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Income Tax Appellate Tribunal, “B” Bench, Mumbai
Before: Shri B.R. Baskaran (AM) & Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the assessee is directed against the order dated 14.9.2011 passed by the Assessing Officer u/s. 143(3) read with section 144C(13) of the Act and it relates to A.Y. 2007-08.
The assessee is engaged in the business of manufacturing of insecticides and other chemicals used for plant protection purpose.
First issue urged by the assessee relates to disallowance of club membership fees of Rs. 1,13,475/-. The Assessing Officer noticed that the assessee has incurred a sum of Rs. 10,94,202/- as club expenses which included annual subscription charges of Rs. 9,80,727/- and cost of services of Rs. 1,13,475/-. The Assessing Officer proposed to disallow entire amount. However, learned DRP held that entrance fees and annual subscription charges amounting to Rs.9,80,727/- is allowable as deduction. For this purpose, learned DRP placed reliance on the decision rendered by Hon'ble Bombay High Court in the case of Otis Elevator Co. (India) Ltd. Vs. CIT (195 ITR 682) and CIT Vs. Samtel Color Ltd. (326 ITR 425)(Del). With regard to cost of services of Rs. 1,13,475/-, learned DRP noticed that the assessee did not furnish any specific evidence to show that the same was incurred for the business purposes. Accordingly, learned DRP sustained the disallowance of Rs. 1,13,475/-.
Learned AR submitted that the matter may be restored to the file of the Assessing Officer in order to find out whether the above said sum of Rs. 1,13,475/- were incurred by the employees for business purpose or not. Learned DR did not object to the plea putforth by learned AR.
Having regard to the submissions made, we restore this issue for examining the claim of Rs. 1,13,475/- to the file of the Assessing Officer. The assessee is directed to furnish necessary details relating to this expenditure. After considering the same, the Assessing Officer may take appropriate decision in accordance with law.
The next issue contested by the assessee relates to disallowance made u/s. 14A of the Act.
During the year under consideration, the assessee received dividend income of Rs. 313.32 lakhs and claimed the same as exempt. The assessee, however, did not disallow any amount u/s.14A of the Act. The Assessing Officer proposed to invoke provisions of Rule 8D for computing disallowance u/s. 14A of the Act. The assessee submitted that the investments have been mainly made in its subsidiary and associates companies and further own funds available with it is in far excess of value of investments. The assessee also submitted that it has incurred a sum of Rs. 4,35,000/- as administrative cost for treasury activity of the company. Accordingly, the assessee submitted before the Assessing Officer that disallowance may be restricted to Rs. 4,15,000/-. The Assessing Officer did not accept the same and he proposed to compute disallowance as per Rule 8D. However, learned DRP partially accepted the contentions of the assessee. Accordingly, the Assessing Officer computed the disallowance under Rule 8D at Rs.10.55 lakhs. The Learned AR submitted that own funds available with the assessee is in far excess of value of investments and hence as per the decision rendered by Hon'ble Bombay High Court in the case of HDF Bank Ltd. (366 ITR 505), no disallowance out of interest expenditure is called for. He submitted that the Assessing Officer has computed the disallowance out of interest expenditure at Rs.5,57,455/-, which needs to be deleted. The Learned AR submitted that the Assessing Officer has computed the disallowance out of administrative expenses at Rs. 4,98,008/- as per provisions of Rule 8D(iii). He submitted that the provisions of Rule 8D is not applicable to the year under consideration as per decision rendered by Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (328 ITR 81). He submitted that the assessee has made investments mainly in the subsidiary and associate concerns and also in the units of mutual funds. Accordingly he submitted that the disallowance of Rs. 4.15 lakhs offered by the assessee would meet the requirements of section 14A of the Act. He further submitted that AO had made identical addition in AY 2006- 07 in the hands of the assessee, but entire addition has been deleted by the ITAT, vide its order dated 25.5.2016 passed in ITA No. 7978/Mum/2010.
We heard learned DR and perused the record. We noticed that the assessee has made investment mainly in the units of mutual funds and also in the subsidiary companies. Further the Hon'ble Bombay High Court has held in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) that provisions of Rule 8D will not apply to A.Y. 2007-08 and earlier years. However, the Hon'ble Bombay High Court has held in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) that disallowance u/s. 14A of the Act has to be computed in reasonable manner for A.Y. 2007-08 and earlier years. We also notice that the own funds available with the assessee was Rs.28662/- lakhs and Rs.33500/- lakhs respectively as on 1.4.2006 and 31.3.2007. The investments held by the assessee on those dates were Rs.400 lakhs and Rs.1591/- lakhs respectively. Hence there is merit in the contentions of the assessee that there is no requirement for making any disallowance out of interest expenditure as per the decision rendered by Hon’ble Bombay High Court in the case of HDFC Bank Ltd (supra). There is no direct expenses liable to be disallowed u/s 14A of the Act. The assessee submitted that the expenditure incurred for its treasury division was Rs. 4,35,000/- only. Hence disallowance, if any, is required to be made out of administrative expenses only. Hence, in the facts and circumstances of the case, we are of the view that the disallowance of Rs.4.15 lakhs offered by the assessee u/s. 14A of the Act for the year under consideration would meet the requirement of section 14A of the Act. Accordingly, we set aside the order passed by the Assessing Officer on this issue and direct him to restrict the disallowance u/s. 14A of the Act to Rs.4.15 lakhs.
The next issue urged by the assessee relates to “Product trial expenses” of Rs. 292.03 lakhs claimed by the assessee. The Assessing Officer disallowed the same by holding that the product trial expenses incurred by the assessee are capital in nature and hence not allowable u/s. 37(1) of the Act. Before learned DRP, assessee relied on following case laws in order to contend that the product trial expenses are revenue in nature. ACIT Vs. Medicamen Biotech (1SOT 347) (Del) DCIT Vs. Max India Ltd. (105 TTJ 1002)(Asr) Escorts Ltd. Vs. ACIT (104 ITD 427)(Del) CIT Vs. Kerala State Industrial Development Corporation Ltd. (182 ITR 62)
The assessee also contended that it has incurred expenses towards making payment to approved scientific research associations for conducting test of the product manufactured by the assessee. Accordingly, the assessee claimed that the payments so made to the approved scientific research associations are eligible for weighted deduction @ 125% u/s. 35(1)(ii) of the Act. Learned DRP was convinced with the contentions of the assessee and accordingly gave following directions:- 9.4 DRP has carefully considered the facts of the case, the AO's findings and observations and the assessee’s submissions including the case law cited above. Considering that the expenditure incurred is only in the course of existing business and existing line of business, and that the product trial runs does not bring into existence any new business asset [as the tested product may or may not be introduced in the market) and the nature of expenditure being only the testing the toxicity and the suitability for application in the Indian market and expenditure also includes contributions/payments made to approved scientific research institutions, DRP is of the view that the expenditure incurred is revenue in nature. All the four decisions cited above fully support such view. The expenditure incurred is allowable as deduction either under section 35(l)(ii) to the extent the relevant conditions are fulfilled and the balance as deduction u/s.37. Hence the assessee's claim for deduction is approved. The proposed addition should be dropped/deleted
The grievance before us is that the Assessing Officer did not grant weighted deduction as per provisions of section 35(1)(ii) of the Act, i.e., he has allowed the claim u/s 37(1) of the Act. We noticed that learned DRP has directed the Assessing Officer to examine the claim of the assessee u/s. 35(1)(ii) of the Act. However, we do not find any discussion about the same in the assessment order passed by the Assessing Officer. Accordingly, we restore this issue to the file of the Assessing Officer with the direction to examine the claim of the assessee for weighted deduction u/s. 35(1)(ii) of the Act in terms of provisions of that section by affording adequate opportunity of being heard.
The next issue contested by the assessee relates to disallowance of gift expenses. The assessee claimed a sum of Rs. 15.56 lakhs as gift expenses in respect of gifts given to the employees, dealers, customers and business associates and also nominal gifts given to the Government officials in the form of sweet boxes on various festival occasions. The Assessing Officer disallowed the same on the reasoning that there is no commercial expediency in giving gifts and further gifts given to the Government officials are not allowable as per section 37 of the Act.
Before learned DRP, the assessee placed reliance on following decisions to contend that after deletion of section 37(2) entertainment expenditure is allowable as deduction.
Punjab Power packs Ltd. Vs. DCIT (71 ITD 163) CIT Vs. Varinder Agro Chemicals Ltd. (205 CTR 334)(P&H)
Learned DRP noticed that the customary gifts given the on the occasion of festivals of reasonable nature has been held to be allowable in the above said two cases. Since the assessee did not furnish details of gift expenses, learned DRP directed the Assessing Officer to allow 25% of the claim of Rs.15.56 lakhs and disallow remaining amount. Accordingly, the Assessing Officer disallowed a sum of Rs. 11.67 lakhs and the assessee is aggrieved by the same.
We heard the parties and perused the record. Learned AR submitted that the gifts given by the assessee to its employees, dealers and business associates on a customary basis during festivals in order to promote cordial relationships, which in turn would promote business of the assessee. He submitted that it is a marketing strategy followed by the assessee and hence the expenditure is allowable as deduction. The Learned AR agreed that nominal gifts given to the Government officials in the form of sweet boxes may be disallowed.
We heard learned DR and perused the record. It has been held in the case of Varinder Agro Chemicals Ltd. (supra) that customary gifts of reasonable nature given on the occasion of festivals can be allowed as deduction. We noticed that learned DRP has directed the Assessing Officer to allow only 25% of the amount claimed by the assessee. In our view, the same appears to be very low, since major portion of gifts have been given to employees and customers. However, Gifts given to the Government officials are against the provisions of law and hence the same is required to be disallowed. Hence, on conspectus of the matter, we are of the view that the disallowance may be restricted to 20% of the amount of Rs. 15.56 lakhs. Accordingly, we modify the order passed by the Assessing Officer and direct him to restrict the disallowance to 20% of Rs. 15.56 lakhs.
Other grounds relating to levying of penalty and interest are consequential in nature.
In the result, appeal filed by the assessee is treated as partly allowed.
Order has been pronounced in the Court on 16.02.2018.