Deputy Commissioner of Income Tax, Circle-16(2), Hyderabad V. Pitti Electrical Equipment Private Limited, Hyderabad

ITA 1794/Hyd/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 4297 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-05-2019
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 22-04-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 02-11-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K J RAO
• Assessee Lawyers: LAXMINIWAS SHAR MA
• Keywords: Opportunity of being heard; Earning of tax free income; Rule 8D
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B ', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN , ACCOUNTANT MEMBER ITA NO. 1794 / HYD/201 7 ASSESSMENT YEAR: 20 13 - 14 DY. COMMISSIONER OF INCOME - TAX , CIRCLE 16(2), HYDERABAD. VS. PITTI ELECTRICAL PVT. LTD., HYDERABAD . PAN AACCP 8334 P A PPELLANT RESPONDENT REVENUE BY: S H RI K.J. RAO ASSESSEE BY: S HRI LAXMINIWAS SHARMA DATE OF HEARING: 22 / 0 4 / 201 9 DATE OF PRONOUNCEMENT: 10 / 0 5 /201 9 O R D E R PER S. RIFAUR RAHMAN , AM: T H IS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF CIT(A) 4 , HYDERABAD, DATED, 2 9 / 08 /201 7 FOR AY 20 13 - 14. 2. BRIEF FACTS OF THE CASE ARE, ASSESSEE , ENGAGED IN M ANUFACTURING AND TRADING OF ELECTRICAL EQUIPMENT, FILED ITS RETURN OF INCOME ON 26/09/2013 ADMITTING LOSS OF RS. 89,01,602/ - . SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY, ACCORDINGLY, NOTICE U/S 143(2) WAS ISSUED AND ASSESSMENT WAS COMPLETED BY ADDING RS. 46,53,855/ - TOWARDS DISALLOWANCE U/S 14A AND RS. 71,99,626/ - TOWARDS DISALLOWANCE U/S 37(1) OF THE INCOME - TAX ACT, 1961 (IN SHORT THE ACT). I.T.A. NO. 1794 /HYD/1 7 PITTI ELECTRICAL EQUIPMENT PVT. LTD., HYD. 2 2.1 DURING THE COURSE OF ASSESSMENT PROCEEDINGS , THE ASSESSING OFFICER FOUND THAT THE ASSESSEE COMPANY HAD INVESTED RS.16,78,38,500/ - , AN INCREASE OF RS.3,12,05,000/ - FROM PREVIOUS YEAR. FROM THESE INVESTMENTS, THE ASSESSEE HAD ADMITTED DIVIDEND INCOME OF RS.1,04,70,000/ - AND CLAIMED AS EXEMPT. IN THE PROFI T & LOSS ACCOUNT, THE ASSESSEE CLAIMED INTEREST ON UNSECURED LOANS AT RS.1,18,53,481/ - . IN THIS CONNECTION, THE ASSESSEE WAS ASKED ON THE ISSUE OF EXPENDITURE RELATABLE TO EARNING OF EXEMPT INCOME ON NON - CURRENT INVESTMENTS. IN RESPONSE, THE ASSESSEE WORKE D OUT THE DISALLOWANCE U/S 14A R.W. RULE 8 D AT RS.46,53,855/ - . ACCORDINGLY, THE SAME WAS VERIFIED AND DISALLOWED. 2.2 FURTHER, THE ASSESSING OFFICER FOUND IN THE BALANCE SHEET, THE ADVANCES TO THE RELATED PARTIES WERE SHOWN AT RS.15,22,44,550/ - . THE ASS ESSEE ALSO CLAIMED INTEREST ON UNSECURED LOANS AT RS.1,18,53,481/ - . AS THESE ADVANCES GIVEN TO RELATED PARTIES WERE NOT FOR THE BUSINESS PURPOSES OF THE ASSESSEE AND IT WAS ONLY A DIVERSION OF INTEREST BEARING FUNDS TO RELATED PARTIES, THE CLAIM OF INTERES T ON UNSECURED LOANS WAS PROPOSED TO BE DISALLOWED. THE INTEREST HAS BEEN WORKED OUT FROM THE DATE OF PAYMENT OF ADVANCE ON THE INTEREST - FREE LOANS / ADVANCES GIVEN TO RELATED PARTIES AND THE SAME WAS ARRIVED AT RS. 1,28,34,110/ - . SINCE AN AMOUNT OF RS. 46, 53,855 / - BEING INTEREST CLAIMED HAD ALREADY DISALLOWED U/S 14A, THE BALANCE OF RS. 71,99,626/ - , OUT OF INTEREST CLAIMED IN P&L A/C OF RS. 1,18,53,481/ - , WAS DISALLOWED U/S 37(1) OF THE ACT. 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFERRED AN APPEA L BEFORE THE CIT(A). I.T.A. NO. 1794 /HYD/1 7 PITTI ELECTRICAL EQUIPMENT PVT. LTD., HYD. 3 4. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT DU RING THE PREVIOUS YEAR, THE ASSESSEE HAD EARNED DIVIDEND ON THE INVESTMENTS MADE DURING THE PREVIOUS YEAR. AS THE DIVIDEND IS EXEMPT U / S 10(34) OF THE IT ACT, THE ASSESSING OFFICER INVOKED PROVISIONS OF SECTION 14A AND DISALLOWED AN AMOUNT OF RS,46,53,855/ - IGNORING THE FACT THAT NEITHER ANY INVESTMENT WAS MADE DURING THE YEAR NOR ANY EXPENDITURE WAS INCURRED FOR EARNING THE DIVIDEND INCOME EXEMPT U / S 10(34). ASSESSEE HAS CLAIMED INT EREST ON UNSECURED LOAN TAKEN AND UTILIZED FOR THE PURPOSE OF BUSINESS IN THE CURRENT YEAR WHEREAS THE INVESTMENTS ON WHICH EXEMPTED INCOME IS RECEIVED WERE MADE BY THE ASSESSEE IN THE EARLIER YEAR. AS THERE IS NO NEXUS BETWEEN THE INTEREST PAID ON UNSECUR ED LOAN AND THE EXEMPTED DIVIDEND INCOME RECEIVED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR NO DISALLOWANCE CAN BE MADE U / S 14A. ASSESSEE , RELIED UPON ITAT HYDERABAD DECISION IN ITA NO. 1805 / HYD / 2012 , IN WHICH, IT IS HELD THAT THERE BEING NO NEXUS BETWEEN THE INTEREST PAID BY THE ASSESSEE ON BORROWALS, CLAIMED TO HAVE BEEN MADE FOR BUSINESS PURPOSE, AND THE INVESTMENTS IN SHARES NO DISALLOWANCE COULD BE MADE U / S 14A OF THE ACT. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE CIT(A) PARTLY ALLOWED THE APPEAL OF THE ASSESSEE BY OBSERVING AS UNDER: 5. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER, FACTS OF THE CASE, SUBMISSIONS ALONG WITH CASE LAW SUBMITTED BY THE APPELLANT. THE ASSESSING OFFICER HAD DISA LLOWED THE INTEREST ON UNSECURED LOANS OF RS.1,18,53,481 / - U / S 14A OF RS.46,53,855 / - AND THE BALANCE OF RS.71,99,626 / - U / S 36(1) OF THE IT ACT. IN THIS REGARD, THE SUBMISSIONS OF THE APPELLANT WERE VERIFIED AND FOUND THAT THE ACTION OF THE ASSESSING OFFICE R IS ILLOGICAL. FROM THE DETAILS OF THE APPELLANT IT WAS OBSERVED THAT THE APPELLANT HAS TAKEN UNSECURED LOAN OF RS.2,07,35,119 / - ON WHICH THE INTEREST OF RS.1,18,53,481 / - I.E. ROUGHLY 10% WAS DEBITED TO P&L I.T.A. NO. 1794 /HYD/1 7 PITTI ELECTRICAL EQUIPMENT PVT. LTD., HYD. 4 ACCOUNT. THERE ARE FURTHER, RS.9,60,40,000 / - UNS ECURED LOANS FREE OF INTEREST. THE APPELLANT HAS SHOWN ON 31/03/2013 ADVANCES OF RS.15,22,44,550 / - AND WITH INTEREST FREE AND INVESTMENT IN SHARES WAS OF RS.3,12, 00,000/ - . THEREFORE, THE APPELLANT PAID INTEREST ON LOAN OF RS.12.75 CRORES BUT NOT RECEIVED A NY INTEREST ON ADVANCES. THE TOTAL UNSECURED LOANS WERE OF RS.22.36 CRORES OUT OF WHICH INTEREST FREE WERE OF RS.9.60 CRORES. THE TOTAL ADVANCES WERE OF R S .18.34 CRORES INCLUDING INVESTMENT IN SHARES OF RS.3.12 CRORES. THEREFORE, FROM THE DETAILS IT SHOULD BE ANALYZED THAT MAJOR AMOUNT OF RS.12.41 CRORES ADVANCES TO PITTI CASTINGS PVT. LTD. WHICH IS A SISTER CONCERN WITHOUT INTEREST. THEREFORE, IT SHOULD BE TAKEN AS INTEREST PAID WILL BE LESS IF INTEREST FREE AMOUNTS NOT GIVEN OR GIVEN WITH INTEREST. THEREF ORE, THE SAME RATE OF INTEREST @10% OF THE SAME TO BE RECEIVED ON ADVANCES OF R . .15.22 CRORES WHICH WORKS OUT TO RS.1.52 CRORES. THE APPELLANT HAD ALREADY DEBITED AS RS.1.18 CRORES AS INTEREST, THEREFORE, EXCESS OF RS.34, 00,000/ - TO BE DISALLOWED FROM THE INTEREST PAYMENTS. THEREFORE, THE ASSESSING OFFICER IS DIRECTED TO CONFIRM RS.34.00 LAKHS IN PLACE OF RS.1.18 CRORES. 6. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS OF APPEAL: 1. THE CIT (A) ERRED IN RESTRICTING THE DISALLOWANCE OF INTEREST MADE BY THE AO U/S 14A AND 37(1) FROM RS. 1,18,53,481/ - TO RS. 34,00,000/ - . 2. THE CIT(A) ERRED IS NOT ADJUDICATING SEPARATELY ON THE TWO DISALLOWANCES MADE U/S 14A AND 37(1). 3. THE CIT(A) ERRED IN IGNORING THAT AS STATED BY THE AO AT PARA 3.1 OF THE ASSESSMENT ORDER, THE DISALLOWANCE U/S 14A AS WORKED OUT BY THE ASSESSEE ITSELF AMOUNTED TO RS.46,53,855/ - . 4. THE CIT(A) ERRED IN IGNORING THE FACT THAT THE ASSESSEE HAD EARNED EXEMPT INCOME OF RS. 1,04,70,000/ - . 5. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME OF HEARING. 7. LD. DR SUBMITTED THAT THE DISALLOWANCE OF RS. 34 LAKHS AS DIRECTED BY LD. CIT(A) IS FACTUALLY WRONG. THE ASSESSEE I.T.A. NO. 1794 /HYD/1 7 PITTI ELECTRICAL EQUIPMENT PVT. LTD., HYD. 5 ITSELF AGREED FOR DISALLOWANCE U/S 14A TO THE EXTENT OF RS. 46.54 LAKHS. LD. CIT(A) HAS IGNORED THE FACT THAT AO HAS DISALLOWED THE INTEREST U/S 37(1) AND SHE HAS NOT ADJUDICATED THE DISALLOWANCE U/S 37(1) AT ALL. HE SUBMI TTED THAT IT MAY BE REMITTED BACK TO CIT(A) TO VERIFY AND ADJUDICATE WITH FACTUAL ISSUE UNDER CONSIDERATION. 8. LD. AR SUBMITTED THAT THE FACTS WERE SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE IS UTILIZING BOTH TYPE OF FUNDS I.E. INTEREST BEARING AND INTER EST - FREE. THE ASSESSEE BORROWED FUNDS FOR ITS OWN REQUIREMENTS AND THE INVESTMENTS WERE OUT OF INTEREST FREE FUNDS AVAILABLE AT THE DISPOSAL OF THE ASSESSEE. HE AGREED THAT IT SHOULD BE REMITTED BACK TO CIT(A). 9. CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL ON RECORD. WE NOTICE THAT ASSESSEE HAS INTEREST FREE FUNDS AT ITS DISPOSAL TO THE EXTENT OF RS. 10.39 CRORES AND BORROWED UNSECURED LONG TERM LOAN FROM ITS PROMOTERS/SHARE HOLDERS AS WELL AS UNSECURED SHORT TERM BORROWINGS FROM INTER CORP ORATE AND SHARE HOLDERS TO THE EXTENT OF RS. 10.93 CRORES AND 11.68 CRORES RESPECTIVELY. AT THE SAME TIME, ADVANCED RS. 15.24 CRORES TO ITS RELATED PARTIES. WE FURTHER NOTICE THAT ASSESSEE PAID RS. 1.18 CRORES AS INTEREST ON UNSECURED LOANS AND RECEIVED RS . 58.76 AS INTEREST ON DEPOSITS. THE AO WITHOUT PROPER VERIFICATION, DISALLOWED TOTAL INTEREST EXPENDITURE PARTLY U/S 14A AND BALANCE U/S 37(1) OF THE ACT. AS FAR AS 14A DISALLOWANCE IS CONCERNED, ASSESSEE AGREED FOR THE DISALLOWANCE AS THE SAME WAS SUBMIT TED BY ASSESSEE AS PER RULE 8D. IN OUR VIEW, AO CANNOT DISALLOW THE ENTIRE INTEREST CLAIMED U/S 37(1) WITHOUT PROPER VERIFICATION, BUT, FUNDS WERE UTILIZED BY THE ASSESSEE IN ITS BUSINESS. THE SECURED LOAN FROM BANK WAS TOWARDS STOCK HOLDINGS BUT WE NOTICE THAT ASSESSEE HAS SUNDRY DEBTORS WHICH IS OUTSTANDING BEYOND 6 MONTHS. THEREFORE, ASSESSEE HAS UTILIZED THE FUNDS BORROWED I.T.A. NO. 1794 /HYD/1 7 PITTI ELECTRICAL EQUIPMENT PVT. LTD., HYD. 6 FROM OUTSIDE. HENCE, WE ARE INCLINED TO REMIT THIS ISSUE BACK TO THE AO TO VERIFY THE SUBMISSION OF THE ASSESSEE AND ALLOW THE DEDUC TION U/S 37(1) AS PER LAW. NEEDLESS TO SAY, ASSESSEE MAY BE GIVEN PROPER OPPORTUNITY OF BEING HEARD. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 10 TH MAY , 201 9. SD/ - ( P. MADHAVI DEVI ) JUDICIAL MEMBER SD/ - ( S. RIFAUR RAHMAN ) ACCOUNTANT MEMBER HYDERABAD, DATED 10 TH MAY , 201 9. KV COPY FORWARDED TO: 1. DCIT, CIRCLE 16(2), 2 ND FLOOR, B BLOCK, IT TOWERS, AC GUARDS, MASAB TANK, HYD. 2 . M/S PITTI ELECTRICAL EQUIPMENT PVT. LTD., 6 - 3 - 648/2, MOTHI BHAVAN, SOMAJIGUDA, HYD . 3 . CIT (A) - 4 , HYDERABAD 4. PR. CIT 4 , HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE