Income Tax Appellate Tribunal - Chennai
India Nippon Electricals Ltd., Chennai vs Department Of Income Tax on 14 June, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
'D' BENCH, CHENNAI.
Before Shri Abraham P. George, Accountant Member &
Shri Challa Nagendra Prasad, Judicial Member
I.T.A. No. 2022/Mds/2011
Assessment Year : 2001 - 02
The Assistant Commissioner of M/s. India Nippon Electricals Ltd.,
Income Tax, Company Circle, II(3), Vs. Alim Centre, II Floor, No. 82, Dr.
No. 121, Uthamar Gandhi Salai, Radhakrishnan Salai, Mylapore,
Chennai - 600 034. Chennai 600 004.
[PAN: AAACI0921R]
(Appellant) (Respondent)
Appellant by Shri K.E.B. Rengarajan, Junior
:
Standing Counsel
Respondent by : Shri R. Vijayaragahavan, Advocate
Date of Hearing : 14.06.2012
Date of pronouncement : 10.07.2012
ORDER
PER Challa Nagendra Prasad, Judicial Member
This is an appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals) XII, Chennai in ITA No. 362/2007- 2008 for the assessment year 2001-02. Shri K.E.B. Rengarajan, Junior Standing Counsel represented on behalf of the Revenue and Shri R. Vijayaragahavan, Advocate represented on behalf of the assessee.
2. The first issue in the grounds of appeal is that the Commissioner of Income Tax (Appeals) erred in allowing capital expenditure incurred in 2 I.T.A. No.2022 No.2022/M/ 2022/M/11 /M/11 connection with setting up of new unit as expansion of existing unit treating it as revenue expenditure.
3. The assessee is engaged in the business of manufacturing electronic ignition system filed its return of income admitting total income of `.17,52,90,196/-. The assessment was completed under section 143(3) on 23.03.2004 determining the income at `.18,20,84,057/-. While doing so, the Assessing Officer disallowed `.18,87,930/- on the ground that the assessee capitalized this expenditure in the books and claimed as revenue expenditure in the computation of income. There is no specific information as to the set up of industry and commencement of business. It is a new project and therefore, the claim of pre-operative expenditure as revenue expenditure, is not allowable.
4. On appeal, the Commissioner of Income Tax (Appeals) allowed the claim of the assessee holding that the said expenses of `.18,87,930/- pertains to the setting up of new industry at Rewara, Haryana and were incurred prior to commencement of operation of the said unit. It was held that it is an undisputed fact that the assessee itself treated this expenses as capital expenditure in its books and treated the said expenses as revenue in its computation of income. The Commissioner of Income Tax (Appeals) following Hon'ble Jurisdictional High Court's decisions in the case of CIT vs. Sakthi Sugars Ltd. [339 ITR 400] and CIT vs. Rane (Madras) Ltd. [293 ITR 3 I.T.A. No.2022 No.2022/M/ 2022/M/11 /M/11 459] held that the Assessing Officer is not correct in disallowing the assessee's claim of above expenses not incurred towards revenue expenses. The Commissioner of Income Tax (Appeals) held that all these expenses are in the nature of revenue only and incurred in relation to setting up of new unit, which is also in manufacture of products similar to the existing units in the same line of business. Against this order of the Commissioner of Income Tax (Appeals), the Revenue is in appeal before us.
5. The counsel for the Revenue submitted that the assessee itself capitalized all these expenses in its books of account, but claimed as revenue expenses in its computation of income and submitted that when the assessee itself capitalized these expenses in its books of account, no different treatment can be given for the purpose of income tax computation. The counsel submitted that the assessee has not provided any details during the course of assessment whether these expenses pertaining to the plant and machinery for the unit which was set up at Rewara, Haryana. The counsel for the Revenue relied on the order of the Assessing Officer and submitted that the Assessing Officer is justified in not allowing these expenditures as Revenue expenses. He further submits that as the assessee has not provided any details before the Assessing Officer, the matter may be sent back to the Assessing Officer for verification. 4 I.T.A. No.2022
No.2022/M/ 2022/M/11 /M/11
6. The counsel for the assessee submits that the pre-operative expenses of `.18,87,930/- incurred are in connection with the expansion of business and all these expenses are in the nature of revenue and hence the entire expenditure is allowable as revenue expenditure, even though the same may be capitalized in the books of account. The counsel for the assessee submits that the Assessing Officer is of the view that there is no specific information as of setting up of industry and commencement of business. He submits that at page 28 of the Annual Report furnished for the year 2001-02 contains the reference in S.No. 17 and also directors' report in page No. 6 that Rewari unit was set up for manufacture of flywheel magneto for north based customer namely Hero Honda. He submits that it is only transfer of business from Hosur to Rewari. It was done to achieve better service to customers and reduce transportation costs. Therefore, he submits that the expenses incurred in the course of expansion of existing business are allowable as deduction. The counsel for the assessee placed reliance on the decision of the Jurisdictional High Court in the case of CIT vs. Sakthi Sugars Ltd. [339 ITR 400] for the preposition that expenditure incurring on setting up of new unit, as an expansion of existing unit, is allowable as revenue expenditure.
7. We have heard both sides, perused the materials available on record and the orders of lower authorities as well as case law relied on by the assessee's counsel. It appears that the assessee furnished the details of 5 I.T.A. No.2022 No.2022/M/ 2022/M/11 /M/11 expenses included in pre-operative expenses of Rewara unit before the Commissioner of Income Tax (Appeals) along with its submission on 07.06.2011, which was extracted by the Commissioner of Income Tax (Appeals) in its order. It appears that these details were not furnished by the assessee before the Assessing Officer at the time of assessment. We see that all these expenses are in the nature of revenue expenses. No doubt that the expenses incurred for expansion of setting up new unit, which is in the same line of business are allowable as revenue expenses, in view of Hon'ble Jurisdictional High Court's decision in the case of CIT vs. Sakthi Sugars Ltd. [339 ITR 400] and various other judicial pronouncements. However, since the assessee has not filed these details before the Assessing Officer, we remit this issue to the file of the Assessing Officer with limited purpose of verification of these expenses. The Assessing Officer has to verify whether these expenses related to the plant and machinery as claimed by the assessee and pertain to expansion of the unit at Rewara, Haryana and if this expenditure is pertaining to that unit, the pre-operative expenses should be allowed as revenue expenditure.
8. The next issue in the grounds of appeal of the Revenue is that the Commissioner of Income Tax (Appeals) erred in restricting the disallowance under section 14A to 2% of the dividend income as against 10% made by the Assessing Officer.
6 I.T.A. No.2022
No.2022/M/ 2022/M/11 /M/11
9. The assessing Officer while completing the assessment disallowed `.28,92,630/- under section 14A towards expenditure attributable to earning of dividend income, which is exempt under section 10(33) of the Act. The Assessing Officer estimated the disallowance at 10% of dividend income of `.2,89,26,300/- for making the disallowance.
10. On appeal, the Commissioner of Income Tax (Appeals) restricted the disallowance to 2% of the dividend income following its predecessors order in assessee's own case for the assessment year 1999-2000 and 2000-01.
11. This Tribunal is taking the view to restrict the disallowance under section 14A to 2% of the dividend income. In the case of M/s. Sowdambika Finance & Investments Pvt. Ltd., in I.T.A. No. 2436/Mds/2006 for the assessment year 2001-02 dated 13.05.2008 and in I.T.A. No. 884/Mds/2008 for the assessment year 2000-01 dated 06.07.2012, the Coordinate Bench of this Tribunal held as under:
"Ground No. 3
3.1. The learned CIT(A) erred in holding that 2% of dividend income of Rs.3,01,253, i.e. `.6,024 is the reasonable expenditure attributable to the earning of dividend income and accordingly, `.6,024 is disallowable u/s 14A of the Income Tax Act.
3.2. The learned CIT(A) ought to have seen that when the assessing officer has held that the entire expenditure is revenue in character, there is no need for estimating any percentage of income vis-a-vis disallowance and that the expenditure was not allowed only because of the provisions of section 14A read with section 10(33) of the I.T. Act.7 I.T.A. No.2022
No.2022/M/ 2022/M/11 /M/11
6. In this ground, it has been contended on behalf of the department that the CIT(A) erred in holding that 2% of the dividend income of `.3,01,523 i.e. `.6,024 was the reasonable expenditure attributable to the earning of dividend income u/s 14A of the Act.
7. We have considered the rival submissions in the light of material on record and the precedent cited. It is seen that the CIT(A) has restricted the disallowance u/s 14A to 2% of the dividend income for the reasons given in paragraph 4.2.1. of his order as under.
"4.2.1. ------- The appellant's claim that no part of the expenditure was incurred for earning dividend income is also not acceptable. A part of the total claim of revenue expenditure must have been expended by the appellant in the course of earning of dividend. The Hon'ble ITAT, Chennai Bench vide its order dated 30.09.2005 in ITA Nos. 25(Mds)/1993 & 2020(Mds)/2000 has recently held in the case of M/s. Sundaram Finance ltd. that 2% of dividend income can reasonably be held to be attributable to the earning of dividend. By respectfully following the said judgment of the Hon'ble ITAT Chennai Bench, I hold that 2% of the dividend income of `.3,0l,253, i.e., 6,024 is the reasonable expenditure attributable to the earning of dividend income by the appellant company and accordingly the sum of `.6,024 is directed to be disallowed u/s 14A of the IT Act. The balance expenditure, i.e. `.36,94,179 is directed to be allowed as the revenue expense, Thus the ground of appeal of the appellant in this regard succeeds partially.
8. We find that the applicability of the provisions of section 14A, introduced with retrospective effect from 01.04.1962, was discussed in great detail by the ITAT Delhi in the case of ACIT v Eicher Ltd. (2006) 101 TTJ (Del) 369. The Tribunal referred to and discussed judgments of various high Courts in the following cases.
i) CIT v. National and Grindlays Bank Ltd. [1993] 202 ITR 559 (Cal.)
ii) CIT v. United Collieries Ltd. [1993]203 ITR 857 (Cal.)
iii) CIT v. Enemour Investments ltd. [1994] 72 Taxman 370 (Cal.)
iv) State Bank of Indore v. CIT (2005) 193 CTR (MP) 62
v) Maruli Udyog Ltd. v. DCIT (2005) 92 ITD 119 (Delhi)
9. The legal position that emerges from the order of the Tribunal in the case of Eicher Ltd. (supra) is that section 14A confers powers / authority upon the AO to disallow such expenditure as satisfies the requirements of the section, that the language employed in section 14A is very wide to include every expenditure irrespective of the head under 8 I.T.A. No.2022 No.2022/M/ 2022/M/11 /M/11 which it is claimed. that the section does not relieve the AO of the burden of proving, on the basis of evidence or material on record, that the assessee had in fact incurred expenditure which had relation to the exempted income, that the onus is on the AO to prove that the expenditure incurred by the assessee related to the exempted income, that the AO cannot estimate and disallow any notional, or ad hoc expenditure to reduce the exempted income, that only the actual expenditure incurred by the assessee in earning the exempted income can be disallowed by the AO u/s 14A.
10. In the present case there is no evidence or material on record to support the disallowance made by the AO. Therefore, the order of the CIT(A) restricting the disallowance u/s 14A to 2%, on estimate basis, could not be found fault with. The ground no. 3 is accordingly rejected."
12. Respectfully following the order of Coordinate Bench of this Tribunal in I.T.A. No. 2436/Mds/2006 dated 13.05.2008 and in I.T.A. No. 884/Mds/2008 dated 06.07.2012, we uphold the order of the Commissioner of Income Tax (Appeals) on this issue and dismiss the grounds of appeal of the Revenue.
13. In the result, the appeal of the Revenue is partly allowed for statistical purpose.
Order pronounced on Tuesday, the 10th July, 2012 at Chennai.
Sd/- Sd/- (ABRAHAM P. GEORGE) (CHALLA NAGENDRA PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 10.07.2012 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.