Disallowance had been made on ad-hoc basis without pointing out any defects in assessee books or vouchers maintained for impugned expenses, and, the same was not, therefore, sustainable.
FULL TEXT OF THE ITAT JUDGMENT
This appeal has been filed by the Revenue against the order dated 20/01/2014 passed by the Ld. Commissioner of Income-tax (Appeals)-V, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2009-10, raising following grounds:
1. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) is justified the disallowance of expenses of Rs.21,90,000/- out of total expenses of Rs.73,77,381/- made by the A.O. u/s 37(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”)?
2. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.7,02,261/- made by the A.O. u/s 40(a)(ia) as the assessee failed to deduct TDS which it was liable to deduct as per the provisions of section 1 94C/194I of the IT Act?
3. Whether on the facts and circumstances of the case & in law, the Ld. CIT(A) is justified in restricting the disallowance u/s 14A to Rs.90,103/- out of Rs.3,00,11,791/- i.e. giving relief of Rs.2,99,21,688/- to the assessee when Rule 8D was clearly applicable?
4. The order of the Ld. CIT(A) is erroneous and is not tenable on the fact and in law.
5. That the order of the Learned CIT(A) is erroneous and is not tenable on facts and in law.
6. That the grounds of appeal are without prejudiced to each other.
2. Briefly stated facts of the case are that the assessee company is engaged in the business of manufacture, sale and trading of automotive tyres and tubes and flaps. For the year under consideration i.e. assessment year 2009-10, the assessee filed return of income on 30/09/2009, declaring nil income. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short the ‘Act’) was issued and complied with. The scrutiny assessment under section 143(3) of the Act was completed on 19/12/2011 after making certain additions/disallowances. Aggrieved, the assessee filed appeal before the Ld. CIT(A), who partly allowed the appeal. Aggrieved with the relief allowed to the assessee, the Revenue is in appeal before the Tribunal, raising the grounds as reproduced above.
3. In ground No. 1, the Revenue has challenged disallowance of 21,90,000/- out of various expenses like, conveyance, travelling, foreign travelling, telephone and electricity etc.
3.1 Before us, the Ld. DR relied on the order of the Assessing Officer and submitted that in view of the excessive claim of the expenses, the Ld. Assessing Officer was justified in disallowing expenses.
3.2 On the contrary, the Ld. counsel of the assessee relying on the finding of the Ld. CIT(A), submitted that the expenses have been disallowed on ad-hoc basis without pointing out any defects in the books of account or vouchers of those expenses, which is not permitted in law. He further referred to the order of Tribunal in the case of the assessee for assessment year 2008-09, which is placed on page 82 -105 of the paper book filed by the assessee and submitted that identical expenses disallowed in assessment year 2008-09, have been deleted by the Tribunal .
3.3 We have heard the rival submissions and perused the relevant material on record. The Assessing Officer has computed the disallowance on percentile basis. For ready reference, the chart of disallowance of expenses reproduced by the Assessing Officer in the assessment order is extracted as under:
|Extent Disallowed||Amount Disallowed|
|Conveyance Expenses-staff||Rs.9,11,016||20% of Rs.9,11,016||Rs.1,82,203|
|Traveling Expenses||Rs.17,15,962||20% of Rs.17,15,962||Rs.3,43,192|
|Foreign Traveling Expenses||Rs.11,97,441||50% Disallowed||Rs.5,98,721|
|Telephone Expenses||Rs. 10,40,644||30% of Rs.10,40,644||Rs.3,12,193|
|Electricity Expenses||Rs 25.12.318||30% of Rs.25,12,318||Rs.7,53,695|
3.4 The reasons for disallowance stated by the Ld. Assessing Officer are that firstly, the claim of expenses was excessive; secondly, expenses were not justified having regard to the quantum results declared by the assessee; thirdly, in preceding assessment year also expenses under these heads were disallowed.
3.5 The Ld. CIT(A) deleted the disallowance following the order of Ld. CIT(A) in preceding assessment year i.e. 2008-09. This deletion has also been confirmed by the Tribunal in IT No. 105/Del/2014. The relevant finding of the Tribunal is reproduced as under:
“7. We have heard the rival contentions and perused the facts of the case. The total expenditure incurred is Rs.64,06,041/- whereas the disallowance made by the Assessing Officer is to the extent of Rs.25,13,385/- as mentioned in the Assessing Officer’s order reproduced hereinabove. From a careful reading of the assessment order, it is evident that the Assessing Officer has not disallowed 100% expenditure and he had considered the maximum expenditure as genuine and having been incurred for the purpose of business u/s 37(1) of the Act, which means that the expenditure claimed by the assessee has been considered as excessive. Nowhere in the order of the Assessing Officer there is a whisper as to how’ the expenditure is excessive and how the expenditure to the extent of Rs. 25,13,385/- is not having been incurred for the purpose of business u/s 37(1) of the Act or there is a personal expenditure. Making of estimation for disallowance under such circumstances and facts of the case is not permissible. Accordingly, we do not find any infirmity in the order of the Ld. CIT(A) who has relied upon the following decisions:
a) CIT Vs. Malayalam Plantations Ltd 53 ITR 140 (SC)
b) CIT V Birla Cotton Spinning & Weaving Mills Ltd 82 ITR 166 [SC]
c) Madhav Prasad Jatia Vs. CIT 118 ITR 200 [SC]
8. Reliance was also placed by the Id. counsel for the assessee on the decision of the Hon’ble Supreme Court in the case of J.J. Enterprises Vs. CIT reported at 254 ITR 216 [SC] where, as per the ‘Head Notes’, it has been held as under:
“In its principal order, the Tribunal had concluded that the addition was unsustainable because it had been made “on the basis of pure guess work”. The Revenue moved the High Court under Section 256(2) of the Income-tax Act, 1961, and the High Court called for a reference on the basis that the question was a question of law. We are unable to agree with the High Court. In the first place, the Tribunal has held that the addition had been made on the basis of pure guess work and this is a matter of fact in respect of which the Tribunal’s conclusion is final. In the second place, there was no question of remanding the matter to the Assessing Officer for re-examination of the same question. ”
3.6 It is evident that in the instant case, disallowance has been made on ad-hoc basis without pointing out any defects in the books of accounts or vouchers maintained for these expenses, thus, respectfully following the finding of the Tribunal(supra), we uphold the finding of Ld. CIT(A) in deleting the disallowance of Rs.21,90,000/-. The ground of the appeal is accordingly dismissed.
4. The ground No. 2 of the appeal relates to disallowance of Rs.7,02,261/- made by the Assessing Officer under section 40(a)(ia) for non-reduction of tax at source under section 194C/194I of the Act on monthly maintenance charges paid to housing societies .
4.1 The Assessing Officer noted that the assessee is a member of various cooperative housing societies and made payments to those cooperative societies on account of reimbursement of common expenses, which were incurred by the Society for maintenance, lift, security charges and similar day-to-day expenses and municipal taxes paid to the government on behalf of its members. According to the Ld. Assessing Officer, these monthly charges levied by the Society on its member were under an implied contract, which attracts liability of deduction of tax at source (TDS) under section 194C or section 194I of the Act, and non-deduction of tax on such payment, made the assessee liable for disallowance of those expenses under section 40(a)(ia) of the Act. Accordingly, he disallowed the relevant expenditure of Rs.7,02,261/-. The Ld. CIT(A) deleted the disallowance holding that there was no relation of contract existed between the assessee and the society in respect of maintenance charges and it was merely reimbursement to the society for expenses incurred on behalf of its members.
4.2 Before us, the Ld. DR relied on the order of the Ld. Assessing Officer and submitted that the Tax Auditor of the assessee has also advised to deduct tax at source on payments to the housing societies for maintenance of flats.
4.3 On the other hand, the Ld. counsel relied on the order of the Ld. CIT(A) and submitted that monthly maintenance charges have been paid in respect of the flats owned by the assessee in the cooperative housing societies, which are not in the nature of payment made to contractor and, therefore, not liable for TDS and consequent disallowance under section 40(a)(ia) of the Act. He also referred to pages 141 to 146 of the paper book, which are sample copies of certificates issued by the cooperative group housing societies.
4.4 We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that payment have been made to the cooperative housing societies for monthly maintenance charges in respect of the flats owned by the assessee company. We have also perused the sample copies of certificates issued by the Cooperative Group Housing Societies, which are available on page 141 to 146 of the paper book. The Ld. CIT(A) after considering the submission of the assessee and decision of the Tribunal in the case of Mistur Shipping Agency Private Limited (ITA No. 3103/Mum/2010), deleted the disallowance. The relevant finding of the Ld. CIT(A) on the issue in dispute is reproduced as under:
“I have carefully gone through the records and perused the decisions relied upon by the ARs. It is noticed that the appellant had made payment of Rs.7,02,261/- to various Co-operative Housing Societies, reimbursing the commone expense incurred by the Societies. The Assessing Officer had disallowed the above sum of Rs.7,02,261/- under Section 40(a)(ia) holding that the appellant failed to deduct tax at source from such payment under Section 194C/194I of the Act.
“On perusal of provisions of section 194C of the Act, it is noticed that tax needs to be deducted at source from the payment made to a contractor only when there exists privity of contract between the parties for carrying out the ‘work’ as defined under that section. In the present case, the privity of contract for carrying out ‘work’, if any, exists between the contractor and the Society (ies) and not between the contractor and the members, including the appellant. In this context it is also observed that since the co-operative societies works on the principle of mutuality and on a principle of “no profit no loss” therefore, it can be said that the reimbursement of expenses by the members to the co-operative society is not in the nature of any payment to the cooperative society but is rather more in the nature of taking the money from one pocket and placing it in the another pocket. This is because it is the members of the society taken together who form the co-operative society and in such a situation the reimbursement made cannot be treated in the nature of payment by the member to the larger body which (that is the Co-operative Society) as it would in effect mean to be paying to oneself. In view of the above discussion in its totality, the ingredients of section 194C of the Act being is not fulfilled, Section 194C of the Act is not applicable.
Similarly, section 194-1 of the Act requires deduction of tax at source if the payment made constitutes income in the hands of the recipient. In the present case, payment made by the appellant to the Society (ies) does not bear the character of income since the Society (ies) works on the principle of mutuality and there exist no profit motive. In this regard, I draw support from the decision of Mitsur Shipping Agency Pvt. Ltd.(supra), wherein the Tribunal held as under:
“9. We have considered the rival submissions. The payment of maintenance charses by the owner of the premises to the society can by no stretch of imagination be said to be a payment to contractor for carrvine out work on behalf of the owner of the premises. These payments were made to defray common cause. There is no contract for maintenance between the society and the owner of the premises. It is a payment to common fund to be used for the benefit of the owners of the premises. The payment by the member of the society is governed by the principle of mutuality and the society does not derive any income. We are therefore, of the view that the impugned addition cannot be sustained and the same is directed to be deleted. Ground No. 2 is accordingly allowed. ”[Emphasis Supplied]
In light of the aforesaid discussion it is held that the appellant was not required to deduct tax at source from the payments made to the Societies , reimbursing the common expenses incurred by these Societies. This ground of appeal is, accordingly, decided in favour of the appellant and the assessing officer is directed to allow the above expenditure incurred by the appellant and thus, the appellant gets the relief of Rs.7,02,261.”
4.5 The Ld. CIT(A) has examined the applicability of both the sections 194C and 194I of the Act. For applicability of section 194C of the Act, there should exist a contract between the parties for carrying out the ‘work’ as defined under that section. The Ld. CIT(A) has noted that the cooperative societies works on the principle of mutuality and on the principle of ‘no profit no loss’ and, therefore, reimbursement of the expenses by the members of the society, is in the nature of merely transfer of money from one hand to another and, thus, not falling under the payments mentioned in section 194C of the Act. Similarly, the Ld. CIT(A) has held for the purpose of section 194I of the Act that the payment in the hand of the recipient should be in the character of income, whereas in the instant case, it is merely reimbursement by the members to the society and, therefore, the payment in question is not liable for TDS. The Ld. CIT(A) in arriving the above conclusion has relied on the decision of the Tribunal in the case of Mistur Shipping Agency Private Limited (supra).
4.4 In our opinion, the Ld. CIT(A) has not committed any error in following the precedent available. The Ld. DR has not brought before us any contrary decision. In view of the above, we do not find any infirmity in the finding of the Ld. CIT(A) on the issue in dispute and accordingly uphold the same. The ground of the appeal of the Revenue is dismissed.
5. The ground No. 3 of the appeal relates to restricting by the Ld. CIT(A) of disallowance under section 14A of the Act to Rs. 90,103/-as against disallowance of Rs. 3, 00, 11, 791/-made by the Assessing Officer.
5.1 The Assessing Officer observed income of Rs.11,01,207/-from dividend claimed as exempt under section 10(34) of the Act, Rs.64,921/- as interest from Unit Trust of India claimed as exempt under section 10(33) of the Act and Rs.7,45,73,635/-from long-term capital gain on sale of shares claimed as exempt under section 10(38) of the Act. No disallowance was made by the assessee in the return of income for expenses related to the income, which does not form part of the total income mentioned above. During assessment proceedings also the assessee repeated the same stand that there was no nexus between the expenses incurred and the income earned which does not form part of the total income. However, without prejudice and in the alternative an amount of Rs.82,000/- was offered for taxation. The Assessing Officer invoking Rule 8D of Income-tax Rules, 1962 (in short ‘the Rules’) made disallowance of Rs.3,00,11,791/- as under:
|a) Direct Expense-Demat Charges [Rule-8D(i)]||Rs. 90,103|
|b) Expenses not directly attributable [Rule-8D(ii)]||Rs. 2,50,610|
|c) 0.5% of average investments [Rule -8D(iii)]||Rs. 48,86,078|
5.2 On further appeal, the Ld. CIT(A) held that the dissatisfaction of the Assessing Officer in respect of the claim of no expenditure related to exempt income, was not discernible from the finding given by the Assessing Officer and, therefore, Rule 8D of the Rules was wrongly applied by the Assessing Officer. The Ld. CIT(A) held that investment in shares/units was made by the assessee out of its own funds or interest-free funds and, thus, no interest expenditure was related to earning of exempt income. Out of the total expenses disallowed by the Assessing Officer, the Ld. CIT(A) upheld the disallowance of direct expenditure for demat charges amounting to Rs.90, 103/- as disallowance under section 14A of the Act.
5.3 Before us, the Ld. DR relied on the order of the Ld. Assessing Officer and submitted that in the return of income filed, the assessee has not disallowed any expenses against the exempt income earned in terms of section 14A of that, whereas during the assessment proceeding offered an amount of Rs.82,000/- for disallowance, which shows that the claim of the assessee of no expenses having direct or indirect relation with earning of exempt income was incorrect. The Ld. DR submitted that the Assessing Officer has mentioned that the reply of the assessee was considered but was not acceptable as per section 14A of the Act. According to the Ld. DR, this expression itself is an implied dissatisfaction by the Ld. Assessing Officer on the claim of the assessee that no expenditure was incurred for earning the exempt income. The Ld. DR in support of contention relied on the finding of the Hon’ble Delhi High Court in the case of Indiabulls Financial Services Ltd., 395 ITR 242 (Delhi). Accordingly, he submitted that the Assessing Officer was justified in invoking Rule 8D of the Rules. Further, the Ld. DR submitted that issue of no disallowance in case of strategic investment made for controlling stake has also been decided against the assessee in the case of Maxopp Investment Limited by the Hon’ble Supreme Court which has been reported in (2018) 91 taxman.com 154 (SC).
5.4 On the contrary, the Ld. counsel of the assessee relied on the order of the Ld. CIT(A) and submitted that in the immediately preceding assessment year also the Tribunal has restricted the disallowance under section 14A of the Act to the extent of demat charges paid by the assessee.
5.5 We have heard the rival submissions and perused the relevant material on record. There is no dispute on the facts related to quantum of exempted income earned by the assessee. There is no dispute on the fact that in the return of income filed, the assessee has not made any disallowance out of the expenses claimed in profit and loss account, against the said exempted income. The first issue in the case is of the requirement of recording satisfaction about the incorrectness of the claim of the assessee. We do not agree with the contention of the Ld. counsel that this issue is covered by the order of the Tribunal in preceding year, because in our opinion, recording of satisfaction about incorrectness of the claim is year specific and we have to examine said satisfaction in the year under consideration also. The Ld. CIT(A) has held that dissatisfaction of the AO is not discernible from the assessment order, however, we note from para -8 of the assessment order that in view of no expenses disallowed by the assessee, a specific query was raised by the Ld. Assessing Officer as why the provisions of section 14A read with Rule 8D of the Rules may not be invoked. The Ld. Assessing Officer considered objection of the assessee but he found the same unacceptable in view of the provisions of section 14A of the Act.
5.6 We find that Hon’ble Delhi High Court in the case of India Bulls Financial Services Private Limited (supra) held that recording the dissatisfaction for invoking Rule 8D may not required in express words. The relevant finding of the Hon’ble Delhi High Court is reproduced as under:
“7. Undoubtedly, the language of Section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. At the same time Section 14A (2) as indeed Rule 8D(i) leave the AO equally with no choice in the matter inasmuch as the statute in both these provisions mandates that the particular methodology enacted should be followed. In other words, the AO is under a mandate to apply the formulae as it were under Rule 8D because of Section 14A(2). If in a given case, therefore, the AO is confronted with a figure which, prima facie, is not in accord with what should approximately be the figure on a fair working out of the provisions, he is but bound to reject it. In such circumstances the AO ordinarily would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted.
5.7 In view of the above decision of the Hon’ble Delhi High Court, we are of the opinion that in the instant case, the decision of the learned CIT(A) that dissatisfaction of the learned AO is not discernible, need a re-look and thus the issue needs to be re-examined by the learned CIT(A) and accordingly, we restore the issue to the file of the Ld. CIT(A) for deciding afresh in view of the decision of the Hon’ble High Court in the case of India Bulls Financial Services Pvt. Ltd. (supra). The Ld. CIT(A), first may adjudicate the issue of requirement of satisfaction as to incorrectness of the claim of the assessee of having incurred no expenses towards exempt income. If he finds that the pre-requisite of satisfaction is cleared, then he may decide qualification of disallowance under three parts of Rule 8D(2) in accordance with law. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. The ground of appeal of the Revenue is accordingly allowed for statistical purposes.
6. The ground Nos. 4 to 6, being general in nature, are not required to adjudicate upon.
7. In the result, the appeal of the Revenue is allowed partly for statistical purposes.
The decision is pronounced in the open court on 15th May, 2018.