ACIT, Cir-3(2), Hyderabad V. Sri Vasavi Industries Ltd., Hyderabad

ITA 860/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66602 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 7 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 17-08-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 09-05-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: GNANA PRAKASH
• Assessee Lawyers: M V JOSHI
• Keywords: Proportionate interest; Notional interest; Revised return
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 860/HYD/2011 ASSESSMENT YEAR: 2003-04 ASST. INCOME-TAX OFFICER, APPELLANT CIRCLE 3(2), HYDERABAD. VS. SRI VASAVI INDUSTRIES LTD., RESPONDENT HYDERABAD (PAN AADCS1262L) ASSESSEE BY : SHRI GNANA PRAKASH RESPONDENT BY : SHRI M.V. JOSHI DATE OF HEARING : 10/12/2012 DATE OF PRONOUNCEMENT : /1 2/2012 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF THE CIT(A), GUNTUR DATED 29/12/2010 FOR TH E ASSESSMENT YEAR 2003-04. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSE SSEE COMPANY IS IN THE BUSINESS OF MANUFACTURE AND TRADING IN IRON AND STEEL, WIND POWER GENERATION, MANUFACTURE OF FERRO CHROME. IT H AD FILED ITS ORIGINAL RETURN OF INCOME FOR ASSESSMENT YEAR 2003- 04 ON 06-01- 2004 DECLARING A LOSS OF (-) RS.1O,65,37,857/-. HOW EVER, THE ASSESSEE HAD FILED REVISED RETURN OF INCOME ON 06-0 1-2004 DECLARING A LOSS OF (-) RS.10,59,62,910/. THE AO HAD COMPLETE D THE SCRUTINY ITA NO. 860/HYD/2011 SRI VASAVI INDUSTRIES LTD. 2 BY DETERMINING THE ASSESSEE'S LOSS' TO BE CARRIED F ORWARD AT (-) RS.7,41,57,152/-. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED FROM THE STATEMENTS FILED THAT THE ASSESSEE HAD INV ESTED AN AMOUNT OF RS.15 CRORES WITH SRI VASAVI HOLDINGS & INVESTME NTS LTD. IT WAS STATED IN THE STATEMENT OF SIGNIFICANT ACCOUNTING P OLICIES FOR THE ASSESSMENT YEAR 2002-03, SCHEDULE-18 OF THE 17TH AN NUAL REPORT THAT SRI VASAVI HOLDINGS & INVESTMENTS LTD. HAD IN TURN INVESTED IN THE EQUITY SHARE CAPITAL OF THE ASSESSEE COMPANY. I N OTHER WORDS, THE ASSESSEE HAS ADVANCED AN AMOUNT OF RS.15 CRORES TO SRI VASAVI HOLDINGS & INVESTMENTS LTD. AND THE SAID COMPANY HA D INVESTED THE SHARE CAPITAL IN THE ASSESSEE COMPANY. IT WAS NOTIC ED BY THE AO THAT THE ASSESSEE HAD INCURRED A LIABILITY OF RS.3, 92,06,677/- AS INTEREST ON WORKING CAPITAL BESIDES INTEREST TO OTH ERS OFRS.9,12,482/-. IN THE CIRCUMSTANCES OF THE CASE, THE AO HELD THAT THE PROPORTIONATE INTEREST ATTRIBUTABLE TO THE AMOU NTS INVESTED IN M/S SRI VASAVI HOLDINGS & INVESTMENTS LTD. CANNOT B E SAID TO HAVE BEEN INCURRED OR LAID OUT WHOLLY AND EXCLUSIVELY FO R THE PURPOSES OF ASSESSEE'S BUSINESS. THE PRO-RATA INTEREST ON THE A MOUNT INVESTED IN SRI VASAVI HOLDING & INVESTMENTS LTD. AS EQUITY HAS ALSO TO BE DISALLOWED U/S 14A OF THE ACT AS THE RETURN ON THE AMOUNT, IF ANY, IN THE FORM OF DIVIDEND DOES NOT FORM PART OF TOTAL IN COME OF THE ASSESSEE. 4. FURTHER, IT WAS STATED IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS NOT EARNED ANY DIVIDEND INCOME DURING THE YEAR AND THAT DOES NOT MAKE ANY DIFFERENCE IF THERE IS EXPEN DITURE ATTRIBUTABLE TO OR INCURRED IN RELATION TO THE EARN ING OF SUCH INCOME OR THE INVESTMENTS MADE THERE-FOR AS PRIMARILY FOR CLAIMING THE ITA NO. 860/HYD/2011 SRI VASAVI INDUSTRIES LTD. 3 INTEREST EXPENDITURE, THE SAME SHOULD HAVE BEEN LAI D OUT FOR THE PURPOSE BUSINESS AND NOT FOR THE PURPOSE OF EARNING THE INCOME. 5. FURTHER, THE AO OBSERVED THAT THE NEXT QUESTION THAT ARISES IS WHETHER THE AMOUNTS BORROWED HAVE BEEN INVESTED IN ACQUIRING THE EQUITY SHARE CAPITAL IN LIMITED COMPANIES. AS STATE D ABOVE THE ASSESSEE HAS BORROWED FUNDS AND EITHER IMMEDIATELY THEREAFTER OR SUBSEQUENTLY HUGE INVESTMENTS WERE MADE IN THE COMP ANIES. THE ASSESSEE HAD NOT FURNISHED ANY INFORMATION AS TO TH E DESTINATION OF THE LOANS, THE UTILISATION OF THE LOANS AND THE AVA ILABILITY OF OTHER FUNDS AT THE TIME OF MAKING INVESTMENTS IN LIMITED COMPANIES. IT REMAINS A FACT THAT THE ASSESSEE HAD BORROWED FUNDS AND PAID SUBSTANTIAL AMOUNT OF INTEREST AMOUNTING TO RS.4,OI ,19,159/-. THE POINT FOR CONSIDERATION IS WHETHER THE ASSESSEE WOU LD HAVE BEEN UNDER AN OBLIGATION TO PAY SUCH HUGE INTEREST, HAD THERE BEEN NO INVESTMENTS IN NON-BUSINESS ASSETS. IT WAS STATED B Y THE AO THAT HAD THE ASSESSEE NOT INVESTED THE MONIES IN NON-BUS INESS ASSETS OR ANY ASSETS YIELDING NON-TAXABLE INCOME, THE ASSESSE E WOULD NOT HAVE BEEN UNDER AN OBLIGATION TO PAY THE INTEREST. IN THIS CONNECTION THE AO QUOTED THE OBSERVATION OF THE ALL AHABAD HIGH COURT IN THE CASE OF CIT VS H.R.SUGAR FACTORY (P) L TD. (187 ITR 363). 6. IT WAS ALSO STATED THAT AS HELD BY THE ITAT, 'C ' BENCH, CALCUTTA, FOR BEING CONSIDERED FOR DISALLOWANCE ULS 14A, THE EXPENDITURE NEED NOT BE DIRECT. WHAT IS TO BE DISAL LOWED IS THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT AND NOT THE EXPENDITURE ACTUALLY INCURRED FOR THE PURPOSE OF EARNING THE IN COME. THE AO ALSO CITED THE OBSERVATION OF THE ITAT IN THE CASE OF S.G. ITA NO. 860/HYD/2011 SRI VASAVI INDUSTRIES LTD. 4 INVESTMENTS AND INDUSTRIES LTD., [89 ITD 44] AND CA LCULATED THE DISALLOWANCE AT 12% ON RS. 15,00,00,000/- THAT IS I NVESTED IN SRI VASAVI HOLDINGS & INVESTMENTS LTD. WORKED OUT AT RS .1,80,00,000/-. 7. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE CIT(A). 8. DURING THE COURSE OF APPEAL HEARING THE A.R. OF THE ASSESSEE HAD FILED WRITTEN SUBMISSIONS ON 21-12-2010 STATING THAT THE ASSESSEE COMPANY HAS INCURRED THE LIABILITY OF RS.3 ,92,06,677/- TOWARDS THE INTEREST ON WORKING CAPITAL BESIDES INT EREST TO OTHERS AMOUNTING TO RS.9,12,482/- AND THE AO HAD ERRED WHI LE TAKING INTO ACCOUNT THE NOTIONAL INTEREST AMOUNT OF RS.L,80,00, 000/- TOWARDS THE INTEREST ON RS.L5,00,00,000/- AT THE RATE OF 12 %. IT WAS PLEADED THAT THE CONTENTION OF THE AO IS NOT CORRECT AND TH ERE IS NO APPLICATION OF SEC.L4A TO THE CASE OF THE ASSESSEE AND FURNISHED THE EXTRACT OF SEC.14 A OF THE ACT AND THAT THE AMOUNT OF INCOME WHICH IS SHOWN IN THE PROFIT & LOSS ACCOUNT DOES NOT INCL UDE THE EXEMPTED INCOME WHICH CAN BE DISALLOWED U/S 14A. IT WAS FURT HER STATED THAT THE ASSESSEE HAS NOT DEBITED ANY AMOUNT TOWARDS THE INTEREST AND THE DISALLOWANCE OF RS.L,80,00,000/- MADE BY THE AO IS NOT CORRECT. THE APPLICATION OF SEC.L4A MADE BY THE AO IS NOT CO RRECT AND SUBMITTED THAT THE ASSESSEE HAS NOT EARNED ANY DIVI DEND INCOME DURING THE YEAR AND HENCE THE CONTENTION OF THE AO IS NOT CORRECT AND NOT JUSTIFIED. IT WAS FURTHER SUBMITTED THAT TH E ASSESSEE HAS BEEN MAINTAINING THE RUNNING CURRENT ACCOUNT WITH T HE BANK AND THEREFORE THE UTILISATION OF THE FUNDS FOR THE DIFF ERENT PURPOSES IS NOT POSSIBLE TO BE FURNISHED. THE AMOUNT WHICH HAS BEEN BORROWED BY THE ASSESSEE HAS BEEN UTILISED FOR THE PURPOSES FOR WHICH IT HAD BEEN BORROWED AND NOTHING HAS BEEN UTILISED FOR THE INVESTMENT ITA NO. 860/HYD/2011 SRI VASAVI INDUSTRIES LTD. 5 PURPOSES AND HENCE THE INTEREST DISALLOWANCE PROPOR TIONATE DOES NOT ARISE. THE ASSESSEE HAD PLACED RELIANCE ON THE DECI SION OF THE CIT(APPEALS), TIRUPATHI IN THE ASSESSEE'S OWN CASE FOR ASSESSMENT YEAR 2002-03 AND PLEADED FOR THE DELETION OF THE DI SALLOWANCE OF INTEREST U/S 14A O FRS.1,80,00,000/-. 9. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E, THE CIT(A) HELD THAT ISSUE INVOLVED IS MERGER OF SRI VASAVI HO LDINGS & INVESTMENTS LTD. AND THE ASSESSEE SRI VASAVI INDUST RIES. WHAT HAPPENED IS SWAP OF SHARES IN TWO YEARS, IN CONTEMP LATION OF A MERGER. THE PRESENT YEAR IS THE SECOND YEAR. AFTER THIS YEAR MERGER TOOK PLACE. THE CIT(A) OBSERVED THAT IN THE IMMEDI ATELY PRECEDING ASSESSMENT YEAR, IN THE SIMILAR CIRCUMSTANCES, THE CIT(A) HAD GIVEN FULL RELIEF, BUT THE REVENUE HAD NOT GONE ON APPEAL AND A COPY OF APPELLATE ORDER FOR THE EARLIER ASSESSMENT YEAR FIL ED BY THE AR IS PLACED ON RECORD. SINCE UNDER SIMILAR FACTS AND CIR CUMSTANCES, THE THEN CIT(A) HAD GIVEN FULL RELIEF, FOLLOWING THE SA ME, THE CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE. 10. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US A ND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE CIT(A) ERRED ON FACTS AND IN LAW. 2. THE CIT(A) OUGHT TO HAVE APPRECIATED THE DISALLO WANCE MADE BY THE AO IN RESPECT OF PROPORTIONATE INTEREST WITH REGARD TO THE INVESTMENT MADE IN THE GROUP COMPANY. 11. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SHRI M.V. JOSHI CANVASSED THAT THE ISSUE UNDER CONSIDERATION IS SQU ARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE JURIS DICTIONAL BENCH IN THE ASSESSEES OWN CASE FOR AY 2002-03 IN ITA NO. 1 00/HYD/2010 ITA NO. 860/HYD/2011 SRI VASAVI INDUSTRIES LTD. 6 (REVENUES APPEAL) VIDE ORDER DATED 13 TH MAY , 2011. A COPY OF THE SAID ORDER IS AVAILABLE ON RECORD. 12. ON THE OTHER HAND, THE LEARNED DR SHRI GNANA PR AKASH DID NOT CONTROVERT THE SUBMISSIONS OF THE LEARNED COUNSEL N OR BROUGHT ANY CONTRARY DECISION ON RECORD. 13. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF TH E AUTHORITIES BELOW. WE FIND THAT THE ISSUE UNDER CONSIDERATION I S SQUARELY COVERED BY THE DECISION OF THE JURISDICTIONAL BENCH OF ITAT, HYDERABAD IN ASSESSEES OWN CASE FOR AY 2002-03 (SU PRA) WHEREIN THE TRIBUNAL HELD AS FOLLOWS:- 4. WE HAVE HEARD BOTH THE PARTIES ON THIS ISSUE. AD MITTEDLY, IN THIS CASE, THE ASSESSEE HAS MADE INVESTMENTS IN THE SIST ER CONCERN. IN RETURN THE SISTER CONCERN HAS MADE INVESTMENT IN TH E EQUITY SHARES OF THE ASSESSEE COMPANY. THE ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT. THE CIT(A) HA S NOT EXAMINED THE APPLICABILITY OF THE SECTION 14A AND ALLOWED TH E CLAIM OF THE ASSESSEE BY HOLDING THAT THE INVESTMENTS MADE BY TH E ASSESSEE IS NOT IMMORAL AND PROHIBITED BY LAW. NEITHER THE ASSE SSING OFFICER NOR THE CIT(A) IN THIS CASE HAS EXAMINED THE FACT WHETH ER THE ASSESSEE COMPANY IS HAVING NON-INTEREST BEARING FUNDS AT ITS DISPOSAL TO INVEST IN THE SISTER CONCERN. THE ASSESSEE IS REQU IRED TO DEMONSTRATE THE AVAILABILITY OF NON INTEREST BEARIN G FUNDS TO INVEST WITH THE SISTER CONCERN AND THE QUESTION OF THE SIS TER CONCERN IN RETURN MAKING INVESTMENTS IS A SEPARATE ISSUE. THE USAGE OF FUNDS IS LEFT TO THE WISDOM OF THE SISTER CONCERN. IF THE ASSESSEE HAS DIVERTED ITS INTEREST BEARING FUNDS TO THE SISTER C ONCERN, THEN THIS IMPUGNED INTEREST IS LIABLE TO BE DISALLOWED. IN OT HER WORDS, IF THE ASSESSEE USED THE SISTER CONCERN AS A CONDUIT TO DI VERT INTEREST BEARING FUNDS TO THE SISTER CONCERN, THEN THIS INTE REST IS TO BE DISALLOWED. THE BURDEN IS ON THE ASSESSEE TO PROVE THAT THERE IS NO PAYMENT OF INTEREST ON THE FUND DIVERTED BY THE ASS ESSEE. FURTHER, ONCE IT IS BORNE OUT OF THE RECORD THAT THE ASSESSE E HAS BORROWED CERTAIN FUNDS ON WHICH INTEREST IS BEING INCURRED A ND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER C ONCERNS OR OTHERS WITHOUT CARRYING ANY INTEREST OR LESS INTERE ST WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THAT EXTENT OF AD VANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO BE DISALLO WED U/S 36(1)(III) ITA NO. 860/HYD/2011 SRI VASAVI INDUSTRIES LTD. 7 OF THE ACT. SUCH BORROWINGS TO THAT EXTENT CANNOT P OSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FOR SUPPLEMENTING T HE CASH DIVERTED WITHOUT DERIVING ANY BENEFIT OUT OF IT. ACCORDINGLY THE ASSESSEE WILL NOT BE ENTITLED TO CLAIM DEDUCTION OF INTEREST ON T HE BORROWINGS TO THAT EXTENT THOSE ARE DIVERTED TO SISTER CONCERNS O R OTHER PERSONS WITHOUT INTEREST. THE ESTABLISHMENT OF NEXUS OF FUN DS BORROWED VIS- -VIS FUNDS DIVERTED TOWARDS THE SISTER CONCERNS O N INTEREST FREE BASIS IS CONCERNED, IN OUR VIEW, THAT THE ONUS OF P ROVING THE NEXUS OF FUNDS AVAILABLE WITH THE ASSESSEE WITH THE FUNDS ADVANCED TO THE SISTER CONCERN WITHOUT INTEREST IS ON THE ASSESSEE. S.36(1)(III) OF THE ACT PROVIDES FOR DEDUCTION OF INTEREST ON THE L OANS RAISED FOR BUSINESS PURPOSE. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION IN THE BOOKS OF ACCOUNTS, THE ONUS WILL BE ON THE ASSE SSEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS RAISED BY THE ASSESSEE, THE SAME WERE USED FOR THE PURPOSE OF BUSINESS. IF IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUCH DEDUCTION, IF IT TRANSPIRES THAT THE ASSESSEE ADVANCED CERTAIN FUNDS TO ITS SISTER CONCERNS, THERE WOULD BE A VERY HEAVY BURDEN ON THE ASSESSEE TO BE DISCHARGED BEFORE THE ASSESSING OFFICER TO THIS EFFECT THAT IN SPITE OF HEAVY INTEREST PAYABLE ON BORROWINGS, STILL THERE IS A JU STIFICATION TO ADVANCE LOANS TO SISTER CONCERN WITHOUT ANY INTERES T. WITH THIS DIRECTION, WE SET ASIDE THE ISSUE TO THE FILE OF AS SESSING OFFICER FOR FRESH CONSIDERATION. 14. SINCE THE ISSUE UNDER CONSIDERATION IS MATERIAL LY IDENTICAL TO THAT OF ASSESSEES OWN CASE IN AY 2002-03 (SUPRA), RESPECTFULLY FOLLOWING THE DECISION OF THE ITAT IN THAT YEAR, WE SET ASIDE THE ORDER OF THE CIT(A) AND REMIT THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE SAME FOLLOWING THE DECISION OF THE TRIBUNAL IN AY 2002-03 (SUPRA). 15. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 20 TH DECEMBER, 2012. SD/- SD/- (CHANDRA POOJARI) (ASHA VIJAYARAGH AVAN) ACCOUNTANT MEMBER JUDICIAL MEMBE R HYDERABAD, DATED: 20 TH DECEMBER, 2012. ITA NO. 860/HYD/2011 SRI VASAVI INDUSTRIES LTD. 8 KV COPY TO:- 1) ACIT, CIRCLE 3(2), 7 TH FLOOR, B BLOCK, IT TOWERS, AC GUARDS, HYDERABAD. 2) SRI VASAVI INDUSTRIES LTD., 2 ND FLOOR, PLOT NO. 8, SAGAR SOCIETY, ROAD NO. 2, BANJARA HILLS, HYDERABAD. 3) THE CIT (A), GUNTUR 4) THE CIT-III, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.