The DCIT, Circle-5, Ahmedabad V. Paras Pharmaceuticals Ltd., Ahmedabad

ITA 3192/AHD/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6093 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 20-07-2011
• Assessment Year: 2000-2001
• Appeal Filed On: 10-09-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P R GHOSH
• Assessee Lawyers: A C SHAH
• Keywords: Earning of tax free income
• Section: 143(3); 14A

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE S/SHRI BHAVNESH SAINI, JM AND A. MOHAN ALANK AMONY, AM DY. CIT, CIR-5, AHMEDABAD. VS. PARASH PHARMACEUTICALS LTD., 6-B, PARASH HOUSE, SATAR TALUKA SOCIETY, ASHRAM ROAD, AHMEDABAD. (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI P. R. GHOSH, DR RESPONDENT BY:- SHRI A. C. SHAH, A.R. O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER . THIS APPEAL IS FILED BY THE REVENUE AGGRIEVED BY T HE ORDER OF LD. CIT(A)-XI, AHMEDABAD IN APPEAL NO.CIT(A)-XI/627/07- 08 DATED 7.7.2008 FOR ASST. YEAR 2000-01 PASSED U/S 250 READ WITH SECTION 143(3) AND 263 OF THE ACT. THE REVENUE HAS RAISED THREE GR OUNDS IN ITS APPEAL, WHEREIN GROUND NOS.2 & 3 ARE GENERAL IN NATURE AND DO NOT SURVIVE FOR ADJUDICATION. THE LONE SURVIVING GROUND IS REPRODUC ED HEREIN BELOW:- (1) THE LD. CIT(A)-XI, AHMEDABAD HAS ERRED IN LAW AND O N FACTS IN DELETING THE ADDITION MADE U/S 14A OF THE ACT OF RS .73,89,256/- ON ACCOUNT OF DISALLOWANCE OF INTEREST EXPENDITURE. ITA NO.3192/AHD/2008 ASST. YEAR2000-01 ITA NO.3192/AHD/2008 ASST. YEAR 2000-01 2 2. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGE D IN THE BUSINESS OF MANUFACTURING AND TRADING IN PHARMACEUT ICAL PRODUCTS. IT FILED ITS RETURN OF INCOME ON 27.11.2000 DECLARING AN INC OME OF APPROXIMATELY 22 CRORES. INITIALLY THE RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE ACT AND SUBSEQUENTLY REOPENED AND ASSESSMENT WAS CO MPLETED U/S 143(3) ON 31.12.2004. SUBSEQUENTLY THE LD. CIT HELD THAT T HE ORDER OF THE AO TO BE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF REV ENUE U/S 263 OF THE ACT SINCE CERTAIN ISSUES WAS NOT EXAMINED. ONE OF THE I SSUES OBSERVED BY THE LD.CIT RELATES TO THE DISALLOWANCE U/S 14A OF THE A CT FOR RS.73.89 BEING INTEREST PAID ON INVESTMENTS MADE IN SHARES AND MUT UAL FUNDS EARNING EXEMPT INCOME WHICH IS RELEVANT FOR THIS APPEAL BEF ORE US. PURSUANT TO THE ORDER OF LD. CIT U/S 263 OF THE ACT, THE LD. AO MAD E AN ADDITION OF RS.73,89,256/- WITH THE FOLLOWING OBSERVATIONS :- 5.2 AS PER PROFIT AND LOSS ACCOUNT, THE INTEREST E XPENSES INCURRED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR WAS OF RS.73,89,256/-. THE ASSESSEE HAS NOT PRODUCED THE PROOF FOR UTILIZING T HE FUNDS BORROWED BY IT, EXCLUSIVELY FOR BUSINESS PURPOSES. ON THE OTHER WAY, THE ASSESSEE COMPANY HAS INVESTED HUGE AMOUNT OF RS.1248 LACS IN SHARES AND MUTUAL FUNDS AND HAS EARNED INCOME IN THE FORM OF DIVIDEND WHICH HAS BEEN CLAIMED TO BE EXEMPT. THE ASSESSEE CLAIMS THAT THE INVESTMENT MADE BY IT IN MUTUAL FUNDS ARE OUT OF THE INTEREST-FREE FUNDS AVAILABLE WITH IT. HOWEVER, THE ASSESSEE HAS NOT BEEN ABLE TO CORROBOR ATE THAT THE SAID INVESTMENT HAS BEEN MADE OUT OF INTEREST FREE FUNDS AS NO SEPARATE ACCOUNT HAS BEEN MAINTAINED FROM WHERE IT CAN BE SA ID TO HAVE BEEN INVESTED. IN ABSENCE OF ANY CORROBORATIVE EVIDENCE ON THE PART OF THE ASSESSEE IN THIS REGARD, THE INTEREST PAID BY IT ON THE BORROWED FUNDS AMOUNTING TO RS.73,89,256/- IS DISALLOWED U/S 14A A ND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. ALSO, IT IS OBSERVED THAT THE ASSESSEE HAS COMMITTED DEFAULT OF FURNISHING INACCURATE PARTICUL ARS AND MAKING FALSE ITA NO.3192/AHD/2008 ASST. YEAR 2000-01 3 CLAIM, THEREBY INCOME HAS ESCAPED ASSESSMENT WITHIN THE MEANING OF SECTION 271(1)9C) FOR WHICH THE PENALTY PROCEEDINGS ARE BEING INITIATED. 3. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A). THE LD. CIT(A) DELETED THE ADDITION AFTER A DETAILED DELIBE RATION ON THE ISSUE. THE EXTRACT OF THE ORDER IS REPRODUCED HEREUNDER FOR RE FERENCE:- 5. I HAVE GONE THROUGH THE FACTS OF THE CASE AND S UBMISSIONS MADE BY THE A. R, OF THE APPELLANT. . THE ASSESSING OFFICER HAS DISALLOWED THE INTEREST ON THE GROUND THAT THE, APPELLANT COMPANY HAS INCURRED EXPENDITURE OF RS. 73.89 LACS FOR THE PURPOSE INVES TMENT OF RS. 1248 LACS IN SHARES AND MUTUAL FUNDS, THE INCOME WHICH IS EXE MPT FROM TAX. THE ASSESSING OFFICER IN PARA 5,2 HAS ALSO OBSERVED THA T THE APPELLANT COMPANY HAS NOT BEEN ABLE TO CORROBORATE THE INVEST MENT WHICH HAVE BEEN MADE OUT OF INTEREST FREE FUNDS AS NO SEPARATE ACCOUNTS ARE MAINTAINED. 5.1 IT IS ARGUED BY THE A. R, OF THE APPELLANT THAT THE COMPANY HAS FURNISHED THE BANK STATEMENTS SHOWING THE NEXUS OF THE INVESTMENTS MADE OUT OF INTEREST FREE FUNDS AND NOT OUT OF BORROWING S. THE SUMMARY OF THE ARGUMENTS OF THE LEARNED AR ARE AS UNDER: (1) THE INVESTMENT OF RS. 11.96 CRORE WAS MADE OUT OF INTEREST FREE FUNDS AS UNDER CASH PROFITS MADE DURING THE YEAR RS. 29 .37 CRORE RETURN OF LOANS & ADVANCES RS. 2.88 CRORE RS. 32.25 CRORE THUS, THE INVESTMENT WAS NOT MADE OUT OF BORROWINGS . (2) THE TOTAL BORROWING OF THE COMPANY HAVE BEEN RE DUCED FROM RS. 9.07 CRORE AS ON 31-03-1999 TO RS. 3.74 CRORE AS ON 31-0 3-2000. THUS, THERE IS NO FRESH BORROWING DURING THE YEAR AND THEREFORE UTILIZATION OF THE BORROWED FUNDS FOR MAKING INVESTMENTS DOES NOT ARIS E. (3) THE BORROWING OF RS. 3.74 CRORE FROM BANK IS AG AINST THE INVENTORY OF RS. 8.76 CRORE AND THEREFORE THE ENTIRE BORROWING F ROM BANK IS INVESTED IN INVENTORY. ITA NO.3192/AHD/2008 ASST. YEAR 2000-01 4 (4) THE COMPANY HAS INCURRED INTEREST EXPENSES OF R S. 73.89 LACS AND HAS EARNED INTEREST OF RS. 46,78 LACS AND THUS THERE IS NET INTEREST EXPENSES ONLY RS. 27.11 LACS. (5) THE COMPANY HAS FURNISHED THE BANK STATEMENTS S HOWING NEXUS OF THE INVESTMENTS AND THE AVAILABLE CREDIT BALANCE WITH T HE BANK. THUS. THE ENTIRE INVESTMENTS ARE MADE OUT OF INTEREST FREE FU NDS. THIS STATEMENTS WERE ALSO FURNISHED TO THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS BY LETTER DATED 25-10-2007. (6) THE AO HAS NOT POINTED OUT ANY NEXUS OF UTILIZA TION OF BORROWED FUNDS FOR MAKING INVESTMENTS. 5.1,2. FROM THE ABOVE REFERRED SUBMISSION AND DETAI LS, I FIND THAT THE APPELLANT HAD MADE INVESTMENTS IN SHARES AND MUTUAL FUNDS OUT OF INTEREST FREE FUNDS. I HAVE ALSO VERIFIED THE DETAI LS FURNISHED BY THE APPELLANT. THE INVESTMENTS IN SHARES AND MUTUAL FUN DS ARE MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE COMPANY. THE COMPANY WAS HAVING SUFFICIENT IN TEREST FREE FUNDS OF RS. 32.25 CRORE, OUT OF WHICH INVESTMENT OF RS. 11.96 CRORE WERE MADE. SECTION 14ACAN BE APP LIED ONLY WHEN THE APPELLANT COMPANY HAS INCURRED EXPENDITURE FOR INCO ME WHICH IS EXEMPTED. IN THE PRESENT CASE, FROM THE DETAILS FUR NISHED, THE APPELLANT COMPANY HAS NOT INCURRED ANY EXPENDITURE OF INTERES T FOR EARNING EXEMPT INCOME AND THEREFORE NO DISALLOWANCE CAN BE MADE UN DER SECTION 14A. HENCE, THE ADDITION MADE OF RS. 73.89 LACS IS HEREB Y DELETED. 4. LD. DR RELIED ON THE ORDER OF THE AO. 5. LD. AR VEHEMENTLY ARGUED THAT ALL THE RELEVANT D ETAILS WERE PRODUCED BEFORE THE CIT(A) WHO AFTER EXAMINING THE RECORDS AND ANALYZING THE FACTS HAD COME TO CONCLUSION THAT IN THE PRESENT CASE, FROM THE DETAILS FURNISHED, THE APPELLANT COMPANY H AS NOT INCURRED ANY EXPENDITURE OF INTEREST FOR EARNING EXEMPT INCOME A ND THEREFORE NO DISALLOWANCE CAN BE MADE UNDER SECTION 14A. LD.AR FURTHER PLACED RELIANCE IN THE DECISION RENDERED IN THE CASE CIT-G ANDHINAGAR (S) V/S. GUJARAT POWER CORPORATION LTD. TAX APPEAL NO. 1587 OF 2009 BY THE ITA NO.3192/AHD/2008 ASST. YEAR 2000-01 5 HONBLE HIGH COURT OF GUJARAT WHEREIN IT WAS HELD T HAT WHEN CIT(A) AND TRIBUNAL BOTH ON FACTS IN THE PRESENT CASE FOUN D THAT THE ASSESSEE DID NOT INVEST BORROWED FUND FOR EARNING INTEREST FREE INCOME, WE ARE OF THE VIEW THAT NOT APPLYING PROVISION OF SECTION 14A OF THE ACT FOR TAXING SUCH INTEREST WAS JUSTIFIED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE MATERIALS ON RECORD. THE ASSESSEE HAD PRODUCED THE REQUISITE DOCUMENTS AND STATEMENT OF ACCOUNTS ALONG WITH THE BANK STATE MENTS BEFORE THE LD.LD.CIT(A) TO ESTABLISH THAT IT HAS APPLIED ITS O WN FUNDS FOR THE INVESTMENTS MADE IN SHARES AND MUTUAL FUND BEARIN G TAX FREE RETURNS. THE LD. CIT(A) HAVE EXAMINED THESE DOCUMENTS AND GR ANTED RELIEF TO THE APPELLANT BY A DETAILED SPEAKING ORDER. RESPECTFULL Y FOLLOWING THE RATIO OF THE HONBLE GUJARAT HIGH COURT CITED SUPRA AND THE FACTS AND CIRCUMSTANCE OF THE CASE BEFORE US WE HAVE NO HESIT ATION TO CONFIRM THE ORDER OF THE LD.CIT(A). IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 22/7/11. SD/- SD/- (BHAVNESH SAINI) (A. MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 22/7/11. ITA NO.3192/AHD/2008 ASST. YEAR 2000-01 6 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 1.DATE OF DICTATION 20/7/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 21/7/11. /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..