C/SCA/4036/2016 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 4036 of 2016 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV 1 Whether Reporters of Local Papers may be allowed to see judgment ? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India or any order made thereunder? MICRO INKS LIMITED....Petitioner(s) Versus PRINCIPAL COMMISSIONER OF INCOME TAX,....Respondent(s) Appearance: MR RK PATEL, ADVOCATE for Petitioner(s) No. 1 MR MANISH BHATT, SENIOR COUNSEL WITH MRS MAUNA M BHATT, ADVOCATE for Respondent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV Date : 21,22/08/2017 Page 1 of 12 HC-NIC Page 1 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. petitioner has challenged notice dated 8.3.2016 issued by respondent Principal Commissioner of Income Tax seeking to taking into revision order of assessment passed by Assessing Officer under section 143(3) read with section 144C of Income Tax Act ( Act for short) on 30.1.2014. 2. Brief facts are as under. petitioner is company registered under Companies Act and is engaged in manufacture and sale of printing inks and auxiliary products. For assessment year 2009 2010, petitioner had filed return of income which was taken in scrutiny by Assessing Officer. During such scrutiny assessment, Assessing Officer raised various queries, one of them with respect to assessee's claim of interest expenditure in respect of loans taken from various banks. amount so obtained was invested in preferred stock of subsidiary company Hostmann and Steinberg Inc. USA to tune of Rs.48.81 crores. sum of Rs. 2.36 crores (rounded off) was charged to Profit and Loss account towards interest and other finance charges. Assessing Officer questioned assessee with respect to such expenditure. In response to queries, assessee raised two fold contentions. First contention was that in order to expand business in USA, company had established subsidiary company in USA to manufacture Page 2 of 12 HC-NIC Page 2 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT and sale printing inks and its auxiliary products. This has resulted in multiple increase in sales of assessee company from India. During year under consideration, company had sold goods worth Rs.75.43 crores to said subsidiary company. Looking to purpose of such investment, it can be stated that expenditure was for purpose of business and was therefore, claimed as business expenditure. alternative contention of assessee was that if this stand is not accepted, expenditure can still be allowed under section 57(iii) of Act. Heavy reliance was placed on decision of Supreme Court in case of CIT v. Rajendra Prasad Moody reported in (1978) 115 ITR 519(SC). While elaborating this contention, assessee argued before Assessing Officer that merely because during relevant period, assessee did not earn any income, does not mean that expenditure would not be allowed. It was contended that for expenditure to be allowed it was not necessary that dividend income must be received during year itself. It was contended that dividend when earned would be chargeable to tax under head Income from other sources. 3. In terms of section 144C of Act, Assessing Officer was required to pass draft order of assessment, invite assessee to raise his objections and place such materials before Dispute Resolution Panel ( DRP for short) comprising of three Principal Commissioners or Commissioners of Income tax. Assessing Officer accordingly passed draft order on 30.3.2013 and supplied copy thereof to petitioner. In such draft Page 3 of 12 HC-NIC Page 3 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT order, Assessing Officer had raised multiple issues. We are however, concerned with only one of them namely, of interest and finance charge expenditure. In this respect Assessing Officer noted at length averments of assessee. Assessing Officer rejected assessee's contention that expenditure being in nature of business expenditure, should have been allowed as such. He however, accepted assessee's alternative contention that, in any case, same would be allowed under section 57(iii) of Act. Assessing Officer made following observations : submission of assessee has been carefully considered undisputedly transaction is for investment purposes but proximate result of said transaction is at most dividend income/capital gains. Both do not fall under head business or profession also and so expense incurred is as as business expense. In view of same, claim of interest and finance charges for investment purposes being allowed as revenue expenses for computing business income is rejected. (Disallowance of Rs. 2,36,18,612/ from business expense) However, alternate claim of assessee of these amounts being eligible for deduction under head 'income from other sources' has been considered. ruling of Hon ble Apex Court relied upon by assessee as quoted above has also been considered. Vide this decision Hon'ble Court has reiterated its earlier decision and ruled that such expenses are allowable under provision of section 57(iii) of IT Act. Since decision of Apex Court is binding on all lower authorities, respectfully following same, these expenses are allowed as expenses under head 'income from other Page 4 of 12 HC-NIC Page 4 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT sources', (Allowance of Rs.2,36,18,612/ as expenses under head 'income from other sources ). 4. In response to draft order of assessment, assessee raised objections. However, with respect to treatment that should be given to interest and finance charge expenses, assessee raised no dispute, presumably because assessee's alternative contention was accepted by Assessing Officer and assessee was not in mood to pursue main contention. Be that as it may, draft order of assessment along with petitioner's objections were considered by DRP as required under sub section(8) of section 144C. Assessing Officer passed order of assessment on 30.1.2014 as per guidelines of DRP in which he confirmed assessee's claim of interest and administrative charges under section 57(iii) of Act. Since in order of assessment, Assessing Officer has made identical observations which he made in draft order, we do not reproduce same in this judgment. Suffice it to note, Assessing Officer believed that investment made in subsidiary company cannot be disallowed merely because dividend income was not earned during year under consideration. Assessing Officer referred to decision of Supreme Court in case of Rajendra Prasad Moody (supra). 5. To take this order of assessment in revision, Commissioner issued impugned notice. He indicated his reasons why according to him, order of assessment Page 5 of 12 HC-NIC Page 5 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT was prima facie erroneous and prejudicial to interest of Revenue. His observations are as under : 3. Examination of assessment record including scrutiny assessment order shows that assessment passed by Addl. CIT, Vapi Range, Vapi, suffers from following mistakes/defects rendering order erroneous as well as prejudicial to interest of revenue. (a) assessee during year under consideration had debited interest and finance charges of Rs.2,36,18,6l2/ on account of loan taken for investment in preferred stock of step down subsidiary company. A0 disallowed this interest from business expenses but, he accepted contention of assessee regarding allowability of said interest expenditure u/s. 57(iii) of I.T. Act. A0 should have properly verified nature of investment made by assessee in subsidiary company. (b) It is evident from record and submissions of assessee that assessee company established step down subsidiary in U.S.A. and therefore, investment made was for purpose of promoting interest of its subsidiary company in, U.S.A. and hence purpose for which expenditure was incurred was to promote interest of its subsidiary company and therefore cannot be equated with promotion of interest of assessee company. (c) In order to allow expenditure u/s 57(iii) of I.T. Act, it is necessary that primary motive of incurring expenditure is directly to earn income falling under head income from other sources. Therefore, interest expenditure allowed by A0 u/s. 57(iii) of IT. Act is not in order. 6. This notice petitioner has challenged in this petition Page 6 of 12 HC-NIC Page 6 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT primarily on two grounds. One, that Assessing Officer had taken view after proper inquiries which was plausible view. This decision was therefore, not open to revision by Commissioner. Second contention of petitioner is that order of assessment was passed after draft order was placed along with petitioner's objections before DRP. issue of interest and administrative expenditure was part of such consideration by DRP. Final order of assessment, therefore, having been passed as per guidelines of DRP, was not open to revision at hands of Commissioner. (22.8.2017) 7. Elaborating such grounds, learned counsel for petitioner submitted that Assessing Officer had made proper inquiries with respect to petitioner's claim for deduction. petitioner had placed for consideration of Assessing Officer full facts. According to petitioner, investment was made for purpose of business since by setting up subsidiary company in USA, petitioner expected to expand its business. In fact, petitioner pointed out that subsidiary company had made substantial purchases of raw materials from petitioner during year under consideration. In alternative, petitioner pointed out that investment would yield dividend income. Merely because no dividend was paid during year under consideration would not disentitle petitioner from claiming deduction under section 57(iii) of Act on interest expenditure. Assessing Officer rejected first contention but accepted alternative ground and granted relief under section 57(iii) Page 7 of 12 HC-NIC Page 7 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT of Act. Thus Assessing Officer after making full inquiry, adopted view which was entirely plausible. It was thereafter not open for Commissioner to overrule such opinion by taking order in revision. In this regard, heavy reliance was placed on decision in case of Malabar Industrial Co. Ltd. v. Commissioner of Income tax reported in 243 ITR 83. Counsel further submitted that Assessing Officer in his draft order had accepted this alternative contention. petitioner therefore, raised no objections with respect to this proposal of Assessing Officer in draft order. However, since petitioner had raised objections to other proposed additions, draft order was placed before DRP. Thus entire draft order was under consideration before DRP. Assessing Officer passed order of assessment in light of directions issued by DRP as required under law. Thus final order of assessment which Assessing Officer passed was with concurrence of DRP and was not open to revision at hands of Commissioner. 8. On other hand, learned counsel Shri Manish Bhatt for department opposed petition contending that Assessing Officer had not examined all relevant aspects before accepting petitioner's alternative contention. claim of expenditure being exclusively for purpose of business was in conflict with petitioner's alternative contention that investment was made for purpose of earning income. Counsel further submitted that assessee did not raise any objection with respect to Assessing Officer's proposed draft order with respect to this Page 8 of 12 HC-NIC Page 8 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT issue and therefore, DRP had no occasion to examine this contentious issue. On this issue, therefore, there was no opinion by DRP and order passed by Assessing Officer was not outside purview of revisional jurisdiction of Commissioner under section 263 of Act. 9. From materials on record, it can be seen that regarding interest and other finance charges of Rs. 2.36 crores, Assessing Officer had undertaken detailed scrutiny during assessment proceedings and called upon assessee to justify claim. assessee's stand was two fold. Firstly, that interest related to borrowed amount which was invested in stock of subsidiary company set up in USA. This company was set up to increase assessee's sale. expenditure was thus exclusively for purpose of business. In alternative, expenditure should be allowed under section 57(iii) of Act since such investment would earn dividend income. Merely because no dividend was paid during year under consideration would not be of any consequence. Assessing Officer rejected first contention but accepted later. assessee did not object to this proposal in draft order supplied by Assessing Officer. Consequently, Assessing Officer passed final order of assessment granting relief to assessee. Commissioner in impugned notice cited his tentative reasons for taking order in revision. In his opinion before granting benefit under section 57(iii) of Act, Assessing Officer should have properly verified nature of investment made by assessee in subsidiary company. He was of opinion that Page 9 of 12 HC-NIC Page 9 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT investment was made for purpose of promoting interest of its subsidiary company in USA. This did not satisfy requirement of section 57(iii) of Act since it was necessary that primary motive of incurring expenditure should be directly to earn income falling under head Income from other sources . Commissioner did not dispute assessee's stand that through stocks of subsidiary purchased by petitioner in due course, dividend would be paid and that such dividend would be taxable as income from other sources. He however, harped upon issue that such investment should be made with primary motive of earning income and that such motive should have direct link with purpose of earning income. Section 57(iii) of Act allows deduction while computing income chargeable under head Income from other sources , any other expenditure laid out or expended wholly and exclusively for purpose of making or earning such income. It was in this context Assessing Officer had accepted assessee's contention that if investment is treated as not having been expended in assessee's business in USA and therefore, wholly and exclusively for purpose of business, same should be treated as one for earning income from other sources. Assessing Officer also accepted assessee's reliance on decision of Supreme Court in case of Rajendra Prasad Moody (supra) in which it was held that deduction under section 57(iii) of Act, was not conditional upon actually making or earning income. It was case where interest was paid on monies borrowed for investment in shares. On such shares, no dividend was received. When Revenue Page 10 of 12 HC-NIC Page 10 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT objected to interest expenditure being allowed by way of deduction on ground that no income was generated out of such investment, Supreme Court rejected contention. It was noted that accepting such contention would bring out situation that expenditure would disqualify for deduction only if no income results from such expenditure in particular assessment year but if there is some income howsoever small or meagre, expenditure would be eligible for deduction. In opinion of Supreme Court this would bring about anomalous result. 10. It can thus be seen that view adopted by Assessing Officer was after proper scrutiny of relevant facts and clearly plausible view and therefore, not open to revision at hands of Commissioner. Supreme Court in case of Malabar Industrial Co. Ltd.(supra), which has been referred to time and again, held and observed that order of assessment would be open to revision provided twin conditions of same being erroneous and prejudicial to interest of Revenue are satisfied. It is also well settled that if after proper inquiries, Assessing Officer has adopted view which is plausible one, view would not be open to revision by Commissioner. 11. additional contention of petitioner of very jurisdiction of Commissioner to revise order of assessment passed after draft order is placed before DRP in terms of section 144C of Act is interesting contention. However, we do not find it necessary in present petition to enter into such issue, since on facts Page 11 of 12 HC-NIC Page 11 of 12 Created On Thu Aug 24 11:56:12 IST 2017 C/SCA/4036/2016 JUDGMENT we find that Commissioner could not have invoked revisional powers. 12. In result, notice dated 8.3.2016 is set aside. Petition is allowed and disposed of. (AKIL KURESHI, J.) (BIREN VAISHNAV, J.) raghu Page 12 of 12 HC-NIC Page 12 of 12 Created On Thu Aug 24 11:56:12 IST 2017 Micro Inks Limited v. Principal Commissioner of Income-tax