NAHAR POLY FILMS LTD.,LUDHIANA vs. ACIT, C-7, LUDHIANA

आदेश/Order

Per R.L. Negi, Judicial Member:

The assessee has filed the captioned appeals against the separate orders both dated 01.08.2019 passed by Commissioner of Income Tax (Appeals)-3, Ludhiana [for short ’the CIT(A)’] for the assessment years

2011-12 & 2012-13, vide which the Ld. CIT(A) has partly allowed the appeals filed by the assessee against the assessment order passed u/s 143(3) of the Income Tax Act, 1961 [for short ’the Act’]. Since the assessee has taken common grounds in both the appeals, these appeals were clubbed, heard together and are being disposed of by this common order for the sake of convenience.

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 2 ITA No. 1414 /CHD/2019 AY 2011-12

are that the assessee filed its return for the assessment year under

consideration declaring nil income under the normal provisions of the

Act, declaring loss of Rs. 40,32,77,160 (to be carried forward).

However, the tax was computed and paid under the provisions of section

115JB of the Act. The return was processed u/s 143(1) of the Act. Later

on, the case was selected for scrutiny and the AO passed assessment

order u/s 143(3) of the Act and inter alia made addition of Rs.

38,42,911/-on account of disallowance u/s 14A read with Rule 8D of the

Act, addition of Rs. 12,94,605/- on account of disallowance u/s

36(1)(iii) of the Act and addition of Rs.2,01,282/- being proportionate

interest @3% less charged on loan advanced to its sister concern.

Further AO determined the net book profit u/s 155JB at Rs 1,14,10,990/-

as against the profit offered by the assessee amounting to Rs. 73,17,985.

In the first appeal the Ld. CIT(A) held that disallowance u/s 14A read

with rule 8D is applicable in this case, however, directed the AO to

recompute the disallowance under rule 8D by considering only those

investments from where the exempt income has been received. The Ld.

CIT(A) further confirmed the addition made u/s 36(1)(iii) and addition

on account of disallowance of interest on loan given to sister concern.

The assessee is in appeal before this Tribunal against the said findings

of the Ld. CIT(A).

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 3 3. The assessee has challenged the impugned order passed by the Ld.

CIT(A) on the following grounds: -

Directions be given to delete the disallowance of Rs.2,01,282/- as the appellant had its sufficient owned funds in the shape of Capital & Reserve.

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 4 4. Vide ground No 1&2, the assessee has challenged the action of the Ld. CIT(A) in holding that section 14A read with Rule 8D is applicable in assessee’s case. The Ld. counsel submitted before us that this issue is covered in favour of the assessee by the decision of the jurisdictional Tribunal in Group company case Oswal Woolen Mills Ltd. vs. ACIT, ITA No. 37/Chd/2015 pertaining to the assessment year 2010-11. The Ld. counsel further submitted that no new investment was made in the previous year rather investments were reduced to Rs. 95.14 Cr. from 105.64 Cr. in the preceding year. The Ld. counsel further contended that since the facts and the

issue involved in the present case are similar to the facts of the case and issue

involved in its group company case, this issue may be decided accordingly.

findings of the Ld. CIT(A) submitted that the Ld. CIT(A) has rightly directed

the AO to recompute the disallowance u/s 14A of the Act read with Rule 8D of

the Income Tax Rules. Since the findings of the Ld. CIT(A) are as per the

provisions of the Act and in accordance with the settled law, there is no merit in

the contention of the assessee. The Ld. DR however, admitted that the Tribunal

has dealt with the identical issue in the group company case aforesaid.

including the decision of the Tribunal rendered in the case of group company.

The coordinate Bench of the Tribunal has dealt with the identical issue in group

company case and directed the AO to restrict the disallowance to the

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 5 proportionate amount computed by the assessee after including personal

expenditure and certain other expenses. The findings of the coordinate Bench

read as under:-

“6. So far as the administrative expenses are concerned, the assessee has given a scientific formula for calculating the disallowance out of administrative expenses. However, we find that the assessee while taking the total administrative expenses has not considered the personal expenses and other allowances. The authorized representative of the assessee, before us, has submitted another chart, wherein, the personnel expenses and other allowances have been included and thereby the proportionate of disallowance out of administrative expenses has been computed as under: -

“Disallowance u/s 14A In case of regular computation Amount (In Rs.) 1.Amount of dividend income 10656014 2. Operating income 6336864325 3 % of dividend income 0.00168 4. Amount of expenses 556724538 5. Proportionate amount of 936183 disallowance of expensed to earn dividend

Details of expenses a. Interest paid to others 21202161 b. Administrative expenses 130240267 c. Personal expenses and 405282110 other allowances 556724538”

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 6

Even the assessee has claimed that it has not incurred any administrative expenses for earning of tax-exempt income. The Assessing Officer in this respect has not recorded any dissatisfaction taking into consideration the accounts of the assessee. The Hon'ble Bombay High Court in the case of ‘Godrej & Boyce Manufacturing Co.’ 328 ITR 81 has held that under section 14A of the Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of such expenditure is correct. The satisfaction of the Assessing Officer must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee. We may further observe that the Hon'ble Delhi High Court in a recent decision has further given a similar view in the case of "CIT vs. Taikisha engineering India Ltd." (supra) and has held that the AO having regard to the accounts of the assessee is required to record his satisfaction that the self or voluntarily expenditure offered by the assessee or claim that no expenditure has been incurred by the assessee in relation to earning of exempt income was not correct or the same was unsatisfactory on examination of the accounts of the assessee. Without recording such a satisfaction, he cannot proceed to apply Rule 8D for the computation of disallowance under section 14A. However, as observed above, in the case in hand, the Assessing officer has not followed the guidelines of objective satisfaction as laid down by the Hon'ble Bombay High Court in the case of ‘Godrej & Boyce’ (supra) while making the disallowance. Neither the Assessing Officer nor the Ld. CIT(A) has pointed out any defect in the working given by the assessee in computing suo motu disallowance except that a certain part of tax relating to the personnel expenditure and other allowances were not

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 7 taken into consideration. In the working given before us, as reproduced above, whereby, the proportionate amount of disallowance of expenditure to earn dividend income has been computed at Rs. 9,36,183/- by including the personnel expenditure and certain other expenses, as noted above. In view of this, the disallowance of administrative expenses is restricted to Rs. 9,36,183/-. However, the assessee will get the benefit / set off at the suo motu disallowance offered by the assessee in the return of income at Rs. 1,33,928/- and accordingly the addition is restricted to Rs. 8,02,255/-.” 7. In the said case the AO had not recorded any dissatisfaction taking into

consideration the accounts of the assessee. In the present case also the

contention of the Ld. counsel is that since the AO had computed the

disallowance in a mechanical manner, the Ld. CIT(A) ought to have deleted the

addition made by the AO. Since the coordinate Bench has already dealt with the

identical issue in the similar set of facts, we do not find any reason to take a

different view. Hence, respectfully following the order dated 03.07.2019 passed

by the coordinate Bench of the Tribunal in the case of Oswal Woolen Mills

Ltd. vs. ACIT (supra) set aside the findings of the Ld. CIT(A) and send the

issue back to the AO to decide the issue afresh in terms of the aforesaid order

after affording a reasonable opportunity of being heard to the

appellant/assessee.

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 8 Carlo Fashion Ltd. ITA No 1341/Chd/2016. The Ld. counsel further relied on the following cases to substantiate his contention: -

the Ld. CIT(A) and submitted that there is no legal or factual infirmity in the

findings of the Ld. CIT(A) to interfere with the same.

material on record including the cases relied upon by the Ld. counsel. As

pointed out by the Ld. counsel, this issue is covered in favour of the assessee by

the decision of the coordinate Bench of the Tribunal in M/s Monte Carlo

Fashions Ltd. relied upon by the Ld. counsel. The operative part of the order

reads as under: -

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 9 The judgment of various Courts in the case of Hero Cycles (P) Ltd. Vs. CIT, Ludhiana C.A. No. 514 of 2008 dt. 05/11/2015, Bright Enterprises Pvt. Ltd. Vs. CIT, Jalandhar (2016) 381 ITR 107 (P&H) held that no disallowance of interest is called for where the assessee has got sufficient own funds. The Assessing Officer is directed to go through the fund position namely capital and interest free advances, reserves and surplus to determine whether any borrowed funds have been utilized more than available own funds and take a decision keeping in view the decisions rendered above. If sufficient own funds are available, no disallowance is called for. This ground may be treated as set aside to the file of Assessing Officer. 11. The coordinate Bench of the Tribunal has dealt with the identical issue in

the similar facts of the case in group company case aforesaid. Hence,

respectfully following the decision of the coordinate Bench, we set aside the

findings of the Ld. CIT(A) and send the issue back to the AO for deciding the

same in terms of order dated 12.10.2017 passed in the case of Monte Carlo

Fashion (supra).

CIT(A) in confirming disallowance of Rs 2,01,282/- made by the AO on

proportionate basis on loan given to its sister concern. The Ld. counsel

submitted before us that this issue is covered in favour of the assessee in

assessee’s own case ITA No 1340/Chd/2016 for the assessment year 2010-11.

The ld. counsel accordingly submitted that since the findings of the Ld. CIT(A)

are contrary to the decision of the Tribunal, the same may be set aside.

already decided this issue in favour of the assessee in assessee’s own case

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 10 referred by the Ld. counsel however, the Ld. DR supported the decision of the

Ld. CIT(A).

this issue and has decided the same in favour of the assessee in assessee’s own

case for the assessment year 2010-11. The relevant para of the order dated

15.05.2018 passed by the coordinate Bench reads as under:-

“7. We have gone through the balance sheet produced by the assessee which shows a reserve and surplus of Rs. 142.47 crores. The advance amount against the said reserves and surpluses was Rs. 3 crore only, that too, was advanced by the assessee on an interest of 8% which the assessee claimed was of business expediency. We find that the case of the assessee is thus squarely covered by the aforesaid decisions of the Hon'ble Supreme Court in the case of Hero Cycle P.Ltd. vs. CIT (SC) and of the Hon'ble Punjab & Haryana High Court in the case of Bright Enterprises Pvt. Ltd vs. CIT (supra) and of the Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd (supra) wherein the Hon'ble Courts have held that where the own funds of the assessee were sufficient to meet the interest free advances given during the year, then the presumption would arise that such advances or investments had been made out of the own funds of the assessee. Hence, respectfully following the aforesaid decisions, and in view of the facts and circumstances of the case, we do not find any justification on the part of the lower authorities in making the disallowance on this issue. The disallowance made on this issue, therefore, is ordered to be deleted.” 15. Since, this issue is covered in favour of the assessee by the decision of the

coordinate Bench in assessee’s own case ITA No 1304/Chd/2016 (supra) we

find no reason to take a different view. Hence, respectfully following the

decision of the coordinate Bench, we allow this ground of appeal and set aside

the findings of the Ld. CIT(A).

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 11

ITA No. 1415/Chd/2019 AY 2012-13

In the present case the assessee filed its return for the assessment year

under consideration declaring total income of Rs. 9,35,01,130/-. The case was

selected for scrutiny and the AO completed assessment under section 143(3) of

the Act and determined the total income at Rs. 9,80,25,690/- under the normal

provisions of the Act inter alia making addition of Rs. 41,58,517/- u/s 14A of

the Act read with Rule 8D of the Income Tax Rules and Rs. 3,66,039/- u/s

36(1)(iii) of the Act. In the first appeal the Ld. CIT(A) held that

disallowance u/s 14A read with rule 8D is applicable in this case,

however, directed the AO to recompute the disallowance under rule 8D

by considering only those investments from where the exempt income

has been received. The Ld. CIT(A) further confirmed the addition made

u/s 36(1)(iii). The assessee is in appeal before this Tribunal against the

said findings of the Ld. CIT(A).

CIT(A) on the following grounds: -

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 12 2. That the Worthy CIT(A)-3, Ludhiana, erred in law and on facts in not deleting the additional disallowance u/s 14A read with rule 8D of the Income Tax Act of Rs. 41,58,517/-. Directions may be given to make the disallowance u/s 14A as computed on proportion basis by the Appellant Company in the return, in view of the decision of various Appellate Courts wherein the method of proportion has been held to be a recognized method for disallowance u/s 14A of the Act. 3. That the Worthy CIT(A)-3, Ludhiana erred in law and on facts in not deleting the disallowance of Rs.3,66,039/-, out of interest paid on working capital limit, on account of addition to fixed assets (building) inspire of the fact the Company had its own sufficient funds. Directions be given to delete the addition of Rs.3,66,039/- made out of interest paid to bank on CC Account. 4. That the appellant craves, leave to add, amend, alter, modify or substitute all or any of the above-mentioned Grounds of Appeal before the appeal is finally heard and disposed of.

of the assessee’s appeal for the assessment year 2011-12 discussed and

decided above. We have set aside the findings of the Ld. CIT(A) and send the

identical issue back to the AO to decide the same afresh in terms of the order

passed by the coordinate Bench of the Tribunal in Oswal Woolen Mills Ltd.

vs. ACIT (supra) after affording a reasonable opportunity of being heard to the

appellant/assessee. Further, there is no material change in the facts of the

present case. We therefore, consistent with our said findings set aside the

findings of the Ld. CIT(A) and direct the AO to decide the issue in terms of the

order passed by the coordinate Bench in the case of Oswal Woolen Mills Ltd.

vs. ACIT (supra).

ITA Nos.1414 & 1415-Chd-2019- Nahar Poly Films Ltd., Ludhiana 13 4. Similarly, ground No 3&4 of the present appeal are identical to ground No 3 of the assessee’s appeal for the assessment year 2011-12 discussed and decided above. We have set aside the findings of the Ld.

CIT(A) and send the issue back to the AO for deciding the same in terms of

order dated 12.10.2017 passed in the case of Monte Carlo Fashion (supra).

Further, there is no material change in the facts of the present case. We

therefore, consistent with our said findings set aside the impugned order passed

by the Ld. CIT(A) and direct the AO to decide the issue in terms of the order

passed by the coordinate Bench in the case of Monte Carlo Fashion (supra).

(supra).

In the result, both the appeals of the assessee are partly allowed for statistical purposes.

Order pronounced on 21s t Oct.,2021

Sd/- Sd/- ( N.K. SAINI) (R.L.NEGI) उपा�य� /Vice President �या�यकसद�य/ Judicial Member Dated : 21.10.2021 “आर.के.” आदेशक ��त,ल-पअ.े-षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकरआयु/त/ CIT 4. आयकरआयु/त (अपील)/ The CIT(A) 5. -वभागीय��त�न2ध, आयकरअपील%यआ2धकरण, च4डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड�फाईल/ Guard File आदेशानुसार/ By order, सहायकपंजीकार/ Assistant Registrar