KAMAL PACKAGING PRIVATE LIMITED,KOLKATA vs. THE ITO, W-6(3), KOLKATA, KOLKATA

The issue raised in Ground No. 1 relates to the disallowance of 20% made by the Assessing Officer out of travelling and conveyance expenses, which is sustained by the ld. CIT(Appeals) to the extent of 10%.

The assessee in the present case is a Company, which is engaged in the business of manufacturing of Paper Tubes. The return of income for the year under consideration was filed by it on 29.09.2010 declaring total income of Rs.17,55,413/-. In the Profit & Loss Account filed along with the said return, the sums of Rs.2,15,681/- and Rs.3,66,687/- were debited ./2016 Assessment year: 2010-2011 Page 2 of 7 by the assessee on account of vehicle expenses and depreciation on car respectively under the head “marketing expenses”. Since no log book was maintained by the assessee to show that the vehicles were used wholly and exclusively for the purpose of its business and the personal use of vehicles by the Directors of the Company as well as their family members could not be ruled out, the Assessing Officer made the disallowance of 20% out of vehicle expenses and depreciation on car for the involvement of personal element. On appeal, the ld. CIT(Appeals) found the disallowance of 20% made by the Assessing Officer to be excessive and restricted the same to 10%.

I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly contended by the ld. counsel for the assessee, the question of involvement of personal element does not arise in the case of the assessee being a Company and, therefore, no disallowance on account of personal use of vehicles by the Directors can be made in the case of a Company. I, therefore, delete the disallowance made by the Assessing Officer out of vehicles expenses and depreciation on car as sustained by the ld. CIT(Appeals) for personal use and allow Ground No. 1 of the assessee’s appeal.

The issue involved in Ground No. 2 relates to the disallowance of 25% made by the Assessing Officer out of festival expenses, which is restricted by the ld. CIT(Appeals) to 12.5%. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has claimed festival expenses of Rs.1,38,021/- and general expenses of Rs.1,16,313/- under the head “miscellaneous expenses”. In the absence of full details and supporting documentary evidence, the Assessing Officer held that the said expenses claimed by the assessee were not fully verifiable. Accordingly, the disallowance of 25% was made by him out of the said expenses. On appeal, the ld. CIT(Appeals) restricted the same to 12.5%. ./2016 Assessment year: 2010-2011 Page 3 of 7

I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the disallowance of 25% out of festival and general expenses was made by the Assessing Officer as the said expenses were not fully supported by the relevant details and documentary evidence and although the ld. CIT(Appeals) agreed with the findings of the Assessing Officer that the relevant expenses claimed by the assessee were not fully verifiable, he held that the disallowance of 25% made by the Assessing Officer was excessive or unreasonable and restricted the same to 12.5%. At the time of hearing before me, the ld. counsel for the assessee has not been able to bring anything on record to rebut or controvert the finding of the authorities below that the festival expenses and general expenses claimed by the assessee were not fully supported by the relevant details and documentary evidences. The unverifiable element thus was involved in the said expenses claimed by the assessee and in my opinion, the disallowance as sustained by the ld. CIT(Appeals) at 12.5% for such unverifiable element being fair and reasonable, no further relief to the assessee is warranted on this issue in the facts and circumstances of the case. I, therefore, find no merit in Ground No. 2 and dismiss the same.

As regards the issue involved in Ground No. 3 relating to the disallowance of 20% made by the Assessing Officer out of travelling expenses, which is restricted by the ld. CIT(Appeals) to 10%, I find that the facts and circumstances relevant to this issue are similar to the issue involved in Ground No. 2 of the assessee’s appeal and since I find that the disallowance of 10% as finally sustained by the ld. CIT(Appeals) for the involvement of unverifiable element being fair and reasonable in the facts and circumstances of the case, no further relief to the assessee is warranted on this issue. I accordingly dismiss Ground No. 3 of the assessee’s appeal. ./2016 Assessment year: 2010-2011 Page 4 of 7

The common issue involved in Grounds No. 4 to 7 relates to the disallowance of Rs.11,50,538/- made by the Assessing Officer under section 14A read with Rule 8D and confirmed by the ld. CIT(Appeals).

During the year under consideration, the assessee had received dividend income of Rs.2.42.973/- on shares and the same was claimed to be exempt from tax under section 10(34) of the Act. No disallowance on account of expenses incurred in relation to the said exempt income, however, was offered by the assessee as required by the provisions of section 14A. According to the Assessing Officer, the earning of dividend income required making of proper investment for which certain managerial and administrative exercise was required. He held that the earning of exempt dividend income thus required incurring of certain expenditure by the assessee and he worked out such expenditure at Rs.11,50,538/- by applying Rule 8D as under:- [in [in Rs.] Rs.] Expenditure directly relating to exempt income 3339 (i) (ii) Part of interest expenses (A) Interest expenses (B) Average value of investment income from which shall not form part of total income, as on the first and last day of the relevant previous year income: As on 01.04.2009- Rs.18087953 As on 03.03.2010- Rs.18657695 Total: Rs.36745648 (C) Average of the total assets as appearing in the balance sheet of the assessee as on the first and last day of the relevant year: As on 01.4.2009 As on 31.3.2010 Fixed Assets Rs.12203604 Rs.11930423 Investment Rs.18087953 Rs.18657695 Current assetsRs.30056873 Rs.29255707 Total: Rs.60348430 Rs.59843825 A X B/C = 3451923 x 18372824/60096128 1055335 (iii) 0.5% of average value of investment, income from 91864 which does not or shall not form part of the total income i.e. 0.5% of (B) 18372824 Therefore, disallowable amount u/s 14A read with 1150538 Rule 8D = (i) + (ii) + (iii) ./2016 Assessment year: 2010-2011 Page 5 of 7 Accordingly, the disallowance of Rs.11,50,538/- was made by the Assessing Officer under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962.

The disallowance made by the Assessing Officer under section 14A was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and since the submissions made by the assessee in support of its case on this issue was not found acceptable by him, the ld. CIT(Appeals) confirmed the disallowance made by the Assessing Officer under section 14A of the Act read with Rule 8D of the Income Tax Rules.

I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As demonstrated by the ld. counsel for the assessee from the copy of relevant balance-sheet of the assessee as on 31.03.2010 placed at page no. 4 of the paper book, the assessee-company had own funds in the form of share capital amounting to Rs.99,50,000/- and Reserves and Surplus amounting to Rs.97,51,502/-, which were more than the investment of Rs.180.88 lakhs made in these shares. It is thus clear that the assessee at the relevant time had sufficient own funds to make investment in shares and there is nothing to show that the said investment was made by the assessee out of the interest bearing borrowed funds. As held by the Division Bench of this Tribunal in the case of Hindustan Motors Limited –vs.- DCIT IITA No. 171/KOL/2012 dated November 20, 2015) cited by the ld. counsel for the assessee, once it is found that the investment in shares is made by the assessee out of its own funds and there is no utilization of borrowed funds for making such investment, no disallowance on account of interest under section 14A can be made even by applying Rule 8D as the said Rule 8D will have application only in such cases where there is any nexus between the interest bearing borrowed funds and investment made in shares. Respectfully following the said decision of this Tribunal, I hold that the disallowance made by the Assessing Officer on account of ./2016 Assessment year: 2010-2011 Page 6 of 7 interest under section 14A read with Rule 8D and confirmed by the ld. CIT(Appeals) is not justified and the same is liable to be deleted.

As regards the disallowance made under section 14A as per Rule 8D(2)(iii) on account of other expenses to the extent of 0.5% of average value of investment, the ld. counsel for the assessee has contended that the same has been worked out by the Assessing Officer by taking into account the entire investment instead of only the investment in shares, which actually earned dividend income during the year under consideration. In this regard, he has relied on the decision of the Division Bench of this Tribunal in the case of REI Agro Limited –vs.- DCIT (ITA No. 1331/KOL/2011 dated 19.06.2013), as affirmed by the Hon’ble Calcutta High Court, wherein it was held that the disallowance as per Rule 8D(2)(iii) is required to be worked out by taking into account only that investment, which has actually earned exempt dividend income during the relevant year and not the entire investment made by the assessee in shares. I accordingly direct the Assessing officer to re-compute the disallowance under section 14A as per Rule 8D(2)(iii) by taking into account only that investment, which has fetched exempt dividend income to the assessee during the year under consideration. The relevant grounds of the assessee’s appeal on this issue are thus partly allowed.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on February 03, 2017.