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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAM LAL NEGI
Per G. Manjunatha, Accountant Member:
This appeal filed by the assessee is directed against order of the Commissioner of Income Tax (Appeals)-47, Mumbai dated 28.02.2017 and it pertains to assessment year 2012-13.
The assessee has raised the following grounds of appeal: “On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in making an addition on account of disallowance of claim of depreciation amounting to Rs.2,13,83,915/- to the book profits u/s 115JB of the Income Tax Act, 1961, without considering the facts and circumstances of the case.
2) On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of Learned Assessing Officer in making disallowance u/s 14A of the Income Tax Act,1961 as per rule 8D, without appreciating the facts and circumstances of the case.
2 3) On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in confirming the action of the Learned Assessing Officer in making an addition of the disallowance made u/s 14A as per Rule 8D, to the book profits u/s 115JB of the Income Tax Act, without appreciating the facts St circumstances of the case. 4) The appellant craves leave to add, amend, alter or delete the said ground of appeal.”
The brief facts of the case are that the assessee is engaged in the business of Information technology solutions and information technology infrastructure management services, providing wide spectrum of technology solutions and services to a diverse customer base, filed its return of income for assessment year 2012-13 on 26.09.2012 declaring total loss of Rs.4,51,73,600/- under normal provisions of the Act, 1961 and book profit of Rs.13,82,07,587/- under section 115JB of the Income Tax Act, 1961. The case was selected for scrutiny and during the course of assessment proceedings, it was noticed by the AO that a survey action under section 133A of the Income Tax Act, 1961 was conducted on 24.02.2012 on the basis of information received from Sales Tax Department that the assessee is one of the beneficiary of accommodation entries of bogus purchase bills aggregating to Rs.96,93,87,572/- from 10 parties listed in para 5(i) of impugned assessment order. It was further noticed that during the course of survey, it was found that purchases totaling to Rs.9,39,60,854/- from other three concerns listed in para 5(ii) of impugned assessment order did not have supporting documents. Thus, total purchase of Rs.106,33,48,426/- were detected. During the course of survey, statement of Shri Prakash Dhanji Shah, MD of the company was recorded under section 131 of the Act, and in reply to the discrepancies found during the course of search and survey, he
3 stated that out of total purchases of Rs.106.33 crores, as against the purchase of Rs.95,92,57,266/- the company had shown sales of Rs.99,97,98,004/- and offered gross profit of Rs.4,05,40,738/- for F.Y. 2009-10 to 2011-12. In respect of balance purchase aggregating to Rs.10,41,15,160/-, it was stated that same has been debited to the capital account on which depreciation claim of Rs.8.8 crores was made for A.Y. 2007-08 to 2012-13. Consequent to survey, the assessee had furnished revised statement of total income vide letter dated nil filed on 10.01.2013 and withdrawn the claim of depreciation on bogus capital account purchases. However, on perusal of records it is revealed that the assessee had not reversed the claim of depreciation in the financial statements. Therefore, the AO has disallowed the sum of Rs.2,13,83,915/- towards depreciation claimed for the year on purchase of computers as per the working tabulated on page 5 of assessment order and was added back to the total income of the assessee under normal provisions of the Act as well as book profits under section 115JB of the Income Tax Act, 1961. Similarly, the AO has made additions towards disallowance of expenditure incurred in relation to exempt income under section 14A by invoking provisions of rule 8D and determined total disallowance of Rs.77,41,478/- and similar adjustment has been made to book profit computed under section 115JB of the Income Tax Act, 1961.
Aggrieved by the assessment order, the assessee preferred appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee contended that as per provisions of section 115JB, only such items which are specifically mentioned in the explanation (1) to
4 section 115JB can be added back to the book profits and no other additions can be made by the AO, once book of accounts are audited and approved by the shareholders in the annual general meeting. In this regard, the assessee relied upon the decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT 255 ITR 273. As regards, disallowance of expenditure incurred in relation to exempt income it was submitted that its own funds in form of share capital as well as reserves are in excess of investments made in shares, which yield exempt income and accordingly, no disallowance can be made in respect of interest disallowances. In this regard, the assessee has relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom). The assessee has also challenged additions made by the AO to book profit computed under section 115JB in respect of amount disallowed under section 14A of the Income Tax Act, 1961.
The Ld. CIT(A) after considering the relevant submissions of the assessee and also by relying upon certain judicial proceedings including the decision of ITAT Special Bench, in the case of Rain Commodities Ltd. Vs. DCIT 40 SOT 265 held that it is a settled position of law that the AO has the power to alter or rewrite the net profit as per profit & loss account, in case it is found that profit & loss account is not prepared in accordance with parts II & III of schedule VI to the Companies Act, 1956 and if accounting policies and accounting standards are not adopted for preparing such accounts and method or rate of depreciation have been incorrectly adopted for preparation of profit & loss account laid before the AGM. Therefore, he opined that merely
5 for the reason that accounts have been audited and approved by the AGM, falsification account in from of bogus claim of depreciation cannot be accepted. He, further, observed that it is an admitted fact that the assessee has accepted capitalization of bogus purchase of assets/computers and raising fiticious claim of depreciation and hence, by no stretch of imagination it can be said that accounts prepared and approved in the AGM are in consonance with the accounting policies and in conformity with applicable mandatory accounting standards. Since, the assessee’s accounts are not in accordance with part II & III of schedule VI to the Companies Act, 1956, the AO has every right to recompute book profit under section 115JB of the Income Tax Act, 1961, accordingly, rejected the ground taken by the assessee. In so far as additions made by the AO towards disallowance of expenditure incurred in relation to exempt income, the Ld. CIT(A) rejected the arguments of the assessee in respect of exclusion of investment in subsidiary companies for strategic purpose in light of the decision of Hon’ble Delhi High Court in the case of Maxopp Investment vs. CIT 347 ITR 372. However, he found merit in the plea taken by the assessee that investment made in foreign subsidiaries is to be excluded while computing disallowance under section 14A of the Act, because the dividend income from the foreign companies is taxable, accordingly, set aside the issue to the file of the AO and directed him to verify working of disallowances under section 14A read with rule 8D furnished by the assessee and make suitable adjustments. As regards re-computation of book profit under section 115JB by adding the amount of disallowance made under section 14A read with rule 8D, the Ld. CIT(A) has directed
6 the AO to ascertain quantum disallowances under section 14A and also make recomputation of book profit by adding revised amount of disallowances under section 14A read with rule 8D in accordance with clause (f) of explanation (1) to section 115JB of the Income Tax Act, 1961.
Aggrieved by the Ld. CIT(A)’s order, the assessee is in appeal before us.
The first issue that came up for reconsideration from ground No.1 of assessee’s appeal is additions made towards disallowance of depreciation on fixed assets to the book profits computed under section 115JB of the Income Tax Act, 1961. The Ld. A.R. submitted that the Ld. CIT(A) confirmed additions made by the AO, without appreciating the fact that once books of accounts are audited and approved by the shareholders in the AGM, the AO does not have power to alter or recompute book profit as per profit & loss account, unless otherwise additions/deletions as provided under explanation (1) of section 115JB of the Income Tax Act, 1961. The Ld. A.R. further submitted that it is a fact that the assessee has filed revised statement of total income withdrawing its claim of depreciation on fixed assets during the course of survey, however, not revised its profit & loss account withdrawing said claim, because the books of accounts of the assessee have been audited and approved by the shareholders in the AGM without any adverse comments on preparation of financial statements, therefore, unless it is expressly provided under explanation (1) of section 115JB, no other additions can be made by the AO under section 115JB of the Income Tax Act, 1961. In this regard, re relied
7 upon the decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT 255 ITR 273.
The Ld. D.R., on the other hand, strongly supported the order of the Ld. CIT(A). The Ld. D.R. further submitted that when assessee itself admitted the fact of bogus claim of depreciation on capital assets it ought to have revised its profit & loss account to reverse said depreciation. Since the assessee has not revised bogus depreciation on fixed assets, the AO is having every right to revise said profit & loss account, because profit & loss account prepared by the assessee is not in accordance with part II & III of schedule VI to the Companies Act, 1956.
We have heard the rival submissions of both the parties and perused the material available on record and also gone through the orders of the authorities below. It is an admitted fact that the books of accounts of the assessee have been audited and approved by the shareholders in the AGM without any adverse comments on preparation of financial statements including profit & loss account in light of part II & III of schedule VI to the Companies Act, 1956. It is also an admitted fact that as per the ratio laid down by Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (supra) the power of the AO while computing the income under section 115JB is limited to the extent of making adjustments as provided under explanation (1) to section 115JB of the Income Tax Act, 1961. In, this legal background, if we examine the case of the assessee whether the AO is right in recomputation of book profit under section 115JB by adding depreciation claimed on alleged bogus fixed assets, we
8 find that the AO has made adjustment towards depreciation on alleged bogus fixed assets without making any observations as to incorrectness in books of accounts prepared by the assessee as per part II & III of schedule VI to the Companies Act, 1956. Unless otherwise, the AO makes out a case of inconsistency in financial statement prepared by the assessee in light of part II & III of schedule VI to the Companies Act, 1956, he cannot make any additions to the book profit computed under section 115JB of the Income Tax Act, 1961, other than as provided under explanation (1) to section 115JB of the Income Tax Act, 1961. This legal proposition is supported by the decision of Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (supra) wherein it was categorically held that the AO has only the power of examining whether the books of accounts are certified by the authorities under the Companies Act, as having been properly maintained in accordance with the Companies Act. Once books of accounts have been maintained in accordance with Companies Act, 1956, then the power of the AO is limited to the extent of making additions/deletions as provided in explanation (1) to section 115JB of the Income Tax Act, 1961. Since, the books of accounts of the assessee have been audited and also have been approved in AGM, the AO cannot alter book profit for any items other than as provided as in explanation (1) to section 115JB of the Income Tax Act, 1961. Further, the AO has accepted the claim of the assessee in preceding financial years when the assessee has claimed depreciation on alleged bogus fixed assets without any adjustment to book profit. Once the claim of the assessee has been accepted in earlier financial years, then there is no reason for the AO to disturb the settled
9 position unless otherwise there is a complete change in facts for the year under consideration. Although, resadjudicata is not strictly applicable to income tax proceedings, but rule of consistency is to be followed as held by the Hon’ble Supreme Court in the case of CIT vs. Radhasoami Sathsung vs CIT (1992) 193 ITR 321(SC), wherein it was held that rule of consistency has to be followed in income tax proceedings even though res- adjudicata is not strictly applicable. Therefore, we are of the considered view that the AO as well as Ld. CIT(A) were erred in making additions towards depreciation on alleged fixed assets to book profit computed under section 115JB of the Income Tax Act, 1961. Accordingly, we direct the AO to delete additions made to book profit under section 115JB towards depreciation claim on fixed assets.
The next issue that came up for consideration from ground No.2 and 3 of assessee’s appeal is additions made towards disallowance of expenditure incurred in relation to exempt income under section 14A read with rule 8D of Income Tax Rules, 1962 and consequent additions made to book profit computed under section 115JB of the Income Tax Act, 1961. The facts with regard to impugned dispute are that the assessee has earned dividend income of Rs.92,29,697/-, but not made disallowances of expenditure incurred in relation to said exempt income under section 14A of the Income Tax Act, 1961. Therefore, the AO had determined disallowances contemplated under section 14A by invoking rule 8D and determined total disallowance of Rs.77,41,478/- under rule 8D(2)(i), (ii) & (iii) of IT Rules, 1962. It was the contention of the assessee before the AO that it has not incurred any expenditure in relation to
10 exempt income and hence, no disallowance can be made under section 14A of the Income Tax Act, 1961. The assessee had also taken another argument in light of certain judicial precedents and argued that own funds in form of share capital and reserves is in excess of investments in shares and securities which yield exempt income and hence no disallowance can be made towards interest expenditure under rule 8D(ii) of IT Rules, 1962. Similarly, the assessee had also challenged the action of the AO in disallowance of other expenses under rule 8D2(iii) on the ground that investments made in subsidiary companies for strategic control and investments made in foreign subsidiaries has to be excluded to determine average value of investments. The Ld. CIT(A) after considering relevant submissions of the assessee rejected the claim of the assessee regarding investment in subsidiary for strategic control in light of the decision of Hon’ble Delhi High Court in the case of Maxopp Investment vs. CIT 347 ITR 372. However, he had accepted the claim of the assessee in so far as investments made in foreign subsidiaries, because dividend income from foreign companies is taxable under the Income Tax Act, 1961. Accordingly, set aside the issue to the file of the AO and directed him to consider working of disallowances furnished by the assessee and recompute the disallowances under section 14A of the Income Tax Act, 1961.
We have heard the rival submissions of both the parties and perused the material available on record and gone through the order of authorities below. It is an admitted fact that the assessee has earned dividend income and claimed exempt under section 10(38) of the Income Tax Act, 1961. It is also an admitted fact that the assessee has not made suo-moto
11 disallowance of expenditure incurred in relation to exempt income. The AO has determined disallowance of expenditure by invoking rule 8D(2) of IT Rules, 1962 on the ground that disallowances contemplated under section 14A shall be determined in accordance with rule 8D of IT Rules, 1962 w.e.f. assessment year 2008-09. We find that as per provisions of section 14A of the Act, disallowance has to be determined in accordance with rule 8D from assessment year 2008-09 onwards. This position has been approved by the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [(2010) 328 ITR 81 (Bom)] wherein it has been categorically held that section 14A and rule 8D are applicable in case of a composite business and also that the number of apportionments of expenses is very much inbuilt in the provisions of rule 8D of IT Rules, 1962. The Hon’ble Supreme Court has approved the above legal position in the case of Maxopp Investment vs. CIT 347 ITR 372. Therefore, we are of the considered view that there is no error in the finding of the AO in applying rule 8D for determination of disallowances of expenditure under section 14A of the Income Tax Act, 1961.
Having said so, let us examine the claim of the assessee in light of certain judicial precedents including the decision of Hon’ble Jurisdictional High Court of Bombay. The Hon’ble Bombay High Court, in the case of CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), had considered the issue and held that when mixed funds including own and borrowed funds are in excess of amount of investments in shares and securities which yield exempt income, then a general
12 presumption goes in favour of the assessee that investments in shares and securities which yielded exempt income is out of own funds. The assessee claims that it has own funds in form of share capital and reserves to the extent of 664.29 crores, whereas its investments in shares and securities is at Rs.144.96 crores. Therefore, no disallowance could be made in respect of interest expenditure under rule 8D(2)(ii) of IT Rules, 1962. This point needs verification from the AO, because the assessee has taken this plea for first time before the Tribunal. In so far as investments in subsidiaries for strategic control, we find that the Hon’ble Supreme Court in the case of Maxopp Investment vs. CIT 347 ITR 372 had rejected the arguments of the assessee for investments in subsidiaries/group companies for strategic purpose and held that the moment exempt income is received provisions of section 14A are applicable. Therefore, even if investments are made in subsidiary companies for strategic control, the provisions of section 14A are applicable and consequent disallowances of expenses shall be determined in accordance with rule 8D of IT Rules, 1962. Therefore, we reject the arguments of the assessee. In so far as investments in foreign subsidiaries, we find that the Ld. CIT(A) has recorded categorical finding that investments in foreign subsidiaries needs to be excluded, because dividend from foreign companies is taxable under Income Tax Act, 1961. Similarly, the Ld. CIT(A) has directed the AO to exclude investments in mutual funds, because dividend from mutual funds and long term capital gains on redemption of units in respect of debt oriented funds is chargeable to tax. Further, the CIT(A) has set aside the issue to the file of the AO and directed him to consider working
13 furnished by the assessee determining the disallowances under section 14A of the Income Tax Act, 1961. Therefore, we are of the considered view that the issue needs to go back to the file of the AO to decide afresh in light of our discussions given hereinabove. Hence, we set aside the issue to the file of the AO and direct him to recompute disallowances contemplated under section 14A in accordance with law in terms of our observations given hereinabove.
Coming to the recomputation of book profit under section 115JB in respect of disallowance of expenditure under section 14A of the Income Tax Act, 1961. We find that this issue has been covered in favour of the assessee by the decision of the ITAT Special Bench Delhi in the case of ACIT vs. Vireet Investments Pvt. Ltd. (2017) 82 taxmann.com 450 (Delhi-Trib.) wherein it was held that computation under clause (f) of explanation (1) to section 115JB(2) is to be made without resorting to computation as contemplated under section 14A read with rule 8D of IT Rules, 1962. Therefore, we are of the considered view that the AO was erred in making additions towards book profit under section 115JB in respect of disallowances of expenditure under section 14A by invoking rule 8D of IT Rules, 1962. Hence, we direct the AO to delete the additions made towards book profit computed under section 115JB in respect of disallowance of expenditure under section 14A of the Income Tax Act, 1961.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 11.10.2019.
Sd/- Sd/- (RAM LAL NEGI) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 11 .10.2019.
* Kishore, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order
Dy/Asstt. Registrar, ITAT, Mumbai.