Asahi Songwon Colors Limited, Ahmedabad V. Deputy Commissioner of Income Tax, Aaykar Bhavan, Ahmedabad

ITA 710/AHD/2023

• Counselvise Citation: [2024] 101 COUNSELVISE.COM (IT) 7287 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-05-2024
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 12-02-2024
• Assessment Year: 2017-2018
• Appeal Filed On: 17-09-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D; Set aside
• Section: 14A; 10B; 80IA; 73

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘A’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, AHMEDABAD BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND MS. SUCHITRA R. KAMBLE, JUDICIAL MEMBER ITA No. 710/Ahd/2023 Assessment Year : 2017-18 Asahi Songwon Colors Limited, 20 Block B, Times Corporate Park, Opp Copper Stone, Thaltej, Shilaj Road, Ahmedabad -380059 PAN : AAACA 9713 D Vs. Deputy Commissioner of Income Tax, Central Circle 2 (3), Aaykar Bhavan, Ahmedabad / (Appellant) / (Respondent) Assessee by : Shri Sunil Talati, AR Revenue by : Ms. Saumya Pandey Jain, Sr DR सुनव ई क त र ख/Date of Hearing : 13.02.2024 घोषण क त र ख /Date of Pronouncement: 10.05.2024 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER Present appeal has been filed by the assessee against order of the Commissioner of Income-tax (Appeals)-12, Ahmedabad [hereinafter referred to as "CIT(A)" for short] dated 18.08.2023 passed under Section 250(6) of the Income-tax Act, 1961 [hereinafter referred to as "the Act" for short], for the Assessment Year (AY) 2017-18. 2. Ground Nos. 1 & 2, it was stated, relate to the same issue of disallowance made of expenses incurred in relation to earning exempt income, in terms of provisions of Section 14A of the Act. The disallowance so made by the Assessing Officer and confirmed by the ld. CIT(A) amounts to Rs.23,00,575/-. Ground Nos. 1 & 2 raised by the assessee read as under:- ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 2 “1. The Ld. CIT(A) has erred in confirming the disallowance u/s. 14A of the Act amounting to Rs.23,00,575/- by invoking Rule 8D of the Income Tax Rules, 1962. The Ld. CIT(A) has erred in not appreciating the fact that during the year, appellant company had neither diverted any interest bearing funds from which exempt income was earned nor any expenditure has been incurred to claim the exempt Income. And the appellant has proved the nexus that all the investments made during the year were from interest free funds. In view of this, there is no justification in making the disallowance and therefore the disallowance so made prayed to be deleted. 2. Without prejudice to the above, the Ld. CIT(A) has erred in confirming disallowance u/s. 14A r.w.r. 8D of the Rules of Rs. 23,00,575/- which is bad in facts as well in law. On the basis of facts and circumstances of the case, such disallowance made is incorrect and thus it is prayed to delete the impugned disallowance.” 3. We have heard both the parties. The facts relating to the issue are that the assessee was noted to have made huge investments, yielding exempt income, amounting to Rs.25.72 crores as at the beginning of the year i.e. on 01.04.2016 and Rs.25.65 crores as at the end of the year i.e. on 31.03.2017. Further, the assessee had earned exempt income in the form of dividend u/s 10(34) of the Act and Long Term Capital Gain u/s 10(38) of the Act as under:- (i) Dividend from companies - Rs.13,97,382/- u/s 10(34) of the Act; (ii) Long Term Capital Gain - Rs. 3,59,87,261/- u/s 10(38) of the Act 4. The expense suo moto disallowed by the assessee u/s 14A of the Act pertaining to the earning of exempt income was “Nil”. The persistent plea of the assessee against any disallowance of expenses to be made u/s 14A of the Act was that it had sufficient interest free own funds for the purposes of making this investment. It was contended that while the investments were to the tune of Rs.25.65 crores, the total interest free funds available with the assessee in the form of share capital & reserve and surplus were Rs.156.59 ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 3 crores. That, the profits earned during the year itself were to the tune of Rs.25.01 crores, which was sufficient for making the investments of Rs.25.65 crores earning exempt income. Both the Assessing Officer and ld. CIT(A) were not convinced with the reply of the assessee, noting the fact that there were huge investments made by the assessee but no disallowance of expenses had been made pertaining to the earning of exempt income. That, the assessee must have incurred some expenses by way of administrative expenses such as documents, salary of employees, handling the investment portfolios, administrative overheads etc. and, therefore, the assessee’s explanation of having incurred no expense was not found acceptable, and Rule 8D of the Income-Tax Rules, 1962 (“Rules” in short)was accordingly invoked in terms of provisions of Section 14(A)(2)(iii) of the Act, for computing the quantum of disallowance u/s 14A of the Act. Accordingly, expenses amounting to Rs. 23,00,575/- were disallowed u/s 14A of the Act r.w.r. 8D of the Rules. 5. The ld. CIT(A) confirmed the findings of the Assessing Officer, holding that the provisions of law are very clear in this regard, that where the assessee claims no expenditure to have been incurred for the earning of exempt income and the AO is not satisfied with the correctness of the claim of the assessee, Rule 8D of the Income-Tax Rules for calculating the quantum of expenses to be disallowed u/s 14A of the Act, is to be invoked. The findings of the ld. CIT(A) at paragraph Nos. 6.2 To 6.3.1 of his order are as under:- “6.2 The main thrust of the appellant’s plea against the aforesaid disallowance is that it had sufficient own funds (non interest bearing) that were utilized for investments that resulted in earning the exempt income. Hence the addition made is not tenable. Several case laws were cited by the appellant in favour of such contention. ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 4 6.3 The argument raised by the appellant is wide of the mark as its argument is based on the provision of law or Rule 8D which has been amended w. e. f. 02.06.2016 and applicable for the year under consideration, i. e. AY 2017-18. The amended rule is as under:- “ [Method for determining amount of expenditure in relation to income not includible in total income. 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2) [(2) The expenditure in relation to income which does not form part of the total income shall be the aggregale of following amounts, namely:— (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.}" 6.3.1 From the reading of the amended rule it is evident that arguments made by the appellant are not applicable in this case and once the AO is satisfied regarding invocation of section 14A rwr 8D, applying Rule 8D(2)(ii) follows. It is immaterial whether the investments were made out of interest-bearing funds or interest free own funds. Once the AO finds that the appellant has earned exempt income and the appellant has not debited any expense related to such earning, the AO is within its rights to apply the Rule 8D and determine the expenditure related to earning of such exempt income which he did. Hence the quantum of disallowance ascertained primarily is found to be correct. There is no objection to the manner of application of Rule 8D by the appellant. Ground of appeal 1 is dismissed.” ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 5 6. It is also the fact on record that in the preceding assessment year, i.e. AY 2016-17, the assessee had suo moto made a disallowance of expenses u/s 14A of the Act amounting to Rs.31,97,450/-, which had been enhanced by the Assessing Officer by invoking Rule 8D of the Income Tax Rules, 1962, to Rs.35,71,058/-, and the enhancement so made by the Assessing Officer was deleted by the ld. CIT(A). These facts emanate from the order of the ld. CIT(A) for AY 2016-17 which was placed before us in the paper-book page Nos. 54-62. 7. Having noted the facts as above, we find no infirmity in the order of the Ld. CIT(A) upholding the disallowance made by the AO u/s 14A of the Act . 8. The assessee has given no plausible explanation for NIL disallowance of expenses u/s 14A of the Act despite having suo moto disallowed such expenses to the tune of Rs.31,97,450/- in the preceding assessment year. No change in facts and circumstances from the preceding year having been pointed out to warrant NIL disallowance of expenses in the impugned year, except for stating that it had sufficient own funds for making the investments. But this fact was present in the preceding year also when also there were sufficient own funds available with the assessee for making investments yet it had suo moto made a disallowance of Rs. 31 lacs u/s 14A of the Act. Further, we agree with the AO that the possibility of incurrence of NIL administrative expenses was not feasible considering the huge quantum of investments made by the assessee earning exempt income to the tune of approx. 25.65 Crs nor do we find it was explained by the assessee with cogent reasons. ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 6 9. In the light of the aforestated facts, the AO, we hold, was correct in being not satisfied with the claim of the assessee of NIL expense being incurred for earning exempt income. The invocation of Rule 8D of the Rules, as a consequence, we hold, has been rightly held by the Ld. CIT(A) to be in accordance with law as per section 14 A(2)/(3) of the Act. 10. The order of the Ld. CIT(A) confirming the disallowance made u/s 14A of the Act of Rs. 23,00,575/- is accordingly upheld. 11. In view of the above, Ground Nos. 1 & 2 raised by the assessee are dismissed. 12. Ground No. 3 of appeal raised by the assessee reads as under:- “3. The Ld. CIT(A) has erred in confirming the addition of Rs. 1,07,897/- being deduction claimed u/s 80IA of the Act by Rs. 1,07,897/-. The total expenditure incurred is Rs. 56,65,811/- in the nature of Director’s Remuneration, Bank Charges, Audit Remuneration/ fees and Internal Audit Fees as claimed in return of income. It is submitted that Ld. CIT(A) has grossly erred in confirming such restriction of deduction on the basis of the ratio of turnover of eligible unit with overall turnover. Such re-allocation of expenditure is without any basis. This being absolutely incorrect and illegal, it is prayed that the same be deleted.” 13. Ground No.3 relates to the disallowance of deduction claimed u/s 80IA of the Act. The disallowance being made on account of the reduction of profits of the eligible unit by allocating certain Head Office/Common expenses to the eligible unit. 14. The Assessing Officer noted the assessee to have not attributed/ allocated expenses relating to Director’s Remuneration, Bank Charges, Auditors Remuneration and Auditors Fees, to the eligible unit. He accordingly proceeded to allocate these expenditure to the eligible unit in the proportion of turnover of the eligible and ineligible unit which, he noted, was ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 7 0.2676% and 99.733% respectively. The quantum of expenditure so allocated, therefore, came to Rs.1,07,897/-. The details of turnover of the two units and the allocation of Head Office expenses are contained at paragraph No.3.1 of the Assessing Officer’s as under:- “3.1 In computation of income, the assessee has claimed deduction u/s. 80IA of Rs. 56,65,811/-. The expenses like director’s remuneration, bank charges, auditor’s remuneration and audit fee are incurred for the organization as a whole and not for a unit as mentioned hereunder: 15. Accordingly, an amount of Rs.1,07,897/-, attributed to the eligible unit on account of commission expenses, was disallowed from the deduction claimed by the assessee under Section 80IA of the Act and proportionate addition was made to the income of the assessee. 16. The contention of the ld. Counsel for the assessee before us was that in the preceding year i.e. AY 2008-09 and 2009-10, identical issue had come up in the case of the assessee before the ITAT where allocation of such expenses to the eligible unit was held to be inappropriate, having no bearing to the earning of income by the eligible unit and the disallowance made, therefore, was deleted. Our attention was drawn to the order of the ITAT pertaining to Turnover of ineligible Unit Turnover of eligible Unit Total turnover 2,564,011,668 6,864,974 2,570,876,642 99.733% 0.267% 100% Particulars Amount (Rs) Proportionate disallowance Director’s remuneration 2,96,09,937 79,058 Bank charges 1,01,60,152 27,127 Auditor’s remuneration 1,80,750 482 Auditor’s fee 4,60,750 1,230 107897 ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 8 AY 2008-09 placed at paper-book page No. 73 to 91. It was pointed out that in the said case, the assessee had claimed exemption/deduction u/s 10B of the Act and this exemption/deduction was reduced by allocation of commission/Head Office expenses in the nature of Director’s remuneration, Bank Charges, Auditors Remuneration/Auditors’ fees, amounting to Rs.21,23,528/-. Our attention was drawn to paragraph No.14 of the order, wherein the ITAT noted the facts relating to the expenses and the finding of the ITAT thereafter that there was no logic in allocating these expenses to the eligible unit. The relevant finding of the ITAT are as under:- “14. The A.O. has nowhere disputed that the bank charges incurred in relation to transactions made with the bank for CPC Blue Division which is 100% EOU has not been debited to the accounts of Blue Division. The auditor's remuneration and the internal audit fees are decided by the auditor after considering the quantum of the work and the legal formalities to be done during the course of the audit of the respective division. Therefore, we do not find any logic in allocating these expenditures on the basis of turnover. Insofar as managerial remuneration is concerned, the assessee has been allocating 50% between the eligible and non eligible unit. Since, the initial year, we fail to understand when no adverse inference was drawn in earlier year why the same has been disturbed during the year under consideration. We, therefore, set aside the findings of the Id. CIT(A) and direct the A.O. not to reduce the claim of deduction u/s 80B of the Act by Rs.21,23,528/-. Ground No.1 is accordingly allowed.” 17. The ld. DR, however, relied on the order of the Assessing Officer. 18. Having heard the contentions of both the parties, we do not find any merit in the disallowance made by allocating the common expenses to the eligible unit and thus reducing the deduction claimed u/s 80IA of the Act to Rs.1,07,897/-. Firstly, it is a fact on record that the quantum of operation of the eligible unit was miniscule as compared to the ineligible unit, with the ineligible unit accounting for almost the entire turnover of the assessee to the ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 9 tune of 99.733% and the eligible unit’s turnover being only 0.2676%. The entire exercise of allocation of expenses, therefore, is a waste exercise by which only 0.26% of the alleged common expenses have been allocated to the eligible unit amounting to Rs.1,07,897/- , out of total of such expenses to the tune of Rs.4 crores approximately. On the principle of materiality itself, this entire exercise of allocating expenses to the eligible unit, therefore, fails. 19. Even otherwise, we have noted that the ITAT in the case of the assessee in AY 2008-09 found identical allocation of expenses to the eligible unit of the assessee claiming exemption of its income u/s 10B of the Act on account of audit fees, managerial remuneration etc. to be inappropriate finding these expenses to have no bearing on the earning of income. Therefore, considering the materiality of the entire exercise and taking note of the decision of the ITAT in the case of assessee in AY 2008-09, we hold that the disallowance made by allocating commission expenses to the eligible unit of the assessee claiming deduction u/s 80IA of the Act amounting to Rs.1,07,897/- is not sustainable. The disallowance so made is, therefore, directed to be deleted. Ground of appeal No.3 is accordingly allowed. Ground of appeal No.3 raised by the assessee is thus allowed. 20. In effect, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 10.05.2024 at Ahmedabad. Sd/- Sd/- (SUCHITRA R. KAMBLE) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad, dated 10/05/2024 bt* ITA No. 710/Ahd/2023 Asahi Songwon Colors Ltd Vs. DCIT AY : 2017-18 10 आदेश की े /Copy of the Order forwarded to : 1. / The Appellant 2. / The Respondent. 3. संबंिधत आयकर आय / Concerned CIT 4. आयकर आय ( ) / The CIT(A) 5. िवभ ग य िति िध, आयकर य िधकरण / DR, ITAT, 6. ग "# फ ई / Guard file. आदेशानुसार/BY ORDER, True Copy उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation- ...08.05.2024 2. Date on which the typed draft is placed before the Dictating Member ...09.05.2024 3. Date on which the approved draft comes to the Sr.P.S./P.S. - ...09.05.2024...... 4. Date on which the fair order is placed before the Dictating Member for Pronouncement ...10.05.2024... 5. Date on which the file goes to the Bench Clerk .. ...10.05.2024......... 6. Date on which the file goes to the Head Clerk.................................. 7. The date on which the file goes to the Assistant Registrar for signature on the order.......................... 8. Date of Despatch of the Order..................