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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI JASON P. BOAZ & SHRI SANDEEP GOSAIN
This appeal by the assessee is directed against the order of the CIT(Appeals)-12, Mumbai dated 6/9/2013 for assessment 2009-10.
The facts of the case, briefly, are as under:-
2.1 The assessee, a domestic company engaged in the manufacture of automotive tyres, filed its return of income for assessment year 2009-10 on 29/9/2009 declaring loss of (-) Rs.33,84,49,425/- as per normal provisions and loss of (-) Rs.37,17,22,590/- under section 115JB of the Income Tax Act,1961( in short ‘the Act’). The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 29/12/2011, wherein the business loss was assessed at (-)Rs.27,27,35,495/- in view of the following additions/disallowances:-
(i) Disallowance under section 14A Rs. 1,60,37,000/- (ii) Difference in valuation of closing stock Rs. 5,88,08,382/- (iii) Payment to Clubs Rs. 4,91,427/- (iv) Disallowance of expenditure on Guest House Residential Flats Rs.4,03,77,121/- 2.2 Aggrieved by the order of assessment for assessment year 2009- 10 dated 29/12/2011, the assessee preferred an appeal before the CIT(Appeals)-12, Mumbai. The Ld. CIT(A) disposed of the appeal vide order dated 6/9/2013 allowing the assessee partial relief.
3.0 Being aggrieved by the order of the CIT(Appeals)-12, Mumbai , the assessee has preferred this appeal before the Tribunal. Originally, the assessee filed certain grounds alongwith the appeal Memo and also additional grounds of appeal vide submission dated 23/04/2014. Subsequently, the assessee filed revised grounds of appeal on 16/11/2015, which are being taken up for adjudication and are extracted hereunder:-
“1.The order of the CIT(A) is unsustainable and non-speaking in law since it is (a) against the facts and circumstances of the case; (b) against the principle of equity and natural justice and (c) without adjudicating the arguments raised by the Appellant.
2. The learned Commissioner of Income-tax (Appeals) ['CIT(A)'] erred in confirming the addition o fRs 1,60,37,000/- made under Section 14A of the Act by the Assessing Officer a. The learned CIT(A) erred in confirming dis-allowance of interest expenses incurred by the Assessee under Section 14A of the Act, without appreciating that borrowed funds were not used by the Assessee for making any investment. b. The learned CIT(A) erred in confirming dis-allowing of general expenses of Rs 12.27 Lacs made by the Assessing Officer under Section 14A of the Act, without appreciating that (i) the Assessee had itself dis-allowed the expenses incurred by it for earning exempt income, (ii) the Assessee had not incurred any additional expense to earn exempt income, (iii) the Assessing Officer has not found any discrepancy in the claim of the Assessee nor has recorded his satisfaction for making such disallowance (ground 2(b) was expressly raised as an additional ground vide petition dated 24.04.2015)
The learned CIT(A) erred in not deleting the adjustment made by the Assessing Officer to the value of closing stock.
The learned CIT(A) erred in confirming the disallowance of guest house expenses without appreciating the evidences and submissions made before him”
4.0 Ground No.1 being general in nature, no adjudication is called for thereon.
5.0 Ground No.2 (a & b) – Disallowance under section14A of the Act. 5.1 In this ground the assessee assails the impugned order of the Ld. CIT(A) in confirming the disallowance of rs.1,60,37,000/- made by the Assessing Officer under section 14A of the Act in respect of (a) interest expenses without appreciating the fact that the assessee had not utilized borrowed funds for making any investments and (b) disallowing of general expenses of Rs.12.27 lakhs without appreciating that the assessee itself had disallowed expenses of Rs.1.20 lakhs incurred by it to earn the exempt income and the Assessing Officer had not found any discrepancy in the claim of the assessee nor recorded satisfaction for making such disallowance.
5.2 In respect of Ground No.2(a) regarding the interest disallowance, the Ld. Representative for the assessee submitted that no disallowance ought to have been made in this regard since the assessee had not utilized any borrowed funds for making the said investments in instrumentS that earned exempt income. The Ld. Representative for the assessee drew the attention of the Bench to the Paper Book (pages 1 to 65) filed by the assessee and specifically to pages 24,26 and 34 to show that the assessee had substantial own interest free funds of Rs.488.938 crores, which were far in excess of the investment in Mutual Funds amounting to Rs42.66 crores which earned exempt income of Rs.77.87 lakhs. It was also submitted that the assessee has sufficient cash flow from business of Rs.131.21 crores. In these circumstances it was contended that since only interest free own funds of the assessee were available and used for investment in mutual funds that generate tax free income, no disallowance in this regard could be made under section 14A of the Act. In support of this proposition, the Ld. Representative for the assessee for the assessee placed reliance on the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2008-09, wherein in its order in dated 26/2/2015, the same issue on similar facts was held in favour of the assessee. The assessee also placed reliance on the decision of the Hon’ble Bombay High Court in the case of HDFC Bank Ltd.(2014) 366 ITR 505 (Bom) in support of the proposition that since the assessee’s own funds are more than the investments made by the assessee, it would be presumed that the investment made by the assessee would be out of the interest free funds available with the assessee.
5.3 Per contra, the Ld. Departmental Representative supported the orders of the authorities below. 5.4.1 We have heard the rival contentions and perused and carefully considered the material on record; including the Judicial pronouncements cited. We find that a Co-ordinate Bench of this Tribunal, on similar facts, in the assessee’s own case for assessment year 2008-09 in its order in dated 26/02/2015 has decided the issue in favour of the assessee holding as under at para 4 thereof:-
“ 4. We have heard both the parties and their contentions have carefully been considered. The factual position regarding own funds of the assessee has not been disputed by the Revenue. Similarly, the factual position regarding investment made by the assessee in tax free securities is also not disputed. If it is so, then the investment of the assessee in the tax fee securities would be a meager sum of Rs.9.60 crores, against own funds available with the assessee of Rs.513.25 crores. Respectfully following the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. (supra), we hold that according to the facts of the present case no disallowance on account of interest factor is called for.”
5.4.2 The factual position regarding the availability of own funds of the assessee at Rs.488.38 crores or the factual position in respect of the investment of Rs.43.68 crores made by the assessee in tax free investments has not been disputed by Revenue. In these circumstances, respectfully following the decision of the Hon’ble Bombay High Court in the case of HDFC Bank Ltd.(supra) and the decision of the Co-ordinate Bench of the Tribunal in the assessee’s own case for Assessment Year 2008-09 (supra), we hold that in keeping with the facts of the case, as discussed above, no disallowance on account of interest portion is called for. Consequently, Ground 2(a) of the assessee’s appeal is allowed.
Ground No.2(b) – Disallowance of administrative Expenses of Rs.12.27 Lakhs under section 14A of the Act 6.1 On due consideration, we admit this additional ground for adjudication in the interest of justice and equity. In this ground, the assessee contends that the disallowance of general expenses of Rs.12.27 lakhs has been made by the Assessing Officer under section 14A of the Act without taking into account the fact that the assessee had itself disallowed Rs.1.20 lakhs as expenditure incurred for earning of exempt income. It is also contended that since the Assessing Officer had neither found any discrepancy in the claim of the assessee nor recorded any satisfaction for making such disallowance, no disallowance on this count could be made by the Assessing Officer. In support of this proposition, the Ld. Representative for the assessee placed reliance on the following judicial decisions:- (i) Graviss Hospitality Ltd. (ITA Nos.3542&4801/Mum/2013 dated 21/11/2014. (ii) SIL Investment Ltd. (ITA No. 2431/Del/2010 and CO No.349/Del/2010 Dated 4/5/2012 for the disallowance u/r. 8D(2) (iii) to be restricted to 5%.
It was submitted that in any case the disallowance under section 14A r.w.s. Rule 8D made at Rs.1.60 crores should not have exceeded the exempt income of Rs.77.87 lacs. In support of this contention, reliance was placed on the following decisions:- (i) Joint Investments P. Ltd. (ITA No.117/2015 – Delhi High Court; (ii) Taikisha Engineering India Ltd., (ITA No.115/2014 – Delhi High Court)
6.2 Per contra, the Ld. Departmental Representative placed strong reliance on the following in the orders of the authorities below on this issue.
6.3.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. The assessee is mainly engaged in the business of manufacture of automotive tyres. It had made investments in Mutual Funds on which it had earned exempt income of approx Rs.77.87 lakhs. It was seen that the assessee had own interest free funds amounting to Rs.488.38 crores approx and a cash flow of approximately Rs.131.21 crores, which was more sufficient to make investments in mutual funds to the extent of Rs. 42.66 crores, which earned the assessee tax exempt income of Rs.77.87 lakhs. In this regard, the assessee had suo-moto disallowed an amount of Rs.1.20 lakhs as expenditure incurred by it for earning the exempt income. The Assessing Officer disallowed an amount of Rs.1.60 crores under section14A r.w. Rule 8D; including the amount of Rs.12.27 lakhs u/r.8D(2)(iii) of the Rules, which is the subject matter of dispute before us.
6.3.2 Once the entire financial statements of the assessee were admittedly before the Assessing Officer , the Assessing Officer was required to record his “satisfaction” or have satisfied himself that having regard to the accounts of the assessee, the claim of the assessee in respect of expenditure debited is not correct and that there could have been certain other expenditures which can be said to have been incurred in relation to the earning of exempt income. The disallowance under section 14A(1) of the Act can be triggered only when the conditions SPECIFIED IN Sec.14A(2) of the Act are satisfied. To make out a disallowance u/r.8D of the IT Rules, 1962, the Assessing Officer has to first examine the accounts of the assessee and the correctness of the claim made by the assessee and then, if he is not satisfied with the claim made or the claim that no expenditure at all has been incurred for the purpose of earning exempt income, only then can be resort to Rule 8D. In the factual matrix of the case on hand, we find that the Assessing Officer has proceeded to apply Rule 8D for the purpose of disallowance under section14A of the Act, without complying with the mandatory requirements of Section 14A(2) of the Act or Rule 8D. In our view, once the Assessing Officer has failed to comply with the statutory requirement, he then cannot proceed to make the disallowance under section 14A(1) of the Act. In coming to this view, we drew support from and rely on the finding rendered by the Co-ordinate Bench of this Tribunal in the case of Graviss Hospitality Ltd. in 4801/Mum/2013 dated 21/11/2014. In this view of the matter, we delete the disallowance under section 14A r.w. Rule 8D(2)(iii) of the Rules amounting to Rs. 12.27 lakhs to the extent it is excess of the suo-moto disallowance of Rs.1.20 lakhs made by the assessee. It is accordingly ordered. Consequently, Ground No.2(b) is allowed as indicated above.
Ground No.3 – Adjustment to Valuation of Closing Stock – Rs.5,58,08,382/- 7.1 In this Ground, the assessee contends that the Ld. CIT(A) erred in not deleting the adjustments made by the Assessing Officer to the value of closing stock. The Ld. Representative for the assessee submitted that this issue is covered by the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case in dated 25/6/2014 for assessment year 2007-08.
7.2 Per contra, the Ld. Representative for the assessee placed strong reliance on the order passed by the Ld. CIT(A).
7.3 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncement cited. We find that the similar issue of adjustment in valuation of closing stock was considered by a Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2007-08 and in its order in dated 25/6/2014 at para – 8, thereof, it has been held as under:-
“8. Third issue raised by the assessee relates to the valuation of closing stock. At the outset, Ld Counsel for the assessee mentioned that this issue should also be remanded to the file of the AO. To justify the same, Ld Counsel mentioned that the assessee is following ‘inclusive method of accounting’ and the only actuals are entered in the books of accounts. There is no need for adjustment of inventories as they were already adjusted basing on the actuals in accordance with the provisions of section 145A of the Act. Ld Counsel for the assessee vehemently argued by stating that the judgments relied on by the Revenue Authorities have no relevance to the facts of the present case. Further, referring to the Annexure-A to the assessment order, Ld Counsel mentioned that there are patent errors in matters of closing stock. He mentioned that some unknown errors are found placed in the order of the AO. Bringing our attention to ‘Item No. V’ of the said Annexure-A, Ld Counsel mentioned that the figures suggest Rs.96,11,053/-; Rs. 10,15,39,384/- & Rs. 11,74,59,949/- are unconnected to the assessee. In all probability, these figures were imported from some other assessees in his jurisdiction.
On the other hand, Ld DR relied on the orders of the Revenue Authorities.
We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. On hearing both the parties and on perusal of the material on record, we are of the opinion that this issue needs to revisit the file of the AC and the closing stock valuations have to be redone in the light of the provisions of section 145A of the Act. Accordingly, we remand the issue to the file of the AO for adjudicating the issue afresh after granting a reasonable opportunity of being heard to the assessee. Accordingly, ground No.3 raised by the assessee is allowed for statistical purposes.”
7.3.2 The above order of the Tribunal was followed by another Co- ordinate Bench in the assessee’s own case for assessment year 2008-09 in dated 26/2/2015. Following the aforementioned orders of the Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2007-08 and 2009-10, we remand this issue to the file of the Assessing Officer for adjudicating this issue afresh, after affording adequate opportunity of being heard and to file details/submissions required. Accordingly, Ground No.3 is treated as allowed for statistical purposes.
Ground No.4 – Guest House expenses – Rs.4,03,77,121/- 8.1 In this ground, the assessee contends that the Ld. CIT(A) erred in confirming the disallowance of guest house expenses without appreciating the evidences and submissions before him. The Ld. Representative for the assessee submitted that this issue is covered by the decision of the Co-ordinate Bench of this Tribunal in the assessee’s own case in dated 25/06/2014 for assessment year 2007-08. 8.2 Per contra, the Ld. Departmental Representative placed reliance on the order passed by the Ld. CIT(A).
8.3.1 We have heard both parties and perused and carefully considered the material on record, including the judicial pronouncement cited. We find that the similar issue of disallowance of expenditure on guest house and residential flats, etc. was considered by a Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2007-08 and in its order in dated 25/06/2014 at para 7 therefore, it has been held as under:- “ 7. Second issue relates to the expenditure on guest house and residential flats. At the very outset, Ld Counsel for the assessee brought our attention to page 182 of the paper book-I, which is an affidavit filed by Shri Govind Sharma, Vice President (Taxation & Crop. Affairs), and mentioned that the confirmation given by Shri Sharma is supported by the ‘guest house register’, which is placed in the paper book-I vide page 174 onwards. He also mentioned that this issue can also be remanded to the file of the AD to examine the expenditure incurred on guest houses and residential flats owned by the employees. It is also submitted that the expenditure incurred on employees may be fully allowed as it is incurred for the business purposes. As such, it is not dear from the record that why the assessee has to incur on the residential flats allotted to the employees of the company. Considering the no objection from the Ld DR, we remand the matter to the file of the AO with a direction to decide the issue afresh after examining the details and contents made in the said affidavit and pass a speaking order after granting a reasonable opportunity of being heard to the assessee. Accordingly, ground no.2 raised by the assessee is allowed for statistical purposes.”
8.3.2 The above referred order of the Tribunal (supra) was followed by another Co-ordinate Bench of this Tribunal in the assessee’s own case for assessment year 2008-09 in dated 26/2/2015. Respectfully following the orders of the Co-ordinate Benches of this Tribunal in the assessee’s own case for assessment year s 2007-08 and 2008-09, we remand the issue of disallowance of expenses on guest house and residential flats to the file of the Assessing Officer with the direction to examine and decide the issue afresh after affording adequate opportunity of being heard to the assessee. Consequently, Ground No.4 is treated as allowed for statistical purposes.