Vanaik Spinning Mills Ltd., New Delhi V. ACIT, Ludhiana

ITA 1342/CHANDI/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6690 (ITAT-CHANDIGARH)
• Duration Of Justice: 10 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 13-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAVI SARANGA L
• Keywords: Business income; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH B, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS.ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.1342/CHD/2016 (ASSESSMENT YEAR : 2012-13) VANAIK SPINNING MILLS LTD., VS. THE A.C.I.T., 105-ASHOKA ESTATE, CIRCEL-7, 24-BARAKHAMBA ROAD, LUDHIANA. NEW DELHI. PAN: AAACV5323J (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI NAVDEEP SHARMA RESPONDENT BY : SHRI RAVI SARANGAL, CIT DR DATE OF HEARING : 27.07.2017 DATE OF PRONOUNCEMENT : .2017 ORDER PER ANNAPURNA GUPTA, A.M. : THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAI NST THE ORDER OF LD. CIT(APPEALS)-4, LUDHIANA DATED 6.4 .2015 RELATING TO ASSESSMENT YEAR 2012-13. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PLASTIC BAGS, SUTLI AND TRADING IN ALL TYPE OF YARN S & FIBERS AND HAD FILED ITS RETURN OF INCOME FOR THE YEAR UND ER CONSIDERATION ON 21.09.2012 DECLARING THEREIN AN IN COME OF RS.3,32,54,710/- WHICH WAS PROCESSED UNDER SECTION 143(1) OF THE ACT AT THE RETURNED INCOME. HOWEVER, THE ASS ESSMENT IN THIS CASE WAS COMPLETED BY THE ASSESSING OFFICER VIDE ORDER UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1 961 (IN SHORT THE ACT) DATED 10.3.2015 AND THE INCOME ASS ESSED AT RS.3,33,08,520/-. WHILE COMPLETING THE ASSESSMENT, THE 2 ASSESSING OFFICER HAD MADE AN ADDITION OF RS.53,801 /- TO THE RETURNED INCOME OF THE ASSESSEE COMPANY ON ACCO UNT OF DISALLOWANCE OF INTEREST BY INVOKING PROVISIONS OF SECTION 36(L)(III) OF THE ACT, AS THE ASSESSEE COMPANY HAD MADE INVESTMENT IN GROUP COMPANIES AND MUTUAL FUNDS OUT OF MIXED FUNDS WITHOUT ANY VISIBLE BENEFIT. APART FROM THIS, THE ASSESSING OFFICER HAD ALSO REJECTED THE REQUEST OF THE ASSESSEE COMPANY TO REVISE DISALLOWANCE MADE BY THE ASSESSEE COMPANY ITSELF UNDER SECTION 14A OF THE AC T FROM RS. 1,87,807/- TO RS.71,571/-. 3. AGGRIEVED BY THE SAME, THE ASSESSEE WENT IN APPE AL BEFORE THE LD.CIT(APPEALS) CHALLENGING BOTH THE AC TIONS OF THE ASSESSING OFFICER, AND WHO VIDE HIS ORDER DATED 6.4.2015 REJECTED ALL THE GROUNDS RAISED BY THE ASS ESSEE AND DISMISSED THE ASSESSEES APPEAL. 4. AGGRIEVED BY THE SAME, THE ASSESSEE HAS NOW COME UP IN APPEAL BEFORE US. GROUND NO.1 RAISED BY THE ASS ESSEE READS AS UNDER: 1. A) THAT THE WORTHY CIT(A)-4, LUDHIANA, ERRED IN LAW A ND ON FACTS IN NOT ALLOWING THE REVISED CLAIM MADE DURING ASSESSMENT PROCEEDINGS OF THE APPELLANT FOR DISALLOWANCE OF RS.71,571/- U/S 14A OF THE ACT BY APPLYING RULE 8D OF THE INCOME-TAX RULES, 1962 AS AGAINST ORIGINAL DISALLOWANCE OF RS.1,87,8077- MADE IN THE RETURN. DIRECTIONS MAY BE GIVEN TO CONSIDER THE DISALLOWANCE U/S 14A READ WITH RULE 8D AS REVISED BY THE APPELLANT DURI NG ASSESSMENT PROCEEDING WHICH IS AS PER LAW. B) THE WORTHY CIT(A)-4, LUDHIANA HAS FURTHER, ERRED IN LAW AND ON FACTS IN NOT DIRECTING THE A.O. TO EXCLUDE TH E AMOUNT OF INTEREST PAID RS.38,91,2571-ON LETTER OF CREDIT WHICH RELATES DIRECTLY TO THE TRADING BUSINE SS ACTIVITIES OF THE APPELLANT AND WHICH ARE DIRECTLY 3 ATTRIBUTABLE TO BUSINESS RECEIPTS SUBJECTED TO TAX, WHILE COMPUTING DISALLOWANCE U/S 14AREAD WITH RULE 8D. 5. IN THE ABOVE GROUND THE ASSESSEE HAS CHALLENGED THE ACTION OF THE LD.CIT(APPEALS) IN UPHOLDING THE ORDE R OF THE ASSESSING OFFICER DENYING THE CLAIM OF THE ASSESSEE WITH REGARD TO REVISION OF DISALLOWANCE U/S 14A OF THE A CT. 6. BRIEFLY STATED, DURING ASSESSMENT PROCEEDINGS TH E ASSESSEE HAD REQUESTED THE ASSESSING OFFICER TO REV ISE THE DISALLOWANCE OF EXPENSES MADE SUO MOTO BY THE ASSE SSEE AS PER SECTION 14A AT RS.1,87,807/-. THE ASSESSEE CON TENDED THAT THE SAME HAD BEEN COMPUTED IN ACCORDANCE WITH THE METHOD PROVIDED UNDER RULE 8D BY INCLUDING IN THE T OTAL VALUE OF INVESTMENTS, THOSE INVESTMENTS ON WHICH NO EXEMPT INCOME HAD BEEN EARNED. THE ASSESSEE STATED THAT COURTS IN A NUMBER OF DECISIONS HAVE HELD THAT WHIL E COMPUTING THE DISALLOWANCE U/S 14A AS PER RULE 8D, INVESTMENTS ON WHICH NO EXEMPT INCOME HAS BEEN EARN ED DURING THE YEAR HAVE TO BE EXCLUDED. RELIANCE WAS PLACED ON THE DECISION OF THE I.T.A.T., CALCUTTA BENCH IN THE CASE OF REI AGRO LTD. VS. DCIT, 144 ITD 141 (KOL). THE ASSESSEE SUBMITTED A REVISED CALCULATION OF THE DISALLOWANCE TO BE MADE U/S 14A BY EXCLUDING THE SAID INVESTMENTS AND REWORKED THE SAME AT RS.71,571/-. THE ASSESSING OF FICER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE. THE LD.CIT(APPEALS) ALSO REJECTED THE ASSESSEES CLAIM STATING THAT THE WORKING MADE BY THE ASSESSEE COMPANY ORIG INALLY WAS IN ACCORDANCE WITH RULE 8D AND THUS REQUIRED NO INTERFERENCE. 4 7. BEFORE US, THE LD. COUNSEL FOR ASSESSEE REITERAT ED THE CONTENTIONS MADE BEFORE THE LOWER AUTHORITIES. THE LD. COUNSEL FOR ASSESSEE CONTENDED THAT FOR THE PURPOSE OF CALCULATING EXPENSES TO BE DISALLOWED U/S 14A IN ACCORDANCE WITH THE FORMULA LAID DOWN IN RULE 8D ON LY EXEMPT INCOME EARNING INVESTMENTS HAVE TO BE CONSID ERED. RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS IN T HIS REGARD: I) ABC INDIA LTD. VS. ACIT ITA NO.615/2014 DATED 24.3.2015 (DEL) II) RAMTECH SOFTWARE SOLUTIONS VS. ACIT ITA NO.477/CHD/2015 DATED 14.8.2015 8. THE LD. COUNSEL FOR ASSESSEE SUBMITTED THAT BY EXCLUDING THOSE INVESTMENTS WHICH DID NOT EARN EXEM PT INCOME DURING THE YEAR, THE DISALLOWANCE U/S 14A WO RKED OUT TO RS.71,517/- AS SUBMITTED TO THE ASSESSING OF FICER ALSO AND REPRODUCED AT PAPER BOOK PAGE NO.4 AS UNDE R: REVISED DISALLOWANCE U/S 14A READ WITH RULE 8D IS WORKED OUT AS BELOW AS ON 31/03/2012 AS ON 31/03/2011 TOTAL ASSETS 262510424 276208983 AVERAGE TOTAL ASSETS = 262510424 + 2762 08983 2 = 269359703 AVERAGE TOTAL INVESTMENTS ON = 9582815 WHICH EXEMPT INCOME RECEIVED I) DIRECT COST NIL II) INDIRECT COST A) INTEREST ON CC A/C 664956/- B) INDIRECT COST INTEREST X AVERAGE INVESTMENT ON WHICH EXEMPT INCOME RECEIVED AVERAGE TOTAL ASSETS = 664956 X 9582815 = 23657 5 (III) % OF AVERAGE = 0.5% X 9582815 = 47914 TOTAL = (I+II+III) 71571 9. THE LD. COUNSEL FOR ASSESSEE ALSO CONTENDED THAT THE INTEREST EXPENSES TO BE DISALLOWED AS PER RULE 8D(2 )(II) OUGHT TO BE CALCULATED BY EXCLUDING THE AMOUNT OF INTERES T PAID ON LETTER OF CREDIT SINCE THE SAME WAS DIRECTLY RELATE D TO THE TRADING BUSINESS ACTIVITY OF THE ASSESSEE. THE LD. COUNSEL FOR ASSESSEE, THEREFORE, STATED THA T THE LD.CIT(APPEALS) HAD ERRED IN NOT GIVING DUE CONSIDE RATION TO THE ABOVE CONTENTIONS OF THE ASSESSEE. 10. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE LD.CIT(APPEALS). 11. WE HAVE HEARD CONTENTIONS OF BOTH THE PARTIES, PERUSED THE ORDERS OF AUTHORITIES BELOW AND ALSO GONE THROU GH THE DOCUMENTS PLACED BEFORE US. WE FIND MERIT IN THE CONTENTIONS OF THE LD. COUNSEL FOR ASSESSEE THAT FO R THE PURPOSE OF CALCULATING DISALLOWANCE OF EXPENSES U/S 14A AS PER RULE 8D, THE INVESTMENT TO BE TAKEN INTO CONSID ERATION ARE ONLY THOSE WHICH HAVE EARNED EXEMPT INCOME. THE SPECIAL BENCH OF THE ITAT IN THE CASE OF ACIT, CIRC LE 17(1) VS VIREET INVESTMENTS PVT. LTD IN ITA NO.502/DEL/20 12 WHILE DEALING WITH THE ISSUE RELATING TO THE MODE O F COMPUTATION U/R 8D(2)(III) HAS HELD THAT WHILE CONS IDERING THE AVERAGE VALUE OF INVESTMENTS, ONLY THOSE INVEST MENTS ARE TO BE TAKEN INTO CONSIDERATION WHICH HAVE YIELD ED EXEMPT INCOME AND NOT THOSE WHICH DID NOT YIELD ANY 6 EXEMPT INCOME. EVEN THE HONBLE DELHI HIGH COURT HA S HELD SO IN THE CASE OF ACB LTD. VS ACIT IN ITA NO.625/20 14 DT.24 TH MARCH 2015. 12. IN VIEW OF THE ABOVE JUDICIAL PRECEDENTS, THE LD.CIT(APPEALS) WE HOLD, HAS ERRED INREJECTING THIS CONTENTION OF THE ASSESSEE. 13. WE FIND MERIT IN THE OTHER CONTENTION OF THE AS SESSEE ALSO THAT LETTERS OF CREDITS ARE ISSUED BY BANKS O N ACCOUNT OF IMPORTS AND ARE, THEREFORE, DIRECTLY RELATABLE T O THE BUSINESS OF THE ASSESSEE. THE INTEREST PAID ON AC COUNT OF THE SAME, THEREFORE, ARE NOT TO BE CONSIDERED FOR T HE PURPOSE OF CALCULATING THE AMOUNT OF DISALLOWANCE O F INTEREST AS PER RULE 8D(2)(II) OF THE RULES. 14. IN VIEW OF THE ABOVE WE HOLD THAT THE DISALLOWA NCE OF EXPENSES MADE U/S 14A BE REWORKED AFTER EXCLUDING INVESTMENTS WHICH DID NOT EARN ANY EXEMPT INCOME DU RING THE YEAR AND AFTER EXCLUDING INTEREST PERTAINING TO LETTERS OF CREDITS GOT ISSUED BY THE ASSESSEE. IN VIEW OF THE ABOVE, GROUND NO.1( A) &( B) STAND ALLOWED. 15. GROUND NO.2 RAISED BY THE ASSESSEE READS AS UND ER: 2 A) THAT THE WORTHY CIT(A)-4, LUDHIANA, ERRED IN LAW AND ON FACTS IN DISALLOWING RS.53,801/- U/S 36(I)(III) O UT OF INTEREST PAID ON WORKING CAPITAL LOAN ON THE PRESUMPTION THAT THE ASSESSEE MIGHT HAVE UTILIZED BORROWED FUNDS FOR INVESTMENT IN SHARES THOUGH NO FRESH INVESTMENTS WERE MADE DURING THE YEAR. THE INVESTMENT MADE IN EARLIER YEARS WERE ALSO OUT OF IT S INTERNAL ACCRUALS AND OWN SURPLUS FUND AVAILABLE. 7 DIRECTIONS BE GIVEN TO THE ASSESSING OFFICER TO DELE TE THE DISALLOWANCE MADE ON ASSUMPTION, SURMISES AND CONJECTURES. B) THAT THE WORTHY CIT(A)-4, LUDHIANA HAS FURTHER ERRED IN LAW AND ON FACTS IN UPHOLDING AND NOT DIRECTING THE ASSESSING OFFICER TO REDUCE RS.1, 56,2917- REGARDING DISALLOWA NCE OF INTEREST U/S 14A R.W. RESPECT TO RULE 8D WHICH HAS BE EN ACCEPTED BY THE DEPARTMENT IN ITS ORDER PASSED U/S 143(3) INSTEAD OF RS.35,325/- WRONGLY CONSIDERED BY THE ASS ESSING OFFICER IN ITS ORDER. DIRECTIONS BE GIVEN TO THE ASSESSING OFFICER TO REDU CE RS.1,56,291/- FROM THE DISALLOWANCE OF RS.89,126/- MAD E U/S 36(1 )(II) AND THEREBY REDUCE THE DISALLOWANCE TO NIL. 16. THE SAID GROUND RELATES TO DISALLOWANCE OF INTE REST MADE U/S 36(1)(III) OF THE ACT ON ACCOUNT OF INVEST MENT MADE BY THE ASSESSEE IN EQUITY, SHARES AND MUTUAL F UNDS WHICH THE ASSESSING OFFICER HELD WERE NOT FOR THE P URPOSE OF BUSINESS OF THE ASSESSEE. THE ASSESSING OFFICER FOU ND THAT THE ASSESSEE HAD MADE THE SAID INVESTMENT AMOUNTING TO RS.1,15,91,042/- AND AT THE SAME TIME HAD INCURRED INTEREST EXPENDITURE AMOUNTING TO RS.45,56,213/-. RELYING UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIG H COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 THE ASSESSING OFFICER WORKED OUT DISALLOWANCE TO BE MADE U/S 36(1)(III) OF THE ACT TO THE EXTENT OF RS.53,80 1/- BY APPORTIONING THE TOTAL INTEREST CLAIMED BY THE ASSE SSEE IN THE DEBT EQUITY RATIO AND MADE ADDITION OF THE SAME TO THE INCOME OF THE ASSESSEE. 17. THE LD.CIT(APPEALS) UPHELD THE DISALLOWANCE SO MADE STATING THAT THE ASSESSING OFFICER WAS FAIR IN MAKI NG DISALLOWANCE BY TAKING DEBT EQUITY RATIO IN CONSIDE RATION. 18. BEFORE US, THE LD. COUNSEL FOR ASSESSEE STATED THAT THERE WAS NO REASON FOR MAKING ANY DISALLOWANCE U/S 8 36(1)(III) OF THE ACT AT ALL SINCE NO FRESH INVESTM ENTS WERE MADE DURING THE YEAR AND ALL INVESTMENTS MADE IN EA RLIER YEARS WERE OUT OF OWN FUNDS OF THE ASSESSEE. THE L D. COUNSEL FOR ASSESSEE DREW OUR ATTENTION TO ITS BALA NCE SHEET PLACED AT PAPER BOOK PAGE NO.16 IN THIS REGARD SHOW ING THAT IT HAD OWN FUNDS IN THE FORM OF SHARE CAPITAL, RESERVES AND SURPLUS TO THE EXTENT OF RS.55 LACS AND RS.9.35 CRORES RESPECTIVELY IN THE PRECEDING YEAR WHICH WAS MORE T HAN SUFFICIENT FOR MAKING THE INVESTMENT OF RS.1.7 CROR ES. ALTERNATIVELY, THE LD. COUNSEL FOR ASSESSEE PLEADED THAT THE DISALLOWANCE OF INTEREST ALREADY MADE U/S 14A OF TH E ACT SHOULD BE REDUCED FROM THE DISALLOWANCE NOW MADE U/ S 36(1)(III) OF THE ACT. 19. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE OR DER OF THE LD.CIT(APPEALS). 20. WE FIND MERIT IN THE CONTENTION OF THE LD. COUN SEL FOR ASSESSEE. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS CIT, JALAND HAR (2016) 381 ITR 107(P&H) HAS HELD THAT WHERE THE AS SESSEE HAS ENOUGH OWN FUNDS THE PRESUMPTION SHOULD BE THAT THE INVESTMENTS OR ADVANCES FOR NON BUSINESS PURPOSE HA VE BEEN MADE OUT OF THE SAID FUNDS. HAVING SAID SO AN D CONSIDERING THE FACT THAT THE AVAILABILITY OF ENOUG H OWN FUNDS HAS BEEN AMPLY DEMONSTRATED BY THE ASSESSEE B Y POINTING OUT THE FIGURES SHOWING AVAILABILITY OF OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES AMOUNTING TO IN ALL RS.10 CRORES, WE FIND THAT THERE ARE MORE THAN SUFFICIENT 9 FUNDS AVAILABLE WITH THE ASSESSEE FOR THE PURPOSE O F MAKING INVESTMENTS OF RS.1.7 CRORES AND, THEREFORE, THERE IS NO REASON AT ALL FOR MAKING ANY DISALLOWANCE OF INTERE ST U/S 36(1)(III) OF THE ACT. WE, THEREFORE, DIRECT THAT THE DISALLOWANCE MADE U/S 36(1)(III) TO THE EXTENT OF R S. 53,801/- BE DELETED. GROUND OF APPEAL NO.2 THEREFORE STANDS ALLOWED. 21. IN THE RESULT, THE APPEAL OF THE ASSESSEE STAND S ALLOWED IN ABOVE TERMS. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 23 RD OCTOBER, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH