MAJOR BRANDS (INDIA) PVT. LTD.,MUMBAI vs. ADDL.CIT -5(2), MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL “G”, BENCH MUMBAI BEFORE SHRI C. N. PRASAD, JM &DR. A.L.SAINI, AM आयकरअपीऱसं./ITA No.2153/M/2016 (निर्धारणवषा / Assessment Year: 2011-12) Major Brands (India) Pvt. Vs. ACIT-5(2), Mumbai Ltd. 401,Skyline Icon, Andheri Kurla AayakarBhavan,M.K. Road,Andheri(East), Mumbai- Road,Mumbai-400020. 400059. स्थायीऱेखासं./ जीआइआरसं./ PAN/GIR No. : AACCM 4949 B (Appellant) .. (Respondent) Appellant by :Shri Paras S.Savla, AR Respondent by :Shri V. Vidhyadhar, DR सुनवाईकीतारीख/ Date of Hearing : 21/02/2018 घोषणाकीतारीख/Date of Pronouncement : 27/02/2018 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM:

The captioned appeal filed by the Assessee, pertaining to Assessment Year 2011-12, is directed against an order passed by the Commissioner of Income Tax-(Appeals)-10, Mumbai, in Appeal No.CIT(A)-10/Addl.CIT- 5(2)/147/2014-15, dated 28.12.2015, which in turn arises out of an order passed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’), dated 30.03.2014. 2.The grounds of appeal raised by the assessee are briefly stated below (1).Ground No.1 and 2:Loss of stock by fire at Rs.15,66,973/- and loss of fixed assets by fire at Rs.19,67,432/-. (2). Ground No.3: Disallowance u/s 14A r.w.r 8D at Rs.16,19,258/- (3).Ground No.4:Penalty on account of late filing fees towards service tax return at Rs.16,000/-

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12

3.1 The brief facts apropos this issue are that during the assessment proceedings u/s 143(3) of the Act, the assessing officer noticed that the assessee had claimed loss due to fire(net of insurance claim received) of Rs.15,56,973/-. The assessee was asked to furnish details of loss by fire.The assessee had submitted before assessing officer, a letter dated 28.06.2011, prepared by M/s/ Phoenix Insurance Adjusters(P) Ltd., who are said to be surveyors in assessee`s case for the insurance company, M/s Tata AIG General Insurance Co. Ltd. The AO noticed from the report that the surveyors have limited the claim to Rs.1,02,46,255/-. There was no report from the fire department or FIR lodged with police or details of any stock salvaged. It was also noted by the AO that report of the surveyors was after the end of F.Y. 2010-11. The AO further noted that the incidence of fire was on the late night of 31.03.2011(after midnight) and the surveyors report was prepared only in June 2011.

During the assessment proceedings, the assessee also reported to the assessing officer that certain fixed assets were destroyed by fire and claimed loss at Rs.19,67,432/-. The assessing officer noted that assessee had given only a list of such assets which were destroyed by fire but failed to give factual details for verification that the fixed assets were situated there at the time of fire and were destroyed in that fire. Therefore, AO has made addition in respect of capital asset of Rs.19,67,432/-, which was written off by the assessee claiming to have been destroyed due to the same fire in the warehouse. Hence, the AO made a total disallowance of Rs.35,24,405/- (Rs.15,66,973/- on account of loss of stock by fire and Rs.19,67,432/- on account of fixed assets destroyed by fire).

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 3.2 On appeal, the ld. CIT(A) observed that the assessee’s stock was comprising luxury footwear, garments, accessories, handbags etc; stored in the warehouse which were damaged in the fire. All the stock was burnt in fire, and the assessee has raised its claim with the insurance company for Rs.1,18,13,228/- of which it received Rs.1,02,46,255/- and the balance of Rs.15,66,973/- ( that is, Rs.1,18,13,228 - Rs.1,02,46,255) which was claimed by the assessee as business loss in its return of income. The AO had denied this claim holding that certain basic details were not filed before him. The AO had also denied the loss on account of capital asset of Rs.19,67,432/- which was claimed by the assessee to have been destroyed in that fire. Having discussed the facts of the assessee’s case, the ld. CIT(A) observed that there was fire in the assessee`s business premises and for that there were evidences in the form of filing of FIR and surveyors reports certifying that the incident had taken place on 31.03.2011 at 12.30 am. The ld. CIT(A) also noted that if this loss is not considered for the current year then it has to be allowed in the next year. Therefore, the primacy should be with regard to the actual claim of loss of stock of Rs.15,66,973/- claimed by the assessee. The ld. CIT(A) noted that the said loss was debited in Profit &Loss account which was denied by the insurance company. The claim made and allowed by the insurance company as per surveyors report dated 28.06.2011 was to the tune of Rs.1,02,46,255/-. The ld. CIT(A) noted that insurance company had granted the insurance cover to the extent of Rs.1,02,46,255/- after making statutory deductions as applicable and assessee claimed the balance loss which was denied by the Insurance company. The ld. CIT(A) held that for balance loss of Rs.15,66,973/- which was not recovered from the insurance company, was not a book loss. The ld. CIT(A) held that statutory disallowances as per policy of insurance company cannot be treated as book loss andassesseecan not claim for income tax purposes therefore, he confirmed the addition made by the AO at Rs.15,66,973/-.

3.3 With regard to the loss of fixed assets of Rs.19,67,432/-, the ld. CIT(A) observed that assessee has failed to prove that the said assets, which were Page | 3

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 claimed to have been destroyed in the fire were situated at the fire incident place and were really destroyed in the fire, was not clarified either before the AO or before him during the appellate proceedings. Therefore, the ld. CIT(A) confirmed the addition of Rs.19,67,432/-.

3.4 Not being satisfied with the order of the ld. CIT(A), the assessee is in further appeal before us.

The ld. Counsel for the assessee submitted before us that assets were located at the fire incident place and the assessee had claimed the loss on disposal of fixed asset at Rs.84,120/- which was disallowed by the assessee suo moto in his computation of income from business or profession(vide PB- 97). The ld. Counsel for the assessee drew our attention towards the fixed assets schedule which is part of the financial statement for A.Y 2011-12 wherein details of fixed assets were given (vide PB-106). The ld. Counsel submitted before us that loss by fire whether it may be loss of stock or loss of fixed assets should be considered as business loss which is incurred by the assessee during the course of doing business. Since the stock and the fixed assets were burnt in the fire and assessee has received compensation from the insurance company and claimed that the losses which were not compensated by the insurance company should be allowed as deduction. The fact, that the insurance company compensated the assessee, proves that there was fire in the business premises of the assessee. The ld. counsel also pointed out that insurance company clearly concerned with the cost of the stock or fixed assets and insurance amount evaluated with respect to the cost of the stock. The insurance company does not compensate the entire loss because there are some statutory deductions and the amount which is not compensated, is claimed by the assessee as business loss. The ld. Counsel for the assessee submitted before us that assessee has lodged FIR in the police station. The assessee immediately lodged the claim before the insurance company and the insurance company compensated the losses and the fact that insurance company has compensated the losses means fire Page | 4

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 had occurred in the godown of the assessee and, therefore, the assessee is entitled to claim the loss which is occurred during the course of business.The ld. Counsel for the assessee has relied on the judgments of Hon’ble Delhi High Court in the case of M.S. Chawla & Co. vs. Inspecting ACIT (1993) 45 ITD 98 wherein it was held that insurance company had compensated partly that losses suffered by assessee on account of riots resulted in fire damage in building and electrical fittings, the High Court held that such losses could be allowed as deduction u/s 37(1) of the Act. Therefore, the Counsel for the assessee prayed the Bench that loss of stock by fire and loss of fixed assets by fire, both, should be allowed as business loss or expenditure.

3.5 On the other hand, Ld. DR for the Revenue has primarily reiterated the stand taken by the AO which we have already noted in our earlier para and is not being repeated for the sake of brevity.

3.6 We have given a careful consideration to the rival submissions and perused the materials available on record, we note that assessee has lodged FIR and filed claim before the insurance company and the insurance company compensated the loss to the tune of Rs. 1,02,46,255/-. This clearly evidences that there was a fire in the assessee`s business premises. The report of the surveyors was submitted before the insurance company and the insurance company compensated the losses after making certain statutory deductions. The balance amount which was not compensated by the insurance company should be treated as a business loss either u/s 28 of the Act or u/s 37 of the Act because the same has occurred while doing the business. The assessee under consideration follows mercantile system of accounting and the fire occurred during the current year and the assessee passed the entry in its books of account, therefore, the loss should be allowed in the current year under consideration. We also rely on the judgment of Hon’ble Delhi High Court in the case of M.S. Chawla & Co. vs. Inspecting ACIT (1993) 45 ITD 98 (Del) (supra), wherein it was held that insurance company had compensated partly that losses suffered by Page | 5

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 assessee on account of riots resulted in fire damage in building and expenses on electrical fittings, replacement of damaged furniture etc, such losses which were not compensated by insurance company, could be allowed as deduction u/s 37(1) of the Act.

We also note that assessing officer has not disputed the existence of the fixed assets in the business premises of the assessee and in the balance sheet of the assessee. The assessing officer failed to adduce any evidence on record that these fixed assets were not burnt in fire.

Therefore, we are of the view that the stock loss which was not compensated by the insurance company and the fixed assets destroyed in the fire, both,are business loss, incurred by the assessee while doing business and the assessee is entitled to claim such losses, therefore, we delete both the additions of Rs.35,24,405/-( that is, Rs.15,66,973/- on account of loss of stock by fire and Rs.19,67,432/- on account of fixed assets destroyed by fire).

3.7. In the result, the appeal filed by the assessee (in Ground No.1 and Ground No.2),are allowed.

4.1The brief facts apropos this issue are that the assessee has earned dividend income, during the year to the tune of Rs.37,63,537/- and disallowed suo-moto Rs.1,95,659/- u/s 14A read with rule 8D of the Rules. The AO asked the assessee to submit the details of disallowance under section 14A of the Act. The assessee, vide its letter dated 24.02.2014, submitted a working of disallowanceunder rule 8D of the Rules. However, the assessing officer rejected the contention of the assessee and computed the disallowance under rule 8D, which is given below: Page | 6

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 8D(2)(i) NIL Interest expenses(A) =Rs.21713541/- 8D(2)(ii) Average Investment (B) = (Rs.6,34,88,097/-)/2 = Rs.31744049/- Average Asset [Fixed Assets + Net Current Assets] (C) Rs.15,32,538 =(Rs.320175583 + Rs.579346305)/2 =Rs.449760944/- A×B÷C = (Rs.21713541/- × Rs.31744049/- ÷449760944/-) 0.5% of Rs. 31744049/- 8D(2)(iii) Rs.1,58,720 Total Disallowance u/s 14A Rs.16,19,258/- 4.2 On appeal, the ld. CIT(A) observed that the issue under consideration is the quantum of disallowances worked out based on rule 8D of the I.T Rules. With regard to working of Rule 8D(2)(i), as the AO had not made any disallowance, therefore, there was no grievance on this count. With regard to rule 8D(2)(ii), the ld. CIT(A) observed that even though the assessee has objected the applicability of Rule 8D(2)(ii), but he has not given any satisfactory explanation that why the interest of Rs.2,17,13,541/- and average investment of Rs.3,17,44,049/-, taken by the AO were wrong, as the funds were from a common pool and the funds cannot be separated. The ld. CIT(A), however,directed the AO to rework the disallowance by taking the average total assets before the liabilities as per the balance sheet, and the working of Rule 8D(2)(ii) was required modification. With regard to Rule 8D(2)(iii), the ld. CIT(A) noted that the decision ITAT, Delhi in the case of Escorts Ltd, 102 TTJ 522, is applicable, wherein the Tribunal held that indirect management and administration expenses qualify for disallowance u/s 14A. The ld. CIT(A) also noted that the similar view was also taken by ITAT Chennai in the case of Southern Petrochemical Industries (93 TTJ) 161) wherein it was held that decision making process is very complicated and requires very careful analysis. The assessee had to keep track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. That activity itself called for considerable management attention and could not be Page | 7

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 left to a junior clerk.This way, the ld. CIT(A) allowed the assessee’s appeal partly. 4.3 Not being satisfied with the order of the ld. CIT(A), the assessee is in appeal before us. At the outset, the ld. Counsel for the assessee has submitted that the assessee has its own sufficient funds which were more than the investment made during the year. The details of these investments are given below: Particulars F.Y 2009-10 F.Y 2010-11 Share Capital(A) 26,110,090 44,458,970 Reserves & Surplus(B) 86,534,994/- 165,827,862 Total own funds(C) (A+B) 112,645,084 210,286,832 Investment made during the 63,488,097 year The ld Counsel submitted that from the above table, it is abundantly clear that the amount of own funds with the assessee were more than sufficient to cover the investment and that no amount of borrowings were utilized for investments and thus no cost was incurred in respect of the purchase of such mutual funds. To support his plea, the Counsel for the assessee relied on the following decisions wherein it was held that if the own funds are more than the investment made, no disallowance can be made under rule 8D(2) (ii):  CIT v. HDFC Bank Ltd. – 366 ITR 505 (bom)(HC)  CIT v. Gujarat Narmade Valley Fertilizers Co. Ltd. – 221 Taxman 479 (Guj) (HC)  CIT v. Amod Stamping (P) Ltd. – 223 taxmann 256(GUJ)(HC)  CIT v. Gujarat State Fertilizers & Chemicals Ltd. – 358 ITR 323(Guj) (HC)  CIT v. Torrent Power Ltd. 363 ITR 474(Guj) (HC)  CIT v. Hitachi Home & Life Solutions (I) Ltd. 221 Taxman 109(Guj) (HC)

In view of the above,the counsel submitted before us that disallowance u/s 14A r.w.r 8D was not warranted since the assessee had sufficient own funds as compared to the investment made during the previous year 2010-11 relevant to the A.Y 2011-12.Apart from this the ld. Counsel for the assessee also relied on the judgment of Hon’ble ITAT, Page | 8

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 Mumbai in the case of Sajjan India Ltd. vs. Addl. CIT in [2018] 89 taxmann.com 21 (Mumbai-Trib.) wherein it was held thatonly those investments are to be considered for computing average value of investment which yielded exempt income during the year.

4.4 On the other hand, Ld. DR for the Revenue has primarily reiterated the stand taken by the AO which we have already noted in our earlier para and is not being repeated for the sake of brevity.

4.5 We have given a careful consideration to the rival submissions and perused the materials available on record, we note that assessee has its own capital, reserves and surplus which are more than the investments. Therefore, the presumption is that the assessee must have made the investments out of its own capital and, therefore, disallowance u/r 8D(2)(ii) is not required. We rely on the judgment of Hon’ble Bombay High Court in the case of Reliance Utilities Power Ltd. 313 ITR 340 (Bom) and HDFC Bank Limited (2016) 67 taxmann.com 42(Bom. HC) wherein it was held that assessee has invested its own interest free funds for making investments, therefore, no addition u/r 8D(2)(ii) is required.

However, we note that so far disallowance u/r 8D(2)(iii) is concerned it is applicable to the assessee’s case under consideration as the assessee must be incurring administrative expenses to take investment decisions, like when to buy, when to sell investments or some investments are to be retained for long time for strategic reasons etc. However, we also note that disallowance u/r 8D(2)(iii) should be made only taking into account dividend bearing securities and for that we rely on the judgment of Coordinate Bench of ITAT, Kolkata in the case of REI Agro Ltd. 144 ITD 141 wherein it was held that disallowance should be made by taking the average investments and those securities on which the assessee is getting dividend, that is, dividend bearing Page | 9

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 securities only. We also rely on the judgment of Coordinate Bench ITAT, Mumbai in the case of Sajjan India Ltd. vs. Addl. CIT in [2018] 89 taxmann.com 21 (Mumbai-Trib.) (supra) wherein it was held thatonly those investments are to be considered for computing average value of investment which yielded exempt income during the year.

Therefore, we delete the addition u/r 8D(2)(ii) as the assessee has own funds which are more than the investments and for addition u/r 8D(2)(iii), we direct the AO to compute the disallowance only taking interest bearing securities, as discussed (supra).

4.6 In the result, the appeal filed by the assessee (Ground No.3) is allowed for statistical purposes.

5.Ground No.3 relates to penalty on account of late filing fee towards service tax return at Rs.16,000/- 5.1 The brief facts apropos this issue are that the assessing officer, during the assessment proceedings, noticed in Column 17(e) of Form No.3CD, submitted by the assessee that there was a penalty of Rs.16,000/- included in the expenditure claimed in the Profit & Loss account. The AO treated this penalty being a penal in nature and added back to the income of the assessee.

5.2 On appeal, the CIT(A) confirmed the penalty imposed by the AO. Not being satisfied with the order of the ld. CIT(A), the assessee is in appeal before us. The ld. Counsel for the assessee submitted before us that the assessee paid penalty on account of late filing of service tax return, which is compensatory in nature and not penal in nature and the additions made by the AO, therefore, should be deleted. On the other hand, Ld. DR for the Revenue has primarily reiterated the stand taken by the assessing officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

Major Brands (India) Pvt. Ltd. Assessment Year: 2011-12 5.3 We have heard both the parties and perused the materials available on record, we note that the penalty paid by the assessee on account of late filing of service tax return are compensatory in nature and not penal in nature and, therefore, we delete the addition made by the AO and confirmed the ld. CIT(A).

5.4 In the result, the appeal filed by the assessee (Ground No.4) is allowed. Order is pronounced in the open court on 27.02.2018.

Sd/- Sd/- (C. N. PRASAD) (DR. A.L.SAINI) न्यधनयक सदस्य / JUDICIAL MEMBER ऱेखध सदस्य / ACCOUNTANT MEMBER Place: Mumbai Dated 27/02/2018 (RS, SPS) आदेशकीप्रनिलऱपपअग्रेपषि/Copy of the Order forwarded to : अपीऱाथी/ The Appellant –Major Brands (India) Pvt. Ltd. 1. प्रत्यथी/ The Respondent-ACIT-5(2), Mumbai 2. आयकरआयुक्त(अपीऱ) / The CIT(A), 3. 4. आयकरआयुक्त/ CIT 5. DR, ITAT, गार्डफाईऱ / Guard file. 6.