DCIT, Madurai V. M/s. Thiagarajar Mills Pvt. Ltd., Madurai

ITA 2427/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7846 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2017
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2012-2013
• Appeal Filed On: 22-08-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PATHLAVETH PERYA
• Keywords: Depreciation; Rule 8D
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 143(3); 92; 14A; 143(1); 250; 80IA; 143(2)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . , ' # BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NO. 2427/MDS/2016 / ASSESSMENT YEAR : 2012-13 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE - 2, MADURAI. VS. M/S. THIAGARAJAR MILLS PVT. LTD., KAPPALLUR, MADURAI - 625 008. [PAN: AAACT 4304R] ( / APPELLANT) ( / RESPONDENT) % & / APPELLANT BY : SHRI PATHLAVETH PERYA, CIT )*% & / RESPONDENT BY : SHRI R. SRINIVASAN, ADVOCATE & /DATE OF HEARING : 22.11.2016 & /DATE OF PRONOUNCEMENT : 31.01.2017 /O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER: THE APPEAL OF THE REVENUE IS DIRECTED AGAINST ORD ER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-1, MADURAI IN ITA NO. 0049/2015-16, :-2-: I.T.A. NO. 2427/MDS/2016 DATED 25.04.2016 FOR THE ASSESSMENT YEAR 2012-13 PA SSED U/S. 143(3) AND 250 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS 'THE ACT'). 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 2.1 THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ER RED IN DELETING THE DISALLOWANCE MADE U/S. 14A ON THE GROUND THAT BORR OWED FUNDS WERE NOT UTILIZED FOR THE PURPOSE OF INVESTMENT IN SHARES, WITHOUT BRINGING FACTS ON RECORD TO CONCLUSIVELY PROVE THA T ONLY OWN FUNDS WERE UTILIZED FOR PURCHASE OF SHARES 2.2 THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE SEEN THE ADDITION ON ACCOUNT OF DISALLOWANCE U/S. 14A HAS B EEN MADE AS PER THE RULE 8 D OF THE IT RULES. 3.1 THE CIT(A), HAS ERRED IN HOLDING THAT THE CLAIM UNDER SECTION 80IA IS TO BE GRANTED WITHOUT SETTING OFF OF THE LOSSES OF THE EARLIER YEARS. 3.2 THE CIT(A) HAS ERRED IN NOT CONSIDERING THAT FA CT THAT PROVISIONS OF SECTION 80IA(5) WHICH SPELLS OUT METHOD OF COMPUTI NG DEDUCTION U/S. 80IA SAYS THAT PROFITS AND GAINS OF ELIGIBLE BUSINESS TO WHICH PROVISIONS OF SECTION 80IA APPLIES TO THE COMPUTAT ION AS IF SUCH ELIGIBLE BUSINESS WERE THE ONLY SOURCE OF INCOME O F THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. 3.3 THE DECISION OF THE JURISDICTIONAL HIGH COURT I N THE CASE OF M/S. VELAYUDHASAMY SPINNING MILLS LTD., VS ACIT (340 IT R 477) FOR THE :-3-: I.T.A. NO. 2427/MDS/2016 ASSESSMENT YEAR 2007-08 RELIED ON BY THE CIT(A) HA S NOT BECOME FINAL AND SLP IS PENDING BEFORE HON'BLE SUPREME CO URT. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY ENGAGED IN MANUFACTURING OF COTTON YARN AND FILED RETURN OF IN COME ON 20.09.2012 WITH TOTAL INCOME OF RS. 5,12,61,332/- AND THE RETURN OF INCOME WAS PROCESSED U/S. 143(1) OF THE ACT. SUBSEQUENTLY, THE CASE WAS SELE CTED FOR SCRUTINY UNDER CASS AND NOTICE U/S. 143(2) OF THE ACT WAS ISSUED. THE LD. AR OF ASSESSEE APPEARED FROM TIME TO TIME AND FILED DETAILS. THE LD. AO ON PERUSAL OF THE FINANCIAL STATEMENTS FOUND THAT ASSESSEE COMPANY RECEIVED DIV IDEND INCOME OF RS. 7,88,484/- ON INVESTMENTS AND UNDER THE PROVISIONS OF SECTION 14A OF THE ACT AND NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPEND ITURE INCURRED IN RELATION TO SUCH EXEMPTED INCOME ON INVESTMENTS WHICH DOES NOT FORM PART OF TOTAL INCOME. IN THE FINANCIAL YEAR 2011-12, THE ASSESSEE COMPANY CLAIMED INTEREST ON BORROWED FUNDS RS. 8,79,95,111/- AND LD. AR EXPLAIN ED THAT BORROWED FUNDS WERE NOT UTILIZED FOR INVESTMENT PURPOSE AND NO POR TION OF INTEREST ON BORROWED CAPITAL PERTAINS TO SUCH INVESTMENTS. FURTHER, THE INVESTMENTS IN SHARES AND MUTUAL FUNDS ARE MADE ON THE DECISIONS OF BOARD OF DIRECTORS OF THE COMPANY AND DIVIDEND INCOME IS RECEIVED WITHOUT INCURRING A NY EXPENDITURE AND ALSO NO EXPENDITURE IN THE NATURE OF ADMINISTRATION OVERHEA DS ARE CHARGED. THE LD. AO HAVING NOT SATISFIED WITH SUBMISSIONS OF LD. AR CAL CULATED DISALLOWANCE U/S. 14A R.W.R. 8D(II) & (III) RS. 88,627/- AND WITH OTHER A DDITIONS PASSED ORDER U/S. 143(3) :-4-: I.T.A. NO. 2427/MDS/2016 OF THE ACT DATED 31.03.2015. AGGRIEVED BY THE ORDE R, THE ASSESSEE FILED AN APPEAL BEFORE COMMISSIONER OF INCOME TAX (APPEALS). 5. IN THE APPELLATE PROCEEDINGS, THE LD. AR ARGUED THE GROUND AND EXPLAINED THAT NO BORROWED FUNDS WERE UTILIZED FOR THE PURPOSE OF INVESTMENTS. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSID ERED THE GROUNDS AND SUBMISSIONS AND FINDINGS OF THE LD. AO AND CAME TO A CONCLUSION THAT EXEMPTED INCOME WAS RECEIVED BY THE ASSESSEE. THE LD. CIT(A ) ALSO FOUND THAT THE ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION ON DISALLOWANCE U/S. 14A IN SPITE OF ASSESSEE COMPANY HAVING ADEQUATE FUNDS AND THE INVESTMENTS IN SHARES IS ONLY RS. 40.19 LAKHS AS AGAINST OWN FUNDS OF RS. 34,615.30 LAKHS AND ASSUMED THAT THE BORROWED FUNDS COULD NOT BE UTILIZ ED FOR INVESTMENT IN SHARES AND DELETED THE DISALLOWANCE AND PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE COMMISSIONER OF INCOME TAX (APPEAL S) ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 6. BEFORE US, THE LD. DR ARGUED THAT THE CIT(A) ERR ED IN DELETING THE DISALLOWANCE WITHOUT CONSIDERING ANY PROOF OF FACTS THAT ONLY OWN FUNDS ARE UTILIZED FOR INVESTMENTS AND DISALLOWANCE U/S. 14A R.W.R. 8D ARE APPLICABLE TO ASSESSEE AND PRAYED FOR ALLOWING THE APPEAL. CONTRA , THE LD. AR RELIED ON THE ORDERS OF THE LD. CIT(A) AND VEHEMENTLY OPPOSED TO THE GROUNDS. :-5-: I.T.A. NO. 2427/MDS/2016 7. WE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS CITED. THE LD. DR ARGUED ON THE APPLICABILITY OF PROVISIONS OF SECTION 14A AND RULE 8D(2)(II) & (III) AND CBDT CIR CULAR, WHERE THE LD. AO HAS MADE DISALLOWANCE OF RS. 88,627 APPLYING RULE 8D, W HEREAS, THE LD. AR CONTENTION THAT THE LD. CIT(A) HAS DELETED THE ADDI TION IN THE ABSENCE OF RECOVERED THE DISSATISFACTION BY THE AO AND ASSESSE E COMPANY MADE INVESTMENTS OUT OF OWN FUNDS OF RS. 34,615.30 LAKHS GENERATED F ROM THE BUSINESS IN SHARES INVESTMENTS OF RS. 40.19 LAKHS, THE ASSESSEE COMPAN Y HAS CLAIMED THAT LOAN FUNDS WERE NOT UTILISED AND CLAIMED INTEREST CHARGE S IN PROFIT AND LOSS ACCOUNT ON BORROWED FUNDS. THE LD. AR EMPHASIZED THAT THE INV ESTMENTS WERE MADE OUT OF INTERNAL ACCRUALS OF BUSINESS OPERATIONS AND FURTHE R SUPPORTED WITH CERTIFICATE OF NET SURPLUS. HOWEVER, WE FIND THAT, THE ASSESSEE C OMPANY COULD NOT SUBSTANTIATE THE INVESTMENTS WITH CASH FLOW STATEME NT AND BANK ACCOUNT, AND THAT BORROWED FUNDS FORM PART OF THE ASSESSEE COMMO N POOL OF FUNDS FROM WHICH INVESTMENT IN SHARES IS MADE FROM TIME TO TIME, NEC ESSITATING PROPORTIONATE METHOD OF ALLOCATING OF FUNDS AND INTEREST COST, AS ADVOCATED UNDER THE RULE 8D. FURTHER, DEPRECIATION RESERVE OF (RS. 21,323.09 LAK HS) HAS TO BE EXCLUDED FROM THE FREE RESERVES AS IT PERTAINS THE DECLINE IN THE VALUE OF FIXED ASSETS. IT IS ONLY WHERE BORROWED FUNDS ARE DEDICATED FUNDS, FOR FINAN CING FIXED ASSET/S OR WORKING CAPITAL, THAT THEIR EXCLUSION, WHERE SO UTILISED, C OULD BE VALIDLY MADE. THE LD. AO HAS RELIED ON PROVISIONS OF SECTION 14A R.W.R. 8D(I I) & (III) AND CALCULATED DISALLOWANCE AND LD. CIT(A) HAS NOT PROVIDED ANY FI NDINGS. CONSIDERING THE APPARENT FACTS AND MATERIAL ON RECORD, WE REMIT THE DISPUTED ISSUE TO THE FILE OF :-6-: I.T.A. NO. 2427/MDS/2016 LD. AO TO VERIFY WHETHER BORROWED FUNDS ARE UTILIZE D FOR THE PURPOSE OF INVESTMENTS AND EXPENDITURE RELATED TO SUCH INVESTM ENTS ARE NOT CHARGED TO PROFIT AND LOSS ACCOUNT AND THEN CALCULATE THE DISA LLOWANCE U/S.14A R.W.RULE 8D AND THE ASSESSEE SHALL BE PROVIDED ADEQUATE OPPORTU NITY OF HEARING BEFORE PASSING THE ORDER. THE GROUND OF THE REVENUE IS AL LOWED FOR STATISTICAL PURPOSE. 8. THE SECOND GROUND RAISED BY THE REVENUE ON THE D EDUCTION U/S. 80IA OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') IN RESPECT OF WINDMILLS. THE LD. AO, RELYING ON PROVISIONS OF SECTION 80IA(5) OF THE ACT DENIED THE ASSESSEE DEDUCTION U/S. 80IA, CLAIMED AT RS. 12,50,48,110/-, BY NOTIONALLY BRINGING FORWARD AND SETTING OFF LOSS OF THE ELIGIBLE BUSINE SS OF THE EARLIER YEARS AND WINDMILLS A SEPARATE UNIT HAS NO POSITIVE INCOME CO NSIDERING THE DEPRECIATION FROM THE YEAR OF INSTALLATION. THIS ISSUE, EVEN AS ADMITTED BY THE PARTIES BEFORE US, IS SQUARELY COVERED BY THE DECISION BY THE HON' BLE JURISDICTIONAL HIGH COURT IN M/S. SRI VELAYUDHASWAMY SPINNING MILLS PVT. LTD., V S. CIT (231 ITR 368). THE HON'BLE COURT HAS THEREIN CLARIFIED, THAT NOTWITHST ANDING PROVISIONS OF SECTION 80IA(5), SUCH LOSSES, ALREADY SET OFF, CANNOT BE NO TIONALLY BROUGHT FORWARD AND ADJUSTED FOR COMPUTING DEDUCTION U/S. 80IA OF THE A CT. FURTHER, THE REVENUE HAS NOT ACCEPTED THE JUDGMENT OF MADRAS HIGH COURT AND FILED SPECIAL LEAVE PETITION (SLP) IN THE HON'BLE SUPREME COURT. THE LD. COUNSE L OF THE ASSESSEE SUBMITTED THAT THE HON'BLE SUPREME COURT IN CIVIL APPEAL NO. 2596/2012 HAS DISMISSED THE SPECIAL LEAVE PETITION FILED BY THE REVENUE IN ORDE RS DATED 23.09.2016. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT SINCE SPECIAL LEAVE :-7-: I.T.A. NO. 2427/MDS/2016 PETITION FILED BEFORE THE APEX COURT IS DISMISSED. THE JUDGMENT OF MADRAS HIGH COURT IS BINDING ON ALL THE AUTHORITIES IN THE STAT E OF TAMIL NADU AND UNION TERRITORY OF PONDICHERRY. THEREFORE, THE COMMISSIO NER OF INCOME TAX (APPEALS) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE BY FO LLOWING THE JUDGMENT OF MADRAS HIGH COURT IN VELAYUDHASWAMY SPINNING MILLS (P) LTD., (SUPRA). ACCORDINGLY, THE TRIBUNAL DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND UPHELD THE CIT(A) ORDER ON THIS GROUND AND DISMISS THE GROUND OF THE REVENUE. 9. IN THE RESULT, THE REVENUE APPEAL FOR THE ASSE SSMENT YEAR 2012-13 IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED ON TUESDAY, THE 31ST DAY OF JANUAR Y, 2017 AT CHENNAI. SD/ - ( ) (SANJAY ARORA) ' / ACCOUNTANT MEMBER SD/ - ( . ) (G. PAVAN KUMAR) $ ' /JUDICIAL MEMBER /CHENNAI, / /DATED: 31ST JANUARY, 2017 JPV & )'12 32 /COPY TO: 1. APPELLANT 2. )*% /RESPONDENT 3. 4 ( )/CIT(A) 4. 4 /CIT 5. 2 )'' /DR 6. 8 /GF