Income Tax Appellate Tribunal - Chandigarh
Hero Cycles Ltd., Ludhiana vs Assessee on 13 October, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH 'B', CHANDIGARH BEFORE Ms. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA No.1297/Chd/2010 (Assessment Year : 2007-08) The A.C.I.T., Vs. M/s Hero Cycles Ltd., Circle-V, Hero Nagar, G.T. Road, Ludhiana. Ludhiana. And C.O.No.49/Chd/2010 Arising out of ITA No.1297/Chd/2010 (Assessment Year : 2007-08) M/s Hero Cycles Ltd., Vs. The A.C.I.T., Hero Nagar, G.T. Road, Circle-V, Ludhiana. Ludhiana. PAN: AAACH4073P (Appellant) (Respondent) Assessee by : None Department by : Shri S.K.Mittal, D.R. Date of hearing : 13.10.2011 Date of Pronouncement : 19.10.2011 O R D E R PER SUSHMA CHOWLA, J.M, :
The appeal of the Revenue and the Cross Objection of assessee are against the order of the Commissioner of Income-tax (Appeals)-II, Ludhiana dated 15.09.2010 relating to assessment year 2007-08 against the order passed under section 143(3) of the Income Tax Act, 1961.
2. Both the appeal of the Revenue and the Cross Objection of the assessee were heard together and are being disposed off by this consolidated order for the sake of convenience.
3. The ground of appeal raised by the Revenue is as under :
"1. That the Ld. CIT(A)-II has erred in law and on facts in deleting the disallowance of Rs.3,08,64,359/- out of interest and disallowance of Rs.1,06,16,355/- out of indirect expenses which were held by the A.O., as expenditure incurred to earn income exempt from tax u/s 14A of I.T. Act."
4. The Assessing Officer during the course of assessment proceedings had invoked the provisions of section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules and computed the disallowance out of dividend income received by the assessee. During the year under consideration the assessee had received dividend income from mutual fund at Rs.3.84 crores and dividend income from shares in Indian companies at Rs.40.77 crores. The said dividend income was claimed exempt u/s 10(34)/10(35) of the Income Tax Act respectively. The Assessing Officer computed the disallowance on Rs.4.16 crores on account of both interest expenditure and indirect expenditure (interest expenditure Rs.3.08 crores and indirect expenditure Rs.1.08 crores). The assessee challenged the aforesaid disallowance u/s 14A of the Income Tax Act before the CIT (Appeals).
5. The CIT (Appeals) deliberated upon the disallowance out of interest expenditure at length taking into consideration the submissions of the assessee in respect of the investments in mutual funds/shares/investment in companies. The CIT (Appeals) noted that there was increase in the investment during the year under consideration to the tune of Rs.46.84 crores. The tabulated details of increase in the investments is incorporated in para 13 at page 16 and 17 of the appellate order. Further there was increase of Rs.62.65 crores in investment in debentures from where the income was taxable. The CIT (Appeals) further noted that "there is fall to the tune of Rs.46.45 crores in the other investments in mutual funds/PMS in main unit from where the income is exempt and there is increase in investment in equity shares to the tune of Rs.30.13 crores. Further, in the C.R.Division there is increase in investment to the tune of Rs.0.50 crores. Thus there is net fall to the tune of Rs.15.18 crores rather than increase in investments covered u/s 14A. In nutshell total increase in investments is as under :
Increase in investments not covered u/s 14A Rs.62.65 crores Fall in investments covered u/s 14A Rs.15.81 crores Rs.46.84 crores
6. The finding of the CIT (Appeals) in view thereof was that "there is no increase in investments covered under the provisions of section 14A". The CIT (Appeals) thus held as under :
"On the contrary as explained in the written submission the assessee has earned income from the investments itself to the tune of Rs.75.30 crores against total increase in investments to the tune of Rs.46.84 crores as explained by appellant below:
Total increase in Investments As On 31.3.2007 468433860 Income from Investments Dividend Received 446159685 Profit on Sale/Switching of Current Investments 378260385 Loss on Derivatives 125455 824545525 Less :
Loss on Sale/Switching of Current Invests 71208499 Loss on Derivatives 322513 7153112 Net Funds Generated from Investments 753014513 Plus Funds from Investments
-284580653 As submitted before Ld. A.O. increase in total investments is only due to reinvestment of surplus income from these investments itself as well as internal accrual which are more than amount of increase in investments. The net cash profits of the cm for the year under consideration as per audited balance sheet are at Rs.123.89 Crores, which includes income from investments at Rs.75.30 Crores as per chart given above."
7. The CIT (Appeals) vide para 14 noted that the assessee during the course of assessment proceedings had filed complete details of its bank account relating to the transaction of investment made, to prove that the surplus funds were available with the company on the date of transaction. The CIT (Appeals) further observed that "The AO has not controverted the facts in the assessment order or in the proceedings before me. The Ld.AR reiterated his stand with reference to these statements placed in paper book that fresh investments in the year under appeal are also out of surplus funds. I have gone through these statements placed in the paper book and find force in his arguments". The CIT (Appeals) thus held as under :
"15. As rightly contended by the Ld.Counsel from these details, it becomes quite clear that the total increase in investments is only due to reinvestment of huge income from these investments itself. Further there is no increase in the investments which are covered u/s. 14A rather there is fall in the same to the tune of Rs.15.81 Crores. The increase of Rs.46.84 crores in investments is mainly, from where the income is the part of the total income and is taxable accordingly.
16. Considering the case of the appellant from all these angles there is considerable force in the contention of the Ld. Counsel that all the current/long term investments have been made out of own funds and no interest bearing borrowings have been used for making these investments in the relevant period. In view of the above, when for the b/f investments no borrowed funds have been held to have been invested in such investments, as already discussed in view of the appellate orders for the earlier years and the increase in investment having been shown to be made as out of income from these investments itself/huge internal accruals of the company as per charts discussed above, no interest bearing borrowed funds have been invested by the appellant during the relevant period for earning the exempt dividend income as erroneously held by the A.O.
17. As explained for the relevant period there are cash profits to the tune of Rs.123.89 Crores and further paid up capital of the company is Rs.39.82 Crores. In view of the ratio of decision of the Hon'ble ITAT in appellant's own case for the Asstt. Year 2004-05 such internal accruals being far more than the net increase in the investments to the tune of Rs.46.84 Crores (including the increase in investment at Rs.62.15 Crores from where the income is taxable), again no disallowance u/s. 14A could be held to be justified."
8. The CIT (Appeals) also noted that similar addition was deleted by the Tribunal in assessee's own case relating to assessment year 2004-05 wherein it was held that no nexus was shown of the amount invested in investment from where the exempt dividend income had been earned with the interest bearing borrowings. The CIT (Appeals) also considered that the assessee had suo motu disallowed a sum of Rs.1.52 crores being the expenditure incurred directly attributable to the exempt income. The CIT (Appeals) thus held that in view of the ratio laid down by the Tribunal in assessee's own case, which has been affirmed by the Hon'ble Punjab & Haryana High Court in judgment reported in 323 ITR 518 (P&H), in assessee's own case, there was no merit in any disallowance u/s 14A of the Act.
9. In the totality of the facts and circumstances of the present case where the assessee has explained the source of investment in the equities, income from which is exempt from tax and similar investment being made in the earlier years wherein no disallowance was found to be merited u/s 14A of the Income Tax Act, no further disallowance is warranted in the hands of the assessee. The Tribunal in assessee's own case relating to assessment year 2004-05 in ITA No.247/Chd/2008 - order dated 4.7.2008 had deleted the disallowance made u/s 14A of the Act. The Hon'ble Punjab & Haryana High Court in assessee's own case relating to assessment year 2004-05 (supra) had confirmed the order of the Tribunal and held that no such disallowance is merited where the assessee has utilized its own generated funds. The CIT (Appeals) in paras 23 and 24 had held that following factual position emerges in the present case :
"23. I have carefully gone through the submissions of the Ld. AR.R. and statements etc. placed in the paper book in support of his contention. After discussions the factual position emerges as under :
i) Before A.O. appellant has filed statements of investments alongwith bank statements in evidence of source of investments made in the year out of surplus funds in the bank. The A.O. has not controverted these facts.
ii) Brought forward investments amounting to Rs.226.73 Crores has been held out of own sources as per appellate orders of the earlier years.
iii) Interest expense incurred by the other units of the company other than main unit is only in relation of manufacturing activities. It is only the main unit is holding almost all the units. In support of this unit-wise balance sheets have been placed in the paper book before me. Further, letter from the State Bank of India lead bank regarding renewal of working capital limit dated 11.4.2005 also filed in support of contention that separate limits have been sanctioned to the other units.
iv) Current year's investments include investment to the tune of Rs.67.65 Crores in the debentures/Real Estate Funds from where the income is taxable. On the contrary there is fall in the investments in the mutual funds etc. as compared to the earlier year from where the income is tax free to the tune of Rs.46.45 Crores and after considering increase in the investments in group companies shares at Rs.30.13 Crores there is net decrease of Rs.15.81 Crores rather than increase in investments covered u/s.14A.
v) The company has also earned interest income to the tune of Rs.2.81 Crores which includes interest earned by the main unit at Rs.2.77 Crores.
vi) As held by the Hon'ble Bombay High Court Rule-8D is not applicable to the year under consideration.
vii) The appellant's cash profits as per audited balance sheets are at Rs.123.89 Crores which also includes income to the tune of Rs.75.30 Crores from the investments. The increase in investment is only due to reinvestment of surplus income from these investments as well as company's internal accruals.
vii) There is no instance of any utilization of amount, which has been borrowed from the bank specifically for the business purposes of the company, for unspecified purposes being investments.
24. In view of the above position, the disallowance of interest at Rs.30864538/- made by the A.O. u/s.14A of the Act cannot be held to be justified and disallowance on merits therefore also deleted. Thus grounds 1, 2(a) & (b) stands allowed in favour of the appellant."
10. The learned D.R. for the Revenue had not controverted the findings of the CIT (Appeals) and in the absence of the same we find no merit in the ground of appeal raised by the Revenue.
11. The only ground of appeal raised by the assessee in Cross Objection is as under :
"That the Ld.CIT(A)-II has erred in confirming the disallowance of Rs.2,00,000/- towards Administrative Expenses on estimate basis ignoring the facts that assessee has already disallowed a sum of Rs.1,52,06,451/- on account of expenses incurred in relation to exempt income."
12. We find that the Hon'ble Bombay High Court in Godrej & Boyce Mfg.Co.Ltd V DCIT & Anr, [234 CTR 1 (Bom) reversing the order of Special Bench of Mumbai Tribunal on the issue held that the provisions of Rule 8D were not ultra virus the provisions of Section 14A and it was also held that the same do not offend Article 14 of the Constitution. It was further held that the provision of Rule 8D was to be applied prospectively w.e.f. 01.04.2007 i.e. in relation to assessment year 2008-09 and subsequent years as the Memorandum explaining the provisions of the Finance Bill 2006 states that this amendment would take effect from 01.04.2007. The Court further held that even in the absence of sub-section (2) and (3) of Section 14A and Rule 8D, the Assessing Officer was not precluded from making apportionment on account of expenditure relatable to earning of exempt income.
13. We further find that the Hon'ble Punjab & Haryana High Court in CIT V Hero Cycles Ltd. [323 ITR 518 (P&H)] observed that "In view of the findings reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable." The said ratio is in connection with interest expenditure in relation to section 14A of the Act. The issue raised by the assessee is against the indirect expenditure disallowed in view of provisions of section 14A of the Act. Following the ratio laid down by the Hon'ble Bombay High Court in Godrej & Boyce Mfg.Co.Ltd V DCIT, we uphold the disallowance of Rs. 2,00,000/- being expenditure relatable to the earning of the exempt income by invoking the provisions of section 14A of the Act. The ground of appeal raised by the assessee is thus dismissed .
14. The appeal of the Revenue and the Cross Objection of assessee are dismissed.
Order Pronounced in the Open Court on 19th day of October, 2011.
Sd/- Sd/-
(MEHAR SINGH) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 19th October, 2011
Rati
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
True Copy
By Order
Assistant Registrar, ITAT, Chandigarh
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