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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
Both the appeals of the Revenue and assessee are directed
against the common order of the Commissioner of Income Tax
(Appeals) -3, Chennai, dated 31.01.2017 for assessment years
2008-09 and 2012-13. For assessment year 2008-09, the assessee
has filed the appeal. Apart from that, the assessee filed cross-
objections for both the assessment years. Therefore, we heard all
the appeals of the Revenue and the assessee and the cross-
objections of the assessee together and disposing of the same by
this common order.
For both the assessment years 2008-09 & 2012-13 in the
Revenue’s appeals, the only issue arises for consideration is
disallowance made by the Assessing Officer under Section 14A of
the Income-tax Act, 1961 (in short 'the Act').
Ms. S. Vijayaprabha, the Ld. Departmental Representative,
submitted that the assessee claimed before the Assessing Officer
that no expenditure was incurred for earning the exempted income.
According to the Ld. D.R., the assessee declared an income of
3 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
`11,60,79,395/- as deemed dividend income, therefore, the
Assessing Officer found that it was hard to believe that no expenditure was incurred to earn income of `11,60,79,395/-. The
investment made by the assessee yielded dividend income of `11.61 Crores. Therefore, according to the Ld. D.R., the assessee
has to naturally incur certain expenditure for general advice from
financial experts. Without engaging the service of financial experts,
the assessee would not have earned this much of dividend income.
Therefore, according to the Ld. D.R., the Assessing Officer, after
referring to Rule 8D of Income-tax Rules, 1962, found that the
assessee has not incurred any direct expenditure. The Assessing
Officer also found that the assessee borrowed loan for the purpose
of business. Since the expenditure incurred by the assessee could
not be ascertained, according to the Ld. D.R., the Assessing Officer
applied Rule 8D(2)(ii).
The Ld. Departmental Representative further submitted that
the Assessing Officer also found that the assessee made
investment during the year under consideration. Accordingly, he
disallowed 0.5% of average investment made during the year under
consideration. While computing, according to the Ld. D.R., the
4 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
Assessing Officer found that the expenditure to the extent of `2,57,06,601/- has to be disallowed under Section 14A of the Act
read with Rule 8D(ii) of the Income-tax Rules, 1962. However, on
appeal by the assessee, the CIT(Appeals) found that the investment
was made for acquiring shares of the assessee’s sister concern.
Therefore, according to the Ld. D.R., the CIT(Appeals) by placing
reliance on the decision of this Bench of the Tribunal in EIH
Associated Hotels Limited v. DCIT (2013) 9 TMI 604, found that
there cannot be any disallowance. According to the Ld. D.R., the
Revenue has already filed appeal against the order of this Tribunal
in EIH Associated Hotels Ltd. before the High Court and the same is
pending for disposal, therefore, the CIT(Appeals) is not correct in
deleting the addition made by the Assessing Officer.
On the contrary, Sh. Vikram Vijayaraghavan, the Ld.counsel
for the assessee, submitted that the assessee invested the funds for
the purpose of business in the sister concerns. This is not in
dispute. According to the Ld. counsel, when the assessee invested
the funds in the subsidiary companies for the purpose of carrying on
the business effectively, earning of dividend income is only
incidental, therefore, there cannot be any disallowance of
5 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
expenditure under Rule 8D(ii) of the Income-tax Rules, 1962.
Therefore, according to the Ld. counsel, the CIT(Appeals) by
placing reliance on the order of this Tribunal in EIH Associated
Hotels Ltd. (supra), found that there cannot be any disallowance
when the assessee invested the funds only in the sister concerns.
In fact, according to the Ld. counsel, the CIT(Appeals) directed the
Assessing Officer to follow the direction of this Tribunal.
We have considered the rival submissions on either side and
perused the relevant material available on record. It is not in
dispute that the investment was made by the assessee in its sister
concerns. This Tribunal examined the issue in EIH Associated
Hotels Ltd. (supra) and found that when the investment was made
in the subsidiary companies, such investments are for the purpose
of business and not for the purpose of earning any capital gain or
dividend income. The investment was made by the assessee to
promote the subsidiary companies. On identical circumstances, this
Tribunal found that no disallowance can be made. The
CIT(Appeals) simply followed the order of this Tribunal while
deleting the addition made by the Assessing Officer. Now the
contention of the Revenue before this Tribunal is that the Revenue
6 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
has filed appeal before the High Court against the order of this
Tribunal in EIH Associated Hotels Ltd. (supra). This Tribunal is of
the considered opinion that mere pendency of appeal before the
High Court cannot be a ground to take a contrary view. It is not the
case of the Revenue that the operation of the order of this Tribunal
was stayed by the High Court. In those circumstances, the
CIT(Appeals) has rightly followed the order of this Tribunal.
Therefore, this Tribunal do not find any reason to interfere with the
order of the lower authority and accordingly the same is confirmed.
Now coming to the appeal in I.T.A. No.1113/Mds/2017, the
assessee is challenging the order of the CIT(Appeals) for
assessment year 2008-09. The first issue arises for consideration is
disallowance of foreign exchange loss debited to Profit & Loss
account.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee, submitted that the assessee suffered a loss of `13,99,149/- towards
foreign exchange. According to the Ld. counsel, the assessee is
consistently adopting the same method in the books of account as
well as the return filed before the authorities in respect of foreign
7 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
exchange loss. The Ld.counsel further submitted that the foreign
exchange loss is in the nature of revenue expenditure for the
purpose of business, therefore, the same is allowable under Section
37 of the Act. The Ld.counsel further submitted that an amount of `8,90,585/- was held by the Assessing Officer as disallowable,
hence, the same amount which was shown as credit item in the
immediately succeeding year should also be excluded from total
income.
On the contrary, Ms. S. Vijayaprabha, the Ld. Departmental
Representative, submitted that the Assessing Officer found that the assessee has debited an amount of `13,99,149/- in the Profit &
Loss account as foreign exchange loss. According to the Ld. D.R.,
the Assessing Officer further found that the loss claimed by the
assessee was occurred due to repayment of loan. Since the loan
was borrowed for purchasing a capital asset, the foreign exchange
loss incurred by the assessee is a capital loss. Therefore,
according to the Ld. D.R., by placing reliance on the judgment of
Apex Court in Sutlej Cotton Mills v. CIT (116 ITR 1), the Assessing
Officer found that when the foreign currency was held as capital
asset, such profit or loss can be on the capital nature. By applying
8 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
the above mentioned judgment of Apex Court in Sutlej Cotton Mills
(supra), according to the Ld. D.R., the Assessing Officer found that
the foreign exchange loss cannot be allowed, therefore, the
CIT(Appeals) has rightly confirmed the disallowance made by the
Assessing Officer.
We have considered the rival submissions on either side and
perused the relevant material available on record. It is not in
dispute that there was a foreign exchange loss arose on account of
repayment of loan and reinstatement of FCNRB loan. The loan was
borrowed for acquiring a capital asset. Therefore, this Tribunal is of
the considered opinion that the Assessing Officer has rightly
disallowed the claim of the assessee by placing reliance on the
judgment of Apex Court in Sutlej Cotton Mills (supra). Therefore,
this Tribunal do not find any reason to interfere with the order of the
lower authority and accordingly the same is confirmed.
The next ground of appeal is with regard to provision for
diminution in value of investment.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee,
submitted that the assessee made provision for diminution in value
9 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
of investment to the extent of `42,06,000/-. According to the Ld.
counsel, provision for diminution in value of investment is
ascertainable liability, therefore, it has to be allowed under Section
37 of the Act.
We have heard Ms. S. Vijayaprabha, the Ld. Departmental
Representative also. The assessee admittedly debited a sum of `42,06,000/- in Profit & Loss account towards diminution in value of
investment. It is only a provision. The Assessing Officer by placing
reliance on the judgment of Kerala High Court in Kerala Small
Industries Development Corporation Ltd. v. CIT (270 ITR 452),
found that diminution in value of investment is not an allowable
expenditure. The CIT(Appeals) confirmed the order of the
Assessing Officer by placing reliance on the judgment of Kerala
High Court in Kerala Small Industries Development Corporation Ltd.
(supra). No other contrary judgment was brought to the notice of
the Bench. Therefore, this Tribunal is of the considered opinion that
the CIT(Appeals) has rightly confirmed the disallowance made by
the Assessing Officer. Therefore, this Tribunal do not find any
reason to interfere with the order of the lower authority and
accordingly the same is confirmed.
10 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
The next issue arises for consideration is disallowance of
Information System Infrastructure expenses.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee,
submitted that the assessee incurred expenditure towards
connectivity charges, lease rentals, hardware maintenance,
consumables and other expenses incurred for maintenance of SAP,
Data Storage and Mailing Solutions. According to the Ld. counsel,
these expenditures are revenue in nature. The assessee filed
supporting documents before the Assessing Officer and the
CIT(Appeals). Inspite of that, the Assessing Officer and the
CIT(Appeals) concluded that the expenditure to the extent of `1,99,08,716/- was unsubstantiated. According to the Ld. counsel,
the assessee has filed all the material before the Assessing Officer,
therefore, the Assessing Officer may re-examine the same.
On the contrary, Ms. S. Vijayaprabha, the Ld. Departmental
Representative, submitted that the main function of the assessee is
to provide infrastructure development to other companies. For the
purpose of providing infrastructure facilities to other companies, the
system provided by the assessee is called Information System
11 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
relating to infrastructure. This is a basic apparatus to earn income
in the assessee’s business. Therefore, according to the Ld. D.R.,
the expenditure incurred for development of Information System
gives enduring benefit to the assessee, therefore, the Assessing Officer disallowed the entire payment of `4,18,71,000/-. According
to the Ld. D.R., on appeal by the assessee, the CIT(Appeals) found
that the assessee could not substantiate payment to the extent of `1,99,08,716/-, therefore, he confirmed the disallowance to the
extent of `1,99,08,716/-.
We have considered the rival submissions on either side and
perused the relevant material available on record. The assessee claimed `4,18,71,000/- towards Information System Infrastructure
Expenses. The Assessing Officer found that the expenditure
incurred by the assessee was in the capital field. The Assessing
Officer also found that the assessee has not deducted tax at source,
therefore, it has to be disallowed under Section 40(a)(ia) of the Act
also. On appeal by the assessee, the CIT(Appeals) found that the expenditure to the extent of `1,99,08,716/- was not substantiated.
From the order of the CIT(Appeals) it appears that the CIT(Appeals)
called for remand report. The assessee has also filed rejoineder.
12 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
The assessee has filed a copy of remand report in the paper-book.
In the remand report, the Assessing Officer found that there was no evidence for TDS to the extent of `1,99,08,716/-. Based upon it, the
CIT(Appeals) restricted the disallowance to `1,99,08,716/-.
The main reason for disallowance is that the expenditure
incurred by the assessee is in the capital field. This issue was not
adjudicated by the CIT(Appeals). Therefore, this Tribunal is of the
considered opinion that first of all it has to be ascertained whether
the expenditure incurred by the assessee is in the capital field or
not. Even in the remand report, the Assessing Officer has not
whispered anything about the nature of expenditure. Therefore, the
matter needs to be re-examined by the Assessing Officer.
Accordingly, the orders of both the authorities below are set aside
and the issue is remitted back to the file of the Assessing Officer.
The Assessing Officer shall re-examine the issue afresh and point
out whether the expenditure incurred by the assessee for
Information System Infrastructure is capital expenditure or revenue
expenditure and thereafter decide the same in accordance with law,
after giving a reasonable opportunity to the assessee.
13 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
The next issue arises for consideration is disallowance of
professional charges.
Sh. Vikram Vijayaraghavan, the Ld.counsel for the assessee,
submitted that the Assessing Officer disallowed a sum of `3,37,27,000/- towards professional charges under Section 40(a)(ia)
of the Act. The assessee, according to the Ld. counsel, deducted
TDS and paid the same as per law, therefore, there cannot be any
disallowance. The Ld.counsel further submitted that the matter may
be verified by the Assessing Officer.
We have heard Ms. S. Vijayaprabha, the Ld. D.R. also. The
assessee claimed that it deducted tax at source while making `3,37,27,000/- payment of towards professional charges.
Therefore, this fact needs to be verified by the assessee.
Accordingly, the orders of both the authorities below are set aside
and the issue of disallowance under Section 40(a)(ia) is remitted
back to the file of the Assessing Officer. The Assessing Officer
shall re-examine the issue afresh in accordance with law and
thereafter decide the same after giving a reasonable opportunity to
the assessee.
14 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
Now coming to cross-objections in C.O. Nos.98 & 99/Mds/2017.
The assessee filed cross-objections for assessment years 2008-09 and 2012-13 only to support the orders of the CIT(Appeals). Therefore, the cross-objections are infructuous and accordingly stand dismissed.
In the result, Revenue’s appeal in I.T.A. Nos.1089 & 1090/Mds/2017 are dismissed, assessee’s appeal in I.T.A. No.1113/Mds/2017 is allowed for statistical purposes and the C.O. Nos.98 & 99/Mds/2017 are dismissed.
Order pronounced on 27th October, 2017 at Chennai.
sd/- sd/- (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) (A. Mohan Alankamony) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member
चे�नई/Chennai, �दनांक/Dated, the 27th October, 2017.
Kri.
15 I.T.A. Nos.1089 & 1090/Mds/17 I.T.A. No.113/Mds/17 C.O. Nos.98 & 99/Mds/17
आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. �नधा�रती /Assessee 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A)-3, Chennai-34 4. Principal CIT-5, Chennai. 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.