ASSISTANT COMMISSIONER OF INCOME TAX vs. SOMNATH VAIJANATH SAKRE,, AURANGABAD

आदेश आदेश / ORDER आदेश आदेश

PER D. KARUNAKARA RAO, AM :

There are total 3 appeals under consideration involving common A.Y. 2011-12. ITA No.2896/PUN/2016 filed by the Revenue and ITA

No.26/PUN/2017 filed by the Assessee are Cross Appeals. Assessee has

also filed C.O.No.55/PUN/2018 against the appeal filed by the Revenue

raising couple of grounds.

We proceed to adjudicate the appeal of the Revenue first.

ITA No.2896/PUN/2016 – By Revenue A.Y. 2011-12

Insurance company and is engaged in general insurance business. Assessee is a Joint Venture organization between Bajaj Finsery India

Limited, India and Allianz SE, Germany. Bajaj Finsery India Ltd. holds

74% of the share capital of the company and Allianz SE holds the

balance 26%. Assessee filed the return of income declaring total income of Rs.231,14,23,220/-. In the assessment u/s.143(3) r.w.s. 92CA(4) of

the Act, AO assessed the income of the assessee at Rs.132,05,73,950/-

making various additions/disallowances.

international transactions with Associated Enterprises amounting to

Rs.460,98,98,628/- u/s.92A and 92B of the Act. On going through the auditor’s report in Form 3CEB, AO referred the case to the TPO

3 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

u/s.92CA(1) of the Act for determining the Arm’s Length Price. The

TPO in his report dated 24-01-2014 accepted the benchmarking done by

the assessee making no adjustments on account of Arm’s Length Price.

However, AO made addition on account of section 14A of the Act read

with Rule 8D(2) of the I.T. Rule, 1962. CIT(A) deleted the same. Hence,

the Revenue is in appeal against the said decision of CIT(A). Grounds

raised by the Revenue read as under :

“1. Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(Appeal) is justified in deleting the disallowance u/s.14A of the Income Tax Act, 1961 amounting to Rs.76,21,500/-. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeal) was justified in holding that section 14A contemplates an exception for deductions allowable under the Act as contained u/s.28 to 43B of the Act and that Section 44 creates special application of these provisions in the cases of insurance companies which prohibits the Assessing Officer to travel beyond section 44 and First Schedule of the Income tax Act? 3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(Appeal) was justified in not considering that section 44 of the Income tax Act, 1961 nowhere restricts the applicability of section 14A of the Income Tax Act, 1961?

Revenue in this appeal relates to disallowability of expenditure u/s.14A

of the Act in a case where the income of assessee is computed as per the

provisions of section 44 of the Act r.w. Ist Schedule of the Income Tax

Act.

during the year under consideration reported earning of interest

amount on tax free securities at Rs.10,65,19,104 and dividend income

at Rs.4,41,51,600/-. Assessee claimed exemption of the above incomes

u/s.10(15)(iv) and 10(34)(35) respectively and suo moto computed the

disallowance u/s.14A of the Act at Rs.14,25,007/- following Net Income

4 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

Method. The said computation has been certified by the Auditors. On

perusing the profit and loss account of the assessee, AO called for the

details with regard to correctness of the claim. The assessee made his

submissions and relied on the orders of Tribunal in assessee’s own case

for the A.Yrs. 2002-03 to 2006-07 where the Tribunal held that section

14A of the Act is not applicable to General Insurance companies and the

disallowance under the said section is not warranted. The AO rejected

the submissions made by the assessee giving the following reasons

“(i) The contention of the assessee on non-applicability of section 14A to general insurance companies is not acceptable in view of provision of section 44 of the Act. For proper appreciation of the legal position of the it will be relevant to reproduce the provisions of section 44 of the Act which governs taxability of general insurance companies :

“……………

On literal interpretation of the aforesaid provision, it is clear that the legislature has specified an exhaustive list of provisions/chapters of Act which will not be applicable for computing income of insurance business. In this regard, it is observed that section 44 nowhere restricts the applicability of section 14A of the Act. Therefore, with due respect to the Hon’ble Pune Tribunal’s ruling in favour of the assessee, I hold that section 14A is applicable while computing taxable income of insurance companies.

(ii) The contention of the assessee that expenses relating to the exempt/non-taxable incomes in terms of section 14A of the Act have been calculated following ‘Net Income Method’, which is a rational and scientific method, is not acceptable. From A.Y. 2008-09 onwards, a uniform method has been prescribed under Rule 8D to resolve disputes between assessee and the department. The Hon’ble Bombay High Court in the case of Godrej & Boyce Vs. DCIT (Bombay High Court) has held that Rule 8D cannot be said to be arbitrary or oppressive. There is a rationale in Rule 8D and its method is “fair and reasonable”. It cannot be said that there is “madness” in the method of Rule 8D so as to render it unconstitutional. Therefore when 14A disallowance is warranted it should be calculated as per Rule 8D of the Income-tax Rule 1962.

(iii) The words used in section 14A are ‘in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under this Act’. These words encompass within their ambit direct as well as indirect expenses. In fact, provisions of law as contained in section 14A(3) through introduced later, clarifies that indirect expenses clearly come within the purview of section 14A because the situation dealt with by this sub-section can arise only in respect of indirect expenses.

5 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

(iv) The assessee has incurred various kinds of expenses in its profit and loss acocunt. It is not possible that assessee has not incurred any expenditure in connection with such investments and earning of such exempt income.”

Eventually, the AO invoking the provisions of section 14A r.w.r. 8D of

the I.T. Rules, 1962 disallowed Rs.76,21,500/- for the assessment year

under consideration.

submissions of the assessee and incorporated the same in Para No.5.

The CIT(A) relying on the decision of Tribunal in the assessee’s own case

for the A.Y. 2003-04 as well as A.Y. 2006-07 deleted the addition by

holding as under :

“I have carefully considered the facts of the case as well as reply of the appellant and I find that the issue in respect of disallowance u/s.14A on both the counts, i.e. income in respect of sale/redemption of investment as well as dividend income is covered in favour of the appellant in Pune Tribunal’s order in appellant’s own case in A.Y. 2003-04 (Income in respect of Sale/redemption of investments) and A.Y. 2006-07 in respect of dividend income. For the sake of clarity the relevant portion of Para 18 of Tribunal’s order for A.Y. 2003-04 (page 81-82 of paper book is reproduced as under :

6 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

Resultantly Ground no. 1 is allowed consequent thereupon Ground no. 2 automatically goes in favour of the assessee. 3.4 Respectfully following the decision of the Tribunal in assessee's own case and in absence of any contrary material brought to our notice by the learned Departmental Representative the ground raised by the assessee is allowed." It is further seen that Hon. Pune Tribunal in A.Y. 2006-07 in ITA No.119/PN/2011 dated 6-5-2011 has allowed relief in respect of addition u/s.14A on account of dividend income too, following its order in A.Y. 2003-04 reproduced above. This being so, the issue stands covered by the decision of Pune Tribunal in favour of the appellant. Accordingly, the Assessing Officer is directed to delete the addition made u/s.14A of the Income Tax Act, 1961. It is seen that the AO has wrongly allowed credit of Rs.14,25,207/- while working out the disallowance u/s.14A assuming that the appellant has already disallowed Rs.14,25,207/- on its own which is not correct as Rs.14,25,207/- is mentioned in the audit report but not considered in the computation of total income. Therefore, total disallowance u/s.14A should have been Rs.90,46,507/- and not Rs.76,21,500/-. However, in view of finding that section 14A is not applicable in this case, the issue has become infructuous. Accordingly, the ground taken by the appellant is allowed and the AO is directed to delete the addition u/s.14A of the I.T. Act, 1961.”

the Tribunal with the aforesaid grounds.

section 44 of the Act. Ld. DR prayed for reversing the order of CIT(A) on

this issue. However, he fairly admitted that this issue was already

decided by the Tribunal in favour of the assessee.

covered issue in favour of the assessee. He brought our attention to the

order of the Tribunal in assessee’s own case in ITA Nos. 1071 &

1072/PUN/2015 and connected appeals dated 29-09-2017 for the

A.Yrs. 2009-10 and 2010-11. Ld. AR read the contents of Para Nos. 17

to 22 of the order of Tribunal (supra) to demonstrate that the provisions

of section 14A cannot be invoked in a case covered by the provisions of

section 44 of the Act. Ld. AR also mentioned that this issue was the

subject matter before the Tribunal for the A.Y. 2003-04 (ITA

7 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

No.1447/PN/2007 & CO No.52/PN/2007, dated 31-08-2009 where one

of us is a party-Accountant Member) and the order was originally passed

in the year 2009 in favour of the assessee. The said order was relied

upon while passing the order for A.Yrs. 2009-10 and 2010-11.

We have also perused the orders of the Tribunal in the assessee’s own

case for the A.Y. 2003-04 as well as order for the A.Yrs. 2009-10 and

2010-11. We find the Coordinate Bench of the Tribunal in ITA No.1071

& 1072/PUN/2015 decided on 29-09-2017 for the A.Yrs. 2009-10 and

2010-11 has decided this issue in favour of the assessee. We therefore

proceed to extract the relevant paragraphs from the said order of the

Tribunal and the same read as under :

“17. The issue raised vide grounds of appeal No.2.1 and 2.2 is against the order of Assessing Officer in making disallowance under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (in short ‘the Rules’).

8 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

Considering the above and following the principle of consistency,

we are of the opinion that the grounds raised by the Revenue have to be

dismissed. Accordingly, the grounds raised by the Revenue are

dismissed.

Now we shall take up the appeal of the assessee.

ITA No.26/PUN/2017 – By Assessee A.Y. 2011-12

disallowance of Risk Inspection charges for want of purchase orders.

assessee claimed Risk Inspection charges amounting to Rs.87,65,448/-.

The AO, on noticing the assessment orders for the A.Yrs. 2008-09 and

2009-10 where the Risk Inspection Charges were disallowed in absence

9 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

of purchase orders, called for the details regarding the Risk Inspection

Charges and proposed to disallow the same. Ld. AR for the assessee

submitted the submissions and the same are incorporated in Para No.

5.1 of the assessment order. The assessee could produce the evidence

only to the extent of Rs.12,64,308/- and could not produce the

purchase orders amounting to Rs. 75,01,140/-. The reasons for the

same are given in the submissions. After considering the same, the AO

made addition of Rs.75,01,140/- as per the discussion given in Para

No.5.2 of his order.

evidences by way of further copies of purchase orders and requested for

admission of the same. The CIT(A) called for the remand report and the

AO in his report dated 19-09-2016 suggested for admission of the same

being found in order. While doing so, the AO considered the order of

Tribunal in assessee’s own case for A.Y. 2008-09 restricting the

disallowance to 25% of the total expenditure after considering the

purchase orders produced by the assessee. The CIT(A) admitted the

additional evidences produced by the assessee and eventually restricted

the disallowance to 25% relying on the order of the Tribunal (supra).

We proceed to extract the finding given by the CIT(A) below :

“15. I have carefully considered the facts of the case as well as reply of the appellant. The additional evidences filed by way of copy of invoices/purchase orders are crucial to decide the issue under consideration. Therefore, the same is admitted. It is seen that Hon. Pune Tribunal in appellant’s own case has restricted the disallowance to 25% of the total expenditure after reducinig the amount covered by purchase orders in its order for A.Y. 2008-09 in appellant’s own case. Therefore, following the above order of the Tribunal, disallowance is worked out as under : Total expenditure disallowed Rs.75,01,140 Less Additional purchase order filed Rs.52,18,426 ----------------- Balance claim for which no purchase

10 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

orders are available Rs.22,82,714/- Disallowance restricted to 25% of Rs.22,82,714/-, i.e. Rs.5,70,679/-

Accordingly, following Tribunal’s order in A.Y. 2008-09 in appellant’s own case, the AO is directed to restrict the disallowance to Rs.5,70,679/- and the appellant gets relief of Rs.69,30,461/-. (75,01,140 – 5,70,679). Accordingly, Ground No.5 is partly allowed.

appeal with the following grounds :

“On the facts and in the circumstances of the case and in law, the learned CIT(A) : Ground No.1: Disallowance of Risk Inspection Charges 1.1 Erred in upholding the action of the Assessing Officer in disallowing Risk Inspection Charges to the extent of Rs.5,70,679/-. The Appellant craves leave to add, alter, vary, omit, substitute, amend or delete one or more of the above grounds of appeal on or before or at the time of hearing of the appeal, so as to enable the Honourable Income Tax Appellate Tribunal to dispose off the appeal according to law.”

incurred Risk Inspection charges on the experts in connection with the

visiting the relevant sites, analysis of various hazards and evaluation of

risks etc. He submitted that similar claims are made in the past also

and the same are allowed in favour of the assessee. For this purpose,

he relied on the order of the Tribunal in the assessee’s own case for the

A.Yrs. 2009-10 and 2010-11 (supra). Therefore, Ld. AR prayed for

allowing the ground in favour of the assessee.

Inspection charges and perused the orders of the Revenue. We find the

Tribunal in the assessee’s own case dealt with this issue and allowed

the claim of the assessee in principle. We therefore find it relevant to

11 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

extract the relevant discussion and findings of the Tribunal given in

A.Yrs. 2009-10 and 2010-11 and the same read as under :

“33. Brief facts relating to the issue are that the assessee had incurred risk inspection charges to assess the risk before deciding to insure such risk and also to determine the terms and conditions while issuing Insurance policies. Accordingly, in certain cases, the assessee had obtained risk inspection reports from third party risk inspection surveyors. The Assessing Officer noted that in assessment year 2008-09, risk inspection charges were disallowed in the absence of purchase orders. Accordingly, the assessee was show caused in this regard. The assessee explained the nature of expenditure and also produced the risk inspection reports along with copies of invoices and the fact that the assessee had entered into insurance agreement with certain parties who were inspected to prove the genuineness and business expediency on incurring the risk inspection expenses. The nature of expenditure was fully explained before the Assessing Officer. The Assessing Officer noted that the assessee had furnished details of risk inspection charges i.e. names, addresses, PAN, etc. and produced evidences in the form of risk inspection reports, invoices, website screenshots, risk inspection charges, etc. to justify the genuineness of risk inspection expenses of Rs.7,54,23,407/- but could produced purchase orders of Rs.2,51,25,372/-. The Assessing Officer following the order of DRP for assessment year 2008-09, wherein it was observed that purchase order constitute the basic document for insurance policy finalization and was essential to substantiate the genuineness of said expenditure and since the assessee could produce the purchase orders of only Rs.2.51 crores, the risk inspection charges of Rs.5,02,98,035/- were disallowed and added to the income of assessee.

12 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

the extent of Rs.2,23,46,348/- and the balance of Rs.1,36,94,578/- was disallowed in the hands of assessee.

"49. We have heard the rival contentions and perused the record. In the facts relating to the issue, during the course of search on one Shri Sandeep Sitani, CA carried out on 22.06.2008 and survey under section 133A of the Act carried out on his official premises, various documents including bills, etc. were found from his premises. When he was considered the said documents, he explained the modus operandi of the transactions, under which he admitted that he was controlling the transactions of more than 25 companies for the purpose of issuing bogus bills on commission. From the details given in the statement and the accounts of the assessee and bank account with Corporation Bank, Bhayander Branch, Mumbai, of the said companies reflected various payments received from assessee, on different dates as tabulated at page 14 of the draft assessment order, totalling Rs.1,08,31,179/-. The assessee was given an opportunity to produce the documents to establish its claim of risk inspection charges of Rs.14,62,61,001/-. Before the Assessing Officer, the assessee furnished evidence of payment of Rs.2,71,49,800/- only. However, no evidence with regard to balance amount of expenditure of Rs.11.91 crores was produced. However, the assessee by way of revised return had withdrawn the claim to the extent of Rs.32,67,497/-. Before the DRP, the assessee further furnished additional evidence of purchase orders totalling Rs.68,07,042/- and claimed that the same should be allowed as deduction. Before us, the learned Authorized Representative for the assessee has referred to the sample copies of risk inspection invoices along with purchase orders filed before the lower authorities placed at pages 225 to 248 of the Paper Book. The list of parties for whom additional purchase orders were filed before the DRP along with sample copies of purchase orders placed at pages 382 to 410 of the Paper Book. The claim of the assessee before us is two-fold that the risk inspection charges were incurred as non-routine expenses and had received services from various risk inspection charges, who had carried out the aforesaid risk inspection on behalf of the assessee. In this regard, it was further pointed out by the assessee that it was not necessary that prospective clients who had been surveyed or for

13 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

whom risk inspection reports were prepared was necessarily insured by the assessee. The said inspection reports were used for primary assessments of whether to channel its sales efforts vis-a- vis such clients. Further the case of the assessee before us was that as against insurance receipts of Rs.1415 crores, total claim of risk inspection charges was only to the extent of Rs.14 crores, out of which Rs.2.71 crores have already been allowed in the hands of assessee. Further, the claim of about Rs.32 lakhs was withdrawn by the assessee and in respect of about Rs.68 lakhs, the assessee furnished additional evidence and the claim of the assessee before us is that the said expenditure having been incurred during the course of its business of insurance, is allowable in the hands of assessee. The risk inspection reports are claimed to have been procured from independent parties, who are not relatable to the assessee and were necessary part of carrying on the business of insurance. The Assessing Officer had received information in respect of payments totalling Rs.1.08 crores. However, no other information was received by the Assessing Officer and on the basis of the said information of Rs.1.08 crores, balance claim was disallowed in the hands of assessee on the premise that the assessee has not produced the purchase orders. After considering the explanation of the assessee, we are of the view that there is merit in the plea of the assessee to the extent that each of the risk inspection reports received by the assessee may not have resulted in the business being allotted to the assessee or after considering the profile of the companies against whom the assessee has received risk inspection reports, the assessee itself takes a view that it was not worthwhile to offer insurance services to such companies whose risk inspection reports were received by it. Admittedly, the onus was higher upon the assessee to establish its claim in view of the information received by the Assessing Officer pursuant to the search conducted upon Shri Sandeep Sitani, CA. However, the information received by the Assessing Officer was limited to the extent of part of the risk inspection charges paid by the assessee. No further information was collected by the authorities below to disprove the claim of the assessee. In the totality of the above said facts and circumstances and considering the explanation of the assessee, we find no merit in rejection of the claim of the assessee on the ground that the assessee had failed to produce the evidence in the form of purchase orders with respect to the risk inspection charges totalling Rs.14.62 crores. The assessee has explained and it is an admitted position that the risk inspection itself would not result in policy being issued by the assessee for insuring the companies businesses. However, the carrying on of such risk inspection by the assessee was necessary as it was in the business of providing general insurance to its clients and it had to be sure that the companies to whom it was providing the services was the correct decision of its business. As we are aware that as against the insurance charges paid by the respective insurer in case of the damages being compensated by the insurance company, the volumes are very high. In such circumstances, it was the responsibility of the assessee to take the requisite steps to protect itself from future losses, if any, in this regard. The risk inspection was the necessary tool in the hands of the assessee. However, in view of the evidence collected by the Revenue Department and in the totality of the facts and circumstances, we hold that the entire expenditure is not allowable in the hands of the assessee. It is not correct to make estimated disallowance of expenses. However, in view of the evidence filed

14 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

against the assessee and in the absence of complete details available before us and to prevent leakage of revenue, we are constrained to disallow 25% of the said expenditure in the hands of assessee. The disallowance would be worked out by taking net expenditure of Rs.11.91 crores i.e. total expenditure of Rs.14.62 crores minus Rs.2.17 crores allowed by the Assessing Officer. Further, the assessee himself had withdrawn the claim of expenditure of Rs.32,67,497/- and has further furnished evidence of Rs.68,07,042/-. The Assessing Officer shall verify the additional evidence filed by the assessee and if the same is found to be in order, the said expenditure would be allowed in the hands of the assessee. Then out of balance remaining, the Assessing Officer shall disallow 25% of the expenditure. The ground of appeal No.4 raised by the assessee is thus, partly allowed."

Considering the above, we are of the opinion that the claim of

deduction of Risk Inspection charges of the assessee needs to be allowed

in full. Therefore, we reverse the order of CIT(A) and delete the addition

made by the AO. Accordingly, the solitary ground raised by the assessee

is allowed.

CO No.55/PUN/2018 – By Assessee (Arising out of ITA No.2896/PUN/2016) A.Y. 2011-12

issues are the same issues raised by the Assessee and the Revenue in

the appeals adjudicated above. Therefore, we find adjudication of these

15 ITA Nos.2896/PUN/2016, ITA No.26/PUN/2017 and CO No.55/PUN/2018

objections would become an academic exercise. Accordingly, the cross

objection of the assessee is dismissed as academic.

No.55/PUN/2018 filed by the assessee are dismissed and ITA

No.26/PUN/2017 filed by the assessee is allowed.

Order pronounced on 19th day of September, 2018.

Sd/- Sd/- (िवकास अव�थी िवकास अव�थी िवकास अव�थी /VIKAS AWASTHY) (डी िवकास अव�थी डी डी. क�णाकरा राव डी क�णाकरा राव क�णाकरा राव/D. KARUNAKARA RAO) क�णाकरा राव �याियक सद�य �याियक सद�य �याियक सद�य/JUDICIAL MEMBER लेखा सद�य �याियक सद�य लेखा सद�य लेखा सद�य/ACCOUNTANT MEMBER लेखा सद�य

पुणे / Pune; �दनांक / Dated : 19th September, 2018. Satish

आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to :- आदेश क� �ितिलिप अ�ेिषत आदेश क� �ितिलिप अ�ेिषत अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (Appeals)-1, Pune. 4. The Pr. CIT-1, Pune. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “बी बी बी” ब�च, बी 5. पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6.

आदेशानुसार / BY ORDER, // True Copy //

Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune