TaxTMI 
TaxTMI 
2012 (10) TMI 1035
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....idend income of which is exempt from tax. The assessee (i) failed to furnish the copy of bank statement showing investment made in each company highlighting respective amount and immediate source thereof & (ii) failed to prove that the investments were made from non-interest bearing funds. Accordingly, AO made disallowance of Rs. 23,64,484/- u/s 14A of the I.T. Act,1961, as per Rule 8D of the I. T. Rules, 1962 as calculated at page 6 of the assessment order. 4.1. The Ld. CIT (A) confirmed the disallowance by giving the following findings at Page 13, Para 4.2 of his order :- "After perusing the assessment order & written submissions, the case laws relied by assessee were applicable when there is no rule 8D. Now the Act has prescribed the method of interest disallowance u/s 14A. The AR has not disputed the calculation of disallowance under rule 8D. It is seen that Assessing Officer is justified in invoking provision of section 14A of the Income Tax Act, 1961 under the given circumstances on the grounds as mentioned in the assessment order, and has rightly worked out the quantum of disallowance by applying the provisions of rule 8D of the Income Tax Rules, therefore the di....
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....eas investment in shares is only Rs. 401.81 lacs. Thus, interest free fund is much more than the investment in shares. It is not the case of the lower authorities that interest bearing funds have been used in making the investment in shares. Therefore, in the absence of any proximate relation of borrowed funds with investment in shares, no expenditure can be disallowed u/s 14A in view of the decision of Supreme Court supra. The issue of disallowance u/s 14A read with rule 8D came up before Hon'ble ITAT in A.Y. 2006-07 in ITA No. 956 & 475/JP/10 dt. 06.05.2011 in assessee's own case, wherein in Para 15, Page 10 of the order (PB 40-41), it held as under:- "Hon'ble Bombay High Court has held that Rule 8D is prospective. Godrej & Boyse Manufacturing Co. Ltd. Vs. DCIT 328 ITR 81. The Hon'ble Bombay High Court has also held that the AO is duty bound to compute the disallowance by applying a reasonable method having regards to the facts and circumstances of the case. If borrowed funds have not been used then no disallowance. Onus on AO to establish the nexus between expenditure and exempt income. If funds are in common pool then reasonable disallowance. Since the Ld. CIT....
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.... utilized for making investment in tax free bonds & that the AO had not established any nexus between the borrowed funds & the investment in tax free bonds. These findings of CIT(A) was held justified & it was held that where funds are mixed & it is not possible to ascertain as to whether investment in tax free bonds was out of assessee's own fund, the AO did not establish nexus between borrowed funds & the investment in tax free bonds, in such cases apportionment on pro rata basis was improper in the absence of any thing brought by the AO to rebut the assessee's stand that the investment in tax free bonds had been made out of the funds of the shareholders. (iii) CIT Vs. Metalman Auto (P.) Ltd. 199 Taxman149 (Punj &Har.) (Mag.) dt. 11.02.2011 A.Y. 04-05 Disallowance u/s 14A of presumptive expenditure could not be taken into account in the absence of actual expenditure. (iv) CIT Vs. Gujarat Power Corporation Ltd. order dt. 28.03.2011 In this case it was held that assessee had demonstrated that it had other sources of investment & according to assessee no part of borrowed funds could be stated to have been diverted to earn tax free income. When CIT....
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....23,64,484/- made by AO & confirmed by CIT(A) u/s 14A is unwarranted & be deleted." 6. On the other hand, the Ld. D/R placed reliance on the order of Ld. CIT (A). Para 4.2 of the order of Ld. CIT (A) was read also. 7. After considering the orders of the authorities below and written submissions, we find that similar issue came before the Tribunal in case of assessee itself for assessment year 2006-07. Similar disallowance was made by invoking provisions of section 14A and disallowance of Rs. 92,94,092/- was made and confirmed by lower authorities. Thereafter on appeal filed by assessee, Tribunal found that Rule 8D is not applicable for assessment year 2006-07 as the amendment is prospective and, therefore, Rule 8D is applicable for assessment year 2008-09. The Hon'ble Bombay High Court in case of Godrej & Boyce Manufacturing Co. Ltd., 328 ITR 81 has held that provisions of section 14A are applicable but rule 8D are not applicable for assessment year 2008-09. In that year also it was stated that assessee has not made any investment in share during the year under consideration and no dividend was received. Therefore, disallowance was not justified. The finding of the Tribuna....
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.... the Assessing Officer will re-compute the disallowance under section 14A as per law after giving opportunity to the assessee and to ascertain as to whether borrowed funds have been used or any other expenditure has link with exempt income. This decision was rendered by the Tribunal in ITA No. 956/JP/2010 vide order dated 6.5.2011. 8. The Hon'ble Supreme Court in 326 ITR 1 in case of Walfort Share and Stock Brokers Pvt. Ltd. has held that there should be nexus between the expenditure and exempt income and then only any disallowance can be made. It has been held that the charge is not on gross receipts, it is on profits & gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure and loss which is not within the prohibition must be allowed if it is on the facts of the case a proper debit item to be charged against the incomings of the business in ascertaining the true profits. A return of investment or a pay back is not such a debit item as explained above, hence, it is not "expenditure incurred" in terms of section 14A. Expenditure is a pay-out. It relates to disbursement. A pay-back is not an expenditure in the ....
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....imated the net profit on oil traded at Rs. 1/kg & worked out the profit on trading of oil at Rs. 24,24,037/-. On this amount, deduction u/s 80IB was disallowed which @30% worked out at Rs. 7,27,211/-. 12.1. The AO further observed that assessee has made sale of mustard oil seed of 32,676 MT but has not maintained record of separate purchases in relation to such sale. Therefore, it is not possible to ascertain the profit on such sale though according to the assessee, it has incurred loss of Rs. 28,68,823/- on sale of mustard seed. He, therefore, ignored this loss in allowing deduction u/s 80IB. 12.2. The Ld. CIT (A) worked out the profit from trading of mustard oil at Rs. 10 lacs on which the disallowance of deduction u/s 80IB was confirmed by giving following findings at para 6.21 pages 18-19 :- - After perusing the assessment order and written submissions, it is seen that the said issue has already been decided by the order of Income Tax Appellate Tribunal. Following the same it is held that AO is justified in not allowing the deduction u/s 80IB on the direct trading of mustard oil. - It is seen that the AO has estimated the net profit on the sale of mustar....
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....on such profits. There is no dispute as to the working of gross profit of Rs. 1.38 per kg on sale of 2424MT of mustard oil. From such gross profit, assessee has reduced the proportionate administrative, financial, packing & other cost which worked out at Rs. 2.96/kg (PB 1). Thus, assessee incurred a loss of Rs. 1.58/kg on sale of the oil so purchased. The lower authorities have not found any discrepancy in this working. Still, the AO took the profit on sale of such oil at Rs. 1/kg & CIT(A) at 41paise/kg. Since the assessee has incurred loss on sale of the oil purchased by it, the lower authorities have erred in reducing the profit for the purpose of calculation of deduction u/s 80IB. In respect of trading in the mustard seed, assessee has incurred loss of Rs. 28,67,823/- (PB 2). AO has ignored this loss without finding any mistake in the same. CIT(A) has erred in holding that assessee is stopped at this stage in raising the claim ignoring that such claim was raised before the AO & because the AO has tried to worked out the profit/loss in respect of such trading he is duty bound to give effect of loss in working out the deduction u/s 80IB. It may be noted ....
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....ble profit for trading of mustard oil in place of Rs. 24,24,037/- made by the Assessing Officer. / After taking into consideration the order of Tribunal for earlier two years and facts of the case in hand, we are of the view that if profit is taken @ 0.30 paise as taken for assessment year 2006-07 that will meet the ends of justice. Accordingly, we direct the Assessing Officer to re-compute the profit @ 0.30 paise per kg for the purpose of reducing the same out eligible profit in trading of mustard oil. / One more contention of the assessee is that the Assessing Officer has ignored the loss in trading of mustard seeds at Rs. 28,07,827/-. No finding has been given by the Assessing Officer and again by Ld. CIT (A). Since no finding has been given by the Assessing Officer or Ld. CIT (A), therefore, while recalculating the profit @ 0.30 paise per kg for the purpose of reducing the same for eligible deduction, the Assessing Officer should consider the loss incurred in trading of mustard seeds. We order accordingly. 15.1. In this way, the ground of the assessee is allowed in part and ground of the department fails. 16. There is no other ground in the appeal of the assessee. 17. ....
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....ejected the books of accounts and made trading addition by making similar observations. However, Hon'ble ITAT accepted the books of accounts and deleted the trading addition & held that section 145(3) is not applicable in A.Y. 03-04 vide ITA No. 465 & 516/JP/07 dt. 30.05.2008 (PB 9-10, Para 7, Page 4-5 of the order), in A.Y. 04-05 vide ITA No. 790 & 793/JP/2009 dt. 11.02.2010 (PB 19-20, Para 6-6.1, Page 11-14) & in A.Y. 05-06 vide ITA No. 955 & 725/JP/2010 dt. 8.04.2011 (PB 27-29, Para 3.11 to 3.13, Page 11-15) after analyzing all the objections raised by the AO including the non maintenance of laboratory test report. In A.Y. 03-04, there is no finding of Hon'ble ITAT that assessee has maintained laboratory test reports for each lot of seed purchased on the basis of which payment is made to the supplier. What was stated in the order is that every lot of seed purchased contains different quantity of oil & after making laboratory test report, the payment is made to the supplier. The assessee vide letter dt. 16.12.2009 [reproduced on CIT(A) Page 5-6] has clarified this position. In the present case, G.P. Rate of 6.57% on turnover of Rs. 9036.59 lacs during the year u....
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....ssment order and the written submissions of the learned counsel, it is seen that there is much substance in the submissions of the learned counsel in as much as the debit balance appearing in the account is on account of the sale transaction. The average monthly sales to Vijay Solvex Ltd. comes to Rs. 5,45,51,054/- whereas the debit balance in the account is only Rs. 3,81,85,737/-. Thus it can safely be concluded that the debit balance is on account of sales transaction, where upon no interest is chargeable. Further, the Assessing Officer has not specifically controverted the stand of the assessee company that the funds to the Vijay Solvex Ltd. has emanated from the interest bearing funds, whereas the assessee company has established with the Balance Sheet as on 31.03.2007, that the debit balance appearing in the account of Vijay Solvex Ltd is out of interest free funds. My attention is also invited to the decision of Bombay High Court in the case of Reliance Utilities and Power Ltd. 178 Taxman 135, wherein it has been decided that where the assessee is having both interest bearing and interest free funds, then a presumption would arise that the investment is out of interest free f....
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.... covered the debit balance of another current account of M/s. Vijay Solvex Ltd. The decision of Hon'ble Supreme Court in case of S.A. Builders is also in support of the case of the assessee as if any amount remained with M/s. Vijay Solvex Ltd. which is a sister concern of the assessee, then the same has to be treated as on account of commercial expediency. The ld. CIT (A) has examined this issue in right perspective and then only it was held that disallowance of interest was not justified. Finding of ld. CIT (A) as stated above remained uncontroverted. Accordingly we confirm the finding of ld. CIT (A) on this issue also. 29. Ground No. 3 we have already disposed off while deciding ground nos. 2 & 3 of the assessee. 30. Ground No. 4 is against deleting the disallowance under section 80IA on Wind Mills. 31. The brief facts in this regard are that in A.Y. 03-04, assessee installed windmills & started producing electricity. The depreciation & business losses of the windmills upto A.Y. 06-07 as tabulated on Page 8-9 of the assessment order were adjusted against other business income of the assessee. A.Y. 07-08 is the initial year in which assessee claimed deduction of Rs. 23,58....
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....ore provision is made applicable from the assessment year 2007-08. The option to claim the deduction u/s 80IA rests with the appellant to claim it in 10 years out of 15 years. The initial assessment year for the appellant is assessment year 2007-08 and from such assessment year, the eligible industrial undertaking will be considered as independent source of income of the appellant and not prior to that. The Assessing Officer has made applicable the provisions of section 80IA from the assessment year 2003-04, when the appellant has not even claimed the deduction under the said provision. The Assessing Officer has misunderstood the first year of commencement of production and initial assessment year as synonymous. The year of commencement of production and initial assessment year bears the different connotation. For this proposition, strength is drawn from the statutory audit report format in form number 10CCB as relied upon by learned counsel. I have no hesitation in giving a finding that the initial assessment year for the appellant is assessment year 2007-08 and from such assessment year, it will be considered as independent source of income. While giving this fi....
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....e assessee is eligible to claim it in 10 years out of 15 years of its choice. The initial assessment year has been taken as 2007-08 and from assessment year the assessee is eligible for claiming deduction under section 80IA for 10 years. The decision of Hon'ble Rajasthan High Court in case of Mewar Oil & General Mills Ltd., 271 ITR 311 (Raj.) was also taken into consideration and in view of these facts, the ld. CIT (A) held that assessee was correct in claiming the deduction under section 80IA from assessment year 2007-08. Finding of ld. CIT (A) has been reproduced somewhere above in this order which is self explanatory. Therefore, we see no reason to interfere with the finding of ld. CIT (A). Accordingly we confirm the order of ld. CIT (A) in this regard also. 35. Now we will take the appeal of the assessee and department for assessment year 2008-09. 36. First issue in appeal of the assessee is against disallowance of expenditure in view of provisions of section 14A. 37. Similar issue was involved in immediately preceding year i.e. 2007-08. The AO and ld. CIT (A) has made and confirmed disallowance in view of provisions of section 14A by holding that rule 8D is applicable....
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....g at Rs. 41,62,990/- after allowing the expenses @6.46% on such sale as against loss of Rs. 13,79,634/- claimed by considering the expenses @ 8.52%. Further, he excluded the trading profit on sale of Salt & Hask at Rs. 37,70,453/- by ignoring the loss in other traded items. Accordingly, he excluded trading profit of Rs. 79,33,533/- (Rs. 41,62,990/- + Rs. 37,70,543/-) for the purpose of deduction u/s 80IB & thus reduced the claim of deduction @ 30% of such amount i.e. Rs. 23,80,060/-. 39.1. The Ld. CIT (a) directed to reduce the eligible profit for disallowance under section 80IB by Rs. 29,92,474/- as against Rs. 79,33,533/- considered by the Assessing Officer by :- - Allowing the expenses against sale of oil @7.5% & thus determining the profit on trading of oil at Rs. 13,64,772/- as against Rs. 41,62,990/- determined by the Assessing Officer. - Considering the trading profit of other items at Rs. 16,27,702/- by allowing the loss in other items as against the profit of Rs. 37,70,543/- taken by the AO. 40. The assessee has made following submissions :- "It may be noted that sometime, assessee has purchased mustard oil from the market which is ungraded....
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..... After considering the trading profit of Rs. 16,27,702/- in other items & trading loss of Rs. 17,55,584/- on sale of oil & cake, there is a loss of Rs. 2,25,639/-. Therefore, no part of the eligible profit on which assessee claimed deduction u/s 80IB is to be reduced." 41. After considering the submissions and perusing the material on record, we find that assessee deserves to succeed in part in this regard whereas department's ground is liable to be dismissed. Similar disallowance was made for earlier three years. However, in earlier three years, the AO has determined profit by adopting certain figures against loss computed by assessee per kg. In this year the AO has allowed expenses on percentage basis and then arrived at a figure for excluding the trading profit for the purpose of deduction under section 80IB. The AO computed the trade profit at Rs. 79,33,533/- and 30% of the same was reduced in deduction under section 80IB. The ld. CIT (A) has computed the figure of Rs. 29,92,475/- against the profit estimated by AO at Rs. 79,33,533/- for the purpose of reducing from eligible deduction under section 80IB. In earlier year, the Tribunal has estimated certain figure of....
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....are similar, therefore, on the same reasoning given for assessment year 2007-08, we confirm the order of ld. CIT (A) for the year under consideration also. 48. Ground No. 3 we have already disposed off while disposing ground of the assessee. 49. Ground No. 4 relates to deleting disallowance of Rs. 20,41,040/- made by the AO on account of interest expenditure. 50. Brief facts in this regard are that Assessing Officer observed that assessee has advanced loan amounting to Rs. 1,70,08,670/- to M/s Dhruv Enclave P. Ltd without interest while interest expenses has been claimed on the loan taken. The assessee has not replied to the order sheet quarry. Therefore relying upon the decision of Madras High Court in case of K. Somasundaram & Brothers vs. CIT 238 ITR 939 he made disallowance of Rs. 20,41,040/- [@ 12% of Rs. 1,70,08,670/-] out of the interest expenses. The Ld. CIT (A) deleted the disallowance by giving following findings in Para 7.2 of the order. "It is seen that during the assessment proceedings the appellant has submitted an analysis of Balance Sheet, wherein the interest bearing and non interest bearing funds were shown as invested in the various heads of Bal....