PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA 1 V. GUJARAT STATE FERTILIZERS AND CHEMICALS LTD.

TAXAP/99/2019

AI Insights

The case revolves around two main issues concerning the interpretation and application of Section 14A of the Income Tax Act, 1961, and the treatment of losses from the sale of fertilizer bonds. The Principal Commissioner of Income Tax, Vadodara, challenged the Tribunal's decision which had reduced the disallowance of administrative expenses related to tax-exempt income and allowed the treatment of losses from fertilizer bonds as business losses. The High Court referenced a previous decision (Tax Appeal No.900 of 2018) involving the same parties, where similar issues were adjudicated. The court found that the Tribunal's decisions were consistent with the precedents set by the High Court in earlier years, particularly noting the assessee's sufficient interest-free funds which negated the need for disallowance under Section 14A.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 727885 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 18-06-2019
• Assessment Year: misc
• Other Referred Cases: Tax Appeal No.900 of 2018
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: MANISH SHAH
• Assessee Lawyers: VARUN PATEL
• Keywords: Administrative Expenses; Business loss; Capital loss; Disallowance; Income Tax; Fertilizer Bonds
• Section: 14A; 260A

Judgement Text

"C/TAXAP/99/2019 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 99 of 2019 ========================================================== PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA 1 Versus GUJARAT STATE FERTILIZERS AND CHEMICALS LTD. ========================================================== Appearance: MR VARUN K. PATEL(3802) for the Appellant MR MANISH J SHAH for the Respondent ========================================================== CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR.JUSTICE A.C. RAO Date : 18/06/2019 ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1.00. This Tax Appeal under section 260(A) of the Income Tax Act, 1961 (for short “the Act, 1961) is at the instance of the revenue and is directed against the order passed by the Income Tax Appellate Tribunal dated 01/08/2018 in ITA No.1403/Ahd/2014 for the A.Y.2010-11. 2.00. The revenue has proposed the following two substantial questions of law in the Memorandum of the Tax Appeal :- “[A]. Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in restricting the disallowance made u/s.14A of the Act to Rs.15 Lacs from Rs.257.76 lacs on account of administrative Page 1 of 7 C/TAXAP/99/2019 ORDER expenses, without appreciating that once it is held that provisions of Section 14A are attracted the disallowance for administrative expenses is to be derogatorily worked out as per Rule 8D of Income Tax Rules and there is no discretion for making ad-hoc disallowance? [B]. Whether on the facts and in circumstances of the case and in law the Appellate Tribunal was justified in allowing set off of loss incurred on sale of fertilizers bonds at Rs.67,63,10,469/-? treating it as business loss and blatantly ignoring the fact that the fertilizer bonds subscribed to by the assessee falls within the bracket of section 2(14) of the Income Tax Act and thus sale of fertilizer bonds is not allowable as business loss and is to be instead treated as capital loss? 3.00. In the course of the hearing of this Tax Appeal, it was pointed out by the learned counsel appearing for the parties that both the proposed questions are squarely covered by the decision of this Court in Tax Appeal No.900 of 2018 and allied Appeals decided on 31/07/2018. 4.00. We take notice of the fact that Tax Appeal No.900 of 2018 was preferred by the revenue against the very same assessee i.e. Gujarat State Fertilizers and Chemicals Limited. 5.00. So far as the first proposed question is concerned, the very same question was considered by the Co-ordinate Bench in Tax Appeal No.900 of 2018. The findings of the Co- ordinate Bench are as under :- “16. Considering the aforesaid findings and decision of the Division Bench of this Court of Page 2 of 7 C/TAXAP/99/2019 ORDER the very assessee for the Assessment Year : 2004-2005, the Division Bench of this Court in the case of the very assessee has set aside / deleted the similar disallowance made by the Assessing Officer under Section 14A of the Act, the same has been been subsequently followed in the case of the very assessee that in the proceeding years, I.e. 2005-2006 to 2007-2008. The Division Bench of this Court in the aforesaid decision has specifically observed that in a case where the assessee was having sufficient funds available with it, more than amount invested for earning the dividend, the disallowance in respect of interest expenditure under Section 14A of the Act read with Rule 8(d) of the Rules is not permissible. The decision of the Division Bench of this Court in the case of the very assessee for the Assessment Year : 2004-2005 has attained finality. In the present case, it is required to be noted that in the earlier years also more particularly, even in the Assessment Year : 2004-2005, the assessee was also having mixed funds and still considering the fact that the assessee was already having sufficient surplus interest free funds, the Division Bench of this Court has held that the disallowance under Section 14A of the Act is not permissible. At the cost of repetition, it is observed that the said decision has attained finality between the parties. Not Page 3 of 7 C/TAXAP/99/2019 ORDER only that, but the Department has followed the same in the subsequent assessment years also. Considering the aforesaid facts and circumstances, it cannot be said that the Tribunal has committed any error in deleting the disallowance made by the Assessing Officer under Section 14A of the Act. Therefore, the two Tax Appeals No.900/2018 and 901/2018 stands dismissed so far as the proposed question No.2 (a) is concerned. 6.00. So far as the second proposed question is concerned, the same is also covered by the findings recorded by the Co-ordinate Bench in para 17 of its judgement, referred to above. Para 17 reads thus :- “17. Now so far as the proposed question No.2(c) in Tax Appeal No.900/2018, arising out of the impugned order passed in ITA No.339/Ahd/2012 for the Assessment Year : 2008-2009 is concerned, which is with respect to the disallowance of loss of sale of fertilizer bond at Rs.91,45,000/= treating as business loss, while holding so, the learned Tribunal in Paragraph 31, 32 and 33 has observed and held as under :- “31. We have heard the rival contentions and perused the record placed before us. Assessee grievance is against the order of Ld. CIT (A) Page 4 of 7 C/TAXAP/99/2019 ORDER confirming the disallowance of loss of sale of fertilizer bonds at Rs.91,45,000/- treating it as capital loss as against business loss claimed by assessee. We find that the appellant company is engaged in manufacturing of fertilizer. Incentive is provided by the Government of India (GOI) which is based on the quantum of DAP & Urea based fertilizer dispatched. The sale price of fertilizers are fixed by the Government of India and many a times, such price is even lower to the cost of production. Therefore to compensate the manufacturer for the difference between the retention price of individual unit and sale price, subsidy is given by the Government. There is no dispute to the fact on the part of the Revenue authority that the assessee accounts for such subsidy receivable on accrual basis which is credited to the sales account and offered as income. This subsidy account is a running account and the amount receivable at the end of the year is shown as subsidy receivable on the asset side of the balance sheet. It transpires from the records that due to cash crunch Government of India at a certain point of time discharged its dues of paying the subsidy by replacing cash/cheque with the fertilizer bonds. These bonds are saleable in the open market and the prices of such bonds are varying. Page 5 of 7 C/TAXAP/99/2019 ORDER 32. We further find that against the subsidy income duly credited in the profit and loss account, assessee received fertilizer bonds. When these bonds were sold in the open market it fetched less value than the value at which they were given to the assessee. This gave rise to a loss which has been claimed as business loss. 33. It is true that these bonds were shown as investment in the Balance Sheet. Before moving further we would like to go to the judgment of Hon’ble Apex Court in the case of Patnaik and Co. Ltd. Wherein a company subscribed for a Government loan on a promise by the Government that assessee will receive preferential treatment in placing the order for motor vehicles which is turn would be supplied to Government departments. Assessee claimed a certain amount of loss sustained by it on disposing of its subscription and claimed it as business loss. Revenue disallowed treating it as capital loss. Tribunal held it as business loss but Hon’ble High Court took different view confirming the action of the A.O. However, Hon’ble Apex Court held it to be a Revenue loss by observing that there was nothing to show that there is any reason for the assessee to hold on the investment in Page 6 of 7 C/TAXAP/99/2019 ORDER the loan indefinitely. There was no enduring advantage. Thus the investment does not bring in an asset of a capital nature and the loss suffered by the assessee was a Revenue loss.” 7.00. No further deliberations are required in view of the decision of the Co-ordinate Bench, referred to above. This appeal, therefore, fails and is hereby dismissed. Sd/- (J. B. PARDIWALA, J) Sd/- (A. C. RAO, J) RAFIK.. Page 7 of 7 "