Income Tax Appellate Tribunal - Ahmedabad
The Dy. Cit., Circle-4,, Ahmedabad vs Gsl Nova Petrochemicals Ltd.,, ... on 20 June, 2018
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'lh' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, AHMEDABAD
सव ी राजपाल यादव या यक सद य एवं olhe vgen] ys[kk lnL;,
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BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND
SHRI WASEEM AHMED, ACCOUNTANT MEMBER
आयकर अपील सं./I.T.A.No.584/Ahd/2014
( नधा रण वष / Assessment Year : 2009-10)
The DCIT, बनाम/ GSL Nova
Circle - 4, Vs. Petrochemicals Ltd.,
Ahmedabad. Survey No.396-403,
Mariya Village,
Sarkhej Bavla High
Way,
Ahmedabad - 380 110
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AAACN 5419 K
(अपीलाथ /Appellant) .. (!"यथ / Respondent)
अपीलाथ ओर से / Appellant by : Shri Saurabh Singh, Sr. D.R.
!"यथ क$ ओर से/Respondent by : Shri T. P. Hemani, A.R.
ु वाई क$ तार)ख /
सन Date of Hearing 31/05/2018
घोषणा क$ तार)ख /Date of Pronounce ment 20/06/2018
आदे श / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Revenue against the appellate order of the Commissioner of Income Tax(Appeals)-IV, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)- IV/AHD/300A/13-14 dated 03/12/2013 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10 -2- referred to as "the Act") dated 25/11/2011 relevant to Assessment Year (AY) 2009-10.
2. The grounds of appeal raised by the Revenue are as under:-
"1. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.44,44,962/- made on account of disallowance u/s. 36(1)(iii) of the Act, without properly appreciating the facts of the case and the material brought on record.
2. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.17,760/- made on account of disallowance u/s.14A of the Act, without properly appreciating the facts of the case and the material brought on record.
3. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.23,508/- made on account of capitalization on interest, without properly appreciating the facts of the case and the material brought on record.
4. On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the AO.
5. It is, therefore, prayed that the order of the ld. CIT(A) may be set aside and that of the AO may be restored to the above extent."
3. The first issue raised by the Revenue in ground no.1 is that learned CIT(A) erred in deleting the addition made by the AO for Rs.44,44,962/- on account of interest on the diversion of the fund.
4. Briefly stated facts are that the assessee is a limited company and engaged in the manufacturing and trading business of POY, FDY, DT, DTEX, Polyester Chips and trading in cloth, etc. The assessee in the year ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10 -3- under consideration has shown advances to its sister concern as detailed under:
Sr. Name of the Sister Concern Amount
No.
1. Gupta Dying & Printing Mills Ltd. 2,46,38,544/-
2. Gupta Synthetics Ltd. 1,24,02,806/-
The assessee has not charged any interest on the amount advanced to its sister concerns whereas it was incurring interest cost on the money borrowed by it. Therefore, the AO was of the view that the assessee has diverted interest-bearing fund to its sister concerns without charging any interest thereon. Accordingly, the AO show-caused the assessee to explain for making the disallowance of proportionate interest on the amount advanced to its sister concern.
However, the assessee failed to make any reply in compliance to the query raised by the AO. Therefore, the AO worked out the amount of interest for Rs.44,44,962/- (12% on Rs. 2,46,38,544 + 1,24,02,806) and made the disallowance u/s 36(1)(iii) of the Act. The amount disallowed was added back to the total income of the assessee.
5. Aggrieved, assessee preferred an appeal to learned CIT(A). The assessee before the learned CIT(A) submitted that it has advanced money to its sister concern in connection with its business transactions. As such the assessee during the year has shown sales of goods to its sister concern worth of Rs. 1339.64 lacs & Rs. 2083.79 lacs respectively. This fact was ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10 -4- duly disclosed in the tax audit report in the column of related party transactions. Thus, the debit balance as observed by the AO is representing the business transactions of the assessee with its sister concern.
6. The assessee in case of the advance made to Gujarat Dying and Printing Mills Ltd has recovered the amount of interest for Rs.11.81 lacs on account of late payment made by it against the supply of goods. This fact was also reported in tax audit report in the column of related party transactions.
7. The assessee has shown its capital of Rs.13.50 Crores and interest- free unsecured loans of Rs.13.53 crores in its balance sheet. The said fund available with the assessee exceeds the amount of advances made to the sister concern. Therefore, the advances were made to the sister concern out of its own and interest-free funds. Hence, it can be concluded that no advances have been given out of the interest-bearing funds. The assessee in support of his claim relied on the judgment of Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. reported in 178 Taxman 135.
The assessee also submitted that the loans obtained by it have been utilized for the acquiring fixed assets and to meet the working capital requirements of the business. The AO has not proved any nexuses ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10 -5- between the borrowed funds and the money advanced to sister concern justifying that advances have been given out of the borrowed funds.
Without prejudice to the above, the Assessee also submitted that it has borrowed Term Loan @ 9.75% and Working Capital Loan @ 10.75% per annum whereas the AO has charged interest @ 12% on the money advanced to the sister concern without applying any basis.
It was also submitted that the assessee was show-caused for not charging the interest on the advance given to the sister concern as per order sheet entry dated 28-11-2011, but the assessment order was passed u/s 143(3) of the Act vide order dated 25-11-2011. Therefore, it is clear that the AO has not applied his mind and charged the interest on the advances given to the sister concern on a notional basis.
The learned CIT(A) after considering the submission of the assessee, deleted the addition made by the AO by observing as under:
"5.2 I have carefully considered the submissions made by the appellant and have gone through the assessment order as well.
5.2.1 The action of the AO is not justified in view of the following reasons:
(i) There are enough evidences submitted by the appellant to prove that actually these were the debit balance in the running business account. The appellant is having regular business transactions with both these related concerns.
(ii) The appellant has also charged interest of Rs.11.81 lakhs from one of the related party on late payment against sale of goods which ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10 -6- proved that the transactions were carried out by the appellant purely on commercial basis.
(iii) The appellant was having sufficient paid-up capital and interest free unsecured loans at its disposal to cover the debit balance of the two sister concerns.
(iv) The contention of the appellant that the date of order i.e. 25-11- 2011 is before the date of show-cause entry dtd.28-11-2011 is also correct which proves that appellant was not given any opportunity to submit its explanation on this issue.
(v) Similar disallowances in earlier AY 2008-09 and subsequent AY 2010-11 have been deleted by ld. CIT (Appeal) after considering the above factors which were also present in above stated two years. 5.2.2 In view of above, the addition made by the AO of Rs.44,44,962/- on account of disallowance u/s 36(1)(iii) of the Act cannot be sustained and the same is deleted. This ground is allowed."
Being aggrieved by order of learned CIT(A) Revenue is in second appeal before us.
The Ld. DR before us vehemently supported the order of the AO whereas, the learned AR before us filed a paper book comprising pages from 1 to 31 and reiterated the submission made before the learned CIT(A).
8. We have heard the rival contentions and perused the material available on record. The issue in the instances case relates to the disallowance made by the AO for the amount of interest charged on the money advanced by the assessee to its sister concern. The assessee has ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10 -7- shown advances to sister concern aggregating to Rs.3,70,41,350/- only. The assessee claimed that such money advanced to its sister concern represents the business transactions.
Similarly, it was also claimed by the assessee that its owned fund exceeds the amount of advanced made to sister concern.
It is an undisputed fact that the owned fund of the assessee exceeds the amount of money advanced to its sister concern as evident from the copy of the balance sheet, which is placed on Page No.7 of the Paper Book. The relevant extract of the balance sheet is reproduced as under:
GSL - NOVA PETROCHEMICALS LIMITED (Formally known as Nova Petrochemicals Ltd.) Balance Sheet as at 31st March, 2009 Particulars Sche Rs. As at 31- As at 31-
No. 03-2009 03-2008
Rs.
SOURCES OF FUNDS
1. Shareholder's Funds:
(a) Share Capital 1 135000000 135000000
(b) Reserves and Surplus 2 Nil Nil
135000000 135000000
From the above, there remains no doubt that the owned funds of the assessee exceed the amount of money advanced to its sister concern. Therefore, the presumption can be drawn that the money has been advanced out of its owned fund. In holding so we find support and guidance from the judgment of Hon'ble Bombay High Court in the case ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10 -8- of CIT vs. Reliance Utilities & Power Ltd. 178 Taxman 135. The relevant extract of the order reproduced below:
"If there are funds available both, interest-free and overdraft and/or loans are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. In the instant case said presumption was established considering the findings of fact, both by the Commissioner (Appeals) and the Tribunal."
As the owned fund of the assessee exceeds the amount of advances given to its sister concern, we hold that the advances have been made out of the owned funds of the assessee, and therefore there is no question of making any disallowance on account of diversion of fund u/s 36(1)(iii) of the Act. Hence, we do not find any reason to interfere in the order of learned CIT(A).
9. The second issue raised by the Revenue in the ground no. 2 is that learned CIT(A) erred in deleting the addition made by the AO for Rs.17,760/- under the provision of Section 14A of the Act.
The assessee in its balance sheet has shown investment in shares but failed to justify the source of money utilized in such investments. The AO accordingly assumed that the borrowed funds had been utilized in investing in shares. Therefore, the disallowance is required to be made under the provisions of Section 14A r.w.r. 8D of Income Tax Rules. Accordingly, the AO made the disallowances for Rs.17,760/- only and added to the total income of the assessee.
ITA No.584/Ahd/2014DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10 -9-
10. Aggrieved, assessee preferred an appeal to learned CIT(A). The assessee before the learned CIT(A) submitted that it has not earned any dividend/ tax-free income from such investments. Therefore, there is no question of making the disallowance u/s 14A r.w.r. 8D.
The learned CIT(A) after considering the submission of the assessee deleted the addition made by the AO by observing as under:
"6.2 I have carefully considered the submissions made by the appellant and have gone through the assessment order as well.
6.2.1 In view of the fact that appellant has not earned any exempted income in the form of dividend in this year, the disallowance made by the AO u/s 14A does not seem to be justified. In view of this, the addition made by the AO of Rs.17,760/- is deleted. This ground is allowed."
Being aggrieved by order of the learned CIT(A) Revenue is in the second appeal before us. Both learned AR and DR vehemently supported the order of the order of authorities below as favorable to them.
11. We have heard the rival contentions and perused the material available on record. It is an undisputed fact that the assessee has not earned any dividend income / exempt income from the shares held as an investment. Therefore, in our considered view, no disallowance u/s 14A r.w.r. 8D can be made. In this regard, we find support and guidance from the judgment of Hon'ble Gujarat High Court in the case of CIT vs. ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10
- 10 -
Corrtech Energy P. Ltd. reported in 372 ITR 97. The relevant extract of the judgment is reproduced as under:
"Section 14A(1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed that where the assessee did not make any claim for exemption, section 14A could have no application."
There is no ambiguity that there was no dividend income / exempt income earned by the assessee during the year. Therefore, the ratio laid down by the Hon'ble Gujarat High Court in the case of Corrtech Energy Pvt. Ltd (supra) is squarely applicable to the facts of the case on hand. Therefore, we do not find any reason to interfere in the findings of the learned CIT(A), and hence ground of appeal filed by the Revenue is dismissed.
12. The next issue raised by the Revenue in the ground no. 3 is that the learned CIT(A) erred in deleting the addition made by the AO for Rs. 23,508/- on account of capitalization of interest expenses.
The assessee during the year has shown capital work-in-progress for Rs. 1,95,900/- only. The AO was of the view that the borrowed funds had ITA No.584/Ahd/2014 DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10
- 11 -
been utilized in the capital work-in-progress as shown in the balance sheet but the assessee has failed to do so. Therefore, the corresponding interest expenses claimed by the assessee should be disallowed and allocated to the capital work-in-progress. Accordingly, the AO worked out the interest expenses about the capital work-in-progress @12% of Rs.1,95,900/- and accordingly, worked out the element of interest expense of Rs. 23,508/-, which needs to be capitalized. Accordingly, the AO disallowed the same and added to the total income of the assessee.
13. Aggrieved, assessee preferred an appeal to learned CIT(A). The assessee before the learned CIT(A) submitted that its own fund including the interest-free unsecured loan of Rs.13.50 crores and 13.53 crores respectively exceeds the amount of capital work-in-progress. Therefore, the entire amount of investment was made by the assessee on its own funds.
The learned CIT(A) after considering the submission of the assessee deleted the addition made by the AO by observing as under:
"7.2.1 It is seen that AO has not correlated the utilization of interest bearing borrowed funds for purchase of items falling in work- in-progress. Without correlating the flow of funds, this finding of the AO cannot be said to be based on verification of facts. Further, the appellant has more than sufficient paid-up capital and interest free unsecured loans to cover such investment in work-in-progress. In view of this, it is held that the AO was not justified in making addition of Rs.23,508/- to the income of the appellant and the same is hereby deleted. This ground is allowed."ITA No.584/Ahd/2014
DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10
- 12 -
Being aggrieved by order of the learned CIT(A) revenue is in second appeal before us. Both learned AR and DR vehemently support the order of authorities below as favorable to them.
14. We have heard the rival contentions and perused the material available on record. There is no dispute that the owned fund of the assessee exceeds the amount of capital work in progress. Therefore, the presumption can be drawn that the money has been invested out of its owned fund. In holding so, we find support and guidance from the judgment of Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. 178 Taxman 135. The relevant extract of the order reproduced below:
"If there are funds available both, interest-free and overdraft and/or loans are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. In the instant case said presumption was established considering the findings of fact, both by the Commissioner (Appeals) and the Tribunal."
As the owned fund of the assessee exceeds the amount of capital work in progress, we hold that it has been made out of the owned funds of the assessee and therefore there is no question of making any disallowance on account of money invested in the capital work in progress. Hence, we do not find any reason to interfere in the order of learned CIT(A).
ITA No.584/Ahd/2014DCIT Vs. GSL Nova Petrochemicals Pvt. Ltd.
Asst.Year -2009-10
- 13 -
15. Ground No.4 and 5 are general and do not require any separate adjudication.
16. In the result, appeal filed by the Revenue is dismissed.
This Order pronounced in Open Court on 20/06/2018
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(RAJPAL YADAV) (WASEEM AHMED)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 20/06/2018
Priti Yadav, Sr.PS
आदे श क त"ल#प अ$े#षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. !"यथ / The Respondent.
3. संबं0धत आयकर आयु2त / Concerned CIT
4. आयकर आयु2त(अपील) / The CIT(A)-IV, Ahmedabad.
5. 5वभागीय ! त न0ध, आयकर अपील)य अ0धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER, स"या5पत ! त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad