ACIT, CHENNAI V. Radha Daga, CHENNAI

ITA 432/CHNY/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 81155 (ITAT-CHENNAI)
• Duration Of Justice: 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 07-08-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 18-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIKRAM VIJAYARAGHVAN
• Assessee Lawyers: GURU BHASHYAM
• Keywords: Earning of tax free income; Permanent establishment; Speculation loss
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHE NNAI . , , ! ' BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER . I.T.A. NO. ASSESSMENT YEAR # APPELLANT $% # RESPONDENT 216/MDS/2014 2008-09 M/S.CHEMISE INDIA PVT LTD., NO.65, SIVASAKTHI VINAYAGAR NAGAR, THIRUVERKADU, CHENNAI-600 077 [PAN: AABCC 1996 P] THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3), CHENNAI-600 034 217/MDS/2014 2009-10 427/MDS/2014 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3), CHENNAI-600 034 M/S.CHEMISE INDUS P LTD., NO.65, SIVASAKTHI VINAYAGAR NAGAR, THRIVERKADU, CHENNAI-600 077 [PAN: AABCC 1996 P] 428/MDS/2014 2009-10 218/MDS/2014 2008-09 SMT. RADHA DAGA, NO.7M, NITYASREE, NO.51, CHAMIERS ROAD, ALWARPET, CHENNAI-600 018 [PAN: ADGPR 9527 G] THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3), CHENNAI-600 034 219/MDS/2014 2009-10 431/MDS/2014 2008-09 THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3), CHENNAI-600 034 SMT. RADHA DAGA, NO.7M, NITHYASHREE, NO.51, CHAMIERS ROAD, ALWARPET, CHENNAI-600 018 [PAN: ADGPR 9527 G] 432/MDS/2014 2009-10 ASSESSEE BY : SHRI VIKRAM VIJAYARAGHVAN, ADVOCATE RESPONDENT BY : SHRI GURU BHASHYAM, JCIT / DATE OF HEARING : 07-08-2014 / DATE OF PRONOUNCEMENT : 26-09-2014 & / O R D E R PER BENCH: ITA NOS.216 & 217/MDS/2014 HAVE BEEN FILED BY M/S.CHEMISE INDIA PVT. LTD., ASSAILING THE ORDERS O F COMMISSIONER I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 2 OF INCOME TAX(APPEALS)-I, CHENNAI DATED 21-11-2013 FOR THE ASSESSMENT YEARS (AYS) 2008-09 & 2009-10, RESPECTIV ELY. THE REVENUE HAS FILED CROSS-APPEALS FOR THE AYS UNDER C ONSIDERATION IN ITA NOS.427 & 428/MDS/2014. ITA NOS.218 & 219/MDS/2014 HAVE BEEN FILED BY SMT. RADHA DAGA, ASSAILING THE ORDERS OF COMMISSIONER OF INCOM E TAX(APPEALS)-I, CHENNAI DATED 21-11-2013 FOR THE AY S.2008-09 & 2009-10, RESPECTIVELY. THE REVENUE HAS FILED CROSS -APPEALS FOR THE AYS UNDER CONSIDERATION IN ITA NOS.431 & 432/MD S/2014. 2. THE FACTS AS EMANATING FROM THE RECORDS ARE AS U NDER: THE ASSESSEES ARE EXPORTER OF GARMENTS. THE ASSESS ING OFFICER IN CASE OF BOTH THE ASSESSEES DURING THE COURSE OF SCR UTINY ASSESSMENT MADE ADDITION/DIS-ALLOWANCE INTER ALIA U/S.14A OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT) AND U/S.40(A)(I) OF THE ACT. AGGRIEVED BY THE ASSESSMENT ORDERS IN RESPECTIVE C ASES FOR BOTH THE AYS, THE ASSESSEES FILED APPEALS BEFORE TH E CIT(APPEALS). THE CIT(APPEALS) VIDE IMPUGNED ORDERS SUSTAINED DIS-ALLOWANCE MADE U/S.14A R.W.RULE 8D BUT DELETED THE DIS- ALLOWANCE MADE U/S.40(A)(I). I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 3 AGGRIEVED BY THE ORDER OF CIT(APPEALS), BOTH THE RE VENUE AND ASSESSEES HAVE COME IN APPEALS BEFORE THE TRIBU NAL. THE ASSESSEE IN ITA NO.219/2014 FOR THE AY.2009-10 HAS ALSO IMPUGNED DIS-ALLOWANCE ON FOREIGN EXCHANGE FLUCTUAT ION LOSS AMOUNTING TO ` 4,41,410/-. 3. SHRI VIKRAM VIJAYARAGHAVAN, APPEARING ON BEHALF OF THE ASSESSEES SUBMITTED THAT THE AUTHORITIES BELOW WHIL E MAKING DIS-ALLOWANCE U/S.14A R.W. RULE 8D HAVE ERRED IN NO T CONSIDERING THE FACT THAT THE ASSESSEE HAD SURPLUS OF OWN FUNDS AND PROFITS FOR INVESTMENT PURPOSES. BORROWED FUNDS WERE NOT USED F OR INVESTMENT PURPOSES. THE ASSESSEE HAD NOT INCURRED ANY EXPENDITURE FOR EARNING INCOME EXEMPT FROM TAX. TH E ASSESSING OFFICER BEFORE INVOKING THE PROVISIONS OF RULE 8D H AS NOT RECORDED SATISFACTION IN RESPECT OF CLAIM OF THE ASSESSEE. THE LD.COUNSEL FURTHER CONTENDED THAT WHILE MAKING DIS-ALLOWANCE U /S.14A, INTEREST ON CAR LOAN, BANK NEGOTIATION CHARGES, INT EREST TOWARDS EXPORT AND BANK CREDIT WHICH ARE ATTRIBUTED FOR A S PECIFIC LOAN CANNOT BE SUBJECT OF DIS-ALLOWANCE U/S.14A. IN ORDER TO SUPPORT HIS CONTENTIONS, THE LD.COUNSEL PLACED RELIANCE ON THE ORDER OF THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SHRIRAM PROPERTIES I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 4 PVT. LTD., VS. ACIT, REPORTED AS 60 SOT 75 (CHENNAI), JUDGMENT OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD., REPORTED AS 323 ITR 518 AND THE JUDGMENT OF HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. HOTEL SAVERA REPORTED AS 239 ITR 795. ON THE ISSUE OF DIS-ALLOWANCE OF FOREIGN EXCHANGE F LUCTUATION LOSS, THE LD.COUNSEL SUBMITTED THAT THE FORWARD CON TRACT WAS ENTERED BY THE ASSESSEE FOR HEDGING FOREIGN EXCHANG E FLUCTUATION RISK. THE LOSS SUFFERED BY THE ASSESSEE WAS NOT ON ACCOUNT OF ANY SPECULATIVE TRANSACTION. 4. ON THE OTHER HAND, SHRI GURU BHASHYAM, APPEARING ON BEHALF OF THE REVENUE VEHEMENTLY SUPPORTED THE FIND INGS OF CIT(APPEALS) ON DIS-ALLOWANCE U/S.14A R.W.RULE 8D. HOWEVER, THE LD.DR ASSAILED THE FINDINGS OF CIT(APPEALS) IN DELE TING THE DIS-ALLOWANCE U/S.40(A)(I) IN RESPECT OF PAYMENT OF OVERSEAS COMMISSION WITHOUT DEDUCTION OF TAX AT SOURCE. THE LD.DR REITERATED THE GROUNDS OF APPEAL. ON THE ISSUE OF FOREIGN EXCHANGE FLUCTUATION LOSS, THE LD.DR CONTENDED THAT CIT(APPEALS) HAS RIGHTLY CONFIRMED THE FINDINGS OF ASSESSING OFF ICER BY RELYING I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 5 ON THE DECISION OF BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. K.MOHAN & CO., (EXPORTS) REPORTED AS 126 ITD 59. CONTROVERTING THE SUBMISSIONS OF LD.DR IN DELETING THE DIS- ALLOWANCE U/S.40(A)(I), THE LD.COUNSEL FOR THE ASSE SSEE SUBMITTED THAT THE COMMISSION HAS BEEN PAID BY THE ASSESSEE T O FOREIGN AGENTS FOR PROCURING ORDERS. THE AGENTS RENDERED T HEIR SERVICES OUTSIDE INDIA AND THE PAYMENTS WERE REMITTED BY THE ASSESSEE THROUGH BANKING CHANNELS OUTSIDE INDIA. THE FOREIG N AGENTS HAVE NO PLACE OF BUSINESS OR PERMANENT ESTABLISHMENT IN INDIA. 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES, AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO EXAMINED THE D ECISIONS ON WHICH BOTH SIDES HAVE PLACED RELIANCE. FROM THE PL EADINGS AND SUBMISSIONS MADE BY BOTH SIDES, THREE ISSUES HAVE E MERGED FOR ADJUDICATION IN THE PRESENT SET OF APPEALS: I. DIS-ALLOWANCE U/S.14A R.W.RULE 8D CONFIRMED BY CIT(APPEALS); II. DIS-ALLOWANCE U/S.40(A)(I) DELETED BY CIT(APPEA LS); AND I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 6 III. FOREIGN EXCHANGE FLUCTUATION LOSS DIS-ALLOWANC E UPHELD BY CIT(APPEALS). 6. THE ASSESSEES IN ALL THE FOUR APPEALS HAVE ASSAI LED THE FINDINGS OF CIT(APPEALS) IN UPHOLDING THE DIS-ALLOW ANCE MADE BY ASSESSING OFFICER U/S.14A R.W.RULE 8D. A PERUSAL O F THE ASSESSMENT ORDER IN ITA NO.216/MDS/2014 AY.2008-09 SHOWS THAT THE ASSESSEE HAS MADE DIS-ALLOWANCE OF ` 12,032/-, WHEREAS IN OTHER CASES NO DIS-ALLOWANCE HAS BEEN MADE. 6.1 THE ASSESSEE-COMPANY HAD INVESTMENTS TO THE TUN E OF ` 2,58,99,556/- IN THE PERIOD RELEVANT TO AY.2008-09. THE ASSESSING OFFICER IN HIS ORDER HAS CATEGORICALLY ST ATED THAT HE HAS REASONS TO BELIEVE THAT THE COMPANY HAS INCURRED EX PENDITURE TOWARDS MAINTAINING HIS INVESTMENTS AND THE DIS-ALL OWANCE MADE BY THE ASSESSEE IS NOT ADEQUATE. AS FAR AS THE OTH ER THREE APPEALS ARE CONCERNED, AS POINTED EARLIER, THE ASSE SSEES HAVE NOT MADE ANY DIS-ALLOWANCE U/S.14A. THE ASSESSING OFFI CER HAS RECORDED REASONS FOR MAKING DIS-ALLOWANCE U/S.14A R .W.RULE 8D. THEREFORE, THE CONTENTION OF THE ASSESSEE THAT ADDI TION WAS MADE WITHOUT RECORDING SATISFACTION IS NOT TENABLE. I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 7 6.2 THE LD.COUNSEL HAS RAISED AN ARGUMENT THAT WHIL E MAKING DIS-ALLOWANCE U/S.14A, THE AUTHORITIES BELOW HAVE A LSO TAKEN INTO CONSIDERATION THE INTEREST ON BANK NEGOTIATION CHAR GES, EPC LOAN, VEHICLE LOAN ETC. THE LOANS ATTRIBUTABLE FOR SPECI FIC PURPOSES CANNOT BE SUBJECT TO DIS-ALLOWANCE U/S.14A. THE DI S-ALLOWANCE U/S.14A HAS TO BE MADE ON EXPENDITURE INCURRED IN R ELATION TO EXEMPT INCOME ONLY. FURTHER, THE STAND OF THE ASSE SSEES IS THAT THEY HAD SUFFICIENT SURPLUS OWN FUNDS FOR MAKING IN VESTMENT. INTEREST BEARING FUNDS WERE NOT USED FOR INVESTMENT PURPOSES. IT IS A WELL SETTLED LAW THAT APPLICATION OF THE PR OVISIONS OF SECTION 14A(2) & (3) R.W. RULE 8D IS NOT AUTOMATIC. THE PROVISIONS OF SECTION 14A AND RULE 8D HAVE TO BE APPLIED AFTER EXAMINING THE FACTS OF EACH AND EVERY CASE. UNLESS PROXIMATE CON NECTION BETWEEN THE EXPENDITURE INCURRED AND THE INCOME NOT FORMING PART OF TOTAL INCOME IS ESTABLISHED, THE PROVISIONS OF S ECTION 14A(2)&(3) AND RULE 8D WILL NOT BE OPERATIVE. [ CIT VS. WALFORT SHARE AND STOCK BROKERS P. LTD., 326 ITR 1 (SC) AND GODREJ AN D BOYCE MANUFACTURING CO. LTD., VS. DCIT 328 ITR 81 (BOM)]. IN OUR CONSIDERED OPINION, THE MATTER NEEDS RE-VI SIT TO THE ASSESSING OFFICER FOR FRESH ADJUDICATION. THE ASSE SSING OFFICER I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 8 SHALL RE-COMPUTE DIS-ALLOWANCE U/S.14A AFTER TAKING INTO CONSIDERATION THE ENTIRE FACTS OF THE CASE AND THE WELL SETTLED LAW. 7. THE ASSESSEE IN APPEAL ITA NO.219/2014 FOR AY.20 09-10 HAS RAISED GROUND WITH REGARD TO FOREIGN EXCHANGE F LUCTUATION LOSS. THE ARGUMENT OF THE ASSESSEE IS THAT THE FORWARD CO NTRACT WAS ENTERED FOR THE PURPOSE OF HEDGING RISK OF FOREIGN EXCHANGE FLUCTUATIONS. THE ASSESSING OFFICER DIS-ALLOWED ` 4,41,410/- BY HOLDING IT AS SPECULATION LOSS, THAT CANNOT BE SET OFF AGAINST BUSINESS PROFITS. THE ASSESSING OFFICER WHILE COMI NG TO SUCH A CONCLUSION PLACED RELIANCE ON THE DECISION OF BANGA LORE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. K.MOHAN & CO., (EXPORTS) (SUPRA). THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD., REPORTED AS 261 ITR 256 (BOM) HAS HELD THAT WHERE FORWARD CONTRACTS WITH THE BANKS IN RESPECT OF FOREIGN EXCHANGE ARE ENTERED, THE TRANSACTION IS NO T SPECULATIVE AND THE LOSS SUFFERED IS A BUSINESS LOSS. IN THE PRESENT CASE, THE ASSESSING OFFICER HAS DIS-ALLOWED AN AMOUNT OF ` 4,41,410/- CLAIMED BY ASSESSEE AS FOREIGN EXCHANGE FLUCTUATION LOSS BY RELYING ON THE DECISION OF BANGALORE BENCH OF THE T RIBUNAL IN THE CASE OF ACIT VS. K.MOHAN & CO., (EXPORTS) (SUPRA). WE FIND THAT I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 9 THE FACTS OF THE CASE ARE ENTIRELY DIFFERENT FROM T HE FACTS OF THE CASE IN HAND. THEREFORE, THE RATIO LAID DOWN BY THE HON 'BLE BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF ACIT VS. K.MOHAN & CO., (EXPORTS) (SUPRA) IS NOT APPLICABLE IN THE FACTS OF THE PRESE NT CASE. THE MATTER IS REMITTED BACK TO ASSESSING OFFICER FO R FRESH DECISION IN THE LIGHT OF THE FACTS OF CASE AND THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD., (SUPRA). ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 8. THE REVENUE IN ITS APPEALS HAS ASSAILED THE FIND INGS OF CIT(APPEALS) IN DELETING DIS-ALLOWANCE U/S.40(A)(I) IN RESPECT OF PAYMENT OF OVERSEAS COMMISSION WITHOUT DEDUCTION OF TAX AT SOURCE. THE CIT(APPEALS) AFTER CONSIDERING THE SUB MISSIONS OF THE ASSESSEES HAS HELD THAT THE PAYMENTS MADE BY THE AS SESSEES TO THE FOREIGN AGENTS IS IN THE NATURE OF COMMISSION A ND NOT IN THE NATURE OF FEE FOR TECHNICAL SERVICES. THE CONTENTI ONS OF THE ASSESSEES THAT COMMISSION IS PAID ON THE EXPORT OF GARMENTS FOR ORDERS PROCURED BY FOREIGN AGENTS; THE COMMISSIONS WERE PAID OUTSIDE INDIA THROUGH NORMAL BANKING CHANNELS; AND THAT THE FOREIGN AGENTS DO NOT HAVE ANY PLACE OF BUSINESS OR PERMANENT I.T.A. NOS. 216, 217, 218 & 219/MDS/14 I.T.A. NOS. 427, 428, 431 & 432/MDS/14 10 ESTABLISHMENT IN INDIA HAVE NOT BEEN REBUTTED BY TH E REVENUE. THE HON'BLE SUPREME COURT OF INDIA IN THE CASE OF GE INDIA TECHNOLOGY CENTRE P. LTD., VS. CIT REPORTED AS 327 ITR 456 (SC) HAS HELD THAT IF THE REMITTANCES ARE NOT CHARGEABLE TO TAX IN INDIA, THERE IS NO QUESTION OF DEDUCTION OF TAX AT SOURCE. WE DO NOT FIND ANY ERROR IN THE FINDINGS OF CIT(APPEALS) ON THE IS SUE. THEREFORE, THE GROUND RAISED BY THE REVENUE IN ITS APPEALS IS REJECTED. ACCORDINGLY, THE APPEALS OF THE REVENUE ARE DISMISS ED. 9. IN RESULT, THE APPEALS OF THE ASSESSEES ARE ALLO WED FOR STATISTICAL PURPOSE AND THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED ON FRIDAY, THE 26 TH SEPTEMBER, 2014 AT CHENNAI. SD/- SD/- ( . ) ( ) (A. MOHAN ALANKAMONY) / ACCOUNTANT MEMBER (VIKAS AWASTHY) ! / JUDICIAL MEMBER /CHENNAI, ! /DATED: 26-09-2014 TNMM !' # $% &% /COPY TO: 1. '( /APPELLANT 2. #)'( /RESPONDENT 3. * () /CIT(A) 4. * /CIT 5. %-. # / /DR 6. .0 1 /GF