Nahar Poly Films Limited, Ludhiana V. DCIT, Circle -1, Ludhiana

ITA 43/CHANDI/2023

AI Insights

Nahar Poly Films Limited appealed against the order of the CIT(A)/NFAC, Delhi, which confirmed the AO's disallowances under section 14A and section 36(1)(iii) of the Income Tax Act. The primary contention was regarding the computation of disallowance under section 14A on a proportionate basis and the inclusion of only those investments from which exempt dividend income was received. Additionally, the assessee contested the disallowance of interest expenses allocated to capital accounts. The Tribunal found that the AO and CIT(A) did not adequately address the assessee's submissions and set aside the matter for a fresh decision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127756 (ITAT-CHANDIGARH)
• Duration Of Justice: 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-07-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 18-06-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 02-02-2023
• Other Referred Cases: Ramtech Software Solutions Pvt. Ltd. Vs. ACIT, ACIT Vs. Vireet Investment Ltd., Monte Carlo Fashions Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D; Set aside
• Section: 142(1); 14A; 143(2)

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “बी” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH ी आकाश द प जैन, उपा य एवं ी $व%म 'संह यादव, लेखा सद,य BEFORE: SHRI. AAKASH DEEP JAIN, VP & SHRI. VIKRAM SINGH YADAV, AM ITA NO. 43/Chd/ 2023 Assessment Year : 2014-15 Nahar Poly Films Limited 376, Industrial Area-A, Ludhiana-141003- Punjab The DCIT Circle-1, Aayakar Bhawan Rishi Nagar, Ludhiana- Punjab PAN NO: AAACN5708K Appellant Respondent ! " Assessee by : Shri Navdeep Sharma, Advocate # ! " Revenue by : Shri Akashdeep, JCIT, Sr. DR $ % ! & Date of Hearing : 19/06/2023 '()* ! & Date of Pronouncement : 03/07/2023 आदेश/Order PER VIKRAM SINGH YADAV, A.M. : This is an appeal filed by the Assessee against the order of the Ld. CIT(A)/NFAC Delhi dt. 27/12/2022 pertaining to Assessment Year 2014-15 wherein the Assessee has taken the following grounds of appeal: 1) a) That the Worthy CIT (A) / National Faceless Appeal Centre (NFAC),Delhi, erred in law and on facts in not directing the Ld Assessing Officer to consider the submissions made by the Assessee to re-compute disallowance u/s 14A on the proportion basis. Directions be given to compute disallowance u/s 14A on the basis of proportion which is one of the recognized method. b) That, without prejudice, to the above ground, worthy CIT (A) / National Faceless Appeal Centre (NFAC), Delhi, further erred in law and on facts in not directing the Ld Assessing Officer to re-compute the disallowance u/s 14A read with Rule 8D, by taking into account only that those investments on which the exempted dividend income has been received. The directions be given to compute disallowance u/s 14A by applying Rule 8D by considering only those investments from which exempted dividend income was received instead of total investments. 2 2) That the Worthy CIT (A) / National Faceless Appeal Centre (NFAC), Delhi, erred in law and on facts in not directing the Ld Assessing Officer to delete the disallowance of Rs.9,75,767/- out of the interest paid on working capital limit by assuming that the amount paid towards addition of plant & machinery, building and towards capital, advances, was given out of borrowed money and further erred in ignoring the fact that the company was having its own surplus money and had sufficient cash accruals during the year under consideration. Directions be given to delete the addition of Rs.9,75,767/- made out of interest paid to bank on C.C./ Account. 3) That the appellant craves, leave to add, amend, alter, modify or substitute all or any of the above mentioned Grounds of Appeal before the appeal is finally heard and disposed off. 2. Briefly the facts of the case are that the Assessee filed its return of income declaring NIL income on 30/09/2014 which was selected for scrutiny and notices under section 143(2) and 142(1) were issued and necessary information were called for and examined by the AO. Thereafter the AO completed the assessment under section 143(3). While completing the assessment, the AO made an addition of Rs. 9,75,767/- to the taxable income of the assessee on account of allocation of interest expenses from revenue account to capital account by invoking the proviso to Section 36(1)(iii) of the Act. 3. Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A)/NFAC, Delhi and as part of its grounds of appeal, it was submitted that the AO has erred in law and on facts in not considering the submissions made by the Assessee during the course of assessment proceedings to recompute the disallowance under section 14A on proportionate basis. It was also submitted that only these investments on which the exempt dividend income has been received needs to be considered while working out the disallowance under section 14A r.w. Rule 8D. Regarding disallowance of Rs. 9,75,767/-, it was submitted that the company was having sufficient surplus funds and cash accruals during the year and therefore the addition of Rs. 9,75,767/- needs to be deleted. 3 4. The Ld. CIT(A)/NFAC, Delhi however confirmed the findings of the AO. As per the Ld. CIT(A)/NFAC, Delhi, the assessee was not a debt free company, it was paying interest on borrowed funds and where the funds were not diverted from the business towards the investment, the assessee’s requirement for business funds and consequently the interest payments would have been less. Therefore, it cannot be said that the investment earning dividends to the assessee have no cost to the business. There is clear cut opportunity cost of these invested funds measurable in proportionate interest payment and therefore the action of the AO was upheld. 5. Against the said findings and the direction of the Ld. CIT(A)/NFAC, Delhi the assessee is in appeal before us. 6. Regarding Ground No. 1(a) & 1(b), the Ld. AR submitted that during the year under consideration, the assessee company has earned dividend income amounting to Rs. 1,95,41,492/- and the assessee company has suo-motu disallowed a sum of Rs. 72,91,675/- under section 14A r.w. Rule 8D in its return of income. However during the course of assessment proceedings, the assessee company requested the AO to recompute the disallowance under section 14A on proportionate basis vide its submission dt. 25/05/2016 which the AO has failed to consider and even the ld CIT(A) has not appreciated the same. It was submitted that the said issue is covered in favour of the assessee by the decision of Coordinate Bench Chandigarh in assessee’s own case in ITA Nos. 1414 & 1415/Chd/2019 dt. 21/10/2021 for A.Y 2011-12 and A.Y 2012-13. 7. It was further submitted that the disallowance under section 14A r.w. Rule 8D needs to be computed in respect of investments on which the assessee company has earned exempt income during the year under consideration and not in respect of total investments. In support, reliance was placed on the Coordinate Chandigarh Bench decision in case of Ramtech Software Solutions Pvt. Ltd. Vs. ACIT in ITA No. 477/Chd/2015 dt. 14/08/2015 and Special Bench 4 decision in case of ACIT Vs. Vireet Investment Ltd. reported in 165 ITR 27 (Del Trib). 8. Regarding Ground No. 2, it was again submitted that the matter is squarely covered by the decision of Coordinate Chandigarh Bench decision in assessee’s own case in ITA No. 1414 & 1415/Chd/2019 pertaining to A.Y 2011-12 & 2012-13. 9. Per contra, the Ld. DR has relied on the findings of the lower authorities. 10. We have heard the rival contentions and perused the material available on the record. Firstly, regarding disallowance under section 14A r/w Rule 8D, we find that in the instant case the assessee company has suo-motu made the disallowance under section 14A r.w. Rule 8D amounting to Rs. 72,91,675/- in its return of income and thereafter during the course of assessment proceedings, the assessee company has sought to revise the disallowance so made by filing an application before the AO seeking re-computation of disallowance under section 14A on proportionate basis. We however find that there is no finding which has been recorded by the AO as to why the submission so made by the assessee seeking revision of disallowance under section 14A r.w. Rule 8D is not admissible to the assessee and even there is no specific finding which has been recorded by the ld CIT(A) as to why the said claim of the assessee is not admissible. Before the ld CIT(A), the assessee has also sought to raise another contention that only investments which have yielded tax free income during the year under consideration should only be considered while working out the disallowance u/s 14A r/w Rule 8D. We however find that there is no finding which has been recorded by the ld CIT(A) in this regard. Therefore in the fact and circumstances of the present case, we deem it appropriate to set aside the matter to the file of the AO to decide the same afresh as per law after providing reasonable opportunity to the assessee. The assessee is at liberty to raise the necessary contentions as so advised before the AO, hence, the same are left 5 open and not adjudicated upon. In the result, Ground No. 1(a) and 1(b) are allowed for statistical purposes. 11. Regarding Ground No. 2 in respect of disallowance under section 36(1)(iii) we find that the Coordinate Bench Chandigarh has recorded its findings at Para 10 & 11 of its order in ITA No. 1414 & 1415/Chd/2019 pertaining to A.Y 2011-12 & 2012-13 and the same reads as follows: “10. We have heard the rival submissions of the parties and perused the material on record including the cases relied upon by the Ld. counsel. As pointed out by the Ld. counsel, this issue is covered in favour of the assessee by the decision of the coordinate Bench of the Tribunal in M/s Monte Carlo Fashions Ltd. relied upon by the Ld. counsel. The operative part of the order reads as under: - 11. It is also to be noted that the Finance Act 2003 has amended Section 36(1)(iii) by inserting a proviso to the existing provision w.e.f 01.04.2004 relevant to assessment year 2004-05. The proviso inserted to the existing provision of section 36(1)(iii) is reproduced as under: “Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.” The judgment of various Courts in the case of Hero Cycles (P) Ltd. Vs. CIT, Ludhiana C.A. No. 514 of 2008 dt. 05/11/2015, Bright Enterprises Pvt. Ltd. Vs. CIT, Jalandhar (2016) 381 ITR 107 (P&H) held that no disallowance of interest is called for where the assessee has got sufficient own funds. The Assessing Officer is directed to go through the fund position namely capital and interest free advances, reserves and surplus to determine whether any borrowed funds have been utilized more than available own funds and take a decision keeping in view the decisions rendered above. If sufficient own funds are available, no disallowance is called for. This ground may be treated as set aside to the file of Assessing Officer. 11. The coordinate Bench of the Tribunal has dealt with the identical issue in the similar facts of the case in group company case aforesaid. Hence, respectfully following the decision of the coordinate Bench, we set aside the findings of the Ld. CIT(A) and send the issue back to the AO for deciding the same in terms of order dated 12.10.2017 passed in the case of Monte Carlo Fashion (supra).” 12. Following the same, in the instant case, the matter is set aside to the file of the AO to examine the claim of the assessee regarding availability of interest free funds and whether any borrowed funds have been utilized for acquisition of assets at the relevant point in time when the investments/payments were made 6 towards acquisition of assets and decide the matter afresh as per law after providing reasonable opportunity to the assessee. The assessee is also directed to furnish the necessary information/documentation as called for by the AO. In the result, this ground of appeal is allowed for statistical purposes. 13. In the result, appeal of the assessee is allowed for statistical purposes. Order pronounced in the open Court on 03/07/2023. Sd/- Sd/- आकाश द प जैन $व%म 'संह यादव (AAKASH DEEP JAIN) ( VIKRAM SINGH YADAV) उपा य / VICE PRESIDENT लेखा सद,य/ ACCOUNTANT MEMBER AG Date: 03/07/2023 ( + ! , - . - Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. $ / CIT 4. - 0 ग 2 3 & 2 3 456 ग7 DR, ITAT, CHANDIGARH 5. ग 6 8 % Guard File ( + $ By order, 9 # Assistant Registrar