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Income Tax Appellate Tribunal, DELHI BENCH : F : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH, MEMBER
BEFORE SHRI R.K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, MEMBER Assessment Year: 2015-16 Addl. CIT, Vs. Rites Ltd., Special Range-7, Scope Building, New Delhi. Scope Minar, Laxmi Nagar, New Delhi. PAN : AAACR0830Q (Appellant) (Respondent) Assessee by : Shri R.S. Singhvi, Advocate Revenue by : Shri Atiq Ahmed, Sr. DR Date of Hearing : 27.10.2021 Date of Pronouncement : 14.12.2021 ORDER
PER R.K. PANDA, AM:
This appeal filed by the Revenue is directed against the order dated 23rd August, 2018 of the CIT(A)-38, New Delhi, relating to Assessment Year 2015- 16.
Ground of appeal No.1 by the Revenue reads as under:-
“1. On the facts and circumstances of the case, the Ld. CIT(A) has erred in law in deleting disallowance of Rs. 1,17,21,750/- u/s 14A read with Rule 8D ignoring the mandatory provision of Rule 8D.”
Facts of the case, in brief are that the assessee is a company engaged in the business of consultancy in all the transport sectors, viz., Railways, Highways, Ports, Airports, Waterways, Ropeways, Urban Transport, Urban Engineering, container depots, institutional buildings, power transmission and rural electrification, etc. It filed its return of income on 26.11.2015 declaring the total income at Rs.408,18,10,950/-. During the course of assessment proceedings, the AO noted that the assessee has shown tax free income to the tune of Rs.17,08,03,873/- and claimed the same as exempt u/s 10(34) of the Act. On being confronted by the AO, it was submitted that no expenditure have been incurred to earn the said exempt income. However, the AO was not satisfied with the arguments advanced by the assessee. According to the AO, to maintain an investment pool, the assessee is required to incur certain expenditure. It has to account for the dividend earned by it for which adequate staff is required to be provided. Therefore, the contention that no expenditure is incurred for earning the exempt income is not acceptable. Relying on various decisions and applying the provisions of section 14A r.w. Rule 8D, the AO made disallowance of Rs.1,17,21,750/- and added the same to the total income of the assessee.
In appeal, the ld.CIT(A) deleted the addition by observing as under:-
“2.2 I have carefully considered the assessment order and the submissions of appellant. During the impugned assessment year the appellant has earned tax free income of Rs. 17,08,03,873/- and claimed the same exempt u/s 10(34) of the IT Act,1961. The appellant has not made any suo-moto disallowance on account of expenditure incurred to earn the tax exempt income. Hon’ble ITAT Delhi vide order m dated 24.04.2017 for AY 2009-10 in appellant’s own case has granted relief to appellant on this ground by recording as under: - "Para 13. We have carefully considered the rival contention and also perused the orders of the lower authorities. During the course of assessment proceedings the assessee was asked that why provisions of Rule 8D should not be applied for disallowing some under section 14 A of the income tax act, despite the claim of the assessee that it has not incurred any expenditure for earning exempt income. According to the provisions of section 14A(2), the Ld. assessing officer before invoking the applicability of Rule 8D should have explained as to why the voluntary disallowances or no disallowances made by the assessee was unreasonable and unsatisfactory. We failed to find any such satisfaction recorded by the Ld. assessing officer. The satisfaction is mandatory in view of the judicial precedents of the jurisdictional High Court laid down before us by the Ld. authorized representative. Therefore, respectfully following the judicial precedent of the jurisdictional High Court we direct the Ld. assessing officer to delete the disallowance of Rs. 1,17,21,750/- under section 14A of the income tax act applying the provisions of Rule 8D of the Income Tax Rules, 1962. Reversing the finding of the Ld. first appellate authority, we allow ground No. 1 of the appeal of the assessee.”
Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
The ld. Counsel for the assessee submitted that the ld.CIT(A) has deleted the disallowance on the ground of non-recording of satisfaction in terms of section 14A(2) and (3) by relying upon the order of the Tribunal for AY 2009-10. The said decision was upheld by the Tribunal and subsequently by the Hon’ble High Court. Since the basis for disallowance in the year under consideration is AY 2013-14 and 2014-15, the grounds raised by the Revenue should be dismissed.
The ld. DR, on the other hand, fairly conceded that the issue stands decided against the Revenue by the decision of the Tribunal and the Hon’ble High Court.
We have considered the rival arguments made by both the sides and perused the record. We find, during the year under consideration, the assessee has earned dividend income of Rs.17,08,03,873/- and claimed the same as exempt u/s 10(34) of the IT Act. We find, the AO, following the provisions of section 14A r.w. Rule 8D, disallowed an amount of Rs.1,17,21,750/-. We find, the ld.CIT(A), following the order of his predecessors deleted the disallowance, the reasons of which have already been reproduced in the preceding paragraphs. We do not find any infirmity in the order passed by the CIT(A) on this issue. We find, identical issue had come up before the Tribunal in assessee’s own case in & 6448/Del/2017 for AYs 2013-14 and 2014-15 filed by the Revenue and CO No.78/Del/2019 filed by the assessee for AY 2013-14. We find the Tribunal vide common order dated 12th January, 2021 upheld the order of the CIT(A) and dismissed the appeal filed by Revenue on this issue by observing as under:-
“7. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUND NO.1 OF REVENUE'S APPEALS IN (AY 2013-14) ITA NO. 6448/Del/2017 (AY 2013-14) 8. Undisputedly, the assessee is a Government undertaking and its substantial investments in specified Government securities are coming from earlier years. It is also not in dispute that during the years under assessment, assessee earned dividend income to the tune of Rs.12,08,26,704/- & Rs.14,83,49,435/- in AYs 2013-14 & 2014-15 respectively.
9. Assessee has come up with specific plea that for earning exempt dividend income, it has not incurred any expenditure, hence no suo motu disallowance has been made. When we examine the order passed by the AO we find that he has proceeded on the premise that since the assessee has earned huge dividend income, some expenditure would have been incurred for earning the same.
10. AO has accepted the audited books of account maintained by the assessee company which is a Government undertaking. When it is undisputed fact on record that assessee company being a Government undertaking has made investment in specific Government securities and moreover substantial portion of investments is coming from earlier years, no question arises to incur separate expenses. In order to invoke the provisions contained u/s 14A read with Rule 8D(2)(iii), the AO is mandatorily required to record his dissatisfaction that claim of the assessee as to not incurring any expenses is not correct. So, without recording proper satisfaction, disallowance under Rule 8D is not sustainable.
AO without bringing on record an iota of evidence if assessee has incurred expenses to earn the dividend income proceeded to invoke the provisions contained under section14A r/w Rule 8D(2)(iii) mechanically which is not permissible. Ld. CIT (A) decided this issue in favour of the assessee by relying upon the decisions rendered by Hon'ble Delhi High Court in cases of Pradeep Khanna vs. ACIT in ITA 953/2015 order dated 11.08.2016, CIT vs. Taikisha Engineering Private Limited 370 ITR 338 (Del.) and Maxopp Investment (P) Ltd. s. CIT 347 ITR 272 (Del.).
Identical issue has been decided in favour of the assessee by the coordinate Bench of the Tribunal in assessee's own case in ITA No.2826/Del/2014 & ITA No.3026/Del/2014 order dated 24.04.2017. In the appeal at hand, it is admitted fact that substantial portion of the investments are made in the earlier years.
13. In these circumstances, finding no illegality or perversity in the deletion made by the ld. CIT (A) under section 14A for AYs 2013-14 & 2014-15, Ground No.1 in both the appeals filed by the Revenue is determined against the Revenue”
Since the facts of the instant case are identical to the facts of the case decided by the Tribunal, therefore, respectfully following the same and in absence of any contrary material brought to our notice, we uphold the order of ld.CIT(A) on this issue. The ground of appeal No.1 by the Revenue is accordingly dismissed.
Ground of appeal
No.2 by the Revenue reads as under:-
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in deleting club expenses of Rs. 6,64,728/- treating as corporate membership fee expenses.”
11. After hearing both the sides, we find, the AO, on the basis of audit report where it is mentioned that the assessee has incurred expenditure at clubs being entrance fee and subscription amounting to Rs.6,64,728/-, made addition of the same to the total income of the assessee. In appeal, the ld.CIT(A) deleted the disallowance holding that the club expenses are towards membership fees and are a permissible business deduction by observing as under:- “4.2 . I have carefully perused the submissions of appellant and the assessment order on this issue. In the course of appeal proceedings AR of appellant has justified the claim of club expenses of Rs. 6,64,728/- for membership of India Habitat Centre Lodhi Road, New Delhi of Rs. 2,86,518/-, DDA Siri Fort Complex, Asiad Village, New Delhi for Rs. 15,168/-, HUDA Gymkhana Club, Sector-29, Gurgaon of Rs. 22,975/- and Delhi Gymkhana Club, New Delhi of Rs. 3,40,067/-. It has been submitted that the expenditure during the year has been made to benefit the business of RITES and its allowable u/s 37 of the IT Act, 1961. The AR of appellant has further submitted that that appellant is in the business of providing technical consultancy to clients all over the world and for the purpose of organising meetings and conferences, the membership of four clubs were subscribed. It was also submitted that club membership is in the name of Directors and Senior Executive employees of the appellant and as such the same is wholly and exclusively for the benefit of employees and 6
business of the appellant. It is seen that despite the specific query of assessing officer, appellant has submitted that this expenditure has been made as per the policy of RITES towards its directors/employees. This same submission has also been made during appeal proceedings. During the course of appeal proceedings copies of bills, vouchers and expenses were submitted which made it clear that the payments are for corporate membership fees. Accordingly, these grounds are allowed.”
12. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
We have heard the rival arguments made by both the sides and perused the record. We find, the ld.CIT(A) while deleting the disallowance has held that the club expenses are towards membership fees and permissible business deduction. We find, the Hon’ble Madras High Court in the case of CIT vs. Sundaram Industries Ltd., reported in 240 ITR 335, has held that expenditure incurred by the assessee towards subscription of the club is an allowable expenditure. Hon’ble Supreme Court in the case of CIT vs. United Glass Mfg. Co., reported in 28 taxmann.com 429 (SC) has held as under:- " 3.3 As far as Question No. 1 is concerned, the issue is answered in favour of the assessee in the order passed today in civil appeal arising out S.L.P.(C) No. 20791 of 2009. As far as Question No. 2 is concerned, we find that a series of judgements have been passed by High Courts holding that club membership fees for employees incurred by the assessee is business expense under Section 37 of the Income Tax Act, 1961. We also find that none of the decisions have been challenged in this Court. Even otherwise, we are of the view that it is a pure business expense."
Therefore, we do not find any infirmity in the order of the CIT(A) in deleting the addition made by the AO. Accordingly the same is upheld and the ground raised by the Revenue is dismissed.
Ground of appeal
No.3 by the Revenue reads as under:- “3. On the facts and circumstances of the case, the Ld. CIT(A) has erred in law in deleting prior period expenses of Rs. 4,26,75,066/- treating them as crystallized during the year.”
16. Facts of the case, in brief, are that during the course of assessment proceedings, the AO observed from the tax audit report at point No.27b that the assessee has claimed an expenditure of Rs.4,30,74,756/- on account of prior period expenses the details of which are as under:-
17. He, therefore, asked the assessee to explain as to why the same should not be disallowed and added back to the total income of the assessee for the impugned year. The assessee filed the following reply:-
18. However, the AO was not satisfied with the arguments advanced by the assessee and made an addition of Rs.4,26,75,066/- by observing as under:- “The reply and submission of the assessee has been considered. The assessee has not produced any satisfactory reply on the disallowance of prior period expenses specific for this AY. Accordingly, expenses claimed for supplies and services amounting to Rs.2,15,01,756/- and other cost amounting to Rs.2,11,73,310/- is hereby disallowed and added back to the income of the assessee.”
19. In appeal, the ld.CIT(A) deleted the addition by observing as under:-
“3.2 The facts of the case and the submissions of the appellant have been carefully considered. In this case, appellant has challenged non-acceptance of claim of prior period expenses amounting to Rs. 4,26,75,066/- as appearing in Note No. 2,28 to the audited Profit & Loss a/c. The assessing officer in the assessment order recorded that as per Tax Audit Report at point 27b the assessee claimed an expense of Rs. 43,074,756/- on account of prior period expenses as under:-
Prior period to which it relates (Year in YYYY-YY _ Type ______ Particulars Amount format) Income credited Fees 399690 2013-14 Supplies and Expenditure debited services 21501756 2013-14 Expenditure debited Other Cost 21173310 2013-14 Accordingly, assessing officer asked the assessee to show cause vide notice u/s 142(1) dated 04.12.2017 why the same should not be disallowed. In response the appellant submitted that RITES is a government of India undertaking. There are well defined procedures for providing income on liability after requisite approval is obtained from the designated authority. This procedure has been applied uniformly for many years and the income/expenses are considered to be crystallized only in the year in which these are approved by the designated authority. 3.3 It was submitted that Hon’ble ITAT Delhi vide order no 4233/Del/2010 for A.Y 2005-06 dated 01.03.2013 has allowed the claim of prior period expenditure made by RITES. It was further submitted that Hon’ble High Court of Delhi vide order & 295/2013 dated 06.12.2013 ruled in favour of RITES. Respectfully following the Hon’ble Delhi High Court and ITAT Delhi in favour of appellant in its own case, this ground of appeal is allowed.”
20. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal.
We have heard the rival submissions and perused the record. We do not find any infirmity in the order of the CIT(A) while deleting the disallowance made by the AO by following the order of the Tribunal and the Hon’ble High Court. We find, the order of the Tribunal for AY 2008-09 deleting the disallowance of prior period expenses was accepted by the Revenue and no further appeal was filed before the High Court, as stated by the ld. Counsel at the bar and not controverted by the ld. DR. Further, the claim of prior period expenses is a regular feature and under similar facts no disallowance was made in AY 2010-11 to 2014-15 as stated by the ld. counsel and not controverted by the ld.DR. In view of the above and in view of the detailed reasonings given by the CIT(A) while allowing the disallowance by following the decision of the Tribunal and the Hon’ble High Court, we do not find any infirmity in his order. Accordingly, we uphold the same. The grounds of appeal raised by the Revenue are dismissed.