DCIT, Circle- 21(1), New Delhi V. Religare Enterprises Ltd., New Delhi

ITA 6432/DEL/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 9131 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-08-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2013-2014
• Appeal Filed On: 23-10-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: ROHIT JAIN
• Keywords: Business income; Commercial expediency; Rule 8D
• Section: 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F, NEW DELHI BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER (THROUGH VIDEO CONFERENCING) ITA NO. 6432/DEL/2017 : ASSTT. YEAR : 2013-14 DCIT, CIRCLE-21(1), NEW DELHI VS RELIGARE ENTERPRISES LTD., D-3, P-3B, DISTRICT CENTRE, SAKET, NEW DELHI-110017 (APPELLANT) (RESPONDENT) PAN NO. A AA CV5888N ASSESSEE BY : SH. ROHIT JAIN, ADV. REVENUE BY : NONE DATE OF HEAR ING: 1 7 . 06 .20 2 1 DATE OF PRONOUNCEMENT: 04 .08 .20 2 1 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDER OF THE LD. CIT(A)-38, NEW DELHI DATED 28. 07.2017. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENU E: 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, TH E LD. CIT(A) HAS ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE IGNORING THE FACT THAT THE ASSESSEE COMPANY FAILED TO PROVE THAT INTEREST BEARING FUNDS WERE GRANTED AS LOAN TO SUBSIDIARIES/GROUP COMPANIES AND NOT ITS OWN FUNDS/FUNDS GENERATED WITH ZERO INTEREST LIABILITY. 2. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN HOLDING THAT THERE WAS A DIRECT CORRELATION BETWEEN THE INTEREST BEARING FUN DS ITA NO. 6432/DEL/2017 RELIGARE ENTERPRISES LTD. 2 AND GRANT OF INTEREST BEARING ICDS TO SUBSIDIARIES/GROUP COMPANIES. 3. THE FACTS RELEVANT TO THIS CASE ARE AS UNDER: THE ASSESSEE COMPANY IS A NON-BANKING FINANCE COMPA NY WITH RESERVE BANK OF INDIA AND WAS ENGAGED IN THE BUSINE SS OF PROVIDING FINANCIAL ADVISORY SERVICES AND SUPPORT S ERVICES TO ITS SUBSIDIARIES AND RELIGARE GROUP COMPANIES. THE COMP ANY INCURRED EXPENSES OF RS.976,30,09,360/- OUT OF WHIC H AN AMOUNT OF RS.946,22,50,000/- HAS BEEN DISALLOWED U/ S 37(1) AND RS.24,52,39,611/- U/S 14A OF THE INCOME TAX ACT , 1961. THUS, THE ENTIRE EXPENSES OF THE COMPANY WAS DISALL OWED EITHER U/S 37(1) OR 14A. FURTHER, THE AO HELD THAT AN AMOU NT OF RS.760,92,407/- WAS NOT DISALLOWED. 4. BEFORE THE AO, IT WAS SUBMITTED THAT THIS AMOUNT PERTAINS TO THE INTEREST COST UTILIZED FOR GRANTING ICDS TO GROUP COMPANIES AND THE INTEREST EARNED THEREOF HAS BEEN DULY OFFERED TO TAX AS THE BUSINESS INCOME. THE AO DID N OT ACCEPT THE CONTENTION OF THE ASSESSEE AND HELD THAT THE CO MPANY FAILED TO PROVE THAT THE INTEREST BEARING FUND WAS GRANTED AS LOAN TO THE GROUP COMPANIES. 5. THE LD. CIT (A) DELETED THE ADDITION MADE BY THE AO. 6. AGGRIEVED THE REVENUE FILED APPEAL BEFORE US. DU RING THE HEARING, THE LD. DR RELIED UPON THE ORDER OF THE AO WHILE THE LD. AR SUPPORTED THE ORDER OF THE LD. CIT (A). 7. WE HAVE GONE THROUGH THE FACTS OF THE CASE AND A LSO ORDER OF THE LD. CIT (A). FOR THE SAKE OF READY REFERENCE , THE ITA NO. 6432/DEL/2017 RELIGARE ENTERPRISES LTD. 3 OPERATIVE PART OF THE ORDER OF THE LD. CIT (A) AUTH ORED BY MS. PARAMITA M. BISWAS IS REPRODUCED AS UNDER: IN ITS RETURN OF INCOME APPELLANT SUO-MOTO MADE DISALLOWANCE OF RS. 24,52,39,611/- UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962 (RULES), COMPUT ATION OF WHICH IS AS UNDER: PARTICULARS AMOUNT (RS.) I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME NIL II) INTEREST COST NOT DIRECTLY ATTRIBUTABLE TO ANY INCOME OR RECEIPT 19,76,29,621 III) AN AMOUNT TO EQUAL TO 0.5 PERCENT OF THE AVERA GE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT FOR M PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSE AS ON THE FIRST DAY AND LAST D AY OF THE PREVIOUS YEAR 4,76,09,990 TOTAL DISALLOWANCE 24,53,29,611 ....THE ASSESSING OFFICER HAS DISALLOWED INTEREST O N COMPULSORILY CONVERTIBLE DEBENTURES (CCDS) OF RS.7,60,92,407/-. THE APPELLANT ALSO SUBMITTED A DETAILED BREAKUP OF THE INTEREST COSTS INCURRED BY IT IN THE INSTANT AY AND SUO-MOTO DISALLOWANCE U/S 14A OF THE ACT R.W. RULE 8D AS UNDER: S.NO. PARTICULARS AMOUNT (RS.) AMOUNT CONSIDERED WHILE COMPUTING DISALLOWANCE UNDER SECTION 14A AMOUNT DISALLOWED UNDER SECTION 37 OF THE ACT AMOUNT NOT CONSIDERED WHILE COMPUTING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT 1. INTEREST PAID ON ICDS 80,13,168 2. INTEREST ON CCDS 16,51,45,127 7,60,92,407 3. LC CHARGES 7,60,92,407 4. INTEREST ON NCDS 1,44,50,900 5. NCD AMORTIZATION CHARGES 7,36,795 TOTAL 19,76,09,195 7,13,96,784 7,60,92,407 ITA NO. 6432/DEL/2017 RELIGARE ENTERPRISES LTD. 4 APPELLANT HAS FURTHER SUBMITTED THAT INTEREST PAID ON LOANS TAKEN FOR SPECIFIC PURPOSES CANNOT BE CONSIDERED FO R CALCULATING DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF RULES. IT HAS SUBMITTED THAT DURING THIS AY IT HAD ALLOTTED UNSECURED COMPULSORILY CONVERTIBLE DEBENTURES (CCDS ) OF RS. 404.83 CR. WITH INTERNATIONAL FINANCE CORPORATION ( IFC) ON NOVEMBER 7, 2012. THE SAID CCDS WERE ISSUED AT A CO UPON RATE OF 15% FOR THE PERIOD NOVEMBER 7, 2012 TO MAY 6, 20 14. THE SAME HAS BEEN DULY CERTIFIED BY THE APPELLANTS STA TUTORY AUDITORS M/S PRICE WATERHOUSE AND COOPERS UNDER NOT E 5.2 OF THE AUDITED FINANCIAL STATEMENTS FOR THE PERIOD END ED MARCH 31, 2013. OUT OF RS. 404.83 CRORES, RS. 264.4 CRORES WA S UTILISED TOWARDS CAPITALISATION OF SUBSIDIARIES. IT WAS FURT HER SUBMITTED THAT CORRESPONDING INTEREST COST OF RS. 16,51,45,14 6/- HAS BEEN DULY DISALLOWED IN ENTIRETY U/S 14A OF THE ACT READ WITH RULE 8D(2)(II). BALANCE CCD PROCEEDS AGGREGATING TO RS. 139.82 CR. WAS UTILISED AS UNDER: (I) ICDS OF RS. 123.65 CRORES TO SUBSIDIARY AND GR OUP COMPANIES @ INTEREST RATE OF 14% ON WHICH INTEREST INCOME OF RS. 7,90,16,370/- WAS EARNED BY THE APPELLANT AND D ULY OFFERED TO TAX A BUSINESS INCOME IN ITS RETURN OF INCOME EX PENSE OF RS.6,92,18,710/- WAS NOT DISALLOWED U/S 14A OF THE ACT. (II) PURCHASE OF 150 12.5% CONVERTIBLE DEBENTURE O F RELIGARE FINVEST LIMITED (RFL) IN THE SECONDARY MARKET ON DECEMBER 7, 2012 AGGREGATING TO RS. 16.17 CRORES). ITA NO. 6432/DEL/2017 RELIGARE ENTERPRISES LTD. 5 IT WAS FURTHER SUBMITTED THAT AS THE APPELLANT ON S ALE OF THE SAID NCDS EARNED INTEREST AGGREGATING TO RS. 57,28, 081/- AND PROFIT ON SALE OF NCDS OF RS. 81,53,633/- WHICH HAS BEEN DULY OFFERED TO TAX AS BUSINESS INCOME IN ITS RETURN OF INCOME FILED FOR THE SUBJECT AY THE CORRESPONDING CCF INTEREST C OST OF RS. 68,73,697/- WAS NOT DISALLOWED U/S 14A OF THE ACT. DURING THE SUBJECT AY, THE APPELLANT HAS INCURRED INTEREST COS TS AGGREGATING TO RS. 34,51,18,811/- WHICH HAS BEEN RE CORDED UNDER SCHEDULE 24-FINANCE COSTS OF ITS AUDITED FI NANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 2013. AS DISCUSSED ABOVE, THE APPELLANT OUT OF THE AFORESAID INTEREST EXPENSE INCURRED BY IT HAS IN ENTIRETY DISALLOWED THE FOLLO WING INTEREST EXPENSE AGGREGATING TO RS. 26,90,05,979/- IN ITS RE TURN OF INCOME EITHER UNDER SECTION 14A OF THE ACT READ WIT H RULE 8D(2)(II) OF RULES OR UNDER SECTION 37 OF THE ACT: A. INTEREST ON ICDS OF RS.1,80,13,168/- B. LC CHARGES OF RS.7,06,59,998/-; C. NCD AMORTIZATION CHARGES OF RS.7,36,795/-; D. INTEREST PAID ON CCDS OF RS.16,51,45,127/-; E. INTEREST PAID ON NCDS OF RS.1,44,50,900/- TOTAL RS.26.90,05.988/- AND HAS CLAIMED THE BALANCE CCD INTEREST EXPENSE AG GREGATING TO RS. 7,60,92,407/- AS A DEDUCTIBLE EXPENSE UNDER SECTION 37(1) OF THE ACT. THE APPELLANT DURING THIS AY HAS GENERATED CASH FLOW AGGREGATING TO RS. 7.95 CRORES FROM BUSIN ESS OPERATIONS. APPELLANT HAS SUBMITTED THAT SINCE IT D ID HAVE ADEQUATE OWN FUNDS FOR INFUSING ADDITIONAL SHARE CA PITAL IN ITS SUBSIDIARIES OR GRANTING THEM SHORT TERM LOANS FOR MEETING THEIR ITA NO. 6432/DEL/2017 RELIGARE ENTERPRISES LTD. 6 WORKING CAPITAL REQUIREMENTS, IT RAISED FUNDS FOR T HE SAME BY ALLOTTING CCDS AGGREGATING TO RS. 404.83 CRORES TO INTERNATIONAL FINANCE CORPORATION (IFC) ON NOVEMBER 7, 2012 AT AN IRR OF 15 PERCENT FOR THE PERIOD NOVEMBER 7, 2012 TO MAY 6, 2 014 AND ALLOTTING NCDS AGGREGATING TO RS. 845 CRORES TO VAR IOUS MUTUAL FUND HOUSES ON MARCH 28, 2013 AT A COUPON RATE OF 1 4 PERCENT. LD. AR OF APPELLANT FURTHER SUBMITTED THAT BEING A PRUDENT BUSINESSMAN, IT WOULD NOT RAISE FUNDS FROM AN INTER NATIONAL ORGANISATION LIKE IFC WHICH IS FUNDED BY THE WORLD BANK NOR WOULD IT PLACE NCDS WITH REPUTED MUTUAL FUND HOUSES UNLESS AND UNTIL ITS OWN FUNDS WERE NOT ADEQUATE TO MEET I TS BUSINESS REQUIREMENTS VIZ. INFUSION OF ADDITIONAL SHARE CAPI TAL IN ITS SUBSIDIARIES AND GRANT OF INTER-CORPORATE DEPOSITS TO ITS SUBSIDIARIES FOR ENABLING THEM TO MEET THEIR WORKIN G CAPITAL REQUIREMENTS. PERUSAL OF SUBMISSIONS REVEALS THAT T HERE EXISTS ONE TO ONE CORRELATION BETWEEN THE FUNDS AGGREGATIN G TO RS. 404.83 CRORES RECEIVED ON ALLOTMENT OF CCDS TO IFC AND PART UTILISATION OF THE SAME TOWARDS GRANT OF INTEREST B EARING ICDS TO SUBSIDIARIES AND PURCHASE OF NCDS FROM THE SECONDAR Y MARKET. 4.3 APPELLANT HAS RELIED ON A NUMBER OF JUDGEMENTS OF THE APEX COURT AS WELL AS VARIOUS HIGH COURTS WHICH HOLD THA T THE EXPENDITURE MUST BE INCIDENTAL TO THE BUSINESS AND MUST BE NECESSITATED OR JUSTIFIED BY COMMERCIAL EXPEDIENCY. THE EXPENDITURE MUST BE DIRECTLY AND INTIMATELY CONNECT ED WITH BUSINESS LAID OUT BY THE ASSESSEE IN HIS CAPACITY A S A TRADER. TO BE A PERMISSIBLE DEDUCTION, THERE MUST BE A DIRECT AND INTIMATE CONNECTION BETWEEN THE EXPENDITURE AND THE BUSINESS . ORDINARILY IT IS FOR THE ASSESSEE TO DECIDE WHETHER A CERTAIN EXPENDITURE SHOULD BE INCURRED DURING THE COURSE OF HIS ITA NO. 6432/DEL/2017 RELIGARE ENTERPRISES LTD. 7 BUSINESS AND IF SUCH EXPENDITURE HAS BEEN INCURRED FOR PROMOTING THE ASSESSEES BUSINESS AND EARNING PROFI TS, THE ASSESSEE CAN CLAIM A DEDUCTION OF THE EXPENSE UNDER SECTION 37(1) OF THE ACT. RESPECTFULLY FOLLOWING THE RATIO OF DECISION OF THE APEX COURT IN THE CASE OF CIT VS. DELHI SAFE DE POSIT CO. LTD. (SUPRA), I HOLD THAT THE INTEREST EXPENSE OF R S. 7,60,92,407/- HAS BEEN INCURRED BY APPELLANT IN RES PECT OF EARNING TAXABLE INCOME. 8. HAVING GONE THROUGH THE DETAILED ANALYSIS AND TH E COGENT REASONS GIVEN BY THE LD. CIT (A), WE HEREBY HOLD TH AT THE ACTION OF THE AO IS IN DISALLOWING THE INTEREST CANNOT BE JUSTIFIED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 04/08/2021. SD/- SD/- (SUCHITRA KAMBLE) (DR. B. R. R. KUMAR) JUDICIAL MEMBER AC COUNTANT MEMBER DATED: 04/08/2021 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR