Honda Siel Power Products Ltd., New ... vs Department Of Income Tax

ITA no. 3157/Del/2013 A.Y. 2000-01 DCIT, Circle 12(1), Vs. Honda Siel Power Products Ltd., New Delhi. 3 & 4/48, 2nd Floor, Enkay House, Malcha Marg, Shopping Complex, Chankayapuri, New Delhi. AAACH 8464 L

ITA no. 3262/Del/2013 A.Y. 2000-01 Honda Siel Power Products Ltd., Vs. DCIT, Circle 12(1), nd 3 & 4/48, 2 Floor, Enkay House, New Delhi. Malcha Marg, Shopping Complex, Chankayapuri, New Delhi.

( Appellant ) ( Respondent )

Department by : Shri Robin Rawal Sr. DR Respondent by : Shri Ajay Vohra Sr. Adv. & Ms. Bhartia Kumar Adv.

Date of hearing : 20-01-2015 Date of order : 23-01-2015.

ORDER

PER S.V. MEHROTRA, A.M:-

These cross appeals, preferred by the department as well as the assessee, are directed against the order dated 28-2--2013, passed by the 2

CIT(Appeals)-XV, New Delhi in appeal no. 37/11-12/CIT(A)-XV, relating to A.Y. 2000-01.

2. The assessee, a public limited company under the Companies Act, in the relevant assessment year, was engaged in the business of manufacturing of portable generating sets, I.C. engines, water pumping sets. It had filed its return of income declaring income of Rs. 14,35,73,320/- and the assessment was completed on 7-3-2003 at an income of Rs. 15,73,66,280/- u/s 143(3). Thereafter, notice u/s 148 was issued to the assessee on 30-7-2007, in response to which assessee filed return of income declaring income of Rs. 14,35,73,320/-. The assessee had filed a writ petition against notice u/s 148 of the Act, which was dismissed by Hon'ble High Court vide order dated 14-2-2011. The AO noticed that assessee had received dividend income of Rs. 188.73 lacs. He further noticed that the assessee had invested about Rs. 2800 lakhs in mutual funds. Applying Rule 8D, the AO made disallowance of expenses u/s 14A of the Act of Rs. 31,31,000/-.

2.1. Ld. CIT(A), while partly allowing the assessee's appeal, recorded a finding that out of the total interest payment of Rs. 82,04,177/-, only an amount of Rs. 25,86,290/- related to CC account only could be considered as an instance of use of mixed funds, which might have been partly used for business purposes and partly for making investment for generating tax exempt income. In addition some amount on account of personal expenses were also attributable towards making investment for earning dividend income. He, accordingly, estimated the disallowance at Rs. 14,66,547/- by applying Rule 8D.

2.2. Being aggrieved, with the order of ld. CIT(A) both the assessee as well as the department are in appeal before us, raising respective grounds of appeal.

3 3. At the time of hearing ld. counsel for the asesssee did not press ground nos. 1 to 5, relating to validity of reassessment proceedings. Ground nos. 6 to 8 read as under:

"6. That on the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in sustaining disallowance of Rs. 14,66,547 alleging the same to be incurred for earning exempt dividend income in terms of provisions of section 14A of the Act.

6.1. That on the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in not appreciating that the funds from internal accruals and equity available with the appellant were invested in mutual funds from which exempt dividend income of Rs.188.73 lacs was earned.

6.2. That on the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in not appreciating that expenditure on interest on cash credit aggregating to Rs. 25,86,290 for availing overdraft facilities were incurred by the appellant for purposes for the business of the appellant and were not attributable to earning of the exempt dividend income.

6.3. That on the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in holding that some amount of personnel expenses were also attributable to earning of exempt dividend income.

7. That on the facts and in the circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in not appreciating that in absence of nexus being established between the expenses and earning of tax free dividend income, no disallowance invoking section 14A could be made.

8. That on the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) erred in not 4

appreciating that disallowance under section 14A of the Act could not be made on estimate basis by following presumptive method prescribed under Rule 80 of the Income tax Rules, 1962.

4. Sole effective ground raised in department's appeal is as under:

"On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in taking into account the interest of Rs. 25,86,290/- only for the purpose of computing disallowance u/s 14A thereby giving a relief of Rs. 16,64,453/-."

5. Ld. counsel for the assessee submitted that in the relevant assessment year 2000-01, Rule 8D was not applicable and, therefore, both the revenue authorities committed an error in applying Rule 8D.

6. Ld. DR, on the other hand, relied on the order of AO.

7. We have considered the submissions of both the parties and have perused the record of the case. Admittedly, for the relevant assessment year 2000-01, Rule 8D was not applicable, therefore, the disallowance made by applying the same cannot be sustained.

8. We find that ld. CIT(A) has specifically considered the interest paid by assessee on various loans and has recorded a specific finding as regards interest on cash credits of Rs. 25,86,290/- as noted earlier. We are in agreement with ld. CIT(A)'s finding that apart from part interest on cash credit, no other interest was relatable to earning of exempt income. As far as interest on cash credit of Rs. 25,86,290/- is concerned, the same needs to be bifurcated between the earning of exempt income and for use in business. The entire interest expenditure cannot be allocated for earning of exempt income. We, therefore, restore the matter to the file of AO for deciding this issue de novo on reasonable basis, in view of the decision of Hon'ble Jurisdictional High Court of Delhi in the case of Maxopp Investment 5

247 CTR 162, subject to aforementioned observations with respect to disallowance relating to interest.

9. In the result, department's appeal is dismissed and the assessee's appeal is partly allowed for statistical purposes.

Order pronounced in open court on 23-01-2015.

Sd/- Sd/- ( H.S. SIDHU ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 23-01-2015. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR