DCIT CIRCLE-3(3), MUMBAI V. SARLA PERFORMANCE FIBRES LTD., MUMBAI

ITA 5810/MUM/2013

• Counselvise Citation: 581019914 RSA 2013
• Duration Of Justice: 1 year(s) 5 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-03-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 26-09-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NEIL PHILIPDR
• Assessee Lawyers: JITENDRA SINGH
• Keywords: Earning of tax free income
• Section: 14A; 80IB; 10

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO.5810/MUM/2013 ASSESSMENT YEAR:2010-11 DY. COMMISSIONER OF INCOME- TAX, CIRCLE-3(3), ROOM NO.609, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400021 / VS. M/S SARLA PERFORMANCE FIBRES LTD. 304, ARCADIA NCPA, NARIMAN POINT, MUMBAI-400021 ( / RR REVENUE) ( /ASSESSEE) P.A. NO. AABC S1322B / REVENUE BY SHRI NEIL PHILIP-DR / ASSESSEE BY: SHRI K. GOPAL & SHRI JITENDRA SINGH ! / DATE OF HEARING : 11/02/2015 ! /DATE OF ORDER 04/03/2015 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) : THE REVENUE IS AGGRIEVED BY THE IMPUGNED ORDER DATE D 29/04/2013 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI. THE FIRST GROUND RAISED BY THE REVENUE PERTAINS TO ALL OW THE CLAIMED DEDUCTION U/S 80IB OF THE INCOME TAX ACT, 1961 (HER EINAFTER THE ACT) ON FOREIGN EXCHANGE GAIN OF RS.51,72,641/-. M/S SARLA PERFORMANCE FIBRES LTD , 2 2. THE CRUX OF ARGUMENT ADVANCED BY SHRI NEIL PHILI P, LD. DR, IS THAT IT WAS NOT DERIVED FROM ELIGIBLE UNDERTAK ING WHILE CLAIMING THE DEDUCTION. ON THE OTHER HAND, SHRI K. GOPAL ALONGWITH SHRI JITENDRA SINGH, LD. COUNSEL FOR THE ASSESSEE DEFENDED THE CONCLUSION ARRIVED AT IN THE IMPUGNED ORDER. 2.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE LD. ASSESSING OFFICER, FROM COMPUTATION OF INCOME, FOUND THAT ASS ESSEE CLAIMED RS.1,00,41,272/- AS DEDUCTION U/S 80IB OF T HE ACT, WHICH INCLUDES A SUM OF RS.51,72,641/-, BEING THE E XCHANGE RATE DIFFERENCE, IN RESPECT OF EXPORTS OF GOODS MAN UFACTURED AT UNIT NO. II AT SILVASA, WHICH WERE EXPORTED OUTSIDE INDIA. THE LD. ASSESSING OFFICER, IN VIEW OF THE DECISION FROM HON BLE APEX COURT IN M/S STERLING FOODS VS CIT (237 ITR 579)(SC ), HELD THAT SUCH EXCHANGE RATE DIFFERENCE WAS NOT DERIVED FROM THE ASSESSEE UNDERTAKING, CONSEQUENTLY, NOT ELIGIBLE FOR CLAIMIN G DEDUCTION U/S 80IB. WITHOUT GOING INTO MUCH DELIBERATION, WE NOTE THAT IN A LATER DECISION FROM HONBLE JURISDICTIONAL HIGH C OURT IN CIT VS RACHNA UDYOG 230 CTR 72 (BOM.) HELD AS UNDER:- HAVING HEARD THE LEARNED COUNSEL APPEARING ON BEHAL F OF THE APPELLANT AND LEARNED COUNSEL APPEARING FOR THE ASSESSEE, WE ARE OF THE VIEW THAT THE DIFFERENCE ON ACCOUNT OF EXCHANGE RATE FLUCTUATION IS LIABLE TO BE ALLOWE D UNDER SECTION 80IB. THE EXCHANGE RATE FLUCTUATION ARISES OUT OF AND IS DIRECTLY RELATED TO THE SALE TRANSACTION INVOLVI NG THE EXPORT OF GOODS OF THE INDUSTRIAL UNDERTAKING. THE EXCHANG E RATE FLUCTUATION BETWEEN THE RUPEE EQUIVALENT OF THE VAL UE OF THE GOODS EXPORTED AND THE ACTUAL RECEIPTS WHICH ARE RE ALIZED ARISES ON ACCOUNT OF THE SALE TRANSACTION. THE DIFF ERENCE M/S SARLA PERFORMANCE FIBRES LTD , 3 ARISES PURELY AS A RESULT OF FLUCTUATION IN THE RAT E OF EXCHANGE BETWEEN THE DATE OF EXPORT AND THE DATE OF RECEIPT OF PROCEEDS SINCE THERE IS NO VARIATION IN THE SALE PRICE UNDER THE CONTRACT. THE VIEW WHICH WE HAVE TAKEN AL SO CONSISTENT WITH THE VIEW TAKEN BY A DIVISION BENCH OF THIS COURT ON 15 TH DECEMBER 2009 IN THE CASE OF SYNTEL LIMITED (INCOME TAX APPEAL NOS. 1974, 1976 AND 1978 OF 2009 ). IN THE CIRCUMSTANCES, WE WOULD AFFIRM THE JUDGMENT OF THE TRIBUNAL IN SO FAR AS THE QUESTION OF EXCHANGE RATE FLUCTUATION IS CONCERNED. IN THE CIRCUMSTANCES, FOLLOWING THE JUDGMENT OF THE SUPREME COURT IN LIBERTY INDIA(SUPRA), WE SET ASIDE THE JUD GMENT OF THE TRIBUNAL IN SO FAR AS THE TRIBUNAL HAS ALLOWED THE CLAIM OF DEDUCTION UNDER SECTION 80IB. IN RESPECT OF (1) DUTY DRAW BACK; (2) EXPORT ENTITLEMENT: (3) DEPB LICENSE. THE JUDGMENT OF THE TRIBUNAL IS AFFIRMED IN SO FAR AS THE CLAIM OF DEDUCTION UNDER THE HEAD OF EXCHANGE RATE DIFFERENCE IS CONCE RNED. 2.2. IN VIEW OF THE ABOVE, IT IS SEEN THAT THE ISSU E BEFORE THE HONBLE APEX COURT IN STERLING FOODS WAS WITH RESPE CT TO PROFITS FROM SALE OF IMPORT ENTITLEMENTS, WHICH WERE HELD T O BE NOT INCLUDIBLE IN INCOME FOR COMPUTING SPECIAL DEDUCTIO N U/S 80HH OF THE ACT, AS THE SAME WAS NOT DERIVED FROM INDUST RIAL UNDERTAKING. THAT DECISION IS DATED 15 TH APRIL 1999, WHEREAS, THE DECISION FROM HONBLE JURISDICTIONAL HIGH COURT IS OF LATER DATED I.E. 13 TH JANUARY, 2010, FOLLOWING THE DECISION FROM HONBLE APEX COURT. RESPECTFULLY, FOLLOWING THE DECISION F ROM HONBLE JURISDICTIONAL HIGH COURT, WE AFFIRM THE STAND OF T HE LD. COMMISSIONER OF INCOME TAX (APPEALS). AS THE EXCHA NGE RATE DIFFERENCE ARISES OUT OF AND IS DIRECTLY RELATED TO SALE TRANSACTION M/S SARLA PERFORMANCE FIBRES LTD , 4 INVOLVING EXPORT OF GOODS OF THE INDUSTRIAL UNDERTA KING, MEANING THEREBY, THE DIFFERENCES ARISES PURELY AS A RESULT OF FLUCTUATION IN THE RATE OF EXCHANGE BETWEEN THE DATE OF EXPORT AND THE DATE OF RECEIPT OF THE PROCEEDS. THIS GROUND OF THE REVENU E, IS THEREFORE, DISMISSED. 3. THE NEXT GROUND PERTAINS TO RESTRICTING THE DISA LLOWANCE MADE U/S 14A TO RS.51,519/-, GIVING RELIEF OF RS.1, 35,526/-. THE CRUX OF ARGUMENT ADVANCED ON BEHALF OF THE REVENUE IS THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DID NOT AP PRECIATE THE FACT THAT THE ASSESSING OFFICER DISALLOWED/WORKED O UT AS PER RULE-8D, READ WITH SECTION 14A OF THE ACT. ON THE O THER HAND, THE LD. COUNSEL FOR THE ASSESSEE DEFENDED THE CONCL USION ARRIVED AT IN THE IMPUGNED ORDER. 3.1. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE COMPANY CLAIMED DIVIDEND INCOME OF RS.1,30 ,685/- AS EXEMPT U/S 10 OF THE ACT. AS PER THE REVENUE, THE ASSESSEE HAS NOT MADE THE DISALLOWANCE U/S 14A READ WITH RULE-8D WITH RESPECT TO EXEMPT INCOME. RIGHT FROM ASSESSMENT ST AGE, THE STAND OF THE ASSESSEE IS THAT IT HAD NOT MADE ANY B ORROWING FOR MAKING INVESTMENT ON WHICH DIVIDEND INCOME WAS EARN ED. THE ASSESSING OFFICER FOLLOWED THE DECISION FROM JURISD ICTIONAL HIGH COURT IN M/S GODREJ & BOYCE MANUFACTURING COMPANY L TD. AND BY APPLYING RULE 8D OF THE RULES, RESTRICTED THE DI SALLOWANCE TO RS.56,360/-. 3.2. ON APPEAL, BEFORE THE LD. COMMISSIONER OF INCO ME TAX (APPEALS), RELIANCE WAS PLACED UPON THE DECISION IN CIT VS RELIANCE UTILITIES AND POWER LTD. (313 ITR 340)(BO M.) AND M/S SARLA PERFORMANCE FIBRES LTD , 5 DELETED THE DISALLOWANCE OF RS.1,35,526/- AGAINST W HICH THE REVENUE IS AGGRIEVED AND IS IN APPEAL BEFORE THIS T RIBUNAL. 3.3. WE FIND THAT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA), THE ASSESSEE EARNED INTEREST ON BORROWED C APITAL. THE ASSESSEE WAS HAVING INTEREST FREE FUNDS AND BORROWE D CAPITAL WAS USED FOR THE PURPOSES OF BUSINESS. THE ASSESSI NG OFFICER RECORDED A FINDING THAT SUM OF RS.213 CRORE WAS INV ESTED OUT OF ITS OWN FUNDS AND RS.147 CRORE WAS INVESTED OUT OF BORROWED FUNDS. ACCORDINGLY, HE DISALLOWED INTEREST AMOUNTIN G TO RS.4.40 CRORES CALCULATED AT 12% PER ANNUM FOR THREE MONTHS FROM JANUARY 2000 TO MARCH 2000. THE COMMISSIONER(APPEAL S) FOUND THAT THE ASSESSEE HAD ENOUGH INTEREST FREE FUNDS AT HIS DISPOSAL FOR INVESTMENT AND ACCORDINGLY AND DELETED THE ADDI TION OF RS.4.40 CRORES. THE ORDER OF THE COMMISSIONER (APP EALS) WAS UPHELD BY THE TRIBUNAL. IN THAT SITUATION, THE ORD ER OF THE TRIBUNAL WAS UPHELD BY THE HONBLE HIGH COURT HOLDI NG THAT THE INTEREST WAS DEDUCTIBLE U/S 36(1)(III) OF THE ACT. THIS DECISION IS DATED 9 TH JANUARY, 2009. HOWEVER, IN A LATER DECISION, DATE D 12 TH AUGUST, 2010, IN GODREJ & BOYCE MANUFACTURING COMPA NY LTD(2010) 43 DTR 177 (BOM) HELD THAT SECTION 14A(1) OF THE ACT STIPULATES THAT IN COMPUTING THE TOTAL INCOME OF TH E ASSESSEE, NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT. SUB-SECTION (2) ENABL ES THE ASSESSING OFFICER TO DETERMINE THE AMOUNT OF EXPEND ITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME IN ACCORDANCE WITH THE METHOD THAT MAY BE PRESCRIBED BY THE RULES MADE UNDER THE ACT. IF THE ASSESSING M/S SARLA PERFORMANCE FIBRES LTD , 6 OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF CL AIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE. BY SUB- SECTION(3), THE PROVISION OF SUB-SECTION (2) WILL A LSO APPLY TO A SITUATION IN WHICH THE ASSESSEE CLAIMS THAT NO EXPE NDITURE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. SECTION 14A WAS INTROD UCED BY AN AMENDMENT TO THE FINANCE ACT, 2001 WITH RETROSPECTI VE EFFECT FROM 1 ST APRIL, 1962. SUB-SECTIONS(2) AND (3) WERE INSERTE D BY THE FINANCE ACT OF 2006 WITH EFFECT FROM 01 ST APRIL, 2007. RULE 8D OF THE I. T. RULES PRESCRIBES THE METHOD FOR DETERMINI NG THE EXPENDITURE INCURRED IN RELATION TO INCOME, WHICH D OES NOT PART FORM OF TOTAL INCOME, WHERE THE ASSESSING OFFICER I S NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE. RULE-8D WAS NOTIFI ED IN THE OFFICIAL GAZETTE OF 24 TH MARCH 2008. HENCE, SECTION 14A IS APPLICABLE TO THE EXPENDITURE INCURRED IN EARNING I NCOME FROM DIVIDEND ON SHARES AND MUTUAL FUNDS, EVEN WHERE THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS INCURRED BY HIM IN R ELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. SE CTION 10 PROVIDES FOR INCOMES WHICH SHALL NOT BE INCLUDED IN COMPUTING THE TOTAL INCOME OF A PREVIOUS YEAR OF ANY PERSON. THUS, SECTION 14A(2) PRESCRIBES A UNIFORM METHOD FOR DETERMINING THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME, IN A SITUATION, WHERE TH E ASSESSING OFFICER , HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM WITH RE SPECT TO SUCH EXPENDITURE. THE PRESENT ASSESSMENT YEAR IS 2010-1 1, THEREFORE, THE DECISION FROM HONBLE JURISDICTIONAL HIGH COURT IN GODREJ & BOYCE MANUFACTURING COMPANY LTD. IS SQUARE LY APPLICABLE, THUS, THE ASSESSING OFFICER IS DIRECTED TO CALCULATE AS M/S SARLA PERFORMANCE FIBRES LTD , 7 PER THIS LATER DECISION AND DECIDE IN ACCORDANCE WI TH LAW. THE ASSESSEE BE GIVEN OPPORTUNITY. THIS GROUND OF THE REVENUE IS THEREFORE, ALLOWED FOR STATISTICAL PURPOSES. FINALLY, THE APPEAL OF THE REVENUE IS PARTLY ALLOW ED FOR STATISTICAL PURPOSES. THIS ORDER WAS PRONOUNCED IN THE OPEN COURT ON 04.03.2015 . SD/ - (RAJENDRA) SD/ - (JOGINDER SINGH) '# / ACCOUNTANT MEMBER $# / JUDICIAL MEMBER MUMBAI; $ DATED : 04/03/201 5 F{X~{T? P.S/. .. %$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. &' () / THE APPELLANT 2. *+() / THE RESPONDENT. 3. , , - ( &' ) / THE CIT, MUMBAI. 4. , , - / CIT(A)- , MUMBAI 5. /01 *2 , , &' ! &23 , / DR, ITAT, MUMBAI 6. 14 5 / GUARD FILE. / BY ORDER, +/' * //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI