GTN Industries Ltd (formerly GTN Textiles Ltd), Aluva V. DCIT, Aluva

ITA 891/COCH/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 52272 (ITAT-COCHIN)
• Duration Of Justice: 3 year(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 03-10-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 16-10-2008
• Court: TRIBUNAL
• Department Lawyers: S VIJAYAPRABHA
• Assessee Lawyers: RADHESH BHAT
• Keywords: Earning of tax free income
• Section: 143(3); 14A; 115JB; 147; 12; 10; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND SANJAY AROR A, AM I.T.A NO. 891/COCH/2008 ASSESSMENT YEAR: 2002-03 GTN INDUSTRIES LTD., (FORMERLY GTN TEXTILES LTD.) ERUMATHALA, ALUVA. [PAN: AAACG 8605N] VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-1, ALUVA. (ASSESSEE-APPELLANT) (REVENUE-RESPONDENT) ASSESSEE BY SHRI RADHESH BHAT, CA REVENUE BY MS. S. VIJAYAPRABHA, JR.DR DATE OF HEARING 04/10/2011 DATE OF PRONOUNCEMENT 21/10/2011 O R D E R PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE ASSESSEE, CHALLENGING THE ORDER BY THE COMMISSIONER OF INCOME-TAX-II, KOCHI (CIT(A) FOR SHORT) DATED 13. 8.2007 FOR THE ASSESSMENT YEAR (A.Y.) 2002-03. 2. THE APPEAL RAISES ONLY ONE EFFECTIVE GROUND, I.E ., GROUND NO. 2; GROUND NOS. 1 & 3 BEING NOT PRESSED BY THE LD. AR, ITS COUNSEL, BEF ORE US, WITH GROUND NO. 4 BEING ONLY A PRAYER FOR LEAVE TO PLEAD ANY OTHER GROUND AT THE T IME OF HEARING. 3. THE ONLY ISSUE, THEREFORE, UNDER APPEAL IS THE A DDITION IN THE SUM OF ` 1,46,13,080/- EFFECTED BY THE ASSESSING OFFICER (AO) IN COMPUTING THE BOOK PROFIT U/S. 115JB OF THE INCOME-TAX ACT, 1961 ('THE ACT', HEREINAFTER), VIDE ASSESSMENT U/S. 143(3) R/W S. 147 OF THE ACT DATED 06/12/2007, SINCE CONFIRMED VIDE THE IMPUGNED ORDER. THE ADJUSTMENT TO I.T.A. NO. 891/COCH/2008 (ASSTT. YEAR 2002-03) 2 THE ASSESSEES BOOK PROFIT STANDS MADE UNDER CLAUSE (F) OF EXPLANATION (1) TO S. 115JB. THE SAME HAS BEEN CONFIRMED BY THE LD. CIT(A) VIDE PARA 3.2 OF HIS ORDER AS HAVING NO BEARING OR RELEVANCE TO SEC. 14A OF THE ACT, WITH R EFERENCE TO WHICH THE ASSESSEE ARGUED ITS CASE BEFORE HIM, RELYING ON THE DECISION BY THE TRIBUNAL IN ITS OWN CASE AS WELL AS IN THE CASE OF DHANALAKSHMI BANK LTD. VS. ACIT AND FEDERAL BANK LTD. TO THE EFFECT THAT DISALLOWANCE U/S. 14A, BEING NOT PER A METHOD AS PE R THE PROVISIONS OF SUB-SECTION (2) THEREOF, WOULD NOT HOLD. 4.1 BEFORE US, THE LD. AR RELIED ON THE DECIS ION BY THE TRIBUNAL IN ITS OWN CASE FOR A.Y. 2002-03 AND 2004-05 (IN I.T.A. NOS. 35, 36 & 3 7/COCH/2008 DATED 27.2.2009 / ANNEXURE IV/PB PGS. 22-25), FURTHER STATING THAT TH E DISALLOWANCE U/S. 14A IS PARA MATERIA IN-AS-MUCH AS BOTH THE DISALLOWANCES, I.E., U/S. 1 4A AS WELL AS U/S. 115JB, ARE ONLY IN RESPECT OF THE EXPENDITURE PURPORTEDLY INCU RRED BY THE ASSESSEE IN THE EARNING THE TAX-FREE DIVIDEND OF ` 931.16 LAKHS FROM INVESTMENT IN TAX FREE ASSETS AT ` 15,63,63,000/-. 4.2 THE LD. DR, ON THE OTHER HAND, WOULD SUBMIT THA T THE ORDER BY THE TRIBUNAL IS ON A WRONG FOOTING, I.E., THAT THE ISSUE BEFORE IT BEING THE DISALLOWANCE U/S. 115JB (PER ADJUSTMENT UNDER PROVISO TO S. 115JB) AND NOT THE DISALLOWANCE U/S. 14A. ON A QUERY BY THE BENCH IN THIS REGARD, SHE ADVERTED TO THE ASSES SMENT ORDER (DATED 15.3.2006) AS WELL AS THE APPELLATE ORDER (DATED 26.9.2007) FOR THE CU RRENT YEAR, LEADING TO THE APPEAL BEFORE THE APPELLATE TRIBUNAL [ANNEXURE I (PGS. 1 TO 4) AN D III (PGS. 9 TO 21) OF PB]. THE FIRST APPELLATE AUTHORITY, WHOSE ORDER STANDS CONFIRMED B Y THE TRIBUNAL, DECIDED THE ISSUE ON THE BASIS THAT AS THE METHOD ADOPTED BY THE AO WAS NOT AS PRESCRIBED; SEC. 14A(2) COMING INTO EFFECT FROM A LATER DATE, FOLLOWING THE DECISION BY THE TRIBUNAL (COCHIN BENCH) IN THE CASE OF FEDERAL BANK LTD . FOR A.Y. 1999-2000 TO 2001-02 AND 2003-04 (IN I.T.A NOS. 283, 297 & 298/COCH/2004 AND 501/COCH/20 05). THE SAID DECISION IS, THUS, CLEARLY NOT APPLICABLE. EVEN ON RATIO, THE SAID DEC ISION WOULD NOT APPLY; THE PROVISION/S OF S. 115JB BEING ON THE STATUTE BY FINANCE ACT, 2000 W.E.F. 1.4.2001. IN FACT, THE PRESENT PROCEEDINGS WERE INITIATED BY THE AO ON IT COMING T O HIS NOTICE THAT WHILE DISALLOWANCE U/S. 14A STOOD EFFECTED, NO CORRESPONDING ADJUSTMEN TS WAS MADE IN THE COMPUTATION OF I.T.A. NO. 891/COCH/2008 (ASSTT. YEAR 2002-03) 3 BOOK PROFIT U/S. 115JB (REFER ANNEXURE II/PGS. 5 TO 8 OF PB). THE LD. AR CONCEDED TO THIS BEING THE STATE OF AFFAIRS. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 5.1 WE FIRSTLY OBSERVE THAT THE ORDER BY THE TRIB UNAL IN THE ASSESSEES CASE (FOR A.Y. 2002-03) QUA DISALLOWANCE U/S. 14A WOULD NOT BE OF ANY ASSISTAN CE TO THE ASSESSEE. THIS IS AS THE DELETION OF THE DISALLOWANCE WAS FOR THE REASON THAT THERE WAS NO SUCH DISALLOWANCE, BUT ONLY ONE U/S. 115JB; THE RELEVANT PARAGRAPH OF THE TRIBUNALS ORDER READING AS UNDER:- (REFER PARA 6, PGS. 22-23 OF ANN EXURE-IV/PB) 6. NOW, WE DEAL WITH THE REVENUES APPEALS. THE FIRST ISSUE WHICH IS COMMON FOR ALL THE ASST. YEARS IS DISALLOWANCE U/S. 14A OF THE ACT . ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT IT IS NOT ACTU ALLY THE DISALLOWANCE U/S. 14A AS THE COMPUTATION ITSELF SHOWS IN THE ASSESSMENT ORDERS T HAT THE COMPUTATION WAS UNDER THE BOOK PROFIT AS PER SECTION 115JB. AS RIGHTLY CONTE NDED BY THE LEARNED COUNSEL FOR THE ASSESSEE, THIS DISALLOWANCE WAS UNDER 115JB COMPUTA TION AND IT IS NOT UNDER NORMAL COMPUTATION SO AS TO INVOKE SECTION 14A. THIS POIN T COULD NOT BE CONTROVERTED BY THE LD. SR. DR AND UNDER THE ABOVE FACTS AND CIRCUMSTANCES, WE AGREE WITH THE FINDINGS OF THE AUTHORITIES BELOW ON THIS ISSUE. WE, ACCORDINGLY, REJECT THE GROUND THAT DISALLOWANCE U/S. 14A IS JUSTIFIED IN THIS CASE. FURTHER, THE ASSESSE E HAS ALSO PROVED THAT THE ASSESSEE IS HAVING SUFFICIENT FUNDS WHICH ARE INTEREST-FREE. U NDER THE ABOVE CIRCUMSTANCES, WE HOLD THAT THIS DISALLOWANCE IS NOT JUSTIFIED. THERE IS AS SUCH NO FINDING QUA DISALLOWANCE U/S. 115JB BY THE TRIBUNAL, AND WHICH IS THE SUBJECT MATTER OF THE INSTANT APPEAL. ALL T HE OTHER DECISIONS BY THE TRIBUNAL RELIED UPON BY ASSESEE ARE ALSO IN CONTEXT OF SEC. 14A. WE TAKE PAINS TO DRAW THIS DISTINCTION AS THE PROVISIONS OF S. 14A(1) AND CLAUSE (F) TO EXPLANATION 1 TO S. 115JB ARE PARA MATERIA , SO THAT THE DELETION OF THE DISALLOWANCE EFFECTED U NDER ONE PROVISION, THE MATTER BEING FACTUAL, WOULD AMOUNT OR LEAD TO CORRESPONDING DISA LLOWANCE UNDER THE OTHER SECTION/PROVISION AS WELL. THE APEX COURT IN THE CA SE OF AJANTA PHARMA LTD. V. CIT (2010) 327 ITR 305 (SC) HAS CLARIFIED THAT THE PROVISIONS OF XII-B OF THE ACT CONTAIN A SELF CONTAINED CODE FOR THE COMPUTATION OF BOOK PROFIT, SO THAT THERE COULD BE NO VESTIGE OF DOUBT IN THE MATTER. I.T.A. NO. 891/COCH/2008 (ASSTT. YEAR 2002-03) 4 5.2 COMING, NEXT, TO THE ISSUE ON MERITS, SECTION 1 15JB, AS IT STOOD AT THE RELEVANT TIME, INSOFAR AS IS RELEVANT FOR OUR PURPOSE, READS AS UNDER:- ` EXPLANATION 1- FOR THE PURPOSE OF THIS SECTION, BO OK PROFIT MEANS THE NET PROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVA NT PREVIOUS YEAR PREPARED UNDER SUB- SECTION (2), AS INCREASED BY - (A) (B) .; OR (F) THE AMOUNT OR AMOUNTS OF EXPENDITURE RELATABLE TO ANY INCOME TO WHICH S. 10 OR S.10A OR S.10B OR S. 11 OR S. 12 APPLY; O R 5.3 THE FACTS IN SO FAR AS ARE RELEVANT, AS GATH ERED FROM THE RECORDS, ARE THAT THE ASSESSEES BALANCE SHEET BEARS AN INVESTMENT OF ` 1563.63 LAKHS IN EQUITY SHARES IN PATSPIN INDIA LTD., A SISTER CONCERN, AND ON WHICH IT HAS RECEIVED A DIVIDEND INCOME OF ` 913.63 LAKHS DURING THE CURRENT YEAR, CLAIMED AND A LLOWED AS EXEMPT U/S. 10, BOTH UNDER THE REGULAR PROVISIONS AS WELL AS IN COMPUTATION OF BOOK PROFIT U/S. 115JB OF THE ACT. THE AO MADE THE IMPUGNED DISALLOWANCE SINCE HE HAD ALRE ADY ESTIMATED THE SAME AS BEING INTEREST EXPENSES RELATABLE TO THE SAID INVESTMENT WHICH YIELDS TAX- FREE INCOME, EXEMPT U/S. 10, SO THAT ADJUSTMENT QUA THE SAME TO THE BOOK PROFIT HAS TO BE MADE. THE LD . CIT(A) HAS CONFIRMED THE SAME ON THE GROUND THAT DISALLOWA NCE IS U/S. 115JB AND NOT U/S. 14A, SO THAT THE CASE LAW RELIED UPON WITH REFERENCE TO THE LAW WOULD NOT BE APPLICABLE. IN FACT, EVEN WITH RESPECT TO S. 14A, THE HONBLE JURI SDICTIONAL HIGH COURT HAS SINCE HELD THAT THOUGH S. 14A(2), PRESCRIBING A METHOD TOWARD ESTIM ATION OF DISALLOWANCE U/S. 14A(1) IS NOT RETROSPECTIVE, YET THE SAME DOES NOT OBVIATE OR EXCLUDE APPLICATION OF S. 14A, BROUGHT ON THE STATUTE BY THE FINANCE ACT, 2001, W.R.E.F. 1 .4.1962, SO THAT IT WOULD HOLD FROM 1.4.2002 (I.E., A.Y. 2002-03 ONWARDS); ITS APPLICAT ION FOR EARLIER YEARS BEING LIMITED TO ONLY PENDING MATTERS VIDE PROVISO THERE-TO. AS SUCH, ANY REASONABLE ESTIMATION WOUL D HOLD, ALSO SUGGESTING A REASONABLE FORMULA TOWARD T HE SAME. REFERENCE IN THIS CONTEXT IS MADE TO ITS DECISION IN THE CASE OF CIT V. DHANLAKSHMI BANK LTD . (IN ITA NO. 1324 OF 2009 DATED 21/10/2010). THIS IS, FURTHER, IN AGREEM ENT WITH THE SETTLED LAW THAT THE AO CAN, IN THE ABSENCE OF PRECISE RECORDS, MAKE REASON ABLE ESTIMATION TOWARD ALLOWANCE OR I.T.A. NO. 891/COCH/2008 (ASSTT. YEAR 2002-03) 5 DISALLOWANCE, AS THE CASE MAY BE (REFER, INTER ALIA , CONSOLIDATED COFFEE LTD. V. STATE OF KARNATAKA (2001) 248 ITR 432 (SC)). 5.4 FURTHER ON, THOUGH THE SCOPE OF DISALLO WANCE U/S. 115JB IS THE RELATABLE EXPENSES AS DEBITED TO THE P&L ACCOUNT, THAT U/S. 14A (OR S. 36(1)(III)) DISALLOWANCE IS AS THAT INCURRED BY THE ASSESSEE. WHEN THE SAME IS DEBITED TO THE P&L ACCOUNT, WITH THE ENTIRE TAX EXEMPT INCOME CREDITED TO THE SAID ACCOUNT, IT IS DIFFICULT TO SEE AS TO HOW AN ESTIMATION UNDER ONE WOULD NOT HOLD OR BE VALID FOR THE OTHER. SO, HOWEVER, TOWARDS THIS, WE FIND THAT THE AO, WHO HAS ESTIMATED THE INTEREST EXPENDITURE ON THE BASIS OF THE PROPORTIONATE INVESTMENT, HAS CONSIDERED THE ENTIRE INVESTMENT IN SHARES AS FUNDED FROM INTEREST-BEARING BORROWED CAPITAL, I.E., ON PROPORT IONATE BASIS. THOUGH THE ASSESSEE HAS NOT IMPUGNED THE SAME, THE ASSESSEE HAS, WITHOUT DO UBT, OWN FUNDS AS WELL, AS BY WAY OF SHARE CAPITAL; IT, RATHER, ALSO EARNING PROFITS FRO M YEAR TO YEAR. THE ASSESSMENT UNDER SUCH CIRCUMSTANCES COULD ONLY BE ON A PRO RATA BASIS; TH E INVESTMENT BEING FROM THE AVAILABLE COMMON POOL OF FUNDS. AGAIN, THIS WOULD ONLY BE FO R AND UP TO THE YEAR IN WHICH THE RELEVANT INVESTMENT HAS BEEN MADE, WHICH, AS IT APP EARS, IS CONSTANT FOR SOME YEARS NOW. IN FACT, IN THE APPELLATE PROCEEDINGS BEFORE THE LD . CIT(A) AGAINST S. 14A DISALLOWANCE, IT WAS CONTENDED THAT INVESTMENT TO THE EXTENT OF ` 650 LAKHS IN THE SHARES (IN PATSPIN INDIA LTD.) CAME FROM THE CAPITAL RAISED THROUGH PUBLIC I SSUE OF EQUITY SHARES DURING 1993-94. THOUGH NO SUCH PLEA STOOD RAISED BEFORE US, THE FA CT IS CERTAINLY RELEVANT. THERE BEING NO MATERIAL BEFORE THE AO AT ANY STAGE, HE IS AT LI BERTY TO VERIFY AND DETERMINE THE FACTS. FURTHER, WHERE THE LOANS STAND APPLIED TO THE SPECI FIC AVENUES OF APPLICATION, I.E., FOR WHICH THESE WERE RAISED, THERE CAN BE NO PRESUMPTIO N AS TO THE DIVERSION OF FUNDS FOR THE AVERAGE FORMULA TO BE APPLY. WITH THESE COMMENTS, W E REST THE MATTER, RESTORING THE ISSUE BACK TO THE FILE OF THE AO FOR FRESH DETERMINATION OF THE FACTS AND ADJUDICATION ON MERITS IN ACCORDANCE WITH LAW, AFTER AFFORDING PROPER OPPO RTUNITY OF HEARING AND PRESENTING OF FACTS TO THE ASSESSEE. WE DECIDE ACCORDINGLY. I.T.A. NO. 891/COCH/2008 (ASSTT. YEAR 2002-03) 6 6. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. SD/- SD/- (N.R.S.GANESAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 21ST OCTOBER, 2011 GJ COPY TO: 1. GTN INDUSTRIES LTD., (FORMERLY GTN TEXTILES LTD. ), ERUMATHALA, ALUVA. 2. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, ALUVA. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-II, KOC HI. 4. THE COMMISSIONER OF INCOME-TAX, KOCHI. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE .