DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(1), BILASPUR vs. MESERS NARMADA DRINKS PRIVATE LIMITED, BILASPUR

आदेश / O R D E R Per Arun Khodpia, AM:

1. Whether in the facts of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 17,47,155/- made u/s. 14A of the Income Tax Act, 1961 which was made on the basis of clear findings by the AO that the assessee could not substantiate that the investment from which the exempt income was earned were made out of Assessee’s own fund and not from borrowed fund?

2. Whether in the facts of the case and in law, the Ld. CIT was justified in deleting the disallowance of Rs. 3,16,84,228/- m u/s. 40A (3) of the Income Tax Act, 1961 which was made on the basis of clear findings that the assessee incurred expenditure in respect of ich payment or aggregate of payments were made exceeding Rs. 3 /- to a person in Narmada Drinks Pvt. Ltd. a day, otherwise by an account payee cheque or y any other prescribed mode of payment specified in the Act? 2.1 Whether in the facts of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 3,16,84,228/- made u/s. 40A(3) of the Income Tax Act, 1961 unilaterally without giving any opportunity to the Assessing Officer even the claim made by the assessee before Ld. CIT(A) that the payment was made as an advance (so the same has not been debited to P&L A/c.) which has not been verified for their treatment in next year? 3. Any other grounds as may be urged at the time of hearing.

3. The brief facts of the case are that the assessee is a company, who had filed its return of Income on 28.09.2015 for the relevant assessment year 2015-16 declaring total income of Rs. 4,18,77,750. The case of the assessee was later selected for scrutiny through CASS for Limited scrutiny. Further, the case was referred u/s 92CA of the Act to Additional CIT(TPO), Ahmadabad upon noticing that the assessee, during the year under consideration, had total specified domestic transactions of Rs. 27.99 Crores. On 22.10.18 the order u/s 92CA(3) of the Act was received from the DCIT (TPO)-2, Ahmadabad without making any adjustments to the Arm’s Length Price on specified domestic transactions. Subsequently the case of assessee was converted from “e-proceedings” to “conventional mode” by taking necessary approval of the PCIT, Bilaspur. In the assessment, Ld. AO made disallowance u/s 14A r.w.r. 8D, disallowance u/s 40(a)(ia) and also u/s 40A(3). that against the said additions the assessee preferred an appeal before the Ld. CIT(A), wherein the ground raised by the assessee qua the additions made by the Ld. AO were discussed and deliberated, thereby the appeal of the assessee was partly allowed by vacating certain additions in favour of the assessee.

Narmada Drinks Pvt. Ltd. 4. The decision of the Ld. CIT(A) in deleting the disallowances pertaining to section 14A and 40A(3) was not considered as justified by the department, thus, to challenge the same the present appeal is filed before us.

6. At the start, Ld. CIT DR on behalf of the revenue submitted that the disallowance was made u/s 14A in terms of observations of Ld. AO, wherein the assessee has invested huge amount of Rs. 22,64,85,625/-. There was nothing on record and the assessee was unable to prove that the investment were made out of capital and no borrowed the fund were utilized from making such investments. The assessee has preferred to dislodge the objections of the AO by way of general explanations but was failed to establish the same. It is further observed that the assessee had claimed that they have made strategic investments in subsidiary/ group companies, but has failed to establish whether any benefits have been derived out of such investment or not. Ld. CIT-DR argued that according to CBDT Circular No. 5 (2014) dated 11.02.2014, wherein it is clarified that, even if there is no exempt income earned by the assessee the relevant FY, the disallowance u/s 14A r.w.r. 8D of the I.T. Act, 1961 is liable to be made. Accordingly, it was the prayer that AO correctly made the disallowance and the same deserves to be sustained by setting aside the order of Ld. CIT(A).

7. In response to the arguments of the department, Ld. AR on behalf of the assessee on the issue pertaining to disallowance u/s 14A has submitted that during the year under consideration there was no exempted income earned by the assessee, this fact is very much

Narmada Drinks Pvt. Ltd. discernible and apparent from records. To support this contention, Ld. AR drew our attention to Page No. 430 of the Assessee’s paper book showing P&L account of the assessee company. On Page No. 431 in Note No. 2.14 under the head of ‘Revenue from operations’ and note No. 2.15 under the head other income, no exempted income credited to P&L Account, the fact is ostensible that the assessee has not earned any exempt income. Ld. AR further submitted that this aspect has duly explained by way of response submitted that before the Ld. AO which were duly recorded in the assessment order in para 7.1 at Page No. 2 and Para 7.2 at Page No.3, however, Ld. AO has not accepted the contentions of assessee. During the appeal proceedings, before the Ld. CIT(A) assessee again submitted the same facts, wherein, Ld. CIT(A) has properly appreciated and acceded the fact in right prospective thereby, it is observed by the Ld. CIT(A) that from the balance sheet and P&L Account of the assessee no such exempted income has been claimed by the appellant which would merit disallowance enjoined under the impugned provisions of the Act. For the sake of clarity, observations of the Ld. CIT(A) while deleting the addition made u/s 14A, are extracted as under: I have considered the grounds of appeal, gone through the order of the AO and seen the submissions of the appellant. From the balance sheet of the year consideration 1 observe that the declared share capital of Rs 1,83,32,900 and Reserves and Surplus at Rs 13,50,35,014 aggregating Rs 15,33,67,914 as the appellants own funds. The revenue from operations are reported at Rs. 1,286,072,421 and other income at Rs. 77,147,595 aggregating to Rs 1,363,220,016. In Note No:2.3 of the financial statements a breakup of the long-term borrowings from ICICI Bank Ltd Delhi, HDFC Bank, YES Bank Ltd, and TATA Motors Finance Limited, Volkswagen Finance Ltd have been provided along with the interest being paid on account of these loans. Interest and financing charges of Rs 9,975,435 are reported at Note No:2.20 which was supported and corroborated by copies of Ledger accounts of interest and finance charges of various banks during the assessment. The appellant has demonstrated the sufficiency of own funds and also the interest being paid

Narmada Drinks Pvt. Ltd. on borrowed funds. The utilization of borrowed funds can be seen from the following facts and figures; From the schedule of fixed assets forming part of the balance sheet I observe substantial additions to the fixed assets during the year such as empty bottle equipment for Rs 91,05,62,69, plant and machinery for Rs 14,82,36,95 among others, as well as substantial investments in stocks. These facts are well documented in the financial statements and recorded in the books and therefore contrary to the observations of the AO that there is nothing on record to prove that whole of the investments were made out of capital and no borrowed funds were utilized for making investments. Regarding the sufficiency of own funds for making the investments in securities for Rs 40,62,00,00 for the year under consideration the appellant during the assessment and in appeal has placed relevant material on record. Relying on the decision of the Hon'ble Bombay High Court in CIT v Reliance Utilities and Power Ltd in 313 ITR 340 and in the case of HDFC Bank Limited v DCIT 366 ITR 505 (Bom) the jurisdictional Raipur tribunal in the case of Goel Zenith Agro (P) Ltd in ITA No: 82/RPR/2016 dated 18.01.2019 held that once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of interest free funds.

Adverting to section 14A of the Act the provisions are entitled expenditure incurred in relation to income not includable in total income. Sub-section 2 of 14A empowers the assessing officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, and sub-section 3 of section 14A enjoins that the provisions of sub-section 2 shall apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. From the above provisions it is clear that what is required to be disallowed is expenditure incurred in relation to income not includible in total income. Where there is no exempt income the disallowance of expenditure into such income does not arise. The Act empowers the AO to determine expenditure even where an assessee claims that no expenditure had been incurred by him and not where no such income has been claimed by him. The disallowance of such expenditure is required to be made in relation to income not includible in total income. I observe from the balance sheet and P&L A/c that no exempt income has been claimed by the appellant which would merit disallowance as enjoined by the impugned provisions of the Act. The observations in the assessment that large investment have been made in shares of various companies which can earn exempt income is more of a presumption than a cogent finding. There is no provision in the Act size of investments in shares in determining the capability of earning exempt Income and making the assessee liable to disallowances, as made by the AO. Investments in shares of companies especially in group companies as strategic investments for exercising control are legally permissible and prescribed methods and cannot be seen from the perspective of earning exempt income where, as in the case of the appellant company, the main and substantial sources of revenue are from sale of manufactured carbonated soft drinks.

Narmada Drinks Pvt. Ltd. 5. I find that no cogent material has been brought on record in the assessment for the disallowances made u/s. 14A r.w.r. 8D of the IT rules which are based on presumptions and surmises.

In the case of CIT v. Chettinad Logistics (P) Ltd. SLP (Civil) Diary No. 15631 of 2018 the Hon'ble Supreme Court dismissed the SLP filed by the revenue against the order of Madras High Court after discussion on merits where the department filed SLP against the judgment of the Madras High Court in CIT v. Chettinad Logistics (P) Ltd. (2017) 248 Taxman 55 (Mad), whereby the High Court held that there was no dividend income in relevant assessment year, therefore, addition made by the AO relying on section 14A was completely contrary to provisions of that section as rule 8D only provides for a method to determine the amount of expenditure incurred in relation to the income, which does not form part of the total income of assessee.The Hon'ble Apex Court dismissed the SLP on the ground of delay as well as on merits.

Also in the case of PCIT v. Sintex Industries limited reported in 255 Taxman 171 the Hon'ble Supreme Court dismissed the SLP against the decision of the Hon'ble Gujarat High Court in this case reported in 248 Taxman 449 where the Hon'ble Gujarat High Court had held that where the assessee had its surplus fund against which investments was made, no question of making any disallowance of expenditure in respect of interest and administrative expenses u/s. 14A of the Act arose, there was no question of any estimation of expenditure in respect of interest and administrative expenses u/r. 8D.

In view of the above facts and circumstances and the judicial pronouncements cited above the disallowance's u/s 14A is deleted and this ground of appeal is allowed.

8. Ld. AR further relied upon various judgments in support of aforesaid facts and observations of the Ld CIT(A), dealing with the aspects that, if there is no exempted income earned by the assessee during the relevant assessment year, no disallowance

is called for:

11. Respectfully following the aforesaid observations of the I.T. Raipur backed with the judgments of various Hon’ble High Courts, which have been followed in several other cases also, we are of the considered opinion that, as admittedly, there is no exempted income earned by the assessee during year, therefore, no disallowance u/s 14A r.w.r. 8D is called for, therefore, the order of CIT(A) on this aspect is found to be justified consequently the same is upheld. In the result ground no. 1 of the revenue is dismissed.

12. On ground no. 2 & 3 with regard to disallowance u/s 40A (3) for Rs. 3,16,84,828/-, it was the submission of Ld. CIT DR that the Ld. AO has rightly made the additions and the same is worth to be upheld. The observations of the Ld. AO are reiterated, which are extracted as under:

9.8 The bills do not mention the details of owner of truck and shows that the payment was made to the Transporter only: From the above details and documentary evidences it is clear that the transporter has claimed that they have received payments over Rs. 35,000/- in a day. The Ledger of the Transporter shows clearly they acted as transporter and not as an agent. No evidence could be produced by the assessee to show that the payments were made actually to the truck driver only and not to any representative of the Transporter.

9.9 Onus was on the assessee: The onus was on the assessee to prove that the payment was made to the truck driver only and not to any representative of the transporter i.e., M/S. Anand Transport & Travellers. The records of the Transporter show that the payments were received by them. The assessee has failed to discharge their onus.

9.10 Person means 'Truck driver' or 'party': The assessee has claimed that certain amount was transferred to Imprest account, from where payments were made. Firstly, nothing could be brought on record to show that payments were made to the truck driver and no to any representative of the Transporter. The documentary evidence show that the payments were received on behalf of transporter M/s. Anand Transport & Travelers. Secondly, 'person' means the party on the facts of this case since the party has claimed to have received cash directly from the assessee company.

9.11 The payments reflected in the ledger of M/s. Anand Transport & Travellers do not show that they are acting as agent: The payments reflected in the ledger of the Transporter, M/S. Anand Transport & Travellers show that these were transportation receipts in cash and not commission for arranging trucks. They have recognized the total amount of cash received from the assessee company - several times in a day. The ledger was sent to the Narmada Drinks Pvt. Ltd. assessee company for confirmation. In response, the assessee company has confirmed that the transactions tally with their records. When the issue of violation of provisions of section 40A(3) was raised, the assessee took different stand and claimed that M/S. Anand Transport & Travellers acted as an agent. Therefore, the claim of the assessee is not accepted.

9.12 Claim that expenses debited is Rs. 1,28,026/- only: The assessee as claimed that they debited an expenses of Rs. 1,28,026/- only in this regard in their Profit & Loss account. It is seen that the assessee has actually incurred huge expenses on this head of expenses. Due to effect of receipt of transportation charges, the net effect may be reduced, but it cannot be said that that extent were not incurred by the assessee. Therefore, this explanation also, is not accepted.

9.13 Production of bills etc in original: During hearing on 18.12.2018, the assessee made a submission enclosing documentary evidences of 88 pages. The assessee could produce documentary evidences in original, in respect of those documentary evidences, which are enclosed with the submission. It is seen that the documentary evidences constitute a very minor proportion of expenses claimed under this head and the documentary evidences, in original, in respect of balance amount of expenses have not been produced.

9.14 Genuineness of expenses: The documentary evidences obtained from the Transporter, which has been confirmed by the assessee as correct representation of ledger, do not support the claim of the assessee that cash payments were not made directly to the Transporter and made to the truck driver. On the basis of above observations, it cannot be said that the expenses were genuinely made to the drivers of different truck owners. In view of the above, the explanation of the assessee is not accepted.

9.15 Therefore, it is clear violation of provisions of section 40A (3) of the I.T. Act, 1961 and a sum of Rs. 3,16,84,228/- (Rs. 3,11,07,228/- +Rs.5,27,000/- + 50,000/-), as mentioned in the above table, is disallowed u/s 40A (3) of the I.T. Act, 1961. [Addition Rs. 3,16,84,228/-]

Ground no. 2 (Disallowance u/s 40A(3) -Rs.3,16,84,828/) Submission of the assessee 1. Payments made on behalf of buyers; it is reimbursement. (i) Payment does not represent any expenditure of assessee. It was made on behalf of buyers of goods. Buyers reimburse freight to assessee. (ii) Freight is expenditure of buyers. (iii) Cash payments made to truck drivers to meet cost of fuel, toll tax, repairs etc. Balance payment made through banking channel. (iv) Freight is charged to the buyers separately in the bill, sample bill at PN 69 & 70 of PB. If freight was Assessee’s expense, it would not have been charged in bill separately. (v) Since it is reimbursement, outgo & amount billed to customers both accounted in one account only, Freight & Cartage (net) a/c, at PN 389 to 392 of P B. (vi) Out of the bill raised on buyers, value of goods sold only credited to sales a/c while freight, VAT etc. credited to Freight & Cartage (net) a/c and VAT a/c. (vii) Buyers pay freight charges to assessee on the basis of bills. There is thus implied condition/agreement that freight is their (buyer's) responsibility and assessee is only a facilitator since goods are to be transported & vehicles are to be arranged by assessee.

Narmada Drinks Pvt. Ltd. (viii) Assessee's claim accepted in past & subsequent years.

 In scrutiny assessment of AY 2017/18, query raised relating to payments made to transporters vide notice dated 12.11.2019, query no. 2 (l). Specific details required in respect of cash payment made to transporters.

 No addition disallowance made on this account. Not only the office, but even the person framing assessment was same.  Claim of assessee accepted by AO in subsequent year. Second appeal could not have been filed by the A (), once having accepted the claim of assessee.

 No addition made in past scrutiny assessment of AY 2012-13 to 2014-15. 2. Payments not claimed as expense/not debited to profit & loss a/c (i) Assessee has only debited Rs. 1,28,026/- in Profit & loss a/c. Balance of Rs. 1,28,026/- in Freight & Cartage (Net) a/c (PN393 of PB) was only transferred to Selling & Distribution (All) [Head office a/c] which is at PN 388 of P B. (ii) Audited P/L a/c is at PN 430 of PB and relevant schedule of expenses at PN 431 to 433 of PB. Perusal of P/L a/c and relevant schedules shows that Freight & Cartage has not been claimed/debited in Profit & loss a/c.

Narmada Drinks Pvt. Ltd. 5. Genuine payments outside the ambit of sec. 40A (3)

AO has not doubted genuineness of the parties or payment.

Object of sec. 40A(3) is not to disallow genuine expenditure. Merely because payments made in excess of limit provided u/s 40A(3), no disallowance can be made. AO has not raised any doubt about genuineness of expenditure. Sec. 40A(3) not attracted. Reliance on ▪ Summary of case laws at PN 123 to 127 of P B. ▪ S.D. Minerals Pvt. Ltd. vs JCIT in vide order cit. 03.02.2020, PN 107 to 122 of PB. Relevant observations at page no. 117, 118, 121 & 122 of PB. ▪ Attar Singh Gurmukh Singh vs ITO (1991) 191 ITR 667 (SC), PN 23 to 28 of PB, 27. ▪ CIT vs M/S Sitaram Anilkumar in Income Tax reference no. 102 of 1999, order dt. 23.08.2011 of Chhattisgarh High Court, PN 29 to 34 of PB. Relevant observations on page no. 3 para no. 3, page no. 5 para no. 6 to 8 of judgement, PN 33 of PB. ▪ DCIT vs Amisha-in-Sky Creations in ITA no. 351 to 354/RPR/2014 order dt. 16.04.2018, PN 39 to 58 of PB. Relevant observations at page no. I l para no. 20 & 21 of order, PN 49 of PB. ▪ ACIT vs R.P. Real Estate Pvt. Ltd. in (2015) 44 CCH 699 (Trib. - Raipur), affirmed by CG High court in Tax Case No. 13 of 2016, PN 35 to 38 of PB. Relevant observation of Hon'ble High Court at para no. 4 & 5 of Hon'ble High Court. ▪ Geo Connent Ltd. vs DCIT (2022) 65 CCH 589 (Del.), at PN 89 to 106 of PB, relevant findings at PN 102 & 105 of PB. ▪ Anupam Tele Services vs ITO (2014) 366 ITR 122 (Guj.), PN 59 to 73 of PB, relevant findings at PN 67.

▪ A. Daga Royal Arts vs ITO (2018) 196 TTJ 541 (Jp.), PN 74 to 97 of PB, relevant findings at PN 89 & 90 of PB. ▪ CIT vs Samwon Precision Mould Mfg. India P. Ltd. (2018) 401 ITR 486 (Del.). ▪ DCIT vs RCP Infratech Pvt. Ltd. Tax No. 154 of 2017 (CG)

Narmada Drinks Pvt. Ltd.

Narmada Drinks Pvt. Ltd. AO in the assessment orders of the said years showing that there was no disallowance u/s 40A(3) of the Act. Ld. AR also shown us a notice of the hearing dated 12.11.2019 for the AY 2017-18, wherein a question pertaining to cash payments to the transporters, based on which disallowance U/s 40A(3) was made in the AY 2015-16, have been asked by the Ld. AO, stating that the this aspect is examined by the Ld AO but no disallowance was made in the Assessment framed shows that the AO is satisfied with the practice and explanation of the assessee, wherein no change has adopted in those years. copy of said notice dated 12.11.2019 for the AY 2016-17, is extracted as under:

Sec 40A

“(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, exceeds ten thousand rupees, no deduction shall be allowed in respect of such expenditure.

(3A) Where an allowance has been made in the assessment for any year in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year (hereinafter referred to as subsequent year) the assessee makes payment in respect thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, the payment so made shall be deemed to be the profits and gains of business or profession and accordingly chargeable to income-tax as income of the subsequent year if the payment or aggregate of payments made to a person in a day, exceeds ten thousand rupees:

Provided that no disallowance shall be made and no payment shall be deemed to be the profits and gains of business or profession under sub-section (3) and this sub-section where a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, or use of electronic clearing system through a bank account or through such other electronic mode as may be prescribed, exceeds ten thousand rupees, in such cases and under such circumstances as may be prescribed, having regard to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors :

Provided further that in the case of payment made for plying, hiring or leasing goods carriages, the provisions of sub-sections (3) and (3A) shall have effect as if for the words "ten thousand rupees", the words "thirty-five thousand rupees" had been substituted.”

Narmada Drinks Pvt. Ltd. of the assessee company which is in the business interest of the assessee company and also is a prevailing practice in the trade, as explained by the Ld. AR. It is also a fact that such expenditure was not claimed by the assessee in P&L account which is precondition for invoking the provisions of section 40A(3). The issue in the present case is also covered by various case laws which were discussed while deciding the similar issue by the coordinate bench of ITAT Raipur in the case of CG Housing Company Vs. ITO (2023)198 ITD 0042 (Raipur-Trib), the finding in the said decision is extracted as under: In sum and substance, where the payment made by the assessee has not been claimed as an expenditure for the purpose of computing his income under the head “Profits and gains of business or profession”, then dehors any such claim of deduction no question of disallowance of the same would arise at all.

Order pronounced in the open court on 08/11/2023.