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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER:
The present appeal filed by the revenue is directed against the order passed by the CIT(A)-8, Mumbai, dated 28.08.2015, which in itself arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 14.02.2014 for A.Y 2011- 12. The revenue assailing the order of the CIT(A) had raised before us the following grounds of appeal :-
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited “1. Whether on the facts of the case and in law the Ld. CIT(A) was right in deleting e disallowance of expenses u/s. 14A holding that the assessee has not earned any exempt income during the year, without appreciating the fact the disallowance u/s. 14A is to be made in respect of Investments and not on Income.
2. Whether on the facts of the case and in law the Ld. CIT(A) was right in deleting the disallowance of expenses u/s. 14A holding that the assessee has not earned any exempt income during the year, without appreciating the fact that the disallowance u/s. 14A is to be made in respect of Investment capable of earning exempt income and not only when the exempt income is earned by such Investments.
Whether on the facts of the case and in law the Ld. CIT(A) was right in deleting the disallowance of expenses u/s. 14A holding that the own funds of the assessee at Ps. 232.89 Crores are more than Investments in shares at Rs. 130.24 Cores, without appreciating the fact that the investments in shares increased in current year by Rs 93.71 Crores without any corresponding increase in sources of own funds.
Whether on the facts of the case and in law the Ld. CIT(A) was right in deleting the disallowance of expenses u/s. 14A holding that the expenses as per P&L A/c. are incurred only in respect of manufacturing & dealing in electronic goods, without appreciating the facts that disallowance u/s. 14A is to be made not only for direct expenses but also indirect expenses such as salaries & employee benefit, legal & Professional expenses etc.
5. Whether on the facts of the case and in law the Ld. CIT(A) was right in deleting the disallowance of expenses u/s. 14A holding that the majority of investments were made in shares of group companies for the purpose of strategic business & control, without appreciating that section 14A r. w. Rule 8D does not differentiate between investments made for earning income or for strategic investments & control.
Whether on the facts of the case and in law the Ld. CIT(A) was right in deleting the disallowance of expenses u/s. 14A made in computing the book profit u/s. I15JB without following the decision of Hon'ble Bench of ITAT Mumbai in the case of RBK Share Broking Pvt. Ltd. (ITA No. 7546/Mum/2011).
Whether on the facts of the case and in law the Ld. CIT(A) was right in deleting the disallowance of provision for warranty expenses without appreciating the fact that the assessee failed to prove before the A.O in details & documentary evidence that criteria laid down by the Hon'ble Supreme Court in the case of Rotork Controls (I) Ltd. have been fulfilled by it for claiming such provisions as expenses.
Whether on the facts of the case and in law the Ld. CIT(A) was right in deleting the adjustment made in computing the book profit u/s. 115JB on account of provision for warranty expenses without appreciating the fact that the said provision was unascertained liability as per Explanation (I) (c) of sub-section (2) of section 115JB.
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited 9. The appellant prays that the order of the CIT(A) on the above ground be aside and that of the assessing be restored.
The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
Briefly stated, the facts of the case are that the assessee company which is engaged in the business of manufacturing and trading of consumer electronics and home appliances had e-filed its return of income for A.Y. 2011-12 on 30.09.2011, declaring total income at Rs. 22,14,57,605/- under the normal provisions and a „book profit‟ of Rs. 1455,34,504/- under Sec. 115JB of the Act for computing the MAT liability. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2).
3. The A.O while framing the assessment observed that though the assessee had made long term exempt income yielding investments, but however, no disallowance in respect of the expenses attributable for earning of the exempt dividend income was made by the assessee in its return of income. The A.O being of the view that disallowance under Sec. 14A of the expenses attributable to the earning of the exempt dividend income were to be worked out as per the methodology contemplated under Rule 8D, therefore, called upon the assessee to put forth an explanation as regards the same. The assessee in its reply submitted before the A.O that as during the year under consideration it had no income which was claimed as exempt from tax, therefore, no disallowance under Sec. 14A r.w. Rule 8D was called for in its hands. Alternatively, it was submitted by the assessee that as the funds raised by way of secured and unsecured loans by the company were utilized for its working capital requirement and not for making exempt income yielding investments in shares, therefore, no disallowance of P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited the interest expenditure in respect of any part of the aforesaid borrowed funds was called for in its hands. It was further submitted by the assessee that as it had sufficient interest free funds available with it from which the investments were made in the shares of its group companies, therefore, on the said count also no disallowance of any part of the interest expenditure was liable to be made in the hands of the assessee. The assessee further to support its aforesaid claim took support of the order passed by the CIT(A) in its own case for the immediately preceding year, viz. A.Y. 2010-11 wherein a similar disallowance of the interest expenditure made by the A.O under Sec. 14A was deleted in appeal. The assessee further submitted that as the investments were made in its group companies which did not require incurring of any administrative expenses, therefore, no part of such expenses could be related to the exempt income yielding investments so made by the assessee. The assessee on the basis of his aforesaid contentions submitted before the A.O that the provisions of Sec. 14A were not applicable to its case.
4. The A.O after deliberating on the contentions of the assessee was however not persuaded to accept the same. The A.O in the backdrop of his dissatisfaction as regards the claim of the assessee that no expenditure was incurred for making of long term exempt income yielding investments, therefore, worked out the disallowance under Sec. 14A as per the method prescribed in Rule 8D. However, the A.O being of the view that as the assessee had provided the details of the interest bearing funds which were deployed for making of exempt income yielding investments, therefore, took the interest expenditure of Rs. 18,44,29,534/- for working out the disallowance under Rule 8D(2)(ii). The A.O thereafter worked out the aggregate disallowance under Sec. 14A r.w. Rule 8D at Rs. 1,37,53,924/-. The A.O also made
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited an addition of Rs. 1,37,53,924/- to the „book profit‟ under Sec. 115JB for working out of the MAT liability in the hands of the assessee.
The A.O during the course of the assessment proceedings observed that the assessee had during the year under consideration made provision for contingent liability, viz. „Provision for Warranty and Maintenance Expenses‟ amounting to Rs. 2,22,50,000/-. The A.O called upon the assessee to show cause as to why the aforesaid „Provision for Warranty and Maintenance Expenses‟ amounting to Rs. 2,22,50,000/- may not be disallowed and added to its total income. The assessee submitted before the A.O that though the provision for warranty and maintenance expense was not a provision for meeting an ascertained liability, but however, as it was a liability in present which was scientifically ascertained on the basis of past records, therefore, the same was allowable as per the normal provisions of the Act and as per the provisions of Sec. 115JB. The assessee submitted that as it was obligatory on the part of the company to attend the complaints of the customers, therefore, the liability did arise as soon as the sale was made and was an integral part of sale even if quantified and paid later. The assessee in order to support his contention relied upon the judgment of the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC). However, the A.O after deliberating on the contentions of the assessee did not find favour with the same. The A.O holding a conviction that as the assessee had failed to substantiate on the basis of necessary documentary evidence that the liability was ascertained by following a scientific method, therefore, the reliance placed on the judgment of the Hon’ble Apex Court in the case of M/s Rotork Controls India (P) Ltd.(supra) was misconceived and not applicable to the facts involved in the case before him. The A.O in order to fortify his aforesaid
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited conviction further observed that as the assessee had in the earlier years on suo motto basis disallowed such expenditure claimed in the accounts by characterizing the same as being contingent in nature, therefore, a claim to the contrary in the year under consideration with no change in the facts was not to be accepted. The A.O on the basis of his aforesaid observations disallowed the provision of warranty and maintenance expenses of Rs. 2,22,50,000/- and added the same to total income of the assessee under the normal provisions, which in the backdrop of his aforesaid deliberations was worked out at Rs. 25,74,61,530/-. The A.O taking cognizance of the aforesaid disallowances made by him under Sec. 14A and in respect of the provisions of warranty and maintenance expenses, also made necessary adjustments to the book profit under Sec. 115JB and reworked the same at Rs. 18,15,38,428/-.
6. Aggrieved, the assessee assailed the order of the A.O before the CIT(A). The assessee challenged before the CIT(A) the validity of the disallowance made by the A.O under Sec. 14A r.w. Rule 8D of Rs. 1,37,53,927/- on various grounds, viz. (i) that as the assessee had no exempt income during the year under consideration, therefore, no disallowance under Sec. 14A was called for in its hands; (ii) that as the capital and reserves of the assessee company as on 31.03.2011 amounting to Rs. 232.89 crores duly explained the source of investment of Rs. 126.20 crores made by the assessee in the shares of its group companies, therefore, no part of the interest expenditure attributable to the borrowed funds was liable to be disallowed under Sec. 14A r.w. Rule 8D(2)(ii); (iii) that as all the expenses incurred by the assessee and claimed in its profit & loss account for the year under consideration were in context of the business of the assessee and not for the purpose of making exempt income yielding
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited investments in shares, therefore, no part of the said expenditure was liable to disallowed under Sec. 14A of the Act; (iv) that as the assessee had made investments in group concerns for strategic purposes with the primary object of holding the controlling stake in the group companies, therefore, no disallowance in respect of such investments was called for under Sec. 14A; and (v) that as the expenses claimed by the assessee in its profit & loss account were clearly relatable to its normal business activities of manufacturing and dealing in electronic goods, therefore, no disallowance of the said expenses was liable to be made under Sec. 14A. The CIT(A) after deliberating on the aforesaid contentions of the assessee and giving a thoughtful consideration to the same was persuaded to be in agreement with the claim so raised by the assessee before him and deleted the disallowance of Rs. 1,37,53,924/- made by the A.O under Sec. 14 r.w. Rule 8D. The CIT(A) further observed that now when the addition made by the A.O under Sec. 14A r.w. Rule 8D in itself had been deleted, therefore, the contention of the assessee that no part of the said disallowance could be added to the book profit for computing the MAT liability under Sec. 115JB was rendered academic and did not survive any more.
7. The CIT(A) adverting to the challenge thrown by the assessee to the validity of the disallowance of Rs. 2,22,50,000/- in respect of provision of warranty and maintenance expenses, which was debited by the assessee in its profit & loss account for the year under consideration, observed that the similar issue had came up before his predecessor in the assesses own case for A.Y. 2010-11. The CIT(A) observed that his predecessor after necessary deliberations in respect of the issue under consideration had deleted the disallowance by concluding that the provision of warranty and maintenance expenses was in the nature of an ascertained liability. The CIT(A) observed that P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited in the backdrop of the business of the assessee which was engaged in manufacturing of vast array of sophisticated consumer appliances, the warranty was an integral part of the sale price because the brand image and the sales turnover were very much dependent on such warranties. The CIT(A) further observed that the principles laid down by the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC) were duly found to be satisfied by the assessee. The CIT(A) further took note of the fact that the A.O while making the aforesaid disallowance had failed to give due consideration to the principles laid down by the Hon‟ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) and other judicial pronouncements. The CIT(A) observed that the A.O not only failed to call upon the assessee to give any statistical analysis or basis of calculating the provision of warranty and maintenance expenses, but rather, had also not given any reasons to refute the remarks of the auditors at Para 16 of the Notes to Accounts of the assesses duly audited accounts, which clearly revealed that the provisions were made “based on technical evaluation and past experience”. The CIT(A) holding a conviction that the A.O had wrongly disallowed the provision of warranty and maintenance expenses of Rs. 2,22,50,000/- without disproving and dislodging the observations made by the auditor, therefore, deleted the same.
8. The revenue being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The Learned Departmental Representative (for short „D.R‟) submitted that the CIT(A) had wrongly vacated the disallowance of Rs. 1,37,53,924/-made by the A.O under Sec. 14A r.w. Rule 8D. The Ld. D.R in support of his contention relied on the order passed by the A.O. The Ld. D.R. further adverting to the disallowance of Rs. 2,22,50,000/- made by the A.O in respect of the P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited provision of warranty and maintenance expenses, submitted that the CIT(A) had lost sight of the fact that as the assessee had failed to substantiate its aforesaid claim and prove that the same was an ascertained liability determined on the basis of a scientific method, therefore, the A.O following the judgment of the Hon‟ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) had rightly disallowed the same. It was submitted by the Ld. D.R. that the CIT(A) had wrongly set aside the aforesaid disallowance which was made by the A.O on the basis of a well reasoned order. Per contra, the Ld. Authorized Representative (for short „A.R‟) for the assessee at the very outset submitted that as the assessee during the year under consideration had no exempt income, therefore, no disallowance under Sec. 14A was called for in its hands. The Ld. A.R. submitted that though the contention raised by the revenue in respect of the disallowance made by the A.O under Sec. 14A to the „book profit‟ for computing the MAT liability under Sec. 115JB, would be rendered as merely academic in the backdrop of the deletion of the said disallowance, however, submitted that even otherwise the said issue was settled in favour of the assessee by the order of the “Special Bench” of the Tribunal in the case of ACIT Vs. Vireet Investment Pvt. Ltd. (ITA No. 502/Del/2012); dated. 16.06.2017. The Ld. A.R. adverting to the disallowance of the provision for warranty and maintenance expenses of Rs. 2,22,50,000/- made by the A.O, which however on appeal was deleted by the CIT(A), submitted that the CIT(A) after appreciating that the assessee had duly satisfied the principle laid down by the Hon‟ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra) had rightly deleted the disallowance made by the A.O. It was submitted by the Ld. A.R that as the appeal filed by the revenue was devoid of any merit, therefore, the same may be dismissed.
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited
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 our indulgence in the present appeal filed by the revenue is sought for adjudication of two issues, viz (i) the validity of the disallowance made under Sec. 14A r.w. Rule 8D; and (ii) the validity of the disallowance of the provision for warranty expenses debited by the assessee in its profit & loss account. We shall first take up the issue pertaining to disallowance of Rs. 1,37,53,924/-made by the A.O under Sec. 14A r.w. Rule 8D. We find that the revenue had assailed the order of the CIT(A) in context of the observations recorded by him while deleting the aforesaid disallowance on multiple grounds, viz. (i) that as the assessee had no exempt income during the year under consideration, therefore, no disallowance under Sec. 14A was called for in its hands; (ii) that as the capital and reserves of the assessee company as on 31.03.2011 of Rs. 232.89 crores duly explained the source of investment of Rs. 126.20 crores made in the shares of the group companies, therefore, no part of the interest expenditure attributable to the borrowed funds was liable to be disallowed under Sec. 14A r.w. Rule 8D(2)(ii); (iii). that as all the expenses incurred by the assessee and claimed in its profit & loss account for the year under consideration were in context of the business of the assessee and not for the purpose of making exempt income yielding investments in shares, therefore, no part of the said expenditure was liable to disallowed under Sec. 14A of the act; (iv) that as the assessee had made investments in group concerns for strategic purposes with the primary object of holding the controlling stake in the said group companies, therefore, no disallowance in respect of such investments was called for under Sec. 14A; and (v) that as the expenses claimed by the assessee in its profit & loss
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited account were clearly relatable to its normal business activities of manufacturing and dealing in electronic goods, therefore, no disallowance of the said expenses was liable to be made under Sec. 14A. We find that the Ld. A.R had though relied on the order passed by the CIT(A) before us, but however, had during the course of the hearing of the appeal primarily focused on the ground that as the assessee during the year under consideration had not earned any exempt income, therefore, no disallowance under Sec. 14A was called for in its hands. We find that the claim of the assessee that it had no exempt income during the year under consideration had not been disputed by the revenue before us. We find that the CIT(A) taking support of the orders of coordinate benches of the Tribunal in the case of Joint Commissioner of Income Tax Vs. Holland Equipment Co. B.V. (2005) 3 SOT 810 (Mumbai) and Delite Enterprises(P) Ltd. Vs. Income-tax Officer (2008) 27 CCH 0169 (Mum) did find favour with the contention of the assessee that as it had no exempt income, therefore, no disallowance under Sec. 14A was liable to be made in its hands. We have deliberated on the contentions of the assessee in the backdrop of the facts of the case and find substantial force in the same. We are of the considered view that the issue that the disallowance of expenditure under Sec. 14A of the Act has to be worked out in the backdrop of the exempt income earned by the assessee and cannot be allowed to exceed the same had been deliberated upon by the Hon’ble High Court of Delhi in the case of Joint Investment Pvt. Ltd. Vs. CIT (2015) 372 ITR 0694 (Delhi). The Hon‟ble High Court being of the view that the disallowance of expenditure under Sec. 14A of the Act has to be worked out keeping in view the exempt income of the assessee, had held as under:-
“The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs.52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.” We thus finding ourselves to be in agreement with the aforesaid view so taken by the Hon'ble High Court, thus, are of the considered view that the CIT(A) had rightly concluded that as the assessee during the year under consideration had not earned any exempt dividend income, therefore, no disallowance under Sec. 14A of the Act was called for in its hands. We thus finding no infirmity in the order of the CIT(A) to the extent he had deleted the disallowance of Rs. 1,37,53,924/- made by the A.O under Sec. 14A r.w. Rule 8D on the said count itself, therefore, affirm his order. The Grounds of Appeal Nos. 1 & 2 raised by the revenue before us are thus dismissed.
10. We may herein observe that as we have upheld the deletion of the disallowance of Rs. 1,37,53,924/- under Sec. 14A r.w. Rule 8D by the CIT(A), for the reason that now when the assessee had not earned any exempt dividend income during the year under consideration, no disallowance under Sec. 14A was called for its hands, therefore, the remaining grounds on the basis of which the revenue had assailed the order of the CIT(A) in context of vacating of the disallowance made in the hands of the assessee under Sec. 14A would be rendered as merely academic in nature and thus are not being adverted to and adjudicated upon by us. The Ground of Appeal No. 3 to 6 raised by the revenue are disposed of in terms of our aforesaid observations.
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited
We now take up the contention of the revenue that the CIT(A) had erred in deleting the disallowance of Rs. 2,22,50,000/- made by the A.O as regards the provision for warranty and maintenance expenses. We find that the revenue had assailed the order of the CIT(A) on the ground that he while vacating the disallowance of provision for warranty and maintenance expenses, had lost sight of the fact that the assessee had failed to prove before the A.O on the basis of supporting documentary evidence that the criteria laid down by the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC) was fulfilled on its part. We have perused the observations arrived at by the CIT(A) and are unable to persuade ourselves to be in agreement with the aforesaid contention so raised by the revenue before us. We find that the CIT(A) after taking cognizance of the fact that as the assessee was undisputedly engaged in the business of manufacturing of sophisticated consumer appliances, therefore, warranty was an integral part of the sale price, because the brand image and the sales turnover were very much dependent on offering of such warranties. We find that the CIT(A) specifically relying on the principles laid down by the Hon‟ble Supreme Court in the case of Rotork Controls India (P) Ltd. (supra), had observed that the A.O had failed to give consideration to the said parameters while dislodging the entitlement of the assessee in respect of its aforesaid claim of deduction in respect of provision for warranty and maintenance expenses. We find that the CIT(A) while vacating the aforesaid disallowance had categorically referred to the observations of the A.O and concluded that not only the A.O had failed to call upon the assessee to place on record the statistical analysis or basis of calculating provision for warranty, but rather, had even failed to give any reasons to refute the observations of the auditors recorded at Para
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited 16 of Notes to Accounts of the assesses duly audited accounts, which clearly mentioned that the provisions were made “based on technical valuation and past experience”. We find that the CIT(A) had categorically taken note of the fact that the A.O while disproving and dislodging the observations made by the auditor had failed to place on record any material in support thereof. We have deliberated on the observations of the CIT(A) and after giving a thoughtful consideration find ourselves persuaded to be in agreement with the same. We are of the considered view that as neither the A.O had placed on record any material which could substantiate that the claim of the assessee in respect of provision for warranty and maintenance expenses was not allowable in the backdrop of the principles laid down by the Hon’ble Supreme Court in the case of Rotork Controls India (P) Ltd. Vs. CIT (2009) 314 ITR 62 (SC), nor anything had been averred by the Ld. D.R during the course of hearing of the appeal before us, therefore, we find no reason to dislodge the well reasoned view taken by the CIT(A), who as observed by us hereinabove had after considering the findings of the A.O had rightly vacated the disallowance. We thus in terms of our aforesaid observations uphold the order of the CIT(A) in context of the issue under consideration and dismiss the Ground of Appeal No. 7 raised by the revenue before us. We may herein observe that as we have upheld the deletion of the disallowance of provision for warranty and maintenance expenses by the CIT(A), therefore, the contention raised by the revenue as to whether the aforesaid disallowance would have any bearing on the „book profit‟ under Sec. 115JB would be rendered as merely academic. We thus in terms of our aforesaid observations refrain from adjudicating the Ground of Appeal No. 8 raised by the revenue before us, as the same had been rendered as merely academic in nature.
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited 12. The Grounds of Appeal Nos. 9 & 10 being general in nature are dismissed as not pressed.
The appeal of the revenue is dismissed in terms of our aforesaid observations.
Order pronounced in open court on 07.03.2018 Sd/- Sd/- (R.C. Sharma) (Ravish Sood) ACCOUNTANT MEMBER JUDICIAL MEMBER भुंफई Mumbai; ददनांक 07.03.2018 Ps. Rohit Kumar आदेश की प्रनिलऱपि अग्रेपषि/Copy of the Order forwarded to : 1. अऩीराथी / The Appellant 2. प्रत्मथी / The Respondent. आमकय आमुक्त(अऩीर) / The CIT(A)- 3. आमकय आमुक्त / CIT 4. ववबागीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भुंफई / 5. DR, ITAT, Mumbai 6. गार्ड पाईर / Guard file. सत्मावऩत प्रतत //True Copy// आदेशधिुसधर/ BY ORDER, उि/सहधयक िंजीकधर (Dy./Asstt. Registrar) आयकर अिीऱीय अधर्करण, भुंफई / ITAT, Mumbai
P a g e | ACIT-3(2)(2) Vs. M/s Kail Limited