COMMISSIONER OF INCOME TAX (CENTRAL) vs. M/S. GMR ENERGY LTD

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 1ST DAY OF JUNE 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.372 OF 2014 BETWEEN: 1. COMMISSIONER OF INCOME TAX

(CENTRAL), CENTRAL REVENUE BUILDING

QUEENS ROAD, BANGALORE-560001. 2. THE ADDL. COMMISSIONER OF INCOME-TAX

RANGE-11, NO.14/3-A, 5TH FLOOR

RASHTROTHANA BHAVAN

BANGALORE-560001. ... APPELLANTS (BY SRI. JEEVAN J. NEERALGI, AGA) AND: M/S. GMR ENERGY LTD., NO.25/1, SKIP HOUSE MUSEUM ROAD BANGALORE-560025. ... RESPONDENT (BY SRI. BALARAM R. RAO, ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 28.03.2014 PASSED IN ITA NO.1184/BANG/2012 FOR THE ASSESSMENT YEAR 2008- 09, PRAYING TO: (i) DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT.

2 (ii) SET ASIDE THE APPELLATE ORDER DATED 28.03.2014 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH, BANGALORE IN APPEAL PROCEEDINGS NO.ITA NO.1184/BANG/2012 FOR ASSESSMENT YEAR 2008-09. THIS I.T.A. COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2008-09. The appeal was admitted by a bench of this Court on the following substantial questions of law:

"(1) Whether on the facts and circumstances of the case the Tribunal is right in law in setting aside the disallowance made by the assessing authority relating to expenditure claimed by assessee to an extent of Rs.11.11 Crores even when the assessee had failed to prove that the said expenditure has been incurred by assessee and not in the hands of M/s. VGPL?

(2) Whether on the facts and circumstances of the case the Tribunal is right in law in confirming the order of the Commissioner of Income Tax (Appeals) relating to disallowance of 0.5% of the average of the value of the investment, the income from which is exempt from tax even when the assessing authority rightly disallowed the disallowed Rs.7.58 crores under section 14A read with Rule 8D in accordance parameters of section 14A and as such the Tribunal failed to confirm the entire disallowance of Rs.7.58 crores?

(3) Whether on the facts and circumstances of the case the Tribunal is right in law in setting aside the disallowance of Rs.11.39 crores relating to interest claimed by assessee even though the assessee had diverted borrowed capital and had not charged interest on the same?" 2. Facts leading to filing of this appeal briefly stated are that assessee is engaged in the business of

4 generation of power and operates a power generating plant at Mangalore. The assessee filed the return of income for the Assessment Year 2008-09, which was revised on 04.05.2009 in which total income of Rs.16,40,64,898/- was declared under the provisions of the Act and book profit of Rs.144,62,37,586/- was declared under Section 115JB of the Act. The return filed by the assessee was taken up for scrutiny and notices under Section 143(2) as well as Section 142(1) of the Act were issued to the assessee on 18.01.2010, 02.03.2010, 08.06.2010 and 02.11.2010. The details as sought by the Assessing Officer were furnished by the assessee and an order of assessment under Section 143(1) of the Act was passed on 27.12.2010, by which the interest paid was not treated as revenue expenditure and disallowance was made under Section 14A read with Rule 8D of the Rules. The interest on the diverted borrowed capital was also disallowed. Thus, in all, disallowance of Rs.43,85,79,362/- was made.

5 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 29.06.2012 allowed the claim with regard to interest paid but not treated as revenue expenditure. Similarly, the disallowance under Section 14A read with Rule 8D(2)(i) of the Rules was restricted to Rs.1,10,967/- and disallowance of interest on the diverted borrowed capital was directed to be deleted and it was held that there was no justification for making disallowance under the aforesaid head to the extent of Rs.11.39 Crores. 4. Being aggrieved, the assessee as well as the revenue filed appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by a common order dated 28.03.2014 inter alia upheld the decision of the Commissioner of Income Tax (Appeals) with regard to disallowance of interest paid not treated as revenue expenditure. The claim for disallowance under Section

6 14A of the Act made by the assessee to the extent it was rejected was not accepted by the tribunal. Similarly, the finding of the Commissioner of Income Tax (Appeals) with regard to disallowance of interest expenditure relatable to investment made by the assessee was also upheld. In the aforesaid factual background, this appeal has been filed by the revenue. 5. Learned counsel for the revenue submitted that the tribunal has not dealt with the issue pertaining to interest paid which was not treated as revenue expenditure elaborately and has not assigned any valid and cogent reasons. It is also urged that the tribunal as well as the Assessing Officer did not ascertain the purpose for which the money was advanced to its sister concern. It is further submitted that the tribunal ought to have remitted the matter to the Assessing Officer for conducting an enquiry. On the other hand, learned counsel for the assessee has submitted that the first substantial question of law involved in this appeal is not

7 in fact a question of law but is a finding of fact, which has concurrently been recorded in favour of the assessee by the Commissioner of Income Tax (Appeals) as well as the tribunal. It is further submitted that with reference to claim of disallowance under Section 14A read with Rule 8D(2)(iii) of the Rules, the submission of the assessee has not been accepted and Assessing Officer has been directed to re work the disallowance and therefore, it is not necessary to answer the second substantial question of law. It is further submitted that third substantial question of law has rightly been answered in favour of the assessee by the Commissioner of Income Tax (Appeals) as well as the tribunal. 6. We have considered the submissions made by learned counsel for the parties and have perused the record. Interest of Rs.11.11 Crores which was incurred was utilized for providing financial assistance to its wholly owned subsidiary of the assessee on account of

8 commercial expediency and the financial assistance was utilized by the wholly owned subsidiary company for its power generating business. In terms of the agreement dated 11.01.2007, interest on the financial assistance given to the wholly owned subsidiary was payable to the assessee from first quarter calendar year 2011 and the same was received. Therefore, the Commissioner of Income Tax (Appeals) as well as the tribunal have rightly treated the payment of interest of Rs.11.11 Crores by placing reliance on the decision of the Supreme Court in 'S.A.BUILDERS VS. Commissioner of Income Tax (Appeals), CHANDIGARH', 280 ITR 1 (SC). The aforesaid finding, which is concurrent in nature does not suffer from any infirmity and cannot be said to be perverse. Therefore, the first substantial question of law is answered against the revenue and in favour of the assessee. 7. So far as claim for disallowance under Section 14A of the Act is concerned, the Commissioner

9 of Income Tax (Appeals) has negatived the submission of the assessee and has directed the Assessing Officer to re-work the disallowance. The aforesaid order has been affirmed in appeal by the tribunal. Therefore, it is not necessary to answer the second substantial question of law. 8. So far as claim of the assessee with regard to disallowance of interest expenditure relating to investment made by the assessee is concerned, the Commissioner of Income Tax (Appeals) after taking into account the details furnished by the assessee, has recorded the finding that there is a nexus between the loan and the business of the assessee and there is no nexus between interest bearing funds and the investment made in the sister concern of the assessee. Therefore, the finding recorded by the Commissioner of Income Tax (Appeals) that investments are presumed to be made out of surplus funds and the borrowed funds have not been diverted for the purpose of providing

10 interest free financial assistance to its sister concerns has been upheld. The aforesaid concurrent finding of fact does not suffer from any infirmity and cannot be termed as perverse. The third substantial question of law is therefore, answered in the negative and against the revenue. In the result, the appeal is dismissed. Sd/- JUDGE Sd/- JUDGE ss