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Income Tax Appellate Tribunal, DELHI BENCH ‘C’ : NEW DELHI
Before: SHRI R.S. SYAL, AM & MS SUCHITRA KAMBLE, JM
by the Revenue arise out of the order passed by the CIT(A) on 26.12.2012 in relation to the assessment year 2009-10.
The only issue raised in the assessee’s appeal and the first ground of the Revenue’s appeal is against the disallowance u/s 14A of the Act.
Briefly stated, the facts of the case as recorded in the assessment order are that the assessee made investment of Rs.18.95 crore in unquoted equity shares. However, no dividend was received during the year. Applying the provisions of section 14A read with Rule 8D, the AO computed disallowance at Rs.1,40,28,358/-. The ld. CIT(A) reduced the disallowance to Rs.74,15,767/-, thereby allowing part relief. Both the sides are in appeal in support of their respective stands.
We have heard the rival submissions and perused the relevant material on record. The AO has categorically recorded on page 2 of the assessment order that: ‘however, no dividend is received during the year.’ Thus it is evident from the assessment order itself that the assessee did not earn any exempt income during the year, but, the AO made disallowance u/s 14A as per Rule 8D. The Hon’ble Delhi High Court in CIT vs. Holcim India P. Ltd. (2014)
90 CCH 081 DEL-HC, has held that in the absence of any exempt income, there can be no disallowance u/s 14A. Recently, the Hon’ble jurisdictional High Court in Joint Investment Pvt. Ltd. Vs. CIT (2015) 372 ITR 694 (Del) has held that disallowance u/s 14A cannot exceed the exempt income. In view of the fact that the assessee did not admittedly earn any exempt income during the year, there can be no question of making any disallowance u/s 14A of the Act in terms of the aforestated precedents from the Hon’ble jurisdictional High Court. We, therefore, order for the deletion of the entire addition. The ground taken by the assessee is allowed and that of the Revenue fails.
Ground No.2 of the Revenue’s appeal is against the deletion of addition of Rs.83,53,148/- (wrongly mentioned as Rs.88,53,148/-). The assessee declared scrap sale at Rs.4.35 crore on turnover of Rs.278.43 crore, which gave ratio of sales to scrap at 1.57%, as against the last year’s scrap sale of Rs.4.39 crore @ 1.87% on turnover of Rs.235.24 crore. The AO observed that there was no justification for accounting scrap generation at a lower level. Noticing 0.3% drop in the scrap sale, he made an addition of Rs.83,53,148/- by applying this percentage to total turnover for the year. The ld. CIT(A) deleted the addition.
Having heard the rival submissions and perused the relevant material on record, we find that the way in which this addition has been made by the AO is not proper. He has gone by the percentage of scrap sale to turnover, which is not a relevant factor. Scrap is ordinarily considered with reference to production. It is further pertinent to note that percentage of scrap to production may not remain consistent over the years. The generation of scrap depends on various factors, such as, quality of raw material, age of machine, quality of work force, etc. If good raw material is used, naturally, it will lead to lower scrap and vice versa. The relevant factors discussed above ultimately find their reflection on the gross profit rate. If the gross profit rate of the assessee is better than that of the preceding year, but, the generation of scrap is less, there cannot be any separate addition for lower generation of scrap because this would show the higher economies availed by the assessee due to better performance or good quality of raw material etc. Adverting to the facts of the instant case, we find that the assessee declared GP rate of 9.77% in the year under consideration as against the last year’s GP rate of 8.61%. These gross profit rates are available in the written submissions filed before the CIT(A), a copy of which is available on page 19 of second paper book.
When the gross profit rate itself has registered an increase of over 1% in the current year, we fail to appreciate as to how any addition on account of lower scrap sale can be made as a percentage of turnover. We, therefore, uphold the impugned order on this issue.
The only other ground which survives for consideration is deletion of disallowance of interest of Rs.3,55,662/- in respect of balance payable to M/s Tobu India Ltd. The AO observed that M/s Tobu India Ltd., is one of the persons specified u/s 40A(2)(b) from whom a sum of Rs.21,48,964/- was receivable. The AO noticed that there should be a nexus between the use of borrowed funds for the purpose of business for claiming deduction u/s 36(1)(iii). He held that the amount was diverted to sister concern on interest free basis and, hence, the proportionate interest paid by the assessee on interest bearing loans was not allowable. Applying interest rate of 12.5%, he made an addition of Rs.3,55,562/-. The assessee argued before the ld. CIT(A) that no fresh amount was advanced to M/s Tobu India Ltd. during the year and the amount shown as receivable was simply opening balance. The ld. CIT(A) got convinced with the assessee’s submissions and deleted the addition.
After considering the rival submissions and perusing the relevant material on record, we find that the assessee argued before the ld. CIT(A), which has been recorded on page 16 of the impugned order, that there was no fresh lending to Tobu India Ltd., during the current year and the balance was an opening balance.
The ld. CIT(A) recorded a categorical finding that the AO had:
‘not established any linkage between the amount borrowed for capital and the amount advanced to the sister concern of the appellant, in earlier years which could justify the disallowance of proportionate interest expenditure u/s 36(iii) of the Act.’ That is how, he deleted the addition. On a specific query to point out the balance of M/s Tobu India Ltd., in the assessee’s account for the preceding year as reflected in the balance sheet, the ld. AR invited our attention towards annual accounts, a copy of which is available on pages 1-39 of the paper book. Details of Schedule of Loans and advances to Balance sheet is available on page 14 of the paper book and the name of M/s Tobu India Ltd., appears on page 15, which is part of Schedule 10. It can be observed that the closing balance of the sister concern in the Annual accounts for the year under consideration is Rs.21,84,964/-, but, there is no corresponding figure of closing balance of this sister concern in the immediately preceding year, as such figure has been shown as Nil.
As such, the entire basis on which the addition has been deleted by the ld. CIT(A), ceases to exist. We cannot countenance the impugned order on this line of reasoning which has not been shown to exist. Under such circumstances, we set aside the impugned order on this score and remit the matter to the file of CIT(A) for deciding this issue afresh, as per law, after taking note of the correct facts.
In the result, the appeal of the assessee is allowed and the appeal of the Revenue is partly allowed for statistical purposes.