ACIT 10(2), MUMBAI V. GODREJ AGROVET LTD, MUMBAI

ITA 4897/MUM/2012

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 8330 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 23-07-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 27-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ADAGIRI
• Keywords: Earning of tax free income; Proportionate interest
• Section: 143(3); 14A; 115JB

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL G , BENCH MUMBAI , BEFORE : SHRI R.C.SHARMA , A M & SHRI SANJAY GARG, J M ITA NO. 1613 / MUM/20 1 1 ( ASSESSMENT YEAR : 200 6 - 0 7 ) DCIT - 10(2), MUMBAI VS. M/S GODREJ AGROVET LTD., GATE NO.2, PIROJSHA N AGAR, EASTER EXPRESS HIGHWAY, VIKHROLI (E), MUMBAI - 400 079 PAN/GIR NO. : A A A C G 0617 Q ( APPELLANT ) .. ( RESPONDENT ) AND ITA NO. 4897 / MUM/20 1 2 ( ASSESSMENT YEAR :2006 - 07 ) A CIT - 10(2), MUMBAI VS. M/S GODREJ AGROVET LTD., PIROJSHA N AGAR, EASTER EXPRESS HIGHWAY, VIKHROLI (E), MUMBAI - 400 079 PAN/GIR NO. : AA A C G 0617 Q ( APPELLANT ) .. ( RESPONDENT ) /REVENUE BY : SHRI B. YADAGIRI /ASSESSEE BY : SHRI M.M. G OLVALA, & SHRI AKRAM KHAN DATE OF HEARING : 2 3 RD JULY , 201 4 DATE OF PRONOUNCEMENT : 22 ND AUG , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : THESE ARE THE APPEALS FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A ) FOR THE ASSESSMENT YEAR 2006 - 07 , IN THE MATTER OF ORDER PASSED U/S. 143(3) OF TH E ACT . ITA NO S . 1613/11 & 4897/12 2 2 . FIRST WE SHALL TAKE UP THE APPEAL OF THE REVENUE I.E. ITA NO.1613/2011 FOR A.Y. 2006 - 07 , WHEREIN FOLLOWING GROUND HA VE BEEN TAKEN : - 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEARNED CIT(A) HAS ERRED IN HOLDING THAT THE PROVISIONS OF RULE 8D WERE NOT APPLICABLE IN THE ASSESSMENT YEAR 2006 - 07.' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEARNED CIT(A) FAILED TO APPRECIATE THAT THE PROVISIONS OF RULE 8D HAD BEEN INSERTED BY THE INCOME TAX (FIFTH AMENDMENT) RULES,2008 TO BE EFFECTIVE FROM 24.03.2008 AND THE SAID RULE WAS RIGHTLY INVOKED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER WHICH WAS PASSED ON 12.12.2008.' 3. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEARNED CIT(A) OUGHT TO HAVE SUSTAINED THE DISALLOWANCE OF RS.9909825J - COMPUTED BY THE ASSESSING OFFICER AS PER THE FORMULA PROVIDED IN RULE 8D.' 4. 'ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE AS WELL AS IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT NO DIRECT OR INDIRECT INTEREST EXPENDITURE WAS INCURRED BY THE ASSESSEE DURING THAT YEAR FOR MAKING INVESTMENTS DURING THE YEAR FOR EARNING EXEMPT INCOME AND CONSEQUENTLY ERRED IN D ELETING THE DISALLOWANCE OF INDIRECT INTEREST EXPENDITURE OF RS.77,82,750 / - MADE BY THE ASSESSING OFFICER.' 5. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEARNED CIT(A) ERRED IN RESTRICTING THE DISALLOWANCE OF ADMINISTRATIV E AND MANAGERIAL EXPENDITURE ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME TO RS.7,12,177 / - AS AGAINST THE DISALLOWANCE COMPUTED BY THE ASSESSING OFFICER AT RS.21,27,075/ - .' 6. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW, THE LEA RNED CIT(A) ERRED IN DIRECTING THE A .O. TO CONSIDER ONLY RS.7,12,17 7 / - FOR THE PURPOSE OF MAKING ADJUSTMENT AS PER C L AUSE(F) OF THE EXPLANATION TO SECTION 115JB OF THE INCOME TAX CT 1961. 7. THE APPELLANT PRAYS THAT THE ORDER OF CIT(A) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . 3 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED . FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF ANIMAL FEES, INTEGRATED POULTRY BUSINESS, TRADING OF AGRICULTURAL PRODUCTS ETC. DURING THE YEAR UNDER CONSIDERATION, THE ITA NO S . 1613/11 & 4897/12 3 ASSESSEE RECEIVED DIVIDEND INCOME OF RS. 3.56 CRORES, WHICH WAS CLAIMED AS EXEMPT U/S. 10(34) OF THE I.T. ACT. THE AO OBSERVED THAT NO DISALLOWANCE WAS MADE ON ACCOUNT OF EXPENDITURE ATTRIBU TABLE TO EARNING OF DIVIDEND INCOME, THEREFORE, HE INVOKED PROVISIONS OF SECTION 14A AND DISALLOWED RS. 99,09,825/ - . 4 . BY THE IMPUGNED ORDER, THE CIT(A) DELETED THE DISALLOWANCE AFTER HAVING FOLLOWING OBSERVATIONS : - 4.3. I HAVE CAREFULLY CONSIDERED THE F ACTS OF THE CASE. IN THE CASE UNDER CONSIDERATION, THE AO MADE DISALLOWANCE U/S 14A AS PER FORMULA PROVIDED IN RULE BD. HOWEVER, IN VIEW OF THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCEE AND MFG. CO. (SUPRA), THE PROVISIONS OF RULE BD WERE NOT APPLICABLE IN THE YEAR UNDER CONSIDERATION. HOWEVER, THE HON'BLE BOMBAY HIGH COURT ALSO HELD THAT IN THE YEAR IN WHICH RULE BD WERE NOT APPLICABLE, THE AO HAS TO ENFORCE THE PROVISIONS OF SUB SECTION (1) OF SECTION 14 A. FOR THIS PURPOSE THE AO IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAD BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE AO SHOULD ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES. THOUGH THE PR OVISIONS OF RULE BD WERE NOT APPLICABLE IN THE YEAR UNDER CONSIDERATION, HOWEVER, IN VIEW OF THE OBSERVATIONS OF HON'BLE COURT, IT HAS BECOME NECESSARY TO EXAMINE AS TO WHETHER ANY EXPENDITURE WAS INCURRED FOR THE PURPOSES OF EARNING EXEMPT INCOME. FOR T HE PURPOSE OF EARNING EXEMPT INCOME, ONE HAS TO INCUR THE DIRECT INTEREST EXPENDITURE, INDIRECT INTEREST EXPENDITURE AND ADMINISTRATIVE & MANAGERIAL EXPENSES. THE AO HAS MADE A DETAILED DISCUSSION IN RESPECT OF THESE EXPENSES IN THE ASSESSMENT ORDER. ON TH E OTHER HAND, THE APPELLANT HAS ALSO FURNISHED AN EXHAUSTIVE SUBMISSION DURING APPELLATE PROCEEDINGS WHICH WERE SUPPORTED WITH FACTS, FIGURES AND THE DETAILS. HOWEVER, IN VIEW OF FINDINGS IN THE EARLIER YEARS AND THE ORDER OF ITAT IN APPELLANT'S CASE FOR A .Y. 2005 - 06, THE DETAILED FINDINGS OF THE AO AND DETAILED APPELLANTS ARE NOT REQUIRED TO BE CONSIDERED AT LENGTH. IN RESPECT OF DIRECT AND INDIRECT INTEREST EXPENDITURE, THE HONOURABLE ITAT IN A.Y. 2005 - 06, HAS GIVEN A FINDING OF FACT THAT NO DIRECT OR INDIRECT INTEREST EXPENDITURE WAS ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. THIS FINDING OF FACT OF THE HONOURABLE ITAT BEING BINDING ON THE LOWER AUTHORITIES, THEREFORE THE UNDERSIGNED HAS TO DECIDE THE ISSUE WITH THE PRESUMPTION THAT UPTO 31 - 03 - 2006, NO DIRECT OR INDIRECT EXPENDITURE WAS INCURRED BY THE APPELLANT FOR THE PURPOSE OF MAKING INVESTMENT WHICH YIELDED EXEMPT INCOME. THEREFORE, THE ONLY QUESTION FOR CONSIDERATION IS AS TO WHETHER THE ITA NO S . 1613/11 & 4897/12 4 APPELLANT INCURRED ANY INTEREST EXPENDITURE FOR THE PURPOSE O F MAKING INVESTMENTS DURING THE YEAR WHICH HAD YIELDED EXEMPT INCOME. FOR THIS PURPOSE ONLY THE INVESTMENTS MADE DURING THE YEAR ARE REQUIRED TO BE CONSIDERED AND AS TO WHETHER THE SAME WERE MADE OUT OF BORROWED FUNDS AND ALSO AS TO WHETHER THOSE INVESTMEN TS YIELDED EXEMPT INCOME OR TAXABLE INCOME. THE APPELLANT IN ITS SUBMISSIONS DISCUSSED ABOVE, H AS EXPLAINED THAT THE TOTAL INVESTMENT DURING THE YEAR WAS ONLY RS. 18.09 CRORES. THE INVESTMENT WAS ADMITTEDLY MADE OUT O F BORROWED FUNDS. HOWEVER, THE INVEST MENT OF RS. 18 CRORES WAS MADE ONLY FOR A VERY SHORT PERIOD OF 2 DAYS ONLY. HOWEVER, THIS INVESTMENT YIELD ED TAXABLE INTEREST INCOME AND THEREFORE, WAS NOT REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE U/S 14A OF THE ACT. SIMILARLY, THE BALANCE INVESTMENT OF RS, 9,05,000/ - WAS MADE IN A COMPANY INCORPORATED IN ABU DHABI, THE DIVIDEND RECEIVED/RECEIVABLE FROM WHICH WAS ALSO TAXABLE. THEREFORE, TILLS INVESTMENT WAS ALSO NOT REQUIRED TO BE CONSIDERED FOR DISALLOWANCE U/S 14A OF THE ACT. IN THE FACTS AND CIRCUMSTANCES, THE INVESTMENTS MADE OUT OF BORROWED FUNDS DURING THE YEAR WERE NOT REQUIRED TO BE CONSIDERED AS THE SAME DID NOT YIELD EXEMPT INCOME. IN VIEW OF THE ABOVE, AS PER THE ITAT ORDER, THE INVESTMENTS MADE UPTO 31 - 03 - 2006 WERE NOT ATTRACT ING DISALLOWANCE OF INTEREST EXPENDITURE. SIMILARLY, NO INVESTMENT WAS MADE AFTER 31 - 03 - 2006 IN INVESTMENTS YIELDING EXEMPT INCOME. THE INVESTMENT MADE AFTER 31 - 03 - 2006 YIELDED ONLY TAXABLE INCOME. IN THE FACTS AND CIRCUMSTANCES, IT WAS EVIDENT THAT NO DIR ECT OR INDIRECT INTEREST EXPENDITURE WAS INCURRED BY THE APPELLANT DURING THE YEAR FOR MAKING INVESTMENTS DURING THE YEAR FOR EARNING EXEMPT INCOME. IN THE FACTS AND CIRCUMSTANCES, THE DISALLOWANCE OF INDIRECT INTEREST EXPENDITURE MADE BY AO AT RS. 77,82,7 50/ - IS DELETED . 5 . THE CIT(A) HAS ALSO RESTRICTED THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF ADMINISTRATIVE AND MANAGERIAL EXPENDITURE TO RS. 7,12,177/ - AS AGAINST DISALLOWANCE MADE BY THE AO AT RS. 21,27,075/ - . THE PRECISE OBSERVATION OF THE CIT(A) I N THIS REGARD IS AS UNDER : - IN RESPECT OF ADMINISTRATIVE AND MANAGERIAL EXPENSES REQUIRED TO BE INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME, THE HONOURABLE ITAT IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR HAS CONSIDERED 2% OF THE TOTAL EXEMPT INCO ME AS SUFFICIENT ADMINISTRATIVE AND MANAGERIAL EXPENSES INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME. THERE IS NO CHANGE IN FACTS IN THE YEAR UNDER CONSIDERATION AS NO NEW INVESTMENTS HAVE BEEN MADE DURING THE YEAR WHICH HAS YIELDED EXEMPT INCOME. THE INVESTMENTS MADE DURING THE YEAR HAS YIELDED TAXABLE INCOME. THEREFORE, FOR ITA NO S . 1613/11 & 4897/12 5 THE PURPOSE OF DETERMINING ADMINISTRATIVE AND MANAGERIAL EXPENSES INCURRED FOR EARNING EXEMPT INCOME, THE INVESTMENTS MADE UP 'TO IMMEDIATELY PRECEDING ASSESSMENT YEAR ONLY ARE RE QUIRED TO BE CONSIDERED. IN RESPECT OF THOSE INVESTMENTS, THE HONOURABLE ITAT HAD ALREADY GIVEN A FINDING. THEREFORE, FOLLOWING THE !TAT ORDER FOR A.Y. 2005 - 06, IT IS HELD THAT ADMINISTRATIVE AND MANAGERIAL EXPENDITURE OF RS. 7,12,177/ - BEING 2% OF TOTAL E XEMPT INCOME WAS ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME. IN THE FACTS AND CIRCUMSTANCES, THE DISALLOWANCE MADE BY AO AT RS. 21,27,075/ - IS REDUCED TO RS.7,12,177/ - . THE BALANCE DISALLOWANCE IS HEREBY DELETED. 6 . WE HAVE CONSIDERED RIVAL CONTENTION S, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT BY INVOKING PROVISIONS OF SECTION 14A, AO HAS DISALLOWED INTEREST EXPENDITURE OF RS. 77,82,750/ - AND OTHER EXPENSES AMOUNTING TO RS. 21,27,075/ - . WHATEVER THE INVESTMENT WAS MADE, W AS MADE IN EARLIER ASSESSMENT YEAR I.E. AY 2005 - 06. THE DEPARTMENT HAS ALSO DISALLOWED ASSESSEES CLAIM FOR INTEREST BY INVOKING PROVISIONS OF SECTION 14A IN THE AY 2005 - 06. HOWEVER, IN AN APPEAL FILED BY THE ASSESSEE, THE TRIBUNAL HAS DELETED THE ADDITION AFTER HAVING THE FOLLOWING OBSERVATION VIDE ITS ORDER DATED 17 - 9 - 2010 IN ITA NO. 1629/MUM/2009 . THE PRECISE OBSERVATIONS OF THE TRIBUNAL ARE AS UNDER : - 7. THE A.O. DID NOT FIND THE SUBMISSION OF THE ASSESSEE TO BE ACCEPTABLE. ACCORDING TO HIM, ALTHOUGH THE ASSESSEE HAD ENOUGH SURPLUS FUNDS TO MAKE INVESTMENT IN SHARES, HE COULD HAVE UTILIZED THE SAID FUNDS FOR REPAYING THE BORROWINGS INSTEAD OF MAKING THE INVESTMENT IN SHARES. HE HELD THAT IT WAS THUS AN INDIRECT CASE OF DIVERSION OF BORROWED FUNDS BY T HE ASSESSEE FOR MAKING INVESTMENT IN SHARES SO AS TO EARN DIVIDEND INCOME AND SINCE SUCH DIVIDEND INCOME WAS EXEMPT FROM TAX, INTEREST ATTRIBUTABLE TO THE BORROWED FUNDS UTILIZED FOR MAKING INVESTMENT IN SHARES WAS LIABLE TO BE DISALLOWED U/S 14A. SINCE T HE INVESTMENT IN SHARES OF RS. 30.42 CRORES MADE BY THE ASSESSEE WAS TO THE EXTENT OF 31.61% OF THE TOTAL FUNDS OF RS. 96.18 CRORES, HE TREATED THE BORROWED FUNDS OF RS. 31.98 CRORES TO THE EXTENT OF ` 10.10 CRORES AS UTILIZED FOR MAKING INVESTMENT IN SHAR ES ON PRO - RATA BASIS AND PROPORTIONATE INTEREST ATTRIBUTABLE TO THE SAID AMOUNT WORKED OUT AT RS. 1,02,21,276/ - WAS DISALLOWED BY HIM U/S 14A. HE ALSO IDENTIFIED THE COMMON ITA NO S . 1613/11 & 4897/12 6 ADMINISTRATIVE EXPENSES INCURRED BY THE ASSESSEE COMPANY AT ` 1,63,05,007/ - AND APP LYING THE RATIO OF 17.39% BETWEEN THE DIVIDEND INCOME AND TOTAL INCOME, HE WORKED OUT THE DISALLOWANCE U/S 14A ON ACCOUNT OF THE SAID EXPENSES AT ` 28,35,404/ - . THUS, A TOTAL DISALLOWANCE OF ` 1,30,56,716/ - WAS MADE BY THE A.O. ON ACCOUNT OF EXPENSES ATTR IBUTABLE TO THE EXEMPT INCOME EARNED BY THE ASSESSEE COMPANY IN THE FORM OF DIVIDEND ON SHARES. ON APPEAL, THE LD. CIT(A) UPHELD THE ACTION OF THE A.O. IN INVOKING THE PROVISIONS OF SECTION 14A TO MAKE A DISALLOWANCE OUT OF INTEREST AND OTHER ADMINISTRATI VE EXPENSES. HE, HOWEVER, RESTRICTED THE QUANTUM OF SUCH DISALLOWANCE MADE BY THE A.O. TO ` 46,97,000/ - BY APPLYING RULE 8D OF THE INCOME TAX RULES 1962 INSERTED W.E.F. 1.4.08. 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE R ELEVANT MATERIAL ON RECORD. AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. (ITA NO. 626 OF 2010 DTD. 12.08.2010), RULE 8D OF THE INCOME TAX RULES 1962 IS APPLICABLE ONLY PROSPECTIVELY I.E. FROM A.Y. 2008 - 09. SINCE THE ASSESSMENT YEAR INVOLVED IN THE PRESENT CASE IS 2005 - 06, RESPECTFULLY FOLLOWING THE SAID JUDGMENT OF THE HONBLE BOMBAY HIGH COURT, WE HOLD THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN APPLYING THE SAID RULE TO QUANTIFY THE DISALLOWANCE U/S 14A. GROUND NO. 4 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. 9. AS REGARDS THE ISSUE RAISED IN GROUND NO. 5 TO 7 OF THE ASSESSEES APPEAL RELATING TO THE DISALLOWANCE MADE OUT OF INTEREST EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 14A, IT IS OBSERVED TH AT ELABORATE SUBMISSIONS WERE MADE ON BEHALF OF THE ASSESSEE BEFORE THE A.O. AS WELL AS BEFORE THE LD. CIT(A) TO ESTABLISH THAT THE INVESTMENT IN SHARES WAS MADE OUT OF ITS OWN FUNDS AND THE BORROWED FUNDS OF RS. 31.98 CRORES WERE ENTIRELY UTILIZED FOR THE PURPOSE OF ITS BUSINESS. AT THE TIME OF HEARING BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS TAKEN US THROUGH THE COPIES OF SUCH SUBMISSIONS PLACED IN HIS PAPER BOOK TO DEMONSTRATE THAT THE ENTIRE AMOUNT OF BORROWED FUNDS WAS UTILIZED FOR THE PURPOSE O F ITS BUSINESS BY THE ASSESSEE COMPANY AND THE INVESTMENT IN SHARES WAS MADE BY IT OUT OF ITS OWN FUNDS. AS POINTED OUT BY HIM, THE SAID BORROWED FUNDS TO THE EXTENT OF ` 21.59 CRORES WERE AVAILED BY THE ASSESSEE IN THE EARLIER YEAR AND IN THE ASSESSMENT COMPLETED FOR A.Y. 2004 - 05, THE A.O. HAD ACCEPTED AFTER VERIFICATION OF THE RELEVANT RECORD THAT THE BORROWED FUNDS TO THAT EXTENT WERE UTILIZED BY THE ASSESSEE COMPANY FOR THE PURPOSE OF ITS BUSINESS AND THE INVESTMENT IN SHARES WAS MADE BY IT OUT OF ITS OWN FUNDS. AS FURTHER POINTED OUT BY HIM, EVEN THE INVESTMENT IN SHARES IN THE YEAR UNDER CONSIDERATION WAS MADE BY THE ASSESSEE COMPANY FROM A SEPARATE CURRENT ACCOUNT MAINTAINED IN IDBI WHERE THE SURPLUS FUNDS GENERATED IN THAT YEAR WERE DEPOSITED. SU FFICIENT EVIDENCE THUS WAS BROUGHT ON RECORD BY THE ASSESSEE COMPANY TO ESTABLISH THAT INVESTMENT IN SHARES WAS MADE BY IT OUT OF ITS OWN FUNDS AND THE BORROWED FUNDS WERE ENTIRELY UTLISED FOR THE PURPOSE OF ITS BUSINESS. AS A MATTER OF FACT, EVEN THE AUT HORITIES BELOW HAVE NOT DISPUTED THIS POSITION. ACCORDING TO THEM, THE ASSESSEE, HOWEVER, COULD HAVE UTILIZED ITS SURPLUS FUNDS IN REPAYING THE BORROWINGS INSTEAD OF INVESTING IN SHARES AND BY NOT DOING SO, THERE WAS DIVERSION OF ITA NO S . 1613/11 & 4897/12 7 BORROWED FUNDS TOWARDS IN VESTMENT IN SHARES TO EARN DIVIDEND INCOME. IN THE CASE OF CIT VS. HERO CYCLES LTD. 323 ITR 518 CITED BY THE LD. COUNSEL FOR THE ASSESSEE, A SIMILAR CONTENTION WAS RAISED IN THE CONTEXT OF DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A AND RELIANCE IN SUPPO RT OF THIS CONTENTION WAS PLACED ON BEHALF OF THE REVENUE ON THE DECISION IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1. THE HONBLE PUNJAB & HARYANA HIGH COURT, HOWEVER, DID NOT ACCEPT THIS CONTENTION RAISED ON BEHALF OF THE REVENUE OBSERVING THAT THE JUDGMENT OF ABHISHEK INDIUSTRIES LTD. (SUPRA) WAS ON THE ISSUE OF ALLOWABILITY OF INTEREST PAID ON LOANS GIVEN TO SISTER CONCERNS WITHOUT INTEREST. IT WAS HELD THAT THE RELEVANT OBSERVATIONS RECORDED IN THE SAID JUDGMENT THEREFORE HAVE TO BE READ IN THAT CONTEXT. IN THE CASE OF HERO CYCLES LTD. (SUPRA), A FINDING WAS RECORDED BY THE TRIBUNAL THAT THE INVESTMENT IN SHARES AND FUNDS WAS MADE BY THE ASSESSEE OUT OF THE DIVIDEND PROCEEDS AND NOT OUT OF BORROWED FUNDS AND IN VIEW OF THIS FINDING OF FA CT, IT WAS HELD BY THE HONBLE PUNJAB & HARYANA HIGH COURT THAT THE DISALLOWANCE U/S 14A WAS NOT SUSTAINABLE. KEEPING IN VIEW THE SAID DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYCLES LTD. (SUPRA) AND HAVING REGARD TO THE FAC TS OF THE CASE, WE HOLD THAT THE DISALLOWANCE MADE BY THE A.O. OUT OF INTEREST EXPENSES U/S 14A AND CONFIRMED BY THE LD. CIT(A) IS NOT SUSTAINABLE. THE SAME IS THEREFORE DELETED ALLOWING GROUND NO. 5 TO 7 OF THE ASSESSEES APPEAL. 7 . DURING THE YEAR UNDE R CONSIDERATION, THE CIT(A) HAS FOLLOWED THE DECISION OF THE TRIBUNAL FOR A.Y.2005 - 06 BY OBSERVING THAT CLEAR FINDING HAS BEEN GIVEN BY THE TRIBUNAL TO THE EFFECT THAT NO DIRECT OR INDIRECT INTEREST EXPENDITURE WAS ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. THEREAFTER THE CIT(A) EXAMINED THE INVESTMENT IF ANY MADE DURING THE YEAR AND WHETHER THE SAME WAS OUT OF BORROWED FUNDS AND HAS TO EXEMPT INCOME OR TAXABLE INCOME EARNED BY THE ASSESSEE ON THOSE INVESTMENTS. IT WAS FOUND THAT TOTAL INVESTMENT DURING THE YEAR WAS RS. 18.09 CRORES. IT WAS FURTHER FOUND THAT INVESTMENT OF RS. 18 CRORES WAS OUT OF BORROWED FUNDS BUT WAS ONLY FOR A SHORT PERIOD OF TWO DAYS. WHATEVER INCOME WAS YIELDED THROUGH THESE INVESTMENTS, WAS OFFERED AS TAXABLE INCOME BY THE ASSESSEE IN IT S RETURN OF INCOME. IT WAS ALSO FOUND BY THE CIT(A) THAT BALANCE INVESTMENT OF RS. 9,500/ - WAS MADE IN ITA NO S . 1613/11 & 4897/12 8 A COMPANY INCORPORATED IN ABU DHABI, DIVIDEND INCOME WAS ALSO TAXABLE. ACCORDINGLY, THOUGH DISALLOWANCE WAS WARRANTED U/S. 14A, THE CIT(A) ALSO EXAMINED IN VESTMENT MADE AFTER 31 - 3 - 2006 , WHICH HAD YIELDED ONLY TAXABLE INCOME AND RECORDED A FINDING TO THE EFFECT THAT NO DIRECT OR INDIRECT EXPENDITURE WAS INCURRED BY THE ASSESSEE DURING THE YEAR FOR EARNING EXEMPT INCOME. ACCORDINGLY, HE DELETED THE DISALLOWANC E OF INTEREST EXPENDITURE OF RS. 77,82,750/ - MADE BY THE AO. IN RESPECT OF DISALLOWANCE OF ADMINISTRATIVE EXPENSES TO THE TUNE OF RS. 21,27,075/ - , THE CIT(A) AFTER FOLLOWING THE ORDER OF THE TRIBUNAL FOR A.Y.2005 - 06 HELD THAT ADMINISTRATIVE AND MANAGERIAL EX PENDITURE OF RS. 7,12,177/ - BEING 2% OF TOTAL EXEMPT INCOME WAS ATTRIBUTABLE TO EARNING OF EXEMPT INCOME. ACCORDINGLY, DISALLOWANCE WAS RESTRICTED TO RS. 7,12,177/ - . SINCE, T HE FINDINGS RECORDED BY THE CIT(A) WITH REGARD TO INVESTMENT MADE AND EXPENDITURE HA VING BEEN INCURRED FOR SUCH INVESTMENT HAS NOT BEEN CONTROVERTED, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) FOR DELETING THE INTEREST EXPENDITURE AND RESTRICT ING THE DISALLOWANCE OF OTHER EXPENSES TO THE TUNE OF RS. 7,12,177/ - . ITA NO. 4 897/MUM/2012 (AY2006 - 07) 8 . IN THIS APPEAL, THE REVENUE IS AGGRIEVED FOR DELETING DISALLOWANCE OF INTEREST OF RS. 41,34,375/ - CLAIMED BY THE ASSESSEE U/S. 36(1)(III) OF THE ACT. ITA NO S . 1613/11 & 4897/12 9 9 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. THE FACTS OF THE CASE W ERE THAT THE ASSESSEE HAD ADVANCED AN AMOUNT OF RS.3,30, 75,000/ - TO AL RAHBA INTERNATIONAL TRADING LLC, ABU DHABI AS INTEREST FREE LOAN. M/ S. AL RAHBA INTERNATIONAL WAS A COMPANY IN WHICH THE ASSESSEE HAD ACQUIRED 675 EQUITY SHAR ES FOR AN AMOUNT OF RS.8,10 ,000/ - . THE AO NOTICED THAT APPELLANT HAD PAID INTEREST ON ITS BORROWED FUNDS BUT DID NOT CHARGE INTEREST ON ITS ADVA NCES OF RS.3.31 CRORE MADE TO M/ S. AI RAHBA INTERNATIONAL TRADING LLC, ABU DHABI. THE AO HELD THAT THE ASSESSEE HAS TAKEN FRESH LOAN OF RS. 129. 96 CRORE DURING THE YEAR WHICH WERE OUTSTANDING AS ON LAST DAY OF THE YEAR. THEREFORE, THE AO HELD THAT THE AMOUNT OF RS.3.31 CRORE OUT OF THE BORROWED FUNDS HAD NOT BEEN USED FOR THE PURPOSE OF BUSINESS AND THE INTEREST AT THE RATE OF 12.5% RELATABLE TO SUCH INTEREST FREE LOAN WAS DISALLOWED AT RS.41,34,375/ - . 10 . BY THE IMPUGNED ORDER, CIT(A) DELETED THE DISALLOWANCE AFTER HAVING FOLLOWING OBSERVATION : - 2.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. DURING THE YEAR, THE APPELLANT HAS GIVEN INTEREST FREE LOANS/ADVANCE OF RS.3.30 CRORE TO M/S. AL RAHBA INTERNATIONAL TRADING LLC, UAE. THE APPELLANT HAS PURCHASED 675 EQUITY SHARE OF M/S. AL RABHA INTERNATIONAL FOR AN AMOUNT OF RS.8,10,000/ - . THE APPELLANT'S SHARE HOLDING IN THE SAID COMPANY IS 45% ONLY. THEREFORE, THE APPELLANT'S SHARE OF PROFIT AND LOSS IN THE SAID COMPANY SHOULD HAVE BEEN ONLY 45%. HOWEVER, THE APPELLANT'S SHARE OF PROFIT/LOSS IN THE SAID COMPANY IS 70%. THE APPELLANT HAS EXPLAINED THAT AS PER LAWS/RULES OF ABU DHABI, NONRESID ENT CANNOT HAVE SHARE CAPITAL OF MORE THAN 45%. HOWEVER, THIS RESTRICTION IS NOT APPLICABLE IN CASE OF PROFIT/LOSS SHARING RATIO. THE APPELLANT HAS EXPLAINED THAT FOR GETTING MORE SHARE OF PROFIT/LOSS I.E. 70%, IT HAD INVESTED / GIVEN AN AMOUNT OF RS.3.30 CRORE TO THAT COMPANY AS INTEREST FREE LOAN/ADVANCE. THUS, THE APPELLANT HAS SATISFACTORILY EXPLAINED THAT THE INTEREST FREE LOAN OF RS.3.30 CRORE HAS BEEN GIVEN TO THE SAID COMPANY FOR THE PURPOSE OF BUSINESS ONLY I.E. FOR GETTING MORE SHARE OF PROFIT IN THAT COMPANY. IN THE FACTS AND CIRCUMSTANCES, THE ITA NO S . 1613/11 & 4897/12 10 DECISION OF SUPREME COURT IN THE CASE OF S.A. BUILDERS (SUPRA) IS APPLICABLE IN APPELLANT'S CASE THAT THE APPELLANT HAS GIVEN INTEREST FREE LOAN OF RS.3.30 CRORE TO THE SAID COMPANY CONSIDERING THE COMMERCI AL EXPEDIENCY. IN OTHER WORDS, THE APPELLANT HAS GIVEN INTEREST FREE LOANS TO THE SAID COMPANY WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS I.E. FOR SHARING PROFIT IN THE SAID COMPANY IN THE RATIO MORE THAN THE PERCENTAGE OF SHARE CAPITAL. THE INTER EST EXPENDITURE INCURRED ON THE SAID INTEREST FREE LOAN GIVEN OF RS.3.30 CRORE WAS THEREFORE, INCURRED FOR THE PURPOSE OF BUSINESS AND MORE SPECIFICALLY FOR EARNING MORE SHARE OF PROFIT FROM THE SAID COMPANY. THE DISALLOWANCE OF INTEREST MADE BY AO AT RS.4 1,34,375/ - IS THEREFORE, DELETED. 1 1 . AGAINST THE ABOVE ORDER OF CIT(A) , REVENUE IS IN FURTHER APPEAL BEFORE US. 1 2 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND FROM THE RECORD THAT ADVANCE OF RS. 3.30 CRORES WAS MADE BY THE ASSESSEE TO M/S AL RAHBA IN TERNATIONAL TRADING LLC, ABU DHABI , WHICH IS AN ENTITY OPERATING IN BREEDING AND PROCESSING OF POULTRY BASED IN ABU DHABI. UNDER ABU DHABI LAW, ANY ENTITY OPERATING IN ABU DHABI NEEDS TO NECESSARILY HAVE A MAJORITY SHAREHOLDING BY A RESIDENT DOMICILED IN A BU DHABI. THIS, HOWEVER, DOES NOT PROHIBIT THE PROFIT SHARING RATIO AND FUNDING RATIO TO BE DIFFERENT. HOWEVER, SHARE OF THE ASSESSEE COMPANY IN THE CAPITAL OF M/S AL RAHBA INTERNATIONAL TRADING LLC WAS RESTRICTED TO 45% BECAUSE OF THE SHAREHOLDING RESTRIC TION IN ABU DHABI. I N RESPECT OF PROFIT AND LOSS, IT WAS DECIDED BY THE PARTNERS THAT SHARE OF ASSESSEE WOULD BE 70%. ACCORDINGLY, PART OF THE FUNDING WAS REQUIRED TO BE ATTRIBUTED TOWARDS SHARE CAPITAL IN THE RATIO OF SHAREHOLDING WHILE THE BALANCE FUNDIN G WAS REQUIRED TO BE STRUCTURED AS LOAN . THUS, THE ASSESSEE HAD SATISFACTORILY EXPLAINED THE BUSINESS EXPEDIENCY OF INVESTMENT OF RS. 3.30 CRORES IN THE SAID COMPANY FOR THE PURPOSE OF ITA NO S . 1613/11 & 4897/12 11 BUSINESS ONLY I.E. FOR GETTING MORE SHARE OF PROFIT IN THAT COMPANY. TH E DETAIL ED FINDING RECORDED BY THE CIT(A) AT PARA 2.3 WITH REGARD TO APPLICATION OF FUNDS FOR THE PURPOSE OF BUSINESS HAS NOT BEEN CONTROVERTED BY THE DEPARTMENT BY BRINGING ANY POSITIVE MATERIAL ON RECORD. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFE RE IN THE FINDINGS OF THE CIT(A) FOR DELETING THE DISALLOWANCE OF INTEREST MADE BY THE AO AT RS. 41.34 LAKHS 1 3 . IN THE RESULT, BOTH APPEAL S OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 22/08/ 201 4 . 22/08 / 2014 SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 22/08 /2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / THE CIT(A) - X, MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//