DCIT, NEW DELHI vs. M/S. HIND INDUSTRIES LTD., NEW DELHI

ORDER PER H.S. SIDHU, JM:

The Revenue has filed the present appeal against the impugned order dated 30/9/2014 passed by the Ld. Commissioner of Income Tax (Appeals)-XV, New Delhi on the following grounds, relevant to assessment year 2010-11.

2. Whether on the facts and circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition as the same contradicts the circular no.

5/2014, dated 11.2.2014 which provides for disallowance of the expenditure even where the taxpayer in a particular year has not earned any exempt income.

3. Whether on the facts and circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition as the same is not acceptable that for managing / controlling / handling the investment

of Rs. 25,38,30,000/- no expenditure was actually incurred.

4. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing.

The case of the assessee was selected for scrutiny and notice u/s. 143(2) of the Income Tax Act, 1961 (hereinafter referred as the Act) was issued on 27.9.2011. Again notice u/s. 143(2) of the Act alongwith questionnaire under section 142(1) of the Act was sent on 06.09.2012. In response to the notices, the A.R. of the assessee appeared from time to time and filed the details and produced the books of account. The assessee is engaged in business of marketing of manufactured fertilizers and retailed intermediate products. The AO observed that the assessee had paid commission expenses of Rs. 2,81,405/- to the Managing Director, who is also a share holder in the assessee company. The AO applied the provisions of section 36(1)(ii) and thereby made the disallowance of such expenses.

Secondly, the AO observed that in the assessment orders of the earlier years from AY 2003-04 till 2009-10, disallowance u/s. 40A(3) was made in respect of cash purchases made from several persons of raw material on the ground that the cash purchases were made through agents known to the assessee in big towns where there was adequate banking facilities. On identical facts in the current year, the AO held that the case of the assessee does not fall under the exemption clauses of Rule 6DD(f). The assessee’s plea before the AO was that it had directly purchased raw material from the growers/farmers/villagers and held that its case was covered by Rule 6DD(f). The AO however, relied on the finding given in the assessment order for assessment years 2004-05 to 2009-10 in which it was observed that in the absence of names and addresses of the suppliers, the claim of the appellant remained unverifiable.

On identical facts in the current year, the assessee was asked to file nature and status of agents, copy of agreements with agents, list of agents and the period since when the agents were working for the company. The AR of the assessee admitted that there was neither any agreement with such agents nor did the company pay any commission to them and such agents kept changing from time to time. On examination of the details filed by the assesse in the form of purchase ledger bill summary, the AO observed that the assessee had issued bearer cheques and that the purchase bill summary did not contain the daily purchases. Under the circumstances, the AO held that there was no documentary evidence to prove that purchases were made from farmers/growers/producers. The AO in this regard relied upon the statement of one Sh. Mohd. Ali Shvaukat, Sr. Manager, Accounts, recorded on oath in A.Y.2005-06, in which he had admitted that the identity of the purchasers and suppliers cannot be verified from the books of accounts. Under the circumstances, the AO held that the assessee’s case was directly covered under the provisions of Section 40A(3) and that the exemption clause of Rule 6DD(f) did not apply to this case. Keeping in view the same, purchases of Rs.86,63,87,667, were disallowed and added back to the total income under Section 40A(3). Lastly, the AO observed that the appellant had made investment in shares, which could be out of the borrowed funds or from own sources. The AO asked the assessee as to why disallowance under Section 14A may not be made, in response to which, the assessee informed that no expenditure was actually incurred to earn the exempt dividend income. However, the AO was not satisfied with the claim of the appellant. Accordingly, by invoking the provisions of Section 14A(2), he applied the provisions of Rule 8D on the ground that substantial part of investment of Rs.25,28,30,OOO was made in shares and mutual funds, for which some expenditure was bound to be incurred, and hence held that the claim of the assessee that no expenditure was incurred for earning the dividend income, was incorrect. Accordingly, in view of the provisions of section 14A(2), he invoked the provisions of Rule 8D, and made disallowance of Rs.1,25,52,405. Thereafter, the income of the assessee was assessed at Rs. 91,63,97,850/- vide order dated 28.3.2013 passed u/s. 143(3) of the Act.

6. On the contrary, Ld. Counsel of the assessee relied upon the order of the Ld. CIT(A) and stated that he has passed a well reasoned order, which does not need any interference.

The details furnished by the assessee show that the assessee had also borrowed funds from IFCI term loan, which were used for the purpose of fixed assets. Under the circumstances, it is evident that the assessee had sufficient own funds, which were utilised for making any investment in inventories and to sundry debtors to the tune of Rs.18.19 crores and for making new investment in shares of M/s HAIL of Rs.6,63,30,000. In addition, the assessee company had current year's profit of Rs. 6.85 crores. Under the circumstances, I hold that the new investment of Rs.6.63 crores made in the shares of M/s HAIL, the subsidiary company was made out of own funds of the assessee and not from the borrowed funds. Accordingly, no disallowance under Section 14A could have been made.

7.1 Regarding the administrative expenses in respect of making such an investment, evidently the investment has been made in the subsidiary company, therefore, no effort in the form of market research, monitoring and seeking paid assistance of professionals in making such investment was needed. Accordingly, we hold that no administrative efforts can be attributed to making of investment in the shares of HAIL, the subsidiary company.

7.2 We further note that the provisions of Section 14A(2) call for invoking the provisions of Rule 8D only where the AO is not satisfied with the correctness of the claim of the assessee, which in the light of the decision of Hon’ble Delhi High Court in the case of CIT vs. Maxopp Investment Ltd. : 347 ITR 272, ought to be on cogent grounds. On careful consideration of the reasoning given by the AO for making the addition under Rule 8D in the assessment order, we find that the AO has not examined the claim of the assessee in this regard. Moreover, the AO did not consider that investment of Rs.18.75 crores was deleted by the ITAT and the new investment of Rs 6.63 crores was also made in the same manner out of own fund of the assessee for the purpose of making investment in subsidiary company for the purpose of core business of the assessee. Further, it has already held that no administrative expenses can be attributed to making such an investment in the subsidiary company. Keeping in view the same, we find that the lack of satisfaction of the AO with the claim of the AO is not on cogent grounds. Accordingly, the AO could not have invoked the provisions of Rule 8D, in the light of the binding decision of the Hon'ble Delhi High Court in the case of CIT Vs. Maxopp Investments (Supra).

Hence, addition on this ground was rightly deleted, which does not need any interference on our part, therefore, we uphold the action of the Ld. CIT(A) on the issue in dispute and reject the grounds raised by the Revenue.

Order pronounced in the Open Court on 04/10/2017.