Taxap/1060/2013 Of Commissioner Of Income Tax I v. Amod Stamping Pvt Ltd

O/TAXAP/1058/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1058 of 2013With TAX APPEAL NO. 1059 of 2013With TAX APPEAL NO. 1060 of 2013 For Approval and Signature: HONOURABLE MR.JUSTICE M.R. SHAHSd/-andHONOURABLE MR.JUSTICE R.P.DHOLARIASd/-=============================================1.Whether Reporters of Local Papers may be allowed to see Nothe judgment ?2.To be referred to the Reporter or not ?No3.Whether their Lordships wish to see the fair copy of the Nojudgment ?4.Whether this case involves a substantial question of law as to Nothe interpretation of the constitution of India, 1950 or any order made thereunder ?5.Whether it is to be circulated to the civil judge ?No=============================================COMMISSIONER OF INCOME TAX I....Appellant(s)VersusAMOD STAMPING PVT LTD....Opponent(s)=============================================Appearance: MR KM PARIKH, ADVOCATE for the Appellant(s) No. 1MR MANISH J SHAH, ADVOCATE for the Opponent(s) No. 1 ============================================= CORAM: HONOURABLE MR.JUSTICE M.R. SHAH and HONOURABLE MR.JUSTICE R.P.DHOLARIA Date : 10/12/2013COMMON ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE M.R. SHAH) [1.0] As common question of law and facts arise in this group of appeals and as such with respect to the same assessee but different assessment years, all these appeals are disposed of by this common judgment and order. Tax Appeal No.1058/2013 [1.1] Feeling aggrieved and dissatisfied with the impugned judgment and order dated 01.05.2013 passed by the learned Income Tax Appellate Tribunal, Ahmedabad [hereinafter referred to as “ITAT”] in ITA No.685/Ahd/2008 for the assessment year 2004-05, the Revenue has preferred the present tax appeal to consider the following substantial question of law “Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in deleting the addition made on account of disallowance of interest expenditure of Rs.16,02,493/- without appreciating that the assessee failed to establish that investments in mutual funds and interest free advances had been made out of own interest free funds by furnishing day-to-day cash-flow statement?” Tax Appeal No.1059/2013 [1.2] Feeling aggrieved and dissatisfied with the impugned judgment and order dated 01.05.2013 passed by the learned ITAT in ITA No.3606/Ahd/2008 for the assessment year 2005-06, the Revenue has preferred the present tax appeal to consider the following substantial question of law “Whether on the facts and in the circumstances of the case and in law, the Tribunal was correct in deleting the addition made on account of disallowance of interest expenditure of Rs.26,21,684/- without appreciating that the assessee failed to establish that investments in mutual funds and interest free advances had been made out of own interest free funds by furnishing day-to-day cash-flow statement?” Tax Appeal No.1060/2013 [1.3] Feeling aggrieved and dissatisfied with the impugned judgment and order dated 01.05.2013 passed by the learned ITAT in ITA No.3192/Ahd/2010 for the assessment year 2006-07, the Revenue has preferred the present tax appeal to consider the following substantial question of law “1)Whether on the facts and circumstances of the case, the ITAT was right in law in deleting the disallowance of Rs.13,89,062/- made u/s.14A of the Act towards interest and other expenses incurred in relation to exempted income without appreciating that the assessee was maintaining mixed funds and failed either to furnish day-to-day cash-flow statement or to establish that it had its own surplus funds for investment which generated exempt income? Tax Appeal No.1060/2013 [1.3] Feeling aggrieved and dissatisfied with the impugned judgment and order dated 01.05.2013 passed by the learned ITAT in ITA No.3192/Ahd/2010 for the assessment year 2006-07, the Revenue has preferred the present tax appeal to consider the following substantial question of law “1)Whether on the facts and circumstances of the case, the ITAT was right in law in deleting the disallowance of Rs.13,89,062/- made u/s.14A of the Act towards interest and other expenses incurred in relation to exempted income without appreciating that the assessee was maintaining mixed funds and failed either to furnish day-to-day cash-flow statement or to establish that it had its own surplus funds for investment which generated exempt income? 2)Whether on the facts and circumstances of the case., the ITAT was right in restricting the addition made on account of disallowance of interest expenditure from Rs.28,00,620/- to Rs.64,909/- without appreciating that the assessee failed to establish that investments in mutual funds and interest free advances had been made out of own interest free funds by furnishing day-to-day cash-flow statement?” [2.0] For the sake of convenience the facts of Tax Appeal No.1058/2013 for the assessment year 2004-05 are considered which in nut-shell are as under: [2.1] That assessee engaged in the business of manufacturing of electrical laminations, job work of stamping filed return of income for the year under consideration declaring loss of Rs.1,35,700/-. That the company took over the business of Surya Laminations Pvt. Ltd. as per the amalgamation during year under consideration. The case was taken up for scrutiny and thereafter the assessment was framed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as “IT Act”] and the income was determined at Rs.2,50,11,834/-. That the AO disallowed an amount of Rs.16,02,493/- being the interest expenditure under Section 36(1)(iii) of the IT Act [which is the dispute / issue in the present tax appeal]. [2.2] That being aggrieved and dissatisfied with the order passed by the AO making disallowance of Rs.16,02,493/- being the interest expenditure under section 36(1)(iii) of the IT Act, the assessee preferred appeal before the learned CIT(A) and the learned CIT(A) confirmed the disallowance made by the AO under section 36(1)(iii) of the IT Act. [2.3] Feeling aggrieved and dissatisfied with the order passed by the learned CIT(A), the assessee preferred appeal before the learned ITAT and by impugned judgment and order, the learned ITAT has deleted the disallowance under section 36(1)(iii) of the IT Act made by the AO, confirmed by the learned CIT(A) by observing that the interest free funds as on the date of the balance-sheet were far in excess of the investments. Therefore, relying upon the decision of the Bombay High Court in the case of Commissioner of Income-Tax vs. Reliance Utilities and Power Ltd. reported in [2009]313 ITR 340 [Bom], the learned ITAT has deleted the disallowance made by the AO under section 36(1)(iii) of the IT Act. [2.4] Similar disallowances were made by the AO with respect to the assessment years 2005-06 and 2006-07, which are deleted by the learned ITAT by impugned judgment and order. [2.5] The additional question of law in Tax Appeal No.1060/2013 with respect to AY 2006-07 is deleting the disallowance of Rs.13,89,062/- made under section 14A of the IT Act towards interest and other expenses incurred in relation to exempted income. [3.0] Heard Shri K.M. Parikh, learned Counsel appearing on behalf of the Revenue and Shri Manish J. Shah, learned Advocate appearing on behalf of the assessee, who is on caveat. [2.4] Similar disallowances were made by the AO with respect to the assessment years 2005-06 and 2006-07, which are deleted by the learned ITAT by impugned judgment and order. [2.5] The additional question of law in Tax Appeal No.1060/2013 with respect to AY 2006-07 is deleting the disallowance of Rs.13,89,062/- made under section 14A of the IT Act towards interest and other expenses incurred in relation to exempted income. [3.0] Heard Shri K.M. Parikh, learned Counsel appearing on behalf of the Revenue and Shri Manish J. Shah, learned Advocate appearing on behalf of the assessee, who is on caveat. [3.1] At the outset it is required to be noted that in each assessment year the AO directed to make disallowance under section 36(1)(iii) of the IT Act which has been deleted by the learned ITAT by impugned judgment and order. At the outset it is required to be noted that while deleting the disallowance made by the AO under section 36(1)(iii) of the IT Act, the learned ITAT has relied upon the decision of the Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra) and has specifically observed that the interest free funds as on the date of balance-sheet were far in excess of investments as on 31.03.2004. In para 23 and while deleting the disallowance made by the AO under section 36(1)(iii) of the IT Act, the learned ITAT has observed as under. “23.From the audited Balance Sheet as on 31.03.2004 placed on record it is seen that as on 31.03.2004 the investments of the Assessee are to the tune of Rs.5.82 crore as compared to Rs.46,000/- in the immediately preceding financial year meaning thereby that the investments to the extent of Rs.5,82,28,953/- have been made during the year. It is also seen from the Balance Sheet that the interest free funds in the form of share capital, reserves and surplus and unsecured loans as on 31.03.2004 was to the extent of Rs.22.92 crore as against Rs.2.79 crore as on 31.03.2004 meaning thereby that there was an increase of Rs.20.13 crore in interest free funds. Thus it is seen that the interest free funds as on the date of Balance Sheet were far in excess of investments as on 31[st] March, 2004. In the case of Reliance Utilities (Supra) the Hon. Bombay H.C. has held as under:- “Held that if there were 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 funds generated or available with the company, if the interest-free funds were sufficient to meet the investments”. O/TAXAP/1058/2013 JUDGMENT Considering the facts of the case and seen in the light of the decision of Hon. Bombay H.C. (supra) and respectfully following it, we are of the view that in the present case a presumption can be made that investment are out of interest free funds and, therefore, the Assessing Officer was not justified in making addition. We, therefore, direct the deletion of addition, made by A.O. Thus this ground Assessee is allowed.” O/TAXAP/1058/2013 JUDGMENT Considering the facts of the case and seen in the light of the decision of Hon. Bombay H.C. (supra) and respectfully following it, we are of the view that in the present case a presumption can be made that investment are out of interest free funds and, therefore, the Assessing Officer was not justified in making addition. We, therefore, direct the deletion of addition, made by A.O. Thus this ground Assessee is allowed.” [3.2] Similar observations are made by the learned ITAT with respect to the assessment years 2005-06 and 2006-07. In the case of Reliance Utilities and Power Ltd. (Supra), the Bombay High Court has held 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 funds generated or available with the company, if the interest-free funds were sufficient to meet the investments and therefore, interest was deductible. Similar view has been taken by the Division Bench of this Court in the case of Commissioner of Income-Tax vs. Gujarat State Fertilizers and Chemicals Ltd. reported in [2013] 358 ITR 323 [Guj]. Applying the ratio/law laid down by the Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra) as well as Division Bench of this Court in the case of Gujarat State Fertilizers and Chemicals Ltd. (Supra) to the facts of the case on hand and when it has been found that the assessee was having interest-free funds far in excess of investments and therefore, it can be said that the investments are made out of interest-free funds and therefore, the AO was not justified in making additions and/or making disallowance under section 36(1)(iii) of the IT Act. Under the circumstances, no error and/or illegality has been committed by the learned ITAT in deleting the disallowance made by the AO under section 36(1)(iii) of the IT Act. No question of law much less substantial question of law arise with respect to deletion of the disallowance made by the AO under section 36(1)(iii) of the IT Act. [4.0] Now, so far as the additional question raised in Tax Appeal No.1060/2013 i.e. whether the ITAT was right in law in deleting the disallowance of Rs.13,89,062/- made u/s.14A of the Act towards interest and other expenses incurred in relation to exempted income is concerned, it is required to be noted that as such learned CIT(A), after considering the factual position that the assessee had shown exempted income of Rs.50,59,675/- comprising of long term capital gain of Rs.13,50,412/- and dividend of Rs.37,09,263/- and placing reliance on the decision of the Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra), restricted the addition made by the AO, by holding as under: [4.0] Now, so far as the additional question raised in Tax Appeal No.1060/2013 i.e. whether the ITAT was right in law in deleting the disallowance of Rs.13,89,062/- made u/s.14A of the Act towards interest and other expenses incurred in relation to exempted income is concerned, it is required to be noted that as such learned CIT(A), after considering the factual position that the assessee had shown exempted income of Rs.50,59,675/- comprising of long term capital gain of Rs.13,50,412/- and dividend of Rs.37,09,263/- and placing reliance on the decision of the Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra), restricted the addition made by the AO, by holding as under: “5.3.I have carefully considered the facts of the case, the submissions of the appellant and the assessment order. From perusal of the bank account and the balance sheet it is noticed that major investments in mutual funds was in the A.Y. 04-05 when the net investment was Rs.2.27 crores against the receipt of interest free unsecured loans of Rs.11.1 Crores. During A.Y. 05-06 the investment as on 31-03-05 was Rs.2.01 crores and there was profit of Rs.85 lakhs from the business and repayment of interest free unsecured loans of Rs.4.7 crores. Further in the current year, there was profit of Rs.11.82 crores and increase in interest free unsecured loan of Rs.1.2 crores and the investment in mutual fund is at Rs.2.33 crores as on 31-03-06. Furthermore all the mutual fund transactions were carried out through Citi Bank account and there are redemption and dividend receipts and investments during the year. No interest chargers are debited in the bank account except for security transaction tax of Rs.64,909/-. In view of the above and decision on the case of CIT vs. Reliance Utilities & Power Ltd. (Ref.2009) 178 Taxman 135 (Bom.), the disallowance is restricted to Rs.64,909/- which is direct expenditure in relation to interest free income, Ground No.2 is partly allowed” [4.1] The aforesaid has been confirmed by the learned ITAT. Considering the aforesaid facts and circumstances and considering the fact that the assessee was having sufficient profit and interest free funds in comparison to the investments and with respect to mutual fund transactions, no interest has been charged by the bank except security O/TAXAP/1058/2013 JUDGMENT transaction tax of Rs.64,909/- and considering the above when the deductions under section 14A of the IT Act was restricted to Rs.64,909/-, it cannot be said that both learned CIT(A) and learned ITAT have committed any error. We are in complete agreement with the view taken by the learned CIT(A) as well as the learned ITAT. No question of law much less substantial question of law arises. [5.0] In view of the above, all the aforesaid questions are held against the revenue and consequently, all these tax appeals are dismissed. Sd/- (M.R. SHAH, J.) Sd/- (R.P. DHOLARIA, J.) Ajay