2019 (4) TMI 1225 - AT - Income Tax

Rectification u/s 254 - non consideration of admission of additional evidence - Whether it alter the outcome of the decision? - HELD THAT - Assessee has no doubt filed additional evidence before the Bench at the time of original hearing, but, in the ITAT order, there is no reference to such additional evidence nor it gave any findings whether accepted the additional evidence or declined. We are not in a position to express our view at the admissibility of the additional evidence and in the first place, it appears that it might have some bearing on the outcome of the decision, in case, the additional evidence is accepted. First, Bench has to evaluate the admissibility of the additional evidence and then, it has to evaluate whether the additional evidence filed by the assessee will have a bearing to lead a different conclusion or come to conclusion as per earlier bench decision. Therefore, in our view, assessee has a reasonable plea to consider. Therefore we are inclined to accept the contention of the assessee and re-fix the appeal of the assessee in order to adjudicate afresh. MA filed by the assessee is allowed.

Issues Involved:
1. Rectification/modification of the Tribunal's order dated 05/07/2018.
2. Non-appreciation of certain facts by the Tribunal.
3. Misinterpretation of the appellant's main object clause.
4. Income generation by the appellant.
5. Capitalization of interest payable.
6. Appointment of directors based on business connection.
7. Disallowance under section 14A read with Rule 8D(2)(i)/8D(2)(ii).

Issue-wise Detailed Analysis:

1. Rectification/modification of the Tribunal's order dated 05/07/2018:
The assessee filed a Miscellaneous Application under section 254(2) of the Income Tax Act seeking rectification/modification of the Tribunal's order dated 05/07/2018 in ITA No. 488/Hyd/2017. The appellant argued that certain facts were either not appreciated correctly or not considered, which may have impacted the final judgment.

2. Non-appreciation of certain facts by the Tribunal:
The appellant pointed out several instances where the Tribunal allegedly did not appreciate or consider certain facts. These include the interpretation of the appellant's main object clause, the nature of income generation, and the capitalization of interest payable, among others.

3. Misinterpretation of the appellant's main object clause:
The Tribunal held that the appellant's main object is to carry on the business of construction and development of the airport, which was not undertaken, and to invest in other companies as a promoter, which was the only activity undertaken. The appellant contended that as per its Memorandum of Association, it can carry out any of its main objects and there is no requirement to carry out all activities mentioned in the object clause. The appellant argued that it has carried out activities as provided in Sl. No.2 of the main object clause and should be considered to have carried out the business activity as set out in its main object clause.

4. Income generation by the appellant:
The Tribunal held that the appellant can earn income only by way of dividends from sister concerns or by way of interest on bank deposits. The appellant argued that it has the right to charge interest on advances made to level-2 companies and had indeed charged interest of ?256.67 Crores during FY 2016-17. The appellant also cited the judgment of the Apex Court in CIT vs. Hero Cycle (P) Ltd (1997) 228 ITR 463 (SC), which was not considered by the Tribunal.

5. Capitalization of interest payable:
The Tribunal held that the interest payable can be capitalized to the cost of investment and claimed when any capital gain arises. The appellant argued that it provided loans/advances to level-2 companies and did not utilize the borrowing to make investments in equity shares of level-2 companies. Therefore, the Tribunal's assumption that borrowed funds were used to make investments was factually incorrect.

6. Appointment of directors based on business connection:
The Tribunal held that directors can be appointed in any company based on their qualification or association, but not because of a business connection. The appellant contended that the directors appointed by it on the board of level-3 companies were representing the appellant based on rights governed by the shareholders' agreement. These directors were appointed to protect the shareholder's interests, oversee business operations, and take strategic decisions, and are key managerial personnel, not independent directors.

7. Disallowance under section 14A read with Rule 8D(2)(i)/8D(2)(ii):
The Tribunal held that the appellant's main source of income is only in the nature of dividends, and there is evidence of a nexus of borrowing funds being invested in sister concerns. Therefore, the entire interest expense has to be considered for disallowance under section 14A read with Rule 8D(2)(i)/8D(2)(ii). The appellant argued that disallowance under section 14A can only trigger if borrowed funds were utilized for making investments in level-2 companies by way of equity, which was not the case.

Conclusion:
The Tribunal observed that the assessee had filed additional evidence before the Bench at the time of the original hearing, but the order did not reference such evidence or provide findings on its acceptance. The Tribunal acknowledged that the additional evidence might have a bearing on the outcome of the decision. Therefore, it decided to re-fix the appeal of the assessee for fresh adjudication, allowing both parties to present their arguments again. The Registry was directed to fix the appeal for hearing in due course. The Miscellaneous Application filed by the assessee was allowed.

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