M/S. CHENGMARI TEA CO. LTD,KOLKATA vs. DY./ACIT, CIRCLE - 4(1), KOLKATA, KOLKATA

Ground No.1 raised by the assessee is general in nature and calls for no adjudication.

Ground No.2 and 3 raised by the assessee reads as follows :- “2. For that the Ld. CI.T(A) erred in confirming the action of the AO in making disallowance of Rs. 7,17,118/- u/s. 14A read with Rule 8D without recording any satisfaction that the expenses had any nexus with earning of the exempt income of Rs. 53,968/ - or the claim of the assessee was incorrect and when the assessee had suo-motto made the disallowance of Rs. 35,440/-. 3. For that the Ld. CI.T(A) erred in confirming the action of the AO in making disallowance U / s. 14A when the capital and reserves of the assessee were more than the investment in shares and even otherwise , the disallowance cannot exceed the exempt income earned. “

On appeal by the assessee the CIT(A) confirmed the order of the AO. Before me the limited prayer made by the ld. Counsel for the assessee was that disallowance u/s 14A of the Act be restricted to the extent of exempt income earned by the assessee. In this regard the ld. Counsel placed reliance on the decision of the Hon’ble Delhi Court in the case of CIT vs Hollin India Pvt. Ltd. 486 of 2014 and 299 of 2014 judgment dated 05.09.2014 which was followed by this tribunal in order dated 25.05.2016 in the case of GVN Fuels Ltd. vs DCIT in which it was held as follows :- “In any case, we direct that the disallowance to be worked out thereon shall not exceed the income which does not form part of the total income. We place reliance in this regard on the decision of Coordinate bench of this Tribunal in the case of PDGD Investments & Trading Pvt. Ltd., supra, wherein it was held as under: “3. After hearing the rival contentions, I am applying the decision of the Hon’ble Delhi High Court in the case of CIT vs Holim India (P) Lyd. In ITA Nos.486/2014 and 299/2014 judgment dated 5th September, 2014. The relevant portion of the judgment is reproduced herein below :- “On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expenditure can be made, there are three decisions of the different High Courts directly on the issue and against the appellant- Revenue. No contrary decision of a High Court has been shown to us. The 2

Income exempt under Section 10 in a particular assessment year,, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax.

What is also noticeable is that the entire or whole expenditure has been disallowed as if there was no expenditure incurred by the respondent-assessee for conducting business. The CTT(A) has positively held that the business was set up and had commenced. The said finding is accepted. The respondent-assessee, therefore, had to incur expenditure for the business in the form of investment in shares of cement companies and to further expand and consolidate their business. Expenditure had to be also incurred to protect the investment made. The genuineness of the said expenditure and the fact that it was incurred for business activities was not doubted by the Assessing Officer and has also not been doubted by the CIT(A).”

Respectfully following the aforesaid decision I hold that the disallowance u/s 14A be restricted to the exempt income earned by the assessee. Ground no. 2 and 3 raised by the assessee are thus partly allowed.

Ground No.4 raised by the assessee reads as follows :- 4. For that the Ld. CI.T(A) erred in confirming the action of the AO in disallowing Rs. 23,52,246/- being 10% of repairing expenses on estimate basis when the expense§ were fully vouched and verifiable , were reasonable and fully incurred for business purposes and evidence whereof was produced before the AO.

The AO disallowed 10% of the repairs and maintenance claimed by the assessee as deduction in computing the total income on the ground that the assessee could not produce the related bills and vouchers. The CIT(A) confirmed the order of the AO. Before me the prayer of the ld. Counsel for the assessee was that the disallowance is excessive and should commensurate with the quantum of total expenditure and the scale of business of the assessee. I find that there has been no basis for the disallowance by the AO or CIT(A). In the given circumstances I am of the view that disallowance of 5% of the repair expenses would be just and fair. Accordingly ground no.4 is partly allowed.

Ground No.;5 raised by the assessee reads as follows :- 5. For that the Ld. CI.T(A) erred in confirming the action of the AO in treating the receipt of surrender value of Keyman Insurance Policy as Central Income when the premium when paid was allowed as deduction from the composite income of the assessee at the time of payment.

During the relevant previous year the assessee received cash surrender value on assignment of Keyman Insurance Policy of Rs.17,87,965/-. The assessee claimed that it 4

On appeal by the assessee the CIT(A) confirmed the order of the AO. Aggrieved by the order of the CIT(A) the assessee has raised ground no.5 before the Tribunal.

I have heard the rival submissions. The only business of the assessee is growing and manufacturing of tea. The surrender value of keyman insurance policy is admittedly connected with the business of growing and manufacture by the assessee and therefore it has to be considered as part of the composite income on which Rule 8 should be applied. In this regard it is also noticed by me that the insurance premium was paid when the policy was in force was allowed as deduction while computing the composite income. Therefore the nexus with the business of the assessee has been accepted by the revenue in the past. Therefore the surrendered value of keyman insurance policy received during the previous year had also to be considered as part of the composite income on which Rule 8 has to be applied. I hold accordigly and allow ground no.5 raised by the assessee.

In the result the appeal by the assessee is partly allowed.