Hind High Vacuum Company (P) Ltd., Bangalore V. ACIT, Bangalore

ITA 1099/BANG/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95245 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 31-08-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 31-08-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR P K SRIHARI
• Keywords: Earning of tax free income
• Section: 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.1099/BANG/2012 ASSESSMENT YEAR : 2008-09 HIND HIGH VACCUM COMPANY (P) LTD., NO.17, I PHASE, PEENYA INDUSTRIAL AREA, BENGALURU 560 058. PAN : AABCH 1227L VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(4), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI MUKESH KUMAR JAIN, CA RESPONDENT BY : DR. P.K. SRIHARI, ADDL. CIT(DR) DATE OF HEARING : 31.08.2015 DATE OF PRONOUNCEMENT : 04.09.2015 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 12.1.2012 OF THE CIT(APPEALS)-I, BENGALURU RELATING TO ASSESSMEN T YEAR 2008-09. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL IS AS TO, WHETHER THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER AND CONFIRMED BY THE CIT(APPEALS) OF EXPENSES INCURRED IN EARNING TA X-FREE INCOME INVOKING ITA NO.1099/BANG/2012 PAGE 2 OF 10 PROVISIONS OF SECTION 14A OF THE INCOME-TAX ACT, 19 61 [THE ACT] R.W. RULE 8D(2) OF THE INCOME-TAX RULES [THE RULES] CAN BE SUSTAINED. 3. THE FACTUAL BACKGROUND OF THE CASE IS AS FOLLOWS . THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURE OF V ACCUM SYSTEMS, PUMPS, WATCH CRYSTALS, FILTERS AND OPTICAL COUNTING . IT IS NOT IN DISPUTE THAT DURING THE PREVIOUS YEAR, THE ASSESSEE EARNED DIVID ED INCOME OF RS.9,728 WHICH WAS EXEMPT U/S. 10(35) OF THE ACT. IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE ACT WHICH PROVIDES THAT ANY EXPE NSES INCURRED IN EARNING INCOME WHICH DOES NOT FORM PART OF TOTAL IN COME SHOULD NOT BE ALLOWED AS A DEDUCTION, WHILE COMPUTING TOTAL INCOM E OF AN ASSESSEE, THE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO EXPLA IN THE EXPENDITURE INCURRED FOR EARNING TAX-FREE DIVIDEND INCOME. THE ASSESSEE, IN REPLY, SUBMITTED THAT NO EXPENDITURE WAS INCURRED FOR EARN ING TAX-FREE INCOME. THE AO, HOWEVER, WAS OF THE VIEW THAT IT IS NOT POS SIBLE TO EARN INCOME WITHOUT INCURRING ANY EXPENDITURE. INVOKING THE PR OVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D(2)(II) & (III) OF THE RULES, T HE AO DISALLOWED A SUM OF RS.46,62,647 AS FOLLOWS:- THE EXPENSES RELATED TO EXEMPT INCOME IN THIS CASE ARE DISALLOWED AS DISCUSSED FURTHER. (A) AS PER RULE 8D 2 (I) : THE ASSESSEE COMPANY HAS NOT INCURRED ANY DIRECT EXPENDITURE TO EARN THE DIVIDEND INCOME. (B) AS PER RULE 8D 2 (II): THE ASSESSEE COMPANY HAS DEBITED AN INTEREST EXPENDITURE OF RS.2,33,64,542 IN ITS BOOKS . (A) ITA NO.1099/BANG/2012 PAGE 3 OF 10 AVERAGE VALUE OF INVESTMENT = 12,03,34,866 (B) AVERAGE OF ASSETS = 69,23,38,631 (C) AXB = 40,60,973 C (C) AS PER RULE 8D 2 (III) 0.5% OF AVERAGE INVESTMENT = 12,03,34,866 X 0.50% = 6,01,674 RULE 8 D2() + RULE 8D2(III) = 46,62,647 THEREFORE RS.46,62,647 IS ADDED BACK TO THE INCOME OF THE ASSESSEE U/S 14A OF IT ACT, 1961. 4. BEFORE THE CIT(APPEALS), THE ASSESSEE SUBMITTED AS FOLLOWS:- ON DISALLOWANCE OF INTEREST EXPENSES INVOKING RULE 8D(2)(II) OF THE RULES: THAT THE ASSESSEE HAD INCURRED INTEREST EXPENSE AGA INST THE BUSINESS FOLLOWING ASPECTS BEFORE CIT(A): I) THE INTEREST DEBITED TO PROFIT & LOSS ACCOUNT O F RS.2,33,64,542/- WHICH WAS CONSIDERED BY THE ASSESS ING OFFICER FOR DISALLOWANCE UNDER RULE 8D OF THE RULES IS THE INTEREST INCURRED BY THE ASSESSEE ON ACCOUNT OF CREDIT FACIL ITIES AND OTHER LEASE OBLIGATIONS. II) TERM LOAN / PERIOD LOAN GRANTED BY BANKS ARE W ITH PRIOR CONDITIONS AND ARE DISBURSED BY BANKS TO THE VENDOR DIRECTLY. SO QUESTION OF INVESTING SUCH AMOUNT IN INVESTMENT WHI CH ARE LIKELY TO YIELD TAX FREE INCOME, DOES NOT ARISE FOR CONSID ERATION AT ALL. III) CASH CREDIT FACILITIES GRANTED BY BANKS ARE A LSO WITH PRIOR CONDITIONS THAT SUCH AMOUNTS ARE UTILIZED FOR BUSIN ESS WORKING CAPITAL AND NOT FOR INVESTMENTS. CASH CREDIT LIMITS GRANTED AND USED, ARE MONITORED SO THAT THE LIMIT IS NOT UTILIZ ED FOR PURPOSES OTHER THAN MANDATED. COPIES OF THE SANCTION LETTERS OF THE BANK WERE ALSO FILED BEFORE CIT(A). ITA NO.1099/BANG/2012 PAGE 4 OF 10 IV) THE ASSESSEE ALSO POINTED OUT THAT IN THE AUDIT ORS REPORT THERE WAS NO ADVERSE COMMENT ON THE USAGE OF THE INTEREST BEARING BORROWED FUNDS. V) THE ASSESSEE ALSO GAVE AN EXTRACT OF THE OWN FU NDS [AS AT 31ST MARCH 2008] OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. SHARE CAPITAL - 2,58,36,420 RESERVES & SURPLUS - 1,1,71,75,150 TOTAL - 1,4,30,11,570 VI) THE ASSESSEE FURTHER POINTED OUT THAT M/S AUREO S INDIA TRUSTEES PRIVATE LIMITED HAD INVESTED RS. 30,00,00, 000 BY WAY OF COMPULSORILY CONVERTIBLE DEBENTURES IN THE COMPA NY IN THE FINANCIAL YEAR 2006-07 [AY 2007-08] WHICH THE ASSES SEE INVESTED IN MUTUAL FUNDS. THESE COMPULSORY CONVERT IBLE DEBENTURES DO NOT CARRY ANY INTEREST . VII) THE ASSESSEE POINTED OUT THAT IT HAD PRIMARILY INVESTED IN MUTUAL FUNDS FROM THE MONEY RECEIVED THROUGH ISSUE OF COMPULSORILY CONVERTIBLE DEBENTURES AS STATED ABOVE . THE CASH FLOW STATEMENT OF USAGE OF THE 30 CRORES WAS ALSO F ILED BEFORE THE CIT(A). VIII) THE ASSESSEE ALSO FURNISHED THE FOLLOWING TAB LE SHOWING DETAILS OF BORROWINGS AND INVESTMENT TO SUBSTANTIAT E THE CLAIM OF THE ASSESSEE THAT BORROWED FUNDS ON WHICH INTEREST EXPENDITURE WAS INCURRED WAS NOT USED FOR MAKING INVESTMENTS WH ICH ARE LIKELY TO YIELD TAX FREE DIVIDEND INCOME, NECESSITA TING INVOKING SEC.14A OF THE ACT: FINANCIAL YEAR BORROWINGS FROM BANKS COMPULSORILY CONVERTIBLE DEBENTURES INVESTMENT IN MUTUAL FUNDS INVESTMENT IN BUILDING INVESTMENT IN MACHINERY INVESTMENT IN SUBSIDIARY 31/3/2006 118,234,771 - - - - - 31/3/2007 145,515,128 300,000,000 130,240,687 - 62,270,612 - 31/3/2008 328,751,010 300,000,000 110,105,846 - 195,440,732 - 31/3/2009 368,389,285 300,000,000 - - 195,440,732 100,000,000 IX) THE ASSESSEE POINTED OUT THAT FROM THE ABOVE TA BLE, IT WOULD BE EVIDENT THAT INTEREST DEBITED TO PROFIT & LOSS ACCOUNT OF RS. 2,33,64,542/- WAS TOWARDS EARNING OF BUSINESS I NCOME ONLY AND NOT TOWARDS EARNING OF DIVIDEND INCOME. ITA NO.1099/BANG/2012 PAGE 5 OF 10 ON DISALLOWANCE UNDER RULE 8D(2)(III) OF THE RULES: THE ASSESSEE ALSO POINTED OUT THAT RULE8D (2) (III) STATES THAT AN AMOUNT EQUAL TO 0.5% OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE AS SESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. THE ASSESSEE SUBMITTED THAT IN THE PRESENT CASE, T HE ASSESSING OFFICER HAS APPLIED THE SIMPLE AVERAGE OF THE VALUE OF THE INVESTMENT. APPLICATION OF THE SIMPLE AVERAGE IN SOME CASES MAY GIVE ABSURD RESULTS. FOR EXAMPLE, IF THE INVESTMENT AT THE BEGINNING DATE IS 10 CRORES AND THE SAID INVESTMENT ARE REDEEMED ON COMPLETION OF ONE MONTH THE AVERAGE CANNOT BE SA ID TO BE 5 CRORES FOR THE YEAR. IF THE WEIGHTED AVERAGE BASED ON TIME IS COMPUTED, THE VALUE WOULD BE AROUND 82 LACS. [10 CRORES*30/365 DAYS]. IN ANOTHER INSTANCE, IF OPENIN G BALANCE IS ZERO AND CLOSING BALANCE IS ZERO, THE NET RESULT WI LL BE ZERO WHEN THE SIMPLE AVERAGE METHOD IS APPLIED. IN SUCH AN IN STANCE, IF THE INVESTMENTS OF THE INTERIM PERIOD ARE NOT CONSIDERE D THEN THE RESULT OBTAINED AGAIN WOULD BE ABSURD. THE ASSESSEE ALSO GAVE A COMPUTATION SHEET APPLYING WEIGHTED AVERAGE BASED ON TIME AND BY DOING SO THE DISALLOWA NCE WOULD WORK OUT TO RS. 90,49,796/-. THE ASSESSEE THUS PLEADED THAT APPLICATION OF RULE 8D(2)CLAUSE (II) & (III) AS DONE BY THE AO WAS ERRONEOUS. 5. THE CIT(APPEALS), HOWEVER, DID NOT AGREE WITH TH E SUBMISSIONS OF THE ASSESSEE. HE WAS OF THE VIEW THAT ASSESSEE FAI LED TO ESTABLISH NEXUS BETWEEN THE BORROWED FUNDS ON WHICH INTEREST WAS PA ID AND ITS USE FOR THE BUSINESS OF THE ASSESSEE. HE ALSO OBSERVED THAT IF ASSESSEE KEPT BOTH BORROWED FUNDS AND OWN FUNDS IN THE SAME BANK ACCOU NT AND WITHDREW THE SAME FOR MAKING INVESTMENTS WHICH WOULD YIELD TAX-F REE INCOME. ACCORDING TO HIM, IN THOSE CIRCUMSTANCES ONE CANNOT SAY WITH CERTAINTY THAT ITA NO.1099/BANG/2012 PAGE 6 OF 10 BORROWED FUNDS ON WHICH INTEREST HAD BEEN PAID HAD NOT BEEN UTILISED FOR MAKING INVESTMENTS WHICH ARE LIKELY TO YIELD TAX FR EE INCOME. THE CIT(APPEALS) FOLLOWED HIS OWN DECISION RENDERED IN THE CASE OF JUPITER CAPITAL PVT. LTD. IN ITA NO.168/AC-11(5)/A-I/10-11 DATED 30.11.2011 , WHEREIN THE CIT(A) HAD CONCLUDED THAT DISALLOWANCE UNDER RULE 8D IS MANDATORY ON AND FROM AY 2008-09 FROM WHICH ASSESSM ENT YEAR RULE 8D WAS APPLICABLE. THE CIT(A) ALSO HELD THAT ONCE THE RE IS TAX-FREE DIVIDEND, THEN DISALLOWANCE U/S. 14A HAS TO BE MADE OF EXPENS ES INCURRED IN EARNING TAX-FREE INCOME IRRESPECTIVE OF THE QUANTUM OF THE EXPENDITURE THAT HAS TO BE DISALLOWED. 6. AGGRIEVED BY THE ORDER OF CIT(APPEALS), THE ASSE SSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. THE SUBMISSIONS MADE BY THE LD. COUNSEL FOR THE ASSESSEE ARE ALMOST IDENTICAL TO THE SUBMISSIONS AS WERE MADE BY THE ASSESSEE BEFORE THE CIT(APPEALS). IN PARTICULAR, IT WAS SUBMITTED BEFORE THAT THE QUANTUM OF EXEMPT INCOME IN THE FORM OF DIVIDEND EARNED BY THE ASSESSEE WAS ONLY A SUM OF RS.9,728, WHEREAS DISALLOWANCE MADE BY THE A O INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT WAS A SUM OF R S.46,62,647. THE LD. COUNSEL FOR THE ASSESSEE BROUGHT TO OUR NOTICE THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF JOINT INVESTMENTS PVT. LTD. V. CIT, ITA NO.117/2015 DATED 25.2.2015 , WHEREIN THE HONBLE HIGH COURT EXPRESSED THE VIEW THAT DISALLOWANCE U/S. 14A OF THE ACT CANN OT, IN ANY CASE, EXCEED ITA NO.1099/BANG/2012 PAGE 7 OF 10 THE DIVIDEND INCOME. FOLLOWING WERE THE OBSERVATIO NS THAT WERE BROUGHT TO OUR NOTICE:- 9. IN THE PRESENT CASE, THE AO HAS NOT FIRSTLY D ISCLOSED WHY THE APPELLANT/ASSESSEES CLAIM FOR ATTRIBUTING RS.2 ,97,440/- AS A DISALLOWANCE UNDER SECTION 14A HAD TO BE REJECTED. TAIKISHA SAYS THAT THE JURISDICTION TO PROCEED FURTHER AND DETERM INE AMOUNTS IS DERIVED AFTER EXAMINATION OF THE ACCOUNTS AND REJEC TION IF ANY OF THE ASSESSEES CLAIM OR EXPLANATION. THE SECOND ASP ECT IS THERE APPEARS TO HAVE BEEN NO SCRUTINY OF THE ACCOUNTS BY THE AO - AN ASPECT WHICH IS COMPLETELY UNNOTICED BY THE CIT(A) AND THE ITAT. THE THIRD, AND IN THE OPINION OF THIS COURT, IMPORTANT ANOMALY WHICH WE CANNOT BE UNMINDFUL IS THAT WHEREA S THE ENTIRE TAX EXEMPT INCOME IS RS.48,90,000/-, THE DISALLOWAN CE ULTIMATELY DIRECTED WORKS OUT TO NEARLY 110% OF THAT SUM, I.E. , RS.52,56,197/-. BY NO STRETCH OF IMAGINATION CAN SE CTION 14A OR RULE 8D BE INTERPRETED SO AS TO MEAN THAT THE ENTIR E TAX EXEMPT INCOME IS TO BE DISALLOWED. THE WINDOW FOR DISALLOW ANCE IS INDICATED IN SECTION 14A, AND IS ONLY TO THE EXTENT OF DISALLOWING EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION T O THE TAX EXEMPT INCOME. THIS PROPORTION OR PORTION OF THE T AX EXEMPT INCOME SURELY CANNOT SWALLOW THE ENTIRE AMOUNT AS H AS HAPPENED IN THIS CASE. 8. REFERENCE WAS ALSO MADE TO THE DECISION OF ITAT MUMBAI BENCH IN DAGA GLOBAL CHEMICALS PVT. LTD. V. ACIT, ITA NO.559 2/MUM/2012, DATED 1.1.2015 , IN WHICH THE TRIBUNAL WAS OF THE VIEW THAT DISALL OWANCE U/S. 14A CANNOT EXCEED THE EXEMPT INCOME. 9. THE LD. DR PLACED RELIANCE ON THE ORDER OF CIT(A PPEALS). IT WAS ALSO SUBMITTED BY HIM THAT EVIDENCE ON RECORD DOES NOT S HOW AS TO HOW THE BORROWED FUNDS WERE NOT USED FOR MAKING INVESTMENTS WHICH YIELD TAX FREE INCOME. ITA NO.1099/BANG/2012 PAGE 8 OF 10 10. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE RI VAL SUBMISSIONS. IN THE COURSE OF HEARING, A QUERY WAS RAISED BY THE BE NCH AS TO WHETHER THE BALANCE SHEET AS ON 31.3.2007 AND 31.3.2008 WERE FI LED TO SHOW THAT BORROWED FUNDS WERE NOT USED FOR THE PURPOSE OF INV ESTMENTS WHICH YIELDED TAX-FREE INCOME. THE LD. COUNSEL FOR THE ASSESSEE HAS NOT FILED THE REQUIRED DETAILS BEFORE THE TRIBUNAL. IN OUR VIEW, FOR THE PURPOSE OF DECIDING THE DISALLOWANCE UNDER SECTION 14A R.W. RU LE 8D(2)(II), THOSE DETAILS WILL BE VERY MATERIAL. WE ARE OF THE VIEW THAT IF THE STAND TAKEN BY THE ASSESSEE ON THE DISALLOWANCE OF INTEREST EXPENS ES UNDER RULE 8D(2)(II) OF THE RULES IS FACTUALLY CORRECT, THEN NO DISALLOW ANCE OF INTEREST EXPENSES CAN BE MADE. WE, HOWEVER, FIND THAT THE REQUIRED D ETAILS HAVE NOT BEEN FILED BY THE ASSESSEE BEFORE US. IN SUCH CIRCUMSTA NCES, WE ARE OF THE VIEW THAT IT WOULD BE JUST AND FAIR TO SET ASIDE THE ORD ER OF THE CIT(APPEALS) ON THIS ISSUE AND REMAND THE QUESTION OF DISALLOWANCE OF INTEREST EXPENSES UNDER RULE 8D(2)(II) TO THE ASSESSING OFFICER FOR F RESH CONSIDERATION WITH A DIRECTION TO THE ASSESSEE TO FURNISH THE REQUIRED D ETAILS TO SUBSTANTIATE ITS CLAIM AS MADE BEFORE THE CIT(APPEALS). 11. AS FAR AS DISALLOWANCE UNDER RULE 8D(2)(III) IS CONCERNED, THE ASSESSEE HAS NOT SHOWN AS TO WHAT IS THE EXPENDITUR E TO BE DISALLOWED. THE ASSESSEES ONLY PLEA BEFORE THE CIT(A) WAS THAT WEIGHTED AVERAGE BASED ON TIME (NO. OF DAYS) IN WHICH INVESTMENTS WE RE MADE SHOULD BE CONSIDERED. AS RIGHTLY CONTENDED BY THE LD. DR, TH E ABOVE STAND OF THE ASSESSEE CANNOT BE SUSTAINED IN VIEW OF THE CLEAR M ANDATE OF RULE ITA NO.1099/BANG/2012 PAGE 9 OF 10 8D(2)(III) OF THE RULES, WHICH REFERS TO ONLY THE A VERAGE VALUE OF INVESTMENTS AS APPEARING IN THE BALANCE SHEET OF TH E ASSESSEE AS ON THE FIRST AND LAST DAY OF THE PREVIOUS YEAR. ONE CANNO T TRAVEL BEYOND THE LANGUAGE OF RULE 8D(2)(III) OF THE RULES. IN THE A BSENCE OF ANY OTHER PLEA BY THE ASSESSEE IN THIS REGARD, THE DISALLOWANCE HA S TO BE SUSTAINED. HOWEVER, WE FIND THAT THE HONBLE DELHI HIGH COURT IN JOINT INVESTMENTS PVT. LTD. (SUPRA) HAS HELD THAT DISALLOWANCE U/S. 14A OF THE ACT CAN NOT BE IN EXCESS OF THE TAX EXEMPT INCOME. FOLLOWING THE AFO RESAID DECISION, WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE TO INCOM E THAT IS EXEMPT IN THE SET ASIDE PROCEEDINGS UNDER RULE 8D(2)(III) OF THE RULE S, AFTER COMPLYING WITH THE DIRECTIONS WITH REGARD TO DISALLOWANCE OF INTER EST EXPENSES UNDER RULE 8D(2)(II) OF THE RULES. 12. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AC CORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF SEPTEMBER, 2015. SD/- SD/- ( S. RIFAUR RAHMAN ) ( N.V. VASUD EVAN ) ACCOUNTANT MEMBER JUDICIAL M EMBER BANGALORE, DATED, THE 4 TH SEPTEMBER, 2015. /D S/ ITA NO.1099/BANG/2012 PAGE 10 OF 10 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR / SENIOR PRIVATE SECRETARY ITAT, BANGALORE.