Gujarat Alkalies & Chemicals Ltd., Baroda V. The Dy.CIT.,Circle-1(1), Baroda

ITA 1983/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 89425 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-05-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 21-04-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 09-08-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SONIA KUMAR
• Assessee Lawyers: SUNIL H TALATI
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD (BEFORE SHRI SHAILENDRA KR. YADAV, J.M. & SHRI ANIL CHATURVEDI, A.M.) I.T. A. NO. 1983/AHD/2011 (ASSESSM ENT YEAR: 2006-07) GUJARAT ALKALIES AND CHEMICALS LTD. NEAR IPCL COMPLEX, P.O PETROCHEMICALS, DIST. BARODA-39134 V/S THE D.C.I.T., CIRCLE-1(1), BARODA (APPELLANT) (RESPONDENT) PAN: AAACG8896M APPELLANT BY : SHRI SUNIL. H. TALATI, A.R . RESPONDENT BY : SMT. SONIA KUMAR, SR. D.R. ( )/ ORDER DATE OF HEARING : 21-04-2015 DATE OF PRONOUNCEMENT : 07-05-2015 PER SHRI ANIL CHATURVEDI,A.M. 1. THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF CIT(A)-I, BARODA DATED 16.06.2011 FOR A.Y. 2006-07. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER. 3. ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN THE B USINESS OF MANUFACTURING OF CAUSTIC SODA, SODA, ASH AND OTHER CHEMICALS. IN THIS CASE INITIALLY ASSESSMENT U/S. 143(3) WAS COMPLETED ON 26.12.2008 AND THE TOTAL INCOME WAS DETERMINED AT RS. 221,56,17,885/-. SUBSEQUENTLY , NOTICE U/S. 148 WAS ITA NO1983/A HD/2011 . A.Y. 2006-0 7 2 ISSUED AND CASE WAS RE-OPENED AND THEREAFTER THE AS SESSMENT WAS FRAMED ON 07.12.2010 U/S. 143(3) R.W.S. 147 OF THE ACT AND T HE TOTAL INCOME WAS DETERMINED AT RS. 113,25,42,512/-. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO VIDE ORDER DATED 16.06.2011 GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUND;- 1. THE ORDER PASSED BY THE HONORABLE COMMISSIONER OF I NCOME TAX (APPEALS)-I IS BAD IN LAW, CONTRARY TO LEGAL PRONOUNCEMENTS AND SAME B E QUASHED. 2. THE HON'BLE CIT (A)-L HAS ERRED IN CONFIRMING THE A DDITION OF RS.65.08 LACS MADE BY AO BY INVOKING THE PROVISIONS OF SECTION 14A R.W.R. 8D OF THE ACT. YOUR APPELLANT SUBMITS THAT THE DISALLOWANCE MADE IS CHANGE OF OPI NION AND REOPENING IS NOT JUSTIFIED. IT BE HELD SO NOW AND THE ORDER PASSED B Y AO BE DIRECTED TO BE QUASHED. 3. THE HON'BLE CIT (A)-L HAS ERRED IN INVOKING THE PRO VISIONS OF SECTION 14A R.W.R 8D OF THE ACT SINCE THE PROVISIONS OF RULE 8D ARE APPLICA BLE FROM A.Y.08-09. IT BE HELD SO NOW AND ADDITION MADE BY AO BE DELETED NOW. 4. BEFORE US AT THE OUTSET, LD. A.R. SUBMITTED THAT TH OUGH THE ASSESSEE HAS RAISED VARIOUS GROUNDS BUT THE ONLY ISSUE IS WITH R ESPECT TO DISALLOWANCE U/S. 14A . 5. IN THE ORIGINAL ASSESSMENT DATED 26.12.2008 PASSED U/S. 143(3) DISALLOWANCE U/S. 14A AT 10% OF THE INCOME EXEMPT WAS MADE ON TH E GROUND THAT THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME W AS NOT DISALLOWED BY THE ASSESSEE. THE AFORESAID ADDITION MADE IN THE ORIGIN AL ASSESSMENT WAS NOT CHALLENGED BY THE ASSESSEE. IN THE RE-OPENED ASSESS MENT THE ISSUE OF DISALLOWANCE U/S. 14A WAS AGAIN CONSIDERED BY THE A .O, THE DISALLOWANCE U/S. 14A READ WITH RULE 8D WAS WORKED OUT AT RS. 86 ,04,000/-. AGGRIEVED ITA NO1983/A HD/2011 . A.Y. 2006-0 7 3 BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER B EFORE LD. CIT(A) WHO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE S UBSTANTIALLY UPHELD THE ORDER OF A.O BY HOLDING AS UNDER:- 5,2 I HAVE CONSIDERED THE MATTER. IN THE ORIGINAL A SSESSMENT U/S 143(3) COMPLETED ON 26,12.2008, DISALLOWANCE U/S 14A WAS MADE @ 10% OF INCOME EXEMPT U/S 10(34)/10(35) OF RS.2,28,79,243/- BEING DIVIDEND AND RS.6,7 1,824/- BEING TAX FREE INTEREST. THE DISALLOWANCE WAS MADE ON THE GROUND THAT EXPEND ITURE INCURRED IN RELATION TO EXEMPT INCOME HAD NOT BEEN DISALLOWED BY THE APPELL ANT ON ITS OWN IN THE RETURN FILED. APPELLANT DID NOT CHALLENGE THE DISALLOWANCE MADE F URTHER IN APPEAL AND ACCEPTED THE SAME, AS SEEN FROM FORM NO,35 FOR AY 2006-07 FILED ON 20,1,2009 APPEALING AGAINST ORIGINAL ASSESSMENT ORDER, WHICH WAS DISPOSED OF TH ROUGH ORDER NO. CAB-1/284/08-09 BY MY ID. PREDECESSOR, CIT(A)-I, BARODA ON 30,10,2009. APPELLANT'S CONTENTION THAT NO DISALLOWANCE WAS REQUIRED TO BE MADE U/S 14A DUE TO NO EXPENDITURE BEING ATTRIBUTABLE TO EXEMPT INCOME IS NOT TENABLE WHEN APPELLANT ITSE LF ACCEPTED THE DISALLOWANCE MADE U/S 14A IN THE ASSESSMENT. WITHOUT PREJUDICE, APPELLANT 'S CONTENTION THAT NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT DIVIDEND AND INTEREST I NCOME CANNOT BE ACCEPTED SINCE APPELLANT HAD INCURRED INTEREST EXPENDITURE OF RS,9 04 LAKH OTHER THAN INTEREST ATTRIBUTABLE TO TERM LOAN OR HIRE/PURCHASE LOANS. S UCH INTEREST WAS NOT ATTRIBUTABLE TO ANY PARTICULAR ASSET AND IS TO BE ATTRIBUTED/APPORTIONE D TO VARIOUS INCOME EARNING ACTIVITIES IN A REASONABLE MANNER, FURTHER, APPELLANT'S INVEST MENT IN SHARES ETC, STOOD AT RS.122.48 CRORE AS ON 31.3.2006 AS AGAINST INVESTMENTS OF RS. 62,5 CRORE ON 31,3,2005, I.E. THERE WAS INCREASE IN INVESTMENT IN SHARES BY A SIGNIFICA NT AMOUNT DURING THE YEAR. DURING THE YEAR, APPELLANT MADE PROMOTER'S CONTRIBUTION UNDER THE PUBLIC ISSUE OF GUJARAT STATE FERTILIZERS & CHEMICALS LTD., THEREBY RECEIVING 88, 23,529 EQUITY SHARES. INVESTMENT OF THIS MAGNITUDE WOULD OBVIOUSLY REQUIRE DECISION MAK ING AND OTHER EFFORTS BY THE TOP MANAGEMENT IN THIS REGARD. FURTHER, IT CANNOT BE DE NIED THAT MANAGEMENT OF INVESTMENTS WOULD HAVE REQUIRED TIME AND ATTENTION OF APPELLANT 'S STAFF AS WELL AS TOP MANAGEMENT, WHOSE ENTIRE SALARIES ARE CHARGED AGAINST TAXABLE I NCOME. APPELLANT'S IS, THEREFORE CLEARLY A CASE WHERE CORRECTNESS OF THE CLAIM OF NO EXPENDITURE IN RESPECT OF EXEMPT INCOME WAS NOT ACCEPTABLE I.E. IT: WAS A FALLING U/ S 14A(2). AS HELD BY BOMBAY HIGH COURT IN THE OF GODREJ & BOYCE MANUFACTURING CO, LT D., RULE 8D IS NOT APPLICABLE ITA NO1983/A HD/2011 . A.Y. 2006-0 7 4 RETROSPECTIVELY, I.E. PRIOR TO AY 08-09 AND THE DIS ALLOWANCE U/S 14A IS TO BE MADE IN A REASONABLE MANNER. IN THE ORIGINAL ASSESSMENT, DISA LLOWANCE WAS MADE IN AN AD HOC MANNER WHICH CANNOT BE CALLED REASONABLE. IT WOULD BE REASONABLE TO APPORTION THE INTEREST EXPENSE ATTRIBUTABLE TO INVESTMENT IN TAX FREE INCOME YIELDING ASSETS IN THE RATIO OF AVERAGE VALUE OF SUCH INVESTMENTS AND AVERAGE VA LUE OF TOTAL ASSETS. INTEREST ON TERM LOAN AND INTEREST ON HIRE/PURCHASE IS TO BE EXCLUDE D FROM TOTAL INTEREST EXPENDITURE THEREBY RESULTING IN APPORTIONABLE INTEREST OF RS,9 04 LAKH. APPELLANT'S CONTENTION THAT INTEREST INCOME OF RS.22.94 LAKH IS TO BE REDUCED I S NOT ACCEPTABLE FIRSTLY IN THE ABSENCE OF PROOF THAT INTEREST PAID OF RS.904 LAKH WAS PART LY TOWARDS INVESTMENTS, WHICH YIELDED INCOME OF RS,22.94 LAKH. SECONDLY, DUE TO {APPORTIO NING OF INTEREST IN THE RATIO OF AVERAGE VALUE OF INVESTMENTS YIELDING TAX FREE INCO ME TO AVERAGE VALUE OF TOTAL ASSETS, INTEREST ATTRIBUTED IS ONLY THAT MUCH, WHICH IS TOW ARDS TAX FREE INCOME YIELDING ASSETS. THERE IS NO NEED TO FURTHER REDUCE INTEREST RECEIVE D FROM INTEREST COMPUTED IN THIS MANNER. APPELLANT'S CONTENTION FOR INCLUDING MISCEL LANEOUS EXPENSES IN TOTAL IS IN THE CONTEXT OF COMPUTATION DONE UNDER RULE 8D, THE COMP UTATION TO BE DONE FOR AY 2006-07 IS NOT AS PER RULE 8D. AS SUCH, THIS CONTENTION IS NOT RELEVANT. 'MISCELLANEOUS EXPENDITURE' APPEARING ON OF BALANCE SHEET IS NOT A TANGIBLE AND HENCE FOR COMPUTING INTEREST ATTRIBUTABLE TO INVESTMENTS YIELDING TAX F REE INCOME, THE SAME IS NOT TO BE TAKEN INTO ACCOUNT. INTEREST ATTRIBUTABLE TO TAX FREE INC OME THUS WORKS OUT TO RS.63.63 LAKH BEING APPORTIONMENT OF RS,904 LAKH (INTEREST) IN TH E RATIO OF RS.9,250 LAKH (AVERAGE VALUE OF INVESTMENTS) AND RS. 1,3.1,410 LAKH (AVERAGE VAL UE OF TOTAL ASSETS),, IN ADDITION, ADMINISTRATIVE AND MANAGERIAL EXPENDITURE TOWARDS M ANAGEMENT OF INVESTMENT PORTFOLIO, STRATEGIC DECISION MAKING IN THIS REGARD INCLUDING WHETHER TO INVEST IN PROMOTERS' EQUITY OF GSPC OR NOT, ETC., CONCERNED PERSONS SALARIES ET C., IS TO BE INCLUDED IN DISALLOWANCE U/S 14A, TOTAL AMOUNT CHARGED TO P & L A/C TOWARDS EMPLOYEES'' REMUNERATION, ETC., IS RS.5950.87 LAKH AND TOTAL ADMINISTRATION EXPENSES W ERE RS.2297.79 LAKH [SCHEDULE 19A)), ATTRIBUTION OF ADMINISTRATIVE AND MANAGERIAL EXPENDITURE OF RS.25 LAKH TOWARDS INVESTMENT ACTIVITIES WOULD THEREFORE BE REASONABLE . TO SUM UP, DISALLOWANCE U/S 14A WOULD WORK OUT TO RS.63.63 LAKH PLUS RS.25 LAKH, I. E. RS.88.63 LAKH AS AGAINST RS.109.59 LAKH WORKED OUT AS PER RULE 8D BY THE AO. ADDITION OF RS.88.63 LAKH LESS RS,23.55 LAKH ITA NO1983/A HD/2011 . A.Y. 2006-0 7 5 (MADE IN. ORIGINAL ASSESSMENT) I.E. RS.65.08 LAKH I S THUS DIRECTED TO BE MADE U/S 14A INSTEAD OF RS.86.04 LAKH MADE BY THE AO. 6. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASS ESSEE IS NOW IN APPEAL BEFORE US. 7. BEFORE US, THE ASSESSEE HAS CHALLENGED THE DISALLOW ANCE MADE U/S. 14A. HE REITERATED THE SUBMISSIONS MADE BEFORE LD. CIT(A) A ND SUBMITTED THAT THE DISALLOWANCE U/S. 14A WAS BEEN WORKED OUT AFTER CON SIDERING THE METHOD PRESCRIBED UNDER RULE 8D. HE SUBMITTED THAT THE RUL E 8D IS APPLICABLE FROM A.Y. 2008-09 AND THEREFORE NOT APPLICABLE TO THE YE AR UNDER CONSIDERATION AND THEREFORE PRAYED THAT THE ADDITION MADE U/S. 14 A BE DELETED. IN THE ALTERNATE, LD. A.R. SUBMITTED THAT THE DISALLOWANCE U/S. 14A BE RESTRICTED TO THAT DETERMINED IN THE ORIGINAL ASSESSMENT FRAMED U /S. 143(3). THE LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O AND LD . CIT(A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT CASE, THE ISSUE IS WITH RESPECT TO DISA LLOWANCE U/S. 14A AND THE ASSESSMENT YEAR INVOLVED IS A.Y. 06-07. WE FIND THA T WHILE FRAMING THE ORIGINAL ASSESSMENT U/S. 143(3), DISALLOWANCE U/S. 14A OF RS. 23,51,106/- WAS MADE BY THE A.O AND THE SAME WAS NOT CHALLENGED BY THE ASSESSEE MEANING THEREBY THAT THE ORDER OF A.O WAS ACCEPTED BY THE ASSESSEE. SUBSEQUENTLY IN THE RE-ASSESSMENT PROCEEDINGS THE D ISALLOWANCE U/S. 14A WAS WORKED OUT BY FOLLOWING RULE 8D AND THE DISALLO WANCE WAS ENHANCED FROM RS. 23,51,106/- TO RS. 86,04,000/-. BEFORE US , IT IS THE SUBMISSION OF ASSESSEE THAT THE DISALLOWANCE U/S. 14A IS UNCALLED FOR THE REASON THAT THE DISALLOWANCE HAS BEEN WORKED OUT ON THE BASIS OF RU LE 8D WHICH IS ITA NO1983/A HD/2011 . A.Y. 2006-0 7 6 APPLICABLE FROM A.Y. 08-09 AND THEREFORE IS NOT APP LICABLE TO THE YEAR UNDER CONSIDERATION. ON THE ISSUE OF PLEA OF THE LD. A.R . WITH RESPECT TO DELETION OF ENTIRE DISALLOWANCE U/S. 14A, WE FIND THAT THE HON BLE APEX COURT IN THE CASE OF CIT VS. SUN ENGINEERING WORKS P. LTD. (1992 ) 64 TAXMAN. 442 (SC) HAS HELD THAT THE CLAIMS WHICH HAVE BEEN DISALLOWED IN THE ORIGINAL ASSESSMENT PROCEEDINGS CANNOT BE RE-AGITATED IN THE RE-OPENED ASSESSMENT AND IN THE RE-ASSESSMENT PROCEEDINGS U/S. 147 ASSES SEE CANNOT SEEK A REVIEW OF CONCLUDED ITEM UNCONNECTED WITH ESCAPEMENT OF IN COME FOR PURPOSE OF COMPUTATION OF ESCAPE INCOME. IN VIEW OF THE AFORES AID DECISION OF HONBLE APEX COURT, WE ARE OF THE VIEW THAT THE DISALLOWANC E OF RS. 23,55,106/- MADE IN THE ORIGINAL ASSESSMENT U/S. 143(3) CANNOT BE NOW CHALLENGED BY THE ASSESSEE IN THE RE-ASSESSMENT PROCEEDINGS BECAUSE T HE DISALLOWANCE U/S. 14A MADE IN THE ORIGINAL ASSESSMENT PROCEEDINGS WAS ACCEPTED BY ASSESSEE AND WAS NOT CHALLENGED AND THEREFORE HAD ATTAINED F INALITY. WITH RESPECT TO ISSUE OF THE ADDITIONAL DISALLOWANCE U/S. 14A WORKE D OUT BY FOLLOWING PROVISIONS OF RULE 8D IN THE RE-ASSESSMENT PROCEEDI NGS, WE ARE OF THE VIEW THAT CONSIDERING THE FACT THAT THE ASSESSMENT YEAR INVOLVED IS A.Y. 2006-07 AND IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. 328 ITR 81 (BOM) WHEREIN IT HAS BEEN HELD THAT THE PROVISIONS OF RULE 8D ARE APPLICABLE FROM ASSES SMENT YEAR 2008-09, WE ARE OF THE VIEW THAT THE DISALLOWANCE U/S. 14A CANN OT BE WORKED OUT BY FOLLOWING RULE 8D FOR THE YEAR UNDER CONSIDERATION. FURTHER, ON PERUSING THE AUDITED BALANCE SHEET AS ON 31.03.2006 WHICH IS PLA CED ON RECORD, IT IS SEEN THAT THE INTEREST FREE FUNDS IN THE FORM OF CAPITAL AND RESERVES AVAILABLE WITH THE ASSESSEE ARE TO THE EXTENT OF RS. 72307.34 LACS AS AGAINST THE INVESTMENTS OF RS. 12248.91 LACS MEANING THEREBY THAT THE FREE FUNDS ARE FAR IN EXCESS OF INVESTMENTS. THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. UTI ITA NO1983/A HD/2011 . A.Y. 2006-0 7 7 BANK LTD. (2013) 32 TAXMANN.COM 370 (GUJ), WHERE TH E ASSESSMENT YEAR INVOLVED WAS A.Y. 03-04, HAS HELD THAT IF THERE ARE SUFFICIENT INTEREST FREE FUNDS TO MEET TAX FREE INVESTMENTS, THEY ARE PRESUM ED TO BE MADE FROM INTEREST FREE FUNDS AND NOT LOANED FUNDS AND NO DIS ALLOWANCE CAN BE MADE U/S. 14A. CONSIDERING THE TOTALITY OF THE AFORESAID FACTS AND THE DECISION OF HONBLE HIGH COURTS CITED HEREINABOVE, WE ARE OF TH E VIEW THAT NO ADDITIONAL DISALLOWANCE U/S. 14A BY INVOKING THE PR OVISIONS OF RULE 8D THEN THAT WORKED OUT IN THE ORIGINAL ASSESSMENT PROCEEDI NGS, IS WARRANTED IN PRESENT CASE. WE THEREFORE RESTRICT THE DISALLOWANC E MADE U/S. 14A TO RS. 23,55,106/- THAT WAS MADE WHILE FRAMING THE ORIGINA L ASSESSMENT U/S. 143(3) OF THE ACT AND DIRECT THE DELETION OF FURTHER DISAL LOWANCE OF RS. 62,52,894/- MADE U/S. 14A IN THE RE-ASSESSMENT PROCEEDINGS. WE THUS DIRECT ACCORDINGLY. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 07 - 05 - 2015. SD/- SD/- (SHAILENDRA KR. YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AH MEDABAD