M/s. Aquagel Chemicals Pvt.Ltd.,, Bhavnagar v. ACIT., Circle-1,, Bhavnagar

ITA 2207/AHD/2009 | 2006-2007
Pronouncement Date: 29-03-2011 | Result: Allowed

Appeal Details

RSA Number 220720514 RSA 2009
Assessee PAN AABCA8064G
Bench Ahmedabad
Appeal Number ITA 2207/AHD/2009
Duration Of Justice 1 year(s) 8 month(s) 15 day(s)
Appellant M/s. Aquagel Chemicals Pvt.Ltd.,, Bhavnagar
Respondent ACIT., Circle-1,, Bhavnagar
Appeal Type Income Tax Appeal
Pronouncement Date 29-03-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 29-03-2011
Date Of Final Hearing 22-03-2011
Next Hearing Date 22-03-2011
Assessment Year 2006-2007
Appeal Filed On 14-07-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI JM AND D. C. AGRAWAL AM) ITA NO.2207/AHD/2009 A. Y.: 2006-07 M/S. AQUAGEL CHEMICALS PVT. LTD. 40 GIDC CHITRA BHAVNAGAR VS THE A. C. I. T. BHAVNAGAR RANGE-1 BHAVNAGAR PA NO. AABCA 8064 G (APPELLANT) (RESPONDENT) APPELLANT BY SHRI TUSHAR P. HEMANI AR RESPONDENT BY SHRI S. K. JHA SR. DR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-XX AHMEDABAD DATED 18-03-2009 FOR ASSESSMENT YEAR 2006-07 ON THE FOLLOWING GROUNDS: 1. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF LD. AO IN RETROSPECTIVELY INVOKING THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES WHICH CAME INTO THE STATUTE BOOK WITH EFFECT FROM 24/03/2008 PROSPECTIVELY. 2. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF LD. AO IN MAKING ADDITION OF RS.1 63 847/- U/S 14A OF THE ACT AS MUC H AS THE CIT(A) HAS ALSO ERRED IN LAW AND ON FACTS IN APPLYING RULE 8D OF THE INCOME TAX RULES. ITA NO.2207/AHD/2009 M/S. AQUAGEL CHEMICALS PVT. LTD. VS ACIT BHAVNAGAR RANGE-1 2 3. BOTH THE LOWER AUTHORITIES HAVE ERRED IN LAW AND ON FACTS IN PASSING THE ORDERS WITHOUT PROPERLY APPRECIATING THE FACTS AND THAT HE FURTHER ERRED IN GROSSLY IGNORING VARIOUS SUBMISSIONS EXPLANATIONS AND INFORMATION SUBMITTED BY THE APPELLANT FROM TIME TO TIME WHICH OUGHT TO HAVE BEEN CONSIDERED BEFORE PASSING THE IMPUGNED ORDER. THIS ACTION OF BOTH THE AUTHORITIES IS IN CLEAR BREACH OF LAW AND PRINCIPLES OF NATURAL JUSTICE AND THEREFORE DESERVE S TO BE QUASHED. 4. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS OF THE CASE IN CONFIRMING THE ACTION OF LD. A O IN LEVYING INTEREST U/S 234B/C/D OF THE ACT. 5. THE LEARNED CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS OF THE CASE IN INITIATING PENALTY PROCEEDINGS U/S 271 (1) ( C) OF THE ACT. 2. THE ASSESSEE FILED RETURN OF INCOME AT RS. 6 60 50 459/-.THE AO ISSUED NOTICE AS TO WHY THE EXPENSES ON DIVIDEND RECEIVED (EXEMPT INCOME) SHOULD NOT BE DISALLOWED U/S 14A OF THE IT ACT. THE ASSESSEE SUBMITTED THAT IT HAS RECEIVED DIVIDEND IN COME OF RS.7 80 380/- DURING THE YEAR UNDER APPEAL BY MAKIN G INVESTMENT OF SURPLUS IN HDFC FLOATING RATE FUND INCOME FUND. T HE DIVIDEND RECEIVED DURING THE YEAR WAS TAX-FREE INCOME. IT WA S SUBMITTED THAT INVESTMENT WAS MADE OUT OF SURPLUS FUNDS REMAINED I N THE CURRENT ACCOUNT OF HDFC BANK. COPY OF THE BANK ACCOUNT WAS FILED FOR VERIFICATION TO SHOW THAT THERE IS DEBIT BALANCE AS PER BOOKS OF ACCOUNTS I.E. CREDIT BALANCE AS PER THE BANK STATEM ENT THROUGHOUT THE YEAR UNDER CONSIDERATION. THIS BANK STATEMENT ITSEL F INDICATED THAT THERE IS SHORT TERM SURPLUS FUNDS REMAINED IN THE C URRENT ACCOUNT OF THE ASSESSEE COMPANY. THE BANK HAS PAID NO INTEREST ON THE CREDIT ITA NO.2207/AHD/2009 M/S. AQUAGEL CHEMICALS PVT. LTD. VS ACIT BHAVNAGAR RANGE-1 3 BALANCE. THEREFORE SHORT TERM SURPLUS FUNDS WERE I NVESTED IN THE SAME BANK UNDER SHORT TERM FLOAT RATE FUND IN ORD ER TO EARN DIVIDEND INCOME. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE COMPANY HAS NOT BORROWED ANY MONEY FROM THE SAID BANK FOR MAKING IN VESTMENT. IT IS CLEAR FROM THE AUDITED STATEMENT OF ACCOUNTS THAT S HORT TERM BORROWINGS WERE MADE FOR BHAVNAGAR UNIT ONLY AND IN THE YEAR UNDER CONSIDERATION BORROWED SHORT TERM FUND OF CASH CRE DIT FROM BANK WAS RS.1 95 724/- WHEREAS INVESTMENT REMAINED OUTST ANDING AS ON 31-3-2006 IN THE HDFC FLOATING RATE FUND AT RS.34 5 7 515/-. THERE WAS FURTHER CASH CREDITS OF RS.19 02 456/- TAKEN AT THE END OF YEAR. IT WAS THEREFORE SUBMITTED THAT NO BORROWED FUNDS HA VE BEEN USED FOR THE PURPOSE OF MAKING INVESTMENT FOR EARNING EXEMPT INCOME. IT WAS ALSO CLEAR THAT NEXUS OF FUNDS INVESTED IS DIRECTLY FROM THE CURRENT ACCOUNT OF HDFC BANK AND NO BORROWED FUNDS WERE USE D FOR MAKING INVESTMENT. SOME CASE LAWS WERE RELIED UPON IN SUPP ORT OF THE CONTENTIONS. THEREFORE DISALLOWANCE OF INTEREST WA S UNJUSTIFIED. THE AO HOWEVER NOTED THAT THERE IS A MIX-UP OF OWN FUN DS AND BORROWED FUNDS INVESTED IN THESE ASSETS INCOME OF WHICH IS EXEMPT. THE AO ALSO NOTED THAT RULE 8D OF THE IT RULES IS APPLICAB LE TO THE ASSESSMENT YEAR UNDER APPEAL IN VIEW OF SPECIAL BEN CH DECISION IN THE CASE OF DAGA CAPITAL. THE AO ALSO NOTED THAT TH US IT IS CLEAR THAT THE QUESTION AS TO WHETHER THE ONUS IS ON THE ASSES SEE OR ON THE AO FOR BRINGING ALL ITEMS OF EXPENDITURE WITHIN SECTIO N 14A OF THE IT ACT IS ALSO IRRELEVANT IN VIEW OF RULE 8 D OF THE IT RULES . THE AO ACCORDINGLY CALCULATED THE INTEREST WITH THE AID OF RULE 8 D OF THE IT RULES AND MADE ADDITION OF RS.1 63 847/-. THE ADDIT ION WAS CHALLENGED BEFORE THE LEARNED CIT(A) AND SAME SUBMI SSIONS WERE ITA NO.2207/AHD/2009 M/S. AQUAGEL CHEMICALS PVT. LTD. VS ACIT BHAVNAGAR RANGE-1 4 REITERATED BY THE ASSESSEE BEFORE HIM. THE LEARNED CIT(A) ALSO CONFIRMED THE ADDITION AND DISMISSED THE APPEAL OF THE ASSESSEE. 3. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S UBMITTED THAT NO BORROWED FUNDS WERE USED FOR EARNING EXEMPT INCOME. EVEN THE PROFIT OF THE ASSESSEE IS AVAILABLE FOR MAKING INVE STMENT. ACCORDING TO RECENT DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS DCIT AND ANOTHER 328 ITR 81 RULE 8D OF THE IT RULE WOULD APPLY FROM THE ASSESSMENT YEAR 2008-09 AND AS SUCH THE SAME RULE WOULD NOT APPLY T O THE ASSESSMENT YEAR UNDER APPEAL. THE LEARNED COUNSEL F OR THE ASSESSEE EMPHASIZED THAT SINCE INVESTMENT IS NOT MA DE OUT OF BORROWED FUNDS THEREFORE ADDITION BE DELETED. HE HAS RELIED UPON THE ORDER OF ITAT AHMEDABAD BENCH IN THE CASE OF TH E SAME ASSESSEE IN THE PRECEDING ASSESSMENT YEAR 2005-06 I N ITA NO.3533/AHD/2008 AND C. O. NO.288/AHD/2008 DATED 09 -09-2010. 4. ON THE OTHER HAND THE LEARNED DR SUBMITTED THAT THE ISSUE IS NOW FINALLY DECIDED BY THE HONBLE BOMBAY HIGH COUR T IN THE CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS DCIT AND ANOTHER 328 ITR 81 IN WHICH THE HONBLE BOMBAY HIGH COURT HELD THAT SECTION 14A IS APPLICABLE TO DIVIDEND INCOME AND INCOME FRO M MUTUAL FUNDS EXEMPT U/S 10(33) OF THE ACT. HE FURTHER SUBMITTED THAT THE HONBLE HIGH COURT HAS ALSO HELD THAT RULE 8D OF TH E IT RULES IS NOT RETROSPECTIVE AND IS APPLICABLE FROM THE ASSESSMENT YEAR 2008-09 AND THE DISALLOWANCE FOR EARLIER PERIOD TO BE DETER MINED ON ITA NO.2207/AHD/2009 M/S. AQUAGEL CHEMICALS PVT. LTD. VS ACIT BHAVNAGAR RANGE-1 5 REASONABLE BASIS. HE HAS THEREFORE SUBMITTED THAT THE MATTER MAY BE REMANDED TO THE FILE OF THE AO FOR RE-CONSIDERAT ION IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT (SUPRA) I N WHICH IT WAS HELD AS UNDER: HELD THAT THE PROVISIONS OF RULE 8D OF THE RULES WHICH HAVE BEEN NOTIFIED WITH EFFECT FROM MARCH 24 2008 WOULD APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09. EVEN PRIOR TO ASSESSMENT YEAR 2008-09 WHEN RULE 8D WAS NOT APPLICABLE THE ASSESSING OFFICER HAD TO ENFORCE THE PROVISIONS OF SUB-SECTION (1) OF SECTION 14A. F OR THAT PURPOSE THE ASSESSING OFFICER IS DUTY BOUND TO DETERMINE THE EXPENDITURE WHICH HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. THE ASSESSING OFFICER MUST ADOPT A REASONABLE BASIS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHING A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON RECORD. THE PROCEEDINGS FOR ASSESSMENT YEAR 2002-03 WOULD STAND REMANDED TO THE ASSESSING OFFICER. THE ASSESSING OFFICER SHOULD DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITURE (DIRECT OR INDIRECT) IN RELATION TO DIVIDED INCOME/INCOME FROM MUTUAL FUNDS WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS CONTEMPLATED UNDER SECTION 14A. THE ASSESSING OFFICER CAN ADOPT A REASONABLE BASIS FOR EFFECTING THE APPORTIONMENT. WHILE MAKING THAT DETERMINATION THE ASSESSING OFFICER SHOULD PROVIDE A REASONABLE OPPORTUNITY TO THE ASSESSEE OF PRODUCING ITS ACCOUNTS AND RELEVANT OR GERMANE MATERIAL HAVING A BEARING ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 5. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT O F THE ABOVE DECISION WE ARE OF THE VIEW THE MATTER REQUIRES RE CONSIDERATION AT THE LEVEL OF THE AO. THE ASSESSEE HAS SPECIFICALLY PLEA DED BEFORE THE AO THAT IT HAS RECEIVED DIVIDEND INCOME OF RS.7 80 380 /- IN THE ITA NO.2207/AHD/2009 M/S. AQUAGEL CHEMICALS PVT. LTD. VS ACIT BHAVNAGAR RANGE-1 6 ASSESSMENT YEAR UNDER APPEAL BY MAKING INVESTMENT O F SURPLUS FUNDS IN HDFC FLOATING RATE FUND. IT WAS PLEADED THAT SURPLUS FUNDS WERE AVAILABLE FOR INVESTMENT IN THE CURRENT ACCOUN T OF HDFC BANK. COPY OF THE BANK ACCOUNT WAS ALSO FILED TO SHOW THA T SUFFICIENT FUNDS WERE AVAILABLE DURING THE ENTIRE YEAR. IT WAS ALSO INDICATED THAT NO INTEREST WAS PAID TO HDFC BANK FOR MAKING THE INVES TMENT THROUGH SURPLUS FUNDS. THE SUMMARY OF SHORT TERM BORROWING FOR BHAVNAGAR UNIT WAS EXPLAINED TO SHOW THAT BORROWED SHORT TERM FUNDS OF CASH CREDITS FROM THE BANK DURING THE ASSESSMENT YEAR WA S ONLY RS.1 95 724/- AS AGAINST INVESTMENT IN EXEMPT INCOM E IN A SUM OF RS.34 57 516/-. APART FROM THAT THE ASSESSEE HAS C ASH CREDITS. THE AO REPRODUCED THE ENTIRE SUBMISSIONS OF THE ASSESSE E BUT MERELY SWAYED BY THE FACT THAT RULE 8 D OF THE IT RULES IS APPLICABLE TO TAKE CARE OF SUCH SITUATION. THE AO DID NOT MAKE ANY EFF ORTS TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDI TURE DIRECTLY OR INDIRECTLY IN RELATION TO DIVIDEND INCOME WHICH DOE S NOT FALL PART OF THE TOTAL INCOME AS CONTEMPLATED U/S 14A OF THE IT ACT. THE AO DID NOT CONSIDER THE FACT THAT THE ASSESSEE WAS HAVING SUFF ICIENT SURPLUS FUNDS FOR MAKING INVESTMENT FOR EARNING EXEMPT INCO ME. THE AO ALSO FAILED TO TAKE NOTE OF THE FACT THAT FOR BHAVNAGAR UNIT SHORT TERM BORROWING WAS OBTAINED WHICH HAVE NO CONNECTION WIT H THE INVESTMENT MADE IN HDFC FLOATING RATE FUND. ACCORDI NG TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS DCIT AND ANOTHER (S UPRA) RULE 8 D OF THE IT RULES WOULD BE APPLICABLE FROM THE ASSESS MENT YEAR 2008- 09 AND AS SUCH IT WOULD NOT APPLY TO THE ASSESSMENT YEAR UNDER APPEAL. THE AO CAN RESORT TO REASONABLE BASIS FOR M AKING ITA NO.2207/AHD/2009 M/S. AQUAGEL CHEMICALS PVT. LTD. VS ACIT BHAVNAGAR RANGE-1 7 DISALLOWANCE AS PER THE ABOVE DECISION IF THE AO WO ULD BE ABLE TO PROVE THAT ASSESSEE HAD INCURRED ANY EXPENDITURE DI RECTLY OR INDIRECTLY IN RELATION TO THE DIVIDEND INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AS MENTIONED IN SECTION 14A OF THE IT ACT. IT WOULD MEAN THAT THE AO SHALL HAVE TO PROVE NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENT MADE BY THE ASSESSEE FOR E ARNING EXEMPT INCOME. THE AO HAS FAILED TO DO SO AND MERELY APPLI ED RULE 8D OF THE IT RULES WHICH IS NO LONGER APPLICABLE TO THE A SSESSMENT YEAR UNDER APPEAL. THE ORDER OF THE AUTHORITIES BELOW TH US CANNOT BE SUSTAINED IN LAW. IN THE PRECEDING ASSESSMENT YEAR 2005-06 IT WAS NOTED THAT THERE WERE NO FRESH BORROWINGS BECAUSE T HE BORROWINGS HAVE GONE DOWN. THEREFORE IT WAS HELD THAT NO DISA LLOWANCE WAS CALLED FOR. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND R ESTORE THE ISSUE TO THE FILE OF THE AO WITH DIRECTION TO RE-DECIDE THE SAME AFRESH AS PER THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF GODREJ AND BOYCE MANUFACTURING CO. LTD. VS DCIT AND ANOTHE R (SUPRA). THE AO SHALL GIVE REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 6. CHARGING OF INTEREST IS CONSEQUENTIAL IN NATURE AND MANDATORY. PENALTY MATTER IS PRE-MATURE AND CALLS FOR NO FINDI NGS. ITA NO.2207/AHD/2009 M/S. AQUAGEL CHEMICALS PVT. LTD. VS ACIT BHAVNAGAR RANGE-1 8 7. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 29-03-2011 SD/- SD/- (D. C. AGRAWAL) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 29-03-2011 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR ITAT AHMEDABAD