Ita/27/2015 Of Muthoot Finance Ltd v. The Joint Commissioner Of Income Tax,Circle1(2)

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE THE ACTING CHIEF JUSTICE MR.ANTONY DOMINIC & THE HONOURABLE MR. JUSTICE DAMA SESHADRI NAIDU THURSDAY, THE 11TH DAY OF JANUARY 2018 / 21 ST POUSHA, 1939 ITA.No. 27 of 2015 AGAINST THE JUDGMENT IN ITA 805/2013 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 18-07-2014 APPELLANT MUTHOOT FINANCE LTD MUTHOOT CHAMBERS, BANERJEE ROAD, ERNAKULAM-682 018. BY ADVS.SRI.P.BALAKRISHNAN (E) SRI.MOHAN PULIKKAL SRI.P.P.NARAYANAN SRI.K.S.MENON (K) RESPONDENT: THE JOINT COMMISSIONER OF INCOME TAX,CIRCLE 1(2) KOCHI. R. BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 11-01-2018, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA No.27 of 2015 APPENDIX APPELLANT'S ANNEXURES; ANNEXURE A: TRUE COPY OF THE ASSESSMENT ORDER DTD.12.12.2011 OF THE JT.COMMISSIONER OF INCOME TAX (OSD) CIRCLE 1(2), KOCHI. ANNEXURE B: TRUE COPY OF THE ORDER DTD.23.10.2013 OF THE COMMISSIONER OFINCOME TAX (APPEALS) II, KOCHI. ANNEXURE C: TRUE COPY OF THE ORDER DTD.18.7.2014 OF THE INCOME TAX APPELLATETRIBUNAL, COCHIN BENCH. ANNEXURE D: TRUE COPIES DEBIT NOTES DTD.29.3.2006 ISSUED BY SHUBH REALITY(SOUTH) PVT.LTD. ANNEXURE E: TRUE COPY OF THE LETTER DTD.17.3.2006 ISSUED BY TNEB TO THE APPELLANT. ANNEXURE F: TRUE COPY OF THE AGREEMENT DTD.29.3.2006 BETWEEN TNEB AND THE APPELLANT. ANNEXURE G: TRUE COPY OF THE LETTER DTD. 4.2.2006 FROM THE APPELLANT TO SHUBH REALTY (SOUTH) PV.LTD. ANNEXURE H: TRUE COPIES DEBIT NOTES DATED 16.2.2006 & 28.2.2006 ISSUED BY SHUBH REALTY (SOUTH) P.LTD. ANNEXURE I : TRUE COPIES OF FINANCIAL STATEMENTS OF THE APPELLANT AS ON 31.3.06. TRUE COPY CSS/ p.s.to judge Antony Dominic & Dama Seshadri Naidu, JJ. ------------------------------------------------- I. T. Appeal No.27 of 2015 -------------------------------------------------- Dated this the 11[th] day of January, 2018 JUDGMENT Dama Seshadri Naidu, J Introduction: The appellant-assessee, a public limited company, advancesloans against the gold ornaments pledged with it. It establishedwindmills in Tamilnadu. Of the amounts it spent, the Revenuedoubted the nature of some. The assessee claims that it spentthose amounts on infrastructure development; the Revenue, onthe contrary, concludes that the expenditure relates to landdevelopment. What has the assessee spent on: infrastructure orland? 2. Equally in dispute is a certain investment. The assesseeestablishes a “new line of business.” It claims that the investmentis from its own funds; the Revenue concludes that it is from theborrowed funds. What is the nature of assessee’s investment:revenue or capital? ITA No.27 of 2015 2 Procedural History: 3. The appellant-assessee filed its return of income for theassessment year 2006-07. The Revenue reopened the assessmentand determined a higher income. Aggrieved, the assessee filed anappeal before the Commissioner of Income Tax (Appeals), Kochi,(“CIT(A)”); it ended in dismissal, through an order, dated23.10.2013. Further aggrieved, the assessee filed the second appeal,ITA No. 805/Coch/2013, before the Income Tax AppellateTribunal, Cochin Bench (“the Tribunal”). It too failed. TheTribunal, through its order dated 18.07.2014, dismissed theappeal. So, the assessee came before this Court. Facts: 4. The assessee advances loans against the gold ornamentspledged with it. On 16.11.2006 it filed its return of income forthe assessment year 2006-07, declaring a total income of Rs.34,07,48,202/-, eventually declared to be Rs.34,52,67,560/- undersection 143(3) of the Income Tax Act, 1961 (“the Act”). 5. Through a notice, dt.16.03.2011, under section 148 of theAct, the Revenue reopened the assessment. Finally, it completed ITA No.27 of 2015 3 4. The assessee advances loans against the gold ornamentspledged with it. On 16.11.2006 it filed its return of income forthe assessment year 2006-07, declaring a total income of Rs.34,07,48,202/-, eventually declared to be Rs.34,52,67,560/- undersection 143(3) of the Income Tax Act, 1961 (“the Act”). 5. Through a notice, dt.16.03.2011, under section 148 of theAct, the Revenue reopened the assessment. Finally, it completed ITA No.27 of 2015 3 the assessment; the Assessment Officer (“AO”) determined thetotal income at `35,74,65,160. In fact, AO disallowed `38,76,000and `83,21,600-—the depreciation claimed on the wind mills andinterest on investment in the assessee’s new line of business,respectively. 6. Aggrieved, the assessee filed an appeal before the CIT(A)but to no avail. Further aggrieved, the assessee filed the secondappeal, ITA. No. 805/Coch/2013, before the Tribunal, the resultbeing no different. So, this appeal to us. (a) Wind-Mills: 7. To be more specific, during 2005-06, the assesseepurchased three windmills or Wind Turbine Generators. Theassessee erected them at Kavalakurichi, Kadanganeri, andKaduvettin in Tamil Nadu. They cost it `18,05,98,860. Out ofthis amount, the assessee paid `1,41,90,000 to M/s.Shubh Realty(South) Pvt. Ltd. 8. The breakup of `1,41,90,000 paid to Shubh Realty runsthus: `45,00,000 towards land purchase for erecting the threewindmills; and `96,90,000 towards Infrastructure Development ITA No.27 of 2015 4 Charges (IDC) paid to Tamil Nadu Electricity Board (“TNEB”).The assessee added all this expenditure to the cost of wind millsand claimed depreciation. 9. The AO treated `96,90,000 paid to TNEB forinfrastructure development charges also towards the cost of landand disallowed depreciation on `38,76,000 (50% for second halfadditions). (b) New-Line of Business: 10. During the same assessment year, the assessee entered anew line of business: He obtained a licence for operating an FMRadio, by paying `8,32,16,000 towards licence fee to the Ministryof Information & Broadcasting and Bharati. The assessee had itsown funds—`63.73 crore—as on 31.03.2005. But the AO assumedthat the assessee borrowed capital for starting the new-line ofbusiness and, so, disallowed `83,21,600, which is 10% of theexpenditure on the new-line of business.Submissions: Assessee’s: 11. Sri Mohan Pulickkal, the learned counsel for the ITA No.27 of 2015 5 appellant-assessee, has submitted that the assessee paid the landcost of `45 lakh separately. The rest of the expenditure, accordingto him, is towards infrastructure development, relatable to theWind Turbine Generators. 12. To elaborate, Sri Mohan has contended that the debitnotes, letters and agreements placed before the AO reveal that theamounts paid to TNEB through Shubh Realty were only towardsinfrastructure development charges. In other words, the workconnected with the land—registration, easy and free assess to land,the up-keep of the vacant area around, and so forth—was carriedout by Shubh Realty. And the assessee paid it separately as wasevident from the six debit notes, dated 16.02.2006 and 28.02.2006.13. On the assessee’s investment in the new-line of business,the learned counsel has contended that the AO, the lowerappellate authority, and the Tribunal have discarded the auditedstatements of accounts. They in fact establish that the assessee hadsufficient funds of its own to invest in the new business. So thedisallowance of `83,21,600, out of the interest expenditureclaimed, asserts the learned counsel, was grossly unjustified. ITA No.27 of 2015 6 14. In the end, Sri Mohan submitted that the Tribunalought to have appreciated that the proviso to Sec. 36 (1)(iii)“disallows deduction of interest only for the period beginningfrom the date on which the capital was borrowed for acquisitionof the asset till the date on which such asset was first put to use.” ITA No.27 of 2015 6 14. In the end, Sri Mohan submitted that the Tribunalought to have appreciated that the proviso to Sec. 36 (1)(iii)“disallows deduction of interest only for the period beginningfrom the date on which the capital was borrowed for acquisitionof the asset till the date on which such asset was first put to use.” 15. On facts, Sri Mohan contends that the assessee dulyacquired the licence and, on its strength, it commenced work forsetting up the FM Radio station. So it cannot be said that theasset was not “put to use.” Revenue’s: 16. Sri P. K. Ravindranatha Menon, the learned SeniorCounsel for the Revenue, in his usual methodical manner, tookus through the entire record. He read out the salient aspects ofthe AO’s order, as well as both the appellate forums’. 17. The learned Senior Counsel, to put it briefly, hasstrenuously supported the concurrent findings of the AO and theother adjudicatory authorities. He has submitted that both theissues—the nature of expenditure and the source of investment—primarily turn on factual findings. Therefore, concurrent findings ITA No.27 of 2015 7 of fact do not call for any interference. 18. Heard Sri Mohan Pulickkal, the learned counsel for the appellant-assessee and Sri P. K. Ravindranatha Menon, thelearned Senior Counsel for the Revenue, besides perusing therecord. Substantial Questions of Law: 1. Has the Tribunal justified in confirming the disallowance of`38,76,000 out of the total depreciation claimed on the WindTurbine Generators? 2. Has not the assessee established that its spending `96,90,000was part of the capital cost to establish and operate the WindTurbine Generators and that it is entitled to claim depreciation? 3. Has the Tribunal erred in confirming the disallowance ofinterest on investment expenditure the assessee incurred forestablishing its new line of business, without examining theassessee’s claim that it had sufficient interest-free funds and hadno necessity to borrow? 4. Has not the assessee entitled to an allowance of interest-freeexpenditure under Sec.36(1)(iii) of the Act? Discussion: 19. The appellant-assessee, primarily, advances loans against the gold ornaments. During 2005-06, the assessee purchased three ITA No.27 of 2015 8 windmills and erected them in Tamil Nadu. They cost it`18,05,98,860. Out of this amount, the assessee paid `1,41,90,000to M/s.Shubh Realty (South) Pvt. Ltd. 20. Shubh Realty, in turn, paid `96,90,000 towardsInfrastructure Development Charges (IDC) to TNEB. The AOtreated Rs.96,90,000/- paid to TNEB towards the cost of land anddisallowed depreciation on `38,76,000 (50% for second halfadditions). 21. During the same assessment year, the assessee obtained alicence for operating an FM Radio—a new-line of business. It paid`8,32,16,000 towards licence fee to the Ministry of Information &Broadcasting and Prasar Bharati. The AO assumed that theassessee borrowed capital for starting this business. So hedisallowed `83,21,600, which is 10% of the expenditure on thenew-line of business. 22. To sum up, the AO disallowed `38,76,000 and`83,21,600-—the depreciation claimed on the wind mills andinterest on investment in the assessee’s new line of business,respectively. ITA No.27 of 2015 9 23. As seen from the record, the AO has concluded that the depreciation of `38.76 lac claimed on Wind Mills had actuallybeen incurred for developing the land—not the windmillinfrastructure. While affirming the AO’s decision, the CIT (A)and the Tribunal held that the debit notes produced by theassessee itself revealed that the amounts were paid “towards IDCrepresenting infrastructure development charges.” Guided by theexpression “registration charges” in those debit notes, both theforums concluded that the entire cost had been incurred fordeveloping the land because “registration” only concerns land. ITA No.27 of 2015 9 23. As seen from the record, the AO has concluded that the depreciation of `38.76 lac claimed on Wind Mills had actuallybeen incurred for developing the land—not the windmillinfrastructure. While affirming the AO’s decision, the CIT (A)and the Tribunal held that the debit notes produced by theassessee itself revealed that the amounts were paid “towards IDCrepresenting infrastructure development charges.” Guided by theexpression “registration charges” in those debit notes, both theforums concluded that the entire cost had been incurred fordeveloping the land because “registration” only concerns land. 25. Factual as it may seem, let us consider how sound theTribunal’s conclusion is. 26. Annexure D has three debit notes; they were raised byShubh Realty on the assessee. They identically read thus: “Beingamount paid to the TNEB on your behalf towards IDC-NOC,registration charges, processing and supervision charges for 1WTG of 1250 KW at location …” Annexure E, which predates Annexure D, is the communication from the TNEB to theassessee. The communication contains the conditions the assessee ITA No.27 of 2015 10 had to comply with. Among those conditions or clauses 12 and 13, which read as follows: 12. The cost of electrical interfacing work, including thecost of infrastructure facility charges, will have to be borneby you. The interfacing lines will become Board’s propertyon commissioning. 13. The difference in infrastructure facility charges, if any,in force at the time of commissioning of Wind ElectricGenerators is to be borne by the Developer. Equally pertinent is condition 26, which reads thus: 27. Since the amount towards infrastructure developmentcharges of Rs. 32.19 lakhs (at Rs. 25.75 lakh/MW) paid withthe application of M/s. Shubh Reality (South) Pvt. Ltd.,Valliyoor, is taken into your account and the same is noteligible for refund in future to Shubh Reality (South) Pvt.Ltd., Valiyoor. 27. From the debit notes and the TNEB’s communication, one cannot help concluding that the amount was spent on developing the infrastructure of the Wind Turbine Generators. Inthese documents, the red herring that led the authorities seems to be the expressions such as “registration”, “processing”,“supervision”. So they concluded that the entire expenditure wastowards land development. ITA No.27 of 2015 11 28. Regrettably, TNEB has nothing to do with theregistration of land, much less with its development orprocessing. Neither the record reveals nor the revenue asserts thatthe assessee purchased the land from TNEB. That accepted, theland registration lies with the revenue, and its development withany other person or entity than TNEB. 29. From the record we also gather that the assessee paid thecharges for “evacuating the land”, as seen from Annexure G. Thisis another red herring, so to say. Indeed, lexically to evacuate is towithdraw or depart from; vacate. American Heritage Dictionary(5[th] Ed.) gives these additional meanings: to excrete or dischargeof waste from (the bowl, for example); to empty or remove thecontents of (a closed space or container). The subject of AnnexureG, a letter the assessee wrote to Shubh Reality, reads: “arrangingland and TNEB evacuation for 3 nos. 1250 KW WTG.” 30. But the body of the letter, we must say, does not refer toTNEB’s evacuating the land. In the letter, the assessee merely asksShubh Reality to arrange “for the land (a prox. 2 acres perWTG)”. The assessee also requires Shubh Reality to “pay ITA No.27 of 2015 12 Infrastructure Development Charges (IDC) @ `32.30 lakh perWTG” to TNEB. Therefore, the Tribunal’s concluding that theexpenditure was “more in the nature of administrative chargespaid for getting permission for use of land/evacuation of land forunhindered space and hence the payment of NOC andregistration” cannot be sustained. 30. But the body of the letter, we must say, does not refer toTNEB’s evacuating the land. In the letter, the assessee merely asksShubh Reality to arrange “for the land (a prox. 2 acres perWTG)”. The assessee also requires Shubh Reality to “pay ITA No.27 of 2015 12 Infrastructure Development Charges (IDC) @ `32.30 lakh perWTG” to TNEB. Therefore, the Tribunal’s concluding that theexpenditure was “more in the nature of administrative chargespaid for getting permission for use of land/evacuation of land forunhindered space and hence the payment of NOC andregistration” cannot be sustained. 31. To install the wind turbine generators, the assessee musthave excavated some earth on the land it purchased. Suchexcavation, to our mind, does not amount to improving the land;rather, it amounts to a preparatory step for erecting the windturbines. Therefore, the land evacuation, if any, must be taken aspart of infrastructure development for establishing the windmills. 32. CIT (A) has observed that the assessee has separatelypaid to one Suzion Infrastructure Ltd for the infrastructuredevelopment and commissioning of the Wind Turbines: WindMill foundation, electrical yards, erection, installing, testing, andcommissioning Transmission Lines. True. But do these paymentsconstrain us to conclude that whatever was paid to TNEB musthave been towards developing land, with which TNEB has ITA No.27 of 2015 13 nothing to do? No. 33. So we are compelled to conclude that the AO and boththe appellate authorities have misread and misapplied theevidence, and that has led to the perversity of findings. Wereckon it to be a judicially reviewable error and accordingly setaside the Tribunal’s finding on the depreciation. As a result, thedepreciation of `38,76,000 (50% for second half addition)claimed on the windmills was allowed. New Line of Business And Source of Capital: 34. The assessee assails the AO’s disallowing `83.21 lakhstowards interest on investment expenditure the assessee incurredon its new the line of business. 35. To dilate, the assessee secured a licence to operate an FM Radio, investing `8,32,16,000, though it had not yet started thebroadcast. In response to an AO’s notice, the assessee maintainedthat it invested in the new line of business from its own fundsand that it had no occasion to capitalize the interest. In otherwords, it had borrowed no capital. The AO disbelieved theassessee’s assertions. ITA No.27 of 2015 14 36. While rejecting the assessee’s claim, the AO has foundthat that the company’s balance sheet as on 31.3.2006 showedborrowed funds at `805.87 crore. Against this, the assessee’s ownfunds, excluding the statutory reserves, are shown at only `77.98crores. He concluded that the assessee had no influx of fundsduring the year, but had its borrowed funds increased by `100crore. As a result, the AO worked out interest @10% on theinvestment, the total amounting to `83,21,600/- 37. In this context, we may examine section 36 (1) of theIncome Tax Act. 36. Other deductions.— (1) The deductions provided for inthe following clauses shall be allowed in respect of thematters dealt with therein, in computing the incomereferred to in Section 28— (i) . . . (ii) . . . (iii) the amount of the interest paid in respect of capitalborrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect ofcapital borrowed for acquisition of an asset [* * *] (whethercapitalised in the books of account or not); for any periodbeginning from the date on which the capital was borrowedfor acquisition of the asset till the date on which such assetwas first put to use, shall not be allowed as deduction. ITA No.27 of 2015 15 36. Other deductions.— (1) The deductions provided for inthe following clauses shall be allowed in respect of thematters dealt with therein, in computing the incomereferred to in Section 28— (i) . . . (ii) . . . (iii) the amount of the interest paid in respect of capitalborrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect ofcapital borrowed for acquisition of an asset [* * *] (whethercapitalised in the books of account or not); for any periodbeginning from the date on which the capital was borrowedfor acquisition of the asset till the date on which such assetwas first put to use, shall not be allowed as deduction. ITA No.27 of 2015 15 38. Section 28 concerns profits and gains of business orprofession. Under section 36 (1) of the Act, if assessee paysinterest on the capital borrowed for the business or profession, itcan deduct the interest. But the proviso carves out an exception:the assessee may borrow capital to acquire an ‘asset’—distinguished from ‘business or profession’. Then, till the asset isused, the assessee cannot claim the deduction. 39. Indeed, the assessee asserted that it had its own net fundof `63.73 crores as on 31.3.2005; it submitted before the AO acopy of its audited financial statement. 40. Pithily put, the assessee objected to AO’s capitalisinginterest. It contends that its new line of business is only anexpansion of its existing business. It has also contended that ithas not diverted funds to any third party. And so the investmentmust be treated as revenue expenditure. 41. As seen from the record, the authorities haveconcurrently held that the assessee has forayed into an entirelynew business, and so whatever investment it has made must ITA No.27 of 2015 16 amount to capital investment. Eventually, the authorities haveheld, applying the proviso to section 36 (1) (iii), that the assesseeborrowed capital to acquire an asset (a licence to broadcast) andthat the business had not commenced. 42. The Tribunal, while concurring with the primary andappellate authorities, has observed that to claim the benefit ofexpenditure, it must concern business carried on by the assessee,and the profits to be computed and assessed to tax should beearned after the business is set up. It has concluded on facts that,by the time the assessee claimed the tax benefit, it had not set upthe business or made it operational; so the question of interestconcession under section 36 (1) (iii) of the Act does not arise. 43. Indisputably, the assessee could not demonstrate toAO’s satisfaction that it actually invested its own funds ratherthan those it borrowed. Thus, we find it difficult to upset theconcurrent findings. Indeed, the assessee did enter a new line ofbusiness, unconnected to its existing business, and it had not bythen commenced that new business. 44. So, we uphold the Tribunal’s findings on the AO’s ITA No.27 of 2015 17 disallowing Rs.83.21 lac towards interest on investment expenditure the assessee incurred on its new the line of business. 45. To sum up, we answer the substantial questions of law one and two in assessee’s favour; three and four in the Revenue’s favour. Thus, the appeal is partly allowed. No order on costs. sd/- Antony Dominic Acting Chief Justice sd/- Dama Seshadri Naidu Judge css/ true copy P.S.TO JUDGE