My Home Industries ltd., Hyd, Hyderabad V. DCIT, Central Circle-7, Hyderabad

ITA 799/HYD/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53698 (ITAT-HYDERABAD)
• Duration Of Justice: 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2003-2004
• Appeal Filed On: 02-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M SRINIVASA RAO
• Assessee Lawyers: S RAMA RAO
• Keywords: Business expenditure; Earning of tax free income; Assessment record; Commercial expediency
• Section: 143(3); 153A; 14A; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI .G.C. GUPTA, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA NO.784/HYD/2011 - ASSESSMENT YEAR 2001-02 ITA NO.785/HYD/2011 - ASSESSMENT YEAR 2002-03 ITA NO.786/HYD/2011 - ASSESSMENT YEAR 2004-05 ITA NO.799/HYD/2011 - ASSESSMENT YEAR 2003-04 M/S MY HOME INDUSTRIES LTD., HYDERABAD (PAN AABCM 9480 C) VS THE DCIT, CIRCLE -7, HYDERABAD APPELLANT RESPONDENT APPELLANT BY: SHRI S. RAMA RAO RESPONDENT BY: SHRI M. SRINIVASA RAO DATE OF HEARING: 04.08.2011 DATE OF PRONOUNCEMENT: 12.10.2011 ORDER PER CHANDRA POOJARI, A.M. THESE FOUR APPEALS PREFERRED BY THE ASSESSEE ARE D IRECTED AGAINST THE ORDER OF CIT DATED 29.3.2011 PASSED U/S 263 OF THE INCOME TAX ACT. SINCE ISSUES INVOLVED IN THESE FOUR APPEALS ARE COMMON IN NATURE, THEY ARE CLUBBED, HEARD AND DISPOSED OFF VIDE THIS COMMON OR DER FOR THE SAKE OF CONVENIENCE. 2. THE COMMON GROUNDS RAISED BY THE ASSESSEE IN T HESE FOUR APPEALS ARE AS FOLLOWS: 2. THE LEARNED CIT ERRED IN HOLDING THAT THE ORDER OF THE ASSESSMENT MADE U/S 143(3) R.W.S. 153A OF THE ACT O N 31.12.2008 IS IN ANY WAY PREJUDICIAL TO THE INTERES TS OF THE REVENUE. 3. THE CIT ERRED IN HOLDING THAT THE INTEREST PAID ON BORROWED FUNDS FOR PURCHASE OF UNITS OF ANDHRA PRAD ESH GAS POWER CORPORATION LTD. (APGPCL) IS NOT ALLOWABLE AS A DEDUCTION. THE CIT OUGHT TO HAVE SEEN THE FACT THA T PURCHASE OF UNITS FROM APGPCL IS FOR THE PURPOSES OF BUSINES S. ITA NO.784 TO 786 & 799/H/2011 MY HOME INDUSTRIES LTD., HYDERABAD 2 4. THE CIT OUGHT TO HAVE CONSIDERED THE FACT THAT BY PURCHASING THE SAID UNITS, THE ASSESSEE COULD GET P OWER AT CONCESSIONAL RATE AND THE CONCESSION DERIVED BY THE ASSESSEE HEREIN IS SUBSTANTIAL AND, THEREFORE, THE CIT OUGHT TO HAVE HELD THAT THE INVESTMENT MADE IN THE UNITS OF APGPCL IS FOR THE PURPOSE OF BUSINESS AND THE INTEREST ON THE AMOUNT BORROWED FOR SUCH INVESTMENT IS ALLOWABLE AS A DEDUCTION UND ER THE HEAD BUSINESS. 5. THE CIT ERRED IN SETTING ASIDE THE ORDER PASSED U/S 143(3) R.W.S. 153A OF THE IT ACT. HE OUGHT TO HAVE SEEN THAT THERE IS NO MISTAKE WHICH IS PREJUDICIAL TO THE INT EREST OF REVENUE IN THE ORDER OF THE ASSESSING OFFICER ORIGI NALLY PASSED. 3. BRIEF FACTS OF THE ISSUE ARE THAT THE ASSESSEE IS A COMPANY ASSESSED UNDER JURISDICTION OF DCIT CENTRAL CIRCLE, 7 HYDERA BAD. THE SCRUTINY ASSESSMENTS U/S 143(3) R.W.S. 153A OF THE INCOME TA X ACT FOR THE ASSESSMENT YEARS 2001-02 TO 2004-05 WAS COMPLETED O N 31.12.2008. SUBSEQUENT TO THE COMPLETION OF THE SCRUTINY ASSESS MENT, ON PERUSAL OF THE ASSESSMENT RECORDS BY THE CIT, IT WAS OBSERVED THA T THE ASSESSEE COMPANY HAS PURCHASED THE SHARES IN APGPCL OUT OF THE LOAN AVAILED FROM THE ICICI BANK. IT IS ALSO OBSERVED THAT THE ASSESSEE HAS SO LD THE SHARES IN M/S APGPCL IN THE FINANCIAL YEAR 2004-05 AND THE RESULT ANT CAPITAL GAINS OF RS.2.81 CRORES WAS CLAIMED EXEMPT U/S 10(23G) OF TH E ACT. THESE SHARES WERE PURCHASED WITH LOANS TAKEN FROM ICICI BANK. T HE LOAN OUTSTANDING AND INTEREST CLAIMED AS PAID TO ICICI BANK FOR THE ASSE SSMENT YEAR 2001-02 TO 2004-05 WERE AS FOLLOWS: ASSESSMENT YEAR LOAN OUTSTANDING AT THE BEGINNING OF THE YEAR (IN RS.) INTEREST @ 12% (IN RS.) 2001-02 5,00,00,000 60,00,000 2002-03 10,00,00,000 1,20,00,000 2003-04 8,00,00,000 96,00,000 2004-05 5,75,00,000 69,00,000 3.1. FROM THE ABOVE, IT IS SEEN THAT THE ASSESSEE COMPANY HAS CLAIMED EXPENDITURE TOWARDS INTEREST PAID/PAYABLE TO ICICI BANK ON THE LOAN TAKEN UTILISED FOR THE PURPOSE OF INVESTMENT IN SHARES IN APGPCL. SUBSEQUENTLY, THESE SHARES WERE SOLD AND THE RESULTANT CAPITAL GA INS WERE CLAIMED AS ITA NO.784 TO 786 & 799/H/2011 MY HOME INDUSTRIES LTD., HYDERABAD 3 EXEMPT U/S 10(23G) OF THE ACT. AS SUCH, THE INTERE ST PAID FOR THE ABOVE ASSESSMENT YEARS WHICH WAS INCURRED AGAINST THE EXE MPT INCOME IS TO BE DISALLOWED U/S 14A OF THE ACT. 3.2. THE PROVISIONS OF SECTION 14A OF THE ACT SPEC IFY THAT ANY EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, WAS TO BE DISALLOWED. SINCE THE RESULTANT CAPITAL GAINS O N SALE OF SHARES OF APGPCL WERE CLAIMED AS EXEMPT U/S 10(23G) OF THE ACT. ACC ORDING TO CIT, THE EXPENDITURE INCURRED IN THE FORM OF INTEREST IN RES PECT OF LOAN AVAILED FROM ICICI BANK FOR THE PURPOSE OF PURCHASE OF SHARES OF APGPCL NEEDED TO BE DISALLOWED AS PER SECTION 14A OF THE ACT. 3.3. HOWEVER, IT IS OBSERVED BY CIT THAT THE ASSES SING OFFICER FAILED TO DISALLOW THE EXPENDITURE CLAIMED TOWARDS INTEREST P AID ON LOANS TAKEN AGAINST EXEMPT INCOME WHILE COMPLETING THE SCRUTINY ASSESSM ENTS U/S 143(3) R.W.S. 153A OF THE ACT FOR THE ASSESSMENT YEARS 2001-02 T O 2004-05. IN VIEW OF THE ABOVE FACT, ACCORDING TO CIT, THE ASSESSMENT ORDER S PASSED U/S 143(3) R.W.S. 153A ON 31.12.2008 FOR THE ASSESSMENT YEARS 2001-02 TO 2004-05 WHICH RESULTED IN SHORT COMPUTATION OF INCOME AS STATED A BOVE ARE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AND LIABLE T O BE REVISED U/S 263 OF THE IT ACT. 4. THE ASSESSEE FILED OBJECTIONS FOR THE NOTICE IS SUED BY THE CIT. THE CIT HAS OVER LOOKED THE OBJECTIONS OF THE ASSESSEE ON THE FOLLOWING REASONS: I) AS PER THE ANNUAL REPORT OF THE COMPANY, THE COM PANY HAS TAKEN LOAN ON INTEREST FROM ICICI BANK FOR PURCHASE OF SHARES OF APGPCL AS PER NOTE TO ACCOUNT. PARA 8(B) IF THE ANNUAL REPORT FOR THE YE AR 2000-01 IS REPRODUCED AS UNDER: THE TERM LOAN FROM ICICI LTD., FOR PURCHASE OF SHA RES OF APGPCL MENTIONED IN SCHEDULE B IS SECURED BY WAY OF PLEDGE OF 1323920 EQUITY SHARES OF RS.10/- EACH OF APGPCL HELD BY THE COMPANY AND ALSO SECURED BY PERSONAL GUARANTEE OF LEARNED DEPARTMENTAL REPRESENTATIVE.J. RAMESWAR RAO , CHAIRMAN AND MD AND ALSO BY CORPORATE GUARANTEE ON M/S MY HOME CONSTRUCTIONS LIMITED AND COLLATERAL SECURI TY ON COMMERCIAL PROPERTY WORTH OF RS.126 LAKHS BELONGING TO M/S RANJIT CONSTRUCTIONS. ITA NO.784 TO 786 & 799/H/2011 MY HOME INDUSTRIES LTD., HYDERABAD 4 II) FURTHER, WHEN THE SHARES ARE SOLD OUT, THE ASS ESSEE HAS COMPUTED CAPITAL GAIN TRANSFER OF THE SHARES WHEN IT HAS CLA IMED EXEMPT U/S 10(23G). THUS, FROM THE BOOKS OF ACCOUNT, IT IS APPARENT THA T THE ASSESSEE HAS MADE INVESTMENT IN SHARES OF APGPCL. THE RETURN ON SUCH INVESTMENT BEING DIVIDEND IS EXEMPT. AGAIN WHEN THERE IS CAPITAL ON TRANSFER OF SHARES, THE SAME IS ALSO EXEMPT U/S 10(23G). THUS, AS PER PROV ISION OF SECTION 14A, THE EXPENDITURE INCURRED EARNING SUCH EXEMPT INCOME IS TO BE ALLOWED. III) AND FINALLY, HELD THAT ASSESSEE HAS PAID INTE REST OF BORROWED FUND WHICH HAS BEEN INVESTED IN SHARES OF ANOTHER COMPAN Y TO EARN EXEMPT INCOME. HENCE, THE INTEREST PAID ON BORROWED FUND CANNOT BE ALLOWED AS A BUSINESS DEDUCTION AS PER PROVISION OF SECTION 14A. ACCORDING TO CIT, THE ASSESSING OFFICER WHILE PASSING ASSESSMENT ORDER HA S ERRONEOUSLY ALLOWED THIS DEDUCTION WHICH HAS RENDERED THE ORDERS PASSED FOR ASSESSMENT YEAR 2001-02 TO 2004-05 AS ERRONEOUS AS PREJUDICIAL TO T HE INTEREST OF REVENUE. ACCORDINGLY, THESE ORDERS ARE LIABLE TO BE REVISED U/S 263. THEREFORE, THE ASSESSMENT ORDERS PASSED U/S 143(3) R.W.S. 153A FOR THE ASSESSMENT YEAR 2001-02 TO 2004-05 ARE SET ASIDE U/S 263 OF THE IT ACT BY CIT WITH A DIRECTION TO THE ASSESSING OFFICER TO DISALLOW THE INTEREST P AID ON LOAN TAKEN FROM ICICI BANK WHICH HAS BEEN INVESTED TO ACQUIRE SHARES OF A NOTHER COMPANY. AGAINST THIS THE ASSESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. WE HAVE ALSO GONE THROUGH THE JUDGEMENT RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE IN THE CASE OF ACIT VS. CH OICE TRADING CORPORATION LTD. (90 ITD 1) ((76 TTJ 892) (COCHIN) WHEREIN HELD THAT INTEREST ON MONEY BORROWED FOR ACQUISITION OF SHARES ALSO IS ALLOWABL E AS DEDUCTION U/S. 36(1)(III) OF THE I.T ACT, IF SUCH ACQUISITION IS FOR COMMERCI AL PURPOSE. FURTHER, THE AR ALSO RELIED ON THE JUDGEMENT OF THE SUPREME COURT I N THE CASE OF SA BUILDERS LTD. VS. CIT (288 ITR 1) (SC) WHEREIN IT IS HELD TH AT ONCE IT ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PUR POSE OF THE BUSINESS, THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESS MAN OR IN THE POSITION OF THE BOARD OF DIR ECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE ITA NO.784 TO 786 & 799/H/2011 MY HOME INDUSTRIES LTD., HYDERABAD 5 CIRCUMSTANCES OF THE CASE. NO BUSINESS MAN CAN BE COMPELLED TO MAXIMISE HIS PROFIT. WHAT IS RELEVANT IS WHETHER THE AMOUNT WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY AND NOT FROM THE P OINT OF VIEW OF WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFIT. WE A LSO GONE THROUGH THE JUDGEMENT RELIED BY THE AR IN THE CASE OF A.T.E. EN TERPRISES LTD. VS. JCIT, MUMBAI (102 ITD 110) (MUM) AND ADDL. CIT VS. PINNAC LE PROJECT & INFRASTRUCTURE PVT. LTD. (104 ITD 122) (AHD.). SIM ILARLY, THE DR RELIED ON THE JUDGEMENT OF SPECIAL BENCH IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (117 ITD 169) (MUM) (SB) FOR T HE PROPOSITION THAT THERE SHOULD BE DISALLOWANCE OF EXPENDITURE INCURRED BY T HE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UND ER THE ACT AND THUS, IN VIEW OF SPECIFIC PROVISIONS OF SECTION 14A, EXPENSE S FALLING UNDER ANY HEAD OR SECTION WHICH ARE OTHERWISE DEDUCTIBLE AS BUSINESS EXPENDITURE OR UNDER OTHER RESPECTIVE HEADS, WOULD CALL FOR DISALLOWANCE S TO THE EXTENT TO WHICH THOSE EXPENSES HAVE BEEN INCURRED IN RELATION TO IN COME EXEMPT FROM TAX. 6. IN THE PRESENT CASE AS SEEN FROM THE FACTS OF TH E CASE THE ASSESSEE COMPANY CLAIMED EXPENDITURE TOWARDS INTEREST PAID/P AYABLE TO ICICI BANK ON THE LOAN TAKEN AND UTILISED FOR THE PURPOSE OF INVE STMENT IN SHARES IN ANDHRA PRADESH GAS POWER CO. LTD. (APGPCL IN SHORT). THES E SHARE WERE SOLD SUBSEQUENTLY AND THE RESULTANT CAPITAL GAIN WAS CLA IMED AS EXEMPT U/S. 10(23G) OF THE ACT. ACCORDING TO CIT. THE INTERES T PAID BY THE ASSESSEE IN THE ABOVE ASSESSMENT YEAR WHICH WAS INCURRED AGAINS T EXEMPT INCOME IS TO BE DISALLOWED. HOWEVER, BEFORE COMING TO THIS CONC LUSION WE HAVE TO SEE THE BACKGROUND OF INVESTMENT. THE BACKGROUND OF THE IN VESTMENT IN APGPCL IS THAT THE ASSESSEE IS DEPEND UPON APSEB FOR THE PURP OSE OF SUPPLY OF POWER. THE APGPCL WAS FORMED BY TRANSMISSION CORPORATION O F ANDHRA PRADESH ON 31.10.1998 AND BUSINESS COMMENCEMENT CERTIFICATE WAS ISSUED ON 2.12.1998. THE MAIN PURPOSE OF FORMATION OF THIS C OMPANY IS TO GENERATE POWER FOR CONSUMPTION BY ITS SHAREHOLDERS CALLED AS THE PARTICIPATING COMPANIES. THE CAPITAL IS CONTRIBUTED BY PARTICIP ATING INDUSTRIES IN THE RATIO OF THE POWER SUPPLIED BY APGPCL FOR CONSUMPTION OF PARTICIPATING INDUSTRIES. THE POWER GENERATED BY THE APGPCL IS NOT FOR SALE A ND IT IS FORMED FOR THE MUTUAL BENEFIT OF THE SHAREHOLDERS AND NOT FOR GAIN ING ANY PROFIT. FOR THE PURPOSE OF DISTRIBUTION OF POWER GENERATED BY THIS COMPANY AND FOR THE ITA NO.784 TO 786 & 799/H/2011 MY HOME INDUSTRIES LTD., HYDERABAD 6 PURPOSE OF RECOVERY OF THE COST OF POWER GENERATED THE COMPANY ENTERED INTO AN MOU WITH ITS SHAREHOLDERS. THUS, ORIGINALLY MOU WAS EXECUTED BY APGPCL AND APSEB (TRANSMISSION CORPORATION OF ANDHR A PRADESH) AND 23 OTHER COMPANIES WHICH INCLUDE SREE RAYALASEEMA ALKA LIES & ALLIED CHEMICALS LTD. IN ORDER TO BE ENTITLED FOR SUPPLY O F 7.20 MW ELECTRICITY. THE SAID SREE RAYALASEEMA ALKALIES & ALLIED CHEMICALS L TD., HAS DISPOSED OF ITS SHARES IN THE APGPCL AND THE ASSESSEE COMPANY BOUGH T THE SHARES BY RAISING A LOAN FROM ICICI BANK. BY PURCHASING THE SHARES OF APGPCL THE ASSESSEE GOT SUPPLY OF POWER AT CONCESSION RATE. T HE COST PER UNIT INCURRED BY THE ASSESSEE IN THIS ASSESSMENT YEAR IS MUCH LES S THAN THE COST OF POWER SUPPLIED BY APSEB. THIS FACT IS EVIDENT FROM THE F OLLOWING TABLE: AY UNITS PURCHASED FROM APGPCL UNIT COST APGPCL AMOUNT (IN RS.) UNIT COST APCPDCL SAVING BY OPTING APGPCL AMOUNT OF SAVING (IN RS.) 2001-02 42643806 2.82 120334673 6.59 3.77 160780755 2002-03 38478178 1.91 73627562 4.56 2.64 101757228 2003-04 54020067 1.80 97493059 3.97 2.17 117235671 2004-05 45827222 1.65 75413720 3.64 1.99 91397368 180969273 366869014 471171022 7. ON GOING THROUGH THE ABOVE FACTS, IN OUR OPINION , THE MONEY WHICH WAS BORROWED BY THE ASSESSEE FROM ICICI BANK WAS UT ILISED FOR THE PURPOSE OF ACQUISITION OF SHARES OF APGPCL FOR THE PURPOSE OF BUSINESS ADVANTAGE AND IT CANNOT BE CONSIDERED AS INVESTMENT IN RELATI ON TO EARNING OF INCOME EXEMPTED FROM TAX. THE BENEFIT DERIVED BY THE ASSE SSEE BY THIS INVESTMENT IS MORE THAN INTEREST INCURRED BY THE ASSESSEE TOWARDS LOAN FROM ICICI BANK. THE INVESTMENT IN THE SHARES BY THE ASSESSEE BY BOR ROWING MONEY FROM ICICI BANK TO BE SEEN WITH SAVING OF POWER COST. THE ASS ESSEE DERIVED EXORBITANT BENEFIT ON THE COST OF POWER. HAD THE ASSESSEE NOT INVESTMENT IN THE SHARES OF APGPCL, THE ASSESSEE SHOULD HAVE INCURRED ADDITI ONAL EXPENDITURE TOWARDS SUPPLY OF POWER. ADMITTEDLY, THE INVESTME NT IN SHARES OF APGPCL BY BORROWING MONEY FROM ICICI BANK AND SAVING OF PO WER COST IS HAVING DIRECT NEXUS. ONCE IT IS ESTABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS, THE CI T IS NOT JUSTIFIED IN COMING TO THE CONCLUSION THAT THE BORROWING FROM BANK IS F OR THE PURPOSE OF EARNING EXEMPTED INCOME. IN OUR OPINION, THE EXPENDITURE I NCURRED BY THE ASSESSEE ITA NO.784 TO 786 & 799/H/2011 MY HOME INDUSTRIES LTD., HYDERABAD 7 TOWARDS INTEREST ON LOAN FROM ICICI BANK IS TO BE A LLOWABLE AS DEDUCTION U/S. 36(1)(III) OF THE ACT AND WE DO NOT ANY MERIT IN TH E ORDER OF THE CIT PASSED U/S. 263 OF THE ACT AND THE SAME IS SET ASIDE. AC CORDINGLY, WE ARE INCLINED TO ALLOW THE APPEALS OF THE ASSESSEE. 8. IN THE RESULT, APPEALS OF THE ASSESSEE ARE ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH OCTOBER, 2011 SD/- (G.C. GUPTA) SD/- (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED THE 12 TH OCTOBER, 2011 COPY FORWARDED TO: 1. M/S. MY HOME INDUSTRIES LTD., C/O. SHRI S. RAMA RAO, ADVOCATE, 3-6- 643, SHRIYAS ELEGANCE, FLAT NO.102, ST. NO.9, HIMA YAT NAGAR, HYDERABAD 2. THE DCIT, CENTRAL CIRCLE-7, HYDERABAD 3. THE CIT (CENTRAL), HYDERABAD 4. THE CIT, HYDERABAD 5. THE DR, ITAT, HYDERABAD TPRAO