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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI RAJESH KUMAR, HONBLE
2 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., O R D E R PER C.N. PRASAD (JM) 1. These appeals are filed by the Revenue and cross objections by the assessee against different orders of the Ld. Commissioner of Income–tax (Appeals)-51, Mumbai [hereinafter in short “Ld. CIT(A)”] dated 11.10.2017 for the A.Ys. 2013-14 and 2014-15.
In Revenue’s appeals the following common grounds have been raised except for the figures. “1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs 9,49,53,336/- made by the Assessing Officer u/s 10AA of the IT Act, 1961, ignoring the fact that the assessee was primarily engaged in trading activities and not in any kind of manufacturing and therefore, not eligible for any deduction u/s 10AA of the Act". 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made by the Assessing Officer u/s 36(1)(iii) of the IT Act of Rs.65,92,402/- without appreciating the fact that the assessee has diverted interest bearing fund to advance interest free loans/ advances to sister concerns and therefore the said expenditure was rightly disallowed by the Assessing Officer u/s 36(1)(iii) of the IT Act, 1961". 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance made by the Assessing Officer u/s 36(1)(iii) of the IT Act of Rs.65,92,402/- without appreciating the fact that the assessee has failed to prove the commercial expediency in advancing interest free loans and advances to sister concern".
At the outset, Ld. Counsel for the assessee submits that in so far as Ground No.1 of the grounds of appeal is concerned i.e. disallowance of deduction u/s. 10AA of the Act, similar issue has been decided by the 3 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., Tribunal in favour of the assessee for the A.Y. 2012-13 in ITA No. 2865/Mum/2017 dated 08.02.2019 wherein the order of the Ld.CIT(A) who deleted the disallowance has been sustained.
Ld. DR vehemently supported the orders of the Assessing Officer.
We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the order of the Tribunal we find that the issue is squarely covered in favour of the assessee wherein claim for deduction u/s. 10AA was allowed for the A.Y. 2012-13 by the Ld.CIT(A) whose order has been upheld by the Tribunal observing as under: - “After having gone through the facts of the present case as well as considering the orders passed by revenue authorities and submissions made by both the parties, we find that as per the facts, the assessee had set up a new export oriented unit in Vishakapattanam, SEZ and the deduction u/s 10AA was claimed in respect of the profits of this unit. The AO during the assessment proceedings held that assessee was primarily engaged in the trading activity and not in any kind of manufacturing. Thus, no entitled for deduction u/s 10AA of the Act. Ld. DR while relying upon the orders passed by the AO, submitted that the documents submitted by the assessee in the shape of purchase invoices and sale invoices, it is clear that the description of items purchased by the assessee were exactly matches with the items sold by the assessee. So in this way, according to Ld. DR, the assessee cannot be said in doing the assembling activities of the goods/articles. Our attention was also drawn to page no. 81 of the paper book, wherein the approval was granted to the assessee by the office of Development Commissioner, Vishakapattanam, Special Economic Zone, for the purpose of setting up a trading unit. On the other hand, Ld. AR reiterated the same arguments as were raised by him before Ld. CIT(A). It was submitted that the assessee was engaged into manufacturing activities and in this way,
4 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., our attention was drawn towards page no. 82 of the paper book, which is part of the permission granted by office of Development Commissioner, Vishakapattanam, SEZ, wherein it is categorically mentioned that the approval was granted to the assessee subject to exporting the goods manufactured/goods imported by the assessee. Ld. AR further relied upon the other documents of the paper books in the shape of bills, challans, bank documents, which corroborates the stand of the assessee. It was also submitted that assessee is in the business of importing high pressure based cylinders which are used for high pressure fire fighting solutions and the product is customized as per the customers requirement and various value additions were made after importing the equipments, like assembling of various parts, filling of gases, putting various assessories and other such things. In this respect, reliance was also placed upon definition of manufacturing as per section 2 of the SEZ Act 2005, which includes fabrication, assembling or processing of new product, which includes blending, repair, polishing, cutting, etc. It was also submitted that AO had itself allowed such claim in the earlier years and the assessee has also furnished enough details to prove that assessee is engaged in the manufacturing activities. We find that Ld. CIT(A) while appreciating the facts of the present case had rightly concluded that assessee was engaged in supply of fire fighting equipment including fire fighting systems which will include fire alarm and detecting systems, fire fighting pump sets and gas suppression systems which includes tank, valves, gases and accessories and most of the items or parts are imported by the assessee company from Chinese companies and thereafter various assembling, fitting, reengineering and fabrication work is done and thereafter gas is filed in cylinders before they are supplied to different clients. Since the customization was done by the assessee as per the requirement of the client and thus the process itself involves a lot of value addition. Even during the course of appellate proceedings, the assessee furnished various details, like various parts or items required to assemble a fire fighting systems , which are imported and then filling of gases and further customization depending upon the requirement of clients. Even otherwise, the claim u/s 10AA was made by the assessee for the first time in the year Assessment Year 2009- 10 and the present year is the fourth such year in which such claim has been made and in earlier three years this claim has been allowed by the AO after due verification. In such circumstances, the Hon’ble Supreme Court in the case of Radhasaomi Satsang V/s CIT, 193 ITR 321 had held that in the absence of any material change, justifying the revenue to take a different view of the matter, if there was no change, the AO could not take a different view. Apart from that in the case of Sunil Kumar Ganeriwal Vrs. DCIT (ITA 4276/Mum/2008 dated 25.11.11), wherein it was held that 5 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., once a particular stand has been taken by the AO in the earlier years, the same should not be changed unless and until there is material difference in the circumstances of the case. Since the Ld. CIT(A) had rightly appreciated the facts of the present case in correct perspective and even no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld. CIT(A). Therefore, we see no reasons to interfere into or deviate from the findings recorded by the Ld.CIT(A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, this ground raised by the revenue stands dismissed.”
As there is no change in facts in these assessment years respectfully following the order of the Tribunal for the A.Y. 2012-13, we uphold the order of the Ld.CIT(A) and reject Ground No.1 of the grounds of appeal of the Revenue.
Ground Nos.2 and 3 of the grounds of appeal of the Revenue are in respect of the deletion of disallowance made u/s. 36(1)(iii) of the Act.
Briefly stated the facts are that, during the course of the assessment proceedings for the A.Y. 2013-14, Assessing Officer noticed that assessee has advanced funds to group concerns namely Nitin Ventures FZE, UAE, Nitin Global PTE Limited, Singapore and also advanced loans to Body Corporate at ₹.86,457/-, ₹.1,60,66,696/- and ₹.3,36,00,822/- respectively. Assessee was asked to explain as to why the proportionate interest in respect of investment made out of interest free borrowing funds attributable for interest free loans and advance given to the sister
6 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., concerns should not be disallowed. Assessee furnished its reply dated 15.01.2016. Not convinced with the reply, Assessing Officer disallowed proportionate interest at 13.25% per annum on the loan obtained u/s. 36(1)(iii) of the Act.
On appeal the Ld.CIT(A) deleted the disallowance for the reason that assessee was in possession of surplus interest free funds far more than the loans advanced. Ld.CIT(A) also referred to the decision of the Tribunal in assessee’s group case in the case of M/s. Eurotech Cylinders Pvt. Ltd., for the A.Y. 2012-13 wherein on identical circumstances Ld.CIT(A) deleted the disallowance.
Ld. DR vehemently supported the orders of the Assessing Officer.
Ld. Counsel for the assessee submits that identical issue arises for the immediately preceding assessment year in assessee’s own case wherein the Ld.CIT(A) deleted the disallowance as the assessee was in possession of surplus funds far more than the loans advanced to sister concerns and others and the Revenue has accepted the position and no appeal has been filed. Ld. Counsel for the assessee submits that Ld.CIT(A) for the A.Y. 2012-13 had in fact referred to his own decision in M/s. Eurotech Cylinders Pvt. Ltd., which is a group concern of assessee
7 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., where identical issue came up for consideration and similar claim was allowed. Ld. Counsel for the assessee submits that appeal has been dismissed by the Tribunal in M/s. Eurotech Cylinders Pvt. Ltd., which is a assessee group concern in ITA No. 187/MUM/2018 dated 22.01.2019. Therefore, Ld. Counsel for the assessee submits that since assessee is having interest free funds far more than the loans advanced to sister concern and others the presumption is that those loans were advanced from out of surplus funds not from loans obtained from the assessee and therefore, no part of Interest can be disallowed. Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Reliance Utilities and Power Limited [313 ITR 340] and CIT v. HDFC Bank Limited [366 ITR 505].
We have heard the rival submissions and perused the orders of the authorities below. On a perusal of the order of the Ld.CIT(A), we find that the Ld.CIT(A) recorded a finding that assessee was in possession of surplus interest free funds far more than the loans and advances given to sister concern and others. Therefore, in view of the decision of the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Limited (supra), he deleted the disallowance made by the Assessing Officer observing as under: -
8 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., “7.1 The contentions of the assessee have been duly considered. In the case of Reliance Utilities and Power Ltd. (313 ITR 340) (Bom), the Jurisdictional High Court has held that where an assessee has its own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose. Similarly, in the case of CIT Vs HDFC Bank Limited (ITA No 330 of 2012), the Jurisdictional High Court while adjudicating the disallowance out of interest expenditure u/s. 14A r.w. Rule 8D(2)(ii) has held that no disallowance can be made in respect of interest paid on borrowing, if assessee's own funds and non-interest bearing funds exceeds investment in tax-free securities. 7.2 In the instant case, the assessee was in possession of surplus interest free funds of Rs. 150.42 crores and against this, the loans and advances given without charging interest are of only Rs. 4.97 crores. Therefore, as per the said two decisions of the Jurisdictional High Court, no disallowance out of interest expenditure can be made in the case of the assessee of account of giving interest free loans and advances. Moreover, the Hon'ble Supreme Court in the case of S.A. Builders (supra) has held that if an amount has been advanced without charging interest to a related concern due to commercial expediency, no disallowance out of interest expenditure should be made. In the instant case, the said amounts were advanced to business associates who were interested to participate in some of the proposed joint venture projects of the assessee. Therefore, on the grounds of commercial expediency also no disallowance out of interest expenditure can be made on account of giving of interest free loans and advances. 7.3 A similar issue involving disallowance out of interest expenditure on account of giving of interest free loans and advances to related concerns and business associates has been adjudicated by my Ld. Predecessor in favour of the assessee for A.Y. 2012-13 vide order dated 31/01/2017 and also in the case of Eurotech Cylinders P. Ltd., a related concern, for A.Y. 2012-13 vide order dated 30/01/2017. 7.4 In view of the aforesaid discussion, the action of the AO of making disallowance of Rs. 65.92.402/- out of interest expenditure is found to be not correct. The same is, therefore, directed to be
On a perusal of the order of the Ld.CIT(A) we do not find any infirmity in deleting the disallowance as the assessee was in possession of surplus interest free funds far more than the loans advances made to sister concerns and others. We also observe that in sister concern case similar issue came up before the Tribunal and the Tribunal observed as under: - “4. We have considered the contention of both the parties and have gone through the orders of authorities below and the decision of co-ordinate bench in assessee’s own case for Assessment Year 2012-13 and find that during the assessment for Assessment Year 2012-13, similar disallowance was made by Assessing Officer under section 36(1)(iii) of Rs. 1.30 Crore and on appeal before the ld. CIT(A), the disallowance was deleted. On further appeal before the Tribunal, the order of ld. CIT(A) was affirmed with the following observations: “9. Upon careful consideration, we find that the ld. CIT(A) has given a finding that the assessee has sufficient interest free own funds to make the interest free advances. This is duly corroborated by the financial statement. This has not been disputed. It is settled law also that in case of mixed funds right of attribution is with the assessee. In this view of the matter, on the basis of undisputed fact that the assessee had sufficient interest free fund to make these advances, we do not find any infirmity in the well reasoned order of the ld. CIT(A). The case law from the Hon’ble jurisdictional High Court in the case of Reliance Power and Utilities Ltd. (supra) duly support the proposition. Hence, this ground raised
by the Revenue is dismissed.”
5. Considering the decision of Tribunal for immediate Assessment Year 2012-13 in and respectfully following the decision of co-ordinate bench, we affirm the order of ld. CIT(A). no contrary facts or law is brought to our notice to take other view. Therefore, we affirm the order of ld. CIT(A).
10 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., 14. In the circumstances, we do not see any reason to interfere with the findings of the Ld.CIT(A) and accordingly the order is sustained. Ground Nos. 2 and 3 raised by the Revenue are rejected.
Coming to the cross objection filed by the assessee the only issue agitated is that the Ld.CIT(A) erred in sustaining the disallowance made u/s. 14A r.w. Rule 8D(2)(ii) of I.T. Rules.
Ld. Counsel for the assessee submits that similar issue came up before the Tribunal for the A.Y. 2012-13 and the Tribunal restricted the disallowance to the dividend income earned by the assessee and therefore the said decision may be applied to the facts of the present appeal and direction be given to the Assessing Officer to restrict the disallowance u/s. 14A to the dividend income earned by the assessee.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below and the decision of the Coordinate Bench in assessee’s own case for the A.Y. 2012-13. We find that the Tribunal for the A.Y.2012-13 directed the Assessing Officer to restrict the disallowance u/s. 14A of the Act to the extent of exempt income earned by the assessee during the assessment year observing as under: - 11 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., “19. We have heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. We noticed that Ld. CIT(A) in its order at para no.
12. To 20 had dealt in details with the facts of the case and while deciding the said ground had although taken into consideration that that assessee had earned dividend income of Rs. 1,25,465/- on investments made in shares. However, while taking into consideration, the total investments of Rs. 73,63,52,619/- in the shares of various companies had accordingly upheld the working of disallowance made by AO u/s 14A r.w.r 8D of the Act at Rs. 33,97,774/-. After considering the entire facts of the present case, we find that Hon’ble Delhi High Court in the case of Joint Investment Pvt. Ltd. vrs. CIT (2015) 372 ITR 694 (Del) had held that section 14A or rule 8D of the I.T. Rules 1962, cannot be interpreted so as to mean that the entire exempt income is to be disallowed. The window for disallowance was indicated in section 14A and was only to the extent of disallowing expenditure ‘incurred by the assessee in relation to the tax exempt income’. This proposition or portion of the exempt income surely cannot swallow the entire amount. Thus it was held that the disallowance can only be to the extent of expenditure income incurred by the assessee in relation to tax exempt income. In the decision rendered by the Coordinate Bench of ITAT in the case of K. Ratanchand and Co. vs. ITO (2017) 83 taxmann.com 242 (Ahd- Trib), wherein it was held that addition u/s 14A cannot be more than exempt income. Thus, such disallowance should not exceed the quantum of exempt income. Whereas the judgments cited by Ld. DR are not relevant and applicable to the facts of the present case. Resultantly, the decision of Ld. CIT(A) on this ground is set aside and AO is directed to restrict the addition to the extent of exempt income earned by the assessee during the year under consideration. Accordingly, this ground raised by the assessee is allowed.”
Following the same, we direct the Assessing Officer to restrict the disallowance made u/s. 14A r.w. Rule 8D of I.T. Rules to the extent of exempt income earned by the assessee during the relevant assessment year.
12 & 186/MUM/2018 (A.Ys: 2013-14 & 2014-15) C.O.Nos. 18 & 19/Mum/2019 M/s. Nitin Fire Protection Industries Ltd., 20. Coming to the appeal of the Revenue and the cross objection of the assessee for the A.Y. 2014-15 facts being similar and identical the decision taken for the A.Y. 2013-14 applies mutatis mutandis to the issues in appeal for the A.Y. 2014-15. Thus, respectfully following the same we reject the grounds raised by the Revenue and allow the ground in cross objection.
In the result, appeals of the Revenue are dismissed and cross objections of the assessee are allowed.
Order pronounced in the open court on the 20th September, 2019