Darling Muesco (India)Pvt.Ltd., Ahmedabad V. The Dy.CIT.,(OSD),Range-1, Ahmedabad

ITA 1613/AHD/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89708 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 17-06-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 25-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DINESH SINGH
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A . BENCH, AHMEDABAD BEFORE SHRI N.S. SAINI ACCOUNTANT MEMBER AND SHRI S.S. GODARA JUDICIAL MEMBER ITA NO .1613 /AHD/ 201 2 A. Y .20 0 8 - 09 DARLING MUESCO (INDIA) PVT. LTD., PLOT NO.97/A, PHASE - I, GIDC, ESTATE, VATVA AH MEDABAD. PAN: AAACD 4055D VS DCIT (OSD), RANGE - I, AHMEDABAD. (APPELLANT) (RESPONDENT) REVENUE BY : S HRI DINESH SINGH, SR. D.R. , ASSESSEE(S) BY : SHRI TUSHAR P. HEMANI, A.R. / DATE OF HEARING : 17 / 06 /201 5 / DATE OF PRONOUNCEMENT: 24 / 0 6 /201 5 / O R D E R PER S.S. GODARA , JUDICIAL MEMBER THIS ASSESSEE S APPEAL FOR A.Y .2008 - 09, ARISE S FROM ORDER OF CIT(A ) - VI , AHMEDABAD, DATED 12.06.2012 PASSED I N CASE NO .CIT(A) - VI/DCIT(OSD).R - 1/166/10 - 11, UPHOLDING D ISALLOWANCE OF RS.4,77,046/ - U/S.14A R.W.S. RULE 8D(2)(II) OF THE INCOME TAX RULES, IN PROCEEDINGS UNDER SECTION 143(3 ) OF THE INCOME TAX ACT , 1961, IN SHORT THE ACT . 2. THE CASE FILE REVEALS THAT THE CIT(A) S ORDER UNDER CHALLENGE COMPRISES OF THE ASSESSING OFFICER S FINDINGS READING AS UNDER: ITA NO. 1613 /AHD/ 2012 DARLING MUESCO (I NDIA) PVT. LTD. FOR A.Y. 2008 - 09 - 2 - 3.1 THE A.O HAS STATED IN THE ASSESSMENT ORDER DTD. 15712/2010, WHICH IS AS UNDER: 'IT IS SEEN THAT THE ASSE SSEE HAS EARNED DIVIDEND INCOME TO THE TUNE OF RS. 1 0,96,385 / - WHICH IS CLAIMED AS EXEMPT FROM TAXABLE INCOME. THE ASSESSEE 'HAS MAD E INVESTMENT OF RS . 2, 1 8,45,496/ - AS ON 31/03/2008, THE ASSESSEE HAS TAKEN LOANS OF RS.40,47,037 / - ON WHICH INTEREST OF RS.7,6 0 ,7 09/ - HAS BEEN CLAIMED BY THE ASSESSEE. IN ADDITION TO THAT SOME ADMINISTRATIVE/OTHER EXPENSES MUST BE INCURRED FOR EARN TAX FREE INCOME. THEREFORE, SOME DISALLOWANCE U/ S .14A OF THE I.T. ACT IS WARRANTED. IN THIS REGARD THE ASSESSEE VIDE NOTICE DATED 07/ 07/2010 WAS SHOW CAUSED TO EXPLAIN WHY THE EXPENSES RELATING TO INVESTMENT MADE FOR EARNING EXEMPT INCOME SHOULD NOT BE DISALLOWED AS PER RULE 8D. IN REPLY TO THIS SHOW CAUSE, THE ASSESSEE REPLIED VIDE LETTER DATED 29/10/210 AND FURNISHED WORKING AS PER RU LE 8D. FURTHER, THE AR WAS ASKED, TO EXPLAIN VIDE ORDER SHEET DATED 17/11/2010, SOURCE OF EACH INVESTMENT MADE FOR EARNING EXEMPT INCOME TO PROVE THAT AT ANY TIME NO BORROWED FUNDS WERE UTILIZED. HOWEVER, NO EXPLANATION WAS FURNISHED IN THIS REGARD, BY THE ASSESSEE. THIS IS A FACT THAT, THE INVESTING ACTIVITY IS AN INDIVISIBLE BUSINESS ACTIVITY OF THE ASSESSEE. SINCE THE INVESTMENT ACTIVITY IS AN INDIVISIBLE ACTIVITY, IT IS A NATURAL COROLLARY THAT OUT OF ALL THE EXPENDITURE INCURRED FOR THE BUSINESS ACTIVI TY BY THE ASSESSEE, IT WOULD ALSO INCLUDE EXPENDITURE FOR THE INVESTMENT ACTIVITY, ALTHOUGH IT MAY NOT BE DIRECT. THE ASSESSEE HAS NOWHERE PROVED THAT NO INDIRECT EXPENDITURE HAS BEEN INCURRED BY IT IN RELATION TO EXEMPT INCOME. THERE ARE A NUMBER OF COSTS LIKE INTEREST, ADMINISTRATIVE AND MANAGEMENT ASSOCIATED WITH EARNING OF THIS INCOME. THIS MEANS THAT THE ASSESSEE HAS ACTUALLY INCURRED EXPENDITURE, DIRECT OR INDIRECT, FOR EARNING INCOME CLAIMED TO BE EXEMPT, WHICH IS CLEARLY HIT BY PROVISIONS OF SECTION 14A. FURTHER, THE ASSESSEE DID NOT PROVE THAT ONLY INTEREST FREE FUNDS WERE UTILIZED BY THE ASSESSEE. FURTHER, THE ASSESSEE DID NOT EXPLAIN CASH AVAILABILITY ON THE DATE OF INVESTMENT. THE ASSESSEE HAS NOT SHOWN HOW ONLY INTEREST FREE FUNDS WERE UTILIZED FOR MAKING INVESTMENTS WHICH EARNED INCOME WHICH IS EXEMPT FROM TAX. IN VIEW OF THESE FACTS AND DUE TO THE FACT THAT THE ASSESSEE HAS NOT PROVED AVAILABILITY OF INTEREST FREE FUNDS ON THE DATE OF INVESTMENTS MADE, IT CANNOT BE ASCERTAINED THAT THE INVESTME NT HAVE BEEN MADE OUT OF OWN FUNDS ON L Y AND NO BORROWED FUNDS WERE UT ILI ZED FOR MAKING INVESTMENTS. IN VIEW OF THESE FACTS, THE INTEREST EXPENDITURE MADE BY THE COMPANY CANNOT BE DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPTS. IN SUCH CIRCUMSTA NCES, RULE 8D IS APPLICABLE. THUS, IT IS SEEN THAT T HE COMPANY COULD NOT JUSTIFY THAT ONLY INTEREST FREE FUNDS WERE PARKED IN THE INVESTMENTS HELD FOR EARNING EXEMPT ITA NO. 1613 /AHD/ 2012 DARLING MUESCO (I NDIA) PVT. LTD. FOR A.Y. 2008 - 09 - 3 - INCOME. FURTHER, THERE ARE OTHER EXPENSES IS ALSO WHICH ARE RELATABLE TO EARNING OF EXEMPT INCOME LIKE ADMINISTRATIVE EXPENSES, ETC. HENCE, DISALLOWANCE U/S. 14A OF THE I.T. ACT IS WARRANTED. THE ASSESSEE HAS DISALLOWED SOME EXPENSES DIRECTLY RELA T ABLE TO EARNING OF EXEMPT INCOME. HOWEVER, DISALLOWANCE IS TO BE MADE AS PER RULE 8D OF INCOME TAX RULES AS UNDER : - I. AMOUNT OF EXPENDITURE DIRECTLY RELATING RS. NIL II. INTEREST PAID X AVERAGE VALUE OF INVESTMENT AVERAGE VALUE OF TOTAL ASSETS 760709 X 18379927 = RS. 3,37,459/ - RS. 41432573 I NVES T MENT AS ON 31 /03/20 08 RS. 21815496 INVESTMENT AS ON 31 /03/2007 RS. 14944358 AVERAGE VALUE OF INVESTMENT RS. 18379927 VAL UE OF ASSETS VALUE OF ASSET S AS ON 31/03/2008 RS. 49158255 VALUE OF ASSETS AS ON 31 /03/2007 RS. 33706890 AVERAGE VALUE OF ASSETS RS. 41432573 III. 0.5% OF AVERAGE VALUE OF INVESTMENT RS. 91,900 / - TO T AL RS. 4 , 29 , 359 / - THE DISALLOWANCE U/S. MA OF THE I.T. ACT IS MADE OF RS. 4,29,359/ - . 3.2 THE APPELLANT HAS SUBMITTED IN ITS WRITTEN SUBMISSION, WHICH IS AS UNDER: 'THE ASSESSEE CO MPANY SUBMITS HEREWITH A STATEMENT SHOWING BREAKUP OF INTEREST EXPENSE RS. 7,60,7091 - WHICH INCLUDES BANK CHARGES, BANK COMMISSION, L/C AMENDMENT CHARGES AND INTEREST EXPENSE AS PER ANNEXURE 'A'. DISALLOWANCE AS PER SECTION 1 4A RULE 8D OF INCOME FAX ACT, 196 1 IS APPLICABLE TO ONLY INTEREST EXPENSE. ASSESSEE HAD NOT TAKEN ANY LOAN DURING THE FINANCIAL YEAR FOR THE PURPOSE OF INVESTMENT FROM WHICH ASSESSEE CAN EARN EXEMPT INCOME. SO, ASSESSEE HAS TAKEN ANY BORROWED MONEY FOR EARNING EXEM PT INCOME. THERE IS N O NEXUS BETWEEN THE INVESTMENT MADE AND FUNDS BORROWED . ITA NO. 1613 /AHD/ 2012 DARLING MUESCO (I NDIA) PVT. LTD. FOR A.Y. 2008 - 09 - 4 - THE ASSESSEE COMPANY HAS TAKEN UNSECURED LOAN ON WHICH THE INTEREST IS PAID WHICH IS THE SUBSTANTIAL LARGE PORTION OF THE TOTAL INTEREST EXPENSE. SUCH LOANS ARE TAKEN FROM DIRECTORS AT THE INITIAL TI ME OF ESTABLISH THE BUSINESS AND FROM THAT DAY IT IS CARRIED FORWARD. IN THE BALANCE SHEET OF THE F.Y.07 - 08(A.Y.08 - 09) UNSECURED LOAN FROM DIRECTORS WORTH RS. 36,34,909.37 STANDING AS ON 31 ST MARCH,2008. THE ASSESSEE COMPANY HAS BEEN PAYING THE INTEREST ON UNSECURED LOAN EVEN BEFORE THE YEAR OF THE INVESTMENT. THE STATEMENT SHOWING INTEREST EXPENSES IS SUBMITTED A S PER ANNEXU RE ? 'B', THE INVESTMENTS ARE MA DE FROM THE INTEREST FREE FUNDS. THE FUNDS BORROWED ON WHICH INTEREST IS PAID SINCE LAST SEVERAL YEA RS. INVESTMENT MADE BY ASSESSEE IS FROM INTERNAL ACCRUAL OF THE COMPANY. THE FUNDS BORROWED HAVE NO NEXUSES. THE RELIANCE IS PLACED ON GUJARAT HIGH COURT DECISION CIT - GANDHINAGAR VS. GUJARAT POWER CORPORATION LTD., WHICH HELD THAT THERE SHALL BE NEXUS OF THE BORROWED FUND VIS - A - VIS INVESTMENT MADE.' 3.3 I HAVE CONSIDERED THE FACTS OF THE CASE; ASSESSMENT ORDER AND APPELLANT'S WRITTEN SUBMISSION. ASSESSING OFFICER MADE DISALLOWANCE OF EXPENSE RELATING TO EXEMPT INCOME. SUCH DISALLOWANCE WAS CONSIDERED NECE SSARY SINCE APPELLANT DID NOT DISALLOW ANY PART OF COMMON INTEREST AND OTHER EXPENSES TREATING THE SAME AS RELATING TO INVESTMENT RESULTING IN EXEMPT INCOME. NOW RULE 8D IS HELD TO BE APPLICABLE WITH EFFECT FROM ASSESSMENT YEAR 2008 - 09 BY BOMBAY HIGH COURT , THE DISALLOWANCE OF EXPENSES RELATING TO EXEMPT INCOME ARE TO BE MADE BY THE METHOD PRESCRIBED IN THE SAID RULE. IT IS NOT IN DISPUTE THAT APPELLANT MADE INVESTMENT OF RS 218.55 LACS WHICH CAN ONLY RESULT IN EXEMPT INCOME IN THE FORM OF DIVIDEND. APPELLA NT PAID FINANCE CHARGES OF RS 7.61 LACS ON BORROWED FUNDS USED FOR BUSINESS PURPOSES AS WELL AS MAKING INVESTMENTS. APPELLANT INCURRED OTHER ADMINISTRATIVE EXPENSES, PART OF WHICH MAY RELATE TO INVESTMENT ONLY RESULTING IN - , S EXEMPT INCOME. SIMILARLY PA YMENT OF INTEREST WILL ALSO PARTLY RELATE TO INVESTMENT RESULTING IN EXEMPT INCOME THEREFORE DISALLOWANCE UNDER SECTION 14 A ON A CCOU NT OF INTEREST AND OTHER EXPENSES ARE NECE SSAR Y. THE DECISIONS RELIED UPON BY THE APPELLANT ARE PRIOR TO ASSESSMENT YEAR 20 08 - 09 WHEN THE RULE 8D WAS NOT APPLICABLE. ACCORDINGLY, THESE DECISIONS ARE NOT APPLICABLE TO THIS ASSESSMENT YEAR WHEN THE DISALLOWANCE IS TO BE MADE AS PER THE FORMULA GIVEN IN RULE 8D. ITA NO. 1613 /AHD/ 2012 DARLING MUESCO (I NDIA) PVT. LTD. FOR A.Y. 2008 - 09 - 5 - COMING TO THE METHOD OF COMPUTATION OF DISALLOWANCE UNDER SECTION 1 4 A, ASSESSING OFFICER DISALLOWED EXPENSES RELATABLE TO EXEMPT INCOME AS PER RULE 8D WHICH IS MANDATORY FROM ASSESSMENT YEAR 2008 - 09. FOR INTEREST, PROPORTIONATE EXPENSE IS , DISALLOWABLE WHEREAS /OR OTHER, EXPENSES .5% OF AVERAGE INVESTMENT VALUE IS DISALL OWABLE. CONSIDERING THE FACT THAT APPELLANT CLAIMED HUGE ADMINISTRATIVE AND OTHER EXPENSES, THE DISALLOWANCE OF ADMINISTRATIVE EXPENSES MADE BY THE ASSESSING OFFICER @.5% OF INVESTMENT RESULTING IN EXEMPT INCOME IS AS PER THE FORMULA GIVEN IN RULE 8D WHICH IS MANDATORY FOR MAKING DISALLOWANCE. IN VIEW OF THIS THE ADDITION @ .5% OF INVESTMENT RESULTING IN EXEMPT INCOME MADE BY THE ASSESSING OFFICER IS CONFIRMED. AS REGARDS INTEREST, APPELLANT HAD BORROWED FUNDS ON WHICH INTEREST WAS PAID. WHILE MAKING INVES TMENTS, BOTH BORROWED FUNDS AS WELL AS OWN FUNDS WERE USED HENCE ONE CANNOT SAY THAT BORROWED FUNDS WERE USED ONLY FOR BUSINESS PURPOSE AND OWNED CAPITAL WAS ONLY USED FOR INVESTMENT. ADMITTEDLY NO SEPARATE ACCOUNTS ARE MAINTAINED FOR BUSINESS AND INVESTME NT ACTIVITIES THEREFORE APPELLANT'S CLAIM IS NOT JUSTIFIED THAT BORROWED FUNDS WERE NOT USED IN MAKING INVESTMENT. THEREFORE IN THE ABSENCE OF CLEAR CUT DETAILS OF UTILIZATION OF FUNDS, THE FORMULA GIVEN IN RULE 8D WHICH IS MANDATORY THIS YEAR IS TO BE APP LIED. THEREFORE DECISION RELIED UPON BY THE APPELLANT IS NOT APPLICABLE TO THIS YEAR WHEN RULE 8D IS MANDATORY. SINCE ASSESSING OFFICER WORKED OUT INTEREST DISALLOWANCE AS PER RULE 8D, THE INTEREST DISALLOWANCE IS CONFIRMED SUBJECT TO THE DIRECTION IN SUBS EQUENT PARA. APPELLANT SUBMITTED THAT ASSESSING OFFICER DISALLOWED INTEREST AS PER RULE 8D ON R S. 760709 WH ICH INCLUDED BANK COMMISSION, L/C AMENDMENT CHARGES AND BANK CHARGES APART FROM INTEREST EXPENSES. APPELLANT SUBMITTED THESE DETAILS AS PER WHICH INTE REST IS R S. 47704 6 ONLY AND REMAINING AMOUNTS ARE FOR BANK CHARGES, BANK COMMISSION ETC. IT IS NOT IN DISPUTE THAT THE DISALLOWANCE UNDER RULE 8D IS MADE IN RESPECT OF INTEREST ONLY AND NOT OF OTHER FINANCE CHARGES. THEREFORE ASSESSING OFFICER IS DIRECTED TO RE - COMPUTE DISALLOWANCE UNDER RULE 8D(II) BY TAKING ONLY INTEREST AMOUNT AFTER VERIFICATION. IN THE FINAL RESULT APPEAL IS PARTLY ALLOWED. 3. WE HAVE HEARD BOTH SIDES. THE ASSESSEE CONFINES ITS CHALLENGE TO THE IMPUGNED DISALLOWANCE UNDER RULE 8D(2)(I I) ONLY. THERE IS NO AVERMENT REGARDING THE OTHER PART OF THE IMPUGNED DISALLOWANCE UNDER CLAUSE (III) OF THE AFORESAID RULE AMOUNTING TO RS.91,900/ - . ITA NO. 1613 /AHD/ 2012 DARLING MUESCO (I NDIA) PVT. LTD. FOR A.Y. 2008 - 09 - 6 - THE REVENUE STRONGLY SUPPORTS THE CIT(A) S ORDER. THE ASSESSEE S INVESTMENTS ARE OF RS.1,49,74,358/ - AS O N 31.3.2007 AND RS.2,18,45,496/ - AS ON 31.3.2008. THE IMPUGNED ASSESSMENT YEAR 2008 - 09. THE ASSESSEE S INVESTMENTS SHOW INCREASE OF RS.68,71,138/ - . ITS INTEREST FREE FUND AVAILABLE AS ON 31.3.2008 SHOW A SUM OF RS.2,25,66,447/ - AS AGAINST RS.1,62,94,071/ - IN PREVIOUS ASSESSMENT YEAR. THIS LEADS TO AN UPWARD TREND OF RS.62,72,376/ - . IT IS FURTHER EVIDENT THAT THE ASSESSEE S INTEREST BEARING SECURED AND UNSECURED LOAN HAVE GONE DOWN FROM RS.46,30,288/ - TO RS.40,47,037/ - IN THE RELEVANT ACCOUNTING PERIOD. ITS PROFIT BEFORE AND AFTER TAX READ RS.90,79,021/ - AND RS.52,72,376/ - ; RESPECTIVELY. THE ASSESSEE HAS BEEN CARRYING FORWARD ITS UNSECURED LOANS OF RS.36,34,909/ - FROM ITS DIRECTORS @12% INTEREST WELL FROM THE PRECEDING ASSESSMENT YEARS. PAGE 4 OF THE PAPER BO OK DEMONSTRATE S GROSS INTEREST OUTGO OF RS.7,60,708.70. THE SAME COMPRISES OF BANK INTEREST PAID ON OF RS.11,267/ - AND RS.4,65,779.5; RESPECTIVELY. THE INSTANT ISSUE RELATES TO THESE TWO HEADS ONLY. THE LATTER INTEREST SUM HAS BEEN INCURRED IN SERVICING UN SECURED LOANS FROM ASSESSEE S DIRECTORS . THE OTHER FIGURE RELATES TO BANK INTEREST CHARGES ON LOANS AVAILED FOR BUSINESS PURPOSES. THERE IS NO CASE OF DIVERSION OF INTEREST BEARING FUNDS AT THE ASSESSEE S BEHEST. WE REITERATE THAT SECTION 14A READ WITH RUL E 8D IS A DISALLOWING PROVISION IN A TAXING STATUTE TO BE LITERALLY CONSTRUED. IT WOULD NOT BE OUT OF PLACE TO OBSERVE THAT ONCE THE ASSESSEE HAS BEEN ABLE TO DEMONSTRATE AVAILABILITY OF SUFFICIENT INTEREST FREE FUND MUCH MORE THAN THE INVESTMENT MADE IN Q UESTION IN THE RELEVANT ACCOUNTING PERIOD, A ITA NO. 1613 /AHD/ 2012 DARLING MUESCO (I NDIA) PVT. LTD. FOR A.Y. 2008 - 09 - 7 - PRESUMPTION HAS TO BE DRAWN THAT THE SAME HAVE COME FROM NON INTEREST BEARING FUND ONLY. THE REVENUE FAILS TO REBUT THE ABOVESTATED FACTS AND FIGURES. IN THESE CIRCUMSTANCES, WE DRAW SUPPORT FROM THE HON BLE JUR ISDICTIONAL HIGH COURT JUDGMENT IN CASE OF CIT VS. KALTHIA ENGINEERING & CONSTRUCTION LTD. TAX APPEAL 11 OF 2015 DECIDED ON 13.1.2015 UPHOLDING THE TRIBUNAL S ORDER DRAWING A SIMILAR PRESUMPTION. THE IMPUGNED DISALLOWANCE ACCORDINGLY STAND S DELETED. 4. TH E ASSESSE S APPEAL IS ALLOWED I N ABOVE TERMS. ORDER PRONOUNCED IN THE COURT ON THIS DAY, THE 24 TH JUNE , 201 5 AT AHMEDABAD . SD/ - SD/ - ( N.S. SAINI ) ( S.S. GODARA ) ACCOUNTANT MEMBER J UDICIAL MEMBER AHMEDABAD; DATED 24 / 06 / 20 1 5 PRABHAT KR. KESARWANI , SR. P . S . / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) - III, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, / ( DY. /ASSTT.REGISTRAR) , / ITAT, AHMEDABAD