TMI Blog2012 (10) TMI 1035X X X X Extracts X X X X X X X X Extracts X X X X ..... ration, assessee company claimed interest expenses of ₹ 1,34,68,630/- on loans advances taken from banks other parties. The Assessing Officer observed that assessee company has made investment in shares amounting to ₹ 4,01,81,350/-, the dividend 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 ₹ 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 se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. All investment were made in earlier years. In earlier years, no such disallowance was made except in A.Y. 06-07. From the Balance Sheet (PB 3), it can be noted that the assessee company is having share capital and reserve and surplus of ₹ 970.47 lacs whereas investment in shares is only ₹ 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 hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deleted the disallowance on the ground that assessee had maintained that interest expenditure was incurred in respect of borrowing on cash credit limits utilized for normal business purpose of the assessee no part of borrowed funds has been 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee. Further, when investment for non business purposes is out of interest free funds, then there cannot be disallowance of interest vice versa. In view of above, disallowance of ₹ 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 ₹ 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 ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o establish the nexus between expenditure and the exempted income. If funds are in common poll and reasonable disallowance should be made. Since the Ld. CIT (A) has directed to apply Rule 8D, we, therefore, modify the direction that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not maintained separate record of sale corresponding to the above purchases. In A.Y. 03- 04, Hon ble ITAT has held that mere processing of purchased oil for Agmark cannot be considered as manufacturing or industrial activity. He, therefore, estimated the net profit on oil traded at ₹ 1/kg worked out the profit on trading of oil at ₹ 24,24,037/-. On this amount, deduction u/s 80IB was disallowed which @30% worked out at ₹ 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 ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entitled to deduction u/s 80HH and 80I. In earlier years, Hon ble ITAT has not allowed deduction u/s 80IB on the direct trading of oil. However, in the year under consideration, it is not a case of direct trading as explained supra therefore assessee is entitled to deduction u/s 80IB on such profits. There is no dispute as to the working of gross profit of ₹ 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 ₹ 2.96/kg (PB 1). Thus, assessee incurred a loss of ₹ 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 ₹ 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 ₹ 28,67,823/- (PB 2). AO has ignored this loss without finding any mistake in the same. CIT(A) has erred in holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as stated above, Assessing Officer has estimated profit at ₹ 1/- per kg. The Ld. CIT (A) following the order of Tribunal for earlier year, the profit was taken at 0.41 paise per kg which resulted a profit of ₹ 10,03,551/-. Accordingly, Assessing Officer was directed to reduce the addition to ₹ 10.00 lacs out of eligible profit for trading of mustard oil in place of ₹ 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 ₹ 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 k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration was considered by CIT(A) in the appellate proceedings for that year where an addition of ₹ 4 lacs was sustained by CIT(A). However, Hon ble ITAT in ITA No. 956 475/JP/2011 order dt. 06.05.2011 (PB 36-38, Para 4-4.1, Page 6-8 of the order deleted the entire trading addition. It may also be noted that in A.Y. 03-04, 04-05 05-06 also, AO rejected 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 sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has not furnished any nexus of interest free funds vis-a-vis the amount advanced to M/s Vijay Solvex Ltd. Therefore, he disallowed the interest of ₹ 21,61,096/- credited in the loan account of M/s Vijay Solvex Ltd. 25. The Ld. CIT (A) deleted the disallowance by giving following findings at Page 15-16, Para 5.2 of the order :- After perusing the assessment 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 ₹ 5,45,51,054/- whereas the debit balance in the account is only ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er noted that Assessing Officer failed to consider that in current account of Vijay Solvex Ltd. there are regular transactions of purchase and sales. There is a trade practice allowing credit period of 21 days on sale of goods to the buyer. The assessee has used its funds fully for business purposes. It is further seen that assessee has sufficient funds on which no interest has been paid which 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed upon by the counsel, has decided the issue in favour of the assessee after considering the decision of Goldmine s case. Further, the main issue is as to when the provision of section 80IA will become applicable upon the appellant. The appellant has opted to claim the deduction u/s 80IA w.e.f. assessment year 2007-08, though the production commenced from the assessment year 2003-04, therefore 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31 CTR 368 (Mad.) by which the issue has been decided in favour of the assessee. It is further seen that provisions of section 80IA became applicable for assessment year 2007-08 and assessee has opted to claim deduction under section 80IA with effect from 2007-08 though the production was commenced from assessment year 2003-04. It has been provided that under the provisions of section 80IA, the 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 appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n u/s 80IB at ₹ 70,41,762/-. AO observed that assessee has made direct purchase of mustard oil of 4907.758 MT but has not maintained separate record of sale corresponding to the above purchases. In A.Y. 03-04, Hon ble ITAT has held that mere processing of purchased oil for Agmark cannot be considered as manufacturing or industrial activity. He, therefore, determined the profit on such trading at ₹ 41,62,990/- after allowing the expenses @6.46% on such sale as against loss of ₹ 13,79,634/- claimed by considering the expenses @ 8.52%. Further, he excluded the trading profit on sale of Salt Hask at ₹ 37,70,453/- by ignoring the loss in other traded items. Accordingly, he excluded trading profit of ₹ 79,33,533/- (Rs. 41,62,990/- + ₹ 37,70,543/-) for the purpose of deduction u/s 80IB thus reduced the claim of deduction @ 30% of such amount i.e. ₹ 23,80,060/-. 39.1. The Ld. CIT (a) directed to reduce the eligible profit for disallowance under section 80IB by ₹ 29,92,474/- as against ₹ 79,33,533/- considered by the Assessing Officer by :- - Allowing the expenses against sale of oil @7.5% thus determining the profit on trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refined oil, vanaspati etc. On trading of salt hask, it earned profit but on other items it incurred losses. After set off of loss against the profit, the net profit is ₹ 16,27,702/- (PB 6). AO ignored the loss only considered the profit. CIT(A) has therefore rightly considered both the profit loss to work out the trading profit on sale of other items at ₹ 16,27,702/- for the purpose of allowing deduction u/s 80IB. After considering the trading profit of ₹ 16,27,702/- in other items trading loss of ₹ 17,55,584/- on sale of oil cake, there is a loss of ₹ 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the addition by taking into consideration this fact. Accordingly we confirm the order of ld. CIT (A) on this issue. 45. Ground no. 2 is against deleting the disallowance of ₹ 20,47,721/- under section 80IA. 46. Similar disallowance was made in earlier year. The ld. CIT (A) deleted the disallowance by observing that assessee has opted to claim deduction under section 80IA from assessment year 2007-08. 47. We have considered the order of ld. CIT (A) for assessment year 2007-08. Facts 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 ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration the details of borrowed funds and details of advances on which no interest was paid or charged. It has been observed by ld. CIT (A) that assessee was having both kinds of funds i.e. interest bearing funds as well as non-interest bearing funds and they are pooled together. The ld. CIT (A) has also noted that assessee is having the non-interest bearing funds sufficient enough to cover up the loan and advances given to M/s. Dhruv Enclave Pvt. Ltd. Reliance has been placed on the decision of Reliance Utilities Power Limited, 178 Taxman 135 (Bom.) wherein it is held that if there are funds available both interest free and over draft and /or loans are taken, then a presumption would rise that investment would be out of interest free funds generated or available with the company, if the interest free funds are sufficient to meet the investment, then no disallowance could be made. Similar view has been expressed in case of CIT vs. Hotel Savera, 239 ITR 795 (Mad.) and in case of Visen Industries Ltd., 136 ITD 309 (Mum)(TM). Following these decisions and in view of the reasoning given by ld. CIT (A) which is reproduced somewhere above in this order, we see no reason to interf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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