Income Tax Appellate Tribunal - Chandigarh
Aarti Steels Ltd., Ludhiana vs Assessee on 25 April, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI H.L.KARWA, VICE PRESIDENT
AND MS. RANO JAIN, ACCOUNTANT MEMBER
ITA No.771/Chd/2011
(Assessment Year : 2008-09)
Aarti Steel Ltd., Vs. The A.C.I.T.,
G.T. Road, Millerganj, Circle-V,
Ludhiana. Ludhiana.
PAN: AABCA4455D
And
ITA No.790/Chd/2011
(Assessment Year : 2008-09)
The A.C.I.T., Vs. Aarti Steel Ltd.,
Circle-V, G.T. Road, Millerganj,
Ludhiana. Ludhiana.
PAN: AABCA4455D
(Appellant) (Respondent)
Assessee by : Shri Subhash Aggarwal
Department by : Shri S.K.Mittal, DR
Date of hearing : 05.04.2016
Date of Pronouncement : 25.04.2016
O R D E R
PER RANO JAIN, A.M. :
Both the cross appeals are directed against the order of learned Commissioner of Income Tax (Appeals)-II, Ludhiana dated 7.6.2011 for assessment year 2008-09. 2 ITA No.771/Chd/2011(Assessee's Appeal):
2. The ground Nos.1 and 2 relates to disallowance under section 14A of the Income Tax Act, 1961 (in short 'the Act'), which read as under :
"1. That the learned CIT- (A) has erred in confirming an addition of Rs.10 Lakhs u/s 14A of the Income Tax Act, 1961, read with Rule 8D(2)(iii).
2. That in any case the addition sustained is against the law and facts of the case."
3. Briefly, the facts are that the Assessing Officer disallowed a sum of Rs.55,55,801/- by applying provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules. The assessee had earned dividend income of Rs.1,28,316/- during the year.
4. Before the learned CIT (Appeals), the assessee contended that the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules are not applicable as the total investments in shares and mutual funds have been made out of own funds. The assessee's investment during the year was a nominal amount of Rs.97,233/- which was made from the internal cash accruals of the company and no money was borrowed for making any investment. It was pointed out that where investment is made out of own resources and availability of funds in the form of capital reserves and net profit, the provision of section 14A and Rule 8D do not apply. Reliance was placed on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Hero Cycles Ltd. 3 (2010) 323 ITR 518 and Mumbai High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Mum). After considering the submissions of the assessee and the case laws relied on by it, the learned CIT (Appeals) has held that since the assessee has earned exempt income under sections 10(34) and 10(35) of the Act and also it has been unable to prove the nexus between investment and funds available, the disallowance is restricted to an amount of Rs.10 lacs to cover up administration and other expenditure relatable to exempt income. In this way, a relief of Rs.45,55,801/- was provided to the assessee by the learned CIT (Appeals) while confirming the disallowance of Rs.10 lacs.
5. Aggrieved by this, both the assessee as well as the Department have come up in appeal before us. The assessee is in appeal against the disallowance to the extent of Rs.10 lacs sustained by the CIT (Appeals), while the Department is in appeal against the relief of Rs.45,55,801/- provided by the learned CIT (Appeals) to the assessee.
6. The learned counsel for the assessee while arguing before us made elaborate submissions to the fact that the assessee has huge funds which have been used for investments made by it. Therefore, in such circumstances, no disallowance under section 14A of the Act can be made. A c h a r t w a s f i l e d b e f o r e u s sho wi ng that at the end of the rel evant assessment year , the assessee had o wned fund s consisti ng of share capi tal and reserves and surpl us amounti ng to Rs.214,46,46,911/-, whi l e the i nvestments were to the tune of 4 Rs.1,42,73,785/-. In such circumstances, it was pleaded that no disallowance under section 14A of the Act can be made. Reliance was placed on the order of the I.T.A.T., Chandigarh Bench in the case of Hero Cycles Ltd. Vs. ACIT in ITA No.192/Chd/2013, dated 29.10.2015, copy of which was placed on record.
7. The learned D.R. vehemently argued relying on the order of the Assessing Officer and stated that after insertion of Rule 8D of the Income Tax Rules w.e.f. assessment year 2008-09, the disallowance under section 14A of the Act is mandatorily to be computed under this Rule if there is some exempt income earned by the assessee. The assessment year being 2008-09, the disallowance made by the Assessing Officer is quiet as per law and the act of the learned CIT (Appeals) in restricting the disallowance to Rs.10 lacs is not as per law. Further, reliance was placed on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Walfort Share and Stock Brokers P. Ltd. (2010) 326 ITR 1, whereby it has been held that the expenses only to the extent incurred for earning taxable income are to be allowed to the assessee.
8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The only issue to be decided by us is whether the disallowance sustained by the learned CIT (Appeals) to the extent of Rs.10 lacs or made by the Assessing Officer as per Rule 8D is applicable to the facts of the present case. From the perusal of the documents 5 brought on record, we observe that the assessee has total owned funds to the tune of Rs.214,46,46,911/- as on 31.3.2008, while the investments as on that date are amounting to Rs.1,42,73,785/-. These figures show that the assessee owns funds far more than the investments. In such a scenario, presumption can be taken that the investments have been made out of owned funds only. If the investments are made out of owned funds, no disallowance on account of interest can be made under section 14A of the Act. The proposition to the effect that such a presumption can be taken has been laid down by the Hon'ble Jurisdictional High Court of Punjab & Haryana in the case of Bright Enterprises Pvt. Ltd. Vs. CIT in ITA No.624 of 2013 dated 24.7.2015 and also in the case of CIT Vs. Kapsons Associates, ITA No.354 of 2013 (O&M). Though we are aware of the fact that the presumption has been laid down by the Hon'ble High Court in the context of disallowance under section 36(1)(iii) of the Act, however, we only intend to borrow presumption that in the presence of sufficient owned funds, it can be taken that the investments have been made out of these funds only and no interest bearing funds have been used for said purposes. In view of this, we do not see any need to make disallowance under section 14A of the Act on account of interest.
9. For the purpose of disallowance of other expenses, we do not find any satisfaction recorded by the Assessing Officer in his order explicitly or implicitly to the fact that the claim of the assessee that no expenses have been incurred for 6 earning exempt income is wrong. Reliance on the judgment of Punjab & Haryana High Court in the case of CIT Vs. Deepak Mittal (2014) 361 ITR 131 (P&H), whereby it has been held that in the absence of any satisfaction recorded by the Assessing Officer, no disallowance of administrative expenses under section 14A can be made. As regards the act of the learned CIT (Appeals) in upholding the disallowance to the extent of Rs.10 lacs, we do not find any substance in such an act on the part of the learned CIT (Appeals) since we are in agreement with the submissions of the learned D.R. that to the extent that if any disallowance has to be made under section 14A of the Act, the same has to be calculated as per Rule 8D w.e.f. assessment year 2008-09. However,, as per the facts of the present case, we have already held that there is no occasion to make disallowance under section 14A of the Act. In view of the above, the appeal of the assessee is allowed and the appeal of the Department is dismissed.
10. The ground No.3, 4 and 5 raised by the assessee reads as under :
"3. That the learned C1T- (A) has erred in confirming disallowance of Rs. 2.51 Crores claim as bad debt/business loss being the amount forfeited by BHEL on account of termination of contract.
4. That in the alternative the amount being in nature of capital expenditure, the appellant was entitled to depreciation on the same.
5. That the Appellant craves leave for permission to add, amend or alter any ground of appeal at the time of hearing."7
11. The facts of the case are that during the assessment year, the assessee has claimed an amount of Rs.2.51 crores in his Profit & Loss Account on account of forfeiture by M/s BHEL. The assessee explained to the Assessing Officer that it had entered into a contract with BHEL for supply of 50MW turbine. The price of the machinery as per contract is Rs.24.75 crores. The assessee has paid an advance of Rs.2.51 crores. On the plea that it has found the supplier namely M/s DF Power Systems Pvt. Ltd. for supply of same machinery at a cheaper rate, the assessee forgone to acquire the machine and as a result Rs.2.51 crores were forfeited by BHEL. The Assessing Officer disallowed the said claim of the assessee stating that any payment made by the assessee for purchase of plant and machinery is a capital expenditure as per the accounting principles. The amount of Rs.2.51 crores given as advance for purchase of machinery forfeited by BHEL has to be treated as capital expenditure. Reliance was placed on the judgment of Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. Vs. CIT (1967) 63 ITR 65.
12. Before the learned CIT (Appeals), it was submitted that the expenditure is in the nature of revenue expenditure forgone in the interest of the business and to safeguard the further loss on the same as the party was additionally demanding a sum of Rs.3.68 crores for cancellation of contract. The expenditure incurred is by way of commercial expediency as the assessee was able to get a power plant of higher capacity at a lower price. It was also submitted that 8 the reliance placed by the Assessing Officer on the judgment of Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. (supra) is mis-placed as in that case, the assessee had to pay compensation for breach of contract while in assessee's case the advance had already been made and the same was cancelled as per the clause 19 of the agreement. In the alternative, if the amount is treated as capital expenditure, the benefit of depreciation was demanded. After considering the submissions of the assessee, the learned CIT (Appeals) found himself not in agreement with the same and held that the claim of bad debt is not in the nature of bad debts under any circumstances but is categorically of the nature of capital loss. In this way, the addition made by the Assessing Officer was confirmed by the CIT (Appeals).
13. Aggrieved by this the assessee has come up in appeal before us. The learned counsel for the assessee while arguing before us, first drew our attention to various pages of Paper Book to show that an agreement was entered into by the assessee with M/s BHEL as on 4.8.2015, whereby the acquisition of machine at a price of Rs.24.75 crores was agreed upon and price for supervision was Rs.0.35 crores. As per the terms of payment, 10% was to be given as advance and the balance as per terms of agreement. As per the completion schedule, the work was to be completed within sixteen months from the date of contract. As per one of the clauses of the agreement, the supplier is to be compensated with the equipment and services completed at the instance of 9 termination of contract. On 16.12.2005, a letter was given to the supplier requesting them to hold on the said order. The request was made on the basis of the fact that the assessee was facing series of problems in stabilization of its power plant and consequently the other units of the plant. A copy of the minutes of meeting was also placed on record, whereby it was stated that the BHEL had stated that on the date on which the project was put on hold i.e. 16.12.2005, substantial progress had already taken place in terms of engineering and procurement. Therefore, BHEL did not immediately put on hold the various activities related to the project resulting in built up of inventory. It was also stated that the BHEL had clarified that expenses on account of engineering charges, procurement of material and inventory carrying cost had already been incurred totaling to Rs.3,67,86,000/-. The fresh order booked by the assessee with DF Power Systems Pvt. Ltd. dated 26.2.2008 for purchase of 50 MW Dongfang Steam Turbine generator for Rs.21.70 crores was placed on record. In view of all these facts, it was stated that since the decision of the amending agreement was taken on account of business prudence, the same has to be allowed as revenue expenditure. Reliance was placed on a number of judgments of various High Courts as under :
i) CIT Vs. Majestic Auto Ltd.
(2009) 315 ITR 445 (P&H)
ii) Idea Cellular Ltd. Vs. Addl.CIT
(2014) 65 SOT 15 (Mum)
iii) Reliance Footprints Vs. ACIT
(2014) 29 ITR (Trib) 82 (Mum)
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iv) ACIT Vs. Anjani Kumar Co. Ltd.
(2003) 259 ITR 114 (Raj)
v) ACIT Vs. Am Kryon International Pvt. Ltd.
ITA No.474/2014 dated 29.10.2015
(Chd.Trib).
14. The judgment of the Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. (supra) as relied on by the lower authorities as well as the learned D.R. was distinguished by stating that the question in that case was that payment of compensation treated as capital expenditure within the meaning of section 10(2)(xv) of the Act. The facts being not peri-matria with the facts of the present case. It was prayed that the disallowance made by the Assessing Officer and confirmed by the learned CIT (Appeals) be deleted.
15. The learned D.R. relied on the order of the Assessing Officer as well as that of the CIT (Appeals) and further submitted that the issue is squarely covered in favour of the Department by the order of the Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. (supra).
16. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The undisputed facts of the case are that some advance was given for acquisition of machinery, but because of some commercial expediency the agreement had to be shelved. In the process, the assessee lost the money advanced, as the same got forfeited by the other party. The issue to be decided by us is 11 whether the loss so incurred by the assessee is capital or revenue in nature, since it is not in doubt that the assessee has in fact incurred losses in the said transaction.
17. The general tests to be applied to distinguish between the losses of the nature of capital or revenue have been enumerated in various case laws. A number of case laws have been quoted by both the parties even before us.
18. However, before proceeding further, we would like to remind ourselves the words of the Hon'ble Apex Court administering caution in the case of Abdul Kayoom Vs. CIT (1962) 44 ITR 689 (SC), whereby Justice Hi Dayatullah, in the majority judgment observed as follows :
"What attributable to capital and what to revenue has led to a long string of cases here and in the English courts. The decisions of this court reported in Assam Bengal Cement Co. Ltd. v. Commissioner of Income-tax and Pingle Industries case have considered all the leading cases, and have also indicated the tests, which are usually applied in such cases. It is not necessary for us to cover the same ground again. Further, none of the tests is either exhaustive or universal. Each case depends on its own facts, and a close similarity between one case and another is not enough, because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of an another. To decide, therefore, on which side of the line a case falls, its broad resemblance to another case is not at all decisive. What is decisive is the nature of the business, the nature of the expenditure, the nature of the right acquired, and their relation inter se, and this is the only key to resolve the issue 12 in the light of the general principles, which are followed in such cases."
19. We are aware of the fact that in the present case, the issue involved is that of losses and not of expenditure incurred by the assessee, however,, we feel that the parameters involved in both the cases are the same. This proposition has also been fortified by the judgment of Madras High Court in the case of CIT Vs. Madras Auto Service Ltd. (19881) 156 ITR 740 (Mad).
20. Undoubtedly, the money originally was paid for acquiring a machinery, i.e. a capital asset. The amount incurred on acquisition of an asset of enduring nature are capital in nature. However, presently, the question is not the allowability of expenditure on acquisition of machinery, but that of loss occurring on forfeiture of advance given for machinery, the agreement for which had to be shelved as a matter of business expediency. The case of the Revenue is that the amount which has been forfeited by the other person, was originally given to it to acquire an asset of enduring nature. Yes, it is true that at the time of making advance, the money was incurred to acquire an asset of enduring benefit. But what was the enduring benefit derived at by the assessee at the time of foregoing the buying agreement. In our opinion, no such benefit of enduring nature has been derived by assessee at the time of suffering losses on account of forfeiture of advance money. The decision of course, was taken by the assessee in a way only to relieve itself from the 13 huge amount of money to be paid for a machinery of lesser capacity in comparison to a machinery of higher capacity available to it at a lower cost. The assessee probably came to terms with the occasion of suffering such losses in wake of the fact of saving itself from incurring further huge losses. This act goes further to prove that the losses are incurred on a decision of prudence taken for the business. Since no capital asset came into existence, the loss is allowable as a business loss.
21. Before parting, we would like to distinguish the judgment of Hon'ble Supreme Court in the case of Swadeshi Cotton Mills (supra), on which both the lower authorities as well as the learned D.R. during the course of hearing before us, had relied on. In that case, the issue was the payment of compensation for cancellation of contract of acquiring a machinery. Since the agreement was undoubtedly for purchase of an asset of enduring benefit and the payment of compensation was also linked with the acquisition or rather, non-acquisition of such an asset. However, in the present case, no such money is paid for acquisition or non-acquisition of a capital asset. Only a decision has been taken by a businessman as a business prudence to forego an agreement earlier entered into. Only this decision has resulted in some loss to the asset. No asset of capital nature has come into existence.
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14. In the result, the appeal of the assessee in ITA No.771/Chd/2011 is allowed and the appeal of the Revenue in ITA No.779/Chd/2011 is dismissed. Order pronounced in the open court on this 25th day of April, 2016.
Sd/- Sd/-
(H.L.KARWA) (RANO JAIN)
VICE PRESIDENT ACCOUNTANT MEMBER
Dated : 25 t h April, 2016
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh