McFills Enterprises Pvt. Ltd., Ahmedabad V. The DCIT, Circle-2(1)(2), Ahmedabad

ITA 1649/AHD/2019

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McFills Enterprises Pvt. Ltd. appealed against the order of the Commissioner of Income Tax (Appeals)-2, Ahmedabad, which confirmed the disallowance of certain vehicle expenses and additions under section 14A of the Income Tax Act. The Tribunal examined the disallowance of 1/5th of vehicle expenses, which was initially disallowed by the Assessing Officer due to the vehicle being registered in the name of the director and the lack of a logbook. The Tribunal found that the case was similar to the precedent set by the Gujarat High Court in Sayaji Iron & Engineering Co. vs. CIT, where it was held that such disallowances were not permissible as the directors were entitled to use the vehicles for personal purposes as per their terms of appointment. Regarding the disallowance under section 14A, the Tribunal noted that the assessee had sufficient interest-free funds to cover the investments yielding exempt income, thus no disallowance of interest expenditure was warranted. However, the disallowance of administrative expenses was upheld but limited to the amount of the exempted income.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131440 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 12-07-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 03-11-2019
• Other Referred Cases: Sayaji Iron & Engineering Company vs. CIT, Corrtech Energy Pvt. Ltd. vs. CIT, CIT vs. Torrent Power Ltd
• Laws Referred To: Income Tax Act, Companies Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Earning of tax free income; Rule 8D
• Section: 14A; 37(1)

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “C” BENCH Before: Shri Waseem Ahmed, Accountant Member And Ms. Madumita Roy, Judicial Member Mcfills Enterprises Pvt. Ltd . 501, “Shikhar”, 5 t h Floor, Near Navrangp ura Railway Crossin g, Navrangp ura, Ah medabad PAN: AADCM595 4B (Appellant) Vs The DCIT, Circle-2(1)(2 ), Ah med abad (Resp ondent) Asses see b y : Shri Tushar Hema ni, Sr. Advoca te & Shri Parimalsinh B. Pa rmar, A. R. Revenue by : M s. Chitra So neji, Sr. D. R. Date of hearing : 13-07 -2 023 Date of pronouncement : 11-10 -2 023 आदेश /ORDER PER : WASEEM AHMED, ACCOUNTANT MEMBER:- This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax, CIT(A)-2, Ahmedabad, in the proceeding u/s ITA No. 1649/Ahd/2019 Assessment Year 2016-17 I.T.A No. 1649/Ahd/2019 A.Y. 2016-17 Page No. Mcfills Enterprises Pvt. Ltd. vs. DCIT 2 250 of the Act vide dated 27/08/2019 passed for the assessment year 2016- 17. 2. The assessee has raised following grounds of appeal:- “Your appellant being dissatisfied with the order passed by the Commissioner of Income Tax (Appeals)-2, Ahmedabad presents this appeal against the same on the following amongst other grounds. 1. The order passed by Commissioner of Income Tax (Appeals) is bad in law and on facts and hence, it is submitted that the same be cancelled and be suitably modified. a) The learned Commissioner of Income Tax (Appeals), has erred in law and on facts in confirming disallowance made by the AO for a sum of Rs. 5,60,888/ being 1/5 of the vehicle expenses by treating the same as personal expenses by wrongly considering that car has been used for personal purposes also in utter disregard to the fact that the car was wholly and exclusively used for the purpose of the business of assessee company only and hence the same is allowable u/s. 37(1) of the I.T. Act. b) The learned Commissioner of Income Tax (Appeals), has erred in law and on facts in confirming the impugned disallowance made by the AO on ad-hoc basis at rate of 1/5th expenses ignoring the fact that the appellant is an incorporated company and there can be no personal expenditure in the case of an incorporated company as held by the Hon'ble High Court in the case of Sayaji Iron & Engineering Company 253 ITR 749. c) It is therefore prayed that the impugned disallowance out of motor car made on ad-hoc basis may please be deleted. 3. a) The learned Commissioner of Income Tax (Appeals), has erred in law and on facts in confirming addition/disallowance of a sum of Rs.10,85,354/- i.e. to the extent of exempted income out of the total addition/disallowance of Rs.14,85,373/- made by the AO u/s.14A of the I.T. Act read with Rule 8D of the 1.T. Rules, 1962 with respect to the exempted income being share of profit from the Partnership Firm. (b) The learned Commissioner of Income Tax (Appeals), has erred in law and on facts in confirming the impugned addition/disallowance to the extent of exempted Income being share of profit from Partnership Firm in utter disregard to the fact that the company had earned income by way of interest on the capital invested in the partnership firm which is chargeable to tax and therefore the provisions of I.T.A No. 1649/Ahd/2019 A.Y. 2016-17 Page No. Mcfills Enterprises Pvt. Ltd. vs. DCIT 3 Section 14A does not apply to the Investment in the partnership firm, which investment was made out of the appellant's own funds. (c)The learned Commissioner of Income Tax (Appeals), has erred in law and on facts of the case in confirming the Impugned addition/disallowance in utter disregard to the fact that the appellant company had not incurred any expenditure directly or indirectly for earning the share of profit from the partnership firm and such income had been earned by the company solely by virtue of it being a partner in the Partnership Firm for which the company had not incurred any administrative expenditure. (d)It is therefore prayed that the impugned disallowance made by the AO may please be deleted. 4. The appellant craves leave to add and or alter any ground at the time of hearing of appeal.” 3. The first issue raised by the assessee is that the learned CIT(A)erred in confirming the disallowance of 1/5 th of vehicle expenses amounting to Rs. 5,68,888/- only. 4. The brief facts are that the assessee, a private limited company, is engaged in the business of Fertilizers, Chemicals, Paints. The assessee during the year claimed vehicle expenses for Rs. 28,44,439/-. However, the AO found that one vehicle, being Porsche Car has been purchased and registered in the name of its director. Therefore, the expenditure attributable to the car registered in the name of director cannot be allowed. However, the AO, in absence logbook and bifurcation of expenses incurred in relation to this vehicle, disallowed 1/5 th of the total vehicle expenses amounting to Rs. 5,68,888/-on ad-hoc basis. I.T.A No. 1649/Ahd/2019 A.Y. 2016-17 Page No. Mcfills Enterprises Pvt. Ltd. vs. DCIT 4 5. Aggrieved assessee preferred an appeal before the learned CIT (A) and confirmed the disallowance made by the AO by observing as under:- “As regard to disallowance of 1/5th of motor car expenses of Rs. 5,68,888/- being 1/5 of vehicle expenses of Rs.28,44,439/- the appellant has not been able to prove by log book etc. that car has not been used for personal use and used exclusively for the business purpose. As the element of personal use by the director cannot be ruled out, therefore, disallowance of Rs.5.68,888/- is confirmed.” 6. Being aggrieved by the order of the learned CIT(A), the assessee is appeal before us. 7. The learned AR before us submitted that the issue is covered in favor of the assessee by the judgment of Hon’ble Gujarat High Court in the case of Sayaji Iron & Engg. Co. vs. CIT reported in 253 ITR 749. 8. On the other hand, the learned DR vehemently supported the order of the authorities below. 9. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, there were certain expenditures incurred towards the running & maintenance of motor vehicle/car held by the assessee company which was registered in the name of the director of the assessee company and same were claimed as business expenditure. However, the AO and the learned CIT(A) held that the possibility of the personal use of the car by the director cannot be ruled out. Accordingly, the AO and learned CIT(A) believed that the entire expenses I.T.A No. 1649/Ahd/2019 A.Y. 2016-17 Page No. Mcfills Enterprises Pvt. Ltd. vs. DCIT 5 incurred on running & maintenance of vehicle/car cannot be allowed as business expenses. Hence, they made disallowances of 1/5 th of such expenses. At the outset, we find that the facts of the present case are identical to the facts in the case of Sayaji Iron & Engg. Co. vs. CIT reported in 253 ITR 749 (Guj). In the case of Sayaji Iron &Engg. Co. also, the AO has held that the car was used by the director and therefore personal use cannot be ruled out. Accordingly, the AO made the disallowance of 1/6 th of the running and maintenance expense of the car. The view held by the AO was further confirmed by the learned CIT(A) and the Tribunal. However, on further appeal by the assessee, the Hon’ble Gujarat High Court reversed the order of the Tribunal in favour of the assessee by holding as under:- As the directors of the assessee-company were entitled to use the vehicles of the assessee-company for their personal use as per the terms and conditions on which they were appointed, it was not proper on the part of the Assessing Officer to disallow one-sixth of the expenditure incurred by the assessee on maintenance of its vehicles. Section 309 of the Companies Act, 1956 provides the modality for determining the remuneration payable to directors, including any managing or full-time director. Such remuneration is payable either as stated in the articles of association of the company or in accordance with the resolution which may be passed by the company in the general meeting. This payment of remuneration is subjected to overall limits of managerial remuneration laid down in section 198 of the Companies Act. After going through section 198 of the Companies Act, it was clear that the expenditure incurred by the assessee-company on maintenance of vehicles which were available to the directors for their personal use would fall within the meaning of 'remuneration' as defined in the Explanation to section 198 of the Companies Act and once such remuneration was fixed as provided in section 309 of the Companies Act it was not possible to state that the assessee- company incurred an expenditure for personal use of the directors. The same was as per the terms and conditions of service and insofar as the assessee-company was concerned, it was a business expenditure and not disallowable as such. There was one more aspect of the matter which required to be considered. The assessee, which was a private limited company, was a distinct assessable entity as per the definition of 'person' under section 2(31) of the Act. Therefore, it could not be stated that when the vehicles were used by the directors 'even if they were personally used by the directors', the vehicles were personally used by the company, because a limited company by its very nature cannot have any 'personal I.T.A No. 1649/Ahd/2019 A.Y. 2016-17 Page No. Mcfills Enterprises Pvt. Ltd. vs. DCIT 6 use'. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view was supported by the provision of section 40(c) and section 40A(5) of the Act. Once the expenditure in question was in terms as provided in sections 309 and 198 of the Companies Act, there could not be any 'non-business' purpose insofar as the assessee-company was concerned. 9.1 Thus, considering the facts stated above, we find that the case of the present assessee company is squarely covered by the judgment of the Hon’ble Jurisdictional High court in the above-mentioned case. Therefore, respectfully following the judgment of Hon’ble Jurisdictional High Court, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition made by him. Hence, the ground of appeal of the assessee is hereby allowed. 10. The last issue raised by the assessee is that the learned CIT(A) erred in confirming the disallowance made under section 14A of the Act for Rs. 10,85,354/- only. 11. The necessary facts are that the assessee has made investments in a partnership firm, namely M/s Iris Infrastructure, from where it received income amounting to Rs. 10,85,354/- and claimed the same as exempted income under section 10(2A) of the Act. However no corresponding disallowance of the expenses specified under section 14A of the Act was made by the assessee. Therefore, the AO by invoking the provision of section 14A(2) r.w.r. 8D of Income Tax Rule made disallowances of Rs. 4,71,458/- on account of interest expenses and Rs. 10,13,915 on account of administrative expenses. I.T.A No. 1649/Ahd/2019 A.Y. 2016-17 Page No. Mcfills Enterprises Pvt. Ltd. vs. DCIT 7 12. The aggrieved assessee preferred an appeal before the learned CIT(A) who restricted the disallowance to the extent of exempted income of Rs. 10,85,354/- claimed by the assessee. The relevant observation of the learned CIT(A) is extracted as under: “ I do not agree with the submission of the appellant, as Assessing Officer as per Rule 8D(2) (ii) has disallowed the interest expenditure of Rs.4,71,458/- and administrative expenditure as per Rule 8D(2) (ii) of Rs.10,13,915/-. As the appellant has earned exempt income, the expenditure relating to earn the same has to be allocated and disallowed. In the preceding year also, I have restricted the disallowance to the extent of exempt income in view of the decision of Gujarat High Court in the case of Corrtech Energy Pvt. Ltd. (supra). Following the above decision, the disallowance u/s. 14A is restricted to the exempt income of Rs.10,85,354/-.” 12.1 Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us. 13. The learned AR before us submitted that there cannot be any disallowance of the interest expense because interest free own fund of the assessee exceeds the amount of investment. 14. On the other hand, the learned DR vehemently supported the order of the authorities below. 15. We have heard the rival contentions of both the parties and perused the materials available on record. It is the settled position of law by virtue of the findings of several competent courts that if there are mixed funds, then the power of presumption would be that the investment has been made from interest free funds. In holding so, we draw support and guidance from the I.T.A No. 1649/Ahd/2019 A.Y. 2016-17 Page No. Mcfills Enterprises Pvt. Ltd. vs. DCIT 8 judgment of Hon’ble jurisdictional High court in the case of CIT vs. Torrent Power Ltd reported in 363 ITR 474 wherein it was held as under: It was noted from records that the assessee was having share holding funds to the extent of 2607.18 crores and the investment made by it was to the extent of`Rs.195.10 crores. In other words, the assessee had sufficient funds for making the investments and it had not used the borrowed funds for such purpose. This aspect of huge surplus funds is not disputed by the revenue which earned it the interest on bonds and dividend income. [Para 7] 15.1 In the case on hand, the present assessee before the learned CIT(A) has contended that that it was having own fund being share capital and reserve & surplus of Rs. 54,15,95,087/- against the average investment of Rs. 20,27,82,965/- only, which is more than the amount of investment. Thus, in the light of the above discussion, it should be presumed that the investment yielding exempted income was made from interest free own fund of the assessee only. Hence, in our considered view, no amount of interest expenditure under section 14A r.w. rule 8D of Income Tax Rule can be disallowed in the given facts of the case. 16. Coming to the issue of disallowance of administrative expenses, in our considered opinion, the contention of the assessee cannot be accepted that no expenditure in relation to the investment was incurred. Therefore, the disallowance of administrative expenses as per rule 8D of the Income Tax Rule needs to be made but such disallowance cannot exceed the amount of exempted income. In other words, the amount required to be disallowed must be lower than the amount calculated in accordance with rule 8D of income tax rule or the amount of exempted income. In the case of the present assessee, the amount of exempted income is Rs. 10,85,354/- whereas I.T.A No. 1649/Ahd/2019 A.Y. 2016-17 Page No. Mcfills Enterprises Pvt. Ltd. vs. DCIT 9 the amount of disallowable administrative expenses worked out under rule 8D of income tax rule is of Rs. 10,13,915/- only. Therefore, we direct the AO to restrict the disallowance of administrative expenses as per rule 8D of income Tax Rules to the extent of Rs. 10,13,915/- only. Hence, the ground appeal of the assessee is partly allowed. 17. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open court on 11-10-2023 Sd/- Sd/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 11/10/2023 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद