O/TAXAP/276/2015 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 276 of 2015 With TAX APPEAL NO. 277 of 2015 For Approval and Signature: HONOURABLE MR.JUSTICE M.R. SHAH Sd/ and HONOURABLE MR.JUSTICE S.H.VORA Sd/ ============================================= 1 Whether Reporters of Local Papers may be allowed to see No judgment ? 2 To be referred to Reporter or not ? No 3 Whether their Lordships wish to see fair copy of No judgment ? 4 Whether this case involves substantial question of law as No to interpretation of Constitution of India or any order made thereunder ? ============================================= PRINCIPAL COMMISSIONER OF INCOME TAX 2....Appellant(s) Versus INDIA GELTINE AND CHEMICALS LTD....Opponent(s) ============================================= Appearance: MRS MAUNA M BHATT, ADVOCATE for Appellant(s) No. 1 ============================================= CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE S.H.VORA Date : 27/04/2015 COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0] As common question of law and facts arise in both these Tax Appeals challenging impugned common judgment and order passed by learned Income Tax Appellate Tribunal, both these Tax Appeals are heard, decided and disposed of together by this common judgment and order. Page 1 of 9 HC-NIC Page 1 of 9 Created On Mon Feb 15 12:56:39 IST 2016 O/TAXAP/276/2015 JUDGMENT [2.0] Feeling aggrieved and dissatisfied with impugned judgment and order dated 10.10.2014 passed by learned Income Tax Appellate Tribunal, B Bench, Ahmedabad (hereinafter referred to as Tribunal ) in ITA No.611/Ahd/2013 for Assessment Year 2009 10 by which learned Tribunal has partly allowed said appeal by deleting disallowance of interest expenses under Section 14A of Income Tax Act, 1961 (hereinafter referred to as Act ) read with Rule 8D of Income Tax Rules (hereinafter referred to as Rules ) in its entirety, Revenue has preferred present Tax Appeal No.276/2015 with following proposed question of law Whether, on facts and in circumstances of case, appellate Tribunal is right in deleting disallowance made on account of interest expenditure u/s 14A r.w.r. 8D though assessee sou moto disallowed amount on adhoc basis? [2.1] Feeling aggrieved and dissatisfied with impugned judgment and order dated 10.10.2014 passed by learned Income Tax Appellate Tribunal, B Bench, Ahmedabad (hereinafter referred to as Tribunal ) in ITA No.781/Ahd/2013 for Assessment Year 2009 10 by which learned Tribunal has dismissed said appeal preferred by Revenue confirming deletion of disallowance of interest expenses under Section 14A of Act read with Rule 8 D of Rules made by learned CIT(A) and deleting disallowance made by AO under Section 40(a)(ia) of Act for non deduction of TDS on overseas freight, Revenue has preferred present Tax Appeal No.277/2015 with following proposed substantial questions of law. [A] Whether, on facts and in circumstances of case, appellate Tribunal is right in deleting disallowance made on account of interest expenditure u/s 14A r.w.r. 8D though assessee suo moto disallowed amount on adhoc basis? [B] Whether Appellate Tribunal has substantially erred in allowing amount of Rs.21,11,736/ on account of disallowance made u/s 40(a)(ia) of Income Tax Act on account of non Page 2 of 9 HC-NIC Page 2 of 9 Created On Mon Feb 15 12:56:39 IST 2016 O/TAXAP/276/2015 JUDGMENT deduction of TDS on overseas freight when assessee has not submitted details of filing of return u/s 172 of Act by non resident ship liner? [3.0] Facts leading to present Tax Appeals in nut shell are as under: [3.1] That assessee filed return of income for AY 2009 10 declaring total income of Rs.14,19,79,940/ . return of income was processed under Section 143(1) of Act. Subsequently, case was selected for scrutiny and notices under Section 143(2) were issued and duly served upon assessee. [3.2] During course of assessment proceedings, AO noticed that assessee had made investment of Rs.21,14,07,850/ in shares and mutual funds. assessee suo moto offered/disallowed amount of Rs.2 lacs on account of Section 14A of Act. As AO observed that assessee is not able to justify that investment made in shares is from his own funds or from funds on which no interest payment is made by assessee and therefore, provision of Section 14A of Act is applicable and since assessee has not offered disallowance worked out under Section 14A of Act, show cause notice was issued and served upon assessee and assessee was called upon to show cause as to why disallowance under Section 14A of Act should not be made. In response to said show cause notice assessee submitted its reply and explanation. Having not satisfied with explanation given by assessee, AO disallowed Rs.14,06,934/ by observing that assessee made investment in shares and mutual funds amounting to Rs.21,14,07,850/ and interest expenses of Rs.40,10,861/ and that assessee is not able to justify that investment was made out of interest free funds. As assessee suo moto disallowed Rs.2,00,000/ in its computation of income, effective disallowance was restricted to Rs.12,06,934/ . Page 3 of 9 HC-NIC Page 3 of 9 Created On Mon Feb 15 12:56:39 IST 2016 O/TAXAP/276/2015 JUDGMENT [3.3] AO also disallowed amount of Rs.1,02,43,720/ under Section 40(a)(ia) of Act for non deduction of TDS on overseas freight. [3.4] Feeling aggrieved and dissatisfied with order of assessment passed by AO of disallowance of interest expenses under Section 14A of Act read with Rule 8 D of Rules and also disallowance made by AO under section 40(a)(ia) of Act for non production of TDS on overseas freight, assessee preferred appeal before learned CIT(A). That learned CIT(A) partly allowed said appeal and deleted disallowance of Rs.5,84,706/ out of disallowance of Rs.12,06,934/ made by AO under Section 14A of Act of amount of disallowance of interest and administrative expenses. Meaning thereby learned CIT(A) confirmed disallowance of administration and calculation charges of Rs.6,22,228/ under Section 14A of Act. learned CIT(A) deleted entire disallowance of Rs.14,06,934/ made by AO under section 40(a)(ia) of Act for non deduction of TDS on overseas freight. [3.5] Feeling aggrieved and dissatisfied with order passed by learned CIT(A), both assessee as well as Revenue preferred Tax Appeal before learned Tribunal. assessee preferred appeal being ITA No.611/Ahd/2013 challenging order passed by learned CIT(A) insofar as confirming disallowance of administration and calculation charges of Rs.6,22,228/ under Section 14A of Act. Revenue preferred Appeal being ITA No.781/Ahd/2013 challenging order passed by learned CIT(A) insofar as deleting disallowance of Rs.5,84,706/ out of total disallowance of Rs.12,06,934/ made by AO under Section 14A of Act as well as deleting disallowance made by AO under Section 14A of Act for non deduction of TDS on overseas freight. By impugned common judgment and order learned Tribunal has allowed appeal preferred by assessee being Page 4 of 9 HC-NIC Page 4 of 9 Created On Mon Feb 15 12:56:39 IST 2016 O/TAXAP/276/2015 JUDGMENT ITA No.611/Ahd/2013 and has deleted disallowance made by AO under Section 14A of Act in its entirety i.e. entire amount of Rs.12,06,934/ disallowed by AO under Section 14A of Act and consequently dismissed appeal preferred by Revenue insofar as challenging deletion of disallowance made by learned CIT(A) and also confirmed order passed by learned CIT(A) in deleting disallowance made under section 40(a)(ia) for non deduction of TDS on overseas freight. [3.6] Feeling aggrieved and dissatisfied with impugned common judgment and order passed by learned Tribunal, Revenue has preferred present two Tax Appeals with aforesaid substantial questions of law. [4.0] Mrs. Bhatt, learned Counsel appearing on behalf of appellant Revenue has vehemently submitted that learned Tribunal has materially erred in deleting disallowance of interest expenses under Section 14A of Act in its entirety. It is submitted that learned Tribunal has not properly appreciated fact that dispute with respect to AY 2009 10 and therefore, Rule 8D of Rules which had come into force with effect from March 2008 would be applicable. It is submitted that it is neither learned CIT(A) nor learned Tribunal which disputed that there were mix kind of expenses and therefore, in that view of matter Rule 8D would be applicable and therefore, entire expenditure was required to be disallowed under section 14A of Act. Mrs. Bhatt, learned Counsel appearing on behalf of Revenue has heavily relied upon decision of Bombay High Court in case of Godrej and Boyce Mfg. Co. Ltd. vs. Deputy Commissioner of Income Tax and Another reported in [2010]328 ITR 81 (Bom) in support of her submission that Rule 8D could be applicable from assessment year 2008 09 and expenditures are mix kind of expenditures. Mrs. Bhatt, learned Counsel appearing on behalf of Page 5 of 9 HC-NIC Page 5 of 9 Created On Mon Feb 15 12:56:39 IST 2016 O/TAXAP/276/2015 JUDGMENT Revenue has further submitted that even learned Tribunal has materially erred in confirming order passed by learned CIT(A) deleting disallowance made by AO under Section 40(a)(ia) of Act. It is submitted that while deleting such disallowance learned Tribunal has not properly appreciated provisions of Act more particularly section 172 of Act. It is submitted that admittedly there was no return filed by recipient as required under Section 172 of Act and therefore, section 172 of Act would not be applicable. It is submitted that therefore both, learned CIT(A) as well as learned Tribunal have materially erred in deleting disallowance made under Section 40(a)ia) of Act for non deduction of TDS on overseas freight. Making above submissions and relying upon above decision, it is requested to admit / allow present Tax Appeals. [5.0] Heard Mrs. Bhatt, learned Counsel appearing on behalf of Revenue at length. We have gone through and considered in detail assessment order as well as order passed by learned CIT(A) as well as impugned judgment and order passed by learned Tribunal. [5.1] Now, so far as deletion of disallowance of interest expenses under Section 14A of Act by learned Tribunal / CIT(A) is concerned, it is required to be noted that AO made disallowance under Section 14A of Act on ground that assessee was not able to justify that investments made in shares and mutual funds amounting to Rs.21,14,07,850/ was made out of interest free funds. However, it is required to be noted that both, learned CIT(A) as well as learned Tribunal have categorically found on basis of material on record that as such assessee was having interest free funds out of which investment was made. Therefore, by observing in paras 6 to 9 extracted hereinbelow, learned Tribunal has deleted entire disallowance of Rs.12,06,934/ made by AO under section Page 6 of 9 HC-NIC Page 6 of 9 Created On Mon Feb 15 12:56:39 IST 2016 O/TAXAP/276/2015 JUDGMENT 14A of Act. 6. We have heard rival submissions and perused orders of lower authorities and material available on record. undisputed facts of case are that Assessing Officer observed that assessee has made investment of Rs.21,14,07,850/ and assessee has paid interest on borrowed funds of Rs.40,10,861/ . He also observed that assessee has not made disallowance of interest expenditure according to section 14A read with Rule 8D of Act. He therefore computed proportionate disallowance of interest expenditure at Rs.5,84,706/ and disallowed same. Before Commissioner of Income Tax (Appeals), assessee submitted that assessee had borrowed funds for purposes of vehicle and old loan of Rs.2005/ for Captive Power Plant, and therefore no borrowed funds were used for non business purposes. Further, assessee relied upon decision of Hon ble Supreme Court in case of S Builders (supra) and Munjal Sales Corporation (supra) and decision of Hon ble Mumbai High Court in case of Reliance Utility & Power Ltd. (supra) where it was held that if interest free funds of assessee were sufficient for making investments, no disallowance of interest expenditure was called for. Commissioner of Income Tax (Appeals) held that finding of Assessing Officer was not correct that assessee has not charged any interest free loan to associate concerns. He held that assessee in fact earned interest income at rate varying from 9% to 12.5% from associated concerns depending upon availability of surplus funds and thereby earned interest income of approximately Rs.50.74 lakhs during year. He, therefore, held that disallowance made by Assessing Officer u/s.36(i)(iii) was of Rs.40,10,861/ was not justified. 7. Departmental Representative has merely relied upon order of Assessing Officer. He has not pointed out any specific error in order of Commissioner of Income Tax (Appeals). He could not bring any material on record to show that assessee could not have advanced interest free loans or loans at lower rate of interest to sister concerns out of its interest free funds available with it. Therefore, we find no infirmity in order of Commissioner of Income Tax (Appeals) which is confirmed and ground no.1 of appeal of Revenue is dismissed. 8. Further, Assessing Officer also made disallowance of Rs.8,22,228/ out of administrative expenses, but had restricted disallowance made to Rs.6,22,228/ as assessee himself had made disallowance of Rs.2,00,000/ as expenses incurred for earning tax free divided income. Commissioner of Income Tax (Appeals) observed that said expenses must have been incurred by assessee in making investments and therefore confirmed disallowance of Page 7 of 9 HC-NIC Page 7 of 9 Created On Mon Feb 15 12:56:39 IST 2016 O/TAXAP/276/2015 JUDGMENT Rs.6,22,228/ made by Assessing Officer. Authorized Representative of assessee submitted that assessee has earned divided income of Rs.12,200/ as will be evidenced from statement of accounts of assessee at pave 26 of paper book for which disallowance of Rs.6,22,228/ cannot be made. 9. We find that Assessing Officer as well as Commissioner of Income Tax (Appeals) could not pinpoint any error in computation of disallowance made by assessee of Rs.2,00,000/ in earning tax free divided income. In circumstances, in our considered opinion, disallowance of Rs.6,22,228/ could not have been made by Assessing Officer and confirmed by Commissioner of Income Tax (Appeals). Our above view finds support from decision of Hon ble Delhi High Court in case of CIT vs. Consolidated Photo & Finvest Ltd. (2012) 211 Taxman 184 (Del.). Therefore, we set aside orders of lower authorities and delete disallowance of Rs.6,22,228/ . Thus, ground no.1 of appeal of assessee is allowed. We are in complete agreement with view taken by learned Tribunal and reasons given by learned Tribunal while deleting disallowance of interest expenses under Section 14A of Act. [5.2] Now, so far as contention on behalf of appellant with respect to applicability of Rule 8D of Rules with effect from 31.03.2006 is concerned, there cannot be any dispute about same. However, it is required to be noted that AO made disallowance under Section 14A of Act solely on ground that assessee failed to justify that investment was made out of interest free funds. However, both learned CIT(A) as well as learned Tribunal have found otherwise. Under circumstances, decision of Bombay High Court in case of Godrej and Boyce Mfg. Co. Ltd. (Supra) which has been relied upon by learned Counsel appearing on behalf of Revenue would not be of any assistance to facts of case on hand. Therefore, we confirm impugned judgment and order passed by learned Tribunal insofar as deleting disallowance of interest expenses under Section 14A of Act in its entirety. Page 8 of 9 HC-NIC Page 8 of 9 Created On Mon Feb 15 12:56:39 IST 2016 O/TAXAP/276/2015 JUDGMENT [5.3] Now, so far as second proposed question of law raised in Tax Appeal No.277/2015 arising out of judgment and order passed by learned Tribunal in ITA No.781/Ahd/2013 i.e. deleting disallowance under Section 40(a)(ia) of Act for non deduction of TDS on overseas freight is concerned, it is required to be noted that as per section 172 of Act, payment made to non resident shipping company would not be covered in Sections 194C or 194 of Act. At this stage it is required to be noted that it is not in dispute that amount in question was infact paid to non resident shipping company. Under circumstances, learned Tribunal has rightly deleted disallowance made by AO under Section 40(a)(ia) of Act. [6.0] In view of above and for reasons stated above, we find that there is no error committed by learned Income Tax Appellate Tribunal, B Bench, Ahmedabad while passing impugned judgment and order. No substantial question of law arise in present Tax Appeals. Under circumstances, both these Tax Appeals deserve to be dismissed and are, accordingly, dismissed. Sd/ (M.R. SHAH, J.) Sd/ (S.H. VORA, J.) Ajay Page 9 of 9 HC-NIC Page 9 of 9 Created On Mon Feb 15 12:56:39 IST 2016 Principal Commissioner of Income-tax 2 v. India Geltine And Chemicals Ltd