M/s Time Cap Pharma Labs (P) Ltd., Hyderabad V. Assistant Commissioner of Income Tax, Hyderabad

ITA 767/HYD/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69845 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 29-04-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOPINATH
• Assessee Lawyers: K C DEVADAS
• Keywords: Bogus purchase; Earning of tax free income; Source of fund; Commercial expediency
• Section: 143(3); 14A; 154

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.767/HYD/2011 ASSESSMENT YEAR 2007-2008 TIME CAP PHARMA LABS (P) LTD. HYDERABAD. PAN AAACT8345C V S ACIT, CIRCLE 2 (3) HYDERABAD A PPELLANT RESPONDENT ITA.NO.338/HYD/2012 ASSESSMENT YEAR 2008-2009 TIME CAP PHARMA LABS (P) LTD. HYDERABAD. PAN AAACT8345C VS ACIT, CIRCLE 2 (3) HYDERABAD APPELLANT RESPONDENT APPELLANT BY : SHRI K.C.DEVADAS (AR) RESPONDENT BY : SHRI GOPI NATH (DR) DATE OF HEARING : 20.06.2013 DATE OF PRONOUNCEMENT : 18.09.2013 ORDER PER SMT. ASHA VIJAYARAGHAVAN, J.M. : THIS APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A), VIJAYAWADA, DATED 28.02.2011 FOR THE ASSESSMENT YEAR 2 007-2008. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMP ANY ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF N.P.S EEDS, ZINFE SR CAPS AND TRADING IN BULK DRUGS, FORMULATIONS & IRO N ORE. FOR THE ASSESSMENT YEAR 2007-08 THE ASSESSEE FILED ITS RETURN OF I NCOME ON 27.10.2001 DECLARING LOSS OF RS.1,22,64,666/- FROM B USINESS AND LONG TERM CAPITAL GAINS AT RS.38,08,415/- AND NET LOSS AT RS.84,56,251/-. 2 THE ASSESSING OFFICER COMPLETED THE ASSESSMENT BY HIS ORD ER DATED 30.12.2009 U/S. 143(3) OF THE ACT DETERMINING TAXABLE INCOME FROM BUSINESS AT RS.1,91,96,499/- BY MAKING DISALLOWANCES O N SALE OF IRON ORE. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER BY HIS LETTER DATED 30.11.2009 REQUIRED THE ASS ESSEE TO FILE OBJECTIONS TO TREAT THE TRANSACTION OF PURCHASE OF IRO N ORE FROM NATCO PHARMA LTD. AS SHAM TRANSACTION. 4. IN RESPONSE TO THE SAID LETTER THE ASSESSEE FILED ITS OBJECT IONS VIDE LETTER DATED 15.12.2009 WHICH ARE AS UNDER : THE ASSESSEE PURCHASED 35,000 MT OF IRON ORE @ 1,673 PER MT FROM NATCO PHARMA LIMLTED ON 31.03.2006 VIDE INVOICE 001/05- 06 DATED 31.03.2006 FOR A TOTAL CONSIDERATION OF RS.6 ,09,00,000 INCLUDING VAT OF RS.23,42,308 @ 4%. THE IRON ORE WA S EXTRACTED BY NATCO PHARMA LIMITED DURING THE PERIOD MAY, 2005 TO JULY, 2005 AND TRANSPORTED TO KRISHNAPATNAM PORT COMPANY LI MITED AND KEPT IN THE PORT. AS PER THE TEST REPORT OBTAINE D BY NATCO PHARMA LIMITED FROM SGS INDIA PRIVATE LIMITED, THE CO NTENT OF IRON (FE) WAS 60.63% AND SILICA (S102) WAS 5.12% IN DE CEMBER, 2005. IN THE VAT RETURN FOR THE MONTH OF MARCH 2006 , FILED BY THE ASSESSEE ON 10.4.2006 WITH THE COMMERCIAL TAXES DEP ARTMENT THE PURCHASE OF IRON ORE WAS DISCLOSED AND INPUT CR EDIT WAS CLAIMED FOR THE VAT PAID AND ADJUSTED AGAINST VAT PAYAB LE BY IT. IT WAS SUBMITTED THAT THE ENTIRE PAYMENT FOR PURCHAS E IS MADE BY 31.03.2006 AS CAN BE SEEN FROM THE ACCOUNT OF NATCO PHARMA LIMITED IN ASSESSEE'S BOOKS. IT WAS SUBMITTED THAT TH E PURCHASE WAS MADE AT RS.L,673 PER MT WHICH IS MARKET PRICE A T THAT TIME AS COULD BE OBSERVED FROM THE DATA OF IRON ORE EXPORT S MADE FROM CHENNAI PORT AT LOWEST PRICE OF RS.1705.99 PER MT A ND THE 3 HIGHEST PRICE AT RS.2,956 PER MT FOR FE CONTENT OF 65%. IT WAS POINTED OUT THAT FROM THE DATA OF EXPORTS OF IRON OR E FROM CHENNAI DURING MARCH, 2006 (SOURCE: M/S. EXIM INDIA, NO.227, THAMBU CHETTY STREET,CHENNAI 600001, PHONE [phone] ,714 MTS OF IRON ORE WITH FE CONTENT OF 62 / 61% IS SOLD AT 1748.96 PER MT BY TRIMEX INDUSTRIES TO NOBLE RESOURCES, HONGKON G WHICH IS NEARER TO THE FE CONTENT OF IRON ORE AT 60.63% PURC HASED BY THE ASSESSEE FOR 1673/- PER MT. IT WAS SUBMITTED THAT TH E PRICE PAID IS REASONABLE AND COMPARABLE TO THE PRICES AT WHICH EXPORTS HAVE BEEN MADE BY OTHERS DURING THE RELEVANT PERIOD AND H ENCE NO EXCESSIVE PRICE IS PAID TO BENEFIT NATCO PHARMA LIMI TED. FURTHER THE ASSESSEE-COMPANY HAS SOLD 28,213.75 MTS TO TRAD EMIN INTERNATIONAL PRIVATE LIMITED, CUDDAPAH ON 17.01.2007 @ RS.975 PER MT WHICH WAS EXPORTED BY THEM TO CHINA IN THE SAME MONTH. IT IS TO BE NOTED HERE THAT DUE TO TIME GAP B ETWEEN DATES OF PURCHASE AND SALE AND RAINS, THE FE CONTENT OF IRO N ORE DROPPED TO 56% AND SILICON CONTENT INCREASED TO 13% WHIC H DRASTICALLY REDUCED THE MARKET VALUE OF THE ORE AND TO COMPOUND THE PROBLEM, PRICES OF IRON ORE DECLINED DURING THAT PERIOD. IT IS TO BE NOTED THAT THE PARTIES TO WHOM THE MATERIAL IS SO LD ARE OUTSIDERS AND ARE NOT CONNECTED EITHER TO THE PROMOTE RS OR DIRECTORS IN ANY WAY. THEY ARE WELL REPUTED ORGANIZA TIONS OF INTERNATIONAL STANDING WITH EXPERIENCE IN IRON ORE TRADING.' IT WAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE PURCHASE WAS MADE AT PREVAILING MARKET PRICE ONLY A ND LOSS SUFFERED IS GENUINE. THE PURCHASE IS REFLECTED IN B OOKS OF ACCOUNT AND VAT RETURN WAS FILED WITHIN DUE DATE RE FLECTING THE SALE OF IRON ORE. THE PARTY FROM WHOM PURCHASE IS M ADE AND THE PARTY TO WHOM MATERIAL IS SOLD ARE IDENTIFIABLE AND GENUINE PARTIES. THE MATERIAL PURCHASED AND SOLD IS EXISTIN G AS 4 EVIDENCED BY ITS SUBSEQUENT EXPORT, RECEIPT OF 'FOR M- H CERTIFICATE OF EXPORT' FROM THE BUYER AND REFUND OF VAT ON SUCH EXPORT FROM THE COMMERCIAL TAXES DEPARTMENT. THEREFORE SINCE TH E PRICE PAID FOR PURCHASE IS ESTABLISHED TO BE REASONABLE A S EXPLAINED ABOVE, IT CANNOT BE SAID THAT THE TRANSACTION IS EN TERED INTO WITH AN INTENTION TO HELP THE ASSOCIATE COMPANY TO EARN PROFITS AT THE COST OF THE ASSESSEE COMPANY. THERE WAS NO PHYSICAL MOVEMENT OF IRON ORE SINCE IRON ORE WAS ALREADY IN PORT AND IS TO BE EXPORTED. IT WAS SUBMITTED THAT THE TRANSACTION IS NOT A SHAM TRANSACTION. 5. WITH REGARD TO DISALLOWANCE UNDER SECTION 14A TH E ASSESSEE SUBMITS THAT IT HAD NEITHER INCURRED ANY INTEREST NOR EXPENDITURE IN EARNING DIVIDEND INCOME SINCE ADVANCES RECEIVED ARE INTEREST FREE AND ALL THE DIVIDENDS WERE DIRECTLY CREDITED TO THE ASSE SSEES ACCOUNT BY ECS CLEARING. THEREFORE DISALLOWING RS.4,11,413/- U /S 14A IS NOT PROPER AND JUSTIFIED SINCE NO EXPENDITURE WAS INCUR RED FOR EARNING EXEMPT INCOME. 6. THE ASSESSING OFFICER HAS TREATED THE COST OF IRO N ORE OF RS.5,85,57,695/- PURCHASED FROM NATCO PHARMA LTD., AS BOGUS PURCHASE AND DISALLOWED RS.3,10,49,752/- AS LOSS INC URRED BY THE ASSESSEE ON SALE OF SUCH IRON ORE WHILE COMPUTING TH E INCOME OF THE ASSESSEE. 7. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE THE C IT(A) AND SUBMITTED THAT THE ASSESSING OFFICER FAILED TO SEE T HAT THE TRANSACTION OF PURCHASE OF IRON ORE FROM NATCO PHARMA LIMITED BY THE ASSESSEE IS NEITHER BOGUS NOR SHAM TRANSACTION FOR THE REASONS FURNISHED BY THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT THE ASSESSI NG OFFICER OUGHT TO HAVE CONSIDERED THE SAID TRANSACTION AS GENUINE AND C ARRIED ON IN THE COURSE OF BUSINESS OF TRADING BY THE ASSESSEE. THE LEARNED CIT(A) 5 HELD AT PARA 4 AS FOLLOWS : 4. DURING THE APPEAL PROCEEDINGS ON 18.02.2011, TH E APPELLANT HAS WITHDRAWN THE GROUNDS RESULTING IN THE DISALLOW ANCE OF LOSS ON SALE OF IRON ORE AMOUNTING TO RS.3,10,49,75 2/- WHICH HAS SINCE BEEN REVISED TO RS.2,44,33,158/- VIDE ORD ER U/S. 154 DATED 10.2.2010. AS THE APPELLANT HAS NOT PRESSED T HIS SUBSTANTIVE GROUND FOR ADJUDICATION, THIS GROUND IS REJECTED. 8. WITH RESPECT TO THE DISALLOWANCE OF RS.4,11,413/ - THE CIT(A) OBSERVED THAT THE INVESTMENT IN DIVIDEND EARNING SHARES DID NOT FLOW FROM THE SURPLUS FUNDS OF THE ASSESSEE WHICH FACT WAS ADMITTED BY THE DIRECTOR OF THE ASSESSEE COMPANY IN HIS OWN DEPOSITION DATED 24.1.20 09 WHEREIN HE HAD STATED THAT THE INVESTMENT OF RS.9,28,76,370/- WAS MADE OUT OF BORROWED FUNDS ON WHICH INTEREST WAS BEING PAID. THE CIT(A) OPINED THAT THE ASSESSING OFFICER HAD CORRECTLY RESORTED TO DISALLOW ANCE OF RS.4,11,413/- BEING 10% OF THE DIVIDEND INCOME AND THE CONTENTION OF THE ASSESSEE THAT NEITHER ANY EXPENDITURE OR INTEREST WAS INCURRED IN E ARNING THE DIVIDEND IS INCORRECT ESPECIALLY SINCE THE DIRECTOR IN HIS OWN S TATEMENT ADMITTED THAT THE TOTAL INVESTMENT WAS MET OUT OF THE BORROWED FU NDS ON WHICH THE ASSESSEE INCURRED INTEREST. HENCE, DISALLOWANCE MAD E BY THE ASSESSING OFFICER WAS CONFIRMED BY THE CIT(A). 9. FOR THE ASSESSMENT YEAR 2007-2008, THE CIT(A) HEL D THAT THE ASSESSEE HAD WITHDRAWN THE GROUNDS OF APPEAL RAISED AGAINST THE REVISED DISALLOWANCE OF RS.2,44,33,158/-. THE LEARNED COUNS EL FOR THE ASSESSEE VEHEMENTLY OPPOSED THE FINDING OF THE CIT(A) AND STA TED THAT THE ASSESSEE HAD NOT WITHDRAWN ANY GROUNDS RAISED AGAINST THE SAI D DISALLOWANCE. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECI SION IN THE CASE OF CIT VS. RAI BAHADUR HARDUTROY MOTILAL CHAMARIA (1967) 66 ITR 443 (SC) WHEREIN THE SUPREME COURT AT PAGE 450 HAS HELD THAT AN ASSE SSEE HAVING ONCE FILED AN APPEAL, CANNOT WITHDRAW IT. 6 10. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RELIE D ON THE DECISION IN THE CASE OF CIT, GUJARAT-III VS. STEEL CAST CORPORATION. (1977) 107 ITR 683 (GUJ.) AND AT PAGE 700 IT HAS BEEN HELD AS FOLLOWS : IN OUR OPINION, THE LEGAL POSITION HAS TO BE CONS IDERED ULTIMATELY IN THE LIGHT OF THE DECISIONS IN HUKUMCH AND MILLS LTD.S CASE (1967) 63 ITR 232 (SC) AND MAHALAKSHMI TE XTILE MILLS LTD.S CASE (1967) 66 ITR 710 (SC). FIRST IT MU ST BE FOUND OUT WHAT IS THE SUBJECT MATTER OF THE APPEAL AND THA T CAN BE DETERMINED ONLY BY FINDING OUT WHAT THE APPELLATE A SSISTANT COMMISSIONER EXPRESSLY OR IMPLIED DECIDED. WE MUST EMPHASIZE AGAIN THAT BY IMPLIED DECISION, WE MEAN T HAT THOUGH A POINT MIGHT HAVE BEEN RAISED BEFORE THE AP PELLATE ASSISTANT COMMISSIONER, IN HIS FINAL ORDER THE APPE LLATE ASSISTANT COMMISSIONER MIGHT NOT HAVE DEALT WITH TH AT POINT AND THEREBY IMPLIEDLY REJECTED IT. 11. THE LEARNED COUNSEL ALSO RELIED ON THE DECISION IN THE CASE OF CIT VS. LATE BEGUM NOOR BANU ALLADIN (1993) 204 ITR 166. ON THE MERITS OF THE CASE THE LEARNED COUNSEL SUBMITTED THAT THE PURCHAS ES WERE IN THE YEAR 2006-2007 WHILE THE SAME HAS TAKEN PLACE IN THE ASS ESSMENT YEAR 2007-08 AND THE VAT RETURN FILED BY THE ASSESSEE WITH THE CO MMERCIAL TAXES DEPARTMENT FOR THE MONTH OF MARCH, 2006, THE PURCHA SE PRICE WAS DISCLOSED AND CLAIM HAS BEEN MADE FOR THE VAT PAID. THE RETUR N WAS FILED ON 10.4.2006 I.E., BEFORE THE DUE DATE. THE ENTIRE PAYM ENT HAS BEEN MADE BY 31.3.2006. 12. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE PURCHASE WAS MADE AT RS.1,673 PER MT WHICH IS MARKET PRICE AT THAT TI ME AS COULD BE OBSERVED FROM THE DATE OF IRON ORE EXPORTS MADE FROM CHENNAI PORT AT LOWEST PRICE OF RS.1705.99 PER MT AND THE HIGHEST PRICE AT RS.2,956 PER MT FOR FE CONTENT OF 65%. THE LEARNED COUNSEL FURTHER SUBMITTED THAT FROM THE DATE OF EXPORTS 7 OF IRON ORE FROM CHENNAI DURING MARCH, 2006 (SOURCE : M/S. EXIM INDIA, NO. 227, THAMBU CHETTY STREET, CHENNAI 600 001, PHONE [phone].714 MTS OF IRON ORE WITH FE CONTENT OF 62/61% IS SOLD AT 1748.96 PER MT BY TRIMEX INDUSTRIES TO NOBLE RESOURCES, HONGKONG WHI CH IS NEARER TO THE FE CONTENT OF IRON ORE AT 60.63% PURCHASED BY THE AS SESSEE FOR 1673/- PER MT. THEREFORE, THE PRICE PAID IS REASONABLE AND COM PARABLE TO THE PRICES AT WHICH EXPORTS HAVE BEEN MADE BY OTHERS DURING THE REL EVANT PERIOD AND HENCE, NO EXCESSIVE PRICE IS PAID TO BENEFIT NATCO PHARMA LIMITED. FURTHER, IT WAS SUBMITTED BY THE LEARNED COUNSEL THAT THE ASS ESSEE COMPANY HAS SOLD 28,213.75 MTS TO TRADEMIN INTERNATIONAL PRIVAT E LIMITED, CUDDAPAH ON 17.01.2007 @ 975 PER MT WHICH WAS EXPORTED BY THEM TO CHINA IN THE SAME MONTH. IT WAS POINTED OUT HERE THAT DUE TO TIM E GAP BETWEEN DATES OF PURCHASE AND SALE AND RAINS, THE FE CONTENT OF IRON ORE DROPPED TO 56% AND SILICON CONTENT INCREASED TO 13% WHICH DRASTICALLY R EDUCED THE MARKET VALUE OF THE ORE. TO COMPOUND THE PROBLEM, PRICES OF IRON ORE DECLINED DURING THAT PERIOD. IT WAS CONTENDED THAT THE PARTIES TO WHOM T HE MATERIAL IS SOLD ARE OUTSIDERS AND ARE NOT CONNECTED EITHER TO THE PROMO TERS OR DIRECTORS IN ANY WAY AND THEY ARE WELL REPUTED ORGANISATIONS OF INTE RNATIONAL STANDING WITH EXPERIENCE IN IRON ORE TRADING. 13. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO T OOK US THROUGH THE PAPER BOOK AT PAGES 47 AND 48 OF THE PA PER BOOK AND PRODUCED THE BILL OF LADING AT PAGES 166 AND PA GE 177 IS COMPARABLE PRICE AT PAGES 179 WITH RESPECT TO CONTE NT OF IRON ORE AND SUBMITTED THAT THE ENTIRE TRANSACTION WAS AT AR MS LENGTH AND NATCO BEING A RICH COMPANY THE ASSESSEE DID NOT GET ANY BENEFIT FROM THIS TRANSACTION. THE COUNSEL RELIED O N THE DECISION OF CIT VS. NAGARI MILLS CO. LTD. 33 ITR 681 AND ALS O THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BERGER PAINS INDIA LTD. VS. CIT (2004) 266 ITR 99 (S.C.) AND SUBMITTED THAT THE RATE OF TAX IS THE SAME FOR BOTH THE COMPANIES AND HENCE THERE IS NO 8 REVENUE LOSS TO THE DEPARTMENT. 14. THE LEARNED A.R. FURTHER SUBMITTED THAT IT HAS BEEN HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CI T VS. WALCHAND & CO. (P) LTD. (1967) 65 ITR 381 (SC) WHIC H READS AS FOLLOWS : IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER AN EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINES S, REASONABLENESS OF THE EXPENDITURE HAS TO BE ADJUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. 14.1. THE LEARNED A.R. THEREFORE, STATED THAT AS A PRUDENT BUSINESSMAN THE ASSESSEE SOLD THE IRON ORE AT THE P RICE TO CUT HIS LOSSES SHORT. 15. THE LEARNED D.R. ON THE OTHER HAND, PRAYED TO THE BENCH THAT THE MATTER SHALL BE REFERRED BACK TO THE CIT(A) WITH RESPECT TO WITHDRAWAL OF THE APPEAL. THE LEARNED D. R. POINTED OUT THAT THE ASSESSEE IS A PHARMACEUTICAL COMPANY AND N ATCO IS NOT IN THE BUSINESS OF TRADING IN IRON ORE. FURTHER , IT WAS POINTED OUT BY THE DR THAT THE ENTIRE TRANSACTION IS COLOUR ABLE AND NOT SUPPORTED BY WRITTEN CONTRACT. THE LEARNED A.R. IN HIS REJOINDER RELIED ON IN THE CASE OF DHAKESWARI COTTON MILLS LT D. VS. CIT (1954) 26 ITR 775 (SC) WHEREIN IT HAS BEEN HELD AS FOLLOWS : THOUGH ITO IS NOT RESTRAINED UNDER SECTION 23(3) B Y TECHNICAL RULES OF EVIDENCE AND PLEADING BUT HE CANNOT MAKE AN ASSESSMENT ON PURE GUESS-WORK WITHOUT REFERENCE TO ANY MATERIAL OR EVIDENCE AND ASSESSEE MUST BE GIVEN AN OPPORTUNITY TO REBUT ANY 9 MATERIAL CONSIDERED BY THE IT AUTHORITIES. 15.1. THE LEARNED D.R. POINTED OUT THAT THE GENUIN ENESS OF THE CONTRACT IS DOUBTFUL AS THE SAME IS NOT DOCUMEN TED. 16. IN THE REJOINDER, THE LEARNED A.R. ARGUED THAT THE CONTRACT NEED NOT BE IN WRITING. 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THE FOLLOWING REASONS FOR SETTING ASIDE THE ORDER OF THE CIT(A). I. THE PURCHASE IS REFLECTED IN BOOKS OF ACCOUNTS A ND VAT RETURN HAS BEEN FILED FOR THE MONTH. II. THE PURCHASE IS AT PREVAILING MARKET PRICE FOR COMPARABLE PRODUCTS. III. THE MATERIAL WAS PAID FOR ON SALE THROUGH BANK TRANSACTIONS AND WAS NOT A MERE BOOK ENTRY. IV. THE PARTIES FROM WHOM PURCHASES ARE MADE AND TH E PARTY TO WHOM THE MATERIAL IS SOLD ARE IDENTIFIABLE AND GENUINE PARTIES. V. THE MATERIAL PURCHASED AND SOLD IS EXISTING EVID ENCED BY ITS SUBSEQUENT EXPORT, RECEIPT OF FORM-H CERTIFI CATE OR EXPORT FROM THE BUYER AND REFUND OF VAT FROM THE COMMERCIAL TAXES DEPARTMENT. 18. SINCE THE PRICE PAID FOR PURCHASE HAS BEEN ESTA BLISHED TO BE REASONABLE, IT CANNOT BE SAID THAT THE TRANSACTION IS ENTERED INTO WITH AN INTENTION TO HELP THE ASSOCIATED COMPANY TO EARN PROFIT. THE PURCHASE IS REFLECTED IN BOOKS OF ACCOUNTS AND VAT RETURN WAS FILED WITHIN DUE DATE REFLECTING THE SALE OF IR ON ORE. THE PARTY FROM WHOM PURCHASE IS MADE AND THE PARTY TO WHOM MA ERIAL IS SOLD ARE IDENTIFIABLE AND GENUINE PARTIES. THE MATE RIAL PURCHASED AND SOLD IS EXISTING AS EVIDENCE BY ITS SUBSEQUENT EXPORT, RECEIPT 10 OF FORM-H CERTIFICATE OF EXPORT FROM THE BUYER AND REFUND OF VAT ON SUCH EXPORT FROM THE COMMERCIAL TAXES DEPART MENT. THEREFORE, SINCE THE PRICE PAID FOR PURCHASE IS EST ABLISHED TO BE REASONABLE AS EXPLAINED ABOVE, IT CANNOT BE SAID TH AT THE TRANSACTION IS ENTERED INTO WITH AN INTENTION TO HE LP THE ASSOCIATE COMPANY TO EARN PROFITS AT THE COST OF THE APPELLAN T COMPANY. LOOKING AT THE COMPARABLE PRICE, THE PURCHASES WAS MADE AT RS.1673 PER MT WHICH IS MARKET PRICE AT THAT TIME A ND FROM THE DATE OF IRON ORE EXPORTS MADE FROM CHENNAI PORT, TH E LOWEST PRICE WAS RS.1705.99 PER MT AND THE HIGHEST PRICE WAS RS. 2956 PER MT FOR FE CONTENT OF 65%. ALSO, IT CAN BE SEEN FROM THE DATA OF EXPORTS OF IRON ORE FROM CHENNAI THAT 48,714 MT OF IRON ORE WITH FE CONTENT OF 62-61% HAS BEEN SOLD AT RS.1748.96 PE R MT BY TRIMEX INDUSTRIES TO NOBLE RESOURCES, HONGKONG WHIC H IS VERY CLOSE TO THE FE CONTENT OF IRON ORE AT 60.63% PURCH ASED BY THE ASSESSEE FOR 1673/- PER MT. HENCE, WE ARE OF THE OP INION THAT THE PRICE PAID IS REASONABLE AND COMPARABLE TO THE PRIC ES AT WHICH EXPORTS HAVE BEEN MADE BY OTHERS DURING THE RELEVAN T PERIOD AND NO EXCESSIVE PRICE HAS BEEN PAID TO BENEFIT NATCO P HARMA LTD. 19. FURTHER, WE FIND THAT THE ASSESSEE HAS SOLD 28.213.75 MTS TO TRADEMIN INTERNATIONAL PRIVATE LIMITED. CUDDAPAH ON 17.01.2007 @ RS.975 PER MT WHICH WAS EXPORTED BY THEN TO CHINA I N THE SAME MONTH. IT IS TO BE NOTED HERE THAT DUE TO TIME GAP BETW EEN DATES OF PURCHASE AND SALE AND RAINS, THE FE CONTENT OF IRON ORE DROPPED TO 56% AND SILICON CONTENT INCREASED TO 13% WHICH DRA STICALLY REDUCED THE MARKET VALUE OF THE ORE. TO COMPOUND THE PROBLEM. PRICES OF IRON ORE DECLINED DURING THAT PERIOD. IT IS TO BE NOTED THAT THE PARTIES TO WHOM THE MATERIAL IS SOLD ARE OUTSIDERS AND ARE NOT C ONNECTED EITHER TO THE PROMOTERS OR DIRECTORS IN ANY WAY. THEY ARE W ELL REPUTED ORGANIZATIONS OF INTERNATIONAL STANDING WITH EXPERI ENCE IN IRON ORE 11 TRADING. 20. WE ALSO NOTE THAT THE ASSESSING OFFICERS OBJEC TION THAT THERE IS NO PHYSICAL MOVEMENT OF STOCKS AND IT IS O NLY AN ACCOMMODATIVE TRANSACTION IS INCORRECT AS THE IRON ORE WAS ALREADY MINED AND TRANSPORTED TO THE PORT FOR THE P URPOSE OF EXPORT. THEREFORE, WE ARE OF THE OPINION THAT THE T RANSACTION IS NOT A SHAM TRANSACTION. THEREFORE, THE ASSESSING OFFICER HAS WRONGLY DISALLOWED A SUM OF RS.3,10,49,752/- BE ING LOSS INCURRED BY THE ASSESSEE ON SALE OF IRON ORE WHILE COMPUTING THE INCOME OF THE ASSESSEE. HENCE, THE ASSESSEES A PPEAL ON THIS ISSUE IS ALLOWED. 21. THE NEXT ISSUE IS WITH RESPECT TO DISALLOWANCE OF RS.4,11,413/- BEING 10% OF DIVIDEND INCOME OF RS.41,14,138/- UNDER SECTION 14A OF THE ACT. THE LE ARNED COUNSEL FOR THE ASSESSEE, ARGUED THAT RULE 8D DOES NOT APPLY FOR THE ASSESSMENT YEAR 2007-2008. THE ASSESSEES C OUNSEL SUBMITTED THAT IT HAD NEITHER INCURRED ANY INTEREST NOR EXPENDITURE IN EARNING DIVIDEND INCOME SINCE ADVANC E RECEIVED ARE INTEREST FREE AND ALL THE DIVIDENDS WE RE DIRECTLY CREDITED TO THE ASSESSEES ACCOUNT BY ECS CLEARING. THE ASSESSEES COUNSEL POINTED OUT TO PAGE 17 OF THE PA PER BOOK WHEREIN THE BALANCE SHEET AS ON 31 ST MARCH, 2007 HAD BEEN PRODUCED. IT WAS STATED THAT THE SHARE CAPITAL AND RESERVES AND SURPLUS AND UNSECURED LOANS WHICH CONSTITUTES T HE SOURCE OF FUNDS WERE SUFFICIENT AND THE LEARNED COU NSEL ALSO POINTED OUT TO PAGE 19 OF THE PAPER BOOK WHEREIN UN DER SCHEDULE-3 LOAN HAS BEEN TAKEN AGAINST THE FIXED DE POSIT. HENCE, IT WAS ARGUED THAT THERE IS NO BORROWED CAPI TAL AND NO INTEREST PAID. 12 22. WE HAVE HEARD BOTH THE PARTIES. WE NOTE THAT T HE MUMBAI HIGH COURT IN GODREJ BOYCE MFG. CO. LTD. (ITA.NO.626 OF 2010 DATED 12.08.2010) HAS HELD THAT RULE 8D APPLIES PROSPECTIVELY FROM A.Y. 2008-09 ONLY AND HE NCE ITS APPLICATION IN A.Y. 2007-08 IS INCORRECT. AS FURTHE R HELD BY THE MUMBAI HIGH COURT THE QUANTUM OF DISALLOWANCE U /S. 14A FOR YEARS PRIOR TO A.Y. 2008-09 HAS TO BE WORKE D-OUT BY ADOPTING SOME REASONABLE METHOD. SUBSEQUENTLY THE M UMBAI TRIBUNAL, AMONGST OTHERS, IN GODREJ AGROVET LTD. (ITA.NO.1629/MUM/2009 ORDER DATED 17.09.2010) AND RELIANCE INDUSTRIAL INFRASTRUCTURE LTD. VS. ACIT (I TA.NO. 69 & 70/MUM/2009 DATED 5 TH APRIL, 2013) HAS HELD THAT 2% OF EXEMPT INCOME BEING A REASONABLE DISALLOWANCE. WE A LSO POINT OUT THE SAME RATIO HAS BEEN ADOPTED BY THE MA DRAS HIGH COURT IN SIMPSON & CO. (TC(A) NO. 2621 OF 2006 DATED 15.10.2012). WE, THEREFORE, DIRECT THE A.O. TO DISA LLOW 2% OF THE ASSESSEES EXEMPT INCOME UNDER SECTION 14A. 23. FOR THE ASSESSMENT YEAR 2008-2009 (ITA.NO.338/HYD/2012) THE FACTS ARE MUTANDIS MUTANDIS TO THAT OF ASSESSMENT YEAR 2007-2008 BEARING ITA.NO.767/HYD/2011 AND THE CONCLUSIONS DRAWN IN ITA.NO.767/HYD/2011 SHALL HOLD GOOD FOR THIS YEAR A LSO ON THE ISSUE OF DISALLOWANCE OF LOSS. 24. REGARDING DISALLOWANCE UNDER SECTION 14A THE LEARNED CIT(A) HELD AS FOLLOWS : I HAVE CAREFULLY CONSIDERED SUCH SUBMISSIONS OF THE LEARNED A.R. HOWEVER, ON DUE CONSIDERATION OF THE FACTS OF THE CASE, I DO NOT AGREE WITH SUCH CONTENTION OF THE LEARNED A.R. 13 ADMITTEDLY, THE APPELLANT HAS INCURRED EXPENDITURE OF RS.34,36,286/- DURING THE PREVIOUS YEAR. THE SAID AMOUNT IS CLAIMED AS INTERENST ON LOAN, SHOWN UNDER FINANCE CHARGES. SUCH AMOUNT IS SHOWN UNDER SCHEDULE-15 TO THE P & L ACCOUNT. IT MAY BE MENTIONED HERE THAT, THE APPELLANT HAS CLAIMED SIMILAR INTEREST FOR THE A.Y. 2007-08. FOR THAT ASSESSMENT YEAR, THE ASSESSING OFFICER HAS MADE DISALLOWANCE OF RS.4,11,413/- U/S. 14A OF THE ACT AND THE SAME WAS UPHELD BY THE CIT(A), VIJAYAWADA, VIDE HIS SAID ORDER DATED 28.02.2011. HAVING REGARD TO SUCH FACTS IN THE CASE OF THE APPELLANT AND WHEN THE A.O. HAS MADE SUCH DISALLOWANCE OF RS.5,21,768/-, AS PER RULE 8D OF THE INCOME TAX RULES, 1962, SUCH DISALLOWANCE MADE BY HIM IS JUSTIFIED. HENCE, THE SAID DISALLOWANCE OF RS.5,21,768/- MADE IN THIS CASE IS UPHELD. 25. THE LEARNED COUNSEL SUBMITTED WITH RESPECT TO SHARE CAPITAL, RESERVES AND SURPLUS AND SECURED LOA NS AND SOURCES AND FUNDS AND PAGE 83 SCHEDULE-3, THE LEARN ED COUNSEL FOR THE ASSESSEE POINTED OUT TO PAGE 81 SCH EDULE-3 WHEREIN LOAN HAS BEEN TAKEN AGAINST THE FIXED DEPOS ITS. 26. IN THE CASE OF TVS INVESTMENTS LTD. CHENNAI VS . ACIT, COMPANY CIRCLE, CHENNAI THE CO-ORDINATE BENCH OF THE MADRAS BENCH IN ITA.NO.1609/MDS/2012 DATED 29.01.20 13 HAS HELD AS FOLLOWS: 14 41. FROM THE ABOVE DISCUSSION, IT IS CLEAR THAT, IN EFF ECT, THE PROVISIONSOFSUB-SECTIONS(2)AND(3)OFSECTION 14AWOULDBEWORKABLE ONLYWITHEFFECTFROMTHEDATEOFINTRODUCTIONOFR ULE8D.THISISSO BECAUSEPRIORTOTHATDATE,THEREWASNOPRESCRIBED METHODANDSUB- SECTIONS(2)AND(3)OFSECTION14AREMAINEDUNWORK ABLE . HOWISSECTION14ATOBEWORKEDFORTHEPERIODPRIO RTOTHEINTRODUCTIONOF RULE8D? 42. SUB-SECTION(2)OFSECTION14A,ASWEHAVESEE N,STIPULATESTHATTHE ASSESSING OFFICER SHALL DETERMINE THE AMOUNT OF EXP ENDITURE INCURRED IN RELATIONTOINCOMEWHICHDOESNOTFORMPARTOFTHE TOTALINCOME'INACCORDANCE WITHSUCHMETHODASMAYBEPRESCRIBED'.OFCOURSE, THISDETERMINATIONCAN ONLY BE UNDERTAKEN IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESSOFTHECLAIMOFTHEASSESSEEINRESPECT OFSUCHEXPENDITURE.THIS PARTOFSECTION14A(2)WHICHEXPLICITLYREQUIRESTH EFULFILLMENTOFACONDITION PRECEDENTISALSOIMPLICITINSECTION14A(1)[ASIT NOWSTANDS]ASALSOINITS INITIALAVATARASSECTION14A.ITISONLYTHEPRESC RIPTIONWITHREGARDTOTHE METHODOFDETERMININGSUCHEXPENDITUREWHICHISNEW ANDWHICHWILLOPERATE PROSPECTIVELY.INOTHERWORDS,SECTION14A,EVENPR IORTOTHEINTRODUCTIONOF SUB-SECTIONS(2)&(3)WOULDREQUIRETHEASSESSING OFFICERTOFIRSTREJECTTHE CLAIMOFTHEASSESSEEWITHREGARDTOTHEEXTENTOF SUCHEXPENDITUREANDSUCH REJECTIONMUSTBEFORDISCLOSEDCOGENTREASONS.IT ISTHENTHATTHEQUESTIONOF DETERMINATIONOFSUCHEXPENDITUREBYTHEASSESSING OFFICERWOULDARISE.THE REQUIREMENTOFADOPTINGASPECIFICMETHODOFDETERM ININGSUCHEXPENDITURE HASBEENINTRODUCEDBYVIRTUEOFSUBSECTION(2)OF SECTION14A.PRIORTOTHAT, THEASSESSINGWASFREETOADOPTANY REASONABLEANDACCEPTABLEMETHOD. 43. THUS,THEFACTTHATWEHAVEHELDTHATSUB-SECT IONS(2)&(3)OFSECTION 14AANDRULE8DWOULDOPERATEPROSPECTIVELY(AND,N OTRETROSPECTIVELY)DOES NOT MEAN THAT THE ASSESSING OFFICER IS NOT TO SATIS FY HIMSELF WITH THE CORRECTNESSOFTHECLAIMOFTHEASSESSEEWITHREGAR DTOSUCHEXPENDITURE.IFHE IS SATISFIED THAT THE ASSESSEE HAS CORRECTLY REFLEC TED THE AMOUNT OF SUCH EXPENDITURE,HEHASTODONOTHINGFURTHER.ONTHEO THERHAND,IFHEISSATISFIED ONANOBJECTIVEANALYSISANDFORCOGENTREASONSTHA TTHEAMOUNTOFSUCH EXPENDITURE AS CLAIMED BY THE ASSESSEE IS NOT CORRE CT, HE IS REQUIRED TO DETERMINETHEAMOUNTOFSUCHEXPENDITUREONTHEBAS ISOFAREASONABLEAND ACCEPTABLEMETHODOFAPPORTIONMENT.ITWOULDBEAPP ROPRIATETORECALLTHE WORDSOFTHESUPREMECOURTINWALFORT(SUPRA)TOTH EFOLLOWINGEFFECT:- 'THETHEORYOFAPPORTIONMENTOFEXPENDITUREBETWEEN TAXABLEANDNON- TAXABLEHAS,INPRINCIPLE,BEENNOWWIDENEDUNDERS ECTION14A.' SO,EVENFORTHEPRE-RULE8DPERIOD,WHENEVERTHEI SSUEOFSECTION14AARISES BEFOREANASSESSINGOFFICER,HEHAS,FIRSTOFALL, TOASCERTAINTHECORRECTNESSOF THECLAIMOFTHEASSESSEEINRESPECTOFTHEEXPENDI TUREINCURREDINRELATIONTO 15 INCOMEWHICHDOESNOTFORMPARTOFTHETOTALINCOME UNDERTHESAIDACT.EVEN WHERETHEASSESSEECLAIMSTHATNOEXPENDITUREHASB EENINCURREDINRELATION TOINCOMEWHICHDOESNOTFORMPARTOFTOTALINCOME, THEASSESSINGOFFICERWILL HAVETOVERIFYTHECORRECTNESSOFSUCHCLAIM.INCA SE,THEASSESSINGOFFICERIS SATISFIEDWITHTHECLAIMOFTHEASSESSEEWITHREGAR DTOTHEEXPENDITUREORNO EXPENDITURE,ASTHECASEMAYBE,THEASSESSINGOFFI CERISTOACCEPTTHECLAIM OFTHEASSESSEEINSOFARASTHEQUANTUMOFDISALLOWA NCEUNDERSECTION14AIS CONCERNED.INSUCHEVENTUALITY,THEASSESSINGOFFIC ERCANNOTEMBARKUPONA DETERMINATION OF THE AMOUNT OF EXPENDITURE FOR THE PURPOSES OF SECTION 14A(1).INCASE,THEASSESSINGOFFICERISNOT,ONT HEBASISOFOBJECTIVECRITERIA ANDAFTERGIVINGTHEASSESSEEAREASONABLEOPPORTUN ITY,SATISFIEDWITHTHE CORRECTNESSOFTHECLAIMOFTHEASSESSEE,HESHALL HAVETOREJECTTHECLAIMAND STATETHEREASONSFORDOINGSO.HAVINGDONESO,THE ASSESSINGOFFICERWILLHAVE TODETERMINETHEAMOUNTOFEXPENDITUREINCURREDIN RELATIONTOINCOMEWHICH DOESNOTFORMPARTOFTHETOTALINCOMEUNDERTHESA IDACT.HEISREQUIREDTODO SOONTHEBASISOFAREASONABLEANDACCEPTABLEMETH ODOFAPPORTIONMENT. INTHELIGHTTHEREOF,WEAREALSOOFTHEOPINIONTH ATBOTHTHEAUTHORITIESBELOW HAVEERREDINAPPLYINGSECTION14A(III)READWITHR ULE8D.ATTHESAMETIME, THEHONBLECOURTHASALSOHELDTHATTHEDISALLOWAN CEQUAEXPENDITUREIN EARNINGEXEMPTINCOMECANSTILLBEMADEONREASONA BLEBASIS.ADMITTEDLY, THEASSESSEEHASDECLAREDDIVIDENDINCOMEOFRS.79, 15,087/-ASEXEMPT INCOME.ASPERTHEABOVESAIDJUDICIALPRECEDENT,T HEDISALLOWANCEFOREARNING EXEMPTINCOMEFORTHEACCOUNTINGPERIOD01.04.2007 TO23.03.2008HASTOBE COMPUTEDBYADOPTINGREASONABLEMETHOD.ATTHISSTA GE,WEOBSERVETHATITIS OPENTOUSTOREMITTHEISSUEBACKTOTHEFILEOFT HEASSESSINGOFFICERTO COMPUTETHEDISALLOWANCE.HOWEVER,WITHAVIEWTOE NDTHELITIGATIONBETWEEN BOTHPARTIESASWELLASINTHELARGERINTERESTOFT HEJUSTICE,WETAKETHETASKOF COMPUTINGTHEABOVESAIDDISALLOWANCEINQUESTIONU PONOURSELVESANDBY EXERCISINGJURISDICTIONINTHELIGHTOFLATESTJUDG MENTOFHONBLEJURISDICTIONAL HIGHCOURTINT.C.(A.)NO.2621OF2006TITLEDASM /S.SIMPSONANDCO.LTD. VS.DCITDECIDEDON15.10.2012,WHEREINITHASBEEN HELDASUNDER: THISTAXCASE(APPEAL),FILEDATTHEINSTANCEOFT HEASSESSEE AS AGAINST THE ORDER OF THE INCOME TAX APPELLATE TR IBUNAL FOR THE ASSESSMENTYEAR2001-02,WASADMITTEDONTHEFOLLOW INGSUBSTANTIAL QUESTIONSOFLAW: 16 1.WHETHERONTHEFACTSANDINTHECIRCUMSTANCESO FTHE CASE, THE TRIBUNAL WAS JUSTIFIED IN UPHOLDING THE ESTIMATED DISALLOWANCE OF 2% OF THEEXPENDITURE, AS BEING INCIDENTAL TO EARNING DIVIDEND INCOME, UNDER SECTION14-AOFTHEACTALTHOUGHNOACTUALEXPENDIT URE WASINCURRED? 2.WHETHERONTHEFACTSANDINTHECIRCUMSTANCESOF THE CASE,THETRIBUNALWASJUSTIFIEDINNOTAPPRECIATIN GTHAT AS PER SECTION 14-A ONLY THAT ACTUAL EXPENDITURE INCURREDINRELATIONOINCOMEWHICHDOESNOTFORMP ART OFTOTALINCOMESHALLBEDISALLOWED? 2. LEARNEDCOUNSELAPPEARINGFORTHEASSESSEEASW ELLASLEARNED STANDING COUNSEL APPEARING FOR REVENUE SUBMITS THAT THE ISSUE INVOLVEDINTHISTAXCASE(APPEAL)ISCOVEREDBYA DECISIONOFTHIS COURTDATED08.08.2012INT.C.(A)NO.2287OF2006 INTHECASEOFM/S. EIDPARRY(INDIA)LIMITEDV.THEJOINTCOMMISSIONER OFINCOMETAX, WHEREINTHISCOURTPOINTEDOUTTHATINTHEABSENCE OFANYMATERIALS REGARDING INCURRING OF EXPENDITURE, THE TRIBUNAL WA S JUSTIFIED IN CONFIRMINGTHEORDEROFTHECOMMISSIONEROFINCOME TAX(APPEALS)THAT THE DEDUCTION OF 2% MANAGERIAL EXPENSES HAD TO BE M ADE WHILE CALCULATINGDEDUCTIONUNDERSECTION80M.THUSBEIN GPUREQUESTIONOF FACT,THEREBEINGNOOTHERMATERIALINSUPPORTOFT HECLAIMMADE.THE ORDEROFTHETRIBUNALWASCONFIRMED. 3. APPLYINGTHEREASONINGGIVENINTHEABOVE-SAID DECISIONTOTHE CASEONHAND,WHENTHETRIBUNALPOINTEDOUTTHATTH EASSESSEEHADNOT FURNISHEDTHEDETAILSOFEXPENDITUREINCIDENTALTO THEEARNINGOFDIVIDEND INCOME,ESTIMATIONWASMADEONTHEEXPENDITUREATTR IBUTABLETO DIVIDENDINCOMEAT2%OFTHEGROSSTOTALINCOME.AC CORDINGLY,THISTAX CASE(APPEAL)STANDSDISMISSED.NOCOSTS. 8. INTHELIGHTOFTHEOBSERVATIONSOFTHEHONBLE JURISDICTIONALHIGH COURT, WE HOLD THAT IT WOULD BE REASONABLE AND APPR OPRIATE IF THE DISALLOWANCEISRESTRICTED@2%OFTHEEXEMPTINCOM EASRETURNEDBY THEASSESSEE.ACCORDINGLY,WEDIRECTTHEASSESSING OFFICERTORESTRICT THEDISALLOWANCEINQUESTION@2%OFTHEEXEMPTINC OMEINHAND. 9. THEASSESSEESAPPEALSTANDSPARTLYALLOWED. 17 27. FOLLOWING THE DECISION OF CHENNAI BENCH WE DIRE CT THE ASSESSING OFFICER TO DISALLOW 2% OF THE ASSESSEES EXEMPT INCOME UNDER SECTION 14A FOR ASSESSMENT YEAR 2008-0 9. 28. IN THE RESULT, ITA.NO.767/HYD/2011 AND ITA.NO.338/HYD/2012 OF THE ASSESSEE ARE PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 18.09.2013. SD/- SD/- (CHANDRA POOJARI) (SMT. ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD DATE 18 TH SEPTEMBER, 2013. VBP/- COPY TO 1. TIME CAP PHARMA LABS (P) LTD. NATCO HOUSE ROAD NO .2, BANJARA HILLS, HYDERABAD. PAN AAACT8345C 2. ACIT, CIRCLE 2 (3), HYDERABAD. 3. C OM MISSIONER OF INCOME TAX (APPEALS) , VIJAYAWADA. 4. COMMISSIONER OF INCOME TAX (APPEALS) - III , HYDERABAD 5. CIT - II, HYDERABAD 6. D.R. B BENCH, ITAT, HYDERABAD.