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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 868/JP/16
आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 868/JP/16 fu/kZkj.k o"kZ@Assessment Year : 2010-11 cuke M/s KGK Diamonds (I) Pvt. Ltd., The Dy. Commissioner of DE-4011-16, Tower D, 4th Floor, Vs. Income-tax, Central Bharat Diamond bourse, Bandra Kurla Circle-2, Jaipur. Complex, Bandra (East), Mumbai- 400051, Maharashtra. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AADCK7579A vihykFkhZ@Appellant izR;FkhZ@Respondent vk;dj vihy la-@ITA No. 869/JP/16 fu/kZkj.k o"kZ@Assessment Year : 2011-12 cuke M/s KGK Diamonds (I) Pvt. Ltd., The Dy. Commissioner of DE-4011-16, Tower D, 4th Floor, Vs. Income-tax, Central Bharat Diamond bourse, Bandra Kurla Circle-2, Jaipur. Complex, Bandra (East), Mumbai- 400051, Maharashtra. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AADCK7579A vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri S.R. Sharma (C.A.)& Shri Rajnikant Bhatra (C.A.) jktLo dh vksj ls@ Revenue by : Shri Varinder Mehta (CIT) lquokbZ dh rkjh[k@ Date of Hearing : 28/09/2017 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 31/10/2017 vkns'k@ ORDER
ITA No. 868&869/JP/2016 M/s KGK Diamonds (I) Pvt. Ltd. Vs. DCIT
PER: VIKRAM SINGH YADAV, A.M.
These are two appeals filed by the assessee against the order of ld. CIT(A)-4, Jaipur dated 15.07.2016 for A.Y. 2010-11 & 2011-12 respectively. Both these appeals involving common issues were heard together and disposed off by this consolidated order.
ITA No. 868/JP/16
In its appeal for AY 2010-11, the assessee has taken the following grounds of appeal: “1. The learned Commissioner of Income-tax (Appeals) has erred in law and on facts and in the circumstances of the case in confirming disallowance under section 14A r.w.r. 8D to the extent of Rs. 2,08,456/-.
The learned Commissioner of Income-tax (Appeals) has erred in confirming the interest expenses as per rule 8D without appreciating the fact that the learned AO has not recorded his satisfaction having regards to accounts of the appellant.
The learned Commissioner of Income-tax (Appeals) has erred in law and on facts and in the circumstances of the case in confirming disallowances Rs. 65,770/- being 10% of business promotion expenses on estimation basis without appreciating the fact that these expenses were incurred wholly and exclusively for the purpose of business.”
At the outset, the ld. AR submitted that the assessee company was formed on 01.10.2009 by way of conversion of partnership firm,
ITA No. 868&869/JP/2016 M/s KGK Diamonds (I) Pvt. Ltd. Vs. DCIT
KGK Enterprises. The said partnership firm filed its return of income u/s 153A for the period 01.04.2009 to 30.09.2009 and the assessee company filed its return of income u/s 153A for the period 1.10.2009 to 31.03.2010. Both the entities were separately assessed u/s 143(3) r.w. section 153A. In the case of KGK Enterprises for A.Y.2010-11, similar disallowance under identical set of facts was made by the AO by invoking section 14A r.w.r. 8D. It was further submitted that the said disallowance was deleted by the Tribunal in ITA no. 797/JP/15 dated 11.08.2016. It was accordingly submitted that the same may kindly be followed and necessary relief may be provided to the assessee company.
It was further submitted by the ld AR that no disallowance can be made when interest free funds available with the assessee company are much higher than investments made to earn exempt income. In support, reliance was placed on decision of Hon’ble Bombay High Court in case of Reliance Utilities & Power Ltd. 313 ITR 340, Hon’ble Gujarat High Court in case of CIT vs. Gujarat Narmada Valley Fertilizers Co. Ltd. 221 Taxman 479, and Hon’ble Bombay High Court in case of CIT vs. HDFC Bank Ltd. 366 ITR 505. It was further submitted that the said investments were made for acquiring controlling stake and were part of strategic investments and they were not made with an intention of earning tax free income. Accordingly section 14A does not apply to such investment, in support, reliance was placed on decision of Hon’ble Delhi High Court in case of Cheminvest Ltd. v. CIT 378 ITR 33. It was further submitted that disallowance of interest expenditure would not be tenable where AO failed to establish a nexus between interest bearing 3
ITA No. 868&869/JP/2016 M/s KGK Diamonds (I) Pvt. Ltd. Vs. DCIT
funds and investment made. In support, reliance was placed on the decision of Hon’ble Karnataka High Court in case of Karnataka State Industrial & Infrastructure Development Corporation Ltd. 65 taxmann.com 295. It was further submitted that no defect has been pointed out by the ld. AO in the claim of the assessee that no expenses were incurred for the purpose of making investment. It was further submitted that the application of section 14A and rule 8D is not automatic and the AO has to record his objective satisfaction having regard to the accounts of the assessee and in support, the ld AR placed reliance on the decision of Hon’ble Supreme Court in case of Godrej & Boyce Manufacturing Company Ltd. v. DCIT 81 taxman.com 111.
The ld. Dr is heard who has vehemently argued the matter, took us through the findings of the AO and the ld CIT(A) and relied on the order of the said authorities.
We have heard the rival contentions and perused the material available on record. The assessee company has shown investment of Rs. 3,37,26,325/- as on 31.03.2010 which is identical to the amount of investment shown by the partnership firm M/s KGK Enterprises as on 30.09.2009. The Assessing Officer disallowed an amount of Rs. 6,13,432 invoking provisions of section 14A and Rule 8D. On appeal, the disallowance was reduced to Rs. 2,08,456/- by the ld. CIT(A) whereby he allowed setting off of interest income from gross interest expenses while work out disallowance u/s 14A. We find that no fresh investments have been made by the assessee company during the year and the subject investments are the investments which have been 4
ITA No. 868&869/JP/2016 M/s KGK Diamonds (I) Pvt. Ltd. Vs. DCIT
made by and taken over from the partnership firm M/s KGK Enterprises. On similar lines, the AO has made a disallowance in the instant case. In case of KGK Enterprises for AY 2010-11 (in ITA No. 797/JP/15 dated 11.08.2016), we have already taken a view that disallowance under the provisions of Section 14A are not warranted and the relevant findings are contained at para 2.4 of our order which is reproduced as under:- “2.4 We have heard the rival contentions and perused the material available on record. It is noted that the investment worth Rs. 3.37 crores have been made by the assessee in the earlier years and not in the year under consideration. Even if one were to consider the availability of interest free funds during the year, it is noted that partner’s capital account is worth Rs. 115.70 crores. Further, the secured loans availed by the assessee in form of packing Credit Limit (PCL) and Post Shipment Export Finance (PSEF) from various bank are exclusively for the purpose of purchase of raw material, payment of labour charges and other direct expenses and which thus have a end-use restriction and monitoring by the banks towards the manufacturing and export activity of the appellant. In light of above, we agree with the contention of the assessee that giving the availability of interest free funds over and above the secured loans and also the fact that the secured loans had a specific end-use restriction, the investments have been made from its internal accruals in the earlier years and given that no expenditure has been incurred, no disallowance u/s 14A is warranted. Further, the decision of Hon’ble Bombay High Court in case of HDFC Bank Ltd. (Supra) and Hon’ble Gujarat High Court in case of Gujarat Narmada Valley Fertilizers (supra) also supports the case of the assessee. In light of above, ground no. 1 of the assessee is allowed.”
In light of above, following our decision in case of KGK Enterprises referred supra, the disallowance under section 14A is 5
ITA No. 868&869/JP/2016 M/s KGK Diamonds (I) Pvt. Ltd. Vs. DCIT
hereby deleted. The grounds no. 1 and 2 of assessee’s appeal are thus allowed.
Regarding ground No. 3, the AO made disallowance of Rs. 188,366/- being 10% of the total expenses of Rs. 80,83,644/- incurred on various expenses. The ld. CIT(A) confirmed 10% disallowances of business promotion expenses of Rs. 6,57,689/- amounting to Rs. 65,770/- and the balance disallowance was deleted. Now the assessee in appeal against the sustain disallowance of Rs. 65,770/-. The ld. AR submitted that the said disallowance has been confirmed on estimated basis without pinpointing any specific defects in the books of account or vouchers maintained by the assessee company and hence, the same may be deleted. On perusal of orders of the lower authorities, we find that the disallowance has been made on a purely adhoc basis and such adhoc disallowance cannot be sustained in the eyes of law. In the result, disallowance of Rs. 65,770/- is hereby deleted. The ground no. 3 of the assessee’s appeal is thus allowed.
ITA No. 869/JP/16 9. In its appeal for AY 2011-12, the assessee has taken the following grounds of appeal:- “1. The learned Commissioner of Income-tax (Appeals) has erred in law and on facts and in the circumstances of the case in confirming disallowance under section 14A r.w.r. 8D to the extent of Rs. 4,57,407/-.
The learned Commissioner of Income-tax (Appeals) has erred in confirming the interest expenses as per rule 8D without
ITA No. 868&869/JP/2016 M/s KGK Diamonds (I) Pvt. Ltd. Vs. DCIT
appreciating the fact that the learned AO has not recorded his satisfaction having regards to accounts of the appellant.
The learned Commissioner of Income-tax (Appeals) has erred in law and on facts and in the circumstances of the case in confirming disallowances Rs. 65,770/- being 10% of business promotion expenses on estimation basis without appreciating the fact that these expenses were incurred wholly and exclusively for the purpose of business.”
In respect of grounds no. 1 & 2 relating to disallowance u/s 14A, we find that earlier investment have been carried forward to this year and further, the assessee company has made a fresh investment of Rs. 2,36,98,875 (Rs 5,74,25,200/- less Rs. 3,37,26,325/-) during the year under consideration. In this regard, the submission of the assessee is that such investment has been made from internal accruals and not from any borrowed funds and no expenditure has been incurred by the assessee company. In this regard, the Assessing officer following the same reasoning as given in A.Y. 2010-11 has disallowed an amount of Rs. 10,66,010/- which has been sustained by the ld. CIT(A) to the extent of Rs. 4,57,407/-. Similar contentions as raised in ITA No. 868/JP/16 have been made before us by the ld. AR. Following our reasoning as given in ITA no. 868/JP/16, our findings and directions contained therein shall apply mutatis mutandis to this appeal as well. In the result, the disallowance under section 14A is hereby deleted. The grounds no. 1 and 2 of assessee’s appeal are thus allowed.
Regarding ground No. 2, the ld. CIT(A) has confirmed the disallowance of Rs. 65,770/- being 10% of the business promotion 7
ITA No. 868&869/JP/2016 M/s KGK Diamonds (I) Pvt. Ltd. Vs. DCIT expenses on an estimated basis. The ld. AR submitted that the said disallowance has been confirmed on estimated basis without pinpointing any specific defects in the books of account or vouchers maintained by the assessee company and hence, the same may be deleted. On perusal of orders of the lower authorities, we find that the disallowance has been made on a purely adhoc basis and such adhoc disallowance cannot be sustained in the eyes of law. In the result, disallowance of Rs. 65,770/- is hereby deleted. The ground no. 3 of the assessee’s appeal is thus allowed. In the result, both the appeals filed by the assessee are allowed. Order pronounced in the open court on 31/10/2017 Sd/- Sd/- ¼dqy Hkkjr ½ ¼foØe flag ;kno½ (Kul Bharat) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 31/10/2017. *Santosh. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s KGK Diamonds (I) Pvt. Ltd., DE- 4011-16, Tower D, 4th Floor, Bharat Diamond bourse, Bandra Kurla Complex, Bandra (East), Mumbai-400051, Maharashtra. 2. izR;FkhZ@ The Respondent- Dy. Commissioner of Income-tax, Central Circle-2, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 6. xkMZ QkbZy@ Guard File {ITA No. 868 &869/JP/2016} vkns'kkuqlkj@ By order, सहायक पंजीकार@Aेेज. त्महपेजतंत