Joint Commissioner of Income tax(OSD) Circle-4(1)(1), Bangalore V. M/s Kurlon Limited , Bangalore

ITA 1160/BANG/2018

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 6023 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 10 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-02-2020
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 09-04-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K N DHANDAPANI CIT BENGALURU
• Assessee Lawyers: C RAMESH
• Keywords: Business expenditure; Earning of tax free income; Rule 8D
• Section: 14A; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO. 1 160 /BAN G/201 8 ASSESSMENT YEAR : 2014-15 JOINT COMMISSIONER OF INCOME TAX (OSD), CIRCLE 4(1)(1), 2 ND FLOOR, BMTC DEPOT, 6 TH BLOCK, KORAMANGALA, BENGALURU 560 095. VS. M/S. KURLON LTD., NO. 301-303, NORTH BLOCK, III FLOOR, MANIPAL CENTRE, DICKENSON ROAD, BENGALURU 560 042. PAN : A ABCK 2150 K APPELLANT RESPONDENT REVENUE BY : SHRI. K. N. DHANDAPANI , ADDL. CIT (DR)(ITAT), BENGALURU ASSESSEE BY : SHRI. C. RAMESH , CA DATE OF HEARING : 1 2 . 12 .20 19 DATE OF PRONOUNCEMENT : 14 . 0 2 .20 20 O R D E R PER A.K. GARODIA, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE REVENUE AND THE SAME IS DIRECTED AGAINST THE ORDER OF LEARNED CIT(A)-4, BENGALURU, DATED 25.01.2017 FOR THE ASSESSMENT YEAR 2014-15. 2. GROUND NO.1 IS GENERAL. AS PER REVISED GROUNDS 2 TO 5, THE GRIEVANCE OF THE REVENUE IS REGARDING PART DELETION OF THE DISALLOWANCE MADE BY THE AO UNDER SECTION 14A R.W.R. 8D(II). IN THIS REGARD, LEARNED DR OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER. HE SUBMITTED THAT THIS ISSUE WAS DECIDED BY LEARNED CIT(A) AS PER PARA 5.4 OF HIS ORDER AND THE DISALLOWANCE WAS DELETED ITA NO. 1160/BANG/2018 PAGE 2 OF 7 BY LEARNED CIT(A) ON THIS BASIS THAT THE AO HAS NOT BEEN ABLE TO IDENTIFY ANY SPECIFIC TRANSACTION OR FUND FLOW SHOWING THAT SPECIFICALLY LINKED TO THE INVESTMENT ACTIVITY. HE SUBMITTED THAT AS PER RULE 8D(2)(II), PROPORTIONATE DISALLOWANCE IS TO BE MADE WHEN THE AO IS NOT ABLE TO ESTABLISH NEXUS OF INVESTMENT WITH INTEREST BEARING BORROWED FUNDS AND THE ASSESSEE IS ALSO NOT ABLE TO ESTABLISH NEXUS BETWEEN THE INVESTMENTS AND INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. HE SUBMITTED THAT UNDER THESE FACTS, THE ORDER OF CIT(A) SHOULD BE REVERSED AND THAT OF THE AO SHOULD BE RESTORED. 3. AS AGAINST THIS, LEARNED AR OF THE ASSESSEE SUPPORTED THE ORDER OF CIT(A). HE ALSO SUBMITTED THAT AS PER PAGE 20 OF THE PAPER BOOK, THE DIVIDEND EARNED BY THE ASSESSEE IN THE PRESENT YEAR IS ONLY RS.0.14 LAKHS. HE PLACED RELIANCE ON TRIBUNAL ORDER RENDERED IN THE CASE OF M/S. SIVAN SECURITIES PVT. LTD., VS. DCIT IN ITA NO.713-715/BANG/2018 DATED 08.05.2019, COPY AVAILABLE ON PAGES 1-12 OF THE PAPER BOOK AND POINTED OUT THAT IN THIS CASE, THE TRIBUNAL HAS FOLLOWED THE JUDGMENT OF HONBLE DELHI HIGH COURT RENDERED IN THE CASE OF CIT V. JOINT INVESTMENT PVT. LTD. 372 ITR 694 WHEREIN IT WAS HELD THAT THE DISALLOWANCE UNDER SECTION 14A OF IT ACT, 1961 CANNOT EXCEED THE EXEMPT INCOME AND POINTED OUT THAT IN PARA 4 OF THIS TRIBUNAL ORDER, THE TRIBUNAL DIRECTED THE AO TO RESTRICT THE DISALLOWANCE UNDER SECTION 14A TO THE EXTENT OF EXEMPT INCOME EARNED BY THE ASSESSEE. HE ALSO SUBMITTED THAT LEARNED CIT(A) HAS UPHELD THE DISALLOWANCE UNDER SECTION 14A TO THE EXTENT OF RS. 14,000/- BEING AMOUNT OF EXEMPT INCOME EARNED BY THE ASSESSEE DURING THE PRESENT YEAR. IN THIS REGARD, HE DRAWN OUR ATTENTION TO PAGE 8 OF THE ORDER OF CIT(A). 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND WE FIND FORCE IN THE SUBMISSIONS OF LEARNED AR OF THE ASSESSEE BECAUSE LEARNED CIT(A) HAS ALREADY UPHELD THE DISALLOWANCE TO THE EXTENT OF EXEMPT INCOME EARNED BY THE ITA NO. 1160/BANG/2018 PAGE 3 OF 7 ASSESSEE IN THE PRESENT YEAR I.E., RS.14,000/- AND AS PER THE TRIBUNAL ORDER CITED BY LEARNED AR OF THE ASSESSEE HAVING RENDERED IN THE CASE OF SIVAN SECURITIES (SUPRA) AND ALSO THE JUDGMENT OF HONBLE DELHI HIGH COURT RENDERED IN THE CASE OF CIT V. JOINT INVESTMENT PVT. LTD. (SUPRA), THE DISALLOWANCE UNDER SECTION 14A CANNOT THE EXCEED THE EXEMPT INCOME EARNED IN THE RELEVANT YEAR AND HENCE, RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENCE, WE DECLINE TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE AND ACCORDINGLY REVISED GROUNDS 2 TO 5 RAISED BY THE REVENUE ARE REJECTED. 5. IN REVISED GROUNDS 6 AND 7 OF THE REVENUES APPEAL, THE ISSUE INVOLVED IS REGARDING DELETION OF DISALLOWANCE MADE BY THE AO IN RESPECT OF LARGE INCREASE IN TAILORING AND MAINTENANCE EXPENSES. LEARNED DR OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER. HE ALSO SUBMITTED THAT ON PAGE 6 OF THE ASSESSMENT ORDER, THE AO HAS DISCUSSED THE INCREASE IN TAILORING AND MAINTENANCE EXPENSES BY 23.9% AND BUSINESS EXPENSES BY 9.5% AND SUCH EXCESS ONLY WAS ADDED BY AO BUT THE SAME WAS DELETED BY LEARNED CIT(A) AS PER PARA 7.3 ON PAGE 11 OF HIS ORDER WITHOUT ANY VALID BASIS AND HENCE, THE ORDER OF CIT(A) SHOULD BE REVERSED AND THAT OF THE AO SHOULD BE RESTORED. LEARNED AR OF THE ASSESSEE SUPPORTED THE ORDER OF CIT(A). 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL, WE REPRODUCE PARA 7.3 OF THE ORDER OF CIT(A) FOR READY REFERENCE. THIS PARA READS AS UNDER: 7.3. THE AO HAS MADE THE IMPUGNED DISALLOWANCE ON AN ESTIMATED BASIS. THE AO HAVING OBSERVED A PROPORTIONATE DIP OF 3.9% IN GROSS-PROFITS AND THE INCREASE IN CERTAIN HEADS OF EXPENDITURE, PROCEEDED TO DISALLOW EXPENDITURE @ 3.9% IN RESPECT OF 'TAILORING AND MAINTENANCE' CHARGES AND 'BUSINESS EXPENDITURE'. THE ASSESSEE HAS VEHEMENTLY ARGUED AGAINST ANY JUSTIFICATION FOR THIS ACTION OF THE AO. THE EXPENDITURE STATEMENTS AS PER ASSESSEE'S ACCOUNTS HAVE BEEN SUBMITTED. IT IS FURTHER ITA NO. 1160/BANG/2018 PAGE 4 OF 7 EXPLAINED BY THE APPELLANT THAT, MAJOR INCREASE UNDER THE BUSINESS PROMOTION HEAD' WAS OWING TO THE CONDUCT OF, SEVERAL NEW SPECIAL-SCHEMES OF CUSTOMERS / DEALERS, BECAUSE OF WHICH THE EXPENDITURE HAS JUMPED TO THE EXTENT OF RS. 529.32 LAKHS. IT IS SUBMITTED THAT, THIS EXPENDITURE WAS INCREASED IN RESPECT OF APPROXIMATELY ONE THOUSAND DEALERS SPREAD ACROSS INDIA, BY WAY OF CONDUCTING SUCH MARKETING EVENTS, TO ARGUMENT THE BUSINESS TURNOVER. IT IS APPARENT FROM THE AO'S ORDER THAT, THERE IS NO SPECIFIC FINDING OF FACT RECORDED AGAINST THE GENUINENESS OF THE IMPUGNED-EXPENDITURES. THE AO HAS NOT DISPUTED THE FACT THAT PAYMENTS WERE ACTUALLY MADE / INCURRED IN THE NORMAL COURSE OF ASSESSEE'S BUSINESS. THERE IS NO DISCUSSION WHATSOEVER BY THE AO TO CONCLUDE THAT, SUCH MARKETING EVENTS ACTUALLY NEVER OCCURRED, DURING THE PERIOD UNDER CONSIDERATION. THE ASSESSEE'S ACCOUNTS ARE AUDITABLE FROM YEAR TO YEAR. THE AO HAS NOT POINTED CUT ANY ADVERSE COMMENTS OR QUALIFYING REMARKS ON THE ISSUE, IN THE AUDITOR'S REPORT. THE AO HAS NOT DOUBTED THE VERACITY OR OTHERWISE FOUND ANYTHING TO EVEN CONSIDER THE REJECTION OF ASSESSEE'S BOOKS OF ACCOUNT AS SUCH, SO AS TO RE-ESTIMATE THE IMPUGNED EXPENDITURE CLAIMS OF THE APPELLANT. IN BACKGROUND OF THE ABOVE DETAILED DISCUSSION AND IN ABSENCE OF ANY EVIDENCIARY JUSTIFICATION IN THE IMPUGNED-ORDER, THE ESTIMATED DISALLOWANCE DITURE CANNOT BE SUSTAINED. THE ASSESSEE'S GROUNDS OF APPEAL ARE THEREFORE ALLOWED. 6. AS PER THE ABOVE PARA REPRODUCED FROM THE ORDER OF CIT(A), IT COMES OUT THAT A CATEGORICAL FINDING IS GIVEN BY LEARNED CIT(A) THAT THE ASSESSEE HAS EXPLAINED ABOUT INCREASE UNDER THE BUSINESS PROMOTION HEAD BECAUSE SEVERAL NEW SPECIAL SCHEMES OF CUSTOMERS / DEALERS WERE CONDUCTED AND THIS INCREASE IN EXPENDITURE IS RS.529.32 LAKHS. THE AO HAS MADE PART DISALLOWANCE TO THE EXTENT OF DIP IN GROSS-PROFITS RATE BY 3.9%. THIS FINDING IS ALSO GIVEN BY CIT(A) THAT THE AO HAS NOT DISPUTED THE FACT THAT THE PAYMENTS WERE ACTUALLY MADE / INCURRED IN THE NORMAL COURSE OF BUSINESS OF THE ASSESSEE. HENCE, ON THIS ISSUE, WE FIND NO INFIRMITY IN THE ORDER OF CIT(A) AND THEREFORE, WE DECLINE TO INTERFERE. ACCORDINGLY, GROUNDS 6 AND 7 OF REVENUES APPEAL ARE ALSO REJECTED. ITA NO. 1160/BANG/2018 PAGE 5 OF 7 7. AS PER GROUNDS 8 AND 9 OF THE REVISED GROUNDS OF APPEAL, THE GRIEVANCE OF THE REVENUE IS REGARDING DELETION OF THE DISALLOWANCE MADE BY THE AO OUT OF PROVISION OF WARRANTY EXPENDITURE. LEARNED DR OF THE REVENUE SUBMITTED THAT THE DISALLOWANCE MADE BY THE AO HAS BEEN DELETED BY CIT(A) WITHOUT ANY VALID BASIS AND THEREFORE, ON THIS ISSUE ALSO, THE ORDER OF CIT(A) SHOULD BE REVERSED AND THAT OF THE AO SHOULD BE RESTORED. AS AGAINST THIS, THE LEARNED AR OF THE ASSESSEE SUPPORTED THE ORDER OF CIT(A). AT THIS JUNCTURE, THE BENCH WANTED TO SEE THE COMPARATIVE CHART OF SUCH WARRANTY PROVISION AND ACTUAL EXPENSES IN THE PRESENT YEAR AND THE PRECEDING 4 YEARS. IN REPLY, THE LEARNED AR OF THE ASSESSEE SUBMITTED A CHART SHOWING WARRANTY PROVISION MADE BY THE ASSESSEE IN ASSESSMENT YEARS 2011-12 TO 2014-15 AS PER WHICH THE PROVISION MADE IN THE PRECEDING YEAR IS REVERSED IN THE SUCCEEDING YEAR. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FIRST OF ALL, WE REPRODUCE THE IMPORTANT FIGURES FROM THE YEAR WISE COMPARATIVE CHART SUBMITTED BY LEARNED AR OF THE ASSESSEE: AS PER THIS CHART, IN A. Y. 2011 12, THE ASSESSEE MADE A PROVISION OF RS.118.85 LAKHS AND THERE WAS OPENING BALANCE MADE IN THE PRECEDING YEAR OF ITA NO. 1160/BANG/2018 PAGE 6 OF 7 RS.80.29 LAKHS. IN ASSESSMENT YEAR 2011-12, THE ASSESSEE REVERSED THE OPENING BALANCE OF SUCH PROVISION. IN ASSESSMENT YEAR 2012-13, THE ASSESSEE MADE A PROVISION OF RS.121.06 LAKHS AND REVERSED THE OPENING BALANCE OF PROVISION MADE DURING THE EARLIER YEARS. SIMILARLY, IN ASSESSMENT YEAR 2013- 14, THE ASSESSEE MADE A PROVISION OF RS.150.05 LAKHS AND REVERSED THE OPENING BALALNCE OF SUCH PROVISION RS.121.05 LAKHS. IN THE SAME MANNER, IN THE PRESENT YEAR ALSO, THE ASSESSEE MADE A PROVISION OF 67.84 LAKHS AND REVERSED THE OPENING BALANCE OF SUCH PROVISION RS.150.05 LAKHS. HENCE, IT IS SEEN THAT IN EACH YEAR, THE PROVISION IS MADE BY THE ASSESSEE BUT THERE IS NO ACTUAL EXPENDITURE AGAINST SUCH PROVISION AND THE ENTIRE AMOUNT OF PROVISION IS REVERSED BY THE ASSESSEE IN THE SUCCEEDING YEAR. THEREFORE, IT IS APPARENT THAT THERE IS NO SCIENTIFIC BASIS OF MAKING THE PROVISION AND IT APPEARS TO BE A TOOL TO REDUCE THE PROFIT OF THE CURRENT YEAR BY MAKING THIS ARTIFICIAL PROVISION TO BE REVERSED IN THE SUCCEEDING YEAR. IN THE LIGHT OF THESE FACTS, NOW WE EXAMINE THE APPLICABILITY OF THE JUDGMENT OF HONBLE APEX COURT RENDERED IN THE CASE OF ROTORK CONTROLS INDIA (P) LTD VS. CIT AS REPORTED IN 314 ITR 62 (SC). IN PARA 18 OF THIS JUDGMENT, IT IS HELD BY HONBLE APEX COURT THAT A LIABILITY IS A PRESENT OBLIGATION ARISING FROM PAST EVENTS. SIMILARLY, IN PARA 13 OF THE SAME JUDGMENT, IT IS OBSERVED BY HONBLE APEX COURT THAT A PAST EVENT THAT LEADS TO A PRESENT OBLIGATION IS CALLED AN OBLIGATING EVENT AND THE OBLIGATING EVENT IS AN EVENT THAT CREATES AN OBLIGATION WHICH RESULTS IN AN OUTFLOW OF RESOURCES. IN THE SAME PARA 13, IT IS OBSERVED THAT FOR A LIABILITY TO QUALITY FOR RECOGNITION, THERE MUST BE NOT ONLY PRESENT OBLIGATION BUT ALSO THE PROBABILITY OF OUTFLOW OF RESOURCES TO SETTLE THAT OBLIGATION. IN THE FACTS OF THE PRESENT CASE, IT IS SEEN THAT FROM THE PAST HISTORY, THERE IS NO LIKELIHOOD THAT THE OBLIGATION OF WARRANTY WILL RESULT INTO AN OUTFLOW OF RESOURCES. HENCE, RESPECTFULLY FOLLOWING THIS JUDGMENT OF HONBLE APEX COURT AND IN VIEW OF THE FACTS OF THE PRESENT CASE, ITA NO. 1160/BANG/2018 PAGE 7 OF 7 WE REVERSE THE ORDER OF CIT(A) ON THIS ISSUE AND RESTORE THAT OF THE AO. THESE TWO GROUNDS OF THE REVENUES APPEAL ARE ALLOWED. 9. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE. SD/- SD/- ( BEENA PILLAI ) (A.K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED: 14 TH FEBRUARY, 2020. /NS/* COPY TO: 1. APPELLANTS 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.