M/s Rico Casting Limited, Ludhiana V. ACIT, Ludhiana

CO 42/CHANDI/2014

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 1400 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 1 month(s) 14 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 30-11-2015
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 16-09-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 16-10-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Earning of tax free income; Question of law
• Section: 14A; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L. KARWA, HONBLE VICE PRESIDENT AND MS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER ITA NO.724/CHD/2014 ASSESSMENT YEARS:2009-10 THE ACIT VS. RICO CASTING LIMITED CIRCLE 1 B-26 LUDHIANA FOCAL POINT LUDHIANA PAN NO. AADCR4805Q & CROSS OBJECTION APPEAL NO. 42/CHD/2014 (IN ITA NO.724/CHD/2014) ASSESSMENT YEARS:2009-10 RICO CASTING LIMITED VS. THE ACIT B-26 CIRCLE 1 FOCAL POINT LUDHIANA LUDHIANA PAN NO. AADCR4805Q (APPELLANT) (RESPONDENT) APPELLANT BY : SH. SUBHASH AGGARWAL RESPONDENT BY : SH. S.K. MITTAL DATE OF HEARING : 17/09/2015 DATE OF PRONOUNCEMENT : 30/11/2015 ORDER PER ANNAPURNA MEHROTRA A.M. THIS APPEAL FILED BY THE REVENUE AND CROSS OBJECTIO N BY THE ASSESSEE IS AGAINST THE ORDER OF CIT(A)- I, LUDHIANA DATED 06.0 5.2014. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FI LED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR ON 29.09.2009 SHOWING NIL INCOME. THEREAFTER, ASSESSMENT PROCEEDINGS WERE INITIATED DURING THE CO URSE OF WHICH THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD MADE INVESTMENT S TO THE TUNE OF RS.6,06,48,305/- IN SHARES OF GROUP COMPANIES AND E ARNED DIVIDEND INCOME OF RS. 9,23,630/-. LD. ASSESSING OFFICER BY APPLYING T HE PROVISIONS OF SECTION 14A 2 READ WITH RULE 8D COMPUTED THE DISALLOWANCE OF EXPE NSES INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME AMOUNTING TO RS. 2 4,53,928/- AS FOLLOWS: AMOUNT (RS.) DISALLOWANCE AS PER 8D(II) 21,50,686 DISALLOWANCE AS PER 8D(III) 3,03, 242 ______________ TOTAL 24, 53, 928 ============= 3. AGGRIEVED BY THE SAME THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A) WHO VIDE HIS ORDER DATED 06.05.2014 RESTRICTED THE DISALLOWANCE TO RS. 9,23,660/- BY HOLDING AT PARA 5 OF HIS ORDER AS FOLLOWS: 5. I HAVE CONSIDERED THE FACTS OF THE CASE THE BA SIS OF APPLICATION OF RULE 8D BY THE ASSESSING OFFICER AND SUBMISSIONS OF THE APP ELLANT DURING ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS. IT IS SEEN THAT THE APPELLANT HAS HUGE AMOUNTS OF CASH PROFITS IN ALL THE YEARS, AS HIGHLIGHTED IN TH E TABLE BELOW: YEAR CASH PROFITS SHARE CAPITAL INVESTMENT MADE 2003-04 78.68 359.75 17.71 2004-05 112.87 359.75 10.56 2005-06 254.09 359.75 1.00 2006-07 495.15 359.75 - 2007-08 747.78 359.75 1.45 2008-09 64.03 719.50 8.25 THE INVESTMENT ARE QUITE MINISCULE IN COMPARISON TO CASH PROFITS. THE DIVIDEND INCOME AS SUBMITTED BY THE ASSESSING OFFICER ON THE ENTIRE INVESTMENT HAS BEEN MADE TO THE TUNE OF RS. 9,23,660/-. THE DISALLOWANC E AS WORKED OUT BY THE ASSESSING OFFICER COMES TO RS. 24,53,928/- WHICH HA S BEEN ON THE PRESUMPTION THAT ENTIRE INTEREST EXPENDITURE DEBITED IN THE P&L ACCOUNT IS INDIRECTLY RELATED TO INVESTMENTS IN EXEMPT ASSETS WHICH IS NOT APPARENT FROM THE FACTS OF THE CASE. THE INTEREST ACCOUNT DEBITED IN P&L ACCOUNT AS RECO RDED BY THE ASSESSING OFFICER IS RS. 99,71,495/- OUT OF WHICH RS. 21,50,686/- HAS BEEN TREATED AS ATTRIBUTABLE TO IMPUGNED INVESTMENTS. THE CONCLUSION ARRIVED BY THE ASSESSING OFFICER REGARDING THE ENTIRE EXPENDITURE INDIRECTLY ATTRIBUTABLE TO E XEMPT INVESTMENT IS NOT LEGALLY SUSTAINABLE. HOWEVER, KEEPING INTO VIEW THE ENTIRET Y OF CIRCUMSTANCES THE DISALLOWANCE U/S 14A IS RESTRICTED TO DIVIDEND INCO ME CREDITED IN THE P&L ACCOUNT TO THE TUNE OF RS. 9,23,660/- AS HELD BY TH E HONBLE ITAT CHANDIGARH BENCH IN THE CASE OF PUNJAB STATE COOP & MARKETING FEDERATION LTD. IN ITA NO.548/CHD/2011. 4. AGGRIEVED BY THE SAME THE REVENUE FILED APPEAL B EFORE US AGAINST THE RELIEF PROVIDED TO THE ASSESSEE TO THE EXTENT OF RS . 15,30,268/-WHILE THE ASSESSEE IS IN APPEAL AGAINST THE DISALLOWANCE OF RS. 9,23,6 60/- UPHELD BY THE CIT(A) U/S 14A OF THE INCOME TAX ACT, 1961 5. WE HAVE HEARD THE RIVAL SUBMISSIONS CAREFULLY AN D PERUSED THE MATERIALS ON RECORD PLACED BEFORE US. 6. AT THE OUTSET IT IS STATED THAT THE LD. AR DID N OT PRESS THE CROSS OBJECTION FILED AND THEREFORE THE SAME IS TREATED AS DISMISSE D. 3 7. AS FOR THE APPEAL FILED BY THE REVENUE, LD. DR A RGUED THAT SINCE MIXED FUNDS WERE USED FOR MAKING INVESTMENTS, THEREFORE B Y VIRTUE OF THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CAS E OF ABHISHEK INDUSTRIES LTD. 286 ITR 1, SOME INTEREST EXPENDITURE IS ATTRIBUTABL E TO THE INVESTMENTS MADE AND THEREFORE THE DISALLOWANCE OF INTEREST U/S 14A IS V ALID. LD. DR FURTHER RELIED UPON THE ORDER OF THE A.O. 8. LD. AR ON THE OTHER HAND RELIED UPON THE ORDER O F THE LD. CIT(A) AND PLEADED THAT THE DISALLOWANCE MADE U/S 14A COULD NO T EXCEED THE EXEMPT INCOME EARNED, BEING DIVIDEND IN THE PRESENT CASE, AMOUNTING TO RS. 9,23,660/-. LD. AR RELIED UPON THE DECISION OF THE ITAT CHANDIG ARH BENCH IN THE CASE OF M/S EMPIRE PACKAGES(P) LTD. IN ITA NO. 978/CHD/2013 DT. 18/06/2015 AND THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF JOI NT INVESTMENTS (P) LTD. VS. CIT IN ITA NO. 117/2015 DT. 25/02/2015 IN THIS REGARD. 9. WE HAVE HEARD THE SUBMISSIONS OF BOTH THE PARTIE S AND HAVE PERUSED THE DOCUMENTS PLACED BEFORE US AS ALSO THE ORDERS OF TH E AUTHORITIES BELOW. 10. THE UNDISPUTED FACTS EMERGING IN THE PRESENT C ASE ARE THAT INVESTMENTS TO THE TUNE OF RS. 6,06,48,305/- WERE MADE BY THE ASSE SSEE IN THE SHARES OF GROUP COMPANIES AND ALL THE INVESTMENTS MADE WERE VERY OL D AND NO NEW INVESTMENTS WERE MADE IN THE IMPUGNED YEAR. EXEMPT INCOME IN THE NATURE OF DIVIDEND AMOUNTING TO RS. 9,23,630/- WAS EARNED BY THE ASSESSEE ON THESE INVESTMENTS DURING THE IMPUGNED ASSESSMENT YEAR. FU RTHER, INTEREST EXPENSES INCURRED DURING THE YEAR BY THE ASSESSEE AMOUNTED T O RS. 99,71,495/-. LD. ASSESSING OFFICER DISALLOWED INTEREST EXPENSES OF R S. 21,50,686/- BY COMPUTING THE SAME AS PER RULE 8D(II) OF THE INCOME TAX RULES . IN THE BACKDROP OF THE ABOVE FACTS WE SHALL PROCEED TO NOW DEAL WITH THE I SSUE AT HAND. UNDER THE PROVISIONS OF SECTION 14A OF THE INCOME T AX ACT, ALL EXPENSES INCURRED IN RELATION TO INCOMES WHICH ARE EXEMPT FROM TAX IS TO BE DISALLOWED. THE 4 MACHINERY PROVISION FOR CALCULATING THE AMOUNT OF D ISALLOWABLE EXPENDITURE IS PROVIDED U/S 14A(2) READ WITH RULE 8D OF THE INCOME TAX RULES 1962. AS PER RULE 8D, EXPENSES INCURRED IN RELATION TO EXEMPT INCOME ARE TO BE CATEGORIZED AS DIRECT AND INDIRECT EXPENSES. ALL DIRECT EXPENSES I NCURRED IN RESPECT TO EARNING EXEMPT INCOME ARE TAKEN INTO CONSIDERATION UNDER RU LE 8D(I). THE INDIRECT EXPENSES INCURRED BY THE ASSESSEE FOR THE PURPOSE O F EARNING EXEMPT INCOME ARE FURTHER CATEGORIZED INTO INDIRECT EXPENSES RELA TING TO INTEREST AND OTHER INDIRECT EXPENSES. FOR DETERMINING THE AMOUNT OF IN DIRECT EXPENSES INCURRED WHICH CANNOT BE CLEARLY IDENTIFIED FROM THE BOOKS O F THE ASSESSEE, A FORMULA HAS BEEN PROVIDED FOR WORKING OUT THE AMOUNT OF EXPENDI TURE INCURRED. IN THE CASE OF INTEREST THE SAME IS WORKED OUT BY AS PER RULE 8 D(II) BY APPORTIONING THE INTEREST EXPENDITURE WHICH CANNOT BE DIRECTLY ATTRI BUTABLE TO THE INVESTMENTS, IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENTS TO TH E TOTAL ASSETS OF THE ASSESSEE. SIMILARLY, THE OTHER EXPENSES INCURRED FOR THE PURP OSE OF EARNING EXEMPT INCOME ARE CALCULATED AS PER RULE 8D(III) BY ATTRIBUTING % OF THE AVERAGE VALUE OF INVESTMENTS AS BEING EXPENDITURE INCURRED FOR THE P URPOSE. 11. IN THE PRESENT CASE WE FIND THAT THE DISALLOWAN CE HAS BEEN MADE BY APPLYING RULE 8D(II), MEANING THEREBY THAT INTEREST EXPENSES NOT CLEARLY AND DIRECTLY IDENTIFIABLE WITH EARNING EXEMPT INCOME HA VE BEEN APPORTIONED FOR DISALLOWANCE U/S 14A. LD. COUNSEL FOR THE ASSESSEE HAS PLEADED THAT THERE WERE HUGE SURPLUS FUNDS WITH THE ASSESSEE IN THE YEAR IN WHICH INVESTMENTS HAVE BEEN MADE. THE ASSESSEE PRODUCED A CHART EXPLAINING THE SAME BEFORE THE LOWER AUTHORITIES. THE LD. CIT(A) AFTER PERUSING THE CHAR T HAS ALSO GIVEN A FACTUAL FINDING ON THIS ASPECT AT PARA 5 OF HIS ORDER WHERE IN IT WAS FOUND BY THE LD. CIT(A) THAT THERE WAS HUGE AMOUNT OF CASH PROFITS I N ALL THE YEARS. WE FIND THAT THIS FACT HAS REMAINED UNCONTROVERTED BY THE REVENU E. IN SUCH CIRCUMSTANCES, WE CONCUR WITH THE FINDINGS OF THE LD. CIT(A), THAT THE ENTIRE INTEREST EXPENDITURE CANNOT BE INDIRECTLY RELATED TO INVESTMENTS IN EXEM PT ASSETS. 5 WE FURTHER FIND NO INFIRMITY IN THE ORDER OF THE LD . CIT(A) RESTRICTING THE DISALLOWANCE U/S 14A TO THE EXTENT OF EXEMPT INCOME EARNED AMOUNTING TO RS. 9,23,660/- FOLLOWING THE DECISION OF THE HONBLE IT AT CHANDIGARH BENCH IN THE CASE OF PUNJAB STATE COOP. & MARKETING FEDERATIO LT D. IN ITA NO. 548/CHD/2011. THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT I NVESTMENT PVT. LTD. VS. CIT (ITA NO. 117/CHD/2015 DT. 25/02/2015) HAS AFFIRMED THIS VIEW HOLDING THAT DISALLOWANCE U/S 14A READ WITH RULE 8D CANNOT EXCEE D THE EXEMPT INCOME. THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT I NVESTMENT PVT. LTD. VS. CIT(SUPRA) MADE THE FOLLOWING IMPORTANT OBSERVATION S: 7. DURING THE COURSE OF HEARING, COUNSEL FOR THE PETITIONER HAD RELIED UPON A DECISION OF THIS COURT IN COMMISSIONER OF INCOME TA X VI V. TAIKISHA ENGINEERING INDIA LTD., (ITA 115/2014, DECIDED ON 25.11.2014). THE COURT HAD, IN THAT JUDGMENT, HIGHLIGHTED THE NECESSITY IN VIEW OF THE PECULIAR W ORDING OF SECTION 14 A (2) THAT COMPUTATION OR DISALLOWANCE OF THE ASSESSEE, OR CLA IM THAT NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME SHOULD BE EXAMIN ED WITH REFERENCE TO THE ACCOUNTS AND ONLY IF THE ASSESSEES EXPLANATION IS UNSATISFACTORY, CAN THE AO PROCEED FURTHER. 8. THE COURT IN TAIKISHA ENGINEERING (SUPRA) PERTINENT LY OBSERVED:- THUS, SECTION 14 A (2) OF THE ACT AND RULE 8 D(1) IN UNISON AND AFFIRMATIVELY RECORD THAT THE COMPUTATION OR DISALLOWANCE MADE BY THE ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME M UST BE EXAMINED WITH REFERENCE TO THE ACCOUNTS, AND ONLY AND WHEN THE EX PLANATION / CLAIM OF THE ASSESSEE IS NOT SATISFACTORY, COMPUTATION UNDER SUB RULE(2) TO RULE 8 D OF THE RULES IS TO BE MADE. 13. WE NEED NOT, THEREFORE, GO ON TO SUB RULE (2) T O RULE 8D OF THE RULES UNTIL AND UNLESS THE ASSESSING OFFICER HAS FIRST RECORDED THE SATISFACTION, WHICH IS MANDATED BY SUB SECTION(2) TO SECTION 14 A OF THE ACT AND SU B RULE (1) TO RULE 8 D OF THE RULES. 9. IN THE PRESENT CASE, THE AO HAS NOT FIRSTLY DISCLOS ED WHY THE APPELLANT / ASSESSEES CLAIM FOR ATTRIBUTING RS. 2,97,440/- AS A DISALLOWANCE UNDER SECTION 14 A HAD TO BE REJECTED. TAIKISHA SAYS THAT THE JURISDIC TION TO PROCEED FURTHER AND DETERMINE AMOUNTS IS DERIVED AFTER EXAMINATION OF T HE ACCOUNTS AND REJECTION IF ANY OF THE ASSESSEES CLAIM OF EXPLANATION. THE SEC OND ASPECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE AO A N ASPECT WHICH IS COMPLETELY UNNOTICED BY THE CIT(A) AND THE ITAT. TH E THIRD, AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UN MINDFUL IS THAT WHEREAS THE ENTIRE TAX EXEMPT INCOME IS RS. 48,90,000/-, THE DI SALLOWANCE ULTIMATELY DIRECTED WORKS OUT TO NEARLY 110% OF THAT SUM,I.E., RS. 52,5 6,197/-. BY NO STRETCH OF IMAGINATION CAN SECTION 14A OR RULE 8 D BE INTERPRE TED SO AS TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME IS TO BE DISALLOWED. THE W INDOW FOR DISALLOWANCE IS INDICATED IN SECTION 14 A, AND IS ONLY TO THE EXTEN T OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE TAX EX EMPT INCOME. THIS PROPORTION OR PORTION OF THE TAX EXEMPT INCOME SURELY CANNOT SWAL LOW THE ENTIRE AMOUNT AS HAS HAPPENED IN THIS CASE. 6 10. FOR THE ABOVE REASONS, THE IMPUGNED ORDER OF THE IT AT IS SET ASIDE. THE QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESS EE. CONSEQUENTLY, ORDER OF THE AO IS SET ASIDE. THE INITIATION OF PENALTY PROCEEDI NGS ALSO IS SET ASIDE. THE MATTER IS REMITTED TO THE AO FOR FRESH CONSIDERATION IN ACCOR DANCE WITH THE ABOVE DIRECTIONS. THE APPEAL IS PARTLY ALLOWED. IN THE INSTANT CASE, THE INCOME FROM DIVIDEND HAS B EEN SHOWN AT RS. 9,23,660/-, THE DISALLOWANCE UNDER SECTION 14 A REA D WITH RULE 8 D WORKED OUT BY THE ASSESSING OFFICER COMES TO RS. 24,53,928 /-. THUS IT IS CLEAR THAT THE AO HAS DISALLOWED THE ENTIRE TAX EXEMPT INCOME WHICH IS NOT PERMISSIBLE IN VIEW OF THE JUDGMENT OF THE HONBLE DELHI HIGH COURT REFERRED TO ABOVE. THE HONBLE DELHI HIGH COURT HEL D THAT THE WINDOW FOR DISALLOWANCE IS INDICATED IN SECTION14 A, AND IS ON LY TO THE EXTENT OF DISALLOWING EXPENDITURE INCURRED BY HE ASSESSEE I N RELATION TO THE TAX EXEMPT INCOME. THE DISALLOWANCE UNDER SECTION 14 A READ WITH RULE 8 D AS WORKED OUT BY THE AO IS NOT IN ACCORDANCE WITH L AW AND AS SUCH WORKING IS NOT SUSTAINABLE. IN VIEW OF THE ABOVE WE UPHOLD THE ORDER OF THE LD. CIT(A) RESTRICTING THE DISALLOWANCE U/S 14A TO RS. 9,23,660/-. 12. THE APPEAL OF THE REVENUE AGAINST THE DELETION OF THE DISALLOWANCE MADE U/S 14 A OF THE ACT OF RS. 15,30,268 IS DISMIS SED. 13. IN THE RESULT BOTH THE APPEAL FILED BY THE REVE NUE AND CROSS OBJECTION OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30/11/2015 SD/- SD/- (H.L. KARWA) (ANNAPURNA MEHROTRA) VICE PRESIDENT ACCOUNTANT MEMBER DATED :30/11/2015 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR