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Before: Shri Duvvuru RL Reddy & Shri S. Jayaraman
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the Assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals)-15, Chennai dated 31.07.2018 relevant to the assessment year 2014-15. The grounds raised in the appeal of the assessee are that the ld. CIT(A) has erred in confirming the part disallowance made under section 14A r.w. Rule 8D, disallowance of depreciation in respect of royalty, disallowance of bad debt and part disallowance under section 14A r.w. Rule 8D in computing book profit under section 115JB of the Income Tax Act, 1961 [“Act” in short].
Brief facts relating to the disallowance under section 14A r.w. Rule 8D are that as per the financials, the assessee has investments in shares of associate and other companies, government securities and mutual funds. The assessee received a dividend income of ₹.3,80,855/- from such investments and has disallowed ₹.7,200/- as expenses pertaining to the exempt income. However, the Assessing Officer determined the expenditure component by applying the provisions of section 14A r.w. Rule 8D at ₹.12,38,309/- and after reducing the disallowance made by the assessee at ₹.7,200/-, ₹.12,31,109/- was brought to tax.
On appeal, after considering the submissions of the assessee and by following the decision in the case of Joint Investments Pvt. Ltd. v. CIT 372 ITR 694 (Delhi), the ld. CIT(A) restricted the disallowance under section 14A of the Act to the extent of exempt income earned.
On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the specific ground raised before the ld. CIT(A), which is condition precedent for disallowance under section 14A of the Act that the Assessing Officer’s satisfaction that voluntary disallowance made by assessee unreasonable and unsatisfactory, was not adjudicated by the ld. CIT(A). By referring to the decision in the case of CIT v. I.P. Support Services India (P.) Ltd. 378 ITR 240 (Delhi) and CIT v. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del), the ld. Counsel for the assessee has prayed for deleting the disallowance confirmed by the ld. CIT(A). On the other hand, the ld. DR supported the order passed by the ld. CIT(A).
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The Assessing Officer determined the expenditure component by applying the provisions of Rule 8D at ₹.12,38,309/- and after reducing the disallowance made by the assessee at ₹.7,200/-, ₹.12,31,109/- was brought to tax. However, on appeal, against the disallowance made under section 14A r.w. Rule 8D as well as computation of book profit under section 115JB of the Act, the ld. CIT(A) restricted the disallowance to the extent the exempt income earned by the assessee by following the decision of Joint Investments Pvt. Ltd. v. CIT (supra). In this case, the assessee has voluntarily disallowed ₹.7,200/- as expenses pertaining to the exempt income. Without recording any satisfaction by the Assessing Officer on the expenses voluntarily disallowed by the assessee, the ld. CIT(A) restricted the disallowance without giving any specific findings by distinguishing the case law relied on by the assessee. Accordingly, we direct the ld. CIT(A) to adjudicate the issue of disallowance under section 14A r.w. Rule 8D alone afresh in accordance with law after allowing an opportunity of being heard to the assessee.
The next ground raised by the assessee relates to disallowance of depreciation in respect of royalty. The assessee has claimed an amount of ₹.39,86,570/- as royalty payment and classified under “other expenses”. After considering the submissions of the assessee, the ld. CIT(A) confirmed the disallowance.
6.1 We have considered the rival contentions and perused the materials available on record. By filing copy of the order, the ld. Counsel for the assessee has submitted that the issue in appeal is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for earlier assessment year and prayed that the same should be followed. We have perused the decision in assessee’s own case for the assessment year 2013-14 in dated 08.06.2017 filed by the Revenue, wherein, the Tribunal has observed and held as under: “7.1 Deleting the addition made by disallowing the royalty expenditure of Rs.43,36,271/- by treating it as revenue expenditure: The assessee had claimed an amount of Rs.43,36,271/- as royalty expenses. On query it was explained that the aforesaid amount was paid to M/s. Shriram Ownership Trust for using the copyright logo as per the agreement dated 22.07.2011. The assessee further pointed out that on the identical issue in the case of group company viz., Shriram City Union Finance Ltd in ITA No.1899/Mds/2015 vide order dated 11.04.2013, the Chennai Bench of the Tribunal allowed the claim of royalty expenses as revenue expenditure. The assessee also relied on the decision of the Hon’ble Apex court in the CIT vs. Wavin (India) Ltd reported in 236 ITR 314, wherein the identical issue was held in favour of the assessee. However, the Ld.AO rejected the claim of the assessee and disallowed the royalty expenses by treating it as capital expenditure but allowed depreciation @ 25% by observing as under: “Further, though the issue of royalty payments has been held in favour of the assessee’s group company by the ITAT, Chennai, with due respect to the Appellate Authorities, the same has not been accepted and the department has filed further appeal to Honourable Madras High Court. However, the matter has not reached its finality as on date. Therefore, the claim of the assessee is not entertained and royalty payment of Rs.32,52,204/- is disallowed after allowing the eligible depreciation @25% on Rs.43,36,271/-. Accordingly depreciation of Rs.10,84,067/- is allowed.” On appeal, the Ld. CIT(A) following the decision of the Chennai Bench of the Tribunal deleted the addition made by the Ld.AO and allowed the claim of royalty expenditure as revenue expenditure by observing as under: “The matter is considered. The ld. Chennai Tribunal in its decision in the case of Shriram City Union Finance Ltd in IUTA No.868 & 869/Mds/2015 dated 29.01.2016 has categorically held that disallowance of Royalty is not warranted. Respectfully following the binding judicial precedence of ld. Chennai Tribunal on the issue, the disallowance made by the Assessing Officer on account of royalty payments stand deleted. This ground is allowed.” After hearing both parties and perusing the issue in detail, we do not find it necessary to interfere with the order of the Ld. CIT(A), because on the identical issue, the matter has been already decided in favour of the assessee by the Chennai Bench of the Tribunal which the Ld. CIT(A) has only judiciously followed. Therefore we hereby confirm the order of the Ld. CIT(A) on this issue.” 6.2 The only contention of the Department that the above decision of the Tribunal was not accepted and preferred further appeal before Hon’ble High Court is not acceptable since Revenue has not filed any decision of higher Court having modified or reversed the decision of the Tribunal. Respectfully following the above decision of the Tribunal in assessee’s own case for earlier assessment years, the disallowance made by the Assessing Officer on account of royalty stands deleted.
The next ground raised in the appeal relates to confirmation of disallowance of bad debts claimed by the assessee at ₹.62,91,673/-. At the time of hearing, the ld. DR has submitted that the issue is squarely covered in against the assessee by the decision of the Tribunal in assessee’s own case for earlier assessment years and pleaded for following the same.
7.1 We have considered rival contentions. Similar issue was subject matter in appeal before the Tribunal for the assessment year 2013-14 in dated 08.06.2017, wherein, the Tribunal has observed and held as under: “5.2 Ground No.2: Bad Debts :- It was observed by the Ld.AO that the assessee had claimed bad debts of Rs.1,94,30,233/- in its Profit & Loss account. It was explained by the assessee that on the direction of its clients the assessee had purchased shares on behalf of its clients but the clients M/s. Nirmala Behen Shah and M/s. Gan Nayak Traders Pvt. Ltd., failed to make payment. Meanwhile the value of the shares had fallen and the clients refused to honor their commitment. Therefore, the assessee treated the fall in value of shares as bad debts. However, the Ld.AO rejected the submission of the assessee and disallowed the claim of bad debts due to the following reasons: 1) The assessee had not written off the bad debts in the books of account. 2) The provisions of Section 36(1)(vii) is not complied with, i.e., the trade receivable was not offered to tax during earlier years. 3) The decision of the Hon’ble Apex court in the case TRF Ltd. vs. CIT reported in 190 taxman 391 was against the case of the assessee. 4) The decision of the Hon’ble Apex Court in the case of Vijaya Bank vs. CIT reported in 190 taxman 257 was not applicable in the case of the assessee because it is not a banking company but only share broking company. 5) The stock which was purchased by the assessee on behalf of its clients was still in possession of the assessee and the assessee owns it. 6) The decision of the case CIT v. Shreyas S. Morakhia reported in 206 taxman 32 was not applicable in the case of the assessee. Further, by relying on the various other decisions, the Ld.AO disallowed the claim of bad debts and thereby added Rs.1,78,57,131/- to the income of the assessee. On appeal, the Ld. CIT(A) following the decision of the Chennai Bench of the Tribunal in the assessee’s own case in ITA No. 733,734&735/Mds/2015 dated
05.05.2016 confirmed the order of the Ld.AO. The gist of the order of the Ld. CIT(A) is reproduced herein below for reference: 6.3 The matter is considered. The Id. Chennai Tribunal, in appellant's own case in &735/Mds/2015 dated 05.05.2016 has held as under on the Issue: "We have considered the rival submissions on either side and perused the relevant material available on record. Section 36(2)(i) of the Act reads as follows: "36(2) In making any deduction for a bad debt or part thereof, the following provisions shall apply- (i) No such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee.” In view of the above, it is for the assesse to establish that the bad debt has been taken into account in computing the income of the assessee of any of the previous year or the money was lent in the course of ordinary business of the assessee. In case the money lending is not the business of the assessee, then the assessee has to necessarily establish that the so-called debt was taken as income of the assessee for the previous year in which the amount of such debt or part thereof is written off or of an earlier previous year. There is no material on record to suggest that the amount invested in shares was taken as income of the assessee in any of the previous year. Moreover, as rightly submitted by the Ld. D.R., the shares purchased by the assessee remained with assessee. The price of the share might have gone down considerably, however, the fact remains that the share remained with the assessee and the assessee has a right to hold the same till the payment was made by the respective clients. Therefore, merely because the clients could not honour their respective commitment of paying the purchase price, it does not mean that the assessee suffers loss at this stage. The assessee has to first sell the shares and the assessee could not realise the entire amount invested, then the amount which could not be realized may be claimed as business loss. At no stretch of imagination, it can be said that the amount due from the clients is bad debt. Since the provisions of Section 36(2)(i) was not complied with, this Tribunal is of the considered opinion that the outstanding amount cannot be construed as bad debt. Therefore, there is no question of allowing the same as bad debt. Since the shares remained with the assessee and it can be sold at any time, at the best, it can be claimed as business loss in the year in which those shares are sold provided there is any actual loss. Accordingly, the Assessing Officer shall verify whether the assessee sold the shares during the year under consideration and suffered any loss. If the assessee suffered loss on sale of such shares, the same shall be allowed as business loss (emphasis supplied)." Respectfully following the decision of Id. Chennai Tribunal on the issue, the disallowance of bad debts made by AO stands confirmed. The grounds of appeal in this regard are dismissed.” After hearing both sides, we find that the issue is squarely covered by the decision of the Chennai Bench of the Tribunal cited by the Ld. CIT(A) in his order supra. Further the Ld.AO has also considered the issue in detail and relying on the various decision of the higher judiciary and the Hon’ble Apex court supra, rightly disallowed the claim of bad debts made by the assessee. In this situation, we do not find it necessary to interfere with the order of the Revenue authorities on this issue. Accordingly we hereby confirm the order of the Revenue authorities on this issue.” On perusal of the appellate order, we find that the ld. CIT(A) has rightly followed the above decision of the Tribunal in assessee’s own case for the assessment year 2013-14 and confirmed the disallowance of bad debts. Thus, we find no infirmity in the order passed by the ld. CIT(A) and accordingly, the ground raised by the assessee stands dismissed.
8. The next ground raised in the appeal relates to confirmation of part of the disallowance made under section 14A r.w. Rule 8D while computing book profit under section 115JB of the Act. At the time of hearing, the ld. Counsel for the assessee has submitted that the issue is squarely covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the assessment year 2013-14.
8.1 We have heard the rival contentions and perused the decision of the Tribunal in assessee’s own case for the assessment year 2013-14 in which the Revenue has agitated deletion of the addition made to book profits under section 115JB of the Act, wherein, the Tribunal has observed and held as under: “7.3 Deletion of the addition made to book profits U/s.115JB of the Act:- The Ld.AO while computing the book profit of the assessee U/s.115JB of the Act made addition by disallowing the expense U/s.14A of the Act of Rs.7,06,109/-. On appeal the Ld. CIT(A) deleted the addition following the decision of the Chennai Bench of the Tribunal on the identical issue in the case of associated company M/s. Shriram Capital Limited in dated 26.06.2015, wherein it was held that disallowance made U/s.14A of the Act, read with rule 8D cannot be added to the book profit U/s.115JB of the Act. Since the Ld. CIT(A) has only followed the decision of the Chennai Bench of the Tribunal on the identical issue, we do not find it necessary to interfere with the order of the Ld. CIT(A) on this issue. It is also worthwhile to mention at this juncture that while interpreting fiscal statutes, on a provision of the Act with friction, another provision of the Act with friction cannot be superimposed. Therefore this ground raised by the Revenue also does not have merit and will not survive. While confirming the disallowance, the ld. CIT(A) has observed that in the case of Max Opp Investment Ltd. v. CIT 402 ITR 640, the Hon’ble Supreme Court has held that the argument that S. 14A & Rule 8D will not apply if the dominant intention of the assessee was not to earn dividends but to gain control of the company or to hold as stock-in-trade is not acceptable. S. 14A applies irrespective of whether the shares are held to gain control or as stock-in-trade. However, the Hon’ble Supreme Court in the above referred case has not given any findings that while computing book profit under section 115JB of the Act, similar disallowance should also be made. Thus, respectfully the above decision of the Tribunal in assessee’s own case for the assessment year 2013-14, the disallowance made under section 14A r.w. Rule 8D while computing book profit under section 115JB of the Act stands deleted.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced on the 11th October, 2019 at Chennai.