PR. COMMISSIONER OF INCOME TAX vs. M/S AMALGAMATED BEAN COFFEE TRADING CO LTD

OF INCOME TAX, RANGE-11

BANGALORE, BMTC BUILDING

KORAMANGALA 6TH BLOCK

BANGALORE - 560095. 2. THE COMMISSIONER OF

INCOME TAX - 1, BANGALORE

BMTC BUILDING, KORAMANGALA

6TH BLOCK, BANGALORE - 560095. 3. ASSISTANT COMMISSIONER OF

INCOME TAX, RANGE-11

BMTC BUILDING, 6TH BLOCK

KORAMANGALA, BANGALORE-560095.

4 ... RESPONDENTS (BY SRI. T.N.C. SRIDHAR, ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 06.12.2017 PASSED IN ITA NOS.1501 & 1586/BANG/2013 FOR THE ASSESSMENT YEAR 2010-11 (ANNEXURE-D), PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (ii) ALLOW THE APPEAL AND SET ASIDE THE IMPUGNED COMMON ORDER PRONOUNCED ON 6.12.2017 BY THE TRIBUNAL IN ITA NOS.1501 & 1586/BANG/2013 (ANNEXURE-D) TO THE EXTENT QUESTIONED & ETC. THESE I.T.As. COMING ON FOR ORDERS, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: COMMON JUDGMENT These appeals under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) have been filed by the assessee as well as the revenue. I.T.A.No.313/2018 and I.T.A.No.315/2018 have been filed by the assessee whereas, I.T.A.No.388/2018 has been filed by the revenue. preferred by the assessee. Since, the appeal pertain to the same Assessment year 2010-11 and arise out of the common order dated 21.06.2017 and order dated 06.12.2017, passed by the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for

5 short), they were heard together and are being decided by this common judgment. The appeals were admitted by a bench of this Court on the following substantial questions of law: "(i) Whether tribunal committed an error of law in upholding disallowance of interest on borrowed capital at the rate of 6% as being attributable to investments made by the appellant in its foreign subsidiary, although the investments had been made to further sales in foreign markets, which is wholly for the purposes of its business and no part of the borrowed capital was utilized for such investment in any event? (ii) Whether the tribunal is correct in upholding the disallowance of Rs.7,97,70,326/- as interest on capital attributable to capital work in progress relying on the proviso to Section 36(1)(iii) when the said proviso was inapplicable to the case of the appellant and no part of the

6 borrowed capital was utilized for investment in work in progress in any event? (iii) The tribunal was correct in upholding the disallowance of interest on borrowed capital as attributable to capital work in progress at 12% as against 7.6% of the average capital work in progress determined by the CIT(A), without assigning any reasons whatsoever? (iv) Whether tribunal was justified in remanding the issue of disallowance of interest in regard to investments made in AN.Coffeeday International Ltd to the file of the Assessing Officer, although the Assessing Officer himself, for the Assessment Year 2009-10, was satisfied that no disallowance of interest under Section 14A was warranted as regards the very same investments and the facts remained the same in the Assessment Year in question? (v) Whether the tribunal has acted in contravention of the provision of Section

7 254(2) of the Act while passing the order dated 06.12.2017 on an application for rectification filed by the assessee.? 2. Facts leading to filing of these appeals briefly stated are that assessee is engaged in the business of selling coffee to domestic and overseas customers and is also engaged in retailing coffee and other related products through a chain of outlets under Café and Express Kiosks, under the name and style of 'Café Coffee Day'. The assessee filed the return of income for the Assessment Year 2010-11 and declared total income of Rs.23,82,29,824/-. The said return of income was taken up for assessment and an order of assessment was passed on 31.03.2013 by which following disallowances were made to the income of the assessee. (i) disallowance of claim under Section 14A of the Act for a sum of Rs.77,72,330/-. (ii) disallowance of interest of Rs.1,90,81,831/- on borrowed capital as having been utilized for share

8 application money to a foreign company A.N.Coffeeday International Ltd. ("AN Coffeeday" for short and as such warranting capitalization; (iii) disallowance of interest of Rs.7,97,70,326/- on borrowed capital as having been utilized towards capital work-in-capital has having been utilized towards capital work-in-progress and as such warranting capitalization; and (iv) disallowance of expenditure of Rs.9,77,23,650/- incurred towards processing and other charges for raising loans and compulsorily convertible debentures on the ground that the same ought to have been capitalized. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals) who by an order dated 14.08.2013 disposed of the appeal holding as follows: (i) the disallowance under Section 14A of the Act, to the extent of Rs.7,35,920/- under Rule 8D(2)(iii)

9 was upheld and to the extent of the balance of Rs.70,36,410/- under Rule 8D(2)(ii), was deleted, and it was held that the said investments were made out of funds owned by the assessee and not from the borrowed funds. (ii) the disallowance of interest on borrowed capital allegedly utilized for the purposes of investment in shares of AN Coffeeday was upheld but the quantum of the disallowance was reduced from Rs.1,90,81,831/- to Rs.1,48,54,153/- by reducing the interest rate to 8.5% as against 12% as held by the Assessing Officer. (iii) the disallowance of interest on borrowed capital allegedly utilized for capital work-in-progress was upheld but the quantum of disallowance was reduced from Rs.7,97,79,326/- to Rs.5,05,06,362/- by reducing the interest rate from 12@ to 7.6%. (iv) the disallowance of processing charges of Rs.9,77,23,650/- was deleted in view of the decision of

10 the Supreme Court in INDIA CEMENTS VS. CIT [(19660 60 ITR 52(SC)]. 3. Being aggrieved by the order passed by the Commissioner of Income Tax (Appeals), the assessee as well as the revenue filed theappeals before the tribunal The tribunal by an order dated 21.06.2017 partly allowed theappeal preferred by the assessee and revenue and held as under: (i) claim for disallowance under Section 14A of ht e Act was set aside on the ground that there was no exempt income. (ii) the disallowance of interest in respect of share application money was upheld but the rate of interest attributable was reduced to 6% as against 12% held by Assessing Officer and Commissioner of Income Tax (Appeals) who had upheld the rate of interest at 8.5%. (iii) The claim for disallowance of interest in respect of capital work in progress was upheld by

11 relying on Proviso to Section 36(1)(iii) which was brought into force with effect from 01.04.2004. (iv) In respect of claim for disallowance of processing and other charges, the matter was remitted to the Commissioner of Income Tax (Appeals). 4. The assessee thereafter filed a miscellaneous petition under Section 254(2) of the Act which was disposed of by an order dated 06.12.2017 and it was held as under: (i) The claim for disallowance of interest made with regard to investments in the share capital of A.N.Coffeeday, the matter was remitted to the Assessing Officer. (ii) With regard to claim made on interest on borrowed capital attributed to capital work in progress, the prayer for rectification was rejected. (iii) The claim for loan processing and other charges, the order of the Commissioner of Income Tax (Appeals) directing deletion of disallowance was upheld.

12 In the aforesaid factual background, these appeals have been filed. 5. Learned counsel for the assessee submitted that the assessee had made investments by way of share application money in one of its foreign subsidiary viz., A.N.Coffeeday for an amount of Rs.17,47,54,752/-, whereas, the assessee's own fund were to the extent of Rs.386,91,31,076/- which were far in excess of the investment made in A.N.Coffeeday. Therefore, the tribunal ought to have appreciated that there was a presumption that the investments were made out of non interest bearing funds and the burden was on the revenue to prove that investments were made out of borrowed funds which was not discharged by the revenue by adducing any evidence. It is also pointed out that the remand by the tribunal following its earlier order for the Assessment Year 2009-10 was wholly unnecessary as for the Assessment Year 2009-10 itself the Commissioner of Income Tax (Appeals) had returned

13 the finding that investments in A.N.Coffeeday as on 31.03.2009 were made out of the funds of the assessee in the context of disallowance under Section 14A read with Rule8D(2)(ii) of the Rules and therefore, same conclusion ought to have been drawn to Section 36(1)(iii) of the Act and therefore, the order of remand was wholly unwarranted. It is also urged that prior to amendment of Section 36(1)(iii) of the Act by Finance Act, 2003 with effect from 01.04.2004, it has been held that interest on borrowed capital utilized for the purpose of business or profession has to be disallowed irrespective of whether the same is towards extension or expansion of business. It is also urged that expression 'expansion' and 'extension' connote different meaning and the legislature in its wisdom has used the aforesaid expressions differently. In this connection, our attention was invited to Section 80-IC(2)(b) and 80-IE(2)(ii) wherein the term 'expansion' is used and substantial 'expansion' is defined as increase in investment of plant

14 and machinery by a specified percentage out of book value of plant and machinery, whereas, under Section 35D(1)(ii) and proviso to Section 36(1)(iii) prior to its amendment used the word 'extension'. 6. It is also submitted that for the subsequent Assessment Years 2011-12, 2012-13, 2013-14, the Commissioner of Income Tax (Appeals) had granted relief to the assessee. It is also contended that against the capital work in progress, the assessee had substantial funds of Rs.386.91 Crores and therefore, the presumption was that the assessee had applied its fund for expansion and not from the borrowed capital and no part of interest on the borrowed capital can be disallowed. It is also argued that the tribunal while passing the order dated 06.12.2017 has rectified the errors, which were apparent on the record. In support of aforesaid submissions, reliance has been placed on decisions in 'CIT VS. RELIANCE INDUSTRIES LTD.', (2019) 102 TAXMANN.COM 52(SC), 'CIT VS.

15 RELIANCE UTILITIES & POWER LTD', (2009) 178 TAXMAN 135 (BOMBAY), 'CIT VS. BRINDAVAN BEVERAGES (P.) LTD', (2017) 88 TAXMANN.COM 477 (KARNATAKA), 'CIT VS. BRIGADE ENTERPRISES LTD.', (2021) 124 TAXMANN.COM 237 (KARNATAKA), 'CIT VS. MONNET INDUSTRIES LTD', (2009) 176 TAXMAN 81 (DELHI), 'CIT VS. MONNET INDUSTRIES LTD.', (2012) 25 TAXMANN.COM 236 (SC). 7. On the other hand, learned counsel for the revenue while inviting the attention of this court to Section 254(2) of the Act submitted that the tribunal has the power to rectify the mistake apparent on record. However, the tribunal in the instant case, has reviewed the order passed by it which is per se without jurisdiction. It is submitted that in the guise of rectification the entire order is reviewed. While referring to order dated 21.06.2017, it is pointed out that the tribunal had recorded the findings of fact on merits and

16 for the limited purpose the mater was remitted. However, while passing the order dated 06.12.2017, the matter has been reviewed on merits and the finding recorded with regard to Section 36(1)(iii) is a pure finding of fact. 8. We have considered the submissions made by learned counsel for the parties and have perused the record. Twin issues arise for consideration in the appeal preferred by the assessee viz., disallowance of interest on borrowed capital insofar as it pertains to investment made in the foreign subsidiary of the assessee and disallowance of interest under Section 36 and disallowance of interest under Section 36(1)(iii) of the Act. Similarly twin issues arise for consideration in this appeal viz., whether loan processing and other charges can be allowed as revenue expenditure or has to be treated as capital in nature and whether the tribunal has acted in contravention of the provision of Section 254(2)

17 of the Act while passing the order dated 06.12.2017 on an application for rectification filed by the assessee. 9. It is well settled legal proposition that where interest free funds are available to the assessee and were sufficient to meet its investment, the presumption is that the investments were made from interest free funds available with the assessee. [See: RELIANCE INDUSTRIES LTD., SUPRA]. The assessee had made investment by way of share application money in one of its foreign subsidiaries i.e., A.N.Coffeeday. The investment which was made as on 31.03.2009 and 31.03.2010 was for an amount of Rs.14,32,75,766/- and Rs.17,47,54,752/- respectively. The assessee held its own funds to the extent of Rs.17,47,54,752/- which were far in excess of the investment made in A.N.Coffeeday. Therefore, the presumption in law arises that the investments were made out of non interest bearing funds and burden was on revenue to show that investments were made out of borrowed funds. The

18 revenue has not discharged the aforesaid burden. Therefore, it has to be presumed that the investments were made from interest free funds which were available with the assessee. It is also noteworthy that for Assessment Year 2008-09, the Commissioner of Income Tax (Appeals) had recorded a finding that investments made during the aforesaid Assessment Year including investments in A.N.Coffeeday as on 31.03.2009 were made out of the funds of the assessee, with reference to claim of disallowance under Section 14A read with Rule 8D(ii)of the Rules and therefore, the same conclusion ought to have been applied to Section 36(1)(iii) as well. Therefore, in the fact situation of the case, the remand by the tribunal to the Assessing Officer to examine whether the investments were made out of the funds of the assessee or from borrowed funds, is not warranted as the Assessing Officer for the Assessment Year 2009- 10, the Assessing Officer on examination of the details furnished by the assessee had accepted the contention

19 that investment was made by the assessee out of the funds owned by it. 10. The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX’ (1992) 60 TAXMAN 248 (SC) has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. For the aforementioned reasons, the substantial question of law No.1 is answered in the negative and in favour of the assessee. 11. Now we may advert to the claim of the assessee in respect of upholding the disallowance of Rs.7,97,70,326/- as interest on capital attributable to

20 capital work in progress relying on proviso Section 36(1)(iii) of the Act. The assessee is in the business of manufacture and trade in coffee and allied products. It has more than 1000 coffee shops with brand name 'Café Coffee Day'. The assessee had capital work in progress of Rs.59,41,92,500/- as on 31.03.2010 which represented various coffee shops being set up which were in different stages. The Assessing Officer disallowed the interest on borrowed capital to the extent of Rs.7,97,70,326/- has been attributable to work in progress on the ground that the same will have to be capitalized along with cost of fixed asset. The order passed by the Assessing Officer was upheld by the Commissioner of Income Tax (Appeals) and the tribunal upheld the disallowance on the ground that in terms of proviso to Section 36(1)(iii) which was incorporated in the At with effect form 01.04.2004 the interest cost ought to have been capitalized.

21 12. It is pertinent to mention here that prior to amendment of Section 36(1)(iii) vide Finance Act, 2003, it is a well settled proposition of law that interest on borrowed capital utilized for the purpose of business or profession has be allowed irrespective of the fact that is towards extension or expansion. In this connection, reference may be made to decision of the High Court of Delhi in Monnet Industries Ltd. supra, which was upheld by the Supreme Court in a decision in (2012) 25 taxmann.com 236 (SC). In CIT VS. UP ASBESTOS LTD. supra Allahabad High Court held that were the assessee increased the capacity of its manufacturing plant, the proposed business was not an individual business but vertical expansion of present business. Therefore, Section 36(1)(iii) was amended by Finance Act, 2003 by inserting a proviso to curtail the deduction insofar as interest on borrowed capital is relatable to extension of existing business, which reads as under:

22 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28— (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : 13. The word 'expansion' and 'extension' connote different meaning and legislature in its wisdom has used the terms differently under various provisions of the Act itself and therefore, the words cannot be used synonymously. In this connection reference may be made to Section 80-IC(2)(b) and Section 80-IE(2)(ii) where the expression 'expansion' is used and 'substantial expansion' is defined as increase in investment in plant and machinery by a specified percentage of book value of plant and machinery. In Section 35D(1)(ii) and proviso to Section 36(1)(iii) (prior to its amendment in the year 2015), the

23 legislature has employed the expression 'extension'. Therefore, prior to its amendment the extension of business was covered under Section 36(1)(iii) of the Act and not the expansion of business. In the instant case, the assessee has set up new coffee shops, which amounts to expansion of business and therefore, the bar under the proviso Section 36(1)(iii) is not applicable. It is only after the amendment of Section 36(1)(iii) of the Act with effect from 01.04.2016 the proviso can be attracted to the case of expansion of business which is not applicable to the facts of the case as the case of the assessee pertains to Assessment Year 2010-11. 14. For the subsequent Assessment Years i.e., 2011-12, 2012-13 and 2013-14, the Commissioner of Income Tax (Appeals) had granted relief to the assessee and had accepted the stand of the assessee that the setting up of new shops is a case of expansion of existing business and not extension of the same. However, on an appeal being preferred by the revenue,

24 the tribunal though noted that a similar issue was decided in favour of the assessee in another assessee's case allowed the appeal preferred by the revenue following the order passed in case of the assessee for Assessment Year 2010-11. The assessee had funds of Rs.386.91 Crores as against the capital work in progress of Rs.59.41 Crores, which leads to a presumption that assessee had used its funds towards the expansion and not for borrowed capital. Therefore, interest on borrowed capital could not have been disallowed. 15. The Assessing Officer had disallowed the claim in respect of processing charges on the ground that the same ought to have been capitalized with the loans as they are directly linked to the borrowings and disallowed the same. However, the Commissioner of Income Tax (Appeals) by placing reliance on decision of the Supreme Court in CIT VS. INDIA CEMENTS supra allowed the appeal preferred by the assessee in an appeal filed by the revenue though tribunal originally

25 restored the matter to the Commissioner of Income Tax (Appeals), however, on an application for rectification made by the assessee, the tribunal allowed the aforesaid application and on merits held in favour of the assessee. From perusal of the order passed by the tribunal on an application filed by the assessee for rectification of the order, it is evident that tribunal has recorded a finding in the para 13 of the order that there has been no adjudication of the claim for disallowance of processing charges and capitalization of Rs.9,77,23,650/-. The tribunal has therefore decided the claim of the assessee on merits. Since, the omission on the part of the tribunal was an error apparent on the face of the record, and therefore, the tribunal rightly invoked provisions of Section 254(2) of the Act. Similarly, in view of decision of Rajasthan High Court in Secure Meters Ltd. supra, the matter pertaining to expenses incurred for convertible debenture is decided in favour of the assessee and the application for

26 rectification has been partly allowed. On close scrutiny of the order dated 06.12.2017 passed by the tribunal, we find that the tribunal has invoked the jurisdiction to rectify the error apparent on the face of the record. In view of preceding analysis, the remaining substantial questions of law involved in these appeals are answered in favour of the assessee and against the revenue. In the result, the orders dated 21.06.2017 and 06.12.2017 to the extent the same are against the assessee are hereby quashed. In the result, the appeal preferred by the assessee succeeds, whereas, the appeal preferred by the revenue is dismissed. Sd/- JUDGE Sd/- JUDGE ss