UNIVERSAL MEDICARE P.LTD MUMBAI vs ACIT 10(3) MUMBAI

M/s Universal Medicare Pvt Ltd 2 1.

On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO in disallowing purchases from M/s Lucid Prints amounting to Rs.

14,67,110/- on the alleged grounds that no Goods Receipt note (GRNs) are available for certain invoices either with the Supplier or with the Appellant.

3 Ground no.1 is regarding disallowance u/s 14A of the I T Act.

3.1 The assessee has earned dividend income amounting to Rs.

26,50,652/- during the year under consideration on the investment in mutual funds and shares.

The said income is exempt u/s 10(34)(35).

The Assessing Officer observed that the assessee has not allocated the expenditure against such exempt income.

Accordingly, the Assessing Officer disallowed a sum of Rs.

29,53,916/- u/s 14A.

While working out the disallowance of interest expenditure, the Assessing Officer has computed the same on the ratio of the total investment to total fund excluding the current liability.

3.2 On appeal, the CIT(A) has concurred with the view of the Assessing Officer.

4 Before us, the ld AR of the assessee has submitted that the assessee is having its own fund more than the amount of investment; therefore, no expenditure towards the interest shall be disallowed under the provisions of sec.

14A.

The ld AR has referred page 24 of the paper book and submitted that the assessee is having non-interest bearing fund for the AY 1998-99 to 2004-05 more than the investment in the respective years.

She has relied upon the decision of the Hon’ble jurisdictional High Court in the case of Commissioner of Income-tax v.

Reliance Utilities and Power Ltd., reported in 313 ITR 340 and submitted that when the assessee is having its own sufficient funds for investment, then no expenditure towards interest can be disallowed u/s 14A. d u/s 14A.

The ld AR has submitted that in various decisions, the Tribunal has taken a view that upto 5% of the dividend is reasonable disallowance as far as theother expenditure is M/s Universal Medicare Pvt Ltd 4 earning of both, taxable and non taxable income, it would be necessary to apportion the expenditure incurred by the assessee.

However, only that part of the expenditure which is incurred in relation to the income which forms part of the total income should be allowed.

The expenditure incurred in relation to the income which does not form part of the total income has to be disallowed.

In order to disallow the expenditure, the Assessing Officer has to see that there must be proximate relationship between the expenditure and the income which does not form part of the total income.

5.3 Having regard to these facts, we are of the considered opinion that in view of the decision of the Hon’ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd (supra) no disallowance is called for when the assessee is having its own sufficient funds.

The Hon’ble High Court has held in para 8 to 10 as under: “8 We have heard learned counsel for both the parties.

In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs.

172 crores was utilised for the purpose of fixed assets in terms of the balance-sheet as on March 31, 1999, is fallacious.

Firstly, we are not concerned with the balance-sheet as on March 31, 1999.

What would be relevant would be the balance-sheet as on March 31, 2000.

Apart from that, the learned counsel has been unable to point out to us from the balance-sheet that the balance-sheet as on March 31, 1999, showed that the shareholders funds were utilized for the purpose of fixed assets.

To our mind the profit and loss account and the balance- sheet would not show whether the shareholders funds have been utilized for investments. vestments.

The argument has to be rejected on this count also.

Apart from that we have noted earlier that both in the order of the Com- missioner of Income-tax (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee had interest-free funds of its own which had been generated in the course of the year commencing from April 1, 1999.

Apart from that in terms of the balance-sheet there was a further availability of Rs.

398.19 crores including Rs.

180 crores of share capital.

In this context, in our opinion, the finding of fact recorded by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal as to availability of interest-free funds really cannot be faulted.

If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can M/s Universal Medicare Pvt Ltd 6 8.1 We have heard the ld AR of the assessee as well as the ld DR and considered the relevant material on record.

At the outset, we note that this issue has been decided by the Hon’ble jurisdictional High Court in assessee’s own case for the Assessment Year 2003-04 in 190 Taxman 144(Bom).

The Hon’ble High Court has decided the issue in favour of the assessee in para 9 as under: “9.

In order that the first part of clause (e) of section 2(22) is attracted, the payment by a company has to be by way of an advance or loan.

The advance or loan has to be made, as the case may be, either to a shareholder, being a beneficial owner holding not less than ten per cent of the voting power or to any concern to which such a shareholder is a member or a partner and in which he has a substantial interest.

The Tribunal in the present case has found that as a matter of fact no loan or advance was granted to the assessee, since the amount in question had actually been defalcated and was not reflected in the books of account of the assessee. assessee.

The fact that there was a defalcation seems to have been accepted since this amount was allowed as a business loss during the course of assessment year 2006-07.

Consequently, according to the Tribunal the first requirement of there being an advance or loan was not fulfilled.

In our view, the finding that there was no advance or loan is a pure finding of fact which does not give rise to any substantial question of law.

However, even on the second aspect which has weighed with the Tribunal, we are of the view that the construction which has been placed on the provisions of section 2(22)(e) is correct.

Section 2(22)(e) defines the ambit of the expression ‘dividend’.

All payments by way of dividend have to be taxed in the hands of the recipient of the dividend namely the shareholder.

The effect of section 2(22) is to provide an inclusive definition of the expression ‘dividend’.

Clause (e) expands the nature of payments which can be classified as a dividend.

Clause (e) of section 2(22) includes a payment made by the company in which the public is not substantially interested by way of an advance or loan to a shareholder or to any concern to which such shareholder is a member or partner, subject to the fulfillment of the requirements which are spelt out in the provision.

Similarly, a payment made by a company on behalf, of for the individual benefit, of any such shareholder is treated by clause (e) to be included in the expression ‘dividend’.

Consequently, the effect of clause (e) of section 2(22) is to broaden the ambit of the expression ‘dividend’ by including certain payments which the company has made by way of a loan or advance or payments made on behalf of or for the individual benefit of a shareholder.

The definition does not alter the legal position that dividend has to be taxed in the hands of the shareholder. areholder.

Consequently in the present case the payment, even assuming that it was a dividend, would have to be taxed not in the hands of the assessee but in the hands of the shareholder.

The Tribunal was, in the circumstances, justified in coming to the conclusion that, in any event, the payment could not be taxed in the hands of the assessee.

We may in concluding note that the basis on which the assessee is sought to be taxed in the present case in respect of the M/s Universal Medicare Pvt Ltd 8 has not been disputed and the accounts of the assessee has not been rejected by the Assessing Officer.

Therefore, merely on the ground of non production of GRN, the purchases made by the assessee cannot be held as non genuine.

11.1 On the other hand, the ld DR has submitted that when the Assessing Officer has specifically asked to produce the evidence in support of the delivery of the goods, then the onus is on the assessee to prove the genuineness of the purchases.

Since the assessee failed to produce any evidence to show the delivery of the goods, then the Assessing Officer is justified in treating the disallowance of the amount on account of non genuine purchases.

He has relied upon the orders of the lower authorities.

12 We have considered the rival contention as well as the relevant material on record.

The assessee has explained before the lower authorities that since the invoices are in respect of the purchase of promotional material and various items were directly dispatched through courier to different locations; therefore, the GRNs were not readily available with the assessee.

We further note that when the supplier of the goods has confirmed the purchase transaction and the payment has been made through cheque which has not been disputed by the Assessing Officer, then only because in some of the cases the assessee could not produce the GRNs cannot be a basis for holding that the purchase is not genuine. t genuine.

Accordingly, in the totally of the facts of the case and when the payment are made through banking channel and there is no allegation of the amount received by the assessee back coupled with the facts that the supplier has confirmed the transaction of purchases, then the disallowance of purchase is not justified.

Accordingly, we delete the addition made by the Assessing Officer on account of non genuine purchases.