TMI Blog2013 (10) TMI 364X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.3,10,49,752/- being loss incurred by the assessee on sale of iron ore while computing the income of the assessee – Decided in favor of Assessee. Disallowance u/d 14A of the Income Tax Act - Dividend income – Held that:- As per Mumbai High Court in Godrej Boyce Mfg. Co. Ltd. [2010 (8) TMI 77 - BOMBAY HIGH COURT], it has been held that Rule 8D applies prospectively from A.Y. 2008-09 only and hence its application in A.Y. 2007-08 is incorrect – Further, Mumbai High court held that quantum of disallowance u/s. 14A for years prior to A.Y. 2008-09 has to be worked-out by adopting some reasonable method - Subsequently the Mumbai Tribunal, amongst others, in Godrej Agrovet Ltd. [2010 (9) TMI 291 - ITAT, MUMBAI] and Reliance Industrial Infrastructure Ltd. vs. ACIT [2013 (5) TMI 473 - ITAT MUMBAI] has held that 2% of exempt income being a reasonable disallowance – In the instant case, assessee had not furnished the details of expenditure incidental to the earning of dividend income, estimation was made on the expenditure attributable to dividend income at 2% of the gross total income - It would be reasonable and appropriate if the disallowance is restricted @ 2% of the exempt incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of Natco Pharma Limited in Assessee's books. It was submitted that the purchase was made at Rs.l,673 per MT which is market price at that time as could be observed from the data of iron ore exports made from Chennai Port at lowest price of Rs.1705.99 per MT and the highest price at Rs.2,956 per MT for FE content of 65%. It was pointed out that from the data of exports of iron ore from Chennai during March, 2006 (Source: M/s. Exim India, No.227, Thambu Chetty Street,Chennai 600001, Phone 044-65393283) 48,714 MTs of iron ore with FE content of 62 / 61% is sold at 1748.96 per MT by Trimex Industries to Noble Resources, Hongkong which is nearer to the FE content of iron ore at 60.63% purchased by the Assessee for 1673/- per MT. It was submitted that the price paid is reasonable and comparable to the prices at which exports have been made by others during the relevant period and hence no excessive price is paid to benefit Natco Pharma Limited. Further the assessee-company has sold 28,213.75 MTs to Trademin International Private Limited, Cuddapah on 17.01.2007 @ Rs.975 per MT which was exported by them to China in the same month. It is to be noted here that due to time gap betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogus nor sham transaction for the reasons furnished by the assessee. It was further submitted that the Assessing Officer ought to have considered the said transaction as genuine and carried on in the course of business of trading by the assessee. The learned CIT(A) held at para 4 as follows : 4. "During the appeal proceedings on 18.02.2011, the appellant has withdrawn the grounds resulting in the disallowance of loss on sale of iron ore amounting to Rs.3,10,49,752/- which has since been revised to Rs.2,44,33,158/- vide order u/s. 154 dated 10.2.2010. As the appellant has not pressed this substantive ground for adjudication, this ground is rejected." 8. With respect to the disallowance of Rs.4,11,413/- the CIT(A) observed that the investment in dividend earning shares did not flow from the surplus funds of the assessee which fact was admitted by the Director of the assessee company in his own deposition dated 24.1.2009 wherein he had stated that the investment of Rs.9,28,76,370/- was made out of borrowed funds on which interest was being paid. The CIT(A) opined that the Assessing Officer had correctly resorted to disallowance of Rs.4,11,413/- being 10% of the dividend income and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment has been made by 31.3.2006. 12. The learned Counsel further submitted that the purchase was made at Rs.1,673 per MT which is market price at that time as could be observed from the date of iron ore exports made from Chennai Port at lowest price of Rs.1705.99 per MT and the highest price at Rs.2,956 per MT for FE content of 65%. The learned Counsel further submitted that from the date of exports of iron ore from Chennai during March, 2006 (Source: M/s. Exim India, No. 227, Thambu Chetty Street, Chennai - 600 001, Phone 044-65393283) 48.714 MTs of iron ore with FE content of 62/61% is sold at 1748.96 per MT by Trimex Industries to Noble Resources, Hongkong which is nearer to the FE content of iron ore at 60.63% purchased by the assessee for 1673/- per MT. Therefore, the price paid is reasonable and comparable to the prices at which exports have been made by others during the relevant period and hence, no excessive price is paid to benefit Natco Pharma Limited. Further, it was submitted by the learned Counsel that the assessee company has sold 28,213.75 MTS to Trademin International Private Limited, Cuddapah on 17.01.2007 @ 975 per MT which was exported by them to China in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1954) 26 ITR 775 (SC) wherein it has been held as follows : "Though ITO is not restrained under section 23(3) by technical rules of evidence and pleading but he cannot make an assessment on pure guess-work without reference to any material or evidence and assessee must be given an opportunity to rebut any material considered by the IT authorities." 15.1. The learned D.R. pointed out that the genuineness of the contract is doubtful as the same is not documented. 16. In the rejoinder, the learned A.R. argued that the contract need not be in writing. 17. We have heard both the parties and perused the material available on record. We find the following reasons for setting aside the Order of the CIT(A). i. The purchase is reflected in books of accounts and VAT return has been filed for the month. ii. The purchase is at prevailing market price for comparable products. iii. The material was paid for on sale through bank transactions and was not a mere book entry. iv. The parties from whom purchases are made and the party to whom the material is sold are identifiable and genuine parties. v. The material purchased and sold is existing evidenced by its subsequent export, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d are not connected either to the promoters or Directors in any way. They are well reputed organizations of international standing with experience in iron ore trading. 20. We also note that the Assessing Officer's objection that there is no physical movement of stocks and it is only an accommodative transaction is incorrect as the iron ore was already mined and transported to the port for the purpose of export. Therefore, we are of the opinion that the transaction is not a sham transaction. Therefore, the Assessing Officer has wrongly disallowed a sum of Rs.3,10,49,752/- being loss incurred by the assessee on sale of iron ore while computing the income of the assessee. Hence, the assessee's appeal on this issue is allowed. 21. The next issue is with respect to disallowance of Rs.4,11,413/- being 10% of dividend income of Rs.41,14,138/- under section 14A of the Act. The learned Counsel for the assessee, argued that Rule 8D does not apply for the assessment year 2007-2008. The assessee's Counsel submitted that it had neither incurred any interest nor expenditure in earning dividend income since advance received are interest free and all the dividends were directly credited to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has made disallowance of Rs.4,11,413/- u/s. 14A of the Act and the same was upheld by the CIT(A), Vijayawada, vide his said order dated 28.02.2011. Having regard to such facts in the case of the appellant and when the A.O. has made such disallowance of Rs.5,21,768/-, as per Rule 8D of the Income Tax Rules, 1962, such disallowance made by him is justified. Hence, the said disallowance of Rs.5,21,768/- made in this case is upheld." 25. The learned Counsel submitted with respect to share capital, reserves and surplus and secured loans and sources and funds and page 83 Schedule-3, the learned Counsel for the assessee pointed out to page 81 Schedule-3 wherein loan has been taken against the fixed deposits. 26. In the case of TVS Investments Ltd. Chennai vs. ACIT, Company Circle, Chennai the Co-ordinate Bench of the Madras Bench in ITA.No.1609/Mds/2012 dated 29.01.2013 has held as follows: "41. From the above discussion, it is clear that, in effect, the provisions of sub- sections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub- sections (2) and (3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has, in principle, been now widened under section 14A." So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... covered by a decision of this Court dated 08.08.2012 in T.C.(A) No. 2287 of 2006 in the case of M/s. EID Parry (India) Limited v. The Joint Commissioner of Income Tax, wherein this Court pointed out that in the absence of any materials regarding incurring of expenditure, the Tribunal was justified in confirming the order of the Commissioner of Income Tax (Appeals) that the deduction of 2% managerial expenses had to be made while calculating deduction under Section 80 M. Thus being pure question of fact, there being no other material in support of the claim made. The order of the Tribunal was confirmed. 3. Applying the reasoning given in the above-said decision to the case on hand, when the Tribunal pointed out that the assessee had not furnished the details of expenditure incidental to the earning of dividend income, estimation was made on the expenditure attributable to dividend income at 2% of the gross total income. Accordingly, this Tax Case (Appeal) stands dismissed. No costs." 8. In the light of the observations of the Hon'ble Jurisdictional High Court, we hold that it would be reasonable and appropriate if the disallowance is restricted @ 2% of the exempt income as retu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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