ACIT, Ludhiana V. M/s Octave Apparels, Ludhiana

ITA 1064/CHANDI/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68531 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 01-08-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 23-10-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: EPASS LUDHIANA PAN NO AAAFG
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A CHANDIGARH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER AND MS SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO. 1064/CHD/2012 ASSESSMENT YEAR:2009-10 THE ACIT, VS M/S OCTAVE APPARELS, RANGE-III, G.T.ROAD (WEST), LUDHIANA. JALANDHAR BYE-PASS, LUDHIANA. PAN NO. AAAF0-3397G (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI AKHILESH GUPTA RESPONDENT BY : SHRI SUDHIR S EHGAL DATE OF HEARING : 06.08.2013 DATE OF PRONOUNCEMENT : 25.09.2013 O R D E R PER SUSHMA CHOWLA, J.M. THE REVENUE HAS FILED THE APPEAL AGAINST THE ORDER OF THE CIT(APPEALS)-I, LUDHIANA DATED 27.08.2012 RELATING TO ASSESSMENT YEAR 2009-10 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 ( 'THE ACT' FOR SHORT). 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FAC TS IN DELETING THE ADDITION OF RS. 17,44,205/- MADE BY TH E A.O. BY APPLYING PROVISIONS OF SECTION 14A OF THE INCOME TA X ACT, 1961 READ WITH RULE 8D OF INCOME TAX RULES, 1962 AN D DISALLOWED OF RS. 2,00,000/- OUT OF ADMINISTRATIVE EXPENSES, AS THE ASSESSEE HAS MADE INVESTMENTS IN VARIOUS FUNDS AND SHARES OF VARIOUS COMPANIES OUT OF BANK OVERDRAFT FACILITI ES AND UNSECURED LOANS RAISED DURING THE YEAR 2. THAT THE LD. CIT(A) HAS ERRED IN LAW IN DELETING THE ADDITION OF RS. 16,99,511/-, FALLING TO APPRECIATE THAT THE UNSECURED LOANS WERE TAKEN FOR EITHER PARTNERS OR R ELATIVES OF PARTNERS. THE SAID PERSONS ARE THE SPECIFIED PERSON S U/S 2 40A(2)(B) OF I.T. ACT 1961, FURTHER FAMILY CONCERN PROVIDES THE BEST RISK FREE PLATFORM TO INVEST MONEY FOR EAR NING INTEREST. 3. THE ISSUE IN GROUND NO. 1 RAISED BY THE ASSESSEE IS AGAINST THE DELETION OF ADDITION MADE UNDER SECTION 14A OF THE ACT. 4. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT D URING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NO TED THAT THE ASSESSEE HAD MADE INVESTMENT OF RS. 6.02 CR IN VARI OUS FUNDS AND SHARES OF COMPANIES. THE ASSESSEE WAS SHOW CAUSED TO EXPLAIN AS TO WHY EXPENSES PERTAINING TO THE EXEMPT INCOME SHOULD NOT BE DISALLOWED UNDER SECTION 14A OF THE ACT. THE EXPLA NATION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT SUCH INVESTMENT WAS MADE OUT OF OWN FUNDS AND HENCE, NO DISALLOWANCE UN DER SECTION 14A OF THE ACT WAS MERITED. THE ASSESSING OFFICER REJE CTED THE EXPLANATION FILED BY THE ASSESSEE AS THE ASSESSEE H AD FAILED TO PROVE AND SUBSTANTIATE THE DIRECT NEXUS BETWEEN THE FUNDS ARISING OUT OF DIFFERENT TYPES OF LOANS, OTHER PROFITS AND CURRENT ACCOUNTS AND INTERNAL ACCRUALS ON THE ONE HAND AND ITS UTILIZATI ON FOR VARIOUS CURRENT AND FIXED ASSETS ETC. ON THE OTHER HAND. T HE ASSESSING OFFICER, APPLYING THE PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE IT RULES, COMPUTED THE DISALLOWANCE AT RS. 17,44,205/-. 5. BEFORE THE CIT(APPEALS), THE ASSESSEE FURNISHED WRITTEN SUBMISSIONS WHICH ARE INCORPORATED UNDER PARA 3 AT PAGES 3 TO 13 OF THE APPELLATE ORDER. THE CIT(APPEALS) VIDE PARA 4 OBSERVED THAT THE INVESTMENT IN THE MUTUAL FUNDS TO THE TUNE OF RS. 6 CR HAD BEEN MADE DURING THE CURRENT YEAR. IT WAS FURTHER OBSERVED B Y THE CIT(APPEALS) THAT THERE WAS NO BORROWINGS BY THE ASSESSEE FROM F INANCIAL INSTITUTIONS/BANKS IN THE ENTIRE HISTORY OF THE CAS E AND FURTHER THE 3 BORROWINGS FROM FAMILY MEMBERS/SISTER CONCERNS ON I NTEREST HAD DECREASED AS COMPARED TO THE EARLIER YEARS, IMPLYIN G THAT NO ADDITIONAL FUNDS WERE BORROWED ON INTEREST DURING T HE YEAR UNDER CONSIDERATION. THE CIT(APPEALS), THUS HELD THAT TH E FUNDS BORROWED ON INTEREST HAD BEEN PUT TO SPECIFIC BUSINESS USE W HEREAS THE INVESTMENT IN TAX FREE ASSETS COULD ONLY BE ATTRIBU TABLE TO INTEREST FREE SOURCES I.E. ACCRUALS ON ACCOUNT OF PROFITS DU RING THE YEAR AND/OR BORROWINGS FREE OF INTEREST IN THE FORM OF CAPITAL. IN RESPECT OF THE INVESTMENT IN SHARES OF M/S OCTAVE APPARELS P.LTD. AMOUNTING TO RS. 2 LACS, THE CIT(APPEALS) NOTED THAT THE SAID INVEST MENT WAS MADE IN THE YEAR 1993-94 I.E. AT THE TIME OF INCORPORATION OF THE SAID COMPANY. THE CIT(APPEALS), THUS DELETED THE ADDITI ON MADE UNDER SECTION 14A OF THE ACT ON ACCOUNT OF INTEREST EXPEN DITURE. HOWEVER, ADDITION OF RS. 2 LACS WAS MADE OUT OF ADMINISTRATI VE EXPENSES BEING ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME UNDER SECTION 14A OF THE ACT. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE IS A PARTNERSHIP CONCERN. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD MADE INVESTMENTS TO TALING RS. 6 CR IN DIFFERENT MUTUAL FUNDS, AS DETAILED HEREUNDER : PARTICULARS DATE OF INVESTMENT AMOUNT OF INVESTMENT ABN AMRO BANK 25.08.2008 RS. 2,00,00,000 DSP MERILL LYNCH 27.06.2008 RS. 1,00,00,000 PNB FIX MATURITY PLAN 19.06.2008 RS. 1,00,00,000 SUNDERAM BNP TARI BUS 04.08.2008 RS. 1,00,00,000 UTI FIX TERM FUNDS 06.11.2008 RS. 1,00,00,000 7. ANOTHER INVESTMENT MADE BY THE ASSESSEE WAS IN S HARES OF OCTAVE APPARELS PVT. LTD. AMOUNTING TO RS. 2 LACS. THE SAID 4 INVESTMENT IN THE SHARES OF THE SAID COMPANY WERE M ADE IN THE FINANCIAL YEAR 1993-94 AS PER THE ASSESSEE. THE AS SESSEE HAD NOT RAISED ANY LIMIT FROM ANY BANK. HOWEVER, THE ASSES SEE HAD RAISED UNSECURED LOANS FROM DIFFERENT PARTIES WHICH WERE B ROUGHT FORWARD FROM THE EARLIER YEAR. THE TABULATED DETAILS OF TH E UNSECURED LOANS RAISED BY THE ASSESSEE AS ON 31.3.2008 AND 31.3.200 9 ARE INCORPORATED AT PAGES 4 & 5 OF THE APPELLATE ORDER. THE CLOSING BALANCE AS ON 31.3.2008 OF THE SAID UNSECURED LOANS WAS RS. 48424,786/- AND THE CLOSING BALANCE AS ON 31.3.2009 WAS RS. 42,760,968/-. THE INCREASE IN THE INDIVIDUAL BALAN CE OF THE SAID UNSECURED CREDITORS WAS ON ACCOUNT OF INTEREST AND IN ADDITION, THE ASSESSEE HAD REPAID LOANS TOTALING RS. 1,09,34,790/ -. THE ASSESSEE HAS PLACED ON RECORD THE BALANCE SHEET AS ON 31.3.2 008 AT PAGE 26 OF THE PAPER BOOK AND THE BALANCE SHEET RELATING TO AS SESSMENT YEAR 2009-10 AT PAGE 65 OF THE PAPER BOOK. THE PERUSAL OF THE SAID BALANCE SHEET REFLECTS NO FRESH UNSECURED LOANS HAV E BEEN RAISED EXCEPT IN THE CASE OF M/S RITESH PROPERTIES & INDUS TRIES LTD. WHICH IS ON ACCOUNT OF TRANSFER OF BALANCE BY THE PREDECESSO R COMPANY M/S RITESH INDUSTRIES LTD. TO ITS SUCCESSOR M/S RITESH PROPERTIES & INDUSTRIES LTD. AS EXPLAINED BY THE LD. AR FOR THE ASSESSEE AND AS NOTED BY CIT(APPEALS), DURING THE YEAR UNDER CONSID ERATION, THOUGH THE ASSESSEE HAS PAID INTEREST TOTALING RS. 52,70,9 72/- ON THE SAID UNSECURED LOAN. THE ASSESSEE BEFORE THE CIT(APPEALS ) HAS ELABORATELY EXPLAINED THE SOURCE APPLICATION CHART AND THE FUND S FLOW STATEMENT WHICH ARE INCORPORATED AT PAGES 6 & 7 OF THE APPELL ATE ORDER TO EXPLAIN THAT THE INVESTMENT IN THE MUTUAL FUNDS IS OUT OF ITS OWN FUNDS. THE PERUSAL OF THE BALANCE SHEET AS ON 31.3 .2008 DID NOT REFLECT THE SAID INVESTMENT IN MUTUAL FUNDS AND THE SAME AT RS. 6 CR 5 HAS BEEN SHOWN IN THE BALANCE SHEET AS ON 31.3.2009 . THE LD. AR FOR THE ASSESSEE HAS FURTHER POINTED OUT THAT THE INVES TMENT IN MUTUAL FUNDS MADE DURING THE YEAR UNDER CONSIDERATION WAS THROUGH WITHDRAWALS FROM HDFC BANK, COPY OF WHICH IS PLACED AT PAGES 115 TO 119 OF THE PAPER BOOK WHICH CLEARLY REFLECT THAT NO BORROWED MONEY HAS BEEN UTILIZED FOR THE PURPOSE OF SAID INV ESTMENTS. 8. THE ISSUE ARISING BEFORE US IS WHETHER IN THE AB OVESAID FACTS AND CIRCUMSTANCES WHERE NO BORROWINGS HAVE BEEN MAD E BY THE ASSESSEE EXCEPT FROM ITS FAMILY MEMBERS AND/SISTER CONCERN IN THE EARLIER YEARS, WHICH STANDS UTILIZED BY WAY OF APPL ICATION IN THE EARLIER YEARS, WHETHER PROVISIONS OF SECTION 14A RE AD WITH SECTION 8D(II) OF INCOME TAX RULES CAN BE APPLIED TO DISALL OW ANY PART OF THE IN EXPENDITURE RELATING TO TAX FREE INVESTMENTS. I N THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, WHERE THE BORROW INGS MADE BY THE ASSESSEE FROM ITS FAMILY MEMBERS AND SISTER CONCERN ON INTEREST HAD DECREASED FROM RS. 4.84 CR AS ON 31.3.2008 TO RS. 4 .27 CR AS ON 31.3.2009 AND ALSO NO BORROWINGS HAVE BEEN MADE BY THE ASSESSEE FROM THE BANKS ESTABLISH THE CLAIM OF THE ASSESSEE THAT NO ADDITIONAL FUNDS HAD BEEN BORROWED ON INTEREST DURING THE YEAR UNDER CONSIDERATION, WHICH COULD BE SAID TO HAVE BEEN UTI LIZED FOR THE PURPOSE OF INVESTMENT IN THE MUTUAL FUNDS TOTALING RS. 6 CR. IN VIEW THEREOF, THE SAID INVESTMENT IN TAX FREE ASSETS TO THE TUNE OF RS. 6 CR COULD ONLY BE ATTRIBUTABLE TO INTEREST FREE SOURCES I.E. EITHER THE ACCRETION ON ACCOUNT OF PROFIT DURING THE YEAR AND/ OR BORROWINGS FREE OF INTEREST IN THE FORM OF CAPITAL. THE INVESTMENT IN SHARES OF OCTAVE APPARELS PVT. LTD. AMOUNTING TO RS. 2 LACS HAD BEEN MADE IN THE EARLIER YEAR I.E. ASSESSMENT YEAR 1993-94. THE CIT (APPEALS) HAS GIVEN A FINDING THAT THE SAID INVESTMENT WAS MADE A T THE TIME OF 6 INCORPORATION OF THE SAID COMPANY AND THE LOANS STA NDING IN THE BOOKS OF THE ASSESSEE WERE NOT IN EXISTENCE AT THAT TIME. IN VIEW OF THE TOTALITY OF THE FACTS AND CIRCUMSTANCES, WE FIN D NO MERIT IN THE DISALLOWANCE OF INTEREST ATTRIBUTABLE TO THE INVEST MENT IN TAX FREE ASSETS UNDER SECTION 14A READ WITH SECTION 8D(II) O F THE ACT. THE CIT(APPEALS) HAS DISALLOWED RS. 2 LACS OUT OF ADMIN ISTRATIVE EXPENSES BEING ATTRIBUTABLE TO EARNING OF EXEMPT IN COME, AGAINST WHICH THE ASSESSEE IS NOT IN APPEAL. CONSEQUENTLY, WE UPHOLD THE ORDER OF CIT(APPEALS) AND DISMISS GROUND NO.1 RAISE D BY THE REVENUE. 9. THE ISSUE IN GROUND NO. 2 RAISED BY THE REVENUE IS AGAINST THE DELETION OF ADDITION OF RS. 16,99,511/-. THE ASSES SING OFFICER NOTED THAT THE ASSESSEE HAD INCURRED EXPENDITURE OF RS. 60,68, 333/- UNDER THE HEAD INTEREST ON LOANS. THE PERUSAL OF THE DETAILS OF I NTEREST PAID REFLECTED THAT THE INTEREST HAD BEEN PAID ON UNSECURED LOANS TAKEN FROM THE FAMILY MEMBERS OR RELATIVES WHO WERE SPECIFIED PERSONS UND ER SECTION 40A(2)(B) OF THE ACT. THE RATE OF INTEREST ON SUCH BORROWING S WERE @ 18% PER ANNUM. THE ASSESSING OFFICER WAS OF THE VIEW THAT THERE WAS NO SPECIFIC REASON AS TO WHY THE SAID BORROWINGS WERE MADE @ 18 % WHEN FUNDS WERE AVAILABLE @ 12%. THE ASSESSING OFFICER, IN VIEW OF THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT, RESTRICTED THE RATE O F INTEREST TO 12% RESULTING IN DISALLOWANCE OF RS. 16,99,511/-. 10. THE CIT(APPEALS) DELETED THE SAID ADDITION AGAI NST WHICH REVENUE IS IN APPEAL. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. UNDER THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT, IT IS PROVIDED THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH THE PAYMENT HAS BEEN MADE TO SPECIFIED PERSONS UNDER CLAUSE (B) TO SECTI ON 40A(2) OF THE ACT, 7 THEN WHERE THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARK ET VALUE OF THE GOODS, SERVICES OR FACILITIES, THEN SUCH EXCESS EXPENDITUR E CANNOT BE ALLOWED AS A DEDUCTION. THE ASSESSEE IN THE PRESENT SET OF FACT S HAD MADE BORROWINGS FROM ITS FAMILY MEMBERS/RELATIVES OF DIRECTORS, ON WHICH THE RATE OF INTEREST PAID WAS 18% AS IN THE EARLIER YEARS. THE SAID RAT E OF INTEREST HAS BEEN ACCEPTED IN THE EARLIER YEARS. HOWEVER, UNDER THE PROVISIONS OF THE ACT I.E. SECTION 40A(2)(A) OF THE ACT, IT IS THE MARKET VALU E OF THE GOODS, SERVICES OR FACILITIES, WHICH IS TO BE CONSIDERED WHILE ALLO WING THE CLAIM OF EXPENDITURE IN RESPECT OF THE PAYMENTS BEING MADE T O SPECIFIED PERSONS UNDER CLAUSE (B) OF THE SAID SUB-SECTION. THE RATE OF INTEREST AT 18% IN THE PRESENT MARKET SCENARIO IS EXCESSIVE AND WE DEEM IT FIT TO REDUCE IT TO 15% PER ANNUM. ACCORDINGLY, ASSESSING OFFICER IS DIREC TED TO RECOMPUTE THE DISALLOWANCE IN THIS REGARD. THE GROUND NO. 2 RAIS ED BY THE REVENUE IS, THUS, PARTLY ALLOWED. 12. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 25 TH DAY OF SEPTEMBER, 2013. SD/- SD/- (T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 25 TH SEPTEMBER,2013 POONAM COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR BY ORDER ASSISTANT REGISTRAR, ITAT, CHANDIGARH