PR COMMISSIONER OF INCOME TAX CENTRAL vs. M/S DEEPAK VEGPRO PVT LTD

In both these appeals common question of law and facts are involved hence they are decided by this common judgment.

By way of these appeals, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee and dismissed the appeal of the department.

Counsel for the appellant has framed the following substantial questions of law:- Appeal No.297/2017 (i) Whether on the facts and in the circumstances of the case the learned ITAT is justified in deleting the addition of Rs.39,82,710/- made by AO on account of disallowance under Section 14A read with Rule 8D. (ii) Whether on the facts and in the circumstances of the case the learned ITAT is justified deleting the addition of Rs.26,52,569/- made by the AO u/s 80IA. (iii) Whether on the facts and in the circumstances of the case the learned ITAT is justified deleting the addition of Rs.1,00,45,602/- made by the AO on account of disallowance of claim of VAT reimbursement. Appeal No.299/2017 (i) Whether on the facts and in the circumstances of the case the learned ITAT is justified in deleting the addition of Rs.53,27,138/- made by AO on account of disallowance under Section 14A read with Rule 8D. (ii) Whether on the facts and in the circumstances of the case the learned ITAT is justified deleting the addition of Rs.1,63,56,577/- made by the AO on account of disallowance of claim of VAT reimbursement.

The facts of the case are that the assessee company is engaged manufacturing of Oil and Vegetable Ghee by crushing of oil seeds. Besides oil seed crushing, assessee company is also manufacturing the tin container, which is an incidental acitvity for the purpose of attainment of its main object. The company was (3 of 19) [ITA-297/2017] also engaged in power generation from Wind Mills situated in Jaisalmer District. The company has also established a new Division at Durgawati, Bihar for manufacturing of Vanspati Ghee and production started on 6.8.2007. This nature of activities was carried in the earlier year and during the year under consideration there is no change in nature and style of manufacturing operations. The assessee company is having the manufacturing operations at 1, Old Industrial Area Itarana Road, Alwar.

Now the issue is squarely covered by the decision of this court in Tax Appeal No.136/2012 (The Commissioner of Income Tax, Alwar vs. M/s. Deepak Vegpro Pvt. Ltd.) decided on 3.8.2017 wherein this court while considering the matter observed as under:- 3.2The other issue regarding 14A is squarely covered by the decision of Bombay High Court in Godrej & Boyce Income Tax & anr. reported in (2010) 328 ITR 81 which has been now confirmed by the Supreme Court in (2017) 81 taxmann.com 111 (SC) wherein it has been observed as under:- “36. Section 14A as originally enacted by the Finance Act of 2001 with effect from 1.4.1962 is in the same form and language as currently appearing in Sub-section (1) of Section 14A of the Act. Sections 14A (2) and (3) of the Act were introduced by the Finance Act of 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that Sub- sections (2) and (3) of Section 14A is retrospective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need not and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what

We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely

In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002- 2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the Assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. Commissioner of Income Tax (1992) 193 ITR (SC) 321 [At Page 329]. We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have (6 of 19) [ITA-297/2017] allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.” 3.3He also relied upon the decision of this court in DB ITA No.172/2008 SBBJ vs. CIT decided on 19.5.2017 wherein it has been held as under:-

In Godrej & Boyce Manufacturing under:- 36. Section 14A as originally enacted by the Finance Act of 2001 with effect from 1.4.1962 is in the same form and language as currently appearing in Sub-section (1) of Section 14A of the Act. Sections 14A (2) and (3) of the Act were introduced by the Finance Act of 2006 with effect from 1.4.2007. The finding of the Bombay High Court in the impugned order that Sub-sections (2) and (3) of Section 14A is retrospective has been challenged by the Revenue in another appeal which is presently pending before this Court. The said question, therefore, need not and cannot be gone into. Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure

We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment

In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the Assessee had been diverted to earn tax free income despite the availability of (8 of 19) [ITA-297/2017] surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. Commissioner of Income Tax (1992) 193 ITR (SC) 321 [At Page 329]. We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

In view of this, part no.1 of issue regarding exemption u/s 14A stand concluded. The income which has been earned from survey made and no loan is taken for investment, the benefit u/s 14A is required to be granted. 5.1In commissioner of Income Tax vs. Reliance Utilities & Power Ltd. (2009) 178 Taxman 135 (Bombay) wherein Bombay High Court held as under:-

From the order of the Assessing Officer the assessee in respect of disallowance of interest amounting to Rs. 4.40 crores preferred an Appeal to the C.I.T. (Appeals). It was the contention of the Assessee that the assessee had invested Rs. 389.60 in Reliance Gas Limited and Rs. 1.01 in Reliance Strategic Investments Limited. The Assessee themselves were in the business of generation of power. The Companies in which the investments were made, were in the energy sector. Investments were made mainly during January, 2000 to March, 2000. It was the (9 of 19) [ITA-297/2017] submission of the Assessee that they had earned regular business income from distribution of power and investments made were in the companies in energy sector and were with a view to build long term business prospects. Investments were in the regular course of business and accordingly no part of interest can be disallowed when the fund is utilized for the purpose of business. It was also pointed out that respondent had borrowed Rs. 43.62 crores by way of issue of Debentures and the said amount was utilised as capital expenditure and inter corporate deposit. It was the submission that no part of the interest bearing fund have gone into investments in the two companies. In so far as funds are concerned it was pointed out that income from operation of the company was Rs. 418.04 crore which was evenly distributed. Considering this, till December, 1999 the appellant had earned Rs. 313.53 crore from its operation. It had raised capital of Rs. 7.90 crores and had also received interest free deposit of Rs. 10.03 crores. Also it had recovered Rs. 39.04 from its debtors. It was also pointed out that considering the balance sheet for the year ending 31st January, 2000 the availability of interest free fund was as under: Share Capital

00 Reserves & Surplus

00 Depreciation reserves 95.39 –------------ Total interest free fund 396.19 –------------- It was, therefore, submitted that from the analysis of balance sheet as on 31st March, 2000 the respondent had enough interest free funds at its disposal for making investment. In the light of the above material the C.I.T. (Appeals) held that it agreed with the contention advanced by the Assessee that they had enough interest free fund at its disposal for investment and accordingly deleted the addition of Rs. 4,40,00,000/- made by the Assessing Officer and directed him to allow the same under Section 36(1)(iii) of the Income Tax Act.

If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's

The above finding has been affirmed by the Tribunal in following terms:

We have given our careful consideration to the rival contentions. In this case, the Assessing Officer has presumed that the investment in shares had been made by the assessee out of borrowed funds. He has accordingly estimated the interest payable in respect of such borrowed funds to make a disallowance under Section 14A. This finding has been disputed by the assessee as, according to it, no borrowed funds have been utilised for the purpose of acquisition of shares. In our considered view, the decision

We have heard learned Counsel for the parties.

The contention raised on behalf of the Revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with theassessee was in common kitty, as held by this Court

We do not find any merit in this submission. The judgment

The Assessing Officer disallowed the deduction of interest of Rs. 17,31,926/- paid on the borrowed funds under Section 14A of the Act and added it back to the total income of the Assessee. This issue was carried in appeal by the Assessee. CIT(Appeals) accepted the Assessee's explanation deleted the addition making following observations:

The facts of the case and arguments of the Appellant have been considered. The Appellant had utilized own funds for making investments in shares, debentures, etc. The loan availed from the Power Finance Corporation was entirely utilized for business purpose and the interest paid was eligible for deduction Under Section 36(1)(iii) of the I.T. Act. There was no finding that any expenditure by way of interest was incurred in respect of the investments in securities and shares and accordingly the disallowance Under Section 14A is not justified. The Assessing Officer is directed to delete the allowance.

Revenue carried the issue in appeal before the tribunal. Tribunal by impugned judgment confirmed view of the CIT (Appeals) holding as under:

We have heard the rival submissions and perused the orders of the lower authorities and the material available on record. In the instant case, the Assessee paid interest of Rs. 17.31 lakhs to Power Finance Corporation on the sum of Rs. 3.83 crores borrowed from them during the year under appeal. The Assessee has also made investment of Rs. 30.79 crores in shares, debentures and bonds and shown tax free income of Rs. 5.68 crores earned on the investment made. The A.O. was of the view that the Assessee has made huge investment of Rs. 30.79 crores for earning tax free income and for this reason, the Assessee has to resort to borrow funds for his other business purposes. Thus, the borrowing has a nexus with the tax free investment and, therefore, he disallowed the interest paid by the Assessee. In appeal, the Ld. CIT(A) after considering the submissions of the Assessee, held that the entire borrowed funds was utilized by the Assessee for its business purposes and, therefore, the A.O. was not justified in disallowing the claim for deduction of interest for Rs. 17.31 lakhs to the Assessee. We find that in the instant case it is not in dispute that the Assessee has utilized its own funds for the purpose of making investment in shares, etc. from which tax free income were earned. It is also not in dispute that the interest bearing borrowed funds were utilized for its own business purposes from which taxable income were earned by the Assessee. The only grievance of the A.O. is that, the Assessee has arranged the above affairs in such a manner so as to reduce its tax liability. The A.O. was of the view that as the Assessee has not invested its (15 of 19) [ITA-297/2017] own fund for earning tax free income, it would not have required to borrow interest bearing funds for its own business. In this view of the matter, the A.O. Observed that interest bearing funds had a nexus with the tax free income of the Assessees. In this regard, the Ld/D.R. also placed reliance on the decision of the Hon'ble Delhi Special Bench of the Tribunal in the case of Aquarius Travels Pvt. Ltd. v. ITO 111 ITD 53 (SB) (Del.) wherein it is held that where tax free income was earned by the Assessee by making investment out of borrowed funds, then the proportionate amount of interest on funds utilized for earning tax free income by the Assessee was to be disallowed. It is thus, observed that the above decision is not applicable to the facts of the instant case as in the instant case it is not in dispute that the borrowed funds were utilized for its own business purposes and the investment in earning tax free income were made out of own interest free funds. In our considered opinion, the Assessee is fully justified in arranging its affairs in such a manner where his tax liability is reduced provided the Assessee does not resort to any illegal means or enter into a sham transaction for the said purpose. It is the prerogative of the Assessee to use its own fund in the manner in which it considers proper. The Revenue cannot dictate the Assessee that how the Assessee should use its own fund. Thus in our considered opinion the A.O.'s approach in the instant case was not justified. The nexus between the interest bearing fund ant interest free investment as claimed by the A.O. was not correct when it is not in dispute that the own funds were utilized for making tax free investment. Under these circumstances, we do not find any infirmity in the order of the Ld. CIT(A) which is confirmed and the ground of appeal of the Revenue is dismissed.

Having thus heard learned Counsel for both sides and having perused the orders on record, we find that in the present case Assessee had sufficiently explained its investment for borrowed funds pointing out that loan was obtained in assessment year 1997-1998 and its majority of the investment for tax free security were made before the said period. Only a small portion of investment was made subsequently. Assessee had demonstrated that it had other sources of investment and that therefore, according to Assessee no part of the borrowed fund could be stated to have been diverted to (16 of 19) [ITA-297/2017] earn tax free income. When CIT(Appeals) and tribunal both on facts in the present case found that the Assessee did not invest borrowed fund for earning interest free income, we are of the view that not applying provision of Section 14A of the Act for taxing such interest was justified. No question of law therefore, is arising for our consideration.

4 In Director of Income Tax (IT)-II vs. BNP Paribus SA (2013) 214 Taxman 548 (Bom) wherein Bombay High Court held as under:-

So far as question (b) is concerned, the Tribunal in the impugned order upheld the finding of the CIT(A) wherein a finding of fact has been reached that the dividend earned on shares by the respondent assessee is from its investments in shares out of the respondent- assessee's own funds. Consequently, the Bombay High Court held as under:-

We do not agree. In the case at hand, as recorded by the ITAT, undisputedly the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax free securities. The ITAT therefore held that there was no basis for deeming that the Assessee had used the borrowed funds for investment in tax free securities. On this factual aspect, the ITAT did not find any merit in the contention raised by the Revenue and therefore,

We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are (19 of 19) [ITA-297/2017] unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected." 4.We have heard counsel for the parties.

1 In view of the circular of CBDT, for both the issues, the appeal is not pressed. Both the issues are answered in favour of the assessee and against the department.

2 In respect of the issue admitted on 11.12.2015, in view of the observations made by the Supreme Court as referred hereinabove, the issue is answered in favour of the assessee and against the department. It is made clear that we have not disturbed the finding of the tribunal in view of the Supreme Court judgment.

In view of the above, no substantial question of law arises.

The appeals stand dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 30-31.