IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH `C' : NEW DELHI)
BEFORE SHRI I.C. SUDHIR, JUDICIAL MEMBER
and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.2103/Del./2012
(ASSESSMENT YEAR : 2008-09)
DCIT, Circle 11 (1), vs. M/s. Indian Sugar Exim Corporation Ltd.,
New Delhi. C Block, 2nd Floor, Ansal Plaza,
August Kranti Marg,
New Delhi 110 049.
(PAN : AAACI1163M)
ITA No.1671/Del./2012
(ASSESSMENT YEAR : 2008-09)
M/s. Indian Sugar Exim Corporation Ltd., vs. DCIT, Circle 11 (1),
C Block, 2nd Floor, Ansal Plaza, New Delhi.
August Kranti Marg,
New Delhi 110 049.
(PAN : AAACI1163M)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ashwani Taneja, Advocate and
Shri Sumit Jain, CA
REVENUE BY : Shri Sunil Bajpai, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
Both these cross appeals filed by the revenue and assessee emanate
from the order of the CIT (Appeals)-XV, New Delhi dated 17.02.2012 for
the Assessment Year 2008-09.
2 ITA No.2103/Del./2012
ITA No.1671/Del./2012
2. The assessee is a company incorporated under the Companies Act,
1956, engaged in the business of export/import of sugar. The return of
income was filed on 29.09.2008 declaring income at Rs.3,58,38,518/-.
3. The grounds of appeal of revenue read as under :-
"1. On the facts and circumstances of the case and in law,
the Ld. CIT (A) has erred in deleting the addition of
Rs.98,33,833/- made on account of loss on sale of
investment.
2. On the facts and circumstances of the case and in law,
the Ld. CIT (A) has erred in restricting the addition of
Rs.5,11,00,925/- to the extent of Rs.1,89,70,367/- made u/s
14A read with Rule 8D of the Income Tax Rules, 1962.
3. On the facts and circumstances of the case and in law,
the Ld. CIT (A) has erred in deleting the addition of
Rs.10,79,68,722/- made on account of valuation of closing
stock.
4. The appellant craves leave to add, alter or amend any
ground of appeal raised above at the time of hearing."
The grounds of appeal of assessee read as under :-
"l(a) That the learned CIT(A) erred, both on facts and in
law in sustaining a disallowance of Rs.1,89,70,367/-
(Rs.64,60,071/- towards interest and Rs.1,25,10,296/-
towards administrative expenditure) u/s 14A of the Income
Tax Act read with Rule 8D of the Income Tax Rules.
1(b) The Id CIT(A) failed to appreciate that the assessee
had made investments during the year from the redemption
proceeds of earlier investments / Realisation from Debtors
and interest free funds available with the assessee and as
such disallowance u/s 14A with respect to interest of
Rs.64,60,071/- deserves to be deleted .
3 ITA No.2103/Del./2012
ITA No.1671/Del./2012
1(c) That the ld CIT(A) in the facts and circumstances of
the case has erred in sustaining disallowance of
Rs.1,25,10,296/- u/s 14A towards administrative
expenditure @ 0.5% of the Average Value of Investments
in a mechanical manner.
l(d) That the ld CIT(A) has erred in failing to appreciate
that the computation of the average value of investments,
income from which does not form part of total income, is
incorrect.
2. The learned CIT(A) has grossly erred in sustaining
disallowance of Rs.824,125/- in relation to TDS deducted
during the FY 2007-08 and deposited on or before due date
of filing of return .
3. That the ld CIT(A) has erred in sustaining
disallowance of Rs.1528/- towards interest on late payment
of TDS without appreciating that it an allowable
expenditure.
4. That the appellant craves leave to add, amend, alter
any grounds of appeal of appeal."
4. Ground Nos.1 (a) to 1 (d) of assessee's appeal and ground no.2 of
the revenue's appeal are with regard to the disallowance of
Rs.5,11,00,925/- made by the Assessing Officer by invoking the provisions
of section 14A of the Income-tax Act, 1961 read with Rule 8D of the
Income-tax Rules, 1962 which has been partly allowed by the CIT (A) and
restricted addition to Rs.1,89,70,367/- (interest Rs.64,60,071/- and
administrative expenses Rs.1,25,10,296/-).
5. While pleading on behalf of the assessee, ld. AR submitted that the
CIT (A) has sustained the disallowance of Rs.1,89,70,369/-
4 ITA No.2103/Del./2012
ITA No.1671/Del./2012
(Rs.64,60,071/- towards interest and Rs.1,25,10,296/- towards
administrative expenditure) u/s 14A read with Rule 8D. It was submitted
by the ld. AR that investments made during the year were from the
redemption proceeds of earlier investments / realization from debtors and
interest free funds available with the assessee. It was also submitted that
the sustenance of disallowance of Rs.1,25,10,296/- being administrative
expenses was a mechanical exercise. It was also submitted that the
computation of the average value of investments, income from which does
not form part of the income, was wrongly done. While pleading on behalf
of the assessee ld. AR submitted written submissions reproduced as
under:-
"During the year under consideration assessee company
has made investments to the tune of
Rs.2,18,16,75,912.68 and received a sum of
Rs.2,16,09,61,251.25 from redemption of
investments. Besides, assessee company has also shown
income of Rs.2,37,40,339/- by way of interest on UTI
Bonds (Refer PB 273,274) and Rs.55,23,351/- (Refer PB
273, 275) as dividend income on mutual funds investment
which was claimed as exempt u/s 10(35) of the Income Tax
Act, 1961.
It is respectfully submitted:
As regards Interest income of Rs. 64,60,071/-
· That during the year assessee company has
made investments to the tune of
Rs.2,18,16,75,912.68 and received a sum of
Rs.2,16,09,61,251.25 from redemption of
investments.
5 ITA No.2103/Del./2012
ITA No.1671/Del./2012
· That purchase of investments is from proceeds
of redemption of existing investments and other
cash surplus generated during the year.
· That it is also not out of place to mention here
that the balance of General Fund as on 01-04-
2007 was much more than the investments as on
01-04-2007.
· That interest expenditure which was debited to
Income and Expenditure account was with
respect to import/ export of sugar alone and not
for investment activity, detailed evidences of
which were filed during the course of
assessment proceedings and also before Ld.
CIT(A).
· That assessee company is paying bank interest
only in relation to packing credit/ packing
credit in foreign currency utilised for export of
sugar from India which is as such a short term
borrowing for purposes of export. The same was
submitted before Ld. CIT(A) vide assessee's
submissions dated 18-08-2011 enclosed at PB
904 in Para 10.9.
· That sanction letters from various banks
confirming that the assessee is enjoying only
packing credit limit (refer PB 276-305) was
also filed to Ld. CIT(A) vide assessee's
submissions dated 09-10-2010 ( refer PB 78-
193).
· That copy of certificates from various banks
certifying that only packing credit in foreign
currency limit were utilised by the assessee
company and was not enjoying any cash credit
limit. The same was submitted before Ld. AO as
well as before Ld. CIT(A) vide assessee's
submissions dated 20-10-2010 enclosed at PB
726-730.
· That, from A.Y. 2001-02 upto A.Y. 2007-08
Hon'ble Income Tax Appellate Tribunal has
6 ITA No.2103/Del./2012
ITA No.1671/Del./2012
held that no interest has been incurred towards
investment activity. Moreover, order of Hon'ble
ITAT for A.Y. 2001-02 has also been approved
by Hon'ble Delhi High Court.
PB 73 -77 is assessee's letter dated 04-10-2010
filed to Ld. AO enclosing details of investments as
on 31.03.2008.
PB 905 would show that out of Rs.218.16 crores,
Rs.216.16 crores were available from the past
investments made from interest free funds.
PB 276-305 are Sanction letters of Bank facilities
confirming that the assessee is not enjoying any
cash credit limit.
PB 306-725 are copies of ledger account of bank
interest and all bank advises for debiting interest
on packing credit in foreign currency filed to Ld.
AO vide assessee' s submissions dated 09-10-2010
enclosed at PB 78-193.
PB 726-730 is assessee's submission dated 20-10-
2010 filed before Ld. AO submitting that assessee
is not enjoying any overdraft/ cash credit facility
and is having credit/ packing credit in foreign
currency facility which is given to exporter for
export purposes. These funds are to be utilised for
purchases etc. for export and cannot be invested in
mutual funds and therefore, no part of interest on
bank loans is attributable to earning of interest
income. Also, enclosed are the Bank Certificates
from various banks certifying only interest on
packing credit /packing credit in foreign currency
for exports has been paid by the assessee company.
PB 898 - 907 is detailed submissions filed before Ld.
CIT(A) on the above aspect.
PB 1042-1206 is submissions dated 13-12-2011 filed
before Ld. CIT(A) together with annexures showing details
of investment made in mutual funds and tax free bonds for
7 ITA No.2103/Del./2012
ITA No.1671/Del./2012
the year ending 31-03-2008 and copy of ICICI Bank
statement showing purchase and redemption of investments
during the year.
PB 913-918 is Investment Summary showing opening
balance, investments made during the year, investments
redeemed during the year and closing balance together with
detailed ledger account of Investments.
PB 925-926 is Detailed Statement of Investments made
during F.Y. 2007-08 together with source of investments.
PB 927 to 963 Copies of bank statement identifying entries
of purchase and redemption of Investments made during
F.Y. 2007-08.
PB 1032 to 1041 is detailed submissions dated 12-10-2011
filed to Ld. CIT(A) regarding 14A.
PB 1207 to 1208 is detailed statement of Investments made
in mutual fund and tax free bonds during F.Y. 2006-07
together with source of investments.
As regards administration and other expenses i.e. 0.5%
of average value of investments
Our first and foremost submission is that Ld.
CIT(A) has erred in calculating the disallowance
as per clause (iii) of sub-section (2) of Rule 8D of
Income Tax Rules, 1962. While calculating 0.5%
of average value of investment, Ld. CIT(A) has
wrongly taken the average value of investment at
Rs.2,50,20,59,294/- instead of Rs.41,88,44,725/-,
which is 16.94% of Rs.2,50,20,59,294, being
investment made during the year from the mixed
funds as calculated by Ld. CIT(A) in his order at
page 16 . Therefore, 0.5% of Rs.41,88,44,725/-
comes to Rs.20,94,224/- and total disallowance
comes to Rs.85,54,295/- instead of
Rs.1,89,70,367/- as made by Ld. CIT(A).
Therefore, it is prayed that Rs.1,89,70,367/- of
8 ITA No.2103/Del./2012
ITA No.1671/Del./2012
disallowance may please be substituted with
Rs.85,54,295/-.
Without prejudice to above, it is respectfully submitted
that no addition on this ground is called for on account of
the following reasons:-
i) Ld. CIT(A) as well as Ld. AO has not specifically
pointed out any expenditure incurred by assessee
company towards investments/ interests.
ii) The assessee had huge surplus and interest free funds
available at its disposal which were more than the
investments made by the assessee during the
impugned year.
iii) It was also submitted that interest expenditure was
incurred in relation to business and not in relation to
investment activity.
iv) Further, it is submitted that investments in debt based
growth funds should be excluded while calculating
average investments for the purposes of exempt
income since it forms part of taxable income and no
dividend can be earned as per the scheme of
investments itself. The same was submitted before
Ld. AO vide assessee's submissions dated 26-10-
2010 together with evidences showing that
investments were made in growth funds (Refer PB
731-846).
v) Moreover, flat rate of 0.5% cannot be made
applicable on those investments on which taxes on
long term capital gain have already been paid by the
assessee company.
vi) That upto A.Y. 2007-08 it has been held that no
interest has been incurred for earning of exempt
income by the assessee company.
vii) Hon'ble Delhi High Court in A.Y. 2001-02 has
decided this issue in favour of the assessee stating
that no interest was incurred towards investment
activity.
9 ITA No.2103/Del./2012
ITA No.1671/Del./2012
viii) No part of interest was attributable to investments
made during the year, therefore, no disallowance can
be made on this ground.
ix) When no expenditure relating to exempt income
which does not form part of total income has ever
been made part of income and expenditure account,
then no question of disallowance of such expenditure
arises.
Reliance is placed on following judicial pronouncements
(a) The principle of apportionment embedded in section
14A, has application only when it is not possible to
determine the actual expenditure in relation to the
exempt income. When it is possible to determine the
actual expenditure in relation to exempt income or,
when no expenditure has been incurred in relation to
exempt income the principle of apportionment has no
application.
· -Expenses towards dividend income exempt under s.
10(33)-Expenditure which the AO seeks to disallow
under s. 14A should be actually incurred-There being no
material with the AO to show that any expenditure was
incurred in earning dividend income, nothing could be
disallowed under s. 14A on estimate basis, ACIT vs.
Eicher Ltd. 101 TTJ 369 (Del)
· Whether it is for Assessing Officer to identify
expenditure which can be reasonably said to have been
incurred to earn a tax exempt income before invoking
disallowance under section 14A Held yes Dresdner
Bank AG v. Addl. CIT 11 SOT 158 (Mum.)
· Whether when no expenditure is incurred by an assessee
in earning dividend income ,no notional expenditure can
be deducted from said income for purpose of computing
deduction under section 80M--Held, yes--
MAHARASHTRA APEX CORPORATION LTD.
V/S CIT--VOL.155-TAXMAN-53(KAR.).
10 ITA No.2103/Del./2012
ITA No.1671/Del./2012
· --Disallowance under s. 14A--Apportionment of
expenditure--Disallowance under s. 14A requires
finding of incurring of expenditure--Where it is found
that for earning exempted income no expenditure has
been incurred, disallowance under s. 14A cannot
stand.--CIT vs. Hero Cycles Ltd. 31 DTR 301(P&H)
· DCIT vs. Jindal Photo Limited in ITA N.
4539/Del/2010 (Delhi ITAT)
"18. Now, as per section 14A(2) of the Act, if the
AO, having regard to the accounts of the assessee, is not
satisfied with the correctness of the claim of the assessee
in respect of expenditure incurred in relation to income
which does not form part of the assessee's total income
under the Act, the AO shall determine the amount
incurred in relation to such income, in accordance with
such method as may be prescribed, i.e., under Rule 8D
of the I.T. Rules. However, in the present case, the
assessment order does not evince any such satisfaction
of the AO regarding the correctness of the claim of the
assessee. As such, Rule 8D of the rules was not
appropriately applied by the AO as correctly held by the
CIT(A). It has not been done by the AO that any
expenditure had been incurred by the assessee for
earning its dividend income. Merely, an adhoc
disallowance was made. The onus was on the AO to
establish any such expenditure. This onus has not been
discharged. In "CIT Vs. hero Cycles" (P&H) 323 ITR
518, under similar circumstances, it was held that the
disallowance u/s 14A of the Act requires a clear finding
of incurring of expenditure and that no disallowance can
be made on the basis of presumptions. In "ACIT Vs.
Eicher Ltd.," 101 TTJ (Del) 369, that it was held that
the burden in on the AO to establish nexus of expenses
incurred with the earning of exempt income, before
making any disallowance u/s 14A of the Act. In "Maruti
udyog Vs. DCIT, 92 ITD 119 (Del), it has been held that
before making any disallowance u/s 14A of the Act, the
onus to establish the nexus of the same with the exempt
income, is on the revenue. In "Wimco Seedlings Limited
Vs. DCIT", 107 ITD 267 (Del) TM, it has been held that
11 ITA No.2103/Del./2012
ITA No.1671/Del./2012
there can be no presumption that the assessee much
have incurred expenditure to earn tax free income.
Similar are the decisions in:
1. Punjab National Bank Vs. DCIT 103 TTJ 908
(Del);
2. Vidyut Investment Ltd., 10 SOT 284 (Del); and
3. D.J. Mehta Vs. ITO 290 ITR 238 (Mum.)(AT)"
· CCI Ltd. vs. JCIT 206 Taxman 563 (Kar.) High
Court
Disallowance on notional basis is invalid. When no
expenditure is incurred by the assessee in earning
dividend income, notional expenditure cannot be
disallowed u/s 14A.
· CIT vs. Metalman Auto P. Ltd., 336 ITR 434 (P&H)
It has been held that disallowance under section 14A of
presumptive expenditure in absence of actual
expenditure could not be taken into account.
Ld.AO has mentioned in para 10 on page 3 of the
assessment order that if the assessee had surplus
funds then it should not make borrowing for
working capital purposes
In reply it is respectfully submitted that Ld. A.O. cannot
step into the shoes of the assessee company and decide as to
how it should run its business. It is assessee company's
prerogative to decide and take decisions accordingly as to
how it runs its business. Therefore, the action of Ld. A.O. in
making the disallowance of expenditure on account of
interest u/s 14A read with rule 8D in the absence of any
contrary evidence is not sustainable under any
circumstances.
It is further submitted that no evidence has been brought by
Ld. A.O. to establish that any interest expenditure in relation
12 ITA No.2103/Del./2012
ITA No.1671/Del./2012
to investments made, was incurred by the assessee
company. Apparent is real unless proved otherwise by
the person making allegations that it is not so. This
principle was recognized by Hon'ble Supreme Court in
the case of P.S. Bedi & Company 230 ITR 518. Burden to
prove this allegation was all the more stringent on the
shoulders of Ld. A.O. as no such expenditure have been
paid in earlier years and stood accepted by the Revenue.
Therefore, when the business expediency of such
expenses has been recognized by the Revenue in earlier
years and now to say in the same breath that interest
was paid for investment purposes is nothing but self
defeating argument of Ld. A.O.
Reliance is placed on following judicial decisions:-
(a) Rule 8D cannot be resorted to unless satisfaction is
recorded having regard to the accounts of the
assessee.
· REI Agro Ltd. vs. DCIT (Kol.)
No s. 14A disallowance if satisfaction not recorded with
reference to A/cs. Under Rule 8D(2)(ii) loans for
specific business purposes cannot be included. Under
Rule 8D(2)(ii) & (iii) investments which have not yielded
income cannot be included, wherein :-
In AY 2008-09, the assessee invested Rs.103 crores in
shares on which it earned tax-free dividends of Rs. 1.3
lakhs. The assessee claimed that though its borrowings
had increased by Rs. 122 crores, the said investments
were funded out of own funds like capital and profits. It
claimed that no expenditure had been incurred to earn
the dividends and no disallowance u/s 14A could be
made. The AO applied Rule 8D and computed the
disallowance at Rs. 4 crore. On appeal by the assessee,
the CIT(A) reduced the disallowance to Rs. 26 lakh. On
cross appeals, HELD by the Tribunal:
(i) When the AO does not accept the assessee's claim
regarding the non-applicability/ quantum of
13 ITA No.2103/Del./2012
ITA No.1671/Del./2012
disallowance u/s 14A, he has to record satisfaction on
that issue. This satisfaction cannot be a plain satisfaction
or a simple note. It has is to be done with regard to the
accounts of the assessee. On facts, as there is no
satisfaction by the AO, no disallowance u/s 14A can be
made (Balarampur Chini Mills 140 TTJ (Kol) 73
followed)
· Relaxo Footwears Ltd vs. Addl. CIT (2012) 50 SOT
102 (Del.)
Satisfaction of the AO is a prerequisite to invoke the
provision of Rule 8D.
AO has to record his satisfaction about correctness or
otherwise of computation made by the AO, which
mutatis mutandis means that if the contention is that no
expenditure has been incurred, it has to be rebutted.
· JK Investors (Bombay) Ltd vs. ACIT in ITA
No.7858/Mum/2011 ITA No.7851/Mum/2011 dated
13-03-2013 of ITAT, Mumbai Bench
The condition precedent for the AO to invoke Rule 8D is
that he first must examine the accounts of assessee and
then record by giving cogent reasons why he is not
satisfied with the correctness of the assessee's claim. In
the absence of an examination of accounts and the
recording of satisfaction, Rule 8D cannot be invoked.
(b) No expense disallowance if investment is out of own
funds or own funds are more than investments
· Reliance is also placed on the judgement of Hon'ble
Mumbai Tribunal in case of Godrej Industries Ltd.
(ITA No. 1090/Mum/2009) wherein it was held that
assessee had sufficient own funds in the form of own
capital and reserves to make the investments. The
Tribunal also considered the Fund Flow Statement
presented to observe that assessee had generated
sufficient funds from its own operations to make
14 ITA No.2103/Del./2012
ITA No.1671/Del./2012
investments and thus disallowance u/s 14A is not
justifiable.
· Reliance in this regard is placed on the judgement of
Hon'ble Mumbai ITAT in case of Avshesh Mercantile P.
Ltd. vs DCIT (ITAT Mumbai) (ITA No.
5779/Mum/2006) wherein it has been held that the
investment in premium notes had the potential of
generating taxable income in the form of short term
capital gains etc. and it is immaterial whether such
taxable income was earned in the year under
consideration or not. The mere possibility of an
investment having the potential of earning taxable
income was adequate to rule that disallowance u/s 14A
could not be made. Similar view has been expressed by
Hon'ble Chennai ITAT in case of MSA Security
Services Pvt. Ltd. vs ACIT (ITA No. 1523/Mds.2012).
CIT v. Lubi Submersibles Ltd.; ITA 868/2010 dated
25.07.2011 (Guj)
In this case it has been held that if the investment in tax
free income yielding securities is made from interest free
funds, no disallowance can be made under section 14A.
G.D. Met Steel (P) Ltd v. Asstt. CIT: (2011) 47 SOT 62
(Mum)
When investments are made from own funds, merely
because the assessee had to subsequently borrow the
funds for business use, it cannot be said that the
borrowed funds have been used for the purposes of
investments. There were no such disallowance in the
earlier years and the investments are old investments. In
these circumstances, the assessee was quite justified in
contending that no part of the interest paid on
borrowings could be treated as having been used for the
purposes of investments, and, accordingly, no
disallowance under section 14A could be made in
respect of the same. The disallowance in respect of
interest was to be deleted. [Para 10]
15 ITA No.2103/Del./2012
ITA No.1671/Del./2012
Ld.CIT(A) has alleged in para 10 at page15-16 of
the appellate order that the investment worth Rs. 35
crores were made through mixed funds (Refer PB 15 of
CIT(A) order) out of total worth investment of
Rs.2,09,00,03,543/- during the year, which comes to
16.94% of total investments made during the year
(35,00,00,000/2,09,00,03,543 X 100)(Refer PB 16 of
CIT(A) order). Hence, for the purpose of disallowance of
interest under Rule 8D, same percentage is taken,
calculation of which is mentioned at page 16 of his order.
In reply it is respectfully submitted that it is not disputed
that mixed funds were used for investment worth Rs. 35
crores. But, if there are substantial reserves in addition to
other reserves in the books of the assessee company and it
can be proved that the investments were out of own funds,
no disallowance on account of interest u/s 14A could be
made. Reliance is placed in the case of Harrisons
Malayalam Ltd vs. ACIT (2008) 19 SOT 363 Cochin.
Also, a date wise chart of proceeds from redemption
received in the bank accounts of the assessee company and
the dates on which the investments were made was filed
before Ld. CIT(A), showing the source of investments
made. The same has been also accepted by Ld. CIT(A) in
his order in Para 10 at Page 15. The same is again being
reproduced hereunder:-
(a) As regards Birla Mutual Fund investment amounting
to Rs 14 Crores, dated 21-6-2007
PB 925 is Detailed Statement of Investments made in
mutual fund and tax free bonds during F.Y. 2007-08
together with source of investments wherein serial no. 10
shows that investment in Birla Sun Mutual Fund has been
made from Standard Chartered Bank Current Account.
PB 934 to 937 is Standard Chartered Bank Current Account
Statement wherein PB 936 shows that on 19-06-2007 two
deposits of Rs 2.69 Crores and Rs 11.48 Crores were
received, being receipts from sale of sugar which were
transferred from EEFC account to Standard Chartered Bank
Current Account and withdrawals made on 21-06-2007
16 ITA No.2103/Del./2012
ITA No.1671/Del./2012
aggregating to Rs. 14 crores vide cheque nos. 370653,
370654, 370655 for investment in Birla Sun Mutual Fund
were out of the above mentioned sale proceeds.
PB 938 is copy of bank statement of ICICI Bank
current account, showing that Rs 6.25 Crores were refunded
by Birla Mutual Fund to the assessee company and have
been credited in bank account on 30-07-2007, as the
investment allotted were only to the tune of Rs. 7.75 crores
as against Rs. 14 crores applied by the appellant on
21.6.2007.
PB 1022 PB 1023 (second half portion) is the copy of
email from Shri JP Silswal (Accountant of appellant
Company) asking for rates on 19.6.2007 and 9.7.2007 on
which USD transfer from EEFC account to Current account
of USD 28 lacs and USD 6.50 lacs has been made. And PB
1022 (first half portion) is email giving the exchange rates
in response to the above email.
PB 1024 is the copy of email from Standard Chartered
Bank to Shri JP Silswal (Accountant of appellant Company)
showing relevant extract of EEFC Bank Statement wherein
entries amounting to USD 28 lacs and USD 6.50 lacs dated
19-06-2007 and USD 35 lacs dated 09-07-2007 are
appearing as transfer to Standard Chartered Bank current
account.
PB 1017 to 1020 is copy of Standard Chartered EEFC
Book ledger account in the books of assessee company
wherein PB 1017 shows that on 10-7-2007 a combined
entry for transfer on 19.6.2007 and 9.7.2007 from EEFC to
Current Account has been made, establishing that sugar
proceeds were transferred to Current Account immediately
before investment in Birla Sun Mutual Fund was made.
This shows that the source of funds of Rs 14 crores was
made out of export proceeds.
IN EEFC a/c company can keep certain percentage of
export realisations.
17 ITA No.2103/Del./2012
ITA No.1671/Del./2012
Even otherwise also, if we see redemption out of
investments up to the date of investment in various banks,
then, the total redemption proceeds received were `41crores
(`14.89crores+`18.78Crores+`8.38Crores), whereas
investments made were `27.25crores (`10crores
+`9crores+`8.25crores). Hence, investments proceeds
utilised for sugar payments was about `14crores.
In any case, if we see immediate redemption and immediate
investments then also Rs 10.69 Crores was from interest
free funds (sugar sale proceeds) Pls see excel sheet
(b) As regards JM Mutual Fund amounting to Rs 14
Crores , Investment dated 12 -07-2007
PB 925 is Detailed Statement of Investments made in
mutual fund and tax free bonds during F.Y. 2007-08
together with source of investments wherein serial no. 11
shows that investment in JM Mutual Fund has been made
from Standard Chartered Bank Current A/c.
PB 1022 1023 (second half portion) is the copy of email
dated 12-07-2007 from Shri JP Silswal (Accountant of
appellant Company) asking for rates on 19.6.2007 and
9.7.2007 on which USD transfer from EEFC account to
Current account of USD 28 lacs and USD 6.50 lacs has
been made. And PB 1022 (first half portion) is email
giving the exchange rates in response to the above email.
PB 1024 is the copy of email from Standard Chartered
Bank to Shri JP Silswal (Accountant of appellant Company)
showing relevant extract of EEFC Bank Statement wherein
entries amounting to USD 28 lacs and USD 6.50 lacs dated
19-06-2007 and USD 35 lacs dated 09-07-2007 are
appearing as transfer to Standard Chartered Bank current
account.
PB 1025 is assessee's letter dated 09-07-2007 to Standard
Chartered Bank requesting for transfer of funds amounting
to USD 35 lacs from EEFC account to Standard Chartered
Bank current account.
18 ITA No.2103/Del./2012
ITA No.1671/Del./2012
PB 1017 to 1020 is Standard Chartered EEFC Book ledger
account in the books of assessee company wherein PB
1018 shows that on 13-07-2007 a combined entry for
transfer of funds on 19.6.2007 and 9.7.2007 from EEFC to
Current account has been made, establishing that sugar
proceeds were transferred to Current Account. This shows
that the source of funds of Rs 14 crores was made out of
export proceeds.
PB 939 - 940 is Standard Chartered Bank current account
statement showing on 09-07-2007 an amount of USD
35lacs @ 40.30 being transferred from EEFC account to
Standard Chartered Bank current account.
(c) As regards Optimix Mutual Fund amounting to Rs 1
Crore, Investment dated 24 -07-2007
PB 938 is ICICI Bank current account statement showing
that on 24-07-2007 an investment of Rs. 1 crore was made
by assessee company vide cheque no. 733882.
PB 938 is ICICI Bank current account statement showing
credit of Rs.1,26,11,952/-, being amount received as
Income Tax Refund vide cheque no. 554479.
PB 938 is ICICI Bank current account statement showing
credit of Rs.8,90,64,500/-, being amount received from
redemption of Tata Mutual Fund.
PB 985 is credit voucher no. 32 dated 13-07-2007 showing
amount of Rs.1,26,11,952/- received as refund from Income
Tax Department issued by Deputy Commissioner of Income
Tax.
PB 986 is copy of cheque no. 554479 dated 29-06-2007
showing the amount of refund of Rs.1,26,11,952/- issued in
the name of assessee company by Deputy Commissioner of
Income Tax for A.Y. 1995-96.
All the above mentioned evidences prove that assessee
company had sufficient funds to invest in mutual funds
from its own sources.
19 ITA No.2103/Del./2012
ITA No.1671/Del./2012
(d) As regards Optimix Mutual Fund amounting to Rs 3
Crores ( out of Rs. 6.25 crores invested), Investment
dated 31 -07-2007
PB 938 is ICICI Bank current account statement showing
that on 30.7.2007 Rs 6.25 Crores received from redemption
of Birla MF as mentioned in bank narration itself.
PB 938 is ICICI Bank current account statement showing
that on 31.7.2007 Rs 6.25 Crores were invested in Optimix
Dynamic Multi Multiplier by the assessee company.
Thus, the entire investments were funded out of the
proceeds from redemption of Birla Sun Mutual Fund. Also,
it can be seen from the order of Ld. CIT(A), he itself has
mentioned in his order at page 15 Rs.3Crores (which is
rather `30 lacs, misinterpreted as `3crores by Ld. CIT(A))
invested out of Rs. 6.25 crores.
This investment has been made out of refund from Birla
Mutual Fund (`14 - `7.75 = `6.25). Remaining is from the
left over proceeds from Tata Mutual Fund and Income Tax
Refund.
Even otherwise, on 30.7.2007 and 31.7.2007, total
withdrawals of Rs 30,17,160 were made (this can be fully
covered from Opening balance of `1.26 crores before credit
of `6.25crores)
(e) As regards SBI Mutual Fund amounting to Rs 2
Crores , Investment dated 30 -10-2007
PB 925 is Detailed Statement of Investments made in
mutual fund and tax free bonds during F.Y. 2007-08
together with source of investments wherein serial no. 22
shows that investment amounting to Rs. 2 crores in SBI
Mutual Fund has been made from Standard Chartered Bank
Current Account out of sale proceeds received from DEPB
licences.
PB 946 is ICICI Bank current account statement showing
credit of Rs.64,59,888/- as on 29-10-2007, being amount
received as Income Tax Refund.
20 ITA No.2103/Del./2012
ITA No.1671/Del./2012
PB 996 is credit voucher no. 55 dated 27-10-2007 showing
amount of Rs. 64,59,888/- received as refund from Income
Tax Department issued by Deputy Commissioner of Income
Tax.
PB 997 is copy of pay-in- slip showing bank name, name of
the assessee company, date of deposit of amount, amount
deposited, account no. of the assessee company, branch of
bank at which amount is deposited and seal of the bank.
PB 998, 999 are copies of cheque no. 554556 dated 17-10-
2007 showing the amount of refund of Rs.64,59,888/-
issued in the name of assessee company by Deputy
Commissioner of Income Tax for A.Y. 2002-03.
All the above mentioned evidences prove that assessee
company had sufficient funds to invest in mutual funds
from its own sources.
Investments made till this date is less than the redemption
proceeds of investments reinvested and Rs 28 Crores
introduced from EEFC account.
UTI bond dividend Rs. 98.60 lacs credited on 4.10.07,
balance Rs. 40 lacs no source, and its not from DEPB .
further on 27.9.07 lots of mutual funds have been redeemed
amounting to Rs. 13.70 cr and Rs. 13.25 cr invested and bal.
Can be utilised???PB 945
(f) As regards Prudential ICICI Mutual Fund
amounting to Rs 1 Crore , Investment dated 19 -12-
2007
Pls see page 1080 of Paper Book (Bank Statement of
Standard Chartered Current a/c wherein loan proceeds are
also deposited)
It is submitted that the amount of ` 1crore was invested out
of `2crores ( ` 1crore + ` 1crore) received from Shri Vinay
Kumar and Shri Shanti Lal Jain on account of endorsement
of Keyman Unit Link Endowment Insurance Policy, which
21 ITA No.2103/Del./2012
ITA No.1671/Del./2012
was taken by the Corporation (ISEC) for the above named
persons vide minutes dated 30-10-2007. This receipt was
offered for taxation also during the impugned year by the
assessee company.
PB..... is copy of minutes of Steering Committee Meeting
held on 30-10-2007 of assessee company acknowledging
that Keyman Unit Link Endowment Insurance shall be
endorsed to Shri Vinay Kumar and Shri Shanti Lal Jain on
the receipt of payment of `1crore each from them.
PB..... is cheque no. 395253 received from Shri Vinay
Kumar for Keyman Insurance Policy transferred, deposited
in bank on 19-12-2007.
PB..... is cheque no. 263453 dated 18-12-2007 received
from Shri Shanti Lal Jain for Keyman Insurance Policy
transferred deposited in bank on 19-12-2007.
Even otherwise also, it is submitted that total redemption of
investments upto 19-12-2007 amounted to `135 Crores (`
107 crores from redemption of investments + introduction
of ` 28 Crores from EEFC for purchase of investments) and
total investments made upto 19-12-2007 amounted to ` 118
Crores. Therefore, it can be seen that the net proceeds were
put into mixed funds.
Also, in the subsequent year i.e. A.Y. 2009-10, Ld. CIT (A)
has given a finding at PB 21 of his order "that out of ` 35
crores, the assessee has brought forward investments of
`10.75 crores as at 1.4.2008 and the balance ` 24.25 crores
had already been redeemed in the last year. Further, these
investments of `10.75 crores remained throughout the year
and were also held by the assessee as at 31/3/2009. In view
of the same, for working out disallowance under Rule 8D
(2)(ii), average investments of ` 10.75 crores alone are
being taken, since use of mixed funds could be held only to
that extent. The remaining investments made during the
year, taxable or exempt, were made out of redemption
proceeds of investments made in earlier years and thus held
to be not from interest bearing funds."
22 ITA No.2103/Del./2012
ITA No.1671/Del./2012
All the investment amounting to ` 35 crores are into growth
fund earning capital gains.
Reliance is placed on following judgements
(a) Nexus is necessary ingredient to invoke the
provisions of section 14A of the Act. If no such nexus
could be made by the Ld. AO in respect of any such
expenditure in relation to exempt income, Rule 8D
cannot be resorted to.
· ITO vs. Karnavati Petrochmem Pvt. Ltd (ITAT
Ahmedabad)
HELD No nexus has been established by the AO
between the expenditure incurred by the assessee and
the tax free income earned by him. Further, as the
interest income was more than interest expense and the
assessee was having net positive interest income, the
interest expenditure cannot be considered for
disallowance u/s 14A and Rule 8D
DCIT vs. Maharashtra Seamless Ltd. (ITAT Del.)
ITA no. 4063/2006 dated 16.12.2010.
No s. 14A disallowance of interest on borrowed funds if
AO does not show nexus between borrowed funds & tax-
free investment.
· CIT vs. Winsome Textile Industries Ltd. [319 ITR
204 (P&H)]
No S. 14A disallowance in absence of nexus between
investment in tax-free securities & borrowed funds.
· CIT vs. Maxopp Investment Ltd. [347 ITR 272 (Del)]
No S. 14A or Rule 8D Disallowance without showing
how assessee's calculation is wrong. Only real
expenditure can be disallowed
23 ITA No.2103/Del./2012
ITA No.1671/Del./2012
· ACIT vs. Justice Sam P Barucha [ITA
No.3889/Mum/2011]
No s. 14A disallowance in absence of "live nexus"
between expenditure & tax-free income.
· CIT vs. Gujarat Power Corporation [Tax Appeal
NO. 1587 of 2009 (Guj.) (High Court)]
The assessee has sufficiently explained that a majority of
the investment in the tax-free security was made before
the borrowing. The assessee had demonstrated that it
had other sources of investment and that no part of the
borrowed fund could be stated to have been diverted to
earn tax free income. As borrowed funds were not used
for earning tax-free income, applying s. 14A was not
justified.
· ACIT vs. SIL Investment Ltd. [ITA No.
2431/Del/2010]
S. 14A: Onus is on AO to show expenditure is incurred
to earn tax-free income.
The contention of the Revenue that some expenditure,
directly or indirectly, is always incurred for earning tax-
free income cannot be accepted. The burden is on the
AO to establish the nexus of the expenditure incurred
with the earning of exempt income before making any
disallowance u/s 14A.
· CIT vs. Walfort Share & Stock Brokers Pvt. Ltd.
[326 ITR 1 (SC)]
For attracting s. 14A, there has to be a proximate cause
for disallowance, which is its relationship with the tax
exempt income.
· Godrej & Boyce Mfg. Co. Ltd. vs. DCIT & ANR.
[(2010) 328 ITR 81]
S. 14A supersedes the principle of law that in the case of
a composite business expenditure incurred towards tax-
free income could not be disallowed and incorporates an
24 ITA No.2103/Del./2012
ITA No.1671/Del./2012
implicit theory of apportionment of expenditure between
taxable and non-taxable income. Once a proximate
cause for disallowance is established which is the
relationship of the expenditure with income which does
not form part of the total income a disallowance u/s
14A has to be effected.
· Minda Investments vs. DCIT [(2011) 138 TTJ 240
(Delhi)]
S. 14A disallowance has to be on basis of nexus between
income & expenditure & not on adhoc estimate basis.
· ACIT vs. Yatish Trading Co. P. Ltd. (2011) 50 DTR
158 (Mum) (Trib.)
The expression "in relation to" in s. 14A means
dominant and immediate connection or nexus with the
exempt income. In order to disallow expenditure u/s
14A, there must be a live nexus between the
expenditure incurred and the tax-free income.
Disallowance cannot be made on presumptions and
estimation by the AO. Notional expenditure can be
apportioned for the purpose of earning income if there
is no actual expenditure incurred "in relation to" the
tax-free income.
ACIT v Punjab state Coop & Mktg: ITA no.
548/Chd/2011 & 579/Chd/2011 dated 30.09.2011
It has been held that if there is no nexus between the
borrowed funds and investments made in purchase of
shares disallowance u/s 14A is not warranted.
(b) Interest on loans for specific taxable purposes to be
excluded
· ACIT vs. Best & Crompton Engineering Ltd (ITAT
Chennai)
HELD: Rule 8D(2)(ii) refers to expenditure by way of
interest which is not directly attributable to any
particular income or receipt. If loans have been
25 ITA No.2103/Del./2012
ITA No.1671/Del./2012
sanctioned for specific projects/expansion and have
been utilized towards the same, then obviously they
could not have been utilized for making any investments
having tax-free incomes and have to be excluded from
the calculation to determine the disallowance under
Rule 8D(2)(ii)
(c) Investments on which Capital Gains Tax has been
paid to be excluded
· Sundaram Asset Management Co. Ltd vs. DCIT
(ITAT Chennai), I.T.A. No. 1774/Mds/2012
Some of the investments made by the assessee are short
term. Since assessee is paying capital gains tax on short
term investments, Rule 8D will not apply on them and
the AO is directed to recompute disallowance u/s 14A
read with Rule 8D after excluding short term
investments.
In view of the above submissions and in view of the judicial
pronouncements relied upon, the entire interest amounting
to Rs.64,60,071/- deserves to be deleted."
6. On the other hand, ld. DR relied on the order of the Assessing
Officer and also pleaded that the relief granted by the CIT (A) was not
justified. He also submitted that if the issue is restored back to the file of
the Assessing Officer then it should be restored in toto.
7. We have heard both the sides on the issue. For the year under
consideration, the assessee has made investment to the tune of
Rs.2,18,16,75,912/-. It is claimed that Rs.2,16,09,61,251/- was received
from redemption of investments. The assessee's claim that investments
were from the proceeds of redemption of old investments and cash surplus
26 ITA No.2103/Del./2012
ITA No.1671/Del./2012
generated by way of interest income on UTI Bonds and dividend income
on mutual funds investment. It was also claimed that the interest
expenditure debited in the profit & loss account was with respect to export
and import of sugar alone and it was not at all related to any investment
activity and it was claimed that no interest was incurred towards the
investment activity. The assessee has also relied on the decision of
Hon'ble Delhi High Court in the case of assessee's own case for
Assessment Year 2001-02 wherein the ITAT's view that no interest has
been incurred towards investment activity has been accrued. On this, we
hold that the Rule 8D is applicable for Assessment Year 2008-09 and
earlier decision on the disallowance u/s 14A shall not have impact for
applicability of Rule 8D for the year under consideration. We would also
like to state that Rule 8D of the Income-tax Rules, 1962 is mandatory by
using the word "shall" in section 14A(2), the legislature made it mandatory
for the Assessing Officer to determine the amount of expenditure incurred
in relation to exempt income according to the prescribed method. Prior to
insertion of Rule 8D of the Rules, the Assessing Officers were having
discretion to determine expenditure on a reasonable and acceptable method
of apportionment of expenditure between the exempt taxable income and
exempt income. Now, the legislature has provided in Rules the method of
apportionment of expenditure between the exempt income and taxable
27 ITA No.2103/Del./2012
ITA No.1671/Del./2012
income, the Assessing Officer as well as the other statutory authorities
under the Act are required to determine the amount of expenditure in
relation to exempt income according to method prescribed in the Rules.
However, the Assessing Officer can embark upon determination of amount of
expenditure incurred in relation to the exempt income only if he records the
finding that he is not satisfied with the correctness of the claim of the assessee
in respect of such expenditure. In the instant case, the Assessing Officer
has worked out the disallowance by holding as under :-
"9. During the instant year, the assessee has shown income of
Rs.2,37,46,339 by way of Interest on UTI Bonds and Rs.55,23,351 as dividend
on mutual funds which was claimed as exempt under Section 10 of the Income
Tax Act. Vide Questionnaire dated 31/8/2010, the assessee was required to
explain why disallowance u/s 14A may not be made.
10. The assessee has mainly submitted that the assessee has hugs surplus
and interest free funds available at its disposal which are more than the
investments made by the assessee. It has also been submitted by the assessee
that interest expenditure is incurred in relation to business of the assessee and
not in relation to investment activity. The submissions of the assessee have
been considered. However, the same is not acceptable. If the assessee had
surplus funds then it should not make borrowings for working capital purposes.
Therefore expenses attributable to earning of exempt income are worked out as
under :
I. Expenditure directly relating to NIL
Income which does not form part
of total Income
II. In case where the assessee has AXB
incurred expenditure by way of C
interest during the previous year
which is not directly attributable
to any particular income or receipt = Rs
an amount computed in 7,68,45,729 x 250,20,59,294
accordance with the formula, 498,23,64,227
= 385,90,629
A: Amount of Interest
Expenditure other than included In
clause (I)
28 ITA No.2103/Del./2012
ITA No.1671/Del./2012
B: Average 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
first and last date of the
assessment year.
C: Average Total Assets as
appearing in the balance sheet of
the assessee on
A = Interest Rs.7,68,45,729
B = Average Investments =
31.3.2007 : 249,17,01,962
31.3.2008 : 251,24,16,625
B = Average Investments =
250,20,59,294
C = Average Total Assets =
31.3.2007 total assets
322,43,39,582
31.3.2008 total assets
674,03,88,872
Average Total Assets =
498,23,64,227
III. 0.5% percent of the average value 0.5% X 250,20,59,294
of investment, income from which = 1,25,10,296
does not or shall not form part of
the total income, as appearing in
the balance sheet of the assessee,
on 1/4/2007 and 31/3/2008
Average Investments as calculated
above : 250,20,59,294
Total 5,11,00,925
The total disallowance on this account comes to Rs.5,11,00,925/-. The same is
therefore, being disallowed and added to the total income."
From the submissions of assessee and from the orders of the revenue
authorities, we find that the Assessing Officer has not considered all
29 ITA No.2103/Del./2012
ITA No.1671/Del./2012
relevant facts on record and has also not verified the claim of the assessee
with regard to the source of investment. To reach at the conclusion that he
was not satisfied with the claim of assessee with regard to expenses
incurred to earn exempted income, then only he can invoke Rule 8D for
working out the disallowance. Therefore, in our considered view, this
issue requires a relook at the level of Assessing Officer. The same is
restored to the file of the Assessing Officer for deciding de novo after
providing an opportunity of being heard to the assessee.
7.1 Similarly, in the case of disallowance with regard to the
administrative and other expenses being 0.5% of average value of
investment, the assessee's claim is that average value of investment taken
by the Assessing Officer was Rs.2,50,20,59,294/- instead of
Rs.41,88,44,725/- which is only 16.94% of the average value of
investment taken by the Assessing Officer. Therefore, for this aspect also,
we set aside the issue to the file of the Assessing Officer. The Assessing
Officer shall decide both these disallowances after providing an
opportunity of being heard to the assessee and considering the legal
position on these issues.
8. Ground No.2 in assessee's appeal is with regard to the sustenance of
disallowance of Rs.8,24,125/- where the TDS deducted during the
30 ITA No.2103/Del./2012
ITA No.1671/Del./2012
financial year 2007-08 and deposited on or before due date of filing the
return.
9. We have heard both the sides on the issue. The assessee has
deducted TDS of Rs.8,21,625/- u/s 194C and Rs.2,500/- u/s 194J of the
Act which have been deposited on 16.06.2008 and 31.05.2008
respectively. After hearing both the sides, we hold that this issue has been
settled by various decisions of High Courts. The Hon'ble Calcutta High
Court in the case of CIT vs. Virgin Creations in ITA No.302 of 2011 has
held that the proviso to section 40(a)(ia) should be deemed to have come
into force from the retrospective operation from 1.4.2005. The reliance
was also placed by ld. AR on the decision of Hon'ble Delhi High Court in
the case of CIT vs. Talbros (P) Ltd. in ITA No.218/2013 dated 06.09.2013
wherein the issue has been decided in favour of the assessee. The relevant
para which states the facts of the case are in para 2 and the same is
reproduced below :-
"2. The contention of the Revenue is that the Income Tax
Appellate Tribunal (Tribunal, for short) in their impugned
orders dated 21st May, 2012 (in the case of Naresh Kumar)
and 8th October, 2012 (in the case of Talbros (P) Ltd.), has
erred in holding that the amendments made to Section
40(a)(ia) of the Act by Finance Act, 2010 should be given
retrospective effect. The contention of the Revenue is that
these amendments are w.e.f. 1st April, 2010 and are not
retrospective and, therefore, not applicable to the
assessment year in question i.e. 2008-09."
31 ITA No.2103/Del./2012
ITA No.1671/Del./2012
The decision of Hon'ble Delhi High Court in paras 26 & 27 read as under:-
26. Principle of matching which is disturbed by Section
40(a)(ia) of the Act, may not materially be of consequence
to the Revenue when the tax rates are stable and uniform or
in cases of big assessees having substantial turnover and
equally huge expenses as they have necessary cushion to
absorb the effect. However, marginal and medium
taxpayers, who work at low G.P. rate and when expenditure
which becomes subject matter of an order under Section
40(a)(ia) is substantial, can suffer severe adverse
consequences as is apparent from the case of Naresh
Kumar. Transferring or shifting expenses to a subsequent
year, in such cases, will not wipe off the adverse effect and
the financial stress. Nevertheless the Section 40(a)(ia) has to
be given full play keeping in mind the object and purpose
behind the section. At the same time, the provision can be
and should be interpreted liberally and equitable so that an
assessee should not suffer unintended and deleterious
consequences beyond what the object and purpose of the
provision mandates. Case of Naresh Kumar is not one of
rare cases, but one of several cases as we find that Section
40(a)(ia) is invoked in large number of cases.
27. One important consideration in construing a
machinery section is that it must be so construed so as to
effectuate the liability imposed by the charging section and
to make the machinery workable. However, when the
machinery section results in unintended or harsh
consequences which were not intended, the remedial or
correction action taken is not to be disregarded but given
due regard."
The Hon'ble High Court had held the amendment to be interpreted liberally
and retrospective. In view of these, we allow this ground of assessee's
appeal.
32 ITA No.2103/Del./2012
ITA No.1671/Del./2012
10. Ground No.3 in the assessee's appeal was not pressed and the same
is dismissed as not pressed.
10. Ground No.4 is general in nature and does not require any
adjudication, hence, the same is dismissed.
11. Ground No.1 in revenue's appeal is with regard to the deletion of
addition of Rs.98,33,833/- made on account of loss on sale of investment.
12. We have heard both the sides on the issue. This issue has been dealt
by the CIT (A) in para 5 of his order, which read as under :-
"5. Ground of Appeal No.3 relates to addition of
Rs.98,33,833 on account of loss on sale of investment. The
appellant has submitted that it has shown in the Profit on
Sale of Investment (Net) Rs.9,31,58,877 in its profit and
loss account. The appellant has submitted that the above
amount is net of Loss on Sale of Investment of
Rs.98,33,833 has been disallowed without confronting the
appellant.
I have carefully gone through the submissions of the
appellant and found that its contention that loss on sale of
investment has already been considered as it has shown Net
Profit on Sale of Investment is correct. In the Computation
of Income, the appellant while computing the business
income has excluded Net Profit on Sale of Investment and
has also considered the same under the head Capital Gains.
No separate disallowance of Rs.98,33,833 is required to be
made. Hence, disallowance of Rs.98,33,833 is hereby
deleted."
After hearing both the sides, we find that the revenue has not controverted
the findings of the CIT (A) that the loss on the sale of investment has been
33 ITA No.2103/Del./2012
ITA No.1671/Del./2012
excluded in computation of business income and the same has been
considered under the head `capital gains'. In such a situation, we find no
infirmity in the order of the CIT (A) and the same is sustained on this
ground. Accordingly, this ground of revenue's appeal is dismissed.
13. In the ground no.3, the revenue has raised the deletion of addition of
Rs.10,79,68,722/- made on account of valuation of closing stock.
14. This issue has been decided by the CIT (A) in para 11 which read as
under :-
"11. Ground no 9 relates to addition of Rs.10,79,68,722 to
the value of closing stock of the appellant. During the
course of appellant proceedings, the appellant stated that the
Hon'ble ITAT in AY 1993-94 has decided this issue in
favour of the appellant.
The issue is that the appellant valued the closing stock on
cost or net realizable value whichever is lower. This method
of valuation of closing stock was followed by the appellant
in Assessment Year 1993-94 and had been accepted by the
Tribunal. Since the facts of the case are identical to the facts
of earlier years and since the appellant is following the
method of valuation consistently on cost or net realizable
value whichever is lower, which is a prescribed method
under AS -2 issued by the Institute of Chartered
Accountants of India, the addition on account of Closing
Stock of Rs.10,79,68,722 is hereby deleted."
The assessee is valuing closing stock on cost or net realizable value
whichever is lower since 1993. The issue was contested in Assessment
Year 1993-94 up to the Hon'ble Delhi High Court wherein the contention
of the assessee has been accepted. Ld. AR has submitted a copy of the
34 ITA No.2103/Del./2012
ITA No.1671/Del./2012
order of the Hon'ble Delhi High Court in ITA No.645/2005 & Ors. wherein
the controversy has been decided in favour of the assessee. The question
of law framed by Hon'ble High Court vide order dated 30.01.2012 is as
under :-
"Whether Income Tax Appellate Tribunal was correct in
law in deleting the addition of Rs.3,64,584/- made by the
Assessing Officer to the income of assessee on account of
under valuation of closing stock by rejecting the change
made by the assessee in the method of valuation of closing
stock?"
This question has been answered by Hon'ble High Court in paras 19 & 20
which read as under :-
"19. The third common question raises a separate issue.
The question is whether the reimbursement payable by the
manufactures should be included in the Net Realizable
Value. This is a different aspect and relates to computation
of Net Realizable Value. We have quoted the reasoning
given by the Assessing Officer in the assessment order in
the assessment year 1993-94. He has stated that the
international price of sugar was lower than the domestic
price and therefore when the respondent/assessee had
incurred losses on exports. The Assessing Officer has not
disputed or stated that the international price cannot be the
criteria to compute or calculate the market value.
International price is not disputed. This is not the contention
of the Revenue. The Assessing Officer in his reasoning has
mentioned that the respondent assessee was receiving
reimbursement of the loss on export from the sugar
manufacturers and losses were reimbursed. Therefore, the
respondent/assessee should compute the closing stock on
cost basis i.e. Net realizable Value plus reimbursement,
which is nothing but the cost price.
35 ITA No.2103/Del./2012
ITA No.1671/Del./2012
20. We have considered the said contention of the
Revenue but are unable to agree with them for several
reasons.
The CIT (A) has granted the relief by relying on the decision of ITAT
which has been confirmed by Hon'ble High Court. Therefore, in our
considered view, there is no fault in the order of the CIT (A) and the same
is sustained on this issue. This ground of revenue's appeal is dismissed.
15. Ground No.4 is general in nature and does not require any
adjudication, hence, the same is dismissed.
16. In the result, the appeal of the revenue and the appeal of the assessee
is partly allowed for statistical purposes.
Order pronounced in open court on this 15th day of September, 2014.
Sd/- sd/-
(I.C. SUDHIR) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 15th day of September, 2013
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-XV, New Delhi.
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.
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