Voith Paper Technology (India) Limited, Kolkata V. ACIT, CHENNAI

ITA 1592/CHNY/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96339 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-11-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 08-09-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 09-06-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A B KOLI
• Keywords: Business income; Opportunity of being heard; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A; 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , A B ENCH, CHENNAI . , ! # , $ & BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./ I.T.A.NO.1592/MDS/2014 ( / ASSESSMENT YEAR: 2009-10) M/S. VOITH PAPER TECHNOLOGY (INDIA) LTD., ECO SPACE, BLOCK-A, 6 TH FLOOR, 11F/11, NEW TOWN, RAJARHAT, KOLKATTA-700 156 VS THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-III(4), CHENNAI. PAN:AABCV1134E ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. RAVI SHARMA, ADVOCATE /RESPONDENT BY : MR. A.B.KOLI, JCIT /DATE OF HEARING : 8 TH SEPTEMBER, 2015 /DATE OF PRONOUNCEMENT : 6 TH NOVEMBER, 2015 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-III, CH ENNAI DATED 14.02.2014 FOR THE ASSESSMENT YEAR 2009-10. 2. THE FIRST ISSUE IN THE APPEAL OF THE ASSESSEE I S THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFI RMING THE DISALLOWANCE OF ESOP CHARGES AMOUNTING TO ` 35,28,333/- WITHOUT APPRECIATING THAT SUCH ESOP EXPENSES REIMBU RSED BY THE ASSESSEE TO L & T LTD. ON ACCOUNT OF DEPUTED 2 ITA NO.1592/MDS/2014 EMPLOYEES WERE INCURRED FOR THE PURPOSE OF BUSINESS AND HENCE ALLOWABLE UNDER SECTION 37(1) OF THE ACT. 3. BRIEF FACTS ARE THAT ASSESSEE IS A SUBSIDIARY OF L & T LTD. DURING THIS ASSESSMENT YEAR, THE PARENT COMPA NY HAD DEPUTED 13 OF ITS EMPLOYEES TO THE ASSESSEE COMPANY AND DEPUTED EMPLOYEES WERE WORKING FOR THE ASSESSEE COM PANY. THE COST OF THE EMPLOYEES HAVE TO BE REIMBURSED BY THE ASSESSEE TO THE PARENT COMPANY. DURING THE ASSESSME NT YEAR UNDER CONSIDERATION, THE PARENT COMPANY HAS AL LOTTED E- SHARES TO THE DEPUTED EMPLOYEES OF THE ASSESSEE COM PANY UNDER STOCK OPTION SCHEME. THE ASSESSING OFFICER DI SALLOWED THE AMOUNT OF ` 35,28,333/- BEING ESOP CHARGES ON THE GROUND THAT ASSESSEE HAS NOT ALLOTTED THE SHARES TO ITS DEPUTED EMPLOYEES AND THE EXPENDITURE CLAIMED PERTA INING TO L & T LTD. AND IT IS A NOTIONAL EXPENDITURE. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APPEALS) SUSTAINED THE DISALLOWANCE ACCEPTING THE VIEW OF THE ASSESSING OF FICER. 4. AT THE OUTSET, COUNSEL FOR THE ASSESSEE SUBMITS THAT AN IDENTICAL ISSUE CAME UP FOR CONSIDERATION BEFORE TH E 3 ITA NO.1592/MDS/2014 BANGALORE BENCH OF THE TRIBUNAL IN THE CASE OF L & T VALDEL ENGINEERING P.LTD. IN ITA NO.506 TO 508 AND 518 TO 520/BANG/2014 DATED 29.06.2015 WHICH IS A SUBSIDIAR Y TO L & T. LTD. CLAIMED ESOP EXPENSES WHICH WERE REIMBURSED TO THE PARENT COMPANY. COUNSEL FOR THE ASSESSEE SUBMIT S THAT IN THAT CASE ALSO L & T LTD. DEPUTED CERTAIN EMPL OYEES TO ITS SUBSIDIARY COMPANY L & T VALDEL ENGINEERING P. LTD. AND THE SUBSIDIARY COMPANY REIMBURSED THE EMPLOYEE COST S INCLUDING ESOP COST. COUNSEL FOR THE ASSESSEE SUBMI TS THAT IN THAT CASE THE ASSESSING OFFICER TREATED SUCH EXP ENDITURE AS CAPITAL EXPENDITURE BUT THE COMMISSIONER OF INCO ME TAX (APPEALS) DENIED THE EXPENSES AS SUCH EXPENSES ARE NOT BELONGED TO THE ASSESSEE BUT THE TRIBUNAL SET ASIDE THE ORDERS OF LOWER AUTHORITIES AND REMITTED THE ISSUE BACK TO THE ASSESSING OFFICER FOR FRESH CONSIDERATION WITH CERT AIN OBSERVATIONS. COUNSEL FOR THE ASSESSEE REITERATING THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES SUBMI TS THAT ESOP EXPENSES WHICH WERE REIMBURSED TO THE PARENT COMPANY BY THE SUBSIDIARY COMPANY ARE ALLOWABLE EXPENDITURE. HE PLACES RELIANCE ON THE DECISION OF MADRAS HIGH COURT IN THE CASE OF PVP VENTURES LTD. IN TCA NO.1023 4 ITA NO.1592/MDS/2014 OF 2005, COPY OF WHICH IS PLACED ON RECORD AT PAGE 1 TO 13 OF THE PAPER BOOK. 5. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDERS OF THE LOWER AUTHORITIES IN DENYING ESOP EX PENSES. 6. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISIONS RELIED ON. L & T LTD. WHICH IS A GROUP CONCERN OF THE ASSESSEE DEPUTED CERTAIN EMPLOYEES T O ASSESSEE COMPANY AND THE ASSESSEE IS REIMBURSING EMPLOYEES COST TO THE PARENT COMPANY ON SUCH DEPUTE D EMPLOYEES. THE PARENT COMPANY L & T LTD. HAS ISSUE D SHARES TO THE DEPUTED EMPLOYEES OF THE ASSESSEE COM PANY UNDER STOCK OPTION PLAN SCHEME AND THE ASSESSEE COM PANY REIMBURSED THE SAID EXPENSES ALONG WITH EMPLOYEE CO ST I.E. SALARY ETC. TO THE PARENT COMPANY. THE ASSESSING O FFICER DISALLOWED ESOP EXPENSES ON THE GROUND THAT THE ASS ESSEE HAS NOT ISSUED SHARES BUT ONLY PARENT COMPANY HAS I SSUED SHARES AND EMPLOYEES ARE NOT ASSESSEES EMPLOYEES A ND THE EXPENDITURE IS ONLY A NOTIONAL EXPENDITURE. TH E COMMISSIONER OF INCOME TAX (APPEALS) SUSTAINED THE SAID 5 ITA NO.1592/MDS/2014 DISALLOWANCE. ON A PERUSAL OF THE ORDER OF THE CO-O RDINATE BENCH OF THE BANGALORE BENCH, WE FIND THAT AN IDENT ICAL ISSUE HAS COME UP FOR CONSIDERATION IN THE CASE OF L & T VALDEL ENGINEERING P.LTD. WHICH IS ALSO A SUBSIDIARY COMPA NY TO M/S. L & T LTD. IN ITA NO.518 TO 520/BANG/2014 FOR THE ASSESSMENT YEARS 2008-09 TO 2010-11 AND THE CO-ORD INATE BENCH BY ORDER DATED 29.06.2015 CONSIDERING THE SUBMISSIONS OF BOTH THE PARTIES AND EVIDENCES ON RE CORD HELD AS UNDER:- 27. VIDE ITS GROUNDS 5 AND 6 FOR A. Y. 2008-09 AND GROUNDS 6 AND 7 FOR A. YS. 2009-10 AND 2010-00 ASSESSEE ASSAILS DISALLOWANCE OF DEBIT NOTES RAISED BY ITS PARENT COMPANY FOR DEFRAYING THE ESOP CHARGES OF EMPLOYEES DEPUTED BY IT. AMOUNT DISALLOWED WAS OF RS.2,70,99,347/- FOR A. Y.2008-09 RS.5,27,68,682/- FOR A. Y. 2009-10 AND RS.2,48,75,779/- FOR A. Y. 2010-11. 28. FACTS APROPOS ARE THAT ASSESSEE HAD DEBITED THE ABOVE AMOUNTS UNDER THE HEAD 'PROFESSIONAL CHARGES. ASSESSEE WAS A SUBSIDIARY OF L & T LTD WHICH HAD DEPUTED CERTAIN EMPLOYEES OF IT TO THE ASSESSEE. AO REQUIRED FROM THE ASSESSEE DETAILS OF THE PAYMENTS MADE BY IT TO THE EMPLOYEESSENT BY L & T LTD, ON DEPUTAT ION. IN SO FAR AS THE AMOUNTS PAID TO THESE EMPLOYEES IN RE LATION TO ALLOTMENT OF SHARES UNDER ESOP SCHEME, THE AO WA S OF THE OPINION THAT ASSESSEE HAD NO SUCH CONTRACTUA L OBLIGATION AND ASSESSEE WAS UNABLE TO PROVIDE ANY CONTRACT BETWEEN IT AND ITS HOLDING COMPANY, FOR SUPPORTING SUCH PAYMENTS. THOUGH THE ASSESSEE CLAIMED THAT PAYMENTS WERE EFFECTED BASED ON DEBIT NOTES RAISED BY M/S. L & T LTD, AO WAS OF THE OPINI ON THAT THERE WAS NO PROOF FOR ACTUAL PAYMENT AND IT W AS NOT A GENUINE EXPENDITURE SUPPORTED WITH NECESSARY CALCULATION. HE TREATED THE OUTGO AS CAPITAL IN NAT URE AND DISALLOWED THE CLAIM. 6 ITA NO.1592/MDS/2014 29. IN ITS APPEAL BEFORE THE CIT (A) ARGUMENT OF TH E ASSESSEE WAS THAT EMPLOYEES DEPUTED BY ITS HOLDING COMPANY WERE WORKING FULL TIME FOR IT. ACCORDING TO ASSESSEE, ALL THE EXPENDITURE INCURRED BY THE HOLDI NG COMPANY FOR SUCH EMPLOYEES WERE CHARGED ON THE ASSESSEE ON A COST-TO-COST BASIS. EMPLOYEES OF L & T LTD, WERE GIVEN THE BENEFIT OF ESOP FRAMED BY M/S. L & T LTD. AS PER THE ASSESSEE, SUCH EMPLOYEES WHO WERE HAVING ESOP BENEFIT OF THE PARENT COMPANY WHEN DEPUTED TO THE ASSESSEE, AND WHEN THEY WERE WORKING FOR THE ASSESSEE, HAVING RECEIVED THE BENEFIT OF LA BOUR OF THE EMPLOYEES, COST INCURRED FOR THE EMPLOYEES BY T HE PRINCIPAL, HAD TO BE DEFRAYED BY IT TO THE HOLDING COMPANY. ASSESSEE ALSO FILED BEFORE THE CIT (A) AN ABSTRACT OF THE LEDGER BOOK AND DEBIT NOTES. ASSESS EE ALSO SUBMITTED THAT NOTING IN THE TAX AUDIT REPORT FOR THE IMPUGNED ASSESSMENT YEAR COULD NOT BE CONSIDERED AS A BASIS FOR CONCLUDING THAT THE EXPENDITURE BY WAY OF REIMBURSEMENT OF ESOP CHARGES OF THE EMPLOYEES DEPUTED BY ITS HOLDING COMPANY WAS A CAPITAL OUTGO. 30. CIT(A) AFTER GOING THROUGH THE SUBMISSIONS OF T HE ASSESSEE AND AFTER OBTAINING A REMAND REPORT FROM T HE AO WAS OF THE OPINION THAT THERE WAS NOTHING WRONG IN DEFRAYING THE DISCOUNT RELATING TO THE ESOP, WHICH HAD TO BE BORNE BY THE EMPLOYER OVER ITS VESTING PERIOD. HOWEVER, HE WAS OF THE OPINION THAT THE SCHEME OF ESOP WAS BETWEEN THE EMPLOYEES OF HOLDING COMPANY AND M/S. L & T LTD. CIT (A) NOTED THAT THE DEBIT NO TES ISSUED BY THE HOLDING COMPANY DID NOT HAVE THE NAME S OF THE EMPLOYEES. THERE WAS NO WRITTEN AGREEMENT BETWEEN THE ASSESSEE AND ITS HOLDING COMPANY WITH REGARD TO THE CONTRACTUAL OBLIGATION ASSESSEE HAD I N RELATION TO THOSE EMPLOYEES WHO WERE DEPUTED BY THE HOLDING COMPANY TO THE ASSESSEE. AS PER THE CIT (A) , THOUGH THE LIABILITY UNDER ESOP SCHEME WOULD BE DEDUCTIBLE IN THE HANDS OF THE HOLDING COMPANY IN ACCORDANCE WITH THE DECISION OF THE SPECIAL BENCH I N THE CASE OF BIOCON LTD, V. DCIT [(2013) 144 ITD 21], TH IS WOULD NOT ENTITLE A PERSON WHO WAS NOT A DIRECT EMP LOYER TO CLAIM SUCH BENEFIT. HE THUS UPHELD THE DISALLOWA NCE. 31. NOW BEFORE US, LD. AR SUBMITTED THAT THE PAYMEN TS EFFECTED BY THE ASSESSEE TO L & T LTD, ITS HOLDING COMPANY WERE BASED ON DEBIT NOTES PLACED AT PAPER BOOK PAGES 111 TO 123. AS PER THE LD. AR ASSESSEE W AS OBLIGED TO REIMBURSE THE CLAIMS MADE BY L & T SINCE THE EMPLOYEES DEBUTED BY L & T WERE WORKING FOR THE 7 ITA NO.1592/MDS/2014 SSESSEE. ASSESSEE WAS SUPPOSED TO REIMBURSE THE HOLDING COMPANY ON COST TO COST BASIS. IT HAD PRODU CED A LETTER FROM L & T LTD, PLACED AT PAGE124 WHICH WOUL D SHOW THAT THE PAYMENTS WERE REIMBURSEMENT OF COST INCURRED BY L & T LTD. AS PER THE LD. AR, L & T LTD , HAD SHOWN SUCH RECEIPTS FROM THE ASSESSEE AS A PART OF ITS INCOME. DISCOUNT IN THE VALUE OF SHARES UNDER AN ES OP SCHEME WAS HELD TO BE ALLOWABLE BY THE SPECIAL BENC H IN THE CASE OF BIOCON LTD, (SUPRA), OVER THE PERIOD OF VESTING. WHEN THE EMPLOYEES WERE BEING USED BY THE ASSESSEE FOR ITS OWN BUSINESS, THE BENEFIT OF THE E SOP WHICH WOULD HAVE OTHERWISE BEEN THAT OF THE HOLDING COMPANY WAS ACTUALLY ENJOYED BY THE ASSESSEE. ACCORDING TO HIM, NATURE OF SUCH EXPENDITURE WAS NO T DOUBTED, BUT A DISALLOWANCE WAS MADE ON AN ERRONEOU S REASONING THAT IT WAS A CAPITAL OUTGO. 32. PER CONTRA, LD. DR STRONGLY SUPPORTING THE ORDE R OF CIT (A) SUBMITTED THAT ON MERE DEBIT NOTES A CLAIM COULD NOT BE ALLOWED. AS PER THE LD. DR THE DEBIT NOTES PRODUCED WERE DUMB WITHOUT ANY DETAILS.CLAIM FOR REVENUE EXPENDITURE SHOULD BE BASED ON TANGIBLE EVIDENCE WHICH SUPPORT THE BUSINESS NEED OF SUCH EXPENDITURE. ASSESSEE HAD NOT DEMONSTRATED THIS. DISALLOWANCE THEREFORE WAS RIGHTLY MADE ACCORDING T O THE LD. DR. 33. WE HAVE PERUSED THE MATERIALS ON RECORD AND HEA RD THE RIVAL CONTENTIONS. DETAILS OF THE DEBIT NOTES A ND THE FINDINGS OF THE AO IN THIS REGARD, AS REPRODUCED BY THE CIT (A), AT PARA 6.1 OF HIS ORDER FOR A. Y. 2009-10 , IS ONCE AGAIN REPRODUCED BY US FOR BREVITY : 6.1 THE AO NOTED THAT THE APPELLANT HAD DEBITED A SUM OF RS.5,27,68,682/- UNDER THE HEAD PROFESSIONAL CH ARGES BEING PAYMENTS MADE TO EMPLOYEES SENT ON DEPUTATION TO THE HOLDING COMPANY I.E. M/S. LARSEN & TOUBRO LT D. FROM THE REPLY OF THE APPELLANT DATED 02/11/2011, T HE AO NOTED THAT IT WAS A PAYMENT MADE TO THE HOLDING COMPANY VIZ. M/S. LARSEN & TOUBRO LTD. FOR PURPOSES OF ALLOTMENT OF SHARES UNDER EMPLOYEES STOCK OPTION SCHEME (ESOP). ACCORDING TO THE AO, NO CONTRACT EVIDENCING PAYMENTS ON ACCOUNT OF CONTRACTUAL OBLIG ATION WAS PRODUCED ; NO PROOF OF ACTUAL PAYMENT WAS FURNI SHED ; THE CLAIM THAT THE PAYMENT IS NOT OPTIONAL BUT AN ACTUAL EXPENDITURE IS NOT SUPPORTED WITH CALCULATIONS ; AN D THE INTENTION OF ALLOTTING EQUITY SHARES UNDER THE ESOP WAS CLEAR FROM THE NATURE OF PAYMENT MADE. THE AO, THEREFORE, TREATED THE SAME AS A CAPITAL EXPENDITUR E AND 8 ITA NO.1592/MDS/2014 BROUGHT THE CORRESPONDING AMOUNT OF RS.5,27,68,682/ - TO TAX AS AN INADMISSIBLE EXPENDITURE. 34. IT IS AN UNDISPUTED FACT THAT ASSESSEE WAS NOT ABLE TO PRODUCE BEFORE THE LOWER AUTHORITIES ANY CONTRACT I T HAD ENTERED WITH L & T LTD, ITS HOLDING COMPANY FOR REIMBURSEMENT OF EMPLOYEE COST. HOWEVER, IT IS ALSO NOT DISPUTED THAT THE EMPLOYEES WERE DEPUTED TO THE ASSESSEE AND THEY WORKED FOR THE ASSESSEE. REIMBURSEMENT FOR THIS TO M/S. L & T LTD , CLAIMED BY THE ASSESSEE WERE ALL ALLOWED BY THE REVENUE, BUT FOR T HE ESOP. NO DOUBT NECESSITY OF INCURRING AN EXPENDITUR E CANNOT BE QUESTIONED BY THE REVENUE, FOR IT IS IN T HE DOMAIN OF A BUSINESSMAN. HOWEVER, PRODUCTION OF EVIDENCE TO SHOW THAT THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINESS IS THE ONUS OF THE ASSESSEE . WHAT THE ASSESSEE HAD PRODUCED BEFORE THE LOWER AUTHORITIES IS ONLY CERTAIN DEBIT NOTES WITH NARRAT IONS WHICH DID NOT GIVE ANY DETAILS. NO DOUBT BEFORE THE CIT (A), IT HAD PRODUCED A LETTER DT 13.12.2012 FROM L & T LTD, WHICH STATED AS UNDER : TO WHOMSOEVER IT MAY CONCERN THIS IS TO CONFIRM THAT LARSEN & TOUBRO LIMITED HAS DEPUTED ITS EMPLOYEES TO L & T VALDEL ENGINEERING LIMITED ON COST- RECOVERY BASIS. THE AMORTIZED ESOP COSTS OF SUCH EMPLOYEES ARE BEING RECOVERED ON A QUARTERLY BASIS. FOR THE FINANCIAL YEAR 2007-08 AN AMOUNT OF RS.29,397,155/- HAS BEEN RECOVERED AND THE SAME HAS BEEN TREATED AS OTHER INCOME IN THE BOOKS OF LARSEN & TOUBRO LIMITED AND HAS ALSO BEEN OFFERED TO TAX. FOR LARSEN & TOUBRO LIMITED SD/- ARUN KIRTANIA DEPUTY GE NERAL MANAGER ABSENCE OF A WRITTEN CONTRACT BY ITSELF MIGHT NOT B E FATAL TO THE CLAIM OF AN EXPENDITURE ESPECIALLY WHEN SUCH EXPENDITURE IS BASED ON AN UNDERSTANDING BETWEEN A HOLDING COMPANY AND A SUBSIDIARY COMPANY,BUT NEVERTHELESS, IT IS THE DUTY OF THE ASSESSEE TO SHO W THAT WHAT HAS BEEN REIMBURSED AS AMORTISED ESOP COST BY ITS HOLDING COMPANY WERE ACTUALLY CHARGED BY SUCH HOLDI NG COMPANY IN ITS P & L ACCOUNT AS EXPENDITURE AND THE 9 ITA NO.1592/MDS/2014 REIMBURSEMENTS MADE BY THE ASSESSEE WERE SHOWN AS A PART OF ITS INCOME. ASSESSEE HAS TO DEMONSTRATE THA T THE SERVICES RECEIVED BY IT FROM SUCH EMPLOYEES WERE COMMENSURATE WITH THE PAYMENT. WE ARE, THEREFORE, O F THE OPINION THAT THE CLAIM OF THE ASSESSEE REQUIRES A F RESH LOOK BY THE AO. WE , THEREFORE, SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES ON THIS ISSUE AND REMIT IT BACK TO THE AO FOR FRESH CONSIDERATION. ASSESSEE WILL BE FREE TO PRODU CE FRESH EVIDENCE TO JUSTIFY THE INCURRENCE OF SUCH EXPENDIT URE AND ALSO SHOW THAT THE EXPENDITURE WAS NOT CLAIMED TWIC E, I.E., BOTH BY THE ASSESSEE AS WELL AS BY ITS HOLDING COMP ANY. GROUNDS 5 & 6 FOR A. Y. 2008-09, GROUNDS 6 & 7 OF T HE ASSESSEE FOR A. YS. 2009-10 AND 2010-11 ARE ALLOWED FOR STATISTICAL PURPOSES. 7. THE CO-ORDINATE BENCH SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION WITH CERTAIN OBSERVATIONS MENTIONED THEREIN. AS THE FACTS AND CIRCUMSTANCES ARE ALMOST IDENTICAL, WE ARE INCLINED TO FOLLOW THE SAID DECISION AND GIVE SIMILAR DIRECTION TO THE ASSESSING OFFICER TO LOOK INTO THE ISSUE AFRESH IN THE LIGHT OF THE OBSERVATIONS OF THE CO-ORDINATE BENCH IN THE CASE O F L & T VALDEL ENGINEERING P. LTD. AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW, AFTER PROVIDING ADEQUATE OPPOR TUNITY OF BEING HEARD TO THE ASSESSEE. 8. THE NEXT ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) GROSSLY ERRED IN DISALLOWING PORTION OF SALARY PAID TO DEPUTED EMPLO YEES AS CLAIMED BY THE ASSESSEE WITHOUT TAKING COGNIZANCE O F THE 10 ITA NO.1592/MDS/2014 EXPLANATION PROVIDED BY THE ASSESSEE AND THE CLARI FICATION PROVIDED BY L & T LTD. WHICH CLEARLY EXPLAINED THAT COST OF ALL THE EMPLOYEES WHICH WERE DEPUTED TO SERVE THE ASSE SSEE WERE EITHER BOOKED UNDER 8036 OR UNDER VOITH AN D THAT DEBIT NOTES RAISED BY THE ASSESSEE COMBINED THE EXP ENSES TOWARDS EMPLOYEES HAVING EITHER OF THE TWO CODES. 9. BRIEF FACTS ARE THAT THE ASSESSING OFFICER DISAL LOWED ` 1,10,31,518/- WHICH IS PART OF SALARY PAID TO PAREN T COMPANY ON ACCOUNT OF DEPUTED EMPLOYEES STATING THAT THIS EXPENDITURE WAS INFLATED THROUGH INVOICES. ON APPEA L, THE COMMISSIONER OF INCOME TAX (APPEALS) DIRECTED THE ASSESSING OFFICER TO ALLOW THE EXPENDITURE WITH REF ERENCE TO THE INVOICES WHEREIN IT IS MENTIONED THE COST CENTR E NAME AS VOITH PAPER TECHNOLOGY AND NOT AS 8036. 10. COUNSEL FOR THE ASSESSEE SUBMITS THAT DURING TH E YEAR UNDER CONSIDERATION, THE ASSESSEE INCURRED ` 3,12,39,355/- TOWARDS SALARY AND BONUS. OUT OF THIS AMOUNT ` 1,10,31,518/- WAS INCURRED TOWARDS DEPUTED EMPLOYEES AND REMAININ G AMOUNT OF ` 1,28,07,828/- WAS INCURRED TOWARDS ASSESSEES 11 ITA NO.1592/MDS/2014 OWN EMPLOYEES. THE ASSESSING OFFICER DISALLOWED ` 1,10,31,518/- BY ERRONEOUSLY ASSUMING THAT ` 1,28,07,828/- REPRESENTED TOTAL SALARY COST PAID TOWARDS BOTH DEP UTED AS WELL AS OWN EMPLOYEES OF THE ASSESSEE AND EXPENDI TURE TO THE EXTENT OF ` 1,10,31,518/- WAS INFLATED THROUGH INVOICES. THE COMMISSIONER OF INCOME TAX (APPEALS) IN HIS OR DER ACCEPTED THE FACT THAT AMOUNT PAID TO L&T OF ` 1,10,31,518/- AS SALARY OF DEPUTED EMPLOYEES IS OVER AND ABOVE ` 1,28,07,828/- WHICH WAS PAID TOWARDS SALARY OF OWN EMPLOYEES OF THE ASSESSEE AND THAT IT WAS NOT AN I NFLATED CLAIM OF EXPENDITURE. HOWEVER, HAVING SAID THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HELD THAT INVO ICES BEARING COST CENTRE 'VOITH' SHOULD ONLY BE ALLOWED AND BALANCE INVOICES BEARING COST CENTRE '8036' DID NOT PERTAIN TO ASSESSEES BUSINESS AND HENCE SHOULD BE DISALLOWED. WHILE DOING SO, THE COMMISSIONER OF INCOME TAX (APPEALS) DISREGARDED LETTER DATED 3 RD FEBRUARY 2014 SIGNED BY MR. UD PATIL, MANAGER ACCOUNTS OF L&T ISSUED ON THE LETTER HEAD OF L&T, COPY OF THE LETTER IS PLACED AT PAGE 73 OF PAPER BOOK. THIS LETTER CLEARLY STATED THAT COST CENTRE '8036' AND 'VOITH' REPRESENTED DEPUTATION COST ON EMPLOYEES DEPUTED TO THE 12 ITA NO.1592/MDS/2014 ASSESSEE . THE COMMISSIONER OF INCOME TAX (APPEALS) WHILE DISALLOWING INVOICES BEARING COST CENTRE '8036' STATED THAT 'TO STATE THAT MANAGER APPROVED THESE PAYMENTS, THE TOTAL OF WHICH COMES TO ` 1,10,31,518/- IS SOMETHING, WHICH IS DIFFICULT TO ACCEPT'. AGAINST THIS, THE ASSESSEE SUBMITTED A S UNDER: THE LETTER DATED 3 RD FEBRUARY 2014 WAS NOT AN APPROVAL, RATHER IT WAS JUST A CONFIRMATION THAT TH E INVOICES FOR DEPUTED EMPLOYEES ARE RAISED BY L&T AND COST CENTRE 8036 PERTAINS TO VOITH. L&T HAS NOT PAID, RATHER IT HAD RECEIVED AMOUNT OF RS 1,10,31,518 ON ACCOUNT OF SALARY OF DEPUTED EMPLOYEES TO THE ASSESSEE. IT IS FURTHER SUBMITTED BY THE COUNSEL FOR T HE ASS ESSEE THAT THE AFORESAID LETTER WAS ISSUED ON L&T'S LETTERHEAD , THEREFORE PRIMARY ONUS OF PROOF WAS DISCHARGED BY THE ASSESSE E AND THE COMMISSIONER OF INCOME TAX (APPEALS) COULD HAV E EITHER ASKED THE ASSESSING OFFICER TO FURNISH REMA ND REPORT POST GETTING INDEPENDENT CONFIRMATION FROM L&T OR C OULD HAVE ISSUED THE APPELLATE ORDER ASKING THE ASSESSI NG OFFICER TO VERIFY THIS FACT AND GIVE DEDUCTION OF THE INVOI CES PERTAINING TO COST CENTRE '8036'. THEREFORE COUNSEL SUBMITS THAT IN THE ABSENCE OF SUCH DIRECTION FOR VERIFICATION OF FACTS AND IN LIGHT OF THE FACT THAT THE ASSESSEE HAD DISCHARGED ITS P RIMARY 13 ITA NO.1592/MDS/2014 ONUS, THE DISALLOWANCE OF SALARY COST INVOICES PERT AINING TO COST CENTRE '8036' IS CLEARLY UNWARRANTED AND UNJUSTIFIED. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ALSO ALLE GED THAT THERE APPEARS TO BE DOUBLE CLAIM FOR MONTH OF MAY 2008 POSSIBLY AS THERE ARE 2 INVOICES RAISED BY L&T BOTH DATED 30 JUNE 2008 FOR ` 79,367 AND ` 1,58,734, COPY OF INVOICES ARE PLACED AT 33 & 34 OF THE PAPER BOOK. IN THIS REGARD, AS IS EVIDENT FROM THE NARRATION INVOICE FOR ` 79,367 PERTAINS TO MAY 2008 AND INVOICE FOR ` 158,734 PERTAINS TO JUNE 2008. ACCORDINGLY, ENTIRE AMOUNT OF ` 1,10,31,518/- ON ACCOUNT OF SALARY PAID SHOULD BE ALLOWED TO THE ASSESSEE IN COMPUTING TAXABLE INCOME. 11. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDERS OF LOWER AUTHORITIES. WHEN A QUERY WAS RAISE D BY THE BENCH AS TO WHETHER THE ISSUE CAN BE SENT BACK TO T HE ASSESSING OFFICER FOR VERIFICATION TO EXAMINE WHETH ER THE COST CENTRE VOITH AND ALSO 8036 ARE ONE AND THE SAM E AND IN WHICH CASE EXPENDITURE HAS TO BE ALLOWED, THE DEPAR TMENTAL REPRESENTATIVE HAS NO OBJECTION FOR VERIFICATION. 14 ITA NO.1592/MDS/2014 12. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES. ON HEARING BOTH THE PARTIES, WE FIND CONSIDERABLE F ORCE IN THE SUBMISSIONS OF THE ASSESSEE. IN FACT, THE COMMISSIO NER OF INCOME TAX (APPEALS) INITIALLY AGREED TO THE EXTENT WHERE THE PAYMENTS MADE TO THE DEPUTED EMPLOYEES WHERE THE CO ST CENTRE IS SHOWN AS VOITH IS TO BE ALLOWED. THE Q UESTION NOW IS WHETHER COST CENTRE VOITH AND 8036 ARE ONE AND THE SAME OR NOT. FOR THIS LIMITED PURPOSE OF EXAMINING AS TO WHETHER VOITH AND 8036 ARE ONE AND THE SAME, WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO FIND OUT WHETHER THESE TWO COST CENTRES ARE ONE AND THE SAME AND IF THEY ARE ONE AND THE SAME, NO DISALLOWANCE TOWARDS REIMBURSEMENT BY THE COMPANY TO THE PARENT COMPANY ON ACCOUNT OF DEPUTED EMPLOYEES SHALL BE MADE. THE ASSESSING OFFICER MAY CALL FOR DETAILS AND DECIDE T HE ISSUE ACCORDINGLY AFTER PROVIDING ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 13. THE LAST ISSUE IN THE APPEAL OF THE ASSESSEE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFI RMING THE ACTION OF THE ASSESSING OFFICER IN APPLYING RUL E 8D WHILE 15 ITA NO.1592/MDS/2014 COMPUTING DISALLOWANCE UNDER SECTION 14A WHEN THE ASSESSEE HAD NOT INCURRED ANY EXPENSES IN RELATION TO EARNING OF SUCH DIVIDEND. 14. THE ASSESSING OFFICER WHILE COMPLETING THE ASSE SSMENT DISALLOWED ` 5,71,602/- UNDER SECTION 14A READ WITH RULE 8D(II) AND 8D(III) WITH THE OBSERVATION THAT ASSESS EE CREDITED A SUM OF ` 48,60,033/- AS EXEMPT INCOME AS DIVIDEND ON MUTUAL FUNDS AND NO EXPENDITURE HAS BEEN DECLARED B Y THE ASSESSEE, THEREFORE IT IS LOGICAL TO ADOPT THE PRIN CIPLE LAID DOWN UNDER RULE 8D FOR THE PURPOSE OF ARRIVING AT EXPENDITURE ATTRIBUTABLE TO SUCH EXEMPT INCOME. WIT H THESE OBSERVATIONS THE ASSESSING OFFICER DISALLOWED ` 5,71,602/- AS EXPENDITURE ATTRIBUTABLE FOR EARNING SUCH EXEMPT INCOME. THE COMMISSIONER OF INCOME TAX (APPEALS) SUSTAINED THE DISALLOWANCE AGAINST WHICH THE ASSESSEE IS IN APPEA L. 15. COUNSEL FOR THE ASSESSEE SUBMITS THAT ASSESSING OFFICER IS NOT AT ALL JUSTIFIED IN INVOKING THE PRO VISIONS OF SECTION 14A WITHOUT RECORDING ANY SATISFACTION AS T O THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. HE SUBMIT S THAT THE 16 ITA NO.1592/MDS/2014 ONUS IS ON THE ASSESSING OFFICER TO ESTABLISH THAT ASSESSEE INCURRED EXPENSES FOR EARNING DIVIDEND INCOME. IN T HE ABSENCE OF ANY SUCH FINDING BY THE ASSESSING OFFICE R, THE DISALLOWANCE IS NOT WARRANTED. FOR THIS PROPOSITION , HE RELIES ON THE DECISION OF DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENTS LTD. VS. CIT (347 ITR 272) AND THE DECI SION OF PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD. (323 ITR 518). THE COUNSEL FURTHER SUBM ITS THAT INVESTMENTS WERE ALL MADE IN THE EARLIER YEARS OUT OF SURPLUS FUNDS THEREFORE NO DISALLOWANCE IS REQUIRED TO BE M ADE UNDER SECTION 14A OF THE ACT. 16. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUPPORTS THE ORDERS OF LOWER AUTHORITIES., 17. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES AND THE DECISIONS RELIED ON. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT NOTICED THAT ASSESSEE HA S EARNED DIVIDEND INCOME AND NO DISALLOWANCE WAS MADE BY THE ASSESSEE ATTRIBUTING EXPENDITURE FOR EARNING SU CH DIVIDEND INCOME AND HE MECHANICALLY APPLIED THE PRO VISIONS 17 ITA NO.1592/MDS/2014 OF SECTION 14A READ WITH RULE 8D. NO SATISFACTION H AS BEEN RECORDED BY THE ASSESSING OFFICER AS TO CORRECTNESS OF THE CLAIM OF THE ASSESSEE AND NO REASONS HAVE BEEN GIVE N FOR INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT B Y THE ASSESSING OFFICER. 18. THE HONBLE SUPREME COURT IN THE CASE OF CIT VS . WALFORT SHARE & STOCK BROKERS P. LTD. (326 ITR 1) H ELD AS UNDER:- ' .....FOR ATTRACTING SECTION 14A THERE HAS TO BE A PROXIMATE CAUSE FOR DISALLOWANCE, WHICH IS ITS RELATIONSHIP W ITH THE TAX EXEMPT INCOME. PAY-BACK OR RETURN OF INVESTMENT IS NOT SUCH PROXIMATE CAUSE, HENCE, SECTION 14A IS NOT APPLICABLE IN THE PRESENT CASE. THUS, IN THE ABSENC E OF SUCH PROXIMATE CAUSE FOR DISALLOWANCE, SECTION 14A CANNOT BE INVOKED. 19. THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD.(SUPRA) HELD AS UNDER:- 'THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHIC H MUST BE DISALLOWED UNDER SECTION 14A AND THE IMPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SECTION 14A CANNOT BE ACCEPTED. DISALLOWANCE UNDER SECTION 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A CANNOT STAND.' 18 ITA NO.1592/MDS/2014 20. THE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT (SUPRA) HELD AS UNDER:- WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGA RD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME.' SIMI LARLY, THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS DCIT (SUPRA) AT PARA 25, PAGE 63 OF PAPER BOOK - II HELD THAT 'HENCE, SUB-SECTION (2) DOES NOT IPSO FACTO ENABLE THE ASSESSING OFFICER TO APPL Y THE METHOD PRESCRIBED BY THE RULES STRAIGHTAWAY WITHOUT CONSIDERING WHETHER THE CLAIM MADE BY THE ASSESSEE IN RESPECT OF THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IS COR RECT . ... THE SATISFACTION OF THE ASSESSING OFFICER MUST BE A RRIVED AT ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE ASSES SING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSE SSEE, THAT THE LEGISLATURE DIRECTS HIM TO FOLLOW THE METHOD TH AT MAY BE PRESCRIBED' 21. AS HELD BY THE HONBLE SUPREME COURT IN THE CAS E OF M/S. WALFORT SHARE & STOCK BROKERS P.LTD. (SUPRA) F OR ATTRACTING SECTION 14A THERE SHOULD BE A PROXIMATE CAUSE FOR DISALLOWANCE WITH RELATION TO ITS TAX EXEMPT INCOME . THE PUNJAB & HARYANA HIGH COURT IN THE CASE OF HERO CYC LES LTD. (SUPRA) HELD THAT DISALLOWANCE UNDER SECTION 14A RE QUIRES FINDING OF INCURRING OF EXPENDITURE WHERE IT IS FOU ND THAT FOR EARNING EXEMPTED INCOME NO EXPENDITURE HAS BEEN INC URRED DISALLOWANCE UNDER SECTION 14A CANNOT BE MADE. THE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. (S UPRA) HELD THAT WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGARD 19 ITA NO.1592/MDS/2014 TO NO EXPENDITURE WAS INCURRED IN RELATION TO EXEMP T INCOME, THE ASSESSING OFFICER SHOULD INDICATE COGENT REASON S FOR THE SAME. THE SATISFACTION OF THE ASSESSING OFFICER SHO ULD BE ARRIVED ON AN OBJECTIVE BASIS. IT IS ONLY WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSE SSEE, HE CAN INVOKE THE PROVISIONS OF SECTION 14A OF THE ACT. IN THIS CASE, THE ASSESSING OFFICER HAS MECHANICALLY APPLIED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D WITHO UT RECORDING ANY SATISFACTION, WHICH IS NOT PERMISSIBL E IN VIEW OF THE ABOVE DECISIONS. RESPECTFULLY FOLLOWING THE DEC ISIONS CITED ABOVE, WE DIRECT THE ASSESSING OFFICER TO DEL ETE THE ADDITION MADE UNDER SECTION 14A OF THE ACT. 22. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 6 TH NOVEMBER, 2015. SD/- SD/- ( # ) ( & (# ) ( CHANDRA POOJARI ) ( CHALLA NAG ENDRA PRASAD ) * / ACCOUNTANT MEMBER ( * / JUDICIAL MEMBER ( /CHENNAI, , /DATED NOVEMBER, 2015 SOMU ./ 0/ /COPY TO: 1. APPELLANT 2.RESPONDENT 3. 1 () /CIT(A) 4. 1 /CIT 5. / 5 /DR 6. /GF .