DCIT, CIR-10(2), KOLKATA, KOLKATA vs. M/S PHILIPS CARBON BLACK LTD., KOLKATA

Since the issues raised in both the appeals are on identical facts and circumstances, we proceed to hear both the appeals together and dispose of the same by a consolidated order with the consent of both the parties for the sake of convenience.

We find that the assessee on its own made disallowance of Rs.2,25,833/- for the purpose of section 14A. The AO made disallowance

The CIT-A considered that the assessee having its own fund which is more than the investment and as such deleted the said disallowance of Rs. 1,16,08,167/- for the A.Y 2009-10 & Rs.1,58,30,500/- for the A.Y 2010-11. He also held that suomotu disallowance made by the assessee is reasonable and as such deleted both the disallowances made thereon for the purpose of section 14A.

The ld. DR relied on the orders of AO.

On the other hand, the ld. AR placed his reliance on the order dt. 31-07-2017 of Co-ordinate Bench of ITAT, Kolkata in the case of DCIT Vs. Century Ply Boards (I) Ltd in ITA No. 1873/Kol/2014 and referred to para 20.1 of the said order at page 43 of the paper book, which reads as under:- 20.1 Now coming to the disallowance made by the AO under rule 80(2)(iii) of the Rules, we find that Ld. CIT(A) has given direction to AO to consider only those investments which have yielded the dividend income during the year after having reliance in the order of Co-ordinate Bench of this Tribunal in the case of REI Agro Ltd. (supra) in ITA NO.1331/Ko1l2011 which was subsequently affirmed by the Hon'ble jurisdictional High Court. In the light of above reasoning, we hold that the order of the Ld. CIT(A) is correct and in accordance with law and no interference is called for. Accordingly, we uphold the same. This ground of Revenue's appeal is dismissed.”

We find that the CIT-A held that the assessee has shown capital reserve fund more than the investments made. Therefore, it is to be presumed that such investment made out of its own fund and, the disallowance made under Rule 8D(2)(ii) of the IT Rules, 1962 is not maintainable and we confirm the impugned order of the CIT-A.

As regards the disallowance under Rule 8D(2)(iii) of the IT Rules, 1962, the Co-ordinate Bench of ITAT, Kolkata in the case of DCIT Vs. Century Ply Boards (I) Ltd in ITA No. 1873/Kol/2014 for the A.Y 2010-11, directed the AO to make disallowance in respect of investments that had yielded exempt income by placing reliance on the order of the Hon’ble High Court of Calcutta in

In view of above, we find no infirmity in the impugned orders of CIT-A and are is justified. Ground no. 1 raised by the revenue in ITA Nos. 1274/Kol/2015 & 1274/Kol/2015 for the A.Ys. 2009-10 & 2010-11 are dismissed. Ground no. 2 in A.Y 2009-10 Ground no. 3 in A.Y 2010-11

Ground no.2 raised by the revenue for the A.Y 2009-10 & ground no. 3 raised by the revenue for the A.Y 2010-11 are relating to deletion of disallowance of 25% of air craft flying right charges.

The ld. DR relied on the orders of the AO.

The ld. AR submits that the issue in hand is covered by the order dt. 12-08-2016 in assessee’s own case for the A.Ys 2006-07 & 2008-09 in ITA Nos. 2123 & 2124/Kol/2013 and referred to paras 12 to 17 of the order dt. 12-08-2016 at pages 6-8 of the paper book.

After hearing both the parties, we find that the issue in hand is covered by the order dt. 12-08-2016 in asessee’s own case for the A.Ys 2006-07 & 2008-09. Relevant portion of which is reproduced herein below:- “12. Ground no.2 raised by the revenue is as under:- 2. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that expenditure of Rs. 85,00,000/- as flying rights charge was allowable business expenditure on the basis of decision of the CIT(A)-XXXIV, Kolkata in assessee's own case for Asst year 2005-06, when the said decision is challenged before the Hon'ble ITAT, Kolkata? 13. Brief facts of this issue are that the AO during the course of assessment proceedings found that the assessee company had incurred aircraft rent amounting to Rs.3,40,00,000/- and the same was claimed as an expenditure in the return. The assessee has made the following submission in support of its claim.

In view of above, we find no infirmity in the impugned orders of the CIT-A. Ground nos. 2 & 3 raised by the revenue in their respective appeals for the A.Ys 2009-10 & 2010-11 are dismissed. Ground no. 3 in A.Y 2009-10 Ground no. 4 in A.Y 2010-11

Ground nos. 3 & 4 for the A.Ys 2009-10 & 2010-11 raised by the revenue are relating to allowability of retainer ship fees paid to M/s. Sreebala P.Ltd.

The ld. AR submits that this issue is covered by the order dt. 12-08- 2016 in assessee’s own case for the A.Ys 2006-07 & 2008-09 in ITA Nos. 2123 & 2124/Kol/2013 and referred to paras 18 to 23 at pages 8-10 of the paper book.

On the other hand, the ld. DR did not controvert the same and did not bring on record any material contrary to the above.

After hearing both the parties, we find that the issue in hand is covered by the order dt. 12-08-2016 in asessee’s own case for the A.Ys 2006-07 & 2008-09. Relevant portion of which is reproduced herein below:- “18. Ground no.3 raised by the revenue is as under:- 3. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that expenditure of Rs.12,26,700/- as retainer-ship fee was allowable business expenditure when the A.O made the addition on the ground that the: track record of the party to render such service was not known ? 19. The AO found that the assessee had made payments of Rs.12,26,700/- to M/s. Sreebala P.Ltd. The assessee has made the following submissions:- "During the previous year, retainership fees amounting to Rs.12267001- was paid to M/s Sreebala Pvt Ltd. The aforesaid party catered to the customers in the non-tyre segment, which are widely scattered, and are in large numbers, and for which purposes the assessee company appointed Sreebala (P) Ltd as their consultant for market development in the non-tyre segment for sale of carbon black in Eastern India since 1994. The role of the party envisages identification of the customers, procurement of the orders from these customers, coordinating supplies and arranges collection from these parties. The payments to the party have always been made by account payee cheques. The details of payments made to M/s. Sreebala Pvt. Ltd are attached herewith. We also attach herewith copy of the renewal agreement with the aforesaid party.” 20. The AO after considering the above submissions of the assessee being similar payments made in AY 2005-06 disallowed the amount of Rs.12,26,700/- for the assessment year under consideration and added back the same to the total income of the assessee. 21. On first appeal, the CIT-A found that the issue of allowability of payment of retainership/consultancy charges paid to M/s. Sreebala P.Ltd came up before the ITAT, Kolkata in assessee’s case in a.y 1996-97 and 1997-98. The Tribunal vide its order dated 26-7-04 in ITA Nos. 720 & 747/Kol/03 held that the payments made to M/s. Sreebala P.Ltd were allowable as business expenses. He further found that the Tribunal in assessee’s own case for AY 1998-99 in ITA No. 232/K/04 dated 05.05.05 and for AY 1999-2000 in ITA No.1818/K/05 dtd. 30.01.06 followed its earlier order for AY 1996-97 and 1997-98 and allowed the claim of assessee regarding retainership fees paid to M/s. Sree Bala P.Ltd The disallowance in AY 2003-04 and 2004-05 was deleted by the CIT(A). The Tribunal in ITA No.1447/Kol/06 dated 22.09.06 and ITA No.566/K/09 dated 10.06.11 had upheld the orders of the CIT(A) deleting the said disallowance. The CIT-A relying on order of Tribunal and following his earlier orders deleted the disallowance being treating as business expenditure 22. Aggrieved by such order of the CIT(A) now the revenue is in appeal before us by raising the above mentioned ground. 23. At the time of hearing before us, the assessee submits that the issue involved in this ground is squarely covered in favour of assessee and against the revenue by the order of the Hon’ble Calcutta High Court dated 30th October, 2014 in GA No.1382 of 2014/ITAT 31 of 2014, wherein the revenue’s appeal was dismissed by upholding the order dated of the Tribunal in ITA No. 235/Kol/2012 for the AY 2005-06.

In view of above, we find no infirmity in the impugned orders of the CIT-A. Thus, ground nos. 3 & 4 for the A.Ys 2009-10 & 2010-11 raised by the revenue are dismissed.

Ground nos. 4 & 5 raised by the revenue for the A.Y 2009-10 is relating to disallowance of 25% towards guest house expenses.

The ld. AR submits that the issue in hand is covered by the order dt. 12-08-2016 in assessee’s own case for the A.Ys 2006-07 & 2008-09 in ITA Nos. 2123 & 2124/Kol/2013 and referred to paras 24 to 29 at pages 10 -11 of the said order.

On the other hand, the ld. DR did not controvert the same and did not bring on record any material contrary to the above.

After hearing both the parties, we find that the issue in hand is covered by the order dt. 12-08-2016 in assessee’s own case for the A.Ys 2006-07 & 2008-09. Relevant portion of which is reproduced herein below:- “24. Ground no.4 raised by Revenue reads as under:- Whether Ld CIT(A)-XII, Kolkata. was justified in holding that expenditure of Rs. 19,33,576/- as 25/'0 of Guest House Expenses was allowable business expenditure on the basis of decision of the Hon'ble ITAT, Kolkata in assessee's own case for Asst year 2000-01 and 2001-02, whereas the Hon'ble Mumbai ITAT in the case of New India Extrusion Ltd -vs- CIT [46 SOT Mum (10 Taxman 165) held the issue in favour of revenue? 25. During the assessment proceedings the AO found that the assessee filed the details of miscellaneous expenses along with Tax Audit Report, wherein it was observed that the assessee has incurred expenditure on guest house of Rs.77,34,306/-. The AO, that being nature of expenses as was in AY 2005-06, disallowed 25% of the total expenses of Rs.19,33,576/- and added the same to the total income of the assessee. On 1st appeal, the CIT-A following the order dt: 29-07-2005 of Tribunal in ITA 26. 1071/Kol/2005 deleted the said disallowance. 27. Aggrieved by such order of the CIT(A) now the revenue is in appeal before us by raising the above mentioned ground. 28. At the time of hearing before us, the assessee submits that the issue in hand is squarely covered in favour of assessee and against the revenue by the order of the Hon’ble Jurisdictional Calcutta High Court vide order dated 23-02-2012 & 30-10-2014 in GA Nos. 276 of 2012 & ITAT 12 of 2012 & 1382 of 2014/ITAT 31 of 2014 (in ITA No.235/Kol/2012 for the AY 2005-06), wherein the revenue’s appeal was dismissed by upholding the order dated 13th November, 2013 of the Tribunal in ITA No. 235/Kol/2012 for the AY 2005-06 on similar issue. The Ld.

In view of above, we find no infirmity in the impugned order of the CIT-A. Thus, ground nos. 4 & 5 for the A.Y 2009-10 raised by the revenue are dismissed.

Ground no. 6 is relating to allowability of licence fees paid to M/s. RPG Enterprises Ltd.

The ld. AR submits that the issue in hand is covered by the order dt. 12-08-2016 in assessee’s own case for the A.Y 2008-09 in ITA No. 2124/Kol/2013 and referred to paras 32 to 37 of the said order at page 12-14 of the paper book.

On the other hand, the ld. DR did not controvert the same and did not bring on record any material contrary to the above.

After hearing both the parties, we find that the issue in hand is covered by the order dt. 12-08-2016 in asessee’s own case for the A.Ys 2006-07 & 2008-09. Relevant portion of which is reproduced herein below:- “32. Ground no.4 raised by revenue reads as under:- 4. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that expenditure of Rs. 2,91,00,000/- as Licence Fee paid to RPG Enterprise was allowable business expenditure on the basis of decision of the Hon'ble ITA T, Kolkata in assessee's own case for Asst year 2004-05, whereas the Revenue has filed appeal before the Hon'ble ITAT, kolkata against the CIT(A)'s decision on same issue for Asst year 2004-05 ?

In view of above, we find no infirmity in the impugned order of the CIT-A. Thus, ground no.6 for the A.Y 2009-10 raised by the revenue is dismissed.

Ground no’s. 7 & 8 are relating to allowability of unrealized loss on foreign exchange fluctuation.

The ld. DR relied on the order of the AO. On the other hand, the ld.AR submits that the issue in hand is covered in favour of assessee by the decision of the Hon’ble Supreme Court in the case of Woodward Governor India Pvt. Ltd reported in 312 ITR 254(SC). The Co-ordinate Bench of this Tribunal in the case of Dhunseri Petrochem & Tea Ltd (ITA No. 1224/Kol/2014 dt. 03-05-2017) & Hindustan Gum & Chemicals Ltd (ITA Nos. 462 & 752/Kol/2014 dt. 08-03-2017 followed the principle

Heard rival submissions and perused the record including the paper book. It is noticed that the assessee claimed loss of Rs.46.58 crores on account of foreign exchange fluctuation. We noticed that the assessee has shown gain in its profit & loss account on account of foreign exchange fluctuation for the A.Y 2010-11 and the AO assessed the same as income on account of forward contract gain, in the same way, in our opinion, the AO should have taken the loss due to unrealized forward contract for the A.Y under consideration as real loss. The CIT-A held the same as real loss and the assessee is entitled to claim as deduction. We find that similar issue on identical facts and circumstances, this Tribunal has decided the issue by placing reliance on the decision of the Hon’ble Supreme Court in the case of Woodward Governor India Pvt. Ltd supra , wherein held that loss recorded due to foreign exchange fluctuation is an allowable deduction. Relevant portion of the order dt. 03-05-2017 is reproduced herein below for better understanding:- paras 18 to 20 of the said order at page 49 to 51 of the paper book. “18. We have heard rival contentions and perused the materials available on record. From the aforesaid discussion, we find that the AO treated the loss arising on account of forward contracts in foreign currency which has not been settled in the year under consideration as notional loss. However the ld. CIT(A) allowed such loss having reliance on judgment of the Hon’ble Delhi High Court in the case CIT Vs Woodward Governor India Ltd. reported in 294 ITR 451. In rejoinder ld. DR stated that the said judgment of the Hon'ble Delhi High Court was delivered much earlier whereas the Instruction No. 3/2010 was issued dated 23.03.2010. Thus the instruction issued by the CBDT was not considered by the Hon'ble Delhi High Court. However, we find that the instructions issued by the CBDT are not binding on the Courts. So there is no value in the argument of the ld. DR. However, we disagree with the view of the AO on the ground that the adjustment was made by the assessee in terms of AS 11 issued by ICAI and in pursuance of mercantile system of accounting as notified u/s 145 of the Act. The relevant extract of Accounting Standard 11 is reproduced below:- “3.6 The Accounting Standards (A) 11, the Effects of changes in Foreign Exchange Rates (revised 2003), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2004. Relevant extract of the Accounting Standard is reproduced as follows:- ‘9. A foreign currency transactions should be recorded on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transactions. 10… 11 (a) At each balance sheet date foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realized from, or required to disburse, a foreign currency monetary item at the balance sheet date, e.g. where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date. In such circumstances, the relevant monetary item

In view of above, we find no infirmity in the impugned order of the CIT-A and it is justified. Ground nos. 7 & 8 raised by the revenue in ITA No. 1273/Kol/2015 for the A.Y 2009-10 are dismissed.

Ground no. 2 raised by the revenue in the appeal ITA No. 1274/Kol/2015 for the A.Y 2010-11 is relating to deletion of disallowance of Rs.1,58,30,500/- made on account of book profit u/s. 115JB of the Act.

The ld. DR relied on the order of the AO. On the other hand, the ld.AR submits that the assessee on its own disallowed a sum of Rs.3,00,500/- for the purpose of section 14A r.w.r 8D of the IT Rules, 1962. The AO disallowed the same by invoking Rule 8D(2)(ii) & (iii) while computing the book profit u/s. 115JB of the Act. The CIT-A deleted the same and found suo motu disallowance made by assessee is reasonable

The ld. AR refers to the order dt. 15-12-2017 of this Co-ordinate Bench (ITAT, Kolkata) in the case of TMT Viniyogan Ltd Vs. DCIT, in ITA No. 561/Kol/2015, A.Y 2008-09 and referred to para 14 of the said order at pages 81-82 of the paper book.

On the other hand, the ld. DR relied on the order of the AO. However, he did not controvert the above submissions of the ld.AR by bringing any contrary material on record.

Heard rival submissions and perused the record including the case law/order as relied on by the assessee. On perusal of record, we find that the similar issue was decided by this Co-ordinate Bench, ITAT, Kolkata in the case of TMT Viniyogan Pvt. Ltd supra as referred by the ld.AR before us, wherein the Tribunal held that no disallowance could be made u/s. 14A while computing the book profit u/s. 115JB of the Act and remanded the matter to the file of AO for computing the disallowance under clause (f) to section 115JB of the Act by placing reliance on the decision of the Hon’ble High Court of Calcutta in the case of CIT Vs. Jayshree Tea Industries Ltd in GA No. 1501 of 2014 (ITAT No. 47 of 2014) dt. 19-11- 14. Relevant partition of order dt. 15-12-2017 is reproduced herein below for better understanding:- 14. We have heard the rival submissions and perused the materials available on record. The issue in the instant case relates to the disallowances made by Assessing Officer u/s 14A r.w.r 8D of the Income Tax Rules while determining the income under normal computation of· income. The disallowance of the same was also made while determining the profit u/s 115JB of the Act. However, we note that in recent judgment of Special Bench of Hon'ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act. Relevant portion of the said order is reproduced below: "In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962. " The ratio laid down by the Hon'ble Tribunal is squarely applicable to the facts of the case. Thus it can be concluded that the disallowance made under section 14A r.w.r 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 of section 115JB of the Act.

In view of the above decision of Hon’ble High Court of Calcutta and respectfully following the same, we remand the matter to the AO and to work the disallowance in terms of clause (f) to Explanation-1 of Section 115JB of the Act for the purpose of book profit. Ground no. 2 raised by the revenue in ITA No. 1274/Kol/2015 for the A.Y 2010-11 is allowed for statistical purpose.

Ground no. 5 raised by the revenue in ITA No. 1274/Kol/2015 for the A.Y 2010-11 is regarding deletion of adhoc disallowance made on account of misc. expenses.

Heard rival submissions and perused the record. We find that the assessee claimed the misc. expenses and without there being any evidence to that effect the AO made the disallowance. The CIT-A considering the submissions of assessee in respect no inference or adverse remark whatsoever was made by the statutory auditor in the tax audit deleted the same. But, however, taking into consideration the facts and circumstances of the case, we find that the AO was justified in disallowing the same at 25% of claimed expenses. Therefore, we reverse the impugned order of the CIT-A and restore the order of AO on this issue. Thus, ground no. 5 raised by the revenue in ITA No. 1274/Kol/2015 for the A.Y 2010-11 is allowed to that extent.

Ground no. 6 raised by the revenue in ITA No. 1274/Kol/2015 for the A.Y 2010-11 is relating to deletion of disallowance of Rs. 10,89,099/- on account of Puja & Temple expenses.

The AO found that the assessee claimed Puja & Temple expenses of Rs.10,89,099/- and disallowed the same as under:-

The CIT-A directed the AO to delete the disallowance of Rs.10,89,099/- by stating as under:- “8.2. I have carefully considered the submission of the AR of the appellant and the impugned order of the AO. I have also perused the judicial precedents on this issue relied upon by the appellant in its submissions. In Para 8 of the impugned order, the AO stated that the pooja & temple expenses did not involve any business expediency and disallowed the same. The appellant has factories located in different states of India. Small temples are constructed in the factory premises to cater to the religious beliefs & sentiments of the labour/workers employed at the factory. Accordingly small rituals &. ceremonies are performed at these temples as required under the local customs such as on occasion of Vishwakarma, Diwali, Onam etc. The expenses incurred at the temples

The ld. DR relied on the order of the AO. On the other hand, the ld.AR placed his reliance on the said CBDT Instruction dt. 03-10-1968.

Heard rival submissions and perused the record. We find that the CIT-A placed his reliance on various case laws of Hon’ble High Courts and CBDT Instruction. The Hon’ble High Courts allowed such expenses treating the same as welfare measure for employees. Thus, the CIT-A was right in directing the AO to delete the same. We find no infirmity in the impugned order of the CIT-A and it is justified. Ground no. 6 raised by the revenue in ITA No. 1274/Kol/2015 for the A.Y 2010-11 is dismissed.

In the result, the appeal filed by the revenue in ITA No. 1273/Kol/2015 for the A.Y 2009-10 is dismissed and the appeal filed by the revenue in ITA No. 1274/Kol/2015 for the A.Y 2010-11 partly allowed for statistical purpose. Order pronounced in the open court on 04-07-2018