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Income Tax Appellate Tribunal, AHMEDABAD “A” BENCH
Before: Shri Mahavir Prasad & Shri Amarjit Singh
आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
These two Revenue’s appeals for A.Ys. 2009-10 & 2010-11, arise from order of the CIT(A)-XI, Ahmedabad dated 25-02-2014 in appeal no. CIT(A)-XI/370/Addl. CIT R-5/2011-12, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
I.T.A Nos.1343 & 1344/Ahd/2014 A.Y. 2009-10 & 2010-11 Page No 2 ACIT vs. M/s. P.G. Foils Ltd.
The facts and issue in both the appeal of the revenue ITA No.1343/Ahd/14 for assessment year 2009-2010 and ITA No.1344/Ahd/14 for assessment year 2010-2011 are identical, therefore, both the appeal are decided together. We take the ITA No.1343/Ahd/14 as the lead case and its findings will be applicable to the ITA No.1344/Ahd/14. The revenue has raised following grounds of appeal:- ITA No. 1343/Ahd/2014 i) The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 53,80,484/- on account of disallowance made u/s. 14A of the I.T. Act. ii) The ld. CIT(A) has further erred in law and on facts in holding that the netting of the interest is to be considered for working out the disallowance disregarding the fact that the assessee was not able to establish that there was direct nexus between the interest income and the interest expenditure. iii) The Ld. CIT(A) has further erred in law and on facts in not deciding the issue of disallowance of deduction of Rs. 32,64,698/- u/s. 80IA of the Act by holding that there would be no profit after allowing the ground against the disallowance u/s. 14A of the Act.”
In this case, return of income declaring income of Rs. 2,07,19,432/- was filed on 23rd September, 2009. Subsequently, the assessee has filed revised return of income on 23rd March, 2000 by declaring a loss of Rs. 2,07,19,432/- During the course of assessment proceedings, on perusal of balance sheet, the assessing officer observed that the assessee has made investment of Rs. 20,70,65,601/- at the beginning of the year and Rs. 26,63,31,126/- at the end of the year. He further noticed that in the computation of income, the assessee has claimed dividend income of Rs. 9,54,294/- and interest on tax free UTI bond of Rs. 16,10,668/- which were claimed as exempt income. Thereafter, the assessing officer has
I.T.A Nos.1343 & 1344/Ahd/2014 A.Y. 2009-10 & 2010-11 Page No 3 ACIT vs. M/s. P.G. Foils Ltd.
applied the provision of section 14A r.w.s. 8D and worked out disallowance amounting of Rs. 64,67,548/- under the provision of section 14A of the act. During the course of assessment proceedings, the assessing officer has also noticed that assessee has claimed income from generation of wind mill as exempt u/s. 10(41) in the second revised return of income filed on 30th Sep, 2010. Thereafter in the third revised return of income the assessee has withdrawn its claim of exemption u/s. 10(41) and claimed exemption from wind mill u/s. 80IA of the act. The assessing officer observed that as per provision of section 80IA (5) income from the undertaking was to be computed as if the undertaking was only the undertaking from initial assessment year and thereafter in the subsequent assessment year. On perusal of the details filed by the assessee, he noticed that after set off of unabsorbed depreciation of the undertaking from the earlier assessment year, there was no profit eligible for deduction u/s. 80IA during the year under consideration. Therefore, the assessing officer has disallowed the claim of the assessee of deduction of Rs. 3264698/-.
Aggrieved against the decision of the assessing officer, the assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee by observing as under:- “3.3 I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made the disallowance by applying Rule 8D read with section 14A. It was noted by him that the appellant had made-substantial investment in shares arid has also incurred interest expenses of Rs. 2,77,74,029/-. Therefore, after considering the appellant's submission and the assessment stage he applied the provisions under section 14A.
I.T.A Nos.1343 & 1344/Ahd/2014 A.Y. 2009-10 & 2010-11 Page No 4 ACIT vs. M/s. P.G. Foils Ltd.
The appellant on the other hand, has submitted that no borrowed were used for making the investment. The appellant had huge balance in share capital and Reserves and Surplus and therefore, no disallowance should have been made. The appellant has submitted that it has made a fresh investment of Rs. 5.89 crores as against that it had a profit of Rs. 8 crores. The company had interest income of Rs. 76,09,577/- which was required to be deducted while calculating interest claimed for the purpose of rule 8D. It is also submitted that it had interest-free unsecured loan of Rs. 4.26 crores which were utilised for making the investment. It has also further submitted that the fresh investment included it sum of Rs. 5.5 crores made in debt securities income from which are not exempt from tax and therefore, the same should be excluded while calculating the investment for the purpose of rule 8D. It has also given a break up of the interest expenditure to show that all interest expenditure should not be taken for interest expenses for the purpose of rule 8D. It is noted from the submission of various claims regarding disallowance of interest expenditure under section 14A. All the claims made by the appellant shall be examined one after the other. First of all the applicability of section 14 A and the disallowance by applying rule 8D is to be examined. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxx Now the claim of the appellant regarding how much interest is to be taken for the purpose of disallowance under section 14 A is to be examined. The appellant has claimed that out of the total expenditure of interest there are several interest expenditures which are direct in nature and cannot be attributed to the investment made by the appellant in tax-exempt assets. These expenditures are specific in nature and are related to the funds utilised for a specific purpose. In order to understand the situation the details given by the appellant regarding various expenditure of interest and their nature are reproduced hereunder:
Sr. No. Particulars Amount (Rs)
1 Interest on FBT payment 1226.00 On FBDT payment. 2 Interest on TDS Challan 3607.00 For late, payment of TDS and added back in computation 3 Interest on Wealth Tax 20272.00 On wealth tax payment 4 Interest paid 275738.00 On purchase of raw material to Bharat Aluminum Co. Ltd. on outstanding balance 5 Interest to bank for LC 05766.00 On discounting of bills discounting raised to sale party
I.T.A Nos.1343 & 1344/Ahd/2014 A.Y. 2009-10 & 2010-11 Page No 5 ACIT vs. M/s. P.G. Foils Ltd.
6 Interest to Bank of Rajasthan Ltd. 2933382.98 Added back in computation of total income.
7 Interest to CITI Bank 17 For buyers credit 136099.96 exclusively for raw material imported 8 Interest to Deutch Bank 762028.00 For buyers credit exclusively for raw material imported 9 Interest on IDBI General nature used for day to day working need including of investment in shares / mutual fund / tax payment etc. 10 Interest to SBBJ Pipliakalan Overdraft against fixed deposits used for meeting routing expenses. 11 Interest to SBBJ Raipur 374239.48 Overdraft against fixed deposits used for meeting routing expenses. 12 Interest to SSI units 169869 Added back in computation of total income. 13 Interest to Standard 444820 For buyers credit Chartered Bank exclusively for raw material imported Total 27774029.42
It has been submitted by the appellant that interest on FBT payment; TDS challan, Wealth Tax should not be taken into account as it is not related to investment in shares and mutual funds and it is not on account of any funds borrowed by the appellant. The submission of the appellant is acceptable and accordingly these interest Sr. No. 1, 2 &. 3 are directed to be excluded from the interest for the purpose of rule 8D. The interest paid for purchase of raw material, paid to bank for obtaining LC for discounting of bills raised to sale party, interest to Citibank for buyers-credit exclusively for raw material imported, interest Deutch bank, and: interest to Standard Chartered bank for buyers credit fare also directly related to purchase of raw material and obtaining
I.T.A Nos.1343 & 1344/Ahd/2014 A.Y. 2009-10 & 2010-11 Page No 6 ACIT vs. M/s. P.G. Foils Ltd.
buyers credit et cetera. The submission of the appellant is that there is no possibility of using these funds otherwise for the purpose of making investment is acceptable and therefore, these items of expenditure (Sr. No. 4, 5, 7, 8 & 13) are also directed to be excluded. Similarly the item number 6 & 12 in the above table is related to interest of bank of Rajasthan Ltd. and SSI Unit. The appellant has submitted that these have been added back in the computation of total income by it. The claim of the appellant is acceptable and therefore these interests should also not be considered for rule 8D. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxx After determining which interest expenditure is to be taken the claim of the appellant regarding netting of interest income with the expenditure is to be further examined. It is a settled principle of law that the interest income and expenditure can be adjusted or netted off only in case where the expenditure as well as interest is related to the business. In other words there should be a nexus between the income and the expenditure. The appellant has given details of interest income earned by it during the year, which is reproduced hereunder. 1 Interest on I.T. Refund 736796.00 Interest on excess payment of advance tax. Advance tax were paid using IDBI bank account. 2 Interest received from 5059328.13 Received from customers customers on extending credit period or discounting LC. 3 Interest received on Bank FDR 1813453 Interest on FDR which were obtained in earlier year and used for overdraft facility Total 7609577.13 It is noted from the above table that interest on IT refund and received on Bank FDR has no nexus with the interest expenditure made by the appellant and therefore the same cannot be considered for the purpose of setting off or reducing the same from the interest expenditure. The interest received from customers is the interest which is received for extending the credit period or discounting of LC. The appellant has explained that this interest has been charged from the customers as it has extended the credit period of payment to against sales made to various customers. The funds received on account of sales are directly deposited in IDBI account and the interest expenditure incurred from that account would be reduced if the appellant received the payment in time therefore there is a direct nexus with the interest paid on IDBI bank and the interest received from customers. The submission of the appellant is acceptable as there is a direct nexus between the interest received from customers and the interest paid by the appellant to IDBI on general borrowings. Accordingly the claim of the appellant regarding netting of the expenditure is accepted only to this extent. Therefore, to sum up the interest expenditure which is to be taken for the purpose of rule 8D for making the disallowance under-section 14 A would be (Rs.5796124-523 1990) 172662 only.”
I.T.A Nos.1343 & 1344/Ahd/2014 A.Y. 2009-10 & 2010-11 Page No 7 ACIT vs. M/s. P.G. Foils Ltd.
“4.3 Decision: I have carefully considered the assessment order and the submission made by the appellant during the course of appellate proceedings. The A.O. has disallowed the claim of deduction u/s. 80IA amounting to Rs. 32,64,698/- as it has been held by him that it has to be computed after deduction of notional brought forward losses and depreciation of the eligible business even if the same have been set off against the other income in earlier years. The appellant has submitted that the view taken by the A.O. was erroneous and relied on the decision of Hon’ble ITAT, Bangalore in the case of Shri Anil H. Lad Vs. DCIT, Central Circle-2(3), Bangalore [ITA No. 1262/Bang/2010 in respect of claim made u/s. 80IA for income from wind mill generation. It is noted that the appellant has got substantial relief of the issue of disallowance under section 14A and there would be no profit after the relief allowed from that addition so assessment order to allow deduction under section 80IA. The ground of appeal therefore, becomes academic in nature and hence it is not adjudicated.”
We have heard the rival contentions and perused the material on record carefully. We have noticed that the AO has made the disallowance by applying Rule 8D read with section 14A. The assessee has claimed that no borrowed funds were used for making the investment as there was a profit of Rs. 8 crores as against fresh investment of Rs. 5.89 crores. The assessee has also claimed it was having interest income of Rs. 76,09,577/- required to be considered while determination of exempt income. The assessee was also having interest-free unsecured loan of Rs. 4.26 crores which it has utilized towards investment. The fresh investment also included a sum of Rs. 5.5 crores made in debt securities income from which are not exempt from tax. We have considered all the above stated facts and details findings of the Ld.CIT(A) including analysis and break up of interest expenditure which was attributed towards exempt income. We consider that the Ld.CIT(A) has taken into account all the relevant factors as elaborated supra in his findings while determining out the disallowance u/s 14A in the case of the
I.T.A Nos.1343 & 1344/Ahd/2014 A.Y. 2009-10 & 2010-11 Page No 8 ACIT vs. M/s. P.G. Foils Ltd.
assessee, therefore, we do not find any reason to interfere in the decision of the Ld.CIT(A) Therefore, the appeal of the revenue is dismissed on this issue. 6. Deduction u/s. 80IA We have noticed that the A.O. has disallowed the claim of deduction u/s. 80IA amounting to Rs. 32,64,698/- on the ground that it has to be computed after deduction of notional brought forward losses and depreciation of the eligible business even if the same have been set off against the other income in earlier years. We have further noticed that the Ld. CIT(A) stated that the assessee has got substantial relief of the issue of disallowance under section 14A and there would be no profit after the relief allowed from that addition to allow deduction under section 80IA. During the course of the appellate proceedings the Ld. DR has not controvert the findings of the Ld.CIT(A) by demonstrating that there was any profit left after considering the relief provided by the decision of the Ld. CIT(A), therefore, we do not find any error in the findings of the Ld.CIT(A). Therefore, the appeal of the revenue is dismissed on this issue also.
In the result, both the appeals of the revenue are dismissed. Order pronounced in the open court on 13-09-2017
Sd/- Sd/- (MAHAVIR PRASAD) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 13/09/2017
I.T.A Nos.1343 & 1344/Ahd/2014 A.Y. 2009-10 & 2010-11 Page No 9 ACIT vs. M/s. P.G. Foils Ltd.
आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद