Income Tax Appellate Tribunal - Mumbai
Mahindra Holdings & Finance Ltd ( Since ... vs Assessee on 19 July, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "H", MUMBAI
Before Shri P.M.Jagtap, Accountant Member
& Shri Vijay Pal Rao, Judicial Member.
I.T.A. No. 4450/Mum/2010.
Assessment Year : 2006-07.
Mahindra Holding & Finance Limited, Asstt. Commissioner of
(Since merged with Mahindra & Vs. Income Tax,
Mahindra Limited), Circle-6(3), Mumbai.
Mahindra Towers, P.K. Kurne Chowk,
Worli, Mumbai - 400 018.
PAN AAACM 4489N.
Appellant. Respondent.
Appellant by : Shri Santosh Parab.
Respondent by : Shri Goli Sriniwas Rao.
Date of Hearing : 19-07-2011.
Date of Pronouncement : 09-09-2011.
O R D E R.
Per P.M. Jagtap, A.M. :
This appeal filed by the assessee is directed against the order of learned CIT(Appeals)-12, Mumbai dated 08-03-2010.
2. The issue raised in ground No. 1 of this appeal relates to the disallowance made by the AO and sustained by the learned CIT(Appeals) u/s 14A of the Act read with Rule 8D of Income-tax Rules, 1962.
3. The assessee in the present case is a finance and investment company. The return of income for the year under consideration was filed by it on 27-10-2006 2 ITA No. 4450/Mum/2010 Assessment Year : 2006-07.
declaring total income of Rs.1,79,70,874/-. In the said return, dividend income of Rs.9,43,51,037/- received during the year under consideration was claimed to be exempt by the assessee u/s 10(34). No disallowance on account of expenditure incurred in relation to the earning of the said income, however, was made by the assessee as required by the provisions of section 14A. In the assessment completed u/s 143(3), the AO worked out such expenses incurred by the assessee in relation to exempt income at Rs.1,01,3,225/- by applying Rule 8D of Income-tax Rules, 1962 and disallowance to that extent was made by him u/s 14A. On appeal, the learned CIT(Appeals) upheld the action of the AO in making the said disallowance u/s 14A of the Act read with Rule 8D of Income-tax Rules, 1962 in principle relying on the decision of Special Bench of ITAT in the case of Daga Capital Management P. Ltd. 117 ITD 169(Mum.)(S.B.). He, however, accepted the alternative contention of the assessee that such disallowance could not exceed the total expenditure actually claimed by the assessee. Since the total expenditure actually claimed by the assessee was only Rs.4.6 lakhs, the learned CIT(Appeals) sustained the disallowance made by the AO on this issue to the extent of Rs.4.6 lakhs.
4. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the learned representatives of both the sides, this issue is squarely covered by the decision of Hon'ble Bombay High Court in the case of DCIT vs. Godrej and Boyce Mfg. Co. Ltd. 328 ITR 81wherein it was held that Rule 8D is applicable only from assessment year 2007-08 and prior to assessment year 2007-08, the quantum of disallowance to be made u/s 14A has to be determined by adopting some reasonable method. Keeping in view the said decision of Hon'ble jurisdictional High Court, we set aside the impugned order of the learned CIT(Appeals) on this issue and restore the matter to the file of the AO 3 ITA No. 4450/Mum/2010 Assessment Year : 2006-07.
with a direction to determine the quantum of disallowance of expenses to be made u/s 14A by adopting some reasonable method. Ground No. 1 of assessee's appeal is accordingly treated as allowed for statistical purposes.
5. In ground No.2, the assessee has challenged the impugned order of the learned CIT(Appeals) confirming the action of the AO to bring to tax a sum of Rs.5,57,18,127/- being alleged share of profit in the partnership firm ChaseCom LLP instead of allowing deduction for share of loss of Rs.83,19,026/- as claimed in the return.
6. In the computation of total income filed along with the return of income, the assessee company had reduced an amount of Rs.83,19,026/- being share of loss in the partnership firm of M/s ChaseCom LLP, a Delaware based limited partnership. From the copy of audited balance sheet and profit & loss account of the said partnership firm filed by the assessee, the AO noticed that the said firm has actually declared a profit of U.S. $ 2,19,58,731/- which was inclusive of gain from the debt restructuring of US $ 2,63,21,330/- for the year under consideration. In this regard, it was submitted on behalf of the assessee before the AO that the gain from debt of restructuring was made by ChaseCom LLP on 10-06-2005 whereas the assessee company was admitted as partner on payment of Rs.4,21,41,244/- only on 15-06-2005. The AO, however, noticed from the financial statements of ChaseCom LLP that initial investment of US $ 10 lakhs was made by the assessee company on 10-06-2005 for a limited partnership interest. He, therefore, required the assessee to explain as to why an amount of Rs.5,57,18,127/- being its share of profit from the said partnership firm calculated at 5.439% of U.S. $ 2,29,58,731/- converted into Rupees at the rate of Rs.44.62 per dollar should not be added to its total income. In reply, it was submitted on behalf of the assessee that it had become 4 ITA No. 4450/Mum/2010 Assessment Year : 2006-07.
partner in the said firm as per the partnership deed entered on 10-06-2005 and since it was entitled to share of profit earned by the said firm only after 10-06- 2005, it was not entitled for the share in the gain received by the said firm from debt restructuring of US $ 2,68,21,330.
7. The stand by the assessee was not found acceptable by the AO for the following reasons given in paragraph No. 4.3 of the assessment order :
" I have perused the arguments of the assessee and am not in agreement with the same. Assessee Company, as per the Tax Aaudit Report, is in the business of financing and investing and for that purpose lend, invest money and negotiate loans, accept, endorse, discount, buy, sell and deal in bills of exchange, hundies, promissory notes, securities and carryout & undertake operations and transactions as financiers & investors. A person conducts as business with the sole intention of earning profits out of the business. As per its own admission, which is confirmed by the Tax Auditor, the assessee is in the business of financing and investments. The investment made by the Assessee Company in ChaseCom LP will also have to be looked at this angle only. Instead of investing in a local company, the assessee has invested in a limited liability partnership firm based in the state of Delaware, which is a tax haven for many industrial purposes, with the sole intention of reaping profits from such an investment. Hence, it cannot be believed hat the assessee has invested an amount of $ 965,133 to acquire a loss of $ 186,442, at the end of the year. Moreover, according to the financial statements of ChaseCom LP, which was filed by the Assessee Company themselves, the assessee has been inducted as a partner on 10.06.2005. The initial investments of $ 1,000,000, which was promised by the assessee for 5.439% limited partnership interest in the partnership firm ChaseCom P and 15.9% membership interest in TC Enterprise LLC, a Delaware limsited liability corporation, the sole general partner of ChaseCom LP, must have been remitted on 15.06.2005. However, as per the financial statements of ChaseCom LP, the Assessee Company has been inducted as a 5.439% partner on 10.06.2005. Hence, the gain from the debt restructuring earned by 5 ITA No. 4450/Mum/2010 Assessment Year : 2006-07.
ChaseCom LP will definitely be available to the Assessee Company for apportionment as the debt restructuring as well as the induction into partnership has happened on the same day being 10.06.2005. No evidence to support the claim of the assessee that they have not enjoyed the proportionate gain on restructuring earned by ChaseCom LP has been furnished by them."
For the reasons given above, the AO held that the share of profit of ChaseCom LLP amounting to Rs.5,57,18,127/- was taxable in the hands of the assessee company and accordingly the said amount was added by him to the total income of the assessee rejecting its claim for share of loss of Rs.83,19,026/- as shown in the return of income.
8. Against the order passed by the AO, an appeal was preferred by the assessee before the learned CIT(Appeals). It was submitted on behalf of the assessee company before the learned CIT(Appeals) that the share of loss from ChaseCom LLP was claimed in the return of income at Rs.83,19,026/- on estimated basis since the audited accounts of the said firm were not ready at the time of filing the said return. The assessee claimed that the audited accounts were now available according to which its share of loss in the partnership was actually Rs.1,02,8,788/- which should be allowed. It was reiterated that the gain out of debt restricting had accrued to the said firm prior to 10-06-2005 when the assessee company was inducted as a partner and it was, therefore, not entitled to any share in the said gain. This submission of the assessee was not found acceptable by the learned CIT(Appeals) and he confirmed the addition made by the AO on this issue by bringing to tax the share of profit of ChaseCom in the hands of the assessee at Rs.5,57,18,127/- as against the loss of Rs.83,19,026/- shown by the assessee company in its return of income for the following reasons given in paragraph No. 3.4 to 3.6 of his impugned order :
6 ITA No. 4450/Mum/2010Assessment Year : 2006-07.
"3.4 I have considered the submissions. According to the copy of the partnership deed, the effective date of the new partnership deed is 10th June 2005. The term profit and loss is defined in the partnership as profits for fiscal year or other year in accordance with code 703 with certain adjustments. The partner is entitled to profits and losses according to his share in the partnership. Profits and losses can be determined monthly, yearly, daily etc. The profit and loss statement and the Balance Sheet filed are for the year ended December 31st, 2005. When the Balance Sheet was drawn up, the appellant was already a partner with a definite share in the profits and losses of the company. The Balance Sheet indicates gain on restructuring by which the company has declared overall profit. The partner is entitled to its share in the overall profits of the company unless there is a specific clause or rule barring the appellant from its share in the profit.
3.5 The appellant could not produce any documentary evidence to prove that it was not entitled to the gain from restructuring of the debts. The contention of the appellant, therefore, remains unsubstantiated. In the course of appellate proceedings, the appellant was asked to furnish a confirmation, atleast, from the ChaseCom LLP clarifying that it was not eligible to share in the profis out of restructuring of debts and that its income from partnership was a loss of Rs.1.02 crores. The appellant has not been able to obtain a confirmation from ChaseCom LLP. In the absence of any evidence, the claim of the appellant cannot be accepted.
3.6 Coming to the partners deficit statement, as the name suggests, this is a copy of capital account of various partners in the partnership. This shows the capital account balance of the appellant as $736,339 after adjusting loss of $228,794 from the capital contribution of $965,133. Firstly, this statement is an unsigned unauthenticated document. It is only a photocopy. Moreover, this document does not show as to how the loss of $ 228,794 is derived. The appellant claimed that this is its share of loss from the operating loss for the year before adjustment of gain from debt restructuring. The figures, however, do not match in as much as the total operating loss as per the Balance Sheet $34,27,236. 5.4% (appellant's share) of this amount is $2,20,262 and not 2,28,794. Even if it is a fact that the capital account has 7 ITA No. 4450/Mum/2010 Assessment Year : 2006-07.
been debited only with the operating profit or loss, in the case of the appellant, the fact remains that the gain from restructuring also accrues to the appellant as a limited partner. There is nothing in the partnership to exclude the limited partner i.e. the appellant from this profit.
3.7 In view of the appellant, the claim of the appellant is not accepted and the assessment of profit at Rs.5,57,18,127/- as share of profit from ChaseCom LLP is confirmed. "
9. The learned counsel for the assessee submitted that the assessee in the present case is an investment company which is also a flagship company of Mahindra group. He submitted that investment in the capital of ChaseCom LLP partnership, USA was made by the assessee company which was duly reflected in its balance sheet. He invited our attention to the copy of relevant balance sheet of the assessee company placed in his paper book as well as other documentary evidence as a proof to show the factum and quantum of such investment. He also invited our attention to the copy of agreement of partnership placed in his paper book to show that the reconstituted partnership firm had become effective from 10- 06-2005. He submitted that the gain from restructuring of debts had accrued to the partnership firm of ChaseCom before the assessee became partner in the said partnership firm. According to him, the assessee company thus had no right to share the said gain and there is no question of bringing to tax any such share in its hands in India. He contended that the assessee company actually got share of loss from the said partnership firm for the year under consideration which was rightly claimed in its return of income. He submitted that this position was clearly established from the audited statement of accounts of the assessee's capital in the partnership firm. He then invited our attention to the relevant portion of partnership agreement at page No. 72 of his paper book and pointed out that the profits and losses of the partnership firm are to be allocated among the partners on prorata 8 ITA No. 4450/Mum/2010 Assessment Year : 2006-07.
basis. He contended that the addition made by the AO on this issue by bringing to tax share of profit of the partnership firm was based on assumption and surmises and the same is not sustainable.
10. The learned DR, on the other hand, submitted that there was nothing in the partnership agreement to specifically provide for the allocation of profits and losses of the period prior to 10-06-2005. He invited our attention to page No.37 of the assessee's paper book to show that the operating loss of US $ 34,27,236 for the entire year including the period prior to 10-06-2005 was allocated to the assessee company in the profit sharing ratio. He contended that when the loss for the period prior to 10-06-2005 was allocated to the assessee company as a partner, there is no reason or basis to say that the assessee was entitled to share profits and losses of the partnership firm for that period. He contended that the gain from debt restructuring thus was rightly allocated and brought to tax by the authorities below in the hands of the assessee company. He submitted that there is no other evidence which has been brought on record by the assessee to support and substantiate its stand that it was not entitled to any share in the profit arising from restructuring of debts of ChaseCom LLP and in the absence of such evidence, the stand of the assessee on this issue cannot be accepted.
11. We have considered the rival submissions and also perused the relevant material on record. It is observed that although the assessee company had made investment in the capital account of ChaseCom LLP in the month of June, 2005 and the partnership agreement admitting the assessee as partner in the said firm was made effective from 10th June, 2005, nothing has been brought on record by the assessee company either before the authorities below or even before us to show that the profit arising as a result of restructuring of debts had been earned by the 9 ITA No. 4450/Mum/2010 Assessment Year : 2006-07.
said firm prior to the admission of the assessee company as a partner in the said firm and that the assessee company was not entitled to any share in the said gain. In this regard, the learned counsel for the assessee has sought to rely on clause 5.2(a) of the partnership agreement dealing with "allocation of profits and losses"
which reads as under :
" Allocations of Profits and Losses.
(a) Profits. Except as provided in Section 5.2(c), Profits for any Fiscal Year will be allocated in the following order :
(1) First, to the Partners, pro rata, in proportion to their respective Sharing Ratios until the cumulative Profits allocated to such Partner under this Section 5.2(a)(1) equals the cumulative Losses allocated to such Partner under Section 5.2(b)(2) for all prior periods; and (2) The balance, if any, to the Partners in proportion to their respective sharing Ratios, determined as of the date of such allocation. "
As is clearly evident from the above clause of the partnership agreement, the same talks about allocation of profits and losses for any fiscal year and there is nothing either to indicate or even suggest as to how the profits or losses are to be allocated among the partners in case of reconstitution of the partnership firm in between any fiscal year. It is also not known as to how the profits or losses of the relevant year ended on 31st December, 2005 were bifurcated between the two periods i.e. 1st January, 2005 to 9th June, 2005 and 10th June, 2005 to 31st December, 2005. As a matter of fact, no such profit & loss account split into two periods has been furnished before us in order to support and substantiate the case of the assessee company that what it got was only the share in the profits or losses of the firm for the period 10th June, 2005 to 31st December, 2005.
10 ITA No. 4450/Mum/2010Assessment Year : 2006-07.
12. On the other hand, a statement of operation of ChaseCom LLP has been placed at page No. 37 of the assessee's paper book which shows that the said firm had suffered operation loss of 34,27,236 US $ for the year ended on 31st December, 2005 and after adjusting the said loss against the gain from debt restructuring, a profit of 2,29,58,731 US $ was finally earned by the said firm. As rightly pointed out by the learned DR, the assessee company had declared a loss of Rs.83,19,026/- in its return of income as share of loss being 5.439% of US $ 34,27,236/- which was actually the loss of ChaseCom LLP for the entire year ended on 31st December,2005. The assessee company thus had claimed its share of loss suffered by the said partnership firm for the entire year ended on 31st December, 2005 thereby accepting that it was entitled to share the profits & losses of the said partnership firm for that entire year. As rightly contended by the learned DR, when the assessee company by its own admission was entitled for share of loss of the said partnership firm for the entire year ended on 31st December, 2005, it follows that it was also entitled to share the profit of the said partnership firm for the entire year as there can be no different treatments given to the profits and losses. Having regard to all these facts of the case, we are of the view that the assessee was entitled to share of 5.439% of the profits of ChaseCom LLP for the year ended 31st December, 2005 amounting to US $ 2,29,58,731 and the said profit equivalent to Rs.5,57,18,127/- was rightly brought to tax in its hands by the AO. In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) confirming the addition made by the AO on this issue to the total income of the assessee and dismiss ground No.2 of the assessee's appeal.
13. As regards the issue raised in ground No. 3 relating to quantification of long term capital losses to be carried forward to the subsequent years, it is observed that this issue has not been adjudicated upon by the learned CIT(Appeals) vide his 11 ITA No. 4450/Mum/2010 Assessment Year : 2006-07.
impugned order despite the fact that the same was specifically raised by the assessee in ground No. 4 taken in its appeal filed before the learned CIT(Appeals). We, therefore, find it just and proper to remit this matter to the learned CIT(Appeals) for deciding the same on merit after giving the assessee an opportunity of being heard. Ground No. 3 of the assessee's appeal is accordingly treated as allowed for statistical purposes.
14. In the result, the appeal of the assessee is treated as partly allowed for statistical purposes.
Order pronounced on this 9th day of Sept., 2011.
Sd/- Sd/-
(Vijay Pal Rao) (P.M. Jagtap)
Judicial Member Accountant Member
Mumbai,
Dated: 9th Sept., 2011.
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, H-Bench.
(True copy)
By Order
Asstt. Registrar,
ITAT, Mumbai Benches,
Mumbai.
Wakode