Income Tax Appellate Tribunal - Ahmedabad
Sintex Industries Ltd.,, Ahmedabad vs Assessee on 18 March, 2016
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'C' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, AHMEDABAD
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
AND
SHRI MANISH BORAD, ACCOUNTANT MEMBER
आयकर अपील सं./ ITA No.851/Ahd/2011
नधा रण वष / Asstt. Year: 2009-2010
AND
आयकर अपील सं./ ITA No.1548/Ahd/2012
नधा रण वष / Asstt. Year: 2010-2011
Sintex Industries Ltd. ACIT (OSD)
701-2, Abhijeet-I, Mithakali Six Roads Vs Cir.8, Ahmedabad.
Ellisbridge, Ahmedabad 380 009.
PAN : AADCS 0858 E
आयकर अपील सं./ ITA No.938/Ahd/2011
नधा रण वष / Asstt. Year: 2009-2010
AND
आयकर अपील सं./ ITA No.1524/Ahd/2012
नधा रण वष / Asstt. Year: 2010-2011
ACIT (OSD) Sintex Industries Ltd.
Cir.8, Ahmedabad. Vs 701-2, Abhijeet-I, Mithakali Six Roads
Ellisbridge, Ahmedabad 380 009.
अपीलाथ!/ (Appellant) "#यथ!/ (Respondent)
Assessee by : Shri Millin Mehta, AR
Revenue by : Mrs.Vibha Bhalla, CIT-DR
सन
ु वाई क तार ख/ Dateof Hearing : 03/02/2016
घोषणा क तार ख / Date of Pronouncement: 18/03/2016
आदे श/O R D E R
PER RAJPAL YADAV, JUDICIAL MEMBER:
The assessee and Revenue are in cross-appeals against the orders of the ld.CIT(A) dated 19.1.2011 and 23.4.2012 passed for the Asstt.Years 2009-10 and 2010-11 respectively. Since common issues ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 2 are involved, therefore, we heard them together and deem it appropriate to dispose of all these appeals by this common order.
2. The grounds of appeal taken by the assessee in both the years read as under:
ITA No.851/Ahd/2011 (Asstt.Year 2009-10)"1.1 The order passed by the learned Commissioner is erroneous and contrary to the provisions of law & facts and therefore requires to be suitably modified. It is submitted that it be so held now.
2. The learned Commissioner of Income Tax (Appeals) has erred in confirming allocation of director's remuneration, directors' traveling expenses, audit fees, computer expense and security charges for calculating profit of Captive Power plant for deduction u/s. 80-IA of the Income Tax Act, 1961 (hereinafter referred to as the "Act").
2.1. Without prejudice to above, the learned Commissioner of Income Tax (Appeals) has erred in confirming allocation of salary of Rs.117.44 lacs paid to Mr. S.B. Dangayach, Managing Director & In-charge of Plastic Division and salary of Rs. 143.65 lacs paid to Mr. Rahul Patel, Managing Director who is looking after sales of Textile Division to Captive Power Plant for calculation of profit eligible for deduction u/s.80IA of the Act who are dedicatedly working on the respective divisions and have nothing to do with the operations of the CPP units. It is submitted to be held so now.
3. The learned Commissioner of Income Tax (Appeals) has erred is not deleting interest charged u/s 234B, 234C & 234D. It is submitted that no interest u/s 234B, 234C & 234D is leviable. It be so held now."ITA No.1548/Ahd/2012 (Asstt.Year 2010-11)
"1. The order passed by the learned Commissioner is erroneous and contrary to the provisions of law & facts and therefore requires to be suitably modified.
2. The learned Commissioner of Income Tax (Appeals) has erred in confirming allocation of certain common head quarter expenses (director's remuneration, directors' traveling expenses, ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 3 audit fees, computer expense and security charges) while calculating profit of Captive Power plant for the purpose of deduction to be allowed u/s. 80-IA of the Income Tax Act, 1961 (hereinafter referred to as the "Act").
3. The Learned Commissioner has erred in confirming further allocation of salary expenses of employees' of corporate division while calculating profit of Baddi unit for the purpose of deduction to be allowed u/s. 80-IC of the Act. The facts and circumstances of the case allocation already made by the appellant was reasonable and ought not to have been disputed.
4. The learned Commissioner erred in confirming disallowance of Rs.90,97,470 u/s.14A of the Act. It is submitted that, in the facts and circumstances, no further disallowance u/s. 14A is required to be made. It is submitted that it be so held now.
5.1 The learned Commissioner has erred in upholding invocation of provisions of Rule 8D in the facts of the Appellant's case. Learned Commissioner erred in holding that the preconditions vide Section 14A of the Act for invocation of Rule 8D were duly satisfied by the AO.
5.2 The Learned Commissioner erred in not appreciating the fact that Assessing Officer invoked provisions of section 14A without recording any reasons for rejecting the claim of the appellant that Rs.52,000 has been incurred for earning exempt income. Learned Commissioner erred in upholding summary rejection by the AO of the facts and submissions made by the Appellant with respect to the fund position and flow and status of investments generating exempt income.
5.3 Without prejudice, the learned Commissioner has erred in working out disallowance u/s. 14A in excess of amount claimed exempt u/s. 10(35). It is submitted that disallowance u/s. 14A in any case has to be restricted to the amount of income claimed exempt u/s. 10(35)."
The ground of appeal taken by the Revenue read as under:
ITA No.938/Ahd/2011 (Asstt.Year 2009-10)[1] The Ld. CIT(A)-XIV, Ahmedabad erred in law and on facts in restricting the disallowance u/s.80IA to Rs. 19.25 Lacs for the Captive Power- Plant (CPP) unit.ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT) 4 [2]. The Ld. CIT[A] has erred and on facts in deleting the disallowance of Rs. 18,25,69,000/-made u/s. 80IC on Baddi Unit.
[3]. The Ld. CIT[A]-XIV, Ahmedabad has erred and on facts in deleting the disallowance of Rs.82,34,951/- made by the Assessing Officer u/s. 14A of the Act.
[4]. The Ld. CIT[A]-XIV, Ahmedabad has erred and on facts in granting relief regarding the disallowance of Rs.24,37,500/- made by the Assessing Officer treating the expenditure towards service charge fee paid to DSP Merill Lynch for purchase of units under Portfolio Management Scheme(PMS) as Capital in nature u/s. 37 of the Act.
[5]. On the facts and in the circumstances of the case, the Id. Commissioner of lncome-tax[A]-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer.
[6]. It is therefore, prayed that the order of the Id. Commissioner of Income-tax[A]-XIV, Ahmedabad may be set- aside and that of the Assessing Officer be restored.ITA No.1524/Ahd/2012 (Asstt.Year 2010-11)
1 .a). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing the Assessing Officer, not to allocate general charges of Rs.4359.1-5 Lacs while computing deduction u/s.80IA of the Act.
1 .b). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Miscellaneous / general charges of Rs.17,00,000/- while computing deduction u/s.80IA of the Act.
1.c). The Ld. Commissjioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate interest / general charges of Rs.5132 Lacs while computing deduction u/s.80IA of the Act.
1 .d). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Director's fees/ general charges of Rs.5,00,000/- while computing deduction u/s.80IA of the Act.ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT) 5
1.e). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Rates and Taxes / general charges of Rs.31,00,000/- while computing deduction u/s.80IA of the Act.
1.f). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Stationary & Printing expenses / general charges of Rs.1021 Lacs while computing deduction u/s.80IA of the Act.
1.g). The Ld. Commissioner of Income-tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Stationary & Printing expenses / general charges of Rs.68 Lacs while computing deduction u/s.80IA of the Act.
1.h). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Salaries & Wages of Corporate Division /general charges of Rs.450 Lacs while computing deduction u/s.80IA of the Act.
1.i). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Contribution to PF of Corporate Division /general charges of Rs.154 Lacs while computing deduction u/s.80IA of the Act.
1.j). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Welfare Expenses of Corporate Division / general charges of Rs. 1026.86 Lacs while computing deduction u/s.80IA of the Act.
1.k). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in directing not to allocate Rent / general charges of Rs.289 Lacs while computing deduction u/s.80IA of the Act.
2). The Ld. Commissioner of Income-Tax (Appeals)-XlV, Ahmedabad has erred in law and on facts in directing the AO to allocate the interest expenses on the investment ratio for allowing deduction U/S.80IC of the Act, in respect of Baddi Unit.
3). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the allocation of common head office expenses to Baddi Unit for calculating profit eligible for deduction U/S.80IA of the Act.
ITA No.851/Ahd/2011 And 3 Others(Sintex Industries Ltd. Vs. ACIT) 6
4). The Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the allocation of certain expenses claimed to be incurred specifically for plastic Division as well as common head office expenses for Baddi Unit while calculating profit eligible for deduction u/s.80lC of the IT. Act.
5). The Ld. Commissioner of Income-Tax (Appeals)-XlV, Ahmedabad has erred in deleting the addition of Rs.39,48,81,350/-, being gain on account of foreign exchange fluctuation gain, on the incorrect ground that similar gain / loss was accepted by Assessing Officer in preceeding and following Assessment Year."
3. The common issue involved in all these grounds of appeals relate to quantification of deduction admissible under section 80IA of the Income Tax Act. The ground nos.2, 2.1 and ground no.2 by the assessee in the Asstt.Year 2009-10 and 2010-11 respectively, ground No.1 and 1(a) to 1(k) by the Revenue in these years are connected to each other, therefore, taken up together.
4. Brief facts of the case are that the assessee has field its return of income electronically on 29.9.2009 and 28.9.2010 declaring total income at Rs.136,42,95,380/- and Rs.133,85,50,330/- in the Asstt.Years 2009-10 and 2010-11 respectively. The ld.AO has issued notice under section 143(2) upon the assessee-company on 8.2.2010 and 16.2.2010 in the Asstt.Years 2009-10 and 2010-11 respectively. A perusal of the record, it revealed to the AO that the assessee is a public limited company engaged in the business of manufacturing of thermoplastic mouldings, prefab structures etc. in its plastic division and manufacturing of blended & cotton fabrics and yarns in its textile division. According to the AO major business of approximately 80.46% in Asstt.Year 2009-10 and 82.91% in the Asstt.Year 2010-11 was undertaken in its plastic division. The assessee had manufactured and marketed various products under the brand name "Sintex". The assessee has captive power plant (CPP for short) on which it has ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 7 claimed deduction under section 80IA. The assessee has four units of CPPs. It has opted to claim deduction for ten consecutive assessment years from the Asstt.Years 2003-04 (for CPP -I & II), Asstt.Year 2005- 06 (for CPP - III) & Asstt.Year 2009-10 (CPP-IV). The assessee has submitted a report in Form No.10CCB for each of CPP. It has claimed deduction of Rs.11,48,30,338/- and Rs.10,99,46,899/- in the Asstt.Years 2009-10 and 2010-11 respectively. The ld.AO did not dispute with regard to admissibility of claim of deduction under section 80IA. The dispute between the parties relates to quantification of deduction claimed by the assessee. According to the AO, the assessee has various divisions. It has debited various expenditures, direct and indirect, relatable to CPP as well as other units. There are common head "office expenses". In the head "office expenses", which according to the AO were required to be allocated in proportionate to the turnover of CPP vis-à-vis other business of the assessee. On an analysis of the details of the account, the ld.AO recorded a finding that the turnover of CPP unit in comparison to the total turnover of the assessee-company worked out to 2.05% in the Asstt.Year 2009-10, and 1.53% in the Asstt.Year 2010-11. The ld.AO thereafter, tabulated various common head expenses. Out of which, expenses are required to be allocated to the CPP in ratio of turnover of CPP vis-à-vis the total turnover. It read as under:
Assessment Year 2009-10 Sr. Particulars Amount No. (Rs.in lakhs) 1 Directors' Remuneration 670.00 2 Directors' Traveling 46.00 4 Audit Fees 43.00 5 Computer Maintenance 165.07 Expenses 6 Security charges 15.12 ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 8 7 General Charges 4228.11 8 Miscellaneous Expenditure 98.00 9 Interest & Financial Charges 6396.75 10 Director Fees 3.90 11 Rlates & Taxes 34.00 12 Stationery & Printing Expenses 1495.00 13 Charity & Donation 7.00 14 Salaries & Wages of Corporate 581.00 Division 15 Contribution to PF of Corporate 142.00 Division
16. Welfare expenses of 926.44 Corporation division
17. Foreign exchange Loss 3178.00 18 Bad debts 25.00
19. Rent 267.25 Total 18321.64 Assessment Year 2010-11:
Sr. Particulars Amount
No. (Rs.in lakhs)
1 Directors' Remuneration 780.00
2 Directors' Traveling 16.00
3 Audit Fees 40.00
4 Computer Maintenance 68.96
Expenses
5 Security charges 10.21
6 General Charges 4359.15
7 Miscellaneous Expenditure 17.00
8 Interest & Financial Charges 5132.00
9 Director Fees 5,00
10 Rates & Taxes 31.00
11 Stationery & Printing Expenses 1021.00
12 Charity & Donation 68.00
13 Salaries & Wages of Corporate 450.00
Division
14 Contribution to PF of Corporate 154.00
Division
15 Welfare Expenses of Corporate 1026.86
Division
18 Rent 289.00
ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT)
9
Total 13469.18
3.3 Therefore, on account of the above, 1.53% of 13468.18 lacs work out to Rs. 206.06 lacs. The same is required to be reduced from the assessee company's claim of total deduction u/s 80IA of Rs. 10,99,46,899/-.
5. Dissatisfied with the disallowance, the assessee carried the matter before the ld.CIT(A). The ld.CIT(A) has upheld the allocation of expenditure out of the following heads viz, Directors' Remuneration, Directors' Traveling Expenditure, Audit fees, computer expenditure, security expenditure, allocation of salary of Managing Directors, whereas, he deleted the allocation of the expenditure out of the rest of the items considered by the ld.AO. The assessee in both years impugning the action of the ld.CIT(A) for confirming the allocation of expenditure at 2.5% and 1.53% of the total expenditure claimed by the assessee under these heads, viz. Director's remuneration, Directors travelling expenses, audit fees, computer maintenance expenditure, security charges and salary expenditure of working directors in both the years. Whereas, the Revenue is impugning the deletion made by the ld.CIT(A).
6. In the Asstt.Year 2009-10, the ground of appeal taken by the Revenue to this effect is that the ld.CIT(A) has erred in restricting the disallowance under section 80IA to Rs.19.25 lakhs for CPP units as against Rs.3,75,59,000/- made by the AO. In the Asstt.Year 2010-11, the grounds of appeal taken by the Revenue are argumentative in nature, which are not in consonance with Rule 8 of the Income Tax (Appellate Tribunal) Rules, 1963. In ground no.1, the Revenue has taken eleven sub-grounds, which are basically heads of accounts, which have been excluded by the CIT(A) for making disallowance of expenditure alleged to have been attributable to CPP.ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT) 10
7. Before we embark upon an inquiry as to whether the items of expenditure considered by the AO for proportionate allocation to CPP unit has any nexus to the operation of CPP unit, we find that in Asstt.Year 2010-11, the ld.First Appellate Authority has taken cognizance of the submissions made by the assessee as well as the order of the CIT(A) passed in A.Y.2009-10. The ld.First Appellate Authority, thereafter, recorded a finding on all these issues independently and upheld the allocation partly which is being challenged by the assessee in its appeal and deleted the allocation partly which is challenged in Revenue's appeal. It is pertinent to take note of the arguments raised by the assessee and the finding of the ld.CIT(A) in the Asstt.Year 2010-11 as under:
"2.2 During the course of appellate proceedings, the AR of the appellant has made the written submission and it will be appropriate to reproduce below the relevant part of the submission:
"The learned Asst. CIT has grossly erred in law and on facts of the case in disallowing an amount of Rs. 2,06,06,000/- out of the appellant's claim for deduction u/s. 80IA in respect of profits of Captive Power Project Unit IV claimed for a sum of Rs.10,99,46,899. The learned Asst. CIT has allocated the certain expenses, as mentioned on Page 2, Para 3.2 of his order, on assumption and presumption while determining the amount of disallowance hereunder. The learned Asst. CIT considered additional expenditure of Rs. 13,468.18 lacs and proportionate expenditure (1.53% of Rs. 13,468,18 lacs) arbitrarily and thereby reduced profit by Rs. 206.06 lacs. Without prejudice to anything else stated for the ground of appeal under consideration, it is respectfully submitted that there can never be allocation of the expenses which are actually related to other activities of the Appellant Company. There cannot be disregard of the fact that certain expenses which are incurred for other activities would never come under consideration at the time of computing income from CPP units under consideration.
Further in this regard Appellant would like to state that the computation of profits eligible u/s 80IA have been duly ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 11 verified and certified by Chartered Accountant in Form No. 10CCB and the same are attached herewith as Annexure-I.
1. In this regards the appellant respectfully submits as under -
Director's Remuneration -
Please note that the total of Directors' remuneration is of Rs.780 lacs-which includes remuneration of five working Directors. This includes a sum of Rs. 117.44 lacs paid to Mr. S.B. Dangayach, Managing Director & In-charge of Plastics Division. Similarly, it also includes a sum of Rs. 178 J 8 lacs paid to Mr. Rahul Pate I, who is also Managing Director looking after the sales operations of Textile Division. Thus, these two Directors have nothing to do with the operations of CPP units.
Therefore, if at all it is to be considered for the purpose of apportionment, it is to be taken in respect other three Directors for a sum ofRs 484.38. lacs, who are looking after the overall operations of the company.
ii) Directors Traveling expenses -
As regards Directors' traveling to the tune of Rs. 16 lacs, it is to be submitted that traveling of Directors comprises of mainly foreign travel and that has nothing to do with or even by any limb, with the operations of the CPP.
Hence, it is submitted that the same should not be considered at all towards allocation of appropriate expenses, vis a vis turnover.
iii) Audit fees In this regard it is submitted that Audit fees ofRs.40 lacs have been considered which should not at all be considered, vis a vis turnover of CPP and total turnover.
iv) Computer maintenance expenses In this regard it is submitted that during the year under review, the company has incurred total computer maintenance expenses of Rs. 68.96 lacs.ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT) 12 The expenses would reveal that it has no connection so far as CPP is concerned and hence, it should not at all be considered for the same.
v) Security charges It is pertinent to note here that during the year under review, the appellant company has incurred Security charges of Rs.10.21 lacs. The expenses would reveal that it has no connection so far as CPP is concerned and hence, it should not at all be considered for the same.
vi) General charges (Rs.4359.15 lacs) In this regard Appellant would like to submit that such expenses have been considered for the purpose of proportionate disallowance. These expenses actually include all the general expenses incurred for the company as a whole. As the nomenclature these are entirely unrelated and general expenses which cannot be allocated to any specific business activity including CPP units.
It is respectfully submitted here that appellant has given operation and Management contract to outside agency and the entire expenditure incurred thereon is treated as direct cost for CPP and therefore there is no justification in allocating any of the expenditure out of general charges.
Without prejudice to above, it is respectfully submitted that there can never be allocation of the expenses which are actually related to other activities of the Appellant Company.
It may please be appreciated that on identical facts the addition on account of general charges were deleted by the Hon'ble CIT(A). In view of this factual back ground appellant submits that on same facts for the year disallowance made should be deleted.
vii) Interest & Financial Charges (Rs.5,132 lacs). Stationary & Printing expenses (Rs.1,021 lacs). Rates & Taxes CRs.31 lacs) and Rent (Rs.289 lacs) These are finance costs pertaining to the company as a - whole and which has no relation with the operations of the CPP units.
ITA No.851/Ahd/2011 And 3 Others(Sintex Industries Ltd. Vs. ACIT) 13 It is respectfully submitted here that these expenses which have been considered by learned AO are actually expenses incurred in relation to general company (as a whole) level which are administrative expenses in nature.
It may please be appreciated that in the preceding years it was appreciated that appellant made investment from its own accrual and no allocation was made out of interest. It is submitted that no fresh investment was made except investment o fRs.7.04 crores in CPP-IV which was made from its internal accrual (cash profit for the year is more than Rs. 425 crores) and therefore no allocation should be made in this regard.
Expenses, other than interest hereunder, are actually incurred for the corporate division of the Appellant Company is unrelated to the CPP units by any stretch of imagination and cannot be considered for the purpose of allocation to CPP units. These expenses are in no ways be considered to be contributing towards earning profits from the CPP units.
Without prejudice to above, it is respectfully submitted that there can never be allocation of these expenses which are actually related to other activities of the Appellant Company.
It may please be appreciated that on identical facts the addition on account of Interest & Financial Charges, Stationery & Printing Expenses, Rates & Taxes and Rent were deleted by the Hon 'ble CIT (A) for the Assessment Year -2009-10. In view of this factual background appellant submits that on same facts for the year disallowance made should be deleted. Copy of the C1T(A) order for the Assessment Year -2009-10 is submitting herewith as Annexure -2 for your immediate reference.
viii) Director Fees (Rs.5 lacs), Charity & Donation (Rs.68 lacs). Salary & Wages of Corporate Division (Rs.450 lacs), Contribution to PF of Corporate Division (Rs.l54 lacs). Welfare Expenses of Corporate Division (Rs. 1,026.86 lacs) & Miscellaneous expenditure (Rs. 17 lacs) These expenses are actually incurred for the corporate division of the Appellant Company and are unrelated to the CPP units by any stretch of imagination and cannot be considered for the purpose of allocation to CPP units. These ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 14 expenses in no ways can be considered to be contributing towards earning profits from the CPP units.
It is pertinent to note in this regard that allocation of expenses like donations made, rates & taxes, welfare expenses, rent etc. are by no stretch of imagination expenses -which may require allocation to any profit centre for the purpose of arriving at the profit of the same. These expenses are totally non-operating and unrelated expenses and hence no allocation is required to be made in this regard.
Without prejudice to above, it is respectfully submitted that there can never be allocation of these expenses which are actually related to other activities of the Appellant Company. It may please be appreciated that on identical facts the addition on account of Director Fees, Charity & Donation, Salary Wages of Corporate Divisions, Contribution to PF of Corporate Division, Welfare Expenses of Corporate Division & Miscellaneous Expenditure "were deleted by the Hon'ble CIT (A) for the Assessment Year -2009-10. In view of this factual back ground appellant submits that on same facts for the year disallowance made should be deleted. Please refer Annexure -2 for Copy of the CIT (A) order for the Assessment Year -2009-10 is submitting for your immediate reference. "
2.3 Decision:
I have carefully perused the assessment order and the submissions given by the appellant. The appellant has submitted that the allocation of expenses which are actually related to the other activities of the appellant company cannot be done. The A. O. has allocated the expenses to the eligible units on the basis of turnover. On further perusal of facts, if is noted that the issue has also been in dispute in the earlier assessment years also. In the immediately preceding year i.e. A. Y. 2009-10, similar disallowances were made by the A. O. and my predecessor decided the issue in respect of each disallowances after taking into account the facts and decision taken by earlier CIT (Appeals). Therefore, in order to maintain the consistency, various disallowances that have been made by the A. O. for the current Asstt. Year are decided after following the decision of my predecessor in the following manner:
ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 15 Sr.No. Particulars Remarks 1. Directors' The claim of the appellant Remuneration has been dismissed in the earlier year and the is allowance made by the A. O. has been confirmed by CIT(A) - XIV in A. Y. 2009- 10. Respectfully following the decision, the disallowance is upheld.
2. Directors' Traveling The claim of the appellant has been dismissed in the earlier year and the Is allowance made by the A.O. has been confirmed by CIT(A) - XIV in A. Y. 2009-
10. Respectfully following the decision, the disallowance is upheld.
3. Audit fees The claim of the appellant has been dismissed in the earlier year and the disallowance made by the A. O. has been confirmed by CIT(A) - XIV in A.Y.2009-10.
Respectfully following
the decision, the
disallowance is upheld.
4. Computer The claim of the appellant
Maintenance has been dismissed in the
Expenses earlier year and the
disallowance made by the AO
has been confirmed by
CIT(A)-XIV in A.Y.2009-10.
Respectfully following the
decision, the disallowance is
upheld.
5. Security charges The claim of the appellant
has been dismissed in the
earlier year and the
disallowance made by the AO
has been confirmed by
CIT(A)-XIV in A.Y.2009-10.
Respectfully following the
decision, the disallowance is
ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT)
16
upheld.
6. General charges The issue has been decided
in favour of the appellant by
my predecessor in para 5 of
his order for A. Y. 2009-10.
Respectfully following the
decision of earlier year, the
allocation of general charges
of Rs.4359.15 lacs is
directed to be deleted.
7. Misc. Expenditure The issue has been decided
in favour of the appellant by
my predecessor in para 5 of
his order for A. Y. 2009-10.
Respectfully following the
decision of earlier year, the
allocation of general charges
of Rs.17lacs is directed to be
deleted.
8. Interest & Financial The issue has been decided charges in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10.
Respectfully following the decision of earlier year, the allocation of general charges of Rs. 5132 lacs is directed to be deleted.
9. Director Fees The issue has been decided in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10.
Respectfully following the decision of earlier year, the allocation of general charges of Rs. 5 lacs is directed to be deleted.
10. Rates & Taxes The issue has been decided in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10.
Respectfully following the decision of earlier year, the ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 17 allocation of general charges of Rs. 31 lacs is directed to be deleted.
11. Stationery & The issue has been decided Printing Charges in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10.
Respectfully following the decision of earlier year, the allocation of general charges of Rs. 1021 lacs is directed to be deleted.
12. Charity & Donation The issue has been decided in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10.
Respectfully following the decision of earlier year, the allocation of general charges of Rs. 68 lacs is directed to be deleted.
13. Salaries & Wages of The issue has been decided Corporate Division in favour of the appellant by my predecessor in para 5 of his order for A. Y. 2009-10.
Respectfully following the decision of earlier year, the allocation of general charges of Rs.45 lacs is directed to be deleted.
14. Contribution to PF The issue has been decided of Corporate in favour of the appellant by Division my predecessor in para 5 of his order for A. Y. 2009-10.
Respectfully following the decision of earlier year, the allocation of general charges of Rs. 154 lacs is directed to be deleted.
15. Welfare Expenses of The issue has been decided ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 18 Corporate Division in favour of Corporate Division the appellant by my predecessor in para 5 of his order for A. Y. 2009-10.
Respectfully following the decision of earlier year, the allocation of general charges of Rs. 1026.86 lacs is directed to be deleted.
18. Rent The issue has been decided in favour of the appellant by my predecessor in para-5 of his order for A. Y. 2009-10.
(Respectfully following the decision of earlier year, the allocation of general of Rs.
289 lacs is directed to be deleted.
The A. O. is directed to work out the disallowance in accordance with the above direction. The ground of appeal is accordingly partly allowed.
8. With the assistance of the ld.representatives, we have gone through the record carefully. The ld.counsel for the assessee has placed on record a chart exhibiting each item of expenditures considered by the AO for allocation and how such item was considered upto the level of Tribunal starting from the Asstt.Year 2004-05 to 2008-
09. This chart has been supplied to the ld.DR on earlier occasions. Both the parties have agreed that all these issues have been considered by the Tribunal in the Asstt.Years 2004-05 to 2008-09. Copies of the Tribunal orders are being placed in the paper book, from page nos.318 to 386. The unanimous history in earlier years is that expenditure incurred under head directors' remuneration, directors travelling expenses, audit fees, computer expenses, security expenses are to be ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 19 considered for allocation in the ratio of turnover of CPP units vis-à-vis total turnover.
9. It is pertinent to observe here that the assessee has been maintaining separate books of accounts for its units which are entitled for deduction under Chapter-VI of the Income Tax Act, viz. 80IA for CCP units and 80IC for the units engaged in manufacturing activities situated in Bhaddi (HP). The AO has not disputed about the admissibility of deduction under section 80IA. He has also not disputed with regard to the fact that all direct expenditure have been debited by the assessee in the eligible units for claiming deduction under section 80IA. The case of the AO is that certain items of expenditure were incurred at the head office, which are of common nature, i.e. CPP might have availed certain facilities for which cost was incurred at the HO. There cannot be any segregation of those facilities for a particular unit. Namely, the directors who are looking over all management of the company as a whole, they must have devoted energy to plastic division, textile division and CPP units. Therefore, expenses incurred on their remuneration and salaries ought to be debited in the CPP units also. This was the basic principle for identifying the expenditure which are incurred under the common head, but element of the involvement with CCP units cannot be ruled out. In the past, the Tribunal has recorded independent findings on each item. In these assessment years, as discernible from the finding of the ld.CIT(A), the ld.First Appellate Authority has included the items for allocation on the basis of past practice. Similarly, the first Appellate Authority has upheld the exclusion of certain items as discernible in the table extracted (supra) on the basis of past history. Before us, neither party was able to point out any circumstances which can demonstrate the disparity on the facts or about the nature of expenditure which deserves to be either included for allocation or excluded from allocation. Considering the detailed ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 20 finding of the CIT(A) in Asstt.Year 2010-11, in the light of the Tribunal order in the Asstt.Years 2004-05 to 2008-09, we are of the view that the issue in dispute is squarely covered. The ld.First Appellate Authority has excluded the items, namely, general charges, misc. expenses, interest and financial charges, directors' fees, rent and taxes, stationery and printing, charity and donations, salary and wages of corporate division, contribution to PF of corporate division, welfare expenses of cooperative division and rent. We do not find any error in the order of the ld.CIT(A) for exclusion of these items from allocation to the CPP units. Similarly, the ld.First Appellate Authority has upheld the inclusion of items for allocation viz. directors' remuneration, directors' travelling expenses, audit fees, computer maintenance expenses, security charges etc. and we do not find any error in the order of the ld.CIT(A) on this issue. Therefore, these grounds of appeal are rejected.
10. Ground no.2 and ground no.4 in the Revenue's appeal for the Asstt.Year 2009-10, 2010-11 and ground no.3 in the assessee's appeal for the Asstt.Year 2010-11.
11. The common issue involved in these grounds relates to computation of deduction admissible to the assessee under section 80IC of the Income Tax Act. Though the facts are common in both the years, for the facility of reference, we mainly take up the facts from the assessment year 2009-10.
12. Brief facts of the case are that in the return of income, the assessee has submitted a computation for deduction under section 80IC. It has submitted Form No.10CCB in this regard. The assessee has claimed deduction of Rs.83,94,80,246/- and Rs.85,10,56,417/- under section 80IC in the Asstt.Years 2009-10 and 2010-11 respectively. The claim of the assessee is that it's one of the units is situated at Bhaddi (HP), which is entitled for deduction under section ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 21 80IC. As far as the admissibility of claim per se under section 80IC is concerned, the AO has not disputed the claim of the assessee. The dispute relates to quantification of the claim. In other words, the assessee has fulfilled all the conditions in order to claim deduction under section 80IC. The AO has reduced the claim of the assessee by a sum of Rs.1825.69 lakhs in the Asst.Year 2009-10 and by a sum of Rs.1768.48 lakhs in the Asstt.Year 2010-11. The first item reduced by the AO is on account of interest expenditure. According to the AO, the assessee has debited interest/financial charges to the tune of Rs.5456.88 lakhs in the Asstt.Year 2009-10 and to the tune of Rs.4564.29 lakhs for the Asstt.Year 2010-11. The assessee has further allocated interest/financial charges of Rs.120.56 lakhs Rs.81.51 lakhs in the accounts of Bhaddi units for both these years respectively. The ld.AO further found that ratio of sales of industrial undertaking at Bhaddi (HP) vis-à-vis total sales of the assessee is at 13.89% and 15.87% in the Asstt.Year 2009-10 and 2010-11. The AO was of the opinion that interest/financial expenditure ought to be allocated in the ratio of sales. Therefore, he worked out total expenditure required to be allocated in the ratio of sales at Rs.757 lakhs and 724.35 lakhs in the Asstt.Year 2009-10 and 2010-11. These figures are 13.89% and 15.87% of the total financial charges debited by the assessee. The AO, thereafter, debited the amounts of Rs.120.56 lakhs and Rs.81.51 lakhs out of these figures, because this much expenditure has already been allocated by the assessee itself. In this way, the ld.AO has allocated the expenditure of Rs.637.40 lakhs and Rs.642.84 lakhs on account of interest/financial charges in these assessments years to the Bhaddi units. In other words, the profit has been further reduced by the AO by these two amounts.
ITA No.851/Ahd/2011 And 3 Others(Sintex Industries Ltd. Vs. ACIT) 22
13. On appeal, the ld.CIT(A) has deleted the allocation of such expenses. The finding recorded by the CIT(A) in para-9 and 10 read as under:
"6. The next grounds of appeal (i.e. 3,4,5 & 6) is against the allocation of expenditure allocated to the Baddi unit for computing deduction u/s 80IC.
As regards interest expenses of Rs.637.40 lacs to the Baddi Unit in the ratio of turnover against the allocation made by the appellant on the basis of investment while calculating the profit eligible for deduction u/s. 80IC of the IT. Act. The AO observed that the appellant has incurred-interest charge of Rs.5456.88 lacs (other than textile division) against which the appellant has allocated interest expense of Rs. 120.56 lacs to Baddi Unit. The AO observed that appellant has a common pool of funds as well as common bank accounts for the entire business being carried out from head quarters. The C.C. Account with the bank and financial institutions and loans raised by them had been utilized as per requirement of running the entire business including Baddi Unit. The AO therefore allocated interest proportionately to this unit on the basis of ratio of sales of the undertaking which comes to Rs. 637.40 lacs. The AO has discussed this issue at para 4.2 of the Assessment Order.
It was submitted by the AR of the appellant that the allocation made by the appellant was reasonable and ought not to have been disputed by the AO. The appellant had claimed that since no other specific loans were taken for establishment of the said unit, no interest cost should be allocated to the said unit. Alternatively, even if it has to be apportioned, it should be apportioned on the basis of investment made in these units. I have considered the facts of the case and the submissions of the appellant. I find that similar issue arose in A.Y. 2003-04- A.Y. 2004-05, AY. 2005-06 that interest expenses should be allocated to these units. However, it should be allocated on the basis of the investment made in these units and the AO is directed to grant relief accordingly."
14. This finding has been followed by the CIT(A) in Asstt.Year 2010-
15. The ld.counsel for the assessee at the very outset submitted that similar issue has come up before the Tribunal in earlier years and the Tribunal has upheld the finding of the CIT(A). He, particularly, drew our ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 23 attention towards the Tribunal order in the Asstt.Year 2005-06 at page no.340.
16. On the other hand, the ld.DR relied upon the order of the AO.
17. We have duly considered rival contentions and gone through the record carefully. The case of the assessee is that financial charges cannot be allocated in the ratio of sales, because, the sales have no direct influence on the interest expenditure. The financial charges are relevant to the investment made by an assessee. In other words, suppose an assessee has made investment after borrowing funds due to some reason or market conditions he could not effect the sales, then, if we go by the logic of the AO, there would be a lesser allocation. The assessee has allocated the expenditure on account of financial charges, keeping in view the investment in Bhaddi units. In other words, these are direct expenditure relatable to Bhaddi units. Therefore, the ld.CIT(A) has rightly deleted the allocation of interest/financial charges in the Bhaddi made on the basis of sales ratio. We do not find any infirmity in the order of the ld.CIT(A) on this issue.
18. The next item considered by the AO is salary expenses including directors' remuneration.
19. In the Asstt.Year 2009-10, the ld.AO observed that the assessee has debited salary of Rs.236.44 lakhs. In terms of sales ratio, the expenditure is 328.56 lakhs. He has reduced the eligible profit by this amount. In the Asstt.Year 2010-11, the salary expenditure is of Rs.2426.86 lakhs. The sale ratio of Bhaddi to the total sale is 15.87%. He worked out the salary expenses required to be allocated to Bhaddi Units in this sale ratio at Rs385.14 lakhs which is 15.87% of total salary of Rs.242686 lakhs.
ITA No.851/Ahd/2011 And 3 Others(Sintex Industries Ltd. Vs. ACIT) 24
20. On appeal, the assessee has contended that remuneration to the employees of Rs.360.00 lakhs already been considered by the assessee for the purpose of Bhaddi Units. The ld.CIT(A) has directed the AO to give credit of this allocation against the salary required to be reduced worked out by him. In other words, the salary considered by the AO is lesser than this amount, therefore, in the Asstt.Year 2009-10, no disallowance would remain under this head. This is the reason, there is no ground taken by the assessee. However, in the Asstt.Year 2010-11, the remuneration allocated by the assessee are of Rs.341.46 whereas worked out by the AO are of Rs.385.14 lakhs. It is for this reason, the assessee has also taken the ground of appeal bearing no.3.
21. The ld.counsel for the assessee, at the very outset submitted that a similar issue has come up before the Tribunal in the Asstt.Year 2008- 09, whereby the Tribunal has observed that the salary of those employees who are working in plastic division could only be allocated.
22. With the assistance of the ld.representatives, we have gone through the record. It is pertinent to observe that the ld.AO has allocated the salary by considering the remuneration payable to the directors also. We have noticed the remuneration paid to the directors while dealing the issue under section 80IA. The directors' remuneration is Rs.670.00 lakhs only in the Asstt.Year 2009-10. Similarly, in the Asstt.Year 2010-11, it is Rs.780 lakhs. Whereas, while considering the allocation of salary in the ratio of sales, the amount considered by the AO is of Rs.2426.86 lakhs in the Asstt.Year 2010-11. The contention of the assessee is that it has already allocated Rs.341 lakhs towards the salary which is relating to those employees who are directly working in this division. The AO has nowhere made a nexus about the total number of employees whose salaries have been debited by the assessee. Why he has taken the total figure of Rs.2426 lakhs for ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 25 attribution ? It is settled principle that the expenses which have any attribution to the eligible profit for grant of deduction under section 80IC, only those expenses are to be reduced from the eligible profits. When the assessee has been maintaining separate accounts, it has been debiting the salary and by allocating the salary of Rs.341 lakhs, it has considered the remuneration paid to the directors etc. Therefore, there should not be further allocation. In the Asstt.Year 2009-10, the allocation made by the assessee is higher than the amount worked out by the AO, therefore, we allow the ground of appeal raised by the assessee and reject the ground of appeal raised by the Revenue. We direct that the expenses allocated by the assessee of Rs.341.46 lakhs has rightly been allocated by the assessee, which includes direct expenses as well as out of total salary of plastic division where the Bhaddi unit is situated. No further allocation in this assessment year is required.
23. Next item out of which the ld.AO has made allocation of Bhaddi unit in both the assessment years is common head office expenses. According to the ld.AO, a perusal of profit & loss account, it reveals that there are certain common head office expenses viz. audit fees, computer maintenance expenses, security charges, misc. expenses, directors' fee, charity and donation, bad debts, forex etc. The ld.AO has worked out total of these expenditure in the Asstt.Year 2009-10 at 3535.09 lakhs. In the Asstt.Year 2010-11. He worked out total expenses at Rs.209.17 lakhs. According to the ld.AO, the sale made by the assessee of the products produced from Bhaddi units is 13.85% and 15.87% of the total sales of the company in these two assessment years respectively. Thus, in his opinion, the assessee ought to have allocated the expenditure in the ratio of sales to these units. The 13.89% of total expenditure under the alleged common head office expenses amounting to Rs.3535.09 lakhs in the Asstt.Year 2009-10 ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 26 comes out to 491.02 lakhs. Similarly, in the Asstt.Year 2010-11, it comes out to Rs.33.20 lakhs. The assessee has allocated expenditure of Rs.235.56 lakhs in the Asstt.Year 2009-10 and Rs.7.34 lakhs in the Asstt.Year 2010-11. Accordingly, the difference has been allocated by the AO for disallowance which will reduce the eligible profit for the purpose of deduction under section 80IC. The amount allocated by the AO is Rs.255.46 lakhs (Rs.491.02 lakhs minus Rs.235.56 lakhs) in the Asstt.Year 2009-10 and Rs.25.86 lakhs in the Asstt.Year 2010-11 (Rs.33.20 lakhs minus Rs.7.35 lakhs).
24. On appeal, the ld.CIT(A) has deleted this allocation made by the AO.
25. With the assistance of the ld.representatives, we have gone through the record carefully. There is no dispute with regard to the proposition that if any unit, which is entitled for deduction under Chapter-VI of the Income Tax Act viz. 80IA or 80IC in the present case, if avails the benefit of certain facilities for which the expenses are incurred under common pool, then a proportionate allocation, according to the scientific method, ought to be made. While dealing with the issue for the purpose of allocation under section 80IA is concerned, we have upheld the allocation in the ratio of turnover. Similarly, we have not uphold the allocation of financial charges in the ratio of sales made from the products of 80IC units vis-à-vis the total sales made by the company, because, we have observed that such expenditure is to be worked out on the basis of actual investment made in 80IC units. With this analogy, when we examine the details, for the purpose of allocation under the present head, then it would reveal that the assessee has been maintaining separate accounts for these units. It has debited expenditure on actual basis. The AO did not find any error in that attribution. He simply jumped to make allocation on the basis of sales ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 27 made by these units vis-a-vis the total sales. That is not a scientific criteria for making disallowance. The ld.CIT(A) has accepted the contention of the assessee, it has considered all these expenditure, and where there is a direct nexus with the activity of 80IC units, vis-à-vis this expenditure, it has already made disallowance. Let us take an example. As far as security charges are concerned, the assessee already accounted the security charges relevant for the purpose of 80IC units. Why allocation out of the expenditure incurred at head office ought to be made to this unit. Similarly, it has allocated out of computer maintenance. This expenditure would relate to the computers which are directly involved in 80IC units. After considering the orders of the ld.CIT(A) on this issue, we do not find any error in the orders, and accordingly, the orders of the CIT(A) in both the years are upheld on this issue. The ld.CIT(A) has rightly deleted the disallowance made by the AO, out of common head expenses of corporate division.
26. Next item of expenditure allocated by the AO is expenditure incurred by plastic division and corporate division. Under this head, the ld.AO found that the expenditure of Rs.8106.37 lakhs and 7180.75 lakhs have been incurred by the assessee on rates and Taxes, printing and stationery, common expenses on sales, general charges and insurance. The assessee has allocated on expenditure of Rs.521.70 lakhs and Rs.424.18 lakhs. The ld.AO made disallowance of Rs.604.27 lakhs and Rs.714.64 lakhs in the Asstt.Year 2009-10 and 2010-11 respectively.
27. On appeal, the ld.CIT(A) has deleted these disallowances in both the years.
28. We have examined the details with the assistance of the ld.representatives. In our reasoning given while upholding the deletion out of certain common head expenses, we do not find any error in ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 28 deleting the disallowance under these head. The basic reason is that the assessee has debited expenditure which has direct nexus with 80IC units. Such expenditure cannot be amplified by considering the sales ratio. The AO has nowhere highlighted, as to which particular facility was used by the assessee, generated out of common head expenses. He simply adopted the figure of sales and then proceeded to disallow the expenditure. In our opinion, the ld.AO ought to have examined this aspect, and find out that a particular item of expenditure incurred by the assessee at head office, which has given benefit to 80IC unit, only out of that expenditure, if he made an allocation, then his stand could be justified. Therefore, following our finding in earlier grounds, we do not find any merit in this ground of appeal of the Revenue, the orders of the CIT(A) on this issue are upheld.
29. The ground no.4 in the Revenue's appeal for the Asstt.Year 2009- 10 is inter-connected with ground no.4 of the assessees' appeal in the Asstt.Year 2010-11. The Revenue in Asstt.Year 2009-10 has pleaded that the ld.CIT(A) has erred in deleting the disallowance of Rs.82,34,951/- which was added by the AO with the aid of section 14A. The assessee in its ground has pleaded that the CIT(A) has erred in confirming the disallowance of Rs.90,97,470/- which has been added with the aid of section 14A of the Income Tax Act.
30. The facts and the explanation of the assessee in both the assessment years are verbatim same except variations in the figures.
31. The brief facts of the case in the Asstt.Year 2009-10 are that the assessee has claimed exempt income of Rs.2.02 crores, which was earned by it as dividend income out of investment made in mutual fund as well as equity shares. The assessee has shown expenditure of Rs.5.10 lakhs. In the Asstt.Year 2010-11, the assessee has claimed exempt income at Rs.22.55 lakhs. It has disallowed a sum of Rs.0.52 ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 29 lakhs attributable to earning of income. The ld.AO has confronted the assessee as to why the disallowance for the purpose of section 14A should not be made with help of Rule 8D. In response to the query of the AO, the assessee has filed a detailed reply vide letter dated 20.2.2010 in the Asstt.Year2009-10. The ld.AO has reproduced the explanation of the assessee, and thereafter, recorded a finding in both the assessment years. For the facility of reference, we take note of the assessee's explanation along with finding of the AO in the Asstt.Year 2010-11. It reads as under:
"1.1. Regarding disallowance u/s 14A of the Act, we would like to state that during the year under consideration, we have earned dividend amounting to Rs. 22.55 lacs on account of investment made equity shares and the same has been claimed as exempt in return of income. In this regard, we would like to state that certain expenses incurred in relation to earning such income have already been disallowed of Rs. 0.52 lacs on suo moto basis by us in its Return of Income. We request your goodself to refer to Annexure 1 for details in this regard.
1.2. At the outset, we would like to mention that surplus funds available with the company are invested in Mutual Funds. The prime motive of investment in mutual funds is to gain by appreciation in the Net Asset Value of the funds. Your goodself would appreciate that all of the investments made by the Company are in 'Growth Option' of the Mutual Funds. It is important to mention here that in case of Growth Options, no dividends are declared by the Mutual Funds and the only income received by the investor is in form of Capital Gains. Capital Gains derived by the assesses on Mutual Funds are taxable and no exempt income is derived from such investments. Your goodself would observe that during the year under consideration, the assessee has earned profit of Rs. 8.23 crores on sale of such investments and the same has been appropriately offered to tax after categorizing the same in long term and short term capital gains.
1.3. Similarly, assessee's investment in overseas subsidiary does not generate any exempt income. Dividends or gains arising from such investment are liable to tax in India and thus this investment does not generate exempt income.ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT) 30 1.4. We would further like to state that even the investments that generated exempt income were made out of owned funds and therefore no interest expenditure was incurred in relation to 'earning exempt income. We submit that investments on which exempt income has been earned were not from interest bearing funds.
1.5. Details of owned funds vis-a-vis investments generating exempt income as at the year beginning is given below:
Rs. in crores Date Share Reserves & Accumulated Total Own Funds Capital Surplus Depreciation (non-cash exp.) April 1, 27.10 1600.63 353.82 1981.55 2009 March 31, 27.10 1855.02 437.05 2319.17 2010 1.6 Your goodself would appreciate that the assessee had significantly high owned funds to make investments. The company has been generating good amount of profits which contributes to the internal accruals. We had owned funds of Rs. 2319.17 crores as against investment in subsidiary company and Dena Bank was only of Rs. 111.09 crores as at March 31, 2010.
1.7 The amounts have been borrowed for purely business purposes. We would like to state that out of Rs.51.32 crores, interest of Rs. 11.34 crores was incurred on various term loans obtained by the assessee for specific projects.
These funds have been directly used for such projects and therefore cannot be taken into account at all. Details of the projects on which such interest was paid is given in Annexure 2. The balance interest was paid on working capital facilities utilized by us for the purpose of the business.
1.8 Your goodself had also sought reason why Rule 8D should not be used for computing disallowance u/s. 14A. In this regard, we would like to mention that Rule 8D can be applied only if the amount disallowed u/s. 14A is not correct. We have completely explained the facts of the case and in view thereof, all the expenditure incurred for the ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 31 purpose of earning such income has been disallowed appropriately.
1.9. Further, computation of such disallowance is also in consonance with the earlier year assessment orders up to AY 2008-09 and thus the amount of disallowance made by us u/s. 14A is appropriate and thus Rule 8D cannot be invoked. Further, during AY 2009-10 additions were made by applying Rule 8D in the case of the Assessee however learned CIT(A) vide his order dated 19th January 2011 deleted the addition made by AO in this regard.
1.10. It is important to note that Rule 8D would trigger only in cases where the Assessing Officer is not satisfied with the correctness of the claim of the Assessee and such dissatisfaction has been arrived at with regard to the accounts of the Assessee. Since the disallowance made by us is in. line with disallowance made by AO in earlier years, Rule 8D cannot be invoked.
1.11 For the purpose, we rely upon the decision of Punjab & Haryana High Court in the case of CIT vs. Hero Cycles. Copy of the said judgement is attached as Annexure V. In the said case, the assessee earned dividend income on shares which was exempt from tax. The AO took the view that the investment in shares was made out of borrowed funds on which interest expenditure was incurred and consequently made a disallowance u/s 14A. Tribunal deleted the disallowance by noting that unless there was evidence to show that the interest - bearing funds had been invested in the tax - free investments and such nexus is to be established by the revenue before applying Section 14A and such disallowance cannot be sustained on mere presumption. On further appeal, the Higher Court held as under:
a. If the investment in the shares is out of the non-
interest bearing funds, disallowance u/s 14A is not sustainable;
b. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted; c. Disallowance u/s 14A requires a finding of incurring of expenditure. If it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A cannot stand;ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT) 32 d. The contention of the revenue that 'even if the assessee has made investments in shares out of its own funds, the said own funds are merged with the borrowed funds in a common kitty and, therefore, disallowance u/s 14A can be made' is also not justified.
1.12. Based on above, we would like to state that there is no justification of making disallowance u/s 14A of the Act in addition to that already suo-moto made by the Assessee in the return of income.
1.13. Without prejudice to above, as desired by you, we are submitting herewith the working of disallowance based on formulae given in Rule 8D in Annexure 3. Application of Rule 8D would result into the disallowance of Rs.0.90 crores against the exempt income of Rs.0.22 crores. In view thereof if at all Rule 8D is to be applied the amount of disallowance has to be restricted to Rs.0.22 crores.
7.1 The above submission of the assessee has been duly considered. As per section 14A no deduction is to be allowed in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under the I.T. Act, As per section 14A (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.
The Parliament is its wisdom had enacted section 14A with retrospective effect from 1-4-1962 in order to clarify the already existing position that only those expenses could be claimed which were relatable to the taxable income. In the past, it was seen that assessee's were pushing the expenses relating to exempt income which were not taxable towards taxable income and thereby reducing the taxable income wrongly. The intention of the Legislature is clearly evident from the Memorandum explaining the provisions contained in the Finance Bill wherein it was explained that only those expenses could be claimed as deduction which are incurred in relation to earning the taxable income. The use of the expression 'only to the extent' in the memorandum is clear indicator that only that part of expenses can be allowed as ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 33 deduction which is related to the earning of taxable income. Accordingly, when the income is exempt and does not form part of the total income then, no expenditure whether direct or indirect in relation to that income could be claimed as deduction.
Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are one of the most important decisions in which top management is actively involved to maximize their benefit. This decision making process is very complicated and requires very careful analysis. Moreover, the assessee has to keep track of the dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself called for considerable management attention and cannot be left out to be unattended.
The contention of the assessee that no expenditure has been incurred is therefore not acceptable and hence Rule 8D is invoked. In view of the above narrated facts and points of law disallowance u/s. 14A r.w.r. 8D is made.
Accordingly, a disallowance of Rs 90,97,470 (Rs. 91,49,470- 52000) after deducting the disallowance already made by Assessee in return of income is made as per working furnished by Assessee and added back to the total income of the assessee.
(Disallowance - Rs. 90,97,470/-)"
32. In the Asstt.Year 2009-10, the assessee has further disclosed summary of its investment categorized, based on their capacity to earn exempt income. Otherwise, the line of the arguments given by the assessee in the Asstt.Year 2010-11 is based on the explanation given in the Asstt.Year 2009-10. The main thrust of the assessee's argument was that surplus fund available with the company is invested in mutual fund. The prime motive of investment in mutual fund is to gain appreciation in the net asset value of the funds. Most of the investment made by the assessee-company was "growth option" of mutual fund. It would also submit that in the case of growth-option, no dividend is declared by the mutual funds, and only income received by the investor ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 34 is in the form of capital gains. The capital gains derived by the assessee on mutual fund are taxable and no an exempt income is derived from such investment. In the Asstt.Year 2009-10, the assessee has earned profit of Rs.19.22 on sale of such investment, and the same has been appropriately offered for tax for categorizing the same in long term capital gains/short term capital gains. Similarly, the assessee had made investment in overseas subsidiaries, which also do not generate any exempt income. It was also disclosed that in certain mutual fund scheme, it has opted dividend option and also earned dividend income. But the investment in such type of scheme was of Rs.60.36 crores as on 31.3.2008 which was liquidated during the Asstt.Year 2009-10 and on 31.3.2009, such investment was shown at NIL. The ld.AO was not satisfied with the explanation of the assessee. He has recorded a verbatim same finding as extracted by us in the Asstt.Year 2010-11. He made addition of Rs.87,44,951/- in the Asstt.Year 2009-10 after giving credit of the amounts, the assessee itself disallowed. An addition of Rs.82,34,951/- was made.
33. On appeal, the ld.CIT(A) have recorded a divergent finding in both the years. The ld.CIT(A) in the Asstt.Year 2009-10 has deleted the disallowance. However, in the Asstt.Year 2010-11, the ld.CIT(A) has confirmed the disallowance by observing as under:
"7.3 Decision:
I have carefully perused the assessment order and the submissions given by the appellant. The appellant has claimed that no expenses other than what have already been disallowed have been incurred for earning of the dividend or earning of exempt income. The appellant had surplus funds which were invested in mutual funds. The other investment is in overseas subsidiary and that has not generated income which is exempt from tax therefore no disallowance on account of interest and other expenses should be made in addition to what have been done by the appellant.ITA No.851/Ahd/2011 And 3 Others
(Sintex Industries Ltd. Vs. ACIT) 35 The claim of the appellant that no disallowance should be made under section 14A as no finding of incurring of expenditure has been given and the investment was out of interest during funds is not acceptable. The appellant has not been able to prove the nexus between the interest free funds, that is the own fund, and the investment in tax exempt securities. The AO has also duly considered the submission made by the appellant and the assessment stage which were on similar lines and he has given a finding that the working of the appellant regarding disallowance was not proper and he accordingly made disallowance under section 14 A read with rule 8D. I am in complete agreement with the finding given by the AO in the assessment order.
It is further noted that the application of rule 8D is judicially settled and it has been held by various courts that rule 8D would be applicable from assessment year 08-09 onwards the appellant has not disputed the calculation made by the AO by applying rule 8D. His main contention is that the assessing officer has no* given any finding regarding the correctness of the claim of the assessee. The claim has duly been considered by the AO and he has given g finding that the claim of the appellant that no expenditure has been incurred was not acceptable in view of various findings that have been mentioned in the order.
The appellant has also relied on the order of my the learned and predecessor for assessment year 2009 - 10 wherein the disallowance made by the AO under section 14 A was deleted. I have carefully considered the order of my Ld. Predecessor and I respectfully disagree with the finding given by him in that order. Tn the present assessment year the assessing officer has clearly given a finding after considering the contention of the assessee regarding applicability of rule 8D and has accordingly made disallowance. He has rejected the claim of the appellant that no expenditure has been incurred. The facts of the case for the present year are therefore, different from the preceding year and accordingly the findings given by learned predecessor are not applicable on this issue for the present year.
The appellant has also claimed that the disallowance by applying rule 8D is much more than the exempt income earned by the appellant and the disallowance should accordingly be restricted to the income earned. The appellant's claim cannot be accepted as it is not necessary that the expenditure should be limited by the income earned. The expenditure cannot be restricted to the income earned. The disallowance is to be made after considering the funds invested in tax exempt assets and the ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 36 overall interest expenditure incurred by the appellant. Similarly, the administrative expenses in maintaining and investing such assets is also to be taken into account. The claim of the appellant is therefore not acceptable.
In view of the above discussion the disallowance made by the AO under section 14A by applying the provisions of rule 8D is upheld and the ground of appeal is dismissed."
34. Before us, the ld.CIT-DR has relied upon the order of the AO and that of the CIT(A) in the Asstt.Year 2010-11. On the other hand, the ld.counsel for the assessee has contended that from the very beginning the assessee was pointing out to the AO that it has added back the amounts which are attributable to earning of exempt income. In its written submissions, the assessee has specifically pleaded that the Rule 8D of the Income Tax Rules, 1962 though applicable in both these years, would not trigger automatically. The AO has to record a finding that he was not satisfied with correctness of the claim of the assessee. Only, thereafter he can calculate the disallowance with the help of Rule 8D. The ld.counsel for the assessee further contended that it has made reliance upon the decision of the Hon'ble Punjab and Haryana High Court in the case of CIT Vs. Hero Cycles (2010) 323 ITR 158. Copy of this decision was annexed as Annexure-A with its explanation. He further took us through the finding of the AO and observed that in this finding, the ld.AO has nowhere pointed out as to how the expenditure claimed by the assessee for adding back was not related to the investment made by it or the expenditure were insufficient. In such situation, according to the ld.counsel for the assessee, the AO was not justified to make disallowance. When this argument was brought to the notice of the ld.CIT(A), the ld.CIT(A) in the Asstt.Year 2009-10 accepted the case of the assessee, but somehow without pointing out any circumstances as to why the ld.CIT(A) wants to differ with his predecessor for the Asstt.Year 2009-10, confirmed the disallowance in A.Y.2010-11. He further contended that in all other issues, the ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 37 ld.CIT(A) has made an observation that following the principle of consistency and order of his predecessor, she accepted the contentions of the assessee, but somehow on this issue of disallowance under section 14A of the Act, the ld.CIT(A) did not assign any reason for such diversion. The ld.counsel for the assessee further relied upon its decision of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT, 347 ITR 272. He placed on record copy of the Hon'ble Delhi High Court decision. He further relied upon the order of the ITAT, Mumbai in the case of Justice Sam P. Bharucha v. ACIT (2012) 53 SOT 192.
35. In rebuttal, the ld.CIT-DR contended that though in these two years, the applicability of Rule 8D is not disputed, but in the Asstt.Year 2005-06, the disallowance of Rs.3,25,863/- was made under section 14A. When this issue travelled upto the Tribunal in ITA No.4352/Ahd/2007 and ITA No.4357/Ahd/2007, then the Tribunal has observed that since Rule 8D is not applicable in this year, therefore, no disallowance can be made. The Tribunal has deleted the disallowance by following its order in the case of ACIT Vs. Vepar Pvt. Ltd. in ITA No.1374/Ahd/2009. The Revenue was not satisfied with conclusions of the Tribunal and took the matter in the Hon'ble High Court. The Hon'ble High Court though dismissed the appeal on account of smallness of the amount involved in that year, but made an observation that even in the absence of Rule 8D, the expenditure can be disallowed on reasonable basis. She contended that even on estimate, this disallowance can be made.
36. We have duly considered rival contentions. As far as the proposition of the ld.CIT-DR that even in the absence of any mechanism for disallowance, the expenditure, which is attributable to earning of exempt income can be worked out on estimate basis or reasonableness ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 38 basis after looking into the facts and circumstances of a particular case is concerned, we do not have any dispute. The amounts can be disallowed on estimate basis. In the present appeals, the assessee itself has made disallowance of Rs.5.10 lakhs in the Asstt.Year 2009-10 and Rs.52,000/- in the Asstt.Year 2010-11. In the Asstt.Year 2009-10, the exempt income is of Rs.2.02 crores whereas in the Asstt.Year 2010- 11 it is Rs.22.50 lakhs. Before embarking upon the facts of the present case, we deem it pertinent to take note of the observations of the Delhi High Court recorded in para-29 of the judgment in the case of Maxopp Investment Ltd. (supra). It reads as under:
"Scope of sub-sections (2) and (3) of Section 14A
29. Sub-section (2) of Section 14A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only 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 the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to .exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition 'precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A.
Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 39 that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub- section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same."
37. According to the Hon'ble Delhi High Court, when an assessee demonstrate actual incurrence of the expenditure, then Rule 8D would not be automatically applied without looking into the explanations. In other words, when an assessee has worked out the expenditure relatable to earning of exempt income on actual, basis and demonstrated to the AO the incurrence of such expenditure, then AO has to record a finding that he was not satisfied with the correctness of the expenditure shown by the assessee. In other words, he has to verify the account of the assessee, and if he was not satisfied with the correctness of the claim made by the assessee, then, after assigning reasons, he would proceed to compute the expenses on the basis of the method brought in the Rule 8D. In the light of the above proposition, let us examine the facts in both the years and finding recorded by the AO. The main contention of the assessee in both the years is that it has made investment in the mutual fund with "growth option". In the case of growth option, no dividends are declared by the mutual fund, and only income declared by an investor is in the form of capital gains. The capital gains derived by the assessee on mutual fund are taxable and not an exempt income derived from such investment. In the Asstt.Year ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 40 2009-10, the assessee has offered a sum of Rs.19.22 crores on sale of such investment for taxation as short/long term capital gain. Similarly, in the Asstt.year 2010-11, a sum of Rs.8.23 crores has been offered. The investment made by the assessee was not out of interest bearing fund. It has its own surplus fund out of which investment has been made. The assessee has demonstrated that it had own funds of Rs.1981.55 crores in the Asstt.Year 2009-10 and investment in the mutual fund was only Rs.144.51 crores. The assessee has also submitted that its investment in earning exempt income has been reduced during the year from 78.45 crores to Rs.18.09 crores. The assessee has submitted these details in its submissions reproduced by the AO. Similarly, in the Asstt.Year 2010-11, it has reserve fund of Rs.2319.17 crores and made investment of Rs.111.09 crores. The ld.AO has not given any heed to these submissions or figures submitted by the assessee. The assessee has further made disallowance of Rs.5.12 lacs in the Asstt.Year 2009-10. This was mainly for management of investment. He simply discussed the background for bringing section 14A as well Rule 8D on the statute book. He has specifically not worked out the amounts even on the basis of Rule 8D. He called for a working from the assessee and made a lumpsum addition in both the years. The ld.AO has not recorded any finding that amounts added back by the assessee are not commensurate with the administrative expenses which might be attributable to earning exempt income. Because, on interest expenses account, there cannot be any disallowance as the assessee has far more interest free fund than investment. We are of the view that the ld.CIT(A) has looked into all these aspects in the Asstt.Year 2009-10 before deleting the disallowance. We do not find any error in the order of the ld.CIT(A) on this issue in Asstt.Year 2009-10. Consequently, we allow the ground of appeal raised by the assessee in the Asstt.Year 2010-11 and delete the disallowance made by the AO.
ITA No.851/Ahd/2011 And 3 Others(Sintex Industries Ltd. Vs. ACIT) 41
38. Next grievance of the assessee in the Asstt.Year 2009-10 is that the ld.CIT(A) has erred in upholding the charging of interest under sections 234B, 234C and 234D of the Act. No arguments were advanced on this issue. Charging of interest is consequential in nature. Hence, this ground of appeal is rejected.
39. In the result, the appeal of the assessee in the Asstt.Year 2009- 10 is dismissed.
40. Next ground pleaded by the Revenue in the Asstt.Year 2009-10 is that the ld.CIT(A) has erred in deleting the disallowance of Rs.24,37,500/-. The ld.AO has recorded a very brief finding on this issue. It reads as under:
8. Expenditure for PMS Services From the details submitted by the assessee in respect of legal and professional expenses, it is observed that an amount of Rs. 24,37,500 has been paid to DSP Merill Lynch towards service fee charged for the purchase of units under Portfolio Management Scheme. Mutual Fund units have been treated by the assessee as capital assets of the company and therefore expenditure in relation thereto is not allowable u/s. 37. Accordingly, an amount of Rs. 24,37,500/- is disallowed and added back to the income of the assessee.
(Disallowance - 24,37,500/-)
41. On appeal, the ld.CIT(A) has deleted the disallowance by observing that gain shown by the assessee is taxable and it is an expenditure incurred by the assessee in the field of revenue. The ld.DR relied upon the order of the AO. On the other hand, the ld.counsel for the assessee relied upon the submissions made before the ld.CIT(A) which have duly been reproduced by the ld.CIT(A) on page nos.16 and 17 of the impugned order. He contended that a portfolio manager is a person who provides advisory services vis-à-vis a portfolio investment to its client. The portfolio makes decision about investment mix and policy, matching investments to objectives, asset allocation for ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 42 individuals and institutions, and balancing risk against performance. Portfolio manager advises an assessee about nature of securities or the instruments where the assessee can make investments. In other words, he provides information in a scientific manner to his clients on the investment from time to time. He pointed out that services of portfolio manager are akin to safeguard the assets in any other forms owned by a company. By virtue of the payments the assessee does not acquire any asset. It only maintains its assets. Thus, the expenditure was of revenue nature. The ld.counsel for the assessee relied upon the decision of the Hon'ble Supreme Court in the case of Dalmia Jain and Co. Ltd. Vs. CIT, (1971) 81 ITR 754 (SC), CIT Vs. Bengal Coal Co. Ltd., (1989) 47 Taxman 284 (Cal.), CIT Vs. Raigarh Jute Mills Ltd., (1989) 47 taxman 166 (Cal.), CIT Vs. Hindustan Times Ltd., (2000) 241 ITR 509 (Del) and CIT Vs. Patiala Flour Mills Co. P. Ltd., (1989) 180 ITR 75 (P&H). In the case of Dalmia Jain and Co. Ltd. (supra) the issue relates to litigation expenses. The government was supposed to lease out land to the assessee, if it succeeded in a litigation against the third party. The assessee was impleaded as defendant along with the government, and hence, it incurred litigation expenses defending the suit filed against it. The litigation expense was allowed to the assessee on the ground that these expenses were incurred to protect the business and not with a view to safeguard its prospects of getting a new lease. Similarly, in the case of Raigarh Jute Mills Ltd. (supra) such expenditures were incurred for defending the persons for the company, who were defendants. This expenditure was allowed to the assessee- company on the strength of this decision. He contended that expenses were incurred for the purpose of management of portfolio.
42. We have duly considered rival contentions and gone through the record carefully. No doubt, the expenses were incurred by the assessee towards consultancy charges for making investment. On sale of ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 43 investment, capital gain would arise to the assessee, but the expenses incurred by the assessee are not directly linked to the purchase of investment. These are paid for consultancy. If the expenses are not to be capitalized in the investment, then how the assessee will get this set off. Therefore, the ld.CIT(A) has rightly observed that the expenses were not incurred towards purchase of investment, rather, these were incurred towards consultancy charges in order to keep track on the investment. Therefore, we do not see any error in the order of the ld.CIT(A). This ground of appeal is rejected.
43. No other arguments were raised on ground no.5 and 6. Accordingly, this appeal of the Revenue is dismissed.
44. In the result, the appeal of the Revenue for the Asstt.Year 2009- 10 is dismissed.
45. The assessees' appeal in the Asstt.Year 2010-11 no other independent ground remained to be adjudicated. Hence, the appeal of the assessee is partly allowed.
46. In the appeal of the Revenue for the Asstt.Year 2010-11, the next ground is that the ld.CIT(A) has erred in deleting the addition of Rs.39,48,81,350/-
47. Brief facts of the case are that on perusal of the accounts, it revealed to the AO that the assessee has credited a sum of Rs.43.93 crores towards foreign exchange gains. Out of this gain, the assessee has claimed that gain of Rs.38.49 crores is attributable to borrowings made for acquiring shares of foreign subsidiary viz. Sintex Holdings B.V., the assessee has claimed that such gains should be excluded from taxable income as it is required to be adjusted against the acquisition of shares. The ld.AO has confronted the assessee as to how such gain ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 44 should not be brought to tax. In response to the query of the AO, the assessee has filed detailed submissions. The assessee contended that as per section 43A of the Income Tax Act, if any asset is acquired in foreign exchange for which the assessee has borrowed in foreign currency, then any increase or decrease in such borrowing on account of change in the exchange rate after acquisition of such asset is required to be added or reduced, from cost of acquisition of a capital asset for the purpose of section 48. It was also contended by the assessee that the loan was acquired by the assessee for financing the expenditure for expansion plan in existing business.
48. The ld.AO was not satisfied with the explanation of the assessee. He recorded a finding that the assessee was required to account for difference foreign exchange as gain or loss in its books of accounts. The gain or loss cannot be considered as a notional gain/loss. According to the AO, the assessee follows accrual system and gains has been duly accounted for in its audited books of accounts, therefore, there is no reason that such gain be excluded from taxation. He made addition of Rs.39,48,81,350/-.
49. On appeal, the ld.CIT(A) has deleted this disallowance. The relevant observations of the ld.CIT(A) reads as under:
" .......
After considering the above details, it is noted that the money have been borrowed by the appellant in foreign exchange for the purpose of expanding its business and making investment. The purpose was, therefore, on capital account and any exchange, fluctuation resulting into profit or loss should be treated on capital account and adjusted from the cost of the asset but it cannot have any impact on the revenue account. Had the loan been taken by the appellant for trading asset or for running the business or for circulating capital, the treatment could have been in the revenue account. The Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. [116 ITR 1] has laid down similar guidelines. Similar view has been taken by ITAT, Mumbai in the case of Essar Oil Limited Vs. DCIT [13 SOT 691 ], ITAT, Bangalore in the case of JSW Steel Limited Vs. ACIT [5 ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 45 ITR (Trib.) 31] and Special Bench of ITAT, New Delhi in case of Apollo Tyres, New Delhi [89 ITD 235 .(SB)]. It is also noted that the appellant had incurred loss in the same account in earlier assessment year as well as subsequent assessment year and the treatment given by the appellant has been accepted. The disallowance made by the A.O. is directed to be deleted and the ground of appeal is accordingly allowed."
50. Before us, the ld.DR relied upon the orders of the AO. On the other hand, the ld.counsel for the assessee submitted that the issue in dispute is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of ACIT Vs. Elecon Engineering Co. Ltd. reported in 189 taxmann 83 (2010). He further contended that the AO has given different treatment in this year. In the past when the assessee has loss and treated as notional loss, the AO did not allow that loss from the taxable income of the assessee. But in this year, when the assessee has gain on account of fluctuation rate, then the AO has made addition. The ld.CIT(A) has analysed this position within the ambit of section 43A of the Income Tax Act.
51. We have considered rival contentions and gone through the record carefully. In the case of ACIT Vs. Elecon Engineering (supra), the Hon'ble Supreme Court has considered the scope of section 43A and observed that where the assessee has acquired asset outside India for the purpose of his business, and that asset was acquired by borrowed funds, the amount by which the liability stood increased or reduced on account of foreign exchange rate during the previous year, they be added to or deducted from the actual cost of the asset as defined in section 43(1) of the Income Tax Act. The observation of the Hon'ble Supreme Court has been noticed by the ld.CIT(A) while taking note of assessee's submissions on page no.49 of the impugned order. The observation of the Hon'ble Supreme Court reads as under:
"9. Section 43 A, before its substitution by a new section 43 A vide Finance Act, 2002, was inserted by Finance Act, 1967 with effect from 1-4-1967, after the devaluation of the rupee on 6-6-1966. It ITA No.851/Ahd/2011 And 3 Others (Sintex Industries Ltd. Vs. ACIT) 46 applied where as a result of change in the rate of exchange there was an increase or reduction in the liability of the assessee in terms of the Indian rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring an asset. The section has no application unless an asset was acquired and the liability existed, before change in the rate of exchange. When the assessee buys an asset at a price, its liability to pay the same arises simultaneously. This liability can increase on account of fluctuation in the rate of exchange. An assessee who becomes the owner of an asset (machinery) and starts using the same, it becomes entitled to depreciation allowance. To work out the amount of depreciation, one has to look to the cost of the asset in respect of which depreciation is claimed. Section 43A was introduced to mitigate hardships which were likely to be caused as a result of fluctuation in the rate of exchange. Section 43A lays down, firstly, that the increase or decrease in liability should be taken into account to modify the figure of actual cost and, secondly, such adjustment should be made in the year in which the increase or decrease in liability arises on account of fluctuation in the rate of exchange. It is for this reason that though section 43A begins with a non obstante clause, it makes section 43(1) its integral part. This is because section 43A requires the cost to be recomputed in terms of section 43Afor the purposes of depreciation [Sections 32 and 43(1)]. A perusal of section 43A makes it clear that insofar as the depreciation is concerned, it has to be allowed on the actual cost of the asset, less depreciation that was actually allowed in respect of earlier years. However, where the cost of the asset subsequently increased on account of devaluation, the written down value of the asset has to be taken on the basis of the increased cost minus the depreciation earlier allowed on the basis of the old cost. One more aspect needs to be highlighted. Under section 43A, as it stood at the relevant time, it was inter alia provided that where an assessee had acquired an asset from a country outside India for the purposes of his business, and in consequence of a change in the rate of exchange at any time after such acquisition, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or part of the cost of the asset or for repayment of the whole or part of the moneys borrowed by him for the purpose of acquiring the asset, the amount by which the liability stood increased or reduced during the previous year shall be added to or deducted from the actual cost of the asset as defined in section 43(1)."
52. The issue in dispute before us squarely covered by the above preposition. In view of the above decision, we do not find any merit in this ground of appeal. It is rejected.
ITA No.851/Ahd/2011 And 3 Others(Sintex Industries Ltd. Vs. ACIT) 47
53. In the result, the appeal of the Revenue for the Asstt.Year 2010- 11 is dismissed.
54. We summarize the result as under:
ITA No.851/Ahd/2011, 938/Ahd/2011 and 1524/Ahd/2012 aredismissed, and ITA No.1548/Ahd/2012 is partly allowed.
Order pronounced in the Court on 18th March, 2015 at Ahmedabad.
Sd/- Sd/- (MANISH BORAD) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER