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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
O R D E R
PER AMIT SHUKLA, JM:
The aforesaid appeal has been filed by the assessee against the impugned order dated 30-11-2005 passed by the learned CIT (Appeals)-6, Mumbai for quantum of assessment passed u/s 143(3) of the Income Tax Act for the assessment year 2002-03 on various grounds.
In the various grounds of appeal, the assessee has challenged, firstly, the disallowance of proportionate expenses of Rs.2,39,814/- u/s 14A; secondly, taxing of DEPB / advance licence benefit of Rs.27,78,000/- on the ground that it has accrued to the assessee and the same is taxable u/s 28(iv); and lastly, disallowance of Rs.16,800/- being amount of penalty paid to Assistant Engineer, BMC for construction of temporary shed before obtaining the requisite permission.
2 Assessment Year: 2002-03 3. Before us, the learned Counsel for the assessee, Shri Niraj Sheth, submitted that disallowance u/s 14A has been confirmed by the learned CIT (A) on account of proportionate interest expenses of Rs.2,39,814/- as against the proportionate disallowance of interest expenses of Rs.5,85,561/- made by the Assessing Officer. While doing so, the learned CIT (A) has followed his own order for assessment year 2001-02. He pointed out that in assessment year 2001-02, before the Tribunal, the assessee has given a chart of availability of surplus funds for making the investment and on that basis the Tribunal has set aside the matter to the file of the Assessing Officer for verification. In this year also the assessee has filed copy of statement showing position of funds and investments made in securities earning tax- free income. From the statement, he submitted that, the interest free and surplus funds available with the assessee was approximately, Rs.166 crores as against the assessee’s investment which resulted tax-free income which stood at Rs.5,27,27,000/-. Thus, no proportionate disallowance of interest can be made. The learned DR on the other hand relied upon the order of the learned CIT(A).
Regarding the second issue of DEPB benefit, he submitted that the assessee has credited a sum of Rs.27,78,000/-as closing balance in its profit & loss account as DEPB benefit. However, the export benefit did not accrue to the assessee till the time actual import is made and the above entry would not result in accrual of any income untill the actual import transaction takes place. Even, the Government accepts such claim of DEPB
3 Assessment Year: 2002-03 only when the actual export is affected. Therefore, it cannot be held that any income has accrued to the assessee merely by making an entry. He submitted that now, this issue stands covered by the decision of the Hon’ble Supreme Court in the case of CIT Vs Excel Industries Ltd. reported in [2013] 358 ITR 295 (SC).
On the other hand, the learned DR submitted that the matter should be sent back to the Assessing Officer for examining, whether there was any accrual of DEPB benefit in this year or not and the matter can be set aside to be decided in the light of the principle laid down by the Hon’ble Supreme Court.
As regards the last issue of disallowance of penalty of Rs.16,800/-, the learned Counsel for the assessee submitted that the penalty has been levied not for any infraction of law, but only on the ground that the assessee did not sought any approval before construction of the temporary shed. It is mere violation of procedural formalities and not any infraction of law. . He also referred to the decision of the Hon’ble Delhi High Court in the case of CIT Vs Lokenath & Co. reported in [1984] 17 taxman 209 (Del.).
The learned DR on the other hand, submitted that there was clear cut violation of the requirement of taking approval before construction and, therefore, such penalty cannot be held as business expenditure and the same falls within the ambit of ‘Explanation’ to Section 37(1).
We have heard the rival submissions and perused the relevant finding given in the impugned order with relation to the aforesaid three issues as raised by the assessee. So far as the disallowance of proportionate interest u/s 14A is concerned, the main contention of the assessee is that, it has huge surplus
4 Assessment Year: 2002-03 funds, mostly in the form of reserves and surplus, and capital which stood at Rs.165.96 Crores as on 31-03-2002. The assessee also had cash profit of Rs.23.72 Crores. As against this, the investment made during the year, which has resulted into tax-free income, Rs.52.72 Crores. Thus, clearly the assessee had huge surplus funds for making the investment and, therefore, there cannot be any presumption that interest-bearing funds would have been diverted for making investments in the securities. Only to ascertain the working given by the assessee with regard to the availability of funds and investments in securities, the matter is restored back to the file of the Assessing Officer who will examine the working as given by the assessee and in case, it is found that availability of surplus funds exceeds the investments, then, no disallowance u/s 14A shall be made. With this direction, ground No.1 is treated as partly allowed for statistical purposes.
As regards taxability of DEPB benefit u/s 28 (iv) of Rs.27,78,000/-, the learned Counsel for the assessee has pointed out that the same was credited to the profit & loss account as closing balance as per the requirement of ICAI Guidelines. However, in actual, no export benefit had accrued to the assessee because no actual import of raw material was made. Accrual of income would not arise till actual export takes place. We find that the Hon’ble Supreme Court in the case of CIT Vs Excel Industries Ltd. (supra) had occasion to deal with this precise issue wherein the Hon’ble Supreme Court laid the following proposition as discussed in Para 20 and 21:- “20. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee.
5 Assessment Year: 2002-03 21. In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not materialize and its money value is therefore not the income of the assessee.” The Hon’ble Supreme Court further observed that if in the subsequent accounting year the assessee had made import and it derived benefits under the DEPB, then the same can be taxed in that year and there is no loss to the Revenue as the same will be taxed in the subsequent year. Respectfully following the ratio laid down by the Hon’ble Supreme Court, we hold that until and unless the assessee has actually carries out import, the benefit of DEPB cannot be taxed on hypothetical basis which has actually not been materialized in this year. Accordingly, the Assessing Officer is directed to verify, whether the assessee had carried out any import in this year on which any DEPB actually accrued to the assessee. Thus, with this direction, ground No.2 is partly allowed for statistical purposes.
Lastly, as regards to the disallowance of penalty of Rs.16,800/-, we find that it has been paid to Municipal Corporation for constructing shed without obtaining prior permission from the Municipal Corporation. Once, that is so, it is clear cut infraction or violation of the Municipal Law/Rules because penalty would be imposed only when there is violation of any kind of procedural requirement as prescribed under the Rules. Accordingly, the disallowance of Rs.16,800/- is confirmed.