ACIT 6(1), MUMBAI V. AR-EX LABORATORIES P. LTD, MUMBAI

ITA 622/MUM/2013

• Counselvise Citation: 62219914 RSA 2013
• Duration Of Justice: 2 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 23-03-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 23-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASGHAR ZAIN V P
• Assessee Lawyers: VIPUL K MODY
• Keywords: Earning of tax free income
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH G, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.576/M/2013 ASSESSMENT YEAR: 2008-09 M/S. AR-EX LABORATORIES PVT. LTD., 21, BOTAWALA BUILDING, SITLADEVI TEMPLE ROAD, MAHIM, MUMBAI 400 016 PAN: AAACA 4479N VS. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 6(1), AAYAKAR BHAVAN, M.K. MARG, MUMBAI - 400020 (APPELLANT) (RESPONDENT) ITA NO.622/M/2013 ASSESSMENT YEAR: 2008-09 DCIT, CIRCLE 6(1), R. NO.506, 5 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400020 VS. M/S. AR-EX LABORATORIES PVT. LTD., 21, BOTAWALA BUILDING, SITLADEVI TEMPLE ROAD, MAHIM, MUMBAI 400 016 PAN: AAACA 4479N (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI NITESH JOSHI, A.R. & SHRI VIPU L K. MODY, A.R. REVENUE BY : SHRI ASGHAR ZAIN. V.P., D.R. DATE OF HEARING : 16.04.2015 DATE OF PRONOUNCEMENT : 30.06.2015 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT ARE THE CROSS APPEALS ONE BY THE ASSES SEE AND THE OTHER BY THE REVENUE PREFERRED AGAINST THE ORDER DATED 22.10 .2012 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [(HEREINAFTER REFERRED TO A S CIT(A)] RELEVANT TO ASSESSMENT YEAR 2008-09. FIRST WE TAKE UP THE ASSES SEES APPEAL. ITA NO.576/M/2013 & ITA NO.622/M/2013 M/S. AR-EX LABORATORIES PVT. LTD. 2 ITA NO.576/M/2013- ASSESSEES APPEAL: 2. THE SOLE ISSUE INVOLVED IN THE APPEAL OF THE ASS ESSEE IS RELATING TO DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. THE BRIEF FACTS OF THE CASE RELATING TO THE ISSUE U NDER CONSIDERATION ARE THAT THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS THE AO) DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD EARNED DIVIDEND INCOME OF RS.62,172/- WHICH WAS CLAIMED AS EXEMPT BUT NO DISA LLOWANCE OF EXPENDITURE FOR EARNING OF SUCH EXEMPT INCOME WAS OFFERED BY TH E ASSESSEE UNDER SECTION 14A. THE AO CALCULATED THE DISALLOWANCE UNDER SECT ION 14A BY WAY OF APPLYING RULE 8D OF THE INCOME TAX RULES AND MADE T HE DISALLOWANCE OF RS.372472/- WHICH WAS MORE THAN THE AMOUNT OF EXEMP T INCOME EARNED BY THE ASSESSEE. BEING AGGRIEVED BY THE ORDER OF THE AO, T HE ASSESSEE PREFERRED APPEAL BEFORE THE LD. CIT(A). 2. BEFORE THE LD. CIT(A), THE ASSESSEE SUBMITTED TH AT THE INTEREST FREE FUNDS OF THE ASSESSEE WERE MORE THAN THE INVESTMENTS. CON SEQUENTLY RELIANCE WAS PLACED ON THE DECISION OF THE HON'BLE BOMBAY HIGH C OURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. HOWEVER THE LD. C IT(A) OBSERVED THAT THE ASSESSEE COULD NOT ESTABLISH THAT NO INTEREST BEARI NG FUNDS HAD BEEN USED FOR THE PURPOSE OF INVESTMENTS. HE THEREFORE CONFIRMED THE DISALLOWANCE MADE BY THE AO. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) ON THIS ISSUE, THE ASSESSEE HAS COME IN APPEAL BEFORE US. 3. BEFORE US, THE COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO THE FINANCIAL POSITION OF THE ASSESSEE AND POINTED OUT THAT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE OWN FUNDS TO COVER THE INV ESTMENT. IN SUPPORT, THE COUNSEL RELIED UPON THE DECISION OF THE HON'BLE BOM BAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD 313 ITR 340 AND ALSO ON THE DECISION OF ITA NO.576/M/2013 & ITA NO.622/M/2013 M/S. AR-EX LABORATORIES PVT. LTD. 3 THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF HDFC B ANK LTD. IN ITA NO.330 OF 2012. THE LD. DR, ON THE OTHER HAND, HAS STRONGLY SUPPOR TED THE FINDINGS OF THE AUTHORITIES BELOW. 4. WE HAVE PERUSED THE ORDER OF THE LOWER AUTHORIT IES AND THE RELEVANT DOCUMENTARY EVIDENCES BROUGHT BEFORE US. THE BALANC E SHEET OF THE ASSESSEE SHOWS THAT IT HAS INTEREST FREE FUNDS AS ON 31.03.2 007 WERE AT RS.50,65,279/- WHICH HAD GROWN UP TO RS.1,24,81,386/- AS ON 31.03. 2008.THE TOTAL INVESTMENTS AS ON 31.3.2007 WERE AT RS.1,59,848/- WHICH HAD INCREASED TO R.7,659848/-. THE LD. AR HAS EXPLAINED THAT THE ONL Y INVESTMENT MADE DURING THE YEAR AMOUNTING TO RS.7500000/- WAS IN THE SUBSI DIARY COMPANY OF THE ASSESSEE BIOXERA PHARMA WHICH WAS MADE ON 28.3.20 08 I.E. AT THE END OF THE FINANCIAL YEAR. THIS SHOWS THAT THE ASSESSEE THE AS SESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS ON THE DATE OF INVESTMENT. A FU RTHER PERUSAL OF THE BALANCE SHEET SHOWS THAT THE ASSESSEE WAS HAVING LOAN FUNDS AS ON 31/03/2007 AT RS.52763600/- WHICH HAD FALLEN DOWN TO RS.45561310/ - AS ON 31.3.2008, WHICH SHOWS THAT THERE WAS A SUBSTANTIAL FALL IN TH E LOAN FUNDS WHICH MEANS THAT THERE WERE NO FRESH BORROWINGS DURING THE YEAR UNDER CONSIDERATION. ON SIMILAR FACTS THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD (SUPRA) HAS OBSERVED THAT IF THERE A RE FUNDS AVAILABLE WITH THE ASSESSEE, BOTH INTEREST FREE AND OVERDRAFT/LOANS TA KEN, THEN PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE. 5. A SIMILAR VIEW WAS TAKEN BY THE HON'BLE BOMBAY H IGH COURT IN THE CASE OF HDFC BANK LTD(SUPRA). THE FACTS OF CASE OF THE A SSESSEE ARE SQUARELY COVERED BY THE ABOVE DECISIONS OF THE HONBLE BOMBA Y HIGH COURT. CONSIDERING THE FACTS IN TOTALITY IN THE LIGHT OF D ECISIONS REFERRED HERE IN ABOVE, ITA NO.576/M/2013 & ITA NO.622/M/2013 M/S. AR-EX LABORATORIES PVT. LTD. 4 IN OUR CONSIDERED VIEW, THERE WAS NO JUSTIFICATION ON THE PART OF THE LOWER AUTHORITIES TO ASSUME THAT THE ASSESSEE HAD USED TH E BORROWED FUNDS FOR INVESTMENTS IN TAX FREE SECURITIES. UNDER THE CIRCU MSTANCES, NO INTEREST DISALLOWANCE UNDER RULE 8D(2) (II) IS WARRANTED IN THIS CASE. THE DISALLOWANCE OF INTEREST EXPENDITURE UNDER RULE 8D(2) (II) IS TH EREFORE ORDERED TO BE DELETED. HOWEVER DISALLOWANCE OF RS. 19549/- MADE ON ACCOUN T OF ADMINISTRATIVE EXPENSES UNDER RULE UNDER RULE 8D(2) (III) IS HEREB Y UPHELD. THE APPEAL OF THE ASSESSEE IS THEREFORE PARTLY ALLO WED. REVENUES APEEAL:ITA NO. 622/M/2013 6. THE REVENUE IN ITS APPEAL HAS AGITATED THE ACTIO N OF THE CIT(A) IN DELETING THE DISALLOWANCE OF RS.1561848/- MADE BY T HE AO U/S 37(1) OF THE ACT ON ACCOUNT OF EXCESSIVE INTEREST PAID ON THE L OAN AMOUNT TO THE PERSONS COVERED UNDER SECTION 40A(2)(B) OF THE ACT. 7. THE AO OBSERVED THAT THE ASSESSEE HAD TAKEN UNSE CURED LOANS FROM DIRECTORS AND THEIR RELATIVES AND PAID INTEREST OF 18% WHEREAS THE MARKET RATE OF INTEREST WAS ONLY 12%. THEREFORE THE AO COMPUTED TH E DIFFERENTIAL AMOUNT OF INTEREST EXPENDITURE AT RS. 15,61,848/- AND DISALLO WED THE SAME. 8. IN APPEAL, THE LD. CIT(A) DELETED THE DISALLOWAN CE SO MADE BY THE AO OBSERVING AS UNDER: 4.2 DURING THE COURSE OF APPELLATE PROCEEDINGS, TH E LD. AR OF THE APPELLANT HAS STATED THAT THIS ISSUE HAS BEEN DECIDED IN APPELLAN T'S FAVOUR BY MY PREDECESSOR AND HON'BLE ITAT IN ASSESSMENT YEAR 2005-06. I HAVE CON SIDERED THE FACTS OF THE CASE. IT IS SEEN THAT IN AY 2005-06, A SIMILAR DISALLOWANCE OF DIFFERENTIAL INTEREST WAS MADE AND MY LD. PREDECESSOR, VIDE ORDER DATED 23/01/2009 IN APPEAL NO. CIT(A)VL/ITO.6(1)(3)/176/07-08 DECIDED THE ISSUE IN FAVOUR OF THE APPELLANT BECAUSE THE AO HAD NOT ADDUCED ANY EVIDENCE THAT THE MARKET RATE OF INTEREST WAS LOWER THAN 18%. THE APPEAL OF THE REVENUE ON THIS ISSUE H AS ALSO BEEN DISMISSED BY HON'BLE ITAT IN ITA NO. 2552/MUM/2009 BY ORDER DATE D 22/12/2010. IT IS ALSO SEEN THAT THE FACTS IN CURRENT YEAR ARE IDENTICAL. ITA NO.576/M/2013 & ITA NO.622/M/2013 M/S. AR-EX LABORATORIES PVT. LTD. 5 4.3 IN VIEW OF ABOVE, THEREFORE, RESPECTFULLY FOLLO WING THE DECISION OF HON'BLE ITAT AND MY LD. PREDECESSOR, I DECIDE THIS ISSUE IN FAVO UR OF THE APPELLANT. THE DISALLOWANCE OF RS. 15,61.8481- MADE BY THE AO IS H EREBY DELETED. 9. BEFORE US, THOUGH THE LD. DR HAS ASSERTED THAT THE PAYMENT OF INTEREST @ 18% WAS EXCESSIVE, HE HOWEVER COULD NOT SHOW ANY EVIDENCE THAT THE MARKET RATE OF INTEREST DURING THE RELEVANT YEAR WA S LESS THAN THAT WAS PAID BY THE ASSESSEE. THE ISSUE IS THUS COVERED BY THE DECI SION OF THE TRIBUNAL IN THE OWN CASE OF THE ASSESSEE FOR EARLIER ASSESSMENT YEA RS. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) ON THIS IS SUE AND THE SAME IS UPHELD. THE APPEAL OF THE REVENUE IS THEREFORE DISMISSED. 10. IN THE RESULT APPEAL OF THE ASSESSEE IS HEREBY PARTLY ALLOWED AND THAT OF THE REVENUE IS HEREBY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30.06.2015. SD/- SD/- (R.C. SHARMA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 30.06.2015. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.