ANUP INSULATION PVT. LTD.,JAIPUR vs. ITO, JAIPUR

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 jurisdiction and for various other reasons and hence the same may kindly be quashed.

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.

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 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.

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 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.

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 of borrowed funds used for investment purpose is liable to be

disallowed. She has relied upon the orders of the authorities below.

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 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."

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/- 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 then decide this issue as per law. Needless to say the assessee be given

an opportunity of hearing.

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.

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 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.

authorities below.

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 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:- 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 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

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