The ACIT, Bhopal V. M/s. Bhaskar Industries Ltd., Bhopal

ITA 391/IND/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 9670 (ITAT-INDORE)
• Duration Of Justice: 1 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 13-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 27-07-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K K SINGH
• Assessee Lawyers: S S DESH
• Keywords: Business income; Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH : INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI R.C.SHARMA, ACCOUNTANT MEMBER PAN NO. : AAACB5809M I.T.A.NO. 391/IND/2009 A.Y. : 2006-07 ACIT, M/S. BHASKAR INDUSTRIES LIMITED, 1(2), VS 6-DWARKA SADAN PRESS COMPLEX, BHOPAL M.P.NAGAR, BHOPAL (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI K.K. SINGH, CIT DR RESPONDENT BY : SHRI S. S. DESHPANDE, C.A. O R D E R PER R. C. SHARMA, A.M. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) DATED 14.5.2009 FOR THE ASSESSMENT YEAR 2 006-07, WHEREIN THE REVENUE IS AGGRIEVED FOR DELETION OF AD DITION OF RS. 36,90,440/- ON ACCOUNT OF DISALLOWANCE OF INTEREST EXPENDITURE. -: 2: - 2 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORDS PERUS ED. 3. FACTS IN BRIEF ARE THAT THE ASSESSEE WAS HAVING INC OME FROM DIVIDEND WHICH IS TAX FREE INVESTMENT, IN ADDI TION TO ITS REGULAR BUSINESS INCOME. DURING THE COURSE OF SCRUT INY ASSESSMENT, THE AO DISALLOWED INTEREST EXPENDITURE OF RS. 36.90 LAKHS OUT OF INTEREST EXPENDITURE OF RS. 616. 77 LAKHS INCURRED BY THE ASSESSEE DURING THE ASSESSMENT YEAR UNDER CONSIDERATION AFTER HAVING THE FOLLOWING OBSERVATIO NS :- AS PER PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAD DEBITED EXPENDITURE UNDER THE HEAD INTEREST AN AMOUNT OF RS. 6,16,77,133/-. FURTHER, IT WOULD BE REASONABLE TO GIVE A SET OFF OF INTEREST EARNED BY ASSESSEE TO ARRIVE AT NET EXPENDITURE OF INTEREST P AID. THE NET INTEREST PAID WAS RS. 5,81,53,554/- AS UNDER :- 1. INTEREST PAID FOR WHOLE OF THE BUSINESS RS. 6 ,16,77,133/- 2. INTEREST EARNED AS PER SCHEDULE 12 I) FROM BANK RS. 14,20,488/- II) FROM OTHER RS. 21,03,091/- NET INTEREST PAID RS. 5,81,53,554/- -: 3: - 3 AS SEPARATE EXPENDITURE OF INTEREST PAID ON EXEMPTE D INCOME WAS NOT WORKED OUT BY THE ASSESSEE, IT WOULD BE DETERMINED IN PROPORTIONATE OF EXEMPTED INCOME AND TOTAL INCOME OF ASSESSEE, AS UNDER :- INTEREST EXPENDITURE X INCOME CLAIMED EXEMPTED/TOTAL INCOME OF ASSESSEE. 5,81,53,554/- X RS. 97,80,912/- ( DIVIDEND INCOME)/ 15,41,26,541/- (PROFIT AS PER PROFIT AND LOSS ACCOU NT ) = RS. 36,90,440/- THEREFORE, ON AMOUNT OF RS. 36,90,440/- IS REQUIRED TO BE DISALLOWED TO ASSESSEE COMPANY AS AN EXPENDITURE INCURRED ON SUCH INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. BY THE IMPUGNED ORDER, THE LD. CIT(A) HAS DELETED T HE DISALLOWANCE OF INTEREST AFTER HAVING THE FOLLOWING OBSERVATIONS :- 4.1 IT SEEMS THAT THE AO HAS, WHILE MAKING THE IMPUGNED DISALLOWANCE OUT OF THE LD. CIT(A) OF INTEREST, HAD THE AFORESAID POSITION OF THE RULE 8D IN MIND. HE HAS, HOWEVER, NOT DEALT WITH THE ISSUE THOROUGHLY INASMUCH AS THESE PROVISIONS CAN BE INVOKED ONLY WHEN IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE -: 4: - 4 PREVIOUS WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THIS IS NOT THE POSIT ION OBTAINING IN THE PRESENT MATTER, WHEREIN THE APPELLANT COMPANY HAS PAID UP CAPITAL AND FREE RESERVES OF MORE THAN RS. 53.30 CRORES AT THE BEGINNING OF THE YEAR WHICH HAVE SURGED UP TO RS. 61.67 CRORES ON THE LAST DAY OF THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION ON WHICH NO INTEREST COST HAS BEEN INCURRED BY THE COMPANY. ALSO, THE APPELLANT COMPANY HAS PAID ALL THE INTEREST TO THE BANKS AND FINANCIAL INSTITUTION S OF VARIOUS LOANS DETAILS OF WHICH HAVE BEEN PROVIDED B Y THE APPELLANT BOTH AT THE ASSESSMENT STAGE AND THE APPELLATE STAGE. THUS WHEN THE ENTIRE INTEREST IS ATTRIBUTABLE TO THE BUSINESS OF THE APPELLANT, NO APPORTIONMENT IS CALLED FOR MUCH LESS INVOCATION OF THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. IN THE RESULT, THE DISALLOWANCE OF RS. 36,90,440/- BEING UNMERITED AND UNJUSTIFIED, IS DELETED. -: 5: - 5 4. IT WAS ARGUED BY THE LD. CIT DR, SHRI K.K. SINGH, T HAT DISALLOWANCE HAS BEEN MADE BY THE ASSESSING OFFICER , SINCE THE ASSESSEE WAS HAVING INVESTMENT IN TAX FREE SECU RITIES, TO WHICH PROVISIONS OF SECTION 14A ARE CLEARLY APPLICA BLE, THE AO HAS DISALLOWED A PART OF INTEREST EXPENDITURE INCUR RED FOR EARNING THE EXEMPT INCOME. HE FURTHER SUBMITTED THA T EVEN THOUGH THE AO HAS NOT STRICTLY APPLIED THE RULE 8-D , BUT HE HAS TRIED TO COMPUTE THE DISALLOWABLE PORTION OF IN TEREST EXPENDITURE ON THE BASIS OF TOTAL INCOME EARNED VIS --VIS INCOME, WHICH IS NOT LIABLE TO TAX. 5. ON THE OTHER HAND, LD. AUTHORIZED REPRESENTATIVE DR EW OUR ATTENTION TO THE AUDITED BALANCE SHEET AS PLACE D BEFORE THE LOWER AUTHORITIES FOR THE YEAR ENDING 31 ST MARCH, 2006, INDICATING INVESTMENT OF RS. 2,10,67,500/- AT THE E ND OF THE YEAR. HE ALSO DREW OUR ATTENTION TO THE FIGURE OF I NVESTMENT AS ON 31 ST MARCH, 2005, WHICH IS EXACTLY THE SAME FIGURE I.E. RS. 2,10,67,500/-. IN VIEW OF NO CHANGE IN THE INVESTME NT, THE LD. AUTHORIZED REPRESENTATIVE ARGUED THAT THE ASSESSEE HAS NOT MADE ANY INVESTMENT IN TAX FREE SECURITIES, INCOME OF WHICH IS -: 6: - 6 NOT LIABLE TO TAX DURING THE YEAR UNDER CONSIDERATI ON, THEREFORE, NO DISALLOWANCE OF ANY INTEREST EXPENDIT URE SHOULD BE MADE. HE FURTHER DREW OUR ATTENTION TO THE TOTAL SHARE CAPITAL AND RESERVE AND SURPLUS AVAILABLE WITH THE COMPANY AS ON 31 ST MARCH, 2006, AMOUNTING TO RS. 6.16 CRORES AND SUBMITTED THAT THE ASSESSEE HAS JUST MADE INVESTMEN T OF RS. 2.10 CRORES IN SUCH SECURITIES, MEANING THEREBY INT EREST FREE FUNDS HAVE BEEN UTILIZED BY THE ASSESSEE FOR MAKING SUCH INVESTMENT, INCOME OF WHICH IS NOT LIABLE TO TAX. H E, THEREFORE, JUSTIFIED THE ORDER OF THE LD. CIT(A) FOR DELETING THE DISALLOWANCE OF INTEREST EXPENDITURE MADE BY THE AS SESSING OFFICER. 6. WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND THE DOCUMENTS PLACED ON RECORD. THERE IS NO DISPUTE TO THE WELL S ETTLED LEGAL PROPOSITION THAT IF ANY INVESTMENT HAS BEEN MADE FO R EARNING INCOME, WHICH IS NOT LIABLE TO TAX, PROPORTIONATE E XPENDITURE ATTRIBUTABLE TO SUCH INVESTMENT IS NOT ALLOWABLE AS BUSINESS EXPENDITURE. IN THE INSTANT CASE BEFORE US, EVEN TH OUGH NO INVESTMENT HAS BEEN MADE DURING THE YEAR IN SUCH SE CURITIES, -: 7: - 7 BUT IT COULD NOT BE EXPLAINED BY ASSESSEE AS TO WHA T IS THE SOURCE OF THIS INVESTMENT, WHICH IS COMING FROM EAR LIER YEARS. IT APPEARS THAT INVESTMENT WAS MADE IN EARLIER YEAR S, WHICH IS BEING CARRIED FORWARD DURING THE YEAR UNDER CONSIDE RATION. THEREFORE, IT IS NOT CLEAR AS TO THE NATURE OF FUND S EMPLOYED IN SUCH INVESTMENT. THE LD. CIT(A) HAS DELETED THE DIS ALLOWANCE OF INTEREST EXPENDITURE BY OBSERVING THAT THE ASSES SEE COMPANY HAS PAID UP CAPITAL AND FREE RESERVES OF MO RE THAN RS. 53.30 CRORES AT THE BEGINNING OF THE YEAR, WHIC H HAVE INCREASED OF RS. 61.67 CRORES ON THE LAST DATE OF T HE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDER ATION ON WHICH NO INTEREST COST HAS BEEN INCURRED BY THE ASS ESSEE. IT WAS ALSO OBSERVED THAT THE ASSESSEE COMPANY HAS PAI D THE INTEREST TO THE BANK AND FINANCIAL INSTITUTION FOR VARIOUS LOANS AVAILED BY THE COMPANY FOR THE PURPOSE OF ITS BUSIN ESS. AS PER THE LD. CIT(A), WHEN THE ENTIRE INTEREST IS ATTRIBU TABLE TO THE BUSINESS OF THE ASSESSEE, NO APPORTIONMENT IS CALLE D FOR, MUCH LESS INVOCATION OF PROVISIONS OF SECTION 14A READ W ITH RULE 8D OF THE INCOME TAX RULES, 1962. THUS, AS PER THE LD. CIT(A), UNDER THESE CIRCUMSTANCES, NO DISALLOWANCE U/S 14A IS -: 8: - 8 WARRANTED. WE ARE NOT IN AGREEMENT WITH THIS PROPOS ITION OF LD. CIT(A), IN SOFAR AS EVEN DURING THE YEAR UNDER CONS IDERATION, THE ASSESSEE WAS UNDOUBTEDLY HAVING INVESTMENT IN T AX FREE SECURITIES AND THE BUSINESS FUNDS WERE INVOLVED. HO WEVER, IT WAS NOT EXPLAINED AS TO WHAT WAS THE SOURCE OF THE FUND AND THE YEAR IN WHICH SUCH INVESTMENT HAS COME INTO EXI STENCE. THE AO HAS ALSO USED A CRUDE METHOD FOR COMPUTING DISALLOWANCE. HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE, 234 CTR 1, HELD THAT RULE 8D IS NOT RETROSPECTIVE BUT IS APPLICABLE PROSPECTIVELY W.E.F . 24.3.2008. THUS, AS PER BOMBAY HIGH COURT, RULE 8D IS APPLICAB LE W.E.F. ASSESSMENT YEAR 2008-09 AND SINCE THE ASSESSMENT YE AR IN THE INSTANT CASE BEFORE US IS 2006-07, RULE 8-D IS NOT APPLICABLE TO IT. HOWEVER, EVEN WITH REGARD TO EARL IER PERIOD, THE HON'BLE HIGH COURT HAS DIRECTED THE AO TO COMPU TE REASONABLY INDIRECT EXPENSES, WHICH ARE ATTRIBUTABL E TO SUCH EARNING OF INCOME. IN VIEW OF THIS POSITION, IT WOU LD BE REASONABLE TO DISALLOW 10 % ON THE AMOUNT INVESTED IN SHARES TREATING RATE OF INTEREST @ 10 % BEING PAID ON THE ADVANCES ATTRIBUTABLE TO SUCH INVESTMENT, TREATING THE SAME AS -: 9: - 9 EXPENDITURE INCURRED FOR EARNING SUCH INCOME. ACCOR DINGLY, WE RESTRICT THE DISALLOWANCE TO THE EXTENT OF RS. 21.0 6 LAKHS. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWED IN PART IN TERMS INDICATED HEREINABOVE. THIS ORDER HAS BEEN PRONOUNCED IN THE OPEN COURT ON 19 TH JANUARY, 2011. SD/- SD/- (JOGINDER SINGH) ( R.C.SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 19 TH JANUARY, 2011. CPU* 1314