VINYL CHEMICALS (INDIA) LTD,MUMBAI vs. DCIT RG 3(3), MUMBAI

The grounds raised by the assessee company in the memo of appeal filed with the Tribunal read as under:-

The brief facts of the case are that the assessee company is engaged in the business of trading of chemicals. During the course of assessment proceedings u/s 143(2) read with Section 143(3) of the Income Tax Act,1961 (Hereinafter called “the Act”) , it was observed by the learned assessing officer (Hereinafter called “the AO”) , that the assessee company has claimed dividend income of Rs. 18,86,490/- as exempt income u/s 10(35) of the Income Tax Act, 1961. The assessee company, further, suo-motu made disallowance u/s 14A of the Act amounting to Rs. 10,000/- which as per the AO is prima facie not as per Rule 8D of the Income Tax Rules, 1962. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the assessee company was asked to furnish the details of expenses incurred for earning exempt income and also show cause as to why the expenses incurred and claimed in respect of exempt income should not be disallowed as per section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962. The assessee company submitted that it has not incurred any expenditure for earning exempt income and hence no disallowance be made. The A.O. held that disallowance of expenses which are attributable for earning exempt income is to be made and the same has to be computed as provided in Rule 8D of the Income Tax Rules,1962 which are applicable w.e.f. the assessment year 2008-09 as laid down by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.(2010) 194 taxman 203( Bom.) and ITA 1066/Mum/2014 3 the disallowance was computed as under following Rule 8D of Income Tax Rule, 1962:-

Aggrieved by the assessment orders dated 04-02-2013 passed by the AO u/s 143(3) of the Act , the assessee company preferred an appeal before the CIT(A) and submitted that it has made entire short term investments in Birla Sun Life Mutual Fund and majority of the investments is in the form of weekly “dividend reinvestments plan”. The assessee company submitted that ITA 1066/Mum/2014 4 dividend was credited 51 times and the dividend was automatically reinvested as per the plan. The direct purchases of units were effected only 11 times and redemption (RTGS) was effected 7 times. There is no expenditure, whatsoever incurred on transactions relating to reinvestments of dividend, redemption of mutual funds as they are directly effected by the Fund Managers. As regards purchases made during the year on such 7 transactions, it was submitted that the assessee company had on its own disallowed a sum of Rs.I0,000/-. In view of the above, the assessee company submitted that the action of the AO is unwarranted and uncalled for.

Aggrieved by the orders of the CIT(A) dated 25-11-2013, the assessee company is in appeal before the Tribunal.

The ld. Counsel for the assessee company submitted that the assessee company is in the business of trading and import of chemicals. The assessee company has made investments in Birla Sun Life Mutual Fund which were deposited when there is a surplus fund with the assessee company and dividend was received during the year amounting to Rs. 18,86,490/- which was claimed as exempt income u/s 10(35) of the Act . The assessee company has voluntarily offered for disallowance of Rs. 10,000/- u/s 14A of the Act. There was a closing balance of Rs. 10.13 crores in the mutual fund as on 31- 3-2010. The ld. Counsel for the assessee company invited our attention to page 11 of the paper book whereby all the transactions with respect to the Birla Sun Life Mutual Fund are reflected. The assessee company submitted that no borrowed funds have been utilised for making the investment. The A.O. has taken 0.5% of average investments held by the assessee company which was disallowed by the A.O. while the A.O. has not recorded any ITA 1066/Mum/2014 6 reason/basis on which he rejected the claim of the assessee company, hence, the assessee company submitted that the disallowance of Rs. 10,000/- offered by the assessee company should be upheld.

The ld. D.R., on the other hand, relied upon the orders of authorities below and submitted that the A.O. has rightly applied Rule 8D of Income Tax Rules ,1962 in the case of the assessee company to make disallowance u/s 14A of the Act.

We have considered the rival contention and also perused the material available on record. We have observed that Rule 8-D of the Income Tax Rules, 1962 is applicable from the assessment year 2008-09 as held by the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd.(supra). Section 14A of the Act stipulates for disallowance of an expenditure incurred in relation to earning of an income which does not or shall not form part of total income. The Rule, 8D, however, provides for method of disallowance of an expenditure in respect of an income, which does not or shall not form part of total income. The assessee company has offered suo-motu voluntarily disallowance of expenditure of Rs. 10,000/- without stipulating the basis of arriving at the figure of Rs 10000/- for disallowance of expenditure in relation to an income which does not form part of the income or shall not form part of total income being exempt income which in the case of the assessee company amounted to Rs.18,86,490/- being dividend income exempt u/s 10(35) off the Act. The AO has not accepted the disallowance of Rs 10000/- of expenditure offered by the asssessee as no basis of arriving at figure of Rs 10000/- for disallowance is provided by the assessee company while ad-hoc disallowance was made by the assessee company. The assessee company has average investment of Rs 6.33 crores in the Mutual fund during the financial year which yielded exempt income in the form of dividend income which was exempt from tax u/s 10(35) of the Act.

Aggrieved by the assessment orders dated 04-02-2013, the assessee company filed its first appeal before the CIT(A) and submitted that that the assessee company had a manufacturing unit and a trading division upto 31- 03-07. Effective from 01-04-2007 the manufacturing division was demerged from the assesee company and merged with Pidilite Industries Ltd as per Hon’ble High Court order’s dated 18-1-2008. Majority of the employees of the assessee company including Mr. A.D. Ubhayakar was transferred to Pidilite Industries w.e.f 01-05-2008. As the salary of these employees were paid by the assessee company upto 30-04-2008, it had recovered salary from Pidilite Industries Ltd. fully except in the case of Mr. Ubhayakar, in which case 90% of salary was recovered from Pidilite Industries Ltd. and 10% from the assessee-company. The assessee company submitted that after 01-05-2008, Pidilite Industries Limited had paid salary to Mr. Ubhayakar, and accordingly recovered 10% from the assessee company. It was submitted that M/s.Pidilite Industries Limited paid Rs.62,25,890/ - to Shri. Ubhayakar as salary during the accounting year 2009-10. The assessee company company only reimbursed Rs.6,86,351/ - which is about 10% of the sum paid to him. In this regard, the photocopy of the debit note was enclosed. Finally, it was stated that the payment made to Pidilite Industries Limited has not given any tax benefit to the assessee company. The said service charges paid by the assessee company is nothing but to follow the principle of accounting so that the expenditure incurred by another person on behalf of the assessee company is given proper accounting treatment in the books of account. The CIT(A) after considering the submission of the assessee company held that the assessee company has made payment of Rs.6,86,351/ - as service charges to M/s. Pidilite Industries Ltd., an associate entity. The assessee company has made substantial sales (86.3% of its total turnover) to the said entity (Pidilite Industries Ltd). The submission of the assessee company is that during the year Pidilite Industries has paid total remuneration of Rs. 62,25,890/- to Shri. A. D. Ubhayakar. Pidilite Industries recovered only Rs.6,86,351/- being ITA 1066/Mum/2014 10 10% of the salary from the assessee-company for services rendered by Shri.Ubhayakar. It was stated that this amount being quite reasonable should be allowed as expenditure incurred for the purpose of business. The CIT(A) observed that it is stated that the services of Shri. Ubhayakar, employed with M/s. Pidilite Industries Ltd. are required and availed for marketing of VAM which is sold by the assessee-company mainly to M/s. Pidilite Industries Ltd. The question arises as to how the person working with the same company helps the assessee-company to effect sales to that company when both the companies are under the same management. M/s. Pidilite Industries Ltd holds 40.64% equity shares of the assessee company and the entire Board of Directors in both the Companies is common including Managing Director of the Companies. Also, M/ s. Pidilite Industries Ltd has raised debit notes for these service charges on quarterly basis for a lump sum amount without any working. As per the finding of the AO, nowhere in these debit notes, it is stated that these charges are for services rendered by Shri. Ubhayakar for marketing of VAM for the assessee company. In view of the above, the CIT(A) held that the AO has rightly disallowed the above sum of Rs.6,86,351/-. The CIT(A) vide orders dated 25.11.2013 accordingly confirmed the orders of the A.O.

The ld. Counsel for the assessee company submitted that the assessee company has paid Rs. 6,86,351/- to M/s Pidilite Industries on account of services of Shri Ubhayakar utilized by the assessee company. The total salary paid to Shri Ubhayakar was Rs. 62.25 lacs out of which 90% of salary was recovered from M/s Pidilite Industries Ltd. and 10% salary was borne by the assessee company. The ld. Counsel submitted that the manufacturing unit was demerged from the assessee company and merged into Pidilite Industries ITA 1066/Mum/2014 11 Ltd. w.e.f 01.04.2007 and majority of the employees of the assessee company (including Shri Ubhayakar) were shifted to M/s Pidilite Industries Ltd w.e.f 01.05.2008. Earlier, the assessee company was raising debit note of 90% of salary of Shri Ubhayakar to M/s Pidilite industries Ltd. which are placed in paper book page 20 to 26 while Shri Ubhayakar was absorbed by M/s Pidilite Industries Ltd. pursuant to the demerger of the manufacturing unit of thee assessee company into M/s Pidilite Industries Ltd. and now M/s Pidilite Industries Ltd.. is raising debit note in favour of the assessee company with respect to 10% of the salary paid to Shri Ubhayakar, proof of which are placed in paper book page 12 to 19. The ld. Counsel submitted that Mr Ubhayakar is rendering services to the assessee company for purchase and marketing of products. The Ld. Counsel submitted that the service tax have been charged on these debit notes with respect to the services of Sh Ubhayakar being utilized by the assessee company and due Taxes have been paid to Government and he submitted that these expenditure should be allowed in the hands of the assessee company.

The ld. D.R., on the other hand, relied upon the order of the lower authorities and submitted that the ld. CIT(A) was right in confirming the order of A.O.

We have considered the rival contention and also perused the material available on record. We have observed that Shri Ubhayakar was working with the assessee company prior to demerger of manufacturing unit to M/s Pidilite Industries Ltd. The assessee company is marketing VAM and the assessee company has made substantial sales(86.3% of total turnover of the assessee company) to Pidilite Industries Limited . The said Sh Ubhayakumar is stated to be rendering services to the assesseee company with respect to purchase/sale on behalf of the assessee company. Sh Ubhayakumar was transferred to Pidilite Industries Limited on 01-05-2008 pursuant to demerger ITA 1066/Mum/2014 12 of the manufacturing unit of the assessee company into Pidilite Industries Limited wef 01-04-2007 which was approved by Hon’ble High Court vide orders dated 18.01.2008. Thus, as submitted by the assessee company, Shri Ubhayakar was providing services to both the companies. The assessee company was debiting 90% of salary of Sh Ubhayakar till 30-04-2008 to M/s Pidilite Industries Ltd. i.e. prior to transfer of employees w.e.f. 01-05-2008 in pursuance of demerger of the manufacturing unit of the assessee company w.e.f 01-04-2007 which was approved by Hon’ble High Court w.e.f 18.01.2008. Shri Ubhayakar was transferred to M/s Pidilite Industries Ltd. w.e.f 01-05-2008 and M/s Pidilite Industries Ltd. started debiting 10% of the salary on which due services taxes have also been paid to the Government. From the facts and circumstances of the case emanating from the record, this practice was continuing earlier also and was accepted by the Revenue in the preceding assessment years also . The assessee company has placed on record the debit notes so raised for earlier year’s also which is placed in paper book page 20-26, which are accepted by the Revenue for earlier years. The principles of consistency has to be followed as laid down by Hon’ble Supreme Court in the case of Radhasoami Satsang (1992) 60 taxman 248(SC) although we are aware that principles of res-judicata are not strictly applicable to income tax proceedings. In view of our above discussions and reasoning, the addition of Rs. 6,86,351/- made by the AO and as confirmed by the CIT(A) by disallowing expenditure of Rs.6,86,351/- towards salary of Sh Ubhayakar being 10% of the total salary being debited to the assessee company, is hereby deleted and we allow the appeal of the assessee company.

In the result, the appeal filed by the assessee company is partly allowed. Order pronounced in the open court on 29th January, 2016. आदेश क� घोषणा खुले �यायालय म� �दनांकः 29-01-2016 को क� गई ।