Income Tax Appellate Tribunal - Ahmedabad
Shree Saras Spices & Food P.Ltd.,, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "B" BENCH AHMEDABAD
Before Shri Mukul Kr. Shrawat, Judicial Member and
Shri T.R. Meena, Accountant Member
ITA Nos. 2527/Ahd/2010
Assessm ent Years :2007-08
&
ITA Nos. 1220/Ahd/2012
Assessm ent Years :2009-10
Shree Saras Spices & Food P. V/s. Dy. Commissioner of Income
Limited A/3, 4 t h Floor, Casela tax (OSD),
Tower, SG Highway, Satellite, Circle-8,
Ahmedabad Ahm edabad
PAN No. AAFCS6824G
(Appellant) .. (Respondent)
अपीलाथȸ कȧ ओर से Shri U.S.Bhati, A.R.
By Appellant
ू×यथȸ कȧ ओर से/By Respondent Shri A. Tirkey, Sr. D.R.
सुनवाई कȧ तारȣख/Date of Hearing
24.09.2012
घोषणा कȧ तारȣख/Date of Pronouncement 09.11.2012
ORDER
PER : T.R.Meena, Accountant Member
These are two appeals filed by the Assessee in ITA Nos. 2527/Ahd/10 & 1220/Ahd/12, which have emanated from the orders of CIT(A)-XIV, Ahmedabad, dated 21.06.2010 for A.Y. 2007-08 & 16.04.2012 for A.Y. 2009- 10 respectively. These two appeals were heard together and are being disposed of by way of this common order for the sake of convenience. The effective grounds of both appeals are as under:
I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 2 Grounds of ITA No.2527/Ahd/2010 (A.Y. 07-08) "1. The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming disallowance of interest on TDS to the extent of Rs.1,05,005/-.
2. The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming disallowance u/s 14A read with Rule 8D amounting to Rs.22,98,627/-."
Ground of ITA No.1220/Ahd/2012 (A.Y. 09-10) "1. The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming disallowance amounting to Rs.3,62,210/- u/s 14A of the Income Tax Act, read with Rule 8D of the Income Tax rules, 1962.
2. The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming disallowance amounting to Rs.3,20,600/- u/s 36(1)(iii) of the Income Tax Act, 1961."
2. The first ground of appeal in A.Y. 07-08 is against confirming disallowance of interest on TDS to the extent of Rs. 1,05,005/-. The A.O. observed that the assessee has claimed interest on TDS of Rs.1,05,005/-. The show cause notice was given to the assessee. The appellant was agreed to propose the addition before the A.O. Before the ld. A.O., the appellant agreed to make the addition of Rs.1,05,005/-, even then, he challenged this issue before the CIT(A) who had dismissed the appeal on page no.2 of the appeal order on the reasoning that interest paid by the appellant on TDS can only be in one circumstance, i.e. late payment of TDS to I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 3 the Government treasury. The appellant utilized Government fund and paid interest on delayed payment of TDS which is compensatory in nature of enjoyment of Government's such amount which was due to Government as per due date after deduction. He also relied in case of East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 (SC). Similarly the interest on late payment of direct taxes is not allowable as deduction as held in case of Bharat Commerce & Industries Ltd. v. CIT (198) 230 ITR 733 (SC).
3. Now the matter is before us. The assessee relied in case of East India Pharmaceutical Works Ltd. v. CIT (supra) and also in service tax appeal in ITA No. 4113/Del/2009 (Del) in case of DCIT vs. Messee Dusseldorf India (P) Ltd., wherein interest paid on late deposit, a service tax in Government account is allowed as deduction. Accordingly, he prayed that the interest paid on late payment of TDS is allowable. At the outset, ld. D.R. relied on the order of the lower authorities.
4. We have perused the orders of the authorities below and heard the arguments from both the sides. The assessee deducted TDS but paid late in Government exchequer, the appellant used the Government money for its own purposes and interest on late payment of TDS is compensatory as held in case of East India Pharmaceutical Works Ltd. v. CIT(supra). Therefore, we dismiss the appeal on this ground.
5. The second ground is confirming the disallowance u/s.14A read with Rule 8D amounting to Rs.22,98,627/- in A.Y. 07-08 and at Rs.3,62,210/- in first ground for A.Y. 09-10. The A.O. found in A.Y. 07-08 that the assessee I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 4 had taken loan of Rs.1,34,07,801/- as on 31.03.2007 and had paid interest to the tune of Rs.21,82,204/-. The appellant had made investments of Rs.2,40,80,000/- as on 31.03.2007 and earned tax free income on it. The ld. A.O. had given reasonable opportunity of being heard which was availed by the assessee who has worked out disallowance u/s. 14A read with Rule 8D at Rs.20,43,821/-. The ld. A.O. also relied on various case laws mentioned at page nos. 2 & 3 of the assessment order and rejected the contention of the appellant. The ld. A.O. had re-worked the disallowance u/s.14A read with Rule 8D which was discussed with the appellant's A.R., who had accepted the mistake committed by them in the working provided themselves. The A.O. calculated total disallowance under Rule 14A at Rs.22,98,627/-. Similar findings for A.Y. 09-10 have been given by the A.O. and disallowances were worked out at Rs.3,62,210/- u/s. 14A read with Rule 8D.
6. The assessee even accepted the working before the A.O., carried the matter before the CIT(A) who had dismissed the appeal for A.Y. 07-08, the operative portion of the order is as under:
"3.3 I have considered the facts of the case and the submissions of the appellant. I am not inclined to accept the contentions of the appellant. The Hon. ITAT Special Bench, Mumbai in the case of M/s. Daga Capital Management Pvt. Ltd., and Others vide its order dt: 20-10-2008 examined the background which led to the insertion of the section 14A by the finance Act, 2001 with retrospective effect from 01-04-1962. It also considered the memorandum explaining the provision in the finance bill, 201 (248 ITR (st) 195) and Circular No. 14 252 ITR (st) 65. It also I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 5 considered the Heydon's Rule also known as ' Mischief Rule' and held -
a) Section 14A has overriding effect over all other sections allowing deduction (Papra 17.7 of the order)
b) Sub-section (2) & (3) of sec. 14A are procedural in nature and hence retrospective. (Para 18 of the order)
c) On going through subsection (1), it can be clearly noticed that the exercise of making disallowance starts with firstly tracing out the exempt income and then initiating the process of working out the expenditure incurred in relation to such exempt income. (Para 22 of the order)
d) All the direct and indirect expenses are disallowable under 14A, which have any relation with the income not chargeable to tax under die Act. (Para 23.7 of the order).
e) The onus to prove that the expenditure was incurred in the taxable business operation and not the exempt income is upon the assessee (Para23.12 of the order).
f) The discussion about the apportionment of direct or indirect expenditure towards taxable and exempt income has become academic in view of Rule 8D which prescribes mechanism for working out the disallowance u/s. 14A. The assessing officer is bound to adopt rule 8D for making disallowances u/s. 14 A, where he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure (para 23.12 of the order).
e) Section 14A is applicable in the cases where the exempt income is incidental to main business of assessee. (Para 26 of the order).
The appellant except stating that no exempt income is claimed during the previous year, failed lo substantiate the fact that out of the huge borrowing of Rs. 1.34 crore as on 31-03-07, no amount was utilised for making investment amounting to Rs. 2.41 crore as on 31-03-07. It is, therefore, beyond doubt that out of the claim of interest of Rs. 21,82,204/- none of its portion related to the borrowed fund utilised for such investment. Even if appellant's argument is accepted for the time being that during I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 6 the previous year, no exempt income is claimed but the interest paid on borrowed capital being utilised for making investment and expenditure incurred in the form of indirect cost (establishment and overhead expenses) has to be identified and to be disallowed since the same are not incurred wholly and exclusively for the purpose of business of the appellant. The onus is on appellant to work out or separate out such interest and expenditure. Considering the direct judgement of Hon'ble ITAT, Delhi (SB) 124 TTJ 577 and ratio of Daga Capital Management, supra, the A.O. is fully justified in making such disallowance u/s. I4A of the Act r.w.r. 8D. The ground of appeal is, therefore, rejected." For A.Y. 2009-10, the CIT(A)'s finding is as under:
"2.3 Decision I have carefully perused the assessment order and the submissions given by the appellant.
Disallowance u/s. 14A The appellant has submitted that disallowance u/s. 14A has already been made for A. Y. 2007-08. The appellant had not made any new investment during the year, therefore, no disallowance is called for. The appellant had sufficient interest free funds for making the investment. The submission of the appellant is not acceptable as the disallowance of the expenses pertaining to the investment in tax exempt assets u/s. 14A is to be made out of the expenses claimed by the appellant in the Profit and Loss Account. The disallowance is determined after taking into account the interest expenses and the administrative I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 7 expenses after applying Rule 8D. The disallowance has to be made every year as long as there is an expenditure which is incurred for earning the tax exempt income and the expenditure has not been disallowed by the appellant himself from the expenses claimed by him. The claim of the appellant that there was a reduction in the unsecured loans is also of no avail as the disallowance has been made by the A.O. after considering the interest expenses that have been incurred in borrowing that loan. The claim of the appellant that there is no sufficient interest free funds including capital reserve is of no help as it is noted that the investment as per balance sheet on 31/03/2009 was Rs.2.37 crores and the shareholder funds were at Rs.2.52 crores. The claim cannot be accepted as the appellant has not been able to establish the nexus between interest free funds and the investment made in tax exempt assets. It is also noted that the disallowance which was made last year has been accepted by the appellant as there is no appeal on record.
Further, the application of Rule 8D has also been judicially settled by various court and it has been held that it is applicable from A. Y. 2008-09 onwards. The A.O. has also given finding regarding the application of interest bearing funds for making the investment in shares and earning the dividend thereon. The reliance placed by the appellant on certain judicial I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 8 pronouncements is respectfully distinguished as the judgments are prior to the period from which the Rule 8D has been brought in the Act. Therefore, the same are not applicable to the case of the appellant. The disallowance made by the A.O. u/s. 14A of the Act is, therefore, upheld. "
7. Now the assessee is before us. Ld. D.R. relied upon the order of CIT(A). Ld. A.R. contended that no expenditure incurred in relation to such income which does not form part of the total income and therefore, the Rule 8D is not applicable in its case. The expenditure claimed by him is allowable u/s. 28 to 37 of the IT Act. However, they have calculated the disallowances u/s.14A before the A.O. at Rs. 20,43,821/-. He further contended that Rule 8D is not applicable for A.Y. 07-08. He argued that secured loan reduced during the year. The assessee had interest free fund as share capital at Rs.5 lacs, share application money of Rs. 67.35 lacs and reserve and surplus Rs.22.27 lacs. No interest bearing fund used in investment in shares. The investment in share has increased from 2.2 crore from 2.40 crores during the year which is increased by Rs. 18 lacs whereas the appellant received share application money during the year at Rs.67.35 lacs. Thus, no disallowance is to be made on account of Section 14A. He also relied in case of ACIT vs. Aquagel Chemicals Pvt. Ltd., Bhavnagar, in ITA No. 3533/Ahd/2008 for A.Y. 05-06 wherein Co-ordinate 'B' Bench on identical facts, had dismissed the appeal of the Revenue. Similar issue dealt by Co-ordinate 'C' Bench in case of Sagar Drugs & Pharmaceuticals (P) Ltd. vs. ACIT, Range-8, in ITA No. I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 9 3170/Ahd/2009 for A.Y. 06-07. It was held that disallowance on administrative expenses cannot be made prior to 07-08 unless there is a direct nexus established by the A.O. Rule 8D is effective from A.Y. 08-09 which cannot be applied for A.Y. 07-08. Therefore, the CIT(A) was not right in confirming the disallowance made under Rule 8D of the IT Rule from administrative expenses unless of course a direct nexus is established which has not been done in the present case. Accordingly, the addition made by the A.O. and confirmed by the CIT(A), may be deleted.
8. We have perused the orders of the authorities below and gone through the case laws cited by the appellant. The appellant had challenged the action of the A.O. on the reasoning that Rule 8D is not applicable for A.Y. 07-08, had confirmed the view by the Hon'ble Bombay High Court decision in case of Godrej & Boyce vs. DCIT. Hon'ble Bombay High Court held that Rule 8D is prospective not retrospective. Therefore, it is applicable for A.Y. 08-09. The A.O. can disallow the expenses u/s.14A but nexus has to be established by him. In the present case, there is no nexus has been established by the A.O. He simply calculated the disallowance by applying the Rule 8D which is applicable from the A.Y. 08-09. Accordingly, we allow the appeal of the assessee.
9. For A.Y. 09-10, the Rule 8D is applicable and it is mandatory on the part of the A.O. to calculate the disallowance under Rule 8D on the basis of formula prescribed in Rule 8D. As the appellant did not point out any defect in the computation provided by the A.O., at any stage. Therefore, the I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 10 disallowance made by the A.O. in A.Y. 09-10, is confirmed. The assessee's appeal in A.Y. 09-10 is dismissed.
10. The remaining ground in A.Y. 09-10 is against confirming disallowance amounting to Rs.3,20,600/- u/s. 36(1)(iii) of the IT Act. The A.O. found that the assessee did not charge any interest from following persons:
(i) Vidit Tradlink - Rs.5 lacs (ii) G.R. Associates - Rs. 4,80,000/- (iii) Impact Impex - Rs. 11 lacs (iv) Pranjee Properties P. Ltd. - Rs. 30 lacs
The A.O. had given reasonable opportunity of being heard to justify the interest free advances to the above persons. The appellant had taken loan of Rs.3,93,48,407/- on which interest of Rs.27,50,253/- was paid. The reasoning of the A.O. was that from one hand he is paying interest on loans but on another hand he is not charging interest on interest free loans. The ld. A.O. after considering the assessee's reply, calculated the interest on above interest free advances at Rs.3,20,600/- and disallowed u/s. 36(1)(iii) of the IT Act.
11. Being aggrieved by the order of the A.O., the assessee carried the matter before CIT(A) who has also confirmed the addition. The operative portion is as under:
"The disallowance u/s.36(1)(iii) has been made by the A.O. as the appellant had made interest free advances out of the interest bearing funds. The appellant has not been able to clearly prove the nexus between the interest free advances and the interest free funds. It has also not been able to establish that the I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 &
12 20 A h d of 20 12 A. Y . 0 9- 10 Page 11 advances were out of purpose of business and no reason for not charging the interest has been given. The disallowance made by the A.O. is, therefore, upheld.
The appellant has also submitted that there was a double disallowance of interest u/s.14A as well as u/s.36(1)(iii) of the Act. The claim of the appellant is without any basis. The disallowance u/s.14A is made out of the interest paid by the appellant by working out the proportionate interest which corresponds to the investment made in shares. Similarly, the disallowance u/s. 36(1)(iii) is made by working out the proportionate interest corresponding to the interest free loans given by the appellant out of the interest bearing funds. Therefore, both the disallowances have no overlapping and have rightly been made separately by the A.O. The ground of appeal is accordingly dismissed."
12. Now the matter is before us. Ld. Counsel for the appellant contended that the unsecured loan had been reduced from 1.79 crore to 1.38 crore. He has also drawn our attention on page nos. 44,45,47 & 48 and claimed that advances were made in earlier year. The assessee has interest free fund by way of share capital, reserves and surplus, share application money. The interest free advances were given to maintain the business relation and for business expediency. Further, he also relied on Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.) and Torrent Financiers vs. ACIT, 73 TTJ 624 (Ahd.) and submitted that it has to be presumed that the entire investments have come from its own fund and not a part of the borrowed capital has gone in malting investment. The ld. A.O. had not established the nexus between interest bearing loan and interest free advances. Therefore, this addition is I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 12 not warranted. From the side of the Revenue, ld. D.R. vehemently relied on the orders of the CIT(A) and A.O.
13. We have perused the rival contentions and submission and heard the arguments from both the sides. It is fact that the assessee had not charged any interest in case of Pranjee Properties P. Ltd. on Rs.30 lacs and Impact Impex on Rs. 11 lacs, which were advanced during the year. Remainings were advanced in earlier years. The appellant had various interest free funds available in form of share capital, reserve surplus, share application money substantially. Further, the unsecured loan had been gone down by Rs.40 lacs compared to preceding year. There is no direct nexus has been established by the A.O. that interest free advances given out of loan taken on interest. Thus, we have considered view that the addition made by the A.O., confirmed by the CIT(A) is not warranted. Accordingly, we delete the addition.
14. In the combined result, Assessee's appeals are partly allowed. These Orders pronounced in open Court on 09.11.2012 Sd/- Sd/-
(Mukul Kr. Shrawat) (T.R. Meena)
Judicial Member Accountant Member
True Copy
S.K.Sinha
आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-
1. अपीलाथȸ / Appellant
2. ू×यथȸ / Respondent
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ- अपील / CIT (A)
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड[ फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार I T A No s . 2 52 7 / A hd /1 0 A . Y . 0 7- 0 8 & 12 20 A h d of 20 12 A. Y . 0 9- 10 Page 13 आयकर अपीलीय अिधकरण, अहमदाबाद ।
Strengthen preparation & delivery of orders in the ITAT
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