Gujarat Alkalies & Chemicals Ltd.,, ... vs Assessee

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

I.T. A. No. 1983/AHD/2011 (Assessment Year: 2006-07)

Gujarat Alkalies and V/S The D.C.I.T., Circle-1(1), Chemicals Ltd. Near IPCL Baroda Complex, P.O Petrochemicals, Dist. Baroda-39134 (Appellant) (Respondent)

PAN: AAACG8896M

Appellant by : Shri Sunil. H. Talati, A.R. Respondent by : Smt. Sonia Kumar, Sr. D.R.

(आदे श)/ORDER

Date of hearing : 21-04-2015 Date of Pronouncement : 07-05-2015

PER SHRI ANIL CHATURVEDI,A.M.

1. This appeal filed by the Assessee is against the order of CIT(A)-I, Baroda dated 16.06.2011 for A.Y. 2006-07.

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 manufacturing of caustic soda, soda, ash and other chemicals. In this case initially assessment u/s. 143(3) was completed on 26.12.2008 and the total income was determined at Rs. 221,56,17,885/-. Subsequently, notice u/s. 148 was 2 ITA No1983/AHD/2011 . A.Y. 2006-07 issued and case was re-opened and thereafter the assessment was framed on 07.12.2010 u/s. 143(3) r.w.s. 147 of the Act and the total income was determined at Rs. 113,25,42,512/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 16.06.2011 granted partial relief to the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following ground;-

1. The order passed by the Honorable Commissioner of Income Tax (Appeals)-I is bad in law, contrary to legal pronouncements and same be quashed.

2. The Hon'ble CIT (A)-l has erred in confirming the addition of Rs.65.08 lacs made by AO by invoking the provisions of section 14A r.w.r. 8D of the Act. Your appellant submits that the disallowance made is change of opinion and reopening is not justified. It be held so now and the order passed by AO be directed to be quashed.

3. The Hon'ble CIT (A)-l has erred in invoking the provisions of section 14A r.w.r 8D of the Act since the provisions of Rule 8D are applicable from A.Y.08-09. It be held so now and addition made by AO be deleted now.

4. Before us at the outset, ld. A.R. submitted that though the Assessee has raised various grounds but the only issue is with respect to disallowance u/s. 14A .

5. In the original assessment dated 26.12.2008 passed u/s. 143(3) disallowance u/s. 14A at 10% of the income exempt was made on the ground that the expenditure incurred in relation to exempt income was not disallowed by the Assessee. The aforesaid addition made in the original assessment was not challenged by the Assessee. In the re-opened assessment the issue of disallowance u/s. 14A was again considered by the A.O, the disallowance u/s. 14A read with Rule 8D was worked out at Rs. 86,04,000/-. Aggrieved 3 ITA No1983/AHD/2011 . A.Y. 2006-07 by the order of A.O., Assessee carried the matter before ld. CIT(A) who after considering the submissions of the Assessee substantially upheld the order of A.O by holding as under:-

5,2 I have considered the matter. In the original assessment u/s 143(3) completed on 26,12.2008, disallowance u/s 14A was made @ 10% of income exempt u/s 10(34)/10(35) of Rs.2,28,79,243/- being dividend and Rs.6,71,824/- being tax free interest. The disallowance was made on the ground that expenditure incurred in relation to exempt income had not been disallowed by the appellant on its own in the return filed. Appellant did not challenge the disallowance made further in appeal and accepted the same, as seen from Form No,35 for AY 2006-07 filed on 20,1,2009 appealing against original assessment order, which was disposed of through order No. CAB-1/284/08-09 by my Id. predecessor, CIT(A)-I, Baroda on 30,10,2009. Appellant's contention that no disallowance was required to be made u/s 14A due to no expenditure being attributable to exempt income is not tenable when appellant itself accepted the disallowance made u/s 14A in the assessment. Without prejudice, appellant's contention that no expenditure was incurred for earning exempt dividend and interest income cannot be accepted since appellant had incurred interest expenditure of Rs,904 lakh other than interest attributable to term loan or hire/purchase loans. Such interest was not attributable to any particular asset and is to be attributed/apportioned to various income earning activities in a reasonable manner, Further, appellant's investment in shares etc, stood at Rs.122.48 crore as on 31.3.2006 as against investments of Rs.62,5 crore on 31,3,2005, i.e. there was increase in investment in shares by a significant amount during the year. During the year, appellant made promoter's contribution under the public issue of Gujarat State Fertilizers & Chemicals Ltd., thereby receiving 88,23,529 equity shares. Investment of this magnitude would obviously require decision making and other efforts by the top management in this regard. Further, It cannot be denied that management of investments would have required time and attention of appellant's staff as well as top management, whose entire salaries are charged against taxable income. Appellant's is, therefore clearly a case where correctness of the claim of no expenditure in respect of exempt income was not acceptable i.e. it: was a falling u/s 14A(2). As held by Bombay High Court in the of Godrej & Boyce Manufacturing Co, Ltd., Rule 8D is not applicable

4 ITA No1983/AHD/2011 . A.Y. 2006-07 retrospectively, i.e. prior to AY 08-09 and the disallowance u/s 14A is to be made in a reasonable manner. In the original assessment, disallowance was made in an ad hoc manner which cannot be called reasonable. It would be reasonable to apportion the interest expense attributable to investment in tax free income yielding assets in the ratio of average value of such investments and average value of total assets. Interest on term loan and interest on hire/purchase is to be excluded from total interest expenditure thereby resulting in apportionable interest of Rs,904 lakh. Appellant's contention that interest income of Rs.22.94 lakh is to be reduced is not acceptable firstly in the absence of proof that interest paid of Rs.904 lakh was partly towards investments, which yielded income of Rs,22.94 lakh. Secondly, due to {apportioning of Interest in the ratio of average value of investments yielding tax free income to average value of total assets, interest attributed is only that much, which is towards tax free income yielding assets. There is no need to further reduce interest received from interest computed in this manner.

Appellant's contention for including miscellaneous expenses in total is in the context of computation done under Rule 8D, The computation to be done for AY 2006-07 is not as per Rule 8D. As such, this contention is not relevant. "Miscellaneous expenditure' appearing on of balance sheet is not a tangible and hence for computing interest attributable to investments yielding tax free Income, the same is not to be taken into account. Interest attributable to tax free income thus works out to Rs.63.63 lakh being apportionment of Rs,904 lakh (interest) in the ratio of Rs.9,250 lakh (average value of Investments) and Rs. 1,3.1,410 lakh (average value of total assets),, In addition, administrative and managerial expenditure towards management of investment portfolio, strategic decision making in this regard Including whether to invest in promoters' equity of GSPC or not, etc., concerned persons salaries etc., is to be included in disallowance u/s 14A, Total amount charged to P & L A/c towards employees'' remuneration, etc., is Rs.5950.87 lakh and total administration expenses were Rs.2297.79 lakh [Schedule 19A)), Attribution of administrative and managerial expenditure of Rs.25 lakh towards investment activities would therefore be reasonable.

To sum up, disallowance u/s 14A would work out to Rs.63.63 lakh plus Rs.25 lakh, i.e. Rs.88.63 lakh as against Rs.109.59 lakh worked out as per Rule 8D by the AO. Addition of Rs.88.63 lakh less Rs,23.55 lakh 5 ITA No1983/AHD/2011 . A.Y. 2006-07 (made in. original assessment) i.e. Rs.65.08 lakh is thus directed to be made u/s 14A instead of Rs.86.04 lakh made by the AO.

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

7. Before us, the Assessee has challenged the disallowance made u/s. 14A. He reiterated the submissions made before ld. CIT(A) and submitted that the disallowance u/s. 14A was been worked out after considering the method prescribed under rule 8D. He submitted that the Rule 8D is applicable from A.Y. 2008-09 and therefore not applicable to the year under consideration and therefore prayed that the addition made u/s. 14A be deleted. In the alternate, ld. A.R. submitted that the disallowance u/s. 14A be restricted to that determined in the original assessment framed u/s. 143(3). The ld. D.R. on the other hand supported the order of A.O and ld. CIT(A).

8. We have heard the rival submissions and perused the material on record. In the present case, the issue is with respect to disallowance u/s. 14A and the assessment year involved is A.Y. 06-07. We find that while framing the original assessment u/s. 143(3), disallowance u/s. 14A of Rs. 23,51,106/- was made by the A.O and the same was not challenged by the Assessee meaning thereby that the order of A.O was accepted by the Assessee. Subsequently in the re-assessment proceedings the disallowance u/s. 14A was worked out by following Rule 8D and the disallowance was enhanced from Rs. 23,51,106/- to Rs. 86,04,000/-. Before us, it is the submission of Assessee that the disallowance u/s. 14A is uncalled for the reason that the disallowance has been worked out on the basis of Rule 8D which is 6 ITA No1983/AHD/2011 . A.Y. 2006-07 applicable from A.Y. 08-09 and therefore is not applicable to the year under consideration. On the issue of plea of the ld. A.R. with respect to deletion of entire disallowance u/s. 14A, we find that the Hon'ble Apex Court in the case of CIT vs. Sun Engineering Works P. Ltd. (1992) 64 Taxman.

442 (SC) has held that the claims which have been disallowed in the original assessment proceedings cannot be re-agitated in the re-opened assessment and in the re-assessment proceedings u/s. 147 Assessee cannot seek a review of concluded item unconnected with escapement of income for purpose of computation of escape income. In view of the aforesaid decision of Hon'ble Apex Court, we are of the view that the disallowance of Rs. 23,55,106/- made in the original assessment u/s. 143(3) cannot be now challenged by the Assessee in the re-assessment proceedings because the disallowance u/s. 14A made in the original assessment proceedings was accepted by Assessee and was not challenged and therefore had attained finality. With respect to issue of the additional disallowance u/s. 14A worked out by following provisions of Rule 8D in the re-assessment proceedings, we are of the view that considering the fact that the assessment year involved is A.Y. 2006-07 and in view of the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. 328 ITR 81 (Bom) wherein it has been held that the provisions of Rule 8D are applicable from assessment year 2008-09, we are of the view that the disallowance u/s. 14A cannot be worked out by following Rule 8D for the year under consideration.

Further, on perusing the audited Balance Sheet as on 31.03.2006 which is placed on record, it is seen that the interest free funds in the form of Capital and Reserves available with the Assessee are to the extent of Rs. 72307.34 lacs as against the investments of Rs. 12248.91 lacs meaning thereby that the free funds are far in excess of investments. The Hon'ble Gujarat High Court in the case of CIT vs. UTI 7 ITA No1983/AHD/2011 . A.Y. 2006-07 Bank Ltd. (2013) 32 Taxmann.com 370 (Guj), where the assessment year involved was A.Y. 03-04, has held that if there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made u/s. 14A. Considering the totality of the aforesaid facts and the decision of Hon'ble High Courts cited hereinabove, we are of the view that no additional disallowance u/s. 14A by invoking the provisions of Rule 8D then that worked out in the original assessment proceedings, is warranted in present case. We therefore restrict the disallowance made u/s. 14A to Rs. 23,55,106/- that was made while framing the original assessment u/s. 143(3) of the Act and direct the deletion of further disallowance of Rs. 62,52,894/- made u/s. 14A in the re-assessment proceedings.

We thus direct accordingly.

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

Order pronounced in Open Court on 07 - 05 - 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