LEE & MUIRHEAD P. LTD,MUMBAI vs. ADDL CIT RG 2(2), MUMBAI

We will first take up the appeal of the assessee in ITA No 7435/M/2011 AY 2008-09. The assessee has raised the following grounds of appeal:

The facts in brief are that the assessee filed its return of income on 31.03.2009 declaring an income of Rs.1,58,52,48,888/-.The case of the assessee was selected for scrutiny and statutory notices were issued and served upon the assessee u/s 143(2) and 142(1) of the Act. The assessment was framed vide order dated 24.12.2010 passed u.s 143(3) of the Act at Rs. 161,81,12,620/- by making various additions.

The issue raised in the first ground of appeal is against confirmation of addition of Rs. 20,12,208/- by CIT(A) as made by the AO u/s 14A of the Act out of which Rs. 5,50,586/- was for the interest charges and remaining Rs. 14,61,622/- was on account of indirect expenses @ 0.5% of the average investments by rejecting the contention of the assessee that the said investments which yielded exempt dividend of Rs.4,34,99,267/- were made out of own funds and not out of borrowed funds and also that no expenses were incurred in relation to the said investments as the investments were made and managed by portfolio management companies who charged 2% from the mutual funds in which the investments were made. The AO further observed that in the case of Godrej and Boyce Mgf and other two appeals. Co Ltd the provisions of rule 8D where held to be applicable from the assessment year 2008-09. 4. 1. The ld CIT(A) upheld the additions of Rs. 20,12,208/- made u/s14A on the ground that the application of section 14A rule 8D stands settled by the decisions in the case of Godrej and Boyce Mfg Co Ltd and the AO had rightly invoked the provisions of section 14A rule 8D of the Act.

Ld AR submitted before us that rule 8D was wrongly invoked by the AO and upheld by the CIT(A) for the reasons that the assessee did not incur any interest or indirect expenses in relation to investments which yielded exempt dividend. So far as the disallowance of interest under rule 8D(2)(ii) was concerned the ld counsel submitted that the assessee had not made any investment out of borrowed funds and it had its own sufficient and adequate funds which were Rs. 58,23,39,972/- as on 31.3.2008 and Rs. 40,30,74,356/- as on 31.3.2007 including reserves and surplus by referring to the balance sheet at page no 13 of the paper book. The ld counsel also submitted that during the year the assessee sold its general cargo division for a consideration of Rs. 179.05 Cr and it had sufficient funds available for investments and also argued that these funds were temporarily held in MF for business considerations where the total investments were to the tune of Rs, 45,38,51,492/- as on 31.3.2008 and Rs. 13,10,21,919/- on the corresponding date in the preceding previous year. The borrowed funds Rs.88,43,158/- were taken for specific purpose and used accordingly. Therefore the interest disallowance of Rs.5,50,586/- be deleted. In respect of remaining amount of Rs. 14,61,622/-, the ld counsel submitted that in the schedule M pertaining to Administrative and Selling Expenses which were Rs. 14,91,12,604/- and personnel cost in schedule no L of Rs. 12,47,94,407/- which were incurred for the purpose of business of the assessee as the assessee was still carrying on the business of project and other two appeals. cargo. The ld counsel brought to our notice the three expenses namely Rent , rates and taxes Rs. 4,54,46,772/- , Legal and professional charges Rs. 1,94,25,756/- and Amount written off Rs. 1,76,70,049/- totaling to Rs.8,25,42,577/- which were not having indirect nexus with dividend income. The ld Counsel ultimately prayed that the additions of Rs. 20,12,208/- be deleted. Per contra ld. DR relied heavily on the orders of authorities below.

We have considered the rival submissions and perused the material on records. We find from the rival arguments and records before us that the assessee had sold during the year its general cargo division for a consideration of Rs. 179.05 Cr. The investments of the assessee as on 31.3.2008 were Rs.45,38,51,492/- as on 31.3.2008 vis-à-vis Rs. 13,10,21,919/- on the corresponding date in the preceding previous year as against the own funds available in the form of share capital and reserves and surplus of Rs. 58,23,39,972 as on 31.3.2008 vis-à-vis Rs. 40,30,74,356/- as on 31.3.2007. In our opinion the assessee had sufficient funds available with it to finance its investments and therefore it can be presumed that it had invested its own funds and not borrowed funds which we have seen that were taken for specific purposes and used accordingly. Thus the additions of Rs. 5,50,586/- made rule 8D(2)(ii) as confirmed by CIT(A) is ordered to be deleted by following the ratio laid down in the case of CIT V/s Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom), and CIT V/s HDFC BANK LTD. [2014] 366 ITR 505 (Bom). In respect of Rs. 14,61,622/-, the disallowance under rule 8D(2)(iii) we find that the investments were made in the mutual funds by the portfolio management companies. Further in the schedule M pertaining to Administrative and Selling Expenses the total of Rs. 14,91,12,604/- were charged whereas personnel cost in schedule no L Rs. 12,47,94,407/-were debited. In the and other two appeals. schedule no M we find that Rent , rates and taxes Rs. 4,54,46,772/- , Legal and professional charges Rs. 1,94,25,756/- and Amount written off Rs. 1,76,70,049/- totaling to Rs.8,25,42,577/- were charged and were not having indirect nexus with dividend income. We therefore find merit in the submissions of the ld counsel that disallowance as made by the AO and upheld by CIT(A) is excessive and unreasonable on the ground that there hardly any expenses incurred for the propose of investments. We are in agreement with the CIT(A) that rule 8D is applicable from AY 2008-09 but not blindly when the assessee had hardly incurred any expenses in relation to the dividend earned and the substantial investments were made temporarily in order to park the idle funds ideally. We therefore allow relief to the assessee to the extent of Rs. 8,00,000/- out of Rs. 14,61,622/-. Thus the assessee gets relief of Rs. 13,50,586 in all out of Rs, 20,12,208/- thereby sustaining the addition of Rs. 6,61,622/-.

4 The ground no. 1 is partly allowed.

The second ground is against the confirmation of additions of Rs. 3,64,975/- in respect of late payment of PF. The AO disallowed the PF for late payment beyond the grace period on the basis of tax audit report by rejecting the contention of the assessee the issue was not covered by the provisions of section 43B of the Act but covered by section 2(24)(x) r.w.s 36(1)(va) of the Act. The assessee submitted that the provident fund was paid before the due date of filing the return of income and was admissible. The ld CIT(A) also upheld the additions on the ground that the PF should have been paid within due date as extended by grace period and not beyond under the relevant Act governing the provident fund scheme and not u/s 43B of the Act. and other two appeals.

We have heard the rival submissions and perused the materials on records. We find from the records and arguments of the counsels that the assessee had paid the PF beyond the grace period after the due date under the relevant Act but well before the due date for filing the return of income u/s 139(1) of the Act. We find merit in the submission of the ld AR that the issue is covered in its favor by the decision of the juri ictional High Court in the case of CIT Vs Ghatge Patil Transport Ltd 368 ITR749(Bombay) in which it has been held that the employers as well as the employees contribution were subject to the provisions of section 43B and the assessee was entitled to the deduction in respect thereof. We therefore respectfully following the ratio laid down in the said decision, delete the addition of Rs. 3,64,975/- and AO is directed accordingly.

The ground no 2 is allowed in favour of the assessee.

The Third ground is against the confirmation of additions of Rs. 56,94,748/- CIT(A) on account of balance written off during the year following selling of general cargo division. The facts in brief are that the assessee had taken two warehouses on lease and license basis from M/S Paras Commercial Centre Pvt Ltd beside taking three warehouses from M/S Synergy Logistics Pvt. Ltd and two from M/S Bhave Warehousing and Storage Pvt. Ltd . Upon sale of the general cargo division by the assessee the warehouses taken from former company M/S Paras Commercial Centre Pvt. Ltd were no more required in the business and therefore the lease and license agreement was prematurely terminated on 31.10.2007 and the licensor deducted Rs. 45,16,000/- as compensation of premature termination of license agreement whereas the warehouses taken from M/S M/S Synergy Logistics Pvt. Ltd and Bhave Warehousing and Storage Pvt. Ltd were transferred along with the general cargo division as slump sale to the buyer for the unexpired period of lease. The assessee wrote of the and other two appeals. advances of Rs. 56,94,748/- including Rs. 45,16,000/- deducted by M/S Paras Commercial Centre P Ltd.

The Ld AO during the course of scrutiny proceedings found that the assessee wrote advances paid to various licensors in respect of warehouses taken on rent for general cargo division which was sold by the assessee during the year and the assets were transferred by way of slump sale by the assessee. The AO held that once the assets including warehouses were transferred to the buyers along with deposits and securities and also taken into account in the net worth of the division sold then the assessee was not in any way connected with the same and therefore claim of write off of Rs. 56,94,748/- was not sustainable. The AO rejected contention of the assessee that two warehouses were not transferred to the buyer and were surrendered to the licensor vide termination deed dated 30.11.2010 .

The CIT(A) also upheld the additions of Rs. 56,94,748/- on the ground that the assessee failed to rebut the observations and findings of the AO. The CIT(A) further held that since the assessee had sold all the assets pertaining to general cargo division and therefore any claim made by the assessee as such u/s 37(1) could not be wholly and exclusively for the business and once the lease in respect of the three warehouses were transferred to the purchaser, the entire deposits and rent for the unexpired period also stands transferred in slump sale to purchaser and therefore the claim of the assessee was wrong and rightly disallowed by the AO.

The ld AR submitted before us that both the AO as well as the CIT(A) did not appreciate the reply filed by the assessee vide letter dated 30.11.2010 clarifying the positions qua the transfer of warehouses to the purchaser and warehouses for which the lease and license agreements were terminated. The assessee had terminated the lease and license in and other two appeals. respect of two warehouses taken on leave and license basis from M/S Paras Commercial Centre Pvt. Ltd who deducted Rs. 45,16,000/- as compensation for pre-mature termination on 31.10.2007 whereas three warehouses from M/S Synergy Logistics Pvt. Ltd and two from M/S Bhave Warehousing and Storage Pvt. Ltd were transferred as part of the slump sale and all the deposits and rent for the unexpired lease were also transferred as part of net worth assets transferred. The ld AR vehemently submitted that the AO and CIT(A) without even going though the letter filed replying the various queries raised during the scrutiny proceedings came to the wrong conclusion that three warehouses were transferred whereas as a matter of fact five warehouses were transferred to the purchaser and two warehouses were surrendered to the licensor by terminating the lease and license deed. It was submitted that the assessee was entitled to deduction of Rs.45,16,000/- deducted by M/S Paras Commercial Centre Pvt. Ltd as compensation for pre-mature termination of lease on 31.10.2007 on the ground of commercial expediency and prayed that the AO be directed accordingly. The ld AR relied upon the decision CIT Vs Microsoft Corporation of India (P) Ltd (Del) 220CTR410. 6.4 The ld DR on the other hand relied on the orders of authorities below.

We have considered the rival submissions and perused the materials on records and find that the assessee had terminated the lease and license in respect of two warehouses taken from M/S Paras Commercial Centre Pvt Ltd who deducted as compensation for pre-mature termination a sum of Rs. 45,16,000/- whereas the remaining five wharehouses were transferred as part of sump sale. We find merit in the arguments of the assessee that the amount deducted by the licensor on pre-mature termination is admissible u/s 37(1) of the Act as wholly and exclusively for and other two appeals. the purpose of business. We also find that the project cargo division of the assessee continued and thus the business of the assessee was carrying on with one division. Even on the ground to commercial expediency the assessee is entitled to deduction of Rs. 45,16,000/- as the continuance of the lease and license would entail additional expenses. We therefore direct the AO to allow deduction of Rs. 45,16,000/- out of total claim of Rs. 56,94,748 thus sustaining the addition to the extent of Rs.11,78,748/- .

6

The AO upon finding that the assessee had written off debts amounting to Rs. 1,76,70,049/-, added the said amount to the income of the assessee by rejecting the said reply dated 30.12.2010 para (g) of the assessee for the reasons that once the entire division was sold as slump sale and the due consideration was paid by the purchaser on the date of sale including for debtors then the benefit of write off could not be allowed to the assessee as the assessee had already claimed the said debtors from sales consideration and the benefit of such debts was taken while computing the long term capital gain.

The ld CIT(A) also confirmed the addition by holding that the debtors were transferred to purchaser in slump sale and thus the AO had rightly disallowed the writing off the debts as the provisions of section 36(1)(vii) r.w.s. 36(2) were not applicable.

The ld AR submitted vehemently that the AO as well as the CIT(A) had not appreciated the facts of the case in correct perspective. The ld counsel drew out attention to clause 3 of the sale agreement dated 04.04.2007 placed at page no 61 of the paper book which provided the manner in which the purchase price was to be determined on the basis of estimated working capital and estimated current assets including debts subject to adjustments if any as defined in the “Adjustment to purchase Price” which was placed at page 55 of the paper book. Under the said arrangements the purchaser had the right to re-assign to the assessee any part of the assets which were forming part of the net current assets. Ld counsel submitted that under this clause , the purchaser M/S Excel re- assigned book debts to the assessee by reducing the same from the and other two appeals. purchase price to the tune of Rs.2,44,22,159.91 out of which the books debts were Rs. 1,76,70,049/- which were written off during the year lawfully and rightfully u/s 36(1)(vi) of the Act. It was also submitted before us that the business of the assessee continued with project cargo section whereas the general cargo section was parted with w.e.f. 01.05.2007 and the income and expenses till 30.04.2007 were duly shown in the books of the assessee and so was the net profits of Rs.72,30,254/-.The AO as well CIT(A) observation was wrong and unfounded for the reasons that by allowing the write off of Rs. 1,76,70,049/-, the assessee would be getting double benefit. The purchaser had reduced the said amount from the consideration paid to the assessee and therefore whatever was given back under the “Adjustments to Purchase Price” clause had to be written off as the same was not part of the slump sale. Finally the Ld AR prayed for reversing the order of lower authorities on this point and allowing the claim of the assessee by relying on decisions in the case of Veecumsees Vs CIT(SC) 220 ITR 185 & CIT Vs Rajni Investments Pvt. Ltd (Mad) 319 ITR 435 .

4 The ld DR per contra relied on the orders of the authorities below.

We have considered the rival submissions and perused the materials on records. During the year the assessee sold its general cargo division vide agreement dated 04.04.2007 w.e.f. 1.5.2007 whereas it continued to own and operate its project division. All the income and expenses relating to the general cargo divisions till 30.04.2007 were duly accounted for thereby showing a net profit of Rs. 72,30,254/-.The agreement transferring the general cargo division provided for determination of the purchase price as per clause 3 of the agreement (placed at page 61 of the paper book) was subject to any adjustments which was provided in the adjustment clause in the definition clause which is placed at page 55 of the paper and other two appeals. book. From the records before us we find that the purchaser M/S Excel re- assigned some debts which were part of the net current assets in the slump sale and reduced the purchase price accordingly by Rs. 2,44,22,159. 91. The assessee wrote off Rs. 1,76,70,049/- out of this amount claiming the same to be admissible under section 36(1)(vi) of the Act however the same was added to the income of the assessee on the ground that the debts were transferred to the purchaser as part of the net current assets under slump sale and the assessee could not be allowed double benefit. Even the CIT(A) upheld the additions on the same analogy. We find that the both AO and CIT(A) had completely ignored the fact that under “Adjustment to Purchase Price” the purchaser reassigned some debts amounting to Rs. 2,44,221,60/- to the assessee and assessee reduced the same from the purchase price which is clearly mentioned in para 7.1 of the assessment order. In our view the finding of AO and the CIT(A) that the debts were transferred as part of net current assets in the slump sale and the assessee would get double benefit if allowed deduction in respect of write off of the book debts were wrong and against the facts of the case. The assessee had rightly written off the debts and the same were admissible under section 36(1)(vi) of the Act. In view of the above facts, the appeal of the assessee on this ground is allowed and the AO is directed accordingly.

The ground no. 4 is allowed.

In the result the appeal of the assessee is partly allowed.

Now, we will take up the appeal bearing ITA No:- 7849/Mum/2011 by the Revenue. and other two appeals.

The grounds of appeal taken by the revenue are reproduced below:

1 At the outset the ld. AR of the assessee pointed out that the tax effect in this appeal is below Rs.10.00 lakhs and further submitted that in view of the CBDT Circular No.21/2015, dated 10.12.2015 issued by the Central Board of Direct Taxes, Department of Revenue, Ministry of Finance, Government of India, the appeal is not maintainable and be dismissed. The ld. DR also agreed to the submission of the ld. AR.

2 We have heard the rival submissions and perused the material on record. We find from the records available before us that the tax involved in the disputed issue is below Rs.10 Lacs and therefore, in view of the Circular issued by CBDT bearing No.21/2015 dated 10.12.2015 prescribing new monetary limit of Rs.10.00 lakhs for preferring appeal against the orders passed by Ld CIT(A) before the Tribunal, the revenue is precluded from pursuing this appeal by the revenue, as the said circular has retrospective effect and is applicable to the existing appeals of revenue. Accordingly, we dismiss the same.

3 Considering the above, the appeal filed by the Revenue, is therefore dismissed. and other two appeals.

4 In the result, the appeal of the Revenue is dismissed.

Now, we will take up the appeal bearing ITA. No:- 6518/Mum/2012 filed by the assessee.

1 The grounds taken by the assessee are as under : “1 The learned CIT(A) erred in confirming the disallowance u/s. 14A amounting to Rs.24,63,205/- worked out as per Rule 8D. Your appellants submit that the disallowance is unwarranted and the same ought to be deleted. Without prejudice to the above, your appellants submit that the disallowance is excessive and ought to be reduced substantially.

Your appellants further reserve the rights to add, amend or alter the aforesaid grounds of appeal as they may think fir by themselves or by their representatives.”

The only issue raised in the appeal is against the confirmation of disallowance u/s. 14A under rule 8D amounting to Rs. 24,63,205/- . The fact in brief are that the assessee company filed its return of income declaring an income of Rs.1,67,74,804/-. The case of the assessee was selected for scrutiny and statutory notices u/s. 143(2) and 142(1) were duly served upon the assessee. During the course of assessment proceedings the AO found that the assessee had received income by way of dividend of Rs. 2,01,81,125/- and claimed the same as exempt u/s. 10 of the Act. The AO also found that the assessee had investments of Rs. 21,51,26,864/- as on 23.03.2009 and therefore, as the assessee had not disallowed any expenses relating to dividend income not forming the part of total income, as provisions of section 14A rule 8D of the Act were applicable and accordingly worked out the disallowance u/s. 14A rule 8D of Rs. 24,63,205/- consisting of Rs. 7,90,759/-and on account of interest and Rs. 16,63,571/- for indirect expenses being 0.5% of the average investment and added the same to income of the assessee. Aggrieved by the order of AO, the assessee preferred an appeal before the ld. CIT(A), and other two appeals. which was dismissed by the CIT(A) on the ground that identical issue had been decided in the AY 2008-09 by his predecessor CIT(A) in the case of the assessee itself.

1 We have the rival submission and perused the materials on records. The ld CIT(A) had upheld the additions for the reasons that the identical issue was decided against the assessee in the AY 2008-09 by the predecessor CIT(A).We have already decided the appeal of the assessee in ITA No 7435/M/2011 AY 2008-09 partly in favour of the assessee. The facts in the present appeal are identical to facts in ITA No 7435/M/2011 AY 2008-09 on the issue of disallowance u/s 14A rule 8D. In the said appeal the disallowance of interest under rule 8D(2)(ii) was deleted on the ground that the assessee had sufficient own sources to make the investments and the loan funds were for the specific purposes. Facts being identical, we accordingly delete the additions of Rs. 7,90,759/- for the interest made under rule 8D(2)(ii) and in respect of the remaining disallowance of Rs. 16,63,571/- under rule 80D(2)(iii) , the facts being similar , we restrict the disallowance to Rs. 6,53,571/- by allowing a relief of Rs. 10,00,000/- to the assessee considering the same to be fair and reasonable.

2 In the result, the assessee’s appeal is partly allowed.

In sum and substance, both the appeals of the assessee stand partly allowed the appeal of the revenue stands dismissed. Order pronounced in the open court on 29th February, 2016 (AMIT SHUKLA) ( RAJESH KUMAR ) न्मायमक सदस्म / JUDICIAL MEMBER रेखा सदस्म / ACCOUNTANT MEMBER भुंफई Mumbai; ददनांक Dated : 29.02.2016 SRL/SRPS. and other two appeals.