DCIT, NEW DELHI vs. M/S. RATHI BARS LIMITED, NEW DELHI

Date of hearing : 14.09.2016 Date of Pronouncement: 19.09.2016 ORDER PER BEENA A. PILLAI, JM: As the issues involved in these Assessment Years are common, we are disposing of these appeals by way of a common order as under: A. I.T.A.No. 5613/Del/2013 (Assessment Year 2005- 06):

This appeal has been filed by the assessee against order dated 16.08.2013 passed by Ld. CIT(A) XVIII, New

2 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013

Delhi for the Assessment Year 2005-06 on the following grounds of appeal: “1. That on the fact and circumstances of the case

(i) the impugned order is not only bad in law and nature but it also whimsical hence it is liable to be deleted.

(ii) The Ld.CIT(A)-XVIII grossly erred in allowing the reopening of assessment u/s 148 which has already been assessed u/s 143(3) of the Act. Invoking the provisions of section 14A r.w.r 8D retrospectively, which is not allowed as per Rule as well as per the judicial pronouncements of various High Courts.

2. That on the facts and circumstances of the case the Ld. CIT(A)-XVIII grossly erred in confirming the addition of Rs.3,13,151/- by applying the provisions of Sec 14A read with rule 8D.”

assessee has earned exempt income in the form dividend and agricultural income and has not disallowed any expenditure attributable towards earning such exempt income, as per the provisions of section 14A disallowances are applicable and the proportionate expenses claimed needs to be disallowed which is higher than Rs.1 lac. In the A.Y.2005-06 the assessee has claim administrative and selling distribution expenses of Rs.1.99 crore out of which selling and distribution expenses works out to Rs. 57,84,993/-. Hence the common administrative expense to be allocated for the purpose of section 14A disallowance works out to Rs. 1,41,49,223/-. Further the assessee has incurred an expenditure of Rs.85,96,385/- towards interest. Hence the proportionate administrative and interest expense attributable to the exempt income works out to Rs.2,58,838/- and Rs.4,56,545/- respectively. Further assessee has shown investment of Rs.2,16,62,957/- for year ending 31.03.2005 and Rs.62,245/- for year ending 31.03.2004. Hence further disallowance of 0.5% of the average investment to the tone of Rs.54,313/- "also needs to be disallowed u/s 14A. Hence the total disallowance u/s 14A of Rs.54,313/- needs to be disallowed Inter- alia the book profit u/s 115JB will also increased by an amount of Rs.7,69,696/-.

The assessee in response to question vide order sheet dated 31.07.2007 and as seen in the return of income, has not attached separate balance sheet, P& L account or the income and expenditure account with respect to its agricultural activities which is a sizeable activity. The investment made in the above has not been disclosed. The assessee has merely tried agreements regarding agriculture land. The basis of income or expenditure for the year and investment in agriculture land and the end of the year has not been submitted as can be seen from assessee's submissions dated 27.07.2007, 10.10.2007, 23.10.2007 and 26.10.2007. Hence there has been 4 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 non compliance ·by the assessee to the notice u/s 142{/) of IT Act as well.

In view of the above facts, I have reason to believe that the assessee has not disclosed fully and truly all material facts necessary for its assessment to the extent of Rs.7,69,696/-. I have also reasons to believe that income to the extent of Rs.7,69,696/- has escaped to be assessed under section 115JB for the year under consideration i.e. A Y 2005-06. There has been a failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment in the A Y 2005-06. Hence the same is to be brought to tax under section 147 of the income Tax Act. Sanction for issue of notice u/s 148 as prescribed u/s 151, may kindly be accorded."

2.3 Pursuant to the reasons being intimated to the assessee, reply was filed on 2012.2012 wherein, it has been submitted that there has been no failure on the part of the assessee in disclosing full and true material facts and that no disallowance could be made u/s 14A read with Rule 8D. 2.4 Ld. A.O. disallowed 0.5% of the proportionate expenditure and the proportionate value of administrative expenses. Aggrieved by the order of Ld. A.O., assessee preferred an appeal before Ld. CIT(A). 2.5 Ld. CIT(A) confirmed the action of reopening and upheld the additions made by L. A.O. Aggrieved by the order of Ld. CIT(A), assessee is in appeal before us now.

5 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 He also submitted that the Assessing Officer has not applied his mind before initiation of reassessment proceedings as to whether there is failure on the part of the assessee to disclose full and true material for the year under consideration. 3.1 Ld. A.R. submitted that there has been no inquiry raised, which is apparent from the reassessment order passed by Ld. A.O. on 30.01.2013. He submitted that there was no tangible relevant material that was before the d. A.O. to form an opinion that income has escaped assessment. Ld. A.R. further demonstrated vide paper book pages 1-12, filed before us that the assessee had disclosed all material facts relating to the income and investment for the purposes of any disallowance u/s14A of the act. He submitted that Ld. A.O. in the original assessment order passed (placed at page 13 of the paper book), has admitted to the fact that the assessee has filed full details as per the order sheet.

3.2 Ld. A.R. submitted that the reopening being beyond 4 years and there being no failure on the part of the assessee to disclose full and true material, proviso (1) to Section 147 of the Act would be applicable to the facts of the present case. 4. On the contrary, Ld. D.R. relied upon the orders of authorities below. 5. We have perused the records placed before us and the arguments advanced by both the sides. Both the 6 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 issues relate to invoking of reassessment proceedings on the ground of Section 14A of the Act beyond 4 years from the end of relevant Assessment Year. From the original assessment order placed at page 13 of the paper book, it appears that the assessee had filed all necessary details and material for the purpose of arriving at disallowance u/s 14A of the Act. There is no evidence from the records placed before us that the assessee has failed or omitted to disclose the material / primary facts. These were every much available on record and the Assessing Officer had failed to draw correct legal inference at the time of original assessment from the said primary facts. This cannot be held as error or omission on the part of the assessee and as per the proviso (1) to Section147 of the Act and reopening of assessment for the year under consideration cannot be sustained. 5.1 Accordingly as the legal issue raised by the assessee in ground No.1 has been upheld, we set aside the order of Ld. CIT(A) and quash the reassessment proceedings initiated for the year under consideration. B. I.T.A.No. 5614/Del/2013 (Assessment Year 2007- 08): 6. The present appeal arises out of the order dated 16.08.2013 passed by Ld. CIT(A) for the Assessment Year 2007-08 on the following grounds of appeal:

1. That on the fact and circumstances of the case

7 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013

(i) the impugned order is not only bad in law and nature but it also whimsical hence it is liable to be deleted.

(ii) The Ld.CIT(A)-XVIII grossly erred in allowing the reopening of assessment u/s 148 which has already been assessed u/s 143(3) of the Act. Invoking the provisions of section 14A r.w.r 80 retrospectively which is not allowed as per Rule as well as per the judicial pronouncements of various High Courts.

2. That on the facts and circumstances of the case the Ld. CIT(A)-XVIII grossly erred in confirming the addition of Rs.4,84,688/- by applying the provisions of Sec 14A read with rule 8D.”

6.1 At the outset, Ld. A.R. submitted that ground No.1 relating to validity of reopening of the assessment, is not pressed. Therefore, to deal with the merits, the brief facts of the case are as under: 6.3 The assessee had filed its return of income on 30.10.2007 declaring total income of Rs.48,28,710/- and book profit u/s 115JB of the Act to the tune of Rs.2,21,54,235/-. The return was processed u/s 143(1) of the Act and original assessment order was passed u/s 143(3) of the Acts on 11.12.2009. The issue relates to the disallowance u/s 14A of the Act for the year under consideration. The assessee had shown in the P & L account, dividend being received to the tune of Rs.30,43,724/-. It had claimed maintenance, selling and administrative expenses amounting to Rs.2.59 crores out of which selling and distribution expenses worked out to Rs.70,23,855/-. Assessee had further incurred an 8 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 expenditure of Rs.98,89,316/- towards interest. Ld. A.O. in reassessment proceedings, observed that since the assessee has earned exempt income from dividend and agriculture, and has not disallowed nay expenses towards earning of such income as per the provisions of Section 14A of the Act, he recomputed the income by applying rule 8D and added Rs.3,84,434/- on account of proportionate administrative expenses and Rs.1,00,345/- being 0.5% of average investment following Rule 8D. 6.4 Aggrieved by the order of Ld. A.O. assessee preferred appeal before Ld. CIT(A). Ld. CIT(A) upheld the additions made by the Ld. A.O., aggrieved by the order of Ld. CIT(A), the assessee is in appeal before us now. 6.5 Ld. A.R. placed reliance upon the decision of this Tribunal for the Assessment Year 2008-09 and 2009-10 in I.T.A.No. 4223/Del/2011 and 2429/Del/2015 passed on 23.11.2002 and 09.01.2015 respectively, wherein the Tribunal had restricted the disallowance to 0.5% of the expenditure for the purposes u/s 14A of the Act. He thus submitted that disallowance as directed by this Tribunal, should be applied to the facts of the present case before us. 6.6 On the contrary, Ld. D.R. relied upon the orders of authorities below. 6.7 We have perused orders of authorities below and records placed before us and the arguments advance by both the parties. It is not possible that no expenditure were incurred towards earning the exempt income and in 9 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 view of the A.O., on the basis of order of this Tribunal in assessee’s own case, for the Assessment Year 2008-09 and 2009-10 (supra) placed at pages 33-44 of the paper book, we direct Ld. A.O. to calculate the disallowance on the basis of 0.5% of expenditdure. Accordingly, ground No.2 of the assessee’s appeal stands disposed off. C. I.T.A.No. 5729/Del/2013 & 6102/Del/2013 (Assessment Year 2010-11): Cross appeals: 7. These cross appeals have been filed by the assessee and the Revenue against the order dated 29.08,.2013 passed by Ld. CIT(A) XVIII, New Delhi for the Assessment Year 2010-11 on the following grounds of appeal: I.T.A.No. 5729/Del/2013 (assessee’s appeal):

1. The Ld.CIT(A)-XVIII has erred in confirming the addition of Rs.1,87,337/- on account of foreign travelling expenses, without appreciating the facts & circumstances of the case.

2. The Ld.CIT(A)-XVIII has erred in confirming the addition of Rs. 96,000/- on account of payment to related person u/s 40A(2)(b) of the Income Tax Act,1961, without appreciating the facts & circumstances of payments.”

I.T.A.No. 6102/Del/2013(Revenue’s appeal): “1. On the facts & in the circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance made under the head of 'foreign travelling expenses' to Rs.1,87,337/- ignoring the fact that these expenses contain the expenses of personal nature. 2. On the facts & in the circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance on account of excessive payment to Rs.96,000/-

10 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 failing to appreciate that the burden of proving the payment as genuine is on assessee. 3. On the facts & in the circumstances of the case, the Ld. CIT(A) has erred in restricting the disallowance u/ s 14A read with rule 8D is not to be made on the percentage basis of administrative expenses.

7.1 The brief facts of the case are as under: 7.2 The assessee filed its return of income for the year under consideration on 27.09.2010 at ‘nil’ income. The case of the assessee was selected for scrutiny and notice u/s 14(2) of the Act was issued. During assessment proceedings, Ld. A.O. observed that the assessee has incurred foreign travel expense to the tune of Rs.15,21,802/- and the assessee has made excessive payment by way of salary to the wives of the directors. He also made disallowance u/s 14A of the Act on the exempt income earned by the assessee. The Ld. A.O. accordingly, made the following disallowances: a) Foreign Travel expenses Rs.8,50,401/- b) Excessive payment made u/s 14A(2) Rs.2,88,000/- c) Disallowance u/s 14A Rs.43,56,622/- 7.3 Aggrieved by the assessment order, the assessee preferred appeal before Ld. CIT(A). Ld. CIT(A) held that out of total foreign travel expenses, assessee had explained an amount of Rs.8,50,401/- and gave relief to this extent. In respect of balance amount of Rs,3,74,674/-, Ld. CIT(A) held, it to be having source of personal element and restricted the disallowance to 50% of such amount being Rs,1,87,337/-. In respect of 11 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 disallowance made towards excessive payment of salary, Ld. CIT(A) held that Smt. Pushpa Rahi, being the wife of the director, helped in the company’s administrative work. He considered an amount of Rs.40,000/- per month as reasonable payment as her salary and restricted these expenses to Rs.4.80 lacs per annum. In respect of disallowance u/s14A, Ld. CIT(A) held that 0.5% of Rs.1,58,87,767/- being taken as administrative expenses which comes to Rs.79,739/- should be the amount of disallowance as against disallowance made by Ld. A.O. Aggrieved by the order of Ld. CIT(A), the Revenue as well as assessee are in appeal before us now. 7.4 We shall first deal with the common issues raised in the appeals filed by the Revenue as well as assessee simultaneously. Ground No.1 raised by Revenue and Assessee: 7.5 Ld. D.R. placed reliance upon the orders passed by Ld. A.O. and submitted that foreign travel has been undertaken by the members of the families by way of holiday/leisure trip, and no such expenses have been incurred exclusively towards business purposes as required u/s 37(1) of the Act. 7.6 On the contrary, Ld. A.R. submitted that before Ld. CIT(A), on 02.04.2012, the assessee had furnished full details of foreign travel undertaken by the directors and their relatives including destination, purpose, date of ravel along with relevant documentation to establish the business purposes. Copies of bills relating to these

12 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 expenses were also furnished. He submitted that qualification and designation along with job profile of the directors and the relatives of the directors, who undertook foreign travel were analyzed by Ld. CIT(A), are as under:

Name of Qualification Designation Job Profile remarks Directors Sh. K. K. Rathi B.Sc. Managing Legal & - Director Administration Sh. Anupam B.Tech. Whole time Operations & - Rathi Director Purchase/sale Sh. Anurag B.Com. Director Production - Rathi Smt. Pushpa Matriculate Administrator Looking after W/o Shro K. Rathi administration K. Rathi of company Smt. Parneeta B.Sc. Operations Operation W/o Sjhri Rathi Assistant Assistant Anupam Rathi Smt. Nandita B.Com. Production Production W/o Shri Rathi Assistant Assistant Anurag Rathi 7.7 Ld. A.R. further submitted that the Assessing Officer has not disputed the salary being paid to these personnel for the job profile undertaken by them. He submitted that the assessee could substantiate and obtain documentary evidences only to the extent of Rs.8,50,401/-. He, therefore, prayed for the total disallowance being deleted for the year under consideration in respect of foreign travel expenses. 7.8 We have perused all the necessary details on record placed before us and heard both the parties. We do not find any infirmity in respect of the findings of Ld. CIT(A) and therefore, uphold the same. In view of above

13 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 discussion, ground No.1 of appeal filed by the Revenue as well as the assessee stand dismissed. Ground No.2 of appeal filed by Revenue and Assessee: 8. It relates to the disallowance made u/s 40A(2)(b) of the Act. Ld. D.R. submitted that Smt. Pushpa Rathi being matriculate and old lady, could not be of any assistance to any administrative duties of the assessee, he therefore, submitted that the payment made to these personnel being Smt. Pushpa Rathi @ Rs.48,000/- per month is highly excessive and cannot be allowed. He placed his reliance on the disallowance made by Ld. A.O. 8.1 On the contrary, Ld. A.R. submitted that Smt. Pushpa Rathi has been involved in the formation of the company as a shareholder w.e.f. 25.06.1993, but she has been taking salary w.e.f. 2000-01. He also submitted that such payment made to Smt. Pushpa Rathi has never been disputed in any of the previous years. He also submitted that Ld. CIT(A) has sustained disallowance to an extent of Rs.96,000/- on ad-hoc basis. He thus prayed for the disallowance being deleted in toto. 8.2 We have perused the details filed before us and the arguments advanced by both the parties. Ld. A.O. and Ld. CIT(A) have admitted to the position that the salary paid to Smt. Pushpa Rathi is almost equal to the salary paid to the other staff members. Thus, L. A.O. has failed to establish the main ingredient to initiate Section 40A, which is, expenditure being excessive or unreasonable. We, therefore, are not agreeable to the ad-hoc

14 I.T.A.Nos.5613,5614, 5729 & 6102./Del/2013 disallowance sustained by Ld. CIT(A) when consistently in the preceding years, no such disallowance has been made by the Ld. A.O. We, accordingly delete the disallowance restricted by Ld. CIT(A) on this count. In the result, ground raised by the Revenue stand dismissed and ground raised by the assessee stand allowed. Ground No.3 of Revenue’s appeal:

9. It is in respect disallowance of expenses u/s 14A of the Act. As in this Assessment Year, Rule 8D would be applicable. We direct the A.O. to calculate the disallowance being 0.5% of the average investment. 9.1 In the result, two grounds raised by the Revenue and one ground raised by assessee stand dismissed, second ground raised by assessee stands allowed and third ground raised by Revenue stands partly allowed.

10. Accordingly, appeal filed by the Revenue stands dismissed and appeal filed by the assessee stands partly allowed. Order pronounced in the open court on 19th Sep., 2016.