HERSHEY INDIA P.LTD,MUMBAI vs. DCIT 14(2)(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ PER RAJENDRA, AM- अनुसार Challenging the order,dated 23/12/2014 of the CIT(A)-22,Mumbai the Assessing Officer (AO)and the assessee have filed cross appeals.Assessee-company, engaged in the business of manufacturing of food and other allied products,filed its return of income on 18/11/ 2011,declaring net loss of Rs.25.37 crores.The AO completed the assessment u/s.143(3)of the Act,on 31/ 01/2014,determining its income at Rs.(-)19.62 crores. ITA/2784/Mum/2015: 2.Effective ground of appeal,raised by the AO,is about deletion of disallowance made u/s.14A of the Act.During the assessment proceedings,the AO found that the assessee had shown investments amounting Rs.253.07 crores as on 31/03/2011, that it had incurred interest and financial charges of Rs.15.18 crores.He directed the assessee to explain as to why disallowance u/s.14A read with rule 8D of Income Tax Rules, 1962 (Rules) should not be made. The assessing replied that it had earned more exempt income during the year, that no disallowance was required to made.However,the AO made a disallowance of Rs. 13.10 crores (expenditure directly relating to exempt income Rs. 2.49 crores+interest expenditure Rs. 9.34

1409&2784/M/15(11-12) Hershey India Pvt.Ltd. crores+ 0.5% of average investment Rs. 1.26 crores).He further observed that the assessee had already made disallowance of Rs. 8.24 crores in its computation. Finally,he made an addition of balance amount of Rs. 4.8 crores to the total income of the assessee. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA)and made elaborate submissions. After considering the assessment order and the submission of the assessee,he held that the assessee had acquired 100%ownership interest in the Nutrine Confectionery Company Ltd.for a consideration of Rs. 253crores, that while acquiring the business it had specified borrowing of Rs. 60 crores to fund the above investment, that it had not found any exempt income,that it had raised specific additional ground in that regard, that it also argued that the investment was made for strategic purposes. The FAA referred to the case of Holcim India P.Limited (ITA for 86/4014 and 299 of 2014 of honorable Delhi High Court, dated 05/09/2014 and held that if there was no exempt income no disallowance could be made u/s.14A. 2.2.During the course of hearing before us, the Departmental Representative (DR) argued that expenses incurred can be allowed only to the extent they were relatable to the earning of taxable income, that the provisions of section 14A reiterated the settled law about matching principle of accountancy,that no expenditure would be allowed at all against the exempt income,that otherwise the matching principle would get disturbed, that there was fundamental difference between the receipt and the income, that the concept had to be understood and applied in reference to dividend and income by way of dividend which was used in various provisions of the Act.He referred to the cases of Distributor (Baroda)Private Ltd.(22 taxman 49),Cloth Traders P Limited(118 ITR 243),ACG Associates Capsules P Ltd. (343 ITR 89) and the provisions of section 80M of the Act along with the circular No. 5, dated 11/02/2014. He further argued that in section 10(34) of the Act it was income by way of dividend and not the receipt of dividend which was exempt. 2.3.Before us, the Departmental Representative (DR) supported the order of the AO and stated that there was difference between receipt and income. The Authorised Representative (AR) supported the order of the FAA and referred to the case is of Cheminvest Ltd. (378 ITR 33). 2.4.We have heard the rival submissions and perused the material before us. We find that the assessee had made a disallowance of Rs. 8.24 crores on its own, that the AO had made further disallowance,u/s.14A read with Rule 8D of the Rules, of Rs. 4.85 crores,that the assessee had 1409&2784/M/15(11-12) Hershey India Pvt.Ltd. not claimed any expenditure against the exempt income. Here,we would like to mention that basic principles of taxation jurisprudence stipulate that there should not be double deduction as well as double taxation.The fundamental principle behind introducing the amendments to section 14A was to curb the practice of claiming exempt income on one hand and making a claim for deduction for expenditure eligible to exempt income.Earlier the assessees would claim expenditure against the income which did not form part of taxable income and thus it resulted in double deduction.To plug the loophole, the legislature brought certain amendments and provided that no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case,the FAA has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that he held that disallowance u/s.14A of the Act could not be made.In the case before us,admittedly the assessee did not make any claim for exemption.In such a situation section 14A of the Act would have no application. The honorable Delhi High Court in the case of Cheiminvest India (supra) has held as under: “The expression “does not form part of the total income” in section 14A of the Income-tax Act, 1961, 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 the income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year.” Considering the above and respectfully following the judgment of Cheminvest (supra),we decide the effective ground of appeal against the AO. ITA/1409/Mum/2015: 3.Effective ground of appeal, raised by the assessee, is about disallowance made 36(1)(iii) of the Act.During the assessment proceedings, the AO directed the assessee to show cause as to why proportionate interest on borrowed funds used for acquisition of capital asset should not be disallowed 36(1)(iii) of the Act.After considering the submission of the assessee dated 27/ 11/ 2013,the AO observed that the verification of the balance sheet revealed that during the year under consideration the capital work in progress increased Rs. 2 958 lakhs as against Rs. 56 lakhs in the previous year, that it clearly showed that there was extension of the business, that the advances had been made by the assessee for the purpose of acquisition of fixed assets which were acquired to augment the installed capacity of production of goods, that it had not provided any justification as to how the advances made for the acquisition of machinery were not in the nature of extension of existing business, that the claim of the assessee that no specific borrowings were made for purposes of making the advances was not supported with 1409&2784/M/15(11-12) Hershey India Pvt.Ltd. documentary evidences, that assessee had not filed cash flow statements indicating availability of own funds, that all the funds of the assessee flow into the common fund and all the expenses were incurred out of the same,that the onus of establishing that own funds had been used for purpose of advancing money for purchase of fixed assets was on assessee, that it had not discharge its onus with supporting documents.He referred to the provisions of section 36 and made an addition of Rs.64,52,322/-total income of the assessee. 3.1.During the appellate proceedings,the FAA, after considering the submission of the assessee,held that the assessee had increased capital work in progress, that the interest payable on the increase had to be disallowed in view of the proviso to section 36. He confirmed the order of the AO. 3.2.Before us,the AR argued that the investment in WIP was out of own funds , that the interest free fund available to the assessee was Rs.299.3 crores, that the investment during the year was made in the 100% subsidiuary company.He relied upon the case of Reliance Utilities and Power Ltd.(313ITR340).The DR argued that cash flow statement was not furnished, that the assessee had not established as to how funds were utilized. 3.3.We have heard the rival submissions and perused the material before us.We find that the assessee had sufficient own funds and reserves to purchase new assets ,that there is no evidence to prove that existing work in progress had increased because of loans taken by the assessee.The balance sheet of the assessee proves that it had sufficient fund.Therefore,respectfully following the judgment of Reliance Utilities and Power Ltd.(supra),we decide the effective ground of appeal in favour of the assessee.