M/s. Hughes Network Systems India Ltd., New Delhi V. DCIT, New Delhi

ITA 2416/DEL/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 65696 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2007-2008
• Appeal Filed On: 21-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R S NEG I SR DR HEARING ON
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: C NEW DELHI BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER AND SHRI A. N. PHUJA, ACCOUNTANT MEMBER I.T.A. NO.2416/DEL/2012 ASSESSMENT YEAR: 2007-08 HUGHES NETWORK SYSTEMS INDIA. LTD. VS. DCIT, 1, SHIVJI MARG, WESTEND GREENS, CIRCLE-12 (1), NATIONAL HIGHWAY NO. 08 NEW DELHI NEW DELHI. PAN:-AAACH3025R (ASSESSEE) (REVENUE) C.O. NO. 2582/DEL/2012 (IN ITA NO. 2416/DEL/2012) ASSESSMENT YEAR: 2007-08 ACIT VS. HUGHES NETWORK SYSTEMS INDIA. LTD. CIRCLE-12 (1) 1, SHIVJI MARG, WESTEND GREENS, NEW DELHI NATIONAL HIGHWAY NO. 08 NEW DELHI. (REVENUE) (ASSESSEE) ASSESSEE BY : SH. AJAY VOHRA, ADV. REVENUE BY: SH. R.S. NEGI, SR. DR HEARING ON : 30/07/2012 ORDER PRONOUNCED ON THE DATE: .. ORDER PER I.C.SUDHIR, JM: ITA NO.1416/DEL/2012 THESE ARE THE CROSS-APPEALS AGAINST THE COMMON FIRS T APPELLATE ORDER. 2. THE ASSESSEE HAS QUESTIONED FIRST APPELLATE ORDER O N THE FOLLOWING GROUNDS: ITA NOS.2416 & 2582 /DEL/2012 2 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN SUSTAINING THE DISALLOWANCE OF INTERE ST EXPENDITURE AMOUNTING TO RS.5,88,898/- UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (THE ACT). 1.1 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE UNDER SECTION 14A OF THE ACT WITHOUT APPRECIATING THAT THE INVESTMENT WAS MADE O UT OF OWN SURPLUS FUNDS AND NO EXPENSE WAS ATTRIBUTED FOR TAX FREE DIVIDEND INCOME. 1.2 THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT IN TERMS OF SECTION S 14A (2) AND 14A(3) OF THE ACT READ WITH RULE 8D OF THE INCOME-T AX RULES, 1962 FOR MAKING DISALLOWANCE UNDER THE SAID SECTION, THE ASSESSING OFFICER HAS TO RECORD SATISFACTION THAT CLAIM OF TH E APPELLANT REGARDING AMOUNT DISALLOWABLE UNDER THE SAID SECTIO N, WAS INCORRECT. 1.3 THAT THE CIT (A) ERRED ON FACTS AND IN LAW IN MAKIN G AN ENHANCEMENT ON ACCOUNT OF ADMINISTRATIVE AND OTHER EXPENSES TO RS.4,09,946/- UNDER SECTION 14A OF THE ACT AS AGAIN ST RS.2,04,973/- COMPUTED BY THE ASSESSING OFFICER WITHOUT ISSUING E NHANCEMENT NOTICE TO THE APPELLANT IN TERMS OF SECTION 251(2) OF THE ACT. ITA NOS.2416 & 2582 /DEL/2012 3 1.4 THAT THE CIT (A) ERRED ON FACTS AND IN LAW IN HOLDI NG THAT INVESTMENT ACTIVITY WAS NOT PASSIVE ACTIVITY B UT WAS WELL INFORMED AND COORDINATED ACTIVITY INVOLVING INPUT F ROM THE VARIOUS SOURCES AND ACUMEN OF SENIOR MANAGEMENT FUNCTIONARY AND HENCE THERE WAS COST IN-BUILT INTO SUCH INVESTMENT ACTIVI TY AND THE APPROPRIATE COST OF COMPOSITE FUNDS NEEDED TO BE AL LOCATED TOWARDS EARNING OF EXEMPT INCOME. 1.5 THAT THE CIT (A) ERRED IN HOLDING THAT THE APPELLAN T HAD NOT FURNISHED THE EVIDENCES TO DEMONSTRATE THAT INVESTM ENTS WERE MADE FROM SURPLUS FUNDS WITHOUT APPRECIATING THAT APPELL ANT HAD PLACED ON RECORD COMPLETE BANK STATEMENT TO SUPPORT ITS CL AIM. 1.6 THAT THE CIT (A) ERRED ON FACTS AND IN LAW IN SUSTA INING THE APPLICATION OF RULE 8D OF THE INCOME TAX RULES 1962 FOR COMPUTING DISALLOWANCE UNDER SECTION 14A OF THE ACT , NOT APPRECIATING THAT THE SAID RULE CANNOT HAVE RETROSP ECTIVE OPERATION. 1.7 WITHOUT PREJUDICE, THE COMMISSIONER OF INCOME TAX ( APPEALS) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT EXCEED RS.7,93, 871/- AS COMPUTED BY THE ASSESSING OFFICER IN TERMS OF RULE 8D. ITA NOS.2416 & 2582 /DEL/2012 4 3. GROUND NOS. 1 TO 1.6: THE ISSUES INVOLVE ARE AS TO WHETHER THE LD. CIT (A) WAS JUSTIFIED IN SUSTAINING THE DISALLO WANCE OF INTEREST EXPENDITURE AMOUNTING TO RS.5,88,898/- U/S 14A OF T HE IT ACT? SECONDLY, AS TO WHETHER THE LD. CIT (A) HAS ERRED IN MAKING AN E NHANCEMENT ON ACCOUNT OF ADMINISTRATIVE AND OTHER EXPENSES TO RS.4,09,946 /- U/S 14A OF THE ACT AS AGAINST RS.2,04,973/- COMPUTED BY THE ASSESSING OFF ICER WITHOUT ISSUING ENHANCEMENT NOTICE TO THE ASSESSEE U/S 251 (2) OF T HE ACT? 4. IN ALTERNATIVE, IN GROUND NO. 1.7 THE ACTION OF THE LD. CIT (A) IN NOT APPRECIATING THAT THE DISALLOWANCE U/S 14A OF THE A CT CANNOT EXCEED RS.7,93,871/-, HAS BEEN QUESTIONED. 5. AT THE OUTSET THE LD. AR SUBMITTED THAT THE ISSUES RAISED IN THE GROUNDS ARE NOW FULLY COVERED BY THE DECISION OF HONBLE JU RISDICTIONAL HIGH COURT OF DELHI IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT (2011) 15 TAXMAN. COM. 390 (DEL) AND IN THE CASE OF CIT (A) VS. MACHI NO PLASTIC LTD. ITA NO. 92 OF 2011, THE JUDGMENT DATED 28.2.2012. HE PO INTED OUT THAT IN VIEW OF THE ABOVE DECISIONS OF HONBLE JURISDICTIONAL HI GH COURT THE ISSUE IS REQUIRED TO BE SET ASIDE TO THE FILE OF THE AO FOR THE FRESH CONSIDERATION. THE LD. DR ON THE OTHER HAND PLACED RELIANCE ON THE ASS ESSMENT ORDER. 6. HAVING GONE THROUGH THE AFORE CITED DECISIONS WE FI ND THAT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT (SUPRA) THE HONB LE DELHI HIGH COURT HAS BEEN PLEASED TO HOLD THAT EVEN WHERE THE ASSESS EE CLAIMS THAT NO ITA NOS.2416 & 2582 /DEL/2012 5 EXPENDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, THE AO IS REQUIRED TO VE RIFY THE CORRECTNESS OF SUCH CLAIM. IT WAS HELD THAT IN CASE THE AO IS NOT, ON THE BASIS OF OBJECTIVES CRITERIA AND AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY, SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HE SH ALL HAVE TO REJECT THE CLAIM AND RECORD REASONS FOR DOING SO. HAVING DONE SO, TH E AO HAS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. I N CASE OF CIT VS. MACHINO PLASTIC LTD. (SUPRA) THE HONBLE DELHI HIGH COURT H AS BEEN PLEASED TO RESTORE THE MATTER TO THE FILE OF THE AO TO DECIDE THE ISSUE AFRESH IN VIEW OF THE DECISION TAKEN IN THE CASE OF MAXOPP INVESTMENT LTD. (SUPRA) WITH DIRECTION TO THE ASSESSEE TO FURNISH RELEVANT DETAI LS AND PARTICULARS REGARDING THE CLAIM. THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CHEMINVEST LTD. VS. ITO 317 ITR (80) 86 (DEL) (SB) HAS HELD THAT WH EN THE EXPENDITURE IS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IT HAS TO SUFFER THE DISALLOWANCE IRRESPECTIVE OF THE FACT WHETHER ANY INCOME WHICH IS EARNED BY THE ASSESSEE OR NOT AND THE PROV ISIONS OF SECTION 14A OF THE ACT DO NOT ENVISAGE ANY SUCH EXCEPTION. IN THE PRESENT CASE BEFORE US THE ADDITION BY WAY OF DISALLOWANCE OF EXPENDITURE IN Q UESTION HAS BEEN MADE ON THE BASIS THAT THE ASSESSEE COULD NOT DEMONSTRAT E WITH EVIDENCE, THEIR CLAIM THAT THE INVESTMENTS WERE FROM OWN RESERVES A ND NOT FROM BORROWED ITA NOS.2416 & 2582 /DEL/2012 6 FUNDS WHEREAS IT REMAINED ADMITTED FACT THAT THERE WAS MIXED POOL OF FUNDS FROM WHERE ALL BUSINESS TRANSACTIONS WERE DON E AND THERE WAS NO SEPARATE FUND OR BANK ACCOUNTS FROM WHERE INVESTMEN TS WERE MADE. THE CONTENTION OF THE ASSESSEE THAT THEY HAVE NOT INCUR RED ANY EXPENDITURE IN DEPLOYING A HUGE FUNDS OF AROUND RS.8.20 CRORE DURI NG THE YEAR HAS ALSO NOT BEEN ACCEPTED BY THE AUTHORITIES BELOW WITH THIS OB SERVATION THAT ALL THESE ACTIVITY WERE WELL COORDINATED AND WERE WELL INFORM ED MANAGEMENT DECISIONS INVOLVING NOT ONLY INPUTS FROM VARIOUS SO URCES BUT ALSO IT INVOLVE ACUMEN OF SENIOR MANAGEMENT DECISIONS, THERE WERE I NCIDENTAL ADMINISTRATIVE EXPENSES ON COLLECTING INFORMATION R ESEARCH ETC. WHICH HELPED THE ASSESSEE IN ARRIVING AT A PARTICULAR INVESTMENT DECISIONS AND THESE EXPENSES RELATING TO EARNING OF INCOME ARE EMBEDDED IN THE DIRECT EXPENSES. THE LD. CIT (A) ACCORDINGLY UPHELD THE INTEREST DIS ALLOWANCE U/S 14A TO THE EXTENT OF RS.5,88,898/- AND HE HAS FURTHER MADE DIS ALLOWANCE U/S 14A ON ACCOUNT OF ADMINISTRATIVE AND OTHER EXPENSES TO THE EXTENT OF RS.4,09,946/- AGAINST 2,04,973/- MADE BY THE AO. ANYWAY UNDISPUTE DLY, THE ISSUE INVOLVE IS TO BE DECIDED IN TERMS OF THE ABOVE CITED DECISI ONS OF HONBLE JURISDICTIONAL HIGH COURT OF DELHI. WE THUS RESTORE THE MATTER TO THE FILE OF THE AO TO DECIDE THE ISSUE AFRESH AS DIRECTED BY TH E HONBLE DELHI HIGH COURT IN THE CASE OF MACHINO PLASTIC LTD. WE ALSO M AKE IT CLEAR THAT WHILE DECIDING THE ISSUE AFRESH THE AO WILL AFFORD OPPORT UNITY OF BEING HEARD TO ITA NOS.2416 & 2582 /DEL/2012 7 THE ASSESSEE ON THE ISSUE. THE GROUNDS ARE THUS ALL OWED FOR STATISTICAL PURPOSES. 7. IN RESULT APPEAL IS ALLOWED FOR STATISTICAL PURPOSE S. ITA NO.2583/DEL/2012 8. THE REVENUE HAS QUESTIONED FIRST APPELLATE ORDER ON THE GROUND THAT THE LD. CIT (A) WAS NOT CORRECT IN DELETING THE DISALLO WANCE OF RS.1,CORE MADE BY THE AO ON ACCOUNT OF IMPAIRED STOCK. 9. IN SUPPORT OF THE GROUND THE LD. DR HAS PLACED RELI ANCE ON THE ASSESSMENT ORDER. THE LD. AR HOWEVER, TRIED TO JUST IFY THE FIRST APPELLATE ORDER ON THE ISSUE. 10. THE RELEVANT FACTS ARE THAT THE AO DISALLOWED THE C LAIMED RS.1, CRORE ON ACCOUNT OF THE PROVISION OF IMPAIRMENT OF STOCK. THE EXPLANATION OF THE ASSESSEE REMAIN THAT THE CLOSING STOCK OF THE ASSES SEE CONSISTS OF OLD/USED STOCK, WHICH ARE CATEGORIZED AS DEFECTIVE BUT REPAI RABLE STOCK AND DEMO STOCK. THE ASSESSEE SUBMITTED THAT AS PER THE CONSI STENT METHOD OF VALUATION OF STOCK, THE CLOSING STOCK IS VALUED AT COST WAS N ET REALIZABLE VALUE, WHICHEVER IS LOWER AS COUNTED BY ACCOUNTING STANDAR D -2 ON VALUATION OF INVENTORIES PRESCRIBED BY THE INSTITUTE OF CHARTER ED ACCOUNTANTS OF INDIA. THE NET REALIZABLE VALUE OF THE DEFECTIVE, BUT REPA IRABLE STOCK IS ARRIVED ON THE BASIS OF AN ESTIMATE PROVIDED BY THE TECHNICAL DEPARTMENT, WHILE THE NRV OF THE DEMO STOCK IS COMPUTED BY MAKING A SMALL DEDUCTION IN ITS ITA NOS.2416 & 2582 /DEL/2012 8 VALUE ON ACCOUNT OF REPEATED USE EVERY YEAR. THE RE SULTING DEDUCTION IN THE VALUE OF CLOSING STOCK IS PROVIDED FOR IN TH E BOOKS OF ACCOUNT BY WAY OF PROVISION FOR IMPAIRMENT OF STOCK. IT WAS SUBMIT TED THAT SUCH STOCKS COULD NOT BE SOLD IN THE MARKET, THEREFORE, THE NET REALI ZABLE VALUE OF SUCH STOCK WAS TAKEN AS NIL. THE MARKET PRICE IN THE PRESENT CASE BEING NIL THE VALUE OF THESE ITEMS WAS WRITTEN DOWN TO NIL AND WAS REDU CED FROM THE VALUE OF THE INVENTORIES. IN ACCORDANCE WITH THE CONSISTENT METHOD OF VALUATION OF INVENTORY FOLLOWED BY THE ASSESSEE, IMPAIRED LOSS W ORTH RS.65,00,000/- WAS REFLECTED IN THE BOOKS OF ACCOUNT AS ON 31.3.2007. THE CUMULATIVE BOOK VALUE AS ON 31.3.2007 OF SUCH OLD AND NON-MOVING ST OCK WAS RS.1 CRORE. OUT OF THIS CUMULATIVE BOOK VALUE OF IMPAIRED STOCK, AS SESSEE HAD ALREADY ADJUSTED AN AMOUNT OF RS.35 LAC WITH THE STOCK OF I NVENTORY AS ON 31.3.2006, THEREFORE, THE ASSESSEE HAD CREATED PROVISION FOR I MPAIRMENT OF STOCK AMOUNTING TO RS.65 LAC AND REDUCED THE SAID AMOUNT OF IMPAIRMENT FROM THE VALUE OF CLOSING STOCK BY WAY OF PROVISION FOR IMPA IRMENT OF STOCK. BEING CONVINCED WITH THESE SUBMISSIONS OF THE ASSESSEE AN D FOLLOWING THE DECISIONS RELIED UPON BY THE LD. AR AS WELL AS THE DECISION OF DELHI BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE (ITA NOS. 4 611 & 4594/DEL/2010 FOR A.Y. 2004-05 AND 2005-06 ORDER DATED 26.12.2011 ) THE LD.CIT (A) HAS ACCEPTED THE CLAIM WITH THIS FINDING THAT THE DISAL LOWANCE OF PROVISION FOR IMPAIRMENT OF STOCK MADE BY THE AO IS NOT PROPER. H AVING GONE THROUGH THE ITA NOS.2416 & 2582 /DEL/2012 9 ORDERS OF THE AUTHORITIES BELOW WE FIND THAT ISSUE IS FULLY COVERED IN FAVOUR OF THE ASSESSEE IN ITS OWN CASE FOR THE A.Y. 2004-05 AND 2005-06 DECIDED BY THE DELHI BENCH OF THE TRIBUNAL IN ITA N O. 4611 & 4594/DEL/2010 VIDE ORDER DATED 26.12.2011. THE RELE VANT PARA NO. 18 THEREOF IS BEING REPRODUCED HEREUNDER FOR A READY R EFERENCE: 18. IN THE PRESENT CASE, AS DISCUSSED ABOVE, THE AS SESSEE HAS BEEN FOLLOWING THE CONSISTENT METHOD OF VALUING THE CLOS ING STOCK AT COST OR MARKET PRICE, WHICHEVER IS LOWER AND THIS SYSTEM AD OPTED BY THE ASSESSEE IS A PRINCIPLE ADOPTED BY THE VARIOUS COUR TS AS NOTED ABOVE. THE ASSESSEE HAS FURNISHED THE DETAILS OF INVENTORY WITH THEIR RESPECTIVE NET REALIZABLE VALUE AS AT THE END OF TH E YEAR. SAME METHOD WAS ADOPTED IN THE ASSESSMENT YEAR 2003-04 WHERE AS SESSEES CLAIM HAS BEEN ACCEPTED. THE ASSESSING OFFICER HAS NOT PO INTED OUT ANY DEFECT OR IRREGULARITY IN THE DETAILS OF RATE ADOPT ED BY THE ASSESSEE FOR VALUING THE STOCK AT NET REALIZABLE VALUE BY MAKING ANY ENQUIRY OR BY UNDERTAKING AN EXERCISE TO ASCERTAIN THE NET REALIZ ABLE VALUE AS AT THE END OF THE RESPECTIVE YEARS. WE FURTHER FIND THAT T HE AO HAS FAILED TO POINT OUT ANY SPECIFIC ITEM IN RESPECT OF WHICH, TH E NET REALIZABLE VALUE ADOPTED BY THE ASSESSEE WAS FOUND TO BE NOT JUSTIFI ED OR EXCESSIVE HAVING REGARD TO THE NATURE OF THE ITEM AND THE COS T INCURRED BY THE ASSESSEE. ITA NOS.2416 & 2582 /DEL/2012 10 THE LD. CIT (A) HAS ALSO PLACED RELIANCE ON THE DEC ISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. BRITISH PAINTS INDIA L TD. 188 ITR 44 (SC) HOLDING THAT WHERE THE MARKET VALUE HAS FALLEN BEFO RE THE DATE OF VALUATION AND AT THAT DATE, THE MARKET VALUE OF THE ARTICLE I S LESS THAN ITS ACTUAL COSTS, THE ASSESSEE IS ENTITLED TO VALUE THE ARTICLES AT M ARKET VALUE AND THE LOSS WHICH HE WILL PROBABLY INCURRED AT THE TIME OF THE SALE OF THE GOODS. IT HAS BEEN HELD FURTHER THAT VALUATION OF THE STOCK IN TR ADE AT COST OR MARKET VALUE WHICHEVER IS THE LOWER, IS A MATTER ENTIRELY WITHIN THE DISCRETION OF THE ASSESSEE. IN THE PRESENT CASE BEFORE US IT IS NOT T HE CASE OF THE AO THAT THE NET REALIZABLE VALUE ADOPTED BY THE ASSESSEE WAS NOT JU STIFIED OR EXCESSIVE HAVING REGARD TO THE NATURE OF THE ITEM AND THE COS T INCURRED BY THE ASSESSEE. IN ABSENCE OF SUCH FINDING WE ARE OF THE VIEW THAT THE LD. CIT (A) HAS RIGHTLY ALLOWED THE CLAIMED PROVISION FOR IMPAIRMENT OF STO CK. THE SAME IS UPHELD. THE GROUND IS ACCORDINGLY REJECTED. 11. IN RESULT APPEAL IS DISMISSED. 12. IN SUMMARY, ASSESSEES APPEAL IS ALLOWED FOR STATIS TICAL PURPOSE WHILE APPEAL OF THE REVENUE IS DISMISSED. 13. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON TH E DAY 29/10/2012. SD/- SD/- ( A. N. PAHUJA ) (I.C. SUDHIR) ACCOUNTANT MEMBER JUDICIAL MEMBER ITA NOS.2416 & 2582 /DEL/2012 11 DATED: 29/10/2012 *AK VERMA* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR