Income Tax Appellate Tribunal - Hyderabad
L & T Infocity Limited , Hyderabad vs Assessee on 22 January, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "B", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND
SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. Asst. Year Appellant Respondent
1515/Hyd/2011 2007-08 Deputy
L&T Infocity Commissioner of
Limited, Income Tax,
Madhapur, Hyderabad
1516/Hyd/2011 2008-09 Hyderabad Joint
Commissioner of
[PAN: AAACL 5895 R] Income Tax,
Hyderabad
50/Hyd/2014 2009-10 Joint
Commissioner of
Income Tax,
Hyderabad
51/Hyd/2014 2010-11 Joint
Commissioner of
Income Tax,
Hyderabad
256/Hyd/2014 2009-10 Deputy Commissioner L&T Infocity
of Income Tax, Limited,
Hyderabad Hyderabad
289/Hyd/2014 2010-11 Deputy Commissioner L&T Infocity
of Income Tax, Limited,
Hyderabad Hyderabad
For Assessee : Dr. Anita Sumanth
Shri Sumanth Karlapudi
Shri Aditya Bajoria
For Revenue : Shri D. Sudhakar Rao, DR
Date of Hearing : 05-12-2014
Date of Pronouncement : 22-01-2015
ORDER
PER B. RAMAKOTAIAH, A.M. :
These are group of appeals filed by assessee for Assessment Years 2007-08, 2008-09, 2009-10, 2010-11 and cross-appeals by Revenue for :- 2 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., AYs.2009-10 & 2010-11. Since common issues are involved in these, we have heard these appeals together and decided by this common order.
2. For the sake of convenience, we will discuss the facts of the appeal in ITA No.1515/Hyd/2011.
3. This is an appeal filed by assessee against the order of the Commissioner of Income Tax(Appeals)-V, Hyderabad dated 13-06-2011 and assessee has raised six grounds in the appeal. Ld.CIT(A) partly allowed the appeal and Revenue has not come in appeal. Briefly stated, assessee-company is engaged in the business of development, maintenance and consultancy in respect of infrastructure facilities for information and technology and related activities. It has filed return of income for AY.2007-08 declaring total income of Rs.13.63 Crores which was processed u/s.143(1) of the Income Tax Act (Act). It has also disclosed book profits u/s.115JB at Rs.31,47,46,170/-. Since tax payable on book profits was more than the tax payable on normal taxable income, tax liability u/s.115JB was adopted u/s.143(1). Even after making certain additions in the assessment, income was determined u/s.115JB only. However, assessee preferred appeals before the CIT(A) on various issues. The issues on which assessee is aggrieved are considered in this appeal. Ground No.1 being general in nature does not require any adjudication.
4. Ground No.2 is disallowance of interest expenses amounting to Rs.4,64,00,000/-. The facts are that assessee has made investments of Rs.46,40,12,844/- in the form of long term investments and mutual funds. The investments are primarily into subsidiary sister-companies. Assessing Officer considered that assessee has diverted funds for investments and therefore interest claimed to the extent of Rs.4.64 :- 3 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., Crores was disallowed out of the interest of Rs.13.69 Crores claimed in P&L A/c. Ld.CIT(A) considering that similar issue was decided by him in earlier years, affirmed the disallowance made by the Assessing Officer. 4.1 At the outset, it was submitted that the orders of the CIT(A) in AY.2003-04 and 2004-05 were subject matter of appeals before the Hon'ble ITAT and the issue was set aside to the file of Assessing Officer for fresh examination. Ld.Counsel has no objection if the matter is restored to the file of Assessing Officer with similar directions.
5. ITAT 'B' Bench, Hyderabad in ITA No.317/Hyd/2007 for AY.2003- 04 has considered similar issue and set aside to the file of the Assessing Officer for consideration of facts afresh. Order of ITAT in para 9 is as under:
"9. We have considered the rival submissions and perused the material available on record. We find that impugned disallowance has been sustained by the CIT(A) observing that detailed particulars of payments have not been furnished by the assessee either before the assessing officer or before him. Since the assessee before us claims to be now in possession of the details of payments, which have been furnished at pages 261 and 264 of the paper-book, we deem it fair and proper to restore this issue to the file of the assessing officer, for fresh consideration in the light of the ratio of the decision of the Apex Court in the case of S.A.Builders (supra). We accordingly set aside the impugned order of the CIT(A) and restore the matter to the file of the assessing officer for a fresh consideration in accordance with law and after giving the assessee reasonable opportunity of being heard. Assessee's grounds on this issue are allowed for statistical purposes.
Respectfully following the same, we accordingly set aside the impugned orders of Assessing Officer and CIT(A) and restore the matter to the file of the Assessing Officer for fresh consideration keeping in mind the orders of the Assessing Officer in earlier years on the similar issue. Assessee should be given reasonable opportunity of being heard. This ground is allowed for statistical purposes.
:- 4 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
6. Ground No.3 is on the issue of set-off of capital loss against the capital gains income during the year. Facts are that the appellant claimed short term capital loss on the sale of mutual funds at Rs.15,66,51,356/-. This short term capital loss was set off against short term capital gain of Rs.52,82,951/- and long term capital gain of Rs.28,33,9 4,489/-. The appellant also claimed exemptions under sections 10(34) and 10(35) with respect to dividend income received amounting to 15,64,95,712/-. By giving the following reasons, Assessing Officer disallowed the claim of capital loss:
"4.1. The above explanation of the assessee is considered. The provisions of Sec. 94(7) have been brought into the statute by the Finance Act, 2001 in order to curb the creation of short term losses. The scope and effect have been explained by the Departmental circular No.14 of 2001 as under:
"The existing provisions did not cover a case where a person buy securities (including units of a mutual fund) shortly before the record date fixed for declaration of dividends, and sells the same shortly after the record date. Since the cum-dividend price at which the securities are purchased would normally be higher than the ex-dividend price at which they are sold, such transactions would result in a loss which could be set off against other income of the year. At the same time, the dividends received would be exempt from tax under section 10(33). The net result would be the creation of a tax loss, without any actual outgoings.
With a view to curb the creation of such short term losses, the Finance Act, 2001 has inserted a new sub- section (7) in the section to provide that where any persons buys or acquires securities or units within a period of three months prior to the record date fixed for declaration of dividend or distribution of income in respect of the securities or units, and sells or transfer the same within the period of 3 months after record date and the dividend or income received or receivable is exempt, then the loss, if any, arising from such purchase or sale shall be ignored to the extent such loss :- 5 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., does not exceed the amount of such dividend or interest, in the computation of the income chargeable to tax or such person."
Simultaneously, Sec.14A was introduced by the Finance Act, 2001 wherein it was specifically provided that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the Act.
In the kind of transactions entered into by the assessee in respect of the purchase and sale of units, the assessee knows that they are short term investments and therefore, the intention is to earn dividend income which is exempt from tax. There is knowledge on the part of the assessee that soon after the dividends are declared, the value of the unit goes down and in the process, any sale would result in definite loss to the assessee. Therefore, it has to be treated that the transaction has been undertaken with a view to earn dividend and that the assessee is prepared to incur loss in the bargain which has to be treated as an 'expense' in the process of earning non-taxable income. The intention of the legislature is very clear and it seeks to curb such practices. The assessee has purchased 1,11,50,211 units at a face value of Rs.25 crores on 08.12.06 and sold them on 26.03.07 for a consideration of Rs.16,85,34,528/- The record date of this transaction is 23.03.07. Similarly, the assessee also has purchased 1,15,65,668 units on 19.12.06 for a consideration of Rs.25 Crores and sold them on 26.03.2007 for a consideration of Rs.17,48,14,l16/-. The record date for this transaction is 23.03.07. It can be observed that the assessee has sold the units just three days from the record date. The purchase of the units are on 08.12.06 and 19.12.06 ie., just a few days more than the period of 3 months before the record date. The assessee has claimed the dividend as exempt and has set off the loss against long term capital gains which cannot be permitted in the face of the nature of transaction. The loss has to be reckoned as 'cost' in the process of earning of dividend.
4.2. In view of the above facts and circumstances, the short term capital loss claimed by the assessee cannot be set off against long term capital gains. Hence, the short :- 6 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., term capital gains of Rs.52,82,951/- and long term capital gains of Rs. 28,27,89,471 + Rs.6,05,018 = Rs.28,33,94,489/- have to be brought to tax".
6.1 Ld.CIT(A) confirmed the adjustments made by Assessing Officer by stating as under:
7.2 I have considered carefully the facts and evidence. The arguments of the appellant only relate to section 70(2) of the Income Tax Act. However, the Assessing Officer has rightly pointed out Section 94(7) of the Income Tax Act was introduced with a specific purpose of tax evasion due to certain colourable transactions in securities. Section 94(7) is reproduced below:
"Section 94(7)-
(a) any person buys or acquires any securities or unit within a period of three months prior to the record date;
(b) such person sells or transfers-
(i) Such securities within a period of three months after such date, or
(ii) Such unit within a period of nine months after such date;
(c) the dividend or income on such securities or unit received or receivable by such person in exempted, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax."
7.2.1 A plain reading of the above section clearly shows that where a person buys any security 3 months prior to the record date, i.e., the "security is purchased cum dividend" and is sold within a specified time after the record date i.e., ex-dividend and the dividend on such security is exempt. Then the loss arising from such transactions will not be allowed.
7.3 In the case of the appellant, the record date in a particular :- 7 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., transaction was 23.3.2007. The appellant purchased 1,11,50,211 units at face value of Rs.25 crores on 08.12.2006 and sold them on 26.3.2007 within 3 dyas of the record date for a consideration of Rs.16,85,34,528/- thereby incurring loss. Similarly, 1,15,65,668 units purchased on 19.12.2006 for a consideration of Rs. 25 crores and the same were sold on 26.3.2007 for Rs.17,48,14,116/-. The appellant claimed the dividend received as exempt and set off the loss against long term capital gains. Accordingly, as per Section 94(7), the loss on these transactions has to be disallowed as per specified in that section.
7.4 In find that the Assessing Officer has treated the loss as cost of earning dividend income. I find that such an interpretation is incorrect as capital loss cannot be equated to cost of earning dividend. Whereas, in principle, I agree that Section 94(7) is applicable. However, I direct the Assessing Officer to apply the section and disallow loss only to the extent of dividend or income received on such securities as specified in the above section. Capital loss is not to be disallowed as cost under section 14A. This ground is accordingly decided partly in favour of revenue.
6.2 Ld.Counsel submitted that the actions of the Assessing Officer and CIT(A) are not according to the law. It was submitted that the stipulations made out in Section 94(7) have not been fulfilled as one of the conditions are not satisfied. It was already held that all the three conditions as specified u/s.94(7)(a), 94(7)(b) & 94(7)(c) are to be satisfied so as to consider the disallowance under that section. However, Ld.CIT(A) did not consider that assessee is not satisfying condition '(a)'. It was submitted that the record date being 26-03-2007 only these shares or units which are purchased on or after 26-12-2006 would come within the purview of sub-clause 'a'. Assessee having purchased them on 08-12-2006 and 09-12-2006 condition (a) is not satisfied. The Ld.Counsel relied on the judgments of CIT Vs. Smt. Alka Bhosle 325 ITR 550 (Bom) and CIT Vs. Shambhu Mercantile Limited 304 ITR (AT)36 (Del) as approved by Hon'ble Dehi High Court in 325 ITR 535. 6.3 The Ld.DR however, relied on the authorities.
:- 8 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
7. We have considered the issue. The provisions of Section 94(7) are already extracted by CIT(A) in the order which does not require any repetition. As per Section 94(7), if any person buys securities or units within three months prior to the record date and such person sells or transfers such securities within three months after such record date, loss on such sale of securities/units shall be ignored for computing income chargeable to tax. As verified from the record, assessee purchased these units and held them for more than three months period as on record date. Therefore, condition '(a)' specified in the section has not been fulfilled.
7.1. In the case of CIT Vs. Smt. Alka Bhosle (supra), the Hon'ble Bombay High Court held as under:
"The assessee purchased certain units within a period of less than three months from the record date, but admittedly, the units were sold beyond a period of three months from the record date. The contention of the Revenue was that though the units were sold beyond a period of three months of the record date, the provisions of section 94(7) of the Income-tax Act, 1961 would apply since they were acquired within a period of three months of the record date. On appeal:
Held, dismissing the appeal, that sub-section(7) of section 94 spelt out three requirements; (i) the purchase or acquisition of any of the securities or units should take place within a period of three months prior to the record date; (ii) the sale or transfer should take place within a period of three months after the record date; (iii) the dividend or income received or receivable should be exempt. In the event that these three conditions were fulfilled, the loss, if any, arising from the purchase or sale of securities or units, had to be ignored for the purpose of computing the income chargeable to tax, to the extent such loss did not exceed the amount of dividend or income received or receivable. The sale of the units had taken place after the expiry of a period of three months from the record date. Hence, the second condition spelt out for the applicability of sub- section 7 would not come into force. The conditions prescribed in clauses (a), (b) and (c) of sub-section 7 were cumulative in nature. Thus, section 94(7) would not be applicable".
:- 9 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
7.2 Similarly, Hon'ble High Court of Delhi in CIT Vs. Shambhu Mercantile Limited (supra) has considered the similar issue and held as under:
"A plain reading of the provision of s. 94(7) indicates that the conditions are cumulative. The reason being that cls. (a) and (b) of sub-s. (7) of s. 94 provided for a statutory period both prior to and after the record date in respect of securities or units [as provided in cl. (c)] the dividend or income of which whether received or receivable is exempt under the Act. It is only in a case where a transaction has all three components as prescribed in cls. (a), (b) and (c) of sub-s. (7) of s. 94 and if a loss is occasioned on purchase and sale of such security or unit then to the extent such loss does not exceed the amount of dividend or income received or receivable it is to be ignored for the purposes of computing income of the assessee chargeable to tax. A perusal of information with respect to the transactions would show that while the purchase was within the statutory period of three months, the sale of the said units was beyond the statutory period of three months from the record date. In the circumstances it is clear that the aforesaid transactions are outside the net of s. 94(7). The record date is really the median line for the statutory period prescribed both for purchase and sale which is three months on either side of the record date. It is only when the transaction is in relation to a security or a unit in respect of which the dividend or income received is exempt and it is within statutory period as prescribed in cls. (a) and (b) of sub-s. (7) of s. 94 that the loss, if any, would stand disallowed to the extent of the dividend or income received or receivable on such securities or units in computing the assessee's income chargeable to tax. The reasoning of the authorities below cannot be faulted. No substantial question of law arises for consideration."
In view of the principles laid down on this, we agree with the assessee's contention that the transactions does not come within the purview of Section 94(7). Therefore, the loss as claimed is to be allowed. This ground is allowed accordingly.
8. Ground No.4 pertains to disallowance of deduction u/s.80IA of the Act in respect of the profits earned from eligible and notified BTS Project.
:- 10 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
This issue arises as the Assessing Officer disallowed claim u/s.80IA on the infrastructure project of the assessee. Facts of the case are that Assessee-Company has been granted deduction U/s 80IA in the earlier asst year for Phase-I and Phase-II of its infrastructure projects based on the CBDT notification dated 13.02.2004. In phase-III, the assessee has constructed three towers with infrastructure facilities which have been let out to five companies viz, HSBC EDP India Pvt Ltd (2,36,776 sft), Motorola India Pvt Ltd (1,52,917 sft), Deloittee Consulting India Pvt Ltd(1,28,200 sft), Deloitte Touche Audit Services India Pvt Ltd (47,680 sft) and Deloitte Support Services India Pvt. Ltd., (10,070sft). The phase-III has been completed in the previous year relevant to the asst. year 2007-08. In phase-Ill, three towers have been developed as three separate, built to suit (BTS projects) infrastructure projects. HSBC occupies one tower fully. Motorola India occupies one tower of project fully. The third one is occupied by the three Deloitte Group of companies. AO was of the opinion that CBDT has issued notification No.246/2007 in F.No.178/79/2007 -ITA-I dated 28.09.2007 for the Industrial Park consisting of the above said three towers and the notification appears to have been obtained on an 'automatic approval' route. AO was of further opinion that as per the scheme of 'automatic approval' (vide SO354 (E) dated 01.04.2002), each industrial park shall have minimum 30 no. of units and no single unit shall occupy more than 50% of the allocable industrial area / park. As company has developed three separate towers and leased out to three separate undertakings viz, HSBC, Motorola and Deloitte and as each has been developed as a separate undertaking, the notification should have been obtained separately for the three undertakings. AO considered the condition that there should be a minimum of 30 units has not been fulfilled by the company. Further condition that each unit shall not occupy more than 50% of the allocable area has also not been :- 11 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., fulfilled. Therefore, AO held that the profits of the BTS projects are not eligible for deduction u/s 80IA. Accordingly, income from the BTS projects amounting to Rs.58,57,542/- was treated as taxable.
8.1 Assessee contended before the Ld.CIT(A) that 'allocable area' referred to in the above Notification pertains to the allocable area of total industrial park and not building-wise or tower wise allocable area. For processing and approving an application for development of Industrial park as envisaged u/s 80IA, the assessee has complied with the conditions as stipulated and got the approval from the Ministry of Commerce. The approval by Central Government (a) refers to only development of industrial park and (b) Para 4 of the notification stipulates a condition that not more than 50% of the allocable area of the industrial park shall be allotted to one unit. Therefore, as per the terms of the approval of the Central Government the company shall not as a whole allot more than 50% of the allocable area of the industrial park, that is more than 2,87,731,50 sq feet (50% of 5,75,643 square feet) to one single unit. As can be seen from the details, no single unit has been allotted more than 2,87,731.50 square feet. Therefore, it was submitted that the total allocable area of the industrial park developed by the company shall be considered for the purpose of verifying the compliance to the condition whether one single unit has been allotted more than 50% of the allocable area and not tower wise occupancy in the light of the intent of the notification itself and not otherwise. Further, the Government machinery supervising the development of the industrial park has also never disputed the allocation made by the Company, which clearly supports the claim made by the company. Further it was submitted that assessee has applied under Non-automatic route and its application was processed and approved by Ministry, therefore AO wrongly considered the same as under
Automatic route.
:- 12 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
8.2 The Ld.CIT(A), however, without examining any of the issue
rejected the contention of assessee by briefly stating as under:
8.2 Without going into other details, I find that the fundamental conditions that there should be a minimum of 30 units has not been fulfilled by the appellant. The second condition that each unit shall not occupy more than 50% of the allocable area was also not been fulfilled by the appellant. The Assessing Officer has clearly written these facts in his order quoted above. Since the appellant has not fulfilled the essential requirement, I confirm the denial of deduction under section 80IA.
8.3 It was the contention of the Ld.Counsel that there are two methods of getting approval from Ministry of Commerce and Industry. Automatic route where the stipulation of 30 units is prescribed and Non-automatic route where such stipulation was not there. High Power Committee in which CBDT Chairman is also a Member, examined the issue and granted approval to the assessee. Referring to the scheme and letter of allotment vide order dt.11-04-2007 by the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion, Infrastructure Development Desk, it was submitted that Govt. of India has conveyed its approval for claiming Income tax benefit under the Industrial Park Scheme, 2002. Ld.Counsel referred to the scheme and specifically to para 6 where proposed number of industrial units are specified as five units. It was submitted that both the Assessing Officer and CIT(A) considered it as an 'automatic approval route' wherein under that scheme, there should be minimum of thirty units as specified in para 6 of the scheme. However, such condition does not apply for the non-
automatic route under para 7 of the scheme wherein Empowered Committee examines the application on a case to case basis and grants approval. Since the approval was not withdrawn, Assessing Officer is bound to grant deduction u/s.80IA, when Chairman of CBDT is a Member of the Empowered Committee which granted approval.
:- 13 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
Ld.Counsel placed on record the copy of application filed before the Department of Industrial Policy, approval received from Central Government dt.11-04-2007, notification by CBDT dt.28-09-2007 and the Industrial Policy Scheme 2002 to explain the facts pertained to assessee and how the Assessing Officer and CIT(A) wrongly considered them. Moreover, it is also submitted that deduction in earlier years was granted on similar issue on Phase-1 and Phase-2 of the project.
8.4 Ld.DR, however, submitted that assessee has not satisfied the conditions as prescribed under the Industrial Park Scheme.
9. We have considered the issue and examined the documents placed on record. As far as fact of the approval is concerned, assessee has made an application under non-automatic route as provided under Industrial Park Scheme 2002. The Automatic Approval Scheme as contended by the Assessing Officer and CIT(A) has these conditions:
"5. Automatic approval - (1) An undertaking shall make an application in the Form-IPS-1 along with an affidavit certifying the details given in such application for obtaining approval for setting up an industrial park.
(2) An application under sub-paragraph (1) shall be made to the Entrepreneurial Assistance Unit of the Secretariat for Industrial Assistance, Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry, Udyhog Bhawan, New Delhi-
110011.
(3) The Secretariat for Industrial Assistance referred to in sub- paragraph (2) shall, upon receipt of application, give acknowledgement for receipt of such applications along with, registration number allotted by such Secretariat.
(4) Every application under sub-paragraph (1) shall be accompanied by a fee of six thousand rupees payable by a demand draft drawn in favour of Pay and Accounts Officer, Department of Industrial :- 14 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., Development payable at State Bank of India, Nirman Bhawan Branch, New Delhi-110011.
(5) All applications made under sub-paragraph (1) and eligible for Automatic approval in accordance with paragraph 6 shall be disposed of within fifteen days of making such application and the decision for such approval shall be communicated to the applicant immediately on disposal of such application.
6. Criteria for automatic approval - An undertaking which seeks approval under paragraph 5, shall fulfil the following conditions, namely:-
(a) The minimum area required to be developed for an Industrial Model Town shall be 1000 acres:
Provided that minimum area for specified industrial park referred to in clause (b) and (c) of paragraph 4 may vary depending upon their activities;
(b) The project referred to in clauses (a), (b) and (c) of paragraph 4 shall have provision for the location of minimum number of industrial units as follows:-
Type of Industrial park Minimum number of units to be provided in the Industrial Model Town/Industrial Park/Growth Centre (1) (2)
(i) Industrial Model Town 50 units;
referred to in clause (a) of paragraph 4.
(ii) Industrial park referred to 30 units;
in clause (b) of paragraph 4.
(iii) Growth centre referred to 30 units;
in clause (c) of paragraph 4.
(c) The minimum percentage of the area to be allocated for industrial use shall not be less than sixty six percent of the total allocable area.
Explanation: For the purpose of this clause, the Industrial use shall include any activity defined in the National Industrial Classification 1987 Code issued by Central Statistical Organisation, Department of Statistics, Ministry of Planning and Programme Implementation, except the following:
:- 15 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
Section 0 Section 8 excluding Group 892, 893, 894, 895
Section 1 Section 9
Section 5 Section X
Section 7 Section XI;
Excluding Division 75
(d) The percentage of land to be earmarked for commercial use shall not be more than ten per cent of the allocable area;
(e) In case of an Industrial Model Town, Industrial Park and Growth Centre, the minimum investment on infrastructure development shall not be less than 50% of the total project cost. In the case of an Industrial Park and Growth Centre which provides built up space for industrial use, the minimum expenditure on infrastructure development including cost of construction of industrial space, shall not be less than 60% of the total project cost;
(f) No single unit referred to in column (2) of the Table given in the sub-paragraph (b) of paragraph 6 shall occupy more than fifty per cent of the allocable industrial area of an industrial model town or industrial park or Growth Centre;
(g) Every undertaking being an industrial park shall obtain approval for Foreign Direct Investment or non resident Indian investment from the Foreign Investment Promotion Board or Reserve Bank of India, or any authority specified under any law for the time being in force, as the case may be.
However, assessee's application is not under Automatic Approval Scheme whereas the same was under Non-automatic Approval Scheme under para 7. Para 7 is as under:
7. Non Automatic Approval: (1) All applications not eligible for Automatic approval under paragraph 6 shall require the approval of Empowered Committee, constitute by the Central Government and all such applications shall be placed before the Empowered Committee within fifteen days of receipt of applications.
(2) The Empowered Committee shall consist of the following, namely:-
(a) Secretary, Department of Industrial Policy and Promotion, Government of India Chairman :- 16 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd.,
(b) Chairman, Central Board of Direct Taxes, Member Government of India, or his representative
(c) Secretary, Department of Urban Development, Government of India, or his representative Member
(d) A representative of the State Government to which the project relates Member
(e) Joint Secretary, Department of Industrial Policy and Promotion, Government of India Member Secretary Provided that the Empowered Committee may co-opt other Secretaries to the Government of India and officials of financial institutions, banks and professional experts from Industry and Commerce as Co-opted members of the Committee and such co-
opted members, however, shall not have any voting right.
(3) The Empowered Committee shall consider each application on a case to case basis, subject to its complying with the statutory requirements as prescribed by the Ministry of Finance under the Income Tax, 1961, and other applicable statutory rules/obligations. The Committee will consider each case on its merit and grant approval subject to such other conditions as may be deemed fit by it. However, in all cases of rejection of proposals, the applicants shall be afforded an opportunity of being heard by the Committee and the orders shall be passed and communicated within twelve weeks. The Committee may also periodically review implementation of the approved proposals.
(4) The Empowered Committee will hold meetins whenever necessary. All Industrial Model Town/Industrial Park/Growth Centre proposal received shall be placed before the Committee within 15 days of receipt. The Committee, as far as possible, would ensure that the Government decision on each proposal is communicated to the applicant within six weeks. The Committee will adopt its own mode and working procedure, keeping in view the requirement of each proposal.
Thus, as can be seen, the conditions as specified under Automatic Approval Scheme are not specified under Non-automatic Scheme and assessee having applied separately and Empowered Committee having :- 17 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., examined the proposal 'case by case' has granted the sanction vide letter dt.11-04-2007 in which it was clearly specified as under:
This is to convey the approval of the Government of India to your proposal for claiming Income Tax benefit of your Industrial Park, in terms of the Industrial Park Scheme, 2002, notified by this Department in exercise of power under section 80 IA, Sub Section 4(iii) of the Income Tax Act, 1961, subject to the following terms and conditions:
i) Name of the Industrial undertaking M/s. L&T Infocity Ltd., Hyderabad
ii) Address of the proposed location of the Madhapur Village, Industrial Park Serilingampalli Municipality, District - Ranga Reddy, AP -
500 033.
iii) Proposed Aras of the Industrial Park 9.16 Acres
iv) Proposed Activities Section Division Group Class A 8 89 892 - Data processing, software development and computer consultancy B 8 89 893 - Business and management consultancy activities C 8 89 894 - Architectural and engineering and other technical consultancy activities.
v) Percentage of allocable area earmarked 100% for industrial use
vi) Percentage of allocable area earmarked Nil for commercial use
vii) Proposed number of industrial units 5 Units
viii) Total investment proposed Rs.1,69,00,19,108/-
ix) Investment on built up space for Rs.1,55,29,28,658/-
industrial use
x) Investment on Infrastructure Rs.1,60,79,28,658/-
Development including investment on built up space for industrial use
xi) Expected date of commencement of the 31-03-2006 Industrial Park Not only that, the CBDT has also notified vide notification dt.28th September, 2007, extracting the same table, which was in the approval letter, with a further condition as under:
:- 18 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
"4. No single unit referred to in column (2) of the Table given in sub- paragraph (b) of paragraph 6 of S.O.354(E) dated the 1st April, 2002, shall occupy more than fifty percent of the allocable industrial area of an industrial park. For this purpose a unit means any separate and distinct enty for the purpose of one and more state or Central tax laws".
Since both the Assessing Officer and the Ld.CIT(A) considered the application under automatic rule, they have raised objection whereas assessee's application does not fall under Automatic Approval Scheme, but under Non-automatic Approval Scheme. In view of this, since there is already approval from the relevant authorities and also from the CBDT, we direct the Assessing Officer to grant the deduction u/s.80IA subject to verification of computation. Assessee's ground on this issue is allowed.
10. Ground No.5 is pertaining to non-grant of TDS credit amounting to Rs.6,57,179/- without assigning any reason. Assessee has raised this contention before the CIT(A), the CIT(A) noted that an amount of Rs.8,02,73,441/- was being granted as TDS credit and directed the Assessing Officer to look into the TDS claim and grant proper claim as per law. Even though there is direction from the CIT(A), it is assessee's contention that credit has not been given. Assessing Officer is directed to examine the claims of assessee and allow the credit after due verification. This ground is considered as 'allowed'.
11. Gr.No.6 pertains to levy of interest u/s.234B and 234D. Even though, these are consequential in nature, as seen from the assessment order, no working of interest has been provided. Assessing Officer is directed to provide working to assessee while giving effect to the consequential order, if any interest is to be levied. With threes directions, appeal is considered 'allowed for statistical purposes'.
:- 19 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
ITA No.1516/Hyd/2011 (AY.2008-09):
12. Assessee has raised four grounds. Out of which Ground No.1 is general in nature and Ground No.4 pertaining to interest which is consequential in nature.
13. Ground No.2 is on the issue of disallowance of interest expenses amounting to Rs.4,45,87,382/-. This issue is similar to the issue considered herein above in ITA No.1515/Hyd/2011 (AY.2007-08) at Ground No.2. For the reasons stated therein, this issue is set aside to the file of Assessing Officer to determine accordingly as per the information provided for assessee and findings of Assessing Officer in earlier Assessment Years. Accordingly, this ground is allowed for statistical purposes.
14. Ground No.3 pertains to issue of deduction u/s.80IA of the Act for an amount of Rs.4,67,83,783/-. This issue is also similar to Ground No.4 considered herein above in ITA No.1515/Hyd/2011 (AY.2007-08). For the reasons stated therein, the Assessing Officer is directed to allow the deduction u/s.80IA subject to verification of computation of income and eligible amount.
14.1 With these directions, appeal is allowed for statistical purposes.
ITA No.50/Hyd/2014 (AY.2009-10):15. In this appeal, assessee has raised three grounds. Out of which Ground No.1 is general in nature. Ground No.3 is consequential in nature for levy of interest.
:- 20 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
16. The only material ground is with reference to the disallowance of deduction u/s.80IA. Facts are similar to the issue considered herein above in ITA No.1515/Hyd/2011 (AY.2007-08). For the reasons discussed therein against Ground No.4 in that order, we direct the Assessing Officer to grant deduction u/s.80IA subject to verification of computation of income and deduction u/s.80IA. Hence, this ground is considered as 'allowed.
16.1 With these directions, appeal is allowed.
ITA No.51/Hyd/2014 (AY.2010-11):17. In this appeal, assessee has raised three grounds. Out of which Ground No.1 is general in nature. Ground No.3 is consequential in nature for levy of interest.
18. The only material ground is with reference to the disallowance of deduction u/s.80IA. Facts are similar to the issue considered herein above in ITA No.1515/Hyd/2011 (AY.2007-08). For the reasons discussed therein against Ground No.4 in that order, we direct the Assessing Officer to grant deduction u/s.80IA subject to verification of computation of income and deduction u/s.80IA. Hence, this ground is considered as 'allowed.
18.1 With these directions, appeal is allowed.
Revenue's Appeals ITA No.256/Hyd/2014 (AY.2009-10) ITA No.289/Hyd/2014 (AY.2010-11):
19. Both the above appeals are filed by Revenue on the following common grounds:
:- 21 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
1. The CIT(A) erred both in law and on facts and circumstances of the case in granting relief to the assessee by deleting the addition made towards disallowance of claim of interest expenditure;
2. The CIT(A) ought to have appreciated that the nexus between the surplus funds and the investments was not established by the assessee company and that the commercial expediency in respect of investments by the assessee with its sister concerns was also failed to be established;
3. The CIT(A) ought to have upheld the decision of Assessing Officer in making disallowance of interest expenditure on the ground that when the assessee itself has surplus funds, there is no necessity for the assessee to avail loans and incur huge interest;
4. The CIT(A) ought to have upheld the decision of Assessing Officer in making disallowance of interest expenditure invoking the provisions of Sec.14A of the IT Act, 1961 since assessee failed to prove the nexus between its investments from out of surplus funds for earning the exempt income with that of the claim of interest expenditure and that the claim of interest is not attributable to the earning of exempt income;
5. Any other ground that may be urged at the time of appeal hearing.
20. Revenue has raised the issue of disallowance made out of interest expenditure on the reason that funds have been diverted and invested in sister-concerns. This issue is similar to the issue considered herein above in ITA No.1515/Hyd/2011 (AY.2007-08) wherein this issue was set aside to the file of Assessing Officer. However, as noticed from the order of the CIT(A), CIT(A) has considered the facts. Based on the order of ITAT for AY.2003-04 and the order of Assessing Officer giving effect to the order dt.30-08-2010, he analysed the facts and considered the whole issue as under:
5.2 I have considered the facts and evidences carefully. As evidenced from the submissions of the appellant, the interest expenditure incurred by the appellant is Rs.13,73,99,903. The :- 22 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., investments as on 31-3-2009 relevant to the A.Y.2009-10 is Rs.30,68,12,863. The total amount of term loan as on 31-3-2009 obtained various banks is Rs.136,60,15,135. From the submissions, it is clearly evident that the appellant is having Share Capital Reserves and Surplus as on 31-3-2009 i.e. relevant to A.Y.2009-10 of Rs.227,15,41,289, which were in excess of investments made of Rs.30, 68,12,863. The borrowed funds from the bank and financial institutions also could be utilized only for the earmarked purpose for which they were borrowed i.e. for business purpose, as per the term loan agreements between the company and the banks. It is also a common practice that, when a bank gives loan to any company for a specific purpose, periodic audit of the utilization of funds would be carried out by the banks/financial institutions. The appellant submitted the sanction letters from various banks for advance term loans wherein it is clearly evident that regular monitoring of the project / work for which the loan is sanctioned, would be undertaken by the banks.
Thus, the appellantcontended that the borrowed capital is utilized wholly and exclusively for the purpose of business and there is no nexus between the interest expenditure on borrowed funds and the investments in mutual funds and subsidiaries. As state he above, the appellant made the investments of Rs.30.68 crores out of t Share Capital, Reserves and Surplus available of Rs.227.15 crores and still the appellant would be having Rs.196.47 crores of excess funds. The appellant also submitted the details of its investments in the following sister concerns, amounting to Rs.30.68 crores as under:
i) Hyderabad Internation Trade Expositions Limited :Rs.9,88,50,000
ii)Vizag IT Park :Rs.2,34,00,000
iii) L&T Infocity Lanka (P) Limited :Rs.4,22,55,223
iv)L&T Hitech City Limited :Rs.14,23,07,700 TOTAL :Rs.30,68,12,863 Under powers vested in me as per Section 250 (4) of the Act, I had called for the evidences in support of the details of sources of these investments. In support of the sources of investments, the appellant explained the sources in all these five sister concerns to be from business receipts, advance from customers, out of mutual funds reinvested, fixed deposits reinvested etc. and submitted bank statements, tally account statements, etc. which are found to be in order.
:- 23 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
5.2.1 The appellant in its own case, aggrieved by the order of the CIT (Appeals)-V, Hyderabad dated 14-12-2006 for A.Y.2003-
04 and dated 31-10-2007 for the A.Y.2004-05, preferred an appeal before the ITAT, Hyderabad, wherein the learned counsel for the appellant has argued as under:
"Para 7.....the investment made by the assessee is in its subsidiary company was out of the huge amount of reserves and surplus of over Rs.21 croes as on 31-3-2002. He also submitted that the assessee made a profit of Rs.8.52 crores during the year. Hence, the investment made by the subsidiary company is out of its own funds and not from out of the interest bearing funds and as such the lower authorities were not justified making any disallowance out of the interest expenditure claimed by the assessee. It was also submitted that the secured loans have been used mainly for the purpose of purchase of fixed assets and not for the purpose of investment in the subsidiary company. In this regard, he relied on the case of SA Builders vs C/T (288 ITR 1), wherein it was held that what was relevant was whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount as advanced for earning profit. It was also held that in that case, that once it is established that there was nexus between the expenditure and purpose of the business, the interest expenditure cannot be disallowed.................."
5.2.2 The Hon' e Tribunal, vide Para.9 observed that the ClT (Appeals) had disallowed he interest expenditure in absence of details of payment before the A.O. and himself and since the appellant claims before us that the details of payment were in the appellant's possession, it restored the matter to the e of the A.O. to redo the same in the light of the ratio of the decision of the Apex Court in the case of SA Builders .. "
5.2.3 The A.O while giving effect to the order of the Tribunal cited above, in his order u/s.143 (3) rws 250 of the Act dated 30-08- 2010, for the A.Y.2003-04, after verifying the evidences to show that the borrowed funds have not been utilized for investing in a sister company, held that since there was no nexus between the use of borrowed funds to the investments, it cannot be concluded that the interest bearing funds were utilized for non-business purpose and allowed proportionate interest accordingly.
:- 24 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
5.2.4 In this case also, the appellant furnished all the evidences to show that there was no nexus between the interest paid on borrowed funds to making of the investments.
5.3 The appellant cited various case-laws as mentioned in Para.5.1 and item 3.0 of the submissions in support of its contention that if own funds are utilized no disallowance of interest expenditure is warranted. I have perused the case-laws cited by the appellant and hold that when the appellant made investments out of own funds /surplus funds available and when there is no nexus between the interest paid on borrowed funds and in making of the investments, disallowance of interest expenditure is not warranted.
5.4 The appellant contended that the investments were made out of 'commercial expediency' to facilitate the company's business. In this connection, the appellant placed reliance of various case laws mentioned at Para.5.1. item No.1.9 and 2.0 above. In the case of SA Builders Limited vs CIT (Appeals) 288 ITR 1, the Supreme Court held as under:
"...interest expenditure is allowable if the same is incurred on grounds of commercial expediency. The expression 'commercial expediency' is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. In the facts of the current case, having satisfied the above condition of commercial expediency, the Company should be eligible for deduction under Section 36(1)(iii) of the Act. Without prejudice to the above, even assuming that the Appellant had utilized borrowed funds, it is clear that the test of 'commercial expediency' as laid down in SA Builders above, was satisfied in the present case. The Apex Court has held that where the holding company has a deep interest in its subsidiary for business purpose, the taxpayer holding company is ordinarily entitled to deduction of interest on borrowed funds."
5.4.1 In the case of CIT Vs Reliance Communications & Infrastructure Ltd 71 DTR 237 (Bom), it was held as under:
"... it was held that investments made in the wholly owned subsidiaries and money advanced were for furthering the business of the assessee and are consistent with the judgment of Supreme Court in the case of SA Builders. There is evidently a significant interest of the assessee in the :- 25 -: ITA Nos.1515 & 1516/Hyd/11 50, 51, 256 & 289/Hyd/14 L&T Infocity Ltd., business of its subsidiaries since both the assessee and the subsidiaries are into the same line of business. Therefore, there can be no reason or justification of disallowance.
5.4.2 In the case of J K Industries Limited-vs-CIT (2011) 61 DTR 153 (Kol), it was held that:
".... interest expenditure of the assessee could not be disallowed on the presumption that interest free loans given to the subsidiaries were made out of the borrowed funds since the subsidiaries were paid out of the profit of the assessee which is far in excess of the amount of loan given to the subsidiaries."
5.5 In this case, the appellant paid interest of Rs.13,73,99,903 on bank loans wholly and exclusively for the purpose of business of the appellant and clearly there is an element of commercial expediency. Out of this, the A.O. allowed only interest of Rs.10,67,18,617/- and disallowed Rs.3,06,81,286 towards notional interest attributable to the investments of Rs.30.68 crores @ 10%. Since the appellant proved that it had surplus funds even after investment of Rs.30.68 crores, the A.O. is not justified to disallow a part of interest i.e. 3.06 crores attributable to the investments of Rs.30.68 crores, out of the total interest paid of Rs.13.73 to the banks on term loans.
5.6 Therefore, respectfully following the case-law cited by the Supreme Court above, Tribunal's order cited above and other case- laws, I hold that the interest expenditure of Rs.13.73 crores is incurred towards bank term loans and not attributable to making of investments and which is incurred wholly and exlucsively for the business purpose and allowable u/s.37(1) / 36(1)(iii) of the Act. Hence, I delete the addition of Rs.3.06 croes made towards disallowance of part interest.
Since the Ld.CIT(A) not only considered the facts of the case but also the consequential order passed by Assessing Officer holding that assessee has not diverted funds, we do not see any merit in these grounds. Accordingly, the same are dismissed.
20.1. In the result, both the appeals of Revenue are dismissed.
:- 26 -: ITA Nos.1515 & 1516/Hyd/11
50, 51, 256 & 289/Hyd/14
L&T Infocity Ltd.,
21. In the result, assessee's appeals in ITA No.1515/Hyd/2011 (AY.2007-08) and 1516/Hyd/2011 (AY.2008-09) are allowed for statistical purposes, appeals in ITA No.50/Hyd/2014 (AY.2009-10) and 51/Hyd/2014 (AY.2010-11) are allowed and Revenue's appeals in ITA No.256/Hyd/2014 (AY.2009-10) and 289/Hyd/2014 (AY.2010-11) are dismissed.
Order pronounced in open Court on 22-01-2015.
Sd/- Sd/- (SAKTIJIT DEY) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER Hyderabad, Dated 22nd January, 2015. TNMM Copy to :
1. L&T Infocity Limited, 1Q4-A1, 1st Floor, Cyber Towers, Hitech City, Madhapur, Hyderabad-500 082
2. Deputy Commissioner of Income Tax, Circle-16(1), 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad
3. Joint Commissioner of Income Tax, Range-16, 6th Floor, Aayakar Bhavan, Basheerbagh, Hyderabad
4. CIT(A)-V, Hyderabad
5. CIT-IV, Hyderabad
6. D.R. ITAT, Hyderabad.