M/s. Dynemic Products Ltd., Ahmedabad V. The Addl. CIT, Range-1, Ahmedabad

ITA 455/AHD/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 8223 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2011-2012
• Appeal Filed On: 03-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RJAESH D SHAH
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B, AHMEDABAD BEFORE SHRI PRADIPKUMAR KEDIA, ACCOUNTANT MEMBER AND SHRI MAHAVIR PRASAD, JUDICIAL MEMBER ITA.NO.455/AHD/2015 / ASSTT.YEAR : 2011-12 M/S.DYNEMIC PRODUCTS LTD. B-301, SATYAMEV COMPLEX-1 OPP: NEW GUJARAT HIGH COURT S.G.HIGHWAY ROAD SOLA, AHMEDABAD 380060. VS ACIT, RANGE - 1 AHMEDABAD. / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SHRI RJAESH D. SHAH, AR REVENUE BY : SHRI MUDIT NAGPAL, SR.DR / DATE OF HEARING : 13/10/2017 / DATE OF PRONOUNCEMENT: 30/10/2017 !'/ O R D E R PER MAHAVIR PRASAD, JUDICIAL MEMBER: THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGA INST ORDER OF THE LD.CIT(A) VI, AHMEDABAD AND FOLLOWING GROUND HAS B EEN TAKEN: THE LD.CIT(A) HAS ERRED IN LAW AND ON FACTS AND IN CIRCUMSTANCES OF THE CASE BY CONFIRMING THE FOLLOWING ADDITIONS MADE BY THE AO: DISALLOWANCE OF NOTIONAL EXPENDITURE U/S.14A R.W RU LE 8D OF THE IT RULES OF RS.1,99,193/- ITA NO.455/AHD/2015 2 2. FACTS OF THE CASE ARE THAT THE ASSESSEE WAS CARR YING ON BUSINESS OF MANUFACTURING AND DEALER/EXPORTER IN EYES, INTERMED IATES AND FOOD COLOURS USED FOR FOOD ITEMS, CHEMICALS, PHARMACEUTICALS, FE RTILIZERS ETC. IT IS SEEN FROM THE RECORD THAT THE ASSESSEE HAS EARNED DIVIDE ND INCOME OF RS.26,000/- FROM MUTUAL FUND AND DIVIDEND FROM COMPANIES OF RS. 27,675/- WHICH IS CLAIMED AS EXEMPT FROM TAX U/S.10(34) OF THE I.T.AC T. THE ASSESSEE HAS TAKEN LOAN OF RS.16,77,85,195/- ON WHICH INTEREST OF RS.8 1,90,732/- HAS BEEN CLAIMED BY THE ASSESSEE. IT IS NOTICED THAT THE AS SESSEE HAS DISALLOWED ONLY RS.5,17,206/- WHICH IS EXPENDITURE DIRECTLY RELATED TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. THE ASSESSEE DID NOT T AKE INTO ACCOUNT INTEREST PORTION AND THE ADMINISTRATIVE/OTHER EXPENSES WHICH WOULD BE ATTRIBUTABLE TO TAX FREE INCOME. IN THIS REGARD, THE AO ISSUED SH OW CAUSE NOTICE AS TO WHY DISALLOWANCE U/S.14A R.W. RULE 8D OF THE ACT SHOULD NOT BE MADE. THE ASSESSEE FILED REPLY AS UNDER: WITH REGARD TO THE EXEMPT INCOME LIKE DIVIDEND ON MUTUAL FUNDS ETC., WE HAVE DIVIDEND INCOME MUTUAL FUND INVESTMENT AMOU NTING TO RS.26000/- AND DIVIDEND ON SHARES OF THE COMPANY RS .27675/- WHICH ARE EXEMPT INCOME U/S 10(34) & 10(35). WE HAVE COME OUT WITH IPO OF RS.1547 LACS IN THE MONTH OF FEB 06 IN YEAR FY 2 005-06 FOR THE BACKWARD INTEGRATION AT OUR EOU-I AND FORWARD INTEG RATION AT EOU- II, SO PENDING THE UTILIZATION OF THESE FUNDS FOR T HE PROJECT: EXECUTION, WE HAVE INVESTED THESE FUNDS TEMPORARILY IN THE MUT UAL FUNDS AND EQUITIES AND WE HAVE EARNED DIVIDEND ON THE SAME. W E HAVE NOT INCURRED ANY EXTRA EXPENDITURE FOR THESE INVESTMENT S AND THE DIVIDEND ARE TRANSFERRED THROUGH THE ECS AND WHATEVER THE DI RECT EXPENDITURES INCURRED FOR THESE INVESTMENTS, AMOUNTING TO US, 51 7206/-, WE HAVE ALREADY DISALLOWED IN THE CALCULATION OF THE STATEM ENT OF TOTAL INCOME, AND SO WE HAVE NOT CLAIMED THESE EXPENDITURES FROM THE INCOME. THE LIST OF SUCH EXPENDITURES IS ALREADY GIVE IN THE BA LANCE SHEET. WHEREIN WE HAVE INVESTED THROUGH THE KOTAK AND WHATEVER EXP ENSES PAID TO THEM HAVE BEEN ADDED BACK TO OUR INCOME IN THE CALC ULATION STATEMENT OF INCOME. THERE IS NO ADDITIONAL INVESTMENTS MADE DURING THE FY 2010-11, IT IS ONLY THE CARRIED FORWARD INVESTMENTS AND THERE IS SALES OF ITA NO.455/AHD/2015 3 INVESTMENTS IN EQUITY AND MUTUAL FUNDS DURING THE Y EAR. THE INCREASE IN THE INVESTMENTS IS DUE TO THE INVESTMENT MADE IN TH E VISHWAS ORGANIZERS LLP, A PARTNERSHIP FIRM, AND THE INTERES T IS RECEIVED ON THAT INVESTMENT WHICH IS REFLECTED IN THE PROFIT AND LOS S ACCOUNT IN SCHEDULE'9 OTHER INCOME. SO FOR EARNING THE TAX FRE E INCOME, THERE IS NO EXPENDITURE INCURRED BY US, AND SO, THERE IS NO QUESTION OF ANY CALCULATION OF EXPENDITURES IN RELATION TO THE EXEM PT INCOME. 3. REPLY OF THE ASSESSEE WAS CONSIDERED, BUT NOT FO UND ACCEPTABLE AND DISALLOWANCE OF RS.1,99,193/- WAS MADE AGAINST THE ASSESSEE. AGAINST THE ORDER OF THE AO, THE ASSESSEE FILED FIRST APPEAL BE FORE THE LD.CIT(A), BUT NO SUCCESS. 4. WE HAVE GONE THROUGH THE RECORD AND RELEVANT ORD ERS OF THE REVENUE AUTHORITIES. THE LD.AR STATED THAT IDENTICAL ISSUE CAME UP FOR CONSIDERATION IN ASSESEES OWN CASE BEFORE THE LD.CIT(A) FOR THE ASS TT.YEAR 2009-10, THE LD.CIT(A) VIDE ORDER DATED 8.11.2013 IN APPEAL NO.C IT(A)-VI/R-1/146/11-12 HELD AS UNDER: 3.1 IDENTICAL ISSUE CAME UP FOR CONSIDERATION IN T HE APPELLANTS OWN CASE IN THE IMMEDIATELY PRECEDING A.Y.2008-09. VID E MY PREDECESSORS ORDER DATED 03.10.2011 IN APPEAL NO.CIT(A)-VI/DCIT( OSD) R- 1/121/10-11, IT WAS HELD AS UNDER: 2.3. I HAVE CONSIDERED THE FACTS OF THE CASE; ASSES SMENT ORDER AND APPELLANT'S SUBMISSION. ASSESSING OFFICER MADE DISA LLOWANCE OF EXPENSE RELATING TO EXEMPT INCOME. SUCH DISALLOWANC E WAS CONSIDERED NECESSARY SINCE APPELLANT DID NOT DISALL OW ANY PART OF COMMON INTEREST AND OTHER EXPENSES TREATING THE SAM E AS RELATING TO INVESTMENT RESULTING IN EXEMPT INCOME. NOW RULE 8D IS HELD TO BE APPLICABLE WITH EFFECT FROM ASSESSMENT YEAR 2008-09 BY BOMBAY HIGH COURT, THE DISALLOWANCE OF EXPENSES RELATING T O EXEMPT INCOME ARE TO BE MADE BY THE METHOD PRESCRIBED IN THE SAID RULE. APPELLANT ONLY DISALLOWED DIRECT EXPENSES RELATING TO EXEMPT INCOME UNDER CLAUSE (I) OF THE RULE 8D. NO DISALLOWANCE UNDER CL AUSE (II) AND (IN) ITA NO.455/AHD/2015 4 OF RULE 8D WAS MADE. IT IS NOT IN DISPUTE THAT APPE LLANT EARNED EXEMPT INCOME IN THE FORM OF DIVIDEND ON INVESTMENT OF MORE THAN RS 652 LACS. APPELLANT PAID INTEREST OF RS 37.74 LA CS ON BORROWED FUNDS USED FOR BUSINESS PURPOSES AS WELL AS MAKING INVESTMENTS. APPELLANT INCURRED SUBSTANTIAL EMPLOYEES' REMUNERAT ION AND OTHER ADMINISTRATIVE EXPENSES, PART OF WHICH MAY RELATE T O INVESTMENT RESULTING IN EXEMPT INCOME. SIMILARLY PAYMENT OF IN TEREST WILL ALSO PARTLY RELATE TO INVESTMENT AND TRADING RESULTING I N EXEMPT INCOME THEREFORE DISALLOWANCE UNDER SECTION 14A ON ACCOUNT OF INTEREST AND OTHER EXPENSES ARE NECESSARY. 5. THE ASSESSEE HAS FILED BALANCE SHEET OF THE ASSE SSMENT YEAR IN QUESTION. WE CAN SEE THAT THE ASSESSEE HAS RESERVE AND SURPLU S FUND OF RS.34,45,25,075/- AND HAD INVESTMENT OF RS.4,18,74, 581/-. IT HAS BEEN HELD IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 (BOM) THAT IF THERE BE INTEREST FREE FUNDS AVAILABLE TO A N ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD R AISED A LOAN, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTERES T FREE FUNDS AVAILABLE. IN THE JUDGMENT OF HONBLE PUNJAB & HARYANA IN THE CAS E IN ITA NO.331 (DEL)2009 A.Y.2008-09, CIT VS. HERO CYCLES LTD., SE CTION 14A AND RULE 8D HAS BEEN CONSIDERED AND IT WAS HELD THAT CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS I NCURRED WHICH MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPE NDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINES S INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A, CANNOT BE ACCEPTED. DI SALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WH ERE IT IS FOUND THAT EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, D ISALLOWANCE U/S.14A CANNOT STAND. ITA NO.455/AHD/2015 5 6. IN VIEW OF THE ABOVE JUDGMENTS, WE ARE OF THE CO NSIDERED OPINION THAT THE ASSESSEE WAS HAVING MUCH MORE RESERVES AND SURP LUS THAN THE INVESTMENT. IN THESE CIRCUMSTANCES, APPEAL OF THE ASSESSEE IS A LLOWED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE COURT ON 30 TH OCTOBER, 2017 AT AHMEDABAD. SD/- SD/- ( PRADIPKUMAR KEDIA ) ACCOUNTANT MEMBER ( MAHAVIR PRASAD ) JUDICIAL MEMBER AHMEDABAD; DATED 30/10/2017 !' # $%& '!&$ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ! / CONCERNED CIT 4. ! () / THE CIT(A) 5. $%& '', / DR, ITAT, 6. &)* + / GUARD FILE. !' ( ) / BY ORDER, */) +, ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD TRUE COPY 1. DATE OF DICTATION- 16-10-2017 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 18.10.2017 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S. - 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT .. 5. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. : 6. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 7. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. DATE OF DESPATCH OF THE ORDER