DCIT, New Delhi V. M/s. Hema Engineering Industries Pvt. Ltd., New Delhi

ITA 1444/DEL/2013

• Counselvise Citation: 144420114 RSA 2013
• Duration Of Justice: 2 year(s) 7 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 23-10-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 11-03-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANIMA BARNWAL
• Assessee Lawyers: ANIL KUMAR MALHOTRA
• Keywords: Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C : NEW DELHI BEFORE SHRI R.S. SYAL, AM & MS SUCHITRA KAMBLE, JM ITA NO.1027/DEL/2013 ASSESSMENT YEAR : 2009-10 HEMA ENGINEERING INDUSTRIES LTD., M/S WAHI & CO., K-1, KAILASH COLONY, NEW DELHI. PAN: AAACH0118F VS. ACIT, RANGE-12, NEW DELHI. ITA NO.1444/DEL/2013 ASSESSMENT YEAR : 2009-10 ACIT, RANGE-12, NEW DELHI. VS. HEMA ENGINEERING INDUSTRIES LTD., M/S WAHI & CO., K-1, KAILASH COLONY, NEW DELHI. PAN: AAACH0118F (APPELLANT) (RESPONDENT) APPELLANT BY : MS ANIMA BARNWAL, SR. DR RESPONDENT BY : SHRI ANIL KUMAR MALHOTRA, CA DATE OF HEARING : 23.10.2015 DATE OF PRONOUNCEMENT : 23.10.2015 ORDER ITA NOS.1027 & 1444/DEL/2013 2 PER R.S. SYAL, AM: THESE TWO CROSS APPEALS - ONE BY THE ASSESSEE AND THE OTHER BY THE REVENUE ARISE OUT OF THE ORDER PASSED BY THE CIT(A) ON 26.12.2012 IN RELATION TO THE ASSESSMENT YEAR 2009- 10. 2. THE ONLY ISSUE RAISED IN THE ASSESSEES APPEAL A ND THE FIRST GROUND OF THE REVENUES APPEAL IS AGAINST THE DISAL LOWANCE U/S 14A OF THE ACT. 3. BRIEFLY STATED, THE FACTS OF THE CASE AS RECORDE D IN THE ASSESSMENT ORDER ARE THAT THE ASSESSEE MADE INVESTM ENT OF RS.18.95 CRORE IN UNQUOTED EQUITY SHARES. HOWEVER, NO DIVID END WAS RECEIVED DURING THE YEAR. APPLYING THE PROVISIONS OF SECTION 14A READ WITH RULE 8D, THE AO COMPUTED DISALLOWANCE AT RS.1,40,28,358/-. THE LD. CIT(A) REDUCED THE DISAL LOWANCE TO RS.74,15,767/-, THEREBY ALLOWING PART RELIEF. BOTH THE SIDES ARE IN APPEAL IN SUPPORT OF THEIR RESPECTIVE STANDS. ITA NOS.1027 & 1444/DEL/2013 3 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE AO HAS CATEGORICALLY RECORD ED ON PAGE 2 OF THE ASSESSMENT ORDER THAT: HOWEVER, NO DIVIDEND IS RECEIVED DURING THE YEAR. THUS IT IS EVIDENT FROM THE ASSES SMENT ORDER ITSELF THAT THE ASSESSEE DID NOT EARN ANY EXEMPT INCOME DU RING THE YEAR, BUT, THE AO MADE DISALLOWANCE U/S 14A AS PER RULE 8 D. THE HONBLE DELHI HIGH COURT IN CIT VS. HOLCIM INDIA P. LTD. (2014) 90 CCH 081 DEL-HC , HAS HELD THAT IN THE ABSENCE OF ANY EXEMPT INCOME, THERE CAN BE NO DISALLOWANCE U/S 14A. RECE NTLY, THE HONBLE JURISDICTIONAL HIGH COURT IN JOINT INVESTMENT PVT. LTD. VS. CIT (2015) 372 ITR 694 (DEL) HAS HELD THAT DISALLOWANCE U/S 14A CANNOT EXCEED THE EXEMPT INCOME. IN VIEW OF THE FA CT THAT THE ASSESSEE DID NOT ADMITTEDLY EARN ANY EXEMPT INCOME DURING THE YEAR, THERE CAN BE NO QUESTION OF MAKING ANY DISALL OWANCE U/S 14A OF THE ACT IN TERMS OF THE AFORESTATED PRECEDENTS F ROM THE HONBLE JURISDICTIONAL HIGH COURT. WE, THEREFORE, ORDER FO R THE DELETION OF THE ENTIRE ADDITION. THE GROUND TAKEN BY THE ASSES SEE IS ALLOWED AND THAT OF THE REVENUE FAILS. ITA NOS.1027 & 1444/DEL/2013 4 5. GROUND NO.2 OF THE REVENUES APPEAL IS AGAINST T HE DELETION OF ADDITION OF RS.83,53,148/- (WRONGLY MENTIONED AS RS.88,53,148/-). THE ASSESSEE DECLARED SCRAP SALE AT RS.4.35 CRORE ON TURNOVER OF RS.278.43 CRORE, WHICH GAVE RATIO OF SALES TO SCRAP AT 1.57%, AS AGAINST THE LAST YEARS SCRAP SALE O F RS.4.39 CRORE @ 1.87% ON TURNOVER OF RS.235.24 CRORE. THE AO OBSER VED THAT THERE WAS NO JUSTIFICATION FOR ACCOUNTING SCRAP GENERATIO N AT A LOWER LEVEL. NOTICING 0.3% DROP IN THE SCRAP SALE, HE MA DE AN ADDITION OF RS.83,53,148/- BY APPLYING THIS PERCENTAGE TO TOTAL TURNOVER FOR THE YEAR. THE LD. CIT(A) DELETED THE ADDITION. 6. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE WAY IN WHICH T HIS ADDITION HAS BEEN MADE BY THE AO IS NOT PROPER. HE HAS GONE BY THE PERCENTAGE OF SCRAP SALE TO TURNOVER, WHICH IS NOT A RELEVANT FACTOR. SCRAP IS ORDINARILY CONSIDERED WITH REFERENCE TO PRODUCTION. IT IS FURTHER PERTINENT TO NOTE THAT PERCENTAGE OF SCRAP TO PRODU CTION MAY NOT REMAIN CONSISTENT OVER THE YEARS. THE GENERATION O F SCRAP DEPENDS ITA NOS.1027 & 1444/DEL/2013 5 ON VARIOUS FACTORS, SUCH AS, QUALITY OF RAW MATERIA L, AGE OF MACHINE, QUALITY OF WORK FORCE, ETC. IF GOOD RAW M ATERIAL IS USED, NATURALLY, IT WILL LEAD TO LOWER SCRAP AND VICE VERSA. THE RELEVANT FACTORS DISCUSSED ABOVE ULTIMATELY FIND THEIR REFLE CTION ON THE GROSS PROFIT RATE. IF THE GROSS PROFIT RATE OF THE ASSES SEE IS BETTER THAN THAT OF THE PRECEDING YEAR, BUT, THE GENERATION OF SCRAP IS LESS, THERE CANNOT BE ANY SEPARATE ADDITION FOR LOWER GENERATIO N OF SCRAP BECAUSE THIS WOULD SHOW THE HIGHER ECONOMIES AVAILE D BY THE ASSESSEE DUE TO BETTER PERFORMANCE OR GOOD QUALITY OF RAW MATERIAL ETC. ADVERTING TO THE FACTS OF THE INSTANT CASE, W E FIND THAT THE ASSESSEE DECLARED GP RATE OF 9.77% IN THE YEAR UNDE R CONSIDERATION AS AGAINST THE LAST YEARS GP RATE OF 8.61%. THESE GROSS PROFIT RATES ARE AVAILABLE IN THE WRITTEN SUBMISSIONS FILED BEFO RE THE CIT(A), A COPY OF WHICH IS AVAILABLE ON PAGE 19 OF SECOND PAP ER BOOK. WHEN THE GROSS PROFIT RATE ITSELF HAS REGISTERED AN INCREASE OF OVER 1% IN THE CURRENT YEAR, WE FAIL TO APPRECIATE AS TO HOW ANY ADDITION ON ACCOUNT OF LOWER SCRAP SALE CAN BE MADE AS A PER CENTAGE OF TURNOVER. WE, THEREFORE, UPHOLD THE IMPUGNED ORDER ON THIS ISSUE. ITA NOS.1027 & 1444/DEL/2013 6 7. THE ONLY OTHER GROUND WHICH SURVIVES FOR CONSIDE RATION IS DELETION OF DISALLOWANCE OF INTEREST OF RS.3,55,662 /- IN RESPECT OF BALANCE PAYABLE TO M/S TOBU INDIA LTD. THE AO OBSE RVED THAT M/S TOBU INDIA LTD., IS ONE OF THE PERSONS SPECIFIED U/ S 40A(2)(B) FROM WHOM A SUM OF RS.21,48,964/- WAS RECEIVABLE. THE AO NOTICED THAT THERE SHOULD BE A NEXUS BETWEEN THE USE OF BOR ROWED FUNDS FOR THE PURPOSE OF BUSINESS FOR CLAIMING DEDUCTION U/S 36(1)(III). HE HELD THAT THE AMOUNT WAS DIVERTED TO SISTER CONCERN ON INTEREST FREE BASIS AND, HENCE, THE PROPORTIONATE INTEREST PAID B Y THE ASSESSEE ON INTEREST BEARING LOANS WAS NOT ALLOWABLE. APPLYING INTEREST RATE OF 12.5%, HE MADE AN ADDITION OF RS.3,55,562/-. THE AS SESSEE ARGUED BEFORE THE LD. CIT(A) THAT NO FRESH AMOUNT WAS ADVA NCED TO M/S TOBU INDIA LTD. DURING THE YEAR AND THE AMOUNT SHOW N AS RECEIVABLE WAS SIMPLY OPENING BALANCE. THE LD. CIT (A) GOT CONVINCED WITH THE ASSESSEES SUBMISSIONS AND DELET ED THE ADDITION. ITA NOS.1027 & 1444/DEL/2013 7 8. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSES SEE ARGUED BEFORE THE LD. CIT(A), WHICH HAS BEEN RECORDED ON PAGE 16 OF THE IMPUGNED ORDER, THAT THERE WAS NO FRESH LENDING TO TOBU INDIA LTD., DURING THE CURRENT YEAR AND THE BALANCE WAS AN OPEN ING BALANCE. THE LD. CIT(A) RECORDED A CATEGORICAL FINDING THAT THE AO HAD: NOT ESTABLISHED ANY LINKAGE BETWEEN THE AMOUNT BOR ROWED FOR CAPITAL AND THE AMOUNT ADVANCED TO THE SISTER CONC ERN OF THE APPELLANT, IN EARLIER YEARS WHICH COULD JUSTIFY THE DISALLOWANCE OF PROPORTIONATE INTEREST EXPENDITURE U/S 36(III) OF T HE ACT. THAT IS HOW, HE DELETED THE ADDITION. ON A SPECIFIC QUERY TO POINT OUT THE BALANCE OF M/S TOBU INDIA LTD., IN THE ASSESSEES A CCOUNT FOR THE PRECEDING YEAR AS REFLECTED IN THE BALANCE SHEET, T HE LD. AR INVITED OUR ATTENTION TOWARDS ANNUAL ACCOUNTS, A COPY OF WH ICH IS AVAILABLE ON PAGES 1-39 OF THE PAPER BOOK. DETAILS OF SCHEDU LE OF LOANS AND ADVANCES TO BALANCE SHEET IS AVAILABLE ON PAGE 14 O F THE PAPER BOOK AND THE NAME OF M/S TOBU INDIA LTD., APPEARS O N PAGE 15, WHICH IS PART OF SCHEDULE 10. IT CAN BE OBSERVED T HAT THE CLOSING ITA NOS.1027 & 1444/DEL/2013 8 BALANCE OF THE SISTER CONCERN IN THE ANNUAL ACCOUNT S FOR THE YEAR UNDER CONSIDERATION IS RS.21,84,964/-, BUT, THERE I S NO CORRESPONDING FIGURE OF CLOSING BALANCE OF THIS SIS TER CONCERN IN THE IMMEDIATELY PRECEDING YEAR, AS SUCH FIGURE HAS BEEN SHOWN AS NIL. AS SUCH, THE ENTIRE BASIS ON WHICH THE ADDITION HAS BEEN DELETED BY THE LD. CIT(A), CEASES TO EXIST. WE CANNOT COUNTENA NCE THE IMPUGNED ORDER ON THIS LINE OF REASONING WHICH HAS NOT BEEN SHOWN TO EXIST. UNDER SUCH CIRCUMSTANCES, WE SET A SIDE THE IMPUGNED ORDER ON THIS SCORE AND REMIT THE MATTER T O THE FILE OF CIT(A) FOR DECIDING THIS ISSUE AFRESH, AS PER LAW, AFTER TAKING NOTE OF THE CORRECT FACTS. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED AND THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATIST ICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 2 3RD OCT., 2015. SD/- SD/- [ (SUCHITRA KAMBLE) (R.S. SYAL) JUDICIAL MEMBER ACCONTANT MEMBER DATED, 23 RD OCTOBER, 2015. ITA NOS.1027 & 1444/DEL/2013 9 DK COPY FORWARDED TO: - 1. APPELLANT : 2. RESPONDENT : 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR