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

आयकर अपीलीय अिधकरण,च"ीगढ़ "ायपीठ “बी” , च"ीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH HEARING THROUGH: HYBRID MODE "ी िव"म िसंह यादव, लेखा सद" एवं "ी परेश म. जोशी, "ाियक सद" BEFORE: SHRI. VIKRAM SINGH YADAV, AM & SHRI. PARESH M. JOSHI, JM आयकर अपील सं./ िनधा"रण वष" / Assessment Year : 2012-13 The Shahabad Co-op. Sugar Mills बनाम The ACIT Ltd. Circle, Kurukshetra Ladwa Road, Shahabad(M) Distt. Kurukshetra, Haryana "ायी लेखा सं./PAN NO: AAAAT0381N अपीलाथ"/Appellant ""थ"/Respondent िनधा"रती की ओर से/Assessee by : Shri Varun Gupta, Advocate राज" की ओर से/ Revenue by : Shri Dharam Vir, JCIT, Sr. DR सुनवाई की तारीख/Date of Hearing : 08/05/2024 उदघोषणा की तारीख/Date of Pronouncement : 28/05/2024 आदेश/Order PER PARESH M. JOSHI, J.M. :

The assessee is Shahabad Co-op Sugar Mills Ltd. who has preferred the appeal against the order of Ld. CIT(A) dt. 11/09/2018 for A.Y 2012-13 before us in terms of Section 253 of the Income Tax Act, 1961. 2. The Assessee being aggrieved by the order of Ld. CIT(A) dt. 11/03/2018 which is hereinafter referred to as the impugned order, before this Tribunal in Form No. 36 has interalia raised the following grounds of appeal:

1. 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- 12. 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.

2. 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.

3. 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.

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

3. 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: 3.2 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 income. Even Rule 8D(2)(ii) and (iii) refers to the value of investment, income from which does not or shall not form part of total income. For the above reasons, the contention of the assessee that investment has been made for business purposes and not to earn dividend cannot be accepted. The assessee has also submitted that the assessee company has not used the funds of cash credit limits for making the above investments, therefore, no disallowance as proposed can be made on this investment. In this regard, it is to be noted that the said investments stand whereas at the same time interest bearing loans are waiting to be repaid. The average value of investment, income from which does not or shall not form part of total income, as appeared in the balance sheet of the assessee company on the first day and the last day of the relevant accounting year. Thus it is impossible to ascertain whether the rupees that were invested in shares were out of the sale receipts or out of the borrowed funds. This view finds support in the decision in CIT vs. Abhishek Industries Ltd. [2006] 286 ITR 1 [P & H]. wherein the jurisdictional 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."

AxB = 38234590 X 27158300 + 0.5% of 27158300 = 4,65,647/- C 3147998760 Using the above formula, an amount of Rs. 4,65,647/- is hereby added back to the taxable income of the assessee. As the assessee furnished inaccurate particulars of income as such provisions of Section u/s 271(l)(c) of the I.T. Act are attracted in this case for which penalty proceedings are initiated separately." The submissions made by the appellant have been clearly controverted by the A.O. in arriving at his conclusion. In the circumstances, I consider that the addition has been correctly made and confirm the same. This ground of appeal is dismissed.

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

“ 4. Ground Nos.2: “ That the addition of Rs. 4,25,000/- spent by the appellant on project report is not justified and requested to delete the same.” The corresponding finding of Ld. CIT(A) is as under: 4.2 Findings :- This relates to a sum of Rs. 4,25,000/- claimed under distillery expenses and disallowed. The A.O. has clearly brought out the reasons for the said disallowance by stating that no manufacturing activity was carried out by the distillery, nor was any income shown and nor was any distillery in existence. The assessee has not been able to rebut the A.O.'s findings in this regard and prove how the expense was attributable to business. Therefore, I confirm the said addition. This ground of appeal is dismissed.

5. The Assessee in respect of Ground No. 3 which was as under before the Ld. CIT(A):

5. Ground Nos. 3: “ That the interest from other sugar mills is not received till today. We have also not claimed interest of that amount recoverable from those sugar mills. The loan addition is also not given by those sugar mills, so the addition of Rs. 91,14,178/- on the basis of presumpted interest is not justified.” The corresponding finding of the Ld. CIT(A) is as under:

5.2 Findings :-

The A.O's finding on this issue is absolutely clear and is reproduced below:

"A perusal of the details of the loan to other sugar mills, it is observed that the assessee society has given loans to other sugar mills amounting to Rs. 7,70,09,819/- , but no interest has been charged. Assessee society, was asked to explain why interest accrued on this amount be not disallowed. In its response, the counsel on behalf of the assessee society replied as under:- " The amount of interest recoverable is from those co-op Sugar Mills of Bhuna and Panipat also has not return the land taken from the mill. The loan is a deal loan and the same is not repaid by them. The interest is calculated could not recover." The reply filed by the assessee society is considered but not found tenable and the issue of similar nature arose in earlier years and addition on this issue is confirmed by the Tribunal as well as the Jurisdictional High Court of Punjab & Haryana at Chandigarh in the case of the assessee society. Moreover, the assessee society is adopting mercantile system of accounting. Therefore, interest accrued on these outstanding loans is required to be shown as income on accrual basis. Keeping in view of the above, interest @12% as paid to the Bank amounting to Rs. 92,41,178/- is hereby disallowed and added back to the income returned by the assessee society." Since the Hon'ble Punjab and Haryana High Court has confirmed the addition on this issue in the appellant's case in earlier year as stated by the A.O. in his order, I confirm the said addition. This ground of appeal is dismissed.

The Assessee in his written submission before the Tribunal has contended 6. as under: “2. That the Ld. Assessing Officer has not justified in applying the decision of CIT V/s Abhishek Industries Ltd. 2006. When no money taken on interest was invested in shares. Rather, it is very important to submit that the Assessee has not spent an iota of cash on any investment in the relevant Assessment Year 2012-13. As per the account statements duly submitted by the Assessee following investments are as shown in the Balance sheet:- I N V E S T M E N T S Investments As on During the As on 31.03.2011 Year 31/03.2012 Share of HARCO Coop. Bank 20,100.00 — 20,100 Share of Sugarfed, Haryana 10,000.00 10,000 2,71,28,200 2,71,28,200 Share of Kaithal Coop. Sugar Mills Total investments 2,71,58,300 NIL 2,71,58,300 Thus, from the perusal of the investment chart, it would be ample clear that not an iota of investment has been made by the Assessee in the relevant Assessment Year 2012-13. The investments, so depicted in the Balance Sheet are of previous years and are being carried on a such. Thus, there is no investment by the Assessee in the relevant assessment year. The copy of the relevant account statement of the Assessee for the Assessment Year 2012-13 is appended as Annexure A-l of the Evidence.

Since there is no investment in the relevant assessment year, therefore the formula applied by the AO for calculation of proportionate interest to be disallowed would result into NIL since there is no investment and thus the component is 0.

Section 14A Expenditure incurred in relation to income not includible in total income. 14A. (1) Notwithstanding anything to the contrary contained in this Act, for the purposes of] computing the total income under this Chapter, 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. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed , if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. Explanation. For the removal of doubts, it is hereby clarified that notwith- standing anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income. Rule 8D 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).

(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (1) and clause (ii) shall not exceed the total expenditure claimed by the assessee. The Income Tax Authorities below AO and CIT(A) while making the addition of Rs. 4,65,647/- as interest on share investment has placed reliance on the judgment of jurisdictional High Court of Punjab & Haryana in case of CIT Vs. Abhishek Industries Ltd. (2006) 286 ITR 1 particularly the following:

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 not form 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 o f interest, other than the amount of interest which is directly attributable to the exempt income stated in (i) above = Rs. 38234590/-. 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. 27158300/- 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. 3147998760/- (iii) An amount equal to 'A % 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. "

AxB = 38234590X27158300 + 0.5% of27158300 = 4,65,647/- C 3147998760 Using the above formula, an amount of Rs. 465647/- is hereby added back to the taxable income of the assessee. As the assessee furnished inaccurate particulars of income as such provisions of section u/s 271 (l)(c) of the I.T. Act are attracted in this case for which penalty proceedings are initiated separately.

Hence addition of Rs. 4,65,647/-

Question of law framed by High Court “ Whether, in the facts and circumstances of the case and in law, the Hon’ble Income-tax Appellate Tribunal was justified in holding that the order of the jurisdictional High Court in the case of CIT Vs. Abhishek Industries Ltd. reported in (2006) 286 ITR 1 (P&H); 156 Taxman 257 (P&H) are not applicable in this case and the disallowance made by the AO under section 14A of the Income-tax Act is not as per law.” Contention of Revenue before High Court “ The contention raised on behalf of the Revenue is that even if the assesee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this court in CIT Vs. Abhisehk Industries Ltd. (2006) 286 ITR 1 and, therefore, disallowance under section 14A was justified.” Findings of the Hon’ble High Court “We do not find any merit in this submission. The judgment of this court in Abhishek Industries Ltd. (2006) 286 ITR 1 was on the issue of allowabiltity of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section 14A could have no application.”

12.1 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. 12.2 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. 12.3 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. 12.4 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.