M/S. BIO MED PRIVATE LIMITED,GHAZIABAD vs. ADDL.CIT, GHAZIABAD

During the year assessee earned exempted dividend income Rs. 46,64,773/-. Ld. AO noticed that no expenses is incurred or booked against the said exempt dividend income and hence proposed to disallow part exp. u/s 14A. Explanation of assessee that he has not incurred any expenditure is rejected as being general/vague as assessee has made huge investment in UTI liquid funds and disallowance u/s 14A/rule 8D is made.

In the first appeal, assessee demonstrated that he has not incurred any expenditure as dividend is only credited to UTI Liquid fund and small dividend is e-transfer with advise to assessee and claimed that AO has also not found any expenditure relating to dividend after examining the accounts in detail. He also contended that ld. AO has not recorded any satisfaction about incorrect claim of assessee or about incurrence of expenditure against dividend income etc.

The ld. CIT(A) found, assertion of ld. AO that reply of assessee is considered which is incorrect as assessee is regularly investing in UTI liquid funds and if the investment is like FDR than intt. On same is taxable, as sufficient to invoke s.14A and held that allegation of assessee about not recording satisfaction or not finding incurrence of any actual expenditure by assessee lacks merit. In upholding the addition he relied on decision of co-ordinate bench in in case of GEBR Pfeiffer p. Ltd. holding that where AO is not satisfied with claim of assessee of no expenditure AO/CIT(A) shall be bound to invoke 14A/Rule 8 D and disallowance is upheld. He also ref. the case of Maxopp inv. Reported in 347 ITR 272 (DEL.). Ld. CIT(A) also refuted the claim of no expenditure as he felt that investment requires conscious managerial decision or expert advise with incurrence of salaries and hence claim is against the principle of preponderance of probability.

The ld. AR demonstrated at length before us that factually no expenditure is incurred in earning the dividend income. He also emphasized that there is no compliance of Sec. 14A (2)/(3) or of Rule 8 D which is precondition to invoke the provision. He also relied on the principle of consistency as in earlier years no disallowance was made u/s 14A. He also took us to several decisions on the issue. Ld. DR. relied heavily on the decision of ld. CIT(A).

After hearing both the parties, we find that none of the authorities below has controverted the facts put forward by assessee. Obviously when dividend is directly credited to fund by way of credit entries and then such credit by fund does not require any effort by assessee which is the major portion of dividend. Other Amount is directly collected by bank through e-transfer example of which is placed on record at pages 3-4. Besides, the authorities below have not indicated any specific amount/item which is considered as related to above income. Ld. CIT(A) misdirected himself in stating about the decisions for investment that too on a probabilistic view but not for exempt income more so when funds etc. itself provided sufficient services as explained by assessee before AO. Investments are admittedly out of own funds for which no addition is made. Ld. AR also took us to the order for AY 2011-12 of assessee with identical facts on the issue which is on pages 15 to 19 of paper book where ld. AO has recorded in para 4 that, ‘…. It is evident that there is no expenditure which is directly attributable to exempt income (dividend). However , it cannot be ruled out that certain element of indirect expenses cannot be remotely attributable to the exempt income…..’. It is also stated that disallowance is made to maintain consistency and keep issue alive. Such specific findings proves that factually no incurrence of expenditure is found even in a subsequent year though revenue is making addition merely to keep issue alive. Hence we do find force in the claim of assessee about non-incurrence of expenditure and upheld same.

Beside above, basis of invoking s. 14A as is stated above is not in terms of said provision read with rule 8 D. There is absolutely no satisfaction except rejection of explanation of assessee. There is no reference to any item of expenses found related to exempt income. There is no reference to accounts in relation to this issue either or even any material/basis in AO order. With the development of law, now we have series of decisions on this issue. The Ld. AR cited following cases on the issue:

In the case of HT MEDIA, AO had invoked 14A almost on the same basis i.e. after stating that explanation on no expenditure is no acceptable and that making, continuing, exiting from investment etc. are coordinated management decision and so expenditure is embedded in indirect expenses( from para 36) and so s.14A invoked. Hon’ble court after relying on Godrej & Boyce Mfg. Co. Ltd. 394 ITR 449(SC) held that AO failed to record proper satisfaction. In the case of Taikisha Engineering, hon’ble court has relied on hon’ble Bombay HC decision in above case of Godrej reported in 328 ITR 81 for the proposition that that satisfaction has to be recorded with respect to accounts in terms of ss. (2)/(3) of s. 14A and the provisions does not ipso facto enable AO to apply method prescribed in rules. This satisfaction must be on an objective basis having regard to claim of assessee. Rule 8 D(1) itself start with the words, ‘where the assessing officer, having regard to the accounts of the assessee…….’ in the absence of proper satisfaction.

In the most recent case of Eicher [supra] it is held in para 13 that AO merely conjectured that, “there is inbuilt cost even in passive investment as also incidental expenditure like collection, telephone, follow up etc, Thus concluding that expenses are embedded in as indirect expenses. This is not as per requirement of rule 8D. There is no satisfaction recorded based on the accounts of assessee. The AO simply presumes that since exempt income exists ………………..’

In the present case AO has not even identified any specific item of expense he merely says that explanation of assessee is not correct as huge investment is made. As per above discussion respectfully following above authorities which are binding on us it is held that there is no satisfaction of terms of s. 14A read with Rule 8 D. Copy of order for AY 08-09 is also placed on pages20-21 of paper book as per which no disallowance u/s 14A was made, hence assessee is right in submitting that disallowance is also against the principle of consistency in the absence of any facts.

Grounds 2 and 3 are allowed and addition of Rs. 8,88,490/- is hereby deleted.

Grounds 4 & 5 is against the ad-hoc disallowance of Rs. 2 lakhs out of business promotion expenses.

During the relevant AY, the assessee has debited business promotion expense of Rs.10,02,455/- to the Profit and Loss A/c. On enquiry on the nature of the expense, it was explained to be for various itemse specially silver/gold coins given under incentive scheme. Though the ld. AO found claim correct in principle to boost sale but held that it cannot be said they are fully for business purposes and disallowed ad-hoc amount of Rs. 2 lakhs. The ld. CIT(A) upheld the addition by observing that that only few instances of distribution of coins given so it is not clear how many were actually distributed in scheme.

Ld. AR placed on record ledger a/c of sales promotion expenses, example of scheme, example of receipts of coins by parties from pages 5- 11 of paper book and relied submissions made before authorities below.

We have heard the rival submissions and perused the records. It is on record that assessee has made all the compliance from time to time. Purchases are fully vouched and accounts are not rejected. It is also a fact that no single item of expense is identified by AO which he could have stated as not incurred for business purposes. It is also borne out from order that such expenses are accepted in past when even % of expenses on sale was more in Ay 06-07. Sales have increased substantially. AR has relied on cases Ganpati Enterprises Ltd. 142 ITD 118(Delhi), NATIONAL INDUSTRIAL CORP. LTD. Vs CIT 258 ITR575, Anil Kumar & Co. [2016] 67 taxmann.com 278 (Karnataka) in support of proposition that without rejection of accounts and without finding any basis/defect in specific expense, ad-hoc disallowance cannot be made. Accordingly, the addition of Rs. 2,00,000/- is hereby deleted.

Ground No. 6 is against holding replacement of compressor of Colling unit as capital expenditure and thereby making addition of Rs. 86,050/-. The AO capitalized this amount considering the life of compressor very long and ld. CIT(A) upheld the same by holding the item as an independent unit. Against this as per once compressor is part of a unit than essentially it is a replacement and each part has to be procured independently.

We have heard the rival submissions and perused the orders and various case law cited. Compressor is admittedly a part of unit which is replaced and it longer life or it is procured independently is wholly irrelevant. Issue is covered by various decisions in favor of assessee and expenditure is revenue in nature. Accordingly, the addition of Rs. 86,050/- is hereby deleted.

In the result, the appeal of the assessee is allowed.