MARK EXHAUST SYSTEMS LTD.,NEW DELHI vs. DCIT, CIRCLE- 16(1), NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “E” BENCH: NEW DELHI

(THROUGH VIDEO CONFERENCING)

BEFORE SHRI R.K.PANDA, ACCOUNTANT MEMBER & SHRI KUL BHARAT, JUDICIAL MEMBER

ITA No.3095/Del/2018 Assessment Year : 2012-13 M/s Mark Exhaust Systems Ltd. vs DCIT, 606, Vishal Bhawan, 95 Nehru Circle-16(1), Place, New Delhi-110019 New Delhi PAN-AAACM1497Q APPELLANT RESPONDENT Appellant by Sh. Sanjay Sood, CA Respondent by Sh. Gaurav Pundir, Sr. DR Date of Hearing 13.09.2021 Date of Pronouncement 11.10.2021

ORDER PER KUL BHARAT, JM :

This appeal filed by the assessee pertaining to assessment year 2012-

13 is directed against the order of Ld. CIT(A)-33, New Delhi dated

28.02.2018. The assessee has raised following grounds of appeal:-

ITA No. 3095/Del/2018

return of income on 26.09.2012 through electronic mode declaring income

of Rs.8,05,23,960/- after claiming the deduction of Rs.63,70,888/- under

chapter VI-A. The case was selected for scrutiny and the assessment was

completed u/s 143(3) of the Income Tax Act, 1961(‘the Act’) vide order

dated 17.03.2015. By framing the assessment, the Assessing Officer

noticed that the assessee had claimed loss on exchange fluctuation of

Rs.97,91,000/-. The assessee was asked as to why the claim should not be

disallowed. In response thereto, the assessee filed its reply however, the

reply of the assessee was not found acceptable, therefore, the Assessing

Officer disallowed the claim of the assessee on exchange fluctuation of

Rs.97,91,000/-. Further, the AO disallowed the expenses related to

club subscription of Rs.3,62,992/-, disallowance u/s 14A of Rs.42,645/-,

disallowance of interest on loan for capital expansion of Rs.1,29,63,747/-

and made ad-hoc disallowance of Rs.93,562/- on travelling and conveyance

of the directors.

CIT(A) who after considering the submissions and material on record,

sustained the addition of Rs.1,29,63,747/- made on account of

disallowance of interest on capital expenses, disallowance made by

invoking the provisions of section 14A of the Act of Rs.42,645/-, and

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deleted the ad-hoc disallowance made by AO and the addition made on

account of claim of loss on account of fluctuation of foreign exchange.

Tribunal.

made on account of disallowance u//s 14A of the Act.

have made disallowance and sustained the same in mechanical fashion

without appreciating the fact in the right perspective. He submitted that

the Assessing Officer failed to appreciate the fact that the assessee had not

incurred any expenditure for earning the exempt income. He submitted

that the primary fact which needed to be ascertained was that whether any

expenditure had been incurred in relation to earning of exempt income. He

contended that there has to be some nexus between the earning of income

and the expenditure so disallowed. In the absence of any relation of the

expenditure qua the exempt income, no disallowance could be made. He

submitted that the Assessing Officer considered the entire finance cost in

making addition, without appreciating that the same consists of bank

charges, as well as interest cost related to specific loans. He further

contended that in the last para of the assessment order, the Assessing

Officer had himself disallowed Rs.1,29,63,747/- out of this interest, being

towards specific loans.

orders of the authorities below.

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available on record and gone through the orders of the authorities below.

Ld.CIT(A) in para 7 had decided the issue by observing as under:-

the Assessing Officer, without adverting to the submissions of the assessee

that no expenditure was incurred for earning of exempt income when it was

categorically contended on behalf of the assessee that no expenditure was

incurred on earning of exempt income. Ld. Counsel for the assessee

submitted that the assessee had subscribed to shares of its bankers in an

earlier Assessment Year a long time back. It was further stated that

investment had been continuing as the initial amount of investment was

Rs.9,49,000/- since these equity shares were held in DEMAT account and

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therefore, dividend of Rs.1,16,000/- was also credited to assessee’s bank

account. It is further stated that the Assessing Officer erroneously

considered the entire finance cost, bank charges as well as interest cost

related to specific loans. Undisputedly, the assessee had invested a sum of

Rs.9,44,000/- in the shares of two banks namely Corporation Bank of

Rs.2,48,000/- and State Bank of Travancore of Rs.6,96,000/-. During the

year under consideration, the assessee has earned dividend income of

Rs.1,16,000/- on this investment which is an exempt income.

Undisputedly, section 14A of the Act empowers the Assessing Officer to

disallow the expenditure incurred in relation to earning of exempt income.

It is contention of the assessee so far interest expenditure claimed by the

assessee is concerned that related to specific loans and did not relate to the

investment out of which the assessee had earned dividend income. It is

well settled law that for making disallowance u/s 14A of the Act, there has

to be an expenditure related to the exempt income which has been charged

in P & L Account by the assessee. In the present case, it is the contention

of the assessee that so far interest expenditure is concerned, firstly, it

related to specific loans and were not related to exempt income and

secondly, the investment was made way back in the share of bankers of

the assessee, such shares were kept in DEMAT account. So far, the

administrative expenses i.e. are concerned, there is no dispute with regard

to the fact that Rule 8D of the Income Tax Rules, 1962 is in operation for

Assessment Year under consideration. Therefore, looking to the facts and

circumstances of the case, we restrict the disallowance to the extent of the

administrative expenses one-half percent of the average of the value of

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investment as on the first day and the last day of the previous year i.e.

Rs.9,44,000/- i.e. 4,720/-. Thus, Ground No.1 raised by the assessee is

partly allowed.

of interest of Rs.1,29,63,747/- and not allowing the depreciation thereon

which was treated by the Assessing Officer being incurred on capital

expansion.

before the authorities below. It was contended that the Assessing Officer

mis-directed himself by not appreciating the facts correctly. He submitted

that the Assessing Officer stated in the assessment order that loan which

was taken from Mizuho Corporate Bank Ltd. was payable in half yearly

installment as per their amortization schedule starting from 31.10.2013 to

30.04.2016. It was further contended that the Assessing Officer then

proceeded to make disallowance of Rs.1,29,63,747/- being the interest on

such loan on the basis that loan was unsecured from Mizuho Corporation

Bank Ltd. and the interest expenditure did not relate to Financial Year

under consideration and the amount of loan had been expended for capital

expansion. Thus, as per Assessing Officer, the interest expended was

needed to be capitalized. Ld. Counsel for the assessee submitted that the

details of interest were furnished before the authorities below. A perusal of

the details indicate that interest was on two different loans from Mizuho

Corporate Bank. One loan was taken in the year ended 31.03.2006 and

other of Rs.17,79,60,000/- was obtained during the year under

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consideration. The interest of Rs.1,29,63,747/- included the interest on the

older loan of Rs.9,73,060/- which was for capital expansion and the

interest of Rs.1,19,90,687/- on the new loan which was taken during the

year under consideration and the same was only for the needs of its day to

day operations. The first loan in Foreign Currency was obtained in March,

2006 from Mizuho Corporate Bank equivalent to USD 3 million. The

principal amount of the loan was repaid in two installments viz 4th/5th

year, after the receipt of the loan. Such loan was repaid as on 31.03.2012.

He submitted that the loan was used to incur capital expenses. The assets

etc. installed using such funds, were put too use soon thereafter and

depreciation etc. was allowed by Department. The interest on the loan has

also been allowed in the past as revenue expenditure. No disallowance on

account of interest was made in the earlier assessment years. The second

loan in Foreign Currency was obtained in May, 2011 from Mizuho

Corporate Bank equivalent to USD 4 million and interest was 9.96% per

annum. This loan was due and outstanding as on 31.03.2012 and stood at

Rs.17,79,60,000/-. The interest on such loan was claimed as expenditure

by the assessee. It was further contended that the timing of the repayment

of the principal amount of the loan has no relationship with the interest

accrued on the loan. The Assessing Officer concluded that the interest was

not to be considered in this Financial Year under consideration. It was

contended that the interest would accrue over the period of the loan and

interest upto 31.03.2012 would accrue as an expenditure for the assessee.

He further submitted that the Assessing Officer treated the loan as

obtained for capital expansion which is factually incorrect, it was only the

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first loan which was taken for capital expansion. He submitted that the

Assessing Officer did not bring any evidence demonstrating that the loan

was utilized for capital expansion.

authorities below.

available on record and gone through the orders of the authorities below.

Ld.CIT(A) has confirmed the addition by observing as under:-

11.2. “Whereas the DCIT has given a finding that Note 5 of the balance sheet states that the assessee has taken unsecured loan from Mizuho Corporation Bank which is payable in half yearly installment as per their amortization schedule which is going to start from 31.10.2013. As the expenditure does not relate to the period under consideration i.e. 01.04.2011 to 31.03.2012, the same is not allowable for the period under consideration. 11.3. Thus, it is evident the assessee has made a provision of interest on loans taken from Mizuho Corporation Bank, Japan for the assessment year 2012-13 and that the said interest was not paid to the said Bank. It has also been noted that the said foreign bank has branches in India and is duly on the list of Reserve Bank of India. Thus, the interest on loan is also subjected to the provisions of Section 43B of the Income Tax Act. But the interest is payable in foreign exchange subject to the Provisions of DT AA which says that such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State. But if the recipient is the beneficial owner of the interest, the tax may be charged (a) @ 10 per cent of the gross amount of the interest if the beneficial owner is a

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bank and (b) @ 15 per cent of the gross amount of the interest in all other cases. 11.4. In this manner the assessee has not followed the provisions of section 195 read with DTAA by not deducting TDS @ 10% of the amount payable and section 43B of the Income Tax Act. Therefore, I hold that the assessee is not eligible to claim interest expense of Rs.l,29,63,747/- for the assessment year 2012-13 and the disallowance, therefore, is hereby confirmed.” 14. From the above, it is clear that Ld.CIT(A) confirmed the disallowance

altogether on the different basis without putting the assessee on notice.

The ground taken for allowance of depreciation on capitalization of interest

was rejected on the basis that before the Assessing Officer, such ground

could not have been taken without claiming it in the return of income. In

support of this, Ld.CIT(A) has placed reliance on the judgement of Hon’ble

Supreme Court rendered in the case of Goetze India Ltd. vs CIT reported in

[2006] 204 CTR 0182. Ld.CIT(A) has mis-directed himself as the judgement

of the Hon’ble Supreme Court does not put fetters on the power of the

appellate authority below for entertaining such claim. Therefore,

considering the totality of the facts and material placed before us, we deem

it proper and in the principle of natural justice to restore this ground to the

file of Ld.CIT(A) to decide the issue afresh after providing a reasonable

opportunity to the assessee. Thus, Ground Nos. 2 & 3 raised by the

assessee are allowed for statistical purposes.

of disallowance of subscription and membership expenses of

Rs.3,62,992/-.

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before Ld.CIT(A). It was contended on behalf of the assessee that the

subscription fees for DLF Golf Club and Panchshila Club. Such facilities

are provided to the senior managerial personnel to meet senior executives

of the assessee and customers etc. in a relaxed settings. It was further

contended that such meetings develop relations which are useful for the

running of business smoothly. It was further contented that the amount

was expended in furtherance of the company’s business hence, no

disallowance ought to have been made. It was further contended that the

expenditure was incurred wholly and exclusively for business expediency.

below, the assessee failed to discharge its onus regarding the expenditure

being incurred for business expediency. Ld. Sr. DR further submitted that

only such expenditure which was incurred for the business and for

furtherance of the business, was allowable. The assessee did not prove

that the expenditure was incurred wholly and exclusively for the purpose of

business.

are, firstly, the expenditure was incurred for business expediency and

secondly, the disallowance is highly excessive. We find that the

expenditure is related to subscription or membership fee and expenditure

incurred for business meetings. It is the contention of the assessee that

the facility was provided to senior managerial personnel of the company

under the terms of employment for having meetings with senior executives

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and probable customers. We find merit in this contention of the assessee

that such membership is used for furthering social relationship and also

develop business communication. Therefore, the disallowance made by the

Assessing Officer is not justified. Hence, same is hereby deleted. This

ground of assessee’s appeal is allowed.

Above decision was pronounced on conclusion of Virtual Hearing in

the presence of both the parties on 11th October, 2021.

Sd/- Sd/- (R.K.PANDA) (KUL BHARAT) ACCOUNTANT MEMBER JUDICIAL MEMBER

*Amit Kumar*