DCIT, C-1, Ludhiana V. Vardhman Acrylics Ltd., Ludhiana

ITA 88/CHANDI/2018

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 9212 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2019
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 30-01-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Assessee Lawyers: SUBHASH AGGARWAL
• Keywords: Depreciation; Earning of tax free income; Retrospective amendment; Rule 8D; Set aside
• Section: 14A

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, B, CHANDIGARH , ! '# $ % & '# , () BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ./ ITA NO. 88/CHD/2018 / ASSESSMENT YEAR : 2013-14 THE DCIT, CENTRAL CIRCLE-1, LUDHIANA M/S VARDHMAN ACRYLICS LIMITED, CHANDIGARH ROAD, LUDHIANA ./PAN NO. AAACV7602E / APPELLANT /RESPONDENT & ./ ITA NO. 81/CHD/2018 / ASSESSMENT YEAR : 2009-10 M/S VARDHMAN ACRYLICS LIMITED, CHANDIGARH ROAD, LUDHIANA THE DCIT, CENTRAL CIRCLE - 1, LUDHIANA ./PAN NO. AAACV7602E / APPELLANT /RESPONDENT ! /ASSESSEE BY : SHRI SUBHASH AGGARWAL, ADVOCATE ' ! / REVENUE BY : SH. MANJIT SINGH, SR.DR # $ % /DATE OF HEARING : 01.07.2019 &'() % / DATE OF PRONOUNCEMENT : 03.07.2019 (*/ ORDER PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT ARE THE CROSS APPEALS, ONE BY THE REVEN UE AND OTHER BY THE ASSESSEE, ARISING OUT OF THE ORDER OF THE COMMI SSIONER OF INCOME TAX-1, LUDHIANA [HEREINAFTER REFERRED TO AS CIT(A)] ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 2 2. THE REVENUE IN THIS APPEAL HAS TAKEN THE FOLLOWI NG GROUNDS OF APPEAL :- 1. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) WAS JUSTIFIED IN LAW AND ON FACTS IN DIR ECTING THE AO TO RECALCULATE THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE U/S. 14A OF THE INCOME TAX ACT, 1961 B Y APPLYING THE AMENDED PROVISIONS OF RULE 8D(2)(II) (@ 1% OF THE ANNUAL AVERAGE OF MONTHLY AVERAGE OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVESTMENTS, WHEREAS THE SAME AMENDMENT WAS INTRODUCED W.E.F. 02.06.2016 AND DOES NOT HAVE RETROSPECTIVE EFFECT? 2. WHETHER UPON FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) WAS JUSTIFIED IN LAW AND ON FACTS IN DEL ETING THE ADDITION ON ACCOUNT OF DISALLOWANCE U/S. 36(L)( III) OF THE INCOME TAX ACT? 3. THAT THE ORDER OF THE LD. CIT (A) BE SET ASIDE A ND THAT OF THE ASSESSING OFFICER BE RESTORED. 4. THAT THE APPELLANT CRAVES LEAVE TO ADD OR AMEND ANY GROUND OF APPEAL BEFORE IT IS FINALLY DISPOSED OFF. WHEREAS, THE ASSESSEE IN ITS APPEAL HAS TAKEN THE F OLLOWING GROUNDS OF APPEAL :- 1. THAT THE ORDER PASSED BY THE LD. CIT(A) IS CONTRARY TO LAW AND FACTS OF THE CASE. 2. THAT THE LD. CIT(A) HAS ERRED IN LAW AND ON FA CTS IN UPHOLDING THE APPLICABILITY OF RULE 8D. 3. THAT THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN MAKING DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER RULE 8D(2)(II). ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 3 4. THAT THE LD. CIT(A) ERRED IN LAW AND ON FACT IN ENHANCING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER RULE 8D(2)(III) BY APPLYING AMENDED RULE 8D. 5. THAT THE APPELLANT CRAVES LEAVE TO ADD/ ALTER / AMEND ANY GROUND OF APPEAL ON OR BEFORE THE DUE DATE OF HEARING OF APPEAL. 3. A PERUSAL OF THE ABOVE GROUNDS OF APPEAL TAKEN BY THE ASSESSE E AS WELL AS BY THE REVENUE REVEALS THAT THE FIRST ISSUE RAISED IN BOTH THE APPEALS IS RELATING TO THE ADDITION MADE BY THE ASS ESSING OFFICER ON ACCOUNT OF DISALLOWANCE OF EXPENDITURE U/S 14A READ WITH RULE 8D OF THE I.T. RULES IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE ON INVESTMENTS MADE FOR EARNING OF TAX EXEMPT INCOME. THE SECOND ISSUE IS RELATING TO THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER U/S 36(1)(III) OF THE ACT ON ACCOUNT OF INTEREST EXPEND ITURE INCURRED BY THE ASSESSEE ON THE AFORESAID INVESTMENTS WHICH WERE NO T RELATING TO THE BUSINESS OF THE ASSESSEE. 4. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE DURING THE YEAR HAD MADE HUGE INVESTMENTS AND HAD ALSO EARNED SUBS TANTIAL TAX EXEMPT INCOME. HOWEVER, THE ASSESSEE HAD SUO MOTU DISALL OWED A SUM OF RS. 1 LAC ON ACCOUNT OF EXPENDITURE RELATABLE TO EARNING OF TAX EXEMPT INCOME U/S 14A OF THE ACT. ON BEING ASKED TO EXPLAIN IN THIS RESPECT, THE ASSESSEE PLEADED THAT ASSESSEE WAS HAVING SUFFICIEN T OWN / INTEREST FREE ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 4 FUNDS TO MEET THE INVESTMENT, HENCE, NEITHER ANY DI SALLOWANCE U/S 14A WAS WARRANTED NOR U/S 36(1)(III) OF THE INCOME TAX ACT, 1961. 5. THE LD. ASSESSING OFFICER, HOWEVER, DID NOT GET SATISFIED WITH THE ABOVE SUBMISSIONS OF THE ASSESSEE AND COMPUTED THE DISALLOWANCE U/S 14A OF THE ACT AS PER THE FORMULA PRESCRIBED UNDER RULE 8D OF THE INCOME TAX RULES, 1962 AT RS. 66,51,923. THE ASSES SING OFFICER FURTHER COMPUTED THE DISALLOWANCE U/S 36(1)(III) OF THE ACT @ 12% OF SUCH INVESTMENTS AT RS. 1115 LACS. HE, HOWEVER, OBS ERVED THAT SINCE THE ASSESSEE HAD CLAIMED TOTAL INTEREST EXPENDITURE OF RS. 26,88,000/- ONLY, AGAINST WHICH A DISALLOWANCE OF INTEREST EXPENDITUR E OF RS. 9,61,553/- UNDER RULE 8D(2)(II) OF THE I.T . RULES HAD ALREADY BEEN MADE, HE THEREFORE, RESTRICTED THE DISALLOWANCE U/S 36(1)(II I) OF THE ACT AT RS. 17,26,447/- AND ADDED THE SAME INTO THE INCOME OF T HE ASSESSEE. 6. BEING AGGRIEVED BY THE ABOVE ORDER OF THE ASSE SSING OFFICER, THE ASSESSEE PREFERRED APPEAL BEFORE THE LD. CIT(A) A ND PLEADED THAT THE ASSESSEE WAS POSSESSED OF SUFFICIENT OWN FUNDS TO MEET THE INVESTMENT IN QUESTION, HENCE, NO DISALLOWANCE OF INTEREST EXP ENDITURE WAS ATTRACTED. IT WAS ALSO PLEADED THAT ASSESSEE HAD AL READY SUO MOTU DISALLOWED AS SUM OF RS. 1 LACS ON ACCOUNT OF ADMIN ISTRATIVE EXPENSES UNDER SECTION 14A READ WITH RULE 8D(2)(III) OF THE I.T. RULES, 1962. THE LD. CIT(A) CONSIDERING THE SUBMISSIONS OF THE ASSES SEE AGREED WITH THE ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 5 CONTENTION OF THE ASSESSEE THAT THE INVESTMENTS WER E MADE OUT OF THE MIXED FUNDS OF THE ASSESSEE. HE FURTHER NOTED THAT THE PROVISIONS OF RULE 8D OF THE I.T. RULES STOOD SUBSTITUTED BY 14 TH AMENDMENT IN THE RULES W.E.F. 2.6.2016. THAT AS PER NEWLY AMENDED RU LES, THE DISALLOWANCE OF EXPENDITURE U/S 14A WAS TO BE CALCULATED, FIRSTL Y, OF THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO THE EARING OF TAX EXEMPT INCOME AND FURTHER AN AMOUNT EQUAL TO 1% OF THE ANNUAL AVERAGE OF MONTHLY AVERAGES OF OPENING AND CLOSING BALANCES OF THE VAL UE OF INVESTMENT WAS TO BE TAKEN. HE NOTED THAT THERE WAS NO DIRECT EXPE NDITURE INCURRED BY THE ASSESSEE IN RELATION TO THE INVESTMENTS, INCOME FROM WHICH WAS TAX EXEMPT. HE, ACCORDINGLY DIRECTED THE ASSESSING OFFI CER TO MAKE THE DISALLOWANCE U/S 14A @ 1% OF THE AVERAGE VALUE OF INVESTMENT AS PRESCRIBED UNDER THE SUBSTITUTED RULES W.E.F. 2.6.2 016. SO FAR AS THE DISALLOWANCE OF EXPENDITURE MADE BY THE ASSESSING OFFICER UNDER SECTION 36(1)(III) OF THE ACT WAS CON CERNED, THE LD. CIT(A) NOTED THAT THE ASSESSEE HAD SUFFICIENT INTER EST FREE FUNDS TO COVER THE INVESTMENT. HE, THEREFORE, RELYING UPON THE DEC ISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT E NTERPRISES LTD. VS CIT (ITA NO. 224 OF 2013) DATED 24.7.2015, WHEREIN, I T HAS BEEN HELD THAT IF THERE ARE INTEREST FREE FUNDS AVAILABLE TO MEET THE INVESTMENT, A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OU T OF THE INTEREST ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 6 FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S 36(1 )(III) OF THE ACT. 7. NOW THE ASSESSEE AS WELL AS THE REVENUE HAVE CO ME IN APPEAL BEFORE US. 8. THE ASSESSEE IN ITS APPEAL HAS AGITATED THE ACTI ON OF THE CIT(A) IN DIRECTING THE ASSESSING OFFICER TO MAKE THE DISALLO WANCE U/S 14A @ 1% OF THE AVERAGE VALUE OF INVESTMENT AS PER THE AMEND ED / SUBSTITUTED RULE 8D OF THE I.T. RULES AS AGAINST THE CLAIM OF THE AS SESSEE THAT NO DISALLOWANCE IN THIS CASE IS ATTRACTED U/S 14A OF T HE ACT EXCEPT THE AMOUNT SUO MOTU DISALLOWED BY THE ASSESSEE. ON THE OTHER HAND, THE REVENUE HAS AGITATED THE ACTION OF THE CIT(A) PLEAD ING THAT THE LD. ASSESSING OFFICER HAD RIGHTLY MADE THE DISALLOWANCE U/S 14A AS PER THE RELEVANT PROVISIONS OF RULE 8D OF THE I.T. RULES AS WERE APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. THE REVE NUE IS ALSO AGGRIEVED WITH THE ACTION OF THE CIT(A) IN DELETING THE DISALLOWANCE U/S 36(1)(III) OF THE ACT. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE UN DISPUTED FACTS ON THE FILE ARE THAT THE ASSESSEE HAD DEMONSTRATED BEF ORE THE LOWER AUTHORITIES THAT THE ASSESSEE WAS POSSESSED OF SUFF ICIENT OWN / INTEREST FREE FUNDS TO MEET THE INVESTMENT IN QUESTION. THE LD. COUNSEL FOR THE ASSESSEE HAS ALSO PLACED RELIANCE IN THIS RESPECT O N A CHART PRODUCED ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 7 BEFORE US TO SHOW THAT THE TOTAL INVESTMENT AS ON 3 1.3.2013 WERE AT RS. 13487.26 LACS, WHEREAS, THE TOTAL INVESTMENT AS ON 31.3.2012 WERE AT RS. 8874.21 LACS AND THERE WAS A NET INCREASE IN THE IN VESTMENTS OF THE AMOUNT TO RS. 4613.05 LACS. THE ASSESSEE HAD SHARE CAPITAL, RESERVE AND SURPLUSES OF RS. 41328 LACS AS ON 31.3.2013 AS AGAI NST OF RS. 39353 LACS AS ON 31.3.2012. APART FROM THAT, THE TOTAL INTERES T PAID DURING THE YEAR WAS RS. 26.88 LACS, WHEREAS, THE ASSESSEE DURING TH E YEAR RECEIVED INTEREST OF RS. 708.72 LACS AND, THEREFORE, THE NET INTEREST RECEIVED DURING THE YEAR WAS OF RS. 681.84 LACS. APART FROM THAT, THE INCOME OF THE ASSESSEE FOR THE YEAR AS PER PROFIT & LOSS ACC OUNT WAS AT RS. 3794.95 LACS. THE ASSESSEE ALSO GOT CLAIM OF ADDITIONAL DEP RECIATION AT RS. 1128.93 LACS, THUS, THE TOTAL INCOME OF THE YEAR I NCLUDING DEPRECIATION WAS AT RS. 4923.88 LACS. THE ABOVE FIGURES SHOW THA T THE ASSESSEE WAS POSSESSED OF SUFFICIENT OWN FUNDS TO MEET THE INVES TMENT IN QUESTION. THE ISSUE IS, THUS, COVERED BY THE VARIOUS DECISION S OF THE HON'BLE HIGH COURTS INCLUDING THAT OF THE HON'BLE JURISDICTIONAL HIGH COURT IN BRIGHT ENTERPRISES LTD VS CIT (ITA NO. 224 OF 2013) DATE D 24.7.2015 AND ALSO WITH THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLES (P) LTD VS. CIT (63 TAXMAN 308) / [2015] 3 79 ITR 347 (SC), WHEREIN, IT HAS BEEN HELD THAT IF ASSESSEE HAS OWN FUNDS / INTEREST FREE FUNDS AVAILABLE WITH IT TO MAKE INVESTMENT, THE PRE SUMPTION WILL BE THAT INVESTMENT MADE BY THE ASSESSEE IS OUT OF OWN FUNDS . THE ISSUE IS ALSO SQUARELY COVERED BY THE RECENT DECISION OF THE HON 'BLE SUPREME COURT ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 8 IN CIT (LTU) VS. RELIANCE INDUSTRIES LTD. [2010] 410 ITR 466 (SC). IN VIEW OF THE ABOVE, NO DISALLOWANCE OUT OF INTERE ST EXPENDITURE IS WARRANTED U/S 14A OF THE INCOME TAX ACT. 10. SO FAR AS THE APPLICATION OF THE SUBSTITUTED PROVISIONS OF RULE 8 D W.E.F. 6.2.2016 BY THE LD. CIT(A) IS CONCERNED, TH E ISSUE HAS BEEN SETTLED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. ESSAR TELEHOLDINGS LTD., [2018] 90 TAXMANN.COM 2 (SC),WHE REIN, IT HAS BEEN HELD THAT THE AMENDED RULE 8D OF THE I.T.RULES IS A PPLICABLE PROSPECTIVELY. 11. SO FAR AS THE DISALLOWANCE OF ADMINISTRATIVE E XPENDITURE INCURRED FOR MAKING THE INVESTMENT IS CONCERNED, WE FIND THA T ASSESSEE DURING THE YEAR HAD MADE INVESTMENT IN FOUR COMPANIES. THE RES T OF THE INVESTMENTS WERE OLD INVESTMENTS. THERE IS NO CHUR NING OF THE PORTFOLIOS OR TO SAY REPETITIVE INVESTMENTS. THE A SSESSEE SUO MOTU HAS DISALLOWED A SUM OF RS. 1 LACS IN THIS RESPECT. THE ASSESSING OFFICER HAS NOT RECORDED HIS SATISFACTION THAT HOW THE SUO MOTU DISALLOWANCE OF RS. 1 LAC MADE BY THE ASSESSEE ON ACCOUNT OF ADMINISTRA TIVE EXPENDITURE WAS NOT JUSTIFIED OR CORRECT VIS-A-VIS THE ACCOUNTS OF THE ASSESSEE AND THE INVESTMENT MADE. IN VIEW OF THIS, WE DO NOT FIND A NY JUSTIFICATION ON THE PART OF THE ASSESSING OFFICER IN ENHANCING THE SUO MOTU DISALLOWANCE MADE BY THE ASSESSING OFFICER ON THIS ISSUE. ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 9 12. IN VIEW OF THIS, WE RESTRICT THE DISALLOWANCE U /S 14A OF THE ACT IN THIS CASE TO THE EXTENT OF SUO MOTU DISALLOWANCE M ADE BY THE ASSESSEE OF RS. ONE LAC. SO FAR AS THE VALIDLY OF DISALLOWA NCE U/S 36(1)(III) OF THE ACT IS CONCERNED, AS DISCUSSED ABOVE, SINCE OWN FUNDS OF THE ASSESSEE WERE SUFFICIENT TO MEET THE INVESTMENT AND AS PER PROPOSITION OF LAW LAID DOWN BY THE VARIOUS HIGH COURTS AS WELL AS OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT (LTU) VS. RELIANC E INDUSTRIES LTD (SUPRA) NO DISALLOWANCE IS ATTRACTED U/S 36(1)(II I) OF THE ACT. THE ORDER OF CIT(A) ON THIS ISSUE IS UPHELD. IN VIEW OF THE DISCUSSION MADE ABOVE, THE APPEAL O F THE ASSESSEE IS TREATED AS ALLOWED, WHEREAS, THE APPEAL OF THE R EVENUE VIS--VIS GROUND NO.1 IS TREATED AS ALLOWED AND IN RESPECT O F OTHER GROUNDS IS TREATED AS DISMISSED WITH THE OBSERVATIONS THAT THE IMPUGNED DISALLOWANCES / ADDITIONS MADE BY THE ASSESSING OFF ICER ARE ORDERED TO BE DELETED. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWE D, WHEREAS, THE APPEAL OF THE REVENUE IS TREATED AS PARTLY ALLOWED IN THE TERMS AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 03.07.2019 SD/- SD/- ( $ % & '# / ANNAPURNA GUPTA) () / ACCOUNTANT MEMBER ( / SANJAY GARG) / JUDICIAL MEMBER DATED : 03.07.2019 .. ITA NOS. 88 & 81-C-2018- M/S VARDHMAN ACRYLICS LTD., LUDHIANA 10 '+ ,- .- / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. # / / CIT 4. # / ( )/ THE CIT(A) 5. -01 2 , % 2 , 34516 / DR, ITAT, CHANDIGARH 6. 15 7$ / GUARD FILE '+ # / BY ORDER, 8 ' / ASSISTANT REGISTRAR