Income Tax Appellate Tribunal - Ahmedabad
Msk Projects (India) Ltd., Ahmedabad vs Department Of Income Tax on 24 August, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A"
Before SHRI T K SHARMA, JUDICI AL MEMBER
And SHRI A N P AHUJ A, ACCOUNTANT MEMBER
ITA nos.2139 & 2140/Ahd/2009
(Assessment Years:-2004-05 & 2005-06)
Assistant Commissioner of M/s MSK Projects (India)
V/s
Income-tax, Circle-4, Ltd., 707-708, Sterling
Baroda Centre, R C Dutt Road,
Baroda-390005
PAN: AABCM 4107 C
[Appellant] [Respondent]
Revenue by :- Shri Abhijit Kumar N, DR
Assessee by:- Shri S N Soparkar, AR
Date of Hearing:- 24-08-2011
Date of Pronouncement:- 30-08-2011
O R D E R
A N Pahuja: These two appeals by the Revenue filed on 6.7.2009 against two separate orders dated 16-03-2009 of the ld. CIT(Appeals)-III, Ahmedabad [the "CIT(A)"], for the Assessment Years 2004-05 and 2005-06, raise the following grounds:-
ITA no.2139/ Ahd/2009 [AY 2004-05] "[1] On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the disallowance of interest of Rs.48,25,520/- though the interest attributable to exempt income or capital asset could not be allowed u/s. 14A or Section 36(1)(iii) of the Income Tax Act. 1961.
[2] The CIT(A) erred in law and on facts in deleting the interest disallowance of Rs.74,250/-, over looking the fact that the assessee had diverged the interest bearing funds for associate concerns.
[3] The CIT(A) erred in law and on facts in allowing the depreciation on trucks and dumpers at 40% though these trucks and dumpers were exclusively used for assessee's own business and not for commercial purpose, for which the applicable rate is 25%.
[4] The appellant craves leave to add, to amend or alter the above grounds as may be deemed necessary.
2 ITA nos.2139 & 2140/Ahd/2009 Relief claimed in appeal.
The order of the CIT(A) on the issues raised in the aforesaid grounds be set aside and that of the Assessing Officer be restored."
ITA no.2140/ Ahd/2009[AY 2005-06] [1] On the facts and in the circumstances of the case, the learned CIT(A) erred in allowing the disallowance of interest of Rs.15,27,015/- though the interest attributable to exempt income or capital asset could not be allowed u/s. 14A or Section 36(1)(iii) of the Income Tax Act. 1961.
[2] The appellant craves leave to add, amend or alter the above grounds as may be deemed necessary.
Relief claimed in appeal.
The order of the CIT(A) on the issues raised in the aforesaid grounds be set aside and that of the Assessing Officer be restored.
2. Adverting first to ground no.1 in these two appeals, facts, in brief, as per relevant orders are that return declaring income of Rs.2,52,36,151/- filed on 01-11-2004 for the AY 2004-05 by the assessee, a contractor, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act,1961[hereinafter referred to as the 'Act'] issued on 16.2.2005. On perusal of the P&L Account of the assessee, the Assessing Officer ['AO' for short] noticed that the assessee claimed deduction for an amount of Rs.1,79,28,681/- towards finance charges while the balance sheet revealed investment in shares of group concerns namely M/s M S Projects (India) JV Ltd. in earlier years and MSK Infrastructure & Toll Bridge Pvt. Ltd. in the current year besides other companies to the extent of Rs.4,38,68,371/-. According to the AO, this investment was held on long term basis and not as a stock-in-trade or for the purpose of business of the assessee. To a query by the AO, the assessee submitted working of the disallowance on the basis of disallowance made in the earlier years while relying on their submissions in those years. However, the AO did not accept these submissions on the 3 ITA nos.2139 & 2140/Ahd/2009 ground that the balance sheet revealed investment in long term shares of Rs.4,38,68,371/-while total loan (secured and unsecured) increased from Rs.11.8 crores to Rs.19.9 crores in the year under consideration. Had the assessee not invested in shares of more than 2.48 crore during the year under consideration there would have been no need of borrowings to the extent of Rs.2.48 crore, the AO observed. Since interest attributable to exempt income was not admissible in terms of provisions of sec 14A of the Act while claim of interest attributable to such investment made with borrowed funds was not established for the purpose of business of the assessee , the AO disallowed interest @ 11 % pa ,amounting to Rs.48,25,520/- u/s.36(l)(iii)/14A of the Act in the AY 2004-05.
2.1 Likewise, in the AY 2005-06, the AO noticed that the assessee incurred financial expenses of Rs.1,63,00,905/- out of which Rs.1,17,37,506/- was towards interest on term loan and other loans from Banks while the assessee invested Rs. 1,37,93,000/- in the equity of MSK Projects India (JV) Ltd. besides preferential shares of Rs. 7,50,000/- .Since the assessee diverted interest bearing funds from the Bank, to group concerns, from whom no interest had been charged nor any other income was received, the AO asked the assessee to explain. In response, the assessee replied vide letter dated 25-12-2007 that the Company made investment in the shares out of its own cash flow during the year, the company having sufficient funds of its own in the form of share capital, reserves and non-interest bearing loans. Since the loans taken from the banks and others were utilised for the purpose of the normal business of the company and the secured loans were taken for purchase of plant and machineries, relying upon the decision of the Hon'ble Supreme Court in S.A. Builders v/s CIT,288 ITR 1(SC), the assessee pleaded that no disallowance could be made. However, the AO did not accept the submissions of the assessee on the ground that the contention that the borrowed funds had been utilized for the business purposes was not borne out by the facts placed before him. As against the investment of Rs.1,37,93,000/- in M/s MSK Projects 4 ITA nos.2139 & 2140/Ahd/2009 (I) (JV)Ltd (equity) and M/s MSK Projects (I) (JV)Ltd (preferential)of Rs.7,50,000/-, the assessee did not receive any sum that added to its profit and even if any dividend would have been received the same would be exempt from tax, the AO mentioned . Moreover, there was no business activity during the relevant year i.e. F.Y. 2004-05 in the said company. Since the assessee failed to discharge the onus placed upon them to establish that the borrowed funds had been utilized exclusively for the business purposes nor the assessee proved that the said investment had been made in the shares out of its own cash flow, relying upon the decisions in C.I.T V/s. Abhishek Industries Ltd., 286 ITR 1 (P&H); C.I.T V/s. Indian Express Newspaper (Madras) P. Ltd.,238 ITR 70 (Mad.); Indian Metals & Ferro Alloys Ltd. V/s. C.I.T,193 ITR 344 (Orissa) and Phaltan Sugar W orks Ltd. V/s. C.I.T,208 ITR 989 (Bom), the AO disallowed a sum of Rs.15,27,015/- out of total interest of Rs.1,17,37,506/-, calculated @ 10.5% of the amount invested in the group companies .
3. On appeal, the learned CIT(A) allowed the claim of the assessee in the AY 2004-05 in the following terms:-
" 9. The contentions in respect of relevant grounds of appeal were considered carefully along with the details .on record. It is seen that most of these issues had been dealt with by my predecessor GIT(A) in Appeal No. CIT(A)-l/CC-1(2)/08/04-05 vide order dated 29-10-2004 for AY 2001-
02. In assessment year 2001-02, the disallowance of interest made on similar grounds had been confirmed b. the CIT(A), following the judgment of Punjab & Haryana High Court in case of S.A. Builders vs. C1T (2004, 269 ITR 535). This decision relied upon by the CIT(A) in A.Y. 2001-02 has been reversed and overruled by the Hon'ble Supreme Court in same case of S.A. Builders Pvt. Ltd. vs. CIT, (2007) reported in 288 ITR 1 (SC). In the case of SA Builders vs. CIT (2007) 288 ITR 1(SC), the Hon. Supreme Court has interpreted that expression for the purpose of the business and held that the expression "for the purpose of business, occurring under the provisions of section 36(1)(in) is wider in scope than the expression for the purpose of earning the income, profit or gains." The investments in the shares of associated concerns had been beneficial to the appellant in securing new business and contracts of civil construction through the contacts of the associated concerns. Therefore the AO was not justified in jumping to the conclusion that the investment made in the shares of 5 ITA nos.2139 & 2140/Ahd/2009 associate concerns did not have any nexus with the business activity of the appellant. Thus, in the facts and circumstances of the appellant and the business purpose of the Special Purpose Vehicle, etc. it is evident that the ratio of the decision in case of S.A. Builders, 288 ITR 1 applies. Following this decision, the disallowance of interest i.e. Rs.48,25,520/- and Rs.74,250/- are not sustainable and are deleted. The related grounds of appeal are allowed."
3.1 Similarly, in the AY 2005-06, the learned CIT(A) deleted the disallowance in the following terms:-
" 8. In respect of the other ground of appeal, i.e. the disallowance of interest, the facts and circumstances and the involved issues are similar to those discussed in the appeal order No.CIT(A)-III/CC-2(2)/l38/08-09 of the same appellant, for A.Y. 2004-05. Following this order, the disallowance is deleted and the related ground of appeal is allowed."
4. The Revenue is now in appeal before us in these two assessment years against the aforesaid findings of the learned CIT(A). The learned DR while supporting the assessment orders contended that despite request made by the AO, the assessee failed to establish that the borrowed funds had been utilized exclusively for the their business purposes nor the assessee proved that the aforesaid investment had been made in the shares out of its own interest free funds. The learned AR on behalf of the assessee, on the other hand, while supporting the orders of the learned CIT(A) invited our attention to a decision dated 7-08-2009 of the ITAT Ahmedabad Bench-D in the assessee's own case for AY 2001-02 in ITA no.3518/Ahd/2004 & ITA no.44/Ahd/2005 and contended that all the investments except in equity shares of MSK Infrastructure & Toll Bridge Private Ltd.[Rs.2,48,52,800/-],MSK Highways Ltd.[Rs.25,01,000/-] & MSK Finance Ltd,[Rs.50,000/-] having been brought forward since 31.3.2000 while disallowance of interest in relation to these brought forward investments having been deleted by the ITAT in the AY 2001-02 , disallowance could not been sustained in the years under consideration. As regards investment in equity shares of MSK Infrastructure & Toll Bridge Private 6 ITA nos.2139 & 2140/Ahd/2009 Ltd.[Rs.2,48,52,800/-],MSK Highways Ltd.[Rs.25,01,000/-] & MSK Finance Ltd,[Rs.50,000/-], the ld. AR while relying upon decisions in SA Builder Ltd. vs. CIT,288 ITR 1(SC) contended that disallowance was rightly deleted by the ld. CIT(A).Inter alia, the ld. AR referred to decisions in Munjal sales Corporation vs. CIT,298 ITR 298 (SC) and CIT vs. Reliance Utilities & Power Ltd.,313 ITR 340(Bom.)
5. W e have heard both the parties and gone through the facts of the case as also the aforesaid decision dated 07-08-2009 of the ITAT Ahmedabad Bench-D in the assessee's case for AY 2001-02 in ITA no.3518/Ahd/2004 & ITA o.44/Ahd/2005. W e find that while adjudicating the issue of disallowance u/s 14A of the Act in the AY 2001-02, the ITAT in their aforesaid order concluded as under:-
"14. Ground No.3 relates to disallowance of interest of Rs.24,57,083/-u/s 14A of the I.T. Act on the ground that interest bearing funds have been invested in shares, income from whom are exempt. The facts are described by the Id. CIT(A) in para 3 of her order. It is noted by the Assessing Officer that a sum of Rs.1.65 crores were utilized in investment in shares. This investment was made in the financial year 1999-2000 and continued this year as well. It was submitted by the assessee that no interest has been incurred as investment was made out of interest free funds. The Assessing Officer did not agree and disallowed proportionate interest amounting to Rs.26,83,618/-. The Id. CIT(A) considered the arguments of the assessee and held that investment in the Nutan Nagrik Sahkari Bank, Baroda Bank Ltd., Baroda Co-op. Bank Ltd., Sindh Co-op. Bank Ltd., Sardar Sarovar Nigam Ltd., totaling to Rs.13,94,071/- were incurred in the course of business and, therefore, she allowed a relief of Rs.2,26,535/- and confirmed the addition of Rs.24,57,083/-. The assessee is in appeal against the addition confirmed whereas the Revenue is in appeal against relief allowed.
15. The Id. A.R. submitted that investment in shares were made in earlier year and there are fresh investments. The Revenue has allowed in earlier year the claim of interest and have not invoked section 14A for disallowing any part of interest attributable to investment of funds in shares. Since facts have not changed, the revenue should have followed the same decision and should not have resorted to disallowance. The decision of Assessing Officer in earlier year in not disallowing any part of the interest would mean that no interest bearing funds have been invested in shares, According to Id. A.R. the assessee had sufficient interest free funds in earlier year out of which investment in shares were made. He 7 ITA nos.2139 & 2140/Ahd/2009 referred to his argument about availability of interest free funds raised by him in respect of ground Nos. 1 and 2. The Id. CIT(A) has followed the decision of Punjab & Haryana High Court in S.A. Builders 269 ITR 535 which is no longer a good law and it has been overruled by the Hon'ble Supreme Court in the case of Munjal Sales Corporation v. CIT (2008) 290 ITR 298(SC).
16. Against this, the Id. D.R. submitted that onus is on the assessee to prove that investment in shares had come out of interest free funds. He submitted that decision of Hon'ble Supreme Court in Munjal Sales Corporation (supra) was on the issue that for claiming interest on borrowed funds it has to be shown that money was borrowed for the purposes of business. In the present case, the business of the assessee is not in trading in shares. It is engaged in the construction activities, therefore, it cannot be presumed that interest bearing funds were not utilized for investing in shares.
17. We have heard the rival submissions and perused the material on record. For deciding the present issue, the main relevant factor is that the assessee has not made any investment in shares in the current year. The Assessing Officer had found following investments in shares and admittedly they were in earlier years.
Particulars of investments As on 31.3.00 As on :
Amount (Rs) 31.3.01
Amount ,
(Rs)
Quoted
Minar Trading Services Ltd 74,000 74,000
Sarv Shakti Synthetics Ltd 15,000 15,000
Corporation Bank 128,000 128,000
Myraj Consultancy Ltd 300,000 300,000
Unquoted
Nutan Nagarik Sahakari Bank 4,800 4,800
Baroda Peoples Co-op Bank Ltd 376,521 376,521
8 ITA nos.2139 & 2140/Ahd/2009
Baroda City Co-op. Bank Ltd 3,150 3,150
Classic Organisers Pvt. Ltd 10,000 10,000
Emsons Textiles pvt Ltd 50,000 50,000
Sindh Mercantile Co-op. Bank Ltd 9,600 9,600
MSK Projects India (JV) Ltd 13793,000 13793,000
MSK Projects India (JV) Ltd Pref. 750,000 750,000
Shares
Investment in Govt. Security
Indira Vikas Patra 500.00 500.00
Sardar Sarovar Narmada Nigam Ltd. 1000000 1000000
16514571 16514571
Thus, no fresh investment has been made this year. There is no reason to take a different view than what Id. A.R. has submitted that once the Assessing Officer has allowed a claim in earlier year then it is presumed that he was satisfied that investment in shares were made out of interest free funds and, therefore, there was no case for disallowance of any interest burden u/s 14A. The Hon'ble Punjab & Haryana High Court in CIT v. H.T.Cotton Textiles Mills Ltd. (2009) 311 ITR 436 (P&H), Hon'ble Rajasthan High Court in CIT v. Malborough Polychem. Pvt. Ltd. (2009) 309 ITR 43 (Raj.), and Hon'ble Delhi High Court in CIT v. Moonlight Builder and Developers (2008) 307 ITR 197 (Del.) and many others, it has been held that for the sake of consistency and for the purposes of finality in litigation including the litigation arrived out of fiscal statutes, earlier decision on the same question should not be reopened unless some fresh facts are found in the subsequent year. Accordingly, where no disallowance is made u/s 14A in earlier years then there being no fresh investment in shares, no disallowance of interest in the current year is called for.
5.1 Since all the aforesaid investments except in Emsons Textiles Pvt Ltd., have been brought forward in the year under consideration i.e AY 2004-05 9 ITA nos.2139 & 2140/Ahd/2009 while investments in MSK Projects India (JV) Ltd. have also been brought forward in the AY 2005-06, in the light of view taken by a co-ordinate Bench in their aforesaid decision dated 07-08-2009 for the AY 2001-02, we have no alternative but to uphold the conclusion of the ld. CIT(A) in relation to disallowance of interest corresponding to these brought forward investments. Therefore, ground no.1 in these two appeals in relation to disallowance of interest on account the aforesaid brought forward investments from the AY 2001-02 is dismissed.
5.2 As regards disallowance of interest in relation to investments in equity shares of MSK Infrastructure & Toll Bridge Private Ltd.[Rs.2,48,52,800/-],MSK Highways Ltd.[Rs.25,01,000/-] & MSK Finance Ltd,[Rs.50,000/- ], we find that despite request made by the AO, the assessee failed to discharge the onus placed upon them in establishing that the borrowed funds had been utilized for the purpose of their business purposes nor the assessee proved that the aforesaid investment had been made in these shares out of their own interest free funds. There is nothing to suggest that these details were placed before the ld. CIT(A) nor the ld. CIT(A) seems to have ascertained that the borrowed funds had indeed been utilized for the purpose of business of the assessee and were not utilised in acquiring the aforesaid shares, especially when the AO noticed that total loan (secured and unsecured) increased from Rs.11.8 crores to Rs.19.9 crores in the year under consideration. W e also find that the ld. CIT(A) in the impugned order nowhere examined the applicability of provisions of sec. 14A of the Act nor any material has been placed before us, which establishes that borrowed funds have indeed been utilized for the purpose of business of the assessee and were not invested in acquiring the aforesaid shares.
5.21 W e further find that recently ,Hon'ble Bombay High Court in their decision dated 12.8.2010 in case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. in the ITA no. 626/2010 while adjudicating a similar issue in the context of 10 ITA nos.2139 & 2140/Ahd/2009 provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded that Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax- free income. It applies only w.e.f AY 2008-09. For the assessment years where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all facts and circumstances, the Hon'ble High Court concluded.
5.22. Hon'ble Supreme Court in their decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P.) Ltd.,326 ITR 1, inter alia, observed that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon'ble Apex Court observed in the context of provisions sec.14A of the Act in the following terms:
"17. The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form 11 ITA nos.2139 & 2140/Ahd/2009 part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of thenature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to 37).................."
5.23. W e also find that Hon'ble Kerala High Court in their decision dated 17.6.2010 in the case of CIT Vs. Smt. Leena Ramachandran in ITA.No. 1784 of 2009, held n the context of provisions of sec.14A of the Act as under:
" 4. On facts we find that the interest paid by the assessee during the previous year for the funds borrowed for acquisition of shares in the company was at the rate of 24% p.a. and the total interest paid in the accounting year alone is as much as Rs.17,44,310/-. It is on record that assessee had received only a dividend income of Rs.3 lakhs and no other benefit is derived from the company for the business carried on by it. The disallowance prohibited under Section 14A is expenditure incurred for earning any income which does not constitute total income of the assessee. In other words, any expenditure incurred for earning any income which is not taxable under the Act, is not an allowable expenditure. Dividend income is exempt under Section 10(33) of the Income Tax Act and so much so, dividend earned by the assessee on the shares acquired by her with borrowed funds does not constitute total income in the hands of the assessee. So much so, in our view, disallowance was rightly made by the Assessing Officer. In fact, the Tribunal itself has estimated disallowance of Rs.2 lakhs by applying Section 14A. We do not know how the Tribunal can restrict the disallowance to Rs.2 lakhs and allow balance above Rs.15 lakhs when the whole borrowed funds were utilised by the assessee for purchase of shares in the company. In our view, the reasoning given by the Tribunal for disallowance of Rs.2 lakhs i.e. by applying Section 14A, squarely applies for the interest paid on borrowed funds because it is on record that the entire funds borrowed were utilised for acquisition of shares by the assessee in the company. In fact, in our view, assessee would be entitled 12 ITA nos.2139 & 2140/Ahd/2009 to deduction of interest under Section 36(1)(iii) of the Act on borrowed funds utilised for the acquisition of shares only if shares are held as stock in trade which arises only if the assessee is engaged in trading in shares. So far as acquisition of shares is in the form of investment and the only benefit assessee derived is dividend income which is not assessable under the Act, the disallowance under Section 14A is squarely attracted and the Assessing Officer, in our view, rightly disallowed the claim. As already pointed out, the Calcutta High Court decision which pertains to the period prior to introduction of Section 14A, has no application. The decision of the Supreme Court also does not apply because in this case apart from investment in shares of the company, there is nothing to indicate that the assessee's business was fully linked with the business of the leasing company or that assessee's business is solely dependent on the business of the leasing company. In fact, the whole transaction was a total fiasco in as much as, as against Rs.17,44,310/- paid towards interest on borrowed funds serviced at the rate of interest of 24% p.a., the dividend income received by the assessee during the previous year was a meagre sum of Rs.3 lakhs. This only shows that the business carried on by the leasing company was not very substantial to justify the assessee's investment through borrowed funds. Therefore, in our view, the principle of commercial expediency gone into by the Supreme Court does not apply to the facts of this case. Therefore, we hold that the Tribunal in principle rightly held that the utilisation of borrowed funds for acquisition of shares will not entitle the assessee for claiming deduction of interest paid on such borrowed funds. However, we hold that the Tribunal was not justified in allowing the claim in excess of Rs.2 lakhs. For the same reasoning applied by the Tribunal, the assessee is not entitled to deduction of any amount towards interest paid on funds borrowed by way of fixed deposits taken for acquisition of shares in the company, which helped the assessee only to earn some dividend. "
5.24 Hon'ble Punjab & Haryana High Court in their decision in CIT vs. Hero Cycles Ltd.,323 ITR 518 have observed that disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand.
5.3 As already pointed out, since the ld. CIT(A) have not cared to ascertain as to whether or not borrowed funds have indeed been utilised for the purpose of business of the assessee and were not utilised in acquiring the aforesaid shares nor the ld. CIT(A) recorded his specific findings on the applicability of provisions of the sec. 14A of the Act and also did not have the benefit of the view taken in the aforesaid decisions while the ld. AR has now taken a plea before 13 ITA nos.2139 & 2140/Ahd/2009 us that the entire borrowings were utilised in their business, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue of disallowance of interest raised in the ground no.1 in the appeal of the Revenue for the AY 2004-05 in relation to investments in equity shares of MSK Infrastructure & Toll Bridge Private Ltd., MSK Highways Ltd.& MSK Finance Ltd, afresh in accordance with law in the light of various judicial pronouncements, including those referred to above, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the issue, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act, bringing out clearly as to whether or not borrowed funds had indeed been utilised in investment in shares for earning exempt income. With these observations, ground no.1 in the appeal of the appeal of the Revenue for the AY 2004-05 is disposed of.
6. Ground no.2 in the appeal of the Revenue for the AY 2004- 05 relates to disallowance of interest of Rs.74,250/-. The AO noticed that the assessee advanced an amount of of Rs.1,75,60,000/- to MSK Finance Ltd. and Rs.62,00,000/- to M/s Mansa Textiles Pvt. Ltd. on 14-07-2003 on which no interest was charged. Since these parties covered u/s 40A(2)(b) of the Act, the AO showcaused the assessee vide letter dated 15-12-2006 ,which reads as under:-
"(2)On perusal of the case records and submission made by you from time to time it is noticed that you have given advance to MSK Finance at Ks.1,75,60,000/- and Rs.62,00,000/- to Mansa Textiles. In this regard, you are required to give the source of such advances and also explain that whether interest has been charged on such advances or not. If not, show cause that why the same should not be considered as advance given out of interest bearing funds and taxed accordingly."
6.1 In response, the assessee while enclosing copy of accounts of MSK Finance Ltd. and Mansa Textile Pvt. Ltd. clarified that M.S.K. Finance Ltd. was an associate concern, providing funding as well as share capital to MSK Projects (India) Ltd. An amount of Rs.1.75 14 ITA nos.2139 & 2140/Ahd/2009 crore was transferred to MSK Finance Ltd. for the purpose of purchasing shares of MSK Highways Ltd. out of the internal accruals, which was placed as fixed deposits with Corporation Bank. The loan against fixed deposit taken to fund MSK Finance Ltd. was at marginal rate of interest, the assessee pointed out. However, the AO did not accept the submissions of the assessee and added an amount of Rs.74,250/- in the following terms:-
"Submission made by the assessee has duly been considered. On verification of the submission it is gathered that assessee has received interest from FD kept with Corporation Bank @ 7.5% and paying interest @ 8% towards the amount taken from bank as loan and subsequently transferred to Mansa Textiles and MSK Finance. Therefore, differential amount of interest paid is liable to be disallowed u/s.40A(2)(a), which comes to Rs.74,250/-. Accordingly the same is added to the total income of the assessee."
7. On appeal, the learned CIT(A) deleted the disallowance while adjudicating the issue of disallowance of interest in terms of provisions of sec. 14A of the Act in para-9 of his order [reproduced in para 3 above].
8. The Revenue is now in appeal before us against the aforesaid conclusion of the learned CIT(A). The learned DR supported the order of the AO. On the other hand, the learned AR on behalf of the assessee supported the findings of the learned CIT(A) while relying upon decision in SA Builder Ltd. vs. CIT,288 ITR 1(SC) .
9. W e have heard both the parties and gone through the facts of the case. As is apparent from the facts narrated before us, , the assessee pleaded before the AO that an amount of Rs.1.75 crore was transferred to MSK Finance Ltd. for the purpose of purchasing shares of MSK Highways Ltd. and for that purpose loan was taken against fixed deposits with Corporation Bank . Thus , borrowed funds are stated to have been were transferred to M/s MSK Finance Ltd. for acquisition of shares of MSK Highways Ltd. W hat is the 15 ITA nos.2139 & 2140/Ahd/2009 interest of the assessee in MSK Highways Ltd. and what was the actual purpose of making investment in the shares of the said company is not evident from the impugned orders nor has been explained before us. In SA Builder Ltd.(Supra) relied upon by the ld. AR and the ld. CIT(A),Hon'ble Supreme Court held that we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. There is no material before us, suggesting any commercial expediency nor the ld. CIT(A) analysed the facts of the case and issue from that angle. A mere glance at the impugned order reveals that the order passed by the ld. CIT(A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi-judicial body/authority must pass reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. The application of mind to the material facts and the arguments should manifest itself in the order. Section 250(6) of the Income Tax Act ,1961 mandates that the order of the CIT(A) while disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reason for the decision. The requirement of recording of reasons and communication thereof has been read as an integral part of the concept of fair procedure. The requirement of recording of reasons by the quasi-judicial authorities is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. We may reiterate that a 'decision' does not merely mean the 'conclusion'. It embraces within its fold the reasons forming basis for the conclusion.[Mukhtiar Singh Vs. State of Punjab,(1995)1SCC 760(SC)]. As is apparent, the impugned order suffers from lack of reasoning and is not a speaking order. In view of the foregoing, especially when the ld. CIT(A) has not passed a speaking order on the issue raised in ground no.2 in this appeal, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding these issues afresh in accordance with law, after allowing sufficient opportunity to both the parties. Needless to say that while 16 ITA nos.2139 & 2140/Ahd/2009 redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act . With these observations, ground no. 2 in the appeal for the AY 2004-05 is disposed of.
10. Ground no.3 in appeal of the Revenue for the AY 2004-05 relates to depreciation on trucks and dumpers. On perusal of the depreciation chart filed by the assessee, the AO noticed that the assessee claimed depreciation on trucks @ 40% and on dumpers @ 50% despite the fact that the assessee did not deploy the same for hire purpose. To a query by the AO ,the assessee replied that depreciation is provided on the trucks and dumpers as per the prescribed rates. The assessee submitted as regards depreciation on trucks that commercial vehicle which is acquired by the assessees on or after the first day of October 1998 but before the first day of April 1999 and put to use for any period before the 1st of April 1999 for the purpose of business or profession in accordance with the third proviso to clause (ii) of sub section (1) of Section 32 of the Act , is entitled to depreciation @40%. Likewise depreciation on Dumper has been claimed @ 50% since the new Commercial Vehicle was acquired on or after the first day of April 2001 but before the first day of April 2002 and put to use before the first day of April 2002 for the purpose of business or profession. However, the AO did not accept these submissions assessee on the ground that the truck and dumpers were not a commercial vehicle so far as assessee was concerned and instead these were part of plant and machinery, the assessee being engaged in the business of construction activities. The AO also observed that M.S. Khurana Engineering Ltd., engaged in the similar line of business and covered u/s.40A(2)(b) of the Act so far as assessee was concerned, considered the trucks, dumpers etc. under the head plant and machinery and not under the head commercial vehicle because of the reason that they were inseparable from normal course of their business activity. Accordingly, the AO restricted the depreciation on trucks and dumpers to 25% against the claim of 40% and 50%. 17 ITA nos.2139 & 2140/Ahd/2009
11. On appeal, the learned CIT(A) allowed the claim of depreciation in the following terms:-
" 10 .............. The disallowance of depreciation on trucks and dumpers made by the AO by restricting the claim on the ground that these were not commercial vehicles but plant and machinery, is not sustainable. Even in common parlance and under the Motor Vehicles Act, the trucks and dumpers come under the category of commercial vehicles apart from their use in the nature of the appellant's business. As such, the contention of the appellant that trucks and dumpers were commercial vehicles and so entitled to depreciation @ 40% is acceptable. The disallowance of Rs.5,74,949/- out of depreciation on and dumpers are therefore deleted and the grounds of appeal is allowed."
12 The Revenue is now in appeal before us against the said findings of the learned CIT(A). The learned DR supported the order of the AO while the ld. AR on behalf of the assessee supported the findings of the learned CIT(A).
13. W e have heard both the parties and gone through the facts of the case. Indisputably, the trucks and dumpers are stated to have been purchased in the preceding years and the claim for depreciation made by the assessee has been accepted by the AO. The expression "commercial vehicle", evidently refers to vehicle which is used for or capable of being used for commercial purposes. Simply because the assessee used trucks and dumpers in their own business, does not imply that these vehicles were not used for commercial purposes. Since the assessee claimed depreciation on these vehicles in accordance with the rates prescribed under item III- Machinery & Plant of the extant Appendix 1 of the IT Rules,1962 while the AO himself allowed a similar claim in the preceding years and the Revenue have not placed any material before us so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A). Therefore, ground no.3 in the appeal of the Revenue for the AY 2004-05 is dismissed. 18 ITA nos.2139 & 2140/Ahd/2009
14. No additional ground having been raised before us in terms of residuary ground no.4 in the appeal for the AY 2004-05 & ground no.2 in the appeal for the AY 2005-06, these grounds are, therefore, dismissed.
15. No other plea or argument was made before us.
16. In the result, appeal for the AY 2004-05 is partly allowed for statistical purposes while that for the AY 2005-06 is dismissed.
Order pronounced in the court today on 30-08-2011
Sd/- Sd/-
(T K SHARMA) (A N P AHUJ A)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated : 30-08-2011
Copy of the order forwarded to:
1. M/s MSK Project (India) Ltd., 707-708, Sterling Centre, R C Dutt Road, Baroda-390005
2. Asst. Commissioner of Income-tax, Circle-4, Baroda
3. CIT concerned
4. CIT(A)-III, Ahmedabad
5. DR, ITAT, Ahmedabad Bench-A, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD