Tax Tribunal Upholds Deductions and Disallowances in Favor of Assessee

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Case Name:

Commissioner of Income Tax vs. Himatsingka Seide Ltd. (High Court of Karnataka)

ITA No. 229 of 2015 C/w ITA No. 228 of 2015

Date: 5th April 2016

Key Takeaways

- The court confirmed that Rule 8D (of Income Tax Rules, 1962) applies prospectively, not retrospectively.

- The Tribunal's decision to sustain a 5% disallowance of exempted income under Section 14A (of Income Tax Act, 1961) was upheld.

- The disallowance of interest under Section 36(1)(iii) (of Income Tax Act, 1961) was deleted, as the interest was related to loans for existing manufacturing units, not diverted for other purposes.

Issue

The central legal questions were:

1. Whether the assessee was entitled to deductions under Section 10B (of Income Tax Act, 1961) despite not fulfilling certain conditions.

2. Whether the disallowance under Section 14A (of Income Tax Act, 1961) was correctly sustained at 5% of exempted income.

3. Whether the disallowance of interest under Section 36(1)(iii) (of Income Tax Act, 1961) was justified.

Facts

- The appellant, Commissioner of Income Tax, challenged the Tribunal's decision favoring Himatsingka Seide Ltd.

- The dispute involved deductions under Section 10B (of Income Tax Act, 1961), disallowance under Section 14A (of Income Tax Act, 1961), and interest disallowance under Section 36(1)(iii) (of Income Tax Act, 1961).

- The Tribunal had previously ruled in favor of the assessee, which the Revenue contested.

Arguments

- Revenue's Argument: The Revenue argued that the assessee did not meet the conditions for deductions under Section 10B (of Income Tax Act, 1961) and that the disallowances under Sections 14A (of Income Tax Act, 1961) and 36(1)(iii) were justified.

- Assessee's Argument: The assessee contended that the Tribunal's decisions were based on established facts and legal precedents, and the disallowances were not warranted.

Key Legal Precedents

- Godrej & Boyce Mfg. Co. Ltd. vs. Deputy Commissioner of Income Tax & Anr.: This case established that Rule 8D (of Income Tax Rules, 1962) applies prospectively.

- Commissioner of Income Tax Vs. Catholic Syrian Bank Ltd. & Ors.: The Kerala High Court's decision was referenced but found not applicable to the retrospective application of Rule 8D (of Income Tax Rules, 1962).

Judgement

The court dismissed the Revenue's appeals, upholding the Tribunal's decision. It found no substantial question of law in the Revenue's arguments. The court agreed with the Tribunal's reasoning that the disallowance under Section 14A (of Income Tax Act, 1961) was correctly sustained at 5% and that the interest disallowance under Section 36(1)(iii) (of Income Tax Act, 1961) was unsustainable.

FAQs

Q1: What was the main issue with Section 10B (of Income Tax Act, 1961)?

A1: The issue was whether the assessee was entitled to deductions under Section 10B (of Income Tax Act, 1961) despite not fulfilling certain conditions. However, this question was not pressed by the Revenue in the appeal.

Q2: Why was the disallowance under Section 14A (of Income Tax Act, 1961) upheld?

A2: The Tribunal upheld a 5% disallowance of exempted income based on previous decisions and the fact that Rule 8D (of Income Tax Rules, 1962) applies prospectively.

Q3: What was the court's reasoning for deleting the interest disallowance under Section 36(1)(iii) (of Income Tax Act, 1961)?

A3: The court found that the interest was related to loans for existing manufacturing units and not diverted for other purposes, making the disallowance unsustainable.

The appellant-Revenue has preferred the present appeals by raising the following substantial questions of law:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the assessee is entitled for deduction under section 10B (of Income Tax Act, 1961) by following its earlier order passed in the case of the assessee even when the assessee has not fulfilled the conditions set

out in the said provision and the orders relied upon by the Tribunal has not reached finality?

2. Whether, on the facts and in the

circumstances of the case, the Tribunal is

right in law in holding that the issue of

disallowance under section 14A (of Income Tax Act, 1961)

being sustained at 5% of exempted income

i.e., Rs.25,23,655/- does not call for any

interference even when the assessing

authority was correct in making

disallowance under section 14A (of Income Tax Act, 1961)

and the Commissioner of Income Tax

(Appeals) had modified the same in the

absence of proper reasonings?

3. Whether, on the facts and in the

circumstances of the case, the Tribunal is

right in law in setting aside the disallowance

of interest amounting to Rs.44,71,565/-

under section 36(1)(iii) (of Income Tax Act, 1961) even when

the assessing authority had rightly

disallowed the same by holding that the

assessee had advanced inter-corporate

loans amounting to Rs.21,03,58,510/- to its

100% subsidiary concern M/s.Himatsingka

Wovens Pvt. Ltd., interest free for which no

interest was charged by the assessee and

assessed had failed to prove that the same

was for the business purpose?”

2. We have heard Mr.K.V.Aravind, learned Counsel

appearing for the appellants-Revenue and Ms.Vani H.,

learned Counsel appearing for the respondent-assessee.

3. We may record that so far as question No.1 is

concerned, learned Counsel for the appellant-Revenue

has not pressed the said question and therefore the said

question would not arise in the present appeals.

4. So far as question No.2 is concerned, the

Income Tax Appellate Tribunal (hereinafter referred to

as ‘the Tribunal’ for brevity) in the impugned order has

considered the said aspects from para-7.3 and 8 which

read as under:

“7.3 We have heard both parties at length

and perused and carefully considered the

material on record and the judicial

decisions cited. It is seen from the order of

the learned CIT (Appeals) that while he has

held that the Assessing Officer was correct

in making of the disallowance under section

14A of the Act, the provisions of Rule 8D (of Income Tax Rules, 1962)

would not be applicable for the year under

consideration i.e. Assessment Year 2007-08

but would be applicable w.e.f. 24.3.2008 i.e.

for -and from Assessment Year 2008-09. In

holding that a reasonable disallowance of

5% of exempted income i.e. Rs.25,23,655 is

to be made in respect of the expenditure

incurred to earn such income, the learned

CIT (Appeals) followed the decisions of the

co-ordinate benches of this Tribunal in the

case of ING Vysya Bank Ltd. in ITA

No.589/Bang/2006 dated 23.4.2008 and

the case of ACIT V Ingersoll Rand India Ltd.

in ITA No.7254/Mum/Bangalore ‘A’ Bench

dated 30.8.2010. In view of the aforesaid

judgments of the co-ordinate benches of

this Tribunal (supra) and on an

appreciation of the facts of the case on

hand, we are of the view the order of the

learned CIT (Appeals) on the issue of the

disallowance under section 14A (of Income Tax Act, 1961)

being sustained at 5% of exempted income,

i.e. Rs.25,23,655 does not call for any

interference and we therefore uphold the

order of the learned CIT (Appeals) on this

issue. Consequently both the grounds

raised by revenue at S.No.5 to 7 and by the

assessee at S.No.2 of its grounds of appeal

are dismissed.

8. In the result, revenue’s appeal is

dismissed.”

5. It may also be recorded that in the decision of

the Bombay High Court in case of Godrej & Boyce Mfg.

Co. Ltd., Vs. Deputy Commissioner of Income Tax &

Anr. reported at (2010) 328 ITR 0081, the view taken

was that Rule 8(D) (of Income Tax Rules, 1962), (hereinafter

referred to as the ‘I.T. Rules’ for short) would apply with

prospective effect and not retrospectively, has also been

considered by the Tribunal.

6. As per the decision of the Bombay High Court

in the above referred case, once Rule 8(D) (of Income Tax Rules, 1962) of the I.T.

Rules, is held to be having prospective effect, naturally

it could not be applied to the assessment year in

question and therefore, the view taken by the Tribunal

cannot be said to be erroneous nor it can be said that

any substantial question of law would arise for

consideration.

7. However, Mr.K.V.Aravind, learned Counsel

appearing for the appellants-Revenue did rely upon the

decision of the Kerala High Court in the case of

Commissioner of Income Tax Vs. Catholic Syrian

Bank Ltd. & Ors. reported at (2012) 344 ITR 0259

and contended that though the said case was pertaining

to assessment year 2007-08, the applicability of Rule

8(D) of the I.T. Rules was accepted by Kerala High Court

and therefore, a different view is said to have been

taken. Under the circumstances, the appeal may

deserve consideration on question No.2.

8. We may record that in the said decision of

Kerala High Court, the question did not arise at all for

consideration before the Kerala High Court as to

whether Rule 8(D) (of Income Tax Rules, 1962) is having

retrospective effect or prospective effect. On the

contrary at para-3 of the judgment, it has been recorded

as under:

“According to both counsel for the assessees

proportionate disallowance is called for only

under sub-s. (2) r/w r.8D (of Income Tax Rules, 1962) which

came into force from 2007-08 onwards and the

same cannot be applied for any earlier

assessment year.”

9. Therefore the judgment can hardly be said to be

on the point decided for considering the applicability of

Rule 8(D) (of Income Tax Rules, 1962) with retrospective effect as

sought to be canvassed. Further, in any case, there is

no consideration on the aspects of prospectivity or

retrospectivity of Rule 8(D) (of Income Tax Rules, 1962). It is hardly

required to be stated that the decision of any High

Court would not be a precedent by deducing the result

on facts of the case and the effect thereon. But it can be

considered as a precedent only if the point is specifically

considered and decided in either way. Under the

circumstances, the decision of Kerala High Court is of

no help to the learned Counsel for the appellants-

Revenue.

10. Once the point is already concluded as per the

decision of Bombay High Court referred to hereinabove,

we do not find that any substantial question of law viz.,

question No.2 would arise for consideration as sought to

be canvassed.

11. On question No.3 the relevant discussion of

the Tribunal from paras-10.5.1 to 10.5.3 read as under:

“10.5.1 We have heard the rival

submissions and perused and carefully

considered the orders of the authorities

below, the assessee’s submissions and the

material on record. From the details on

record, it is seen that there is no dispute

with regard to the fact that the assessee had

borrowed funds from banks for acquiring

fixed assets for its new unit at Hassan, as

well as Term Loans and working capital of its

existing operational units at Seide and Filate

for manufacturing fabrics and yarn. The

learned Authorised Representative has

furnished break up of the interest debited to

profit and loss account for the relevant

period which evidences that the interest of

Rs.44,71,565 was claimed as follows:

a) On Term Loan for Filate & Siede units

Rs.44,20,762 and

b) On working capital for Filate & Siede

units Rs.50,803.

Therefore the facts that the entire

interest paid on the Term Loan taken for

acquiring fixed assets for its new unit at

Hassan has been capitalized as work-in-

progress has evidently not been claimed as a

revenue expenditure is, in our view, factually

established.

10.5.2 We also find from the

submissions of the learned Authorised

Representative that the assessee company

has been earning profits year on year and

had a net worth of approx.. Rs.600.71

Crores, whereas the loan advanced to its

subsidiary M/s. Himatsingka Wovens P.

Ltd. during the period under consideration,

was only Rs.9.60 Crores and the aggregate

loans advanced by the assessee to this

subsidiary including that of earlier year is

approx.. Rs.21.03. Crores. We also observe

from the order of assessment, that the

Assessing Officer has not established with

any material evidence that the loans

advanced interest free by the assessee to its

subsidiary, Himatsingka Wovens P.Ltd.

were diverted to it by the assessee from out

of the Term Loan taken by it from banks for

the existing manufacturing units at Filate

and Seide or from out of loans taken for

working capital for its existing units at Filate

and Seide.

10.5.3 In view of the established fact

that the interest of Rs.44,71,565 claimed by

the assessee in its profit and loss account for

the period under consideration pertained to–

(i) The Term Loan taken for the existing

manufacturing units at Filate and Seide

amounting to Rs.44,20,762; and

(ii) Working Capital Loan taken for the

existing units at Filate and Seide

amounting to Rs.50,803, it is, in our

opinion, factually clear that the interest

on the Term Loan for the new Hassan

unit of the assessee company has been

capitalized and what has been charged

by the assessee to the profit and loss

account is only interest pertaining to its

existing manufacturing units at Filate

and Seide. In this view of the matter, as

discussed from para 10.1 to 10.5.3 of

this order (supra), we are of the opinion

that the disallowance of interest

amounting to Rs.44,71,565 under

section 36(1)(iii) (of Income Tax Act, 1961) made and

confirmed by the authorities below is

unsustainable on facts and is, therefore,

accordingly deleted. It is ordered

accordingly.”

The aforesaid shows that the Tribunal has after

undergoing the examination of the record found that the

amount of Rs.44,20,762/- was pertaining to the term

loan taken for the existing manufacturing unit at Falite

and Seide and it has also found that the amount of

Rs.50,803/- is pertaining to working capital loan taken

for the existing unit at Falite and Seide and both the

aforesaid amount totaling to Rs.44,71,565/- are

towards interest claimed by the assessee.

12. Once the interest is of a loan taken for the

existing manufacturing unit, may be as term loan or

may be working capital, the interest cannot be

disallowed. Further on the question of diversion of

fund, it is by now well settled that the business wisdom

of the assessee cannot be substituted by the assessing

officer. Further the loan was actually taken for

establishing a new unit and the utilization thereof is

proved.

13. Under these circumstances, we find that it

cannot be said that the Tribunal has committed an

error in deleting the disallowance made by the

Assessing Officer or CIT (Appeals) of the amount of

interest of Rs.44,71,565/-. In our view, no substantial

question of law vide question No.3 would arise for

consideration as sought to be canvassed.

14. In view of the above, both the appeals are

dismissed.

Sd/-

JUDGE

Sd/-

JUDGE