Mascot Footcare, Faridabad vs Department Of Income Tax

BEFORE SHRI G. C. GUPTA, HON'BLE VICE PRESIDENT AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No.2364 /Del/2012 Assessment year : 2008-09 ACIT, Circle II, B Block, Vs. Mascot Footcare, CGO Complex, NH-IV, Plot No.130, Sector 24, Faridabad Faridabad GIR / PAN:AACFM2564K (Appellant) (Respondent)

Appellant by : Shri P Dam Kanunjha, Sr. DR Respondent by : Shri Sachin Vasudeva, FCA

Date of hearing : 18/03/2015 Date of pronouncement : 25.03.2015

ORDER

PER T.S. KAPOOR, AM:

This is an appeal field by Revenue against the order of Ld. CIT(A) dated 28.02.2012. The Revenue has raised 2 grounds of appeal, one of which relates to the action of Ld. CIT(A) by which he had deleted the addition of Rs.12,56,610/- made by A.O. on account of disallowance u/s 14A. The other grievance of Revenue is the action of Ld. CIT(A) by which he had deleted an addition of Rs.52,193/- out of total addition of Rs.1,73,796/- made by A.O. u/s 36(1)(iii) of I. T. Act, 1961.

2. At the outset, Ld. D.R. submitted that the assessee had made investment in shares and the income from which is exempt and, therefore, as per the provisions of Section 14A, disallowance was mandatory and in view of the application of Rule 8D, the A.O. had rightly made addition of 2 ITA No.2364/Del/2012

Rs.12,25,610/-. It was submitted that the A.O. has held that irrespective of receipt of exempt income, the addition has to be made u/s 14A if the assessee had made investment and income of which is exempt under the provisions of the Act. Regarding second addition, Ld. D.R. heavily relied upon the assessment order.

3. Ld. A.R. on the other hand submitted that there was no income earned by assessee during the year which fact is clear from the findings of A.O. vide para 5.2. It was submitted that Hon'ble Delhi High Court in the case of CIT Vs Holsim India P. Ltd. in I.T.A. No. 486 and 299/2014 order dated 05.09.2014 has held that where there is no exempt income, disallowance u/s 14A cannot be made. In this respect, he filed a copy of Hon'ble Delhi High Court decision the case of Holsim India P. Ltd. (supra). Ld. A.R. further submitted that Hon'ble Punjab & Haryana High Court in the case of CIT vs Lakhani Marketing Incl. vide order dated 02.04.2014 had similarly held that disallowance u/s 14A requires incurring of certain expenditure and assessing Officer has not pointed out any expenditure, which was incurred to earn exempt income and, therefore, the case of assessee was duly covered in its favour on this account also. It was reiterated that in fact, since no exempt income was earned in the year under consideration, therefore, Hon'ble Delhi High Court decision in the case of Holcim India (P) Ltd. was applicable. Regarding second addition, Ld. A.R. relied upon Ld. CIT(A)'s order.

4. We have hard rival parties and have gone through the material placed on record. We find that Hon'ble Delhi High Court in the case of CIT Vs. Holcim India (P) Ltd. in I.T.A. No. 486 & 299/ 2014 order dated 05.09.2014, in similar circumstances has held as under:

3 ITA No.2364/Del/2012 "On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant-Revenue. No contrary decision of a High Court has been shown to us. The Punjab and Haryana High Court in Commissioner of Income Tax, Faridabad Vs. M/s. Lakhani Marketing Incl., ITA No. 970/2008, decided on 02.04.2014, made reference to two earlier decisions of the same Court in CIT Vs. Hero Cycles Limited, [2010] 323 ITR 518 and CIT Vs. Winsome Textile Industries Limited, [2009] 319 ITR 204 to hold that Section 14A cannot be invoked when no exempt income was earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.20 14. In the said decision it has been held:

"As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs.2, 03,752/- made by the Assessing Officer was in order" .

Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security 4 ITA No.2364/Del/2012

transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.

What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CIT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).

In these circumstances, we do not find any merit in the present appeals. The same are dismissed in limine.

5. This is an admitted fact that assessee had not earned exempted income during the present year, therefore, following above judicial pronouncement in the case of Holcim India (P) Ltd., we hold that disallowance was not sustainable and, therefore, we dismiss ground No.1.

6. Now, coming to ground No.2, we find that Ld. CIT(A) has allowed part relief of Rs.52,193/- out of disallowance of Rs.1,73,796/- by holding as under:

"6. I have considered the submissions of ld. counsel for the appellant and gone through the documents filed on record as well as 5 ITA No.2364/Del/2012

the judicial rulings relied upon by the Ld. Counsel and the A.O. In ground No.1 of appeal, the appellant has challenged the disallowance of interest of Rs.1,73,796/ - made by the AO by invoking the proviso to section 36(l)(iii) of the Act in respect of interest paid on term loan and the funds utilized out of CC account for acquisition of assets. As per the proviso to section 36(1)(iii), any amount of the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business, whether capitalized in the books of account or not, for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Therefore, the disallowance of interest pertaining to term loan is in conformity with the provisions of law. However, the AO has given a finding that the funds were also utilized from CC account with State Bank of India. The appellant has contended that the term loan was availed only in respect of purchase of plant and machinery and the investment in building etc. was made out of internal accruals. The total investment made in fixed assets during the year was Rs.3.93 crores. Neither the AO has exactly identified the amount of term loan utilized for purchase of plant and machinery nor has the appellant been able to furnish such details. The details filed by the appellant along with submissions dated 01.11.2011 reveal that the entire amount of Rs.1, 73, 796 / - pertains to both term loan as well as funds utilized from the CC bank account. Section 36(1)(iii) of the Act provides for allowing of interest as an eligible expenditure subject to fulfillment of the conditions that the funds must have been borrowed, the expenditure by way of interest on such fund should have been incurred and the borrowed fund must have been utilized for the purpose of business. In the identical facts when the payment of advance tax was made out of over draft account wherein the business profits were also deposited, the Hon'ble High Court of Calcutta in the case of Woolcombers of India Ltd. vs. CIT (7 Taxman 188) held that-

"Having regard to the facts of the case, it appeared that the assessee's profits, which were deposited in the overdraft account, were sufficient to meet the advance tax liability. It should, therefore, be presumed that in essence and in their true character, the taxes were paid out of the profits of the year and not out of the overdraft account from the running of the business. The impugned interest was, therefore, not relatable to 6 ITA No.2364/Del/2012

the payment of advance tax and hence could not be disallowed in computation of the assessee's business income."

In a latter decision, the Hon'ble Mumbai High Court in the case of reliance Utilities and Powers Ltd. (221 CTR 435) has held that-

"If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (224 ITR 627) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (134 ITR 219) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments."

The principle that follows from the above judicial rulings is that when the sale proceeds, recoveries from the debtors and internal accruals etc. are deposited by the assessee in OD/CC account and the investment in assets is made which are not put to use in business, the disallowance of interest cannot be made only on the ground that the payments have been made from OD I CC account, provided the 7 ITA No.2364/Del/2012

internal accruals are sufficient to meet the investments made in the assets. The appellant has further contended that the internal accruals were to the extent of Rs.1.23 crores, which are roughly 30% of the total investment made in assets. Therefore, 30% of the interest disallowed by the AO pertains to internal accruals. However, since there is direct nexus of term loan with acquisition of machinery, the interest pertaining to the period till the asset is put to use for the purpose of business has to be capitalized in terms of the proviso to section 36(1)(iii) of the Act. Therefore, the disallowance to the extent of 70% of Rs.1,73,796/-, being Rs.1,21,657/-is confirmed. The consequential effect of this addition would be on the claim of depreciation. The assets have been put to use during the years and therefore, the AO is directed to allow depreciation on the above addition as per the provisions of law. The remaining addition of Rs.52,193/- is deleted. This ground of appeal is partly allowed.

7. We find that Ld. CIT(A) has made a clear finding of fact that internal accounts of the assessee represented about 30% of value of fixed assets and, therefore, he had allowed relief to the extent of 30% and has upheld addition to the extent of 70% of disallowance. Ld. CIT(A) has passed a well reasoned and speaking order and, therefore, we are in agreement with his findings. Therefore, ground No.2 is, also dismissed.

8. In view of above, appeal filed by Revenue is dismissed.

9. Order pronounced in the open court on 25th March, 2015.

Sd./- Sd./-

( G. C. GUPTA) (T.S. KAPOOR) VICE PRESIDENT ACCOUNTANT MEMBER Date:25.03. 2015

Sp 8 ITA No.2364/Del/2012

Copy forwarded to:- The appellant The respondent The CIT The CIT (A)-, New Delhi.

The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order (ITAT, New Delhi) S.No. Details Date Initials Designation 1 Draft dictated on 19/3 Sr. PS/PS 2 Draft placed before author 20,22,23 Sr. PS/PS Draft proposed & placed before the Second 3 JM/AM Member 4 Draft discussed/approved by Second Member AM/AM 5 Approved Draft comes to the Sr. PS/PS 25/3/2015 Sr. PS/PS 6 Kept for pronouncement 25/3 Sr. PS/PS 7 File sent to Bench Clerk 25/3 Sr. PS/PS 8 Date on which the file goes to Head Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order