Embio Ltd, Mumbai vs Assessee

आयकर अपील य अ धकरण, मुंबई यायपीठ "ई" मुंबई IN THE INCOME TAX APPELLATE TRIBUNAL" E" BENCH, MUMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM) सव ी बी.आर.बा करन, लेखा सद य एवं अ मत शु ला, या यक सद य के सम

आयकर अपील सं./I.T.A. No.2685/Mum/2012 ( नधारण वष / Assessment Year :2009-10)

M/s Embio Limited, बनाम/ Asstt. Commissioner of Income Tax 501, 5th Floor, Sentinel, Rance 10(3), Vs. Hiranandani Garden, Mumbai.

Powai, Mumbai-400076 (अपीलाथ /Appellant) .. ( यथ / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AAACE1154C

अपीलाथ ओर से / Appellant by Shri Paresh Shaparia यथ क ओर से/Respondent by Smt.N V Nadkarni

सन ु वाई क तार ख / Date of Hearing : 21.4.2015 घोषणा क तार ख /Date of Pronouncement : 29.4.2015

आदे श / O R D E R

PER B.R. BASKARAN (AM)

The assessee has filed this appeal challenging the order dated 07- 03-2012 passed by ld.CIT(A)-22, Mumbai and it relates to the assessment year 2009-10. The assessee is aggrieved by the decision rendered by Ld.CIT(A) on the following additions:

a) Disallowance of interest relating to Capital WIP.

b) Disallowance of Rs.17,37,725/- u/s 14A r.s.r.8D

2. The assessee is engaged in the business of manufacture and sale of bulk drugs. The first issue relates to interest disallowance. During the year under consideration, the assessee claimed interest expenditure of Rs.3.82 crores. The AO noticed that the assessee was constructing some Capital 2 I T A N o . 2 6 8 5 / Mu m / 2 0 1 2

assets and accordingly it has shown "Capital WIP" in its books of account. The AO took the view that a part of interest should be attributed to "Capital WIP" and accordingly disallowed a sum of Rs.1,26,255/- from out of interest expenditure. The Ld CIT(A) also confirmed the same.

3. Before us, the ld. AR submitted that the opening balance of Work-in- Progress at the beginning of the year was Rs.12.82 lakhs and the amount spent during the year was Rs.15.38 lakhs. Accordingly, closing Work-in- Progress was shown at Rs.27.20 lakhs. The Ld. AR further submitted that the assessee financed this work-in-progress out of its own funds and hence, there was no requirement of disallowing part of interest expenditure. The ld.AR further submitted that the assessee has repaid considerable part of loans, that were taken in the earlier years and the said fact also proves that the assessee has used its own funds only for financing the Capital Work in Progress. In this regard, he invited our attention to the details of secured loans given in Schedule -3, which is extracted below:

SCHEDULE-3 31.3.09 31.3.08 SECURED LOANS

1. Term loans from Financial Institutions 800.00 1160.00 (Refer note 12(B) (i)

2. Cash Credit From Banks 1126.81 2156.59 (Refer note 12(B)(ii)

3. ICICI Bank Ltd - 0.45 1926.81 3317.04

Accordingly, the ld A.R contended that the Ld CIT(A) was not justified in confirming the disallowance made out of interest expenditure. On the contrary, the Ld D.R strongly defended the addition confirmed by Ld CIT(A).

3 I T A N o . 2 6 8 5 / Mu m / 2 0 1 2

4. A perusal of the table extracted in the preceding paragraph would show that the loan amount has come down from 33.17 crores from the beginning of the year to Rs.19.26 crores at the end of the year, meaning thereby there is merit in the contention of the assessee that the capital Work-in-Progress was financed by own funds only. If the loan funds have gone up, then there may be a case that the assessee might have financed work in progress out of loan funds. But this is not the case here. The ld.

AR further submitted that the assessee availed interest free fresh loan of Rs.51 lakhs from the Directors during the year under consideration. Since it was interest free, the question of disallowance of interest would not arise even if the said loan funds were used for financing work in progress. Under these set of facts, we find merit in the contention of the assessee that the capital Work-in-Progress has been financed out of interest free funds and hence there is no requirement to make any disallowance out of interest expenditure. Accordingly, we set aside the order of ld.CIT(A) on this issue and direct the AO to delete the disallowance made out of interest expenditure.

5. The next issue relates to disallowance made u/s 14A of the Act. The assessee had received a dividend income of Rs.10,000/-, but it did not make any disallowance u/s 14A of the Act. The AO computed the disallowance u/s 14A at Rs.17.37 lakhs by following the methodology given in Rule 8D of the Income Tax Rules. The ld. CIT(A) also confirmed the same.

4.

6. Before us, the ld. AR submitted that the interest free funds available with the assessee are in far excess of investment made by it. He submitted that the shareholder fund available with the assessee was Rs.47.02 crores as at the beginning of the year and the same has risen to Rs.62.74 Crores as at the end of the year. The investment at the 4 I T A N o . 2 6 8 5 / Mu m / 2 0 1 2

beginning of the year was Rs.14.92 crores and the same has fallen down to 14.00 lakhs at the end of the year. The Ld A.R further submitted that the shares were purchased in earlier years also out of own funds only. To support this contention, the Ld A.R invited our attention to the Cash flow statement placed at page 23 of the paper book. Accordingly the ld. AR submitted that there is no requirement to make any disallowance out of interest expenditure under Rule 8D(2)(ii) of the I.T Rules, in view of the decision rendered by the Hon'ble Jurisdictional High Court in the case of Commissioner of Income Tax v/s Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom).

7. With regard to the disallowance to be made out of administrative expenses as per Rule 8D(2)(iii), the ld. AR submitted that the assessee did not incur any expenses for earning the dividend income. In the alternative he submitted that the same may be restricted to the amount of dividend income received by the assessee.

8. We heard the ld.DR and perused the records on this issue. A perusal of the Balance sheet filed by the assessee would show that the assessee is having sufficient interest free funds to make the investments. Hence, following the decision rendered by the Hon'ble Jurisdictional High Court in the case of Reliance Utilities and Power Ltd (supra), which was again followed by the Hon'ble Jurisdictional High Court in the case of CIT v. HDFC Bank Ltd ( 2014) 366 ITR 505(Bom.)(HC), we hold that there is no requirement to make any disallowance out of interest expenditure.

9. With regard to the disallowance made under Rule 8D(2)(iii) out of general administrative expenses, we notice that the AO has computed the disallowance at the rate of 0.5% of average value of investments held by the assessee and the same was worked out at Rs.3.76 lakhs. However, the contention of the assessee is that it has not incurred any expenditure 5 I T A N o . 2 6 8 5 / Mu m / 2 0 1 2

in realizing the interest income and in the alternative, it has been pleaded that the disallowance should be restricted to the amount of dividend received by the assessee. A perusal of the investment portfolio of the assessee given in Schedule 6 of the balance sheet, we notice that the assessee has sold equity shares and redeemable preferential shares of Karnataka Malladi Biotics Ltd during the year under consideration. In view of the same, the amount of investment has come down drastically from Rs.14.92 crores to Rs.14 lakhs. Since there was not much movement in the investment portfolio, in our view, the assessee would not have incurred administrative expenditure to the tune of Rs.3.76 lakhs for earning a dividend income of Rs.10,000/-. At the same time, we are also not able to agree with the contention of the assessee that it did not incur any expenditure at all. Hence, under the facts prevailing in the instant case, we find merit in the alternative contention of the assessee that the expenditure amount to be disallowance towards administrative expenses should be restricted to Rs.10,000/-. Accordingly, we set aside the order of ld. CIT(A) on this issue and direct the AO to restrict the disallowance to be made u/s 14A of the Act to Rs.10,000/-.

10. In the result, the appeal filed by the assessee is partly allowed.

The above order was pronounced in the open court on 29th Apr, 2015.

घोषणा खल ु े यायालय म दनांकः29th Apr, 2015 को क गई ।

Sd sd

(अ मत शु ला / AMIT SHUKLA) (बी.आर.बा करन / B.R. BASKARAN) या यक सद य / JUDICIAL MEMBER लेखा सदस ्य / ACCOUNTANT MEMBER

मुंबई Mumbai:29th Apr,2015.

व. न.स./ SRL , Sr. PS 6 I T A N o . 2 6 8 5 / Mu m / 2 0 1 2

आदे श क त ल प अ े षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. आयकर आयु त(अपील) / The CIT(A)- concerned

4. आयकर आयु त / CIT concerned

5. वभागीय त न ध, आयकर अपील य अ धकरण, मब ुं ई / DR, ITAT, Mumbai concerned

6. गाड फाईल / Guard file.

आदे शानस ु ार/ BY ORDER, True copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई /ITAT, Mumbai