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Income Tax Appellate Tribunal, ‘PANAJI’ BENCH, GOA
Before: SHRI CHANDRA MOHAN GARG & SHRI GIRISH AGRAWAL
IN THE INCOME TAX APPELLATE TRIBUNAL, ‘PANAJI’ BENCH, GOA BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.398/PAN/2018 Assessment Year: 2013-14 Shirdi Steel Re-rollers ITO, WARD-5, MARGAO Pvt. Ltd. Nagaraj Kale, Chartered Accountant, G-4, Vs. Kurtarkar Vihar, Opp: Costa Factory, Aquem, Margao, Goa-403601 PAN: AAKFS 3191 G (Appellant) (Respondent) Present for: Appellant by : Shri Srinivas Nayak, CA Respondent by : Shri Mayur Kamble, Sr. DR Date of Hearing : 16.06.2022 Date of Pronouncement : 02.09.2022 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal by the assessee is arising out of the order of Ld. CIT(A),- 2, Panaji in Appeal No. ITA No. 597/CIT(A)-2/PNJ/2017-18 dated 27.06.2018 against the assessment order passed by ITO, Ward-5, Margao, u/s 143(3) r.w.s 92CA of the Income-tax Act, 1961 (hereinafter referred to as the ‘Act’) dated 30.12.2018 for A.Y. 2013-14.
In the present appeal, the assessee has challenged the additions made by the Ld. AO for four different items for which the Ld. CIT(A) has dismissed the assessee’s appeal for non-prosecution.
Before us, Shri Srinivas Nayak, CA represented the assessee and Shri Mayur Kamble, Sr. D.R represented the Department.
2 ITA No.398/PAN/2018 Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 4. Brief facts of the case are that the assessee is engaged in the business of manufacturing of iron and steel products. It filed its return of income on 28.09.2013 reporting total income of Rs. 2,93,84,260/-. Statutory notices were issued which were complied with by the assessee by filing and submitting the requisite details. Assessment was completed by the Ld. AO u/s 143(3) r.w.s 92CA of the Act wherein the following four additions/disallowances were made:
i) Cessation of Liability u/s 41(1) Rs. 8,55,400/-
ii) disallowance u/s 37 transportation charges Rs. 12,000/-
capitalized
iii) Disallowance u/s 37 donation debited to profit Rs. 44,550/-
and loss account
iv) Disallowance u/s 14A read with Rule 8D(2)(iii) Rs. 33,844/-
The assessee has placed on record paper book containing 71 pages along with detailed written submission to substantiate its claim in respect of addition/disallowance made by the Ld. AO. The four additions/disallowance made by the Ld. AO are dealt herein as under:
i) In respect of first addition, assessee had purchased store consumables from Technergy Engineering (India) Pvt. Ltd. worth Rs. 10,71,000/- on 27.04.2011 for which invoice is placed in the paper book at page 4 of the paper book. It was submitted by the Ld. Counsel that against this purchase part advance payment was made and the material was received which was duly accounted with the balance amount as payable in the sum of Rs. 8,55,400/-. The relevant ledger extracts were referred placed in the paper book. Owing to quality issue a dispute arose between the assessee and the supplier and the balance
3 ITA No.398/PAN/2018 Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 payment was withheld by the assessee. Finally the assessee wrote off the said amount of Rs. 8,55, 400/- due to the supplier in the FY 2016- 17 relevant to AY 2017-18 for which relevant ledger extract and the income tax return acknowledgment for AY 2017-18 are placed in the paper book. Ld. Counsel thus submitted that once the assessee himself has written off the amount in AY 2017-18 and offered it to tax the addition made by the Ld. AO in the year under consideration leads to taxing the said amount twice and therefore the addition so made u/s 41(1) of the Act by the Ld. AO ought to be deleted. He further submitted that there was no write off in the current year under consideration and the unilateral act by the Ld. AO is not warranted.
ii) In respect of second issue relating to disallowance of Rs. 12,000/- towards transportation charges capitalized it was submitted that these charges were incurred by the assessee towards storage racks purchased from Presto Systems which has been duly capitalized to the asset under office equipment and forms part of the gross block of assets in the financial statement of the assessee. Relevant voucher and debit note are placed in the paper book. Ld. Counsel thus submitted that the assessee has never claimed this amount as an expenses in its profit and loss account and therefore the disallowance made by the Ld. AO is on absolute misconception of the facts and therefore ought to be deleted.
iii) In respect of third issue which relates to the disallowance made in respect of donation debited in profit and loss account for Rs. 44,550/-, Ld. Counsel referred to the income tax return form placed in the paper book to demonstrate that the assessee had suo-moto disallowed this amount in its return and never claimed it as an allowable expenditure. Accordingly Ld. Counsel submitted that this disallowance also ought to be deleted.
4 ITA No.398/PAN/2018 Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 iv) In respect of fourth disallowance made u/s 14A of the Act read with Rule 8D(2)(iii) of Rs. 33,844/-, Ld. Counsel submitted that assessee made investment in equity shares of listed and private companies out of its own funds. He stated that the assessee had interest free capital, reserves and surplus of Rs. 33,81,80,474/- as on 31.03.2013 for which reference was made to the financial statements placed on record in the paper book. Ld. Counsel also claimed that assessee had not incurred any expenditure to earn the exempt income and Ld. AO has not recorded any dissatisfaction having regard to the books of accounts of the assessee.
Per contra, Ld. Sr. D.R placed reliance on the findings of Ld. AO.
We have heard rival contention and perused the material on record and given our findings in the case which are following ad- seriatim with the issue listed above. On the first issue for addition made u/s 41(1), it is a fact on record that assessee has written off the said liability and offered it to tax in AY 2017-18 considering which we are inclined to accept the submission made by the Ld. Counsel and direct the ld. AO to delete the addition so made. Further it is settled position of law that unilateral right off in the manner which the Ld. AO has done cannot be sustained u/s 41(1) of the Act. In respect of second and third issue taken together, we note that it is an uncontroverted fact that assessee has never claimed these expenses in its return of income while reporting the total income. Thus, when no claim has been made by the assessee for the allowance of these expenses that the disallowance so made by the Ld. AO is not warranted and it is directed that the same be deleted. In respect of disallowance made u/s 14A read with Rule 8D(2)(iii), we note that the assessee had capital, reserve and surplus far exceeding investment made in securities yielding exempt income. We also note that Ld. AO has straightway applied Rule 8D(2)(iii)
5 ITA No.398/PAN/2018 Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 for the purpose of making a disallowance without complying with the requirements of Section 14A to record a satisfaction having regard to the books of account of the assessee. Ld. AO has not brought on record the proximate relationship between the expenditure and the tax exempt income. We note that application of Section 14A read with Rule 8D(2) is not automatic and it is mandatory on the part of Ld. AO to record an objective satisfaction before resorting to computation of disallowance under rule 8D(2). Accordingly, we direct the Ld. AO to delete the disallowance of Rs. 33,844/- made by applying Rule 8D(2)(iii). While directing so, we find force from the decision of Hon’ble Jurisdictional High Court of Bombay, Panaji Bench in the case of CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) (2020) 429 ITR 358 (Bom.) wherein it has held as under:
“11. As the record reveals, the assessee received dividend income of Rs. 13,85,03,376. It was exempted under the Income-tax Act. The assessee claimed that it did not incur any expenditure to earn that dividend. It is said to have invested surplus funds through the bankers and other financial institutions. The mutual fund officials used to come to the assessee's doorstep to fill up the forms and to do all other things necessary in that regard. The assessee only issued the Cheques. The Assessing Officer disagreed. He reckoned that without devoting time and without analysing the nature of the investment, the assessee could not have invested in the mutual funds. The Assessing Officer took the view that section 14A clearly applied to the assessee's case. The Assessing Officer accordingly invoked rule 8D and computed the disallowance at 0.5 per cent. of Rs.381,67,09,731, the average investment. Then, he disallowed Rs. 1,90,83,548. The assessee appealed to the Commissioner of Income- tax (Appeals). Indeed, the appellate authority confirmed the Assessing Officer's disallowance. Of course, the Tribunal reversed it. Let us see whether the Tribunal's view is sustainable. …… 19. Here, on facts, the Tribunal noted that the. Assessing Officer only discussed the provisions of section 14A(1) but has not justified how the expenditure the assessee incurred during the relevant year related to the income not forming part of its total income. The Assessing Officer, according to the Tribunal, straightaway applied rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax exempt income. Only then would a disallowance have to be effected. This court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between
6 ITA No.398/PAN/2018 Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 the expenditure and the exempt income. That is, the application of section 14A and rule 80 is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that before rejecting the disallowance computed by the assessee, the Assessing Officer must give a clear finding with reference to the assessee’s accounts as to how the other expenditure claimed by the assessee out of the non-exempt income is related to the exempt income. 21. So, we see no valid reasons to upset the Tribunal’s well reasoned judgment on this substantial question of law.” Accordingly grounds of appeal are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced under Rule 34(4) of the IT(AT) rules, 1963 on 02.09.2022. Sd/- Sd/- (CHANDRA MOHAN GARG) (GIRISH AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 02.09.2022. SB, Sr.PS. Copy to: 1. The Appellant: Shirdi Steel Re-rollers Pvt. Ltd. 2. The Respondent: ITO, Ward-5, Margao 3. The CIT, Concerned, 4. The CIT (A) Concerned, 5. The DR Concerned Bench
//True Copy// [ By Order
Sr. Private Secretary ITAT