DCIT,, Ludhiana v. M/s Hero Cycles Ltd.,, Ludhiana

ITA 467/CHANDI/2009 | 2006-2007
Pronouncement Date: 24-11-2011 | Result: Dismissed

Appeal Details

RSA Number 46721514 RSA 2009
Assessee PAN CEACT2001W
Bench Chandigarh
Appeal Number ITA 467/CHANDI/2009
Duration Of Justice 2 year(s) 6 month(s) 19 day(s)
Appellant DCIT,, Ludhiana
Respondent M/s Hero Cycles Ltd.,, Ludhiana
Appeal Type Income Tax Appeal
Pronouncement Date 24-11-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 24-11-2011
Date Of Final Hearing 14-11-2011
Next Hearing Date 14-11-2011
Assessment Year 2006-2007
Appeal Filed On 05-05-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B CHANDIGARH BEFORE MS. SUSHMA CHOWLA JUDICIAL MEMBER AND SHRI MEHAR SINGH ACCOUNTANT MEMBER ITA NO. 467/CHD/2009 ASSESSMENT YEAR: 2006-07 DCIT CIRCLE-V V M/S HERO CYCLES LTD. LUDHIANA . HERO NAGAR GT ROAD LUDHIANA. PAN: ABXPS-6706K (APPELLANT) (RESPONDENT) DEPARTMENT BY: SHRI S.K.MITTAL ASSESSEE BY : NONE DATE OF HEARING : 14.11.2011 DATE OF PRONOUNCEMENT : 24.11.2011 ORDER PER MEHAR SINGH AM THE PRESENT APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER DATED 24.02.2009 PASSED BY THE LD. CIT(A) U/S 250(6) OF THE INCOME-TAX ACT 1961 (IN SHORT 'THE ACT'). 2. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLO WING GROUNDS OF APPEAL: 1. THE LD. CIT(A)-II LUDHIANA HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.2 78 97 243/- MADE BY THE AO ON ACCOUNT OF DISALLOWANCE MADE U/S 14A OF THE INCOME-TAX ACT 1961 BEING EXPENSES INCURRED FOR EARNING DIVIDEND INCOME CLAIMED EXEMPT U/S 10(34) & 10(35) BY THE ASSESSEE. 2. THAT THE APPELLANT CRAVES LEAVE TO ADD OR AMEND ANY GROUND OF APPEAL BEFORE IT IS FINALLY DISPOSED OFF. 2 3. LD. 'DR' PLACED RELIANCE ON THE ORDER OF THE AO. 4. THE BRIEF FACTS AS CULLED OUT FROM THE RELEVANT RECORDS ARE THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS.48 13 78 855/-. THE DIVIDEND INCOME FROM MUTUAL FUND AS PER RETURN OF INCOME WAS DISCLOSED AT RS.7 16 42 275/- AND DIVIDEND INCOME FROM SHARES AT RS.40 97 36 580/ -. SUCH INCOME WAS CLAIMED AS EXEMPT BY THE ASSESSEE APPELLANT U/S 10(34) AND 10(35) OF THE ACT RESPECTI VELY. THE AO CONSIDERED THE SUBMISSIONS FILED BY THE ASSESSEE IN THIS REGARD AS THE ASSESSEE FURNISHED VARIOUS STATEMENTS BEFORE THE AO REGARDING THE QUERY FOR DISALLOWANCE OF INTE REST U/S 14A IN RESPECT OF INVESTMENT ON WHICH THE EXEMPT IN COME WAS EARNED. THE AO HOWEVER DISCUSSED AS TO HOW T HE LONG TERM INVESTMENTS OF THE APPELLANT CHANGED FROM 31.3 .2005 TO 31.3.2006. THESE DETAILS ARE REPRODUCED ON PAGE 10 AND 11 OF THE ASSESSMENT ORDER. ON THE OTHER HAND THE APPELLANT WAS FOUND TO HAVE PAID INTEREST OF RS.9 67 03 894/- ON VARIOUS BORROWINGS DISCUSSED ON PAGE 11 OF THE ASSESSMENT ORDER. INTEREST PAID ON SHORT TERM DEPOSITS BEING SHORT TERM DEBENTURES ARRANGED FOR W ORKING CAPITAL THROUGH MIBOR WAS FOUND TO BE RS.81 46 067/ -. THE AO REFERRED TO THE LANGUAGE OF THE PROVISIONS O F SECTION 14A OF THE ACT WHICH HAS BEEN INTRODUCED BY THE FIN ANCE ACT 2001 W.E.F. 1.4.1962. THE AO OBSERVED THAT THE ADDITIONAL INVESTMENTS OF RS.77 66 47 556/- HAVE BE EN FINANCED BY THE APPELLANT FROM OWN FUNDS AS WELL AS FUNDS BORROWED FROM BANKS MANAGING DIRECTORS AS WELL AS OTHERS. SHE NOTED THAT EVEN THE OLD INVESTMENTS COULD NOT B E SAID TO 3 HAVE BEEN MADE ENTIRELY FROM INTERNAL ACCRUALS. AS PER HER THE APPELLANT COULD NOT CLAIM THAT NO INVESTMENT HA D BEEN MADE IN THE SHARES AND MUTUAL FUNDS OUT OF ITS BORR OWED FUNDS OF MORE THAN RS.156 CRORES. SHE REFERRED TO THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES LTD. IN ITA NO. 110 OF 2005. SHE OBSERVED THAT IN VIEW OF THE SAID JUDGEM ENT IT WAS EVIDENT THAT THE APPELLANT HAD BORROWED CERTAIN FUNDS ON WHICH LIABILITY TO PAY INTEREST WAS BEING INCURR ED AND ON THE OTHER HAND CERTAIN AMOUNTS HAD BEEN INVESTED I N EARNING TAX FREE DIVIDEND INCOME THEREFORE A PART OF THE INTEREST LIABILITY WOULD BE ON ACCOUNT OF INVESTMEN TS MADE FOR EARNING THE TAX FREE DIVIDEND INCOME. SHE THER EFORE CONCLUDED THAT IT WAS ESTABLISHED THAT THE APPELLAN T HAD INVESTED PART OF THE BORROWED FUNDS FOR EARNING THE DIVIDEND INCOME. IN VIEW OF THE MASSIVE TURNOVER OF THE APPE LLANT AND ITS COMPLICATED FLOW OF FUNDS SHE HOWEVER NOTED TH AT IT WAS DIFFICULT TO IDENTIFY AS TO WHICH FUNDS HAD BEEN US ED FOR WHAT PURPOSES. THEREFORE THE ENTIRE AMOUNT OF APP ELLANTS SHARE CAPITAL RESERVES & SURPLUS AS WELL AS ITS BO RROWED FUNDS OF RS.5 83 66 98 226/- WERE TREATED BY HER AS A COMMON POOL FROM WHICH INVESTMENTS HAD BEEN MADE AMOUNTING TO RS.2 25 40 99 775/-. DURING THE RELEV ANT PERIOD THE INTEREST PAID OF RS.10 49 30 271/- WAS APPORTIONED BY HER IN THE RATIO OF INVESTMENTS TO T HE TOTAL FUNDS OF THE APPELLANT AS FOLLOWS : INTEREST PAID ATTRIBUTABLE = 9 67 03 894 X 2 26 73 04 001 TO EARNING OF DIVIDEND INCOME 7 85 94 55 042 = 2 78 97 243/- 4 5. THE AO THEREFORE HELD THE INTEREST PAID AT RS.2 78 97 243/- TO BE EXPENSES INCURRED FOR EARNIN G THE DIVIDEND INCOME OF RS.48 13 78 855/- AND WHICH WAS TO BE DISALLOWED U/S 14A OF THE ACT. THE ADDL.CIT THERE FORE CONSIDERED THE NET DIVIDEND INCOME I.E. RS.45 34 81 612/- (481378855-27897243) ONLY TO BE EXEMPT U/S 10(34) A ND 10(35) OF THE ACT. 6. WE HAVE CAREFULLY PERUSED THE FACTS OF THE CASE RELEVANT RECORDS AND ASSESSMENT ORDER AS WELL AS TH E ORDER PASSED BY THE CIT(A). IT IS CONSIDERED ESSENTIAL TO REPRODUCE THE FINDINGS OF THE CIT(A) ON THE ISSUE IN QUESTION FOR THE PURPOSE OF PROPER APPRECIATION OF THE FINDINGS RECO RDED BY THE CIT(A) FROM PARA 4 TO 4.4: 4. I HAVE CAREFULLY CONSIDERED THE CONTENTION OF THE LD. COUNSEL FOR THE APPELLANT AND PERUSED THE RELEVANT RECORD. AS EXPLAINED IN THE WRITTEN SUBMISSIONS OF THE LD COUNSEL SIMILAR ADDITIONS WE RE ALSO MADE IN APPELLANTS OWN CASE FOR THE ASSESSMENT YEAR 2004-05 AND 2005-06. SUCH ADDITIONS WERE FINALLY COMPLETELY DELETED BY THE HON'BLE ITAT IN THEIR ORDER DATED 4.7.2008 IN ITA N O. 205/CHD/2008 FOR THE ASSESSMENT YEAR 2004-05. FOLLOWING THIS ORDER OF THE HON'BLE ITAT SIMILAR ADDITIONS MADE IN THE ASSESSMENT YEAR 2005-06 WERE DELETED BY ME IN THE APPELLATE ORDER DATED 14.8.2008 IN APPEAL NO.328/IT/CIT(A)-II/LDH/07-08. IN VIEW OF THESE DECISIONS IT HAS TO BE CONSIDERED THAT AS FAR AS INVESTMENTS OF RS.225.41 CRORES BROUGHT FORWARD FROM ASSESSMENT YEAR 2005-06 ARE CONCERNED NO INTEREST BEARING BORROWED FUNDS WERE INVESTED AND IN RESPECT OF WHICH INTEREST U/S 14A WAS TO BE DISALLOWED. 5 4.1 COMING TO THE INCREASE IN THE INVESTMENTS DURING THE PERIOD RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION AS PER THE DETAILS BROUGHT OUT IN TH E WRITTEN SUBMISSIONS SUCH INCREASE IN TOTAL INVESTMENTS IS SHOWN AT RS.78 65 63 048/-. AS EXPLAINED IN PARA 1(IV) UNDER THE HEAD FACTS IN THE WRITTEN SUBMISSIONS REPRODUCED ABOVE THE APPELLANT RECEIVED DURING THE RELEVANT PERIOD TOTAL AMOUNT OF RS.93 95 05 146/- ON ACCOUNT OF DIVIDEND ON CURRENT INVESTMENT RE-INVESTMENT PROFIT ON SALE SWITCHIN G OFF OF CURRENT INVESTMENTS PROFIT AND DERIVATIVES AND DIVIDEND ON LONG TERM INVESTMENTS REDUCED BY LOSS ON SALE/SWITCHING OFF OF CURRENT INVESTMENTS AND LO SS ON DERIVATIVES. FOR THE SAKE OF CONVENIENCE THIS IS REPRODUCED HEREUNDER AGAIN : TOTAL INCREASE IN INVESTMENTS DURING 786563048 THE YEAR ENDED 31.3.2006 INCOME GENERATED FROM INVESTMENTS CURRENT INVESTMENT DIVIDEND ON CURRENT INVESTMENTS REINVESTED 71642275 PROFIT ON SALE/SWITCHING OF CURRENT INVESTMENT 507843361 PROFIT ON DERIVATIVES 24211866 603697502 LOSS ON SALE/SWITCHING OF CURRENT INVESTS 34537366 LOSS OF DERIVATIVES 39391570 73928936 NET INCREASE 529768566 LONG TERM INVESTMENTS DIVIDEND RECEIVED ON LONG TERM INVESTS. 409736580 939505146 NET SURPLUS 152942098 4.2 AS RIGHTLY CONTENDED BY THE LD. COUNSEL FROM TH ESE DETAILS IT BECOMES QUITE CLEAR THAT THE TOTAL INCR EASE IN THE INVESTMENTS IS ONLY DUE TO REINVESTMENT OF HUGE INCOME FROM THESE INVESTMENTS ITSELF. CONSIDERING THE CASE OF THE APPELLANT FROM THAT ANGLE THERE IS CONSIDERABLE FORCE IN THE CONTENTION OF THE LD. COU NSEL THAT ALL THE CURRENT/LONG TERM INVESTMENTS HAVE BEE N MADE OUT OF OWN FUNDS AND NO INTEREST BEARING BORROWINGS HAVE BEEN USED FOR MAKING THESE 6 INVESTMENTS IN THE RELEVANT PERIOD. IN VIEW OF THE ABOVE WHEN FOR THE BROUGHT FORWARD INVESTMENTS NO BORROWE D FUNDS HAVE BEEN HELD TO HAVE BEEN INVESTED IN SUCH INVESTMENTS AS ALREADY DISCUSSED (IN VIEW OF THE APPELLATE ORDERS FOR THE ASSESSMENT YEARS 2004-05 A ND 2005-06) AND THE CURRENT INVESTMENTS HAVING SHOWN T O BE MADE AS RE-INVESTMENT OF INCOME ETC. DISCUSSED I N THE ABOVE CHART IT HAS TO BE HELD THAT NO INTEREST BEARING BORROWED FUNDS HAVE BEEN INVESTED BY THE APPELLANT DURING THE RELEVANT PERIOD FOR EARNING TH E EXEMPT DIVIDEND INCOME AS ERRONEOUSLY HELD BY THE A O. 4.3 FURTHER AS ALSO OBSERVED IN THE APPELLATE ORDER FOR THE ASSESSMENT YEAR 2005-06 FOR DELETING SIMILAR ADDITION IN THE ASSESSMENT YEAR 2004-05 IN APPELLAN TS OWN CASE THE HON'BLE ITAT HAS OBSERVED THAT AS THE APPELLANT HAD SUFFICIENT INTERNAL ACCRUALS FOR MAKI NG ANY SUCH INVESTMENTS SIMILAR DISALLOWANCE U/S 14A WAS NOT JUSTIFIED. AS EXPLAINED IN THE WRITTEN SUBMISSIONS FOR THE RELEVANT PERIOD ALSO THE CASH PROFITS OF THE APPELLANT CAME TO RS.163.49 CRORE AN D FURTHER PAID UP CAPITAL OF THE APPELLANT WAS RS.39. 82 CRORES. IN VIEW OF THE RATIO OF DECISION OF THE HO N'BLE ITAT IN APPELLANTS OWN CASE FOR THE ASSESSMENT YEA R 2004-05 SUCH INTERNAL ACCRUALS BEING FOR MORE THAN THE INCREASE IN INVESTMENTS OF RS.78.64 CRORES AGAIN N O DISALLOWANCE U/S 14A COULD BE HELD TO BE JUSTIFIED. ANOTHER GROUND FOR DELETING SUCH ADDITION BY THE HO N'BLE ITAT IN APPELLANTS OWN CASE FOR THE ASSESSMENT YEA R 2004-05 WAS THAT NO NEXUS HAD BEEN SHOWN OF THE AMOUNTS INVESTED IN INVESTMENTS WHERE FROM EXEMPT DIVIDEND INCOME HAD BEEN EARNED WITH THE INTEREST BEARING BORROWINGS. IN THE ASSESSMENT YEAR UNDER CONSIDERATION ALSO NO SUCH NEXUS HAS BEEN SHOWN. RATHER THE AO HAS HERSELF ADMITTED THAT IT WAS DIF FICULT TO IDENTIFY AS TO WHICH FUNDS HAD BEEN USED FOR WHA T PURPOSES. AS HELD BY THE HON'BLE ITAT IN THE APPE AL FOR THE ASSESSMENT YEAR 2004-05 IN THIS CASE SUCH 7 DISALLOWANCE COULD NOT BE MADE UNLESS THERE WAS EVIDENCE TO SHOW THAT SUCH INTEREST BEARING FUNDS H AD BEEN INVESTED IN THE INVESTMENTS WHICH HAD GENERATE D THE TAX EXEMPT DIVIDEND INCOME. ADMITTEDLY NO SUCH NEXUS HAS BEEN ESTABLISHED IN THIS CASE BY THE AO. THEREFORE AS HELD BY THE HON'BLE ITAT NO SUCH DISALLOWANCE COULD BE MADE ON MERE PRESUMPTIONS AN D PROVISIONS OF SECTION 14A COULD NOT BE APPLIED FOR SUCH PRESUMPTIONS. THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPN. (SUPRA) A ND OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ROCKMAN CYCLE INDS. LTD. (SUPRA) WHICH HAVE BEEN RELIED UPON BY THE LD COUNSEL ALSO SUPPORT THE CAS E OF THE APPELLANT IN VIEW OF THE ABOVE FACTUAL POSITION . 4.4 KEEPING IN VIEW THE ABOVE DISCUSSED POSITION TH E DISALLOWANCE OF INTEREST OF RS.2 78 97 243/- MADE B Y THE AO U/S 14A OF THE ACT CANNOT BE HELD TO BE JUST IFIED. THE DISALLOWANCE IS THEREFORE DELETED AND THIS GRO UND OF APPEAL IS ALLOWED. 7. THE ASSESSEE CONTENDED IN THE WRITTEN SUBMISSION S FILED BEFORE THE CIT(A) THAT SIMILAR ADDITIONS MADE IN THE ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2004-05 AND 2005-06 WERE DELETED BY THE HON'BLE ITAT IN ORDER D ATED 04.07.2008 IN ITA NO. 205/CHD/2008 FOR THE ASSESSME NT YEAR 2004-05. IN THE LIGHT OF THESE DECISIONS IT HAS TO BE CONSIDERED THAT AS FAR AS INVESTMENT OF RS.225.41 C RORES BROUGHT FORWARD FROM THE ASSESSMENT YEAR 2005-06 AR E CONCERNED NO INTEREST BEARING FUNDS WERE INVESTED IN RESPECT OF WHICH INTEREST U/S 14A WAS TO BE DISALLO WED. THE LD. CIT(A) HAS DEALT THIS ISSUE IN DETAIL. IT IS EVIDENT ON PERUSAL OF THE DETAILS BROUGHT ON RECORD BY THE CIT (A) THAT INCREASE IN TOTAL INVESTMENTS DURING THE PERIOD REL EVANT TO 8 THE ASSESSMENT YEAR UNDER CONSIDERATION IS TO THE T UNE OF RS.78 65 63 048/-. IT HAS BEEN POINTED OUT BY THE C IT(A) THAT THE APPELLANT RECEIVED DURING THE RELEVANT PER IOD TOTAL AMOUNT OF RS.93 95 05 146/- ON ACCOUNT OF DIVIDEND ON CURRENT INVESTMENT RE-INVESTMENT PROFIT OF SALE SWITCHING OFF OF CURRENT INVESTMENTS PROFIT AND DERIVATIVES AND DIVIDEND ON LONG TERM INVESTMENTS REDUCED BY LOSS O N SALE/SWITCHING OFF OF CURRENT INVESTMENTS AND LOSS ON DERIVATIVES. SUCH DETAILS HAVE BEEN RECORDED BY TH E CIT(A) IN PARA 4.1 AS REPRODUCED ABOVE IN THE FORM OF CHA RT. THUS TOTAL INCREASE IN THE INVESTMENT IS ATTRIBUTED TO R E- INVESTMENT OF HUGE INCOME FROM THESE INVESTMENTS IT SELF. IF APPROACHED FROM SUCH ANGLE THERE IS CONSIDERABLE M ERIT IN THE CONTENTION OF THE ASSESSEE THAT ALL CURRENT/LON G TERM INVESTMENTS HAVE BEEN MADE OUT OF OWN FUNDS AND NO INTEREST BEARING BORROWINGS HAD BEEN USED FOR THE P URPOSE OF THESE INVESTMENTS IN THE RELEVANT PERIOD. ACCOR DINGLY CIT(A) HELD THAT NO INTEREST BEARING FUNDS HAD BEEN INVESTED BY THE ASSESSEE DURING THE RELEVANT PERIOD FOR EARN ING THE EXEMPT DIVIDEND INCOME AS HELD BY THE AO. THE ASS ESSEE REFERRED TO THE DECISION OF THE APEX COURT IN THE C ASE OF MUNJAL SALES CORPORATION V CIT 298 ITR 298 AND THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ROCKMAN CYCLE INDUSTRIES LTD. 176 TAXMAN 2 (P&H) TO SUPPORT HIS CONTENTION ON THE ISSUE IN QUESTION. 8. THE LD. CIT(A) HAS FOLLOWED THE DECISION OF THE HON'BLE ITAT IN ASSESSEE'S OWN CASE AS DISCUSSED EARLIER AND ALSO REFERRED TO THE DECISION OF THE HON'BLE SUPREME COU RT IN THE 9 CASE OF MUNJAL SALES CORPORATION (SUPRA) AND THE JURISDICTIONAL HIGH COURT IN THE CASE OF ROCKMAN CY CLES INDUSTRIES LTD. (SUPRA) AND DELETED THE IMPUGNED AD DITIONS. 9. IN VIEW OF THE ABOVE DISCUSSIONS AND THE LEGAL P OSITION WE DO NOT FIND ANY INFIRMITY IN THE FINDINGS OF THE CIT(A) AND HENCE THE SAME ARE UPHELD. 10. IN THE RESULT APPEAL OF THE REVENUE IS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH NOV. 2011. SD/- SD/- (SUSHMA CHOWLA) (MEHAR SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 24 TH NOV. 2011. POONAM COPY TO: THE APPELLANT THE RESPONDENT THE CIT(A) THE CIT DR ASSISTANT REGISTRAR ITAT CHANDIGARH