Aia Engineering Ltd.,, Ahmedabad vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL " C " BENCH, AHMEDABAD (BEFORE SHRI SHAILENDRA Kr. YADAV, J.M. & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. Nos. 889 & 922/AHD/2012 (Assessment Year: 2007-08)

AIA Engineering Ltd.. 115, V/S The ACIT, Circle-1, G.V.M.M Estate, Odhav Ahmedabad Road, Odhav, Ahmedabad Gujarat-382410 (Appellant) (Respondent)

The ACIT, Circle-1, V/S AIA Engineering Ltd.. 115, Ahmedabad G.V.M.M Estate, Odhav Road, Odhav, Ahmedabad Gujarat-382410 (Appellant) (Respondent)

PAN: AABCA 2777J

Appellant by : Shri Tushar Hemani Respondent by : Smt. Vibha Bhalla, CIT/DR

(आदे श)/ORDER Date of hearing : 10-07-2015 Date of Pronouncement : 23 -07-2015

PER ANIL CHATURVEDI, ACCOUNTANT MEMBER

1. These 2 appeals of which 1 is filed by the Assessee and the other is filed by the Revenue are against the order of CIT(A)-6, Ahmedabad dated 21.02.2012 for A.Y. 2007-08.

2. The relevant facts as culled out from the material on record are as under.

2 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08

3. Assessee is a company stated to be engaged in the business of manufacturing and trading of alloy steel casting. Assessee filed its return of income for A.Y. 2007-08 on 31.10.2007 declaring total income of Rs. 87, 17,27,190/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) r.w.s. 144C vide order dated 22.2.2011 and the total income was determined at Rs. 109,31,16,073/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 21.02.2012 granted partial relief to the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee and Revenue are now in appeal before us. The grounds raised by the Assessee reads as under:-

1.1 The Commissioner of Income Tax (Appeals) ['CIT(A)'] erred in making an additional disallowance of Rs. 14,65,232 under Section 14A of the Act. 1.2 The Appellant has not made any borrowings for the purpose of investments.

Therefore, no interest expense has been incurred in relation to investments. 1.3 The CIT(A) erred in confirming the approach of the Assessing Officer ('AO') to disallow the interest expense of Rs 14,65,232 on the basis of proration of interest expenses by dividing average value of investment to average value of total assets.

1.4 The above method appears in Rule 8D of the Income Tax Rules, 1961 ('the Rules') and Rule 8D does not apply to the year under consideration as held in the Appellant's own case for AY 2006-07 by the Honorable jurisdictional Tribunal vide its order dated 19 January 2012.

1.5 The Appellant suo-motu offered Rs. 16,30,762 on the basis of apportionment of indirect expenses in the ratio of dividend income to total income. While working out this disallowance of Rs. 16, 30, 762 the appellant has already included interest expenses of Rs. 47.45 lakhs.

1.6 The Appellant submits that the approach followed by the CIT(A) being akin to Rule 8D and as mentioned above Rule 8D does not apply to the year under consideration, therefore the disallowance of Rs. 14,65,232 should deleted and the amount of disallowance should be restricted to Rs 1 6,30,762. 1.7 The Appellant prays that the disallowance of Rs. 14,65,232 made by the AO and confirmed by the CIT(A) is erroneous, unwarranted and be deleted.

4. On the other hand the ground raised by the Revenue reads as under:-

1. The Id. CIT(A) erred in law and on facts in directing the AO to allow if the employees' contribution to ESI is paid before the due date of filing of return. Employee contributions are not covered by section 43B of the Act, but covered u/s 3 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 36(1)(v) r.w.s. 2(24)(x) of the Act. Parliament has provided separate section to disallowance for "Employee Contribution" if not paid within the time allowed under the relevant Act.

2. The Id, CIT(A) erred in law and on facts in deleting the disallowance of Rs.53,39,722/- u/s 14A r.w. Rule 8D of I.T. Rules, 1962.

3. The Id. CIT(A) erred in law and on facts in deleting the addition of income from investments in Free Zone Entity in the Ajman Free Zone amounting to Rs.21,24,75,000/-.

We first take up Assessee's appeal in ITA No. 889/Ahd/2012

5. Though various grounds have been raised but the only issue is with respect to disallowance u/s. 14A.

6. During the course of assessment proceedings, A.O noticed that Assessee has earned dividend income to the tune of Rs. 7,49,28,962/- which was exempt from tax. He also noticed that Assessee had investments to the tune of Rs. 164 crores and the exempt income constituted 11% of the total profits earned but Assessee had not disallowed any amount as per the provisions of Section 14A of the Act. The Assessee was therefore asked to justify of no disallowance u/s. 14A to which assessee interalia submitted that provisions of Rule 8D of the I.T. Rules are applicable from A.Y. 08-09 and not applicable to the year under consideration and further Assessee had not utilized any borrowed funds for the purpose of investment and the own free funds were far in excess of the investments and therefore in such a case the presumption was that the investments have been made out of free funds and not borrowed funds and therefore no disallowance of interest was required. The Assessee during the course of assessment proceedings however worked out the disallowance u/s. 14A at Rs. 16,30,762/- and requested the A.O to consider the same for disallowance.

The submission of the Assessee was not 4 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 found acceptable to the A.O for the reason that Assessee has not maintained separate accounts in relation to the income that does not form part of the total income. A.O was further of the view returns on investment is not automatic and involves time, energy and resources in terms of finance, administration, decision making and managing the activities involving the buying and selling of investments, re-investment of dividend. He also noticed that Assessee while working the disallowance during the course of assessment proceedings had bifurcated the indirect and common expenses into related and non related expenses which according to him was without any rationale and the apportionment of the expenses on the basis of ratio of exempt income to the total turnover was arbitrary. He was of the view that the better way for apportioning the related expenses would have been in the proportion of exempt income and the taxable income. He was of the view that the method prescribed in Rule 8D of the I.T. Rules would be logical method for working out the disallowance.

He accordingly worked out the disallowance u/s. 14A at Rs. 84,35,716/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who after considering the submissions of the Assessee granted partial relief to the Assessee by holding as under:-

3.3 I have considered the facts of the case, assessment order and appellant's submission. Assessing Officer made the similar addition in assessment year 2006-07 which was confirmed by DRP against which appellant preferred appeal in ITAT. !TAT Ahmedabad by order dated 23rd of January 2012 in ITA number 530/AHD/2011 decided the issue partly in favour of the appellant. The decision of ITAT on this issue is in para- 26 of the said order which is quoted below-

"26. We have considered the rival submissions perused the material on record and have gone through the orders of authorities below. We find that this is now a settled legal position that Rule 8D is not applicable in assessment year 2006-07.The assessee has given working regarding interest expenditure which can be attributed for investment in shares/mutual funds on which -dividend income was earned by the assessee and the same has been worked out at Rs.6,96,609/-. The Ld. D.R. could not point out any mistake in this working on account of interest expenditure in respect of

5 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 investment in shares/mutual funds. Regarding indirect expenditure, the assessee has also given working as per which attributable expenditure has been worked out at Rs.4.52 lacs and in this working also, no defect could be pointed out by the Ld. D.R. On the basis of these two workings, the total amount to be disallowed u/s 14A comes to Rs. 11,48,609/-. Hence, we confirm the disallowance u/s 14A to this extent and delete the balance disallowance made by the A.O. This ground of the assessee is partly allowed." Assessing officer made addition in respect of expenses relating to exempt income under section 14A of the ground that appellant did not disallow any part of expense although it earned more than RS 7 crores exempt income. The disallowance was computed by the assessing officer as per rule 8D. However ITAT in the appellant's own case in the immediate preceding year as mentioned above held that rule 8D is applicable only with effect from assessment year 2008-09 and therefore disallowance under section 14 A cannot be made as per the formula given in rule 8D for this assessment year.

Accordingly respectfully following the decision of jurisdictional ITAT in the appellant's case for assessment year 2006-07, it is held that disallowance of expenses under section 14 A cannot be made for assessment year 2007-08 as per rule 8D. However, even without applying rule 8D, disallowance of expenses relating to exempt income has to be made. Appellant quantified the disallowance during assessment proceeding on the basis of salary of the person working for investment division and proportionate indirect expenses resulting in exempt income. The disallowance quantified by the appellant was RS 16,30,762. Assessing officer did not agree with this disallowance proposed by the appellant on the ground that appellant did not consider certain expenses and after considering of the same the indirect expenses comes to RS 1022.68 Lacs for making this disallowance. The difference between assessing officer and appellant's quantification of disallowance is on two counts- (1) assessing officer included entire depreciation of Rs. 251.26 lakhs as against appellant's Rs 96.05 lakhs which was treated as related to exempt income by the appellant.

(2) Appellant considered total income at Rs. 42808,36 lakhs as against 8732.50 lakhs considered by the assessing officer while computing proportionate disallowance. As far as considering the entire depreciation as indirect expenses for making proportionate disallowance, I do not find merit in assessing officer's action since depreciation for factory building and ether direct equipments and machines are not relating to investment and earning of exempt income and therefore entire depreciation cannot be considered for making proportional disallowance.

As regards difference in the figure of total income adopted for making proportional disallowance, assessing officer adopted the taxable income whereas appellant considered turnover/gross revenue as the basis of apportionment. Normally Indirect expenses are apportioned in the ratio of turnover as per accounting policies and therefore there is merit in appellant's method. However the same method will not be applicable with regard to interest disallowance which is based on investments, and funds utilized. Considering this, the disallowance of indirect expenses made by the assessing officer is restricted to Rs 16,30,762 excluding interest disallowance. As regards interest disallowance, which was also confirmed separately by ITAT in assessment year 2006-07, the disallowance is to be worked out in proportion to funds used in exempt investments as compared to total assets. Since formula given in rule 8D works out disallowance of Interest as per this method only, the Interest disallowance 6 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 made by the assessing officer Rs.14,65,232 is absolutely correct and justified. Since appellant used common bank accounts for both business as well as investment activity, there is no distinction as to which fund (whether borrowed or owned) was used for investment resulting on exempt Income. Therefore disallowance of interest relating to earning of exempt income has to be in proportion to exempt investment with total assets of the business. Considering this, the interest disallowance made by the assessing officer RS 14,65,232 is confirmed. The total disallowance under section 14 A is confirmed to the extent of Rs 16,30,762 plus Rs14,65,232 totaling to Rs 30,95.994.

7. Aggrieved by the aforesaid order of ld. CIT(A), Assessee and Revenue are now in appeal before us.

8. Before us, ld. A.R. reiterated the submissions made before A.O and ld. CIT(A) and further submitted that the interest free funds available with the Assessee were far in excess of the investment and in such a case the presumption would be that the investments are out of interest free funds and therefore no disallowance on account of interest expenditure was called for and for this proposition Assessee placed reliance on the following decisions.

(i) CIT vs. Torrent Power Ltd. -363 ITR 474 (Guj.) (ii) CIT vs. Suzlon Energy Ltd. - 354 ITR 630 (Guj.)

(iii) CIT vs. Gujarat Power Corporation Ltd. -352 ITR 583 (Guj.)

(iv) CIT vs. Hitachi Home and Life Solutions (I). Ltd. - (2014) 41 taxmann.com 540 (Guj.)

(v) CIT vs. Reliance Utilities & Power Ltd. - 313 ITR 340 (Bom)

(vi) Munjal Sales Corporation vs. CIT - 298 ITR 298 (SC)

9. Ld. A.R. further submitted that ld. CIT(A) confirmed the disallowance of Rs. 14,65,232/- u/s. 14A in respect of interest which was worked out by the A.O based on Rule 8D. He submitted that since the provisions of Rule 8D were not applicable for the year under consideration it was not tenable in the 7 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 eyes of law to confirm part disallowance u/s. 14A by following the mentioned prescribed under Rule 8D. He further submitted that Assessee had suo motu offered Rs. 16,30,762/- as disallowance u/s. 14A and no mistake in the disallowance that was offered by Assessee has been pointed out by the A.O and in such a situation, the disallowance u/s. 14A at a figure different than the disallowance suo motu offered by the Assessee is not permissible. He further submitted that the methodology adopted by the A.O for working out disallowance u/s. 14A was also erroneous since firstly he has considered entire depreciation as against the depreciation on assets related to exempt income and secondly he has considered taxable income as against the total income. He therefore submitted that when the methodology used for working out disallowance u/s. 14A itself is erroneous, the entire disallowance u/s. 14A made by the A.O needs to be deleted. The ld. D.R on the other hand supported the order of A.O.

10. We have heard the rival submissions and perused the material on record. It is an undisputed fact that for the year under consideration the method prescribed under Rule 8D for working the disallowance u/s. 14A would not be applicable in view of the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce 328 ITR 81 (Bom) wherein the Hon'ble High Court has held that the method prescribed under Rule 8D would be applicable to A.Y. 08-09 and subsequent assessment years. We further find that the co- ordinate Bench of Tribunal in Assessee's own case for A.Y. 06-07 had held that Rule 8D is applicable only with effect from A.Y. 08-09 and therefore disallowance u/s. 14A cannot be made as per the formula given in Rule 8D. With respect to working out the disallowance whereby A.O considered the entire depreciation, we find that ld. CIT(A) has noted that depreciation for 8 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 factory building and other direct equipments and machines are not related to investments and earning of exempt income and therefore the depreciation cannot be considered for making proportionate disallowance. Before us, Revenue has not placed any material on record to demonstrate as to how the aforesaid finding of ld. CIT(A) is wrong. We further find that the Assessee had suo motu worked out the disallowance u/s. 14A at Rs. 16,30,762/- and in the aforesaid working of Assessee also no mistake has been pointed out by the Revenue. Further, in view of the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.(supra) where the Hon'ble High Court has held that Rule 8D would be applicable from A.Y. 08-09 and prior to that reasonable disallowance may be worked out by A.O and the year under consideration being A.Y. 07-08, we are of the view that no disallowance in excess of the amount that has been worked out by the Assessee (i.e. Rs. 16,30,762/-) is called for. We thus direct the deletion by the disallowance in excess of the disallowance worked out by the Assessee of Rs. 16,30,762/-. Thus the ground of Assessee is allowed.

11. In the result, the appeal of Assessee is allowed.

Now we take up Revenue's appeal in ITA No. 922/Ahd/2012

1st ground is with respect to disallowance of employees contribution to ESIC.

12. During the course of assessment proceedings and on perusing the tax audit report, A.O noticed that there were certain instances where the Employees contribution of ESIC was not deposited with the authorities before the 9 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 prescribed due date and the aggregate of such delayed deposits was Rs. 36,313. A.O was of the view that employees contribution is treated as income u/s. 2(24)(x) of the Act and the same is allowed an expense if it is paid within the prescribed due date. If the payment is not made within due date then the expense is not allowable u/s. 36(1)(va) of the Act. He accordingly considered the delayed payment of Rs. 36,313/- of Employees contribution towards ESIC to be as income of the Assessee. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who decided the issue in favour of the Assessee by holding as under:-

4.3 I have considered the facts of the case; assessment order and appellant's submission.

This issue is covered in favor of the appellant by the several decisions of jurisdictional ITAT. Delhi High Court also held that if employee's contribution is deposited before due date of filing return, the same is allowable. Respectfully following these decisions, assessing officer is directed to allow employee's contribution to ESI if the same is paid before due date of filing return.

13. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us.

14. Before us, ld. D.R. submitted that the delayed payment of ESIC contribution is now covered against the Assessee by the decision of Hon'ble Gujarat High Court in the case of Gujarat State Road Transport Corporation 366 ITR 170. He therefore submitted that in view of the decision of jurisdictional High Court the order of A.O be upheld. The ld. A.R did not object to the submission made by ld. D.R.

15. We have heard the rival submissions and perused the material on record. In the present case, it is an undisputed fact that the employees contribution of 10 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 ESIC was paid after the due date prescribed under ESI Act. We find that the issue of delayed payment of ESIC contribution has now decided in favour of the Revenue by the decision of Hon'ble Gujarat High Court in the case of GSRTC (supra) where the Hon'ble High Court has held as under:-

"any sum with respect to the employees contribution as mentioned in s. 36(l)(va), assessee shall be entitled to the deduction of such sum towards the employees contribution if the same is deposited in the accounts of the concerned employees and in the concerned fund such as Provident Fund, ESI Contribution fund, etc provided the said sum is credited by the assessee to the employees accounts in the relevant fund or funds on or before the "due date" under the Provident fund Act, ESI Act, Rule, Order or Notification issued thereunder or under any Standing Order, Award, Contract or Service or otherwise. .."

16. In view of the aforesaid decision of Hon'ble Gujarat High Court and in the absence of any contrary binding decision brought on record by ld. A.R, we are of the view that A.O was justified in treating the delayed deposit of Employees contribution of ESIC as income of the Assessee and accordingly uphold the order of A.O on this ground. In the result, the ground of Revenue is allowed.

Ground no. 2 is with respect to disallowance u/s. 14A.

17. Before us, both the parties submitted that the present ground is interconnected with ground no. 1 of Assessee's appeal and the submissions made by them while arguing the appeal would also be applicable to the present ground. In view of the aforesaid submission of both the parties, we for the reasons stated hereinabove while deciding the appeal for Assessee's 11 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 appeal in ITA No. 889/Ahd/2011(supra) and for similar reasons dismiss the ground of Revenue.

Ground no. 3 is with respect to deleting the addition by income from investment in Free Trade Zone.

18. On perusing the accounts of the Assessee, A.O noticed that Assessee had made investments in Emirates of Ajman in the form of free Zone entity by the name of Vega Industries (Middle East) FZE in Ajman Free Zone and had earned income through it amounting to Rs. 2124.75 lacs and which was not offered to tax. A.O also noticed that similar issue was involved in A.Y. 06- 07 where it was held that Vega Industries (Middle East) FZE to be a proprietary concern of the Assessee and the whole of income earned by it was held to be taxable in India u/s. 5(1) of the Act. The A.O therefore considered the income of Rs. 21,24,75,000/- earned from aforesaid free Zone entity as income of the Assessee. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who deleted the addition by holding as under:-

From the aforesaid decision of jurisdictional ITAT in the appellant's own case on the same issue it is clear that Vega ME is held to be an independent entity and not a proprietorship concern of the appellant. ITAT has met with all the arguments of the assessing officer and therefore the same are not repeated here. Since highest fact-finding authority has held that Vega UAE is an independent corporate body, the profit of Vega UAE cannot be taxed in the hands of appellant. Respectfully following the decision of jurisdictional tribunal in the appellant's own case in the immediate preceding year on the identical facts, it is held that Vega UAE is a separate company and accordingly profit of Vega UAE cannot be added to the 12 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08 income of the appellant. As a result of this, addition made by the assessing officer is deleted.

19. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us.

20. Before us, at the outset ld. A.R. submitted that the issue in the present case is identical to that of earlier years and in earlier years, the issue was decided in favour of the Assessee by the Hon'ble Tribunal in ITA No. 580/A/2011. He also placed on record the copy of the aforesaid decision. He therefore submitted that since the issue is squarely covered in Assessee's favour and therefore no interference to the order of ld. CIT(A) is called for. The ld. D.R. on the other hand supported the order of A.O and ld. CIT(A).

21. We have heard the rival submissions and perused the material on record.

We find that ld. CIT(A) while deleting the addition has followed the decision of Tribunal for A.Y. 06-07 in Assessee's own case. Before us, Revenue has not pointed out any distinguishing feature in the facts of the case for the year under consideration as compared to that of A.Y. 06-07 which was relied by ld. CIT(A) nor has placed any material on record to demonstrate that the aforesaid decision of Co-ordinate Bench of Tribunal for A.Y. 06-07 in Assessee's own case has been overturned by Hon'ble High Court. In view of the aforesaid facts, we therefore find no reason to interfere with the order of ld. CIT(A) and thus the ground of Revenue is dismissed.

22. Thus the appeal of Revenue is partly allowed.

13 ITA No 889 & 922/Ahd/2012 . A.Y. 2007-08

23. In the result, Assessee's appeal is allowed and Revenue's appeal is partly allowed.

Order pronounced in Open Court on 23- 07 - 2015.

Sd/- Sd/- (SHAILENDRA Kr. YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad