M/s Sunev Pharma Solutions Ltd., Panchkula V. DCIT, Panchkula

ITA 1185/CHANDI/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6836 (ITAT-CHANDIGARH)
• Duration Of Justice: 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 15-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: CHANDRA KANTA
• Assessee Lawyers: S C GUPTA SHRI JASPAL SHARMA
• Keywords: Earning of tax free income
• Section: 14A; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI DR. B.R.R. KUMAR, ACCOUNTANT MEMBER ITA NO.1157/CHD/2016 ASSESSMENT YEARS: 2012-13 DY. CIT, VS. M/S SUNEV PHARMA SOLUTION LTD. PANCHKULA CIRCLE, PLOT NO. 52, INDUSTRIAL AREA PANCHKULA PH-I, PANCHKULA PAN NO. AAKCS5651E ITA NO.1185/CHD/2016 ASSESSMENT YEARS: 2012-13 M/S SUNEV PHARMA SOLUTION LTD. VS. DY. CIT PLOT NO. 52, INDUSTRIAL AREA PANCHKULA CIRCLE PH-I, PANCHKULA PANCHKULA (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI. S.C. GUPTA SHRI. JASPAL SHARMA DEPARTMENT BY : SMT. CHANDRAKANTA DATE OF HEARING : 05/07/2017 DATE OF PRONOUNCEMENT : 20/09/2017 ORDER PER DR. B.R.R. KUMAR, AM THE PRESENT APPEAL FILED BY THE REVENUE AND THE CRO SS APPEAL FILED BY THE ASSESSEE ARE AGAINST THE COMMON ORDER OF LD. CI T(A), PANCHKULA DT. 16/09/2016. 2. THE REVENUE HAS RAISED FOLLOWING GROUND OF APPEA L: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED TO ALLOW THE APPEAL OF THE ASSESSEE AND RESTRICT TH E DISALLOWANCE TO RS. 18 LACS MADE U/S 14A BECAUSE THE ASSESSEE COMPANY HAS BEEN MADE INVESTMENT IN EQUITY SHARE AMOUNTING TO RS. 33,56,64,000/- ON THE OTHER HAND ASSESSEE IS PAYING HUGE INTEREST AMOUNT. 3. IN THE CROSS APPEAL ASSESSEE HAS RAISED THE FOLL OWING GROUNDS: 1. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANCE S OF THE CASES, THE LD. CIT(A) ERRED IN LAW AND FACTS WHILE HOLDING THAT THE AO HA D RECORDED OBJECTIVE SATISFACTION AS PER REQUIREMENT OF SECTION 14A(2) O F THE INCOME TAX ACT. 2 2. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANCE S OF THE CASE, THE LD. CIT(A) HAS ERRED IN HAVING HELD THAT THE APPELLANT HAS FAI LED TO DISCHARGE THE INITIAL ONUS TO FURNISH SATISFACTORY EXPLANATION FOR NON APPLICA TION OF SECTION 14A OF THE INCOME TAX ACT. 3. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANCE S OF THE CASE, THE LD. CIT(A) HAS ERRED IN HAVING HELD THAT SINCE COMMON EXPENDIT URE AND COMMON INTEREST HAS BEEN INCURRED THEN ALLOCATION OF EXPENDITURE HA S TO BE MADE ON PROPORTIONATE BASIS AS PER PROVISIONS OF SECTION 14 A READ WITH RULE 8D OF THE INCOME TAX ACT WITHOUT APPRECIATING THE APPELLANTS PLEA THAT NO EXPENSES HAS BEEN INCURRED TO EARN EXEMPT DIVIDEND INCOME. 4. THAT HAVING REGARD TO THE FACTS AND CIRCUMSTANCE S OF THE CASE, THE LD. CIT(A) HAS ERRED IN HAVING DIRECTED THE AO TO COMPUTE THE DISALLOWANCE UNDER RULE 8D(2)(III) HOWEVER RESTRICTING THE SAME TO THE EXTE NT OF EARNING OF EXEMPT DIVIDEND INCOME OF RS. 18,00,000/- OR THE AMOUNT OF DISALLOWANCE WHICHEVER IS LOWER. 4. FIRSTLY WE SHALL DEAL WITH THE CROSS APPEAL IN I TA NO. 1185/CHANDI/2016 FILED BY THE ASSESSEE. 5. BRIEF FACTS OF THE CASE ARE THAT THE AO NOTED TH AT THE ASSESSEE HAD INVESTED RS.33.56.64.000/- IN EQUITY SHARE. THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY PROPORTIONATE DISALLOWANCE OF INTEREST U/ S 14 READ WITH RULE 8D MAY NOT BE MADE. IN ABSENCE OF ANY PLAUSIBLE EXPLANATIO N, THE AO AS CALCULATED IN PARA 3.1 OF THE ASSESSMENT ORDER MADE DISALLOWANCE OF RS.57,77,206/- AND ADDED TO THE INCOME OF THE ASSESSEE. 6. DURING THE PROCEEDINGS BEFORE THE LD. CIT(A), TH E COUNSEL FOR THE APPELLANT SUBMITTED THAT THE AO HAS MADE AN ADDITIO N OF RS.57,77,206/- U/S 14A WITHOUT ESTABLISHING THE FACT THAT WHETHER ANY EXPE NDITURE HAVE BEEN INCURRED ON THE INVESTMENT, THE INCOME OF WHICH IS EXEMPT U/ S 10 OF THE ACT. IN THE CASE OF DIVIDEND INCOME, SINCE THE TAX IS COLLECTED AT S OURCE, THERE IS NO LOGIC IN DISALLOWING EXPENDITURE U/S 14A. THE COUNSEL FURTHE R SUBMITTED THAT THE AO HAS ALSO NOT SPECIFIED IN THE ORDER WHETHER ANY EXPENDI TURE HAS BEEN MADE TO EARN THE EXEMPT INCOME AND THAT THE ACCOUNTS ARE INCORRE CT. THE ASSESSMENT ORDER DOES NOT HAVE EVIDENCE FOR ANY SATISFACTION AS PER SECTION 14A(2) OF THE ACT REGARDING THE CORRECTNESS OF THE CLAIM OF THE ASSES SEE. 7. IT WAS ALSO SUBMITTED BEFORE US THAT NET WORTH O F A COMPANY AS ON 31.03.2012 WAS RS.4.89 CRORES AND THE AMOUNT OF INT EREST FREE UNSECURED LOAN WAS RS.39.06 CRORES, SO THE TOTAL SUM OF RS.43.95 C RORES WAS MORE THAN THE AMOUNT OF RS.33.57 CRORES INVESTED BY THE APPELLANT COMPANY IN EQUITY SHARES A 3 FURTHER, FOR RULE 8D(2)(II) TO APPLY THERE HAS TO B E SOME EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPTS. THE DETAIL OF EXPENDITURE INCURRED BY THE ASSESSEE COMPANY UNDER THE HEAD 'INTEREST' WAS ALSO SUBMITTED AND IT WAS EXPLAINED THAT THE INTEREST EXPENDITURE OF RS.61.47 LACS CONSIST OF RS.43.45 LACS, RS.0.26 LAC S, RS. 17.76 LACS AS INTEREST ON TERM LOANS, ON VEHICLE LOANS AND ON WORKING CAPITAL. SO, OUT OF TOTAL OF RS.61.47 INCURRED BY THE ASSESSEE UNDER HEAD 'INTEREST PAID THE INTEREST EXPENDITURE OF RS. 17.76 LACS ONLY WAS PAID BY THE ASSESSEE COMPANY ON ITS WORKING CAPITAL AND SINCE, AS THE AMOUNT OF TERM LOANS AND VEHICLE LOAN S WERE SPECIFICALLY USED BY THE ASSESSEE COMPANY FOR WHICH THESE LOANS WERE GRA NTED, SO THE PROVISIONS OF SECTION 14A OF THE ACT SHALL NOT BE APPLIED ON THE AMOUNT OF INTEREST EXPENDITURE INCURRED BY THE ASSESSEE COMPANY ON TER M LOANS AND VEHICLE LOANS. FURTHER, THE COUNSEL FOR THE APPELLANT SUBMITTED TH AT THE AO FAILED TO APPRECIATED THE FACT THAT THE ASSESSEE COMPANY HAD RECEIVED DIVIDEND INCOME OF RS.18 LACS ONLY AND IN ANY CASE THE DISAL LOWANCE, IF ANY IS TO BE MADE SHALL NOT EXCEED THE AMOUNT OF DIVIDEND INCOME EARN ED BY THE ASSESSEE COMPANY DURING THE A.Y. 2012-13. THE APPELLANT RELI ED UPON VARIOUS COURT JUDGMENTS IN ITS WRITTEN SUBMISSION. 8. THE LD. DR VEHEMENTLY ARGUED THAT THERE IS AN OB JECTIVE SATISFACTION DRAWN BY THE ASSESSING OFFICER WHILE DETERMINING DI SALLOWANCE UNDER SECTION 14A. THE LD. DR HAS REFERRED TO THE SUBSTANTIATION OF OBJECTIVE SATISFACTION IN THE ORDER OF THE LD. CIT(A). 9. ARGUMENTS OF THE LD. AR HAVE BEEN EXAMINED IN TH E LIGHT OF THE PROVISIONS OF THE SECTION 14A AND THE ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER. 10. THE RELEVANT PART OF ASSESSMENT ORDER HAS BEEN REPRODUCED IN TOTO WHICH IS AS UNDER: ADDITION ON ACCOUNT DISALLOW ANCE OF INTEREST U/S 1 4A READ WITH RULE 8D ON PERUSAL OF THE DETAILS FILED BY THE COUNSEL OF T HE ASSESSEE, IT IS NOTICED THAT THE ASSESSEE COMPANY HAS BEEN MADE INVESTMENT IN EQUITY SHARE AMOUNTING TO RS. 33,56,64,000/-. THE ASSESSEE WAS ASKED TO EXPLAIN A S TO WHY PROPORTIONATE DISALLOWANCE INTEREST UNDER SECTION 14A READ WITH R ULE 8D MAY NOT BE MADE. IN RESPONSE, NO PLAUSIBLE EXPLANATION WAS SUBMITTED BY THE ASSESSEE. ACCORDINGLY, PROPORTIONATE DISALLOWANCE UNDER SECTION 14A READ W ITH RULE 8D IS CALCULATED AS BELOW: 4 A) DISALLOWANCE OF INTEREST 61,46,557 X25,17,48, 000/34,24,58,245 EXPENDITURE: = 45,18,466/- B) DISALLOWANCE @0.5% OF AVG. = 0.5% OF 25,17,48,0 00/- VALUE OF INVESTMENT = 12,58,740/- TOTAL = 57,77,206/- THEREFORE AN AMOUNT OF RS. 57,77,206/- IS BEING ADD ED TO THE RETURNED INCOME OF THE ASSESSEE. 11. THE RELEVANT SECTION OF THE INCOME TAX ACT PERTAINING TO SE CTION 14A DISALLOWANCE IS AS UNDER: 14A. (1) FOR THE PURPOSE OF COMPUTING THE TOTAL INC OME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCR IBED, IF THE ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INC OME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION(2) SHALL ALSO APP LY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURR ED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 12. A CONCURRENT READING OF THE SECTION 14A AND THE ORDER OF THE ASSESSING OFFICER SHOWS THAT WHILE IT IS MANDATORY TO RECORD A SATISFACTION FOR DETERMINATION OF EXPENDITURE THE ASSESSING OFFICER HAS FAILED TO DO IT. THE SUB SECTION (3) OF SECTION 14A FURTHER EMPHASIS THAT EVEN WHEN ASSESSE E CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM EVEN THEN ALSO RECORDING OF SATISFACTION IS A PRE-REQUISITE. 13. JUDGMENT OF HONBLE HIGH COURT IN THE CASE OF C IT VS. ABHISHEK INDUSTRIES 380 ITR 652 (P&H)HELD AS UNDER SECTION 14A OF THE ACT REQUIRES THE ASSESSING OFF ICER TO RECORD SATISFACTION THAT INTEREST BEARING FUNDS , HAVE BEEN USED TO EARN TAX FREE INCOME. THE SATISFACTION TO BE RECORDED MUST BE BASED UPON CREDIBLE AND RELE VANT EVIDENCE. THE ONUS, THEREFORE, TO PROVE THAT INTEREST BEARING FUNDS WER E USED, LIES SQUARELY ON THE SHOULDERS OF THE REVENUE. THUS, IF THE ASSESSING OF FICER IS ABLE TO REFER TO RELEVANT MATERIAL WHILE RECORDING SATISFACTION THAT BORROWED FUNDS WERE USED TO EARN INTEREST FREE INCOME AS OPPOSED TO THE ASSESSEE'S O WN FUNDS, THE ASSESSING OFFICER MAY LEGITIMATELY DISALLOW SUCH A CLAIM. THE ASSESSI NG OFFICER, HOWEVER, CANNOT, BY RECORDING GENERAL OBSERVATIONS, PARTICULARLY WHE RE THE ASSESSEE HAS DENIED USING INTEREST BEARING FUNDS, PROCEED TO INFER THAT INTEREST BEARING INCOME MUST HAS BEEN USED TO EARN EXEMPTED INCOME. SECTION 14A OF THE ACT, BEING IN THE NATURE OF AN EXCEPTION, HAS TO BE CONSTRUED STRICTL Y AND ONLY WHERE THE ASSESSING OFFICER RECORDS SATISFACTION, ON THE BASIS OF CLEAR AND COGENT MATERIAL, SHALL AN 5 ORDER BE PASSED UNDER SECTION 14A OF THE ACT, DISAL LOWING SUCH A CLAIM CANNOT BE ACCEPTED. 14. IN THE CASE OF GODREJ 394 ITR 449 THE HONBLE S UPREME COURT HAS HELD AS UNDER : 2003SUB-SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES MERELY PRESCRIBE A FORMULA FOR DETERMINATION OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN A SITUATION WHERE THE ASSESSING OFFICER IS NOT SATI SFIED WITH THE CLAIM OF THE ASSESSEE. WHETHER SUCH DETERMINATION IS TO BE MADE ON APPLICATION OF THE FORMULA PRESCRIBED UNDER RULE 8D OR IN THE BEST JUD GMENT OF THE ASSESSING OFFICER, WHAT THE LAW POSTULATES IS THE REQUIREMENT OF A SAT ISFACTION IN THE ASSESSING OFFICER THAT HAVING REGARD TO THE ACCOUNTS OF THE A SSESSEE, AS PLACED BEFORE HIM, IT IS NOT POSSIBLE TO GENERATE THE REQUISITE SATISF ACTION WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. IT IS ONL Y THEREAFTER THAT THE PROVISIONS OF SECTION 14A(2) AND (3) READ WITH RULE 8D OF THE RUL ES OR A BEST JUDGMENT DETERMINATION, AS EARLIER PREVAILING, WOULD BECOME APPLICABLE 15. WE FIND THAT THE CIT(A) HAS VALIANTLY TRIED TO DECIPHER OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER BUT AT THE SA ME TIME THE ORDER OF THE ASSESSING OFFICER MENTIONED ABOVE DO NOT EVEN MENTI ONED A WORD ABOUT SATISFACTION HENCE THE RECOMPUTATION DONE BY THE ASSESSING OFFICER IS FAULTY CAN NOT ACCEPTED. SINCE NO CLEAR RECORDING OF SATIS FACTION COULD BE SEEN IN THE ASSESSMENT ORDER IT IS HELD THAT THE PROVISION OF S ECTION 14A(2) HAVE NOT BEEN FOLLOWED AND THE GROUNDS OF APPEAL RAISED BY THE AS SESSEE ARE ALLOWED. 16. SINCE THE ASSESSEE APPEAL IS ALLOWED, ADJUDICAT ION ON THE GROUNDS TAKEN BY THE REVENUE BECOMES INFRUCTUOUS AS SAME ISSUE IS INVOLVED. 17. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSE D AND CROSS APPEAL FILED BY THE ASSESSEE IS ALLOWED. THE ORDER IS PRONOUNCED ON 20/09/2017 IN THE OPEN COURT. SD/- SD/- (DIVA SINGH) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER AG COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DEPARTMENTAL REPRESENTATIVE