Interest u/s. 234D will also apply to A.Y. commencing before 1-6-2003 if the regular assessment reducing refund completes on or after 1-6-2003
IN THE ITAT MUMBAI BENCH ‘L’
Income-tax Officer, Ward-10(3)(4)
v.
Strides Arcolab Ltd.
IT Appeal NO. 6487 (MUM.) OF 2004
c.o. no. 132 (Mum.) of 2005
[ASSESSMENT YEAR 2001-02]
AUGUST 3, 2012
ORDER
R.S. Syal, Accountant Member
This appeal by the Revenue and cross objection by the assessee arise out of the order passed by the Commissioner of Income-tax (Appeals) on 15.06.2004 in relation to the assessment year 2001-2002.
2. First ground of the Revenue’s appeal as well as the assessee’s cross objection relate the disallowance u/s 14A. Briefly stated the facts of these grounds are that the assessee claimed dividend income of Rs. 33,06,831 as exempt u/s 10(33) of the Act. The Assessing Officer observed that the provisions of section 14A require making of disallowance of any expenditure incurred for earning the exempt income. On being called upon to explain as to why the interest expenditure on investment in shares should not be disallowed under this section, the assessee submitted an explanation to the effect that it had opening reserves and share capital to the extent of Rs. 151.68 crore, as against which it had made investment during the previous year relevant to the assessment year only to the extent of Rs. 61.25 crore. The other balance sheet figures were also put forth before the A.O. to bring home the point that no disallowance was called for u/s 14A. The Assessing Officer noticed that the total interest expenditure incurred by the assessee was to the tune of Rs. 19.41 crore. By considering the total amount of interest bearing borrowings, the Assessing Officer worked out average rate of interest at 13.63%. Such rate was applied to the investments made by the assessee in shares for working out disallowance at Rs. 6,38,37,708. The learned CIT(A) observed that only the dividend income received from a domestic company is exempt u/s 10(33) of the Act. As the assessee had invested inter alia in equity shares of Strides Inc., USA, Arcolab SA – Switzerland, Infra Industri, Brazil and Solara Farmaceutica, Mexico, the learned CIT(A) held that interest in relation to investment in the shares of such foreign companies was not liable to be considered u/s 14A. It was still further noted that the assessee had invested in three domestic companies, namely, Dena Bank, Kothari Pioneer Infotech and Kothari Pioneer Blue Chip Fund. These investments as on 31.03.2001 totalled Rs. 2.84 crore. He determined average rate of interest at 6.20%. The said percentage was applied on the total investment of Rs. 2.84 crore for sustaining the disallowance at Rs. 17,66,427. Both the sides are in appeal against their respective stands.
3. We have heard the rival submissions and perused the relevant material on record. Section 14A(1) provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Section 10(33), at the material time, exempted inter alia dividend referred to in section 115-O from the purview of taxation. Section 115-O talks of a ‘domestic company’. A ‘domestic company’ has been defined u/s 2(22A) to mean ‘an Indian company or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangement for the declaration and payment, within India, of the dividend (including dividends on preference shares) payable out of such income.’ A bare perusal of the definition of ‘domestic company’ transpires that it is only Indian company or any other company, which in respect of its income is liable to tax under this Act, has made prescribed arrangement for the declaration and payment of dividend. Obviously this definition does not extend to foreign companies. As such the disallowance u/s 14A is conceivable in respect of investment made in the shares of domestic companies and not foreign companies. No material has been brought on record by the learned Departmental Representative to controvert the finding recorded by the learned CIT(A) in respect of the companies referred to in the impugned order as foreign companies. In view of these facts, it becomes apparent that the provisions of section 14A cannot extend to investments made in the shares of such foreign companies. To this extent we uphold the impugned order.
4. Coming to the assessee’s objection about the sustainability of part of disallowance u/s 14A, we observe from page 3 of the impugned order that total investments made in the shares of domestic company is to the tune of Rs. 2.84 crore. It is palpable that the assessee made investments in shares of Dena Bank in financial year 1996-1997. Investment in Kothari Pioneer Infotech and Kothari Pioneer Blue Chip Fund was made in the previous year ending 31.03.2000. It shows that no fresh investment was made by the assessee during the current year in the shares of these companies. The assessee’s annual accounts for the current and also the earlier relevant years are available in the paper book. Page 11 is copy of Profit and loss account for the year ending 31.03.2001 as well as 31.03.2000. Out of the total investments of Rs. 2.84 crore, the assessee had made investment in shares of Dena Bank to the tune of Rs. 12.57 lakh, thereby leaving remaining investment of Rs. 2.72 crore made in the year ending 31.03.2000 in the shares of Kothari Pioneer Infotech and Kothari Pioneer Blue Chip Fund. A close look at the Profit and loss account of the assessee-company for the corresponding date of 31.03.2000 divulges that the assessee earned profit for the said year amounting to Rs. 24.56 crore. The amount of depreciation itself for that year stands at Rs. 6.07 crore which is a non-cash item. When we consider the magnitude of profit with the company and the investments made in these shares of Kothari group, it can be easily noticed that the profit for the relevant year itself was much more than the amount of investment. Coming to the investments in the shares of Dena Bank in financial year 1996-1997 it is observed that the share capital of the company far exceeds the amount of investment in shares as at the end of such financial year. The Hon’ble jurisdictional High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [(2009) 313 ITR 340 (Bom.)] has held that if there be interest free funds available to the assessee sufficient to meet its investments and at the same time loan has been raised, it can be presumed that the investments were made from interest free funds. While reaching this conclusion the Hon’ble jurisdictional High Court considered the judgment of the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT [(1997) 224 ITR 627 (SC)]. In view of the aforesaid precedent of the Hon’ble jurisdictional High Court, it is apparent that no interest bearing funds can be said to have been deployed by the assessee for the purposes of making investment in the shares of these three companies, from which exempt dividend income was earned. It is axiomatic that where investment is made out of assessee’s own funds and not out of borrowed funds, there can be no disallowance u/s 14A. Our view is fortified by the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. K.Raheja Corporation Pvt. Ltd., a copy of this judgment dated 8th October, 2011, has been placed on record. In view of the foregoing discussion, we are of the considered opinion that the learned CIT(A) was not justified in sustaining the disallowance at Rs. 17.65 lakh u/s 14A in respect of the investments made by the assessee in the shares of three domestic companies. The ground raised by the assessee is allowed and that of the Revenue is dismissed.
5. Ground nos.2 and 3 of the Revenue’s appeal and ground nos.2 and 3 of the assessee’s cross objection deal with the disallowance u/s 43B. The Assessing Officer made disallowance u/s 43B amounting to Rs. 39,46,088 on the ground that the assessee defaulted in depositing employees’ contribution to provident fund and ESI within the permissible time. He also made addition of Rs. 37,83,095 on account of delayed payment of employer’s share of provident fund and ESIC. The learned CIT(A) deleted the disallowance to the extent the assessee had deposited the contributions within the grace period. However the remaining addition was sustained for which the amount was deposited by the assessee beyond the grace period but before the due date prescribed u/s 139(1) of the Act. Both the sides are in appeal against their respective stands.
6. After considering the rival submissions and perusing the relevant material on record we find that the Hon’ble Supreme Court in the case of CIT v. Alom Extrusions Ltd. [(2009) 319 ITR 306 (SC)] has held that the amendment to first proviso and the omission of the second proviso to section 43B by the Finance Act, 2003 is retrospective. In that view of the matter any amount referred to in section 43B, being the sum payable by the employer shall be allowed as deduction if it is paid before the due date of filing of the return. The Hon’ble Delhi High Court in the case of CIT v. Aimil Ltd. [(2010) 321 ITR 508 (Del.)] has held that if employees’ share is deposited before the due date then no disallowance is called for. In reaching this conclusion, the Hon’ble Delhi High Court relied on the judgment of the Hon’ble Supreme Court in the case of CIT v. Vinay Cement Ltd. [(2007) 213 CTR (SC) 268] in which it was held that the amount of employees contribution etc. deposited before the filing of return, cannot be disallowed u/s 43B. In view of the above discussion, the grievance of the assessee is accepted and objection of the Revenue is overruled.
7. Ground no.4 of the Revenue’s appeal is against deletion of disallowance of Rs. 4,57,765 towards foreign travel expenses. The Assessing Officer disallowed 10% of the foreign travel expenses by relying on the view taken by him in the immediately preceding year. The learned CIT(A) deleted the disallowance by holding that foreign travel expenses were incurred for the purpose of business.
8. Having heard the rival submissions and perused the relevant material on record it is observed that the immediately preceding assessment year, that is, 2000-2001 came up for adjudication before the Tribunal. Vide its order, copy of which is available on record, the Tribunal, through para 10, has held that no disallowance on account of foreign travel expenses can be sustained. As the view of the Assessing Officer in making the disallowance is based on his view for assessment year 2000-2001, which no more survives, in our considered opinion, there can be no justification in sustaining this disallowance also. We, therefore, uphold the impugned order on this issue.
9. Ground no.5 of the Revenue’s appeal and ground no.5 of the assessee cross objection are on the question as to whether relief u/s 80-IA/80-IB should be adjusted before allowing deduction u/s 80HHC. While computing ‘profits of the business’ for the purpose of deduction u/s 80HHC, the Assessing Officer deducted the amount of deduction u/s 80-IB by considering sub-section (9) of section 80-IA. The learned CIT(A) observed that only 30% of profit of eligible unit qualified for deduction u/s 80-IA/80-IB. He, therefore, held that only this much percentage of profit was required to be deducted for computing claim u/s 80HHC.
10. Having heard the rival submissions and perused the relevant material on record we find that this issue is no more res integra in view of the judgment of the Hon’ble jurisdictional High Court in the case of Associated Capsules Pvt. Ltd. v. DCIT & Anr. [(2011) 332 ITR 42 (Bom.)] in which it has been held that restriction u/s 80-IA(9) is not applicable at the stage of computing deduction u/s 80HHC but only at the stage of allowing deduction u/s 80HHC. In view of the above judgment of the Hon’ble High Court, it becomes apparent that the action of the Assessing Officer in entirety cannot be sustained. The impugned order to the extent it is against the assessee is vacated and to the extent it is against the Revenue is upheld. The assessee’s ground is allowed and Revenue’s ground is dismissed.
11. Ground no.6 of the Revenue’s appeal is against netting of interest receipts for the purpose of deduction u/s 80HHC. The Assessing Officer, while computing deduction u/s 80HHC considered the gross amount of interest. The learned CIT(A), however, overturned this finding by holding that only the net amount of interest was to be considered. Having heard the rival submissions it is noticed that this issue has been settled by the Hon’ble Supreme Court in Associated Capsules Pvt. Ltd. v. CIT [(2012) 343 ITR 89 (SC)] by holding that netting of interest is permissible. The reliance of the ld. DR on the judgment in the case of CIT v. Asian Star Co. Ltd. [2010] 326 ITR 56 (Bom) is misconceived as the same has been reversed by the Hon’ble Supreme Court in the afore noted case. As such no fault can be found with the impugned order on this score. This ground is not allowed.
12. Ground no.7 of the Revenue’s appeal is against the direction of the learned CIT(A) to exclude the amount of excise duty on Rs. 8.92 crore from ‘total turnover’ for the purposes of computing deduction u/s 80HHC. The Assessing Officer included the amount of excise duty in ‘total turnover’ while computing deduction u/s 80HHC. The learned CIT(A) overturned the assessment order on this point.
13. After considering the rival submissions and perusing the relevant material on record we find that this issue has also been settled by the Hon’ble Supreme Court in the case of CIT v. Laxmi Machine Works [(2007) 290 ITR 667 (SC)] holding that the excise duty is not includible in the ‘total turnover’ in the formula contained in section 80HHC. The impugned order on this issue, being in conformity with the view taken by the Hon’ble Supreme Court, does not warrant any interference. This ground is not allowed.
14. Ground no.8 of the Revenue’s appeal is against the direction of the learned CIT(A) for treating the profit on sale of DEPB licence as export incentives and allowing deduction u/s 80HHC under proviso to section 80HHC(3) of the Act.
15. After considering the rival submissions and perusing the relevant material on record we find that the issue raised through this grounds is no more res integra in view of the judgment of the Hon’ble Supreme Court in the case of Topman Exports v. ITO [(2012) 67 DTR 185 (SC)] in which it has been held that when DEPB is sold by a person, his profit on transfer of DEPB will be sales value of DEPB less its face value. It has further been held that DEPB is chargeable as income u/s 28(iiib) in the year in which such person applies for DEPB against the exports and profit on sale of DEPB is chargeable u/s 28(iiid) in the year in which he transfers DEPB. Respectfully following the precedent we set aside the impugned order on this issue and direct the Assessing Officer to allow the claim in accordance with the aforenoted judgment of the Hon’ble Supreme Court.
16. Ground no.9 is against the direction of the learned CIT(A) to reduce 10% export incentives from the gross indirect cost by considering the same as indirect expenditure incurred in earning such incidence. Having heard the rival submissions it is noted that this ground is also covered in favour of the assessee by the judgment of the Hon’ble Supreme Court in the case of Hero Exports v. CIT [295 ITR 454 (SC)]. In this case it has been held that the principle of attribution is applicable to cases falling u/s 80HHC(3)(b) and therefore, part of indirect cost has to be apportioned to expenses incurred for earning export incentives. 10% of total income has been held as fair estimate in this case. As the view taken by the learned CIT(A) matches with that of the Hon’ble Supreme Court in the aforenoted case, we are of the considered opinion that no interference can be made in the impugned order on this issue. This ground is not allowed.
17. Last ground of the Revenue’s appeal is against the direction of the learned CIT(A) to reduce export profits based on book profit in the ratio of export turnover to total turnover and not the quantum of deduction as worked out u/s 80HHC for the purposes of working out ‘book profit’ liable for MAT u/s 115JB of the Act.
18. After considering the rival submissions and perusing the relevant material on record we find that this issue is directly covered in favour of the assessee by the judgment of the Hon’ble Supreme Court in the case of Ajanta Pharma Ltd. v. CIT [(2010) 327 ITR 305 (SC)] in which it has been held that clause (iv) of the Explanation to section 115JB covers full export profits of 100% as ‘eligible profits’ and the same cannot be reduced to 80% by relying on section 80HHC(1B). Thus it is evident that the learned CIT(A) has taken an inescapable view on this point which does not require any interference. This ground is not allowed.
19. Ground no.4 of the assessee’s cross objection is against the direction of the learned CIT(A) for treating sale of scrap as part of ‘total turnover’ in the computation of deduction u/s 80HHC.
20. After considering the rival submissions and perusing the relevant material on record we find that the learned CIT(A) sustained the inclusion of ‘scrap sale’ within the ‘total turnover’. The assessee’s contention that the amount of realization from sale of scrap should be reduced from the direct cost of exports is not acceptable in view of the fact that there is no material on record to indicate that the scrap was generated from the material directly used for manufacture of goods exported having no element of profit. The Hon’ble Punjab & Haryana High Court in CIT v. Bicycle Wheels (India) [(2011) 335 ITR 384 (P&H)] has held that the sale of scrap cannot be excluded from ‘total turnover’ which shall increase the denominator of formula for determining the extent of benefit admissible to an assessee u/s 80HHC of the Act. Similar view has been taken by the Mumbai bench of the tribunal in the case of M/s. Albright & Wilson Chemicals India Limited v. DCIT in ITA No. 4362/m/2003. In our considered opinion the learned CIT(A) was justified in deciding accordingly. This ground of C.O. is not allowed.
21. The assessee has raised two additional grounds. The ld. AR stated that both the grounds involve only the determination of question of law without requiring any consideration of fresh facts. No serious objection was taken by the learned Departmental Representative against the raising of such additional grounds. We, therefore, admit such additional grounds for disposal on merits.
22. The first additional ground is against non-charging the interest u/s 234D of the Act. The learned Counsel for the assessee stated that the return for the relevant assessment year i.e. 2001-2002 was filed on 31.10.2001 claiming a refund of Rs. 73,82,177. Refund of Rs. 81,13,024 (including interest) was granted on 24.04.2003. Assessment order in this case was passed u/s 143(3) on 16.02.2004 raising a demand of Rs. 4,38,03,112 inclusive of interest u/s 234D to the tune of Rs. 5,24,101. The assessee has challenged the levy of interest u/s 234D.
23. We have heard the rival submissions and perused the relevant material on record. Section 234D was inserted by the Finance Act, 2003 with effect from 01.06.2003 providing for the levy of interest on excess refund. Sub-section (1) reads as under:-
‘234D. Interest on excess refund.-(1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and-
(a) no refund is due on regular assessment ; or
(b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment,
the assessee shall be liable to pay simple interest at the rate of one-half per cent. on the whole or the excess amount so refunded, for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.
(emphasis supplied by us)
24. Doubts were expressed in certain quarters about the significance of the date of 1.6.2003, by which this provision became a part of the statute by the Finance Act, 2003. It was interpreted by some persons as an indicative of the assessment year from which this provision is intended to come into force, viz., A.Y. 2004-05. Others looked at it as the date of intimation u/s 143(1) and the resultant granting of refund. Still some others interpreted it as the date of passing the regular assessment order, curtailing or eliminating the refund earlier granted pursuant to intimation under section 143(1). To resolve the controversy, this issue was referred to the Special Bench of the Tribunal in the case of ITO v. Ekta Promoters Pvt. Ltd. [(2008) 113 ITD 719 (Del) (SB)]. The Special Bench noticed that section 234D was inserted with effect from 01.06.2003. This provision, being substantive in nature, was held not to have retrospective effect and hence applicable from assessment year 2004-2005 only. It was, therefore, held that interest u/s 234D is chargeable from assessment year 2004-2005 only and hence this section cannot be applied to earlier assessment years even though regular assessment for such assessment years were framed after 1st June, 2003 or the refund granted for those years after the said date. The Hon’ble Delhi High Court in the case of Director of Income Tax v. Jacabs Civil Incorporated [(2011) 330 ITR 578 (Del.)] upheld the view taken by the Special Bench of the tribunal in the afore noted case by holding that section 234D is applicable only from assessment year 2004-2005. The Hon’ble Madras High Court in CIT v. Infrastructure Development Finance Co. Ltd. took a contrary view vide its judgment dated 8th September, 2011 reported in [(2012) 340 ITR 580 (Mad.) by holding that for the applicability of section 234D what is relevant is the date of assessment and not the year of assessment. Since regular assessment in that case was completed on 30th March, 2004 and section 234D came into operation from 1st June, 2003, the Hon’ble High Court held that the assessee was liable to pay interest on the excess refund amount received.
25. At this juncture it is relevant to note that the Finance Act, 2012 has inserted Explanation 2 to section 234D with retrospective effect from 01.06.2003, which reads as under:-
“For the removal of doubts, it is hereby declared that the provisions of this section shall also apply to an assessment year commencing before the 1st day of June, 2003, if the proceedings in respect of such assessment year is completed after the said date.”
(emphasis supplied by us)
26. The rationale of the insertion of Explanation 2 has been explained in the Memorandum explaining the provision of Finance Bill 2012 as under:-
Clause 85 of the Bill seeks to insert a new Explanation to section 234D of the Income-tax Act relating to interest on excess refund.
The existing provisions of sub-section (1) of the aforesaid section 234D provides that where any refund is granted to the assessee under sub-section (1) of section 143 and no refund is due on regular assessment, or the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, then, the assessee shall be liable to pay simple interest at the rate of one-half per cent. on the whole or the excess amount so refunded for every month or part of a month comprised in the period from the date of grant of refund to the date of such regular assessment.
