Excel Industries Ltd, Mumbai vs Assessee

अिधकरण, मुंबई Ûयायपीठ 'ई', मुंबई ।

आयकर अपीलीय अिधकरण, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES "E", MUMBAI सव[ौी ǒवजय पाल राव,Ûयाियक सदःय एवं ौी बी.आर. भाःकरन लेखा सदःय , के सम¢ ।

BEFORE SHRI VIJAY PAL RAO, JM & SHRI B R BASKARAN, AM

ITA No.8278/Mum/2011: Asst.Year 2008-2009 DCIT CC.33 M/s. Excel Industries Ltd. R.No.32(1), GR. Floor, Aayakar Bhavan बनाम/ 184-187, Excel Estate, S.V. Rd. M.K. Rd. Jogeshwari (W) Mumbai-400 020 Vs. Mumbai -400 102 PAN : AAACE2488F (अपीलाथȸ /Appellant) (ू×यथȸ/Respondent)

ITA No.1067/Mum/2012: Asst.Year 2008-2009 M/s. Excel Industries Ltd. DCIT CC.33 184-187, Excel Estate, S.V. Rd. बनाम/ R.No.32(1), GR. Floor, Jogeshwari (W) Aayakar Bhavan Mumbai -400 102 Vs. M.K. Rd. PAN : AAACE2488F Mumbai-400 020 (अपीलाथȸ /Appellant) (ू×यथȸ/Respondent)

अपीलाथȸ कȧ ओर से /Appellant by : Shri Neilphilip (DR)

ू×यथȸ कȧ ओर से /Respondent by : Shri Kirit R. Kamdar (AR)

सुनवाई कȧ तारȣख / घोषणा कȧ तारȣख / Date of Hearing : 19.11.2014 Date of Pronouncement :02 .01.2015

आदे श / O R D E R

Shri Vijay Pal Rao ( JM) :

These cross appeals are directed against the order dated 21.09.2011 of the CIT(A) for the assessment year 2008-09.

2. The assessee has raised the following grounds as under;

1. On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in confirming the action of the Deputy Commissioner of Income-tax in disallowing an amount of Rs 61,50,964 under section 14A of the Income-tax Act ('the Act') in respect of expenditure incurred for earning tax-free income.

2. On the facts and in the circumstances of the case and in law, the 2 ITA Nos.1067&8278/Mum/2011,

Commissioner of Income-tax (Appeals) erred in confirming the action of the Deputy Commissioner of Income-tax in taxing advance licence benefit utilized/written off, DFIA benefit receivable utilized / written off and advance licence I DFIA obligation aggregating to Rs 28,36,888, thereby resulting in double taxation of an amount aggregating to Rs 28,36,888.

3.On the facts and in the circumstances of the case and in law, the Commissioner of -tax in disallowing a sum of Rs 2226,000 out of interest paid attributable to Income-tax (Appeals) erred in confirming the action of the Deputy Commissioner of Income loan to a subsidiary.

4. Without prejudice to the ground of appeal no. 3, the Commissioner of Income-tax (Appeals) erred in confirming the action of the Deputy Commissioner of Income-tax in considering the rate of interest on borrowings © 14% for making the aforesaid disallowance out of interest paid.

3. Ground no.1 regarded disallowance u/s.14A, the assessee received dividend of Rs.80,45,298/- from the domestic companies and Rs.13,85,100/- from tax free US 64 Bonds of UTI. Thus total amount of Rs.94,30,398/- was claimed as exempt u/s.10(34) and u/s.10(15) of the I.T. Act. The AO noted that assessee has paid interest on borrowed funds and also made investment in shares/units. The AO issued a show cause notice to the assessee to explain as to why disallowance u/s.14A not be made. The Assessee contended before the AO that assessee has not used any borrowed fund for making investment in question and most of the investments are very old. It was further contended that the assessee has not incurred any expenditure for earning dividend income therefore; no disallowance is called for u/s.14A. The AO did not accept the contention of the assessee and held that the rule 8D of I.T. Rules is applicable for the year under consideration and accordingly worked out the disallowance of Rs.61,51,000/-The assessee challenged the action of the AO before the CIT(A). The CIT(A) confirmed the disallowance made by the AO on the ground that it is to be computed as per rule 8D.

4. Before us, Ld. AR of the assessee has submitted that the investments held by the assessee are old investment, and made from own funds. Therefore, no interest expenditure was incurred for investment in question. The Ld.AR has referred the details of time period when investments were made and submitted that most of the investments are very old even made more than 10 years back. He has further contended that shares in Excel Crop Care Limited have been received as a result of demerger of Excel 3 ITA Nos.1067&8278/Mum/2011,

Industries Ltd. Hence, the investment in shares Excel Crop Care Ltd. was not made out of borrowed funds and accordingly, no expenditure on interest can be attributed to such investment. He has pointed out that the income from shares of Saraswat Co-operative Bank Limited is not tax free income, hence such investment need to be excluded in computing average investment for the purpose of disallowance u/s.14A. The Ld. AR has referred the earlier order of this Tribunal in assessee's own case and submitted that only 2% was estimated as reasonable disallowance u/s.14A. He has also relied upon the decisions of this tribunal in case of M/s. JM financial Limited v. ACIT dated 26.03.2014 in ITA No.4521/Mum/2012 as well as in case of Garware Wall Ropes Limited, vs. ACIT dated 15.01.2014 in ITA No.5408/Mum/2012 and submitted that the tribunal has held that section 14A will not be applied in the case of investment in the subsidiary for the purpose of holding the controlling stack. Thus, the Ld. AR has submitted that the disallowance made by the AO is liable to be deleted. The Ld. AR pointed out that when the assessee itself made a disallowance 10% of the dividend income in the computation of income then no further disallowance is called for in the case of the assessee. On the other hand, Ld. DR has relied upon the order of the Assessing Officer as well as CIT(A) and submitted that when the assessee has claimed exempt income amounting to Rs.94,30,398/- then the provisions of section 14A are applicable and the disallowance has to be worked out as per rule 8D of the Income tax Rules.

5. We have considered the rival submissions as well as relevant material on record. The assessee claimed to have used its own fund and not borrowed fund for investment made in the shares and bonds. It was also contended by the assessee that the investment are very old and no expenditure was incurred for earning dividend income. Further most of investments are in group concern for strategic investment and not for earning the dividend income. It is pertinent to note that since beginning there has been a disallowance u/s.14A as it is evident from the order of this tribunal in the earlier assessment year. Prior to this year ruled 8D was not applicable therefore, the disallowance was based on reasonable estimates. For the assessment year under consideration rule 8D is applicable and the working of disallowance has to be as per 4 ITA Nos.1067&8278/Mum/2011,

formula provided under rule 8D and there is no scope of any estimation of disallowance under section 14A. Rule 8D stipulates separate disallowances for direct and indirect expenditure as well as the indirect expenditure on the account of interest and administrative expenses. There is no dispute regarding the direct expenditure which is only Rs.835/-. The dispute before us is regarding indirect expenditure on account of interest expenses as well as administrative and general managerial expenses. During the year under consideration assessee has shown 7 investments details which are given by the Assessing Officer as under;

Sr. Name of the Company No. of Shares Amount of Investment (Rs.in No. dividend (Rs.) lacs)

1. Bank of India 35900 53850 16.16

2. Punjab Chemicals & Crop 584977 1462442 309.00 Protection Limited

3. Transmetal Limited 888750 1333125 177.75

4. Excel Crop Care Limited 100000 375000 0.40

4. Saraswat Co-op. Bank Ltd. 2500 4500 0.25

6. TIL Limited 4285 12855 1.53

7. Transpek Silox 1067450 4803525 286.08

Out of the above 7 investment only 2 investment viz the Bank of India and TIL Limited are non-group concern. Further the income from the investment in the shares of Saraswat Co-op. Bank Limited is not tax free therefore; for the purpose of disallowance under section 14A the investment in Saraswat Co-op. Bank shall be excluded. The remaining 4 investments are in group concerns of the assessee.

6. We further noted that some of the investments are very old and there is no frequent movement of purchase and sale. In case of investment in Punjab Chemicals & Crop Protection Limited the last investment was made in the year 1994-95. Therefore, the investment is very old however in the year 2003-04 bonus shares were received by the assessee. Though the assessee has claimed to have made the investment in 5 ITA Nos.1067&8278/Mum/2011,

Punjab Chemicals & Crop Protection Limited as strategic business investment however we note that the assessee has been selling shares in the said company on regular intervals first in the year 1993-94 then 2002-03, 2003-04 and 2004-05. Therefore, investment in Punjab Chemicals & Crop Protection Limited would not fall category of strategic investment when the assessee is selling out shares frequently. So far as the investments in subsidiaries is concern the co-ordinate bench in this tribunal in case of JM financial Limited as well as Garware Wall Ropes Limited (supra) has taken a view that section 14A would not be applicable on such investment in subsidiary for holding controlling stack. Therefore, the said view is applicable only in the case of subsidiary and not in the group concern. As regards the investment in Excel Crop Care Limited the same was as a result of demerger of the Excel Industries Limited and therefore, it would not fall under the category of acquiring the shares by payment of any consideration. Accordingly, for the purpose of computing disallowance as per rule 8D the investment in subsidiaries including Excel Crop Care Limited as well as the investment which does not yield tax free income as in the case of Saraswat Co-op. Bank shall be excluded from the average investment.

7. The assessee has vehemently contended that assessee has not used borrowed fund for the purpose of investment. It is pertinent to note that neither the assessee furnished proper relevant details to show availability of its own fund nor the authorities below have examined the said factum of availability fund. Therefore, availability of own fund in respect of the investment requires proper verification and examination at the level of the AO. Accordingly, AO is directed to verify and decided this issue as per law. As regards the administrative expenses the assessee itself disallowed 10% of the exempt income without applying rule 8D. For the year under consideration the computation of disallowance shall be as per the formula provide under rule 8D and not on the basis of estimation. As we have already directed the AO that the investment in the subsidiary and not yielding taxable income shall be excluded from the average investment therefore, the disallowance on account of administrative expenses shall be computed accordingly. It is made clear that disallowance computed under rule 8D shall not be more than the actual expenditure attributable for earning the tax free 6 ITA Nos.1067&8278/Mum/2011,

income and debited in the profit and loss account. The AO to ear mark the expenses which can be attributable for earning taxable as well as tax free income. The expenditure incurred exclusively for business activity cannot be included in such attributable expenses for the purpose of disallowance u/s.14A. Hence, this issue is partly allowed for statistical purposes.

8. Ground no.2 regarding advance licence benefit utilize/written off. This ground of the assessee's appeal becomes anfractuous in view of finding on the ground no.1 of the revenue's appeal, accordingly dismissed.

9. Ground no.3 & 4 regarding disallowance of interest for interest free advances and rate of interest.

10. We have heard Ld. AR as well as Ld. DR and considered relevant material on record. At the outset, we note that an identical issue has been considered by this tribunal for the assessment year 2007-08 in para 4.1 and 5.1 as under;

4.1 After hearing both the sides we find the A.O. disallowed an amount o Rs.2,24,000/- out of interest paid attributable to other loans. In appeal the Ld. CIT(A) following the orders of his predecessor for A.Y.1999-2000 to 2005-06 upheld the action of the A.O. We find similar issue had come up before the Tribunal in assessee's own case in the immediately preceding assessment year vide ITA No.4134/Mum/2009. We find the tribunal at para no.17&18 of the order has decided the issue and restored the same to the file of the A.O. for fresh adjudication. Following the same ratio, this ground by the assessee is restored to the file of the A>O. for fresh adjudication in terms of the decision of the tribunal in the preceding assessment year. This ground raised by the assessee is accordingly allowed for statistical purpose. 5.1 After hearing both the sides we find this is an alternative ground to grounds of appeal no.3&4 by the assessee. We find the assessee had taken similar ground in the preceding assessment year and the Tribunal held that this ground is consequential and accordingly set aside the issue to the file of the A.O. in view of the fact that grounds of appeal no.2 & 3 has already been restored to the file of the A.O. for fresh adjudication. Respectfully following the decision of the Tribunal in assessee's own case in the immediately preceding assessment year this ground is set aside to the file of the A.O. this ground by the assessee is accordingly allowed for statistical purpose.

Accordingly, the following earlier order of this tribunal we set aside the issue of disallowance interest as well as rate of interest to the record of the assessing officer on similar terms and directions.

7 ITA Nos.1067&8278/Mum/2011, 11. Revenue has raise following grounds:

"1.Whether on the facts and in the circumstances of the case and in law, the CIT(A) was justified in deleting the addition of Rs. 36,63,053/- made by the A.O. on account of advance license / duty free replenishment certificate (DFRC)/EFIA benefit receivable by holding that the Hon'ble Tribunal has decided the issue in favour of the appellant in earlier years in assessee's own case."

2. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in deleting the addition of Rs. 96,16,892/- on account of pass book benefit receivable by holding that the Hon'ble Tribunal has decided the issue in favour of the appellant in earlier years in assessee's own case."

3."On the facts and in the circumstances of the case and in law, the CIT(A) was justified in deleting the reversal of advance license obligation amounting to Rs. 11,00,942/- by holding that the Hon'ble Tribunal has decided the issue in favour of the appellant in earlier years in assessee's own case."

12. Ground No.1 & 2 regarding taxability of advance licence/duty free replenishment certificate benefit as well as taxability of pass book benefit receivable.

13. We have heard Ld. DR as well as Ld. AR and considered relevant material on record. It was pointed out that an identical issue has been decided by the Hon'ble Supreme Court in case of the assessee for the assessment year 2001- 02 in 358 ITR 295(SC). We find that the Hon'ble Supreme Court while dealing with the identical question in assessee's own case has held in para 21,27,28,31 &32 as under:

" 21. In so far as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licences as well as under

the duty entitlement pass book, there was no corresponding liability on the customs authorities to pass on the benefit of duty free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, the hypothetical income which may or may not materialize and its money value is, therefore, not the income of the assessee. x x x x x x x x x x x x x x x x x x x x x x x x x x........

27. Applying the three tests laid down by various decision of this court, namely whether the income accrued to the assessee is real or hypothetical, whether there is a corresponding liability of the other party to pass on the benefits of duty free import to the assessee even without any imports having been made; and the probability or improbability of realization of the benefits by the assessee considered from the realistic and practical point of view( the assessee may not have made imports), it is quite clear that in fact no real income but only 8 ITA Nos.1067&8278/Mum/2011,

hypothetical income had accrued to the assessee and section 28(iv) of the Act would be inapplicable to the facts and circumstances of the case. Essentially, the Assessing Officer is required to be pragmatic and not pedantic.

28. Secondly as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licences or under the duty entitlement pass book do not represent the real income of the assessee.

Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned counsel for the Revenue.

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31. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been derived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.

32. For the aforesaid reasons, we dismiss the civil appeals with no order as to costs, but with the hope that the Revenue implements its litigation policy a little more practically and a little more seriously.

This issue is now settled by the Hon'ble Supreme Court in assessee's own case. Accordingly ground no.1 & 2 of the Revenue's appeal are dismissed.

14. Ground no.3 regarding taxability of advance license obligation reversed.

15. We have heard the Ld. AR as well as Ld. DR and considered relevant material on record. This issue has been considered by this tribunal in assessee's own case for A.Y.2005-06 as well as for the assessment year 2006-07. The CIT(A) has deleted the addition by following earlier order of this tribunal. It is pertinent to note that in the earlier year tribunal has deleted the addition on the ground that the assessee did not claim this expenditure in the earlier year and therefore, same cannot be taxed at the time of reversing back. Accordingly, AO directed to verify the fact whether the expenditure of advance licence obligation in question was claimed by the assessee in the earlier year or not and then decide this issue.

9 ITA Nos.1067&8278/Mum/2011, 16. In the result, the Cross appeals are partly allowed for statistical purpose.

Order pronounced on this 2nd day of January, 2015.

आदे श कȧ घोषणा Ǒदनांकः 02.01.2014 को कȧ गई ।

Sd/- Sd/-

(B.R. BASKARAN) (Vijay Pal Rao,) लेखा सदःय / ACCOUNTANT Ûयाियक सदःय / JUDICIAL MEMBER MEMBER

मुंबई Mumbai; Ǒदनांक Dated : 2nd January, 2015. Patel* आदे श कȧ ूितिलǒप अमेǒषत/Copy षत of the Order forwarded to : 1. अपीलाथȸ / The Appellant 2. ू×यथȸ / The Respondent. 3. आयकर आयुƠ(अपील) / The CIT, Mumbai. 4. आयकर आयुƠ / CIT(A)-9, Mumbai

5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai

6. गाड[ फाईल / Guard file.

आदे शानुसार/ BY ORDER,

स×याǒपत ूित //True Copy// उप/सहायक पंजीकार (Dy./Asstt.

उप/ Registrar) आयकर अपीलीय अिधकरण, अिधकरण, मुंबई / ITAT, Mumbai