The Dy. CIT., Circle-4, Ahmedabad V. Inductotherm (India) Private Ltd., Ahmedabad

ITA 2340/AHD/2006

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9373 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 03-11-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 06-11-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ABHIJEET KUMAR N
• Assessee Lawyers: M K PATEL
• Keywords: Business income; Principle of natural justice; Earning of tax free income; Bad and doubtful debts
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D BEFORE SHRI G.D.AGRAWAL, VICE-PRESIDENT (AZ) AND SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER DATE OF HEARING : 03/11/2010 DRAFTED ON: 03/ 11/2010 ITA NO.2340/AHD/2006 ASSESSMENT YEAR : 2003-04 THE DCIT CIRCLE-4 AHMEDABAD VS. INDUCTOTHERM (INDIA) PVT.LTD. AMBLI-BOPAL ROAD BOPAL, AHMEDABAD PAN/GIR NO. : AAACI 3672 B (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI ABHIJEET KUMAR N., D.R. RESPONDENT BY: SHRI M.K. PATEL, A.R. O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE REVENUE WH ICH HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-VII I, AHMEDABAD DATED 30/08/2006 PASSED FOR ASSESSMENT YEAR 2003- 04. 2. GROUND NO.1 READS AS UNDER:- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO DELETE THE DISALLOWANCE OF PROPORTIONATE ADMINISTRA TIVE EXPENSES AT RS.20,376/- U/S.14A OF THE INCOME-TAX ACT. 2.1. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDI NG ASSESSMENT ORDER PASSED U/S.143(3) OF THE I.T. ACT, 1961 DATED 14/0 2/2006 WERE THAT THE ASSESSEE, A PRIVATE LIMITED COMPANY, IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF INDUCTION FURNACES. THE ASSESS ING OFFICER HAS MADE ITA NO. 2340/AHD/2006 DCIT VS. INDUCTOTHEM (INDIA) PVT.LTD. ASST.YEAR 2003-04 - 2 - A PROPORTIONATE DISALLOWANCE BY INVOKING THE PROVISIO NS OF SECTION 14A OF THE ACT IN RESPECT OF THE ADMINISTRATIVE EX PENDITURE . AS AGAINST THAT, THE PLEA OF THE ASSESSEE WAS THAT THE GOVERNMENT BONDS WERE PURCHASED WAY BACK IN THE YEAR 1995 AND DURING THE YEAR UNDER CONSIDERATION ONLY TWO DIVIDEND WARRANTS WERE RECEI VED. DUE TO THIS REASON, THERE WAS NO MANAGEMENT COSTS WHATSOEVER IN VOLVED, ASSESSEE HAS EXPLAINED. HOWEVER, THE ASSESSING OFFICER HAD MADE A PROPORTIONATE DISALLOWANCE OF ADMINISTRATIVE EXPENSES WHICH WAS C OMPUTED AT RS.20,376/-. THE MATTER WAS CARRIED BEFORE THE F IRST APPELLATE AUTHORITY. 3. THE LEARNED CIT(APPEALS) HAS FOLLOWED THE DECISI ON OF ITAT DELHI BENCH IN THE CASE OF ACIT VS. EICHER LTD. (1 01 TTJ 369) [DELHI] AND HELD AS UNDER:- 4.1. BEFORE ME, THE LEARNED COUNSEL FOR THE APPEL LANT CONTENDED THAT IT WAS THE INVESTMENT MADE IN THE YEAR 1998 AND DURING THE YEAR 2 INTEREST WARRANTS WERE RECEIVED AND FOR ENCASHING THE SAME, THERE WAS NO SPECIFIC EXPENDITURE INCURRED DURING THE YEAR. HE ALSO RELIED ON THE DECISION OF HON'BLE ITAT DELHI BENCH IN THE CASE OF ACIT V. EICHER LIMITED 101 TTJ 369 WHEREIN IT WAS HELD THAT IT WA S THE DUTY OF THE ASSESSING OFFICER TO PIN POINT SUCH EXPENDITURE ON THE BASIS OF MATERIAL ON RECORD WITH AN ACCEPTABLE DEGREE OF ACCURACY AND NOT ON A NOTIONAL BASIS. IN THIS CASE, IT IS QUITE APPARENT THAT NO SPECIFIC EXPENDITURE IS ATTRIBUTABLE FOR DEPOSITING JUST 2 INTEREST WARRANT S AND AS SUCH THE PROPORTIONATE DISALLOWANCE IS PURELY ON NOTIONAL BA SIS AND HENCE THE DISALLOWANCE OF RS.20,376/- ON THIS ACCOUNT IS DIRE CTED TO BE DELETED. 4. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE HAVE FOUND THAT IN ASSESSEES OWN CASE ITAT B BENCH AHMEDABA D IN THE CASE OF DCIT VS. INDUCTOTHERM INDIA PVT. LTD. IN ITA NO.423 1/AHD/2007 FOR ASSESSMENT YEAR 2004-05 ORDER DATED 29/10/2010 HAS DECIDED THE ISSUE ITA NO. 2340/AHD/2006 DCIT VS. INDUCTOTHEM (INDIA) PVT.LTD. ASST.YEAR 2003-04 - 3 - BY FOLLOWING THE DECISION IN THE CASE OF CIT VS. HE RO CYCLES 323 ITR 518 (P&H), RELEVANT PARAGRAPHS REPRODUCED:- 9. WE FIND THAT THE ASSESSMENT YEAR INVOLVED IN T HE PRESENT APPEAL IS 2004-05. HON'BLE BOMBAY HIGH COURT HAS HELD THAT AMENDMENT TO SECTION 14A BY WAY OF INSERTION OF SUB-SECTION (2) AND (3) IS PROSPECTIVE AND APPLICABLE FROM ASSESSMENT YEAR 2007-08 AND SUB SEQUENT ASSESSMENT YEARS. 10. FURTHER THE HON'BLE PUNJAB AND HARYANA HIGH C OURT IN THE CASE OF CIT VS. HERO CYCLES LTD., (2010) 323 ITR 518 HAS HELD THAT :- THE CONTENTION OF THE REVENUE THAT DIRECTLY OR IND IRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISALL OWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURR ED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME W HICH MAY NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE ACCEP TED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEM PTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDE R SECTION 14A CANNOT STAND. 11. IN THE INSTANT CASE, WE FIND THAT IT IS NOT IN DISPUTE THAT IN RESPECT OF EXEMPT INCOME WARRANTS THE ASSESSEE HAD ONLY RECEIV ED TWO INTEREST WARRANTS AND FOUR DIVIDEND WARRANTS. NO MATERIAL WAS BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT ANY SPECIFIC EXP ENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME THEREFORE, IN VI EW OF THE ABOVE CITED DECISIONS WE DO NOT FIND ANY ERROR IN THE ORD ER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS). IT IS CONFIR MED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 5. SINCE A VIEW HAS ALREADY BEEN TAKEN BY THE RESPE CTED CO-ORDINATE BENCH AND THE LAW AS PRONOUNCED BY THE HON'BLE HIGH COURT IS STATED TO BE APPLICABLE TO THE ISSUE INVOLVED, THEREFORE, WE FIND NO REASON TO TAKE ANY OTHER VIEW BUT TO FOLLOW THE VIEW AS EXPRESSED HEREINABOVE. IN THE ABSENCE OF ANY DIRECT OR CLINCHING EVIDENCE PRODUCE D FROM THE SIDE OF THE REVENUE ABOUT THE EXPENDITURE, THEREFORE, THE PROPO RTIONATE DISALLOWANCE ITA NO. 2340/AHD/2006 DCIT VS. INDUCTOTHEM (INDIA) PVT.LTD. ASST.YEAR 2003-04 - 4 - BY INVOKING SEC. 14A CAN NOT BE APPROVED, IN THE RE SULT THIS GROUND OF THE REVENUE IS HEREBY DISMISSED. 6. GROUND NO.2 READS AS UNDER:- 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO DELETE THE DISALLOWANCE OF RS.10,75,814/- RELATING TO BAD DEBTS WRITTEN OFF. 6.1. THIS GROUND HAS ALSO BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE RESPECTED CO-ORDINATE BENCH VIDE ORDER DATED 29/10/ 2010 (SUPRA), WHEREIN RELIANCE WAS PLACED ON A CIRCULAR ISSUED BY CBDT NO.551 DATED 23/01/1990, AS ALSO A DECISION OF HON'BLE GUJARAT H IGH COURT IN THE CASE OF GIRISH BHAGWAT PRASAD 256 ITR 772 (GUJ.) AND, TH EREAFTER, HELD AS UNDER:- 18. NO SPECIFIC MISTAKE WAS POINTED OUT BY THE L EARNED DEPARTMENTAL REPRESENTATIVE IN THE FINDINGS OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS). IT IS ALSO NOT IN DISPUTE THAT THE AMOUNTS IN QUESTION WERE WRITTEN OFF BY TH E ASSESSEE IN ITS BOOKS OF ACCOUNT DURING THE YEAR UNDER CONSIDERATIO N. THEREFORE, WE DO NOT FIND ANY GOOD AND JUSTIFIABLE REASON TO I NTERFERE IN THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (AP PEALS), WHICH IS CONFIRMED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 7. IN ADDITION TO THE ABOVE CITATIONS, THERE IS A L ATEST DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF TRF LTD. REPOR TED AS 323 ITR 397 (SC), WHEREIN IT WAS HELD AS UNDER:- THIS POSITION IN LAW IS WELL-SETTLED. AFTER APRI L 1, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DE BT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. HOW EVER, IN THE ITA NO. 2340/AHD/2006 DCIT VS. INDUCTOTHEM (INDIA) PVT.LTD. ASST.YEAR 2003-04 - 5 - PRESENT CASE, THE ASSESSING OFFICER HAS NOT EXAMINE D WHETHER THE DEBT HAS, IN FACT, BEEN WRITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. WHEN A BAD DEBT OCCURS, THE BAD DEBT ACCOUNT IS DEB ITED AND THE CUSTOMERS ACCOUNT IS CREDITED, THUS, CLOSING THE A CCOUNT OF THE CUSTOMER. IN THE CASE OF COMPANIES, THE PROVISION IS DEDUCTED FROM SUNDRY DEBTORS. AS STATED ABOVE, THE ASSESSI NG OFFICER HAS NOT EXAMINED WHETHER, IN FACT, THE BAD DEBT OR PART THEREOF IS WRITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. THIS EXERCISE HAS NOT BEEN UNDERTAKEN BY THE ASSESSING OFFICER. HENCE, T HE MATTER IS REMITTED TO THE ASSESSING OFFICER FOR DE NOVO CONSI DERATION OF THE ABOVEMENTIONED ASPECT ONLY AND THAT TOO ONLY TO THE EXTENT OF THE WRITE-OFF. 7.1. APART FROM THE ABOVE LAW LAID DOWN BY THE HON' BLE SUPREME COURT, ON FACTS AS WELL THE ISSUE APPEARS TO BE IN FAVOUR OF THE ASSESSEE CONSIDERING THE DETAILS OF THE BAD DEBTS WRITTEN OF F FURNISHED IN THE COMPILATION. THE COMPILATION SUBMITTED BY THE AS SESSEE CONTAINS THE NAMES, ADDRESSES AND THE LEGAL ACTION TAKEN OF THOS E DEBTORS. THROUGH THESE EVIDENCES, THE ASSESSEE HAS TRIED TO ESTABLIS H THAT THE EFFORTS HAVE BEEN MADE TO RECOVER THE OUTSTANDING DUES, HOWEVER, COULD NOT SUCCEED, THEREFORE, IT WAS DECIDED TO WRITE OFF THOSE DEBTS . TOTALITY OF THE CIRCUMSTANCES, THUS, WARRANTS TO AFFIRM THE FINDING S OF LEARNED CIT(APPEALS). THIS GROUND OF THE REVENUE IS, THER EFORE, DISMISSED. 8. GROUND NO.3 READS AS UNDER:- 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO EXCLUDE THE SALES TAX AND EXCISE DUTY FROM TOTAL TU RNOVER FOR COMPUTATION OF DEDUCTION U/S.80HHC OF THE INCOME-TA X ACT. 8.1. THE FIRST APPELLATE AUTHORITY HAS FOLLOWED IFB AGRO INDUSTRIES LTD. 83 ITD 96 (CAL.)[SB] AND HELD THAT THE EXCISE DUTY AND SALES-TAX DO NOT ITA NO. 2340/AHD/2006 DCIT VS. INDUCTOTHEM (INDIA) PVT.LTD. ASST.YEAR 2003-04 - 6 - FORM PART OF THE PROFIT AND THEREFORE TO BE EXCLUDE D FROM THE TOTAL TURNOVER. 9. ON HEARING THE SUBMISSIONS OF BOTH THE SIDES, NO W THIS ISSUE IS SQUARELY COVERED BY A LATEST DECISION OF HON'BLE SU PREME COURT IN THE CASE OF LAXMI MACHINE WORKS 290 ITR 667 (SUPREME CO URT), WHEREIN IT WAS HELD THAT THE EXCISE AND SALES-TAX DO NOT FORM A PART OF THE TOTAL TURNOVER. ONCE A LAW HAS BEEN PRONOUNCED BY THE HO NBLE APEX COURT, THEREFORE, THE VIEW TAKEN BY THE TAKEN BY THE LEARN ED CIT(APPEALS) IS HEREBY AFFIRMED. RESULTANTLY THIS GROUND OF THE REV ENUE IS HEREBY DISMISSED. 10. GROUND NO.4 READS AS UNDER:- 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DIRECTING TO DELETE THE DISALLOWANCE OF 90% OF BAD DEBTS RECOVER ED, KASAR INCOME AD BAD DEBTS WRITTEN OFF AMOUNTING TO RS.52, 811/- FROM THE ADJUSTED PROFIT OF THE BUSINESS FOR WORKING OUT THE DEDUCTION U/S.80HHC. 10.1. THE OBSERVATION OF THE ASSESSING OFFICER WAS THAT ON VERIFICATION, IT WAS NOTICED THAT THE ASSESSEE-COMPANY HAD INCLUD ED 90% OF THE INTEREST INCOME, LICENCE FEES AND COMMISSION INCOME WHILE CALCULATING THE ADJUSTED PROFIT OF THE BUSINESS FOR THE PURPOSE OF COMPUTATION OF DEDUCTION U/S.80HHC OF THE I.T.ACT. A SHOW-CAUSE NOTICE WAS ISSUED TO EXPLAIN AS TO WHY THE SAID INCOME SHOULD NOT BE EXC LUDED WHILE WORKING OUT THE ADJUSTED PROFIT OF THE BUSINESS. BEING N OT SATISFIED WITH THE REPLY OF THE ASSESSEE, THE ASSESSING OFFICER HAS AP PLIED CLAUSE(BAA) TO ITA NO. 2340/AHD/2006 DCIT VS. INDUCTOTHEM (INDIA) PVT.LTD. ASST.YEAR 2003-04 - 7 - EXPLANATION OF SECTION 80HHC(4A) OF THE ACT AND REC OMPUTED THE DEDUCTION U/S.80HHC BY EXCLUDING TO THE EXTENT OF 9 0% OF SUCH INCOME. 11. AT THE OUTSET, IT WAS INFORMED TO US THAT THIS ISSUE WAS ALSO DEALT WITH BY THE ITAT AHMEDABAD B BENCH IN ASSESSMEN T YEAR 2004-05 VIDE ORDER DATED 29/10/2010 (SUPRA). HOWEVER, THE LAW HAS BECOME CLEAR BY A LATEST DECISION OF HON'BLE BOMBAY HIGH C OURT PRONOUNCED IN THE CASE OF CIT VS. ASIAN STAR COMPANY 231 CTR PA GE-01 (BOM.), WHEREIN AN EARLIER DECISION OF DELHI SPECIAL BENCH IN THE CASE OF LALSONS ENTERPRISES 82 TTJ 1048 WAS REVERSED. A CONCLUSI ON WAS DRAWN IN TERMS OF EXPLANATION (BAA) TO EXPLANATION 80HHC, 90 % OF THE GROSS INTEREST RECEIVED BY THE ASSESSEE HAS TO BE REDUCED FROM THE PROFITS AND GAINS OF THE BUSINESS FOR THE PURPOSE OF COMPUTING THE DEDUCTION U/S.80HHC OF THE ACT. WHILE EXPLAINING THE REASO NS, THE HON'BLE COURT HAS SAID THAT AS PER EXPLANATION (BAA) TO SECTION 8 0HHC RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES A ND OTHER SIMILAR RECEIPTS ARE TO BE EXCLUDED FROM THE BUSINESS PROF ITS, AS THESE RECEIPTS HAVE NO NEXUS WITH THE EXPORT ACTIVITY. SINCE THE EXPENDITURE INCURRED IN EARNING THE INCOME BY WAY OF INTEREST, BROKERAGE , COMMISSION, RENT, ETC. ALSO GO INTO THE COMPUTATION OF BUSINESS PROFI TS, THEREFORE, PARLIAMENT THOUGHT IT FIT TO EXCLUDE ONLY 90% OF TH E RECEIPTS IN ORDER TO ENSURE THAT THE EXPENDITURE WHICH IS INCURRED BY THE ASSESSEE IN EARNING THE RECEIPTS WHICH HAD GONE INTO THE COMPUT ATION OF THE BUSINESS PROFITS IS TAKEN CARE OF. PARLIAMENT HAS , THUS, PROVIDED THE ADHOC DEDUCTION OF 10% FROM SUCH INCOME ONLY TO ACC OUNT FOR THE EXPENSES INCURRED IN EARNING THE RECEIPTS. THE HON'BLE COURT HAS REFERRED MEMORANDUM EXPLAINING THE PROVISIONS OF FI NANCE BILL, 1991 AS ITA NO. 2340/AHD/2006 DCIT VS. INDUCTOTHEM (INDIA) PVT.LTD. ASST.YEAR 2003-04 - 8 - ALSO CBDT CIRCULAR NO.621 DATED 19/12/1991. NOT ONLY THIS DECISION, BUT THE HON'BLE HIGH COURT IN THE CASE OF CIT VS. S HRI RAM HONDA POWER EQUIPMENTS 289 ITR 475 (DELHI) HAS HELD THAT THE I NTEREST EARNED CAN ONLY BE CATEGORIZED AS INCOME FROM OTHER SOURCES AND NOT AS PROFITS AND GAINS OF BUSINESS OR PROFESSION . WITH THIS OBSERVATION, IT WAS HELD THAT THE INTEREST INCOME DO NOT HAVE ANY IMMED IATE NEXUS WITH THE EXPORT BUSINESS, HENCE, DO NOT QUALIFY ANY DEDUCTIO N U/S.80HHC OF THE ACT. 12. IN THE LIGHT OF THESE DECISIONS, WE HAVE PERUSE D THE ORDERS OF THE AUTHORITIES BELOW, HOWEVER, HAVE NOTICED THAT IN TH E ABSENCE OF CLEAR UNDERSTANDING OF LAW, THE DECISION TAKEN BY THEM WA S DEVOID OF MERITS. NATURAL JUSTICE THEREFORE DEMANDS TO RESTORE THIS GROUND BACK TO THE STAGE OF ASSESSING OFFICER TO BE DECIDED DE NOVO , NEEDLESS TO SAY AFTER PROVIDING A REASONABLE OPPORTUNITY OF HEARING TO TH E ASSESSEE. WITH THE RESULT, THIS GROUND OF THE REVENUE MAY BE TREATED A S ALLOWED FOR STATISTICAL PURPOSES. 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 26/ 11 /2010. SD/- SD/- ( G.D.AGRAWAL ) ( MUKUL KR. SHRAWAT ) VICE PRESIDENT (AZ) JUDICIAL ME MBER AHMEDABAD; DATED 26 / 11 /2010 T.C. NAIR, SR. PS ITA NO. 2340/AHD/2006 DCIT VS. INDUCTOTHEM (INDIA) PVT.LTD. ASST.YEAR 2003-04 - 9 - COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPARTMENT. 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-VIII, AHMEDABAD 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD 1. DATE OF DICTATION..03/11/2010 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 03/11/2010 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S26.11.10 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 26.11.10 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER