ITO Corporate Ward 6(3), CHENNAI V. Sounararaja Mills Ltd., Dindigul

ITA 1255/CHNY/2018

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 5287 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 12-04-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R KUMAR
• Assessee Lawyers: V M MAHADIR
• Keywords: Earning of tax free income; Cost of acquisition; Bad and doubtful debts; Capital receipt; TDS; Rule 8D; Set aside
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B BENCH, CHENNAI . . . , , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ./ I.T.A.NO.1255/CHNY/2018 ( [ [ / ASSESSMENT YEAR: 2014-15) THE INCOME TAX OFFICER, CORPORATE WARD 6(3), CHENNAI 600 034. VS M/S. SOUNDARARAJA MILLS LTD., NO.1, SOUNDARARAJA BUILDINGS, G.T.N. SALAI, N.G.O. COLONY, DINDIGUL 624 005. PAN: AAACS8799R ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI R. KUMAR, ADVOCATE / RESPONDENT BY : SHRI V.M. MAHADIR, JCIT /DATE OF HEARING : 07.08.2019 /DATE OF PRONOUNCEMENT : 19.08.2019 / O R D E R PER INTURI RAMA RAO, ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE REVENUE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-15, CHENNAI, (IN SHORT CIT(A)) DATED 27.12.2017 FOR THE ASSESSMENT YEAR 2014-15. 2 I.T.A. NO.1255/CHNY/2018 2. THE REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS CONTRARY TO THE LAW AND FACTS OF THE CASE. 2. THE LD CIT(A) ERRED IN DIRECTING THE AO TO RESTRICT THE DISALLOWANCE UNDER SECTION 14A TO THE EXTENT OF DIVIDEND EARNED DURING THE YEAR. 2.1)THE LD CIT(A) ERRED IN DIRECTING THE AO TO DELETE THE ADDITION U/S 14A, HOLDING THAT THE ASSESSEE DID NOT EARN ANY EXEMPT INCOME DURING THE YEAR WHEN RULE 8D DOES NOT MAKE ANY DISTINCTION AND THE INTENTION OF THE ASSESSEE IN MAKING SUCH INVESTMENT IS RELEVANT TO DECIDE THE ISSUE AS HELD BY THE APEX COURT IN RAJENDRA PRASAD MOODY (115 ITR 519) AND NOT THE ACTUAL EARNING OF INTEREST IN A PARTICULAR YEAR. 2.2) THE LD CIT(A) ERRED IN NOT FOLLOWING THE BINDING DECISION OF ITAT CHENNAI BENCH IN SIVA INDUSTRIES & HOLDINGS LTD VS ACIT (ITA 1039/MDS/2014.2108/MDS/2012, 687 & 884/MDS/2014 DATED 07/10/2016) HAS HELD THAT THE DISALLOWANCE U/S 14A NEED NOT TO BE RESTRICTED TO THE EXTENT OF EXEMPT INCOME EARNED BY THE ASSESSEE. 2.3) THE LD CIT(A) FAILED TO NOTE THAT' AS PER SECTION 14A READ WITH RULE 8D CLARIFIED THE LEGISLATIVE INTENT THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. NO EXPENDITURE, WHETHER DIRECT OR INDIRECT, WHICH IS NOT ATTRIBUTABLE OR RELATABLE TO EARNING OF TAXABLE INCOME CAN BE ALLOWED' 2.4 THE LD CIT(A) FAILED TO NOTE THAT THOUGH THE ISSUE OF DISALLOWANCE U/S 14A HAS BEEN HELD IN FAVOUR OF THE M/S SHRIRAM TRANSPORT GROUP CASES BY THE I TAT, CHENNAI, WITH DUE RESPECT TO THE APPELLATE AUTHORITIES, THE SAME HAS NOT BEEN ACCEPTED AND THE DEPARTMENT HAS FILED FURTHER APPEAL BEFORE HONOURABLE MADRAS HIGH COURT. 3. THE LD CIT (A) ERRED IN DIRECTING AO TO DELETE THE DISALLOWANCE OF BAD DEBT WRITTEN OFF TOWARDS CARBON CREDIT FOR RS.6,25,00,000/- 3.1 THE LD CIT(A) FAILED TO NOTE THAT 'AS PER SECTION 36(1)(VII) OF THE I.T. ACT, ONE OF THE CONDITION FOR ALLOWABILITY OF BAD DEBTS IS 'SUCH DEBT SHOULD BE REVENUE IN NATURE'. LN THE INSTANT CASE THE SALE OF CARBON CREDIT IS CAPITAL IN NATURE AND HENCE THE SAME CANNOT BE ALLOWED AS BAD DEBT. THE RELIANCE IS 3 I.T.A. NO.1255/CHNY/2018 PLACED IN THE FOLLOWING CASE LAWS WHEREIN THE HON'BLE COURT HAS HELD THAT THE RECEIPT OF ON ACCOUNT OF SALE OF CARBON CREDIT IS A CAPITAL RECEIPT'. 3.2 THE LD CIT(A) FAILED TO NOTE THAT THE PROCEEDS REALIZED BY THE ASSESSEE ON SALE OF CERTIFIED EMISSION REDUCTION CREDIT, WHICH THE ASSESSEE HAD EARNED ON THE CLEAN DEVELOPMENT MECHANISM IN ITS WIND ENERGY OPERATIONS, IS A CAPITAL RECEIPT AND NOT TAXABLE. 3.3 THE LD CIT(A) FAILED NOTE THAT THE APPELLATE TRIBUNAL IS CORRECT IN HOLDING THAT SALE OF CARBON CREDITS IS TO BE CONSIDERED AS CAPITAL RECEIPT AND NOT LIABLE FOR TAX UNDER ANY HEAD OF INCOME UNDER INCOME TAX ACT, 1961. 3.4 THE LD CIT(A) FAILED TO NOTE THAT THOUGH THE ISSUE OF CARBON CREDIT HAS BEEN HELD IN FAVOUR OF THE ASSESSEE, CHENNAI, WITH DUE RESPECT TO THE APPELLATE AUTHORITIES, THE SAME HAS NOT BEEN ACCEPTED AND THE DEPARTMENT HAS FILED FURTHER APPEAL TO HONOURABLE MADRAS HIGH COURT IN THE CASE OF AMBIKA COTTON MILLS LTD VS. DCIT (40 TAXMAMM.COM 171) AND ARUN TEXTILES (P) LTD. ACIT (58 TAXMANN.COM 223). 3.5 THE LD CIT(A) FAILED NOTE THAT THERE IS NO COST OF ACQUISITION OR COST OF PRODUCTION TO GET ENTITLEMENT FOR THE CARBON CREDITS, WITHOUT APPRECIATING THAT GENERATION OF CARBON CREDITS IS EMPLOYED IN THE PRODUCTION PROCESS BY THE ASSESSEE. 4.THE LD CIT(A) ERRED IN DIRECTING AO TO DELETE THE ADDITION OF RS. 4,25,987/- AS INTEREST RECEIPTS U/S 26AS PROVIDE THE CREDIT FOR TDS FOR NEXT ASSESSMENT YEAR 2015-16. 4.1 THE LD CIT OUGHT TO HAVE APPRECIATED THAT AS PER SECTION 251(1)(A) OF THE ACT, THE 'POWER TO SET ASIDE' OR EXAMINING THE ISSUE AFRESH' HAS BEEN OMITTED WITH EFFECT FROM 01.06.2001 AS PER THE FINANCE ACT,2001. 4.2 THE LD CIT (A) FAILED NOTE THAT THE INTEREST INCOME HAS ACCRUED OR AROUSED DURING THE RELEVANT PREVIOUS YEAR I.E. ASSESSMENT YEAR 2014-15. WHEN IT ACCRUES DURING THE AY 2014-15 ITSELF THE SAME CANNOT BE DEFERRED TO THE NEXT FY. 5) FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 4 I.T.A. NO.1255/CHNY/2018 3. THE BRIEF FACTS OF THE CASE ARE AS UNDER: THE APPELLANT NAMELY M/S. SOUNDARARAJA MILLS LTD., IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF SYNTHETIC AND COTTON YARNS. THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2014-15 WAS FILED ON 30.09.2014 DECLARING NIL INCOME AFTER SETTING OFF THE BROUGHT FORWARD LOSSES. AGAINST THE SAID RETURN OF INCOME, THE ASSESSMENT WAS COMPLETED BY THE INCOME TAX OFFICER, CORPORATE WARD 6(3), CHENNAI (HEREINAFTER REFERRED AS AO') VIDE ORDER DATED 20.12.2016 PASSED U/S.143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) AT A TOTAL INCOME OF RS.9,24,51,442/- BEFORE SETTING OFF BROUGHT FORWARD BUSINESS LOSS. WHILE DOING SO, THE AO MADE ADDITION OF RS.625 LAKHS ON ACCOUNT OF CARBON CREDITS RECEIVABLE WRITTEN OFF IN THE BOOKS OF ACCOUNT AND CREDITED P&L ACCOUNT SAYING IT AS CAPITAL RECEIPT. 4. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE LD.CIT(A), WHO VIDE IMPUGNED ORDER DIRECTED THE AO TO DELETE THE ADDITION MADE ON ACCOUNT OF CARBON CREDITS RECEIVABLE TAKING INTO ACCOUNT, THE FACT THAT IN THE YEAR IN WHICH THAT CARBON CREDIT RECEIVABLE WAS OFFERED TO TAX IN THE ASSESSMENT YEAR 2007-08. AS REGARDS TO THE 5 I.T.A. NO.1255/CHNY/2018 DISALLOWANCE OF 14A OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT), THE LD.CIT(A) HELD THAT IN THE ABSENCE OF EXEMPT INCOME, NO DISALLOWANCE U/S.14A OF THE ACT CAN BE MADE. BEING AGGRIEVED BY THE ORDER OF LD.CIT(A), THE REVENUE IS IN APPEAL BEFORE US IN THE PRESENT APPEAL. 5. THE GROUND NO.2 CHALLENGES THE DECISION OF LD.CIT(A) TO RESTRICT THE DISALLOWANCE U/S.14A OF THE ACT TO THE EXTENT OF EXEMPT INCOME. THIS DECISION OF LD.CIT(A) IS IN CONSONANCE WITH THE SETTLED PROVISIONS OF LAW THAT THE AMOUNT OF DISALLOWANCE CANNOT EXCEED EXEMPT INCOME. THEREFORE, WE DO NOT FIND ANY MERIT IN THE GROUND OF APPEAL NO.2. 5.1 THE GROUND OF APPEAL NO.3 CHALLENGES THE LD.CIT(A) TO DELETE THE BAD DEBTS WRITTEN OFF ON CARBON CREDIT AT RS.625 LAKHS. WHILE GRANTING RELIEF, THE LD.CIT(A) HAD GRANTED RELIEF CONSIDERING THE SUBMISSION OF THE RESPONDENT THAT THE INCOME WAS OFFERED TO TAX IN THE ASSESSMENT YEAR 2007-08. HOWEVER THE LD.CIT(A) HAS NOT REFERRED TO ANY MATERIAL. ACCORDINGLY, WE ARE OF THE CONSIDERED OPINION THAT THE ISSUE REQUIRES VERIFICATION BY THE AO, WHETHER THIS 6 I.T.A. NO.1255/CHNY/2018 AMOUNT WAS OFFERED TO TAX IN THE ASSESSMENT YEAR 2007-08 OR NOT. ACCORDINGLY, THE MATTER IS REMITTED BACK TO THE FILE OF AO FOR DENOVA ASSESSMENT AFTER DUE VERIFICATION ON THE ABOVE LINES. 6. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 19 TH AUGUST, 2019 AT CHENNAI. SD/- SD/- ( . . . ) (N.R.S. GANESAN) / JUDICIAL MEMBER ( ) (INTURI RAMA RAO) /ACCOUNTANT MEMBER /CHENNAI, /DATED, THE 19 TH AUGUST, 2019. RSR /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. ( )/CIT(A) 4. /CIT 5. /DR 6. [ /GF