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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI VIJAY PAL RAO, JM & SHRI BHAGCHAND, AM vk;dj vihy la-@ITA No. 392/JP/2017
आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh fot; iky jko] U;kf;d lnL; ,oa Jh Hkkxpan] ys[kk lnL; ds le{k BEFORE: SHRI VIJAY PAL RAO, JM & SHRI BHAGCHAND, AM vk;dj vihy la-@ITA No. 392/JP/2017 fu/kZkj.k o"kZ@Assessment Year : 2013-14 cuke M/s Anup Insulation Pvt. Ltd. The ITO, Vs. 7-B Umang House, Ward-6(2), Bharat Mata Path, Jaipur. Jamanalal Bajaj Marg, C-Scheme, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAGCA 1569 F vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri Rajeev Sogani (C.A.) & Shri Rohan Sogani (C.A.) jktLo dh vksj ls@ Revenue by : Smt. Seema Meena (JCIT) lquokbZ dh rkjh[k@ Date of Hearing : 12/06/2018 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 18/06/2018 vkns'k@ ORDER
PER: VIJAY PAL RAO, J.M. This appeal by the assessee is directed against the order dated 08.03.2017 of CIT (A), Ajmer for the assessment year 2013-14. The assessee has raised the following grounds:-
“1. That the impugned assessment order u/s 143(3) dated 29.12.2015 is bad in law and on facts of the case for want of
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
jurisdiction and for various other reasons and hence the same may kindly be quashed.
Rs.23,78,650/-: The Id. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the disallowance of Rs. 23,78,650/- made by the Id. AO u/s 14A r.w.r. 8D despite the admitted facts that the assessee neither earned the exempt income nor incurred any expenditure on those investment and without considering our contention. Hence the disallowance so made by the AO and confirmed by the Id. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence same may kindly b deleted in full.
Rs.6,28,288/-: The Id. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the disallowance of Rs. 6,28,288/- out of Rs. 12,93,714/- (about 50%) made by the Id. AO on account of commission paid on commission sale. Hence the disallowance so made by the AO and confirmed by the Id. CIT(A) is being totally contrary to the provisions of law and facts on the record and hence same may kindly be deleted in full.
The Id. AO further erred in law as well as on the facts of the case in making the disallowance without rejecting the books of account or without invoking the provisions of S. 145(3). Hence all the disallowance so made by the AO is being totally contrary to the provisions of law and facts on the record and hence same may kindly be deleted in full. 5. The Id. AO has grossly erred in law as well as on the facts of the case in charging interest u/s 234A, 234B & 234C. The appellant totally denies it liability of charging 2
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
of any such interest. The interest, so charged, being contrary to the provisions of law and facts, may kindly be deleted in full. 6. The appellant prays your honour indulgences to add, amend or alter of or any of the grounds of the appeal on or before the date of hearing.”
At the time hearing, the learned counsel for assessee as stated at
bar that the assessee does not press ground nos. 1, 4 to 6 and the
same may be dismissed as not pressed. The ld. DR has raised no
objections if ground nos. 1, 4 to 6 of the assessee’s appeal are
dismissed as not pressed. Accordingly the ground nos. 1, 4 to 6 of the
assessee’s appeal are dismissed being not pressed.
Ground No. 2 is regarding disallowance made U/s 14A of the
Income Tax Act. During the course of assessment proceedings the AO
noted that the assessee is having investment of Rs. 3,09,00,000/- the
income on which is exempt from tax. Accordingly, the AO proposed to
disallow the expenditure on account of interest as well as indirect
administrative expenditure. The assessee objected to the disallowance
U/s 14A of the Act and contended that these are strategic investment
made on account of business expediency. Further, the assessee
contended that no income was received during the year out of the
investment and the investments were made from interest free fund 3
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
available with the assessee. AO did not accept these contentions and
made disallowance U/s 14A r.w.r 8D and computed on amount of Rs.
23,78,650/- to be disallowed and added to the total income of the
assessee. The assessee challenged the action of the AO before the ld.
CIT(A) but could not succeed.
Before us, the ld. AR of the assessee has submitted that when no
exempt income was earned or received by the assessee during the year
under consideration from the investment then no disallowance is called
for. In support of his contention he has relied upon the following cases
as under:- • ACIT vs. Deepak Vegpro in ITA No. 235 & 248/JP/2017 order dated 11.05.2017. • KGK Enterprises vs. ACIT 88 taxmann.com 264. • Cheminvest Ltd. vs. CIT 378 ITR 33.
The alternative contention of the ld. AR of the assessee is that the
assessee has not incurred any expenditure in respect of the investment
made and for earning any exempt income. The ld. AR has submitted
that the assessee’s own interest free fund was available for making
investment. In any case only a shortage of Rs. 75,58,200/- can be
considered for the purpose of disallowance on account of interest
expenditure whereas the Assessing Officer has considered the entire
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
investment of Rs. 3,09,00,000/- for computing the disallowance on
account of interest expenditure. Thus, the ld. AR has submitted that the
order of the AO is contrary to the actual facts.
On the other hand, the ld. DR has submitted that the assessee
raised the contention before the AO as well as ld. CIT(A) that the
investments in question were strategic in nature and due to commercial
expediency and therefore, no disallowance U/s 14A of the Act is called
for. The ld. DR has submitted that the Hon’ble Supreme Court in case of
Maxopp Investment Ltd. vs. CIT has held that dominant purpose for
which the investment into share is made by an assessee is not relevant.
Further, the Hon’ble Supreme Court has upheld the rule of
apportionment as included in the provisions of Section 14A of the Act.
Thus, the objective behind section 14A is to apportion the expenses
incurred in relation to the income which does not from part of total
income. The ld. DR has further submitted that if the AO has given a
details as furnished by the assessee regarding the assessee’s own fund
and there is no change or increase in assessee’s own funds during the
year under consideration whereas there is a fresh investment during the
year to the tune of Rs. 1.40 Crores. Therefore, the interest on account
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
of borrowed funds used for investment purpose is liable to be
disallowed. She has relied upon the orders of the authorities below.
We have considered the rival submissions as well as the relevant
material on record. The first contention of the assessee is that it has not
received or earned any tax free income during the year under
consideration from the investments in question and consequently no
disallowance can be made. We find that so far as the indirect
expenditure to be apportioned for earning the dividend income it is now
settled proposition that when the assessee has not received or earned
any exempt income then, no disallowance on account of indirect
common expenditure to be apportioned. The Hon’ble Delhi High Court
in case of Cheminvest vs. CIT (supra) has dealt with this issue has held
in paras 18 to 23 as under:-
“18. In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income. 19. In light of the clear exposition of the law in Holcim India (P.) Ltd's. case (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned 6
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue. 20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody's case (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57(iii) of the Act could be allowed as a deduction against dividend income assessable under the head "income from other sources". Under Section 57(iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income', did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: "What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody's case (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is 'for the purpose of making or earning such income'. Section 14A of the Act on the other hand contains the expression 'in relation to income which does not form part of the total income.' The decision in Rajendra Prasad Moody's case (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act. 22. In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd's. case (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd's. case (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case. 23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
Following the said decision, the Coordinate Benches of this Tribunal in
case of ACIT vs. Deepak Vegpro (supra) as well as K.G.K. Enterprises
vs. ACIT (Supra) has also taken a similar view. However, the said
principle would not apply in case of direct expenditure incurred for
making the investment which would yield in tax free income. Therefore,
in case the assessee has utilized borrowed funds for making investment
then the interest expenditure on such borrowed founds would be a
direct expenditure for the purpose of making investment and
consequently the said expenditure is not allowable against the other
taxable hence, the same would be disallowed U/s 14A of the IT Act. In
the case in hand, the AO has given the details of investment as under:-
Investment is equity instruments Rs. 1,69,00,000/- Current Investment in equity Rs. 1,40,00,000/- Total Rs. 3,09,00,000/-
Thus, it is clear case that during the year an investment in the equity of
Rs. 1.40 crores was made by the assessee. The Assessing Officer has
also given details furnished by the assessee regarding interest free
funds available with the assessee as under:-
Particulars As on 31/03/2013 As on 31/03/2012
Shree capital 1,82,67,090/- 1,82,67,090/-
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
Securities premium 50,74,710/- 50,74,710/-
Total 2,33,41,800/- 2,33,41,800/-
These facts were part of the assessee’s reply and therefore, the
assessee has not disputed the correctness of the facts recorded by the
AO. Hence, there is fresh investment of Rs. 1.40 Crores during the year
under and there is no increase in the interest free funds with the
assessee during the year under consideration and therefore, to the
extent of borrowed funds used by the assessee for making fresh
investment during the year, the interest on such borrowed fund is not
allowable claim against the taxable income and hence, the same is a
direct expenditure to be disallowed U/s 14A of the Act. The exact details
of the borrowed funds as well as the amount of borrowed funds used
for investment is not available. However, the assessee has claimed that
only Rs. 75, 58,200/- were used by the assessee as borrowed funds for
making investment. In view of the above facts and circumstances of the
case, we set aside this issue to the record of the Assessing officer to
verify the facts regarding the use of borrowed funds for making current
investment and availability of assessee’s own interest free funds and
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
then decide this issue as per law. Needless to say the assessee be given
an opportunity of hearing.
Ground No. 3 is regarding disallowance of commission
expenditure. The Assessing Officer noted that the assessee has paid
commission of Rs. 10,62,231/- to various related parties. The AO
further observed that no supporting evidence to show that these parties
had actual rendered the services to justify the payment of commission
which is higher than the earlier year. Accordingly, the AO applied the
rate of commission at 1.40% of the total sale as paid for the
assessment year 2011-12 and consequently disallowance a sum of Rs.
6,78,288/- out of the total commission of Rs. 10,62,231/- paid to the
related parties. The assessee challenged the action of the AO before the
ld. CIT(A) but could not succeed.
Before us, the ld. AR of the assessee has submitted that the rate
of commission paid to the related parties is equivalent to the payment
made in the earlier years and therefore, the Assessing officer is not
right in making the disallowance by taking the percentage of
commission against the total sales and ignoring the commission paid to
the related parties against the sale of the respective related parties. The
ld. AR has further contended that the commission paid to the related
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
parties for the years under consideration is equivalent in term of
percentage to the respective sales as paid in the A.Y. 2011-12. He has
further submitted that during the year under consideration the assessee
has also paid commission to unrelated parties @ 6% of the sale made
by the said unrelated parties whereas the commission paid to the
related parties is from 2 to 5% which is less than the commission paid
to unrelated parties. When the internal comparable price is available
then applying the wrong percentage of commission by the AO is not
justified.
On the other hand, the ld. DR has relied upon the orders of the
authorities below.
We have considered the rival submissions as well as the relevant
material on record. We note that the assessee has paid commission of
Rs. 10,62,231/- to 7 related parties which are common as in the earlier
assessment years. For the assessment year 2011-12 the commission
was paid to these related parties @ 2%, 4% and 5% which is
equivalent to the rate of commission paid by the assessee during the
year under consideration. However the AO has worked out the fair
market rate of commission by considering the total commission paid by
the assessee for the assessment year 2011-12 against the total sales
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
whereas the sales affect by the related parties in the said assessment
year is only Rs. 3,14,26,896/- as against the total sale of Rs.
8,37,60,982/-. Thus the AO has applied a wrong bench mark/ para
meter for making disallowance of commission paid to the related
parties. The provisions of Section 40A(2)(b) of the Act provides
disallowance of expenditure if in the opinion of the AO such expenditure
is excessive or unreasonable having record to the fair market value of
services or facilities for which the payment is made. In the case in
hand, the AO has not compared commission paid to the related parties
with the fair market price of the services rendered by the related
parties. Rather the AO has applied improper method of computing the
comparable rate of commission and instead of comparing the rate of
commission to the related parties for the earlier year the, AO applied
the average rate of commission against total sales. Even if such rate
was applied by the AO then, the said rate of commission has to be
compared with the average rate of commission against the total sales
for the year under consideration instead of rate of commission paid to
each individual parties. The relevant details of the commission paid for
the year under consideration and for assessment year 2011-12 are as
under:-
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
FY 2012-13 (AY 2013-14) (relevant AY) Name of person Commission (in Rate of Sales on which Rs. (A) commission% commission has been paid (in Rs.) KR Bhanuka & Related party 1,27,506 4.00% 31,87661
sons
Dhanuka Related party 2,03,406 4.00% 50,85,142
Enterprises
Anup Related party 2,52,411 5.00% 50,48,235
Electricals
Alok electrical Related party 2,80,803/- 5.00% 56,16,045
Palak Related party - 0.00% -
Enterprises
Dhruv Related party 56,712 4.00% 14,17,803
Enterprises
Smt. Nisha Related party 1,41,393 2.00% 70,69,625
Dhanuka
Sub-total (related party) 10,62,231 2,74,24,511
Cable sales Unrelated 2,31,483 6.00% 38,58,058
Agency party
Total 12,93,714 3,12,82,569
FY 2010-11 (AY 2011-12) Name of person Commission (in Rate of Sales on which Rs. (A) commission% commission has been paid (in Rs.) 14
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO
KR Bhanuka & Related party 2.88,600 4.00% 78,09,862
sons
Dhanuka Related party 4,93,300 4.00% 1,16,23,567
Enterprises
Anup Related party 94,860 5.00% 18,97,190
Electricals
Alok electrical Related party 1,56,065 5.00% 31,21,297
Palak Related party
Enterprises
Dhruv Related party
Enterprises
Smt. Nisha Related party 1,39,500 2.00% 69,74,980
Dhanuka
Sub-total (related party) 11,72,324 3,14,26,896
Cable sales Unrelated - -
Agency party
Total 11,72,324 3,14,26,896
The AO has worked out the comparable rate by consideration the total
sale divided by total commission paid for the assessment year 2011-
2012 and such rate of 1.40% was applied for making disallowance.
Whereas the AO did not dispute the fact that for the earlier year the
commission paid to the related parties was at the same rate as paid 15
ITA No. 392/JP/2017 M/s Anup Insulation Pvt. Ltd. vs. ITO during the year under consideration. Accordingly, in view of the above facts and circumstances of the case, when the commission paid by the assessee is at same rate and is less than the rate of commission paid to the unrelated parties then, the disallowance made by the AO is uncalled for hence, the same is deleted. In the result, the appeal filed by the assessee is partly allowed. Order pronounced in the open court on 18/06/2018.
Sd/- Sd/- ¼Hkkxpan ½ ¼fot; iky jko½ (Bhagchand) (Vijay Pal Rao) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 18/06/2018. *Santosh. आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s Anup Insulation Pvt. Ltd., Jaipur. 2. izR;FkhZ@ The Respondent- ITO, Ward-6(2), Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत. 6. xkMZ QkbZy@ Guard File {ITA No. 392/JP/2017} vkns'kkuqlkj@ By order,
सहायक पंजीकार@Aेेज. त्महपेजतंत