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TMI Blog2022 (6) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act r.w.r. 8D(2)(ii) of the Rules. We are of the view that the CIT(A) has rightly come to the conclusion that the disallowance under section 14A of the Act r.w.r. 8D(2)(ii) of the Rules deserves to be deleted. We find no infirmity in the order of the CIT(A) and accordingly dismiss ground No. 3 raised by the Revenue. Disallowance of interest and depreciation expenses confirmed Addition of aircraft maintenance expenses - As in the absence of details, disallowance was required to be made but that had to be based on bifurcation of fixed costs of running the aircraft, which cannot be disallowed because fixed costs have to be incurred irrespective of the usage of the aircraft. As far as variable cost is concerned, a proportion of usage of aircraft for non-business purpose can be disallowed. The disallowance of Rs. 45 lacs which is roughly about 10% of the aircraft expenses in our view was just and fair. We find no ground to interfere in the order of the CIT(A) and accordingly dismiss ground No. 4 preferred by the Revenue. Addition u/s 40A(2)(a) - HELD THAT:- We are of the view that the AO gave no basis for disallowing the entire expense of Rs. 1.92 Crores claimed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. In this regard, we find that the CIT(A), as a matter of abundant caution, has besides quashing the assessment under section 147 of the Act, has proceeded to decide the issue on merits also. As we have already stated, we do not wish to adopt such a course in view of our conclusion that the order of reassessment deserves to be quashed and annulled. Accordingly, appeal of the Revenue as well as the assessee are dismissed. - ITA Nos. 1219/Bang/2016, 1563/Bang/2014 , 1601/Bang/2014 - - - Dated:- 30-5-2022 - SHRI N. V. VASUDEVAN, VICE PRESIDENT AND MS. PADMAVATHY S, ACCOUNTANT MEMBER For the Appellant : Sumer Singh Meena, CIT (DR) For the Respondents : Sheetal Borkar, Advocate ORDER Per N. V. Vasudevan, Vice President ITA No. 1219/Bang/2016, is an appeal by the Revenue against the order dated 31.03.2016 of CIT(A)-4, Bengaluru, relating to Assessment Year 2011-12. The grounds raised by the Revenue reads as follows: 1. The Order of the Ld. CIT(A), in so far as it is prejudicial to the interest of the Revenue, is opposed to law and the fact and circumstances of the case. 2. On facts of the case, the Ld. CIT(A) has erred in holding that in case the ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee has earned dividend income of Rs. 61,94,777/- which does not form total income under the Act and is exempt. In the computation of total income, the assessee has shown expenses at Rs. 8,28,302/-. The AO called upon the assessee to explain the basis of disallowance as made by the assessee in the computation of total income. After considering the reply of the assessee, the AO computed disallowance under section 14A of the Act r.w.r. 8D of the Rules. In so far as disallowance of interest expense under section 14A r.w.r 8D(ii) of the Rules is concerned, the AO noticed that the assessee has incurred interest expense of Rs. 4,36,01,531/- out of which interest on loan availed on purchase of aircraft was Rs. 3,12,19,594/-. Remaining interest on loan on fixed deposit was Rs. 1,23,81,937/-. The AO accepted that aircraft loan was for the purpose of business but disallowed the interest on loan against fixed deposit under section 14A of the Act. 4. As far as disallowance of other expenses under Rule 8D(iii) is concerned, the AO worked out the disallowance as follows: Disallowance attracted u/s. 14A read with Rule 8D A. Total amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Unquoted equity shares Subsidiary companies 350,25,48,071 251,21,10,840 Other Companies 31,90,68,890 61,90,18,240 Quoted equity shares Current investments 9,57,93,809 NIL Others 64,14,22,258 NIL Mutual funds 45,50,27,081 NIL Total Investment 501,38,60,089 313,11,29,080 The assessee pointed out that the incremental investment was a sum of Rs. 188,27,31,009 (Rs. 501,38,60,089 - 313,11,29,080). Out of the above Rs. 45,50,27,081 are in mutual funds, which do not give raise to exempt income. The net incremental investment therefore was only Rs. 142,77,03,928. The assessee pointed out that it had an opening cash and bank balance of Rs. 392,76,31,695 and a closing balance of Rs. 251,53,33,253. The reduction was thus a sum of Rs. 141,22,98,442. The assessee had share capital and reserves in excess of Rs. 1000 crores and gave the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reserves and surplus increased from 1000,63,63,826/- to Rs. 1801,99,18,452/- which works out to be 18% more. As against this, the loan funds stood at Rs. 1,28,64,29,658/- on 31.03.2011, viz-a-viz the figure of Rs. 83,10,67,978/- as on 31.03.2010. Correspondingly the investments increased from Rs. 313,11,29,080 to Rs. 501,38,60,089/- which gives incremental figure of Rs. 188.27 crores. The assessee has submitted that in this scenario out of this incremental investment, Rs. 45 crores are in debt fund which do not result in dividend income. For the balance, the appellant argues that it has availability of Rs. 392 crores at beginning of the year and has an operating profit of approximately Rs. 20 crores. In the facts and circumstances, the assumption that the entire interest (as applied by the AO) was attributable to earning exempt income is not supported by facts. There is strength in the assessee's contention that the investments were largely made out of its available funds and not necessarily from the borrowed capital. The Hon'ble jurisdictional ITAT Bangalore has ruled in several cases that (in absence of direct nexus to prove the diversion of interest), where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 2,24,38,333/- from hiring aircraft to third parties. The AO, therefore, was of the view that out of expenses related to aircraft, a sum of 30,46,07,470/- should be disallowed and accordingly he added the aforesaid sum to the total income of the assessee. On appeal by the assessee, the CIT(A) came to the conclusion that depreciation on aircraft cannot be disallowed as the assessee is the owner of the aircraft and has used the aircraft for the purpose of business. The CIT(A) also was of the view that interest paid to the bank on borrowings for the purpose of acquiring the aircraft cannot be disallowed as the conditions for allowing the interest expenses as a deduction are fully satisfied. In so far the remaining sum of Rs. 4,77,09,360/- which was claimed by the assessee as aircraft operating expenses, the CIT(A) was of the view that an ad hoc disallowance of Rs. 45 lakhs would be just and appropriate. The reasons given by the CIT(A) for coming to such a conclusion was as follows: The Aircraft operating expenditures have been claimed at the figure of Rs. 4,77,09,360/- against the total earning from Aircraft hiring at Rs. 11,03,35,125/-. It is seen from the Break-up of the Hir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee. This claim of the assessee was disallowed by the AO by holding that the assessee company has not given the details of the passengers who flew in the Aircraft, details of loadings and the purpose for which the Aircraft was used. This disallowance was reduced by the learned CIT(A) to Rs. 45.60 lakhs. In para No. 4.6 of his order, this finding is given by the learned CIT(A) that as per various judgments noted by him in para No. 4.5, two conditions are to be satisfied for an assessee to be eligible for claim of depreciation under section 32. These conditions noted by him in para 4.6 of his order are (1) the building, machinery, plant and furniture may be owned by the assessee (2) it should be used for the purpose of its business or profession. A categorical finding has been given by the CIT(A) in his order that the assessee satisfies both the conditions and on this basis, it was held by him that the assessee is eligible for depreciation on the Aircraft. He has further noted that the Aircraft was acquired to run it on hire and air craft charges are in fact received and, on this basis, he decided that depreciation on Aircraft of Rs. 2100,08,528/- is allowed. We find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pointed out that assessee had entered into an agreement with VHPL on 01.04.2009 for rendering managerial services at Rs. 5 lacs per month. Another company by name Asia Net TV Holdings Pvt. Ltd., (ATHPL) entered into an agreement dated 01.04.2009 with VHPL whereby ATHPL agreed to pay VHPL management fee of Rs. 11 lakhs per month. The assessee also explained that VHPL was responsible for providing quantified personnel for assisting the assessee its business related to investments, preparing business plans, strategies and providing management resources, assisting in liasoning with banks, financial institutions, statutory and government agencies and providing incidental services. The assessee thus claimed that the payment made to VHPL has to be allowed as a deduction. 17. The AO however held that the assessee firstly failed to provide evidence to substantiate the nature and scope of services rendered by VHPL. The AO also found that as per the agreement dated 01.04.2009 between VHPL and ATHPL, VPHL was to provide services only to ATHPL and even after merger, the agreement continued meaning thereby that VHPL has to provide services only to ATHPL and its associated business. The AO th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the view that the approach adopted by the CIT(A) in allowing a sum of Rs. 60 lakhs as deduction on the ground that the services rendered by VHPL were one and the same even after the merger of the assessee with ATHPL is justified and calls for no interference. Accordingly, ground No. 5 raised by the Revenue is also dismissed. 21. As far as ground No. 6 raised by the Revenue is concerned, the facts are that the assessee company had given share application money to assessee's sister concerns/companies totally a sum of Rs. 82.27 Crores, as follows: Sl. No. Name of the recipient company 31-03-2011 31-03-2010 1 Advanced Audio Solutions (Bangalore) Pvt. Ltd. 75,00,000 2 Asianet News Pvt. Ltd. 32,58,00,000 14,80,00,000 3 Axis Aerospace and Technologies Pvt. Ltd. 5,60,15,414 4 Azure Media Publications Pvt. Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness of the assessee. He however noticed that the very same interest expenditure of Rs. 1,23,81,938/- was subject matter of disallowance u/s. 14A of the Act and a sum of Rs. 42,13,847/- out of the said sum was disallowed u/s. 14A of the Act, read with Rule 8D(2)(ii) of the Rules. The total sum disallowed u/s. 14A of the Act, i.e., under Rule 8D(2)(ii) Rule 8D(2)(iii) of the Rules was Rs. 42,13,847 + Rs. 61,910 = Rs. 42,75,757/-. The balance amount of Rs. 81,06,181/- (Rs. 1,23,81,938 - Rs. 42,75,757) was disallowed further from being claimed as revenue expenditure for the year. This amount was added to the income returned by the assessee for the year, 23. On appeal by the assessee, the CIT(A) deleted the addition made by the AO with the following observations: 7.3. The AO, while making the disallowance of interest, u/s. 36(1)(iii) has done so primarily on the premise that, borrowed funds were utilized for payments towards share-application money. There is also a presumption that, the entire interest expenses are utilized largely for making investments. The AO has not established a clear nexus between the interest on borrowed capital and payment made towards investment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not be the source of funds but, the commercial expediency and business purpose. In the present case the AO has not made such a case. It is further seen from the perusal of the Appellate-orders of my predecessor in the Assessment Year: 2010-11 that, disallowances made u/s. 36(1)(iii) stand deleted, in similar situation. In the facts and circumstances the disallowance of Rs. 81,06,181/- made u/s. 36(1)(iii) is deleted. 24. Aggrieved by the order of the CIT(A), the Revenue has raised ground No. 6. The learned DR relied on the order of the AO. The learned Counsel for the assessee relied on the order of the CIT(A). 25. We have already seen while deciding the issue under section 14A of the Act that interest expenditure of Rs. 1,23,81,938/- cannot be disallowed as interest paid on borrowings on the security on fixed deposit receipts were not used for the purpose of making investments that would yield tax free income because of availability of surplus interest free funds with the assessee. The aforesaid finding would equally apply to the disallowance under section 36(1)(iii) of the Act also and therefore on the same reasoning, the disallowance deserves to be delet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 4,34,18,027/- to the income returned by the assessee and assessing the assessee at a total income of Rs. 3,90,17,741/-. Thereafter the AO issued a notice u/s. 148 of the Act, proposing the assess the assessee u/s. 147 of the Act, on income that has escaped assessment. The AO issued notice u/s. 148 of the Act dated 02.07.2012 after recording the following reasons:- The assessee company, M/s. Jupiter Capital Private Limited filed its return of income for the assessment year 2007-08 on 31/10/2007, declaring loss of Rs. 44,00,286. The case was selected for scrutiny and an assessment order u/s. 143(3) was passed on 30/12/2009 by making additions of Rs. 4,34,18,027 and assessing the taxable income at Rs. 3,90,17,741. It has been learnt that, during the financial year 2005-06, a company by name M/s Vectra Holdings Pvt. Ltd(now called as. M/s Vectra consultancy Services Pvt. ltd.) had purchased 26,400 shares of M/s. Jupiter Capital Pvt. Ltd. @ Rs. 10/- per share. No premium was paid by this company on these shares in that year. However, in the same year, i.e., financial year 2005-06, five other companies applied for 5,20,565 shares. The face value of the share was Rs. 10/- each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e M/s. Vectra Consultancy Services Pvt. Ltd. came into the picture and paid a sum of Rs. 35,49,94,838/- being 25 of the share premium due from the four companies and bought around 2,84,565 shares from the four companies. As per. the share transfer forms, M/s Vectra Consultancy Services Pvt. Ltd, bought the above shares of Jupiter Capital Pvt. Ltd. from the above companies at the following consideration: Company No. of Shares Consideration Tayana Consult Pvt. Ltd 186800 Rs, 14,01,000 Coimbatore cable Net Pvt. Ltd 91700 Rs. 6,87,750 Larite Industries Ltd 2665 Rs.19,988 Nucent Technologies Ltd 3400 Rs.25,500 M/s. Epsilon Advisors Pvt. Ltd. also transferred its holding of 2,36,000 shares of Jupiter Capital Pvt. Ltd. to M/s. Vectra Consultancy Services Pvt. Ltd. apparently at a paltry sum. Thus, M/s. Vectra Consultancy Services Pvt. Ltd. became the owner of 99.91% of the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is no mention of the fact of either of forfeiture of shares by the four companies during the year nor the exclusive transaction wherein these shares were purchased by Vectra Consultancy Services Pvt. Ltd. The whole amount earned by the company as the share capital and share premium has been shown as the Capital Reserve in the balance sheet and has been considered as a capital receipt. This amount has been earned by the company, even though there has never been any valuation of shares. It is noted that the share premium may not genuinely fall under the heading of capital receipt. This whole business transaction has not been disclosed by the assessee in its financial statements, audit report, notes to accounts or Form 3CD. Thus it is seen that the assessee company has failed to disclose fully and truly all the material facts necessary for assess than and has also understated its income. It is also noted that there has been a deliberate attempt on the part of the assessee to suppress the facts, with the intention of evading taxation on the income of Rs. 106,78,30,162. This is because the nature of the transaction has not been disclosed anywhere in its financial statements ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares was capital in nature, which was not required to be offered for tax. 32. The CIT(A) on the validity of the initiation of reassessment proceedings u/s. 147 of the Act, was of the view that the assessment for A.Y. 2007-08 was reopened u/s. 147, by issue of notice u/s. 148 of the Act dated 02.07.2012 i.e. after the expiry of four years from the end of the relevant Assessment year i.e., AY 2007-08. The CIT(A) placed reliance of Hon'ble Delhi High Court in the case of United Electrical Co. Pvt. Ltd. vs. CIT (2002) 125 Taxman 775 (Delhi) and on the decision of the ITAT Ahmedabad Bench in the case of C.D. Singh v. ITO (2010) 129 TTJ (Ahd 'D-Trib) 495. The CIT(A) firstly noticed that the reasons recorded by the AO before initiating proceedings u/s. 147 of the Act, were on facts which were already on record when the original proceedings u/s. 143 were completed by the AO. He found that existence of tangible material, for the formation of opinion for escapement of income, after the conclusion of Assessment proceedings, is a prerequisite for initiation of action under section 147 of the Act. Since the reopening of assessment was based on facts already on record of the AO, he h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision in the case of Kalyanji Mavji Co 102 ITR 287 (SC), where it was held that oversight, inadvertence or mistake in passing assessment order will give the A.O jurisdiction to reopen the assessment, is not good law in view of the subsequent decision in Indian and Eastern Newspaper Society Vs. CIT 119 ITR 996 (SC) wherein it was held that an error discovered on a reconsideration of the same material (and no more) does not give him that power. The aforesaid view on the above proposition has been reiterated by the Apex Court in A.L.A. Firm vs. CIT 183 ITR 285. Thus, reopening has held to be invalid on this ground also. The Full Bench of the Hon'ble Karnataka High Court in the case of Dell India Pvt. Ltd. Vs. JCIT 382 ITR 310 (Karn) reiterated the law laid down by the Hon'ble Supreme Court in the case of Kelvinator India Ltd., (supra). The law is thus very clear that an assessment completed under section 143(3) of the Act can be reopened only on the basis of existence of tangible material coming into income possession of the AO after conclusion of such assessment proceedings. On the basis of the very same material available at the time of conclusion of the proceedings u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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