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Disallowance of interest as per second limb of Rule 8D is untenable if assessee proves that investment is made using own funds: ITAT

2019-TIOL-1491-ITAT-MUM

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘H’ MUMBAI

ITA No.4262/Mum/2018
Assessment Year: 2014-15

INCOME TAX OFFICER
6(3)(4), R NO 524, 5th FLOOR
AAYAKAR BHAVAN MK ROAD
MUMBAI – 400020

Vs

M/s KHANDELWAL LABORATORIES PVT LTD
79/78, D LAL PATH CHINCHPOKLI MUMBAI-400033
PAN NO:AAACK4225E

Mahavir Singh, JM & M Balaganesh, AM

Date of Hearing: July 15, 2019
Date of Decision: July 17, 2019

Appellant Rep by: Shri Manojkumar Singh
Respondent Rep by: 
Shri Dharmesh Shah

Income Tax – Sections 14A & Rule 8D

Keywords – Reserves & surplus of shares – Share capital

The assessee was engaged in the business of manufacturing all forms of drugs and molecules. During the course of the assessment proceedings, the AO observed that the assessee had claimed exempt income in the form of dividend in the sum of Rs 11.53 lacs in respect of investments made in equity shares. Subsequently, the AO observed that assessee company had made suo moto disallowance of Rs 3.92 lacs u/s.14A read with third limb of rule 8D. Rejecting the various explainations of the assessee, AO made further disallowance in respect of Rule 8D and by applying second limb towards disallowance of interest in the sum of Rs 9.51 lacs in the assessment. On appeal, the CIT(A) appreciated the contentions of the assessee that assessee is having sufficient own funds in its kitty and hence, it could be presumed that the investments were made out of own funds. Accordingly, he reversed the order of the AO.

On appeal, the Tribunal held that,

Whether disallowance of interest under second limb of Rule 8D is warranted in respect of investment if assessee proves that such investment is made using own funds – NO: ITAT

++ the balance sheet of the assessee shows the own funds of the assessee in the form of share capital and reserves and surplus as on March 31, 2014 was Rs.85.03 Crores as against the total investments made by the assessee in the sum of Rs.6.33 Crores. This goes to prove that assessee is having sufficient own funds in his kitty to make investment thereon. This Tribunal find that the CIT(A) by placing records on the decision of Jurisdictional High Court in the case of CIT vs Reliance Power and Utilities Ltd. and in the case of CIT vs. HDFC Bank Ltd. had deleted the disallowance of interest made under second limb of rule 8D (2). Hence, this Tribunal does not find any infirmity in the action of the CIT(A).

Revenue’s appeal partly allowed

(Editor’s note:Ground no 2 & 3 of the appeal are not disscussed in this headnote.)

ORDER

Per: M Balaganesh:

This appeal in ITA No.4262/Mum/2018 for A.Y.2014-15 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-12, Mumbai in appeal No.CIT(A)-12/ITO-6(3)(4)/B2-653/16-17 dated 05/04/2018 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 21/12/2016 by the ld. ITO-6(3)(4), Mumbai (hereinafter referred to as ld. AO).

2. The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in deleting the disallowance made u/s.14A of the Act in the facts and circumstances of the case.

3. The brief facts of this issue are that the assessee is engaged in the business of manufacturing all forms of drugs and molecules. The ld. AO observed that the assessee had claimed exempt income in the form of dividend in the sum of Rs.11,53,821/- in respect of investments made in equity shares. The ld. AO observed that assessee company had made suo moto disallowance of Rs.3,92,517/- u/s.14A of the Act read with third limb of rule 8D of the rules in the return of income. The ld. AO made further disallowance in respect of Rule 8D and by applying second limb towards disallowance of interest in the sum of Rs.9,51,930/- in the assessment. The ld. CIT(A) appreciated the contentions of the assessee that assessee is having sufficient own funds in its kitty and hence, it could be presumed that the investments were made out of own funds thereon. Accordingly, he disallowed the disallowance of interest made under second limb of rule 8D(2) of the rules.

4. Aggrieved, the revenue is in appeal before us.

5. We have heard rival submissions. We find from the balance sheet of the assessee that own funds of the assessee in the form of share capital and reserves and surplus as on 31/03/2014 was Rs.85.03 Crores (as on 31/03/2003 it was Rs.84.02 Crores), as against the total investments made by the assessee as on 31/03/2014 in the sum of Rs.6.33 Crores (as on 31/03/2013 it was Rs.9.37 Crores.) This goes to prove that assessee is having sufficient own funds in his kitty to make investment thereon. We find that the ld. CIT(A) by placing records on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs Reliance Power and Utilities Ltd., reported in 313 ITR 340 = 2009-TIOL-27-HC-MUM-IT and in the case of CIT vs. HDFC Bank Ltd., reported in 67 Taxman.com 41 had deleted the disallowance of interest made under second limb of rule 8D (2) of the rules. We do not find any infirmity in the said action of the ld. CIT(A). Accordingly, the ground No.1 raised by the revenue is dismissed.

6. The ground No.2 raised by the revenue is with regard to disallowance made u/s.36(1)(va) r.w.s. 2(24)(x) of the Act in respect of delayed payment of provident fund and ESI dues beyond the due dates specified under the respective acts.

6.1. We have heard rival submissions. We find that the date of remittance of PF and ESI dues for each month is duly tabulated in pages 8 & 9 of the order of CIT(A) and from which it is seen that the entire dues were duly remitted by the assessee on or before the due date of filing of return of income and hence, by respectfully following the decision of Hon’ble Jurisdictional High Court in the case of CIT vs. Ghatge Patel Transport Ltd reported in 368 ITR 749 = 2014-TIOL-1826-HC-MUM-ITCIT vs. Hindustan Organic Chemicals Ltd. reported in 366 ITR 1 = 2014-TIOL-1129-HC-MUM-IT and DCIT vs Hind Filter Ltd., reported in 90 Taxman.com 51, the ld. CIT(A) had deleted the disallowance made u/s. u/s.36(1)(va) r.w.s. 2(24)(x) of the Act in the sum of Rs.93,44,251/- which does not call any interference. Accordingly, ground No.2 raised by the revenue is dismissed.

7. The last issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in deleting disallowance of Rs.26,90,802/- towards travelling and conveyance which was made on an ad hoc basis by the ld. AO.

7.1. We have heard rival submissions. We find that the ld. AO had made ad hoc disallowance of 5% of total travelling and conveyance expenses of Rs.5,38,16,049/- debited to the profit and loss account. The ld. AO had observed in his order that the details of travelling and conveyance expenses were duly submitted by the assessee vide letter dated 04/11/2016 containing the names of the employees, mode of payment in tabulated form who had been subjected to travel. However, the ld. AO held that the assessee could not discharge its onus to substantiate that the said travel expenses were incurred for the purpose of business of the assessee, for which purpose he made an ad hoc disallowance at 5% in the sum of Rs.26,90,802/-. We find that the assessee had pleaded before the ld. CIT(A) that it had to employed 400 medical representatives who travel all over the country and their expenditure of travelling together with salary are to be borne by the assessee. The assessee had also filed turnover chart together with the list of travelling expenses incurred from A.Yrs 2009-10 to A.Yrs 2014-15 wherein it could be seen that the travelling expenses constituted on an average 6.43% of the total turnover. It was also pleaded by the assessee that the entire payments were made through concerned bank accounts of the representatives and these were incurred from time to time in the regular course of its business. The assessee also submitted documentary evidences including bills and vouchers in three box files containing all the details of travelling expenses along with all the vouchers for four months vide letter dated 04/11/2016 before the ld. AO while this is so, it was argued that there was no need to make any ad hoc disallowance at 5%. The ld. CIT(A) deleted the disallowance in the sum of Rs.26,90,802/- by observing as under:-

“22. I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. As the appellant is engaged in the business of manufacture and sale of pharmaceutical products, it engages a large number of MRs for the purpose of procurement of orders and collection of payments as per the business practice in the said industry. The MRs are required to travel extensively for the said purpose and the appellant reimburses the expenditure incurred by the MRs towards travel, conveyance and daily expenses in discharge of their duties. The Travelling & Conveyance expenses incurred by the appellant during the year is mainly towards such reimbursement of expenses incurred by the MRs.

23. The AO made ad-hoc disallowance of 5% of the Travelling & Conveyance expenses on the ground that the appellant could not discharge the onus that lay on it to support and substantiate its claim for the said expenses by producing relevant supporting documentary evidence and therefore, inflation of the said expenses and personal use cannot be ruled out. On the other hand, the appellant contended that three box files containing all the details of the Travelling & Conveyance expenses along with all the documentary evidences including bills and vouchers for a period of four months were furnished to the AO during the assessment proceedings vide letter dated 04.11.2016. It was stated that the vouchers for the balance eight months were also produced for verification. On perusal of the copy of the letter dated 04.11.2016 submitted by the appellant to the AO during the assessment proceedings, it is seen that the appellant furnished the bills and vouchers in respect of this expenditure for a period of 4 months and produced the bills and vouchers for the remaining period also for the verification of the AO. Hence, it is not correct to state that the appellant failed to produce supporting documentary evidences.

24. As regards the observation of the AO that inflation of expenses and personal use cannot be ruled out, it is seen that this observation does not represent a finding of fact based on verification of the details and evidences furnished by the appellant. Further, it is not the case of the AO that significant portion of the expenditure has been incurred in cash thereby rendering it not amenable for verification of the genuineness of the expenditure. In fact, no instances of violation of the provisions of section 40A(3) of the Act have been reported in the tax audit report and perusal of the ledger account of Travelling & Conveyance expenses shows that the payments to MRs were made through cheques only.

25. Further, it is pertinent to state that the AO made ad-hoc disallowance of Travelling & Conveyance expenses in the assessment order for the AY 2012-13 for the same reasons as stated in the assessment order for the present AY 2014-15 and the said addition was deleted by the CIT(A)-12, Mumbai vide order dated 10.08.2006 by observing as under:

It is seen that disallowance has been made at 20% on ad-hoc basis without bringing out anything on record in the assessment order. Perusal of the tax audit report also shows that no expenditure is quantified as cash expenditure. Thus, it is held that no disallowance can be made on pure estimation without any basis of documentary proof on mere surmises and presumptions. Thus, Ground of appeal No. 4 is allowed.

26. The fact of the case for the present assessment year are identical to the facts of the case for the earlier AY 2012-13 in respect of which the CIT(A) deleted the ad-hoc disallowance as mentioned above. Hence, having regard to the same and the discussion made regarding the facts of the case in the preceding paragraphs, it is held that the ad-hoc disallowance of 5% of the Travelling & Conveyance expenses made by the AO is not justified in the facts of the appellant’s case. Hence, the AO is directed to delete the disallowance of Travelling & Conveyance expenses of Rs. 26,90,802/- made in the assessment order. This ground of appeal is therefore allowed.”

7.2. We have heard rival submissions. We find from the aforesaid categorical observation and findings of the ld. CIT(A) that no ad hoc disallowance of travel expenses @5% in the sum of Rs.26,90,802/- is warranted in the facts and circumstances of the case. However, we find that this Tribunal for A.Y.2012-13 in assessee’s own case in ITA No.6483/Mum/2016 dated 10/01/2019 on the impugned issue had remanded the matter back to the file of the ld. AO for fresh examination in pages 11 & 12 of its order which are not reiterated for the sake of brevity. Respectfully following the said decision, we deem it fit to remand this issue to the file of the ld. AO with the similar directions prevailing as in A.Y.2012-13 supra. Accordingly, ground No.3 raised by the revenue is allowed for statistical purposes.

8. Ground No.4 & 5 raised by the revenue are general in nature and does not require any specific adjudication.

9. In the result, appeal of the revenue is partly allowed for statistical purposes.

(Order pronounced in the open court on this 17.07.2019)

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