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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI RAJESH KUMAR, AM (A.Y:2011-12) Dy. Commissioner of Income Tax M/s Rishiroop Rubber International Ltd. Circle-3(3)(1), Room No.609, 6th Floor, 65, Atlanta, Nariman Point, Vs. Mumbai-400021 Aayakar Bhavan, M.K. Road, Mumbai-400021 PAN: AAACR1789G Appellant .. Respondent (A.Y:2011-12) M/s Rishiroop Rubber International Ltd. Dy. Commissioner of Income Tax Circle-3(3)(1), Room No.609, 6th Floor, 65, Atlanta, Nariman Point, Vs. Mumbai-400021 Aayakar Bhavan, M.K. Road, Mumbai-400021 PAN: AAACR1789G Appellant .. Respondent Revenue by .. Shri B.S. Bist, Sr. DR Assessee by .. Shri Jayesh Dedia, AR Date of hearing .. 15-11-2016 Date of pronouncement .. 15-11-2016 O R D E R PER MAHAVIR SINGH, JM:
These two appeals, one by the Assessee and other by the Revenue, are arising out of the common order of CIT (A)-8, Mumbai in appeal No. CIT(A)-8/Addl.CIT-3(3)/IT-534/13-14 dated 22-12-2014. Assessment was framed by the Addl. CIT, Range-3(3), Mumbai u/s 143(3) for the assessment year 2011-12 vide his order dated 24-01-2014 of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in this appeal of Revenue is against the order of CIT (A) deleting the addition made by AO by treating the Revenue expenditure as capital amounting to Rs.32,54,413/-. For this Revenue has raised following ground No.1: -
1. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) was justified in directing the AO to treat the expenditure of 2 Rs.32,54,413/- as Revenue expenditure without appreciating the fact that the nature of expenditure shown is undoubtedly capital in nature as the expenditure incurred is nothing but replacement or old structure with new structure which is permanent in nature and gives the assessee enduring benefit.”
We have heard rival contentions and gone through the facts and circumstances of the case. The assessee claimed a sum of Rs.29,32,172/- in respect of factory building repair and maintenance and also claimed expenditure in respect of repair of office building amounting to Rs.3,22,241/-. According to the AO, the repair and maintenance expenses for the year under consideration was increased from Rs.3,31,166/- during the A.Y. 2010-11 to Rs.32,54,413/- in A.Y. 2011-12, the year under consideration. The AO required the assessee to explain the nature of such expenses and assessee explain that these includes labour charges for AC sheets removing, old pipes dismantling, pipe line fabrications, fittings, purchase of tiles, purchase of paints, labour charges etc. According to AO, the expenditure claimed are purely in the nature of Capital and accordingly, disallowed the entire expenses of Rs.32,54,413/- and allowed depreciation as per applicable rates. Aggrieved assessee preferred appeal before CIT(A). The CIT(A) deleted the addition and held the expenditure as Revenue in nature by observing as under: - “5. I find that the appellant company has incurred expenditure of Rs.25,84,047/-for repairs of existing factory building at Vapi to strengthen the beam of the existing building. Similarly, Rs.3,48,125/was spent on repair of the boundary wall at Nashik factory. It is also found that Rs. l6,32,302/- was spent on purchase of steel and cement sheets. These sheets were purchased to protect the existing building and support the existing structure. It is also seen that labour charges of Rs.2.92,889/-was also paid. Replacement or repair of old walls cannot lead to a conclusion that new capital assets came into existence. I refer here to the decision in the case of New Shorroc Spg. & Mfg. Co.Ltd. v. VIT so ITR 338 (Bom); Addl.CIT v. Desai Bros -.108 ITR 14 (Guj); CIT v. Chowgule & C0. (P) Ltd. 81 Taxman 384/214 ITR 523(Bom); CIT v. Saravana Sp. Mills (P) Ltd. 163 Taxman 201215293 IT'R 201(SC); CIT v. Janakiram Mills Ltd. 275 ITR 403(Madras); CIT v. Madras Auto Service (P) Ltd. 99 Taxman 575 (SC); CIT v. Manohar Lal Him Ltd. 219 Taxman 161; CIT v. Jawahar Mills Ltd. 226 ITR 230 - Madras High Court. In View of the above, the expenditure of Rs.32,54,413/- made by the appellant company is treated as revenue expenditure. Thus, the addition of Rs.30,75,581/- made by the AO is deleted. Aggrieved Revenue is in second appeal before Tribunal
We find that the assessee has carried repair to the existing factory building at Vapi and to strengthen the beam of the existing building. The assessee also carried out repair of boundary walls of factory at Nasik. Once this is repair, the expenditure is Revenue in nature, hence, we agree with the findings of CIT (A) and confirmed the same. This issue of Revenue’s appeal is dismissed.
The next issue in this appeal of Revenue is as regards to the order of CIT (A) deleting the disallowance of expenses relatable to exempt income by the AO by invoking the provisions of Section 14A read with Rule 8D of the Rules 1962 (hereinafter ‘the Rules’). For this revenue has raised following grounds No. 2&3: - “2. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting proportionate interest of Rs.5,58,036/- out of total disallowance u/s. 14A of Rs.5,94,435/- holding that the assessee has own interest free funds available more than the investment made in tax free securities without appreciating the fact that as per Section 14A of the IT Act ,the relation has to be seen between the exempt income and the expenditure incurred in relation to it and not vice versa.
3. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting proportionate interest of Rs. 5,58,036/out of total disallowance u/s. 14A of Rs.5,94,435/relying on the decision of the Hon’ble Bombay High Court in the case CIT Vs Reliance Utilities and Power Ltd., without appreciating the fact that the decision is in the context of disallowance of interest expenditure u/s. 36(1)(iii) of the Act and has no direct application for a disallowance u/s. 14A.”
6. We have heard rival contention and gone through the facts and circumstance of the case. The facts of the case are that the assessee has earned dividend income of Rs.1,10,97,653/- and long term capital gain on sale of mutual funds amounting to Rs.46,16,259/-. The assessee claimed these two income as exempt u/s 10 (34) of the Act. The assessee suo moto worked out the expenditure relatable to such exempted income amounting to Rs.11,11,265/- and made disallowance u/s 14A of the Act. AO was not convinced with the explanation of the assessee, and accordingly applied Rule 8D of the rules and disallowed sum of Rs.17,5,700/- and thereby after considering the suo moto disallowance made by the assessee, he restricted the disallowance amounting to Rs.5,94,435/-. Aggrieved assessee appeal before CIT (A), who after considering the submissions of assessee restricted the disallowance of Rs.5,94,435/- by observing as under: - 4 “I find that the appellant company made a cash profit of Rs.9.25 crore during the year. The net own funds as on the balance sheet date is Rs.43.57 crore. Thus the entire investment of Rs.25.39 crore is made out of own funds and profit and not out of borrowed funds. In CIT v. HDFC Bank Ltd. (2014) 366 ITR 505 (Born), it has been held in the context of disallowance u/s. 14A that if the assessee’s capital, reserves, surplus and current account deposits are higher than the cost of tax free investments, it would have to be presumed that the said investments made by the assessee would be out of interest free funds. Also it has been held in the case of CIT v. Reliance Utilities and Power Ltd. 313 ITR 340 (Bom) that if there are fund available both interest free and interest bearing, then a presumption would arise that the investments made are out of interest free funds generated or available with the company and if the interest free funds are sufficient as meet the investment then there is no need for disallowing any interest. I find that the appellant company has suo motu disallowance of Rs.11,11,265/- u/s 14A of the Act. In View of the above, the further disallowance of Rs.5,94,435/- is restricted to Rs. 36,399/-.” Aggrieved Revenue is in second appeal before Tribunal.
We have heard rival contentions and after going through the facts, we noticed that the assessee has interest free fund in the balance sheet amounting to Rs.43.57 crores and investment is amounting to Rs.25.39 crores. There is presumption that the assessee might have made investment out of its own interest free funds available with him, in case AO is unable to prove nexus. This view of ours is supported by the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom). Respectfully following the Hon’ble High Court, we confirmed the decision of CIT (A) and this issue of Revenue’s appeal is dismissed.
The next Issue in this appeal of Revenue is against the order of CIT (A) deleting the addition made by AO being work-in-progress amounting to Rs.11,80,812/-. For this Revenue has raised following ground No.4:
4. Whether on the facts and circumstances of the case and in law, the Ld. CIT (A) was justified in deleting the Addition made by the A.O. of Rs.11,80,812/- being work in progress without appreciating the fact that the assessee has failed to demonstrate with any supporting evidences the ‘yield of finished goods’ in respect of ‘raw material utilized’ and also the ‘bye- products’ if any produced during the course of manufacturing process.”
We have heard rival contentions and gone through the facts and circumstances of the case. The facts of the case are that the AO noticed from working in progress & material consumed and finished goods production ratio that the assessee has not disclose any closing work in progress despite having consumed raw material amounting to Rs.11,80,81,229/-. The assessee explained before the AO that its manufacturing process involves various materials to be blended together and blending process planned during the day and completed within that day and thereafter there is no work in progress at any point of time. The AO estimated the deployment of material for manufacturing of finished goods at 1% and estimated work in progress amounting to Rs.11,80,812/-. Aggrieved assessee preferred appeal before CIT (A), who deleted the addition made by AO by observing as under: - “I find that the manufacturing process of the appellant company Involves imported material to be blended. In the past assessment years also the appellant-company has never shown work in progress since It never had work in progress in its audited accounts. The AG has not brought any material on record to justify that the appellant company has not disclosed work in progress. The finding of the AO that “not having any raw material/semi- finished goods in the machinery itself in the manufacturing process at any particular point of time cannot be ruled out” is not based on any reasoning. Therefore, the adhoc disallowance of 1% of raw materials deployed for manufacturing of finished goods which has been made by the (AC) and which comes to Rs.11,80,812/- is deleted.” Aggrieved Revenue is in second appeal before Tribunal.
We have considered the submissions of both the sides and find that the AO has made adhoc disallowance of 1% on raw material and CIT (A) deleted the same as there is no evidence. We find no infirmity in the order of CIT (A) and hence deletion is confirmed. This issue of Revenue’s appeal is dismissed. 11. Coming to assessee’s appeal, the only issue is against the order of CIT (A) confirming the action of the AO in making addition of foreign travel expenses amounting to Rs.7,34,610/-. 12. Brief facts leading to the above issue are that the AO found facts in respect of certain foreign travel expenditure that the assessee simply claimed the purpose of such foreign travel as “business”. During the course of assessment 6 proceeding, the AO asked the assessee to justify its claim of foreign travel to Zurich, Leipzig, Kulalampur, Hongkong. From the details filed, the AO found that in respect of other foreign travel performed by the Directors, the assessee has simply furnished the photocopies of visiting cards of the persons to whom the directors have met and the details of travelling agent bill. The assessee had not furnished any e-mail correspondence, invitations, if any, offered by the said foreign parties in support of the said foreign travel. In absence of such details, the business purpose of such foreign travel by merely relying on the copies of visiting cards and copies of travel agent bill was not acceptable to the AO. The argument of the assessee that such foreign travel is to source new suppliers is not maintainable as the majority of purchases shown by the assessee is from Germany, China, UAE, South Korea and the foreign travel expenditures to such places have already been considered and allowed. As the assessee failed to file corroborative evidence to justify that such foreign travel is wholly and exclusively for the purpose of business, the AO disallowed the expenses of Rs.7,34,610/- with regard to visit of Arbind M. Kapoor to Zurich and Kualalumpur and the visit of Adidtya Kapoor to Zurich and Hongkong. The CIT (A) also confirmed the disallowance of Foreign Travel Expenses exactly on identical reasons. Before us also, assessee could not controvert the finding of CIT(A) or the AO, hence we confirm the disallowance and dismiss this issue of assessee’s appeal.
In the result, the appeal of Revenue and that of the assessee, both are dismissed. Order pronounced in the open court on 15-11-2016.