Rathi Bars Ltd., New Delhi vs Assessee

Date of Hearing : 29.12.2014 Date of Pronouncement : 09.01.2015

ORDER Per N. K. Saini, AM:

This is an appeal by the assessee against the order dated 07.02.2013 of ld. CIT(A)-XVIII, New Delhi.

2. Following grounds have been raised in this appeal:

"1. That the learned Commissioner of Income Tax (Appeals)- XVIII, New Delhi has erred both in law and, on facts in confirming the disallowance of sum of Rs. 41,22,933/- by incorrectly invoking section 14A of the Act.

1.1 That the learned Commissioner of Income Tax (Appeals) has failed to appreciate that in absence of satisfaction of statutory preconditions provided in section 14A(1) of the Act, no disallowance could be validly made on an application of Rule 8D of the Income Tax Rules, 1962.

2 ITA No. 2429/Del/2013 Rathi Bars Ltd.

1.2. That while upholding the disallowance, the learned Commissioner of Income Tax (Appeals) has overlooked the decision of the Hon'ble Tribunal in the case of the appellant company for Assessment Year 2008-09 wherein it has been held that no disallowance was permissible under clause (i) and clause (ii) of Rule 8D on the facts of the appellant company.

1.3 That even otherwise the computation made by the learned Assessing Officer and upheld by the learned Commissioner of Income Tax (Appeals) under Rule 8D is in disregard of the fact of the case of the appellant company and provision of law and hence unsustainable particularly the fact that assessee was maintaining separate bank account for transaction of mutual funds.

It is therefore prayed that disallowance made and sustained of Rs. 41,22,933/- may kindly be deleted and appeal of the appellant company be allowed."

3. From the above grounds it is gathered that the only grievance of the assessee in this appeal relates to the confirmation of disallowance of Rs. 41,22,933/-. Facts of the case in brief are that the assessee filed the return of income on 30.09.2009 declaring nil income. The said return was processed u/s 143(1) of the I. T. Act, 1961 (hereinafter referred to as the Act). Later on, the case was selected for scrutiny.

4. During the course of assessment proceedings the AO noticed that the assessee had shown dividend income of Rs. 34,409/- in the profit and loss account. He asked the assessee to give a note on applicability of Section 14A of the Act. The assessee furnished the requisite note which has been discussed by the AO in page nos. 2 & 3 of the assessment order dated 3 ITA No. 2429/Del/2013 Rathi Bars Ltd.

29.12.2011. The AO was not satisfied from the submissions of the assessee and observed that the assessee was having common infrastructure and personnel for earning income under various heads, thus, the assessee was also using its administrative, managerial and infrastructural set up for earning income which did not form part of total income under the Act. The AO disallowed a sum of Rs. 41,22,933/- by observing in paras 3.3 and 3.4 of the assessment order dated 29.12.2011 as under:

"3.3 It is pertinent of mention here that during the year the assessee had agricultural income as well as income from the business activities. There have been administrative expenses booked under the business activities but no such expenses have been claimed against earning of exempt income including agricultural income. The administrative expenses works out to Rs. 2,12,64,280/- apart form labour & salaries totaling to Rs. 83,99,818/- against sale of bars of Rs. 256,80,64,575/- and agricultural income of Rs. 2,08,76,215/-. Therefore, it is considered reasonable to proportionately allocate such expenses in the ratio of the turnover of exempt income and business sales which are directly attributable to the earning of exempt income. Such expenses have been worked out at Rs. 1,71,467/- (21264280 + 8399818) × 20876215/(2568064575 + 20876215). Accordingly, the same is hereby treated for the purposes of working out disallowance u/s 14A of the Act.

3.4 Quantum of disallowance In view of above facts, the disallowance as per Rule 8D is worked out as below:

As per Rule 8D(i) - as per para 3.3 above Rs. 1,71,467/- As per Rule 8D(ii) -

Interest paid 1,49,54,210 4 ITA No. 2429/Del/2013 Rathi Bars Ltd.

Average of investments 19,52,61,690 Average of assets 98,14,55,021

(Interest × avg. Of investment/avg. of investments) Rs. 29,75,158/-

As per Rule 8D(iii) - (0.5% of avg. of investments) Rs. 9,76,308/-

TOTAL Rs. 41,22,933/-

5. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted the written submission which has been incorporated in para 5 of the impugned order, for the cost of repetition the same is not reproduced herein. The ld. CIT(A) after considering the submissions of the assessee confirmed the disallowance made by the AO by observing that the assessee had not maintained a separate bank account for investment in mutual funds and that the entire redemption proceeds did not cover the fresh investments made in the mutual funds during the year. She also observed that there was no evidence filed to show that the initial investments in mutual funds had not been made out of mixed account or the CC limit had not been used for making the initial investment. The ld. CIT(A) observed, that the dividend income did not form part of total income under the Act, the provisions of Section 14A of the Act were applicable and the allowance of expenditure in relation to dividend income was not admissible in computing the income of the assessee. She was of the view that the disallowance was to be made irrespective of the fact whether any income was earned by the assessee or not as Section 14A of the Act did not envisage any such exemption. The ld. CIT(A) also referred the following case laws:

5 ITA No. 2429/Del/2013 Rathi Bars Ltd.

Ø Godrej & Boyce Mfg. Co. Ltd. Vs DCIT in ITA No. 626 of 2010 and writ petition no. 758 of 2010, order dated 12.08.2010 (Bomb. H.C) (ITAT Mumbai, SB) Ø ITO Vs Daga Capital Management Pvt. Ltd. (2009) 117 ITD 169. Ø ACIT Vs Citicorp Finance (India) Limited 300 ITR 398 (AT) (Mum) Ø Dhanuka & Sons Vs CIT 12 Taxmann.com 227 (Cal.)

6. Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the issue under consideration is squarely covered vide order dated 23.11.2012 of this Bench of the Tribunal in assessee's own case in ITA No. 4223/Del/2011 for the assessment year 2008-09 (copy of the said order was furnished which is placed on record). The ld. DR in his rival submissions strongly supported the orders of authorities below.

7. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the facts for the year under consideration are identical to the facts involved in the preceding assessment year 2008-09 which has already been adjudicated by this Bench of the ITAT vide order dated 23.11.2012 in ITA No. 4223/Del/2011 (supra) wherein the relevant findings have been given at para 7 of the said order which read as under:

"7. We have heard the rival submissions of both the parties and have gone through the material available on record. We find that from page 30 that there were specific term loans against plant & machinery and against vehicle and the working capital of total limits were only to the extent of Rs. 8.49 crores which was 6 ITA No. 2429/Del/2013 Rathi Bars Ltd.

invested fully in the net current assets in the form of inventories of Rs. 12.7 crores, sundry debtors Rs. 24.88 crores, cash and bank balance Rs. 1.84 crores, loans & advances Rs. 13.93 crores. Out of these investments in current assets, Rs. 20.46 crores was financed through current liabilities and provisions leaving net investment in working capital to the extent of Rs. 32.26 crores. In view of the fact that specific term loans were obtained for specific assets and investment in net working capital was much more than working capital limit, it can be said that no borrowed funds were used for making investment and therefore disallowance of interest u/s 14A was not justified. However, from the computation of income placed at page 44, we find that besides earning of long term, capital gain and dividend income, the assessee had incurred a short term capital loss of Rs. 4.80 crores which was incurred on sale of mutual funds. The amount of loss is quite high therefore, it can be said that assessee had been making significant investments in mutual funds. The investment and trading activity in shares/mutual funds definitely involve human capital and other infrastructure expenditure for which the assessee must have spent certain amount. The incurring of short term loss from mutual funds and earning from long term capital gains on shares proves that assessee was continuously engaged in investment activities both short term and long term which cannot be done without proper human resources and proper infrastructure. Therefore, we are of the considered opinion that the Assessing Officer had rightly disallowed 0.5% of expenditure as disallowance u/s 14A of the Act. In view of the above, we restrict the disallowance to the extent of Rs. 5,64,016/- and delete the addition of Rs. 18,39,156/ on account of disallowance of interest u/s 14A of the Act."

8. We, therefore, by respectfully following the aforesaid referred to order dated 23.11.2012 in assessee own case for the assessment year 2008- 7 ITA No. 2429/Del/2013 Rathi Bars Ltd.

09 in ITA No. 4223/Del/2011, direct the AO to disallow 0.5% of the expenditure as disallowance u/s 14A of the Act.

9. In the result, the appeal of the assessee is partly allowed. (Order pronounced in the open Court on 09/01/2015).

Sd/- Sd/- (H. S. Sidhu) (N. K. Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 09/01/2015 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR

Date Initial 1. Draft dictated on 02.01.2015 PS 2. Draft placed before author 02.01.2015 PS 3. Draft proposed & placed before the JM/AM second member 4. Draft discussed/approved by Second JM/AM Member. 5. Approved Draft comes to the Sr.PS/PS PS/PS 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order.