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Income Tax Appellate Tribunal, “A” BENCH, PUNE
Before: SHRI S.S.GODARA, JM & SHRI DR. DIPAK P. RIPOTE, AM
आदेश / ORDER
PER S. S. GODARA, JM :
These Assessee’s twin appeals ITA Nos. 523 & 524/PUN/2020 for A.Y. 2015-16 and 2016-17, arise against the CIT(A) - 7, Pune’s order, dated 27/02/2020 passed in case Nos. PN/CIT(A)-7/Cir.14/10181/2017-18 and PN/CIT(A)-7/Cir.14/10272/2018-19, involving proceedings u/s. 143(3) of the Income Tax Act, 1961 ; in short “the Act”, respectively.
2 ITA No.523 & 524/PUN/2020, A. Y.: 2015-16 & 2016-17 Kirloskar Industries Ltd.,
The assessee’s identical substantive grounds raised in both these appeals challenges correctness of the learned lower authorities action invoking section 14 A r.w.s 8D(5) of Rs.2,11,77,385/- and Rs.2,20,52,278/- assessment year wise, respectively. It’s next substantive grievance in both these assessment years seeks to delete security and gardening expenses disallowance of Rs.2,30,63,890/- and Rs.1,44,37,939/-; appeal wise, respectively.
We note at the outset with the able assistance coming from both the parties that these twin issue are no more res-intergra as this tribunal’s co- ordinate bench order dated 11.03.2022 in Assessment years 2011-12 to 2014-15 in ITA No. 787/PN/17, 1383/PN/17, ITA 267/PN/18, 268/PN/18, respectively has upheld the very twin disallowance as under:-
“3. First, we shall take up appeal in ITA No.787/PUN/2017 for A.Y. 2011-12.
The ground No. 1 raised by the assessee challenging the action of CIT(A) in confirming the disallowance made Rule 8D r.w.s. 14A of the Act in the facts and circumstances of the case.
Heard both the parties and perused the material available on record. We note that the assessee is a company engaged in the business of generation of power from non-conventional resources including wind power. During the year under consideration, the assessee earned dividend income of Rs.21,45,22,509/- and claimed the same as exempt u/s. 10(34) of the Act. The assessee on its own disallowed expenses of
3 ITA No.523 & 524/PUN/2020, A. Y.: 2015-16 & 2016-17 Kirloskar Industries Ltd.,
Rs.1,18,53,570/- relating to earning of the above said exempt income. The AO asked the assessee to explain why a part of administrative expenses should not be held to be incurred for earning the said exempt income. The assessee explained the expenditure disallowed by the assessee is reasonable and the said disallowance was worked out on the basis of ratio of exempt income to the total income. Most of the investments have been held for the considerable period of time and the expenses disallowed on its own were on sound and reasonable basis. The AO recorded that the method of working out of disallowance on the basis of ratio of exempt income held to total income is not the appropriate method and under Rule 8D has been prescribed under Income Tax Rules which is objective method in calculation of disallowance u/s. 14A of the Act. The AO proceeded to disallowexpenditure under Rule 8D(2)(iii) vide Para No. 3.3 to 3.5 of the assessment order and he worked out expenditure of Rs.1,00,90,193/- (Rs.2,19,43,763/- - Rs.1,18,53,570/-) being 0.5% of average value of investments. The CIT(A) observed that the assessee has shown corporate overhead allocation of Rs.1,13,01,195/- for property income which requires to be disallowed and the computation does not reflect the correct allocation of the expenses were exempt income. According to the CIT(A), the disallowance of Rs.2,19,43,763/- is less than the allocable expenditure of Rs.2,54,41,706/-, if overhead allocation for property is taken into consideration for disallowance then also disallowance under Rule 8D(2)(iii) could be less than the total disallowance required to have been made. By holding so held the AO has rightly invoked the methodology under Rule 8D and confirmed the disallowance made by the AO for the purpose of Section 14A of the Act.
The ld. AR, Shri C.H. Naniwadekar submits that the AO did not record its satisfaction with regard to accounts of the assessee relating to the expenditure in earning dividend income. The AO should have recorded its satisfaction before applying the procedure under Rule 8D and without there beingits satisfaction, further, disallowance under Rule 8D(2)(iii) is not maintainable and referred to order of this Tribunalfor A.Y.
4 ITA No.523 & 524/PUN/2020, A. Y.: 2015-16 & 2016-17 Kirloskar Industries Ltd.,
2011-12. The ld. AR argued by referring to Para No. 17 that this Tribunal in the case of Capgemini Technology Services India Ltd. in ITA No. 74/PUN/2016 for A.Y. 2011-12 considering the decision of Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT &Anr. reported in 394 ITR 449 (SC) held the disallowance in the absence of any satisfaction by the AO is not maintainable. The ld. AR further referred to Para Nos. 37 and 38 of the decision of Hon’ble Supreme Court and argued that the disallowance made by the AO as confirmed by the CIT(A) is bad under law. The AO discussed the issue at Para No. 3 of the assessment order, on perusal of which we note that the AO asked the assessee to explain why a part of administrative expenses should not be held to be incurred for earning this exempt income u/s. 14Ar.w. Rule 8D. In response to which the assessee filed submission vide letter dated 06-03-2014. The AO extracted the relevant query relating to disallowance u/s. 14A in its order in Para No. 3.2. We note that it was explained the assessee has disallowed Rs.1,18,53,570/- u/s. 14A which is considered to be reasonable. The disallowance is worked out on the basis of ratio of exempt income to total income. The Company contends that most of the investments have been held for the considerable period of time and the expenses have been worked out on sound and reasonable basis. Considering the same the AO recorded as the method of working out the disallowance on the basis of ratio of exempt income held to total income is not the appropriate method adopted. To do away with subjective elements in the calculation of the disallowance u/s. 14A, Rule 8D has been prescribed under Income Tax Rules, which is objective method in calculation of disallowance under the section 14A of the Income Tax Act, 1961. In the working of disallowance u/s. 14A, it was seen that Clause (iii) of Sub-rule (2) of Rule 8D is primarily applicable in assessee’s case, we find the observation of which made by the AO, in our opinion, is a satisfaction recorded by not accepting the disallowance made by the assesse on its own as it was not appropriate method. The AO arrived at such conclusion only on the examination of accounts of the assessee and held disallowance primarily
5 ITA No.523 & 524/PUN/2020, A. Y.: 2015-16 & 2016-17 Kirloskar Industries Ltd.,
under Rule 8D(2)(iii) is required to be made which clearly shows that the AO not satisfied with the accounts of assessee and proceeded to made disallowance only under Rule 8D(2)(iii) in addition to the disallowance made by the assessee, in our opinion, that the AO examined the accounts of the assessee and by recording its non-satisfaction vide Para No. 3.3 of the assessment order proceeded to further disallowanceas required u/s. 14A of the Act. Therefore, the ratio laid down by the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) which was followed by this Tribunal in the case of Caggemini Technology Services India Ltd. (supra) for A.Y. 2011-12. Thus, the arguments of ld. AR in respect of satisfaction by the AO are rejected. Thus, the order of CIT(A) is justified and the ground No. 1 raised by the assessee is dismissed.”
We next note that learned co-ordinate bench has rejected the assessee’s latter substantive ground as under :- “11. Heard both the parties and perused the material available on record. We note that the AO observed the assessee claimed security and garden expenses under the income from house property. The AO asked the assessee to justify the claim. The assessee explained the said expenses are pertaining to the property located at LaxmanraoKirloskar Road, Khadki, Pune which was let out to Kirloskar Oil Engines Ltd., under a Leave and License agreement. As per the terms of the agreement, security and garden maintenance expenses are part and parcel of the services provided as per Clause 5(c)(iv) of the Leave and License agreement. The consideration agreed in the agreement is a “Composite Compensation” towards license fees and security and garden maintenance services provided by the assessee. Since, the Licensing fees considered from calculation of Income from House Property include the compensation for the said services, while calculating the annual value and the rent for the purpose of Section 23, the said amount ought to be reduced from the gross rent to arrive at the annual value.The AO
6 ITA No.523 & 524/PUN/2020, A. Y.: 2015-16 & 2016-17 Kirloskar Industries Ltd.,
opined that the standard deduction of 30% allowed u/s. 24 is for all expenses including maintenance of property, no separate deduction can be allowed for any other expense, thereby, he disallowed security charges and garden maintenance and added to the total income of the assessee. Before the CIT(A), the assessee reiterated the said submissions in support of its claim in reducing the security charges and garden expenses to gross rent to arrive at the annual value. The CIT(A) discussed the issue in Para No. 7.3 of the impugned order and observed the composite compensation the receipt from ancillary services rendered is taxable under the head of business income or income from other sources. The assessee did not give any bifurcation in respect of receipt with reference to ancillary services provided and expenditure required to be made with actual services furnished documentary evidences. The CIT(A) held the contention of the assessee that lease rental received is composite compensation as the license fees and security and garden maintenance services are not supported with documentary evidences. We note that in the absence of such evidences as required the CIT(A) proceeded to confirm the order of AO by holding no separate deduction is allowable from house property income. The ld. AR referred to Page No. 27 of the paper book and pointed at Clause (3) in Page No. 28 of the paper book and submitted that the licensee (assessee) shall pay to the licensor a license fee of Rs.1,50,00,000/- per month for the use and occupation of the scheduled property and submitted that it is a composite license fee and for calculation of annual letting value the security charges and gardening charges ought to be deduction to arrive at the annual value. We note that the said leave and license agreement dated 30-03- 2010 at Page No. 27 of the paper book entered into Kirloskar Oil Engines Limited as licensor and Kirloskar Engines India Limited as licensee which clearly explains in Clause (B) in Page No. 2 of the said agreement that the licensor (Kirloskar Oil Engines Limited) is the owner of the premises more particularly described in Schedule A and Clause (D) describes licensee (Kirloskar Engines India Limited) has approached the licensor in leave and license of scheduled property to allow use and to
7 ITA No.523 & 524/PUN/2020, A. Y.: 2015-16 & 2016-17 Kirloskar Industries Ltd.,
occupy for its manufacturing operation. It is evident that the Kirloskar Oil Engines Limited is the owner of property whereas, the assessee before us is M/s. Kirloskar Industries Ltd. claimed to have let out to Kirloskar Oil Engines Limited vide its submissions reproduced in Para No. 5.1 of the assessment order, whereas, from the reading agreement that the Kirloskar Oil Engines Limited as a licensor let out its property to Kirloskar Engines India Limited. Therefore, the agreement filed before us does not convey anything that the assessee let out its property and in turn it shows contrary to the explanation offered to the AO which is reproduced in Para No. 5.1 of the AO’s order. The assessee did not furnish any evidence showing that the license fee of Rs.1,50,00,000/- is inclusive of security and gardening expenses and no bifurcation given in support of its contention as rightly pointed out by the CIT(A). Therefore, in the absence of such valid evidences, we find no infirmity in the order of CIT(A). The ld. AR placed on record order of Delhi Tribunal in the case of Neelam Cable Manufacturing Co. Vs. ACIT reported in 63 ITD 1. On perusal of the same the Tribunal held no separate deduction for security service charges is provided u/s. 24 of the Act but the service charges is to be deductible while computing the annual value u/s. 23 of the Act. In the present case, as discussed above, there was no break up provided by the assessee as pointed out by the CIT(A) and also Leave and License agreementno such break up is reflected to claim gardening and security service charges for computing the annual value. Therefore, the order of Delhi Tribunal in the case of Neelam Cable Manufacturing Co. (supra) is not applicable. In view of the discussion made here-in-above, the impugned order passed by the CIT(A) is justified. Thus, ground No. 3 raised by the assessee is dismissed.”
Learned counsel for the assessee is fair enough in not been pointing any distinction on facts or law; as the case may be, in both these assessment years. We thus adopt judicial consistency to affirm the impugned disallowance(s) regarding these twin heads. Ordered accordingly.
8 ITA No.523 & 524/PUN/2020, A. Y.: 2015-16 & 2016-17 Kirloskar Industries Ltd.,
These assessee’s twin appeals are dismissed in above terms. A copy of this common order be placed in the respective case files.
Order pronounced in the Open Court on this 29th day of August, 2022.
Sd/- Sd/- SDsSd (DR.DIPAK P.RIPOTE) (S.S. GODARA) लेखध सदस्य/ ACCOUNTANT MEMBER न्यधनयक सदस्य/JUDICIAL MEMBER पपणे / Pune; ददनधांक / Dated : 29th August, 2022. Ashwini
आदेश की प्रनतनलनप अग्रेनषत / Copy of the Order forwarded to : अपऩलधथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. 3. The CIT(A)-7, Pune. 4. The Pr.CIT-6, Pune. 5. नवभधगऩय प्रनतनननध, आयकर अपऩलऩय अनधकरण, “ए” बेंच, पपणे / DR, ITAT, “A” Bench, Pune. गधर्ा फ़धइल / Guard File. 6. आदेशधनपसधर / BY ORDER,
// True Copy // Senior Private Secretary आयकर अपऩलऩय अनधकरण, पपणे / ITAT, Pune.
9 ITA No.523 & 524/PUN/2020, A. Y.: 2015-16 & 2016-17 Kirloskar Industries Ltd.,
S.No. Details Date Initials 1 Draft dictated on 22.06.2022 2 Draft placed before author 17.08.2022 Draft proposed & placed before the Second 3 Member 4 Draft discussed/approved by Second Member 5 Approved Draft comes to the Sr. PS/PS 6 Kept for pronouncement on 7 Date of uploading of Order 8 File sent to Bench Clerk 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order