DCIT, NEW DELHI vs. M/S. MAWANA SUGARS LTD., NEW DELHI

BRIEF FACTS OF FOR AY 2007-08 CO NO.153/DEL/2012 FOR AY 2007-08

AO further made addition of Rs.1,05,000/- by invoking the provisions contained u/s 14A read with Rule 8D on account of disallowance in respect of dividend income.

BRIEF FACTS OF FOR AY 2007-08 ITA NO.752/DEL2012 FOR AY 2008-09 CO NO.154/DEL/2012 FOR AY 2008-09 ITA NO.2921/DEL/2012 FOR AY 2009-10 CO NO.379/DEL/2012 FOR AY 2009-10

GROUNDS NO.2, 2.1 & 2.2 IN FOR AY 2005-06 (REVENUE’S APPEAL)

“2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in restricting the addition of Rs.15.17 lacs as against RS.24.29 lacs made by the AO on account of the sum received by the assessee as a result of waiver of loan by M/s. FITL. 2.1 The Ld. CIT (A) ignored the fact that as whole of the waiver amount has been received during the year and is taxable u/s 41 (1) of the Act. 2.2 The Ld. CIT (A) ignored the fact that the assessee has got the net benefit to the extent of Rs.24.29 lacs including the interest components on the waiver of loan scheme.”

“as to whether the amount remitted on account of loan liability was on capital account and hence not taxable u/s 41(1) of the Act as contended by the assessee?”

Mahindra Ltd. - 261 ITR 501 in order to work out as to how section 41 (1) of the Act is to be applied has held as under :-

“That in order to apply section 41(1), an assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee has not obtained such allowance or deduction in respect of expenditure or trading liability. The assessee has paid interest at 6 per cent over a period of ten years on Rs.57,74,064. In respect of that interest, the assessee never got deduction under section 36(1)(iii) or section 37. In the circumstances, section 41(1) of the Act was not applicable. Secondly, even assuming that the assessee had got deduction on allowance section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. Lastly the toolings constituted capital assets and not stock-in- trade. Therefore, taking into account all the above facts, section 41 (1) of the Act was not applicable.”

GROUND NO.3 & 3.1 IN FOR AY 2005-06 (REVENUE’S APPEAL) GROUND NO.2 & 2.1 IN FOR AY 2006-07 (REVENUE’S APPEAL) GROUND NO.1 IN FOR AY 2007-08 (ASSESSEE’S APPEAL)

“3. On the facts and in the circumstances of the case and in law, the learned CIT (appeals) has erred in deleting the addition of RS.1,23,90,639/- made by AO by disallowing proportionate interest on account of investment made in the sister concern by the assessee company. 3.1 The Ld. CIT (A) ignored the fact that each year is unique in itself and the assessee is paying interest on borrowed capital and has advanced interest free loans to sister concerns and made other investments with sister concerns.”

“4.5 The submissions of the Ld ARs have been carefully considered. From the details filed by the appellant it is observed that advance of Rs.1270.33 lakhs to Siel Limited is brought forward from earlier years and no disallowance was made in assessment years 2003-04 and 2004-05. Investment of Rs.520 lacs in shares of Siel Limited had been made out of proceeds of right issue made by the appellant company in accordance with the SOA and appellant was permitted by the COR Cell to raise right issue of Rs.8.50 crores for the purpose of making investment in above shares of Siel Limited. Advance of Rs.788.12 lacs to Siel Holdings Limited has also been made in accordance with the SOA. Further, the funds on account of share capital and reserves to the extent of Rs.116.68 crores which is much higher than the above mentioned investments / loans to sister concerns were available with the appellant. Current year's profit of the company were also Rs.40.15 crores. Case law relied upon by the Ld. ARs also supports the claim of the company. In view of the facts of the case and the judgements relied upon by the AR I am afraid I cannot agree with the action of the AO in disallowing interest in respect of investment made in Siel Limited as well as loan / advances receivable from Siel Limited and Siel Holdings Limited. Hence, AO is directed to delete the disallowance of Rs.1,23,90,639/-.”

Hon’ble Delhi High Court in case cited as CIT vs. Tosha 22.

International Ltd. – 331 ITR 440 (Delhi) held that when the assessee has provided interest free advances to its subsidiary relevant time the assessee was having adequate non-interest bearing funds in the form of share capital and reserves, the advances made to subsidiary on business consideration are nothing but commercial expediencies of the assessee.

GROUNDS NO.1, 2 & 3 IN FOR AY 2007-08 (REVENUE’S APPEAL) AND GROUNDS NO.1 & 1.1 IN CO NO.153/DEL/2012 FOR AY 2007-08 (ASSESSEE’S CO)

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of RS.381.20 lakhs being amount of sale proceeds of sugar and Rs. 32.20 Lakhs being amount of sale of scrap etc., which were received during the period of trial run.

2. On the facts and in the circumstances of the case, the Ld. CIT (Appeals) has erred in holding that the receipts referred to in Ground No. (1) above are required to be capitalized and adjusted against the cost of projects, without appreciating the fact that these amounts had been received after the assessee had started production.

3. On the facts and in the circumstances of the case, the Ld. CIT (Appeals) has erred in holding that the Supreme Court's decision in the case of CIT vs. Bokaro Steels Ltd (236 ITR 315) is applicable to the facts of this case.”

“1. That on facts and in law the CIT(A) erred in upholding the taxability of interest income of Rs.76.10 as income chargeable to tax under the head "income from other sources". 1.1 That on facts and in law the CIT(A) erred in not appreciating that the above Interest income was in the nature of "capital receipt" (i.e. operational, trial run period income) and hence not exigible to tax.” the assessee has received pre-operative interest income of Rs.79,61,000/- (the correct amount is Rs.76.10 lakhs) and has sold sugar of Rs.3,81,20,000/- termed as income from trial run of the new sugar units; and has further received misc. income of Rs.32,20,000/- (total comes to Rs.4,84,01,000/-) on which no tax has been offered. AO by relying upon the decision rendered by Hon’ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT – 227 ITR 172 proceeded to conclude that income from short term deposit with the banks in operation period is chargeable to tax under the head ‘income from other sources’ and consequently the interest income of Rs.76.10 lakhs is brought to tax under the head ‘income from other sources’. AO also brought to tax misc. income of sale of sugar on trial run under the head ‘income from other sources’ as the assessee has not incurred any expenditure u/s 57 of the Act and made total addition of Rs.4,84,01,000/-.

SI Particulars Expenses/ Expenses/ Expenses/ No . receipts receipts up to receipts for up to the 31.03.2007 period. 30.09.2006 01.10.2006 to 31.03.2007 1. Expenses other than 210.80 142.29 68.60 . interest 2. Interest 248.97 77.67 171.30 Total A 459.77 219.96 239.90 Less: a. Interest received 19.69 12.08 7.61 b. Income from trial run 38.12 0.00 38.12 c. Misc Income 3.72 0.50 3.22 Total B 61.53 12.58 48.95 Total expenses(A-B) 398.24 207.38 190.86 amount of Rs.76.10 lakhs earned by the assessee as interest income during the pre-operative period cannot be brought to tax under the head ‘income from other sources’ as the same was part of the composite transaction when the assessee company after availing huge loan has kept some part thereof being not required at that moment in the fixed deposits.

Hon’ble Madras High Court in case cited as Commissioner 35. of Income-tax v. VGR Foundations- [2008] 298 ITR 132 (Mad) held that the expenses incurred prior to the commencement of the business – interest income from out of fixed deposits with bank for period prior to commencement of business, the interest income can be set off against the expenses and as such, the said income cannot be treated as ‘income from other sources’ to be brought to tax.

Steel Ltd. - 236 ITR 315 (SC) while deciding the identical issue held that in case the assessee receives any amount which are inextricably linked with the processing of setting of its plant and machinery, such receipts will go to reduce the cost of assets and these receipts are of capital nature and cannot be treated as income.

(supra) is reproduced for ready perusal as under :-

“Held, dismissing the appeal, that the first three heads of income were (i) the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii), interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which by the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They has, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.” following the law laid down by Hon’ble Supreme Court in CIT vs. Bokaro Steel Ltd. (supra), we are of the considered view that sale of sugar and scrap in the pre-operative period as well as interest income from FDRs bought by the assessee in the pre-operative period out of the loan taken on heavy interest being not required for the time being are directly connected with the completion of the project and as such, cannot be brought to tax by treating the same as income from other sources. So, ld. CIT (A) has rightly deleted the addition of Rs.381.20 and Rs.3.20 lakhs on account of sale of sugar and scrap etc. respectively.

However, ld. AR for the assessee has not pressed this ground keeping in view the smallness of the addition, hence determined accordingly.

GROUNDS NO.3 & 4 IN CO NO.153/DEL/2012 FOR AY 2007-08 (ASSESSEE’S CO)

GROUNDS NO.2, 2.1, 2.2 & 3 IN FOR AY 2007-08 (ASSESSEE’S APPEAL) GROUNDS NO.1 & 2 IN ITA NO.752/DEL/2012 FOR AY 2008-09 (ASSESSEE’S APPEAL)

GROUNDS NO.1, 2, 3 & 4 IN CO NO.154/DEL/2012 FOR AY 2008-09 (ASSESSEE’S CO) GROUND NO.1 IN FOR AY 2009-10 (REVENUE’S APPEAL)

GROUNDS NO.1, 2, 3 & 4 IN CO NO.379/DEL/2012 FOR AY 2009-10 (ASSESSEE’S CO) except the difference in amount, therefore, for the sake of brevity, Grounds No.1 & 2 in for AY 2008-09 are reproduced as under :-

“1. On the facts and the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in restricting the disallowance of Rs. 179.80 made by the AO u/s 14A of the Act to Rs.13,20,073/- 2. On the facts and in the circumstances of the case, the Ld. CIT (Appeals) has erred in taking into account the stand alone balance sheet of M/s Siel Ltd. as on 31.3.2007, when the merger of the erstwhile company of Mawana Sugars Ltd. with the assessee company has taken place on 1.10.2006 , i.e. during the previous year relevant to AY. 2007-08, when assessment in relation to any period after 1.10.2006 is to be made in the case of assessee company only; and the entire amount of interest paid has be claimed as deduction in the case of the assessee company only.”

“1. That on facts and in law the C1T(A) erred in upholding disallowance of Rs.13,20,073 (i.e Rs 3,20,073/- out of interest cost and Rs.10,00,000/- out of administrative expenses) under section 14A of the Income Tax Act

2. That on facts and in law the CIT(A) erred in erred in upholding the assumption of jurisdiction u/s 14A r/w Rule 80(2) by the AO.

3. That on facts and in law to the Commissioner of Income Tax (Appeals) {herein above referred to as 25 1479 & 5614/Del/2010 ITA No.751 & 752/Del/2012 CO No.153, 154 & 379/Del/2012 ITA No.2921/Del/2012 "CIT(A)"} erred in upholding the order of AO partly and not allowing complete relief as claimed.

4. That on facts and in law the order passed by Assessing Officer {herein above referred to as "AO"} is void ab initio and bad in law.

Hon’ble jurisdictional High Court in case cited as Cheminvest Ltd. vs. CIT - (2015) 378 ITR 33 (Delhi) wherein it is held as under :-

“Held, that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee was not in doubt, no disallowance could be made under section 14A.”

Hon’ble Apex Court in Godrej & Boyce Manufacturing 47.

Company Ltd. vs. DCIT – 394 ITR 449 (SC) thrashed the issue in controversy as to invoking of the provisions contained under Rule 8D of the Rules by observing as under :-

“37. 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 prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”

Consequently, Grounds No.2, 2.1, 2.2 & 3 in for AY 2007-08 are determined in favour of the assessee. Grounds No.1 & 2 in ITA No.752/DEL/2012 for AY 2008-09 and Ground No.1 in ITA No.2921/Del/2012 for AY 2009- 10 are determined against the Revenue. Grounds No.1, 2, 3 & 4 in CO No.154/Del/2012 for AY 2008-09 and Grounds No.1, 2, 3 & 4 of the assessee.