IN INCOME TAX APPELLATE TRIBUNAL BENCH : CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER] ./I.T.A.No.1200, 1201/Mds/2013 & 1890/Mds/2014 Assessment years : 2003-04, 2006-07 & 2003-04 M/s Carburettors P. Ltd Vs. Asstt. Commissioner of Raheja Towers Income-tax 7th Floor, Sigma Wing Company Circle I(3) No.177, Anna Salai Chennai Chennai 600 002 [PAN AAACC 1299 E] (Appellant) (Respondent) Appellant by : Shri S. Sridhar, Advocate Respondent by : Shri Shiva Srinivas, JCIT Date of Hearing : 17-08-2016 Date of Pronouncement : 20-10-2016 O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER These appeals of assesseee are directed against orders of Commissioner of Income-tax (Appeals)-IX, Chennai, dated 28.1.2013 and 18.3.2014 for assessment year 2003-04 in I.T.A.Nos.381/08-09 and 360/13-14 and 21.3.2013 for assessment year 2006-07 in I.T.A.No. 530/10-11 passed u/s 143(3) r.w.s 147/263 and 250 of Income-tax Act, 1961(in short Act ). Since :- 2 -: ITA No.1200/13 etc common issues arise for consideration in all appeals, we heard them together and disposing of same by this common order. 2. First we take up I.T.A.No.1200/Mds/2013 for assessment year 2003-04. first ground is that CIT(A) has erred in confirming disallowance of expenditure made by Assessing Officer irrespective of fact that expenditure was incurred wholly and exclusively for purpose of business and assessee s business was in existence and main objects of assessee- company being promotion of companies and sister concerns. Ground No.2 is that CIT(A) has erred in confirming disallowance u/s 14A of Act irrespective of fact that there is no income received from investment made in sister concerns. 3. Brief facts of case are that assessee is in business of carburetors manufacturing and filed its return of income on 31.10.2003 declaring loss of ` 25,81,919/- and return of income was processed u/s 143(1). Subsequently, Assessing Officer noticed that there is reason to believe that income has escaped assessment and issued notice u/s 148. In response, assessee vide letter dated 25.3.2008 requested Assessing Officer to treat original return filed in compliance to notice u/s 148. Ld. AR of assessee appeared from time to time and filed necessary details. :- 3 -: ITA No.1200/13 etc Assessing Officer on perusal of Profit & Loss Account found that assessee has shown income in respect of dividend, profit on sale of assets, interest income and rental income whereas dividend was claimed u/s 10(34) of Act, rental income disclosed under head income from house property, profit on sale of assets under head capital gains. Assessing Officer was of opinion that assessee has not carried out any business activity during financial year 2002-03. Further, Assessing Officer verified financial statements and was of opinion that assessee has not carried out business activity but has parked its surplus funds in different companies and earned interest. show cause notice was issued to assessee-company to disallow claim of expenditure relying on decision of Delhi High court in case of International Marketing Ltd vs ITO, 159 taxman 24. In compliance to show cause notice, ld. AR of assessee requested reasons for reopening of assessment and same was furnished. It was also submitted that assessee is in business from earlier years and also promoting companies and such promotion cannot take place on day-to-day basis and requires sufficient time and relied on case law of Bharat Nidhi Ltd 60 ITR 520(Mad). assessee- company submitted that it has brought over Mikuni s 26% stake in M/s UCAL Fuel Systems Ltd. But ld. Assessing Officer is of opinion :- 4 -: ITA No.1200/13 etc that assessee has not submitted any information in respect of transactions/activities held during year but only relied on paper cutting to prove business activity. Assessing Officer found from material of assessment that assessee s main activity is promoting other companies. Assessing Officer relied on judicial decisions referred at pages 5 to 7 of his order and come to conclusion that assessee has not invested in above company neither for purpose of protecting its business nor acquiring control of business as shareholding pattern is less than 50%. Assessing Officer further found that assessee has been receiving substantial amount of dividend from group companies and main activity of business is not in existence. Therefore, expenditure debited in Profit & Loss Account in respect of administrative overheads has been disallowed and Assessing Officer also found that accounts of company were not audited u/s 44AB of Act and no income has been disclosed in Profit & Loss Account therefore, no deduction can be allowed in respect of such expenditure and accordingly computed income from house property, and income from other sources and capital gains and passed order u/s 143(3) r.w.s 147 of Act on 18.12.2008. :- 5 -: ITA No.1200/13 etc 4. Aggrieved by order of Assessing Officer, assessee has filed appeal before CIT(A). In appellate proceedings, ld. AR of assessee argued that Assessing Officer has erred in disallowing expenditure irrespective of fact that assessee is in business in earlier years and subsequent year also. main business of assessee-company is promoting companies. financial statements depicts all secured loans obtained and also interest charges paid in respect of investments. Whereas investment of assessee in group companies was with profit motive and dividend is only incidental and also supported his arguments with judicial decisions. CIT(A) considered findings of Assessing Officer and submissions of assessee in assessment proceedings and appellate proceedings and dealt with in his order elaborately relying on judicial decisions also. assessee also filed written submission in respect of claim of expenditure and disallowance is unjustified. Contention of assessee that there is no dispute on genuineness of expenditure while Assessing Officer was of opinion that assessee is not carrying on any business. expenditure was incurred as promoter of M/s UCAL Fuel Systems and assessee has substantial interest and investment has been made and therefore, provisions of sec. 14A are not applicable. But CIT(A) was of :- 6 -: ITA No.1200/13 etc opinion that assessee has claimed expenditure in Profit & Loss Account but not carried out any business activity during financial year 2002-03. Even before CIT(A) assessee could not substantiate with evidence that there is business activity carried on in financial year 2002-03. With these observations, CIT(A) has confirmed order of Assessing Officer. 5. Aggrieved, assessee has filed appeal before Tribunal. Before us, ld. AR argued grounds and reiterated submissions made before Assessing Officer and CIT(A). He further explained on activities of assessee-company. ld. AR further submitted that CIT(A) is not justified in confirming disallowance of business expenditure as there is no business activity by assessee-company. Prima facie expenditure has been incurred for promoting companies and therefore, claim was made in Profit & Loss Account. CIT(A) has relied on findings of Assessing Officer without verifying genuineness and also objectives of assessee-company as per Memorandum of Association and Articles of association and prayed for allowing claim u/s 37(1) of Act as expenditure has been incurred wholly and exclusively for purpose of business. :- 7 -: ITA No.1200/13 etc 6. On other hand, ld. DR relied on orders of lower authorities and submitted that assessee has not carried out any business activity during financial year 2002-03. 7. We heard rival submissions, perused material on record and judicial decisions. sole crux of issue being claim of expenditure by assessee-company was disallowed by Assessing Officer on ground that there is no business activity carried on whereas ld. AR substantiated that assessee has been in business activities as per Memorandum and Articles of Association ad also submitted that assessee-company has taken over 26% stake in M/s UCAL Fuel Systems and it was reported in business lines. ld. AR cannot prove with correct picture of activity carried on by assessee during financial year 2002-03. Further, ld. AR could not establish before us that there was any business activity carried on by assessee-company with any statutory service or any transactions with Government. No doubt, assessee-company has made substantial investment in subsidiary companies and main business being promoting companies. objects of Memorandum of Association cannot overrule provisions of Income-tax Act, 1961 though main object of assessee-company is promoting companies and other object is :- 8 -: ITA No.1200/13 etc to manufacture carburetors. activity of assessee-company has to be seen from present working status irrespective of fact that there are main objects to be perused from Memorandum of Association. Considering apparent facts and activities of assessee-company and Assessing Officer has not verified in depth about business carried on by assessee during earlier year. But in interest of justice, we remit this issue back to file of Assessing Officer, Assessing Officer shall verify from earlier years and subsequent years whether activities of assessee-company are being carried on. Further lullness in business cannot be taken as no activities were carried on. fact that companies are incorporated under Companies Act 1956 and company can close its activity only on winding up. Further, in subsequent assessment year 2005-06 it had taken over stake in UCAL that shows still there is existence of company and activities were being carried on irrespective of fact that there is no direct and indirect expenditure. With these observations, we remit entire issue to file of Assessing Officer to decide afresh on disputed issue. This ground is allowed for statistical purposes. 8. As far as disallowance u/s 14A is concerned, assessee has made huge investments in subsidiary companies and :- 9 -: ITA No.1200/13 etc CIT(A) has observed that there is no business income relying on order of Assessing Officer. contention of assessee is that section 14A cannot be applied because investment in companies are merefor promotion of business and dividend is only incidental. 9. On other hand, ld. DR supported orders of lower authorities. 10. We have considered rival submissions. Since assessment year under consideration is prior to assessment year 2008- 09, we In our opinion, judgment of Madras High Court in case of M/s Simpson & Co Ltd vs DCIT in TCA No.2621 of 2006 dated 15.10.2012 is directly applicable to facts of this case as Rule 8D is not applicable to assessment year 2003-04. Accordingly, in view of judgment of Madras High Court in M/s Simpson & Co. Ltd (supra), we direct Assessing Officer to disallow 2% of dividend income as expenditure for earning exempted income by assessee. This ground is partly allowed. 11. In result, I.T.A.No.1200/Mds/2013 is partly allowed for statistical purposes. :- 10 -: ITA No.1200/13 etc 12. Coming to I.T.A.No.1201/Mds/2013 for assessment year 2006-07, assessee has raised similar grounds. We have adjudicated issues in former part of this order in detail. In view thereof, this appeal is also partly allowed for statistical purposes. 13. Coming to I.T.A.No. 1890/Mds/2014 for assessment year 2003-04, assessee has filed appeal against order of CIT(A) passed u/s 143(3) r.w.s 263 of Act. assessee has raised two substantial grounds being CIT(A) has erred in considering findings of Assessing Officer and upholding order of applicability of provisions of sec. 50C and second issue is that CIT(A) has erred in taxing amount of ` 3,04,160/- under head income from other sources irrespective of fact that this pertains to funds of business and to be treated as business income. 14. brief facts of case are that assessee is in business of manufacture of carburetors and having income from house property and capital gains and has filed return of income on 301.10.2003 admitting loss of ` 25,81,919/- which was processed u/s 143(1) of Act. Subsequently order u/s 143(3) r.w.s 147 was passed on 18.12.2008 assessing taxable income at ` 1,31,31,861/- including long term capital gain of ` 50,74,985/-. :- 11 -: ITA No.1200/13 etc CIT on perusal of assessment order was of opinion that order passed by Assessing Officer was without application of mind and it is erroneous and prejudicial to interest of Revenue and passed order u/s 263 of Act dated 8.2.2011 and set aside assessment order. Assessing Officer in assessment proceedings on issue of calculation of long term capital gains on applicability of sec. 50C reference was made to Valuation Officer to ascertain market value of property transferred. ld. AR appeared from time to time and filed detailed explanations challenging validity of invoking provisions of section 50C and also expenditure claimed in Profit & Loss Account in this regard. Assessing Officer has dealtwith details of commercial complex named as Raheja Towers where assessee has entered into joint venture development on 28.5.94 and also consideration was received. Whereas Assessing Officer has made calculation in respect of consideration and worked out long term capital gains at ` 54,60,454/-. In respect of corresponding built-up area which was allotted to assessee sale consideration was at ` 56,87,799/- and Assessing Officer allowed index cost of proportionate division of land and calculated long term capital gains at ` 54,60,454/-. Assessing Officer further gave finding that assessee has closed down its business long back and no :- 12 -: ITA No.1200/13 etc activities were conducted by assessee. Therefore, corresponding expenditure in respect of such claims has been disallowed and calculated interest to be taxable on deposits at ` 3,04,160/-. Further, in said assessment year assessee has received dividend income of ` 81 lakhs and disallowance u/s 14A of Act was not made by assessee. assessee has explained that no expenditure was incurred to earn dividend income as dividend was received from subsidiary companies. With these observations, Assessing Officer made two disallowance in respect of long term capital gains and income from other sources and passed order u/s 143(3) r.w.s 263 of Act dated 31.3.2011. 15. Aggrieved, assessee has filed appeal before CIT(A). In appellate proceedings, ld. AR of assessee argued grounds and substantiated his arguments with facts and findings made by Assessing Officer which are against principles of natural justice. It was explained that provisions of sec. 50C shall not be invoked. assessee has disclosed long term capital gains in respect of property where agreement was entered in 1994 and not in financial years 2001-02/2004-05. At time of transfer, provisions of sec. 50C were applied and District Valuation officer has worked out value of property and arrived :- 13 -: ITA No.1200/13 etc at long term capital gains. Whereas Assessing Officer has erred in enhancing income from capital gains from ` 15,74,985/- to ` 54,60,454/- irrespective of fact that agreement with developer for transfer of property was entered into on 28.5.1994 i.e long before provisions of sec. 50C of Act are introduced in Act, Assessing Officer has no jurisdiction to invoke provisions of sec. 50C. CIT(A), on perusal of revisional order u/s 263 of Act and submissions made by assessee during revision proceedings and appellate proceedings found that CIT has directed provisions of sec. 50C are applicable. CIT(A) is of view that order u/s 263 of Act passed by CIT should be challenged and not order passed u/s 143(3) r.w.s 263. Since order of Assessing Officer has been passed applying provisions of sec. 50C, as per CIT s directions, grounds of assessee are dismissed. 16. In respect of addition of ` 3,04,160/- as income from other sources, proportionate disallowance was made considering income from deposits and also expenditure incurred. :- 14 -: ITA No.1200/13 etc 17. ld. AR of assessee supported his case that Assessing Officer has erred in taxing interest income under head income from other sources irrespective of fact that interest payment exceeded total interest receipt and borrowals were more than ` 1 crore, therefore, telescoping has to be considered. CIT(A) gave categorical finding that ld. AR has not brought any material on record to show that there is nexus between interest expenditure paid and interest income received. With this observation, CIT(A) has upheld order of Assessing Officer. CIT(A) further confirmed addition of ` 7,19,800/- in respect of interest paid for purchase of AC plant in building and dismissed appeal. 18. Before us, aggrieved by above order, ld. AR reiterated submissions made before Assessing Officer and CIT(A). He further submitted that assessee has challenged revision order passed by CIT u/s 263 of Act whereas this order has emanated from consequential order of Assessing Officer passed u/s 143(3) r.w.s 263 of Act in respect of calculation of long term capital gains. Assessing Officer has erred in applying provisios of sec. 50C which in fact is not applicable to said assessment year whereas agreement was entered in 1994 and sales in assessment year 2002-03 to 2005-06, therefore, :- 15 -: ITA No.1200/13 etc calculation of enhancing long term capital gains does not have any merit and order of CIT(A) in respect on this ground be dismissed. Secondly, Assessing Officer erred in treating interest income as income from other sources irrespective of fact that interest payment was made by assessee and claimed in Profit & Loss Account whereas this income also form part of business income therefore, telescoping should be allowed. 19. Contra, ld. DR relied on orders of CIT(A) and revisional order of CIT. 20. We have heard rival submissions and perused material on record. ld. AR s contention that provisions of sec. 250C are not applicable since agreement with developer for transfer of property was entered on 28.5.1994. We have gone through findings of Assessing Officer. reference was made to DVO. Assessing Officer had enhanced long term capital gains but we find that CIT(A) has not given any proper findings whether provisions of sec. 50C shall be applicable or not and grounds are not properly adjudicated. Considering facts and activities of assessee, we set aside order of lower authorities and remit disputed issue to file of CIT(A) for passing speaking order. :- 16 -: ITA No.1200/13 etc 21. In respect of second ground regarding taxing amount of ` 3,04,160/-, we are of opinion that since assessee is limited company it has various transactions and funds are borrowed and interest has been paid by company to various financial institutions. Assessing Officer could not prove that funds are surplus earned during year. We are of opinion that this income has direct nexus with business of assessee and comply matching concept. We, therefore, set aside order of CIT(A) on this ground and direct Assessing Officer to treat interest income of ` 3,04,160/- as business receipt and ground is allowed. 22. In result, I.T.A.No.1890/Mds/2014 is partly allowed. 23. To summarize, I.T.A.Nos.1200 and 1201/Mds/2013 are partly allowed for statistical purposes whereas I.T.A.No.1890/Mds/2014 is partly allowed. Order pronounced on 20th October, 2016, at Chennai. Sd/- Sd/- (ABRAHAM P. GEORGE) (G. PAVAN KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai Dated: 20th October, 2016 RD Copy to: 1. Appellant 3. CIT(A) 5. DR 2. Respondent 4. CIT 6. GF M/s Carburettors P. Ltd. v. Asstt. Commissioner of Income-tax Company Circle I(3), Chennai