DCIT, CHENNAI vs. SHRIRAM PROPERTIES PVT LIMITED, CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

2. The Revenue has raised three elaborate grounds in its appeal. However the cruxes of the issues are as follows:-

i. The Ld.CIT(A) has erred in directing the AO to allow the professional fees of Rs.25,89,854/- claimed by the assessee as its expenditure. ii. The Ld. CIT(A) has erred in directing the Ld.AO to delete the disallowance made U/s.14A of the Act for Rs.4,30,98,790/-. iii. The Ld.CIT(A) has erred in treating the interest income received from inter corporate deposits as business income though the assessee was not in the business of financing.

During the course of scrutiny assessment proceedings, it was noticed by the Ld.AO that the assessee has claimed Rs.25,89,854/- as professional and consultancy charges which was paid to the consultant without deducting TDS. On query it was explained by the Ld. Assessee’s representative that the aforesaid amount was paid to M/s. Mayor Brown LLB towards professional fees for services rendered outside India with respect to documentation. It was further clarified that M/s. Mayor Brown LLB did not have any permanent establishment in India and hence the income did not accrue or arise in India to the foreign entity. The assessee also enclosed Form 15CB in lieu of the transaction and claimed that the provisions of Section 195 will not be attracted. However the Ld.AO rejected the arguments advanced by the Ld.AR by relying on explanation 2 to Section 9(1)(vii) of the Act, the decision in the cases, Gmp International GmbH dated 29.01.2010 reported in 188 taxmann 143 AAR, M/s. Transmission Corporation of Andhra Pradesh reported in 239 ITR 589 (SC) and the Indo US treaty. Thereafter he invoked the provisions of Section 40(a)(i) of the Act, and accordingly disallowed the claim of expenditure of Rs.25,89,854/-. On appeal the Ld.CIT(A) after examining the issue in detail deleted the addition made by the Ld.AO by observing as under:- “5.1.2 I have considered the findings given by the Assessing Officer. The appellant has relied upon the decision of ITAT “D” Bench, Chennai in the case of ACIT V/s. M/s. M.M. Forging Ltd. In dated 19.06.2015. The commission paid to foreign agents for procuring orders cannot be called either to rendering of technical services or managerial or consultancy services. The Hon’ble Delhi High Court in the case of director of Income Tax (International Taxation)-II, v/s. Panalfa Auto Elektrik Ltd. 49 Taxmann.com 412 has held that the services rendered for procurement of export orders etc. cannot be termed as managerial services provided by the non-residents. As per DTAA agreement, no tax at source it to be deducted. Therefore, the Assessing Officer is directed to allow professional tax of Rs.25,89,854/-. These ground of appeal are allowed.”

4.1 Before us the Ld. DR reiterated the findings of the Ld.AO and argued in support of the same, while as the Ld.AR relied on the order of the Ld.CIT(A).

4.2 We have heard the rival submissions and carefully perused the materials on record. At the outset we find merit in the Order of the Ld.CIT(A). From the facts of the case it is clear that the assessee had incurred expenditure of Rs.25,89,854/- related to documentation outside India and the services were rendered by company situated outside India. Therefore, it is crystal clear that for services rendered by M/s. Mayor Brown LLB., outside India, income cannot be said to have accrued or arisen in India.

Hence, we do not find it necessary to interfere with the order of the Ld.CIT(A) on this issue.

Since, the dividend income earned by the assessee company from its investments were not taxable and since the assessee company had not made any disallowance on its own towards the expenditure incurred for maintaining such investments, the Ld.AO invoked the provisions of Section 14A of the Act and Rule 8D of the Rules by rejecting the following submission of the Ld.AR:-

5.1 On appeal the Ld.CIT(A) directed the Ld.AO to delete the addition of Rs.4,30,98,790/- observing as under:- “The fact that the assessee incurs routine expenditure to maintain its establishment and towards administration, a portion of which can be attributable to the activity of earning dividend. The managerial staff and the Directors of the assessee company are involved in the decision making process on investments made; the assessee claims the managerial remuneration in whole as an expenditure. Therefore, a portion of the expenditure of the assessee could be attributable towards the dividend earned by the assessee which is to be exempt u/s.10”

5.2 Before us the Ld.DR argued in support of the order of the Ld.AO, while as the Ld.AR relied on the order of the Ld.CIT(A) and further submitted that most of the investments made by the assessee company were in its sister concerns. The Ld.AR further submitted that the Tribunal on many earlier instance had held that the provisions of Section 14A of the Act will not be applicable when investments are made in sister concerns for statistical reasons.

5.3 We have heard the rival submission and carefully perused the material on record. At the outset, we find that this issue is covered by our recent decision in the case of M/s. SIDD Life Sciences in order dated 10.04.2017.

The gist of the relevant portion of the case is reproduced herein below for reference:

“5. We have heard the rival submissions and carefully perused the materials available on record. Relying on various decisions of the higher judiciary this bench of the Tribunal on the earlier occasion in the case of Lakshmi Electrical Drives Ltd in vide order dated 23.03.2017 has held as follows:- “The assessee had invested Rs.18.01 crores which would yield exempt income. Therefore the Ld. AO invoked the provisions of Section 14A and Rule 8D of the Rules and made addition which was subsequently confirmed by the Ld. CIT(A). At the outset, the Ld. AR submitted before us that, the entire investments, for strategically reasons, was made in subsidiary companies and it was sourced from interest free funds. The Ld. AR further argued that on several occasions, the Chennai bench of the Tribunal has held that if such investments are made in sister /subsidiary companies, the provisions of Section 14A cannot be invoked. He therefore pleaded that the addition made by invoking the provisions of Section 14A of the Act, may be deleted. The Ld. DR though opposed to the submission of the Ld. AR could not successfully controvert to the submissions. After hearing both sides, we find merit in the arguments of the Ld. AR. On several instance this bench of the Tribunal has held as what was argued by the Ld. AR. For instance in the case of M/s. Data Software Research Company (International) Pvt. Ltd. v. ACIT, ITA Nos.2169 & 2170/Mds/2015 and ACIT v. M/s. Data Software Research Company (International) Pvt. Ltd., ITA Nos. 2171& 2172/Mds/2015 vide order dated 03.02.2016, this bench of the Tribunal has held as follows: “7. We have heard both the parties and carefully perused the materials available on record. It is a normal practice to make investment in sister companies due to commercial exigencies. While doing so, no expense can be attributable other than interest expense for making such investments because all management costs will be absorbed for strategic decision making process which is allowable as business expenditure. In the case of the assessee it is submitted that no interest cost was incurred as the entire investments were made out of own funds. Further in the decision of the Tribunal in ITA No.115/Mds/2015 dated 06.01.2016, extracted herein below, it has been held that section 14A of the Act will not be applicable when investments are made in sister companies. “5. We have heard both the parties and carefully perused the materials available on record. On the identical issue as pointed out by the Ld. A.R. the Chennai bench of the Tribunal in vide order dated 20/08/13 for the assessment year 2009-10 has remitted back the matter to the Ld. Assessing Officer to decide the matter once again afresh based on the findings whether the assessee had actually incurred any expenditure in earning the dividend income. The relevant portion of the order is extracted herein below for reference:-

Further, on the identical issue various Benches of the Tribunal and the Hon’ble Bombay High Court have held as follows:- i) Garware wall Ropes Ltd., Vs. ACIT reported in (2014) 65 SOT 086 (Mum.) held as follows:-

“When assessee has prima facie brought out case that no expenditure has been incurred for earning income, which does not form part of total income, then in absence of any finding that expenditure has been incurred for earning exempt income provisions 14A cannot be applied..” ii) Integlobe Enterprieses Ltd., Vs. DCIT repoted in (2014) 40 CCH 0022(Del. Trib.) held as follows:-

“No disallowance of interest is required to be made under rule 8D(i) & 8D(ii) where no direct or indirect interest expenditure was incurred for making investments. Where the assessee had utilized interest free funds for making fresh investments and that too into its subsidiaries, which was not for the purpose of earning exempt income and which was for strategic purposes only, no disallowance of interest was required to be made under Rule 8D(i) & 8D(ii) and strategic investment has to be excluded for purpose of arriving at disallowance under Rule 8D(iii).” iii) M/s.JM Financial Ltd., Vs. ACIT reported in 2014-TIOL-202- ITAT-MUM held as follows: “…the department has not disputed this fact out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. The assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the Assessing Officer is not justified, accordingly the same is deleted.” (iv) CIT Vs. Bharti Televenture Ltd. reported in (2011) 331 ITR 0502. “Where the assessee was found to be having adequate non- interest bearing fund by way of share capital and reserves and there was no nexus between the borrowals of assessee and the advances given, no disallowance for interest was called for.”

(v) CIT Vs. Reliance Utilities & Power Ltd., reported in (2009) 313 ITR 0340(Bom.) has held as follows:- “Tribunal having recorded a clear finding that the assessee possessed sufficient interest-free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds.”

(vi) EIH Associated Hotels Ltd Vs. DCIT reported in 2013-TIOL- 796-ITAT-MAD “…. The investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. The assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company 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. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company.”

Taking note of the above decisions and the decision of the Chennai bench of the Tribunal in cited supra, we hereby remit the matter back to the file of Ld. Assessing Officer to examine the issue involved in this case afresh and pass appropriate order as per law and merits and in the light of the decisions cited herein above. While doing so, we also direct the Ld. Assessing Officer to consider the decision of the Tribunal in the case M/s Agile Electric Sub Assembly Pvt. Ltd. cited supra wherein it was held as follows:-

‘”7.2 In regard to applicability of Section 14A of the Act read with Rule 8D also; the above view will be applicable. Moreover in the case EIH Associated Hotels Ltd v. DCIT reported in 2013 (9) TMI 604 in 1624/Mds/2012 dated 17th July, 2013, it has been held by the Chennai Bench of the Tribunal as follows:- “Disallowance U/s. 14A rw Rule 8D – CIT upheld disallowance – Held that – investments made by the assessee in the subsidiary company are not on account of investment for earning capital gains or dividend income. Such investments have been made by the assessee to promote subsidiary company into the hotel industry. A perusal of the order of the CIT(Appeals) shows that out of total investment of Rs.64,18,19,775/-, Rs.63,31,25,715/- is invested in wholly owned subsidiary. This fact supports the case of the assessee that the assessee is not into the business of investment and the investments made by the assessee are on account of business expediency. Any dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore, the investments made by the assessee in its subsidiary are not to be reckoned for disallowance U/s. 14A r.w.r. 8D. The Assessing Officer is directed to re-compute the average value of investment under the provisions of Rule 8D after deleting investments made by the assessee in subsidiary company – Decided in favour of assessee.” For the above said reasons, we hereby hold that in the case of the assessee the provisions of Section 14A read with Rule 8D will not be applicable in regard to investments made for acquiring the shares of the assessee’s sister concerns. Accordingly we restrain ourselves from interfering with the Order of the Ld.CIT(A) on this regard.”

8. Therefore, following the aforesaid decision of the Tribunal, we hereby direct the learned Assessing Officer to delete the addition made on account of section 14A where investments are made in sister concerns such as equity shares and share application money. However, if the investments are made from borrowed funds, section 14A of the Act would be applicable and learned Assessing Officer shall compute the disallowance under section 14A read with rules 8D in accordance with law.”

6.1 Accordingly we hereby remit back the matter to the file of the Ld. AO to consider the issue afresh in the light of the above order of the Tribunal and pass appropriate order in accordance with merits and law. We also make it clear that for the investments made in mutual funds, provisions of Section 14A read with Rule 8D will be applicable since the assessee would incur some expenditure at least for the decision making process as to in which mutual fund the investment has to be made and at what point of time exit from such funds. It is ordered accordingly.

Accordingly in this case of the assessee also, we hereby remit the matter back to the file of the Ld. AO for fresh consideration so as to pass appropriate Order as per merit and law and in the light of the above Order of the Tribunal.”

In view of the above decision of the Chennai benches of the Tribunal, we hereby remit the matter back to the file of the Ld.AO with directions to pass appropriate Order in the light of the afforested decision after examining the facts of the case. We also make it clear that if the assessee has admitted any expenses to have been incurred relating to exempt income as pointed out by the Ld.CIT(A) in his order at para No.5.2.1, then to that extent disallowance has to be sustained by virtue of Section 14A of the Act. It is ordered accordingly.

During the course of assessment proceedings, it was observed that the assessee had earned interest amounting to Rs.2,34,24,327/- as detailed herein below:- SPL Relators Private Limited Rs.1,15,50,001/- Bengal Shriram Hitech City Private Limited Rs.1,16,04,506/- Bank Interest Rs. 2,69,820/- ------------------------ Rs.2,34,24,327 Total ------------------------ The assessee treated the aforesaid interest income as business income by relying on the decision of the Hon’ble Kolkata High Court in the case Eveready Industries Ltd vs.CIT reported in 323 ITR 312. However, the Ld.AO by relying on the decision of the Hon’ble Apex court in the case Tuticorin Alkaline Chemicals & Fertilizers Ltd vs. CIT reported in 93 taxman 502 and the decision of the Hon’ble Kerala High Court in the case CIT vs. Vaikundam Rubber Company Pvt. Ltd. reported in 131 taxman 61 held that the interest income has to be assessed under the head ‘Income from other sources’ as per the provisions of Section 54 of the Act.

6.1 On appeal the Ld.CIT(A) accepted the claim of the assessee and held that the interest income earned by the assessee has to be assessed under the head ‘Income from business’ by observing as under: “As regards the interest received from SPL Realtors Pvt. Ltd., as subsidiary company of our company is also engaged in the same line of business. Similarly Bengal Shriram Hitech City Private Limited is company coming within the purview of our Company under our management. The appellant has been assisting these companies in accordance with clause 11 of the object clause of Memorandum of Association. Hence the interest received from these companies is assessable under the head “Business”. The Assessing Officer’s opinion that since the appellant is in the business of property development, the interest is not assessable under the head “Business” is not correct. As regards the Bank Interest, the same is assessable under the head “Business” as in the light of the Hon’ble Karnataka High Court decision in the case of Eveready Industries India Limited vs. Commissioner of Income Tax (323 ITR 312).”

6.2 After hearing both sides, we don’t find merit in the Order of the Ld.CIT(A). The assessee has parked its surplus funds in other companies and earned interest. Such income has to be necessarily assessed under the head ‘Income from other source’ as per Section 54 of the Act, as held by the Ld.AO. The Ld.AO’s decision is in accordance with the decision of the Hon’ble Apex court which is cited by the Ld.AO in his order. Hence, we hereby direct the Ld.AO to assess the interest earned from the bank and inter-corporate deposits under the head ‘Income from other source’.

Order pronounced in the court on the 6th June, 2017.