DCIT, CHENNAI vs. CHETTINAD BUILDERS PVT. LTD., CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

The appeal filed by the Department is directed against order of the Commissioner of Income-tax (Appeals)-1, Chennai in ITA

No.32/14-15/A-1, dated 29.12.2015 for the assessment year 2011- 2012 passed u/s.143(3) and 250 of the Income Tax Act, 1961 (herein

after referred to as ‘the Act’).

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The Revenue has raised the following grounds of appeal:- 2.

‘’2.1 The learned CIT(A) erred in deleting the disallowance made u/s./14A of Rs. 35,00,000/ -. 2.2 The learned CIT(A) ought to have appreciated the fact that the decision of the Jurisdictional ITAT in the case of EIH Associated Hotels in ITA NO.1503/Mds/20 12 for A.Y.2008-09 dated 17-07-2013 has not been accepted by the department and appeal u/s.260A has been preferred which is pending before the Hon'ble High Court. 2.3 The learned CIT(A) ought to have appreciated the Board's Circular No.5/2014 dated 11-02-2014 wherein it is stated that disallowance u/s. 14A can be made even in cases where the taxpayer has not earned exempt income in any particular. 3.1 The learned CIT(A) erred in directing the Assessing Officer to allow additional depreciation on plant and machinery to the tune of Rs.62,63,733/- 3.2 The learned CIT(A) failed to note that the additional depreciation is available for those engaged in the manufacture of production .and the instant assessee company is engaged in the business of civil construction. 3.3 The learned CIT(A) failed to appreciate the Apex Court's decision in the case of N.C. Budharaja & Company reported in 204 ITR 412 (SC) the facts of which is squarely applicable to the facts of the assessee company wherein it was held that production of ready mix concrete does not amount to 'manufacture' as defined ujs.32(1)(iia). 3.4 The learned CIT(A) ought to have appreciated the decision of the Apex Court in the case of Builders Association of India vs. UOI reported in 209 ITR 877 (SC) and the Allahabad High Court's decision in the case of Agra construction Corporation reported in 146 Taxman 31 which are favourable to revenue. 3.5 The learned C1T(A) ought to have appreciated the fact that the on similar issue for A.Y.2009-10 in the assessee's own case, the department has filed appeal before the Hon'ble High Court. Since the issue has not reached finality, filing further appeal is necessitated on this issue. 4.1 The learned C1T(A) erred in allowing the deduction u/s.80IA of the Act.

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4.2. The learned C1T(A) erred in not appreciating the fact that the loss on account of depreciation on windmills in earlier years. had to be set off notionally against the deduction as per Section 801A(S) as per the Special Bench decision of Ahmedabad Tribunal in the case of M/s.Goldmine Shares & Finance Private Ltd (2008) 113 1TD 209. 4.3 The learned CIT(A) ought to have- appreciated the fact that the decision of the jurisdictional High Court in the case of Velayudhaswamy Spinning Mills Private Limited (2012) (38 DTR 57) (340 1TR 477) has not been accepted by the department and SLP has been filed before the Hon'ble Supreme Court’’.

The Brief facts of the case that the assessee company is 3.

engaged in Civil construction and industrial constructions,

construction of IT Parks and Hotels and manufacturing and selling of

ready mix concrete and filed Return of income electronically on

30.09.2011 with total income of �12,51,60,370/-. Subsequently

Revised Return of income was filed on 23.12.2011 with total income of

�12,50,59,350/- and notice u/s.143(2) of the Act was issued and the

ld. Assessing Officer also called for information. The ld. Authorised

Representative appeared from time to time and filed the details and

the ld. Assessing Officer found from the financial statements that the

assessee company has made investments in M/s. Chettinad Cement

Corporation Ltd �69,99,99,940/- being group concern and no

expenditure was disallowed as per provisions of Sec. 14A of the Act.

Considering the submissions of the assessee and the ld. Assessing

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Officer discussed elaborately on the applicability of provisions at page

2 to 5 order and computed disallowance u/sec. 14A r.w.s.8D (iii)

�35,00,000/-. Aggrieved by the addition, the assessee filed an appeal

before Commissioner of Income Tax (Appeals).

3.1 In the appellate proceedings, the ld. Commissioner of

Income Tax (Appeals) considered the grounds, submissions and relied

on findings of the ld. Assessing Officer and observed at para 6 & 7of

the order as under:-

‘’6. I have carefully considered the facts in issue, the view taken by the AO, the arguments advanced by the appellant and material on record. The plea made by appellant that disallowance u/s.14A r.w. Rule 80 is not triqqered in view of the investments being made in sister concerns as also, that no dividend was. earned during the year. This proposition finds support in the decisions of the Jurisdictional IT T in the case of EIH Hotels Ltd v. DCIT, ITA No.1503 & 1624/Mds/2012 dated 17. 7.2013 chennai Tribunal), and jurisdictional Tribunal in ACIT vs. M Baskaran in ITA No.1717/Mds/2013 order dt. 31st of July, 2014. In EII-I Hotels (supra) it was he Id by the ITAT that where investments were made by the assessee in the subsidiary company the same are not to earn capital gains or dividend income. They were made to promote the subsidiary company. The assessee not being in the business of investment, such investments were made on account of business expediency. The dividend earned by the assessee from investment in subsidiary company is purely incidental. Therefore the investment made by the assessee in its subsidiary are not to be reckoned for disallowance u/s 14A r.w. u/s 8D. In the decision of jurisdictional ITAT in DCIT v. Mls Amalgamations

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Ltd in ITA No,811 &1712/Mds/2015 order dt. 16.9.2015), it was held similarly, reliance beinq placed in the ratio in EIH Associates Hotels v. CIT.

and deleted the addition. Aggrieved by the Commissioner of Income

Tax (Appeals) order, the Revenue assailed an appeal before the

Tribunal.

3.2 Before us, the ld. Departmental Representative argued that

the ld. Commissioner of Income Tax (Appeals) erred in deleting the

addition u/sec. 14A of the Act and the Revenue has filed appeal

against the ITAT order of EIH Associated Hotels Limited vs. DCIT in

ITA No.1503/Mds/2012, dated 17.07.2013 in the jurisdictional High

Court and ld. CIT(A) overlooked the Board Circular were the provisions

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of Sec. 14A of the Act are applicable in cases were no exempted

income received and prayed for setting aside the order of the

Commissioner of Income Tax (Appeals).

3.3 Contra, the ld. Authorised Representative relied on the

orders of the ld. Commissioner of Income Tax (Appeals) and

vehemently opposed to the grounds.

3.4 We heard the rival submissions, perused the material on

record and judicial decisions cited. The crux of the issue being the

assessee has made investments in sister companY and the contention

that own funds are generated out of business and no borrowed funds

were utilized for the purpose of investments. Further, investments in

sister/group company shall not be considered for the purpose of

calculation of disallowance under Rule 8D(2) and relied on judicial

decisions. The assessee company made investments on Business

expediency and no income has been generated by sister/group

company. The provisions of Sec. 14A r.w.r. 8D are mandatorily

applicable from assessment year 2008-09 but while calculating the

disallowance u/sec. Rule 8D(2), the ld. Assessing Officer shall consider

that the investments in group/ sister company are made in ordinary

course of business. Similar issue was considered by the Tribunal in the

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case of DCIT vs. M/s. Regen Powertech (P) Ltd. in ITA No.766 &

786/Mds /2016, assessment year 2011-12, dated 17.08.2016 at page

24, para 9.4 as under:-

9.4 We heard the rival submissions, perused the material on record and judicial decisions cited. The crux of the issue being the assessee has made investments in subsidiary/sister companies and the contention that own funds are generated out of business and no borrowed funds were utilized for the purpose of investments. Further, investments in subsidiary/sister company shall not be considered for the purpose of calculation of disallowance under Rule 8D(2). The ld. Authorised Representative drew our attention to the statement of details of subsidiary group companies and the investments reflected in financial statements and relied on judicial decisions. The assessee company made investments in these companies on Business expediency and no income has been generated by sister/group companies and also shareholding pattern varied from company to company. The provisions of Sec. 14A r.w.r. 8D are mandatorily applicable from assessment year 2008-09 but while calculating the disallowance u/sec. Rule 8D(2), the ld. Assessing Officer shall consider that the investments in subsidiaries are made in ordinary course of business. We found that there are no findings in the assessment order on this subsidiary/group companies which are considered as investments for calculating disallowance u/sec. 14A r.wr.8D(2) and rely on the Co-ordinate Bench decision of M/s. Rane Holdings vs. ACIT, Chennai in ITA No.115/Mds/2015, dated 06.01.2016 were it was held as under:- ‘’Taking note of the above decisions and the decision of the Chennai bench of the Tribunal in ITA No.156/Mds/13 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

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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 ITA No.1503, 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.” It is ordered accordingly’’.

and we remit the disputed issue to the file of the ld. Assessing Officer

to verify and exclude the investments in group companies for the

purposes of calculation of disallowance under Sec. 14A r.w.Rule 8D(2)

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and the assessee should be provided adequate opportunity of being

heard before passing the order on merits. The ground of the Revenue

is allowed for statistical purpose.

The next ground raised by the Revenue that the ld. 4.

Commissioner of Income Tax (Appeals) erred in deleting the additional

depreciation on Plant and Machinery �62,63,733/-.

4.1 The ld. Assessing Officer found that assessee company has

claimed deprecation on additions of �3,41,98,133/- to plant and

machinery- RMC and issued show cause notice. In the assessment

proceedings, the ld. Authorised Representative filed explanations

referred at page 2, para 6.1. of the order as under:-

"Note on additional depreciation claimed in respect of mechlneries used for production of Ready Mix Concrete (RMC):-

The assessee is engaged in manufacturing of ready mix concrete. The assessee procures necessary raw materials such as sand, crushed stone, cement, flyash and gypsum. These are poured into the batching plant in the desired proportion and properly mixed by using water. The plant is run for certain duration depending upon the desired mixture and product manufactured is mixed with another chemical called add- mixture. The final product after mixing has to be used

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within specified time. The product produced is altogether a different product from the material out of which it was produced. The product produced is known by name "Ready Mix Concrete (RMC)" and is sold as such in the market. This final mixture is poured into the vehicles mounted with transit mixtures and are taken to construction sites in rotating condition so that the materials do not get solidified and maintained in proper condition to be used for construction purposes. The raw materials once mixed cannot be reconverted into their original shape and character. Thus, from the above process, it could be understood that the raw materials by themselves are independent products and gets transformed into a different product known as RMC with totally varied character. Thus the process involves a manufacturing activity and hence the assessee has claimed additional depreciation for the additions to fixed assets".

But the ld. Assessing Officer relied on judicial decisions and

disallowed the claim of additional depreciation. Aggrieved by the

order, the assessee filed an appeal before Commissioner of Income

Tax (Appeals).

4.2 In the appellate proceedings, the ld. Commissioner of

Income Tax (Appeals) considered the grounds, submissions and

findings of the ld. Assessing Officer and on similar issue for

assessment year 2009-2010 observed at page 5 at para 11 of order as

under:-

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‘’11. I have carefully considered the facts in issue, the view taker by the AO, the arguments advanced by the appellant and material on record. Similar issue was considered by my predecessor in the case of the appellant for the AY. 2009-10 in ITA NO.373/13-14 dated 25.11.2013. Since the facts obtaining in the case of the appellant in the appeal under consideration are same; I do not find any reasons to take different view in the matter as taken in AY 2009-10. Respectfully followinq the same, the AO is directed to modify the order by deleting the addition of Rs.62,63,733/-. This ground of appeal is allowed’’.

The ld. Commissioner of Income Tax (Appeals) relying on the earlier

year order directed the ld. Assessing Officer to allow the deduction.

Aggrieved by the order, the Revenue assailed an appeal before the

Tribunal.

4.3 Before us, the ld. Departmental Representative argued that

the ld. Commissioner of Income Tax (Appeals) erred in deleting the

addition, of additional depreciation, were such depreciation is allowed

to entity engaged in manufacture or production but not civil

construction works and relied on the Apex Court decision and other

judicial decision were production of ready mix concrete does not

amount to manufacture and the appeal is pending on similar issue

and prayed for allowing the ground of the Revenue.

4.4 On the other land, the ld. Authorised Representative relied

on earlier year orders and supported the order of Commissioner of

Income Tax (Appeals) and opposed to the grounds.

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4.5 We heard the rival submissions, perused the material on

record and judicial decisions cited. The assessee is in the business of

Civil construction works and has claimed additional depreciation on

ready mix concrete as the activity of assessee company cannot be

manufacture or production to allow additional depreciation. The ld

Departmental Representative argued that the Apex court decision

squarely cover the case. On the other hand, the ld. Authorised

Representative explained that similar issue of the assessee for earlier

year was decided in assessee favour.. We perused the order of ld.

Assessing Officer and activity of the assessee company engaged in the

Business of manufacturing of readymix concrete and once the raw

material is mixed which cannot be reconverted in shape. The Hon’ble

Apex Court in the case of CIT vs. N.C. Budharaja & Company 204 ITR

412 (SC) has held that readymade mixed concrete cannot be in the

nature of manufacture. We also find similar issue dealt in the case of

CIT vs. Agra Construction Corpn. (2005) 146 Taxmann 31 (All) and

M/s. Cherian Varkey Construction Co. (P) Ltd vs. ACI in ITA

No.25/Coch/2014, dated 20.03.2015 at para 20 & 21 of order as

under:-

‘’20. I have heard the rival submissions and perused the record. It is common knowledge that an uneducated mason does the work of preparation of readymix concrete for construction of houses and it is never

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treated as manufacturing activity either in the common parlance or in the commercial parlance. The readymix concrete can be produced in huge volume with the help of machines with less manpower but merely because there is increase in volume, it cannot automatically be treated as manufacturing activity. At any rate, the end product is only an intermediate product which is used for construction of buildings, roads, dams etc. and when the end product is not considered as manufacturing activity, then it is difficult to hold that the intermediate product can be classified as manufacture or production of article or thing.

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Budharaja & Co. (cited supra) a statute cannot always be construed with dictionary in one hand and the statute in the other hand. (pg. 204 ITR 434). Regard must also be had to the scheme, context and to the leglislative history of the provision. Having regard to the ratio laid down by the Hon’ble Apex Court, bearing in mind the fact that the end product should amount to manufacture or production of an article or thing, the readymix concrete manufactured by the assessee, which is also engaged in the construction activity, cannot be said to be a manufacturing activity.

Respectfully following the Tribunal decision, we set aside order of

Commissioner of Income Tax (Appeals) and allow the ground of the

Revenue.

80-IA of the Income Tax Act, 1961 (in short ‘’the Act’’) in respect of

windmills.

5.1 The ld. Assessing Officer denied the deduction of

�34,30,895/- under section 80IA of the Act by notionally bringing in

and setting off the brought forward loss for determining the profits

qualifying for deduction u/s.80IA from the initial assessment year

being the year relevant to the financial year in which operations

relating to the windmill infrastructure commenced. Aggrieved, the

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assessee preferred an appeal before the Commissioner of Income Tax

(Appeals).

5.2 On appeal, the Commissioner of Income Tax (Appeals)

observed that the issue is covered by the jurisdictional High Court

order in the case of CIT vs. Velayuthasamy Spinning Mills 231 CTR 368

/340 ITR 477 and allowed the claim of the assessee by directing the ld.

Assessing Officer to withdraw the disallowance. . Against

Commissioner of Income Tax (Appeals) order, the Revenue assailed

an appeal before Tribunal.

5.3 We heard the rival submissions and perused the material on

record. The only contention of the Department before the Tribunal

that the Revenue has not accepted the judgment of Madras High Court

and an appeal has already been filed along with Special Leave Petition

and the same is pending before the Apex Court. This Tribunal is of

the considered opinion that mere pendency of Special Leave Petition

before the Apex Court cannot be a reason to take a different view.

The judgment of Madras High Court is binding on all the authorities in

the State of Tamil Nadu and Union Territory of Pondicherry.

Therefore, the Commissioner of Income Tax (Appeals) has rightly

allowed the claim of the assessee by following the binding judgment of

Madras High Court in Velayudhaswamy Spinning Mills (P) Ltd (supra).

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Therefore, this Tribunal do not find any infirmity in the order of the Commissioner of Income Tax (Appeals). The ground of the Revenue is

dismissed.

Order pronounced on Thursday, the 8th day of September, 2016, at Chennai.

Sd/- Sd/- (चं� पूजार�) (जी. पवन कुमार) (CHANDRA POOJARI) (G. PAVAN KUMAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER

चे�नई/Chennai �दनांक/Dated:08.09.2016 KV

आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF