Income Tax Appellate Tribunal - Jaipur
Acit, Kota vs Chambal Fertillzers & Chemicals Ltd., ... on 25 September, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ ITA. No. 470/JP/13
fu/kZkj.k o"kZ@Assessment Year : 2009-10
The ACIT, Circle-2, Kota. cuke M/s Chambal Fertilisers &
Vs. Chemicals Limited
Gadepan, District-Kota.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAACC9762A
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ ITA. No. 412/JP/13
fu/kZkj.k o"kZ@Assessment Year : 2009-10
M/s Chambal Fertilisers & cuke The JCIT, Range-2, Kota.
Chemicals Limited Gadepan, Vs.
District-Kota.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAACC9762A
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri M.L. Patodi (Adv) &
: Shri P.J. Pardiwalla (Adv)
jktLo dh vksj ls@ Revenue by : Shri Varinder Mehta (CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 30/06/2017
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 25/09/2017
vkns'k@ORDER
PER SHRI VIKRAM SINGH YADAV, A.M.
These are the cross appeals filed by the Revenue and the assessee against the order of ld. CIT(A), Kota dated 28.02.2013 for A.Y. 2009-10. Both ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota the appeals were heard together and are being disposed off by this consolidated order. The respective grounds of the appeal are as under:-
ITA No. 470/JP/13 (Ground of Revenue's appeal):"i) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in holding that the donation of Rs. 24,56,781/- made by the assessee to DAV Trust was expenditure incurred wholly and exclusively for the purpose of business of the assessee;
ii) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting addition of Rs. 1,13,56,861/- on account of depreciation disallowed on catalyst;
iii) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing club expenses of Rs. 2,44,736/- paid by assessee for membership of its employees;
iv) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing rent paid for flat of Rs. 10,80,000/- to a person specified u/s 40A(2)(b);
v) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 60,72,592/- u/s 35D out of payments of Rs. 67,47,325/- made by the assessee to Zuari Investment Ltd. without appreciating the fact that these expenses are w.r.t. shipping division whose income was offered on the basis of Tonnage Scheme, hence no expenditure of this division can be separately allowed. Otherwise also these expenses were falling under the mischief of section 35D of the I.T. Act and should have been accordingly allowed;
vi) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in curtailing disallowance out of interest paid on borrowed funds to Rs. 37,65,316/- as against that of Rs. 78,47,330/-
made by A.O. since the decision of Ld. CIT(A) is not in conformity with the ratio laid down by the Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (Punjab) to the effect that all the borrowed funds and assessee's own funds go into common kitty;
2ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota
vii) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in curtailing disallowance out of interest paid on borrowed funds to Rs. 1,79,04,632/- as against that of Rs. 12,90,03,457/- made by A.O. since the decision of Ld. CIT(A) is not in confirmity with the ratio laid down by the Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Abhishek Industries Ltd. (2006) 286 ITR 1 (Punjab) to the effect that all the borrowed funds and assessee's own funds go into common kitty;
viii) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in treating incentive of Rs. 3,15,62,138 received on pre-payment of deferred sales tax liability as income for A.Y. 2005-06 and not for A.Y. 2009-10;
ix) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting addition made on account of disallowance of Rs. 1,58,71,98,115/- made u/s 40(a)(ia) due to failure of the assessee to deduct tax at source u/s 194J in respect of gas transmission charges paid to M/s Gas Authority of India Ltd. (GAIL) and M/s Indian Oil Corporation ( IOC);
x) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing deduction of Rs. 86,08,460/- to the assessee against sale proceeds of mining rights without affording opportunity of being heard to the A.O. under Rule 46 of I.T. rules 1962."
ITA No. 412/JP/13 (Ground of Assessee's appeal):"1. That the L'd. Joint Commissioner of Income Tax, Range-2, Kota erred in disallowing interest of Rs. 78,47,330 on borrowed funds on account of investment made in subsidiary companies and the L'd Commissioner of Income Tax (Appeals), Kota further erred in confirming the disallowance of interest of Rs. 37,65,316 without proving any nexus between investment and interest bearing loans. Hence the addition of Rs. 37,65,316/- sustained, deserves to be deleted.
2. That the L'd. Joint Commissioner of Income Tax, Range-2, Kota erred in disallowing interest of Rs. 12,90,03,457/- on loan on account of 3 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota investment in mutual funds and the L'd Commissioner of Income Tax (Appeals), Kota further erred in maintaining the addition of interest of Rs. 1,79,04,632/- without proving any nexus between investments and interest bearing loans. Hence the addition made on this account deserves to be deleted.
3. That the L'd Joint Commissioner erred in not allowing the deduction from income of Rs. 3,05,18,573/- and holding that education cess is a disallowable expenditure u/s 40(a)(ii) and not allowable expenditure u/s 37 and the L'd CIT(Appeals) erred in confirming the same. Hence the claim for deduction from income in respect of education cess of Rs. 3,05,18,573/- should be allowed.
4. That the L'd Joint Commissioner erred in making the disallowance of Rs. 25,00,816/- in respect of previous years expenses crystallized during A.Y. 2009-10 and the L'd CIT(Appeals) further erred in confirming the same. Since the expenditure crystallized during the year the same are allowable expenses and the disallowance made should be deleted.
5. That the L'd Assessing Officer erred is not allowing deduction of Rs. 1,73,53,860/- for the expense incurred against the sale of mining rights and thereby not reducing the short term capital gains as directed by the Hon'ble ITAT, Jaipur Bench in the assessee's own case for A.Y. 2004-05 and the L'd CIT(Appeals) erred in maintaining the addition of Rs. 87,45,400/-. Since there is a specific direction in respect of deduction of Rs. 1,73,53,860/-; the balance amount of deduction of Rs. 87,45,400/- from short term capital gains should be allowed."ITA No. 470/JP/13
2. Firstly, we refer to Revenue's grounds of appeal, other than common grounds of appeal which we shall be discussing subsequently. At the outset, the ld. AR submitted that ground No. 1 to 5 & 8 of the Revenue's appeal are 4 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota covered in favour of the assessee by the earlier decisions of the Coordinate Bench. It was further submitted that there are no change in the facts and circumstances of the case, hence, the earlier decisions of the Coordinate Bench may kindly be followed.
3. Per contra, the ld. DR vehemently supported the order of the Assessing Officer but fairly admitted that all these issues are covered in favour of the assessee by the earlier decisions of the Coordinate Bench.
4. We now refer to the decisions of the Coordinate Bench in ITA No. 459 & 558/JP/2012 dated 28.10.2016 for AY 2008-09 wherein the relevant findings in respect of each of this grounds of appeal are reproduced as under:-
Ground no. 1 relating to donation to DAV Trust:
"16. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee's own case for the A.Y. 2006-07 passed in ITA No. 268/JP/2010 order dated 31/10/2011, the Coordinate Bench has held as under:-
"2.7 We have heard both the parties. This issue has been considered by the Tribunal in the case of the assessee for the assessment years 2003-04 to 2005-06. It is not the case of the revenue that the assessee has paid the contribution to the trust. The claim of the assessee is that it has reimbursed the expenditure and hence the provisions of Section 40A(9) may not be applicable. The Hon'ble Rajasthan High Court in the case of CIT Vs. Rajasthan Spinning & Weaving Mills Ltd., 281 ITR 408 had an occasion to consider the allowability of expenditure relating to the donation of bus to school. In that case, the AO was of the view that the school is not owned by the company and the entry in the school is also not restricted to the wards of the workmen and staff members of the company. The expenditure was treated as donation. The Hon'ble Jurisdictional High Court in the case CIT Vs. Rajasthan Spinning & Weaving Mills Ltd.,(supra) observed that the question of claim to deduction of any amount spent by the assessee as expenditure laid out wholly and exclusively for the purpose of assessee's business is not to be decided in the light that the assessee must be entitled to the whole benefit accruing from 5 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota such expenses and nobody else should be sharing this benefit as is derived by the assessee by dint of such expenses. The Hon'ble Bombay High Court in the case of CIT Vs. B.C. Shirke & Co., 264 ITR 83 had an occasion to consider the allowability of contribution to the three trusts formulated for the welfare of the employees. The Hon'ble Bombay High Court in this case has observed as under:-
''Voluntary payments made by an employer for the general welfare and benefit of the employees on grounds of commercial expediency are revenue expenditure, deductible under section 37 of the Income- tax Act. Such expenditure has nexus with the conduct of business and the expenditure incurred for maintaining industrial peace and cordial relations with the employees is an expenditure for the carrying on of the business. In this view of the matter, in the facts of this case, where there is no dispute about the bona fides in creation of the trusts or utilisation of the funds contributed by the assessee to the trusts, we have no hesitation in holding that the expenditure incurred by the assessee by way of contribution to the welfare trust of the employees was rightly held to be deductible under section 37 of the Income- tax Act."
By respectfully following the order of the Coordinate Bench in assessee's own case for the A.Y. 2006-07, we uphold the order of the ld. CIT(A) for this assessment year. Accordingly, this ground of the Revenue's appeal is dismissed."
Ground no. 2 relating to depreciation on Catalyst:
"21. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee's own case for the A.Y. 2006-07 passed in ITA No. 268/JP/2010 order dated 31/10/2011, the Coordinate Bench has held as under:-
"3.3 This issue has been decided by the Tribunal while deciding the appeal of the assessee for the assessment year 2002-03 to 2005-06. Following our findings, we hold that the ld CIT(A) was justified in deleting the disallowance of Rs 74,64,626. "
By respectfully following the order of the Coordinate Bench in assessee's own case for the A.Y. 2006-07, we uphold the order of the ld. CIT(A) for this 6 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota assessment year. Accordingly, this ground of the Revenue's appeal is dismissed."
Ground no. 3 relating to club expenses of employees:
"11. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee's own case for the A.Y. 2005-06 passed in ITA No. 445/JP/2009 order dated 09/09/2011, the Coordinate Bench has held as under:-
"10.2 The details of payments made to club expenses are available at pages 158 to 161 of the paper book. In these details, the assessee has given the name of the employees, date, amount, name of the club, nature of payment and period. The club membership has been paid in respect of 28 employees. It is noticed from the period mentioned in the chart that payments are annual subscription or subscription for part of the year. It is not a case where the assessee has paid corporate fee to the club. There is no payment for the period exceeding one year so that the benefit may be given to the employees for more than a year. The expenditure as club membership fee is an expenditure for the purpose of the business. Hence, the expenditure is allowable u/s 37 of the Act. Therefore, the ld. CIT(A) was justified in deleting the disallowance of Rs. 6,70,422/-."
Admittedly, there is no change in the facts and circumstances of the case as compared to earlier years where the matter has been decided in favour of the assessee company. By respectfully following the order of the Coordinate Bench in assessee's own case for the A.Y. 2005-06, we uphold the order of the ld. CIT(A) for the impunged assessment year. Accordingly, this ground of the revenue's appeal is dismissed."
Ground no. 4 relating to rent payment under section 40A(2)(b):
"31. We have heard the rival contentions of both the parties and perused the material available on the record. The ld CIT(A) has given a finding that the employees of the assessee company stayed at the guest house in respect of which an amount of Rs 10,80,000 has been paid as rent. Further, the Revenue has not brought on record any material evidence to suggest that the 7 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota rent paid was excessive vis-à-vis an accommodation of same size and facility in the same locality. We therefore confirm the order of the ld CIT(A) who has allowed the rent payment as incurred for the purposes of the assessee's business. Accordingly, this ground of the Revenue's appeal is dismissed."
Ground no. 5 relating to disallowance under section 35D:
"36. We have heard the rival contentions of both the parties and perused the material available on the record. For the purposes of invocation of section 35D, two conditions are prescribed. Firstly, the nature of expenditure should be as specified in section 35(2) and secondly, the expenditure should be incurred either before the commencement of the business, or where the business has been commenced, in connection with the extension of the undertaking or in connection with the set up of a new unit. Nothing has been brought on record to satisfy the above two conditions. Further, the Revenue has taken the ground that these expenses are with respect to the shipping division whose income was offered on the basis of Tonnage Scheme. However, there is nothing on record and which has been brought to our notice which suggest that these expenses are with respect to the Shipping Business subject to Tonnage tax scheme. In light of these, we are unable to accede to the position of the Revenue that the expenses are covered by the provisions of section 35D of the Act. Hence, the ground of the Revenue is dismissed."
Ground no. 8 relating to pre-payment of deferred sales tax liability:
"6. We have heard the rival contentions of both the parties, perused the material available on the record and the earlier orders passed by the Coordinate Bench. In assessee's own case for the A.Y. 2005-06, the Coordinate Bench has held as under:-
"2.19 It is true that in notification dated 27.3.2003, the state Govt. provided a scheme for the dealers who availed the deferment of sales tax to deposit the amount of deferred tax even before the stipulated due date of deposit. The 8 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota payment is to be on the basis of net present value as specified in that notification. Net present value has been mentioned as percentage of amount payable and such percentage varies as per the period of month between the actual date of payment and the extended date of payment. However Board Circular 496 dated 25.9.87 stated that statutory liability is to be treated as paid in case the State Govt. makes an amendment that sales tax deferred under the scheme is to be treated as actually paid. Benovelent Circular of Board are mandatory. The liability is not that of sales tax but it is a liability of loan. Hence the decision of special bench in the case Sulzer India Ltd. is squarely applicable. It will be useful to reproduce Head Note in the case of Sulzer India Ltd.
"Business income-Profits chargeable to tax under s.41(1)-Payment of net present value against deferred sales-tax liability-Assessee company obtained incentive by way of sales-tax deferral schemes of 1983 and 1988 notified by the Government of Maharashtra-As per the said schemes, the sales-tax collected by the assessee during the period from 1st Nov., 1989 to 31st Oct., 1996, was to be paid after 12 years in six equal annual instalments-Fourth proviso to s. 38(4) of Bombay Sales-tax Act, 1959 provides that where an entitlement certificate has been granted to the eligible unit for availing of the incentives by way of deferment of sales-tax, etc. such unit may, at its option prematurely pay an amount equal to the NPV of the deferred tax and on making such payments, the deferred tax shall be deemed to have been paid- Assessee paid an amount of Rs.3,37,13,393 against the aggregate deferral amount of Rs.7,52,01,338 to SICOM, the implementing agency, which represented the NPV as determined by the latter-It cannot be said that the assessee has obtained the benefit of deduction of sales-tax liability simply because deduction was allowed for the purpose of s. 43B by applying Circular No.496, dt. 25th Sept., 1987-Said circular clearly states that the statutory liability shall be treated to have been discharged "for the purchases of s. 43B"- Thus, the first requirement of s. 41(1) is not fulfilled-NPV is equivalent to the present value of future sum-What the assessee was required to pay after 12 years in six equal instalments has been paid as NPV-There is no iota of evidence of show that there has been any remission or cessation of liability- Thus, further requirement for the applicability of s. 41(1) is also not fulfilled- Assessee has passed necessary entries in its books of account showing the difference as capital receipt Merely because the sales tax authorities have not issued modified eligibility certificate, it does not mean that the payment made by the assessee cannot be accepted as the payment of NPV of the future sum 9 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota towards discharge of full liability-Amount which was payable from 1st May, 2003 to 1st May, 2008 has been paid on 30th Dec., 2002-This does not satisfy the condition of actual remission in prasenti-Amount has been paid as per the formula for collecting the NPV given by SICOM-Therefore, such payment of NPV of the future liability cannot be treated as remission or cessation of liability so as to attract the provisions of s. 41(1) 2.20 The Special bench in respect of applicability of section 28 (iv) has held that it will not be applicable. The special Bench observed as under.
"Sec.28(iv) seeks to charge the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, as profits and gains of business or profession. Therefore, what is to be examined is whether the waiver of loan would amount to a perquisite so as to be taxable, as such, under s. 28. The Bombay High Court in the case of Mahindra & Mahindra Ltd. Vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501(Bom) : (2003) 128 Taxman 394 (Bom), has explained that s. 28(iv) seeks to charge the value of any benefit or perquisite, meaning thereby that the benefit must be in kind; the Court further held that waiver of loan is in respect of money transaction and, therefore, would not be in nature of any benefit or perquisite as construed in s. 28(iv).
2.21 The argument of the ld. DR that scheme of Rajasthan Govt is different is not of relevance. In the case of Maharashtra, the scheme of receipt of prepayment of loan was by a State Corporation while in Rajasthan it has been implemented by State Govt. The implementing agency may be different but the nature of the scheme is the same 2.22 We therefore hold that Ld.CIT(A) was not justified in confirming the addition of Rs.12,06,33,254/- as provisions of section 41(1) are not applicable.
For the case of A.Y. 2007-08, the Coordinate Bench in ITA No. 374/JP/2010 has held as under:-
"16.2 Following our order for the assessment year 2005-06 (supra) we hold that the ld. CIT(A) was not justified in holding the receipt of Rs. 1,74,49,093/- as capital receipt."
During the course of hearing, the ld AR submitted the year-wise breakup of amount of deferred sales tax payable, its NPV and the resultant difference treated as capital receipt. For the year under consideration, as against the 10 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota deferred sales tax liability of Rs 90,692,932, the assessee has paid its NPV amounting to Rs 65,810,057 resulting in difference of Rs 24,882,876 which has been treated as capital receipt and not offered to tax. Further, it is noted that the pre-payment of deferred sales tax liability for the all the years together (including the impunged assessment year) has been made in the AY 2005-06 wherein the Coordinate Bench has deleted the addition of Rs.12,06,33,254/- (which includes the amount of 24,882,876) as provisions of section 41(1) were held not applicable. By respectfully following the order of the Coordinate Bench in assessee's own case for the A.Y. 2005-06 and 2007- 08, we uphold the order of the ld. CIT(A) for the impunged assessment year. Accordingly, this ground of the Revenue's appeal is dismissed."
Our findings
5. Admittedly, there is no change in the facts and circumstances of the case or in the legal position as compared to earlier year where the matter in relation to each of the subject ground of appeal has been decided in favour of the assessee company by the Coordinate Bench. By following the order of the Coordinate Bench in assessee's own case for the A.Y. 2008-09, we uphold the order of the ld. CIT(A) for the impunged assessment year. Accordingly, the ground no. 1 to 5 & ground no. 8 of the Revenue's appeal are dismissed.
6. Regarding ground No. 9 of the Revenue appeal, briefly the facts of the case are that the Assessing Officer held that gas transmission charges paid to GAIL and IOC were in the nature of fees for technical services and was covered under the provisions of section 194J for the purposes of deduction of tax at source as against section 194C under which the assessee has done the TDS. The Assessing officer referred to the order of JCIT(TDS) Udaipur dated 28.11.2011 wherein he held that the assessee should have done TDS u/s 194J and not under section 194C and has levied penalty u/s 271C for AY 2008-09 and AY 2009-10 and a show-cause was issued to the assessee. After examining the reply of the assessee but not agreeing to the same, the 11 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota Assessing Officer disallowed payment of Rs. 1,58,71,98,115/- u/s 40(a)(ia) of the Act.
7. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) and his relevant finding of the CIT(A) are reproduced as under:-
"4.132 Discussion and the Appellate Decisions I have gone through Assessing Officer's findings and Assessee's submissions The payment covered u/s 194J covers fees for professional or fees for technical services. The payment made to lawyers, advocates, CAs, architects, are covered u/s 194J.
Whereas payments u/s 194C covers payment for work contract. Payments for construction of Roads, building, excavation, transportation etc are covered u/s 194C.
In my opinion the payment covered u/s 194J were related to use of technical or professional knowledge of an individual and only a small part of fees paid may be related to material consumed or equipment used or expenses actually incurred.
E. g. A lawyer's fee is mostly for use of his expert knowledge and fee paid hardly relates to expenses on material consumed or equipment [computers etc] used. Same is the case when payment is made to an Architect, CA, or a company secretary etc. Whereas the payment covered u/s 194C are related to actual consumptions of material or use of equipments and very small amount may be related to use of expert knowledge.
e.g. (1) In case of construction of High-rise building, the payment is more for actual use of material, and equipments, labour and less for technical expertise. Even when the works are highly complicated [construction of Roads, Bridges, Dams, Nuclear power plant, power plants etc] and required services of highly technical experts; such works are covered u/s 194C and not 194J.
(2) In case of transportation of goods, the payment is more for actual use of material [Diesel] and equipment [truck etc] and less for technical expertise of Driver. In case of transportations of perishable item, like fish etc, at sub zero temperature, the driver has to be technically expert to maintain temperature 12 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota of the container, still the payment for transportation is covered u/s 194C and not 194J.
Going by the above logic, one criteria for distinguishing payments covered u/s 194C & 194J can be summarized as under:-
1:- In case of work contracts the payments is more for actual consumption of material and actual use of equipment and less for technical expertise.
Whereas in the case of fees for technical or professional services, the payment is more for use of technical or professional expertise and less for actual consumption of material or use of equipment.
In the light of above if the contract between assessee and suppliers are examined then it can be concluded that the transmission charges paid were more for use of equipment [pipeline, pressure pumps etc.] and power/Diesel { use for pumping} consumed and less for man power supervising such transmission. Use of skilled manpower was only incidental to the main object of transmission of gas.
The Board vide circular No. 9/2012 [F. No. 275/11/2012-IT(B)] dated 17.10.2012 has clarified as under:-
"it is clarified that in case the owner/Seller of the gas sells as well as transports the gas to the purchaser till the point of delivery, where the ownership of gas to the purchaser is simultaneously transferred, the manner of raising the sale bill [whether the transportation charges are embedded in the cost of gas or shown separately) does not alter the basis nature of such contract which remains essentially a 'contract for sale' and not a works contract' as envisaged in section 194C of the Act. Hence in such circumstances, provisions of Chapter XVII-B of the Act are not applicable on the component of Gas Transportation charges, paid by the purchaser to the Owner/seller of the gas. The use of different modes of transportation of gas by owner/seller will not alter the position."
The Hon'ble ITAT vide its order dated 18.02.2013 [appeal No. 337 & 338/JP/2012] in the case of assessee, while deciding the issue of charging of interest u/s 201(1A) and TDS u/s 201 has held as under:-
" In our considered opinion, a contract, which is intended to be a contract for sale of goods [for delivery], cannot be construed as anything else but a contract of sale. Accordingly, no duty is cast, in the facts and circumstances of 13 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota the case, on the assessee company to deduct any TDS either u/s 194C of 194J of the Act.
Therefore, interest charged u/s 201(1A) of the Act for alleged short deduction of tax has been correctly set aside by the ld. CIT(A). The fact that the assessee was deducting TDS u/s 194 C was stated to be on account of abundant caution taken by the assessee. This conduct of the assesee, being taken to be on the safer side cannot be treated adversary to its interest as has been canvassed by the department."
In the case of assessee the payment of Rs. 158,71,98,115/- was made to GAIL and IOC, who were suppliers of GAS to assessee.
Therefore I am of the opinion that the contract between assessee and suppliers was at the most covered u/s194C and not u/s 194J.
Considering the above I am of the firm opinion that case of assessee is not covered u/s 194J and therefore there was no default in deduction of TDS and therefore the Assessing officer was not justified in making addition of Rs. 158,71,98,115/-. The same is directed to be deleted.
This ground of appeal is, therefore, allowed."
8. In this regard, the Ld. AR submitted that the issue stands covered by the decision of Hon'ble Rajasthan High Court in ITA no. 25/2014, 53/2014, 54/2014 & 55/2014 dated 25.04.2016 wherein the issue for consideration before the Hon'ble High Court was short levy of tax on gas transmission charges u/s 194C vis-a-vis 194J and levy of penalty u/s 271C. The Hon'ble High Court referred to its earlier decision rendered in the case of Samtel Glass Ltd reported in 369 ITR 392 and held as under:
"8. Taking into consideration the judgment rendered by this Court in M/s Samtel Glass Ltd. (supra) in identical facts and self same controversy being involved in the instant appeals, in our view the issue being squarely covered, no question of law, much less substantial question of law can be said to emerge as the findings are based on material on record and findings of fact, no illegality or perversity is noticed in the order impugned so as to call for 14 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota interference of the Court. Accordingly, the instant appeals being devoid of merits are dismissed. Since the appeals of the Revenue does not survive on the fact of levy of TDS itself, question of imposition of penalty u/sec. 271-C of the Act also does not survive and accordingly the penalty appeals also being devoid of merits, are hereby dismissed."
Our findings
9. Respectfully following the decision of Hon'ble Rajasthan High Court in assessee's own case as referred supra where the Hon'ble High Court has held that the payment of gas transmission charges are not subject to levy of TDS, there is no question of disallowance u/s 40(a)(ia) of the Act. In the result, ground no. 9 of revenue's appeal is dismissed.
ITA No. 412/JP/201310. Now, coming to assessee's grounds of appeal, other than common grounds of appeal which we shall be discussing subsequently.
11. In Ground no. 3, the assessee has challenged the action of ld CIT(A) in confirming the action of AO in holding that education cess of Rs. 3,05,18,573/- is a disallowable expenditure u/s 40(a)(ii) and not allowable expenditure u/s 37.
12. Both the parties submitted that the issue is covered against the assessee and in favour of the revenue by the decision of the Coordinate Bench ITA No. 459 & 558/JP/2012 dated 28.10.2016.
13. We now refer to the relevant findings of the Coordinate Bench in ITA No. 459 & 558/JP/2012 dated 28.10.2016 which are reproduced are as under:-
"63.1. Now coming to the contention of the AR that where the legislature wanted certain taxes other than income-tax to be excluded for the purposes of computation of taxable income, it has specially provided for the same. The instances are amounts paid as wealth-tax, securities transaction tax and fringe benefit tax in section 40 of the IT Act. Had there been any intention of disallowing education cess, such provision would have been specifically been 15 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota enacted which has not been done. We have given a careful consideration to the aforesaid contention of the ld AR but we are afraid we are unable to accede to the same. As we have already held above, the basis character of education cess as intended by the legislature is tax which is levied on the profits or gains of the business and given that such tax has already been provided in section 40(a)(ii) as not an allowable deduction, there was nothing more that was required or expected from the legislature. The levy of wealth tax, securities transaction tax and fringe benefit tax are not on the profits or gains of business or profession, hence, there was a necessity felt by the legislature and which was specifically provided for.
64. In light of above discussions and the facts and circumstances of the case, we are of the view that ld CIT(A) has rightly disallowed the claim of education cess as an allowable deduction under section 40(a)(ii) of the Act. In the result, ground taken by the assessee is dismissed."
14. In light of above, respectfully following the decision of the Coordinate Bench, we confirm the finding of the ld CIT(A) and ground no. 3 of the assessee's appeal is dismissed.
15. In ground no. 4, the assessee has challenged the disallowance of expenses of Rs. 25,00,816/-which are claimed to be crystallized during the year under consideration and thus claimed to be allowable in the hands of the assessee.
16. The details of expenses and submission of the assessee before the ld CIT(A) and which has been reiterated before us is as under:-
"1. Rs. 9,43,693.00:- In estimating the income from co-marketer arrangement this amount was booked in excess vide document no. 100247242 dt. 31.03.2008 in the AY 2008-09 and the error was realised when the actual bills dated 10.06.2008 which were received by in the next financial year, hence the same was corrected by us through document no. 100105008 dt. 30.09.2008. This being a routine rectification entry, is not actually an "expense" but a 16 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota reversal of excess income booked in a previous year and already taxed in that year.
2. Rs. 11,50,279.00:- Due to some quality issue the appellant did not lift the material from the warehouse of 'NATIONAL AGRICULTURAL COOPERATIVE MARKETING FEDERATION OF INDIA LTD' (NAFED) and sent a request to NAFED to waive the penal godown rent for such period. However NAFED did not accept the request and the same was conveyed to the appellant after closure of the financial year vide letter received by the assessee on 26.04.2008, hence the appellant booked the expenses in financial year 2008- 09 through document no. 100107966 dt. 15.10.2008. As far as the assessee is concerned the liability to pay only crystallised in the assessment year 2009-
10.
3. Rs. 267,780.00:- During the financial year 2007-08 the appellant arranged a tour for its business associates through M/s Lionel Holdings. Initially and gave an advance of Rs. 8,71,600/- to M/s Lionel Holidays and the balance amount was to be settled after receipt of the final bill. However, the final bill was misplaced at the appellant's office and was finally traced in December 2008 and the same was processed through document no. 100135535 dt. 31.12.2008. It is humbly submitted that if for any reason the claim of deduction for expenditure is for any reason not allowed in AY 2009-10, direction may kindly be given to allow the same in AY 2008-09."
17. The relevant findings of the CIT(A) are reproduced as under:-
"4.122 The issue is dealt separately for each item, as under:-
(i) Rs. 943,693 :- the ITR for AY 2008-09 could be revised on or before 31.03.2010. The assessee filed it's return for AY 2009-10 on 30.09.2009, when the time for revising return for AY 2008-09 was still available. Therefore the assessee is held to be not entitled for deduction of Rs. 9,43,693/-.This ground of appeal is, therefore dismissed.
(ii) Rs. 1150279/- :- the assessee claimed that the issue came to it's notice after closure of F.Y 2007-08. I have gone through the document (Annexure-A) in the form of a letter. The assessee claimed that this letter came to it's notice after closure of FY 2007-08, where as the fact was that this letter referred to a cheque No. 521749 dated 21.02.2008 and the same was encased on 17 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota 27.02.2008. Therefore it can be reasonably presumed that assessee was knowing the contents of this letter prior to 27.02.2008. This ground of appeal is, therefore, dismissed.
(iii) Rs. 2,67,780:- The ITR for AY 2008-09 could be revised on or before 31.03.2010. The assessee filed it's return for AY 2009-10 on 30.09.2009, when the time for revising return for AY 2008-09 was still available. Therefore the assessee is held to be not entitle for deduction of Rs. 2,67,780/-. This ground of appeal is, therefore, dismissed."
Our findings
18. We have heard the rival contentions and perused the material available on record. Firstly, regarding amount of Rs 9,43,693, it relates to income under the co-marketer arrangement which was booked in excess in the previous financial year and now been reversed during the current financial year. It is thus not an expense but a reversal of income excess booked earlier and now been rectified during the year under consideration. There is thus no question of disallowance of the same.
19. The other expense relates to godown rent of Rs 11,50,279 for which a request was made by the assessee to NAFED for waive off in the previous financial year however, the final decision of NAFED was received by the assessee during the subject financial year wherein NAFED refused to waive off the rent. Since the assessee didn't lift the material from the godown of NAFED during the previous financial year, it was contesting its liability to pay the godown rent which was finally crystallised during the year under consideration and accordingly, the same was claimed as an allowable expenditure. Similar is the position regarding travel bill of Rs 267,780, the same was finally traced and processed in December 2008. There is no dispute that all these expenses have been incurred for the purposes of the business and all are duly supported by verifiable documentation which has been 18 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota produced and available on record. Further, it is not the case of the Revenue that the tax rates have changed from last year and any prejudice have been caused to the Revenue. In the entirety of facts and circumstances of the case, we set-aside the order of the lower authorities and the AO is directed to allow these expenses as an allowable expenditure in the hands of the assessee. In the result, ground no. 4 of assessee's appeal is allowed.
Common grounds of appeal
20. Now, we refer to the common grounds of appeal wherein both the parties are in appeal before us against the findings of the ld CIT(A).
21. Regarding ground No. 10 of the Revenue's appeal and ground No. 5 of the assessee's appeal relating to deduction against sale proceeds of mining rights, the relevant facts and findings of the ld CIT(A) are reproduced as under:-
"4.142 The assessee claimed expenses of Rs. 24553629/- in AY 2004-05 as new project expenses. The same were related to cement project being setup but the same could not be materialized.
The Assessing Officer disallowed the same and while deciding the issue Hon'ble ITAT has held as under (order dated 28/07/2011, ITA No. 959/JP/2007):-
"The new project was being set up under the same Management and control and the finances were also to be provided by the assessee. Hence, the expenses on the new project are allowable except the expenses due to which certain capital assets have come into existence. The details of the project expenses showed that except following, the other expenses are of revenue in nature and are to be allowed.
1. Deep excavation road work 86,08,460
2. Misc. Capital expenses 87,45,400 1,73,53,860 19 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota The assessing Officer will ascertain as to whether any capital assets has been acquired by making expenses as above and in case the assessee has acquired capital asset then to the extent, the expenditure will be treated as capital. Depreciation will be allowable in case such capital assets have been used for the purpose of business. The alternate plea of the assessee is that the expenditure in respect of mining right should be allowed as deduction from sale proceeds of mining rights in the assessment year 2009-10. In case the AO comes to conclusion that in case the capital expenses amounting to Rs. 1,73,53,860/- included in the cost of mining right i.e. non-tangible assets then such cost may be considered to be deducted against the sale of mining rights in the assessment year 2009-10."
I have gone through order giving effect to ITAT order and it was seen that AO has allowed only Rs. 71,99,769/- thus balance amount of Rs. 1,73,53,860/- stands disallowed.
Assessee received a sum of Rs. 5,26,67,000/- from sale of mining rights and vide letter dated 10.10.2011 and 21.11.2011 [ITAT order was dated 28.07.2001] asked the AO to allow expenses of Rs. 1,73,53,860/- against sale of mining rights. However there is no finding given by AO. As the order of ITAT was dated 28.07.2011 [after expiry of time for file revised Written] the Assessing Officer should have considered the issue, which he failed to do therefore the same is being considered by me.
The Hon'ble ITAT has directed that in case the AO comes to conclusion that the capital expenses amounting to Rs. 1,73,53,860/- included in the cost of mining rights i.e. non-tangible assets then such cost may be considered to be deducted against the sale of mining rights in the assessment year 2009-10.
Therefore the assessee was asked to furnished details of these expenses which were included in the mining rights.
The assessee submitted that amount of Rs. 87,45,400/- were paid to M/s ANS construction for dismantling of existing structure, fencing of boundary, construction of temp. site office and security in plant area.
Firstly from the above nothing could be concluded [no details were produced], secondly it's connection to mining was not proved.
20ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota From the details already in the order of ITAT it can be concluded that of Rs. 8608460/- related to deep excavation and road work were related to mining operation and treated as included in sale of mining rights.
Whereas misc. Capital expenses of 87,45,400/- [in absence of details] cannot be treated as related to mining rights.
Therefore the AO is directed to allowed deduction of Rs. 86,08,460/- from sale proceeds of mining rights.
This ground of appeal is, therefore partly allowed."
22. The ld AR drawn our reference to the order of the Coordinate Bench for AY 2004-05 and the submitted that the whole of the expenses amounting to Rs 1,73,53,860 has been directed by the Coordinate Bench to be allowed as deduction against sale of mining rights in AY 2009-10 and accordingly, the same should be allowed.
Our findings
23. We have heard the rival contentions and purused the material available on record and have also gone through the order of the Coordinate Bench for AY 2004-05. In the said order, the Coordinate Bench has directed the AO to verify whether any capital asset has been acquired by making the subject expenses and where the same is found to be correct, allow depreciation thereon. On the alternate plea of the assessee that such expenditure should be allowed as a deduction from the sale proceeds of mining rights in AY 2009- 10, it was held by the Coordinate Bench that where the AO comes to a conclusion that the subject capital expenses are included in the cost of mining rights, then, in such situation, such cost may be considered to be deducted against the sale of mining rights in the AY 2009-10. In our view, the above directions of the Coordinate Bench have to be read and understood as 21 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota directing the AO to verify the claim of the assessee as to whether such cost are included in the overall cost of mining rights or not and where it is found to be so included, allow the claim of the assessee to claim deduction of such costs against the sale of mining rights. Such directions are therefore directions subject to necessary verification at the end of the AO. Given that, in the instant case, the AO has not verified the said expenses but the ld CIT(A) has carried the necessary verification and has come to correct conclusion that Rs. 86,08,460/- related to deep excavation and road work were related to mining operation and treated as included in sale of mining rights whereas misc. capital expenses of 87,45,400/- in absence of details cannot be treated as related to mining rights. We therefore do not see any infirmity in the order of the ld CIT(A) and the same is sustained. The ground no. 10 of revenue's appeal and ground no. 5 of assessee's appeal are thus dismissed.
24. Regarding ground No. 7 of the Revenue's appeal and ground No. 3 of the assessee's appeal relates to disallowance of interest on loan on account of investment in Mutual Funds. The AO has disallowed interest of Rs. 12,90,03,457/- which was reduced to Rs 1,79,04,632 by the ld CIT(A) and now both the parties are in appeal against the action of the ld CIT(A).
25. Briefly, the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee company has declared dividend income of Rs. 4,89,31,413/- on Mutual Funds which has been claimed as exempt income u/s 10(35) of the Act. The Assessing Officer further observed that total investment of Rs. 699.45 Cr has been made in units of various Mutual Funds during the year out of cash credit account maintained by the assessee with HDFC Bank, New Delhi. A show cause notice was issued to the assessee to explain why disallowance be not made out of interest paid on borrowed funds as per section 14A of the Act and also 22 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota because the assessee has failed to prove any commercial expediency. In response, the assessee submitted that the investment in the Mutual Fund units have been made for very short term period and were made out of surplus cash available from the assessee from time to time. It was further submitted that major investments in the Mutual Funds were made during the period May 2008 to March 2009 from the HDFC Bank and the bank has charged cash credit interest of Rs. 3,87,800/- during the period from December 2008 to March 2009. However, the Assessing officer did not accept the submission of the assessee and computed interest payable on the funds invested in units of Mutual Funds at 13.25% per annum which is payable by the assessee on cash credit facility availed from HDFC Bank and worked out a total amount of Rs. 12,90,03,457/- which was disallowed as per the provisions of section 14A of the Act. Further, the Assessing officer held that the disallowance is also required to be made as per the ratio laid down in case of Abhishek Industries reported in 286 ITR 1 (P&H) since the funds borrowed from various sources, internal accruals and assessee's own funds form part of a common kitty from where the assessee has utilised funds partly for business purposes and partly for non-business purposes. Accordingly, disallowance of Rs 12,90,03,457 was made out of interest paid by the assessee on borrowed funds.
26. Being aggrieved the assessee carried the matter in appeal before the ld. CIT(A) and submitted as under:-
Written submission dated 21.08.2012:
"4.91 It is humbly submitted that an amount of Rs. 4,89,31,413/- being dividend income was earned on Mutual Funds, which has been claimed as exempt income u/s 10(35) of the Act. The Investments in the Mutual Funds were made out of the surplus short term funds available within the business during that period. There were no specific/ direct borrowings for the 23 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota investment. The copy of the bank statements reflecting entries relating to investment in the Mutual Funds were duly submitted during the course of assessment proceedings. As surplus fund were invested in the Mutual Funds, the appellant did not incur any interest expenditure relating thereto. The investment in Mutual Funds during the whole year was based on the availability of surplus fund, generally for the short period and it is not the appellant's regular business and therefore, they do not engage any person specifically for this job. The employees dealing with banking job also take care of the investments in Mutual Funds, which is not the regular business of the company. Additionally, the efforts put to do such investment in Mutual Funds were miniscule and very low as compared to the other banking transactions of the Company as a whole. There were very few transactions of investment in the Mutual Funds during the whole of the Assessment Year under consideration. The major investment in the Mutual Funds were made during December 2008 to March 2009 from the HDFC Bank Account and the bank has charged cash credit interest of only Rs. 3,87,800/- during the period from December 2008 to March 2009. However, the L'd Assessing Officer calculated notional interest based on the period of holding of the security without considering the actual interest paid during the relevant period.
Considering the above, it is humbly submitted that the addition made on this account deserves to be deleted.
Written submission dated 17.09.2012:
"It is humbly submitted that an amount of Rs. 4,89,31,413/- being dividend income was earned on Mutual Funds, which has been claimed as exempt income u/s 10(35) of the Act. The investments in the Mutual Funds were made out of the surplus short term funds available within the business during that period. There were no specific/direct borrowings for the investment. The copy of the bank statements reflecting entries relating to investment in the 24 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota Mutual Funds were duly submitted during the course of assessment proceedings. A copy of the same is also annexed herewith at Annexure 5. As surplus fund were invested in the Mutual Funds, the appellant did not incur any interest expenditure relating thereto. The investment in Mutual Funds was based on the availability of surplus fund. The assessee would never borrow at prohibitive interest rates and invest to earn a meagre 9% odd.
It is further submitted that the major investment in the Mutual Funds were made during December 2008 to March 2009 from the HDFC bank Account and the bank has charged cash credit interest of only Rs. 3,87,800/- during the period from December 2008 to March 2009. However, the L'd Assessing Officer calculated notional interest based on the period of holding of the security without considering the actual interest paid during the relevant period. When the total interest of only Rs. 3,87,800/- was paid in respect of HDFC, it is inconceivable that an interest of about Rs. 12.77 Crores has been calculated by the L'd Assessing officer without any basis.
Further there is a mistake in the calculations of the L'd Assessing Officer are taken into consideration and there is a calculation mistake of Rs. 9,598,087/- as is evident from the statements given at Annexure 6 and 7.
Considering the above, it is humbly submitted that the addition made on this account deserves to be deleted."
Written submission dated 05.11.2012:
"Further to our earlier submissions in this regard, we are enclosing a statement showing the sources of funds in respect of investments in Mutual Funds. As can be seen from the statements, the investment in Mutual Funds are mainly from cash generated from sale of fertilizer bonds, sales collection, FDR maturity, Mutual Funds Redemption & NCD's. The following table summarizes the position:-25
ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota Sr. Name of Investment Amount of Date of Source of Funds No Investment Investment .
1 Lotus Mutual Fund 194,500,000.00 13-Jun-08 Invested for 3 days
400,000,000.00 17-Jan-08 Invested for 1 days
2 Reliance Mutual Fund 450,000,000.00 17-Jan-08 Invested for 1 days
450,000,000.00 4-Aug-08 Invested for 1 days
500,000,000.00 5-Dec-08 Sale of Fertiliser Bonds
3 Birla Mutual Fund 125,000,000.00 5-Dec-08 Sale of Fertiliser Bonds
375,000,000.00 7-Dec-08 Sale of Fertiliser Bonds
4 ICICI Prudential Mutual 335,000,000.00 10-Dec-08 Collection from sales &
Fund NCD's
165,000,000.00 29-Jan-09 Collection/FD
Matured/NCD,s
5 Kotak Mutual Fund 250,000,000.00 25-Feb-09 Redemption of Mutual
Funds
250,000,000.00 19-Mar-09 Redemption of MF &
Collection
6. Franklin Templeton 500,000,000.00 25-Feb-09 Redemption of Mutual
Mutual Fund Funds
7 Fortis Mutual Fund 250,000,000.00 19-Mar-09 Redemption of MF &
Collection
8 SBI Mutual Fund 300,000,000.00 10-Dec-09 Collection from sales &
NCD's
200,000,000.00 29-Jan-09 Collection/FD
Matured/NCD,s
250,000,000.00 19-Mar-09 Redemption of MF &
Collection
9 HDFC Mutual Fund 500,000,000.00 25-Feb-09 Redemption of Mutual
Funds
10 JP Morgan India Mutual 500,000,000.00 25-Feb-09 Redemption of Mutual
Fund Funds
11 JM Mutual Fund 362,500,000.00 8-Dec-08 Sales of Fertiliser
Bonds
26
ITA No. 470& 412 /JP/13
ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota 250,000,000.00 2-Jan-08 Sales of Fertiliser Bonds 137,500,000.00 29-Jan-09 Collection/FD Matured/NCD,s 12 Tata Mutual fund 500,000,000.00 29-Jan-09 Collection/FD Matured/NCD,s Total 6,994,500,000.00 As can be seen from the above, all the investments have been made from surplus funds and no loan fund is invested in the Mutual Funds except from the NCD money.
NCD's of Rs. 60 Crores were availed on 10.12.2008 and was repaid between 11th to 15th December i.e. the maximum outstanding was for 5 days. NCD's of Rs. 50 crores were availed on 29.01.2009 and was repaid on 9th February 2009 i.e. the outstanding was only for 11 days.
The appellant humbly submits that the maximum utilization of borrowed funds is for a period of 11 days whereas disallowed notional interest has been calculated up to a period of about 4 months.
The appellant further reiterates that during the period December 2008 to March 2009 when the major investments were made from HDFC Bank, the bank has charged cash credit interests of only Rs. 3,87,800/-
Thus the interest of Rs. 12,90,03,457/- disallowed by the L'd Assessing Officer is unlawful and against law and the additions made on this account should be deleted."
27. We now refer to the findings of the ld CIT(A) which are reproduced as under:
27ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota "4.92 The assessee has diverted interest bearing funds for earning non-
taxable income, therefore corresponding interest expenses has to be disallowed.
However on verification it was seen that part of the investment was from its own funds (internal accrual) and disallowance related to same has to be deleted.
It was also seen that part of the interest bearing loans were repaid out of internal accrual and actual interest paid was lesser than one computed by Assessing Officer.
In my opinion the disallowance has to be restricted to lower of interest payable and interest paid.
The disallowance on this basis is computed as under:-
1. Interest on 19.45 Cr. 3 days 2,11,818
2. Interest on 40.00 Cr. 1 day 1,45,205
3. Interest 45.00 Cr. 1 day 1,63,356
4. Interest 45.00 Cr. 1 day 1,63,356 Sr. No. 5, 6, 7 (of statement of investment referred above) were invested out of realization from sale of fertilizer Bonds. As fertilizers bonds were issued by Govt. of India, the same is part of assessee's internal accrual and no interest disallowance was required.
Out of remaining it was seen that the investment were from collection, redemption of MF, sale of fertilizer bonds, maturity of FDs and NCD's.
Out of there except NCD all other items relate to internal sources. On these amounts related to NCDs, the interest is held to be disallowable. Similarly 28 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota interest paid to HDFC was also hold to be not allowable. Considering the above the disallowance interest is computed as under:-
1. INTEREST OF MUTUAL FUNDS INVESTMENT MADE DURING JUNE-08 TO AUGUST-08 Name of Amount of Date of Date of Rate of Interest investment Investment Investment Redemption Interest Lotus 194,500,000.00 13-Jun-08 16-Jun-08 13.25% 211,818,.49 Mutual Fund Lotus 400,000,000.00 17-Jun-08 18-Jun-08 13.25% 145,205,.48 Mutual Fund Reliance 450,000,000.00 17-Jun-08 18-Jun-08 13.25% 163,356,.16 Mutual Fund 450,000,000.00 4-Aug-08 5-Aug-08 13.25% 163,356,.16 Total 683,736.30
2. ACTUAL INTEREST CHARGED ON CC A/C WITH HDFC BANK FOR THE PERIOD DEC. 08 TO MARCH 09 (W.R.T. INVESTMENT MADE OUT OF FUNDS).
BANK DEC. 08 JAN. 09 FEB. 09 MARCH 09 TOTAL HDFC 246,866.00 19,047.00 79,927.00 41,960.00 387,800.00
3. INTEREST OF NCDS FOR THE PERIOD 10/12/08 TO 31/03/09 ON NCD OF 60 CRORES AND 50 CRORES CALCULATED AT AVG. RATE OF NCE INTT. FOR THE RELEVANT MONTH Amount From To NCD Int. Interest Rate 120,000,000 10-Dec.-08 31-Dec-08 8.49% 614,071,2329 150,00,00.00 10-Dec.-08 31-Dec-08 8.49% 767,589.0411 330,000,00.00 10-Dec.-08 31-Dec-08 8.49% 1,688,695,.8904 600,000,000.00 1-Jan-09 31-Jan-09 6.83% 3,480,493.1507 29 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota 600,000,000.00 1-Feb-09 28-Feb-09 5.73% 2,637,369.8630 500,000,000.00 1-Mar-09 31-Mar-09 5.73% 2,818,027.3973 500,000,000.00 29-Jan-09 31-jan-09 6.83% 280,684.9315 500,000,000.00 1-Feb-09 28-Feb-09 5.73% 2,197,808.2192 500,000,000.00 1-Mar-09 31-Mar-09 5.73% 2,348,356.1544 Total 16,833,095.89 Grant total 17,904,632.19 The interest of NCD is calculated on the basis of average rate of interest paid by assessee on NCDs in each month. Accordingly interest of Rs.
1,79,04,632.19 was found to be related to amount paid to mutual fund as the income from mutual funds is exempt, corresponding interest is held to be not allowable.
Accordingly addition of Rs. 1,79,04,632/- is confirmed. The Assessing Officer is directed to delete balance addition of Rs. 11,10,98,825/-. This ground of appeal is, therefore, partly allowed."
Our findings
28. We have heard the rival contentions and purused the material available on record, the written submissions, the findings of the AO and the ld CIT(A). In its written submissions dated 5.11.2012 filed before the ld CIT(A), the assessee company has submitted a statement showing the sources of funds in respect of investment in mutual funds units and has contended that all the investments have been made from surplus funds and no loan fund is invested in the Mutual Funds except from the NCD money. As regards NCDs, it was further submitted that NCD's of Rs. 60 Crores were availed on 10.12.2008 and was repaid between 11th to 15th December and NCD's of Rs. 50 crores were availed on 29.01.2009 and was repaid on 9th February 2009. It was 30 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota submitted that the maximum utilization of borrowed funds is for a period of 11 days whereas disallowed notional interest has been calculated up to a period of about 4 months. It was further submitted that during the period December 2008 to March 2009 when the major investments were made from HDFC Bank, the bank has charged cash credit interest of only Rs. 3,87,800/-. In light of above submissions of the assessee, it is therefore clear that borrowed funds in form of NCDs and cash credit facility have been utilised to an extent for the purposes of making investment in the mutual funds units and a clear nexus has thus been established between the borrowed funds and the investment in the mutual fund units.
29. The next question that comes is the determination of interest on such borrowed funds which have been utilised for making the investments in the mutual fund units. In this regard, we have gone through the findings of the ld CIT(A) and confirm his findings regarding disallowance of Rs 683,736 for the reason that no specific source has been pointed out by the assessee for making the subject investments in the mutual fund units and it has been established that the amount so invested has been drawn out of the borrowed funds withdrawn from the cash credit account. We also confirm the findings of the ld CIT(A) regarding disallowance of Rs 387,800 which is the actual interest charged by the HDFC bank on the cash credit account during the period Dec 2008 to March 2009 when the major investment has been made by the assessee in the mutual fund units and the funds have been withdrawn from the cash credit account.
30. As far as disallowance of interest on NCD is concerned, we find that the ld CIT(A) has worked out the interest without taking into consideration the fact that these NCDs of Rs. 60 Crores were availed on 10.12.2008 and were repaid between 11th to 15th December and NCD's of Rs. 50 crores were availed on 29.01.2009 and were repaid on 9th February 2009. The interest 31 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota disallowance has therefore to be restricted for the period NCDs were availed and repaid. The matter is accordingly set-aside to the file of the AO for the limited purposes of working out the interest on NCDs and limit the disallowance to that extent in relation to NCDs.
31. In the result, respective grounds of appeal taken by the revenue and the assessee are disposed off.
32. Regarding ground No. 6 of the Revenue appeal and ground no. 1 of the assessee's appeal, the facts of the case are that during the relevant assessment year, the assessee company increased its investment in unquoted shares of CFCL Overseas Limited (a foreign Company) and in the equity shares of Chambal Infrastructure Ventures Limited (an Indian Company) as under:-
S. No. Name of the Wholly owned subsidiary Amount (Rs. in lac) company 1 CFCL Overseas Limited, Cayman Islands 523.94 2 Chambal Infrastructure Ventures Limited 120.00 As per the AO, there is clear-cut, direct and proximate nexus between the interest bearing borrowed funds out of the cash credit accounts and nil income earning investment made by the assessee. Further, the assessee failed to prove any commercial expediency to make investment in above subsidiary companies. The AO accordingly disallowed an amount of Rs 78,47,330 determined using the rate of interest of 13.25/12.75% per annum payable on the cash credit accounts from where such investments were made.
33. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) and submitted that CFCL Overseas Limited was incorporated as a Special purpose vehicle for consolidation of entire software business of 32 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota assessee. It is a wholly owned subsidiary of the appellant. Chambal Infrastructure Ventures Limited is a special purpose vehicle and wholly owned subsidiary of the appellant i.e. a 100% subsidiary. This subsidiary is engaged in development and setting up of power projects.
As desired by your good-self, please find enclosed herewith copy of relevant bank accounts reflecting above investment (page no. 3 to 12). Further, this is to submit that the investment have been made out of the internal accruals of the Company.
The appellant Company had earned a profit (PAT) of Rs. 230.56 crores and cash profit of more than Rs. 439.26 crores (PAT+ Dep-Deff Tax credit) during the year. The investment in subsidiary companies was made out of internal accruals generated by the company. The position of its Reserves and Surplus as on 31.03.2009 are hereunder:-
a) General Revenue Rs. 13,695.36 lac b) Profit and Loss Account Rs. 62,843.32 lac
The payments for the investments were made through the company's bank cash credit account; however, it does not exactly denote the borrowings as the company does not maintain its profit from operations in a separate bank account rather parks the same into its cash credit bank account to reduce the interest cost. The banking account is a running account where payments are issued and collections are deposited. The increase/decrease in borrowings is due to increase/ decrease in operational requirements. The investment of Rs. 1.20 crores was made on 19.08.2008 and there was a negative bank balance on that day, which has reduced to Rs. 27.87 lac by 22.08.2008; in other case, the investment of Rs. 5.24 crores was made on 03.04.2008, which resulted into a negative balance of Rs. 2.13 crore on that day in the bank account. The negative balance was further reduced to Rs. 0.03 crore on 22.04.2008 and later on converted into a positive balance on 25.04.2008. However, the 33 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota appellant reiterates that these investments were made out of the profits earned by the Company and not through borrowings from the bank.
The L'd Assessing Officer has however disallowed interest @ 13.25%/ 12.75% (rate of interest on cash credit account) on the investment made in subsidiary account even though investment was made out of internal accruals. The fresh investments had been made out of the surplus funds of the assessee. This was amply proven to the L'd Assessing Officer. The amounts invested in the subsidiaries have been shown under the head "Investments". The L'd Assessing officer however has, without proving a nexus between the amounts invested in subsidiary companies and interest paid on borrowed funds, has added an amount of 78.47 lacs. The following decisions further support the contention of the appellant:-
• DCIT v/s Banc of American Securities (India) (128 ITD386) • Gujarat State Export Corporation Ltd. v/s CIT (209 ITR 649) Considering the above submission, it is requested that the addition in respect of notional interest of Rs. 78.47 lac may kindly be deleted.
"Without prejudice to the contention of the assessee that the investments were made out of the surplus earned by the assessee, and that the investments had a direct nexus to the existing business of the assessee, we submit that the interest disallowed cannot in any case exceed the interest actually charged by the bank. On this basis we have made a calculation of maximum interest that could be considered, which works out to Rs. 47.11 Lakhs. This calculation is without prejudice to the contention of the assessee that the investments were made out of the surplus earned by the assessee."
34. The relevant findings of the ld. CIT(A) are reproduced as under:-
"4.82 I have gone through the details and it was see that the payment to it's wholly owned subsidiaries were made from cash credit account and same was 34 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota therefore out of interest bearing funds. However it was seen that when payment of Rs. 5.24 crores was made the assessee had credit balance in the account and only Rs. 2.13 crores were over draft. Thus out of Rs. 5.24 crore only an amount of Rs. 2.13 crore was related to interest bearing funds. The other payment of Rs. 1.20 crore was directly related to over draft (interest bearing funds.) As the assessee diverted interest bearing fund to it's subsidiaries the disallowance was justified.
The quantum is computed below:-
On Rs. 2.13 crore Rs. 28,22,515/-
On Rs. 1.20 crore Rs. 942,801/-
Rs. 37,65,316/-
Therefore disallowance of Rs. 37,65,316/- is confirmed the Assessing Officer is directed to delete the balance disallowance. This ground of appeal is, therefore, partly allowed."
Our findings
35. We have heard the rival contentions and purused the material available on record. As per submissions of the assessee, the investment of Rs. 1.20 crores was made on 19.08.2008 and there was a negative bank balance on that day in the cash credit account. We have gone through SBH's bank statement for 19.08.2008 available at APB 242 and find that both opening and closing balances on 19.08.2008 were negative which means that there were withdrawals in form of borrowings from the bank for the purposes of making the subject investment. Further, regarding investment of Rs 5.24 crores which was made on 03.04.2008, the assessee has submitted that the same has resulted into a negative balance of Rs. 2.13 crore on that day in the bank account. We have gone through SBI bank statement for 03.04.2008 available 35 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota at APB 219 and find that there was positive bank balance on 03.04.2008 of Rs 3,10,91,392 prior to making investment of Rs 5.23 Cr and after the investment, the bank balance was turned into negative figure of Rs 2,13,02,722 which means that there were withdrawals in form of borrowings from the bank to the extent of Rs 2,13,02,722 as per assessee's own submissions. In light of the same, we donot see any infirmity in the findings of the ld CIT(A) who has rightly established the necessary nexus between the borrowed funds and the investments in the subsidiary company and has disallowed the interest of Rs 37,65,316 on such borrowed funds. In the result, ground No. 6 of the Revenue appeal and ground no. 1 of the assessee's appeal is dismissed.
In the result, the appeal of the revenue and the assessee are disposed off with above directions.
Order pronounced in the open court on 25/09/2017.
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(Kul Bharat) (Vikram Singh Yadav)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Jaipur
Dated:- 25/09/2017
Santosh*
vkns'k dh izfrfyfi vxzsf"kr@Copy of the order forwarded to:
1. vihykFkhZ@ The Appellant- ACIT, C-2/ JCIT, Range-2, Kota.
2. izR;FkhZ@ The Respondent- M/s Chambal Fertilisers & Chemicals Limited Gadepan, District-Kota.
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr¼vihy½@The CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT,
6. xkMZ QkbZy@ Guard File (ITA No. 470 &412 /JP/2013) 36 ITA No. 470& 412 /JP/13 ACIT Vs. M/s Chambal Fertilisers & Chemicals Ltd., Kota vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant Registrar.37