Income Tax Appellate Tribunal - Chandigarh
Sunder Forging, Ludhiana vs Assessee on 6 September, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIG ARH BENCH ' A', CHANDIG ARH
BEFORE SHRI T.R. SOOD, A.M AND Ms. SUSHMA CHOWLA, JM
ITA No. 1042/Chd/2012
Assessment Year : 2009-10
Sunder Forging V Addl CIT, Range I
Industiral Area C Ludhiana
Sua Road
Ludhiana
AANFS 7430H
ITA No. 1251/Chd/2012
Assessment Year : 2009-10
A.C.I.T. C-I V Sunder Forging
Ludhiana Industiral Area C
Sua Road
Ludhiana
(Appellant) (Respondent)
Assessee by Shri Ashwani Kumar
Department by: Shri J.S.Nagar
Date of hearing 10.7.2013
Date of Pronouncement 2.8.2013
O R D E R
PER T.R.SOOD, A.M
These are cross appeals directed against the order of the ld. CIT(A)-I, Ludhiana dated 6.9.2011. These were heard together and are disposed off by this common order for the same of convenience.
ITA No. 1042/Chd/2012 2 In this appeal the assessee has filed the following ground:
"That order passed u/s 250(6) of Income-tax Act by the ld. CIT(A)-I, Ludhiana is against law and facts on the file in as much he was not justified to uphold disallowance u/s 14A to the extent of Rs. 13,27,503/-."2
3 After hearing both the parties we find that during assessment proceedings the AO noticed that the assessee has made certain investments in the mutual fund. Therefore, the Assessing Officer invoked Section 14A read with Rule 8D of IT Rule and worked out the disallowance at Rs. 13,27,503/-. 4 On appeal the disallowance has been confirmed by the ld. CIT(A).
5 Before us, the ld. counsel of the assessee submitted that the issue is covered against the assessee by the order of the Tribunal in earlier years in ITA No. 803/Chd/2011 and 1059/Chd/2011.
6 On the other hand, the ld. DR for the revenue strongly supported the order of the ld. CIT(A).
7 W e have heard the rival submissions carefully. We find that identical issue came up for consideration of the Tribunal and the same was decided against the assessee vide para 29 to 33 which read as under:
29. We have heard the rival submissions carefully. We find that the decision of Hon'ble Jurisdictional High Court in the case of CIT V. Hero Cycles Ltd, 323 ITR 518 was rendered for Assessment Year 2004-05. Later on Hon'ble Bombay High Court in case of Godrej and Boyce Manufacturing Co. Ltd V. DCIT, 328 ITR 81 has considered the implications of Section 14A even the constitutional validity and applicability of Rule 8D in great detail ultimately Hon'ble High Court has given the following conclusion:
"88 Our conclusion in t his judgment are as follows :
(i) Dividend income and income from mutual funds falling within the ambit of section 10(33) of the Income-tax Act, 1961, as was applicable for the assessment year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of section 14A(1) ;
(ii) The payment by a domestic company under section 115-
O(1) of additional income-tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The 3 company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis ;
(iii) The provisions of sub-sections (2) and "(3) of section 14A of the Income-tax Act 1961 are constitutionally valid ;
(iv) The provisions of rule 8D of the Income-tax Rules as inserted by the Income-tax (Fifth Amendment) Rules, 2008, are not ultra vires the provisions of section 14A, more particularly sub-section (2) and do not offend article 14 of the Constitution ;
(v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09 ;
(vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub- section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record ; (yii) The proceedings for the assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case."
30. The above decision has been rendered after considering the decision of Hon'ble Supreme Court in case of CIT v. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C), therefore, in our opinion, the ratio of this decision is applicable to the case of the assessee and rule 8D would be applicable in the present case which relates to Assessment Year 2008-09.
31. Though the ld. CIT(A) deleted the addition by observing that investment in mutual fund is out of current account but it was not denied before us that all the receipts are being credited to the current account which means current account is dealing with the combined fund of the assessee-company. The assessee has nowhere shown that the interest free funds were available for investment in mutual fund. In fact before the provision of Section 14A the assessee had the right to claim all the expenses if such expenses could not be bifurcated in terms of normal taxable income and exempted income in view 4 of the decision of Hon'ble Supreme Court in case of Rajasthan State Warehousing Corporation V. CIT, 242 ITR 450 but this position changed after the introduction of Section 14A by Finance Act, 2001. The Memorandum explaining the provisions of finance bill reads as under:
"Certain income are not includible while computating the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is again the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.
It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income- tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred bythe assessee in relation to income which does not form part of the total income under the Income- tax Act.
The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent Assessment Year."
32. In fact the Hon'ble Bombay High Court has noted this position and then confirmed that theory of apportionment of expenses is very much applicable in Section 14A. In fact at placitum 28 it has observed as under:
"During the course of this judgment, it would be necessary to revisit the decision of Hon'ble Supreme Court in Walfort. At this stage, however, it needs to be emphasized that the provisions of section 14A were construed in Walfort to evince Parliamentary intent 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 taxable income. Section 14A is clarificatory of the position that expense can be allowed only to the extent that they are relatable to the earning of taxable income. Only those expenses which are in respect of the earning of taxable income can be allowed. The section 14A broadens the theory of apportionment of expenditure between taxable and non-taxable income is evident from the following observations of the Hon'ble Supreme Court:
"The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened u/s 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words 5 '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)."
Thus on the basis of above, it was held that after introduction of Section 14A, it was possible to apportioned the expenditure between taxable income and exempted income. Rule 8D reads as under:
"(1) Where the Assessing Officer having regard to the account of the assessee of a previous year, is not satisfied with -
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he hall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:-
A X B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;
B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
C = the average of total asset as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.6
(3) For the purposes of this rule, the 'total assets' shall mean, total asset as appearing in the balance sheet excluding the increase on account of revaluation of asset but including the decrease on account of revaluation of assets.).
Clause (b) of sub-section (2) clearly shows that if assessee does not show that the interest has been incurred specifically for a particular item of income then it has to be apportioned. In case before us since the assessee had incurred expenses on interest which can not be directly related to particular type of income, therefore, interest is required to be apportioned.
33. Perusal of assessment order shows that the disallowance u/s 14A is based on Rule 8D which has been noted above was applicable during the year under consideration and which is in consonance with the decision of Hon'ble Bombay High Court. Therefore, we set aside the order of ld. CIT(A) and restore that of the Assessing Officer by confirming the disallowance u/s 14A."
Following the above we decide this issue against the assessee.
7. In the result, appeal of the assessee is dismissed. ITA No. 1251/Chd/2012 8 In this appeal the Revenue has filed the following ground:
"1 That the ld. CIT(A) has erred in law and on the facts in deleting the deduction u/s 80IB of Rs. 86,12,650/- whereas the Assessing Officer has rightly disallow the claim of deduction u/s 80IB of the Income-tax Act, 1961.
2 That the ld. CIT(A) has erred in law and on the facts in deleting the addition of Rs.9,98,060/- made by the Assessing Officer u/s 40A(2)(b) of the Income-tax Act, 1961.
9 After hearing both the parties we find that the assessee had claimed deduction u/s 80IB of the Act which was denied because the investments by the assessee had exceeded the limit of Rs. 1 crore and thus the assessee was no more a small scale industry.
10 On appeal the claim of the assessee was allowed by the ld. CIT(A).
11 On the other hand, the ld. DR for the revenue strongly supported the order of the ld. CIT(A).
712 Before us, the ld. counsel of the assessee submitted that the issue is covered by the decision of the Tribunal in earlier years in ITA No. 803/Chd/2011 and 1059/Chd/2011 in favour of the assessee.
13 W e have heard the rival submissions carefully. We find that identical issue came up for consideration o the Tribunal and the same was decided against the Revenue vide para 9 which read as under:
9. We have heard the rival submissions carefully and find force in the submissions of the ld. counsel of the assessee. We have perused the notification No. 1642(E) dated 29.9.29006 and find that there is no condition that new definition is applicable to the new units only. In fact, Section 80IB(14)(g) reads as under:
"small-scale industrial undertaking" means an industrial undertaking which is, as on the last day of the previous year, regarded as a small scale industrial undertaking under section 11B of the Industries (Development and Regulation) Act, 1951 (65 of1951)."
The above clearly shows that the amount of investment has to be seen as on the last date of previous year. In the case before us, the last date of the preceding year is 31.3.2007 and the new limit of Rs. 5.00 crore was applicable from 2.10.2006. Therefore, as on 31.3.2007 the assessee was clearly covered by the new definition. Accordingly we find that the ld. CIT(A) has correctly adjudicated the issue and his order does not require any interference. "
Following the above we decide this issue against the Revenue.
14 Ground No. 2 - After hearing both the parties we find that during assessment proceedings the AO noticed that the assessee had raised certain unsecured loans. The Assessing Officer was of the opinion that interest paid was excessive and therefore, restricted the allowance of interest to 12%. 15 On appeal the claim of interest was accepted at15%. 16 Before us, the ld. DR for the revenue relied on the order of the Assessing Officer.
817 On the other hand, the ld. counsel of the assessee submitted that this issue has been decided by the Tribunal in Assessment year 2007-08 in favour of the assessee. 18 After considering the rival submissions we find that this issue was decided in favour of the assessee vide para No. 20 of ITAs No. 803 & 1059/Chd/2011. Accordingly we decide this issue against the revenue.
19 In the result, appeals of the assessee as well as Revenue are dismissed.
Order pronounced in the open court on 2.8.2013
Sd/- Sd/-
(SUSHMA CHOWLA) (T.R. SOOD)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated : 2.8.2013
SURESH
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR