M/s Chengmari Tea Co. Ltd, Kolkata V. DCIT, CIR-4, KOLKATA, Kolkata

ITA 1433/KOL/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 1639 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 05-07-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMITAVA BHATTACHARYYA ADD L
• Assessee Lawyers: S M SURANA
• Keywords: Business expenditure; Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

1 ITA NO.1433/KOL/2016 M/S CHENGMARI TEA CO.LTD. A.Y. 2011-12 IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH C KOL KATA [BEFORE HONBLE SHRI N.V.VASUDEVAN, JM & SHRI WAS EEM AHMED, AM ] ITA NO.1433/KOL/2016 ASSESSMENT YEAR : 2011-12 M/S CHENGMARI TEA CO.LTD. -VERSUS- D.C.I.T., CIRCL E-4, KOLKATA KOLKATA (PAN:AABCC 0672 Q) (APPELLANT) (RESPONDENT) FOR THE APPELLANT: SHRI S.M.SURANA, ADVOCATE FOR THE RESPONDENT: SHRI AMITAVA BHATTACHARYYA, ADD L. CIT, SR.DR DATE OF HEARING : 08.01.2018. DATE OF PRONOUNCEMENT : 02.02.2018. ORDER PER N.V.VASUDEVAN, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 12.05.2016 OF C.I.T- (A)-2, KOLKATA RELATING TO A.Y.2011-12. 2. GROUND NOS. 1,5 AND 6 ARE GENERAL IN NATURE AND DOES NOT CALL FOR ANY SPECIFIC ADJUDICATION. 3. GROUND NO.2 & 3 RAISED BY THE ASSESSEE READ AS FOLLOWS :- 2.FOR THAT THE LD. C.I.T(A) ERRED IN CONFIRMING TH E DISALLOWANCE OF RS. 62,734/- UNDER SEC. 14A WITHOUT WHEN NO SATISFACTION WAS REC ORDED BY THE AO AS TO THE APPLICABILITY OF THE SAID PROVISIONS AND EVEN THE S HARE CAPITAL AND RESERVES OF THE ASSESSEE WERE MORE THAN THE INVESTMENTS MADE. 3. FOR THAT THE CONFIRMATION OF THE ADDITION OF RS. 62,734/- U/ S. 14A LD. C.I.T(A) WAS NOT JUSTIFIED. 4. THE ASSESSEE IS A COMPANY WHICH IS ENGAGED IN TH E BUSINESS OF GROWING AND MANUFACTURING OF TEA. IN THE COURSE OF ASSESSMENT P ROCEEDINGS THE AO NOTICED THAT THE ASSESSEE HAD EARNED EXEMPT DIVIDEND INCOME OF RS.62 ,734/-. THE ASSESSEE HAD DISALLOWED A SUM OF RS.10,000/- AS EXPENSES INCURRE D IN EARNING EXEMPT INCOME 2 ITA NO.1433/KOL/2016 M/S CHENGMARI TEA CO.LTD. A.Y. 2011-12 WHICH IS TO BE DISALLOWED U/S 14A. THE AO APPLIED R ULE 8D OF THE IT RULES AND MADE A DISALLOWANCE OF RS.72,734/- IN THE FOLLOWING MANN ER :- RS. I. DIRECT EXPENSES RELATING TO EXEMPT INCOME NIL II. INTEREST EXPENSES 29,178/- III. % OF AVERAGE INVESTMENT 43,556/- TOTAL 72,734/- SINCE THE ASSESSEE HAS ALREADY DISALLOWED A SUM OF RS.10,000/- THE AO ADDED A SUM OF RS.62,734/- TO THE TOTAL INCOME OF THE ASSESSEE AND MADE DISALLOWANCE U/S 14A OF THE ACT. 5. BEFORE CIT(A) THE ASSESEE SUBMITTED THAT THE AO HAS NOT FOUND THE QUANTUM OF DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT AS MADE IN THE COMPUTATION OF INCOME BY THE ASSESSEE TO BE INCORRECT. THE ASSESSEE SUBMITTE D THAT IT WAS THE INCUMBENT ON THE PART OF THE AO BEFORE INVOKING RULE 8D OF THE RULES TO REJECT THE QUANTUM OF DISALLOWANCE MADE BY THE AO ON AN OBJECTIVE BASIS. HE HAS TO RECORD SATISFACTION THAT THE QUANTUM OF DISALLOWANCE OF EXPENSES AS MADE BY THE ASSESSEE IN THE COMPUTATION OF INCOME IS INCORRECT. WITHOUT RECORDING SUCH SATI SFACTION THE AO CANNOT PROCEED TO DISALLOW EXPENSES U/S 14A OF THE ACT BY INVOKING TH E PROVISION OF RULE 8D OF THE IT RULES, 1962. THE ASSESSEE RELIED ON THE FOLLOWING D ECISIONS IN SUPPORT OF THE ABOVE CONTENTION :- KOLKATA TRIBUNAL IN THE CASE OF LAUREL SECURITIES PVT LTD VS I.T.O IN ITA NO.1849/KO1/2012 KOLKATA TRIBUNAL LN THE CASE OF .DCIT . V ASHISH JH UNJHUNWALA IN ITA NO. 1809/KO1/2012. KOLKATA TRIBUNAL IN THE CASE OF BALARAMPUR CHINI MI LLS LIMITED REPORTED IN 140 TTJ 73. KOLKATA TRIBUNAL IN THE CASE OF DCIT - VS- MICRO MA NAGEMENT IN I. T.A.NO. 1399/KO1/2011. MUMBAI TRIBUNAL IN THE CASE OF-J.K.INVESTORS -(BOM BAY) LTD. VS. ACIT IN ITA NO.7858/MUM/2011, AY 2008-09 DATED 13.03.2013. MUMBAI TRIBUNAL IN THE CASE OF 3DPLM SOFTWARE SOLUT IONS LTD. VS. ACIT IN ITA NO.5736/MUM/2012, AY 2008-09 DATED 31.7.2014 3 ITA NO.1433/KOL/2016 M/S CHENGMARI TEA CO.LTD. A.Y. 2011-12 DELHI TRIBUNAL IN THE CASE OF DCIT VS MLS. JINDAL P HOTO LIMITED IN ITA NO. 814 /DEU.2011 PRONOUNCED ON 23.9.2011. 6. THE ASSESSEE ALSO SUBMITTED THAT DISALLOWANCE OF INTEREST IN TERMS OF RULE 8(2)(II) OF THE RULES WERE NOT WARRANTED AS THE ASS ESSEE HAS SUFFICIENT INTEREST FREE FUND. THE ASSESSEE POINTED OUT THAT THE INVESTMENT S IN SHARES WERE ONLY TO THE TUNE OF RS.1 CRORE WHEREAS THE ASSESSEES CAPITAL AND RESER VES WERE MORE THAN RS.,7.57 CRORES. THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LIMITED 313 ITR 340 (BOM) WHEREIN IT WAS HELD THAT IF INTEREST FREE FUNDS AVAILABLE WITH THE ASSE SSEE WAS SUFFICIENT TO MEET THE INVESTMENTS AND AT THE SAME TIME IF LOANS HAVE BEEN RAISED BY THE ASSESSEE IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM INTEREST FR EE FUNDS AND NO DISALLOWANCE OF INTEREST IS CALLED FOR. THE ASSESSEE ALSO RELIED ON SIMILAR RULING OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. HDFC BANK LTD. (I TA 330 OF 2012) JUDGMENT DATED 23.07.2014. 7. WITH REGARD TO THE DISALLOWANCE OF OTHER EXPENS ES UNDER RULE 8D(2)(III) OF THE RULES, THE ASSESSEE POINTED OUT THAT ONLY INVESTMEN TS WHICH YIELDED TAX FREE INCOME VIZ. AN INVESTMENT OF RS.43,556/- SHOULD BE CONSID ERED FOR ARRIVING AT AVERAGE VALUE OF INVESTMENTS. THE OTHER INVESTMENTS IN WEBSOL ENE RGY SYSTEMS LTD OF RS.47,38,770/- DID NOT YIELD ANY DIVIDEND INCOME. T HE ASSESSEE SUBMITTED THAT IN COMPUTING THE DISALLOWANCE IN TERMS OF RULE 8D(2)(I II) OF THE RULES ONLY % OF THE AVERAGE VALUE OF INVESTMENTS OF RS.43,556/- SHOULD BE DISALLOWED. 8. THE CIT(A) HOWEVER DID NOT DEAL WITH ANY OF THE AFORESAID ARGUMENTS BUT HE REJECTED THE PLEA OF THE ASSESSEE BY HOLDING AS FOL LOWS :- I HAVE CONSIDERED THE SUBMISSIONS OF THE AUTHORISE D REPRESENTATIVE OF THE APPELLANT AS WELL AS THE ASSESSMENT ORDER FRAMED IN THE LIGHT OF THE MATERIALS AVAILABLE ON RECORD BEFORE THE ASSESSING OFFICER DU RING THE ASSESSMENT PROCEEDINGS. KEEPING IN VIEW OF ABOVE, THE ORDER OF THE AO IS UPHELD AND THIS GROUND OF THE APPEAL IS DISMISSED. 4 ITA NO.1433/KOL/2016 M/S CHENGMARI TEA CO.LTD. A.Y. 2011-12 9. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE HA S PREFERRED GROUND NOS. 2 AND 3 BEFORE THE TRIBUNAL. 10. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS CLEA R FROM THE ORDER OF THE REVENUE AUTHORITIES THAT THEY HAVE NOT REJECTED THE BASIS O F COMPUTATION OF DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT AS MADE BY THE ASSESSEE .. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES. HE FURTHER PLACED RELIANCE ON THE DECISION OF THE HONBLE ITAT, KOLKA TA BENCH IN THE CASE OF REI AGRO LTD. VS DCIT IN ITA NO.1331/KOL/2011 FOR A.Y.2008-0 9 DATED 19.06.2013. HE ALSO RELIED ON THE DECISION OF ITAT IN THE CASE OF BALRA MPUR CHINI MILLS IN 140 TTJ 73 WHEREIN THE TRIBUNAL HELD THAT SECTION 14A R.W. R.8 D CAN BE INVOKED WHEN THE AO IS NOT SATISFIED HAVING REGARDS TO THE ACCOUNTS OF TH E ASSESSEE THAT THE CLAIM OF THE EXPENSES MADE BY THE ASSESSEE IS NOT CORRECT. REFER ENCE WAS ALSO MADE TO A SIMILAR RULING OF THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF DHANUKA & SONS VS CIT 201 TAXMAN 105 (KOL). THE LD. DR RELIED ON THE ORDER OF THE AO. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. A PER USAL OF THE PROVISIONS OF SECTION 14A, MORE SPECIFICALLY SUB-SECTION (2), SHO WS THAT IF THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, THEN THE AO SHALL DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THE ACT. FOR THIS THE METHOD IS PRESCRIBED IN RULE 8D. THE PROVISION OF SECTION 14A, SUB-SECTION (3) SPECIFIES THE PROVISION OF 14A(2) WOULD ALSO APPLY WHERE THE ASSESSEE MAKES A CLAIM THAT THERE I S NO EXPENDITURE INCURRED. THIS IS BECAUSE IF THE ASSESSEE DOES NOT MAKE A DISALLOWANC E UNDER SECTION 14A IN ITS COMPUTATION OF TOTAL INCOME, WHEN FILING THE RETURN , THEN IF SUBSECTION (3) WAS NOT AVAILABLE, THE AO MIGHT NOT BE ABLE TO MAKE A DISAL LOWANCE UNDER SECTION 14A. THUS, WHERE THE ASSESSEE MAKES A CLAIM THAT ONLY A PARTIC ULAR AMOUNT IS TO BE DISALLOWED UNDER SECTION 14A OR WHERE THE ASSESSEE DOES NOT MA KE A DISALLOWANCE UNDER SECTION 14A, IF THE AO PROPOSES TO INVOKE THE SECTION 14A, HE IS TO RECORD A SATISFACTION ON THAT ISSUE. THIS SATISFACTION CANNOT BE A PLAIN SAT ISFACTION OR A SIMPLE NOTE. IT IS TO BE 5 ITA NO.1433/KOL/2016 M/S CHENGMARI TEA CO.LTD. A.Y. 2011-12 DONE WITH REGARD TO ACCOUNTS OF THE ASSESSEE. IN TH E PRESENT CASE, THERE IS NO SATISFACTION BY THE AO AND CONSEQUENTLY, IN VIEW OF THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF BALRAMPUR CHI NI MILLS LTD REFERRED TO SUPRA, NO DISALLOWANCE UNDER SECTION 14A CAN BE MADE. THUS T HE ADDITION MADE U/S 14A OF THE ACT IS DELETED. GROUND NO.2 AND 3 RAISED BY THE ASS ESSEE ARE ALLOWED. 12. GROUND NO.4 RAISED BY THE ASSESSEE READS AS FOL LOWS :- 4. FOR THAT THE LD. C.I.T(A) ERRED IN CONFIRMING T HE DISALLOWANCE OF RS. 22,01,093/- BEING FOREIGN TRAVELLING EXPENSES WHICH WAS INCURRED FOR BUSINESS PURPOSES AND WAS ALLOWABLE DEDUCTION. 13. THE ASSESSEE CLAIMED DEDUCTION OF RS.22,01,093/ - AS EXPENSES INCURRED ON ACCOUNT OF FOREIGN TRAVEL. . ON PERUSAL OF THE DETA ILS THE AO NOTICED THAT THE ASSESSEE HAD SPONSORED THE UNIVERSITY EXPENSES OF SHRI YASH KAJRIWAL OF RS.16,85,334/- FOR STUDYING MANAGEMENT COURSE ABROAD. THE ASSESSEE SUB MITTED THAT THERE WAS AN AGREEMENT BETWEEN SHRI YASH KAJRIWAL AND THE ASSESS EE DATED 01.08.2008 WHEREBY SHRI YASH KAJRIWAL UNDERTOOK TO SERVE THE ASSESSEE COMPANY AFTER COMPLETION OF HIS STUDIES. THE ASSESEE ALSO POINTED OUT THAT SHRI YAS H KAJRIWAL WAS APPOINTED AS PRESIDENT OF THE COMPANY ON 01.05.2012. THE AO HOWE VER WAS OF THE VIEW THAT DURING THE RELEVANT PREVIOUS YEAR SHRI YASH KAJRIWA L WAS NOT ASSOCIATED WITH THE ASSESSEE COMPANY AND HAD NOT RENDERED ANY SERVICE T O THE ASSESSEE COMPANY IN ANY CAPACITY. THEREFORE THE EXPENSES RELATING TO HIS ST UDIES WERE HELD BY THE AO TO BE NOT WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE ASESSEE AND ACCORDINGLY THE SAME WAS DISALLOWED. WITH REGARD TO THE REMAINING SUM OF RS.5,15,759/- THE AO HELD THAT THE ASSESEE FAILED T O ESTABLISH THE BUSINESS CONNECTION OF THESE EXPENSE AND THEREFORE THE ENTIRE FOREIGN T RAVELLING EXPENSES OF RS.22,01,093/- WAS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSE. 14. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED THE ORDER OF THE AO OBSERVING AS FOLLOWS :- 6 ITA NO.1433/KOL/2016 M/S CHENGMARI TEA CO.LTD. A.Y. 2011-12 I HAVE CONSIDERED THE SUBMISSIONS OF THE AUTHORIZE D REPRESENTATIVE OF THE APPELLANT AS WELL AS THE ASSESSMENT ORDER FRAMED IN THE LIGHT OF THE MATERIALS AVAILABLE ON RECORD BEFORE THE ASSESSING OFFICER DU RING THE ASSESSMENT PROCEEDINGS. THE AO HAS MENTIONED THAT DURING THE Y EAR UNDER CONSIDERATION, SRI KAJRIWAL WAS NOT ASSOCIATED WITH THE COMPANY AND DI D NOT SERVE THE COMPANY IN ANY CAPACITY. AS SUCH, THE EXPENSES RELATED TO HIS STUDIES CANNOT BE SAID TO BE INCIDENTAL IN THE CONDUCT OF BUSINESS ACTIVITIES OF THE COMPANY. AS REGARDS REMAINING EXPENSES OF RS. 5,15,759/- NO BUSINESS CONNECTION COULD BE ESTABLISHED AS THE ASSESSEE NEVER HAD ANY EXPORT AC TIVITY. THE ASSESSEE HAS FAILED TO PROVE THE BUSINESS CONNECTION OF THESE EXPENSES 'AS CLAIMED BY HIM DURING THE YEAR UNDER CONSIDERATION. KEEPING IN VIEW OF ABOVE, HE ORDER OF THE AO IS UPHELD AND THIS GROUND OF THE APPEAL IS DISMISSED. 15. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE H AS RAISED GROUND NO.4 BEFORE THE TRIBUNAL. 16. THE LD. COUNSEL FOR THE ASSESSEE PLACED RELIANC E ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF M/S GOURNITYE TE A & INDUSTRIES VS CIT IN ITA NO.249 OF 2005 JUDGMENT DATED 24.06.2010. IN THE AF ORESAID DECISION ON IDENTICAL FACTS OF DISALLOWANCE OF FOREIGN TRAVEL EXPENSES, T HE HONBLE CALCUTTA HIGH COURT TOOK THE FOLLOWING VIEW :- ON CAREFUL READING OF ALL THOSE DECISIONS WE COULD FIND THAT ANY EXPENDITURE INCURRED ON ACCOUNT OF TRAINING AND IMPARTING HIGHE R EDUCATION IN ABROAD OR EVEN INSIDE THE COUNTRY ARE TREATED TO BE BUSINESS EXPENDITURE PROVIDED AFTER COMPLETION OF THEIR STUDY THEY HAVE CONTRIBUTED TO THE BUSINESS ACTIVITIES OF THE ASSESSEE COMPANY IRRESPECTIVE OF THE FACT WHETHER T HE COMPANY HAS CONTINUED BUSINESS ACTIVITIES OR EARNED PROFIT. 17. IT IS THUS CLEAR THAT THE FACT THAT THE PERSON WHO UNDERTOOK THE FOREIGN TRAVEL WAS NOT AN EMPLOYEE OF THE ASESSEE AT THE TIME OF U NDERTAKING FOREIGN TRAVEL CANNOT BE THE BASIS FOR ANY DISALLOWANCE OF EXPENSES. IN THE PRESENT CASE MR. YASH KAJRIWAL SERVED THE ASSESSEE COMPANY AFTER COMPLETING STUDIE S ABROAD AS PER AGREEMENT WITH THE ASSESSEE COMPANY. SINCE THE DISALLOWANCE OF A S UM OF RS.16,85,334/-BEING EXPENSES FOR SPONSORING HIGHER EDUCATION OF SHRI YA SH KAJRIWAL WAS DISALLOWED ONLY ON THE BASIS THAT HE WAS NOT AN EMPLOYEE, THE DISAL LOWANCE IS DIRECTED TO BE DELETED. 7 ITA NO.1433/KOL/2016 M/S CHENGMARI TEA CO.LTD. A.Y. 2011-12 18. AS FAR AS THE REMAINING SUM OF RS.5,15,759/- IS CONCERNED,THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT NO DETAILS WHATSOEVER W ERE CALLED FOR AND PRAYED THAT THE ISSUE MAY BE SET ASIDE TO THE AO TO ENABLE THE ASSE SSEE TO GIVE THE REQUIRED DETAILS. WE ARE OF THE VIEW THAT SINCE THE ASSESEE WAS NOT C ALLED UPON TO EXPLAIN THE DETAILS OF THESE EXPENSES BY THE AO IT WOULD BE JUST AND PROPE R TO SET SIDE THE ORDER OF THE CIT(A) , AS FAR AS THE REMAINING SUM OF RS.5,15,759 /- IS CONCERNED . ACCORDINGLY WE SET ASIDE THE ORDER OF THE CIT(A) AND REMAND TO THE AO FOR FRESH CONSIDERATION AFTER DUE OPPORTUNITY TO THE ASSESSEE THE DISALLOWANCE OF FOREIGN TRAVEL EXPENSES OF RS.5,15,759/-. THE ASSESSEE WILL EXPLAIN THE NATURE OF THESE EXPENSES AND NEXUS WITH THE BUSINESS OF THE ASSESSEE. THE AO WILL DECIDE TH E ISSUE AFRESH AFTER AFFORDING THE ASSESSEE OPPORTUNITY OF BEING HEARD. GROUND NO.4 IS THUS PARTLY ALLOWED. 19. IN THE RESULT THE APPEAL BY THE ASSESSEE IS PAR TLY ALLOWED. O RDER PRONOUNCED IN THE OPEN COURT ON 02.02.2018. SD/- SD/- [WASEEM AHMED] [ N.V.VASUDEVAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 02.02.2018. [RG SR.PS] COPY OF THE ORDER FORWARDED TO: 1.M/S CHENGMARI TEA CO. LTD., 37, SHAKESPEARE SARAN II, 2 ND FLOOR, KOLKATA-700017. 2. D.C.I.T., CENTRAL CIRCLE-4, KOLKATA. 3. C.I.T.(A)-2, KOLKATA 4. C.I.T.- 2, KOLKATA.. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER, SENIOR PRIVATE SECRETARY HEAD OF OFFICE/D.D.O., ITAT, KOLKATA BENCHES 8 ITA NO.1433/KOL/2016 M/S CHENGMARI TEA CO.LTD. A.Y. 2011-12