Income Tax Appellate Tribunal - Ahmedabad
Gujarat Urja Vikas Nigam Board., Baroda vs Assessee on 22 June, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD '' A " BENCH - AHMEDABAD
Before Shri R. P. Tolani, JM, & Shri Manish Borad, AM.
ITA No. 837/Ahd/2012
Asst. Year: 2008-09
Gujarat Urja Vikas Nigam Ltd., Vs. ACIT, Circle-1(1), Baroda.
Sardar Patel Vidyut Bhavan,
Race Course Circle, Baroda.
Appellant Respondent
PAN AACCG2861L
AND
ITA No. 899/Ahd/2012
Asst. Year: 2008-09
DCIT, Circle-1(1), Vs. Gujarat Urja Vikas Nigam Ltd.,
Baroda. Sardar Patel Vidyut Bhavan,
Race Course Circle, Baroda.
Appellant Respondent
Appellant by Shri J. P. Shah, AR
Respondent by Shri R. I. Patel, CIT, DR
Date of hearing: 2/6/2016
Date of pronouncement: 22/6/2016
ORDER
PER Manish Borad, Accountant Member.
These are Cross appeals against the order of ld. CIT(A)-I, Baroda, dated 3.2.2012 in appeal No.CAB-I, 152/10-11, passed ITA No. 837 & 899/Ahd/2012 2 Asst. Year 2008-09 against order u/s 143(3) of the IT Act, 1961 (in short the Act) for Asst. Year 2008-09 on 28.12.2010 by DCIT, Circle-1(1), Baroda.
2. Briefly stated facts as culled out from the records are that the assessee is a company engaged in buying and selling of power. Original e-return for Asst. Year 2008-09 was filed on 29.09.2008 declaring total loss at Rs.31.15 crores. Subsequently the return of income was revised on 18.9.2009 declaring total loss of Rs.33.01 crores. Book profit u/s 115JB of the Act was worked out at Rs.2,38,76,190/- in the revised return as against Rs.4,25,35,566/- shown in the original return of income. The case was selected for scrutiny assessment and notice u/s 143(2) of the Act was issued on 17.08.2009. Further a notice u/s 143(2) r.w.s. 129 of the Act was issued on 16.8.2010 followed by notice 142(1) of the Act along with questionnaire. Necessary details were submitted. Case was discussed and income was assessed at Rs.NIL and deemed income u/s 115JB was revised at Rs.155.29 crores. Various additions were made to the returned income as well as to the book profit against which assessee went in appeal before ld. CIT(A) and got part relief.
3. Now both the assessee and the Revenue are in appeal before us against the order of ld. CIT(A).
4. First we take up Ground no.1 of assessee's appeal and that of Revenue's appeal which read as under :-.
ITA No. 837 & 899/Ahd/2012 3Asst. Year 2008-09 4.1 Ground No.1 of assessee's appeal :
1.0 The learned Commissioner of Income Tax (Aprf5eals) erred in law and on facts has restricted the additions made under section 14A of the I T Act, 1961 to Rs.61,45,72,000/- considering the same as attributable to exempt dividend income. It is submitted that the disallowance is uncalled for and be directed to be deleted.
4.2 Ground No. 1 of Revenue's appeal
1. On the facts and in the circumstances of the case and Id.CIT(Appeals) erred in restricting the disallowance of interest expenses u/s.l4(A) read with rule 8D of Rs.15246. 27 lacs to Rs.6145.72 lacs without appreciating-that the disallowance made by the Assessing Officer was as per the formula given in 8D for deriving proportionate interest disallowance.
5. Ground No.1 of assessee's appeal and ground no.1 of Revenue's appeal which relate to the addition made u/s 14A of the Act made by ld. Assessing Officer. During the course of assessment proceedings it was observed by ld. Assessing Officer that assessee has earned exempt income of Rs.2,48,67,198/- and against this income the expenditure was not shown to have been incurred by assessee nor any disallowance was made by assessee relating to the expenditure relating to earning this exempt income. Ld. Assessing Officer also observed that interest expenditure of Rs.131.23 crores was claimed and also there stood investment as on 31.3.2008 at Rs.5582.05 crores and ld. Assessing Officer was of the belief that interest bearing funds have been diverted for making investment fetching exempt income to the assessee. During the course of assessment proceedings assessee submitted that out of Rs.131.23 crores of interest expenditure Rs.6.3 crores is paid as guarantee fees and Rs.126.67 crores paid to various banks and financial institutions on various types of business loan. While framing the assessment ld.
ITA No. 837 & 899/Ahd/2012 4Asst. Year 2008-09 Assessing Officer applied Rule 8D of the IT Rules r.w.s 14A of the Act which came into effect in Asst. Year 2008-09 and applying the method as provided under Rule 8D calculated the disallowance u/s 14A of the Act at Rs.152.46 crores. Against this addition when assessee went in appeal before ld. CIT(A) the addition u/s 14A of the Act was sustained to Rs.61.46 crores by ld. CIT(A) by observing as under :-
3.2. I have carefully considered facts of the case and appellant's submissions. There is no dispute that appellant had made investments in shares of subsidiaries and other companies, income from which i.e. dividend would be exempt from taxation. As per section 14A of the Income tax Act, no deduction is to be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Income tax Act. As held by Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. (2011) 15 taxmann.com 390 (Delhi), if the expenditure in question has a relation or connection with -or pertains to exempt income, it cannot be allowed as a deduction, even if it otherwise qualifies under other provisions of the Income tax Act. Thus, even if investment in shares etc. was for reasons of commercial expediency and/or expenditure in relation to such investments by way of interest or other expenses was allowable u/s.36(l)(iii)/37, the same would not be allowable as deduction as per provisions of section 14A. As held by ITAT's Special Bench in the case of Cheminvest Ltd.(2009) 124 TTJ (Del) (SB) 577 and also ITAT Ahmedabad in the case of Shanker Chemical Works (2011) 12 taxmann.com 461 (Ahd), if there is any expenditure in relation to earning exempt income, the same has to be disallowed even if there is no actual earning of any exempt income. In the case of Shanker Chemical Works (supra), it was further held that if interest bearing borrowed funds are utilized for the purpose of investment in shares and there is no receipt of dividend income or if there is only meager amount of dividend income, even then, whole amount of interest expenditure incurred for this purpose will be subject to disallowance u/s.!4A. It was held in the case of Smt. Leena Ramchandran (2011) 10 taxmann.com 109 (Kerala) that even where utilization of borrowed funds was for acquiring controlling interest in a company i.e. for business purpose, so far as acquisition of shares was fn the form of investment and only benefit the assessee derived therefrom was dividend income not assessable under the Act, disallowance u/s.l4A was squarely attracted. In view of this, appellant's contention that disallowance was made u/s.36(l)(iii) till A.Y.2006-07, investment in shares was under ITA No. 837 & 899/Ahd/2012 5
Asst. Year 2008-09 Financial Restructuring Plan approved by Government of Gujarat, i.e. investments were for commercial expediency, investments were strategic investments to maintain control of business, no dividend income or meager dividend income was earned from such shares in subsidiaries etc. are not tenable. Appellant's contention that investments in subsidiaries were as per notified balance sheet as on 1.4.2005 by Government of Gujarat, which was accepted by appellant company as it is and the loans etc. were prior to such notification, due to which investments in shares of subsidiaries could not be said to be out of :arrowed funds is now taken up. Part of the loans appearing on appellant's balance sheet were in fact raised by erstwhile GEB for acquisition of capital assets for generation, transmission of electricity etc. Under the Financial Restructuring Plan, such loans were assigned to the 2opellant company against which shares in subsidiary companies i.e. GSECL, GETCO etc. were also allotted. The underlying capital assets acquired out of such loans are appearing on the balance sheet of GSECL, GETCO etc. As far as appellant company is concerned, the interest burden on such loans inherited by it from GEB is in relation to such investments in subsidiary companies etc. Thus, merely because the loans were taken prior to Financial Restructuring Plan does not mean that interest on loans inherited from GEB by the appellant company is not at all in relation to investments yielding tax free-income. Appellant's contention that dividend income had already suffered dividend distribution tax, due to which there was no logic in disallowing expenditure u/s.!4A is not tenable since dividend income is exempt in the hands of appellant whereas dividend distribution tax is to be paid by the company distributing dividend. Appellant's contention that investments were made out of funds received from State Government and out of net profit of the appellant company, due to which interest on loans raised after 1.4.2005 can also not be disallowed is now taken up. Appellant has not maintained separate books of accounts in respect of dividend income. Neither any separate bank account is maintained for tax free income and related expenditure. As held by Hon'ble High Court of Kerala in the case of CIT, Thissur vs. Dhanalaxmi Bank Ltd. (2011) 10 taxmann.com 213 (Kerala), if the assessee had a case that separate funds available or funds sourced other than through borrowing only were utilized for investment in securities, bonds and shares, which yielded tax free income, they could have maintained such accounts and produced the same before the Assessing Officer when proportionate disallowance was proposed by the Assessing Officer. The Hon'ble Court further held that by subsequent amendment through subsection (2) and by prescribing Rule 8D therein, what is achieved is to prescribe specific guidelines for disallowance in cases where separate accounts are not available on expenditure incurred for earning tax free income. Since appellant did not maintain separate accounts in respect ITA No. 837 & 899/Ahd/2012 6 Asst. Year 2008-09 of dividend income, application of Rule 8D to apportion expenditure in relation to exempt income is justified. It was also held in case of Dhanuka & Sons vs. CIT (Central)-I by Hon'ble High Court of Calcutta (2011) 12 taxmann.com 227 (Cal) that mere fact that shares were old ones and not acquired recently was immaterial; it was for assessee to show by production of materials that those shares were acquired from funds available in its hand at relevant point of time without taking benefit of any loan and since no such material was produced by the assessee, disallowance of proportionate amount of interest having regard to total income and exempt source was justified. Appellant's contention regarding investments being old and out of interest free funds etc. is therefore not tenable and it is a case falling u/s. 14A(2) of the Income tax Act requiring determination of expenditure to be disallowed as per Rule 8D of Income tax Rules. Assessing Officer has apportioned entire interest of Rs.13122.56 lakh under Rule 8D(2)(ii); however, the interest to be apportioned under clause(ii) of Rule 8D(2) is "...... interest during the previous which is not directly attributable to any particular income or receipt....,". As per details submitted by appellant, interest of Rs.167.48 crore was directly attributable to its business of bulk purchase and bulk sale of power, being in relation to working capital borrowings. On other hand, interest of Rs.33.94 crore on loans raised by GEB and outstanding on 31.3.2008 and certain other items included in total interest were not directly attributable to any particular income. The interest to be apportioned under Rule 8D(2)(ii) would accordingly be as under:-
Net interest claimed Rs. 131.22 crore
Add: Provision of interest on Govt. loans returned back. Rs. 67.80 crore
Interest capitalized. Rs. 7.16 crore
Rs. 206.18 crore
Less: Interest claimed to be on working capital
borrowings exclusively for power trading business. Rs. 167.48 crore
Rs. 38.7 crore
Disallowance under Rule 8D(2)(ii)
(38.7 X 552957.24 / 581358.105) = Rs. 36.8094 crore
Add: Disallowance under Rule 8D(2)(iii)
(as per assessment order). Rs. 27.6478 crore
i.e. Rs.61.4572 crore
ITA No. 837 & 899/Ahd/2012 7
Asst. Year 2008-09
Thus, instead of disallowance of Rs.152.4627 crore U/S.14A made by the Assessing Officer, disallowance of Rs.61.4572 crore is directed to be made subject to verification by the Assessing Officer that interest of Rs.167.48 crore was in relation to working capital loans or other loans utilized exclusively for power trading business of appellant company.
6. Now the assessee is in appeal against the confirmation of Rs.61.46 crores and Revenue is in appeal against the order of ld. CIT(A) for partly deleting the disallowance u/s 14A of the Act r.w.s. Rule 8D of the IT Rules for Rs.91 crores.
7. At the outset ld. AR submitted that similar type of disallowance u/s 14A was made in assessee's own case for Asst. Years 2006-07 and 2007-08 and the issue went upto the Tribunal in ITA No.1820/Ahd/2010 & in ITA Nos.1874 & 1821/Ahd/2010 for Asst. Year 2007-08. Ld. AR submitted that the Tribunal has decided the issue in ITA Nos.1874 & 1821/Ahd/2010 vide order dated 20.6.2014 by giving reference to the Tribunal's order for Asst. Year 2006-07 dated 30.9.2013. Ld. AR further submitted that the interest expenditure of Rs.131.22 crores exclusively relates to interest paid on working capital loan and bill discounting and other business loan specifically granted for carrying out regular business activities and there has been no diversion of the business fund to the investment a/c. Ld. AR further submitted that as on 1.4.2005 when the company was given Balance Sheet as notified by the State Government, the company had total investment of Rs.5580.20 crores consisting of investment in subsidiary company at Rs.5336.43 crores and investment in other companies at Rs.243.69 crores. During the period from financial year 2005-06 to 2007-08 the investment in subsidiary ITA No. 837 & 899/Ahd/2012 8 Asst. Year 2008-09 companies has increased by Rs.100 crores whereas investment in other companies increased by Rs.5.05 crores. Mandatory investment in subsidiary and other companies were made from the funds received from the State Government as equity and balance out of the net profit earned by the company during these years. Considering the above submissions, ld. AR submitted that the disallowance confirmed by ld. CIT(A) at Rs.61.46 crores should be deleted. In this connection ld. AR also referred and relied upon the following judgments :-
1. CIT vs. Abhishek Industries Ltd. (P & H) 380 ITR 652
2. Cheminvest vs. CIT (Delhi) 378 ITR 33
3. CIT vs. Oriental Structure Engineers Ltd.(Del) 216 taxman 92
4. Garware Wall Ropes Ltd. vs. ACIT (Mum.Trib) 65 SOT 86
5. M/s JM Financial vs. ACIT ITA 4521/Mum/2012
6. Interglobe Enterprise vs. DCIT ITA 1362 & 1032/Del/2013
7. EIH Associate Hotels Ltd. vs. DCIT (Chennai) ITA No.1503/Md/2012
8. Gujarat Alkalies vs.DCIT (Ahd) ITA No.2398/Ahd/2012
9. Kunal Corporation vs. ACIT 28 (Mum) ITR (T) 277
10.CIT vs. Hlmatsingka Sied Ltd. (Kar) 69 Taxmann.com 259
8. On the other hand, ld. DR supported the orders of lower authorities.
9. We have heard the rival contentions and perused the material on record. In these grounds raised by the assessee and the Revenue challenge the action of ld. CIT(A). We observe that an addition of Rs.152.46 crores was sustained, made by ld. Assessing Officer which was sustained to Rs.61.46 crores by ld. CIT(A) and, therefore, assessee has raised the ground against the sustained addition of Rs.61.46 crores whereas Revenue has challenged the deletion of Rs.91 crores out of the disallowance u/s 14A of the Act.
ITA No. 837 & 899/Ahd/2012 9Asst. Year 2008-09
10. In ITA No.1874/Ahd/2010 vide its order dated 20.6.2014 the Tribunal adjudicated the issue relating to disallowance u/s 14A and held as under :-
7. We have heard the rival submissions and perused the orders of lower authorities and materials available on record. The undisputed facts of the case are that the Assessing Officer found that the assessee has earned tax free dividend income of Rs 1283.95 lakhs and that the assessee has claimed interest expenditure of Rs 18,325.41 lakhs. The assessee has not attributed any expenditure towards earning of exempt dividend income. Therefore, by invoking the section 14A read with Rule 8D he made disallowance of Rs 197.80 crores.
We find that a similar issue had come up before this Tribunal in assessee's own case in the immediately preceding Assessment Year 2006-07 wherein the Tribunal restored the matter back to the file of the Assessing Officer for adjudication afresh by observing as under:
"2. At the outset, our attention has been drawn on an additional ground of appeal raised by the Revenue Department reads as under:
"1(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the addition ofRs.187.97 crores u/s 14A of the Act on account of interest attributable to investment in shares without appreciating the fact that in view of Section 106 of the Indian Evidence Act, it was up to the assessee company to adduce evidence that all the borrowings were used for the purposes of business and its is assessee' s own surplus fund that were invested in the shares and deposits earning exempted income, and, even in case of mixed funds, the disallowance of interest could be made."
1(b) As an alternate plea, the Id. CIT(A) erred in not upholding the addition u/s. 14A on account of interest attributable to investment in shares to the extent in view of provisions of section 14A read with Rule 8D. "
3. Learned DR has pleaded that an addition of Rs. 187.97 crores which was made u/s 14A was deleted by learned CIT(A), however, it was not adjudicated as per the grounds of appeal. Learned DR has also argued that the assessee was required to adduce evidence that all the borrowings were used for the purpose of the business and the assessee's own surplus funds were invested in the shares. Learned DR has also informed that in A.Y. 2007-08, the addition of similar nature was upheld by learned CIT(A). He has thus pleaded that the issue being legal in nature which has emerged from the facts already on record, therefore, the additional ground deserves to be admitted for adjudication.
4. After hearing both the sides, the additional ground of the Revenue Department is hereby admitted for adjudication. At the outset, it is worth to mention that the impugned addition of Rs.18796.82 lacs was made by the ITA No. 837 & 899/Ahd/2012 10 Asst. Year 2008-09 AO without having any discussion in respect of the applicability of Section 14A of the IT Act. Likewise, learned CIT(A) has also not discussed the applicability of the provisions of Section 14A of IT Act, however, after considering the merits of the case, deleted the addition. With this clarification, we have examined the facts and the issue as emerged from the corresponding assessment order passed u/s. 143(3), dated 26.12.2008. It was noted by the AO that the assessee had claimed a huge amount of interest expenditure of Rs. 19360.59 lacs, as per the following bifurcation.
(Rs. in lacs)
Particulars Amount
Interest on Term Loans 8981.35
Working Capital 8184.50
Others 677.63
Bank Charges & Guarantee Fees 591.65
19435.13
Less: Interest Capitalized 74.54
19360.59
4.1 At the same time, it was also found by the AO that the assessee had made the investment of Rs.5,47,709.74 lacs on which dividend earned was at Rs.508.18 lacs. The AO's objection was that on one hand the assessee has diverted the huge funds towards such investment having exempted income and on the other hand borrowed huge funds of Rs.3,46,272.51 lacs on which claimed interest of Rs. 19360.59 lacs. Therefore, the AO was of the view that the assessee had diverted the borrowed funds for earning exempted income. The assessee's contention was that the investment during the year was only Rs.102.32 lacs and rest of the investment was made in the earlier years. According to the AO, if the assessee had not made such investment either in the year under consideration or in earlier years then the assessee would not have been required to borrow interest bearing loans. The AO has placed reliance upon the case of H.R Sugar Factory, 187 ITR 366 (Aid) for the legal proposition that the assessee could have otherwise avoided its liability of interest by not giving interest free funds to its group concerns. The addition in the question was thus made by the AO in the following conclusion.
"In view of the above discussion and provision of law, the interest attributable to the investment is not allowable expenditure. The assessee was required to give the rates of interest paid to various sources. The assessee vide its reply did not furnish the rates of interest paid. It simply submitted that loans from various banks with varying interest rates were obtained. During the year under consideration, the market rate of interest was 12%. Therefore, interest at the rate of 12% works out to Rs.65725.17 lacs on investments of Rs.547709.74 lacs. However, the assessee has ITA No. 837 & 899/Ahd/2012 11 Asst. Year 2008-09 claimed interest expenditure of Rs.19360.59 lacs and has shown interest income of Rs.55.59 lacs and dividend income of Rs.508.18 lacs. Hence, against the interest expenditure of Rs.19360.59 lacs assessee has grown interest and dividend income of Rs.563.77 lacs. Thus, net disallowance is made of Rs.18796.82 lacs."
5. Being aggrieved the matter was carried before the First Appellate Authority who has decided the issue in assessee's favour in the following manner:
"Thus, the only test to be applied is that of "commercial expediency". In the instant case, it is seen that no investment was made by the assessee company by using borrowed funds.The entire investment, except minor investment of Rs.11.25 lacs was inherited in the demerger exercise. The investment in shares was due to the restructuring carried out at the behest of GOG. The investments were in the form of shares of subsidiary companies as pan of the financial restructuring plan approved by the Government of Gujarat which was integral to the demerger. This was clearly commercially expedient for the appellant company. The business itself was viable only under the plan of restructuring, which required the company to have cross-holdings in the unbundled companies of GEB. In fact, the appellant became the holding company of the generating and transmission companies. Looking to the facts and circumstances of the case, I am of the opinion that there was no diversion of borrowed funds for non-business purposes. Accordingly, the addition of Rs. 18796.82 lacs is directed to be deleted."
6. With this factual background, we have heard both the sides. Learned DR has primarily placed reliance on a decision of respected Special Bench of ITAT Mumbai in the case of ITO V/s. Daga Capital Management Pvt. Ltd., 117 ITD 169 (Mum) (SB). Learned DR has also pleaded that in one of the assessment year, i.e., in A.Y. 2007-08 learned CIT(A) had sustained the same nature of addition. From the facts of the case, we have noted that there was re-structuring according to which erstwhile GEB was demerged into seven different companies. Post restructuring; the assessment year under consideration is the first year of operation of the assessee company. On one hand, those were the facts which were relied upon by the learned CIT(A). However, on the other hand, the AO has reproduced some of the replies of the assessee through which it was claimed that the said investment was not made by the assessee company out of the borrowed funds but from the consumers, contribution and subsidiaries. There was a reference of the annual accounts of the year 2005-06. The assessee has also informed that during the year under consideration the assessee company had invested only a sum of Rs.11.25 lacs. Rest of the investments were the share capital of the subsidiary companies as per the terms of the Financial Restructuring Plan approved by the Government of Gujarat. We have noted that the learned CIT(A) has granted relief only on the ground that the assessee company had become ITA No. 837 & 899/Ahd/2012 12 Asst. Year 2008-09 the holding company and the investments were in the form of shares of subsidiary companies which was an integral part of the demerger arrangement. Therefore, it was nothing but commercial decision.
6.2 According to us, the issue has been mixed up by the Revenue Department. The first step should be to examine the scheme of demerger and thereafter the issue could have been streamlined. As per the definition of "demerger" prescribed u/s.2(19AA) means; the transfer pursuant to a scheme of arrangement by a demerged company of its one or more undertakings to any resulting company in such a manner that all the property of the undertaking/unit being transferred by the demerged company immediately before the demerger, which becomes the property of the resulting company by virtue of the demerger. Therefore, it was necessary for the AO to examine the balance sheet of the demerged company and the position of the accounts of the undertaking which is demerged with the resulting company. The AO has to examine the liabilities related to the said undertaking whether being transferred under the scheme of arrangement which were in existence immediately before the demerger. The AO has to examine the value of the property in the books of accounts immediately before the demerger which was transferred. The AO has also to examine the financial position of the "resulting company", as defined u/s.2(41A) of IT Act. In general, an undertaking of the demerged company is transferred in a demerger scheme and as a result a resulting company comes into existence. The resulting company in consideration of such transfer of an undertaking of the demergerd company issues shares to the share holders of the demerged company. Therefore, the responsibility of the "resulting company" was also required to be ascertained by the AO. This is the first aspect, which was not examined by the AO and the order of the Revenue Authorities are silent on this subject.
6.3 Next question is about the huge amount of interest expenditure claimed by the assessee. The AO is required to examine first the correctness of the claim. Whether the interest on term loans, bank charges and guarantee fees were in respect of the business of the assessee. Thereafter, the AO is also required to give a clear finding about the borrowings made by the assessee on which the said interest was paid. The next step is that the AO has to examine the sources of the funds which were invested for earning the dividend income. If the source of such investment is out of the interest bearing borrowings, then only the question of disallowance of interest would arise, otherwise not. On the other hand, the claim of the assessee is that there were sufficient non interest bearing reserves or surplus available. The AO is required to investigate the correctness of the claim that whether the assessee had sufficient non interest bearing fund available and in what form those were utilized by the assessee. If the assessee is in a position to demonstrate that the non-
ITA No. 837 & 899/Ahd/2012 13Asst. Year 2008-09 interest bearing funds have actually been invested to earn exempted income then the assessee's claim is legally correct. Thereafter, the question of the invocation of Section 14A comes into play. As far as the applicability of the decision of Special Bench is concerned the same now stood covered by the decision of Hon'ble Bombay High Court pronounced in the case of Godrej and Boyce, 328 ITR 81 (Bom). For the sake of completeness herein below reproduced a portion of an ITAT order viz., Aditya Midcals as follows:
"5. With this brief background, we have examined the facts of the case as also the law pronounced in this regard.
6. As far as the Assessing Officer's action is concerned, the disallowance has been made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the working of disallowance was wrong because while calculating the proportionate interest attributable to dividend income the ratio of dividend income and total sales have been taken though there was no direct relation between the two. The Assessing Officer had thus made the calculation after taking into account the proportion of the interest on the ratio between the investment in shares and total assets including investment in shares. Apart from this, there is nothing in the assessment order which can establish the nexus of utilization of borrowed interest-bearing funds diverted towards investment in debentures. But there are other discussions in this very assessment order wherein the provisions of section 36(l)(iii) of the Act have also been touched upon. The Assessing Officer was expected to correlate the said discussion with the exempted dividend income u/s. 10(33) of the Act. As far as the law pronounced in this regard is concerned, first of all, we have to follow a latest decision of Hon'ble Bombay High Court pronounced in the case of Godrej & Boyce Mfg. Co.Ltd. Mumbai vs. Dy.CIT in Income tax Appeal No.626 of 2010 and Writ Petition No.758 of 2010 order dated 12/08/2010, { now reported as 328 ITR 81(Bom) } wherein the Hon'ble High Court has upheld the constitutional validity of section 14A of the I.T. Act, 1961 and held that the Assessing Officer should determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income and/or income from mutual fund which do not form part of the total income as contemplated U/S.14A of the I.T. Act, 1961. It has also been directed that the Assessing Officer can adopt a reasonable basis for effecting the apportionment. It has also been observed by the Hon'ble Court that while making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and material having a bearing on the facts and circumstances of the case.
6.1. In this judgement at the end, the Hon'ble Court has also recapitulated the conclusion and pronounced that a finding is required whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the ITA No. 837 & 899/Ahd/2012 14 Asst. Year 2008-09 assessee pertaining to the said exempt income. Rather, the Court was very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation. It has also been made clear that the proviso to section 14A of the Act was effective from 2001-02. The Hon'ble Court has also pointed out the importance of Rule 8D of the I.T.Rules, 1962. It was made clear that sub-section (1) to section 14A was inserted with retrospective effect from 01/04/1962, however, sub-sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001 , however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008; reproduced below:-
"a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallow ability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter.
b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-
2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001 -2002 would not bar the Tribunal from considering disallowance under Section 14A in assessment year 2002-2003.
c) The decisions reported in Sridev Enterprises (supra), Munjal Sales Corporation (supra) and Radhasoami Satsang (supra) holding that there must be consistency and definiteness in the approach of the revenue would not apply to the facts of the present case, because of the material change introduced by Section 14A by way of statutory disallowance in certain cases. There, the decisions of the Tribunal in the earlier years would have no relevance in considering disallowance in assessment year 2002-2003 in the light of Section 14A of the Act.
73. For the reasons which we have indicated, we have come to the conclusion that under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form pan of the total income under the Act and if so to quantify the extent of the disallowance. The Assessing Officer would have to arrive at his determination after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination.
ITA No. 837 & 899/Ahd/2012 15Asst. Year 2008-09 Conclusion:
74. Our conclusions in this 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 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 115O(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 24th March, 2008 shall apply with effect from Assessment Year 2008-09;
(vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (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 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;
vii) The proceedings for 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."
ITA No. 837 & 899/Ahd/2012 16Asst. Year 2008-09 6.4 Due to the decision of the Hon'ble Bombay High Court, it is legally correct to refer this issue back to the stage of the AO to be decided de novo as per the guidelines of the Hon'ble Court. The outcome of the above discussion is that the "Additional Ground" raised by the Revenue may be treated as allowed but only for statistical purpose."
8. In the absence of any distinguishing features pointed out by the Departmental Representative, facts being identical, respectfully following the precedent we restore this issue back to the file of the Assessing Officer for adjudication afresh with the same directions as given by the Tribunal in the Assessment Year 2006- 07 in the above quoted order. Needless to mention that he shall allow reasonable and proper opportunity of hearing to the assessee before adjudicating the issue. Thus, this ground is allowed for statistical purpose.
11. We further observe that Rule-8D of the IT Rules came into effect from Asst. Year 2008-09 with respect to provisions of section 14A of the Act which reads as follows :-
Sec. '14A. Expenditure incurred in relation to income not includible in total income.--(1)For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.'
2. New Rule 8D :
2.1 In exercise of the powers given in S. 14A(2) C.B.D.T. has issued a Notification No. S.O. 547(E) on 24-3-2008 (299 ITR (ST) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a "Method for determining amount of expenditure in relation to income not includible in total income". Reading this Rule it is evident that the Rule ITA No. 837 & 899/Ahd/2012 17 Asst. Year 2008-09 provides for disallowance of not only direct expenditure incurred for earning the exempt income but also for disallowance of proportionate indirect expenditure. This is clearly contrary to the main objective with which S. 14A was enacted.
2.2 Broadly stated, the new Rule 8D provides as under :
(i) The method prescribed in the Rule is to be applied only if the AO is not satisfied with :
(a) The correctness of the claim of expenditure incurred for earning the exempt income made by the assessee or
(b) The claim made by the assessee that no expenditure has been incurred for earning exempt income.
(ii) The method prescribed in the Rule states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts :
(a) The amount of expenditure directly relating to income which does not form part of total income.
(b) In the case of interest on borrowed funds which is not directly attributable to any particular income or receipt, the amount computed in accordance with this following formula :
Ax B C A = Amount of interest, other than the amount of interest which is directly attributable to the exempt income stated in (a) above.
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 relevant accounting year.
C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. The term 'Total Assets' means total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.
(c) An amount equal to ½ % of the average of the 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 relevant accounting year.
12. We also observe that ld. Assessing Officer applied the facts and figures of the assessee company into the method provided under Rule 8D of the IT Rules because assessee was having an average investment of Rs.5529.57 crores , interest paid during the year at Rs.131.22 crores and exempt income of Rs.249 crores. Going through these figures ld. Assessing Officer felt appropriate to applying the method of Rule 8D but did not look into the following facts :-
ITA No. 837 & 899/Ahd/2012 18Asst. Year 2008-09
(i) As on 1.7.205 when the company was given a balance sheet duly notified by the State Govt., the company had total investment of Rs.5580.20 crores considering all investment in subsidiary companies at Rs.5336.43 crores, investment in other companies at Rs.243.69 crores and balance in petty investment.
(ii) Opening balance of investment as on 1.4.2007 stood at Rs.5477.16 crores.
(iii) Few investments were made during Financial Year 2005-06 to 2007-08 and in subsidiary companies and funds for the same were partly received from State Government as equity and remaining from net profit earned.
(iv) Interest expenditure of Rs.131.32 crores represents mostly the interest paid on bill discounting of IPPs and working capital loan from banks which are specifically meant for the business purpose; and
(v) Total exempt income earned by assessee during the year stood at Rs.249 crores.
13. We observe that ld. Assessing Officer has made disallowance u/s 14A of the Act without examining the facts referred above which were very crucial to reach at the final disallowance u/s 14A of the Act. There are series of judgments of the co-ordinate benches that the disallowance u/s 14A of the Act should not exceed the exempt income earned during the year and also decisions wherein the disallowance u/s 14A of the Act on account of interest expenditure are held to be incorrect if the assessee has sufficient equity and general reserve to cover the investments.
ITA No. 837 & 899/Ahd/2012 19Asst. Year 2008-09
14. We are, therefore, of the view that applying the decision of the co-ordinate bench in assessee's own case in ITA No.1874 & 1821/Ahd/2010 for Asst. Year 2007-08 is dated 20.6.2014 the matter is set aside to the file of Assessing Officer to examine the facts and figures of the case in the light of our observations made above in order to arrive at a final conclusion as to whether disallowance u/s 14A is to be made and if so, then the amount thereof which in no case should exceed the exempted income earned by assessee during the year under appeal. It is needless to mention that ld. Assessing Officer shall allow reasonable and sufficient opportunity of hearing to the assessee before adjudicating the same. These grounds of assessee and the Revenue are allowed for statistical purposes.
15. Now we take ground no.3 of assessee's appeal which reads as below :-
3.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the enhancement of Book Profit computed under section 115JB of the Income Tax Act, 1961 by Rs.61,45,72,000/- on account of disallowance made under section 14A of the Income Tax Act, 1961.
16. At the outset ld. AR submitted that this ground relates to the disallowance under section 14A of the Act due to which book profit u/s 115JB was enhanced by ld. Assessing Officer and the fate of this ground depends on the decision to be taken for ground no.1 raised by them.
ITA No. 837 & 899/Ahd/2012 20Asst. Year 2008-09
17. We observe that this ground is incidental to ground no.1. As we have already decided while adjudicating ground no.1 that the matter be set aside to the file of Assessing Officer for looking afresh into the disallowance made u/s 14A of the Act as per our observations made in paras 12,13 & 14 above, we accordingly set aside the matter referred in this ground to the file of Assessing Officer to recomputed book profit u/s 115JB of the Act on the basis of disallowance, if any, to be made by ld. Assessing Officer as referred in ground no.1 above for calculating the disallowance, if any, u/s 14A of the Act. Accordingly, this ground is also allowed for statistical purposes.
18. Ground no.2 of assessee's appeal reads as under :-
2.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the disallowance of depreciation amounting to Rs.9,17,49,861/- on the basis that certain items included under the head computers do not qualify for depreciation @ 60% under the Income Tax Act, 1961.
19. Brief facts relating to this ground are that during the course of assessment proceedings ld. Assessing Officer observed that depreciation claimed on certain items in the nature of plant and machinery @ 60% claiming them under the block of computers, and the issue was pointed to the ld. AR of the assessee. Vide submissions dated 24.12.2010 assessee agreed before ld. Assessing Officer on the mistakes and submitted revised depreciation table reducing total depreciation claim by Rs.9174986/-. On the basis of this submission ld. Assessing Officer made disallowance of depreciation at Rs.9174986/-.
ITA No. 837 & 899/Ahd/2012 21Asst. Year 2008-09
20. Pursuant thereto assessee preferred appeal before ld. CIT(A) against this disallowance claiming that the addition in plant and machinery also includes the cost towards annual maintenance charges, cost of recorder machines, LCD projector etc. Out of which some of the expenses are fully allowable during the year and on some of the machines depreciation @ 60% is allowable but at the time of framing assessment order depreciation has been allowed at reduced rates. However, ld. CIT(A) confirmed the addition towards disallowance of depreciation at Rs.9174986/- by observing as under:-
"7.2. I have considered the matter. Assessing Officer has not held that entire expenditure incurred of Rs.164,75,39,828/-, i.e. addition towards computer assets was not of capital nature. Appellant's submissions in this regard are therefore not relevant. The dispute is regarding rate of depreciation applicable on such assets. As per rates of depreciation applicable for A.Y.2008-09, computer software was eligible for 60% rate of depreciation as prescribed in New Appendix-I of Income tax Rules. The assets on which Assessing Officer did not allow 60% depreciation rate were furniture and fixtures i.e. panels, racks etc. and assets such as recorder machines, LCD projectors, electrical works, air conditioning, public address system, cost towards AMC and ATC etc. Assets of this kind can neither be said to be "computers" nor "computer software".
Depreciation rate at the rate of 60% was not applicable on such assets and the Assessing Officer rightly allowed depreciation at rate applicable to blocks of furniture & fixtures and normal plant and machinery. Disallowance of excess claim of depreciation of Rs.9,17,49,861/- is confirmed."
21. Aggrieved, assessee is now in appeal before us.
22. Ld. AR reiterated the submissions made before the ld. CIT(A) and also submitted that this issue may be set aside to the file of Assessing Officer before whom fresh working of depreciation shall be ITA No. 837 & 899/Ahd/2012 22 Asst. Year 2008-09 provided in the light of various facts submitted before ld. CIT(A) so as to arrive at the correct claim of depreciation on computers.
23. On the other hand, ld. DR supported the orders of lower authorities.
24. We have heard the rival contentions and perused the material on record. Through this ground, assessee is aggrieved with the disallowance of depreciation of Rs.9174986/- claimed on the computers. We find that during the assessment proceedings assessee has himself submitted the revised computation of depreciation on the computers and has agreed that depreciation has been claimed excess by Rs.9174986/-. Thereafter the matter which was almost closed due to the submission made by assessee, was revived back by the assessee by raising ground against this addition before ld. CIT(A) and gave various details and documents supporting the ground that depreciation disallowed needs to be re-worked as various types of expenditure which are fully allowable during the year are included in addition of block of assets, computers and similarly there are various machines which are actually eligible for depreciation @ 60% have been subjected to depreciation @ 15% only. We further observe that ld. CIT(A) has looked into this aspect and has open the way for examining the relates facts towards calculation of correct depreciation in the block of assets relating to computers by way of observing the related facts in his decision.
ITA No. 837 & 899/Ahd/2012 23Asst. Year 2008-09
25. We are, therefore, of the view that in the given circumstances this issue needs to go back to the file of ld. Assessing Officer for re- examination and calculation of depreciation on computers in the light of submissions made by assessee before ld. CIT(A) after giving sufficient and reasonable opportunity to the assessee for providing necessary details so as to arrive at the correct amount of depreciation on computers for which the assessee is eligible. Accordingly this ground is allowed for statistical purposes.
26. Ground Nos.4 & 5 of assessee's appeal read as under :-
4.0 The learned Commissioner of Income Tax (Appeals) erred in law and on facts has dismissed the ground relating to the initiation of penalty proceedings under section 271(l)(c) of the I T Act.
5.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on fact has dismissed the ground relating to the initiation of penalty proceeding under section 271B of the Income Tax Act, 1961.
27. These two grounds are premature, hence need no adjudication.
28. Ground No. 6 reads as under :-
6.0 The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in confirming the charging of interest under section 234B, 234C and 234D of the Income Tax Act, 1961,
29. This ground is consequential.
30. Ground No.7 is as under :-
7.0 The appellant craves leave to add to, alter, delete or modify any of the grounds of appeal either before or at the time of hearing of this appeal.
31. This ground is general in nature, hence needs no adjudication.
ITA No. 837 & 899/Ahd/2012 24Asst. Year 2008-09
32. Now we take up ground no.2 of Revenue's appeal which reads as under:-
2. On the facts and in the circumstances of the case and in law, the Id.CIT(Appeals) erred in deleting the addition on account of disallowance of claim of guarantee fees of Rs.4.76 crores without appreciating that the disallowance was made as the same are enduring nature in the assessee's business.
33. In the books of accounts assessee has claimed an expenditure towards guarantee fees of Rs.4.76 crores paid to Government of Gujarat but the same was held as capital expenditure by ld. Assessing Officer on the basis of his observations that assessee is going to derive benefits in the form of restructuring the debt, rescheduling of repayment schedule, reduction in internet etc. over a long period of time which are in the range of more than 5 years and the assessee will derive advantage of enduring nature.
34. In appeal before ld. CIT(A) the impugned addition of Rs.4.76 crores towards treating it a guarantee and as capital expenditure was deleted by ld. CIT(A) by applying the judgment of Hon. Supreme Court in the case of India Cements Ltd. 60 ITR 52 (SC) by observing as under :-
4.2 I have considered facts of the case and appellant's submissions.
Guarantee fee was an annual recurring expenditure incurred by the appellant. Guarantee fee was payable to Government of Gujarat every year in respect of loans taken by appellant and guaranteed by Government of Gujarat. As held by Hon'ble Supreme Court in the case of India Cements Ltd. 60 ITR 52 (SC), loan cannot be treated as asset or advantage resulting in enduring benefit. Guarantee fees paid to Government of Gujarat was in connection with raising of loans and enduring benefit or advantage could not be said to have resulted by taking ITA No. 837 & 899/Ahd/2012 25 Asst. Year 2008-09 such loans. Only if the assets acquired out of such loans were not put to use till the end of previous year, i.e. 31.3.2008, guarantee fees to such extent, i.e. in respect of such loans only needs to be capitalized as cost of such assets. Appellant has certified that guarantee fee was paid in respect of loans for acquisition of capital assets which were put to use prior to 1.4.2007. Guarantee fees of Rs.4,76,00,000- is directed to be allowed as revenue expenditure, subject to verification by the Assessing Officer of the certificate filed during appellate proceedings, i.e. loans on which guarantee fees was paid were fully utilized and there was no capital work-in-progress in respect of such loans during F.Y.2007-08.
35. Aggrieved, Revenue is now in appeal before the Tribunal.
36. Ld. DR supported the order of Assessing Officer.
37. On the other hand, ld. AR at the outset submitted that the issue is squarely covered in favour of the assessee by the decision of the co-ordinate bench in the case of Gujarat Energy Transmission Corpn. Ltd. vs. ACIT, Circle-1(1), Baroda in ITA No.704 & 761/Ahd/2012 for Asst. Year 2008-09 pronounced on 12.06.2015.
38. We have heard the rival contentions and perused the material on record and gone through the decision referred and relied upon by both the parties. Through this ground Revenue has challenged the action of ld. CIT(A) deleting the disallowance of guarantee fees at Rs.4.76 crores.
39. We observe that ld. AR has referred and relied on the decision of the co-ordinate bench in the case of Gujarat Energy Transmission Corpn. Ltd. (supra), wherein similar issue regarding the claim of guarantee fees paid to Government of Gujarat has been dealt with by ITA No. 837 & 899/Ahd/2012 26 Asst. Year 2008-09 the Tribunal as to whether the guarantee fees is an expenditure of capital in nature or revenue in nature and has observed as under :-
35. We find that the Tribunal in its order dated 8.5.2015 cited supra has held as under:
"6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) decided these issues in paras- 5.2 & 5.3 and 6.2 respectively by observing as under:-
"5.2. I have considered the submissions of the ld.AR and the facts of the case. The issue relating to whether an item of expenditure lies in the capital or the revenue field has exercised the courts in numerous cases. From an analysis of such cases a few guiding principles/tests can be identified. One of the important tests for categorizing any expenditure as capital in nature is whether the laying out of the impugned expenditure results in the acquisition of creation of any new asset. Where no such asset is created, it would be indicative of an expenditure which was not capital in nature. Another test relates to the principle of "enduring benefit".
"Enduring benefit" may be in the form of long lasting use of an asset or the acquisition of a right to exploit certain commercial processes, etc. In the instant case, the assessee did not acquire any right to exploit a commercial technology or process, and neither was the benefit "enduring", since the payment of guarantee commission was an annual charge. The benefit derived from payment of such commission thus lasted for exactly one year only. Such ITA No.704 and 761/Ahd/2012shortlived benefit cannot be categorized as "enduring". Hence, I am inclined to the view that the payment of guarantee commission was a revenue expenditure. 5.3. Further, the jurisdictional Bench of ITAT had occasion to consider the allowability of guarantee commission paid to a Director of the company in respect of loans taken from the bank. In the case of Himalaya Machinery Pvt.Ltd. (ITA No.738/Ahd/2009) for AY 2006-07, the Tribunal held, vide order dt.5.6.2009, following the decision of the Rajasthan High Court in CIT v. Metalising Equipment Co.Pvt.Ltd., 8 DTR 12, that the payment of commission for guaranteeing repayment of loan was allowable as revenue expense. In the instant case, the loan has been guaranteed by the Government of Gujarat. Hence, quite apart from the other sound reasons for treating the expenditure as revenue, it would be unrealistic to say that the appellant company could derive any undue advantage or collateral benefit by making such payment to ITA No. 837 & 899/Ahd/2012 27 Asst. Year 2008-09 the GOG. In view of the totality of the circumstances, I am of the opinion that the AO was not justified in treating the payment of guarantee commission (Rs.8,39,04,550/-) as capital in nature. The addition is directed to be deleted. 6.2. I have considered the submissions of the ld.AR and the facts of the case. The jurisdictional Bench of ITAT has held in the case of Shri Rama Multi Tech vs. ACIT, 92 TTJ 568, that in determining the nature of expenditure incurred for obtaining loan, it is irrelevant to consider the purpose of loan. The amount spent on stamp duty, lawyer fees, etc. for obtaining loan secured by charge on its fixed assets is a revenue expenditure, because the transactions were entered into directly to facilitate the business of the company and payment of consultancy charges was made on ground of commercial expediency.In India Cements Ltd. vs. CIT, 60 ITR 52, the Supreme Court had also held that the expenditure incurred for securing the use of money for a certain period was revenue expenditure. In the instant case, the assessee has secured the loan by creating a charge (hypothecation of its assets). Hence the ratio of the above mentioned two cases would squarely apply. Accordingly, it is held that the AO was not justified in making the disallowance of Rs.45,24,582/-, which is directed to be deleted."
6.1 The ld.CIT(A) has followed the decision of the Tribunal passed in ITA No.738/Ahd/2009 for AY 2006-07 in the case of Himalaya Machinery Pvt.Ltd., dated 5.6.2009 and in the case of Shri Rama Multi Tech vs. ACIT reported at 92 TTJ 568.
6.2. The ld.CIT-DR could not distinguish the facts of the case, therefore we do not see any reason to interfere with the order of the ld.CIT(A), same is hereby upheld. Thus, these two grounds raised in the Revenue's appeal are rejected."
36. DR could not point out any good reason as to why the above quoted order of the Tribunal should not be followed for the year under consideration. In the absence of distinguishing features being pointed out by the DR, and the facts being identical, respectfully following the above quoted decision of the Tribunal, we confirm the order of the CIT(A), and dismiss this ground of appeal of the Revenue.
40. We are of the view that the issue raised in this ground is squarely covered by the decision of co-ordinate bench referred above in the case of Gujarat Energy Transmission Corpn. (supra) and ITA No. 837 & 899/Ahd/2012 28 Asst. Year 2008-09 respectfully following the same, we find no reason to interfere with the order of ld. CIT(A) and uphold the same. This ground of Revenue is dismissed.
41. Ground No.3 of Revenue's appeal reads as under :-
3. On the facts and in the circumstances of the case and in taw, the Id.CIT(Appeals) erred in directing the Assessing Officer to exclude the provisions for gratuity of Rs.44.36 lacs which is an unascertained liability for the computation of book profit u/s115JB of the Act.
42. The assessee did not add the provisions for gratuity of Rs.44.36 lacs on the basis that the same was made on acturial valuation, but ld. Assessing Officer did not find the contention of assessee acceptable because of his view that provisions made as acturial valuation does not make ascertained liabilities and the facts remained that it is mainly a provision which need to be added back to profit for computing the tax liability on the book profit as per the provisions of section 115JB of the Act and the was taken up before the ld. CIT(A) and decision was given in favour of assessee by ld. CIT(A), who followed the decision of his predecessor for Asst. Year 2006-07 and 2007-08.
43. Aggrieved, Revenue is in now in appeal before the Tribunal..
44. Ld. DR supported the order of Assessing Officer.
45. Whereas the ld. AR at the outset submitted that the issue in this ground is squarely covered in favour of assessee by the decision of ITA No. 837 & 899/Ahd/2012 29 Asst. Year 2008-09 the co-ordinate bench in the case of DCIT vs. Gujarat Urja Vikas Ltd. in ITA No.1820/Ahd/2010 for asst. year 2006-07.
46. We have heard the rival contentions and perused the material on record and gone through the decision referred by ld. AR. Through this ground Revenue has challenged the action of ld. CIT(A) deleting the addition made by ld. Assessing Officer for adding the provisions for gratuity at Rs.44.36 lacs to the book profit calculated u/s 115JB of the Act. We find that in assessee's own case similar issue came up before the Tribunal in the case of DCIT vs. Gujarat Urja Vikas Ltd.(supra) wherein it was held as under :-
20. After examining the facts of the case, learned CIT(A) has referred the case of Bharat Earth Movers, 245 ITR 428 and certain decisions of the Tribunal and then came to the conclusion that the provision for gratuity was made on acturial valuation; hence, it was not an unascertained liability. In our opinion, there was no fallacy in the said verdict of learned CIT(A) because the assessee has demonstrated that the provision for gratuity was made on the basis of specific calculation and it was not an unascertained liability. In the case of Esar Motors Limited, 82 TTJ, it was held by the respected co-ordinate Bench that the provision for gratuity based upon acturial valuation was not an unascertained liability which could be added back while computing the book profit for the purpose of Section 115JB. Respectfully following this decision, no interference is required in the view taken by learned CIT(A). This ground of the Revenue is, therefore, dismissed.
47. From going through the above decision we observe that this issue is squarely covered in favour of assessee in its own case as referred above paragraph and respectfully following the above ITA No. 837 & 899/Ahd/2012 30 Asst. Year 2008-09 decision of the co-ordinate bench, we find no reason to call for any interference with the order of ld. CIT(A). We uphold the same. This ground of Revenue is dismissed.
48. Other ground is general in nature, which needs no adjudication.
49. In the result, the appeal of assessee and that of the Revenue both are partly allowed for statistical purposes.
Order pronounced in the open Court on 22 June, 2016
Sd/- sd/-
(R.P. Tolani) (Manish Borad)
Judicial Member Accountant Member
Dated 22/6/2016
Mahata/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Asst. Registrar, ITAT, Ahmedabad
ITA No. 837 & 899/Ahd/2012 31
Asst. Year 2008-09
1. Date of dictation: 16/06/2016
2. Date on which the typed draft is placed before the Dictating Member: 17/06/2016 other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the Dictating Member for pronouncement: __________
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk:22/6/2016
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the Assistant Registrar for signature on the order:
9. Date of Despatch of the Order: