Income Tax Appellate Tribunal - Chandigarh
Hero Cycles Ltd.,, Ludhiana vs Department Of Income Tax on 14 November, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'B' CHANDIGARH
BEFORE Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER
ITA No. 467/CHD/2009
Assessment Year: 2006-07
DCIT, Circle-V V M/s Hero Cycles Ltd.,
Ludhiana . Hero Nagar, GT Road,
Ludhiana.
PAN: ABXPS-6706K
(Appellant) (Respondent)
Department by: Shri S.K.Mittal
Assessee by : None
Date of Hearing : 14.11.2011
Date of Pronouncement : 24.11.2011
ORDER
PER MEHAR SINGH, AM
The present appeal filed by the Revenue is against the order dated 24.02.2009 passed by the ld. CI T(A) u/s 250(6) of the Income-tax Act,1961 (in short 'the Act').
2. In this appeal, the Revenue has raised the following Grounds of Appeal:
"1. The ld. CIT(A)-II Ludhiana has erred in la w and on f acts in deleting the addition of Rs.2,78,97,243/- made by the AO on account of disallo wance made u/s 14A of the Income-tax Act,1961 being expenses incurred f or earning dividend income claimed exempt u/s 10(34) & 10(35) by the assessee.
2. That the appell ant craves leave to add or amend any ground of appeal before it is f inally disposed off."2
3. Ld. 'DR' placed reliance on the order of the AO.
4. The brief facts as culled out from the relevant records are that the assessee earned dividend income of Rs.48,13,78,855/-. The dividend income from mutual fund as per return of income was disclosed at Rs.7,16,42,275/- and dividend income from shares at Rs.40,97,36,580/-. Such income was claimed as exempt by the assessee appellant u/s 10(34) and 10(35) of the Act respectively. The AO considered the submissions filed by the assessee in this regard as the assessee furnished various statements before the AO regarding the query for disallowance of interest u/s 14A in respect of investment on which the exempt income was earned. The AO, however, discussed as to how the long term investments of the appellant changed from 31.3.2005 to 31.3.2006. These details are reproduced on page 10 and 11 of the assessment order. On the other hand, the appellant was found to have paid interest of Rs.9,67,03,894/- on various borrowings discussed on page 11 of the assessment order. Interest paid on short term deposits being short term debentures arranged for working capital through MIBOR was found to be Rs.81,46,067/-. The AO referred to the language of the provisions of Section 14A of the Act which has been introduced by the Finance Act 2001 w.e.f. 1.4.1962. The AO observed that the additional investments of Rs.77,66,47,556/- have been financed by the appellant from own funds as well as funds borrowed from Banks, Managing Directors as well as others. She noted that even the old investments could not be said to 3 have been made entirely from internal accruals. As per her, the appellant could not claim that no investment had been made in the shares and mutual funds out of its borrowed funds of more than Rs.156 crores. She referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of M/s Abhishek Industries Ltd. in I TA No. 110 of 2005. She observed that in view of the said judgement it was evident that the appellant had borrowed certain funds on which liability to pay interest was being incurred and on the other hand, certain amounts had been invested in earning tax free dividend income, therefore, a part of the interest liability would be on account of investments made for earning the tax free dividend income. She, therefore, concluded that it was established that the appellant had invested part of the borrowed funds for earning the dividend income. In view of the massive turnover of the appellant and its complicated flow of funds, she however noted that it was difficult to identify as to which funds had been used for what purposes. Therefore, the entire amount of appellant's Share Capital, Reserves & Surplus as well as its borrowed funds of Rs.5,83,66,98,226/- were treated by her as a common pool from which investments had been made amounting to Rs.2,25,40,99,775/-. During the relevant period the interest paid of Rs.10,49,30,271/- was apportioned by her in the ratio of investments to the total funds of the appellant as follows :
I nt er e st p ai d at t r i b u t a bl e = 9, 6 7, 0 3, 8 9 4 x 2, 2 6, 7 3, 0 4, 0 0 1 t o ear nin g of div i d en d i nc o m e 7, 8 5, 9 4, 5 5, 0 4 2 = 2, 7 8, 9 7, 2 4 3 /-4
5. The AO, therefore, held the interest paid at Rs.2,78,97,243/- to be expenses incurred for earning the dividend income of Rs.48,13,78,855/- and which was to be disallowed u/s 14A of the Act. The Addl.CIT, therefore, considered the net dividend income i.e. Rs.45,34,81,612/-
(481378855-27897243) only to be exempt u/s 10(34) and 10(35) of the Act.
6. We have carefully perused the facts of the case, relevant records and assessment order as well as the order passed by the CI T(A). It is considered essential to reproduce the findings of the CI T(A) on the issue in question for the purpose of proper appreciation of the findings recorded by the CIT(A) from para 4 to 4.4:
"4. I have caref ully considered the contention of the ld. counsel for the appell ant and perused the relevant record. As expl ained in the written submissions of the ld counsel, simil ar additions were also made in appellant's own case f or the assessment year 2004-05 and 2005-06. Such additions were finally completely deleted by the Hon'ble ITAT in their order dated 4.7.2008 in ITA No. 205/Chd/2008 for the assessment year 2004-05. Follo wing this order of the Hon'ble ITAT simil ar additions made in the assessment year 2005-06 were deleted by me in the appellate order dated 14.8.2008 in appeal No.328/IT/CIT(A)-II/Ldh/07-08. In vie w of these decisions it has to be considered that as f ar as investments of Rs.225.41 crores brought f orward from assessment year 2005-06 are concerned, no interest bearing borro wed f unds were invested and in respect of which interest u/s 14A was to be disallowed.5
4.1 Coming to the increase in the investments during the period relevant to assessment year under consideration, as per the details brought out in the written submissions such increase in total investments is sho wn at Rs.78,65,63,048/-. As expl ained in para 1(iv) under the head FACTS in the written submissions reproduced above the appell ant received during the relevant period total amount of Rs.93,95,05,146/- on account of dividend on current investment, re-investment, prof it on sale, s witching off of current investments, prof it and derivatives and dividend on long term investments reduced by loss on sale/s witching off of current investments and loss on derivatives. For the sake of convenience this is reproduced hereunder again :
Tot al i n cr e as e i n i nv e st m e nt s d ur i n g 786563048 Th e y e ar e n d e d 3 1 . 3 . 2 0 0 6 I nc om e g en er at e d from inv e st m ent s C ur r e nt I n v est m e nt D iv id e nd on c u rr e n t 71642275 i nve s tme n ts r ei n ves t ed Prof it o n s al e /s wi tc h i n g of 507843361 cu r re n t i nve s tme n t Prof it o n D er iv a ti ve s 24211866 603697502 Los s o n s al e /s wi tc h i n g of 3 4 5 3 7 3 6 6 cu r re n t i nve s ts Los s of Der iv a ti ve s 39391570 73928936 N et I n cr e as e 529768566 Lo n g T e rm In ve s tme n ts D iv id e nd rec ei ve d o n Lo n g 409736580 939505146 T erm In v es ts .
N et s ur pl u s 152942098 4.2 As rightly contended by the ld. Counsel f rom these
details, it becomes quite clear that the total increase in the investments is only due to reinvestment of huge income f rom these investments itself . Considering the case of the appellant f rom that angle there is considerable f orce in the contention of the ld. Counsel that all the current/long term investments have been made out of own f unds and no interest bearing borro wings have been used f or making these 6 investments in the relevant period. In vie w of the above when f or the brought f orward investments no borrowed funds have been held to have been invested in such investments, as already discussed (in vie w of the appellate orders for the assessment years 2004-05 and 2005-06) and the current investments having sho wn to be made as re-investment of income etc. discussed in the above chart, it has to be held that no interest bearing borro wed f unds have been invested by the appellant during the relevant period f or earning the exempt dividend income as erroneously held by the AO.
4.3 Further as also observed in the appell ate order f or the assessment year 2005-06, for deleting simil ar addition in the assessment year 2004-05 in appellant's o wn case the Hon'ble ITAT has observed that as the appellant had suff icient internal accruals f or making any such investments, simil ar disallo wance u/s 14A was not justif ied. As explained in the written submissions, f or the relevant period also the cash prof its of the appell ant came to Rs.163.49 crore and further paid up capital of the appellant was Rs.39.82 crores. In vie w of the ratio of decision of the Hon'ble ITAT in appellant's o wn case f or the assessment year 2004-05 such internal accruals being f or more than the increase in investments of Rs.78.64 crores, again no disallo wance u/s 14A could be held to be justif ied.
Another ground f or deleting such addition by the Hon'ble ITAT in appellant's o wn case f or the assessment year 2004-05 was that no nexus had been sho wn of the amounts invested in investments where f rom exempt dividend income had been earned with the interest bearing borro wings. In the assessment year under consideration also no such nexus has been shown. Rather, the AO has herself admitted that it was diff icult to identif y as to which f unds had been used f or what purposes. As held by the Hon'ble ITAT, in the appeal f or the assessment year 2004-05 in this case such 7 disallo wance could not be made unless there was evidence to sho w that such interest bearing f unds had been invested in the investments which had generated the tax exempt dividend income. Admittedly no such nexus has been established in this case by the AO. Therefore, as held by the Hon'ble ITAT no such disallo wance could be made on mere presumptions, and provisions of Section 14A could not be applied f or such presumptions. The decision of the Hon'ble Supreme Court in the case of Munjal Sales Corpn. (supra), and of the Hon'ble Punjab & Haryana High Court in the case of Rockman Cycle Inds. Ltd. (supra), which have been relied upon by the ld counsel also support the case of the appell ant in vie w of the above factual position. 4.4 Keeping in vie w the above discussed position the disallo wance of interest of Rs.2,78,97,243/- made by the AO u/s 14A of the Act cannot be held to be justified. The disallo wance is, theref ore deleted and this ground of appeal is allo wed."
7. The assessee contended in the written submissions filed before the CIT(A) that similar additions made, in the assessee's own case for the assessment year 2004-05 and 2005-06 were deleted by the Hon'ble I TAT in order dated 04.07.2008 in ITA No. 205/Chd/2008 for the assessment year 2004-05. In the light of these decisions, it has to be considered that as far as investment of Rs.225.41 Crores brought forward from the assessment year 2005-06 are concerned, no interest bearing funds were invested, in respect of which interest u/s 14A was to be disallowed. The ld. CIT(A) has dealt this issue, in detail. It is evident on perusal of the details brought on record by the CIT(A) that increase in total investments during the period relevant to 8 the assessment year under consideration is to the tune of Rs.78,65,63,048/-. It has been pointed out by the CIT(A) that the appellant received during the relevant period, total amount of Rs.93,95,05,146/- on account of dividend on current investment, re-investment, profit of sale, switching off of current investments, profit and derivatives and dividend on long term investments reduced by loss on sale/switching off of current investments and loss on derivatives. Such details have been recorded by the CI T(A) in para 4.1, as reproduced above in the form of chart. Thus, total increase in the investment is attributed to re- investment of huge income from these investments itself. If approached from such angle, there is considerable merit, in the contention of the assessee that all current/long term investments have been made out of own funds and no interest bearing borrowings had been used for the purpose of these investments in the relevant period. Accordingly, CIT(A) held that no interest bearing funds had been invested by the assessee during the relevant period for earning the exempt dividend income, as held by the AO. The assessee referred to the decision of the Apex Court in the case of Munjal Sales Corporation V CI T, 298 ITR 298 and the decision of the Hon'ble Punjab & Haryana High Court in the case of Rockman Cycle Industries Ltd., 176 Taxman 2 (P&H), to support his contention on the issue in question.
8. The ld. CI T(A), has followed the decision of the Hon'ble ITAT, in assessee's own case, as discussed earlier and also referred to the decision of the Hon'ble Supreme Court in the 9 case of Munjal Sales Corporation (supra) and the jurisdictional High Court in the case of Rockman Cycles Industries Ltd. (supra) and deleted the impugned additions.
9. In view of the above discussions and the legal position, we do not find any infirmity in the findings of the CIT(A) and hence, the same are upheld.
10. In the result, appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 24 t h Nov.,2011.
Sd/- Sd/- (SUSHMA CHOWLA) (MEHAR SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 24 t h Nov.,2011. 'Poonam' Copy to:
The Appellant, The Respondent, The CI T(A), The CIT,DR Assistant Registrar, I TAT Chandigarh