M/s. Madhu Silica Pvt.Ltd., Bhavnagar V. The ACIT.,Circle-1, Bhavnagar

ITA 2230/AHD/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 67680 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 04-09-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 01-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J P JANGID
• Assessee Lawyers: T P HEMANI
• Section: 143(3); 14A

Judgement Text

ITA NO 2230 /AHD/2010 . A.Y. 2007- 08 1 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD (BEFORE SHRI MUKUL KR. SHRAWAT, J.M. & SHRI ANIL CH ATURVEDI, A.M.) I.T. A. NO. 2230/AHD/2010 (ASSESSMENT YEAR: 2007-08) M/S MADHU SILICA PVT. LTD., 40, GIDC, CHITRA, BHAVNAGAR. (APPELLANT) VS. THE ACIT, BHAVNAGAR RANGE-1, BHAVNAGAR. (RESPONDENT) PAN: AABCM 4381J APPELLANT BY : SHRI T.P. HEMANI. A.R. RESPONDENT BY : SHRI J.P. JANGID. SR. D.R. ( )/ ORDER DATE OF HEARING :04-09-2013 DATE OF PRONOUNCEMENT : 20-09-2013 PER SHRI ANIL CHATURVEDI,A.M. 1. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF CIT(A)-XX. AHMEDABAD DATED 27.04.2010 FOR A.Y. 2007-08. 2. THE FACTS AS CULLED OUT FROM THE ORDER OF LOWER AUT HORITIES ARE AS UNDER. 3. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF MA NUFACTURING OF VARIOUS GRADES OF PRECIPITATED SILICA. IT ELECTRONI CALLY FILED ITS RETURN OF INCOME FOR AY 2007-08 ON 21.10.2007 DECLARING TOTAL INCOME OF RS 5,42,79,162/-. THE CASE WAS SELECTED FOR SCRUTINY A ND THEREAFTER THE ITA NO 2230 /AHD/2010 . A.Y. 2007- 08 2 ASSESSMENT WAS FRAMED U/S 143(3) VIDE ORDER DATED 1 5.12.2009 AND THE TOTAL INCOME WAS DETERMINED AT 5,56,19,260/-. AGGRI EVED BY THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT( A) VIDE ORDER DATED 27.4.2010 GRANTED PARTIAL RELIEF TO THE ASSESSEE. A GGRIEVED BY THE AFORESAID ORDER OF CIT(A), THE ASSESSEE IS NOW IN A PPEAL BEFORE US AND HAS RAISED THE FOLLOWING EFFECTIVE GROUND. 1. THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACT S IN CONFIRMING THE ACTION OF LD. ASSESSING OFFICER BY INVOKING PROVISIONS OF SEC TION 14A OF THE ACT AND ACCORDINGLY ERRED IN CONFIRMING THE ACTION OF LD. A SSESSING OFFICER IN MAKING ADDITION OF RS. 7,64,096/- U/S. 14A OF THE ACT. 2. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF LD. ASSESSING OFFICER IN RETROSPECTIVELY INVOKIN G THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES WHICH CAME INTO THE STATUTE BO OK WITH EFFECT FROM 24.03.2008 PROSPECTIVELY. 3. THE LD. CIT(A0 HAS GROSSLY ERRED IN LAW AND ON FACT S IN NOT ADJUDICATING GROUND FOR ADDITION OF RS. 4,506/- MADE BY THE LD. ASSESSI NG OFFICER IN RESPECT OF SHORT CREDIT OF INTEREST INCOME. 4. GR. NO 1 & 2 ARE INTERCONNECTED AND ARE WRT DISALLO WANCE U/S 14A: 5. ON PERUSAL OF THE PROFIT AND LOSS ACCOUNT, ASSESSIN G OFFICER NOTICED THAT ASSESSEE HAS EARNED SHARE DIVIDEND OF RS. 44,68,289 /- AND CLAIMED EXEMPTION ON IT U/S 10(34). AO ALSO NOTICED THAT AS SESSEE HAD PAID INTEREST OF RS 2,24,41,516/-. ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM FOR NOT DISALLOWING EXPENDITURE U/S 14A. ASSESSEE INTER ALIA SUBMITTED THAT INVESTMENTS HAVE BEEN MADE FROM OWN FUNDS AND NOT F ROM BORROWED FUNDS AND FURTHER PROVISIONS OF RULE 8D WERE NOT AP PLICABLE TO THE YEAR UNDER CONSIDERATION AND THEREFORE NO DISALLOWANCE O F INTEREST WAS CALLED FOR. AO DID NOT ACCEPT THE CONTENTIONS OF THE ASSES SEE. HE WAS OF THE VIEW THAT PROVISIONS OF S. 14A ARE APPLICABLE WHERE AN ASSESSEE CLAIMS NO EXPENDITURE OR NEGLIGIBLE EXPENDITURE WAS INCURRED FOR EARNING EXEMPT ITA NO 2230 /AHD/2010 . A.Y. 2007- 08 3 INCOME OR WHERE THE AO WAS NOT SATISFIED WITH THE E XPLANATION OF THE ASSESSEE. HE ACCORDINGLY CALCULATED THE DISALLOWANC E BY FOLLOWING THE FORMULA PRESCRIBED UNDER RULE 8D AND WORKED OUT THE DISALLOWANCE OF INTEREST AT RS 6,78,250/- AND OTHER EXPENSES AT RS 85,846/- AND THUS MADE AGGREGATE DISALLOWANCE OF RS 7,64,096/-.AGGRIEVED B Y THE ORDER OF AO, ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) D ISMISSED THE GROUND OF ASSESSEE BY HOLDING AS UNDER: 2.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, AND THE LAW ON THE POINT AND I FIND THAT THE ISSUE UNDER CONSIDERATION IS DIRECTLY COVERED AGAINST THE APPELLANT BY MY ORDER IN THE CASE OF ASSOCIATE CONCERN OF THE AP PELLANT IN THE CASE OF AQUAGEL CHEMICALS PVT. LTD. FOR A.Y. 2006-07 PASSED IN APPE AL NO. CIT(A)-XX/133/08-09 DATED 18/03/2009 WHEREIN UNDER IDENTICAL CIRCUMSTAN CES AND FACTS, I HAVE UPHELD THE ACTION OF ASSESSING OFFICER IN MAKING DISALLOWA NCE. IN VIEW OF THE REASONS AND DISCUSSION MADE IN THE SAID ORDER, I DISMISS THIS G ROUND OF APPEAL RAISED BEFORE ME, BY THE APPELLANT. 6. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS N OW IN APPEAL BEFORE US. 7. BEFORE US THE LD. A.R. SUBMITTED THAT ASSESSEE HAD MADE INVESTMENTS IN HDFC MUTUAL FUND OUT OF OWN FUNDS AND NO BORROWED F UNDS WERE UTILISED FOR MAKING INVESTMENTS. HE FURTHER SUBMITT ED THAT THE AFORESAID INVESTMENTS WERE MADE IN EARLIER YEARS AND NO INVES TMENTS WERE MADE DURING THE YEAR UNDER CONSIDERATION. ON THE CONTRAR Y AT THE YEAR END THE INVESTMENTS HAVE DECREASED BY RS 3.05 CRORE. HE TH EREFORE SUBMITTED THAT SINCE THE ASSESSEE HAD SUBSTANTIAL INTEREST FR EE FUNDS AT ITS DISPOSAL AND IN THE ABSENCE OF NEXUS BETWEEN THE BORROWINGS AND INVESTMENTS, NO DISALLOWANCE U/S 14A WAS CALLED FOR. HE FURTHER PLA CED RELIANCE ON THE DECISION OF RELIANCE UTILITIES LTD 313 ITR 340, WOO LCOMBERS OF INDIA ITA NO 2230 /AHD/2010 . A.Y. 2007- 08 4 LTD VS CIT 134 ITR 219 (CAL), HERO CYCLES 323 ITR 1 58 AND OTHER DECISIONS. HE FURTHER SUBMITTED THAT IN ASSESSEES OWN CASE FOR AY 2005- 06 (ITA NO 3958/AHD/2008) DISALLOWANCE MADE U/S 14A WAS DELETED. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT INCURRE D ANY EXPENDITURE AND THEREFORE THERE CAN BE NO DISALLOWANCE. THE LEARNED D.R. ON THE OTHER HAND RELIED ON THE ORDER OF AO. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT ASSESSEE HAS EARNED T AX FREE INCOME FROM DIVIDEND AMOUNTING TO RS 44,68,289/-AND HAS NOT DIS ALLOWED ANY EXPENDITURE U/S 14A WHILE COMPUTING THE TAXABLE INC OME. FROM THE AUDITED BALANCE SHEET AS ON 31 ST MARCH 2007 WHICH IS PLACED ON RECORD, IT IS SEEN THAT THE INVESTMENTS AT THE YEAR END HAV E REDUCED FROM RS 3.24 CRORE ( AS ON 31.3.2006) TO RS 18.81 LACS (AS ON 31 .3.2007) MEANING THEREBY THAT NO NEW INVESTMENTS HAVE BEEN MADE AS A T THE END OF THE YEAR. AS PER THE AUDITED BALANCE SHEET OF THE COMPA NY AS ON 31.3.2007, THE OWNED FUNDS OF THE ASSESSEE IN THE FORM OF CAPI TAL AND RESERVES ARE TO THE TUNE OF RS 23.61 CRORES AS AGAINST THE INVES TMENTS OF RS 18.81 LACS MEANING THEREBY THAT THE OWNED FUNDS ARE FAR IN EXC ESS OF THE INVESTMENTS AS AT THE END OF THE YEAR. IN THE CASE OF RELIANCE UTIIITES (SUPRA), THE HON. BOMBAY HIGH COURT HAS HELD THAT I F THERE ARE FUNDS AVAILABLE BOTH INTEREST FREE AND OVERDRAFT AND /OR LOAN TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE O UT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF T HE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. FURTHER IN THE PRESENT CASE, THE AO HAS APPLIED THE PROVISIONS OF RULE 8D AND COMPUT ED THE DISALLOWANCE U/S 14A. H'BLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ & ITA NO 2230 /AHD/2010 . A.Y. 2007- 08 5 BOYCE (2010) 328 ITR 81 (BOM) HAS HELD THAT PROVIS IONS OF RULE 8D ARE APPLICABLE FROM A.Y. 2008-09 AND NOT IN EARLIER YEA RS. IN THE ASSESSEES OWN CASE FOR AY 2005-06, THE CO-ORDINATE BENCH OF T RIBUNAL IN ITA NO 3958/AHD/2008 ORDER DATED 17.6.2011 HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY HOLDING AS UNDER: 18. WE HAVE HEARD THE PARTIES. IN VIEW OF THE FACT THAT ASSESSEE HAD SUFFICIENT PROFIT, CAPITAL AND RESERVES WHICH ARE MORE THAN INVESTMENT MADE BY THE ASSESSEE IN MUTUAL FUND, IT CANNOT BE PRESUMED THAT INVESTMENT IN MUTU AL FUND MADE BY THE ASSESSEE WERE OUT OF INTEREST BEARING BORROWED FUNDS. HON. SUPREM E COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT (2008) 298 ITR 298 (SC) H ELD THAT WHERE THE ASSESSEE HAD CAPITAL AND PROFITS MORE THAN THE INTEREST FREE FUN DS ADVANCED THEN IT HAS TO BE PRESUMED THAT SUCH INTEREST FREE ADVANCES WERE GIVE N OUT OF INTEREST FREE CAPITAL AVAILABLE WITH THE ASSESSEE. IT IS FOR THE AO TO SH OW THE NEXUS BETWEEN THE INTEREST BEARING BORROWED FUNDS AND INVESTMENT WHOSE INCOME IS EXEMPT. 19 FURTHER, PROVISIONS OF SUB-SECTIONS (2) & (3) OF SECTION 14A OF THE ACT AND RULE 8D ARE APPLICABLE W.E.F. ASSST. YEAR 2007-08 AS HEL D BY HON. BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. (2010) 328 I TR 81 (BOM). THE DISALLOWANCE U/S 14A FOR THE YEAR UNDER CONSIDERATION CAN BE MAD E ON REASONABLE BASIS AFTER FOLLOWING THE AUTHORITIES ON THE SUBJECT. EVEN OTHERWISE HON'BLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD (2009) 313 ITR 340 (BOM.) HELD THAT IF THERE ARE FUNDS AVAILABLE, BOTH INTEREST-FREE AND O VERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE O UT OF THE INTEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN VIEW OF ABOVE, THIS GROUND OF REVENUE IS ALSO REJECTED. AS A RESULT, THE APPEAL FILED BY THE REVENUE IS DIS MISSED. 9. CONSIDERING THE TOTALITY OF FACTS AND RELYING ON TH E DECISIONS OF HIGH COURTS STATED HEREINABOVE AND THE DECISION OF THE C O-ORDINATE BENCH OF TRIBUNAL, IN THE ASSESSEES OWN CASE FOR A.Y. 05-06 , WE ARE OF THE VIEW THAT NO DISALLOWANCE U/S 14A CAN BE MADE IN THE PRE SENT CASE. WE THUS DIRECT THE DELETION OF DISALLOWANCE. THUS THIS APPE AL OF THE ASSESSEE IS ALLOWED. ITA NO 2230 /AHD/2010 . A.Y. 2007- 08 6 GROUND NO. 3 IS WITH RESPECT TO SHORT CREDIT O F INTEREST INCOME WAS NOT SERIOUSLY ARGUED BY LD. A.R. AND THEREFORE DISMISSE D AS NOT PRESSED. 10. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLO WED. ORDER PRONOUNCED IN OPEN COURT ON 20 - 09 - 2013. SD/- SD/- (MUKUL KR. SHRAWAT) (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 ,AHMEDABAD