O E N INDIA LIMITED,KOCHI V. DCIT, CORPORATE CIR 2(1), KOCHI

ITA 861/COCH/2023

AI Insights

OEN India Limited appealed against the orders of the National Faceless Assessment Centre / Commissioner of Income-tax (Appeals) for the assessment years 2012-2013, 2016-2017, and 2018-2019. The primary issues in the appeals were the disallowances made under section 14A related to exempt income and under section 40A(9) concerning contributions to the employees' welfare fund. The Tribunal found that the disallowances under section 14A were not justified as the investments yielding exempt income were made from own funds, not borrowed funds. However, the Tribunal upheld the disallowance under section 40A(9), agreeing with the lower authorities that the contributions were not made out of business expediency.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 47001 (ITAT-COCHIN)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2018-2019
• Other Referred Cases: CIT v. HDFC Bank, Premier Finance & Trading Co. Ltd., Ashok Apparels, Godrej & Boyce Manufacturing Company Ltd. v. DCIT, Maxopp Investment Ltd. v. CIT, CIT v. Travancore Cochin Chemicals Ltd., Checkmate Services Pvt. Ltd. v.CIT, Aspinwall and Co. (Travancore) Ltd. v. DCIT (Assessment)
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: LEENA LAL
• Assessee Lawyers: RADHESH BHATT
• Keywords: Earning of tax free income; Rule 8D

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN Before Shri George George K, Vice-President & Shri Inturi Rama Rao, Accountant Member ITA No.859/Coch/2023 :Asst.Year 2012-2013 ITA No.860/Coch/2023 :Asst.Year 2016-2017 ITA No.861/Coch/2023 :Asst.Year 2018-2019 OEN India Limited 51/129, Vytilla Kochi – 682 019. PAN : AAACO2007Q. v. The Assistant Commissioner of Income-tax, Circle 2(1) Kochi. (Appellant) (Respondent) Appellant by : Sri.Radhesh Bhatt, CA Respondent by :Smt.Leena Lal, Sr.AR Date of Hearing :02.04.2025 Date of Pronouncement : 08.04.2025 O R D E R Per Inturi Rama Rao, AM : These three appeals at the instance of the assessee are directed against different orders of National Faceless Assessment Centre / Commissioner of Income-tax (Appeals) [“CIT(A)”] all dated 16.10.2023 passed u/s.250 of the Income-tax Act, 1961 [“the Act”] for the assessment years 2012-2013, 2016-2017 and 2018-2019. 2. Since identical issues are involved in these appeals, they were heard together and are being disposed of by this consolidated order for the sake of convenience. We take ITA No.859/Coch/2024 as the lead ITA Nos.859-861/Coch/2023. OEN India Limited. 2 appeal for adjudication and to state that the decision that would arrive at therein would be applicable to the other two appeals as well. 3. Briefly the facts of the case are that the appellant is a limited company incorporated under the provisions of Companies Act, 1956. It is engaged in the business of manufacturing and dealing in switches, relays and other electromechanical components.. The return of income for the assessment year 2012-2013 was filed on 24th September, 2012 disclosing total income of Rs.15,59,94,810. Against the said return of income, the assessment was completed by the Assessing Officer (“the AO”) vide order passed u/s.143(3) of the Income-tax Act, 1961 (“the Act”) at a total income of Rs.15,89,34,110. While doing so, the AO made a disallowance u/s.14A of the Act at Rs.10,61,485 and disallowance u/s.40(a)(i) of Rs.95, 188. 4. During the course assessment proceedings, the AO noticed that the appellant has earned exempt income of Rs.1,26,94,382 from the following heads, i.e., (i) Dividend from companies Rs.27,45,622, (ii) Agricultural income Rs.38,748, and (iii) Share of partnership firm Rs.99,10,012. Therefore, the AO called upon the appellant to explain as to why provisions of sec.14A of the Act cannot be applied. In response to the show cause notice, the appellant submitted that in respect of agricultural income which is exempt u/s.10(1) of the Act, the expenditure incurred had been disallowed while computing taxable income. In response to the dividend income, the assessee contended that borrowed funds have not been used for the purpose of making investments, which yielded exempt income. In respect of share of profit ITA Nos.859-861/Coch/2023. OEN India Limited. 3 from partnership firm the appellant contended that no expenditure was incurred for earning the exempt income u/s.10(2A) of the Act. It is further contended that no indirect expenditure was incurred to earn the exempt income. However, the AO rejecting the above contentions had made an addition of Rs.10,61,485 under the provisions of sec.14A of the Act, which includes disallowance under sub-rule (2) of Rule 8D being interest expenditure of Rs.4,64,888 and under sub-clause (3) amounting to Rs.5,95,597. The AO also made a disallowance of contribution made to employees’ welfare fund of Rs.95,188, rejecting the contention of the appellant that the contribution was made out of business expediency for the welfare of the employees. 5. Being aggrieved by the above disallowances, the appellant filed appeal before the CIT(A), who vide the impugned order dated 16.10.2023 dismissed the grounds of appeal on both the issues. 6. Being aggrieved, the appellant is in appeal before us in the present appeal. Before us it is contended that the interest free funds far exceeds the investment which yielded exempt income. Therefore, no disallowance of interest u/s.14A r.w. Rule 8D(2) is called for. In support of this contention, he filed a chart at page 4 and 5 of the written submission, and prayed that no disallowance of interest is called for. Reliance is placed on the following decisions, i.e., (i) CIT v. HDFC Bank 366 ITR 505 (Bombay), (ii) Premier Finance & Trading Co. Ltd. (104 Taxmann.com 97 (Bom HC), and (iii) Ashok Apparels 106 Taxmann.com 63 (Bom.) ITA Nos.859-861/Coch/2023. OEN India Limited. 4 7. As regards the disallowance under clause (3) of Rule 8D, it is submitted that application of Rule 8D is not automatic and AO cannot be resorted to the disallowance without recording satisfaction as to how the contention of the appellant that no expenditures were incurred, is incorrect. In support of this he relied on the decision of the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. v. DCIT (2017) 394 ITR 449(SC) and also in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 620 (SC). 8. As regards the disallowance u/s.40(a)(i) of the Act, it is submitted that the appellant made a contribution of Rs.95,188 to OEN employees welfare fund. The said contribution was made in pursuance of terms of memorandum of settlement entered into by the appellant with the employees, hence, the contribution is made out of business expediency and wholly and exclusively for the business purpose, no disallowance is called for and he also placed reliance on the Hon’ble Kerala High Court in the case of CIT v. Travancore Cochin Chemicals Ltd. 243 ITR 284 (Kerala). 9. On the other hand, the learned Senior DR by placing the reliance of the orders of the lower authorities submits that no interference is called in their orders. 10. We heard rival submissions and perused the material available on record. The grounds of appeal Nos.1 and 4 are general in nature, which does not require any specific adjudication. Ground No.2 challenges the disallowance made by the AO u/s.14A of the Act as confirmed by the ITA Nos.859-861/Coch/2023. OEN India Limited. 5 CIT(A). We have carefully perused the assessment order as well as the order passed by the CIT(A). The appellant had asserted that no disallowance of interest u/s.14A of the Act is called for in view of the fact that own funds in the form of share capital reserve funds far exceeds the investments made which yielded exempt income. It is well settled position of law that when investments which yielded exempt income were made out of own funds, no disallowance of interest u/s.14A of the Act r.w. Rule 8D(2)(ii) is called for. The lower authorities have not disputed the fact the own funds far exceeds the investment made which yielded the exempt income. Therefore, it is settled position of principles of law that as held by the Hon’ble Supreme Court in the case of South Indian Bank Ltd. v. CIT (2021) 438 ITR 1 (SC) wherein it is held that investments would be presumed to be made from assessee’s own funds if own funds far exceeds the investments. Thus, in view of the settled position of law, we direct the AO to delete the addition of interest of Rs.4,64,888. 11. As regards the disallowance under clause (iii) of Rule 8D(2), on perusal of the assessment order it would clearly reveal that before the AO it was asserted that no indirect expenditure was incurred to earn exempt income. However, the AO had not recorded a satisfaction as to how the contention of the appellant that no indirect expenditure is incurred, is incorrect. Now it is settled position of law that the AO cannot resort to disallowance u/s.14A r.w. Rule 8D(2)(iii) without recording such satisfaction. Reliance can be placed in this regard on the decision of the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. v. DCIT (2017) 394 ITR 449(SC) and ITA Nos.859-861/Coch/2023. OEN India Limited. 6 also in the case of Maxopp Investment Ltd. v. CIT (2018) 402 ITR 620 (SC). Therefore, in view of the settled position of law we direct the AO to delete the addition made u/s.14A r.w. Rule 8D(2)(iii) of Rs.5,95,597. 12. In the result, ground No.2 filed by the assessee stands allowed. 13. Ground No.3 challenges the disallowance u/s.40A(9) towards the contribution made to employees’ welfare fund. It is submitted that the contribution was made on account of contractual obligation in terms of the agreement entered into with the employees of the company and the provisions of 40A(9) has no application, placing reliance of Hon’ble Kerala High Court in case of CIT v. Travancore Cochin Chemicals Ltd. 243 ITR 284 (Ker.). 14. We have carefully perused the submissions made on behalf of the assessee. We are of the considered opinion that in this case the contribution is hit by the provisions of sec.40A(9) and the decision of the Hon’ble Kerala High Court in the case of Aspinwall and Co. (Travancore) Ltd. v. DCIT (Assessment) (2007) 295 ITR 553 (Ker.) is squarely applicable. Accordingly, Ground No.3 is dismissed. 15. In the other two appeals, i.e., ITA No. 860 and 861/Coch/2023 for assessment years 2016-2017 and 2018-1019, respectively, the appellant raised the ground relating to contribution towards PF and ESI. This issue is squarely covered against the assessee by the decision of the Hon’ble Apex Court in the case of Checkmate Services Pvt. Ltd. v.CIT ITA Nos.859-861/Coch/2023. OEN India Limited. 7 (2022) 448 ITR 518 (SC). Thus, this ground raised in both the years is dismissed. 16. In the result, the appeals filed by the assessee are partly allowed. Order pronounced on this 08th day of April, 2025. Sd/- (George George K) Sd/- (Inturi Rama Rao) VICE-PRESIDENT ACCOUNTANT MEMBER Cochin; Dated : 08th April, 2025. Devadas G* Copy to : 1. The Appellant. 2. The Respondent. 3. The CIT, Cochin. 4. The DR, ITAT, Cochin. 5. Guard File. Asst.Registrar/ITAT, Cochin "