Case Law Details
Addl. CIT Vs. M/s Abhishek Industries Limited ( ITAT Chandigarh), ITA No.756/Chd/2014, Asstt Year : 2007-08, Date of Decision : 27.10.2015
Both cross appeal are raised against the order of CIT(A) – II, Ludhiana dt. 09.06.2014 for the Assessment year 2007-08.
ITA No.651/Chd/2014
Brief Of The Case
In the case of M/s Trident Limited vs. The Addl. CIT, Assessee raised three matters in its appeal and out of three two were sent to back to the file of the assessing officer for revision of evaluation. On Ground No. 1 i.e. objection against the order of CIT (A) for disallowance of financial expense of Rs. 500000 against the dividend income of Rs. 46,91,849 is not appropriate, ITAT held that allowance of Rs. 2,50,000 on the said dividend income is reasonable. For this ITAT made reliance on the order issued by ITAT for the Asstt Year 2005-06, Where Rs.1,25,000 was disallowed on the income of Rs. 25,75,000/-.
Facts Of The Case
1. Assessee company made an investment of Rs. 5038.88 lacs and Rs. 4575.77 Lacs as on 31.03.2006 & 31.03.2007 in various tax free equity funds, from which assessee company gain an dividend of Rs. 46,91,849/-. During the proceeding of A. Yr. 2007-08, Assessing Officer (A.O.) observed that Assessee Company had incurred interest expenditure; hence section 14A of Income Tax Act, 1961 is applicable. Further by applying Rule 8D of Income Tax Rules, 1962, A.O. made the disallowance of Rs. 65,30,803.
2. Assessee Company made a payment of Rs. 22,49,634/- to PSEB for laying down of electric feeder line and claimed it as revenue expenditure. Assessing officer is of view that this expenditure is capital expenditure and disallowed the expenditure.
a. Assesee company aggrieved by the order of assessing officer made an appeal to CIT (A). CIT (A) relying upon the judgment of Hon’ble Punjab & Haryana High Court in the case of Sriyansh Industries Limited, reported in ITA No. 277 of 2004, dt. 15.11.2013, confirmed the order of assessing officer.
b. For the same matter, Assessee company had filed an appeal to ITAT for the asstt year 2005-06 and ITAT give direction to the assessing officer to apply the ratio laid down in the case of Sriyansh Industries Limited (supra). This order released when issue was pending before CIT (A) for the Asstt Year 2007-08. While issuing order CIT (A) didn’t consider the same.
3. Assessee company incurred an Financial expenditure of Rs. 38,07,84,433/-. During its assessement proceeding assessing officer comes to know that company had not allocated any interest expenditure to the unit claiming 80IA and allocate a sum of Rs. 2,09,58,801/- to the said unit. Assessee filed an appeal against the order of Assessing officer to CIT(A). CIT(A) after making reliance on no. of judgments confirmed the order passed by the Assessing officer and dismissed the appeal of assessee.
Contention of Revenue
1. For the First Ground
a. As Section 14A of the Act is applicable to the dividend income earned by the company, for calculation of disallowance, revenue complied with provision of Rule 8D of Income Tax Rules 1962.
b. On the matter before CIT (A), CIT (A) found, Rs.5,00,000 would be reasonable for disallowance.
2. For the Second Ground, revenue placed reliance on the judgment of following case :-
Brief of Sriyansh Industries Ltd (Supra)
i. Any Expenditure incurred in complying with statutory requirements and where it is going to give benefits year to year, it would be asset of enduring nature. Thus, expenditure is categorized as capital expenditure.
ii. The fact that the assessee has transferred land to the forest department or has paid money for compensatory forestry does not deprieved the assessee right in asset created.
iii. It was held that expense incurred by the company for fulfillment of statutory obligation for discharge of effluents, leaves no ambiguity that expense incurred upon construction of the drain for release of effluents leads to a benefit of enduring nature to the assessee company. Therefore appeal of assessee is rejected.
In the light of above judgment, they argued that benefit from expense incurred by assessee company for laying down of lines will last for longer period. Therefore it is capital in nature.
3. For the Third Ground
Revenue is of point of view that section 14A is applicable on the income claiming deduction U/s 80IA and further financial expenditure claimed by the assessee is not appropriate as there is no allocation to the unit claiming deduction. Therefore, allocate the financial expenditure claimed by the assessee company to the unit claiming deduction u/s 80IA.
Contention of Assessee
1. On the First Ground, Assessee company contended the following :
a. In A.Y. 2007-08, the provision of Rule 8D of the Rules are not applicable. For this assesee company relied upon the judgment of Godrej & Boycee Ltd. Vs. DCIT, 328 ITR 81.
b. Further in its own case pertaining to A. Yr. 2005-06, disallowance of Rs. 2,50,000/- made on dividend income of Rs. 25,75,000/- & same was confirmed by CIT (A). On Appeal to ITAT, disallowance was reduced to Rs. 1,25,000/-
c. In front of ITAT, Assessee Company requested ITAT to make reliance on ITAT order issued for the A.Yr. 2005-06 and do the reasonable reduction in the disallowance.
2. On the Second Ground, Assessee company contended the following :
In its own case for the Asstt. Year 2005-06 the same issue was raised and on this Chandigarh Bench of the Tribunal in ITA No. 859/Chd/ 2012 Dt 20.03.2014 set aside the matter to the file of assessing officer to find out that amount spend is mere work in progress or to create an asset into existence. Further ITAT directed assessing officer to apply the ratio laid down in the Sriyansh Industries Ltd (Supra) after evaluating the facts of the case.
3. On the Third Ground, assessee company contended the following :
CIT (A) ignores the fact that “separate books of accounts are maintained by the assesee for the period under review and the same are not rejected by assessing officer. Hence, there is no question of allocation of expenditure to the unit claiming deduction u/s 80IA.
Held by the CIT (A)
In first round of litigation CIT (A) concludes the following:-
For the first issue, CIT (A) after placing reliance on judgment of Hon’ble Mubai Godrej & Boycee Ltd. Vs. DCIT, 328 ITR 81, held that Provisions of Rule 8D for A. Yr. 2008-09 are not applicable in the view of ratio of above said case and deleted the disallowance made by the Assessing officer for the A Yr. 2008-09. Further after reviewing the facts related to A Yr. 2005-06, he found that the disallowance of Rs. 5,00,000/- on dividend income of Rs. 46,91,849 is reasonable for the Asstt. Yr. 2007-08.
For the second issue, CIT(A) made reliance on the judgment of Hon’ble Punjab & Haryana High Court in the case of Sriyansh Industries Limited, reported in ITA No. 277 of 2004, held that this matter is squarely covered by the judgment given by the court. Therefore, Assessing officer is correct in treating the expenditure as capital in nature and dismissed the appeal made by the assessee.
For the Third issue, CIT (A) held that assessee is not eligible for the deduction u/s 80P (2)(d) of the Act after deducting the expenditure related to the earning of the Income and dismissed the ground raised by the assesee.
Held by the Tribunal
After listening both the parties, ITAT held the following on three ground raised by the assessee:-
For the first issue, ITAT after making reliance on the ITAT order issued for the Asstt. Year 2005-06 {i.e. Disallowance of Rs. 1,25,000/- is reasonable for Rs. 25,75,000 dividend Income}, held that disallowance of Rs. 2,50,000/- is reasonable for the dividend income of Rs. 46,91,849. Further stated that this is in agreement with the fact that computation as per Rule 8D of the Income Tax Rules is not applicable in the Asstt. Year 2007-08 as directed in the Godrej & Boycee Ltd. Vs. DCIT(supra).
For the second ground, ITAT found that lower authorities issued order without following the order given by the ITAT for the Asstt Year 2005-06. Further ITAT states that it is necessary for the authority to give the facts of assessee which is in support of its reliance on any judgment. This matter sent back to CIT (A). ITAT directed CIT (A) to decide the issued in the light ITAT order issued for the Asstt Year 2005-06 and to bring all necessary facts on paper before applying any judgment.
For the third ground, ITAT Observed that while resolving the issue CIT(A) got confused on the issue of applicability of Section 14A on the income of unit claiming exemption u/s 80IA with the disallowance made by the Assessing officer. Further ITAT send matter back to CIT (A) and directed CIT (A) to resolve the matter in a proper way.
Hence the appeal of assessee is partly allowed.
ITA No.756/Chd/2014
(Asstt. Year: 2007-08)
Brief of Case
Appeal was raised by the revenue, in which two grounds are adjudicated by the ITAT and two are found general in nature, hence no action has been taken. For first ground i.e. disallowance made under Section 14A of the Act, ITAT instructed to apply the observation made in the ITA appeal no. 651/CHD/2014. For second ground i.e. deletion of the addition of Rs. 60,00,000 made u/s 40A(2)(a) r.w.s 37 of the Income Tax Act, 1961, ITAT held that disallowance made by the assessing officer is adhoc in nature and as there is no basis of disallowance of 50% of salary as reasonable, no disallowance can be permitted. Therefore, deletion made by CIT (A) was confirmed.
Facts of the Case
Assessee company incurred a expenditure of Rs.2.40 crores as salary to the managing director in addition to the commission amounting to Rs. 63,36,283/- and a sitting fee of Rs. 8,20,000/-. Assessing observed that during the Asstt Year 2006-07, expenditure incurred by assessee company is of Rs. 1.20 Crore and change in turnover is of + 9.6% and expense related to salary is increased by 100%.Hence, concluded the increase of 100% expenditure unreasonable and disallowed Rs. 60 Lacs u/s 40A(2)(a).
Contention of Revenue
The assessee company made increase only in the salary of the person having substantial interest in the company U/s 40(A)(2)(b) of the Act. The increment is approved by the family member only.
Contention of Assessee
Before CIT (A), assessee gave the list of the employee whose salary got increased by more than 70%. Further managerial remuneration paid was as per the provision of Section 198 & 309 of the companies Act and in addition to this proper analysis of the change in turnover, exports and return on net worth are given against the observation made by Assessing Officer. Therefore, the contention of the assessing officer that the increment of related parties, is not justifiable.
Held by CIT (A)
CIT (A) deleted the addition made by assessing officer in support of his decision gave the following observations:-
Assessee company is a listed company, here public is substantially interested and its share are listed on stock exchange. While comparing performance indicators it is very clear that there is increase from 34% to 123% between the Periods Dec, 2002 to March, 2005. Further remuneration paid to MD was approved by BOD and Shareholders of the company. There are number of person whose salary has increased by more than 100%.
Hence contention of assessing officer is not justifiable.
While crossing the file, it was observed that assessing officer had not worked out on any comparables in support of his disallowance.
Whatever remuneration received by the Managing director was taxed at maximum marginal rate. Hence, there is no loss to the revenue. For this reliance made on the judgment of the Hon’ble P & H High Court in the case of CIT vs. Siyaram Garg (HUF) (2011) 49 DTR 126. Facts of the case are;
AO made addition u/s 40A (2) of the IT Act, stating that appellant paid higher amount on account of purchases made by him from its sister concern.
In this CIT (A) held that sister concern and assessee are taxed at same rate. Sister concern showed its full income in return filed by it. Therefore there is no evasion of tax in this transaction and deleted the addition made by the Assessing officer.
Held by ITAT
ITAT after hearing the contention of both parties held that CIT (A) was correct in his approach. As Section 40A (2) (a) says that if any expenditure incurred by the assessee considers to be excessive or unreasonable with respect to its fair market value, then he can disallow the expenditure so incurred. Further 50% Increment of remuneration considered by the assessing officer as reasonable was without any base or comparable with respect to its Fair Market Value. Hence, decision taken on the personal perspective cannot be held as good in law. Therefore confirm the deletion made by the CIT (A).
