Chudgar Ranchodlal Jethalal Trade ... vs Assessee

1. This appeal filed by the Assessee is against the order of CIT(A)-VI, Ahmedabad dated 10.12.2012 for A.Y. 2008-09.

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

3. Assessee is a company stated to be engaged in the business of trading of Ready Cotton Bales and Investment. Assessee filed its return of income for A.Y. 08-09 on 23.09.2008 declaring total income of Rs. 94,51,250/-. The case was selected for scrutiny and thereafter the assessment was framed 2 ITA No 245/AHD/2013 . A.Y. 2008-09 under section 143(3) vide order dated 09.12.2010 and the total income was determined at Rs. 98,95,455/-. Aggrieved by the order of A.O., Assessee carried the matter before CIT(A) who vide order dated 10.12.2012 dismissed the appeal of the Assessee. Aggrieved by the aforesaid order of CIT(A) Assessee is now in appeal before us and has raised the following effective grounds;-

1. Ld. CIT (A) erred in law and in facts in confirming action of AO in disallowing Rs. 3,42,128/-, being weight shortage expenses by simply following appellate order of A.Y. 2007/08 without granting opportunity of hearing to the appellant as well ignoring the submissions on record. Ld. CIT (A) ought to have independently adjudicated the issue rather than relying on earlier appellate order for confirming disallowance.

2. Ld. CIT (A) erred in law and in facts confirming disallowance made by AO of Rs. 1,02,007/- by invoking provisions of section 14A r.w. rule 8D of the Act. Both the lower authorities erred in ignoring the fact that the appellant had sufficient own funds to invest in tax free dividend earning investment. Ld. CIT (A) ought to have deleted such disproportionate disallowance of expense for earning dividend income of Rs. 20, 498/-.

Ground no. 1 is with respect to disallowance of Rs. 3,42,128/- as weight shortage expenses.

4. During the course of assessment proceedings, A.O noticed that Assessee has claimed weight shortage expenses of Rs. 3,42,128/-. A.O noted that no evidence was produced before him to support the claim and further no shortage expenses was claimed before A.Y. 07-08. He accordingly disallowed the claim of Assessee. Aggrieved by the order of A.O, Assessee carried the matter before CIT(A). CIT(A) noted that identical issue arose in A.Y. 07-08 and his predecessor had disallowed the expenditure. He therefore following the order of his predecessor upheld the order of A.O by holding as under:-

3 ITA No 245/AHD/2013 . A.Y. 2008-09 3.1 Identical issue arose in the immediately preceding A.Y. 2007-08. Vide order dated 09.02.2011 in appeal No. CIT(A)-VI/DCIT.Cir.1/415/09-10, my predecessor held as under:-

"3.3.1 have considered the facts of the case and assessment order and appellant's submission. Appellant claimed weight shortages expense for the first time during the year\. No such claim was made in earlier years despite that fact that appellant was in the same line of business from several years. Against claim of such loss, only copy of account of the party was submitted. No other evidence in the form of specific reasons for shortages or correspondences proving shortages in transit was filed. In the' absence of any material, such abnormal claim made for the first time, cannot be allowed as genuine business expense. The decisions relied upon by the appellant are on the issue of levy of penalty and hence not applicable to the facts of the case. Accordingly the disallowance made by the AO is confirmed. "

As seen from para-2 of the assessment order, no explanation was given on the issue. Following the order of my predecessor, impugned disallowance of Rs.3,42,128/- is upheld. These grounds of appeal are dismissed.

5. Aggrieved by the order of CIT(A), Assessee is now in appeal before us.

6. Before us, at the outset ld. A.R. submitted that identical issue arose in Assessee's case in A.Y. 07-08 when the matter was carried by Assessee before Hon'ble ITAT. Hon'ble Tribunal decided the issue in Assessee's appeal bearing no. ITA NO. 1008/AHD/2011 order dated 04.04.2014. She also placed on record the copy of the aforesaid order. She therefore submitted that since CIT(A) had followed the order of his predecessor for A.Y. 2007-08 while deciding the appeal against the Assessee and now since the issue for A.Y. 07-08 has been decided in favour of the Assessee by the Tribunal, the ground be decided in favour of the Assessee. She also placed on record, the copy of the aforesaid Tribunal order. The ld. D.R. on the other hand supported the order of A.O and ld. CIT(A).

7. We have heard the rival submissions and perused the material on record. We find that the claim of weight shortage expenses was disallowed by the A.O 4 ITA No 245/AHD/2013 . A.Y. 2008-09 and the disallowance was confirmed by ld. CIT(A) by following his predecessor order for A.Y. 07-08. Against the order of CIT(A) for A.Y. 07- 08, Assessee had preferred appeal before Hon'ble ITAT. We find that the Co-ordinate Bench of Tribunal in ITA NO. 1008/AHD/2011 for A.Y. 07-08 (order dated 04.04.2014) decided the issue in favour of Assessee by holding as under:-

1. Learned CIT(A) has erred in law and in facts in confirming action of AO in disallowing Rs.5,38,121/-, being weight shortage expenses. Both the lower authorities erred in ignoring the evidences produced by the appellant in the form of correspondences with the parties and debit notes issued by the parties. Ld. CIT(A) ought to have deleted the disallowance.

3. Apropos to ground No.l, the Id.counsel for the assessee submitted that the assessee is engaged in trading of ready cotton bales since last more than 21 years and the debit notes were raised by the concerned parties. The Id.counsel for the assessee further submitted that there is no dispute that the material was weighed and transported and during the course of transit, there was weight loss. The Id.counsel for the assessee submitted that the authorities below were not justified in disallowing the genuine expenses.

3.1. The ld.Sr.DR submitted that the assessee has been engaged in this line of business for many years and the assessee has never claimed this kind of expenses in earlier years. He further submitted that the assessee has not given any evidence in support of its claim that there was loss of weight.

3.2. In rejoinder, the ld.counsel for the assessee submitted that the evidences were placed on record; namely, the ledger account of weight shortage expenses, the debit notes raised by the concerned parties. The ld.counsel for the assessee submitted that merely because the assessee has claimed this kind of expenditure for the first time and it cannot be the sole ground for making disallowance.

4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the AO as well as the Id.CIT(A) has disallowed the expenditure on the basis that in earlier year the 5 ITA No 245/AHD/2013 . A.Y. 2008-09 assessee has not claimed such kind of expenditure. In our considered view, since the assessee has placed on record the debit notes raised by various parties to whom the material was supplied, therefore the authorities below were not justified in disallowing the expenses claimed by the assessee. We therefore direct the AO to delete this addition. Accordingly, ground raised by the assessee is allowed.

8. Before us, Revenue has not brought on record any material to demonstrate as to how the decision of Hon'ble Tribunal for A.Y. 07-08 in Assessee's own case would not be applicable to the facts of the case for the year under appeal more so when ld. CIT(A) himself has noted that identical issue arose in A.Y. 07-08 and had followed the order of his predecessor. In view of the aforesaid facts and respectfully following the decision of the co-ordinate Bench of the Tribunal, this ground of Assessee is allowed.

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

9. During the course of assessment proceedings, A.O noticed that Assessee has earned dividend income of Rs. 20,498/- which was claimed as exempt from tax. He also noticed that Assessee had investment of Rs. 11.13 lacs and had taken loans of Rs. 3.07 crore on which interest of Rs. 5.48 lacs was paid by the Assessee. A.O therefore asked the Assessee to show cause as to why no disallowance u/s. 14A be made to which Assessee interalia submitted that the investments were made out of free reserves of the company and no interest bearing funds have been used by the Assessee. The submission of the Assessee was not found acceptable to the A.O for the reasons that Assessee had not submitted proof of availability of interest free funds on the date of investments and the investment activity of the Assessee was on indivisible activity and Assessee had also not proved about non incurring of 6 ITA No 245/AHD/2013 . A.Y. 2008-09 interest expenditure of earning exempt income. He therefore following the formula prescribed under Rule 8D worked out the disallowance of Rs. 1,02,007/-. Aggrieved by the order of A.O., Assessee carried the matter before CIT(A) who upheld the order of A.O by holding as under:-

4.1Identical issue arose in the immediately preceding A.Y. 2007-08. Vide order dated 09.02.2011 in appeal No. CIT(A)-VI/DCIT.Cir.1/415/09-10, my predecessor held as under:-

4.3. 1 have considered the facts of the case anfi assessment order and appellant's submission. It is not in dispute that appellant incurred interest expense to the extent of Rs. 12. 92 lakhs on the borrowings ofRs. 266. 779 Lacs. Appellant did not have separate bank account for exempt investment. Common funds are used for earning both exempt and non-exempt income. Appellant could not establish that investment in exempt asset was made out of non-interest bearing funds only. Therefore the disallowance out of interest and administrative expenses for making investment and earning exempt income is required under section 14 A. It is true that the rule 8D is applicable from assessment year 2008-09 as per Bombay High Court decision in the case of Godrej and Boyce Ltd.

However even as per this decision, disallowance of interest and other expenses relatable to exempt income are to be made. The formula given in rule 8D computes the disallowable interest by spreading interest paid to the total asset and therefore it is quite reasonable and disallows interest only at the average cost of borrowing by the company including all the funds. Similarly the disallowance of other expenses is just Rs. 5137 which is quite reasonable. Accordingly the disallowance made by the assessing Office is confirmed.

As seen from para-3 of the assessment order, no explanation was given on the issue. Following the order of my predecessor, impugned disallowance of Rs. 1,02,077/- is upheld. These grounds of appeal are dismissed.

10. Aggrieved by the order of CIT(A), Assessee is now in appeal before us.

11. Before us, ld. A.R. reiterated the submissions made before ld. CIT(A). She further submitted that no new investments were made during the year and 7 ITA No 245/AHD/2013 . A.Y. 2008-09 the investments were made in earlier years from the free funds available. She further submitted that though the provisions of Rule 8D are applicable to the year under consideration but the interest free funds are far in excess of the investments and therefore no disallowance of interest can be made. With respect to the disallowance of administrative expenses, she submitted that no disallowance is called for as the Assessee has not incurred any administrative expenses for earning tax free income. She further submitted that the disallowance made u/s. 14A is far in excess of the tax free income. He further placed reliance on the decision of Chandigarh Tribunal in the case of ACIT vs. Punjab State Co-Op. and Marketing Fed. Ltd. in (ITA No. 548/Chd/2011) and Delhi Tribunal in the case of Sahara India Financial Corporation Ltd. vs. DCIT (2014) 41 Taxman.com. 251 (Del) for the proposition that disallowance u/s. 14A cannot exceed the exempt dividend income. She therefore submitted that considering the totality of the facts no addition u/s. 14A was called for. However as an alternative she submitted that a token disallowance as felt appropriate by the Tribunal be made on account of administrative expenses which would take care of disallowance u/s. 14A as the year involved is A.Y. 08-09. The ld. D.R. on the other hand submitted that A.O was fully justified in disallowing the expenses in view of the fact that rule 8D is applicable from A.Y. 08-09. He thus supported the order of A.O and CIT(A).

12. We have heard the rival submissions and perused the material on record. On perusing the Balance sheet, we find that there is no change in investments at the year under as at 31st March, 2007 and as at 31st March 2008 meaning thereby that prima facie no new investments have been made by the Assessee during the year. Further on perusing the Balances sheet as at 31st 8 ITA No 245/AHD/2013 . A.Y. 2008-09 March 2008 we find that the share holders fund comprising of Share capital and reserves and surplus were to the extent of Rs.1.49 crores and during the year Assessee has also earned profit after tax of Rs. 60.39 lacs meaning that the availability of interest free funds with Assessee at the year end were in excess of investments. From the details of other income placed on record, it is seen that during the year dividend earned by the Assessee is of Rs. 20,498/- and the disallowance made by A.O u/s 14A is of Rs. 1,02,007/- and thus the disallowance u/s. 14A worked out by A.O is more than the tax free income. Before us, ld. D.R. has not brought any decision of Tribunal or High Court on record to controvert the submissions made by ld. A.R that disallowance u/s. 14A cannot be more than tax free income. On the other hand, while dictating the order, we have come across the decision of Hon'ble Delhi High court in the case of Joint Investment Pvt. Ltd. vs. CIT ITA No. 117 of 2015 decided on 25.02.2015 wherein the Hon'ble High Court has held as under:-

"9. In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs. 2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT(A) and the IT AT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs. 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire lax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure 'incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case."

9 ITA No 245/AHD/2013 . A.Y. 2008-09

13. Considering the totality of the facts and in view of the fact that the provisions of Rule 8D are applicable for the year under consideration and in the light of the aforesaid decision of Delhi High Court cited hereinabove and in view of the fact that the disallowance worked out by A.O u/s. 14A is more than the exempt income and considering the alternate submission of ld. A.R. to make a reasonable disallowance u/s. 14A as deemed fit, we are of the view that disallowance of Rs. 5,000/- if made in the present case will meet the ends of justice. We thus direct accordingly.

14. In the result, the appeal of Assessee is partly allowed.

Order pronounced in Open Court on 27 - 03 - 2015.

Sd/- Sd/- (KUL BHARAT) (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