Deepti Formulations Private Limited, Hyderabad, Hyderabad V. ITO, Ward-17(1), Hyderabad, Hyderabad

ITA 238/HYD/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2582 (ITAT-HYDERABAD)
• Duration Of Justice: 11 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 02-02-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 14-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P V SUBBA RAJU
• Assessee Lawyers: T CHAITANYA KUMAR
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B (SMC), HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 238/HYD/2017 ASSESSMENT YEAR: 2012-13 DEEPTI FORMULATIONS PRIVATE LIMITED, HYDERABAD [PAN: AAACD7145G] VS INCOME TAX OFFICER, WARD-17(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI T. CHAITANYA KUMAR, AR FOR REVENUE : SHRI P.V. SUBBA RAJU, DR DATE OF HEARING : 02-02-2018 DATE OF PRONOUNCEMENT : 09-02-2018 O R D E R THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-5, HYDERABAD, DATED 30-11-2016 ON THE ISSUE OF DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT [ACT]. 2. BRIEFLY STATED, ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF PHARMACEUTICAL FORMULATIONS. IN ADD ITION TO EARNING ITS REGULAR INCOME, IT ALSO EARNED DIVIDEND F ROM MUTUAL FUNDS AMOUNTING TO RS. 40,000/- AND CLAIMED EXEMPTION . ASSESSING OFFICER (AO) INVOKED THE PROVISIONS OF SEC TION 14A R.W.R. 8D AND MADE A DISALLOWANCE OF RS. 3,87,990/- CALCULATED ITA NO. 238/HYD/2017 :- 2 -: UNDER THE RULE 8D OF THE ACT. IT WAS THE CONTENTION OF A SSESSEE THAT ASSESSEE HAS NOT SPENT ANY DIRECT EXPENDITURE TO BE DISALLOWED UNDER RULE 8D(2)(I) AND ALSO THERE WAS N O INTEREST EXPENDITURE PERTAINING TO INVESTMENTS AS IT HAS SUFFICI ENT FUNDS AND REGULAR INCOME OF THE BUSINESS WAS MORE THAN THE INVESTMENTS IN SUCH FUNDS. AO WHILE ACCEPTING THE EXPL ANATION OF ASSESSEE WITH REFERENCE TO THE DIRECT EXPENDITURE, HO WEVER, INVOKED RULE 8D(2)(II) TO DISALLOW PROPORTIONATE INTERE ST EXPENDITURE ON CERTAIN LOANS OBTAINED TO AN EXTENT OF RS . 2,31,06,277/- AND ALSO 0.5% OF AVERAGE VALUE OF INV ESTMENTS UNDER RULE 8D(2)(III). ASSESSEE CONTESTED THE SAME BEFORE THE CIT(A) TO SUBMIT THAT ALL THE BORROWALS ARE FOR SPECIF IC PURPOSES AND NO PART OF THE BORROWED AMOUNT WAS DIVERTED TO INVESTMENTS AND QUESTIONED THE DISALLOWANCE. IT WAS CONTE NDED THAT AO CANNOT DISALLOW EXPENDITURE BY MAKING GENERAL OBSERVATIONS IN A MECHANICAL WAY. SINCE ASSESSEE QUE STIONED THE VERY INVOKING OF SECTION 14A, LD. CIT(A) ELABORATE LY DISCUSSED THE PRINCIPLES GOVERNING SECTION 14A, RULE 8D IN HIS ORDER. IN DOING SO, HE CONFIRMED THE DISALLOWANCE M ADE UNDER RULE 8D(2)(II) AND 8D(2)(III). HENCE, THE PRESENT A PPEAL. 3. LD. COUNSEL REFERRING TO THE ANNUAL REPORTS, INCOME S EARNED AND DIVIDEND AND BANK ACCOUNT OF THE RELEVANT P ERIOD SUBMITTED THAT ASSESSEE RECEIVED RS 40 LAKH BY WAY OF S ALE OF PROPERTY AND BALANCE IS BUSINESS FUNDS AVAILABLE WI TH ASSESSEE. IT WAS SUBMITTED THAT THERE WAS DIRECT NEXUS OF OWN FUNDS WITH THAT OF INVESTMENT MADE. WITH REFERENCE TO TH E DISALLOWANCE UNDER RULE 8D(2)(III) OF ADMINISTRATIVE EXPENDITURE, IT WAS SUBMITTED THAT AO SHOULD HAVE CONSID ERED ITA NO. 238/HYD/2017 :- 3 -: ONLY PROPORTIONATE DISALLOWANCE FOR PART OF THE YEAR BU T NOT FOR ENTIRE YEAR. 4. LD. DR HOWEVER, RELIED ON THE DETAILED ORDER OF THE CIT(A). 5. WE HAVE EXAMINED THE RIVAL CONTENTIONS AND PERUSED THE CONTENTIONS. THERE IS NO DISPUTE WITH REFERENCE TO INVO KING OF RULE 14A WHICH, ASSESSEE HAS NOT CONTESTED BEFORE US, CONSEQUENTLY, THE ISSUE IS ONLY WHETHER DISALLOWANCE C AN BE MADE UNDER RULE 8D? THERE IS NO DIRECT EXPENDITURE W HICH CAN BE DISALLOWED UNDER RULE 8D(2)(I). AS FAR AS THE EXPENDITURE INCURRED BY WAY OF INTEREST, RULE 8D(II) CAN BE INVOKED ONLY IN A CASE WHERE THERE IS AN INTEREST DURI NG THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. IN THAT EVENT, PROPORTIONA TE AMOUNT IS TO BE DISALLOWED AS PROVIDED IN THE RULE. HOWEVER, AS SEEN FROM THE BALANCE SHEET, THERE ARE LOANS FROM THE DIRECTORS AND SHAREHOLDERS OBTAINED IN EARLIER YEARS. IT WAS SUBMITTED THAT NO PART OF IT WAS DIVERTED TO INVESTMENTS IN MUTUAL FUNDS ETC. NO FINDING WAS GIVEN BY THE AO THAT THE SE FUNDS ARE UTILISED FOR THE INVESTMENTS. AS SEEN FROM TH E BANK STATEMENT FILED, THERE WAS SUFFICIENT CASH BALANCE IN TH E ACCOUNT DURING THE PERIOD. OPENING BALANCE AS ON 01-0 2-2012 WAS RS. 21,66,808/-. AN AMOUNT OF RS. 40 LAKHS WAS R ECEIVED ON 09-02-2012. THE BALANCE AS ON 13-02-2012 WAS RS. 52,95,625/-. OUT OF THIS ASSESSEE INVESTED AN AMOUNT OF RS. 50,00,000/- IN MUTUAL FUNDS. CONSEQUENTLY, IT CAN BE STATED THAT NO PART OF BORROWED FUNDS ARE DIVERTED TO INVESTMEN TS. FOLLOWING THE PRINCIPLES LAID DOWN BY THE HON'BLE BOM BAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. , ITA NO. 238/HYD/2017 :- 4 -: [313 ITR 340] (BOM), WE ARE OF THE OPINION THAT NO PAR T OF THE INTEREST PAID ON THE BORROWED FUNDS CAN BE DISALLOWED UNDER RULE 8D(2)(II). MOREOVER, IF AT ALL THERE IS ANY DIV ERSION OF FUNDS THAT SHOULD TRIGGER DISALLOWANCE U/S. 36(1)(III) I.E., FOR DIVERSION OF FUNDS FROM THE BUSINESS. AO HAS NOT DISALLOWED ANY AMOUNT U/S. 36(1)(III). IN VIEW OF THIS, WE ARE OF THE OPIN ION THAT THE INTEREST PAID ON TERM LOANS OBTAINED CANNOT BE CONSIDER ED AS INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICUL AR INCOME OR RECEIPT UNDER RULE 8D(2)(II). IN VIEW OF TH IS, DISALLOWANCE OF RS. 3,71,990/- INVOKING THE SUB-RUL E 2(II) IS SET ASIDE. 5.1. COMING TO THE DISALLOWANCE OF RS. 16,000/- INVO KING SUB-RULE (2)(III) OF 0.5% OF AVERAGE VALUE OF INVES TMENT, IT WAS THE CONTENTION THAT ONLY PROPORTIONATE AMOUNT FOR THE PERI OD CAN BE DISALLOWED. RULE 8D(2) (III) SPECIFIES THAT A N AMOUNT EQUAL TO % OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME , AS APPEAR IN THE BALANCE SHEET OF ASSESSEE ON THE FIRST DA Y AND THE LAST DAY OF THE PREVIOUS YEAR HAS TO BE ATTRIBUTED. WORK ING HAS TO BE MADE ON THE INVESTMENT AS SPECIFIED, WITHOUT SEGREG ATING THEM ON INCOME YIELDING OR NON-INCOME YIELDING DURIN G THE YEAR. THE RULE DOES NOT PROVIDE FOR PROPORTIONATE EX PENDITURE DISALLOWANCE. MOREOVER, AS SEEN FROM THE BALANCE SH EET, ASSESSEE ALSO HAD RS. 6 LAKHS OPENING INVESTMENT AND ANOTHER RS. 8 LAKHS DURING THE YEAR. THEREFORE, THE CONTENTION THAT ONLY PROPORTIONATE AMOUNT SHOULD BE DISALLOWED DOES N OT REQUIRE ANY CONSIDERATION. IN VIEW OF THE ABOVE, WE ARE OF THE OPINION THAT AO IS CORRECT IN DISALLOWING 0.5% OF THE AVERAGE INVESTMENTS AS AVAILABLE IN THE BALANCE SHEET. TO THAT E XTENT OF ITA NO. 238/HYD/2017 :- 5 -: RS. 16,000/-, ASSESSEES CONTENTIONS ARE REJECTED. TH E DISALLOWANCE IS CONFIRMED. 6. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH FEBRUARY, 2018 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 9 TH FEBRUARY, 2018 TNMM ITA NO. 238/HYD/2017 :- 6 -: COPY TO : 1. DEEPTI FORMULATIONS PRIVATE LIMITED, C/O. SRI T. CHAITANYA KUMAR, ADVOCATE, FLAT NO. 102, GOWRI APARTMENTS, URDU LANE, HIMAYAT NAGAR, HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-17(1), HYDERABAD. 3. CIT (APPEALS)-5, HYDERABAD. 4. PR.CIT, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.