KUTTALAM PILLAI KRISHNAKUMAR,COCHIN V. THE ITO NON CORP WARD -1(1), KOCHI

ITA 201/COCH/2023

AI Insights

The case involves Kuttalam Pillai Krishnakumar, an individual engaged in the business of exporting seafood, who appealed against the order of the CIT(A)/NFAC concerning the assessment year 2013-14. The primary issues in the appeal were the disallowance of entry tax written off and the disallowance of expenditure under Section 14A of the Income Tax Act, 1961. The Tribunal examined whether the entry tax paid should be considered a revenue or capital expenditure and whether disallowances under Section 14A were applicable in the absence of exempt income. The Tribunal's decision partially overturned the CIT(A)'s ruling, allowing depreciation on the entry tax as a capital expenditure and rejecting the disallowance of expenses related to exempt income.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 34335 (ITAT-COCHIN)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-12-2024
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2013-2014
• Other Referred Cases: Maini Materials Movement Pvt. Ltd. v. DCIT, CIT vs. Corrtech Energy Private Limited, CIT v. Chettinad Logistics Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961, Kerala Tax on entry of goods into local areas Act, Kerala Value Added Tax (KVAT), 2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: LEENA LAL; SNR
• Assessee Lawyers: PARVATHY AMMAL
• Keywords: Capital asset; Revenue expenditure; Depreciation; Capital expenditure; Earning of tax free income; Rule 8D; CHAPTER IV
• Section: 143(3); 142(1); 143(2); 250; 13; 14A

Judgement Text

"ITANo.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH: COCHIN BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No.201/Coch/2023 Assessment Year: 2013-14 Kuttalam Pillai Krishnakumar 39/116 Kay Kay House, Mullassery Canal Road Cochin Ernakulam 682 011 Kerala PAN NO : ACFPK6005Q Vs. ITO Non Corp Ward-1(1) Kochi APPELLANT RESPONDENT Appellant by : Smt. Parvathy Ammal, CA Respondent by : Smt. Leena Lal, Snr AR Date of Hearing : 02.12.2024 Date of Pronouncement : 26.12.2024 O R D E R PER KESHAV DUBEY, JUDICIAL MEMBER: This appeal at the instance of the assessee is directed against the order of ld. CIT(A)/NFAC dated 03.02.2023 vide DIN & Order No. ITBA/NFAC/S/250/2022-23/1049389242(1) for the AY 2013- 14 passed u/s 250 of the Income Tax Act, 1961 (in short “The Act”). 2. The assessee has raised the following grounds of appeal: ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 2 of 13 ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 3 of 13 ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 4 of 13 ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 5 of 13 ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 6 of 13 3. Brief facts of the case are that the assessee being an individual is in the business of exporting sea food and also acts as an overseas buyer agent. The return of income was filed on 09.10.2013 declaring a total income of Rs. 13,10,580/- Thereafter the return was selected for scrutiny and accordingly, statutory notices u/s. 143(2) as well as 142(1) of the Act were issued and ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 7 of 13 served upon the assessee calling for details / documents / evidences / information and books of account along with bills / vouchers etc. In response to the said notices, the assessee furnished books of accounts including cash books, bills, vouchers etc. which were verified by the AO. 3.1 On verification of the P&L a/c. the AO found that the assessee has claimed deduction of Rs. 2,18,645/- as Entry tax receivable written off. The assessee vide letter dated 08.01.2016 submitted that the Entry Tax of Rs. 25,165/- paid in 2005-06 and Rs. 1,93,480/- paid in FY 2006-07 as per the provisions of the Kerala Tax on entry of goods into local areas Act. As per the provisions of the Kerala Value Added Tax (KVAT), 2003 this entry tax can be set off against the output VAT on sale of goods and accordingly, the assessee has not charged the amount to profit and loss account and was carrying this amount in his accounts for set off against output tax. However, as the assessee were Exporters and the exports are exempted and therefore setting off was not possible either during the FY 2005-06 or during FY 2006-07. As per the provisions contained in the section 11(6) of the KVAT, 2003 the entry tax balance at the year end cannot be carried forward and the refund has to be applied. Accordingly, the assessee has applied for the refund and carried forward the amount as receivables in the assets side of the Balance sheet. However, upon communication from the department that the amount claimed as refund is not eligible and rejection of the claim of the assessee, the assessee has written off the amount of Rs. 2,18,645/- as irrevocable. The AO did not accept the contention as the assessee did not produce any evidence to show that he is not entitled for the refund. Moreover, the AO was of the view that the Entry tax was paid for bringing machinery which is a capital asset and should have been added to the cost of the asset and accordingly, held that the assessee cannot ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 8 of 13 write off such a claim in this assessment year and added back the same to the total income of the assessee under the head Income from business. 3.2 Further, on verification of the balance sheet, the AO found that the assessee has an investment of Rs. 44,86,056/-. The verification reveals that the liability has been incurred in form of secured loans to balance the assets of the firm which includes this investment. Hence, in the opinion of AO, the interest expenses relatable to exempt investment need to be disallowed as per section 14A of the Act. In response to the same, the assessee submitted that, he is the share holder in Sea Food Park Pvt. Ltd. holding 30,000 number of shares at the total cost of Rs. 30,00,000/-. The assessee contended that the investment in share capital of Sea Food Park Pvt. Ltd. is only a business investment and not investment per say attracting provisions of the Sec 14A of the Act. In the opinion of AO, the explanation of the assessee is not acceptable since the section 14A of the act provides for disallowance of expenditure in relation to income not includible in Total income and accordingly, by applying Rule 8D, the AO disallowed a sum of Rs. 2,39,678 U/s. 14A of the Act. 4. Aggrieved by the assessment completed u/s. 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A) / NFAC. 5. With regard to ground relating to disallowance of entry tax written off amounting to Rs. 2,18,645/-, the ld. CIT(A) / NFAC dismissed this ground by holding that Entry tax has been paid for bringing capital asset (machinery) to the site in Kerala in the process of putting this capital asset to use. Therefore, this entry tax is not a revenue expenditure but capital expenditure which needs to be included in the cost of the capital asset. ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 9 of 13 5.1 Now with regard to disallowance of expenditure U/s. 14A the ld. CIT (A) / NFAC also dismissed this ground holding that the purpose of the investment is not relevant as what needs to be examined is income not includable in the total income. Further, the ld. CIT(A) / NFAC held that bank interest of Rs. 81,73,337/- and Bank charges of 15,49,401/- and interest on India Bulls business loan of Rs. 89,092/- cannot be said to be utilized for exports or purchase of capital assets alone. Therefore the contention of the assessee that the interest expenses has been incurred only for export business and purchase of capital assets only was not accepted by the ld. CIT(A) / NFAC. Lastly, ld. CIT(A) / NFAC held that after the Finance Act, 2022 disallowance computed u/s 14A r.w. Rule 8D can exceed even the exempted income and accordingly, appeal of the assessee was dismissed. 6. Aggrieved by the order of the ld. CIT(A)/NFAC, the assessee has filed the present appeal before this Tribunal. 7. Before us, ld. A.R. of the assessee vehemently submitted that the Entry Tax of Rs. 25,165/- paid in 2005-06 and Rs. 1,93,480 paid in FY 2006-07 as per the provisions of the Kerala Tax on entry of goods into local areas Act. As per the provisions of the Kerala Value Added Tax (KVAT), 2003 this entry tax can be set off against the output VAT on sale of goods and accordingly, the assessee has not charged the amount to profit and loss account and was carrying this amount in his accounts for set off against output tax. However, as the assessee were Exporters and the exports are exempted and therefore setting off was not possible either during the FY 2005-06 or during FY 2006-07. As per the provisions contained in the section 11(6) of the KVAT, 2003 the entry tax balance at the year end cannot be carried forward and the refund has to be applied. ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 10 of 13 Accordingly, the assessee has applied for the refund and carried forward the amount as receivables in the assets side of the Balance sheet. However, upon communication from the department that the amount claimed as refund is not eligible and rejection of the said claim of refund of the assessee, the assessee has written off the amount of Rs. 2,18,645/- as irrevocable. Further, without prejudice, the AR of the assessee submitted that if the same is treated as capital expenditure, then the depreciation may be allowed on the same as per the provisions contained under the Income Tax Act. 7.1 With regard to disallowance of expenditure U/s. 14A of the Act, the ld. AR of the assessee vehemently submitted that investment in the share capital of Sea Food park is only a business investment and the same does not attract the provision of Sec. 14A. Further, the AR submitted that ld. CIT(A) / NFAC grossly erred in concluding that after the Finance Act 2022, the disallowance computed u/s. 14A r.w. 8D can exceed the exempted income. Lastly, the AR of the assessee submitted that as there is no exempt income earned by the assessee, no disallowance u/s. 14A is warranted and accordingly, prayed to allow the appeal of the assessee. 8. The ld. D.R. on the other hand supported the orders of the authorities below. 9. We have heard the rival submissions and perused the materials available on record. The grounds of appeal are related to i) Disallowance of entry tax written off and ii) Disallowance of expenditure u/s. 14A of the Act. ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 11 of 13 9.1 Now coming to the grounds related to the Disallowance of entry tax written off, we find that the Entry Tax of Rs. 25,165/- paid in 2005-06 and Rs. 1,93,480/- paid in FY 2006-07 as per the provisions of the Kerala Tax on entry of goods into local areas Act. As per the provisions of the Kerala Value Added Tax (KVAT), 2003 this entry tax can be set off against the output VAT on sale of goods and accordingly, the assessee has not charged the amount to profit and loss account and was carrying this amount in his accounts for set off against output tax. However, as the assessee were Exporters and the exports are exempted and therefore setting off was not possible either during the FY 2005-06 or during FY 2006-07. As per the provisions contained in the section 11(6) of the KVAT, 2003 the entry tax balance at the year end cannot be carried forward and the refund has to be applied. Accordingly, the assessee has applied for the refund and carried forward the amount as receivables in the assets side of the Balance sheet. However, upon communication from the department that the amount claimed as refund is not eligible and rejection of the said claim of refund of the assessee, the assessee has written off the amount of Rs. 2,18,645/- as irrevocable. We are of the opinion that the Entry tax of Rs. 2,18,645/- (Rs. 25,165/- relating to 2005-06 and Rs. 1,93,480/- relating to FY 2006-07) has been paid for bringing capital asset (machinery) to the site in Kerala in the process of putting this capital asset to use. Therefore, we agree with the view of ld. CIT(A) / NFAC that this entry tax paid is not a revenue expenditure but a capital expenditure which needs to be included in the cost of the capital asset. Being so, we are of the considered opinion that since the entry tax paid is upheld as capital in nature, the depreciation rate as applicable in case of plant and machinery should also be allowed on total entry tax paid amounting to Rs.2,18,645/- treating it as part of the block “plant & machinery” in accordance with the ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 12 of 13 provisions of Income Tax Act, 1961. It is ordered accordingly. Therefore, this ground of the assessee is partly allowed. 9.2 Now with regard to ground which relates to disallowance u/s.14A of the Act, amounting to Rs. 2,39,678./- admittedly, the assessee has not earned any exempt income in the year under consideration. Therefore, in the absence of any exempt income, no disallowance u/s.14A r.w. Rule 8D of the Income-tax Rules, is warranted. In holding so, we rely on the order of the co-ordinate Bench in the case of Maini Materials Movement Pvt. Ltd. v. DCIT in ITA No.1069/Bang/2024 (order dated 22.07.2024), the Bangalore Bench held as under:- “7. We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the assessee has not earned any exempt income in the year under consideration, therefore, in the absence of any exempt income, no disallowance under section 14A r.w.r. 8D of Income Tax Rules is warranted. In holding so, we rely on the judgment of Hon’ble High Court of Gujarat in the case of CIT vs. Corrtech Energy Private Limited reported in 45 taxmann.com 116 where it was held that the provision of section 14A of the Act cannot be applied in the absence of any exempted income. The relevant observation of the Hon’ble Bench reads as under: Section 14A(1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the instant case, the Tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the Tribunal held that disallowance under section 14A could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed that where the assessee did not make any claim for exemption, section 14A could have no application. Respectfully following the orders of the Hon’ble High Court as mentioned above, we hold that disallowance under the provision ITA No.201/Coch/2023 Kuttalam Pillai Krishnakumar, Ernakulam Page 13 of 13 of section 14A r.w.r. 8D of Income Tax Rules cannot exceed the exempted income in the given facts and circumstances. As such, there is no dividend income in the year under consideration and therefore, there cannot be any disallowances of the expenses as envisaged under the provision of section 14A r.w.r. 8D of Income Tax Rules. Hence, the ground of appeal of the assessee is allowed.” 10. We also rely on the judgment of Hon’ble Madras High Court in the case of CIT v. Chettinad Logistics Pvt. Ltd. (2017) 80 taxmann.com 221 (Madras HC) as well as 95 taxmann.com 250 (SC), wherein the SLP against the Hon’ble Madras High Court ruling has been dismissed. Accordingly, this ground of the assessee is allowed. In the result, appeal filed by the assessee is partly allowed. Order pronounced in the open court on 26th Dec, 2024 Sd/- (Prashant Maharishi) Vice President Sd/- (Keshav Dubey) Judicial Member Bangalore, Dated: 26th Dec,2024. VG/SPS Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The DR, ITAT, Bangalore. 5 Guard file By order Asst. Registrar, ITAT, Cochin. "