SIWANA AGRI MARKETING LTD., Ahmedabad V. THE ITO WATD8(2), Ahmedabad

ITA 1206/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6279 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 02-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 17-04-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: G S SOURYAWANSI
• Assessee Lawyers: P D SHAH
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL : A BENCH : AHMEDABAD (BEFORE HONBLE SHRI T.K. SHARMA, J.M. & HONBLE SHRI A.N.PAHUJA, A.M.) I.T.A. NO. 1206/AHD./2009 ASSESSMENT YEAR : 2006-2007 SIWANA AGRI MARKETING LTD. VS- I.T.O., WARD-8(2), AHMEDABAD (PAN : AACCS 9598J) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI P.D.SHAH, A.R. RESPONDENT BY : SHRI G.S.SOURYAWANSI, D.R. O R D E R PER SHRI T.K. SHARMA, JUDICIAL MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER DATED 27-02-2009 OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-XIV, AH MEDABAD CONFIRMING THE DISALLOWANCE OF EXPENSES OF RS.6 LAKHS UNDER SECTIO N 14A OF THE I.T.ACT, 1961 MADE BY THE AO FOR THE ASSESSMENT YEAR 2006-07. 2. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF TRADING IN AGRICULTURAL PRODUCTS. FOR T HE ASSESSMENT YEAR UNDER APPEAL, IT FILED THE RETURN OF INCOME ON 23.12.2006 SHOWING TO TAL INCOME OF RS.NIL. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON VERIFICATION O F BALANCE-SHEET, THE AO NOTICES THAT AS ON 31.03.2006, THE INVESTMENTS WERE AT RS.5 ,51,91,510/-. THE OPENING BALANCE WAS OF RS.51,04,510/-. ON THIS INVESTMENT, THE INCO ME EARNED IS DIVIDEND, WHICH IS CLAIMED AS EXEMPT FROM INCOME-TAX. IN THE PROFIT & LOSS A/C., THE ASSESSEE COMPANY HAS DEBITED INTEREST OF RS.49,36,315/-. THE AO ACCO RDINGLY ASKED THE ASSESSEE TO SHOW-CAUSE AS TO WHY DISALLOWANCE UNDER SECTION 14A OF THE I.T. ACT SHOULD NOT BE MADE. 2.1 IN REPLY, VIDE LETTER DATED 23.07.2008, THE ASS ESSEE SUBMITTED THAT IT IS HAVING SUFFICIENT SURPLUS FUND OF RS.19.85 CRORES CONSISTI NG OF SHARE CAPITAL, RESERVES, ITA NO.1206/AHD/2009 2 UNSECURED LOAN, DEPRECIATION AND ADVANCE AGAINST SA LES. INVESTMENTS WERE ONLY OF RS.5.51 CRORES. THEREFORE, THE ENTIRE INVESTMENTS W ERE MADE OUT OF OWN FUNDS AND THERE CANNOT BE ANY DISALLOWANCE UNDER SECTION 14A OF THE I.T.ACT, 1961. 2.2 AFTER CONSIDERING THE AFORESAID REPLY, IN THE A SSESSMENT ORDER, THE AO OBSERVED THAT IF THE ASSESSEE HAD SURPLUS FUNDS, THEN WHY TH E INTEREST OF RS.49.36 LAKHS IS PAID. AS A PRUDENT BUSINESSMAN, THE ASSESSEE SHOULD HAVE FIRST PAID THE LOAN LIABILITY INSTEAD OF INVESTING IN INTEREST-FREE FUND IN SHARES. THE A O ALSO OBSERVED THAT MAIN BUSINESS ACTIVITY OF THE ASSESSEE COMPANY IS OF TRADING IN A GRICULTURAL PRODUCTS AND NOT INVESTMENT IN SHARES. AT ONE SIDE, THE ASSESSEE COM PANY IS PAYING INTEREST AND ON ANOTHER SIDE, FUNDS ARE DIVERTED FOR EARNING THE EX EMPT INCOME. IT MEANS THAT LOAN FUNDS ARE USED FOR EARNING THE EXEMPT INCOME. CONSI DERING THESE FACTS, THE AO WORKED OUT THE INTEREST COST ON SHARES AT RS.5,50,3 66/-. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAD ALSO INCURRED OTHER EXPENSES LIKE ADMINISTRATIVE COST FOR MAKING INVESTMENT IN SHARES. CONSIDERING THE INTEREST PORT ION AND OTHER EXPENSES, HE WORKED OUT DISALLOWANCE UNDER SECTION 14A AT RS.6 LAKHS AN D DISALLOWED THE SAME. 3. ON APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE R EITERATED THAT IT WAS HAVING SUFFICIENT SURPLUS FUNDS OF RS.19.85 CRORES CONSIST ING OF SHARE CAPITAL, RESERVES, UNSECURED LOANS, DEPRECIATION AND ADVANCE AGAINST S ALES AND THEREFORE, THE ENTIRE INVESTMENTS WERE MADE OUT OF OWN INTEREST FREE FUND S AND THEREFORE, THERE COULD NOT BE ANY DISALLOWANCE UNDER SECTION 14A OF THE I.T. ACT, 1961. RELIANCE WAS ALSO PLACED ON THE DECISION OF THE ITAT IN THE CASE OF TORRENT FIN ANCIERS REPORTED IN 73 TTJ 787 (AHD.). IT WAS ALSO SUBMITTED THAT INTEREST-BEARING FUND WAS FOR A SPECIFIC PURPOSE I.E. FOR THE WORKING CAPITAL AND, THEREFORE, THE SAME CO ULD NOT BE USED FOR OTHER PURPOSE AND THE AO COULD NOT ESTABLISH THE FACT THAT INTERE ST BEARING FUND WAS UTILISED FOR THE INVESTMENT IN SHARES. FURTHER, THE SHARES WERE ACQU IRED TO EARN CAPITAL GAIN AND NOT DIVIDEND INCOME AND THE SAID CAPITAL GAIN WAS TAXAB LE AND THEREFORE DIVIDEND INCOME WAS ONLY A BY-PRODUCT OF THE SHARES ACQUIRED AND IT COULD NOT BE SAID THAT THE ASSESSEE HAD MADE INVESTMENT IN SHARES FOR EARNING DIVIDEND INCOME, WHICH WAS EXEMPT. IN ITA NO.1206/AHD/2009 3 SUPPORT OF THIS, RELIANCE WAS PLACE IN THE CASE OF CIT-VS- S.A.BUILDERS REPORTED IN 288 ITR 1 (SC). 3.1 AFTER CONSIDERING THE AFORESAID SUBMISSIONS, TH E LD. CIT(A) CONFIRMED THE DISALLOWANCE OF RS.6 LAKHS MADE BY THE AO UNDER SEC TION14A OF THE I.T. ACT FOR THE DETAILED REASONS GIVEN IN PARA 5.2 OF THE IMPUGNED ORDER, WHICH IS REPRODUCED AS UNDER: 5.2 I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E SUBMISSIONS OF THE A.R. CAREFULLY ALONG WITH THE CASE LAWS RELIED UPON. IT IS SEEN THAT THOUGH THE APPELLANT STATED THAT IT WAS HAVING SUFFICIENT SURP LUS FUNDS AT ITS DISPOSAL AND THE SAME WAS USED TO MAKE INVESTMENT IN SHARES, IT HAS NOT BEEN ABLE TO SUBSTANTIATE ITS CLAIM BY FURNISHING SUPPORTING EVI DENCES. I, THEREFORE, AGREE WITH THE OBSERVATION OF THE A.O. THAT IF THE APPELL ANT WAS IN FACT HAVING SUFFICIENT OWN FUNDS, WHY IT HAD TAKEN A LOAN FROM THE BANK, FOR WHICH IT HAD PAID INTEREST. THE CASE LAWS RELIED UPON BY THE A.R . ARE, THEREFORE, NOT APPLICABLE IN ITS CASE, AS THE APPELLANT COULD NOT PROVE THAT IT HAD INVESTED IN SHARES OUT OF ITS OWN SUFFICIENT FUNDS. I, THEREFOR E, HOLD THAT THE DISALLOWANCE MADE BY THE A.O. U/S 14A IS QUITE JUSTIFIED AND THE SAME IS HEREBY CONFIRMED. 4. AGGRIEVED WITH THE ABOVE ORDER, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 5. AT THE TIME OF HEARING BEFORE US, ON BEHALF OF T HE ASSESSEE, SHRI P.D.SHAH APPEARED AND CONTENDED THAT THERE WAS SUFFICIENT SU RPLUS FUND OF RS 19.85 CRORES CONSISTING OF SHARES CAPITAL, RESERVES, UNSECURED L OAN, DEPRECIATION AND ADVANCE AGAINST SALES, AGAINST THE INVESTMENTS OF RS 5.51 C RORES. THEREFORE ENTIRE INVESTMENT WERE MADE OUT OF OWN INTEREST FREE FUNDS. THEREFORE THERE CANNOT BE ANY DISALLOWANCE U/S.L4A OF THE INCOME TAX ACT. IN THIS REGARD RELIA NCE IS PLACED ON THE JUDGMENT OF JURISDICTIONAL HON'BLE ITAT-AHMEDABAD IN TORRENT FI NANCERS 73 TTJ 787 (AHD). FURTHER RELIANCE WAS PLACED BY THE LD. COUNSEL FOR THE ASSESSEE ON THE DECISIONS OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS GUJARAT POWER CORPORATION LIMITED DATED 28/3/2011(ITA NO.L587/2009) AND MUMBA I HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LIMITED (313 IT R 340)(MUM). 5.1 IT WAS ALSO CONTENDED THAT INTEREST BEARING FUN D FROM BANK IS FOR THE SPECIFIC PURPOSE I.E. FOR THE WORKING CAPITAL AND THEREFORE THE SAME CANNOT USED FOR OTHER ITA NO.1206/AHD/2009 4 PURPOSE. ACCORDINGLY, THE AO HAS NOT ESTABLISHED TH AT INTEREST BEARING FUND HAS BEEN UTILIZED FOR THE INVESTMENT IN THE SHARES, NO PART OF INTEREST IS TO BE DISALLOWED. 5.2 FINALLY, THE COUNSEL OF THE ASSESSEE POINTED OU T THAT SHARES WERE ACQUIRED TO EARN CAPITAL GAIN AND NOT DIVIDEND INCOME AND THE S AID CAPITAL GAIN IS TAXABLE. THE DIVIDEND INCOME IS ONLY BY-PRODUCT OF THE SHARES AC QUIRED. THEREFORE, IT CANNOT BE SAID THAT WE HAVE MADE INVESTMENT IN THE SHARES FOR EARNING EXEMPTED INCOME. THEREFORE, RELYING, ON THE JUDGMENT OF THE HON'BLE APEX COURT IN THE CASE OF CIT VS S A BUILDERS. 288 ITR 1(SC) AND MUNJAL SALES CORPORA TION -VS CIT (298 ITR 298)(SC), NO PART OF INTEREST CAN BE DISALLOWED. 5.3 WITH REGARD TO ESTIMATION OF OTHER EXPENSES LIK E ADMINISTRATIVE COST FOR MAKING INVESTMENT IN SHARES, COUNSEL OF THE ASSESSEE POINT ED OUT THAT FOR THE ASSESSMENT YEAR UNDER APPEAL, SUB-SECTIONS (2) AND (3) OF SECTION 1 4A OF THE ACT AND RULE 8D IS APPLICABLE W.E.F. THE ASSESSMENT YEAR 2007-08 AS HE LD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE & MANUFACTURING C O. LTD. REPORTED IN 210 ITR PAGE 81 (BOM.), NO DISALLOWANCE FOR ADMINISTRATIVE EXPENSES CAN BE MADE IN THE ASSESSMENT YEAR UNDER APPEAL. 6. ON THE OTHER HAND, SHRI G.S.SOURYAWANSI, APPEARI NG ON BEHALF OF THE REVENUE, VEHEMENTLY SUPPORTED THE ORDER OF THE LD. CIT(A) AN D CONTENDED THAT THE VIEW TAKEN BY THE LD. CIT(A) BE UPHELD. 7. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT IN PARA 5.2 OF THE IMPUGNED ORDER, THE LD. CIT(A) HAS MENTIONED THAT THOUGH THE ASSESSEE HAS S TATED THAT IT WAS HAVING SUFFICIENT SURPLUS FUND AT ITS DISPOSAL AND THE SAME WAS USED TO MAKE INVESTMENT IN SHARES, THIS CLAIM WAS NOT SUBSTANTIATED BY FURNISHING SUPPORTIN G EVIDENCES. BEFORE US, THE COUNSEL OF THE ASSESSEE MADE AN ATTEMPT TO DEMONSTR ATE THAT IT IS HAVING SUFFICIENT SURPLUS FUND OF RS.19.85 CRORES CONSISTING OF SHARE CAPITAL, RESERVES, UNSECURED LOANS, ETC. AS AGAINST INVESTMENT OF RS.5.51 CRORES MADE. FURTHER, RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF RELIANCE UTILITY & POWER LTD. ( SUPRA ). ADMITTEDLY, THE JUDGEMENT OF ITA NO.1206/AHD/2009 5 HONBLE SUPREME COURT IN THE CASE OF S A BUILDERS, MUNJAL SALES CORPORATION AND JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE O F RELIANCE UTILITY & POWER LTD. ( SUPRA ) WERE NOT AVAILABLE TO THE LD. CIT(A) BEFORE PASSI NG THE IMPUGNED ORDER. THE HONBLE SUPREME COURT IN THE CASE OF MUNJAL SALES C ORPORATION ( SUPRA ) HELD THAT WHERE THE ASSESSEE HAD CAPITAL AND PROFIT MORE THAN INTEREST-FREE FUNDS/ADVANCES, THEN IT HAS TO BE PRESUMED THAT SUCH INTEREST-FREE ADVAN CES WAS GIVEN OUT OF INTEREST FREE CAPITAL AVAILABLE WITH THE ASSESSEE. FURTHER, THE PROVISIONS OF SUB-SECTION (2) AND (3) OF SECTION 14A OF THE I.T. ACT, 1961 AND RULE 8D AR E APPLICABLE ONLY W.E.F. THE ASSESSMENT YEAR 2007-08 AS HELD BY THE HONBLE BOMB AY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. ( SUPRA ), DISALLOWANCE UNDER SECTION 14A FOR THE YEAR UNDER CONSIDERATION CAN BE MADE AT REASONABLE BASIS, AFTER FOLLOWING THE AUTHORITIES OF THE SUBJECT. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT-VS- RELIANCE UTILITIES AND POWER LTD. ( SUPRA ), RELIED ON BY THE LD. COUNSEL OF THE ASSESSEE, HELD THAT IF THERE ARE FUNDS AVAILABLE, BOTH INTERE ST-FREE AND OVERDRAWN AND/OR LOAN TAKEN, THEN PRESUMPTION COULD ARISE THAT INVESTMENT COULD BE OUT OF INTEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF INTERES T-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 7.1 ADMITTEDLY, IN THE CASE BEFORE US, BEFORE THE A O, THE ASSESSEE PLEADED THAT IT WAS HAVING SURPLUS FUNDS OF RS.19.85 CRORES AS AGAI NST LOAN FUND AS ON 01.04.2005 RS.12,82,75,094/- AND SAME WAS AT RS.4,09,112/- ON THE CLOSING DATE. IN THE ASSESSMENT ORDER, THE AO OBSERVED THAT IF THE ASSES SEE HAD INTEREST-FREE FUNDS THEN AS A PRUDENT BUSINESSMAN, HE SHOULD HAVE FIRST PAID TH E LOAN LIABILITY. IN OUR CONSIDERED OPINION, THIS OBSERVATION OF THE AO IS NOT CORRECT BECAUSE AS A PRUDENT BUSINESSMAN, IT IS HIS OPTION TO DECIDE WHEN AND WHERE TO INVEST WH AT AMOUNT. DESPITE ALL THIS, LOOKING TO THE FINDING OF FACT RECORDED BY THE LD. CIT(A) IN PARA 5.2 THAT THE ASSESSEE HAS NOT SUBSTANTIATED ITS CLAIM BY FURNISHING SUPPO RTING EVIDENCES, WE ARE OF THE VIEW THAT IT WILL MEET THE ENDS OF JUSTICE, IF THE ORDER OF THE LD. CIT(A) IS SET ASIDE AND THE MATTER IS REMANDED TO THE AO WITH THE DIRECTION THA T THE ASSESSEE SHOULD FURNISH THE COMPLETE AVAILABILITY OF THE FUND. THE AO WILL EXAM INE THE SAME, KEEPING IN VIEW THE VARIOUS DECISIONS CITED BEFORE US BY THE LD. COUNSE L OF THE ASSESSEE AND RE-ADJUDICATE ITA NO.1206/AHD/2009 6 THE DISALLOWANCE OF INTEREST EXPENSES OF RS.5,50,36 6/-. THUS, THE ADDITION TO THIS EXTENT IS SET ASIDE TO THE FILE OF THE AO WHO WILL RE-ADJUDICATE THE SAME, AFTER GIVING OPPORTUNITY OF BEING HEARD TO BOTH THE SIDES. 7.2 WITH REGARD TO DISALLOWANCE OF RS.49,634/- (RS. 6,00,000/- - RS.5,50,366/-), WE ARE OF THE VIEW THAT PROPORTIONATE ADMINISTRATIVE C OST ATTRIBUTABLE TO EARNING TAX-FREE INCOME CANNOT BE DISALLOWED UNTIL RULE 8D CAME INTO FORCE. RULE 8D IS INSERTED W.E.F. FINANCIAL YEAR 2007-08 WHICH PROVIDES THE PRECISE F ORMULA FOR WORKING OUT THE DISALLOWANCE TO BE MADE UNDER SECTION 14A. IN SUPPO RT OF THIS, RELIANCE IS PLACED ON THE JUDGEMENT DATED 21.10.2010 OF THE HONBLE KERAL A HIGH COURT IN I.T. APPEAL NO.467 & ORS. OF 2010 IN THE CASE OF CIT-VS- CATHOL IC SYRIAN BANK LTD., TRISSUR. THE ASSESSMENT YEAR INVOLVED IN THE PRESENT APPEAL IS 2 006-07. FOLLOWING THIS DECISION, THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES IS DELE TED. 8. IN THE RESULT, FOR STATISTICAL PURPOSES, THE APP EAL FILED BY THE ASSESSEE IS TREATED TO BE PARTLY ALLOWED. THE ORDER PRONOUNCED IN THE COURT O N 30.06.2011 SD/- SD/- (A.N.PAHUJA) (T.K. S HARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30/06/2011 COPY OF THE ORDER IS FORWARDED TO:- (1) THE ASSESSEE (2) THE DEPARTMENT. (3) CIT (A.) CONCERNED. (4) CIT CONCERNED. (5) D.R., ITAT, AHMEDABAD. TRUE COPY BY ORDER DEPUTY REGISTRAR, ITAT, AH MEDABAD. TALUKDAR/ SR. P.S.