Case Law Details
M/s. Sri Chamundeswari Sugars Ltd. Vs DCIT (ITAT Bangalore)
FACTS –
Disallowance u/s 14A r.w.r 8D – Assessee submitted that AO must establish that the borrowed funds have been deployed in making investments that yield exempt income.
Disallowance of Professional fees as capital expenditure – Assessee submitted that they had proposed increased in share capital and hence professionals were hired for feasibility study, however, they dropped the proposal to raise additional share capital and claimed the professional fees as expenditure u/s 37.
Addition on account of carbon credit – AO observed that the assessee had shown carbon credit of Rs.135.46 lakhs as outstanding on 31.03.2011, however, it was NIL on 31.03.2012.
Assessee submitted that it had shown revenue of Rs.135.46 lakhs from carbon credit for the year ending 31.03.2011 on an erroneous understanding of law. However, after coming to know of the judicial pronouncements wherein ITAT Benches has held that carbon credits have no element of profit or gain and cannot be subjected to tax under any head of income, the assessee has not shown any revenue / income from carbon credit in the year ending 31.03.2012.
Assessee submitted that they have not received any carbon credit during the year under consideration i.e. AY 2012-13. Assessee submitted that addition made by AO on account of non-existence income ought to be deleted.
HELD –
Disallowance u/s 14A r.w.r 8D – We find that the AO has computed the disallowance towards interest on borrowed funds without even verifying the details and without determining whether there is any nexus between the borrowed funds and the earning of exempt income.
The assessee has not produced any details to support its claim that the borrowed funds were not utilised to make the investments that earned the exempt income. It is the primary responsibility of the assessee to submit evidence to support its claim; which onus, in our view, has not been discharged by the assessee. Matter remanded.
Disallowance of Professional fees as capital expenditure – Matter remanded back for fresh examination and determination of the allowability of the professional fees as deduction u/s 37 of the Act.
Addition on account of carbon credit – In our considered view, the right course of action for the AO was to examine and test the claim of the assessee that there was no receipt on accrual of carbon credit during the year under consideration.
Adopting the figure of carbon credits of the earlier year and assuming / presuming the same as the assessee’s income in the year under consideration as income from carbon credit is absolutely baseless, untenable, unacceptable and is contrary to all cannons of taxation.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is directed against the order of the CIT(A)-6, Bangalore dated 29.03.2017 for Assessment Year 2012-13.
2. Briefly stated, the facts of the case are as under:
2.1 The assessee, a company engaged in the manufacturing of sugar, alcohol and power, filed its return of income for Assessment Year 2012-13 on 27.09.2012. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short ‘the Act’) and the case was subsequently taken up for scrutiny for this Assessment Year. The assessment was concluded under section 143(3) of the Act vide order 05.02.2015, wherein the assessee’s income was determined at Rs.NIL after setting off of brought forward loss of Assessment Year 2009-10. In this order, the Assessing Officer (AO) made the following additions / disallowances:
(i) Disallowance under section 14A r.w.r. 8D – Rs. 18,52,774/-
(ii) Professional fees disallowed – Rs. 16,54,500/-
(iii) Addition on account of carbon credits – Rs.1,35,45,905/-
2.2 On appeal, the CIT(A) – 6, Bangalore, disallowed the assessee’s appeal vide the impugned order dated 29.03.2017.
3. Aggrieved by the order of CIT(A)-6, Bangalore dated 29.03.2017 for Assessment Year 2012-13, the assessee has preferred this appeal before the Tribunal, wherein it has raised the following grounds:
1. The order of the Learned Commissioner of Income Tax Appeals is opposed to law, fact and circumstance of the case.
2. The learned Commissioner of Income Tax (Appeals) has without appreciating the facts pertaining to the cases mentioned in detail, in the statement of facts has routinely confirmed disallowance u/s 14A.
3. The learned Commissioner of Income Tax (Appeals) ought to have appreciated the fact that courts have consistently held that before resorting to section 14A disallowance, it must be clearly established by the Assessing Officer that borrowed funds have been deployed in making the investment that yield the exempted Income. In fact the appellate commissioner has failed to consider in proper perspective the following judicial pronouncements which clearly held that only after giving and finding fact that borrowed funds have been utilised to acquire the financial assets yielding tax free income.
a. CIT Vs. L&T Infrastructure Development Projects Ltd [(2014) 357 ITR 763(Madras)]
b. CIT Vs. Gujarat Apollo Industries Ltd [(2015 55 com158(Gujarat)]
c. CIT Vs. Deepak Mittal [(2013) 323 ITR 131(Punjab & Haryana)]
d. CIT Vs. Hero Cycles Ltd [(2010) 323 ITR 518 (Punjab & Haryana)]
4. The Learned CIT(A) ought to have considered that disallowance u/s. 14A read with Rule 8D cannot exceed the exempt income. The CIT(A) without any reason upheld the Assessing officer’s stand. The CIT(A) ought to have considered the decisions in the following cases wherein it has been held that the disallowance u/s.14A cannot exceed the exempted income:
a. Joint Investments (P) Ltd Vs CIT reported in 59 com295(Delhi)
b. CIT Vs Taikisha Engineering India Ltd reported in 54 com109(Delhi)
5. The learned Commissioner of Income Tax (Appeals) has failed to consider that the company had originally planned to go in for raising additional share capital and in the process had incurred certain expenditure for securing technical consultancy opinion. However take into account the overall need and expediency the company did not pursue the matter and had paid the consultant certain amount as technical fee. Since no actual share where issued the expenditure cannot be treated as capital in nature and in this connection the following judicial pronouncements placed before CIT (A) which were not at all considered by him and without proper application of mind he has dismissed the appeal in a single line
6. The CIT(A) order in dismissing the ground in perfunctory manner is not tenable because none of the following judicial pronouncements has been considered by the authority
a. ACIT Vs. R.R.Industries Limited [1256/Madras/2011]
b. Nimbus Communication Ltd Vs. ACIT [132TTJ351](Mumbai Bench)
c. CIT Vs. Crompton Engg. Co. L Td [ 242ITR3 17 (Madras)]
7. The honorable Bombay High court in case of CIT Vs. Glaxo Laboratories(India) Ltd reported in 181 ITR 59, it has been held that the court must look into the objects and purpose of the expenditure from the point of view of the businessman.
8. The learned Commissioner of Income Tax (Appeals) has failed to considered that the company has not received any Carbon credit during the Assessment year 2012-13 nor any Carbon credit accrued to the company. CIT(A) has simply repeated the opinion of the Assessing Officer while confirming the additions.
9. It is basic tenant that before taxing income it is duty of the authorities to give a finding of fact whether any income has really accrued to the assessee. In this case it is borne on facts and also the available financial statement clearly indicate that no carbon credit had been received by the company and no carbon credit accrued to the company during the relevant previous year. Hence, taxing a non-existent income which neither accrued not received would be, against all cannons of taxation.
4. Ground No. 1 (supra),is general in nature and therefore no adjudication is called for thereon.
5. Ground Nos. 2 to 4 – Disallowance u/s 14A r.w.r. 8D
5.1 In these grounds (supra), the assessee assailed the action of the CIT(A) in upholding the disallowance made by the AO u/s 14A r.w.r. 8D of the Income Tax Rules, 1962 (in short ‘the Rules’) amounting to Rs.18,52,774/- [viz., Rs.18,16,744/- u/R 8D(2)(ii) and Rs.36,030/- u/R 8D(2)(iii)] citing various judicial pronouncements.
5.2 The facts of the matter, as emerge from the record on this issue are that in the course of assessment proceedings, the AO observed that the assessee has shown exempt dividend income of Rs.7,40,380/-. The AO was of the view that when the assessee has shown exempt income, it is mandatory to apply the provisions of section 14A of the Act r.w.r. 8D of the ITAT Rules, 1962 (in short ‘the Rules’) and worked out the disallowance thereunder as follows:
(i) u/R 8D(2)(ii) – Rs.18,16,744/-
(ii) 5% of average investments u/R 8D(2)(iii) – Rs. 36,030/-
5.2.1 Aggrieved by the aforesaid disallowance, the assessee preferred an appeal before the CIT(A) on this issue which was dismissed.
5.3 Before us, it was contended that the CIT(A) had decided the issue without appreciating the facts put forth in the statement of facts submitted before the CIT(A). The contentions of the assessee are two – fold, namely:
A. That the AO must establish that the borrowed funds have been deployed in making investments that yield the exempt income. In support of this contention, the assessee has placed reliance on the following judicial pronouncements:
(i) CIT Vs. L & T Infrastructure Development Projects Ltd., (2014) 357 ITR 763 (Madras)
(ii) CIT Vs. Gujarat Apollo Industries Ltd., [(2015) 55 com158 (Gujarat)];
(iii) CIT Vs. Deepak Mittal (2013) 323 ITR 131 (Punjab & Haryana), and
(iv) CIT Vs. Hero Cycles Ltd., [(2010) 323 ITR 518 (Punjab & Haryana)
B. It is also contended that the authorities below ought to have held that the disallowance u/s 14A r.w.r. 8D cannot exceed the exempt income of Rs.7,40,380/- earned by the assessee, inter alia, placing reliance on the decision of the Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd., Vs. CIT (2015) 372 ITR 694 (Delhi).
5.4 Per contra, the learned DR for Revenue supported the orders of the authorities below.
5.5.1 We have considered the rival contentions / submissions on the issue of the disallowance u/s 14A r.w.r. 8D, and carefully perused the material on record. We find that the AO has computed the aforesaid disallowance towards interest on borrowed funds without even verifying the details and without determining whether there is any nexus between the borrowed funds and the earning of exempt income. We further observe that the assessee has also not produced any details to support its claim that the borrowed funds were not utilised to make the investments that earned the exempt income. The assessee has only provided the year end balances of the borrowed funds and not the details of investments made in order to establish that borrowed funds were not used for investments in instruments which earned the assessee exempt income. It is the primary responsibility of the assessee to submit evidence to support its claim; which onus, in our view, has not been not discharged by the assessee.
5.5.2 In the factual matrix, on the issue of disallowance u/s 14A of the Act r.w.r. 8D(2)(ii) and 8D(2)(iii), as laid out above, we are of the view that in the interest of substantial justice, the orders of the authorities below on this issue be set aside and this issue be remanded to the file of the AO for fresh determination of the disallowance after considering the facts of the case and also the legal propositions in the matter; including the propositions that the disallowance u/s 14A of the Act cannot exceed the exempt income and the judicial pronouncement cited in this regard (supra). The assessee is directed to furnish the details of investment made and also establish with evidence that the investments in instruments generating exempt income to the assessee were not made out of borrowed funds; which shall be considered by the AO while deciding the issue. We hold and direct accordingly. Consequently, grounds 2 to 4 of assessee’s appeal are allowed for statistical purposes.
6. Ground Nos. 5 to 7 – Disallowance of Professional Fees as capital expenditure
6.1 In these grounds (supra), the assessee assails the action of the CIT(A) in upholding the AO’s disallowance of professional fees of Rs.16,54,500/- paid to Keynote Corporate Services Pvt. Ltd.
6.2.1 The facts of the matter, as emerge from the record, are that in the course of assessment proceedings, the AO observed that the assessee had incurred Legal and Profession Fees of Rs.56.61 lakhs out of which an amount of Rs.16,54,000/- was paid to Keynote Corporate Services Ltd., (‘Keynote’). On being queried in this regard, the assessee explained that it had proposed to increase its share capital and that in this context had appointed this party to conduct a feasibility study. ‘Keynote’ conducted the feasibility and raised a bill for Rs.16,54,500/-which was paid after deducting tax at source thereon. However, the assessee dropped the proposal to raise additional share capital and the aforesaid expenditure of Rs.16,54,500/- was claimed as allowable u/s 37 of the Act. The contention of the assessee did not find favour with the AO who rejected the same and disallowed the assessee’s claim, by holding the aforesaid expenditure of Professional Fees to be capital expenditure, as it was incurred for the purpose of raising share capital.
6.2.2 Aggrieved by the disallowance, the assessee carried the matter in appeal before the CIT(A), who confirmed the action of the AO by holding that no documentary evidence was produced by the assessee and in the absence of documentary evidence to support its claim / contentions, the disallowance made by the AO was to be upheld.
6.3 Before us, the assessee submitted that the expenditure was incurred for securing technical consultancy opinion and since the share capital was not raised, this expenditure is allowable as a deduction u/s 37 of the Act. In support of its contentions, the assessee placed reliance on the following judicial pronouncements:
(i) ACIT Vs. R. R. Industries Ltd., (1256/Mad/2011)
(ii) Nimbus Communication Ltd., (132 TTJ 351) (Mumbai, ITAT)
(iii) CIT Vs. Crompton Engg. Co. Ltd., (242 ITR 317) (Mad.)
6.4.1 We have considered the rival contentions / submissions and perused the material on record. From an appraisal of the record before us, we find that the Annual General Meeting (AGM) of the assessee company on 13.09.2010 had approved the proposal of increasing the assessee’s authorized share capital. Even before the approval of the AGM, the assessee vide letter dated 08.09.2010 seems to have made an offer to the party concerned to act as ‘Book Running Lead Manager’. The payment is made vide letter dated 25.11.2010 (copy placed at page 2 of Paper Book); whereas the invoice for the same is raised by the party on 08.12.2010 (copy on page 3 of Paper Book); much after the payment was made.
6.4.2 In view of the above factual contradictions in the chronological sequence of dates in the documents submitted (supra), we are of the considered opinion that the AO should have first examined the genuineness of the payment claimed to have been made; the purpose of the payments and then decide as to whether the payment of professional fees to ‘Keynote’ is allowable as deduction u/s 37 of the Act. As the facts related to the payments and surrounding circumstances have not been examined, we deem it appropriate to set aside the orders of the authorities below and restore the matter back to the file of the AO for fresh examination and determination of the allowability of the professional fees paid to ‘Keynote’ as deduction u/s 37 of the Act. Needless to add, the assessee shall be afforded adequate opportunity of being heard and to file details / submissions required, which shall be duly considered by the AO while deciding this issue. We hold and direct accordingly. In the result, grounds 5 to 7 of assessee’s appeal are allowed for statistical purposes.
7. Ground Nos. 8 and 9 – Addition on account of Carbon Credit
7.1 In these grounds (supra), the assessee assails the action of the CIT(A) in upholding the addition of Rs.1,35,45,905/- made by the AO towards Carbon Credit shown as outstanding as on 31.12.2011 but not shown as outstanding as on 31.12.2012, and therefore adding the same to the income of the assessee.
7.2.1 The facts of matter, on the issue of Carbon Credits, as emerge from the record, are that in the course of assessment proceedings, the AO observed that the assessee had shown carbon credit of Rs.135.46 lakhs as outstanding as on 31.03.2011, but the carbon credit balance as on 31.03.2012 was shown at NIL. On being queried, in this regard, the assessee submitted before the AO that it had shown revenue of Rs.135.46 lakhs from carbon credit for the earlier year ending 31.03.2011 on an erroneous understanding of law. However, after coming to know of the judicial pronouncements wherein ITAT Benches had held that carbon credits have no element of profit OR gain and cannot be subjected to tax under any head of income, the assessee has not shown any revenue / income from carbon credit in the year under consideration; namely the Financial Year ending 31.03.2012. The explanation put forth by the assessee; that carbon credit was capital in nature; did not find favour with the AO and the same was rejected. The AO also observed that the judicial decisions cited by the assessee cannot be applied to the assessee’s case as they do not pertain to his jurisdiction. According to the AO, carbon credits receipts are only ancillary to the business profit and are, therefore, to be treated as revenue income and were accordingly exigible to tax. After making the above observations, the AO assumed that the carbon credit receipts for the year under consideration to be at the same level as the earlier year and added an amount of Rs.1,35,45,905/- to the income of the assessee.
7.2.2 On appeal, the CIT(A), after reproducing the facts of the case, as appearing in the order of assessment, the grounds raised and the statement of facts appended to the Form 35, upheld the action of the AO by stating that no documentary evidence was produced by the assessee and in the absence of documentary evidence to support its contentions, the additions made by the AO are confirmed.
7.3 Before us, it has been submitted that the assessee has not received any carbon credit during the year under consideration; i.e., in the period relevant to Assessment Year 2012-13. It was contended that the AO has to first render a finding of fact as to whether any income was actually received or accrued to the assessee on account of carbon credit in the year under consideration and that taxing a non-existent income which was neither received nor accrued is against all cannons of taxation. In these circumstances, the assessee prayed that the addition made by the AO on account of non-existent income ought to be deleted.
7.4.1 We have considered the rival contentions and submissions and examined the details on record on the issue of carbon credits. From an appraisal of the record before us, we find that the assessee had shown carbon credits of Rs.135.46 lakhs under the head “Revenue from Operations” for the earlier year ended 31.03.2011. However, for the previous year ended 31.03.2012, relevant to the year under consideration i.e., Assessment Year 2012-13, the assessee has not shown any carbon credit under this head. It was submitted by the assessee before the AO that there has been no receipt or accrual of carbon credit during the year under consideration. In our considered view, the right course of action for the AO was to examine and test the claim of the assessee that there was no receipt on accrual of carbon credit during the year under consideration; i.e., in the Financial Year ending 31.03.2012. In case the AO has found that there has been receipt / accrual of carbon credit, then the AO should have quantified such receipt / accrual. Thereafter, the AO should have examined whether such carbon credit was capital in nature or revenue income in nature. While making such a determination, the AO has to consider the judicial pronouncements rendered in this regard by various courts / Tribunals. In case he finds that the cited decisions are not to be followed, he should render a finding as to why those decisions are not to be followed. A cursory statement brushing aside their applicability to the issue at hand on the ground that the cited decisions are not pertaining to his jurisdiction is not tenable. In the absence of the above, the addition made by the AO on account of non-existent income from carbon credits in the year under consideration is not at all acceptable. We observe that the AO has not even rendered a finding that the income from carbon credits has actually been received by or accrued to the assessee. Adopting the figure of carbon credits of the earlier year and assuming / presuming the same as the assessee’s income in the year under consideration as income from carbon credit is absolutely baseless, untenable, unacceptable and is contrary to all cannons of taxation. In view of the facts and circumstances on this issue, as discussed above, we have no hesitation in holding that the addition of Rs.1,35,45,905/- made as income from carbon credits is factually unsustainable and untenable and is accordingly set aside and deleted. Consequently, grounds 8 and 9 of assessee’s appeal is allowed.
8. In the result, the assessee’s appeal for Assessment Year 2012-13 is partly allowed.
