Delhi High Court - Orders
Filing Appeal) Pr. Commissioner Of ... vs Uk Paints India Pvt. Ltd on 1 May, 2024
Author: Yashwant Varma
Bench: Yashwant Varma, Purushaindra Kumar Kaurav
$~39
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 24/2024 & CM APPL. 1047/2024 (Delay of 19 days in
filing appeal)
PR. COMMISSIONER OF INCOME TAX-7, DELHI
..... Appellant
Through: Mr. Puneet Rai, Sr. SC.
versus
UK PAINTS INDIA PVT. LTD. ..... Respondent
Through: Ms. Kavita Jha, Advocate
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE PURUSHAINDRA KUMAR
KAURAV
ORDER
% 01.05.2024
1. Having heard Mr. Rai, learned counsel appearing in support of the appeal and Ms. Jha, learned counsel appearing for the respondent- assessee, we take note of the following facts.
2. While dealing with the question of Section 14A of the Income Tax Act, 1961 ["Act"] read along with Rule 8D of the Income Tax Rules, 1962 ["Rules"], it appears from the record that the assessee had initially submitted a suo moto disallowance of INR 7,50,000/-.
3. In the course of assessment and upon being invited by the Assessing Officer ["AO"] to submit a fresh computation, the assessee without prejudice its original suo moto disallowance quantified it at INR 44,00,176.
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4. The AO on due consideration of the aforesaid, proceeded to hold as under:
"Reg. disallowance under section 14-A; Companies main business is manufacturing of Paints, Tin containers and Financing activities. We are not doing any share trading business as your honour has mention in your query. We have (6) manufacturing units in allover India.
• All the expenses as per schedule -13 of Balance sheet are pertain to manufacturing activities only.
• The total expenses under bank interest is Rs. 18.57 lakhs paid to SCB/PSB against OD, FD account, towards making payment to various company as Inter-Corporate Deposits and invested in Mutual Fund and shares from which company has earned interest income of Rs.6.04 crores (which is Taxable) and short-term capital gain on shares /Mutual Fund Rs.4.34 Crores and Rs.52,000/- paid for day to day business transaction. Actually the entire interest is paid for business purposes only for earning of interest and gain on which company has paid tax.
• During the year company has received dividend of Rs.8.55 crores as compared to last year Rs.20.75 crores, as per detail enclosed. From the detail you will find major amount of dividend is from old investment made by the company in Berger Paints and therefore minimal expenditure has been incurred for earning the said exempt income.
• During the year under consideration total turnover was Rs. 24.66 crores as compared to last year Rs. 18.67 crores. This shows increase of around 40% in turnover and decrease in exempt income by 60% as mentioned above.
• The company in view of the provisions of section 14-A suomoto disallowed expenses amounting of Rs. 7,50,000/- at the time of filing of Return of Income.
• Details of Rs. 7,50,000/- is as under:
(i) Part Salary of Mr. K. S. Dhingra, Director (Who look after the investment activities). Rs.5,00,000
(ii) Part Salary of Mr. K. S. Nair and Tejinder Singh Rs.1,00,000 (Administrative staff who look after banking work)
(iii) Other administrative expenses Rs. 1,50,000 Total Rs. 7,50,000 Now as per recent changes in working of Rule 8-D, disallowance comes to Rs.44,00,176/- (as per annexure-ii)"
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The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 07/05/2024 at 20:57:59 Annexure-ii submitted by the assessee company is reproduced hereunder:
U.K. PAINTS INDIA PVT. LTD. (A.Y.) 2008-09) The expenditure in relation to total income which does not form part of the total income shall be the aggregate of the following amounts, namely 1 The amount of expenditure directly 0 relating to income which does not form part of the total income 2 Proportionate expenditure by 0 way of interest 3 0.5% of the average of the value of investment, income from which is exempted to income tax.
In our case only the 3rd calculation need to be made Calculation of Average Investment:
Opening investment as on 788,962,527.03 1.4.2007 (A.Y . 2008-09) Closing Investment as on 971,107,967.22 31.3.2008 (A.Y. 2008-09) Total 1,760,070,494.25 Average 880,035,247.13 0.5% of the Average 4,400,176.24 Investment Therefore as per Rule 8D an amount of 4,400,176.24 to be This is a digitally signed order.
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However, it is found that the assessee company has not calculated the amount of disallowance under Rule 8D properly. As per the provisions of Rule 8D the total value of investment on the first day and the last day of the previous year is to be taken on which assessee has received exempt income.
The quantum of expenditure disallowable u/s 14A is recomputed as per method prescribed by the Board in Rule 8D of the I.T. Rules, 1962 which is applicable from the assessment year 2008-09:-
(i) Expenditure directly relating to such income =Rs.
7,50,000/-
The assessee company has disallowed the sum of Rs. 7,50,000/- in the return of income considering it expenditure directly relating to earning of exempt income.
(ii)(A) Expense on interest = Rs.2,38,532/- (B) Average value of investment= Rs. 1,69,08,69,749/- (C) Average total assests in the Balance Sheet =Rs. 2,55,68,86,922/-
AxB = Rs 1,57,771/-
C
(iii) 1/2% of Average value of investment (B)= Rs.84,54,349/-
Disallowance u/s 14A= (i)+(ii)+(iii) =Rs.7,50,000 + Rs. 1,57,771+ Rs .84,54,349 =Rs 93,62,120/-
It is seen from the submission filed that the assessee had already added back Rs 7,50,000/- u/s 14A in the total income therefore an amount of Rs 86, 32,120/- (Rs 93,62,120 -Rs. 7,50,000) is hereby disallowed u/s 14A of the I.T. Act and added back to the income of the assessee."
5. The issue ultimately boiled down to the correctness of the computation with the assessee on the one hand placing the disallowance at INR 44,00,176/- and the AO on the other estimating it at INR 93,62,120/-.
This is a digitally signed order.
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6. The aforesaid computation appears to have been undertaken in accordance with the procedure as prescribed under Rule 8D of the Rules. However, the Income Tax Appellate Tribunal ["ITAT"] has in paragraph 24 observed as follows:
"24. We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the disallowance u/s 14A of the Act. It is an undisputed fact that assessee had made as suo moto disallowance of Rs.7,50,000/- u/s 14A of the Act being the salary of Directors and expenses attributable to the tax free income earned by assessee. It is also a fact that CIT(A) while deciding the issue has noted that suo moto disallowance made by assessee was not found to be defective by AO and no adequate satisfaction as mandated u/s 14A(2) of the Act was recorded by AO before invoking Rule 8D. Before us, no fallacy in the findings of CIT(A) to the extent of his recording a finding that no proper satisfaction was recorded by AO before invoking Rule 8D has been pointed out by the Revenue. We are of the view that once the procedure prescribed under Section 14A(2) r.w. Rule 8D has not been followed by Revenue then in that case the Revenue cannot proceed to work out the disallowance on ad hoc basis over and above that has been made by assessee. We, therefore, direct the AO to restrict the disallowance u/s 14A at Rs.7,50,000/- that was made by assessee and thus the ground of Revenue is dismissed and the Ground of assessee in CO is allowed."
7. It is in the aforesaid backdrop that Mr. Rai, contends that the view as expressed is rendered perverse. We, accordingly, admit the instant appeal on the following question of law:
"A. Whether on the facts and circumstances of the case and in law, the ITAT was right in restricting the amount of disallowance under Section 14A to INR 7,50,000/- without appreciating that the computation of disallowance was made by the Assessing Officer in accordance with Section 14A of the Act read with Rule 8D of the Rules."
8. We accord liberty to Ms. Jha to place the paper book as filed This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 07/05/2024 at 20:57:59 before the ITAT on the record of these proceedings on or before the next date fixed.
9. Let the appeal be called again on 22.08.2024.
YASHWANT VARMA, J.
PURUSHAINDRA KUMAR KAURAV, J.
MAY 01, 2024/p This is a digitally signed order.
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