Income Tax Appellate Tribunal - Chennai
Acit Central Circle, Salem vs Thriveni Earthmovers Pvt. Ltd., Salem on 25 September, 2019
आयकर अपील य अ धकरण, 'डी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL, 'D' BENCH : CHENNAI
ी इंटूर रामा राव, लेखा सद य एवं
ी ध ु व
ु आर.एल रे डी, या यक सद य के सम
[BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER]
आयकर अपील सं./I.T.A. Nos. 2280, 2281, 2282 & 2283/CHNY/2018
नधा$रण वष$ /Assessment years :2011-12, 2012-13, 2013-14 and
2014-15
The Assistant Commissioner Vs. M/s. Thriveni Earthmovers Pvt Ltd,
of Income Tax, 22/110, Greenways Road,
Central Circle, Fairlands,
Salem Salem 636 016.
[PAN AABCT 6759R]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ( क) ओर से/ Appellant by : Shri. M. Srinivasa Rao, IRS, CIT.
+,यथ( क) ओर से /Respondent by : Shri. T. Banusekar, C.A.
सन
ु वाई क) तार ख/Date of Hearing : 27-06-2019
घोषणा क) तार ख /Date of Pronouncement : 25-09-2019
आदे श / O R D E R
PER INTURI RAMA RAO, ACCOUNTANT MEMBER
These are appeals filed by the Revenue directed against different orders of the Commissioner of Income Tax (Appeals)-18, Chennai ('CIT(A)' for short) dated 16.04.2018 for the Assessment Years (AY) 2011-12, 2012-13, 2013-14 and 2014-15.
:- 2 -: ITA Nos.2280-83 /2018
2. There is a delay of two days in filing the present appeals by the Revenue. The Assessing Officer filed petition praying for condonation of delay stating that delay had occurred on account of delay in transmission of assessment records from higher authorities and delay is neither willful nor wanton and therefore prayed for condoning the delay. Ld. Authorised Representative did not raise any serious objection for condoning the delay. In the circumstances, we condone the delay of two days in filing the appeals and admit the appeals for adjudication.
3. Since, the identical facts and issues are involved in these appeals, we proceed to dispose the same vide this common order.
4. For the sake of convenience and clarity the facts relevant to the appeal in ITA No.2280/Chny/2018 for assessment year 2011-12 are stated herein.
5. The brief facts of the case are as under:
The Respondent- assessee namely M/s. Thiruveni Engineering Pvt Ltd is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of contractual iron ore mining services, transportation & handling of iron ore and lime stone and quarrying of blue metal boulders and sale of :- 3 -: ITA Nos.2280-83 /2018 aggregates. The return of income for the AY 2011-12 was filed on 29.09.2011 disclosing total income of Rs.241,05,04,840/-. Against the said return of income, the assessment was completed by the Assessing Officer vide order dated 28.02.2014 at total income of A242,82,49,494/- and STCG at A2,25,843/-.
6. Subsequently, the Deputy Commissioner of Income Tax, Central Circle XXI, Kolkata informed the Assessing Officer vide his letter dated 18.03.2014 that Respondent- assessee is one of the beneficiaries of accommodation entries provided by one M/s. Sakshi Trade Link Pvt Ltd during the previous year relevant to assessment year under consideration. The Assessing Officer also informed the modus operandi adopted by M/s. Sakshi Trade Link Pvt Ltd. It was stated by the Deputy Commissioner of Income Tax, Central Circle XXI, Kolkata that said M/s. Sakshi Trade Link Pvt Ltd is into the business of providing turnover account entries to facilitate beneficiaries to book bogus expenditure under the heads sub contract job, commission & brokerage and fees for professional & technical services. In consideration of providing this bogus accommodation entries, M/s. Sakshi Trade Link Pvt Ltd had received commission at the rate of 0.50% of the turnover during the previous year relevant to assessment year under consideration. It was stated that Respondent-
:- 4 -: ITA Nos.2280-83 /2018 assessee was provided accommodation entries to the extent of
A22,06,000/-. Based on the above information, the Assessing Officer had issued notice u/s.148 of the Act on 15.09.2014 by alleging that assessee had failed to disclose fully and truly all material facts necessary for the assessment. In response to the said notice, Respondent- assessee filed letter dated 09.10.2014 stating that original return of income filed on 29.09.2011 for the assessment year 2011-12 be treated as return in response to notice issued u/s.148 of the Act. The Assessing Officer also furnished reasons to assessee for reopening the assessment on 14.11.2014. The reasons recorded reads as under:-
''The assessee company filed the return of income on 29,092011 declaring an income of Rs.241,05,04,870/- & Short term capital gain of Rs.225,843/. Assessment was completed u/s 143(3) of Income lax Act, 1961 on 28.02.2014 by assessing income at Rs.242,82,49,494/- & STCG at Rs. 2,25,843/-.
Deputy Commissioner of Income Tax, Central Circle XXI, Kolkata has informed vide his letter dated 18.03.2014 that during the assessment proceedings in the case of M/s.Sakshi Trade Link Pvt Ltd for AY. 2011-12 it was detected that M/s. Sakshi Trade Link Pvt Ltd provided turnrnover accommodation entries to facilitate beneficiaries to book bogus expenditure under the head sub contract job, commission & brokerage and fees for professional & technical services. It was found out by the Deputy Commissioner of Income Tax, Central Circle XXI, Kolkata that M/s Thriveni Earth Movers Pvt Ltd was also one of the beneficiary of the a:commodation entries & had claimed bogus expenditure to the tune of Rs22,06,000J during 5he previous year relevant to A.Y 2011-12. It is seen that assessment in the case of M/s. Sakshi Trade Link Pvt Ltd was completed by Deputy Commissioner of Income Tax, Central :- 5 -: ITA Nos.2280-83 /2018 Circle XXI, Kolkata assessing income @ 0.50% of the gross turnover as commission received for providing accommodation entries including the accommodation entries for M/s Thriveni Earth Movers Pvt Ltd mentioned above. Thus it is clear that M/s.Thirveni Earth Mover Pvt Ltd. has not furnished true and accurate particulars of its income necessary for assessment and deliberately concealed income of R-s.22,06,000/- by claiming bogus expenditure.
Therefore, I have reasons to believe that income of Rs.22,06,000/- chargeable to tax has escaped assessment for AX.2011-12 due to the failure on the part of the assessee to disclose and truly all material facts necessary for this assessment''.
The assessee on receipt of the reasons for reopening the assessment filed objections for reopening the assessment on 26.10.2015. The objections came to be disposed of by the Assessing Officer on 17.12.2015 and subsequently assessment was completed by the Assistant Commissioner of Income Tax, Central Circle (i/c) Salem vide order dated 31.03.2016 passed u/s.143(3) r.w.s. 147 of the Act at total income of A281,80,97,656/-. While doing so, the Assessing Officer made the following additions Contract payments made to M/s. Sakshi Trade Link Pvt Ltd. 20,00,000 Provisions made reducing amounts from contract receipts received from M/s. Thakur 21,28,32,313 Prasad Sao & Sons P Ltd Provisions made reducing amounts from contract receipts received from M/s. Serajuddin 8,27,62,884 & Co :- 6 -: ITA Nos.2280-83 /2018 Provisions made reducing amounts from contract receipts received from Indrani Patnaik 44,70,158 (Mahaparat site) Subcontract payments in Sirajuddin mines out of scope of work order disallowed. 9,19,55,168
7. Being aggrieved by the above additions, the assessee-company preferred an appeal before ld. CIT(A) challenging the very validity of initiation of reassessment proceedings as well as merits of the additions made. Reopening was challenged on the grounds that reassessment proceedings were prompted by mere change of opinion on the same set of facts, primary facts necessary for assessment was disclosed fully and truly. It cannot be alleged that assessee had failed to disclose material facts necessary for the assessment, even on the merits, Respondent- assessee challenged the additions. Ld. CIT(A) after considering the submissions and materials placed before him allowed the appeal vide impugned order both on the validity of the reopening as well as merits of the additions.
8. Being aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us in the present appeal. Ld. CIT (Departmental Representative) contented that the assessment was reopened based on creditable information received from the Deputy Commissioner of :- 7 -: ITA Nos.2280-83 /2018 Income Tax, Central Circle XXI, Kolkata that Respondent- assessee was beneficiary of accommodation entries provided by one M/s. Sakshi Trade Link Pvt Ltd and this information constitutes "new tangible" information enabling the Assessing Officer to form reason to believe that income escaped assessment. The ld. CIT (Departmental Representative) further submitted that the Assessing Officer had duly followed the procedure prescribed by the Hon'ble Supreme Court in the case of case of GKN Driveshafts (India) Ltd 259 ITR 19. He further submitted that sufficiency or correctness of the material is not to be seen at the stage of reopening the assessment. In this connection, he placed reliance on the judgment of Hon'ble Supreme Court in the case of Raymond Wollen Mills Ltd, 236 ITR 34. He also placed reliance on the judgments of Hon'ble Gujarat High Court in the cases of Purviben Snehalbhai Panchhigar , 409 ITR 124 and Atul Ratilal Makadia, 94 taxmann.com 435 and Bombay High Court in the case of Export Credit Guarantee Corporation of India Ltd, 350 ITR 651.
9. Even on merits of the additions, ld. CIT (Departmental Representative) made detailed submissions. Ld. CIT (DR) further contended that ld .Commissioner of Income Tax (Appeals) ought not have granted relief on technicalities on the grounds of reopening as well as merits of the addition.
:- 8 -: ITA Nos.2280-83 /2018 10. On the other hand, Shri. T. Banusekar, Authorised Representative of the assessee submitted that very initiation of
reassessment proceedings is bad in law and the Assessing Officer had initiated reassessment proceeding based on the borrowed satisfaction of the DCIT, Central Circle-XXI, Kolkata without independently applying his mind. Therefore he submitted that reassessment proceedings must be quashed and placed reliance on the following Hon'ble High Court decisions.
Harikishan Sunderlal Virmani vs DCIT, (2017) 394 ITR 146 (Guj) CIT vs Shodiman Investments Pvt Ltd (2018) 167 DTR 290 (Bom) CIT vs. Shree Rajasthan Syntex Ltd (2009) 313 ITR 231 (Raj).
11. On the merits of the additions payments made to M/s. Sakshi Trade Link Pvt Ltd, he submitted that payments were made towards liasoning services and he further submitted that expenditure cannot be treated as bogus expenditure for the following reasons:-
''(i)A letter from the director of Sakshi Trade Links Pvt Ltd, Shri.Suraj confirming the transaction and that the payment was received by them through e transfer, was filed before the Assessing Officer during the course of assessment proceedings.
(ii) Though the statement of Shri.Sumit Sharma was taken as the basis for reopening the assessment, another director of the company had confirmed the transaction vide letter dated 28.01.2016 (Refer page 7 of Paper book) :- 9 -: ITA Nos.2280-83 /2018
(iii) It may be noted that Shri.Suraj is one of the directors of the company and that the same can be verified from the master data of M/s.Sakshi TradeLinks Pvt Ltd (Refer pages 8 & 9 of Paper book)
(iv) Payments were made to Sakshi Trade Links Pvt Ltd after deducting tax at source at lower rates based on lower deduction certificate submitted by STLPL (Refer page 13 of Paper book)
(v) Where the TDS Officer of STLPL has issued a lower deduction certificate it cannot be said that the payments made to STLPL were not genuine
(vi) For liasioning services which is nothing but arranging and organizing for lifting of iron ore, no man power or equipment is necessary
(vii) When the assessee has paid Rs.22,06,000/- which is inclusive of service tax the Assessing Officer has chosen to disallow only a sum of Rs.20,00,000/-. Where the Assessing Officer had decided that the expenditure is bogus then the entire sum of Rs.22,06,000!- including service tax which was paid by the assessee to STLPL should have been disallowed.
The Assessing Officer could not have treated the service tax portion alone as genuine if the expenditure is treated as bogus
(viii) Further, the turnover of the assessee company for the impugned assessment year is Rs.810 crores and the expenditure of Rs.20 lakhs which was treated as bogus amounts to 0.02% of the total turnover. It may be illogical to state that an assessee who is having a turnover of Rs.241 crores would have shown a bogus expenditure to the extent of 0.08% of its total turnover''.
As regards to the additions, he submitted that addition made on account of reducing contract receipts, he submitted that reasons for reopening the assessment is only with regards to the disallowance of amount paid to M/s. Sakshi Trade Link Pvt Ltd. In case this Tribunal holds that no addition is warranted in respect of alleged bogus :- 10 -: ITA Nos.2280-83 /2018 expenditure paid to M/s. Sakshi Trade Link Pvt Ltd, no other addition can be made even in terms of Explanation 3 to Section 147 of the Act reliance in this regard was placed on the decision of Hon'ble Jurisdictional High Court in the case of Martech Peripherals Pvt Ltd vs. DICT & Anr (2017) 394 ITR 733. Without prejudice to this, ld. Authorised Representative submitted that provision towards reducing the amounts from contract receipts were made based on the Government Order No.5905/SM , dated 07.09.2010 issued by the Government of Odisha, Department of Steel and Mines and this provision represents the amount which the mine owners proposed to deduct from assessee and this provision is made based on the G.O of Government of Odisha and the working of the provision was also furnished. This is nothing but difference in royalty and this provision is made for ascertained liability and the same is deductable as deduction and placed reliance on the following judgments.
S.A. Builders Ltd vs. CIT (A) & Anr (2007) 288 ITR 1 (SC) Hero Cycles (P) Ltd vs CIT, (2015) 379 ITR 347 (SC) Sassoon J. David & Co P Ltd vs. CIT (1979) 118 ITR 261
12. We heard the rival submissions and perused the material on record. We shall take up the primary ground which goes to the very root of the matter i.e validality of the reopening of the assessment. Admittedly original assessment order was passed by the Assessing :- 11 -: ITA Nos.2280-83 /2018 Officer under scrutiny proceedings. During the course of original assessment proceedings, no doubt assessee had filed primary details in respect of this item of expenditure i.e. payments made to M/s. Sakshi Trade Link Pvt Ltd. However consequent upon information received from the DCIT, Central Circle XXI, Kolkata the assessment was reopened. Information received from DCIT, Central Circle XXI, Kolkata is that Respondent - assessee is a beneficiary of the accounting entry provided by M/s. Sakshi Trade Link Pvt Ltd, this would constitute tangible new material enabling the Assessing Officer to form an opinion that income escaped assessment. The Hon'ble Supreme Court in the case of Phool Chand Bajrang Lal and Another vs. ITO, (1993) 203 ITR 456 held that any fresh information relating to the concluded assessment which goes to expose the falsity of the statement made by the assessee at the time of original assessment constitute fresh information enabling the Assessing Officer to believe that income chargeable to tax had escaped the assessment on account of omission of the assessee to make full and true disclosure of the primary facts was relevant, reliable and specific. Relevant para of the judgment as follows:
''19..........Acquiring fresh information, specific in nature and reliable in character, relating to the concluded assessment which goes to expose the falsity of the statement made by the assessee at the time of the original assessment is different from drawing a fresh inference from the same facts :- 12 -: ITA Nos.2280-83 /2018 and material which were available with the Income-tax Officer at the time of the original assessment proceedings. The two situations are distinct and different. Thus, where the transaction itself, on the basis of subsequent information, is found to be a bogus transaction, the mere disclosure of that transaction at the time of original assessment proceedings cannot be said to be a disclosure of the "true" and "full" facts in the case and the Income-tax Officer would have the jurisdiction to reopen the concluded assessment in such a case. It is correct that the assessing authority could have deferred the completion of the original assessment proceedings for further enquiry and investigation into the genuineness of the loan transaction but, in our opinion, his failure to do so and complete the original assessment proceedings would not take away his jurisdiction to act under section 147 of the Act, on receipt of the information subsequently. The subsequent information on the basis of which the Income- tax Officer acquired reasons to believe that income chargeable to tax had escaped assessment on account of the omission of the assessee to make a full and true disclosure of the primary facts was relevant, reliable and specific. It was not at all vague or non-specific''.
The Hon'ble Supreme Court in the case of Raymond Wollen Mills Ltd (supra) had held that at the initiation stage, what is required is only reasons to believe but not establishing the fact of escapement of income. At the stage of issue of notice, the only question is whether there is relevant material on which reasonable person could have formed requisite belief, whether the material would conclusively prove the escapement is not the concern at that stage. This fact of law is reiterated by the Hon'ble Supreme Court in the case of ACIT vs. Rajesh Jhaveri Stock Brokers Private Ltd (2007) 291 ITR 500.
:- 13 -: ITA Nos.2280-83 /2018
13. The question whether information received from the Investigation Wing of the Department for reopening the assessment has been justified or not is gone into by several High Courts. The Hon'ble Gujarat High Court in the case of Jayant Security & Finance Ltd vs. ACIT, (2018) 254 Taxman 81, Hon'ble Rajasthan High Court in the case of Ankit Agrochem (P) Ltd vs. JCIT, 253 Taxman 141, PCIT vs. Paramount Communication P. Ltd, (2017) 392 ITR 444 (Delhi) and Aradhana Estate Pvt. Ltd vs. DCIT (2018) 404 ITR 105 (Guj) had upheld the validity of the reassessment based on the information received from Investigation Wing of the Department, if the Assessing Officer had formed a belief that income escaped assessment based on the information received from the investigation wing, if there is nexus between information so received and belief formed by the Assessing Officer. In the present case, the Assessing Officer had received information from the DCIT, Central Circle XXI, Kolkata and recorded reasons for reopening the assessment as extracted above.
From the perusal of the reasons recorded, it is clear that the Assessing Officer had perused the material placed and perused the materials received from DCIT, Central Circle XXI and thereupon considering all the materials formed belief that income chargeable to tax had escaped assessment. There is no quarrel as to legal proposition advanced by the Authorised Representative that assessment cannot :- 14 -: ITA Nos.2280-83 /2018 be reopened merely based on the borrowed satisfaction of any other authority. But in the present case, it cannot be said that the Assessing Officer had initiated reassessment proceedings on the borrowed satisfaction of DCIT, Kolkata. From the reasons recorded, it is clear that the Assessing Officer had perused the material which had come to his knowledge and formed an opinion that income had escaped assessment for the failure of the assessee to disclose all material facts which are necessary for assessment. Information received from DCIT, Kolkata throws light on the truth fullness or otherwise of transactions with M/s. Sakshi Trade Links Pvt. Ltd. This information enabled the Assessing Officer to form belief that income escaped assessment. As stated by us (supra) at the initial stage of issue of notice u/s.148 of the Act, it is not necessary to go into the sufficing or of otherwise of the new material to make the addition. Therefore the information received from DCIT, Kolkata suggested that payment made to M/s. Sakshi Trade Link P. Ltd is bogus, the Assessing Officer formed belief that income chargeable to tax had escaped assessment and accordingly initiated reassessment proceedings. Therefore we uphold the validity of the reopening of the assessment and accordingly, allow ground No.2 raised by the Revenue.
:- 15 -: ITA Nos.2280-83 /2018
14. Now, we take up the ground challenging the decision of the ld. CIT(A) deleting the addition of payments made to M/s. Sakshi Trade Link Pvt Ltd of A20,00,000/-
15. During the previous year relevant to assessment year under consideration, assessee made payment of A22,06,000/- to M/s. Sakshi Trade Link Pvt Ltd inclusive of Service Tax towards consideration stated to have been for services of liasoning work. The payment was made through banking channel and Respondent- assessee had also deducted TDS and the laisoning services are rendered for arranging and organizing for lifting of iron ore, no man power or equipment is necessary. Assessee also filed confirmation letter from one of the Directors of M/s. Sakshi Trade Link Pvt Ltd namely Suraj who confirmed the transaction vide his letter dated 28.01.2016 placed at page No.7 of the paper book. However, based on the statement of another Director of M/s. Sakshi Trade Link Pvt Ltd namely Shri. Sumit Sharma, DCIT, Kolkata have come to conclusion that transaction is bogus. From the perusal of the assessment order, nothing is discernable to say that copy of the statement recorded from said Shri. Sumit Sharma stated to be Director of M/s. Sakshi Trade Link Pvt Ltd is made available to the assessee and assessee was given an opportunity of cross examination of the said Director.
:- 16 -: ITA Nos.2280-83 /2018
16. It is a matter of record that that assessee filed letter dated 28.01.2016 before the Assessing Officer from one Mr. Suraj, Director of M/s. Sakshi Trade Link Pvt Ltd confirming the transaction and rendition of the services and the Assessing Officer had not given an opportunity to the assessee to neither cross examine Mr. Sumit Sharma nor made any independent enquiries to corroborate the statement of Mr. Sumit Sharma. It is settled proposition of law that no addition can be made based on unconfronted oral statement of third party. Reliance can be placed on the decision of Hon'ble Rajasthan High Court in the case of CIT vs. A.L. Lalpuria Construction (P) Ltd, (2013) 32 taxmann.com 387, wherein, it was held that addition on account of accommodation entries cannot be made on the basis of unconfronted oral statement of third party. Similarly, the Hon'ble Supreme Court in the case of Andaman Timber Industries vs. CCE (2015) 62 taxmann. com 3, had held that when statements of witnesses are made basis of addition, not allowing assessee to cross examine witness is a serious flaw which makes order nullity as it amounts to violation of principles of natural justice. Further, reliance can be placed on the judgments of Hon'ble Bombay High Court in the case of R.W. Promotions (P) Ltd vs. ACIT, (2015) 61 taxmann.com 54, Hon'ble Gujarat High Court in the case of CIT vs. Indrajit Singh Suri (2013) 33 taxmann.com 281, Hon'ble Delhi High Court in the case of :- 17 -: ITA Nos.2280-83 /2018 CIT vs. SMC Share Brokers Ltd, (2007) 159 taxman 306 (Delhi) and Hon'ble Rajasthan High Court in the case of CIT vs. Geetanjali Education Society (2008) 174 taxman 440 (Raj).
In the present case, admittedly, there is no corroborative evidence brought by the Assessing Officer in support of the information received from DCIT, Kolkata. In the absence of such corroborative materials addition cannot be sustained, in the backdrop of legal position discussed above. Therefore, grounds of appeal challenging the deletion of addition of payment made to M/s. Sakshi Trade Link Pvt Ltd stands dismissed.
17. Now, we take up other grounds of appeal challenging the decision of the ld. CIT(A) in deleting other items of additions.
18. A preliminary issue was raised when notice for reopening was issued on one of items of additions, and no addition had been made in respect of item for which notice of reopening was issued, whether the Assessing Officer is entitled to make any further additions in respect of items which has come to the notice at the time of reassessment proceedings, this issue had been considered by Jurisdictional High Court in the case of Martech Peripherals P. Ltd vs. DCIT, (2017) 394 ITR 733 wherein the Hon'ble High Court after referring to the decisions of Hon'ble Bombay High Court in the case of :- 18 -: ITA Nos.2280-83 /2018 CIT vs. Jet Airways (I) Ltd, (2011) 331 ITR 236 (Bom), Gujarat High Court in the case of CIT vs. Mohmed Juned Dadani, (2013) 355 ITR 172 (Guj) and Delhi High Court in the case of Oriental Bank of Commerce vs. Addl. CIT, 49 Taxmann.co, 485 held that in case where notice for reopening of assessment was issued in respect of one item of addition, and during the reassessment proceeding, if the Assessing Officer had come to notice other items of addition, other items of addition can be sustained only, if addition had been made by the Assessing Officer in respect of an item of addition based on which reassessment notice was issued.
19. The Hon'ble Bombay High Court in the case of Jet Airways (I) Ltd (supra) after referring to the decisions of Hon'ble Supreme Court in the cases of CIT vs. Sun Engineering Works P. Ltd (1992) 198 ITR 297 and V. Jaganmohan Rao vs. Commission of Income Tax and Excess Profits Tax, (1970) 75 ITR 373 had examined the effect of Explanation 3 to Section 147 and held as follows:
"The effect of the amended provisions came to be considered, in two distinct lines of precedent on the subject. The first line of authority, to which a reference has already been made earlier, adopted the principle that where the Assessing Officer has formed a reason to believe that income has escaped assessment and has issued a notice under section 148 on certain specific issues, it was not open to him during the course of the proceedings for assessment or reassessment to assess or reassess any other income, which may have escaped assessment but which did not form the subject matter of the notice under section 148. This view was adopted in the judgment of :- 19 -: ITA Nos.2280-83 /2018 the Punjab and Haryana High Court in Vipan Khanna v. CIT [2002] 255 ITR 220 (P&H) and in the judgment of the Kerala High Court in Tranvancore Cements Ltd. v. Asst. CIT [2008] 305 ITR 170 (Ker). This line of authority would now cease to reflect the correct position in law by virtue of the amendment which has been brought in by the insertion of Explanation 3 to section 147 by the Finance (No. 2) Act of 2009. The effect of the Explanation is that once an Assessing Officer has formed a reason to believe that income chargeable to tax has escaped assessment and has proceeded to issue a notice under section 148, it is open to him to assess or reassess income in respect of any other issue though the reasons for such issue had not been included in the reasons recorded under section 148(2) . . .
Explanation 3 lifts the embargo, which was inserted by judicial interpretation, on the making of an assessment or reassessment on grounds other than those on the basis of which a notice was issued under section 148. Setting out the reasons, for the belief that income had escaped assessment. Those judicial decisions had held that when the assessment was sought to be reopened on the ground that income had escaped assessment on a certain issue, the Assessing Officer could not make an assessment or reassessment on another issue which came to his notice during the proceedings. This interpretation will no longer hold the field after the insertion of Explanation 3 by the Finance (No. 2) Act of 2009. However, Explanation 3 does not and cannot override the necessity of fulfilling the conditions set out in the substantive part of section 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income ('such income') which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee . . ."
We agree with the submission which has been urged on behalf of the assessee that section 147 as it stands postulates that upon the for mation of a reason to believe that income chargeable to tax has :- 20 -: ITA Nos.2280-83 /2018 escaped assessment for any assessment year, the Assessing Officer may assess or reassess such income 'and also' any other income chargeable to tax which comes to his notice subsequently during the proceedings as having escaped assessment. The words 'and also' are used in a cumulative and conjunctive sense. To read these words as being in the alternative would be to rewrite the language used by Parliament. Our view has been supported by the background which led to the insertion to Explanation 3 to section 147. Parliament must be regarded as being aware of the interpretation that was placed on the words 'and also' by the Rajasthan High Court in CIT v. Shri Ram Singh [2008] 306 ITR 343 (Raj). Parliament has not taken away the basis of that decision. While it is open to Parliament, having regard to the plenitude of its legislative powers to do so, the provisions of section 147 as they stood after the amendment of April 1, 1989, continue to hold the field."
This decision of Hon'ble Bombay High Court was referred to by the Hon'ble Delhi High Court in the case of Ranbaxy Laboratories Ltd vs. CIT, (2011) 336 ITR 136 (Delhi) wherein it was held as follows:-
''18. We are in complete agreement with the reasoning of the Division Bench of the Bombay High Court in the case of CIT v. Jet Airways (I) Limited [2011] 331 ITR 236 (Bom). We may also note that the heading of section 147 is "income escaping assessment" and that of section 148 "issue of notice where income escaped assessment". Sections 148 is supplementary and complimentary to section 147. Sub- section (2) of section 148 mandates reasons for issuance of notice by the Assessing Officer and sub-section (1) thereof mandates service of notice to the assessee before the Assessing Officer proceeds to assess, reassess or recompute the escaped income. Section 147 mandates recording of reasons to believe by the Assessing Officer that the income chargeable to tax has escaped assessment. All these conditions are required to be fulfilled to assess or reassess the escaped income chargeable to tax. As per Explanation 3 if during the course of these proceedings the Assessing Officer comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the Legislature could not be presumed to have intended to :- 21 -: ITA Nos.2280-83 /2018 give blanket powers to the Assessing Officer that on assuming jurisdiction under section 147 regarding assessment or reassessment of the escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before the Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under section 148.
19. In the present case, as is noted above, the Assessing Officer was satisfied with the justifications given by the assessee regarding the items, viz., club fees, gifts and presents and provision for leave encashment, but, however, during the assessment proceedings, he found the deduction under sections 80HH and 80-I as claimed by the assessee to be not admissible. He consequently while not making additions on those items of club fees, gifts and presents, etc., proceeded to make deductions under sections 80HH and 80-I and accordingly reduced the claim on these accounts.
20. The very basis of initiation of proceedings for which reasons to believe were recorded were income escaping assessment in respect of items of club fees, gifts and presents, etc., but the same having not been done, the Assessing Officer proceeded to reduce the claim of deduction under sections 80HH and 80-I which as per our discussion was not permissible. Had the Assessing Officer proceeded to make disallowance in respect of the items of club fees, gifts and presents, etc., then in view of our discussion as above, he would have been justified as per Explanation 3 to reduce the claim of deduction under sections 80HH and 80-I as well.
21. In view of our above discussions, the Tribunal was right in holding that the Assessing Officer had the jurisdiction to reassess issues other than the issues in respect of which proceedings are initiated but he was not so justified when the reasons for the initiation of those proceedings ceased to survive. Consequently, we answer the first part of question in the affirmative in favour of the Revenue and the second part of the question against the Revenue''.
:- 22 -: ITA Nos.2280-83 /2018 Even the Jurisdictional High Court in the case of Martech Peripherals Pvt Ltd (supra), wherein it was held as follows:-
''21. To my mind, a careful reading of section 147 of the Act would show that it empowers an Assessing Officer to reopen the assessment, if, he has reason to believe, that any income chargeable to tax has escaped assessment for the relevant year, "and also bring to tax", any other income, which may attract assessment, though, it is brought to his notice, subsequently, albeit, in the course of the reassessment proceedings.
21.1. To put it plainly, the purported income discovered subsequently during the course of reassessment proceedings, can be brought to tax, only, if the escaped income, which caused, in the first instance, the issuance of notice under section 148 of the Act, is assessed to tax.
22. Explanation 3, to my mind, supports this approach, which emerges upon a plain reading of the said provision, along with the main part of section 147 of the Act. The emphasis in this behalf is on the expression "and also bring to tax" appearing in the main part of section 147 in relation to the right of the Revenue to assess taxable income discovered during reassessment proceedings. In my view, Explanation 3, clearly, expounds that the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment and such other issue, that comes to his notice subsequently, albeit, in the course of proceedings held under section 147 of the Act. In other words, if, notice for reopening of the assessment was issued on one aspect, and in the course of reassessment proceedings another aspect was discovered, the reassessment order would be valid, only if, the aspect, which led to the reopening of assessment, continues to form part of the reassessed income.
23. This view, as has been correctly submitted by the learned counsel for the petitioner-assessee, has found resonance with at least three (3) High Courts, i.e., the Bombay High Court, the Gujarat High Court and the Delhi High Court in the following cases :
(i) CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom) ;
:- 23 -: ITA Nos.2280-83 /2018
(ii) CIT v. Mohmed Juned Dadani [2013] 355 ITR 172 (Guj) ;
Manu/ GJ/0061/2013 ; and
(iii) Oriental Bank of Commerce v. Addl. CIT Manu/DE/1935/2014.
23.1. The only High Court, which has taken a contrary view, as it were, is the Punjab and Haryana High Court in the matter of : Majinder Singh Kang v. CIT [2012] 344 ITR 358 (P&H) ; [2012] 25 taxmann.com 124 (P&H).
23.2. In my opinion, with respect, the court, in rendering the judgment in Majinder Singh Kang's case, ignored the fact that the provisions of Explanation 3 had to be read in conjunction with the main provision, and that, the said Explanation cannot override the main provision. 23.3. This aspect of the matter has also been brought to fore by the Bombay High Court in : CIT v. Jet Airways (I) Ltd. [2011] 331 ITR 236 (Bom).
23.4. The relevant observations made in this behalf are extracted hereafter (page 247) :
"However, Explanation 3 does not and cannot override the neces sity of fulfilling the conditions set out in the substantive part of sec tion 147. An Explanation to a statutory provision is intended to explain its contents and cannot be construed to override it or render the substance and core nugatory. Section 147 has this effect that the Assessing Officer has to assess or reassess the income ('such income') which escaped assessment and which was the basis of the formation of belief and if he does so, he can also assess or reassess any other income which has escaped assessment and which, comes to his notice during the course of the proceedings. However, if after issuing a notice under section 148, he accepted the contention of the assessee and holds that the income which he has initially formed a reason to believe had escaped assessment, has as a matter of fact not escaped assessment, it is not open to him independently to assess some other income. If he intends to do so, a fresh notice under section 148 would be necessary, the legality of which would be tested in the event of a challenge by the assessee." (emphasis is mine)
24. This takes me to the last submission made on behalf of the respondents- Revenue, which is that, there is an :- 24 -: ITA Nos.2280-83 /2018 alternative remedy available to the petitioner and, therefore, the instant writ petition should not be entertained''. And again the Jurisdictional High Court in the case of Tractors and Farm Equipment Ltd vs. ACIT, (2018) 409 ITR 369, wherein it was held as follows:-
''16. The decision in the case of Jet Airways (cited supra) was referred to by the High Court of Delhi in the case of Ranbaxy Laboratories Limited v. CIT [2011] 336 ITR 136 (Delhi), wherein it was held that the Legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction under section 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. Further, it was held that for every new issue coming before the Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to issue a fresh notice under section 148 of the Act. Thus, it was held that the Assessing Officer had jurisdiction to reassess the income other than the income in respect of which the proceedings under section 147 were initiated, but, he was not justified in doing so when the reasons for the initiation of those proceedings ceased to survive. Therefore, the argument advanced by the Revenue placing reliance on Explanation 3 to section 147 is of little avail''.
The principle that can be culled out from the ratios of the above decisions is that the Assessing Officer had jurisdiction to reassess the income other than the income in respect of which proceedings of Section 147 of the Act was initiated but he was not justified in doing so, when no addition was made in respect of item for which notice of reopening was issued. In the present case, admittedly, :- 25 -: ITA Nos.2280-83 /2018 notice for re-assessment is issued for the purpose of disallowing the expenditure claimed being the payment made to M/s. Sakshi Trade Link P. Ltd. In the preceding paragraphs for the reasons stated therein, we held that no disallowance can be made for the payment made to M/s. Sakshi Trade Link P. Ltd. Thus, when addition made on account of item for which notice for reopening is issued is squashed by us, the Assessing Officer had no jurisdiction to make further additions in respect of any other items, which had come to his notice at the time of reassessment proceedings. In the light of the legal positions discussed above, other items of addition made by Assessing Officer cannot be sustained. Therefore, it is not necessary for us to go into the merits of additions made in respect of other items of additions. Thus all other grounds of appeal filed by the Revenue stand dismissed.
20. In the result, the appeal filed by the Revenue in ITA No.2280/CHNY/2018 for assessment year 2011-12 is partly allowed. ITA No.2281/Chny/2018 for Assessment Year 2012-13:
21. Now, we take up appeal of the Revenue in ITA No.2281/CHNY/2018, for assessment year 2012-2013.
:- 26 -: ITA Nos.2280-83 /2018 The Revenue company raised the following grounds of appeal:
''1. The order of the ld.CIT(A) is contrary to the provisions of the Income Tax Act, Rules and facts of the case.
2. The ld.CIT(A)'s decision on the disallowances made u/s 14A is not accepted, since the Assessing Officer had only made the disallowances as per provisions of Rule 8D of Income Tax Rules as per the CBDT Circular No.5/20 14, dated 11.02.2014.
3. The view of the ld.CIT(A) is not correct in as much as the CSR expenses have not been proved to have been incurred wholly and exclusively for the purpose of the business of the assessee.
4. The order of the ld.CIT(A) is not considered acceptable on the deletion of addition made to income based on difference between the figures as per income credited to P&L account and as per form 26AS, further appeal to the ITAT is recommended since the assessee has not properly given in any acceptable explanations as to why the said amount has not been credited into P&L a/c as income. Also, in respect of the major amount of Rs.2,80,75,405/- involved in the above disallowances the same represents the provision made during the year in accounts which has been reversed in the next financial year without adequate reasons.
5. The ld.CIT(A) 's deletion of the additions made towards payment made to sub contractors, is not accepted, since the very fact that there has been no response to the statutory notices issued u/s 133(6) to the concerned sub contractor who is stated to have undertaken certain works and also considering the fact that the assessee did not bother to produce any proper confirmation of accounts from the said party even after being told about the non compliance to the said statutory notice by the sub contractor.
6. The ld.CIT(A) is erroneous in deleting the additions made towards unproved purchases from various parties at Kolkata for the mines at Orissa, since the Dept. found out during the enquiries conducted that these firms were not existent. in the said addresses and thus, the genuineness of the transactions are not proved only because payments have been made through banking channels etc.
7. In view of the facts and circumstances, since monetary limit i.e. Rs.3,97,17,826/- exceeds the prescribed limit as per the Board's Circular No.3/20 18 in F No.279/Misc. 142/ 2007-ITJ (Pt.), second appeal is suggested on this issue''.
:- 27 -: ITA Nos.2280-83 /2018
22. The brief facts of the case are as under:
The return of income for the AY 2012-13 was filed electronically on 30.09.2013 disclosing total income of Rs.153,37,92,630/- under normal provisions and book profit of ₹142,14,99,272/- under the provisions of Section 115JB of the Act. Against the said return of income, the assessment was completed by the Dy. CIT, Circle -1, Salem (hereinafter called as ''Assessing Officer'') vide order dated 31.03.2015 passed u/s. 143(3) of the Income Tax Act, 1961 (for short 'the Act') at total income of Rs. 163,69,13,455/-, while doing so, the Assessing Officer made the following additions/ disallowances.
(i) Disallowance u/s.14 r.w. Rule 8D ₹52,94,404
(ii) Disallowance out of CSR expenses ₹76,76,946
(iii) Disallowance of interest on TDS ₹13,57,431
(iv) Addition to income based on 26AS reconciliation ₹3,79,15,937
(v) Disallowance out of sub contract payment ₹4,38,09,329
(vi) Disallowance our of purchases ₹70,66,678 During the course of assessment proceedings, the Assessing Officer noted that Respondent - assessee had earned dividend income of A4,03,78,555/- for which no disallowance was made by the assessee.
The Respondent - assessee was required to explain as to why the :- 28 -: ITA Nos.2280-83 /2018 expenditure should not be disallowed, invoking the provisions of s. 14A of the Act. The Respondent - assessee submitted that no borrowed funds were utilized for making investments which yielded exempt income. In support of this, Respondent - assessee submitted that interest free funds were available with the assessee as on 31.12.2012 is A55,71,00,000/- and investments made are only A10,11,90,000/-. As regards to the other disallowance of administrative expenses, it is submitted that maximum expenditure that can be disallowed is only A6,00,000/- per annum, however the Assessing Officer computed the amount of disallowance under the provisions of Rule 8D arrived at the disallowance of A52,94,404/-. The Assessing Officer also disallowed a sum of A76,76,946/- out of the Corporate Social Responsibility (in short ''CSR'') expenditure by holding that expenditure was in the form of donation and renovation of college building etc., and the expenditure was not incurred out of any business expediency. The Assessing Officer disallowed interest on belated remittance of TDS A13,57,531/-. The Assessing Officer made addition on account of discrepancy in the amount reflected in Form-26AS and amount credited to P & L account. During the course of assessment proceedings, assessee was asked to explain as to how there is discrepancies between the receipts reflected in the 26AS statement :- 29 -: ITA Nos.2280-83 /2018 and reflected in the Profit and Loss account of the year. Assessee submitted the following explanation.
1. Rs.2,80,75,405/- Provision made by the assessee co for reduction mining contract receipts claimed in FY 2011-12. In FY 2012-13 the provision is said to be reversed.
2. Rs.43,42,206/- K J S Ahiuwalia- Transportation income --earlier period 2010-11. Debit note dt 21.10.2011
3. Rs. 18,98,293/- Orewin contract receipts- Discount Rs. 18.62 lakhs for Feb &mar2Oll and June 2011 Rs.39967/- acctd
4. 3,79,768/- Contract receipts -- BS Mining deduction
5. 90,376/- Contract receipts -- Geo Mm consultants
6. 5,909/- MSP sponge Iron Ltd
7. 43,683/- The Rameshwar Jute Mills Ltd
8. 2,04,080/- Ardent Steel Ltd
9. 32,636/- Banspani Iron Ltd
10. 4444/- ABS Merchants P Ltd
11. 12,677/- T R Chemicals
12. 4,86,460/-Steel Authority Of India Ltd :- 30 -: ITA Nos.2280-83 /2018
13. 23,40,000/- Bagadiya Brothers Private Limited''. Based on the explanation offered by the assessee, the Assessing Officer noted that Respondent - assessee had not offered explanation in respect sum of A3,79,15,937/- The Assessing Officer also disallowed payments made to sub contractors. During the assessment proceedings, the Assessing Officer noted that assessee made payments to various subcontractors for doing drilling, excavation, screening etc., Assessee made payment of A4,38,09,329/- to subcontractors Shri. Zafar Hayat. During the course of assessment proceedings, Assessing Officer issued notice u/s.133(6) of the Act to said Shri. Zafar Hayat seeking details of work done by him. Shri. Zafar Hayat had not responded to the notice issued u/s.133(6) of the Act, then assessee was asked to prove the genuineness of the expenditure. Assessee had filed explanation stating that subcontractor Shri. Zafar Hayat was engaged to provide subcontract services at Balda Mines. The sub contract charges were paid for drilling, run of mines (ROM), excavation & loading work, hiring of dumpers and supply of heavy earth moving equipment for working at the crusher plant. It is further stated that all the payments were made out of account payee cheques or through banking channels and expenditure was incurred wholly and exclusively for the purpose of business. On consideration of the explanation of the Respondent - assessee, the :- 31 -: ITA Nos.2280-83 /2018 Assessing Officer concluded that payment by cheque or banking channels and deduction of tax at source does not establish the genuineness of the transaction as the sub-contractor had not responded to notice issued u/s.133(6) of the Act, the Assessing Officer concluded that payments were not made for business purpose and accordingly disallowed the sum of A4,38,09,329/-. The Assessing Officer further disallowed a sum of ` 70,66,678/-out of purchases. The Assessing Officer disallowed purchases of A70,66,678/- made from the following three persons.
Sl.No Name of the concern Address of the Amount paid
concern
1 Maruti Enterprises 58/H/5, Kailash 27,51,570
bose street,
Kolkatta
2 N.K. Steel Traders 58/H/5, Kailash 26,77,543
bose street,
Kolkatta
3 Bengal Udyou 17/H/B, Balai 16,37,565
Sinha Lane,
Kol-09
Based on the information received from DCIT, Kolkata that the above concerns were not existence at the given address. When the assessee was required to explain, it was submitted that payments are made to the above parties towards purchase of stores and spares items namely channel, MS Plates and other items. Payments have been made by way of account payee cheques. However, the Assessing Officer :- 32 -: ITA Nos.2280-83 /2018 concluded that mere payment by banking channel does not establish that expenditure was incurred for the purpose of business. In the absence of evidence of transportation of goods and necessity of making purchases at Kolkata when the mining operations were carried out at Orisha, he disallowed the above payment by holding that the purchases are bogus.
23. Being aggrieved by the above additions, the assessee- company preferred an appeal before ld. CIT(A), who vide impugned order deleted the addition made u/s.14A of the Act accepting the contention of the assessee that no borrowed funds were utilized for the purpose of making investments, when no expenditure was incurred in earning dividend income, no expenditure can be disallowed. As regards to the disallowance of CSR expenditure, ld. CIT(A) placing reliance on the decisions of Hon'ble Jurisdictional High Court in the cases of CIT vs. Madras Refineries Ltd, 266 ITR 170, CIT vs. Velumanickam Lodge, 317 ITR 338, Cholan Roadways Corporation ltd vs. CIT, 235 ITR 473 and Amarjothi Pictures vs CIT, 69 ITR 755 and on the analysis of the expenditure incurred on CSR, the ld. CIT(A) directed the Assessing Officer to disallow only 10% of the expenditure incurred in case amounting to ₹1,12,827/-. As regards to the addition made on account of difference between receipts as per 26AS and the amount credited to P & L account, the ld. CIT(A) considering the :- 33 -: ITA Nos.2280-83 /2018 explanation offered deleted the addition partly. As regards to payment made to subcontractors amounting to ₹4,38,09,329/-. Ld. CIT(A) after considering the fact that payments were made through banking channels and TDS was made holding that the mere fact that sub contractors not responded in response to notice issued u/s.133(6) of the Act cannot be reason to disallow the expenditure, he directed the Assessing Officer to delete the addition. As regards to the disallowance of purchases amounting to ₹70,66,678/- alleged to be bogus, the ld. CIT(A) directed the Assessing Officer to delete the addition considering the fact that payments were made through banking channels and by observing that the Assessing Officer cannot step into the shoes of the assessee as to how assessee should conduct the business.
24. Being aggrieved by the above decision of the CIT(A), the Revenue is in appeal before us challenging the correctness of the order of the CIT(A). Ld. Departmental Representative submitted that ld. Commissioner of Income Tax (Appeals) ought not have allowed CSR expenses of Rs.76,76,946/- being amount spent on the development of local area of mines. He further submitted that ld. Commissioner of Income Tax (Appeals) ought not have restricted disallowance of 10% of cash expenditure alone. As regards to the issue of addition to income based on 26AS reconciliation, ld.
:- 34 -: ITA Nos.2280-83 /2018 Departmental Representative submitted that ld. Commissioner of Income Tax (Appeals) has misdirected himself in directing to delete the addition of Rs.2,80,75,405/- on account of provision made for reduction in mining receipts accepting the explanation of the assessee that same was offered to tax in the succeeding assessment year ignoring the principle that each assessment year is separate unit of assessment. Similar argument is also advanced in sl. No.12 & 13 in respect of item No.2, ld. Departmental Representative submitted that ld. Commissioner of Income Tax (Appeals) granted relief to the assessee considering additional evidence filed in violation of provision of Rule 46A. Regarding disallowance of payment made to sub contractors, he submitted that mere fact that payments were made through banking channels and TDS was deducted does not establish that payments were made wholly and exclusively for the purpose of business and none of the case laws relied upon during the proceedings before ld. Commissioner of Income Tax (Appeals) fit into the facts of the present case. Regarding disallowance of purchase of Rs.70,66,678/-, disallowance was made by the Assessing Officer based on the information received from the DICT, Circle-5, Kolkata, and therefore ld. Commissioner of Income Tax (Appeals) ought not have granted relief.
:- 35 -: ITA Nos.2280-83 /2018
25. On the other hand, ld. Authorised Representative submitted that the Assessing Officer ought not have invoked the provisions of Section 14A read with Rule 8D(2) (ii) and (iii) as much as assessee had substantiated the contention that no borrowed funds were utilized for making investments which yielded exempt income by referring to the financial statements placed at pages 2 to 18 of the paper book. As regards to the disallowance u/s.8D(2) (iii), he submitted that if at all, disallowance is to be made, only investments which yielded exempt income has to be considered. As regards to the CSR expenditure, the ld. Authorised Representative submitted that expenditure was incurred for the following purposes.
''(i) Setting up and running and maintenance of schools
(ii) Setting up and running and maintenance of hospitals, medical and health check up camps
(iii) Providing drinking water
(iv) Lighting facilities
(v) Training the villager particularly the unemployed youth by way of skill development programs and creation of employment opportunities
(vi) Training the tribals by setting up security training schools and providing employment to them
(vii) Community assisted programmes and events, sports activities
(viii) Community welfare expenses and running old aged homes
(ix) Providing plantation jobs for the tribal and unskilled people living in the vicinity of the mines area''.
It is submitted that assessee company is engaged in mining services at various mines located in Keonjihar Dist. Odisha State. The mines :- 36 -: ITA Nos.2280-83 /2018 are located in remote and tribal areas of Kenojhar Dist. The villages lack adequate drinking water, medical facilities, school for children and proper road facilities. Most of the villagers in this region are indentified as living below the poverty line and this expenditure was incurred in order to buy goodwill and ensure smooth business operations in the locality and therefore expenditure was incurred only out of the business expediency. Thus, he submitted that no interference in the order of the ld. Commissioner of Income Tax (Appeals) is required. As regards to the additions to income based on 26AS reconciliation, the ld. Authorised Representative submitted that assessee had filed explanation reconciling the discrepancy between the amount shown in the Profit and Loss account and reflected in the form 26AS. The Assessing Officer had made additions without appreciating the nature of the items and no fresh evidence in violation of Rule 46A (3) was filed before the ld. Commissioner of Income Tax (Appeals) and therefore it is submitted that no interference is called for. As regards to the disallowance of payments made to sub contractors, it is submitted that expenditure was incurred wholly and exclusively for the purpose of business and the payments were made by banking channels and provisions of TDS were duly complied with. Mere fact that sub contractor had not responded to notice issued u/s.133(6) of the Act cannot be a reason to make addition. He further submitted :- 37 -: ITA Nos.2280-83 /2018 that he had discharged primary onus of filing details such as name, address and payment details and therefore findings of the ld. Commissioner of Income Tax (Appeals) is based on proper appreciation of facts and no interference is called for. With regards to the disallowance of purchases from Kolkata parties to the tune of Rs.70,66,678/-, ld. Authorised Representative submitted that assessee company discharged primary onus lying upon it by filing details i.e. name, address, TIN, CST numbers, details of payments made etc. He further submitted that the sellers had directly delivered the goods to assessee's mines and therefore there is no evidence of transportation of goods and he further submitted that it is purely business decision as to where from purchases has to be made, the Assessing Officer cannot step into the shoes of the assessee company.
26. We heard the rival submissions and perused the material on record. The grounds of appeal No.1 & 7 are general in nature therefore does not require any adjudication.
27. The Ground No.2, challenges the decision of the ld. Commissioner of Income Tax (Appeals) in deleting the addition of Rs.52,94,404/- made u/s.14A of the Act. Admittedly, assessee had dividend income of Rs.4,03,78,555/-. The addition made includes under clause (ii) of Rule 8D of Rs.28,65,261/- and clause (iii) of Rule :- 38 -: ITA Nos.2280-83 /2018 8D Rs.24,29,143/-. During the course of assessment proceedings as well as before the ld. Commissioner of Income Tax (Appeals) assessee company had substantiated its claim that no borrowed funds were utilized for making investments which yielded the exempt income by filing financial statements. From the financial statements, it is clear that assessee has own funds of Rs.55,71,00,000/- against investments of A10,11,90,000/-. It is clear that own funds are more than investments. Therefore presumption should be drawn that own funds were utilized for the purpose of making investments and no disallowance of interest should be made. This proposition of law has been upheld by the Hon'ble Supreme Court in the case of CIT v. Reliance Industries Ltd. [2019] 410 ITR 466 (SC) affirm the decision of the Hon'ble High Court in the case of CIT v. Reliance Industries Ltd. [2017] 86 taxmann.com 24 (Bom.), wherein it was held as follows:
33. We do not see how when the Assessing Officer's views are that in cases of the interest free loans and interest given by the assessee to its subsidiary companies are in the above sums, still, the principle laid down by this Court that if there are funds available to them interest free and overdraft or loans taken, would not apply. This view of the Assessing Officer is ex facie contrary to the settled principle that a presumption would arise that the investment would be out of the interest free funds generated or available with the company. Then, the borrowed capital in hand in that case and interest expenditure was deductible under Section 36(1)(iii) of the I.T. Act, 1961. The Tribunal held that the interest free fund available to the assessee is sufficient to meet its investment. It can be presumed that investments were made from interest free funds available with the assessee. This position clearly emerges from the record and for the current assessment year as well. We do not see how a different view in the facts and :- 39 -: ITA Nos.2280-83 /2018 circumstances can be taken. If the Tribunal had followed the earlier view and on facts, then, there is no perversity when nothing contrary to the factual material was brought on record by the Revenue. In such circumstances, the concurrent view on disallowance of interest was reversed and the appeal of the assessee to that extent was partly allowed. We do not see any substantial question of law arising from such a view of the Tribunal.
The Hon'ble High Courts of Gujarat & Bombay reiterated the same principle of law in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom) and Gujarat State Fertilizers & Chemicals Ltd. [2013] 358 ITR 323 (Guj) & CIT vs. Amod Stamping (P.)Ltd. [2014] 45 taxman.com 427 (Guj.).
28. In the present case, Indisputedly own and interest free funds are more than the investment made and therefore that the presumption should be drawn that investments are made out of own funds in view of the principle enunciated in above mentioned decisions. Therefore, no disallowance of interest under clause (ii) of Rule 8D can be made. As regards to the disallowance of administrative expenses under clause (iii), the law is settled to the extent that for the purpose of computing the amount of disallowance on clause (iii) of Rule 8D, only investments which yielded exempt income alone should be considered. Accordingly, we direct the Assessing Officer to compute the amount of disallowance under Rule 8D(iii) by considering the value of investments which yielded exempt :- 40 -: ITA Nos.2280-83 /2018 income alone. In the result, ground No.2 filed by the Revenue is partly allowed for statistical purpose.
29. Ground No.3 challenges the decision of the ld. Commissioner of Income Tax (Appeals) to restrict the CSR disallowance to 10% the expenditure incurred in cash. From the perusal of the assessment order, it is clear that the Assessing Officer had accepted in principle the allowability of the CSR expenditure. The Assessing Officer disallowed the amount only to the extent of Rs.76,76,946/- as expenditure was incurred in the nature of donation and renovation of college building etc., Admittedly, the expenditure was incurred in the areas where business operations of the assessee company were carried out in order to promote social economic condition of the local community living and in order to win the goodwill of the local people. The Hon'ble Jurisdictional High Court in the cases of Madras Refineries Ltd (supra), Velumanickam Lodge (supra) as well as Cholan Roadways Corporation Ltd (supra) had held that the expenditure incurred on promoting social welfare of the local community and providing drinking water facilities, educational facilities cannot be regarded as expenditure wholly incurred outside the ambit of business of the assessee and allowed business deduction. Having regard to the ratio of the decisions, we are of the considered opinion that the decision of the ld. Commissioner of Income Tax :- 41 -: ITA Nos.2280-83 /2018 (Appeals) is based on proper appreciation of facts and we do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals). Ground No.3 filed by the Revenue is dismissed.
30. Ground No.4 challenges the decision of the ld. CIT(A) in partly granting relief in respect of addition on account of discrepancy between the amount of receipt reflected in form 26AS and credited to P & L account. Apparently there is discrepancy between the amount reflected in form 26AS and the amount shown in the Profit and Loss account. Assessee company offered an explanation as to how the discrepancies arose between the two. The ld. CIT(A) considering the explanation partly granted relief to the assessee. However, ld. CIT(A) had not discussed the fact situation as to how the income shown in Form-26AS had not accrued. Therefore, we are of the considered opinion that the matter should be remand back to the file of the Assessing Officer for denovo assessment after giving due opportunity of hearing to the assessee. We order accordingly. Thus, the Ground No.4 filed by the Revenue is partly allowed for statistical purpose.
31. The Ground of appeal No.5 challenges the decision of the ld. CIT(A) deleting the addition made on account of payment made to subcontractor. Admittedly, the Assessing Officer made disallowance to the tune of ₹4,38,09,329/- on the ground that subcontractor had not responded to the notice issued by the Assessing Officer u/s.133(6) of :- 42 -: ITA Nos.2280-83 /2018 the Act. The assessee company had discharged its initial onus by filing primary details i.e., name, address, payment details, copies of invoices etc., The Assessing Officer had not even called upon the assessee company to produce subcontractor before him. The Assessing Officer cannot resort to the disallowance merely because subcontractor has not responded to the notice issued u/s.133(6) of the Act. Reliance in this regard can be placed on the decision of Hon'ble Bombay High Court in the case of PCIT v. Chawla Interbild Construciton Co. (P.) Ltd. [2019] 104 taxman.com 402 held as follows:
"7. We find that the Assessing Officer while passing the assessment order has dis-allowed 40% of the total payments made on the basis of the payments made to 13 parties, who were not produced before him during the assessment proceedings. This on the ground that payments are not genuine. We are unable to understand on what basis the dis-allowance is made on the total payments, if at all it should have been restricted only to the amounts paid to the 13 persons who are not produced before the Assessing Officer. Be that as it may, we find that the respondent - assessee had done everything to produce necessary evidence, which would indicate that the payments have been made to the parties concerned. The details furnished by the respondent assessee were sufficient for the Assessing Officer to take further steps if he still doubted the genuineness of the payments to examine whether or not the payment was genuine. The Assessing Officer on receipt of further information did not carry out the necessary enquiries on the basis of the PAN numbers, which were available with him to find out the genuineness of the parties. The CIT(A) as well as the Tribunal have correctly held that it is not possible for the assessee to compel the appearance of the parties before the Assessing Officer."
Furthermore, there is no evidence to show that the amount paid to subcontractor is recycled back to the assessee and there is not even an allegation by the Assessing Officer to this effect.
:- 43 -: ITA Nos.2280-83 /2018 Nevertheless, the receipts from this contract was offered to tax and it is not the case of the Assessing Officer that assessee had incurred expenditure in executing the contract apart from the subcontract expenses. In the circumstances, we are unable to uphold the disallowance made by the Assessing Officer and accordingly do not find any reason to interfere with the order of the ld. CIT(A). Ground No.5 filed by the Revenue stands dismissed.
The Ground of appeal No.6 challenges the decision of the ld. CIT(A) in deleting the addition made towards bogus purchases from Kolkata parties. From the perusal of the assessment order, it reveals that Assessing Officer based on the information received from DICT, Kolkata that three parties were not in existences at given address and the Assessing Officer had also questioned the necessity of purchasing materials from Kolkata when the assessee company was executing the work in Odisha. Admittedly, purchases made by the assessee company was duly supported by bills and the payments were made through banking channels and assessee had discharged the initial onus of filing the name, address, copies of invoice, TIN and CST etc. The Assessing Officer had not brought any evidence on record to show that the amounts paid to the sellers was recycled back to the assessee and moreover, the Assessing Officer had not doubted the consumption of the materials brought. In the absence of this material evidence, no addition can be made towards alleged bogus expenditure. We refer to :- 44 -: ITA Nos.2280-83 /2018 the decision of Hon'ble Gujarat High Court in the case of PCIT vs. Tejua Rohitkumar Kapadia (2018) 94 taxmann.com 324 which was confirmed by Hon'ble Supreme Court by dismissal the SLP in PCIT vs. Tejua Rohitkumar Kapadia [2018] 94 taxmann.com 325 (SC). Accordingly, we do not find any reason to interfere with the order of the ld. CIT(A). Ground No. 6 filed by the Revenue stands dismissed.
32. In the result, the appeal filed by the Revenue in ITA No.2281/CHNY/2018 for assessment year 2012-2013 is partly allowed for statistical purpose.
33. Now, we take up appeal in ITA No.2282/CHNY/2018 for assessment year 2013-14.
34. The Revenue raised the following grounds of appeal.
'1. The order of the ld.CIT(A) is contrary to the provisions of the Income Tax Act, Rules and facts of the case.
2. The ld.CIT(A)'s decision on the disallowances made u/s 14A is not accepted, since the Assessing Officer had only made the disallowances as per provisions of Rule 8D of Income Tax Rules as per the CBDT Circular No.5/20 14, dated 11.02.2014.
3. The view of the ld.CIT(A) is not correct in as much as the CSR expenses have not been proved to have been incurred wholly and exclusively for the purpose of the business of the assessee.
4. The order of the ld.CIT(A) is not considered acceptable on the deletion of addition made in respect of receipts from Electrical Engineer, Rural Works II, Keonjhar, since the assessee maintains accounts in Mercantile system basis and hence the income should be :- 45 -: ITA Nos.2280-83 /2018 recognized in the year in which the work was done and necessary bill raised. Hence, second appeal.
5. The ld.CIT(A) 's deletion of the additions made towards payment made to sub contractors, is not accepted, since the very fact that there has been no details of work order filed in relation to the work stated to have been executed by the above party and also considering that, the said party has not filed any return of income for the said year at all and also since no confirmation of details have been furnished to prove the genuineness of said claim of expenses incurred. Hence, second appeal.
6. In view of the facts and circumstances, since monetary limit i.e. Rs.1,15,61,200/- exceeds the prescribed limit as per the Board's Circular No.3/20 18 in F No.279/Misc. 142/ 2007-ITJ (Pt.), second appeal is suggested on the above issues''.
35. The brief facts of the case are as under:
The return of income for the AY 2013-14 was filed electronically on 29.09.2013 disclosing total income of Rs.215,23,95,950/- under normal provisions and book profit of ₹207,03,15,246/- under the provisions of Section 115JB of the Act. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax, Central Circle (i/c) Salem (hereinafter called as ''Assessing Officer'') vide order dated 31.03.2016 passed u/s. 143(3) of the Income Tax Act, 1961 (for short 'the Act') at total income of Rs. 194,61,35,917/-, while doing so, the Assessing Officer made the following additions/ disallowances.
(i) Disallowance u/s.14A r.w.rule 8D 17,15,991
(ii) Disallowance of CSR expenses 3,32,90,591 :- 46 -: ITA Nos.2280-83 /2018
(iii) Payment from Chettinad Cement Corporation 11,542
(iv) Receipts from Electrical Engineer, Rural works II, Keonjhar 45,27,491
(v) Expenditure over booked by the assessee 19,14,735
(vi) Sub-contract payments M/s. Preeya Earth Mover, Salem 81,76,288
36. Being aggrieved by the above additions, the assessee- company preferred an appeal before ld. CIT(A) challenging the additions made. The ld. CIT(A) deleted the addition in respect of addition made u/s.14A, in respect of CSR expenditure, directed the Assessing Officer to restrict to 10% of expenditure incurred in cash. Ld. CIT(A) also deleted addition on account of receipt received from State Highways Dept. Rural Works II, Keonjhar of ₹45,27,491/- considering the fact that the income was offered to tax in the assessment year 2014-15. As regards to the disallowance of subcontractor payment of ₹81,76,288/-, ld. CIT(A) considering the partnership deed, details of payments, details of TDS made and the fact that Mr. M. Neduncheziyan, Managing Partner of Preeya Earthmovers had expired on 27.12.2014 had directed the Assessing Officer to delete the addition.
:- 47 -: ITA Nos.2280-83 /2018
37. Being aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us in the present appeal.
38. We heard the rival submissions and perused the material on record. The grounds of appeal No.1 & 6 are general in nature therefore does not require any adjudication.
39. The Ground of appeal No.2, challenges the decision of the ld. Commissioner of Income Tax (Appeals) in deleting the addition u/s.14A of the Act. Identical issue has arisen in the preceding year in ITA No.2281/CHNY/2018 for assessment year 2012-13, wherein we had upheld the deletion of addition under clause (ii) of Rule 8D. However, in respect of addition made under clause (iii) of Rule 8D, we restored the matter back to the file of the Assessing Officer to compute the amount of disallowance by considering only value of investments which yielded exempt income. Accordingly, ground No.2 filed by the Revenue is partly allowed for statistical purpose.
40. The Ground of appeal No.3 challenges the decision of the ld. Commissioner of Income Tax (Appeals) to restrict the CSR disallowance to 10%. This ground is similar to the ground No. 3 raised by the Revenue for assessment year 2012-13 in ITA No.2281/CHNY/2018. We have already deleted the disallowance in para 29 above in the ground of appeal involving identical facts and :- 48 -: ITA Nos.2280-83 /2018 issue. For the parity of reasons mentioned therein, we dismiss this ground of appeal also filed by the Revenue.
41. The Ground of appeal No.4 challenges the decision of the ld. CIT(A) in deleting the addition made on account of accrued interest in respect of work done for Electrical Engineer, Rural Works II, Keonjhar. On perusal of the assessment order, it is clear that the Assessing Officer brought to tax sum of A45,27,491/- received from Electrical Engineer, Rural Works II, Keonjhar and same was offered to tax by the assessee in succeeding assessment year i.e. 2014-15. It is contended before the Assessing Officer that income had not accrued as no bill was raised and the details of the receipts were awaited from payer and therefore no income was recognized. On appeal before the ld. CIT(A), ld. CIT(A) deleted the addition considering the fact that income was offered to tax in the immediate succeeding assessment year. No doubt each assessment year is a separate and distinct unit of assessment but the Assessing Officer had not brought any material on record to show that income had accrued to the assessee in terms of agreement of contract. Mere receipt of money does not constitute income and therefore we cannot uphold the addition to income. Accordingly, ground No.4 filed by the Revenue stands dismissed.
:- 49 -: ITA Nos.2280-83 /2018
42. Vide its ground No.5, the Revenue challenges the decision of the ld. CIT(A) in deleting the addition made on account of subcontractor payment made to M/s. Preeya Earthmovers. On perusal of the assessment order, it would reveal that Assessing Officer made disallowance of subcontractor payment made to M/s.Preeya Earthmovers of A81,76,288/- primary on the ground that subcontractor had not filed return of income. It is also stated that assessee had discharged its initial onus by filing details such as name, address, payments details, copies of invoices, bills raised etc., On appeal before the ld. CIT(A) the addition deleted the addition by holding that mere non filing of return by the sub contractor would not itself can be reason to disallow the payment. The Assessing Officer had not disputed the actual work done by M/s. Preeya Earthmovers. This ground is similar to the ground No. 5 raised by the Revenue for assessment year 2012-13 in ITA No.2281/CHNY/2018. We have already deleted the disallowance in para 26 above. Accordingly, we delete the ground No.5 raised by the Revenue.
43. In the result, the appeal filed by the Revenue in ITA No.2282/CHNY/2018 for assessment year 2013-14 is partly allowed for statistical purpose.
:- 50 -: ITA Nos.2280-83 /2018
44. Now, we take up appeal No.2283/CHNY/2018 for assessment year 2014-2015 for adjudication.
45. The Revenue raised the following grounds of appeal.
''1. The order of the ld.CIT(A) is contrary to the provisions of the Income Tax Act, Rules and facts of the case.
2. The order of the ld.CIT(A) is not considered acceptable as the Assessing Officer had given a clear finding that the payment made to the concerned parties are not justified in view of the following reasons
(a) Bearing any loss due to quality assurance is not a clause in the contract agreement.
(b) When the benefit on sales are more for the mine owner, why the claims on quality need to be borne by the contractor alone.
(c) Loss on quality allowance not passed to sub-contractors.
(d) Foregoing almost the same rate received as a contractor as an expenditure on quality allowance is not a believable explanation.
(e) It is seen that most of the payments made were as advance to a party who has no direct business dealings with the assessee and huge amounts are kept outstanding in those cases.
The ld.CIT(A) has also taken a view that similar expenditure claimed in earlier years were accepted by the Department which is not true, since the Principal CIT has. already set aside the assessment order passed in respect of the AY 2013-14 u/s 263 of the IT Act to the AO in order to consider the genuineness of such payments made. In view of the above, further appeal.
3. The view of the ld.CIT(A) is not correct in as much as the CSR expenses have not' been proved to have been incurred wholly and exclusively for the purpose of the business of the assessee.
:- 51 -: ITA Nos.2280-83 /2018
4. The order of the ld.CIT(A) is not considered acceptable since the Assessing Officer had clearly given a finding that the legal expenses were met out for appearing in Supreme Court in an unconnected case of T.N. Godavarman Thirumalpad Vs Union of India, a PIL filed against illegal mining in Odissa, the outcome of which will have a• direct effect on the mine owners only and this assessee being a raise in contractor is also having business operations in other states like Andhra Pradesh, Tamilnadu etc. Also, the adverb "wholly" in the phrase "laid out or expended for business" refer to the quantum of expenditure. The adverb "exclusively" has reference to the object or motive of the act behind the expenditure. Unless such motive is solely for promoting the business, the expenditure will not qualifying for deduction CIT Vs T.S.Haji Moosa Co.(Madras) 153 ITR 422. Mysore Kirlosker Ltd Vs CIT(Karnataka) 166 ITR Vs 836. Siddo Mal & Sons Vs ITO(Delhi) 122 ITR 83.
5. The ld.CIT(A)'s decision on the disallowances made u/s 14A is not accepted, since the Assessing Officer had only made the disallowances as per provisions of Rule 8D of Income Tax Rules as per the CBDT Circular No.5/20 14, dated 11.02.2014
6. In view of the facts and circumstances, since monetary limit i.e. Rs.26,48,97,183/- exceeds the prescribed limit as per the Board's Circular No.3/20 18 'in F No.279/Misc. 142/ 2007-ITJ (Pt.), second appeal is suggested on this issue''.
46. The return of income for the AY 2014-15 was filed electronically on 29.09.2014 disclosing total income of Rs.191,05,21,190/- under normal provisions and book profit of ₹193,27,18,841/- under the provisions of Section 115JB of the Act. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax, Central Circle Salem (hereinafter called as ''Assessing Officer'') vide order dated 29.12.2016 passed u/s. 143(3) of the Income Tax Act, 1961 (for short :- 52 -: ITA Nos.2280-83 /2018 'the Act') at total income of Rs. 248,97,78,690/-, while doing so, the Assessing Officer made the following additions/ disallowances.
(i) Disallowance on quality allowance 44,54,80,402
(ii) Disallowance out of CSR expenses 3,90,49,461
(iii) Disallowance u/s.37(1) 10,77,65,497
(iv) Disallowance of legal expenses 1,06,60,000
(v) Disallowance u/s.14A r.w.rule 8D 7,51,000
47. The factual background of the additions made are as under:-
The Respondent - assessee made claim for deduction of quality allowance and claims of A44,91,60,000/-. This expenditure represents rebate/discount claimed by the parties who purchased iron ore, if the quality of ore is not up to the grade. Assessee also furnished copies of debit notes raised by the parties i.e. M/s. Shyam Sel & Power Ltd and M/s.Shyam mettallics & energy ltd. On verification of the debit notes, the Assessing Officer found that the claims were made against assessee company against purchase of ores from M/s.Sirajuddhin & Co and Indrani Patnaik. The Assessing Officer taking note of the fact that Respondent - assessee is only raising contractor and doing mining for the mine owners who had taken the mines on lease and the works was awarded by mine workers in terms of written agreement entered between both parties. Considering the scope of work given in the agreement, the Assessing Officer concluded :- 53 -: ITA Nos.2280-83 /2018 that in the absence of any specific clause in the agreement between assessee company and licensee, there is no liability on the part of the assessee company to pay any penalty on account of low grade ores.
Representatives of the mine owners are alone responsible to ensure quality of the grade of the finished products and subcontractor is not entitled for payment if low grade ore is raised for which buyers are not available for raising contractor. Considering the above facts, the Assessing Officer concluded as under:-
'From the above said clauses the assessee company, rather the Raising Contractor is not at any kind of risk with respect to the quality of ore mined. If the ores mined by the sub- contractor is of low grade, assessee company need not pay the sub contractors. If the ore mined by the assessee company is of low grade, it has only to be reprocessed for improving the quality of the finished product. Therefore, once the ores are dispatched from the mine, it is considered to be of proper quality. After the sales by the mine owner there is no possibility for the purchaser to raise a debit note on the assessee company. First of all there is no direct link between the purchaser of ore and the assessee company. If the grade of ore purchased is not upto the mark, the purchaser can raise a debit note on the mine owner who had sold the ore and not against the raising contractor''.
Based on the facts, the Assessing Officer had required the assessee to explain why the same should not be allowed as deduction, for which detailed reply was filed by the assessee which is reproduced by the Assessing Officer vide pages 5, 6 & 8 of the assessment order. The explanation offered by the assessee company is that agreement between mine owners and assessee company is silent as regards to :- 54 -: ITA Nos.2280-83 /2018 the liability arising out of the claim from buyer on quality issue. After mutual discussion, it was decided that liability of claims from buyer should be borne and settled by the raising contractor i.e. assessee.
Considering the submissions, the Assessing Officer held that payments made to M/s. Shyam Sel & Power Ltd and M/s.Shyam mettallics & energy ltd are not justified by giving following reasons.
'1) Bearing any loss due to quality assurance is not a clause in the contract agreement or work order with the mine owner.
2) When the benefit on sales are more for the mine owner, why the claims on quality should be borne by the contractor alone.
3) Loss on quality allowance is not passed on to the sub contractors also.
4) The assessee company being a mere contractor was getting fixed rates of about Rs. 1300/- to 1500/- for lumps and Rs.200/- to Rs.350/- for fines. Forgoing almost the same rate as quality allowance by the contractor issomething unbelievable.
5) Nature of transactions as discussed in the above cases and as noticed in their ledger copies doesn't seems to be like "quality allowance" as claimed by the assessee as most of the payments were made in advance to a party who has no direct business transaction with the assessee and huge amounts were kept outstanding also in those cases''.
and accordingly disallowed the sum of A44,54,80,402/-.
48. Addition on account of 100% depreciable asset. During the previous year relevant to assessment year under consideration, assessee company made claim for reduction of 100% depreciation :- 55 -: ITA Nos.2280-83 /2018 on the mines internal road for A10,77,65,497/-. Work for laying road was given to one contractor M/s. Simplex Project Ltd, Kolkata, who stated in response to notice issued u/s.133(6) of the Act that road works was done in earlier years and capitalized. The Assessing Officer based on this information concluded that it is not temporary structure and has got an enduring life. Since contract entered by the assessee company with mine owners is for long period, accordingly, assessee was required to show cause how the claim can be allowed. In response to the same, assessee submitted as under:-
"we have incurred expenditure on internal road laying work at the Balda Block Mines of Serajudhin & CO AND AT Unchaballi Mines of Indrani Patnaik. These internal roads are laid with carting of excavated earth and laying in 6" or 8"
inches thick layer of excavated earth, consolidation using road roller, evenly spreading, watering and compacting for vehicle use from mines to office, mines to weighbridge and mines to staff quarters! canteen.
The temporary roads have been laid within the mines owned by the mine owned by the mine owners M/s.Serajudhin & Co. and Indrani Patnaik. These temporary mine haul roads are laid with excavated earth and are not concrete or tar roads. Such roads are laid down mainly for hauling purposes by dumpers, loaders, mining equipments and jeeps. By maintaining good roads, both truck and equipment maintenance will be kept to minimum resulting in reduced mining cost. Besides the temporary nature of road, these are laid on land owned by the mine owners for use by our company. By incurring the expenditure for laying of temporary roads, our company got the business advantage of using it...."
Assessee has relied on the Supreme Court judgement in the case of L.H.Sugar factory & oil mills (p) Ltd. Vs. CIT 125 ITR
293. In this particular case, the assessee was carrying on the :- 56 -: ITA Nos.2280-83 /2018 business of manufacture and sale of sugar. It had it's factory in UP. The assessee paid a contribution towards meeting the cost of construction of roads in the area around it's factory under a sugarcane development scheme. The court held that, although the advantage secured was of longer duration, it was not an advantage in the capital field because no tangible or intangible asset was acquired by the assessee, nor was there any addition to or expansion of the profit making apparatus of the assessee. The amount was contributed for the purpose of facilitating the business of the assessee and making it more efficient and profitable. It was therefore, Revenue expenditure''. Considering the submissions of the assessee, the Assessing Officer concluded that the claim of the assessee company for 100% depreciation on temporary structure cannot be accepted as the road is classified as building for depreciation purpose the Assessing Officer also held that the same cannot be allowed as revenue expenditure for a reason that the benefit of the expenditure is for mining owners and not assessee company. Accordingly disallowed the claim of the assessee. As regards CSR expenditure, the Assessing Officer disallowed sum of A3,90,49,461/- out of the total CSR expenditure of A7,59,10,000/-. The purpose of incurring expenditure was explained by the assessee company before the Assessing Officer which is set out by the Assessing Officer vide page 13 of the assessment order. Out of the above expenditure a sum of A3,90,49,461/- was disallowed by the Assessing Officer on analysis of the expenditure, it is found that specifically in the form of donations to various organization which is eligible for deduction u/s.80G of the Act.
:- 57 -: ITA Nos.2280-83 /2018
49. The Assessing Officer also disallowed legal expenses of A.1,06,60,000/-. During the course of assessment proceedings, the Assessing Officer found that sum of A1,06,60,000/- was incurred towards legal fees for engaging legal advocates to appear before Hon'ble Supreme Court on behalf of assessee in PIL filed against illegal mining in Odisha. The Assessing Officer was of the opinion that outcome of the PLI of the case has no bearing on the business of the assessee company and therefore, he felt that there is no necessity of incurring legal expenditure of A1,06,60,000/-.
50. Disallowance u/s.14A of the Act, the Assessing Officer made disallowance under clause (iii) of Rule 8D of A7,51,000/- noticing that assessee had earned dividend income of A4.1 Crores.
51. Being aggrieved by the above additions, the assessee filed an appeal before the ld. CIT(A), who vide impugned order directed the Assessing Officer to delete the addition on account of quality allowance of A44,54,80,402/-, considering the fact that in the earlier years similar expenditure was allowed and the payments has been made by way of banking channels. As regards to the CSR expenditure, the ld. CIT(A) had restricted the disallowance to 10% of the expenditure incurred in cash A3,90,49,461/-. As regards to the disallowance of road lying expenditure, ld. CIT(A) directed the :- 58 -: ITA Nos.2280-83 /2018 Assessing Officer to allow the claim as revenue expenditure following the decisions of Hon'ble Supreme Court in the cases of Laskhmiji Sugar Mills Co. P. Ltd vs. CIT, 82 ITR 376, CIT vs. Kirkend Coal Co, 77 ITR 530, Jurisdictional High Court in the cases of CIT vs. Coats Viyella India Ltd 253 ITR 667 and CIT vs. T.V. Sundaram Iyengar & Sons (P) Ltd, 95 ITR 428, the CIT(Appeals) deleted the additions on legal expenses and disallowance u/s.14A of the Act.
52. Being aggrieved by the order of the ld. CIT(A), the Revenue is in appeal before us in the present appeal. Ld. Departmental Representative submitted that with regard to quality allowances and claims in the absence of clause in the agreement between the assessee and the mine owners there is no liability on the part of the assessee company to pay claims arising on account of the quality of iron ores. He further submitted that once the iron ore is dispatched from the mine, ore is considered to be in proper and good quality and there is no possibility of raising any issue as to the quality of the ore and there is no necessity of paying any damages on account of quality issues of the buyers of the mines. He finally submitted that it was not expenditure incurred wholly and exclusively for the purpose of business and ld. CIT(A) ought not have allowed the claim as deduction. As regards to the CSR expenditure, he submitted that CIT(Appeals) ought not have directed the Assessing Officer to restrict :- 59 -: ITA Nos.2280-83 /2018 10% of expenditure, incurred on cash. As regards to the disallowance of legal fees, he submitted that there is no necessity of incurring of expenditure since the cases were filed against mine owners.
53. Per contra, ld. Authorised Representative submitted that liability on account of quality allowances and claim from the buyers are borne by the assessee company in the business interest of the assessee company in order to continue business relationship with mine owners and to continuity of mine contracts. He further submitted that assessee company incurred heavy raising cost and lot of working capital is locked up in the business. Unless and otherwise ore raised is sold immediately, assessee company could not be in a position to claim the bills from the mine owners. He further submitted that the Assessing Officer had not questioned the genuineness of the transaction and the payments were made wholly and exclusively for the purpose of business and the same should be allowed as deduction on the ground of commercial expediency. He placed reliance on the decisions of Hon'ble Supreme Court in the cases of S.A. Builders Ltd (supra), Hero Cycles (P) Ltd vs CIT, (supra) and Sassoon J. David & Co P Ltd (surpra). As regards to legal expenses, it is submitted that the assessee company received notice from M.B. Shah Commission which was set up for inquiring into illegal mining case in various states. It is further submitted that assessee company is a member of :- 60 -: ITA Nos.2280-83 /2018 FIMI, an association of mining industries also participated in the hearings in the business interests of its members which in turn distributed the expenses among its members. Expenditure is incurred only to protect the business interest of the assessee and the same should be allowed as deduction. He placed reliance on the decisions of Hon'ble Supreme Court in the cases of S.A. Builders Ltd (supra), Hero Cycles (P) Ltd vs CIT, (supra) and Sassoon J. David & Co P Ltd (surpra). As regards to CSR expenditure and Section 14A of the Act disallowance, he reiterated the same submissions made in assessment year 2012-13.
54. We heard the rival submissions and perused the material on record. The grounds of appeal No.1 & 6 are general in nature therefore does not require any adjudication.
55. Ground No.2 challenges the decision of the ld. CIT(A) allowing the claims on quality from the buyers of the ore of A44,54,80,402/-. The Assessing Officer disallowed quality allowances and claims primarily for the following reasons.
(i) There is no agreement between assessee company
and the mine owners to bear the quality
:- 61 -: ITA Nos.2280-83 /2018
allowances and claims in case of mining low
grade ores.
(ii) Mine owners only do sampling of Ore at crushing
and screening plant as well as at the point of
dispatch.
Assessee company being contractor may have to further process any produce if desired by the mine owners for the purpose of improving the quality of the mines ores. Admittedly, there is no clause in the agreement between assessee company and mine owners regarding who has to bear the liability of the claims from the buyers of the ore on account of low grade ore etc., There is no proximate connection between assessee company and the buyers of the ore. The reasons as to why liability of the claim is borne by the assessee company is explained before the Assessing Officer as under:-
the following are the four major payments which relate to the iron ore mining operation. The other payments mainly relate to coal trading and aggregate division.
Sl.No Name of the party to whom Amount
paid
1 SHYAMMETALICSAND ENERGYLTD 16,54,50,411
2 SHYAMSEL&POWERLTD l7,61,51,327
3 BAITLOGITECH PVT. LTD 3,16,10,248
:- 62 -: ITA Nos.2280-83 /2018
4 BHUSHAN POWER &STEEL LTD 7,22,68,416
TOTAL 44,54,80,402
Our company is a contractor engaged mainly in providing iron ore mines development and operation services to the private mine owners. In this regard, we had submitted the work orders issued by the various mine owners. Though the work orders issued by the mine owners did not have any specific clause on Quality allowance, subsequently after mutual discussion the mine owners have orally stated that any claims from the buyers arising out of quality issues shall be borne/settled by raising contractor.
The contract revenue for our company as mutually agreed with the mine owners is either affixed percentage of the sale price of the ore or fixed rate per Metric Ton as specified in the work order. Such revenue rates awarded to our company are comparatively higher and result in much better realization per MT as compared to rates awarded by other entities namely Odisha Mining Corporation, a state Govt. undertaking. The rates are agreed upon to compensate the considerable risk involved, the totality of the services of an end to end nature of work, scientific mining with state of the art mining equipment and maximizing the returns by optimizing productivity.
After mutual discussion it was agreed between the mine owner and the contractor that any compensation arising out of quality issues shall be borne by the contractor and has to be mutually settled by the buyer and the contractor. Contractor has agreed upon to bear the cost of compensation in view of the higher price awarded and to continue the future business relationship with the mine owner. This is purely a commercial decision taken by the contractor completely weighing the pros and cons of the proposal and for the betterment of relation with mine owner and continuity of business. The cost of compensation borne by the contractor has ultimately been passed on to the buyer. This has got close nexus with the business carried on by the assessee and being revenue in nature, rightly allowable under section 3 7(1) of the Income tax Act.
• Link between the purchaser and the raising contractor:
With regard to the AO's observation that there is no direct link between the purchaser of ore and assessee company, we submit that owing to the nature of operation carried out by the contractor and as per the commercial arrangement with the mine owner, the :- 63 -: ITA Nos.2280-83 /2018 "Quality allowance/ claim" expenditure has been borne by the contractor.
• On all material dispatched are of Hood quality only:
With regard to AO 's observation that f the ore mined by assessee company is of low grade, it has to be only reprocessed for improving the quality and once, ore is dispatched from mines, it is considered of good quality, we beg to differ. We submit that mine owners representative does only sampling of the ore for quality, at the crushing or screening plant at the mines and with large quantities of ore being processed and dispatched, it would not be possible to ensure entire material sent confirms to specifications. Subsequently after the material is dispatched, the buyer if not satisfied with the quality of the processed iron ore, is entitled to raise the same. The quality allowance! claim is made by the buyer after the receipt of the material at his place. It would not be possible to transport such material back to the mines for reprocessing. Such move would negate any cost advantage of the price of the ore.
• The clause on reprocessing of ore would occur and be applicable only where the material remains at the mines or mine stock yard and not when dispatch has occurred to the buyer. Further, in respect of the work order issued by our company to sub contractors engaged by us, the clause in the contract "sub contractor shall not be entitled for payment if low grade ore raised or accumulated and remain unsold, "we submit that this clause is applicable only when the low grade material remains unsold. Whereas in the case of quality allowance claimed by us, the material has been dispatched to the buyer who has in turn raised debit notes on our company.
• On rebate charged being equivalent to rate paid for ore:
The mine owner sells the processed iron ore 5-18, 10-30 and fines material to the buyer at mutually agreed market rates as per the purchase order issued by the buyer. As already stated, owing to the nature of operation and services rendered by the contractor, it has been agreed that any quality issues or claim or allowance relating to the processed ore shall be borne and settled by the contractor. As far as the buyer is concerned, any quality allowance or claim shall be relating to the total price paid by him for the material. Generally, the sale price of 5-18 is around Rs.5500/ per MT and Rs.1600 to 1800/per MT for fines. The buyer is not concerned about the rate or the price which the contractor gets. The quality allowance paid, amounts to around 20% of the total sale price of the ore. We are submitting few copies of the purchase order issued by the buyer to mine owner (Annexure-I) which contains the quantity and rate :- 64 -: ITA Nos.2280-83 /2018 agreed in the case of 1)Shyam Metalics and 2) Shyam Power Sel Ltd. We submit that the comparison of rebate on account of quality allowance to what the contractor gets would not be appropriate to the instant case.
Payments made to a) Shyam Metalics and Energy Ltd. and b) Shyam Sel &Power Ltd.
We submit copies of statement received from Shyam Metallics & Energy Ltd. for the period 2013-1 4 which confirms the quality allowance received by them • Payments to Bhusan Steel & Power Ltd: Rs. 7,22,68,416/-
In respect of payments made to Bhusan Steel &Power Ltd. we have enclosed copies of all the debit notes issued by the party. The rebate in the case of Bhusan Steel &Power Ltd. amounted to Rs. 105/- per metric Ton.
• Bait Logitech Private Limited: Rs.3,16,1O,248/-
Our company had entered into an MOU with M/s.Bait Logitech Private Limited to facilitate BLPL to participate in a open tender (copy enclosed- Annexure 3) for supply of iron ore fines for 3.53 lakh MT by MMTC Ltd. to the integrated steel plant at Nelachal Isptat Nigam Ltd. Under the arrangement, if the BLPL is awarded the contract for iron ore fines supply, it shall flfl the fines material that is accumulated and held at the Serajuddin &Co. Balda mines. Our company had entered with such an arrangement with BLPL to ensure that fines stock of Serajuddin &Co. is disposed and in the process stand to benefit from getting it's raising contract charges for fines material dispatched. Under the MOU, our company agreed to pay Rs.50 lakh for the arrangement and services rendered by BLPL. Our company agreed to bear differential price between the purchase price of BLPL and the tender awarded rate. Besides, TEMPL agreed to bear any punitive charges, terminal charges, dead freight and demurrage charges levied by MIvITL on the said supply of iron ore fines.Pursuant to the tender, MMTC Ltd. issued an order for supply of iron ore fines to BLPL for 176160 MT Under this business arrangement, BLPL purchased iron ore fines of 176160 MT from Serajuddin & Co and supplied to NINL over a period of three months plus April to July,2013. On completion of the supplies,BLPL raised following debit notes ( )for the differential price as listed below:
:- 65 -: ITA Nos.2280-83 /2018
Sl.No. Debit Debit note Description Oty in Amount
Note Date MT A
No.
1 2 31.01.2014 Differential 176160 1,46,01,886
2 3 28.02.2014 Price on 1,07,97,962
3 4 31.03.2014 Purchase 62,10,400
and sales
Total 3,16,10,248
• Our company had accounted the above loss under the head Quality allowances & claims. The price differential per MT works out to around 180/- per MT. On the other hand our company had realized its share of revenue for raising work offines at around Rs. 780/- to 820/- per MT We submit the quality allowance expenditure has a direct nexus with the business carried on by the assessee and being revenue in nature rightly allowable under section 3 7(1) of the Income Tax Act for the following reasons:
a) It is directly related to the business of the assessee
b) Owing to the nature of operation whereby entire work of mining, hauling and processing is done by the contractor.
c) Is as per mutually agreed commercial terms
d) The practice of quality allowance payment has been in vogue in earlier periods
e) The higher contract price per MT awarded/rate linked to sale price of ore to the con tractor vis a vis other similar contracts of state Govt. undertaking supports and justfles the Quality allowance being borne by the contractor.
f) The cost of quality claim borne by the contractor has ultimately been passed on to the buyer."
:- 66 -: ITA Nos.2280-83 /2018 More importantly, the Assessing Officer had not doubted the genuineness of the expenditure. The Assessing Officer is only questioning the necessity of the expenditure. In the backdrop of the fact that there is no clause in the agreement between assessee company and the mine owners to bear the liability of claim of buyers of the ores. The circumstances under which expenditure was incurred by the assessee company before Assessing Officer as well a ld. CIT(A) stating that expedition disposal of the ore and realization thereof would benefit the assessee company in the form of lower working capital and the continuous business relationship with mine owners and higher revenue from the contract compared to the market rates etc., Submissions made by the assessee company remain uncontroverted by the Assessing Officer. The Assessing Officer had also not questioned the genuineness of the expenditure but disallowance was made by the Assessing Officer questioning the necessity of the expenditure. Now, it is settled position of law that it is not for the Assessing Officer to dictate the assessee as to how the assessee should conduct his business and it is not for him to tell the assessee on what expenditure assessee can incur. The Hon'ble Supreme Court in the case of Eastern Investments Ltd vs. CIT, 20 ITR 1 held that it is not necessary to show expenditure was profitable or in fact any profit was earned. The relevant para is as under:-
:- 67 -: ITA Nos.2280-83 /2018 '(4) that the transaction was more in the interest of the shareholder Scott than that of the company.
The decision of this appeal rests on the true construction of Section 12(2). In our opinion, the law on this point has been correctly summarised in the judgment of the High Court. The following principles are relevant:--
(a) though the question must be decided on the facts of each case the final conclusion is one of law: Indian Radio & Cable Communi cation Ltd. v. The Commissioner of Income-tax, Bombay [1937] 5 ITR 270 PC, and Tata Hydro- Electric Agencies Ltd. v. The Commissioner of Income-tax, Bombay [1937] 5 ITR 202 PC;
(b) it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned : Moore v. Stewarts and Lloyds [1906] 6 Tax Cas.
501and Usher's case [1915] AC 433;
(c) it is enough to show that the money was expended "not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business".
13 British Insulated and Helsby Cables Ltd. v. Athertonh [1926] AC 205; and
(d) beyond that no hard and fast rule can be laid down to explain what is meant by the word "solely ".
Further, subsequently the Hon'ble Supreme Court in the case of CIT vs. Walchand and Co. Pvt Ltd, 65 ITR 381 had held that while applying the test of commercial expediency whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It is further observed that the :- 68 -: ITA Nos.2280-83 /2018 rule that expenditure can only be justified if there is corresponding increase in the profits is erroneous. In the case of Sassoon J. David and Co. Pvt. Ltd. v. CIT [1979] 118 ITR 261 (SC), the Supreme Court after referring to the legislative history held that Assessing Officer cannot question the necessity of the expenditure nor is that necessary for the assessee to show that any expenditure incurred by the assessee for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business. The relevant para is reproduced hereunder:-
''20........................ It has to be observed here that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily". Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure. . . . laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed" The introduction of the word "necessarily" in the above section resulted in public protest.
Consequently when section 37 was finally enacted into law, the :- 69 -: ITA Nos.2280-83 /2018 word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in CIT v. Chandulal Keshavlal & Co. [1960] 3 SCR 38 at page 48 :
"Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party--Usher's Wiltshire Brewerv v. Bruce 6 TC 399 (HL). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby -- [Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee."
The issue in the present case is required to be adjudicated having regard to the principle enumerated in the above decisions. Admittedly, in the present case, the Assessing Officer had not doubted the expenditure, he only questioned the necessity of the expenditure in the backdrop of the facts that there is no clause in the agreement entered between assessee company and mine owners to bear the loss :- 70 -: ITA Nos.2280-83 /2018 claims from the buyers of the ore. The explanation offered to substantiate that payments were made out of business expediency remain unconverted by the Assessing Officer. Having regard to the principles enumerated above, it is not for the Assessing Officer to question the necessity of expenditure irrespective of the fact whether expenditure has resulted in profit or more income, as long as payment was made wholly and exclusively for business purpose, the same should be allowed as deduction. From the material on record, it can inferred that expenditure was incurred voluntarily indirectly to facilitate the carrying on of the assessee company as the expenditure was incurred on grounds of commercial expediency. The Hon'ble SC in the case Gordon Woodrofee Leather Mfg vs. CIT, 44 ITR 551 (SC) held that any expenditure expended on the ground of commercial expediency in order to indirectly facilitate the carrying on the business is allowable as deduction. Therefore the claim falls within the purview of the provisions of Section37(1) of the Act. In the circumstances, the order of the ld. CIT(A) is based on proper appreciation of facts and legal principles governing the issue on hand. Therefore we do not find any reason to interfere with the order of the ld. CIT(A). Thus the ground of appeal No. 2 raised by the Revenue is dismissed.
56. Ground No.3 challenges the decision of the ld.
Commissioner of Income Tax (Appeals) to restrict the CSR
:- 71 -: ITA Nos.2280-83 /2018
disallowance to 10%. This ground is similar to the ground No. 3 raised by the Revenue for assessment year 2012-13 in ITA No.2281/CHNY/2018. We have already deleted the disallowance in para 29 above in the ground of appeal involving identical facts and issue. For the parity of reasons mentioned therein, we dismiss this ground of appeal also filed by the Revenue.
57. Ground No.4 challenges the decision of ld. CIT(A) in allowing legal expenses to the tune of A1,06,60,000/-. The Assessing Officer disallowed legal charges in connection with the case of T.N. Godavarman Thirumalpad vs. UOI, a PIL filed against illegal mining in Odisha. It is the case of the Assessing Officer that assessee is being a contractor for mine owners and he had no locus standi in litigation before Hon'ble Supreme Court. Therefore the Assessing Officer was of the opinion that legal expenditure was not allowable as deduction. The assessee company submitted that it is a member of FIMI, which is also impleaded before the Hon'ble Supreme Court in the PIL and the association had allotted its expenditure among members. Apparently, business of the assessee is directly connected with mining and expenditure was incurred only to protect the business interest of the assessee company and the same is allowable as legal expenditure in the light of the decisions of Hon'ble Supreme Court in the case of Dalmial Jain and Co Ltd vs CIT, 81 ITR 754 (SC) and Sree Meenkshi :- 72 -: ITA Nos.2280-83 /2018 Mills Ltd vs. CIT, 63 ITR 207 (SC). The Hon'ble Karnataka High Court in the case of DCIT vs. B.Kumara Gowda, 396 ITR 386 after referring to the above decisions of SC had held as follows:-
13. Before we proceed further, we shall refer to the following judgments cited at the Bar:--
(a) In Dalmia Jain & Co., Ltd., it has been observed thus:--
"The question for decision is whether the litigation expenses incurred by the assessee were for the purpose of creating, curing or completing the assessee's title to capital or whether it was for the purpose of protecting its business. If it is the former then the expenses incurred must be considered as capital expenditure. But, on the other hand, if it is held that the expenses were incurred to protect the business of the assessee, then it must be considered as a business loss. The principle which has to be deduced from decided cases is that, where the expenditure laid out for the acquisition or improvement of a fixed capital asset is attributable to capital, it is a capital expenditure but if it is incurred to protect the trade or business of the assessee then it is a revenue expenditure. In deciding whether the particular expenditure is capital or revenue in nature, what the courts have to see is whether the expenditure in question was incurred to create any new asset or was incurred for maintaining the business of the company. If it is the former it is the capital expenditure; if it is the latter, it is the revenue expenditure."
(b) In Dalmia Jain, this Court relied upon Shree Meenakshi Mills and held that "Deductibility of expenditure incurred in prosecuting a civil proceeding depends upon the nature and purpose of the legal proceeding in relation to the assessee's business and the same cannot be affected by the final outcome of that proceeding. However wrong-headed, ill advised, unduly optimistic or overconfident in his conviction the assessee might appear in the light of the ultimate decision; expenditure in starting and prosecuting a civil proceeding cannot be denied as a permissible deduction in computing the taxable income merely because the proceeding had failed, if otherwise the expenditure was laid out for the purpose of the business wholly and exclusively, that is, reasonably and honestly incurred to promote the interest of the business. Persistence of the assessee in launching the proceeding and carrying it from Court to Court and incurring expenditure is not a ground for disallowing the claim."
(c) In B. Jaganmohan Rao, it has been held, it is well established that where money is paid to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be capital payment and not revenue payment. What is essential to be seen is whether the amount was paid for bringing into existence a right or an asset of an enduring nature. In other words, if the asset which is acquired is in its :- 73 -: ITA Nos.2280-83 /2018 character a capital asset, then any sum paid to acquire it must surely be capital outlay. Money paid in consideration of the acquisition of a source of profit of income is capital expenditure.
In the aforesaid judgment, reliance has been placed on Atherton v. British Insulated and Helsby Cables Ltd. [1926] A.C. 205 (HL), wherein, Viscount Cave has said as under:--
But when an expenditure is made, not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade, I think that there is very good reason (in the absence of special circumstances leading to an opposite conclusion) for treating such an expenditure as property attributable not to revenue but to capital.
7. In Commissioner of Taxes v. Nchanga Consolidated Copper Mines Ltd. [1964] A.C. 948 [1965] 58 I.T.R. 241. Lord Radcliffe observed at page 960:
.... courts have stressed the importance of observing a demarcation between the cost of creating, acquiring or enlarging the permanent (which does not mean perpetual) structure of which the income is to be the produce or fruit and the cost of earning that income itself or performing the income-earning operations. Probably this is as illuminating a line of distinction as the law by itself is likely to achieve...."
(d) In Mangalore Ganesh Beedi Works, it has been observed at Paragraph No.17, that on a consideration of the issues placed before the Tribunal, including the decision of this Court in Dalmia Jain, it is held that the expenses incurred by the Assesee were honest and reasonable and were incurred for the purpose of protecting the business of the firm as a going concern.
(e) In M/s. ITC Hotels Ltd., it has been observed that on a consideration of the facts in detail, the Tribunal has recorded a finding that the litigation expenses were incurred not to protect the lease hold rights or to protect its title, but were incurred to defend its right to carry on business of a hotel and therefore, the expenses are revenue in nature and it is purely a finding of fact and does not involve any question of law.
(f) Similarly, in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC), it has been held that the question as to whether any expenditure is capital or revenue in nature has all along been considered to be a question of fact to be determined by the Income-tax Authorities on an application of the broad principles laid down and the courts of law would not ordinarily interfere with such findings of fact if they have been arrived at on a proper application of those principles. It has also been held in the said decision that the aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence.
:- 74 -: ITA Nos.2280-83 /2018
14. In B. Jaganmohan Rao, facts were that payment of money made by the assessee therein was in order to perfect his title to the capital asset. It was a lump sum payment for acquisition of a capital asset and therefore, the Hon'ble Supreme Court held that the amount should be treated as capital payment and the assessee was not entitled to exclude from the income sought to be assessed in his hands any portion of that amount. But having regard to the facts in the present case noted above and by applying the decisions in the aforementioned judgments, we find that the Tribunal was justified in holding in favour of the assessee and thereby, dismissing Department's appeal''.
Thus the law is settled to the extent that legal expenditure incurred in order to protect the business is allowable as revenue expenditure. In the present case as held by us (supra) it is an expenditure incurred to protect the business of the assessee company. Therefore we hold that the same is allowable as deduction without any hesitation. Thus the ground No.4 filed by the Revenue is dismissed.
58. Ground No.5, challenges the decision of the ld. Commissioner of Income Tax (Appeals) in deleting the addition u/s.14A of the Act. Identical issue has arisen in the preceding year in ITA No.2281/CHNY/2018 for assessment year 2012-13, wherein we had upheld the deletion of addition under clause (ii) of Rule 8D. However, in respect of addition made under clause (iii) of Rule 8D, we restore the matter back to the file of the Assessing Officer to compute the amount of disallowance by considering only value of investments which yielded exempt income. Accordingly, ground No.5 filed by the Revenue is partly allowed for statistical purpose.
:- 75 -: ITA Nos.2280-83 /2018 59. In the result, the appeal filed by the Revenue in ITA
No.2283/CHNY/2018 for assessment year 2014-2015 is partly allowed for statistical purpose.
60. To summarize the results, the appeals filed by the Revenue in ITA No.2280/CHNY/2018 for assessment year 2011-12 is partly allowed, whereas ITA Nos. 2281 to 2283/CHNY/2018, for assessment years, 2012-13, 2013-14 and 2014-15 are partly allowed for statistical purpose.
Order pronounced on 25th day of September, 2019, at Chennai.
Sd/- Sd/-
(ध ु व
ु आर.एल रे डी) (इंटूर रामा राव)
(DUVVURU RL REDDY) (INTURI RAMA RAO)
या!यक सद#य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
चे नई/Chennai
2दनांक/Dated:25th September, 2019.
KV
आदे श क) + त4ल5प अ6े5षत/Copy to:
1. अपीलाथ(/Appellant 3. आयकर आय7
ु त (अपील)/CIT(A) 5. 5वभागीय + त न<ध/DR
2. +,यथ(/Respondent 4. आयकर आयु7त/CIT 6. गाड$ फाईल/GF