THE SHAHABAD COOP. SUGAR MILLS,SHAHABAD vs. ACIT, CIRCLE, KURUKSHETRA

That the addition of Rs.465647/- as interest on share investment is not justified when No Investment was made during the relevant financial Year 2011-

Thus the addition made under Section 14(A) of the Act read with Rule 8D of the Rules do not apply in the present claim and is liable to be deleted.

That the addition of Rs. 4,25000/- is not justified when the expenditure was for the further use of bye-products in distillery plant. Therefore, the expenditure incurred on the Project Report of the Distillery Plant having got prepared from MITCON Consultancy Services for Rs 4,25,000/- is allowable as expenditure incurred for the purpose of business. Thus the impugned addition may kindly be deleted.

That the addition of Rs. 92,41,178/- on the basis of the presumpted interest on the loan given to other sugar mills is not justified as the same is not received. The Bhanu Coop. Sugar Mill has gone into liquidation on 18/07/2006. 4. That the Assessee craves for the right to add, amend or alter any of the grounds of appeal before or at the time of hearing of appeal.

The Assessee in respect of Ground No. 1 which was as under before the Ld. CIT(A):

Ground Nos. 1: “That the Ld. ACIT, Circle, Kurukshetra is not justified in applying the decision of CIT Vs. Abhishek Industries Ltd. 2006 when no money taken on interest was invested in shares. So the addition of Rs. 4,65,647/- disallowed and added back in income needs to be deleted.” The corresponding finding of CIT(A) is as follows:

2 Findings :- I have examined the facts of the case and the submissions made by the assessee. The A.O. has, in his order, given a detailed finding in this regard and reasoned why the decision in CIT vs. Abhishek Industries Ltd.(2006) 236 ITR [P & H] is applicable. The relevant extract of the assessment order is as under: "During the course of assessment proceedings, it was noticed that the assessee society has invested in share capital amounting to Rs. 13,72,98,655/- out of working capital and has paid interest on his amount, dividend income from which is exempt. As income from these investments is not includable in total taxable income. Accordingly, the assessee society was asked show caused as to why proportionate disallowance of interest should not be made as per provisions of section 14A read with rule 8D of the I.T. Act/Rules. In response to this counsel on behalf of the assessee society replied as under:- "That investment in shares was not made from any amount of loan. These loans taken as working capital are mostly nil during several years. No money was taken on interest per investment in shares. So the provisions of section 14A read with rule 8D do not apply in this case. The term loan was taken to install factory/ industry. The installments were paid from the income of the factory." The reply filed by the assessee society is considered but was found not tenable as section 14A does not go behind intention of the assessee society. But purely considers whether exempt income is arisable or not. The expression 'income that does not form part of total income' implies not only on income that 'has not formed' part of total income in any given year, but also income that 'shall not' form part, of total income. Thus, even if dividends have not been received or Long Term Capital Gains have not arisen in a given year, funds that stand invested in shares are in relation to income that does not form part of the total [2006] 286 ITR 1 [P & H]. wherein the juri ictional High Court holds that "Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business that have the colour of business receipts and have no separate identification. Sources have no concern whatsoever." In view of the observations made above, it would be justified to invoke Rule 8D and to determine the amount of expenditure in relation to such income in accordance with the provisions laid down in its sub rule (2), which says that "(2) The expenditure in relation to income which does form part part of the total income shall be the aggregate of the following amounts: (i) The amount of expenditure directly relating to income which does not form part of total income. (ii) In the case of interest on borrowed funds, which is not attributable to any particular income or receipts, the amount computed in accordance with this following formula: AxB/C A= Amount of interest, other than the amount of interest which is directly attributable to the exempt income stated in (i) above = Rs. 3,82,34,590/-. B= The average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year = Rs. 2,71,58,300/- C= The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. The term "Total Assets" means total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets = Rs. 3,14,79,98,760/- (iii) An amount equal to ½ % of these average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year."

The assessee in respect of Ground No. 2 which was as under before Ld. CIT(A):

Per contra the assessee has contended that CIT vs. Abhishek Industries Ltd. case is not applicable to the facts of the present case in as much as no money taken on interest was invested in shares. Assessee has not spent an iota of any cash on any investment a chart of investment (supra) is same for year 2011 & 2012. The chart perse shows that not an iota of investment has been made by the assessee in A.Y. 2012-13. The investments so depicted in the balance sheet are of previous years and are being carried on as such. Thus there is no investment by the assessee in the relevant assessment year. The disallowance has got to be made under section 14A if any expenditure relating to the earning of income which is not chargeable to tax had been debited to the accounts by the assessee. In the present case assessee has not incurred any expenditure for making investment, no disallowance is warranted under section 14A. Reliance is placed on the judgement of Hon’ble Punjab & Haryana High Court in case of CIT vs. Winsome Textiles Industries Ltd. 319 ITR 2004(P&H). In brief no investment in relevant assessment year formula applied by Income Tax Industries Ltd. (supra) we noticed as under:

1 In the present case the assessee has repeatedly urged before AO, CIT(A) that case of CIT Vs. Abhishek Industries Ltd. (supra) does not apply to the fact of present case as no money taken on interest was invested in shares.

2 The assessee has not spent an iota of money on any investment in the relevant A.Y. 2012-13. Details of investment as on 31/03/2011 and as on 31/03/2012 depicted by Chart shows that no investment in shares have been made at all. Value of total investment as on 31/03/2011 was Rs. 2,71,58,300/- and same was also as on 31/03/2020 . This clearly shows that assessee has not expended any money on investment during A.Y. 2012-13. The investments so depicted in the balance sheet are of previous years and are being carried on as such. There is thus no addition in the terms of investment. The Income Tax authorities below despite above submission both before AO & CIT(A) have not rebutted this aspect, any where despite explaining them on more than two occasions. There is thus no categorical rebuttal even before us by the learned DR. We therefore have no hesitation in holding that no expenditure is incurred in relation to income non includible in total income. We further specifically hold that provision of section 14A (1) which is non obstante in nature cannot be applied in the facts of the present case where condition precedent is expenditure incurred. When this condition precedent is absent as no expenditure is incurred the later part of statute 14A(1) does not come into play at all ie.; in relation to income which does not form part of the total income under this Act. Both the authorities below have grossly erred in law. What is the test for applying section 14A(1) is first meeting the requirement of condition precedent which is expenditure incurred.

3 Once there is no expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act Section 14A(1) would not apply. Needless to state 14A(1) deals with no deduction shall be allowed; in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this act expenditure incurred thus is condition precedent. The assessee primafacie has averred that there is no expenditure incurred in making any investment has shown audited balance sheet, further has shown a chart besides explanation, then in order to bring charge or disallow such deduction the burden of proof shifts to the Department to establish contrary by confronting material in their possession calling upon them to show cause why no proposed deduction should not be made in respect of expenditure incurred by assessee in relation to income which does not form part of total income under this Act. Entire reading of Sectoin 14(1) per se puts initial burden on the assessee but upon explanation if Department / Revenue wants to disallow then a show cause notice or an opportunity crystalizing such amount of expenditure incurred (including the head of common pool of funds available with the assessee from which expense is made] corresponding to income which does not form part of the total income under the act is a must. It is only thereafter AO should determine the amount of expenditure to be disallowed in accordance with law & Rules framed as such under the Income Tax Act, 1961. We read the principles of natural justice including all the opportunity to the assessee by the Department before applying provisions of section 14A(1) particularly so, when assessee has primafacie avered that there is no expenditure incurred.

4 The Ld. DR has relied upon the decision of ITAT, Guwahati Bench in case of ACIT Vs. Williamson Financial Services Ltd. reported in (2022) 140 taxmann.com 164 which deals with explanation to Section 14A brought by Finance Act, 2022 w.e.f 01/04/2022 and issue therein is different than the facts of the present case.

We finally delete the addition of Rs. 4,65,647/-.

With Regard to addition of Rs. 4,25,000/- which was expenditure incurred as and by way of payment towards consultancy services from One Mitcon Consultancy Services. We observe that documents annexed to paper book i.e; work order No. SMS-2010/Pur/3162 dt. 10/09/2010 clearly reflects various heads and respective rate for the same i.e; charges for preparation of feasibility / viability report of 45/60 KLPD Distillery based on Molasses / grain @ rate of Rs. 50,000/- lump sum, charges for preparation of detailed project report of 45/60 KLPD Distillery based on molasses / grain @ of Rs. 1,75,000/- lump sum and charges for preparation of Draft notice inviting tender of 45/60 KLPD distillery based on molasses / grain @ of Rs. 2,00,000/- lump sum. The aggregate value of work order is Rs. 4,25,000/-. We have simultaneously perused the invoice of Mitcon Consultancy and Engineering Services ltd. wherein above work order is recorded, which is dt. 24/03/2011. We notice that payment of Rs. 4,25,000/- has been paid by cheque to Mitcon (supra). We fully agree with the contention of the assessee that the said amount of Rs. 4,25,000/- is expenditure incurred on project report for Distillery unit to be set up in future by assessee society is an expense / expended laid / spent wholly and exclusively for the purpose of business and allowable while computing income. The better and material particulars in line of the business which is carried out by the assesse i.e; manufacture of sugar and generation of several by products in the process of manufacturing of sugar as discussed aforesaid, we feel that the work order as aforesaid for fruitful utilization of by products of sugar industry can conveniently be said to be in the line of business and the said work order has all the better and material particulars. Distillery based on by products of sugar / sugar cane industry are far too many. This is a common knowledge now. Reliance on judgment placed by Ld. DR on 1990 (185 ITR 267)(Bom) in case of Trade Wings Ltd. Vs. CIT in our view is not applicable. The assesse in this case was in business of Travel Agency and wanted to set up a hotel in Goa. Hon’ble High Court held that Travel Agency business does not include hoteliering. But here admittedly

1 Since these papers were before AO and Ld. CIT(A) it was incumbent upon them to have at least perused it minutely. It is wrong on part of Department to contend that it is not tenable. It is totally incorrect on part of lower authority to hold that no manufacturing activity was carried out by the distillery nor any income shown and distillery was not in existence. The same is disallowed and added back to income returned by the assessee society. We just do not subscribe to this view of both AO and CIT(A) as they have not read and perused the document produced by the Assessee in both the proceedings below i.e. AO & CIT(A). The lower authority should apply their mind and should at least read the document produced by the assessee. They have not realized that all documents like work order, invoice etc is for obtaining feasibility and project report for setting up a distillery plant which they had proposed / conceived. Needless to say that there are several by products in sugar / sugar cane Industry like molasses, buggasse, press, mud etc which have several uses including in Refinery / Distillery. An assesee in sugar industry who procures sugar cane has right to obtain a project and feasibility report so that by products are fruitfully used. Such type of disallowance would discourage sugar industry which comes under essential commodity. We feel CBDT should depute field officers to specific industry to study the production process so that they get familiar with working of industry at ground zero level. Once they get familiar with specific industry in their region they would acquire domain knowledge of the working of specific industry like sugar, spinning, weaving, ginning, sports, etc. So that while computing income during assessment proceedings they have some basis knowledge of product, their by product in areas of their juri iction. Be that as it may we allow

Ground No. 3 is not pressed during the hearing before us.

In the forgoing, we set aside the impugned order of Ld. CIT(A) and allow the appeal of the assessee. Order pronounced in the open Court on 28/05/2024. िव"म िसंह यादव परेश म. जोशी ( VIKRAM SINGH YADAV) (PARESH M. JOSHI) लेखा सद"/ ACCOUNTANT MEMBER "ाियक सद" / JUDICIAL MEMBER AG

""यथ"/ The Respondent 3. आयकर आयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/