PRINCIPAL COMMISSIONER OF INCOME TAX - 3 vs. PATEL ALLOY STEEL CO. PVT. LTD.

COMMON ORAL ORDER (PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0] As common question of law and facts arise in this group of Tax Appeals and as such with respect to the same assessee but different assessment years and as such arise out of the impugned common   order   passed   by   the   learned   Income   Tax   Appellate Tribunal, Ahmedabad (hereinafter referred to as “Tribunal”), all these Tax Appeals are heard together and present common order is passed. [2.0] Feeling   aggrieved   and   dissatisfied   with   the   impugned common order dated 08.04.2016 passed by the learned Tribunal in ITA No.857/Ahd/2012 for AY 2008­09, the Revenue has preferred the   Tax   Appeal   No.808/2018   with   the   following   proposed questions of law. “[A] Whether the Income Tax Appellate Tribunal is right in law and on facts in deleting disallowance u/s. 40A(2)(b) on   account   of   excess   remuneration   to   directors   of Rs.3,21,96,765/­? [B] Whether the Income Tax Appellate Tribunal is right in law and on facts in deleting the disallowance u/s. 14A of Rs.14,57,995/­   out   of   the   total   disallowance   of Rs.31,17,765/­? [C] Whether the Appellate Tribunal is right in law and on facts in holding that the assessee’s profit earned on the sale fo shares shall be treated as capital gain instead of business income?” [2.1] Feeling   aggrieved   and   dissatisfied   with   the   impugned common order dated 08.04.2016 passed by the learned Tribunal in ITA No.1213/Ahd/2012 for AY 2008­09, the Revenue has preferred the   Tax   Appeal   No.809/2018   with   the   following   proposed questions of law. “[A] Whether the Appellate Tribunal is right in law and on facts in deleting disallowance u/s. 40A(2)(b) on account of excess remuneration to directors of Rs.1,40,99,171/­? [B] Whether   the   Income   Tax   Appellate   Tribunal   has substantially erred in deleting the addition made u/s 145A of the Income Tax Act, 1961?” [2.2] Feeling   aggrieved   and   dissatisfied   with   the   impugned common order dated 08.04.2016 passed by the learned Tribunal in ITA No.2617/Ahd/2012 for AY 2009­10, the Revenue has preferred the   Tax   Appeal   No.810/2018   with   the   following   proposed questions of law. “[A] Whether   the   Income   Tax   Appellate   Tribunal   has substantially   erred   in   law   and   on   facts   in   deleting   the disallowance   of   Rs.36,26,359/­   made   u/s   14A   of   the Income Tax Act, 1961? [B] Whether   the   Income   Tax   Appellate   Tribunal   has substantially   erred   in   law   and   on   facts   in   deleting   the disallowance   made   on   account   of   notional   interest   on delayed refund of security deposits? [C] Whether   the   Income   Tax   Appellate   Tribunal   has substantially   erred   in   law   and   on   facts   in   deleting   the disallowance of excess payment on Director’s remuneration of Rs.1,33,39,000/­ u/s 40A(2)(b) of the Income Tax Act, 1961?” [2.3] Feeling   aggrieved   and   dissatisfied   with   the   impugned common order dated 08.04.2016 passed by the learned Tribunal in ITA No.2921/Ahd/2012 for AY 2009­10, the Revenue has preferred the   Tax   Appeal   No.811/2018   with   the   following   proposed questions of law. “[A] Whether   the   Income   Tax   Appellate   Tribunal   has substantially   erred   in   law   and   on   facts   in   deleting   the addition of Rs.2,31,36,464/­ made u/s. 145A of the Income Tax Act, 1961? [B] Whether   the   Income   Tax   Appellate   Tribunal   has substantially erred in law and on facts in deleting the the disallowance of excess payment on Director’s remuneration of Rs.4,31,56,827/­ u/s 40A(2)(b) of the Income Tax Act, 1961?” [2.4] Feeling   aggrieved   and   dissatisfied   with   the   impugned common order dated 14.09.2017 passed by the learned Tribunal in ITA No.707/Ahd/2015 for AY 2010­11, the Revenue has preferred the   Tax   Appeal   No.250/2018   with   the   following   proposed questions of law. “[A] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance made u/s. 14A r.w. Rule 8D? [B] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance of Rs.1,26,09,556/­ made on account of Directors remuneration u/s 40A(2)(b) of the Act?” [2.5] Feeling   aggrieved   and   dissatisfied   with   the   impugned common order dated 14.09.2017 passed by the learned Tribunal in ITA No.953/Ahd/2015 for AY 2010­11, the Revenue has preferred the   Tax   Appeal   No.251/2018   with   the   following   proposed questions of law. “[A] Whether the Appellate Tribunal has erred in law and on facts in deleting the addition of Rs.3,81,99,984/­ on account   of   disallowance   of   Directors   Remuneration   u/s. 40A(2)(b) of the Act? [B] Whether the Appellate Tribunal has erred in law and on facts in deleting the addition of Rs.2,05,61,969/­ made u/s 145A of the Act?” [2.6] Feeling   aggrieved   and   dissatisfied   with   the   impugned common order dated 14.09.2017 passed by the learned Tribunal in ITA No.708/Ahd/2015 for AY 2011­12, the Revenue has preferred the   Tax   Appeal   No.252/2018   with   the   following   proposed questions of law. “[A] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance made u/s. 14A r.w. Rule 8D? [B] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance of Rs.4,37,73,636/­ made on account of Directors Remuneration u/s 40A(2)(b) of the Act?” [2.7] Feeling   aggrieved   and   dissatisfied   with   the   impugned common order dated 14.09.2017 passed by the learned Tribunal in ITA No.974/Ahd/2015 for AY 2011­12, the Revenue has preferred the   Tax   Appeal   No.253/2018   with   the   following   proposed questions of law. “[A] Whether the Appellate Tribunal has erred in law and on facts in deleting the disallowance of Rs.4,37,73,636/­ made on account of Directors Remuneration u/s 40A(2)(b) of the Act? [B] Whether the Appellate Tribunal has erred in law and on facts in deleting the addition of Rs.2,33,55,558/­ made u/s 145A of the Act?” [2.8] Feeling aggrieved and dissatisfied with the impugned order dated   15.01.2018   passed   by   the   learned   Tribunal   in   ITA No.3158/Ahd/2015 for AY 2012­13, the Revenue has preferred the Tax Appeal No.646/2018 with the following proposed questions of law. “[A] Whether the Appellate Tribunal was right in law and on facts in deleting the disallowance u/s. 14A of the Act, 1961 as disallowed by the AO? [B] Whether the Appellate Tribunal was right in law and on facts in deleting the disallowance u/s 40A(2)(b) of the Act, 1961 as disallowed by the AO?” [2.9] Feeling aggrieved and dissatisfied with the impugned order dated   15.01.2018   passed   by   the   learned   Tribunal   in   ITA No.3340/Ahd/2015 for AY 2012­13, the Revenue has preferred the Tax Appeal No.647/2018 with the following proposed questions of law. “[A] Whether the Appellate Tribunal was right in law and on facts in deleting the disallowance u/s. 40A(2)(b) of the Act, 1961 as disallowed by the AO? [B] Whether the Appellate Tribunal was right in law and on facts in confirming the decision of the CIT(A) in deleting the addition u/s 145A of the Act, 1961? as disallowed by the AO?” [3.0] At the outset it is required to be noted that in most of the appeals the proposed question viz. deleting the disallowance under Section   40A(2)(b)   on   account   of   excess   remuneration   to   the Directors; deleting the disallowance under Section 14A deleting the addition   under   Section   148A   of   the   Income   Tax   Act,   1961 (hereinafter referred to as “IT Act”) with respect to the unutilized CENVAT credit would be common. [4.0] For   the   sake   of   convenience   the   facts   in   Tax   Appeal No.808/2018   arising   out   of   the   ITA   No.857/Ahd/2012   for   AY 2008­09 are narrated which in nut­shell are as under: [4.1] That the assessee filed the return of income for AY 2008­09 declaring total income at Rs.24,20,54,250/­. A revised return was filed   on   17.03.2009   declaring   the   total   income   at Rs.23,23,95,910/­.   That   during   the   course   of   the   assessment proceedings, it was noticed by the Assessing Officer that there is an extraordinary increase in the salary paid to the Directors (from Rs.94,97,449/­ paid in the FY 2003­04 to Rs.4,00,31,600/­ paid in the year 2007­08 in the case of Director Shri K.H. Jhaveri) and (from Rs.4,50,000/­ paid in FY 2005­06 to Rs.60,01,750/­ paid in FY  2007­08   in   the   case   of   Director   Shri   Abhishek   K.  Jhaveri). Therefore,   vide   notice   dated   13.09.2010,   the   assessee   was requested to furnish justification. Vide letter dated 29.09.2010 the assessee submitted the justification. However, the Assessing Officer was not satisfied with the said justification for the increase in the renumeration   of   Directors   and   granting   of   10%   increase   in renumeration   every   year,   the   Assessing   Officer   determined   the renumeration at Rs.1,32,96,429/­ in the case of Director Shri K.H. Jhaveri and determined at Rs.5,40,000/­ in the case of Director Shri Abhishek K. Jhaveri. Consequently, the Assessing Officer made the disallowance under Section 40A(2)(b) of Rs.2,67,35,171/­ out of the renumeration of Shri K. H. Jhaveri and made disallowance of of Rs.54,61,570/­ out of the remuneration paid to Director Shri Abhishek K. Jhaveri. Therefore, the total disallowance worked out to Rs.3,21,96,741/­. [4.2] During   the   course   of   the   assessment   proceedings   the Assessing   Officer   found   from   the   statement   of   computation   of income that the assessee has shown the income as exempt from tax under Section 10. The Assessing Officer noticed that however no disallowance   under   Section   14A   has   been   made   in   respect   of expenditure incurred by the assessee in respect of the said income which does not form part of the total income under the IT Act. The assessee was requested to explain why disallowance under Section 14A shoud not be made in respect of the expenditure attributable to the exempt income. The assessee replied to the same, however the   Assessing   Officer   was   not   satisfied   with   the   explanation submitted   by   the   assessee   and   held   that   the   amount   of Rs.31,17,765/­ to be added back to the profit as per Profit & Loss accounts   for   the   purpose   of   computing   “Profits   and   gains   of business”, by making disallowance of the aforesaid amount under Section 14A of the IT Act. During the course of the assessment proceedings and from the statement of computation of income the Assessing Officer noticed that the assessee has declared short term capital   gain   of   Rs.1,61,40,648/­   and  long   term   capital   gain   of Rs.82,15,286/­. The Assessing Officer noticed that the assessee has continuously been trading in shares in past years also. On analysis of the transaction of purchase and sale of shares traded by the assessee, the Assessing Officer was of the opinion that nature of the profit earned by the assessee on sale and purchase of shares was not capital gain but it was business profit earned by the assessee in trading   activities   of   shares   carried   out   by   the   assessee   and therefore, the sum shown by the assessee under the head “capital gain” be treated as incme chargeable under the head “profits and gains of business from business or profession”. [4.3] It appears that during the course of assessment proceedings the   assessee   was   requested   to   explain   whether   at   the   time   of valuing the closing stock, the amount of tax paid or incurred by the assessee to bring the goods to the place of its location has been included in the value, as provided under Section 145. The assessee replied   to   the   same   and   submitted   that   as   per   the   relevant accounting   standards   the   value   of   the   purchases   of   the   raw materials value of the sales and closing stock are shown as CENVAT etc. as per the accounting method being followed. However, the Assessing Officer was not satisfied with the same and held that as per the provision of Section 145A, the value of the closing stock shown by the assessee is required to be further increased by the amount of taxes paid on the raw material lying in the closing stock. Accordingly, the Assessing Officer held that the value of the closing stock of the assessee is to be increase by Rs.47,41,915/­ being the taxes paid attributable to the raw material lying in the closing stock. Consequently, the Assessing Officer framed the assessment and assessed the income of the assessee at Rs.32,97,03,690/­. [4.4] Feeling aggrieved and dissatisfied with the assessment order and making above disallowances more particularly under Section 40A(2)(b) and section 14A, treating the income from sale of shares as business income making addition under Section 145A of the IT Act, the assessee preferred the appeal before the learned CIT(A). The learned CIT(A) partly allowed the appeal and confirmed the disallowance made under Section 40A(2)(b) of the IT Act in the case   of   Shri   Abhishek   K.   Jhaveri.   Regarding   disallowance   of Rs.2,67,35,171/­ for the case of Director Shri K.H. Jhaveri, the learned   CIT(A)   confirmed   the   disallowance   to   the   extent   of Rs.1,81,24,270/­   and   directed   to   delete   the   balance   of Rs.1,40,99,171/­. [4.5] Now, so far as the disallowance made under Section 14A read with Rule 8D of Rs.31,17,765/­, the learned CIT(A) deleted the disallowance made under Section 14A of the IT Act. [4.6] Now, so far as treating the income from sale of shares as business   income   and   disallowing   the   claim   of   the   assessee   on capital   gain,   the   learned   CIT(A)   confirmed   the   action   of   the Assessing   Officer   by   observing   that   the   assessee   was   regularly engaged   in   share   trading   business   during   the   year   under consideration and earlier orders. [4.7] Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A) the assessee preferred the appeal before hte learned Tribunal being ITA No.857/Ahd/2012 for AY 2008­09. The Revenue also preferred the appeal being ITA No.1213/Ahd/2012 for the AY 2008­09. That by impugned common order the learned Tribunal has allowed the appeal preferred by the assessee being ITA No.857/2012 and has dismissed the appeal preferred by the Revenue and has deleted the disallowance under Section 40A(2) (b)   made   by   the   Assessing   Officer   on   account   of   excess remuneration to Directors of Rs.3,21,96,765/­ and also directed to delete the disallowance under Section 14A of Rs.14,57,995/­ out of the total disallowance of Rs.31,17,765/­ and also observed and held that the assessee’s profit earned on sale of shares shall be treated as capital gain instead of business income. [4.8] Feeling aggrieved and dissatisfied with the impugned order passed by the learned Tribunal deleting the impugned order passed by the learned Tribunal deleting the disallowances under Section 40A(2)(b) of the IT Act on account of excess remuneration to the Directors; deleting the disallowance under Section 14A read with Rule 8D and holding that the assessee’s profit earned on the sale of shares shall be treated as capital gain instead of business income, the   Revenue   has   preferred   the   Tax   Appeal   Nos.808/2018   and 809/2018 for AY 2008­09 with the following proposed questions of law. Tax Appeal No.808/2018 “[A] Whether the Income Tax Appellate Tribunal is right in law and on facts in deleting disallowance u/s. 40A(2)(b) on   account   of   excess   remuneration   to   directors   of Rs.3,21,96,765/­? [B] Whether the Income Tax Appellate Tribunal is right in law and on facts in deleting the disallowance u/s. 14A of Rs.14,57,995/­   out   of   the   total   disallowance   of Rs.31,17,765/­? [C] Whether the Appellate Tribunal is right in law and on facts in holding that the assessee’s profit earned on the sale fo shares shall be treated as capital gain instead of business income?” Tax Appeal No.809/2018 “[A] Whether the Appellate Tribunal is right in law and on facts in deleting disallowance u/s. 40A(2)(b) on account of excess remuneration to directors of Rs.1,40,99,171/­? [B] Whether   the   Income   Tax   Appellate   Tribunal   has substantially erred in deleting the addition made u/s 145A of the Income Tax Act, 1961?” Similar   orders   are   passed   by   the   learned   Tribunal   with respect to other assessment orders deleting the disallowance under Section 40A(2)(b) on account of excess renumeration to Directors; deleting   the   disallowance   under   Section   14A   and   the   addition under Section 145A of the IT Act. [5.0] Heard Shri Manish Bhatt, learned Senior Advocate appearing on behalf of the Revenue and Shri B.S. Soparkar, learned Advocate appearing on behalf of the assessee in respective appeals. [5.1] The chart showing the issues in respective Tax Appeals is as under: Sr. No. ITA No. Tax Appeal No. AY Issue 1. 857/2012 808/2018 2008­09 1. 40A(2)(b) Excess remuneration of to directions 2. 14A r.w. Rule 8D

“16. The appellant has also raised other trivial issues which cannot be accepted in view of the express provisions of sec. 14A r.w. Rule 8D of the IT Act. I have also perused various case laws cited by the appellant but the ratio of these case laws   will  not   apply   in   the   year   under  consideration   since provisions of Rule 8D are applicable for the AY 2008­09. Since the   A.O.   Had   scrupulously   followed   provisions   of   rule   8D accordingly, I do not have any hesitation in agreeing with the contentions of the ld. A.O. In view of above, disallowance of Rs.31,17,765/­ made by the A.O. u/s.14A of the I.T. Act is confirmed. This ground of appeal is dismissed Heard both sides. Relevant records perused. There is no dispute about the fact that the above stated direct expenditure already stands accepted. Ld. Authorized representative draws our attention to assessee’s   P   &   L   account   demonstrating   assessee’s   interest income in the impugned assessment year as Rs.2,59,32,546/­ with  interest  expenditure  of  Rs.9,33,696/­   resulting  in  net positive figure. A co­ordinate bench of the Tribunal in ITA 1277/Kol/2011 DCIT vs. Trade Apartment Ltd. decided on 30­ 03­2012 holds that such an interest disallowance is not to be made in absence of any net interest expenditure upon setting off interest credited to P & L account. Another co­ordinate bench in ITA 2228/Ahd/2012 ITA vs. Karnavati Petro­chem Ltd. Decided on 05­07­2013 echoes the very principle. The Revenue is unable to draw any distinction on facts or law. This proportionate interest disallowance is accordingly deleted.” [6.1] It has come on record that the assessee was already having the   enough   suprlus   funds.   Therefore,   the   said   issue   is   already covered against the Revenue in light of the decision of the Division Bench of this Court in the case of  Principal Commissioner of Income­tax­3 vs. Nirma Credit & Capital (P.) Ltd.  reported in [2017] 85 taxmann.com 72 (Gujarat)  as well as in the case of Principal Commissioner of Income Tax­4 vs. Sintex Industries Ltd.  reported in  [2017] 82 taxmann.com 171 (Gujarat)  and in Gelatine and Chemicals Ltd.  reported in  [2015] 376 ITR 553 (Gujarat). We are in complete agreement with the view taken by the learned Tribunal as observed hereinabove. The issue is already concluded against the Revenue in view of the three decisions of the Divisoin   Bench   of   this   Court.   Under   the   circumstances,   Tax Appeal  /  respective  Tax  Appeals  qua  deleting the  disallowance under Section 14A read with Rule 8D deserves to be dismissed. [6.2] There is one additional issue in Tax Appeal No.810/2018 arising out of the ITA No.2617/Ahd/2012  for AY 2009­10 viz. deleting  disallowance   made   by   the   AO  on   account   of   notional interest on delayed refund of security deposits. It is required to be noted that it has been found that no interest was due in the year under consideration – AY 2009­10. It has come on record and it is not   disputed   that   infact   the   assessee   had   already   received   his security amount latest by 23.08.2007 relevant for AY 2008­09 only and   not   to   the   impugned   AY   2009­10. Therefore,   as   rightly observed by the learned CIT(A) as well as the learned Tribunal the deemed interest could not have been made in the assessment year under consideration i.e. AY 2009­10. Under the circumstances, the learned Tribunal has rightly deleted the disallowance  made on account of notional interest on delayed refund of security deposits. [7.0] In view of the above and for the reasons stated above, the following order is passed.