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Income Tax Appellate Tribunal, “A” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals)-13, Chennai in dated 01.12.2017 for assessment year 2005-06.
M/s. Global Calcium Pvt. Ltd., the assessee, is a manufacturer of bulk drugs and chemicals for food and pharmaceutical application. While making the assessment for assessment year 2005-06, the AO, inter alia, disallowed additional depreciation claimed on the cost of windmill, made disallowance u/s. 14A, disallowed 10% financial charges on the grounds that non-interest bearing loans were advanced to companies wherein the directors of the assessee company are interested, assessed the rent received from staff quarters (non-factory building) and admitted under the head “business” as an income from “house property” and consequently disallowed the depreciation claimed by the assessee. Aggrieved, the assessee filed an appeal before the Ld. CIT(A) . The Ld. CIT(A) dismissed the appeal. Against the order of the Ld. CIT(A), the assessee filed this appeal.
The AR submitted that the AO disallowed the claim of additional depreciation on the windmill for the reason that the assessee has not produced any article or thing using the windmill but for power. Though the jurisdictional High Court decision in the case of CIT vs M/s. Hitech Arai Ltd (TC(A) No. 670 & 671 of 2009), wherein it was held that the new machinery or plant need not have any operational connectivity to the article or thing that was being manufactured by the tax payer and jurisdictional High Court Madurai decision in VTM Ltd vs CIT, Madurai etc were relied before the Ld. CIT(A), he dismissed the appeal. The AR
:- 3 -: CIT invoked the jurisdiction u/s. 263 on this aspect vide his proceedings in C.No 218(90)/CIT-263-09- 10 dated 26.02.2010, however, dropped the proceedings by his letter dated 19.03.2010. In view of the above facts & circumstances, the AR pleaded that the disallowance made by the AO & confirmed by the Ld. CIT(A) be deleted. Per contra, the Ld. DR supported the orders of the lower authorities.
We heard the rival submissions. The AR has made out a case in assessee’s favour, supra. Following the jurisdictional High Court decisions in the cases of CIT vs M/s. Hi Tech Arai Ltd., & VTM Ltd vs CIT, Madurai, supra, the assessee’s grounds of appeal are allowed on this issue.
5. The next issue is disallowance u/s. 14A. The AR submitted that the assessee received dividend of Rs. 5,46,641/- and claimed it as an exempt income, towards which it has not shown any expenditure. The AO determined u/s. 14A r.w.r. 8D Rs. 1,56,453/- an expenditure relatable to the exempt income. Aggrieved, the assessee filed an appeal. The Ld. CIT(A) after considering the decisions in the cases of Chem Invest vs CIT, 378 ITR 33 (Del), this tribunal decision in the case of ACIT vs M. Bhaskara, 152 ITD 844, held that disallowances could be restricted to the extent of exempt income and in this case, the disallowance made by the AO being at Rs 1,58,453/-, which is less than the exempt income earned by the :- 4 -: AO. In this regard, the AR submitted that the impugned dividend was earned on the old investments made in the earlier years and there are no expenses incurred to earn it. Hence, he pleaded to delete the addition. Per contra, the Ld. DR supported the orders of the lower authorities.
6. We heard the rival submissions. Though section 14A r.w.r 8D is not applicable for this assessment year i.e., for assessment year 2005-06, this tribunal consistently held that disallowance of reasonable sum is warranted and 2% of the exempt income could be a reasonable sum which could be disallowed. Accordingly, we direct the AO to restrict the disallowance accordingly. The corresponding appeal grounds are allowed partly.
7. The next issue is disallowance of 10% financial charges on the grounds that non-interest bearing loans were advanced to companies wherein the directors of the assessee company are interested. In this regard, the AO found that the assessee has advanced non-interest bearing fund at Rs. 43,45,000/-, in total, to two companies viz., Bebloc India Private Ltd & Global Suppliers Pvt. Ltd., wherein the directors of the assessee company are interested. Since, the assessee has incurred financial charges of Rs. 29,71,724/-, the AO disallowed 10% of such charges on the total loans. Aggrieved, the assessee filed an appeal before the Ld. CIT(A). The AR submitted before the Ld. CIT(A) that the assessee
:- 5 -: company is a profit making company, it has accumulated cash surplus out of its business income that were subjected to tax. Such internal accruals have been used for temporary short lending to group companies. The assessee does not use any own funds or working capital funds for this purpose. Unless such finding is made, the disallowance should not be made. However, the Ld. CIT(A) upheld the disallowance. In the facts and circumstances, the AR pleaded for deletion of such disallowance. The Ld. DR relied on orders of the lower authorities.
We heard the rival submissions. Though the assessee pleaded before the lower authorities that the company is a profit making company, it has accumulated cash surplus out of its business income that were subjected to tax, such internal accruals have been used for temporary short lending to group companies, the assessee does not use any own funds or working capital funds for this purpose, unless such finding is made, the disallowance should not be made etc, we find that the lower authorities have not recorded any finding on the assessee’s plea. In the facts and circumstances, we deem it fit to remit this issue back to the AO for a fresh examination in accordance with law. The assessee shall place relevant materials before the AO in support of its contention and the AO after giving adequate opportunity to the assessee decide this issue in accordance with law. Hence, the corresponding grounds are treated as allowed for statistical purposes.
The next issue is computation of rental income derived from staff quarters under the head house property. In this regard, the AR did not press the grounds of appeal and hence, the corresponding grounds are treated as dismissed. Since, this ground is dismissed, consequentially the issue on the depreciation claim on such properties are also treated as dismissed.
In the result, the assessee’s appeal is partly allowed.
Order pronounced on Wednesday, the 31st day of October, 2018 at Chennai.