M/S KARNATAKA STATE BEVERAGES CORPORATION LIMITED ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER

ITA Nos. & Assessment Appellant Respondent Years 971/Bang/2018 M/s. Karnataka State ACIT, 2009-10 Beverages Corporation Ltd., Circle - 4(1)(1), 4th Floor, TTMC Building Bengaluru. ‘A’ Block, BMTC, Shantinagar, Bengaluru. PAN : ACAPR 1985 P 972/Bang/2018 -do- -do- 2010-11

1925/Bang/2017 -do- DCIT, 2010-11 Circle - 4(1)(1), Bengaluru.

Assessee by : Shri. S. V. Ravishankar, Advocate Revenue by : Shri. Priyadarshi Mishra, Addl. CIT (DR)(ITAT), Bengaluru Date of hearing : 27.07.2021 Date of Pronouncement : 29.07.2021 O R D E R Per N. V. Vasudevan, Vice President ITA Nos.971 and 972 are appeals by the assessee’s against two orders dated 30.11.2017 of CIT(A)-4, Bengaluru, relating to Assessment Years 2009-10 and 2010-11 while ITA No.1925/Bang/2017 is an appeal by the asseessee against the

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 2 of 14 order dated 17.07.2017 of CIT(A)-2, Bengaluru, relating to Assessment Year 2010-11. This appeal arises out of an order passed under section 143(3) r.w.s. 147 of the Act for Assessment Year 2010-11.

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 3 of 14 of Assessment. However, in the order dated 19.03.2015 passed under section 143(3) r.w.s. 254 of the Act, after remand by the Tribunal, this issue was considered by the AO. The assessee had included a sum of Rs.18.90 lakhs towards liability for ex-gratia payment. This was part of the administrative and general expenses claimed by the assessee in the profit and loss account. The liability for payment of ex-gratia was only in the nature of provision. According to the AO, it was an unascertained liability and cannot be allowed as a deduction. It was the case of the assessee that the liability for payment of ex-gratia was an ascertaining liability and had to be allowed as a deduction. Alternatiely, the assessee prayed that in the Assessment Year 2010-11 it made an actual payment of Rs.18,66,328/- towards ex- gratia payment and if the sum of Rs.18,90,000/- is not allowed in Assessment Year 2009-10, atleast the sum of Rs.18,66,328/- paid in Assessment Year 2010-11 should be allowed as a deduction in Assessment Year 2010-11. The AO however did not accept the plea of the assessee. He held that the liability in question was an unascertained and contingent liability and cannot be allowed as a deduction. The CIT(A) concurred with the view of the AO. The CIT(A) observed that ex-gratia payment was a liability which becomes ascertained only on approval by the Government and since no such approval was given in the previous year relating to Assessment Year 2009-10, the liability was an unascertained liability and contingent and therefore cannot be allowed as a deduction. The CIT(A) however directed that the amount should be allowed in the Assessment Year in which the payment is made so that the assessee does not suffer double taxation.

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 4 of 14 account of leave encashment of employees could be disallowed as being a contingent liability. The Hon’ble Supreme Court laid down that if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What is important is the incurring of the liability and ascertainment of the quantum of liability with reasonable certainty. If the above requirements are satisfied, the Court held that the liability is not a contingent one. The learned Counsel drew our attention to page 233 to 251 of the Paper Book wherein the assessee has given the basis of the quantification of the liability of Rs.18,58,958/-. A specific query was raised by the Bench as to what is the basis on which ex-gratia payment was sanctioned by the Government. The learned Counsel for the assessee submitted that the quantification as given in pages 233 to 251 is based on the Rules / Policy of the Government regarding payment of ex-gratia. It was submitted by him that the actual payment was made by the assessee on 06.04.2010 and therefore the quantification as done by the assessee cannot be faulted. From pages 233 to 251 of the Paper Book what we have notice is that the payment is in reference to the Financial Year 2008- 09 relevant to Assessment Year 2009-10. The order of Managing Director approving payment is stated to be dated 31.03.2010. Prima facie it appears that the quantification of the liability at Rs.18,90,000/- by the assessee to be true to the extent of Rs.18,66,328/- which is the actual payment made towards ex-gratia and approved by the Government. We are, however, of the view that the assessee has to furnish the evidence on the basis of which he quantified the liability at Rs.18.90 lakhs and what is the Rules / Policy under which ex-gratia payments are made and how the quantification made by the assessee is in accordance with the Rules / Policy of the Government in this regard. We therefore deem it fit and appropriate to remit the issue to the AO for fresh consideration with the direction to the assessee to establish conditions necessary for considering the liability in question as ascertained liability on the basis of the principles laid down by the Hon’ble Supreme Court in the case of Bharat Earth Movers (supra). The AO will afford opportunity of being heard to

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 5 of 14 the assessee before deciding the issue. Thus the relevant grounds of appeal of the assessee are treated as allowed for statistical purposes.

“6.9 The investments have flown from a common pool of funds, -the current accounts. The business receipts an payments as well investments are made from these accounts. The company has not maintained separate records in report of its income not forming part of total income. Therefore, it cannot be assumed with any degree of certainty that the investments were made exclusively out of surplus funds. Considering the commonality of the expenses, having regard to the accounts, not being satisfied that the correctness of the claim of the assessee is respect of such expenditure in relation to income which does not form part of total income. I am satisfied the assessee's claim that no expenditure is incurred, is not correct and therefore, the provisions of section 14A are hereby invoked and applied. Considering the fact that such indirect expenses cannot be allocated to any specific head of income and also that the assessee does not maintain the accounts in such manner as to enable to identify the expenditure relating to exempted income, the provisions of section 14A are attracted and accordingly are applied.”

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 6 of 14 7. The AO also was of the view that in the absence of any explanation regarding disallowance of other expenses in terms of Rule 8D(2)(iii) of the Act, he had to apply the provisions of the Rules and make a disallowance. Accordingly, the AO made a disallowance under section 14A of the Act read with Rule 8D(2)(ii) and (iii) as follows:

“6.18 Assessee company has submitted vide letter dated 18.03.2015 that for the purpose of Rule 8D the amount of total assets on the first day of the .:.7revious year is at Rs. 517,27,23,000 and the last day of the previous year is at Rs. 438,48,47,000. Assessee's contention is not acceptable, since as per the provisions of Rule 8D the total assets as appearing in the Balance Sheet are to be taken into account. According to the financials submitted by the assessee, Balance sheet figures are Rs. 517,27,23,000/- and Rs. 359,69,71,000/- as _a: 31.03.2008 and 31.03.2009 respectively. Hence, while computing under Rule 8D, the total of assets as appearing in the Balance Sheet are considered. 6.19 Therefore the disallowance attracted u/s14A read with Rule 8D is as follows: A Total amount of Direct Interest / Nil other expenses pertaining to tax exempt investments u/r 8D(i) Rs. 2,50,93,000 Total amount of indirect interest B expenditure AY 08-09 AY 09-10 Average C Average amount 20,00,00,000 57,00,00,000 of tax exempt 38,50,00,000 investments D Average amount 359,69,71,000 517,27,23,000 438,48,47,000 of total assets E BxC Rs.22,03,225 Proportionate indirect interest to D be disallowed F Rs.19,25,000 0.5% of average amount of tax exempt investments G Total A+E+F Rs.41,28,225 disallowance Attracted U/s 14A r w Rule 8D

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 7 of 14

“In so far as the source of investment relating to the exempt income is concerned, the assessee has not provided any clarity or distinction in the source of use of funds, whether from borrowed or from temporary surplus funds, as the investment has flown from a common pool of funds viz. the current account. In such a scenario such expenditure is to be disallowed. In all other cases where a direct nexus cannot be established between the expenditure and the exempt income the provisions of section 14a read with rule 8D are applied. This is the essence of this section. The business receipts and payments as well as investments are made from these accounts. The company has not maintained separate records in report of its income not forming part. of total income. Therefore, it cannot be. assumed with any decree of certainly that the investments were made exclusively out of surplus funds. Considering the commonality of the expenses, having regard to the accounts of the assessee, regarding the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income, the undersigned is satisfied that the assessee's claim that no expenditure is incurred, is not correct and therefore, the provisions of section 14a are hereby invoked and applied. Considering the fact that such indirect expense cannot be allocated to any specific head of income and also that the assessee does not maintain the accounts in such manner as to enable to identity the expenditure relating to exempted income, the provisions of section 14A are attracted and accordingly applied. The above points are supported by the following case laws: i) Indian Sugar Exim Corpn. Ltd. Vs. DCIT in ITA No. 1042(Del)/2005, dated 05/12/2008 ii) Decision of Apex Court in CIT Vs. Walfort Share & Stock Brockers P Ltd 326 ITR 0001. iii) Judgement of the Honible High Court of Bambay in the case of Godrej & Boyce Mfg. Co Ltd dated 12/08/2010 iv) ACIT Vs. Citicorp Finance (India)Ltd 108 ITD 457

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 8 of 14 v) CIT Vs. SG Investment and Industries Limited [2004] 89 ITD 44 vi) Kalpatharu Construction Overseas (P) Limited Vs. CIT [2007] 13 SOT 194 (Mum) A detailed discussion on the aforementioned issued are already discussed in the Assessment order dated. 19.03.2015. with regard to the computation submitted by the assessee, the same is not acceptable as they are contrary to the records available and hence the computation as carried out in the Assessment Order holds good.”

“ 6 5 - In the present case it is seen that the AO has placed reliance on the elaborate findings contained in the original assessment order u/s 143(3) r.w.s. 147 r.w.s. 254 dated 19/03/2015. The assessee has failed to furnish (during the impugned assessment proceedings) as well as the present appeal proceedings, any specific fund-flow break-up or justification to counter or negate the AO's findings in the said original order. This leads to the conclusion that. a substantial amount of fund applied towards the earning of exempt income, came from borrowed funds. It is therefore held that the nexus between the source of funds and its application towards exempt income was quite evident, in the given facts & circumstances and as also brought out in the original assessment order dated 19/03/2015. In background of the above discussion, facts & circumstances of the case and the legal position on the issue, the disallowance to the extent of Rs. 18,87,663/-made on account of proportionate interest, is to be upheld. 6.6. The AO made a disallowance of Rs. 19,25,000/- (under rule 8D(iii)) on account of the sum being 0.5% of average amount of tax- exempt investments. There is no dispute in the fact that, whenever exempt income is earned, certain Indirect / common expenditures would always be attributable to such receipts. In this view of the matter, the applicati9n of Rule 8D(iii) r.w.s 14A, has to be upheld in principle. It is also apparent in the present case that, statedly there is exempt income earned during the year to the extent of Rs. 7,70,76,407/-. The jurisdictional courts have held there can be application of section 14A r.w.s. 8D(iii) in a particular case, only to the of exempt income which

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 9 of 14 has been earned during the year. In the present case, the AO has recorded that the appellant earned dividend income of Rs. 770,76,407/- , during the current year, which was claimed as exempt. In respect of clause (iii) of 8D of 1.T. Rules, one-half percent of average value of tax- free investments is suggested for any other indirect expenditure. The indirect expenditure is normally estimated even under the standard accounting principles as per the requirements of section 14A. The rule suggests a prescribed percentage in this regard. Rule 8D(i) and (ii) may require examination of accounts and various details by the AO for making the disallowances whereas on the other hand, no such exercise is required in respect of Rule 8D(iii), as the percentage of disallowance is fixed with reference to average tax exempt investments. In background of the discussion in the preceding paras, the disallowance made by the AO in terms of section 14A r.w.r.8D(iii) is upheld at the figure of Rs. 19,25,000/- being less than Rs. 7,70,76,407/- ,the extent of Exempt Income earned by the appellant, during the year.”

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 10 of 14 14A of the Act read with Rule 8D(2)(ii) and 8D(2)(iii) of the Rules deserves to be upheld and the same is upheld. The grounds of appeal are accordingly dismissed.

In this appeal, the grounds 2 to 4 raised by the assessee is with regard to disallowance of a sum of Rs.38,90,000/- towards ex-gratia payments. This issue is not the subject matter of the Order of Assessment dated 31.01.2016 passed pursuant to the directions of the Hon’ble Karnataka High Court. In fact, no grounds of appeal has been raised by the assessee in this regard before the CIT(A). Consequently, these grounds are dismissed as not arising out of the order of the CIT(A). We however observe that this issue arises out of an order passed under section 143(3) r.w.s. 147 of the Act, dated 20.03.2015 for Assessment Year 2010-11 and the appeal in ITA No.1925/Bang/2017 deals with the aforesaid ground. The issue will be adjudicated while deciding the said appeal.

4.5 The assessee has submitted that the daily collection amount has been invested in mutual funds in order to avoid the funds remaining idle in current accounts, that too after fulfilling all requirements such as advances, weekly payments and revenue and capital expenditures of the Corporation. But it is seen that the Corporation has also been making use of loan funds/overdraft facility for giving advance to

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 11 of 14 distillers/suppliers etc. This has resulted in financial expenses to the extent of Rs. 55,58,000/- being paid in the year, thus reducing the profit of the assessee to that extent. 4.6 By making investment in mutual funds, the assessee has also earned Rs. 7,16,78,000/ - of tax exempt income. Therefore, it can be seen that the assessee is trying to earn tax exempt income, while at the same time borrowing money from banks for its working capital requirements. It would have been prudent on the part of the assessee to reduce the working capital loan and payment of interest by utilizing the excess funds available with it. 4.7 Therefore, Sec.14A read with rule 8D is applicable in this case. Whenever, a direct nexus can be proved between the amount borrowed and amount invested in tax exempt investments, the interest paid on such loans can be disallowed. But in all other cases, where direct nexus cannot be established between the amount borrowed and amount invested in tax exempt investment, the Sec.14A read with Rule 8D helps in quantifying the indirect expenses incurred in earning tax exempt income. This is the main reason of constitutionality of Sec.14A read with rule 8D. 4.8 Therefore the disallowance attracted u/s14A read with Rule 8D is as follows: A] Total amount of Direct Interest/other expenses NA pertaining to tax exempt investment B] Total amount of Indirect interest pertaining to Rs.55,58,000 tax exempt investment AY 2009-10 AY 2010-11 Average C] Average amount of taxi 10,00,00,000 33,50,00,000 57,00,00,000 exempt investment D] Average amount of total 125,95,05,000 62,33,27,000 94,14,16,000 assets E] Proportionate indirect interest to be disallowed = BXC = Rs.19,77,797 F] 0.5% of average amount of tax exempt investment = Rs.16,75,000 G] Total disallowance u/s14A read with Rule 8D = A-4-E+F = Rs.36,52,797 15. The AO in the Order of Assessment dated 31.01.2015 has followed the findings of the AO in the order dated 27.02.2013. On appeal by the assessee, the CIT(A) confirmed the order of the AO. In the findings of the CIT(A) in this regard

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 12 of 14 are identical to findings of Assessment Year 2009-10. Submissions made by the learned Counsel for the assessee are identical to the submissions made in Assessment Year 2009-10. We have already rejected similar contention raised on behalf of the assessee. The conclusions arrived at in this regard in Assessment Year 2009-10 will hold good for Assessment Year 2010-11 also. Accordingly, relevant grounds of appeal raised by the assessee are dismissed.

“12. The learned Commissioner of Income-tax (Appeals) failed to adjudicate the ground of the appellant that the learned Assessing Officer is not justified in law in computing the tax under section 115,JB of the Act on the facts and circumstances of the case. 13. The learned Commissioner of Income-tax (Appeals) failed to adjudicate the ground of the appellant that the learned Assessing Officer computed the tax liability under section 115,JB of the Act without giving a show cause notice to the appellant and consequently the computation made is in violation of principles of natural justice and requires to be deleted on the facts and circumstances of the case.

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 13 of 14 This appeal relates to Assessment Year 2010-11. The AO passed an order dated 20.03.2015 under section 143(3) r.w.s. 147 of the Act and in this order, he disallowed a sum of Rs.38.90 lakhs being ex-graia payment. The contention of the assessee was that provision for ex-gratia payment was an ascertained liability and not contingent. The stand of the assessee and AO in this regard are identical to the similar issue decided in Assessment Year 2009-10. The CIT(A) confirmed the order of the AO. The directions given in Assessment Year 2009-10 remanding this issue to the AO for consideration afresh will hold good for Assessment Year 2010-11 also. Accordingly, the AO is directed to examine this issue as per the directions given in Assessment Year 2009-10. The order of CIT(A) is set aside to this limited extent.

ITA Nos.971, 972/Bang/2018 and 1925/Bang/2017 Page 14 of 14 22. In the result, ITA Nos.971/Bang/2018 and 1925/Bang/2017 are partly allowed for statistical purposes and ITA No.972/Bang/2018 is dismissed.

Pronounced in the open court on the date mentioned on the caption page.

Sd/- Sd/- (CHANDRA POOJARI) (N. V. VASUDEVAN) Accountant Member Vice President Bangalore. Dated : 29.07.2021. /NS/*

Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order

Assistant Registrar, ITAT, Bangalore.