The DCIT, Circle- 2(1)(1), Ahmedabad V. M/s. Gyscoal Alloys Limited, Ahmedabad

ITA 3670/AHD/2015

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 5412 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 30-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN
• Keywords: Earning of tax free income; Proportionate interest; Onus to prove
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH BEFORE: SHR I MAHAVIR PRASAD , JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER THE DCIT, CIRCLE - 2(1)(1), AHMEDABAD (APPELLANT /RESPONDENT ) VS M/S. GYSCOAL ALLOYS LIMITED, 2 ND FLOOR, MRUDAL TOWER, B/H, TIMES OF INDIA, ASHRAM ROAD, AHMEABAD - 380009 PAN: AAECS6731M (RESPONDEN T /APPELLANT ) REVENUE BY : S H RI LALIT P. JAIN , SR. D . R. ASSESSEE BY: SHRI SUNIL TALATI, A.R. DATE OF HEARING : 23 - 08 - 2 018 DATE OF PRONOUNCEMENT : 28 - 09 - 2 0 18 / ORDER P ER : AMARJIT SINGH, ACCOUNTANT MEMBER : - THESE TWO APPEALS FILED BY REVENUE AND ASSESSEE RESPECTIVELY FOR A. Y. 2012 - 13 , ARI SE FROM ORDER OF THE CIT(A) - 2, AHMEDABAD DATED 30 - 10 - 2 015 , IN PROCEEDINGS UNDER SECTION 143(3) OF THE INCOME TAX ACT , 1961; IN SHORT THE ACT . 2. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL: - 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE MADE U/S.14A R.W.R 8D OF THE ACT AMOUNTING TO RS. 46,98,601/ - , WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF INTEREST EXPENSES AMOUNTING TO RS. 93,15,446/ - U/S.36(L)(III) OF THE ACT, WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD. I T A NO . 3670 / A HD/20 15 & ITA N O. 84/AHD/2016 A SS ESSMENT YEAR 2012 - 13 I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 2 THE ASSESSEE HAS RAISED FOL LOWING GROUND OF APPEAL : - 1. THE LEARNED CIT(A) HAS ERRED ON LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.5,61,043/ - IN RESPECT OF ADMINISTRATIVE AND OTHER EXPENDITURE INC URRED , OUT OF TOTAL DISALLOWANCE MADE BY A.O. OF RS. 52,59,644/ - U/S 14A READ WITH RULE 8D. IT IS SUBMITTED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME BY THE APPELLANT AND FURTHER APPELLA NT COMPANY WAS HAVING INTEREST - FREE FUNDS LYING WITH IT IN FORM OF SHARE CAPITAL AND RESERVE AND SURPLUS AS WELL AS INTEREST FREE UNSECURED LOANS. THESE FACTS HAS NOT BEEN APPRECIATED BY THE LD. CIT(A) FULLY AND CONFIRMING THE PART ADDITION AS ABOVE WHICH IS TOTALLY INCORRECT AND UNJUSTIFIABLE. THUS YOUR APPELLANT PRAYED BEFORE YOUR HONOR THAT KINDLY DELETE THE DISALLOWANCE OF RS. 5,61,043/ - IN THE INTEREST OF JUSTICE AND OBLIGE. GROUND OF APPEAL 1 OF THE REVENUE AND GROUND OF APPEAL OF THE ASSESSEE: 3 . THE ASSESSEE HAS MADE CROSS OBJECTION FOR RESTRICTING THE DISALLOWANCE TO THE EXTENT OF RS. 5 , 63 , 043/ - BY THE CIT(A) IN RESPECT OF ADMINISTRATIVE AND OTHER EXPENDITURE OUT OF TOTAL DISALLOWANCE MADE BY ASSESSING OFFICER OF RS. 52 , 59 , 644/ - U/S. 14A R.W. RU LE 8D OF THE ACT. SINCE THE COMMON FACTS AND ISSUE INVOLVED IN THE CO AND THE GROUNDS OF APPEAL, THEREFO RE, FOR THE SAKE OF CONVENIENCE, THE SAME ARE ADJUDICATED TOGETHER. 4 . IN THIS CASE, RETURN OF INCOME DECLARING INCOME OF R S. 78 , 83 , 943/ - WAS FILED ON 21 ST DECEMBER, 2013. SUBSEQUENTLY , THE CASE WAS SELECTED UNDER SCRUTINY BY ISSUING OF NOTICE U/S. 143(2) OF THE ACT ON 4 TH SEP, 2014. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF TRADING OF SCRAP OF IRON AND STEEL, MANUFACTURING OF CTD BARS ETC. ON SCRUTINY, THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 33 , 50 , 033/ - AND CLAIMED EXEMPT U/S. 10(38) OF THE ACT. THE ASSESSING OFFICER ASKED THE ASSESSEE TO PROVIDE THE DETAILS AND EXPLAINED WHETHER ANY EXPENSES HAS B EEN CLAIMED IN RESPECT OF ANY EXEMPT INCOME WHICH IS DISALLOWABLE U/S. 14A R.W. RULE 8D OF THE IT RULE. THE ASSESSEE COMPANY EXPLAINED THAT IT HAS NOT CLAIMED ANY EXPENSES TO EARN THE EXEMPT INCOME. IT WAS STATED THAT INVESTED IN MUTUAL FUND WAS MADE O UT OF THE PROCEEDS FROM THE I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 3 PUBLIC ISSUE AND THE CAPITAL WORK IN PROGRESS HA D BEEN REDUCED BY THE DIVIDEND EARNED . THE ASSESSING OFFICER HAS NOT ACCEPTED THE EXPLANATION OF THE ASSESSEE AND STATED THAT ASSESSEE HAS GIVEN GENERAL EXPLANATION THAT IT HAS NOT INCURRED ANY EXPENSES TO EARN EXEMPT INCOME . T HEREFORE, HE HAS COMPUTED AN AMOUNT OF RS. 52 , 59 , 644/ - AS DISALLOWANCE AS PER THE PROVISION OF SECTION 14A R.W. RULE 8D OF THE IT RULE . 5. AGGRIEVED ASSESSEE HAS FILED APPEAL BEFORE THE LD. CIT(A). THE LD. C IT(A) HA S PARTLY ALLOWED THE APPEAL OF THE ASSESSEE. THE RELEVANT PART OF THE DECISION OF THE LD. CIT(A) IS REPRODUCED AS UNDER: - 2.3. DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSIONS OF TH E APPELLANT. THE AO HAS MADE THE DISALLOWANCE U/S. 14A OF RS.52,59,644/ - WHICH INCLUDED THE INTEREST DISALLOWANCE OF RS. 46,98,601/ - UNDER RULE 8D(2)(II) AND RS.5,61,043/ - TOWARDS ADMINISTRATIVE AND OTHER EXPENSES UNDER RULE 8D(2)(III). THE AO HAS MADE THE DISALLOWANCE U/S. 14A OF THE I. T. ACT, 1961 STATING THAT THE INTEREST BEARING BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF INVESTMENT IN THE SHARES. FURTHER, IT WAS MENTIONED THAT THE APPELLANT NEEDS TO PROVE BY DEMONSTRATING EVIDENCE THAT ON THE DAY ON WHICH THE INVESTMENTS WERE MADE, THE ASSESSEE HAD INTEREST FREE FUNDS AND THERE WAS NO DIVERSION OF INTEREST BEARING FUNDS FOR NON BUSINESS PURPOSE. THE APPELLANT COULD NOT PROVE BY WAY OF SUBMITTING FUND FLOW STATEMENT THAT THERE WAS NO DIVERSION O F INTEREST BEARING FUNDS AND SUBSEQUENTLY HE RELIED UPON CERTAIN DECISIONS / JUDGMENTS. THE AO OBSERVED THAT THE RESERVES AND SURPLUS WERE BLOCKED AGAINST ASSETS, TRADE RECEIVABLES AND STOCK. THEREFORE, IT WAS NOT AVAILABLE WITH THE ASSESSEE IN LIQUID FORM , SO THAT ASSESSEE COULD UTILISE IT FOR THE PURPOSE OF INVESTMENT IN SHARES AND SECURITIES. HE ALSO OBSERVED THAT, HAD THESE FUNDS WERE AVAILABLE WITH THE ASSESSEE IN LIQUID FORM, THE INTEREST LIABILITY OF THE ASSESSEE IN RESPECT OF LOAN TAKEN AGAINST INTE REST BEARING SECURED LOANS COULD HAVE BEEN REDUCED TO THAT EXTENT. THUS, THE ASSESSEE HAS CLEARLY FAILED TO PROVE THAT NO INTEREST BEARING FUNDS WAS USED IN MAKING INVESTMENT IN MUTUAL FUNDS ON WHICH EXEMPTED INCOME WAS EARNED. 2.4. THE APPELLANT HAS CLAIM ED THE INTEREST EXPENSES AT RS.8,43,79,463/ - PAID ON UNSECURED LOANS WHICH WERE USED FOR THE PURPOSE OF BUSINESS. IT WAS ARGUED THAT THE APPELLANT HAD THE INTEREST FREE OWN FUNDS IN THE FORM OF SHARE CAPI TAL AND RESERVES AND SURPLUS OF RS. 103.78 CRORES SHA RE CAPITAL AT RS. 15.83 CRORES, THE RESERVES AND SURPLUS AT RS.74.70 CRORES AND INTEREST FREE UNSECURED LOANS AT RS.13.25 CRORES) WHILE THE INVESTMENTS WERE TO THE TUNE OF RS.6.12 CRORES ONLY. EVEN DURING THE YEAR UNDER CONSIDERATION, NO NEW INVESTMENTS HA VE BEEN MADE AND THESE INVESTMENTS WERE MADE IN THE PRECEDING YEARS OUT OF THE IPO PROCEEDS AT RS.54.67 CRORES. THUS, THE INTEREST FREE FUNDS AVAILABLE WERE IN EXCESS TO THE INVESTMENT IN MUTUAL FUNDS / SHARES. IN SUPPORT OF THIS, THE APPELLANT RELIED! UPO N THE VARIOUS JUDGMENTS. 2.5. HAVING CONSIDERED THE FACTS AND SUBMISSION, IT IS NOTICED THAT THE INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL, RESERVES AND SURPLUS AND INTEREST FREE ADVANCES WERE MUCH MORE THAN THE INVESTMENT IN SHARES AND CONTENDED T HAT NO INTEREST BEARING FUNDS HAVE BEEN UTILISED FOR THE PURPOSE OF INVESTMENT IN SHARES. DURING THE COURSE OF APPELLATE PROCEEDINGS, THE APPELLANT WAS ASKED TO SUBMIT THE DETAILS OF THE IPO PROCEEDS RECEIVED BY IT AND THE INVESTMENTS MADE THERE - FROM IN TH E SHARES AND CWIP FROM ITS PROCEEDS I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 4 RECEIVED. IN COMPLIANCE TO THE SAME, T HE APPELLANT SUBMITTED THE DATE WISE COMPLETE DETAILS OF THE SOURCES OF FUNDS RECEIVED AND THE UTILISATION THEREOF IN THE INVESTMENT IN MUTUAL FUNDS AND ALSO IN THE CWIP. THE SAME IS DEPICTED AS UNDER: - XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 2.6. FROM THE ABOVE TABLE, IT IS APPARENT THAT INITIALLY THE APPELLANT HAD RECEIVED THE IPO FUNDS ON 27/1 0/2010 AT RS.33,76,06,781/ - OUT OF WHICH THE INVESTMENT IN MUTUAL F UNDS ON 29/10/2010 AMOUNTING TO RS. 25 CRORES WERE INVESTED. THEREAFTER, THE APPELLANT RECEIVED THE REDEMPTION PROCEEDS OF THE PARTIAL INVESTMENT MUTUAL FUND ON 29/11/2010 AT RS.5,00,14,279/ - AND ON 01/12/2010 AT RS.10,07,24,537/ - . OUT OF THESE PROCEEDS, A GAIN THE APPELLANT INVESTED IN MUTUAL FUNDS ON 01/12/2010 AMOUNTING TO RS. 10 CRORES. THEREAFTER, AGAIN THE MUTUAL FUNDS INVESTED IN EARLIER OCCASION WAS REDEEMED TO RS. 5 CRORE ON 02/12/2010 WHICH WAS INVESTED ON THE SAME DAY IN THE OTHER MUTUAL FUND. THU S, AT THE YEAR END AS ON 31/03/2011, RELEVANT TO A. Y. 2011 - 12, THE FUNDS INVESTED IN THE MUTUAL FUNDS WERE AT RS. 1 1,02,09,030/ - WHICH WERE CARRIED FORWARD TO THE YEAR UNDER CONSIDERATION. THEREAFTER, DURING THE YEAR UNDER CONSIDERATION, THE PARTIAL MUTUA L FUNDS WERE REDEEMED AND AT THE YEAR END, THE INVESTMENT OF RS.6.12 CRORE REMAINED OUTSTANDING. 2.7. THUS, FROM THE ABOVE FUND FLOW STATEMENT, WHICH IS VERIFIABLE FROM THE BANK STATEMENT OF THE APPELLANT ALSO THAT THE INVESTMENTS WERE MADE IN THE A. Y. 20 11 - 12 OUT OF THE IPO PROCEEDS AND DURING THE YEAR UNDER CONSIDERATION, THE INVESTMENT REMAINED AT RS.6.12 CRORE WERE OUT OF THE INVESTMENTS MADE IN A. Y. 2011 - 12 AND NOT THE NEW INVESTMENTS DURING THE YEAR UNDER CONSIDERATION. THUS, FROM THE AFORESAID DETA ILS AND CHART, IT IS APPARENT THAT THE SOURCES OF THE INVESTMENT IN THE MUTUAL FUNDS WERE OUT OF THE IPO PROCEEDS WHICH WAS THE INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT AND NO INTEREST EXPENDITURE HAS BEEN INCURRED THEREUPON. THUS, THE QUESTION OF MAKING ANY INTEREST DISALLOWANCE ON THESE INVESTMENTS DOES NOT ARISE. 2.8. THE APPELLANT ALSO RELIED UPON THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. TORRENT POWER LTD. (SUPRA) AND CIT VS. GUJARAT APOLLO INDUSTRIES LTD. (SUPRA) TH AT THE AO HAS ESTABLISHED NO NEXUS OF DIVERSION OF INTEREST BEARING FUNDS UTILISED FOR MAKING INVESTMENT WHICH GENERATE EXEMPT INCOME WAS ON THE REVENUE AND CONSIDERING THESE JUDGMENTS, NO SUCH DISALLOWANCE IS WARRANTED ON INTEREST ACCOUNT IN THE CASE OF A PPELLANT, AND THEREFORE, THE INTEREST DISALLOWANCE MADE BY THE AO IS DELETED. 2.9. THE OTHER LIMB OF THE DISALLOWANCE IS OUT OF THE GENERAL EXPENDITURE ON ACCOUNT OF ADMINISTRATIVE EXPENDITURE. THE AO HAS WORKED OUT THE DISALLOWANCE BY APPLYING THE FORMULA PROVIDED IN RULE 8D. THE APPELLANT HAS NOT MADE ANY DISALLOWANCE UNDER SECTION 14 A AND CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED FOR THIS PURPOSE. IT IS NOTED THAT THE APPELLANT HAS NOT KEPT ANY ACCOUNT OR RECORD TO SHOW THAT NO ADMINISTRATIVE EXPEND ITURE HAS BEEN INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME OR MAINTAINING THE TAX EXEMPT INVESTMENT. THE ONUS TO PROVE THAT IT HAS NOT INCURRED ANY EXPENDITURE IS ON THE APPELLANT AS IT IS THE CLAIM MADE BY IT AND THE ONUS THEREFORE, WOULD BE ON THE APPELLANT. THE RELIANCE IS PLACED ON THE RECENT DECISION OF ITAT PANAJI BENCH IN THE CASE OF JOE MARCELINHO MATHIAS 143 ITD 132 AND HERCULES HOIST LTD 35 TAXMAN.COM 592, MUMBAI ITAT. FURTHER, THE GENERAL LOGIC, THAT IT IS NOT POSSIBLE THAT NO EXPENDITURE M IGHT HAVE BEEN INCURRED FOR EARNING THE DIVIDEND INCOME, IS APPLICABLE IN THE CASE OF THE APPELLANT. SOME ADMINISTRATIVE ACTION SUCH AS THE REVIEW OF INVESTMENT OR MONITORING OF THE ACTIVITIES OF THE COMPANIES IN WHICH THE APPELLANT COMPANY HAS MADE SUBSTA NTIAL INVESTMENT MIGHT HAVE BEEN DONE BY THE DIRECTOR OF THE APPELLANT COMPANIES AND THE SUPPORTING EMPLOYEES MUST HAVE DONE SOME ACTIVITY BY SPENDING SOME TIME ON THE ISSUE. THEREFORE, THE SALARY PAID BY THE APPELLANT COMPANY TO THOSE EMPLOYEES' AND THE I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 5 D IRECTORS HAVE NOT BEEN UTILISED EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY. A PART OF IT CAN ALWAYS BE ATTRIBUTED TO THE EARNING OF DIVIDEND WHICH IS EXEMPT FROM TAX. THEREFORE, IN THESE CIRCUMSTANCES ALSO HAVING REGARD TO THE ACCOUNTS OF T HE APPELLANT, I AM NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE APPELLANT IN RESPECT OF NO ADMINISTRATIVE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT THAT IS THE DIVIDEND INCOME SHOWN BY THE APPEL LANT. 2.10. THEREFORE, AFTER HAVING HELD THAT THE ACCOUNTS OF THE APPELLANT IN RESPECT OF ADMINISTRATIVE EXPENDITURE INCURRED FOR EARNING THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME ARE NOT CORRECT, THE ADMINISTRATIVE EXPENDITURE INCURRED WILL HAVE TO BE WORKED OUT BY APPLYING THE PROVISIONS OF RULE 8D. IT IS NOTED THAT THE AO HAS APPLIED RULE 8D FOR WORKING OUT THE DISALLOWANCE . ACCORDINGLY, THE APPLICATION OF RULE 8D(2)(III) BY THE AO FOR MAKING THE DISALLOWANCE UNDER SECTION 14 A AT RS.561043 / - OUT OF ADMINISTRATIVE EXPENSES IS UPHELD. 2.11. THE GROUND OF APPEAL IS PARTLY ALLOWED. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD. DURING THE ASSESSMENT, THE ASSESSING OFFICER NOTICED THAT THE ASSESSE COMPANY EARNED D IVIDEND INCOME FOR RS. 33,50,033/ - WHICH WAS CLAIMED AS EXEMPT U/S. 10(38) OF THE ACT. IT WAS ALSO NOTICED THAT ASSESSE HAS NOT DISALLOWED ANY EXPENSES U/S. 14A OF THE ACT INCURRED TOWARDS EARNING THE AFORESAID EXEMPT INCOME. THE ASSESSEE RESPONDED THA T COMPANY HAS INVESTED IN MUTUAL FUND AND NO EXPENSES HAVE BEEN INCURRED TO EARN THE EXEMPT INCOME. THE ASSESSING OFFICER WAS NOT AGREED WITH THE ASSESSEE ON THE REASONING THAT THE ASSESSEE HAS GIVEN GENERAL EXPLANATION AND NO DAY TO DAY FUND FLOW HAS BEE N SUBMITTED. THEREFORE, THE ASSESSING OFFICER HAS WORKED OUT THE DISALLOWANCE U/S. 14A ACCORDING TO RULE 8D OF THE IT RULE AND COMPUTED DISALLOWANCE OF RS. 52,59,644/ - . THE LD. CIT(A) HAS RESTRICTED THE DISALLOWANCE TO THE EXTENT OF DISALLOWANCE OF ADMIN ISTRATIVE EXPENSES AS PER RULE 8D(2)(II) TO THE AMOUNT OF RS. 5,61,043/ - AND DELETED THE REMAINING DISALLOWANCE PERTAINING TO INTEREST COST ON THE GROUND THAT THE ASSESSEE HAS MADE INVESTMENT IN MUTUAL FUNDS AND OTHER SECURITIES OUT OF THE INTEREST FREE FU NDS AVAILABLE WITH THE ASSESSEE. WE FIND CORRECTNESS IN THE FINDINGS OF THE LD. CIT(A) IN VIEW OF THE MATERIAL ON RECORD IT IS CLEAR THAT THE ASSESSEE HAD MADE INVESTMENT IN THE ASSESSMENT YEAR 2011 - 12 OUT OF THE IPO PROCEEDS AND DURING THE YEAR UNDER CO NSIDERATION NO NEW INVESTMENT WAS MADE ON WHICH EXEMPT INCOME WAS EARNED. THE DETAILS OF SUCH INVESTMENT MADE FROM THE IPO FUNDS HAS BEEN ELABORATED AT PARA 2.6 IN THE FINDINGS OF THE LD. CIT(A). THE ASSESSING OFFICER HAS WORKED THE DISALLOWANCE OF ADMIN ISTRATIVE EXPENDITURE I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 6 TO THE EXTENT OF RS. 5 , 61 , 043/ - ACCORDING TO THE RULE 8D OF THE ACT SINCE THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE. WE COULD NOT FIND ANY MERIT IN THE CLAIM OF THE ASSESSEE THAT NO ADMINISTRATE EXPENSES HAS BEEN INCURRED FOR THE PU RPOSE OF EARNING EXEMPT INCOME FOR WANT OF APPROPRIATE RELEVANT MATERIAL TO DEMONSTRATE THAT NO ADMINISTRATIVE EXPENDITURE HAS BEEN INCURRED RELATING TO EARNING OF EXEMPT INCOME. WE ARE OF THE VIEW THAT PART OF THE MANPOWER AND OFFICE ESTABLISHMENT MIGHT HAVE BEEN ISSUED FOR THE PURPOSE OF MAKING INVESTMENT ON WHICH EXEMPT INCOME WAS EARNED DURING THE YEAR UNDER CONSIDERATION. AFTER CONSIDERING THE ABOVE FACTS AND FINDINGS OF THE LD. CIT(A), WE JUSTIFY THE DISALLOWANCE TO THE EXTENT OF RS.5,60143/ - AS AD MINISTRATIVE EXPENSE U/S. 14A OF THE ACT. ACCORDINGLY, THE APPEAL OF THE REVENUE AND APPEAL OF THE ASSESSEE ON THIS COMMON ISSUE ARE DISMISSED. 2 ND GROUND OF APPEAL OF THE REVENUE DISALLOWANCE U/S. 36(1)(III) 7 . DURING THE ASSESSMENT , THE ASSESSING OFF ICER NOTICED THAT THE ASSESSEE HAS GIVEN HUGE AMOUNT OF CAPITAL LOAN DURING THE YEAR UNDER CONSIDERATION, THEREFORE, THE ASSESSEE WAS ASKED AS TO WHETHER ANY INTEREST EXPENSES WAS CAPITALIZED WITH THE CA P ITAL ASSETS OR NOT. THE ASSESSEE EXPLAINED THAT DE TAILS OF L OAN S A N D ADVANCES WERE ATTACHED AS PER ANNEXURE 4 AND THE COMPANY HAS NOT GRANTED ANY ADVANCES DURING THE YEAR FOR THE PURPOSE OF OTHER THAN BUSINESS. IT WAS FURTHER STATED THAT THE COMPANY HAS NOT AVAILED A NY INTEREST - BEARING FUND EXCEPT LOAN O F RS. 4.5 CRORE S FROM ADITYA BIRLA FINANCE. THERE IS NO QUESTION OF THE DIVERSION OF INTEREST BEARING FUND FOR NON - BUSINESS PURPOSE. IT WAS ALSO STATED THAT COMPANY HAS ADEQUATE INTEREST FREE FUND AT THE TIME OF GRANTING INTEREST FREE ADVANCES. THE COMP ANY HAS CAPITAL A ND RESERVES OF RS . 90 , 53 , 025 , 86/ - AND INTEREST FREE UNSECURED LOAN OF RS. 13 , 25 , 41 , 352/ - AS ON 31 ST MARCH, 2012. THE ASSESSING OFFICER HAS NOT ACCEPTED THE EXPLANATION OF THE ASSESSEE STATING THAT ASSESSEE HAS NOT ESTABLISHED ANY NEXUS FO R UTILIZATION OF OWN FUND FOR THE PURPOSE OF CWIP. HE STATED THAT IN ABSENCE OF ANY EVIDENCES PROVIDING NEXUS THAT THE SURPLUS FUND AVAILABLE WITH THE ASSESSEE WERE UTILIZED FOR CWIP , THE CLAIM OF THE ASSESSEE WAS NOT ACCEPTABLE . THE ASSESSING OFFICER I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 7 HA S WORKED OUT AS PER PARA 8.7 OF THE ASSESSMENT ORDER INTEREST U/S. 36(1)(III) OF THE ACT TO THE AMOUNT OF RS. 9315446/ - AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 8 . AGGRIEVED ASSESSEE FILED APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS DELETED TH E ADDITION MADE BY THE ASSESSING OFFICER. THE RELEVANT PART OF THE DECISION OF THE LD. CIT(A) IS REPRODUCED AS UNDER: - 6.3 DECISION: I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, THE ASSESSMENT RDER AND THE WRITTEN SUBMISSIONS OF THE APPELLANT. THE AO HAS MADE THE DISALLOWANCE ON THE INTEREST OF RS.93,15,446/ - U/S. 36(1)(III) AND CAPITALISED THE SAME ON THE GROUND THAT THE APPELLANT HAS UTILISED THE INTEREST BEARING BORROWED MONEY FOR THE PURPOSE OF CWIP. THE AO OBSERVED THAT DURING THE YEAR, THE OPE NING BALANCE OF CWIP WAS AT RS.23,73,592/ - AS ON 01/04/2011, WHILE THE CLOSING BALANCE OF CWIP WAS AT RS. 12,11,16,320/ - . THUS, THERE WAS SUBSTANTIAL INCREASE IN THE CWIP DURING THE YEAR UNDER CONSIDERATION AND THIS WAS OUT OF THE INTEREST BEARING BORROWED FUNDS. THE AO OBSERVED THAT THE APPELLANT HAS FAILED TO ESTABLISH THE NEXUS OF UTILISATION OF OWN INTEREST FREE FUNDS FOR THE PURPOSE OF CWIP. 6.4. ALTHOUGH IN PARA NO. 8.6 OF THE ASSESSMENT ORDER, THE AO ADMITTED THAT NO DOUBT THE CONTENTION OF THE APPEL LANT WAS CORRECT THAT HE HAD RECEIVED RS.54.67 CRORES AS SHARE CAPITAL THROUGH IPO DURING THE PREVIOUS YEAR, BUT IT WAS EXAMINED THAT THE SAME WAS UTILISED FOR THE PURPOSE OF CAPITAL ADVANCES DURING THE LAST YEAR ITSELF. DURING THE YEAR, A DIRECT NEXUS OF INCREASE IN NON - CURRENT ASSETS I.E. INCREASE IN CWIP OF RS. 10 CRORES HAVE BEEN NOTICED AND AGAINST THE SAME ENTRIES IN CORRESPONDING NON - CURRENT LIABILITY I.E. LONG TERM BORROWINGS OF RS.12 CRORES HAVE BEEN FOUND. THUS, THERE WAS A DIRECT NEXUS OF UTILISA TION OF BORROWED FUNDS FOR THE PURPOSE OF CWIP FOR WHICH THE APPELLANT HAD PAID INTEREST, AND THEREFORE, INTEREST ON BORROWED FUNDS TO THE EXTENT UTILISED FOR THE PURPOSE OF CWIP HAD TO BE I CAPITALISED U/S. 36(1)(III) OF THE I. T. ACT. IT WAS ALSO ARGUED THAT THE APPELLANT COULD NOT PROVE BY WAY OF SUBMITTING THE FUND FLOW STATEMENT THAT THERE WAS NO DIVERSION OF INTEREST BEARING FUNDS AND INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AT THE TIME OF CAPITAL WORK - IN PROGRESS. THUS IN ABSENCE OF ANY EVIDEN CE PROVING NEXUS THAT THE SURPLUS FUNDS AVAILABLE WITH THE APPELLANT WAS UTILISED FOR CWIP, THE CLAIM OF THE APPELLANT WAS NOT FOUND ACCEPTABLE AND HENCE INTEREST U/S. 36(1)(II I) OF THE I. T. ACT WAS CAPITALISED BY TAKING THE AVERAGE OF BORROWED FUNDS WITH THE AVERAGE OF THE WIP IN RES PECT OF THE CLAIM OF INTEREST. 6.5. ON THE OTHER SIDE, THE APPELLANT SUBMITTED THAT IT HAS NOT AVAILED ANY NEW INTEREST BEARING FUNDS EXCEPT TO THE LOAN OF RS.4.50 CRORE FROM ADITYA BIRLA FINANCE, FROM ANY BANK OR PRIVATE PER SONS. SO, THERE WAS NO QUESTION OF DIVERSION OF INTEREST BEARING FUNDS FOR NON - BUSINESS PURPOSES. FURTHER, CLAIMED THAT THE COMPANY HAD THE INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL, RESERVES AND SURPLUS AND THE INTEREST FREE LOANS TOTALLING TO RS .103.78 CRORES WHICH WERE MORE THAN THE REQUIREMENT OF THE INVESTMENT IN THE MUTUAL FUNDS AND CWIP. THUS, NO BORROWED FUNDS HAVE BEEN UTILISED FOR THE PURPOSE OF CWIP. IT HAS ALSO BEEN SUBMITTED THAT THE WHOLE OF THE INVESTMENT IN RESPECT OF CWIP WERE OUT OF THE IPO PROCEEDS AND OTHER FUNDS. IT ALSO SUBMITTED THE BREAK - UP OF THE CWIP OF RS.12.11 CRORES ALONG WITH LEDGER ACCOUNT OF MAJOR ITEMS OF CWIP ALONG WITH ITS SOURCE OF INVESTMENT. THE DETAILS OF THE SAME ARE AS UNDER: - SUMMARV OF CAPITAL WIP SI. NO. CAPITAL WIP AMOUNT (RS.) I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 8 1 SHED AND BUILDING STRUCTURE - NEW 78,24,207/ - 2 MACHINERY 1 1 ,50,32,958/ - 3 LAND ACCOUNT 79,42,760/ - 4 SHED AND BUILDING STRUCTURE 53,000/ - 5 SURVEYOR EXPENSE LAND 12,000 / - 6 WELDING MACHINE NEW 71,175/ - - 13,09,36,100/ - 7 IPO INCOME (98,19,7817 - ) 12,11,16,319/ - 6.6. THE DETAILED BREAK - UP OF THE FUNDS RECEIVED FROM IPO, PROMOTERS CONTRIBUTION AND INCOME FROM INVESTMENT OF IPO PROCEEDS TOTALLING TO RS.6565.20 LACS AND THE EXPENDITURE TOWA RDS CWIP : AND OTHER ITEMS TOTALLING TO RS.5927.68 LACS BESIDES INVESTMENT IN MUTUAL FUND AT RS.612 LACS ARE DULY CERTIFIED BY THE TAX AUDITOR IN ITS REPORT AT NOTE NO. 36 TO THE NOTE ON FINANCIAL STATEMENTS OF FINAL ACCOUNTS OF THE APPELLANT COMPANY WHICH WERE AVAILABLE BEFORE THE AO. FOR READY REFERENCE, SUCH DETAILS OF THE AUDITOR'S CERTIFICATE ARE REPRODUCED S UNDER: - 36. DURING THE PREVIOUS FINANCIAL YEAR, THE COMPANY HAS COMPLETED ITS INITIAL PUBLIC OFFER (IPO) COMPRISING OF 77,00,000 EQUITY SHARES AT A PRICE OF RS. 71 PER SHARE AGGREGATING TO R.5467.00 LACS. THE SHARE PREMIUM OF RS. 61 PER SHARE AMOUNTING TO RS.4697.00 LACS HAS BEEN CREDITED TO SHARE PREMIUM ACCOUNT. THE SHARE ISSUE EXPENSES AMOUNTING TO RS.510.69 LACS HAVE BEEN ADJUSTED TO SHARE PREMI UM ACCOUNT. UTILIZATION OF PROCEEDS OF IPO RS IN LACS PARTICULARS 2011 - 2 2011 - 12 2010 - 11 2010 - 11 AMOUNT RECEIVED FROM IPO 5467.00 5467.00 PROMOTER CONTRIBUTION 1000.00 1000.00 INCOME FROM INVESTMENT OF IPO PROCEEDS 98.20 36.70 6565.20 6503.70 PROJECTED ACTUAL PROJECTED ACTUAL LAND COST 765.38 603.68 765.38 478.75 CIVIL COST 600.00 0.53 600.00 0.00 PLANT & MACHINERY 4405.11 4264.66 4405.11 3836.51 I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 9 LONG TERM WORKING CAPITAL 500.00 52 81.12 500.00 531.08 GENERAL CORPORATE PURPOSE 25.00 10.00 25.00 10.00 IPO EXPENSES 482.35 510.69 482.35 510.69 6777.85 5927.68 6777.85 5167.03 FIXED DEPOSITS WITH BANK* 25.52 36.67 INVESTMENT IN MUTUAL FUNDS* 612.00 1100.00 TOTAL - 6565.70 6503.70 IT INCLUDES ADVANC ES GIVEN TO VARIOUS PARTIES FOR L AND AND PLANT & MACHINERY FOR NEW PROJECT. AS ON 31 ST MARCH, 2012, UNUTILIZED FUNDS HAVE BEEN TEMPORARILY IN INTEREST BEARING LIQUID INSTRU MENTS INCLUDING DEPOSIT WITH BANKS AND INVESTMENTS IN MUTUAL FUNDS. 6.7. SO THERE WAS COMPLETE NEXUS OF THE AMOUNT INVESTED IN CWIP, OUT OF THE INTEREST FEE FUNDS AVAILABLE WITH THE APPELLANT THROUGHOUT THE YEAR. THE APPELLANT HAS INCORRECTLY CAME TO THE C ONCLUSION THAT THE INTEREST BEARING FUNDS HAVE BEEN UTILISED FOR THE CWIP. THUS, THERE WAS NO DIVERSION OF ANY INTEREST BEARING FUNDS AND NOTIONAL DISALLOWANCE MADE BY THE AO WAS INCORRECT. IT HAS ALSO SUBMITTED THE TABLES SHOWING THE DETAILS OF THE IPO PR OCEEDS AND ITS UTILISATION IN INVESTMENT IN THE MUTUAL FUNDS AND IN THE CWIP. THIS TABLE HAS BEEN DEPICTED IN THE DECISION GIVEN ON THE GROUND NO. 1 IN THE PRECEDING PARAS. 6.8. IN VIEW OF THE AFORESAID DISCUSSION, IT IS APPARENT THAT FIRSTLY, THE APPELLAN T HAD MORE INTEREST FREE FUNDS IN THE FORM, OF SHARE CAPITAL, RESERVES AND SURPLUS AND INTEREST FREE ADVANCES AT RS.103.78 CRORES, WHILE THE INVESTMENT IN THE MUTUAL FUNDS WERE ONLY AT RS.6.12 CRORE AND INVESTMENT IN CWIP WERE AT RS.12.11 CRORES. THUS, THE UTILISATION OF THE FUNDS WAS MUCH LESS THAN THE AVAILABILITY OF THE AFORESAID INTEREST FREE FUNDS. EVEN OTHERWISE ALSO, THE APPELLANT HAD THE IPO PROCEEDS OF RS.54.67 CRORES, PROMOTERS CONTRIBUTION AT RS.10 CRORES AND INCOME FROM INVESTMENT OF IPO PROCEED S AT RS.98.20 CRORES TOTALLING TO RS.65.65 CRORES WHICH HAVE BEEN FULLY UTILISED NOT ONLY IN CWIP BUT IN RESPECT OF PLANT AND MACHINERY AND OTHER ASSETS AND INVESTMENT IN MUTUAL F UNDS, AS HAS BEEN CERTIFIED BY THE AUDITOR'S IN THEIR TAX AUDIT REPORT VIDE C LAUSE NO. 36 TO THE NOTES ON FINANCIAL STATEMENTS WHICH HAS ALREADY BEEN REPRODUCED IN THE PRECEDING PARA. EVEN THE AO HAS NOT CONTROVERTED TO THE DETAILS ESTABLISHING THE UTILISATION OF THE IPO FUNDS IN THE ASSETS AS SPECIFIED IN NOTE NO. 36 TO FINANCIAL STATEMENTS REPRODUCED ABOVE. FURTHER, THE AOS OBSERVATION THAT THE IPO FUNDS WERE UTILISED FOR ANY OTHER PURPOSES IN THE PRECEDING YEARS IS NOT SUPPORTED WITH ANY DETAILS AND DOCUMENTS, AND HENCE, THE OBSERVATIONS ARE UNSUBSTANTIATED. 6.9. IN VIEW OF THE AFORESAID DISCUSSION, THERE IS NO CASE THAT THE INTEREST EXPENDITURES HAVE NOT BEEN INCURRED FOR THE PURPOSE OF BUSINESS, AND THE SOURCES OF SUCH INVESTMENTS IN CWIP HAVE BEEN DULY EXPLAINED FROM THE INTEREST FREE FUNDS WITH THE DETAILED DISCUSSION IN THE PRECEDING PARAS. HENCE, INVOCATION OF T HE PROVISIONS OF SECTION 36(1)(II I) I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 10 OF THE ACT IS NOT CORRECT AND THE AOS STAND FOR CAPITALIZATION OF THE PROPORTIONATE INTEREST EXPENDITURE IS NOT JUSTIFIED. THE GROUND OF THE APPEAL IS ACCORDINGLY ALLOWED. 9 . WE H AVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD ON THIS ISSUE. DURING THE COURSE OF ASSESSMENT, THE ASSESSING OFFICER HAS NOTICED THAT ASSESSEE HAS SHOWN OPENING BALANCE OF CAPITAL WORK IN PROGRESS AT RS. 2,37,3592/ - AND CLOSING BALACE CWIP AT RS. 12,11,16,320/ - AND THE ASSESSE HAS ALSO AVAILED LONG TERM AND SHORT TERM BORROWING DURING THE YEAR BUT NO INTEREST WAS CAPITALIZED TOWARDS THE CWIP. THEREFORE, THE ASSESSING OFFICER HAS PROPORTIONATELY WORKED OUT INTEREST FROM THE BORROWED FUN DS TO THE CWIP AT RS. 93,15,446/ - AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE LD. CIT(A) HAS DELETED THE IMPUGNED ADDITION STATING THAT ASSESEE HAS DULY EXPLAINED THAT INVESTMENT IN THE CWIP WAS MADE FROM THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. ON THE PERUSAL OF THE MATERIAL ON RECORD WE FIND THAT THE ASSESSE COMPANY HAS CAPITAL AND RESERVES OF RS.90,53,02,586/ - AND INTEREST FREE UNSECURED LOAN OF RS.13,25,41,352/ - AS ON 31/03/2012. THE COMPANY HAS NOT AVAILED ANY NEW INTEREST BEAR ING FUND EXCEPT LOAN OF RS. 4.5 CORES FROM ADITYA BIRLA FINANCE. THE ASSESSEE COMPANY WAS HAVING INTEREST FREE FUNDS TO THE AMOUNT OF RS. 103.78 CRORES CONSISTING OF SHARE CAPITAL, RESOURCES AND SURPLUS AND INTEREST FREE LOANS WHICH WERE MORE THAN THE A MOUNT INVESTED IN THIS MUTUAL FUNDS AND CWIP. WE HAVE ALSO GONE THROUGH THE DETAILS OF UTILIZATION OF PROCEEDS OF IPO AS GIVEN IN THE FINDINGS OF THE LD. CIT(A) STATING THAT THERE WAS COMPLETE NEXUS OF THE AMOUNT INVESTED IN CWIP OUT OF THE INTEREST FREE FUNDS AVAILABLE WITH THE COMPANY DURING THE YEAR RUDER CONSIDERATION. AFTER CONSIDERING THE ABOVE FACTS AND THE DETAILED FINDINGS OF THE LD. CIT(A), WE ARE OF THE VIEW THAT THE ASSESSING OFFICER HAS INCORRECTLY MADE THE DISALLOWANCE ON ESTIMATE BASIS WITHO UT DISPROVING THE CLAIM OF THE ASSESSEE BASED ON RELEVANT MATERNAL AS ABOVE AND MENTIONED IN THE FINDINGS OF THE LD. CIT(A). CONSIDERING THE ABOVE, WE ARE INCLINED WITH THE DECISION OF THE LD. CIT(A), THEREFORE, THE APPEAL OF THE REVENUE IS DISMISSED. I.T.A NO. 3670 /AHD/20 15 & I.T.A. NO. 84/AHD/2016 A.Y. 2012 - 13 PAGE NO D CIT VS. M/S. GYSCOAL ALLOYS LIMITED 11 1 0 . IN THE RESULT, THE APPEAL OF THE REVENUE AND THE APPEAL OF THE ASSESSEE BOTH ARE DISMISSED. ORDER PR ONOUNCED IN THE OPEN C OURT ON 28 - 09 - 201 8 SD/ - SD/ - ( MAHAVIR PRASAD ) ( AMARJIT SINGH ) JUDICIAL M EMBER ACCOUNTANT MEMBER AHMEDABAD : DATED 28 /09 /2018 / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,