Income Tax Appellate Tribunal - Bangalore
Dtdc Courier And Cargo Limited , ... vs Assessee on 1 May, 2013
Page 1 of 15 1 ITA No.733/Bang/2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
BANGALORE BENCH 'C'
BEFORE SHRI GEORGE GEORGE K, JUDICIAL MEMBER AND
SHRI JASON P BOAZ, ACCOUNTANT MEMBER
ITA No.733/Bang/2012
(Asst. year 2008-2009)
M/s DTDC Courier and Cargo The Deputy
Ltd., DTDC House, No.3, Commissioner of
Victoria Road, Bangalore-47. Vs Income Tax, LTU,
PA No.AAACD 8017 H Bangalore.
(Appellant) (Respondent)
Date of Hearing : 01.05.2013
Date of Pronouncement : 10.05.2013
Appellant by : Shri Cherian K Baby, C.A.
Respondent by : Shri Etwa Munda, CIT-III
ORDER
PER GEORGE GEORGE K :
This appeal of the assessee company is directed against the order of the CIT (A) (LTU), Bangalore dated 18.1.2012. The relevant assessment year is 2008-09.
2. The assessee company has raised four grounds, out of which, ground No.4 is general in nature and no specific adjudication is called for. The remaining grounds relate to the following issues, namely:
(1) that the CIT (A) was not justified in up-holding the disallowance of Rs.30,01,873/- u/s 43B(f) of the Act;
(2) that the CIT (A) had erroneously upheld the stand of the AO that the write off of investment was a capital expenditure; & (3) that the CIT (A) had also erred in sustaining the disallowance of Rs.4,18,764/- made by the AO u/s 14A of the Act r.w. rule 8D of I.T. Rules.Page 2 of 15 2 ITA No.733/Bang/2012
3. The issues, in brief, are as under:
3.1. The assessee company is in the business of courier and cargo services.
It had furnished its return of income, admitting a taxable income of Rs.15,48,93,270/- which was, initially, processed u/s 143(1) of the Act on 16.11.2009 and the same had undergone rectification u/s 154 of the Act on the same day. The assessee had subsequently furnished a revised return on 24.11.2009 to claim additional tax deducted at source. 3.1.1. During the course of assessment proceedings, the AO had noticed in the audit report in Form 3CD that the provision made for leave encashment debited in the P & L account was not considered for disallowance u/s 43B, apparently placing reliance on the ruling of the Hon'ble Calcutta High Court reported in 292 ITR 470 (Cal). However, the AO, in view of the stay granted by the Hon'ble Supreme Court on a Special Leave to Appeal (Civil) No.22889/2008 dated 8.5.2009) against the operation of the Calcutta High Court's ruling, the amount of Rs.30,01,873/- debited to P & L account was disallowed u/s 43B(f) of the Act.
3.1.2. The AO had, further, observed that the assessee debited Rs.2 lakhs as investment written off. Being queried, the assessee had explained that the amount written off relates to the NSC deposited with the Customs Department and since the Certificates were untraceable by the said Department, the same was written off. Rejecting the assessee's assertion, the AO took a view that as per section 37 of the IT Act, the investment in NSC was a capital expenditure and, thus, writing off of such investment was also capital in nature. 3.1.3. Further, the AO had observed that the assessee derived income from dividends which was claimed as exempt u/s 10(34) of the Act. After due consideration of the assessee's contentions and also for the detailed reasons Page 3 of 15 3 ITA No.733/Bang/2012 recorded therein, the AO was of the view that the provisions of s. 14A of the Act were attracted in the assessee's case and, thus, worked out the disallowance u/s 14A of the Act r. w. rule 8D of I.T. Rules to the extent of Rs.4,18,764/-. Accordingly, the AO had concluded the assessment.
4. Aggrieved, the assessee took up the issues before the CIT (A) (LTU) for re-consideration.
4.1. After taking into account the elaborate submissions of the assessee and also extensively quoting the rulings of various judiciaries as detailed in her appellate order under dispute, the CIT (A) had rejected the assessee's contentions on all the issues raised by the assessee in its appeal. The relevant portions of her reasoning under various heads are extracted as under:
Disallowance of provision for leave encashment u/s 43B(f):
"3.2. On a perusal of the above decisions of the Calcutta High Court and of the Supreme Court, it is crystal clear that the AO had rightly concluded that the Apex Court had granted stay against the operation of the judgment relied upon by the appellant in the case of CIT v. Exide Industries Ltd vide (Petition for Special Leave to Appeal (Civil) No.22889/2008 dated 8.5.2009), the relevant of portion of which is reproduced below:
'Pending hearing and final disposal of the Civil Appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the Department to recover that amount in case Civil Appeal of the Department is allowed.
We further make it clear that the assessee would, during the pendency of this Civil Appeal, pay tax as if section 43B(f) is on the Statute Book but at the same time it Page 4 of 15 4 ITA No.733/Bang/2012 would be entitled to make a claim in its returns'(emphasis supplied).
It is quite apparent from a plain reading of the decision of the Supreme Court in response to the SLP filed by the Department before the Apex Court that the stay granted is not merely against the recovery of amounts due from the said assessee by way of penalty & interest but that the stay granted is against the very operation of the decision of the Hon'ble Calcutta High Court in the case of Exide Industries Ltd v. UOI 292 ITR 470. Under the circumstances, I have no hesitation in upholding the disallowance of Rs.30,01,873/- u/s 43B(f) made by the AO..........."
Disallowance of write off of investments as capital in nature:
After analyzing the provisions of s. 37(1) and also extensively quoting the ruling of various judiciaries including (i) the Hon'ble Karnataka High Court reported in 112 ITR 12, and (ii) the Hon'ble Supreme Court reported in 230 ITR 927, the CIT (A) had observed thus -
"4.2...................................................................................................In view of the foregoing analysis and the decisions of the jurisdictional High Court as well as the Supreme Court which are squarely applicable to the facts and circumstances of the appellant's case, I uphold the disallowance of the sum of Rs.2,00,000/- being write off of investments as capital in nature as rightly held by the AO........"
Disallowance u/s 14A:
Having given due weightage to the assessee's submission, perusal of the AO's reasoning and also quoting various rulings of the Apex Court, the CIT (A) had observed that -Page 5 of 15 5 ITA No.733/Bang/2012
"5.2.1..................................................................................... (On page 18) The above judgments make it clear beyond a shadow of doubt that Courts are not required to look into the object or intention of the Legislature by resorting to aids to interpretation where the language of the provisions is clear and unambiguous. Consequently, the meaning of each word used by the Legislature is to be given its plain and natural meaning and no word should be ignored while interpreting a provision of a Statute. The jurisdictional High Court also held in the case of Karnataka Forest Plantations Corporation Ltd v. CIT 156 ITR 275 and Karnataka State Financial Corporation v CIT 174 ITR 206 that in a taxing Act, one has to look merely at what is said. There is no presumption as to tax.
Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. It is abundantly clear that the provisions of sec. 14A(2) & (3) r. w. rule 8D have to be followed scrupulously and there is no question of two possible opinions in the methodology to be followed in determining the amount of expenditure incurred in relation to such exempt income.
In view of the foregoing analysis, I am inclined to agree with the AO's stand and uphold the disallowance u/s 14A of Rs.4,18,764/- as computed in Annexure I to the assessment order........."
5. Aggrieved, the assessee has come up with the present appeal. During the course of hearing, the submissions made by the learned AR are summarized as under:
Leave encashment:
- that s. 43B(f) applies only to a sum which has actually become payable but not actually paid and not to provisions made on the basis of actuarial valuation. As the leave encashment becomes due and payable only when an employee decides to en-cash it while in service or on termination of service, the provisions for accruing liability that has not yet Page 6 of 15 6 ITA No.733/Bang/2012 become due is outside the mischief of s. 43B(f) of the Act. Hence, the same is required to be allowed;
- that as the provision relates to actual liability that has accrued, though not due, is determined on scientific actuarial principles and is accounted on the basis of mandatory accounting standards, the disallowance made by the AO requires to be deleted;
- that S. 43B(f) deals only with amounts payable in lieu of leave at the credit of the employee. As the assessee had made a provision for accruing liability on account of compensated absences and as the compensation can be either by availing leave or encashment, this provision is not covered by s. 43B (f) which is much narrower in content and is applicable only to payment in lieu of leave that has actually become payable and that even if the amendment to s. 43B (f) is to be upheld, it is proved that the said provision is not affected by it.
Relies on the following case laws:
(i) M/s. Krishna Grameena Bank v. ACIT - ITA Nos.117 & 232/Bang/12 dated 14.12.2012;
(ii) CIT v. M/s. Hindustan Latex Ltd - ITA No.64 of 2012 dt: 7.6.2012 of the Hon'ble High Court of Kerala.
Write off of investments:
- that the investments relate to NSC which were deposited with the Customs Department as a security for obtaining landing permission for bringing international inward consignments and that on maturity, the Customs Department was unable to trace those certificates and return the same. After all efforts to retrieve the NSC certificates from the Department and to en-cash the same failed, it was decided to treat this as loss in investment in NSCs made for business purposes and wrote off as a business expenditure; and
- that the investment was made in the normal course of business to enable it to carry on its business and write off of such an investment considered commercially irrecoverable was a business expenditure incurred in the course of Page 7 of 15 7 ITA No.733/Bang/2012 carrying on its business and, hence, allowable as a business expenditure.
Disallowance u/s 14A:
- That the exempt dividend was received from the following companies:
Name of the company No. of shares Amount
Cipla Limited 4125 8,250
Reliance Capital Limited 600 2,100
Canara Bank 2000 14,000
Total 24,350
That the investments from which tax free dividends received were made in the earlier years i.e., accounting years-ended 31.3.1995 and 31.3.2003 when the assessee had no borrowings except vehicle loans and while it was earning significant cash profits;
That it is easily visible from the accounts that no interest expenditure was attributable to these investments and income therefrom and, thus, the provisions of rule 8D were inapplicable as no specific expenditure was attributable to these investments during the period under consideration;
- Relies on the following case laws:
• CIT v. Walfort Share and Stock Brokers Pvt. Ltd - 326 ITR 1 (SC);
• CIT v. K Raheja Corporation P Ltd - ITA No.1260 of 2009 dt.8.8.2011- • Bombay High Court • (iii)CIT v. Reliance Utilities and Power Ltd - 313 ITR 340 (Bom); & • CCI Ltd v. JCIT - 206 Taxmann 563 (Kar)
- that the AO was of the view that the assessee has to pay attention towards rise or fall in the value of investments with a view to suitably change the investment pattern and, therefore, this leads to expenditure disallowable u/s 14A. Countering the AO's stand, it Page 8 of 15 8 ITA No.733/Bang/2012 was claimed that the assessee did not make any new investments in quoted securities from which tax free dividend was earned; and that the investments in shares of subsidiary companies and partnership firms was for furthering business interests and were made from own funds and not borrowed funds;
- assuming that the amount is to be disallowed 14A towards general over-heads, the AO's computation of the average value of investments and consequently the amount to be disallowed was not in accordance with rule 8D since as per the said rule, only those investments, the income from which does not form part of total income shall be considered for average; &
- that the AO had made a disallowance of Rs.4,18,764/- as expenditure incurred to earn a meager income of Rs.24,350/- which was more than seventeen times the exempt income. Even on this score, the disallowance made requires to be deleted.
5.1. On the other hand, the learned D R supported the stand of the authorities below on the issues. He had, further, submitted that the issues under consideration have since been analyzed elaborately before coming to a conclusion judicially by the CIT (A), the findings of the first appellate authority require to be sustained.
6. We have duly considered the submissions of the learned AR as well as the learned D.R, perused the relevant materials on record and also the case laws on which the learned AR had reposed his reliance.
The issues raised by the asssessee are adjudicated chronologically, as under:
(i) Disallowance of provision for leave encashment u/s 43B(f):
(a) At this point of time, we would like to recall the findings of the earlier Bench of this Tribunal on an identical issue to that of the issue under consideration in the case of M/s. Krishna Grameena Bank v. ACIT in ITA Page 9 of 15 9 ITA No.733/Bang/2012 Nos.146 & 224/Bang/2011 dated 15.6.2012 [AY 2007-08]. After due consideration of the assessee's submission and also extensively quoting the rulings of the (i) Hon'ble Apex Court in the case of Bharat Earth Movers v. CIT [245 ITR 428 (SC)]; and (ii) the Hon'ble Calcutta High Court in the case of Exide Industries Ltd v. Union of India [292 ITR 470 (Cal)] had recorded its findings as under:
"6.3.3. In view of the facts and circumstances of the case as discussed above and in accordance with the ratio and reasoning laid down by the Apex Court in the case of BEML (supra) and the fact that the Hon'ble High Court of Calcutta in the case of Exide Industries Limited (supra) struck down the provisions of s. 43B(f) of the Act, we are of the considered view that the assessee's claim for deduction of the provision for privilege leave encashment is not a contingent liability and is to be allowed..."
(b) The Hon'ble Kerala High Court in the case of CIT v. M/s. Hindustan Latex Ltd (supra) had decided an identical issue in favour of the assessee. The relevant portions of the ruling of the Hon'ble Court are extracted as under:
"5. The above provision, specifically Clause (f) of Section 43B came up for consideration before the Calcutta High Court wherein the amendment brought in introducing the said clause was challenged as ultra vires and inconsistent with the object disclosed while inserting the original section 43B. The Calcutta High Court in the decision reported in Exide Industries Ltd and another v. Union of India and others (2007) 292 ITR 470 held Clause (f) of section 43B to be unconstitutional. The provision was found to arbitrary, unsustainable and de hors the Supreme Court decision in the case of Bharat Earth Movers. In effect the amendment was held to be incompetent and the law declared by the Supreme Court in Bharat Earth Movers remained as such. Obviously, Page 10 of 15 10 ITA No.733/Bang/2012 there is no challenge made to the Supreme Court from the aforesaid decision, by the Department; as there is nothing mentioned about any such challenge in the appeal memorandum. We are also in respectful agreement of the reasoning in Exide Industries case (supra).
6. In any event what was intended by introduction of clause (f) was to deny the deduction of liabilities not actually incurred or in other words to exclude the provisions being made ass against future liabilities, from being granted a deduction. In the instant case, it was not a provision for future liability which was claimed as a deduction. The assessee, a Government Company had insured itself against the liabilities that may arise on account of the claims made by the employees towards leave encashment. The assessee being covered by a valid insurance policy and premium being regularly paid, incurs no liability towards leave encashment.
The liability, being covered by a valid insurance policy, is solely that of the insurer. Even if section 43B (f) stands, in the case of the assessee, where the liability is borne by the insurer, there can be no situation wherein assessed could make a valid claim for deduction under section 43B(f) since the actual liability is not incurred in any of the years."
As the issue under consideration is similar to that of the one which has been discussed above and also in conformity with the ratios laid down by the Hon'ble Apex Court in the case of BEML as well as the Hon'ble Kerala High Court (supra), we are of the view that the assessee's claim for deduction of the provision for the privilege leave encashment was not a contingent liability as held by the authorities below. In essence, this issue is decided in favour of the assessee.
Page 11 of 15 11 ITA No.733/Bang/2012
(ii) Disallowance of write off of investments:
It was the case of the assessee that the investment relates to National Savings Certificates (NSC) which was deposited with the Customs Department as a security for obtaining landing permission for bringing International inward consignments. According to the assessee, on maturity of NSCs, the Customs Department had not returned the same to the assessee on the plea that the certificates were untraceable. As the assessee could not able to retrieve the same, according to the learned AR, it took a commercial decision to the effect that it was a loss of investment in NSCs made basically and purely for business purposes and, therefore, wrote off the same in its books of account and debited the same in its P & L account.
We find force in the argument of the assessee that since the investment was precisely made to enable it to run its business smoothly, writing it off such an investment considered commercially irrecoverable, is a business loss incurred during the course of its normal business activities. The ruling of the Hon'ble Supreme Court in the case of Assam Bengal Cement Company Limited v. CIT reported in (1955) 27 ITR 0034 (SC) supports the assessee's case. The Hon'ble Court had held that ".........If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand, it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profit, it is revenue expenditure..........'' This very fact has fairly been conceded by the learned CIT (A). However, on the same breath, she took a divergent view that "In the instant case, due to the appellant's abject failure to prove that the investment made was for enabling it to carry on its business, the question of allowing its Page 12 of 15 12 ITA No.733/Bang/2012 write off as business expenditure on the ground that it was commercially irrecoverable, therefore, does not arise..." [Refer: Page 9 of CIT (A) order].
It is an undisputed fact that the assessee, being Courier and Cargo services, was obliged to deposit the said sum under the scheme NSC with the Customs Department as a security to procure landing permission for bringing international inward consignments. This deposit was made with the Customs Department in the course of assessee's business and 'not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profit'. Since the NSCs could not be retrieved from the said Department for a simple reason that they were untraceable and also to have a cordial relationship with the Government agency, the assessee took a commercial decision to written off the same in its books of account as business loss. Since these NSCs were deposited with the Customs Department in the course of assessee's business and for the purpose of its business, we are of the firm view that the loss incurred is an allowable expenditure. In view of the above facts and circumstances of the issue, we hold that the assessee was entitled to claim the loss of investment in NSCs as business expenditure. It is ordered accordingly.
(iii) Disallowance u/s 14A:
The AO had disallowed Rs.4,18,764/- as expenditure for earning exempt income of Rs.24,350/- by invoking the provisions of s.14A of the Act r.w. rule 8D of I. T. Rules on the premise that the provisions of section 14A were applied in the face of assessee's claim that no expenditure was incurred in relation to the investments. The stand of the AO has been sustained by the CIT (A) for the detailed reasons recorded in her appellate order under consideration.
Page 13 of 15 13 ITA No.733/Bang/2012
It was the claim of the assessee that the investments from which tax free dividends received were made in the earlier years i.e., accounting years- ended 31.3.1995 and 31.3.2003 relevant to the assessment years 1995-96 and 2003-04 when the assessee had no borrowings. To substantiate it claim, the assessee had produced audited balance sheets for those assessment years which are placed on record. It was argued that the provisions of rule 8D have no application as no specific expenditure was attributable to these investments during the year under consideration.
We have carefully considered the submission of the assessee as well as the reasoning of the authorities below on the issue.
In the meanwhile, our attention was drawn to the judicial view on a similar issue, namely:.
(i) In the case of CIT v. Walfort Share and Stock Brokers Pvt. Ltd reported in 326 ITR 1 (SC), the Hon'ble Supreme Court has ruled that "For attracting Sec. 14A, there has to be a proximate cause for disallowance which is its relationship with the tax exempt income."
(ii) In the case of CIT v. Reliance Utilities and Power Limited reported in 313 ITR 340 (Bom), the Hon'ble Bombay High Court has ruled that "If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available."
(iii) The Hon'ble jurisdictional High Court had, in the case of M/s. CCI Limited v. JCIT in ITA No.359 of 2011 dated 28.2.2012, an occasion to Page 14 of 15 14 ITA No.733/Bang/2012 decide as to whether the provisions of s. 14A of the Act are applicable to the expenses incurred by the assessee in the course of its business merely because the assessee is also having dividend income when there was no material brought to show that the assessee had incurred expenditure for earning dividend income which is exempted from taxation? After hearing the respective parties, the Hon'ble Court had ruled thus -
"5. When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63% of the shares which were purchased are sold and the income derived therefrom is offered to tax business income. The remaining 37% of the shares are retained. It has remained unsold with the assessee. It is those unsold shares have yielded dividend, for which, the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the asssessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to his business of sale of shares which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deduction. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside. Accordingly, we pass the following:
(i) Appeal is allowed; (ii) impugned orders are hereby set aside; (iii) the substantial question of law is answered in favour of the assessee and against the revenue."
Taking into account all the facts of the issue as discussed in the fore-going paragraphs and also in consonance with the rulings of various judiciaries, especially, the ratio laid down by the Hon'ble jurisdictional High Page 15 of 15 15 ITA No.733/Bang/2012 Court (supra), we are of the considered view that the learned AO was not within his realm to invoke the provisions of s. 14A of the Act read with rule 8D of the I.T. Rules to disallow a sum of Rs.4.18 lakhs as expenditure alleged to have been incurred by the assessee in connection with the earning of paltry exempt income of Rs.24,350/-. It is ordered accordingly.
7. In the result: the assessee's appeal is allowed.
Order pronounced in the open court on 10th day of May, 2013.
Sd/- Sd/-
(JASON P BOAZ) (GEORGE GEORGE K)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Copy to :
1. The Revenue
2. The Assessee
3. The CIT concerned.
4. The CIT(A) concerned.
5. DR
6. GF
MSP/ By order
Senior Private Secretary, ITAT, Bangalore.