DCIT CIR 6(1), MUMBAI vs. ABC BEARING LTD, MUMBAI

ORDER PER G.S.PANNU,A.M:

These are cross-appeals filed by the Revenue and the assessee against the order of CIT(A)-14, Mumbai dated 26/11/2013, pertaining to the Assessment Year 2009-10, which in turn, has arisen from the order passed by the Assessing Officer dated 29/12/2011 under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).

s appeal raised by Revenue as well as assessee read as under:- Revenue’s Grounds of Appeal:-

1. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance of interest of Rs.32,19,155/- made by the A.O. u/s. 36(1)(iii) of the I.T. Act by holding that no loan was taken by the assessee during the year despite the fact that the working capital loan has increased from RS.17.48 crores last year to Rs.44.19 crores this year.

2. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the disallowance of interest of Rs.32,19,155/- made by the A.O. u/s. 36(1)(iii) of the I.T. Act without appreciating the fact that the assessee had failed to prove in course of assessment proceedings that amount borrowed on which deduction for interest is claimed has been utilized for business of assessee (work-in- progress).

3. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in deleting the additions made by the A.O on account of prior period expenses of Rs.3,66,034/- holding that the same has already been capitalized in earlier year without any evidence being available on record. If any evidence was brought during the appellate stage then fresh evidence was accepted for the first time without giving opportunity of examining the same to the A.O in contravention of Rule 46A of I.T Rules.

4. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in giving relief of Rs.18,21,489/- out of disallowance of repair and maintenance expenses by holding that the amount of Rs.18,21,489/- incurred by the assessee has already been capitalized without any evidence being available on record. If any evidence was brought by assessee at the appellate stage for the first time then it is in violation of Rule 46A of I.T.Rules as no opportunity of examining the same was given to the A.O.

5. Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) has erred in giving relief of Rs.43,17,791/- out of disallowance of repair and maintenance expenses by holding that the sum of Rs.43,17,791/- spent by the assessee is a revenue expenditure without any evidence being available on record. If any evidence was brought by assessee at the appellate stage for the first time then it is in violation of Rule 46A of I.T.Rules as no opportunity of examining the same was given to the A.O.

6. Whether on the facts and in the circumstances of the case and in law, Ld. ClT(A) has erred in directing the AO to rework the adjustment u/s.145A without there being any claim in this effect by the assessee in its Return of Income in contravention to the judgement of the Hon'ble Supreme Court's decision in the case of Goetze (India) Ltd. (284 ITR 323).

“1) The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance out of sales promotion expenses and travelling expenses & restricting it to 10% of the expenditure incurred. Your appellants submit that the sales promotion expenses and foreign travelling expenses ought to have been allowed in full as claimed by your appellants. 2) The learned CIT (Appeals) erred in confirming the disallowance to the extent of Rs.26,95,219/- out of interest u/s. 14A read with Rule 8D of the Income Tax Act, 1961. Your appellants submit that no disallowance is called for out of interest and interest expenditure as claimed ought to have been allowed. Without Prejudice to the above our appellants submit that the CIT (Appeals) erred in taking the figure of interest for calculating disallowance at Rs. 4,06,24,243/- instead of Rs. 2,00,60,521/- as accepted by the CIT{Appeals) in Para 4.3.7 at page no.11 of the appellate order passed by her. 3) The learned CIT (Appeals) erred in confirming the disallowance of Rs.6,30,407/- on account of expenses u/s. 14A read with Rule 8D of the Income Tax Act,1961. Your appellants submit that the disallowance is not warranted and ought to be deleted. Without Prejudice to the above, your appellants submit that the disallowance made on account of expenses is excessive and disallowance if any, ought to be restricted to Rs.10,000/-.

4) The learned CIT{A) erred in confirming the disallowance of Rs.13,55,948/- under section 40a(ia) of the Income Tax Act, 1961. Your appellants submit that the said disallowance is not called for and this addition be deleted. Your appellants submit that the tax was not required to be deducted from the payments made to Mr. Tarciscio Lucchetta and Mr.Tazo Totsua based on certificate of Chartered Accountants and under bonafide belief that no tax was required to be deducted. Under the circumstances, your appellants submit that the deduction ought to be allowed from amounts paid to Mr. Tarciscio Lucchetta and Mr. Tazo Totsua. 5) The learned CIT (A) failed to appreciate that in the facts and circumstances your appellant's case and in law, interest under section 234B of the Income Tax Act, 1961 is not chargeable at all and ought to have been directed that the interest under section 234B be deleted. 6) Your appellants further reserve the rights to add, amend or alter the aforesaid grounds of appeal as they may think fit by themselves or by their representatives.”

3. First we shall take up the appeal of the assessee, wherein the first issue relates to the action of the CIT(A) in confirming the disallowance out of Sale Promotion expenses and Travelling expenses @10% of the total expenditure in an adhoc manner.

3.1 In this context, the relevant facts are that assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter- alia, engaged in the business of manufacture of ball, thrust and roller bearings. In the course of assessment proceedings, the Assessing Officer noticed that as per the AIR information received, most of the expenses incurred by the assessee towards Travelling expenses and Sales promotion were through credit cards. Accordingly, the Assessing Officer called for the details and as per the discussion contained in Para-4 of the assessment order, he has disallowed 1/4th of the total expenses of Rs.13,82,042/- as being incurred for non-business purposes. As a consequence, the disallowance of Rs.3,45,512/- was worked out.

3.2 Before CIT(A), apart from other Grounds, assessee contended that the expenses were incurred purely for the purposes of business and that even the foreign travel expenses related to short terms visits by the directors and employees of the assessee company for meeting customers and suppliers. It was also pointed out that the foreign travel expenses also included expenses relating to the travel undertaken by the two of the foreign consultants hired by the assessee. The CIT(A) observed that the incurrence of sales promotion and foreign travel expenses in the course business has not been doubted but the only dispute pertained to the quantification of such expenses incurred for the purposes of business. The CIT(A), further observed that ‘it is a matter of common knowledge that for any such expenditure, there are certain expenses which are not fully verifiable’ and therefore, he estimated the disallowance at 10% of the expenditure as against 25% made by the Assessing Officer.

3.3 It is quite clear from the manner in which the disallowance was initially made by the Assessing Officer and, thereafter partly confirmed by the CIT(A), that the same is based on mere surmises without bringing out any specific instances of expenditure having been incurred for non-business purposes, inspite of the fact that the complete details were made available by the assessee in the course of the proceedings. In this view of the matter, we deem it fit and proper to set-aside the action of the CIT(A) and direct the Assessing Officer to delete the entire disallowance since the decision of the CIT(A) is based on some conjectures and surmises. Thus, on this ground assessee succeeds.

4.1 The relevant facts are that during the year under consideration, assessee was found to have earned dividend income of Rs.4,43,882/- and interest income of Rs.42,623/-, which was claimed as exempt. The Assessing Officer noted that inspite of existence of exempt income, assessee had not disallowed any expenditure relatable to such income, as required under the provisions of section 14A of the Act. The Assessing Officer noted that assessee had paid interest of Rs.4,83,83,904/- on various loans and after reducing a sum of Rs.1,62,36,376/- representing interest on secured loans taken for purchase of fixed assets, the balance of Rs.3,21,47,528/- was considered as interest for the purposes of applying the formula contained in Ruled 8D(2)(ii) of the Rules. On this basis, the disallowance of interest was worked out to Rs.26,95,219/-.

4.2 Before CIT(A), assessee has raised various submissions assailing the disallowance. The only plea accepted by the CIT(A) was that the amount of interest considered for the purposes of applying the formula of Rule 8D(2)(ii) of the Rules be reduced by a sum of Rs.77,59,661/-, which represented the interest received by the assessee during the year. Apart therefrom, the action of the Assessing Officer has been affirmed.

4.3 Before us, the Ld. Representative for the assessee has vehemently pointed out that during the year under consideration, no fresh investments have been made. It is pointed out that the only investment during the year are in relation to the NSC Certificate - Rs.10,000, Equity shares of NSK-ABC Bonds Joint Venture – Rs.12,50,00,000/-and redeemable preference shares and equity shares of MIPCO– Rs.1,89,00,000/- and Rs.95,86,025/- respectively; the aforesaid investments have been culled out by the Assessing Officer in Para – 5.1 of the assessment order based on the written submissions of the assessee. Before the lower authorities as well as before us, one of the pertinent points raised by the assessee is that the amount of Share capital and Free Reserves available with the assessee are substantially more as compared to the total investments as on 31/3/2009 and, therefore, following the ratio of the judgment of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd.,313 ITR 340(Bom), it has to be presumed that the said investments have been made out of interest free funds. It is also pointed out by the assessee that the interest expenditure of Rs.4,83,83,904/- has been incurred on specific loans raised, details of which have also been reproduced by the Assessing Officer in the assessment order. On this basis, it is also sought to be emphasized that no component of interest expenditure can be said to be relatable to the investments in question and rather the interest expenditure is relatable to the business activities and not to the investments in question.

4.4 Factually speaking, we find that the aforesaid assertions of the assessee are borne out of record and infact, written submissions of the assessee dated 27/12/2011, which has been reproduced by the Assessing Officer in Para-5.1 of his order brings out such details. The aforesaid fact-situation has not been repudiated by the Revenue at any stage and, therefore, following the ratio of the judgments of the Hon'ble Bombay High Court in the cases of CIT vs. HDFC Bank Ltd., 366 ITR 505(Bom) and HDFC Bank Ltd. vs. DCIT,383 ITR 529 (Bom), wherein the principle laid down in the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd.(supra) has been applied in the context of section 14A of the Act also, the impugned disallowance is not maintainable. Thus, noticing that the interest-free funds available with the assessee in the shape of Share capital and Free Reserves being more than investments in question, a presumption can be drawn that such investments have been made out of such interest free funds, and accordingly no disallowance under section 14A of the Act is merited out of the interest expenditure. As a consequence, the disallowance of Rs.26,95,219/- made under section 14A by applying Rule 8D(2)(ii) of the Rules is hereby deleted. Thus, on this aspect assessee succeeds.

4.5 In so far as, the disallowance of Rs.6,30,407/- on account of expenses is concerned, the Assessing Officer has computed the same in terms of Rule 8D(2)(iii) of the Rules . The CIT(A) has also affirmed the said disallowance.

4.6 Before us, the Ld. Representative for the assessee submitted that the disallowance is not warranted and that in any case the disallowance was excessive. In this context, it is noticed that the disallowance computed by the Assessing Officer is quite excessive inasmuch as the exempt income is merely to the extent of Rs.4,86,505/-, whereas the disallowance out of expenses has been made to the tune of Rs.6,30,407/-. Considering the entirety of facts and circumstances, we deem it fit and proper to retain the disallowance to the extent of the exempt income and balance of the disallowance is directed to be deleted.

4.7 In the result, Ground of appeal No.2 is allowed, whereas Ground of appeal No.3 is partly allowed.

5. In brief, the relevant facts are that assessee had paid a sum of Rs.5,71,154/- to Mr. Tarciscio Lucchetta, a resident of Italy and Rs.7,84,794/- to Mr. Tazo Totsua, a resident of Japan as remuneration for engaging their services. In terms of their of contracts, copies of which are placed at pages 114 to 127 of the Paper Book, it is seen that the two individuals were engaged to provide engineering services at Baruch Plant of the assessee company. As per the contract with Mr. Tarciscio Lucchetta dated 22/2/2008, the scope of work is stated to be maintenance of machines, reducing breakdown time, to enhance productivity of machines and quality of products and also to train engineers on maintenance and other aspects of machines. The period of contract have been stated to be six months. Similarly, with respect to the contract with Mr. Tazo Totsua dated 20/09/2008, the services have been hired for assisting the manufacturing team in reducing the set-up time, reduction of cycle time, reduction of in-process rejections, to improve the cp/cpk values and enhancing the quality level of products apart from training the quality team in improving the quality systems and process optimization. Further, it is prescribed that the period of contract shall be of 17 days i.e. 21/09/2008 to 07/10/2008. Similarly, other contracts have also been entered with Mr. Tazo providing for varying periods of engagement. It is pointed out that the total period of engagement for both the consultants does not exceed 183 days. The stand of the assessee has been that the payments made to the two professionals are for the work done by them from time to time in India for a period of less than 183 days; and that they are providing Independent Personal Services, thus, not liable to be taxed in India having regard to the respective Double Taxation Avoidance Agreement between India-Italy and India-Japan. The Assessing Officer and also the CIT(A) have disagreed with the assessee that the two individuals have rendered independent personal services, as claimed by the assessee. As per the income-tax authorities, the two individuals are to be taken as contract employees and for that matter, the CIT(A) has referred to the fact that the travel expenditure of the two individuals has been debited in the travel expenses account. Secondly, as per the lower authorities, the amount paid is in the nature of technical service and hence, it is an income deemed to accrue or arise in India in terms of section 9(1)(vii) of the Act. For the above reasons, it has been held that such payments attract the provisions of section 195(1) of the Act for deducting requisite tax at source in India, and in the absence of the requisite tax having been deducted at source the corresponding expenditure of Rs.15,55,948/- has been disallowed under section 40(a)(i) of the Act 5.1 Before us, Ld. Representative for the assessee vehemently pointed out that the stand of the CIT(A) to the effect that the two individuals are to be understood as employees of the assessee is completely misdirected. It was pointed out that though the travel expense of the two individuals has been debited to the foreign travel expenses account but the two have not been treated as employees and for that matter referred to the Fringe Benefit Tax (FBT) calculations. It has been pointed out that both the individuals have been hired for rendering their professional services by way of individual contracts and there is no dispute to the fact that the total period for which they have rendered services in India during the previous year under consideration is less than 183 days. In this context, reference has been made to Article -15 of the India – Italy DTAA to point out that income derived by recipients of a contracting state in respect of professional services or other independent activities can be taxed in the other state only if such person stays in other state for a period or periods exceeding 183 days or in the relevant year he has a fixed base regularly available to him in the other State for the purpose of performing his activities but only so much of the income as is attributable to that fixed base. In this context, Ld. Representative for the assessee pointed out that the period of stay of Mr. Lucchetta is less than 183 days in India and he has no fixed base available in India and therefore, there was no liability to deduct tax at source on such payments. Similarly, in the context of payment made to Mr. Tazo is concerned, reliance has been placed on Article -14 of India-Japan DTAA, wherein similar provisions are existing. By referring to various individual contracts with Mr. Tazo, copies of which has been placed in the Paper Book, it has been pointed out that the said individual has not stayed in India for a period aggregating 183 days in the instant year and nor does he has any fixed base in India. It is pointed out that the two individuals are basically engineers and have provided services to the assessee in their independent capacity as professional services.

5.2 On the other hand, Ld. Departmental Representative has primarily reiterated the stand of the lower authorities, which we have already noted in the earlier paras and is not being repeated for the sake of brevity.

5.3 We have carefully considered the rival submissions. The relevant contracts with the individuals bring out that the services have rendered by them in the field of their profession. Both the recipient individuals are Engineers/Consultants and in-fact, the contracts with them specifically say that their services have been engaged as Advisors/Consultants. They have rendered services in their professional capacity. Though the services rendered by them may involve technical abilities, but no technical know-how has been passed on. Moreover, the relevant clauses of the DTAA between India-Italy and India-Japan clearly suggest that where the payments fall within the purview of Independent Personal services then, even if, they are treated as Fees for technical fee or Fees for included services, such income of the non- resident shall be liable to be taxed under Article governing Independent Personal services and not as Fee for technical services. Under these circumstances, we find no reason to disagree with the stand of the assessee that the payments in question are liable to be taxed under the respective Articles of Indo-Japan & Indo-Italy DTAA governing Independent Personal services. Once it is held that the payments fall under the Article governing Independent Personnel services, the same can be taxed in India only, if the two individuals have stayed in India for more than 183 days during the previous year relevant to the assessment year under consideration. In so far as the duration of stay is concerned, there is no dispute that the two individuals have stayed in India for a period of less than 183 days during the previous year relevant to the assessment year under consideration. Thus, such payments are not liable to be taxed in India and there is no fault on the part of the assessee in not deducting tax at source on such payments.

5.4 Therefore, in our considered opinion, the lower authorities were not justified in invoking section 40(a)(i) of the Act to disallow the impugned expenditure. As a consequence, the order of the CIT(A) is set-aside and the Assessing Officer is directed to delete the addition of Rs.13,55,948/-.

5.5 In the result, appeal of the assessee is partly allowed.

6.3. Before us, the Ld. Departmental Representative has pointed out that the CIT(A) was wrong in inferring that no new loans were raised by the assessee as during the year under consideration the amount of working capital loan has since increased than the last year. It has also been pointed out that during the course of assessment proceedings assessee was not able to prove that the interest expenditure claimed has been used for the purposes of business or not. 6.4 On the other hand, Ld. Representative for the assessee contended that during the year under consideration there was no fresh term loans for the purposes of acquiring any capital asset and rather the assessee had only availed-off increased working capital loans as per the chart placed at page24 of the Paper Book. Apart there from, it has been pointed out that assessee had raised specific loans for the purposes of acquiring plant and machinery, which was in the earlier years. It has been pointed out that so far as the proviso to section 36(1)(iii) of the Act is concerned, the same is not applicable as there has been no extension of the existing business. In sum and substance, the Ld. Representative for the assessee has supported the order of the CIT(A) on this aspect.

6.5 We have carefully considered the rival submissions. Section 36 (1)(iii) of the Act permits deduction for the amount of interest paid in respect of capital borrowed for the purposes of business. The proviso to section 36(1)(iii), as it stood for the assessment year under consideration, prescribed that where any amount of interest is paid in respect of borrowings made for acquisition of an asset ‘for extension of existing business’, the same shall not be allowed as deduction for any period beginning from the date on which such amount was borrowed till the date on which such asset was put to use. On the strength of the said proviso, the Assessing Officer has inferred that interest relatable to the capital work-in-progress deserves to be disallowed. For that matter, the Assessing Officer has made a notional estimation of such interest @12%. Notably, in so far as the stand of the Assessing Officer in principle is concerned, there cannot be any dispute. So however, in order to invoke the proviso to section 36(1)(iii) of the Act, the Assessing Officer is required to establish interest has been paid in respect of the capital borrowed for acquisition of an asset. Further, it is also required to be established that the acquisition of such asset was for extension of existing business. Quite clearly, the aforesaid aspects of the matter are neither emerging from the assessment order and nor it is brought out before us. It is relevant to note here that before the CIT(A) it has been specifically pleaded by the assessee, and which has been reproduced by the CIT(A) in para 6.2 of her order, that ‘there is no extension of business during the year and even if the loan is taken for acquiring the purpose of acquiring capital assets unless they are used for expansion of existing business, interest expenses should be allowed’. The aforesaid stand of the assessee is supported by the phraseology of section 36(1)(iii) of the Act, as it stood for the assessment year under consideration and in the absence of any factual repudiation to the same, we find no reason to interfere with the ultimate conclusion of the CIT(A) in deleting the addition. As a consequence, we affirm the order of the CIT(A) and Revenue fails in Ground of appeal No.1 & 2.

7. In so far as, Ground of appeal No.3 is concerned, the same relates to a disallowance of Rs.3,66,034/- made by the Assessing Officer on the ground that they are prior period expenses. In the assessment order, the Assessing Officer notes that the details of foreign travel expenses submitted by the assessee revealed that expenses totalling to Rs.3,66,334/- pertained to prior period and he disallowed the same. Before CIT(A), assessee asserted that such expenses were in-fact relatable to the previous year relevant to the assessment year under consideration and in the details submitted to the Assessing Officer it was erroneously typed as 21/08/2008, whereas the relevant date was 21/3/2009, corresponding to the assessment year under consideration. Secondly, assessee also pointed out that actually no deduction was claimed, as such expenses were duly capitalized. The CIT(A) noted the submissions and deleted the addition on the ground that no deduction was claimed to the P&L Account as the expenses were capitalized.

7.1 Before us, the Ld. Departmental Representative appearing for the Revenue has not referred to any cogent evidence or material, which would require us to interfere with the finding of the CIT(A), which is hereby affirmed. As a consequence, Ground of appeal No.3 raised by the Revenue is dismissed.

8.2 Before us, there is no material to controvert the finding of the CIT(A) that an amount of Rs.18,24,489/- already stands capitalized by the assessee. Therefore, the CIT(A) justifiably deleted the said addition as otherwise it would have amounted to double disallowance. Now, so far as the balance addition of Rs. 43,17,791/- is concerned, the finding of the CIT(A) is that the same has been incurred on repairs. In this context, the Ld. Representative for the assessee referred to page 30 of the Paper Book to point out the nature of the expenditure. At pages 42 to 45 of the Paper Book is placed details of the expenditure incurred on repairs to Plant & machinery, which clearly show that no new asset has been acquired and that the expenses are on repairs of the existing assets. Similarly, even the details of the repairs to buildings, copies of which have been placed at pages 70 to 72 of the Paper Book, reveal that the same have been incurred on repairs and maintenance of existing assets, for instance replacement of fencing, repair of tile work in the administrative block, whitewash and partition, dismantling of old damaged wall, etc. None of the items of expenses have been shown to result in acquisition of any new asset. Considered in the light of the material on record, we find that the CIT(A) made no mistake in holding that the expenses are in the nature of routine repairs and not in the nature of capital. Thus, the aforesaid stand of the CIT(A) is also affirmed. Resultantly, Grounds of appeal No.4 & 5 raised by the Revenue are dismissed.

9.2 Before us, the only plea of the Revenue is that the instant is a fresh claim made after filing the return of income, and it could be made only by filing a revised return of income following the ratio of the judgment of the Hon’ble Supreme Court in the case of Goetz (India) Ltd.(supra).

9.3 On the other hand, Ld. Representative for the assessee defended the finding of the CIT(A) as according to her the same is consequent to the stand of the Assessing Officer in other assessment years.

9.4 Having considered the rival stand, in our view the Grounds raised by the Revenue are totally misconceived. Quite clearly, the assessee could not have foreseen at the time of filing of the return of income the impact of the adjustment under section 145A of the Act, because the same was made by the assessing authorities in the assessment for assessment years 2005-06, 2006- 07 and 2008-09. It is only after the appellate authorities upheld the stand of the Assessing Officer for the said assessment years that the consequential claim of the assessee would spring up. Therefore, under these circumstances, it was quite germane for the assessee to have raised such a plea before the CIT(A), who justifiably admitted the same. In our considered opinion, the CIT(A) has made no mistake in directing the Assessing Officer to consider the plea of the assessee and rework the adjustment under section 145A as per law. Thus, on this aspect, we hereby affirm the action of the CIT(A) and Revenue fails on this Ground.

9.5 In the result, appeal of the Revenue is dismissed.

Order pronounced in the open court on 11/01/2017