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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI RAM LAL NEGI, JM
Assessee by : Shri Jay Bhansali Revenue by : Shri V. Justin सुनवाई क� तार�ख / : 06.02.2018 Date of Hearing घोषणा क� तार�ख / : 12.04.2018 Date of Pronouncement आदेश / O R D E R Per Shamim Yahya, A. M.: These are cross appeals by the assessee and the Revenue arising out of the order of the ld. Commissioner of Income Tax (Appeals) dated 16.11.2014 and pertaining to assessment year 2010-11. Assessee’s appeal
2 & 642/Mum/2016 M/s. Essel Propack Ltd. 2. The grounds of appeal in assessee’s reads as under:
1. Disallowance u/s 14 A - Rs.1,91,28,205/- a) The Ld. CIT (A) erred in law and facts in upholding disallowance of Rs. 1,52,53,225/- out of interest and Rs.38,74,980/- out of expenses u/s 14 A of the Act. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law. b) The Ld. CIT (A) erred in law and facts in disallowing interest u/s 14A of the Act without considering the fact that all investments are made out of internal accruals and assessee has interest free funds and internal accruals far in excess of these investments. c) The Ld. CIT (A) erred in law and facts in upholding disallowance u/s 14A of the Act even though investment are made in subsidiary/associate where the assessee has deep business interests, without following the Supreme Court decision in the case of S. A. Builders Ltd. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law. d) The Ld. CIT (A) erred in law and facts in upholding notional allocation of expenses to tax free income and disallowance of Rs.38,74,980/- out of expenses without proving nexus of expenses with tax free income and without recording reasons of rejecting assessee's claim that no expenditure incurred to earn exempt income. e) The Ld. CIT (A) followed Hon. ITAT's order on other grounds but deliberately not followed the order of Hon. ITAT for A.Y. 2007-2008 which deleted the disallowance u/s 14A of the Act and followed the order of the predecessor CIT (A) of asst. year 2008-09 and 2009-10 which was against the assessee.
2. Set-off of brought forward MTM loss - Rs. 86,98,122/- a) The Ld. CIT (A) erred in law and facts in denying set off of brought forward (speculation) Mark to Market (MTM) loss against MTM Profit of Rs. 86,98,122/-. The reasons given him for doing so are wrong and improper. b) The Ld. CIT (A) erred in law and facts in treating MTM (Foreign exchange (FX) Loss as speculation loss in A.Y. 2008-2009 & 2009-2010 and MTM {FX) gain during the year as normal income for denying set off of gain against brought forward loss of same nature. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law. c) Without prejudice to other grounds of appeal, the Ld. CIT(A) ought to have allowed set-off of brought forward MTM loss (FX Loss) on open forward contracts treated as speculation loss against MTM gain (FX gain) on the same nature of transactions in the year under appeal. The reasons given by her for doing so are wrong, contrary to the facts of the case and against the provisions of law. d) Without prejudice to above, the Ld. AO erred in law and facts in not reversing / set off speculation loss brought forward when the MTM loss is reversed and netted off against other business loss in the subsequent year
3. The above grounds / sub-grounds are without prejudice to each other.
Brief facts on this issue noted by the Assessing Officer are as under:
The balance-sheet of the assessee shows that there were investments in equity/ redeemable preference shares totaling to Rs.573,39,87,298/-. Out of this, investment of Rs.495,41,55,660/- was in foreign subsidiaries and of Rs.77,98,31,638/- was in Indian subsidiaries. The assessee had received dividend from foreign subsidiaries to the tune of Ks.24.62,02.887/-. This was offered for taxation as income from other sources. However, the assessee had made investment in equity shares of Indian subsidiaries also and dividend from such investment is exempt from taxation. The assessee has however, not apportioned any expenditure relatable to the same.
4. Upon the Assessing Officer’s query as to why disallowance of expenses in earning the exempt income should not be made, the assessee responded that the investments were made out of internal accrual and no borrowed funds was used. It was further submitted that the assessee had made a strategic investment in its subsidiary associate companies and hence interest and other expenses relating to such investment cannot be disallowed. However, the Assessing Officer was not convinced.
He proceeded to make the disallowance as per Rule 8D u/s. 14A and made a disallowance of Rs.1,91,28,205/-.
Upon the assessee’s appeal, the ld. Commissioner of Income Tax (Appeals) has held as under:
It is seen that the CIT(A) for the A.Y.2008-09 has dismissed this claim of the appellant u/s.14A vide order No.CIT(A)-12/Addl.CIT 6(2)/32/2011-12
4 & 642/Mum/2016 M/s. Essel Propack Ltd. dt.22.2.2013. For the A.Y. 2009-10 the undersigned, as CIT(A)-12, has also dismissed similar claim of the appellant u/s.l4A vide order No.CIT(A)-12/IT 79/DCIT 6(2)/13-14 dt.4,8.2015. It is seen that for the Assessment Year under consideration here, ie. A.Y. 2010-11 claim u/s.l4A in Ground of Appeal
No.l clause(i)-(iv) are on identical grounds and so the same are dismissed by following the earlier orders. However, in clause (v) of Ground of Appeal No.l the appellant has stated that the disallowance of Rs.1,91,28,205/- U/S.14A of the Act(including the estimated expenses) by the A.O. by adding it to book profits u/s.115JB is erroneous both in law and facts in the light of the Hon'ble Supreme Court decisions in the case of Goetze India Ltd. Vs CIT(2009)
32. SOT lOl(Del) vide order dt.20.5.2009 and Hon'ble Jurisdictional ITAT decisions in the cases of (i) Essar Techholdings Ltd. in ITA No.3850/M/10, Bengal Finance and Investments Fvt. Ltd. (ii) Bengal Finance & Investments Pvt Ltd. (ITA No.5620 & 5937/Mum/2010) (iii) Reliance Capital Ltd. (ITA No.3037 & 2155/Mum/2008) (iii) Reliance Industrial Infrastructure Ltd.(ITA No.69 & 70/Mum/2009) (iv) Reliance Industries Ltd. (TfA No.4475 & 4537/Mum/2007) Thus it was submitted that the addition of Rs.1,91,28,205/- made to book profit u/s.115 JB should be deleted. Thus in the light of Hon'ble Apex Court and jurisdictional ITATs orders the A.O. is directed not to add the amount of Rs.1,91,28,205/- u/s.115 JB for computation of Book Profit. The disallowance of Rs.1,91,28,205/- U/S.14A r.w.s. 8D by the A.O. under normal provisions is confirmed. Thus Ground of Appeal No.l is partly allowed.
Against the above order, the assessee and the Revenue are in cross appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the assessee contended that as regards the dividend on foreign investment, the assessee has duly offered the same for taxation. As regards the investment in domestic companies, the ld. Counsel of the assessee submitted that no dividend income has been earned. He submitted that the Hon’ble Delhi High Court in the case of Cheminvest Ltd vs CIT [2015] 378 ITR 33 (Del) is in favour of the assessee. He submitted that in assessee’s own case in for assessment year 2009-10, this tribunal has adjudicated this issue by holding as under:
5 & 642/Mum/2016 M/s. Essel Propack Ltd.
3. At the outset, learned AR placed on record the order of the Tribunal for A.Y.2008-09 dated 11/09/2017, wherein both the issues raised by assessee during the year under consideration were decided in favour of the assessee. We had carefully gone through the orders of the Tribunal wherein disallowance made u/s.14A was deleted by Tribunal after observing as under:- "6. We heard the rival submissions and gone through the orders of the tax authorities below. We have also gone through the case law relied upon before us. From the computation statement as well as the Balance Sheet as submitted by the assessee we noted that the assessee had made investments in foreign subsidiary companies and from those companies it got the dividend income. The assessee has not claimed the said dividend income as exempt. The dividend income has been shown as income from other sources and due tax has been computed by the assessee in the computation statement. Therefore no question arises on making disallowance in respect of investment made in foreign subsidiary company. The assessee has also made investments in Indian companies but did not earn any dividend income. In view of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT 378ITR 33 no expenses can be disallowed under section 14A as the assessee has not earned any exempt income. Same view has been taken by the Hon'ble Bombay High Court in the case of Principal CIT vs. Ballarpur Industries Ltd. ITA No. 51 of 2016. No contrary decision was brought to our knowledge. We, therefore, delete the disallowance made by the AO and sustained by the CIT(A). Thus ground No. 1 taken by the assessee is allowed. "
During the year under consideration also assessee has not earned any exempt income, accordingly following the order of the Tribunal in assessee's own case, we do not find any merit for the disallowance made u/s.14A.
We find that the facts in the present case are identical. There is no finding that the assessee has earned any dividend income out of the concerned investments. Hence, following the aforesaid precedent, we hold that no disallowance u/s. 14A is permissible inasmuch as the assessee has not earned any exempt income on the concerned investment.
Apropos ground relating to set off of brought forward MTM loss - Rs.86,98,122/-
On this issue, the ld. Counsel of the assessee submitted that the issue raised has now become infructuous, as the ITAT for the preceding year has held the impugned adjustment of brought forward loss no longer arises. Accordingly, in view of the above submissions of the ld. Counsel of the assessee we hold that this ground raised has become infructuos and the same is dismissed as such.
Revenue’s appeal
Grounds of appeal in Revenue’s appeal reads as under:
1. "Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance ofRs. 2,91,28,205/- u/s 14A r.w.r.SD of the Income Tax Act, 2961 for purpose of calculating the MAT u/s 115JB of the Act without considering the facts that book profit should be increased by disallowance u/s 14A r.w.r. 8D" 2. "On facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting disallowance of interest of Rs.37,61,89s/- made by the Assessing Officer u/s 36(l)(iii) of the Income Tax Act without appreciating the fact that the assessee had failed to prove during the course of assessment proceedings that the expenditure incurred on its subsidiary companies were from its surplus funds and not interest-bearing funds" 3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary."
Apropos ground no.1:
We find that as we have already held in assessee’s appeal herein above, that since the assessee has not earned any exempt income, no disallowance is permissible u/s. 14A.
No disallowance is required under normal provisions. In this view of the matter, no issue arises as to the disallowance of expenses u/. 115JB of the Act. Hence, this ground raised by the Revenue stands dismissed.
Apropos ground no.2
On this issue, the Assessing Officer observed that the assessee has given loans and advances to subsidiary companies and joint venture companies. The Assessing Officer Officer further enquired as to why the interest should not be disallowed u/s. 36(1)(iii) on these non interest bearing loans/advances made to subsidiary/joint venture companies.
Being not convinced by the assessee’s response, the Assessing Officer has held as under:
“8.3. The assessee's submission has been carefuily considered. The assessee has borrowed interest-bearing funds and paid interest thereon. The company has given advances to its subsidiaries and Joint Venture Companies from such interest- bearing funds whicn cannot constitute purposes of business of assessee company. Further, the assessee has not established by fund flow statement that the expenditure incurred on its subsidiary companies were from its surplus ftmds and not interest-bearing funds/ The onus is on the assessee to demonstrate that the funds advanced were out of assessee's own interest-free funds. For every proposed disallowance, or for every utilization of fund, the assessee cannot refer to the availability of interest-free funds.
8.4. Further, detailed reasons are given in assessment order for A.Y. 2007-08 (wherein the part of the assessment order for A.Y. 2006-07 has been reproduced in para 4.2 of the order for A.Y. 2007-08), Similar disallowance was also made in preceding A.Y. 2009-10. Considering the facts & circumstances of the case, the disallowance of interest u/s, 36(l)(iii) in respect of interest-free loans and advances given to the subsidiaries is worked out. The assessee was asked to submit the details of advances on similar line as made in preceding assessment year. The same is as under; Calculation of Disallowance u/s 36(1)(IU) ADVANCE AGAINST EXPENSES Closing Interest Balance
1 The Egyptian India Co. for Modern 592,801 132,751 Packaging S.A.E., Egypt 2 Essel Packaging (Guangzhou) Ltd. 583,019 752,312 3 Tubopack De Columbia S,A, 335,040 130,534 4 Essel Propack de Venezuela C.A. 1,856824 198,932 5 Essel Propack Philippines Inc. 191,517 108,863 6 Essel Propack LLC, Russia 1,416,007 126,394 7 Essel de Mexico, S.A. de C,V. 2,768,136 417,884 8 Telcon UK 3,314,737 341,220 9 Essel propack MISR 89,822 69,901 10 Arista Tubes-USA 2,154,257 356,873 11 Essel Propack Polska Sp. Z.O.O., 2,713,856 1,120,250 Poland
8 & 642/Mum/2016 M/s. Essel Propack Ltd. 12 Essell Propack Hefei, China 102,555 5,978 16,118,671 3,761,893 8.5. The disallowance u/s. 36(l)(iii) on account of interest-free advances and meeting the liabilities on behalf of its subsidiaries worked out at Rs.37,61,893/- is disallowed and added back to the total income.”
Against the above order, the assessee appealed before the ld. Commissioner of Income Tax (Appeals).
The ld. Commissioner of Income Tax (Appeals) held as under:
CIT(A)’s order for A.Y. 2008-09 vide order dt. 22.2.2013, and CIT(A) order dt. 10.8.2015 for a.Y. 2009-10 has deleted the addition of the A.O. since A.Y. 2003- 04 onwards till A.Y. 2007-08 by following the same on identical issue. Such order of CIT(A) has also been accepted by the Department. Therefore, ground of appeal no. 4 is allowed since the issue is the same for this assessment year also.
Against the above order, the Revenue is in appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the identical issue was considered by this tribunal in assessee’s own case for assessment year 2009-10. The tribunal has held as under:
8. With regard to disallowance of interest explained u/s.36(1)(iii), the CIT(A) has recorded the following findings:- 77.7 CFT(A)'s order for A.Y. 2008-09 vide order dt.22.2.2013, has deleted the addition of the A.O. since A.Y. 2003-04 onwards till A.Y. 2007-08 on identical issue: Such order of CIT(A) has also been accepted by the Department. Therefore, ground of appeal
No.4 is allowed. Since the issue is the same for this assessment year.
9. It is clear from the findings recorded by CIT(A) that similar disallowance made by the AO was deleted by CIT(A) since A.Y.2003-04 to 2008-09 on identical issues, however, Department did not file any appeal and accepted assessee's contention.
10. We have considered rival contentions and found from record that the assesses has incurred expenses on behalf of certain foreign subsidiaries and Indian subsidiary and shown them under the head Advances Recoverable. The assessee has not made any non business advance to the these companies, but these amount represents various debits in the nature of sale of spares, royalty receivable, service 9 & 642/Mum/2016 M/s. Essel Propack Ltd. charges and the expenses incurred on their behalf such as traveling expenses, establishment expenses, financial guarantees, communications expenses, etc. The assessee does not have system of charging interest on such debits of expenses incurred on their behalf. Such advances did not attract any adjustment in Transfer Pricing order also. However, the Ld, AO considered these debit balances as advances without interest and disallowed Rs.1,07,54,398/- out of interest u/s. 36(1)(iii). We do not find any merit for the disallowance so made by the A.O.
17. We find that the ld. Departmental Representative has not disputed that fact for this year are not identical. Since the facts of the case are identical, following the ITAT decision in assessee’s own case as above, we uphold the order of the ld. Commissioner of Income Tax (Appeals).
18. In the result, the assessee’s appeal stands partly allowed and the Revenue’s appeal stands dismissed. Order pronounced in the open court on 12.04.2018 Sd/- Sd/- (Ram Lal Negi) (Shamim Yahya) �या�यक सद�य / Judicial Member लेखा सद�य / Accountant Member मुंबई Mumbai; �दनांक Dated : 12.04.2018 व.�न.स./Roshani, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. आयकर आयु�त(अपील) / The CIT(A) 3. आयकर आयु�त / CIT - concerned 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 5. गाड� फाईल / Guard File 6. आदेशानुसार/ BY ORDER,