IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `C' : NEW DELHI
BEFORE SHRI R.S. SYAL, AM & MS SUCHITRA KAMBLE, JM
ITA No.1027/Del/2013
Assessment Year : 2009-10
Hema Engineering Vs. ACIT,
Industries Ltd., Range-12,
M/s Wahi & Co., New Delhi.
K-1, Kailash Colony,
New Delhi.
PAN: AAACH0118F
ITA No.1444/Del/2013
Assessment Year : 2009-10
ACIT, Vs. Hema Engineering
Range-12, Industries Ltd.,
New Delhi. M/s Wahi & Co.,
K-1, Kailash Colony,
New Delhi.
PAN: AAACH0118F
(Appellant) (Respondent)
Appellant by : Ms Anima Barnwal, Sr. DR
Respondent by : Shri Anil Kumar Malhotra, CA
Date of hearing : 23.10.2015
Date of pronouncement : 23.10.2015
ORDER
2 ITA Nos.1027 & 1444/Del/2013
PER R.S. SYAL, AM:
These two cross appeals - one by the assessee and the other
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.
2. 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.
3. 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.
3 ITA Nos.1027 & 1444/Del/2013
4. 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.
4 ITA Nos.1027 & 1444/Del/2013
5. 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.
6. 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
5 ITA Nos.1027 & 1444/Del/2013
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.
6 ITA Nos.1027 & 1444/Del/2013
7. 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.
7 ITA Nos.1027 & 1444/Del/2013
8. 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
8 ITA Nos.1027 & 1444/Del/2013
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.
9. In the result, the appeal of the assessee is allowed and the
appeal of the Revenue is partly allowed for statistical purposes.
Decision pronounced in the open Court on 23rd Oct., 2015.
Sd/- Sd/-
[
(SUCHITRA KAMBLE) (R.S. SYAL)
JUDICIAL MEMBER ACCONTANT MEMBER
Dated, 23rd October, 2015.
9 ITA Nos.1027 & 1444/Del/2013
dk
Copy forwarded to: -
1. Appellant :
2. Respondent :
3. CIT
4. CIT(A)
5. DR, ITAT
Assistant Registrar
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