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Income Tax Appellate Tribunal, MUMBAI BENCHES “D” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, AM These two cross appeals- one by the assessee and the other by the Revenue- for the assessment year 2006-07 and the only appeal by the assessee for the assessment year 2007-08 involve some common issues. As such we are proceeding to dispose them off by this consolidated order for the sake of convenience. These appeals are directed against the order of the learned Commissioner (Appeals) – 10, Mumbai and arise out of order u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal filed by the assessee for the A.Y. 2006-07 ( read as under:
i. The Learned Commissioner of Income Tax (Appeals) – 10, Mumbai erred in holding that an amount of Rs. 51,00,214/- claimed by the Appellant Company during the assessment year 2006-07 paid towards lease rent and cess to the Government of Tamil Nadu for the salt works at Vedaranyam pursuant to the directive of the Hon'ble Supreme Court, on the ground that they do not relate to the business carried on by the appellant during the relevant assessment year. ii. The Learned Commissioner of Income Tax (Appeals) – 10, Mumbai erred in holding that the above mentioned sum of Rs. 51,00,214/- was not wholly and exclusively incurred for the purpose of trading in securities and funding operations which was the only existing line of business during the assessment year ignoring the fact, the manufacturing business was carried on by the same company. iii. The Learned Commissioner of Income Tax (Appeals) – 10, Mumbai erred in holding that the expenditure cannot be allowed u/s 176(3A) from the income earned after discontinuance of erstwhile business either as no income has been earned by the appellant from the erstwhile business and offered to tax during the relevant assessment year. iv. The Learned Commissioner of Income Tax (Appeals) – 10, Mumbai erred in invoking rule 8D, though relevant rules are not applicable for the assessed year, ignoring the actual disallowances based on cash flow submitted by the assessee during the course of hearing.
The grounds of appeal filed by the revenue for the A.Y. 2006-07 ( read as under:
i. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 58,37,594/- made u/s 14A r.w. Rule 8D of the Income Tax Act by Assessing Officer. ii. On the facts and circumstances of the case and in law, the impugned order of the Ld. CIT(A) is contrary to law and consequently merits to be set aside and that of the Assessing Officer be restored. 4. The grounds of appeal filed by the assessee for A.Y. 2007
08. (ITA No. 156/M/2011) read as under: i. The Learned Commissioner of Income Tax (Appeals) – 10, Mumbai erred in holding that an amount of Rs. 5,03,208/- paid by the Appellant Company during the assessment year 2007-08 paid towards lease rent and cess to the Government of Tamil Nadu for the salt works at Vedaranyam pursuant to the directive of the Hon'ble Supreme Court, on the ground that they do not relate to the business carried on by the appellant during the relevant assessment year. ii. The Learned Commissioner of Income Tax (Appeals) – 10, Mumbai erred in invoking rule 8D, though relevant rules are not applicable for the assessment year ignoring the actual disallowances based on cash flow submitted by the assessee during the course of hearing.
We begin with the ground of appeal raised by the assessee in respect of Rs. 51,00,214/- for the A.Y. 2006-07 and Rs. 5,03,208/- for the A.Y. 2007-08 paid towards lease rent and cess to the Government of Tamilnadu for the salt works at Vedaranyam pursuant to the directive of the Hon'ble Supreme Court.
In a nutshell, the facts are that in the computation of income filed along with the return of income, the assessee company had reduced its income by Rs. 51,00,514/- for the A.Y. 2006-7 and Rs. 5,03,208/- for the A.Y. 2007-08 being extraordinary items relating to payment of Vdearanyam cess payment. The assessee appended a note its return of income which reads as under:
In February 1999, the Company had transferred the Salt Works at Vedaranyam as a going concern for a sum of Rs. 450 lacs subject to the condition that the Government of Tamil Nadu approved the transfer of lease of land where the salt works is located. The said consideration was secured by Bank guarantee by the company. The Government has not yet approved the transfer of lease expired on 31.03.2003. The right of automatic renewal of lease is pending for adjudication before Madras High Court. GHCL has encashed the Bank Guarantee in March 2005, but has not returned the salt works to the company as per the terms of the agreement. Provision for the said loss has been made in the earlier years. The Supreme Court has directed the company to pay Rs. 75/- per acre per annum as deposit till the High Court has decided to entitlement of extension or renewal of lease. The claim pertaining to the period from July 2003 to March 2006 has been provided in the Profit & Loss account for the year. The dispute between the company and GHCL has been referred to the sole arbitration proceedings are going on
The AO noted that the expenditure incurred by the assessee is not related to the business in existence during F.Y. 2005-06 as the assessee is engaged this year in the business of share trading. It was part of the manufacturing business of the case which was discontinued in the year 1999-2000. Since the expenditure was not related to its business carried on in the previous year 2005-06, the AO disallowed the same in computation of income for the A.Y. 2006- 07. On the same reasoning he disallowed the claim also in the A.Y. 2007-08. The AO relied on the judgement of the Hon'ble Bombay High Court in Jai Kishan Narang vs. CIT 50 ITR 700 (Bom) stating that loss of a dead, separate and distinct business cannot be set off against income of another continuing business. The AO also relied on the decision in the case of I.S. & C. Machado vs. CIT 75 ITR 38 (Mad.) wherein it has been held that as the lease rent and cess do not relate to the current years business of the assessee, they are not allowable.
The assessee preferred an appeal against the order of the AO before the learned CIT(A). The learned CIT(A) noted that the salt works manufacturing business was being run by the assessee in the name of DCW Ltd. which was sold as a going concern in the A.Y. 1999- 2000 for a consideration of Rs. 4.50 crore. The resultant income from the said sale proceeds has also been offered and taxed in the said assessment year. Thereafter, the assessee had switched over to a new business of non-banking company and share trading under the present name i.e. DoubleDot Finance Ltd. Thus the expenditure of Rs. 51,00,514/- for the A.Y. 2006-07 and Rs. 5,03,208/- for A.Y. 2007-08 claimed by the assessee related to lease rent of land for manufacturing of salt works in the name of DCW Ltd. which no longer existed as it stood sold to GHCL. Therefore, any liability of expenditure incurred in relation to non-existent business and sold out business cannot be set off out of current year’s income derived from share trading which is separate and distinct business. In view of the above, the learned CIT(A) upheld the disallowances made by the AO.
Before us, the learned counsel of the assessee filed a copy of (i) relevant pages of the balance sheet and profit & loss account of the appellant for A.Y. 1998-99, (ii) copy of the ITR acknowledgement for A.Y. 1999-2000 along with computation of total income, (iii) relevant pages of the balance sheet and profit & loss account of the appellant for A.Y. 1999-20000, (iv) relevant pages of Tax Audit Report of the appellant for A.Y. 1999-2000, (v) copy of the ITR acknowledgement for A.Y. 2000-01 along with computation of total income, (vi) relevant pages of the balance sheet and profit & loss account of the appellant for A.Y. 2000-01, (vii) relevant pages of Tax Audit Report of the appellant for A.Y. 2000-01 & (viii) computation of total income of the appellant for A.Y. 2006-07. He also relied on the decision in the case of Tata Chemicals Ltd. vs. DCIT (2000) 72 ITD 1 (Mum), Bansidhar Pvt. Ltd. vs. CIT (1981) 127 ITR 65 (Guj), CIT vs. Western Bengal Coalfields Ltd. (1998) 233 ITR 139 (Cal) and Veecumsees vs. CIT (1996) 187 ITR 185 (SC).
On the other hand, the learned DR supports the order passes by the learned CIT(A).
We have heard the rival submissions and perused the relevant material on record. We begin with the decisions relied on by the learned counsel of the assessee.
In Tata Chemicals Ltd. (supra), the assessee – company claimed a deduction of Rs. 86.42 crores towards interest paid by it against Rs. 5.18 crore received as interest. The AO considered Rs. 55.12 crores for allowance under the head “business”. The AO held that out of the above sum, Rs. 35.13 crores represented interest on capital borrowed and utilised for the purpose of the business operations of the fertilizer division which had not started functioning during the year and was only in the process of being put up. He, therefore, disallowed its deduction u/s 36(1)(iii). The assessee contended that the fertilizer division was a part of the assessee’s existing chemical business and was not distinct or separate business and, therefore, the interest on capital borrowed for fertilizer plant constituted a valid business deduction. However, the AO held that the fertilizer unit was a separate and distinct business and did not constitute part of the business carried on by the assessee during the year. On appeal, the Commissioner (Appeals) affirmed the order of the AO. On appeal by the assessee, the Tribunal held that where the assessee’s new fertilizer business was under process of construction, it was found to be interlacing, inter dependent and inter connected with old chemical business and two businesses should be held as single and interest on borrowed capital attributable to fertilizer businesses should be allowed even though it had not started functioning.
In Bansidhar Pvt. Ltd. (supra), the assessee a private limited company was carrying on different business activities at different points of time viz., (i) purchase and sale cloth (business continued up to the relevant year of account and even thereafter), (ii)processing of cloth and manufacturing of chemicals and dyes (business closed in the relevant year of account 1966-67), (iii) manufacture of machinery (business closed on August 1, 1961) and (iv) steel plant and rolling mill (business closed on September 30, 1961). Upon the closure of the business in the relevant year of account, the total sum paid by way of retrenchment compensation was Rs. 9,603/-. Further, in respect of the two other businesses, namely manufacture of machinery and steel plant and rolling mill, which were closed earlier, the assessee could not recover outstanding dues in the total sum of Rs. 34,617/- and the amounts were written off as bad debt in the relevant year of account. The assessee claimed deduction u/s 37 of the Act of a sum of Rs. 9,603/- paid as retrenchment compensation and also claimed deduction u/s 36(1)(vii) of an amount of Rs. 34,617/- by way of debts. The ITO and, on appeal, the AAC, rejected both the claims. On further appeal, the Tribunal held that since retrenchment compensation was paid and bad debts were incurred in business totally distinct from the business carried on by the assessee, the deduction could not be allowed in the assessment of the assessee. The Hon'ble High Court held that “there was complete interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the assessee and all the activities constituted one and the same business and the deduction on account of retrenchment compensation paid by the assessee upon the closure of one of its businesses and the write off of its outstanding dues as bad debts in the other were allowable deductions under section 37 and section 36(1)(vii) respectively.
In Western Bengal Coalfields Ltd. (supra) , the assessee carried on mining business till the nationalisation of coal mines under the Coal Mines (Nationalisation) Act, 1973. During the assessment years 1975-76, 1977-78 and 1978-79, the assessee claimed before the AO that it had incurred expenditure by way of interest to the bank amounting to Rs. 2,91,980, Rs. 7,71,851 and Rs. 7,71,851 respectively. The assessee also brought to the notice of the AO that it was not only carrying on the activity of coal mining but also carried on boring business and both constituted one and the same business and that, therefore, whatever loan had been obtained though for one line of business and if that was closed, even after the closure of that business, the assessee’s business continued and it carried on some other activities, the assessee was entitled to deduction of interest on the loans obtained for the purpose of carrying on the business. The AO rejected the claim of the assessee. The Hon'ble High Court held that the coal mining business and the boring business constituted the same business and that the assessee was entitled to deduction of interest on the loan obtained from the bank.
In Veecumsees (supra), the assessee ran a jewellery business. It then commenced business also in the exhibition of cinematographic films. In 1961, it obtained loans for building a cinema theatre. The said theatre was built in 1962 and was run by the assessee until July 31, 1965, when it was transferred to another firm. For the years during which the assessee exhibited films in the said theatre the interest paid on the loans obtained for constructing it were allowed by the revenue as a deduction under the provisions of section 36(1)(iii) of the Act. The Income Tax Officer declined the deduction for the assessment years 1967-68, 1968-69 and 1969-70, on the ground that the business of exhibition of films in the said theatre was no longer in existence. The Hon'ble High Court held that “Tribunal was right in concluding that such interest had to be treated as a deduction under section 36(1)(iii) of the Act. The loans had been obtained for the purposes of the assessee’s business. The fact that the particular part of the business for which the loans had been obtained had been transferred or closed down did not alter the fact that the loans had, when obtained, been for the purpose of the assessee’s business. Apart from this, the Tribunal found as a fact that the business carried on by the assessee as jeweller and in running the cinema theatre, etc., was composite. In view of this finding also, the assessee was entitled to the deduction of the interest paid on the loans in question u/s 36(1)(iii) of the Act.”
11.1 Now we turn to the decisions relied on by the AO and the learned CIT(A). In Jai Kishan Narang(supra), the ‘Head Note’ is as under : Section 37(1) of the Income-tax Act, 1961 (Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922) - Business expenditure - Allowability of - Assessment years 1956-57 and 1957-58 - Assessee was karta of HUF which carried on guarantee broking business for certain bank and was also partner in a certain firm which carried on money lending business but HUF discontinued guarantee broking business in 1947 as well as in money lending business after partial partition - Assessee who continued money lending business in his individual capacity claimed deduction of half of decretal amount which liability arose in guarantee broking business in 1955 and legal expenses incurred in connection with it in computation of his income on ground that guarantee broking business was never discontinued and share of security deposit made with bank received by him constituted his stock-in-trade and that business of guarantee brokers formed part and parcel of his money lending business - Whether guarantee broking business consisted of introducing clients to bank and as this activity was stopped in 1947, business could not be said to continue merely because commission and interest in respect of transactions guaranteed before 1947 continued to be received - Held, yes - Whether money-lending business and guarantee broking business were not identical and in absence of proof loss suffered in guarantee broking business could not be said to be loss suffered in money-lending business, particularly when two business vested in two different entities and it could not be said that they were branches of same business and therefore loss of dead, separate and distinct business could not be claimed as set off against income of another business which assessee was carrying on in relevant accounting year - Held, yes - Whether, further, when guarantees broking business was discontinued, its assets and liabilities became capital in nature as there was evidence to show that they were taken over as stock-in-trade in money lending business, loss arising in guarantee broking business was capital in nature and not allowable - Held, yes - Whether legal expenses to get rid of liability which was capital in nature could not be allowed as business expenditure under section 10(2)(xv) - Held, yes.
In I.S. & C. Machado (supra), the ‘Head Note’ runs as under: Section 28(1) of the Income-tax Act, 1961 [Corresponding to section 10(1) of Indian Income-tax Act, 1922] – Business loss/deduction – Allowable as – Assessment year 1953-54 – Assessee-firm was carrying on country craft route agency business which had been discontinued and a petroleum agency business which was not discontinued – Whether assessee’s claim for set off of a sum paid in discharge of decree in respect of its country craft route agency business could not be allowed against profits of its petroleum agency business under section 10(1) of 1922 Act – Held, yes.
11.2 The assessee by virtue of an arrangement with DCW Ltd. (the lease holder) was manufacturing salt at Vedaranyam (Tamil Nadu) between 1990 December1998. The assessee was known by the name DCW Home Products Ltd. The assessee-company disposed off its salt undertaking at Vedaranyam (Tamil Nadu) to GHCL for a sum of Rs. 450 lacs during A.Y. 1999-2000 and the responsibility for transfer of the lease in favour of the buyer, i.e. GHCL rested with the assessee. The Hon'ble Supreme Court vide its order dated 8th April, 2005 ruled as under:
“The directions of the learned Single Judge for deposit of Rs. 75/- per acre (by order dated 8.11.2004) shall be complied with within six weeks as undertaken. This deposit shall not, however, be construed as payment for the purpose of renewal or extension.” 11.3 During the course of proceedings before us the learned counsel of the assessee filed a chart indicating that the assessee-company had earned income from manufacturing activities of Rs. 1,12,04,47,776/- (A.Y. 1997-98), Rs. 1,01,35,79,302/- (A.Y. 1998-99), Rs. 56,41,92,495/- (A.Y. 1999-00) and Rs. 31,58,205/- (A.Y. 2000-01). Also it is submitted by him that the assessee-company had earned income from trading in shares and securities and financial activities of Rs. 50,83,839/- (A.Y. 1997-98), Rs. 17,89,800/- (A.Y. 1998-99), Rs. 53,54,723/- (A.Y. 1999-00), Rs. 34,66,46,566/- (A.Y. 2000-01), Rs. 27,17,77,249/- (A.Y. 2001-02), Rs. 16,92,26,716/- (A.Y. 2002-03), Rs. 76,07,56,032/- (A.Y. 2003-04), Rs. 82,41,36,993/- (A.Y. 2004-05), Rs. 67,03,76,351/- (A.Y. 2005-06) and Rs. 1,65,74,13,300/- (A.Y. 2006- 07). It is also submitted that the assessee-company had earned other income of Rs. 1,51,80,393/- (A.Y. 1997-98), Rs. 1,73,00,148/- (A.Y. 1998-99), Rs. 79,59,421/- (A.Y. 1999-00), Rs. 44,98,972/- (A.Y. 2000- 01), Rs. 29,80,440/- (A.Y. 2001-02), Rs. 54,90,912/- (A.Y. 2002-03), Rs. 31,81,966/- (A.Y. 2003-04), Rs. 30,41,317/- (A.Y. 2004-05), Rs. 2,29,904/- (A.Y. 2005-06) and Rs. 17,35,700/- (A.Y. 2006-07).
11.4 Now we turn to the subject matter in the instant appeal ‘of complete interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the assessee’ as distilled from the decisions cited by both the parties. The same has not been verified by the AO or the learned CIT(A). The order of the CIT(A) on the above issue is set aside and the issue is restored to the file of the AO with a direction to verify whether there was complete interconnection, interlacing, interdependence and dovetailing of the different business activities carried on by the assessee and all the activities constituted one and the same business . If the answer is yes, then the AO is directed to allow the claim of Rs. 51,00,214/- for the A.Y. 2006-07 and Rs. 5,03,208/- for the A.Y. 2007- 08. Otherwise, the AO would disallow the above claim. The assessee is directed to file before the AO the relevant details. The AO would pass an order after giving a reasonable opportunity of being heard to the assessee. Thus the above grounds of appeal are allowed for statistical purposes.
12. Now we turn to the appeal filed by the revenue for the A.Y. 2006-07 ( ). It relates to the deletion by the learned CIT(A) of disallowance of Rs. 58,37,594/- made by the AO u/s 14A r.w. Rule 8D. The learned CIT(A) has restricted the disallowance. Similar is the issue in ground no 4 of the appeal filed by the assessee for the A.Y. 2006-07 (ITA No. 552/Mum/2011). Briefly stated the facts are that during the A.Y. 2006-07, the assessee has shown dividend income of Rs. 60,72,683/- which it claimed as exempt u/s 10(34) of the Act. The A.O. applied rule 8D r.w.s. 14A of the Act and made a disallowance of Rs. 58,37,594/-. Similarly for the A.Y. 2007- 08, the assessee-company had earned dividend of income of Rs. 49,08,211/- which it claimed as exempt under the provisions of the Act. The AO applied rule 8D r.w.s. 14A and made a disallowance of Rs. 10,37,647/-. In appeal filed by the assessee, the learned CIT(A) directed the AO to make the disallowance as under:
i. Direct ii. Indirect Interest Indirect interest 0.5% of average Total Interest Average attributable investment disallowance investment/average u/s asset 14A=i+ii+v 12.1 We have heard the rival submissions and perused the relevant material on record. We find that the AO has worked out the disallowance u/s 14A r.w.r. 8D. The same rule is not retrospective as it was notified on 24/03/2008 and would be applicable only from AY 2008-09. In Godrej & Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81(Bom), it has been held that Rule 8 D is not retrospective. The Hon’ble Bombay High Court in CIT vs. M/s. Godrej Agrovet Ltd vide Income Tax Appeal No. 934 of 2011, dated 8.1.2013, has held that percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09. In the above case it upheld the dis allowance to the extent to 2% of the total exempt income. Respectfully following the above decision, we direct the AO to restrict the disallowance to 2% of the total exempt income. We order accordingly.
In the result, the appeal is partly allowed.
Order pronounced in the open court on 29/03/2017