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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & MS. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND MS. PADMAVATHY S, ACCOUNTANT MEMBER
ITA No. and Appellant Respondent Assessment Year 1219/Bang/2016 Deputy Commissioner of Income Tax, M/s. Jupiter Capital Pvt. Ltd., 2011-12 Circle – 4(1)(1), #54, Richmond Road, Bengaluru. Bengaluru – 560 025. PAN: AABCJ 5666 R 1563/Bang/2014 -do- -do- 2007-08 1601/Bang/2014 M/s. Jupiter Capital Pvt. Ltd., CIT(A)-1, 2007-08 #54, Richmond Road, Bengaluru. Bengaluru – 560 025. PAN: AABCJ 5666 R Assessee by : Smt. Sheetal Borkar, Advocate Revenue by : Shri. Sumer Singh Meena, CIT(DR)(ITAT), Bengaluru. Date of hearing : 25.05.2022 Date of Pronouncement : 30.05.2022 O R D E R Per N. V. Vasudevan, Vice President :
ITA No.1219/Bang2016, is an appeal by the Revenue against the order dated 31.03.2016 of CIT(A)-4, Bengaluru, relating to Assessment Year 2011-12. The grounds raised by the Revenue reads as follows:
The Order of the Ld. CIT (A), in so far as it is prejudicial to the interest of the Revenue, is opposed to law and the fact and circumstances of the case. 2. On facts of the case, the Ld.CIT (A) has erred in holding that in case the nexus between the investment and interest
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bearing funds is not established, section 14A r.w.r 8D has not applicability at all, when it is stated in Circular No 5/2014 dated 11/02/2014 that the disallowance u/s 14A r.w.r 8D has to be made even when the tax payer on a particular year has not earned any exempted income. 3. On facts of the case, the Ld. CIT (A) is not justified in deleting the 14A addition made under Rule 8D when the AO has rightly made the disallowance after analyzing the investment portfolio and the balance sheet given by the assessee. 4. On facts of the case, the Ld. CIT (A) has erred in deleting the addition merely based on his predecessor order of relief by a random figure without any justification. 5. On facts of the case, the Ld. CIT (A) has erred in deleting the disallowance made u/s 40A(2) , whereas the assessee has failed to established in furnishing the supporting evidences that the legal and professional fee incurred wholly and exclusively for the purpose of the business of the assessee for which the onus was on the assessee. 6. On facts of the case, the Ld. CIT (A) has erred in deleting the disallowance e by AO u/s 36(1)(iii) by merely relying on his predecessor order in the assessee's own case for 2010-11 without any justification. 7. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. The appellant craves leave-to add, alter, amend and / or 8. delete any of the grounds that may be urged.
Grounds No.1, 7 & 8 are general grounds and needs no specific adjudication. Ground Nos.2 and 3 relates to the disallowance of expenses incurred in earning income which is exempt. Under section 14A of the Income Tax Act, 1961 (hereinafter called ‘the Act’) r.w.r. 8D of the Income Tax Rules, 1962 (hereinafter called ‘the Rules’), expenses which are
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incurred in earning income, which does not form part of the total income under the Act, have to be disallowed while computing total income.
The assessee is a company. It carries on business of non-banking financial services besides investment in charter aircraft. In the course of assessment proceedings under section 143(3) of the Act for Assessment Year 2011-12, the AO noticed that the assessee has earned dividend income of Rs.61,94,777/- which does not form total income under the Act and is exempt. In the computation of total income, the assessee has shown expenses at Rs.8,28,302/-. The AO called upon the assessee to explain the basis of disallowance as made by the assessee in the computation of total income. After considering the reply of the assessee, the AO computed disallowance under section 14A of the Act r.w.r. 8D of the Rules. In so far as disallowance of interest expense under section 14A r.w.r 8D(ii) of the Rules is concerned, the AO noticed that the assessee has incurred interest expense of Rs.4,36,01,531/- out of which interest on loan availed on purchase of aircraft was Rs.3,12,19,594/-. Remaining interest on loan on fixed deposit was Rs.1,23,81,937/-. The AO accepted that aircraft loan was for the purpose of business but disallowed the interest on loan against fixed deposit under section 14A of the Act.
As far as disallowance of “other expenses” under Rule 8D(iii) is concerned, the AO worked out the disallowance as follows:
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Disallowance attracted u/s. 14A read with Rule 8D A. Total amount of Direct interest/other expenses Nil pertaining to tax-exempt investments B. Total amount of indirect interest pertaining to Rs. 1,23,81,938 tax-exempt investments A.Y 10-11 A.Y 11-12 Average C. Average amount of tax 407,24,94,585 313,11,29,080 501,38,60,089 exempt investments D. Average amount of total 1088,63,64,371 1145,61,65,374 1117,12,64,873 assets B x C 1,23,81,938 x 407,24,94,585 E. Proportionate indirect interest to be disallowed D 1117,12,64,873 = Rs. 42,13,847 F. 0.5 % of average amount of 61,910 tax exempt investments Total disallowance A + E + F Rs. 42,75,757 G. attracted u/s. 14A read with Rule 8D
Finally, the amount disallowed under section 14A is as follows: “5.6 This amount of Rs.42,75,757/- is held as attracted for disallowance u/ s. 14A read with Rule 8D of the Income Tax Act. However, the assessee has already made a disallowance u/s.14A of Rs.8,28,302/-, the balance amount of Rs.34,47,455/- is added to the Income returned by the assessee for the year.”
Aggrieved by the aforesaid order of the AO, assessee preferred appeal before the CIT(A). As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules of Rs.1,23,81,938 is concerned, the assessee submitted that it did not use borrowed funds for the purpose of making investments that would yield exempt income and submitted that the investments in equity shares and Mutual funds, that would yield exempt income were as follows:
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As on As on March 31, 2011 March 31, 2010 Unquoted equity shares Subsidiary companies 350,25,48,071 251,21,10,840 Other Companies 31,90,68,890 61,90,18,240 Quoted equity shares Current investments 9,57,93,809 NIL Others 64,14,22,258 NIL Mutual funds 45,50,27,081 NIL Total Investment 501,38,60,089 313,11,29,080
The assessee pointed out that the incremental investment was a sum of Rs.188,27,31,009 (Rs.501,38,60,089 – 313,11,29,080). Out of the above Rs.45, 50,27,081 are in mutual funds, which do not give raise to exempt income. The net incremental investment therefore was only Rs 142,77,03,928. The assessee pointed out that it had an opening cash and bank balance of Rs 392,76,31,695 and a closing balance of Rs 251,53,33,253. The reduction was thus a sum of Rs.141,22,98,442. The assessee had share capital and reserves in excess of Rs.1000 crores and gave the following details in this regard: Particulars YE 31.3.2011 YE 31.3.2010 Share Capital 5,01,97,200 54,74,650 Reserves and Surplus 18,01,99,18,452 .1000,00,89,176 Loan Funds 1,28,64,29,658 83,10,67,978 Deferred Tax 9,96,20,072 4,89,32,667 Total 11,45,61,65,374 1088,63,64,371
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The assessee pointed out that from the above table it would be clear that borrowed funds have not been used for making investments which were used to make investments that would yield except income.
The assessee also submitted that the fixed deposits receipts representing investments in the banks were offered as security for borrowings and the borrowed funds were used for temporary working capital and not for making any investments. It was also submitted that except for allegation that interest expense on borrowings on the securities on fixed deposits were used for making investments that would yield exempt income, the AO has not brought out any evidence on record to show that the borrowed funds on the security of fixed deposits were in fact used for making investments that would yield tax free income.
The CIT(A) agreed with the submissions of the assessee that the assessee had sufficient interest free funds from and out of which it can be presumed that it made investments that would yield tax free exempt income. The CIT(A) therefore deleted the disallowance made by the AO at Rs.42,13,847/- out of interest expenditure of Rs.1,23,81,938/- under Sec.14A read with Rule 8D(2)(ii) of the Rules The findings of the CIT(A) in this regard were as follows: “The assessee's contention in respect of the disallowance u/s. 14A have been cosndiered. The appellant is stated to be a registered NBFC, its main business activity being in the nature of money lending and investment in equities. It is seen that the assessee has earned interest in income of Rs.31,12,19,202/- as against the interest expenditure incurred. A comparative analysis of the Balance Sheet for the period
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ending 31.03.2011 and 31.03.2010 reveals that, the reserves and surplus increased from 1000,63,63,826/- to Rs. 1801,99,18,452/- which works out to be 18% more. As against this, the loan funds stood at Rs. 1,28,64,29,658/- on 31.03.2011, viz-a-viz the figure of Rs. 83,10,67,978/- as on 31.03.2010. Correspondingly the investments increased from Rs. 313,11,29,080 to Rs. 501,38,60,089/-which gives incremental figure of Rs. 188.27 crores. The assessee has submitted that in this scenario out of this incremental investment, Rs. 45 crores are in debt fund which do not result in dividend income. For the balance, the appellant argues that it has availability of Rs. 392 crores at beginning of the year and has an operating profit of approximately Rs. 20 crores. In the facts and circumstances, the assumption that the entire interest (as applied by the AO) was attributable to earning exempt income is not supported by facts. There is strength in the assessee's contention that the investments were largely made out of its available funds and not necessarily from the borrowed capital. The Hon'ble jurisdictional ITAT Bangalore has ruled in several cases that„(in absence of direct nexus to prove the diversion of interest), where the reserves and supply exceed borrowals, no interest disallowance can be made u/s. 14A.”
Aggrieved by the order of the CIT(A), the Revenue has raised grounds 2 and 3 before the Tribunal. As far as ground No.2 is concerned, it is clearly a misconceived ground as the relief given by the CIT(A) was only restricted to disallowance of interest under Rule 8D(2)(ii) of the Rule and no relief has been given on the basis that the assessee did not earn any tax free income. As far as ground No.3 is concerned, we are of the view that the assessee had enough surplus funds and borrowed funds were not used for the purpose of making investments that would yield tax free income. In this scenario, we find that in the light of the principles laid down by the Hon’ble
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Karnataka High Court in the case of CIT Vs. Micro Labs Ltds., 383 ITR 90 (Karn.), wherein it was held that when investments are made out of common pool of funds and when the non-interest bearing funds or interest free funds that were available with the assessee were more than the investments that would yield exempt income, the presumption is that investments that would yield exempt income were made out of own funds that are interest free and hence there cannot be any disallowance of interest expenditure under section 14A of the Act r.w.r.8D(2)(ii) of the Rules. We are of the view that the CIT(A) has rightly come to the conclusion that the disallowance under section 14A of the Act r.w.r. 8D(2)(ii) of the Rules deserves to be deleted. We find no infirmity in the order of the CIT(A) and accordingly dismiss ground No.3 raised by the Revenue.
As far as ground No.4 raised by the Revenue is concerned, the fact are that the AO found that the assessee owned a aircraft and in respect of which the following expenses had been incurred by the assessee:
Expenses related to aircraft owned Sl. Amount in Particulars No. Rs. 1 Depreciation 33,60,13,642 2 Interest to Bank (paid to Yes 3,12,19,593 Bank) 3 4,77,09,360 Aircraft operating expenses Total 41,49,42,595
The AO also found that the assessee earned revenue of only Rs.2,24,38,333/- from hiring aircraft to third parties. The AO, therefore, was of the view that out of expenses related to aircraft, a sum of
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30,46,07,470/- should be disallowed and accordingly he added the aforesaid sum to the total income of the assessee. On appeal by the assessee, the CIT(A) came to the conclusion that depreciation on aircraft cannot be disallowed as the assessee is the owner of the aircraft and has used the aircraft for the purpose of business. The CIT(A) also was of the view that interest paid to the bank on borrowings for the purpose of acquiring the aircraft cannot be disallowed as the conditions for allowing the interest expenses as a deduction are fully satisfied. In so far the remaining sum of Rs.4,77,09,360/- which was claimed by the assessee as aircraft operating expenses, the CIT(A) was of the view that an adhoc disallowance of Rs.45 lakhs would be just and appropriate. The reasons given by the CIT(A) for coming to such a conclusion was as follows:
The Aircraft operating expenditures have been claimed at the figure of Rs. 4,77,09,360/- against the total earning from Aircraft hiring at Rs. 11,03,35,125/-. It is seen from the Break-up of the Hire-receipt that, an amount of Rs. 2,24,38,333/-pertains to third parties and the Balance is stated to be received from the associate concerns. In this background, the AO's primary observation With regard to claim of expenditures at Rs. 4,77,09,360/- is that, full details / party particulars were not provided by the Appellant. The Assessee, during the present Appeal-proceedings has strongly objected to the disallowance. However, apart from the information submitted before the AO, no fresh party particulars; were submitted in this regard. It is seen from the past history of the case that, such disallowances have been made by the AO. Even though it reveals from my predecessors' order that, substantial relief has been given at appellate level, it was incumbent upon the Assessee to produce all relevant expenditure-details, which would include passenger lists; details / number of sorties flown and the areas of
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flight operation. In this background, and in view of past history of the case, and in absence of complete details provided, it is reasonable to hold that disallowance to the extent of 45 lakhs is upheld out of the total expenditure disallowance made by the AO.
Aggrieved by the order of the CIT(A), the Revenue has preferred ground No.4 before the Tribunal.
We have heard the rival submissions. We find that in assessee’s own case for Assessment Year 2010-11, similar issue had arisen for consideration in ITA No.1595/Bang/2013 and this Tribunal by order dated 13.12.2019 upheld similar order of the CIT(A). The following were the relevant observations of the Tribunal:
“5. As per ground No.3, this is a grievance of the Revenue that learned CIT(A) has erred in restricting the disallowance of the net Aircraft expenditure to Rs.45.60 lakhs. On this issue also, learned DR for the Revenue supported the assessment order whereas learned AR of the assessee supported the order of the CIT(A). In this regard, it is noted by the learned CIT(A) in para No.4.2 of his order that the assessee has incurred total expenditure on account of Aircraft of Rs.2253,23,695/- including Rs.2100,08,528 being depreciation, Rs.38,95,273/- being interest and Rs.114,19,894/- being expenses. From this total amount of expenses, an amount of Rs.269,80,969/- has been reduced being Aircraft Hire Charges received and net expenditure of Rs.1983,42,726/- was claimed by the assessee. This claim of the assessee was disallowed by the AO by holding that the assessee company has not given the details of the passengers who flew in the Aircraft, details of loadings and the purpose for which the Aircraft was used. This disallowance was reduced by the learned CIT(A) to Rs.45.60 lakhs. In para No.4.6 of his order, this finding is given by the learned CIT(A) that as per various judgments noted by him in para No.4.5, two conditions are to be satisfied for an assessee to be eligible for claim of depreciation under section 32. These
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conditions noted by him in para 4.6 of his order are (1) the building, machinery, plant and furniture may be owned by the assessee (2) it should be used for the purpose of its business or profession. A categorical finding has been given by the CIT(A) in his order that the assessee satisfies both the conditions and on this basis, it was held by him that the assessee is eligible for depreciation on the Aircraft. He has further noted that the Aircraft was acquired to run it on hire and air craft charges are in fact received and, on this basis, he decided that depreciation on Aircraft of Rs.2100,08,528/- is allowed. We find that there is no dispute that an amount of Rs.269,80,969/- was earned by the assessee towards aircraft hire charges and the expenses claimed by the assessee of Rs.1983.43 lakhs is after reducing the charges received by the assessee of Rs.269.81 lakhs. Under these facts, we find no infirmity in the order of the CIT(A) as per which it was held by him that the expenses on aircraft including depreciation is allowable. Hence, on this issue also, we find no infirmity in the order of the CIT(A) and we confirm the same. Ground No.3 is also rejected.”
Respectfully following the order of the Tribunal, we uphold the order of the CIT(A) in so far as disallowance of interest and depreciation expenses are concerned. In so far as disallowance of an adhoc sum of Rs.45 lacs on aircraft maintenance expenses is concerned, in the absence of details, disallowance was required to be made but that had to be based on bifurcation of fixed costs of running the aircraft, which cannot be disallowed because fixed costs have to be incurred irrespective of the usage of the aircraft. As far as variable cost is concerned, a proportion of usage of aircraft for non-business purpose can be disallowed. The disallowance of Rs.45 lacs which is roughly about 10% of the aircraft expenses in our view was just and fair. We find no ground to interfere in the order of the CIT(A) and accordingly dismiss ground No.4 preferred by the Revenue.
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As far as ground No.5 raised by the Revenue is concerned, the facts are that the assessee paid legal and professional charges of Rs.1,92,00,000/- and service tax of Rs.11,22,700/- making a total payment of Rs.2,03,22,700/- under the head legal and professional charges. The legal and professional charges were paid by the assessee to its holding company M/s. Vectra Holdings Pvt. Ltd., (VHPL) for providing management services. It is not in dispute that VHPL was a person falling within the ambit of 40A(2)(a) of the Act that he was a related person and therefore as per the aforesaid provisions, the assessee has to justify the payment made to a related party keeping in mind the nature of services provided and the price at which such services are generally available in open market between unrelated parties. The AO called upon the assessee to substantiate the payments made to VHPL and also the nature of services provided by VHPL.
The assessee pointed out that assessee had entered into an agreement with VHPL on 01.04.2009 for rendering managerial services at Rs.5 lacs per month. Another company by name Asia Net TV Holdings Pvt. Ltd., (ATHPL) entered into an agreement dated 01.04.2009 with VHPL whereby ATHPL agreed to pay VHPL management fee of Rs.11 lakhs per month. The assessee also explained that VHPL was responsible for providing quantified personnel for assisting the assessee its its business related to investments, preparing business plans, strategies and providing management resources, assisting in liasoning with banks, financial institutions, statutory and government agencies and providing incidental services. The assessee thus claimed that the payment made to VHPL has to be allowed as a deduction.
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The AO however held that the assessee firstly failed to provide evidence to substantiate the nature and scope of services rendered by VHPL. The AO also found that as per the agreement dated 01.04.2009 between VHPL and ATHPL, VPHL was to provide services only to ATHPL and even after merger, the agreement continued meaning thereby that VHPL has to provide services only to ATHPL and its associated business. The AO therefore came to the conclusion that the assessee has failed to prove that the sum of Rs.1.92 Crores paid to VHPL is for legitimate business needs and that the payment was reasonable and not excessive compared to the market rate. The AO accordingly disallowed the claim of the assessee for deduction of the entire sum of Rs.1.92 Crores.
On appeal by the assessee, CIT(A) agreed with the AO that the provisions of section 40A(2)(a) of the Act were attracted in the case. But he was of the view that the quantification of disallowance made by the AO was not correct. In this regard, the CIT(A) firstly noticed that what could be disallowed under section 40A(2)(b) of the Act is only the payment which is excessive or unreasonable. He thereafter found that the assessee already had an agreement with VHPL dated 01.04.2009 for payment of management fee at Rs. 5 lakhs per month and similarly ATHPL had an agreement with VHPL dated 01.04.2009 for rendering management services at Rs.11 lakhs per month. ATHPL and the assessee merged as one entity and was one entity during the relevant previous year. After the merger of the assesse with ATHPL, the assesse made 2 payment i.e., Rs.5 lakhs as per the agreement with the assesse prior to amalgamation and Rs.11 lakh per month
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payable by ATHPL prior to the amalgamation. The CIT(A) was of the view that the services rendered by VHPL was one and the same under both the agreements and in the circumstances 2 payments to VHPL was not justifiable. The CIT(A) therefore was of the view that only a sum of Rs.60 lakhs at Rs.5 lakhs per month which was paid by the assesse prior to the merger was a reasonable payment and he sustained the disallowance only in respect of a sum of Rs.1.32 Crores (Rs.1.92 Crores – Rs.60 lakhs).
Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal. Learned DR reiterated the stand of the AO. Learned Counsel for the assessee relied on the order of the CIT(A).
After considering the rival submissions, we are of the view that the AO gave no basis for disallowing the entire expense of Rs.1.92 Crores claimed by the assessee as payment of management fee. As per the provisions of section 40A(2) of the Act, only payments which are excessive and unreasonable has to be disallowed. It is not disputed that services were rendered by the VHPL. In the circumstances, we are of the view that the approach adopted by the CIT(A) in allowing a sum of Rs.60 lakhs as deduction on the ground that the services rendered by VHPL were one and the same even after the merger of the assessee with ATHPL is justified and calls for no interference. Accordingly, ground No.5 raised by the Revenue is also dismissed.
As far as ground No.6 raised by the Revenue is concerned, the facts are that the assessee company had given share application money to
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assessee’s sister concerns/companies totally a sum of Rs.82.27 Crores, as follows:
Sl. 31-03-2011 31-03-2010 Name of the recipient company No. 1 Advanced Audio Solutions 75,00,000 (Bangalore) Pvt. Ltd. 2 Asianet News Pvt. Ltd. 32,58,00,000 14,80,00,000 3 Axis Aerospace and Technologies 5,60,15,414 Pvt. Ltd. 4 Azure Media Publications Pvt. Ltd. 3,54,96,600 3,54,96,600 5 Hindustan Infrastructure Projects 86 25,00,00,000 20,00,00,000 Engg. Pvt. Ltd. 6 India Radio Ventures Pvt. Ltd 12,09,26,306 11,56,00,000 7 Indigo Films Pvt. Ltd. 5,64,120 8 Kochi Property Developers Pvt. Ltd. 3,50,00,000 3,50,00,000 9 P V K Shelters (India) Pvt. Ltd. 1,50,00,000 1,50,00,000 10 Tayana Software Solutions Pvt. Ltd. -- 11 Videocon Properties Ltd 3,90,00,100 12 Indigo music pvt. Ltd 1,05,07,120 -- 13 Suyog Corporate Solutions Pvt. Ltd. 3,00,00,000 Total 82,27,30,026 65,21,76,234
As above, it is seen that the share application money given has increased from Rs. 65.21 crores to Rs. 82.27 crores. The average of the said amount was worked out by the AO at Rs.73,74,53,130/. According to the AO, the Hon'ble Karnataka High Court in the case of CIT Vs. Mythreyi Pai 152 ITR 247 and in the case of United Breweries Ltd 321 ITR 546 has held that the expenditure incurred towards purchase of shares is a capital expenditure and does not qualify for deduction u/s. 36(1)(iii) of the Income Tax Act. According to the AO, interest worked out at the rate of 12% per annum needs to be disallowed from being claimed as a revenue expenditure. The AO found that indirect interest debited in the profit and loss account
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claimed as deduction was a sum of Rs.1,23,81,938/-. The AO restricted the disallowance u/s.36(1)(iii) of the Act, to this interest expenditure alone and he disallowed indirect interest debited by the assessee for the year of Rs. 1,23,81,938/- u/s. 36(1)(iii) as pertaining to the acquisition of shares in the subsidiary companies and not related to the business of the assessee. He however noticed that the very same interest expenditure of Rs.1,23,81,938/- was subject matter of disallowance u/s.14A of the Act and a sum of Rs.42,13,847/- out of the said sum was disallowed u/s.14A of the Act, read with Rule 8D(2)(ii) of the Rules. The total sum disallowed u/s.14A of the Act, i.e., under Rule 8D(2)(ii) & Rule 8D(2)(iii) of the Rules was Rs.42,13,847 + Rs.61,910 = Rs.42,75,757/-. The balance amount of Rs.81,06,181/- (Rs.1,23,81,938 – Rs.42,75,757) was disallowed further from being claimed as revenue expenditure for the year. This amount was added to the income returned by the assessee for the year,
On appeal by the assessee, the CIT(A) deleted the addition made by the AO with the following observations:
“7.3. The AO, while making the disallowance of interest, u/s. 36(1)(iii) has done so primarily on the premise that, borrowed funds were utilized for payments towards share-application money. There is also a presumption that, the entire interest expenses are utilized largely for making investments. The AO has not established a clear nexus between the interest on borrowed capital and payment made towards investment in share-application money. This disallowance therefore is rather tentative, as also, involves duplication, keeping in view, the AO's simultaneous working of interest disallowance u/s. 14A. The Addition is therefore an indirect way of attributing interest payments towards share-capital which is not supported by clear facts.
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The Appellant on the contrary in a similar vein (to establish that, interest bearing funds were not utilized towards share- application money), has made detailed submissions as to the actual user of the same. It has been contended that, it's own funds were sufficient for the purpose. It has been submitted that, the assessee has large availability of reserves and surplus to the extent of Rs. 1801,99,18,452/- as against loan funds of Rs. 28,64,29,650/-. It is evident therefore, that the AO cannot categorically hold that, investment towards share application money was only from borrowed funds and that, any certain amount of interest was attributable, to the same. It is further seen from the Break-up of total interest- expenditures that, out of total expenditure of Rs. 436,01,531/-. Interest paid to Yes Bank for Aircraft was Rs. 312,19,594/- and interest on loan (against FD's) stand at Rs. 123,81,937/-. There is no specific detail of payments made directly, (out of the borrowed funds) for share application, and the specific amount of interest attributable to such Transaction. It has also been brought to notice that the appellant has raised an amount of Rs. 31.12 crores from FD's. The AO in this case is only considering the interest paid on loan taken against FD's. In these facts and circumstances, the disallowance of Rs. 81,06,181/- is not supported by adequate facts and figures. The Appellant is a registered NBFC and therefore it is typically an investment company, and payments towards share application are a part of its routine business activity. The question of commercial expediency therefore, assumes importance in this context. It cannot be said that, the assessee invested for a non-business purpose. The Appellant, in view of the mixed funds at its disposal, has placed reliance on the observations of the Supreme Court in the case of S.A. Builders Ltd. Vs. CIT 268 ITR I-(Supreme Court) and
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Punjab Steel Vs. CIT 324 ITR 396, wherein it has been held that, the primary test to be applied in such case would not be the source of funds but, the commercial expediency and business purpose. In the present case the AO has not made such a case. It is further seen from the perusal of the Appellate- orders of my predecessor in the Assessment Year: 2010-11 that, disallowances made u/s. 36(1)(iii) stand deleted, in similar situation. In the facts and circumstances the disallowance of Rs.81,06,181/- made u/s. 36(1)(iii) is deleted.”
Aggrieved by the order of the CIT(A), the Revenue has raised ground No.6. The learned DR relied on the order of the AO. The learned Counsel for the assessee relied on the order of the CIT(A).
We have already seen while deciding the issue under section 14A of the Act that interest expenditure of Rs1,23,81,938/- cannot be disallowed as interest paid on borrowings on the security on fixed deposit receipts were not used for the purpose of making investments that would yield tax free income because of availability of surplus interest free funds with the assessee. The aforesaid finding would equally apply to the disallowance under section 36(1)(iii) of the Act also and therefore on the same reasoning, the disallowance deserves to be deleted and was rightly deleted by the CIT(A). We find no ground to interfere in the order of the CIT(A). Accordingly, ground No.6 raised by the Revenue is also dismissed.
In the result, the appeal of the Revenue is dismissed.
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ITA Nos.601/Bang/2014, 1563/Bang/2014
ITA No.601/Bang/2014 is an appeal by the assessee while ITA No.1563/Bang/2014 is an appeal by the Revenue. Both these appeals are directed against the order dated 27.08.2014 of CIT(A)-1, Bengaluru, relating to Assessment Year 2007-08.
First, we shall take up for consideration grounds 2 to 4 raised by the Revenue, which relates to validity of initiation of reassessment proceedings u/s.147 of the Act, which reads as follows:
On the facts of the case, the Ld.CIT (A) has failed to appreciate the fact that the assessee company has failed to disclose fully and truly all material facts. necessary for its assessment and when it is clearly brought out in the reasons recorded u/s 147 of the I T Act, 1961 that it is benefited in the form of share premium on account of foregoing of the amount paid by the other four group concerns. 3. On the facts of the case, the Ld. CIT(A) has failed to take note of the fact that M/s Vectra Holdings Private Limited took over the shares during the previous year 2006-07 and hence, the taxability of the amount foregone is for AY 2007-08 and hence ought to be taxed for the year under consideration. 4. On the facts of the case, the Ld. CIT(A) has failed to appreciate that the amount received by the assessee company has been shown as its capital reserve and the share premium paid by the four companies were not returned back to them by the assessee company, but the entire shares have been credited to the account of M/s Vectra Holdings Private Limited on payment of below 25% during the year under consideration.
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As can be seen, the aforesaid grounds of appeal relate to validity of initiation of reassessment proceedings. As far as the validity of the action of the Revenue authorities in initiation of reassessment proceedings is concerned, the facts are that for AY 2007-08 the assessee filed return of income on 31.10.2007, declaring a loss of Rs.44,00,286/-. The return was processed u/s.143(1) of the Act on 20.2.2009. Thereafter an order of assessment u/s.143(3) of the Act dated 30.12.2009 was passed by the AO making additions of Rs.4,34,18,027/- to the income returned by the assessee and assessing the assessee at a total income of Rs.3,90,17,741/-. Thereafter the AO issued a notice u/s.148 of the Act, proposing the assess the assessee u/s.147 of the Act, on income that has escaped assessment. The AO issued notice u/s.148 of the Actdated 02.07.2012 after recording the following reasons:-
"The assessee company, M/S.Jupiter Capital Private Limited filed its return of income for the assessment year 2007-08 on 31/10/2007, declaring loss of Rs.44,00,286. The case was selected for scrutiny and an assessment order u/s 143(3) was passed on 30/12/2009 by making additions of Rs.4,34,18,027 and assessing the taxable income at Rs. 3,90,17,741. It has been learnt that, during the financial year 2005-06, a company by name M/ s Vectra Holdings Pvt. Ltd(now called as .M/ s Vectra consultancy Services Pvt. ltd.) had purchased 26,400 shares of M/ s. Jupiter Capital Pvt. Ltd @ Rs. 10/- per share. No premium was paid by this company on these shares in that year. However, in the same year, i.e., financial year 2005-06, five other companies applied for 5,20,565 shares. The face value of the share was Rs. 10/- each and the premium was Rs.4,990/- per share. The position of shareholding and share premium contributed ,by all the shareholders in M/s Jupiter Capital Pvt. Ltd., in the financial year 2005-06, is as under:- Details of equity shares share premium of Jupiter Capital Pvt.Ltd. issued by company
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Names of the No. of Face value Premium Period shareholder shares Rs. Rs.4,990/- 2005-06 K Venkatarame Allotment Gowda 500 5000 - at 26,400 2,64,000 - Purchased Vectra . Holdings Pvt.Ltd at par 2,36,000 23,60,000 . 117,76,40,00 Epsilon Adviser Pvt.Ltd 0 100 called 1,86,800 18,68,000/ 69,90,99,000 up Tayana Consult - 75 called up Pvt.Ltd 91,700 9,17,000 34,31,87,250 Coimbatore Cable Net Pvt.Ltd 75 called u Preferential allotment 2,665 26,650/- 99,73,762 Larite Industries Ltd., 75 called up 3,400 34,000/- Nucent 1,27,24,500 technologies 75 called up Pvt.Ltd 547465 54,74,650 224,26,24,512 Total as on 31.03.2006
As evident from the above table; AV s Epsilon Advisors Pvt.Ltd., to whom 2,36,000 shares were allotted, paid the entire share premium in the financial year 2005-06 itself and its total investment was Rs.118, 00, 00,000/ -. During the subsequent year, i.e., in financial year 2006-07, four of the above companies, viz., Tayana Consult Put.ltd, Coimbatore Cable Net Pvt. Ltd., Larite Industries Ltd., and Nucent Technologies Pvt. Ltd, could not pay the balance 25 share premium of Rs.35,49,94,838/-. At this juncture M/s Vectra Consultancy Services Pvt.ltd. came into the picture and paid a sum of Rs.35,49,94,838/- being 25 of the share premium due from the four companies and bought around 2,84,565 shares from the four companies. As per. the share transfer forms, M/ s Vectra Consultancy Services Pvt. ltd, bought the above shares of Jupiter Capital Pvt. ltd from the above companies at the following consideration:
Company No. of Shares Consideration Tayana Consult Pvt. Ltd 186800 Rs, 14,01,000 Coimbatore cable Net Pvt. Ltd 91700 Rs. 6,87,750 Larite Industries Ltd 2665 Rs.19,988 Nucent Technologies Ltd 3400 Rs.25,500
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M/s Epsilon Advisors Pvt. Ltd also transferred its holding of 2,36,000 shares of Jupiter Capital Pvt. Ltd to M/ s. Vectra Consultancy Services Pvt. Ltd. apparently at a paltry sum. Thus, M/s.Vectra Consultancy Services Pvt. Ltd became the owner of 99.91% of the share, i.e., 5,46,965 shares of M/s.Jupiter Capital Pvt. Ltd. Based on the above, it is seen that, during F. Y2005-06, substantial amounts in crones were brought in by the four companies mentioned above as share premium in Jupiter Capital Pvt. Ltd and they have foregone this amount in. the subsequent financial year and the shares were transferred to M/s Vectra Consultancy Services Put. Ltd. The above mentioned four companies had applied for shares of Jupiter Capital Pvt. Ltd and had paid 75 of the total amount. The face value of the shares was Rs.10/- and the premium value was Rs.4,990/- per share. It is learnt that the shares of M/ s. Jupiter Capital Pvt. ltd were not valued at any point of time and the share premium had been fixed without any basis. The total amounts paid by these four companies are as follows: SI. Name of the share holder Total amount paid (share No. premium 4-share capital) 1 Tayana Consult Pvt.ltd 69,90,99,000+ 18, 68.000=70, 09,67, 000 Coimbatore Cable Net 34,31,87.250 + 2 9.17.000=34,41.04,250 3 99, 73, 762+26,650=1,00,00,412 Larite Industries Ltd Thus it is seen that the four companies had paid a total amount of Rs.106,78,30,162 and the amount paid by Vectra Consultancy Services Pvt. Ltd—to (require- around 99.9 share holding in Jupiter Capital Pvt. Ltd is Rs.35,49,94, 838/- which was the 25% share premium due from the four companies. The amount received by Jupiter Capital has been shown by them as its Capital reserve. The share premium paid .by the four companies was not returned back by Jupiter Capital Pvt. Ltd. to them.
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As per the provisions of Part II of Schedule 6 of the Companies Act, the Profit & Loss account has to disclose every material feature including credits or receipts and debits or expenses in respect of non recurring transactions or transactions of exceptional nature. Further miscellaneous income earned by the company also has to be recorded by the company in the profit & loss account. But on perusal of the balance sheet and profit & loss account of the assessee company for the financial year 2006-07(AY 2007-08), there is no mention of the fact of either of forfeiture of shares by the four companies during the year nor the exclusive transaction wherein these shares were purchased by Vectra Consultancy Services Pvt. Ltd. The whole amount earned by the company as the share capital and share premium has been shown as the Capital Reserve in the balance sheet and has been considered as a capital receipt. This amount has been earned by the company, even though there has never been any valuation of shares. It is noted that the share premium may not genuinely fall under the heading of capital receipt. This whole business transaction has not been disclosed by the assessee in its financial statements, audit report, notes to accounts or Form 3CD. Thus it is seen that the assessee company has failed to disclose fully and truly all the material facts necessary for assessthent and has also understated its income. It is also noted that there has been a deliberate attempt on the part of the assessee to suppress the facts, with the intention of evading taxation on the income of Rs. 106, 78,30,162. This is because the nature of the transaction has not been disclosed anywhere in its financial statements and the whole procedure, wherein related concerns have paid a huge share capital and share premium of Rs.4990 (on unvalued shares) and then forfeited the same, seems to be with the ulterior motive of parking funds in the company. The assessee seems to have made use of a colorable device to probably bring back its own funds and in the process, the other related concerns have also ended up claiming a huge revenue loss. The forfeited amount cannot be
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claimed as a capital receipt by the assessee company and exempt from tax."
The summarized reason recorded by the AO is that in previous year relevant to AY 2005-06, four companies viz., Tayana Consult Pvt. Ltd., Coimbatore Cable Net Pvt.Ltd., Larite Industries Ltd., and Nucent Technologies Ltd., purchased shares at substantial premium amount in the assessee company at Rs.4990/- per share and retransferred those shares in the previous year relevant to AY 2007-08 at a price which was less than what they paid for acquiring shares in the previous year relevant to AY 2005-06. There was no valuation of shares at the time when these four companies acquired shares of the assessee in the previous year relevant to AY 2005-06. The purchase price was Rs.106,78,30,162 whereas the sale price was Rs.35,49,94,383/-. According to the AO the above four companies paid huge premium to park their funds in the assessee when they purchased the shares and the assessee forfeited these shares for non-payment of call money. The four companies claimed the loss on forfeiture of shares as a revenue loss. The purchaser of shares from these four companies was one M/s. Vectra Consultancy Services Pvt. Ltd., which held 99.9% of the Shares of the assessee after such acquisition. The amount forfeited by the assessee was claimed as capital receipt not chargeable to tax and thus there was a loss of revenue and income to that extent has escaped assessment.
Therefore, the AO. reopened the assessment u/s 147 by issue of a notice u/s 148 dated 2/7/2012 in response to which the assessee vide its
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letter dated 27/7/2012 requested the AO to treat the original return filed on 31/10/2007 as one filed in compliance with the notice u/s .148 of the Act. The objection of the assessee to the reopening of the assessment was that the shares issued at a premium had been disclosed in the return and that the amount received by it against forfeited shares was capital in nature, which was not required to be offered for tax.
The CIT(A) on the validity of the initiation of reassessment proceedings u/s.147 of the Act, was of the view that the assessment for A.Y. 2007-08 was reopened u/s 147, by issue of notice u/s 148 of the Act dated 02.07.2012 i.e. after the expiry of four years from the end of the relevant Assessment year i.e., AY 2007-08. The CIT(A) placed reliance of Hon’ble Delhi High Court in the case of United Electrical Co. Pvt. Ltd. vs. CIT (2002) 125 Taxman 775 (Delhi) and on the decision of the ITAT Ahmedabad Bench in the case of C.D. Singh v. ITO (2010) 129 TTJ (Ahd 'D-Trib) 495. The CIT(A) firstly noticed that the reasons recorded by the AO before initiating proceedings u/s.147 of the Act, were on facts which were already on record when the original proceedings u/s.143(3) were completed by the AO. He found that existence of tangible material, for the formation of opinion for escapement of income, after the conclusion of Assessment proceedings, is a prerequisite for initiation of action under section 147 of the Act. Since the reopening of assessment was based on facts already on record of the AO, he held that initiation of reassessment proceedings was invalid. Although, the reopening of assessment u/s 147 and issue of notice u/s 148 of the Act was considered as invalid by the CIT(A), he however, proceeded the decide the various grounds of appeal raised by the
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assessee on merits as well for the reason that in case initiation of reopening of assessment vis-a-vis issue of notice u/s 148 of the Act upheld by the higher forum, it would be appropriate to decide issues on merit.
Aggrieved by the order of the CIT(A), the revenue has raised grounds No.2 to 4 in its appeal. The Learned DR reiterated the stand of the Revenue as contained in grounds 2 to 4 raised by the Revenue before us. Learned Counsel for the assessee, besides relying on the decision of the Hon’ble Supreme Court in the case of CIT Vs. vs. Kelvinator India Ltd. 320 ITR 561 (SC) also relied on the decision of Hon’ble Karnataka High Court in the case of Dell International Pvt. Ltd., 432 ITR 212 (Karn.) (Full Bench).
We have given a very careful consideration to the rival submissions. A bare perusal of the reasons recorded by the AO which has been reproduced in the earlier part of the order, shows that whatever has been set out therein, is based on the material available on record when the assessment proceedings were concluded under section 143(3) of the Act by order dated 30.12.2009. No new material whatsoever has come into the possession of the AO based on which he came to the conclusion that the assessee with an intention of evading tax on income of Rs.1,06,78,30,162/- were the information already available from the record of assessment. In view of the fact that there was no fresh tangible material in the possession of AO at the time of recording of reasons for initiating proceedings u/s.147 of the Act, the law laid down by the Hon’ble Supreme Court in the case of CIT vs. Kelvinator India Ltd. 320 ITR 561 (SC), has to be applied. It was held by the Hon’ble Supreme Court that for reopening of the assessment, the AO should have in its
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possession ‘tangible material’. The term ‘tangible material’ has been understood and explained by various courts subsequently. There has been unanimity of the courts on this issue that in absence of fresh material indicating escaped income, the AO cannot assume jurisdiction to reopen already concluded assessment. The decision in the case of Kalyanji Mavji & Co 102 ITR 287 (SC), where it was held that “oversight, inadvertence or mistake” in passing assessment order will give the A.O jurisdiction to reopen the assessment, is not good law in view of the subsequent decision in Indian and Eastern Newspaper Society Vs. CIT 119 ITR 996 (SC) wherein it was held that an error discovered on a reconsideration of the same material (and no more) does not give him that power. The aforesaid view on the above proposition has been reiterated by the Apex Court in A.L.A.Firm vs. CIT 183 ITR 285. Thus, reopening has held to be invalid on this ground also. The Full Bench of the Hon’ble Karnataka High Court in the case of Dell India Pvt.Ltd. Vs. JCIT 382 ITR 310 (Karn) reiterated the law laid down by the Hon’ble Supreme Court in the case of Kelvinator India Ltd., (supra). The law is thus very clear that an assessment completed under section 143(3) of the Act can be reopened only on the basis of existence of tangible material coming into income possession of the AO after conclusion of such assessment proceedings. On the basis of the very same material available at the time of conclusion of the proceedings under section 143(3) of the Act, the AO cannot be allowed to review his own order. The decision of the Hon’ble Supreme Court in the case of Kelvinator India Ltd. (supra) is directly on the point. The principle laid down by the Hon’ble Supreme Court has again been reiterated by the Hon’ble Karnataka High Court in the case of Dell International Ltd., (supra). In the given facts and circumstances of the case, we are of the view that there is no merit in grounds 2 to 4 raised by the Revenue in the appeal. Consequently, the said grounds are dismissed. In
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view of the conclusion, the reassessment proceedings were not validly initiated and the consequent quashing of the order under section 147 of the Act, we are of the view that the other issues raised by the assessee as well as Revenue in various grounds of appeal does not require any adjudication. In this regard, we find that the CIT(A), as a matter of abundant caution, has besides quashing the assessment under section 147 of the Act, has proceeded to decide the issue on merits also. As we have already stated, we do not wish to adopt such a course in view of our conclusion that the order of reassessment deserves to be quashed and annulled. Accordingly, appeal of the Revenue as well as the assessee are dismissed.
In the combined result, appeal of the Revenue for Assessment Year 2011-12 i.e., ITA No.1219/Bang/2016 and the appeal of the Revenue for Assessment Year 2007-08 in ITA No.1563/Bang/2014 and ITA No.1601/Bang/2014 are dismissed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (PADMAVATHY S) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 30.05.2022. /NS/*
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Copy to: 1. Assessees 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.