The ACIT, Ward-3(1), Ahmedabad V. M/s. Nirma Credit & Capital P. Ltd., Ahmedabad

ITA 1057/AHD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 6094 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-02-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2010-2011
• Appeal Filed On: 27-04-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: V K SINGH
• Keywords: Opportunity of being heard; Earning of tax free income; Source of fund; Proportionate interest
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH AHMEDABAD BEFORE, SHRI S. S. GODARA, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ITA NOS. 105 7 TO 1059/AHD/2016 (ASSESSMENT YEARS: 2010-11 TO 2012-13) ASST. COMMISSIONER OF INCOME-TAX, WARD-3(1)(1), AHMEDABAD A PPELLANT VS. M/S. NIRMA CREDIT & CAPITAL P. LTD., NIRMA HOUSE, ASHRAM ROAD, AHMEDABAD 380009 RESPONDENT PAN: AAACN5351J /BY REVENUE : SHRI V. K. SINGH, SR. D.R. /BY ASSESSEE : SHRI HIMANSHU SHAH, A.R. /DATE OF HEARING : 12.02.2018 /DATE OF PRONOUNCEMENT : 16.02.2018 ORDER PER S. S. GODARA, JUDICIAL MEMBER THESE THREE REVENUES APPEALS FOR ASSESSMENT YEARS 2010-11 TO 2012-13 ARISE AGAINST THE CIT(A)-9, AHMEDABADS ORDERS DATE D 08.02.2016 (IN FORMER TWO CASES) AND 09.02.2016 (IN LAST ONE) PASSED IN CASE NOS. CIT(A)-9/104/ACIT, CIR- 5/13-14, CIT(A)-9/168/ACIT-CIR-5/13-14 & CIT(A)-9/6 33/ITO.WD.3(1)(1)/14-15; RESPECTIVELY, REVERSING ASSESSING OFFICERS IDENTIC AL ACTION(S) INVOKING SECTION 14A DISALLOWANCE(S) OF RS.1,13,02,712/-, RS.53,76,180/- & RS.59,55,852/- IN NORMAL COMPUTATION AS WELL AS MAT PURPOSES, IN PROCEEDINGS U/S. 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT. ITA NOS. 1057 TO 1059/AHD/16 [ACIT VS. M/S. NIRMA C REDIT & CAPITAL P. LTD. ] A.Y. 2010-11 - 2 - 2. BOTH THE LEARNED REPRESENTATIVES ARE FAIR ENOUGH IN EXPRESSING THEIR AGREEMENT TO THE CIT(A)S IDENTICAL CONCLUSION IN A LL THE THREE IMPUGNED ASSESSMENT YEARS HOLDING THAT THE FACT OF ASSESSEE HAVING SUFFICIENT INTEREST FREE FUNDS LEAD TO SAFE A PRESUMPTION THAT IT HAD MADE T HE IMPUGNED TAX FREE INVESTMENTS THEREFROM ONLY THAN FROM INTEREST BEARING BUSINESS FUNDS. MR. SHAH TAKES US TO CIT(A)S OPERATIVE PART IN ASSESSMENT YEAR 2010-11 READING AS UNDER: 5.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE, CONTENTIONS OF THE APPELLANT AS WELL AS THE CASE LAWS RELIED UPON BY T HE APPELLANT AND THE ORDER OF A..O. THE A.O HAS MADE AN ADDITION OF RS. 1,13,02,7 12/- ON ACCOUNT OF DISALLOWANCE U/S.14A R.W. RULE 8D OF THE I.T.RULES. THE APPELLANT HAS RECEIVED DIVIDEND OF AN AMOUNT OF RS.42,53,607/-. DURING THE YEAR UNDER CONSIDERATION THE APPELLANT HAS ALSO MADE NEW INVESTMENT BY PURCHASE OF DEBENTURES OF SHREE RAMA MULTITECH LTD. OF RS. 54.50 LACS AND EQUITY SHARES OF KALUPUR COOPERATIVE BANK LTD. OF RS.0.02 LAC. AGAINST THE SAME THE APPELLANT HAD RECEIVED CONSIDERATION OF RS.11.99 LACS OF HPCL, RS.6.40 LACS F.C.S. SOFTWARE SOLUTIONS LTD., ONGC RS.143.10 LACS AND STEEL AUTHORITY OF INDIA LTD. RS .28.99 LACS. THE ADDITION TO THE INVESTMENT IS LESS THAN THE SALES CONSIDERATION OF THE SHARES. DURING THE ASSESSMENT PROCEEDINGS THE APPELLANT HAS EXPLAINED THE SOURCE OF THESE INVESTMENTS TO THE A.O.. THE APPELLANT IS CLAIMING THAT IT HAS NOT INC URRED ANY EXPENDITURE IN ORDER TO EARN THE SAID EXEMPT INCOME. DURING THE ASSESSMENT PROCEEDINGS AS WELL AS APPELLATE PROCEEDINGS THE APPELLANT HAD SUBMITTED T HAT IT HAD SHARE CAPITAL AND RESERVES OF RS. 25,33 CRORES AS ON 31/3/2010.; DURI NG THE APPELLATE PROCEEDINGS THE APPELLANT HAS ALSO SUBMITTED THAT THE DIVIDEND WHICH WAS RECEIVED WAS CREDITED DIRECTLY TO THE BANKS. FURTHER, THE APPELLANT HAS A LSO RELIED ON VARIOUS JUDGMENTS DISCUSSING THE AVAILABILITY OF NON-INTEREST BEARING FUNDS AND DISALLOWANCE U/S.14A OF THE ACT. IT IS A MATTER OF :FACT THAT-THE APPELL ANT HAD THE SHARE CAPITAL AND RESERVES AMOUNTING TO RS: 25.33 CRORES AGAINST THE INVESTMENT OF RS.21.65 CRORES WHICH IS MORE THAN THE INVESTMENT. IT IS SEEN FROM THIS EXPLANATION THAT THESE INVESTMENTS HAVE NOT BEEN MADE OUT OF ANY BORROWED FUNDS. THE APPELLANT HAS PLACED ITS RELIANCE ON 'THE JUDGMENT OF JURISDICTIO NAL HIGH COURT IN THE CASE OF UTI BANK LTD. 32 TAXMAN.COM 370 (GUJ.) AND CIT VS SUZLO N ENERGY LTD. 354 ITR 630 (GUJ). IN BOTH THE CASES IT HAS BEEN HELD THAT WHER E THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS TO MEET ITS TAX FREE INVESTMENT YIELDING EXEMPT INCOME THEN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE MADE FROM INT EREST FREE FUNDS AND NOT LOANED FUNDS .AS WELL AS THERE EXIST NO DIRECT NEXU S BETWEEN INTEREST BEARING BORROWED FUNDS AND SUCH INVESTMENTS. THEREFORE, NO DISALLOWANCE U/S.14A IS WARRANTED. THE APPELLANT HAS ALSO RELIED UPON VARIO US OTHER CASE LAWS AS MENTIONED IN THE SUBMISSION OF THE APPELLANT. I AGR EE WITH THE PRINCIPLES LAID DOWN IN THE CASE LAW OF UTI BANK LTD. AND SUZLON ENERGY LTD(SUPRA) AND VARIOUS OTHER JUDGMENTS OF JURISDICTIONAL HIGH COURT. CONSIDERING THE AVAILABILITY OF NON-INTEREST BEARING FUNDS IN THE HANDS OF THE APPELLANT FOR MAK ING INVESTMENTS AND EARNING EXEMPT INCOME, I AM OF THE CONSIDERED OPINION THAT NO DISALLOWANCE UNDER SUB- SECTION 14A IS WARRANTED IN THIS CASE. ACCORDINGLY, THE A.O IS DIRECTED TO DELETE THE DISALLOWANCE OF RS,1,13,02,712/- MADE U/S.14A OF TH E ACT. THUS, THIS GROUND OF APPEAL IS ALLOWED. ITA NOS. 1057 TO 1059/AHD/16 [ACIT VS. M/S. NIRMA C REDIT & CAPITAL P. LTD. ] A.Y. 2010-11 - 3 - 3. HE THEREAFTER REFERS TO LEARNED CO-ORDINATE BENC HS DECISION IN ITA NO.980/AHD/2012 IN ASSESSEES CASE ITSELF FOR ASSES SMENT YEAR 2008-09 WHEREIN A CO-ORDINATE BENCH HAD FOLLOWED MORGAN STANLEY INDIA SECURITIES LTD. VS. ACIT (2011) 55 KTR 177 (MUM) AND DCIT VS. TRADE APARTMEN TS LTD. (ITA NO. 1277/KOL/2011, DATED 30.03.2012 IN DIRECTING THE AS SESSING OFFICER TO RESTRICT THE IMPUGNED DISALLOWANCE ON NET OF INTEREST AMOUNT THA N GROSS INTEREST EXPENDITURE. LEARNED COUNSEL THEREAFTER INFORMS US THAT THE REVE NUE HAD PREFERRED TAX APPEAL NO. 409 OF 2017 BEFORE HONBLE JURISDICTIONAL HIGH COURT. THE SAME ALSO STANDS DECLINED IN ORAL JUDGMENT DATED 31.08.2017. LEARNE D DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND REFERS TO TRIBUNALS CO-ORDINATE BENCHS ORDER IN ASSESSEES CASE ITSELF FOR IMMEDIATE PRECEDING ASSESSMENT YEAR 2009 -10 ITA NO.1189/AHD/2013 REMITTING THE ISSUE BACK TO THE ASSESSING OFFICER A FTER CONSIDERING THE ABOVE 2008- 09 ORDER AS FOLLOWS: 7.2 IT WAS THUS CANVASSED THAT THE COORDINATE BENC H OF ITAT HAS HELD IN THE EARLIER YEAR IN ASSESSEE'S OWN CASE THAT THE ASSESS EE IS ENTITLED TO SET OFF OF INTEREST RECEIVED AGAINST THE INTEREST INCURRED BY THE ASSES SEE AND ONLY SURPLUS INTEREST INCURRED IS SUSCEPTIBLE TO RULE 8D OF THE INCOME TA X RULES, 1962. THE REASONS FOR HOLDING SO BY THE CO-ORDINATE BENCH IS NOT FAR TO S EEK. THE SACROSANCT UNDERLYING PRINCIPLE TO ENABLE SUCH SET OFF IS THAT COST OF AV ERAGE BORROWED FUNDS TO THE EXTENT OF CORRESPONDING INTEREST GENERATING FUNDS REQUIRES TO BE FIRST NULLIFIED AND ONLY DIFFERENTIAL BORROWED FUNDS OVER AND ABOVE CORRESPO NDING FUNDS GENERATING INTEREST INCOME CAN BE DEEMED TO HAVE BEEN DEPLOYED FOR INVESTMENTS AND OTHER PURPOSES. THERE CAN BE NO QUARREL TO SUCH UNDERLYIN G SALUTARY PRINCIPLE. THE INTEREST ON BORROWED FUNDS EQUIVALENT TO CORRESPOND ING FUNDS GIVING RISE TO INTEREST INCOME NEEDS TO BE SET OFF AND MAY BE TREATED AS US ED FOR GENERATING INTEREST INCOME. 7.3 HOWEVER, TO APPRECIATE THE ISSUE IN PERSPECTIV E, LET US ILLUSTRATE THE POINT BY WAY OF AN EXAMPLE. SUPPOSE THE ASSESSEE HOLDS BO RROWED FUNDS OF SAY RS.100/- AND PAID INTEREST THEREON SAY RS.12/-. THE ASSESSEE SIMULTANEOUSLY HAS GIVEN ADVANCE OF SAY RS.80/- WHEREFROM THE ASSESSEE HAS E ARNED SAME INTEREST OF RS.12/- OWING TO HIGHER RATE. THE NET INTEREST EXPENDITURE INCURRED AFTER SET OFF THUS IS ZERO. HOWEVER, AS CAN BE SEEN, THE ASSESSEE HAS PLACED BA LANCE SUM OF RS.20/- OUT OF BORROWED FUNDS FOR PURPOSES OTHER THAN IMPUGNED FIN ANCING. THE ASSESSEE THUS IS CLEARLY NOT ENTITLED TO SET OFF OF INTEREST EXPENDI TURE IN RESPECT OF REMAINING BORROWED FUNDS NOT DEPLOYED IN ACTIVITY GENERATING INTEREST INCOME. AS A CONSEQUENCE, THE ASSESSEE CANNOT ESCAPE THE CLUTCHE S OF SECTION 14A READ WITH RULE 8D IN RESPECT OF INTEREST COSTS INCURRED ON DI FFERENTIAL BORROWED FUNDS OF RS.20/- UNLESS HE IS ABLE TO DEMONSTRATE THAT THE S URPLUS BORROWED FUNDS HAVE FOUND WAY IN SOME OTHER BUSINESS ACTIVITY IN COMMERCIAL S PIRIT. THUS, IN ESSENCE, IT IS THE BORROWED FUNDS AND THE CORRESPONDING ADVANCE WHICH IS REQUIRED TO BE MATCHED ITA NOS. 1057 TO 1059/AHD/16 [ACIT VS. M/S. NIRMA C REDIT & CAPITAL P. LTD. ] A.Y. 2010-11 - 4 - AND NOT MERE INTEREST COSTS AND INCOME ARISING THER EFROM. HOWEVER, PERTINENT HERE TO SAY, ONCE AN ASSESSEE IS ABLE TO BROADLY SHOW TH AT THE INTEREST FREE FUNDS AVAILABLE AT ITS DISPOSAL, OWN OR BORROWED, IS EQUI VALENT TO OR IN EXCESS OF INVESTMENT AND SOME OTHER NON- BUSINESS DEPLOYMENTS , THE PRESUMPTION OF USAGE OF INTEREST BEARING BORROWED FUNDS FOR BUSINESS ACTIVI TIES WOULD OPERATE FAVOURABLY. HOWEVER, PRESUMPTION IN FAVOUR OF THE ASSESSEE WOUL D BE AVAILABLE TAKING INTO CONSIDERATION TOTAL FUND POSITION AT A GIVEN POINT OF TIME. HENCE, THE ONUS RESTS ON THE ASSESSEE TO PRIMA FACIE DEMONSTRATE ITS CASE WI TH REFERENCE TO THE OVERALL FUND POSITION. 7.4 IN THE LIGHT OF ABOVE, WE NOW EXAMINE THE FACTS OF THE PRESENT CASE. FINANCIAL YEAR 2008-09 RELEVANT TO ASSESSMENT YEAR 2009-10 IS UNDER SCRUTINY. ON PERUSAL OF FINANCIAL STATEMENT FOR THE YEAR ENDING 2008-09 QUA 2007-08, WE NOTE THAT BORROWED FUNDS DURING THE YEAR HAS GONE UP BY NEARL Y 47.48 CRORES. THE CORRESPONDING INVESTMENT IN SHARES HAS GONE UP BY N EARLY RS. 10.70 CRORES AND REMAINING ADDITIONAL BORROWED FUNDS APPEARS TO BE H AVE BEEN PARKED IN LOANS AND ADVANCES DURING THE YEAR (RS. 10.33 CRORE) AND IN C ASH AND BANK BALANCE (RS. 24.50 CRORES). THUS, APPARENTLY SOME PART OF FRESH BORROWED FUNDS APPEARS TO HOLD PROXIMATE RELATIONSHIP WITH THE INCREASE IN THE INV ESTMENTS. HOWEVER, WE SEEK TO CLARIFY THAT THE FUND FLOW AND TOTAL FACTS IN THIS REGARD ARE NOT AVAILABLE BEFORE US. 7.5 NEEDLESS TO SAY, THE ASSESSEE IS PRIVY TO FACTS CONCERNING OVERALL SOURCE OF FUNDS AT ITS DISPOSAL AND APPLICATION THEREOF AT A GIVEN POINT OF TIME. THUS, THE PRIMARY ONUS WOULD LIE WITH THE ASSESSEE TO DEMONSTRATE THA T ITS CUMULATIVE OWN FUNDS TOGETHER WITH NON-INTEREST BEARING FUNDS ARE IN EXC ESS OF CUMULATIVE INVESTMENTS (GIVING RISE TO TAX-FREE INCOME) TOGETHER WITH OTHE R FORM OF NON BUSINESS INVESTMENTS/ UTILISATIONS. ONCE THE PRIMARY ONUS IS DISCHARGED BY THE ASSESSEE, THE ONUS WILL SHIFT TO THE REVENUE TO DEMONSTRATE THE C AUSE FOR DISALLOWANCE UNDER RULE 8D. THE BENEFIT OF PRESUMPTION WOULD BE AVAILABLE T O THE ASSESSEE PROVIDED THE OVERALL NON INTEREST BEARING FUND POSITION EQUALS T O OR EXCEEDS INVESTMENT AND OTHER NON BUSINESS UTILIZATIONS IN AGGREGATE. THUS, WHILE WE ARE IN PARITY WITH THE UNDERLYING PROPOSITION LAID DOWN IN ASSESSEE'S OWN CASE IN THE EARLIER YEAR IN ADMITTING SET OFF OF INTEREST EXPENDITURE, THE GOVE RNING FACTS TO DETERMINE THE ISSUE NEEDS ELABORATION FROM ASSESSEE. THE PRESUMPTION OF INTEREST BEARING BORROWED FUND DEEMED TO BE UTILIZED FOR BUSINESS PURPOSES AN D THUS OUT OF AMBIT OF SECTION 14A WOULD OPERATE ONLY TO THE EXTENT OF INTEREST FREE FUNDS AVAILABLE TO MEET THE INVESTMENT AND OTHER NON BUSINESS ACTIVITIES IN AGG REGATE. THE PROPORTIONATE INTEREST ON THAT PORTION OF BORROWED FUNDS WHICH SE EKS TO COVER THE SHORTFALL IN INVESTMENT WOULD THUS BE AMENABLE TO S. 14A READ WITH RULE 8D(2)(II) OF THE IT RULES. THUS, IN ORDER TO EXAMINE THE RELEVANT FACTS , IT WOULD BE EXPEDIENT TO REMIT THE ISSUE BACK TO THE FILE OF AO. THE AO SHALL GRAN T REASONABLE OPPORTUNITY TO ENABLE THE ASSESSEE TO DEMONSTRATE WHETHER OWN FUND S TOGETHER WITH INTEREST FREE FUNDS SURPASSES CORRESPONDING INVESTMENTS IN SHARES ETC. AND OTHER NON BUSINESS INVESTMENTS IN AGGREGATE. IN THE LIGHT OF ABOVE DIS CUSSION, THE ASSESSING OFFICER IS DIRECTED TO EXAMINE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER GIVING PROPER OPPORTUNITY OF BEING HEARD. 8. IN CONCLUSION, THE ASSESSEE WOULD BE ENTITLED TO BENEFIT OF SET OFF OF INTEREST ON AO BEING SATISFIED THAT THE ASSESSEE IS HOLDING SUF FICIENT OWN FUNDS TOGETHER WITH OTHER INTEREST-FREE BORROWED FUNDS AND OTHER RECEIP TS AT ITS COMMAND WHICH ARE ITA NOS. 1057 TO 1059/AHD/16 [ACIT VS. M/S. NIRMA C REDIT & CAPITAL P. LTD. ] A.Y. 2010-11 - 5 - SUFFICIENT TO COVER THE CORRESPONDING INVESTMENTS A ND OTHER NON-BUSINESS UTILIZATION OF FUNDS. THE DISALLOWANCE OF INTEREST, IF ANY, WOU LD THUS BE RESTRICTED IN PROPORTION TO THE SHORTFALL IN OWN FUNDS AND NON INTEREST BEAR ING FUND IN CUMULATIVE QUA AGGREGATE OF INVESTMENTS AND OTHER PERSONAL OR NON BUSINESS UTILIZATIONS AS NOTED ABOVE. 4. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO RI VAL SUBMISSIONS. THE ABOVE FACTS AND CIRCUMSTANCES SUFFICIENTLY INDICATE THAT THE ASSESSING OFFICER IS YET TO FINALISE HIS CONSEQUENTIAL COMPUTATION IN SAID PREC EDING ASSESSMENT YEAR(S) AFTER ADOPTING NETTING FORMULA. WE THEREFORE RESTORE THE INSTANT IDENTICAL ISSUE AS WELL BACK TO THE ASSESSING OFFICER FOR A FRESH DECISION AFTER ADOPTING SIMILAR NETTING FORMULA IN ALL THE THREE IMPUGNED ASSESSMENT YEARS AS WELL. THE REVENUES IDENTICAL SUBSTANTIVE GROUND(S) ARE THEREFORE ACCEP TED FOR STATISTICAL PURPOSES. 5. THESE REVENUES INSTANT THREE APPEALS ARE ACCORD INGLY ALLOWED FOR STATISTICAL PURPOSES. [PRONOUNCED IN THE OPEN COURT ON THIS T HE 16 TH DAY OF FEBRUARY, 2018.] SD/- SD/- ( AMARJIT SINGH ) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD: DATED 16/02/2018 TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE ! / CONCERNED CIT 4 !- / CIT (A) ( )*+ ,--. . /0 / DR, ITAT, AHMEDABAD 1 +23 45 / GUARD FILE. BY ORDER / . // . /0