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Hema Engineering Industries Ltd., M/s Wahi & Co., K-1, Kailash Colony, New Delhi. Vs. ACIT, Range-12, New Delhi.
October, 26th 2015
     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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