THE DY. CIT-1(2),, RAIPUR (CG) vs. M/S. SAUMYA MINING LTD.,, RAIPUR (CG)

IN THE INCOME TAX APPELLATE TRIBUNAL RAIPUR BENCH, RAIPUR BEFORE:SHRI N.S.SAINI, AM & SHRI PAVAN KUMAR GADALE,JM ITA No.150/RPR/2013 (Assessment Year :2010-2011) DCIT-1(2), Raipur vs M/s Saumya Mining Limited, Nathani Building, Shastri Chowk, Raipur(C.G.) PAN No. : AADCS 5050 J (Appellant) .. tnednopseR Revenue by : Shri P.K.Mishra, CITDR Assessee by : Shri Praveen Jain, AR Date of Hearing : 17/01/2018 Date of Pronouncement 31/01/2018 आदेश / O R D E R Per Shri N.S.Saini, AM: This is an appeal filed by the Revenue against the order of the CIT(A), Raipur, dated 07.08.2013 for the assessment year 2010-2011. 2. The Revenue has raised the following grounds of appeal:- 1. "Whether in law and on facts & circumstances of the case, the CIT(A) has erred in deleting the deleting the disallowance of Rs.6,11,96,528/- made by the AO on account of bogus expenditure." 2. "Whether in law and on facts & circumstances of the case, the CIT(A) has erred in deleting the disallowance of Rs.51,43,787/- made by the AO out of interest expenses under section 14A." 3. "Whether in law and on facts & circumstances of the case, the CIT(A) has erred in deleting the disallowance Rs.2,76,128/- made by the AO on account of sale of investment." 4. "Whether in law and on facts & circumstances of the case, the CIT(A) has erred in deleting the disallowance of Rs.9,11,062/- made by the AO on account of various expenses." 5. "The Order of the Ld. CIT (A) is erroneous both in law and on facts." 6. "Any other ground that may be adduced at the time of hearing." 3. Brief facts relating to the ground No.1 are that the AO stated that the assessee is engaged in execution of contract works, hiring of

2 ITA No.150/RPR/2013 equipment and trading and the assessee has shown the GP at 23.19% on total turnover of Rs.179.28 crores as against GP rate of 21.24% shown in the preceding year on turnover of Rs.164.99 crores. The the net profit has slightly fallen in comparison to last year when it stood at 4.96%, while this year it was shown at 3.94% and fall in net profit was explained as attributable to the increase in expenses like bank commission, interest, staff salary and finance charges. This year the assessee has executed contract works of several Government Departments. The assessee has claimed to have executed excavation contract works worth Rs.7,96,72,605/- for M/s A.P. Nirman Limited, 224, Arihant Complex, Station Road, Raipur (APNL), TDS certificate substantiating execution of works, receipt/credit of contract payments and TDS made u/s 194C thereon was also filed. The assessment of said company for assessment year 2010-11 was made by the It. Commissioner of Income-tax, Range-I, Raipur and in the course of assessment proceedings, the A.O. has found that the claim of sub-letting work to the assessee and its onward execution by the present assessee is not correct; that the enquiries conducted by the JCIT, Range-I, Raipur from the Executive Engineer, Water Resources Department, Gariyaband and the Executive Engineer, Mahanadi Jal Pariyojna, Tilda, Raipur have revealed that the said APNL has done actual excavation work of Rs.45,12,000/- for EE, WRD, Gariyaband and of Rs.21,19,159/- for EE, MJP, Tilda. As established and held by the JCIT, the excavation work done was much less in quantum than the excavation charges claimed to have been paid to the present appellant i.e. SML. The A.O. has required APNL to explain why the claim

3 ITA No.150/RPR/2013 of excavation charges of Rs.7,96,72,605/- should not be disallowed. The APNL has not furnished satisfactory reply and the close study of the fact surfaced in the case of APNL and the reply given by the assessee reveals that the claims of sub-letting the work by APNL and its subsequent execution by the present assessee are not correct. Out of alleged contract work payment of Rs.7,96,72,605/- credited to the appellant's account, an amount of Rs.7,00,00,000/- was shown as outstanding. The payment was not made even in the subsequent assessment year. Only a nominal amount of Rs.20,00,000/- was shown to have been received this year and balance amount of Rs.6,80,00,000/- is lying as outstanding as on 31.03.2011. Both the parties are doing business and paying huge interest to their creditors. They are not related parties; that under such circumstances, it is beyond every human probability that any prudent businessman would execute contract works worth about Rs.7.96 crores after receiving only 12% of the receipts and incurs corresponding expenditure out of his pocket and discloses 23.19% gross profit thereon and further pays income tax thereon. It is clear that the present assessee SML has also claimed bogus expenditure against alleged execution of the above works. The AO, therefore, held that the corresponding expenditure claimed by SML has to be disallowed. According to the AO the GP shown by the assessee is 23.19%, therefore the AO disallowed the amount of corresponding expenditure which is worked out at Rs.6,11,96,528/- (Rs.7,96,72,605 (-) 23.29% thereof i.e. Rs.1,84,76,077/-). 4. Against the order of AO, the assessee carried the matter in appeal before the CIT(A) and submitted that the assessee has furnished all the

4 ITA No.150/RPR/2013 details required by A.O. from time to time, which were also verified from books of account and vouchers, bank statement, extract of cash book, etc. The assessee maintained branch wise books of account and in Chhattisgarh apart from registered office, company had only one branch i.e. Mandirhasaud Branch in which works for 2 parties in the year under consideration were executed:- (Rs. in lakhs) Particulars Amount D.S.Constructions Limited 1248.50 A.P.Nirman Limited 796.73 TOTAL 2045.23 The assessee further submitted that that during the course of assessment, assessee submitted Profit & Loss Account of Mandirhasaud Branch. The gross profit and net profit of Mandir Hasaud Branch are as under:- (Rs.in lakhs) Particulars Amount Percentage Gross Turnover from 2045.23 -- mandirhasaud Branch Less: Work Expenses 899.30 -- Gross Profit 1145.93 56.03% Indirect Expenses 98.01 -- Net Profit or Balance 1047.92 51.23% 5. That out of aforesaid expenses of Rs.899.30 lakhs, major expenses are Blasting expenses, Diesel Oil expenses, Spare parts expenses, Tyre Tube expenses and Salary. The payments are mostly made by account payee cheques and all suppliers/service providers are reputed. Hence adhoc disallowance without pointing out any particular expenses as bogus/bringing on record cogent evidence is arbitrary and uncalled for. In Mandirhasaud Branch 2 (two) works have been executed and total Diesel Oil Expenses is Rs.270.47 lakhs. The diesel oil is utilized / consumed for

5 ITA No.150/RPR/2013 executing the work of D.S. Construction Limited and A.P. Nirman Limited. When Diesel Oil expenses is genuine for executing the work of D.S. Construction Limited then without pointing out any particular bill as fake how same expenses can be ingenuine for executing the work for A.P. Nirman Limited. Out of Diesel Oil Expenses of RS.270.47 lakhs, major purchase is from Bhansali Fuels i.e. Rs.206.20 lakhs. Similarly assessee has incurred spare parts expenses of Rs.349.53 lakhs and major purchase is made from H.O. Kolkata through authorized dealers for all the branches of assessee. In this branch more than 85% of spare parts were purchased and supplied from Head Office and Ld. A.O. has accepted the expenses for executing the D.S. Construction Limited work then why similar expenses have been disallowed for executing the work of A.P. Nirman Limited. The A.O disallowed and added back RS.611.97 lakhs out of expenses incurred for the work of A.P. Nirman Limited which is equal to 76.81% of work done for A.P. Nirman Limited. On the basis of addition made by the A.O., total gross profit works out to be:- (Rs. in lakhs) Particulars Amount Percentage Work done for A.P.Nirman Limited 796.73 -- Gross Profit shown by the appellant 446.40 56.03% Expenses disallowed by the AO 611.97 76.81% 1058.37 132.84% 6. That it is beyond every human probability in the earth that how an entity can earn 132.84% gross profit. The A.O. is of the opinion that by executing the work of Rs.796.72 lacs, assessee has earned 1058.37 lacs; that quantitative details of work done by M/s Saumya Mining Limited, Raipur and bill submitted by main contractor to Government Department

6 ITA No.150/RPR/2013 are approximately same. In pursuance of assessment of M/s A.P. Nirman Limited, the JCIT, Raipur issued the notice uls 133(6) of LT. Act, 1961 dated 23.01.2013 to Saumya Mining Limited in response to that Saumya Mining Limited filed reply dated 0l.02.2013. Since the A.O. accepted the receipts of the assessee then without pointing out any particular expenses as bogus, adhoc disallowance of expenses to the tune of Rs.6,11,96,528/- resulting into G.P. of 132.84% from Mandirhasaud Branch for A.P. Nirman Limited work is highly arbitrary and uncalled for. If the income is accepted the expenditure incurred to execute that work should not be disallowed on adhoc basis. The JCIT disallowed subcontract expenses credited to the account of assessee in case of A.P. Nirman Limited, this means if expenses is treated as bogus then even income should also be treated as bogus and should be deleted. The A.O. cannot take two different views on same facts merely because they happen to be different officers. The A.O. of main contractor issued notice u/s 133(6) of IT. Act, 1961 to EE Water Resources Department, Gariyaband, EE Mahanadi Jal Pariyojna, Tilda is response to A.O's notice officer of the respective department have submitted their reply along with work order and copy of running bill submitted by the assessee to the respective department. The assessee filed photocopy of the bill raised by the appellant and in turn raised by main contractor and also enclosing summary of bill raised for the quantity of work executed. The quantity of both the bills are similar, hence, contention of the A.O. that the assessee has not executed work is not correct and disallowance of the expense is bad in law. The main contractor has raised RA-Ion 21.02.2010 for Rs.192.90 lakhs and RA-II on

7 ITA No.150/RPR/2013 27.03.2010 for Rs.238.02Iakhs; the combined details of RA-I and RA-IJ are as under:- Gross Bill amount Rs.430.92 lakhs Less: Machinery Advance Rs.I92.90 lakhs Work done Rs.238.02Iakhs 7. Out of above work done, deduction towards S.D., taxes, interest on mobilization advance, etc were made and payment to tune of Rs.196.00 lakhs was received vide cheque no.960975 dated 27.03.2010 towards work done and Rs.192.90 lakhs was received vide cheque No. 660962 dated 21.02.2010 towards machinery advance by the main contractor. From above it is clear that contention of the JCIT is incorrect and beyond the facts of the case. The A.O in point no.6 of his order mentioned that main contractor viz. A.P. Nirman Limited has raised the bill of merely Rs.64.39 lakhs which is also not correct. Apart from wrongly considering the receipts of Bhatapara Canal, the A.O has erred in excluding work executed for Pairi Project in making such calculation; that main contractor have raised following bills:- (Rs. in lakhs) Sl. Particulars Actual of Amount No. work done considered by the AO 1. Parii Project RVC & Fingeshwar Canal 238.02 -- 2. Bhatapara Canal Work between 2.00 41.42 21.19 kms to 5.00 kms. 3. Bhatapara Canal Work between 37.04 139.04 43.20 kms to 40.754 kms Total 418.53 64.39 8. The assessee further submitted that out of this, main contractor has claimed Rs.354.79 lakhs on account of excavation, removal and filing of soil, sloping work. The assessee has actually executed the work of quantity as depicted in annexure-3, which has also been confirmed by the

8 ITA No.150/RPR/2013 main contractor; that the contract work awarded to appellant was liable to VAT to the tune of Rs.15,93,452/- and TDS of Rs.15,93,452/- which was deducted for the contract receipts. The assessee has produced books of account bill vouchers and all records from time to time. Without pointing out any expenses as bogus, just on the basis of assessment order of A.P. Nirman Limited passed by the Joint Commissioner, disallowing Rs.611.97 lacs arbitrarily by the AO in case of appellant is uncalled for. In none of the preceding previous year any major disallowance has been made on such premise. The summary of last three assessment year is as under:- Assessment Year Returned Income Income as per Asst. (Rs.) Order (Rs.) 2009-10 79461530.00 79554460.00 2008-09 42720840.00 43352243.00 2007-08 22265460.00 22876403.00 That the comparative chart of G.P. and N.P. for previous five years are as under:- Particulars 2009-10 2008-09 2007-08 2006-07 2005-06 Work done 17928.12 16499.16 10119.18 7286.21 4589.18 Gross profit 4157.17 3503.69 2465.64 1690.82 1156.51 %of GP on 23.19% 21.24% 24.37% 23.21% 25.20% sales % of N.P. 3.94% 4.96% 5.34% 4.14% 4.34% 9. The assessee further submitted that the G.P. of current year is better than immediate preceding year and net profit has slightly reduced in C.Y. reasons of which were adequately explained at the time of assessment proceedings and which the A.O. has considered and accepted; that when G.P. and N.P. was accepted and books and accounts was also accepted by the A.O. without pointing out any expenses as bogus, disallowance without any logical reason is uncalled for. Therefore, the assessee submitted that the entire contract receipts

9 ITA No.150/RPR/2013 and expenditure flowed from the audited books of account the correctness of which was certified by the auditors in their statutory audit report, could not be doubted or disputed simply on premise and suspicions. 10. The CIT(A) after considering the submissions of assessee deleted the addition by observing as under :- “7. I have carefully gone through the assessment order and written submissions of the appellant. Incidentally, the name of the main contractor referred in the present case namely A.P. Nirman Limited is also in appeal before the undersigned in Appeal No. 126/13-14 and one of the ground of appeal raised in the said appeal is directed against disallowance of Rs.7,96,72,605/- on account of subcontract work done by Saumya Mining Ltd. i.e. the appellant in the instant case. It is seen that the A.O, in the instant case, has drawn inference based on the information received from the JCIT who completed the assessment in the case of A.P. Nirman Limited. I am of the considered opinion that the most appropriate action on the part of the A.O upon receipt of information from the JCIT holding the subcontract work as sham and bogus would have been to treat the income of the appellant also as sham and bogus. A sham transaction is the one which does not have any existence at all. Hence, if the expenditure claimed by A.P. Nirman Limited has been held as sham, the A.O ought to have reduced the corresponding income shown by the appellant in its books, particularly, when the A.O had in his possession complete information of the conclusion drawn by the JCIT in the case of A.P. Nirman Limited. It is seen that, instead of reducing the income of the appellant by a sum of Rs.7,96,72,605/-, the A.O has disallowed the expenses based on his calculation. In my considered view, the facts recorded by the A.O in the assessment order are self defeating and contradictory in as much as the A.O himself has stated in the assessment order that "the appellant has claimed to have executed excavation contract works worth Rs. 7,96,72,605/- for M/s A.P. Nirman Limited, 224, Arihant Complex, Station Road,

10 ITA No.150/RPR/2013 Raipur (APNL), TDS certificate substantiating execution of works, receipt/credit of contract payments and TDS made u/s 194C thereon was also filed. The assessment of said company for assessment year 2010-11 was made by the Jt. Commissioner of Income-tax, Range-I, Raipur and in the course of assessment proceedings, the A.O. has found that the claim of sub-letting work to the appellant and its onward execution by the present appellant is not correct. It is beyond every human probability that any prudent businessman would execute contract works worth about Rs. 7.96 crores after receiving only 12% of the receipts and incurs corresponding expenditure out of his pocket and discloses 23.19% gross profit thereon and further pays income tax thereon." I do not find any merit in the assertion of the A.O that merely these facts lead to an irrebutable presumption that the appellant has claimed bogus expenses. On one hand, the AO has recorded his satisfaction as regards details and documents furnished by the appellant in support of income of Rs.7,96,72,605/-, yet, drawing inference based on the information received from the JCIT, instead of reducing the income of the appellant by sum of Rs. 7,96,72,605/-, the A.O has held the expenses as bogus. In my considered view, as the appellant is following mercantile system of accounting, it was not a discretion on the part of the appellant but mandatory to recognize the income which had accrued although not received. The A.O has not brought on record the mischief committed by the appellant, I am of the considered opinion that the delay in receipt of payment is a fact which is diluting the allegation of the A.O as it is not the case of the A.O that the appellant has tried to introduce his unaccounted income.

11 ITA No.150/RPR/2013 the business of civil construction. The case of the appellant was under scrutiny even in preceding years.

12 ITA No.150/RPR/2013 10. I am in agreement with the submissions of the appellant that as a result of disallowance, the total Gross Profit after addition of the expenses has exceeded even the gross receipts from the sub contract work which is impractical. The appellant has furnished the quantitative details of work done by the appellant and demonstrated that the bills have been raised to the Government by the main contractor namely A.P. Nirman Ltd. for the same quantity of work.

13 ITA No.150/RPR/2013 not pointed out any defect whatsoever in any of the evidences furnished by the appellant.

14 ITA No.150/RPR/2013 turnover. The AO had not specified the quantum of expenses which, according to him, were either unverifiable or disallowable. As already stated, the accounts are statutorily audited and the declared version on the basis of such audited accounts was virtually accepted since there was no estimation of GP or NP. In the given facts and circumstances, there was no justification for making adhoc disallowances out of expenses claimed, as held in Monarch

15 ITA No.150/RPR/2013 NP shown as per audited books of account, having been undisputedly accepted as reasonable, in my considered view, the AO had no option to go back to the trading and P&L account, for making adhoc disallowances out of expenses claimed therein. Since this was done in the case of the appellant, under consideration, it was against the concept of the GP and NP defined as per the basic principles of accountancy. Reliance for this proposition is respectfully placed on the numerous judicial pronouncements, including the one in Indwell Constructions v CIT (1999) 151 CTR (A.P.) 207 CIT v. Banwari Lal Banshidhat (1998) 148 CTR (All.) 533.

The appellant gets relief of Rs.6,11,96,528/-.

16 ITA No.150/RPR/2013 12. On appeal, the CIT(A) deleted the addition mainly on the ground that no defect in the books of accounts and expenses vouchers could be pointed out by the AO. 13. We find that the finding and the action of AO are self-contradictory. If the AO was of the opinion that no work was executed by the assessee then the AO should also have reduced the assessee’s income by Rs.7,96,72,605/- while disallowing entire expenses of Rs.6,11,96,528/-. 14. It is an absurd proposition to say that contract work of Rs.7,96,72,605/- was achieved by the assessee without incurring any expenses. We agree with the finding of the CIT(A) that without pointing out any defect or error in the vouchers of expenses it was not open to the AO to make adhoc disallowance out of the same. 15. Before us also the Revenue could not point out any specific contract expenses which was claimed by the assessee was either not supported by the vouchers or were found to be bogus. In the above circumstances, we find no justification in disallowing entire expenses of Rs.6,11,96,528/- after accepting the corresponding contract income of Rs.7,96,72,605/-. Therefore, we confirm the order of CIT(A) and dismiss this ground of appeal of Revenue. 16. Brief facts relating to the ground No.2 are that the A.O has stated that as per Balance sheet as on 31.03.2010, assessee has invested an amount of Rs.18,39,57,111/- in share capital/share application money of various group companies, the income from which is not includible in the total taxable income of the appellant. The assessee has claimed interest expenditure of Rs.8,21,29,262/-, which includes interest paid on funds

17 ITA No.150/RPR/2013 invested as above in sources generating income, which is not included in the assessee's total income. In view of provisions of Section 14A, proportionate interest expenditure is not allowable. The investments are of long term in nature and income from such investments is derived as dividends, which is not taxable in the hands of the shareholder. 17. Being aggrieved with the order of AO, the assessee carried the matter before the CIT(A) and submitted that the net worth of the assessee is Rs.58.71 crores and during the year it has increased by Rs.27.40 crores. Against this the total investment by the assessee is Rs.18.39 crores. The investment has been made out of assessee's own share capital and share premium. No expenditure has been incurred by the assessee on such investment. Hence any addition u/s 14A of the Income Tax Act, 1961 is uncalled for, not justified. The assessee relied on the following judicial pronouncements:- (i) DCIT vs. Jammu & Kashmir Bank Ltd. (2013) 152 TTJ (Asr- Trib) 522. (ii) CIT vs. Reliance Utilities and Power Ltd. (2009) 221 CTR (Born) 435. (iii) REI Agro Ltd. vs. DCIT (ITA T Kolkata). (iv) DCIT vs. Ashish Jhunjhunwala (ITA T Kolkata) - ITA No./809/koIl20 12 dt. 14.05.2013. (v) Investors (Bombay) Ltd. vs. ACIT (ITA T Mumbai) - ITA No. 7858/Mum/2011/A- May 6th, 2013. (vi) CIT vs. Suzlon Energy Ltd. (2013) 33 Taxman.com 151 (Guj) dt. 3rd April, 2013. (vii) Maxopp Investment Ltd. vs. CIT (Delhi High Court) 247 CTR (Del) 162. (viii) CIT vs. Hero Cycles Ltd. 189 Taxman 50; (ix) Everest Kanto Cylinder Ltd. vs. DCIT (LTU), ITA No. 5421Mum/2012. (x) Impulse India (P) Ltd. vs. Asst. Commissioner of Income Tax (OSD) 22 SOT 368 (Del); (xi) Wimco Seedling Limited vs. Dy. CIr- 107 ITR 267; (xii) BNP Paribas SA vs. Dy.DIT (2012) 137 ITD 322 (Mum.) (Trib.) (xiii) DIT(IT) - II vs. BNP Paribas SA (2013) 32 Taxman.com 276 (Born.) dt. February 14th 2013.

18 ITA No.150/RPR/2013 (xiv) DCIT Cir-3(2) Hyderabad (2013) 33 Taxman.com 447 (Hyd) dt. April 5, 2013. (xv) Godrej & Boyce Manufacturing Company Ltd. vs. DCIT 328 ITR 181. (xvi) Zaveri Veerbhai Mandalia vs. ACIT (2013) 152 TT] 20 (Ahd- Trib). (xvii) Asst. DIT vs. Credit Agricole Indosuez (2013) 21 ITR 345 (Mumbai -Trib). 18. The CIT(A) after considering the submission of assessee deleted the addition made by the AO by observing as under :- 21. I have carefully gone through the assessment order and written submissions of the appellant. It is seen that the disallowance has been made without establishing any nexus between the interest bearing funds and exempted income yielding investment. It is seen that the appellant had sufficient non interest bearing funds for making the investment in shares as it had sufficient net worth of its own. The A.O has not disputed the submission of the appellant that no expenditure was incurred for making the investment. The case of the appellant is squarely covered by the decision of the Hon'ble ITAT Kolkata Bench in DCIT vs. Ashish Jhunjhunwala ITA No. 1809/Kol/2012 dated 14.05.2013 relying upon the decision of the Hon'ble Mumbai Tribunal in the case of J.K.Investors (Bombay) Ltd. vs. in ITA No.7858/Mum12011 A.Y2008-09 dated 13.03.2013 wherein it was held that;

"The AO has not brought on record anything which proves that there is any expenditure incurred towards earning (if dividend income. The AO has not examined the accounts of the assessee and there is no satisfaction recorded by the A O about the correctness of the claim of the assessee and without the same he invoked Rule 8D. While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. The AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under

19 ITA No.150/RPR/2013 Rule 8D of the Rules on presuming the aye rage value of investment at Y2% of the total value. This is not permissible. "

" It was brought to notice that out of the above investments, investment in shares other than of subsidiary companies was not in the assessment year under consideration. It was made long back in the earlier assessment years. [Para II}

• The revenue submitted that the assessee, instead of making investment in sister concerns, could have very well cleared the existing loans and could have saved the interest amount. More so, no income was coming from the sister concerns. There was no necessity for using the borrowed funds for investment in sister concerns. However, there is no finding that any investments in sister concerns were made in current assessment year out of borrowed funds on which interest is payable by the assessee. Neither the Assessing Officer nor the Commissioner (Appeals) gave any finding that actually borrowed funds had been diverted to the sister concerns free of interest. Rule 8D(2)(ii) deals with the case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular of income or receipt, so that the lower authorities were expected to examine whether the interest paid in the assessment year is or is not directly attributable to any particular of income or receipt. Unless there is a finding that interest is directly related to the diverted funds to the sister concerns, it cannot be held that interest incurred by the assessee is for non-business purposes. Therefore, the provisions contained in rule 8D(2)(ii) cannot be made applicable. Before disallowance of notional interest incurred for earning exempted income, it is incumbent upon the lower

20 ITA No.150/RPR/2013 authorities to establish the nexus between interest paid as it is related to amount diverted. In the absence of establishing clear-cut nexus between the amount diverted and interest incurred, the disallowance of notional interest is not possible. The Tribunal again and again holding that if the assessee diverted any interest bearing funds to the sister concern then it is business taken by the assessee to make such an investment and even if it is resulted no income to the interest, notional interest cannot be disallowed on the reason that the assessee should have used its non-interest bearing funds for the purpose of its own business purposes instead of using borrowed funds for its business. The Assessing Officer cannot sit in the armchair of a businessman and decide what the assessee has to do to maximize his profits. In view of this, the ground taken by the assessee is allowed. [Para 12]"

"Section I4A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Dividends] - Whether where investment was made by assessee in foreign subsidiaries, disallowance of interest expenditure under section I4A was not justified since dividend income from foreign subsidiaries, is taxable in India - Held, yes - Whether where assessee had own interest free funds many times over the investment made in Indian subsidiaries and further, there was no direct nexus between interest bearing borrowed funds and such investment, no disallowance of interest expenditure could be made under section I4A - Held, yes [Para 3.I]"

21 ITA No.150/RPR/2013 "Section I4A of the Income-tax Act, 1961 - Expenditure incurred in relation to exempt income [Dividend] - Assessment year 2002-03 - During previous year assessee earned dividend income on shares and claimed same to be exempt under section 10(33) on plea that investment in shares was made from its own funds - Assessing Officer did not accept plea of assessee and estimating interest expenses incurred by assessee in relation to exempt dividend income on pro-rata basis made a certain disallowance by invoking provisions of section I4A - Commissioner (Appeals) deleted impugned disallowance made by Assessing Officer - He recorded a finding of fact that dividend earned on shares by assessee was from its investments in shares out of its own funds and consequently question of invoking section I4A to disallow expenditure would not arise - Tribunal upheld order of Commissioner (Appeals) - Whether since revenue did not challenge finding of fact recorded by Commissioner (Appeals) before Tribunal, no question of law arose for consideration before High Court - Held, yes [Para 3 ]"

"The expression "expenditure incurred" refers to actual expenditure and not to some imagined expenditure but the 'actual' expenditure that is in contemplation under s. I4A(l) is the 'actual' expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under s. I4A. (Para 28)

Sub-s. (2) of S. I4A provides the manner in which the AO is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if one examines the provision carefully, one would find that the AO is

22 ITA No.150/RPR/2013 required to determine the amount of such expenditure only if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act. In other words, the requirement of the AO embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if AO returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-s. (3) is nothing but an offshoot of sub-so (2) of S. 14A. Sub-so (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the Act. In other words, sub-so (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the Act and sub-so (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the AO, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-s. (2) of S. 14A. It is only if the AO is not satisfied with the correctness of the claim of the assessee, in both cases, that the AO gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in accordance with the prescribed method, the prescribed method being the method stipulated in r. 8D. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the AO would have to indicate cogent reasons for the same. (Para 29)

Rule 8D also makes it clear that where the AO having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee;

23 ITA No.150/RPR/2013 or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, the AO shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub- r. (2) of r. 8D. Rule 8D(1) places the provisions of S. 14A(2) and (3) in the correct perspective. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under r. 8D would only come into play when the AO rejects the claim of the assessee in this regard. If one examines sub-r. (2) of r. 8D, it is found that the method for determining the expenditure in relation to exempt income has three components. In terms of the said rule, the amount of expenditure in relation to exempt income has two aspects-raj direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of cl. (i) of sub-r. (2) of r. 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one- half per cent of the average value of the investment, income from which does not or shall not form part of the total income, is Sub-s. (2) of S. 14A stipulates that the AO shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of S. 14A (2) which explicitly requires the fulfilment of a condition precedent is also implicit in S. 14A(l) (as it now stands) as also in its initial Avatar as S. 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, S. 14A, even prior to the introduction of sub-ss. (2) and (3) would require the AO to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the AO would

24 ITA No.150/RPR/2013 arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-so (2) of S. 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method. Thus, the fact that sub-ss. (2) and (3) of S. 14A and r. 8D would operate prospectively (and, not retrospectively) does not mean that the AO is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. So, even for the pre-r. 8D period, whenever the issue of S. 14A arises before an AO, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO will have to verify the correctness of such claim. In case, the AO is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the A O is to accept the claim of the assessee insofar as the quantum of disallowance under S. 14A is concerned. In such an eventuality, the AO cannot embark upon a determination of the amount of expenditure for the purposes of S. 14A(l). In case, the AO is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the AO will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.-CIT vs. Walfort Share & Stock Brokers

25 ITA No.150/RPR/2013 (P) Ltd. (2010) 233 CTR (SC) 42: (2010) 41 DTR (SC) 233 : (2010) 326ITR 1 (SC) relied on." 26. Looking to the facts and circumstances of the case as also decisions cited above, the disallowance made by the A.O cannot be sustained. Hence, the disallowance is deleted. The appellant gets relief of Rs.51,43,787/-“

26 ITA No.150/RPR/2013 22. In the above circumstances, we do not find any good and justifiable reason to interfere with the order of the CIT(A) which is confirmed and the ground of appeal of Revenue is dismissed. 23. Brief facts relating to ground No.3 are that the AO has stated that the assessee has made profit of Rs.2,76,128/- on sale of investments made in private funds/securities. This income was not found included in the total income. This amount was excluded from the computation, as proof of payment of STT was not given to the tax consultant. It cannot be treated as exempted income. Accordingly the AO added the same to the total income of the assessee. 24. Assessee being aggrieved with the order of AO, preferred appeal before the CIT(A) and submitted that on its own in the computation of total income has not claimed STT paid as deduction as the receipts of STT were not verified by the statutory auditors. Since the securities sold are listed and transactions was routed through proper depository, the transaction is compulsorily liable for STT. Non-furnishing of proof of STT in any case cannot lead to taxing of exempted transaction. 25. The CIT(A) after considering the submission of assessee deleted the addition made by the AO by observing as under :- 30. I have carefully gone through the assessment order and written submissions of the appellant. It is not the case of the A.O that the sale of listed securities has not been effected through the recognized stock exchange, it is a matter of common knowledge that Securities Transaction Tax is paid on every transaction effected through stock exchange, hence, there is no merit in taxing the exempt income. Therefore, the addition made by the A.O is deleted. The appellant gets relief of Rs.2,76,128/-

27 ITA No.150/RPR/2013 26. We have heard rival submissions and perused the orders of lower authorities and materials available on record. In the instant case, the AO observed that the assessee had made profit of Rs.2,76,128/- on sale of investments made in private funds/securities and this income was not included in the total income. The AO observed that no proof of payment of Security Transaction Tax (STT) was given by the assessee and, therefore, the same cannot be treated as exempt income. Accordingly, he added the same to the total income of the assessee. 27. On appeal, the CIT(A) deleted the disallowance on the ground that the sale of listed securities was effected through recognised stock exchange and that Securities Transaction Tax is paid and effected through stock exchange and, therefore, there was no merit in taxing the exempt income. 28. Before us, the DR though supported the order of the AO but could not bring any cogent and positive material on record to controvert the above finding of the CIT(A). Hence, we find no good reason to interfere with the order of CIT(A), which is confirmed and this ground of appeal of Revenue is dismissed. 29. Brief facts relating to ground No.4 are that several expenses which are of personal and non-business nature were claimed and included under different heads of expenses. The Staff Welfare Expenses claimed on 22nd, 29th , 31st march, 2010, Staff Medical Expense claimed on 24th, 27th, 31st reflect several expenses incurred on Shri A.C. Jain, father of the directors and on the directors. The electricity expenses claimed on 23rd March included expenses incurred on electricity Connections

28 ITA No.150/RPR/2013 available in the personal names of directors and family members, apparently relate to non-business purpose; that such expenditure on electricity connections is of personal use and cannot be allowed. The AO further observed that similar is the case with telephone expenses and travelling expenses, where most of the expenses are claimed as payment in lump sum without any details. The assessee’s authorized representative could not offer proper explanation accordingly, the AO disallowed the following amounts on estimate basis:- Sl. Head of Expenses Amount % Amount No. claimed Disallowed Disallowed 1. Electricity Expenses 21,17,825/- 1% 21,178/- 2. Medical Expenses 14,23,097/- 10% 1,42,309/- 3. Staff Welfare Expenses 38,38,780/- 10% 3,83,878/- 4. Travelling Expenses 72,73,938/- 5% 9,11,062/- TOTAL 9,11,062/- In this way, the AO added Rs.9,11,062/- to the total income of the assessee. 30. Assessee being aggrieved with the order of AO, preferred appeal before the CIT(A) and submitted that it is undisputed that some payments for business purposes had necessarily to be made by self made vouchers since the receipts were either illiterates or not in position to provide appropriate supporting. Since GP and NP was not disputed by the A.O, the genuineness and quantum of the expense, relatable to GP and NP, were deemed to have been undisputedly accepted; that the impugned adhoc disallowance made by the AO are mutually contradictory to his own decision in not disturbing the book results. No evidence whatsoever was brought on record to prove that expenses are incurred for non business purposes / personal purposes / are of capital nature, hence this adhoc

29 ITA No.150/RPR/2013 disallowance out of various expenses was uncalled for. The assessee relied on following case laws:- (i) Asst. CIT vs. Hemkund Fertilizers Pvt. Ltd. - ITA No.359/Nag/2008; (ii) Asst. cit VS. Vandana Rolling Mills Pvt. Ltd. - Order No.336/Nag/2004; The jurisdiction Bench of the Hon'ble ITA T, Nagpur Bench (Camp at Raipur) in its order in ITA No.240/NAG/05 dated 19.01.2006 in Sashi Singhania, Raipur vs. ITO 1(1), Raipur had inter alia held that since the assessee maintained regular books of account which were statutorily audited and the statutory auditors had not made any adverse comment in the audit report regarding the books maintained by the assessee, rejection of books of account by the A.O. and also by the CIT(A) - according to the Hon'ble IT AT - was not proper and justified; that in this very decision, while dealing with the adhoc disallowance out of material purchased and out of earth transporting charges, since the expenses under these heads were incurred for purpose of business, respectfully following the decision of the SC in Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 it was held that such adhoc disallowance made on the basis of guess work were not sustainable; that hence the A.O. was directed to delete such adhoc disallowances; (iii) ITO vs. Bajrang Trading Company (2011) Tax World Vol. XLV Part. 1 Page 33 (January, 11); (iv) Ashok Kumar Haria vs. ITO (16 TT] 493); (v) Lahoti Medicare Private Limited vs. DCIT (2005) 33 ITC 76; (vi) Commissioner of Income Tax vs. Banwari Lal Banshidhar - 148 CTR All 533; (vii) Smt. Rajmati Devi vs. ITO (ITA No.332/LKW/2011); (viii) Agrawal Trading Co. vs. ITO (2007) 111 TT] (Delhi Tribunal) 589; (ix) Dakeshwari Cotton Mills vs. CIT (1954) 26 ITR 775; Mahindra Oil Cake Industries Pvt. Ltd. vs. CIT (1996) 55 TT] 711 (Ahd.) x) Sayaji Iron & Engg. Co. vs. CIT 172 CTR339 (Guj);

30 ITA No.150/RPR/2013

31 ITA No.150/RPR/2013 34. The DR could not controvert the above finding of CIT(A). Hence, we find no good reason to interfere with the order of CIT(A), which is confirmed and grounds of appeal of Revenue is dismissed. 35. In the result, appeal filed by the Revenue is dismissed. Order pronounced in pursuance with Rule 34/4 of ITAT Rules, by putting the copy of the same on Notice Board on Wednesday the 31st January,2018 at Raipur. Sd/- Sd/- (PAVAN KUMAR GADALE) (N. S. SAINI) न्याययक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER Raipur; दिन ांक Dated 31/01/2018 प्र.कु.मि/PKM, Senior Private Secretary आदेश की प्रयिलऱपि अग्रेपिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant- 2. प्रत्यर्थी / The Respondent- 3. आयकर आयुक्त(अपील) / The CIT(A), आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण, Raipur / DR, ITAT, Raipur 5. ग र्ड फ ईऱ / Guard file. 6. सत्य पित प्रतत //True Copy// आदेशानुसार/ BY ORDER, (Senior Private Secretary) Income Tax Appellate Tribunal, Raipur