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Income Tax Appellate Tribunal, MUMBAI BENCHES “I”, MUMBAI
Before: Shri Joginder Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, Accountant Member
These cross appeals filed by the assessee as well as the Revenue are directed against the order of CIT(A)-12, Mumbai, dated 10.12.2015, and it pertains to assessment year 2011-12. Since facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed of by this common order.
Brief facts of the case are that the assessee is a public limited company engaged in the business of manufacturing and trading of synthetic dyestuff, chemicals and dyes. It filed its return of income for A.Y. 2011-12 on 30.09.2011, declaring ‘Nil’ total income. The case was selected for scrutiny and, accordingly, notices u/s. 143(2) and 142(1) along with detailed questionnaire calling for various details were issued. In response to notices, the AR of the assessee appeared from time to time and filed the details called for. The assessment was completed u/s. 143(3) on 28.03.2014, determining the total income at ` 10,18,63,220/-, inter alia, making additions towards disallowances of expenses incurred in relation to exempt income u/s 14A of the Income tax Act, 1961, additions towards bogus purchases u/s. 69C of the Income tax Act, 1961, and re-computation of Short term capital gain as well as Long term capital gain on depreciable asset by denying set off of unabsorbed depreciation of A.Y. 1996-97. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A).
Before the CIT(A) the assessee has challenged the additions made by the Assessing Officer towards disallowances of expenses incurred in relation to exempt income on the ground that during the year under consideration the assessee has not earned any exempt income. Therefore, no disallowance can be made u/s. 14A of the Income tax Act, 1961. The assessee also made a alternative submission, in as much as its investments yielding exempt income were out of its own funds and in the absence of any findings to the contrary, there was a presumption that investments are made from own funds available to the assessee and, therefore, no disallowance can be made towards expenditure under Rule 8D(2)(ii). In this regard he relied upon the decision of Hon’ble Bombay High Court in the case of Reliance Utilities & Power Ltd. vs. CIT [313 ITR 340]. As regards denial of brought forward unabsorbed depreciation of the assessment years 1996-97 to 2000-01, the assessee submitted that when the amendment was brought to section 32(2) of the Income tax Act, 1961, the period of eight years had not expired allowing indefinite carry forward of the losses. Therefore, the Assessing Officer was incorrect in restricting unabsorbed depreciation set off up to the assessment year 2000-01. Similarly, as regards additions towards bogus purchases, the assessee has filed various details including purchase bills and payment details to M/s. Amrish Traders and S P Corporation. It was argued that merely because third party statement reveals that the parties are hawala operators engaged in providing accommodation entries, purchases from these parties cannot be treated as bogus when the assessee has filed necessary evidences.
The CIT(A) after considering relevant submissions of the assessee and also relying upon the decision of Hon’ble Kerala High Court in the case of State Bank of Travancore [16 taxman.com 289], rejected the arguments of the assessee in so far as disallowance of expenses incurred in relation to exempt income by holding that the Assessing Officer has brought out clear facts that the assessee has earned exempt income, however, failed to disallow any expenses incurred in relation to earning of exempt income. Therefore, there is no reason to interfere in the findings of the Assessing Officer.
As regards rejection of set off of unabsorbed depreciation of A.Ys. 1996-97 to 2000-01, the CIT(A) allowed partial relief to the assessee wherein he has allowed set off towards unabsorbed depreciation for A.Ys 1997-98 to 2000-01 on the ground that brought unabsorbed depreciation for A.Ys 1997-98 to 2000-01 can be carried forward even after amendment to section 32(2) by the Finance Act,2001 as the period of eight years has not expired. However, he confirmed the action of the Assessing Officer in so far as A.Y. 1996-97.
In so far as additions towards unexplained purchases from M/s. Amrish Traders and S P Corporation are concerned, the CIT(A) deleted the additions made by the Assessing Officer by following the jurisdictional High Court judgment in the case of CIT vs. Nikunj Exim Enterprises (Pvt.) Ltd.
Aggrieved by the order of the CIT(A), the assessee as well as the Revenue are in appeal before us.
7. The first issue that came up for consideration from assessee’s appeal is the disallowance of expenditure in relation to exempt income. During the course of assessment proceedings, the Assessing Officer observed that the assessee has received dividend income of ` 2000/- which does not form part of total income. The Assessing Officer further observed that the assessee has claimed exemption for dividend income but failed to disallow expenses attributable to earning such exempt income u/s. 14A. Therefore, called upon the assessee to explain as to why the expenses in relation to exempt income should not be disallowed. In response to show cause notice, the assessee submitted that during the year under consideration it has earned dividend from co-operative bank, which is not exempt u/s. 10(34) of the Income tax Act, 1961, although it has claimed exemption for such dividend income by mistake of facts. During the course of assessment proceedings it has filed before the Assessing Officer withdrawing exemption claimed towards dividend income by stating that any dividend received from co-operative banks is not exempt u/s. 10(34) of the Act. The assessee further submitted that it did not incur any specific expenditure for earning exempt income therefore, question of disallowance of expenses by invoking the provisions of Rule 8D of the Income tax Rules, 1962, does not arise. The Assessing Officer after considering the relevant submissions of the assessee and also relying upon various decisions including the decision of ITAT Delhi Special Bench in the case of Cheminvest Limited vs. ITO 317 ITR 86 (AT) held that the disallowance u/s. 14A can be made even if no exempt income is actually earned or received during the year from the investments. The Assessing Officer further observed that the assessee cannot earn dividend without systematic management and the activity of investment is very complex in nature. It requires substantial market research, day to day analysis of market trends and decisions with regard to acquisition, retention and sales of shares at the appropriate time. Therefore, there is no merit in the arguments of the assessee that no expenditure has been incurred in relation to earning of exempt income. Accordingly, determined the disallowance contemplated u/s. 14A of the Act, by applying the prescribed method under Rule 8D of the Income tax Rules 1962 and made the addition of ` 27,22,435/-
The learned AR for the assessee submitted that the learned CIT(A) erred in confirming the additions made by the Assessing Officer towards disallowance of expenses in relation to exempt income without appreciating the fact that the Assessing Officer has failed to establish nexus between exempt income earned and purported expenses incurred to earn such exempt income. The AR further submitted that during the year under consideration, the assessee has not earned any exempt income which do not form part of total income under this act and in view of the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd [2015] 378 ITR 33 (Del), section 14A will not apply if no exempt income is received or receivable during the relevant previous year. The Assessing Officer has made additions towards expenses u/s. 14A by applying the Special Bench decision of ITAT Delhi in the case of Cheminvest Ltd., but the said decision has been over ruled by the Hon’ble Delhi High Court, wherein it was held that the expression ‘does not part of total income’ in section 14A envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to said income. Since the assessee has not earned any exempt income the question of disallowance of any expenses in relation to exempt income does not arise.
The learned DR, on the other hand, strongly supported the orders of the authorities below.
We have heard both the parties and perused the material available on record. At the time of hearing, the learned AR for the assessee submitted that the issue is covered in favour of the assessee by the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd [2015] 378 ITR 33 (Del), wherein it has been categorically held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year. There is no dispute with regard to the fact that the assessee has not earned any exempt income during the year under consideration. Although the assessee has claimed exemption u/s. 10(34) for dividend income received from co-operative bank, such claim has been withdrawn before the Assessing Officer by stating that dividend received from co-operative bank is not exempted u/s. 10(34) and the claim made in the return of income by mistaken facts has been withdrawn. We further observed that the Hon’ble Delhi High Court in the case of Cheminvest Ltd (supra), in para 23 observed that the expression ‘does not part of total income’ in section 14A envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. In this case, on perusal of facts, we find that the assessee has not earned any exempt income, which form part of total income. Therefore, we are of the considered view that the Assessing Officer has erred in computing disallowance u/s. 14A by invoking Rule 8D(2)(ii) of the Income tax Rule, 1962. Hence, we direct the Assessing Officer to delete the additions made u/s. 14A of the Income tax Act, 1961.
The next issue that came up for consideration from the assessee’s as well as Revenue’s appeal is disallowance of carry forward unabsorbed depreciation loss of A.Ys. 1996-97 to 2000-01. The Assessing Officer has disallowed unabsorbed depreciation loss set off against income of current year on the ground that by virtue of amendment to section 32(2) of the Income tax Act, 1961, by the Finance Act 2001, from A.Y. 2002-03, the unabsorbed depreciation of upto A.Y. 2001-02 can be carried forward up to eight years. According to the Assessing Officer, depreciation loss of earlier years can be carried forward up to maximum eight years by virtue of section 32 of I.T.Act. However, such restrictions have been removed from A.Y. 2002-03 onwards, where assessee can carry forward depreciation for indefinite period. Since the assessee has carried forward unabsorbed depreciation of A.Ys 1996-97 to 2001-02 against current year income under the head income from capital gains, disallowed unabsorbed depreciation of earlier years.
The learned AR for the assessee, at the time of hearing, submitted that the issue is squarely covered in favour of the assessee by the decision of the Tribunal in its own case for A.Y. 2009-10, wherein similar issue has been decided in favour of the assessee by following the judgment of Hon’ble Gujarat High Court in the case of General Motors Pvt. Ltd. (2012) 25 taxman.com 364, wherein the Co-ordinate Bench held the unabsorbed depreciation prior to A Y 1997-98 and after A.Y. 2003-04, set off after a period of eight years in regards with section 32(2) of the Act, is to be allowed in view of amendment by the Finance Act, 2001.
Having heard both the sides, we find that the issue is no longer res integra and the co-ordinate Bench of ITAT, Mumbai Benches, vide order dated 09.06.2017, in assessee’s own case for A.Y. 2009-10 in after considering the ratio laid down by Hon’ble Gujarat in the case of General Motors Pvt. Ltd. (supra), held that unabsorbed depreciation loss can be carried forward without any limitation to pre-amended and post-amended period. The relevant portion of the order is extracted below:
“5. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in denying carry forward unabsorbed depreciation of Rs. 3,18,76,367/- and Rs.9,94,88,199/-- pertaining to AYs 1995-96 and 1996-97 respectively. For this assessee has raised the following ground No.2: - "2. The Ld. CIT(A) has erred in law and on the facts of the case in confirming the action of the AO in denying Carry Forward of Unabsorbed Depreciation of Rs. 3,18,76,367/- and Rs. 9,94,88,199/- pertaining to AY 1995-96 & AY 1996-97 respectively, i.e. pertaining to assessment years prior to the amendments made by the Finance Act No. 2 of 1996 which restricted carry forward of unabsorbed depreciation up to 8 years, in which the appellant had vested right to indefinite carry forward."
6. Briefly stated facts are that the assessee made claim of unabsorbed depreciation pertaining to AYs 1995-96 of Rs. 3,18,76,367/- for AY 1996- 97 of Rs. 9,94,88,1997-. The AO denied the carry forward of unabsorbed depreciation for the reason that in AYs 1996-97 to 2001-02 the limit for carry forward of unabsorbed depreciation was for 8 years by virtue of amendment in the provisions of section 74(1) of the Act but with effect from 01-04-2003 this restriction was removed by another amendment in the provisions of section 74(1) of the Act and in between from the period of 1997-98 to 2001-02 this limit was in force. The learned counsel for the assessee stated that this issue is squarely covered in favour of assessee and against the Revenue by the decision of Hon'ble Gujarat High Court and other High Court judgements particularly in the case of General Motors India Pvt. Ltd. vs. DCIT (2012) 25 taxmann.com 364 Gujarat, wherein it is held that the unabsorbed depreciation prior to AY 1997-98 and after AY 2003-04, set off after a period of 8 years in regards with the section 32(2) of the Act is to be allowed in view of the amendment by the Finance Act 2001. The learned counsel for the assessee also relying on the CBDT circular clarifying the intend of the amendment in Section 74(1) of the Act and argued that it is for enabling the industry to conserve sufficient funds to replace the plants and machinery and accordingly, the amendment dispenses with the restriction of 8 years for carry forward and set off unabsorbed depreciation. In view of this, the learned counsel for the assessee stated that the orders of the lower authorities are vitiated and without any basis.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the issue is squarely covered in favour of assessee reason being the claim of carry forward of unabsorbed depreciation pertains to AY 1995-96 and 1997-98 and this restriction came from AY 1997-98 to 2001-02. This period is outside the ambit of restriction period and in view of the decision of the Hon'ble Gujarat High Court in the case of General Motors India Pvt. Ltd (Supra), which has interpreted the restricted period and hold the issue in favour of assessee. Respectfully, following the same, we allow the claim of the assesseee. The issue of appeal of assessee is allowed.”
In this view of the matter and being consistent with the view taken by the Co-ordinate Bench of this Tribunal in assessee’s own case for A.Y. 2009-10, we direct the Assessing Officer to allow set off of unabsorbed depreciation of A.Y. 1996- 97 to AY. 2000-01.
The next issue that came up for consideration from Revenue’s appeal is addition towards unexplained purchases from M/s. Amrish Traders and S P Corporation for `.8,08,500/- . The Assessing Officer made additions towards purchases from above two parties on the ground that the assessee has failed to file any evidences in support of purchases from the above parties in view of the findings of the Investigation Wing of Maharashtra VAT department, that these parties were involved in providing accommodation entries. The Assessing Officer further observed that the assessee even failed to produce the parties in question for examination therefore, opined that purchases from the said parties are bogus in nature and accordingly, made addition u/s. 69C of the Income tax Act, 1961.
It is the contention of the assessee that purchases from above parties are supported by valid documents including purchase bills, purchase orders, goods receipt entry notes, ledger accounts, payment for said purchases has been made through banking channel and all these evidences have been placed before the Assessing Officer, but he made the additions only on the basis of information from third parties ignoring the fact that the assessee has made VAT payment on the said purchases.
We have heard both the sides and have perused the material available on record. The learned CIT(A) has recorded categorical finding in the light of evidence filed by the assessee that purchase from M/s. Amrish Traders and S P Corporation amounting to ` 8,08,500/- are supported by valid documents. The relevant portion of the order is extracted below:
“11. Ground of Appeal
No.9 relates to the disallowance of purchases from M/s. Amrish Traders and S P Corporation of Rs 1,96,875/- and Rs 6,11,625/- respectively. It is seen that such purchases have been made during the ordinary course of business. The appellant has also submitted the documentary evidence such as copies of purchase orders, invoices, goods receipt entry notes, ledger accounts and bank statements. It is also seen that both the purchases are reflected in the books of account and the appellant has made payment of VAT on the said purchases. The payment to these two parties have been made through A/c Payee cheque drawn in their favour. The appellant has relied on the jurisdictional High Court order dt. 17.12.2013 in the case of CIT-1, Mumbai Vs. M/s. Nikunj Eximp Enterprises (Pvt.) Ltd. and jurisdictional ITAT orders in the case of M/s. Nikunj Eximp Enterprises (ITA 8994/M/04, Madhukant B Gandhi (ITA No. 5929/M/2013 and ITA 6203/M/2013). Therefore, since the disallowance on this account is identical to thee jurisdictional decisions, the Grounds of Appeal No.9 is allowed. The A.O. is directed to delete the addition of Rs.8,08,500/-)”
18. Facts remain unchanged, the Revenue fails to bring on record any evidence contrary to the findings of facts recorded by learned CIT(A). Therefore, we are of the considered view that the CIT(A) was right in deleting additions made towards bogus purchases. We do not find any error in the order of the CIT(A), hence, inclined to uphold his findings and reject the ground of the Revenue.
In the result, the Revenue’s appeal is dismissed and that of the assessee is allowed.
Order pronounced in the open court on this day of 15th June 2018.