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Income Tax Appellate Tribunal, AHMEDABAD “B” BENCH
Before: Shri Rajpal Yadav & Shri Amarjit Singh
आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
These two assessee’s appeals for A.Y. 2006-07 & 2010-11, arise from order of the CIT(A)-1, Ahmedabad dated 06-02-2015, in proceedings under section 143(3) r.w.s. 154 of the Income Tax Act, 1961; in short “the Act”.
I.T.A Nos. 1395 & 1396/Ahd/2015 A.Y. 2006-07 & 2010-11 Page No 2 Devarsons Industries Pvt. Ltd. vs. DCIT
ITA No. 1395/Ahd/2015
The assessee has raised following grounds of appeal:- “1. The learned Commissioner of Income-Tax (Appeals) erred in law and on facts in confirming addition of Rs. 1,69,720/- on account of disallowance u/s 14A of the I. T. Act, 1961 by applying rule 8D of Income - Tax Rules in spite of the fact that the assessee company has not incurred any expenditure for earning income which does not form part of total income and further that Rule 8D came into force with effect from assessment year 2008-09. 2. The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming disallowance u/s 14A where the Assessing Officer without pointing out single instance of any direct or indirect expenditure incurred by the appellant for earning the dividend income which is exempt under the IT Act. There is no finding by the Assessing Officer how much administrative expenditure incurred by the appellant for earning dividend income. 3. Rule 8D of the Income Tax Rules has been amended with effect from A.Y. 2008-09. The assessment year under consideration is A.Y. 2006-07, therefore Rule 8D has no application. 4. The learned Commissioner of Income-Tax (Appeals) erred in law and on facts that in regard to the administrative and other expenses which could have been relating to the earning of dividend income, disallowance u/s 14A can be made. The appellant company says and submits that the investments made by the company are Long Term Investments made in past years and no expenditure is incurred by the company for earning income which does not form part of total income. The investment activity is an ancillary activity of the company for earning income by utilizing its idle source of resources and for earning this investment income, no staff is engaged / involved for the administration of the investment. Even, in the Income Tax Act, 1961, under Section 14A, it is written that "the expression in relation to' of the Section 14A would mean that disallowance under section 14A cannot be made if the connection is not dominant and immediate but is merely incidental, ancillary or remote one." The Investments held by the appellant company is for long time. No time is involved for its administration. The addition of Rs. 1,69,720/- is confirmed by the CIT (Appeals) without considering the fact that no expenditure is incurred by the appellant company, therefore no disallowance can be made under Section 14A r.w.r. 8D of the I. T. Rules. 5. The appellant says and submits that the learned Assessing Officer has disallowed one percent of administrative expenses related to the appellant company in respect of manufacturing activity and not related to investment activity. The learned Assessing Officer without pinpoint any expenditure
I.T.A Nos. 1395 & 1396/Ahd/2015 A.Y. 2006-07 & 2010-11 Page No 3 Devarsons Industries Pvt. Ltd. vs. DCIT
related to the exempt income, made adhoc disallowance of one percent of administrative expenses which is confirmed by the learned Commissioner of Income Tax (Appeals).” 3. In this case, assessment was completed u/s. 143(3) of the act on total income of Rs. 3,14,19,978/- on 26th December, 2008 as against the return of income of Rs. 3,07,71,977/-. The assessed income included an addition of Rs. 2,71,069/- made on account of disallowance of expenses u/s. 14A of the act. In the first appeal, the disallowance was reduced to Rs. 1,50,000/-. Thereafter, the Co- ordinate Bench of the ITAT has set aside the matter to the file of assessing officer to decide the issue afresh in the light of the judgment of Hon’ble Bombay High Court in the case of the Godrej Boyce Manufacturing Company Ltd. vs. DCIT 328 ITR 81 (Bom). Thereafter, the assessing officer has passed order u/s. 143(3) r.w.s. 254 of the act on 30st August, 2012 after taking into consideration the judicial pronouncement of Bombay High Court in the case of Boyce Manufacturing Company Ltd. vs. DCIT supra and determined the disallowance u/s. 14A of the act at Rs. 1,69,720/-.
Aggrieved against the decision of the assessing officer, the assessee preferred appeal before the ld. CIT(A). The ld. CIT(A) has sustained the addition made by the assessing officer by observing as under:- “5. I have perused the facts of the case as enumerated by A.O. and as submitted by appellant. I have perused the case laws relied on by A.O. as well as appellant. After careful consideration of facts, submission and contention of both A.O. as well as of appellant, ground wise adjudication is as follows:
I.T.A Nos. 1395 & 1396/Ahd/2015 A.Y. 2006-07 & 2010-11 Page No 4 Devarsons Industries Pvt. Ltd. vs. DCIT
The appellant through both the grounds raised objection against disallowances of Rs. 169720 u/s. 14A of the Act. As discussed in earlier paras, this is set aside proceedings to consider the directions of Hon'ble ITAT in this case in view of Hon'ble Bombay High Court decision in the case of Godrej and Boyce Manufacturing Pvt. Ltd, which held that application of Rule 8D is prospective i.e. w.e.f. 01/04/2008 and for earlier period before 01/04/2008 a reasonable disallowance can be made u/s. 14A of the Act. it is important that Hon'ble ITAT also directed to appellant to file fresh evidences and available judicial pronouncement for the readjudication of the issue. It is undisputed fact that during previous year the appellant earned dividend income of Rs. 23,17,095 and claimed the same as exempt. It is also undisputed that appellant has not considered any expenditure relatable to such huge exempt income. As per audited financial accounts of previous year, the appellant company has share capital of Rs. 84.96 lac and reserve & surplus at Rs.26.77 crore. The appellant company's investment got increased from Rs. 11.30 crore to Rs. 13.61 crore. The A.O. out of total administrative & other expenses of Rs. 27276716 (sch. 14 of audited P&L a/c) considered only Rs. 1,69,72,075/- administrative expenses for disallowances. The details of some of such expenses as considered by A.O. are as follows: (i) Salaries 2548534 (ii) Director's remuneration 2548534 (iii) Contribution to providend & other fund 2649980 (iv) Vehicle maintenance expenses 253243 (v) Rent 132000 (vi) Rates & Taxes 34860 (vii) Conveyance & Travelling 595571
The A.O disallowed 1% of these administrative expenses. I am inclined with A.O. that, 1% disallowances out of administrative expenses like salary, director remuneration, rent, vehicle expenses i.e. from the expenditure which can be said to relatable to earn dividend income is quite reasonable. Even if a corollary drawn from the section like 80HHC, 80IA etc. where 90% of other income is excluded gives that legislature consider 10% of such receipt being expenditure relatable to earn such receipt. In view of this, appellant's dividend income of Rs. 23,17,095 when considered, the 10% of the same worked out to Rs. 2,31,709/-. It is therefore the disallowance so made by A.O. are reasonable and does not require any interference. These disallowance are therefore upheld. Both the grounds are dismissed.” 5. We have heard the rival contentions and perused the material on record. The assessing officer has made disallowances of Rs.
I.T.A Nos. 1395 & 1396/Ahd/2015 A.Y. 2006-07 & 2010-11 Page No 5 Devarsons Industries Pvt. Ltd. vs. DCIT
1,69,720 u/s. 14A of the Act. In this case, the original assessment was set aside as per the directions of Hon'ble ITAT to consider the directions laid down by Hon'ble Bombay High Court’s decision in the case of Godrej and Boyce Manufacturing Pvt. Ltd, in which it was held that application of Rule 8D is prospective i.e. w.e.f. 01/04/2008 and for earlier period before 01/04/2008 a reasonable disallowance can be made u/s. 14A of the Act. The assessing officer has made disallowances of Rs. 169720 u/s. 14A of the Act as the assessee has not considered any expenditure in respect of exempt income. We find that the assessing officer had given the complete details of the administrative expenses incurred by the assessee on which 1% of disallowance was made for earning exempt income. After considering the findings of the Ld. CIT(A), we are of the opinion that 1% attribution of administrative expenses towards earning exempt is reasonable and justifiable. Therefore, we do not find any reason to interfere in the decision of the Ld. CIT(A) and the appeal of the assessee is dismissed.
ITA No. 1396/Ahd/2015
The assessee has raised following grounds of appeal:- “1. The learned Commissioner of Income-Tax (Appeals) erred in law and on facts in confirming addition of Rs. 10,88,461/- on account of disallowance u/s 14A of the I. T. Act, 1961 by applying rule 8D of Income- Tax Rules in spite of the fact that the assessee company has not incurred any expenditure for earning income which does not form part of total income. 2. The learned Commissioner of Income Tax (Appeals) erred in law and on facts in confirming disallowance u/s 14A where the Assessing Officer
I.T.A Nos. 1395 & 1396/Ahd/2015 A.Y. 2006-07 & 2010-11 Page No 6 Devarsons Industries Pvt. Ltd. vs. DCIT
without pointing out single instance of any direct or indirect expenditure incurred by the appellant for earning the dividend income which is exempt under the IT Act. There is no finding by the Assessing Officer how much administrative expenditure incurred by the appellant for earning dividend income. 3. The learned Commissioner of Income-Tax (Appeals) erred in law and on facts that in regard to the administrative and other expenses which could have been relating to the earning of dividend income, disallowance u/s 14A can be made. The appellant company says and submits that the investments made by the company are Long Term Investments made in past years and no expenditure is incurred by the company for earning income which does not form part of total income. The investment activity is an ancillary activity of the company for earning income by utilizing its idle source of resources and for earning this investment income, no staff is engaged / involved for the administration of the investment. Even, in the Income Tax Act, 1961, under Section 14A, it is written that "the expression 'in relation to' of the Section 14A would mean that disallowance under section 14A cannot be made if the connection is not dominant and immediate but is merely incidental, ancillary or remote one." The Investments held by the appellant company is for long time. No time is involved for its administration. The addition of Rs. 10,88,461/- is confirmed by the CIT (Appeals) without considering the fact that no expenditure is incurred by the appellant company, therefore no disallowance can be made under Section 14A r.w.r. 8D of the I. T. Rules. 4. The appellant further says and submits that while computing disallowance under Rule 8D of the Income Tax Act, 1961, value of "tax exempt investments" only to be considered while computing the average value of investment under Rule 8D(2)(ii), instead of total investment as computed by the learned Assessing Officer.”
In this case, return of income declaring income of Rs. 7,77,78,903/- was filed on 23th September, 2010. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the act on 28th Sep, 2011. During the course of assessment proceedings, the assessing officer has noticed that assessee has earned dividend income to the tune of Rs. 50,60,425/- and made investment of Rs. 22,90,97,918/- as on 31st March, 2010. Thereafter,
I.T.A Nos. 1395 & 1396/Ahd/2015 A.Y. 2006-07 & 2010-11 Page No 7 Devarsons Industries Pvt. Ltd. vs. DCIT
the assessing officer has applied provision of section 14A r.w. Rule 8D of the act and made disallowance of Rs. 10,92,837/-. 8. Aggrieved against the decision of the assessing officer, assessee preferred appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee by observing as under:- “5. I have perused the facts of the case as enumerated by A.O./ and as submitted by appellant. I have perused the case laws relied on by A.O. as well as appellant. After careful consideration of facts, submission and contention of both A.O. as well as of appellant, ground wise adjudication is as follows: All the grounds are interlinked and against the disallowances of Rs. 1092837 u/s. 14A of the Act. As discussed above at para 4A that A.O. after identifying the exempt income in the form of dividend of Rs. 5060425 and the fact that appellant has not considered and disallowed any expenses related to this exempt income, drawn has satisfaction that both direct & indirect expenses in the nature of interest as well as administrative expenses viz salary, director remuneration, rent etc. are relatable to exempt income and invoked the mandatory Rule 8D for computing disallowances u/s. 14A of the Act. The appellant through various case laws & facts contended that it has huge investment for which no borrowed capital was utilized and no direct cost in the form of interest is incurred. It further contended that no indirect expenses were incurred hence disallowance u/s. 14A of the Act by invocation of Rule 8D is not justified. I am law partly inclined with appellant as far as interest part so computed under dule 8D(2)(iii) by A.O. Considering the old investment no new investment & claim of interest of Rs. 8965, such disallowance cannot be held justified. But, I am not inclined with appellant that no other cost in the form of indirect expenses are incurred. The appellant in its own submission dt. 20/02/2015 admitted that one director gives one hour per week for the administration of investment. This itself required a part disallowance from director's remuneration but appellant did not disallowed the same. It is therefore A.O, is justified in invoking Rule 8D which is mandatory for computation of disallowances. The appellant further contended that working of av. investment by A.O. as considered under Rule 8D(2)(iii) is not proper since it considered investment from which no dividend income earned in previous year as well as it include investment in partnership firm. I am not inclined with appellant because as per application for computation of average investment, all the investments are to be considered, the income from which not only for previous year but whenever come in succession year will be exempt. The investment in partnership firm also give rise to exempt income in the form of share of profit of firm. It is therefore, A.O is justified in taking such figure for average investment and working out disallowances as per Rule 8D(2)(iii) at Rs. 1088461. This disallowance is upheld. The appellant gets part relief of Rs. 4376 is related to interest (Rule 8D(2)(iii). It is therefore ground no. 1 is allowed while ground no. 2 is dismissed.”
I.T.A Nos. 1395 & 1396/Ahd/2015 A.Y. 2006-07 & 2010-11 Page No 8 Devarsons Industries Pvt. Ltd. vs. DCIT
We have heard the rival contentions. The assessing officer has made disallowances of Rs. 10,92,837 as expenses related to exempt income u/s. 14A of the acts r.w. rule 8D of the income tax rule. We have also noticed that the assessee has admitted during the course of assessment proceedings that one director gives one hour per week for the administration of investment. We find that the Ld. CIT(A) has accepted the claim of the assessee in respect of interest expenses of Rs.8,965 that no borrowed capital was utilized and no direct cost in the form of interest was incurred. We observed that assessee has shown substantial exempt income of Rs. 50,60,425/- on huge investment of Rs. 22,90,97,918/-, therefore, we are of the view that the contention of the assessee that no other indirect expenses were incurred is not justified. In view of the above facts and detailed findings of the Ld. CIT(A), we do not find any error in the decision of the Ld.CIT(A). Therefore, the appeal of the assessee is dismissed.
In the result, appeals of the assessee for both the years are dismissed.
Order pronounced in the open court on 13-09-2017
Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 13/09/2017
I.T.A Nos. 1395 & 1396/Ahd/2015 A.Y. 2006-07 & 2010-11 Page No 9 Devarsons Industries Pvt. Ltd. vs. DCIT
आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद