DCIT, C-I, Ludhiana V. M/s Rico Auto Industries Limited, Ludhiana

ITA 404/CHANDI/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 5657 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2019
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 03-04-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: G S PHANI KISHORE
• Assessee Lawyers: VIPIN GUPTA
• Keywords: Earning of tax free income; Retrospective amendment; Revised return; Rule 8D; Set aside
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BE NCH B, CHANDIGARH .., ! '# #$ %, & '( BEFORE: SHRI. N.K.SAINI, VP & SHRI , SANJAY GARG, J M ITA NO. /CHD/ ASSESSMENT YEAR : THE DCIT CIRCLE-I LUDHIANA, PUNJAB M/S RICO AUTO INDUSTRIES LTD. B-26, FOCAL POINT, LUDHIANA, PUNJAB !' PAN NO: AAACR8724R # APPELLANT $% # RESPONDENT &'()! ASSESSEE BY : SHRI VIPIN GUPTA, CA *()! REVENUE BY : SHRI G.S. PHANI KISHORE, CIT DR + ,('-' DATE OF HEARING : 25/09/2019 ./01('-' DATE OF PRONOUNCEMENT : 03/10/2019 ')/ ORDER PER N.K. SAINI, VICE PRESIDENT THIS IS AN APPEAL BY THE DEPARTMENT AGAINST THE ORD ER DT. 15/01/2018 OF LD. CIT(A)-1, LUDHIANA. 2. FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEA L: 1. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. CIT(A) WAS JUSTIFIED IN LAW AND ON FACTS IN DIRECTING THE AO TO RE-CALCULATE THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE U/S. 14A OF THE INCOME T AX ACT, 1961 BY APPLYING THE AMENDED PROVISIONS OF RULE 8D(2)(II) @ 1% OF THE ANNUAL AVERAGE OF MONTHLY AVERAGE OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVESTMENTS, WHEREAS THE SAME AMENDMENT WAS INTRODUCED W.E.F. 02 .06.2016 AND DOES NOT HAVE RETROSPECTIVE EFFECT? 2. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. CIT(A) WAS JUSTIFIED IN LAW AND ON FACTS IN ALLOWING THE DISAL LOWANCE U/S. 14A OF THE INCOME TAX ACT, 1961 VOLUNTARILY MADE BY THE ASSESSEE AT T HE TIME OF FILING OF RETURN OF INCOME BASED ON OBSERVATION OF AUDITORS, WHO, THEMS ELVES ON CLOSE PERUSAL OF THE BOOKS AND INVESTMENTS OF THE ASSESSEE WERE CONV INCED THAT DISALLOWANCE U/S. 14A IS CALLED FOR THE TUNE OF RS. 2.05 CRORE? 2 3. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. CIT(A) WAS JUSTIFIED IN LAW AND ON FACTS IN ALLOWING THE VOLUN TARY 7 DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT, 1961 MADE BY THE ASSESSEE AT THE TI ME OF FILING OF RETURN OF INCOME, IGNORING THE DECISION OF THE HON'BLE SUPREM E COURT IN THE CASE OF GOETZE (INDIA) LTD., VS. CIT [2006; 284 ITR 323], W HEREIN IT WAS CATEGORICALLY HELD THAT THE AO CANNOT ENTERTAIN CLAIM OF DEDUCTION OTHE RWISE THAN BY FILING OF THE REVISED RETURN BY THE APPELLANT? 4. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. CIT(A) WAS JUSTIFIED IN LAW AND ON FACTS IN ALLOWING RELIEF ON ACCOUNT OF CAPITALIZATION OF INTEREST AS PER PROVISO TO SECTION 36(L)(III) OF THE INCOME TAX ACT, 1961 ON INVESTMENT IN SHARES OF DOMESTIC COMPANIES AND CAPI TAL ADVANCE FOR PURCHASE OF LAND AND OTHER ADVANCES DESPITE THE FACT THAT SH ARE CAPITAL AND RESERVES AND SURPLUS WERE ALREADY EXHAUSTED BY THE ASSESSEE IN FIXED ASSETS? 5. THAT THE ORDER OF THE LD. CIT (A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6. THAT THE APPELLANT CRAVES LEAVE TO ADD OR AMEND ANY GROUND OF APPEAL BEFORE IT IS FINALLY DISPOSED OFF. 3. FROM THE ABOVE GROUNDS IT IS GATHERED THAT ONLY GRIEVANCE OF THE DEPARTMENT RELATES TO THE DELETION OF DISALLOWANCE MADE BY THE A.O. BY INVOKING THE PROVISIONS OF SECTION 14A OF THE INCOM E TAX ACT, 1961 (HEREINAFTER REFERRED TO AS ACT). 4. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME ON 24/11/2014 DECLARING TOTAL INCOME OF RS. 16,51,91,6 10/-, LATER ON THE CASE WAS SELECTED FOR SCRUTINY. THE A.O. DURING THE COURSE O F ASSESSMENT PROCEEDINGS NOTICED THAT THE ASSESSEE HAD EARNED DIVIDEND INCOM E OF RS. 2,96,24,955/- IN SHARES OF THE DOMESTIC GROUP COMPANIES. HE ASKED TH E ASSESSEE TO FURNISH CALCULATION OF DISALLOWANCE UNDER SECTION 14A OF TH E ACT. THE ASSESSEE SUBMITTED THAT THE DISALLOWANCE WAS WRONGLY ADDED W HILE FILING THE RETURN OF INCOME AND THAT NO DISALLOWANCE WAS REQUIRED. THE A .O. WAS OF THE VIEW THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LI ABILITY TO PAY INTEREST IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUN TS HAD BEEN INVESTED FOR EARNING TAX FREE INCOME, THEREFORE DISALLOWANCE UND ER SECTION 14A WAS CALLED FOR. THE A.O. MADE THE DISALLOWANCE OF RS. 2,05,47, 517/-. 3 5. BEING AGGRIEVED THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) WHO DELETED THE DISALLOWANCE MADE BY THE A.O. BY OBSERV ING IN PARA 4 TO 7 OF THE IMPUGNED ORDER AS UNDER: 4. THE SUBMISSIONS OF THE APPELLANT AND THE BASIS O F THE IMPUGNED DISALLOWANCE MADE BY THE AO HAVE BEEN CAREFULLY CONS IDERED. THE APPELLANT HAS, ADMITTEDLY, EARNED EXEMPT INCOME DURING THE YE AR UNDER CONSIDERATION AND THE OUTLAY IN TERMS OF INTEREST ON BORROWED CAPITAL IS ALSO A FACT ON RECORD. THAT THE APPELLANT COMPANY MAINTAINS COMMON AND UN-DEMAR CATED FUNDS IS ALSO NOT DISPUTED. IT IS ALSO FAIRLY UNDERSTANDABLE THAT THE APPELLANT COULD NOT IDENTIFY OR DEMARCATE THE UTILIZATION OF NON-INTEREST-BEARING F UNDS FOR MAKING INVESTMENTS BECAUSE OF THE COMMON POOL OF FUNDS AS ALSO ON ACCO UNT OF THE ENORMITY OF THE SAME. SIMILARLY, IN VIEW OF THE MASSIVE TURNOVER OF THE APPELLANT COMPANY AND ITS COMPLICATED FUND FLOW, THE DIFFICULTY IN IDENTIFYIN G AS TO WHICH FUNDS HAVE BEEN USED FOR WHAT PURPOSES ALSO CANNOT BE EMPHASIZED MO RE. THERE IS NO DOUBT ABOUT THE UNITY OF CONTROL AND COMMONALITY OF FUNDS AND MANAGEMENT IN RELATION TO THE BUSINESS ACTIVITY' AND 'INVESTMENT ACTIVITY, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME '. 5. SINCE NO DIRECT EXPENSES ARE PURPORTED TO HAVE BEEN MADE BY THE APPELLANT COMPANY IN ACQUIRING THE INVESTMENTS OR NOTICED BY THE AO, NO DISALLOWANCE HAS BEEN MADE UNDER RULE 8D (2) (I). TO TAKE CARE OF A SITUATION WHERE THERE IS A MIXED USE OF BORROWED FUNDS, APPORTIONMENT OF INTER EST EXPENDITURE IS MANDATED AS PER THE PROVISIONS OF RULE 8D, WHICH STANDS SUBS TITUTED BY THE IT (14TH AMDT.) RULES, 2016, W.E.F. 02/06/2016. THE SAID RULE PROVI DES THAT THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE FOLLOWING AMOUNTS, NAMELY: (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTA L INCOME; AND (II) AN AMOUNT EQUAL TO ONE PERCENT OF THE ANNUAL AVERAGE OF THE M ONTHLY AVERAGES OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVEST MENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME, PR OVIDED THAT THE AMOUNT REFERRED TO IN CLAUSE (I) & CLAUSE (II) SHALL NOT EXCEED THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE. THIS AMENDMENT TO THE MECHANISM OF CALCUL ATING DISALLOWANCE UNDER THE PROVISIONS OF SECTION 14A, PARTICULARLY THE MER GER OF THE ERSTWHILE RULE 8D (2) (II) & (III) INTO RULE 8D (II) SPECIFYING THE PROPO RTIONATE DISALLOWANCE AT THE RATE OF 1%, IS UNDOUBTEDLY, MEANT FOR TAKING CARE OF A SITU ATION WHERE THERE IS A MIXED USE OF BORROWED FUNDS AND NON-INTEREST-BEARING FUND S AND CONSEQUENTLY APPORTIONMENT OF EXPENDITURE IS WELL-NIGH IMPOSSIBL E. IF THE SAID PROVISION IS INTERPRETED IN A WAY TO MEAN THAT ONLY EXPENSES DIR ECTLY RELATED TO EARNING DIVIDEND INCOME OR EXEMPT INCOME ARE TO BE DISALLOW ED AND EXPENSES OF THE NATURE OF INTEREST ON BORROWINGS WHICH ARE NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME ON RECEIPT ARE NOT COVERED, IT WO ULD ONLY MAKE THE PROVISION OF RULE 8D (2) (II) OTIOSE AND REDUNDANT. SUCH AN INTE RPRETATION CANNOT BE CONSIDERED TO BE BASED ON PURPOSIVE CONSTRUCTION OF THE RULE. 6. IT IS JUDICIALLY WELL SETTLED THAT RULES ARE PRO CEDURAL LAW AND ARE APPLICABLE TO THE PROCEEDINGS, WHICH ARE PENDING AS ON DATE. T HE AFORESAID AMENDED PROVISIONS OF RULE 8D HAVE BEEN MADE EFFECTIVE FROM 02/06/2016 AND, THEREFORE, ITS APPLICABILITY IN THE INSTANT CASE IS NECESSARIL Y IMPLIED. IT CLEARLY INDICATES THAT 4 THE APPLICABILITY OF THE AMENDED RULES ARE NOT REFE RABLE TO EITHER THE FINANCIAL YEAR OR THE ASSESSMENT YEAR. MAKING IT EFFECTIVE FR OM 2 ND OF JUNE, 2016 MEANS THAT THE AMENDED PROVISIONS SHALL BE APPLICABLE TO ALL P ENDING PROCEEDINGS OF ASSESSMENT OR APPEAL AS ON 2 ND OF JUNE, 2016. A DISTINCTION CAN BE DRAWN BETWEEN ENACTMENTS THAT HAVE SUBSTANTIVE EFFECT AND THOSE THAT ARE MERELY PROCEDURAL. HERE SUBSTANTIVE MEANS HAVING TO DO WIT H THE SUBSTANCE OF THE LAW, IN PARTICULAR THE NATURE AND EXISTENCE OF LEGAL RIG HTS, POWER OR DUTIES, WHEREAS PROCEDURE IS CONCERNED WITH FORMALITIES AND TECHNIC ALITIES, RATHER THAN SUBSTANCE. A PROCEDURAL CHANGE IS EXPECTED TO IMPROVE MATTERS FOR EVERYONE CONCERNED, WITHOUT INFLICTING DETRIMENT OR IMPAIRING THE VESTE D RIGHTS. AS STATED EARLIER, THE AMENDMENT TO THE RULE 8D HAS BEEN MADE ONLY TO UNCO MPLICATED AND SETTLE THE ISSUE OF APPORTIONMENT OF EXPENSES TOWARDS TAXABLE AND NON-TAXABLE INCOME, WHICH WAS TURNING INTO A WIDELY CONTESTED AND LITIG IOUS ISSUE. 7. ACCORDINGLY, IT IS HELD THAT DISALLOWANCE UNDER THE PROVISIONS OF SECTION 14A HAS TO BE COMPUTED IN ACCORDANCE WITH THE PROVI SIONS OF RULE 8D (2) (II) @ 1% OF THE ANNUAL AVERAGE OF MONTHLY AVERAGES OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVESTMENTS. HOWEVER, WHIL E UNDERTAKING THE AFORESAID CALCULATION, THE AO SHALL ACCOUNT FOR ONLY THOSE INV ESTMENTS WHICH HAVE YIELDED EXEMPT INCOME DURING THE YEAR. IN TERMS OF THE AFOR ESAID, THE AO IS DIRECTED TO RECOMPUTE THE DISALLOWANCE FOR ADDITION TO THE RETU RNED INCOME. IT IS SEEN THAT THE APPELLANT HAD ITSELF ADDED BACK AN AMOUNT OF RS .2,05,73,267/- AS DISALLOWANCE UNDER THE PROVISIONS OF SECTION 14A. H OWEVER, IT WAS CLAIMED BEFORE THE AO THAT SUCH VOLUNTARY DISALLOWANCE WAS INADVERT ENTLY MADE AND THAT THERE WAS NO REQUIREMENT OF THE SAID DISALLOWANCE IN VIEW OF THE JUDICIAL PRECEDENTS WHICH ARE UNANIMOUS IN HOLDING THAT IF INVESTMENTS HAVE BEEN MADE OUT OF OWN AND NON-INTEREST-BEARING FUNDS, DISALLOWANCE WOULD NOT BE NECESSARY. THE AO REFUSED TO ENTERTAIN THE SAID PLEA OF THE APPELLANT AT THE ASSESSMENT STAGE BY RELYING UPON THE DECISION OF THE HON'BLE SUPREME CO URT IN THE CASE OF GOETZE (INDIA) LTD. VS. CIT [2006; 284 ITR 323] WHEREIN IT WAS CATEGORICALLY HELD THAT THE AO CANNOT ENTERTAIN CLAIM OF DEDUCTION OTHERWISE THA N BY FILING OF THE REVISED RETURN BY THE APPELLANT. IN THE APPELLATE PROCEEDIN GS, THE APPELLANT PLACED RELIANCE ON THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF JUTE V- CORPORATION OF INDIA [1991; 187 ITR 688] IN WHICH I T HAS BEEN HELD THAT AN ASSESSEE IS ENTITLED TO RAISE NOT MERELY ADDITIONAL LEGAL SU BMISSIONS BEFORE THE APPELLATE AUTHORITIES BUT IS ALSO ENTITLED TO RAISE ADDITIONA L CLAIMS BEFORE THEM. SUPPORT TO THIS PROPOSITION WAS ALSO SOUGHT FROM THE DECISION OF THE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX, CENTRAL-1, MUMBAI VS. PRUTHVI BROKERS AND SHAREHOLDERS [2012; 349 ITR 336] WHEREIN IT WAS HELD THAT THE APPELLATE AUTHORITIES ARE ENTITLED TO EXERCISE THEIR JURISDIC TION TO CONSIDER THE ADDITIONAL CLAIM IN VIEW OF THE VARIOUS JUDGEMENTS ON THE ISSU E INCLUDING THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF NATIONAL THERMAL P OWER CORPORATION LTD. [1998; 229 ITR 383]. CONSIDERED IN THIS BACKDROP, IT IS HELD THAT THE AP PELLANT CANNOT BE MADE TO SUFFER AN INADVERTENT MISTAKE MADE AT THE TIME OF M AKING OF RETURN AND MORE SO WHEN A NEW MECHANISM OF DISALLOWANCE UNDER THE PROV ISIONS OF SECTION 14 A READ WITH RULE 8D IS BEING ENFORCED, AS HAS BEEN DO NE IN THE INSTANT CASE HEREIN ABOVE. NEEDLESS TO SAY THAT THE VOLUNTARY DISALLOWA NCE OF RS.2,05,47,517/- PURPORTED TO HAVE BEEN MADE INADVERTENTLY BY THE AP PELLANT NEEDS TO BE 5 NEUTRALISED BY REDUCING THE ASSESSED INCOME BY THE SAID AMOUNT BEFORE ADDING BACK THE RECOMPUTED DISALLOWANCE AS INDICATED ABOVE . IT IS ORDERED ACCORDINGLY AND HENCE THE GRIEVANCE OF THE APPELLAN T, AS EMBODIED IN GROUND NOS. 1 TO 4 ARE, THUS, DECIDED IN THE MANNER STATED ABOVE. 6. NOW THE DEPARTMENT IS IN APPEAL. 7. THE LD. CIT DR STRONGLY SUPPORTED THE ORDER OF T HE A.O. AND FURTHER SUBMITTED THAT THE ASSESSEE ITSELF MADE THE DISALLO WANCE SUOMOTU UNDER SECTION 14A OF THE ACT. IT WAS STATED THAT THE LD. CIT(A) H AS NOT APPRECIATED THE FACTS IN RIGHT PERSPECTIVE AND WRONGLY ACCEPTED THIS CONTENT ION OF THE ASSESSEE THAT THE DISALLOWANCE MADE BY THE ASSESSEE WAS INADVERTENT. 8. IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT AN IDENTICAL ISSUE HAVING SIMILAR FACTS WAS A SUBJECT MATTER OF THE DEPARTMENTAL APPEAL FOR THE PRECEDING ASSESSMENT YEAR 2013-14 IN ITA NO. 800/CHD/2018 WHEREIN A SIMILAR ISSUE HAS BEEN SET ASIDE TO THE F ILE OF THE A.O. VIDE ORDER DT. 02/05/2019, COPY OF THE SAID ORDER WAS FURNISHED WH ICH HAS BEEN PLACED ON RECORD. 9. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE P ARTIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. IT IS NOTICED THA T A SIMILAR ISSUE HAVING IDENTICAL FACTS WAS A SUBJECT MATTER OF THE DEPARTMENTAL APPE AL FOR THE PRECEDING ASSESSMENT YEAR 2013-14 WHEREIN THE ISSUE HAS BEEN SET ASIDE TO THE FILE OF THE A.O. VIDE ORDER DATED 02/05/2019 IN ITA NO. 800/CHD /2018 AND THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARA 6 WHICH READ AS UN DER: 6. REGARDING ISSUE NO.(3)ABOVE- THE APPLICABILITY OF AMENDMENT TO SECTION 14A FROM 02/06/2016,WE ARE THE VIEW THAT DUE TO THE FACT THAT THERE IS A SPECIFIC DATE MENTIONED REGARDING THE APPL ICABILITY OF THE AMENDED PROVISIONS HENCE THE SAME CANNOT BE SAID TO BE R ETROSPECTIVE. THE ASSESSING OFFICER IS DIRECTED TO COMPUTE THE DISAL LOWANCE AS PER THE RULES APPLICABLE AS ON THE DATE. REGARDING THE RULING THAT THE ASSESSING OFFICER SHALL ACCOUNT ON THE THOSE INVESTMENTS WHICH HAVE Y IELDED EXEMPT INCOME, WE FIND STRENGTH BY THE ORDERS OF THE SPE CIAL BENCH OF ITAT IN THE CASE OF VREET INVESTMENT PVT. LTD. 188 TTJ 001 (DEL-TRIB.) AND 6 ALSO THE ORDER IN THE CASE OF PRIME PROPERTY DEVELOPME NT CORP PVT. LTD. IN ITA NO. 7402/MUM/2016 DT. 16.11.2017. WE DIRECT TH E ASSESSING OFFICER TO COMPUTE THE DISALLOWANCE ACCORDINGLY. SO RESPECTFULLY FOLLOWING THE AFORESAID REFERRED TO ORDER DT. 02/05/2019 IN ITA NO. 800/CHD/2018 FOR THE ASSESSMENT YEAR 2013-1 4 IN ASSESSEES OWN CASE, THIS ISSUE IS SET ASIDE TO THE FILE OF THE A.O. TO BE ADJUDICATED IN ACCORDANCE WITH THE DIRECTIONS GIVEN VIDE AFORESAID ORDER DT. 02/05 /2019. 10. IN THE RESULT, APPEAL OF THE DEPARTMENT IS ALLO WED FOR STATISTICAL PURPOSES. (ORDER PRONOUNCED IN THE OPEN COURT ON 03/10/2019 ) SD/- SD/- #$ % .., (SANJAY GARG ) ( N.K. SAI NI) & '(/ JUDICIAL MEMBER ! / VICE PRESIDENT AG DATE: 03/10/2019 /!2($'345!4' COPY OF THE ORDER FORWARDED TO : 1. # THE APPELLANT 2. $% # THE RESPONDENT 3. + 6' CIT 4. + 6'78 THE CIT(A) 5. 49$';<-;<=>?@ DR, ITAT, CHANDIGARH 6. ?A, GUARD FILE /!2 + BY ORDER, B * ASSISTANT REGISTRAR