ASSOCIATED CONTAINER LINE P.LTD,MUMBAI vs. DCIT 5(1), MUMBAI

Briefly stated, the facts of the case are that the assessee company which is engaged in the business of providing freight forwarding services to shippers/exporters for export of their cargo to various international destinations had e-filed its return of income for A.Y 2010-11 on 28.09.2010, declaring total income of Rs.1,98,56,010/-. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2) of the Act.

During the course of the assessment proceedings the A.O made the following additions/disallowance in the hands of the assessee:

The assessee being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The duly authorized Senior Manager (Accounts and Finance) (for short „A.R‟) of the assessee company at the very outset submitted that the lower authorities had erred in making a disallowance of Rs.2,29,151/- under Sec.14A r.w. Rule 8D. It was submitted by the ld. A.R that the A.O had erred in dislodging the claim of the assessee that no disallowance was called for in its hands under Sec. 14A of the Act. It was submitted by the ld. A.R that the A.O without arriving at a satisfaction that having regard to the accounts of the assessee, as placed before him, it was not possible to generate the requisite satisfaction as regards the correctness of the claim of the assessee that no disallowance was liable to be made in its hands under Sec. 14A of the Act, had most arbitrarily scrapped the claim of the assessee and made a disallowance of Rs. 2,29,151/- under Sec. 14A r.w Rule 8D. Alternatively, it was submitted by the ld. A.R that as 85% of the total dividend income was earned by the assessee from investments made in mutual funds, thus no expense debited by the assessee in its profit & loss account for the year under consideration could be attributed to either making or monitoring of the said investments. It was thus the claim of the ld. A.R that as no expense was incurred for earning of the tax free dividend income by the assessee, hence the disallowance made by the A.O under Sec.14A r.w. Rule 8D and sustained by the CIT(A) was liable to be struck down. Alternatively, it was submitted by the ld. A.R that even otherwise the disallowance of Rs. 2,29,151/- made by the A.O under Sec. 14A was substantially excessive. The ld. A.R in order to fortify his aforesaid contention submitted that in its own case for A.Y 2005-06 a P a g e | 4 & 5759/Mum/2015 AYs. 2010-11 & 2011-12 Associated Container Line Pvt. Ltd. Vs. DCIT-5(1) coordinate bench of the Tribunal viz. ITAT “A” bench, Mumbai had held a disallowance under Sec. 14A of Rs.25,000/- as reasonable in the case of the assessee. It was further submitted by the ld. A.R that the lower authorities failing to appreciate the explanation of the assessee in the right perspective, as regards the reasons leading to the variance in the balance reflected against the account of M/s Continental Warehousing Corporation (NS) Ltd. in the books of account of the assessee, as in comparison with that shown by the aforesaid party, had wrongly made an addition of Rs.33,956/- in the hands of the assessee company. It was submitted by the ld. A.R. that the impugned variance was on account of incorrect entries passed by M/s Continental Warehousing Corporation (NS) Ltd. in its books of account. It was submitted by the ld. A.R that as the balance payable to M/s Continental Warehousing Corporation (NS) Ltd. was shown by the assessee at a lower figure, as against that claimed by the said party as recoverable from the assessee, thus the said variance did not have any bearing on the taxable income of the assessee for the year under consideration. Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities.

We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. We find that the assessee had during the year under consideration earned a dividend income of Rs.11,67,933/- on exempt income yielding investments of Rs.7,12,52,078/-. The assessee had not attributed any part of the expenses as having been incurred for earning of the aforesaid exempt income. On a query by the A.O as to why the disallowance under Sec.14A may not be made in respect of the exempt dividend income, it was submitted by the assessee that as it had not incurred any expense other than demat charges, hence no disallowance under Sec.14A was called for in its hands. We find that the A.O had dislodged the claim of the assessee that no expense was attributable to earning of the exempt dividend income, merely on the basis of an observation that it was beyond comprehension that no part of the expenses aggregating to Rs.2,50,32,263/- debited by the P a g e | 5 & 5759/Mum/2015 AYs. 2010-11 & 2011-12 Associated Container Line Pvt. Ltd. Vs. DCIT-5(1) assessee in its profit and loss account could be related to earning of the exempt dividend income by the assessee.

We have deliberated at length on the orders of the lower authorities, and are of the considered view that the A.O while dislodging the claim of the assessee that as no part of the expenses debited in the profit and loss account was relatable to earning of the exempt dividend income, thus no disallowance under Sec. 14A was called for in its hands, had failed to record his satisfaction as regards the correctness of such claim, having regard to the accounts of the assessee. Rather, we find that the A.O had dislodged the claim of the assessee that no disallowance under Sec. 14A was liable to be made in its hands by holding a conviction that it was beyond comprehension that no expense incurred by the assessee could be related to earning of exempt dividend income. We are of the considered view that in the backdrop of the judgment of the Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC), it was obligatory on the part of the A.O to have recorded his satisfaction, having regard to the accounts of the assessee, as to why the latters claim that no expenditure was attributable to earning of the exempt dividend income was not to be accepted. The Hon‟ble Supreme Court while deliberating on the said issue at length had observed as under:

We shall now advert to the addition of Rs.33,956/- made by the A.O on account of difference in the account of M/s Continental Warehousing Corporation (NS) Ltd. We find that the assessee had submitted before the lower authorities that the aforesaid difference of Rs.33,956/- was on P a g e | 7 & 5759/Mum/2015 AYs. 2010-11 & 2011-12 Associated Container Line Pvt. Ltd. Vs. DCIT-5(1) account of two reasons viz. (i) non-posting of TDS entry of Rs.32,346/- by the aforesaid party viz. M/s Continental Warehousing (NS) Ltd; and (ii) difference in opening balance of Rs.1,610/-. We find that both of the lower authorities had summarily disregarded the claim of the assessee, not only as regards the reasons leading to the impugned variance in the respective balances, but rather had also brushed aside its contention that the said variance would not have any bearing on the income of the assessee for the year under consideration. We have deliberated on the conceded facts leading to the aforesaid variance of Rs.33,956/- and find substantial force in the claim raised by the assessee before the lower authorities. We concededly the difference of Rs.32,346/- had arisen on account of non-posting of a TDS entry by the aforementioned party viz. Continental Warehousing Corporation (NS) Ltd, in the account of the assessee as appearing in its books of accounts. We find ourselves to be in agreement with the contention of the ld. A.R that the failure on the part of the aforesaid party to post the TDS entry of Rs.32,346/-, leading to the impugned variance to the said extent, as against the balance shown by the assessee to be payable to the said party, will not have any bearing on the income of the assessee for the year under consideration. We thus, in the backdrop of our aforesaid observations are of the considered view that no addition in respect of the impugned variance of Rs.32,346/- was called for in the hands of the assessee. We thus, in terms of our aforesaid observations delete the addition of Rs.32,346/- sustained by the CIT(A).

We further find that the CIT(A) had sustained an addition of Rs.1,610/- on account of „Opening balance‟ difference in the account of the aforementioned party viz. M/s Continental Warehousing Corporation (NS) Ltd. We are of the considered view that as the difference in the opening balance had emerged on account of transactions pertaining to the preceding year/years, thus the same shall in no way have any bearing on the income of the assessee for the year under consideration. We thus, not finding ourselves to be in agreement with the view taken by the CIT(A), delete the addition of Rs.1,610/- sustained by him. In terms of our aforesaid

The appeal of the assessee is allowed in terms of our aforesaid observations.

We shall now advert to the appeal filed by the assessee for A.Y 2011- 12. The assessee assailing the order of the CIT(A) had raised before us the following grounds of appeal:

The appellant craves leave to add, amend, alter, modif y or omit any of the aforesaid Grounds of Appeal

We shall first advert to the disallowance of Rs.4,06,350/- made by the A.O under Sec. 14A r.w. Rule 8D, which thereafter had been sustained by P a g e | 9 & 5759/Mum/2015 AYs. 2010-11 & 2011-12 Associated Container Line Pvt. Ltd. Vs. DCIT-5(1) the CIT(A). We have perused the order of the A.O and find that he while dislodging the claim of the assessee that no expenditure debited in the profit & loss account was attributable to earning of the exempt dividend income of Rs. 18,70,574/-, has however failed to arrive at a satisfaction having regard to the accounts of the assessee, as placed before him, that it was not possible to generate the requisite satisfaction with regard to the correctness of the said claim of the assessee. Rather, we find that the said claim of the assessee that no expense was incurred for earning of the exempt dividend income had been most casually dislodged by the A.O, by observing that the assessee ought to have made disallowance of expenditure in relation to the income which does not or shall not form part of total income as required under Sec. 14A in accordance with the provisions of Rule 8D. We though find that the A.O while making the disallowance had made a mention of having referred to the accounts of the assessee company for the year under consideration and that he was not satisfied with the correctness of the same, but he had not said a word as to why he was unable to generate the requisite satisfaction with regard to the correctness of the claim of the assessee that no expenditure was relatable to earning of the exempt dividend income. We are of the considered view that the A.O while dislodging the claim of the assessee that no expense was relatable to earning of the exempt dividend income ought to have made a mention of the expenses which were booked by the assessee in its books account, and in the backdrop of the same should have pointed out that the incurring of the same had an inextricable nexus with the earning of the exempt dividend income. We thus, are of considered view that as observed by us in the case of the assessee for the immediately preceding year, viz. A.Y 2010-11, in the year under consideration also the A.O while dislodging the claim of the assessee that no disallowance was called for in its hands under Sec. 14A, had failed to generate the requisite satisfaction with regard to the correctness of the said claim of the assessee. We thus, are of the considered view that as the disallowance made by the A.O Under Sec. 14A r.w Rue 8D is not as per the mandate of the judgment of the Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Vs. DCIT and Anr.

We shall now advert to the disallowance of amount of Rs.50,000/- made by the A.O out of the administrative expenses of Rs.3,27,482/- which were booked by the assessee in its profit and loss account. We find that the A.O while making the disallowance of Rs.50,000/- had observed that on verification of the bills and vouchers pertaining to the administrative expenses, some bills/vouchers were found to be undated or unsigned and many vouchers were not supported with relevant bills. We have deliberated on the aforesaid observations of the lower authorities and are unable to persuade ourselves to subscribe to the same. We find that though there is a mention by the lower authorities that some bills/vouchers pertaining to the administrative expenses were found to be undated or unsigned and many vouchers were not supported with relevant bills, but surprisingly there is not a mention of a single such bill/voucher which is found to be suffering from any such alleged infirmity. We are of the considered view that in the case before us, as there is no evidence which could support the claim of the A.O that some of the bills/vouchers were found to be undated or unsigned or not backed by relevant bills, it is difficult for us to subscribe to the disallowance made by him in the thin air. We thus, in the backdrop of our aforesaid observations are unable to uphold the adhoc disallowance of Rs.50,000/- sustained by the CIT(A). We thus set aside the order of the CIT(A) in context of the issue under consideration and delete the addition of Rs.50,000/- made in the hands of the assessee. The Ground of appeal No. 3 is allowed.

That as the Ground of appeal no. 4 is general, the same is dismissed as not pressed.