The DCIT, (OSD), Circle-8, Ahmedabad V. M/s. Transformers & Rectifiers (India) Ltd., Ahmedabad

ITA 1589/AHD/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 0507 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 21-09-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 29-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY MAJMUDAR
• Keywords: Earning of tax free income; Proportionate interest; Bad and doubtful debts
• Section: 143(3); 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD BEFORE SHRI RAJPAL YADAV, JM, & SHRI MANISH BORA D, AM. ITA NO. 1589/AHD/2013 ASST. YEAR: 2009-10 DCIT (OSD), CIRCLE-8, AHMEDABAD. VS. M/S TRANSFORMER & RECTIFIERS (INDIA) LTD. S. NO.344/350, OPP. PWD STORE, SARKHEJ-BAVALA HIGHWAY, CHANGODAR, TAL.SANAND, AHMEDABAD. APPELLANT RESPONDENT PAN AACCT 8243P APPELLANT BY SHRI PRASOON KABRA, SR.DR RESPONDENT BY SHRI SANJAY MAJMUDAR, AR DATE OF HEARING: 21.9.2016 DATE OF PRONOUNCEMENT: 23/9/2016 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF LD. CIT(A)-XIV, DATED 22/03/2013 IN APPEAL NO.CIT(A) XI V/ACIT,CIR.8/ 180/2001-12 PASSED AGAINST ORDER U/S 143(3) OF THE IT ACT, 1961 (IN SHORT THE ACT) FRAMED ON 15/12/2011 BY ACIT, CIR.8, AHMEDABAD. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENUE : - 1) THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV , AHMEDABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.75,61,482/- OUT OF TOTAL DISALLOWANCE OF RS.1,14,58,817/- MADE ON ACCOUNT OF INTEREST U/S.14A OF THE ACT. ITA NO. 1589/AHD/2013 ASST. YEAR 2009-10 2 2) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD OUGHT TO HAVE U PHELD THE ORDER OF THE ASSESSING OFFICER. 3) IT IS THEREFORE, PRAYED THAT THE ORDER OF THE LD . COMMISSIONER OF INCOME-TAX (APPEALS)-XIV, AHMEDABAD MAY BE SET-A-SIDE AND THAT OF THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A L IMITED COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADIN G OF ELECTRIC TRANSFORMERS. IT FILED ITS RETURN OF INCOME ON 29.0 9.2009 DECLARING TOTAL INCOME AT RS.60,10,03,340/-. THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT. NOTICE U/S 143(2) OF THE ACT WAS ISSUED ON 23.08.2010. ASSESSEE SUBMITTED ALL THE DETAILS AND AFTER CONSID ERING THE SUBMISSIONS OF ASSESSEE ASSESSMENT WAS COMPLETED AT THE TOTAL INCOME OF RS.61,25,10,260/-, AFTER MAKING ADDITION TOWARDS DISALLOWANCE U/S 14A OF THE ACT AT RS.1,14,58,817/- AND DISALLOWANCE OF RS.48,100/-. BOOK PROFIT U/S 115JB WAS ALSO ASSE SSED AT RS.63,59,42,400/- AFTER MAKING DISALLOWANCE U/S 14A OF RS.1,14,58,817/- AND PROVISIONS FOR DOUBTFUL DEBTS AT RS.1,08,95,000/-. 3. APPEAL BEFORE LD. CIT(A) BROUGHT PART RELIEF TO THE ASSESSEE. 4. NOW THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL ON A SOLITARY GROUND RELATING TO DELETING OF DISALLOWANCE U/S 14A OF THE ACT AT RS.75,61,482/- OUT OF TOTAL DISALLOWANCE OF RS.1,14 ,58,817/-. 5. LD. DR REFERRED AND RELIED TO THE ORDER OF ASSES SING AUTHORITY. ITA NO. 1589/AHD/2013 ASST. YEAR 2009-10 3 6. ON THE OTHER HAND, LD. AR REFERRED TO THE ORDER OF LD. CIT(A) AND ALSO SUBMITTED THAT ASSESSEE COMPANY RAISED RS.139. 27 CRORES FROM IPO FUNDS AND AFTER INCURRING EXPENSES OF RS.4.01 C RORES TOWARDS PUBLIC ISSUE EXPENSES THERE REMAINED AN AMOUNT OF R S.135.26 CRORES WITH THE ASSESSEE. THIS AMOUNT WAS INVESTED IN MUTUAL FUNDS FOR A TEMPORARY PERIOD TILL THE TIME OF PROGRESS OF THE PROJECT ENVISAGED IN THE IPO IS COMPLETED. 7. LD. AR FURTHER SUBMITTED THAT THE ASSESSEE COMPA NY WAS INCURRING EXPENSES IN THE EXPANSION PROJECT, IT WAS LIQUIDATING MUTUAL FUND INVESTMENT AS AND WHEN REQUIRED. LD. AR FURTHE R SUBMITTED THAT THERE WAS NO INTEREST BURDEN ON THE ASSESSEE ON THE SE FUNDS RECEIVED OUT OF IPO. THEREFORE, LD. CIT(A) HAS RIGH TLY DELETED THE DISALLOWANCE U/S 14A OF THE ACT TO THE EXTENT RELAT ING TO DISALLOWANCE OF INTEREST EXPENDITURE IN THE PROPORTION OF INVEST MENTS IN MUTUAL FUNDS TO THAT OF TOTAL ASSETS. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. THE ONLY GROUND IN THIS APPEAL IS AGAINS T THE ORDER OF LD. CIT(A) DELETING THE DISALLOWANCE OF RS.75,61,482/- OUT OF TOTAL DISALLOWANCE OF RS. 1,14,58,817/- MADE BY ASSESSING OFFICER. WE FIND THAT WORKING OF DISALLOWANCE MADE BY ASSESSING OFFICER AS PER THE PROVISIONS OF SECTION 14A OF THE ACT BY APPLYIN G THE METHOD AS PRESCRIBED UNDER RULE-8D OF THE IT RULES, 1962 WAS MADE IN THE FOLLOWING MANNER :- ITA NO. 1589/AHD/2013 ASST. YEAR 2009-10 4 4.10 THE WORKING OF THE DISALLOWANCE WITH THE PR OVISIONS OF SECTION 14A OF THE ACT BY APPLYING THE METHOD AS PRESCRIBED IN RULE 8D IS AS UNDER: PARTICULARS AMOUNT (IN RS.) 1 AMOUNT OF EXPENDITURE DIRECTLY RELATED TO EXEMPT IN COME 4,85,363/- 2 PROPORTIONATE INTEREST EXPENDITURE A) INTEREST EXPENDITURE* 2,62,48,000/- B) AVERAGE TAX INVESTMENT 77,94,67,000/- C) AVERAGE TOTAL ASSETS 2,70,57,46,000/- THEREFORE, ATTRIBUTABLE INTEREST (A * B/C) 75,61,482/- 3. 0.5 % OF THE VALUE OF INVESTMENT ON WHICH EXEMPT IN COME IS EARNED 38,97,335/- TOTAL EXPENSES ( 1+ 2 +3) 1,19,44,180/- INTEREST = [691.58-(53.28+51.98+3.35+78.18)] - (230.05+12.26) INTEREST INCOME= 2,62,48,000 . 9. WE FURTHER FIND THAT LD. CIT(A) PARTLY DELETED T HE DISALLOWANCE RELATING TO INTEREST EXPENSES OF RS.75,61,482/- BY OBSERVING AS UNDER:- 3.3 DECISION: ,, I HAVE CAREFULLY PERUSED IHE ASSESSMENT ORDER AND T HE SUBMISSIONS GIVEN BY THE APPELLANT. THE APPELLANT HAS SUBMITTED THAT IT HAS NOT INVESTED ANY INTEREST BEARING FUNDS IN THE MUTUAL FUNDS WHICH HA S EARNED EXEMPT INCOME. IT HAS BEEN SUBMITTED BY THE APPELLANT THAT THE COMPANY HAD COME OUT WITH ITS MAIDEN PUBLIC ISSUE ON 27/12/2007 AND HAS RECEIVED NET PROCEEDS OF RS. 139.27 CRORES WHICH HAS BEEN INVEST ED IN MUTUAL FUNDS. NO OTHER INTEREST BEARING FUNDS HAVE BEEN INVESTED BY THE APPELLANT IN THE MUTUAL FUND. THE APPELLANT HAS ALSO SUBMITTED A STA TEMENT SHOWING DETAILED WORKING OF AMOUNT INVESTED IN MUTUAL FUND OUT OF TH E PROCEEDS OF THE PUBLIC ISSUE. AFTER EXAMINATION OF THE SUBMISSION OF THE APPELLAN T AND DETAILS OF INVESTMENT AND FLOW OF FUNDS, IT IS APPARENT THAT THE PROCEEDS OF THE PUBLIC ISSUE HAVE BEEN INVESTED IN THE MUTUAL FUNDS BY THE APPELLANT. THE A. O. HAS NOT ACCEPTED THE PLEA OF THE APPELLANT ON THE GROUND TH AT SUCH INVESTMENT REDUCE THE AVAILABILITY OF LIQUID FUNDS WITH THE COMPANY W HICH MANY TIMES CREATE THE NEED FOR THE BORROWED FUNDS. HE HAS FURTHER HELD TH AT HAD THE FUNDS NOT BEEN DIVERTED FOR SUCH INVESTMENT THE NEED FOR INTEREST BEARING FUNDS WOULD HAVE BEEN LESSER. THE FINDINGS GIVEN BY THE A. O. ARE NO T JUSTIFIED AS IN THIS CASE, ITA NO. 1589/AHD/2013 ASST. YEAR 2009-10 5 THERE IS A DIRECT NEXUS BETWEEN THE NON-INTEREST BE ARING FUNDS AND THE INVESTMENT MADE BY THE APPELLANT. NO DISALLOWANCE O N ACCOUNT OF INTEREST U/S.14A R. W. RULE 8D CAN BE DONE. THERE IS NO DOUB T THAT WITH INTRODUCTION OF RULE 8D, THE ASSESSING OFFICER NEED NOT ESTABLISH T HE NEXUS WITH THE INTEREST BEARING FUND AND THE INVESTMENT MADE TO EARN EXEMPT INCOME. HOWEVER, IN THIS CASE, THE APPELLANT HAS CLEARLY ESTABLISHED TH AT NO INTEREST BEARING FUND HAS BEEN INVESTED AND, THEREFORE, NO DISALLOWANCE O N ACCOUNT OF INTEREST U/S. 14A CAN BE MADE IN THE CASE OF THE APPELLANT. THE A PPELLANT HAS ALSO RIGHTLY RELIED ON THE DECISIONS OF CIT VS. HERO CYCLES [323 ITR 158, [P & H] AND MINDA INVESTMENT LTD. VS. DCIT [ITA IMO.4046/D EL/2009], ITAT, NEW DELHI ORDER DATED 13/10/2010. ACCORDINGLY, THE ADDITION O F RS. 75,61,482/- IS DIRECTED TO BE DELETED. THE A. O. HAS ALSO MADE DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES AMOUNTING TO RS.19,86,825/- BY APPLYING RULE 8D. TH IS EXPENDITURE IS SUPPOSED TO HAVE BEEN INCURRED ON VARIOUS ADMINISTR ATIVE HEADS FOR MANAGEMENT AND MAINTENANCE OF THE INVESTMENTS MADE BY THE APPELLANT IN MUTUAL FUNDS. THOUGH THE FUNDS FOR INVESTMENT WERE SEPARATE THAT THE ADMINISTRATIVE EXPENDITURE IS BOUND TO BE INTERMIXE D AND THE APPELLANT MUST HAVE USED HIS EXISTING ADMINISTRATIVE SET UP LIKE - EMPLOYEES, OFFICE, DIRECTORS ETC. FOR MONITORING AND MANAGING THE INVESTMENT. TH EREFORE, THE PLEA OF THE APPELLANT THAT IT HAS NOT INCURRED ANY EXPENDITURE IS NOT ACCEPTABLE AND THE DISALLOWANCE MADE BY THE A. O. AMOUNTING TO RS.38,9 7,335/- IS UPHELD. CONSIDERING THE ABOVE FACT AND THE FACT THE SIMILAR ISSUE HAS ALREADY BEEN DECIDED BY MY PREDECESSOR IN THE PRECEDING YEAR I.E . A. Y. 2008-09, THE GROUND OF APPEAL IS PARTLY ALLOWED. 10. IN THE LIGHT OF FACTS NARRATED ABOVE BY LD.AR, THE OBSERVATIONS MADE BY THE FIRST APPELLATE AUTHORITY AND IN THE GI VEN FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE INVESTM ENT IN MUTUAL FUNDS WAS HAVING A DIRECT NEXUS WITH THE INTEREST F REE FUNDS AVAILABLE WITH THE ASSESSEE OUT OF THE FUNDS RECEIVED FROM IP O OF RS.139.27 CRORES WHICH WAS USED FOR A TEMPORARY PERIOD OF TIM E BY INVESTING INTO MUTUAL FUNDS AND LIQUIDATING THE FUNDS AS AND WHEN REQUIRED FOR DEVELOPMENT OF THE PROJECT FOR WHICH IPO WAS RAISED . WE ARE, THEREFORE, OF THE VIEW THAT LD. CIT(A) HAS RIGHTLY DELETED THE ITA NO. 1589/AHD/2013 ASST. YEAR 2009-10 6 DISALLOWANCE TO THE EXTENT OF RS.75,61,482/- OUT OF THE TOTAL DISALLOWANCE OF RS. 1,14,58,817/- MADE U/S 14A OF T HE ACT. WE UPHOLD THE SAME. THIS GROUND OF THE REVENUE IS DISM ISSED. 11. OTHER GROUNDS OF REVENUE ARE OF GENERAL IN NATU RE, WHICH NEED NO ADJUDICATION. 12. IN THE RESULT, APPEAL FILED BY THE REVENUE IS D ISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD SEPTEMBER, 2016 SD/- SD/- (RAJPAL YADAV) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 23/9/2016 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. 1589/AHD/2013 ASST. YEAR 2009-10 7 1. DATE OF DICTATION: 21/09/2016 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 22/09/2016 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: 23/9/16 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: