The DCIT, Circle-4, Ahmedabad V. GMM Pfaulder Ltd., Ahmedabad

ITA 1360/AHD/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0766 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 22-08-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 09-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR JAYANT JHARORI
• Keywords: Business expenditure; Earning of tax free income; Proportionate interest; Capital expenditure
• Section: 143(3); 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH AHMEDABAD BEFORE SHRI S. S. GODARA, JM, & SHRI MANISH BORA D, AM. ITA NO.1360/AHD/2012 ASST. YEAR: 2009-10 DCIT, CIRCLE-4, AHMEDABAD. VS. GMM PFAULDER LTD., B-JADAV CHAMBERS, 3 RD FLOOR, ASHRAM ROAD, AHMEDABAD. APPELLANT RESPONDENT PAN AABCG 0653A APPELLANT BY DR. JAYANT JHARORI, SR. DR RESPONDENT BY MS URVASHI SHODHAN, AR DATE OF HEARING: 22/8/2016 DATE OF PRONOUNCEMENT: 06/9/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THIS APPEAL OF THE REVENUE FOR ASST. YEAR 2009-10 IS DIRECTED AGAINST THE ORDER OF LD. CIT(A) VIII, AHMEDABAD DA TED 14.02.2013 VIDE APPEAL NO.CIT(A)-VIII/ACIT/CIR.4/245/11-12. AS SESSMENT U/S 143(3) OF THE I.T. ACT (IN SHORT THE ACT) WAS FRAME D ON 11.11.2011 BY ACIT, CIRCLE-4, AHMEDABAD. 2. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS A LIMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF CORROSI ON RESISTANT GLASS. RETURN OF INCOME WAS FILED ON 26.09.2009 DEC LARING TOTAL ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 2 INCOME OF RS.15,76,06,440/-. CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AND NOTICE U/S 143(2) OF THE ACT WAS ISS UED ON 27.8.2010 AND DULY SERVED UPON THE ASSESSEE. ASSESSMENT WAS C OMPLETED AT AN ASSESSED INCOME OF RS.17,14,48,192/- AFTER MAKIN G FOLLOWING ADDITIONS:- I) DISALLOWANCE U/S 14A RS.18,04,252/- II) DISALLOWANCE U/S 36(1)(III) RS.70,05,000/ - III) ROYALTY PAYMENT TREATED AS CAPITAL EXPENDITURE RS.50,32,500/- --------------------- ---- RS.1,38,41,752/- 3. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE LD. CI T(A) WHERE ALL THE ABOVE THREE ADDITIONS OF RS.1,38,41,752/- WERE DELETED BY LD. CIT(A). 4. AGGRIEVED, REVENUE IS NOW IN APPEAL BEFORE THE T RIBUNAL RAISING 5 GROUNDS :- GROUND NO.1 1. THE LD. CIT{A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS. 18,04,252/- MADE U/S. 14A OF THE ACT WITHOUT APPREC IATING THE FACT THAT THE ASSESSEE COMPANY HAD MADE HUGE INVESTMENT IN SHARES AND MUTU AL FUNDS WITHOUT MAKING ANY DISALLOWANCE U/S. 14A OF THE ACT. THE EXPENDITURE I NCURRED FOR EARNING THE EXEMPT INCOME OF RS. 18,04,252/- WAS, THEREFORE, DISALLOWE D U/S. 14A OF THE ACT R. W. RULE- 8D. 5. LD. DR SUBMITTED THAT DURING THE COURSE OF ASSES SMENT PROCEEDINGS IT WAS NOTICED BY LD. ASSESSING OFFICER THAT ASSESSEE HAS EARNED EXEMPT INCOME, THERE IS INVESTMENT IN SHARES AND MUTUAL FUNDS, INTEREST EXPENDITURE HAS BEEN CLAIMED AND NO DISALLOWANCE ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 3 WAS WORKED OUT U/S 14A OF THE ACT AND ACCORDINGLY A PPLYING THE METHOD PROVIDED UNDER RULE-8 OF THE IT RULES, 1062 (IN SHORT THE RULE) R.W.S. 14A OF THE ACT BY CALCULATING DIRECT E XPENDITURE FOR EARNING EXEMPT INCOME AT RS.NIL, DISALLOWANCE OF IN TEREST EXPENDITURE AT RS.12,36,802/- AND ADMINISTRATIVE CO ST @ 0.5% ON AVERAGE INVESTMENT OF RS.5,67,450/- IN TOTAL DISALL OWANCE U/S 14A OF THE ACT AT RS.18,04,252/- WAS MADE, WHICH HAS BEEN DELETED BY LD. CIT(A). 6. LD. DR FURTHER SUBMITTED THAT METHOD PROVIDED UN DER RULE 8D IS MECHANICAL IN NATURE AND IN THE GIVEN CIRCUMSTAN CES WHERE IT IS NOT POSSIBLE TO EXTRACT THE ACTUAL EXPENDITURE INCURRED FOR EARNING EXEMPT INCOME AS WELL AS TO MAINTAIN THE ASSETS FETCHING E XEMPT INCOME THEN THE DISALLOWANCE IS TO BE CALCULATED AS PER TH E METHOD PROVIDED UNDER RULE-8D OF THE RULES AND LD.ASSESSING OFFICER HAS RIGHTLY DONE THE SAME. 7. ON THE OTHER HAND, LD. AR SUBMITTED THAT SPECIFI C DISALLOWANCE OF RS.30,347/- WAS MADE SUO MOTO BY ASSESSEE AS OBS ERVED BY AUDITOR IN THE AUDIT REPORT. FURTHER NO DISALLOWANC E IS CALLED FOR OUT OF THE INTEREST EXPENDITURE AS THE COMPANY HAS SUFFICI ENT INTEREST FREE FUNDS AND THE INTEREST EXPENDITURE IS ONLY TOWARDS WORKING CAPITAL LOAN TAKEN FROM BANK AGAINST HYPOTHECATION OF STOCK AND ASSETS AND HAS TO BE SPECIFICALLY USED FOR BUSINESS PURPOSES. LD. AR FURTHER SUBMITTED THAT THE ISSUE RAISED BY THE REVENUE IN T HIS GROUND IS SQUARELY COVERED IN FAVOUR OF ASSESSEE IN VIEW OF T HE DECISION OF THE CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO. 318/AHD/2011 ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 4 FOR ASST. YEAR 2006-07 AND OTHERS PRONOUNCED ON 17. 4.2015 AND BY THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT IN T HE CASE OF PRINCIPAL CIT VS. INDIA GELATINE AND CHEMICALS LTD. (2016) 66 TAXMANN.COM 356 (GUJARAT) WHEREIN IT HAS BEEN HELD THAT NO DISA LLOWANCE U/S 14A OF THE ACT IS CALLED FOR TOWARDS THE INTEREST EXPEN DITURE IF THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS OUT OF WHICH THE INVESTMENT WAS MADE. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED BEFORE US. THROUGH THIS GROUND REVENUE HAS C HALLENGED THE ACTION OF LD. CIT(A) DELETING THE DISALLOWANCE U/S 14A OF THE ACT OF RS.18,04,252/-. WE FIND THAT AVERAGE INVESTMENT IN SHARES AND MUTUAL FUNDS OF THE ASSESSEE COMPANY AS ON 31.03.20 09 STOOD AT RS.107.13 CRORES. INTEREST EXPENDITURE FOR THE YEAR AT RS.1,30,50,000/- DIVIDEND INCOME OF RS.8,19,154/- A ND A SPECIFIC DISALLOWANCE SUO MOTO MADE BY ASSESSEE AT RS.30,347 /- AS OBSERVED BY AUDITORS. WE OBSERVE THAT IN THE ASSESS MENT ORDER LD. ASSESSING OFFICER HAS NOWHERE MENTIONED ABOUT THIS SPECIFIC DISALLOWANCE MADE BY ASSESSEE AT RS.30,347/-. 9. WE FURTHER OBSERVE THAT LD. CIT(A) HAS DELETED T HE DISALLOWANCE BY OBSERVING AS UNDER :- 3.3. I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E SUBMISSION OF THE A.R. CAREFULLY. FROM THE PERUSAL OF THE ASSESSMENT ORDER IT IS FOUND THAT THERE ARE NO FINDINGS THAT THE BORROWED FUNDS HAVE BEEN INVESTED IN EQUITY SHARES OR UNITS OF MUTUAL FUNDS. IN EARLIER YEARS UP TO ASSESSMENT YEA R 2001-02 AND ASSESSMENT YEAR 2003-04 NO PORTION OF THE INTEREST EXPENDITURE HAD BEEN DISALLOWED FOR DIVERSION OF FUNDS IN INVESTMENT EITHER U/S 36(1)(I II) OR 14A OF THE INCOME TAX ACT, 1961. THIS MEANS BORROWED FUNDS HAD BEEN UTILIZED F OR THE PURPOSE OF BUSINESS. ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 5 IN ASSESSMENT YEAR 2002-03 AND 2004-05 THE HONOURAB LE ITAT, AHMEDABAD HAS DELETED ADDITION OF INTEREST EXPENSES U/S 14A OF TH E INCOME TAX ACT, 1961. IN ASSESSMENT YEARS 2005-06 TO 2007-08, COMMISSIONER ( APPEAL) HAS DELETED THE ADDITION OF INTEREST EXPENSES U/S 14A OF THE INCOME TAX ACT, 1961. THUS UP TO ASSESSMENT YEAR 2007-08 NO BORROWING HAS BEEN USED FOR INVESTMENTS MADE. IN ASSESSMENT YEAR 2008-09 AND IN CURRENT YEAR THE ASS ESSEE HAS MADE INVESTMENT OUT OF SALE PROCEED OF MUTUAL FUND. FROM THE SUBMISSION MADE AB.OVE IT IS SEEN THAT THE INTEREST EXPENDITURE IS IN RELATION TO CASH CREDIT ACCOUNT WITH 'BANKS AND THE CASH CREDIT FACILITY HAS BEEN O BTAINED' AGAINST SECURITY OF BOOK DEBTS, AND INVENTORY. THE..APPELLANT. HAS SUBM ITTED THAT.THE SAID MONEY HAS BEEN UTILIZED FOR THE PURPOSE OF MANUFACTURING ACTIVITIES CARRIED ON AT KARMSAD FACTORY AND NO FUND FROM CASH CREDIT ACCOUN T AT KARMSAD HAS BEEN TRANSFERRED TO BANK ACCOUNT MAINTAINED AT BOMBAY FR OM WHERE INVESTMENTS HAVE BEEN MADE IN PAST AND DURING THE YEAR UNDER CONSIDE RATION. FROM THE BANK STATEMENT IT IS SEEN THAT NO BORROWED MONEY HAS BEE N DIVERTED FOR INVESTMENT. THE A.O. HAS NOT CONSIDERED THESE ASPECTS IN THE AS SESSMENT ORDER. SINCE, THE ASSESSEE HAS ESTABLISHED THAT NO BORROWED MONEY IS USED FOR INVESTMENT; NO INTEREST IS TO BE DISALLOWED U/S 14A R.W.R. 8D. THE REFORE, THE A.O. IS DIRECTED TO DELETE DISALLOWANCE OF RS. 12,36,802/- ON ACCOUNT O F INTEREST PAID. THE APPELLANT HAS SUBMITTED THAT IN RESPECT OF EXEM PT INCOME NO SPECIFIC EXPENDITURE HAS BEEN INCURRED AND OUT OF DIVIDEND I NCOME OF RS. 8,19,154/-, RS. 6,43,206/- HAS NOT BEEN RECEIVED BUT IS REINVESTED IN THE UNITS OF THE RESPECTIVE MUTUAL FUNDS. THE APPELLANT HAS SUBMITTED THAT IN R ESPECT OF THE DIVIDEND INCOME CHEQUES ARE RECEIVED AND DEPOSITED INTO BANK ACCOUN T AND FOR COLLECTION OF THE CHEQUES NO EXPENDITURE IS INCURRED. SIMILARLY, FOR DEPOSITING THE DIVIDEND CHEQUES INTO BANK NO SPECIFIC EXPENDITURE IS INCURR ED. IN RESPECT OF LONG TERM CAPITAL GAIN RS. 14,55,875/- ON REDEMPTION OF MUTUA L FUNDS THERE IS NO QUESTION OF DISALLOWANCE U7S 14A AS THE SAME ARE TAXABLE CAP ITAL GAIN. THEREFORE IN THE ABSENCE OF ANY EXPENDITURE INCURRED, NO DISALLOWANC E IS TO BE MADE. HOWEVER, IN THE RETURN OF INCOME THE APPELLANT HAS SUBMITTED TH AT APPELLANT HAS DISALLOWED RS. 30,347/- ON THE BASIS OF AUDIT REPORT. THERE IS NO SATISFACTION OF THE A.O. IN THE ASSESSMENT ORDER THAT THE CLAIM OF THE APPELLAN T IS INCORRECT AND THERE ARE NO FINDING THAT THE APPELLANT HAD INCURRED EXPENDITURE MORE THAN RS.30,347/-. IN THE ABSENCE OF SUCH FINDINGS NO FURTHER DISALLOWANCE CA N BE MADE U7S. 14A R.W.R. 8D. IT IS CORRECT THAT THE DISALLOWANCE TO BE MADE ON THE BASIS OF RULE 8D SHOULD NOT EXCEED ACTUAL EXPENDITURE INCURRED. IN ASSESSEE 'S OWN CASE HONOURABLE ITAT, AHMEDABAD IN ASSESSMENT YEAR 2002-03 AND 2004 -05 HAS DELETED THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES IN .THE ABS ENCE OF NEXUS BETWEEN THE EXPENDITURE INCURRED AND EXEMPTED INCOME. IN THE YE AR UNDER APPEAL, THERE IS NO FINDING REGARDING NEXUS OF EXPENDITURE DISALLOWED B Y A.O. AND THE EXEMPTED INCOME. SINCE THERE. ARE-NO FINDINGS THAT THE APPEL LANT HAS INCURRED EXPENSES MORE THAN THE EXPENDITURE DISALLOWED BY IT, THE DIS ALLOWANCE OF RS. 30.647/- APPEARS TO BE CORRECT AND NO FURTHER DISALLOWANCE I S CALLED FOR. THEREFORE, THE A.O. IS DIRECTED TO DELETE THE DISALLOWANCE OF RS. 5,67,8507- IN RESPECT OF ADMINISTRATIVE EXPENSES U/S 14A OF THE IT. ACT. ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 6 10. GOING FURTHER WE FIND THAT RULE 8D OF THE IT RU LES PROVIDES FOLLOWING METHOD FOR CALCULATING DISALLOWANCE U/S 1 4A OF THE ACT :- SEC. 14A. EXPENDITURE INCURRED IN RELATION TO INCO ME NOT INCLUDIBLE IN TOTAL INCOME.(1)FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS C HAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE 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 PRESCRIBED, IF THE ASSESSING OFFIC ER, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT: PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOW ER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCI NG THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE ASSESSEE UNDER SECTION 154, FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL, 2001. 2. NEW RULE 8D : 2.1 IN EXERCISE OF THE POWERS GIVEN IN S. 14A(2) C. B.D.T. HAS ISSUED A NOTIFICATION NO. S.O. 547(E) ON 24-3-2008 (299 ITR (ST) 88). THIS NOTIFIC ATION AMENDS THE INCOME-TAX RULES BY INSERTION OF A NEW RULE 8D PROVIDING FOR A 'METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME'. READING THIS RULE IT IS EVIDENT THAT THE RULE PROVIDES FOR DISALLOWANCE OF NOT ONLY DIRECT EXPEND ITURE INCURRED FOR EARNING THE EXEMPT INCOME BUT ALSO FOR DISALLOWANCE OF PROPORTIONATE INDIRECT EXPENDITURE. THIS IS CLEARLY CONTRARY TO THE MAIN OBJECTIVE WITH WHICH S. 14A WAS ENACTED. 2.2 BROADLY STATED, THE NEW RULE 8D PROVIDES AS UND ER : (I) THE METHOD PRESCRIBED IN THE RULE IS TO BE APPL IED ONLY IF THE AO IS NOT SATISFIED WITH : (A) THE CORRECTNESS OF THE CLAIM OF EXPENDITURE INC URRED FOR EARNING THE EXEMPT INCOME MADE BY THE ASSESSEE OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME. ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 7 (II) THE METHOD PRESCRIBED IN THE RULE STATES THAT THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF THE FOLLOWING AMOUNTS : (A) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. (B) IN THE CASE OF INTEREST ON BORROWED FUNDS WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, THE AMOUNT COMPUTED IN ACCORDANC E WITH THIS FOLLOWING FORMULA : A X B C A = AMOUNT OF INTEREST, OTHER THAN THE AMOUNT OF IN TEREST WHICH IS DIRECTLY ATTRIBUTABLE TO THE EXEMPT INCOME STATED IN (A) ABOVE. B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE S HEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR. C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEA R. THE TERM TOTAL ASSETS MEANS TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INC REASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. (C) AN AMOUNT EQUAL TO % OF THE AVERAGE OF THE VA LUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SH EET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE RELEVANT ACCOUNTING YEAR. 11. FROM GOING THROUGH THE ABOVE METHOD WE FIND THA T THERE ARE THREE LIMBS WHICH IN TOTAL ARRIVES AT THE AMOUNT OF DISALLOWANCE U/S 14A OF THE ACT. IN THE FIRST LIMB LD. ASSESSING OFF ICER HAS MADE NIL DISALLOWANCE BUT THE ASSESSEE HAS HIMSELF OFFERED R S.30,347/- AS DISALLOWANCE TOWARDS SPECIFIC EXPENDITURE FOR EARNI NG EXEMPT INCOME AS OBSERVED BY AUDITOR AS WELL AS BY LD. CIT(A) AND WE ALSO ACCEPT THE SAME. GOING FURTHER TOWARDS DISALLOWANCE UNDER SECOND LIM B RELATING TO INTEREST EXPENDITURE WE FIND THAT AS PER THE DET AILED SUBMISSIONS MADE BY ASSESSEE BEFORE THE LOWER AUTHORITIES, THE OBSERVATION MADE BY LD. CIT(A), DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF ASSESSEES OWN CASE IN ITA NO.318/AHD/2011 (SUPRA) AND LOOKING TO THE FACTS OF THE CASE THAT INTEREST EXPENDITURE IS ONLY TOWARDS TO THE ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 8 WORKING CAPITAL LIMIT SPECIFICALLY USED FOR THE PUR POSE OF BUSINESS AND ASSESSEE COMPANY HAVING SUFFICIENT INTEREST FREE FU NDS, PROVES THAT ONLY INTEREST FREE FUNDS HAVE BEEN USED TO INVEST I N SHARES AND MUTUAL FUNDS. FURTHER WE OBSERVE THAT IS IN CONFORM ITY WITH THE ORDER OF THE TRIBUNAL, DELETING THE ENTIRE DISALLOWANCE U /S 14A OF THE ACT ON THE GROUND THAT ASSESSEE HAD SUFFICIENT INTEREST FR EE FUNDS OUT OF WHICH INVESTMENT WAS MADE IS IN CONFORMITY WITH THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT IN THE CASE OF PRINC IPAL, CIT VS. INDIA GELATINE AND CHEMICALS LTD. (SUPRA). RESPECTFULLY F OLLOWING THE JUDGMENT OF HON. GUJARAT HIGH COURT IN THE CASE OF PRINCIPAL CIT VS. INDIA GELATINE & CHEMICALS LTD. (SUPRA) AND THE OBS ERVATION MADE ABOVE, WE FIND THAT NO DISALLOWANCE IS CALLED FOR I N THE SECOND LIMB OF RULE 8-D RELATING TO INTEREST EXPENDITURE. NOW COMING TO THE THIRD LIMB TOWARDS ADMINISTRATIVE COST TO BE CALCULATED @ 0.5% OF THE AVERAGE VALUE OF INVESTMEN T, WE FIND THAT LD. CIT(A) HAS DELETED THIS DISALLOWANCE BY OBSERVI NG THAT ASSESSEE HAD MADE SPECIFIC DISALLOWANCE OF RS.30,347/-, THAT DIVIDEND INCOME OF RS.8,19,154/- ASSESSEE HAS REINVESTED RS.3,26,40 6/- IN THE UNITS OF MUTUAL FUNDS AND NO SATISFACTION OF THE ASSESSIN G OFFICER IN THE ASSESSMENT ORDER AS WELL AS NO FINDING THAT THE ASS ESSEE HAS INCURRED MORE THAN RS.30,347/- 12. WE OBSERVE THAT THE THIRD LIMB OF THE RULE -8D OF THE RULES R.W.S. SEC.14A OF THE ACT HAS BEEN BROUGHT INTO EFFECT TO COPE UP WITH SITUATION WHERE AN ASSESSEE IN THE DUE COURSE OF R UNNING BUSINESS MAKES HUGE INVESTMENT IN SHARES AND MUTUAL FUNDS FO R EARNING ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 9 EXEMPT INCOME IN THE FORM OF DIVIDEND AND LONG TERM CAPITAL GAIN AS WELL AS SHORT TERM CAPITAL GAIN SUBJECT TO SPECIAL RATES. CERTAINLY ASSESSEE HAS NOT SPECIFICALLY BOOKED ANY EXPENDITUR E TOWARDS ADMINISTRATIVE COST OF HUGE INVESTMENT IN SHARES AN D MUTUAL FUNDS BUT ONE CANNOT IGNORE THE COST OF TIME USED BY VARI OUS STAFF MEMBERS AS WELL AS OFFICERS AT THE HELM OF AFFAIRS WHO ARE REQUIRED TO GIVE SUFFICIENT ENERGY TO SELECT VARIOUS SCRIPS AND MUTU AL FUNDS AND TO INVEST INTO, SELLING OFF OR SWITCHING OFF OF THE IN VESTMENTS BETWEEN VARIOUS MUTUAL FUNDS ARRANGING OF FUNDS OUT OF THE ALREADY INVESTED FUNDS AS WELL AS OTHER SERVICES INCLUDING IDLE BUSI NESS FUNDS FOR USE OF BANKING SERVICES FOR THE SPECIFIC MOVEMENT OF FU NDS ROUND THE YEAR AND MORE IMPORTANTLY TOWARDS SAFEGUARDING THE INVES TMENTS AGAINST ANY POSSIBLE LOSSES. THESE ALL ACTIVITIES INVOLVE E LEMENTS OF COST OF THE COMPANY WHICH BEING NOT CALCULABLE IN GENERAL, ARE THUS TAKEN CARE OF BY THIRD LIMB OF RULE 8-D OF THE RULES R.W. S. 14A OF THE ACT. 13. WE FURTHER FIND THAT LD. CIT(A) IN HIS ORDER DE LETING THE IMPUGNED ADDITION HAS OBSERVED THAT OUT OF THE DIVI DEND INCOME OF RS.8,19,154/- ASSESSEE HAS REINVESTED RS.6,43,206/- AND ALSO HAS OBSERVED THAT LONG TERM CAPITAL GAIN OF RS.14,55,87 5/- ON ACCOUNT OF REDEMPTION OF MUTUAL FUNDS WAS TAXABLE IN NATURE. T HEREFORE, IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE VIEW THAT AS AGAINST 0.5% OF THE AVERAGE INVESTMENT OF RS.11.35 CRORES WORKING OUT AT RS.5.67.450/- LUMP SUM DISALLOWANCE OF RS.2, 50,000/- WILL BE JUSTIFIED TOWARDS ADMINISTRATIVE COST INCURRED ON M AINTAINING INVESTMENT IN SHARES AND MUTUAL FUNDS. ACCORDINGLY TOTAL DISALLOWANCE OF RS.2,80,347/- (RS.30,347/- + 2,50,0 00/-) IS HELD TO BE ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 10 DISALLOWANCE U/S 14A OF THE ACT. ACCORDINGLY THE GR OUND OF REVENUE IS PARTLY ALLOWED. GROUND NO.2 2. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN D ELETING THE DISALLOWANCE OF RS. 70,05,000/- MADE ON ACCOUNT OF INTEREST EXPENSES U/ S. 36(L)(III) OF THE ACT WITHOUT APPRECIATING THE FACT THAT ONCE THE FUNDS ARE PUT I NTO THE BUSINESS, THEY LOSE IDENTITY. 14. WE HAVE HEARD THE PARTIES. WE FIND THAT THE ISS UE TRAVELLED UPTO THE STAGE OF TRIBUNAL BY WAY OF ITA NO.2923/AHD/200 8 AND THE TRIBUNAL HAS DECIDED THE ISSUE VIDE ITS ORDER DATED 28.01.2014 IN FAVOUR OF ASSESSEE BY HOLDING AS UNDER:- 18. GROUND NO.5 IS AGAINST THE DELETION OF DISALLO WANCE OF RS.1,29,034/- U/S.36(1)(III) OF THE ACT. THE LD.SR.DR HAS SUPPORT ED THE ORDER OF THE AO, WHEREAS LD.COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDER OF THE LD.CIT(A) AND SUBMITTED THAT UNDER THE IDENTICAL FACTS, THE HONBLE TRIBUNA L IN ITA NO.1476/AHD/2006(SUPRA) THE ISSUE HAS BEEN DECIDED IN FAVOUR OF ASSESSEE VIDE PARA NOS.9 & 16 BY OBSERVING AS UNDER:- 9. GROUND NO.4(A) RELATES TO DISALLOWANCE OF PROPO RTIONATE INTEREST OF RS.10,70,7000/-. THE AO DISALLOWED PROPORTIONATE IN TEREST OUT OF INTEREST PAID ON BORROWED FUNDS ON THE ASSUMPTION THAT BORRO WED MONEY HAS BEEN USED FOR ACQUISITION OF INVESTMENT AS ON BALANCE SH EET DATE. AS PER AO THE COMPANY HAD MADE TOTAL INVESTMENT TO THE EXTENT OF RS.1008.51 LACS IN THE EQUITY SHARES AND MUTUAL FUNDS. DURING THE YEAR THE INVESTMENT IN SHARES AND MUTUAL FUNDS WERE INCREASED FROM 940.32 LACS TO RS.1008.51 LACS. OUT OF THIS INVESTMENT, TO THE TUNE OF RS.61 LACS, IS MADE IN SUBSIDIARY COMPANIES NAMELY KARAMSAD INVESTMENT LTD . & KARAMSAD HOLDING LTD. SINCE THE ASSESSEE HAD PURCHASED SHARE S IN THOSE COMPANIES BEING SISTER CONCERNS, THE NATURE OF INVESTMENT IS THE SAME AS IN SHARES AND MUTUAL FUND OF OTHER COMPANIES. THE ASSESSEE COMPAN Y HAD EARNED DIVIDEND INCOME OF RS.94.47 LACS DURING THE YEAR AN D HAS CLAIMED AS EXEMPT UNDER SECTION 10(33). INVOKING SECTION 14A A O HELD THAT EXPENDITURE FOR EARNING EXEMPTED INCOME CANNOT BE A LLOWED AS DEDUCTION. SIMILARLY, THE AO IDENTIFIED THAT ADMINISTRATIVE EX PENDITURE WHICH COULD HAVE BEEN INCURRED FOR HANDLING THE INVESTMENT IN S HARES AND MUTUAL FUND. A PART OF SUCH EXPENDITURE WAS CONSIDERED ATT RIBUTABLE TO INVESTMENT MADE IN SISTER CONCERNS, THE INCOME THER EFROM WAS EXEMPT UNDER SECTION 10(33). THE ASSESSEE SUBMITTED THAT I T HAS ENOUGH WORKING ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 11 CAPITAL AND IT HAS NOT INCREASED ITS BORROWINGS THI S YEAR. THEREFORE, IT CANNOT BE SAID THAT INVESTMENT IN SUBSIDIARY WAS DO NE DURING THIS YEAR OUT OF ANY BORROWED CAPITAL MADE THIS YEAR. REGARDING A DMINISTRATIVE EXPENDITURE SOUGHT TO BE DISALLOWED ASSESSEE SUBMIT TED BEFORE THE AO THAT THERE IS NO RELATIONSHIP OF SUCH EXPENDITURE WITH T HE INVESTMENT ACTIVITIES. NO SPECIFIC STAFF HAS BEEN APPOINTED FOR THIS PURPO SE. THE AO, HOWEVER, DID NOT AGREE AND DISALLOWED PROPORTIONATE INTEREST BY HOLDING THAT ASSESSEE DID NOT PRODUCE ANY EVIDENCE TO SHOW THAT INTEREST FREE FUNDS WERE ALONE USED FOR MAKING SUCH INVESTMENT IN SISTE R CONCERNS. THE ASSESSEE HAS NOT MAINTAINED SEPARATE ACCOUNT FOR MA KING INVESTMENT ARE OUT OF MIXED FUNDS. THERE IS NO NEXUS BETWEEN THE I NVESTMENT AND INTEREST FREE FUNDS. ONUS IS ON THE ASSESSEE DURING THE YEAR AND ALSO IN EARLIER YEARS THAT INVESTMENT FOR EARNING CAPITAL GAINS AND DIVID END ARE MADE OUT OF INTEREST FREE CAPITAL. AFTER LONG AND DETAILED DISC USSION THE AO DISALLOWED PRO-RATA INTEREST WORKED OUT AT RS.10.70 LACS. IN A DDITION, HE ALSO DISALLOWED, BY ESTIMATE ADMINISTRATIVE, EXPENDITURE OF RS.1,20,000/-. 16. SINCE ASSESSEE HAD SUFFICIENT PROFITS GENERATED THIS YEAR AND IT HAD MIXED FUNDS AND NO NEXUS IS ESTABLISHED BY THE AO A S TO WHETHER INVESTMENT WAS MADE OUT OF INTEREST BEARING FUNDS, DISALLOWANCE OF INTEREST CANNOT BE MADE. SIMILARLY NO DISALLOWANCE OUT OF ADMINISTRATIVE EXPENDITURE CAN BE MADE AS THERE IS NO DIRECT NEXUS . AS A RESULT, THIS GROUND IS ALLOWED. 18.1. IN THE PRESENT CASE ALSO, THE FACTS ARE IDENT ICAL AS THE LD.CIT(A) HAD GIVEN A FINDING ON FACT THAT THERE ASSESSEE HAD SUFFICIENT INTEREST FREE FUND AND IT HAD NOT DIVERTED THE INTEREST BEARING FUND SAME REMAINED UN REBUTTED. THEREFORE, WE DO NOT FIND ANY REASON TO TAKE A CONTRARY VIEW THAN TAKEN BY THE HONBLE COORDINATE BENCH. THUS, THIS GROUND OF THE REVENUES APPEAL IS REJECTED. 15. SINCE THE FACTS ARE IDENTICAL TO THE FACTS AS W ERE RAISED IN ITA NO.2923/AHD/2008 FOR AY 2005-06 AND THE REVENUE HAS NOT POINTED OUT ANY CHANGE INTO THE FACTS AND CIRCUMSTANCES OF THE CASE, THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF CO ORDINATE BENCH PASSED IN ITA NO.2923/AHD/2008, THE ISSUE IS DECIDE D IN FAVOUR OF ASSESSEE IN THIS YEAR AS WELL. HENCE, THE FINDING O F THE LD.CIT(A) IS SUSTAINED AND THIS GROUND OF REVENUES APPEAL IS RE JECTED. ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 12 GROUND NO.3- 3. THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS IN D ELETING THE DISALLOWANCE OF RS.50,32,500/- MADE ON ACCOUNT OF ROYALTY PAYMENT W ITHOUT APPRECIATING THE FACT THAT THE SAID PAYMENT WAS MADE FOR THE USE OF TRADEMARK. 16. AT THE OUTSET LD. AR HAS SUBMITTED THAT THE ISS UE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE BY THE DECISION OF TH E CO-ORDINATE BENCH IN ASSESSEES OWN CASE IN ITA NO.318/AHD/2011 (SUPRA). 17. LD. DR COULD NOT CONTROVERT THE SUBMISSIONS OF LD. AR. 18. WE HAVE HEARD THE PARTIES. WE FIND THAT THE ISS UE TRAVELLED UPTO THE STAGE OF TRIBUNAL BY WAY OF ITA NO.2923/AHD/200 8 (SUPRA) AND THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF ASS ESSEE BY HOLDING AS UNDER:- 20. GROUND NO.7 IS AGAINST THE DELETION OF DISALLO WANCE OF ROYALTY OF RS.41,06,250/-. THE LD.SR.DR SUPPORTED THE ORDER OF THE AO, WHEREAS LD.COUNSEL FOR THE ASSESSEE SUPPORTED THE ORDER OF THE LD.CIT(A) AND SUBMITTED THAT THE ASSESSEE-COMPANY IS PAYING ROYALTY TO PFAUDLER INC, USA FOR THE USAGE OF TRADE MARKS. IT IS SUBMITTED THAT AS PER USER AGREEMENT THE ASSESSEE-COMPANY HAS GOT THE RIGHT OF USER ONLY AND NOT OF OWNERSHIP. THE PAYMENT OF ROYALTY IS RELATED TO SALES MADE BY USER OF TECHNOLOGY SUPPLIED BY THEM. IF THE ASSESSEE DOES NOT USE THE TECHNOLOGY THEN NO ROYALTY PAYMENT IS REQUIRED. USER OF THE TRADEMARK DID NOT CREATE ANY ASSET OR CONFERRED ANY PERMANENT RIGHT IN FAVOUR OF THE ASSESSEE. THE AGREEMENT IS ONLY FOR 11 YEARS AND TE RMINABLE BY SHORT NOTICE. ROYALTY IS PAID IN COURSE OF PROFIT EARNING PROCESS. 20.1. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. W E FIND THAT ON THE BASIS OF THE SUBMISSIONS OF THE ASSESSEE, LD.CIT(A) HAS GIVEN A FINDING ON FACT THAT THE ASSESSEE HAS NOT ACQUIRED ANY OWNERSHIP RIGHTS. IT HAS GOT THE R IGHT OF USER ONLY. SINCE, AY 1989- 90, THE USER CHARGES CLAIMED AS ROYALTY HAVE BEEN ALLOW ED IN THE ASSESSMENTS, THE RATE OF USER CHARGES IS 1% OF THE SALES DURING THE YEAR UNDER CO NSIDERATION. TDS HAS BEEN MADE IN RESPECT OF ROYALTY PAYMENTS. AS IT IS A RECURRING E XPENDITURE PAYABLE ON THE BASIS OF SALES AND THE APPELLANT HAS NOT ACQUIRED ANY CAPITAL ASSE T OR PERMANENT RIGHT, THE PAYMENT OF ROYALTY IS ALLOWABLE AS BUSINESS EXPENDITURE. THE R EVENUE HAS NOT CONTROVERTED THIS FACT BY PLACING ANY MATERIAL ON RECORD, THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 13 THE LD.CIT(A), THE SAME IS HEREBY UPHELD. THUS, THI S GROUND OF REVENUES APPEAL IS REJECTED. 19. SINCE THERE IS NO CHANGE INTO THE FACTS AND CIR CUMSTANCES OF THE CASE, THEREFORE TAKING A CONSISTENT VIEW, THE I SSUE IS DECIDED IN FAVOUR OF ASSESSEE. THUS, THIS GROUND OF REVENUES APPEAL IS REJECTED. 20. GROUND NOS.4 & 5 ARE OF GENERAL NATURE, WHICH N EED NO ADJUDICATION. 21. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH SEPTEMBER, 2016 SD/- SD/- (S. S. GODARA) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 6/9/2016 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD ITA NO. 1360/AHD/2013 ASST. YEAR 2009-10 14 1. DATE OF DICTATION: 22/08/2016 & 6/9/16 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 06/09/2016 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 7/9/2016 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: