Mamta Machinery Pvt. Ltd.,, Ahmedabad vs Assessee

2. ACIT (OD)-I 2.Mamata Machinery Range-4 Pvt.Ltd. Ahmedabad Ahmedabad थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AABCM 8241 P (अपीलाथ# /Appellants) .. ($%यथ# / Respondents)

Assessee by : Shri M.J. Shah, AR Revenue by : Shri Nimesh Yadav, Sr.DR

ु वाई क( तार)ख / सन Date of Hearing 15/04/2015 घोषणा क( तार)ख /Date of Pronounce ment 13/05/2015

आदे श / O R D E R

PER SHRI KUL BHARAT, JUDICIAL MEMBER :

These cross-appeals by the Assessee and the Revenue are directed against the order of the Ld.Commissioner of Income Tax(Appeals)-VIII, Ahmedabad ('CIT(A)' in short) dated 18/05/2011 pertaining to ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09 -2-

Assessment Year (AY) 2008-09. Since both the appeals are arising out of the same order of the ld.CIT(A), these were heard together and are being disposed of by way of this consolidated order for the sake of convenience.

2. First, we take up the Assessee's appeal in ITA No.1667/Ahd/2011 for AY 2008-09. The assessee has raised the following grounds of appeal:-

1. Your appellant being aggrieved by the order passed by Learned CIT(Appeals)-VIII, Ahmedabad presents this appeal on following grounds.

2. The Learned CIT(Appeals)-VIII, Ahmedabad, has erred in making disallowance u/s.14A of Rs.17,14,615/- being though explained. The addition made be deleted.

3. The appellant craves, leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before hearing of this appeal.

2.1. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as "the Act") was framed vide order dated 13/11/2010, thereby the Assessing Officer (AO in short) made disallowance of Rs.26,86,817/- by invoking the provisions of section 14A of the Act and also made disallowance of Rs.3,28,175/- on account of excess depreciation on vehicle. Aggrieved by the order of the ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09 -3-

ld.CIT(A), the assessee preferred an appeal before the ld.CIT(A), who after considering the submissions of the assessee, restricted the disallowance made u/s.14A of the Act to Rs.17,14,615/-. The ld.CIT(A) has also deleted the addition made on account of disallowance of depreciation on vehicle amounting to Rs.3,28,175/-. Now, both the Assessee and the Revenue are in cross-appeals before us.

3. The only effective ground of assessee's appeal is against the confirmation of disallowance of Rs.17,14,615/- by invoking the provisions of section 14A of the Act.

3.1. The ld.counsel for the assessee submitted that the authorities below were not justified in confirming the addition. He submitted that before the ld.CIT(A), it was categorically submitted that the assessee has incurred the expenses of Rs.88,56,044/-. It was pointed out that the total interest expenses incurred was of Rs.88,56,044/- and the break-up of the expenses are shown such as, (i) interest on cash credit of Rs.20,39,607/-,

(ii) interest on packing credit limit of Rs.24,87,210/-, (iii) interest to other of Rs.1,66,241/-, (iv) interest on unsecured loan of Rs.10,54,049/-, (v) interest on tem loan of Rs.25,74,770/- and (vi) interest on vehicle loan of Rs.5,34,167/-. The ld.counsel for the assessee submitted that the AO made disallowance of Rs.23,87,072/- in respect of interest expenses u/s.14A of the Act under the assumption that the entire interest expenses ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09 -4-

appearing under the profit and loss account is related to investment and, accordingly, wrongly applying Rule 8D and made the disallowance. He submitted that the AO ought to have excluded the interest paid for the purpose of working capital facility while calculating the disallowance u/s.14A of the Act. The assessee has availed the term loan for exhibition. The interest of Rs.25,74,770/- is paid for such term loan availed for exhibition purpose. He submitted that Rule 8D applies to income which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. Therefore, administration expenses should have been disallowed on investment on which tax free income is earned. Rule 8D provides the applicable rate i.e. 0.5% on the average investment on which income earned in exempted. He submitted that out of Rs.7,43,19,897/-, the AO has taken the average value of investment of Rs.5,99,49,081/-. He submitted that the AO has wrongly included the investment of Rs.2,16,92,081/- for the purpose of average value of investment and the same should have been excluded. He further submitted that the AO failed to take note of the fact that the interest expenditure incurred by the assessee was taken for the specific business purposes. There was not nexus between the interest expenditure incurred and the investment made by the assessee. He further submitted that the AO failed to take not of the fact that the assessee was having sufficient interest-free funds to make investment in the securities. He placed reliance on the ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09 -5-

judgement(s) of Hon'ble Jurisdictional High Court rendered in the case of CIT vs. Gujarat Narmada Valley Fertilizers Co.Ltd. reported at (2014) 42 taxmann.com 270 (Guj.) and of CIT vs. Amod Stamping (P) Ltd. reported at (2014) 45 taxmann.com 427 (Guj.).

3.2. On the contrary, ld.Sr.DR supported the orders of the authorities below.

4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. Since the assessment under appeal, i.e. AY 2008-09, therefore there is no dispute with regard to the fact that Rule 8D is applicable. It is also not in dispute that during the year, the assessee has earned dividend income amounting to Rs.59,36,503/-. For earning this dividend income, the assessee has made investment of Rs.2,20,01,000/- (Rs.1,37,500/- + Rs.2,16,08,500/- and Rs.2,55,000/-). The contention of assessee is that the assessee has invested out of interest-free funds and the details submitted a chart at page No.6 of the paper-book. Another contention of the assessee is that the borrowed capital was utilized for the purpose of business and no borrowed fund was utilized for the purpose of investments from which the assessee has earned tax-free income. We find that the ld.CIT(A) has decided this issue in paras-6.5 to 6.7 of his order by observing as under:-

ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09 -6-

"6.5. The submission of the Ld.A.R has considerable substance. The argument of the Ld.A.R regarding excluding the investment in foreign shares because those does not generate exempt income is correct and therefore it is accepted without any further deliberation. This fact has been accepted by the A.O also, but there is some mismatch in the figures of calculation of investment in shares of foreign companies in assessment order.

Regarding the interest on exhibition loan and packing credit, etc. the Ld.A.R could not demonstrate with cogent evidence whether those loans are exclusively used for those specific purposes and there is no intermixing of funds which were used for acquisition of tax free securities and therefore this argument of Ld.A.R is not accepted.

6.6. In view of these facts the disallowance u/s.14A is recalculated as under:-

1. Interest :88,56,044 x 3,82,57,000 = 15,23,330

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22,24,11,253

2. Adm. Expenses 0.5% of 3,82,57000 = 1,91,285

6.7. As such addition of Rs.17,14,615/- is confirmed. The appellant gets relief of Rs.9,72,202/-. This ground of appeal is partly allowed."

4.1. As per Rule 8D of the IT Rules, 1962, the expenditure should be related to the exempt income which does not form part of the total income. Therefore, the AO should have verified whether the expenditure which he proposed to disallow related to the exempt income or not. In the case in hand, the assessee's contention qua the interest expenditure is that it had sufficient interest-free funds and the investment ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09 -7-

has been made out of such funds. The fact that the expenditure is not related to the exempt income and the investment wherefrom exempt income is earned is made out of interest-free fund needs verification.

Therefore, the issue is restored to the file of AO for verifying the contention of the assessee that the interest expenditure is not related to exempt income and also investment out of which exempt income is earned was made out of interest-free fund. In case, the AO finds the contention of the assessee is correct, he would delete the addition.

5. In the result, assessee's appeal in ITA No.1667/Ahd/2011 for AY 2008-09 is allowed for statistical purposes.

6. Now, we take up the Revenue's appeal in ITA No.1932/Ahd/2011 for AY 2008-09, wherein following grounds have been taken:-

1. The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.9,72,202/- made by the AO on account of disallowance u/s.14A of the Act.

2. The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.3,28,175/- made by the AO on account of excess depreciation on vehicle without appreciating the fact that no evidences regarding the delivery of vehicle was submitted.

3. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.

ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09 -8-

4. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent.

6.1. First ground of Revenue's appeal is against the deletion of addition of Rs.9,72,202/- made on account of disallowance u/s.14A of the Act. Both the parties have advanced their arguments as were made in the assessee's appeal(supra). Since we have restored the issue in assessee's appeal in ITA No.1667/Ahd/2011(supra) back to the file of AO for decision afresh, this issue, raised in the Revenue's appeal, is also restored back to the file of AO for decision afresh with the same direction. Accordingly, this ground of Revenue's appeal is allowed for statistical purposes.

7. Second ground of Revenue's appeal is against the deletion of addition of Rs.3,28,175/- made on account of excess depreciation on vehicle. The ld.Sr.DR submitted that the ld.CIT(A) was not justified in deleting the addition. He submitted that the first requirement for allowing the claim of depreciation, the assessee is required to demonstrate that the asset has been used for business purposes. He submitted that the assessee has not furnished any evidence in support of its contention that the vehicles were put to use for business purposes. He submitted that merely that the assessee has purchased vehicle on 29/03/2008 and 31/03/2008 does not serve the purpose for proving that ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09 -9-

the delivery of such vehicles were taken on the aforesaid dates and on the same dates the vehicles were put to use for business purposes.

7.1. On the contrary, the ld.counsel for the assessee supported the order of the ld.CIT(A) and submitted that the assessee has placed on record invoices of vehicles and also evidences of registration of the State Transport Authority. He drew our attention towards page Nos.28 to 44 and also Certificate of Registration which was placed at page No.78 of the paper-book. The ld.counsel for the assessee argued at length to buttress his contention that the evidences so furnished are sufficient to prove that the vehicles were put to use for business purposes.

8. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. During the course of hearing, the ld.counsel for the assessee was asked to furnish copy of the delivery challan received from the dealer of the vehicles from which the assessee has purchased the vehicles. We find force into the contention of the ld.Sr.DR that furnishing of registration certificate issued by the state transport authority would not be a sufficient evidence to prove that the vehicles were put to use for business purposes. During the course of hearing, the ld.counsel for the assessee was requested to furnish the delivery challan issued by the dealer of the vehicles in question. However, the ld.counsel for the assessee expressed ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09

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its inability to furnish the delivery challan. In our considered view, the assessee is required to demonstrate that assessee-company has purchased vehicles during the year under consideration, the delivery of such vehicles has also been taken and such vehicles were put to use for business purposes. It would not be sufficient that the assessee obtained the registration certificate from the state transport authority to prove that the vehicles have been put to use for business purposes. For claiming depreciation, onus is on the assessee that the vehicles so purchased have been put to business as in the case in hand delivery of vehicles to the assessee is not proved, however registration of vehicles is proved. In our considered view, the assessee should have furnished other evidences for proving that in fact vehicles were put to use. Therefore, the order of the ld.CIT(A) is hereby set aside. The issue of allowability of depreciation is restored to the file of AO for decision afresh. Needless to say that the AO would give sufficient opportunity to the assessee for proving that the vehicles were put to use for business purposes. Thus, this ground of Revenue's appeal is allowed for statistical purposes.

9. Ground Nos.3 & 4 are general in nature which require no independent adjudication.

ITA No.1667/Ahd/2011 (By Assessee) and ITA No.1932/Ahd/2011 (By Revenue) Mamata Machinery Pvt.Ltd. vs. ACIT (OSD)-I Asst.Year - 2008-09

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10. In the combined result, cross-appeals filed by the Assessee and Revenue both are allowed for statistical purposes.

Order pronounced in the Court on Wednesday, the 13th day of May, 2015 at Ahmedabad.

Sd/- Sd/- (एन.एस.सैनी) (कुल भारत) लेखा सद य या यक सद य ( N.S. SAINI ) ( KUL BHARAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 13/ 05 /2015 ट).सी.नायर, व. न.स./T.C. NAIR, Sr. PS आदे श क !त#ल$प अ%े$षत/Copy of the Order forwarded to : 1. अपीलाथ# / The Appellant 2. $%यथ# / The Respondent. 3. संबं3धत आयकर आयु5त / Concerned CIT

4. आयकर आयु5त(अपील) / The CIT(A)-VIII, Ahmedabad

5. 6वभागीय $ त न3ध, आयकर अपील)य अ3धकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड: फाईल / Guard file.

आदे शानुसार/ BY ORDER,

स%या6पत $ त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad

1. Date of dictation .. 27.4.15 (dictation-pad 19+ pages attached at the end of this File)

2. Date on which the typed draft is placed before the Dictating Member ..11.5.15

3. Other Member...

4. Date on which the approved draft comes to the Sr.P.S./P.S.................

5. Date on which the fair order is placed before the Dictating Member for pronouncement......

6. Date on which the fair order comes back to the Sr.P.S./P.S.......13.5.15

7. Date on which the file goes to the Bench Clerk..................... 13.5.15

8. Date on which the file goes to the Head Clerk..........................................

9. The date on which the file goes to the Assistant Registrar for signature on the order..........................

10. Date of Despatch of the Order..................