KGK DIAMONDS (I) LTD., MUMBAI V. DCIT, Jaipur

ITA 868/JPR/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1966 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 1 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 28-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VARINDER MEHTA
• Assessee Lawyers: S R SHARMA
• Section: 143(3); 153A; 14A

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S, JAIPUR JH DQY HKKJR] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YA DAV, AM VK;DJ VIHY LA- @ ITA NO. 868/JP/16 FU/KZKJ.K O'K Z @ ASSESSMENT YEAR : 2010-11 M/S KGK DIAMONDS (I) PVT. LTD., DE-4011-16, TOWER D, 4 TH FLOOR, BHARAT DIAMOND BOURSE, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI- 400051, MAHARASHTRA. CUKE VS. THE DY. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2, JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AADCK7579A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT VK;DJ VIHY LA- @ ITA NO. 869/JP/16 FU/KZKJ.K O'K Z @ ASSESSMENT YEAR : 2011-12 M/S KGK DIAMONDS (I) PVT. LTD., DE-4011-16, TOWER D, 4 TH FLOOR, BHARAT DIAMOND BOURSE, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI- 400051, MAHARASHTRA. CUKE VS. THE DY. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2, JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AADCK7579A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RE SPONDENT FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI S.R. SHARMA (C.A.)& SHRI RAJNIKANT BHATRA (C.A.) JKTLO DH VKSJ LS @ REVENUE BY : SHRI VARINDER MEHTA (CIT) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 28/09/2017 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT: 31/10/2017 VKNS'K@ ORDER ITA NO. 868&869/JP/2016 M/S KGK DIAMONDS (I) PVT. LTD. VS. DCIT 2 PER: VIKRAM SINGH YADAV, A.M. THESE ARE TWO APPEALS FILED BY THE ASSESSEE AGAINS T THE ORDER OF LD. CIT(A)-4, JAIPUR DATED 15.07.2016 FOR A.Y. 2010 -11 & 2011-12 RESPECTIVELY. BOTH THESE APPEALS INVOLVING COMMON I SSUES WERE HEARD TOGETHER AND DISPOSED OFF BY THIS CONSOLIDATED ORDE R. ITA NO. 868/JP/16 2. IN ITS APPEAL FOR AY 2010-11, THE ASSESSEE HAS T AKEN THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN CONFIRMING DISALLOWANCE UNDER SECTION 14A R.W.R. 8D TO THE EXTENT OF RS. 2,08,456/-. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE INTEREST EXPENSES AS PER RULE 8D WITHOUT APPRECIATING THE FACT THAT THE LEARNED AO HAS NOT R ECORDED HIS SATISFACTION HAVING REGARDS TO ACCOUNTS OF THE APPE LLANT. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN CONFIRMING DISALLOWANCES RS. 65,770/- BEING 10% OF BUSINESS PROMOTION EXPENSES ON ESTIMATION BASIS WITHOUT APPR ECIATING THE FACT THAT THESE EXPENSES WERE INCURRED WHOLLY AND E XCLUSIVELY FOR THE PURPOSE OF BUSINESS. 3. AT THE OUTSET, THE LD. AR SUBMITTED THAT THE ASS ESSEE COMPANY WAS FORMED ON 01.10.2009 BY WAY OF CONVERSION OF PA RTNERSHIP FIRM, ITA NO. 868&869/JP/2016 M/S KGK DIAMONDS (I) PVT. LTD. VS. DCIT 3 KGK ENTERPRISES. THE SAID PARTNERSHIP FIRM FILED IT S RETURN OF INCOME U/S 153A FOR THE PERIOD 01.04.2009 TO 30.09.2009 AND TH E ASSESSEE COMPANY FILED ITS RETURN OF INCOME U/S 153A FOR THE PERIOD 1.10.2009 TO 31.03.2010. BOTH THE ENTITIES WERE SEPARATELY ASS ESSED U/S 143(3) R.W. SECTION 153A. IN THE CASE OF KGK ENTERPRISES FOR A. Y.2010-11, SIMILAR DISALLOWANCE UNDER IDENTICAL SET OF FACTS WAS MADE BY THE AO BY INVOKING SECTION 14A R.W.R. 8D. IT WAS FURTHER SUBM ITTED THAT THE SAID DISALLOWANCE WAS DELETED BY THE TRIBUNAL IN ITA NO. 797/JP/15 DATED 11.08.2016. IT WAS ACCORDINGLY SUBMITTED THAT THE SAME MAY KINDLY BE FOLLOWED AND NECESSARY RELIEF MAY BE PROVIDED TO TH E ASSESSEE COMPANY. 4. IT WAS FURTHER SUBMITTED BY THE LD AR THAT NO DI SALLOWANCE CAN BE MADE WHEN INTEREST FREE FUNDS AVAILABLE WITH THE AS SESSEE COMPANY ARE MUCH HIGHER THAN INVESTMENTS MADE TO EARN EXEMPT IN COME. IN SUPPORT, RELIANCE WAS PLACED ON DECISION OF HONBLE BOMBAY HIGH COURT IN CASE OF RELIANCE UTILITIES & POWER LTD. 313 ITR 340, HONBLE GUJARAT HIGH COURT IN CASE OF CIT VS. GUJARAT NARMADA VALLE Y FERTILIZERS CO. LTD. 221 TAXMAN 479, AND HONBLE BOMBAY HIGH COURT IN C ASE OF CIT VS. HDFC BANK LTD. 366 ITR 505. IT WAS FURTHER SUBMITTED THAT THE SAID INVESTMENTS WERE MADE FOR ACQUIRING CONTROLLING STA KE AND WERE PART OF STRATEGIC INVESTMENTS AND THEY WERE NOT MADE WITH A N INTENTION OF EARNING TAX FREE INCOME. ACCORDINGLY SECTION 14A DO ES NOT APPLY TO SUCH INVESTMENT, IN SUPPORT, RELIANCE WAS PLACED ON DECI SION OF HONBLE DELHI HIGH COURT IN CASE OF CHEMINVEST LTD. V. CIT 378 IT R 33. IT WAS FURTHER SUBMITTED THAT DISALLOWANCE OF INTEREST EXPENDITURE WOULD NOT BE TENABLE WHERE AO FAILED TO ESTABLISH A NEXUS BETWEE N INTEREST BEARING ITA NO. 868&869/JP/2016 M/S KGK DIAMONDS (I) PVT. LTD. VS. DCIT 4 FUNDS AND INVESTMENT MADE. IN SUPPORT, RELIANCE WAS PLACED ON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN CASE O F KARNATAKA STATE INDUSTRIAL & INFRASTRUCTURE DEVELOPMENT CORPORATION LTD. 65 TAXMANN.COM 295. IT WAS FURTHER SUBMITTED THAT NO D EFECT HAS BEEN POINTED OUT BY THE LD. AO IN THE CLAIM OF THE ASSES SEE THAT NO EXPENSES WERE INCURRED FOR THE PURPOSE OF MAKING INVESTMENT. IT WAS FURTHER SUBMITTED THAT THE APPLICATION OF SECTION 14A AND R ULE 8D IS NOT AUTOMATIC AND THE AO HAS TO RECORD HIS OBJECTIVE SA TISFACTION HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE AND IN SUPPO RT, THE LD AR PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN CASE OF GODREJ & BOYCE MANUFACTURING COMPANY LTD. V. DCIT 81 TAXMAN. COM 111. 5. THE LD. DR IS HEARD WHO HAS VEHEMENTLY ARGUED TH E MATTER, TOOK US THROUGH THE FINDINGS OF THE AO AND THE LD CIT(A) AND RELIED ON THE ORDER OF THE SAID AUTHORITIES. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE COMPANY HAS SHOWN INVESTMENT OF RS. 3,37,26,325/- AS ON 31.03.2010 WHICH IS IDENTIC AL TO THE AMOUNT OF INVESTMENT SHOWN BY THE PARTNERSHIP FIRM M/S KGK EN TERPRISES AS ON 30.09.2009. THE ASSESSING OFFICER DISALLOWED AN AMO UNT OF RS. 6,13,432 INVOKING PROVISIONS OF SECTION 14A AND RULE 8D. ON APPEAL, THE DISALLOWANCE WAS REDUCED TO RS. 2,08,456/- BY T HE LD. CIT(A) WHEREBY HE ALLOWED SETTING OFF OF INTEREST INCOME FROM GROSS INTEREST EXPENSES WHILE WORK OUT DISALLOWANCE U/S 14A. WE FI ND THAT NO FRESH INVESTMENTS HAVE BEEN MADE BY THE ASSESSEE COMPANY DURING THE YEAR AND THE SUBJECT INVESTMENTS ARE THE INVESTMENTS WHI CH HAVE BEEN ITA NO. 868&869/JP/2016 M/S KGK DIAMONDS (I) PVT. LTD. VS. DCIT 5 MADE BY AND TAKEN OVER FROM THE PARTNERSHIP FIRM M/ S KGK ENTERPRISES. ON SIMILAR LINES, THE AO HAS MADE A DISALLOWANCE IN THE INSTANT CASE. IN CASE OF KGK ENTERPRISES FOR AY 2010-11 (IN ITA NO. 797/JP/15 DATED 11.08.2016), WE HAVE ALREADY TAKEN A VIEW THAT DISA LLOWANCE UNDER THE PROVISIONS OF SECTION 14A ARE NOT WARRANTED AND THE RELEVANT FINDINGS ARE CONTAINED AT PARA 2.4 OF OUR ORDER WHICH IS REP RODUCED AS UNDER:- 2.4 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE MATERIAL AVAILABLE ON RECORD. IT IS NOTED THAT THE INVESTMENT WORTH RS. 3.37 CRORES HAVE BEEN MADE BY THE ASSESSEE IN T HE EARLIER YEARS AND NOT IN THE YEAR UNDER CONSIDERATION. EVEN IF ONE WERE TO CONSIDER THE AVAILABILITY OF INTEREST FREE FUNDS DURING THE YEAR, IT IS NOTED THAT PARTNERS CAPITAL ACCOUNT IS WORTH RS. 115.70 CRORES. FURTHER, THE SECURED LOANS AVAILED BY THE A SSESSEE IN FORM OF PACKING CREDIT LIMIT (PCL) AND POST SHIPMENT EXP ORT FINANCE (PSEF) FROM VARIOUS BANK ARE EXCLUSIVELY FOR THE PU RPOSE OF PURCHASE OF RAW MATERIAL, PAYMENT OF LABOUR CHARGES AND OTHER DIRECT EXPENSES AND WHICH THUS HAVE A END-USE RESTR ICTION AND MONITORING BY THE BANKS TOWARDS THE MANUFACTURING A ND EXPORT ACTIVITY OF THE APPELLANT. IN LIGHT OF ABOVE, WE AG REE WITH THE CONTENTION OF THE ASSESSEE THAT GIVING THE AVAILABI LITY OF INTEREST FREE FUNDS OVER AND ABOVE THE SECURED LOANS AND ALS O THE FACT THAT THE SECURED LOANS HAD A SPECIFIC END-USE RESTR ICTION, THE INVESTMENTS HAVE BEEN MADE FROM ITS INTERNAL ACCRUA LS IN THE EARLIER YEARS AND GIVEN THAT NO EXPENDITURE HAS BE EN INCURRED, NO DISALLOWANCE U/S 14A IS WARRANTED. FURTHER, THE DECISION OF HONBLE BOMBAY HIGH COURT IN CASE OF HDFC BANK LTD. (SUPRA) AND HONBLE GUJARAT HIGH COURT IN CASE OF GUJARAT N ARMADA VALLEY FERTILIZERS (SUPRA) ALSO SUPPORTS THE CASE OF THE A SSESSEE. IN LIGHT OF ABOVE, GROUND NO. 1 OF THE ASSESSEE IS ALLOWED. 7. IN LIGHT OF ABOVE, FOLLOWING OUR DECISION IN CA SE OF KGK ENTERPRISES REFERRED SUPRA, THE DISALLOWANCE UNDER SECTION 14A IS ITA NO. 868&869/JP/2016 M/S KGK DIAMONDS (I) PVT. LTD. VS. DCIT 6 HEREBY DELETED. THE GROUNDS NO. 1 AND 2 OF ASSESSEE S APPEAL ARE THUS ALLOWED. 8. REGARDING GROUND NO. 3, THE AO MADE DISALLOWANCE OF RS. 188,366/- BEING 10% OF THE TOTAL EXPENSES OF RS. 80 ,83,644/- INCURRED ON VARIOUS EXPENSES. THE LD. CIT(A) CONFIRMED 10% D ISALLOWANCES OF BUSINESS PROMOTION EXPENSES OF RS. 6,57,689/- AMOUN TING TO RS. 65,770/- AND THE BALANCE DISALLOWANCE WAS DELETED. NOW THE ASSESSEE IN APPEAL AGAINST THE SUSTAIN DISALLOWANCE OF RS. 6 5,770/-. THE LD. AR SUBMITTED THAT THE SAID DISALLOWANCE HAS BEEN CONFI RMED ON ESTIMATED BASIS WITHOUT PINPOINTING ANY SPECIFIC DEFECTS IN T HE BOOKS OF ACCOUNT OR VOUCHERS MAINTAINED BY THE ASSESSEE COMPANY AND HEN CE, THE SAME MAY BE DELETED. ON PERUSAL OF ORDERS OF THE LOWER A UTHORITIES, WE FIND THAT THE DISALLOWANCE HAS BEEN MADE ON A PURELY ADH OC BASIS AND SUCH ADHOC DISALLOWANCE CANNOT BE SUSTAINED IN THE EYES OF LAW. IN THE RESULT, DISALLOWANCE OF RS. 65,770/- IS HEREBY DELE TED. THE GROUND NO. 3 OF THE ASSESSEES APPEAL IS THUS ALLOWED. ITA NO. 869/JP/16 9. IN ITS APPEAL FOR AY 2011-12, THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL:- 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN CONFIRMING DISALLOWANCE UNDER SECTION 14A R.W.R. 8D TO THE EXTENT OF RS. 4,57,407/-. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE INTEREST EXPENSES AS PER RULE 8D WITHOUT ITA NO. 868&869/JP/2016 M/S KGK DIAMONDS (I) PVT. LTD. VS. DCIT 7 APPRECIATING THE FACT THAT THE LEARNED AO HAS NOT R ECORDED HIS SATISFACTION HAVING REGARDS TO ACCOUNTS OF THE APPE LLANT. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN CONFIRMING DISALLOWANCES RS. 65,770/- BEING 10% OF BUSINESS PROMOTION EXPENSES ON ESTIMATION BASIS WITHOUT APPR ECIATING THE FACT THAT THESE EXPENSES WERE INCURRED WHOLLY AND E XCLUSIVELY FOR THE PURPOSE OF BUSINESS. 10. IN RESPECT OF GROUNDS NO. 1 & 2 RELATING TO DIS ALLOWANCE U/S 14A, WE FIND THAT EARLIER INVESTMENT HAVE BEEN CARRIED F ORWARD TO THIS YEAR AND FURTHER, THE ASSESSEE COMPANY HAS MADE A FRESH INVESTMENT OF RS. 2,36,98,875 (RS 5,74,25,200/- LESS RS. 3,37,26,325/ -) DURING THE YEAR UNDER CONSIDERATION. IN THIS REGARD, THE SUBMISSIO N OF THE ASSESSEE IS THAT SUCH INVESTMENT HAS BEEN MADE FROM INTERNAL AC CRUALS AND NOT FROM ANY BORROWED FUNDS AND NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE COMPANY. IN THIS REGARD, THE ASSESSING OFF ICER FOLLOWING THE SAME REASONING AS GIVEN IN A.Y. 2010-11 HAS DISALLO WED AN AMOUNT OF RS. 10,66,010/- WHICH HAS BEEN SUSTAINED BY THE LD. CIT(A) TO THE EXTENT OF RS. 4,57,407/-. SIMILAR CONTENTIONS AS RA ISED IN ITA NO. 868/JP/16 HAVE BEEN MADE BEFORE US BY THE LD. AR. F OLLOWING OUR REASONING AS GIVEN IN ITA NO. 868/JP/16, OUR FINDIN GS AND DIRECTIONS CONTAINED THEREIN SHALL APPLY MUTATIS MUTANDIS TO THIS APPEAL AS WELL. IN THE RESULT, THE DISALLOWANCE UNDER SECTION 14A I S HEREBY DELETED. THE GROUNDS NO. 1 AND 2 OF ASSESSEES APPEAL ARE THUS A LLOWED. 11. REGARDING GROUND NO. 2, THE LD. CIT(A) HAS CONF IRMED THE DISALLOWANCE OF RS. 65,770/- BEING 10% OF THE BUSIN ESS PROMOTION ITA NO. 868&869/JP/2016 M/S KGK DIAMONDS (I) PVT. LTD. VS. DCIT 8 EXPENSES ON AN ESTIMATED BASIS. THE LD. AR SUBMIT TED THAT THE SAID DISALLOWANCE HAS BEEN CONFIRMED ON ESTIMATED BASIS WITHOUT PINPOINTING ANY SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNT OR VOU CHERS MAINTAINED BY THE ASSESSEE COMPANY AND HENCE, THE SAME MAY BE DEL ETED. ON PERUSAL OF ORDERS OF THE LOWER AUTHORITIES, WE FIND THAT THE DISALLOWANCE HAS BEEN MADE ON A PURELY ADHOC BASIS AND SUCH ADHO C DISALLOWANCE CANNOT BE SUSTAINED IN THE EYES OF LAW. IN THE RES ULT, DISALLOWANCE OF RS. 65,770/- IS HEREBY DELETED. THE GROUND NO. 3 OF THE ASSESSEES APPEAL IS THUS ALLOWED. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASSES SEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31/10/2017 SD/- SD/- DQY HKKJR FOE FLAG ;KNO (KUL BHARAT) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 31/10/2017. * SANTOSH. VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S KGK DIAMONDS (I) PVT. LTD., DE- 4011-16, TOWER D, 4 TH FLOOR, BHARAT DIAMOND BOURSE, BANDRA KURLA COMPLEX, BANDRA (EAST), MUMBAI-400051, MAHARA SHTRA. 2. IZR;FKHZ@ THE RESPONDENT- DY. COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE-2, JAIPUR. 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR. 6. XKMZ QKBZY@ GUARD FILE {ITA NO. 868 &869/JP/2016} VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR