Case Law Details
MVL Industries Ltd. vs. D.C.I.T. (ITAT Delhi)– Provisions of section 14A are to prevent claims of deduction of expenditure in relation to income which does not form part of the total income of the assessee; that these provisions are enacted to ensure that only expenses incurred in respect of earning taxable income are allowable; that the principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business; that the principle of taxation on net income applies even for the purposes of section 14A and expenses towards non-taxable income must be excluded and that the relationship of the expenditure with the income which does not form part of the total income has to be established for disallowance u/s. 14A.
In this context, it is to be born in mind the plain meaning of section 14A that no deduction can be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. In other words, no deduction of expenditure incurred to earn exempt income are allowable under the Act; that the income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation. The ld. CIT(A) while deciding the issue has observed that dividend income and income from mutual funds are incomes which by virtue of the provisions of section 10 do not form part of the total income under the Act and the expenditure incurred in relation thereto are to be disallowed under section 14A of the Act. The ld. CIT(A) analyzing the meaning of expression “income which does not form part of the total income” observed that such income is income which is not includible in computing the total income of the assessee. A perusal of impugned order also reveals that the ld. CIT(A) while dealing with this issue has referred to sub-sec. (1) of Sec. 115-O observed that under this section charge is not on income by way of dividend in the hands of the shareholder and that the tax on distributed profits is a charge on the company. The Company is chargeable to tax on its profits as a distinct taxable entity and it does not do so on behalf of the shareholder. The company does not act as an agent of the shareholder in paying the tax under section 115-O and in the hands of the recipient shareholder dividend does not form part of the total income. He also observed that section 10(33) clearly evinces Parliamentary intent that incomes from dividend and from mutual funds are not includible in the total income. He relied on the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. CIT that the provisions of rule 8D of the Rules which have been notified w.e.f. 24.03.2008 would apply with effect from A.Y. 2008-09, but even prior to assessment year 2008-09 when rule 8D was not applicable, the Assessing Officer had to enforce the provisions of sub-section (1) of section 14A. He therefore, affirmed the action of the Assessing Officer for working out the disallowable expenditure u/s. 14A, but modified the working of such disallowable expenditure as made by the Assessing Officer.
ITAT have gone through the computation of income placed by assessee at page 27 of the paper book where it is seen that during the year no any exempt income is shown to have been received by the assessee. The income shown in the computation of income is tallied with the return of income filed by the assessee which has been accepted by the Assessing Officer. It is pertinent to note here that section 14A applies only where there is actual receipt of income, which is not includible in the total income during the relevant year for the purpose of disallowance of any expenditure incurred in relation to such income. In other words, section 14A will not apply if no income is received or receivable during the relevant previous year. We, therefore, do not find any justification in the action of the ld. Authorities below while disallowing expenditure u/s. 14A of the Act, as none of the authorities below have pointed out receipt of any such income by the assessee which does not form part of the total income . For this proposition, we lay our hands on the principle of law laid down by Hon’ble Jurisdictional High Court in the recent decision in case of Cheminvest Limited vs. CIT (ITA 749/2014) decided on 02.09.2015, wherein after setting aside the decision of Special Bench of ITAT, relied upon by the Assessing Officer, it was held that “the expression ‘does not form part of the total income’ in Section 14A of the Act envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income.” In view of this, the appeal of the Revenue has to be dismissed and that of the assessee is liable to be allowed on this issue.
INCOME TAX APPELLATE TRIBUNAL,
DELHI BENCH ‘E’ NEW DELHI
BEFORE :SHRI I.C SUDHIR, JUDICIAL MEMBER &
SHRI L.P. SAHU, ACCOUNTANT MEMBER
ITA No. 5477/Del./2012-Asstt. Year : 2008-09
D.C.I.T., vs. MVL Industries Ltd.
ITA No. 6079/Del./2012 & 2392/Del/2013
Asstt. Year : 2008-09 & 2009-10
MVL Industries Ltd. vs. D.C.I.T.
Revenue by : Shri P. DAM Kanunjna, Sr. DR
Assessee by : Shri Arun Kushore, C.A.
Date of hearing : 19.08.2015
Date of pronouncement : 16.10.2015
ORDER
Per L.P. Sahu, Accountant Member:
Out of above bunch of appeals, ITA Nos. 5477/Del./2012 & 6079/Del./2012 are cross appeals filed by the Revenue and the assessee against the order dated 27.07.2012 of learned CIT(A)-IX, New Delhi for the assessment year 2008-09 whereas by way of appeal No. 2392/Del./2013, the assessee has challenged the order dated 13.03.2013 passed by ld. CIT(A)-IX, New Delhi for the assessment year 2009-10. Since common questions of law and facts are involved in all these appeals, the same are being disposed by this consolidated order for the sake of convenience.
2. The grounds raised by the Revenue and the assessee in the respective appeals are as under :
Grounds in ITA No. 5477/Del./2012 (By Revenue for A.Y. 2008-09):
“1. The order of the learned CIT(Appeals) is erroneous & contrary to facts & law.
2. On the facts and in the circumstances of the case, the learned CIT(A) has erred in directing the Assessing officer to recomputed the disallowance u/s. 14A of the I.T. Act read with Rule 8D of the Income Tax Rules considering the interest amount of only Rs.6,86,69,493/- instead of Rs.11,69,94,410/-.
2.1 Whether the Ld. CIT(A) has erred in holding that bank charges, discounting charges and hire charges do not form part of interest without considering the definition of interest given in section 2(28A) of the Income Tax Act, 1961.
3. Whether the Ld. CIT(A) has erred in deleting the proportionate disallowance of interest amounting to Rs.52,44,823/-.
4. Whether, the Ld. CIT(A) has erred in deleting the addition of Rs.2,69,551/- made u/s. 2(24)(x) of the Income Tax Act on the account of deposit of Employees’ Contribution towards PF and ESI.”
Grounds in ITA No. 6079/Del./2012 (By Assessee for A.Y. 2008-09):
“1. That on the facts and circumstances of the case, the order of CIT(Appeals) in appeal No. 101/10-11, to the extent mentioned hereunder is illegal, unjust and opposed to facts.
2. That learned CIT(Appeals) has erred in confirming addition u/s. 14A, the appellant denies its liability u/s. 14A of the IT Act.
3. That without prejudice to the above contention the working of the disallowance as directed by the CIT(Appeals) is erroneous which needs to be corrected in accordance with Sec. 14A read with Rule 8D.
4. That the addition made in terms of sec. 14A of the IT Act be deleted.
Grounds in ITA No. 2392/Del./2013 (By Assessee for A.Y. 2009-10):
“1. That on the facts and circumstances of the case, the order of the CIT(Appeals) dt. 13.03.2013 in appeal no. 140/11-12, to the extent mentioned hereunder is illegal unjust and opposed to facts.
2(i). That learned CIT(Appeals) has erred in conforming addition of Rs.1,31,52,337/- u/s. 14A of the IT Act, 1961.
(ii). That the investments owned by the appellant are not covered with the ambit of Sec. 14A of the Act and rule 8D of the IT Rules.
(iii). That the learned AO has not recorded his satisfaction in respect of the computation filed by the appellant.
(iv). That the learned AO has applied the mechanical provisions irrespective of the circumstances of the present case.
(v). That without prejudice to the above contention the working of the disallowance as directed by the CIT(Appeals) is erroneous which needs to be corrected in accordance with sec. 14A read with Rule 8D.
3. That the addition of Rs.1,31,52,337/- made u/s. 14A of the Act be deleted and consequential interest charged u/s. 234 of the Act be also deleted.”
3. First, we take up the cross appeals for the A.Y. 2008-09. The brief facts of the cases are that during the year under consideration, the assessee was engaged in the business of manufacturing and trading of electronic and plastic goods. The return of income was filed on 10.02.2010 declaring total income of Rs.1,46,95,200/-. The Assessing Officer completed the assessment u/s. 143(3) of the IT Act at an income of Rs.4,00,73,910/-. In the assessment proceedings, the AO noticed that the assessee had incurred expenditure for earning such income which does not form the part of the total income and therefore, after relying upon the decisions of Special Bench of ITAT, Delhi in the cases of M/s. Daga Capital Management Pvt. Ltd., 312 ITR (AT) 01 and Cheminvest Ltd. vs. ITO, 317 ITR 86 (Delhi Spl. Bench), and also the Notification No. 45/2008 dated 24.03.2008 of CBDT issued vide F.No. 134/09/2007-TPL) regarding computation of disallowance as per Rule 8D, disallowed expenditure of Rs.1,98,64,333/- . The AO further relying upon various decisions cited at pages 5 & 6 of the assessment order, made proportionate disallowance of interest on interest free loans to the tune of Rs.52,44,823/-. Besides, for non-payment of employees/employers contribution towards EPF/ESI in time, the Assessing Officer also disallowed a sum of Rs.2,69,551/- on this account vide assessment order dated 07.12.2010. Aggrieved, assessee challenged this order in appeal before the learned CIT(A), who directed the AO to recomputed the disallowance under rule 8D considering the amount of interest paid of Rs.6,86,69,493/-. While doing so, he observed that the AO while computing the disallowance u/s. 14A read with Rule 8D has considered the entire amount of financial charges totaling to Rs.11,69,94,410/- whereas from the details of financial overheads filed by the assessee, total amount of interest paid during the year was Rs.6,86,69,493/- out of which Rs.5,45,80,881/- was debited directly as interest charges and the interest of Rs.1,40,88,612/- was included in the bank charges. He observed that the balance amount of Rs.4,83,24,917 was incurred as bank charges, discounting charges and hire charges which do not fall in the ambit of rule 8D. The learned CIT(A), however, deleted the addition of Rs. 2,69,551/- made by Assessing Officer on account of non-deposit of EPF/ESI contribution in time, observing that the employees/employer contribution, if paid prior to the due date of filing of return would be eligible for deduction u/s 36(1)(va) read with section 2(24)(x) and 43B of the Act. Both the parties were not satisfied by the impugned order, hence, these cross appeals by the Revenue and assessee.
4. During the course of hearing, the learned DR submitted that the ld. CIT(A) is not justified to direct the AO to recomputed the disallowance u/s. 14A after considering the interest amount of only Rs.6,86,69,493/- instead of Rs.11,69,94,410/-. It was submitted that the definition of interest is wide enough to cover the bank charges, discounting charges and hire charges etc. He contended that proportionate disallowance of interest amounting to Rs.52,44,823/- has been wrongly deleted by the ld. CIT(A). It was also submitted that late deposition of EPF/ESI contribution suggest the disallowance u/s. 2(24)(x), which the ld. CIT(A) has wrongly deleted. He therefore, contended that the appeal of the Revenue is liable to be allowed.
5. On the other hand, the ld. Counsel for the assessee contended that no disallowance u/s. 14A is called for. The AO has adopted the total block of financial expenses which is inclusive of discounting charges, bank charges, hire purchase charges on equipments and vehicles and interest, whereas amount of interest as defined under clause A of Rule 8D should have been adopted by him. Break up of interest and bank charges was filed during the course of assessment proceedings, but the AO preferred to adopt the gross block of financial expenses. He, therefore, contended that the disallowance as computed by the authorities below are not tenable at all. The ld. Counsel for the assessee placed reliance on the following decisions :
(i). ITO vs. Narayan Prasad Dalmia(2015) 152 ITD 276 (Kol. Tri).
(ii). ACIT vs. Four M. Maritime Pvt. Ltd. (2015) 152 ITD 557 (Chennai-Tri)
(iii). CIT vs. Reliance Industries Ltd. (2011) 339 ITR 632 (Bom)
(iv). Karnataka Bank vs. ACIT (2015) 228 Taxman 212
(v). ACIT vs. Punjab State Co-op. Marketing Fed. Ltd. (2012) 14 ITR(Trib)69.
(vi). CIT vs. Metal Man Auto Pvt. Ltd. (2011) 336 ITR 434 (P&H)
(vii). CIT vs. Winsome Textile Industries Ltd. (2009) 319 ITR 204 (P&H)
(viii). CIT vs. Cellice Developers Pvt. Ltd. (2015) 231 Taxman 255 (Cal.)
(ix). Maxopp Investments Ltd. vs. CIT, 15 Taxman.com 390
(x). CIT vs. Taikisha Engineering India Ltd. (2015) 229 Taxman 143(Del).
(xi). ACIT vs. Sun Investments Pvt, Ltd. (2011) 8 ITR(Trib)33(Delhi)
(xii). ACIT vs. Iqbal M. Chagla (2015) 67 SOT 123 (Mum)(Uro)
(xiii). Graviss Hospitality Ltd. vs. DCIT (2015) 67 SOT 184(Mum)(Uro).
(xiv). CIT vs. Abhishek Industries Ltd. (2015) 231 Taxman 85 (P & H)
It was further submitted that the disallowance of interest was also not justified in view of various judicial pronouncements, as the interest incurred was for the purpose of business transactions. He also submitted that ld. CIT(A) has rightly deleted the addition made on account of EPF/ESI after considering various judicial pronouncements. Accordingly, the ld. Counsel urged for allowance of assessee’s appeal and dismissal of Revenue’s appeal.
6. We have considered the rival submissions, perused the material available on record and the decisions cited by both the parties. Before deciding the issue relating to application of section 14A, we think it proper to reproduce the provisions of sec. 14A which read as under :
14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall 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 prescribed1, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also 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 :
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.”
7. On perusal of the above provisions, the principles which emerge there from are that the provisions of section 14A are to prevent claims of deduction of expenditure in relation to income which does not form part of the total income of the assessee; that these provisions are enacted to ensure that only expenses incurred in respect of earning taxable income are allowable; that the principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business; that the principle of taxation on net income applies even for the purposes of section 14A and expenses towards non-taxable income must be excluded and that the relationship of the expenditure with the income which does not form part of the total income has to be established for disallowance u/s. 14A. In this context, it is to be born in mind the plain meaning of section 14A that no deduction can be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. In other words, no deduction of expenditure incurred to earn exempt income are allowable under the Act; that the income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation. The ld. CIT(A) while deciding the issue has observed that dividend income and income from mutual funds are incomes which by virtue of the provisions of section 10 do not form part of the total income under the Act and the expenditure incurred in relation thereto are to be disallowed under section 14A of the Act. The ld. CIT(A) analyzing the meaning of expression “income which does not form part of the total income” observed that such income is income which is not includible in computing the total income of the assessee. A perusal of impugned order also reveals that the ld. CIT(A) while dealing with this issue has referred to sub-sec. (1) of Sec. 115-O observed that under this section charge is not on income by way of dividend in the hands of the shareholder and that the tax on distributed profits is a charge on the company. The Company is chargeable to tax on its profits as a distinct taxable entity and it does not do so on behalf of the shareholder. The company does not act as an agent of the shareholder in paying the tax under section 115-O and in the hands of the recipient shareholder dividend does not form part of the total income. He also observed that section 10(33) clearly evinces Parliamentary intent that incomes from dividend and from mutual funds are not includible in the total income. He relied on the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. CIT that the provisions of rule 8D of the Rules which have been notified w.e.f. 24.03.2008 would apply with effect from A.Y. 2008-09, but even prior to assessment year 2008-09 when rule 8D was not applicable, the Assessing Officer had to enforce the provisions of sub-section (1) of section 14A. He therefore, affirmed the action of the Assessing Officer for working out the disallowable expenditure u/s. 14A, but modified the working of such disallowable expenditure as made by the Assessing Officer.
8. We have gone through the computation of income placed by assessee at page 27 of the paper book where it is seen that during the year no any exempt income is shown to have been received by the assessee. The income shown in the computation of income is tallied with the return of income filed by the assessee which has been accepted by the Assessing Officer. It is pertinent to note here that section 14A applies only where there is actual receipt of income, which is not includible in the total income during the relevant year for the purpose of disallowance of any expenditure incurred in relation to such income. In other words, section 14A will not apply if no income is received or receivable during the relevant previous year. We, therefore, do not find any justification in the action of the ld. Authorities below while disallowing expenditure u/s. 14A of the Act, as none of the authorities below have pointed out receipt of any such income by the assessee which does not form part of the total income . For this proposition, we lay our hands on the principle of law laid down by Hon’ble Jurisdictional High Court in the recent decision in case of Cheminvest Limited vs. CIT (ITA 749/2014) decided on 02.09.2015, wherein after setting aside the decision of Special Bench of ITAT, relied upon by the Assessing Officer, it was held that “the expression ‘does not form part of the total income’ in Section 14A of the Act envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income.” In view of this, the appeal of the Revenue has to be dismissed and that of the assessee is liable to be allowed on this issue.
9. As regards the issue relating to disallowance of interest, we find that the AO has disallowed a sum of Rs.52,44,823/- being proportionate interest on account of interest free loans advanced by the assessee to three parties, viz., M/s. Boeing Investments Private Limited, M/s. M.K. Marketing and M/s. Brics Securities Ltd. of Rs.62,99,375/-, Rs.54,022/- and Rs.3,73,53,462/- respectively. The AO has observed that the assessee had taken loans from the banks at the average interest of 12%. He, therefore, disallowed proportionate interest on interest free loans as mentioned above. However, the perusal of record shows that the Assessing Officer has nowhere established that the impugned advances were given for non-business purposes and that the interest bearing funds was utilized for the same. In absence of satisfaction of these two conditions, the disallowance made by the AO cannot be said to be justified in disallowing the proportionate interest. Besides, the ld. CIT(A) after considering various documentary evidences submitted before him by assessee u/r 46A, has elaborately discussed the advances given to above three parties He has rightly held that when the recovery of the principal amount itself was doubtful, there was no question of providing for interest on the same in the case of M/s. Boeing Investments Private Limited. Similarly, with respect to M/s. M.K. Marketing, after considering the copy of account found that the said concern was a C & F Agent and the transactions carried with it during the year were all business transactions. He, therefore, rightly held that no disallowance is called for in respect of the business transactions dealt with this party. With respect to other party, namely, M/s. Brics Securities Ltd., the ld. CIT(A) has considered the joint venture agreement with the assessee and its group company M/s. MVL Ltd. (Joint venture partner), the money of the assessee was utilized by the group company for making investments in stock exchange and the resultant profit, if any was agreed to be equally divided between the two entities and in case of loss, the same was to be entirely borne by M/s. MVL Ltd. Ultimately, the appellant suffered a loss of Rs.4,66,43,500/- which was borne by the other joint venture partner as per the terms agreed between the two parties. Accordingly, the assessee suffered a loss to the extent of interest on capital employed for three to six months for stock market operations, but the other joint venture partner had to bear the burden of the aforesaid loss of Rs.4,66,43,500/-. In view of these facts, this advance cannot be said to be an interest free non-business transaction. Moreover, the advance was given to the broking company for the purpose of investment in the share market. In view of these facts, we do not find any infirmity in the conclusion of the ld. CIT(A) in this regard. Therefore, the appeal of the revenue on this issue has to be dismissed.
10. Adverting to the last issue regarding disallowance of Rs.2,69,551/- on account of delayed payments of employees contribution to ESIC/EPF, we find that the learned CIT(A) relying upon the decisions of in the case of CIT vs. P.M. Electronics Ltd. (2009) 177 Taxman 1 (Delhi H.C.), CIT vs. Vinay Cement Ltd. (SLA No. 1934 of 2007 dated 07.03.2007, CIT vs. Dharmendra Sharma (2008) 297 ITR 320 (Del) and CIT vs. Nexus Computer Pvt. Ltd. (2009) 177 Taxmann 202, has rightly held that where payments of EPF contribution if made after the due date prescribed under the relevant Act and Rules, but before the due date of furnishing the return of income under section 139(1), would be eligible for deduction under section 36(1)(va) read with section 2(24)(x) and sec. 43B. In the instant case, it is not in dispute that the assessee had made the payments before the due date of filing the return of income. No contrary law is placed by the ld. DR. Therefore, we do not find any infirmity in the conclusion of the ld. CIT(A) for deleting the disallowance made by the AO on this count.
11. In view of the above discussion, the appeal of the Revenue, being devoid of merits, is dismissed and that of the assessee is allowed.
ITA No. 2392/Del./2013 (2009-10 By Assessee):
12. In this appeal, the only issue involved is with respect to sustenance of addition of Rs.1,31,52,337/- made u/s. 14A read with Rule 8D of the IT Rules. This issue has been elaborately discussed and decided in favour of the assessee and against the Revenue in cross appeals of the assessee and Revenue for the A.Y. 2008-09 in the identical facts and circumstances. There being no factual change in this year, we direct that the findings recorded in para 6 to 8 on this issue in cross appeals would equally apply to the present case also. Accordingly, the appeal of the assessee is allowed for this year also.
13. In the result, the appeal of the Revenue is dismissed and both the appeals of the assessee are allowed.
Order pronounced in the open court on 16.10.2015.
