M/S. Ashok Griha Udyog Kendra Private Limited, Kanpur V. Assistant Commissioner of Income Tax- 5, Kanpur

ITA 558/LKW/2019

AI Insights

The case involves Ashok Griha Udyog Kendra Pvt. Ltd., which appealed against the order of the Commissioner of Income Tax (Appeals) - II, Kanpur, concerning the assessment year 2013-14. The primary issues in the appeal were the disallowance of Rs.7,30,696/- under section 14A of the Income-tax Act, 1961, and the disallowance of Rs.3,00,000/- under section 40A(2) related to remuneration paid to director Shri Abhishek Gupta. The Tribunal examined the arguments and evidence presented, including the financial records and relevant judicial precedents, before making its decision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 136112 (ITAT-LUCKNOW)
• Duration Of Justice: 3 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: B
• Next Hearing Date: 29-11-2022
• Assessment Year: 2013-2014
• Appeal Filed On: 23-09-2019
• Other Referred Cases: South Indian Bank Ltd. Vs. CIT, CIT Vs. Reliance Utilities & Power Ltd., CIT Vs. HDFC Bank Ltd., CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Question of law; Rule 8D
• Section: 143(3); 14A

Judgement Text

। आयकर अपीलीय अिधकरण Ɋायपीठ, लखनऊ । IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, LUCKNOW BEFORE SHRI MAHAVIR SINGH, HON’BLE VICE PRESIDENT & SHRI GIRISH AGRAWAL, HON’BLE ACCOUNTANT MEMBER ITA No. 558/LKW/2019 Assessment Years: 2013-14 Ashok Griha Udyog Kendra Pvt. Ltd. 51/92, Shree Bhagwati Tower Nayaganj- 208001 [PAN: AABCA1684N] Vs. Asstt. Commissioner of Income Tax -5, Kanpur (Appellant) (Respondent) Assessee by : Shri P.K. Kapoor, C.A. Revenue by : Shri Amit Nigam, D/R सुनवाई की तारीख/Date of Hearing : 30/11/2022 घोषणा की तारीख/Date of Pronouncement : 20/02/2023 O R D E R PER BENCH: This appeal by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals) – II, Kanpur, (hereinafter the “ld. CIT(A)”) dated 01/08/2019 for Assessment Year 2013-14 against the assessment order passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by Assistant Commissioner of Income Tax – 5, Kanpur, dated 17/03/2016. 2. Originally, assessee took six grounds of appeal in appeal memo, which relates to two issues, first being disallowance of Rs.7,30,696/- made u/s 14A of the Act and second relating to disallowance of Rs.3,00,000/- u/s 40A(2) of the Act, towards remuneration paid to director, Shri Abhishek Gupta. Assessee revised/modified the grounds so taken with a view to clarify them vide application dated 19/09/2022. From the perusal of modified grounds, we note that issues raised in this application relates to the same two issues stated above ITA No. 558/LKW/2019 Assessment Years: 2013-14 Ashok Griha Udyog Kendra Pvt. Ltd. 2 and the contents of these modified grounds are more in the nature of peripheral arguments. Despite this, we take up the matter for adjudication. 3. Brief facts of the case are that assessee filed its return of income on 30/11/2013 reporting total income of Rs.2,58,71,350/-. In the course of assessment proceedings, ld. AO noted from the balance sheet that assessee has made investments in various shares/mutual funds amounting to Rs.6,32,44,710/-. Assessee has also earned dividend income amounting to Rs.18,94,686/-. Explanations were called for by ld. AO for making disallowance u/s 14A of the Act for which assessee submitted that it has made investments out of its own interest free funds available and, therefore, no disallowance is called for. Ld. AO did not find favour with the submissions made by the assessee and computed the disallowance by applying provisions of Section 14A read with Rule 8D(2)(ii) and 8D(2)(iii). He made a disallowance of Rs.4,30,590/-, under Rule 8D(2)(ii) and of Rs.3,00,106/- under Rule 8D(2)(iii), totaling to Rs.7,30,696/-. Ld. AO also noted from the tax audit report in respect of nature of payment made to person specified in 40A(2)(b) of the Act, that a sum of Rs.3,00,000/- has been disallowed which is 50% of Rs.6,00,000/- paid to Shri Abhishek Gupta, which has also been disallowed in the immediately preceding AY 2012-13. Thus, ld. AO following the consistency, made disallowance of Rs.3,00,000/- in the impugned year also. 4. Before us, Shri P.K. Kapoor, CA, represented the assessee and Shri Amit Nigam, D/R, represented the Department. 5. Ld. Counsel for the assessee stated that disallowance made by ld. AO u/s 14A of the Act is uncalled for as assessee had substantial interest free funds in the form of share capital and surplus, duly represented in its balance sheet as on 31/03/2013, amounting to Rs.16,57,65,673/-. Against this, investment in shares and mutual funds as reported in the balance sheet is at Rs.6,32,44,710/-. ITA No. 558/LKW/2019 Assessment Years: 2013-14 Ashok Griha Udyog Kendra Pvt. Ltd. 3 He, thus, emphasised that when the assessee had sufficient interest free funds out of which investments have been made, no disallowance can be made u/s 14A of the Act. 5.1. To buttress his contention, Ld. Counsel for the assessee placed reliance on the decision of Hon’ble Supreme Court in the case of South Indian Bank Ltd. Vs. CIT (2021) 130 taxman.com 178 (SC) dated 09.09.2021 wherein it was held that where interest free own funds available with assessee bank exceeded the investment in tax free securities, investments would be presumed to be made out of assessee’s own funds and proportionate disallowance was not warranted u/s. 14A on the ground that separate accounts were not maintained by the assessee for investments and other expenditure incurred for earning tax free income. 5.2. Ld. Counsel also referred to the decision of Hon’ble High Court of Bombay in the case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom.) wherein it was held that if there are funds available, both interest free and overdraft and/or loans taken, a presumption would arise that investment would be out of interest free funds generated or available with company, provided such funds are sufficient to meet the said investments. 5.3. Reference was also made to another decision of Hon’ble High Court of Bombay in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom.) wherein also similar views were upheld. 6. On the other hand, Ld. Sr. DR placed reliance on the orders of the authorities below. 7. We have heard the rival contentions and perused the material available on record and gone through the judicial precedents referred to, before us. ITA No. 558/LKW/2019 Assessment Years: 2013-14 Ashok Griha Udyog Kendra Pvt. Ltd. 4 Admittedly, it is a fact that the own funds i.e. interest free funds available with the assessee in the form of Reserves and Surplus as reported in its Balance Sheet placed on record stand at Rs.16,57,65,673/- as against total investment of Rs.6,32,44,710/-. It is also a fact on record noted by the authorities below that there is a huge hotch-potch of funds comprising of both interest bearing and interest free funds. We also note that neither Ld. AO nor Ld. CIT(A) have brought on record, direct nexus of any part of interest bearing funds which have been used for the purpose of making investments, yielding exempt income. Also, nothing has been specifically pointed out in respect of administrative and general expenses which have been incurred in respect of earning of exempt income from the P&L Account of the assessee. 7.1. There is no satisfaction which has been recorded by the authorities below to this effect to dislodge the claim of the assessee that no expenses have been incurred for earning of exempt income. We also note that provisions of section 14A read with Rule 8D are to be applied if the AO is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred on earning exempt income. It is a settled position of law as held by the Hon’ble Supreme Court in the case of South Indian Bank Ltd. (supra) that where interest free own funds available with assessee bank exceeded the investment in securities yielding exempt income, such investments would be presumed to be made out of assessee’s own funds and proportionate disallowance was not warranted u/s. 14A on the ground that separate accounts were not maintained by the assessee for investments and other expenditure incurred for earning tax free income. 7.2. Further, Hon’ble High Court of Bombay has also dealt with the issue favoring the assessee in the case of Reliance Utilities & Power Ltd. (supra) and HDFC Bank Ltd. (supra). In the present case before us, Reserve & Surplus are far ITA No. 558/LKW/2019 Assessment Years: 2013-14 Ashok Griha Udyog Kendra Pvt. Ltd. 5 exceeding the total amount of investment made and further, there is a huge hotch-potch of funds available with the assessee comprising of own funds and borrowed funds. Accordingly, respectfully following the decisions of Hon’ble Supreme Court and the Hon’ble jurisdictional High Court of Bombay referred to above, disallowance made under Rule 8D(2)(ii) of Rs.4,30,590/- is directed to be deleted. 7.3. Further, in respect of disallowance made under rule 8D(2)(iii) of Rs.3,00,106/-. Hon’ble High Court of Bombay, Panaji Bench in CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) (2020) 429 ITR 358 (Bom.) has held that – “19. Here, on facts, the Tribunal noted that the. Assessing Officer only discussed the provisions of section 14A(1) but has not justified how the expenditure the assessee incurred during the relevant year related to the income not forming part of its total income. The Assessing Officer, according to the Tribunal, straightaway applied rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax exempt income. Only then would a disallowance have to be effected. This court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section 14A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that before rejecting the disallowance computed by the assessee, the Assessing Officer must give a clear finding with reference to the assessee’s accounts as to how the other expenditure claimed by the assessee out of the non-exempt income is related to the exempt income. 21. So, we see no valid reasons to upset the Tribunal’s well reasoned judgment on this substantial question of law.” 7.4. Accordingly, respectfully following the said decision of Hon’ble jurisdictional High Court of Bombay, we direct the Ld. AO to delete the ITA No. 558/LKW/2019 Assessment Years: 2013-14 Ashok Griha Udyog Kendra Pvt. Ltd. 6 disallowance of Rs.3,00,106/- so made. Accordingly, grounds of appeal are allowed. 8. On the second issue relating to disallowance of Rs.3,00,000/- for remuneration paid to one director Shri Abhishek Gupta, it is undisputed fact noted by ld. CIT(A) and ld. AO that Shri Abhishek Gupta is pursuing B.B.A., and during the year, his college attendance is 75% and he looks after various works of the assessee, during his vacations in summer and winter. Ld. Counsel for assessee could not bring anything more on record to substantiate the claim of Rs.6,00,000/- as remuneration to Shri Abhishek Gupta which is same as for all the other Directors who are devoting their 100% time and efforts in the business of the assessee. Considering these facts on record, we have no hesitation in upholding the findings given by the ld. CIT(A) in sustaining the addition of Rs.3,00,000/-. Accordingly, this ground of appeal is dismissed. 9. In the result, appeal of the assessee is partly allowed. Order pronounced under Rule 34(4) of the ITAT Rules, 1963, by placing result on the notice board on 20.02.2023. Sd/- Sd/- (MAHAVIR SINGH) (GIRISH AGRAWAL) VICE PRESIDENT ACCOUNTANT MEMBER Lucknow, Dated: 20 .02.2023 SC. Sr. P.S. ITA No. 558/LKW/2019 Assessment Years: 2013-14 Ashok Griha Udyog Kendra Pvt. Ltd. 7 Copy to: 1. The Appellant: 2. Respondent : 3. The CIT(A)- Lucknow 4. The CIT , Lucknow 5. The DR ITAT, Lucknow //True Copy// By Order Assistant Registrar ITAT, Lucknow Benches, Lucknow