Nestle India Ltd., Gurgaon V. ITO (OSD) LTU, New Delhi

ITA 4389/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 8463 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2007-2008
• Appeal Filed On: 11-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A; 201

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: E, NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NO.4389/DEL/2016 ASSESSMENT YEAR: 2007-08 M/S. NESTLE INDIA LTD., M-BLOCK NESTLE HOUSE, DLF CITY, PHASE-II, JACARANDA MARG, GURGAON VS. ITO(OSD) LTU, NBCC PLAZA, PUSPH VIHAR, SECTOR-V, NEW DELHI PAN :AAACN0757G (APPELLANT) (RESPONDENT) ORDER PER O.P. KANT, AM: THIS APPEAL BY THE ASSESSSE IS DIRECTED AGAINST T HE ORDER DATED 22.06.2016 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS), 22, NEW DELHI [IN SHORT LEARNED CIT (A)] RAISING THE FOLLOWING GROUNDS: 1. THAT THE COMMISSIONER OF INCOME TAX (APPEALS) [ CIT(A)] ERRED ON FACTS AND IN LAW IN HOLDING THAT A SUM OF RS.37,47, 358/-, BEING 5% OF THE EXEMPT DIVIDEND INCOME EARNED BY THE APPE LLANT DURING APPELLANT BY SHRI AJAY VOHRA, SR. ADVOCATE, SHRI NEERAJ K. JAIN, ADV. RESPONDENT BY MS. RAKHI VIMAL, SR.DR DATE OF HEARING 08.01.2020 DATE OF PRONOUNCEMENT 17.01.2020 2 ITA NO.4389/DEL/2016 THE RELEVANT PREVIOUS YEAR WAS DISALLOWABLE UNDER S ECTION 14A OF THE INCOME-TAX ACT, 1961 [THE ACT]. 1.1 THAT THE CIT (A) ERRED ON FACTS AND IN LAW IN H OLDING AS AFORESAID WITHOUT ESTABLISHING ANY PROXIMATE RELATIONSHIP BET WEEN THE EXPENDITURE INCURRED AND THE DIVIDEND INCOME EARNED AND NOT APPRECIATING THAT NO EXPENDITURE WAS ACTUALLY INCUR RED IN EARNING THE EXEMPT DIVIDEND INCOME. 1.2 WITHOUT PREJUDICE, THAT THE DISALLOWANCE IF ANY SHOULD HAVE BEEN RESTRICTED TO RS.5,83,685/- AS PER CALCULATION PROV IDED BY THE APPELLANT. 2. THAT, WITHOUT PREJUDICE, THE CIT(A) ERRED ON FAC TS AND IN LAW IN NOT RESTRICTING THE DISALLOWANCE UNDER SECTION 14A OF T HE ACT TO RS.23,55,952/-, BEING THE AMOUNT DISALLOWED IN THE ORIGINAL ASSESSMENT PROCEEDINGS. 2.1 THAT THE CIT(A) ERRED IN LAW IN STATING THAT ON CE THE MATTER IS RESTORED BACK TO THE FILE OF THE AO FOR DE-NOVO ASS ESSMENT, THE AOS DISCRETION IS NOT LIMITED TO THE ADDITION MADE IN THE ORIGINAL ASSESSMENT UNLESS THE 1TAT SPECIFICALLY MENTIONS IN ITS ORDER. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, AMEND OR VARY THE ABOVE GROUNDS OF APPEAL AT OR BEFORE THE TIME OF HE ARING. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSE SSEE FILED RETURN OF INCOME ON 29.10.2007, DECLARING TOTAL IN COME OF RS.4,36,49,710/-. THE ASSESSMENT UNDER SECTION 143( 3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) WAS COMPL ETED ON 30.03.2015 AT TOTAL INCOME OF RS.4,76,80,22,462/-, WHEREIN DISALLOWANCE OF LICENSE FEES OF RS.40,07,44,800/- AND DISALLOWANCE UNDER SECTION 14A, AMOUNTING TO RS.23, 55,952/- WAS MADE. ON FURTHER APPEAL, THE LD. CIT(A) VIDE HI S ORDER DATED 04.07.2012 DELETED THE DISALLOWANCE OF LICENSE FEES OF RS.40,07,44,800/-, HOWEVER, UPHELD THE DISALLOWANCE UNDER SECTION 14A TO RS.22,14,685/-. ON FURTHER APPEAL BY THE ASSESSEE 3 ITA NO.4389/DEL/2016 THE TRIBUNAL IN ITA NO. 4669/DEL/2012 AND 4670/DEL/ 2012, DATED 03.01.2014 DISMISSED THE APPEAL OF THE DEPART MENT IN RESPECT OF LICENSE FEES BUT RESTORED THE ISSUE OF D ISALLOWANCE UNDER SECTION 14A OF THE ACT TO THE ASSESSING OFFIC ER FOR DECIDING DE-NOVO AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. IN COMPLIANCE TO THE DIRECTION OF THE TRIBUNAL, THE ASSESSING OFFICER ALLOWED VARIOUS OPPORTUNITIES TO THE ASSESSEE. THOUGH INITIALLY NO COMPLIANCE WAS MADE BY THE ASSE SSEE OF THE OPPORTUNITY GRANTED BY THE ASSESSING OFFICER VIDE H IS LETTER DATED 23.07.2014 AND 20.01.2015, HOWEVER, AT THE END OF T HE PROCEEDINGS REPRESENTATIVE OF THE ASSESSEE ATTENDED AND FILED SUBMISSION. HE IDENTIFIED THE EXPENSES OF RS.5,83,6 85/- BY APPORTIONING COST OF RUNNING THE TREASURY OPERATION S OF THE ASSESSEE FOR DISALLOWANCE U/S 14A OF THE ACT. THE S UO MOTU DISALLOWANCES OF RS.5,83,685/- PROPOSED BY THE ASES SEE WAS NOT ACCEPTED BY THE ASSESSING OFFICER AND HE PROPOSED T HE DISALLOWANCE IN PROPORTION OF THE EXEMPT INCOME TO THE TOTAL INCOME PLUS EXEMPT INCOME. THE LD. ASSESSING OFFICE R ARRIVED AT THE PROPORTION OF 1.68% WHICH HE APPLIED OVER THE I NTEREST EXPENSES AND ADMINISTRATIVE EXPENSES AND WORKED OUT DISALLOWANCE OF RS.1,01,656/- TOWARDS INTEREST EXPE NSES INDIRECTLY ATTRIBUTABLE TO EARNING OF THE EXEMPT IN COME AND RS. 1,80,87,686/- AS ADMINISTRATIVE EXPENSES ATTRIBUTAB LE TO EXEMPT INCOME. THE COMPUTATION OF DISALLOWANCE MADE IN PAR A 7 OF THE ASSESSMENT ORDER IS REPRODUCED AS UNDER: 4 ITA NO.4389/DEL/2016 2.1 ON FURTHER APPEAL, THE LD. CIT(A) DELETED THE ADDI TION OF RS.1,01,656/- OUT OF INTEREST PAYMENT FOLLOWING HIS FINDING IN THE CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2001-12. R EGARDING THE ADMINISTRATIVE EXPENSES, THE LD. CIT(A) REJECTED TH E CONTENTION OF THE ASSESSEE OF DISALLOWANCE NOT EXCEEDING RS.31,83 3/-. THE BREAK-UP OF DISALLOWANCE WAS GIVEN BY THE ASSESSEE AS UNDER: PARTICULARS AMOUNT (IN RS.) EXEMPT INCOME (A) 74,9,47,000 GROSS RECEIPTS AS PER P & L ADD: EXCISE DUTY 3025,77,58.000 TOTAL RECEIPTS (B) 119,35,89,000 PROPORTION (AIM 024% DISALLOWANCE: INTEREST EXPENSE 60,51,000 14,4 19 ADMINISTRATIVE EXPENSES 107,66,48,000 8,283 TREASURY STAFF COST 38,31,879 9.131 TOTAL DISALLOWANCE 31,831 5 ITA NO.4389/DEL/2016 2.2 THE LD. CIT(A) REJECTED THE BASIS OF CALCULATION O F THE DISALLOWANCE BY THE ASSESSEE IN PARA 5.1 OF THE IMP UGNED ORDER WHICH IS REPRODUCED AS UNDER: 5.1 AS EVIDENT FROM THE ABOVE, IT IS NOT UNDERSTOO D HOW THE ABOVE FIGURE HAS BEEN ARRIVED AT. AS FAR AS THE FIGURE OF RS.9131/- IS CONCERNED, IT IS 0.24% OF THE TREASURE STAFF COST O F RS.38,31,879/-. HOWEVER, THE FIGURE OF TREASURY STAFF COST IS NOT V ERIFIABLE. AS REGARDS THE FIGURE OF RS.8283/- THE ADMINISTRATIVE EXPENSES HAVE BEEN MENTIONED IN THE ABOVE TABLE AS RS.107,66,48,0 00/- AND RS.8283/- IS ONLY .0008% OF THE SAME. 2.3 BEING NOT SATISFIED WITH THE COMPUTATION OF DISALL OWANCE OF ADMINISTRATIVE EXPENSES, THE CIT(A) ESTIMATED 5% OF THE DIVIDEND INCOME OF RS.7,49,47,159/- WHICH WAS WORKED OUT TO RS.37,47,358/- TOWARDS THE EARNING OF EXEMPT INCOME . THE RELEVANT PARA OF THE IMPUGNED ORDER IS REPRODUCED A S UNDER: 5.2 CONSIDERING THE ABOVE FACTUAL BACKGROUND AND T HE ARGUMENT OF THE APPELLANT THAT THE TOTAL ADMINISTRATIVE EXPE NSES OF RS.107,66,48,000/- ALSO INCLUDED VARIOUS EXPENSES W HICH HAVE NO CONNECTION WITH THE EARNING OF EXEMPT DIVIDEND INCO ME LIKE CONTRACT MANUFACTURING CHARGES, TRAINING EXPENSES, INSURANCE RATES AND TAXES, RENT, ETC. THE METHOD ADOPTED FOR COMPUTATIO N OF DISALLOWANCE BY THE AO IS SUBSTITUTED BY AN ESTIMATED DISALLOWAN CE OUT OF THE EXEMPT INCOME EARNED. THEREFORE, THE DISALLOWANCE I S CONFIRMED AT 5% OF THE DIVIDEND INCOME EARNED OF RS.7,49,47,159/ - WHICH COMES TO RS.37,47,358/- 3. BEFORE US, THE LD. COUNSEL OF THE ASSESSEE FIELD A PAPER- BOOKS CONTAINING PAGES 1 TO 118 AND SUBMITTED THAT THE LD. ASSESSING OFFICER HAS MADE DISALLOWANCE EVEN MORE T HAN THE AMOUNT WHICH WAS DISALLOWED IN THE ORIGINAL ASSESSM ENT PROCEEDINGS. HE SUBMITTED THAT THE ASSESSING OFFICE R WAS NOT JUSTIFIED IN COMPUTING THE DISALLOWANCE OF ADMINIST RATIVE 6 ITA NO.4389/DEL/2016 EXPENSES IN PROPORTION OF THE EXEMPT INCOME. HE SUB MITTED THAT EVEN CALCULATION MADE BY THE ASSESSING OFFICER IS ALSO NOT CORRECT. HE FURTHER SUBMITTED THAT THERE IS NO BASI S OF ESTIMATION OF 5% OF THE DIVIDEND INCOME AS EXPENSES RELATED TO THE EXEMPT INCOME BY THE LD. CIT(A). THE LD. COUNSE L REFERRED TO PAGE 41 OF THE PAPER-BOOK WHEREIN THE BASIS OF T HE SUO MOTU DISALLOWANCE MADE BEFORE THE AO OF RS.5,83,685 /- HAS BEEN WORKED OUT. THE LD. COUNSEL FOR THE ASSESSEE F URTHER SUBMITTED THAT THE ASSESSEE HAS SEGREGATED THE COST OF THE STAFF ENGAGED IN TREASURY OPERATIONS ON THE BASIS O F THE ESTIMATED TIME SPENT BY THEM IN THE INVESTMENT ACTI VITY IN THE MUTUAL FUND. HE SUBMITTED THAT IN CASE OF ESTIMATED TIME SPENT BY OFFICER, 18.75% IS TREATED TOWARDS MUTUAL FUND ACTIVITY WHEREAS IN CASE OF THE OTHER TREASURY STAF F TIME IS ESTIMATED AT 6.75% TOWARDS MUTUAL FUND ACTIVITY. H E FURTHER SUBMITTED THAT OTHER EXPENSES HAVE ALSO BEEN ESTIMA TED IN RESPECT OF THE STAFF COST. ACCORDING TO HIM, THE AS SESSMENT YEAR BEING PRIOR TO ASSESSMENT YEAR 2008-09, THE DI SALLOWANCE IS TO BE COMPUTED ON REASONABLE BASIS RATHER THAN U NDER RULE 8D. HE SUBMITTED THAT THE DISALLOWANCE MADE BY THE ASSESSEE ON SCIENTIFIC BASIS MUST BE ACCEPTED. 4. ON THE OTHER HAND, LD. DR SUBMITTED THAT THE ASSES SING OFFICER HAS PROVIDED AMPLE OPPORTUNITY TO THE ASSES SEE, HOWEVER, THE ASSESSEE ONLY AT THE FAG END OF THE PR OCEEDING, PROVIDED THE CALCULATION OF DISALLOWANCE OF RS.5,83 ,687/-. SHE REFERRED TO RELEVANT PAGES OF THE PAPER-BOOK AND SU BMITTED THAT NO SCIENTIFIC BASIS HAS BEEN PROVIDED FOR ESTI MATING THE NUMBER OF PERSONS ENGAGED IN THE TREASURY STAFF AND 7 ITA NO.4389/DEL/2016 PERCENTAGE OF THE TIME SPENT BY THEM ON THE MUTUAL FUND ACTIVITY. SHE SUBMITTED THAT THE PERCENTAGE TIME SP ENT HAS BEEN ESTIMATED WITHOUT ANY BASIS. SHE ALSO SUBMITTE D THAT THE BASIS OF ESTIMATION OF OTHER EXPENSES TOWARDS EARNI NG EXEMPT INCOME IS ALSO NOT PROPER. SHE SUBMITTED THAT IN RU LE 8D ADMINISTRATIVE EXPENSES ARE DISALLOWED IN PERCENTAG E TERMS OF INVESTMENT OF THE TAX PAYERS. IN VIEW OF THE ARGUME NTS, SHE SUBMITTED THAT THE ESTIMATION OF 5% OF EXEMPT INCOM E IS MOST REASONABLE AND THE SAME SHOULD BE UPHELD. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN FIRST R OUND OF THE PROCEEDINGS, NO SUO MOTU DISALLOWANCE WAS MADE BY T HE ASSESSEE UNDER SECTION 14A AND THE ASSESSING OFFICE R MADE DISALLOWANCE OF RS.23,55,952/-. IN SECOND ROUND OF PROCEEDINGS, THE ASSESSING OFFICER HAS ESTIMATED TH E DISALLOWANCE OF ADMINISTRATIVE EXPENSES IN PROPORTI ON TO THE EXEMPT INCOME TO THE TOTAL INCOME PLUS EXEMPT INCOM E. THIS CALCULATION HAS BEEN REJECTED BY THE LD. CIT(A), HO WEVER, HE CONFIRMED 5% OF THE DIVIDEND INCOME TOWARDS DISALLO WANCE FOR ADMINISTRATIVE EXPENSES. THE CONTENTION OF THE ASSE SSEE THAT IT HAS WORKED OUT THE DISALLOWANCE OF ADMINISTRATIVE E XPENSES ON SCIENTIFIC AND REASONABLE MANNER. THE WORKING OF THE ASSESSEE AVAILABLE ON PAGE 41 OF THE PAPER-BOOK IS REPRODUCED AS UNDER: TREASURY STAFF STAFF COST WHETHER INVOLVED IN MF ACTIVITY (Y/N) ESTIMATED TIME SPENT FOR MF ACTIVITY * PROPORTIONATE EXPENSES TREASURER 1,653,196 Y 6.25% 103,325 MANAGER 717,034 Y 6.25% 44,815 EXECUTIVE 789,572 Y 6.25% 49,348 8 ITA NO.4389/DEL/2016 OFFICER 579,057 Y 18.75% 108,573 OFFICER 93,020 N NA NA 3,831,879 306,061 OTHER EXPENSES OTHER STAFF RELATED EXPENSES 2,070.021 PREPARATION EXPENSE 214,515 ELECTRICITY EXPENSE 27,505 RENT EXPENSE 49,132 PROFESSION AND LEGAL EXPENSES 510.472 BUILDING MAINTENANCE 100,524 TELECOMMUNICATION EXPENSES 90,915 POSTAGE EXPENSE 55,323 OFFICE EXPENSES 54,850 TRAVELLING EXPENSE 164,689 TRAINING & MEETING EXPENSES 116,498 OTHER EXPENSES 21,405 3,475,849 ## 277,624 TOTAL EXPENSE 583,685 * THE COMPANY DOES NOT HAVE EMPLOYEES WHO ARE E XCLUSIVELY INVOLVED IN THE ACTIVITIES RELATED TO EARNING DIVIDEND INCOME. ## OTHER EXPENSES HAVE BEEN ALLOCATED IN THE RAT IOS OF STAFF COST. 5.1 ON PERUSAL OF THE ABOVE TABLE, WE FIND THAT THE AS SESEE HAS SEGREGATED STAFF COST OF RS.38,31,879/-. FURTHE R TIME SPENT FOR MUTUAL FUND ACTIVITY IN CASE OF THREE STA FFS (TREASURE, MANAGER, EXECUTIVE) HAVE BEEN ESTIMATED TO 6.25% AN D IN CASE OF ONE PERSON (OFFICER) HAS BEEN ESTIMATED TO 18.7 5% BUT NO BASIS HAS BEEN GIVEN FOR ADOPTING THE TIME SPENT BY THOSE PERSONS. NO SUCH DETAILS WERE EVEN PRODUCED BEFORE THE ASSESSING OFFICER. THE DISALLOWANCE OF RS.2,22,674/ - OUT OF OTHER EXPENSES HAS BEEN ESTIMATED IN RATIO OF STAFF COST BUT NO DETAILS OF THE CALCULATION IN THIS REGARD HAS BEEN PROVIDED IN THE TABLE. 5.2 WE FIND THAT THE ASSESSEE AS WELL AS THE LD. AO/CIT(A) HAS MADE DISALLOWANCE ON ESTIMATE BASIS. AS THE ASS ESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOUNT OR NOT IDE NTIFIED 9 ITA NO.4389/DEL/2016 EXPENSES SEPARATELY TOWARDS EARNING THE EXEMPT INCO ME, THERE IS NO ALTERNATIVE EXPECT ESTIMATION. THE ASSESSEE H AS ESTIMATED THE DISALLOWANCE ON THE BASIS OF ESTIMATI ON OF MAN HOURS SPENT TOWARDS THE INVESTMENT IN MUTUAL FUND A CTIVITY. THE LD. AO HAS ESTIMATED THE EXPENDITURE FOR EARNIN G EXEMPT INCOME IN PROPORTION OF EXEMPT INCOME TO TOTAL INCO ME INCLUDING EXEMPT INCOME. THE LD. CIT(A) HAS ESTIMAT ED THE DISALLOWANCE AT 5% OF EXEMPTED INCOME. WE FIND THE LEGISLATURE HAS APPROVED THE SIMILAR DISALLOWANCE F OR ADMINISTRATIVE EXPENSES W.E.F. ASSESSMENT YEAR 2008 -09 UNDER RULE 8D(2)(III) AS (0.5%) OF AVERAGE INVESTMENT IN ASSETS YIELDING EXEMPT INCOME. THE HONBLE DELHI HIGH COU RT IN THE CASE OF ACB INDIA LTD. VS. ACIT [ITA NO. 615 OF 201 4, ORDER DATED 24 TH MARCH, 2015] AND THE SPECIAL BENCH OF THE TRIBUNAL IN ACIT VS. VIREET INVESTMENT PVT. LTD. (ITAT-DELHI) (SPECIAL BENCH) [ITA NO. 502/DEL/2012 (FOR AY: 2008-09), ORD ER DATE 16.06.2017], HAS RESTRICTED THE DISALLOWANCE TOWARD S ADMINISTRATIVE EXPENSES UNDER RULE 8D(2)(III) TO 0. 5% OF THE ASSETS WHICH YIELDED EXEMPT INCOME DURING THE YEAR. IN OUR OPINION, THE ESTIMATION OF 0.5% OF ASSETS WHICH YIE LDED EXEMPTED INCOME DURING THE YEAR WOULD BE A MOST REA SONABLE ESTIMATE FOR IDENTIFYING THE ADMINISTRATIVE EXPENDI TURE FOR EARNING THE EXEMPT INCOME. WE, ACCORDINGLY, DIRECT THE ASSESSING OFFICER TO COMPUTE THE DISALLOWANCE IN VI EW OF OUR ABOVE DIRECTION, HOWEVER, THE DISALLOWANCE, IF ANY, COMPUTED IN THIS MANNER SHOULD BE RESTRICTED TO DISALLOWANCE OF RS.23,55,952/-, WHICH WAS MADE BY THE ASSESSING OFF ICER IN 10 ITA NO.4389/DEL/2016 ORIGINAL ASSESSMENT PROCEEDINGS. THE GROUNDS OF APP EAL ARE ACCORDINGLY ALLOWED PARTLY FOR STATISTICAL PURPOSES . 6. THE APPEAL OF ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH JANUARY, 2020. SD/- SD/- (AMIT SHUKLA) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 17 TH JANUARY, 2020. RK/-(D.T.D.) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI