Income Tax Appellate Tribunal - Chandigarh
Punjab Tractors Ltd., Patiala vs Department Of Income Tax on 22 March, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIG ARH BENCH ' A', CHANDIG ARH
BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND
Ms. SUSHMA CHOWLA, JUDICI AL MEMBER
ITA No. 599 & 600/Chd/2013
Assessment Years : 2008-09 to 2009-10
A.C.I.T, Circle, Patiala Vs. M/s Punjab Tractors Ltd.
S.A.S. Nagar, Mohali
AAACP 8578K
ITA No. 644 & 645/Chd/2013
Assessment Years : 2008-09 to 2009-10
M/s Punjab Tractors Ltd. Vs. A.C.I.T. Circle, Patiala
S.A.S. Nagar, Mohali
AAACP 8578K
(Appellant) (Respondent)
Department by: Smt. Jyoti Kumari
Assessee by: Shri Sumeet Khurana
Date of hearing 29.4.2014
Date of Pronouncement 20.5.2014
O R D E R
PER BENCH These are cross appeals directed against the order dated 22.3.2013 of the Ld CIT(A), Patiala. Some issues are common in these appeals which were heard together and are being disposedoff by this consolidated order for the sake of convenience. I T As N o . 5 9 9 & 6 0 0 / C h d / 2 0 1 3 - R e v e n u e Ap p e a l s
2. In both these appeals identical grounds have been raised by the Revenue in Assessment year 2008-09 which are as under:
"1 In the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 80,81,719/- made by the A.O on account of disallowance of expenditure incurred interalia on purchase of new items like wooden cabinets, wooden partitions, notice boards, almirahs 66KV Potential transformer, 3 phase double speed motor, Starter motor, Simodrive, fabrication and erection of structures etc. ignoring the fact that most of the items purchased by the appellant were new identifiable assets.
2 In the facts and circumstances of the case the Ld. CIT(A) has erred in holding the acquisition of new assets for replacement of existing assets as current repairs, through the Hon'ble Supreme Court in the 2 cases of CIT Vs. Sri Mangayarkarshi Mills (P)Ltd., 315 ITR 114, CIT Vs. Saravana Spinning Mills (P) Ltd, 293 ITR 201 has held that replacement of machinery was capital expenditure and could not be treated as current repairs."
In Assessment year 2009-10 identical grounds have been raised but only difference is that the amounts are different. 3 After hearing both the parties we find that during assessment proceedings the Assessing officer noticed that assessee has claimed expenses on account of repair of building amounting to Rs. 189.77 lakhs and repair to plant & Machinery amounting to Rs. 193.39 lakhs. The assessee was asked to file the details which were duly furnished. The Assessing officer after examination of the details noticed that various items listed at para I(i) which according to him were of capital nature out of the building repair expenses. To these items 20% of labour expenses were added and thus a sum of Rs. 5913039/- was held to be of capital nature. Similarly in case of repair to plant & Machinery items listed at para I(ii) were held to be of capital nature and after adding 20% of labour expenses a sum of Rs. 2759984/- was held to be of capital nature.
4 On appeal these additions were deleted by the Ld. CIT(A) following the order of the Tribunal in assessee's own case in earlier years particularly in ITA No. 594/Chd/2008 for Assessment year 2004-05 and ITA No. 107/Chd/2010 for Assessment year 2006-07. 5 Before us. the Ld. D.R. for the Revenue referred to the list of items and submitted that perusal of these items would clearly show the items are of capital nature. He further submitted that it cannot be said that the issue is covered by the order of the Tribunal because in each year the items would be different and the LD. CIT(A) should have examined various items on merits. 6 On the other hand, the Ld. Counsel for the assessee submitted that the issues are covered by the order of the Tribunal for earlier years and in this regard he referred to various issues filed in books 3 of accounts for Assessment year 2002-03, 2003-04 and 2006-07. However, certain items like purchase of wooden almirah were confronted to him and he had no specific reply.
7 W e have gone through the rival submissions carefully and find force in the submissions of the Ld. D.R. for the Revenue that in such matters the issues cannot be said to be covered by earlier order of the Tribunal because it would depend on the nature of the items and depending on the nature of each item the same has to be treated as capital expenditure or Revenue expenditure. The Assessing officer has mentioned various items and no doubt the wooden paneling, wooden partition, some small items of steel or purchase of cement etc. may fall under repair but at the same time purchase of almirah in Assessment year 2008-09 amounting to Rs. 102600/-, installation of board etc. can not be termed as repair and maintenance. Similarly the assessee has shown purchase of Orissa type W .C along with G.I. Flush bend, C.I Pee Trap etc. which shows construction of new bath room. The Ld. Counsel for the assessee could not give any answer in respect of these items. At the same time there is no purpose if the issue is set aside, therefore after examining various items we are of the opinion if 10% of items listed by the Assessing officer are held to be of capital nature, same would meet the ends of justice. Accordingly we set aside the order of the Ld. CIT(A) and direct the Assessing officer to treat 10% of the items from building repair as well as plant & Machinery repair as listed by the Assessing officer as Revenue expenditure. We may further clarify that on capital portion of the item requisite depreciation may also be allowed.
8. In the result, appeals of the Revenue in ITAs No. 599 & 600/Chd/2013 are partly allowed.
I T As N o . 6 4 4 & 6 4 5 / C h d / C h d / 2 0 1 3 - As s e s s e e ' s a p p e a l s 4 9 In both these appeals the assessee has raised grounds objecting to the disallowance u/s 14A r.w.r. 8D. 10 After hearing both the parties we find that during assessment proceedings the Assessing officer noticed that assessee has made fresh investment to shares and mutual funds, therefore assessee was asked to show cause as to why the expenses attributable to the exempt income should not be disallowed. In response it was stated vide letter dated 12.11.2010 as under:
" In t h is r e g ar d, w e s ub m it th a t i t w as e nt ir e ly a Bus i n es s d ec is i on d uly tak e n an d a p pr ov e d by th e B o ar d of d ir ec t or s to i nv es t in t h e s ha r es of o t her c om p an i es . N ow , j us t bec a us e th e inc o m e fr om d iv id e nd is a tax fr ee i nc o m e as per th e Ac t , t ha t d o es n ot me a n t ha t t h e ex pe ns e h av e n ec es s ar i ly t o b e ap p or t i o ne d t ow ar ds o per a ti n g & a d mi n is t r a t iv e ex pe ns es t o e ar n s uc h i nc o m e. As y o u ar e a w ar e of t ha t, our s is a ma n uf ac tur i ng c onc er n a n d th e i nv es t me n ts ar e i n t h e s h ar es o f t he ot h er c om p any a nd in v ar i ous Mu t u al Fu nds wh ic h ar e ma i n ly i n D- m at Ac c o u nt a n d w her e t h e E C S c r ed it of D iv i de n d is au t om at ic a l ly do n e. W e c a n c o m pa r e t his D iv i d e nd i nc o m e w it h t h e i nc om e fr o m d iv i de n ds fr o m inv es t m e nts in s har es o f c o mp a n i es by t h e i nd iv i d ua l s . O nc e t he i nv es tm e nt is ma d e, th er e ar e h ar d ly a ny ex p ens es r eq u ir ed to b e i nc ur r e d a ft er th at .
In a ny c as e w e i nf or m y ou t h at Co m m is s i on er A p pe a ls i n t h e A .Y . 2 00 4- 05 & 20 0 6- 07 , hav e m a d e an a d hoc ad d it i o n o f Rs . 2 5 L ac s a ga i ns t th e a d di t io ns ma d e by t h e as s es s i n g of f ic e r o n pr op or ti o n at e b as is . F ur t h er to i nf or m y o u th a t th Ho n 'b l e I T AT, Ch a n di gar h B enc h 'A ', v i de i ts or d er d at e d 20 N ov e m be r 2 0 09 per t ai n i ng t o A . Y. 2 00 4- 0 5 , h as dec i d ed th e is s ue i n t h e f av o ur of th e as s es s e e c om p any an d a l l ow ed th e d is al l ow a nc e of Rs . 25 lac s ma d e by t he Ld . CI T( A) . "
The Assessing officer after examining the submissions observed that even earning of dividend would require some monitoring of investment and other funds and therefore he invoked rule 8D. Thereafter the Assessing officer made disallowance amounting to Rs. 144.03 lakhs.
11 On appeal it was mainly submitted that issue is covered by the order of the Tribunal in earlier years. However, it was noticed by the Ld. CIT(A) that the assessee has made fresh investments, it was admitted during the course of appellate proceedings that the facts are different, therefore the issue is not covered. It was further contended before the Ld. CIT(A) that the investments were made as per the Board resolution and since the share holding was kept in demat account and the dividend has been received through ECS 5 therefore no direct expenses were involved. Further it was submitted that Assessing officer has not pointed out which particular expenditure is relatable to the exempt income and therefore invocation of rule 8D was not justified.
12 The Ld. CIT(A) examining the issue in earlier years of Assessment year 2004-05 and 2006-07 and observed that the Tribunal has made adhoc addition of Rs. 25 lakhs. He further observed that the issue relating to apportionment of the expenditure comes into picture only when the expenditure are of consolidated nature for which legislature has provided a mechanism by way of Rule 8D. He further observed that invocation of Rule 8D was justified and confirmed the action of the Assessing officer. 13 Before us. the Ld. Counsel for the assessee reiterated the submissions made before the lower authorities. He further submitted that Rule 8D could not be invoked unless and until some error is pointed out in the method adopted by the assessee. 14 In respect of Assessment year 2009-10 he referred to page 13 of the paper book and pointed out that firstly profit and loss account is for the period of four months. This is so because the company was merged with Mahindra group. Therefore as far as disallowance u n d e r c l a u s e ( i i i ) o f R u l e 8 D ( 2 ) w h i c h i s @ ½% of the value of investment should have been determined proportionately for four m o n t h s b e c a u s e ½% would relate to whole year. Secondly during the year there was no interest expenditure and in fact there was interest income of Rs. 7.3 crores. Therefore no disallowance could have been made in respect of interest. Thirdly he referred to page 17 of the paper book and pointed out hat certain investments have been made in debt fund and income from same, is not exempt. At this juncture the Bench specifically asked whether dividend from 6 debt fund was exempt or taxable and he admitted that dividend from debt fur was exempt. However, the sale of such units is not exempt. 15 On the other hand, the Ld. D.R. for the Revenue strongly supported the order of the Ld. CIT(A).
16 W e have gone through the rival submissions carefully. We agree with the finding of the Ld. CIT(A) that the issues are not covered by the order of the Tribunal in earlier years because in earlier years before Assessment year 2008-09 Rule 8D was not applicable. Hon'ble Bombay High Court in case of Godrej & Boyce Manufacturing Vs. DCIT, 328 ITR 81 (Bom) has clearly held that Rule 8D has no retrospective application and is applicable only from Assessment year 2008-09. Further we find no force in the submissions that the Assessing officer has not given any reason or pointed which expenditure is allocable to the exempt income before invocation of Rule 8D. In fact the Assessing officer has observed in the assessment order as under:
( i) Th e as s es s e e has c on te n de d t ha t it r ec e iv e d t he d iv i d en d by E C S c r ed i t an d d e pos i te d i n to ba nk ac c ou nt of t h e c o m pa ny a n d th er e w as n o ex pe n d it ur e i nc ur r e d f or e ar ni n g d iv id e nd i nc o m e. T h is p le a o f t he as s es s e e is n ot c or r ec t bec a us e w he n t h e as s es s e e h as i nv es t ed 6 C r or es ap pr ox . i n di ff er e nt s ec ur i t ies a n d t h e s ec ur it i es ar e o f s uc h a v o la t il e n at ur e t h at o ne h as t o k ee p c ons t an t v i g i l o n th e mo m e nts o f pr ic es as we l l as f i na nc ia l gr o up v i ab i l ity of th e c o m p any , m o me n t o f c o m pa ny , i ts s h ar e pr ic e e tc . ho w t he c o mp a ny r e ma i ns c o nf i de nt w i t h ou t e mp l oy i ng a s in g l e p er s on f or t he jo b .
i i) S ec o n d ly , in a c or p or at e e nt i ty , th e c o m p a ny h as t o r e m a in v i gi l an t a n d has t o k e e p tr ac k o f e ac h ac t iv ity un d er t ak e n s o t ha t s t af f r es p on s i bl e h av e t o ans w er a ny ne g l ig e nc e fo u nd by th e m a na g em e nt .
i i i) Th ir dly , it has t o k e ep s e par a te r ec or ds , fi l i ng c or r es po n de nc e w it h c om p any th e ir p or t f ol i o m an a ger s tr ac k w i th s t oc k ex c h an g e, a dh er e nc e t o S E BI g u id e l in es , ma i nt e na nc e o f s ta tu t or y r e gis t er ho l d in g of b oar d m ee t in g etc .
iv ) Fo ur t h ly , t he as s es s e e has po i nt e d ou t th a t i t h as ma d e th e i nv es tm e nts way ba c k . T h is p l e a of th e as s es s e e is a l s o n ot t en a bl e , h er e it n ee d t o be ap pr ec ia t ed t ha t if t h e s e f u n ds w er e no t b lo c k ed in t hes e s ec ur it i es t h e n t h es e to b e us ed in bus i ne s s p ur pos e a nd c om pa ny t o th at ex t en t may no t h av e nec es s ar i ly to bo r r o w fr o m t h e b ank an d c e r ta i n ly , t h e i nt er es t bur de n s h a l l b e r ed uc e d a p ar t fr o m ot her e n du r i n g be n ef i ts der iv e d by t h e c o mp a ny du e t o its eas i er l i q ui d ity .
v) Fi ft h ly , t he c o m pa ny ha d e mp l oy i ng b a nk f ac il i ty s i nc e l o ng a n d p ay in g r eg u l ar ly h e av y i n ter e s t o n t h es e b or r ow ed f un ds , as s uc h, th er e i s d ir ec t n ex us be tw e en i nv es t me nt a nd bo r r o w ed f u nds . A c c or d i n g ly , s ec t io n 14 A c l e ar ly h as ap p l ic a t io n i n t h is c as e. "7
The above clearly show that the Assessing officer has given his reasoning. It is a common knowledge that the investments in shares and mutual fund by the Corporate sector requires big financial efforts and are handled by a department known as Treasury operations. In fact this is one of the important function of the Finance department to handle surplus funds with respect to liquidity, safety and at the same time to generate maximum returns. Therefore it cannot be said that no expenditure is required to be incurred for making investments and receiving dividends. Firstly the Treasury department has to identify the surplus funds and availability of same at the various points of time then investments have to be identified keeping the liquidity requirements of the company in mind and then the financial investments are made and rotated as per the liquidity and other requirements of the company. All these activities require involvement of various management and finance personnel which involves expenditure. Therefore to say that the assessee has not incurred any expenditure or the Assessing officer has not pointed out any reason, is totally incorrect. In view of this matter Rule 8D has been rightly invoked by the Assessing officer.
17 As far as the issue regarding investment in debt find in Assessment year 2009-10 is concerned, we find no force because during the year the assessee has not shown any taxable income from debt funds. It was admitted before us that dividend income even from debt fund would be exempt. Now some income may arise at the time of sale of such debt but if the assessee does not sell such debt and simply redeem the same then that would be treated as redemption income and no taxable income would be there. Therefore in our opinion, income from debt fund is exempt and provisions of section 14A are Rule 8D would be applicable. 8 18 However, as far as the issue regarding disallowance under Rule 8D(iii) is concerned, we agree with the contention of the Ld. Counsel for the assessee. S i n c e ½% d i s a l l o w a n c e i s b a s e d o n t h e investment and it has to be treated disallowance for the full year. If an organization has operated only for four months then disallowance has to be restricted proportionately and accordingly we direct the Assessing officer to restrict disallowance u/s 8D(ii)(iii) proportionately.
19 We also agree that if no interest expenditure has been incurred in Assessment year 2009-10 then no proportionate disallowance can be made out of interest and accordingly we direct the Assessing officer to verify this aspect and then if no interest expenditure has been incurred then no disallowance should be made.
20. In the result, appeal of the assessee in ITA No. 644/Chd/2013 for Assessment year 2008-9 is dismissed and ITA No. 645/Chd/2013 for Assessment year 2009-10 is partly allowed.
21 In the result, Revenue's appeals in ITAs No. 599 & 600/Chd/2013 are partly allowed and assessee's appeal in ITA No. 644/Ched/2013 is dismissed and 645/Chd/2013 is partly allowed.
Order pronounced in the open court on 20.5.2014
Sd/- Sd/-
(SUSHMA CHOWLA) (T.R. SOOD)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated: 20.5.2014
SURESH
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR 9