DCIT, Circle-1(1), Bhubaneswar, Bhubaneswar V. M/s. Indian Metals & Ferro Alloys Ltd., Bhubaneswar

ITA 512/CTK/2014

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 0972 (ITAT-CUTTACK)
• Duration Of Justice: 4 year(s) 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2010-2011
• Appeal Filed On: 30-12-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Source of fund; Question of law; Rule 8D
• Section: 43B; 14A; 201; 43; 13

Judgement Text

P A G E 1 | 15 IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE SHRI CHANDRA MOHAN GARG , JUDICIAL MEMBER AND LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA NO . 471 /CTK/201 4 ASSESSMENT YEAR : 201 0 - 1 1 INDIAN METALS AND FERRO ALLOYS LTD., IMFA BUILDING, BOMIKHAL, RASULGARH VS. JCIT, RANGE - 2, BHUBANESWAR. PAN/GIR NO. AAACI 4818 F (APPELLANT ) .. ( RESPONDENT ) ITA NO .512 /CTK/201 4 ASSESSMENT YEAR : 201 0 - 2011 JCIT, RANGE - 2, BHUBANESWAR VS. INDIAN METALS AND FERRO ALLOYS LTD., IMFA BUILDING, BOMIKHAL, RASULGARH. PAN/GIR NO. AAACI 4818 F (APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY : SHRI ROHIT GARG , AR REVENUE BY : SHRI S .M.KESHKAMAT , CIT DR DATE OF HEARING : 19 / 11 / 201 9 DATE OF PRONOUNCEMENT : 16 / 1 2 / 201 9 O R D E R PER C.M.GARG,JM TH E CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE CIT(A),1, BHUBANESWAR FOR THE ASSESSMENT YEAR 2010 - 2011 . ITA NO.471/CTK/2014 - ASSESSEES APPEAL INDIAN METALS AND FERRO ALLOYS LTD P A G E 2 | 15 2. GROUND NOS.1 TO 1.2 READ AS UNDER: 1. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE COMMISSIONER OF INCOME TAX (APPEALS) ['CIT (A)'] ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER ('AO') IN DISALLOWING DEDUCTION OF RS.5,78,30,880/ - BY INVOKING SECTION 43B OF THE ACT WITHOUT APPRECIATING THAT THE SAID SUM REPRESENTED DEPOSIT OF ELECTRICITY DUTY IN A DESIGNATED NON - LIEN BANK ACCOUNT, IN ACCORDANCE WITH THE DIRECTIONS OF THE HON'BLE ORISSA HIGH COURT. 1.1 THAT IN HOLDING AS AFORESAID, THE CIT(A) ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE LIABILITY HAVING CRYSTALLIZED AND DISCHARGED BY THE APPELLANT, SECTION 43B OF THE ACT COULD NOT HAVE BEEN INVOKED. 1.2 THAT CIT(A) ERRED IN NOT APPRECIATING THAT THE SAID AMOUNT WAS DEPOSITED ON SPECIFIC DIRECTIONS OF THE HON'BLE ORISSA HIGH COURT AND THERE WAS ACTUAL OUTFLOW OF CASH FROM THE APPELLANT, WHICH TANTAMOUNTS TO ACTUAL PAYMENT FOR THE PURPOSES OF SECTION 43B OF THE ACT. 3. APROPOS THESE GROUNDS, LD COUNSEL FOR THE ASSESSEE, IN ALL FAIRNESS, SUBMITTED THAT ITAT, CUTTACK BENCH VIDE ORDER DATED 13.6.2015 IN ITA NO.521/CTK/2013 FOR ASSESSMENT YEAR 2009 - 2010 HAS DISMISSED SIMILAR GROUNDS OF THE ASSESSEE ON IDENTICAL FACTS. LD COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE HAS FILED APPEAL BEFORE THE HONBLE JURISDICTIONAL HIGH COURT AND THE HONBLE HIGH COURT VIDE ORDER DATED 8.2.2016 PASSED IN ITA NO.20/2 014 HAS ADMITTED THE APPEAL OF THE ASSESSEE ON SUBSTANTIAL QUESTION OF LAW. LD COUNSEL FURTHER EXPLAINED THAT SUBSEQUENTLY, ITAT, CUTTACK BENCH IN ASSESSEES APPEAL IN ITA NO.230/CTK/2017 FOR ASSESSMENT YEAR 2007 - 08 ORDER DATED 10.8.2018 HAS RESTORED THE ISSUE TO THE FILE OF THE AO ON FILING OF FORM NO.8 REGARDING DECLARATION BY THE ASSESSEE INDIAN METALS AND FERRO ALLOYS LTD P A G E 3 | 15 U/S.158A OF THE ACT CLAIMING THAT IDENTICAL QUESTION OF LAW IS PENDING BEFORE THE HONBLE HIGH COURT. THEREFORE, THE ISSUE MAY KINDLY BE RESTORED TO THE FILE OF THE AO TO RECO NSIDER THE ISSUE BASED ON THE FINAL OUTCOME OF THE ASSESSEE S APPEAL PENDING BEFORE THE HONBLE HIGH COURT FOR THE ASSESSMENT YEAR 2009 - 2010. 4. REPLYING TO ABOVE, LD CIT DR STRONGLY SUPPORTED THE ASSESSMENT AND FIRST APPELLATE ORDER. HOWEVER, HE DID NOT CONTROVERT THAT THE HONBLE JURISDICTIONAL HIGH COURT HAS IN ITA NO.20/2014 VIDE ORDER DATED 8.2.2017 ADMITTED THE INCOME TAX APPEAL OF THE ASSESSEE AGAINST THE ORDER OF THE ITAT CUTTACK BENCH DATED 13.6.2014.(SUPRA). LD CIT DR, IN ALL FAIRNESS, SUBMITTE D THAT THE GRIEVANCE OF THE ASSESSEE IN THESE GROUNDS MAY BE RESTORED TO THE FILE OF THE AO IN THE MANNER AS HAS BEEN DONE BY THE ITAT CUTTACK IN ORDER DATED 10.8.2018 FOR THE ASSESSMENT YEAR 2007 - 08. 5. ON CAREFUL CONSIDERATION OF RIVAL SUBMISSIONS, WE OB SERVE THAT ITAT, CUTTACK HAS RESPECTFULLY FOLLOWING THE ORDER OF THE HONBLE HIGH COURT DATED 8.2.2016 (SUPRA), WHEREIN, HONBLE HIGH COURT HAS ADMITTED THE INCOME TAX APPEAL OF THE ASSESSEE ON SUBSTANTIAL QUESTION OF LAW , RESTORED THE ISSUE TO THE FILE OF THE AO TO RECONSIDER THE ISSUE ON THE BASIS OF FINAL OUTCOME OF THE ASSESSEEA APPEAL FOR THE ASSESSMENT YEAR 2009 - 2010 BY HONBLE HIGH COURT. THE RELEVANT PARAS 27 OF THE ITAT, CUTTACK ORDER DATED 10.8.2018 FOR THE ASSESSMENT YEAR 2007 - 08 READ AS FOLL OWS: 27. IN GROUND NO.1, THE ASSESSEE HAS AGITATED THAT THE CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF DEDUCTION BY INVOKING 43B OF THE ACT. LD. INDIAN METALS AND FERRO ALLOYS LTD P A G E 4 | 15 AR BEFORE US FILED FORM NO.8 REGARDING DECLARATION UNDER SECTION 158A(1) OF THE ACT, 1961 TO BE MADE BY AN ASSESSEE CLAIMING THAT IDENTICAL QUESTION OF LAW IS PENDING BEFORE THE HIGH COURT OR THE SUPREME COURT. THE SUBSTANTIAL QUESTIONS OF LAW FRAMED BY THE HONBLE HIGH COURT ARE AS UNDER : - 08.02.2016 MR. S.JOLLY , LEARNED COUNSEL & HIS ASSOCIATE HAVE ENTERED APPEARANCE ON BEHALF OF THE PETITIONER BY FILING A VAKALATNAMA IN COURT TODAY. THE SAME IS ACCEPTED AND TAKEN ON RECORD. HEARD LEARNED COUNSEL FOR THE PETITIONER. THIS INCOME TAX APPEAL IS ADMITTED ON THE FO LLOWING SUBSTANTIAL QUESTIONS OF LAW: B) WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ITAT WAS RIGHT IN CONFIRMING THE ACTION OF THE AO AND CIT(A) IN DISALLOWING DEDUCTION OF PAYMENT OF ELECTRICITY DUTY BY ERRONEOUSLY INVOKING SECTION 4 3B OF THE ACT WITHOUT APPRECIATING THAT THE SAID SUM IS A CRYSTALLIZED LIABILITY AND DEPOSITED IN A NO LIEN ACCOUNT PURSUANT TO THE DIRECTIONS OF THE HONBLE ORISSA HIGH COURT? D) WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ITAT ERRE D IN CONFIRMING THE ACTION OF THE AO AND THE CIT(A) IN DISALLOWING EXPENDITURE INCURRED ON FOREIGN TRAVEL OF DIRECTORS OF THE APPELLANT WITHOUT APPRECIATING THAT THE SAME HAS BEEN UNDERTAKEN WHOLLY AND EXCLUSIVELY FOR THE BUSINESS OF APPELLANT COMPANY? I SSUE NOTICE TO THE RESPONDENT BY SPEED POST WITH A.D. MAKING IT RETURNABLE WITHIN FOUR WEEKS. REQUISITES FOR ISSUE OF NOTICE BE FILED WITHIN ONE WEEK. LIST THIS MATTER FOUR WEEKS AFTER. THE REGISTRY IS DIRECTED TO CALL FOR THE L.C.R. FROM THE TRIBUNAL IN THE MEANTIME. WE CONSIDERING THE DECLARATION FILED BY THE ASSESSEE IN FORM NO.8 AND THE OBSERVATIONS OF THE HONBLE HIGH COURT AND THE PROVISIONS OF LAW, RESTORE THIS ISSUE TO THE FILE OF ASSESSING OFFICER TO CONSIDER BASED ON THE FINAL OUTCOME OF THE ASSESSEES APPEAL IN IDENTICAL ISSUE PENDING BEFORE THE HONBLE HIGH COURT FOR THE ASSESSMENT EAR 2009 - 2010 AS MENTIONED IN THE FORM NO.8. ACCORDINGLY, THIS GROUND OF APPEAL IS ALLOWED INDIAN METALS AND FERRO ALLOYS LTD P A G E 5 | 15 6. RESPECTFULLY FOLLOWING THE ORDER OF CO - ORDINATE BENCH OF THIS TRIBUNAL AND CONSIDERING THE DECLARATION FILED BY THE ASSESSEE IN FORM NO.8 AND OBSERVATION OF HONBLE HIGH COURT IN THE ORDER DATED 8.2.2016, THIS ISSUE IS RESTORED TO THE FILE OF THE AO FOR A FRESH CONSIDERATION AS PER THE FINAL OUTCOME OF ASSESSEES APPEAL IN ITA NO.20/2014 PENDING BEFORE THE HONBLE HIGH COURT FOR THE ASSESSMENT YEAR 2009 - 2010. ACCORDINGLY, GROUND NOS.1 TO 1.2 OF THE APPEAL ARE ALLOWED FOR STATISTICAL PURPOSES. 7. GROUND NO. 2 TO 2.3 READ AS FOLLOWS: 2. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN DISALLOWING AN AMOUNT OF RS. 48,17,000/ - BY INVOKING THE PROVISION OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 ('THE RULES') WITHOUT APPRECIATING THAT NO EXPENSES HAD BEEN INCURRED BY THE APPELLANT IN EARNING THE EXEMPT DIVIDEND INCOME. 2.1 THAT CIT (A) ERRED IN CONFIRMING THE ACTION OF THE AO IN INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT WITHOUT APPRECIATING THAT NO SATISFACTI ON WAS RECORDED HAVING REGARD TO THE BOOKS OF ACCOUNTS OF THE APPELLANT, THAT CERTAIN EXPENDITURE WAS ACTUALLY INCURRED FOR EARNING THE EXEMPT DIVIDEND INCOME. 2.2 THAT THE CIT (A) ERRED IN NOT APPRECIATING THAT SINCE THERE IS NO PROXIMATE NEXUS BETWEEN EARNING OF THE EXEMPT DIVIDEND INCOME AND THE EXPENDITURE INCURRED, NO EXPENSES COULD BE SAID TO BE RELATABLE TO EARNING OF EXEMPT DIVIDEND INCOME. 2.3 THAT IN HOLDING AS AFORESAID, THE CIT(A) ERRED IN HOLDING THAT SATISFACTION OF THE AO IS DISCE RNIBLE IN THE ASSESSMENT ORDER AND FURTHER ERRED IN CONFIRMING THE FINDING OF AO THAT INTEREST BEARING OR MIXED FUNDS HAVE BEEN DIVERTED FOR GENERATING EXEMPT INCOME, WITHOUT APPRECIATING THAT NO MATERIAL/EVIDENCE HAS BEEN BROUGHT ON RECORD BY THE AO TO SU PPORT THAT THE FUNDS HAVE BEEN DIVERTED. 8. APROPOS THESE GROUNDS, LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LD CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS. 48,17,000/ - BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT R.W. RULE 8D OF T HE INCOME INDIAN METALS AND FERRO ALLOYS LTD P A G E 6 | 15 TAX RULES, 1962 WITHOUT APPRECIATING THAT NO EXPENSE HAS BEEN INCURRED BY THE ASSESSEE FOR INCURRING EXEMPT DIVIDEND INCOME. LD COUNSEL STRENUOUSLY CONTENDED THAT THE LD CIT(A) HAS ERRED IN CONFIRMING THE ASSESSMENT ORDER OF THE AO IN INVOKING THE SAID PROVISIONS WITHOUT APPRECIATING THAT NO PROPER SATISFACTION WAS RECORDED BY THE AO HAVING REGARD TO THE CORRECTNESS OF BOOKS OF ACCOUNT OF THE ASSESSEE THAT CERTAIN EXPENDITURE WAS ACTUALLY INCURRED FOR EARNING THE EXEMPT DIVIDEND INCOME. LD COUN SEL ALSO SUBMITTED THAT THE AUTHORITIES BELOW ARE NOT CORRECT AND JUSTIFIED IN IGNORING THE FACT THAT SINCE THERE IS NO PROXIMATE NEXUS BETWEEN EARNING OF THE EXEMPT DIVIDEND INCOME AND THE EXPENDITURE INCURRED, NO EXPENSES COULD BE SAID TO BE RELATABLE TO EARNING OF EXEMPT DIVIDEND INCOME. LD COUNSEL LASTLY SUBMITTED THAT THE LD CIT(A) WAS ALSO NOT REASONABLE IN HOLDING THAT THE SATISFACTION OF THE AO IS DISCERNIBLE IN THE ASSESSMENT ORDER AND IN CONFIRMING THE FINDINGS OF THE AO THAT INTEREST BEARING OR MIXED FUNDS HAVE BEEN DIVERTED FOR GENERATING EXEMPT INCOME WITHOUT APPRECIATING THAT NO MATERIAL OR EVIDENCE HAS BEEN BROUGHT ON RECORD BY THE AO TO SUPPORT THAT THE FUNDS HAVE BEEN DIVERTED . 9. REPLYING TO ABOVE, LD CIT DR VEHEMENTLY SUPPORTED THE ASSESS MENT ORDER AND SUBMITTED THAT THE AO IN PARA 7 OF THE ASSESSMENT ORDER HAS MADE DETAILED ENQUIRY REGARDING THE RELEVANT FACTS AND EXPLANATION OF THE ASSESSEE, WHICH CONSTITUTE THE PROPER SATISFACTION AS PER THE REQUIREMENTS OF MANDATE OF SECTION 14A R.W. 8 D OF THE I.T.RULES. LD CIT DR FURTHER INDIAN METALS AND FERRO ALLOYS LTD P A G E 7 | 15 SUBMITTED THAT THE ASSESSEE HAS DIVERTED THE BORROWED BUSINESS FUNDS TO THE INVESTMENT ACTIVITIES AND INTEREST ON BORROWED FUNDS DIVERTED FROM BUSINESS CLAIMED AS INTEREST IS NOT ALLOWABLE FROM THE PROFITS OF THE AS SESSEE, WHICH WAS USED FOR THE PURPOSE OF EARNING EXEMPT INCOME. LD CIT DR VEHEMENTLY POINTED OUT THAT EVEN IF MIXED FUNDS WERE DIVERTED, INTEREST U/S.36(1)(III) OF THE ACT IS NOT ALLOWABLE BY VIRTUE OF THE ONUS BEING ON THE ASSESSEE WHO IS IN THE SPECIA L KNOWLEDGE OF FACTS IN TERMS OF SECTION 106 OF THE EVIDENCE ACT. LD CIT DR SUBMITTED THAT THE ASSESSEE HAS DIVERTED THE BUSINESS FUND FOR THE NON - BUSINESS PURPOSE AND, THEREFORE, INTEREST AND OTHER EXPENSES ARE TO BE DISALLOWED AS PER PROVISIONS U/S.14A R.W.RULE 8D. LD CIT DR ALSO SUBMITTED THAT THE ASSESSEE IS CONTINUOUSLY MAKING A CLAIM THAT NO EXPENSE HAS BEEN INCURRED BY THE ASSESSEE FOR EARNING EXEMPT DIVIDEND INCOME BUT THE ONUS IS ON THE ASSESSEE TO PROVE THAT HUGE EXEMPT DIVIDEND INCOME OF RS.2,6 1,75,497/ - HAS BEEN EARNED WITHOUT ANY EFFORTS. LD CIT DR ALSO POINTED OUT THAT THE ONUS WAS ON THE ASSESSEE TO PROVE THAT NO EXPENSE HAS BEEN INCURRED FOR EARNING THE IMPUGNED DIVIDEND INCOME AND SUCH ONUS HAS NOT BEEN DISCHARGED BY THE ASSESSEE. LD CIT DR ALSO DREW OUR ATTENTION TOWARDS PARA 5.2 OF THE CIT(A) ORDER AND SUBMITTED THAT AFTER CONSIDERING THE CONTENTION OF THE ASSESSEE, LD CIT RIGHTLY CONCLUDED THAT THE ADDITION U/S.14A R.W RULE 8D OF I.T.RULES HAS TO BE MADE IN THE HANDS OF THE ASSESSEE. LD CIT DR ALSO POINTED OUT THAT THE CIT(A) HAS TAKE N A VERY BALANCING APPROACH AND HAS INDIAN METALS AND FERRO ALLOYS LTD P A G E 8 | 15 CONSIDERED THE ALTERNATIVE PLEA AND THE COMPUTATION THERETO MADE BY THE APPELLANT IN REGARD TO POSSIBLE DISALLOWANCE UNDER RULE 8D AND THEREAFTER RESTRICTED THE SAME TO RS.48,17,000/ - . THEREFORE, NO INTERFERENCE IS CALL ED FOR IN THIS REGARD. 10. ON CAREFUL CONSIDERATION OF THE RIVAL SUBMISSIONS, FIRST OF ALL, WE MAY POINT OUT THAT THE AO IN PARA 7 OF THE ASSESSMENT ORDER AFTER CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE ALONGWITH THE EXPLANATION OF THE AS SESSEE MADE DISALLOWANCE OF RS.4,83,38,000/ - . THE RELEVANT PARA 7 READS AS FOLLOWS: DISALLOWANCE U/S.14A DURING THE YEAR ASSESSEE HAS EARNED DIVIDEND INCOME OF RS.2,6I,75,497/ - WHICH HAS BEEN CLAIMED AS EXEMPT INCOME U/S.I 0(34) OF THE ACT. ON PERUSAL OF THE BALANCE SHEET IT IS FOUND THAT THE ASSESSEE'S INVESTMENT WHICH WAS AT RS.93.I0 CRORE AS ON 01.04.2009 HAS INCREASED TO RS,I37.79 CRORES AS ON 31.03.2010. DURING THE YEAR UNDER CONSIDERATION ASSESSEE HAS CLAIMED INTEREST AND FINANCIAL CHARGES AT RS.40.39 CRORES IN THE PROFIT & LOSS ACCOUNT. ON PERUSAL OF BALANCE SHEET IT IS FOUND THAT ASSESSEE'S INTEREST BEARING LOAN FUND HAS INCREASED FROM RS.352.38 CRORE AS ON 01.04.2009 TO RS.426.9I CRORE AS ON 31.03.2010. THOUGH THERE IS INCREASE IN SHARE CAPITAL, RESERVE AND SURPLUS FROM R S. 45 8.33 CRORE AS ON 01.04.2009 TO RS.606.63 CRORE AS ON 31.03.2010 BUT THERE IS A LSO INCREASE IN FIXED ASSETS FROM RS.449.60 CRORE AS ON 01.04.2009 TO RS.635.69 CRORES AS ON 31.3.2010. THERE IS CWIP AT THE END OF YEAR TO THE TUNE OF RS.272.I0 CRORE AS ON 31.3.2010. LOOKING TO THE SOURCE OF FUND AND ITS UTILIZATION IT IS CLEAR THAT THE ASSESSEE HAS NO SUCH HUGE SURPLUS FUND WHICH IS UTILIZED FOR INVESTMENT PURPOSE. VIDE QUESTIONNAIRE DATED 27.11.2012, ASSESSEE WAS ASKED TO FURNISH REPLY REGARDING DISALLOWANCE U/S.I4A OF THE ACT FOR WHICH ASSESSEE IN ITS REPLY DATED 28.01.2013 SUBMITTED AS UNDER. INDIAN METALS AND FERRO ALLOYS LTD P A G E 9 | 15 'WE WOULD LIKE TO INFORM YOUR HONOUR THAT DURING DIE YEAR UNDER CONSIDERATION THE COMPANY HAS NOT TRADED ANY SHARE RESULTING ANY CAPITAL GAIN/LOSS. DISALLOWANCE OF ANY EXPENDITURE U/S.I4A OF INCOME TAX ACT, 1961 IS THEREFORE DOES NOT ARISE.' TH OUGH THERE MAY NOT BE TRADING ACTIVITIES IN SHARES OR SECURITIES DURING THE YEAR BUT IT IS FACT THAT IN DIE BALANCE SHEET, THE INVESTMENT IN SHARES HAS BEEN INCREASED. FROM THE SCHEDULE - E OF THE BALANCE SHEET RELATED TO INVESTMENT IT IS ALSO FACTS THAT ASS ESSEE IS DEALING IN VARIOUS MUTUAL FUNDS SALE & PURCHASE THROUGHOUT THE YEAR. THE ASSESSEE HAS ALSO RECEIVED THE DIVIDEND INCOME OF RS.2,61,75,497/ - DURING DIE YEAR. THEREFORE, THE REPLY OF THE ASSESSEE IS NOT SATISFACTORY ON LEGALLY AND FACTUALLY. THE AS SESSEE FAILED TO PROVE TO THE SATISFACTION THAT NO INTEREST BEARING LOAN FUND IS UTILIZED FOR THE INVESTMENT PURPOSE. THE ASSESSEE FAILED TO SUBMIT SEPARATE ACCOUNT FOR INVESTMENT WHICH IS FORMED BY THE INCOME WHICH IS NOT INTEREST BEARING FUND. IN ABSENCE OF SEPARATE INVESTMENT ACCOUNT, IT IS PRESUMED THAT INVESTMENT WAS TAKEN PLACE FROM COMMON ACCOUNTS WHICH CONSIST OF BORROWED FUND, OVER DRAFT ACCOUNT AND OTHER TRADING ACCOUNT UTILIZED FOR BUSINESS PURPOSE. THERE IS SEPARATE TAX TREATMENT FOR BUSINESS A ND INVESTMENT IN THE INCOME TAX ACT. SINCE THE INVESTMENT ACTIVITIES AND THE BUSINESS ACTIVITIES HAS ITS SEPARATE NATURE IN PRINCIPLE AND NO EXPENDITURE/ INTEREST IS ALLOWABLE ON INVESTMENT ACTIVITIES. IF THE INTEREST BEARING BUSINESS FUND WOULD HAVE NOT U TILIZED FOR INVESTMENT PURPOSE THE INTEREST PAYMENT EXPENSE WOULD HAVE BEEN REDUCED. THE ASSESSEE HAS DIVERTED BORROWED BUSINESS FUNDS TO DIE INVESTMENT ACTIVITIES AND DIE INTEREST ON THE FUNDS DIVERTED FROM THE BUSINESS, THE CLAIM OF INTEREST IS NOT ALLOW ABLE FROM THE PROFIT OF THE BUSINESS. EVEN IF MIXED FUNDS WERE DIVERTED, INTEREST U/S. 36 (I) (III) IS NOT ALLOWABLE BY VIRTUE OF THE ONUS BEING ON A PERSON WHO IS IN THE SPECIAL KNOWLEDGE OF FACTS IN TE RMS OF SEC. 106 OF THE EVIDENCE ACT. THEREFORE, THE A SSESSEE HAS DIVERTED THE BUSINESS FUND FOR THE NON BUSINESS PURPOSE AND THE THEREFORE, INTEREST AND OTHER EXPENSES TO BE DISALLOWED AS PER PROVISION U/S.I4A R.W. RULE 8D. IN THE INCOME TAX ACT, AS PER PROVISIONS OF SECTION 14A WHEREIN, ANY EXPENSES INCURRED FOR EARNING EXEMPT INCOME IS DISALLOWABLE. IN THE CIRCUMSTACN3S TO DRAW SUPPORT FROM THE AMENDMENT MADE BY THE FINANCE ACT, 2006 IN SECTION 14A AND RULE 8D INSERTED BY THE INCOME TAX (5 TH AMENDMENT) RULES, 2008 FOLLOWING THE PRINCIPLE OF CONTEMPORANEOUS EXPOSITION. THE ASSESSEE HAS EARNED DIVIDEND INCOME DURING THE YEAR. IN THE LIGHT OF ABOVE, DISALLOWANCE OF EXPENSES FOR INCOME NOT INCLUDIBLE IN TOTAL INCOME AS PER RULE 8D IS CALCULATED AS UNDER: INDIAN METALS AND FERRO ALLOYS LTD P A G E 10 | 15 WORKING OF DISALLOWANCE U/ S I4A [RULE 8D] DATA : - I INTEREST A) INTEREST PAID (30.80 CR+3.20 CR) 3 4 CRORES 2 AVERAGE TOTAL INVESTMENTS OPENING TOTAL INVESTMENTS AS ON 01 - 04 - 2009 9.3.10 CR CLOSING TOTAL INVESTMENTS AS ON 31 - 03 - 2010 137.79 CR TOTAL [ OPENING + CLOSING ] 233.88 CR AVERAGE TOTAL INVESTMENTS 115.445 CR 3 AVERAGE ASSETS OPENING ASSETS AS ON 01 - 04 - 2009 810.71 CRORES CLOSING ASSETS AS ON 31 - 03 - 2010 1033.54 CRORES TOTAL [ OPENING + CLOSING ] 1844.25 CRORES AVERAGE TOTAL ASSETS 922.125 CR WORKING OF DISALLOWANCE UNDER RULE 8D (I) EXPENDITURE DIRECTLY ATTRIBUTABLE TO EXEMPT INCOME (II) ( LI) INTEREST 34 (INT.) X 115.44 5 (AVERAGE INVT. = 4.2566 CRO 922.125 (AVERAGE TOTAL ASSETS) (III) 0.5% OF AVERAGE INVESTMENT 0.5% 115.445 CR 0.5772 CR TOTAL DISALLOWANCE A+B 4.8338 CRO ACCORDINGLY, AS PER CALCULATION AS ABOVE, DISALLOWANCE WORKED OUT AT ,000/ - AND SAME IS DISALLOWED. 11. FURTHER FROM PARA 5.2 OF THE CIT(A) ORDER, WE OBSERVE THAT THE LD CIT(A) AFTER CONSIDERING THE SUBMISSION AND CONTENTION OF THE ASSESSEE CONFIRMED THE ADDITION WITH THE FOLLOW ING OBSERVATIONS AND FINDINGS: I HAVE CONSIDERED THE MATTER. I FIND SOME MERIT IN THE SUBMISSION OF THE APPELLANT IN SO FAR AS COMPUTATION OF DISALLOWANCE UNDER RULE 8D R.W.S. 14A IS CONCERNED. THE APPELLANT'S SUBMISSION THAT THE AO HAS NOT RECORDED HIS SATISFACTION FOR RESORTING TO THE DISALLOWANCE UNDER RULE 8D R.W.S. 14A IS NOT SUPPORTED WITH ANY MATERIAL OR EVIDENCE. EVEN OTHERWISE, THE SATISFACTION OF THE AO IS DISCERNIBLE IN THE ASSESSMENT ORDER ITSELF WHEN THE AO HAS GIVEN A FINDING THAT INTEREST B EARING FUNDS OR MIXED FUNDS HAVE BEEN DIVERTED FOR INVESTMENT ACTIVITIES GENERATING EXEMPT INCOME. HOWEVER, - THE COMPUTATION OF DISALLOWANCE BY THE AO SUFFERS FROM SERIOUS FLAWS SINCE THE AC, WHILE COMPUTING THE DISALLOWANCE U/S,14A, HAS CONSIDERED EVEN THE INTEREST ON LONG TERM LOANS TAKEN EARLIER AND FOR SPECIFIC PURPOSES. THE AO HAS WRONGLY TAKEN ALL INVESTMENTS FOR COMPUTING THE DISALLOWANCE UNDER RULE 8D INSTEAD OF TAKING ONLY THE INVESTMENTS INDIAN METALS AND FERRO ALLOYS LTD P A G E 11 | 15 WHICH EARN EXEMPT INCOME. INTEREST FOR AN AMOUNT OF RS.30.8 C RORES WAS PAID TO THE BANKS ON TERM LOANS, HENCE SUCH LOANS COULD NOT HAVE BEEN USED FOR INVESTMENTS IN MUTUAL FUNDS FOR. WHICH SUCH INTEREST HAS NO NEXUS WITH EARNING OF EXEMPT INCOME. THE AO HAS WRONGLY CONSIDERED AVERAGE OF ALL THE INVESTMENTS RATHER TH AN ONLY INVESTMENTS WHICH GIVE RISE TO EXEMPT INCOME AS REQUIRED UNDER RULE 8D(2)(II). THE AO HAS ALSO TAKEN AVERAGE ASSETS WRONGLY WHILE CALCULATING THE DISALLOWANCE UNDER RULE 8D SINCE THE OPENING ASSET AS ON 1.4.2009 AT RS.810.71 CRORES AND CLOSING ASSE TS AS ON 31.3.2010 AT RS.1033.54 CRORES TAKEN BY THE AO ARE ACTUALLY NET ASSETS AFTER DEDUCTING OF LIABILITIES. IN THIS REGARD THE APPELLANT HAS CORRECTLY TAKEN THE AVERAGE ASSETS AS PER THE BALANCE SHEET WHICH IS CALCULATED BEFORE DEDUCTION OF CURRENT LIA BILITY AND PROVISIONS. I HAVE GONE THROUGH THE ALTERNATIVE PLEA AND THE COMPUTATION THEREOF MADE BY THE APPELLANT IN REGARD TO THE POSSIBLE DISALLOWANCE UNDER RULE 8D AND FIND THAT THE SAME IS DONE IN ACCORDANCE WITH THE PROVISIONS UNDER RULE 8D R.W.S. 14A . IN VIEW OF THE ABOVE, THE AO IS DIRECTED TO DISALLOW EXPENSES FOR AN AMOUNT OF RS.48,17,000/ - UNDER RULE 8D AS CORRECTLY COMPUTED BY THE APPELLANT INSTEAD OF THE AMOUNT OF RS.4,83,38,000/ - . 12 IN VIEW OF ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE AO HAS ADJUDICATED THE ISSUE WITH DETAILED DELIBERATIONS AND AFTER CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES OF THE CASE. THE ASSESSEE WAS ALSO PROVIDED DUE OPPORTUNITY OF HEARING BY THE AO AND THEREAFTER THE AO OBSERVED THAT THE ASSESSEE HAS FAILED TO PROVE TO THE SATISFACTION THAT NO INTEREST BEARING LOAN FUND IS UTILISED FOR THE INVESTMENT PURPOSE AND TO SUBMIT SEPARATE ACCOUNT FOR INVESTMENT WHICH IS FORMED BY THE INCOME WHICH IS NOT INTERE ST BEARING FUND. THE AO FURTHER OBSERVED THAT IN ABSENCE OF SEPARATE INVESTMENT ACCOUNT, IT IS PRESUMED THAT INVESTMENT WAS TAKEN PLACE FROM COMMON ACCOUNTS WHICH CONSIST OF BORROWED FUND, OVER DRAFT ACCOUNT AND OTHER TRADING ACCOUNT UTILISED FOR BUSINESS PURPOSE MEANING THEREBY THE AO CATEGORICALLY HELD THAT THE ASSESSEE HAS USED INTEREST BEARING BORROWED FUNDS, OVER DRAFT AND OTHER TRADING FUNDS FOR THE PURPOSE OF INVESTMENT WHICH EARNED EXEMPT DIVIDEND INCOME OF THE ASSESSEE. IT WAS ALSO INDIAN METALS AND FERRO ALLOYS LTD P A G E 12 | 15 OBSERVED BY TH E AUTHORITIES BELOW THAT INVESTMENT ACTIVITIES AND BUSINESS ACTIVITIES HAS ITS SEPARATE NATURE IN PRINCIPLE AND NO EXPENDITURE IS ALLOWABLE ON INVESTMENT ACTIVITIES, WHICH BRINGS EXEMPT DIVIDEND INCOME OF THE ASSESSEE. THE AO WENT UP TO THE EXTENT TO OBSE RVE THAT IF THE INTEREST BEARING FUND WOULD HAVE NOT UTILISED FOR INVESTMENT PURPOSE, THE INTEREST PAYMENT EXPENSE WOULD HAVE BEEN REDUCED IN ACCORDANCE WITH THE TAXABLE INCOME OF THE ASSESSEE. 13. IN THIS SCENARIO, WE ARE INCLINED TO HOLD THAT THE AO WAS RIGHT IN INVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D OF I.T.RULES. HOWEVER, THE LD CIT(A) AFTER ACCEPTING THE ALTERNATE PLEA OF THE ASSESSEE AND THE COMPUTATION MADE THERETO BY THE AO, REST RICTED THE DISALLOWANCE TO THE AMOUNT OF RS.48,17,000/ - UNDER RULE 8D. AFTER CAREFULLY CONSIDERING THE ORDERS OF LOWER AUTHORITIES, ESPECIALLY PARA 5.2 OF THE CIT(A) ORDER, WE ARE OF THE VIEW THAT THE CIT(A) WAS RIGHT IN RESTRICTING AND CONFIRMING THE AD DITION TO THE TUNE OF RS.48,17,000/ - . WE, ACCORDINGLY UPHOLD THE FINDINGS OF THE CIT(A) AND DISMISS THE GROUND OF APPEAL OF THE ASSESSEE. ITA NO.512/CTK/2014 - REVENUES APPEAL 1 4. IN GROUND NO.1 OF APPEAL, THE GRIEVANCE OF THE REVENUE IS THAT THE LD CIT(A ) IS NOT JUSTIFIED IN RESTRICTING THE DISALLOWANCE TO RS.48,17,000/ - AS AGAINST RS.4,83,38,000/ - MADE BY THE ASSESSING OFFICER. INDIAN METALS AND FERRO ALLOYS LTD P A G E 13 | 15 15. WHILE ADJUDICATING THE GROUND OF APPEAL NO.2 OF APPEAL OF THE ASSESSEE, WE HAVE CONFIRMED THE FINDINGS OF THE LD CIT(A). HE NCE, WE DISMISS THIS GROUND OF APPEAL OF THE REVENUE. 16. GROUND NO.2 OF APPEAL RELATES TO DELETION OF RS.36,347/ - MADE U/S.2(24)(X) OF THE ACT. 17. AFTER HEARING THE RIVAL SUBMISSIONS, WE FIND THAT THE CIT(A) HAS DELETED THE DISALLOWANCE MADE BY THE AO FO LLOWING THE DECISION OF THIS BENCH OF THE TRIBUNAL IN THE CASE OF ORISSA SPONGE IRON & STEEL LTD. IN ITA NO.273/CTK/2012 ORDER DATED 13.7.2012, WHEREIN, IT IS HELD THAT IF THE PAYMENT IS PAID BEFORE THE DUE DATE OF FILING THE RETURN, THE SAME IS ALLOWABLE. 18. IN THE INSTANT CASE, IT IS NOT IN DISPUTE THAT THE CONTRIBUTION TO EPF WAS DEPOSITED BY THE ASSESSEE BEFORE DUE DATE OF FILING THE RETURN OF INCOME U/S.139(1) OF THE ACT. RECENTLY, HONBLE DELHI HIGH COURT I N THE CASE OF CIT VS. BHARAT HOTELS LTD., (2019) 103 TAXMANN.COM 295 (DEL) HELD THUS: 7. THE ISSUE HERE CONCERNS THE INTERPLAY OF SECTION 2(24)(X) OF THE ACT READ WITH SECTION 36(1)(VA) OF THE ACT ALONGSIDE PROVISIONS OF THE EMPLOYEES PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT , 1952 (ESPECIALLY REGULATION 38 OF THE EMPLOYEES PROVIDENT FUNDS SCHEME, 1952) AND THE PROVIS IONS OF THE EMPLOYEES STATE INSURANCE ACT , 1948. THE AO HAD BROUGHT TO TAX AMOUNTS WHICH WERE DEDUCTED BY THE EMPLOYER/ASSESSEE FROM THE SALARIES AND WAGES PAYABLE TO ITS EMPLOYEES, AS PART OF THEIR CONT RIBUTIONS. IT IS NOT IN DISPUTE THAT THE EMPLOYER S RIGHT TO CLAIM DEDUCTIONS UNDER THE MAIN PART OF SECTION 43 - B OF THE ACT IS NOT AN ISSUE. THE QUESTION THE AO HAD TO THEN DECIDE WAS WHETHER THE AMOUNT S DEDUCTED FROM THE SALARIES OF THE INDIAN METALS AND FERRO ALLOYS LTD P A G E 14 | 15 EMPLOYEES WHICH HAD TO BE DEPOSITED WITHIN THE STIPULATED TIME (IN TERMS OF NOTIFICATION/CIRCULAR DATED 19.03.1964 WHICH WAS MODIFIED ON 24.10.1973), AS FAR AS THE EPF CONTRIBUTION WENT AND THE PERIOD OF THREE WEEKS AS F AR AS THE ESI CONTRIBUTIONS WENT. THE AO MADE A TABULAR ANALYSIS WITH RESPECT TO THE CONTRIBUTIONS DEDUCTED AND ACTUALLY DEPOSITED. THE CUMULATIVE EFFECT OF NOTIFICATIONS UNDER THE EMPLOYEES PROVIDENT FUNDS ACT , 1952 AND THE EMPLOYEES STATE INSURANCE ACT , 1948 WAS THAT IN RESPECT OF THE EPF SCHEME CONTRIBUTIONS THE DEDUCTIONS WERE TO BE DEPOSITED WITHIN 15 DAYS OF THE SUCCEEDING WAGE PERIOD WITH A GRAC E PERIOD OF 5 DAYS; FOR ESI CONTRIBUTIONS THE DEPOSIT WITH THE CONCERNED STATUTORY AUTHORITY HAD TO BE MADE WITHIN THREE WEEKS OF THE SUCCEEDING WAGE MONTH/PERIOD. THE CIT IN THIS CASE CONFIRMED THE ADDITIONS - MADE BY THE AO BASED ON THE ENTIRE AMOUNTS TH AT WERE DISALLOWED. THE ITAT HOWEVER GRANTED COMPLETE RELIEF. 8. HAVING REGARD TO THE SPECIFIC PROVISIONS OF THE EMPLOYEES PROVIDENT FUNDS ACT AND ESI ACT AS WELL AS THE CONCERNED NOTIFICATIONS WHICH G RANTED A GRACE PERIOD OF 5 DAYS (WHICH APPEARS TO HAVE BEEN LATE WITHDRAWN RECENTLY ON 08.01.2016), WE ARE OF THE OPINION THAT THE ITAT S DECISION IN THIS CASE WAS NOT CORRECT. THE ASSESSEE UNDOUBTEDLY WAS ENTITLED TO CLAIM THE BENEFIT AND PROPERLY TREAT S UCH AMOUNTS AS HAVING BEEN DULY DEPOSITED, WHICH WERE IN FACT DEPOSITED WITHIN THE PERIOD PRESCRIBED (I.E. 15 + 5 DAYS IN THE CASE OF EPF AND 21 DAYS + ANY OTHER GRACE PERIOD IN TERMS OF THE EXTENT NOTIFICATION). AS FAR AS THE AMOUNTS CONSTITUTING DEDUCTIO NS FROM EMPLOYEES SALARIES TOWARDS THEIR CONTRIBUTIONS, WHICH WERE MADE BEYOND SUCH STIPULATED PERIOD, OBVIOUSLY THE ASSESSEE WAS NOT ENTITLED TO CLAIM THE DEDUCTION FROM ITS RETURNS. 9. IN VIEW OF THIS DISCUSSION, THE REVENUE S APPEAL IS PARTLY ALLOWED. THE AO IS DIRECTED TO EXAMINE THE CONTRIBUTIONS MADE WITH REFERENCE TO THE DATES WHEN THEY WERE ACTUALLY MADE AND GRANT RELIEF TO SUCH OF THEM WHICH QUALIFIED FOR SUCH RELIEF IN TERMS OF THE PREVAILING PROVISIONS AND NOTIFICATIONS. WE ALSO CLARIFY THAT THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION IN TERMS OF SECTION 36(1)(VA) OF THE ACT. 1 9 . IN VIEW OF ABOVE FINDINGS OF HONBLE DELHI HIGH COURT (SUPRA), THE ISSUE IS RESTORED TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE CONTRIBUTIONS MADE WITH REFERENCE TO THE DATES WHEN THEY WERE ACTUALLY INDIAN METALS AND FERRO ALLOYS LTD P A G E 15 | 15 MADE AND GRANT RELIEF TO SUCH OF CLAIM WHICH QUALIFIED FOR SUCH RELIEF IN TERMS OF PREVAILING PROVISIONS OF THE ACT. WE CLEARLY OBVERSE THAT THE ASSESSEE WOULD B E ENTITLED TO DEDUCTION S IN TERMS OF SECTION 36(1)(VA) OF THE ACT. ACCORDINGLY, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOSES. 20 . IN THE RESULT, APPEAL S OF THE ASSESSEE AND REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED ON 16 / 1 2 /201 9 . S D/ - SD/ - (LAXMI PRASAD SAHU) ( CHANDRA MOHAN GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER CUTTACK; DATED 16 / 1 2 /20 1 9 B.K.PARIDA, SPS COPY OF THE ORDER FORWARDED TO : BY ORDER SR . PVT. S ECRETARY ITAT, CUTTACK 1. THE APPELLANT : /ASSESSEE: INDIAN METALS AND FERRO ALLOYS LTD., IMFA BUILDING, BOMIKHAL, RASULGARH 2. THE RESPONDENT /REVENUE: JCIT, RANGE - 2, BHUBANESWAR 3. THE CIT(A) - 1 , BHUBANESWAR 4. PR.CIT - 1 , BHUBANESWAR 5. DR, ITAT, CUTTACK 6. GUARD FILE. //TRUE COPY//