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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
PER SAKTIJIT DEY, J.M.
This is an appeal by the assessee against the order dated 1st April 2013, passed by the learned Commissioner (Appeals)–21, Mumbai, for the assessment year 2009–10.
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At the outset, it needs to be mentioned that the Registry has pointed out delay of 207 days in filing the present appeal. The assessee has filed an application dated 12th February 2014, accompanied with an affidavit sworn by a director of assessee company explaining the cause of delay. The reason stated in the Affidavit is, the registered office of the assessee company is at Knowledge House, Shyam Nagar, Off Jogeshwari – Vikhroli Link Road, Jogeshwari (E), Mumbai, which was incorporated as the address for communication in Form no.35. From this place, many other companies and concerns belong to Future Group operate and, accordingly, the group as a whole receives numerous letters daily by post, among others. It was submitted, the Group has a centralized receiving centre to keep track of various inwards. It appears that the order of the learned Commissioner (Appeals) was received at the above address by post on 21st May 2013. However, as certain tax related matters were being handled from another place of the group company at 247 Park, Tower–C, Vikhroli, Mumbai, the first appellate order was given for dispatch by hand delivery at the Voikhroli address, and the letter did not reach Vikhroli office and, hence, lost track, which resulted in delay in filing the appeal before the Tribunal.
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The learned Departmental Representative has not opposed condonation of delay.
We have considered the submissions of both the parties. Considering the aforesaid facts, we are of the view that the delay in filing the appeal is for a reasonable cause, hence, we are inclined to condone the delay and admit the appeal for hearing on merit.
Following grounds have been raised by the assessee:–
“1. NATURAL JUSTICE: 1.1 The Learned Commissioner of Income - tax (Appeals) - 21, Mumbai ["Ld. CIT (A)"], erred in passing the appellate order without giving sufficient, proper and adequate opportunity of being heard to the Appellant. 1.2 It is submitted that in the facts and the circumstances of the case, and in law, the appellate order be held as bad in law as the same is passed in breach of the principles of natural justice. WITHOUT PREJUDICE TO THE ABOVE 2.1 It is submitted that in the facts and the circumstances of the case, and in law, the assessment order passed u/s. 144 of the Income - tax Act, 1961 ("the Act"] is had and illegal. WITHOUT FURTHER PREJUDICE TO THE ABOVE: 3.1 It is submitted that in the facts and the circumstances of the case, and in law, the addition of Rs. 11,99,165/- on account of preliminary expenses was bad in law
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3.2 It is submitted that in the facts and the circumstances of the case, and in law, no such addition was called for. 3.3 Without prejudice to the above, it is submitted that the computation of such addition is not in accordance with the law, is arbitrary and / or is excessive. 4.1 The Ld. CIT(A) erred in confirming the action of the A.O. in computing the consultancy income of Rs.90,000/- under the head "Income from Other sources as against under the head "Profits & Gains of Business or Profession” as claimed by the Appellant. 4.2 It is submitted that in the facts and the circumstances of the case, and in law, no such action was called for. 5.1 The Ld. CIT(A) erred in confirming the action of the A.O. in computing the disallowance u/s. 14A of the Act at Rs. 41,68,062/-. 5.2 It is submitted that in the facts and the circumstances of the case, and in law, no such disallowance was called for. 5.3 Without prejudice to the above, it is submitted that the computation of such addition is not in accordance with the law, is arbitrary and / or is excessive.”
Ground no.6, being general in nature, is not required to be adjudicated upon.
At the outset, the learned Counsel for the assessee submitted, he does not want to press grounds no.1 and 2.1. Accordingly, these grounds are dismissed as “not pressed”.
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In grounds no.3.1 to 3.3, assessee has challenged addition of ` 11,99,165, on account of preliminary expenditure.
Briefly stated the facts are, assessee a company filed its return of income for the assessment year under consideration on 24th September 2009, declaring total loss of ` 12,04,165. During the assessment proceedings, the Assessing Officer, while verifying the accounts of the assessee, noticed that as against income shown of ` 90,000, as income from consultancy services, assessee had claimed expenditure towards legal and professional charges at ` 22,84,782 and audit fees of ` 5,000. He further noticed that assessee has amortized preliminary expenditure to the extent of ` 22,78,200 and claimed deduction under section 35D of the Act for an amount of ` 12,82,583. In the course of assessment proceedings, the assessee in its submissions made vide letter dated 24th November 2011, further disallowed expenditure of ` 4,55,640. The Assessing Officer, after verifying the details furnished, observed, investments of ` 93,22,25,000 in Future Generali Insurance Co. Ltd. is having no co– relation with the assessee’s business , hence, it cannot be said that assessee had employed capital towards its business. The Assessing Officer observed, as per Memorandum and Article of Association, the
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initial share capital of the assessee company was ` 5,00,000 as on 31st October 2005. He, therefore, held that the assessee would be eligible for deduction under section 35D at 1/5th of ` 5,00,000 and accordingly allowed the amount of ` 5,000 as deduction. Being aggrieved of such disallowance, assessee preferred appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) also upheld the disallowance.
Learned A.R. submitted before us, observation of the Assessing Officer is contradictory as at one place while he mentioned the date of incorporation as 11th November 2015 but at some other place, he has taken the initial date of investment in share capital as 31st October 2015. Further, he submitted that the observation of the Assessing Officer that the investment made in Future Generali Insurance Co. Ltd. is not for assessee’s business is without any basis as it is a group company and the investment is made for the business of assessee. Furnishing a computation of deduction under section 35D, learned A.R. submitted, assessee is eligible for an amount of ` 8,26,943. As far as the allegation of the Assessing Officer that assessee has not carried out any business activity during
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the relevant assessment year, learned A.R. submitted, as per the Memorandum and Article of Association, one of the objects of the assessee is to undertake business in advisory services. Therefore, consultation charges received by the assessee are to be treated as business income only.
Learned Departmental Representative contesting the claim of the assessee submitted the expenditure claimed by the assessee does not fit into the provisions of section 35D.
We have considered the submissions of the parties and perused the material available on record. As could be seen from the orders of the Departmental Authorities, the main ground on which assessee’s claim of deduction under section 35D has not been accepted is there is no business activity conducted by the assessee during the relevant previous year and the only income reported by the assessee from consultation charges was treated as income from other sources. However, as could be seen, assessee’s claim that advisory services are also one of the business activities as per Memorandum and Article of Association has not been considered. Further, whether the assessee has at all started its business activities or not has not been properly considered by the
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Departmental Authorities. Moreover, the Assessing Officer’s observation that the investment made in Future Generali Insurance Co. Ltd. is not for assessee’s business is without proper basis as he has not examined all the facts relevant for deciding the issue. Learned Commissioner (Appeals)’s finding on the issue is also cryptic and assessee’s claim of business income has been negated on the reasoning that assessee has not incurred any salary expenditure. In our view, assessee’s claim of deduction under section 35D, as well as the proper head under which the consultancy charges is to be assessed requires denovo examination before the Assessing Officer as, all relevant materials have not been brought on record either before the Assessing Officer or before the learned Commissioner (Appeals). Accordingly, this issue is restored back to the file of the Assessing Officer for deciding afresh after providing due opportunity of being heard to the assessee. In view of our decision as aforesaid, there is no need to adjudicate ground no.4.1 and 4.2 separately as this issue also is to be considered denovo by the Assessing Officer. Grounds no.3.1 to 4.2 are allowed for statistical purposes.
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The only other issue left for consideration as raised in ground no.5.1 to 5.3 relates to disallowance made under section 14A of the Act for an amount of ` 41,68,062.
Briefly stated the facts are, during the assessment proceedings, the Assessing Officer noticing that assessee has initiated an amount of ` 93,22,25,000 in Future Generali Insurance Co. Ltd. observed that such investment has a potential to earn exempt income like dividend. Hence, he was of the view that disallowance of part of expenditure claimed has to be made in terms of section 14A r/w rule 8D. Though, the assessee objected to proposed disallowance under section 14A r/w rule 8D, but the Assessing Officer rejecting submissions of the assessee proceeded to disallow an amount of ` 41,68,062 being 0.5% of the average value of investment in terms of rule 8D(2)(iii). The learned Commissioner (Appeals) also confirmed the disallowance.
Learned Counsel for the assessee submitted before us that the disallowance under section 14A r/w rule 8D(2)(iii) is palpably wrong as during the relevant previous year, assessee has not earned any exempt income. Therefore, he submitted no disallowance under
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section 14A is called for. In support of such contention, he relied upon the following decisions:–
i) CIT v/s Holcim India Ltd. [2014] 90 CCH 81 (Del.); ii) Garware Wall Ropes Ltd. v/s ADIT, [2014] 39 CCH 435 (Mum.); and iii) CIT v/s Delite Enterprises, ITA no.110 of 2009, judgment dated 26th February 2009.
Further, learned Counsel for the assessee submitted, investment made by the assessee in Future Generali Insurance Co. Ltd., which is a group company, being for a strategic purpose, no disallowance under section 14A can be made. In this context, he relied upon the decision of the Hon'ble Delhi High Court in Cheminvest v/s CIT.
Learned Departmental Representative, however, supported disallowance of expenditure under section 14A r/w rule 8D and in support he relied upon the decision of the Tribunal, Mumbai Bench, in HDFC Bank Ltd. v/s DCIT, [2015] 173 TTJ 810 (Mum.).
We have considered the submissions of the parties and perused the material available on record in the light of the decisions
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relied upon. At the outset, we intend to examine whether any disallowance under section 14A r/w rule 8D, can be made in a case where the assessee during the relevant previous year has not earned any exempt income. As could be seen from the assessment order as well as submissions made by the assessee before the learned Commissioner (Appeals), the fact that the assessee has not earned any exempt income during the relevant previous year has not been disputed by the Department. Hon'ble Delhi High Court in CIT v/s Holcim India Pvt. Ltd., [2014] 90 CCH 81 (Del.), has held that where the assessee has not earned any exempt income during the relevant previous year, no disallowance under section 14A of the Act can be made. The Hon'ble Delhi High Court again in Cheminvest v/s CIT (supra) reversing the Special Bench decision of the Tribunal, Delhi, held that if the assessee in a particular assessment year has not earned any exempt income no disallowance under section 14A can be made. The Hon'ble Jurisdictional High Court in CIT v/s Delite Enterprise, Hon'ble Gujarat High Court in CIT v/s Corrtech Energy Pvt. Ltd. and Hon'ble Allahabad High Court in CIT v/s Shivam Motors Pvt. Ltd., have also expressed similar view. In fact, there are also a number of decisions of this Tribunal holding similar view. That being the case, accepting the principle of law laid down by the different
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High Courts as well as the Tribunal, we hold that as the assessee during the impugned assessment year has not earned any exempt income, no disallowance under section 14A r/w 8D can be made. As far as decision of the Tribunal, Mumbai Bench, in HDFC Bank Ltd. (supra) is concerned, on careful scrutiny of the said order, we find that it is rendered on a different set of facts, hence, not applicable to the facts of the present case. Moreover, none of the decisions of the High Court referred to above have been considered in HDFC Bank Ltd. (supra). In view of the aforesaid, we delete the addition of ` 41,68,062 under section 14A r/w rule 8D. As we have deleted the addition made by Assessing Officer, we refrain from dealing with the issue whether any disallowance under section 14A r/w rule 8D can be made if the investment is made for strategic purpose.
In the result, appeal stands partly allowed. Order pronounced in the open Court on 29.02.2016
Sd/- Sd/- SAKTIJIT DEY RAMIT KOCHAR ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 29.02.2016
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Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Mumbai