Income Tax Appellate Tribunal - Delhi
M/S. East West Rescue Private Ltd., New ... vs Dcit, New Delhi on 3 August, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI 'D' BENCH,
NEW DELHI
BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND
SHRI K.N. CHARY, JUDICIAL MEMBER.
ITA No. 3880/DEL/2014
[Assessment Year: 2010-11]
East West Rescue Private Limited Vs. DCIT
38, Golf Links, Circle - 3(1)
New Delhi New Delhi
PAN : AAACE 0482 H
[Appellant] [Respondent]
Date of Hearing : 03.08.2017
Date of Pronouncement : 03.08.2017
Assessee by : Shri P.N. Monga,
Shri Manu Monga, AR
Revenue by : Shri Anshu Prakash, CIT-DR
ORDER
PER B.P. JAIN, ACCOUNTANT MEMBER,
This appeal of the assessee arises from the order of the ld. CIT(A)-XXVIII, New Delhi vide order dated 23.05.2014 for assessment year 2010-11.
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2. The assessee has raised the following grounds of appeal;
"1.That the Learned Commissioner of Income Tax (Appeal) has erred in fact & in law while confirming disallowance of Rs. 8,31,908/- applying section 14A of the Income Tax Act, 1961 and Rule 8D of the Income Tax Rules.
2.That the Learned Commissioner of Income Tax (Appeal) has erred in fact & in law while confirming the disallowance of Rs.1,185/- out of the claim of depreciation.
3.That the Learned Commissioner of Income Tax (Appeal) has erred in fact & in law while confirming disallowance of Rs.62,403/- being payable to sundry creditor as non-payable.
4.That the Learned Commissioner of Income Tax (Appeal) has erred in fact & in law while confirming disallowance of Rs.22,000/- paid as fee for arbitration to Justice R. L. Khurana, for non-deduction of TDS; where the said fee is not covered in the definition of professional fee.
5.That the Learned Commissioner of Income Tax (Appeal) has erred in fact & in law while confirming disallowance of Rs.2,20,924/- towards personal use out of / Travelling Expense (Rs. 53,181/-), Telephone Expenses (Rs. 67743/-) & Business. Promotion (Rs. 1,00,000/-) 3
6. That the Learned Commissioner of Income Tax (Appeal) has erred in fact & in law while disallowing the claim of the assessee in respect of carry forward of loss of Rs 4,11,895/-, and instead treating it as Long Term Capital Gain of Rs. 23,83,252/- and including the same in the taxable income of the assessee.
3. As regards Ground No. 1, the brief facts of the case are that the ld. CIT(A), after careful consideration of the assessment order and submissions thereof, observed that the assessee received dividend income of Rs. 71,89,451/- which has been claimed as exempt u/s 10(34) of the Income-tax Act, 1961 [hereinafter referred to as 'the Act' for short]. The ld. CIT(A) further observed that the assessee has also made investment in shares, mutual funds and bonds etc. The Assessing Officer thus invoked the provisions of section 14A by providing the assessee due opportunity. On the basis of detailed reasons given on pages 2 to 5 of the assessment order the Assessing Officer expressed his satisfaction that the assessee company had invested in shares and would generate income which does not or shall not form part of total income of the assessee company and indirect cost in the form of administrative expenditure and interest is involved in this process. He accordingly made a disallowance of Rs.8,31,908/- under Clause (iii) of Rule 8D(2) of the Act. The ld. CIT(A) further observed that during the appellate proceedings, the appellant reiterated its submissions and 4 claimed that no disallowance was called for under clause (iii) as the assessee does not have to incur any effort to receive or recover the income. The assessee has not taken any loan or paid any interest in respect of any investment and no decision or administrative expense has been incurred on the manner of investments. Accordingly, the ld. CIT(A) confirmed the action of the Assessing Officer.
4. We have heard the rival contentions and perused the facts of the case. At the outset, we do not find any infirmity in the order of the ld. CIT(A). The Assessing Officer has expressed his satisfaction before taking recourse to Rule 8D. Further, it was observed by the ld. CIT(A) that any income, whether exempt or not, can only be earned after incurring some expenditure. In the case of the assessee, such expenditure cannot be segregated in the accounts of the assessee and is clubbed with overall administrative/financial and other expenses of the business as a whole. If any income is exempt from tax because it is not included in the total income by virtue of section 10 of the Income- tax Act, 1961, section 14A of the Act prohibits allowance of any expenditure incurred in relation thereto. Income from deployment of funds in shares earned by way of dividend is not included in total income by virtue of the provisions contained in section 10(34) of the 5 Act, whether the shares are held as stock-in-trade or as investment. As dividend income does not form part of total income under the Act, the provisions of section 14A are applicable. The allowance of expenditure in relation to dividend income is thus not admissible in computing the income of an assessee whether the shares are held as investment or they are held on trading account as stock-in-trade. The provisions of section 14A, controls the computation of income under the provisions of the Act and has overriding effect over other provisions. Therefore, even if the expenditure is allowable under any other provision of the Act, disallowance is made because of the overriding effect of section 14A of the Act.
5. We further observe that the Legislature, by using the expression "expenditure in relation to income which does not form part of the total income" in section 14A of the Act, in no way indicates that it does not encompass disallowance of expenditure incurred in relation to the income in the absence of actual receipt of income during the relevant previous year. On the contrary, the term "in relation to" is wide enough to include in its sweep expenditure both "for making or earning income" and "incurred wholly and exclusively for the purposes of business carried on by the assessee". When there is no income, it 6 cannot form part of anything and certainly it does not, in any case form part of total income. When dividend is not taxable at all, the expenses pertaining to that would also not be allowable because there is no taxable income of the assessee against which such expenses can be allowed.
6. Further, sub-section (2) of section 14A empowers the AO to determine the amount of expenditure incurred in relation to exempt income in accordance with the method as may be prescribed. The method has since been prescribed by insertion of rule 8D of the I.T. Rules, 1962 w.e.f. 24.03.2008. Sub-section (3) of section 14A mandates that the above provisions of sub-section (2) shall also apply to a case where an assessee claims that no expenditure has been incurred by him in relation to exempt income. The constitutional validity of section 14A read with sub-sections (1), (2) and (3) thereof has since been upheld by the Hon'ble Bombay High Court vide its order dated 12.08.2010 in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT in ITA No. 626 of 2010 and writ petition no. 758 of 2010 after dwelling on the above issue in great details and considering decisions of various Courts and Tribunals on the matter including that of ITAT, Mumbai (Special Bench) in the case of ITO vs. Daga Capital 7 Management Pvt. Ltd. (2009) 117 ITD 169. The Hon'ble High Court has also upheld the validity of Rule 8D, w.e.f. AY 2008-09. The relevant portion of the aforesaid order of the Hon'ble High Court is reproduced hereunder:
Our conclusion in this judgment are as follows:
i. Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1);
ii) The payment by a domestic company under Section 115(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis;8
iii) The provisions of sub section (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid;
iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution;
v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008- 09;"
7. In ACIT v Citicorp Finance (India) Limited [300 ITR 398(AT Mum)] it was held that the provisions of sub sections (2) & (3) are procedural in nature and therefore section 14A will apply to all pending matters. The Hon'ble Calcutta High Court in Dhanuka & Sons vs. CIT 12 Taxmann.com 227 (Cal.) held that:
"In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is 9 payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment."
8. Considering the above, the impugned addition of Rs. 8,31,908/- made by the AO by applying rule 8D read with section 14A of the Act has rightly been confirmed by the ld. CIT(A). In view of the above facts and circumstances of the case, the order of the ld. CIT(A) on the issue is confirmed and ground raised by the assessee is dismissed.
9. As regards Ground No. 2, the brief facts pertaining to this ground are that the Assessing Officer noticed that the bills were not in the name of the company but in the name of the director of the assessee company and the payment has been made by the company and belong to the company, therefore, the assets purchased were capable of personal use. Accordingly, the Assessing Officer made the disallowance which was confirmed by the ld. CIT(A). 10
10. We have heard the rival contentions and perused the facts of the case. We find that no plausible explanation has been given either before the authorities below or even before us. Therefore, the assets purchased by the assessee, like furniture and mobile set are capable of personal use. Accordingly, in the absence of any satisfactory explanation, we do not find any infirmity in the order of the ld. CIT(A) who has rightly confirmed the action of the Assessing Officer. Thus, Ground No. 2 of the assessee is dismissed.
11. As regards Ground No. 3, the Assessing Officer made disallowance of Rs. 62,403/- on account of unconfirmed creditors, which action of the Assessing Officer was confirmed by the ld. CIT(A).
12. We have heard the rival contentions and perused the facts of the case. As a matter of fact, it was pleaded before the ld. CIT(A) as well as before us that the party is demanding money and copy of demand letter has been placed on record. But the ld. CIT(A) has not commented upon such demand letter and has not made any enquiry in this regard. In the interest of justice, the matter is set aside to the file of the ld. CIT(A) who will conduct proper enquiry and find out whether the creditors are still outstanding and genuineness of the 11 demand letter so placed on record. Accordingly, Ground No. 3 is allowed for statistical purposes.
13. As regards Ground No.4 of the assessee, we find that the Assessing Officer disallowed non deduction of TDS on fees paid to arbitrators which was confirmed by the ld. CIT(A).
14. We have heard the rival contentions and perused the facts of the case. We find that the ld. counsel for the assessee has made the following submissions before the ld. CIT(A) :
"In respect of payment made to Sh. Justice R.L. Khurana, Arbitrator, the same does not fall in the category of professional fee and as such no TDS is applicable. In section 194J in the explanation it is explained that "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified by the Board for the purposes of section 44A A or of this section"12
It is very clear from the above that Arbitration fee is not covered by the definition of professional services as mentioned above also does not fall in any of the categories mentioned therein. The arbitration proceedings do not fall in any of the categories mentioned above.
In respect of the professions notified under section 44AA of the Income Tax Act, 1961, as per circular No. 205 dated 27-07- 1976, as well as the arbitration is not a profession covered by the circular. Copy of the circular is attached."
15. In view of the above facts and circumstances of the case we do not agree with the submissions of the assessee since the TDS is deducted on services rendered whether legal, technical or as mentioned in section 194J of the Act. Therefore, tax required to be deducted. We find no infirmity in the order of the ld. CIT(A) and thus Ground No. 4 of the assessee is dismissed.
16. As regards Ground No. 5, the Assessing Officer made disallowance of Rs. 220924/- for personal use on account of travelling expenses and telephone expenses @ 10% of the claim and Rs. 1 lakhs on account of business promotion for personal use which action of the Assessing Officer was confirmed by the ld. CIT(A).
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17. We have heard the rival contentions and perused the facts of the case. The assessee is not maintained any record for use of vehicle and telephone and therefore, personal use cannot be ruled out and also no account for business promotion has been maintained and, therefore, personal use at this juncture, can also not be ruled out. Expenses appear to be quite reasonable. Therefore, we find no infirmity in the order of the ld. CIT(A) who has rightly confirmed the action of the Assessing Officer in this regard. Accordingly, Ground No. 5 is dismissed.
18. As regards Ground No. 6, the brief facts are that the Assessing Officer made disallowance of loss for long term capital gain as per revised computation, which action was confirmed by the ld. CIT(A).
19. We have heard the rival contentions and perused the facts of the case. As a matter of facts, the assessee filed revised computation during the course of assessment proceedings which was not accepted by the authorities below for the reason that the assessee should have made the claim through revised return. It is settled law that the claim which is legally permissible should otherwise be allowed by the Assessing Officer which, in fact, has not been allowed in the present case and, therefore, the matter is set aside to the file of the Assessing 14 Officer who will allow the claim after verifying the genuineness of the computation of loss as per revised computation filed during the assessment proceedings. Thus, Ground No. 6 of the assessee is allowed for statistical purposes.
20. In the result, the appeal of the assessee is partly allowed.
The order is pronounced in the open court on 03.08.2017.
Sd/- Sd/-
[K.N. CHARY] [B.P. JAIN]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 03rd AUGUST, 2017
VL/
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
Asst. Registrar,
ITAT, New Delhi