GVK Power & Infrastructure Ltd. Vs ACIT (ITAT Visakhapatnam)
Conclusion: Where there was no dividend income earned during the relevant assessment year, there was no case for disallowing the expenditure relatable to dividend income.
Held:
Assessee after filing the original return of income, found that there was no case for making disallowance under section 14A in the absence of dividend income, hence, withdrawn the disallowance made by assessee and filed revised return of income within the due date. AO however rejected the revised return of income. It was held AO did not make out a case that assessee had received the dividend income or exempt income in the year under consideration. Tribunal in the case of ACN Infotech(India)Pvt Ltd vs ACIT circle1(1), Visakhapatnam, ITA No.79/Viz/2017 dated 28.11.2018 had held that there was no case for disallowance of expenditure relatable to exempt income in the absence of exempt income. In the instant case, there was no dispute that there was no dividend income earned during the impugned assessment year. Therefore, there was no case for disallowing the expenditure relatable to dividend income. Accordingly, the expenditure relatable to dividend income withdrawn by assessee required to be upheld.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal is filed by the assessee against the order Assessing Officer(AO) passed u/s 143(3) r.w.s 92CA(3) & 144C(13) of the Income Tax Act, 1961 (in short ‘Act’) dated 25.09.2018 for the Assessment Year (A.Y.) 2014-15 and the Dispute Resolution Panel (DRP)-1, Bengaluru vide F.No.94/DRP-1/BNG/2018-19.
2. Ground No.1 and 2 are related to the disallowance of expenditure u/s 14A, 36(1)(iii) and 37(1) of the Act.
3. The assessee filed the return of income declaring total income of Rs.51,71,23,460/- on 28.11.2014. Subsequently, the assessee had filed the revised return of income on 18.02.2016 declaring loss of Rs.6,01,05,172/-. In the original return of income filed on 28.11.2014, the assessee had disallowed the expenditure relatable to the income under section 14A to the extent of Rs.57,75,34,535/-. In the revised return of income, the assessee restricted the disallowance u/s 14A to Rs.2,80,900/- as against the original disallowance of Rs.57.75crores. The revised return was filed during the course of assessment proceedings before the end of the relevant assessment year.
4. The AO in the draft assessment order rejected the revised return of income stating that as per sub section 5 of section 139 of the Act, the assessee is permitted to file the revised return of income due to discovery of any omission or discovery of any wrong statement. Since the revised return of income is not a consequence of either discovery of any omission or discovery of any wrong statement, the AO held that the revised return of income filed by the assessee is invalid and accordingly rejected the same.
5. The AO further held that the expenses of Rs.57,72,53,635/- relating to interest and processing charges claimed by the assessee which was debited to the Profit & Loss account are neither allowable u/s 36(i)(iii) nor u/s 14A of Act, since the expenses were not wholly and exclusively laid out for the purpose of business. The AO observed that the assessee had borrowed the funds and invested in six wholly owned subsidiaries which act as Special Purpose Vehicles (SPV). As per the assessee’s claim the projects are carried on in their respective verticals, operate and execute through the project-specific subsidiaries. The assessee had borrowed the funds from banks at the interest rates varying from 11.5% to 14% and given the interest free loans to the subsidiary companies in the commercial interest as corporate strategy since, the SPVs are extended arm of the assessee company. Though the assessee relied on the decision of S.A. Builders Ltd. Vs. CIT (2016) 74 taxmann.com 114(SC) and argued that the funds were extended to the subsidiaries due to commercial and business exigencies, the AO viewed that there is no urgency or commercial expediency in extending interest free loans to the subsidiary companies.
Also, Check this section 10 34 of income tax act.
5. The AO further observed from the financial statements of the subsidiaries that none of the subsidiary companies are earning the income and all the subsidiary companies are reporting losses or the nil income, hence it is an effort to reduce the taxes in the hands of the assessee. The AO downloaded the Balance Sheet and Profit & Loss account of the subsidiaries for the financial year 2013-14 and made the following observations.
a. Except GVK Airports Developers Pvt. Ltd, no subsidiary is earning any income from routine course of business/operating income. Four of them have reported NIL income from all sources and one has earned interest income but none of the five have earned any revenue from operations.
b. Three of the six subsidiaries are receiving funds from the assessee and diverting it further to their subsidiaries.
c. None of the six subsidiaries has reported profits. All have either reported it as NIL or there are, losses incurred. With all awareness that the profits of the company are not the sole criteria of their performance, it is pertinent to mention here that commercial prudence behind investments is that the subsidiaries prosper and provide good results.
d. Four out of six subsidiaries are reporting negative reserves and surplus figure& It reflects that losses are being accumulated over a period of time.
5.1. The AO relied on the decision of Hon’ble Delhi High Court in CIT Vs. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 and held that there is no prudence in disposal of interest bearing funds to the subsidiary companies which are reporting losses and accumulating it and bearing financial costs for those borrowed funds and getting nothing in return. The AO further observed that the assessee is diverting the funds to the subsidiary companies and the subsidiary companies are further diverting to its subsidiary companies at free cost of interest. The Ld.AO also was of the view that interest on borrowed funds to its 100% subsidiary companies is allowable to the extent of first level, but not second level onwards since the purpose and object of the first level stands deviated from the original object after further diversion to second level. Accordingly held that the interest paid on loans on borrowed funds is not allowable when the immediate subsidiary is not earning revenue or applying it for it’s regular course of business, but merely acting as a conduit for furthering the funds to step down subsidiaries. Accordingly, disallowed the interest u/s 36(1)(iii) of the Act.
5.2. The AO disallowed the interest expenditure and processing charges u/s 37(1) of the Act also. It is observed by the AO that the assessee made investments in mutual funds to the extent of Rs.5.77 crores and the investment in mutual funds are done in mutual funds growth plan which is not capable of generating any exempt income. Mutual fund growth plan’s primary investment objective is long term growth of capital. The investor allows the fund investor to invest the money; it would otherwise receive in the form of dividend. Hence, the investor does not actually receive any dividend but the benefits accrue and reinvested over a period of time, thereby increasing the Net Asset Value of the investment. The AO observed that in the case of mutual fund growth plan, the expenditure takes the character of capital expenditure since the Net Asset Value is increased / decreased year after year. Hence, held that the expenditure is not wholly and exclusively incurred for the purpose of business, thus required to be disallowed.
5.3. During the assessment proceedings, the assessee submitted an explanation stating that the assessee has not received any exempt income, thus, there is no case for disallowance of any interest / expenditure relatable to exempt income and accordingly requested not to disallow the expenditure. The AO placed reliance on CBDT Circular No.5/2014 dated 11.02.2014 and rejected the contention of the assessee and the AO proposed to disallow the entire interest and processing charges to the extent of Rs.57,72,53,635/- in the draft assessment order dated 29.12.2017.
6. Against the proposal of the AO in the Draft Assessment Order, the assessee filed objections before the DRP and argued that revised return filed u/s 139(5) is valid and there is no case of disallowance of expenditure u/s 14A since there is no dividend income earned by the assessee.
6.1. Secondly, with regard to the disallowance u/s 36(1)(iii), the assessee submitted that it has made the investments in subsidiary companies for business purposes and the subsidiary companies have utilized the same for the purpose intended to and no personal benefit was derived by the promoters / directors of the company. The assessee further submitted that there was no diversion of funds for the non-business purposes, hence argued before the DRP that the assesse’s case is squarely covered by the decision of Hon’ble Supreme Court in the case of SA Builders Ltd. Vs.CIT (supra) and the investments have been made for commercial expediency, hence, there is no case for disallowance u/s 36(1)(iii) also.
6.2. Thirdly, the assessee also argued before the DRP that the assessee had made the investments in mutual funds for the purpose of business. One of the objectives of the company is to carry on the business of Investment Company, and the investment is in accordance with the objectives. Therefore, argued that the expenditure required to be allowed as business expenditure. The assessee further argued that the assessee had internal accruals which are interest free and share holder funds to the extent of Rs.2478 crores in the business. The investments were only Rs.1.89 crores, hence, argued that there is no case for disallowance u/s 37(1) of the Act.
6.3. The next contention of the assessee before the Ld.DRP is that the assessee has satisfied all the conditions u/s 139(5), hence the revised return is valid.
7. Not being convinced with the explanation of the assessee, the Ld.DRP held that the assessee had given interest bearing funds to its subsidiaries and the said subsidiaries in turn made interest free advances to the step down subsidiaries and SPVs. The DRP relied on the decision of coordinate bench of ITAT, Hyderabad in the case of GVK Airport Developers Ltd. in I.T.A. No.488/Hyd/2017 and upheld the disallowance u/s 36(1)(iii) holding that there is no business activity and the investment itself cannot be considered for the purpose of business as there is no business activity at all. Applying the principle laid down by the Hon’ble ITAT, Hyderabad in the case of GVK Airport Developers Ltd. (supra), the DRP has rejected the contention of the assessee not to disallow the interest.
7.1. Secondly, on disallowance u/s 14A, the DRP relied on the CBDT Circular 5/2014 dated 11.02.2014 and the Hon’ble Supreme Court’s decision in the case of Max opp Investments Ltd. Vs. Commissioner of Income-Tax (Civil Appeal Nos.104-109 of 2016) and rejected the contention of the assessee on it’s request not to make the disallowance u/s 14A of the Act.
7.2. Further with regard to investment in mutual funds also, the DRP upheld the proposed disallowance since the assessee failed to produce any evidence to show that the investment was made out of the reserve funds.
7.3. The Ld.DRP also observed that the assessee has not satisfied the twin conditions for filing the revised return, hence held that the AO is justified in not accepting the revised return. Accordingly, rejected the ground of the assessee and directed the AO to pass orders accordingly.
8. The AO passed the assessment order u/s 143(3) r.w.s. 144C(13) on 25.09.2018 ignoring the revised return of income and rejecting the deductions claimed by the assessee amounting to Rs.57,72,53,635/-in the revised return.
9. Against the order of the AO passed u/s 143(3) r.w.s. 144C(13), the assessee filed appeal before this Tribunal. During the appeal hearing, advancing the arguments on the validity of the revised return of income the Ld.AR submitted that the assessee filed the original return of income on 28.11.2014 declaring total income of Rs.51,71,23,460/- for the A.Y. 2014-15. The Ld.AR submitted that return of income filed originally was within the time allowed u/s 139(1) of the Act. Subsequently, the assessee detected the mistake of erroneous disallowance of expenditure relatable to earning of exempt income and filed the revised return on 18.02.2016 within one year from the end of the relevant assessment year. Therefore, submitted that the revised return of income is filed within the time limit allowed u/s 139(5) of the Act due to discovery of error committed by the assessee itself, hence, argued that the revised return of income is valid return and cannot be ignored. The assessee further submitted that the similar claim made by the assessee in respect of disallowance of expenditure relatable to dividend income through revised computation of income in the immediately preceding assessment year for the F.Y. 2012-13 was rejected by the AO and DRP for the previous financial year 2012-13 relating to the A.Y. 2013-14. The said matter was travelled to the ITAT and the ITAT has directed the authorities to entertain the claim and given a ruling in favour of the assessee. The assessee argued that the disallowance of expenditure relating to the income u/s 14A was a sheer mistake of the assessee which was offered to income and it should not go against the assessee having filed the revised return within the time allowed u/s 139(5) of the Act and argued that the assessee satisfies the conditions for filing the revised return. Therefore, requested to treat the revised return as valid return.
10. The next contention of the assessee is with regard to the disallowance u/s 14A of the Act. The Ld.AR argued that though the assessee had offered the expenditure relatable to the dividend income for taxation in the original return, the assessee had detected the mistake subsequently and filed the revised return withdrawing disallowance of interest and processing charges relating to the investments made in shares. Since the assessee did not receive the dividend income during the impugned assessment year, there is no case for making the disallowance u/s 14A. The Ld.AR requested to set aside the orders of the lower authorities and allow the claim of the assessee. The assessee relied on the decision of this Tribunal in the assessee’s own case for the A.Y. 2013-14 and argued that in case of no dividend income, there is no case for disallowance u/s 14A and accordingly requested to delete the addition made by the AO relating to earning of income u/s 14A.
11. With regard to the disallowance u/s 36(1)(iii), the Ld.AR argued that the assessee is a company engaged in multi business projects and the objects of the company are as under :
1. To carry on the business of operating and maintaining electric and all other kinds of power generation projects.
2. To carry on the business of providing operating and maintaining facilities relating to electric and all other kinds of power generation projects including among other things responsibility for day to day operations, routine maintenance and management of the facilities.
3. To carry on the business of “an investment company and to buy, underwrite, invest in and acquire, hold and dispose-off the shares, stock, debentures, debenture-stock, bonds; obligations and other securities by whatever name called, issued or guaranteed by any company; firm, person, financial institution, banks, central or state government or its agencies, local authorities, within or outside India of any industry including but not limited to those engaged in the business of power, roads, highways, expressways. tramways, waterways, docs, harbors, canals, reservoirs, shipping, irrigation, railways, ports, airports, aviation, telecom, SEZ EPZ refineries, urban / rural infrastructure and other infrastructure development projects, estates, logistics, mass rapid transport systems, hotel, warehouses, malls; multiplex theatres, entertainment centers, information technology (IT) and IT enabled cervices, biotechnology, electric and electronic, steel, cement, pharma, auto and manufacturing industry etc.,and also to carry, on the business as a promoter, sponsor, developer, advisor, operator or otherwise, alone or in consortium with others, within or outside the group companies and to do all such acts as are required to participate, float or acquire through bidding or negotiated process for promoting, developing, implementing and operations all kinds of projects whether in infrastructure or not and to carry on the business of inter-corporate investments, loans, guarantees etc., and also to undertake, develop, execute and implement various projects for itself or for others, whether directly or indirectly or through turnkey basis and also to act as contracts, sub-contracts and to provide engineering, technical, operational and maintenance and managerial services to various projects and to lease, sub-lease, hire purchase or charter or otherwise deal with various plant and machinery, equipments apparatus including movable and immovable properties.
The assessee company is also carrying on the business of an investment company, advisory, consultancy and other related services relating to infrastructure projects including implementation thereof. Carrying out infrastructure projects either directly or through SPV’s or JVs which can be floated directly or acquired through bidding process and providing loans and guarantees. The assessee company has various verticals such as, power, energy, road projects etc. For each of the business operation or segments the assessee has formed the operating cum investment holding companies for better administration and operational efficiency and given various other considerations i.e. business and commercial risks, bidding process, consolidation of value of each vertical, transparency from regulators perspective. The assessee has formed the operating cum investment holding company for each vertical such as GVK Energy Ltd., GVK Airport Developers Ltd., GVK Transportation Private Ltd. and others and carried out the execution of projects through its immediate subsidiary company or step down subsidiaries. The said subsidiary company / step down subsidiary companies are the operating or operating cum investment holding companies, hence, the entire structure is based on commercial expediency considering the various commercial considerations involved in execution of such large infrastructure projects and associated risks thereof. The Ld.AR further submitted that availing of funds from various strategic investors or to meet the requirement of regulators are carried out through separate entities. During the year under consideration, the assessee had granted unsecured interest free advances to its subsidiary companies or group companies or made investment in such companies partly out of own funds and partly out of borrowed funds. The assessee has borrowed a sum of Rs.530.36 crores from Axis Bank, Syndicate Bank and Yes Bank Ltd., and given interest free loans to its subsidiary companies or step down subsidiary companies. Both the subsidiary companies and step down subsidiary companies have utilized the funds for the purpose of business and nothing was diverted for other than business purposes. The Ld.AR further argued that while disallowing the interest u/s 36(1)(iii), the Ld.AO mainly relied on the financials of the subsidiary companies and observed the subsidiary companies or step down subsidiary companies did not earn profits or had accumulated the losses, thereby the assessee company did not get any benefit out of diversion of funds to subsidiaries. The said observation of the AO is incorrect, since the assessee company has invested or given interest free loans to subsidiary companies for the long term business plans and not for immediate returns. All the subsidiary companies are executing long term projects. Though there was no immediate benefit, the assessee company had invested the funds or advanced the loans to the subsidiary companies expecting due returns in long term. The investments were made for strategic operational convenience. The issue to be considered is the verticals of the assessee company are carrying out the major operations of various segments, thus, the structure itself is on commercial expediency. Hence, the advancement of funds also to be considered as commercial expediency. The Ld.AR further submitted that the immediate subsidiaries have utilized 50% of the interest free loans at the first level itself and the second level also, the step down subsidiaries have utilized the funds for the purpose of business and no amount was diverted for any personal benefit. The assessee further argued that the group structure is out of commercial necessity and due to business prudence. The observation of the AO that the subsidiary company did not yield any income or accumulated the losses without getting anything in return is very narrow thinking and not based on commercial lines. The Ld.AR submitted that the assessee made the investment in road projects which does not generate any immediate cash flow and it will have long gestation period. In the initial stage of projects, the company may operate in loss and the same is the case with the energy and power sector as well as airport business. In some projects, subsidiaries which have undertaken the projects did not yield any income due to termination of the project. In the case of GVK Oil and Gas Ltd., the project could not be completed due to termination notice given by Govt. of India. Similarly, in the case of GVK Developers Ltd. and GVK Energy Ltd and GVK Transportation Ltd., they are operating holding companies and in the earlier years, they were earning revenue from the operations by charging project maintenance fee. In the case of GVK SEZ Project, though the company has taken SEZ project, after feasibility study, the company did not undertake development projects. Accordingly, the Ld.AR submitted the project-wise details of subsidiary companies for no return and the earning of income. Accordingly argued that the interest free loans given to the subsidiary companies and step down subsidiary companies with a commercial prudence and commercial expediency and requested to allow the expenditure and not to resort for the disallowance. The Ld.AR further argued that the Ld.DRP has heavily placed reliance on the decision of Hon’ble ITAT in the case of GVK Airport Developers Ltd. for upholding the disallowance and argued that the case law relied upon by the DRP is distinguishable on facts and has no application in the case of the assessee company. The Ld.AR argued that GVK Airports Developers was holding investments in subsidiaries and was not carrying on any of its business of its own. Whereas, in the case of the assessee company, it is carrying on the business of its own and also through subsidiary companies and step down subsidiary companies. The Ld. AR further submitted that the assessee has filed miscellaneous petition before the ITAT, Hyderabad against the order of the GVK Airports Ltd., and also filed appeal before the Hon’ble High Court of Hyderabad challenging the order of the ITAT. GVK Airports developers Ltd., and GVK Energy Ltd, are the holding entities for airport business vertical and energy business vertical of the GVK Group to which the money was advanced by the assessee company were having operating revenues for the year under consideration. Similarly, other subsidiary companies also have operating revenues in the earlier years unlike GVK Airports Developers Ltd. Other subsidiary companies, Goriganga Hydro Power Pvt. Ltd. GVK Oil & Gas Ltd. GVK Perambalur SEZ Private Ltd., to which the money was advanced were utilized for its own business and they did not have any step down subsidiary. Nearly, 50% of the funds were utilized by the immediate subsidiary companies in tier one and tier two level, therefore, argued that the case law of Hon’ble ITAT Hyderabad has no application in the case of the assessee and the case law is distinguishable on both facts and merits. The Ld.AR relied on the decision of SA Builders Vs. CIT(A) and Anr(2006) 74 CCH 1023, decisions of Hon’ble High Court of Delhi in the case of Basti Sugar Mills Company Ltd. in I.T.A No.205/2018 , CIT vs. Modi Entertainment Ltd. (2014) 89 CCH 0014 and CIT Vs. Tulip Star Hotels Ltd. [338 ITR 0482], decision of Hon’ble ITAT, Mumbai in the case of Piramal Realty (P) Ltd and decision of this Tribunal in the case of KotuSarat Kumar in I.T.A No.493/Viz/2017 dated 20.02.2019.
12. We have heard both the parties and perused the material placed on record. In this case, the assessee has offered the income of Rs.57.72 crores in the original return of income by disallowing the expenditure stating to be relatable to earning of dividend income u/s 14A of the Act which is exempt. Subsequently, the assessee has withdrawn the disallowance made and filed the revised return of income. The original return of income was filed within the due date u/s 139(1) of the Act and the revised return was also filed within the due date specified u/s 139(5) of the Act. After filing the original return of income, the assessee found that there is no case for making disallowance u/s 14A of the Act in the absence of dividend income, hence, withdrawn the disallowance made by the assessee. On the similar issue in the immediately preceding assessment year, the assessee had withdrawn the disallowance of expenditure relating to exempt income by filing the statement of computation of income before the AO which was rejected by the AO as well as the DRP and on appeal Hon’ble ITAT has remitted the matter back to the file of the CIT(A) to consider the disallowance of expenditure on merits. In the impugned assessment year, the assessee has filed the revised return withdrawing the disallowance of expenditure keeping in view of the legal precedents that in the absence of dividend income, there is no case for disallowance of expenditure relatable to the exempt income. Hence it is an erroneous disallowance of expenditure relatable exempt income and the assessee is free to file the revised return due to mistake committed by it. Since the revised return is filed within the time allowed u/s 139(5) of the Act the same cannot be rejected and accordingly, we, hold that the revised return is valid.
13. In the assessment year under consideration, it is a fact that there is no dividend income or exempt income relatable to section 14A of the Act. The department did not make out a case that the assessee has received the dividend income or exempt income in the year under consideration. This Tribunal in the case of ACN Infotech(India)Pvt Ltd vs ACIT circle1(1), Visakhapatnam, ITA No.79/Viz/2017 dated 28.11.2018 has held that there is no case for disallowance of expenditure relatable to exempt income in the absence of exempt income. While delivering the above ruling, this Tribunal has followed the decision of Hon’ble Madras High Court in the case of Redington(India) Ltd. Vs. ACIT reported in (2017) 77 taxman.com 257 (Mds.). In the instant case, there is no dispute that there is no dividend income earned during the impugned assessment year. Therefore, there is no case for disallowing the expenditure relatable to dividend income. This view is also supported by the decision of this Tribunal in the assessee’s own case for the A.Y. 2013-14 in I.T.A. No.530/Viz/2017 dated 18.05.2018 also. Therefore, respectfully following the view taken by this Tribunal in the case cited we hold that there is no case for disallowing the expenditure relatable to exempt income without having derived exempt income. Accordingly, the expenditure relatable to dividend income withdrawn by the assessee required to be upheld. Hence, we set aside the orders of the lower authorities and allow the appeal of the assessee on this issue.
14. The next issue is relatable to the disallowance of expenditure in respect of the investments in mutual funds. The AO observed that investment in mutual funds have increased from Rs.3.88 crores to Rs.5.77 crores with a net increase of 1.89 crores. The AO disallowed the expenditure u/s 37(1) of the act, treating the expenditure as capital expenditure. Though the assessee has argued that it is having internal accruals, both the AO as well as the DRP have upheld the disallowance u/s 37(1) of the Act.
15. We have heard both the parties and perused the material placed on record. The Ld.DRP and the AO upheld the disallowance for want of evidence from the assessee with regard to availability of interest free funds. Perusal of the Balance Sheet shows that the assessee has shareholder’s funds of Rs.2478.45 crores and the investment made in mutual funds is a paltry sum of Rs.1.89 crores. Therefore, we hold that the assessee is having sufficient interest free funds to the make the investment in mutual funds, hence, we do not see any reason to sustain the disallowance u/s 37(1) of the act. Accordingly, we set aside the orders of the lower authorities on this issue and delete the addition made by the AO. The assessee succeeds on this ground also.
16. The next issue is the disallowance of interest expenses u/s 36(1)(iii) of the Act. The reason for disallowance of interest expenses u/s 36(1)(iii) is diversion of interest bearing business funds for non-business purposes / subsidiaries. As stated earlier, the assessee has taken the loans from the banks and given interest free advances or made investments in the subsidiaries / step down subsidiaries/ group companies. Such advances or investments are given partly out of the own funds and partly out of the borrowed funds. From the Balance Sheet, it is found that the assessee is having own funds of Rs.2478.45 crores under the head ‘Share Capital, Reserves and Surpluses’ as on 31.03.2014 and the assessee had borrowed funds of Rs.530.36 crores from various banks as under :
