Income Tax Appellate Tribunal - Chandigarh
Dcit, C-I, Ludhiana vs M/S Rico Auto Industries Limited, ... on 3 October, 2019
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ "बी" , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH "B", CHANDIGARH ी एन.के.सैनी, उपा य! एवं ी संजय गग%, या&यक सद(य BEFORE: SHRI. N.K.SAINI, VP & SHRI , SANJAY GARG, JM आयकर अपील सं./ ITA NO. 404/Chd/2018 नधा रण वष / Assessment Year : 2014-15 The DCIT बनाम M/s Rico Auto Industries Ltd.
Circle-I B-26, focal Point, Ludhiana, Punjab
Ludhiana, Punjab
थायी लेखा सं./PAN NO: AAACR8724R
अपीलाथ#/Appellant $%यथ#/Respondent
नधा &रती क( ओर से/Assessee by : Shri Vipin Gupta, CA
राज व क( ओर से/ Revenue by : Shri G.S. Phani Kishore, CIT DR
सन
ु वाई क( तार-ख/Date of Hearing : 25/09/2019
उदघोषणा क( तार-ख/Date of Pronouncement : 03/10/2019 आदे श/Order PER N.K. SAINI, VICE PRESIDENT This is an appeal by the Department against the order dt. 15/01/2018 of Ld. CIT(A)-1, Ludhiana.
2. Following grounds have been raised in this appeal:
1. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in law and on facts in directing the AO to re-calculate the addition made on account of disallowance u/s. 14A of the Income Tax Act, 1961 by applying the amended provisions of Rule 8D(2)(ii) @ 1% of the annual average of monthly average of the opening and closing balances of the value of investments, whereas the same amendment was introduced w.e.f. 02.06.2016 and does not have retrospective effect?
2. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in law and on facts in allowing the disallowance u/s. 14A of the Income Tax Act, 1961 voluntarily made by the assessee at the time of filing of return of income based on observation of auditors, who, themselves on close perusal of the books and investments of the assessee were convinced that disallowance u/s. 14A is called for the tune of Rs. 2.05 crore?2
3. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in law and on facts in allowing the voluntary7 disallowance u/s. 14A of the Income Tax Act, 1961 made by the assessee at the time of filing of return of income, ignoring the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd., Vs. CIT [2006; 284 ITR 323], wherein it was categorically held that the AO cannot entertain claim of deduction otherwise than by filing of the revised return by the appellant?
4. Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in law and on facts in allowing relief on account of capitalization of interest as per proviso to section 36(l)(iii) of the Income Tax Act, 1961 on investment in shares of domestic companies and capital advance for purchase of land and other advances despite the fact that Share Capital and Reserves and Surplus were already exhausted by the assessee in fixed assets?
5. That the order of the Ld. CIT (A) be set aside and that of the Assessing Officer be restored.
6. That the appellant craves leave to add or amend any ground of appeal before it is finally disposed off.
3. From the above grounds it is gathered that only grievance of the Department relates to the deletion of disallowance made by the A.O. by invoking the provisions of Section 14A of the Income Tax Act, 1961 (hereinafter referred to as 'Act').
4. Facts of the case in brief are that the assessee filed its return of income on 24/11/2014 declaring total income of Rs. 16,51,91,610/-, later on the case was selected for scrutiny. The A.O. during the course of assessment proceedings noticed that the assessee had earned dividend income of Rs. 2,96,24,955/- in shares of the domestic group companies. He asked the assessee to furnish calculation of disallowance under section 14A of the Act. The assessee submitted that the disallowance was wrongly added while filing the return of income and that no disallowance was required. The A.O. was of the view that the assessee had borrowed certain funds on which liability to pay interest is being incurred and on the other hand, certain amounts had been invested for earning tax free income, therefore disallowance under section 14A was called for. The A.O. made the disallowance of Rs. 2,05,47,517/-.
35. Being aggrieved the assessee carried the matter to the Ld. CIT(A) who deleted the disallowance made by the A.O. by observing in para 4 to 7 of the impugned order as under:
4. The submissions of the appellant and the basis of the impugned disallowance made by the AO have been carefully considered. The appellant has, admittedly, earned exempt income during the year under consideration and the outlay in terms of interest on borrowed capital is also a fact on record. That the appellant company maintains common and un-demarcated funds is also not disputed. It is also fairly understandable that the appellant could not identify or demarcate the utilization of non-interest-bearing funds for making investments because of the common pool of funds as also on account of the enormity of the same. Similarly, in view of the massive turnover of the appellant company and its complicated fund flow, the difficulty in identifying as to which funds have been used for what purposes also cannot be emphasized more. There is no doubt about the unity of control and commonality of funds and management in relation to the "business activity" and "investment activity, income from which does not or shall not form part of the total income".
5. Since no direct expenses are purported to have been made by the appellant company in acquiring the investments or noticed by the AO, no disallowance has been made under Rule 8D (2) (i). To take care of a situation where there is a mixed use of borrowed funds, apportionment of interest expenditure is mandated as per the provisions of Rule 8D, which stands substituted by the IT (14th Amdt.) Rules, 2016, w.e.f. 02/06/2016. The said Rule provides that the expenditure in relation to income which does not form part of the total income shall be the aggregate following amounts, namely: (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one percent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income, provided that the amount referred to in clause (i) & clause (ii) shall not exceed the total expenditure claimed by the assessee. This amendment to the mechanism of calculating disallowance under the provisions of section 14A, particularly the merger of the erstwhile Rule 8D (2)
(ii) & (iii) into Rule 8D (ii) specifying the proportionate disallowance at the rate of 1%, is undoubtedly, meant for taking care of a situation where there is a mixed use of borrowed funds and non-interest-bearing funds and consequently apportionment of expenditure is well-nigh impossible. If the said provision is interpreted in a way to mean that only expenses directly related to earning dividend income or exempt income are to be disallowed and expenses of the nature of interest on borrowings which are not directly attributable to any particular income on receipt are not covered, it would only make the provision of Rule 8D (2) (ii) otiose and redundant. Such an interpretation cannot be considered to be based on purposive construction of the Rule.
6. It is judicially well settled that Rules are procedural law and are applicable to the proceedings, which are pending as on date. The aforesaid amended provisions of Rule 8D have been made effective from 02/06/2016 and, therefore, its applicability in the instant case is necessarily implied. It clearly indicates that 4 the applicability of the amended Rules are not referable to either the financial year or the assessment year. Making it effective from 2nd of June, 2016 means that the amended provisions shall be applicable to all pending proceedings of assessment or appeal as on 2nd of June, 2016. A distinction can be drawn between enactments that have substantive effect and those that are merely procedural. Here substantive means having to do with the substance of the law, in particular the nature and existence of legal rights, power or duties, whereas procedure is concerned with formalities and technicalities, rather than substance.
A procedural change is expected to improve matters for everyone concerned, without inflicting detriment or impairing the vested rights. As stated earlier, the amendment to the Rule 8D has been made only to uncomplicated and settle the issue of apportionment of expenses towards taxable and non-taxable income, which was turning into a widely contested and litigious issue.
7. Accordingly, it is held that disallowance under the provisions of section 14A has to be computed in accordance with the provisions of Rule 8D (2) (ii) @ 1% of the annual average of monthly averages of the opening and closing balances of the value of investments. However, while undertaking the aforesaid calculation, the AO shall account for only those investments which have yielded exempt income during the year. In terms of the aforesaid, the AO is directed to recompute the disallowance for addition to the returned income. It is seen that the appellant had itself added back an amount of Rs.2,05,73,267/- as disallowance under the provisions of section 14A. However, it was claimed before the AO that such voluntary disallowance was inadvertently made and that there was no requirement of the said disallowance in view of the judicial precedents which are unanimous in holding that if investments have been made out of own and non-interest-bearing funds, disallowance would not be necessary. The AO refused to entertain the said plea of the appellant at the assessment stage by relying upon the decision of the Hon'ble Supreme Court in the case of Goetze (India) Ltd. Vs. CIT [2006; 284 ITR 323] wherein it was categorically held that the AO cannot entertain claim of deduction otherwise than by filing of the revised return by the appellant. In the appellate proceedings, the appellant placed reliance on the decision of the Hon'ble Supreme Court in the case of Jute v- Corporation of India [1991; 187 ITR 688] in which it has been held that an assessee is entitled to raise not merely additional legal submissions before the appellate authorities but is also entitled to raise additional claims before them. Support to this proposition was also sought from the decision of the Bombay High Court in the case of Commissioner of Income Tax, Central-1, Mumbai Vs. Pruthvi Brokers and Shareholders [2012; 349 ITR 336] wherein it was held that the appellate authorities are entitled to exercise their jurisdiction to consider the additional claim in view of the various judgements on the issue including the judgement of the Supreme Court in the case of National Thermal Power Corporation Ltd. [1998; 229 ITR 383].
Considered in this backdrop, it is held that the appellant cannot be made to suffer an inadvertent mistake made at the time of making of return and more so when a new mechanism of disallowance under the provisions of section 14 A read with Rule 8D is being enforced, as has been done in the instant case herein above. Needless to say that the voluntary disallowance of Rs.2,05,47,517/- purported to have been made inadvertently by the appellant needs to be 5 neutralised by reducing the assessed income by the said amount before adding back the recomputed disallowance as indicated above. It is ordered accordingly and hence the grievance of the appellant, as embodied in Ground Nos. 1 to 4 are, thus, decided in the manner stated above.
6. Now the Department is in appeal.
7. The Ld. CIT DR strongly supported the order of the A.O. and further submitted that the assessee itself made the disallowance suomotu under section 14A of the Act. It was stated that the Ld. CIT(A) has not appreciated the facts in right perspective and wrongly accepted this contention of the assessee that the disallowance made by the assessee was inadvertent.
8. In his rival submissions the Ld. Counsel of the Assessee submitted that an identical issue having similar facts was a subject matter of the Departmental appeal for the preceding Assessment Year 2013-14 in ITA No. 800/Chd/2018 wherein a similar issue has been set aside to the file of the A.O. vide order dt. 02/05/2019, copy of the said order was furnished which has been placed on record.
9. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that a similar issue having identical facts was a subject matter of the Departmental appeal for the preceding Assessment Year 2013-14 wherein the issue has been set aside to the file of the A.O. vide order dated 02/05/2019 in ITA No. 800/Chd/2018 and the relevant findings have been given in para 6 which read as under:
"6. Regarding issue no.(3)above- the applicability of amendment to Section 14A from 02/06/2016,we are the view that due to the fact that there is a specific date mentioned regarding the applicability of the amended provisions hence the same cannot be said to be retrospective. The Assessing Officer is directed to compute the disallowance as per the rules applicable as on the date. Regarding the ruling that the Assessing Officer shall account on the those investments which have yielded exempt income, we find strength by the orders of the special Bench of ITAT in the case of Vreet Investment Pvt. Ltd. 188 TTJ 001 (Del-Trib.) and 6 also the order in the case of Prime Property Development Corp Pvt. Ltd. in ITA No. 7402/Mum/2016 dt. 16.11.2017. We direct the Assessing Officer to compute the disallowance accordingly."
So respectfully following the aforesaid referred to order dt. 02/05/2019 in ITA No. 800/Chd/2018 for the Assessment Year 2013-14 in assessee's own case, this issue is set aside to the file of the A.O. to be adjudicated in accordance with the directions given vide aforesaid order dt. 02/05/2019.
10. In the result, appeal of the Department is allowed for statistical purposes.
(Order pronounced in the open Court on 03/10/2019 )
Sd/- Sd/-
संजय गग% एन.के.सैनी,
(SANJAY GARG ) ( N.K. SAINI)
या&यक सद(य/ Judicial Member उपा य! / VICE PRESIDENT
AG
Date: 03/10/2019
आदे श क( $ त3ल4प अ5े4षत/ Copy of the order forwarded to :
1. अपीलाथ#/ The Appellant
2. $%यथ#/ The Respondent
3. आयकर आय6 ु त/ CIT
4. आयकर आय6 ु त (अपील)/ The CIT(A)
5. 4वभागीय $ त न;ध, आयकर अपील-य आ;धकरण, च>डीगढ़/ DR, ITAT, CHANDIGARH
6. गाड फाईल/ Guard File आदे शानस ु ार/ By order, सहायक पंजीकार/ Assistant Registrar