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TMI Blog2018 (3) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... investments - AO and CIT(A) were right in treating the activity carried out by the assessee as investment activity and accordingly finance charges is not deductable under section 36(1)(iii). Also the assessee has made an alternate plea in as much as finance charge incurred shall be deductable u/s 57(iii) as its dividend income is taxable under the head “Income from other sources”, the facts remain that the assessee has failed to furnish any details in respect of investments which earned income and investments which do not earn dividend income for the year under consideration. The assessee itself had admitted that all its investments are not earned dividend income. CIT(A), after considering relevant facts, has directed the AO to allow finance charges on proportionate basis in respect of investments which earned dividend income after verifying the facts. CIT(A) has given factual finding, after considering the relevant facts of the case. We do not find any error or infirmity in the order of the Ld. CIT(A), hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject grounds raised by the Revenue as well as the assessee. For Penalty u/s 271(1)(c) an order imposing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax Act, 1961. The assessment was completed under section 143(3) on 24.03.06 determining total income at ₹ 5,35,87,040/-, after making additions on account of disallowance of miscellaneous and staff welfare expenses amounting to ₹ 91,453/- and finance charges amounting to ₹ 4,89,55,754/-. 3. The assessee has carried the matter in appeal before the first appellate authority. The Ld. CIT(A) vide his order dated 24.11.08 has partly allowed appeal filed by the assessee wherein he has given relief of ₹ 8,511/- towards miscellaneous and staff welfare expenses. However, confirmed additions made by the AO towards disallowance of finance charges amounting to ₹ 4,89,55,754/-. The assessee carried the matter in further appeal before the ITAT. The ITAT vide its order dated 15.07.11 in ITA No.705/M/2009 has confirmed the disallowance of miscellaneous and staff welfare expenses as the same was not pressed by the assessee, however, set aside the issue of disallowance of finance charges to the file of the AO with a direction that the Ld. CIT(A) has confirmed additions made by the AO towards finance charges by following the order of the Ld. CIT(A) for the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income Tax Act, 1961. 5. The AO after considering the relevant submissions of the assessee and also analysis of provisions of section 36(1)(iii) and 57(iii) of the Act, observed that on going through the Memorandum of Association and Articles of Association of the assessee company, it is seen that the main objects do not encompass any of the activities carried on as above. The assessee has carried out only activity during the year under consideration is investment in shares of Anand Group of Companies and such investments had been shown under the head Investments . Even during the course of assessment proceedings, the assessee failed to explain as to how acquisition of shares for holding controlling interest in group companies was in the nature of business activity. 6. In so far as alternate plea of the assessee to allow finance charges under section 57(iii), the AO observed that during the year the assessee had earned dividend income of ₹ 3,37,25,873/-. Even though the dividend income is taxable under the head Income from other sources , the assessee in his own submissions has stated that dividend is not earned on all investments. The assessee also failed to file a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has carried out only investment activity in shares of group companies. The assessee company has recorded such investments in shares under the head Investments . The assessee also failed to explain as to how acquisition of shares for acquiring controlling interest in Anand Group of Companies was in the course of business activity. The Ld. CIT(A), further observed that in so far as alternate plea of the assessee in the light of the observation of ITAT that dividend income earned for the year under consideration is taxable, the corresponding expenditure incurred including interest needs to be allowed on proportionate basis considering the total dividend income earned by the assessee. The relevant portion of the order of the Ld. CIT(A) is extracted below: 5.1 I have carefully and dispassionately considered the facts and circumstances of the case, statement of facts, relevant rectification order, written submission and the arguments made by the LAR before the undersigned. 5.2 Earlier appellate authority has given a finding of fact which may be summarized as under:- 11. In the Annual Accounts for the year ended 31.3.2003, in the Auditors Report, the Auditor in cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is aspect has not been dealt with by the LAO in the set-aside assessment proceedings. In the course of appellate proceedings, it is seen that the appellant has not earned dividend and therefore, not disclosed any taxable income out of the following investments in shares:- Date Investment in shares No. of shares Amount (Rs.) 02.01.2001 Spicer India Ltd. 19,60,000 1,96,00,000 02.01.2001 Dytek India Ltd. 25,573 89,53,306 02.01.2001 Dytek India Ltd. 25,861 92,47,700 02.01.2001 Dytek India Ltd. 25,337 88,00,750 02.01.2001 Dytek India Ltd. 19,667 70,28,170 02.01.2001 Degramont India Ltd. 81,960 81,96,000 5.5 As on 31.03.2003, the appellant had an investment portfolio of ₹ 93.54 crores. Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed finance charges on the ground that the expenditure incurred under the head Finance Charges is not incurred wholly and exclusively for the purpose of business of the assessee, which is evident from the fact that the assessee did not carry out any business activity during the year under consideration, except holding investments in shares of group companies for acquiring controlling interest. According to the AO, investments in shares of group companies for acquiring controlling interest cannot be formed part of business activity of the assessee. The AO further was of the opinion that the statutory auditors in their audit report categorically observed that the company is not engaged in carrying on any business or as a part of its business activity of acquisition of shares except making long term investments. The AO further was of a view that the Memorandum of Association and Articles of Association of the assessee company does not encompass any of the activities carried on by the assessee as per its main objects. It is the contention of the assessee that it has incurred finance charges wholly and exclusively for the purpose of business which is evident from the fact that its ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the head Income from other sources and accordingly any expenditure incurred to earn dividend income including finance charges needs to be deducted under section 57(iii) of the Act. However, the facts remain that the assessee has failed to furnish any details in respect of investments which earned income and investments which do not earn dividend income for the year under consideration. In fact, the assessee itself had admitted that all its investments are not earned dividend income. The Ld. CIT(A), after considering relevant facts, has directed the AO to allow finance charges on proportionate basis in respect of investments which earned dividend income after verifying the facts. The Ld. CIT(A) has given factual finding, after considering the relevant facts of the case. We do not find any error or infirmity in the order of the Ld. CIT(A), hence, we are inclined to uphold the findings of the Ld. CIT(A) and reject grounds raised by the Revenue as well as the assessee. 15. In the result, the appeal filed by the assessee in ITA No.7539/M/2013 and appeal filed by the Revenue in ITA No.62/M/2014 are dismissed. ITA No.4779/M/2014 16. This appeal filed by the assessee is ari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee for the year under consideration. Meantime, the AO has initiated penalty proceedings under section 271(1)(c) and after considering the submissions of the assessee passed penalty order under section 271(1)(c) on 05.03.10 and levied penalty of ₹ 1,79,91,239/- being 100% of tax sought to be evaded. 19. Aggrieved by the penalty order, the assessee preferred an appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee has filed elaborate written submissions which has been reproduced by the Ld. CIT(A) in his order at paragraph 4.1 page Nos.4 to 23. The sum and substance of the arguments of the assessee before the Ld. CIT(A) was that, when the assessment has been set aside by the Tribunal, the penalty order passed by the AO cannot survive in the eyes of law as the addition on which penalty has been levied is set aside by the ITAT to the AO for fresh consideration. As regards merits of the case, the assessee submitted that there is no concealment of particulars of income or furnishing of inaccurate particulars of income as alleged by the AO, as the AO has made additions towards disallowance of interest on the ground that expenditure incurred by the assessee can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he parties, perused the materials available on record and gone through the orders of the authorities below. The AO levied the penalty under section 271(1)(c), for furnishing of inaccurate particulars of income in respect of additions made towards disallowance of miscellaneous expenses and staff welfare expenses and finance charges, even though the assessee has challenged the order of the AO before the first appellate authority. The AO has taken into account the order passed by the first appellate authority before initiation of penalty under section 271(1)(c), however, ignored the fact that the assessee has preferred further appeal before the ITAT. The ITAT has set aside the appeal filed by the assessee to the AO, in so far as additions made by the AO towards disallowance of finance charges. The AO has levied penalty before the ITAT has passed its order. The ITAT has set aside the issue to the file of the AO and direct him to reconsider the issue in the light of the facts of the assessee s case that dividend income earned by the assessee is taxable under the head Income from other sources and this fact has not been considered by the lower authorities before disallowing interest ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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