Income Tax Appellate Tribunal - Chennai
Beach Mineral Company Private Limited, ... vs Assessee on 22 May, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
' B ' BENCH : CHENNAI
BEFORE Dr. O.K. NARAYANAN, VICE PRESIDENT &
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
I.T.A. No. 263/Mds/2012
Assessment Year 2007-08
M/s. Beach Mineral Company Private Asst. Commissioner of
Limited, C/o. M/s. Dr. Anita Sumanth, Income Tax,
N. Muthukumar, G. Stanly Hebzon Vs. Company Circle 1(2) (i/c),
Singh, M. Kaushik Krishna & R.G. No. 121, Mahathma Gandhi
Muthukumaran, Advocates, No. 51, Road, Nungambakkam,
Nungambakkam High Road, CHENNAI - 600 034.
CHENNAI - 600 034.
I.T.A. No. 603/Mds/2012
Assessment Year 2007-08
O/o. ACIT, Company Circle I(3) M/s. Beach Minerals
121, Mahatma Gandhi Road, Company Private Limited,
Aayakkar Bhavan, New Block Vs. BMC House, No. 32/2,
VIth Floor, Halls Road, Egmore,
CHENNAI - 600 034. CHENNAI - 600 008.
PAN : AADCB 3450 D
(Appellant) (Respondent)
Assessee by : Dr. Anita Sumanth
Revenue by : Dr. S. Moharana
Date of hearing : 22-05-2013
Date of pronouncement : 25-06-2013
ORDER
PER VIKAS AWASTHY, J.M.
The aforesaid appeals have been filed by the assessee and the Revenue respectively impugning the order of CIT(A)-III, Chennai, dated 30-12-2011.
2 I.T.A. No. 263/Mds/2012
I.T.A. No. 603/Mds/2012
2. The brief facts of the case are that the assessee is a company engaged in the business of manufacturing, processing and exporting of Pulvarised Garnet Abrasives Grit. The assessee filed its return of income for the Assessment Year 2007-08 on 30-10-2007 declaring its income to be Nil, after claiming deduction of Rs. 26,46,13,089/- u/s. 10B of the Income Tax Act, 1961 (herein after referred as 'the Act'). The case of the assessee was selected for scrutiny and notice u/s. 143(2) was issued to the assessee on 12-09-2008. The Assessing Officer (AO) vide assessment order dt. 31-12-2009 made additions/dis-allowances inter-alia on account of deduction claimed u/s. 10B of the Act and dis-allowance of expenditure u/s. 14A r.w.r. 8D of Income Tax Rules, 1962 (herein after referred to as 'the Rules').
3. Aggrieved against the assessment order, the assessee preferred an appeal before the CIT(A). The CIT(A) vide order dated 30-12-2011 partly allowed the appeal of the assessee. While allowing the appeal, the CIT(A) held that the assessee is entitled to claim deduction u/s. 10B of the Act in accordance with the decision of the Special Bench of the Tribunal in the case of ITO Vs. Sak Soft Ltd., reported as (2009) 121 TTJ (Chennai) (SB) 865; 313 ITR (AT)-353. With respect to dis-allowance u/s. 14A r.w.r. 8D, the CIT(A) held that the provisions of Rule 8D are not applicable in the present case in view of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., reported as 328 ITR 81 (Bom). However, in view of the order of the Special Bench of the Tribunal in the case of Cheminvest Ltd., Vs. ITO reported as 317 ITR (AT) 86 (Del), 3 I.T.A. No. 263/Mds/2012 I.T.A. No. 603/Mds/2012 the CIT(A) confirmed the findings of the AO with regard to the proportionate interest expenditure incurred on investment in share to the tune of Rs. 26,67,00,000/-.
Aggrieved against the order of the CIT(A), both the Revenue and the assessee have come in appeal before us.
4. Dr. S. Moharana, representing the Revenue fairly considered that as regard deduction u/s. 10B is concerned, the issue is decided against Revenue in the case of Sak Soft Ltd., (supra). The ld. Departmental Representative (DR) submitted that the other ground on which the Revenue has assailed the order of the CIT(A) is restricted the dis- allowance u/s. 14A of Rs. 69,17,637/- instead of Rs. 76,59,387/- as determined by the AO. The ld. DR further submitted that the expenditure relating to exempt income is not allowable as per the provisions of the Section 37 of the Act and the CIT(A0 ought to have upheld the quantification of the dis-allowance as per the provisions of Section 40A. The ld. DR strongly supported the order of the AO on the issue.
5. On the other hand, Dr. Anitha Sumanth, appearing on behalf of the assessee submitted that the CIT(A) has erred in confirming the dis- allowance u/s. 14A to the extent of Rs. 69,79,637/-. The ld. Counsel submitted that since the assessee has not earned any dividend income during the year, therefore, no dis-allowance is to be made under the provisions of Section 14A. She further submitted that as per the 4 I.T.A. No. 263/Mds/2012 I.T.A. No. 603/Mds/2012 provisions of Section 14A, there should have been actual expenditure in earning of the exempt income, whereas in the instant case, no dividend income was earned, only investments were made by the assessee. The ld. Counsel further contended that the CIT(A) after coming to the conclusion that Rule 8D is not applicable in the present case, erred in confirming the proportionate interest of Rs. 69,79,637/- determined by the AO in accordance with the provisions of Rule 8D. The ld. Counsel prayed for setting aside of the dis-allowance made u/s. 14A of the Act.
6. We have heard submissions made by the representatives of both the sides and have perused the orders of the authorities below. In both the appeals, common issues are involved with respect to computation of deduction u/s. 10B and dis-allowance of expenditure u/s. 14A of the Act. As regards computation of deduction u/s. 10B is concerned, the ld. DR has fairly conceded that the issue is covered in favour of the assessee by the order of the Special Bench of the Tribunal in the case of Sak Soft Ltd., (supra). The assessee has incurred expenditure towards: shipment expenses Rs. 2,15,14,331/-, ship freight Rs. 33,80,845, terminal handling charges Rs. 91,88,676/-, insurance Rs. 27,69,195/-, total amounting to Rs. 3,68,53,043/-. The Assessing Officer while computing deduction u/s. 10B excluded the aforesaid amounts from export turnover but did not exclude the same from the total turn-over. It is a well settled law that expenses on freight, telecommunication or insurance attributable to the delivery of the articles or things out-side India or expenditure incurred in foreign exchange in providing technical services 5 I.T.A. No. 263/Mds/2012 I.T.A. No. 603/Mds/2012 outside India which are excluded from export turn-over should also be excluded from total turn-over while computing deduction under the provisions of Section 10B of the Act. In view of the well settled law, this ground of appeal of the Revenue is dismissed.
7. The Second Ground on which the order of the CIT(A) has been assailed by both the parties is dis-allowance of expenditure u/s. 14A. The Assessing Officer during the course of assessment has dis-allowed an amount of Rs. 76,59,387/- by applying Rule 8D. The Assessing Officer while computing the said amount has taken two components i) Expenditure incurred by way of interest Rs. 69,17,637/- and ii) 1 ½ % of average value of investment i.e., Rs. 7,41,750/-. It is an admitted fact that the assessee has total investment in shares to the tune of Rs. 107,27,91,228/-. During the relevant AY, the assessee had made investment to the tune of Rs. 29,67,00,000/-. It is also not disputed by the assessee that the assessee has made interest payment of Rs. 4,09,99,105/- during the same AY. The assessee has not been able to show either before the Assessing Officer or before the CIT(A) any specific reason for the borrowings and expenditure incurred on payment of interest in relation to these borrowings. Even before us, the ld. Counsel for the assessee has not been able to give any explanation or plausible reason for incurring such a huge expenditure on payment of interest. The CIT(A) has given a categoric finding that assessee has not been able to establish that the interest has no nexus with the investments. The 6 I.T.A. No. 263/Mds/2012 I.T.A. No. 603/Mds/2012 Special Bench of the Tribunal in the case of Cheminvest Ltd., Vs. ITO (supra) while dealing with the similar situation has held as under:
The controversy raised in this case is that the assessee had not earned or received any dividend in the year under consideration and, therefore, no disallowance can be made by invoking the provisions of section 14A of the Act. We do not find any force in this contention of the assessee. When the expenditure of interest is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception. This is even if the interest paid on borrowings for the purchase of shares were allowable under section 57 as an expenditure incurred for earning or making income as held by the Supreme Court in the case of Rajendra Prasad Moody [1978] 115 ITR 519 or under section 36(1)(iii) as an expenditure incurred wholly and exclusively for the purposes of business as held by various decisions right from the beginning of the Income-tax Act. When prior to introduction of section 14A, an expenditure both under sections 36 and 57 was allowable to an assessee without such requirement of earning or receipt of income, we cannot import any such condition when it comes for disallowance of the same expenditure under section 14A of the Act. This is what is held by the Ahmedabad Bench of the Tribunal in the case of Harish Krishnakant Bhatt [2005] 278 ITR (AT) 1 when it observed that interest on monies borrowed for purchase of shares held as investment is not allowable whether or not there is any yield of dividend. It is so held by applying the decision of the Supreme Court in Rajendra Prasad Moody [1978] 115 ITR 519 in the reverse case wherein it is that irrespective of dividend receipt, expenditure has to be allowed. Now since dividend is exempt, as a consequence thereof expenditure has to be disallowed.
In view of the decision of the Special Bench of the Tribunal in the case of Cheminvest Ltd., Vs. ITO (supra), we are of the view that the CIT(A) has rightly upheld the findings of the Assessing Officer on account of dis-
allowance of interest u/s. 14A. However, the CIT(A) has confirmed the dis-allowance of interest u/s. 14A calculated by the Assessing Officer in accordance with Rule 8D. As has been held in the case of Godrej & Boyce Mfg. Co. Ltd.,(supra), Rule 8D is applicable w.e.f. AY. 2008-09, whereas the case in hand relates to the AY. 2007-08. Prior to AY. 2008- 09 dis-allowance u/s. 14A has to be made on some reasonable basis or method in the facts and circumstances of the each case. After taking the 7 I.T.A. No. 263/Mds/2012 I.T.A. No. 603/Mds/2012 holistic view and the quantum of investment in shares, we deem it appropriate to reduce the dis-allowance from Rs. 69,17,637/- to Rs.
55.00 Lakhs.
In view of our above observations, the appeal of the Revenue is dismissed and the appeal of the assessee is Partly Allowed in the aforesaid terms.
Order pronounced on Tuesday the 25th June, 2013 at
Chennai.
Sd/- Sd/-
(Dr. O.K. NARAYANAN) (VIKAS AWASTHY)
VICE PRESIDENT JUDICIAL MEMBER
Dated: 25th June, 2013
TNMM
Copy to: Assessee/AO/CIT(A)/CIT/DR