Income Tax Appellate Tribunal - Chandigarh
Sigma Cartons (P) Ltd., Ludhiana vs Department Of Income Tax on 6 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH"A" CHANDIGARH
BEFORE SHRI H.L. KARWA, VP AND SHRI T.R. SOOD, AM
ITA No. 769/Chd/2011
Assessment Year: 2008-09
A.C.I.T. Circle - V V Sigma Cartons (P) Ltd.
Ludhiana GT Road, Jugiana
Ludhiana
AACCS 2698 M
(Appellant) (Respondent)
Appellant by: Shri N.K. Saini
Respondent by: Shri Sudhir Sehgal
Date of hearing: 6.07.2012
Date of Pronouncement: 10 .07.2012
ORDER
PER T.R. SOOD, A.M
In this appeal the Revenue has raised the following grounds:
"1 That the ld. CIT(A)-II, Ludhiana on facts as well as in law, has erred in deleting the disallowance of Rs. 6,19,626/- made u/s 36(I)(iii) of the Act.
2 (a) That the ld. CIT(A)-II, Ludhiana on facts as well as in law has erred in deleting disallowance of Rs. 4,75,974/- made u/s 14A of the Act read with rule 8D of IT Rules.
(b) That the ld. CIT(A)-II, Ludhiana has failed to appreciate that the assessee had made investments which would generate exempted income and thus this section 14A read with Rule 8D of the IT Act comes into play."
2. Ground No. 1 - After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that the assessee has advanced certain amounts to M/s Jai Durga Paper Mills Pvt Ltd. It was noted that there was a debit balance throughout the year and there was opening debit balance and even on closing of the year there was a debit balance. On a query it was mainly submitted that with M/s Jai Durga Paper Mills Pvt Ltd. assessee has business dealings and the assessee has in fact made purchases of Rs. 5.40 crores and even sales have been made at Rs. 3.10 crores. Therefore, these were business transactions and interest could not be disallowed. However, the Assessing Officer did not agree with the submissions and he 2 worked out the debit balance on various dates and disallowed the interest by following the decision in case of CIT V. Abhishek Industries, 286 ITR 1 (PH). The disallowance was worked out at Rs. 6,19,626/-.
3. Before the ld. CIT(A) the submissions made before the Assessing Officer were reiterated. The ld. CIT(A) agreed with the submissions and deleted the addition.
4. Before us, the ld. DR for the revenue strongly supported the order of Assessing Officer. He also referred to page 7 of the order where the Assessing Officer has found that the assessee had advanced the money on 9.4.2007 and debit balance kept on increasing till the middle of July 2007.
This clearly shows that the assessee has diverted the interest bearing funds for giving interest free loans to sister concern.
5. On the other hand, the ld. counsel of the assessee reiterated the submissions made before the appellate authority and strongly supported the impugned appellate order.
6. We have heard the rival submissions carefully and find force in the submissions of the ld. counsel of the assessee. The ld. CIT(A) has decided this issue vide para 3 which is as under:
"I have carefully considered the contentions of the counsel for the appellant and perused the relevant record. The Assessing Officer has made the disallowance of interest by holding that the advancing of money by the appellant to M/s M/s Jai Durga Paper Mills Pvt Ltd. is amounting to giving of interest free loan whereas on the other hand, the counsel in his written submissions has stated that the said advances are in the ordinary course of the business of the appellant. The counsel have brought my attention to the fact that during the year under consideration, the appellant has made total purchase of Rs. 5.40 Crores and total sales of Rs. 3.10 crores with the above company which substantiates his contention that there are regular dealings between the appellant and the above said company. The Ld. LD. A.R has also stated that against the monies advanced by the appellant to the above company, there have been purchase of raw material and this fact has also not been denied by the Assessing Officer. It has also been argued that the Assessing Officer has erred in mentioning in his assessment order that there has been a debit balance of the above company in the books of the appellant whereas the fact of the matter is that on various dates during the year, there has also been a credit balance of the above party in the books of the appellant. Under the above facts and circumstances of the case, I find force in the contention of the ld. AR that the AO cannot step into the shoes of the businessman and decides the advance that should be given to the supplier in the ordinary course of business. It has also not been denied by the A.O that advances to M/s Jai Durga Paper Mills Pvt Ltd. have been adjusted against the supplies made by the said company to the appellant and neither there has been any doubt the huge purchase and sale transactions between the appellant and the above company. The Hon'ble Supreme Court in the case of M/s S.A. Builders has held that in case there is commercial expediency in advancing the money then no disallowance of interest can be made u/s 36(1)(iii) of the Act. The under-mentioned judgments relied upon by the A.R also support the case of the appellant:3
i. Accelerated Freeze Drying Co. Ltd. V. DCIT (2008) 5 DTR 285 ii. Munjal Salesa Corporation V. CIT & Anr (2008) 3 DTR (S.C) 217 iii. M/s Kashmiri Lal Bharat Bhushan (2005) 26 IT Rep 152 (Asr-Trib) iv. CIT V. Rockman Cycle Industries Ltd. (2009) 176 Taxman 21 v. CIT V. Premier Poly Sacks Pvt Ltd (2010) 321 ITR 450 The above clearly shows that with M/s Jai Durga Paper Mills Pvt Ltd. the assessee had made regular business dealings and the amounts going into debit are on account of sales when the assessee was doing business with the sister concern then it is natural that some time account may be in debit. In these circumstances we are of the opinion that the ratio of the decision in case of CIT V. Abhishek Industries (supra) is not applicable. Accordingly we find nothing wrong with the order of the ld. CIT(A) and confirm the same.
7. Ground No. 2 - After hearing both the parties we find that during assessment proceedings the Assessing Officer noticed that the assessee has made investment of Rs. 51,02,000/- and Rs. 1,53,52,000/- as on 31.3.2007 and 31.3.2008. The income from investments was found to be exempt. Since the assessee has incurred interest expenses the Assessing Officer invoked Section 14A of the Act along with Rule 8D of IT Rules and calculated the disallowance u/s 14A at Rs. 4,75,974/-.
8. On appeal before the ld. CIT(A) it was mainly stated that there was no nexus between the investments made and the loan taken by the assessee, therefore, no addition can be made u/s 14A.
9. The ld. CIT(A) found force in the submissions of the assessee and deleted the addition particularly in view of the decision of Hon'ble Punjab & Haryana High Court in the case of CIT V. Hero Cycles Ltd, 323 ITR 518 (PH).
10. Before us, the ld. DR for the revenue submitted that since the year involved before us is 2008-09 and therefore, Rule 8D would be applicable in this regard he relied on the decision of Hon'ble Bombay High Court in case of Godrej and Boyee Manufacturing V DCIT, 328 ITR 81 (Bom).
11. On the other hand, the ld. counsel of the assessee reiterated the submissions made before the lower authorities and supported the impugned appellate order.
4
12. We have heard the rival submissions carefully. We find that the decision of Hon'ble Jurisdictional High Court in the case of CIT V. Hero Cycles Ltd, 323 ITR 518 was rendered for Assessment Year 2004-05. Later on Hon'ble Bombay High Court in case of Godrej and Boyce Manufacturing Co. Ltd V. DCIT, 328 ITR 81 has considered the implications of Section 14A even the constitutional validity and applicability of Rule 8D in great detail ultimately Hon'ble High Court has given the following conclusion:
"88 Our conclusion in t his judgment are as follows :
(i) Dividend income and income from mutual funds falling within the ambit of section 10(33) of the Income-tax Act, 1961, as was applicable for the assessment year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of section 14A(1) ;
(ii) The payment by a domestic company under section 115-O(1) of additional income-tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of section 10(33). Income from mutual funds stands on the same basis ;
(iii) The provisions of sub-sections (2) and "(3) of section 14A of the Income-tax Act 1961 are constitutionally valid ;
(iv) The provisions of rule 8D of the Income-tax Rules as inserted by the Income-tax (Fifth Amendment) Rules, 2008, are not ultra vires the provisions of section 14A, more particularly sub-section (2) and do not offend article 14 of the Constitution ;
(v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09 ;
(vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of subsection (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record ;
(yii) The proceedings for the assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case."5
13. The above decision has been rendered after considering the decision of Hon'ble Supreme Court in case of CIT v. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C), therefore, in our opinion, the ratio of this decision is applicable to the case of the assessee and rule 8D would be applicable in the present case which relates to Assessment Year 2008-09.
14. Though the ld. CIT(A) deleted the addition by observing that investment in mutual fund is out of current account but it was not denied before us that all the receipts are being credited to the current account which means current account is dealing with the combined fund of the assessee-company. The assessee has nowhere shown that the interest free funds were available for investment in mutual fund. In fact before the provision of Section 14A the assessee had the right to claim all the expenses if such expenses could not be bifurcated in terms of normal taxable income and exempted income in view of the decision of Hon'ble Supreme Court in case of Rajasthan State Warehousing Corporation V. CIT, 242 ITR 450 but this position changed after the introduction of Section 14A by Finance Act, 2001. The Memorandum explaining the provisions of finance bill reads as under:
"Certain income are not includible while computating the total income as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This is again the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.
It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act, 1961, that no deduction shall be made in respect of any expenditure incurred bythe assessee in relation to income which does not form part of the total income under the Income-tax Act.
The proposed amendment will take effect retrospectively from April 1, 1962 and will accordingly, apply in relation to the assessment year 1962-63 and subsequent Assessment Year."
15. In fact the Hon'ble Bombay High Court has noted this position and then confirmed that theory of apportionment of expenses is very much applicable in Section 14A. In fact at placitum 28 it has observed as under:
"During the course of this judgment, it would be necessary to revisit the decision of Hon'ble Supreme Court in Walfort. At this stage, however, it needs 6 to be emphasized that the provisions of section 14A were construed in Walfort to evince Parliamentary intent not to allow deduction in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act against taxable income. Section 14A is clarificatory of the position that expense can be allowed only to the extent that they are relatable to the earning of taxable income. Only those expenses which are in respect of the earning of taxable income can be allowed. The section 14A broadens the theory of apportionment of expenditure between taxable and non-taxable income is evident from the following observations of the Hon'ble Supreme Court:
"The theory of apportionment of expenditure between taxable and non- taxable has, in principle, been now widened u/s 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words 'expenditure incurred' in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (see sections 30 to 37)."
Thus on the basis of above, it was held that after introduction of Section 14A, it was possible to apportioned the expenditure between taxable income and exempted income.
16. We also find that in a recent judgment of Hon'ble Punjab & Haryana High Court dated 18.7.2011 in ITA No. 565 of 2006 on a similar issue, the following observations were made:
"11. Adverting to question No.(ii), learned counsel for the revenue submitted that while determining the quantum of deduction admissible to the assessee under Section 80M of the Act, the expenditure incurred relating to the earning of dividend income has to be excluded there-from. According to the learned counsel, the expenditure which was to be deducted was required to be deducted on proportional basis for incurring of such expenditure. Reliance was placed on Section 14A of the Act which was incorporated by Finance Act 2001 retrospectively .w.e.f. 1.4,1962. Support was gathered from the decision of the Rajasthan High Court in Shekhavati General Traders Ltd. vs. Commissioner of Income Tax (1987) 167 ITR116 and the judgment of this Court in Income Tax Appeal No. 530 of 2006 (The Punjab State Cooperative Milk Producer's Federation Ltd, vs. Commissioner of Income Tax-if and another) decided on 28,3,2011 and of the Apex Court in Commissioner of income Tax vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 41 DTR Judgments 233.
12. Controverting the aforesaid submission, learned counsel for the assessee relied upon the decision of the Calcutta High Court in Commissioner of Income Tax vs. United Collieries Ltd. (1993) 203 ITR 857 (Calcutta). Learned counsel also relied upon Commissioner of Income Tax vs. Central Bank of India (2003) 264 ITR 522 (Bombay) and State Bank of Indore vs. Commissioner of Income Tax (2005) 275 ITR 23 (MP). It was contended that it was only the actual expense incurred for earning dividend which was to be deducted from the dividend income for calculating the admissible deductions under Section 80M of the Act. It was urged that the plea of the Revenue that proportional expenses should also be reduced, was against the statute.
13. We have given our thoughtful consideration to the respective submissions of the learned counsel for the parties and find 7 *force in the submissions of the learned counsel for the revenue. Finance Act 2001 had inserted Section 14A with effect from 1.4.1962. According to the said Section, any expenditure incurred by the assessee for earning income which did not form part of the total income under the Act was not to be allowed as expenses. This Court in the case of Punjab State Cooperative Milk Producer's Federation Ltd.'s case (supra) relying upon the decision of the Apex Court in Walfort Share and Stock Brokers's case (supra), wherein, while defining the scope of Section 14A of the Act, incorporated retrospectively w.e.f. 1.4.1962, it had laid down as under:
Income Tax Appeal No. 565 of 2006 The insertion of Section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expendiiure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dated 22.11.2001 K In other words, Section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of Section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of Section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of Section 14A is that certain Incomes are not includibie while computing total income as these are exempt under certain provisions of the Act. In the past, there have bean in which deduction has been sought In respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt Income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. Oh the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of Section 14A. In Section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within Section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of Section 14A. Further, Section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in Sections 15 to 59 are now to be allowed only with reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of the nature specified in part of total income could not be allowed against ore income includible in the total income for the purpose of chargeability to tax.
The theory of apportionment of expenditures between taxable and non- taxable has, in principle, been now widened under Section 14A. Reading Section 14 in juxtaposition with Sections 15 to 59, it is clear that the words "expenditure incurred" in Section 14A refers to expenditure on rent, taxes, salaries, interest,etc. in respect of which allowances are provided for (see Sections 30 to 37)." ' 8
14. The apex Court had specifically recorded that the theory of apportionment of amount of expense* between taxable and non- taxable income stood widened by incorporation of Section 14A. It was further noticed that the expression 'expenses incurred' occurring in Section 14A referred to tax, salary, interest etc. in respect" of which allowances are provided for under Sections 30 to 37 of the Act.
15. In all fairness to the assessee, in the judgments relied upon by the learned counsel for the assessee, Section 14A as incorporated by Finance Act 2001, with effect from 1.4.1962, was not under consideration and, therefore, the same do not come to the rescue of the assessee.
16. In view of the above, the substantial question No.(ii) is answered in favour of the revenue and against the assessee. Income Tax Appeal Nos. 565, 567 and 569 stand disposed of accordingly."
Thus theory of apportionment as approved by the Hon'ble Supreme Court in case of CIT V. Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C) was approved by the Hon'ble Jurisdictional High Court and disallowance u/s 14A held to be justified. Rule 8D reads as under:
"(1) Where the Assessing Officer having regard to the account of the assessee of a previous year, is not satisfied with -
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he hall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:-
AXB C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;
B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
C = the average of total asset as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total 9 income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
(3) For the purposes of this rule, the 'total assets' shall mean, total asset as appearing in the balance sheet excluding the increase on account of revaluation of asset but including the decrease on account of revaluation of assets.).
Clause (b) of sub-section (2) clearly shows that if assessee does not show that the interest has been incurred specifically for a particular item of income then it has to be apportioned. In case before us since the assessee had incurred expenses on interest which can not be directly related to particular type of income, therefore, interest is required to be apportioned.
17. Perusal of assessment order shows that the disallowance u/s 14A is based on Rule 8D which has been noted above was applicable during the year under consideration and which is in consonance with the decision of Hon'ble Bombay High Court. Therefore, we set aside the order of ld. CIT(A) and restore that of the Assessing Officer by confirming the disallowance u/s 14A.
18. Therefore, we set aside the order of the ld. CIT(A) and restore the order of the Assessing Officer because rule 8D of IT Rules is applicable in the year before us and disallowance has been worked out as per Rule 8D of IT Rules. Accordingly this ground is allowed.
19 In the result, appeal filed by the Revenue is partly allowed.
Order pronounced on 10 .07.2012
Sd/- Sd/-
(H.L. KARWA) (T.R. SOOD)
VICE PRESIDENT ACCOUNTANT MEMBER
Dated: 10 .07.2012
SURESH
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/ The DR 10