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Facts
OEN India Limited, the appellant, filed appeals against CIT(A) orders for AY 2012-13, 2016-17, and 2018-19. The Assessing Officer had made disallowances under Section 14A for interest and indirect expenses related to exempt income, and under Section 40(a)(i) (later treated as 40A(9)) for contributions to an employees' welfare fund. The CIT(A) dismissed the appellant's grounds on both issues.
Held
The Tribunal allowed the appeal in part, deleting disallowances under Section 14A for interest (Rs. 4,64,888) and indirect expenditure (Rs. 5,95,597) due to sufficient own funds and lack of AO's satisfaction regarding indirect expenses. However, the disallowance of contribution to the employees' welfare fund under Section 40A(9) (Rs. 95,188) was upheld, as were similar PF/ESI contribution disallowances for other assessment years based on a Supreme Court judgment.
Key Issues
Whether disallowance under Section 14A for interest and indirect expenditure related to exempt income is warranted when the assessee has sufficient own funds or AO lacks proper satisfaction. Also, whether contributions to employees' welfare funds are disallowable under Section 40A(9) and similar PF/ESI contributions in other assessment years.
Sections Cited
250, 143(3), 14A, Rule 8D, 10(1), 10(2A), 40A(9)
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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Before: Shri George George K, Vice- & Shri Inturi Rama Rao
:Asst.Year 2016-2017 :Asst.Year 2018-2019 OEN India Limited The Assistant Commissioner 51/129, Vytilla v. of Income-tax, Circle 2(1) Kochi – 682 019. Kochi. PAN : AAACO2007Q. (Appellant) (Respondent) Appellant by : Sri.Radhesh Bhatt, CA Respondent by :Smt.Leena Lal, Sr.AR Date of Date of Hearing :02.04.2025 Pronouncement : 08.04.2025 O R D E R Per Inturi Rama Rao, AM : These three appeals at the instance of the assessee are directed against different orders of National Faceless Assessment Centre / Commissioner of Income-tax (Appeals) [“CIT(A)”] all dated 16.10.2023 passed u/s.250 of the Income-tax Act, 1961 [“the Act”] for the assessment years 2012-2013, 2016-2017 and 2018-2019.
Since identical issues are involved in these appeals, they were heard together and are being disposed of by this consolidated order for the sake of convenience. We take as the lead
Briefly the facts of the case are that the appellant is a limited company incorporated under the provisions of Companies Act, 1956. It is engaged in the business of manufacturing and dealing in switches, relays and other electromechanical components.. The return of income for the assessment year 2012-2013 was filed on 24th September, 2012 disclosing total income of Rs.15,59,94,810. Against the said return of income, the assessment was completed by the Assessing Officer (“the AO”) vide order passed u/s.143(3) of the Income-tax Act, 1961 (“the Act”) at a total income of Rs.15,89,34,110. While doing so, the AO made a disallowance u/s.14A of the Act at Rs.10,61,485 and disallowance u/s.40(a)(i) of Rs.95, 188.
During the course assessment proceedings, the AO noticed that the appellant has earned exempt income of Rs.1,26,94,382 from the following heads, i.e., (i) Dividend from companies Rs.27,45,622, (ii) Agricultural income Rs.38,748, and (iii) Share of partnership firm Rs.99,10,012. Therefore, the AO called upon the appellant to explain as to why provisions of sec.14A of the Act cannot be applied. In response to the show cause notice, the appellant submitted that in respect of agricultural income which is exempt u/s.10(1) of the Act, the expenditure incurred had been disallowed while computing taxable income. In response to the dividend income, the assessee contended that borrowed funds have not been used for the purpose of making investments, which yielded exempt income. In respect of share of profit -861/Coch/2023. OEN India Limited. from partnership firm the appellant contended that no expenditure was incurred for earning the exempt income u/s.10(2A) of the Act. It is further contended that no indirect expenditure was incurred to earn the exempt income. However, the AO rejecting the above contentions had made an addition of Rs.10,61,485 under the provisions of sec.14A of the Act, which includes disallowance under sub-rule (2) of Rule 8D being interest expenditure of Rs.4,64,888 and under sub-clause (3) amounting to Rs.5,95,597. The AO also made a disallowance of contribution made to employees’ welfare fund of Rs.95,188, rejecting the contention of the appellant that the contribution was made out of business expediency for the welfare of the employees.
Being aggrieved by the above disallowances, the appellant filed appeal before the CIT(A), who vide the impugned order dated 16.10.2023 dismissed the grounds of appeal on both the issues.
Being aggrieved, the appellant is in appeal before us in the present appeal. Before us it is contended that the interest free funds far exceeds the investment which yielded exempt income. Therefore, no disallowance of interest u/s.14A r.w. Rule 8D(2) is called for. In support of this contention, he filed a chart at page 4 and 5 of the written submission, and prayed that no disallowance of interest is called for. Reliance is placed on the following decisions, i.e., (i) CIT v. HDFC Bank 366 ITR 505 (Bombay), (ii) Premier Finance & Trading Co. Ltd. (104 Taxmann.com 97 (Bom HC), and (iii) Ashok Apparels 106 Taxmann.com 63 (Bom.)
-861/Coch/2023. OEN India Limited.
As regards the disallowance under clause (3) of Rule 8D, it is submitted that application of Rule 8D is not automatic and AO cannot be resorted to the disallowance without recording satisfaction as to how the contention of the appellant that no expenditures were incurred, is incorrect. In support of this he relied on the decision of the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. v. DCIT (2017) 394 ITR 449(SC) and also in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 620 (SC).
As regards the disallowance u/s.40(a)(i) of the Act, it is submitted that the appellant made a contribution of Rs.95,188 to OEN employees welfare fund. The said contribution was made in pursuance of terms of memorandum of settlement entered into by the appellant with the employees, hence, the contribution is made out of business expediency and wholly and exclusively for the business purpose, no disallowance is called for and he also placed reliance on the Hon’ble Kerala High Court in the case of CIT v. Travancore Cochin Chemicals Ltd. 243 ITR 284 (Kerala).
On the other hand, the learned Senior DR by placing the reliance of the orders of the lower authorities submits that no interference is called in their orders.
We heard rival submissions and perused the material available on record. The grounds of appeal
Nos.1 and 4 are general in nature, which does not require any specific adjudication. Ground No.2 challenges the disallowance made by the AO u/s.14A of the Act as confirmed by the -861/Coch/2023. OEN India Limited. CIT(A). We have carefully perused the assessment order as well as the order passed by the CIT(A). The appellant had asserted that no disallowance of interest u/s.14A of the Act is called for in view of the fact that own funds in the form of share capital reserve funds far exceeds the investments made which yielded exempt income. It is well settled position of law that when investments which yielded exempt income were made out of own funds, no disallowance of interest u/s.14A of the Act r.w. Rule 8D(2)(ii) is called for. The lower authorities have not disputed the fact the own funds far exceeds the investment made which yielded the exempt income. Therefore, it is settled position of principles of law that as held by the Hon’ble Supreme Court in the case of South Indian Bank Ltd. v. CIT (2021) 438 ITR
1. (SC) wherein it is held that investments would be presumed to be made from assessee’s own funds if own funds far exceeds the investments. Thus, in view of the settled position of law, we direct the AO to delete the addition of interest of Rs.4,64,888.
11. As regards the disallowance under clause (iii) of Rule 8D(2), on perusal of the assessment order it would clearly reveal that before the AO it was asserted that no indirect expenditure was incurred to earn exempt income. However, the AO had not recorded a satisfaction as to how the contention of the appellant that no indirect expenditure is incurred, is incorrect. Now it is settled position of law that the AO cannot resort to disallowance u/s.14A r.w. Rule 8D(2)(iii) without recording such satisfaction. Reliance can be placed in this regard on the decision of the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. v. DCIT (2017) 394 ITR 449(SC) and -861/Coch/2023. OEN India Limited. also in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 620 (SC). Therefore, in view of the settled position of law we direct the AO to delete the addition made u/s.14A r.w. Rule 8D(2)(iii) of Rs.5,95,597.
12. In the result, ground No.2 filed by the assessee stands allowed.
13. Ground No.3 challenges the disallowance u/s.40A(9) towards the contribution made to employees’ welfare fund. It is submitted that the contribution was made on account of contractual obligation in terms of the agreement entered into with the employees of the company and the provisions of 40A(9) has no application, placing reliance of Hon’ble Kerala High Court in case of CIT v. Travancore Cochin Chemicals Ltd. 243 ITR 284 (Ker.).
14. We have carefully perused the submissions made on behalf of the assessee. We are of the considered opinion that in this case the contribution is hit by the provisions of sec.40A(9) and the decision of the Hon’ble Kerala High Court in the case of Aspinwall and Co. (Travancore) Ltd. v. DCIT (Assessment) (2007) 295 ITR 553 (Ker.) is squarely applicable. Accordingly, Ground No.3 is dismissed.
15. In the other two appeals, i.e., and 861/Coch/2023 for assessment years 2016-2017 and 2018-1019, respectively, the appellant raised the ground relating to contribution towards PF and ESI. This issue is squarely covered against the assessee by the decision of the Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. v.CIT
In the result, the appeals filed by the assessee are partly allowed.
Order pronounced on this 08th day of April, 2025.