DCIT, CIRCLE-1(1), BHUBANESWAR, BHUBANESWAR vs. M/S. INDIAN METALS & FERRO ALLOYS LTD., BHUBANESWAR

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK

BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No.471/CTK/2014 Assessment Year : 2010-11

Indian Metals and Ferro Vs. JCIT, Range-2, Alloys Ltd., IMFA Building, Bhubaneswar. Bomikhal, Rasulgarh PAN/GIR No.AAACI 4818 F (Appellant) .. ( Respondent)

ITA No.512/CTK/2014 Assessment Year : 2010-2011

JCIT, Range-2, Vs. Indian Metals and Ferro Bhubaneswar Alloys Ltd., IMFA Building, Bomikhal, Rasulgarh. PAN/GIR No.AAACI 4818 F (Appellant) .. ( Respondent)

Assessee by : Shri Rohit Garg, AR Revenue by : Shri S.M.Keshkamat , CIT DR

Date of Hearing : 19 /11/ 2019 Date of Pronouncement : 16/12/ 2019

O R D E R Per C.M.Garg,JM The cross appeals filed by the assessee and the revenue are

directed against the order of the CIT(A),1, Bhubaneswar for the

assessment year 2010-2011.

ITA No.471/CTK/2014- Assessee’s appeal

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“ 1. That on facts and circumstances of the case, the Commissioner of Income Tax (Appeals) ['CIT(A)'] erred in confirming the action of the Assessing Officer ('AO') in disallowing deduction of Rs.5,78,30,880/- by invoking section 43B of the Act without appreciating that the said sum represented deposit of electricity duty in a designated non-lien bank account, in accordance with the directions of the Hon'ble Orissa High Court.

1.1 That in holding as aforesaid, the CIT(A) erred on facts and in law in not appreciating that the liability having crystallized and discharged by the appellant, section 43B of the Act could not have been invoked.

1.2 That CIT(A) erred in not appreciating that the said amount was deposited on specific directions of the Hon'ble Orissa High Court and there was actual outflow of cash from the Appellant, which tantamounts to actual payment for the purposes of Section 43B of the Act.

submitted that ITAT, Cuttack Bench vide order dated 13.6.2015 in ITA

No.521/CTK/2013 for assessment year 2009-2010 has dismissed similar

grounds of the assessee on identical facts. Ld counsel further submitted

that the assessee has filed appeal before the Hon’ble Jurisdictional High

Court and the Hon’ble High Court vide order dated 8.2.2016 passed in ITA

No.20/2014 has admitted the appeal of the assessee on substantial

question of law. Ld counsel further explained that subsequently, ITAT,

Cuttack Bench in assessee’s appeal in ITA No.230/CTK/2017 for assessment

year 2007-08 order dated 10.8.2018 has restored the issue to the file of

the AO on filing of Form No.8 regarding declaration by the assessee

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u/s.158A of the Act claiming that identical question of law is pending before

the Hon’ble High Court. Therefore, the issue may kindly be restored to

the file of the AO to reconsider the issue based on the final outcome of the

assessee’s appeal pending before the Hon’ble High Court for the

assessment year 2009-2010.

first appellate order. However, he did not controvert that the Hon’ble

Jurisdictional High Court has in ITA No.20/2014 vide order dated 8.2.2017

admitted the Income tax appeal of the assessee against the order of the

ITAT Cuttack Bench dated 13.6.2014.(supra). Ld CIT DR, in all fairness,

submitted that the grievance of the assessee in these grounds may be

restored to the file of the AO in the manner as has been done by the ITAT

Cuttack in order dated 10.8.2018 for the assessment year 2007-08.

Cuttack has respectfully following the order of the Hon’ble High Court dated

8.2.2016 (supra), wherein, Hon’ble High Court has admitted the Income tax

appeal of the assessee on substantial question of law , restored the issue

to the file of the AO to reconsider the issue on the basis of final outcome of

the assessee’a appeal for the assessment year 2009-2010 by Hon’ble High

Court. The relevant paras 27 of the ITAT, Cuttack order dated 10.8.2018

for the assessment year 2007-08 read as follows:

“ 27. In ground No.1, the assessee has agitated that the CIT(A) has erred in confirming the disallowance of deduction by invoking 43B of the Act. Ld.

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AR before us filed Form No.8 regarding declaration under Section 158A(1) of the Act, 1961 to be made by an assessee claiming that identical question of law is pending before the High Court or the Supreme Court. The substantial questions of law framed by the Hon’ble High Court are as under :-

“08.02.2016 Mr. S.Jolly, learned counsel & his associate have entered appearance on behalf of the petitioner by filing a vakalatnama in Court today. The same is accepted and taken on record.

Heard learned counsel for the petitioner. This Income Tax Appeal is admitted on the following substantial questions of law:

B) Whether on facts and circumstances of the case and in law, the ITAT was right in confirming the action of the AO and CIT(A) in disallowing deduction of payment of electricity duty by erroneously invoking Section 43B of the Act without appreciating that the said sum is a crystallized liability and deposited in a ‘no lien’ account pursuant to the directions of the Hon’ble Orissa High Court?

D) Whether on facts and circumstances of the case and in law, the ITAT erred in confirming the action of the AO and the CIT(A) in disallowing expenditure incurred on foreign travel of Directors of the Appellant without appreciating that the same has been undertaken wholly and exclusively for the business of Appellant Company?

Issue notice to the respondent by speed post with A.D. making it returnable within four weeks. Requisites for issue of notice be filed within one week.

List this matter four weeks after.

The Registry is directed to call for the L.C.R. from the Tribunal in the meantime”.

We considering the declaration filed by the assessee in Form No.8 and the observations of the Hon’ble High Court and the provisions of law, restore this issue to the file of Assessing Officer to consider based on the final outcome of the assessee’s appeal in identical issue pending before the Hon’ble High Court for the assessment ear 2009-2010 as mentioned in the Form No.8. Accordingly, this ground of appeal is allowed”

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and considering the declaration filed by the assessee in Form No.8 and

observation of Hon’ble High Court in the order dated 8.2.2016, this issue is

restored to the file of the AO for a fresh consideration as per the final

outcome of assessee’s appeal in ITA No.20/2014 pending before the

Hon’ble High Court for the assessment year 2009-2010. Accordingly,

Ground Nos.1 to 1.2 of the appeal are allowed for statistical purposes.

2.2 That the CIT (A) erred in not appreciating that since there is no proximate nexus between earning of the exempt dividend income and the expenditure incurred, no expenses could be said to be relatable to earning of exempt dividend income.

2.3 That in holding as aforesaid, the CIT(A) erred in holding that satisfaction of the AO is discernible in the assessment order and further erred in confirming the finding of AO that interest bearing or mixed funds have been diverted for generating exempt income, without appreciating that no material/evidence has been brought on record by the AO to support that the funds have been diverted.”

the ld CIT(A) has erred in confirming the disallowance of Rs.48,17,000/- by

invoking the provisions of section 14A of the Act r.w. Rule 8D of the Income

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tax Rules, 1962 without appreciating that no expense has been incurred by

the assessee for incurring exempt dividend income. Ld counsel strenuously

contended that the ld CIT(A) has erred in confirming the assessment order

of the AO in invoking the said provisions without appreciating that no

proper satisfaction was recorded by the AO having regard to the correctness

of books of account of the assessee that certain expenditure was actually

incurred for earning the exempt dividend income. Ld counsel also

submitted that the authorities below are not correct and justified in ignoring

the fact that since there is no proximate nexus between earning of the

exempt dividend income and the expenditure incurred, no expenses could

be said to be relatable to earning of exempt dividend income. Ld counsel

lastly submitted that the ld CIT(A) was also not reasonable in holding that

the satisfaction of the AO is discernible in the assessment order and in

confirming the findings of the AO that interest bearing or mixed funds have

been diverted for generating exempt income without appreciating that no

material or evidence has been brought on record by the AO to support that

the funds have been diverted.

order and submitted that the AO in para 7 of the assessment order has

made detailed enquiry regarding the relevant facts and explanation of the

assessee, which constitute the proper satisfaction as per the requirements

of mandate of section 14A r.w. 8D of the I.T.Rules. Ld CIT DR further

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submitted that the assessee has diverted the borrowed business funds to

the investment activities and interest on borrowed funds diverted from

business claimed as interest is not allowable from the profits of the

assessee, which was used for the purpose of earning exempt income. Ld

CIT DR vehemently pointed out that even if mixed funds were diverted,

interest u/s.36(1)(iii) of the Act is not allowable by virtue of the onus being

on the assessee who is in the special knowledge of facts in terms of Section

106 of the Evidence Act. Ld CIT DR submitted that the assessee has

diverted the business fund for the non-business purpose and, therefore,

interest and other expenses are to be disallowed as per provisions u/s.14A

r.w.Rule 8D. Ld CIT DR also submitted that the assessee is continuously

making a claim that no expense has been incurred by the assessee for

earning exempt dividend income but the onus is on the assessee to prove

that huge exempt dividend income of Rs.2,61,75,497/- has been earned

without any efforts. Ld CIT DR also pointed out that the onus was on

the assessee to prove that no expense has been incurred for earning the

impugned dividend income and such onus has not been discharged by the

assessee. Ld CIT DR also drew our attention towards para 5.2 of the

CIT(A) order and submitted that after considering the contention of the

assessee, ld CIT rightly concluded that the addition u/s.14A r.w Rule 8D of

I.t.Rules has to be made in the hands of the assessee. Ld CIT DR also

pointed out that the CIT(A) has taken a very balancing approach and has

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considered the alternative plea and the computation thereto made by the

appellant in regard to possible disallowance under rule 8D and thereafter

restricted the same to Rs.48,17,000/-. Therefore, no interference is called

for in this regard.

point out that the AO in para 7 of the assessment order after considering

the entire facts and circumstances of the case alongwith the explanation of

the assessee made disallowance of Rs.4,83,38,000/-. The relevant para 7

reads as follows:

“ Disallowance u/s.14A

During the year assessee has earned dividend income of Rs.2,6I,75,497/- which has been claimed as exempt income u/s.I0(34) of the Act. On perusal of the balance sheet it is found that the assessee's investment which was at Rs.93.I0 crore as on 01.04.2009 has increased to Rs,I37.79 crores as on 31.03.2010. During the year under consideration assessee has claimed interest and financial charges at Rs.40.39 crores in the Profit & Loss account.

On perusal of balance sheet it is found that assessee's interest bearing loan fund has increased from Rs.352.38 crore as on 01.04.2009 to Rs.426.9I crore as on 31.03.2010. Though there is increase in share capital, reserve and surplus from Rs. 458.33 crore as on 01.04.2009 to Rs.606.63 crore as on 31.03.2010 but there is also increase in fixed assets from Rs.449.60 crore as on 01.04.2009 to Rs.635.69 crores as on 31.3.2010. There is CWIP at the end of year to the tune of Rs.272.I0 crore as on 31.3.2010. Looking to the source of fund and its utilization it is clear that the assessee has no such huge surplus fund which is utilized for investment purpose.

Vide questionnaire dated 27.11.2012, assessee was asked to furnish reply regarding disallowance u/s.I4A of the Act for which assessee in its reply dated 28.01.2013 submitted as under.

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"We would like to inform your honour that during die year under consideration the company has not traded any share resulting any capital gain/loss. Disallowance of any expenditure u/s.I4A of Income Tax Act, 1961 is therefore does not arise."

Though there may not be trading activities in shares or securities during the year but it is fact that in die balance sheet, the investment in shares has been increased. From the Schedule-E of the balance sheet related to investment it is also facts that assessee is dealing in various mutual funds sale & purchase throughout the year. The assessee has also received the dividend income of Rs.2,61,75,497/- during die year.

Therefore, the reply of the assessee is not satisfactory on legally and factually. The assessee failed to prove to the satisfaction that no interest bearing loan fund is utilized for the investment purpose. The assessee failed to submit separate account for investment which is formed by the income which is not interest bearing fund. In absence of separate investment account, it is presumed that investment was taken place from common accounts which consist of borrowed fund, over draft account and other trading account utilized for business purpose.

There is separate tax treatment for business and investment in the Income Tax Act. Since the investment activities and the business activities has its separate nature in principle and no expenditure/ interest is allowable on investment activities. If the interest bearing business fund would have not utilized for investment purpose the interest payment expense would have been reduced. The assessee has diverted borrowed business funds to die investment activities and die interest on the funds diverted from the business, the claim of interest is not allowable from the profit of the business. Even if mixed funds were diverted, interest u/s. 36 (I) (iii) is not allowable by virtue of the onus being on a person who is in the special knowledge of facts in terms of Sec. 106 of the Evidence Act. Therefore, the assessee has diverted the business fund for the non business purpose and the therefore, interest and other expenses to be disallowed as per provision u/s.I4A r.w. Rule 8D.

In the income tax Act, as per provisions of Section 14A wherein, any expenses incurred for earning exempt income is disallowable. In the circumstacn3s to draw support from the amendment made by the Finance Act, 2006 in section 14A and rule 8D inserted by the Income Tax (5th amendment) Rules, 2008 following the principle of “ contemporaneous exposition”.

The assessee has earned dividend income during the year. In the light of above, disallowance of expenses for income not includible in total income as per Rule 8D is calculated as under:

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Working of Disallowance u/ s I4A [Rule 8D] Data :-I Interest a) Interest paid (30.80 cr+3.20 cr) 34 crores 2 Average Total Investments Opening total Investments as on 01-04-2009 9.3.10 cr Closing total Investments as on 31-03-2010 137.79 cr Total [ Opening + Closing ] 233.88 cr Average Total Investments 115.445 CR 3 Average Assets Opening Assets as on 01-04-2009 810.71 crores Closing Assets as on 31-03-2010 1033.54 crores Total [ Opening + Closing ] 1844.25 crores Average Total Assets 922.125 cr Working of Disallowance under Rule 8D (i) Expenditure directly attributable to exempt income (ii) (li) Interest 34 (Int.) x 115.445 (average invt. = 4.2566 cro 922.125 (Average total assets) (iii) 0.5% of average investment 0.5% 115.445 cr 0.5772 cr Total disallowance A+B 4.8338 cro Accordingly, as per calculation as above, disallowance worked out at ,000/- and same is disallowed.”

CIT(A) after considering the submission and contention of the assessee

confirmed the addition with the following observations and findings:

“ I have considered the matter. I find some merit in the submission of the appellant in so far as computation of disallowance under Rule 8D r.w.s. 14A is concerned. The appellant's submission that the AO has not recorded his satisfaction for resorting to the disallowance under Rule 8D r.w.s. 14A is not supported with any material or evidence. Even otherwise, the satisfaction of the AO Is discernible in the assessment order itself when the AO has given a finding that interest bearing funds or mixed funds have been diverted for investment activities generating exempt income. However,-the computation of disallowance by the AO suffers from serious flaws since the AC, while computing the disallowance u/s,14A, has considered even the interest on long term loans taken earlier and for specific purposes. The AO has wrongly taken all investments for computing the disallowance under Rule 8D instead of taking only the investments

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which earn exempt income. Interest for an amount of Rs.30.8 crores was paid to the banks on term loans, hence such loans could not have been used for investments in mutual funds for. which such Interest has no nexus with earning of exempt income. The AO has wrongly considered average of all the investments rather than only investments which give rise to exempt income as required under Rule 8D(2)(ii). The AO has also taken average assets wrongly while calculating the disallowance under Rule 8D since the opening asset as on 1.4.2009 at Rs.810.71 crores and closing assets as on 31.3.2010 at Rs.1033.54 crores taken by the AO are actually net assets after deducting of liabilities. In this regard the appellant has correctly taken the average assets as per the balance sheet which is calculated before deduction of current liability and provisions. I have gone through the alternative plea and the computation thereof made by the appellant in regard to the possible disallowance under Rule 8D and find that the same Is done in accordance with the provisions under Rule 8D r.w.s. 14A. In view of the above, the AO is directed to disallow expenses for an amount of Rs.48,17,000/- under Rule 8D as correctly computed by the appellant instead of the amount of Rs.4,83,38,000/-.”

12 In view of above, we are of the considered view that the AO has

adjudicated the issue with detailed deliberations and after considering the

entire facts and circumstances of the case. The assessee was also provided

due opportunity of hearing by the AO and thereafter the AO observed that

the assessee has failed to prove to the satisfaction that no interest bearing

loan fund is utilised for the investment purpose and to submit separate

account for investment which is formed by the income which is not interest

bearing fund. The AO further observed that in absence of separate

investment account, it is presumed that investment was taken place from

common accounts which consist of borrowed fund, over draft account and

other trading account utilised for business purpose meaning thereby the AO

categorically held that the assessee has used interest bearing borrowed

funds, over draft and other trading funds for the purpose of investment

which earned exempt dividend income of the assessee. It was also P a g e 11 | 15

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observed by the authorities below that investment activities and business

activities has its separate nature in principle and no expenditure is allowable

on investment activities, which brings exempt dividend income of the

assessee. The AO went up to the extent to observe that if the interest

bearing fund would have not utilised for investment purpose, the interest

payment expense would have been reduced in accordance with the taxable

income of the assessee.

invoking the provisions of section 14A r.w. rule 8D of I.T.Rules. However,

the ld CIT(A) after accepting the alternate plea of the assessee and the

computation made thereto by the AO, restricted the disallowance to the

amount of Rs.48,17,000/- under Rule 8D. After carefully considering the

orders of lower authorities, especially para 5.2 of the CIT(A) order, we are

of the view that the CIT(A) was right in restricting and confirming the

addition to the tune of Rs.48,17,000/-. We, accordingly uphold the findings

of the CIT(A) and dismiss the ground of appeal of the assessee.

ITA No.512/CTK/2014- Revenue’s appeal

CIT(A) is not justified in restricting the disallowance to Rs.48,17,000/- as

against Rs.4,83,38,000/- made by the Assessing officer.

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assessee, we have confirmed the findings of the ld CIT(A). Hence, we

dismiss this ground of appeal of the revenue.

u/s.2(24)(x) of the Act.

deleted the disallowance made by the AO following the decision of this

Bench of the Tribunal in the case of Orissa Sponge Iron & Steel ltd. In ITA

No.273/CTK/2012 order dated 13.7.2012, wherein, it is held that if the

payment is paid before the due date of filing the return, the same is

allowable.

was deposited by the assessee before due date of filing the return of

income u/s.139(1) of the Act. Recently, Hon’ble Delhi High Court in the case

of CIT vs. Bharat Hotels Ltd., (2019) 103 Taxmann.com 295 (Del) held

thus:

“ 7. The issue here concerns the interplay of Section 2(24)(x) of the Act read with Section 36(1)(va) of the Act alongside provisions of the Employees‟ Provident Funds and Miscellaneous Provisions Act, 1952 (especially Regulation 38 of the Employees‟ Provident Funds Scheme, 1952) and the provisions of the Employees‟ State Insurance Act, 1948. The AO had brought to tax amounts which were deducted by the employer/assessee from the salaries and wages payable to its employees, as part of their contributions. It is not in dispute that the employer‟s right to claim deductions under the main part of Section 43-B of the Act is not an issue. The question the AO had to then decide was whether the amounts deducted from the salaries of the

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employees which had to be deposited within the stipulated time (in terms of notification/circular dated 19.03.1964 which was modified on 24.10.1973), as far as the EPF contribution went and the period of three weeks as far as the ESI contributions went. The AO made a tabular analysis with respect to the contributions deducted and actually deposited. The cumulative effect of notifications under the Employees‟ Provident Funds Act, 1952 and the Employees State Insurance Act, 1948 was that in respect of the EPF Scheme contributions the deductions were to be deposited within 15 days of the succeeding wage period with a grace period of 5 days; for ESI contributions the deposit with the concerned statutory authority had to be made within three weeks of the succeeding wage month/period. The CIT in this case confirmed the additions - made by the AO based on the entire amounts that were disallowed. The ITAT however granted complete relief.

issue is restored to the file of the Assessing Officer to examine the

contributions made with reference to the dates when they were actually

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made and grant relief to such of claim which qualified for such relief in

terms of prevailing provisions of the Act. We clearly obverse that the

assessee would be entitled to deductions in terms of section 36(1)(va) of

the Act. Accordingly, this ground is allowed for statistical purposes.

allowed.

Order pronounced on 16 /12/2019.

Sd/- sd/- (Laxmi Prasad Sahu) (Chandra Mohan Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Cuttack; Dated 16 /12/2019 B.K.Parida, SPS

Copy of the Order forwarded to : 1. The Appellant : /Assessee: Indian Metals and Ferro Alloys Ltd., IMFA Building, Bomikhal, Rasulgarh

Sr.Pvt.secretary ITAT, Cuttack

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