Income Tax Appellate Tribunal - Mumbai
Seto Technolog P. Ltd , Mumbai vs Assessee on 1 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "G", MUMBAI
BEFORE SHRI P.M. JAGTAP, A.M. AND SHRI V. DURGA RAO, J.M.
ITA No. 4195/Mum/2010
Assessment Year: 2007-08
Seto Teknolog Pvt. Ltd., ... Appellant
101/406, Hill View Ind. Estate,
Off LBS Marg, Ghatkopar (West),
Mumbai - 400 086
(PAN - AABCS4066)
Vs.
Income-tax Officer-(10)(2)(2), ...Respondent
Mumbai.
Appellant by : Mr. F.V. Irani & D.B. Shah
Respondent by : Mr. A.K. Nayak
Date of Hearing : 01/12/2011
Date of Pronouncement : 31/01/2012
ORDER
PER V. DURGA RAO, J.M.:
This appeal filed by the Assessee is directed against the order of CIT(A)-22, Mumbai, passed on 12/03/2010 for the assessment year 2007-08.
2. Ground No. 1 and 2 read as under:-
"1. The CIT(A) erred in upholding the disallowance of interest cost of Rs. 16,91,958/- on the alleged ground that interest cost was incurred for the purpose of making an investment in the shares of Sameera Electronics Pvt. Ltd. (Sameera) and not incurred for the purpose of the business of the appellant, hereas the investment in Sameera was integral to the core business of 2 ITA No. 4195/Mum/10 M/s Seto Teknolog P. Ltd.
the appellant. The CIT(A) has passed a cryptic order without discussing the submissions of the appellant.
2. The CIT(A) erred in upholding the action of the AO to treat the interest f ree advance given to vendor as well as appellant's subsidiary i.e. Sameera as a commercial loan on which notional interest is to be disallowed, summarily disregarding the f acts and submissions of the appellant that the amount was advanced in the course of business of the appellant.
3. Briefly the facts relating to raise this ground are that the assessee is stated to be engaged in the business of manufacturing and dealing of all types of electrical and electronics and computer hardware and software systems. The assessee had filed its return of income on 21/10/2007 declaring total income at Rs. 27,66,870/-, which was processed u/s 143(1) and thereafter assessment was completed us/ 143(3) of the Act assessing the total income at Rs. 53,02,570/-. During the course of assessment proceedings the AO observed that assessee had taken loan from SIDBI for acquisition of shares of M/s Sameera Electronics Pvt. Ltd. a 100% subsidiary of the assessee company for which it had paid Rs. 16,91,958/- and claimed the same as financial expenses. The AO had noted that these expenses were not incurred for the purpose of assessee's existing business. The AO further noted that the assessee had classified these shares as 'investment' in balance sheet, therefore its contention that acquisition of shares for the purpose of business is not correct. The AO also distinguished the decisions relied upon by the assessee. The AO found that the assessee was paying rent for use of premises of Sameera on commercial terms and, hence, acquisition of shares could not be said for using premises of Sameera Electronics Pvt. Ltd. and the same separate entity and doing separate business. In view of these facts, the AO disallowed the term loan interest amounting to 3 ITA No. 4195/Mum/10 M/s Seto Teknolog P. Ltd.
Rs. 16,91,958/- and added the same to the returned income of the assessee.
4. Before the CIT(A), the assessee had furnished written submissions wherein it had been stated that the assessee had received large number of orders during the year under consideration and to accomplish such large order book position, the assessee was urgenlty in need of extra manufacturing/assembling capacity. The assessee further submitted that it had to take premises on lease/to purchase premises on ownership and to purchase and install plant and machinery and to build a suitable infrastructure which can be used for the purpose of business of the assessee. The assessee also submitted that its intention for acquisition of 100% shareholding in Sameera Electronics Pvt. Ltd., was only for the purpose of the effective and efficient utilisation of premises/infrastructure of the Sameera Electronics Pvt. Ltd. and thereby increase in the manufacturing/assembling capacity of the assessee to meet the surge in the orders. The assessee further submitted that it had partly financed the said acquisition of shares by taking a term loan from SIDBI and incurred an interest expenditure on the said loan amounting to Rs. 16,91,958/-. The assesee relied upon various case laws, which were mentioned by the CIT(A) in his order at page 2. In view of the said submissions the assessee prayed that the disallowance made on account of cost of interest amounting to Rs. 16,91,958/-. may be deleted. The learned CIT(A) after considering the submissions of the assessee, held as under:-
3.4 I have gone through the assessment order, perused the submissions made by the appellant and also discussed the case with the AIR of the appellant. A.O. during the assessment proceedings observed that assessee took a loan from SIDBI for acquisition of shares of M/s. Sameera Electronics Pvt. Ltd. and paid interest of Rs.16,91,958!- and claimed the same financial expenses. The A.O. further observed that the assessee itself has classified these shares as "investment" in balance sheet and not under the head 'Fixed assets' and therefore its argument that interest was 4 ITA No. 4195/Mum/10 M/s Seto Teknolog P. Ltd.
paid on borrowed money for purchase of shares and for acquisition of controlling interest is baseless. The A.O. further noted that there was no increase in turnover of the business in the current year as compared to the earlier year. A.O. held that the appellant out of this investment can receive dividend which is exempt income and hence no revenue will be generated out of this investment, A.O. further stated that since the appellant is paying service charges to Sameera for utilizing its premises/infrastructure ,the acquisition of shares cannot be related to the use of Sameera's assets since it is not free of cost. Before me it was submitted that the shares were acquired only for the purpose of effective utilization of premises/infrastructure which was financed by the loan from SIDBI on which interest was paid. However, I do not agree with the contention of the appellant since the share transfer agreement dated 06.09.2006 clearly states that this agreement is being made with a view to make investments and nothing else. In fact, on Page 3 of the agreement it has been mentioned that Sameera has agreed to accept the appellant as a new shareholder and also agreed to acknowledge and register the said transfer of shares in favour of buyer after proper execution of the agreement. Further, nowhere in the agreement it is mentioned that the purpose is to make investment in SIDBI with the intention of expansion. The appellant relies upon loan agreement with SIDBI and directors report. However, the most vital document is the agreement to purchase the shares which has been discussed. Thus, there is no proof regarding the claim of the appellant that the purpose was for acquisition of shares to expand business. The appellant has relied upon several case laws referred to above, the facts which are different as compared to the assessee's case. The appellant in submissions has admitted that the turnover of the company went down from Rs.41.87 millions in A.Y. 2007-2008 to Rs.17.03 millions in A.Y. 2008-2009 which supports A.O's view. The appellant further submitted that interest on capital borrowed which is used for the purpose of business has to be allowed. However, in the case of H.T.Conville Vs. CIT 4 ITR 137, it was held that where borrowed money is utilized for earning the non assessable income, no deduction shall be allowed for interest paid on such borrowings. Ratio of this judgement is squarely applicable since the dividend income receivable out of the investment in shares of Sameera is Exempt from tax.
5. The learned CIT(A) confirmed the order of the AO by observing as above.
6. Still aggrieved, the assessee is in appeal before the Tribunal.
7. The learned counsel for the assessee submitted that the assessee had acquired the shares in Sameera for the purpose of business, for which he relied on the paper book at pages 31 & 32. The assessee had shown the shares acquired for the purpose of business in the books of account as an investment which is as per companies Act and also according to the accounting standards issued by the ICAI. It is submitted that mere classification in the books of account does not to be a determinative factor for the true character of the transaction. For the above proposition, the learned counsel for the 5 ITA No. 4195/Mum/10 M/s Seto Teknolog P. Ltd.
assessee relied upon the CIT Vs. Gopal Purohit wherein the Bombay High Court has held that entries in books of account alone are not conclusive in determining the nature of income. It is further submitted that the AO has erroneously relied on the classification in the balance sheet and ignored the fact that the acquisition of shares for the purpose of business. The assessee had acquired the shares of Sameera Electronics Pvt. Ltd. which is subsidiary of assessee company and also a loss making company, no prudent businessman invests in loss making company. It is further submitted that the loan was taken for the purpose of business, for that he relied on the paper book at pages 58 & 59. It is submitted that the assessee had acquired the shares of Sameera only for immediate necessity of business and, therefore, the interest paid thereon either allowable u/s 36(1)(iii) or 37 of the Act. The learned counsel for the assessee relied upon the following decisions:
1. CIT Vs. Jardine Henderson Ltd., 210 ITR 981 (Cal.)
2. ATE Enterprises Ltd. Vs. JCIT, 102 ITD 112 (Bom.)
3. CIT Vs. Rajeev Lochan Kanoria, 208 ITR 616 (Cal.)
8. On the other hand, the learned DR submitted that the assessee had acquired the capital asset with an interest to earn dividend income and therefore, the interest paid thereon has to be capitalized. The DR further submitted that the assessee had entered into a separate agreement with Sameera Electronics Pvt. Ltd. and paid rent for the purpose of utilizing the premises and, therefore, the contention of the assessee is that the assessee had acquired the shares in Sameera for the purpose of business is not correct.
6 ITA No. 4195/Mum/10M/s Seto Teknolog P. Ltd.
9. We have considered the rival submissions, perused the record and gone through the orders of the authorities below as well as decisions cited. The question for consideration before us is whether interest paid by the assessee on the borrowings for acquisition of shares of Sameera Electronics Pvt. Ltd. for the purpose of business or not ? The case of the assessee is that the assessee is in the business of manufacturing and dealing of electrical, electronics and computer hardware and software. During the year under consideration, the assessee had acquired shares of M/s Sameera Electronics Pvt. Ltd., a 100% subsidiary of the assessee company, for which it had paid Rs. 16,91,958/- to the SIDBI from whom the assessee borrowed the money and to this effect the assessee referred pages 58 & 59 where the schedules of the Project, finance plan, and amortization schedule and letter of intent from SDBI for financial assistance. The main contention of the assessee is that the above stated shares acquired by the assessee for the effective control in the Sameera Electronics and thereby using the premises of the Sameera for the purpose of immediate necessity of assessee's business. The assessee has explained the same before the AO and CIT(A) and ultimately they have rejected the explanation offered by the assessee. To this effect, the assessee referred pages 31 & 32 of the paper book to establish that the said submissions made before the revenue authorities. The assessee had acquired shares in Sameera Electronics Pvt. Ltd., which is a loss making company is the sister concern of the assessee company in which the assessee is having interest. The assessee had also given interest free loans to its sister concern Sameera Electronics Pvt. Ltd. The assessee in one of its submissions before us stated that nobody is interested in acquiring shares in Sameera because it is a loss making company. When the Sameera Electronics Pvt. Ltd. is loss making company where assessee is also 7 ITA No. 4195/Mum/10 M/s Seto Teknolog P. Ltd.
having interest, we are unable to understand that what is the necessity of acquiring the shares in Sameera to effective control in that company. It is a fact that the assessee has entered into a separate agreement with M/s Sameera Electronics Pvt. Ltd. for utilization of premises and rent was also paid. When the assessee has paid charges for using of the premises, it cannot be said that the shares acquired by the assessee is for the purpose of the business of the assessee and, therefore, allowable u/s 36(1)(iii) of the Act. Therefore, in our considered opinion, acquiring shares in Sameera Electronics Pvt. Ltd. by the assessee is not connected for the purpose of business. Therefore, the acquisition of shares in Sameera Electronics Pvt. Ltd. is not for the purpose of the business and the interest paid thereon is not allowable either in the section 36(1)(iii) or section 37 of the Act. In so far as the case laws relied upon by the learned counsel for the assessee is concerned, in the case of CIT Vs. Jardine Henderson Ltd., [1994] 210 ITR 981 the Court has held as under:-
"It was categorical finding of the Tribunal that the borrowal for the purchase of shares was for the managing agency business of the assessee and to retain its grip over the managing agency business. The tribunal also found that the investment in shares was principally and primarily with a view to obtain the managing agency commission rather than dividend income. The said f acts was also evident from the comparatively small amount of dividend which the assessee received compared to the large amount of managing agency commission received during the various previous years. Therefore, the entire amount of interest paid was deductible in computing the prof its and gains of the asessee's business."
10. The learned counsel for the assessee also relied upon the decision of ITAT, Mumbai Bench "H", Mumbai, in the case of ATE Enterprises Ltd. Vs. JCIT order dated 11/11/2005 wherein the Tribunal has held as under:-
8 ITA No. 4195/Mum/10M/s Seto Teknolog P. Ltd.
"11. Rival submissions of the parties have been considered caref ully. The question for consideration I whether interest paid by the assessee on the borrowings for acquisition of shares of Trumac can be allowed as deduction u/s 36(1)(iii) considering the facts of the case and case law available on this point. There is no dispute between the parties that deduction is allowable if money is borrowed f or the purpose of business. The expression for the purpose of business is much wider than the expression for the purpose of earning prof its' as held by Hon'ble Supreme Court in the case of India Cements Ltd., 60 ITR 52. Thus, for the purpose of allowing deduction u/s 36(1)(iii) it would be irrelevant to consider whether borrowed money was utilized f or meeting day to day expenses or for acquiring capital assets to be used in business. Therefore, interest f or borrowing would be allowed even if borrowed fund is utilized for acquiring plant and machinery or land and building for use in business. Reference can be made to jurisdictional high Court judgment in the case of Calico Dyeing & Printing Works Vs. CIT, 34 ITR 265.
12. In view of the above legal background, the question which survives for our consideration is whether on facts it can be said that money was borrowed for the purpose of business. Admittedly Trumac' was a joint venture of assessee and Maf tlal Group of companies. In its reply to show cause notice, the assessee had stated that promoters of the assessee company as well as of Maf tlal Group had good business relationships having close association with Indian Textile Industry. This f act has not been disputed by the revenue at any stage. It is because of these facts, the Chairman of assessee company was on the Board of Trumac' as non-executive Chairman and could get sole selling agency for the distribution of the products manuf actured by Trumac. Since it was main source of income, it was natural for a prudent man to safeguard its business interest. Therefore, if the assessee decided to increase its holding in Trumac' In our opinion, the assessee was guided by business consideration to safeguard its selling agency. If shares are purchased by outsiders then there is possibility that outsider may jeopardize th business interest of assessee company. Therfore, in our opinion, act of borrowing money for the acquisition of shares was closely connected with or incidental to the carrying on the business. Consequently, the conditions of allowing deduction u/s 36(1)(iii) stood satisf ied.
9 ITA No. 4195/Mum/10M/s Seto Teknolog P. Ltd.
11. The assessee also relied on the CIT Vs. Rajeev Lochan Kanoria (supra) wherein the Court has held as under:-
"Held, that directorship is nothing but a vocation. The assessee was admittedly a director of several controlled companies. The activity of controlling, managing, administering and f inancing companies is nothing but a business/professional/vocational activity. A businessman, like the assessee in this case, did not purchase shares of different companies for acquiring controlling interest therein only for earning dividends. Acquiring controlling interest in companies and managing, administering, f inancing and rehabilitating companies under control were for business and/or professional purpose. Interest on capital borrowed for investment in shares was deductiable."
12. The above three case laws relied upon by the learned counsel for the assessee are not applicable to the facts of the case under consideration for the reason that in the present case, one of the material distinguishable fact is that the assessee entered into a separate agreement with the Sameera Electronics Pvt. Ltd. and paid service charges for the utilization of the premises of Sameera, therefore, the above case laws are not applicable to the case of the assessee.
13. In view of the above, this ground of appeal raised by the assessee is dismissed.
14. In so far as ground No. 4 is concerned, the AO observed that the assessee had paid Rs. 2,56,684/- as consultancy charges and Rs. 8,15,000/- as loan syndication charges in connection with the acquisition of shares of Sameera Electronics Pvt. Ltd. for the purpose 10 ITA No. 4195/Mum/10 M/s Seto Teknolog P. Ltd.
of the business of the assessee. Since the said expenditure was not in connection with the business of the assessee, the AO disallowed the said amounts. On appeal, the CIT(A) confirmed the action of the AO.
15. Since, this issue is inter-connected with ground No. 1, the conclusions drawn in Ground No. 1 are applicable to this ground also and, therefore, in view of the discussion in ground No.1, this ground is also dismissed.
16. As regards Ground No. 2, during the course of assessment proceedings, the AO had observed that the assessee had advanced Rs. 15,60,865/- as interest-free loan to M/s Sameera Electronics Pvt. Ltd. The assessee has paid interest on borrowed funds from the Directors as well as other loans borrowed. Accordingly, the AO disallowed proportionate interest of Rs. 1,40,477/-. On appeal, the CIT(A) confirmed the action of the AO. Aggrieved the assessee carried the matter in appeal before us..
17. The learned counsel for the assessee submitted that the assessee is having own funds and also borrowed funds. Once own funds are available with the assessee, the presumption is in favour of the assssee that the own funds are used for the purpose of interest- free loans. For this, he relied on the decision of Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities Power Ltd., 313 ITR 340 wherein it was held that if there are funds available both interest free and overdraft/loans taken, then a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds are sufficient to meet the investments.
11 ITA No. 4195/Mum/10M/s Seto Teknolog P. Ltd.
18. On the other hand, the learned DR submitted that the issue may be remitted to the AO to examine whether the assessee is having sufficient interest free funds or not.
19. We have heard both the parties, perused the record and gone through the orders of the authorities below. The issue raised by the assessee, i.e. assessee having sufficient own funds, was neither examined by the AO nor by the CIT(A). Therefore, in the interest of justice, we set aside the order of the CIT(A) and restore the issue to the file of the AO with a direction to examine the issue and decide the same after considering the decision Hon'ble Bombay High court in the case of Reliance Utilities and Power (supra) after providing reasonable opportunity of hearing to the assessee.
20. Ground No. 3 is relating to disallowance u/s 40(a)(ia) of the Act.
21. During the course of assessment proceedings, the AO observed that assessee had paid testing charges amounting to Rs. 3,22,128/- to Electronic Regional testing Laboratory and Rs. 56,120/- to Electronic Corporation of India. The AO noticed that no tax has been deducted on these payments. The AO noted that as per section 196, tax need not be deducted only if the income of the statutory corporation are exempt. The AO further noted that as per the copy of receipt issued by Electronic Regional testing laboratory and Electronic Corporation of India, they are liable of service tax, which clearly shows their income is not exempt for taxation. In view of these facts, the AO disallowed the amounts paid to the tune of Rs. 3,78,248/- u/s 40(a)(ia) and added the same to the total income of the assessee. On appeal, before the CIT(A), the assessee has furnished written submission wherein it had been stated that the assessee paid testing 12 ITA No. 4195/Mum/10 M/s Seto Teknolog P. Ltd.
charges to Electronic Regional Testing Laboratory and ECIL aggregating to Rs. 3,78,428/-. It was further stated that it had not deducted tax at sources at ERTL and ECIL are government agency and hence the same is covered by the provisions of section 196 of the Act and disallowance of Rs. 3,78,248/- u/s 40(a)(ia) of the Act is not justified and same may be deleted. The CIT(A) rejected the submissions of the assessee on the ground that since the AO had mentioned with proof that ERTL and ECIL are liable for service tax and hence their income cannot be exempt from tax. He, therefore, upheld the addition. Aggrieved, the assessee is in appeal before us.
22. Before us, the learned counsel for the assessee submitted that the AO had disallowed testing charges paid to ERTL and ECIL u/s 40(a)(ia) ignoring the fact that payments made to Statutory Corporation are not subject to deduction of tax at source u/s 196 of the Act. The learned counsel for the assessee invited our attention to sample invoices, which have been placed at 131 & 132 of assesee's paper book to establish that ERTL and ECIL are Govt. of India Enterprises.
23. On the other hand, the learned DR besides relying on the orders of the authorities below, submitted that since ERTL and ECIL are liable to pay service tax, the AO disallowed the testing charges paid by the assessee for non deduction TDS.
24. We have heard the rival submissions, perused the record and gone through the orders of the authorities below. The issue involved in this ground is whether the TDS has to be deducted on payment made to the a corporation established by or under a central Act, which is under any law for time being in force exempt from income-
13 ITA No. 4195/Mum/10M/s Seto Teknolog P. Ltd.
tax on its income. In the present case the assessee made payments to ECIL. As per section 196 a statutory corporation, which is established under law is exempt from the TDS. In the present case, the AO disallowed the payments made by the assessee to ECIL, ERTL towards testing charges on the ground that ECIL and ERTL pay the service tax. In this case, in our opinion, whether the assessee has to deduct the tax in view of section 196 or not has to be examined. Therefore, neither the AO nor CIT(A) examined the issue in proper perspective. Thus, we restore issue to the AO with a direction to decide the issue afresh in the light of section 196 of the Act.
25. In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on this 31 s t day of
January, 2012.
Sd/- Sd/-
(P.M. JAGTAP ) (V. DURGA RAO)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 31 s t January, 2012.
kv
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A) concerned.
4) The CIT concerned.
5) The Departmental Representative, "G" Bench, I.T.A.T., Mumbai.
By Order //true copy// Asst. Registrar, I.T.A.T., Mumbai.