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Income Tax Appellate Tribunal, HYDERABAD BENCH ‘A, HYDERABAD
Before: SHRI D. MANMOHAN & SHRI S. RIFAUR RAHMAN
PER S. RIFAUR RAHMAN, AM:
Both these appeals filed by the assessee are directed against the orders of CIT(A) - 10, Hyderabad, both, dated 30/09/2016 for the AYs 2010-11 & 2011-12.
ITA No. 455/Hyd/2017 for AY 2010-11
Brief facts of the case are, assessee, is a Managing Director of M/s ICSA (India) Ltd., filed his return of income for the assessment year 2010-11 on 22-09-2010 declaring the income from "salary" at Rs.3,61,80,000/-, (ii) Income from "house property" at Rs.11,06,700/-, (iii) Income from "business and Profession" at Rs.2,25,96,190/- by excluding Dividend income of Rs.1,38,37,954/- and Capital loss of Rs.14,97,537/-
2.1 The return of income was processed u/s 143(1) of the Income Tax. Act, 1961 ( in short ‘the Act’). The case was
2 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G selected for Scrutiny under CASS and Notice u/s 143(2) was issued and duly served on the assessee on 3rd September, 2011. During the course of assessment proceedings, AO noticed that assessee had received commission income of Rs. 3,47,91,757/- from M/s ICSA (India) Ltd., in which, the assessee is Chairman-cum-Managing Director. Assessee had treated commission income as business income and claimed the expenditure to the extent of Rs. 1,22,13,925/- and declared net income as ‘income from business’. AO after considering the Board’s resolution dated 30/09/2006, treated the commission income as part of the salary income earned by the assessee by invoking section 17(1)(iv) of the Act. Accordingly, he disallowed the entire expenditure claimed by the assessee and whole commission income brought to tax. Aggrieved with the above order, assessee preferred an appeal before the CIT(A).
Before the ld. CIT(A), assessee contested that AO had incorrectly treated the commission income as salary as the assessee had followed the same method treating commission income as business income in the earlier years by consistently following the method, but, the AO had changed the head of income as it is not permitted u/s 145 of the Act, for the reason that the expenditure claimed by the assessee is genuine business expenditure and the company had deducted tax at source u/s 194H and not u/s 192 of the Act. He further submitted that profit declared by the assessee was subjected to tax audit u/s 44AB and duly audited.
3.1 Ld. CIT(A) called for the report from AO and AO had submitted remand report dated 23/12/2015 wherein AO had confirmed the findings made in the assessment order. Remand report was forwarded to the assessee for his
3 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G comments/objections and the assessee had filed its reply reiterating earlier submissions made before the CIT(A) and further relied on the few case law.
3.2 Assessee further filed a written submission on 05/02/2016, in which, similar claim was reiterated and relied on the decisions of Hon’ble Supreme Court in the case of CIT Vs. Pramod Kumar Jain [1995] 80 Taxmann 333 (Raj.) and the decision of Hon’ble High court of Rajastan in the case of CIT Vs. R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC). The same was forwarded to AO vide letter dated 03/03/2016 to submit report and also to submit a report on disallowance u/s 14A of the Act, as the CIT(A) had noticed that assessee has earned exempt income. AO submitted remand report dated 16/08/2016 and the AO had reiterated the factual report submitted on 23/12/2015 and distinguished the cases referred by the AO along with calculation of disallowance of expenditure u/s 14A rwr 8D as per the advice of CIT(A). Again the above remand report was also forwarded to assessee for his comments. Assessee filed his objection vide letter dated 16/09/2016 wherein the assessee had submitted as under:
"Without prejudice to the submissions made earlier, it is to submit that the appellant has obtained loan of Rs. 3.60 crores in his individual name from UTI Bank, Jubilee Hills, Hyderabad under the account No. 030010100384933 on 05.07.2007 and transferred to ICSA (Ind.) Ltd for preferential issue on 05.07.2007 for the business promotion of the said company. Further, the appellant has also obtained loan of Rs. 10 crores in his individual name on 11.06.2010 under Account No. 110510100026661 in Andhra Bank, Vivekananda Nagar Branch, Hyderabad and transferred the said amount of Rs. 10,00,00,000/- on 14-06-2016 to ICSA (India) Ltd for its business promotion. As the above huge amounts were lent to the said company ICSA (India) Ltd for its business promotion by the appellant, the said company, in turn, by its Board's resolution allowed 2% commission on the Net profit of the company to the appellant for his
4 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G investment for promotion of the business of the company. Thus, the commission of 2% received by the appellant is that of business activity in promoting the business of the company. Thus, the receipt of commission is only the business activity of the appellant in investing such huge amounts in the said company, wherein he is the chairman & managing Director of ICSA (India) Limited for its business promotions. Hence, the nature of receipt is only that of "business income" of the appellant and not as that of "Salary" as well held by the Assessing Officer in his assessment order for the assessment year 2010-11.
It is, therefore, requested to consider and to accept the income received by the appellant at 2% on Net profit of the company is only "business income of the assessee" and is to be assessed under the head "Business Income" only and to direct the Assessing Officer to modify the assessment in treating the commission at 2% as "business income" in the hands of the appellant."
3.3 Further assessee has objected for invoking section 14A and submitted as under:
“4. Disallowance u/s 14A of the Act:- In this regard, it is submitted that in remand report cited above, AO has reported the working of disallowance u/s 14A at Rs.1,33,91,435/ -. In this regard we would like to submit our submission as under which may please be considered in favour to the assessee.
4.1 We would like to submit that the AO has to record his satisfaction first regarding assessee's claim being not acceptable and then only he can embark upon determination of the amount of expenditure for the purposes of Section 14A. It is submitted that at the same time of assessment proceedings completed u/s 143(3) of the Act, the AO had also not recorded his satisfaction in the assessment order dated 27.03.2013.
4.2 It is submitted that the investments of Rs. 73,12,45,019/- as on 31.03.2010 are the investments which are being continued from earlier year of FY 2008- 09 and same has been made by the assessee out of the own funds and there is no disallowance u/ s 14A of the Act before the year under consideration. Therefore it is very clear that assessee has made the earlier investment out of his own funds and there is no interest
5 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G bearing funds has been utilised therefore no disallowance has been attracted u/ s 14A of the Act. Further, it is submitted that during the year there are no huge investments made by the assessee, he has made only investment in equity in the FY 2009-10 for an amount of Rs. 8,45,31,585/-.
The AO ought to have appreciated that the assessee has made investment purely in nature of business and it is a strategic investment and income from the business i.e. commission income is already offered to tax in this regard. Therefore, no disallowance can be made in this regard u/s 14A of the Act.
4.3 The assessee has made investment from its own funds :-
It is submitted that the investments of Rs. 73,12,45,019/- as on 31.03.2010 are the investments which are being continued from earlier year of FY 2008- 09 and there are no huge investments made during FY 2009-10. The assessee has made investment in equity in the FY 2009-10 for an amount of Rs. 8,45,31,585/- only. A Copy of Statement showing details of investment opening, during the year and closing is enclosed herewith for your kind reference. Therefore, the assessee is having the sufficient own funds for making investments and no interest bearing borrowals are utilized to make investments. The assessee company has sufficient own funds for the years in which investments are made. Hence these own funds of the assessee are the source for the assessee to make investments during the year under consideration. The facts indicate that the investments made in equity were explained to have been made from the internal funds of the assessee.
4.4 interest expenditure debited by the assessee company does not have nexus with the during the year investment: - In this regard, we would like to submit that in remand report the AO has calculated the disallowance u/s 14A of the Act for an amount of Rs. 1,33,91,435/- which is not correct. In this regard we would like to submit that during the year under consideration the assessee has incurred total interest expenditure of Rs. 1,13,56,173 i.e. on Cholamandalam Loan and Andhra Bank Loan for an amount of Rs. 89,88,999/- and Rs. 23,67,174/-. We would like to submit that in year under consideration the assessee has made investment of Rs. 8,45,31,585/- only and balance investment is carry
6 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G forwarded from the earlier years. The assessee has made investment in year under consideration from the his own funds and not from the borrowals funds, therefore interest expenditure debited into the P & L account does not connected with the during the year investment. The interest expenditure debited into the P & L account does not connected with the investment and hence provision of section 14A is not applicable to the present case of assessee.
We would like to submit that Assessee Company has made equity investment and interest expenditure debited in P & L account does not have any nexus with the investments. Hence, the loan taken does not have any nexus with the investment and the provisions of Section 14A are not applicable. The provision of 14A requires incurring of expenses for earning the exempt income but here the interest expense incurred by the assessee are not related to the exempt income. Thus, the interest expenditure amounting to Rs.1,13,56,173/- shown by the assessee company is on the loans but not the investments made in the equity. The assessee has made investment out of the internal funds and a borrowed fund does not have any nexus with the investment made by the company and no disallowance u/ s 14A of the Act can be made. Hence, as there is no nexus between interest expenditure on the loans disallowance cannot be made u/s 14A during the year under consideration.
4.5 No Nexus between the borrowed funds and investment made in Equity: It is submitted that there is no nexus between the Investments made in equity with the borrowed funds for the A Y 2010-11. Therefore, there is no nexus that can be established between the secured/unsecured Loans and the investments made by the assessee, hence when no nexus has been established by the AO, no disallowance can be made u/s 14A of the Act. In connection to the above, reliance is placed on the decision of the Hon'ble ITAT, Hyderabad in the case of M/s. Modi Shelters Pvt. Ltd., Hyderabad in ITA Nos. 1565-67/Hyd/2013 and 1784-86/Hyd/2013 wherein it was held that:-
"The observation of the CIT(A) that unless nexus between the borrowals made by an assessee and the investments yielding exempt income made by the assessee is established, no disallowance under S.14A read with Rule 8D can be made is in consonance with the settled position of law laid down inter-alia by the Bombay High Court in CIT v/s. SBI DHFL Ltd. (376 ITR
7 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G 296) and Punjab and Haryana High Court in the case of CIT v/s. Hero Cycles Ltd. (323I1'R 518) relied upon by the assessees"
From the above judgement, it is very clear that for making disallowance u/s 14A of the Act, there should be nexus between the borrowed funds and investment yIelding exempt income, and in absence of nexus between them no disallowance u/s 14A of the Act can be made.
4.6. No expenditure is directly or indirectl7J connected with investment, the income there {rom which is exempt: Further, it is submitted that the assessee has not debited any expenditure relating to the investment made in equity, the income from which is exempt. The A.O. has wrongfully invoked the provisions of Section - 14A, without their giving any finding or satisfaction by him to the effect that the assessee had claimed any expenditure relatable to the investment, the income there-from which is exempt.
The appellant humbly draws attention to the sub heading of Sec.14A of the Act, which may be perused. It is mentioned that "expenditure incurred in relation to income not includable in total income". A reading of the said sub head specify that Section 14A would apply only when the company incurs expenditure with a view to derive any income which is not includable as the total income for the purpose of Income-tax. In the instant case, the assessee has not debited any expenditure by way of interest to the P & L A/c, relatable to the investment made in equity, the income there from which is exempt. Therefore, disallowance u/ s 14A is not correct and not justified.
In this regard, reliance is placed on the following:
• The Punjab & Haryana High Court in the case of CIT vs. Deepak Mittal & Amrit Sagar Mittal reported in 361 ITR 131 held that:
"No expenditure was claimed to have been incurred for earning exempted income and the Assessing Officer cannot disallow any part of the expenditure claimed."
• CIT Vs. Hero Cycles Ltd (2010) 323 ITR 518 (P &H)
8 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G "For the purpose of making disallowance u/ s 14A, a finding of incurring the expenditure for earning exempt income is absolutely necessarily. "
• CIT vs. Reliance Industries Ltd (2011) 339 ITR 632 (Bom.)
"Dividend income is statutory exempt and in the absence of any expenditure shown for earning dividend income, disallowance under section-14A was not justified. "
• Gujarat High Court in the case of 01' us. Gujarai Power Ltd. Reported in 352 ITR 583 wherein it is held that
"where the company was using its own funds for investment in shares and using borrowed funds for business purposes, no disallowance u/ s 14A can be made".
4.7 The assessee has made Investment in ICSA India Limited in earlier years (rom the Cholamandalam Loan and credited the Commission Income and debited the interest expenditure:- During the year under consideration, the assessee has incurred Interest expense of Rs. 89,88,999/- towards Interest on loan from Cholamandalam taken in the year 2007 and the same Interest Expense has been debited to Profit & Loss A/ c. It is submitted that the assessee has utilised the above loan as investment in ICSA (India) Limited. The loan amount taken were for the purpose business since the assessee is a Chairman cum - managing Director of ICSA (INDIA) Limited. The assessee has received commission income from the ICSA India Limited for an amount of Rs. 3,47,91,757/- which is credited into the P & L account. Therefore it is very clear that assessee company has made investment in ICSA for the purpose of business income and accordingly the assessee has earned commission income as business income. As the assessee has booked the business income in his P & L account, he is eligible for claiming the expenditure of business also. Therefore the assessee has debited the interest expenditure of Rs. 89,88,999/- towards the Cholarnandalam Loan as business expenditure.
It is pertinent to mention here that the assessee has debited the interest expenditure incurred towards the business income and no interest expenditure is related to the investment. Therefore provision of 14A requires incurring of expenses for earning the exempt income but
9 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G here the interest expense incurred by the assessee are not related to the exempt income. Thus, the interest expenditure amounting to Rs.89,88,999/- shown by the assessee is on the Loan taken which has been incurred for the purpose of business and not for the investments on which dividend is received. Hence, as there is no nexus between interest expenditure and the dividend received therefore disallowance u/s 14A of the Act of Rs. 1,33,91,435/- is liable to be deleted.
4.8 Dividend Income of Rs. 1,38,57,954/- earned on the previous years investments and not from the during the year investments :- It is submitted that the assessee during the AY 2010-11 has received dividends of Rs. 1,38,57,954/-. The same is credited to Profit & Loss A/c. The assessee company has earned above dividend from various Investments made in the earlier years. In this regard it is submitted that the assessee has earned dividend income by way of investments made in the past years and not from the during the year investment. This fact can be appreciated from the break -up of dividend income whereas the assessee has earned the income from the past investment. In this regard, we would like to submit the following break up of divided income earned during the year as under :-
Particulars of Dividend Amount Rs. Motilal Oswal Finance 112 ICSA India Limited 1,09,09,406 Harrisons Malayalam 150 ERG Ener Ltd 29,48,286 Total Dividend Income 1,38,57,954 Received
As can be seen from the above table that the assessee company has received major dividend income from ICSA India Limited and BRG Energy Limited and in both the companies no investment has been made during the year. A Copy of Ledger of Dividend income is enclosed herewith for your kind reference. During the year the assessee has not made any fresh investment in both the companies for which major dividend income has been received and interest debited does not have any nexus with the exempted income therefore disallowance made u/ s 14A is bad in law.
The Company has not incurred any expenditure to earn the above dividend income; therefore no disallowance
10 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G u/s 14A of the Act can be made. The assessing officer ought to have appreciated the fact that the appellant company has not incurred any expenditure towards investments made while making the disallowance u/ s 14A of the Act.
4.9 It is submitted that during the year the assessee company has made investment of Rs. 8,45,31,585/- only and therefore for the purpose of 14A disallowance only fresh investment can be taken up and not the entire investment which has been made out of the internal funds. In this regard, it is submitted for calculating the 0.5% of average value of investment u/ s 14A of the Act as per Rule 8D only fresh investment of Rs. 8,45,31,858/- should be considered not the entire investment.
4.10 Interest expenditure towards the Andhra Bank does not connected with the investment as loan utilized [or personal purpose :- In respect of loan taken from Andhra Bank it is to submit the assessee has incurred Interest expense of Rs. 23,67,174/ - towards Interest on loan from Andhra Bank for an amount of Rs. 20,00,00,000/- on various dates in the year 2010 and the same Interest Expense has been debited to Profit & Loss A/ c. It is submitted that this Loan was utilised by the Assessee for his personal purpose and not for earning any dividend Income Hence, the loan taken does not have any nexus with the investment and the pro visions of Section 14A are not applicable. The provision of 14A requires incurring of expenses for earning the exempt income but here the interest expense incurred by the assessee are not related to the exempt income. Thus, the interest expenditure amounting to Rs. 23,67,174/- shown by the assessee is on the Loan taken but not the investments on which dividend is received. Hence, as there is no nexus between interest expenditure on the Loan taken and the dividend received, disallowance of Rs. 1,33,91,435/- made u/s 14A during the year under consideration is liable to be deleted.
4.11 The working of disallowance u/s 14A at Rs. 1,33,91,435/- by the Dy. Commissioner of Income Tax, Circle-2(l) is not in accordance with the provisions of sec.14A of the Act. Moreover, provisions of section 14A are not applicable in the appellant's case since the investments in the shares were made from out of the internal accruals of income of the appellant in earlier years i.e., much earlier to the dates of obtaining loans from banks on which expenditure towards interest was
11 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G claimed. Thus, provisions of sec.14A of the Act are not applicable [or the year under consideration.
3.4. After considering the remand report and submissions of the assessee, CIT(A) has confirmed the findings of the AO and made enhancement by invoking section 14A rwr 8D (2)(iii) to the extent of Rs. 35,13,391/- by observing as under: 9.4 The submissions of the appellant are considered. It is very clear that the appellant earned dividend income which is claimed as exempt u/s. 10(34) of the I.T. Act and paid interest on borrowed funds which were invested during the year in shares of the companies from which the assessee earned dividend. In principle, the disallowance u/s. 14A to be upheld as per the notice issued as per para 6 above. However, since the expenditure disallowable u/s. 14A of the I.T. Act is more than the expenditure claimed and the entire expenditure viz., bank charges, chit loss, loan processing fees, service tax is disallowed u/s. 37(1) of the I.T. Act, there is no expenditure which is to be considered for enhancement in this case except Rs. 35,13,391/- representing 0.5% of the average investment as this expenditure is not considered under any other head of income. Therefore, the assessment is enhanced by Rs.35,13,391/-.
Aggrieved by the order of CIT(A), assessee is in appeal before us raising the following grounds of appeal: “1. The Ld. CIT (A) has erred both in law and on facts in passing appellate order, upholding the additions made by the DCIT, Circle-2(1), Hyd, hereinafter referred to as A.O u/s 143(3) of the Income Tax, 1961.
The Ld. CIT (A) erred in upholding the addition made by AO for an amount of Rs. 3,47,91,757/- towards treating the commission income as salary income instead of the business income as declared by the assessee.
The Ld. CIT(A) erred in changing the head of income from "Business Income" to "Income from Salaries", without appreciating the fact that re-categorizing the nature of income is not permitted u/s 145 of the Act.
"Hon'ble DRP, Hyderabad, in the case of M/s. Visu International Limited in dated 27.09.2012."
12 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G
The Ld. CIT (A) ought to have appreciated the fact that assessee has followed the same method of accounting continuously year after year by treating the commission income as Business Income of assessee.
The Ld. CIT (A) ought to have appreciated the fact that commission was paid @ 2% of net profit as per the Board Resolutions passed in AGM on 30.09.2006 of M/s ICSA (India) Pvt Ltd. for promoting and improving the business of company in which the assessee is the Chairman and Managing Director.
The AO ought to have appreciated the fact that commission received by the assessee was under contract for service in addition to salary and it is only income under the head "Business Income".
The AO ought to have appreciated the fact that as per provision of section 28(i) of the Act, commission received at 2% on net profit of company is income under the head "Business" only.
The AO ought to have appreciated that MI s ICSA Pvt ltd has deducted tax at source on commission ul s 194H treating it as business income. Hence, the assessee has also treated the same amount as a business income.
The AO ought to have appreciated that the assessee has got his books of accounts audited ul s 44AB of the Income Tax Act, 1961.
The Ld. CIT (A) erred in disallowing the expenditure of Rs.1,22,13,925/- which has been debited in the P & L account in respect of the commission income of Rs. 3,47,91,757/-.
The Ld. CIT (A) erred in making an disallowance of Rs. 1,33,91,435/- towards disallowance u/s 14A of the Act without appreciating the fact that entire business income was treated as salary and other income. Therefore when there is no business income no disallowance can be made.
The Ld. CIT (A) ought to have appreciated that the investments as on 31.03.2010 represents the investments that are being continued from earlier years.
The Ld. CIT (A) ought to have appreciated that the investments made by the assessee are out of his own
13 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G funds and that there are no interest bearing funds utilized for making such investments.
The Ld. CIT (A) ought to have appreciated that there is no nexus between the investments made in equity shares and the borrowed funds for the assessment year under consideration.
The Ld. CIT (A) ought to have appreciated that the dividend income earned by the assessee is from the investment made in the previous years and not from the investments made during the year of account.
The Ld. CIT (A) ought to have appreciated the fact that loan from Cholamandalam has been utilised for investment in ICSA for the purpose of business and accordingly assessee has earned commission income of Rs. 3,47,91,757/-. Therefore interest expenditure of Rs. 89,88,999/- cannot be linked with the investment on which dividend income received.
The Ld. CIT (A) ought to have appreciated the fact that loan from Andhra Bank has been utilised for personal purpose of assessee therefore interest expenditure of Rs. 23,67,174/- cannot be linked with the investment on which dividend income received.
The Ld. CIT (A) erred in enhancing the assessment by Rs. 35,13,391/- towards the disallowance of expenditure u/ s 37(1) of the Act being 0.5% of the average investment.
The Ld. CIT (A) ought to have appreciated that the assessee has made investments of Rs. 8,45,31,585/- only and therefore for purpose of 14A disallowance only fresh investments can be taken up and not the entire investments.
The Ld. CIT (A) ought to have appreciated that for calculating the 0.5% of average value of investments u/ s 14A of the Act as per Rule 8D, only fresh investments made relatable to the income which does not form part of total income during the year should be considered and not the entire investments.
The assessee may add, alter or modify or substitute any other point to the Grounds of appeal at any time before or at the time of hearing of the appeal.”
14 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G 5. Ground Nos. 1 & 21 are general in nature. Ground Nos. 2 to 10 relate to treating commission income as salary income and disallowance of expenditure relating to business. Ground Nos. 11 to 17 relate to 14A disallowance and Ground Nos. 18 to 20 are against enhancement of disallowance by CIT(A) u/s 14A.
5.1 The assessee has also filed the following additional grounds:
As per the ratio Iaid down by the Hon'ble Supreme Court of India in the case of National Thermal Power Co. Ltd vs. CIT (1998) 229 ITR 383 (SC) the IT AT has jurisdiction to examine the question of law though not arisen before the CIT(A) but has arisen before the IT AT for the first time.
The Ld. CIT(A) erred in enhancing addition u/s 14A without accepting commission as business income of the assessee.
The Ld. CIT(A) erred in exercising the power of the Assessing Officer(AO) under rule 8D.
The CT(A) erred in not recording satisfaction before invoking the provisions of section 14A of the Act.
The CIT(A) ought to have appreciated the fact that no expenditure has been incurred directly, or indirectly in connection with the investment, the income from which is exempt.
Without the prejudice to other grounds the CIT(A) ought to have appreciated that only the value of investment on which dividend income is earned should be considered average value of investment for the purpose of calculation of disallowance u/s 14A of the Act.
The assessee may add, alter or modify or substitute any other points to the grounds of appeal at any time before or at the time of hearing of the appeal.”
15 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G 6. Before us, the ld. AR reiterated the submissions as made before the CIT(A) and further submitted a copy of MoU entered into between assessee and M/s ICSA (India) Ltd., which was executed on 14/05/2009. Further, he submitted that provisions of section 14A cannot be invoked without proper satisfaction recorded by the AO. For this proposition, he relied on the decision in the case of Reliance Capital. He also submitted that CIT(A) has enhanced the addition to the extent of Rs. 35,13,391/- by observing that the expenditure disallowable u/s 14A of the Act is more than the expenditure claimed and the entire expenditure is disallowable u/s 37(1) of the Act. Ld. AR contended that when the assessee has not made any expenditure relating to exempt income, CIT(A) cannot enhance the addition.
Ld. DR, on the other hand, relied on the orders of revenue authorities.
Considered the rival submissions and perused the material on record. The assessee is earning salary income along with commission calculated on the basis of certain percentage on net profit. As per the normal condition, commission income earned by the assessee is to be charged to tax under the head ‘income from salary’ since there exist employer and employee relationship between the assessee and the company. However, grouping of income in different heads of income depends upon the respective definitions, nature of activity and objects of the assessee. In the given case, no doubt there is explicit definition u/s 17, but, as per the evidence brought on record by the assessee i.e. MoU between the assessee and company, which is placed on record, as per clause (c) & (d) i.e. assessee is already holding 10% of the share capital in ICSA (India) Ltd., in order to
16 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G continue to get the commission assessee has to further invest an amount of Rs. 10 crores. This condition imposed on the assessee to earn commission income. Otherwise, assessee is not eligible to earn any commission income. This is similar to the situation wherein rental income should be grouped and assessed under the head ‘income from house property’ in the normal case however, when the activity and objects of the assessee are mainly to letting out and earning profit is the particular objective, thus, such income can be assessed only under the head ‘income from business’, as held in the case of CIT Vs. Chennai Properties Ltd., 773 ITR 673. In the said judgment, the law laid down authoritatively in the case of Karanpur Development Company Ltd. Vs. CIT, [1962] 44 ITR 362 (SC), as per which, it was pointed out that before income, profit or gains can be brought to computation, they have to be assigned to one or the other head. These heads are in a sense of exclusive of one another and income, which falls within one head cannot be assigned to, or taxed under, another head. Thereafter, the Court pointed out that the deciding factor is not the ownership of the land or lease but the nature of the activity of the assessee and the nature of the operations in relation to them. Similarly, in the given case also, commission earned by the assessee is conditional upon the investment by the assessee. When the assessee earned the commission without any condition as in the given case, assessee would not have earned commission without fulfilling the condition as per the MoU. In that process, assessee has taken certain loans from financial institutions and fulfilled the condition, therefore, the assessee has earned commission income during this AY. It clearly shows that the commission income can be assessed only as business income.
17 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G 8.1 With regard to disallowance u/s 14A, CIT(A) has enhanced the income of the assessee by invoking section 14A rwr 8D(2)(iii). We have noticed that AO has disallowed the entire expenditure claimed by the assessee considering the fact that the income offered by the assessee as business income was not accepted by the AO, which was discussed in detail in the previous para. By treating the commission income as salary income, AO has disallowed the entire expenditure claimed by the assessee i.e. on record, all the expenditure claimed by the assessee were rejected. Therefore, at least on revenue record, there is no expenditure allowed to claim whether it relates to exempt income or not. Therefore, we are not in a position to appreciate that ld. CIT(A) has invoked section 14A when no expenditure claimed by the assessee were allowed. For the sake of clarity, section 14A(2) is reproduced below: “Sub-section (2) of section 14A provides the manner in which the amount of expenditure incurred in relation to exempt income is to be determined by the Assessing Officer. Sub section (2) provides that if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of assessee’s claim for the expenditure incurred in relation to exempt income, then in such a case the Assessing Officer has to determine the quantum of disallowance as per the method prescribed i.e. in accordance to Rule 8D of the Income tax Rules.”
8.2 As per the above provision, it is the AO to determine the amount of expenditure incurred in relation to exempt income under this Act in accordance with such method i.e. rule 8D, if the AO with regard to accounts submitted by the assessee, is not satisfied with the correctness of the claim in respect of such expenditure in relation to such exempt income under this Act. Therefore, it is the domain of the AO to satisfy with regard to expenditure claimed by the assessee. In the given case, AO has rejected the whole expenditure claimed by the
18 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G assessee. Therefore, he has not recorded any satisfaction with regard to expenditure. Therefore, we are unable to understand how on earth CIT(A) invoked section 14A when there is no expenditure or satisfaction was recorded by the AO, hence, ld. CIT(A) is wrong in invoking section 14A r.w.r 8D(2)(iii) to enhance the income by making disallowance u/s 14A. Therefore, the disallowance made by the CIT(A) is, accordingly, deleted.
8.3 Since we have allowed the ground of assessee treating the commission income as business income, related business expenditure should also be allowed as business expenditure. Therefore, it is for the AO to determine the relevant expenditure relating to exempt income by applying the provisions of section 14A(2) and rule 8D. Accordingly, we direct the AO to determine the expenditure relevant for the exempt income. It is noted that only during this AY assessee has borrowed certain funds to make investment. Therefore, whatever the investment made by the assessee in the earlier years are out of interest free funds. The relevant expenditure should be determined on the basis of the investments which are made out of interest free and interest bearing funds. Also administrative expenses, which are to be calculated based on rule 8D(2)(iii). The investment, which has earned exempt income should alone be considered for calculation of 0.5% as relevant expenditure for earning exempt income. Therefore, for the purpose of determining the 14A disallowance as per the above directions, we remit this issue back to the file of AO. It is irrelevant to mention that assessee may be given proper opportunity of being heard.
In the result, appeal of the assessee is treated as allowed for statistical purposes.
19 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G
ITA No. 456/Hyd/2017 for AY 2011-12
In this appeal, assessee has raised 29 grounds. Ground Nos. 1 & 29 are general.
10.1 Ground Nos. 6 to 19 relate to treating commission income as salary income and disallowance of expenditure relating to business.
10.2 Similar grounds were raised in AY 2010-11 (supra). Therefore, following the conclusions drawn therein, we remit the issue raised in these grounds to the file of AO for verification as directed in ITA No. 455/Hyd/2017 (supra).
10.3 Ground Nos. 20 to 28 relate to 14A disallowance and enhancement of disallowance by CIT(A) u/s 14A. Similar grounds were raised in AY 2010-11 (supra). Therefore, following the conclusions drawn therein, we remit the issue raised in these grounds to the file of AO for determination of disallowance u/s 14A as per the direction in ITA No. 455/Hyd/2017 (supra).
As regards ground Nos. 2 to 5 regarding addition of Rs. 7,68,03,155/- u/s 68 of the Act, the assessee is deriving income from salary, income from house property, income from other sources etc., and the assessee filed return of income for asst. Year 2011-12 admitting total income at Rs.3,64,40,000/-. During the course of assessment proceedings, the Assessing Officer noticed that an amount of Rs.10,06,03,153/- was shown as unsecured loans and the assessee was asked to produce the persons to prove the genuineness of the credits and credit worthiness of the creditors. In respect of unsecured
20 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G loans from N.Y. Sridhar (Rs.2,70,00,000/-) and Sahasra Investments (Rs.4,98,03,153/ -) the assessee did not produce any supporting evidence except confirmation letters. The AO disbelieved these two amounts aggregating to Rs.7,68,03,155/-. Therefore, the Assessing Officer treated the loans in the name of these two persons as unexplained cash credits u/ s. 68 of the Act.
During the course of appellate proceedings, the assessee's representative vide letter dt. NIL filed on 23.10.2015 filed additional evidence in the form of confirmation letters from these two persons along with PAN and jurisdiction details. The additional evidence was forwarded to the Assessing Officer for a factual report. The Assessing Officer vide letter dt. 29.04.2016 submitted that the evidence was already submitted during the assessment proceedings except item no. 5 with regard to notice of 12th Annual General Meeting, regarding issue of commission and submitted that this additional evidence may not be admitted. The remand report of the AO was forwarded to the assessee for his comments if any. The assessee filed reply vide letter dt. NIL on 08.08.2016. In the reply the assessee submitted that assessee has filed confirmation letters from the above two creditors along with their PAN and discharged the primary onus of giving evidences in respect of identity, creditworthiness and genuineness of the transactions, the AO did not verify the creditworthiness of the creditors and genuineness of transaction. The assessee relied on various decisions in this regard, which were extracted by the CIT(A) at page 43 of his order.
12.1 In the written submissions it was submitted that confirmation letters were filed along with PAN. Therefore, the
21 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G identity of the creditors, creditworthiness and genuineness of the transactions have been proved and the burden is shifted to the Assessing Officer. It was also claimed that the transactions were made through cheques and addition was made on assumptions and presumptions. The assessee relied on CIT vs. Lovely Exports Pvt. Ltd., 216 CTR 195.
After considering the submissions of the assessee, ld. CIT(A) discussed the issue at length with various case law and upheld the action of the AO by observing as under: “7.3 The submissions of the assessee have been. considered. In respect of other creditors, the Authorised Representative had furnished copies of IT returns along with computation of income, P & L A/ c , Balance Sheet and copy of the bank account and confirmation letter in respect of BRG Energy Ltd. on the letter head of the company. However in respect of these two creditors, the assessee simply filed confirmation letters without supporting evidence and did not produce these parties before the AO for verification. It is seen from the confirmation letters that Sahasra Investments Pvt. Ltd. is assessed to tax and mode and date of payment are not mentioned in the confirmation letter.
7.4 Submissions of the appellant have been considered. The assessee did not produce the parties even though insisted by the Assessing Officer. Just because the amounts were received through bank, genuineness of the transaction is not established. In the remand report, the Assessing Officer mentioned that item nos. 1 to 7 were already submitted during the course of assessment proceedings which includes confirmation letter from Sri N.V. Sridhar and M/ s. Sahasra Investments Pvt. Ltd., alleged creditors, these are nothing but confirmation letters and PAN jurisdiction of the case. Even during the course of remand proceedings, the assessee did not produce these persons before the Assessing officer. Even though PAN is mentioned in the confirmation letter copies of return of income of alleged creditors have not been furnished. The mode of payment, dates of payment and also purpose of payment have not been mentioned in the confirmation letters. Therefore, the genuineness of the creditors have not been proved. The facts of the case in the decisions are distinguishable from the facts in the present assessee produced them before the
22 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G Assessing Officer nor the sources for advancing the amounts to the assessee by the alleged creditors is proved by the assessee.”
Ld. AR submitted that assessee has already submitted the confirmation letters from the creditors along with PAN and complete address before the AO. However, the assessing officer without considering the above submission has made the addition to the total income of the assessee which is not justified. The AO and CIT(A) ought to have appreciated the fact that the assessee has discharged the primary burden cast on him of proving the identity, creditworthiness and genuineness of the transaction. The entire transaction has taken place through proper banking channel and therefore no addition can be made to the income of the assessee.
14.1 He submitted that that the assessee has received an amount of Rs. 2,70,00,000/- from Sri N Y Sridhar. In this regard, it is submitted that • The assessee has already submitted the confirmation letter from Sri N Y Sridhar addressing to AO who has accepted the advancing of amount to the AO. • The assessee has submitted the PAN of the creditor (i.e., AEHPN9311A) to the assessee. • The assessee has submitted the complete address of the creditor. • The amount has been received through proper banking channel i.e., through RTGS in his Andhra Bank Account. • The assessee has already submitted the copy of ledger account of Sri NY Sridhar in his books of account.
14.2 He further submitted that the assessee has received an amount of Rs. 4,98,03,155/ - from M/s Sahasra Investment Private Limited. In this regard, it is submitted that
23 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G • The assessee has already submitted the confirmation letter from M/ s Sahasra Investments Private Limited addressing to AO who has accepted the advancing of amount to the assessee. • The assessee has submitted the PAN of the creditor (i.e., AAKCS7369H) to the assessee. • The assessee has submitted the complete address of the creditors. • The amount has been received through proper banking channel i.e., through 'Union Bank of India Account of the creditor. • The assessee has already submitted the copy of ledger account of assessee in books of account of Sahasra Investments Private Limited.
14.3 Further, he submitted that the confirmation letters and details of the creditors were already submitted before the assessing officer, which are placed at page nos. 8-12 of the paper book. He relied on the following cases: (i) Lovely Exports P Ltd 319 ITR 5 (ii) The judgment of Hon'ble Supreme Court in the case of CIT Vs Orissa Corporation Pvt Ltd reported in 159 ITR 78 (iii) The order of Mumbai IT AT in the case of Rubaina Properties Pvt Ltd in ITA No 845/MUM/2011
Ld. DR, on the other hand relied on the orders of revenue authorities.
Considered the rival submissions and perused the material on record. In the given case, the assessee has submitted confirmation letters from the creditors along with the PAN, jurisdiction and addresses of the creditors. The
24 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G assessee has brought on record the required proof of identity and creditworthiness of the creditors. With regard to genuineness, all the transactions were routed through the bank. It was held in the case of CIT Vs. Orissa Corporation Pvt. Ltd., 159 ITR 78 (SC), as under:
In this case the assessee had given the names and addresses of the alleged creditors. It was in the knowledge of the revenue that the said creditors were the income-tax assessees. Their index number was in the file of the revenue. The revenue, apart from issuing notices under section 131 at the instance of the assessee, did not pursue the matter further. The revenue did not examine the source of income of the said alleged creditors to find out whether they were credit-worthy or were such who could advance the alleged loans. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the assessee could not do any further. In the premises, if the Tribunal came to the conclusion that the assessee has discharged the burden that lay on him then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence. If the conclusion is based on some evidence on which a conclusion could be arrived at, no question of law as such arises.”
From the above, it is clear that when the assessee submits the onus of proof, it is for the revenue who should pursue the evidence and prove that the evidence submitted is not proper. Respectfully following the above ratio, in our considered view, assessee has actually fulfilled the initial onus to prove the identity, creditworthiness and genuineness, the burden shifted to revenue and unless certain adverse material is brought on record by the AO by making further enquiry, provisions of section 68 of the Act cannot be invoked to treat the creditors as unexplained. Therefore, the addition made u/s 68 is deleted.
In the result, appeal of the assessee is allowed for statistical purposes.
25 I.T.A. Nos. 455 & 456/Hyd/2017 Bala Reddy G
To sum up, both the appeals under consideration are allowed for statistical purposes.
Pronounced in the open court on 12th January, 2018.
Sd/- Sd/- (D. MANMOHAN) (S. RIFAUR RAHMAN) VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, dated 12th January, 2018.
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