Sagar Drugs & Pharmaceuticals Pvt. Ltd., Ahmedabad V. The Addl.CIT.,Range-8, Ahmedabad

ITA 3179/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6530 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 01-06-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 27-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B L YADAV
• Keywords: Earning of tax free income; Retrospective amendment; Commercial expediency
• Section: 14A

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE S/SHRI M.K. SHRAWAT, JM AND D.C.AGRAWAL, AM SAGAR DRUGS & PHARMACEUTICALS (P) LTD., SAGAR, OPP. KAMDHENU COMPLEX, NR. SAHAJANAND COLLEGE, AMBAWADI, AHMEDABAD. VS. ADDL. CIT, RANGE-8, AHMEDABAD. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SMT. URVASHI SHODHAN, AR RESPONDENT BY:- SHRI B. L. YADAV, SR.DR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE ASSESSEE RAISING FO LLOWING GROUNDS :- (1) THE LD. CIT(A) FAILED TO UNDERSTAND THE FACTS A ND CIRCUMSTANCES OF THE CASE. (2) THE LD. CIT(A) ERRED IN APPLYING RULE 8D OF THE INCOME-TAX RULES THOUGH THE CONDITIONS FOR APPLICATION OF RULE 8D AR E NOT SATISFIED ON THE FACTS OF THE CASE. (3) THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOW ANCE OF RS.7,75,201/- U/S 14A, CONSIDERING THE SAME AS EXPE NDITURE INCURRED FOR THE PURPOSE OF EARNING TAX-FREE DIVIDE ND INCOME, OUT OF SALARY, WAGES, BONUS & PF EXPENSES. ITA NO.3179/AHD/2009 ASST. YEAR 2006-07 ITA NO.3179/AHD/2009 ASST. YEAR 2006-07 2 (4) THE LD. CIT(A) ERRED IN ENHANCEMENT OF THE DISA LLOWANCE TO RS.9,17,154/- FROM RS.7,75,201/- U/S 14A BY APPLYIN G RULE 8D OF INCOME-TAX RULES. 2. THE ONLY ISSUE INVOLVED IN THIS APPEAL IS ABOUT DISALLOWANCE OF PART OF ADMINISTRATIVE EXPENSES U/S 14A BY INVOKING RULE 8D OF THE IT RULES AS ACCORDING TO THE AO PART OF THE ADMINISTRATIVE E XPENSES RELATED TO EARNING OF EXEMPTED INCOME. IN THIS REGARD THE AO W ORKED OUT THE DISALLOWANCE AS UNDER :- THE ASSESSEE HAS SHOWN DIVIDEND INCOME OF RS.66,82 ,739/- AND LONG TERM CAPITAL GAIN U/S 10(36) AND 10(38) OF THE INCO ME-TAX ACT, 1961 OF RS.1,35,37,801/-. THE AFORESAID INCOMES ARE EXEMPTE D FROM TAX. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY EXPENSES AT TRIBUTABLE TO EARNING OF DIVIDEND INCOME AND LONG TERM CAPITAL GAIN SHOUL D NOT BE DISALLOWED IN ACCORDANCE WITH SECTION 14A OF THE INCOME-TAX AC T, 1961. THE ASSESSEES EXPLANATION IN THIS REGARD HAS BEEN DULY CONSIDERED. THE ASSESSEE HAS DISALLOWED DIRECT EXPENSES WHICH ARE A TTRIBUTABLE TO EARNING OF DIVIDEND INCOME. HOWEVER, EXPENSES ATTRIBUTABLE TO EARNING DIVIDEND INCOME AND LONG TERM CAPITAL GAIN OUT OF PAYMENT TO EMPLOYEES IN RESPECT OF SALARY, BONUS AND PF HAVE NOT BEEN DISALLOWED. T HE ASSESSEE HAS DEBITED PAYMENT TO EMPLOYEES (SALARY, WAGES, BONUS & PF EXPENSES) TO THE TUNE OF RS.58,81,000/-. THIS EXPENDITURE INCURR ED ON EMPLOYEES IS MULTIPLIED BY THE RATIO OF DIVIDEND INCOME AND CAPI TAL GAIN (RS.2,02,20,540/-) TO THE TOTAL TURN OVER (RS.15,34 ,26,146/-) WHICH WORKS OUT TO RS.7,75,201/-. THE WORKING OF DISALLOWANCE U /S 14A OF THE INCOME- TAX ACT, 1961 IS AS UNDER :- RS. RS. SALARY, WAGES, BONUS & PF EXP. 58,81,946/- EXEMPTED INCOME DIVIDEND INCOME 66,82,730/- LONG TERM CAPITAL GAIN U/S 10(36) & 10(38) 1,35,37,801/- 2,02,20,540/- TOTAL TURNOVER 15,34,26,146/- = RS.58,81,946/- X RS.2,02,20,540/- = RS.7,75,201/- RS.15,34,26,146/- DISALLOWANCE I/S 14A OF THE I.T. ACT OF RS.7,75,201 /- ITA NO.3179/AHD/2009 ASST. YEAR 2006-07 3 3. THE LD. CIT(A) WAS NOT SATISFIED AND HE ENHANCED THE DISALLOWANCE TO RS.9,17,154/- AS PER THE CALCULATION MADE IN THE APPELLATE ORDER. 4. THE LD. AR SUBMITTED THAT DISALLOWANCE OF ADMINI STRATIVE EXPENSES CANNOT BE DONE PRIOR TO ASST. YEAR 2007-08 BECAUSE RULE 8D HAS NOT BEEN ACCEPTED AS HAVING RETROSPECTIVE EFFECT AND, THEREF ORE, ONLY THOSE EXPENSES WHICH HAVE DIRECT NEXUS WITH THE EXEMPTED INCOME CAN ONLY BE DISALLOWED. SHE REFERRED TO FOLLOWING JUDGMENT IN S UPPORT OF HER ARGUMENT: CIT VS. CATHOLIC SYRIAN BANK LTD. & ORS. (2011) 237 CTR (KER) 164 IN WHICH HON. KERALA HIGH COURT OBSERVED AS UNDER :- SO FAR AS THE DISALLOWANCE OF ADMINISTRATIVE EXPEN DITURE IS CONCERNED, CONSIDERING THE FACT THAT THERE IS NO PRECISE FORMULA FOR PROPO RTIONATE DISALLOWANCE, NO DISALLOWANCE IS CALLED FOR, THE PROPORTIONATE ADMIN ISTRATIVE COST ATTRIBUTABLE TO EARNING OF TAX FREE INCOME UNTIL R.8D CAME INTO FOR CE. THEREFORE, ALL THE ASSESSMENTS ARE REMANDED BACK TO THE AO FOR REWORKING DISALLOWA NCE UNDER S.14A IN THE CASE OF EACH ASSESSEE FOR EACH ASSESSMENT YEAR. THE PROPORT IONATE DISALLOWANCE UNDER S.14A SHOULD BE LIMITED TO ONLY INTEREST LIABILITY AND NO T OVERHEADS OR ADMINISTRATIVE EXPENDITURE, WHICH SHOULD BE CONSIDERED FOR DISALLO WANCE UNDER R.8D FROM 2007-08 ONWARDS. SHE THEN REFERRED TO JUDGMENT IN THE CASE OF IMPULS E (INDIA) (P) LTD. (2008) 22 SOT 368 (DELHI) FOR THE SIMILAR PROPOSITI ON THAT EXPENDITURE HAVING NO NEXUS WITH THE EARNING OF EXEMPTED INCOME CANNOT BE DISALLOWED. FINALLY SHE REFERRED TO A JUDGMENT OF T HIS TRIBUNAL IN THE CASE OF ACIT VS. G M M PFAULDER LTD. IN ITA NO.1241/AHD/ 2006 ASST. YEAR 2002-03 AND OTHERS WHEREIN FOLLOWING FINDINGS WERE GIVEN:- ITA NO.3179/AHD/2009 ASST. YEAR 2006-07 4 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW, THE MATTER WOULD GO TO THE FILE OF AO AS PER THE DECISION OF HON. BOMBAY HIGH COURT IN TH E CASE OF GODREJ BOYCE MFG. CO. LTD. (SUPRA) ONLY WHEN IT IS HELD TH AT SOME AMOUNT IS REQUIRED TO DISALLOWED AS THERE IS A NEXUS BETWEEN THE EXEMPTED INCOME AND INVESTMENT, I.E. IF REVENUE IS ABLE TO SHOW THA T INTEREST BEARING CAPITAL HAS BEEN INVESTED IN SHARES BUT WHERE NO SU CH NEXUS IS ESTABLISHED THE QUESTION OF DETERMINING ANY DISALLO WANCE DOES NOT ARISE AND, THEREFORE, MATTER NEED NOT BE SENT TO THE FILE OF AO AS NO DETERMINATION OF ANY DISALLOWANCE WOULD BE NECESSAR Y. IN THE PRESENT CASE WE NOTICE THAT LOAN FUNDS HAVE DECREASED THIS YEAR AS COMPARED TO EARLIER YEARS. EVEN THOUGH INVESTMENTS HAVE INCREAS ED FROM RS.940.32 LACS TO RS.1008.51 LACS BUT SUCH INCREASE IN INVEST MENT CANNOT BE LINKED TO ANY BORROWED FUNDS THIS YEAR AS ASSESSEE HAS IN FACT NOT BORROWED ANY ADDITIONAL FUND THIS YEAR. PRIOR TO THE DECISION OF HON. SUPREME COURT IN THE CASE OF HONBLE SUPREME COURT IN S.A. BUILDERS VS. CIT 288 ITR 1(SC) ONUS WAS CONSIDERED ON THE ASSESSEE TO SHOW T HE NEXUS BETWEEN THE INTEREST FREE FUNDS AND INVESTMENT ON WHICH NO INCO ME IS EARNED. AFTER S.A. BUILDERS CASE (SUPRA) ONUS IS CONSIDERED SHIF TED TO THE REVENUE AND AO HAS TO SHOW THAT INTEREST BEARING CAPITAL ALONE WERE INVESTED IN INVESTMENT ON WHICH NO INCOME WAS EARNED. HON. SUPR EME COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT (2008) 298 ITR 298 (SC) HELD WHERE ASSESSEE HAD SUFFICIENT PROFITS IN THE CURREN T YEAR THEN INTEREST FREE ADVANCES CAN BE CONSIDERED TO BE FLOWING FROM SUCH PROFITS. HONBLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES & P OWER LTD. (2009) 313 ITR 340 (BOM) HELD THAT IF THERE ARE FUND AVAIL ABLE BOTH INTEREST FREE AND INTEREST BEARING, THEN A PRESUMPTION ARISE THAT INVESTMENT WERE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE. IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT N O DISALLOWANCE OF ITA NO.3179/AHD/2009 ASST. YEAR 2006-07 5 INTEREST PAID ON BORROWED FUNDS WOULD BE NECESSARY. ONCE SUCH PRESUMPTION IS ESTABLISHED CLAIM OF INTEREST WAS AL LOWABLE. 15. THERE IS ANOTHER ASPECT OF THE MATTER. IF THE A SSESSEE HAS MADE INVESTMENT IN SUBSIDIARIES OUT OF MIXED FUNDS AND F OR COMMERCIAL EXPEDIENCY THEN NO INTEREST OUT OF PAYMENT MADE ON BORROWED FUNDS CAN BE DISALLOWED AS HELD IN S. A. BUILDERS LTD. VS. CI T (2007) 288 ITR 1 (SC). HONBLE PUNJAB & HARYANA HIGH COURT IN CIT VS . HERO CYCLES LTD. (2010) 323 ITR 518 (P & H) HELD THAT NO DISALLOWANC E OUT OF INTEREST PAYMENT IS PERMISSIBLE IF AO DOES NOT ESTABLISH NEX US BETWEEN THE EXPENDITURE INCURRED AND INCOME GENERATED. 16. SINCE ASSESSEE HAD SUFFICIENT PROFITS GENERATED THIS YEAR AND IT HAD MIXED FUNDS AND NO NEXUS IS ESTABLISHED BY THE AO A S TO WHETHER INVESTMENT WAS MADE OUT OF INTEREST BEARING FUNDS, DISALLOWANCE OF INTEREST CANNOT BE MADE. SIMILARLY NO DISALLOWANCE OUT OF ADMINISTRATIVE EXPENDITURE CAN BE MADE AS THERE IS NO DIRECT NEXUS . AS A RESULT, THIS GROUND IS ALLOWED. SHE SUBMITTED, FOLLOWING ABOVE DECISIONS, NO DISAL LOWANCE ON ADMINISTRATIVE EXPENSES SHOULD BE MADE. 5. THE LD. DR ON THE OTHER HAND, SUPPORTED THE ORDE RS OF AUTHORITIES BELOW AND SUBMITTED THAT DISALLOWANCE ON ESTIMATE B ASIS CAN ALSO BE DONE AND SUCH ESTIMATE CAN ALSO BE APPLIED TO ADMINISTRA TIVE EXPENSES. 6. WE HAVE HEARD THE RIVAL PARTIES. IN OUR CONSIDER ED VIEW THE POSITION OF LAW IN RELATION TO DISALLOWANCE OF ADMINISTRATIV E EXPENSES IS NOW CLEAR. ITA NO.3179/AHD/2009 ASST. YEAR 2006-07 6 SUCH DISALLOWANCE CANNOT BE MADE PRIOR TO ASST. YEA R 2007-08 UNLESS THERE IS A DIRECT NEXUS ESTABLISHED BY THE AO. IT H AS BEEN HELD THAT RULE 8D IS NOT RETROSPECTIVE AND WOULD BE APPLICABLE FOR AN D FROM ASST. YEAR 2007-08 AND, THEREFORE, IT CANNOT BE APPLIED IN ASS T. YEAR 2006-07 WHICH IS BEFORE US AND, THEREFORE, CALCULATION AS PER RUL E 8D CANNOT BE DONE FOR DISALLOWANCE OF ADMINISTRATIVE EXPENSES, UNLESS OF COURSE A DIRECT NEXUS IS ESTABLISHED WHICH HAS NOT BEEN DONE IN THE PRESE NT CASE. ACCORDINGLY, THE ADDITION MADE BY THE AO AND ENHANCED BY THE LD. CIT(A) IS DELETED AND THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER WAS PRONOUNCED IN OPEN COURT ON 3/6/11. SD/- SD/- (M. K. SHRAWAT) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 3/6/11. MAHATA/- COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD ITA NO.3179/AHD/2009 ASST. YEAR 2006-07 7 1.DATE OF DICTATION 1/6/2011 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 2/6/2011 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..