ACIT, LUDHIANA vs. M/S AVON CYCLES LTD., LUDHIANA

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH ‘A’, CHANDIGARH

BEFORE MS.DIVA SINGH, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA No.195/Chd/2016 (Assessment Year : 2012-13) The A.C.I.T., Vs. M/s Avon Cycles Ltd., Circle-5, G.T. Road, Ludhiana. Ludhiana. PAN: AABCA4140R & C.O.No.6/Chd/2016 In ITA No.195/Chd/2016 (Assessment Year : 2013-14) M/s Avon Cycles Ltd., Vs. The A.C.I.T., G.T. Road, Circle-5, Ludhiana. Ludhiana. PAN: AABCA4140R (Appellant) (Respondent)

Assessee by : Shri Subhash Aggarwal, Adv. Department by : Shri Akhilelsh Gupta, Addl.CIT Date of hearing : 09.05.2018 Date of Pronouncement : 06.08.2018 ORDER PER ANNAPURNA GUPTA, A.M. :

The present appeal has been preferred by the Revenue

against the order of Ld. Commissioner of Income Tax

(Appeals)-2, Ludhiana dated 7.12.2016 relating to

assessment year 2012-13. The assessee has filed Cross

Objection against the same.

We shall first be taking up the appeal of the Revenue

in ITA No.195/Chd/2016.

ITA No.195/Chd/2016 2 & C.O.No.6/Chd/2016 A.Y.2012-13

ITA No.195/Chd/2016:

“1. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is right in law in holding that disallowance undersection36(l)(iii) cannot be made in respect of investment in land despite the investment being not for business purpose? 2. Whether on the fact and in the circumstances of the case, the Ld.CIT(A) is right in law in deleting disallowance of interest pertaining to building under construction, ignoring that the funds utilized by the assessee are mixed funds and therefore interest is liable to be disallowed under proviso to section 36(1)(iii). 3. Whether on the facts and circumstances of the case, the Ld.CIT(A) was right in law in restriction the disallowance under section 14A to Rs.30,85,987/- instead of Rs.73,03,132/- computed as per provisions of Rules 8D(2)(ii) of the Income Tax Rules, 1962? 4. Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is right in law in holding that for the purpose of computation of disallowance u/s 14A under Rule 8D, the netting off interest income out of interest expenditure is to be allowed to the assessee.” 3. Ground Nos. 1 and 2 raised by the Revenue relate to

disallowance of interest made under section 36(1)(iii) of the

Income Tax Act, 1961 (in short ‘the Act’) amounting to

Rs.14,42,161 which was deleted by the CIT (Appeals).

Assessing Officer noted that the assessee had claimed

financial expenses of Rs.6.13 crores. He also noted that the

assessee had invested in purchase of land at Neelon Khurd

and Aayali Kalan which he found was not for the business

purposes and that the assessee had shown investment in

capital work in progress as at the end of the year amounting

ITA No.195/Chd/2016 3 & C.O.No.6/Chd/2016 A.Y.2012-13

to Rs.5.26 crores. Accordingly interest attributable to both

was disallowed under section 36(1)(iii), amounting to

Rs.13,56,748/- on account of investment made in land and

Rs.85,413/-on account of investment in capital work in

progress. Thus total disallowance under section 36(1)(iii) of

the Act amounting to Rs.14,42,161/- was made. The same

was deleted by the Ld.CIT (Appeals) following the order of

the I.T.A.T. in the case of the assessee in preceding years

i.e. assessment years 2010-11 and 2011-12 which the Ld.CIT

(Appeals) observed were decided on identical facts.

covered by the decision of the I.T.A.T. in the preceding

years. He, however, relied upon the order of the Assessing

Officer in support of the disallowance made.

the CIT(Appeals) and stated that the issue was squarely

covered by the order of the I.T.A.T. in the preceding years,

wherein identical disallowance made of interest on account

of land purchased at Village Morekarima and Shekhpura was

deleted holding that the said investment had been made out

of own funds. The Ld. counsel for assessee further stated

that in the impugned year the break up of old investment in

land and investment made during the year was as under:

Old Investment in land Rs.7,68,53,820/- Investment during the year Rs.1,21,89,190/- Interest disallowed Rs. 13,56,748/- on debt equity ratio

ITA No.195/Chd/2016 4 & C.O.No.6/Chd/2016 A.Y.2012-13

investment in land had already been dealt with by the

I.T.A.T. in its order relating to preceding years and,

therefore, no disallowance of interest under section 36(1)(iii)

of the Act on account of the same was warranted having

been decided in the preceding years itself in favour of the

assessee. As for the investment made in the impugned year

amounting to Rs.1.21 crores, the Ld. counsel for the

assessee stated that it had enough own funds for making the

said investment. Our attention was drawn to the status of

availability of own funds of the assessee as under:

Share capital as on 01.04.2011 89.64.420/- Reserves & Surpluses 207,79,63,134/- Total 208,69,27,554/- Income of the year 4132.84 Lakhs Add Depreciation 1242.43 Lakhs Total 5375.27 Lakhs 8. Referring to the same the Ld. counsel for assessee

stated that the assessee had own funds available to the

extent of Rs.53.75 crores which was more than the sufficient

for making the investment in land during the year and,

therefore, applying the proposition applied by the I.T.A.T. in

the preceding years, no disallowance of interest on account

of investment made in land during the year, was also

warranted. With regard to the investment made in capital

work in progress the Ld. counsel for assessee stated that the

same was also covered by the decision of the I.T.A.T. in the

preceding year wherein identical disallowance of interest

made on account of investment in capital work in progress

ITA No.195/Chd/2016 5 & C.O.No.6/Chd/2016 A.Y.2012-13

was also deleted upholding the order of the CIT(Appeals) that

the same was not warranted since there was no findings by

the Assessing Officer that the building being so constructed

was not for business purpose and even if any disallowance

was warranted the same could be made under the proviso to

section 36(1)(iii) of the Act, wherein the same could have

been done only by showing that the assessee had borrowed

funds specifically for investing in capital work in progress

which had not been demonstrated by the Revenue. The Ld.

counsel for the assessee, therefore, stated that the

disallowance of interest made under section 36(1)(iii) of the

Act to the extent of Rs.14,42,161/- had been rightly done by

the Ld.CIT (Appeals).

find no merit in the present ground raised by the Revenue.

Undoubtedly, the CIT(Appeals) had deleted the disallowance

of interest following the order of the I.T.A.T. in preceding

years i.e. assessment years 2010-11 and 2011-12 finding the

facts to be identical with the present case both with regard

to investment made in land and investment in capital work

in progress. The ITAT, we note, had deleted the disallowance

for the reason that the assessee had demonstrated

availability of own funds for the purpose of making the

investment. Vis a Vis the investment made in capital work in

progress the ITAT, we find, agreed with the CIT(Appeals) that

for the purpose of making disallowance of interest on

account of investment made in work in progress, it was

ITA No.195/Chd/2016 6 & C.O.No.6/Chd/2016 A.Y.2012-13

necessary to show that interest bearing funds had been

borrowed specifically for the said purpose, which was not

done by the Revenue. The Revenue, in the present case, we

find, has not brought out to our notice any distinguishing

facts. Even otherwise, the Ld. counsel for assessee has

demonstrated the availability of enough own funds for the

purpose of making investment in land during the year, which

fact has not been controverted by the Revenue before us.

Therefore, following the parity of reasoning made in the

earlier years by the I.T.A.T., no disallowance of interest on

account of investment made in land during the year, we

hold, was also warranted.

CIT(Appeals) in deleting the disallowance made of interest

made under section 36(1)(iii) of the Act, amounting to

Rs.14,42,161/-. Ground of appeal Nos.1 and 2 raised by the

Revenue are, therefore, dismissed.

disallowance made u/s 14A r.w.r. 8D of the Income Tax

Rules, 1962 on account of expenditure incurred for earning

exempt income amounting to Rs. 97,32,906/- which was

restricted by the Ld.CIT(Appeals) by directing the Assessing

Officer to compute the same in accordance with the order of

the ITAT in earlier years giving part relief to the assessee .

of Rs.45.93 crores, income from which did not/would not

form part of the total income and at the same time claimed

ITA No.195/Chd/2016 7 & C.O.No.6/Chd/2016 A.Y.2012-13

financial expenses of Rs.6.13 crores. The Assessing Officer

held that the expenses incurred in relation to these

investments was required to be disallowed and accordingly

worked out the disallowance under Rule 8D of the Income

Tax Act, 1961 of Rs.97,32,906/-. Before the Ld.CIT(Appeals)

the assessee raised several contentions that disallowance

of interest if any was to be made after netting off interest

received, that interest paid on loans taken for specific

purposes related to the business of the assessee was to be

excluded and that in view of sufficiency of own funds no

disallowance u/s 14A was warranted. The Ld.CIT(Appeals)

found that the I.T.A.T. had decided identical issue in the

case of the assessee in assessment years 2010-11 and 2011-

12 in ITA No.687/Chd/2014 dt27.11.2015 & in assessment

year 2008-09, giving part relief to the assessee. He

accordingly directed the Assessing Officer to rework the

disallowance in accordance with the order of the ITAT in

preceding years thus giving part relief to the assessee.

the ITAT in assessment years 2010-11 & 2011-12, which was

followed by the CIT(Appeals) and copy of which was placed

before us. Drawing our attention to pages 7-13 of the order,

where the issue of disallowance of expenses u/s 14A was

dealt with ,it was pointed out that the ITAT had granted

relief to the assessee accepting its contention that interest

paid which is directly attributable to earning taxable income

i.e. interest on cash credits and packing credit be excluded

ITA No.195/Chd/2016 8 & C.O.No.6/Chd/2016 A.Y.2012-13

for computing disallowance u/s 14A of the Act. Ld.DR stated

that Revenue was aggrieved by the order of the CIT(Appeals)

directing the Assessing Officer to follow the order of the

ITAT and thus allow relief to this extent to the assessee,

which has been raised in Ground No.3 before us. Ground

No.4 raised by the Revenue relating to netting off the

interest, it was admitted before us, had been wrongly taken

since the CIT(Appeals) had denied the benefit of netting and

the Revenue therefore had no grievance against the same.

the issue was covered by the order of the I.T.A.T. in the case

of the assessee itself in the preceding assessment years i.e.

2010-11 and 2011-12. He however relied on the order of the

Assessing Officer.

upon the order of the CIT(Appeals).

view of the admitted fact that in preceding years the ITAT

had held the exclusion of interest paid on specific loans

taken for business purposes from the interest disallowable

u/s 14A of the Act, we find no reason to interfere in the

order of the CIT(Appeals) directing the Assessing Officer to

recompute the disallowance in accordance with the said

direction of the ITAT. No distinguishing facts have been

brought to our notice by the Ld. DR. Therefore the direction

of the CIT(Appeals) to follow the order of the ITAT in the

preceding year in this respect is upheld.

ITA No.195/Chd/2016 9 & C.O.No.6/Chd/2016 A.Y.2012-13

Grounds of appeal Nos.3 & 4 raised by the Revenue are

accordingly dismissed.

C.O.No.6/Chd/2016:

issue of denial of benefit of netting of interest received by

the assessee against the interest paid during the year for the

purpose of calculating the interest disallowable u/s 14A of

the Act. The assessee has raised the following grounds

before us:

“1. That the learned CIT (A) - II, Ludhiana, has erred in sustaining a disallowance of Rs.40,19,112/- u/s 14A / Rule 8D(2)(ii) of the Income Tax Rules. 2. That the learned CIT(A) is in complete defiance of the order of the Tribunal for the A.Y. 2010-11 & 2011- 12 wherein the Hon'bje Tribunal had deleted the disallowance u/s 14A on the ground that after netting of interest nothing remained for making any disallowance on account of interest. 3. That the learned CIT(A) has ignored that the principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities and non-compliance leads to initiation of contempt proceedings. 4. That in any case the conformation of disallowance of Rs.40,19,112/- is against the law and facts of the case and ignoring the submissions made by the appellant. 5. That the assessee craves for permission to add, amend or alter any cross-objection at the time of hearing.” 19. During the course of hearing before us Ld. counsel for

the assessee pointed out that the I.T.A.T. in the preceding

years i.e. assessment years 2010-11 & 2011-12, in the case

ITA No.195/Chd/2016 10 & C.O.No.6/Chd/2016 A.Y.2012-13

of the assessee, had decided this issue in favour of the

assessee. Our attention was drawn to the findings of the

I.T.A.T. at para 14 of the order in ITA No. ITA

No.687/Chd/2014 dt.27.11.2015 as under:

issue is squarely covered by the order of the I.T.A.T. in the

preceding years and following the same the assessee should

be granted the benefit of netting of interest.

in favour of the assessee by the order of the I.T.A.T. in the

preceding years i.e. assessment years 2010-11 and 2011-12

ITA No.195/Chd/2016 11 & C.O.No.6/Chd/2016 A.Y.2012-13

but pointed out that in A.Y 2008-09 identical issue had been

decided against the assessee by the ITAT, which had been

directed by the CIT(Appeals) to follow.

contention of the Ld.Counsel for the assessee. Admittedly

identical issue has been decided in favour of the assessee in

the assessment years 2010-11 & 2011-12, which is the latest

decision in contrast to that rendered for assessment year

2008-09. The said decision therefore will apply to the case

before us. Further, No distinguishing facts having been

brought to our notice by the Ld. DR, the decision of the

I.T.A.T. in assessment years 2010-11 & 2011-12, squarely

applies in the impugned year also, following which we allow

the grounds of Cross Objection raised by the assessee and

direct the Assessing Officer to recompute the disallowance

after allowing netting of interest. In view of the above, the

Cross Objection filed by the assessee is allowed.

dismissed and the Cross Objection filed by the assessee is

allowed.

Order pronounced in the Open Court.

Sd/- Sd/- (DIVA SINGH) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 6th August, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent

ITA No.195/Chd/2016 12 & C.O.No.6/Chd/2016 A.Y.2012-13

Assistant Registrar, ITAT, Chandigarh