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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI B.R.BASKARAN (AM) & SHRI RAM LAL NEGI (JM)
These are cross appeals preferred by the assessee and the revenue respectively against impugned order dated 15/01/2013 passed by the Ld. CIT (Appeals)-7 Mumbai, whereby the Ld. CIT(A) partly allowed the appeal filed by the assessee against assessment order dated 15/11/2010 passed by DCIT 3(3) Mumbai u/s 143(3) of the Income Tax Act, 1961 (for short ‘the Act’) for the Asst. Year 2008-09. Since both the appeal pertain to the same assessee, same were clubbed, heard together and are being disposed of by this common order for the sake of convenience.
ITA No. 3107/Mum/2013 A.Y. 2008-09
Brief facts of the case are that the assessee company filed its return of income declaring loss of Rs. 70,04,297/-. In the revised return the assessee reduced the value of fringe benefits from Rs. 15,10,622/- to Rs. 9,68,497/-. The case was processed u/s 143(1) of the Act and the assessment order was passed u/s 143(3) of the Act, determining the total taxable income of the assessee at Rs. 2,33,98,910/- (rounded off) after making inter alia additions of Rs. 4,23,832/- u/s 14A read with rule 8D of the Income Tax Rules, 1962, disallowance of Rs. 36,14,162/-, on account of foreign travel expenses claimed and disallowance of Rs. 12,39,375/- (paid to collector of stamps) claimed by the assessee and also treating interest income Rs. 47,98,692/- as income from other sources instead of business income claimed by the assessee.
3. Aggrieved, the assessee challenged the assessment order before the Ld. CIT(A) who after hearing the assessee partly allowed the appeal. Still aggrieved, the assessee is in appeal before the Tribunal on the following effective grounds:-
“The Commissioner of Income Tax (Appeals)-7, Mumbai has erred in :-
1) in confirming a disallowance u/s 14A in respect of profit from partnership firms.
2) In disallowing the entire expense on foreign travel. Without prejudice, the disallowance needs to be substantially reduced, particularly because it has also been considered while computing Fringe Benefit Tax.
3) In enhancing the income from House Property be adding a sum of Rs. 1,23,93,750/- being the amount of levy by the Collector Mumbai which was borne by the tenant.
4) Without prejudice, in not allowing the said sum paid by the tenant as a deduction as well since it was a levy by the Collector and was actually paid during the year.
5) in treating interest income as Income from Other Sources. Without prejudice, in taxing interest received from partnership firms as Income from other Sources, notwithstanding a specific charge u/s 28 itself on the same.”
4. Before us, the Ld. Counsel for the appellant/assessee submitted that the Ld. CIT(A) has wrongly confirmed the disallowance u/s 14A of the Act, read with Rule 8D(iii) of the Income Tax Rules in respect of profit from partnership firms. The assessee was having capital reserves and surplus of Rs. 10,61,53,315/- as on 31.3.2002, whereas the total investments were worth Rs. 92,18,750/-. The Ld. counsel further submitted that except investment of Rs. 12,500/- and 10,000/- made in National co-operative Bank and Gujarat State Financial Corporation respectively all others are either strategic investments or the investments which do not earn exempt income. Hence, the findings of the Ld. CIT(A) is liable to be set aside.
5. Second ground of appeal pertains to foreign tour expense, the Ld. Counsel submitted that the Ld. CIT(A) has wrongly confirmed the disallowance made by the AO. Since, the expenses were incurred in connection with the business and the assessee has explained the purpose of visit before the authorities below, the Ld. CIT(A) ought to have deleted the disallowance made by the AO. Without prejudice, the Ld. Counsel submitted that disallowance should have been substantially reduced particularly because this aspect has also been considered while computing Fringe Benefit Tax.
6. As regards ground No 3 and 4, the Ld. Counsel submitted that the CIT(A) has wrongly enhanced the income from House Property by adding a sum of Rs. 1,23,93,750/- being the amount of levy by the Collector Mumbai which was borne by the tenant. Without prejudice, the Ld. CIT(A) ought to have allowed the said sum paid by the tenant as a deduction since it was a levy by the collector and was actually paid during the year.
7. As regards the 5th ground the Ld. Counsel submitted that the Ld. CIT(A) has wrongly concurred with the findings of the A.O and treated the interest income as Income from Other Sources. Without prejudice, the Ld. Counsel submitted that Ld. CIT(A) has wrongly confirmed the action of the AO by taxing the interest received from partnership firms as Income from other sources, ignoring the provisions u/s 28 of the Act.
On the other hand the Ld. DR relying on the impugned order submitted that the Ld. CIT(A) has rightly confirmed the disallowance made u/s 14A of the Act read with Rule 8D(2)(iii) as the same is in accordance with the decision of Hon’ble jurisdictional High Court rendered in Godrej & Boyce Mfg Co. Ltd. vs. DCIT (328 ITR 81) . On second ground of appeal the Ld. DR submitted that the Ld. CIT(A) has rightly disallowed the entire expenditure on foreign travel. It was noticed by the A.O that expenses were incurred on foreign tour of the directors along with family members. No evidence was furnished by the assessee to substantiate the claim that foreign tours were conducted in connection with the business of the assessee. Regarding the third ground the Ld. DR submitted that the Ld. CIT(A) has rightly confirmed the findings of the A.O. Since the assessee company did not furnish breakup value of stamp duty of property, deduction of Rs. 12,39,375/- claimed by the assessee, the same has rightly been disallowed by the AO and confirmed by the Ld. CIT(A) in first appeal. As per the provisions of section 24, only municipal taxes paid are to be allowed as a deduction. In respect of stamp duty on property there is no provisions under the said Act. Moreover, the expenditure is also not allowable u/s 37(1). As regards fifth ground of appeal the Ld. DR submitted that since it was seen that the assessee had received interest of Rs. 47,98,692/- and the assessee has treated the same as business income, the AO has rightly treated the same as Income from other sources. The assessee also failed to give any explanation during the first appellate proceedings, the Ld. CIT(A) rightly confirmed the action of the AO.
We have heard the rival submissions and carefully perused the material placed before us by the parties in support of their respective contentions including the law relied upon by the parties. The Ld. CIT(A) has upheld the addition made by AO u/s 14A read with Rule 8D(2)(iii) of the Income Tax Rules relying on the ratio laid down by the Hon’ble jurisdictional High Court in Godrej & Boyce Mfg Co. Ltd. vs. DCIT(supra). We notice that during the assessment year under consideration the assessee had made total investment of Rs. 92,18,750/-. Out of the said investment, only two investments of Rs. 12,500/- and 10,000/- have been made for the purpose of earning exempt income and rest of the investments are either strategic in nature or the ones which do not earn exempt income. Hence, in our considered opinion addition is required to be calculated in terms of Rule 8D(2)(iii) in respect of the said two investments. We, therefore, modify the findings of the Ld. CIT(A) and send this issue back to file of AO with the direction to restrict the addition in respect to the said investments. We, accordingly, partly allow this ground of appeal.
10. The assessee has challenged the confirmation of disallowance made by the AO on foreign travel expenses claimed by the assessee vide ground No 2 of the appeal. Findings of the authorities below establish that Directors of the assessee company visited Europe along with family members. The contention of the assessee is that directors visited abroad to get first hand information on the scope of export of yarn which was essential for expansion of ongoing business of the assessee company. As per the settled law onus of proving necessary facts in order to claim deduction, is on the assessee. Since, the assessee has failed to justify the entire expenses incurred on foreign visit of its directors along with their family members, in our considered opinion the assessee is not entitled to claim the entire expenditure. We, therefore, restrict the expenses incurred on the directors. Hence, this issue is set aside to the file of AO to assess the actual expenses incurred on directors’ visit and allow the expenditure to that extent. Accordingly, we partly allow this ground of the appeal of the assessee.
Ground No 3 pertains to disallowance of deduction of Rs. 1,23,39,370/-. During assessment proceedings it was noticed that the assessee had claimed deduction of Rs. 1,23,39,370/- on account of payment made to collector of stamps while computing income from house property. After hearing the assessee the AO disallowed the said claim. In appeal the Ld CIT(A) enhanced the income from house property holding that Rs. 1,23,93,750/-being part of the actual rent received by the assessee is taxable u/s 23(1) of the Act. The assessee has challenged the action of the Ld. CIT(A) vide this ground of appeal. The Ld. Counsel submitted that during the relevant year the assessee incurred an expenditure of Rs. 1,23,93,750/- on account of payment to collector of stamps for obtaining necessary no objection certificate in order to enter into an agreement of lease and license with State Bank of India. Since the lease was for a period of 10 years 1/10th of said amount was reduced while computing the taxable annual value of the property. Since the amount in question was paid to the government the assessee has rightly reduced the total value. But the Ld. CIT(A) has held that out of the total amount of Rs. 2,47,87,500/- the assessee has borne ½ and remaining ½ was borne by the tenant State Bank of India under the agreement entered between the parties. Since, an amount of Rs. 1,23,93,750/-has been paid by the assessee, the assessee is entitled for the deduction, however, the assessee is liable to pay tax on the amount borne by the State Bank of India u/s 23(1) of the Act. Accordingly, the Ld. CIT(A) enhanced the appellant’s income to the extent of Rs. 1,23,93,750/-.
12. Under these circumstances, we do not find any merit in the contention of the assessee. The amount paid by the tenant state Bank of India is certainly the income of the assessee and therefore, taxable in the hands of the assessee. We are, therefore, of the considered opinion that the findings of the Ld. CIT(A) on this issue do not suffer from any infirmity. Hence, we uphold the findings of the Ld. CIT(A) and dismiss this ground of the appeal of the assessee.
13. Fourth ground is without prejudice to the third ground vide which the assessee has taken the plea that since the payment was levied by the collector and was actually paid during the relevant financial year the said allowance should be allowed to be deducted from the income from the house property. Since, we have confirmed the findings of the Ld. CIT(A) and dismissed ground No 3 of the appeal, we do not consider it necessary to adjudicate this alternative ground separately.
During the financial year relevant to the assessment year under consideration the assessee received interest of Rs. 47,98,692/-. The assessee treated the same as business income. The AO treated the same as income from other sources in the absence of any explanation by the assessee. In first appeal Ld. CIT(A) confirmed the findings of the Ld. CIT(A). The assessee has challenged the action of the Ld. CIT(A) in treating interest income as income from other sources, vide 5th ground of appeal . Before us the Ld. counsel for the assessee submitted that the interest in question was received from partnership firms. Without prejudice, the Ld. CIT(A) ought to have charge the tax on interest received from partnership firms under the provisions of section 28 of the Act. Perusal of orders passed by the authorities below reveal that the authorities concerned have not given any reason for rejecting the contention of the assessee. So, we are of the considered opinion that the matter needs fresh consideration in the light of the contention of the assessee. We, therefore, set aside this issue to the file of AO for determining the issue afresh after giving an opportunity of being heard to the assessee. Hence, this issue is partly allowed for the statistical purposes.
The revenue has challenged the impugned order on following effective grounds of appeal:-
1. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A), erred in holding the disallowance u/s 14A r.w.r 8D(2)(ii) was not justified as the assessee’s own capital and reserve and surplus were more than investment made without appreciating the fact that the assessee failed to provide any proof in support of its claim before the A.O and before the CIT(A) that the investment made from own funds.”
2. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A), was right in deleting an addition of Rs. 62,69,551/- made by the A.O as deemed dividend u/s 2(22)(e) of the I.T.Act and allowing the claim of the assessee on the ground that the impugned payment was made by the assessee in its regular course of business ignoring the fact that the lending of money is not a substantial part of the business of the assessee.”
3. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A), erred in holding that the advances of Rs. 62,69,551/- were made in the regular course of business operation and hence will not come under the preview of section 2(22)(e) of the Act, without appreciating the fact that the advances from received from Amline Textile Pvt. Ltd. which is a 100% subsidiary of the assessee company and hence in view of the decision of Hon’ble Apex Court decision in the case of Tarulata Shyam vs. CIT(1977) 108 ITR 345, section 2(22)(e) is squarely applicable to the assessee’s case.”
2. Ld. DR submitted that the Ld. CIT(A) has wrongly held that disallowance u/s 14A read with Rule 8D(2)(ii) of the Income Tax Rules holding that the assessee’s own capitals and reserves and surplus were more than the investments made. The assessee has failed to prove that the investments in question were made by the assessee from own funds.
The Ld. Counsel, on the other hand submitted that this ground is covered by the decision of Hon’ble jurisdictional High Court in CIT vs. HDFC Bank Ltd. (366 ITR 505) as the assessee’s was having capital reserves and surplus of Rs. 10,61,53,315/- as on 31.3.2002, whereas the total investments were worth Rs. 92,18,750/- therefore, the findings of the Ld. CIT(A) is in accordance with the law laid down by the Hon’ble jurisdictional High Court.
We notice that assessee did not earn dividend during the year under consideration. No investment was made by the assessee during the year under consideration. The investments mentioned by the AO have been made in the earlier years and no money was borrowed for the purpose of making these investments. Since no expenses are incurred, the question of applying rule 8D(2)(i)&(ii) does not arise. Moreover, the assessee had adequate interest free funds at its disposal no disallowance under section 14A of Act reads with Rule 8D(2)(i)&(ii) of the Income Tax Rules is called for. The appellant earned interest on the advances given to these forms and the same have already been taxed hence no disallowance of interest paid should be made while making disallowance under section 14 A of the Act.
In Commissioner of Income Tax vs. HDFC Bank Ltd.366 ITR 505, the Hon’ble jurisdictional High Court has held that where assessee's capital, profit reserves, surplus and current account deposits are higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A. Respectfully following the ratio laid down by the Hon’ble High Court, in the case aforesaid, we uphold the findings of the Ld. CIT(A) and dismiss this ground of appeal of the revenue.
Vide second and third grounds of appeal, the revenue has challenged the action of the Ld. CIT(A) in deleting an addition of Rs. 62,69,551/-made by the AO as deemed dividend u/s 2(22)(e) of the Act and allowing the claim of assessee on the ground that the impugned payment was made by the assessee in the routine course of business. The AO has held that Amline Textile Pvt. Ltd. is a subsidiary company of the assessee, therefore, payment received from the said company falls within the ambit of deemed dividend u/s 2(22)(e) of the Act. The AO has pointed out that as per the books of account an amount of Rs. 14,54,551/-was due to textile division of Amline on 17.10.2007 and total outstanding due to cotton division of Amiline prior to this date was Rs. 48,15,000/-. Hence the AO holding that the total amount of Rs. 62,69,551/- is out of accumulated profit of M/s Amline Textile Pvt. Ltd. made addition of the said amount as deemed dividend u/s 2(22)(e) of the Act.
The contention of the assessee, on the other hand is that a sum of Rs. 48,15,000/- was payable to Amline by the appellant’s Cotton Division on 3.8.2007 and on the same day a sum of Rs. 3,99,90,448/- was actually receivable from Amline by the textile Division of the appellant. Hence, the addition of Rs. 48,15,000/-needs to be deleted. The Ld. counsel for the assessee relied on the judgment of Hon’ble High Court of Andhra Pradesh passed in Commissioner of Income Tax vs. Indian Fruits Ltd.(2014) 369 ITR 0581 (AP) and the judgment of Hon’ble High Court of Punjab and Haryana passed in Commissioner of Income Tax vs. Suraj Dev Dada (2014) 367 ITR 78 (P&H) 8. The Ld. CIT(A) has deleted the addition in question mainly on the ground that since, M/s Amline Textile Pvt. Ltd. is the subsidiary of the assessee company and since the entire advance was made in the course of business operation, the same does not under the provisions of section 2(22)(e) of the Act. 9. So, in our considered opinion, the matter requires further verification by the AO to ascertain as to whether the assessee has received the amount in question out of accumulated profit of its subsidiary company M/s Amline Textile Pvt. Ltd. or the same has been received in the course of business operation as has been held by the Ld CIT(A) taking into consideration the contention of the assessee. We, therefore, restore this issue to the file of the AO to decide this issue afresh, after affording reasonable opportunity of being heard to the assessee, in accordance with the judicial pronouncements relied upon by the assessee. Hence, this ground of appeal is allowed for the statistical purposes.
In the result appeal filed by the assessee for A.Y. 2008-09 is partly allowed and the appeal filed by the revenue for the same assessment year is partly allowed for the statistical purposes.