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Income Tax Appellate Tribunal, DELHI BENCH “A”, NEW DELHI
Before: SHRI H.S. SIDHU & SHRI L.P. SAHU
M/S AK SERVICES PRVIATE LIMITED, DCIT, CENTRAL CIRCLE-2, VS FLAT NO. N. SAGAR APARTMENT, NEW DELHI ROOM NO. 323, 3RD FLOOR, ARA 6,TILAK NAGAR, NEW DELHI (PAN:AABCA1591L) CENTRE, JHANDEWALAN EXTN., NEW DELHI (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) Department by : Sh. K.K. Jaiswal, DR Assessee by : Sh. Ved Jain, Adv. Date of Hearing: 18.01.2016 Date of Order : 10.02.2016
ORDER ORDER ORDER ORDER
PER PER H.S. SIDHU : JM PER PER H.S. SIDHU : JM H.S. SIDHU : JM H.S. SIDHU : JM
This Appeal filed by the Revenue is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-XXXI, New Delhi for the assessment year 2009-10.
The grounds raised in the Revenue’s Appeal read as under:-
“ 1. On the facts and in the circumstances of the case, the ld. CIT(A) has erred in restricting the disallowance under section 14A r.w. Rule 8D from Rs. 23,97,233/- to Rs. 2,44,641/- by adopting the procedure not prescribed in Rule 8D of Income Tax Rules, 1962.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 15,35,666/- being bogus business promotion expenses claimed.
3. The order of the CIT(A) is erroneous and is not tenable on facts and in law.
4. The appellant craves leave to add, alter or amend any / all of the grounds ofa peal before or during the course of the heairng of the appeal.
The brief facts of the case are that Assessee company filed Return of income on 30.9.2009 declaring loss of Rs. 2,26,26,478/- after adjusting brought lossess for the AY 2006-07 and AY 2008-09. The return was processed u/s. 143(1) of the I.T. Act, 1961. In response to notice u/s. 143(2) of the I.T. Act, 1961, the Authorised Representative attended the assessment proceedings and filed the necessary, in response to the questionnaire alongwith notices u/s. 143(2) and 142(1) of the I.T. Act, 1961. Thereafter, the AO vide his order dated 22.12.2011 passed u/s. 143(3) of the I.T. Act, 1961 has assessed total loss at (-) Rs. 1,60,40,739/- and made various additions.
Aggrieved with the aforesaid order of the AO, the assessee filed appeal before the Ld. CIT(A) who vide impugned order dated 19.11.2013 deleted the additions.
Against the order of the learned CIT(A) the Revenue is in appeal before the Tribunal.
Ld. DR relied upon the order of the AO and reiterated the contentions raised in the grounds of appeal
. It was submitted by the learned DR that the AO has rightly assessed the income at (-) Rs. 1,60,40,739/-. It was further submitted that AO has given cogent 2 reasons for disallowing the addition of Rs. 23,97,233/- made u/s. 14A r.w. Rule 8D and addition of Rs. 15,35,666/- on account of business promotion expenses.
7. On the contrary, the Ld. Counsel of the Assessee contended that the action of the AO was not justified. With regard to addition made u/s. 14A r.w. rule 8D amounting to Rs. 23,97,233/- he stated that the assessee has incurred interest expense of Rs. 1,39,79,586/- during the year under consideration. This interest has been paid by the assessee to the Banks. The said interest has been paid in lieu of the funds borrowed from the Bank limits, which could have been utilised only for purchase of debt secuirites and not for the purpose of purchasing any instruments like shares, mutual funds. In this behalf, he enclosed the copies of sanction letters from the banks at PB Page 21-32. Hence, he stated that the amounts on which the interest has been paid were not utilized for making the tax free investments. He further stated that details of interest were submitted by the assessee before the AO and the AO without giving any reasoning, has disregarded the explanation, submission and calculation of the assessee has arbitrarily made the disallowance u/s. 14A. In the last he stated that it is a settled law that the AO has to first verify the correctness of the assessee’s claim which has not been done in the present. Merely saying that the submission of the assessee have been consdiered is not enough for making the impugned disallowance. To support his contention, he relied upon the following judgments and stated that the issue in hand is squarely covered by these judgements: - CIT vs. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del) - ITAT, Delhi decision in the case of Power Grid Corporation of India Ltd. vs. ACIT passed in dated 30.9.2015) - ITAT, Pune Bench decision dated 30.1.2014 in the case of Kalyani Steels Ltd. vs. ACIT passed in ITA No. 1733/PN/2012 3
- ACIT vs. M/s Magarpatta Township Development & Construction Company Ltd. (ITA No. 2114/PN/2012) dated 27.5.2014. (ITAT, Pune) - ITAT, Delhi in the case of M/s Minda Capital Ltd. vs. DCIT passed in dated 25.3.2015 - ITAT, Pune Bench in the case of Bhart Forge Ltd. vs. ACIT in ITA No. 795/PN/2013 dated 30.5.2014. - ITAT Delhi in the case of Multiplex Capital Ltd. vs. ITO in ITA No. 571/Del/2013 dated 25.3.2015. - ITAT, Delh in the case of Agnity India Technologies Pvt. Ltd. vs. ITO passed in ITA Nos. 1780 & 2045/Del/2013 dated 13.5.2015. - ITAT, Bangalore in the case of M/s. Chaitnaya Properties Pvt. Ltd. vs. JCIT (OSD) in ITA No. 52, 148 & 125/Bang/2013 dated 27.3.2015.
In view of above, Ld. Counsel of the Assessee stated that addition made by the AO was rightly deleted by the Ld. CIT(A), hence, the same may be upheld.
We have heard both the parties and perused the paper book, case laws cited by the Ld. Counsel of the assessee in his written synopsis, assessment order and the order of the Ld. CIT(A). With regard to ground no. 1 is concerned, we find that the Ld. CIT(A) has elaborately discussed the issue and gave his finding vide para no. 4.2.3 to 4.2.4 at page no. 9 to 11 of his impugned order. For the sake of convenience, the relevant finding of the Ld. CIT(A) is reproduced below:- “4.2.3 During the appeal proceedings the AR has made a detailed submission recounting the detailed submissions made before the AO. They also submitted copies of the various documents 4
submitted before the AO in their paper book containing 128 pages. The main thrust of the AR’s argument has been that the interest debited to P&L A/c has nothing to do with the investment income from which is exempt from taxation. It has been submitted that the investments were old investments and the borrowed funds have not been used for making such investments. It has been pointed out that there is a clear restriction imposed by the banks while dispersing the loans to the effect that the amount raised had to be utilized only for the purpose of debt securities and not for the purpose of purchasing instruments such as shares, units of mutual funds, etc. He has also pointed out to the conditions in each of the bank sanction letters wherein it is stated that this fund should not be used for capital market operations. The detailed submissions made by the AR have already been reproduced in the earlier paragraphs of this order which have been noted. 4.2.4 In spite of the detailed submissions made by the assessee during the assessment proceedings the AO has not given any reason countering averments made by the assessee. The assessee has shown in very clear terms that the interest debited to P&L A/c is not on the funds used for the investment activity. The assessee had also given copies of the loan sanction letters given by the banks where a condition has been put in each of the sanction letters that the funds should not be used for capital market operations. Again the investments are also mostly old investments. The 5 total investment in fact has come down from Rs. 13,65,91,034/- to Rs. 3,29,00,660/-. The appellant has its own non-interest bearing funds of more than 30 Crores in the form of its own share capital (Rs. 1.08 crores) and reserves and surplus (Rs. 30.87 Crores). However, there is not a single word from the AO as to why he considers that the interest debited to P&L A/c should be considered for working out disallowance u/s. 14A r.w. rule 8D of the Income Tax Rules. Under Rule 8D the interest which is directly relatable to the business activity of the assessee cannot be considered for calculating the disallowance u/s. 14A. in the instant case the assessee has been able to provide detailed explanation in respect of interest expenditure. However, the AO has not considered the same. I am of the view that in the given circumstances there is no merit in taking interest expenditure for computing disallowance u/s. 14A as the assessee has been able to show with facts and figures that the said expenditure relates to the funds borrowed from the banks which have been used for trading in debt securities and not for the purpose of purchasing any shares, mutual funds, etc. the income from which is exempt. Considering these factors I hold that the interest debited to P&L A/c should not be considered for calculating disallowance u/s. 14A r.w. Rule 8D. However, it cannot be denied that the appellant would be incurring certain expenditure for his investment activity and it cannot be said that no expenditure is required for 6 such activity. Hence, disallowance u/s. 14A is very much called for. The same is to be worked out by including the interest debited to P&L A/c and thus disallowance works out to Rs. 2,44,641/- being 0.5% of average investment. The appellant itself had submitted before the AO that the disallowance comes to Rs. 2,44,641/-. Therefore, disallowance u/s. 14A is restricted to Rs. 2,44,641/- and the balance is hereby deleted.”
From the above, we find that assessee during the assessment proceedings the AO has not given any reason countering averments made by the assessee. The assessee has shown in very clear terms that the interest debited to P&L A/c is not on the funds used for the investment activity. The assessee had also given copies of the loan sanction letters given by the banks where a condition has been put in each of the sanction letters that the funds should not be used for capital market operations. Again the investments are also mostly old investments. The total investment in fact has come down from Rs. 13,65,91,034/- to Rs. 3,29,00,660/-. The assessee has its own non-interest bearing funds of more than 30 Crores in the form of its own share capital (Rs. 1.08 crores) and reserves and surplus (Rs. 30.87 Crores). However, there is not a single word from the AO as to why he considers that the interest debited to P&L A/c should be considered for working out disallowance u/s. 14A r.w. rule 8D of the Income Tax Rules. Under Rule 8D the interest which is directly relatable to the business activity of the assessee cannot be considered for calculating the disallowance u/s. 14A. in the instant case the assessee has been able to provide detailed explanation in respect of interest expenditure. However, the AO has not considered the same. Therefore, Ld. CIT(A) has rightly observed that there is no merit in taking interest expenditure for computing disallowance u/s. 14A as the assessee has been able to show with facts and figures that the said expenditure 7 relates to the funds borrowed from the banks which have been used for trading in debt securities and not for the purpose of purchasing any shares, mutual funds, etc. the income from which is exempt. We find cogency in the finding of the Ld. CIT(A) that the interest debited to P&L A/c should not be considered for calculating disallowance u/s. 14A r.w. Rule 8D. However, it cannot be denied that the assessee would be incurring certain expenditure for his investment activity and it cannot be said that no expenditure is required for such activity. Hence, disallowance u/s. 14A is very much called for. The same is to be worked out by including the interest debited to P&L A/c and thus disallowance works out to Rs. 2,44,641/- being 0.5% of average investment. We also find that assessee during the assessment proceedings has submitted before the AO that the disallowance comes to Rs. 2,44,641/-. Therefore, disallowance u/s. 14A was rightly restricted by the Ld. CIT(A) to Rs. 2,44,641/- and the balance was accordingly, deleted. In the background of the aforesaid detailed discussions, we are of the view that Ld. CIT(A) has passed a well reasoned order which does not need any interference on our part, hence, we uphold the same. Accordingly, the ground no. 1 raised by the Revenue is dismissed.
With regard to ground no. 2 is concerned, we find that the Ld. CIT(A) has elaborately discussed the issue and gave his finding vide para no. 4.3.2 to 4.3.3 at page no. 11 to 12 of his impugned order. For the sake of convenience, the relevant finding of the Ld. CIT(A) is reproduced below:- “4.3.2 During the appeal proceedings, the AR has submitted that the AO has failed to appreciation that the appellant deals with nearly 2000 clients and business promotion expenses related to expenses incurred for client meetings and small gift items given to clients during such meetings. He has drawn attention to the submissions made before the AO during the assessment proceedings. The appellant had submitted entire details of the expenses 8
incurred by them in the form of ledger account, note on business promotion expenses and details of business promotion expenses in a tabular form. It was also submitted that the bills and vouchers related to credit card expenses were also submitted before the AO who has ignored the same. 4.3.3 I have considered the submissions of the AR and the assessment order. It is noted that the appellant is a Pvt. Ltd. Company and is in the business of arranging finances and dealing with debt securities. It advises the clients on their investment decisions. It has been stated before the AO that there are about 2000 business constituents spread all over India and in order to generate business and maintaining cordial relations with them the directors of the company have to meet and interact with them regularly. For such client meetings in different hotels etc. the directors have incurred expenses on food and other items which are necessary expenses required for the purpose of the appellant’s business. The AO has not brought on record any material to the effect that the expenditure related to personal expenses of the Directors. He has not probed further if he had got any doubts on the matter. He has not mentioned what sorts of details were called for and what was not provided to him. I am of the view that, the submissions of the assessee cannot be brushed aside unless it can be shown that any particular expenditure has been incurred for the personal benefit of any of the directors. Even then, assessee being a company such expenditure of the director cannot be disallowed in the hands of the company. Considering these factors, I do not find any merit in making disallowance of business promotion expenses of Rs. 15,35,666/- especially when the nature of the appellant’s business is such that it has to constantly meet several clients. Looking to the fact that the appellant has 9 generated a sizeable income of Rs. 4,22,04,724/- during the year the expenditure by way of business promotion also appears to be reasonable. Considering these factors the disallowance made by the AO is hereby deleted.” 12. From the above, we find that assessee has submitted before the AO that there are about 2000 business constituents spread all over India and in order to generate business and maintaining cordial relations with them the directors of the company have to meet and interact with them regularly. For such client meetings in different hotels etc. the directors have incurred expenses on food and other items which are necessary expenses required for the purpose of the appellant’s business. We further find that the AO has not brought on record any material to the effect that the expenditure related to personal expenses of the Directors.
He has not probed further if he had got any doubts on the matter. He has not mentioned what sorts of details were called for and what was not provided to him. Therefore, we find considerable cogency in the submissions of the assessee its submissions cannot be brushed aside unless it can be shown that any particular expenditure has been incurred for the personal benefit of any of the directors. Even then, assessee being a company such expenditure of the director cannot be disallowed in the hands of the company. It was also noted that assessee has generated a sizeable income of Rs. 4,22,04,724/- during the year the expenditure by way of business promotion also appears to be reasonable. Therefore, disallowance of Rs. 15,35,666/- was rightly deleted by the Ld. CIT(A). In the background of the aforesaid detailed discussions, we are of the view that Ld. CIT(A) has passed a well reasoned order which does not need any interference on our part, hence, we uphold the same. Accordingly, the ground no. 2 raised by the Revenue is dismissed.
In the result, the appeal filed by the Revenue stand dismissed.
Order pronounced in the Open Court on 10/02/2016.