Avanti Feeds Ltd.,, Hyderabad v. Addl.CIT, Range-1, Hyderabad

ITA 1295/HYD/2011 | 2006-2007
Pronouncement Date: 23-10-2013 | Result: Partly Allowed

Appeal Details

RSA Number 129522514 RSA 2011
Assessee PAN AABCA7365E
Bench Hyderabad
Appeal Number ITA 1295/HYD/2011
Duration Of Justice 2 year(s) 3 month(s) 16 day(s)
Appellant Avanti Feeds Ltd.,, Hyderabad
Respondent Addl.CIT, Range-1, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 23-10-2013
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 23-10-2013
Date Of Final Hearing 14-06-2012
Next Hearing Date 14-06-2012
Assessment Year 2006-2007
Appeal Filed On 07-07-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY JUDICIAL MEMBER ITA NO. 1295/HYD/2011 ASSESSMENT YEAR : 2006-07 AVANTI FEEDS LTD. HYDERABAD. PAN: AABCA7365E VS. ADDL. COMMISSIONER OF INCOME- TAX RANGE 1 HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI M.V.R. PRASAD REVENUE BY : SHRI M.H. NAIK DATE OF HEARING : 14-10-2013 DATE OF PRONOUNCEMENT : 23-10-2013 O R D E R PER B. RAMAKOTAIAH A.M.: THIS IS AN APPEAL BY ASSESSEE DIRECTED AGAINST THE ORDER OF CIT(A)-II HYDERABAD DATED 31-03-2011 ON THE ISSU E OF DISALLOWANCE U/S 14A OF THE IT ACT MADE BY THE AO OF RS. 20 98 485/- WHICH WAS CONFIRMED BY THE LD.CIT(A). 2. BRIEFLY STATED ASSESSEE COMPANY FILED ITS RETUR N OF INCOME FOR AY 2006-07 ON 29-11-2006 SHOWING TOTAL LOSS OF RS. 4 15 32 037/- AND FILED REVISED COMPUTATION REDUCING LOSS TO RS. 4 10 85 255/-. THE AO NOTICED THAT ASSESSEE HAD INVESTED DURING THE FY AN AMOUNT OF RS. 32.62 CRORES IN MUTUAL FUNDS AND ASSESSEE HAD PAID INTEREST OF RS. 2 70 89 678/-. HE THEREFORE ASKED ASSESSEE AS TO WHY INTEREST SHOULD NOT BE DISALLOWED AT 7% ON AN AVERAGE AS EXP ENDITURE INCURRED FOR THE PURPOSE OF EARNING EXEMPT INCOME U /S 14A OF THE IT 2 ITA NO. 1295/HYD/2011 AVANTI FEEDS LTD. ACT. ASSESSEE SUBMITTED THAT ITS INVESTMENT IN MUTU AL FUNDS WAS OUT OF ITS OWN FUNDS AND ITS RESERVES ARE MORE THAN THE INVESTED FUNDS AND FURTHER IT RECEIVED A DIVIDEND WHICH IS OFFERED AS NON-TAXABLE INCOME U/S 10(35) OF THE IT ACT AND ALSO OFFERED CA PITAL GAIN ON SALE OF MUTUAL FUNDS BY WAY OF REVISED COMPUTATION. IT W AS THEREFORE SUBMITTED THAT NO DISALLOWANCE U/S 14A IS WARRANTED . THE AO HOWEVER REJECTED THE SUBMISSIONS OF THE ASSESSEE A ND MADE DISALLOWANCE AT RS. 20 98 485/-. 3. BEFORE THE LEARNED CIT(A) IT WAS SUBMITTED THAT ASSESSEE INVESTED IN SHARES IN ITS SISTER CONCERNS AS A PART OF BUSINESS ACTIVITY IN EARLIER YEARS AND THOSE ARE OUT OF OWN FUNDS AND NO BORROWED FUNDS WERE INVOLVED. FURTHER IT WAS SUBMITTED THAT INVESTMENT IN MUTUAL FUNDS WERE ALSO MADE OUT OF ASSESSEES OWN F UNDS WHICH WAS ALSO REDEEMED DURING THE YEAR AND THEREFORE NO DI SALLOWANCE WAS WARRANTED U/S 14A OF THE IT ACT. IT WAS FURTHER SUB MITTED THAT INTEREST PAID HAS NO RELATION TO THE INVESTMENTS MADE AND AC CORDINGLY INTEREST CANNOT BE DISALLOWED U/S 14A. THE LEARNED CIT(A) H OWEVER DID NOT AGREE WITH THE ASSESSEES CONTENTIONS ON THE REASON THAT ASSESSEE DID NOT ESTABLISH THE NEXUS BETWEEN THE INTEREST FR EE FUNDS AND THE INVESTMENT MADE IN MUTUAL FUNDS AND THEREFORE CONF IRMED THE DISALLOWANCE SO MADE BY THE AO U/S 14A. 4. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE FILED AN ADDITIONAL GROUND WHICH IS AS FOLLOWS: THE LD. CIT(A) OUGHT TO HAVE REALIZED THAT THE INVE STMENTS IN QUESTION MADE BY THE APPELLANT CO. ARE IN SHARES OF UNQUOTED COMPANIES AND IN UNITS OF MUTUAL FUNDS WHICH ARE NO T EQUITY ORIENTED FUNDS AND AS SUCH THEY CANNOT BE REGARDE D AS INVESTMENTS WHICH YIELD EXEMPTED INCOME SO AS TO AT TRACT THE DISALLOWANCE OF THE RELATABLE INTEREST U/S 14A. 5. IT WAS SUBMITTED THAT THIS IS A LEGAL ISSUE WHI CH DOES NOT REQUIRE ANY VERIFICATION AND ACCORDINGLY THIS LE GAL ISSUE MAY BE 3 ITA NO. 1295/HYD/2011 AVANTI FEEDS LTD. PERMITTED TO BE RAISED. THIS ADDITIONAL GROUND IS I N ADDITION TO THE GROUNDS RAISED BY ASSESSEE ON THE ISSUE OF DISALLOW ANCE U/S 14A. 6. CONTINUING THE ARGUMENTS THE LEARNED COUNSEL FO R ASSESSEE FIRST CLARIFIED THAT THE AMOUNT OF DIVIDEND CONSIDE RED BY THE AO AND THE CIT(A) AT RS. 1 36 84 106/- IS NOT CORRECT AS A SSESSEE EARNED ONLY RS. 13 94 065/- AS DIVIDEND WHICH IS CLAIMED A S EXEMPT. HE REFERRED TO THE COMPUTATION OF INCOME COPY OF RET URN AND COPY OF REVISED COMPUTATION PLACED IN THE PAPER BOOK AT PA GE 105 TO SUBMIT THAT WHAT WAS CLAIMED AS EXEMPT U/S 10(35) WAS ONLY RS. 13 94 065/-. WITH REFERENCE TO THE DISALLOWANCE OF INTEREST HE NOT ONLY REFERRED TO THE SCHEDULE 14 OF BALANCE SHEET -INTEREST PAYMEN T BUT ALSO TO THE SCHEDULE OF INVESTMENTS MADE AND OWN FUNDS TO SUBMI T THAT ASSESSEES OWN FUNDS ARE MORE THAN THE INVESTMENTS AND ACCORDINGLY THE SAME CANNOT BE DISALLOWED U/S 14A. IT WAS FURT HER SUBMITTED THAT ASSESSEE HAD OFFERED CAPITAL GAIN OUT OF THE MUTUAL FUND INVESTMENTS AND WHEN THE INVESTMENTS HAVE POTENTIAL TO GENERATE TAXABLE INCOME IN THE FORM OF CAPITAL GAINS/OTHER SOURCES THE SAM E CANNOT BE SUBJECTED TO DISALLOWANCE U/S 14A. IT WAS SUBMITTED THAT ASSESSEES INVESTMENTS IN OTHER GROUP COMPANIES IF SOLD WOULD EARN CAPITAL GAINS AND THEREFORE THESE INVESTMENTS HAVE POTENTIAL T O GENERATE TAXABLE INCOME. HE FURTHER SUBMITTED THAT WHAT ASSESSEE HAS INVESTED IS ONLY DEBT FUNDS WHICH HAVE BEEN SUBJECTED TO TAX U/S 11 5-R AND ACCORDINGLY IT CAN NOT BE CONSIDERED AS NON-TAXABL E. HE RELIED ON THE DECISION OF THE COORDINATE BENCH OF ITAT MUMBAI IN CASE OF AVSHESH MERCANTILE (P.) LTD [2012] 26 TAXMANN.COM 43 (MUM.) DATED 13-06- 2012 TO SUBMIT THAT WHERE INVESTMENTS HAVE POTENTIA L OF GENERATING TAXABLE INCOME IN THE FORM OF SHORT-TERM CAPITAL GA INS ETC. PROVISIONS OF SECTION 14A DO NOT APPLY. THIS ARGUMENT IS ALSO IN SUPPORT OF ADDITIONAL GROUND RAISED. HE ALSO SUBMITTED THAT WH EN CAPITAL GAINS WERE OFFERED ON THE SALE OF MUTUAL FUNDS PROVISION S OF SECTION 14A ARE NOT APPLICABLE AND FOR THIS PROPOSITION HE REL IED ON THE DECISION OF ITAT PUNE IN CASE OF S. BALAN ALIAS SHANMUGAM V S. DCIT [2009] 4 ITA NO. 1295/HYD/2011 AVANTI FEEDS LTD. 120 ITD 469 (PUNE). WITH REFERENCE TO THE ARGUMENT THAT INVESTMENTS MADE IN EARLIER YEARS ARE OUT OF OWN FUNDS AND NO B ORROWED FUNDS WERE UTILIZED HE RELIED ON THE ORDER OF CIT(A)-II HYDERABAD DATED 07- 03-2008 FOR AY 2005-06 WHEREIN DISALLOWANCE MADE U/ S 14A WAS DELETED ENTIRELY BY THE LEARNED CIT(A). 7. THE LEARNED DR HOWEVER SUBMITTED THAT THE FACT THAT DIVIDEND INCOME WAS WRONGLY TAKEN WAS NOT AGITATED BEFORE TH E AUTHORITIES AND FURTHER THE ARGUMENT RAISED IN ADDITIONAL GROUND W AS ALSO NOT BEFORE THE AUTHORITIES. HE SUBMITTED THAT THESE ISSUES CA N BE REMITTED TO THE FILE OF THE CIT(A) OR THE AO FOR FRESH EXAMINATION. 8. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE FA CTS PLACED ON RECORD. WE ARE OF THE OPINION THAT WITHOUT GOING INTO THE LEGAL GROUND RAISED BY THE LEARNED COUNSEL AND THE ARGUME NTS OF THE LEARNED DR THAT THESE ISSUES WERE NOT AGITATED BEFO RE THE AUTHORITIES WE CAN ADJUDICATE THESE ISSUES ON THE BASIS OF THE FACTS AVAILABLE ON RECORD. 9. AS SEEN FROM THE PAPER BOOK AND PARTICULARLY THE COMPUTATION PLACED ON RECORD IT IS A FACT THAT ASSESSEE EARNED ONLY THE DIVIDEND INCOME OF RS. 13 94 065/-. FROM WHERE THE AO CONSID ERED THE DIVIDEND INCOME AT RS. 1 36 84 106/- IS NOT DISCERN IBLE FROM THE DOCUMENTS ON RECORD. FURTHER AS SEEN FROM THE BALA NCE SHEET PLACED ON RECORD THE INVESTMENTS AS SHOWN IN THE BALANCE SHEET WAS RS. 15.73 CRORES AS ON 31-03-2005 WHICH HAS COME DOWN TO RS. 8.82 CRORES AS ON 31-03-2006. IN FACT THERE IS A REDUCTI ON IN INVESTMENTS DURING THE YEAR. ASSESSEES SHARE CAPITAL AND RESER VES AND SURPLUS ARE AT RS. 6.54 CRORES AND 65.61 CRORES RESPECTIVEL Y AS AT 31-03- 2006. IT IS SEEN THAT RESERVES AND SURPLUS INCREASE D FROM 55.39 CRORES AS ON 31-03-2005 TO RS. 65.61 CRORES AS ON 3 1-03-2006. THUS ASSESSEES CONTENTION THAT IT HAD MORE OF ITS OWN F UNDS THAN THE INVESTMENTS MADE HAD VALIDITY. AS SEEN FROM THE SCH EDULE 3 OF 5 ITA NO. 1295/HYD/2011 AVANTI FEEDS LTD. SECURED LOANS THE ASSESSEE HAD OBTAINED TERM LOANS TO THE TUNE OF RS. 30.19 CRORES DURING THE YEAR WHICH WERE BASICA LLY SANCTIONED FOR PURCHASE OF ASSETS. ASSESSEE ALSO EXPLAINED TO THE CIT(A) DETAILS OF INTEREST PAID VIDE LETTER DATED 16-12-2008 PLACED I N PAPER BOOK AT PAGES 148 & 149. AS SEEN FROM THESE DETAILS WE FIN D THAT NONE OF THESE AMOUNTS PAID AS INTEREST ARE NOWHERE RELATED TO THE INVESTMENTS MADE BY ASSESSEE IN MUTUAL FUNDS DURING THE YEAR. AS FAR AS THE INVESTMENT IN OTHER GROUP CONCERNS ARE C ONCERNED THESE HAVE BEEN COMING FROM EARLIER YEARS AND THE CIT(A) VIDE HIS ORDER FOR AY 2005-06 HAD GIVEN A CLEAR FINDING THAT NO INVEST MENT HAS BEEN MADE OUT OF LOAN FUNDS ON WHICH INTEREST WAS BEING PAID. HE FURTHER HELD THAT DISALLOWANCE MADE BY THE AO IN AY 2005-06 WAS PURELY ON ESTIMATE BASIS. SIMILAR ISSUE WAS ALSO DECIDED IN A SSESSEES OWN CASE FOR AY 2002-03 BY THE CIT(A). IN VIEW OF THIS TO THE EXTENT OF INVESTMENT MADE BY THE ASSESSEE IN GROUP COMPANIES THERE IS A FINDING THAT ASSESSEE HAS NOT BORROWED OR UTILIZED ANY BORROWED FUNDS FOR MAKING INVESTMENT. HENCE THE SAME CANNOT BE CONSIDERED FOR DISALLOWANCE U/S 14A. 10. COMING TO THE ISSUE OF MUTUAL FUNDS IT WAS THE ARGUMENT BEFORE THE AO AND THE CIT(A) THAT THE ASSESSEES BO RROWED FUNDS WERE NOT UTILIZED IN INVESTING IN MUTUAL FUNDS. WE FIND THAT THIS ASPECT WAS NOT EXAMINED BY THE AO AND THE CIT(A) BUT THE F ACT THAT NO DISALLOWANCE WAS MADE U/S 36(1)(III) INDICATES THAT THE AO WAS SATISFIED THAT THE BORROWED FUNDS WERE NOT UTILIZ ED FOR NON-BUSINESS PURPOSES. 11. INVOKING OF PROVISIONS OF RULE-8D I.E. DISALLOW ANCE OF INTEREST WHICH WAS NOT DIRECTLY CONNECTED TO THE BUSINESS CA NNOT BE MADE IN AY 2006-07. IF ASSESSEE HAD INVESTMENTS OUT OF BORR OWED FUNDS AND SO MUCH OF THE INTEREST WAS NOT CONNECTED WITH THE BUSINESS ACTIVITY THE SAME COULD HAVE BEEN DISALLOWED BY THE AO U/S 3 6(1)(III) WITHOUT RESORTING TO SECTION 14A. AS SEEN FROM THE REVISED COMPUTATION 6 ITA NO. 1295/HYD/2011 AVANTI FEEDS LTD. ASSESSEE ALSO OFFERED GAINS ON MUTUAL FUNDS SO IN VESTMENTS PER-SE IN MUTUAL FUNDS CANNOT BE CONSIDERED AS EXEMPT FROM TAX. THEREFORE ON FACTS WE DO NOT SEE ANY REASON TO UPHOLD THE OR DERS OF THE CIT(A) AND AO. 12. HOWEVER IF THE ASSESSEE IS EARNING DIVIDEND IN COME TO THE EXTENT OF RS. 13 94 065/- IT CANNOT BE SAID THAT T HE THIS DIVIDEND INCOME WAS EARNED WITHOUT INCURRING ANY EXPENDITURE . IN THE ABSENCE OF ANY DETAILS BEING ENQUIRED BY THE AO OR BEING PL ACED BY ASSESSEE WE CAN ONLY ESTIMATE A REASONABLE EXPENDITURE FOR D ISALLOWANCE U/S 14A FOR THE IMPUGNED ASSESSMENT YEAR AND THEREFORE WE HOLD THAT 2% OF THE DIVIDEND INCOME CAN BE CONSIDERED AS REAS ONABLE EXPENDITURE FOR EARNING THE SAID INCOME. ACCORDINGL Y BY MODIFYING THE ORDERS OF THE AO AND THE CIT(A) WE DIRECT THE AO TO DISALLOW 2% OF THE DIVIDEND INCOME CLAIMED AS EXEMPT I.E. 2 % O N RS. 13 94 065/- FOR DISALLOWANCE U/S 14A OF THE IT ACT. TO THAT EXT ENT GROUNDS RAISED BY ASSESSEE ARE CONSIDERED AS PARTLY ALLOWED. 13. EVEN THOUGH THE LEARNED COUNSEL RAISED ADDITION AL GROUND IN THE COURSE OF ARGUMENTS THERE IS NO NECESSITY TO ADJUD ICATE THIS GROUND ON LEGAL PRINCIPLES ALONE AS WE HAVE DISCUSSED THE ISSUE ON FACTS. IT IS ALSO NOT ON RECORD THAT MUTUAL FUNDS INVESTED BY THE ASSESSEE ARE PURELY DEBT FUNDS AS CONTESTED BY THE ASSESSEE IN T HE ADDITIONAL GROUND RAISED. BE THAT AS IT MAY WE ARE OF THE OPI NION THAT NO SPECIFIC ADJUDICATION IS REQUIRED ON THE ADDITIONAL GROUND WHEN ASSESSEES MAIN GROUNDS ARE CONSIDERED AND ADJUDICA TED ON THE BASIS OF FACTS. WITHOUT GOING INTO THE LEGALITY OF THE ADDITIONAL GROUND WE ARE OF THE OPINION THAT DISALLOWANCE MADE BY THE AO IS NOT CORRECT ON THE FACTS OF THE CASE. ACCORDINGLY WE MODIFY TH E ORDERS OF THE REVENUE AUTHORITIES AS STATED ABOVE. THE ADDITIONAL GROUND IS REJECTED AS ACADEMIC IN NATURE. 7 ITA NO. 1295/HYD/2011 AVANTI FEEDS LTD. 14. IN THE RESULT APPEAL OF ASSESSEE IS PARTLY ALL OWED. PRONOUNCED IN THE OPEN COURT ON 23 RD DAY OF OCTOBER 2013. SD/- SD/- (SAKTIJIT DEY) (B. R AMAKOTAIAH) JUDICIAL MEMBER ACCOUNT ANT MEMBER HYDERABAD DATED: 23 RD OCTOBER 2013. KV COPY TO:- 1) AVANTI FEEDS LTD. G-2 CONDORDE APARTMENTS 6-3 -656 SOMAJIGUDA HYDERABAD 500 082 2) ADDL. COMMISSIONER OF INCOME-TAX RANGE 1 HYD ERABAD. 3) CIT(A)-II HYDERABAD. 4) CIT-I HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE I.T.A .T. HYDERABAD.