Income Tax Act, 1961, Section 14A

Disallowance under section 14A--Expenditure against exempt income--No exempt dividend income earned by assessee

Conclusion: There is no case for disallowance of expenditure relatable to exempt income in the absence of exempt income.

The Assessee had 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 under section 14A which was 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 Subsequently, the assessee has withdrawn the disallowance made and filed the revised return of income.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 under section 139(1) and the revised return was also filed within the due date specified under section 139(5). After filing the original return of income, the assessee found that there is no case for making disallowance under section 14A in the absence of dividend income, hence, withdrawn the disallowance made by the assessee. Held: In the assessment year under consideration, it is a fact that there was no dividend income or exempt income relatable to section 14A. The department did not make out a case that the assessee has received the dividend income or exempt income in the year under consideration. 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. Respectfully following assessee’s view taken by this Tribunal in the case 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 Accordingly, the expenditure relatable to dividend income withdrawn by the assessee required to be upheld.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, the orders of the lower authorities were set aside and allow the appeal of the assessee on this issue was allowed.

Decision: In assessee’s favour.

Followed:  ACN Infotech (India) (P) Ltd. v. Asstt. CIT [ITA No. 79/Viz/2017, dt. 28-11-2018], Redington (India) Ltd. v. Asstt. CIT (2017) 77 Taxmann.com 257 (Mds) and [ITA No. 530/Viz/2017, dt. 18-5-2018]

 

IN THE ITAT, VISAKHAPATNAM BENCH

V. DURGA RAO, J.M. & D.S. SUNDER SINGH, A.M.

GVK Power & Infrastructure Ltd. v. ACIT

I.T.A. No. 553/VIZ/2018

3 April, 2019

Appellant by: G.V.N. Hari, Authorised Representative

Respondent by: D.K. Sonowal, Commissioner Departmental Representative

ORDER

D.S. Sunder Singh, A.M.

This appeal is filed by the assessee against the order assessing officer (AO) passed under section 143(3) read with section 92CA(3) & 144C(13) of the Income Tax Act, 1961 (in short 'Act') dated 25-9-2018 for the assessment year (A.Y.) 2014-15 and the Dispute Resolution Panel (DRP)-1, Bengaluru vide F.No. 94/Dispute Resolution Panel-1/BNG/2018-19.

2. Ground No. 1 and 2 are related to the disallowance of expenditure under section 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 18-2-2016 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 under section 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 assessing officer 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 assessing officer held that the revised return of income filed by the assessee is invalid and accordingly rejected the same.

5. The assessing officer 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 under section 36(i)(iii) nor under section 14A of Act, since the expenses were not wholly and exclusively laid out for the purpose of business. The assessing officer 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. v. CIT (2016) 74 taxmann.com 114(SC) and argued that the funds were extended to the subsidiaries due to commercial and business exigencies, the assessing officer viewed that there is no urgency or commercial expediency in extending interest free loans to the subsidiary companies. The assessing officer 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 assessing officer 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 (P) 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 assessing officer relied on the decision of Hon'ble Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 (Del) : 2002 TaxPub(DT) 625 (Del-HC) 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 assessing officer 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 learned assessing officer 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 under section 36(1)(iii) of the Act.

5.2. The assessing officer disallowed the interest expenditure and processing charges under section 37(1) of the Act also. It is observed by the assessing officer 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 assessing officer 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 assessing officer placed reliance on CBDT Circular No. 5/2014, dt. 11-2-2014 and rejected the contention of the assessee and the assessing officer proposed to disallow the entire interest and processing charges to the extent of Rs. 57,72,53,635 in the draft assessment Order, dt. 29-12-2017.

6. Against the proposal of the assessing officer in the Draft Assessment Order, the assessee filed objections before the Dispute Resolution Panel and argued that revised return filed under section 139(5) is valid and there is no case of disallowance of expenditure under section 14A since there is no dividend income earned by the assessee.

6.1. Secondly, with regard to the disallowance under section 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 Dispute Resolution Panel that the assesse's case is squarely covered by the decision of Hon'ble Supreme Court in the case of SA Builders Ltd. v. CIT (supra) and the investments have been made for commercial expediency, hence, there is no case for disallowance under section 36(1)(iii) also.

6.2. Thirdly, the assessee also argued before the Dispute Resolution Panel 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 under section 37(1) of the Act.

6.3. The next contention of the assessee before the learned Dispute Resolution Panel is that the assessee has satisfied all the conditions under section 139(5), hence the revised return is valid.

7. Not being convinced with the explanation of the assessee, the learned Dispute Resolution Panel 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 Dispute Resolution Panel 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 under section 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 Dispute Resolution Panel has rejected the contention of the assessee not to disallow the interest.

7.1. Secondly, on disallowance under section 14A, the Dispute Resolution Panel relied on the CBDT Circular 5/2014, dt. 11-2-2014 and the Hon'ble Supreme Court's decision in the case of Max opp Investments Ltd. v. CIT (Civil Appeal Nos. 104-109 of 2016) and rejected the contention of the assessee on it's request not to make the disallowance under section 14A of the Act.

7.2. Further with regard to investment in mutual funds also, the Dispute Resolution Panel 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 learned Dispute Resolution Panel also observed that the assessee has not satisfied the twin conditions for filing the revised return, hence held that the assessing officer is justified in not accepting the revised return. Accordingly, rejected the ground of the assessee and directed the assessing officer to pass orders accordingly.

8. The assessing officer passed the assessment order under section 143(3) read with section 144C(13) on 25-9-2018 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 assessing officer passed under section 143(3) read with section 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 learned Authorised Representative 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 assessment year 2014-15. The learned Authorised Representative submitted that return of income filed originally was within the time allowed under section 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 18-2-2016 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 under section 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 financial year 2012-13 was rejected by the assessing officer and Dispute Resolution Panel for the previous financial year 2012-13 relating to the assessment year 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 under section 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 under section 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 under section 14A of the Act. The learned Authorised Representative 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 under section 14A. The learned Authorised Representative 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 assessment year 2013-14 and argued that in case of no dividend income, there is no case for disallowance under section 14A and accordingly requested to delete the addition made by the assessing officer relating to earning of income under section 14A.

11. With regard to the disallowance under section 36(1)(iii), the learned Authorised Representative 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, subcontracts 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 (P) 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 learned Authorised Representative 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 learned Authorised Representative further argued that while disallowing the interest under section 36(1)(iii), the learned assessing officer 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 assessing officer 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 learned Authorised Representative 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 assessing officer 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 learned Authorised Representative 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 learned Authorised Representative 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 learned Authorised Representative further argued that the learned Dispute Resolution Panel 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 Dispute Resolution Panel is distinguishable on facts and has no application in the case of the assessee-company. The learned Authorised Representative 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 learned Authorised Representative 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 (P) Ltd. GVK Oil & Gas Ltd. GVK Perambalur SEZ (P) 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 learned Authorised Representative relied on the decision of SA Builders v. CIT (A) & 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 v. Modi Entertainment Ltd. (2014) 89 CCH 0014 and CIT v. Tulip Star Hotels Ltd. (2011) 338 ITR 482 (Del) : 2012 TaxPub(DT) 419 (Del-HC), decision of Hon'ble ITAT, Mumbai in the case of Piramal Realty (P) Ltd. and decision of this Tribunal in the case of Kotu Sarat Kumar in I.T.A No. 493/Viz/2017, dt. 20-2-2019.

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 under section 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 under section 139(1) of the Act and the revised return was also filed within the due date specified under section 139(5) of the Act. After filing the original return of income, the assessee found that there is no case for making disallowance under section 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 assessing officer which was rejected by the assessing officer as well as the Dispute Resolution Panel and on appeal Hon'ble ITAT has remitted the matter back to the file of the Commissioner (Appeals) 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 under section 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) (P) Ltd. v. ACIT circle1(1), Visakhapatnam, ITA No. 79/Viz/2017, dt. 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. v. 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 assessment year 2013-14 in I.T.A. No. 530/Viz/2017, dt. 18-5-2018 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 assessing officer 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 assessing officer disallowed the expenditure under section 37(1) of the act, treating the expenditure as capital expenditure. Though the assessee has argued that it is having internal accruals, both the assessing officer as well as the Dispute Resolution Panel have upheld the disallowance under section 37(1) of the Act.

15. We have heard both the parties and perused the material placed on record. The learned Dispute Resolution Panel and the assessing officer 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 under section 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 assessing officer. The assessee succeeds on this ground also.

16. The next issue is the disallowance of interest expenses under section 36(1)(iii) of the Act. The reason for disallowance of interest expenses under section 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 31-3-2014 and the assessee had borrowed funds of Rs. 530.36 crores from various banks as under :--

(i)

Axis Bank Ltd.

-Rs. 200.00 crores

(ii)

Syndicate Bank Ltd.

- Rs. 149.86 crores

(iii)

Yes Bank Ltd.

-Rs. 180.50 crores

 

Total

Rs. 530.36 crores

16.1. The assessee has utilized the said borrowed funds for the purpose of making investments or interest free funds to its subsidiaries directly, partly to step down subsidiaries as per the details given here under :--

Name of company

Relationship with the Appellant

Utilization of proceeds

Amount (INR in Crs)

Proceeds from Axis Bank Limited

GVK Airport Developers Limited (GVKADL) (refer note-1)

Wholly-owned subsidiary company

The proceeds were majorly utilized to provide interest-free advances to/investment in GVKADL. Through GVKAHPL, GVKADL utilized the proceeds for the purpose of infusing last tranche of owners' contribution towards the modernization and development of Mumbai International Airport (P) Ltd. (refer note-2).

199.45

Appellant itself

N.A.

General corporate purpose

0.55

Total

200.00

Proceeds from Syndicate Bank Limited

Goriganga Hydro Power (P) Ltd. (refer note-3)

Wholly-owned subsidiary company

The proceeds were majorly utilized to provide interest-free advances which was utilized by the latter in relation to the project being developed by it.

13.74

 

GVK Oil & Gas Limited (refer note-4)

Wholly-owned subsidiary company

The proceeds were majorly utilized to provide interest-free advances which was utilized by the latter in relation to the project being developed by it.

43.62

GVK Transportation (P) Ltd. (refer note-5)

Wholly-owned subsidiary company

The proceeds were majorly utilized to provide interest-free advances to GVK Transport which was utilized by the latter to undertake the development of road projects through GVK Bagodara-Vasad Expressway (P) Ltd. and GVK Deoli Kota Expressway (P) Ltd. (refer note-6 and 7).

24.66

 

GVK Perambalur SEZ (P) Ltd. (refer note-8)

Wholly-owned subsidiary company

The proceeds were majorly utilized to provide interest-free advances which was utilized by the latter in relation to the project being developed by it.

3.11

 

Gautami Power Limited, GVK Industries Limited and GVK Coal (Tokisud) Company (P) Ltd. (refer note-9)

Step-down wholly-owned subsidiary company

Proceeds were utilized to acquire shares of Gautami Power Limited from third party (Rs. 56.62 Crs); Advance/investment in GVK Industries Limited (INR 1.10 Crs); INR 3.09 Crs were utilized by GVK Coal Tokisud for the purpose of project

60.81

 

Appellant itself

N.A.

General corporate purpose

2.38

Total

149.86

Proceeds from Yes Bank Limited

GVK Airport Developers Limited (GVKADL) (refer note-1)

Wholly-owned subsidiary company

The proceeds were majorly utilized to provide interest-free advances to/investment in GVKADL which was utilized by the latter for general corporate purposes

64.19

GVK Transportation (P) Ltd. (refer note-5)

Wholly-owned subsidiary company

The proceeds were majorly utilized to provide interest-free advances to/investment in GVK Transportation which was utilized by the latter for general corporate purposes for its road projects

86.48

Appellant itself

N.A.

General corporate purpose

29.83

Total

180.50

16.2. During the year under consideration, the assessee incurred the expenditure of Rs. 57,72,53,625 towards the interest and processing charges, corresponding to the loans availed by the assessee from various banks or financial institutions. The loans were utilized for making advances to its subsidiaries or associates and not for the purpose of investment in share capital of associates that could yield any exempt income. The assessing officer disallowed the interest under section 36(1)(iii) with the observation that the business funds are diverted to subsidiary companies and the subsidiary companies have in turn diverted to step down subsidiary companies, the objects of the assessee-company are not linked to the objects of the step down companies and the assessee is not getting any return out of the interest free funds or investments made to the subsidiaries/step down companies. The assessing officer held that there is no business prudence in diversion of funds to the subsidiary companies and further diversion of funds to the step down subsidiary companies and the expenditure is not allowable. The learned Dispute Resolution Panel upheld the disallowance made by the assessing officer mainly placing reliance on the decision of Hon'ble ITAT, Hyderabad in the case of GVK Airports Developers Ltd. supra. In the instant case, there is no dispute that the assessee had borrowed funds and utilized for the purpose of making investments or interest free advances to the subsidiary companies and step down subsidiary companies. The advances given were used for the purpose of business and not diverted for any personal purposes. As per the audit report, interest free advances were utilized for the purpose for which they were intended. As discussed earlier, the main objects as per the Memorandum of Association include carrying on the business of an investment company and carrying out advisory, consultancy and other related services relating to infrastructure projects including implementation thereof, carrying out infrastructure projects or through SPVs or JVs which can be floated directly or acquired through bidding process etc. and providing loans and guarantees. The learned Authorised Representative submitted that the assessee is an infrastructure conglomerate operating in various infrastructure segments i.e. power, energy, airport, road projects etc. as per the pictogram reproduced herewith.

Group holding structure :--

16.3. For each of the major business operations, segments for better administration and operational efficiency and other factors like business and commercial risks, bidding process, consolidation of value of each verticals, transparency from regulators perspective etc. the assessee had floated different subsidiaries. The assessee has formed an operating cum investment company for each vertical i.e. GVK Energy Ltd., GVK Airport Developers Ltd., GVK Transportation (P) Ltd., and implemented the execution of projects through its immediate subsidiary company/step down subsidiary companies. Subsidiary companies or step down subsidiaries are operating or operating cum investment holding companies. The group structure is based on commercial expediency from the business prudence perspective and part of the overall corporate strategy. The learned Authorised Representative explained the overall strategy as under :--

(i) The assessee is engaged in the infrastructure sector which is vast in itself and encompasses several sub-sectors like power, roads, airports, ports etc. Further, infra projects are very capital intensive. To attend the business of development and operation of the infrastructure project(s) in such diversified sector, the Appellant formed such optimal group structure to meet the following objectives and business considerations :--

(a) The Group is able to focus on each sector independently and separately.

(b) To meet the business need of such sectors as the concession agreement, business model, skill set and administrative need of each sector are different from each other.

(c) To provide flexibility to raise funds at each level without compromising on the controlling stake of the Group.

(ii) The assessee would also like to submit that the strategic investors look for investment in the specific sector/group of entities having interest in specific sector instead of investment in ultimate parent company having diversified set of business operations. For example, one of the Investors wanted to invest in Energy vertical only. This could not have been possible without the structure being in place.

(iii) Many a times, the lenders stipulated pre-closing precedent that the assessee should consolidate the sub-sector asset under an operating cum investment holding company set-up for that particular sector.

(iv) Further, it may also be noted that it is the requirement of regulators in terms of bidding process/documents/concession agreement, power purchase agreements, etc. that each project to be developed and executed through a separate SPV.

(v) In the case of project financing, separate SPV's for each project helps to create separate charge on the project asset by the project lender which helps to protect interest of lenders as well as commercial feasible terms for project loan. However, in the case of multiple projects in same entity, the interest of each of project lenders gets jeopardized leading to several restriction/conditions/unfavorable terms for project loan and hence it is not commercially prudent to execute multiple projects in the same entity.

(vi) To meet the above business requirements, segment-wise operating cum investment holding company for Power, Airport and Transport vertical has been set-up by the assessee. Further, the assessee would like to submit that any major infrastructure player operating in different kind of projects would have a similar structure/operating model as that of it.

16.4. From the above, it is observed that the subsidiaries/step down subsidiaries are nothing but the extended arm of the assessee through which separate projects are being carried out. This is in accordance with the main objects as per the Memorandum and Articles of Association. The said set up or structure is to hold and carry out different projects through different SPVs for commercial necessity as mentioned above. Most of the companies are operating entities and engaged in the development of infrastructure projects. From the above, it is amply clear that the assessee had borrowed the funds and given to its subsidiaries and floated different verticals for each business operation. and no amount was used for the personal benefit of any of the Directors of the company. The assessee after participating in the bidding process, if the bidding is successful, the work is allotted to the subsidiaries and receives from the subsidiaries the reimbursement of expenses, payment for services rendered etc.. The assessee-company has utilized more than Rs. 243.06 crores out of total borrowings of Rs. 530.36 crores from its own sources and extended as a loan to its immediate associate/subsidiary company. The assessee is having its own business and declaring income and claiming depreciation from its own business. Therefore, the case law relied upon by the Dispute Resolution Panel in the case of Hon'ble ITAT, Hyderabad in G.V.K. Airports is distinguishable and has no application in the assessee's case. From the above discussion, it is clear that the assessee had borrowed funds from the banks and given it as interest free advances or investments to its subsidiary companies or step down subsidiary companies for business purpose as a business strategy. The subsidiary companies and the step down subsidiary companies have used the funds for the business purposes and there was no diversion or personal gains. The assessing officer contended that there was no return or income received from the subsidiary companies. The same cannot be reason for disallowance of interest as the return and the profit of the company depends on lot of other factors. The advances or investments were made out of business compulsions or commercial expediency as part of corporate strategy to expand business through subsidiaries. The assessee has explained the reasons for not receiving the revenue from some of the subsidiary companies such as gestation period in case of road projects, time taken for completion of projects, cancellation of licence from Govt. authorities in the case of SEZ vertical. In respect of GVK Transportation and Road infrastructure vertical although the assessee did not receive operating revenue for the year under consideration, the assessee stated that it had received operating revenue in the earlier years and the revenue was received in couple of verticals and the revenue is expected in some verticals in the coming years. Therefore, the observation of the assessing officer that the disallowance of expenditure for non receipt of income/benefit immediately after investment is unjustifiable. Interest on borrowed funds required to be allowed as deduction representing the funds used for the purpose of business but need not necessarily to earn the income. The assessee has to satisfy the following three conditions for allowing the interest to be allowed under section 36(1)(iii).

(i) the assessee should borrow the funds

(ii) the funds borrowed should be used for the purpose of business and

(iii) the assessee should pay interest on borrowed funds.

16.5. The learned Dispute Resolution Panel relied on the decision of GVK Airports Developers which is distinguishable on facts of the case and have no application in the assessee's case. From the above facts, it is established that interest free loans were given or amounts are advanced by the company as per the objects of the Memorandum and Articles of Association as a Corporate strategy to expand its business operations. Therefore, we hold that the funds are utilized prudently as a prudent business man. The business expediency or commercial expediency has to be decided by the business man and not by the assessing officer on the facts and circumstances of the case. The assessee relied on the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd. v. CIT (A) &Anr supra, Hon'ble Apex Court in para No. 31 and 32 held as under :--

"31. We agree with the view taken by the Delhi-Ugh Court in CIT v. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 166 : (2002) 254 ITR 377 (Del) : 2002 TaxPub(DT) 625 (Del-HC) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably can put itself in the armchair of the businessman or in the position of the board of directors and assume the route to decide flow much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and-see how a prudent businessman would act. The authorities must not took at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

32. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For Instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated hers). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."

This view is fortified by Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. v. CIT (Central), Ludhiana, (2015) 63 taxmann.com 308 (SC)

16.6. The assessee also relied on the decision of Hon'ble High Court of Delhi in the case of M/s. Basti Sugar Mills Company Ltd. dated 28-9-2018 in I.T.A. No. 205/2018. The Hon'ble High Court held as under :--

"Money borrowed, even when advanced to a sister concern for some business purpose, would qualify for deduction of interest. However, if the money borrowed is utilized by the assessee for personal benefit and not for business purpose, interest paid on that amount would not satisfy the test of commercial expediency."

16.7. In the case of CIT v. Modi Entertainment Ltd. (2014) 89 CCH 0014 Delhi HC held as under :--

3. According to the Tribunal, advancing of such monies to the subsidiaries was driven by commercial expediency. In support of this view the Tribunal relied upon the following judgments :--

(1) SA Builders v. CIT (2007) 288 ITR 1 (SC) : 2008 TaxPub(DT) 344 (Del-Trib)

(2) CIT v. Dalmia Cement (P) Ltd. (2002) 254 ITR 377 (Del) : 2002 TaxPub(DT) 625 (Del-HC)

(3) CIT v. Bharti Televentures Ltd. (2011) 331 ITR 502 (Delhi) : 2011 TaxPub(DT) 776 (Del-HC)

4. Under section 36(1)(iii) the following conditions are required to be satisfied before the assessee can successfully claim deduction in respect of interest paid :--

(a) The assessee should have borrowed capital;

(b) The borrowing of the capital should be for the purpose of the business and

(c) Interest should have been paid on the borrowing.

The finding of the Tribunal, applying the judgments of the Supreme Court and of this Court, is that the advancing of interest-free monies to the subsidiary companies was driven by business considerations since the subsidiaries were also engaged in the same business in which the assessee was engaged. The Tribunal accordingly held that it would be in the interest of business of the assessee and certainly would be commercially expedient for the assessee to advance interest-free monies to the subsidiaries as part of the corporate business strategy to expand its business operations through its subsidiaries. This finding of fact has not been disputed. If that is so we do not see how the decision of the Tribunal can be faulted.

16.8. In the instant case, the assessee is carrying on the business with various objects and the company has given interest free advances to the subsidiary companies for accomplishing the objects through the verticals. Therefore, the case law relied upon by the assessee in Modi Entertainment Ltd. is squarely applicable on the facts of the case.

16.9. In the case of Tulip Star Hotels Ltd. (2011) 338 ITR 482 (Del) : 2012 TaxPub(DT) 419 (Del-HC), Hon'ble Delhi High Court has taken the similar view with regard to interest free loans, advances to sister concerns. In the case of Pr. CIT v. Reebok India Company in 98 taxmann.com 413, Hon'ble Delhi High Court held that

"in the context of the present case, the unsecured loans were not used for personal purpose. Merely because non-interest-bearing advances were given to third parties, would not justify a finding that the test of "commercial expediency" was not satisfied. Interest free advances were preferred to the parties connected with the business of the respondent/assessee. Money taken on loan was not diverted for non business purpose."

17. The Coordinate Bench of ITAT Mumbai in the case of DCIT v. Piramal Realty (P) Ltd. 100 taxmann.com 294 on identical facts held that interest paid on advances given to subsidiary companies and step down subsidiary companies is for the purpose of commercial expediency and accordingly allowed the deduction of interest on borrowed capital.

17.1. In the instant case, the assessee has demonstrated the commercial expediency and corporate strategy for advancing interest bearing funds as interest free advances to subsidiary companies. The subsidiaries are 100% owned by the assessee-company and step down subsidiaries are owned by the subsidiaries, therefore, the interest on borrowed capital required to be allowed as deduction and there is no case for disallowance. Accordingly, we hold that in the instant case there is no case for disallowance of interest under section 36(1)(iii) of the Act.

18. From the Balance Sheet, it is observed that the assessee has interest free funds of Rs. 2478.45 crores in share capital, Reserves and Surpluses which the assessee is free to make investment with or without charging interest. In the instant case, though the assessee had borrowed the sum of Rs. 530.36 crores from the banks, the advances given to the subsidiary companies are much lesser than the interest free funds available to the assessee. The fact that the interest free funds are available to the assessee is not disputed by the revenue. Against the sum of Rs. 2478.45 crores of interest free funds, the amounts advanced to its subsidiary companies/step down subsidiary companies was only to the extent of Rs. 530.36 crores. The interest free funds available are far more than the amounts advanced to subsidiary companies/step down subsidiaries. The assessee is free to apply interest bearing funds for it's business and to draw the own funds from the business for other purposes. On identical facts, Hon'ble Bombay High Court in the case of Reliance Industries Ltd. 86 Taxmann.com 24 held that no disallowance is required to be made under section 36(1)(iii) for interest on borrowed capital for interest free loans to subsidiary companies. The order of the Hon'ble Bombay High Court is upheld by the Hon'ble Supreme Court in 102 taxmann.com 52. In the instant case, there is no dispute that the assessee had interest free funds to the extent of Rs. 2478.45 and the facts are squarely covered by the decision of Hon'ble Supreme Court in the case of Reliance Industries Ltd. cited supra. Therefore, we hold that interest free advances given to the assessee to its subsidiary are part of corporate strategy with a business prudence and interest free funds available to the assessee are more than the advances given to the subsidiary company. Therefore, we hold that no disallowance is required under section 36(1)(iii) of the Act.

19. Accordingly, we hold that the disallowance made by the assessing officer in respect of expenditure relatable to exempt income under section 14A, disallowance of capital expenditure under section 37(1) and disallowance of interest expenditure under section 36(1)(iii) are unsustainable, accordingly deleted. The orders of the lower authorities in respect of ground No. 1 and 2 are set aside and the appeal of the assessee is allowed. In the result appeal of the assessee on ground No. 1 and 2 are allowed.

20. Ground No. 3 is related to the addition of legal expenses of Rs. 9,08,562. During the course of assessment proceedings, the assessing officer found that the assessee had debited the legal and professional expenses to the extent of Rs. 9,08,562 to the Profit and loss account which was proposed for addition in the draft assessment Order, dt. 29-12-2017.

20.1. Against the draft assessment order, the assessee filed objections before the Dispute Resolution Panel. The learned Dispute Resolution Panel found that the assessee had claimed the expenditure of Rs. 34,32,226 and reduced the excess provision made in the earlier years to the extent of Rs. 25,23,664 and the net amount of Rs. 9,08,562 was claimed as deduction and the assessing officer proposed addition in the Draft Assessment order. The Dispute Resolution Panel has observed that the assessee had claimed a sum of Rs. 24,99,139 expenditure relating to the payment made to GVK Tech towards legal and professional services. The learned Dispute Resolution Panel further the observed that a sum of Rs. 20,83,089 was the amount paid to GVK Technical and Consultancy (P) Ltd., for retainer ship fee @ Rs. 6,94,363 for the months of January to March 2014 is not allowable and accordingly directed the assessing officer to disallow the sum of Rs. 20,83,089. The Dispute Resolution Panel was of the view that as per agreement, GVK Technical and Consultancy (P) Ltd. is required to provide manpower to the assessee-company. Since, the expenditure of Rs. 20,83,089 represented the retainership fee paid @Rs. 6,94,363 for the months of January, 2014 to March, 2014 the Dispute Resolution Panel held that the expenditure cannot be allowed. The assessing officer completed the assessment making addition of Rs. 20,83,089. Against the order of the assessing officer under section 144C(13) read with section 143(3), the assessee is in appeal before this Tribunal.

21. During the appeal hearing, the learned Authorised Representative submitted that the GVK Tech Company is a company engaged in the business of providing technical consultancy services to various companies by deputing its personnel having requisite knowledge, experience and expertise and rendering the services for which the fee is paid. The assessee-company has taken the services of the GVK Tech and accordingly made the payment. Necessary service tax was paid and the TDS was also deducted from the payments made to GVK Tech. The learned Authorised Representative submitted that all the necessary evidences such as agreement, bills and vouchers were produced before the assessing officer as well as the Dispute Resolution Panel, hence the genuineness of expenditure was proved, thus, there is no case for disallowing the expenditure and requested to set aside the orders of the lower authorities and allow the appeal of the assessee.

22. On the other hand, the learned Departmental Representative supported the orders of the lower authorities.

23. We have heard both the parties and perused the materials placed on record. The assessee has stated that M/s. GVK Tech provided the services to the company as per the agreement placed in paper book in page No. 534. Agreement was entered into between the GVK Power & Infrastructure and GVK Technical Consultancy Services (P) Ltd. (in short 'service provider') and as per the agreement, service provider agreed to provide the following services to the assessee-company.

(a) Personnel to review various contractual documents

(b) To review insurance program

(c) To discuss with Banks/Financial Institutions regarding raising finances for various projects

(d) To attend commercial works at project sites.

(e) Finalisation of consultants/designers, works, planning, scheduling of various activities as per the requirement of projects.

(f) For preparation of MIS and capitalization of related issues.

(g) To undertaken functions related to material procurements, work orders, purchases, related negotiations etc.

(h) Secretarial works

(i) Functions related to payroll of the employees of the projects

(j) Attending to various Government related works

(k) Mail server maintenance, user ID creation, domain control operation and video conferencing facility maintenance.

23.1. Terms and conditions were also mentioned in the agreement for rendering services, the payment and period of agreement. As per the terms and conditions, the service provider required to provide the manpower to the assessee on ongoing basis, as per the requirement. The persons deployed by the service provider would be working under the supervision, instruction and control of the assessee and the agreement is valid for 5 years from the date of entering into the agreement. The agreement also specifies the terms of payment of fees which is at actual cost incurred by the service provider on manpower plus 20% service charges apart from the taxes and duties. For the sake of clarity and convenience we extract Fees and Terms of payment as per the agreement which reads as under :--

Fees and Terms of Payment

(a) In consideration for supply of the manpower as per the requirement of GVKPIL, the GVKPIL will reimburse the fees to GVK Tech as below :--

(i) Actual cost incurred by GVK tech on such manpower

(ii) 20% services charges towards the expenses incurred on managing the compliance requirements of such manpower and any other incidental matter.

(b) Any taxes, duties and other levies levied/changed by the Government of India, any local State in India, any authority, local bodies, Employee State Insurance, and any other levy liable to be payable by GVK Tech as per the laws in force, shall be claimed as re-imbursement by GVK Tech from GVKPIL.

(c) GVK Tech will raise monthly bills on GVKPIL, which will be reimbursed by GVKPIL within 15 days of the submission at the bill.

(d) The agreement shall be effective for period of 5 years from 1st February2009.

23.2. From the agreement, it is found that the service provider is providing services to the assessee-company for supply of manpower and expertise wherever and whenever needed on ongoing basis. The assessee has made the payment through cheque and the service tax was paid and the TDS was also deducted for the services rendered by the service provider. The department has not brought on record any evidence to show that the agreement is bogus. Hence, there is no reason to suspect the payment or nature of services rendered. Therefore, there is no case to sustain the addition made by the assessing officer. Accordingly the addition made by the assessing officer is deleted and the appeal of the assessee on this ground is allowed.

24. Ground No. 4 is related to the disallowance of sponsorship expenses of Rs. 1,67,469. In the draft assessment order, the assessing officer proposed for disallowance of expenditure debited under the head sponsorship fee for an amount of Rs. 4,92,700, since, the assessing officer found that there was no nexus between the nature of expenditure and the business of the company. Against the order of the assessing officer, the assessee filed objection before the Dispute Resolution Panel and the learned Dispute Resolution Panel upheld the action of the assessing officer, since, the assessee failed to establish any business expediency or exigency for incurring the expenses.

25. We have heard both the parties and perused the material placed on record. The details of breakup of expenditure incurred by the assessee for an amount of Rs. 4,92,700 are as under :--

Nature of event

Amount (in INR)

Sponsorship fee paid towards charged for 9th Young Indian National Summit 2013

561,800

Sponsorship fee paid towards corporate contributor for AGM 2014

280,900

Sub-Total

842,700

Reimbursed by Group Companies

(350,000)

Net Liability

492,700

As per the details furnished by the assessee, the assessee made the payment of sponsorship fee to the Confederation of Indian Industry (CII) for conducting AGM 2014 for an amount of Rs. 2,80,900 and also paid a sum of Rs. 5,61,800 towards sponsorship for 9th Yi National Summit 2013 and received the reimbursement of Rs. 3,50,000 and the net expenditure incurred was Rs. 4,92,700. This issue is squarely covered by the decision of this Tribunal in the assessee's own case for the assessment year 2013-14 in I.T.A No. 530/Viz/2017, dt. 18-5-2018. The Tribunal in the case cited supra held that the expenditure incurred for sponsorship is business expenditure and accordingly deleted the addition made by the assessing officer. For the sake of clarity and convenience, we extract relevant part of the order of this Tribunal in para No. 16 and 17 which reads as under :--

"16. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee has incurred the amount of Rs. 10,68,138 towards sponsorship expenses and genuineness of expenses was not disputed by the assessing officer As per the details furnished by the assessee the sponsorship fee was paid to Financial Times and for conducting the Second Financial Times-Yes Bank International Banking Summit held in Mumbai and Young Indian National Summit held in Delhi and submitted in the events that are taken place, the hoardings of the assessee are displayed, the senior management people of the assessee were invited to address the forum. Therefore, argued that the expenditure was incurred to promote the public awareness of the company, hence the expenditure is in the nature of business expenditure and requested to allow the same.

17. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The assessee has incurred the expenses for conducting various events that have taken place as mentioned above, to promote the public awareness of the company and the expenditure was incidental to the assessee's business. Merely because the assessee-company is engaged in Power and Infrastructure, the argument of the assessee that such an event would promote the public awareness would not be brushed aside. It is common to sponsor some events to advertise the products of the company or to build the corporate image. The Young Indian National Summit held in Delhi would create awareness and promote the assessee's company among the public. There is no need to have direct nexus of the assessee's business with the sponsorship linked events. Even indirect benefit is sufficient to sponsor the sports or social or economic events. We are of the considered view that the social events, sports events and the business events which involve the participation of various institutions would have direct or indirect impact on the assessee's business and the expenditure incurred on such events is business expenditure. The case laws relied upon by the assessee in the case of JCIT v. ITC Limited (2008) 112 ITD 57 (Kol) : 2008 TaxPub(DT) 976 (Kol-Trib) (Special Bench) and CIT v. Lake Place Hotels and Motors (P) Ltd. (2007) 293 ITR 281 (Raj) : 2007 TaxPub(DT) 725 (Raj-HC) have also taken the similar view. Therefore, we hold that the sponsorship amount is a business expenditure, which required to be allowed as deduction and accordingly, we delete the addition made by the assessing officer and allow the appeal of the assessee."

Since the facts are identical, respectfully following the view taken by the Tribunal in the assessee's own case, we hold that the expenditure is allowable expenditure and accordingly, we delete the addition made by the assessing officer and set aside the orders of the lower authorities. The appeal of the assessee on this ground is allowed.

26. Ground No. 6 is related to the corporate guarantee of Rs. 7,90,99,581 In the instant case, the assessing officer has referred the international transaction to the Transfer Pricing Officer Transfer Pricing Officer, since, it exceeded the sum of Rs. 15.00 crores for determination of Arm's Length Price (ALP) under section 92CA of the Act. The Transfer Pricing Officer found that the assessee has given corporate guarantee to it's AE for an amount of Rs. 3326,01,00,000 as on 31-3-2014 and charged the guarantee commission of Rs. 29,94,47,328 to its AE which is found to be not at Arm's Length Price. The taxpayer has charged the guarantee commission at 0.90% on corporate guarantee provided to the AE and the Transfer Pricing Officer proposed for corporate guarantee charges at 1.30% by show cause notice and the assessee filed explanation justifying the guarantee commission charged by it and objecting for enhancement proposed by the Transfer Pricing Officer.

27. Not being satisfied with the explanation of the assessee, the Transfer Pricing Officer suggested for adjustment of Rs. 23,27,14,272 @1.60 as per bank rates. The assessing officer had issued the draft assessment order and the assessee filed objections before the Dispute Resolution Panel and the learned Dispute Resolution Panel upheld the action of the Assessing officer/Transfer Pricing Officer for the proposed adjustment of Rs. 23,27,14,272. Accordingly, the assessing officer passed the assessment order under section 143(3) read with section 144C(13) of the Act and made the addition.

28. Aggrieved by the order of the assessing officer, the assessee filed appeal before this Tribunal. During the appeal hearing, the learned Authorised Representative brought to our notice that this issue is squarely covered by the decision of this Tribunal in favour of the assessee in the assessee's own case for the assessment year 2013-14 and the Tribunal in its order held that the charging of corporate guarantee commission @ 0.90% is reasonable. The learned Departmental Representative did not bring any other decision of superior court supporting the order of the Assessing officer/Dispute Resolution Panel. For the sake of clarity and convenience, we extract relevant part of the order of this Tribunal in assessee's own case cited supra in para No. 6 which reads as under :--

"6. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. In this case, the assessee has conducted Transfer Pricing study and arrived at Arm's Length Price rate of 0.89% based on US Industrial bond yield curve. The assessee has extended the corporate guarantee to the third party lender banks for providing credit facilities. The primary security given by the Associated Enterprises is mortgage of land, securities, mining tenements and other fixed assets of the target company and all shares owned by the GVK Coal. We agree with the argument of the learned Authorised Representative that the bank guarantee and the corporate guarantees are issued on different approaches and with different motivations. In corporate guarantee, the risk factor is lesser since the credit facilities granted by the bank was firstly covered by the assets of the borrowing company, whereas in the bank guarantee, the risk factor is more since immediate monetary transaction is involved. Therefore, the commission charged in bank guarantee would be more than the corporate guarantee to cover the risks and the profits. Further in case of bank guarantee, the bank guarantees are undertaken with a profit element, whereas, in the case of corporate guarantee mutual commercial interest and long term benefits are prime factors. Further, though the learned assessing officer adopted the bank guarantee commission as a comparable and at Arm's Length Price, the terms and conditions of the bank guarantee and the terms and conditions of the corporate guarantee were not brought on record and did not allow the necessary adjustments to various risks. If the assessing officer is taking any of the comparable cases for transfer pricing study, the risk factors involved, the terms and conditions of the guarantee, the profits, etc. require suitable adjustments. In this case, the assessing officer has not made any such adjustments and brushed aside the entire argument advanced by the assessee before the assessing officer as well as the Dispute Resolution Panel. The Dispute Resolution Panel also brushed aside the argument of the assessee simply stating that the assessee did not demonstrate how the US bond rate is more applicable than the bank rates adopted by the Transfer Pricing Officer. Neither the assessing officer nor the Dispute Resolution Panel studied the issue how the US bond rate is more applicable than the bank rate and there was no analysis of data with risk factors, financial factors, commercial interest, profits, etc., while making the transfer pricing study. The assessee has brought on record the number of case laws relied up on, but the revenue did not make out a case for rejection of the commission @ 0.25% to 0.53%, which is held to be reasonable. Neither the assessing officer nor Dispute Resolution Panel brought on record any decision, which is held to be more favourable to the revenue and no other judgment was brought on record controverting the decisions relied upon by the learned Authorised Representative. In the case of Videocon Industries Ltd. v. DCIT Range-3(3)(2), Mumbai reported in 79 Taxmann.com 216 by ITAT 'K' Bench, Mumbai held that where the loan for which assessee had given corporate guarantee, primarily covered by pledge of securities hypothecation of debtors balances and other assets of AE, corporate guarantee commission around 0.5% would be acceptable as Arm's Length Price. Further, the ITAT Mumbai 'K' Bench in the case of Nimbus Communications Ltd. v. ACIT (11)(1) Mumbai (2017) 85 Taxmann.com 237, against the guarantee commission adjustment made by the assessee @ 3% held that 0.5% is reasonable and at Arm's Length Price. In the case of Glenmark Pharmaceuticals Ltd. (supra) relied upon by the assessee, Hon'ble Bombay High Court held that bank guarantee commission is not a comparable transaction for transaction to determine the Arm's Length Price. However, Hon'ble Supreme Court has granted SLP in this case. Therefore, in the assessee's case, the primary securities offered by the assessee was the assets of the GVK Coal and corporate guarantee was extended to third party lender. As per the decisions referred to in this order of various Tribunals and High Courts, the corporate guarantee commission charged @ 0.25% to 0.53% is considered to be reasonable in the facts and circumstances of the assessee's case. The learned Departmental Representative did not place any other judgment or order of the High Court or any other court to controvert the decision cited (supra). In the assessee's case the corporate guarantee commission charged by the assessee was 0.90% which is more than the corporate guarantee commission of 0.25% to 0.53% approved by various judicial forums. Therefore, respectfully following the view taken by the coordinate benches, we hold that the corporate guarantee commission charged by the assessee-company is at Arm's Length Price and no adjustment is required. Accordingly, we delete the addition made by the assessing officer and allow the appeal of the assessee."

Since the facts are identical, respectfully following the view taken by this Tribunal in the assessee's own case for the assessment year 2013-14, we hold that Corporate Guarantee commission charged by the assessee@0.90% is reasonable. Accordingly, we set aside the orders of the lower authorities and delete the addition made by the assessing officer.

29. Ground No. 5 is related to the addition relating to folio maintenance charges of Rs. 3,54,405 and provision for leave encashment of Rs. 12,90,884 which was made addition in the final assessment order without being brought on Draft assessment order. The learned Authorised Representative brought to our notice that the assessing officer did not make the proposed disallowance of folio maintenance charges and provision for leave encashment in the draft assessment order, therefore, there is no case for making any addition. The learned Authorised Representative further submitted that during the assessment proceedings, the assessing officer has called for the explanation for which the assessee submitted the reply and no proposal was made in the draft assessment order, thus, the assessee was under the impression that the explanation of the assessee was accepted and no disallowance was proposed to be made. Therefore, argued that the scheme of assessment under section 144C does not permit the assessing officer to make the additions which are not proposed in the draft assessment order. Hence, requested to delete the additions and allow the appeal of the assessee.

30. On the other hand, the learned Departmental Representative supported the orders of the lower authorities.

31. We have heard both the parties and perused the material placed on record. The scheme of assessment under section 144C is to resolve the disputes at the stage of assessment itself, instead of prolonging the legal matters. Therefore, the assessee was given option at the stage of assessment itself to accept the draft assessment or to approach the Dispute Resolution Panel with objections against the draft assessment order and the Dispute Resolution Panel is authorized to hear the case consider the objections and issue directions to the assessing officer which are binding on the assessing officer. Therefore for all practical purposes, the Dispute Resolution Panel acts as a first appellate authority against the draft assessment. That is the reason appeal lies with the ITAT at second appellate stage against the order passed under section 144C(13) read with section 143(3). Therefore, without the proposal in draft assessment order, and the approval of Dispute Resolution Panel the addition in the final assessment unauthorized against the principles of natural justice. In the instant case, the assessing officer did not propose any additions, therefore, the assessee did not file any objections before the Dispute Resolution Panel. As per the scheme of 144(C), the assessing officer shall pass the order in conformity with the directions of the Dispute Resolution Panel and the assessing officer is not permitted to tinker with any of the directions of the Dispute Resolution Panel. For the sake of clarity and convenience, we extract sub section1, 2, 5, 6 and 13 of 144(C) of the Act which reads as under :--

"144C. (1) The assessing officer shall, notwithstanding anything to the contrary contained in this Act, in the first instance, forward a draft of the proposed order of assessment (hereafter in this section referred to as the draft order) to the eligible assessee if he proposes to make, on or after the 1-10-2009, any variation in the income or loss returned which is prejudicial to the interest of such assessee.

(2) On receipt of the draft order, the eligible assessee shall, within thirty days of the receipt by him of the draft order,--

(a) file his acceptance of the variations to the assessing officer; or

(b) file his objections, if any, to such variation with,--

(i) the Dispute Resolution Panel; and

(ii) the assessing officer.

(5) The Dispute Resolution Panel shall, in a case where any objection is received under sub-section (2), issue such directions, as it thinks fit, for the guidance of the assessing officer to enable him to complete the assessment.

(6) The Dispute Resolution Panel shall issue the directions referred to in sub-section (5), after considering the following, namely :--

(a) draft order;

(b) objections filed by the assessee;

(c) evidence furnished by the assessee;

(d) report, if any, of the assessing officer, Valuation Officer or Transfer Pricing Officer or any other authority;

(e) records relating to the draft order;

(f) evidence collected by, or caused to be collected by, it; and

(g) result of any enquiry made by, or caused to be made by, it.

(13) Upon receipt of the directions issued under sub-section (5), the assessing officer shall, in conformity with the directions, complete, notwithstanding anything to the contrary contained in section 153 or section 153B, the assessment without providing any further opportunity of being heard to the assessee, within one month from the end of the month in which such direction is received."

32. From plain reading of section, it is observed that the assessing officer is not permitted to make any addition which is not contained in the draft assessment order and approved by the Dispute Resolution Panel. In the instant case, the additions made by the assessing officer in the final assessment in respect of folio maintenance and provision for leave encashment does not contain in the draft assessment order and without the approval of Dispute Resolution Panel. Therefore, we hold that the additions made in the final assessment with regard to folio maintenance and leave encashment are unsustainable, accordingly deleted.

33. Ground No. 7 and 8 are related to the levying of interest under section 234A of the Act amounting to Rs. 28,92,230. In the instant case, the assessee filed the return of income on 28-11-2014 against the due date of 30-11-2014. Subsequently, the assessee filed the revised return of income on 16-2-2016 within the time limit allowed under section 139(5). In the earlier paragraphs, we have held that the revised return was filed due to mistake of omission and the same was held to be valid. Since we held that the return of income filed under section 139(5) is valid, there is no case for levying of interest under section 234A. Accordingly, the interest charged under section 234 A is cancelled and the appeal of the assessee is allowed.

34. Ground No. 8 is related to the charging of interest under section 234B which is consequential in nature, hence, upheld.

35. In the result, appeal of the assessee is allowed.