M/S CHENGMARI TEA CO. LTD,KOLKATA vs. DCIT, CIR-4, KOLKATA, KOLKATA

Ground Nos. 1,5 and 6 are general in nature and does not call for any specific adjudication.

The Assessee is a company which is engaged in the business of growing and manufacturing of tea. In the course of assessment proceedings the AO noticed that the assessee had earned exempt dividend income of Rs.62,734/-. The assessee had disallowed a sum of Rs.10,000/- as expenses incurred in earning exempt income M/s Chengmari Tea Co.Ltd. A.Y.2011-12 which is to be disallowed u/s 14A. The AO applied Rule 8D of the IT Rules and made a disallowance of Rs.72,734/- in the following manner :- Rs. I. Direct expenses relating to exempt income Nil II. Interest Expenses 29,178/- III. ½% of Average Investment 43,556/- Total 72,734/- Since the assessee has already disallowed a sum of Rs.10,000/- the AO added a sum of Rs.62,734/- to the total income of the assessee and made disallowance u/s 14A of the Act.

Before CIT(A) the assesee submitted that the AO has not found the quantum of disallowance of expenses u/s 14A of the Act as made in the computation of income by the assessee to be incorrect. The assessee submitted that it was the incumbent on the part of the AO before invoking Rule 8D of the Rules to reject the quantum of disallowance made by the AO on an objective basis. He has to record satisfaction that the quantum of disallowance of expenses as made by the assessee in the computation of income is incorrect. Without recording such satisfaction the AO cannot proceed to disallow expenses u/s 14A of the Act by invoking the provision of Rule 8D of the IT Rules, 1962. The assessee relied on the following decisions in support of the above contention :- “Kolkata Tribunal in the case of Laurel Securities Pvt Ltd Vs I.T.O in Kolkata Tribunal ln the case of .DCIT . v Ashish Jhunjhunwala in ITA No. 1809/Ko1/2012. Kolkata Tribunal in the case of Balarampur Chini Mills Limited reported in 140 TTJ 73. Kolkata Tribunal in the case of DCIT - Vs- Micro Management in I. T.A.No. 1399/Ko1/2011. Mumbai Tribunal in the case of-J.K.Investors -(Bombay) Ltd. Vs. ACIT in ITA No.7858/Mum/2011, AY 2008-09 dated 13.03.2013. Mumbai Tribunal in the case of 3DPLM Software Solutions Ltd. Vs. ACIT in ITA No.5736/Mum/2012, AY 2008-09 dated 31.7.2 M/s Chengmari Tea Co.Ltd. A.Y.2011-12

The assessee also submitted that disallowance of interest in terms of Rule 8(2)(ii) of the Rules were not warranted as the assessee has sufficient interest free fund. The assessee pointed out that the investments in shares were only to the tune of Rs.1 crore whereas the assessee’s capital and reserves were more than Rs.,7.57 crores. The assessee relied on the decision of the Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Limited 313 ITR 340 (Bom) wherein it was held that if interest free funds available with the assessee was sufficient to meet the investments and at the same time if loans have been raised by the assessee it can be presumed that the investments were from interest free funds and no disallowance of interest is called for. The assessee also relied on similar ruling of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (ITA 330 of 2012) judgment dated 23.07.2014.

With regard to the disallowance of other expenses under Rule 8D(2)(iii) of the Rules, the assessee pointed out that only investments which yielded tax free income viz. an investment of Rs.43,556/- should be considered for arriving at Average value of investments. The other investments in Websol Energy Systems Ltd of Rs.47,38,770/- did not yield any dividend income. The assessee submitted that in computing the disallowance in terms of Rule 8D(2)(iii) of the Rules only ½ % of the average value of investments of Rs.43,556/- should be disallowed.

The CIT(A) however did not deal with any of the aforesaid arguments but he rejected the plea of the assessee by holding as follows :- “I have considered the submissions of the authorised representative of the appellant as well as the assessment order framed in the light of the materials available on record before the assessing officer during the assessment proceedings. Keeping in view of above, the order of the AO is upheld and this ground of the appeal is dismissed.”

Aggrieved by the order of CIT(A) the assessee has preferred ground nos. 2 and 3 before the Tribunal.

We have heard the rival submissions. It is clear from the order of the revenue authorities that they have not rejected the basis of computation of disallowance of expenses u/s 14A of the Act as made by the assessee.. The ld. Counsel for the assessee reiterated the submissions made before the revenue authorities. He further placed reliance on the decision of the Hon’ble ITAT, Kolkata bench in the case of REI Agro Ltd. Vs DCIT in for A.Y.2008-09 dated 19.06.2013. He also relied on the decision of ITAT in the case of Balrampur Chini Mills in 140 TTJ 73 wherein the Tribunal held that section 14A r.w. r.8D can be invoked when the AO is not satisfied having regards to the accounts of the assessee that the claim of the expenses made by the assessee is not correct. Reference was also made to a similar ruling of the decision of the Hon’ble Calcutta High Court in the case of Dhanuka & Sons vs CIT 201 Taxman 105 (Kol). The ld. DR relied on the order of the AO.

We have considered the rival submissions. A perusal of the provisions of section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, when filing the return, then if subsection (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be M/s Chengmari Tea Co.Ltd. A.Y.2011-12 done with regard to accounts of the assessee. In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate Bench of this Tribunal in the case of Balrampur Chini Mills Ltd referred to supra, no disallowance under section 14A can be made. Thus the addition made u/s 14A of the Act is deleted. Ground No.2 and 3 raised by the assessee are allowed.

Ground No.4 raised by the assessee reads as follows :-

The assessee claimed deduction of Rs.22,01,093/- as expenses incurred on account of foreign travel. . On perusal of the details the AO noticed that the assessee had sponsored the University expenses of Shri Yash Kajriwal of Rs.16,85,334/- for studying management course abroad. The assessee submitted that there was an agreement between Shri Yash Kajriwal and the assessee dated 01.08.2008 whereby Shri Yash Kajriwal undertook to serve the assessee company after completion of his studies. The assesee also pointed out that Shri Yash Kajriwal was appointed as President of the company on 01.05.2012. The AO however was of the view that during the relevant previous year Shri Yash Kajriwal was not associated with the assessee company and had not rendered any service to the assessee company in any capacity. Therefore the expenses relating to his studies were held by the AO to be not wholly and exclusively incurred for the purpose of the business of the asessee and accordingly the same was disallowed. With regard to the remaining sum of Rs.5,15,759/- the AO held that the assesee failed to establish the business connection of these expense and therefore the entire foreign travelling expenses of Rs.22,01,093/- was disallowed and added to the total income of the assesse.

On appeal by the assessee the CIT(A) confirmed the order of the AO observing as follows :- M/s Chengmari Tea Co.Ltd. A.Y.2011-12

Aggrieved by the order of CIT(A) the assessee has raised ground no.4 before the Tribunal.

The ld. Counsel for the assessee placed reliance on the decision of the Hon’ble Calcutta High Court in the case of M/s Gournitye Tea & Industries vs CIT in of 2005 judgment dated 24.06.2010. In the aforesaid decision on identical facts of disallowance of foreign Travel expenses, the Hon’ble Calcutta High Court took the following view :- “On careful reading of all those decisions we could find that any expenditure incurred on account of training and imparting higher education in abroad or even inside the country are treated to be business expenditure provided after completion of their study they have contributed to the business activities of the assessee company irrespective of the fact whether the company has continued business activities or earned profit.”

It is thus clear that the fact that the person who undertook the foreign travel was not an employee of the asessee at the time of undertaking foreign travel cannot be the basis for any disallowance of expenses. In the present case Mr. Yash Kajriwal served the assessee company after completing studies abroad as per Agreement with the assessee company. Since the disallowance of a sum of Rs.16,85,334/-being expenses for sponsoring higher education of Shri Yash Kajriwal was disallowed only on the basis that he was not an employee, the disallowance is directed to be deleted.

As far as the remaining sum of Rs.5,15,759/- is concerned,the ld. Counsel for the assessee submitted that no details whatsoever were called for and prayed that the issue may be set aside to the AO to enable the assessee to give the required details. We are of the view that since the assesee was not called upon to explain the details of these expenses by the AO it would be just and proper to set side the order of the CIT(A) , as far as the remaining sum of Rs.5,15,759/- is concerned . Accordingly we set aside the order of the CIT(A) and remand to the AO for fresh consideration after due opportunity to the assessee the disallowance of foreign travel expenses of Rs.5,15,759/-. The assessee will explain the nature of these expenses and nexus with the business of the assessee. The AO will decide the issue afresh after affording the assessee opportunity of being heard. Ground No.4 is thus partly allowed.

In the result the appeal by the assessee is partly allowed. Order pronounced in the open Court on 02.02.2018.