PRIYA LTD.,MUMBAI vs. DCIT (OSD),CIR 2(3), MUMBAI

1. This is an appeal filed by the Assessee under Section 260A of the Income Tax Act, 1961 (‘Act’) against the order dated 4th January, 2013 passed by the Income Tax Appellate Tribunal (‘ITAT’) in for the Assessment Year (‘AY’) 2004-05. 2. Admit. 3. The following substantial question of law is arises for determination: “Whether disallowance under Section 14A of the Act can be made in a year in which no exempt income has been earned or received by the Assessee?

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4. The Appellant is engaged in the business of making investment in shares and accepting/granting of loans. The Assessee is one of the co- promoters of Max India Ltd.

"1,21,03,367 x 6,88,70,000/8,51,65,000" = Rs. 97,87,570

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22. The controversy raised in this case is that the assessee had not earned or received any dividend in the year under consideration and, therefore, no disallowance can be made by invoking the provisions of Section 14A of the Act. We do not find any force in this contention of the assessee. When the expenditure of interest is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception. This is even if the interest paid on borrowings for the purchase of share were allowable u/s 57 as an expenditure incurred for earning or making income as held by the Supreme Court in the case of Rajendra Prasad Moody (supra) or u/s 36(1)(iii) as an expenditure incurred wholly and exclusively for the purposes of business as held by various decisions right from beginning of the Income Tax Act. When, prior to introduction of section 14A, an expenditure both u/s 36 and 57 was allowable to an assessee without such requirement of earning or receipt of income, we cannot import any such condition when it comes for disallowance of the same expenditure u/s 14A of the Act. This is what is held by the Ahmedabad Bench of the Tribunal in the case of Harish Krishnakant Bhat (supra) when it observed that interest on monies borrowed for purchase of shares held as investment is not allowable whether or not there is any yield of dividend. It is so held by applying the decision of the Supreme Court in Rajendra Prasad Moody (supra) in the reverse case wherein it is that irrespective of dividend receipt, expenditure has to be allowed. Now since dividend is exempt, as a consequence thereof expenditure has to be disallowed.

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15. 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 s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be 8 M/s Priya Ltd. & 3526/Mum/2015 making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."

2.1 On the other hand the ld. Sr. DR defended the addition by placing reliance upon the Special Bench decision from Delhi Tribunal in the case of Cheminvest Ltd. Vs. ITO (2009) (124 TTJ (Del.)(SB) 577) order dated 5/8/2009.

3.1 The aggrieved Assessee preferred appeal before the ld. CIT(A) wherein following the Special Bench decision in the case of Cheminvest Ltd. Vs. ITO (supra), affirmed the view taken by the AO. We note that the Special Bench while coming to a particular conclusion held that 10 M/s Priya Ltd. & 3526/Mum/2015 when the expenditure of interest is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether an income is earned by the Assessee or not. In this decision it was also held that section 14A does not envisage any such exception – whether any expenditure was incurred by the Assessee in relation to an income that does not form part of the total income of the Assessee under the Act and if the answer is in the affirmative then the expenditure cannot be allowed irrespective of the fact that it was allowable under different provisions of the Act. Further, disallowance has to be of the entire amount of the expenditure so related and cannot be reduced by the receipt of interest which has no relation to such expenditure. However, Hon’ble Allahabad High Court in the case of M/s. Shivam Motors Pvt. Ltd. (2014-TIOL-754-HC-ALL-IT) vide order dated 6-05-2014 while deciding an identical question u/s. 14A vide para 10 held as under:-

10. As regards the second question, sec.14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the Assessee in relation to income which does not form part of the total income under the Act. Hence, what section 14A provides is that if there is any income which does not form part of income under the Act, the expenditure which is incurred for earning an income is not an allowable deduction. For the year in question, the finding f fact is that the Assessee has not earned any tax free income. Hence, in the absence of any tax free income the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law, hence, the deletion of disallowance of Rs.2,03,752/- made by the AO was in order.

3.2 In a later decision dated 31/07/2014, the Chennai Bench in the case of ACIT vs. Mr. M. Baskaran also followed the aforesaid decision from Hon’ble Allahabad High Court in the case of M/s. Shivam Motors Pvt. Ltd. and also considered the Special Bench decision from Delhi Tribunal in Cheminvest Ltd. Vs. ITO (supra). The Bench also followed and discussed various other decisions including decision of Hon’ble Gujarat High Court in the case of Corrtech Energy Pvt. Ltd.(Tax Appeal No.239 of 2014 dated 24/03/2014, wherein it was held as under :-

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We have given our thoughtful consideration of the facts and the decisions relied upon by ld.AR. The Hon’ble Punjab & Haryana High Court in the case of CIT vs. Winsome Textile Industries lts. Reported at (2009) 319 ITR 204 (P&H) has held that in the present case, admittedly, the Assessee did not make any claim for exemption. In such a situation, sec.14. A could have no application. In this case also, the Assessee has not claimed any exempt income in this year. Therefore, respectfully following the judgement of Hon’ble Punjab & Haryana High Court in the case of CIT vs. Winsome Textiles Industries Ltd. (supra), we hereby allow this ground and direct the AO to delete the addition……….

3.3 In another case Hon’ble Bombay High Court in CIT vs. Delite Enterprises(Tax Appeal No.110 of 2009 order dated 26 Feb. 2009) , Hero Cycles Ltd. (320 ITR 518) and M/s. Lakhani Marketing Incl (ITA No.970 of 2008) dated 2/4/2014 and CIT vs. Winsome Textile Industries Ltd. (319 ITR 204) from Hon’ble Punjab & Haryana High Court held that where there is no claim for exemption of income in such situation sec. 14A has no application. In the present appeal also since the Assessee company has not claimed any exempt income during the year, therefore, there is no question of disallowance of expenditure. Respectfully following the aforesaid decisions we delete the disallowance made u/s. 14A of the Act as the Assessee has not claimed any exempt income during the year. We allow the appeal of the Assessee.

2.3. It is also noted that the ration laid down in the case of CIT vs Shivam Motors Pvt. Ltd. (2015) 55 taxman.com 262 (All.) supports the case of the assessee. Identically, Hon'ble Gujarat High Court in CIT vs Corretech Energy (Pvt.) Ltd. (2014) 272 CTR 262 (Guj); (2015) 372 ITR 97 (Guj.) held that, where the assessee did not make any claim for exemption of any income from payment of tax disallowance, u/s 14A could not be made. Identically, the Punjab & Haryana High Court in CIT vs Lakhani Marketing Inc. (2014) 49 taxman.com 257 (P & H), relying upon the decision in CIT vs Hero Cycles Ltd. (2010)

12 M/s Priya Ltd. & 3526/Mum/2015 223 ITR 518 (P & H) and CIT vs Winsome Textile Industries Ltd. (2009) 319 ITR 204 (Para-6) held that section 14A cannot be invoked where the assessee has not received any dividend income during the relevant year. Thus, following the ratio laid down in the aforesaid cases, we decide this issue in favour of the assessee as no exempt income was earned by the assessee during the relevant Assessment Year.

3. The next ground pertains to confirming the disallowance of provision for warranty of Rs.3,06,365/- as against correct disallowance of Rs.34,029/-. At the outset, the ld. DR pointed out that this issue is covered against the assessee by the decision of the Tribunal for Assessment Year 2005-06 (ITA No.8725/Mum/2010). The ld. counsel for the assessee did not controvert this factual matrix. However, he contended that the Assessing Officer may be directed to quantify the correct disallowance.

3.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal for ready reference and analysis:-

“ITA No.8725/Mum/2010 -AY.2005-06

2.First ground of appeal pertains to confirmation of the disallowance of provision for warranty for After Sales Service of Rs.10,10,378/-.During the assessment proceedings AO found that 13 M/s Priya Ltd. & 3526/Mum/2015 the assessee had debited an amount of Rs.19.04 lacs as warranty replacement expenses. The assessee had debited an amount of Rs. 19,04,996/- as warranty replacement expenses. On verification of the details furnished by the assessee, it is noticed that the expenses include provisions of Rs. 10, 10,378/-. He directed the assessee to file justification for the claim. After considering the reply of the assessee dated 3.9.2007 ,he held that the contention of the assessee was not acceptable, that as per section 37(1), any expenditure (not being in the nature of capital expenditure or personal expenditure) laid out or expended wholly and exclusively for the purpose of business, should be allowed, that for claiming deduction amount in question should have been laid out or expended during the previous year ,that the assessee had not incurred the expenditure during the year under consideration, that it had not furnished the basis of estimate of the liability, that the amount claimed was nothing but a provision for future expenditure that might or might not be incurred, that contingent liabilities did not constitute expenditure and could not be the subject matter of deduction even under mercantile system of accounting. Finally, he made a disallowance of Rs.10.10 lacs .

2.1.Against the order of the AO, assessee preferred an appeal before the First Appeal Authority (FAA).After considering the submissions of the assessee and the assessment order, he held that there was no merit in the contentions of the appellant, that the AO had disallowed only the provision out of aggregate amount of Rs 19.04 lakh debited as warranty expenses, that the assessee had been allowed deduction on actual expenses that nothing was brought on record that the same was ascertained liability, that no basis for arriving at the figure had been furnished, that ad hoc provision could not be allowed, that the expenditure which was deductible for income tax purposes was one which was towards a liability actually existing at the relevant time, that putting aside of money which might become expenditure on the happening of an event was not an allowable item, that contingent liabilities did not constitute expenditure and could not be subject matter of deduction even under the mercantile system of accounting, that if 14 M/s Priya Ltd. & 3526/Mum/2015 the liability had accrued and though discharged at a later date would be deductible, that it should be capable of being estimated with reasonable certainty though the actual quantification might not be possible, that in the case under consideration these facts were missing, that liability would arise only when any claim was made by the purchasers and not before. He placed reliance on the judgments of Indian Molasses Co. P. Ltd (37 ITR 66),Calcutta Co. Ltd (37ITR1) Sajjan Mill Ltd (156 ITR 585).

He finally held that the assessee had made a provision regarding charges payable in terms of sale which had not crystallised ,that the assessee failed to prove the actual incurrence of liability under the warranty cause, that in absence of any such details, acceptance of the claim without any basis could not be allowed, that the AO was justified in making the impugned disallowance.

2.2.Before us, Authorised Representative(AR) submitted that the assessee was incurring expenditure under the head warranty for After Sales Service, that during the year assessee had incurred warranty expenditure of Rs.9 lacs for the year under consideration, that the assessee had made provisions for the first time, that in subsequent year necessary entries were passed in books of a/cs., that in the balance-sheet said fact was mentioned in form of a note, that sales of the assessee has increased in the year under consideration as compared to last year, that provision made was reasonable considering the sales. He referred to page no.1,11,12of the Paper-Book (PB).He relied upon the judgment of the Hon’ble Supreme Court delivered in the case of Rotork Controls India Pvt. Ltd.(314ITR62).He also referred to the order of the Bangalore ITAT delivered in the case of Lenovo (India)Pvt. Ltd.(21Taxmann.com.256).Departmental Representative (DR) submitted that no scientific basis for calculating warranty was provided by the assessee, that actual expenditure had gone down with the increased sales, that there was no direct relation with the sale, that provision was ad-hoc and could not be allowed. He relied upon the case of Micro Land India Ltd. (18taxmann.80- High Court of Karnataka).

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2.3.We have heard the rival submissions and perused the material before us. Expenditure incurred by an assessee for warranty liability is allowable expenditure, provided it is covered by the principles enumerated by the Courts, from time to time, in this regard. As per the established law warranty liability can be considered part and parcel of the sale and might be allowed in computing the taxable income. But, for claiming the allowance one has to furnish a fair, scientific and reasonable basis to the AO. To arrive at the conclusion that the assessee is following a reasonable and scientific method with regard to warranty liabilities, as directed by the Hon’ble Supreme Court in the matter of Rotork Controls India Pvt. Ltd.(supra),facts and figures of the earlier years are essential. Besides, AO should also consider as-what was the policy practised by the assessee in earlier years, what was the basis for calculating a certain percentage of sales for determining warranty liability, and what was the rate of reversals of liabilities in the earlier years. We find that in the case under consideration, the assessee did not provide material with regard to warranty liabilitiesto the AO or to FAA during assessment/appellate proceedings. We find that the AO has specifically mentioned that assessee had filed any basis of calculating the amount of warranty. It is found that assessee-company has not certified the paper-book as required by Rule,18 of ITAT, Rules 1963 and it has not mentioned that all the papers, including paper no.1,were produced before the AO.Pg.1 of the PB contains basis of warranty expenditure. In absences of the certificate as whether the paper no.1 was before the AO or not we can safely say that same was not made available to him. Even if it was furnished to him, in our opinion it is of no use. We find that the company has not scrutinised the ‘historical trend’ of warranty provisions made and compared it with the actual expenses incurred. Appellant has failed to prove that figures furnished by it are based on a ‘sensible estimate’. We find that evidence of ‘yearly reassessment of such estimates’ were not produced. In other words appellant has not ‘maintained data systematically’. assessee has claimed that gross sales had increased over the years. We find that the assessee in not only dealing in computer peripherals, but it is also engaged in the 16 M/s Priya Ltd. & 3526/Mum/2015 business of exporting of chemicals and dye stuff, bulk pharmaceuticals and intermediaries. It is not known whether the increase in sales was result of selling of computers or other items. DR has rightly pointed out that there is no correlation between the increased sales and warranty expenditure on warranty liability has gone down with increase in sales. In these circumstances, we are of the opinion that provision made by the assessee was for contingent liability. We have perused the judgments delivered by the Hon’ble Apex Court delivered in the case of Rotork Controls India Pvt. Ltd. (supra).In our humble opinion that case rather supports the views expressed by the AO and the FAA. We find that in the submissions made by the assessee ‘historical trend’ of warranty provisions ‘sensible estimate’ and ‘yearly reassessment of such estimates’ were existing. In other words assessee has not ‘maintained data systematically’, as desired by the Hon’ble Supreme Court. In the case of Lenovo (India) Pvt. Ltd.(supra)assessee company had taken over business from IBM. Considering the above fact Tribunal held that as IBM was making provisions in earlier years, so assessee can use the data for warranty expenditure. It was further held that if estimate was made on a scientific basis, same could be allowed. In the matter before us, scientific data is not available. In these circumstances we hold that there is no need to interfere with the order of the FAA. Upholding his order we decide ground no.1 against the assessee.”

In the light of the above, in principle, we decide this issue against the assessee, however, we direct the ld. Assessing Officer to examine the factual matrix and disallow the correct amount, if any, accordingly.

Thus, the appeal of the assessee is disposed off in terms of indicated hereinabove.

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4. Now, we shall take up the appeal of the Revenue (ITA No.3526/Mum/2015), wherein, the only ground raised by the assessee pertains to directing the Assessing Officer to recomputed the disallowance u/s 14A of the Act r.w.r. 8D of the Rules after excluding the long term capital investment in subsidiary/group concerns relying upon the decision of the Tribunal in the case of Garware Wall Roaps Ltd. (65 SOT 86) ignoring the fact that the decision of the Tribunal has not been accepted by the Department.

4.1. During hearing, the ld. DR advanced arguments, which is identical to the ground raised. The ld. counsel for the assessee defended the order of the Tribunal. We have considered the rival submissions and perused the material available on record. We find that while coming to a conclusion, the Ld. Commissioner of Income Tax (Appeal) has deliberated upon the factual matrix and various case laws including from Hon'ble jurisdictional High Court and the Tribunal. We find no infirmity in the same. So far as, the contention of the ld. DR that the order of the Tribunal is under challenge before the Hon'ble High Court, is concerned, we are of the view that order of the Hon'ble High Court will be binding upon both the parties but as on date the issue is in favour of the assessee, therefore, we dismiss the appeal of the Revenue.

Finally, the appeal of the assessee is disposed off in terms indicated hereinabove and the appeal of the Revenue is dismissed.

18 M/s Priya Ltd. & 3526/Mum/2015 This Order was pronounced in the open court in the presence of ld. representatives from both sides at the conclusion of the hearing on 13/02/2017.

Sd/- Sd/- (N.K. Pradhan) (Joginder Singh) लेखा सद�य / ACCOUNTANT MEMBER �या�यक सद�य / JUDICIAL MEMBER मुंबई Mumbai; �दनांक Dated : 21/02/2017 f{x~{tÜ? P.S /�नजी स�चव आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy//