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Income Tax Appellate Tribunal, “G”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI RAMLAL NEGI, JM
आदेश / O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A) for the assessment year 2009-2010, in the matter of order passed u/s. 143(3) of the I.T. Act wherein the following grounds have been taken by the assessee. Being aggrieved by the order passed under section 250 of the Income tax Act, 1961 ('the Act') by the learned Commissioner of Income tax (Appeals)-9, Mumbai ['CIT(A)'], your appellant submits the following grounds of appeal for your sympathetic consideration:
1. The learned CIT(A) erred in not directing the Assessing Officer to delete the addition of Rs. 4,42,01,504/- made under section 145A on account of Excise Modvat on closing stock of Raw Material and spares. He further erred in not appreciating the fact that where section 145A of the Act is invoked, corresponding effect should be given to the opening stock, purchase and sales made during the year 2 Gabriel India Ltd., and net result of these adjustment on the profit of the year would be Nil.
The learned CIT(A) erred in not directing the Assessing Officer (' AO') to adopt value of Rs. 13,26,03,000/- being fair market value of the property as determined by the DVO as on 6 May 2008 being the full value of consideration of Mulund property sold by the appellant.
3. The learned CIT(A) erred in not granting deduction of Rs. 5.70 crores being amount paid by Runwal Developers towards out of court settlement and legal cost, as cost of improvement while computing the long term capital gains, without appreciating the fact that the said sum was deducted by the buyer from the balance consideration due on sale of Mulund property to the appellant.
The learned CIT(A) erred in confirming the disallowance of Rs. 62,87,173/- under section 14A of the Act r.w. Rule 8D as against Rs. 49,66,962 suo-moto disallowed by the appellant. He ought to have appreciated the submission of the appellant that it has sufficient own fund and therefore, no disallowance towards interest cost ought to be made. Without prejudice to the above, he erred in not directing th~ AO to consider the gross value of fixed assets as well as current assets for the purpose of computing disallowance as per Rule 8D; 5. The learned CIT(A) erred-in confirming the disallowance of Rs. 1,54,15,493/- under section 37(1) of the Act on the ground that the appellant paid excess managerial remuneration to managerial personnel in violation of government rules and are specifically prohibited for allowing deduction. He further erred in observing that no, documentary evidence was filed by the appellant regarding the review of order by the Ministry of Corporate Affairs (MCA). Without prejudice to the above, the learned CIT(A) ought to have allowed deduction of Mr. Prakash Kulkarni Rs. 18,40,868 being excess managerial remuneration of allowed by the MCA.
The learned CIT(A) erred in excluding a sum of Rs. 6,97,806 while granting deduction under section 80IC of the Act. The Appellant craves leave to add or amend any or all of the above grounds of appeal, if necessary.”
3 Gabriel India Ltd., 2. Rival contentions have been heard and record perused.
Facts in brief are that assessee is engaged in manufacturing and sale of Ride Control Products and Bearings. During the year under consideration AO made addition u/s. 145A which was confirmed by the CIT(A). At the outset, learned AR fairly conceded that issue is covered against assessee by the order of the Tribunal for the assessment year 2005-2006 and 2006-2007. Respectfully following the order of the Tribunal, we dismiss the ground raised
by the assessee. However, in all fairness if addition is made in the closing stock u/s.145A, then corresponding adjustment is also required to be made in the opening stock. We direct the AO accordingly.
4. Next grievance of assessee relates to addition to long term capital gains in respect of Mulund property.
5. Rival contentions have been heard and record perused.
6. Facts in brief are that assessee agreed to sell total land admeasuring 32,863 sq.mtr in Mulund to Runwal developers in 2006 for a total consideration of INR 85 crores, out of which land admeasuring 25,425 sq.mtr was transferred in A.Y.2007-08 for a consideration of INR 75 crores. The same had been offered for tax in AY 2007-08 under the head “Long-term Capital Gains” which was also accepted in the assessment order u/s.143(3). The balance plot of land admeasuring 7438.10 sq.mtr has been transferred in the year under consideration i.e. AY 2009-10 for the balance amount INR 10 crores. The subject matter of the plot i.e., 7438.10 sq. mtr immovable property was under dispute. Buyer (Runwal 4 Gabriel India Ltd., Developers) paid INR 4.30 crores (INR 10 crores – INR 5.70 crores towards cost of settlement and legal cost) to the assessee company as full and final settlement of the consideration. The issue involved is what is the fair market value of the plot of land admeasuring 7438.10 aq.mtr should be considered for the purpose of Section 50C.
7. We have considered rival contentions and found from record that there is no dispute on the year of taxability by the assessee as well as the tax department. So far as invocation of Section 50C is concerned, the AO was correct in invoking the same. Since Stamp Duty value was more than fair market value, the AO referred the matter to the DVO.
Fair market value - per the DVO's report dated 27.12.2012 - as on 06.05 2008 was INR 13,26,03,000/- and as on 31.03.2009 was INR 14,23,23,000/-.
Assessee give limited power of attorney in August 2007 to Runwal Developers to represent the matter in the Court. Since the matter was disputed in the High Court the date on which stay was vacated by the High Court is required to be considered as the date of transfer and therefore, the fair market value as on 06/05/2008 is required to be taken for the purpose of Section 50C. Accordingly, AO is directed to recompute the addition u/s. 50C, taking the value at Rs.13,26,03,000/-. We direct accordingly.
5 Gabriel India Ltd., 9. Next grievance of assessee relates to allowing legal expenditure incurred by Runwal Development for vacating the property after having out of court settlement, while computing the long term capital gains.
We have considered rival contentions and found that since Runwal Developers had reached out of court settlement with third party and incurred expenses on litigation, while computing the capital gains as per Section 50C of the Act, the cost of improvement incurred in the form of out of court settlement for getting clear title of the plot and litigation cost should be considered. However, CIT(A) has rejected assessee’s claim on the plea that these payments have not been made by the assessee and capital gains in this case have been worked out under deeming provisions of Section 50C.
We have carefully gone through the term sheet signed by assessee and Runwal Developers on 19 September 2006, according to which Runwal Developers paid 75 crores to Assessee and the Assessee was under obligation, among others, to ensure, the following for conclusion of the sale: (i) Removal of machines from factory. (ii) Factory Closure Certificate from Govt of Maharashtra. (iii) NOC from Labour Commissioner, Govt of Maharashtra. (iv) Settlement with Sitaram Dharam Bond and Others - (Writ Petition No. 5416 of2004 filed by Gabriel before Bombay High Court.)
6 Gabriel India Ltd., (v) Balance part of the consideration i.e. INR 10 crores was payable by Runwals on satisfactory and timely compliance of conditions stipulated in the term sheet.
It is clear from the term sheet that it was the assessee's responsibility to pass on the clear title of the property to Runwal Developers. Since Runwal Developers had been given general power of attorney to represent matter in the Court, it had settled the matter out of court. Therefore, the cost incurred by Runwal Developers on account of out of court settlement and legal cost, the same has been adjusted from the balance sales consideration i.e. INR 10 crores. Hence. the payment made by Runwal Developers would be considered as constructive payment being made by the assessee. Therefore, the same should be considered as deductible while computing the capital gains.
As per our considered view Even if an assessee exercises his option to substitute the market value of the asset instead of the actual cost price, under Section 55(2)(i), deduction of any type of expenditure whether it is connection with the transfer or in connection with improvement to the capital assets, is allowable. Accordingly, we direct the AO to allow the legal expenses incurred and paid by Runwal Developers, while computing capital gains in the hands of assessee.
Next grievance of assessee relates to disallowance made u/s. 14A read with Rule 8D. We have considered rival contentions and found that Assessee had invested INR 1,333.10 lakhs in Equity shares from which it had earned exempt income of Rs. 1.66 lacs. The said investments were 7 Gabriel India Ltd., made out of the Own Fund i.e. Share Capital and Reserves. As of 31 st March 2008, these are stated at INR 13,264.7 lacs and Investment of INR.1333.10 lakhs is only 10.08 % of the Net Worth. As per the decision of Jurisdictional High Courts in case of HDFC Bank Ltd., 366 ITR 505 and Reliance Utilities & Power Ltd., 313 ITR 340, if assessee is having sufficient own funds, no disallowance of interest is warranted. We also found that against the exempt income of Rs.1.66 lakhs the assessee suo- moto worked out the disallowance as per Rule 8D at INR 49,66,962 as against the disallowance of INR 62,87,173 worked out by the AO. Accordingly, we direct the AO to restrict disallowance u/s 14A of Rs.49,66,962/-.
Next grievance of assessee relates to disallowance of Rs. 1,54,15,493/- under section 37(1) being excess payment of managerial remuneration.
We have considered rival contentions and found that excess remuneration so paid was approved by the shareholders in their General Meeting held on 28th July, 2009. The shareholder also approved application to the Central Government for the same. This fact was also duly disclosed at Sub-Note No.17(b) under Note No.20 “Notes forming part of Accounts” of Audited Annual Accounts. Accordingly, Assessee filed a waiver application in Form 25A for the approval from the Ministry of Corporate Affairs for the excess managerial remuneration paid to the company officials as mentioned below. Subsequently, the assessee 8 Gabriel India Ltd., received approvals from the Ministry of Corporate Affairs, New Delhi, as mentioned below for the said application. a. Mr. Arvind Walia vide letter no.SRN No.A71766505/2010-CL-VII dated 30th September, 2010 (i) Remuneration allowed as pr the MCA - Rs.51,85,181/- (ii) Remuneration Disallowed (to be recovered) - Rs.47,20,659/- b. Mr. Prakash Kulkarni vide letter No.A71651418/2010-CL-VII dated 21st September 2010 (Annexure F) (i) Remuneration allowed as per the MCA – Rs.18,40,868/- (ii) Remuneration disallowed (to be recovered) – Nil c. Mr. K.N. Subramanian vide letter no.A71767636/2010-CL-VII dated 21st July, 2010. (i) Remuneration Allowed as per the MCA – NIL (ii) Remuneration disallowed (to be recovered) – Rs.59,77,968/-.
We also found that in light of rejection of applications in the case of Mr. Arvind Walia and Mr. K N Subramaniam as mentioned above, Assessee Company filed a Review Application' vide letter dated 27th January 2011 and disposal of the same is still awaited. Total remuneration paid during the year also included the Management Incentive Bonus Plan and long Term Management Incentive Bonus Plan for earlier year(s) as per the Company policy uniformly followed by the Assessee over the years. During the year under consideration, Assessee was impacted by the down turn in auto industry with reduced margins and increased finance costs. However, assessee company could still achieve 9 Gabriel India Ltd., increase in terms of volume mainly on account of various cost saving and other measures taken by these top executives of the company and as such assessee company deemed it appropriate to reciprocate them with the similar bonus as paid in the earlier years which was always well within limits prescribed by the Companies Act,1956.
We also found that in respect of Mr. Prakash Kulkami, waiver was granted from recovery of excess remuneration amounting to INR 18,40,868/-. As such, entire amount paid to him was allowed by the MCA and nothing was recoverable. However, AO has disallowed the differential amount of Rs.47,16,866/- i.e. difference between total remuneration paid to Mr. Kulkami of Rs.65,57,734 less waiver granted by the MCA amounting to Rs.18,40,868/-. Since entire amount paid to Mr. Kulkami stands allowed by the MCA, no disallowance can be made u/s 37. However, neither AO nor CIT(A) have properly appreciated all these factual aspects.
In view of the above discussion, we set aside the order of the lower authorities and restore the matter back to the file of the AO for deciding afresh, keeping in view our above observations.
Ground with regard to disallowance of deduction u/s. 80IC on other income was not pressed by learned AR, the same is therefore, dismissed in lemine.
In the result, appeal of the assessee is allowed in part.