DCIT, New Delhi V. M/s. Hind Industries Ltd., New Delhi

ITA 6575/DEL/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4158 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 04-12-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 40A(3); 143(3); 142(1); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C, NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 6575 /DEL/201 4 A.Y. : 20 10 - 11 DCIT, CIRCLE 11(2), NEW DELHI VS. M/S HIND INDUSTRIES LTD., A-1, PHASE-1, OKHLA INDUSTRIAL AREA, NEW DELHI 11 0 020 (PAN:AAACH0870N) (APPELLANT) (RESPONDENT) DEPARTMENT BY : SH. ARUN KUMAR YADA V , SR. DR ASSESSEE BY : SH. M.P. RASTOGI, ADV. ORDER PER H.S. SIDHU, JM: THE REVENUE HAS FILED THE PRESENT APPEAL AGAINST THE IMPUGNED ORDER DATED 30/9/2014 PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-XV, NEW DELHI ON THE FOLLOWING GROUNDS, RELEVANT TO ASSESSMENT YEAR 2010-1 1. 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 1,25,52,405/- MADE ON ACCOUNT OF DISALLOWANCE U/S. 14A READ WITH RULE 8D. 2 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION AS THE SAME CONTRADICTS THE CIRCULAR NO. 5/2014, DATED 11.2.2014 WHICH PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE EVEN WHERE THE TAXPAYER IN A PARTICULAR YEAR HAS NOT EARNED ANY EXEMPT INCOME. 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION AS THE SAME IS NOT ACCEPTABLE THAT FOR MANAGING / CONTROLLING / HANDLING THE INVESTMENT OF RS. 25,38,30,000/- NO EXPENDITURE WAS ACTUALLY INCURRED. 4. THE APPELLANT CRAVES LEAVE, TO ADD, ALTER OR AMEND ANY GROUND OF APPEAL RAISED ABOVE AT THE TIME OF THE HEARING. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 3,71,76,370/- O N 21.5.2011. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AN D NOTICE U/S. 143(2) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFE RRED AS THE ACT) WAS ISSUED ON 27.9.2011. AGAIN NOTICE U/S. 143( 2) OF THE ACT ALONGWITH QUESTIONNAIRE UNDER SECTION 142(1) OF THE ACT WAS SENT ON 3 06.09.2012. IN RESPONSE TO THE NOTICES, THE A.R. OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FILED THE DETAILS AND PRODUCED THE BOOKS OF ACCOUNT. THE ASSESSEE IS ENGAGED IN BUSINE SS OF MARKETING OF MANUFACTURED FERTILIZERS AND RETAILED INTERMEDIAT E PRODUCTS. THE AO OBSERVED THAT THE ASSESSEE HAD PAID COMMISSION EXP ENSES OF RS. 2,81,405/- TO THE MANAGING DIRECTOR, WHO IS ALSO A SHARE HOLDER IN THE ASSESSEE COMPANY. THE AO APPLIED THE PROVISI ONS OF SECTION 36(1)(II) AND THEREBY MADE THE DISALLOWANCE OF SUCH E XPENSES. SECONDLY, THE AO OBSERVED THAT IN THE ASSESSMENT ORDER S OF THE EARLIER YEARS FROM AY 2003-04 TILL 2009-10, DISALLOW ANCE U/S. 40A(3) WAS MADE IN RESPECT OF CASH PURCHASES MADE FROM SEVE RAL PERSONS OF RAW MATERIAL ON THE GROUND THAT THE CASH PURCHASES WERE MADE THROUGH AGENTS KNOWN TO THE ASSESSEE IN BIG TOWNS WHER E THERE WAS ADEQUATE BANKING FACILITIES. ON IDENTICAL FACTS IN TH E CURRENT YEAR, THE AO HELD THAT THE CASE OF THE ASSESSEE DOES NOT FALL UNDER THE EXEMPTION CLAUSES OF RULE 6DD(F). THE ASSESSEES PL EA BEFORE THE AO WAS THAT IT HAD DIRECTLY PURCHASED RAW MATERIAL FROM THE GROWERS/FARMERS/VILLAGERS AND HELD THAT ITS CASE WAS COVERED BY RULE 6DD(F). THE AO HOWEVER, RELIED ON THE FINDING G IVEN IN THE ASSESSMENT ORDER FOR ASSESSMENT YEARS 2004-05 TO 2009 -10 IN WHICH IT WAS OBSERVED THAT IN THE ABSENCE OF NAMES AND ADDRESSES OF THE SUPPLIERS, THE CLAIM OF THE APPELLANT REMAINE D UNVERIFIABLE. 4 ON IDENTICAL FACTS IN THE CURRENT YEAR, THE ASSESSEE W AS ASKED TO FILE NATURE AND STATUS OF AGENTS, COPY OF AGREEMENTS WITH AGE NTS, LIST OF AGENTS AND THE PERIOD SINCE WHEN THE AGENTS WERE WORKI NG FOR THE COMPANY. THE AR OF THE ASSESSEE ADMITTED THAT THERE WAS NEITHER ANY AGREEMENT WITH SUCH AGENTS NOR DID THE COMPANY PA Y ANY COMMISSION TO THEM AND SUCH AGENTS KEPT CHANGING FROM TIME TO TIME. ON EXAMINATION OF THE DETAILS FILED BY THE ASSES SE IN THE FORM OF PURCHASE LEDGER BILL SUMMARY, THE AO OBSERVED THA T THE ASSESSEE HAD ISSUED BEARER CHEQUES AND THAT THE PURCHASE BILL SUMMARY DID NOT CONTAIN THE DAILY PURCHASES. UNDER THE CIRCUMSTA NCES, THE AO HELD THAT THERE WAS NO DOCUMENTARY EVIDENCE TO PROVE THAT PURCHASES WERE MADE FROM FARMERS/GROWERS/PRODUCERS. THE AO IN THIS REGARD RELIED UPON THE STATEMENT OF ONE SH. MOHD. ALI SHVAUKAT, SR. MANAGER, ACCOUNTS, RECORDED ON OATH I N A.Y.2005-06, IN WHICH HE HAD ADMITTED THAT THE IDENTITY OF THE PURCH ASERS AND SUPPLIERS CANNOT BE VERIFIED FROM THE BOOKS OF ACCO UNTS. UNDER THE CIRCUMSTANCES, THE AO HELD THAT THE ASSESSEES CASE W AS DIRECTLY COVERED UNDER THE PROVISIONS OF SECTION 40A(3) AND THAT THE EXEMPTION CLAUSE OF RULE 6DD(F) DID NOT APPLY TO THIS CASE. KEEPING IN VIEW THE SAME, PURCHASES OF RS.86,63,87,667, WER E DISALLOWED AND ADDED BACK TO THE TOTAL INCOME UNDER SECTION 40A( 3). LASTLY, THE AO OBSERVED THAT THE APPELLANT HAD MADE INVESTMENT IN SHARES, 5 WHICH COULD BE OUT OF THE BORROWED FUNDS OR FROM OWN SOURCES. THE AO ASKED THE ASSESSEE AS TO WHY DISALLOWANCE UNDER S ECTION 14A MAY NOT BE MADE, IN RESPONSE TO WHICH, THE ASSESSEE I NFORMED THAT NO EXPENDITURE WAS ACTUALLY INCURRED TO EARN THE EXEMP T DIVIDEND INCOME. HOWEVER, THE AO WAS NOT SATISFIED WITH THE CLAIM OF THE APPELLANT. ACCORDINGLY, BY INVOKING THE PROVISIONS OF SECTION 14A(2), HE APPLIED THE PROVISIONS OF RULE 8D ON THE GROUND T HAT SUBSTANTIAL PART OF INVESTMENT OF RS.25,28,30,OOO WAS MADE IN SH ARES AND MUTUAL FUNDS, FOR WHICH SOME EXPENDITURE WAS BOUND TO BE INCURRED, AND HENCE HELD THAT THE CLAIM OF THE ASSESSE E THAT NO EXPENDITURE WAS INCURRED FOR EARNING THE DIVIDEND IN COME, WAS INCORRECT. ACCORDINGLY, IN VIEW OF THE PROVISIONS OF SECTION 14A(2), HE INVOKED THE PROVISIONS OF RULE 8D, AND MADE DISA LLOWANCE OF RS.1,25,52,405. THEREAFTER, THE INCOME OF THE ASSESS EE WAS ASSESSED AT RS. 91,63,97,850/- VIDE ORDER DATED 28.3 .2013 PASSED U/S. 143(3) OF THE ACT. 3. AGGRIEVED WITH THE AFORESAID ASSESSMENT ORDER, ASS ESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A), WHO VIDE HIS IMPUGNED ORDER DATED 30.9.2014 HAS PARTLY ALLOWED THE APPEAL O F THE ASSESSEE BY DELETING THE ADDITIONS IN DISPUTE. 6 4. NOW THE REVENUE IS AGGRIEVED AGAINST THE IMPUGNED ORDER AND FILED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 5. LD. DR RELIED UPON THE ORDER OF THE AO AND REITERA TED THE CONTENTIONS RAISED IN THE GROUNDS OF APPEAL. 6. ON THE CONTRARY, LD. COUNSEL OF THE ASSESSEE REL IED UPON THE ORDER OF THE LD. CIT(A) AND STATED THAT HE HAS PASSED A WELL REASONED ORDER, WHICH DOES NOT NEED ANY INTERFERENCE . 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RE CORDS, ESPECIALLY THE IMPUGNED ORDER PASSED BY THE LD. CIT (A). WE FIND THAT THE EFFECTIVE GROUND IS RELATING TO DELETION OF AD DITION OF RS. 1,25,52,405/- MADE ON ACCOUNT OF DISALLOWANCE U /S. 14A READ WITH RULE 8D. IN THIS CASE THE AO HAS INVOKED THE PROV ISIONS OF RULE 8D AND OBSERVED THAT THE ASSESSEE HAD MADE NO DISALLO WANCE, WHATSOEVER, IN RESPECT OF EXPENSES INCURRED FOR MAKI NG INVESTMENTS OVER RS.25.38 CRORES, THE ASSESSEES PLEA HAS BEEN THAT THE COMPANY HAS MADE INVESTMENT IN ITS SUBSIDIARY, HIND AG RO INDUSTRIES LTD. (HAIL), ON WHICH NO DIVIDEND INCOME, WAS RECEIVED NOR WAS TO BE RECEIVED AS SUCH INVESTMENT WAS MADE FO R THE PURPOSE OF EXERCISING STRATEGIC CONTROL OVER THE SUBSI DIARY COMPANY, WHICH IS FOR THE BUSINESS PURPOSE OF THE ASSESSEE. T HE A.R. OF THE ASSESSEE ALSO HAD INFORMED THAT THE BUSINESS OF THE A SSESSEE 7 COMPANY IS CLOSELY INTEGRATED WITH THAT OF M/S HAIL. TH E LD. COUNSEL OF THE ASSESSEE FURTHER INFORMED THAT THE ASS ESSEES MAIN BUSINESS IS PROCESSING OF MEAT FOR THE PURPOSE OF EX PORT AND FOR THIS PURPOSE, THE COMPANY PURCHASES CARCASS FROM ROWERS/VENDORS/FARMERS ETC., WHICH ARE FIRST DELIVER ED AT THE FACTORY OF M/S HAIL WHERE SUCH CARCASSES ARE PROCESSED/DEBO NED AND WASTE MATERIALS REMOVED AND ONLY AFTER THAT NET RAW MAT ERIAL IS WEIGHED ON WHICH THE SUPPLIERS ARE TO BE PAID. SUCH RAW MATERIAL IS THEN SENT TO THE ASSESSEES FACTORY, WHERE AFTER DUE PRO CESSING, THE PROCESSED MEAT IS EXPORTED. IN VIEW OF THE ABOVE, IT IS EVIDENT THAT THE INVESTMENT IN THE SHARES OF HAIL, THE SUBSIDIARY COMPANY WAS MADE FOR THE PURPOSE OF CORE BUSINESS OF MANUFACTURI NG AND EXPORT OF MEAT AND NOT FOR EARNING DIVIDEND FROM HAIL, WHIC H IS ALSO EVIDENT BY THE FACT THAT NO AMOUNT OF DIVIDEND INCOME W AS ACTUALLY RECEIVED BY THE ASSESSEE SINCE EARLIER YEARS. IN VI EW OF THE ABOVE, THE PROVISIONS OF SECTION 14A WILL NOT APPLY FOR SUCH INVESTMENT AS WAS HELD BY THE HON'BLE HIGH COURT IN THE CASE OF O RIENTAL STRUCTURAL ENGINEERING {P} LTD. (ITA 605/2012) AND IT HAS FURT HER BEEN HELD BY THE ITAT, MUMBAI IN THE CASE OF JM FINANCIAL LTD. V AC IT (ITA NO 4S21/MUM/2012). WE NOTE THAT THE COMPANY HAS MADE NE W INVESTMENT OF RS.6,63,30,000/- DURING THE CURRENT YE AR IN M/S HAIL WHILE IT HAS CARRYING FORWARD OLD INVESTMENTS OF RS.18 .75 CRORES 8 FROM THE EARLIER YEARS. IN RESPECT OF THE OLD INVESTME NT THE ITAT, DELHI WHILE DECIDING THE APPEAL FOR A.Y.2009-10 HAS GIVEN A FINDING THAT SUCH AN INVESTMENTS WERE MADE WITH OWN FUNDS AND NO AMOUNT OF BORROWED FUNDS WERE UTILISED FOR THAT PURPOSE. FUR THER, WHILE DURING THE CURRENT YEAR, THE ASSESSEE HAS MADE INVESTM ENT OF RS.6,60,30,000, IT HAD ITS OWN RESERVE FUNDS OF RS.5 3,10,50,472. AT THE SAME TIME, THE COMPANY HAD OBTAINED SECURED LOAN F ROM OTHER BANKS FOR THE PURPOSE OF WORKING CAPITAL WHICH AMOUN TED TO RS.36,12,14,O85/- AS ON 31.03.2010, WHICH WERE UTILI SED IN INVENTORIES (RS.29,76,88,836) AND SUNDRY DEBTORS (24 ,55,04,434). THE DETAILS FURNISHED BY THE ASSESSEE SHOW THAT THE ASSESSEE HAD ALSO BORROWED FUNDS FROM IFCI TERM LOAN, WHICH WERE USED FOR THE PURPOSE OF FIXED ASSETS. UNDER THE CIRCUMSTANCES, IT IS EVIDENT THAT THE ASSESSEE HAD SUFFICIENT OWN FUNDS, WHICH WERE UTI LISED FOR MAKING ANY INVESTMENT IN INVENTORIES AND TO SUNDRY DEB TORS TO THE TUNE OF RS.18.19 CRORES AND FOR MAKING NEW INVESTMEN T IN SHARES OF M/S HAIL OF RS.6,63,30,000. IN ADDITION, THE ASSESSE E COMPANY HAD CURRENT YEAR'S PROFIT OF RS. 6.85 CRORES. UNDER THE CIRCUMSTANCES, I HOLD THAT THE NEW INVESTMENT OF RS.6.63 CRORES MADE IN THE SHARES OF M/S HAIL, THE SUBSIDIARY COMPANY WAS MADE OUT OF OWN FUNDS OF THE ASSESSEE AND NOT FROM THE BORROWED FUNDS. ACCORDI NGLY, NO DISALLOWANCE UNDER SECTION 14A COULD HAVE BEEN MADE . 9 7.1 REGARDING THE ADMINISTRATIVE EXPENSES IN RESPECT OF MAKING SUCH AN INVESTMENT, EVIDENTLY THE INVESTMENT HAS BEEN MADE IN THE SUBSIDIARY COMPANY, THEREFORE, NO EFFORT IN THE FOR M OF MARKET RESEARCH, MONITORING AND SEEKING PAID ASSISTANCE OF PROFESSIONALS IN MAKING SUCH INVESTMENT WAS NEEDED. ACCORDINGLY, WE HO LD THAT NO ADMINISTRATIVE EFFORTS CAN BE ATTRIBUTED TO MAKING OF I NVESTMENT IN THE SHARES OF HAIL, THE SUBSIDIARY COMPANY. 7.2 WE FURTHER NOTE THAT THE PROVISIONS OF SECTION 14A( 2) CALL FOR INVOKING THE PROVISIONS OF RULE 8D ONLY WHERE THE A O IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSES SEE, WHICH IN THE LIGHT OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MAXOPP INVESTMENT LTD. : 347 ITR 272, OUGHT TO BE ON COGENT GROUNDS. ON CAREFUL CONSIDERATION OF THE REASO NING GIVEN BY THE AO FOR MAKING THE ADDITION UNDER RULE 8D IN THE ASSESSMENT ORDER, WE FIND THAT THE AO HAS NOT EXAMINED THE C LAIM OF THE ASSESSEE IN THIS REGARD. MOREOVER, THE AO DID NOT C ONSIDER THAT INVESTMENT OF RS.18.75 CRORES WAS DELETED BY THE ITAT AND THE NEW INVESTMENT OF RS 6.63 CRORES WAS ALSO MADE IN THE SA ME MANNER OUT OF OWN FUND OF THE ASSESSEE FOR THE PURPOSE OF MA KING INVESTMENT IN SUBSIDIARY COMPANY FOR THE PURPOSE OF CORE BUSINESS OF THE ASSESSEE. FURTHER, IT HAS ALREADY HELD THAT NO ADMINISTRATIVE EXPENSES CAN BE ATTRIBUTED TO MAKING SUCH AN INVESTM ENT IN THE 10 SUBSIDIARY COMPANY. KEEPING IN VIEW THE SAME, WE FIN D THAT THE LACK OF SATISFACTION OF THE AO WITH THE CLAIM OF THE AO IS NOT ON COGENT GROUNDS. ACCORDINGLY, THE AO COULD NOT HAVE INVOKED THE PROVISIONS OF RULE 8D, IN THE LIGHT OF THE BINDING DECISION OF TH E HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. MAXOPP INVESTMENTS (SUPRA). HENCE, ADDITION ON THIS GROUND WAS RIGHTLY DELETED, WH ICH DOES NOT NEED ANY INTERFERENCE ON OUR PART, THEREFORE, WE UPHO LD THE ACTION OF THE LD. CIT(A) ON THE ISSUE IN DISPUTE AND REJECT TH E GROUNDS RAISED BY THE REVENUE. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 04/10/2017. SD/- SD/- [L.P. SAHU] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER DATE 04/10/2017 SRBHATNAGAR COPY FORWARDED TO: - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES