THE DCIT, CIRCLE-2(1)(1),, AHMEDABAD vs. GUJARAT APOLLO INDUSTRIES LTD.,, AHMEDABAD

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH Before: Shri Rajpal Yadav, Judicial Member And Shri Amarjit Singh, Accountant Member ITA Nos. 109 to 110/Ahd/2015 Assessment Year 2010-11 to 2011-12

Gujarat Apollo Industries The Jt. CIT, Ltd., “Parishram”, 5-B, Range-4, Rashmi Society, Vs Ahmedabad Near Mithakhali Circle, (Respondent) Narvangpura, Ahmedabad PAN: AAACG7248P (Appellant)

ITA Nos. 153 to 154/Ahd/2015 Assessment Year 2010-11 to 2011-12

The DCIT, Gujarat Apollo Circle-2(1)(1), Industries Ltd., Ahmedabad Vs “Parishram”, 5-B, (Appellant) Rashmi Society, Near Mithakhali Circle, Narvangpura, Ahmedabad PAN: AAACG7248P (Respondent)

Revenue by: Shri V.K. Singh, Sr. D.R. Assessee by: Shri M.K. Patel, A.R. Date of hearing : 11-07-2018 Date of pronouncement : 19-09-2018 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-

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These four appeals filed two by the assessee and two by the revenue for A.Y. 2010-11 to 2011-12, arise from the order of the CIT(A)-VIII, Ahmedabad dated 22-10-2014, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.

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performance or for any other reasons. The assessing officer has worked out total such unrealized sales to the amount of Rs. 47,22,523/-. The assessee had explained that as per the purchase orders, the buyers had agreed to pay only 90% of the bill amount initially on receipt/dispatch of the machineries and remaining 10% was payable only on the fulfillment of the several conditions after certain period. Therefore, 10% of the billing amount was retained by the buyer and the same had not accrued to the assessee company during the year under consideration. It was further submitted that as and when such amount retained will be received by the company, the same will be considered and offered for taxation. The assessing officer has not accepted the explanation of the assessee. He was of the view that this part of sale consideration had accrued to the assessee in the financial year 2009-10 which cannot be reduced from the sale on the basis of obligation of contingent nature. Consequently, the assessing officer has added such amount of Rs. 47,22,523/- being unrealized sale to the total income of the assessee.

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assessee for the assessment year 2008-09 and 2009-10 by the CIT(A) and the Co-ordinate Bench of the ITAT has dismissed the revenue’s appeal vide ITA No. 199 and 200/Ahd/2013 dated 16th Jan, 2017. The relevant part of the decision of the ITAT is reproduced as under:- “14. We also find that the issue travelled up to the Hon’ble High Court and the Hon’ble High Court was seized with the following substantial question of law:- “[A] Whether the Appellate Tribunal is right in law and facts of the case to delete the disallowance of claim on account of retention money of Rs. 40,32,955/-? 15. And the Hon’ble High Court held as under:- 5. Insofar as the first question is concerned, a perusal of the order passed by the Commissioner (Appeals) shows that after analyzing the terms of payments of purchase orders in respect of various parties, has given categorical finding that the retention of 10% money of total sales was due to specific terms and conditions for final payment mentioned in the customer purchase order, it was further held that the assessee - company had been following this system of accounting for the last several years and was accepted by the department. The Commissioner (Appeals) further examined as to whether the assessee had made any deviation from the usual practice followed by it in the earlier years with an intention to evade tax and found that there was no such change during the year under appeal and whatever retention money had not been shown in that year and realized in the subsequent year had been shown as sale proceeds in that year and offered for tax. It is in these circumstances that the Commissioner (Appeals) was of the view that there was no need to disturb the method of accounting followed by the assessee - company and also found no discrepancy in terms and conditions of purchase orders. The Tribunal has concurred with the findings recorded by the Commissioner (Appeals). 6. From the facts and contentions noted hereinabove, it is amply clear that the controversy involved in this case stands concluded in favour of the assessee and against the revenue by the above decision of this court. Under the circumstances, no question of law can be stated to arise as/proposed. This ground of appeal is, therefore, dismissed. 16. Respectfully following the decision of the Co-ordinate Bench and the Hon’ble High Court (supra), we do not find any reason to interfere with the findings of the ld. CIT(A). Ground no. 2 is accordingly dismissed.” Respectfully following the decision of the Co-ordinate Bench and the Hon’ble High Court on identical facts as supra , we do not find any reason to interfere in the finding of ld. CIT(A). Therefore, this ground of appeal of the revenue is dismissed. Ground No.2 (Deleting addition of Rs. 31,22,445/- on account of late delivery charges) 8. During the course of assessment, the assessing officer noticed that assessee has incurred expenses to the amount of Rs. 31,22,445/- as late

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delivery charges and debited the same in the P & L a/c under the head administrative and selling expenses. The assesseee explained that the late delivery charges were deducted by the Govt. organizations viz. Directorate General Border Roads and IRCON International Ltd. etc. at the time of making final payment to the assessee company as per the terms and conditions of agreement entered with them by the assessee company . The assessing officer has not accepted the explanation of the assessee. He was of the view that late delivery charges have been paid because of delay in supplying goods to various parties and the same cannot be considered as business expenditure in accordance with the provisions of section 37 of the act. Consequently, the assessing officer has disallowed the late delivery charges amounting to Rs. 31,22,445/- and added to the total income of the assessee company.

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Respectfully following the decision of the Co-ordinate Bench on the similar facts as supra , we do not find any reason to interfere in the decision of ld. CIT(A). Accordingly this ground of appeal of the revenue is dismissed.

Ground No. 3 (Disallowance of Rs. 1,89,56,798/- u/s. 40(a)(ia) 11. During the course of assessment proceedings, the assessing officers noticed that assessee has claimed commission payment of Rs. 1,89,56,798/- for making export sale to non-resident parties without deduction of tax. Therefore the assessee was issued show cause to explain why no TDS was made as per provision of section 195 of the act . The assessee responded that all the sales were made outside India and the agents were non-residents and all the services were rendered outside India, therefore, no income accrues or arise or is deemed to accrue or arise in India. It was also submitted that all the services were rendered outside India as per the provision of section 5 and 9 of the act therefore no part of commission income has been received or deemed to be received in India. The assessing officer has not accepted the reply of the assesee. He was of the view that section 195 of the act casts an obligation on a person to deduct tax at source while making a payment to a non-resident from a sum which is chargeable to tax in India .He stated that assessee company has failed to comply with the provisions of section 195(2) of the act while deciding the issue of applicability or other wise of withholding tax u/s 195 of the act. Therefore, the assessing officer has disallowed the impugned commission expenses u/s. 40(a)(ia) of the income tax act and added to the total income of the assessee.

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agents by holding that the income arising on account of commission payable to overseas agents was deemed to accrue or arise in India and was accordingly taxable under the Provisions of section 5 (2)(b) read with section 9 (1)(i) of Income Tax Act. It has further been observed by the AO that the appellant company had failed to comply with the Provisions of section 195 (2). The appellant on the other hand, in its detailed written submission, has claimed that the Provisions of Section 5 (2)(b) read with section 9 (1)(i) of Income Tax Act were not applicable in its case. The income has been earned abroad and is therefore, not taxable in India. The issues which are to be examined and decided are: - 1. Whether the commission paid to foreign agents is taxable in India by virtue of the provisions of sectionsS (2)(b) read with section 9 (l)(i) of Income Tax Act. 2. Whether the provisions of section 195(2) were applicable on the appellant and it should have deducted tax and in case of no deduction he should have obtained a no deduction certificate from the AC. And 2.3.1 Regarding the first issue it is noted from the evidences given by the appellant as well as noted by the AO in his order that the services have been rendered by the foreign agents outside India. The sales were booked by them in their country or for the country for which they have been appointed as commission agents. None of the activity of soliciting the clients and procuring the orders is in India. The goods are being delivered by the appellant company in the other country. The activities of procuring the payment on behalf of the appellant company are also done abroad. The AO was therefore, not right in holding that the source of income lies in India as the sales have been made from India. The provisions of Income Tax Act clearly provide that the tax would be deducted on the income which is taxable in India. The activity of earning the income is not the sale but soliciting the sales by commission agents. Though this activity is linked to the sales of the company but it cannot be said that the income has been derived from sales which has been made from India. The income has been derived from the activity of soliciting the sales on behalf of the appellant company. The agents have carried out all the activity on the foreign soil and none of their activity is in India therefore, it cannot be said that the income has accrued or arisen in India and the source of income was in India. There is no fact brought out by the AO in the order as well as observed by me during the course of appellate proceedings to indicate that the services have been rendered in India. The appellant has rightly relied on the judgement of honourable Supreme Court in the case of Toshoku (supra) wherein it has been held that commission earned by the non-resident for acting as the selling agent for the Indian exporter, wherein such non- resident was rendering services from outside India does not accrue in India. In the present case before me also, the foreign selling commission agent is resident of foreign country, from where the procurement service has been provided for which the commission has been paid, and therefore, the issue is directly and squarely covered by the Apex Court decision. Regarding the observation of the AO that the income is deemed to accrue or arise in India by applying the provisions of section 9 (l)(i) it is seen that there is no fact on record to indicate that any of the agents had any Permanent Establishment in India. All the agents had their offices on the foreign soil and the records do not indicate that they had any PE in India. Further the assessing officer has also not pointed out any such fact in its order which indicate that there was any such office which attracts the deeming provisions. Further the observation that the source of income was in India, is also not proper as it has clearly been discussed in the preceding paragraphs that none of the services have been rendered in India and source of income cannot be said to be in India as the source of income is the services rendered and not the sales. There is no business connection in India from which the income has been earned,' there is no property through or from which the income has been earned. Therefore, the Provisions of section 9 (1)(i)

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also cannot be applied. The appellant has rightly placed reliance on the judgement of honourable Supreme Court in the case of GE India Technology Centre Private Limited 327 1TR 456. In a recent judgement of honourable ITAT Chennai bench in the case of I M Gears Private Limited, 49 taxmann.com 175, it has been held that no tax was deductible at source on commission payment to overseas agent for procuring orders, as said services not being in nature of technical services, v payments in question were not taxable in India. In the present case also the services rendered by the agents of the appellant to whom the commission payment has been made, are in the nature of soliciting orders for the appellant and no other services, which can be categorized as technical services, have been offered. Similar view has also been adopted by Honourable Gujarat High Court in the case of CIT Vs. Vinayak Exports (Tax Appeal No.404 of 2011 dt. 12.6.12). The Honourable High Court has confirmed the view taken by the Tribunal that in view of CBDT's Circular, no tax was required to be paid nor any IDS was required to be deducted in respect of commission payments to foreign agents, who had no business connection in India or PE in India. Therefore, in view of the preceding discussion the AO was not justified to hold that the commission payable to the overseas agents was deemed to accrue or arise in India and is taxable under the Act in view of the specific Provisions of sections 5 (2)(b) read with section 9 (1)(i) of Income Tax Act. 2.3.2 Regarding the issue of obtaining no deduction certificate under section 195 it is seen that for the applicability of the provisions of this section, the sum must be chargeable under the provisions of the Income Tax Act. Section 195 provides for deduction of tax by the person responsible for paying to a non-resident any interest or any other sum chargeable under the Provisions of the Act. It is clear that the payment was not ithe nterest. It has to be seen whether the payment is covered under the term "any other sum chargeable under the provision of this Act". It has been observed in the preceding discussion that income was not chargeable to tax as it has not been received in India nor it has accrued or arisen in India directly or indirectly. Therefore, once the income is not taxable there is no liability to deduct tax and therefore, it was not obligatory for the appellant to deduct tax in view of this there was no violation of the provisions of section 195 and the appellant also was not required to pay no deduction certificate from the AO. The issue whether the payer has to apply for a certificate under section 195 if some payment has been made, has been considered by various courts. The special bench of Chennai ITAT in the case of Prasad Productions reported in 125 ITD 263 has held in para-35 of the order that in if the assessee has not applied to the Assessing Officer under section 195(2) for deduction of tax at a lower or nil rate of tax under a bona fide belief that no part of the payment made to the non-resident is chargeable to tax, then he is not under any statutory obligation to deduct tax at source on any part of thereof. While deciding the case the honourable Bench has considered several cases which were relevant to the issue. Similar view has been taken by Hon'ble Gujarat High Court in the case of Vinayaka Exports (supra). In the present case the appellant did not deduct the tax or approached the AO for low/no deduction of tax certificate as there are several judicial pronouncements in support of the appellant which have been relied by it in the written submission. It has submitted that the commission paid to non-resident agent was not liable to tax under the Provisions of the Act when the services were rendered outside India, services were used outside India, payments were made outside India and there was no permanent establishment or business connection in India. The submission given by the appellant clearly demonstrates its bona fide belief. Therefore, considering the above discussion there was no liability on the part of the appellant to deduct tax under section 195 or approach the I.T. Authorities for no deduction tax certificate. The AO has also made an observation that in most of the cases there was no written agreement with the agents. In this regard it is noted that the appellant has given

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sufficient evidence in the form of letters, correspondence with those agents, debit notes issued by the agents, the proof of remittance of commission through banking channel and the basis of commission indicating the sale of machine on which the commission has been given. It is further noted that there are several agents which have been rendering services to the appellant since last four - five years and only few agents appear to be new. The position is similar for both the assessment years involved. In view of these facts are the findings given by the AO regarding -non-availability of written agreement is of no consequence as the appellant has given sufficient proof. The AO has also placed reliance on the decision of Hon'ble Authority of Advance Rulings in the case of SKF Boilers and Driers (P.) Ltd. (2012) 18 Taxmann 325 and Rajive Malhotra (2006) 284 ITR 564 (Delhi). The judgements are not applicable to the present facts as there are several other decisions which hold that such kind of commission is not taxable in India and accordingly no liability to deduct tax was there. Further the decision of honourable Supreme Court of India in the case of Hon'ble Supreme Court in the case of CIT vs. Toshoku Limited 125 ITR 525, still prevails as on date and is the law of the land as regards applicability of TDS provisions to commission paid to overseas/non-resident agents by Indian Exporters. In view of the preceding discussion, it is clear that the appellant was not liable to deduct tax on the commission paid foreign agents. Therefore, the disallowance of Rs. 1, 89,56,768/- for AY 2010- 11 and Rs. 1,07,23,167/- for A Y 2011-12 under section 40(a)(ia) made by the AO is directed to be deleted. The grounds of appeal for both the years are accordingly allowed.”

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commission was paid for the activities carried out side India.Section 195 is applicable only if the payments made to non-residents are chargeable to tax. If the payment is not chargeable to tax under the act, the payer would not be liable to deduct tax at source under the act. Section 4 of the act provides that income tax shall be charged for a particular year in accordance with the provision of the act. Section 5 of the act deals with the scope of the total income of the non-residents and takes within the scope two types of income , the income which is received or deemed to be received in India and second one the income accrues or arises or deemed to accrues or arise in India. In the case of the assessee we are dealing with the second part of the scope of income pertaining to income deemed to accrue or arise in India. Section 9 of the act provides for the income deemed to accrue or arise in India. It is noticed that no income is deemed to accrue or arise in India by applying the provisions of section 9 (l)(i) as the assessing officer has failed to establish accruing or arising of any income from business connection in India or through or from any property or through the transfer of a capital asset situated in India. We observe that there was no material which can demonstrate that any of the agents had any Permanent Establishment in India as all the agents had their establishments situated in the overseas places. In the lights of the above facts and detailed findings of the Ld.CIT(A) it is clear that the Provisions of section 9 (1)(i) cannot be applied, therefore we consider that the Ld.CIT(A) has rightly deleted the impugned disallowance of commission payment made to the foreign agents. In the result the appeal of the revenue is dismissed.

ITA No. 109/Ahd/2015, Assessee’s appeal

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Similar details are also available for A.Y 2011 - 12. The appellant had made an investment of Rs. 21.49 crores during the year in shares and securities. The interest expenses were Rs. 2.5794 crores. The appellant had also earned dividend income of Rs.1547562/- and had accordingly claimed exemption. After considering all the details and facts it is noted that the appellant has not given any details to prove that the amount has been invested out of the interest-free funds available with it. In fact the written submission given during the course of appellate proceedings clearly mention that as the appellant company had not been maintaining separate cash and bank accounts for interest-bearing and non-interest-bearing funds, it was difficult to submit specific details linking funds with investment in earlier years. Therefore, the claim of the appellant that the investment is out of the interest-free funds cannot be accepted as it is the claim of the appellant to say that the investment is out of the interest-free fund and therefore, the onus is on the appellant to prove the same. To prove its claim the appellant has to demonstrate specific nexus between the investment and the interest free funds invested which it has not done. Therefore, the contention of the appellant that the investment was out of interest free funds is not acceptable. It has also not given any specific nexus such as the entries in the bank account or the dates of investment to show that certain interest free funds which were available at that point of time has been invested in the case of tax exempt assets. The onus to prove that it has not incurred any expenditure is on the appellant as it is the claim made by it and the onus therefore, would be on the appellant. The reliance is placed on the recent decision of ITAT Panaji Bench in the case of Joe Marcelinho Mathias 143 ITD 132 and Hercules Hoist Ltd 35 taxman.com 592, Mumbai ITAT. The onus has not been satisfactorily discharged. Therefore, the appellant's contention regarding non-incurring of any interest expenditure is not accepted. In these circumstances it is hereby held that having regard to the accounts of the appellant, I am not satisfied with the correctness of the claim of the appellant in respect of no expenditure in relation to income which does not form part of the total income under this Act. The appellant has in fact not kept any detailed account or any systematic or logical account to prove its claim that it is not incurred any interest expenditure in purchase of tax exempt assets. It is noted that my predecessor CIT(A) has allowed the claim of the appellant regarding interest disallowance by applying the provisions of rule 8D read with section 14 A for A Y 2009 - 10. It was held by him in the order that no disallowance out of interest should be made as the appellant had sufficient interest free funds for making the investment. While doing so, he considered the financial chart showing the financial summary of last 10 years and held that it had sufficient surplus interest-free funds for making the investments reflected in the balance sheet for that year. However in a recent decisionfJuly 2014), honourable Mumbai ITAT in the case of Doubledot Finance Ltd. reported in 49 taxman.com 291, has held that if there is a hotchpotch of interest-free and interest-bearing funds and the investment and expenditure for business as well as investment is done from common funds and the same cannot be segregated the principal of apportionment of expenditure has been approved by honourable Supreme Court. It would be appropriate to reproduce the relevant extract from the judgement: - "10. A perusal of the provision of Rule 8D as discussed above and also the memorandum of explanation regarding the rationale for the insertion of Section 14A as well as the relevant observations of the Hon'ble Supreme Court in the case of Walfort Share & Stock Brokers (P.) Ltd. (supra) as well as of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Co. Ltd. (supra) needs no doubt to the effect that the disallowance under section 74A read with Rule 8D is to be made not only in respect of income which does not form part of the total income but also in respect of income which shall not form part of the total income and as observed above by the Hon'ble Supreme Court and by the Hon'ble Jurisdictional High Court of Bombay that the section 14A(1) is enacted to ensure that the expenses incurred can be allowed only to the extent they are relatable to

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the earning of taxable income, which means that the expenses which are not incurred not for the purpose of earning of taxable income cannot be allowed for the computation of net income. Hence, even if from the investments made, no exempt income has resulted but the said expenditure cannot be said to be incurred for earning of taxable income, the same cannot be allowed while computing the taxable income. Where there is a hotchpotch of funds and the expenditure both for investments and business purposes are incurred from the common poof and cannot be segregated, the hon'ble Supreme Court has upheld the principle of apportionment of expenses as provided under section 14 A of the Act." As has been discussed in the preceding Paras that the appellant has itself admitted that it is not maintaining any separate funds and was not in a position to demonstrate that the investment has been made out of interest free funds, it would be appropriate that disallowance out of interest on account of investment in the assets which has yielded exempt income should also be made. For this purpose reliance is placed on the judgement of honourable Mumbai ITAT in the case mentioned in the preceding discussion. Accordingly, I respectfully differ from the judgement of my predecessor in which it was held that the investments made up to FY 2008 - 09 shall not be considered for making the disallowance out of interest, under section 14A. It is accordingly held that the disallowance of interest as provided in rule 8D should be made. A perusal of the balance sheet for FY 2009 - 10 (AY 2000 - 11 Jshow that there is a new investment of Rs. 3029500 in the subsidiary of the appellant company in Germany and an investment of Rs. 45 lakh in a partnership firm namely Apollo Quarry Works. Further examination of the position of funds shows that there is an increase of secured loans from 10.28 crores to 20.38 crores. Similarly there is an increase of unsecured loans from 9.17 crores to 17.55 crores during this year. This shows that there is a substantial increase in the borrowings of the company during the year. There is also an increase of share holders funds from Rs 112 crores to Rs. 143 crores during the year. The increase is on account of share premium amount received amounting to Rs. 9.35 crores and the profit of the current year. However, as mentioned in the preceding discussion, the appellant had itself submitted that it is not maintaining separate cash and bank account for interest-bearing and non-interest-bearing funds; it was not in a position to explain the specific details about the investment. It is apparent from the above details that there is a substantial increase in the loan funds and also the appellant has received certain interest free funds during the year. However the appellant has not been able to give any satisfactory explanation regarding the nexus of the funds to show that the investment was out of the interest-free funds. Accordingly, the investment made by the appellant in the current year is considered to be as out of mixed funds and not out of interest free funds. The appellant was specifically asked to prove the nexus but it has expressed inability to do the same. However, as discussed, the appellant has not been able to prove any nexus of interest free funds with the investments made the AO is directed to work out the proportionate interest corresponding to the investment made in tax exempt assets by applying Rule 8D. The investment made in the subsidiary in Germany should not be considered for the purpose of working out the disallowance of interest as the dividend income from that company would be taxable in India and accordingly the same cannot be considered for working the disallowance under section 14 A. For AY 2011 - 12, the details available in the annual report for FY 2010 - 11 show that there is an increase of tax exempt investment from Rs. 15.3999 crores to 36.8823 crores. The increase is due to increase in investment from 30.295 Lacs to 3.7944 crores in the subsidiary in Germany, accordingly there is an increase of Rs.3,49,14,500/-. The another investment is in equity shares of associate company in the name of Apollo Earthmovers Ltd, which has increased from 13.2533 crores to

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31.2533 crores. Therefore, there is an increase of 18 crores during the year. As discussed in the preceding Para, the appellant has not given any nexus of this investment with the interest free funds. The appellant was specifically asked to prove the nexus but it has expressed inability to do the same. The details of this year's balance sheet show that there is an increase from shareholders fund from 143 crores to 152 crores whereas there is an increased in the loan funds from 37.93 crores to 43.62 crores. Accordingly the increase in share holders funds is insufficient to make the investment of 21.49 crores. Accordingly the claim of the appellant that it has made the investment out of interest-free funds during the year cannot be accepted. The AO is accordingly directed to work out the interest disallowance by considering the investment made in the Indian subsidiary amounting to Rs. 18 crores during the year. The investment made in foreign subsidiary should not be considered for the purpose of making the disallowance under section 14A as the dividend from that company would be taxable in India. The A.O is directed to re-work the disallowance after excluding the investment in foreign subsidiary by applying Rule 8D. It would also be appropriate here to deal with the possible argument that the investment in group companies should not be considered for the purpose of making disallowance under section 14 A as it is in the nature of business investment. It is noted that the appellant has not proved as to what was the business interest which was served by making the investment in the group companies. The appellant has not demonstrated as to how the company would be benefited by making such investment and what benefit in terms of taxable income would be derived by the appellant by making such investment. Therefore, hypothetical^, this argument also cannot be considered in absence of any evidence in support. Similarly, as regards the administrative expenditure, it is noted that the appellant has not kept any account or record to show that no administrative expenditure has been incurred for the purpose of earning exempt income or maintaining the tax exempt investment. The AO has pointed out that the auditor in the 3 CD report, has pointed out certain disallowance for section 14A however the appellant has not made any disallowance in the statement of income for this section. The onus to prove that it has not incurred any expenditure is on the appellant as it is the claim made by it and the onus therefore, would be on the appellant. The reliance is placed on the recent decision of ITAT Panaji Bench in the case of Joe Marcelinho Mathias 143 ITD 132 and Hercules Hoist Ltd 35 taxman.com 592, Mumbai ITAT. Further, the general logic, that if is not possible that no expenditure might have been incurred for earning the dividend income, is applicable in the case of the appellant. Some administrative action such as the review of investment or monitoring of the activities of the companies in which the appellant company has made substantial investment might have been done by the director of the appellant companies and the supporting employees must have done some activity by spending some time on the issue. Therefore, the salary paid by the appellant company to those employees and the directors have not been utilised exclusively for the purpose of the business of the company. A part of it can always be attributed to the earning of dividend which is exempt from tax. Therefore, in these circumstances also having regard to the accounts of the appellant, I am not satisfied with the correctness of the claim of the appellant in respect of no administrative expenditure in relation to income which does not form part of the total income under this Act that is the dividend income shown by the appellant. It is further noted that my predecessor CIT(A) has restricted the disallowance made by the AO for A.Y 2009 - 10 to an amount of Rs.7,00,000/- as against the disallowance of Rs.l 1,08,067/- made by the AO by applying the provisions of Rule 8D. The appellant has sought to place reliance on the judgement of my predecessor for that year in this respect. I would respectfully disagree with the judgement of my predecessor in this respect. Once it is held that a disallowance under section 14 A is to be made the same is to be done by applying the Provisions of Rule 8D as provided in the Act. No lump

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sum disallowance in an ad hoc manner can be made. The disallowance has to be either on an actual basis or in case of an estimate it is to be made by applying the provisions of Rule 8D. I, therefore, do not agree with the findings given by my predecessor. The disallowance out of administrative expenditure shall therefore be made by applying the Provisions of Rule 8D, by taking 0.5% of the average investment during the year. It is also noted that the appellant has made certain investmenis in the foreign subsidiaries. The dividend received from these companies would be taxable in India and therefore, these investments will not be covered by the Provisions of section 14 A. Accordingly, the same should not be considered while working out the disallowance out of administrative expenses. The AO is accordingly directed to work out the disallowance by applying the third limb of Rule 8D as directed above. Without prejudice to above discussion, it has also been held by honourable 1TAT Kolkata in the case of Champion Commercial Company Limited reported in 139 ITD 108 that when the assessee offers a disallowance under section 14 A, provisions of section 14 A(2), read with Rule 8D cannot be invoked unless assessing officer is satisfied about the incorrectness of the disallowance so offered, but when assessee does not offer any disallowance under section 14 A by claiming that there was no expenditure incurred to earn exempt income, provision of section 14 A(2), read with Rule 8D could be invoked without there being any need to express satisfaction about the correctness of such a claim. In the present case, the appellant has not offered any disallowance under section 14 A and claimed that there was no expenditure incurred to earn exempt income, the provisions of Rule 8D can be straightaway applied by following the above judgement of honourable ITAT. Since the appellant has not made any disallowance under section 14 A in the return of income, in view of this judgement also the application of Rule 8D by the AO is upheld. The appellant has also placed reliance on various judgements which have been reproduced and mentioned at the relevant page where the submission of the appellant has been given. However, after going through the various judgements it is noted that none of the judgement is applicable to the appellant's case as the facts in those cases were different from that of the appellant. The cases are therefore, respectfully distinguished. Regarding the judgement of honourable Gujarat High Court in the case of Corrtech Energy P. Ltd (supra), it is noted that the judgement is not applicable as in that case the appellant did not claim any exemption on account of the dividend received, whereas in the present case the appellant has claimed exempt income, in both the assessment years involved, on account of dividend received from the investments. The judgement is therefore respectfully distinguished. The grounds of appeal for both the years are accordingly, partly allowed.”

I.T.A Nos. 109,110, 153 & 154/Ahd/2015 A.Y. 2010-11 to 2011-12 Page No 16 Gujarat Apollo Industries vs. Jt. CIT

dismissed by the ITAT vide order ITA No. 199 & 200/Ahd/2013 dated 16th Jan, 2017. We have considered that Co-ordinate Bench of the ITAT Ahmedabad in the case of Jivraj Tea Ltd. vs. DCIT ITA No. 886/Ahd/2012 vide order dated 28/08/2014 has restricted the disallowance to the extent of exempt income. After perusal of the above facts and material on record it is noticed that during the year under consideration the assessee company has earned exempt income to the amount of Rs. Rs. 5,25,837/- only. We have noticed that in a number of decisions of the Co-ordinate Benches of the ITAT Ahmedabad on similar issues have restricted the disallowance u/s. 14A to the extent of exempt income earned by the assessee, therefore, we restrict disallowance u/s. 14A in the case of the assessee to the extent of exempt income earned of Rs. 5,25,837/- . On the similar reasons disallowance u/s. 14A in respect of A.Y. 2011-12 is also restricted to the extent of exempt income of Rs.15,47,552/-Accordingly, the appeal of the asssessee is partly allowed.

Order pronounced in the open court on 19-09-2018

Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 19/09/2018 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file.

I.T.A Nos. 109,110, 153 & 154/Ahd/2015 A.Y. 2010-11 to 2011-12 Page No 17 Gujarat Apollo Industries vs. Jt. CIT

By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद