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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri M. Balaganesh, AM & Shri K. Narasimha Chary, JM]
ORDER Per Shri K. Narasimha Chary, JM:
This appeal by revenue and cross objection by assessee are arising out of order of CIT(A)-VI, Kolkata vide Appeal No. 236/CIT(A)-VI,Cir-6/2010-11/Kol dated 28.03.2013. Assessment was framed by DCIT, Circle-6, Kolkata u/s. 143(3)/115WE(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2008-09 vide its order dated 29.12.2010. For the sake of convenience, we dispose of both the appeal and the cross objection by this common order.
Brief facts of the case are that, the assessee is a Public Limited company engaged in the business of consultancy including software and power sector engineering and Internet services. During the FY 2007-08 relevant to the AY 2008-09 the assessee filed its return of income on 29.09.2008 declaring total loss of Rs.1,55,86,009/-. The case was selected for scrutiny and on following the procedure and on considering the annual accounts, Tax Audit Report and other claims made on behalf of the assessee during the assessment proceedings, the AO assessed the business income at Rs.15,00,145/-.
CO No.122 of 2013 Descon Ltd., AY 2008-09 3. While assessing the income of the assessee u/s. 143(3) of the Act, the AO disallowed the interest expenses claimed by the assessee as exempt and added back Rs.84,52,516/-, Rs.89,000/- towards club membership, Rs.1,36,49,714/- towards written off claim, Rs.41,39,764/- towards prior period legal expenses, Rs.13,13,117/- claimed towards advances written off, Rs.28,68,900/- on the ground of non-deduction of TDS on certain payments, Rs.1,41,216/- towards audit expenses disallowed in the earlier year and Rs.1,51,942/- disallowing donation.
As against this, the assessee carried the matter in appeal before the CIT(A), who by way of impugned order confirmed the additions u/s. 14A of the Act read with Rule 8D of the I. T. Rules, 1962 (hereinafter referred to as the “Rules”) towards club membership fees, audit expenses disallowed in the earlier year and deleted the addition made by the AO basing on special expenditure to the tune of Rs.1,36,49,714/-, prior period legal expenses to the tune of Rs.49,39,764/-, advances written off of Rs.13,13,117/-, amount towards which TDS was not deducted to the tune of Rs.28,68,900/- and donation to the tune of Rs.1,51,942/-.
Challenging the deletion of the legal expenses of the prior period to the tune of Rs.41,39,764/- and advances written off in respect of the amount of tax recoverable from Government Department amounting to Rs.6,60,101/-, the revenue preferred appeal before the Tribunal on the following grounds:
“1. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in deleting the addition made by the AO amounting to Rs.41,39,764/- being payment made relating to earlier/prior period.
2. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in allowing the deduction under the head ‘Advances written off’ in respect of the amount of tax recoverable from Govt. Department amounting to Rs.6,60,101/-.”
6. So also, challenging the dismissal of the appeal in respect of the disallowance u/s. 14A of the Act read with Rule 8D(2)(ii) of the Rules to the tune of Rs.80,59,865/-, disallowing club membership to the tune of Rs.89,000/- and disallowing the audit expenses of the earlier year to the tune of Rs.1,41,216/-, the assessee preferred this Cross Objection on the following grounds:
“1. That on facts as well as on law the Learned CIT(A) - VI, Kol has erred in confirming the disallowances under section 14A on account of proportionate amount of interest on borrowed CO No.122 of 2013 Descon Ltd., AY 2008-09 capital amounting to Rs.80,59,865 despite the fact that the cross objector did not incur any expenditure towards cost of interest to earn exempt income.
2. That on facts as well as on law, the Learned CIT(A) - VI, Kol has erred in disregarding the amount of disallowances made under section 14A amounting to Rs. 2,00,000 offered by the cross objector on its own in the computation of total income.
That on facts as well as on law, the Learned CIT(A) - VI, Kol has erred in not appreciating the fact of the cross objector that no direct expenditure was incurred in relation to the earning of exempt income during the year under appeal.
4. That on facts as well as on law, the Learned CIT(A) - VI, Kol has erred in confirming the disallowances of entrance fee amounting to Rs. 89,000 on account of payment made to Calcutta Rowing Club disregarding various judicial pronouncements as relied on by the cross objector.
5. That on facts as well as on law, the Learned CIT(A) - VI, Kol has erred in confirming the disallowances on account of the claim of the Cross objector amounting to Rs. 1,41,216 which was disallowed in immediately preceding year for non deduction of tax at source, even though the TDS was duly deducted and deposited by the Cross objector into the account of Central Government in the year under appeal and accordingly claimed in the return of income.
That, your cross objector begs your leave to urge any additional ground of appeal
or to modify any ground of appeal before or at the time of hearing .”
7. We have heard Ld. DR. None appeared on behalf of the assessee in spite of opportunities given. In these circumstances, we find no other option but to proceed on the basis of the arguments advanced by the Ld. DR and the material available on record. It is the argument of the Ld. DR that the Ld. CIT(A) held in deleting Rs.41,39,764/- being payment made relating to earlier and prior period and a sum of rs.6,60,101/- under the head advance written off in respect of the amount of tax recoverable from Government Department. Basing on the grounds and the contentions of the Ld. DR as well as the objections raised by the assessee to the additions before the Ld. CIT(A) as we could delineate the same from the order of Ld. CIT(A), the following issues are emanating for consideration:
(i) Are the authorities below justified in making an addition of Rs.80,59,865/- u/s. 14A of the Act read with Rule 8D(2)(ii) of the Rules? (ii) Are the authorities below justified in disallowing the club membership fees to the tune of Rs.89,000/-? (iii) Are the authorities below justified in disallowing the audit fee relating to the earlier year to the tune of Rs.1,41,216/-? (iv) Are the Ld. CIT(A) justified in deleting the sum of Rs.41,39,764/- claimed by the assessee as deduction towards legal expenses relating to the earlier year?
CO No.122 of 2013 Descon Ltd., AY 2008-09 (v) Are the Ld. CIT(A) justified in deleting the additions made by the AO towards advance written off including the amount of tax recoverable from the Govt. Department to the tune of Rs.6,60,101/-? Issue No. (i): 8. So as to this issue is concerned, it is borne out from record that the total interest paid by the assessee during the AY in question is Rs.2,73,43,890/-, average investment is Rs.11,85,30,225/- and according to the order of the Ld. CIT(A) the exempt dividend income is Rs.1,20,67,940/- whereas according to the assessee, it is only Rs.22,02,178/-. Assessee offered a sum of Rs.2 lacs towards expenses incurred for earning exempt income whereas the AO computed the same at Rs.86,52,516/-. It could be seen from the assessment order that on the average investments of Rs.11,85,32,225/- the AO computed the disallowable portion of .5% at Rs.5,92,651/-. In Cross Objection, the assessee does not challenge this finding and on the other hand, before the Ld. CIT(A) his plea was that out of this Rs.5,92,651/- he had already offered Rs.2,00,000/- in his return, as such, the balance of Rs.3,92,651/- alone may be disallowed. The challenge of assessee in Cross Objection is confined to Rs.80,59,865/- u/s. 14A of the Act read with Rule 8D(2)(ii) of the Rules. For this purpose and on this aspect, the contention of the assessee was that the shares from which they derived the dividend income were acquired out of their own funds except a part of the shares in DPSC Ltd. According to them, in all, they held 13,67,818 shares of DPSC Ltd. out of which 68,702 shares were acquired with the borrowed fund of Rs.218.28 lacs and such loan was obtained in FY 2005-06 from five lenders, and the entire loan was discharged in the FY 2005-06 and 2006-07. Since the assessee does not dispute the invocation of section 14A of the Act read with Rule 8D(2)(iii) of the Rules, aspects relating to the management expenses are not adverted to by us.
Ld. CIT(A) having considered the books of account of the assessee, Tax Audit Report and other relevant matter found that as on the date of investment the assessee had paid interest on huge borrowings and there was no direct investment from any exclusive capital funds having any direct nexus of its origin and being invested as investments earning exempted income. The Ld. CIT(A) satisfied himself that the offering of Rs. 2 lacs by the assessee was without any basis and no documents supporting the same are produced. As a matter of fact, as rightly observed by the Ld. CIT(A) there may not always be a direct and immediate nexus between any capital or the borrowing funds with the investments. It
CO No.122 of 2013 Descon Ltd., AY 2008-09 cannot be ruled out that the loans taken for the purpose of capital expenditure for purchasing machinery will not yield any income investible for earning any exempt income. What is initially a capital expenditure with the borrowed funds could generate, in the process of manufacturing and sale of goods, the income that could be invested for generating the exempt income. It is for the assessee to demonstrate with reference to relevant accounts maintained separately to show that the exempt income is generated solely through their own funds and no part of the borrowed funds is directly or indirectly could have been utilised for generating the exempt income. Obviously, the assessee did not produce any scrap of papers before us for this purpose.
In so far as the plea of the assessee that the investments in DPSC Ltd. were made through the loans obtained in the FY 2005-06 and such loan was completely discharged in FY 2005-06 and 2006-07 is concerned equally there is no documentary evidence before us and the bald statement of assessee does not take the place of legal evidence or proof. At this stage, we can profitably make a reference to the decision of the Jurisdictional High Court of Calcutta in Dhanuka & Sons Vs. CIT (2011) 339 ITR 319 (Cal), wherein it has held as under:
“9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment." The Ld. CIT(A) himself has referred to the following decisions : i) ACIT Vs. Champion Commercial Co. Ltd. in for AY 2008-09 of Kolkata ITAT; ii) ISG Traders Ltd. Vs. CIT in ITA No. 264/Kol/2003 reported in (2011-TOIL- 621-HC-Kol-IT; iii) Technopak Advisors (P) Ltd. Vs. Addl. CIT reported in (2012) 18 taxmann.com 146 (Del.); iv) Cheminvest Ltd. Vs. ITO reported in (2009) 121 ITR 318 (Del)(SB); v) Sonata Information Technology Ltd. Vs. DCIT reported in 2012-TIOL-721- ITAT-MUM: vi) Sanchayita Mercantile (P) Ltd. Vs. ACIT (2008) 25 SOT 57 (Mum) and CO No.122 of 2013 Descon Ltd., AY 2008-09 vii) CIT Vs. RKBK Fiscal Services Pvt. Ltd. (2013)-TIOL-188-HC-Kol-IT and stated that it is for the assessee to state the source of investment to earn exempt income by production of materials that such investments were made with the funds available in the hands of the assessee at the relevant point of time without taking the benefit of any loan.
As a matter of fact, it is the finding of the Ld. CIT(A) that the assessee failed to produce cogent material before him to show that they have sufficient funds in their hands at the time of the alleged investments of funds or that the admitted borrowings had never been utilised for investments to earn exempt income, either by preparing or producing separate account of expenditure or to substantiate how much of the composite expenditure incurred was in relation to the exempted income. In the absence of any evidence on this aspect matter cannot be decided merely on the statement made by the assessee that they had separate own fund utilised in the investment or that the borrowings with which the DPSC Ltd. shares were purchased were fully discharged by 2005-06 and 2006-07 so that no interest remained payable in the FY 2007-08 cannot be accepted. Unless on facts we are convinced that either all these things should have had happened, it is not possible for us to give a finding that at relevant point of time the assessee did not utilize any borrowed funds for investment to generate the exempt income. Equally it is not possible for us to give a finding that the source of purchasing the shares in DPSC Ltd. was discharged prior to the FY 2007-08, as such, no expenditure towards interest on that aspect could have been incurred by them. We, therefore, find in these set of facts and circumstances that the finding of the Ld. CIT(A) on this aspect is very convincing and the reasons are cogent and do not warrant any interference at all. We confirm the same and dismiss the ground nos. 1, 2 and 3 of the assessee’s Cross Objection.
Issue No. (ii):
Now coming to the claim of the assessee to allow deduction of Rs.89,000/- incurred by them for securing entrance fee to the Calcutta Rowing Club on the ground that such an expenditure is in the interest of business, as such, it has to be allowed. On this aspect the finding of the Ld. CIT(A) is that the assessee has not filed any evidence to show that the expenditure on entrance fee to club was actually used for the purpose of the business of the assessee company, guests were entertained pursuant thereto or that meetings were organised
CO No.122 of 2013 Descon Ltd., AY 2008-09 and that some customers were also present. On this score of question of fact, the Ld. CIT(A) sought evidence. The CIT(A) confirmed this addition not on the ground that it is a capital expenditure but the confirmation is on the question of fact. The Ld. CIT(A) expressed the opinion that the assessee has not filed any evidence whether the expenditure was the personal expenditure on directors the food expenses incurred on them and their family members and personal friends or for any business purpose. It is the expenditure in relation to business purpose alone that could be allowed as expenditure u/s. 37(1) of the Act. Unless and until the assessee removes this doubt in the mind of the lower authorities that the club membership was used solely for the purpose of business and not for the personal purpose of the directors or their family members or personal friends etc. merely because the assessee says that it has a potentiality to expand the business avenues, in a routine manner, such an expense cannot be allowed to be deducted. Hence, we find it necessary to direct the Ld. AO to verify this fact with reference to the material to be produced by the assessee and to give a finding as to the tax liability of the assessee in respect of the expenditure incurred to secure the access to the club. We, therefore, set aside the finding of the lower authorities on this aspect and restore this issue for fresh adjudication of the Ld. AO. This ground of Cross Objection of assessee is allowed for statistical purposes.
Issue No. (iii)
Now coming to the claim of the assessee in respect of Rs.1,41,216/- u/s. 40(a)(ia) of the Act towards audit fee is concerned, the assessee company booked liability for audit fee payable to the auditors for audit of accounts of the company for the FY 2006-07 and tax at source was required to be deducted at the time of payment or credit whichever was earlier. However, no such tax deducted by 31.03.2007, as such, it was disallowed u/s. 40(a)(ia) of the Act for the AY 2007-08. However, during the FY 20-07-08, at the time of making payment of audit fees, the assessee deducted the tax at source and deposited the same on 19.09.2008 and claimed Rs.1,41,216/- as deduction in the AY 2008-09 for the payment made in the AY 2007-08. Section 40(a)(ia) reads as under:
“ [any interest, commission or brokerage, [rent, royalty,] fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub- contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)], on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, [has not been paid on or before the due date specified in sub-section (1) of section 139 :]”
CO No.122 of 2013 Descon Ltd., AY 2008-09 Therefore, it is clear that the deduction is not available in case the TDS is not deposited in the year of payment. Here the year of payment was 2007-08 ended by 31.03.2007 whereas the deposit of TDS was on 19.09.2008. In view of this mandate of law no such deduction is allowable and the AO has rightly disallowed such an expense and the Ld. CIT(A) has rightly confirmed the same. We do not propose to interfere with such a finding of Ld. CIT(A), as such, we confirm the same and dismiss the ground no. 5 of assessee’s Cross Objection.
Now coming to the allowability of legal expenses incurred in the year 2008 paid in the FY 2008-09 is concerned, it is borne on record that the assessee company incurred legal expenses to the tune of Rs.4,13,764/- in respect of certain legal cases in Calcutta High Court, the cases were disposed of in the FY 2007-08 but the legal experts sent its bills only in the FY 2008-09, as such, such a liability could not be crystallised during the FY 2007- 08 and it is only on receipt of the bills the liability was crystallized and by that time the books of account were closed, as such, in the books of account for the year 2008-09 they are entered as prior period expenses. However, the AO was unmindful of this fact and disallowed such expenses but rightly corrected by the Ld. CIT(A) holding that the liability for the payment to the advocates crystallized during the period relevant to the AY 2008-09 and as such, a sum of Rs.31,55,362/- was to be allowed as expenditure pertaining to AY 2008-09 and the bills relating to Rs.8,10,657/- though issued in the AY 2009-10 but the services were rendered during the AY 2008-09 incurring liability, as such, the assessee had an option to create the provisions for the payment of the same or may debit exact amount on the basis of bills received immediately in the next FY. This finding of Ld. CIT(A) is well considered one and we do not see any illegality or irregularity in it. We, therefore, confirm the same and dismiss the ground no. 1 of appeal of revenue.
Issue No. (v):
Now coming to the disallowance of advances written off amounting to a total of Rs.13,13,117/- of which the credit from Govt. Departments is a part, is concerned, the Ld. CIT(A) discussed this in the light of the written submissions made by the assessee and recorded a finding that the assessee written off this amount being irrecoverable u/s. 36(1)(vii) of the Act and they have not received tax credit certificates relating to Sales Tax, Service tax and work contract tax. The Ld. CIT(A) was convinced himself with the CO No.122 of 2013 Descon Ltd., AY 2008-09 explanation of the assessee that it is a business loss being the payment of advance in ordinary course of business. In these circumstances, the Ld. CIT(A) deleted the addition. On this score, we do not find any material forthcoming from revenue to take different view when the assessee written off the amount as irrecoverable debts and amounts to business loss. We are in agreement with the Ld. CIT(A) that the same has to be allowed as deduction and the Ld. CIT(A) has rightly deleted the same. We find no infirmity in his order and the same is hereby upheld. This ground of revenue’s appeal is also dismissed.
In the result, the revenue’s appeal is dismissed and the Cross Objection of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on 24.08.2016