Income Tax Appellate Tribunal - Chandigarh
Vardhman Polytex Ltd., Ludhiana vs Department Of Income Tax on 21 November, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH 'B', CHANDIGARH BEFORE Ms. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA No.758/Chd/2009 (Assessment Years : 2001-02) Ms Vardhman Polytex Ltd., Vs. The A.C.I.T., Chandigarh Road, Range I, Ludhiana. Ludhiana. PAN: AAACV 5821H AND ITA Nos.821 & 822/Chd/2009 ( Assessment Years : 2000-01 & 2001-02) The A.C.I.T., Vs. Ms Vardhman Polytex Ltd., Range I, Chandigarh Road, Ludhiana. Ludhiana. (Appellant) (Respondent) Assessee by : Shri Subhash Aggarwal & Shri Abjit Arora Department by : Smt.Jaishree Sharma, DR Date of hearing : 21.11.2011 Date of Pronouncement : 25.11.2011 O R D E R Per SUSHMA CHOWLA, J.M. :
Out of these appeals two appeals are cross appeals filed by the assessee and the Revenue against the consolidated order of the Commissioner of Income Tax (Appeals)-I, Ludhiana dated 06.05.2009 relating to assessment year 2001-02. The third appeal is filed by the Revenue against the consolidated order of the Commissioner of Income Tax (Appeals)-I, Ludhiana dated 06.05.2009 relating to assessment year 2000-01. Both the appeals were decided by the CIT (Appeals) against the assessment completed u/s 143(3) of Income Tax Act, 1961.
2. The three appeals relating to the same assessee on similar issues were heard together and are being disposed off by this consolidated order for the sake of conveniene.
ITA No.758/Chd/2009(Assessment year 2001-02) (Assessee's Appeal)
3. The assessee has raised the following grounds of appeal:
"1. That the learned CIT(A) has erred in confirming the disallowance of Rs.3,62,752/- under section 14-A of the Income Tax Act out of Personnel & Administrative expenses in earning the Dividend Income without pointing out any direct link between the expenditure incurred and the earning of Dividend income."
4. The appeal by the assessee was filed after a delay of one day. The assessee has moved an application for condonation of delay in filing the present appeal. It is contended vide application that the appeal documents were sent though courier and due to some error on the part of the courier company the delivery was done on 15.7.2009, though the documents were sent on 11.7.2009. It is further contended that by mistake the packet had gone to Ambala and then came to Chandigarh. In the above said facts and circumstances we find merit in the condonation application moved by the assessee and the same is allowed.
5. The learned A.R. for the assessee pointed out that the issue of disallowance under section 14A of the Act on account of expenses incurred for earning dividend income arose before the Tribunal in assessee's own case relating to assessment year 2002-03 and disallowance of Rs.1 lac was upheld in the case of the assessee.
6. The learned D.R. for the Revenue placed reliance on the order of the Assessing Officer.
7. We have heard the rival contentions and perused the record. During the year under consideration the assessee had received dividend income of Rs.62,04,990/- and break up of the same is as under :
S.No. Name of the security Investible Amount Dividend Amount
( in lacs)
1. Mahavir Spinning Mills 2079.37 60,61,440/-
Ltd.
2. IDBI Ltd. 13.65 1,43,550/-
TOTAL 62,04,990/-
8. The investment in the said securities was made in the financial year 1996-97. Similar issue was raised before the Tribunal in assessment year 2002-03 where the assessee had received dividend income of Rs.62,91,120/- from the same companies as received in assessment year 2001-02. The Tribunal in ITA No.1139/Chd/2009 alongwith cross appeal in ITA No.62/Chd/2010 relating to assessment year 2002-03 vide order dated 30.8.2011, held that part of the expenditure out of personnel and administrative expenditure is to be disallowed being relatable to the earning of exempt income in view of the provisions of section 14A of the Act. The disallowance was restricted to Rs.1 lac, by observing as under :
7. We have heard the rival contentions and perused record. The assessee during the year under consideration, had received dividend income of Rs.62,91,120/- and break-up of the same is as under :
S.No. Name of the security Investible Amount Dividend Amount ( in lacs)
1. Mahavir Spinning Mills 2079.37 60,61,440/-
Ltd.
2. IDBI Ltd. 8.37 2,29,680/-
TOTAL 62,91,120/- 8. Admittedly, the said investment was made in the financial year 1996-97. The claim of the assessee is that the majority of the dividend income is earned from a group company under the same management by way of a single dividend warrant and no efforts/expenses were spent or incurred to earn the same. The investment in shares was made in the earlier years and no borrowings as per the assessee were raised to make the aforesaid investment. The CIT(A) has incorporated the reply of the assessee under para 4.1 at pages 3 to 9 of the appellate order. The tabulated details of investments made by the assessee starting from financial year 1996-97 to financial year 2001-02 reflects that the investment made in the financial year 1996-97 is carried forward to the financial year 2001-02. As per the assessee, it has sufficient equity fund as well as reserves amounting to Rs.14317 lacs, which justifies the investment made by the assessee. The extract of the balance sheet relating to financial year 1996-97 was enclosed along with the written submissions. The CIT(A) restricted the disallowance to Rs.1,00,000/- u/s 14A of the Act in view of the similar issue being decided in assessment year 2004-05.
9. We find that the Hon'ble Bombay High Court in Godrej & Boyce Mfg.Co.Ltd V DCIT & Anr, [234 CTR 1 (Bom) reversing the order of Special Bench of Mumbai Tribunal on the issue held that the provisions of Rule 8D were not ultra virus the provisions of Section 14A and it was also held that the same do not offend Article 14 of the Constitution. It was further held that the provision of Rule 8D was to be applied prospectively w.e.f. 01.04.2007 i.e. in relation to assessment year 2008-09 and subsequent years as the Memorandum explaining the provisions of the Finance Bill 2006 states that this amendment would take effect from 01.04.2007. The Court further held that even in the absence of sub-section (2) and (3) of Section 14A and Rule 8D, the Assessing Officer was not precluded from making apportionment on account of expenditure relatable to earning of exempt income.
10. The ld. AR for the assessee placed reliance on the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT V Hero Cycles Ltd., 323 ITR 518 (P&H) which has been relied upon in CIT V Metalman Auto P.Ltd., 336 ITR 434 (P&H). Ld. DR for the Revenue pointed out that the issue before the Hon'ble Punjab & Haryana High Court was in connection with disallowance of financial expenses which is not the issue in the present appeal. We find that the Hon'ble Punjab & Haryana High Court in CIT V Hero Cycles Ltd. observed that "In view of the findings reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable.". Following the ratio laid down by the Hon'ble Bombay High Court in Godrej & Boyce Mfg.Co.Ltd V DCIT, we uphold the disallowance of Rs. 1,00,000/- being expenditure relatable to the earning of the exempt income by invoking the provisions of section 14A of the Act. The ground of appeal raised by the assessee is thus dismissed."
9. The dividend income earned by the assessee during the year under consideration is from the identical companies as earned in assessment year 2002-03. As the facts are identical, applying the ratio of assessment year 2002-03 to the facts of the present case the disallowance under section 14A of the Act is restricted to Rs.1 lac. The ground of appeal raised by the assessee is partly allowed.
ITA No.821 & 822/Chd/2009 (Assessment year 2000-01 & 2001-02) (Revenue's Appeals)
10. The Revenue has raised following grounds of appeal in ITA No.821/Chd/2009:
"1. That the Ld. CIT(A) has erred in deleting the addition of Rs.17,09,309/- made by the Assessing Officer u/s 36(1)(iii) of the Income Tax Act,1961.
3. That the Ld. CIT(A) has erred in law in holding that the provisions of section 234D of the Income Tax Act, 1961 are not applicable for the Assessment Year 2000-01 as the same are applicable from 01.06.2003, ignoring the fact that the assessment (set aside case) was completed u/s 143(3) on 01.10.2008."
11. The Revenue has raised following grounds of appeal in ITA No.822/Chd/2009:
"1. That the Ld. CIT(A) has erred in deleting the addition of Rs.92,82,000/- made by the Assessing Officer u/s 36(1)(iii) of the Income Tax Act,1961.
2. That the Ld. CIT(A) has erred in law and facts in excluding financial expenses in calculating the expenses relatable to earning dividend income thereby allowing relief of Rs.2,35,756/- out of total disallowance of Rs.5,98,508/-/- made by the Assessing Officer under section 14A of the Income Tax Act, 1961.
3. That the Ld. CIT(A) has erred in law in holding that the provisions of section 234D of the Income Tax Act, 1961 are not applicable for the Assessment Year 2001-02 as the same are applicable from 01.06.2003, ignoring the fact that the assessment (set aside case) was completed u/s 143(3) on 01.10.2008."
12. Ground No.2 in ITA No.822/Chd/2009 raised by the Revenue is against the relief allowed by the CIT (Appeals) in respect of disallowance under section 14A of the Act. Identical issue has been adjudicated by us in paras hereinabove in respect of ground No.1 raised by the assessee in its appeal relating to assessment year 2001-02. In view of the above said ratio laid down by us, ground No.2 raised by the Revenue is dismissed.
13. The issue in ground No.1 raised by the Revenue in both the appeals is against the deletion of addition made under section 36(1)(iii) of the Income Tax Act.
14. The learned A.R. for the assessee pointed out that the issues stand covered by the ratio laid down by the Hon'ble Supreme Court in DCIT Vs. Core Health Care Ltd. [298 ITR 194 (SC)]. It was further pointed out by the assessee that similar issue has also been adjudicated by the Hon'ble Punjab & Haryana High Court in CIT Vs. M/s Highway Cycle Industries Ltd., ITA No.402 of 2008, date of decision 9.9.2008 wherein following the ratio laid down by the Hon'ble Supreme Court in DCIT Vs. Core Health Care Ltd.(supra) the appeal of the Revenue was dismissed.
15. The learned D.R. for the Revenue placed reliance on the order of the Assessing Officer and pointed out that the Assessing Officer had decided the appeal following the Full Bench decision of the Hon'ble Punjab & Haryana High Court in assessee's own case wherein the issue was decided against the assessee.
16. It was pointed out by the learned A.R. for the assessee that the borrowed capital was utilized for expansion of unit at Baddi and in view of the ratio laid down by the Hon'ble Supreme Court no disallowance is warranted under section 36(1)(iii) of the Act.
17. We have heard the rival contentions and perused the record. We find that the Revenue in its appeals i.e. ITA Nos.821 & 822/Chd/2009 relating to assessment years 2000-01 and 2001-02 have raised similar issue against the deletion of addition made under section 36(1)(iii) of the Act.
18. As common issues have been raised by the Revenue in the appeals relating to assessment years 2000-01 and 2001-02 we proceed to decide the same together.
19. The assessee had borrowed funds to set up new units at Baddi and Bhatinda in assessment years 2000-01 and 2001-02 respectively. These units were set up in addition to the existing units of the assessee for manufacturing of same items as originally manufactured by the assessee. The setting up of the units was held to be expansion of existing business of the assessee by the Tribunal in the appeal relating to assessment year 1992-93. The Tribunal in appeal relating to assessment year 1992-93 had allowed deduction of interest on borrowed capital holding that the deduction is to be allowed where the amounts borrowed were invested for the expansion of the existing business of the assessee. The Hon'ble Punjab & Haryana High Court in the appeal of the Revenue reported at 299 ITR 152 (P&H) decided the issue against the assessee. The matter was set aside to the file of the Assessing Officer by the Tribunal in the appeals relating to assessment years 2000-01 and 2001-02.
20. The Assessing Officer held that as in the case of the assessee, the expenditure was incurred for setting up a unit which had noot commenced production, the interest attributable to the borrowed capital cannot be allowed as a deduction and such interest was to be capitalized only. The Assessing Officer accordingly disallowed the interest paid on borrowed funds amounting to Rs.17,09,309/- for assessment year 2000-01 and Rs.92,82,000/- for assessment year 2001-02. The CIT (Appeals) considered the contention of the assessee that the units at Baddi and Bhatinda were set up in assessment years 2000-01 and 2001-02 respectively and were manufacturing the same items as were being manufactured by the then existing units of the assessee. Accordingly, the said setting up of units was only expansion of the existing business of the assessee, which was also upheld by the Tribunal in assessment year 1992-93 in the case of the assessee. In the assessment years under consideration, when the appeals came up before the Tribunal against deletion of disallowance the matter was set aside to the file of the Assessing Officer so that the issue could be decided in accordance with the outcome of the assessee's appeal pending before the jurisdictional High Court. The decision of the Hon'ble High Court reported at 299 ITR 152 (P&H) was against the assessee. The Assessing Officer appliled the same. The CIT (Appeals) held that he did not agree with the view of the Assessing Officer that subsequent decision of the Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra), does not help the case of the appellant, I do not agree with the A.O. in this regard. If the Hon'ble ITAT had come to the conclusion that the borrowed funds of the appellant were invested not in expansion of the existing business, but in a new business, then interest on the capital invested for such business was even otherwise to be disallowed. Therefore, the observation of the A.O. that the borrowed funds were invested by the appellant not in expansion of the existing business, but in a new unit where business had not started, is not in line with the conclusion drawn by the Hon'ble ITAT.
21. The CIT (Appeals) further observed that the Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra) have held that the proviso to section 36(1)(iii) added by the Finance Act 2003, is applicable from the Assessment year 2004-05 only and that shall be prospective. The Hon'ble Supreme Court has further observed in this case that section 36(1)(iii) of the Act was a code by itself and determination of actual cost of an asset u/s 43(1) had no relevancy to section 36(1)(iii).
22. The CIT (Appeals) further observed that As further pointed out by the ld. Counsel, even the jurisdictional High Court in the light of this decision of the Hon'ble Supreme Court, had changed its stand and held the prospective operation under section 36(1)(iii) in favour of the assessee in the case of CIT Vs. Highway Cycle Inds. Ltd. (ITA No.402/2008 dated 9.9.2008. It is seen that in this case where assessment year involved was 2000-01, i.e. prior to A.Y. 2004-05, the Hon'ble High Court has rather allowed deduction of such interest pertaining to a new business that came into operation in the subsequent assessment year from the income of the existing business. The assessee had extended its existing business of manufacturing bicycle parts into manufacture of a different item and component. Following the ratio of the decision of the Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra), the Hon'ble jurisdictional High Court held that such interest was duly allowable as deduction.
23. In view of the above said, the CIT (Appeals) allowed the claim of deduction of interest paid on borrowed capital which was invested for the expansion of the existing business, as allowable business deduction in the hands of the assessee.
24. The Revenue is in appeal against the order of the CIT (Appeals) for both the captioned assessment years 2000-01 and 2001-02.
25. We find that the issue raised before us is allowability of interest on borrowed capital which was utilized for setting up of the units at Baddi and Bhatinda in assessment years 2000-01 and 2001-02 respectively, which were established in extension of the manufacturing activities already carried on by the assessee. The interest expenditure relatable to such borrowed funds is to be allowed as revenue expenditure in view of the ratio laid down by the Hon'ble Supreme Court in Core Health Care Ltd. (supra). The Tribunal in the earlier round of appeals in assessee's onw case relating to assessment years 2000-01 and 2001-02 had held that the borrowed capitals were utilized for expansion of existing business of the assessee. However, the matter was remitted back to the file of the Assessing Officer to decide the issue in accordance with the outcome of assessee's appeal pending before the Hon'ble Jurisdictional High Court. Admittedly, the Hon'ble High Court vide its decision reported at 299 ITR 152 (P&H) had held that the proviso to section 36(1)(iii) of the Act inserted by the Finance Act 2003 was merely clarificatory and interest paid on the capitals borrowed even for expansion of existing business could not be allowed as revenue expenditure up to the date when it was first put to use. However, the Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra) have laid down the proposition that the proviso to section 36(1)(iii) added by the Finance Act 2003, is applicable from the Assessment year 2004-05 only and that shall be prospective. The Hon'ble Supreme Court has further observed in this case that section 36(1)(iii) of the Act was a code by itself and determination of actual cost of an asset u/s 43(1) had no relevancy to section 36(1)(iii). The Jurisdictional High Court in CIT Vs. Highway Cycle Inds. Ltd. (supra) have followed the ratio laid down by the Hon'ble Supreme Court in Core Health Care Ltd.(supra) and held that the proviso to section 36(1)(iii) of the Act would apply prospectively. The assessment years involved before us are assessment years 2000-01 and 2001-02 that is prior to assessment year 2004-05. Following the ratio laid down by the Hon'ble Supreme Court in Core Health Care Ltd.(supra) and the Hon'ble Punjab & Haryana High Court in Highway Cycle Inds. Ltd. (supra), we uphold the order of the CIT (Appeals) in allowing the claim of interest on borrowed capital as revenue expenditure, where such borrowed capitals were utilized for expansion of existing business of the assessee. The ground No.1 raised by the Revenue in assessment years 2000-01 and 2001-02 are thus dismissed.
26. The issue in ground No.2 raised by the Revenue in assessment year 2000-01 and ground No.3 raised by the Revenue in assessment year 2001-02 are identical.
27. The issue raised by the Revenue is against the application of provisions of section 234D of the Income Tax Act. The learned A.R. for the assessee fairly pointed out that the issue stands covered by the order of the Tribunal in assessee's own case relating to assessment year 2002-03 (supra) wherein it has been held that the provisions of section 234D were applicable only from assessment year 2004-05 onwards.
28. On perusal of the record and the order of the Tribunal relating to 2002-03 we find that identical issue arose before the Tribunal in assessee's own case and the Tribunal (supra) vide it is order dated 30.8.2010 held as under :
"12. The Revenue vide Ground No.2 has raised the issue regarding application of provisions of Section 234D of the Income-tax Act. The AO had directed charging of interest u/s 234D of the Act. The contention of the assessee before CIT(A) was that the said Section was applicable from 01.06.2003 as the same was introduced by Finance Act, 2003 and was not applicable to the year under consideration. Reliance was placed on the ratio laid down by the Special Bench of Delhi Tribunal reported in ITO V Ekta Promoters Pvt. Ltd., 117 TTJ 289 (Del) (SB). The CIT(A) following the ratio laid down by the Special Bench of Delhi Tribunal in ITO V Ekta Promoters P.Ltd. (supra) held that the levy of interest u/s 234D of the Act would apply prospectively i.e. from assessment year 2004-05 onwards. The Revenue is in appeal against the said directions of the CIT(A).
13. Ld. DR for the Revenue pointed out that the issue stands covered by the order of Kerala High Court in CIT V Kerala Chemicals & Proteins Ltd., 323 ITR 584 (Ker). Ld. AR for the assessee, on the other hand, pointed out that the Hon'ble Delhi High Court in Director of Income Tax V Jacabs Civil Incorporated, 330 ITR 578 (Del) has held that Section 234D was applicable only from assessment year 2004-05 onwards.
14. We have heard the rival contentions and perused records. Both the ld. Counsels before us have failed to point out any ratio laid down by the jurisdictional High Court on the issue of levy of interest u/s 234D of the Act. Ld. AR for the assessee placed reliance on the ratio laid down by the Hon'ble Delhi High Court in Director of Income Tax V Jacabs Civil Incorporated (supra) and also the Special Bench of Delhi Tribunal in ITO V Ekta Promoters P.Ltd. (supra) whereas the ld. DR for the Revenue has placed reliance on the ratio laid down by the Hon'ble Kerala High Court in CIT V Kerala Chemicals & Proteins Ltd. (supra). The Hon'ble Delhi High Court has laid down the proposition that Section 234D was applicable only from the assessment year 2004-05 onwards and not in the earlier assessment years and therefore, no interest under that provision could be levied for the period prior to the assessment year 2004-05. On the other hand, contrary view has been held by the Hon'ble Kerala High Court in CIT V Kerala Chemicals & Proteins Ltd (supra). However, in view of the diverging opinions expressed by the two different High Courts the one favouring the assessee is to be applied as is held by various Courts on this account. Applying the ratio laid down by the Hon'ble Delhi High Court in Director of Income Tax V Jacabs Civil Incorporated (supra) we are in agreement with the order of CIT(A) that interest u/s 234D of the Act is chargeable only from assessment year 2004-05 onwards. The year under appeal relates to assessment year 2002-03. The provisions of Section 234D are not applicable to the captioned assessment year. Thus, Ground No.2 raised by the Revenue is dismissed."
29. The assessment years before us are assessment years 2000-01 and 2001-02 i.e. prior to assessment year 2004-05, which is year from which section 234D of the Income Tax Act was introduced. Following the ratio laid down by the Tribunal in assessee's own case relating to assessment year 2002-03, we dismiss the respective grounds of appeal raised by the Revenue in assessment years 2000-01 and 2001-02.
30. In the result, the appeal of the assessee relating to assessment year 2001-02 is partly allowed and both the appeals of the Revenue relating to assessment years 2000-01 and 2001-02 are dismissed.
Order pronounced in the open court on this 25th day of November, 2011.
Sd/- Sd/-
(MEHAR SINGH) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated 25th November, 2011
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
True Copy
By Order
Assistant Registrar, ITAT, Chandigarh
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