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Income Tax Appellate Tribunal, DELHI ‘E’ BENCH,
Before: SMT DIVA SINGH, & SHRI B.P. JAIN,
PER B.P. JAIN, ACCOUNTANT MEMBER,
This appeal of the Revenue arises from the order dated 04.10.2013 of ld. CIT(A)- V, New Delhi for A.Y 2008-09.
The Grounds of appeal raised by the appellant are as under :-
2 ITA No. 105/DEL/2014 “1. Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in deleting the disallowance of expenses of Rs. 25,13,385/-, when the business was not fully functional?
Whether on the facts and circumstances of the case and in law, the ld. CIT(A) is justified in taking rental income as under the head business income instead of income from house property?
Whether on the facts and circumstances of the case and in law, the ld. CIT(A) in restricting the disallowance u/s 14A of the Act to Rs. 2,18,304/- out of Rs. 39,14,000/- is giving relief of Rs. 36,95,625/- to the assessee on adhoc basis.
That the order of the ld. CIT(A) is erroneous and is not tenable on facts and in law.
That the grounds of appeal are without prejudice to each other.
That the appellant craves leave to add, alter, amend or forgo any ground(s) of the appeal either before or at the time of hearing of the appeal.”
Ground Nos. 4 to 6 are general in nature and need no adjudication at our end.
3 ITA No. 105/DEL/2014 4. The brief facts pertaining to Ground No. 1, as noted by the Assessing Officer in paras 6 to 6.4 are reproduced hereinbelow for ready reference:
“6.1 It is noticed that the assessee has claimed, inter alia, the following expenditure in its Profit and Loss account: Conveyance Expenses-staff Rs.16,50,000 Travelling Expenses Rs. 21,06,431 Foreign Travelling Expenses Rs. 1,23,300 Telephone Expenses Rs. 11,03,304 Electricity Expenses Rs 14,23,006 Total Rs. 64,06,041
6.2 A perusal of the schedule 9 shows that the assessee does not have income out of business activities but incomes declared only relate to interest received on deposits, dividend income and rent and other income which have been qualified under the head “Other Income”. This being so the claim of expenses under the above heads are not only excessive but does not have justifiable relation to the quantum results declared during the year. However, since, as has been discussed in the pre-paragraphs, there has been significant activities for revival of the assessee’s business and as has been noted, the assessee company has also started production in the subsequent F.Yrs, though the same may not have any bearing to the expenses claimed during the year.
4 ITA No. 105/DEL/2014 6.3 Since the fact that the assessee is a corporate entity in business, maintaining certain amount of expenses under the above heads is necessary. Observing so the issue after discussion with the ARs of the company is felt that the interest of natural justice as well as the interest of revenue has to be taken into a balanced consideration so that the justice and revenue par takes its share wit in the ambit of law. Accordingly, it is held, that in order to maintain such principal of natural justice and revenue orientation, it is estimated that expenses to the extent as discussed below out of the claim of expenses under the above heads are allowable to the assessee company.
6.4 Accordingly, the remaining of the expense is disallowed and added back to the income of the assessee.
Head Claimed Amount Claimed Extent Amount Disallowed Disallowed Rs.16,50,000 Rs 4,95,000 Conveyance 30% of Rs Expenses-staff 16,50,000 Travelling Rs. 21,06,431 30% of Rs Rs 6,31,930 Expenses 21,06,431 (Contd.)
The ld. CIT(A), vide para 5.4 at pages 6 and 7 of the impugned order deleting the disallowance observed that the said expenses were incurred by the assessee for business purposes and were also genuine in nature since the Assessing Officer had allowed certain
5 ITA No. 105/DEL/2014 part of the above expenditure u/s 37(1) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. He further held that it is not necessary that the assessee is required to actually earn income from a particular expenditure if the expenditure is incurred for the purpose of business. Relying upon various judgments of the Hon'ble Supreme Court, the ld. CIT(A) directed the Assessing Officer to allow the expenditure incurred by the assessee in totality and accordingly, the assessee was allowed a relief of Rs. 25,13,385/-, against which the Revenue is in appeal.
The ld. DR relied upon the order of the Assessing Officer whereas the ld. counsel for the assessee relied upon the impugned order passed by the ld. CIT(A) and relied upon various decisions including the decisions relied upon by the ld. CIT(A) in his order.
We have heard the rival contentions and perused the facts of the case. The total expenditure incurred is Rs. 64,06,041/- whereas the disallowance made by the Assessing Officer is to the extent of Rs. 25,13,385/- as mentioned in the Assessing Officer’s order reproduced hereinabove. From a careful reading of the assessment order, it is evident that the Assessing Officer has not disallowed
6 ITA No. 105/DEL/2014 100% expenditure and he had considered the maximum expenditure as genuine and having been incurred for the purpose of business u/s 37(1) of the Act, which means that the expenditure claimed by the assessee has been considered as excessive. Nowhere in the order of the Assessing Officer there is a whisper as to how the expenditure is excessive and how the expenditure to the extent of Rs. 25,13,385/- is not having been incurred for the purpose of business u/s 37(1) of the Act or there is a personal expenditure. Making of estimation for disallowance under such circumstances and facts of the case is not permissible. Accordingly, we do not find any infirmity in the order of the ld. CIT(A) who has relied upon the following decisions:
a) CIT Vs. Malayalam Plantations Ltd 53 ITR 140 (SC) b) CIT V Birla Cotton Spinning & Weaving Mills Ltd 82 ITR 166 [SC] c) Madhav Prasad Jatia Vs. CIT 118 ITR 200 [SC]
Reliance was also placed by the ld. counsel for the assessee on the decision of the Hon'ble Supreme Court in the case of J.J. Enterprises Vs. CIT reported at 254 ITR 216 [SC] where, as per the ‘Head Notes’, it has been held as under:
“In its principal order, the Tribunal had concluded that the addition was unsustainable because it had been made "on the basis of pure guess work". The Revenue moved the
7 ITA No. 105/DEL/2014 High Court under Section 256(2) of the Income-tax Act, 1961, and the High Court called for a reference on the basis that the question was a question of law. We are unable to agree with the High Court. In the first place, the Tribunal has held that the addition had been made on the basis of pure guess work and this is a matter of fact in respect of which the Tribunal's conclusion is final. In the second place, there was no question of remanding the matter to the Assessing Officer for re-examination of the same question.”
Reliance was also placed on the decision of the ITAT Delhi Bench in the case of Dwarka Prasad Agarwal Vs. ITO reported at 52 ITD 239 wherein it has been held that the Assessing Officer has not pointed out any expenditure of personal nature relating to partner of employee of the assessee. The adhoc disallowance made by the Assessing Officer without supporting evidence was not permissible. Reliance was also placed on the decision of the ITAT Delhi Bench in the case of ACIT Vs. Amtek Auto Ltd reported at 112 TTJ 455 wherein it has been held that regarding foreign tour expenditure, the Assessing Officer made disallowance on adhoc basis but no specific instance of any non business related expenditure was pointed out and the appeal of the assessee was decided in favour of the assessee. Under such facts and circumstances of the case, the
8 ITA No. 105/DEL/2014 order of the ld. CIT(A) is a correct order and as mentioned above, we do not find any infirmity in the same. Thus, Ground No. 1 of the Revenue stands dismissed.
The brief facts pertaining to Ground No. 2 as narrated by the Assessing Officer in para 7 page 5 in his assessment order are reproduced hereinebelow for ready reference:
“6. In the profit and loss account, the assessee has shown Miscellaneous income of Rs.97.88 lacs which includes rental income of Rs.85.02 lacs. As per provision of section 22, the annual value of property consisting of any building or land appurtenant thereto of which the assessee is the owner, shall be chargeable to income tax under the head House property. As per decisions of various Courts including the Apex Court, for the purposes of levy of income tax, management of properties cannot be business and the income there from has to be charged as Income from House Property. Hence, the rental income is not the business income of the assessee. The income of the assessee chargeable under head Income from House property is determined as under:
Annual value — Gross Rent receivedRs. 85,02,000 Less: 30 % Deduction Rs. 25,50,600 Income from House propertyRs.59,51,400”
9 ITA No. 105/DEL/2014 11. When the aggrieved assessee went in appeal, the CIT(A) deleted the addition. While deleting the addition, the CIT(A) observed that u/s 22 of the Act, the value of business assets which are used as part of business by an assessee is not subjected to tax as ‘income from house property’ and the same is assessable as part of the ‘business income’. The assessee has suspended business which was revised as part of implementation of the revival scheme passed by BIFR. He further observed that the assessee had rental income which was derived during the intervening period while business was suspended from commercial exploitation of the business assets in the form of employees’ quarters, office premises, etc. Accordingly, the CIT(A) held that the same is assessable as ‘business income’ and he relied upon the decisions of various courts of law, mentioned at page 9 of his order.
On the other hand, the ld. DR, at the very outset, relied upon the order of the AO whereas the ld. AR relied upon the order of the CIT(A) apart from relying upon the decisions of various courts of law, which will be discussed hereinbelow.
10 ITA No. 105/DEL/2014 13. We have heard the rival submissions and have carefully perused the relevant material on record. On a bare reading of section 22 of the Act, it is evident that, only the value of property other than property which the assessee may occupy for the purpose of business or profession, shall be chargeable to tax under the head ‘income from house property’. Thus, the value of business assets which are used as part of business by the assessee is not subject to tax as income from house property and the same is assessable as part of business income. It is also not in dispute that the assessee had temporarily suspended business which was part of draft rehabilitation scheme passed by the BIFR and implemented by the assessee. That is the reason the AO disallowed part of the expenditure and allowed the other part of expenditure. This clearly shows that the AO had in mind that the expenditure is excessive. Whereas in the present case the assessee had exploited the asset for commercial exploitation in the form of employees’ quarters, office premises, etc. Therefore, under such facts and circumstances of the case, we find no infirmity in the order of the CIT(A) who has rightly treated the income as income assessable under the head ‘business income’ instead of assessable under the head ‘income from house property’.
11 ITA No. 105/DEL/2014 14. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Vikram Cotton Mills Ltd reported at 169 ITR 597 [SC]. The facts of the said decision of the Hon'ble Supreme Court and the decision is reproduced hereinbelow:
“The respondent- assessee company, carried on business of manufacture of textiles. From the year 1949, the respondent started running into losses, resulting in the stoppage of its manufacturing activity from December, 1953. In May, 1956, one of the creditors of the company filed a winding up petition in the High Court. One major creditor of the respondent-company, in exercise of its powers under an English mortgage of the fixed assets of the company took actual possession of the immovable properties hypothecated to the creditor. The High Court, with the approval of the assessee company and its creditors, evolved a scheme whereunder the business assets of the company were let out on a rent of Rs.2,50,000 per year. The lease was for ten years with option of renewal for another ten years. The intention was that the various creditors would be paid out of the lease money. The lease money realised by the company for the assessment years 1957-58 to 1959-60 was assessed by the Income Tax Department under section 10 of the Income Tax Act under the head "Profits and gains of business". But in the subsequent assessment years, the Income Tax officer held that income from the lease rent was liable to be assessed under the head "Income from other sources" under section 12 of the Act. The assessee company filed an appeal against the order of the Income Tax officer. The Commissioner upheld the order of
12 ITA No. 105/DEL/2014 the Income Tax officer. The assessee took the matter to the Income Tax Tribunal. The Tribunal directed the Income Tax officer to treat the income arising out of the letting out of the assets as 'business income'. The matter then went to the High Court. The High Court held that the income derived by the assessee company by way of the lease rent from the letting out of the assets during the years ending 31st December, 1959, 31st December, 1960, 31st December, 1961 and 31st December, 1962, is assessable to tax under the head "profits and gains of business". Aggrieved by the decision of the High Court, the revenue appealed to this Court.
HELD: Whether a particular income received by the assessee as a result of the activities carried on by the assessee is business income or rental income depends upon the manner of the exploitation of the assets of the assessee. It only varies from the facts and circumstances of each case. In each case, the intention has to be gathered as to whether the commercial asset was intended to be exploited by the assessee or whether it was intended to be used by letting it out for a temporary period. From the facts and circumstances of the case, it appears that it was a possible conclusion that the assessee intended that there should be a temporary suspension of the business for the purpose of re- construction of the company and for that matter, there must be stopping of the user of the machinery by the assessee. It was a temporary lease though for 10 or 19 years on renewal, and after the expiry of the period, the property reverted back to the assessee. It is predominantly a matter of
13 ITA No. 105/DEL/2014 intention, which is an inference to be drawn from the relevant facts. All the relevant facts, it appears, have been considered by the Tribunal from the correct stand- point. The Tribunal found that the intention was not to part with the machine but to lease it out for a temporary period as a part of exploitation. In such circumstances, it cannot be said that no business was carried on and the income derived from the machine letting out was only a rent income, and in the facts and circumstances of the case, it cannot be said that such a finding was perverse or not sustainable.
The High Court was right in the view it took”.
Reliance was also placed on the decision of the Hon'ble Delhi High Court in the case of ACIT Vs. Rajindra Flour and Allied Industries [P] Ltd reported at 128 ITR 402 [Del] wherein it has been held that the company started erecting building and machinery for its flour mill and for three years incurred considerable expenditure thereon. After the installation of the factory company letting the flour mill for five years owing to difficulties, the assets were restored to the assessee on expiry of term of lease and the assessee thereafter, ran the mill. Rent received for this purpose has been treated as ‘business income’ by the Hon'ble High Court of Delhi.
14 ITA No. 105/DEL/2014 16. Reliance was also placed on the decision of the Hon'ble Delhi High Court in the case of Northern India Iron and Steel Co. 211 ITR 370 [Del] wherein it has been held that assessee was running business of manufacturing items of iron and steel and heavy castings. The assessee continued its business from December 1968 to May 1970 and thereafter, factory building and machinery were leased out from time to time for about six years. Income received from such lease has been held as ‘business income’ for the period of temporary suspension. Accordingly, under such facts and circumstances of the case, and in view of the above findings and decisions relied upon various courts of law, we find no infirmity in the order of the CIT(A). Thus, ground No. 2 raised by the Revenue is dismissed.
The brief facts pertaining to Ground No. 3, as noted by the Assessing Officer in para 8 of the assessment are reproduced hereinebelow for ready reference:
“On a perusal of the P&L account, it is seen that the assessee has earned dividend of Rs. 33,54,00,000/- which it has claimed as exempt income. It was asked as to why proportionate disallowance of expenses may not be made u/s 14A of the Act. In its reply the ld. counsel for the assessee submitted that the aforesaid dividend income has been earned on the following investments:
15 ITA No. 105/DEL/2014 Name of the Year in Source of Amount of Dividend company which funds through investment earned during investment which [Rs. In the relevant made investments lacs] previous year made Spin 1983-84 Internal 20.92 5,98,300 Investment accruals [India]Ltd Spice Net Ltd 1990-91 Internal 434.00 13,02,000 1991-92 accruals Gujarat 1983-84 14% secured 3335.00 33,35.00,000 Guardian Ltd fully convertible debentures
It was further submitted that investments were made at the time when the surplus funds were available with the assessee, and hence no borrowed amounts were utilized to make aforesaid investments. Further, on perusal of Schedule-3 & 4 of the audited annual accounts, it is noted that no new borrowings were made during the relevant previous year. Thus, it was argued that no disallowance under section 14A can be made in this regard. In the alternative, the assessee has offered 1/3rd of the annual emoluments of its Controller Accounts, i.e., Rs.63,000 as disallowance under section 14A of the Act.
8.1 The aforesaid contention of the assessee is considered but is found to be not acceptable. Section 14A provides as under:
“14A.Expenditure incurred in relation to income not includible in total income. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in
16 ITA No. 105/DEL/2014 respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.”
8.2 in view .of the explicit provisions of section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Therefore it becomes necessary to quantify the expenditure incurred by the assessee in relation to the earning of income which does not form part of total income. Recently, Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.j Mumbai. V. DCIT: 328 ITR 81 (Bom.), has held Rule-8D to be prospective in nature and applicable from assessment year 2008-09 onwards. Accordingly, disallowance as per Rule-8D is being calculated as under: Rs. [in Rs. lacs] Demat Charges Rule 8D(2)(i) 2,18,304 Rule 8D(2)(ii) (A x Bye A = amount of expenditure by way of - interest other than the amount of interest included in clause (i) incurred during the previous year;
17 ITA No. 105/DEL/2014
B = the average of value of investment, income from which does not or shall not 7,391.25 form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year C = the average of total assets as appearing in the balance sheet of the - assessee, on the first day and the last day of the , previous year; 0.5% of Rule 8D(20(iii) average investment 3695625 Expenditure allowed as per Rule 8D 3913929 Rounded off 3914000
The CIT(A) deleted the disallowance and while deleting the disallowance, he observed that u/s 14A of the Act, only actual expenditure can be disallowed and not the notional disallowance. Sub- sections (2) and (3) of section 14A empowers the AO to apply the formula u/r 8D of the Income tax Rule subject to recording of satisfaction that the claim of the assessee in respect of expenditure incurred in relation to exempt income is incorrect. The assessee having incurred no expenditure in relation to exempt income, the AO, therefore, should have recorded prima facie satisfaction why the AO does not agree with the claim of the assessee. He relied on several decisions of various High Courts of law and accordingly held that the
18 ITA No. 105/DEL/2014 demat charges amounting to Rs. 2,18,304/- was directly related to the earning of the dividend income while allowing rest of the amount as relief to the assessee.
Per contra, the ld. DR relied upon the order of the AO whereas the ld. AR relied upon the order of the CIT(A) and numerous decisions of various courts of law.
We have heard the rival submissions and have carefully perused the relevant material on record. At the outset, we reproduce section 14A of the Act as under:
“14A. Expenditure incurred in relation to income not includible in total income.—(1)For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of
19 ITA No. 105/DEL/2014 such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:”
On a bare reading of the said section, it is amply clear that only the actual expenditure incurred for the purpose of disallowance has to be incurred and not any notional disallowance can be made by the AO. Sub-sections (2) and (3) of the aforesaid section empowers the AO to apply the formula given in Rule 8D of the I.T. Rules subject to his recording of satisfaction that the claim of the assessee in respect of expenditure in relation to exempt income is incorrect, which has not been done in the present case. Reliance was placed on the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT reported in 328 ITR 81 wherein it has been held as under:
“..... In order to determine the quantum of the disallowance, there must be a proximate relationship between the expenditure and the income which does not form part of the total income. Once such a proximate relationship exists, the disallowance has to be effected. All expenditure incurred in the earning of income which does not form part of the total income has to be disallowed subject to compliance with the test adopted by the Supreme Court
20 ITA No. 105/DEL/2014 in Walfort and it would not be permissible to restrict the provisions of Sec 14A by an artificial method of interpretation.”
Reliance was also placed on the Hon'ble Delhi High Court decision in the case of Maxopp Investment Ltd Vs. CIT reported in 347 ITR 272 wherein it has been held expenditure incurred refer to actual expenditure and not some imagined expenditure. It was further observed that as a necessary corollary, if no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s 14A of the Act.
As regards the application of Rule 8D of the Rules, for A.Y 2008- 09, the assessee Hon'ble High Court observed as under:
“29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total
21 ITA No. 105/DEL/2014 income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub- section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub- section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub- section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the
22 ITA No. 105/DEL/2014 claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure as the case may be in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.”
Accordingly, in view of the decisions referred to hereinabove, the AO has wrongly applied the formula given in Rule 8 of the I.T. Rules. The arguments made by the ld. AR that the investments were old investments except the shares of MTCPL which were revived as part of rehabilitation scheme duly approved by BIFR and on which no dividend income was earned during the year. The assessee having incurred demat charges amounting to Rs. 2,18,304/- which, in fact, relates to earning of dividend income and to that extent, the CIT(A) has rightly disallowed and allowed the balance relief of Rs. 36,95,625/-.
Reliance was placed on the decisions of various courts of law as quoted by the ld. AR in his paper book pages 16 to 26 which are listed hereinbelow:
23 ITA No. 105/DEL/2014 a) CIT Vs. Oriental Structural Engineers Pvt. Ltd 216 Taxman 92 b) Eicher Goodearth Ltd Vs. CIT 378 ITR 28 c) Intergloble Enterprises VS. DCIT ITA No. 1362 & 1032/DEL/2013 d) Cheminvest Ltd Vs. CIT 378 ITR 33 e) CIT Vs. Holcim India P Ltd 272 CTR 282 f) REI Agro Ltd Vs. DCIT 160 TTJ 107 g) ACB India Ltd Vs. ACIT 374 ITR 108 h) CIT Vs. Givo Ltd ITA No. 941/2010 i) Friends Clearing Agency P Ltd Vs. CIT 332 ITR 269
In that view of the matter, we do not find any infirmity in the order of the CIT(A) who has rightly deleted the disallowance to the extent as mentioned hereinabove, Thus, Ground No. 3 of the Revenue is dismissed.
In the result, the appeal of the Revenue in ITA No. 105/DEL/2014 is dismissed.
The order is pronounced in the open court on 10.11.2017.
Sd/- Sd/- [DIVA SINGH] [B.P. JAIN] JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 10th NOVEMBER, 2017 VL/
24 ITA No. 105/DEL/2014 Copy forwarded to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi