M/s. Mohit Industries Ltd., Surat V. The Dy.CIT.,Cent.Circle-1, Surat

CO 52/AHD/2012

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 8192 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 month(s) 24 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 11-01-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 08-01-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 17-02-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: Y P VERMA
• Assessee Lawyers: R K MAL
• Keywords: Depreciation; Additional depreciation; Earning of tax free income; Notional interest; Onus to prove
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD B BENCH BEFORE: SHRI D.K. TYAGI, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTAN T MEMBER I.T.A. NO.2493 & 2810/AHD/2010 A.Y.2007-08 M/S MOHIT INDUSTRIES LTD. A-601/B, INTERNATIONAL TRADE CENTRE, MAJURA GATE, SURAT PAN-AABCM5903E ( ASSESSEE) VS. DY. C.I.T., CENTRAL CIRCLE-1 SURAT ( DEPARTMENT ) WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012 A.Y.2008-09 DY. C.I.T., CENTRAL CIRCLE-1 SURAT ( DEPARTMENT ) VS. M/S MOHIT INDUSTRIES LTD. A WING, 601/B, INTERNATIONAL TRADE CENTRE, MAJURA GATE, SURAT, PAN-AABCM5903E ( ASSESSEE) DEPARTMENT BY : SHRI Y.P. VERMA, SR. D.R. ASSESSEE BY : SHRI R.K. MALPANI, A.R. DATE OF HEARING : 08.01.2013 DATE OF PRONOUNCEMENT : 11.01.2013 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER THESE APPEALS AND C.O. HAVE BEEN FILED AGAINST THE ORDER OF LD. CIT(A), AHMEDABAD DATED 01.07.2010 AND 18.11.2011. I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 2 2. SINCE ALL THE APPEALS BELONGS TO THE SAME ASSESS EE, FOR THE SAKE OF CONVENIENCE THEY ARE BEING DISPOSED OF BY THIS CONS OLIDATED ORDER. 3. FIRST WE TAKE UP I.T.A. NO.2493 & 2810/AHD/2010. IN I.T.A. NO.2493/AHD/2010 ASSESSEE HAS TAKEN FOLLOWING GROUN DS OF APPEAL:- 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF C ASE AND ALSO IN LAW THE LD. CIT(A) HAS ERRED IN UPHOLDING THE DISAL LOWANCE OF INTEREST U/S 14A OF THE I.T. ACT, 1961 IN RESPECT O F ADVANCE GIVEN TO M/S ALIDHARA TEXTOOL ENGINEERS PVT. LTD. 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AS WELL AS ON FACTS IN DIRECTING THE A.O. TO ALSO MAKE THE DISALLOWANCE U/ S 14A OF THE ACT IN RESPECT OF OTHER INVESTMENTS MADE BY THE ASSESSE E, WHEREAS NO SUCH DISALLOWANCE WAS MADE BY THE A.O. AND THE SAID ISSUE WAS NOT AT ALL THE SUBJECT MATTER OF THE APPEAL. THE DIREC TION GIVEN BY LD. CIT(A) IS WRONG ON FACTS AS WELL AS IN LAW. WHILE THE REVENUE IN I.T.A. NO.2810/AHD/2010 HAS TA KEN FOLLOWING GROUNDS OF APPEAL:- I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE AD DITION AT RS.14,17,786/- MADE ON ACCOUNT OF DISALLOWANCE OF I NTEREST MADE ON INTEREST FREE ADVANCES GIVEN TO THE SISTER CONCE RNS FOR NON- BUSINESS PURPOSE IGNORING THAT THE ASSESSEE WAS UNA BLE TO PROVE THE NEXUS BETWEEN THE INTEREST FREE FUNDS AVAILABLE WITH IT AND THE INTEREST BEARING FUNDS IN SPITE OF OPPORTUNITY GIVE N TO THE ASSESSEE TO EXPLAIN THE SAME VIDE ORDER SHEET ENTRY DATED 24 .12.2009. II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE AD DITION AT RS.14,17,786/- MADE ON ACCOUNT OF DISALLOWANCE OF I NTEREST MADE ON ADVANCES GIVEN TO THE SISTER CONCERNS FOR NON-BU SINESS PURPOSE, BY RELYING ON THE SUBMISSION OF THE ASSESSEE THAT A SSESSEE IS HAVING SUFFICIENT OWN FUNDS AND RESERVE AND SURPLUS TO COVER UP THESE LOANS. III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE AD DITION AT RS.14,17,786/- MADE ON ACCOUNT OF DISALLOWANCE OF I NTEREST MADE ON ADVANCES GIVEN TO THE SISTER CONCERNS FOR NON-BU SINESS PURPOSE, BY RELYING ON THE FOLLOWING CASE LAWS, IGNORING THA T AS THE FACTS OF THE BELOW MENTIONED CASE LAWS ARE QUITE DISTINGUISH ABLE FROM THE FACTS OF THE INSTANT CASE AS IN THESE JUDGMENTS, NO WHERE THE NEXUS I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 3 BETWEEN THE INTEREST FREE FUNDS AND INTEREST FREE A DVANCES WERE RAISED NEITHER BY THE ASSESSEE NOR THE REVENUE AND ALSO THE ADVANCES IN THOSE CASES WERE MADE TO BUSINESS PURPO SE, WHICH IS NOT THE CASE HERE. A) TORRENT FINANCIERS VS. ACIT 73 TTJ 624 (AHD) B) MUNJAL SALE CORPORATION VS. CIT 298 ITR (SC) C) CIT VS. RELIANCE UTILISE & POWER LTD. 313 ITR 340 D) CIT VS. RADICO KHETAN LTD. 274 ITR 354 (ALL) IV) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE AD DITION AT RS.14,17,786/- MADE ON ACCOUNT OF DISALLOWANCE OF I NTEREST MADE ON ADVANCES GIVEN TO THE SISTER CONCERNS FOR NON-BU SINESS PURPOSE, RELYING ON THE FACTS OF MUNJAL SALE CORPORATION VS. CIT 298 ITR (SC) IGNORING THAT THE ABOVE JUDGMENTS WAS MADE ON A DIFFERENT CONTEXT AS OBSERVED BY THE COURT IN ITS EXPLANATION OF LEGAL POSITION INVOLVED IN THAT PARTICULAR CASE. V) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, LD. CIT(A) ERRED IN IGNORING THE RATIO OF THE FOLLOWING CASE L AWS WHILE DEVIDING TO DELETE THE ADDITIONS, WHEREIN, VARIOUS COURTS HA VE TAKEN THE VIEW THAT THE ONUS TO PROVE THE NEXUS BETWEEN THAT INTER ET FREE FUNDS AND THE INTEREST FREE ADVANCES SQUARELY LIES WITH T HE ASSESSEE AND NO ON THE REVENUE AND IN THE INSTANT CASE THE ASSES SEE FAILED TO EXPLAIN THE NEXUS BETWEEN THE INTEREST FREE FUNDS A ND INTEREST FREE ADVANCES GIVEN TO SISTER CONCERNS FOR NON-BUSINESS PURPOSE IN SPITE OF GIVEN SUFFICIENT OPPORTUNITY. VI) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE AD DITION OF RS.62,77,368/- MADE ON ACCOUNT OF DISALLOWANCE ON A DDITIONAL DEPRECIATION CLAIMED HOLDING THAT ASSESSEES BUSINE SS OF TEXTURISING OF YARN IS A MANUFACTURING ACTIVITY. VII) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LD. CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE AD DITION OF RS.62,77,368/- MADE ON ACCOUNT OF DISALLOWANCE ON A DDITIONAL DEPRECIATION CLAIMED, HOLDING THAT TEXTURING OF YAR N IS A MANUFACTURING ACTIVITY AS PER THE DECISION OF THE H ONBLE SUPREME COURT IN THE CASE OF CIT VS. EMPTEE POLY YARN P. LT D. 229 CTR 1 (SC) IGNORING THE OBSERVATION OF COURT IN THE ABOVE CASE THAT THIS JUDGMENT SHOULD NOT BE UNDERSTOOD TO MEAN THAT PER SE TWISTING AND TEXTURISING WOULD CONSTITUTE MANUFACTURE IN E VERY CASE. VIII) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE LD. CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE AD DITION OF RS.62,77,368/- MADE ON ACCOUNT OF DISALLOWANCE ON A DDITIONAL DEPRECIATION CLAIMED, HOLDING THAT TEXTURING OF YAR N IS A I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 4 MANUFACTURING ACTIVITY AS PER THE DECISION OF THE H ONBLE SUPREME COURT IN THE CASE OF CIT VS. EMPTEE POLY YARN P LTD . 229 CTR 1 (SC) IGNORING THAT THE ASSESSEE IN SITE OF GIVEN SU FFICIENT OPPORTUNITY TO EXPLAIN THE BASIS FOR CLAIM OF ADDIT IONAL DEPRECIATION HAS FAILED TO GIVE ANY EXPLANATION THAT THE BUSINES S OF THE ASSESSEE IS MANUFACTURING, RATHER THAN RELYING UPON THE JUDG MENT IN THE CASE OF CIT VS. KASHIRAM TEXTILE MILLS LTD. 123 TAX MAN 831 (GUJ), THE FACTS OF WHICH IS QUITE DISTINGUISHABLE FROM TH E FACTS OF THE INSTANT CASE. IX) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) ERRED IN LAW AND IN FACTS IN DELETING THE AD DITION OF RS.62,77,368/- MADE ON ACCOUNT OF DISALLOWANCE ON A DDITIONAL DEPRECIATION CLAIMED, HOLDING THAT TEXTURING OF YAR N IS A MANUFACTURING ACTIVITY AS PER THE DECISION OF HONB LE SUPREME COURT IN THE CASE OF CIT VS. EMPTEE POLY YARN P LTD . 229 CTR 1 (SC) IGNORING THAT THE COURT IN ITS JUDGMENT HAS OB SERVED THAT THIS JUDGMENT IS GIVEN ON A PARTICULAR CONTEXT THAT IN T HE RELEVANT CASE, EXPERT OPINION, AS TO WHETHER TEXTURISING IN THAT P ARTICULAR CASE IS MANUFACTURING OR NOT, WAS OBTAINED BY THE ASSESSEE FROM, MUMBAI UNIVERSITY AND DEPARTMENT HAS NOT GIVEN ANY OBJECTI ON TO THE FINDING OF THE EXPERTS AND FURTHER HOLD THAT IN VIE W OF THE ABOVE CONTEXTUAL POSITION OF THE CASE THIS JUDGMENT SHOUL D NOT BE UNDERSTOOD TO. 4. THE GROUNDS TAKEN BY THE ASSESSEE AND THE GROUND NOS. I) TO V) TAKEN BY THE REVENUE RELATE TO DISALLOWANCE OF INTEREST O F RS.14,17,786/- BY THE A.O. 5. DURING THE ASSESSMENT PROCEEDINGS THE A.O. OBSER VED THAT ASSESSEE HAS TAKEN HUGE LOANS ON WHICH INTEREST WAS BEING PAID B UT AT THE SAME TIME ASSESSEE HAS ADVANCED FOLLOWING LOAN AS ADVANCE FOR NON-BUSINESS PURPOSE ON WHICH NO INTEREST HAS BEEN CHARGED:- SR.NO. NAME OF THE PARTY AMOUNT (RS.) 1. HARIHAR REALTOR 17,00,000/- 2. NAVNIDHI DYING * PRINITING MILLS 20,00,000/- 3. SHAH SILK CORPORATION 5,34,902/- 4. SHREE KRISHNA SYNTHETICS 4,00,000/- 5. SHREE BALAJI FAHION 10,00,000/- 6. SUMEET INDUSTRIES LTD. 85,00,000/- 7. EARNEST MONEY DEPOSIT-BOB (ADVANCE FOR 73,96,500 /- I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 5 FLAT) 8. AALIDHARA TEXTOOL ENGINEERS PVT. LTD. 2,00,00,00 0/- IN RESPECT OF ADVANCES GIVEN TO AALIDHARA TEXTOOL E NGINEERS PVT. LTD., ASSESSEES CLAIM WAS THAT IT WAS GIVEN FOR MACHINER Y. HOWEVER, FROM FURTHER INQUIRY IT WAS FOUND THAT ADVANCES GIVEN TO M/S AAL IDHARA TEXTOOL ENGINEERS PVT. LTD. WAS GIVEN BY M/S ALIDHARA TEXTOOL TOMOHIT YARNS LTD., A SISTER CONCERN, WHO IN TURN HAS INVESTED THE SAME IN THE R IGHT SHARES OF THE ASSESSEE COMPANY. HENCE IT WAS EVIDENT THAT THE AD VANCE WAS USED FOR PURCHASING THE SHARE OF OWN CONCERN. FURTHER, THE A.O. OBSERVED THAT THE LOAN GIVEN TO OTHERS ALSO WAS ALSO FOR NON-BUSINESS PURPOSES. THE ASSESSEES CLAIM WAS THAT THIS WAS GIVEN FROM INTEREST FREE FU NDS LIKE SHARE CAPITAL AND RESERVES BUT INSPITE OF BEING SPECIFICALLY ASKED BY THE A.O. TO FILE THE BANK BOOK AND BANK STATEMENT OF THE RELEVANT PERIOD TO S HOW THAT THESE LOANS AND ADVANCES HAVE BEEN GIVEN FROM INTEREST FREE FUNDS, THE ASSESSEE DID NOT DO THE SAME AND DID NOT PROVE THE NEXUS. THEREFORE, T HE A.O. DISALLOWED THE CORRESPONDING INTEREST AND MADE THE ADDITION OF RS. 14,17,786/- TO THE INCOME OF THE ASSESSEE. BEFORE LD. CIT(A) THE SUBMISSION OF THE ASSESSEE WAS THAT ADVANCES HAVE BEEN GIVEN FOR BUSINESS PURPOSE AND E VEN IF IT WAS PRESUMED THAT THESE WERE NOT GIVEN FOR BUSINESS PURPOSE, THE N ALSO NO INTEREST CAN BE DISALLOWED AS THE ASSESSEE COMPANY WAS HAVING SUFFI CIENT OWN CAPITAL (RS.4,78,86,000/- AS SHARE CAPITAL + RS.2,45,98,894 /- AS RESERVE AND SURPLUS AS ON 31.03.2006) OR INTEREST FREE FUNDS TO COVER U P THESE LOANS. FURTHER, DURING THE PERIOD FRESH CAPITAL WAS RECEIVED AND AL SO PROFIT HAS BEEN EARNED. I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 6 HENCE, NO INTEREST CAN BE DISALLOWED. FOR MAKING T HIS SUBMISSION RELIANCE WAS PLACED ON THE CASE LAWS OF TORRENT FINANCIERS V S. ACIT 73 TTJ 624 (AHD), MANJUL SALES CORPORATION VS. CIT 298 ITR 298 (SC), CIT VS. RELIANCE UTILIZE & POWER LTD. 313 ITR 340 AND CIT VS. RADICO KHETAN LT D. 274 ITR 354 (ALL.). IT WAS FURTHER SUBMITTED ON BEHALF OF THE ASSESSEE THA T LOAN GIVEN TO AALIDHARA TEXTOOL ENGINEERS PVT. LTD. WAS AS ADVANCE TO SUPPL Y OF MACHINERY AND IT WAS FOR THE BUSINESS PURPOSE AND OUT OF COMMERCIAL EXPE DIENCY. THE LOAN GIVEN BY THE SAID PARTY TO SISTER CONCERN WAS A SEPARATE AND INDEPENDENT TRANSACTION. THE OTHER LOANS GIVEN WERE ALSO FOR T HE BUSINESS PURPOSES. RELYING ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT 288 ITR 1 IT WAS FURTHER SUBMITTED THA T WHEN THE LOAN WAS GIVEN FOR BUSINESS EXIGENCY, NO DISALLOWANCE CAN BE MADE EVEN THOUGHT THERE MAY NOT BE A COMMERCIAL BENEFIT TO THE ASSESSEE. 6. AFTER TAKING INTO CONSIDERATION THESE SUBMISSION S OF THE ASSESSEE LD. CIT(A) HELD THAT THE ADVANCES WERE GIVEN TO ALL THE SISTER CONCERNS OUT OF SUFFICIENT OWN FUNDS IN THE FORM OF SHARE CAPITAL A ND RESERVES AND SURPLUS AVAILABLE TO THE ASSESSEE AND THEREFORE NO INTEREST CAN BE DISALLOWED IN RESPECT OF THESE LOANS FOLLOWING THE DECISION RELIE D BY THE ASSESSEE. IN RESPECT OF ADVANCES GIVEN TO AALIDHARA TEXTOOL ENGINEERS PV T. LTD. LD. CIT(A) OBSERVED AS UNDER:- HOWEVER, IN RESPECT OF THE ADVANCE GIVEN TO ALIDHA R TEXTOOL ENGG. P. LTD., I DO NOT AGREE WITH THE APPELLANTS VIEW. THE CLAIM OF THE APPELLANT THAT THIS WAS GIVEN FOR THE PURCHASE OF M ACHINERY, IS NOT FOUND CORRECT AS NO MACHINERY WAS RECEIVED AGAINST THIS AMOUNT. FURTHER, IT HAS BEEN BROUGHT ON RECORD BY THE ASSES SING OFFICER THAT THE ADVANCE GIVEN HAS BEEN DIVERTED TO SISTER CONCE RN M/S MOHIT YARNS LTD. WHO IN TURN DIVERTED IT TO THE APPELLANT ITSELF AS AMOUNT GIVEN FOR SHARE PURCHASE. THUS, THE AMOUNT HAS BEE N INDIRECTLY INVESTED FOR SHARE PURCHASE FOR THE SHARES OF APPEL LANT COMPANY I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 7 ITSELF. FOR ANY AMOUNT INVESTED FOR SHARE PURCHASE , IS HIT BY PROVISIONS OF SECTION 14A OF THE I.T. ACT. AS THE AMOUNT INVESTED IS FOR EARNING INCOME WHICH IS EXEMPT AND NOT TAXABLE, THE INTEREST ON THE FUNDS USED FOR THIS PURPOSE IS NOT ALLOWABLE. IT DOES NOT MAKE A DIFFERENCE WHETHER INVESTMENT HAS RESULTED INTO E ARNING THE DIVIDEND INCOME WHICH IS EXEMPT, OR DURING THE PERI OD NO DIVIDEND HAS BEEN EARNED. IT WILL ALSO NOT MAKE A DIFFERENC E WHETHER INVESTMENT IS DIRECTLY MADE IN THE SHARES BY THE AP PELLANT COMPANY OR IT IS DONE USING THE CONDUIT OF OTHER ENTITIES B UT IN A SPIRIT THE FACT IS THAT THE APPELLANTS FUND IS USED FOR THE P URCHASE OF SHARES. WHEN THE PROVISION OF SECTION 14A IS APPLICABLE, TH E CASE LAWS RELIED ON BY THE APPELLANT ARE NO LONGER APPLICABLE AS THE Y ARE FOR THE DISALLOWANCE OF INTEREST U/S 36(1)(III) AND NOT U/S 14A OF THE ACT. FOR THIS, THE AMOUNT OF DISALLOWANCE HAS TO BE CALC ULATED USING RULE 8D OF THE I.T. RULES. AS THE ISSUE UNDER APPEAL IS DISALLOWANCE OF INTEREST ONLY, THE CIT(A) CAN DECIDE THE ISSUE WHET HER THE SAME IS DONE BY SECTION 36(1)(III) OR U/S 14A OF THE I.T. A CT. WHEN IT IS CONSIDERED UNDER SECTION 14A OF THE I.T. ACT, THE O THER INVESTMENT MADE IN THE SHARES BY THE APPELLANT COMPANY HAS ALS O TO BE CONSIDERED. FROM THE BALANCE SHEET FILED BY THE AP PELLANT DURING THE APPELLATE PROCEEDINGS, IT IS SEEN THAT THE APPE LLANT HAS INVESTED A SUM OF RS.2,66,47,200/- IN VARIOUS SHARES/SHARE A PPLICATION MONEY. HENCE, THE CORRESPONDING INTEREST HAS TO BE DISALLOWED U/S 14A OF THE I.T. ACT ON THESE INVESTMENTS ALSO. THE ASSESSING OFFICER IS DIRECTED TO RECOMPUTED THE DISALLOWANCE OF INTEREST U/S 14A OF THE I.T. ACT BY APPLYING RULE 8D OF THE I.T. RULES IN RESPECT OF INVESTMENT MADE FOR RS.2,66,47,200/- AS WELL AS FOR LOAN AND ADVANCES GIVEN OF RS.2,00,00,000/- WHICH HAS ULTIMA TELY BEEN INVESTED IN SHARES IN THE APPELLANT COMPANY ITSELF. 7. AGGRIEVED BY THE RELIEF GIVEN BY LD. CIT(A) TO A SSESSEE, REVENUE IS IN APPEAL BEFORE US WHILE THE ASSESSEE HAS FILED THE A PPEAL AGAINST THE RELIEF BEING NOT GIVEN IN RESPECT OF LOAN/ADVANCE GIVEN TO AALIDHARA TEXTOOL ENGINEERS PVT. LTD. 8. AT THE TIME OF HEARING BEFORE US LD. COUNSEL OF THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE LD. CIT(A) AND FURTHER SUBMITTED THAT NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR E ARNING EXEMPT INCOME. THEREFORE, LD. CIT(A) WAS NOT JUSTIFIED IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT IN ASSESSEES CASE AND WAS NOT JUSTI FIED TO DIRECT THE A.O. TO I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 8 RECOMPUTE THE DISALLOWANCE OF INTEREST BY APPLYING RULE 8D OF THE I.T. RULES IN RESPECT OF INVESTMENT MADE BY THE ASSESSEE OF RS.2, 66,47,200/- AS WELL AS FOR LOAN ADVANCE GIVEN OF RS.2 CRORES. IT WAS FURTH ER SUBMITTED THAT RULE 8D OF THE I.T. RULES CAME INTO EFFECT FROM THE ASSESSM ENT YEAR 2008-09 AND WAS NOT APPLICABLE FOR THE YEAR UNDER APPEAL. LD. D.R. , ON THE OTHER HAND, RELIED ON THE ORDER OF THE A.O. 9. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD WE FIND THAT THERE IS NO DISPUTE ABOUT THE FACT THAT ASSESSEE HA S SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL OF RS.4,78,86,00 0/- AND RESERVE AND SURPLUS AMOUNTING TO RS.2,45,98,894/- TO COVER THE LOANS OF RS.4,15,31,402/- GIVEN BY THE ASSESSEE TO EIGHT PARTIES INCLUDING AALIDHAR A TEXTOOL ENGINEERS PVT. LTD. THERE IS NO FINDING EITHER BY THE A.O. OR BY LD. CIT(A) THAT ANY PORTION OF THE BORROWED FUNDS WAS UTILIZED FOR ADVANCING THESE LOANS. SINCE NO BORROWED FUNDS WERE UTILIZED FOR ADVANCING THESE LO ANS AND ASSESSEE WAS HAVING SUFFICIENT FUND AVAILABLE TO HIM TO ADVANCE THESE LOANS, IN VIEW OF THE LAW AS LAID DOWN IN THE CASES OF TORRENT FINANCIERS VS. ACIT 73 TTJ 624 (AHD), MANJUL SALES CORPORATION VS. CIT 298 ITR 298 (SC), CIT VS. RELIANCE UTILIZE & POWER LTD. 313 ITR 340 AND CIT VS. RADICO KHETAN LT D. 274 ITR 354 (ALL.), NO PORTION OF THE INTEREST PAID ON BORROWED CAPITAL CA N BE DISALLOWED. 10. IN VIEW OF THE ABOVE, ASSESSEES APPEAL IS ALLO WED AND GROUND NO.1 TO 5 OF THE REVENUES APPEAL ARE DISMISSED. 11. GROUND NO.6 TO 9 OF REVENUES APPEAL RELATE TO DISALLOWANCE OF ADDITION DEPRECIATION CLAIM U/S 32(1)(2A) OF THE ACT FOR RS. 62,77,368/-. DURING THE ASSESSMENT PROCEEDINGS THE A.O. OBSERVED THAT ASSES SEE HAS CLAIMED THE ADDITIONAL DEPRECIATION OF RS.62,77,388/- @ 15%. H OWEVER, THE SAME WAS I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 9 DISALLOWED BY THE A.O. ON THE GROUND THAT THE TAXTU RISING WAS NOT A MANUFACTURING ACTIVITY. FOR MAKING THIS ADDITION T HE A.O. RELIED ON THE DECISION OF THE MUMBAI BENCH IN THE CASE OF JATTA P OLY YARN PVT. LTD. 50 ITD 368. LD. CIT(A), HOWEVER, PLACING RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. EMPTEE POLY YA RN P. LTD. 229 CTR 1 (SC) HELD THAT THE TAXTURISING OR TWISTING OF YARN WERE NOT MANUFACTURING ACTIVITIES AND THEREFORE ASSESSEE HAS RIGHTLY CLAIM ED ADDITIONAL DEPRECIATION U/S 32(1)(IIA) OF THE ACT FOR RS.62,77,368/-. SINC E LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE BY PLACING RELIANCE ON THE DECISION OF HONBLE SUPREME COURT, WE FIND NO INFIRMITY IN THE ORDER PASSED BY HIM AND THE SAME IS HEREBY UPHELD. THUS, GROUND NOS.6 TO 9 ARE ALSO DISMISSED . 12. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED AND REVENUES APPEAL IS DISMISSED. 13. NOW COMING TO I.T.A. NO.126/AHD/2012 OF THE REV ENUE AND C.O. NO.52/AHD/2012 OF THE ASSESSEE. 14. REVENUE IN ITS APPEAL THOUGH HAS TAKEN SIX GROU NDS BUT ALL RELATED TO DISALLOWANCE OF INTEREST OF RS.14,67,106/- MADE BY THE A.O. 15. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O. OBSERVED THAT THE ASSESSEE COMPANY HAD GIVEN INTEREST FREE LOANS AND ADVANCES TO SIX PARTIES MENTIONED IN THE TABLE GIVEN IN PARA 5 OF THE ASSES SMENT ORDER. THE A.O. ALSO OBSERVED THAT THESE INTEREST FREE LOANS AND ADVANCE S WERE NOT FOR THE BUSINESS PURPOSE. THE ASSESSEE COMPANY HAS PAID INT EREST ON BORROWINGS BY WAY OF TERM LOANS AND WORKING CAPITAL LIMITS THE WA Y FROM BANK AND FINANCIAL INSTITUTIONS. THUS, THE A.O. WAS OF THE VIEW THAT INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR GIVING THESE INTEREST FREE LOANS AND ADVANCES. THE A.O. I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 10 CALCULATED THE NOTIONAL INTEREST ON THIS LOANS AND ADVANCES AT RS.14,67,106/- @ 12% PER ANNUM AND ASKED THE ASSESSEE TO SHOW CAUS E AS TO WHY THE INTEREST TO THE TUNE OF RS.14,67,106/- SHOULD NOT B E DISALLOWED IN RESPECT OF UTILIZATION OF BORROWED FUNDS FOR GRANTING THE ABOV E INTEREST FREE LOANS AND ADVANCES WHICH WERE NOT FOR BUSINESS PURPOSES. THE ASSESSEES REPLY WAS THAT ASSESSEE HAD GIVEN INTEREST FREE ADVANCES OUT OF THE BUSINESS EXITENCY AND IN COURSE OF BUSINESS. THE ASSESSEE ALSO SUBMI TTED THAT IT HAS SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AN D RESERVE SURPLUS AVAILABLE WITH IT TO COVER UP THE ADVANCES. IT WAS ALSO ARGU ED THAT INTEREST HAS BEEN PAID ON THE BORROWED FUNDS WHICH HAVE BEEN DIRECTLY UTILIZED FOR THE PURPOSE OF BUSINESS HENCE NO INTEREST CAN BE DISALLOWED IN RESPECT OF THESE ADVANCES. IT WAS ALSO CONTENDED BEFORE THE A.O. THAT THE IDEN TICAL DISALLOWANCE MADE IN RESPECT OF THESE ADVANCES IN ASSESSMENT YEAR 2007-0 8 HAS ALREADY BEEN DELETED BY LD. CIT(A). HOWEVER, THE ASSESSEES SUB MISSION WAS NOT ACCEPTABLE TO THE A.O. ACCORDINGLY HE MADE DISALLO WANCE OF RS.14,67,106/- OUT OF INTEREST EXPENDITURE ON THE GROUND THAT THE BORROWED FUNDS TO THIS EXTENT WERE NOT UTILIZED TO THE ABOVE EXTENT BUT WE RE UTILIZED FOR ADVANCING THESE LOANS. 16. LD. CIT(A) DELETED THIS ADDITION BY OBSERVING A S UNDER:- 7.1 I HAVE CAREFULLY GONE THROUGH THE REASONS MENT IONED BY THE A.O. IN THE ASSESSMENT ORDER AS WELL AS THE ELABORA TE ARGUMENTS MADE ON BEHALF OF THE APPELLANT. I HAVE ALSO CONSI DERED THE JUDICIAL PRONOUNCEMENTS PLACED BEFORE ME. THE MAJORITY OF T HESE ADVANCES WERE GRANTED DURING THE COURSE OF F.Y. 2006-07 RELE VANT TO A.Y. 2007-08. FROM THE AUDITED FINANCIAL STATEMENTS OF THE APPELLANT, IT IS EVIDENT THAT THE SHARE CAPITAL AND RESERVES AND SURPLUS OF THE APPELLANT COMPANY AT THE END OF 31 ST MARCH, 2007 AS WELL AS 31 ST MARCH, 2008 WERE MUCH MORE THAN THESE LOANS AND ADV ANCES. THE TOTAL AMOUNT OF THE LOANS AND ADVANCES GRANTED BY T HE APPELLANT INCLUDING THE FLAT AT SOFFITEL TOWER WORKS TO BE RS .2.19 CRORES. AS I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 11 AGAINST WHICH THE SHARE CAPITAL AND RESERVES AND SU RPLUS AS ON 31- 03-2007 WAS RS.21.98 CRORES AND AS ON 31-03-2008 TH E SAME WERE AT RS.24.51 CRORES. THEREFORE, IT IS CLEAR THAT TH E APPELLANT HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT TO COVER UP ABOVE LOANS AND ADVANCES. IN THE CASE LAWS RELIED UPON T HE APPELLANT IT HAS BEEN HELD THAT IF THE APPELLANT IS HAVING SUFFI CIENT INTEREST FREE FUNDS AVAILABLE WITH IT TO COVER UP THE INTEREST FR EE LOANS AND ADVANCES, THEN NO DISALLOWANCE OF INTEREST CAN BE M ADE FOR THE INTEREST ON BORROWED FUNDS. FURTHER, IN THE APPELL ANTS CASE THE INTEREST HAS BEEN PAID ONLY ON SECURED LOANS AND WO RKING CAPITAL LIMITS FROM BANKS AND FINANCIAL INSTITUTION. THESE BORROWINGS WERE DIRECTLY USED FOR THE BUSINESS PURPOSES. BANKS/FIN ANCIAL INSTITUTIONS ARE ALSO HAVING MONITORING OVER THE END USE OF THES E FUNDS. IN THE CASE OF KUSUM SILK MILLS PVT. LTD. (SUPRA), HONBLE ITAT, AHMEDABAD HAS HELD AS FOLLOWS:- THE INTEREST FREE ADVANCES TO SISTER CONCERN IS ON LY TO EXTEND OF RS.10.95 LACS, WHEREAS INTEREST-FREE FUND IN THE FO RM OF CAPITAL AND RESERVE IS OVER RS.515.51 LACS. THOUGH THE INTERES T-FREE FUNDS ARE PAID OUT OF CASH CREDIT, THE CASH CREDIT ACCOUNT DI D NOT RECORD ONLY THE LOAN TAKEN BUT ALSO RECORDS THE SALE PROCEEDS O F GOODS AND PROFIT AMOUNT THEREON. THIS GOES TO SWELL THE RESE RVE. THEREFORE, IT CANNOT BE HELD THAT THE INTEREST FREE ADVANCES I S OUT OF INTEREST FREE FUND AVAILABLE WITH THE ASSESSEE. IN SUCH CIR CUMSTANCES, NO DISALLOWANCE IS CALLED FOR. WE, THEREFORE, DELETE THE ADDITION MADE BY THE AO . 7.2 RESPECTFULLY FOLLOWING THE ABOVE CASE LAWS AND DECISION IN THE PRECEDING YEAR A.Y. 2006-07 BY MY LEARNED PREDECESS OR, I HOLD THAT NO DISALLOWANCE CAN BE MADE OF INTEREST AS THE APPELLANT HAS SUFFICIENT INTEREST FREE FUNDS IN FORM OF SHARE CAP ITAL AND RESERVES & SURPLUS AVAILABLE WITH IT TO COVE R UP THESE LOANS AND ADVANCES. FURTHER, THE BORROWED FUNDS WERE CLEARLY UTILIZED F OR THE BUSINESS PURPOSES. THEREFORE, THE DISALLOWANCE OF INTEREST OF RS.14,67,106/- IS HEREBY DELETED AND ACCORDINGLY, THIS GROUND OF A PPEAL IS ALLOWED. 17. SINCE, LD. CIT(A) HAS GIVEN RELIEF TO THE ASSES SEE BY FOLLOWING HIS PREDECESSORS ORDER FOR THE A.Y. 2007-08 WHICH HAS BEEN UPHELD BY US IN I.T.A. NO.2493 & 2810/AHD/2010, WE FEEL NO NEED TO INTERFERE WITH THE ORDER PASSED BY HIM AND THE SAME IS HEREBY UPHELD. 18. IN THE RESULT, REVENUES APPEAL IS DISMISSED. I.T.A. NO.2493 & 2810/AHD/2010, A.Y.2007-08 WITH I.T.A. NO.126/AHD/2012 WITH C.O. NO.52/AHD/2012, A.Y.2008-09 12 19. AS FAR AS THE C.O. FILED BY THE ASSESSEE IS CON CERNED, AT THE TIME OF HEARING THE SAME WAS NOT PRESSED AND THEREFORE, THE C.O. OF THE ASSESSEE IS DISMISSED AS NOT PRESSED. 20. IN THE COMBINED RESULT, ASSESSEES APPEAL (ITA NO.2493/AHD/2010) IS ALLOWED AND REVENUES APPEAL (ITA NO.2810/AHD/2010) IS DISMISSED. REVENUES APPEAL (ITA NO.126/AHD/2012) AS WELL AS C .O. OF THE ASSESSEE (C.O. NO.52/AHD/2012) ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 11.01.20 13 SD/- SD/- (A.MOHAN ALANKAMONY) (D.K. TYAGI ) ACCOUNTANT MEMBER JUDICIAL MEMBER TRUE COPY N.K. CHAUDHARY, SR. P.S. COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD 6. THE GUARD FILE BY ORDER AR,ITAT,AHMEDABAD