The ACIT,(OSD)-1, Circle-4, Ahmedabad V. Jay Chemical Industries Ltd., Ahmedabad

ITA 729/AHD/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 62969 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 17-07-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 28-03-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Earning of tax free income
• Section: 14A

Judgement Text

ITA NO.7 29/AHD/2012 WITH C.O.97/A HD/2012 ASST YEA R 2008- 09. . 1 IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, A HMEDABAD (BEFORE SHRI G.C.GUPTA VICE PRESIDENT & SHRI ANIL C HATURVEDI, A.M.) I.T. A. NO. 729/AHD/2012(BY REVENUE) C.O.NO.97/AHD/2012 (B Y ASSESSEE) (ASSESSMENT YEAR: 2008-09) THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4, AHMEDABAD. (APPELLANT) VS. JAY CHEMICAL INDUSTRIES LTD., JAY HOUSE, PANCHVATI CIRCLE, AHMEDABAD. (RESPONDENT) PAN : AAACJ 7628J APPELLANT BY : MR. O.P. BHATEJA,SR. D.R. RESPONDENT BY : MR.NIMISH VYAWALA. ( )/ ORDER DATE OF HEARING : 16 - 7 -2012 DATE OF PRONOUNCEMENT : 5-10 -2012 PER: SHRI ANIL CHATURVEDI, A.M. THIS APPEAL IS FILED BY THE REVENUE AND THE CROSS O BJECTION FILED BY THE ASSESSEE ARE INTER-CONNECTED BOTH ARE BEING DIS POSED OF TOGETHER BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE . 2. THE ONLY EFFECTIVE GROUND OF THE REVENUE READS AS U NDER:- ITA NO.7 29/AHD/2012 WITH C.O.97/A HD/2012 ASST YEA R 2008- 09. . 2 THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN D ELETING ADDITION OF RS.15,50,415/- ON ACCOUNT OF INTEREST E XPENDITURE U/S.14A WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAD MADE SUBSTANTIAL INVESTMENT IN SHARES OF THE ASSOCIATES COMPANY, FIN ANCING OR MONEY LENDING AND THIS INVESTMENT HAD BEE MADE WITH THE S OLE PURPOSE OF EARNING DIVIDEND WHICH HAD BEEN MADE CLAIMED AS EXE MPT INCOME. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING AND EXPORTER IN DYES AND CHEMICALS ET C. ASSESSEE FILED ITS E-RETURN FOR A.Y. 2008-09 ON 30-9-2008 DECLARING TO TAL INCOME AT RS.11,04,32,383/-. THE CASE WAS TAKEN UP FOR SCRUTI NY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O. OBSERVED THAT TH E ASSESSEE-COMPANY IS HAVING INVESTMENTS OF RS.1,02,25,000/- IN SHARES OF JAY INFRA TRADE PVT. LTD., A SISTER CONCERN. THE A.O. WAS OF THE VIEW TH AT THE MOTIVE FOR INVESTING IN SISTER-CONCERN WAS TO EARN DIVIDENDS W HICH IS EXEMPT FROM INCOME TAX. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE DISALLOWANCE SHOULD NOT BE MADE IN RESPECT OF INVESTMENT MADE IN THE COMPANY. THE ASSESSEE CONTENDED THAT THE INVESTMENTS IN THE ASSO CIATE CONCERNS ARE IN THE ASSOCIATE WHO SUPPLY SERVICE AND THEREFORE THE INVESTMENT IS FOR BUSINESS PURPOSES. IT WAS FURTHER SUBMITTED THAT TH E SHARES WERE ACQUIRED DURING F.Y. 2003-04 OUT OF OWN FUNDS AND THEREFORE, RULE 8D R.W.S. 14A IS NOT APPLICABLE. THE A.O. DID NOT ACCEPT THE CONTENT IONS OF THE ASSESSEE. HE WAS OF THE VIEW THAT SINCE INVESTMENTS EXIST DURING THE YEAR AND IT HAS BEEN MADE WITH THE INTENTION TO EARN DIVIDEND IT IS IMM ATERIAL AS TO WHETHER THE ASSESSEE HAS EARNED ANY EXEMPT INCOME DURING THE YE AR OR NOT. ACCORDINGLY, A.O. COMPUTED THE DISALLOWANCE U/S. 14 A AND MADE TOTAL ITA NO.7 29/AHD/2012 WITH C.O.97/A HD/2012 ASST YEA R 2008- 09. . 3 DISALLOWANCE OF RS.16,89,270/- COMPRISING OF INTERE ST DISALLOWANCE OF RS.15,50,145/- AND OF ADMINISTRATIVE COST OF RS.1,3 9,125/-. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT (A). 4. BEFORE CIT (A) THE LD. A.R. HAS MADE SUBMISSIONS AND CIT (A) GAVE PARTIAL RELIEF TO THE ASSESSEE BY DELETING THE ADDI TION MADE ON ACCOUNT OF INTEREST BY HOLDING AS UNDER:- 2.1.11 I HAVE GONE THROUGH THE ASSESSMENT ORDER AN D THE SUBMISSIONS OF THE APPELLANT. I FIND THAT SO FAR AS INTEREST ELEMENT OF DISALLOWANCE IS CONCERNED THERE IS SUBSTANTIAL FORC E IN THE SUBMISSION OF THE ASSESSEE. RULE 8D CAN BE APPLIED WHEN THERE IS FINDING THAT INTEREST BEARING FUNDS WERE UTILIZED FOR EARNING TA X FREE INCOME. THE ASSESSEE HAS CLAIMED THAT NO INTEREST BEARING FUNDS HAVE BEE UTILIZED FOR INVESTMENT IN SHARES. THE CIT (A) ORDER FOR A.Y . 2004-05/2005-06 DELETING THE DISALLOWANCE OF INTEREST (THOUGH NOT U /S.14A) WAS THERE ON RECORD. THE CIT(A) HAD GIVEN THE FINDING THAT NO INTEREST BEARING FUNDS WERE USED FOR THE AFORESAID INVESTMENTS. THOS E ORDERS OF THE CIT (A) AND THE FINDING HAVE NOW BEEN CONFIRMED BY THE ITAT VIDE ORDER NO. ITA 4237/AHD/2007 & ITA 1593/AHD/2008 DAT ED 31-5-2011. IT IS THE PRE-REQUIREMENT BY THE A.O. TO SHOW THAT CLAIM OF THE ASSESSEE IS WRONG AND ONLY THEN RULE 8D CAN BE APPL IED. THE A.O. HAS NOT DONE ANY EXERCISE TO PROVE OR BRING TO THE RECORD THAT THE INTEREST BEARING FUNDS WERE USED FOR THE AFORESAID INVESTMENT. IN VIEW OF THIS, THE DISALLOWANCE OF RS.15,50,415/- IN AS M UCH AS IT PERTAINS TO INTEREST, CANNOT BE SUSTAINED. THEREFORE, THE ADDIT ION TO THE EXTENT OF RS.15,50,415/- IS DELETED. 2.1.12. HOWEVER, AS REGARDS THE DISALLOWANCE U/S. 14A READ WITH RULE 8D SO FAR AS IT PERTAINS TO EXPENDITURE, I FIN D THAT THE ASSESSEE HAS NOT MAINTAINED ANY SEPARATE RECORD FOR EXPENDIT URE INCURRED IN RESPECT OF THE SHARES. SECONDLY, THE APPELLANT CANN OT DENY THAT THERE WERE NO ADMINISTRATIVE EXPENSES INCURRED FOR THE IN VESTMENTS. IN VIEW OF THIS, THE A.O. WAS JUSTIFIED TO FOLLOW RULE 8D R .W.S.14A OF THE I.T. ITA NO.7 29/AHD/2012 WITH C.O.97/A HD/2012 ASST YEA R 2008- 09. . 4 ACT,1961. THEREFORE, THE ADDITION OF RS.1,39,125/- IS SUSTAINED IN VIEW OF THE ABOVE DISCUSSION. 5. AGGRIEVED BY THE ORDER OF CIT (A), BOTH THE PART IES ARE NOW IN APPEAL BEFORE US. THE REVENUE IS IN APPEAL FOR DELETION O F RS.15,50,415/- ON ACCOUNT OF INTEREST EXPENDITURE AND THE ASSESSEE FO R DISALLOWANCE OF RS.1,39,125/- SUSTAINED WITH RESPECT TO ADMINISTRAT IVE EXPENSES. 6. THE LD. D.R. SUBMITTED THAT THE RULE 8D IS EFFEC TIVE FROM A.Y. 2008- 09. HE FURTHER SUBMITTED THAT EVEN IF THE INVESTMEN T HAS BEEN MADE PRIOR TO THE INTRODUCTION OF RULE, ONCE THE RULE IS IN PLACE , ANY SUBSEQUENT DETERMINATION OF DISALLOWANCE U/S.14A WILL BE GOVER NED BY RULE IRRESPECTIVE OF THE YEAR IN WHICH THE INVESTMENTS ARE MADE. IN T HE CASE OF THE ASSESSEE SINCE THE INVESTMENTS EXISTS DURING THE YEAR AND HA S BEEN MADE WITH THE INTENTION OF EARNING DIVIDED, IT IS IMMATERIAL AS T O WHETHER THE ASSESSEE HAS EARNED ANY EXEMPTED INCOME DURING THE YEAR OR NOT. HE THEREFORE, URGED THAT THE A.O. WAS RIGHT IN MAKING THE DISALLOWANCE U/S. 14A AND THEREFORE, ORDER OF THE A.O BE UPHELD. 7. THE LD. A.R. ON THE OTHER HAND SUBMITTED THAT TH E INVESTMENTS IN JAY INFRA TRADE PVT. LTD., WAS MADE IN F.Y. 2003-04. TH E INVESTMENTS WERE MADE IN THE NORMAL COURSE OF THE BUSINESS AND WERE MADE OUT OF OWN FUNDS. THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS WHEN THE INVESTMENTS WERE MADE DUE TO ENOUGH CASH PROFITS. T HE LD. A.R. FURTHER SUBMITTED THAT DISALLOWANCE OF INTEREST MADE IN A.Y . 2004-05 WAS DELETED BY CIT(A) FOR THE REASON THAT SUFFICIENT OWN FUNDS WERE AVAILABLE WITH THE ITA NO.7 29/AHD/2012 WITH C.O.97/A HD/2012 ASST YEA R 2008- 09. . 5 ASSESSEE AND NO NEXUS WAS ESTABLISHED SO AS TO PROV E THAT THE BORROWINGS FROM THE BANK WERE INVESTED FOR ACQUIRING THE SHARE S. THE ASSESSEE ALSO POINTED OUT TO THE CHART REPRODUCED ON PAGE-9 OF CI T (A) ORDER WHEREIN THE INVESTMENTS IN THE SHARES, PROFIT AND SURPLUS WAS D EPICTED FROM A.Y. 2004- 04 TO A.Y. 2008-09. FROM THE TABLE HE POINTED OUT T HAT THE ASSESSEE WAS ALWAYS HAVING SURPLUS FUNDS AND HAD NO NEW INVESTME NTS MADE AFTER A.Y. 2004-05. 8. LD. A.R. FURTHER POINTED OUT THAT THE HONBLE IT AT IN ITA NO.4237/AHD/2007 DATED 31-5-2011 HAD ACCEPTED THE F ACT THAT THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS, AND THE INVESTMENTS WERE OF RS.55.25 LAKHS FOR THE YEAR ENDING 31-3-200 3 AND ALSO ON 31-3- 2004. ON THESE FACTS ITAT HAD HELD THAT IN THE ABSE NCE OF ANY DIRECT NEXUS BETWEEN THE INVESTMENTS IN SHARES AND INTEREST BEAR ING BORROWED FUNDS AND IN THE ABSENCE OF FINDING THAT THE FUNDS HAVE B EEN DIVERTED FROM OPERATIONS AND THE OWN FUNDS WERE NOT AVAILABLE WIT H THE ASSESSEE FOR INVESTMENT IN SHARES, HONBLE ITAT HAS DELETED THE DISALLOWANCE OF INTEREST U/S. 36(1)(III). HE POINTED OUT PARAGRAPH 18 ON PAG E 13 OF THE RELEVANT FINDING OF THE HONBLE ITAT. THE A.R. ALSO RELIED O N VARIOUS DECISIONS OF THE HIGH COURT INCLUDING THE DECISION IN THE CASE OF CI T VS. RELIANCE UTILITY 319 ITR 340 (MUM), CIT VS. HERO CYCLES 323 ITR 518. IT WAS ALSO CONTENDED THAT SINCE THE ASSESSEE WAS HAVING SUFFICIENT OWN F UNDS WHICH WERE FAR IN EXCESS OF INVESTMENTS, PRESUMPTION MAY BE DRAWN THA T THE AMOUNT HAD BEEN INVESTED OUT OF OWN FUNDS. THE LD. A.R. POIN TED TO THE DECISION OF HERO CYCLES 323 ITR 518(DEL), WHERE THE HONBLE HIG H COURT HAS HELD THAT THE DISALLOWANCE U/S.14A REQUIRES FINDING OF INCURR ING OF EXPENDITURE. IN THE ITA NO.7 29/AHD/2012 WITH C.O.97/A HD/2012 ASST YEA R 2008- 09. . 6 CASE OF MAXOPP INVESTMENT LTD VS. CIT.(2012) 247 CT R 162 HONBLE HIGH COURT HAS HELD THAT FOR MAKING DISALLOWANCE U/S.14A A.O. HAS TO BE SATISFIED ON AN OBJECTIVE ANALYSIS AND FOR COGENT R EASONS THAT THE AMOUNT OF EXPENDITURE AS CLAIMED BY THE ASSESSEE IS NOT CORRE CT, HE IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ON THE BAS IS OF REASONABLE AND ACCEPTABLE METHOD OF APPORTIONMENT. THE LD. A.R. SU BMITTED THAT SINCE IN THE PRESENT CASE THERE IS NO FINDING OF THE A.O., N O DISALLOWANCE U/S. 14A CAN BE MADE. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE FACTUAL POSITION IS THAT THE ASSESSEE H ADE MADE INVESTMENTS IN JAY INFRASTRUCTURE IN THE F.Y. 2002-03 AND THE SOUR CE OF INVESTMENT AS HELD BY THE CO-ORDINATE BENCH OF ITAT WAS ITS OWN FUNDS AND NOT BORROWED FUNDS. THE ASSESSEE HAS ALSO DEMONSTRATED THAT NO N EW INVESTMENTS HAVE BEEN MADE AFTER F.Y. 2002-03 IN THAT COMPANY. IT HA S ALSO DEMONSTRATED THROUGH ITS BALANCE SHEET THAT THE ASSESSEE WAS HAV ING SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF SURPLUS IN THE PROFIT AND LOSS ACCOUNT, ACCUMULATED DEPRECIATION. HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITY (SUPRA) HAS HELD THAT IF THE INTEREST FREE FUNDS ARE AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET WITH INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE. IN THE PRES ENT CASE BEFORE US CONSIDERING THE FINDING OF CO-ORDINATE BENCH AND OF THE CIT (A). IT CAN BE PRESUMED THAT ASSESSEE WAS HAVING SUFFICIENT FUNDS FOR INVESTMENTS. IN VIEW OF THESE FACTS AND RESPECTFULLY FOLLOWING THE DECISION OF HIGH COURT WE ARE OF THE VIEW THAT IN THE PRESENT CASE NO INTERFE RENCE IS CALLED FOR IN THE ITA NO.7 29/AHD/2012 WITH C.O.97/A HD/2012 ASST YEA R 2008- 09. . 7 ORDER OF CIT (A) WITH RESPECT TO THE DISALLOWANCE P ERTAINING TO DISALLOWANCE OF INTEREST AMOUNTING TO RS.15,50,415/-. WITH RESPE CT TO THE DISALLOWANCE OF RS.1,39,125/-ON ACCOUNT OF ADMINISTRATIVE EXPENSES, THE FACTUAL POSITION IS THAT THE ASSESSEE HAS STATED IT HAS NOT INCURRED AN Y ADMINISTRATIVE EXPENDITURE A.O. HAS ALSO NOT GIVEN A FINDING TO TH E EFFECT THAT THE ASSESSEE HAS INCURRED EXPENDITURE TOWARDS EXEMPT IN COME. IN VIEW OF THESE FACTS AND RESPECTFULLY FOLLOWING THE DECISION OF PUNJAB AND HARYANA HIGH COURT IN THE CASE OF HERO CYCLES (SUPRA) WE AR E OF THE VIEW THAT NO DISALLOWANCE ON ACCOUNT OF ADMINISTRATIVE EXPENSES CAN BE MADE IN THE PRESENT CASE. WE ACCORDINGLY DELETE THE ADDITION MA DE BY THE A.O. THUS THE GROUND OF REVENUE IS DISMISSED AND THE C.O. OF ASSESSEE IS ALLOWED. 10. THE ISSUE UNDER CROSS OBJECTION IS CONNECTED TO THAT DEALT WITH BY US HEREINABOVE IS COVERED AND DECIDED ACCORDINGLY IN F AVOUR OF THE ASSESSEE. 11. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSE D AND C.O. OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 5 -10- 2012. SD/- SD/- (G.C.GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER AHMEDABAD. S.A.PATKI. COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. ITA NO.7 29/AHD/2012 WITH C.O.97/A HD/2012 ASST YEA R 2008- 09. . 8 3. THE CIT (APPEALS) VIII, AHMEDABAD. 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHMEDABAD 1.DATE OF DICTATION 18 - 7 -2012 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING 21 / 9 / 2012 MEMBER.OTHER MEMBER. 3.DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S - -2012. 4.DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT - -2012 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S - -2012 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK - -2012. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER