HERSHEY INDIA P.LTD, MUMBAI V. DCIT 14(2)(1), MUMBAI

ITA 1409/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0566 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: J
• Next Hearing Date: 04-01-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 09-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ALOK JOHARI; ARJU GORADIA
• Keywords: Capital asset; Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -JBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./1409/MUM/2015, /ASSESSMENT YEAR: 2011-12 HERSHEY INDIA PVT.LTD. (FORMERLY GODREJ HERSHEY LTD.) C/O., KALYANIWALLA & MISTRY ARMY & NAVY BUILDING, 3 RD FLOOR 148, M.G. ROAD,FORT,MUMBAI-400 001. PAN:AABCT 6106 C VS. DCIT, -14 (2)(1) ERSTWHILE DY.CIT-10(2) ROOM NO.432, 4 TH FLOOR AAYAKAR BHAWAN, M.K. ROAD MUMBAI-400 020. ( /APPELLANT ) ( / RESPONDENT ) ./I.T.A./2784/MUM/2015, /ASSESSMENT YEAR: 2011-12 DCIT, -14 (2)(1) MUMBAI-400 020. VS. HERSHEY INDIA PVT.LTD. (FORMERLY GODREJ HERSHEY LTD.) MUMBAI-400 001. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: S/SHRI ALOK JOHARI & ARJU GORADIA ASSESSEE BY: SHRI NITESH JOSHI / DATE OF HEARING: 06.04.2017 / DATE OF PRONOUNCEMENT: 24.05.2017 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) / PER RAJENDRA, AM - CHALLENGING THE ORDER,DATED 23/12/2014 OF THE CIT(A )-22,MUMBAI THE ASSESSING OFFICER (AO)AND THE ASSESSEE HAVE FILED CROSS APPEALS.ASSES SEE-COMPANY, ENGAGED IN THE BUSINESS OF MANUFACTURING OF FOOD AND OTHER ALLIED PRODUCTS,FIL ED ITS RETURN OF INCOME ON 18/11/ 2011,DECLARING NET LOSS OF RS.25.37 CRORES.THE AO C OMPLETED THE ASSESSMENT U/S.143(3)OF THE ACT,ON 31/ 01/2014,DETERMINING ITS INCOME AT RS.(-) 19.62 CRORES. ITA/2784/MUM/2015: 2. EFFECTIVE GROUND OF APPEAL,RAISED BY THE AO,IS ABOU T DELETION OF DISALLOWANCE MADE U/S.14A OF THE ACT.DURING THE ASSESSMENT PROCEEDING S,THE AO FOUND THAT THE ASSESSEE HAD SHOWN INVESTMENTS AMOUNTING RS.253.07 CRORES AS ON 31/03/2011, THAT IT HAD INCURRED INTEREST AND FINANCIAL CHARGES OF RS.15.18 CRORES.HE DIRECTE D THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCE U/S.14A READ WITH RULE 8D OF INCOME TA X RULES, 1962 (RULES) SHOULD NOT BE MADE. THE ASSESSING REPLIED THAT IT HAD EARNED MORE EXEMPT INCOME DURING THE YEAR, THAT NO DISALLOWANCE WAS REQUIRED TO MADE.HOWEVER,THE AO MA DE A DISALLOWANCE OF RS. 13.10 CRORES (EXPENDITURE DIRECTLY RELATING TO EXEMPT INCOME RS. 2.49 CRORES+INTEREST EXPENDITURE RS. 9.34 1409&2784/M/15(11-12) HERSHEY INDIA PVT.LTD. 2 CRORES+ 0.5% OF AVERAGE INVESTMENT RS. 1.26 CRORES) .HE FURTHER OBSERVED THAT THE ASSESSEE HAD ALREADY MADE DISALLOWANCE OF RS. 8.24 CRORES IN ITS COMPUTATION. FINALLY,HE MADE AN ADDITION OF BALANCE AMOUNT OF RS. 4.8 CRORES TO THE TOTAL INCOME OF THE ASSESSEE. 2.1. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA)AND MADE ELABORATE SUBMISSI ONS. AFTER CONSIDERING THE ASSESSMENT ORDER AND THE SUBMISSION OF THE ASSESSEE,HE HELD TH AT THE ASSESSEE HAD ACQUIRED 100%OWNERSHIP INTEREST IN THE NUTRINE CONFECTIONERY COMPANY LTD.FOR A CONSIDERATION OF RS. 253CRORES, THAT WHILE ACQUIRING THE BUSINESS IT HAD SPECIFIED BORROWING OF RS. 60 CRORES TO FUND THE ABOVE INVESTMENT, THAT IT HAD NOT FOUND AN Y EXEMPT INCOME,THAT IT HAD RAISED SPECIFIC ADDITIONAL GROUND IN THAT REGARD, THAT IT ALSO ARGU ED THAT THE INVESTMENT WAS MADE FOR STRATEGIC PURPOSES. THE FAA REFERRED TO THE CASE OF HOLCIM IN DIA P.LIMITED (ITA FOR 86/4014 AND 299 OF 2014 OF HONORABLE DELHI HIGH COURT, DATED 05/09/ 2014 AND HELD THAT IF THERE WAS NO EXEMPT INCOME NO DISALLOWANCE COULD BE MADE U/S.14A . 2.2. DURING THE COURSE OF HEARING BEFORE US, THE DEPARTM ENTAL REPRESENTATIVE (DR) ARGUED THAT EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY WERE RELATABLE TO THE EARNING OF TAXABLE INCOME, THAT THE PROVISIONS OF SECTION 14A REITERATED THE SETTLED LAW ABOUT MATCHING PRINCIPLE OF ACCOUNTANCY,THAT NO EXPENDITURE WOULD BE ALLOWED AT ALL AGAINST THE EXEMPT INCOME,THAT OTHERWISE THE MATCHING PRINCIPLE WOULD GET DISTURBED, THAT THERE WAS FUNDAMENTAL DIFFERENCE BETWEEN THE RECEIPT AND THE INCOME, THAT THE CONCEPT HAD TO BE UNDERSTOOD AND APPLIED IN REFERENCE TO DIVIDEND AND INCOME BY WAY OF DIVIDEND WHICH WAS USED IN VARIOUS PROVISIONS OF THE ACT.HE REFERRED TO THE CASES OF D ISTRIBUTOR (BARODA)PRIVATE LTD.(22 TAXMAN 49),CLOTH TRADERS P LIMITED(118 ITR 243),ACG ASSOCI ATES CAPSULES P LTD. (343 ITR 89) AND THE PROVISIONS OF SECTION 80M OF THE ACT ALONG WITH THE CIRCULAR NO. 5, DATED 11/02/2014. HE FURTHER ARGUED THAT IN SECTION 10(34) OF THE ACT IT WAS INCOME BY WAY OF DIVIDEND AND NOT THE RECEIPT OF DIVIDEND WHICH WAS EXEMPT. 2.3. BEFORE US, THE DEPARTMENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDER OF THE AO AND STATED THAT THERE WAS DIFFERENCE BETWEEN RECEIPT AN D INCOME. THE AUTHORISED REPRESENTATIVE (AR) SUPPORTED THE ORDER OF THE FAA AND REFERRED TO THE CASE IS OF CHEMINVEST LTD. (378 ITR 33). 2.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US. WE FIND THAT THE ASSESSEE HAD MADE A DISALLOWANCE OF RS. 8.24 CRORES ON ITS OWN, THAT THE AO HAD MADE FURTHER DISALLOWANCE,U/S.14A READ WITH RULE 8D OF THE RULES , OF RS. 4.85 CRORES,THAT THE ASSESSEE HAD 1409&2784/M/15(11-12) HERSHEY INDIA PVT.LTD. 3 NOT CLAIMED ANY EXPENDITURE AGAINST THE EXEMPT INCO ME. HERE,WE WOULD LIKE TO MENTION THAT BASIC PRINCIPLES OF TAXATION JURISPRUDENCE STIPULAT E THAT THERE SHOULD NOT BE DOUBLE DEDUCTION AS WELL AS DOUBLE TAXATION.THE FUNDAMENTAL PRINCIPL E BEHIND INTRODUCING THE AMENDMENTS TO SECTION 14A WAS TO CURB THE PRACTICE OF CLAIMING EX EMPT INCOME ON ONE HAND AND MAKING A CLAIM FOR DEDUCTION FOR EXPENDITURE ELIGIBLE TO EXE MPT INCOME.EARLIER THE ASSESSEES WOULD CLAIM EXPENDITURE AGAINST THE INCOME WHICH DID NOT FORM PART OF TAXABLE INCOME AND THUS IT RESULTED IN DOUBLE DEDUCTION.TO PLUG THE LOOPHOLE, THE LEGISLATURE BROUGHT CERTAIN AMENDMENTS AND PROVIDED THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF THE EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. IN THE PRESENT CASE,THE FAA HAS RECO RDED THE FINDING OF FACT THAT THE ASSESSEE DID NOT MAKE ANY CLAIM FOR EXEMPTION OF ANY INCOME FROM PAYMENT OF TAX. IT WAS ON THIS BASIS THAT HE HELD THAT DISALLOWANCE U/S.14A OF THE ACT COULD NOT BE MADE.IN THE CASE BEFORE US,ADMITTEDLY THE ASSESSEE DID NOT MAKE ANY CLAIM F OR EXEMPTION.IN SUCH A SITUATION SECTION 14A OF THE ACT WOULD HAVE NO APPLICATION. THE HONOR ABLE DELHI HIGH COURT IN THE CASE OF CHEIMINVEST INDIA (SUPRA) HAS HELD AS UNDER: THE EXPRESSION DOES NOT FORM PART OF THE TOTAL INC OME IN SECTION 14A OF THE INCOME-TAX ACT, 1961, ENVISAGES THAT THERE SHOULD BE AN ACTUAL RECEIPT OF INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, DURING THE RELEVANT PREVIOUS Y EAR FOR THE PURPOSE OF DISALLOWING ANY EXPENDITURE INCURRED IN RELATION TO THE INCOME. IN OTHER WORDS, SECTION 14A WILL NOT APPLY IF NO EXEMPT INCOME IS RECEIVED OR RECEIVABLE DURING T HE RELEVANT PREVIOUS YEAR. CONSIDERING THE ABOVE AND RESPECTFULLY FOLLOWING TH E JUDGMENT OF CHEMINVEST (SUPRA),WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGAINST THE A O. ITA/1409/MUM/2015: 3. EFFECTIVE GROUND OF APPEAL, RAISED BY THE ASSESSEE, IS ABOUT DISALLOWANCE MADE 36(1)(III) OF THE ACT.DURING THE ASSESSMENT PROCEEDINGS, THE AO D IRECTED THE ASSESSEE TO SHOW CAUSE AS TO WHY PROPORTIONATE INTEREST ON BORROWED FUNDS USED F OR ACQUISITION OF CAPITAL ASSET SHOULD NOT BE DISALLOWED 36(1)(III) OF THE ACT.AFTER CONSIDERI NG THE SUBMISSION OF THE ASSESSEE DATED 27/ 11/ 2013,THE AO OBSERVED THAT THE VERIFICATION OF T HE BALANCE SHEET REVEALED THAT DURING THE YEAR UNDER CONSIDERATION THE CAPITAL WORK IN PROGRE SS INCREASED RS. 2 958 LAKHS AS AGAINST RS. 56 LAKHS IN THE PREVIOUS YEAR, THAT IT CLEARLY SHOW ED THAT THERE WAS EXTENSION OF THE BUSINESS, THAT THE ADVANCES HAD BEEN MADE BY THE ASSESSEE FOR THE PURPOSE OF ACQUISITION OF FIXED ASSETS WHICH WERE ACQUIRED TO AUGMENT THE INSTALLED CAPACI TY OF PRODUCTION OF GOODS, THAT IT HAD NOT PROVIDED ANY JUSTIFICATION AS TO HOW THE ADVANCES M ADE FOR THE ACQUISITION OF MACHINERY WERE NOT IN THE NATURE OF EXTENSION OF EXISTING BUSINESS , THAT THE CLAIM OF THE ASSESSEE THAT NO SPECIFIC BORROWINGS WERE MADE FOR PURPOSES OF MAKIN G THE ADVANCES WAS NOT SUPPORTED WITH 1409&2784/M/15(11-12) HERSHEY INDIA PVT.LTD. 4 DOCUMENTARY EVIDENCES, THAT ASSESSEE HAD NOT FILED CASH FLOW STATEMENTS INDICATING AVAILABILITY OF OWN FUNDS, THAT ALL THE FUNDS OF TH E ASSESSEE FLOW INTO THE COMMON FUND AND ALL THE EXPENSES WERE INCURRED OUT OF THE SAME,THAT THE ONUS OF ESTABLISHING THAT OWN FUNDS HAD BEEN USED FOR PURPOSE OF ADVANCING MONEY FOR PURCHA SE OF FIXED ASSETS WAS ON ASSESSEE, THAT IT HAD NOT DISCHARGE ITS ONUS WITH SUPPORTING DOCUM ENTS.HE REFERRED TO THE PROVISIONS OF SECTION 36 AND MADE AN ADDITION OF RS.64,52,322/-TO TAL INCOME OF THE ASSESSEE. 3.1. DURING THE APPELLATE PROCEEDINGS,THE FAA, AFTER CON SIDERING THE SUBMISSION OF THE ASSESSEE,HELD THAT THE ASSESSEE HAD INCREASED CAPIT AL WORK IN PROGRESS, THAT THE INTEREST PAYABLE ON THE INCREASE HAD TO BE DISALLOWED IN VIE W OF THE PROVISO TO SECTION 36. HE CONFIRMED THE ORDER OF THE AO. 3.2 .BEFORE US,THE AR ARGUED THAT THE INVESTMENT IN WI P WAS OUT OF OWN FUNDS , THAT THE INTEREST FREE FUND AVAILABLE TO THE ASSESSEE WAS RS .299.3 CRORES, THAT THE INVESTMENT DURING THE YEAR WAS MADE IN THE 100% SUBSIDIUARY COMPANY.HE RE LIED UPON THE CASE OF RELIANCE UTILITIES AND POWER LTD.(313ITR340).THE DR ARGUED T HAT CASH FLOW STATEMENT WAS NOT FURNISHED, THAT THE ASSESSEE HAD NOT ESTABLISHED AS TO HOW FUNDS WERE UTILIZED. 3.3 .WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD SUFFICIENT OWN FUNDS AND RESERVES TO P URCHASE NEW ASSETS ,THAT THERE IS NO EVIDENCE TO PROVE THAT EXISTING WORK IN PROGRESS HA D INCREASED BECAUSE OF LOANS TAKEN BY THE ASSESSEE.THE BALANCE SHEET OF THE ASSESSEE PROVES T HAT IT HAD SUFFICIENT FUND.THEREFORE,RESPECTFULLY FOLLOWING THE JUDGMENT OF RELIANCE UTILITIES AND POWER LTD.(SUPRA),WE DECIDE THE EFFECTIVE GROUND OF APPEA L IN FAVOUR OF THE ASSESSEE. AS A RESULT,APPEAL FILED BY THE ASSESSEE IS ALLOWED AND THE APPEAL OF THE AO STANDS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH MAY, 2017. 24 , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED 24.05.2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 1409&2784/M/15(11-12) HERSHEY INDIA PVT.LTD. 5 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.