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Income Tax Appellate Tribunal, ‘A’ BENCH, KOLKATA
Before: Shri Sanjay Garg & Dr. Manish Borad
Per Dr. Manish Borad, Accountant Member:- This appeal at the instance of Revenue for assessment year 2009-10 is directed against the order of ld. Commissioner of Income Tax (Appeals)-12, Kolkata dated 22.03.2017, which is arising out of the order under
Assessment Year: 2009-2010 M/s. Cheviot Company Limited section 263/ 143(3) of the Act dated 15.03.2015 framed by ld. DCIT, Circle-1(1), Kolkata.
The first issue for our consideration is that the ld. CIT(Appeals) has erred in deleting the disallowance of Rs.1,27,64,973/- debited towards cess paid on exported finished goods and cess paid on consignment sales expenses.
The ld. Departmental Representative vehemently argued supporting the order of ld. Assessing Officer, whereas ld. Counsel for the assessee supported the finding of ld. CIT(Appeals).
We have heard the rival contentions and perused the relevant records placed before us. We observe that the assessee is a Limited Company, which declared income of Rs.17,85,51,389/- in the return for A.Y. 2009-10 filed on 25.09.2009. During the course of scrutiny carried out by the ld. Assessing Officer in compliance to order under section 263 of the Act examined the issue of education cess expenditure claimed by the assessee. The assessee deals in Jute goods and makes domestic sales, export sales and consignment sales. It was submitted by the assessee that cess paid on the domestic sales is reimbursed from the buyers and, therefore, the sale is shown as net off cess paid, whereas for export sales and consignment sales, the cess is not recovered from the buyers and, therefore, the same is claimed as an expenditure. The ld. Assessing Officer, however, was not Assessment Year: 2009-2010 M/s. Cheviot Company Limited satisfied and he disallowed the cess expenditure of Rs.1,27,64,973/-.
When the assessee carried the matter before the ld. CIT(Appeals), who was able to explain the accounting system and business model adopted by it consistently regarding cess charged on manufacturing of jute goods. The relevant finding of the ld. CIT(Appeals) reads as under:-
“3.1. I have considered the assessment order as well as the written submission along with supporting evidence filed by the A/R of the appellant. I find that the simple issue for my consideration is that whether the claim of appellant relating to cess paid on exported finished goods amounting to Rs. 1,10,53,188/- and cess paid on consignment sales amounting to Rs. 17,11,785/- is allowable or not. I find from the records that indeed a cess of 1% is levied and collected on removal of every article manufactured out of jute under the Jute Manufacturers Cess Act, 1983. I find that appellant’s sales include Domestic sales, Export sales and Consignment sales. The assessee collects cess separately in case of domestic sales and therefore the domestic sales are net of cess invoiced to customers. No claim is made by the assessee in case of cess realised and paid in respect of domestic sales. However, in case of export sales and consignment sales, since the assessee cannot separately realise the cess, it separatejv^alms cess on export sales and consignment sales in its P/L account. The assessee has filed copies of invoices in support of its claim which were already filed before A.O. I find that cess paid is not invoiced to the export customer and therefore cess is not excluded from the sales. I find that cess pertaining to export sales and consignment sales is borne by the assessee and is therefore allowable deduction. I find that the A.O. has simply rejected the plea of the assessee without verifying any of the supporting evidences filed by the assessee in this regard. I find the action of A.O. to disallow cess as export finished goods and cess on consignment sales is without any basis. It was stated by the A/R of the appellant that this is a regular phenomenon and in all earlier assessments this claim of the appellant has not been disallowed. Thus since there is no change in 3
Assessment Year: 2009-2010 M/s. Cheviot Company Limited any facts and circumstances during the relevant assessment year, the A.O. cannot disallow the claim relating to cess paid on finished goods and cess paid on consignment sales. The allegation of A.O. that it is not clear whether the assess company does not realize any cess from customer in respect of consignment sales is easily verifiable from invoices drawn as each consignment sales. The A.O. did not do so. Thus considering the entire facts and circumstances the A.O. is directed to delete the aggregate disallowance of Rs. 1,27,64,973/- on account of cess paid on export of finished goods and cess paid on consignment sales, ihese grounds are thus allowed”.
From perusal of the above finding, we notice that the assessee is consistently adopting the accounting policies, wherein the cess of 1% levied by it and collected on removal of every article manufactured out of jute under the Jute Manufacturers Cess Act, 1983, the cess collected on domestic sales is recovered from the customers and, therefore, net of cess is invoiced and no claim is made by the assessee for such cess realized and paid in respect of domestic sales. In other words, against the cess collected from the domestic sales, cess deposited with the authority is set off and the account is squared off. However, in case of export sales and consignment sales, the assessee is not realizing the cess separately from its customers and the cess being paid in the regular course of business of manufacturing jute articles, is claimed as business expenditure. Under these given facts, we fail to find out any infirmity in the finding of ld. CIT(Appeals) rightly allowing the claim of expenditure in the form of cess paid of Rs.1,27,64,973/- deposited by the assessee calculated @ 1% on the export sales and consignment sales. Thus Ground No. 1 raised by the Revenue is dismissed.
Assessment Year: 2009-2010 M/s. Cheviot Company Limited
The second issue for our consideration is regarding disallowance under section 14A of the Act.
The ld. Assessing Officer based on the figures of average investments calculated the disallowance under section 14A of the Act at Rs.55,57,150/- as per Rule 8D of the Income Tax Rules. The matter was carried before the ld. CIT(Appeals). The ld. CIT(Appeals) deleted the interest disallowance under section 14A on the ground that reserve free surplus and capital are much more than investment in shares in the Mutual Funds. As regards disallowance under section 8D(2)(iii) of the Income Tax Rules is concerned, the ld. CIT(Appeals) held that the issue needs to be restored to the ld. Assessing Officer for re-computing the disallowance only with regard to the investment yielding exempt income. The finding of the ld. CIT(Appeals) reads as under:-
“4.1. I have considered the findings contained in the assessment order as well as the written submissions filed by the A/R of the appellant. The detailed working of such disallowance U/s. 14A read with Rule 8D as per page 3 of assessment order shows as under: - Disallowance under Rule 8D(2)(i) Nil Disallowance under Rule 8D(2)(ii) Rs. 17,53,1397- Disallowance under Rule 8D(2)(iii) Rs. 41,06,595/- Rs. 58,59,734/- Less: Disallowed in original Assessment Rs. 3,02,584/- Rs. 55,57,150/- I fully agree with the contentions of A/R that borrowed fund of Rs. 5 Crores and odd cannot play any role in acquiring investments in share & Mutual Funds aggregating to Rs.96 Crores since the assessee’s own Capital including reserves amounted to Rs. 236 Crores . I further find while deciding similar disallowance U/s 14A relevant to Assessment Year 2012-13 that 5
Assessment Year: 2009-2010 M/s. Cheviot Company Limited A.O. did not make any disallowance for interest payment within the meaning of Rule 8D(2)(ii) in that year. 1 also agree that the decision of Kolkata high Court in the case of RKBK Fiscal Services (P) Ltd., Supra and / or CBDT’s Circular No. 05/2014 dated 11.02.2013 cannot have any application since facts are distinguishable. In view of the totality of facts there arises no question for disallowance under Rule 8D(2)(ii) in the present case. Hence, A.O. is directed to delete disallowance of Rs. 17,53,139/- under Rule 8D(2)(ii). So far as disallowance under Rule 8D(2)(iii) is concerned, I have already given detailed findings while dealing with similar dispute relatable to assessment year 2012-13 in Appeal No. 10178/CIT(A)-12/Kol/2015-16. A.O. is accordingly directed to re-compute disallowance under Rule 8D(2)(iii) proportionate of assessee’s investment in Share & Mutual Funds which has, in fact, yielded exempt income. This ground is accordingly allowed in part as indicated above”.
From the perusal of the above finding so far as interest disallowance under section 14A of the Act at Rs.17,53,139/- is concerned, we fail to find any justification in the finding of ld. Assessing Officer since the assessee-company has its own capital reserve amounting to Rs.236 crores and the borrowed funds are of Rs. 5 crores only. Therefore, in lack of any specific observation of the ld. Assessing Officer that the borrowed funds have been utilized for making the investment in shares and Mutual Funds, it is to be deemed that the assessee has applied its accumulated reserve and capital towards the investment in shares & Mutual Funds. Thus the ld. CIT(Appeals) has rightly deleted the interest disallowance of Rs.17,53,139/-.
As far as the 3rd limb of Rule 8D(2) is concerned, which provides for disallowance of 0.5% of the average investment, we Assessment Year: 2009-2010 M/s. Cheviot Company Limited notice that this Tribunal in the case of REI Agro Limited reported in (2013) 144 ITD 141, which has been subsequently affirmed by the Hon’ble Jurisdictional High Court, it has been held that for the purpose of Rule 8D(2)(iii) of the investment, which does not yield exempt income, cannot be included for the purpose of disallowance. We note that the ld. CIT(Appeals) has applied this ratio and restored the issue to Assessing Officer for necessary re- computation, and such finding do not call for any interference from our side. Thus Ground No. 2 is partly allowed for statistical purposes.
Ground No. 3 is general in nature, which does not call for recording of any finding.
In the result, the appeal of the Revenue is partly allowed for statistical purposes. Order pronounced in the open Court on 12th May, 2023. Sd/- Sd/- (Sanjay Garg) (Manish Borad) Judicial Member Accountant Member Kolkata, the 12th day of May, 2023 Copies to :(1) Deputy Commissioner of Income Tax, Circle-1(1), Kolkata, Aayakar Bhawan, 7th Floor, Room No. 20, P-7, Chowringhee Square, Kolkata-700069 (2) M/s. Cheviot Company Limited, 9th Floor, Magma House, 24, Park Street, Kolkata-700016 7