DCIT, CHENNAI vs. TRIVITRON HEALTH CARE PVT. LTD., CHENNAI

आदेश / O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

Further, the AO found that the main reason for the increase in the investments was to acquire the business of M/s. Kiran Medical Systems Ltd. (“M/s. KMSL”) for Rs.26.00 Cr. During the year, the assessee has acquired only 26% of shares and ultimately 100% shares was acquired in the subsequent financial years. The AO held that until the control of the business of M/s. KMSL is acquired up to the level of at least 51% of its shares, it is only a part payment and the capital asset has not been put to use.

Therefore, he disallowed proportionate interest on the investment of Rs.26.00 Cr. @ 11% at Rs.2,14,50,000/- u/s.36(1)(iii) and held that the interest to this extent should have been capitalized. Aggrieved, the assessee filed an appeal before the CIT (A). The CIT (A) allowed the assessee’s appeal.

Aggrieved against the CIT (A) order, the Revenue filed this appeal primarily on two grounds viz.,

1) The learned CIT (A) erred in not appreciating that the provisions of section 14A is mandatory, the method of computation provided in Rule 8D of the IT Rules 1962 has 3 limits, vis., a) Direct interest expenses, b) Indirect expenses and c) Expenditure and in this case, the Assessing Officer has computed disallowance under the third limb i.e., expenditure incurred. Such :- 3 -: disallowances have to be made even if there is no exempt income nor any expenditure incurred relating to these investment.

exempted income and no expenditure has been incurred related to these investments. In the circumstances, it is submitted that Section 14 A and Rule 8D have no application and hence there cannot be any disallowance under this provision. The AR relied on the Chennai Tribunal decisions : in CIT vs M. Bhaskaran — ITA No: 171 7/Mds/2013 dated 31st July 2014 wherein it was held that there cannot be any disallowance under section 14A, if the assessee has not earned/ received any exempted Income and in EIH Associated Hotels Ltd. v. DCIT it was held that investments made by the assessee in the subsidiary company were not on investment for earning capital gains or dividend income. Such investments had been made by the assessee to promote subsidiary company into hotel industry and were on account of business expenditure and dividend there from is purely incidental. Therefore, the investment made by the assessee in its subsidiary is not to be reckoned for disallowance u/s.14A r.w.r.8D and several High Court decisions in the last one year in support of the above ratio viz a) CIT Vs Sivam Motors Pvt Ltd - ITA No: 88 of 2014 dated 05/05/14 Allahabad High Court. b) CIT Vs Corrtech Energy Pvt Ltd — ITA No: 239 of 2014 dated 24/03/2014- Gujarat High Court. c) CIT Vs Delite Enterprises (ITA No: 2009 of 2014 — Bombay High Court d) CIT Vs Wnsome Textile Industries Ltd (319 ITR 204) - Punjab & Haryana. e) In ITO v. Pioneer Radio Training Services Pvt. Ltd. (ITA No. 4448/Del/2013) (Order dated 19-1-2015), the Delhi ITAT has held that investments in subsidiaries are not to earn dividend income and cannot be considered for disallowance etc. Without prejudice to the claim that there can be no disallowance under section 14A in the absence of claim of exempted income, the AR invited our attention to the alternate grounds raised before the CIT(A) as under :

ITA No.462/Mds/2016 :- 6 -:

“The following companies have merged with Trinitron Healthcare Private Ltd, the assessee, vide court order dated 15 -03-2015, the appointed date being 1st April 2011. a) Trivitron Medical Technologies Private b) Trivitron Dental Technologies Private Ltd c) ET Trivitron Medical Solutions Private Ltd One of the major divisions of Trivitron Medical Systems Private Ltd has been demerged and merged with Trivitron Healthcare Private Ltd. The appointed date for this demerger is also fixed as 1st April 2011. While calculating the disallowance, the investments in these subsidiaries have also been considered. As these Companies have merged effective from 1st April 2011, the investments in these companies should have been excluded while calculating 14A disallowance. Further, while calculating the disallowance, investments in Companies outside India have also been considered. The following companies are located outside India and any dividend income from these companies is taxable in India; a) Star Trivitron FZLLC, Dubai b) Trivitron Navakrama Medical Technologies Private Ltd , Srilanka. and submitted that for the purpose of calculating the average investments, the investments in the foreign subsidiaries / associates have to be excluded”.

4.1 With regard to the disallowance made under section 36 (1) (iii) , the AR inviting our attention to the relevant portion of the assessment order and the order of the CIT (A) submitted that the investments in Kiran Medical Systems Ltd and Alliance Medicorp Ltd were made for strategic reasons during the year 2011-12. All the investments were made out of own funds and not out of borrowed funds as evidenced by the table below;

ITA No.462/Mds/2016 :- 7 -:

(Rs. In lakhs) Paid up capital 81.03 Reserves and surplus 5868.89 Total Net worth 5949.92 The application of funds as on 31.03.2012 was as follows:

Tangible fixed assets 1081.21 Intangible fixed assets 65.89 Non-current investments (including 4807.98 investments in Kiran Medical and Alliance Medicorp Total 5955.08 The above table would prove that the investments in Fixed assets as well as Investments have been made out of share capital and accumulated earnings and not out of borrowed funds. The AO failed to appreciate the fact that the investments made in Kiran Medical Systems Private Ltd was strategic in nature. Both the assessee and Kiran Medical Systems Private Ltd are engaged in same Healthcare business while the appellant is selling / distributing imaging equipments and machineries such as CT, MR, X-Ray machines , Ultra Sound machines etc., Kiran Medical Systems Private Ltd is engaged in manufacture and distribution of consumables used in Imaging business, such as digital X ray cassettes, contrast media, X-ray protection apparels etc.. Both businesses have great synergy and the acquisition of Kiran Medical systems Private Ltd will greatly enhance the business dynamics of the appellant and give them a clear edge in terms of product range, export opportunities, geographical spread etc. The AO also failed to appreciate the :- 8 -: fact that the investment made in Kiran Medical Systems Private Ltd was not Financial in nature with an intention to earn dividend income. It was the intention and agreement between the assessee and the seller that the assessee will acquire 100% shareholding in a phased manner over a period of three years and make Kiran Medical Systems Private Ltd as its 100% subsidiary. The intention was to merge Kiran Medical Systems Private Ltd with itself once it becomes 100% subsidiary. This intention has been fulfilled in 2015 as Kiran Medical Systems Ltd was merged with Trinitron Healthcare Private Ltd vide court order dated 28th April 2015. The appointed date for this merger was April 2011. The investment in Alliance Medicorp was also made for strategic reasons as Alliance Medicorp was engaged in Dialysis business and the assessee was engaged in distribution dialysis equipments and consumables and both businesses have great synergy between them. The investments in Kiran Medical Systems Private Ltd were made for the purpose of its business and in the course of its business. Even if the investments had come out of interest bearing funds, the interest on such investments cannot be disallowed as the investment was made with an intention to broad base, stabilize and improve the business of the appellant and such investment was purely for the purpose of business of the appellant. In this regard, the AR relied on the ratio prescribed by the Apex Court in the case S.A. BUILDERS LTD (288 ITR 1) and jurisdictional High Court decision in the case of CIT Vs RPG Transmissions Ltd (359 ITR 673-MDS) wherein it is held that interest

ITA No.462/Mds/2016 :- 9 -: paid on borrowings that were used to acquire shares of group company, which is engaged in Power Generation and Distribution, is an allowable deduction under section 36(1)(iii) in as much as both businesses have great nexus and the investment was not made with an intention to earn dividend income .Invited our attention to the relevant findings of the High Court as under :

“The Tribunal, in consideration of appeal of the assessee in paragraph 35 of the order dated January 23, 2006, has dealt with this issue at length. The Tribunal has found that there is proximate nexus between the business of the assessee-company and that of the company in which investments were made in the form of shares. It may be true that the returns are not commensurate with the expected returns in the form of interest, but if and when, the shares are liquidated, there is expectancy of substantial gains which fact has been glossed over by the Assessing Officer while confining his findings that the returns are far below the quantum of interest paid on the borrowed funds and, therefore, the basis of analyzing that the payment of interest on borrowed funds has to be tested on the ground of quantum of return is untenable.Furthermore, as rightly pointed out by the learned senior counsel for the assessee, section 36(1)(iii)of the Act does not contemplate any test that the amounts so invested should be “wholly and exclusively for making or earning such income”. On a plain reading of section 36(1)(iii), we do not find any such requirement mandated in the section to confine such expense. Furthermore, the section also does not place any embargo for investments to be made in group concerns and subsidiary concerns. Therefore, we are not in agreement with the findings of the Commissioner of Income-tax (Appeals) and concur with the findings of the Tribunal in this regard. In our judgment in the tax case appeal in T. C. (A.) No. 1980 of 2008, (since reported in CIT v. Spencers and Co. Ltd. (No.3 (2013] 359 ITR 644 (Mad) which was heard along with these appeals and disposed of today, we have elaborately discussed the issue relating to payment of interest on borrowed capital and the reasons given by us in the said judgment for sustaining the order of the Tribunal are also applicable to the present appeals.

:- 10 -: We have carefully scrutinized the reasons given by the appellate authority and the Tribunal for allowing the assessees claim of interest paid on borrowed capital. The appellate authority and the Tribunal found that the investment made by the assessee by utilizing borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and, therefore, the claim was fully allowable under section 36(1)(iii). We also found that the Revenue did not adduce any material to show that the borrowed capital was utilized by the assessee for non-business purposes. The appellate authority, in our considered view, was correct in allowing the claim of the assessee and deleting the disallowance made by the assessing authority. We also find that the Tribunal in correct appreciation of the matter had in turn confirmed the finding of the appellate authority. We see no reason to interfere with the order passed by the Tribunal.”

4.2 Similar findings have been given by the Chennai ITAT in the case of NMS Consultancy Private Ltd Vs DCTO - Company Circle - ITA NO:

1523/Mds/2012. The Tribunal held that acquisition of shares and placing of share application money was in the course of business of the assesee and hence there can be no disallowance under section 36(1) (iii) of the Act. The argument of the AO that only part control is taken up (namely 26%) and that until 100% acquisition is made, it cannot be said that the capital asset has been put to use and hence interest is disallowed u/s36(1)(iii) is erroneous and contrary to law . The provisions of section 36(1) (iii) is applicable only in respect of certain assets like Factory Building, Plant and Machinery etc... and is not applicable for investments in shares of companies. The term “put to use “has been used in the Income Tax Act only with reference to acquisition of fixed assets and has no application to acquisition of Investments. Hence, it is ITA No.462/Mds/2016 :- 11 -: submitted that section 36(1)(iii) which is meant to disallow interest paid on acquisition of fixed assets has been erroneously invoked here to deny the appellant a legitimate claim of interest on the amount borrowed for working capital purpose. Besides, disallowing interest on working capital funds, the AO has also invoked section 14 A to disallow “expenditure relatable to exempted income”. It is submitted that there cannot be double disallowance, namely under section 14 A read with Rule 8D and under Section 36(1)(iii) . Once section 14 A is invoked there cannot be another disallowance under section 36(1)(iii).

4.3 The AR further submitted that after considering the relevant material and the assessee’s plea, the CIT (A) has rightly concluded as under :

“5. ………………………………….. …………………………………………………………… I have gone through the assessment order, the written submissions, grounds and also considered the additional submissions made before me by the AR in addition to the various decisions quoted. From the submissions made by the AR it can be concluded that – (1) the entire investments have been mode out of own funds and retained earnings and no interest bearing funds have been used for acquiring these investments; (2) there has been no claim of exempted income and no expenditure has been incurred related to these investments; (3) investments made by the assesse in the subsidiary company were not on account of investment for earning capital gains or dividend income. Such investments had been made by the assessee to promote subsidiary company and were on account of business expediency and dividend there from is purely incidental.

:- 12 -: Based on the above facts coupled with the various decisions quoted by the appellant in its favour, I have no hesitation to hold that the action of the AO in adding Rs.10,92,205/- and Rs.2,14,50,000/- is incorrect an accordingly these additions are directed to be deleted. Hence all the grounds raised are allowed.” and hence pleaded that the order of the CIT (A) may be upheld.

Chettinad Logistics Pvt. Ltd before the Hon’ble Madras High Court. The relevant portion in its order in TCA No. 24 of 2017, dated 13.03.2017 is extracted as under:

“The Only issue, which arose for consideration, before the Tribunal, was, whether an addition made in the sum of Rs. 86,62,748/- qua, the Assessee, by invoking the provisions of section 14A of the Act, read with, Rule 8D of the Income Tax Rules, 1962 (in short, the Rules) was valid.”

5.1 The operative portion of the judgment is extracted as under:

“ 16. To our minds, questions of law, which could have arisen are already covered by the judgement of a Co-ordinate Bench of this Court rendered in M/s. Redington (India) Limited case.“

5.2 The Hon’ble High Court of Madras in the case of Redington (India)

Ltd. Vs. Addl CIT in TCA No. 520 of 2016 dated 23.12.2016 held that “in conclusion, we are of the view that the provisions of section 14A r.w.r. 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of :- 13 -: exempt income.” Since in this case, there is no exempt income, applying the ratios in the above judgmentsa, the deletion of the addition made u/s 14A , as directed by the CIT (A) , does not require interference and hence the Revenue’s corresponding grounds fail.

Order pronounced in the Open Court on November 20th , 2017, at Chennai.