Income Tax Appellate Tribunal - Ahmedabad
Dinesh Mills Ltd.,, Baroda vs Acit.,Circle-4,,, Baroda on 10 April, 2017
आयकर अपीलीय अिधकरण,
अिधकरण, अहमदाबाद यायपीठ 'ड
ड '
ड अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, AHMEDABAD
ौी मुकुल ौावत,
ौावत, याियक
याियक सदःय एवं ौी अिनल चतुव"द ,
, लेखा सदःय के सम%
BEFORE SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER AND
SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER
ITA No. 2369/Ahd/2010
AY 2007-08
Shree Dinesh Mills Ltd., ACIT, Circle-4,
Padra Road, Baroda.
P.O.Box No. 2501,
Vadodara-390020.
PAN: AADCS3115Q
Appellant Respondent
ITA No. 2452/Ahd/2010
AY 2007-08
ACIT, Circle-4, Shree Dinesh Mills Ltd.,
Baroda. Padra Road,
P.O.Box No. 2501,
Vadodara-390020.
PAN: AADCS3115Q
Appellant Respondent
Revenue by : Sh. K.C. Matthews, Sr. DR
Assessee(s) by : Sh. Sunil Talati, AR
सुनवाई क' तार ख/
/ Date of Hearing : 21/04/2014
घोषणा क' तार ख /Date of Pronouncement: 29/04/2014
आदे श/O R D E R
PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :
These are the cross-appeals arising from the order of CIT(A)-III, Baroda dated 14.05.2010.
A. Assessee's Appeal (ITA No. 2369/Ahd/2010) Ground no. 2 of the assessee's appeal is reproduced below:
ITA Nos. 2369 & 2452 of 2010 Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08 -2- "The Hon'ble CIT(A) has erred in confirming the disallowance of Rs 31,87,067/- made by the A.O. invoking provision of section 14A of the Act r.w. rule 8D of Income Tax Rules. Your appellant submits that the Hon'ble CIT(A) has failed to appreciate the facts submitted during the course of hearing and also not considering various decisions more particularly that the A.O. has failed to prove that such expenses were incurred and also to prove the nexus between the Investment and Borrowed Fund."
2. The facts in brief as emerged from the corresponding assessment order passed u/s 143(3) dated 23.12.2009 are that the assessee company is in the business of manufacturing of suiting etc. It was noted by the Assessing Officer that during the year, the assessee has earned dividend income of interest on UTI amounting to Rs 44,85,867/- and Rs 48,39,914/- respectively. In respect of the said income, the assessee had claimed exemption u/s. 10(34) and u/s. 10(35) of I.T. Act. The objection of the Assessing Officer was that as per the provisions of section 14A, no deduction was to be allowed in respect of the expenditure incurred by the assessee in relation to the aforementioned income because that income had not formed part of the total income. In addition to the invocation of section 14A, the Assessing Officer has also invoked Rule 8D of I.T. Rules. The assessee's reply was that the investment for earning the said exempted income was from the internal accrual of the company. The assessee's reply before the Assessing Officer was as under:
"3.2. The assessee has replied to this query vide its letter dated 14.12.2009. It is stated that during the year under consideration, dividend of Rs.44,85,867 and interest of tax free UTI bonds amounting to Rs.48,39,914 has been earned by the assessee company. The investment for earning this exempted income was made from the internal accrual of the company itself. As can be observed from the balance ITA Nos. 2369 & 2452 of 2010 Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08 -3- sheet that there is no diversion of interest bearing funds for investment made and hence no disallowance of interest should be made. Out of the total investment as on 31.3.2007 amounting to Rs.21,24,63,232, only Rs. 5,7 485,8 8 2 has been invested during the year. All the other investments were made in the previous years. As is evident from the cash flow statement for the FY.2006-2007, the company had a net cash flow from operating activities of Rs.14,24,75,724 and the net cash used in investing activities is Rs.13,42,70,949. Thus, the net increase of Rs.5,74,85,882 in the total investment has been sourced from the internal accruals of the company and no expenditure has been incurred to earn such expenditure. The assessee has placed reliance on the recent decision in the case of Hero Cycles, wherein the Punjab &. Haryana High Court has held that disallowance u/s. 14A of the Act can be made only if there is an actual nexus between tax free income and expenditure. Thus, the investment have been made out of own funds and the borrowed funds have not been utilized for the same and hence no amount is disallowable u/s.14A of the Income Tax Act, 1961."
2.1. However, the Assessing Officer was not convinced. According to him, the assessee had paid interest of Rs 1,91,35,167/-. According to the Assessing Officer, there was no evidence that the investment made in mutual fund as well as in UTI bonds were out of the internal accruals. According to him, interest bearing funds have been utilized. After invoking the provisions of Rule 8D, the Assessing Officer has computed the disallowance of Rs 9,02,897/-. However, that was rectified and it was noted that there was a calculation mistake and the correct disallowance should have been Rs 31,87,067/-. For the sake of clarity, both the calculations are reproduced below:
ITA Nos. 2369 & 2452 of 2010 Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08 -4-
(a) Calculation as per assessment order Exempted income Rs 93,25,781 Interest paid Rs 1,91,35,167 Average value of investment [Rs13,37,63,282+Rs 12,58,77,400/2] Rs 12,98,20,341 * excluding investment made in [Dinesh Remedies Limited in both the Years] Average of total assets Rs 978,78,90,335 [Rs 1214505947+Rs 743072120] [Disallowance u/s. 14A r.w.r.8D=A+B+C] [A] Expenses relating directly to Rs. Nil Exempted income [B] Total interest x average value of investment Average of total assets Rs 1,91,35,167 x Rs 12,98,20,341 Rs 2,53,796 Rs 978,78,90,335 [C] 0.5% of average value of Rs 6,49,101 investment[0.5% of Rs 12,98,20,341] Rs 9,02,897 Accordingly, the disallowance of Rs 9,02,897 is made us.
14A read with Rule 8D of the Income Tax Rules, 1961.
[Disallowance - Rs 9,02,897]
(b) Rectified calculation as per CIT(A) Total interest x average value of investment Average of total assets Rs 1,91,35,167 x Rs 12,98,20,341 Rs 25,37,966 Rs 9,78,78,90,335 0.5% of average value of investment (0.5% of Rs 12,98,20,341) Rs 6,49,101 Total Rs 31,87,067 ITA Nos. 2369 & 2452 of 2010 Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08 -5-
3. Before the Ld. CIT(A), it was informed that out of the total investment of Rs 21,24,63,232/- only, a sum of Rs 5,74,85,882/- have been made during the year and the balance investments were made in the previous year. The assessee has also informed that there was a cash profit of Rs 14,24,75,724/-. The assessee has cited in support of the argument, the decision of Hero Cycles and the decision of late Vinod Kumar Chiraniya 129 TTJ
41. The Ld. CIT(A) was not convinced and affirmed the action of the Assessing Officer in the following manner:
"After giving careful consideration to the submissions made and the facts brought on record as also the law in this regard, I find that the provisions of section 14A have rightly been invoked by the AO in this case. In view of the express provision of section 14A of the Act, expenditure has to be worked out even if the same is not admitted by the tax payer. Moreover, as rightly pointed out by the AO, there is no law that if there are internal accruals, the investment in exempted income earning transactions has necessarily to be presumed from such internal accruals. Therefore, this plank of the appellant in the absence of demonstrative evidence has to be rejected. Further in view of the express provisions of the Act such expenditure has to be worked out as per the provisions of the Rule 8D. Therefore this ground is rejected."
4. In the light of above, factual background, we have heard both the sides. It is worth to note at the outset that the Ld. AR has placed reliance on "cash flow statement from AY 2005-06 to AY 2007-08" placed at page no. 10 of the paper book. But Ld. DR has raised an objection that the said page no. 10 could not have been filed before the. Assessing Officer or Ld. CIT(A) because the date printed on the said page is much later than the dates on which the orders were pronounced by the Revenue authorities. We find force in this submission of Ld. DR. We, therefore, ignore this page ITA Nos. 2369 & 2452 of 2010 Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08 -6- and proceed to decide accordingly. As far as the year under consideration is concerned, it is worth to mention that the same cannot be decided independently on the prevailing facts. On careful perusal of the balance sheet, it appears that there was increase in other investments as well as in addition to the investment as noted by Assessing Officer. Therefore, in the absence of a clear nexus that the internal accruals have been utilized towards impugned investments, it is difficult to believe the assessee's submission that the internal accruals or assessee's own funds have been used towards investment. Rather, it appears that the interest bearing borrowings have been utilized because the assessee has not controverted the said allegation. We find no force in this ground of the assessee and the same is hereby dismissed.
5. Ground no. 3 of assessee's appeal is reproduced below:
"The Hon'ble CIT(A) has erred in confirming the disallowance of repairs for water proofing expenses of RS 703328/- and replacement of corrugated sheets Rs 1808000/- aggregating to Rs 2511328/- treating the same as of Capital in nature and in turn directing the A.O. to allow the depreciation. Your appellant submits that such expenditure being of revenue in nature be allowed as claimed for which the necessary facts and various decisions relied upon were by submitted during the course of hearing. The claim of repairs be allowed as revenue expenditure."
6. The assessee has claimed expenditure pertaining to waterproofing of Rs 7,03,328/-. Further, the assessee has also claimed replacement expenditure for corrugated sheets of Rs 18,08,000/-. The assessee's explanation was that both were part of the "current repairs". However, the Assessing Officer was not convinced and held that the replacement of the existing parts were ITA Nos. 2369 & 2452 of 2010 Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08 -7- not current repairs but capital expenditure. Resultantly, a disallowance of Rs 25,11,328/- was made.
7. The Ld. CIT(A) has affirmed the action of the Assessing Officer in the following manner:
"After giving careful consideration to the submissions made and the facts of the case, I am of the considered opinion that the appellant has acquired the benefits of enduring nature on account of such expenditures as noted above. The AO has rightly pointed out that the expenditure incurred on water proofing treatment/process is not in the nature of repairs but in the nature of value addition to the existing assets and the resultant benefit is enduring in nature. Similarly, installation of new corrugated sheets cannot be considered as repairs as the new assets were acquired, the benefit of which would spill over several years. Accordingly, it is held that the AO has rightly capitalized these expenditures."
8. Having heard the submission of both the sides, we are of the view that such type of expenditure pertaining to waterproofing and related to corrugated sheets were nothing but Revenue expenditure. It is wrong to presume that an independent asset was created by the assessee. Our attention was drawn on an order of ITAT 'B' Bench pronounced in assessee's own case for AY 2006-07 bearing ITA No. 1746/Ahd/2009 dated 20.04.2012 wherein an identical legal issue was decided after following the case laws as under:
Sr. Decision in the case Reported in
No. of
1 Asian Hotels Ltd. Vs. 101 ITD 247
Dy.CIT
2 Bony Rubber Co.(P) Ltd. 12 taxmann.com 159
vs. CIT (Punj.& Ha.)
3 Punj Hospitality (P) Ltd. 35 SOT 421 (Delhi)
vs. ITO
4 CIT Vs. Saravana 293 ITR 201 (SC)
Spinning Mills (P) Ltd.
ITA Nos. 2369 & 2452 of 2010
Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08 -8- 8.1 If an expenditure is incurred to preserve and maintain an already existing asset, then the expenditure is nothing but current repairs. We have also noted that the object of the expenditure was not to bring a new asset into existence or to obtain a new advantage. Because of the reasons as stated hereinabove as also following the case laws referred (supra), we hereby reverse the findings of the authorities below and direct to allow the ground of appeal.
B. Revenue's Appeal (ITA No. 2452/Ahd/2010)
1. Ground no. 1 of the appeal is reproduced below:
"1(i) On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of Rs 66,97,495/- being interest on the investment made in the subsidiary company by invoking the provisions of section 36(1) (ii) of the Income Tax Act.
(ii) The learned CIT(A) erred in not appreciating the fact that the assessee could not prove the business expediency in making investment in shares of its subsidiary company and that the Assessing Officer has proved beyond doubt that the investment in shares of its subsidiary company has been made o give undue advantage to its subsidiary company."
2. It was noted by the Assessing Officer that the assessee had made the investment in shares of Rs 7,86,99,950/- in its subsidiary company namely Shri Dinesh Remedies Limited. The details of the investment in shares was stated to be as under:
Date Particulars Amount
1.4.2006 Opening balance 29099950
31.3.2007 Investments made by Dinesh 25000000
Platechem Ltd. and now
ITA Nos. 2369 & 2452 of 2010
Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08 -9- transferred to the company on amalgamation as per the order of the High Court of Gujarat with effect from 1.4.2005 4.7.2006 Investments made vide cheque 24600000 no. 017641 drawn on Centurion Bank of Punjab Ltd.
31.3.2007 Closing balance 78699950 2.1 Further, it was noted by the Assessing Officer that the assessee had not charged any interest on the above investment. The assessee's explanation was that a sum of Rs 4,96,00,000/- was invested in the said subsidiary company out of the internal accruals of the current financial year. Although the investment was made to earn income as per assessee's explanation, but no income was earned during the year. The Assessing Officer has noted that if the assessee had huge reserves and surplus then what was the need to take term loan and to pay the interest on the loan. The assessee had paid interest of Rs 1,91,35,167/-. So, the objection was that on one hand, the assessee was paying huge interest on borrowings, but on the other hand huge amount was invested in equity shares of subsidiary company. Therefore, as per Assessing Officer, interest to the extent of investment in subsidiary company was to be disallowed at the rate on which the assessee was paying interest. It was found by the Assessing Officer that the assessee was paying interest at the rate of 9.5% on the borrowings, therefore applying the same rate of interest on the invested amount, the Assessing Officer had calculated disallowance of Rs 66,97,495/-.
2.2 The Ld. CIT(A) was of the view that the investment made for purchase of shares was assessee's legitimate business activity. According to him, a substantial amount was invested in ITA Nos. 2369 & 2452 of 2010 Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08
- 10 -
earlier years wherein no such disallowance was made, therefore he has held that the Assessing Officer was not justified for making the impugned disallowance.
3. We have heard both the sides. We have perused the record. From the side of the assessee, Ld. AR has cited the decision of ITAT, Chennai Bench pronounced in the case of CIT Vs. Vistas Wind Technology India Private Ltd. 31 taxmann.com 356 (Chennai-Trib.) wherein it was held that because of some commercial interest, the assessee had invested in its subsidiary. Therefore, the interest on loan was held as allowable. The Ld. AR has also placed reliance on ITAT Kolkata Bench's decision pronounced in the case of S.P. Jaiswal Estate 29 taxmann.com 221. In the said decision, it was found that the interest from advances was given and no part of borrowed funds has been diverted as non- interest bearing advances to subsidiary company. After giving those findings, the view was taken in assessee's favour. The Ld. AR has also cited the case of Visen Industries Ltd. 22 taxmann.com 43 (Mumbai), but in that case it was found that there was cash profit available which was much more than the amount invested in the share capital, hence disallowance was reversed. On the other hand, the Ld. DR has placed reliance on the following decisions:
Sr. Decision in the case of Reported in No. 1 CIT Vs. Deepak Agarwal (2013) 35 taxmann.com 293 (Allahabad) 2 Sarabhai Sons(P) Ltd. Vs. (1993) 201 ITR 464(Guj.) CIT 3 Kalindi Investment (P) (2003) 129 taxman 219 Ltd. Vs. CIT (Guj.) 4 CIT Vs. Smt. Leena (2011) 10 taxmann.com Ramachandran 109 (Ker.) 5 CIT Vs. Subrata Roy (2013) 38 taxmann.com 324 (Allahabad) ITA Nos. 2369 & 2452 of 2010
Shree Dinesh Mills Ltd. Vs. ACIT, Cir-4,Baroda AY 2007-08
- 11 -
Having heard the submissions of both the sides and after perusing the case laws cited hereinabove, we are of the considered opinion that the Ld. CIT(A) was not correct in holding that the investment made for purchase of shares of subsidiary company was a legitimate business activity of the assessee. According to us, the assessee is not in the business of finance, but a manufacturer of suitings. The Ld. CIT(A) has erred in holding that no disallowance was made in the past, therefore the Assessing Officer was not justified for the impugned disallowance in the year under consideration. Each year is an independent year. Facts of this year are to be seen independently and not to be governed by the decision taken in the past. The Assessing Officer had noted that the assessee was unable to prove that the own non-interest bearing funds have been utilized. Rather, it was held by the Assessing Officer that the assessee had paid heavy interest on the loans and borrowings. In the absence of specific rebuttal from the side of the assessee, we are of the view that the Assessing Officer was justified in the said disallowance. The action of the Assessing Officer is hereby confirmed and the view taken by the Ld. CIT(A) is reversed.
4. In the result, the assessee's appeal is partly allowed, however the Revenue's appeal is allowed.
Order pronounced in the Court on Tuesday, the 29th of April, 2014 at Ahmedabad.
Sd/- Sd/-
(ANIL CHATURVEDI) (MUKUL Kr. SHRAWAT)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated /04/2014
Ghanshyam Maurya, Sr. P.S.