MAESTRO VENTURES P. LTD, MUMBAI V. DCIT 8(2), MUMBAI

ITA 7270/MUM/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 1189 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 22-02-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 05-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M C OMI NINGSHENDR
• Assessee Lawyers: RONAK G DOSHI; MANTHAN SHAHARS
• Keywords: Scheme of amalgamation; Notional interest
• Section: 14A

Judgement Text

, , , , INCOME-TAX APPELLATE TRIBUNAL -HBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./7270/MUM/2014, /ASSESSMENT YEAR: 2011-12 MAESTRO VENTURES PVT.LTD. (NOW MERGED WITH YUVAK VENTURES PVT.LTD.) PIRAMAL TOWER ANNEXE, CORPORATE PARK, GANPATRAO KADAM MARG, LOWER PAREL, MUMBAI-400 012. PAN:AAHCM 0976 B VS. DCIT, RANGE-8(2) 2ND FLOOR, AAYAKAR BHAVAN, M.K. ROAD, CHURCHGATE, MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT ) ./I.T.A./7305/MUM/2014, /ASSESSMENT YEAR: 2011-12 DCIT, RANGE-8(2) MUMBAI-400 020. VS. MAESTRO VENTURES PVT.LTD. MUMBAI-400 012. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY : SHRI M.C. OMI NINGSHEN-DR ASSESSEE BY: S/SHRI RONAK G. DOSHI & MANTHAN SHAH-ARS / DATE OF HEARING: 22.02.2017 / DATE OF PRONOUNCEMENT:12.04.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) / PER RAJENDRA, AM - CHALLENGING THE ORDER, DATED 11/09/2014,OF THE CIT (A)-17,MUMBAI, THE ASSESSEE AND THE ASSESSING OFFICER(AO)HAVE FILED CROSS APPEALS FOR T HE YEAR UNDER CONSIDERATION.ASSESSEE- COMPANY, ENGAGED IN THE BUSINESS OF TRAINING AND GO ODS AND COMMODITIES,FILED ITS RETURN OF INCOME ON 29/09/2011,DECLARING TOTAL INCOME OF RS. 5.12 CRORES.THE AO COMPLETED THE ASSESSMENT U/S.143(3)OF THE ACT,ON 11/02/2014, DETE RMINING ITS INCOME AT RS. 8.55 CRORES. 2. DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE (AR) STATED THAT ASSESSEE WAS NOT INTERESTED IN PURSUING THE FIRST G ROUND OF APPEAL. HENCE, SAME STANDS DISMISSED,AS NOT PRESSED. 2.1. VIDE ITS APPLICATION, DATED 20/02/2017, THE ASSESSE E HAS FILED ADDITIONAL GROUND OF APPEAL STATING THAT VARIOUS JUDICIAL PRONOUNCEMENTS HAVE N OW LAID DOWN CERTAIN PRINCIPLES REGARDING DISALLOWANCE TO BE MADE U/S.14A OF THE ACT, THAT TH E ISSUE RAISED BY IT IS OF LEGAL NATURE AND DO NOT REQUIRE INVESTIGATION OF FACTS.DURING THE CO URSE OF HEARING BEFORE US, IT WAS STATED ON BEHALF OF THE ASSESSEE THAT ADDITIONAL GROUND DEA LT ONLY WITH DISALLOWANCE U/S.14A AND IT 7270&7305/M/14(11-12) M/S. MAESTRO VENTURE PVT.LTD. 2 GOES TO THE ROOT OF THE ISSUE.ON BEHALF OF THE DEPA RTMENT IT WAS STATED THAT ISSUE COULD BE DECIDED ON MERITS. WE HAVE GONE THROUGH THE ADDITIONAL GROUNDS RAISED BY THE ASSESSEE.WE FIND THAT WITH THE PASSAGE OF TIME CLARITY IS EMERGING WITH REGARD TO DISALLOWANCE TO BE MADE UNDER RULE 8D R.W.S. 14A OF THE ACT, THAT VARIOUS JUDICIAL FORUMS HAVE DISCUSSED AND DELIBERATED UPON THE ISSUE AT LENGTH. THE ISSUE RAISED BY THE ASSESSEE I S A LEGAL ONE, THEREFORE, WE ARE ADMITTING IT AS PER THE PROVISIONS OF RULE 11 OF THE ITAT RULES. ITA/7305/MUMBAI/2014. 3. FIRST GROUND OF APPEAL, RAISED BY THE AO, IS ABOUT DELETING THE DISALLOWANCE OF RS.3.15 CRORES,U/S.14A OF THE ACT.DURING THE ASSESSMENT PRO CEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.1.21 CRORES AND SA ME WAS CLAIMED EXEMPT U/S.10(34) OF THE ACT,THAT THE ASSESSEE ON ITS OWN HAD DISALLOWED THE SUM OF RS.9.21 CRORES U/S.14A READ WITH RULE 8D OF THE INCOME TAX RULES,1962 (RULES). HE OBSERVED THAT THE WORKING OF DIS - ALLOWANCE WAS NOT PROPER.ACCORDINGLY,HE DIRECTED TH E ASSESSEE TO EXPLAIN AS TO WHY DISALLOW -ANCE U/S.14A READ WITH RULE 8D SHOULD NOT BE MADE. CONSEQUENTLY,A SUM OF RS.12. 15 CRORES WAS DISALLOWED AS AGAINST THE DISALLOWANCE MADE BY THE ASSESSEE ITSELF OF RS.9,21,18,554/-. 3.1. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,IT WAS ARGUED T HAT THE AO HAD WORKED OUT THE DISALLOW -ANCE CONSIDERING THE ASSESSEES BALANCES ALONE AS ON 31/ 03/2010, THAT THREE COMPANIES, NAMELY NOZAKI FINANCE AND INVESTMENT PRIVATE LTD. ( NFIPL),AIKONE MARKETING AND MANAGE -MENT SERVICES PRIVATE LTD.(AMMSPL)AND YUGA FININVE ST PRIVATE LTD. (YFPL)MERGED INTO ASSESSEE,THAT IT WAS NECESSARY TO CONSIDER THE CLOS ING BALANCES OF THESE COMPANIES AS ON 31/03/2010 IN WORKING OUT THE DISALLOWANCE U/S.14A. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER, THE FAA HELD THAT THE ASSESSEE HAD RIGHTLY CONSIDERED THE CLOSING BAL ANCES OF INVESTMENTS AND ASSETS AS ON 31/ 03/2010 OF THREE COMPANIES,THAT RULE 8D PROVIDED TH AT FOR THE PURPOSE OF THE RULE,TOTAL ASSETS WOULD MEAN TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF THE VALUATION OF ASSETS BUT INCLUDING TH E DECREASE ON ACCOUNT OF THE INCREASE OF ASSETS, THAT FOR COMPUTATION OF DISALLOWANCE WHAT W AS MATERIAL WAS TO FIND OUT THE AVERAGE OF THE VALUE OF INVESTMENT,THAT THERE WAS NO MERIT IN THE ARGUMENT OF THE AO IN NOT INCLUDING THE PART OF THE AVERAGE VALUE OF INVESTMENT, THAT THE M ERGER TOOK PLACE LONG BACK, THAT SAME WAS EFFECTIVE FROM A PARTICULAR DATE AS DECLARED BY THE HONORABLE HIGH COURT, THAT THERE WAS NO 7270&7305/M/14(11-12) M/S. MAESTRO VENTURE PVT.LTD. 3 INFIRMITY IN THE COMPUTATION OF INCOME OF THE ASSES SEE.FINALLY,HE DELETED THE ADDITION MADE BY THE AO. 3.3. BEFORE US, THE DEPARTMENTAL REPRESENTATIVE (DR) SUP PORTED THE ORDER OF THE AO . THE AUTHORISED REPRESENTATIVE (AR) RELIED UPON THE ORDE R OF THE FAA. 3.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE HONBLE BOMBAY HIGH COURT VIDE ITS ORDER,DATED 05/0 8/2001,HAD APPROVED THE SCHEME OF AMALGAMATION WITH EFFECT FROM 01/04/2010, THAT IN P URSUANCE OF THE SCHEME THREE ENTITIES MERGED WITH THE ASSESSEE COMPANY ONLY ON 01/04/2010 AND NOT BEFORE THAT.IT IS A FACT THAT NFIPL,AMMSPL AND YFPL GOT AMALGAMATED WITH THE ASSE SSEE FROM A PARTICULAR DATE AND THE ASSESSEE HAD TAKEN THE BALANCES OF THESE ENTITI ES FOR CALCULATING THE DISALLOWANCE AS PER RULE 8D READ WITH SECTION 14A OF THE ACT. IN OUR OP INION, THE FAA HAD RIGHTLY HELD THAT INVESTMENT IN ALL THE THREE COMPANIES WOULD FORM TH E PART OF AVERAGE VALUE OF INVESTMENT CONTRARY TO THE FINDING OF THE AO. AS WE DO NOT FIN D ANY LEGAL OR FACTUAL INFIRMITY IN HIS ORDER,SO,CONFIRMING THE SAME,WE DECIDE THE FIRST GR OUND OF APPEAL AGAINST THE AO. 4. SECOND GROUND OF APPEAL IS ABOUT DELETING THE DISAL LOWANCE OF INTEREST U/S.36(1) (III) OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUN D THAT THE ASSESSEE HAD CLAIMED SUNDRY BALANCES WRITTEN OFF, AMOUNTING TO RS.6.56 CRORES, THAT THE ASSESSEE ITSELF HAD DISALLOWED LOAN WRITTEN OFF, THAT THE ASSESSEE HAD GIVEN LOAN TO AC T FINVEST LTD. (AFL) OF RS.6.69 CRORES, DURING THE YEAR UNDER CONSIDERATION, THAT OUT OF TH E SAID AMOUNT IT HAD WRITTEN OFF RS.6, 56, 21,308/-AND HAD DEBITED THE SAME TO ITS PROFIT AND LOSS ACCOUNT. HE DIRECTED THE ASSESSEE TO FURNISH THE BASIS OF CALCULATION OF INTEREST OFFERE D FOR TAXATION ON INTEREST-FREE LOAN AND ADVANCES AND TO EXPLAIN AS TO WHY LOAN GIVEN TO AFL WAS NOT CONSIDERED FOR COMPUTATION OF INTEREST OFFERED FOR TAXATION. IN ITS REPLY, THE AS SESSEE STATED THAT NOTIONAL INTEREST ON ADVANCE TO AFL AT AVERAGE BORROWING RATE OF 8.54% WOULD WOR K OUT TO RS.28.23 LAKHS, THAT THE PRINCIPAL LOAN BALANCE ITSELF WAS WRITTEN OFF, THAT THERE WAS NO QUESTION OF CONSIDERING THE DISALLOWANCE ON THE AMOUNT IN QUESTION, THAT THE LO AN WRITTEN OFF ITSELF WAS NOT CLAIMED AS ALLOWABLE,THAT IN THE COMPUTATION OF INCOME THE DIS ALLOWANCE OF RELATED INTEREST WAS ALSO NOT CONSIDERED.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE, THE AO HELD THAT AFL HAD BORROWED MONEY FOR A PERIOD OF SIX MONTHS, THAT THE ASSESSEE WAS PAYING INTEREST ON THE BORROWED FUNDS ON ONE HAND AND THAT ON OTHER HAND I T WAS NOT CHARGING AN INTEREST ON ADVANCES GIVEN TO AFL, THAT IT WAS ENGAGED IN THE B USINESS OF TRADING OF GOODS AND COMMODITIES, THAT IT HAD CONSIDERED THE INTEREST RE CEIVED UNDER THE HEAD INCOME FROM OTHER 7270&7305/M/14(11-12) M/S. MAESTRO VENTURE PVT.LTD. 4 SOURCES, THAT THE INTEREST PAID HAD NO DIRECT NEXUS WITH THE INTEREST PAID.FINALLY, HE HELD THAT INTEREST EXPENDITURE OF RS.28,23,052/- WAS NOT INCU RRED WHOLLY AND EXCLUSIVELY FOR EARNING THE INTEREST INCOME, THAT SAME WAS TO BE ADDED TO T HE TOTAL INCOME OF THE ASSESSEE. 4.1. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FAA AND MADE ELABORATE SUBMISSIONS AND RELIED UPON SEVERAL CASE LAWS. AFTER CONSIDERING THE AVAILABLE MATERIAL, HE HELD THAT THE AO HAD BEGUN W ITH THE PRESUMPTION THAT INCOME ACCRUED TO THE ASSESSEE AND WORKED OUT THE SAME AT 8.5% FOR THE LOAN ADVANCED TO AFL, THAT INCOME CANNOT BE LEVIED ON HYPOTHETICAL INCOME. HE REFERRE D TO THE CASES OF SHOORJI VALLABHDAS & COMPANY (46 ITR 144) AND MORVI INDUSTRIES LTD. (82 ITR 835) AND GODHRA THE ELECTRICITY COMPANY LTD. (225 ITR 746) THAT NO REAL INCOME HAD ACCRUED TO THE ASSESSEE, THAT THE AO HAD NOT GIVEN ANY FINDING OF FACT THAT THE LOAN ADV ANCED WAS OUT OF THE INTEREST-BEARING FUNDS, THAT HE HAD ALSO NOT GIVEN ANY FINDING AS TO WHETHE R THE ASSESSEE HAD CONSIDERED THE LOAN IN QUESTION WHILE DISALLOWING THE INTEREST ON INTEREST -FREE LOANS, THAT IT HAD DISALLOWED INTEREST PAID OF RS.11.77 CRORES, DURING THE YEAR UNDER CONS IDERATION, ON INTEREST-FREE LOANS GIVEN TO VARIOUS PARTIES, THAT THE AO HAD FAILED TO ESTABLIS H THAT THE INCOME HAD ANY NEXUS WITH THE INTEREST THAT HAS NOT BEEN CHARGED BY THE ASSESSEE FROM AFL, THAT THE ASSESSEE HAD ON ITS OWN DISALLOWED INTEREST ON INTEREST-FREE LOAN GIVEN TO VARIOUS PARTIES, THAT THERE WAS NO SCOPE OF ANY FURTHER DISALLOWANCE ON THAT COUNT. ACCORDINGLY , HE DELETED THE DISALLOWANCE AS THE SAME WOULD AMOUNT TO DOUBLE DISALLOWANCE. 4.2. DURING THE COURSE OF HEARING BEFORE US, THE DR STAT ED THAT MATTER COULD BE DECIDED ON MERITS. THE AR SUPPORTED THE ORDER OF THE FAA AND R ELIED UPON THE CASE OF EXCEL INDUSTRIES (358ITR295).ALTERNATIVELY, HE ARGUED THAT HE HAD NO OBJECTION IF THE MATTER WAS SENT BACK TO AO TO VERIFY THE FUND POSITION AND INTEREST FREE LO AN AMOUNT. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT ASSESSEE HAD ADVANCED LOAN TO AFL, THAT IT HAD NOT CHARGED ANY INTEREST FROM AFL, THAT IT HAD ON ITS OWN DISALLOWED RS.11,77,28,592/- ON INTEREST FREE LOANS GIVEN TO VARIOUS ENTITIES.THOUGH IN THE BOOKS OF ACCOUNTS THE ASSESS EE HAD WRITTEN OFF RS.6.58 CRORES, BUT, IN THE STATEMENT OF INCOME IT HAD NOT CLAIMED THE DEDU CTION. BUT, WE FIND THAT THERE IS NEED TO MAKE FURTHER VERIFICATION ABOUT THE POSITION OF INT EREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AND INTEREST FREE LOAN ADVANCED BY IT.THEREFORE, IN THE INTEREST OF JUSTICE, WE ARE RESTORING BACK HE ISSUE TO THE FILE OF THE AO FOR FURTHER VER IFICATION. HE IS DIRECTED TO AFFORD A 7270&7305/M/14(11-12) M/S. MAESTRO VENTURE PVT.LTD. 5 REASONABLE OPPORTUNITY TO THE ASSESSEE. SECOND GROU ND IS DECIDED IN FAVOUR OF THE AO, IN PART. ITA/7270/MUM/2014 : 5. FIRST GROUND OF APPEAL, AS STATED EARLIER WAS NOT P RESSED BEFORE US. 6. SECOND GROUND OF APPEAL (ADDL GOA NO.1) RAISED BY T HE ASSESSEE IS ABOUT DISALLOWANCE MADE BY THE AO U/S.14A OF THE ACT. WHILE DECIDING T HE APPEAL FILED BY AO WE HAVE NARRATED THE FACTS OF THE CASE. 6.1. BEFORE US, WITH REGARD TO THE ADDITIONAL GROUND OF APPEAL THE ASSESSEE HAS ARGUED THAT THE FAA SHOULD HAVE RESTRICTED THE DISALLOWANCE U/S. 14 A OF THE ACT TO THE EXTENT OF RS.1.21 CRORES, THAT THE DISALLOWANCE U/S. 14A COULD NOT EX CEED THE EXEMPTED INCOME RECEIVED BY IT AMOUNTING TO RS.1,21,51,710/-, THAT EVEN IF THE ASS ESSEE INADVERTENTLY HAD MADE AN EXCESS SUO MOTO DISALLOWANCE IN ITS COMPUTATION OF INCOME THE DEPARTMENTAL AUTHORITY SHOULD HAVE GIVEN RELIEF IN ACCORDANCE WITH THE PROVISIONS OF THE ACT . THE AR RELIED UPON THE CASE OF JOINT INVESTMENTS PVT. LTD.(372ITR694).THE DR LEFT THE IS SUE TO THE DISCRETION OF THE BENCH. 6.2. WE FIND THAT THE ASSESSEE HAD MADE A SUO MOTO DISA LLOWANCE OF RS.9.21 CRORES, THAT THE AO HAD DISALLOWED AN AMOUNT OF RS.12.36 CRORES, THA T THE FAA HAD RESTRICTED THE DISALLOWANCE TO RS.9.21 CRORES, THAT THE EXEMPT INC OME RECEIVED FOR THE YEAR BY THE ASSESSEE AMOUNTED TO RS.1.21 CRORES ONLY. WE FIND THAT THE R ECENT JUDGEMENT/ORDER OF THE HON'BLE HIGH COURT/S / TRIBUNAL WERE NOT AVAILABLE TO THE F AA AT THE TIME OF DECIDING THE APPEAL. AS HE WAS NOT HAVING THE BENEFIT OF SOME OF THE JUDGME NTS/ORDER SO,WE ARE OF THE OPINION THAT IN THE INTEREST OF JUSTICE THE MATTER SHOULD BE RESTOR ED TO FILE OF FAA. HE WOULD DECIDE THE ISSUE AFTER AFFORDING REASONABLE OPPORTUNITY TO THE ASSES SEE AND AFTER CONSIDERING THE CASE LAWS REFERRED BY AR BEFORE US.GROUND NO.2 IS DECIDED IN FAVOUR OF THE ASSESSEE,IN PART. AS A RESULT, APPEALS FILED BY THE AO AND THE ASSESS EE STAND PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH APRIL, 2017. 12 , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 12.04 .2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 7270&7305/M/14(11-12) M/S. MAESTRO VENTURE PVT.LTD. 6 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.