M/S Hastha Agro Techo (P) Limited,, ... vs Assessee

M/s. Hastha Agro-tech Vs. Dy. Commissioner of Income Private Limited Tax, Central Circle-9 Hyderabad 500033 Hyderabad PAN: AABCH 2674 M (Appellant) (Respondent)

Assessee by: Shri K.C. Devdas, C A Department by: Smt. G. Aparna Rao, (DR)

Date of Hearing: 09/02/2015 Date of Pronouncement: 25/03/2015

ORDER

Per Smt. Asha Vijayaraghavan, J.M.

The appeal of the assessee is directed against the order of the CIT (Central), Hyderabad dated, 19.02.2013 passed for A.Y 2003-04 u/s 143(3) r.w.s. 147 of the I.T. Act.

2. Briefly stated, the assessee company, M/s Hastha Agro-tech (P) Ltd filed its return of income for the A.Y 2003-04 on 28.11.2003 declaring a total income of Rs.5,91,630. The return was processed u/s 143(1) of the Act on 10.02.2006 determining a tax refund of Rs.8,64,130. The case was selected for scrutiny and the assessment u/s 143(3) of the Act was completed on 27.03.2006 accepting income of Rs.5,91,630 as returned by the assessee.

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3. The CIT (Central) assumed jurisdiction u/s 263 on the ground that he observed from the P&L account, that interest income of Rs.46,28,979 was credited to P&L a/c. The said interest income were earned on fixed deposits. The CIT held that during financial year 2002-03 relevant to the A.Y 2003-04, the assessee earned no income from the business of agricultural operations. However, expenditure of Rs.40,33,313 has been debited to P&L a/c which includes interest paid to others of Rs.40.00 lakhs. The CIT opined that as there was no income from business, the expenditure debited for Rs.40,33,313 needs to be disallowed. The CIT held that since the interest is earned on fixed deposits, the same is to be treated as income from other sources against which no set off of expenditure is allowable. Since the AO while completing the assessment had not disallowed the interest debited to P&L a/c for Rs.40.00 lakhs, the CIT was of the opinion that the order passed by the AO failed to disallow the interest debited to the P&L a/c and the order passed by the AO has become erroneous and prejudicial to the interests of the Revenue and as such liable for revision u/s 263 of the I.T. Act, 1961.

4. Aggrieved, the assessee is in appeal before us against the order passed by the CIT u/s 263. The ld Counsel for the assessee reiterated the submissions made in the reply to the show cause notice as follows.

"3......... that the AO completed the assessment u/s 143(3) r.w.s. 147 duly verifying the facts submitted by the assessee and accepted the income returned. Hence it is beyond the purview of supervisory power to invoke the provisions of section 263 of the Income Tax Act, 1961. The AO consciously examined and accepted the return filed by the assessee and set off of interest payment of rs.40,33,313 was allowed against the interest income of Rs.46,28,979. It was

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also submitted by the assessee that, they accepted inter corporate deposit from M/s. Maytas Infra Ltd. The purpose of borrowal of funds was not fulfilled. Instead of keeping the money idle, the assessee company placed the same with the banks as fixed deposit and received interest income. Therefore, interest paid to M/s. Maytas is an expenditure incurred to earn the interest income under consideration".

5. The ld DR stated that from the records it was found that during the financial year 2002-03, there was no business operation. Further, the assessee company itself accepted that the purpose for which the borrowal was obtained from M/s Maytas Infra Ltd was not fulfilled. Moreover, the investigations by investigation agencies revealed that the assessee company is one of front companies floated by Sri B. Ramalinga Raju for the purpose of routing the funds and to acquire vast track of lands. As the assessee company has not started business operations, interest income earned by the company has to be treated as income from other sources and no expenditure is allowable against it, in view of the decision of the Apex Court in the case of M/s Tuticorin Alkali Chemicals & Fertilizers Ltd reported in 227 ITR 172. According to the ld DR, the order passed by the AO dated 8.12.2010 for A.Y 2003-04 is erroneous and prejudicial to the interests of the Revenue and hence a revision u/s 263 is to be made.

6. We have heard both the parties and perused the material on record. Further, the assessment has been reopened by the AO stating as follows:

"M/s. Hastha Agro Tech Pvt. Ltd, PAN -AACCR 4354B has filed its return of income for the A.Y 2003-04 on

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28.11.2003 declaring income of Rs.5,91,630. The assessment u/s 143(3) was completed on 27.3.2006.

On 7th January 2009 Sri B. Ramalinga Raju, Ex- Chairman of M/s. Satyam Computer Services Ltd (SCSL for short) in his letter sent to the Books of accounts of Directors with a copy marked to SEBI has stated that books of accounts have been fudged for the last several years. He further stated that the revenues and profits were manipulated by falsification of accounts for the last several years. Subsequently, investigating agencies like the CBI, SFIO and the Enforcement Directorate have conducted investigations and it came to light that Shri B. Ramalinga Raju and his family members have floated numerous front companies for the purpose of routing the funds and to acquire vast tracts of lands in and around Hyderabad in the names of entities like the assessee company. The control and management of these companies was with Shri B. Ramalinga Raju and in particular through Shri B. Suryanarayana Raju his brother. The controlling directors or share holders of these front companies are the family members of Shri B.Ramalinga Raju. In almost all these companies the other directors are the employees of concerns of Shri B. Ramalinga Raju.

Sworn statement of Sri B. Ramalinga Raju was recorded u/s 131 of the I.T. Act, 1961 on 20.12.2009 in the Central Prison, Chanchalguda, Hyderabad. In his statement, he has confirmed and reiterated the facts and figures that were stated in his letter dated

07.01.2009 addressed to the Board of Directors. Sri B. Ramalinga Raju has further stated that the step was taken to artificially shore up the performance of the company in line with the market expectations.

The assessee company is one of the front companies. As per the return of income and its enclosed annual report for the financial year 2002-03, Shri B. Suryanarayana Raju brother of Sri Ramalinga Raju was Director of the assessee company. It is further observed that monies have originated from the family members and have been transferred in a circuitous and complex manner through the front companies with an

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intention to prevent the revenue and the regulatory agencies to trace the antecedents and to mask the actual sources of money and 31.3.2008. The assessee took unsecured loans of Rs.2,98,02,402 from its directors and of Rs.6,18,61,214 from others who were either family members or close relatives of the Directors. Further, the assessee gave loans and advances which stood at Rs.70,21,481 as at 31.3.2003. The acquisition of lands in the names of entities such as the assessee company by roughing the monies in a circuitous and complex set of transactions between the group individuals/entities has been revealed during the investigations by the investigating agencies.

Further the assessee has shown interest income of Rs.46,28,979 and has debited business expenditure of Rs.40,33,413. Since the company is an agricultural company and no business activities have yet started, the interest income earned cannot be treated as income earned from business activities. The interest income has to be treated as income earned from other sources and consequentially no business expenditure is allowable against it, in view of Apex Court decision in the case of M/s. Tuticorin Alkali Chemicals & Fertilizers Ltd, reported in 227 ITR 172.

I have thus, reason to believe that there is failure on the part of the assessee to disclose fully and truly all material facts necessary for its assessment for A.Y 2003-04 and also that it resulted in escapement of income chargeable to tax to the tune of at least Rs.40,37,349 given the volume of the transactions as stated above, within the meaning of section 147 r.w.s. 149 of the I.T. Act".

7. Hence we find that the issue has been subjected to scrutiny by the AO as it is part of the reasons recorded for reopening the completed assessment u/s 143(3) of the Act. The AO had come to the conclusion and gave the finding for the set off of interest payment of Rs.40,33,313 from out of the interest

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income of Rs.46,28,979 based on the facts examined by him in the course of assessment/reassessment proceedings.Explanation was submitted before the AO and the AO had applied his mind on the issue. It is noticed that the CIT has taken same judicial principles of Tuticorin Alkalies, which was noted by AO at the time of reopening. It is only when there is non-application of mind to relevant material or incorrect assumption of fact or an incorrect application of law that the CIT can assume jurisdiction u/s 263 as held in the case of CIT vs. Jawahar Bhattacharjee (2012), 341 ITR 434 (Gauhati High Court Full Bench).

8. In the case of CIT vs. Ashish Rajpal (320 ITR 674) (Delhi H.C) and CIT vs. Vikash Polymers (194 Taxman 57 (Delhi) (H.C), it has been held that if the AO allows the claim, on being satisfied with the explanation of assessee, on an inquiry made during the course of assessment proceedings, the decision of the AO cannot be held to be erroneous, on ground that there is no elaborate discussion in that regard in the order. It is the practice that whenever any claim of the assessee is accepted, AO may not discuss the same in his order.

9. Further, when two views are possible and when the AO takes one of the two views permissible in law to which the Commissioner does not agree with, it cannot be treated as erroneous and prejudicial to the interests of the Revenue as held by the decisions of the Hon'ble Supreme Court (i) CIT vs. Max India Ltd (295 ITR 282) and (ii) Malabar Industries Company Ltd (243 ITR 83). Hence, the revisionary jurisdiction assumed by the CIT (A) is invalid.

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10. Further, on merits the order of the CIT setting aside with a direction to re-compute the income of the assessee company after disallowing the expenditure claimed is incorrect. The CIT has observed that as the assessee company has not started its business operations, interest income earned by the company has to be treated as income from other sources and no expenditure is allowable against it in view of the decision of the Apex Court in the case of M/s. Tuticorin Alkali Chemicals & Fertilizers Ltd (227 ITR 172). The principles laid down in that case was wrongly applied by CIT. The facts in the present case was that the assessee borrowed funds on interests, the same was kept in fixed deposit. Out of the interest received from FD's, assessee paid interests on borrowed funds, which was allowable u/s 57(iii). AO after examining this has allowed the same. It is CIT who wrongly considered the expenditure as business expenditure. We rely on the decision of the Hon'ble Delhi High Court in the case of CIT vs. Taj International Jewellers (335 ITR 144 (Delhi) where the facts were that:

"the assessee an exporter of jewellery, borrowed money and converted it into fixed deposits. There was a difference between the rate of interest in India and the interest rate outside India which was payable at the LIBOR rate (London Interbank Offered Rate). Because of this peculiar nature of the transaction and the scheme of the Govt. of India for the benefit of exporters the assessee earned more interest on the fixed deposit receipts than the interest payable to the bank on the borrowed funds. The assessee showed the interest earned on the fixed deposit receipts as "income from other sources" reducing the interest paid to the Bank on the loans from the interest earned on the fixed deposit receipts. The AO however, disallowed the interest paid by the assessee to the bank on the borrowed amount on the ground that the loan was borrowed for business purpose and interest paid thereon should not be allowed as deduction while computing the income under the head "income from

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business". The assessee filed an appeal against the order before the CIT (A) who deleted the addition and allowed the deduction of interest paid by the assessee to the bank on the borrowed funds u/s 57(iii) of the Income Tax Act, 1961. This order of the Commissioner (Appeals) was affirmed by the Tribunal. On appeal to the High Court:

Held, dismissing the appeals, that the interest paid had to be allowed under the provisions of section 57(iii)".

11. Hence, the order passed by the DCIT Central Circle-9 Hyderabad is neither erroneous nor prejudicial to the interests of the Revenue and the CIT is not justified in assuming jurisdiction u/s 263. Accordingly we set aside the order of the CIT and allow the appeal of the assessee.

12. In the result appeal filed by the assessee is allowed.

Order pronounced in the Open Court on 25thMarch, 2015.

Sd/- Sd/- (B. Ramakotaiah) (Asha Vijayaraghavan) Accountant Member Judicial Member

Hyderabad, dated 25th March, 2015. Vnodan/sps Copy to:

1. M/s. Sekhar & Co. C.A. 133/4, Rashtrapathi Road, Secunderabad

2. Dy. Commissioner of Income Tax, Central Circle 9, VII Floor, Aayakar Bhavan, Hyderabad

3. The CIT(Central), 7th Floor, Aayakar Bhavan, Basheerbagh Hyderabad

4. The CIT (C.R)3, Hyderabad

5. The DR, ITAT, Hyderabad

6. Guard File By Order

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