Ajinkya Electromelt Pvt.Ltd, Pune V. Deputy Commissioner of Income-tax, Circle - 8, Pune

ITA 1828/PUN/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9133 (ITAT-PUNE)
• Duration Of Justice: 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 28-07-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: R G NAHAR
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 1828 /P U N/20 17 / ASSESSMENT YEAR : 20 1 3 - 1 4 AJINKYA ELECTROMELT PVT. LTD., KHANDELWAL JAIN & ASSOCIATES, 1 ST FLOOR, ALANKAR CINEMA BUILDING, ABOVE UNITED BANK, PUNE 411001 . / APPELLANT PAN: A ABCA5142M VS. T HE DY. COMMISSIONER OF INCOME TAX , CIRCLE 8, PUNE . / RESPONDENT / APPELLANT BY : SHRI R.G. NAHAR / RESPONDENT BY : SHRI ACHAL SHARMA, ADDL.CIT / DATE OF HEARING : 0 5 . 0 3 .20 1 8 / DATE OF PRONOUNCEMENT: 21 . 0 3 .201 8 / ORDER PER SUSHMA CHOWLA, J M : TH E APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT(A) - 6 , PUNE , DATED 2 2 . 05 .201 7 RELATING TO ASSESSMENT YEAR 20 1 3 - 1 4 AGAINST ORDER PASSED UNDER S ECTION 143(3) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APPEAL: - 1. ON THE FACTS AND CIRCUMSTANCES PREVAILING IN THE CASE AND AS PER PROVISIONS & SCHEME OF THE ACT IT BE HELD THAT THE DISALLOWANCE OF RS.1,20,33,699/ - MADE U/S 14A R.W. RULE 8D OF THE INCOME TAX RULE IS NOT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT & JUDICIAL PRONOUNCEMENTS MADE IN THIS BEHALF. THE DISALLOWANCE SO MADE BE DELETED. ITA NO. 1828 /P U N/20 17 AJINKYA ELECTROMELT PVT. LTD. 2 3. THE ISSUE RAISED IN THE PRESENT APPEAL IS AGAI NST DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF INCOME TAX RULES, 1962 (IN SHORT THE RULES) AT 1,20,33,699/ - . 4. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING IN STEEL PRODUCTS. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD FURNISHED THE RETURN OF INCOME DECLARING TOTAL INCOME OF 1,15,78,410/ - . THE ASSESSEE HAD DERIVED TAX FREE DIVIDEND INCOME OF 40,62,488/ - . THE ASSESSING OFFICER NOTED THAT DURING THE YEAR UNDER CONSIDERATI ON, THE ASSESSEE HAD DERIVED THE SAID INCOME FROM INVESTMENTS MADE AT 22,56,86,109/ - . FURTHER, THE ASSESSEE HAD DEBITED INTEREST EXPENDITURE OF 2,88,97,978/ - . THE ASSESSEE WAS THUS ASKED AS TO WHY DISALLOWANCE SHOULD NOT BE MADE AS PER PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES. THE SUBMISSIONS OF ASSESSEE BEFORE THE ASSESSING OFFICER WERE THAT TOTAL INVESTMENT WAS MADE IN SHARES AS LONG TERM INVESTMENTS OF 19.70 CRORES AND IN FERROTHERM PARTNERSHIP FIRM AT 50,67,663/ - . THE TOTAL INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE COMPRISED OF SHARE CAPITAL OF 5 LAKHS AND RESERVES & SURPLUS OF 27.48 CRORES, WHICH WAS MUCH MORE THAN FUNDS INVESTED. RELYING ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS . RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM) , T HE ASSESSEE STATED THAT NO DISALLOWANCE IS TO BE MADE OUT OF INTEREST EXPENDITURE. FURTHER, THE ASSESSEE ALSO RELIED ON THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF DELHI IN JOINT INVESTME NTS PVT. LTD. VS. CIT IN ITA NO.117/2015, JUDGMENT DATED 25.02.2015 FOR THE PROPOSITION THAT AT BEST THE DISALLOWANCE UNDER SECTION 14A OF THE ACT IF HAS TO BE MADE, THEN THE SAME IS TO BE RESTRICTED TO THE AMOUNT OF EXEMPT ITA NO. 1828 /P U N/20 17 AJINKYA ELECTROMELT PVT. LTD. 3 INCOME. THE SECURED LOAN OF COS MOS BANK OF 5 CRORES WAS UTILIZED FOR WORKING CAPITAL , IN ANY CASE . THE ASSESSING OFFICER REJECTING THE PLEA OF AVAILABILITY OF NON - INTEREST BEARING FUNDS FOR MAKING THE AFORESAID INVESTMENTS ALSO RECORDED SATISFACTION AS TO INVOKING OF SAID SECTION , IN THE ABSENCE OF ASSESSEE HAVING DISALLOWED ANY PART OF EXPENDITURE RELATABLE TO EARNING OF EXEMPT INCOME. THE ASSESSING OFFICER ALSO TOOK NOTE OF RELIANCE OF ASSESSEE ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. HDFC BANK LTD. (2014) 366 ITR 505 (BOM) AND REFERRED TO THE BALANCE SHEET OF SAID CONCERN AND OBSERVED THAT DISALLOWANCE NEEDS TO BE WORKED OUT IN VIEW OF PROVISIONS OF RULE 8D OF THE RULES. THE ASSESSING OFFICER THUS, DISALLOWED UNDER RULE 8D(II) OF THE RULE S AT 1,19,26,198/ - AND UNDER RULES 8D(III) OF THE RULES AT 1,07,501/ - , TOTAL DISALLOWANCE BEING 1,20,33,699/ - . 5. THE CIT(A) UPHELD THE ORDER OF ASSESSING OFFICER ON THE GROUND THAT THE RATIO LAID DOWN BY HONBLE BOMBAY HIGH COURT IN CIT VS. RELIANC E UTILITIES AND POWER LTD. (SUPRA) WAS WHILE DECIDING THE MATTER UNDER SECTION 36(1)(III) OF THE ACT AND FURTHER THE ISSUE DECIDED IN CIT VS. HDFC BANK LTD. (SUPRA) PERTAINED TO ASSESSMENT YEARS 2001 - 02 TO 2005 - 06, WHERE THE RELEVANT PROVISIONS OF SECTION 14A OF THE ACT WERE AT VARIANCE. FURTHER, RULE 8D OF THE RULES HAD BEEN BROUGHT ON THE STATUTE ONLY W.E.F. 24.03.2008 AND BECAUSE OF SUBSEQUENT CHANGE IN LAW, THE EARLIER DECISIONS WERE NOT APPLICABLE. THE CIT(A) UPHELD THE WORKING ADOPTED BY THE ASSESSI NG OFFICER UNDER RULE 8D OF THE RULES. THE CIT(A) ALSO HELD THAT THERE WAS NO REQUIREMENT OF RECORDING ANY SATISFACTION BY THE ASSESSING OFFICER AND SATISFACTION, IF ANY, IS TO BE RECORDED, ONLY IF CERTAIN EXPENDITURE IS CLAIMED TOWARDS EXEMPT INCOME AND THE ASSESSING OFFICER WAS TO SATISFY THE CORRECTNESS OF SAID EXPENDITURE. ITA NO. 1828 /P U N/20 17 AJINKYA ELECTROMELT PVT. LTD. 4 6. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 7. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE RELYING ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT I N HDFC BANK LTD. VS. DCIT & ORS. (2016) 383 ITR 529 (BOM) HELD THAT IN VIEW OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE, NO DISALLOWANCE WAS TO BE MADE ON ACCOUNT OF INTEREST EXPENDITURE, IF ANY, RELATABLE TO EARNING OF EXEMPT INCOME. OUR ATTENTION WAS DRAWN TO THE BALANCE SHEET PLACED AT PAGE 11 OF THE PAPER BOOK TO POINT OUT THAT THE ASSESSEE HAD SHARE CAPITAL OF 5 LAKHS AND RESERVES & SURPLUS TO THE TUNE OF 27.49 CRORES, WHICH WERE COMPLETELY INTEREST FREE, AS AGAINST THE SAME, INVESTMENTS WERE TO THE TUNE OF 22,56,86,109/ - . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT IN ASSESSMENT YEARS 2011 - 12 AND 2012 - 13 WHEN INVESTMENTS WERE TO THE TUNE OF 15.40 CRORES AND 20.43 CRORES AND WHERE FREE RESERVES WERE AVAILABLE TO THE TUNE OF 23.29 CRORES AND 26.09 CRORES, NO DISALLOWANCE WAS MADE ON ACCOUNT OF INTEREST RELATABLE T O EXEMPT INCOME UNDER RULE 8D(II) OF THE RULES. THE INSTANT ASSESSMENT YEAR WAS THE FIRST YEAR WHEN THE DISALLOWANCE WAS MADE AND ALSO IN ASSESSMENT YEAR 2014 - 15, SIMILAR DISALLOWANCE WAS MADE. HOWEVER, IN ASSESSMENT YEAR 2015 - 16 WHEN INVESTMENT IN CURRE NT ASSETS WAS TO THE TUNE OF 19. 11 CRORES AND RESERVES & SURPLUS WAS AVAILABLE OF 30.43 CRORES, NO DISALLOWANCE OF ANY KIND WAS MADE. HE FURTHER PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE HIGH COURT OF DELHI IN JOINT INVESTMENTS PVT. LTD. VS. CIT (SUPRA) , WHEREIN IT HA S BEEN HELD THAT DISALLOWANCE UNDER SECTION 14A OF THE ACT IS ONLY TO THE EXTENT OF DISALLOWING THE EXPENDITURE, INCURRED BY THE ASSESSEE IN RELATION TO TAX EXEMPT INCOME COULD BE INTERPRETED TO MEAN THAT THE ENTIRE TAX EXEMPT INCOME WAS TO BE DISALLOWED. THE LEARNED AUTHORIZED ITA NO. 1828 /P U N/20 17 AJINKYA ELECTROMELT PVT. LTD. 5 REPRESENTATIVE FOR THE ASSESSEE ALSO STRESSED THAT NO SATISFACTION WAS RECORDED BY THE ASSESSING OFFICER BEFORE INVOKING PROVISIONS OF SECTION 14A OF THE ACT. 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FAIRLY POINTE D OUT THAT SATISFACTION WAS DULY RECORDED BY THE ASSESSING OFFICER WHICH IS CLEAR FROM PERUSAL OF ASSESSMENT ORDER ITSELF. FURTHER, THE DISALLOWANCE HAS BEEN WORKED OUT AS PER PROVISIONS OF THE ACT AND THERE IS NO MERIT IN THE PLEA OF ASSESSEE THAT NO DIS ALLOWANCE IS TO BE MADE BECAUSE OF RESERVES & SURPLUS AVAILABLE, WHERE THE SAID RESERVES & SURPLUS HAS BEEN UTILIZED BY THE ASSESSEE FOR CARRYING OUT ITS BUSINESS. ANOTHER POINT WHICH WAS RAISED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE W AS THE COMPUTATION OF DISALLOWANCE WHICH WAS AS PER RULE 8D OF THE RULES, WHICH WAS TO BE APPLIED FOR WORKING OUT THE DISALLOWANCE. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES IN THE PRESENT APPEAL IS THE APPLICA BILITY OF PROVISIONS OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES. THE ASSESSEE HAS SHOWN TAX FREE INCOME IN THE FORM OF DIVIDEND FROM SHARES AT 40,62,488/ - AND SHARE OF PROFIT FROM PARTNERSHIP FIRM AT 28,10,647/ - . THE ASSESSING OFFICER WAS OF THE VIEW THAT IN VIEW OF EXEMPT INCOME EARNED BY THE ASSESSEE, THEN DISALLOWANCE HAS TO BE WORKED OUT UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES AND HENCE, DISALLOWANCE IN THE HANDS OF ASSESSEE. THE CASE OF ASSESSEE ON THE OTHER HAND, IS THAT IT HAD SUFFICIENT NON - INTEREST BEARING FUNDS AVAILABLE WITH IT WHICH COULD JUSTIFY THE INVESTMENT IN EQUITIES FROM WHICH EXEMPT INCOME WAS EARNED A ND THERE WAS NO MERIT IN MAKING ANY DISALLOWANCE ITA NO. 1828 /P U N/20 17 AJINKYA ELECTROMELT PVT. LTD. 6 OUT OF INTEREST EXPENDITURE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D(II) OF THE RULES. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD. VS. DCIT (2016) 383 ITR 529 (BOM) HAS RELIED ON THE R ATIOS LAID DOWN IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (SUPRA) AND IN CIT VS. HDFC BANK LTD. (SUPRA) AND HAD OBSERVED THAT WHERE BOTH INTEREST FREE FUNDS AND INTEREST BEARING FUNDS WERE AVAILABLE AND THE INTEREST FREE FUNDS WERE MORE THAN INVESTMENTS MADE, THEN THE PRESUMPTION WAS THAT INVESTMENT IN TAX FREE SECURITIES WOULD HAVE BEEN MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. SUCH WAS THE PROPOSITION LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (SUPRA) , T HOUGH, IN THE CONTEXT OF SECTION 36(1)(III) OF THE ACT . T HE HONBLE HIGH COURT OBSERVED THAT THE SAME WAS CONSCIOUSLY APPLIED BY THE COURT WHILE INTERPRETING SECTION 14A OF THE ACT IN CIT VS. HDFC BANK LTD. (SUPRA). IN OTHER WORDS, PRESUMPTION LAID DOWN IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (SUPRA) IS WITH REGARD TO INVESTMENT IN TAX FREE SECURITIES COMING OUT OF ASSESSEES OWN FUNDS. IN CASE, THEY WERE IN EXCESS TO INVESTMENTS MADE IN SECURITIES, NOTWITHSTANDING THE FACT THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON INTEREST , T HE SAID PROPOSITION WAS APPLICABLE WHILE APPLYING PROVISIONS OF SECTION 14A OF THE ACT. IN THE FAC TS OF THE CASE BEFORE THE HONBLE HIGH COURT, THE ASSESSEE HAD PAID INTEREST ON BORROWED FUNDS AND HAD CLAIMED THE DEDUCTION THEREOF. HOWEVER, THE ASSESSEE DID NOT DISALLOW ANY EXPENDITURE ON THE INCOME EARNED ON TAX FREE SECURITIES ON THE GROUND THAT THE SAID INVESTMENT WAS MADE OUT OF ITS TAX FREE FUNDS AVAILABLE. THUS, NO DISALLOWANCE WAS TO BE MADE ON THE EXPENDITURE CLAIMED AS INTEREST PAID ON BORROWED FUNDS. THE HONBLE HIGH COURT ALSO LAID DOWN THE PRINCIPLE VIS - - VIS EFFECT OF DECISION OF JURISDI CTIONAL HIGH COURT AND COORDINATE TRIBUNALS AND THE AUTHORITIES THEREUNDER. ITA NO. 1828 /P U N/20 17 AJINKYA ELECTROMELT PVT. LTD. 7 10. APPLYING THE SAID PRINCIPLE TO THE FACTS OF PRESENT CASE, WHERE THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE IN THE FORM OF SHARE CAPITAL AND RESERVES & SURPLUS I.E. GENERATED OUT OF ITS INCOME FROM YEAR TO YEAR, THEN PRESUMPTION IS THAT INVESTMENT IN TAX FREE SECURITIES HAS BEEN MADE OUT OF SAID NON - INTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE. ACCORDINGLY, WE HOLD SO. CONSEQUENTLY, NO DISALLOWANCE OF AN Y PART OF INTEREST EXPENDITURE IS TO BE MADE SINCE IT IS NOT THE CASE OF REVENUE THAT INVESTMENT IN TAX FREE SECURITIES HAS BEEN MADE OUT OF SUCH INTEREST BEARING FUNDS. IN ANY CASE, THE ISSUE STANDS SETTLED BY THE HONBLE BOMBAY HIGH COURT IN HDFC BANK L TD. VS. DCIT (2016) 383 ITR 529 (BOM) , WHEREIN THE APPEAL RELATES TO ASSESSMENT YEAR 2008 - 09 I.E. THE YEAR WHEN PROVISIONS OF RULE 8D OF THE RULES HAD COME ON STATUTE AND APPLYING THE SAID RATIO TO THE FACTS OF THE PRESENT CASE, WE HOLD THAT NO DISALLOWANC E OUT OF INTEREST EXPENDITURE IS TO BE MADE IN THE HANDS OF ASSESSEE BECAUSE OF AVAILABILITY OF NON - INTEREST BEARING FUNDS BEING MORE THAN INVESTMENTS MADE ON WHICH THE INCOME WAS EXEMPT FROM TAX. FURTHER, ON INVESTMENTS MADE IN EARLIER AND LATER YEARS AL SO, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES HAS BEEN MADE IN ASSESSMENT YEARS 2011 - 12, 2013 - 14 AND 2015 - 16. HOWEVER, DISALLOWANCE WORKED OUT UNDER RULE 8D(III) OF THE RULES AT 1,07,501/ - STANDS UPHELD. ACCORDINGLY, W E ALLOW THE GROUND OF APPEAL RAISED BY THE ASSESSEE. 1 1 . WE ARE NOT ADDRESSING THE OTHER RELATED ISSUES RAISED BY THE ASSESSEE VIS - - VIS SAID DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT, IN VIEW OF OUR ALLOWING THE CLAIM OF ASSESSEE, FOLLOWING THE RATI O LAID DOWN BY THE JURISDICTIONAL ITA NO. 1828 /P U N/20 17 AJINKYA ELECTROMELT PVT. LTD. 8 HIGH COURT IN HDFC BANK LTD. VS. DCIT (2016) 383 ITR 529 (BOM) . THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS THUS, PARTLY ALLOWED. 1 2 . IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 21 ST DAY OF MARCH , 201 8 . SD/ - SD/ - ( ANIL CHATURVEDI ) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 21 ST MARCH , 20 1 8 . G G C C V V S S R R / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE C I T (A) - 6 , PUNE ; 4. THE PR. C I T - 5 , PUNE ; 5 . , , / DR A , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE