DCIT, CHENNAI V. AML Steel Ltd., CHENNAI

ITA 306/CHNY/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68624 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-08-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 06-08-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 19-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T N BETGIRI JT
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER] I.T.A.NO.306/MDS/2013 ASSESSMENT YEAR : 2009-10 THE DY. CIT COMPANY CIRCLE I(1) CHENNAI VS M/S AML STEEL LTD AML TOWERS, NO.9, 6 TH STREET GOPALAPURAM CHENNAI - 86 [PAN AAACA 4304 Q] (APPELLANT) (RESPONDENT) C.O.NO.63/MDS/2013 ASSESSMENT YEAR : 2009-10 M/S AML STEEL LTD AML TOWERS, NO.9, 6 TH STREET GOPALAPURAM CHENNAI - 86 VS THE DY. CIT COMPANY CIRCLE I(1) CHENNAI (CROSS OBJECTOR) (RESPONDENT) DEPARTMENT BY : SHRI T.N.BETGIRI, JT.CIT ASSESSEE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE DATE OF HEARING : 06-08-2013 DATE OF PRONOUNCEMENT : 14-08-2013 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE RE VENUE AND THE CROSS OBJECTION FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A)-III, CHENNAI, DATED 19.11.2012. I.T.A.NO.306/13 C.O 63/13 :- 2 -: 2. GROUND NO.1 AND 3 OF THE REVENUES APPEAL ARE GENER AL IN NATURE AND HENCE, REQUIRES NO SPECIFIC ADJUDICATION BY US. 3. IN GROUND NO.2 OF THE APPEAL OF THE REVENUE, THE SO LE GRIEVANCE OF THE REVENUE IS THAT THE LD. CIT(A) ERR ED IN DELETING THE DISALLOWANCE UNDER THE SECOND COMPONENT OF RULE 8D WHEN THE ASSESSEE HAS NOT CONCLUSIVELY PROVED THAT THE BORRO WED FUNDS WERE NOT USED FOR MAKING THE INVESTMENTS. 4. IN GROUND NOS. 1 AND 2 OF THE CROSS OBJECTION, THE GRIEVANCE OF THE ASSESSEE IS THAT THE LD. CIT(A) FAILED TO A PPRECIATE THAT THE ASSESSING OFFICER HAD NOT RECORDED ANY REASONS FOR INVOKING RULE 8D ON THE PREMISE THAT EXPENDITURE WAS INCURRED IN REL ATION TO EXEMPT INCOME DURING THE YEAR AND THAT THE LD. CIT(A) OUGH T TO HAVE APPRECIATED THAT THE ISSUE WAS SQUARELY COVERED BY THE DECISION OF THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S SI VA INDUSTRIES & HOLDINGS LTD VS ACIT IN I.T.A.NO. 2148/MDS/2010. 5. AS THE FACTS AND ISSUES INVOLVED IN THE REVENUES APPEAL AND GROUND NOS. 1 & 2 OF ASSESSEES CROSS OBJECTION AR E COMMON, WE DISPOSE OF THE SAME TOGETHER AS UNDER: I.T.A.NO.306/13 C.O 63/13 :- 3 -: 6. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE, DURING THE YEAR UNDER CONSIDERATION, HAD MADE INVESTMENT IN COMPANIES AND INCOME FROM WHICH WOULD BE CLAIMED AS EXEMPT U/S 10(34) OF THE ACT. THE ASS ESSEES INTENTION WAS TO EARN SUCH INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE. ACCORDING TO THE ASSESSING OFFICER, AS PER PROVISIONS OF SECTION 14A OF THE ACT NO DEDUCTION SHALL BE ALLOWE D IN RESPECT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME. HE FURTHER OBSERVED THAT THE ASSESSEE WAS ASKED TO CLARIFY AS TO WHY THE DISALLOWANCE SHALL N OT BE MADE U/S 14A R.W. RULE 8D. THE ASSESSEE REPLIED THAT IT HAD NO T INCURRED ANY EXPENDITURE FOR EARNING THE EXEMPT INCOME. THE ASS ESSING OFFICER DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE AND OBS ERVED THAT THE ASSESSEE HAS INCURRED AN AMOUNT OF ` 2,53,96,020/- AS INTEREST ON BORROWED CAPITAL DURING THE YEAR. HE FURTHER OBSER VED THAT THE ASSESSEE HAS CLAIMED THAT SUCH BORROWED FUNDS WERE NOT UTILIZED FOR MAKING INVESTMENTS, BUT COULD NOT CLEARLY ESTABLISH THE SAME. FUNDS FOR A COMPANY COME IN A COMMON KITTY AND IT COMPRIS ES OF BORROWED FUNDS, SHARE CAPITAL AND RETAINED EARNINGS AND THER EFORE, TO ARGUE THAT NO PORTION OF THE INTEREST PAID RELATES TO INVESTME NT WAS NOT VALID. I.T.A.NO.306/13 C.O 63/13 :- 4 -: THE ASSESSING OFFICER ALSO OBSERVED THAT IT WAS LOG ICAL TO CONCLUDE THAT A PORTION OF THE ROUTINE EXPENDITURE TO MAINTAIN IT S ESTABLISHMENT AND ADMINISTRATION CAN BE ATTRIBUTABLE TOWARDS THE ACTI VITY OF MAKING INVESTMENTS TO EARN DIVIDEND. HE OBSERVED THAT IT WAS THE FACT THAT THE MANAGERIAL STAFF AND THE DIRECTORS WERE INVOLVE D IN MAKING DECISIONS ON INVESTMENTS, HENCE, A PORTION OF THIS MANAGERIAL REMUNERATION AND DIRECTORS REMUNERATION DEFINITELY BE ATTRIBUTABLE TOWARDS EARNING SUCH EXEMPT INCOME. THE ASSESSING O FFICER ALSO OBSERVED THAT TO DETERMINE THE EXPENSES ATTRIBUTABL E TO EARNING SUCH EXEMPT INCOME, THE FINANCE ACT, 2006 HAD BROUGHT IN THE PROVISIONS OF SECTION 14A(2) WHICH REQUIRES THE ASSESSING OFFICER TO DETERMINE THE EXPENSES RELATING TO AN EXEMPT INCOME IN ACCORDANCE WITH RULE 8D. HE RELIED ON THE DECISION OF THE HON'BLE BOMBAY HIG H COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS DCIT, 328 ITR 8 1, WHEREIN IT WAS HELD THAT DISALLOWANCE UNDER RULE 8D R.W.S 14A(2) W AS FAIR AND REASONABLE. ACCORDINGLY, THE ASSESSING OFFICER CO MPUTED THE DISALLOWANCE UNDER RULE 8D(II) OF ` 1,21,84,209/- AND DISALLOWANCE UNDER RULE 8D(III) BEING 0.5% OF AVERAGE INVESTMENT S YIELDING EXEMPT INCOME OF ` 22,51,364/- AND THEREBY MADE A TOTAL DISALLOWANCE OF ` 1,44,36,173/-. I.T.A.NO.306/13 C.O 63/13 :- 5 -: 7. THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A). T HE ASSESSEE CONTENDED THAT INTEREST EXPENDITURE OF ` 2.54 CRORES COMPRISED OF CASH CREDIT OF ` 6.76 CRORES, TERM LOANS OF ` 9.35 CRORES, HIRE PURCHASE LOAN OF ` 5.10 CRORES AND UNSECURED LOANS OF ` 18.69 CRORES. IT WAS CONTENDED THAT CASH CREDIT OF ` 6.76 CRORES WAS COMPARABLE WITH ITS VALUE OF INVENTORY OF ` 19.48 CRORES AND DEBTORS OF ` 27.11. CRORES. IT WAS ALSO CONTENDED THAT SECURED LOANS OF ` 14.45 CRORES (TERM LOANS AND HIRE PURCHASE LOAN) WERE TOW ARDS PROJECTS NOT FOR THE PURPOSE OF INVESTMENTS. IT WAS ALSO SUBMIT TED THAT OUT OF TOTAL INTEREST EXPENDITURE OF ` 2.54 CRORES, ` 2.53 CRORES WAS TOWARDS INTEREST ON CASH CREDIT LC AND TERM LOANS AND THE REMAINING INTEREST OF ` 0.015 CRORES WAS TOWARDS INTEREST ON OVERDRAFTS, V EHICLE LOANS AND PENAL INTEREST FOR LC. IT WAS ALSO CONTENDED THAT T HE QUESTION OF DISALLOWANCE UNDER SECTION 14A DOES NOT ARISE SINCE THE ASSESSEE HAD NOT MADE ANY CLAIM UNDER EXEMPT INCOME DURING THE Y EAR UNDER APPEAL. THIS PRINCIPLE WAS UPHELD BY THE CHENNAI B ENCH OF THE TRIBUNAL IN THE CASE OF M/S SIVA INDUSTRIES AND HOL DINGS LTD. VS ACIT IN I.T.A.NO. 2148/MDS/2010. 8. THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSIONS O F THE ASSESSEE, OBSERVED THAT FROM ASSESSMENT ORDER IT TR ANSPIRES THAT THE I.T.A.NO.306/13 C.O 63/13 :- 6 -: OBJECTIVE SATISFACTION OF THE ASSESSING OFFICER AS TO THE CORRECTNESS OF THE ASSESSEES CLAIM WAS NOT RECORDED IN THE INSTA NT CASE. HOWEVER, EVEN IF RULE 8D CANNOT BE APPLIED, THE ASSESSING OF FICER IS OBLIGED TO ASCERTAIN THE EXPENDITURE WHICH HAD BEEN INCURRED T O EARN THE TAX FREE INCOME. HE ALSO OBSERVED THAT ON THE FACTS OF EACH CASE THE DISALLOWANCE HAS TO BE WORKED OUT KEEPING IN VIEW T HE PECULIAR FACTS OF EACH CASE. SUB-RULE (2) OF RULE 8D PROVIDES A SCIE NTIFIC AND RATIONAL BASIS FOR COMPUTING SUCH DISALLOWANCE ONCE THE ASSE SSING OFFICER IS SATISFIED THAT THE CLAIM OF EXPENDITURE MADE BY THE ASSESSEE IN RELATION TO EXEMPT INCOME IS NOT CORRECT. 9. THE LD. CIT(A) OBSERVED THAT AS REGARDS THE SECOND COMPONENT OF RULE 8D(2) INTEREST EXPENDITURE OF TH E ASSESSEE DURING THE YEAR WAS ` 2.54 CRORES OUT OF WHICH ` 2.53 CRORES WAS TOWARDS INTEREST ON ASH CREDIT, LC AND TERM LOANS. HE OBSE RVED THAT THE DETAILS OF BALANCE AMOUNT OF ` 1,45,266/- HAVE BEEN FILED BEFORE HIM WHICH SHOWS THAT THIS AMOUNT CONSISTED OF LC PENAL INTERE ST, OVERDRAFT INTEREST AND INTEREST ON VEHICLE LOANS. HE, THEREF ORE, CONCLUDED THAT NO PART OF INTEREST EXPENDITURE WAS DIRECTLY ATTRIB UTABLE TO EARNING OF EXEMPT INCOME AND THEREFORE, SECOND COMPONENT OF RU LE 8D CANNOT I.T.A.NO.306/13 C.O 63/13 :- 7 -: BE APPLIED. HENCE, HE DELETED THE DISALLOWANCE OF INTEREST OF ` 1,21,84,809/-. 10. THE LD. CIT(A) FURTHER OBSERVED THAT AS REGARDS THE THIRD COMPONENT OF RULE 8D(2), THE VALUE OF INVESTMENT, I NCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS ON 1.4.2008 WAS ` 42,68,13,170/- AND THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME AS O N 31.3.2009 WAS ` 47,37,32,330/-. THE INCREASE IN THE VALUE OF INVES TMENTS DURING THE PREVIOUS YEAR WAS ` 4,69,19,160/-. HE, THEREFORE, HELD THAT THERE WAS INCREASE OF ` 4.70 CRORES IN THE VALUE OF INVESTMENTS DURING THE PREVIOUS YEAR INCOME FROM WHICH DOES NOT OR SHALL N OT FORM PART OF THE TOTAL INCOME. THE DETAILS OF THESE INVESTMENTS ARE GIVEN IN SCHEDULE 6 TO THE BALANCE SHEET. THE SOURCES OF THE ADDITIONA L INVESTMENTS MADE DURING THE YEAR HAVE NOT BEEN SPECIFIED. THE ASSE SSEE MUST HAVE DEFINITELY INCURRED ADMINISTRATIVE EXPENDITURE ON M AINTAINING INVESTMENTS AND MAKING FRESH INVESTMENTS DURING THE YEAR INASMUCH AS THE EFFORTS OF THE EMPLOYEES GO IN TRACKING THE MUTUAL FUND AND OTHER INVESTMENTS, PURCHASE AND SALE OF SHARES, MUT UAL FUNDS AND OTHER ASSETS, DEPOSIT OF THE DIVIDEND WARRANTS, POR TFOLIO MANAGEMENT ETC. HE FURTHER OBSERVED THAT THE CONTENTION OF TH E ASSESSEE THAT I.T.A.NO.306/13 C.O 63/13 :- 8 -: SINCE NO EXEMPT INCOME HAS BEEN EARNED DURING THE P REVIOUS YEAR, THEREFORE, NO DISALLOWANCE U/S 14A WAS WARRANTED, WAS NOT ACCEPTABLE IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THE DELHI TRIBUNAL IN THE CASE OF CHEMINVEST LTD VS ITO [2009 ] 121 ITD 318. HE, THEREFORE, HELD THAT IN THE INSTANT CASE, THE A VERAGE VALUE OF THE INVESTMENT ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR WAS ` 45,02,72,750/-, ONE-HALF PERCENT OF THE SAME WORKS OUT TO ` 22,51,364/- WHICH HAS BEEN CORRECTLY WORKED OUT BY THE ASSESSING OFFICER AS THE AMOUNT TO BE DISALLOWED AS PER REQUI REMENT OF RULE 8D(2)(III). HE, THEREFORE, CONFIRMED THE DISALLOWA NCE MADE BY THE ASSESSING OFFICER OF ` 22,51,364/-. 11. THE LD. DR SUPPORTED THE ORDER OF THE ASSESSING OFF ICER. 12. THE LD. A.R OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF INTEREST EXP ENDITURE OF ` 1,21,84,809/-. 13. WITH REGARD TO THE CONFIRMATION OF THE DISALLOWANCE OF ` 22,51,364/- BEING ONE-HALF PERCENT OF THE AVERAGE V ALUE OF INVESTMENTS YIELDING EXEMPT INCOME, HE RELIED ON TH E DECISION OF THE KOLKATA BENCH OF THE TRIBUNAL IN THE CASE OF REI AG RO LTD VS DCIT, I.T.A.NO.306/13 C.O 63/13 :- 9 -: 2013-TIOL-540-ITAT-KOL WHEREIN IT WAS HELD THAT RUL E 8D(2) HAS THREE SUB-PARTS. THE FIRST SUB-PART I.E (I) DEALS WITH THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO THE INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME. IN SECOND SUB-PART I.E (II), IT IS A COMPUTATION PROVIDED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THUS, THE TRIBUN AL HELD THAT RULE 8D(2)(II) CLEARLY WORDED IN THE NEGATIVE WITH THE WORDS NOT DIRECTLY ATTRIBUTABLE . THUS, FOR BRINGING ANY INTEREST E XPENDITURE, CLAIMED BY THE ASSESSEE, UNDER THE AMBIT OF RULE 8D(2)(II) IT WILL HAVE TO BE SHOWN BY THE ASSESSING OFFICER THAT THE SAID INTERE ST IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE TRIBUNAL FURTHER HELD THAT IN RESPECT OF RULE 8D(2)(III), A PERUSAL OF THE SAID PROVISION SHOWS THAT WHAT IS DISALLOWABLE UNDER RULE 8D(2)(I II) IS THE AMOUNT EQUAL TO PERCENTAGE OF THE AVERAGE VALUE OF INVES TMENT THE INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE T OTAL INCOME. THUS, IT IS NOT THE TOTAL INVESTMENT AT THE BEGINNING OF THE YEAR AND AT THE END OF THE YEAR WHICH IS TO BE CONSIDERED BUT IT IS THE AVERAGE OF THE VALUE OF INVESTMENT WHICH HAS GIVEN RISE TO THE INC OME WHICH DOES NOT FORM PART OF THE TOTAL INCOME WHICH IS TO BE CONSID ERED. I.T.A.NO.306/13 C.O 63/13 :- 10 -: 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED T HE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAIL ABLE ON RECORD. IN THE INSTANT CASE, THE ASSESSEE CLAIMED THAT NO EXPE NDITURE WAS INCURRED IN RELATION TO EXEMPT INCOME AND THEREFORE , NO DISALLOWANCE CAN BE MADE U/S 14A OF THE ACT. THE ASSESSING OFF ICER OBSERVED THAT THE ASSESSEE HAS MADE INVESTMENTS, INCOME FROM WHI CH WILL NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE AND THERE FORE, INTEREST PERTAINING TO SUCH INVESTMENT HAS TO BE DISALLOWED WHILE COMPUTING THE INCOME OF THE ASSESSEE. ACCORDING TO THE ASSE SSING OFFICER, THE ASSESSEE HAS CLAIMED INTEREST EXPENDITURE OF ` 2,53,96,020/- AND THEREFORE, THE ASSESSING OFFICER MADE A PROPORTIONA TE DISALLOWANCE OF INTEREST EXPENDITURE OF ` 1,21,84,809/-. 15. THE ASSESSEE EXPLAINED BEFORE THE LD. CIT(A) THAT NO PART OF THE BORROWED FUNDS WAS UTILIZED IN THE INVESTMENTS MADE BY THE ASSESSEE. THE LD. CIT(A), ON EXAMINING THE BALANCE SHEET AND OTHER DETAILS ARRIVED AT THE CONCLUSION THAT OUT OF THE T OTAL INTEREST EXPENDITURE OF ` 2.54 CRORES, ` 2.53 CRORES WAS TOWARDS INTEREST ON CASH CREDIT, LC AND TERM LOANS AND THE BALANCE AMOU NT OF ` 1,45,266/- WAS FOR LC PENALTY INTEREST AND OVERDRAFT INTEREST AND INTEREST ON VEHICLE LOANS. ON THE BASIS OF THIS EXAMINATION, T HE LD. CIT(A) ARRIVED I.T.A.NO.306/13 C.O 63/13 :- 11 -: AT THE CONCLUSION THAT NO PART OF INTEREST EXPENDIT URE WAS DIRECTLY ATTRIBUTABLE TO EARNING OF SUCH EXEMPT INCOME AND T HEREFORE, THE SECOND COMPONENT OF RULE 8D WAS NOT APPLICABLE AND ACCORDINGLY DELETED THE DISALLOWANCE OF INTEREST EXPENDITURE OF ` 1,21,84,809/-. 16. THE ASSESSING OFFICER MADE A DISALLOWANCE OF ` 22,51,364/- BEING % OF AVERAGE INVESTMENT YIELDING EXEMPT INCO ME ON THE GROUND THAT MANAGERIAL STAFF AND DIRECTORS ARE INVO LVED IN MAKING DECISION ON INVESTMENTS, WHICH WAS CONFIRMED IN APP EAL BY THE LD. CIT(A). THE LD. CIT(A) REJECTED THE CONTENTION OF THE ASSESSEE THAT AS NO INCOME WAS CLAIMED BY THE ASSESSEE IN ITS RETUR N OF INCOME AS NOT FORMING PART OF THE TOTAL INCOME, THEREFORE, NO DIS ALLOWANCE OF EXPENDITURE WAS CALLED FOR BY FOLLOWING THE DECISIO N OF THE SPECIAL BENCH OF THE DELHI TRIBUNAL IN THE CASE OF CHEMINVE ST LTD.(SUPRA) WHEREIN IT WAS HELD THAT DISALLOWANCE U/S 14A CAN BE MADE EVEN IN A YEAR IN WHICH NO EXEMPT INCOME HAS BEEN EARNED OR R ECEIVED BY THE ASSESSEE. 17. BEFORE US, THE LD. A.R OF THE ASSESSEE HAS RELIED O N THE DECISION OF THE KOLKATA BENCH OF THE TRIBUNAL IN TH E CASE OF REI AGRO LTD.(SUPRA) WHEREIN IT HAS BEEN HELD THAT IT IS NOT THE TOTAL INVESTMENT AT THE BEGINNING OF THE YEAR AND AT THE END OF THE YEAR WHICH IS TO BE I.T.A.NO.306/13 C.O 63/13 :- 12 -: CONSIDERED BUT IT IS THE AVERAGE OF THE VALUE OF IN VESTMENTS WHICH HAS GIVEN RISE TO INCOME WHICH DOES NOT FORM PART OF TH E TOTAL INCOME WHICH IS TO BE CONSIDERED FOR CALCULATING THE AMOUN T EQUAL TO % OF THE AVERAGE VALUE OF INVESTMENT THE INCOME FROM WHI CH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME. SINCE IN THE YEAR UNDER APPEAL, IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS NOT CLAIMED ANY INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOM E, THEREFORE, ACCORDING TO THE DECISION OF THE KOLKATA BENCH OF T HE TRIBUNAL IN THE CASE OF REI AGRO LTD (SUPRA), NO DISALLOWANCE UNDER RULE 8D(2)(III) CAN BE MADE. 18. FURTHER, THE ASSESSEE HAS RELIED ON THE DECISION O F THE CHENNAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S SI VA INDUSTRIES & HOLDINGS LTD VS ACIT (SUPRA) FOR ITS CONTENTION THA T AS THE ASSESSEE HAS NOT CLAIMED ANY INCOME WHICH DOES NOT FORM PART OF ITS TOTAL INCOME, NO DISALLOWANCE OF EXPENDITURE CAN BE MADE AND THE LD. CIT(A) HAS NOT ACCEPTED THE SAME BY FOLLOWING THE D ECISION OF THE DELHI SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CHEMINVEST LTD.(SUPRA). 19. AT LAST, THE LD. A.R OF THE ASSESSEE ARGUED THAT DI SALLOWANCE BY INVOKING RULE 8D WAS WITHOUT JURISDICTION INASMU CH AS THE I.T.A.NO.306/13 C.O 63/13 :- 13 -: ASSESSING OFFICER BROUGHT NO POSITIVE MATERIAL ON R ECORD TO CONTROVERT THE CONTENTION OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED DURING THE YEAR FOR MAKING INVESTMENT WHICH COULD H AVE YIELDED EXEMPT INCOME. FOR THE ABOVE, HE RELIED ON THE DEC ISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MFG. CO.LTD. (SUPRA) AND ALSO ON THE DECISION OF THE HON'BLE P&H HIGH COURT IN THE CASE OF CIT VS HERO CYCLES LTD., 323 ITR 518. 20. WE FIND THAT IN THE INSTANT CASE, THE ASSESSEE CLA IMED THAT NO EXPENDITURE WAS INCURRED IN RELATION OF INCOME W HICH WAS EXEMPT FROM TAX DURING THE YEAR UNDER CONSIDERATION. THE ABOVE CONTENTION OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFI CER BY OBSERVING AS UNDER: THE ASSESSEE DURING THE YEAR HAD MADE INVESTMENTS I N COMPANIES AND THE INCOME FROM WHICH WOULD BE CLAIME D AS EXEMPT U/S 10(34). THE ASSESSEE'S INTENTION IS TO EARN SUCH INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE. AS PER THE PROVISIONS OF SECTION 14A OF T HE INCOME TAX ACT, 1961, NO DEDUCTION SHALL BE ALLOWED IN RES PECT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME. THE ASSESSED WAS ASK ED TO CLARIFY AS TO WHY THE DISALLOWANCE SHALL NOT BE MADE U/S.14 A R.W. RULE 8D. THE ASSESSEE HAD STATED THAT IT HAD NOT ANY EXP ENDITURE FOR EARNING THE EXEMPT INCOME. THE CONTENTION OF THE AS SESSEE IS NOT ACCEPTABLE FOR THE FOLLOWING REASONS: I.T.A.NO.306/13 C.O 63/13 :- 14 -: I. THE ASSESSEE HAS INCURRED AN AMOUNT OF RS.2,53,96,020/- AS INTEREST ON ITS BORROWED CAPITAL DURING THE YEAR. THOUGH THE ASSESSEE CLAIMED THAT SUCH BORROWED FUNDS WERE NOT UTILIZED FOR MAKING INVEST MENTS, IT COULDN'T CLEARLY ESTABLISH THE SAME. FUNDS FOR A COMPANY COME IN A COMMON KITTY AND IT COMPRISES OF BORROWED FUNDS, SHARE CAPITAL AND RETAINED EARNINGS (RESERVES & SURPLUS). THEREFORE, TO ARGUE THAT NO PORTION OF THE INTEREST PAID RELATES TO INVESTMENT IS NOT VALID. II. IT IS LOGICAL TO CONCLUDE THAT A PORTION OF THE ROUTINE EXPENDITURES TO MAINTAIN ITS ESTABLISHMENT AND ADMINISTRATION CAN BE ATTRIBUTABLE TOWARDS THE ACTI VITY OF MAKING INVESTMENTS TO EARN DIVIDEND. FURTHER, IT IS THE FACT THAT THE MANAGERIAL STAFF AND THE DIRECTORS ARE INV OLVED IN MAKING DECISIONS I ON INVESTMENTS. HENCE, A PORTION OF THIS MANAGERIAL REMUNERATION AND DIRECTORS REMUNERATION DEFINITELY BE ATTRIBUTABLE TOWARDS EARNING SUCH EXE MPT INCOME. III. TO DETERMINE THE EXPENSES ATTRIBUTABLE TO EARN ING SUCH EXEMPT INCOME, THE FINANCE ACT, 2006 HAD BROUGHT IN THE PROVISIONS OF SECTION 14A(2) WHICH REQUIRES THE ASS ESSING OFFICER TO DETERMINE THE EXPENSES ALREADY RELATING TO AN EXEMPT INCOME IN ACCORDANCE WITH RULE 8D. RELIANCE IS PLACED ON THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE VS DCIT, WHEREIN IT HAS BEEN HELD THAT DISALLOWANCE UNDER RULE 8D R.WS. 14A(2) IS FA IR AND REASONABLE. 21. WE, THUS, FIND THAT PROVISION OF RULE 8D WAS INVOK ED BY THE ASSESSING OFFICER AFTER REJECTING THE ASSESSEES C ONTENTION FOR THE ABOVE MENTIONED REASONS. WE FIND THAT THE ASSESSIN G OFFICER HAS BROUGHT NO MATERIAL ON RECORD TO SHOW THAT ANY INTE REST EXPENDITURE WAS INCURRED BY THE ASSESSEE IN RESPECT OF INVESTM ENT WHICH EITHER YIELDED OR COULD HAVE YIELDED EXEMPT INCOME. FURTH ER, WE FIND THAT APART FROM MAKING GENERAL OBSERVATIONS, THE ASSESSI NG OFFICER COULD I.T.A.NO.306/13 C.O 63/13 :- 15 -: NOT BRING ON RECORD ANY SPECIFIC EXPENDITURE WHICH WAS ACTUALLY INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INC OME. WE FIND THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO., 328 ITR 81, HAS HELD AS UNDER: THE SATISFACTION ENVISAGED IN SUB-SECTION (2) OF SECTION 14A IS OBJECTIVE SATISFACTION THAT HAS TO BE ARRIVED AT BY THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE. THE SAFEGUARD INTRODUCED BY SUB-SECTION(2) OF SECTION 1 4A FOR A FAIR AND REASONABLE EXERCISE OF POWER BY THE ASSESSING O FFICER, CONDITIONED AS IT IS BY THE REQUIREMENT OF AN OBJEC TIVE SATISFACTION, MUST THEREFORE, BE SCRUPULOUSLY OBSER VED. 22. FURTHER WE FIND THAT THE HON'BLE P&H HIGH COURT IN THE CASE OF HERO CYCLES LTD.(SUPRA) HAS HELD THAT THE CONTEN TION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALW AYS INCURRED WHICH MUST BE DISALLOWED U/S 14A CANNOT BE ACCEPTED. DI SALLOWANCE U/S 14A REQUIRES A FINDING OF INCURRING OF EXPENDITURE. IF IT IS FOUND THAT FOR EARNING EXEMPT INCOME NO EXPENDITURE HAS BEEN I NCURRED, DISALLOWANCE U/S 14A CANNOT BE SUSTAINED. 23. IN VIEW OF THE ABOVE, IN OUR CONSIDERED OPINION, IN VOCATION OF RULE 8D FOR MAKING DISALLOWANCE U/S 14A WAS WITHOU T SATISFACTION OF PRE-REQUISITE CONDITIONS OF INVOKING RULE 8D AND TH EREFORE, WITHOUT JURISDICTION. CONSEQUENTLY, THE DISALLOWANCE OF ` 1,21,84,809/- MADE BY THE ASSESSING OFFICER IS UNSUSTAINABLE. WE, THE REFORE, DO NOT FIND I.T.A.NO.306/13 C.O 63/13 :- 16 -: ANY MERIT IN THE GROUND OF APPEAL OF THE REVENUE AN D THE SAME IS DISMISSED. 24. FURTHER, FOR THE ABOVE MENTIONED REASONS, GROUND NO S.1 & 2 OF THE CROSS OBJECTION OF THE ASSESSEE ARE ALLOWED AND DISALLOWANCE OF ` 22,51,364/- SUSTAINED BY THE LD. CIT(A) IS HEREBY DELETED. 25. THE THIRD GROUND OF THE CROSS OBJECTION OF THE ASS ESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) IN DIS ALLOWING THE DEPRECIATION ON ELECTRICAL FITTINGS TO THE TUNE OF ` 1,50,700/-. 26. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSIN G OFFICER OBSERVED THAT THE ASSESSEE HAS INCLUDED ELECTRICAL FITTINGS UNDER 15% BLOCK FOR CLAIM OF DEPRECIATION FOR INCOME-TAX PURP OSES. HE REQUIRED THE ASSESSEE TO FILE THE BIFURCATION OF EACH ITEM. FROM THE DETAILS SO FILED BY THE ASSESSEE, THE ASSESSING OFFICER OBSER VED THAT THE ASSESSEE HAS CLAIMED DEPRECIATION OF ` 4,50,211/- ON ELECTRICAL FITTINGS OF ` 30,01,410/- @15% INSTEAD OF @10% ALLOWABLE AS PER THE PROVISIONS OF THE ACT. THEREFORE, HE DISALLOWED TH E EXCESS DEPRECIATION OF ` 1,50,700/-. 27. THE ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A) AN D CONTENDED THAT THERE WAS NO ADDITION TO THE BLOCK D URING THE YEAR I.T.A.NO.306/13 C.O 63/13 :- 17 -: UNDER APPEAL AND DEPRECIATION WAS ALLOWED IN THE PR EVIOUS YEAR IN THE BLOCK. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD USED THE NOMENCLATURE ELECTRICAL FITTINGS INSTEAD OF ELEC TRICAL EQUIPMENTS INADVERTENTLY WHICH ARE INDEED EQUIPMENTS USED FOR THE PURPOSE OF MANUFACTURING. 28. THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSIONS O F THE ASSESSEE, HELD THAT EXCEPT STATING THAT ASSESSEE H AS USED THE NOMENCLATURE ELECTRICAL FITTINGS INSTEAD OF ELEC TRICAL EQUIPMENTS INADVERTENTLY, NO OTHER EVIDENCE, WHATSOEVER, HAS B EEN PRODUCED TO VERIFY THE TRUE NATURE OF THESE ASSETS. WHEN THERE IS SPECIFIC PROVISION TO COVER THE ITEMS, THERE IS NO NEED TO LOOK BEYOND AND ALLOW FURTHER BENEFIT. HENCE, HE CONFIRMED THE ORDER OF THE ASSES SING OFFICER AND DISMISSED THE GROUNDS OF APPEAL OF THE ASSESSEE. 29. BEFORE US, THE LD. A.R HAS REITERATED THE SUBMISSI ONS MADE BEFORE THE LD. CIT(A) WHEREAS THE LD. DR HAS SUPPOR TED THE ORDER OF THE LD. CIT(A). 30. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSIN G THE MATERIALS AVAILABLE ON RECORD, WE FIND THAT THE ASS ESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HAS CLAIMED DEPRECIATIO N @15% OF ` I.T.A.NO.306/13 C.O 63/13 :- 18 -: 30,14,120/- INSTEAD OF @10% ALLOWABLE UNDER THE INC OME-TAX ACT, 1961. HE, THEREFORE, DISALLOWED THE EXCESS DEPRECI ATION CLAIMED OF ` 1,50,700/-. THE ASSESSEE CONTENDED BEFORE THE LD. CIT(A) THAT THE ASSESSEE INADVERTENTLY USED THE NOMENCLATURE AS EL ECTRICAL FITTINGS INSTEAD OF ELECTRICAL EQUIPMENTS AND AS NO ADDITI ON TO THE BLOCK WAS MADE DURING THE YEAR AND DEPRECIATION @ 15% WAS ALL OWED IN THE BLOCK IN THE EARLIER YEARS SO THE DEPRECIATION CLA IMED BY THE ASSESSEE WHICH WAS @15% SHOULD BE ALLOWED. THE LD. CIT(A) D ISMISSED THE APPEAL OF THE ASSESSEE OBSERVING THAT NO EVIDENCE WAS PRODUCED TO SHOW THAT THE ITEMS WERE NOT ELECTRICAL EQUIPMENTS AND NOT ELECTRICAL FITTINGS. 31. BEFORE US ALSO, THE ASSESSEE HAS NOT PRODUCED ANY MATERIALS TO SHOW THAT THE ITEMS ON WHICH DEPRECIATION @ 15% WAS CLAIMED WERE ELECTRICAL EQUIPMENTS AND NOT ELECTRICAL F ITTINGS. HENCE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A) AND WHICH IS CONFIRMED AND THE GROUND OF CROSS OBJECTI ON OF THE ASSESSEE IS DISMISSED. I.T.A.NO.306/13 C.O 63/13 :- 19 -: 32. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED AND THE CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLO WED. ORDER PRONOUNCED ON WEDNESDAY, THE 14 TH OF AUGUST, 2013, AT CHENNAI. SD/- SD/- (V. DURGA RAO) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 14 TH AUGUST, 2013, RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR