Consider Only Dividend bearing Securities for Section 14A disallowance R.W. Rule 8D(2)(iii)

Pricewaterhouse Coopers Private Limited Vs ACIT, Circle-2(2) (ITAT Kolkata)

Issue raised by the assessee is no linger res integra. The Coordinate Bench of Kolkata ITAT in the case of REI Agro Ltd. vs. DCIT [(2013) (144 ITD 141)] has held that only dividend bearing securities should be considered for the purpose of disallowance under rule 8D(2) (iii) of the Income Tax Rules. The relevant findings of the Coordinate Bench are given below:

“8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee’s appeal, is restored to the file of the AO for re-computation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case.

In the light of the judgment of the Coordinate Bench of ITAT Kolkata in the case of REI Agro Ltd (supra), we note that only dividend bearing securities should be considered for disallowance under rule 8D(2)(iii) of the I.T. Rules. Therefore, we direct the assessing officer to compute the disallowance under Rule 8D(2)(iii) of the Rules by taking into account dividend bearing securities only.

FULL TEXT OF THE ITAT JUDGEMENT

The captioned appeal filed by the assessee pertaining to Assessment Year 2014 – 15 is directed against the fair assessment order passed by the Assessing Officer u/s 143(3)/144C/ 144C(5) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’), dated 30.10.2018 which incorporates the findings of the Ld Dispute Resolution Penal (For short ‘DRP’), vide DRP order dated 11.09.2018.

2. Pricewaterhouse Coopers Private Limited (hereinafter referred to as ‘PWCPL’) is in the business of providing, inter alia, management consultancy services and also accounting and business advisory services. The Company’s operations are segregated into different line of services like advisory, taxation services. The assessee provides both onshore as well as offshore services in the wide areas of Consulting, Deals, Forensic Services, Government Reforms and Infrastructure Developments (GRID), Accounting Advisory, Risk Advisory Services, Tax and Regulatory Services. The Company filed revised return of income on 31 March 2016 determining total income of Rs. 69,83,53,700/-. During the AY under consideration, the Learned Assessing Officer (‘Ld. AO’), pursuant to the Directions of the Hon’ble Dispute Resolution Panel (‘Hon’ble DRP’) issued in September 2018, passed the final assessment order dated 30 October 2018 under section 143(3) r.w.s 144C/144C(5) of the Income-tax Act, 1961 (‘the Act’) wherein adjustments/variations were made, thereby computing the total assessed income at Rs. 75,16,99,450/-. Aggrieved by the impugned fair assessment order, the Assessee Company is in appeal before us.

3. Ground No.1 raised by the assessee company reads as follows:

“ On the facts and in law and in the circumstances of the case, the ld AO erred in not following the Directions of the Hon`ble DRP and making in addition of Rs.1,17,57,533/-, being provision for bad debts and doubtful debts written back during the year, without appreciating the fact that the amount of such provisions were already offered to tax in the earlier AYs.”

4. Facts of the issue which can be stated quite shortly are as follows: During the year under consideration, the Company has claimed an amount of Rs. 1,17,57,533/-, in its computation of income on account of ‘reversal of provision for bad & doubtful debts of earlier years’. Assessee submitted before the Ld. AO that the said provision was duly offered to tax in the earlier years, hence the reversal of the same during the year has been considered to be allowable in the return of income. However, in the draft assessment order, the Ld. AO proposed to disallow the same by alleging that the assessee failed to substantiate the claim with proper documentary evidences. Aggrieved, by the order of the ld AO, the assessee filed reference before the Ld DRP.

Before the ld DRP, assessee submitted party-wise details of reversal of the provision during the course of the proceedings before the Hon’ble DRP and the Hon’ble DRP asked the Ld. AO to furnish a remand report on the same. The Ld. AO, upon perusal and verification of the details furnished and further explanations and details provided during the hearings, furnished his remand report dated 24 July 2018 wherein it was mentioned that ‘reversal of the said provision is nothing but a creation of further provision’ and no specific comments were made on the details furnished by the assessee. The Hon’ble DRP observed that the reversal of provision is apparently allowable and directed the ld. AO to verify the claim on the basis of the details submitted (refer para 2.5 at page nos. 10 to 12 of the Directions of the Hon’ble DRP).

However, the Ld. AO, without appreciating the above fact and the details and documents submitted in this regard, made an addition of Rs. 1,17,57,533/- in the impugned final assessment order dated 30^th October 2018. Aggrieved, the assessee is in appeal before us.

5. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. We note that ld DRP had given the directions to the assessing officer as follows:

“2.5.3 The AO has apparently completely misunderstood the accounting principles in this regard. It was sufficient to examine whether the provisions reversed during this year had been offered to tax in the preceding year, the amount actually written off as bad debt out of the provisions of preceding year, and how much of the provisions created during the year has been included in the amount claimed, if any, and whether the provisions created during the year are ascertained and related to the business transactions of the assessee. On facts available it is apparent that the amount of provision claimed in this year is allowable. The AO is directed to verify the above observations (in this para) and allow the claim accordingly.”

(emphasis supplied)

We note that Ld. AO, without taking into account, the above directions of ld DRP, made an addition of Rs.1,17,57,533/- in the impugned final assessment order dated 30^th October 2018, which is in violation of the Directions of the Ld DRP.

6. We note that judicial discipline demands that once an order has been passed in the assessee’s own case, lower authorities are duty bound to act in accordance with the same. The ld Counsel for the assessee submitted before us the following details and information about bad debts and provision for doubtful debts, which is given below:

“ During the year under consideration i.e. AY 2014-15, the Company has reversed the provision for doubtful debts as under:

The aforesaid reversal of Rs.25,96,86,032 has been made out of provisions created in preceding year (i.e. AY 2013-14) and duly offered to tax in that year, as under:

To substantiate the above, the assessee submitted the following details:

a) Party-wise details of the reversal of provision during the AY under consideration (refer page no. 414 of the PB where the reference of the details has been made, complete details enclosed at page nos. 451 to 522 of the PB)

b) Year-wise movement in provision for doubtful debts (refer page nos. 415 to 445 of the PB)

c) Copies of invoices (656 in numbers) in a CD vide letter dated 23 July 2018 (refer page no. 447 of the PB)

During the course of the hearing on 23 July 2018, the Ld. AO asked the assessee to reconcile the provisions created, recovered & paid (party-wise) for earlier as well as current year, on the same day (by 5 pm). The assessee duly furnished the party-wise details of provision created and reversed during the year under consideration along with the reconciliation of provision reversed during the year with the provision created in preceding year (AY 2013-14) on the same day vide another letter dated 23 July 2018 – refer page nos. 451 to 522 of the PB.

On perusal of the details submitted vide letters dated 23 July 2018, it is clear that the provision reversed during the year have been claimed out of the ascertained provisions created and offered to tax in the preceding year and hence should not be disallowed again. The Hon’ble DRP has also observed that the claim of the assessee should be allowed.”

We note ld DRP is higher authority, therefore AO ought to follow the direction of ld DRP. We note that AO had neither follow the directions of ld DRP nor he had examined the submissions, documents and details filed by the assessee in right perspective, as noted above. Therefore, we direct the AO to examine the assessee`s claim in respect of provisions for bad and doubtful debts and adjudicate the issue in accordance to law.

7. Ground Nos. 2 & 2.1 raised by the assessee reads as follows:

“2. On the facts and in law and in the circumstances of the case, the Hon`ble DRP/Ld AO erred in making a disallowance of Rs.8,20,500/- under section 14A read with Rule 8D(2)(iii) of the Income Tax Rules 1962 as against the disallowance of Rs.30,000/-made by the appellant in the Return of Income.

2.1 That the ld AO/DRP erred in not appreciating that the disallowance under section 14A read with rule 8D(iii) of the Rules ought to be restricted with respect to only those investments which yielded exempt income during the year.”

8. The facts of the issue which can be stated quite shortly are as follows: During the year under consideration, the assessee earned exempt dividend income amounting to Rs. 21.01 crores from Pricewaterhouse Coopers Service Delivery Centre (Kolkata) Pvt. Ltd. (‘PwC SDC’) which is exempt under section 10(34) of the Act. The Company voluntarily disallowed a sum of Rs. 30,000/- under section 14A of the Act in the computation of total income, being expenditure attributable to earning of such exempt income and same is also certified by a chartered Accountant, which is reported in clause 21(h) of the tax audit report for the assessment year under consideration (refer page. no.45 of the PB).

However, the Ld. AO ignored the contention of the assessee and arrived at an amount of Rs.49,35,100/- for disallowance under section 14A of the Act by applying the formula provided in Rule 8D of the Income tax Rules. Since the assessee had already offered to tax Rs. 30,000/- as expenses incurred towards earning exempt income, the Ld. AO added back a further amount of Rs. 49,05,100 [i.e. Rs. 49,35,100 less Rs.30,000].

9. Aggrieved by the order of the ld AO, the assessee filed the objection before the Hon’ble DRP, who deleted the addition made by the Ld. AO by applying the first and second limb of Rule 8D and upheld the disallowance in third limb, under Rule 8D(2)(iii) of the Rules. The relevant extracts of the Directions of the Hon’ble DRP, to the extent applicable for our discussion, are reproduced below:

“2.6.2. The AO has computed the disallowance u/s 14A of the Act by considering expenditure directly relating to exempt income at ‘Nil’ under Rule 8D(2)(i) of the Income tax rule (the Rules), Rs. 40.846 lakh u/r 8D(2)(ii) of the Rules and Rs 8.505 lakh u/r 8D(2)(iii) of the Rules. The AO has however not given any finding with regard to the nexus between the investments and the interest paid on loans during the year in terms the judgement of the Hon’ble Supreme Court in Maxxop. Now it is settled law that only such investments in respect of which the dividend income or exempted income has been earned can be considered when computing the disallowance u/s 14A read with Rule 8D. On perusal of the audited financials it is observed that the assessee’s investment are either in its subsidiaries (Rs. 10.99 Cr., being opening balance in this year) or in PricewaterhouseCoopers Service Delivery Centre (Kolkata) Put. Ltd. (Rs. 1.00 lakh, being opening balance in this year) beside fresh investment of Rs. 12.02 Cr. in Hercules Merger Parent Ltd. from which no dividend has been received during the year. As such no disallowance is called for u/r 8D(2)(ü) of the Rules. However, the disallowance u/r 8D(2)(iii) of the Rules is mandatory. Therefore, disallowance is upheld to the extent of Rs.8.505 lakh.

10. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. We note that issue raised by the assessee is no linger res integra. The Coordinate Bench of Kolkata ITAT in the case of REI Agro Ltd. vs. DCIT [(2013) (144 ITD 141)] has held that only dividend bearing securities should be considered for the purpose of disallowance under rule 8D(2) (iii) of the Income Tax Rules. The relevant findings of the Coordinate Bench are given below:

“8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee’s appeal, is restored to the file of the AO for re-computation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case.

In the light of the judgment of the Coordinate Bench of ITAT Kolkata in the case of REI Agro Ltd (supra), we note that only dividend bearing securities should be considered for disallowance under rule 8D(2)(iii) of the I.T. Rules. Therefore, we direct the assessing officer to compute the disallowance under Rule 8D(2)(iii) of the Rules by taking into account dividend bearing securities only. For statistical purposes, the grounds raised by the assessee are allowed.

11. Ground Nos. 3 to 4 raised by the assessee are identical and common and they relate to adhoc addition/disallowance made by ld DRP/AO therefore we shall adjudicate them together. Ground Nos. 3 to 4 read as follows:

“3.On the facts and in law and in the circumstances of the case, the Hon`ble DRP/Ld AO erred in making an ad hoc addition of Rs.8,13,368/- being 15% of the total amount of expenditure of Rs.54,22,452/- incurred as ‘Entertainment Expenses’, without appreciating that the said expenses were incurred wholly and exclusively for the purposes of business and the complete details of the expenditure were furnished during the course of assessment proceedings.

3.1 On the facts and in law and in the circumstances of the case, the ld AO, in making the ad hoc disallowance of entertainment expenses, erred in not following the directions of the Hon`ble DRP by not restricting the ad hoc disallowance to the extent of expenses related to reimbursement to employees.

4. On the facts and in law and in the circumstances of the case, the Hon`ble DRP/ld AO erred in making in ad hoc addition of Rs.53,00,938/- being 10% of Rs.5,30,09,377/- ( i.e. total amount of expenditure of Rs. 8,09,86,625/- less Rs. 2,79,77,248/- suo moto disallowed by the assessee) incurred on account of Seminar & Conferences, without appreciating that the said expenses were incurred wholly and exclusively for the purpose of business and the complete details of the expenditure were furnished during the course of assessment proceedings.”

12. Brief facts qua the issue are that during the assessment year under consideration, the assessee has debited an amount of Rs.54,22,452/- in the profit and loss account on account of entertainment expenses. During the course of assessment proceedings, the assessee submitted details of entertainment expense, along with sample supporting documents, in the format requisitioned by the Ld. AO, including name of the parties, PAN and address, nature, amount, TDS details, etc., as under:

• Details of entertainment expenses (sl. nos. 1 to 259) submitted vide letter dated 22 November 2017 (refer page nos. 186 to 196 of the PB)
• Sample supporting documents (bills, vouchers, etc.) submitted vide letter dated 8 December 2017 (refer page nos. 253 to 259 of the PB)

In the draft assessment order, the Ld. AO proposed an ad hoc disallowance of 50% of the total entertainment expense.

13. Aggrieved by the order of the AO, the assessee filed the objections before the Ld DRP. The Hon’ble DRP upheld the disallowance only to the extent of 15% of reimbursement to employees, and observed as under:

“2.10.3 We have examined the details given at pages- 4.400 to 4.410.It is observed that most of the expenses reimbursement to the employees for certain expenses incurred by them, and the other expenses relate to subscription for membership to clubs and business chambers where TDS has been made as applicable. Admittedly, all expenses vouchers/invoices of expenses related to reimbursement to the employees were not produced before the AO. However, there is no finding on facts by the AO that the expenses are not related to business of the assessee. Under these facts, while it is settled now that expenses for membership of clubs/business chambers are related to business, it would be sufficient to restrict the disallowance to 15% of the expenses related to reimbursement to the employees.”

14. During the assessment year under consideration, the assessee has debited an amount of Rs.8,09,86,523/- in the profit and loss account towards seminar and conference expenses, out of which an amount of Rs. 2,79,77,248 was suo-moto disallowed by the assessee. During the course of assessment proceedings, the assessee submitted details of the seminar and conference expenses, along with sample supporting documents, in the format requisitioned by the Ld. AO, including name of the parties, PAN and address, nature, amount, TDS details, etc., as under:

• Details of seminar and conference expenses (sl. nos. 1 to 1,097) submitted vide letter dated 22 November 2017 (refer page nos. 197 to 233 of the PB)
• Sample supporting documents (bills, vouchers, etc.) submitted vide letter dated 8^th December 2017 (refer page nos. 260 t0 402 of the PB)

In the draft assessment order, the Ld. AO proposed an adhoc disallowance of 25% of the seminar and conference expense.

15. Aggrieved by the order of the AO, the assessee filed the objections before the Ld DRP. The Hon’ble DRP restricted the disallowance to 10% of the said expense other than already disallowed by the assessee. The findings of the ld DRP is reproduced below:

“2.11.1 These expenses are similar to those considered in ground no. 17 herein above and the reply of the assessee is also similar. The AO is directed to restrict the disallowance to 10% of the expenses other than already disallowed by the assessee.”

16. Aggrieved by the order of the ld DRP/AO the assessee is in appeal before us.

17. Learned Counsel for the assessee submitted before us written submissions, the relevant portion of the written submissions are reproduced below:

“Written submissions for ground No. 3

3.5 On perusal of the details of entertainment expense (at page nos. 186 to 196 of the PB), Your Honours would observe that expenses in the nature of reimbursement to employees (amounting to Rs. 39,41,940) included under the entertainment expense, have been incurred towards various client and team meetings and are not at all personal in nature. These expenses play a pivotal role in building good relationship with the clients/team and are exclusively incurred for the purpose of business. Hence, no disallowance should be made on account of reimbursement to employees for expenses incurred by them in connection with the business of the assessee.

3.6. The assessee further wishes to submit that disallowance cannot be made on an ad hoc basis. The Ld. AO/ Hon’ble DRP have failed to bring cogent and credible submission/evidence on record to substantiate the ad hoc disallowance. The Ld. AO/Hon’ble DRP have also not been able to point out as to how the expenditure was not incurred wholly for assessee’s business purposes.

3.7 It is the submission of the assessee that it has discharged its initial onus of its claim for the expenditure under this head and the Ld. AO/ Hon’ble DRP completely failed in bringing out any specific instances of expenditure being used for non-business purposes or such expenses not having been actually incurred or being excessive or lack of supporting evidence.

3.8 It is also admitted fact that the accounts of the assessee were duly audited and were also examined for the purpose of tax audit, which were neither rejected by the Ld. AO nor any allegation that the same is not in accordance with section 145 of the Act was made. Thus, there is no basis or material with the Ld. AO/ Hon’ble DRP to disallow above expenses, that too on an ad hoc basis.

3.9 Reliance in this regard is placed on the decision of the jurisdictional Kolkata Tribunal in the case of Shree Venkatesh Agro Food Put. Ltd. vs. DCIT [IT(SS)A No. 54-56/Kol/2011] [refer page nos. 4 to 12 of the Case Law PB] wherein the Assessing Officer had made an ad hoc disallowance of 5% on various expenses on the reasoning that the assessee failed to file the details despite the fact that the assessee’s accounts were fully audited. The Hon’ble Tribunal deleted the ad hoc disallowance and held that disallowance purely resorting to ad hoc method and without any cogent reason, cannot be made, relevant extracts reproduced below:

“4. We have heard rival contentions and gone through the facts and circumstances of the case. We find that AO has made disallowance on ad hoc basis @ 5% and there is no basis for making disallowance. We also observe that CIT(A) has simply confirmed the disallowance. Whether the disallowance by restricting @ 5% on account of business expenditure can be made or not in the absence of any reasoning? The disallowance purely by resorting to ad hoc method cannot be made. These are business expenditure, and in the absence of cogent reason, the disallowance should not have been made. We hold that disallowance made by AO is without any basis and hence deserves to be deleted. Accordingly, we delete the disallowance. This issue of assessee’s appeal is allowed.”

“Written submissions for ground No. 4

4.5. The assessee relies on the legal submission made in Ground No. 3 above with respect to ad hoc disallowance made by the Ld. AO/ Hon’ble DRP.

4.6. The assessee further wishes to submit that the expense incurred towards seminar and conferences were wholly and exclusively incurred for the purpose of the business of the assessee. Your Honours may please appreciate the assessee is engaged in consultancy profession and appoints large number of employees across various cities in India (around 4000 employees working across 8 locations). The profession entails participation in various seminars and conferences and other incidental expenses (such as dinner, lunch, travel and stay expenses, training program, etc.) have been incurred wholly and exclusively for the purpose of business of the assessee.

4.7. Your Honours would observe from the details furnished (refer page nos. 197 to 233 of the PB) that most of the payments have been made by the assessee to renowned institutions/associations/chambers such as:

• American Chamber of Commerce in India
• Assocham
• Association Of Certified Fraud Examiners (Acfe)
• Bombay Chamber Of Industry And Commerce
• Bombay Chartered Accountants’ Society
• Confederation Of Indian Industry (CII)
• Federation Of Indian Chambers Of Commerce And Industry
• The Institute Of Chartered Accountants Of India
• The Bengal Club Limited

4.8. Further, out of the total expense of Rs. 8,09,86,523, reimbursement to employees aggregates to Rs. 74,96,813 only and the said expenses have been incurred by its employees for business purpose, the reimbursement of which has been subsequently claimed by them. Some of the reasons/business purpose of the expenses claimed by the employees are enumerated below:

• Attending ICAI International conference
• Conference registration fees
• Attending Banking Colloquium
• Townhall meetings/ internal meetings/ client meetings
• CII Conference Delegate charges
• Attending M2M workshop organized by Assocham
• Attending FICCI conference
• Attending seminar arranged by Bombay Chamber of Commerce
• Nasscom Conference
• Delegate fees for seminar on sustainable mining

4.9 The assessee further submits that the details of date, venue/topics, nature of expense, etc. along with sample supporting documents (bills/vouchers, etc.) have also been furnished before the Ld. AO. Some of the topics attended are listed below:

• Tax Symposium event at Westin Hotel
• CII Conference On Financial Market Conclave
• IFA Conference On International Taxation & Transfer Pricing Evolving Landscape
• PHD Seminar On Appeals Settlement Commission
• Seminar on valuation course conducted by ICAI.
• Assocham Seminar on International tax & Transfer Pricing
• Assocham National Seminar On Tax Deduction
• National Law School International Arbitration Moot

4.10. In view of the above, there is no iota of doubt that the expense has been incurred for the purpose of the business of the assessee and ad hoc disallowance of the same without assigning any cogent reason therefore, is unwarranted.”

18. On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the ld DRP/Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

19. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. We note that the ld DRP/ AO could have ventured into estimation only after rejecting the books of accounts of the assessee u/s 145(3) and thereafter by best judgment assessment u/s 144 of the Act. Here in this case, the DRP/ AO has not passed any order u/s 144 of the Act. The DRP/ AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses. While scrutinizing the expenditure if the expenses claimed are not having any nexus to the business of the assessee or if there is deficiency in the vouchers or there is no bills supporting the incurrence of an expenditure, at the most expenses to the extent that are not supported by the vouchers can be held to be non-genuine and can be disallowed by the DRP/ AO; and item-wise the DRP/ AO could have disallowed the expenditure rather than going for adhoc disallowance of percentage basis of the expenses claimed by the assessee which action of the DRP/ AO is arbitrary in nature and cannot be sustained. For that we rely on the judgment of the Hon`ble Delhi High Court in the case of National Industrial Corp. Ltd, 258 ITR 575 (Del-HC) wherein it was held as follows:

“26. Regarding the sale promotion expenses, according to the assessee-company it spent Rs. 23,75,170 on giving major gift items. The AO held that keeping in view the nature of the business of the assessee-company and the reasonableness of such expenditure he deemed it fit to disallow 50 per cent of the expenditure on gift items as detailed in the table being of a non-business nature and thus disallowable as per provisions of s. 37(1) of the IT Act and initiated penalty proceedings under s. 271(1)(c) of the Act separately on this issue.

27. The CIT(A) mentioned about the disallowance of sale promotion expenses of Rs. 11,83,585 and allowed Rs. 10 lakhs, which according to her was related to business and a part of Rs. 1,83,585 was confirmed as used in personal gifts and personal expenditure.

28. The Tribunal has observed that the CIT(A) has allowed bulk of the relief by observing that the expenditure was related to business expenditure. The CIT(A) has sustained the disallowance which accounts for about 5 per cent of the total claim. The Tribunal observed that “In our opinion, the disallowance of Rs. 75,000 under this head will meet the end of justice. Thus, we confirm the disallowance to the extent of Rs. 75,000 under this head and delete the balance amount”.

29. It may be pertinent to mention that Mr. Gupta argued that there was no material on record to show that any part of the said expenditure was not for the sale promotion and the Tribunal was, therefore, in error in law in sustaining the disallowance of Rs. 75,000 without any basis.

He submitted that the order of the Tribunal regarding sale promotion expenses is based on no material and that is how this becomes a substantial question of law.

30. We have carefully examined the judgment of the Tribunal and there is no material on record to show that any part of the sale promotion expenditure was incurred for non-business purposes. The Tribunal has not given any basis whatsoever while confirming the disallowance to the extent of Rs. 75,000. All that the Tribunal observed was that the disallowance of Rs. 75,000 under this head will meet the ends of justice. The approach of the Tribunal in dealing with this aspect of the matter was erroneous and cannot be sustained. We set aside this part of the order. On the basis of our aforesaid findings, the appeal is accordingly allowed and disposed of. In the facts and circumstances of this case we direct the parties to bear their own costs.”

20. Our view is also fortified by the judgment of the Hon`ble Delhi High Court in the case of Jay Engineering works Ltd, 113 ITR 389 (Del-HC), wherein it was held as follows:

“Whether, on the facts and in the circumstances of the case, the Tribunal in the absence of any evidence was legally correct in holding that the amounts of Rs. 3,26,200 and of Rs. 83,523 were deductible from determination of profits for the asst. yrs. 1962- 63 and 1963-64 respectively ?”

The applicant-assessees carry on business of manufacturing of fans, etc., on a large scale. The relevant account books for the accounting years 1961-62 and 1962-63 was destroyed in fire in November, 1962. In the returns filed by the assessees along with the statements of profit and loss accounts and balance-sheets a deduction of Rs. 3,36,200 from the determination of profits for the asst. yr. 1962-63 and a deduction of Rs. 83,523 from the determination of the profits for the asst. yr. 1963-64 were claimed by the assessees. The deductions were disallowed by the ITO, but were allowed by the AAC and by the Tribunal. The applications made by the assessees for reference of the above question of law to this Court were also dismissed by the Tribunal. Hence the present applications.

 In finding out whether the Tribunal should be asked to refer to this Court the above question of law, two points require consideration, viz.:

(1) When can it be said that a finding by an income-tax authority is not supported by any evidence ? and 

(2) Whether in the present case the orders allowing the deductions claimed by the assessees could be said to be unsupported by any evidence ?

Point No. 1

The ITO and certain other authority functioning under the IT Act have a dual character. They are both agencies of investigation made into the incomes of assessees and they are also quasi-judicial authorities assessing the liabilities of the assessees to payment of income-tax. Under s. 142(2) of the Act the ITO may make such enquiry as he considers necessary for the purpose of obtaining full information in respect of the income or loss of an assessee. Under s. 143(3) of the Act, the ITO does not only hear such evidence as the assessee may produce or as he may require to be produced, but also takes into consideration “all relevant material which he has gathered” for the purpose of making an assessment. While the word “evidence” may recall the oral and documentary evidence as may be admissible under the Indian Evidence Act, the use of the word “material” shows that the ITO not being a Court can rely upon material which may not be strictly evidence admissible under the Indian Evidence Act for the purpose of making an order of assessment. Courts often take judicial notice of certain facts which need not be proved, while administrative and quasi-judicial authorities can take “official notice” of wider varieties of facts which need not be proved before them. Thus, not only in respect of the relevancy but also in respect of proof the material which can be taken into consideration by the ITO and other authorities under the Act is far wider than the evidence which is strictly relevant and admissible under the Evidence Act.

Under s. 34 of the Indian Evidence Act account books maintained in the regular course of business are evidence after the relevant entries are proved by oral evidence or are admitted. The ITOs, however, have to deal with such numerous cases of assessment that they can accept as correct books of account maintained in regular course of business without such a formal proof.

In the present case, the relevant books of account in which detailed information as to the expenses which were claimed as deductions for the asst. yrs. 1962-63 and 1963-64 are destroyed by fire in November, 1962. Under the Indian Evidence Act secondary evidence of the contents of these account books would have to be adduced if they were to be used to prove any fact. The external auditors of the assessee-companies had, however, made their annual reports under s. 227(2) of the Companies Act, 1956, to the members of the company on the accounts examined by them and on the balance-sheets and profit and loss accounts for these two years. These reports do not doubt the correctness of the expenses, deductions of which were claimed by the assessees. Under s. 227(3)(b) and (c) the auditor’s report had to state whether in their opinion proper books of account as required by law have been kept by the company and whether the company’s balance-sheets and profit and loss accounts were in agreement with the books of account and returns. Under s. 209 of the Companies Act, the assessee-company was required to maintain proper books of account with reference to the receipts and expenditure taking place in the business of the assessees. The account books maintained by them must be such as to give a true and fair view of the state of affairs of the companies.

The question arises, therefore, whether the reports of the auditors could be said to be “material” on which reliance could be placed by the IT authorities. Unlike the proof required of such reports as also of the account books under the Indian Evidence Act, it is quite competent for the IT authorities not only to accept the auditors’ report, but also to draw the proper inference from the same. The IT authorities could, therefore, come to the conclusion that since the auditors were required by the statute to find out if the deductions claimed by the assessees in their balance-sheets and profit and loss accounts were supported by the relevant entries in their account books, the auditors must have done so and must have found that the account books supported the claims for deductions, when the deductions were disallowed, by the ITO on the ground that detailed information regarding them was not available, justice was not done to the assessees. It was not possible for the assessees to produce the original account books, which were destroyed in fire. There was, however, other material mainly consisting of the auditors’ reports from which it could be inferred that the deductions were properly supported by the relevant entries in the account books. In a sense it may be a question of law as to what the meaning of “material” is and whether the auditors’ reports were material. But the question of law is well settled and is not capable of being disputed and does not, therefore, call for reference.

Point No. 2

The Tribunal has stated that, though, ordinarily, the adjustments relating to expenses should have been made by the assessees in the accounts of the year to which the adjustments relate and not in a subsequent year, it is often inevitable that such adjustments relating to earlier years have to be made in subsequent years. This is specially so, when the business, as of the assessees, is of giant proportions and the branches are farflung. The Tribunal has also very properly relied upon the auditors’ reports to draw the proper inference from the same. Since the evidence in income-tax proceedings need not consist necessarily of evidence admissible under the Evidence Act but may consist of other material which has a probative value, the Tribunal was justified in taking such material into account. It cannot, therefore, be said that the decision of the Tribunal was not based on any evidence. On the contrary, it was based on evidence meaning thereby that it was based on relevant material which can be considered in the income-tax proceedings.

The applications are, therefore, dismissed. There will be no order as to costs.”

21. We note that there is no material on record to show that any part of these expenses were incurred for non-business purposes.We note that assessee`s books of accounts are audited by Chartered Accountant. The reports of the auditors could be said to be “material” on which reliance could be placed by the IT authorities. The IT authorities not only to accept the auditors’ report, but also to draw the proper inference from the same. Here in assessee`s case, the DRP/ AO has not passed any order u/s 144 of the Act. The DRP/ AO thus without rejecting the books of account of the assessee has gone for estimation on suspicion and conjectures that the assessee may be inflating its expenses. It may be pertinent to mention here that there was no material on record to show that any part of the these expenditures were not for the purpose of business. Therefore, the ad hoc additions of Rs.8,13,368/- on account of entertainment expenses and Rs.53,00,938/- on account of Seminars/conferences made by ld DRP/AO are directed to be deleted.

22. Ground No.5 raised by the assessee company reads as follows:

“5 On the facts and in law and in the circumstances of the case, the ld AO erred in making a disallowance of Rs. 13,90,869/- incurred towards purchase of software by wrongfully holding that the said expense related to preceding assessment year.”

23. Brief facts qua the issue are that during the assessment year under consideration, the Company has debited an amount of Rs. 4,09,78,069/- in the Profit and Loss account on account of purchase of software for resale. During the course of assessment proceedings, the assessee submitted complete details of the expense including the name of the parties, PAN, address, nature, amount, invoice and TDS details, etc. in sl. nos. 1 to 68 (refer page nos. 241 to 244 of the PB).In the draft assessment order, the Ld. AO, inter alia, proposed to disallow an amount of Rs. 13,90,869/- out of the total expense on the understanding that the said expense did not pertain to the year under consideration.

24. Aggrieved by the order of the AO, the assessee filed the objections before the ld DRP. The ld DRP had directed the AO to allow the claim of the assessee after verification that whether the expenses are related to the year under consideration or not. Aggrieved, the assessee is in appeal before us.

25. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. The ld Counsel for the assessee submitted before us following written submissions which is reproduced below:

“5.5 The assessee humbly submits that the above expense of Rs.13,90,869 were prepaid expenses shown in previous AY 2013-14 (not debited in profit and loss account) and paid during AY 2013-14 after deduction of applicable withholding taxes. However, as the assessee follows mercantile system of accounting, the actual expenses have been booked during AY 2014-15 on account of the fact that they relate to the current financial year.

5.6. In connection with the same, the assessee has submitted the following details along with the TDS certificate before the Hon’ble DRP and the Ld. AO (refer page nos. 535 to 537 of the PB):

5-7.From perusal of the above details and the TDS certificate, Your Honours would appreciate that though TDS was deducted on the full value of the transaction of Rs.1,71,74,463 in FY 2012-13 at the time of payment/ credit to the vendor, an amount of only Rs. 18,09,552 was booked as an expense during FY 2012-13 and the rest was carried to the prepaid account.

Thereafter, in the succeeding financial year 2013-14 i.e. the year under consideration, an amount of Rs. 13,90,869/- was correctly charged from prepaid account to the profit and loss account as actual expenses for the year under consideration and the balance was carried over to the next year under the mercantile system of accounting.

5.8. However, the Ld. AO, on a complete misunderstanding of facts and solely observing the TDS certificate, has wrongly concluded that the impugned expense of Rs. 13,90,869 pertained to FY 2012-13 (AY 2013-14) as tax was deducted in that year and disallowed the same.”

26. However, ld DR for the Revenue submitted before us that this issue should be examined by the assessing officer afresh. We note that ld DRP had already directed the AO to examine the said claim of the assesee. The relevant directions of the ld DRP is reproduce below:

“AO is directed to verify the invoice and give a clear findings as to which year this expense relates and, considering that the expenditure is otherwise allowable as business expenses, allow the same”

Based on the facts narrated above, we direct the AO to examine the submission of the assessee and documents /invoices involved in these submissions, as noted above, and adjudicate the issue in accordance to law. For statistical purposes, the ground No. 5 raised by the assessee is allowed.

27. Ground No.6 raised by the assessee company reads as follows:

“6.On the facts and in law and in the circumstances of the case, the ld AO erred in rejecting the claim of foreign tax credit amounting to Rs.3,22,24,046/- for the taxes paid in United states of America (USA) on the doubly taxed income in accordance with the provisions of section 90/91 of the Act”

6.1 On the facts and in law and in the circumstances of the case, the ld AO erred in not appreciating that the said claim could not be made at the time of filing of the Return of income as the payment of taxes in USA was not made till that time.”

28. Brief facts qua the issue are that the assessee has been deriving income from rendering of services in USA. However, the assessee was under a bona fide belief that it was not required to file a tax return or pay taxes in USA in respect of income earned from rendering the services in FY 2013-14 in USA. Accordingly, the assessee had not filed any tax return in USA for FY 2013-14. For the AY 2014-15 pertaining to previous year 2013-14, the assessee, being a resident company of India, filed its tax return in India inclusive of the incomes earned from the transactions carried in USA. Subsequently, the assessee came to know that it was required to pay taxes in USA. Accordingly, the assessee filed its tax return in USA for FY 2013-14 in May 2018, computing a total income of USD 11,59,173 and determining a tax liability of USD 4,59,032. The above tax liability has been accepted by the Internal Revenue Service (IRS) vide Form 4549 dated 7 June 2018 and the tax liability was paid by the assessee on 11 September 2018.

As mentioned above, income thus taxed in USA is also included in the total income in the return of income filed in India and tax on the same is paid in India under the provisions of the Act. Hence, income is doubly taxed, once in USA as a source country and again in India as a resident country. Hence, the assesseee is eligible to claim foreign tax credit of taxes paid in USA against the tax liability determined in India. Therefore, the assessee after payment of taxes in USA raised the aforesaid claim of foreign tax credit (FTC) amounting to Rs. 3,22,24,046/-(USD 4,59,032) before the Ld. AO by way of application dated 15 October 2018

(refer page nos. 538 to 555 of the PB).

However, the Ld. AO, without assigning any cogent reason and without appreciating the facts and circumstances of the case, rejected the claim of the assessee by simply mentioning that the assessee did not make the aforesaid claim of foreign tax credit (FTC) at the time of filing the return of income or during the course of the assessment proceedings. (refer page no. 556 of the PB).

29. Aggrieved by the order of the AO, the assessee is in appeal before us.

30. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld DRP/AO and other materials brought on record. The ld Counsel submits that at the time of filing of income tax return in India for AY 2014-15, the assessee had not claimed foreign tax payable as credit as no tax for the year under consideration was determined and paid in USA at that time and also the tax return was not filed in USA. Hence, the assessee after payment of taxes in USA, raised the aforesaid claim of foreign tax credit (FTC) before the Ld. AO by way of application dated 15^th October 2018 in accordance with Rule 128 of the Income Tax Rules, 1962. The ld Counsel draws our attention that Rule 128 of the I.T. Rules in connection with claim of foreign tax credit which provides as under:

“128. (1) An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule :

…………..

(4) No credit under sub-rule (1) shall be available in respect of any amount of foreign tax or part thereof which is disputed in any manner by the assessee:

Provided that the credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if the assessee within six months from the end of the month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an evidence to the effect that the liability for payment of such foreign tax has been discharged by him and furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed.”

31. The ld Counsel for the assessee submits before us that the claim of credit for taxes paid in USA with respect to tax liability finalized in June 2018 is in accordance with the law.

The ld Counsel also relied on the judgment of Coordinate Bench of Kolkata Tribunal in the case of TCG Lifesciences Put. Ltd. vs. DCIT [ITA No. 121/Kol/2016] wherein, on similar facts, the Hon’ble Tribunal directed the Assessing Officer to consider the claim of the assessee in accordance with law after due verification. Findings of the Coordinate Bench is given below:

“32. As far as the question of giving credit to taxes paid in Japan is concerned, it requires verification by the AO and therefore the AO is directed to consider the plea of the Assessee raised in the additional ground in accordance with law after due verification.”

32.  We have gone through the submission of the assessee, as noted above. The ld DR for the Revenue also fairly agreed that foreign tax credit (FTC) may be allowed to the assessee in accordance to law. Therefore, we direct the assessing officer to examine the correctness of the assessee`s claim for foreign tax credit (FTC), as per India USA-Treaty, and allow the claim of the assessee in accordance to law. For statistical purposes, the ground No. 6 raised by the assessee is allowed.

33. Ground No.7 raised by the assessee company reads as follows:

“7. On the facts and in law and in the circumstances of the case, the ld AO erred in granting of tax deducted at source of Rs.23,48,66,831/- instead of Rs.73,17,90,335/- as claimed in the return of income and also reflected under form 26AS statement, thereby resulting in short grant of credit of Rs.49,69,23,504/-.

34. We have heard both the parties. We note that assessee is entitled to get the credit of TDS therefore, we direct the assessing officer to give TDS credit as claimed in the revised return of income filed by the assessee on 31^st  March 2016 in accordance to law.

35, Before parting, it is noted that the order is being pronounced after 90 days of hearing. However, taking note of the extraordinary situation in the light of the Covid-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, we rely upon the decision of the Co-ordinate Bench of the Mumbai Tribunal in the case of DCIT vs JCB Limited in ITA No 6264/Mum/2018 and ITA No. 6103/Mum/2018 for A.Y. 2013-14 order dated 14.05.2020.

36. In the result, the appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the open court on this 17/06/2020.