HARIYANA SHIP BREAKERS LTD, MUMBAI V. ACIT CC 38, MUMBAI

ITA 2556/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 0785 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-05-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 17-05-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 05-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RIJU JAIKARAN LD
• Assessee Lawyers: REEPAL G TRAISHAWALA LD
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 10

Judgement Text

ITA NO.2556/M/2015 HARIYANA SHIP BREAKERS LIMITED ASSESSMENT YEAR-2007-08 IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI , , BEFORE SHRI JOGINDER SINGH, JM AND SHRI MANOJ KUMAR AGGARWAL, AM ./I.T.A. NO.2556/MUM/2015 ( / ASSESSMENT YEAR: 2007-08) HARIYANA SHIP BREAKERS LIMITED 156, MAKER CHAMBERS VI 220, JAMANALAL BAJAJ MARG, NARIMAN POINT MUMBAI 400 02 1 / VS. ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE 38 AAYKAR BHAWAN M.K.MARG MUMBAI 400 020 ./ ./PAN/GIR NO. AAACH-2476-E ( ' /APPELLANT ) : ( #$ ' / RESPONDENT ) A SSESSEE BY : REEPAL G. TRAISHAWALA, LD. AR RE VENUE BY : RIJU JAIKARAN , LD. DR / DATE OF HEARING : 17/05/2017 / DATE OF PRONOUNCEMENT : 19/05/2017 ITA NO.2556/M/2015 HARIYANA SHIP BREAKERS LIMITED ASSESSMENT YEAR-2007-08 2 / O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. THE CAPTIONED APPEAL BY THE ASSESSE FOR ASSESSME NT YEAR [AY] 2007-08 ASSAILS THE ORDER OF LD. COMMISSIONER OF IN COME TAX (APPEALS)- 54 [CIT(A)], MUMBAI DATED 30/12/2014 QUA CONFIRMATION OF DISALLOWANCE U/S 14A. THE ASSESSE IS IN SECOND ROUND OF APPEAL B EFORE US. 2. BRIEFLY STATED, THE ASSESSE, BEING RESIDENT CORPORATE ASSESSEE ENGAGED IN THE BUSINESS OF SHIP BREAKING & MANUFACTURING OF SPONGE IRON, WAS ASSESSED FOR IMPUGNED AY U/S 143(3) AT RS. 1,31 ,82,422/- UNDER NORMAL PROVISIONS AND RS.4,51,30,190/- U/S 11 5JB AS AGAINST RETURNED INCOME OF RS.97,09,250/- FILED ON 29/10/20 07. SINCE ASSESSEE EARNED EXEMPT INCOME U/S 10 FOR RS.20.07 LACS, AO A PPLIED RULE 8D AND COMPUTED THE SAID DISALLOWANCE U/S 14A AT RS.30 .56 LACS, WHICH WAS CARRIED UP-TO THE LEVEL OF TRIBUNAL VIDE ITA NO . 837/MUM/2010 ORDER DATED 10/12/2010 WHERE THE MATTER WAS RESTORED BACK TO LD. AO FOR RE- ADJUDICATION IN VIEW OF THE ORDER OF HONBLE BOMBAY HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. [328 ITR 81]. 3. CONSEQUENTLY, LD. AO RE-EXAMINED THE ISSUE VIDE AN ORDER U/S 143(3) READ WITH SECTION 254 DATED 07/09/2012 AND COMPUTED THE SAID DISALLOWANCE IN THE FOLLOWING MANNER:- NO. PARTICULARS AMOUNT (RS.) 1. INTEREST EXPENSES @12% ON INVESTMENT IN SHARES RS.138.12 LACS 16,57,481/- 2. ON ACCOUNT OF SALARY, PRINTING, STATIONERY, BANK CHARGES, GENERAL EXPENSES ETC. 15,00,000/- TOTAL 31,57,481/ - ITA NO.2556/M/2015 HARIYANA SHIP BREAKERS LIMITED ASSESSMENT YEAR-2007-08 3 4. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN SE COND ROUND WITH PARTIAL SUCCESS BEFORE LD. CIT(A) VIDE IMPUGNED ORD ER DATED 30/12/2014 AND RAISED VARIOUS CONTENTIONS IN SUPPORT OF THE CL AIM THAT NO EXPENDITURE WAS INCURRED TO EARN THE EXEMPT INCOME AND THE ASSESSEE HAD SUFFICIENTLY LARGE OWNED FUNDS TO MAKE INVESTME NTS IN SHARES, AND THEREFORE, NO DISALLOWANCE U/S 14A WAS WARRANTED FO R PARTICULARLY WHEN THE ASSESSEE, HIMSELF MADE SUO-MOTO DISALLOWANCE OF DIRECT EXPENDITURE OF RS.4.86 LACS. HOWEVER, NOT CONVINCED, LD. CIT(A) CONFIRMED INTEREST DISALLOWANCE OF RS.16.57 LACS BUT RESTRICTED EXPENS E DISALLOWANCE TO 2% OF ADMINISTRATIVE EXPENDITURE OF RS.2.32 CRORES WHICH CAME TO RS.4.64 LACS. TO SUM UP, THE ADDITION OF RS.31.57 L ACS COMPUTED BY AO WAS RESTRICTED TO RS.21.21 LACS. STILL AGGRIEVED , THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LD. COUNSEL FOR ASSESSEE [AR], FIRST OF ALL DREW OUR ATTENTION TO THE FINANCIAL STATEMENTS OF THE ASSESSEE, TO CONTEN D THAT THE ASSESSEE AT THE BEGINNING AS WELL AS AT THE END OF THE YEAR HAD LARGE SELF OWNED FUNDS IN THE SHAPE OF SHARE CAPITAL AND FREE RESERVES TO MAKE INVESTMENTS IN SHARES AND HENCE, NO INTEREST DISALL OWANCE COULD BE MADE. THERE BEING NO DIRECT NEXUS BETWEEN BORROWED FUNDS AND INVESTMENTS, A PRESUMPTION HAS TO BE DRAWN THAT THE INVESTMENTS WERE OUT OF OWNED FUNDS IN VIEW OF THE JUDGMENT OF HONB LE BOMBAY HIGH COURT IN CIT VS. HDFC BANK LIMITED [366 ITR 505]. 6. PER CONTRA, LD. DR PLACED RELIANCE ON THE FINDINGS OF LOWER AUTHORITIES AND CONTENDED THAT UNSECURED LOANS RAIS ED BY THE ASSESSEE WERE INCREASED DURING THE YEAR AND THE ASSESSEE HAS DEBITED INTEREST ITA NO.2556/M/2015 HARIYANA SHIP BREAKERS LIMITED ASSESSMENT YEAR-2007-08 4 EXPENDITURE OF RS.6.01 CRORES AS AGAINST INTEREST I NCOME 1.43 CRORES AND THEREFORE, RIGHTLY SADDLED WITH IMPUGNED DISALLOWAN CE. MOREOVER, ADEQUATE RELIEF WAS ALREADY GRANTED BY LD. CIT(A) T O THE ASSESSEE WITH RESPECT TO ADMINISTRATIVE EXPENDITURE AND THEREFORE , NO FURTHER RELIEF COULD BE GRANTED TO THE ASSESSEE. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED RELEVANT MATERIAL ON RECORD. A PERUSAL OF FINANCIAL STATEMENTS PRODUC ED BEFORE US REVEALS THAT THE ASSESSEE IS HAVING OWNED FUNDS IN THE SHAP E OF SHARE CAPITAL & FREE RESERVES TO THE EXTENT OF RS.30.78 CRORES & RS.31.37 CRORES AS ON 31/03/2006 & 31/03/2007 RESPECTIVELY. AGAINST THE S AME, INVESTMENT STOOD AT RS.7.34 CRORES & RS.2.43 CRORES AS ON 31/0 3/2006 & 31/03/2007 RESPECTIVELY. IN FACT, INVESTMENTS HAVE REDUCED DRA STICALLY FROM RS.7.34 CRORES AT THE BEGINNING TO RS.2.43 CRORES AT THE EN D OF THE YEAR AND THEREFORE, THE FINDING BY LOWER AUTHORITIES THAT UN SECURED LOANS HAVE BEEN RAISED DURING THE YEAR TO MAKE NEW INVESTMENT IN SHARES, PRIMA FACIE, SEEMS ERRONEOUS. A FURTHER PERUSAL OF FINANCIAL STA TEMENTS ALSO REVEALS THAT ALTHOUGH UNSECURED LOANS OBTAINED BY T HE ASSESSEE HAVE INCREASED BY RS.11.42 CRORES, HOWEVER, LOANS ADVANC ED BY ASSESSEE HAVE ALSO INCREASED BY RS.14.66 CRORES. THEREFORE, WE FIND STRENGTH IN THE ARGUMENT OF LD. AR THAT THERE BEING NO NEXUS BE TWEEN BORROWED FUNDS AND INVESTMENTS, A PRESUMPTION HAS TO BE DRAW N THAT THE INVESTMENTS WERE OUT OF OWNED FUNDS AS OBSERVED BY HONBLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES & POWER LTD. [313 ITR 34 0] WHICH WAS FOLLOWED IN CIT VS. HDFC BANK LTD. [SUPRA]:- IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN AS SESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD R AISED A LOAN IT CAN BE ITA NO.2556/M/2015 HARIYANA SHIP BREAKERS LIMITED ASSESSMENT YEAR-2007-08 5 PRESUMED THAT THE INVESTMENTS WERE FROM THE INTERES T-FREE FUNDS AVAILABLE. IN OUR OPINION, THE SUPREME COURT IN EAST INDIA PHARMACEUT ICAL WORKS LTD. V. CIT (1997) 224 ITR 627 HAD THE OCCASION TO CONSIDER THE DECISI ON OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. (1982) 134 ITR 219 WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOU LD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNIN G OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM T HE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORC E, BUT CONSIDERING THE FACT THAT THE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS OF INDIA LTD.'S CASE (1982) 134 ITR 219 THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROF ITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITE D IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED T HAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAF T ACCOUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, T HERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH C OURT. THE PRINCIPLE, THEREFORE, WOULD BE THAT IF THERE WERE FUNDS AVAILABLE BOTH IN TEREST-FREE AND OVER DRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT IN VESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT. IN THIS CAS E THIS PRESUMPTION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISS IONER OF INCOME-TAX (APPEALS) AND THE INCOME-TAX APPELLATE TRIBUNAL. THEREFORE, RESPECTFULLY FOLLOWING THE RATIO OF ABOV E DECISION, WE DELETE INTEREST DISALLOWANCE OF RS.16.57 LACS. 8. HOWEVER, SO FAR AS EXPENSE DISALLOWANCE OF 2% IS CONCERNED, WE ARE INCLINED TO RESTRICT THE SAME TO 1% KEEPING IN VIEW THAT FACT THAT THE ASSESSEE EARNED EXEMPT DIVIDEND INCOME OF RS.3.59 L ACS ONLY AND FURTHER, THE INVESTMENT IN SHARES WAS REDUCED DRAST ICALLY FROM RS.7.34 CRORES TO RS.2.43 CRORES DURING THE IMPUGNED AY. 9. IN NUTSHELL, THE ASSESSEES APPEAL STANDS PARTLY ALLOWED. ITA NO.2556/M/2015 HARIYANA SHIP BREAKERS LIMITED ASSESSMENT YEAR-2007-08 6 ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH MAY, 2017. SD/- SD/ - (JOGINDER SINGH) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 19.05.2017 SR.PS:- THIRUMALESH / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #$ ' / THE RESPONDENT 3. + ( ) / THE CIT(A) 4. + / CIT CONCERNED 5. #&- , - , / DR, ITAT, MUMBAI 6. ./ / GUARD FILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI