DCIT,CIR-3(3)(2), MUMBAI V. TECHNO ELECTRONICS LTD., MUMBAI

ITA 2338/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8094 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 05-04-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 29-04-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITTAL
• Assessee Lawyers: BHUPENDRA KHARKANIS
• Keywords: Earning of tax free income
• Section: 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C , MUMBAI BEFORE SHRI SAKTIJIT DEY , J M & SHRI G MANJUNATHA , A M I TA NO. 2338/MUM/2016 A SSESSMENT Y EAR : 20 11 - 1 2 DCIT CIR 3(3)(2) MUMBAI VS. TECHNO ELECTRONICS LTD., 17 TH FLOOR, C - WING, MITTAL COURT, NARIMAN POINT, MUMBAI 400 021. PAN AACCT6860A ( APPELLANT) RESPONDENT) APPELLANT BY : SHRI RAJAT MITTAL RE SPONDENT BY : SHRI BHUPENDRA KHARKANIS DATE OF HEARING : 08.11.2017 DATE OF PRONOUNCEMENT : 18 .12.2017 O R D E R PER SAKTIJIT DEY , JUDICIAL MEMBER THIS IS AN AP P E AL BY THE DEPARTMENT AGAINST ORDER DATED 19.01.2016 OF LEARNED CIT(A) - 8, MUMBAI FOR A.Y. 2011 - 12. 2. IN G ROUND NO.1, DEPARTMENT HAS CHALLENGED DELETION OF ADDITION MADE OF ` 6,03,255/ - ON ACCOUNT OF INTEREST PAID ON DELAYED P AYMENT OF TDS/TCS. 3. BRIEFLY, THE FACTS ARE THE ASSESSEE A COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF CONSUMER ELECTRONICS AND HOME APPLIANCES. FOR THE ASSESSMENT YEAR UNDER DISPUTE THE ASSESSEE FILED ITS RETURN OF INCOME ON 29. 09.2011 DECLARING LOSS OF ` 9,23,56,352/ - UNDER THE NORMAL PROVISIONS OF THE ACT. HOWEVER, THE ASSESSEE DECLARED BOOK PROFIT OF ITA NO. 2338/MUM/2016 TECHNO ELECTRONICS LTD 2 ` 8,27,48,465/ - U/S.115JB OF THE ACT. DURING THE ASSESSMENT PROCEEDINGS, THE AO NOTICING THAT THE ASSESSEE HAD DEBITED AN AMOU NT OF ` 6,03,255/ - TOWARDS INTEREST ON TDS AND TCS WAS OF THE VIEW SUCH PAYMENT BEING OF PENAL NATURE IS NOT ALLOWABLE AS PER SECTION 40(A)(II). HE FURTHER HELD THAT AS PER THE SAID PROVISION SUCH EXPENDITURE IS NOT FOR THE PURPOSE OF BUSINESS ALLEGING TH AT THE ASSESSEE DID NOT JUSTIFY THE DEDUCTION CLAIMED BY FURNISHING ANY EXPLANATION, HE DISALLOWED THE AMOUNT OF ` 6,03,255/ - ASSESSEE CHALLENGED THE DISALLOWANCE BEFORE THE CIT(A). 4. BEFORE THE FIRST APPELLATE AUTHORITY, IT WAS SUBMITTED THAT THE INTE REST ON DELAYED PAYMENT OF TDS AND TCS BEING COMPENSATORY IN NATURE CANNOT BE CONSIDERED AS PENAL IN NATURE TO DISALLOW THE SAME. FURTHER IT WAS SUBMITTED THE INTEREST PAID IS ALSO NOT COVERED U/S. 40(A)(II) AS IT IS NOT THE TAX LIABILITY OF THE ASSESSEE ON ITS PROFITS AND GAINS OF THE BUSINESS. IN SUPPORT OF SUCH CONTENTIONS, ASSESSEE RELIED UPON A NUMBER OF DECISIONS. LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN THE LIGHT OF THE DECISIONS RELIED UPON DELETED THE ADDITION MADE BY THE AO. 5. WHILE THE LEARNED DR RELIED UPON THE OBSERVATIONS OF THE AO, THE LEARNED AR STRONGLY SUPPORTED THE FINDING OF THE FIRST APPELLATE AUTHORITY. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. AS FAR AS THE NATURE OF PAYMENT IS CONCERNED, THERE CANNOT BE ANY DOUBT THAT THE INTEREST ON DELAYED PAYMENT OF TDS/TCS IS NOT PENAL IN ITA NO. 2338/MUM/2016 TECHNO ELECTRONICS LTD 3 CHARACTER BUT IT IS COMPENSATORY IN NATURE. T HIS VIEW HAS BEEN EXPRESSED BY HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. ORIENTAL INSURANCE CO. LTD. 2009 183 TAXMAN 186. FURTHER IN OUR CONSIDERED VIEW THE INTEREST ON DELAYED PAYMENT OF TDS/TCS CANNOT BE CONSIDERED TO BE A PAYMENT TOWARDS ANY RATE OR TAX LEVIED ON THE PROFIT OR GAINS OF ANY BUSINESS OR PROFESSION AS PROVIDED U/S. 40 (A) (II) OF THE ACT. THAT BEING THE CASE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE FIRST APPELLATE AUTHORITY IN DELETING THE ADDITION. 7. IN G ROUND NO.2 DE PARTMENT HAS CHALLENGED DELETION OF ADDITION MADE OF ` 54,93,131/ - ON ACCOUNT OF DISALLOWANCE OF PROVISION FOR WARRANTY EXPENSES. BRIEFLY THE FACTS ARE DURING THE ASSESSMENT PROCEEDINGS, ON EXAMINING THE AUDITED ACCOUNTS, CASH FLOW STATEMENT AND AUDITORS REPORT, THE AO FOUND THAT THE ASSESSEE HAS MADE PROVISIONS FOR CONTINGENT LIABILITY AMOUNTING TO ` 54,93,131/ - TOWARDS PROVISION FOR WARRANTY AND MAINTENANCE EXPENSES. THEREFORE THE AO CALLED UPON THE ASSESSEE TO FURNISH DETAILS OF THE PROVISION MADE AND ALSO TO EXPLAIN WHY THE DEDUCTION CLAIMED BEING OF CONTINGENT NATURE SHOULD NOT BE DISALLOWED. IN RESPONSE, IT WAS SUBMITTED BY THE ASSESSEE THAT THE PROVISION FOR WARRANTY AND MAINTENANCE IS A SCIENTIFICALLY ASCERTAINED LIABILITY ON THE BASIS OF PAST REC ORD. IN SUPPORT OF SUCH CONTENTIONS THE ASSESSEE RELIED UPON CERTAIN JUDICIAL PRECEDENTS. THE AO HOWEVER DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE. HE OBSERVED THAT THE CLAIM OF THE ASSESSEE IS ALLOWABLE ONLY IF THE ASSESSEE IS ABLE TO FURNI SH THE DETAILS REGARDING WHEN SUCH PROVISION WAS RECOGNISED IN ITA NO. 2338/MUM/2016 TECHNO ELECTRONICS LTD 4 THE ACCOUNTS THAT IS TO SAY THE DETAILS OF PRESENT OBLIGATION AS A RESULT OF PAST EVENT, THE DETAILS OF OUTFLOW OF RESOURCES TO SETTLE THE OBLIGATIONS AND A RELIABLE ESTIMATE OF THE AMOUNT OF T HE SAID OBLIGATION. THE AO ALSO IN ABSENCE OF SUCH DETAILS THE PROVISION CREATED BY THE ASSESSEE CANNOT BE CONSIDERED AS AN ASCERTAINED LIABILITY. ACCORDINGLY, HE DISALLOWED THE CLAIM OF THE ASSESSEE. BEFORE THE FIRST APPELLATE AUTHORITY THE ASSESSEE RE ITERATED THE STAND TAKEN BEFORE THE AO. FURTHER THE ASSESSEE SUBMITTED THAT AS PER THE PROVISIONS OF SECTION 115JB OF THE ACT THE AO CANNOT GO BEYOND THE PROFITS SHOWN IN THE PROFIT AND LOSS ACCOUNT. IN THIS CONTEXT ASSESSEE RELIED UPON NUMBER OF DECISIO NS INCLUDING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF APPOLLO TYRES VS. CIT 255 ITR 273. THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE FOUND THAT HIS PREDECESSOR FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CAS E OF ROTORK CONTROLS INDIA (P) LTD VS CIT 314 ITR 62 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN AYS 2008 - 09 AND 2009 - 10, DELETED THE ADDITION MADE BY THE AO. 8. THE LEARNED DR RELIED ON THE OBSERVATIONS OF THE AO. THE LEARNED AR SUPPORTING THE FI NDING OF THE FIRST APPELLATE AUTHORITY SUBMITTED THAT IN ASSESSEES OWN CASE FOR EARLIER ASSESSMENT YEARS THE CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE. FURTHER HE SUBMITTED IN CASE OF OTHER GROUP COMPANIES OF THE ASSESSEE THE TRIBUNAL HAS ALLOWED PROV ISION MADE ON ACCOUNT OF WARRANTY AND MAINTENANCE EXPENSES. IN THIS CONTEXT HE DREW OUR ITA NO. 2338/MUM/2016 TECHNO ELECTRONICS LTD 5 ATTENTION TO THE DECISIONS OF THE TRIBUNAL IN THE CASE OF DCIT VS M/S. CENTURY APPLIANCES PVT LTD IN ITA NO.5152/MUM/2015 DATED 16.06.2017 AND DCIT VS. M/S KAIL LTD IN ITA NO.4415/MUM/2012 AND ORS DATED 13.09.2017. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND GONE THROUGH THE MATERIAL ON RECORD. FROM THE MATERIAL AVAILABLE ON RECORD IT IS SEEN THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING A METHOD OF ACCOUNTING WHEREIN HE CREATES A PROVISION FOR WARRANTY AND MAINTENANC E AS PER THE PAST RECORD AND ON A FAIRLY SCIENTIFIC BASIS. THE ASSESSEE HAS DEMONSTRATED BEFORE US THAT OUT OF THE PROVISIONS CREATED IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE THE ASSESSEE HAS UTILISED AN AMOUNT OF ` 2,14,73,380/ - . IT IS ALSO A FACT ON RECORD THAT IN ASSESSEES OWN CASE FOR THE PRECEDING ASSESSMENT YEAR THE CIT(A) HAS HELD THAT THE PROVISION ON ACCOUNT OF WARRANTY AND MAINTENANCE HAVE BEEN CREATED ON SCIENTIFIC BASIS CANNOT BE TREATED AS UNASCERTAINED LIABILITY. WE HAVE ALSO NOTED IN CASE OF OTHER GROUP COMPANIES SIMILAR DISALLOWANCE MADE BY THE AO WAS DELETED BY THE CIT(A) AND WHILE DECIDING THE APPEAL OF THE DEPARTMENT THE TRIBUNAL FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS I NDIA (P) LTD HAS UPHELD THE DECISION OF THE CIT(A). EVEN IN THE FACTS OF THE PRESENT CASE ALSO THE AO HAS AGREED IN PRINCIPLE THAT PROVISION FOR WARRANTY AND MAINTENANCE IS ALLOWABLE AS PER THE METHODOLOGY LAID DOWN BY THE HONBLE SUPREME COURT IN THE CAS E OF ROTORK CONTROLS INDIA (P) LTD (SUPRA). IN VIEW ITA NO. 2338/MUM/2016 TECHNO ELECTRONICS LTD 6 OF THE AFORESAID, WE UPHOLD THE ORDER OF THE CIT(A) BY DISMISSING THE GROUND RAISED. 10. IN GROUND NO.3 DEPARTMENT HAS CHALLENGED THE DELETION OF THE ADDITION MADE OF ` 1,47,922/ - U/S. 14A OF THE ACT REA D WITH RULE 8D OF THE RULES. BRIEFLY THE FACTS ARE DURING THE ASSESSMENT PROCEEDINGS THE AO NOTICING THAT THE ASSESSEE HAS MADE LONG TERM INVESTMENTS WHICH COULD GIVE RISE TO EXEMPT INCOME BY THE WAY OF DIVIDEND CALLED UPON THE ASSESSEE TO EXPLAIN WHY EX PENDITURE ATTRIBUTABLE FOR MAKING INVESTMENT SHOULD NOT BE DISALLOWED U/S. 14A READ WITH RULE 8D. THOUGH THE ASSESSEE OBJECTED TO THE PROPOSED DISALLOWANCE, HOWEVER, THE AO REJECTING THE SUBMISSIONS OF THE ASSESSEE DISALLOWED AN AMOUNT OF ` 1,47,922/ - U/S . 14A READ WITH RULE 8D. ASSESSEE CHALLENGED THE DISALLOWANCE BEFORE THE FIRST APPELLATE AUTHORITY. LEARNED CIT(A) HAVING FOUND THAT THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUND AVAILABLE WITH IT HELD THAT NO DISALLOWANCE OF INTEREST EXPENDITURE CAN BE MADE. FURTHER AS FAR AS DISALLOWANCE OF ADMINISTRATIVE EXPENSE IS CONSIDERED THE LEARNED CIT(A) HELD THAT SUCH EXPENSES BEING DIRECTLY RELATED TO THE BUSINESS OF THE ASSESSEE CANNOT BE DISALLOWED. ACCORDINGLY, HE DELETED THE ADDITION MADE BY THE AO. 1 1. THE LEARNED DR RELIED ON THE OBSERVATIONS OF THE AO THE LEARNED AR STRONGLY SUPPORTED THE FINDING OF THE CIT(A). HE SUBMITTED AS THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUND NO DISALLOWANCE OF INTEREST ITA NO. 2338/MUM/2016 TECHNO ELECTRONICS LTD 7 EXPENDITURE CAN BE MADE. FURTHER HE SUBM ITTED THE ASSESSEE HAVING MADE THE INVESTMENTS ONLY IN GROUP COMPANIES THEY ARE IN THE NATURE OF STRATEGIC INVESTMENTS NO DISALLOWANCE U/S. 14A CAN BE MADE. FINALLY, THE LEARNED AR SUBMITTED IN THE RELEVANT PREVIOUS YEAR THE ASSESSEE HAS NOT EARNED ANY EX EMPT INCOME THEREFORE THE PROVISIONS OF SECTION 14A ARE NOT APPLICABLE. 12. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. THE FACTUAL FINDING OF THE FIRST APPELLATE AUTHORITY THAT THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT HAS NOT BEEN CONTROVERTED BY THE DEPARTMENT THEREFORE, NO DISALLOWANCE OF INTEREST EXPENDITURE UNDER RULE 8D(2)(II) CAN BE MADE. FURTHER THE CLAIM OF THE ASSESSEE THAT ALL INVESTMENTS ARE IN GROUP COMPANIES HENCE, ARE IN THE NATURE OF STRATEGIC I NVESTMENT THEREFORE SHOULD BE EXCLUDED FROM THE AVERAGE VALUE OF INVESTMENT FOR COMPUTING DISALLOWANCE U/S. 14A DESERVES TO BE ACCEPTED. IT IS FURTHER RELEVANT TO OBSERVE FROM THE ASSESSMENT ORDER IT APPEARS THAT THE AO HAS PROCEEDED TO MAKE DISALLOWANCE U/S. 14A READ WITH RULE 8D ONLY BECAUSE INVESTMENTS MADE BY THE ASSESSEE WOULD GIVE RISE TO EXEMPT INCOME. THERE IS NOTHING ON RECORD TO INDICATE THAT IN THE RELEVANT PREVIOUS YEAR ASSESSEE HAS EARNED ANY EXEMPT INCOME BY WAY OF DIVIDEND. THAT BEING THE CASE NO DISALLOWANCE U/S. 14A CAN BE MADE IN VIEW OF THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CHEMINVEST LTD. VS. CIT 378 ITR 33. IN VIEW OF THE AFORESAID, WE UPHOLD THE DECISION OF THE CIT(A) ON THIS ISSUE. THE GROUND RAISED IS DISMISSE D. ITA NO. 2338/MUM/2016 TECHNO ELECTRONICS LTD 8 13. GROUND NO.4 & 5 BEING GENERAL IN NATURE DO NOT REQUIRE ADJUDICATION 14. IN THE RESULT, THE DEPARTMENTS APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH DECEMBER 2017 . SD/ SD/ ( G MANJUNATHA ) ( SAKTIJIT DEY ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED : 18 TH DECEMBER 2017 SA COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE C I T(A), MUMBAI. 4. THE C I T 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER, //TRUE COPY// (ASS IS T ANT REGISTRAR) I NCOME T AX A PPELLATE T RIBUNAL , MUMBAI