ACIT, Ludhiana V. M/s Fitex Industries Ltd., Ludhiana

ITA 817/CHANDI/2014

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8728 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-01-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 29-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Keywords: Capital asset; Earning of tax free income; Proportionate interest; Cost of acquisition; Notional interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R.SOOD, ACCOUNTANT MEMBER ITA NO. 817/CHD/2014 ASSESSMENT YEAR: 2008-09 THE ACIT, V M/S FITEX INDUSTRIES LTD., CIRCLE V, INDUSTRIAL AREA-C, LUDHIANA. LUDHIANA. PAN: AAACF2772P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MANJIT SINGH , DR RESPONDENT BY : NONE DATE OF HEARING : 13.01.2015 DATE OF PRONOUNCEMENT : 21.01.2015 O R D E R PER BHAVNESH SAINI,JM THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ORDE R OF LD. CIT(APPEALS)-II LUDHIANA DATED 16.07.2014 FOR ASSES SMENT YEAR 2008-09. 2. WE HAVE HEARD LD. DR AND PERUSED THE FINDINGS OF THE AUTHORITIES BELOW. HOWEVER, NONE APPEARED ON BEHAL F OF THE ASSESSEE DESPITE SERVICE OF THE NOTICE. THE ASSESS EE IS, THEREFORE, PROCEEDED EX-PARTE. 3. ON GROUND NO.1, REVENUE CHALLENGED THE DELETION OF ADDITION OF RS. 8,89,585/- MADE BY ASSESSING OFFICE R UNDER SECTION 14A OF THE INCOME TAX ACT. BRIEFLY, THE FA CTS ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING 2 OFFICER NOTED THAT ASSESSEE HAD SHOWN INVESTMENTS I N HIS BALANCE SHEET, INCOME FROM WHICH DID NOT FORM PART OF THE TOTAL INCOME. THE ASSESSEE HAD, DURING THE YEAR CLAIMED INTEREST EXPENDITURE OF RS. 1.99 CR. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY EXPENDITURE INCURRED IN REL ATION TO EARNING OF EXEMPT INCOME MAY NOT BE DISALLOWED UNDE R SECTION 14A OF THE INCOME TAX ACT. THE ASSESSEE SUBMITTED THAT THERE WERE NO NEXUS BETWEEN THE INVESTMENTS MADE AND THE BORROWED FUNDS. FURTHER, THERE WERE NO EXEMPT INCOME EARNED BY THE ASSESSEE. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND MADE THE DISALLOWAN CE OF RS. 8,89,585/- UNDER SECTION 14A OF THE ACT. 4. THE ASSESSEE CHALLENGED THE ADDITION BEFORE LD. CIT(APPEALS) AND WRITTEN SUBMISSION WAS FILED WHICH IS REPRODUCED IN THE APPELLATE ORDER IN WHICH THE ASSE SSEE HIGHLIGHTED THAT INVESTMENTS WERE MADE IN SHARES OF VARIOUS COMPANIES IN THE YEAR 1998-99 TO 2005-06. DURING T HESE YEARS, ASSESSEE COMPANY WAS HAVING ITS OWN INTEREST FREE F UNDS OUT OF WHICH INVESTMENTS IN SHARES WERE MADE. SIMILARLY, I T WAS EXPLAINED THAT DURING THE YEAR 2005-06, OUT OF BORR OWED FUNDS OF RS. 14.67 CR, FUNDS WORTH RS. 13.52 CR ARE EXCLU SIVELY FOR THE PURPOSE OF EXPORT BUSINESS OF THE ASSESSEE IN THE S HAPE OF PACKING CREDIT LIMITS AND PURCHASE OF EXPORT SALE B ILLS AND ON ACCOUNT OF LETTER OF CREDIT OPENED BY THE BANK. BA LANCE SHEETS IN RESPECT OF THE SAME WERE FILED. IT WAS, THEREFO RE, SUBMITTED THAT NO INTEREST BEARING FUNDS WERE USED BY THE ASS ESSEE FOR THE INVESTMENTS IN SHARES IN ANY COMPANY AND ONLY OWN F UNDS HAVE BEEN USED FOR THE PURPOSE OF INVESTMENT. THERE IS NO NEXUS OF 3 INVESTMENT IN SHARES AND BORROWED FUNDS. IT WAS AL SO SUBMITTED THAT MAJOR PORTION OF THE INTEREST OF RS. 1.99 CR W AS PAID TOWARDS THE COST OF INTEREST ON EXPORT PACKING CRED IT LIMIT AND EXPORT BILL PURCHASE COST WHICH IS HAVING DIRECT NE XUS WITH THE FUNDING OF THE EXPORT ACTIVITY OF THE ASSESSEE. IT WAS REITERATED THAT NO EXEMPT INCOME WAS EARNED BY ASSESSEE AND NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE FOR T HE SAME. THE ASSESSEE RELIED UPON ORDER OF ITAT, CHANDIGARH BENCH IN THE CASE OF GURDAS MANN VS DCIT DATED 28.09.2012 IN WHI CH IT WAS HELD THAT IN THE ABSENCE OF ANY INCOME EARNED BY AS SESSEE, WHICH IS EXEMPT UNDER THE PROVISIONS OF SECTION 14A OF THE ACT, THERE IS NO MERIT IN DISALLOWANCE OF ANY PART OF EX PENDITURE BEING RELATABLE TO SUCH EXEMPT INCOME WHICH IN THE CASE OF THE ASSESSEE IS NIL. THE ASSESSEE ALSO RELIED UPON D ECISION OF ALLAHABAD HIGH COURT IN THE CASE OF SHIVAM MOTORS I N ITA 88/2014 IN WHICH IT WAS HELD THAT SECTION 14A OUTRI GHTLY DID NOT APPLY WHERE NO TAX FREE INCOME DURING THE YEAR WAS EARNED. THE ASSESSEE ALSO RELIED UPON RECENT DECISION OF THE HO N'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS LAKHANI MARKETING INCL DATED 02.04.2014 IN WHICH IT WAS HELD THAT UNL ESS AND UNTIL THERE IS A RECEIPT OF EXEMPT INCOME FOR CONCERNED A SSESSMENT YEAR, WE ARE OF THE VIEW THAT SECTION 14A OF THE AC T CANNOT BE INVOKED. 5. THE LD. CIT(APPEALS), AFTER EXAMINATION OF THE R ECORD FOUND THAT THERE IS NO EXEMPT INCOME EARNED BY THE ASSESS EE DURING THE YEAR. THEREFORE, ISSUE IS COVERED BY DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF LAKHANI MARKETING INCL.(SUPRA). FOLLOWING THE ABOVE DECISION, ADDITI ON WAS DELETED. 4 6. AFTER HEARING CONTENTION OF THE LD. DR, WE FIND THAT ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGEMENT OF HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF LAKHANI MARKETING INCL. (SUPRA). SINCE ASSESSEE HAS NOT EARNED ANY E XEMPT INCOME DURING THE YEAR UNDER CONSIDERATION AND NO INVESTME NTS HAVE BEEN MADE, THEREFORE, LD. CIT(APPEALS) CORRECTLY DE LETED THE ADDITION. THIS GROUND IS, THEREFORE, DISMISSED. 7. ON GROUND NO. 2, REVENUE CHALLENGED THE DELETIO N OF ADDITION OF RS. 1,80,000/- ON ACCOUNT OF INTEREST U NDER SECTION 36(1)(III) OF THE ACT IN RESPECT OF INTEREST FREE A DVANCE GIVEN BY THE ASSESSEE TO SHRI CHANDER SHEKHAR. THE ASSESSIN G OFFICER NOTED THAT ASSESSEE HAD GIVEN INTEREST FREE ADVANCE S TO MANY PERSONS INCLUDING RS. 15 LACS TO SHRI CHANDER SHEKH AR. THE OTHER ADDITIONS HAVE BEEN MAINTAINED BY LD. CIT(APP EALS). THEREFORE, THE FACTS ARE TAKEN WITH REGARD TO THE I NTEREST FREE ADVANCE GIVEN TO SHRI CHANDIGAR SHEKHAR ONLY. THE ASSESSING OFFICER NOTED THAT ASSESSEE HAD CLAIMED INTEREST EX PENDITURE OF RS. 1.99 CR DURING THE YEAR. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY PROPORTIONATE INTEREST ON M ANY ADVANCES MAY NOT BE DISALLOWED. WITH REGARD TO SHR I CHANDER SHEKHAR, THE ASSESSEE SUBMITTED THAT ADVANCE WAS GI VEN FOR THE PURPOSE OF PURCHASE OF SOME PROPERTY UNDER AN ORAL AGREEMENT. THE DEAL COULD NOT BE MATURED AND THE ADVANCE ALSO COULD NOT BE RECOVERED. IT WAS SUBMITTED THAT SHRI CHANDER S HEKHAR WAS LOOKING AFTER THE EXPORT SALES OF THE ASSESSEE FOR WHICH HE WAS NOT CHARGING ANY COMMISSION. THE ASSESSING OFFICER , HOWEVER, DISALLOWED THE INTEREST ON ADVANCES. THE ASSESSEE REITERATED BEFORE LD. CIT(APPEALS) THAT ADVANCE TO SHRI CHANDE R SHEKHAR 5 WAS GIVEN FOR PURCHASE OF PROPERTY FOR BUSINESS PUR POSES. THE DEAL COULD NOT BE MATURED AND ADVANCE COULD NOT BE RECOVERED DESPITE MANY EFFORTS AND THE AMOUNT IN QUESTION BEC OME IRRECOVERABLE AND WAS WRITTEN OFF AS BAD DEBT IN TH E YEAR 2010-11. THE ASSESSEE RELIED UPON DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT DATED 11.02.2014 IN THE CASE OF CIT-II LUDHIANA VS SURAJ DEV DADA WHEREIN IT WAS H ELD THAT WHERE THE PRINCIPLE AMOUNT WAS ITSELF DOUBTFUL OF R ECOVERY AND RECOVERED AFTER PROLONGED LITIGATION AND WITH THE I NTERVENTION OF INFLUENTIAL PERSON, THE NOTIONAL INTEREST CANNOT BE CHARGED UNDER SECTION 36(1)(III) OF THE ACT. THE LD. CIT(APPEALS) ACCEPTED THE CONTENTION OF THE ASSESSEE. 8. THE ASSESSING OFFICER DID NOT CONTROVERT THE FAC T THAT IN THE ASSESSMENT YEAR 2010-11, THE ADVANCE GIVEN TO SHRI CHANDER SHEKHAR WAS WRITTEN OFF AS A BAD DEBT. IT WAS, THE REFORE, FOUND THAT THE ADVANCE WAS GIVEN TO HIM FOR THE PURPOSE O F BUSINESS. IT WAS, THEREFORE, HELD THAT WHEN PRINCIPLE AMOUNT ITSELF BECOME IRRECOVERABLE, THERE WAS NO QUESTION OF CHARGING IN TEREST ON THE SAME. THE LD. CIT(APPEALS), FOLLOWING THE DECISION OF THE HON'BLE HIGH COURT IN THE CASE OF SURAJ DEV DADA (SUPRA) D ELETED THE ADDITION. 9. AFTER HEARING SUBMISSION OF LD. DR, WE DO NOT FI ND ANY MERIT IN THIS GROUND OF APPEAL OF THE REVENUE. THE CLAIM OF ASSESSEE THAT ADVANCE WAS GIVEN FOR THE PURPOSE OF BUSINESS WAS NOT DISPUTED AND FURTHER, SUCH ADVANCE COULD NOT BE RECOVERED IN FUTURE, THEREFORE IT WAS WRITTEN OFF A S BAD DEB T IN ASSESSMENT YEAR 2010-11. WHEN THE RECOVERY OF THE PRINCIPLE A MOUNT ITSELF WAS IN DOUBT AND BECOME IMPOSSIBLE, THERE WAS NO QU ESTION OF 6 CHARGING ANY INTEREST ON SUCH ADVANCE. THE LD. CIT (APPEALS), ON PROPER APPRECIATION OF THE FACTS AND MATERIAL ON RE CORD, CORRECTLY DELETED THE ADDITION. THIS GROUND IS, THEREFORE, D ISMISSED. 10. ON GROUND NO. 3, REVENUE CHALLENGED THE DELETI ON OF ADDITION OF RS. 3,94,970/- MADE BY ASSESSING OFFICE R ON ACCOUNT OF CAPITALIZATION OF INTEREST ON THE BASIS THAT NO CAPITAL WAS BORROWED SPECIFICALLY FOR CONSTRUCTION OF BUILDING. THE ASSESSING OFFICER NOTED THAT ASSESSEE HAD SHOWN BUI LDING UNDER CONSTRUCTION AMOUNTING TO RS. 34,33,908/-. THE ASS ESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN WHY INTEREST PERTAINING TO THE BUILDING UNDER CONSTRUCTION MAY NOT BE CAPITALI ZED. THE ASSESSEE SUBMITTED THAT NO LOAN HAD BEEN RAISED FOR THE CONSTRUCTION OF BUILDING. THE ASSESSING OFFICER WA S NOT SATISFIED WITH THE CLAIM AND DISALLOWED ABOVE INTEREST. THE ASSESSEE CHALLENGED THE ADDITION BEFORE LD. CIT(APPEALS) AND ITS WRITTEN SUBMISSION IS REPRODUCED IN THE APPELLATE ORDER IN WHICH THE ASSESSEE HIGHLIGHTED THAT ASSESSING OFFICER IGNORED THE FACTS FOR THE PURPOSE OF CREATING ARTIFICIAL DEMAND. IT WAS SUBMITTED THAT PART OF THE EXISTING FACTORY BUILDING IS BEING CONSTRUCTED/RENOVATED AND A SUM OF RS. 34,33,908/- WAS SPENT UPTO YEAR 2007-08. NO LOAN/INTEREST BEARING FUNDS HAVE BEEN OBTAINED BY ASSESSEE COMPANY FOR THE PURPOSE OF CON STRUCTION OF BUILDING. THE BORROWED FUNDS HAVE BEEN USED FOR TH E PURPOSE OF BUSINESS. NO INTEREST BEARING FUNDS HAVE BEEN USED BY THE ASSESSEE FOR CONSTRUCTION OF BUILDING. THEREFORE, ADDITION WAS WHOLLY UNJUSTIFIED. 11. THE LD. CIT(APPEALS) ON ANALYZING THE FACTS FOU ND THAT ASSESSEE HAD MADE INVESTMENT IN CONSTRUCTION OF BUI LDING AND 7 NO INTEREST FREE ADVANCES HAVE BEEN GIVEN BY THE AS SESSEE. NO LOANS HAVE BEEN OBTAINED FOR THE PURPOSE OF ACQUISI TION OF ANY CAPITAL ASSET. NO BORROWED THE FUNDS HAS BEEN USED FOR THE PURPOSE OF CONSTRUCTION OF BUILDING. THE ASSESSING OFFICER HAS NOT SHOWN ANY NEXUS BETWEEN BORROWED FUNDS AND THE INVESTMENT IN CONSTRUCTION OF BUILDING. IT WAS FOU ND THAT NO BORROWED FUNDS HAVE BEEN ADVANCED FOR NON-BUSINESS PURPOSES. THE LD. CIT(APPEALS), THEREFORE, FOUND THAT SINCE N O CAPITAL WAS BORROWED FOR CONSTRUCTION OF BUILDING, THEREFORE, C ONDITIONS OF SECTION 36(1)(III) OF THE ACT ARE NOT SATISFIED AND BY FOLLOWING CERTAIN DECISIONS OF THE TRIBUNAL, DELETED THE ADDI TION. 12. CONSIDERING THE SUBMISSION OF LD. DR IN THE LIG HT OF THE FACTS FOUND BY THE LD. CIT(APPEALS), WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE REVENUE . IT WAS SPEC IFICALLY FOUND THAT ASSESSEE HAS NOT BORROWED ANY FUNDS FOR THE PU RPOSE OF MAKING CONSTRUCTION OF THE FACTORY BUILDING. THERE FORE, THE LD. CIT(APPEALS) WAS JUSTIFIED IN DELETING THE ADDITION . THIS GROUND OF APPEAL IS DISMISSED AND IS DISMISSED. 13. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST JANUARY,2015. SD/- SD/- (T.R.SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 21 ST JANUARY,2015. POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR, ITAT CHANDIGARH