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Income Tax Appellate Tribunal, BENGALURU BENCH C, BENGALURU
Before: SHRI. A. K. GARODIA & SHRI. LALIT KUMAR
PER LALIT KUMAR, JUDICIAL MEMBER :
The present appeal is filed by the assessee against the order of the CIT (Appeals) – 7, Bengaluru, dated 23.11.2016, for the assessment year 2011-12, on the following grounds :
ITA.376/Bang/2017 Page - 2
The brief facts are that the assessee is an IT solution provider with its core business is to enable clients to set up and run businesses ITA.376/Bang/2017 Page - 3 and critical applications through provision of IT infrastructure and maintenance services. The assessee was following the mercantile system of accounting and the accounts are duly audited. During the impugned assessment year, the assessee filed the original return of income on 30.09.2011 declaring total income of Rs.5,40,70,200/-. Thereafter it was revised to Rs.6,55,43,750/-. Based on the audit report, the assessee declared the net profit figure of Rs.1,77,73,076/-. In the said computation the assessee has offered various additions by effecting several disallowances of expenditure and payments, amounting in all to Rs.5,13,12,585/-, debited in its books. However, the AO made the regular assessment u/s.143(3) and recomputed the total income of the assessee at Rs.7,57,49,844/-. Feeling aggrieved by the addition, the assessee approached the CIT (A) for relief.
The CIT (A) partly granted relief to the assessee. Hence the assessee is now in appeal before us with the grounds mentioned herein above.
Ground no.2 pertains to disallowance made by the AO and confirmed by the CIT (A) under Rule 8D(2)(iii) r.w.s.14A. In this regard, the Ld. AR has submitted that the addition made by both the lower authorities is without any basis as the assessee has not earned any dividend income during the year under consideration and therefore no expenditure can be disallowed by the AO by invoking Rule 8D(2)(iii) r.w.s.14A. The Ld. AR relies upon the judgment ITA.376/Bang/2017 Page - 4 passed by the Hon’ble Delhi High Court in the matter of Cheminvest Ltd. v. ITO [378 ITR 33].
On the other hand, the Ld. AR relies upon the order passed by the lower authorities.
We have heard the rival submissions and perused the record. The AO in para 5 records that the total investment as on 31.03.2011 was Rs.1,37,70,000/-. However no dividend income was declared during the previous year by this company, hence the assessee did not claim any dividend for the previous year. Thus, it is clear that the assessee during the year under consideration has not received any dividend income from investment made in equity shares of companies. Now the issue of disallowance under rule 8D(2)(iii) r.w.s. 14A is no more res integra so far as non receipt of dividend income. The Hon’ble Delhi High Court in the matter of PCIT-04 v. IL & FS Energy Development Co., [(2017) 84 taxmann.com 186] in paras 11 to 23 has held as under: 11. At the outset, it requires to be noticed that we are concerned with the AY 2011-12 and, therefore, the question of the applicability of Rule 8D, which was inserted with effect from 24th March 2008, is not in doubt. 12. Section 14A of the Act, which was inserted with retrospective effect from 1st April 1962, provides for disallowance of the expenditure incurred in relation to income exempted from tax. From 11th May 2001, a proviso was inserted in Section 14A to clarify that it could not be used to reopen or rectify a completed assessment. Sub- sections (2) and (3) of Section 14A were inserted with effect from 1st April, 2007 to provide for methodology for computing of disallowance under Section 14A. However, the actual methodology was provided in ITA.376/Bang/2017 Page - 5 terms of Rule 8D only from 24th March 2008. There was a further amendment to Rule 8D with effect from 2nd June 2016 limiting the disallowance the aggregate of the amount of expenditure directly relating to income which does not form part of total income and an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not form part of the total income. It is also provided that the amount shall not exceed the total expenditure claimed by the Assessee.
13. In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the AY in question but where potential exists for exempt income being earned in later AYs.
In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1st April 1962, it was clarified that "expenses incurred can be allowed only to the extent they are relatable to the earned income of taxable income". The object behind Section 14A was to provide that "no deduction shall be made in respect of any expenditure incurred by the Assessee in relation to income which does not form part of the total income under the Income Tax Act".
15. What is taxable under Section 5 of the Act is the "total income" which is neither notional nor speculative. It has to be 'real income'. The subsequent amendment to Section 14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the AY in question from investments made, not in that AY, but earlier AYs.
Rule 8D (1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or ITA.376/Bang/2017 Page - 6
(b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2)."
17. The words "in relation to income which does not form part of the total income under the Act for such previous year" in the above Rule 8 D (1) indicates a correlation between the exempt income earned in the AY and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the AY in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A read with Rule 8D would not arise.
18. The CBDT Circular upon which extensive reliance is placed by Mr. Hossain does not refer to Rule 8D (1) of the Rules at all but only refers to the word "includible" occurring in the title to Rule 8D as well as the title to Section 14A. The Circular concludes that it is not necessary that exempt income should necessarily be included in a particular year's income for the disallowance to be triggered.
In the considered view of the Court, this will be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in CIT v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 (SC), the mandate of Section 14A of the Act is to curb the practice of claiming deduction of expenses incurred in relation to exempt income being taxable income and at the same time avail of the tax incentives by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. Consequently, the Court is not persuaded that in view of the Circular of the CBDT dated 11th May 2014, the decision of this Court in Cheminvest Ltd. (supra) requires reconsideration.
ITA.376/Bang/2017 Page - 7
20. In Redington (India) Ltd. v. Addl. CIT [2017] 392 ITR 633/77 taxmann.com 257 (Mad.), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income." It was further explained that, "The computation of total income in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe thus would be carrying the artifice too far."
21. The decisions in CIT v. Lakhani Marketing Inc. [2014] 49 taxmann.com 257/226 Taxman 45 (Mag.), CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204, CIT v. Shivam Motors (P.) Ltd. [2015] 230 Taxman 63/55 taxmann.com 262 (All.) have all taken a similar view. The decision in Taikisha Engineering India (P.) Ltd. (supra) does not specifically deal with this issue. 22. It was suggested by Mr. Hossain that, in the context of Section 57(iii), the Supreme Court in CIT v. Rajendra Prasad Moody [1978] 115 ITR 519explained that deduction is allowable even where income was not actually earned in the AY in question. This aspect of the matter was dealt with by this Court in Cheminvest Ltd. (supra) where it reversed the decision of the Special Bench of the ITAT by observing as under: '20. Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57 (iii) of the Act could be allowed as a deduction against dividend income assessable under the head "income from other sources". Under Section 57 (iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income", did not mean that any income should in fact have been ITA.376/Bang/2017 Page - 8 earned as a condition precedent for claiming the expenditure. The Court explained: "What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."
21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is "for the purpose of making or earning such income." Section 14A of the Act on the other hand contains the expression "in relation to income which does not form part of the total income." The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.' 23. The decisions of the ITAT in Ratan Housing Development Ltd. (supra) and Relaxo Footwears Ltd. (supra), to the extent that they are inconsistent with what has been held hereinbefore do not merit acceptance. Further, the mere fact that in the audit report for the AY in question, the auditors may have suggested that there should be a disallowance cannot be determinative of the legal position. That would not preclude the Assessee from taking a stand that no disallowance under Section 14 A of the Act was called for in the AY in question because no exempt income was earned.
ITA.376/Bang/2017 Page - 9
Respectfully following the order of the Hon’ble Delhi High Court, we allow the ground no.2, relating to disallowance under Rule 8D(2)(iii).
Ground nos.3 and 6 are pertaining to the amounts written off as under : i) EMD of Rs.84,412/- ; and ii) Business loss u/s.28 r.w.s.37(1), amounting to Rs.20,02,741/-.
In this regard, the Ld. AR has submitted that the amounts were written off in the books of account as the balance was appearing as outstanding in the books of account. It was further submitted that the AO should have considered the facts that the assessee out of the business expediency deposited margin money in the banks and a sum of Rs.20,02,741/- had not been reconciled and therefore this margin money payment to that extent which it remained unsettled/ un reconciled for a long period in the books of the assessee was written off by the assessee.
The Ld. DR submitted before us that the authorities below have considered the above said facts and thereafter only had disallowed the write-off.
We have heard the rival contentions and perused the record. The CIT (A) in para 8.3 has recorded as under : 8.3 The contention of the appellant that it has incurred a business loss has to be seen in the pretext of the question ITA.376/Bang/2017 Page - 10
that what is the object of expenditure. If the deposits not received are made in usual activity of the appellant and to ease out the business then it is an expenditure which is allowable u/s 37(1) of IT Act. However there is no question of maintaining that an deposit which was available for meeting any capital liability and due delay on inconvenience, the same was treated as written off, can be allowed as a business loss. The appellant company is an IT solutions provider with its core business aligned to enable 4clients to set up and run businesses and critical applications through provisioning of IT infrastructure and maintenance services and as reported it provides the aforesaid services through strategic alliances with partners such as Hewlett Packard, Microsoft, Sun Microsystems and CISCO etc. it is never been the business of extending Margin Money for bank Guarantee. The appellant has apprehended that this margin money given on hank guarantee has been adjusted with bank charges by the bank but no such evidence has been furnished. Further in case the amount has been already adjusted then there is no scope for writing it off once again. At the time of hearing, we enquired from the assessee to furnish the proof of earnest money deposited with various authorities as well as the bank guarantee furnished for the amount of Rs.20,02,741/-, which was not reconcilable and unsettled. However, despite the query by the bench the assessee has failed to produce any evidence showing that EMD( earnest money deposit) was deposited by the assessee to the extent of Rs.84,412/-, as well as the bank guarantee deposit by the assessee of an amount of Rs.20,02,741/-. As the assessee failed to discharge the primary onus of proving the investment or deposit made by it, therefore the fact of these two amounts being written off or becoming bad, is not sustainable in the eyes of law. Accordingly ground nos.3 and 6 of the assessee are dismissed.
ITA.376/Bang/2017 Page - 11
Ground 4 of the assessee pertains to disallowance of Rs.11,59,600/- claimed on security deposits written off in the normal course of business as business loss under the provisions of Section 28 r.w.s.37(1) of the Act. In this regard the Ld. AR has drawn our attention to Anexure-2 of the paper book where an amount of Rs.11,59,600/- was shown as receivable from various authorities including BSNL, Food Corporation, Government departments etc., and the said amount has been shown as receivable in the assessee’s books of account.
On the other hand the Ld. DR relies upon the orders passed by the authorities below.
We have heard the rival submissions and perused the material on record. It is the case of the assessee that the assessee has claimed the write-off of various advances and deposits u/s.28 r.w.s.37(1) of the Act. In view thereof, the judgment relied upon by the assessee in the matter of TRF Ltd (supra), is not applicable as in the said judgment, the Hon’ble Supreme Court was concerned with the interpretation of the provisions of section 36(1)(vii) and in that context it was held by the Hon’ble Supreme Court that if the bad debts were written off in the books of account then, it is not necessary for the assessee to prove the debts became actual bad . In the present case, no evidence was filed before the lower authorities or before us to show that the loan advances, security deposits etc., have become irrecoverable resulting in business loss to the assessee in the present year. As the onus has ITA.376/Bang/2017 Page - 12 not been discharged by the assessee showing that the loan advances, security deposits became irrecoverable during the year, therefore, this ground of the assessee fails and accordingly we dismiss ground.4 of the assessee.
14. Ground no.7 of the assessee is in respect of disallowance of Rs.37,45,165/- towards the employees’ advances which was written off in the normal course of business. In this regard, facts of the issue as narrated by the CIT (A) and the finding given in paras 10 to 10.4, are as under : 10 The AO has made an addition of Rs.37,45,165 under the head expenditure incurred and spent on the payment of advances to the appellant's employees. In Para 6 of the order gives the list of items written off under this head and the reasons for disallowance. The disallowance made by AO has 2 distinct division One is in regard to the write off of the amount of Rs.15,82,181 in the name of Sri Gururaj Anjaneyalu who was working as Senior VP sales and has left the services on 31.03.2009. But later on he joined as one of the directors in a sister concern of the appellant company by name M/s Value Point Knowledge Works Pvt. Ltd., and that the appellant has made investments in the said company and the two directors of the appellant company (viz., Sri. Sampath Kumar and Sri. R.S. Shanhag) are also share holders in the said company along with Sri, Gururaj Anjaneyalu.
10.1 With regard to the outstanding amount Rs. 15,82,181 in the case of Sri.Gurururaj Anjaneyalu, is made up of three items viz., a) Salary advance outstanding Rs.6,39,093, b) Current account balance outstanding Rs.4,89,093 and c) Loan amount outstanding Rs.4,53,995. Considering the fact that Mr Gururaj was an employee with the appellant company before 2007-08 and that he left the Company for setting up set up his own Company named Knowledge Works Pvt. Ltd. in which Directors of the appellant company have invested in shares ITA.376/Bang/2017 Page - 13 and the name was changed to Value Point Knowledge Works Pvt Ltd goes to only indicate that no timely effective efforts (which was available to the appellant company) were taken to recover the dues from this old employee. The fact that he fell sick and went into coma and after very long hospitalisation he passed away and therefore the advance outstanding in his case was not recoverable is hardly sufficient reason to write off the outstanding amount as business loss of the appellant company. In this view of the matter the addition made to the extent of Rs. 15,82,181 is upheld holding that it was premature to write off the said dues without reconciliation and for want of reasonable efforts for recovering the said dues
10.2 In this background it has been held that the claim that advances given to said Sri Gururaj could not he recovered is held as not substantiated and the claim of Rs. 15,82,181 has been held that it cannot he allowed as expenditure of the appellant either u/s 36(1)(vii) or U/s 37(1).
10.3 The appellant has also disallowed the write off of the remaining amount of Rs.21,62,984 treating that it is not the business of the appellant to loan and advance and therefore if some loans are given to employees, and the same could he recovered though the salaries and without any valid explanation why the same could not be recovered and what efforts were made to recover the same The Assessing Officer his held that the appellant cannot unilaterally write off the loans and claim the same as business expenditure.
10.4 In the matter relating to eases of other employees, the amounts involved as advances to the employees is clearly on the higher side. These amounts have been explained as payments made to them towards incentives and later on as it was found that they were not entitled / eligible to any incentives the amounts paid to them remained as outstanding amounts to he recovered in their cases, As the outstanding amounts remained to be recovered and as it could not be recovered before the said employees left the appellant company they had to ITA.376/Bang/2017 Page - 14 be written off as they were lying for a long period of time in their books The explanation offered in this regard for non recovery or non adjustment of these outstanding incentive amounts is considered as not acceptable and it is not sufficient cause for effecting such write off where large amounts are involved. Hence, the disallowance of in their cases upheld by holding that it was premature to write off the said dues without reconciliation and for want of reasonable efforts for recovering the said dues. Accordingly, these grounds of appeal are dismissed.
The disallowance of Rs.37,45,165/- was divided by the CIT (A) into two parts one is towards the payment of advances made to one Guraraj Anjaneyalu for an amount of Rs.15,82,181/- towards salary advances outstanding, current account balance outstanding and loan amount outstanding and the other amount was Rs.21,62,985/-, as advances given to other employees.
First we shall deal with the amount of Rs.15,82,181/- which is the payment made to Gururaj Anjaneyalu. In this regard, the Ld. AR has submitted that the amount of Rs.15,82,181/- was irrecoverable as Gururaj Anjaneyalu had died and before he passed away, he was into the state of coma( remained hospitalized for long) and therefore the amount of Rs.15,82,181/- though was outstanding became irrecoverable.
16. On the other hand the Ld. DR had submitted that the advances were made and the said person happens to be the director of the company in which the assessee company has invested, therefore the ITA.376/Bang/2017 Page - 15 same cannot be said to be irrecoverable.
We have heard the rival submissions and perused the record. It is an undisputed fact that Gururaj Anjaneyalu was working as Sr.VP (Sales) along with two of its directors who are shareholders in the company. It is also not disputed that Gururaj Anjaneyalu fell sick and went into Coma and subsequently had passed away. In our view once the person to whom the advances / loans etc., were given had passed away then, said amount becomes irrecoverable and the assessee was right in writing off the said amount in its books of account. However it is for the assessee to prove that the advance became irrecoverable in the year under consideration.
In the present case, no evidence was filed before the lower authorities or before us to show that the loan advances have become irrecoverable resulting in business loss to the assessee in the present year. As the onus has not been discharged by the assessee showing that advances, became irrecoverable during the year, therefore, this ground of the assessee fails.
The next limb of addition was Rs.21,62,984/- which was given as advances to various employees and those employees had left the employment of the assessee. The details of the loans and advances given to the employees were mentioned in Annexure-D of the paper book. The Ld. AR had made similar arguments as made in respect to ITA.376/Bang/2017 Page - 16 Ground.4 by relying upon the judgment of the Hon’ble Supreme Court in TRF Ltd (supra) and a Board Circular in this regard.
19.. The Ld. DR has relied upn para.10.4 of the CIT (A) order (supra) and submitted that the explanation given by the assessee is plausible and therefore this explanation cannot be accepted.
We have heard the rival contentions and gone through the records. It is the case of the assessee that the assessee has claimed the write-off of various advances and deposits u/s.28 r.w.s.37(1) of the Act. In view thereof, the judgment relied upon by the assessee in the matter of TRF Ltd (supra), is not applicable as in the said judgment, the Hon’ble Supreme Court was concerned with the interpretation of the provisions of section 36(1)(vii) and in that context it was held by the Hon’ble Supreme Court that if the bad debts were written off in the books of account then, it is not necessary for the assessee to prove the debts became actual bad . In the present case, no evidence was filed before the lower authorities or before us to show that the loan advances, security deposits etc., have become irrecoverable resulting in business loss to the assessee in the present year. As the onus has not been discharged by the assessee showing that the loan advances, security deposits became irrecoverable during the year, therefore, this ground of the assessee fails and accordingly we dismiss ground.7 of the assessee. In the result Ground.7 of the assessee is dismissed.
ITA.376/Bang/2017 Page - 17
Ground.5 raised by the assessee is in respect of disallowance of Rs.4,406/- claimed on account of telephone deposit written off in the normal course of business. In this regard, the Ld. AR made similar arguments as made in respect ground.4 above. The Ld. DR relied on the orders of the lower authorities 22. We have heard the rival submissions and perused the material. Since the amount of Rs.4,406/- was towards telephone deposit which was written off, in our view, ground of the assessee is required to be allowed as the same was duly reflected in the books of account of the assessee. Following the reasoning given by us in ground.4, we reject this ground 5 as well.
Apropos ground nos.8 and 9 the Ld. AR has submitted that these grounds are required to be allowed on the same analogy given in respect of groundno.4 (supra).
The Ld. DR relies upon the order of the lower authorities.
We have heard the rival contentions and gone through the records. In our view, in para 11 the CIT (A) has clearly mentioned that the assessee has neither made any specific ground nor furnished any evidence for impairment of the immovable property rights. For this the assessee has failed to furnish any details in support of its claim in ground nos.8 and 9. Therefore, no interference is called for. These grounds of the assessee are accordingly dismissed.
ITA.376/Bang/2017 Page - 18
In the result, appeal of the assessee is partly allowed.