M/s Pee Cee Soap & Chemicals (P) Ltd., Agra V. Addl. C.I.T., Range-4, Agra

ITA 236/AGR/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 7695 (ITAT-AGRA)
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-04-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 16-04-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 21-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K SHARMA
• Section: 14A; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NO.236/AGR/2011 ASSESSMENT YEAR: 2006-07 M/S. PEE CEE SOAP & CHEMICALS (P) LTD., VS. ADDL. COMMISSIONER OF INCOME G-10/8, PADAMDEEP, TAX, RANGE 4, AGRA. SANJAY PLACE, AGRA. (PAN : AAACP 7281 M). (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PANKAJ GARGH, ADVOCATE RESPONDENT BY : SHRI A.K. SHARMA, JR. D.R. DATE OF HEARING : 16.04.2012 DATE OF PRONOUNCEMENT : 20.04.2012 ORDER PER A.L. GEHLOT, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 17.03.2011 PASSED BY THE LD. CIT(A)-II, AGRA FOR THE ASSESSMEN T YEAR 2006-07. 2. THE ASSESSEE RAISED AS MANY AS 5 GROUNDS OF APPE AL. THE FIRST EFFECTIVE GROUND IS IN RESPECT OF DISALLOWANCE OF RS.11,34,43 2/- MADE BY THE ASSESSING OFFICER WHICH HAS BEEN REDUCED BY THE CIT(A) TO THE EXTENT OF RS.8,00,000/- ITA NO.236/AGR/2011 A.Y. 2006-07 2 INVOKING SECTION 14A OF THE INCOME TAX ACT, 1961 ( THE ACT HEREINAFTER). THE SECOND EFFECTIVE GROUND IS IN RESPECT OF DISALLOWAN CE OF RS.2,00,000/- MADE BY THE ASSESSING OFFICER AND RESTRICTED BY THE CIT(A) TO T HE EXTENT OF RS.1,00,000/- OUT OF VARIOUS EXPENSES ON ACCOUNT OF PERSONAL USE. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY CARRIES ON BUSINESS OF MANUFACTURING AND TRADING OF LAUNDRY SOAP, DETERGEN T POWDER AND DETERGENT CAKE. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OF FICER NOTICED THAT THE ASSESSEE MADE INVESTMENT OF RS.5,28,01,422/- IN SHARES, INCO ME OF WHICH IS EXEMPT FROM TAX AND EARNED INCOME TO THE TUNE OF RS.3,91,317/-. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUN D IN INVESTMENT OF SHARES. THEREFORE, THE INTEREST OF RS.33,86,271/- IS NOT AL LOWABLE. THE ASSESSING OFFICER WAS OF THE VIEW THAT SECTION 14A INSERTED BY THE FI NANCE ACT, 2006 W.E.F. 01.04.2007 IS A PROCEDURAL AMENDMENT OF WHICH EFFEC T IS RETROSPECTIVE. THE ASSESSING OFFICER CALCULATED AMOUNT OF DISALLOWANCE OF RS.11,34,432/- ON THE BASIS OF RULE 8D OF INCOME TAX RULES, IN ACCORDANCE WITH SECTION 14A OF THE ACT. THE CIT(A) HELD AS UNDER :- I HAVE ANALYSED THE MATTER AND FOLLOWING THE JUDGE MENT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD., 234 CTR (BOMB AY) 1 WHEREIN IT HAS BEEN HELD THAT PROVISIONS OF SUB-SECTION (2) & (3) OF SECTION 14A AND THE PROVISIONS OF RULE 8D OF IT RULES WHICH HAV E BEEN NOTIFIED ITA NO.236/AGR/2011 A.Y. 2006-07 3 W.E.F. 24.3.08 SHALL APPLY W.E.F. A.Y. 2007-08, I H OLD THAT THE A.O. WAS NOT RIGHT IN APPLYING THE PROVISIONS OF RULE 8D WHI LE MAKING DISALLOWANCE UNDER SEC. 14A OF THE ACT. HOWEVER, I T IS TO BE NOTED THAT INTEREST OF ` 3386271/- HAS BEEN DEBITED IN THE APPELLANTS ACCOUNTS AND INVESTMENT TO THE EXTENT OF RS.5,28,01 ,422/- IS THERE IN THE SHARES FROM WHICH DIVIDEND INCOME OF RS.391317/ - HAS BEEN EARNED. IT HAS NOT BEEN DEMONSTRATED BY THE APPELL ANT WITH FACTS AND FIGURES AND CASH FLOW STATEMENT THAT NO INTEREST-BE ARING FUNDS WERE INVESTED IN THE PURCHASE OF SHARES. IN THE CASE O F CHEMIWEST LTD. VS. ITO 124 TTJ 577 (DEL) S.B. IT WAS HELD THAT IF THE EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME IS EARNED BY THE ASSESSEE OR NOT. THERE FORE, I HOLD THAT AS THE ASSESSEE HAS MADE SUBSTANTIAL INVESTMENT IN SHA RES AND IT HAS ALSO RESORTED TO BORROWING OF FUNDS ON WHICH INTEREST OF ` 3386271/- HAS BEEN PAID, THEREFORE, IT IS LOGICAL TO PRESUME THAT SOME OF THE BORROWED FUNDS HAVE BEEN DIVERTED TO INVESTMENT IN SHARES. I CONSIDER IT FAIR AND REASONABLE TO ESTIMATE SUCH EX PENDITURE AT RS.8 LACS. THEREFORE, THE DISALLOWANCE MADE BY THE A.O. TO THE EXTENT OF RS.8 LACS IS CONFIRMED. GROUND IS PARTLY ALLOWED. 4. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE CIT(A) DID NOT ACCEPT THE ASSESSING OFFICERS VIEW THAT SECTION 14A OF TH E ACT READ WITH RULE 8D OF I.T. RULES IS RETROSPECTIVE. IT IS APPLICABLE FROM A.Y. 2007-08. THE CIT(A) HELD THAT THE ASSESSING OFFICER WAS NOT CORRECT IN APPLYING R ULE 8D WHILE MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT. HOWEVER , THE CIT(A) ON PRESUMPTIONS HELD THAT SOME OF THE BORROWED FUNDS HAVE BEEN DIVE RTED TO INVESTMENT IN SHARES AND ACCORDINGLY RESTRICTED THE DISALLOWANCE TO THE EXTENT OF RS.8,00,000/-. ITA NO.236/AGR/2011 A.Y. 2006-07 4 5. THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OTHE R HAND, RELIED UPON THE ORDER OF THE CIT(A). 6. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PAR TIES AND RECORDS PERUSED. THE ASSESSING OFFICER MADE OUT THE CASE THAT SECTIO N 14A OF THE ACT READ WITH RULE 8D OF WHICH THE EFFECT IS RETROSPECTIVE AND APPLICA BLE TO ASSESSMENT YEAR 2006-07, THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICE R DISALLOWED THE AMOUNT CALCULATED UNDER RULE 8D OF IT RULES. THE CIT(A) D ID NOT AGREE WITH THE VIEW THAT SECTION 14A READ WITH RULE 8D IS APPLICABLE IN THE YEAR UNDER CONSIDERATION FOLLOWING A JUDGEMENT OF BOMBAY HIGH COURT IN THE C ASE OF GODREJ & BOYCE MFG. CO. LTD., 234 CTR (BOMBAY) 1 WHEREIN IT HAS BEEN HE LD THAT RULE 8D READ WITH SECTION 14A IS APPLICABLE W.E.F. ASSESSMENT YEAR 20 07-08. 7. THE LD. REPRESENTATIVES OF PARTIES ADMITTED THAT THE REVENUE DID NOT FILE ANY APPEAL AGAINST THIS FINDING OF THE CIT(A). THUS, T HE CONTROVERSY RELATING TO WHETHER SECTION 14A OF THE ACT READ WITH RULE 8D IS APPLICABLE IN THE YEAR UNDER CONSIDERATION, ASSESSMENT YEAR 2006-07, OR NOT BECA ME FINAL AS REVENUE DID NOT FILE ANY APPEAL AGAINST THE ORDER OF CIT(A) WHEREIN IT HAS BEEN HELD THAT SECTION 14A READ WITH RULE 8D IS APPLICABLE W.E.F. 2007-08. HOWEVER, THE PRESUMPTION OF THE CIT(A) WAS THAT SOME BORROWED FUNDS HAVE BEEN D IVERTED TO INVESTMENT IN ITA NO.236/AGR/2011 A.Y. 2006-07 5 SHARES OF WHICH INCOME IS EXEMPT. THE LD. AUTHORIS ED REPRESENTATIVE POINTED OUT THE POSITION OF SHARE CAPITAL, RESERVE & SURPLUS, U NSECURED LOAN ETC. AND LOAN GIVEN AND INVESTMENT IN SHARES. THE DETAILS WHICH IS POI NTED OUT FROM ORDER OF THE CIT(A) AT PAGE NO.2 READS AS UNDER :- SHARE CAPITAL RS.44,50,000/- RESERVE AND SURPLUS RS.12,59,74,541/- UNSECURED LOAN NIL SECURED LOAN:- O.D. LIMIT RS.2,52,72,561/- VEHICLE LOAN RS.15,50,588/- RS.2,68,23,149/- LOAN GIVEN RS.5,15,88,194/- INTEREST RECEIVED RS.60,36,620/- INTEREST PAID RS.34,81,490/- INVESTMENT IN SHARES RS.5,28,01,422/- 8. AFTER CONSIDERING THE TOTALITY OF THE FACTS OF T HE CASE, THE LIMITED ISSUE TO BE DECIDED BEFORE US IS WHETHER THE INTEREST CLAIM OF THE ASSESSEE IS DISALLOWABLE ON THE GROUND THAT THE ASSESSEE HAS USED THE INTEREST BEARING BORROWED FUNDS IN THE INVESTMENT OF SHARES. THE CLAIM OF INTEREST ON BOR ROWED FUND IS ALLOWABLE UNDER SECTION 36(1)(III) OF THE ACT. ACCORDING TO THE SA ID SECTION 36(1)(III) THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR TH E PURPOSE OF BUSINESS OR PROFESSION IS ALLOWABLE EXPENSES SO LONG AS THE AMO UNT BORROWED IS USED IN THE BUSINESS. THE INTEREST PAID ON SUCH BORROWING IS A N EXPENDITURE WHICH IS REQUIRED TO BE DEDUCTED IN THE COMPUTATION OF THE INCOME FRO M BUSINESS. TO EXAMINE THE ITA NO.236/AGR/2011 A.Y. 2006-07 6 PROBLEM IN CASES WHERE FUNDS ARE PUMPED OUT OF THE BUSINESS WHICH ARE COMPRISED OF BOTH TYPE OF FUNDS I.E. BORROWED AS WELL AS OWN FUNDS, FOR NON-BUSINESS PURPOSE. IN ALL SUCH CASES WHERE MIXED FUNDS ARE USED FOR BU SINESS AND OTHER THAN BUSINESS PURPOSES IN SUCH CIRCUMSTANCES THE I.T.A.T., MUMBAI BENCH IN THE CASE OF ACIT VS. H.P. SHAH & CO. ITA NO.3694/M/2006 ORDER DATED 15.01.2009 HELD THAT THERE IS NO PRESUMPTIONS THAT MONEY USED FOR OTHER PURPOS ES CAME OUT OF BORROWED FUNDS. IT CAN BE SAID THAT INTEREST FREE FUNDS GIV EN ON INVESTMENT IF ARE OUT OF OWN FUNDS, I.E. OWN CAPITAL AND RESERVES IS SUFFICIENT TO COVER SUCH INTEREST FREE INVESTMENT. IN THAT CIRCUMSTANCES, IT IS PRESUMED THAT THE INVESTMENT IN INTEREST FREE FUNDS WERE OUT OF OWN CAPITAL AND RESERVES AND UNDER SUCH CIRCUMSTANCES, THE REVENUE CANNOT DISALLOW INTEREST CLAIM OF THE ASSES SEE UNDER SECTION 36(1)(III) OF THE ACT. THE ALLAHABAD HIGH COURT IN THE CASE OF C IT VS. PREM HEAVY ENGINEERING WORKS PVT. LTD., 285 ITR 554 (ALLD.) WH EREIN IT HAS BEEN HELD THAT IF THE ASSESSEE HAD ADEQUATE INTEREST FREE FUNDS BY WA Y OF PROPRIETARY CAPITAL OR BY WAY OF INTEREST FREE DEPOSITS FROM CUSTOMERS, THERE IS INFERENCE THAT BORROWED FUNDS ARE NOT DIVERTED FOR NON-BUSINESS PURPOSES. THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT(A) 298 ITR 298 WHE REIN LAW LAID DOWN THAT INTEREST FREE FUNDS TO SISTER CONCERN OUT OF OWN FU NDS, THE DISALLOWANCE CANNOT BE MADE UNDER SECTION 36(1)(III) OF THE ACT. THE LD. AUTHORISED REPRESENTATIVE RELIED UPON VARIOUS DECISIONS OF WHICH GIST HAS BEEN FILED BUT THESE DECISIONS RELATED TO ITA NO.236/AGR/2011 A.Y. 2006-07 7 THE INVOCATION OF SECTION 14A OF THE ACT. THESE CA SES HAVE BEEN DECIDED BY THE COURT/BENCH CONSIDERING THE FACTS OF RESPECTIVE CAS ES. IN THE LIGHT OF ABOVE DISCUSSIONS AND JUDICIAL PRONOUNCEMENTS NOTED ABOVE , IF WE CONSIDER THE FACTS, WE FIND THAT THE ASSESSEE WAS HAVING SHARE CAPITAL OF RS.44,50,000/- AND RESERVE AND SURPLUS OF RS.12,59,74,541/- OUT OF WHICH THE INVES TMENT IN SHARES WAS RS.5,28,01,422/-. THUS, WE FIND THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES TO MAKE I NVESTMENT IN SHARES. UNDER THE CIRCUMSTANCES, NO DISALLOWANCE IS REQUIRED UNDER SE CTION 36(1)(III) OF THE ACT. IN THE LIGHT OF THE FACT, WE DO NOT AGREE WITH THE FIN DING THE CIT(A) WHICH IS ON PRESUMPTION BASIS THAT BORROWED FUNDS HAS BEEN DIVE RTED TO INVESTMENT IN SHARES AND THAT PART OF THE ORDER OF CIT(A) IS SET SIDE AN D DELETE THE ADDITION OF RS.8,00,000/- SUSTAINED BY HIM. 9. THE SECOND EFFECTIVE GROUND IS IN RESPECT OF DIS ALLOWANCE OUT OF VARIOUS EXPENSES. THE ASSESSING OFFICER DISALLOWED RS.2,00 ,000/- OUT OF TRAVELING & CONVEYANCE EXPENSES, VEHICLE RUNNING & MAINTENANCE EXPENSES, DEEPAWALI AND MISCELLANEOUS EXPENSES ON ACCOUNT OF INVOLVEMENT OF PERSONAL IN NATURE. THE CIT(A) IN PRINCIPLE AGREED WITH THE ASSESSING OFFIC ER THAT THESE EXPENSES INVOLVE SOME PERSONAL NATURE AND RESTRICTED THE DISALLOWANC E TO THE EXTENT OF RS.1,00,000/-. ITA NO.236/AGR/2011 A.Y. 2006-07 8 10. AFTER HEARING THE LD. REPRESENTATIVES OF THE PA RTIES, WE FIND THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY AND IN CASE OF COMPANY THE DISALLOWANCE CANNOT BE MADE ON THE BASIS OF PERSONAL ELEMENT AS HELD BY TH E GUJARAT HIGH COURT IN THE CASE OF SAYAJI IRON AND ENGINEERING CO. VS. CIT, 25 3 ITR 749 AND CIT VS. DINESH MILLS LIMITED, 191 CTR (GUJ.) 509. FOLLOWING THE A BOVE JUDGMENTS OF GUJARAT HIGH COURT, WE DELETE THE ADDITION OF RS.1,00,000/- SUSTAINED BY THE CIT(A). 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. (ORDER PRONOUNCED IN THE OPEN COURT ON 20.04.2012) SD/- SD/- (BHAVNESH SAINI) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 20 TH APRIL, 2012 PBN/* COPY OF THE ORDER FORWARDED TO: APPELLANT/RESPONDENT/CIT CONCERNED/CIT (APPEALS) CO NCERNED/ D.R., ITAT, AGRA BENCH, AGRA/GUARD FILE. BY ORDER SR. PRIVATE SECRETARY INCOME-TAX APPELLATE TRIBUNAL, AGRA TRUE COPY