DHARAMPAL PREMCHAND LTD.,DELHI vs. ACIT, CENTRAL CIRCLE-29, NEW DELHI

Brief facts of the case are that the assessee company is in the business of manufacture of flavoured chewing tobacco and Kiwam under the brand name “Baba” and the main ingredients for production of chewing tobacco are tobacco, perfumery compounds, sandal, saffron, menthol etc. and silver in flake forms. For the assessment year 2014-15 it has filed its return of income on 21/11/2014 declaring an income of Rs. 36,96,45,100/-, while declaring profit of Rs. 46,17,19,442/- and adjusting it against the brought forward depreciation resulting in the current years business income of Rs. 37,12,47,070/-. The assessee declared speculative loss of Rs. 2,22,46,177/- in the commodities which is carried forward; that the tax on the taxable income of Rs. 36,96,45,093/- was declared on which the tax and interest of Rs. 13,23,84,690/- was determined whereas the MAT credit available under section 115 JA of the Act of Rs. 3,09,73,335/- was adjusted in calculation of tax payable.

Assessment under section 143(3) of the Act was complete by order dated 23/12/2016 at a total income of Rs. 47,73,75,770/- after making the following additions/disallowances on account of:-

Speculative loss on shares, F & O Rs. 9,86,42,179/- and commodity trading 2. Disallowance under section Rs. 45,04,777/- 14 A of the act 3. Reduction of exemption under Rs. 45,83,724/- section 10 AA of the Act

Aggrieved by such an action of the learned Assessing Officer, assessee preferred appeal before the Ld. CIT(A). Ld. CIT(A), by way of the impugned order rejected the contentions of the assessee in respect of the speculation loss and the claim of deduction under section 10 A of the Act, but accepted the alternative plea of the assessee in respect of the addition made on account of 14A of the Act read with Rule 8D of the Rules and the deduction to the quantum of the dividend that was earned. The assessee is, therefore, before us in this appeal challenging these additions to the extent they are sustained by the Ld. CIT(A).

Insofar as the ground No. 1.1, relating to the finding of the learned Assessing Officer that the loss of Rs. 96,51,151/- incurred in future trading as a speculation loss, it is argued on behalf of the assessee that dealing in derivatives cannot be said to be purchase and sale of shares; that the derivatives are neither shares not scripts nor stock; that the shares are capable of being held and delivered, whereas it is not so in the case of derivatives; and that the transactions in derivatives are not in respect of share scripts, therefore, not covered by the expression “purchase and sale of shares” as used in isolation to section 73 of the Act.

Ld. CIT(A), however, observed that the issue is covered against the assessee by the decision of the Hon’ble jurisdictional High Court in the case of CIT vs. DLF Commercial Developers Ltd in and therefore, declined to entertain the plea taken by the assessee. Ld. CIT(A) accordingly dismissed this ground of appeal.It is submitted by the Ld. AR before us that the decision of the Hon’ble jurisdictional High Court in the case of DLF developers (supra) relied upon by the authorities below is under appeal before the Hon’ble Supreme Court and therefore to keep the issue alive, this ground is maintained.

Be that as it may, as of now the issue is squarely covered by the decision of the Hon’ble Jurisdictional High Court and it was rightly followed by the authorities below. In these circumstances, unless and until there is change in the facts and circumstances or in the law holding the field, we find it difficult not to follow the decision of the jurisdictional High Court. While respectfully following the same we dismiss this ground of appeal.

We have gone through the record in the light of the submissions made on either side on this aspect. Vide paragraph No. 6 of the assessment order, learned Assessing Officer recorded that the assessee was showing substantial investments in shares of other companies; that the expenses are required to be incurred on manpower, office expenses etc. for the purpose of maintaining and keeping track of the fund; that the assessee also could not attribute the interest expenses to any particular income; that if the assessing officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income, section 14A of the Act comes into force; and, therefore, learned Assessing Officer was not in agreement with the claim of the assessee that no expenditure was incurred by it in relation to the investments from which exempt income was likely to be received by it.

It is, therefore, clear that the learned Assessing Officer not satisfied with the plea of the assessee that it is did not incur any expenditure in relation to the investment from which exempt income was derived by it, because according to the learned Assessing Officer, the assessee must have incurred some expenditure on manpower, office expenses etc. for the purpose of maintaining and keeping track of the funds. Learned Assessing Officer further noted that section 14A of the Act applies when the learned Assessing Officer is not satisfied with the correctness of the claim of the assessee in that respect. Having noted all these things, learned Assessing Officer proceeded to calculate the disallowance in the light of the provisions in section 14A of the Act read with Rule 8D of the Rules. We, therefore, are of the opinion that there is proper satisfaction recorded by the learned Assessing Officer in this matter and the learned Assessing Officer recorded his dissatisfaction as to the correctness of the claim of the assessee having gone through the amounts in investment in shares of other companies.

Now coming to the contention of the Ld. AR about the utilisation of the own funds of the assessee for investment in shares, it could be seen from the assessment order vide paragraph No. 5.2 that the assessee contended before the learned Assessing Officer that the investment in shares was made out of substantial reserve and surplus is of the assessee company and no expenditure was incurred to earn the dividend income and therefore, no disallowance under section 14 A of the Act could be made. Learned Assessing Officer had not considered this aspect as to the availability of the funds with the assessee in the shape of share capital and Reserves & Surplus. So also, the Ld. CIT(A). In the circumstances, we are of the considered opinion that the contention of the assessee merits consideration by the learned Assessing Officer.

Ld. CIT(A) had granted relief to the assessee by limiting the disallowance to the exempt income in the light of the decision of the Hon’ble jurisdictional High Court in the case ofJoint Investments P. Ltd. vs. CIT (2015) 372 ITR 694. However, further grievance of the assessee is that for the purpose of disallowance u/s 14A of the Act read with rule 8D(2)(iii) of the Rules, such an amount should have been computed only qua the investment which yielded exempt income during the relevant previous year. Reliance is placed on the decision of the Hon’ble jurisdictional High Court in the case of ACB India Ltd. vs ACIT, 374 ITR 108 (Del) and the decision of the Kolkata Bench of the Tribunal in REI Agro Ltd. vs DCIT, 144 ITD 141n (Kol-Trib).

Coming to this submission of the learned AR,in view of the decision in the case of ACB India Ltd. vs ACIT, 374 ITR 108 (Del) and REI Agro Ltd. vs DCIT, 144 ITD 141n (Kol-Trib), the appeal against which was dismissed by the Hon’ble Calcutta High Court in of 2013, while calculating the average investment under Rule 8D(2)(ii)(iii), only those investments which have actually yielded dividend income during the relevant year should be considered.We are, therefore, convinced with this argument of the Ld. AR. In fact, the Hon’ble jurisdictional High Court in ACB India Ltd. (supra) held that the learned AO is required by the mandate of Rule 8D(2)(i) to (iii) detailed in the methodology to be adopted; and the learned AO cannot adopt the average value of the total investment instead of the average value of investment of which income is not part of a total income i.e. value of tax-exempt investment. In view of this binding precedent, we find that the learned AO had to consider only those investments which have actually yielded the tax-exempt income during the relevant year and not the total investment.Assessee furnished the details of the investments which yielded the exempt income, vide page No. 9 of the paper book.

In view of our above finding, we set aside the findings of the authorities below on this issue and remand the issue back to the file of the learned Assessing Officer for considering the extent of own funds of the assessee for investment in the shares and in case the whole funds of the assessee in the shape of share capital and Reserves & Surplus exceeds the investment in the current year, the question of interest component under rule 8D(2)(ii) of the Rules does not arise. Further we direct the learned Assessing Officer to verify the investments yielding exempt income and to reach the correct amount of disallowance keeping in view the decision of the Hon’ble jurisdictional High Court in the case of ACB India Ltd (supra). Ground No. 2 is therefore, allowed for statistical purpose

Ground No. 3 is concerned with the disallowance of Rs.45,83,724/- under section 10AA of the Act. Assessee claimed the profit of the unit exempt under section 10AA of the Act to the tune of Rs. 2,95,16,153/- and submitted that the unit situated at Noida, SEZ is engaged in the manufacture and export of articles and things; that such unit commenced production from the financial year 2008-09 and has been 100% export oriented unit; and that, therefore, the profit of the unit is eligible for exemption under section 10AA of the Act.

On examination of the Balance Sheet in the profit and loss account of the NSEZ unit, learned Assessing Officer found that the funds of the company were provided by head office and at the end of the year the profit of the unit was also transferred to the head office and in the P&L Account also the operational figures of sale, purchase and other expenses which were directly incurred in the unit were also shown. Learned Assessing Officer further found that the assessee company was provided various services by the head office but the value of which was not transferred to the eligible unit for the purpose of computing the profit of the unit, and thereby though the non- allocation of expenses has not resulted into suppression of consolidated profits of the assessee company, such non-allocation of expenses has resulted into overstatement of profits of the eligible undertaking which are exempt from the tax. On this premise, taking the turnover as the basis for apportionment of certain expenses at 2.64%, the learned Assessing Officer allocated a sum of Rs. 6,50,923/- to NSEZ out of the total expenses of Rs. 2,46,56,200/- incurredby the head office in respect of key man insurance, basic salary of Director, transit goods insurance, cash transit insurance, motor car insurance so on and so forth and reduces the same from the profit of the eligible unit.

Learned Assessing Officer, on examination of the Balance Sheet of the eligible unit, further found that the liability towards head office as on 31/3/2013 was Rs. 3,03,77,120/- and as on 31/3/2014 was 3,51,69,570/-, the average of which comes to Rs. 3,27,73,345/- and therefore, considering the interest at 12% per annum reduced the profit of the eligible unit by Rs. 39,32,81/- and therefore he totally disallowed a sum of Rs. 45,83,724/- from out of Rs. 2,95,16,153/- claimed by the assessee under section 10AA of the Act and limited it to Rs. 2,49,32,429/-.

In the appeal before the Ld. CIT(A), it was argued on behalf of the assessee that the duties of the Directors of a company are not confined to just towards seeing the turnover of the company, that it is common knowledge that a major part of the duties of the Directors is to administer the affairs of the company with emphasis on the compliance of the companies act and a host of other acts aggregating to 3 dozen and odd; that expenses on key-man insurance, basic salary of Director, audit fees, tax audit fees and certification, taxation matter and Directors meeting fees should not be allocated to NSEZ. It was further pleaded that the expenses relating to transit good incidence and Diwali expenses in respect of NSEZ have been separately claimed in the books of NSEZ and therefore the question of allocation of such expenses to NSEZ does not arise. According to the assessee the total expenditure which has to be apportioned between the head office and the NSEZ is only Rs. 72,13,329/- and the disallowance on this count shall be confined only to Rs. 1,90,432/-.

In respect of the allocation of interest component is concerned, it was argued that a perusal of section 8 IA (8) of the Act would show that it takes into its ambit only goods or services which stand transferred to the eligible business and since there is no definition of “services” in the Income Tax Act, 1961, the definition of services as per section 659 of the finance act, 1994 has to be taken which shows that a transaction in money or actionable claim is not considered as a service by the legislature.

Ld. CIT(A) on consideration of these contentions raised before him, observed that the expenses incurred on key man insurance, basic salary of Directors, audit fees, tax audit fees and certification, tax matters and Directors meeting fees were incurred for the whole of the business of the assessee, including the NSEZ unit and not only for the head office, as claimed by the assessee and therefore, in view of the fact that the assessee has not allocated such common expenses to the NSEZ unit, there was artificial increase in the exempted profits claimed under section 10AA of the Act. He, therefore, held that there is no infirmity in the allocation of expenses by the learned Assessing Officer, and accordingly confirmed the disallowance to the tune of Rs. 6,50,923/- .

In respect of the disallowance of interest allocable to the NSEZ, Ld. CIT(A) held that since the expenses incurred on interest towards finance to NSEZ unit was not allocated and all the expenditure towards finance cost was debited in the head office account and other taxable units, it also resulted in artificial increase in the exempted profits claimed under section 10 AA of the Act. He therefore confirmed this disallowance also.

Similar arguments are advanced before us by the Ld. AR. There does not seem to be anything illegality or irregularity in the observations of the authorities below as to certain expenses relating to the key man insurance, basic salary of Directors, audit fees, tax audit fees and certification, taxation matters and Directors meeting fee etc. No doubt the Directors do not work for head office alone. The fact that they also oversee the work of the exempt unit, makes it obligation on the part of the exempt unit to contribute to such expenditure. So also, in respect of the other expenditure, other than the one which was separately accounted for in the books of NSEZ. However, it seems the authorities below missed to notice the contention of the assessee that the expenses relating to transit goods insurance and Diwali expenses in respect of NSEZ were separately claimed in the books of NSEZ and therefore, the question of allocation of such expenses does not arise. This fact needs to be verified.

It is further submitted before us in respect of the interest component that at the end of the every year, as observed by the authorities below, the profit of the exempt unit also is transferred to the head office and head office holds it on behalf of the exempt unit out of which the exempt unit draws the amounts for its operations and therefore, the exempt unit owing any amount to the head office so as to necessitate the contribution in the interest expenses incurred by the head office. As a matter of fact, the authorities below noted that at the end of the year the profit of the unit is also transferred to the head office. In such case, the funding of the exempt unit by the head office by incurring interest expense does not arise. Since the learned Assessing Officer did not consider this aspect, it is now necessary for us to direct him to do so.

On ground No. 3, we accordingly hold that no portion of common expenditure is allocable to the NSEZ in respect of such expenditure as was entered by the NSEZ in its own books of accounts. Further, the learned Assessing Officer shall verify whether the head office is holding the profit of the NSEZ which is transferred to it at the end of every year out of which certain funds are provided to the NSEZ for its operations. If it be so, no portion of interest expense incurred by the head office is allocable to the NSEZ to the extent of the funds which are not provided to the NSEZ by the head office by incurring interest expenditure. For this purpose and to this extent, we set aside the impugned order and remand issue to the file of the learned Assessing Officer.

In the result, appeal of the assessee is allowed in part and for statistical purpose.