Mahesh Kumar Mittal, Ludhiana V. ACIT, Ludhiana

ITA 270/CHANDI/2015

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1609 (ITAT-CHANDIGARH)
• Duration Of Justice: 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-10-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 16-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRS RAJINDER KAUR
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Capital asset; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND MS. RANO JAIN, ACCOUNTANT MEMBER ITA NO.268/CHD/2015 (ASSESSMENT YEAR : 2009-10) AARTI STEELS LIMITED, VS. THE D.C.I.T., G.T. ROAD, MILLERGANJ, CIRCLE-V, LUDHIANA. LUDHIANA. PAN: AABCA4455D AND ITA NO.271/CHD/2015 (ASSESSMENT YEAR : 2009-10) AARTI INTERNATIONAL LIMITED, VS. THE A.C.I.T., G.T. ROAD, MILLERGANJ, CIRCLE-V, LUDHIANA. LUDHIANA. PAN: AABCA4454C (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUBHASH AGGARWAL RESPONDENT BY : MRS.RAJINDER KAUR, DR DATE OF HEARING : 12.10.2015 DATE OF PRONOUNCEMENT : 30.11.2015 O R D E R PER RANO JAIN, A.M . : BOTH THESE APPEALS FILED BY THE DIFFERENT ASSESSEES ARE DIRECTED AGAINST THE SEPARATE ORDERS OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-2, 2 LUDHIANA EACH DATED 16.2.2015 RELATING TO ASSESSMEN T YEAR 2009-10. ITA NO.268/CHD/2015 : 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED AS MANY AS FIVE GROUNDS, WHILE THE LEARNED COUNSEL FOR THE ASSESSEE PREFERRED NOT TO PRESS GROUND NOS.1 AND 2. THE GR OUND NOS.4 AND 5 ARE GENERAL IN NATURE. THEREFORE, THE ONLY GROUND TO BE DECIDED BY US IS GROUND NO.3. 3. IN THIS GROUND, THE CONTENTION OF THE ASSESSEE IS THAT THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) READ WITH RULE 8D OF THE INCOME TAX RULES IS TO BE RESTRICTED TO THE EXTENT OF DIVIDEND INCOME EARNED BY IT AMOUNTING TO RS.98,870/- 4. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF IRO N & STEEL PRODUCTS AND OXYGEN GAS & GENERATION OF POWER . DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OF FICER NOTED THAT THE ASSESSEE HAD SHOWN INVESTMENT OF RS.1,42,73,785/- AND RS.2,29,66,556/- AS ON 31.3.20 08 AND 31.3.2009 RESPECTIVELY. THE INCOME FROM THESE INVESTMENTS ARE NOT PART OF TOTAL INCOME. THE ASS ESSEE HAD CLAIMED INTEREST OF RS.35,48,84,527/-. AFTER CONSIDERING ASSESSEES SUBMISSION, THE ASSESSING OF FICER INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT A ND COMPUTATION MADE AS PER RULE 8D, MADE A DISALLOWANC E OF 3 RS.12,35,568/-. ONE OF THE CONTENTIONS BEFORE THE LEARNED CIT (APPEALS) WAS THAT THE DISALLOWANCE UNDER SECTI ON 14A OF THE ACT OVER AND ABOVE THE AMOUNT OF TAX FREE IN COME EARNED IS LEGALLY NOT TENABLE. HOWEVER, REJECTING THE SAID CONTENTION OF THE ASSESSEE THE LEARNED CIT (APPEALS ) OBSERVED THAT THE LEGISLATURE HAS PROVIDED RULE 8D OF THE RULES FOR COMPUTATION OF DISALLOWANCE UNDER SECTION 14A OF THE ACT, WHICH DOES NOT PROVIDE FOR ANY SUCH LIM IT. PROVIDING ANY LIMITS TO THE DISALLOWANCE IN THESE CIRCUMSTANCES BY CONTENDING THAT THE DISALLOWANCE S HOULD NOT EXCEED THE AMOUNT OF EXEMPT INCOME WOULD TANTAMOUNT TO AMENDING THE PROVISIONS OF RULE 8D OF THE RULES. 5. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TOTAL DIVIDEND INCOME EARNED DUR ING THE YEAR BY THE ASSESSEE IS ONLY RS.98,869/-, WHILE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS RS.12,35,568/-, WHICH CAN NEVER BE THE INTENTION OF THE LEGISLATURE WHILE FRAMING THE PROVISIONS OF SECTION 14A OF THE ACT OR THAT OF RULE 8D OF THE RULES. IN THIS REGARD, ON THE PROPOSITION THAT THE DISALLOWANCE CANNOT EXC EED THE EXEMPT INCOME. RELIANCE WAS PLACED ON THE JUD GMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CAS E OF CIT VS. MASCOT FOOTCARE IN ITA NO.67 OF 2009 (O &M) DATED 2.4.2014. RELIANCE WAS ALSO PLACED ON A NUM BER OF ORDERS OF VARIOUS BENCHES OF THE TRIBUNAL INCLUDING THAT 4 OF CHANDIGARH BENCH IN THE CASE OF EMPIRE PACKAGES (P) LTD. VS. ITO IN ITA NO.978/2013 DATED 18.6.2015. 6. THE LEARNED D.R. RELIED UPON THE ORDER OF THE ASSESSING OFFICER AS WELL AS THAT OF THE LEARNED CI T (APPEALS) AND FURTHER SUBMITTED THAT IN THE CASE OF CIT VS. WALFORT SHARE & STOCK BROKERS (P) LTD. (2010) 3 26 ITR 1, IT HAS BEEN HELD BY THE APEX COURT THAT THE EXPE NSES ONLY TO THE EXTENT INCURRED FOR EARNING THE TAXABLE INCOME ARE TO BE ALLOWED TO AN ASSESSEE. 7. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. THIS IS AN UNDISPUTED FACT THAT THE DIVIDEND INCOME WHICH IS A TAX FREE INCOME HAS BEEN SHOWN DURING THE YEAR TO RS.98,870/- ONLY. BY MAKING DISALLOWANCE OF AN AM OUNT OF RS.12,35,568/-, THE ASSESSING OFFICER HAS NOT ON LY DISALLOWED THE EXPENSES TO THE EXTENT OF ENTIRE EXE MPT INCOME, HE ALSO EXCEEDED THE INCOME SO EARNED. IN THE CASE OF MASCOT FOOTCARE (SUPRA), THE HON'BLE PUNJAB & HARYANA HIGH COURT HAS HELD IN VERY CLEAR TERMS THA T THE DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT EX CEED THE DIVIDEND INCOME OR ANY OTHER TAX FREE INCOME EA RNED BY THE ASSESSEE DURING THE YEAR. THOUGH THIS CASE WAS RENDERED BEFORE INSERTION OF RULE 8D OF THE RULES, SINCE THE CASE RELATES TO ASSESSMENT YEAR 2000-01, WE OBS ERVE THAT THE PROPOSITION HAS BEEN LAID DOWN BY THE HIGH COURT IN THE CONTEXT OF SECTION 14A OF THE ACT AND NOT IN THE CONTEXT OF RULE 8D OF THE RULES, WHICH IS ONLY A 5 COMPUTATIONAL PROVISION AND THIS IS A TRITE LAW THA T THE SUBSTANTIVE PROVISIONS ARE CONSIDERED TO BE SUPERIO R IN LAW THAN THE MACHINERY PROVISIONS. THERE ARE A NU MBER OF JUDGMENTS OF OTHER HIGH COURT INCLUDING THAT OF DELHI HIGH COURT IN THE CASE OF CIT VS. HOLCIM INDIA P. LTD., ITA NO.486/299 OF 2014, DATED 5.9.2014 AND THAT OF GUJARAT HIGH COURT IN THE CASE OF CIT VS. CORRTECH ENERGY P.LTD. (2015) 571 ITR 97 (GUJ), WHEREBY IT HAS BEEN HELD THAT IF THE ASSESSEE DOES NOT EARN ANY TAX FREE INC OME, DISALLOWANCE UNDER SECTION 14A OF THE ACT CANNOT BE MADE. THE PROPOSITION AS REGARDS TO NO TAX FREE IN COME, NO DISALLOWANCE UNDER SECTION 14A OF THE ACT HAS AL SO BEEN LAID DOWN BY THE JURISDICTIONAL PUNJAB & HARYA NA HIGH COURT IN THE CASE OF CIT VS. LAKHANI MARKETIN G IND. (2014) 111 DTR 149 (P&H). WE DO NOT FIND OURSELVES IN AGREEMENT WITH THE PROPOSITION THAT THE RULE 8D OF THE RULES BEING MANDATORY, DISALLOWANCE AS PER RULE 8D HAS TO BE MADE EVEN IN CASES WHERE NO TAX FREE INCOME H AS EARNED OR WHERE TAX FREE INCOME EARNED IS LESSER TH AN THE AMOUNT COMPUTED AS PER RULE 8D OF THE RULES. IN O UR VIEW, THE PROPOSITION LAID DOWN BY VARIOUS HIGH COU RTS AS MENTIONED HEREINABOVE IS APPLICABLE IN THE PRESENT CASE WITH FULL FORCE. IN VIEW OF THIS, WE DIRECT THE A SSESSING OFFICER TO LIMIT THE DISALLOWANCE MADE UNDER SECTIO N 14A OF THE ACT READ WITH RULE 8D OF THE RULES TO THE AM OUNT OF TAX FREE INCOME EARNED BY THE ASSESSEE. THIS GROU ND OF APPEAL RAISED BY THE ASSESSEE IS ALLOWED. 6 8. THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ITA NO.271/CHD/2015 : 9. IN THIS APPEAL, GROUND NOS. 1 AND 2 ARE NOT PRESSED. 10. IT IS RELEVANT TO OBSERVE HERE THAT THE ISSUE IN GROUND NO.3 IS SIMILAR TO THE ISSUE IN GROUND NO.3 RAISED BY THE ASSESSEE IN ITA NO.268/CHD/2015 AND THE FIND INGS GIVEN IN ITA NO.268/CHD/2015 SHALL APPLY TO THIS CA SE ALSO WITH EQUAL FORCE. 11. THE GROUND NO.4 RAISED BY THE ASSESSEE IS GENERAL IN NATURE AND HENCE, NEEDS NO ADJUDICATION. 12. THE GROUND NO.5 IS AGAINST THE OF INTEREST UND ER SECTION 36(1)(III) OF THE ACT. 13. BRIEFLY, THE FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD INVES TED MONEY IN PURCHASE OF LAND AMOUNTING TO RS.48,90,240 /-. THE ASSESSING OFFICER ASKED THE ASSESSEE TO PROVIDE THE PROOF OF LAND HAVING BEEN PUT TO USE. THE ASSESSE E SUBMITTED THAT THE LAND WAS REQUIRED FOR EXPANSION OF PLANT AND THAT THE LAND WAS PURCHASED FROM ITS OWN FUNDS. NOT SATISFIED WITH THE SUBMISSION OF THE A SSESSEE, THE ASSESSING OFFICER HELD THAT THE INTEREST PAID F OR THE PERIOD THE ASSET NOT BEING PUT TO USE WAS REQUIRED TO BE CAPITALIZED. THIS WAY, THE ASSESSING OFFICER CAPI TALIZED 7 THE INTEREST EXPENDITURE IN PROPORTION TO THE INTER EST ON INVESTMENT IN LAND @ 8% AND ACCORDINGLY, CAPITALIZE D AN AMOUNT OF RS.44,825/-. 14. BEFORE THE LEARNED CIT (APPEALS), IT WAS SUBMITTED THAT THE INVESTMENTS WERE MADE OUT OF CAS H ACCRUALS OF THE ASSESSEE COMPANY, WHICH IS A SUM OF RS.22,76,10,565/- AND THE PETTY AMOUNT OF INVESTMEN T IN LAND WAS MADE OUT OF THE INCOME FOR THE YEAR. REL IANCE WAS PLACED ON THE ORDER OF THE CHANDIGARH BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. SAMRAT FORGING LT D. IN ITA NO.975/CHD/2011 DATED 24.5.2012. THE LEARNED CIT (APPEALS) DID NOT FIND HIMSELF IN AGREEMENT WITH TH E SUBMISSIONS OF THE ASSESSEE. HE OBSERVED THAT NO S PECIFIC TERM LOAN HAD BEEN BORROWED BY THE ASSESSEE FOR THE PURCHASE OF LAND. THE PAYMENTS WERE MADE FROM CC ACCOUNT, WHICH HAS DEBIT BALANCE AS WELL AS CREDIT BALANCE FROM TIME TO TIME. THEREFORE, THE ASSESSEE HAD BO TH THE BORROWED FUNDS AND PERSONAL FUNDS IN ITS POSSESSION . THEREFORE, THE FUNDS COMING OUT OF THE MIXED FUNDS, HE WAS OF THE OPINION THAT IT WOULD BE FAIR AND REASON ABLE TO RESTRICT THE DISALLOWANCE IN THE DEBT EQUITY RATIO. IN THIS WAY, HE DIRECTED THE ASSESSING OFFICER TO COMPUTE T HE DISALLOWANCE OF INTEREST ON DAY-TO-DAY BASIS BY APP LYING OF DEBT EQUITY RATIO. 15. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATE D THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES A ND AGAIN PLACED RELIANCE ON THE ORDER OF DCIT VS. SAMR AT 8 FORGING LTD. (SUPRA), WHILE THE LEARNED D.R. RELIED UPON THE ORDER OF THE ASSESSING OFFICER AS WELL AS THAT OF THE LEARNED CIT (APPEALS). 16. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOTH THE PARTIES, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AND CONSIDERED THE MATERIAL AVAILABLE ON RECO RD. ON PERUSAL OF THE ORDER OF THE CHANDIGARH BENCH IN THE CASE OF SAMRAT FORGING LTD. (SUPRA), WE OBSERVE TH AT ON SIMILAR ISSUE THE I.T.A.T., CHANDIGARH BENCH HAS HE LD AS UNDER : 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE RAISED IN GROUND NO.1 IS IN RELATION TO THE APPLICATION OF PROVISO TO SECTION 36(1)(III) OF THE ACT. THE SAID SECTION 36(1)(III) OF THE ACT TALKS OF DEDUCTION TO BE ALLOWED ON THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR TH E PURPOSES OF BUSINESS OR PROFESSION, WHILE COMPUTING THE INCOME FROM PROFITS AND GAINS OF BUSINESS. THE PRO VISO TO SECTION 36(1)(III) OF THE ACT PROVIDES THAT WHER E ANY AMOUNT OF INTEREST WAS PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF ASSET, THEN SUCH INTERE ST WHICH IS RELATABLE TO THE PERIOD BEGINNING FROM THE DATE ON WHICH CAPITAL WAS BORROWED FOR ACQUISITION OF AS SET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS A DEDUCTION. 9. THE PROVISIONS OF MAIN SECTION AND THE PROVISO A RE IN RELATION TO THE AMOUNT OF INTEREST PAYABLE ON CA PITAL BORROWED. THE FIRST JUNCTURE THUS TO BE SEEN IS WH ETHER THE ASSESSEE HAD BORROWED ANY CAPITAL FOR THE PURPO SES OF INVESTMENT IN CAPITAL ASSET FOR EXTENSION OF EXI STING BUSINESS OR PROFESSION. IN THE FACTS OF THE PRESEN T CASE, THERE IS NO FINDING BY THE ASSESSING OFFICER IN RES PECT OF 9 THE BORROWALS MADE BY THE ASSESSEE FOR THE PURPOSES OF INVESTMENT IN CAPITAL WORK-IN-PROGRESS. THE ASSESS ING OFFICER NOTED THAT THE ASSESSEE HAD SHOWN CAPITAL W ORK- IN-PROGRESS IN ITS BALANCE SHEET AND CONSEQUENTLY COMPUTED DISALLOWANCE IN VIEW OF THE PROVISIONS OF PROVISO TO SECTION 36(1)(III) OF THE ACT. THE CIT (APPEALS) HAS GIVEN THE FINDING THAT NO LOAN HAD BE EN RAISED BY THE ASSESSEE COMPANY FOR THE PURCHASE OF FURNACE OR FOR THE CONSTRUCTION OF BUILDING. THE S AID FINDING OF THE CIT (APPEALS) HAD NOT BEEN CONTROVER TED BY THE LEARNED D.R. FOR THE REVENUE. FURTHER THE C IT (APPEALS) HAS ALSO NOTED THAT THE TOTAL INVESTMENT MADE BY THE ASSESSEE DURING THE YEAR ON CAPITAL WORK-IN- PROGRESS WAS RS.42.46 LACS SPENT ON FURNACE AND RS.33.23 LACS ON THE BUILDING AS AGAINST THE NET PR OFIT OF THE ASSESSEE FOR THE YEAR AT RS.1.97 CRORES. IN VI EW OF THE ABOVE SAID FACTS AND CIRCUMSTANCES, WE FIND NO MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. UPLOADING THE ORDER OF THE CIT (APPEALS) WE DISMISS GROUND NO.1 RAISED BY THE REVENUE. 17. THIS IS AN ADMITTED FACT IN THE PRESENT CASE T HAT NO SPECIFIC LOAN WAS RAISED BY THE ASSESSEE FOR THE PURPOSES OF PURCHASE OF THIS LAND. THIS IS ALSO A FINDING OF FACT RECORDED BY THE LOWER AUTHORITIES THAT THER E WERE MIXED FUNDS AVAILABLE FOR THIS PURPOSE WITH THE ASS ESSEE. ON AVAILABILITY OF MIXED FUNDS, IT CANNOT BE PRESUM ED BY THE REVENUE THAT THE BORROWED FUNDS HAVE BEEN USED FOR THE PURPOSES OF ACQUISITION OF SAID LAND. WE FIND THAT THE OBSERVATIONS MADE BY THE I.T.A.T., CHANDIGARH BENCH ARE APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE PR ESENT CASE ALSO. RESPECTFULLY FOLLOWING THE ORDER OF TH E COORDINATE BENCH, WE DIRECT THE ASSESSING OFFICER T O 10 DELETE THE ADDITION MADE BY HIM. THIS GROUND OF A PPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE. 18. THE GROUND NOS.4 TO 6 ARE GENERAL IN NATURE AN D HENCE, NEEDS NO ADJUDICATION. 19. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASSESSES ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF NOVEMBER, 2015. SD/- SD/- (BHAVNESH SAINI) (RANO JAIN) JUDICIAL MEMBER ACOUNTANT MEMBER DATED : 30 TH NOVEMBER, 2015 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH