Acme Chem Limited Vs DCIT (ITAT Kolkata)
ITAT Kolkata held that addition based on such retracted statement of third person and that too without giving any opportunity of cross examination to the assessee deserves to be deleted.
Facts- The assessee is a limited company engaged in the business of manufacture and sale of rubber chemicals. Income of Rs. 8,22,97,170/- declared in the e-return filed on 28.09.2012 pertaining to AY 2012-13. Case selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act. Assessment u/s 143(3) of the Act completed on 24.03.2015 after making various additions/disallowances and income assessed at Rs. 10,19,05,350/-. The additions made by ld. AO were challenged by the assessee but he failed to get any relief from ld. CIT(A). Aggrieved, the assessee is now in appeal before this Tribunal.
Conclusion- With regard to disallowance of bad debts claimed of Rs. 27,90,726/- for alleged non-submission of the proof, it is held that major amount of bad debts is on account of final account reconciliation and certain deductions/rebate given to the buyers of the assessee which mainly include MRF Ltd., CEAT Ltd. Birla Tyres Ltd. and various small amounts below Rs. 50,000/- amounting to Rs. 2,15,883/-. Since the sales have been duly accounted for and certain portions of the sundry debtors which could not be recovered have been claimed to be bad debts and this claim of the assessee is allowable. We are inclined to hold that the assessee has made a justified claim of bad debts u/s 36(1)(vii) of the Act and the same deserves to be allowed.
With regard to addition of unexplained income u/s 68, it is held that No opportunity of cross examination was provided to the assessee by ld. AO and also the said statement was retracted within ten days by Shri Rajkumar Kothari and therefore, making the addition based on such retracted statement and that too without giving any opportunity of cross examination to the assessee in whose case addition has been made on the basis of a statement of a third person deserves to be deleted and, thus, the legal issue raised by the assessee challenging the impugned addition is allowed.
With regard to disallowance of deduction u/s 80G, it is held that this Tribunal in the case of M/s. JMS Mining Pvt. Ltd. vs PCIT in ITA No. 146/KOL/2021 order dated 22.07.2021 has allowed the deduction u/s 80G of the Act on CSR expenses. We, therefore, respectfully following the decision referred herein above, are inclined to hold that the assessee is eligible for deduction u/s 80G of the Act at Rs. 17.50 lakh and thus, set aside the finding of ld. CIT(A).
FULL TEXT OF THE ORDER OF ITAT KOLKATA
The captioned appeals filed by the assessee pertaining to the Assessment Years (in short “AY”) 2012-13, 2017-18 & 2018-19 are directed against separate orders passed u/s 250 of the Income Tax Act, 1961 (in short the “Act”) by ld. Commissioner of Income Tax (Appeal), NFAC, Delhi [in short “ld. CIT(A)”] evenly dated 16.09.2022 arising out of the assessment order framed u/s 143(3) of the Act dated 24.03.2015 for AY 2012-13, 22.12.2019 for AY 2017-18 & 25.03.2021 for AY 2018-19.
2. The assessee is in appeal before the Tribunal raising the following grounds:
ITA No. 641/KOL/2022 for AY 2012-13:
“1. The impugned order passed by the Ld. CIT(A) is bad in law, illegal and arbitrary, the same deserves to be quashed/annulled and set aside.
2. On the facts and the circumstances of the case and in law, the Hon’ble CIT(A) erred in upholding the action of the Ld. AO in disallowing a sum of Rs. 33,86,993/- u/s 14A of the Act being the disallowance computed as per Rule 8D of the Income Tax Rules, 1962 (“the Rules”).
3. The Appellant prays that the AO be directed to delete the disallowance u/s 14A of the Act amounting to Rs. 33,86,993/- or the disallowance be appropriately reduced.
4. Without prejudice to the above, where the assessee has sufficient interest-free funds exceeding tax-free investments, it is presumed that investments are made out of such interest-free funds and therefore no disallowance u/s. 14A r.w.r. 8D(2)(ii) of the Rules is called for;
5. Without prejudice to the above, while computing average investments for Rule 8D of the Rules, only those investments from which exempt income has been earned during the year should be considered;
6. On the facts and in the circumstances of the case and law, the Ld. CIT(A) has erred in upholding the computation under clause (f) of Explanation to section 115JB(2) made by the AO without resorting to the computation as contemplated u/s 14A r.w. Rule 8D of the I.T. Rules, 1961.
7. That the ld. Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer in making the addition u/s 68 to the tune of Rs. 1,62,80,000/-, which is against the facts and circumstances of the case.
8. That the ld. CIT (A) has also erred in confirming the addition, especially when no cross-examination of Shri Raj Kumar Kothari was allowed to the assessee and, thus, the statement recorded at the back of the assessee has no evidentiary value.
9. That the confirmation of addition without allowing the cross-examination of the assessee is against the principles laid down by the Hon’ble Supreme Court in the case of Andaman Timber Industries v. CCE [2015] 62 com and, thus, the sustaining of addition, is against the facts and circumstances of the case.
10. That the confirmation of addition by the CIT (A) on human probabilities is not proper and is against the documentary evidence furnished before the authorities below, which has not been doubted at all.
ITA No. 650/KOL/2022 for AY 2017-18:
“1. The impugned order passed by the Ld. CIT(A) is bad in law, illegal and arbitrary, the same deserves to be quashed/annulled and set aside.
2. For that on the facts and in the circumstances of the case, the CIT (A) was unjustified in upholding the addition u/s 68 of the Act totalling Rs.8,61,00,000/-.
3. For that on the facts and in the circumstances of the case, the appellant having furnished relevant documentary evidences establishing the identity and creditworthiness of the share subscribers and proving the genuineness of transaction the authorities below were unjustified in making addition of Rs.8,61,00,000/- as income of the appellant chargeable u/s 68 of the Act.
4. For that on the facts and in the circumstances of the case, the CIT(A) was unjustified in upholding the action of the AO in making addition of Rs.8,61,00,000/- and taxing the same at special rate u/s 115BBE of the Act.
5. That the ld. CIT (A) has also erred in confirming the addition, especially when no cross-examination of Shri Raj Kumar Kothari was allowed to the assessee and, thus, the statement recorded at the back of the assessee has no evidentiary value.
6. That the confirmation of addition without allowing the cross-examination of the assessee is against the principles laid down by the Hon’ble Supreme Court in the case of Andaman Timber Industries v. CCE [2015] 62 com and, thus, the sustaining of addition, is against the facts and circumstances of the case.
7. That the confirmation of addition by the CIT (A) on human probabilities is not proper and is against the documentary evidence furnished before the authorities below, which has not been doubted at all.
8. The Ld. CIT (A) has erred in confirming the disallowance of Corporate Social Responsibility (CSR in short) expenses of Rs.17,50,000/- u/s 80G of the Income tax Act when the same was allowable according to the decision of the Hon’ble Kolkata Bench of the Tribunal in the case of M/s JMS Mining Pvt Ltd Vs PCIT, Kolkata-2 in I.T.A. No. 146/Kol/2021 in the A.Y. 2016-17 Order dated 22.07.2021.
9. The Ld. CIT (A) has erred in confirming the disallowance of CSR expenses on the ground that in spite of sufficient opportunity the assessee failed to produce receipt evidencing the sum was donated to the trust approved u/s 80G for the relevant assessment year.”
ITA No. 660/KOL/2022 for AY 2018-19:
“1. The impugned order passed by the Ld. CIT(A) is bad in law, illegal and arbitrary, the same deserves to be quashed/annulled and set aside.
2. For that on the facts and circumstances of the case, the CIT(A) was wholly unjustified in confirming the addition of Rs.2,03,823 made by the AO by way of unreconciled duty drawback and deserves to be deleted.
3. For that on the facts and circumstances of the case, the CIT(A) was wholly unjustified in confirming the disallowance of bad debts of Rs 27,90,726 for alleged non-submission of proof substantiating that the debts had become irrecoverable.
4. For that on the facts and circumstances of the case, the appellant has satisfied the conditions laid down in Section 36(2) had rightly claimed deduction of bad debts of Rs.27,90,726 and in that view of the matter the impugned disallowance being unsustainable on facts and in law deserves to be deleted.”
3. As the issues raised in these appeals are common and the facts are identical, therefore, as agreed by both the parties, they are heard together and disposed off by way of this common order for the sake of convenience and brevity.
First, we take up ITA No. 641/KOL/2022 for AY 2012-13:
4. Brief facts of the case as culled out from the records are that the assessee is a limited company engaged in the business of manufacture and sale of rubber chemicals. Income of Rs. 8,22,97,170/- declared in the e-return filed on 28.09.2012 pertaining to AY 2012-13. Case selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act. Assessment u/s 143(3) of the Act completed on 24.03.2015 after making various additions/disallowances and income assessed at Rs. 10,19,05,350/-. The additions made by ld. AO were challenged by the assessee but he failed to get any relief from ld. CIT(A). Aggrieved, the assessee is now in appeal before this Tribunal raising following three issues:
i) Disallowance u/s 14A of the Act at Rs. 33,86,993/- (ground nos. 2 to 5)
ii) Disallowance u/s 14A of the Act added to the book profit for the purpose of computing the income u/s 115JB of the Act (ground no. 6)
iii) Addition u/s 68 of the Act for unexplained share capital at Rs. 1,62,80,000/- (ground nos. 7 to 9)
5. As regards the first issue for disallowance u/s 14A of the Act at Rs. 33,86,993/- facts in brief are that the assessee earned exempt income in the form of (i) dividend at Rs. 43,40,324/-, (ii) long term capital gain on venture capital fund at Rs. 2,43,893/-, (iii) long term capital gain on shares at Rs. 1,13,56,149/-.
6. AO on examining the details about the exempt income earned by the assessee during the year, and investments appearing in the balance sheet both current and non-current, quoted and unquoted resorted to apply Rule 8D of the Income Tax Rules, 1962 and made NIL disallowance under Rule 8D(i) of the Rules, disallowed interest expenditure at Rs. 14,74,087/- under Rule 8D(ii) of the Rules, disallowed Rs. 19,12,906/- under Rule 8D(2)(iii) of the Rules. The finding of ld. AO stands confirmed by ld. CIT(A). Before us ld. Counsel for the assessee has submitted that the assessee company has sufficient share capital and reserve to cover up the investments made in the equity shares and mutual funds. Therefore, in view of the judgment of Hon’ble Supreme Court of India in the case of CIT vs. Reliance Industries Ltd. (2019) 410 ITR 466 interest disallowance is uncalled for u/s 14A of the Act. As regards under Rule 8D(iii) at the rate of 0.5% of the average investments it was submitted that the same ought to have been computed only on the investments fetching exempt income and for this contention reliance was placed on the judgment of Hon’ble Jurisdictional High Court in the case of PCIT vs. REI Agro Ltd. (2022) 140 taxmann.com 71.
7. On the other hand, ld. D/R vehemently argued supporting the orders of both the lower authorities.
8. We have heard rival contentions and perused the records placed before us. The assessee is aggrieved with the disallowance u/s 14A of the Act at Rs. 33,86,993/- confirmed by both the lower authorities. We notice that the assessee earned exempt income to the tune of Rs. 1,59,40,366/- and average investments in equity shares and other mutual funds is Rs. 39.91 Cr approx. As far as the interest disallowance u/s 14A of the Act computed under Rule 8D(2)(ii) such disallowance is made towards use of borrowed funds for investing in investments and other funds giving rise to exempt income. On perusal of the audited balance sheet, we notice that as on the close of the year the share capital and reserve and surplus stood at Rs. 73.79 Cr. There is no specific finding of the lower authorities indicating that the interest bearing funds have been applied for investment purposes on the basis of entries appearing in the books of accounts. In other words, disallowance made by ld. AO is merely based on the average investments of the assessee. Hon’ble Supreme Court of India in the case of Reliance Industries Ltd. (supra) affirmed the view taken by the Tribunal that if interest free funds available with the assessee are sufficient to meet its investment then it could be presumed that investments were made from the interest free funds available to the assessee. Applying this ratio on the issue in the instant appeal we find that the assessee had interest free funds in the form of share capital and reserve and surplus as on 31.03.2012 at Rs. 73.79 Cr approx which is much more than investments in shares and mutual funds at Rs. 39.91 Cr. Therefore, it can be safely presumed that interest free funds have been applied for the purpose of making investments in shares and therefore, interest disallowance of Rs. 14,74,087/- is uncalled for and the same is deleted.
9. As regards the disallowance at the rate of 0.5% of the average investment made under Rule 8D(2)(iii) of the Rules the contention of the assessee taking shelter of the judgment of the Hon’ble Jurisdictional High Court in the case of REI Agro Ltd. (supra) is that such disallowance should be made only in relation to income which does not form part of total income and this can be done only taking into consideration the investment which has given rise to such income which does not form part of total income. In the instant case we notice that the exempt income is not only from dividend but also from long term capital gain from sale of equity shares. No specific details have been filed by the assessee in support of its contention and prayer is made to restore the issue to ld. AO which will keep the issue live. We, on perusal of the audited balance sheet placed at page 22 to 49 of the paperbook notice that the investments constitute investment in equity shares at Rs. 10.10 Cr, investment in mutual funds and venture capital funds at approx 6 Cr and other investments in quoted and unquoted investments. So far as the investments in mutual funds are concerned the assessee is charged by such mutual fund companies for maintaining the investments. So, no additional expenditure needs to be incurred to keep the investments in the mutual funds. We, therefore, in order to end the litigation and taking into consideration the investments of the assessee company, sustain the disallowance at Rs. 6 lakh under Rule 8D(2)(iii) of the Act. Therefore, the grounds raised by the assessee against the disallowance made u/s 14A of the Act in ground nos. 2, 3, 4 and 5 are partly allowed and disallowance is sustained at Rs. 6 lakh, and thus, the assessee gets a relief of Rs. 27,86,993/.
10. Now, we take ground no. 6 for AY 2012-13 regarding adjustment of disallowance u/s 14A of the Act for the purpose of computing book profit u/s 115JB of the Act. Before us. Ld. Counsel for the assessee has referred to the decision of Coordinate Bench, Ahmedabad in the case of DCIT vs. Adani Wilmar Ltd. in ITA No. 1761/AHD/2016 dated 19.08.2020 wherein the Tribunal taking note of the judgment of the Hon’ble Jurisdictional High Court in the case of CIT vs. Jayshree Tea Industries Ltd. in ITAT No.47 of 2014 dated 19.11.14 dealt with the issue whether disallowance u/s 14A of the Act which should be considered for the purpose of computing book profit u/s 115JB of the Act held as follows:
“We have heard the rival contentions of both the parties and perused the materials available on record. The AO in the instant case has made the disallowance u/s 14A r.w.r. 8D of the Income Tax Rules for Rs. 2,11,98,182/- while determining the income under normal computation of income. Further, the AO while determining the income under Minimum Alternate Tax (MAT) as per the provisions of section
115JB of the Act, has added the disallowance made under the normal computation of Income under section 14A r.w.r. 8D of Income Tax Rule for Rs. 2,11,98,182/- in pursuance to the clause (f) of explanation 1 to section 115JB of the Act which was restricted to Rs. 11,37,500/-by the ld. CIT-A.
However, we note that in the recent judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the net profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below:
“In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962.”
The ratio laid down by the Hon’ble Tribunal is squarely applicable to the facts of the case on hand. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be resorted while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act.
However, it is also clear that the disallowance needs to be made with respect to the exempted income in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance regarding the exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:-
“We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 under section 115JB of the Act. We remand the matter for such computation to be made by
the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.”
Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the IT Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).
Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we note that there is no mechanism/ manner given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/ determine the expenses with respect to the exempted income. Therefore in the given facts & circumstances, we feel that adhoc disallowance will serve the justice to the Revenue and assessee to avoid the multiplicity of the proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance of 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also feel to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed.
In the result, the CO. of the assesse is partly allowed.”
11. Respectfully following the above decision, we are inclined to hold that so far as the disallowance u/s 14A of the Act which is to be considered for computing total income under the normal provision of Income Tax Act and it cannot be considered for the purpose of computing book profit u/s 115JB of the Act, however, taking note of Clause ‘f’ to Explanation ‘1’ of Section u/s 115JB of the Act which provides that for purpose of computing book profit the same should be increased by the amount or amounts of expenditure relatable to any income to which Section 10 (other than the provisions contained in clause (38) thereof) or Section 11 or Section 12 apply and therefore, for the purpose of Clause ‘f’ to Explanation ‘1’ of Section 115JB of the Act an ad-hoc disallowance is made at Rs. 3 lakh and the same should be added to the book profit for the purpose of Section 115JB of the Act. Therefore, ground no. 6 raised by the assessee is partly allowed.
12. Now, we take ground nos. 7, 8 & 9 of the assessee’s appeal for AY 2012-13 which leads to addition u/s 68 of the Act for unexplained share capital and share premium of Rs. 1,62,80,000/-. We notice that during the year under consideration the assessee company issued equity shares to the following companies at a face value of Rs. 10/- and charged premium of Rs. 990/- on each share.
