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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
आदेश / O R D E R
PER AMARJIT SINGH, AM:
Both the appeals of the assessee and revenue are directed against the order of the Commissioner of Income Tax (Appeal)-53, Mumbai (hereinafter as the ld. CIT(A) in the relevant A.Y. 2010-11. Since these different appeals are pertained to the same assessment year based on identical issues, therefore, both these appeals are adjudicated together in this order.
(Appeal filed by the Assessee) Ground No. 1 Reopening in bad in law: “1. The ld CIT(A) erred in upholding the reopening of assessment vide .notice u/s. 148 dtd: 30/01/2014 for the A.Y: 2010-11 without appreciating that original assessment was completed u/s 143 (3) of the Act dtd: 22/2/2013 after proper application of mind on the issues involved, thus reopening in based on mere change of opinion on same set of facts which was duly disclosed in the assessment.
The reopening of assessment is based on audit objection dtd: 21.11.2013 which clearly reveals that reopening is based on direction of revenue audit and not independent mind of the Assessing Officer, therefore the reasons are recorded mechanically based on the direction received from audit department, without application of mind, hence reopening is bad in law.”
2. In this case, original assessment was completed u/s 143(3) of the Act on 22.02.2013 determining total loss of Rs.150,45,080/-. Thereafter the case was reopened by issuance of notice u/s 148 of the Act, dated 30.01.2014 on the basis that assessee had not carried out any business activities and had shown income consisting of interest income, dividend income and income from house property. The assessee had received Rs.10,67,850/- as dividend income which was claimed as exempt and debited financial charges of Rs.532,35,432/- and administrative expenses of Rs.95,94,383/-. It is also mentioned in the reason recorded that financial charges included interest expenditure of Rs.532,26,176/- and administrative expenses included processing fees of Standard Chartered Bank (SCB) amounting to Rs.94,97,458/-. The assessee had also taken loan from SCB in assessment year 2009-10. Since the loan was taken in the earlier year therefore the A.O was of the view that the processing fees should not be allowed in the assessment year under consideration. The assessment u/s 143(3) r.w.s 147 of the Act was finalized on 16.02.2015 determining the total income at Rs.215,94,313/- after disallowing the claim of processing fees of Rs.94,97,458/- and making further disallowance u/s 14A of the Act.
During the course of the appellate proceedings before us, at the outset the ld. counsel of the assessee pleaded that reopening in the case of the assessee is bad in law as the reopening of assessment is based on audit objection and A.O has not applied his mind independently. The ld. counsel submitted that original assessment was made after detailed verification and subsequent reopening was only made on the basis of audit objection therefore, the assessment is bad in law.
On the other hand, the ld. Departmental Representative submitted that in the copy of reason for reopening of the assessment u/s 147 r.w.s 148 of the Act placed at Page No. 28 of the paper book submitted by the assessee nowhere it is mentioned that the assessment was reopened on the basis of audit objection. The ld. D.R has also referred the decision of Hon’ble High Court of Delhi in the case of Dalmia Brothers Pvt. Ltd. 16 taxman.com 336, wherein it is held audit objection may be the source of information to the assessing officer.
Heard both the sides on the issue of validity of reopening of assessment. We have gone through the assessment material pertaining to the original assessment made u/s 143(3) of the Act, and observed that nowhere in the assessment order the A.O has dealt with the claim of processing fees paid to the SCB and there is no other material which demonstrate that assessing officer has examined the issue of allowability of processing/facility fee paid to SCB during the course of original assessment proceedings. Further we have noticed that in the reason for reopening of assessment A.O has not mentioned anywhere that reopening has been carried out only on the basis of audit objection. Therefore, we don’t find any force in the submission of the assessee that reopening of the assessment has been made only on the basis of audit objection. Further, the contention of the ld. counsel that the issue of allowability of SCB fee has been examined by the A.O during the course of original assessment is not supported with relevant supporting material. Therefore, this ground of appeal of the assessee that reopening is bad in law is dismissed.
We adjudicate the ground of appeal of the assessee on merit as follows:
“Upholding the disallowance u/s 14A of the Act of Rs.1,14,28,916/-.”
During the course of the assessment u/s 143(3) the A.O has made a disallowance u/s 14A r.w.rule 8D(2)(iii) of the Act to the amount of Rs.373,19,130/-. The ld. CIT(A) had restricted the disallowance to the extent of Rs.114,28,916/-.
Heard both the sides and perused the material available on record. It is undisputed fact that assessee has earned exempt income in the form of dividend during the year under consideration to the amount of Rs.10,67,850/- only. After taking into consideration the finding of the number of judicial pronouncements on this issue we consider that disallowance u/s 14A cannot exceed the exempt income earned by the assessee during the year under consideration. Therefore, we restrict the disallowance u/s 14A to the extent of exempt dividend income of Rs.10,67,850/- only. Accordingly, this ground of appeal of the assessee is partly allowed for statistical purposes.
Ground No. 2 disallowance of Rs.37,15,151/- u/s 36(1)(iii) of the Act:
“5. The Id CIT (A) erred in making a disallowance u/s 36(l)(iii) of the Act of Rs.37,15,151/- being the differential interest charged and paid on borrowings i.e.
(Rs.3,93,40,151/- (-) Rs.3,56,25,000/-) without appreciating the commercial expediency and business interest of the group company.
6. The Id. CIT(A) erred in making the disallowance without issuing a show cause notice to the assessee in course of appellate proceeding.”
During the year the assessee has paid interest to SCB amounting to Rs.393,40,151/- and received interest on debentures amounting to Rs.356,25,000/-. The assessee has received interest on the debenture from its parent company M/s Arch Pharma Lab Ltd. @ 14.25% for which assessee has made investment out of the loan obtained from SCB, whereas assesee has paid interest ranging between 16.50% and 16.75% to the SCB on the loan of Rs.25 crores. The A.O was of the view that assessee had utilized interest bearing funds borrowed at higher rate of interest for making investment in the debentures issued by the parent company without any commercial expediency. Therefore excess of interest paid over interest received amounting to Rs.37,15,151/- [Rs.3,93,40,151/- (-) Rs.356,25,000/-] was disallowed u/s 36(1)(iii) of the Act. The ld. CIT(A) has dismissed this ground of appeal of the assessee.
During the course of appellate proceedings before us, the ld. counsel submitted that M/s Arch Pharma Lab Ltd. was the sister concern of the assessee in which the assessee was having substantial investment and that company was in a financial problem, therefore, to protect the interest of the assessee it had subscribed to the debentures of that company. The ld. counsel has further contended that it was the parent company of the assessee and assessee company had subscribed its debentures out of commercial expediency.
On the other hand, the ld. D.R has supported the order of CIT(A).
Heard both the sides and perused the material on record. Without reiterating the facts as reported above the assessee has paid interest to SCB amounting to Rs.393,40,151/- whereas it has received interest on debentures amounting to Rs.356,25,000/- . The differential interest of Rs.37,15,151/- was disallowed u/s 36(1)(iii) of the Act on the ground that assessee has given interest bearing funds at lower rate of interest to the sister concern without any commercial expediency. After perusal of the balance sheet of the assessee company it is noticed that it had made investment in 891307 equity share of M/s Arch Pharma Lab Ltd. for the amount of Rs.24,37,82,885/- as on 31.03.2010 which showed that assessee was having business interest in the said company therefore to overcome the financial problem of the parent company the assessee had subscribed non convertible debentures @ 14.25% for a total amount of Rs. 5 crore as on 31.03.2010. In the light of the above facts and circumstances we consider that subscribing of debentures at 14.25% as a type of long term investment cannot be compared with the loan and advance amount received by the assessee company on which it has marginally paid higher amount of interest, therefore, the disallowance u/s 36(1)(iii) is not justified. Accordingly this ground of appeal of the assessee is allowed.
Ground No. 3 Disallowance of Rs.94,97,458/- being 1/5 of facility fees paid to Standard Chartered Bank:
7. The Id CIT(A) erred in upholding the disallowance of Rs.94,97,458/- being processing or facility fees paid to SCB claimed as deferred revenue expenditure, on the ground that assessee has failed to satisfy the test of commercial expediency and merely relied on appellate order for A.Y. 2011-12.
During the course of reassessment u/s 143(3) r.w.s 147 of the Act the A.O stated that assessee has claimed deduction of Rs.94,97,458/- being 1/5 of facility fees paid to Standard Chartered Bank. The assessee submitted that it had incurred expenditure of Rs.474,87,291/- towards facility fees to Standard Chartered Bank during F.Y. 2008-09 relevant to A.Y. 2009-10. The assessee has further clarified that it had treated the entire expenditure of Rs.474,87,291/- as a deferred expenditure and debited 1/5 Rs.94,97,458/- to the profit and loss account. The A.O had not accepted the claim of the asesssee stating that assessee should have claimed these expenditure in the year in which such expenses were incurred. The ld. CIT(A) has sustained the disallowance made by the A.O.
During the course of the appellate proceedings at the outset the ld. counsel submitted that similar issue on identical facts pertaining to A.Y. 2011-12 in i.e M/s Arch Impex Pvt. Ltd. Vs. ACIT, CC-32 has been adjudicated in its favour.
On the other hand, the ld. D.R. relied on the order of the lower authorities.
Heard both the sides and perused the material on record. The assessee has taken loan of Rs.25 crore from Standard Chartered Bank at interest Rs.16.50% and 16.75% during the F.Y. 2008-09 to A.Y. 2009-10. A total amount of Rs.474,87,291/- was paid by the assessee to the standard chartered bank as facility/processing fees and claimed deduction of 20% or 1/5 as deferred revenue expenditure on that year onward. With the assistance of the ld. Representatives we have gone through the decision of the coordinate bench of ITAT, Mumbai in the case of the assessee itself for A.Y. 2011-12 supra. The relevant operative para is reproduced as under:
“8. As per our considered view, once the expenditure is accepted as “Revenue Expenditure”, then it is upto the assessee that whether to claim the expenditure in one year or to spread over the said expenditure as per the enduring benefit available with them. For this contention the decision of the Hon’ble Gujarat High Court in the Case of CIT vs. Gujarat State Fertilizer Chemicals Ltd. reported in 358 ITR 323 supported our view. In the case of Gujarat State Fertilizers the assessee has claimed deduction of corporate debt restructuring expenses of Rs. 2.57 crores on payment to financial consultants who provided their professional services in connection with the scheme of corporate debt restructuring by negotiating with the banks and financial institutions, which eventually helped the reduction of the interest burden of the assessee. The Assessing Officer held that the assessee would derive benefit of enduring nature as a result of the corporate debt restructuring exercise and treated all the expenses as capital and disallowed them. The Commissioner (Appeals) held that the expenditure could not be considered to have an enduring benefit. The Tribunal held the expenditure revenue in nature and spread it over a period. On appeal held that for the waiver of the loan, payment had been made to the financial consultants. This was for the purpose of business and was allowable under section 37(1) of the Act. Once the expenditure was held to be revenue in nature incurred wholly and exclusively for the purpose of business, it could be allowed in its entirety in the year in which it was incurred. However, when the expenditure was spread over a period of six years and the assessee had no objection to such revenue expenditure being spread over, though it could have insisted that this amount be allowed in the year under consideration, the Department could not challenge it as the expenditure was revenue in nature. Following the decision of the coordinate bench of the ITAT as referred above we find that issue raised before the Tribunal in this year are similar to the issue pertaining to A.Y. 2011-12. Therefore, it would not be appropriate for us to deviate from the view taken in earlier year without pointing out any material change in facts and circumstances in the year consideration. Since identical issue was dealt with by Tribunal in earlier year as cited (supra) in the assessee’s own case following the principle of consistency we direct the A.O to allow the claim of deduction. Therefore, this ground of appeal of the assessee is allowed.
ITA No. 7475/Mum/2016 A.Y. 2010-11
During the course of the assessment u/s 143(3) the A.O has made a disallowance u/s 14A r.w.rule 8D(2)(iii) of the Act. The ld. CIT(A) had restricted the disallowance upto exempt income.
Heard both the sides and perused the material on record. Following the judicial pronouncement referred in the order of ld. CIT(A) wherein held that disallowance u/s 14A cannot exceed the exempt income, we don’t find any infirmity in the order of the lower authorities. Therefore, this ground of appeal of the revenue is dismissed.
In the result, the appeal of the assessee is partly allowed while the appeal of the revenue is dismissed.
Order pronounced in the open court on 17.03.2022