Tata Chemicals Limited Vs DCIT (ITAT Mumbai)
Conclusion: Addition of sum paid to Tata Sons Limited towards subscription paid for Brand Equity and Business Promotion Agreement was not justified as the said payment was made annually on a recurring basis for business purpose and the same was allowable as a revenue expense.
Held: During the course of assessment proceedings, assessee submitted before AO stating that the Company had entered into an agreement titled “Tata Brand Equity & Business Promotion Agreement” vide which it had to pay 0.25% of its annual profits to M/s Tata Sons Ltd. as premium for using the TATA logo. Explaining that the said payment was made annually on a recurring basis, assessee explained before AO that the same be allowable as a revenue expense. However, AO was not convinced with the above explanation of assessee on the ground that (i) the Company was a well known Tata group Company since 1939 having its own reputation as a house hold name; assessee had its own well-established logo which also disclosed the Tata linkage of the company, (ii) the payment for premium was being made under a mandatory direction from the holding company and was for non-business consideration and (iii) the agreement as referred was nothing but an arrangement to share profits with the holding company at a predetermined rate and any payment in perseverance to the said agreement was not allowable as an expense relating to the business of the Company. It was held that similar issue arose before the Tribunal in assessee’s own case for AY 2002-03 in ITA No. 3383/Mum/2015, wherein it was noted that the same issue had been decided in favour of the assessee in its own case for AY 2000-01 (ITA No. 5446/M/2014, dated 21.06.2017) and AY 2001-02 (ITA No. 6366/M/2014, dated 15.09.2017) by the Tribunal. Also in the case of its subsidiary company i.e. Rallis (India) Ltd., the same issue had been decided in favour of the assessee by the Tribunal in ITA No. 5257/M/2008 vide order dated 30.08.2001. Therefore, the Tribunal in AY 2002-03 affirmed the order of CIT(A) deleting the addition made by the AO.
FULL TEXT OF THE ITAT JUDGEMENT
The captioned cross appeals- one by the assessee and other by the Revenue – are directed against the order of the Commissioner of Income Tax (Appeals)-6, Mumbai [in short CIT(A)] and arise out of the assessment completed u/s 143(3) of the Income Tax Act 1961 (the ‘Act’). As common issues are involved, we are proceeding to dispose them off by this consolidated order for the sake of convenience.
ITA No. 2439/MUM/2011
(Assessee’s Appeal)
2. The original return of income was filed on 28.11.2003 declaring income at Rs.254,78,10,992/- u/s 115JB and Rs.274,17,21,703/- under the normal provisions of the Act. A revised return along with the revised tax audit report and consolidated accounts (incorporating the working results of Hind Lever Chemicals Ltd. for the financial year (FY) 31.03.2003, assessment year (AY) 2003-04 which was merged with the assessee-company) was filed on 30.03.2005 disclosing total income of Rs.79,60,48,750/- under normal provisions and Rs.107,21,06,283/- under the provisions of MAT (section 115JB).
3. The 1st ground of appeal
The Ld. CIT(A) erred upholding the disallowance of provision for bad and doubtful debts for computing the book profit u/s 115JB.
Before us, the Ld. counsel for the assessee submits that they have filed an additional ground of appeal before the Tribunal stating :
“That the amount of Rs.2,94,39,561/- written off in the appellant’s accounts ought to be allowed as a deduction for bad and doubtful debts under section 36(1)(vii) of the Act.”
As the additional ground raised herein does not require investigation of additional facts and as it goes to the root of the matter, we admit it for adjudication by following the decision of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT 229 ITR 383 (SC).
In the computation of income u/s 115JB, the Assessing Officer (AO) has made an addition of provision for bad and doubtful debts of Rs.2,94,39,561/-.
In appeal, the Ld. CIT(A) vide order dated 21.01.2011 held that “in view of the amendment in the provisions of the relevant section, the AR did not press this ground. Hence, this ground is dismissed”.
4. Before us, the Ld. counsel for the assessee submits that during the year under reference an amount of Rs.2,94,39,561/- was provided in the books as “provision for bad and doubtful debts”. In the return of income, while computing income u/s 115JB, the said amount was not added back to the profit. It was mentioned by way of a Note in the return of income that “provision for doubtful debts and advances is not added back while computing the book profits in view of the Bombay High Court’s decision in CIT v. Echjay Forgings Pvt. Ltd. reported in 251 ITR 15”.
The Ld. counsel relies on the decision in CIT v. Yokogawa India Ltd. (2012) 17 taxmann.com 15 (Karn.) stating that while computing book profits, provision made for bad and doubtful debts cannot be added back in accordance with Explanation (c) to section 115JB(1) as same is not an ascertain liability.
Referring to the decision in Echjay Forgings (P.) Ltd. (supra), it is stated that where the assessee had made provision for doubtful debts to meet ascertained liability, such provisions would have to be excluded from net profit for working out book profits u/s 115J of the Act.
Referring to the decision in Vijaya Bank v. CIT (2010) 190 Taxman 257 (SC), it is stated that where assessee-Bank had written off bad debt in its books by way of debit to profit and loss account, simultaneously reducing corresponding amount from loans and advances to debtors depicted on asset side in balance sheet at close of year, the assessee was entitled to deduction u/s 36(1)(vii) and for that purpose, it was not necessary for it to close individual account of each of its debtors in its books.
Referring to the decision in CIT v. Syndicate Bank (2019) 101 taxmann.com 171 (Karn) it is held that where AO while computing book profit u/s 115JA, added back provision for ‘Non-performing Assets’ covered under policy with Deposit Insurance and Credit Guarantee Corporation, matter was to be remanded back to the CIT(A) with a direction to look into records and to record a finding as to whether bad and doubtful debts were reduced from loan and advances of debtors from asset side of balance sheet and thereafter, recompute income u/s 115JA.
Referring to the decision in CIT v. Vodafone Esser Gujarat Ltd. (2017) 397 ITR 55 (Guj.) [FB], it is stated that “that prior to the insertion of clause (i) of Explanation 1 to section 115JB , the then existing clause (c) did not cover a case where the assessee made a provision for bad or doubtful debt. With the insertion of clause (i) of Explanation 1 with retrospective effect, any amount or amounts set aside for provision of diminution in the value of the asset made by the assessee, would be added back for compensation of book profit under section 115JA . However, if that was not a mere provision made by the assessee by merely debiting the profit and loss account and crediting the provision for bad and doubtful debt, but by simultaneously obliterating such provision from its accounts by reducing the corresponding amount from the loans and advances on the assets side of the balance-sheet and consequently, at the end of the year showing the loans and advances on the assets side of the balance-sheet as net of the provision for bad debt, it amounted to a write off and such an actual write off was not hit by clause (i) of Explanation 1 to section 115JB.”
5. On the other hand, the Ld. Departmental Representative (DR) supports the order passed by the Ld. CIT(A).
6. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.
In Vijaya Bank (supra), relied on by the Ld. counsel, in the relevant assessment years 1993-94 and 1994-95, the AO disallowed the amount which the assessee-bank had reduced from loans and advances or debtors on the ground that the impugned bad debts had not been written off in an appropriate manner as required under the accounting principles. According to him, write off of each and every individual account under the head ‘loans and advances’ or debtors was a condition precedent for claiming deduction u/s 36(1)(vii). On appeal, the Commissioner (Appeals) held that it was not necessary for the purpose of writing off of bad debts to pass corresponding entries in the individual account of each and every debtor; and that it would be sufficient if the debit entries were made in the profit and loss account and corresponding credit was made in the ‘bad debt reserve account’. On the Revenue’s appeal, the Tribunal affirmed the view taken by the Commissioner (Appeals) on the grounds that (i) the assessee had rightly made a provision for bad and doubtful debts by debiting the amount of bad debt to the profit and loss account so as to reduce the profits of the year, (ii) the provision account so created was debited and simultaneously, the amount of loans and advances or debtors stood reduced and, consequently, the provision account stood obliterated and (iii) loans and advances or the sundry debtors of the assessee as at the end of the year lying in the balance sheet were shown as net of ‘provision for doubtful debt’ created by way of debit to the profit and loss account of the year.
That view of the Tribunal was not accepted by the High Court which held that in view of the insertion of the Explanation to section 36(1)(vii) vide the Finance Act, 2001 w.e.f. 01.04.1989, merely creation of a provision did not amount to actual write off of bad debts.
On appeal by the assessee, the Hon’ble Supreme Court held that where assessee-bank had written off impugned bad debt in its books by way of a debit to the profit and loss account, simultaneously reducing corresponding amount from loans and advances to debtors depicted on asset side in balance sheet at close of year, assessee was entitled to deduction u/s 36(1)(vii) and for that purpose, it was not necessary for it to close individual account of each of its debtors in its books.
6.1 In Syndicate Bank, Manguluru (supra), relied on by the Ld. counsel, the assessee filed its return declaring certain income u/s 115JA. The assessee claimed certain amount as provision for ‘non-performing assets’ covered under policy with Deposit Insurance and Credit Guarantee Corporation. The AO recomputed the income u/s 115JA and added back said amount of provision to assessee’s income. The Tribunal, however, directed the AO to allow provision as deduction while computing book profit u/s 115JA. In view of the order passed by the Hon’ble Supreme Court in Vijaya Bank (supra), the Hon’ble Karnataka High Court remanded back the matter to the Commissioner (Appeals) with a direction to look into records and give a finding as to whether bad and doubtful debts were reduced from loan and advances of debtors from asset side of balance sheet and thereafter, recompute income u/s 115JA of the Act. The Hon’ble High Court thus held :
“4. The same fell for consideration before this Court in the case of CIT v. YOKOGAWA INDIA LTD. [2012] 204 Taxman 305 (Kar.). Therein, the judgment of the Apex Court in the case of Vijaya Bank v. CIT [2010] 190 Taxman 257/323 ITR 166 was considered, wherein the Apex Court considered the Explanation with regard to Item (c) of the Explanation of Section 115JA of the Act. It was held that a mere debit to the profit and loss account would constitute a bad and doubtful debt, but it would not constitute actual write off and that was the very reason why the explanation stood inserted. That prior to the Finance Act, 2001, the assessee would take the benefit of a deduction under Section 36(1)(vii) of the Act by merely debiting the impugned bad debt to the profit and loss account and, therefore, the explanation was added on to state that a mere reduction of profits by debiting the amount to the profit and loss account per se, would not constitute an actual write off. However, it was clarified that, besides debiting the profit and loss account and creating a provision for bad and doubtful debt, the assessee correspondingly/simultaneously obliterated the said provision from its accounts by reducing the corresponding amount from loans and advances/debtors on the assets side of the balance sheet. Consequent to the explanation, the assessees are now required, not only to debit the profit and loss account but, simultaneously also reduce the loans and advances from the assets side. Therefore, it was held that, if the bad debt or doubtful debt is reduced from the loans and advances of the debtors from the assets side of the balance sheet, the Explanation to Section 115JA or JB is not at all attracted.”
6.2 Having regard to the facts of the case, we are of the considered view that the decision in Syndicate Bank (supra) relied on by the Ld. counsel is applicable to the instant case, wherein the Hon’ble Karnataka High Court by following the judgment of the Hon’ble Supreme Court in Vijaya Bank (supra) has held that where the AO while computing book profit u/s 115JA, added back provision for ‘Non-performing Assets’, matter was to be remanded back with a direction to look into records and to record a finding as to whether bad and doubtful debts were reduced from loan and advances of debtors from asset side of balance sheet and thereafter, recompute income u/s 115JA.
Accordingly, we set aside the order of the Ld. CIT(A) and restore the matter to the file of the AO to re-compute income u/s 115JB by following the above ratio laid down in Vijaya Bank (supra) and Syndicate Bank (supra) after giving reasonable opportunity of being heard to the assessee. We direct the assessee to file the relevant accounts/documents before the AO. Thus the 1st ground of appeal along with the additional ground is allowed for statistical purposes.
7. The 2nd ground of appeal
The Ld. CIT(A) erred in upholding the disallowance of Rs.3,73,88,538/- paid to Tata Sons Limited towards the subscription paid for The Brand Equity and Business Promotion(BEPB) Agreement.
7.1 During the course of assessment proceedings, the assessee submitted before the AO vide letter dated 10.10.2005 stating that the Company has entered into an agreement dated 01.01.1999 titled “Tata Brand Equity & Business Promotion Agreement” vide which it had to pay 0.25% of its annual profits to M/s Tata Sons Ltd. as premium for using the TATA logo. Explaining that the said payment is made annually on a recurring basis, the assessee explained before the AO that the same be allowable as a revenue expense.
However, the AO was not convinced with the above explanation of the assessee on the ground that (i) the Company is a well known Tata group Company since 1939 having its own reputation as a house hold name; the assessee had its own well-established logo which also discloses the Tata linkage of the company, (ii) the payment for premium is being made under a mandatory direction from the holding company and is for non-business consideration and (iii) the agreement as referred is nothing but an arrangement to share profits with the holding company at a predetermined rate and any payment in perseverance to the said agreement is not allowable as an expense relating to the business of the Company.
Accordingly, the AO had a disallowance of the above claim of Rs.3,73,88,538/-.
8. In appeal, the Ld. CIT(A) affirmed the disallowance of Rs.3,73,88,538/- with the following reasons :
“I have considered the facts of the issue and the submissions made by the AR. There is merit in AO’s finding that the company is well known as a Tata Group Company since 1939 having its own reputation as a household name. Further, the AO is right in noting that the appellant had its own well established logo which clearly indicated the linkage of the appellant with the Tata Groups. Hence, the company did not need to make any payments for utilizing the Tata logo to promote its sales or to further get identified with the Tata Group. Hence, the finding of the AO that the said payment was being made under a mandatory direction from the holding company and was not for business consideration is perfectly in order. Thus, the same cannot be allowed as a deduction. Hence, the order of the AO disallowing the said payment is confirmed. Alternatively, even if the decision of the DRP is followed, still the said expenditure cannot be allowed as a revenue expenditure.”
9. Before us, the Ld. counsel submits that in the wake of new competitive environment and radical transformation of the business scene created by liberalization and globalization of trade and industry, it was felt that all Tata Companies should come under one umbrella and hence an agreement titled “TATA Brand Equity & Business Promotion Agreement” was signed on 01.01.1999 and the assessee-company subscribed to the ‘Brand Equity Scheme’ by paying premium @ 0.25% per annum. The said agreement was entered into between Tata Sons and Tata Chemicals (the assessee-company) to pool their resources and make a co-operative effort to promote a unified common Tata Brand which, collectively would match the Brand Equity of well known international brand names. Explaining the above, the Ld. counsel submits that the ITAT ‘H’ Bench, Mumbai in assessee’s own case for AY 2002-03 (ITA No. 3383/Mum/2015) on similar facts has dismissed the appeal filed by the Revenue.
On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A).
10. We have heard the rival submissions and perused the relevant materials on record. Similar issue arose before the Tribunal in assessee’s own case for AY 2002-03 in ITA No. 3383/Mum/2015, wherein it is noted that the same issue has been decided in favour of the assessee in its own case for AY 2000-01 (ITA No. 5446/M/2014, dated 21.06.2017) and AY 2001-02 (ITA No. 6366/M/2014, dated 15.09.2017) by the Tribunal. Also in the case of its subsidiary company i.e. Rallis (India) Ltd., the same issue has been decided in favour of the assessee by the Tribunal in ITA No. 5257/M/2008 vide order dated 30.08.2001. Therefore, the Tribunal in AY 2002-03 affirmed the order of the Ld. CIT(A) deleting the addition made by the AO.
Facts being identical, we follow the above order of the Co-ordinate Bench in assessee’s own case and delete the addition of Rs.3,73,88,538/-made by the AO. Thus the 2nd ground of appeal is allowed.
11. The 3rd ground of appeal
The Ld. CIT(A) erred in confirming the disallowance u/s 80M/section 14A with a direction to rework the same in respect of indirect expenses.
The assessee has filed an additional ground stating that “the AO erred in adding back a sum of Rs.7,45,00,000/- towards allocation of interest expenses towards dividend income, under the head business income”.
During the year under consideration, the assessee received dividend and income from units of mutual funds amounting to Rs.12,73,84,631/-. Out of the same, it claimed an amount of Rs.12,00,21,432/- (being dividend received from domestic companies) as deduction u/s 80M of the Act, without allocating any expense towards earning such income. During the course of assessment proceedings, the assessee explained before the AO that the main business is manufacturing and sale of chemicals, cement, detergent and urea. The surplus funds are invested in shares and other securities and at no stage borrowed funds diverted for investment in shares. There are surplus reserves with the company to explain the source of its investments and shares and borrowings are made for specific purposes only.
However, the AO was not convinced with the above reply of the assessee on the ground that the common pool of funds is source to all outgoings including investments, advances, fixed assets and other current assets and is destination of all incoming funds from loans and advances, capital and retained earnings in the nature of reserves. The AO restricted the net deduction u/s 80M with the following reasons :
“Having said so, since it is not possible to identify the source of each outgoing from the common pool of funds including both own funds as well as borrowed funds, what is more important is to determine the tangible cost of capital employed i.e. the actual interest expenses with respect to total capital employed. It is noted from the balance sheet, as on 31-3-2003 that total funds employed in the business including own capital, borrowed funds and reserves are Rs.3602.61 Crores. The interest paid during FY 2002-03 (pertaining to TCL) is Rs.98.25 crores (gross). Hence the average interest cost to entire capital employed is 2.73%. While computing the average cost of funds employed, assessee’s contention regarding investment out of internal resources has also been taken care of. The total investment in quoted and unquoted equity shares of domestic companies (excluding investments received on account of merger of Hind Lever Chemicals Limited), dividend income from which is claimed as deduction u/s 80M is Rs.272.72 crores as per schedule F to the balance sheet.
As the average interest cost of capital employed is 2.73% the interest cost allocable to the above investments comes to Rs.7.45/- crores.
Accordingly an amount of Rs.7.45 crores is attributed as interest expense towards the investment in shares of domestic companies, income from which is claimed as deduction u/s 80M of the I. T. Act. Therefore, net deduction u/s 80M of the Income Tax Act (after allocation of interest expenses) would be Rs.4,55,21,432/-(Rs.12,00,21,432/- minus Rs.7,45,00,000/-).”
12. In appeal, the Ld. CIT(A) by following the order of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg Co. Ltd. v. DCIT (ITA No. 626/10 and WP No. 785/10) held that :
“Since, it has been held in this case that rule 8D is only prospectively applicable, the same cannot be applied in the year under consideration. However, in that case, it has also been held by the Jurisdictional High Court that the disallowance u/s. 14A has to be made by the AO on a ‘reasonable’ basis. Hence, the action of the AO in allocating expenses towards earning of exempt income (relating to deduction u/s. 80M) and making of disallowance u/s. 14A is confirmed albeit he would re-work out such allocation /disallowance u/s 14A on a reasonable basis keeping in view the findings given by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd vs. DCIT (ITA No.626/10 and W.P. No.785/10); without resorting to the provisions of rule 8D as held by the Jurisdictional High Court in the above stated case. Hence, this ground is partly allowed with the above said directions to the AO.”
13. Before us, the Ld. counsel submits that the surplus funds for past several years were deployed systematically for expansion of business and investments in units of mutual funds and shares of various reputed companies. Such income earned on investments during the year was as under:
