DCIT, Faridabad V. M/s. Richa Holdings Ltd., Faridabad

ITA 555/DEL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 3180 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Next Hearing Date: 16-05-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 31-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Notional interest
• Section: 14A

Judgement Text

PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH - F NEW DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI , ACCOUNTANT MEMBER ITA NO. 555/DEL/201 4 ASSESSMENT YEAR : 2009-10 DCIT CIRCLE-1 FARIDABAD VS. RICHA HOLDINGS LTD. 1483, SECTOR 14 FARIDABAD PAN AABCC7401M (APPELLANT) (RESPONDENT) PER BHAVNESH SAINI, JUDICIAL MEMBER ORDER THIS APPEAL BY REVENUE HAS BEEN DIRECTED AGAINST TH E ORDER OF LD. CIT(A) FARIDABAD DATED 21 ST NOVEMBER, 2013 FOR ASSESSMENT. YEAR 2009- 10 ON THE FOLLOWING GROUNDS :- 1. THE CIT(A) HAS ERRED BOTH IN LAW AND FACTS IN NOT APPRECIATING THE ADDITION MADE U/S 14A OF THE INCOM E TAX ACT WHEN THE CALCULATION OF AMOUNT DISALLOWED U/S 8D HA S NOT BEEN FAULTED WITH OR ANY POINT. 2. THE CIT(A) HAS ERRED BOTH IN LAW AND FACTS IN NOT A PPRECIATING THE DISALLOWANCE MADE IN RESPECT OF LETTING-GO OF I NTEREST INCOME ON ADVANCES, WHICH CAN ONLY BE SAID PERSONAL OR NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS OF THE ASSESSEE, PARTICULARLY IN THE LIGHT OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN VIEW OF THE DECISION O F [CIT VS ABHISEK INDUSTRIES LTD. (2006) 286 ITR 1 (P & H) ASSESSEE BY : SHRI F.R. MEENA, SR. DR DEPARTMENT BY: SHRI VIJAY KUMAR SINGLA, CA DATE OF HEARING 16//05/2017 DATE OF PRONOUNCEMENT 25/05/2017 ITA NO. 555/DEL/2014 DCIT VS. RICHA HOLDINGS LTD. PAGE 2 OF 7 2. BRIEFLY THE FACTS OF THE CASE ON GROUND NO. 1 AR E THAT THE ASSESSING OFFICER ON PERUSAL OF THE BALANCE SHEET F OUND THAT ASSESSEE HAD MADE INVESTMENT IN M/S. RICHA INDUSTRIES LTD. T HE ASSESSING OFFICER ISSUED NOTICE TO THE ASSESSEE AS TO WHY INVESTMENT IN M/S RICHA INDUSTRIES LTD. SHOULD NOT BE COVERED U/S 14A OF T HE I.T. ACT SINCE ITS PURPOSE WAS TO EARN TAX FREE DIVIDEND INCOME. THE A SSESSEE EXPLAINED THAT THE INVESTMENTS IN THE SAID COMPANY WERE MADE THROUGH OWN UNUTILIZED FUNDS AND NOT THROUGH BORROWED FUNDS. IT ALSO SOUGHT ESTABLISHMENT OF NEXUS BETWEEN ALL INDIRECT EXPENSE S AND EXEMPT INCOME IN THE LIGHT OF JUDGMENT OF ITAT DELHI BENCH IN THE CASE OF DCIT VS JINDAL PHOTO LTD. (ITA 4539/DEL/ITAT). FURTHERM ORE, IT WAS SUBMITTED THAT THE METHOD PRESCRIBED IN RULE 8D CAN BE USED TO DISALLOW EXPENSES AS PER SECTION 14A IF THE ASSESSING OFFICE R, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS NOT SATISFIED WITH THE CORRECTNESS OF ITS CLAIM IN RESPECT OF EXPENDITURE INCURRED IN RELATIO N TO EXEMPT INCOME. THE ASSESSING OFFICER AFTER CONSIDERING REPLY OF TH E ASSESSEE MADE ADDITION OF RS. 31,50,724/- U/S 14A OF THE I.T. ACT ON THE REASONS THAT INVESTMENTS IN SHARES BY ASSESSEE COMPANY CONSTITUT ED 52% OF THE TOTAL ASSETS OF THE COMPANY, THE ASSESSEE IS ENGAGED IN T HE SALE AND PURCHASE OF SHARES THROUGH RECOGNIZED STOCK EXCHANG E REGULARLY AND THAT DURING THE YEAR ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS. 7,018/-. ITA NO. 555/DEL/2014 DCIT VS. RICHA HOLDINGS LTD. PAGE 3 OF 7 3. THE ASSESSEE CHALLENGED THE ABOVE ADDITIONS BEFO RE LD. CIT(A) AND WRITTEN SUBMISSIONS OF ASSESSEE IS REPRODUCED I N THE APPELLATE ORDER IN WHICH THE ASSESSEE EXPLAINED THAT M/S. RICHA CA PITAL PRIVATE LIMITED AND M/S. RICHA CLOTHING PRIVATE LIMITED WERE MERGED IN M/S CSB CAPITAL LTD. (NOW NAME CHANGED TO M/S RICHA HOLDING LIMITED ) VIDE ORDER OF PUNJAB & HARYANA HIGH COURT DATED 29 TH MAY, 2009. DURING THE COURSE OF AMALGAMATION PROCEEDINGS, THE HIGH COURT DIRECTE D THE ASSESSEE COMPANY TO PREPARE THE CONSOLIDATED ACCOUNTS OF ALL THE ABOVE THREE COMPANIES AS ON 31 ST MARCH , 2008. THE NECESSARY DETAILS OF UNSECURED LOAN RECEIVED / ADVANCED (INTEREST FREE AS WELL INT EREST BEARING) AND INVESTMENT IN SHARES OF DIFFERENT COMPANIES AS ON 3 1 ST MARCH, 2008 AND 31 ST MARCH, 2009 WERE PREPARED AND PLACED ON RECORD. TH E DETAILS OF INVESTMENT IN SHARES BY ALL THE THREE COMPANIES IND IVIDUALLY AS ON 31 ST MARCH, 2008 WERE TOTALING TO RS. 7.57 CRORES AND CO NSOLIDATED INVESTMENT IN SHARES AS ON 31 ST MARCH, 2009 WERE RS. 10.67 CRORES. THE ASSESSEE DID NOT INCUR ANY INTEREST LIABILITY ON TH E INVESTMENT IN THE SHARES OF DIFFERENT COMPANY. THE INVESTMENTS WERE M ADE OUT OF CAPITAL AVAILABLE WITH THE ASSESSEE COMPANY. THE ASSESSING OFFICER HAS NOT BROUGHT ANY MATERIAL IN THE ORDER TO PROVE THE NEXU S BETWEEN FUNDS BORROWED AND INVESTED IN SHARES OF THE COMPANY. THE DETAILS OF FUND AVAILABLE AND INVESTMENT MADE IN SHARES WERE EXPLAI NED TO SHOW THAT ASSESSEE WAS HAVING SUFFICIENT FUNDS TO INVEST IN S HARES OF THE COMPANIES THEREFORE PROVISIONS OF SECTION 14A WOULD NOT APPLY. THE ASSESSEE RELIED UPON THE DECISIONS OF HON'BLE PUNJA B & HARYANA HIGH ITA NO. 555/DEL/2014 DCIT VS. RICHA HOLDINGS LTD. PAGE 4 OF 7 COURT IN SUPPORT OF THE SUBMISSIONS. LD. CIT(A) NOT ED THE DETAILS OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE COM PANY BOTH AT THE BEGINNING AS WELL AS AT THE END OF THE YEAR WHICH I S REPRODUCED AT PAGE 6 OF THE APPELLATE ORDER WHICH PROVE THAT THE AMOUN T OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE COMPANY BOTH AT T HE BEGINNING AS WELL AS AT THE END OF THE YEAR MUCH HIGHER AS COMPARED T O THE AMOUNT UTILIZED IN INVESTMENT IN SHARES. IT WAS ALSO NOTED THAT ASSESSING OFFICER ALSO DID NOT ESTABLISH THE FACT THAT BORROWED FUNDS WERE USED FOR MAKING INVESTMENT IN SHARES. LD. CIT(A) RELIED UPON DECISI ON OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS . HERO CYCLES LTD. 323 ITR 518 IN WHICH IT WAS HELD THAT DISALLOWANCE U/S 14A REQUIRED FINDING OF INCURRING OF EXPENDITURE. WHERE IT WAS F OUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED , DISALLOWANCE U/S 14A COULD NOT STAND. LD. CIT (A) ALSO RELIED UPON D ECISION OF THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS WINSOME TEXTILE INDUSTRIES PVT. LTD. 319 ITR 204 IN WHICH IT WAS HELD AS UNDER : THEREFORE, IT IS TO ASCERTAINED AS TO WHETHER THE ASSESSEE HAS MADE THE INVESTMENT IN PURCHASE OF SHARES OUT OF BO RROWED FUNDS OR INVESTED ITS OWN FUNDS. IF THE ASSESSEE HAS INVE STED ITS OWN MONEY IN THE PURCHASE OF SHARES THEN THERE IS NO QU ESTION OF ANY DISALLOWANCE IN RESPECT OF INTEREST ON BORROWED FUN DS UNDER SECTION 14A. HOWEVER, IF THE BORROWED FUNDS HAVE BE EN UTILIZED FOR PURCHASE OF SHARES OF M/S. WINSOME YARNS LIMITE D, DISALLOWANCE UNDER SECTION 14A SHALL HAVE TO BE CAL CULATED EVEN WHEN INVESTMENT HAS BEEN MADE IN THE COURSE OF BUSI NESS OF THE ASSESSEE. ITA NO. 555/DEL/2014 DCIT VS. RICHA HOLDINGS LTD. PAGE 5 OF 7 4. IN VIEW OF THE ABOVE FINDINGS HELD THAT ASSESSIN G OFFICER ERRED IN MAKING DISALLOWANCE OF RS. 31,50,724/- U/S 14A OF THE ACT AND DELETED THE ADDITION. 5. ON GROUND NO. 2 ASSESSING OFFICER MADE ADDITION OF NOTIONAL INTEREST OF RS. 28,02,218/-. THE ASSESSING OFFICER NOTED THAT ASSESSEE HAS GIVEN INTEREST FREE ADVANCES TO NUMBER OF PERSO NS THEREFORE HE DISALLOWED INTEREST @ 7.5% ON ACCOUNT OF NOTIONAL I NTEREST. THE ASSESSEE SUBMITTED BEFORE LD. CIT(A) THAT THE ASSES SEE IS A NBFC. ACCEPTANCE OF DEPOSITS OR LOANS AND ADVANCING IS TH E BUSINESS OF THE ASSESSEE COMPANY. THE ASSESSEE AS ON 31 ST MARCH, 2009 HAS TAKEN INTEREST FREE LOANS FOR RS. 1.45 CRORE AND ADVANCE OF RS. 3,20,25,347/- . THE ASSESSEE HAS DRAWN CUMULATIVE EFFECT OF AVAI LABILITY OF FREE FUNDS AFTER INVESTMENT IN SHARES OF THE COMPANY AND INTER EST FREE LOAN AS PER ANNEXURE ATTACHED WITH THE WRITTEN ARGUMENTS DATED 22 ND AUGUST, 2012. THE ASSESSEE AFTER INVESTMENT IN SHARES AND INTERES T FREE LOAN HAS FREE FUND OF RS. 7,12,19,771/-. THE ASSESSEE HAS THEREFO RE NOT INCURRED ANY INTEREST LIABILITY OF FUNDS INVESTED IN SHARES OR I NTEREST FREE LOANS. LD. CIT(A) NOTED THAT ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT AND THAT INTEREST FREE ADVANCES WERE GIVEN OUT OF THOSE FUNDS. THE ASSESSING OFFICER HAS NOT ESTABLISHED THAT INTE REST FREE FUNDS HAVE BEEN GIVEN OUT OF BORROWED FUNDS. LD. CIT(A) ACCORD INGLY DELETED THE ADDITION. ITA NO. 555/DEL/2014 DCIT VS. RICHA HOLDINGS LTD. PAGE 6 OF 7 6. LD. DR RELIED UPON ORDER OF THE ASSESSING OFFICE R. ON THE OTHER HAND, LD. COUNSEL FOR ASSESSEE REITERATED THE SUBMI SSIONS MADE BEFORE AUTHORITIES BELOW AND ALSO SUBMITTED THAT THE LD. C IT FARIDABAD DID NOT RECOMMEND FILING OF THE APPEAL ON GROUND NO. 2 AS P ER ANNEXURE A FILED BY THE DEPARTMENT IN DEPARTMENTAL APPEAL. 7. AFTER CONSIDERING RIVAL SUBMISSIONS WE DO NOT FI ND ANY MERIT IN THE DEPARTMENTAL APPEAL. THE ASSESSEE HAS PROVED BEFORE LD. CIT(A) THAT IT HAS AMOUNT OF INTEREST FREE FUNDS AVAILABLE WITH TH E ASSESSEE COMPANY BOTH AT THE BEGINNING AND AT THE END OF THE YEAR WH ICH WAS MUCH HIGHER AS COMPARED TO THE AMOUNT UTILIZED IN INVESTMENT IN SHARES. THE ASSESSEE THUS PROVED IT MADE INVESTMENT IN SHARES O UT OF OWN SURPLUS CAPITAL. THE ASSESSING OFFICER DID NOT PROVE THAT I NVESTMENTS HAVE BEEN MADE OUT OF BORROWED FUNDS. ASSESSING OFFICER HAS A LSO NOT PROVED IF ASSESSEE INCURRED ANY EXPENDITURE FOR EARNING EXEMP T INCOME. ON GROUND NO. 2 THE ASSESSEE SIMILARLY PROVED THAT IT HAS GIVEN INTEREST FREE ADVANCES TO NUMBER OF PERSONS OUT OF INTEREST FREE FUNDS AVAILABLE WITH IT. THEREFORE NO NEXUS HAVE BEEN PROVED BETWEEN INT EREST FREE ADVANCES AND BORROWED FUNDS. HON'BLE SUPREME COURT IN THE CA SE OF HERO CYCLE PVT. LTD. VS. CIT 379 ITR 347 HELD THAT ASSESSEE H AS CREDIT BALANCE IN BANK ACCOUNT AT THE TIME OF ADVANCES, NO DISALLOWAN CE OF INTEREST ON THE BORROWINGS CAN BE MADE. OTHER DECISIONS RELIED UPO N BY LD. CIT(A) CLEARLY SUPPORT ITS FINDINGS FOR DELETING THE ADDIT ION. EVEN ON GROUND NO. 2 LD. CIT(A)FARIDABAD AS PER ANNEXURE A FILED BY TH E DEPARTMENT DID NOT ITA NO. 555/DEL/2014 DCIT VS. RICHA HOLDINGS LTD. PAGE 7 OF 7 RECOMMEND ON GROUND NO. 2. SINCE ASSESSEE USED ITS SURPLUS FUNDS FOR THE PURPOSE OF INVESTMENT AND GIVING INTEREST FREE LOANS, THEREFORE, LD. CIT(A) ON PROPER APPRECIATION OF FACTS AND MATERIA L ON RECORD CORRECTLY DELETED BOTH THE ADDITIONS . 8. BOTH GROUNDS OF APPEAL OF REVENUE ARE DISMISSED. IN THE RESULT DEPARTMENTAL APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT. SD/- SD/- (PRASHANT MAHARISHI) ( BHAVNESH SAINI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 25.5.2017 *VEENA* COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. PRINCIPAL CIT 4. CIT(A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR