ANUSHAKTI CHEMICALS & DRUGS LTD.(FORMERLY AARTI HEALTHCARE LTD NOW MERGED WITH AARTI INDUSTRIES LIMITED.),MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 15(1)(2), MUMBAI

1 M/s Anushakti Chemicals & Drugs Ltd. Assessment Year-2012-13 आयकर अपीलीय अिधकरण “ए” "ायपीठ मुंबई म"। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI "ी श""जीत दे,"ाियक सद" एवं "ी मनोज कुमारअ"वाल, लेखा सद" के सम"। BEFORE SHRI SAKTIJIT DEY, JM AND SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपील सं./ (िनधा"रण वष" / Assessment Year:2012-13) Anushakti Chemicals & Drugs Ltd. ACIT -15(1)(1) [Formerly Aarti Healthcare Ltd. now merged Mumbai. बनाम/ with Aarti Industries Ltd.] Vs. 2nd Floor, Udyog Kshetra, Mulund Goregaon Link Road, Mumbai-400 080. "थायीलेखासं./जीआइआरसं./PAN/GIR No. AAACA-3517-H (अपीलाथ"/Appellant) (""थ" / Respondent) : अपीलाथ"कीओरसे/ Appellant by : Shri Anuj Kisnadwala-Ld.AR ""थ"कीओरसे/Respondent by : Shri S. Michael Jerald-Ld.DR सुनवाईकीतारीख/ : 15/10/2019 Date of Hearing घोषणाकीतारीख / : 15/10/2019 Date of Pronouncement आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member): -

1. The Appellant submits the following grounds , which are without prejudice to one another: .

2. Re: Disallowance u/s. 14A read with Rule 8D of Rs. 31,34,247/-: 2.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the Assessing Officer of disallowing expenses attributable to earning the dividend income u/s. 14A by invoking Rule 8D without appreciating that: 1.Section 14A was not applicable in instant case since Assessing Officer failed to establish satisfaction as to how the claim of the Appellant was incorrect; . 2.The Appellant had sufficient interest free funds to carry out investments and hence no borrowed funds were utilized for purpose of investments; 3.No disallowance ought to made in respect strategic investments, not acquired with an intention of earning exempt income. 2.2. The learned CIT(A) grossly erred in not following the decision passed by the Jurisdictional Bombay High Court in the case of HDFC Bank Ltd. ([2014] 366 1TR 505 (Bombay) and wrongly relied on the decision of his learned Predecessor for AY 2011-12 while dismissing the appeal, without appreciating that the Predecessor CIT(A) had allowed the ground in favor of the Appellant for AY 2011-12. 2.3. Without prejudice to the above, the learned CIT (A) grossly erred in not rectifying the errors in calculating amount of disallowance u/s 14A as per Rule 8D. 2.4. Without prejudice to the above, the disallowance u/s. 14A ought to be substantially reduced.

3. Re: Reducing disallowance made u/s. 14A read with Rule 8D while computing 115JB: 3.1The CIT(A) failed to appreciate that the provisions of sec.115JB and sec. 14A are deeming provisions enacted under the Income-tax Act which have are to be made operative only to the extent of the deeming fiction created therein. The CIT(A) ought to have appreciated that both section 115JB and section 14A are mutually exclusive and there ought not to be any disallowance of amount disallowed u/s. 14A while computing the book profit u/s. 115JB. Without prejudice to the above, the learned CIT (A) grossly erred in importing provisions of subsection (2) and (3) of section 14A into explanation to section 115JB without appreciating the decided case laws on the subject. 3.2 On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the action of the Assessing Officer in making disallowance u/s 14A read with Rule 8D while computing book profit u/s 115JB, without appreciating that: . 1 Section 14A was not applicable in instant case since Assessing Officer failed to establish satisfaction as to how the claim of the Appellant was incorrect; 2 The Appellant had sufficient interest free funds to carry out investments and hence no borrowed funds were utilized for purpose of investments; 3 No disallowance ought to made in respect strategic investments, not acquired with an intention of earning exempt income 3.3 The CIT(A) failed to appreciate that in absence of direct and specific expenditure incurred for earning the exempt income no addition of the amount disallowed u/s. 14A read with Rule 8D to the book profit was warranted.

4. Re: Treatment of lease rental as income from other sources - Rs 3,00,00,000/-: 4.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the stand of the Assessing Officer that the income from lease rental of the plant and machinery together with building is assessable under the head 'Income from Other Sources' without appreciating that the Appellant continued to develop and deploy its intellectual property rights, engage a huge work force of scientists and engineers for rendering of manufacturing services to the Lessee as a composite arrangement. 4.2 On the facts and in the circumstances of the case and in law, the learned CIT(A) grossly erred in upholding the stand of the Assessing Officer that since the Appellant has leased out all its assets 3 M/s Anushakti Chemicals & Drugs Ltd. Assessment Year-2012-13 therefore the said assets have ceased to be business assets, without appreciating the fact that the said assets are the commercial assets of the Appellant. 4.3 On the facts and in the circumstances of the case and in law, the CIT(A) ought to have appreciated that the Appellant has actively pursued business of manufacture of chemicals and the allegations of the Assessing Officer that the Appellant has practically discontinued business are factually incorrect, hence lease income from lease of certain plant & machinery and building should be treated as business income and not as income from other sources. 4.4 Without prejudice to the above, the learned CIT(A) failed to appreciate that pursuant to the Scheme of Arrangement between Anushakti Chemicals & Drugs Ltd. and Spack Chemicals Pvt. Ltd. and Aarti Healthcare Ltd. approved by the Hon'ble High Court of Mumbai vide its order dated 10th August, 2011, the manufacturing business undertaking of Anushakti Chemicals & Drugs Ltd. got demerged and demerged manufacturing business undertaking along with Spack Chemicals Pvt. Ltd. got merged simultaneously into Aarti Healthcare Ltd. Thus, post merger of the manufacturing business, the contention of the Assessing Officer that no business is being carried on by the Appellant is grossly incorrect.

5. Re: Disallowance interest u/s. 36(1)(iii) of Rs. 30,82,204/-: 5.1 On the facts and in the circumstances of the case and in law, the learned CIT(A) failed to appreciate that disallowance of interest u/s. 36(1)(iii) can only be made in respect of interest paid in respect of specific capital borrowed for acquisition of asset. 5.2 The learned CIT(A) failed to appreciate that the disallowance u/s. 36(1)(iii) is unwarranted and unjustified since the Appellant had more than sufficient own / interest free funds, and in absence of any adverse nexus established by the Assessing Officer the acquisition of capital assets and capital advances is deemed to be made out of own interest free funds. 5.3 Without prejudice to the above, the amount of interest disallowed as per the provisions of Section 14A read with Rule 8D ought to be reduced. 5.4 Without prejudice to the above, if disallowance of interest is made u/s. 36(l)(iii), the interest ought to be capitalized to CWIP depreciation ought to be allowed on the same in later assessment years, when assets are ready to be put to use. 5.5 Without prejudice to the above, the disallowance u/s. 36(l)(iii) ought to be reduced.”

As evident from the grounds, the assessee is aggrieved on various counts viz. (i) disallowance u/s.14A and adjustment thereof u/s 115JB; (ii) Treatment of lease rental as income from other sources; (iii) interest disallowance u/s.36(1)(iii). 2.1 Facts on record would reveal that the assessee being resident corporate assessee stated to be engaged in manufacturing of dyes and leasing of manufacturing facilities was assessed for year under consideration u/s 143(3) on 28/03/2015 wherein the income under normal provisions was determined at Rs.37.87 Crores after certain additions as against returned income of Rs.36.80 Crores e-filed by the assessee on 4 M/s Anushakti Chemicals & Drugs Ltd. Assessment Year-2012-13 29/09/2012. The Book Profits u/s 115JB were determined at Rs.38.85 Crores after sole addition of disallowance u/s 14A for Rs.31.34 Lacs. 2.2 During assessment proceedings it transpired that assessee earned exempt income of Rs.15.99 Lacs against investments of Rs.12.50 Crores but did not offer any disallowance u/s 14A. The assessee was show-caused as to why the disallowance u/s 14A read with Rule 8D was not to be made considering the investments so made. However, the assessee failed to submit any details. Hence, not satisfied, Ld. AO, applying Rule 8D, computed aggregate disallowance of Rs.31.34 Lacs which comprised-off of interest disallowance u/r 8D(2)(ii) for Rs.27.12 Lacs and expense disallowance u/r 8D(2)(iii) for Rs.4.21 Lacs. The said disallowance was added back while computing income under normal provisions as well as while computing Book Profits u/s 115JB. 2.3 As per stand taken in earlier years, it was found that the assessee leased out its building and Plant & Machinery to an entity namely Aarti Industries Ltd. As per the terms of agreement, the assessee practically discontinued its business operations since then. The assessee offered lease rental income of Rs.3 Crores as Business Income. However, following the stand taken in earlier years, the said income was brought to tax under the head income from other sources. 2.4 The last disallowance made was interest disallowance u/s 36(1)(iii). The perusal of financial statements revealed that the assessee had closing Capital Work-in-progress (CWIP) for Rs.302.28 Lacs and given capital advances for Rs.53.73 Lacs. However, the assessee had huge borrowed 5 M/s Anushakti Chemicals & Drugs Ltd. Assessment Year-2012-13 funds and was paying interest on the same which was debited to Profit & Loss Account. The assessee submitted that Sec. 36(1)(iii) was not applicable since all the advances were in the nature of business advances. However, not satisfied, Ld. AO computed proportionate disallowance u/s 36(1)(iii) for Rs.30.82 Lacs out of total interest of Rs.778.07 Lacs claimed by the assessee during year under consideration. Aggrieved, the assessee challenged the quantum additions before learned first appellate authority. 3.1 Apropos disallowance u/s 14A, the assessee submitted that although no expense was incurred for earning of exempt income, however out of abundant caution, it had offered suo-moto disallowance of Rs.61,400/- as against the observation of Ld. AO that no disallowance was offered. The assessee submitted that no satisfaction was recorded by Ld. AO before proceeding to apply Rule 8D and therefore, disallowance was not justified. The assessee also pleaded that no funds were borrowed to make investments and assessee’s own funds in the shape of share capital and free reserves amounting to Rs.101.62 Crores were sufficient enough to cover the investments of Rs.12.85 Crores made by the assessee. Hence, no interest disallowance would be justified in terms of decision of Hon’ble Bombay High Court rendered in HDFC Bank Ltd. 366 ITR 505. The assessee raised various other pleas viz. few investments were strategic investments, certain investments would yield taxable income, certain investments did not yield any exempt income, the disallowance should be considered net of interest income, specific borrowings were to be excluded 6 M/s Anushakti Chemicals & Drugs Ltd. Assessment Year-2012-13 etc. in support of the submissions that disallowance was not justified. However, Ld. CIT(A), noticing that similar issue was decided against the assessee for AY 2011-12, dismissed this ground of appeal

. The plea to exclude the same while computing Book Profits u/s 115JB was also dismissed by following the decision of Mumbai Tribunal in Dabur India Ltd. 145 ITD 175 which held that disallowance u/s 14A was covered under clause (f) to explanation 1 to Section 115JB(2). 3.2 Regarding treatment of lease rental, the assessee contended that letting out of commercial assets was business activity for the assessee and the assessee was engaged in commercial exploitation of the property for a set period of time with no intention of discontinuing its normal business activities. The attention was drawn to the fact that entire business unit was let out on as is where is basis. However, following the decision of its predecessor for AYs 2009-10 to 2011-12, Ld. CIT(A) confirmed the stand of Ld. AO on this count. 3.3 Regarding interest disallowance u/s 36(1)(iii), it was submitted that no borrowings were made to acquire the fixed assets rather the assessee had sufficient interest free funds to make capital advances. In the alternative, it was pointed out that the disallowance was to be restricted as per the actual usage of funds for capital advances and CWIP. Reliance was placed on the decision of Hon’ble Bombay High Court rendered in Reliance Utilities 18 DTR

1. The Ld. CIT(A), while confirming the applicability of interest disallowance u/s 36(1)(iii), directed Ld. AO to compute the disallowance 7 M/s Anushakti Chemicals & Drugs Ltd. Assessment Year-2012-13 only for the period commencing from the date of payment till the date of capitalisation.

4. Aggrieved, the assessee is in further appeal before us. We have heard and considered rival submissions, perused material on record and deliberated on judicial pronouncements as cited before us. After applying our mind, our adjudication on the stated issues would be as follows. 5.1 The first issue is related with disallowance u/s 14A and adjustment thereof u/s 115JB. The perusal of computation of income as placed on record would show that the assessee has made suo-moto disallowance of Rs.61,400/- u/s 14A as against the observation of Ld. AO that no disallowance was made by the assessee. However, the basis of computation was not furnished by the assessee either during assessment proceedings nor during appellate proceedings. In fact, the assessee did not furnish any explanation regarding the adequacy of the same during assessment proceedings. Therefore, we are not convinced with the plea that Ld. AO did not record the requisite satisfaction before proceeding to apply Rule 8D since it was obligatory on the part of the assessee to demonstrate how the suo-moto disallowance worked out was fair and reasonable. No such basis was furnished by the assessee and therefore, we find no force in this plea raised by Ld. AR before us. 5.2 Proceeding further, our attention has been brought to the fact the Ld. first appellate authority proceeded on wrong assumption of facts that the matter of disallowance u/s 14A stood against the assessee by appellate order for AY 2011-12. We concur with the same since upon perusal of the 8 M/s Anushakti Chemicals & Drugs Ltd. Assessment Year-2012-13 relevant order for AY 2011-12, we find that this issue has, in fact, been decided in assessee’s favour which is evident from para 2.4.3.2 of the appellate order dated 05/02/2016. 5.3 Upon perusal of financial statements as placed on record, it is also observed that the assessee has sufficient own funds in the shape of Share Capital & Reserves amounting to Rs.101.61 Crores as against investment of Rs.12.85 Crores and therefore, unless it is shown that the investments were made out of borrowed funds and the nexus between the two was brought on record, a presumption was to be drawn in assessee’s favour that own funds were used to make the investments. However, no such exercise emanates from quantum assessment order. 5.4 Therefore, upon carful perusal of facts and circumstances, we find that matter of disallowance u/s 14A has not been properly addressed by lower authorities. Therefore, on the facts and circumstances, we deem it fit to remit the matter of disallowance u/s 14A while computing income under normal provisions as well as while computing Book Profits u/s 115JB to the file of Ld. AO for adjudication de-novo after considering the issue in correct perspective. The Ld. AO is directed to appreciate the suo-moto disallowance offered by the assessee and if not satisfied, recompute the disallowance keeping in view the ratio of binding judicial pronouncements and principals laid down regarding the same. The adjustment of disallowance u/s 14A while computing Book Profits u/s 115JB, in terms of clause (f) to explanation-1 to Sec 115JB(2), would be attracted only in case it is established that the assessee has actually debited any expenditure in 9 M/s Anushakti Chemicals & Drugs Ltd. Assessment Year-2012-13 profit & loss account relatable to earning of any exempt. Resultantly, the ground stand allowed for statistical purposes.

6. So far as the treatment of lease rental income is concerned, both representatives converge on the point that the matter may be restored back to the file of Ld. AO on same lines as done by the Tribunal in assessee’s own case for AY 2011-12, order dated 25/05/2018, a copy of which has been placed on record. Therefore, following the earlier view of Tribunal for AY 2011-12, this matter stand restored back to the file of Ld. AO for fresh adjudication on similar lines as directed by Tribunal vide paras 4 to 6 of the stated order. This ground also stand allowed for statistical purposes.

7. The last ground pertains to interest disallowance u/s 36(1)(iii). For this the Ld. AR has relied upon the recent decision of Hon’ble Supreme Court rendered in CIT V/s Reliance Industries Ltd. [410 ITR 466 02/01/2019] for the submission that in case of mixed use of funds, a presumption was to be drawn that capital advances were out of free funds available with the assessee. The Ld. CIT(A) has directed Ld. AO to recompute the disallowance based on number of days for which funds were actually utilized for capital advances. However, respectfully following the cited decision, we modify the directions by directing Ld. AO to ascertain the nexus of borrowed funds vis-à-vis capital advances made by the assessee and until nexus is established between the two, a presumption would be drawn in assessee’s favour that capital advances were out of free funds available with the assessee as per the cited decision of Hon’ble Supreme