Income Tax Appellate Tribunal - Delhi
Indian Sugar Exim Corporation Ltd., New ... vs Assessee on 6 December, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI 'C' BENCH
BEFORE SHRI R.P. TOLANI, JM & SHRI A.N. PAHUJA, AM
IT A No.130/Del./2011
Assessment Year:2006-07
Indian Sugar Exim Corporation V/s. DCIT, Circle 11(1), Room
Ltd., C-Block, 2 n d Floor, Ansal No. 312, C.R. Building.,
Plaza, New Delhi New Delhi
IT A No.923/Del./2011
Assessment Year:2006-07
DCIT, Circle 11(1), Room No. V/s. Indian Sugar Exim
312, C.R. Building, New Delhi Corporation Ltd., C-Block,
2 n d Floor, Ansal Plaza,
New Delhi
[P AN/GIR: AAACI 1163 M]
(Appellant) (Respondent)
Assessee by S/Shri Rakesh Gupta, Ashwani
Taneja & Tarun, Kunal Nagpal
and Sumit Jain, ARs
Revenue by Shri H.L. Dhiana,DR
Date of hearing 29-12-2011
Date of pronouncement 29-12-2011
ORDER
A.N.Pahuja:- These cross-appeals filed on 10.01.2011 by the assessee & on 17.02.2011 by the Revenue, against an order dated 6th December, 2010 of the ld. CIT(A)-XIII, New Delhi, raise the following grounds:-
I.T.A. No.130/D/2011[Assessee] 1A "That the learned CIT(A) erred, both on facts and in law in sustaining a disallowance of. u/s 14A of the Income-tax Act of ``8,32,808/-
1B The learned CIT(A) has grossly erred in holding that the appellant has himself admitted that expenditure has been incurred towards earning of exempt income and as such the disallowance u/s 14A deserves to be deleted.
2 ITA nos.130 & 923/Del./2011
2. That the learned CIT(A) has erred in sustaining disallowance of ``526 towards interest on late payment of TDS.
3. That the appellant craves leave to add, amend, alter any grounds of appeal."
I.T.A. No.923/D/2011[Revenue]
1. "The order of Ld. CIT(A) is wrong, perverse, illegal and against the provisions of law, liable to be set aside.
2. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of `29,45,898/- on account of disallowance of depreciation.
3. On the facts and circumstances of the case and in law, the CIT(A) has erred in deleting the addition of ``16,73,593/- on account of foreign traveling expenses.
4. On the facts and circumstances of the case and in law, the CIT (A) has erred in deleting the addition of ``16,87,274/- on account of employers contribution to assessee's provident fund trust.
5. On the facts and circumstances of the case and in law, the CIT (A) has erred in deleting the addition of ``2,10,50,189/- on account of addition of under section 14A of I.T. Act read with Rule 8D.
6. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing.
2. Adverting first to ground no.2 in the appeal of the Revenue, facts ,in brief, as per relevant orders are that return declaring income of ``14,47,52,320/- filed on 28.11.2006 by the assessee, engaged in the business of import and export of sugar, was selected for scrutiny with the service of notice u/s 143(2) of the Income-tax Act, 1961 (hereinafter referred to as the "Act") on 6.10.2007. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the conveyance deed in respect of leasehold office building and car 3 ITA nos.130 & 923/Del./2011 parking at Ansal Plaza was yet to be executed. Accordingly, the assessee being not the owner of the building, relying upon his findings in the preceding year, the A.O. disallowed the claim for depreciation of ``29,45,898/-.
3. On appeal, the learned CIT (A) deleted the disallowance while following the decision of his predecessor for the AY 2005-06 in the following terms:
" 4.1.........In the appellate order for AY 2005-06 dated 19.10.10 in Appeal No. 105/09-10 it has been observed as under:
' In view of the finding of my predecessor on identical issue in the previous assessment year in appellant's case to which I am in agreement and as the property in question has already been mutated in favour of the appellant by the MCD and house tax is being paid regularly paid and the fact that the appellant is using the said premises for its business (it may be noted that the assessee's registered office/correspondence address from many years is at Ansal Plaza only), I hold that the depreciation is allowable to the appellant, in view of applicability of the ratio of decision in case of Mysore Minerals (supra) to the facts of the appellant's case.
In view of identical issue, the Assessing Officer is directed to allow depreciation on such premises of ``29,45,898/-."*
4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld.
AR on behalf of the assessee relied upon the decision dated 15.11.2011 in the assessee's own case in ITA nos.5943 & 5960/Del./2010 for the AY 2005-06.
5. We have heard both the parties and gone through the facts of the case and as also the aforesaid decision dated 15.11.2011 in ITA nos.5943 & 5960/Del./2010 for the AY 2005-06 wherein while adjudicating an identical issue, the ITAT concluded as under:-
4 ITA nos.130 & 923/Del./2011 "8. In the case of hearing of this appeal, it was pointed out by the ld. Counsel for the assessee that ld. CIT (A)'s order passed in A.Y. 2004-05 has been upheld by the Income Tax Appellate Tribunal, Delhi Bench 'C' vide order dated 29.04.2011 by holding and observing as under: -
"35. We have heard both the parties. There is no dispute about the fact that assessee had purchased the property in the financial year 1999-2000 and was occupied by the assessee. The assessee had been paying house tax in its own name. The Assessing Officer had disallowed the claim of the assessee on the ground that the conveyance deed was not registered in the name of the assessee. Hon'ble Supreme Court however, in the case of Mysore Minerals vs. CIT 239 ITR 775 has held that sec. 32 of the Income Tax Act, 1961 allows deduction by way of depreciation on building etc. owned by the assessee and used for the purpose of business or profession. The terms "owner", "ownership", "owned" are generic and relative terms. They have a wide and also a narrow connotation. The meaning would depend on the context in which the terms are used. The decision in the case of CIT vs. Podar Cement P. Ltd. 226 ITR 625 (SC) has to be taken as a trendsetter in the concept of ownership. Assistance from the law laid down therein can be taken for finding out the meaning of the term "owned" is occurring in sec. 32(1) of the Income Tax Act. The term "owned" is occurring in sec. 32(1) of Income Tax Act, must be assigned a wider meaning. Anyone in possession of property in his own title exercising such dominion over the property as would enable others being excluded there from and having the right to use and occupy the property and/or to enjoy its usufruct in his own right would be the owner of the building though a formal deed of title may not have been executed and registered as contemplated by the Transfer of Property Act, the Registration Act, etc. In view of the decision of Hon'ble Supreme Court for the purpose of sec. 32(1), the assessee is owner of the property and is entitled for depreciation. Merely because the property has not been registered in the name of the assessee, disallowance of depreciation cannot be made. The decision in the case of Tamil Nadu Civil Supplies Corporation Ltd. (supra) is not applicable to the facts 5 ITA nos.130 & 923/Del./2011 of the case before us as in that case the assessee had not acquired dominion on the property. But in the present case, the assessee is in possession of property; has been paying taxes in his own name; and has used the property for the purposes of business. Hence, the facts are distinguishable. Therefore, ld. CIT(A) was justified in deleting the disallowance made on account of depreciation on building."
9. Respectfully following the Tribunal's order passed in AY 2004-05,we do not find any reason to interfere with the order of ld. CIT(A) in allowing depreciation on office building. Thus ground no.2 raised by the revenue is rejected.
5.1 In the light of view taken by the ITAT in their aforesaid decisions for the AYs 2004-05 & 2005-06 on identical facts and circumstances, we do not find any reason to interfere with the findings of the ld. CIT(A) in allowing the claim of depreciation. Therefore, ground no.2 in the appeal of the Revenue is dismissed.
6.. Ground no.3 in the appeal of Revenue relates to disallowance of ``16,87,274/- on account of foreign traveling expenses. During the course of assessment proceedings, the AO noticed that the assessee claimed foreign travel expenses of ``16,73,693/- in respect of its employees for attending meeting of Global Alliance for sugar trade & Reform and Liberalization. Following his decision in the AY 2002-03, the AO disallowed the claim for these foreign travel expenses.
7. On appeal, the learned CIT(A) deleted the disallowance in the following terms:-
"5.1 Finding on ground No.3:
The counsel has submitted that the company's business is export/import of sugar. It is important for the assessee company's Directors/Committee Members to attend international conferences and even highlighted specific provisions in the MOA/AOA of the assessee company. Global Alliance for Sugar trade reform and liberalization is an alliance of some of the major sugar producing 6 ITA nos.130 & 923/Del./2011 developing countries and represent half of the world sugar production. It was formed with the objective of removing distortions in the world sugar market and objective are to phase out export subsidies, to remove domestic support and remove non tariff barriers. The Assessing Officer has not brought anything on record as to why the attending of such international conferences is not a business purpose for the assessee. Moreover, I have gone through the letters/brochures received with regard to Global Sugar Alliance members meeting to be held at Geneva and Hong Kong (pages 459 to 487 of paper book) which clearly indicates business purpose of the appellant.
Keeping in view the above discussion and also in view of the order of the Hon'ble Tribunal in assessee's own case, the disallowance of ``16,73,593/- is deleted."
8. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the decision dated 15.11.2011 in the assessee's own case in ITA nos.5943 & 5960/Del./2010 for the AY 2005-06.
9. We have heard both the parties and gone through the facts of the case and as also the aforesaid decision dated 15.11.2011 in ITA nos.5943 & 5960/Del./2010 for the AY 2005-06 wherein while adjudicating an identical issue, the ITAT concluded as under:-
"13. We have heard both the parties and perused the material on record.
14. From the AO's order, it is clear that the AO has disallowed the traveling expenses to attend the conferences for the reasons given by him in A.Y. 2002-03, 2003-04 & 2004-05. The identical additions were deleted by the ld. CIT(A) in earlier years against which department did not file any appeal before the Tribunal except filing an appeal before the Tribunal in the A.Y. 2003-04. The ld. CIT(A)'s order passed in A.Y. 2003-04 has been upheld by the Tribunal by observing that the disallowances made in earlier years were deleted by the appellate 7 ITA nos.130 & 923/Del./2011 authority and which have not been reversed by any higher forum and the relief granted to the assessee has been accepted by the department keeping the issue no more open.
15. We have perused the common order for A.Y. 2003-04 of the Tribunal dated 19.03.2010, where the Tribunal has affirmed the decision of ld. CIT(A) in deleting the disallowance on account of foreign traveling expenses incurred for attending meeting of Global Alliance for Sugar Trade Reform & Liberalization. Respectfully following the Tribunal's order passed in A.Y. 2003-04, the order of ld. CIT(A) in the present A.Y. on this issue is upheld."* 9.1 In the light of view taken by the ITAT in their aforesaid decisions for the AYs 2003-04 & 2005-06 on identical facts and circumstances, we do not find any reason to interfere with the findings of the ld. CIT(A) in allowing the claim for deduction of foreign travel expenses. Therefore, ground no.3 in the appeal of the Revenue is dismissed.
10. Ground no.4 in the appeal of the Revenue relates to disallowance of ``16,87,274/- towards employer's contribution towards provident fund. The AO noticed during the course of assessment proceedings that the provident fund of the assessee company namely 'Indian Sugar General Industry Export Import Corporation Ltd. Delhi Provident Fund' did not invest the funds as per prescribed Income-tax Rules. Accordingly, while relying on his findings in the AY 2003-04, the AO disallowed the claim for deduction in terms of provisions of sec. 43B of the Act.
11 On appeal, the learned CIT(A) allowed the claim of the assessee in the following terms:-
"6. Ground of appeal No.4 relates to disallowance of employers contribution to assessee's provident fund trust of ``16,87,274/- u/s 43B of the Income-tax Act considering the same to be 8 ITA nos.130 & 923/Del./2011 unrecognized. The appellant has submitted that it is having a registered provident fund trust u/s 2(38) of the Income-tax Act, "M/s Indian Sugar General Industry & Export Import Corporation Ltd. Delhi Provident Fund". The counsel for the appellant submitted that their provident fund trust is a trust registered under Provident Fund Act, 1925/1952. It was further submitted before me that this fact has been confirmed by the Income Tax Department vide its letter dated 25.08.1976 Ref: F No. CIT/HQIII/PF 36/75-76 2370 copy of which is placed in the paper book. Assessee has been allowed contribution to its provident fund trust for more than three decades and as such in view of principle of consistency, the Department cannot change its stand.
The appellant filed order of Hon'ble ITAT for assessment year 2003-04 in Appeal No.4159/d/06 and 4361/D/06 dated 19.3.2010, wherein the Hon'ble ITAT has held that the appellant's Provident Fund Trust is a recognized provident fund trust as observed in para 7 page 5 and 6 of the order which is reproduced below:-
"Reading the aforesaid section it is clear that to claim deduction by way of contribution to a recognized provident fund, it has to be demonstrated that the contribution is towards a recognized provident fund. The phrase "Recognized Provident Fund" is defined in section 2(38) of the Act. As per the definition it means a provident fund, which has been and continues to be recognized by the Chief Commissioner or Commissioner in accordance with rules contained in Part A of the Fourth Schedule, and includes a provident fund established under a scheme framed under the Employees' Provident Fund Act, 1952. Since as per the letter issued by CIT, Delhi III dated 28.5.1976 the provident is considered as fund to which the Provident Fund Act 1925/1952 applies, it amounts to a "Recognized Provident Fund" within the meaning of Section 2(38) of the Act and hence in terms of section 36(1)(iv) the contribution to "recognized provident fund" is allowable as such. Since there is no dispute that the amount was paid within the due dates prescribed, the disallowance is to be deleted. We, therefore, delete the disallowance of `15,22,234/-.
6.1 Finding on Ground of appeal No.4:
In view of the submission of the appellant & following /the order of ITAT in appellant's own case for assessment year 2003-04, referred to above, I hold that the assessee has contributed to recognized provident fund trust and hence the contributions made to such recognized provident fund trust are allowable under the provisions of the Income-tax Act. Accordingly, the disallowance of ``16,87,274/- is being deleted."
9 ITA nos.130 & 923/Del./2011
12. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the order of the AO while the ld. AR on behalf of the assessee relied upon the decision dated 15.11.2011 in the assessee's own case in ITA nos.5943 & 5960/Del./2010 for the AY 2005-06.
13. We have heard both the parties and gone through the facts of the case and as also the aforesaid decision dated 15.11.2011 in ITA nos.5943 & 5960/Del./2010 for the AY 2005-06 wherein while adjudicating an identical issue, the ITAT concluded as under:-
"20. The identical issue has been decided in favour of the assessee in A.Y. 2003-04 by the Tribunal by observing and holding as under: -
7. "We have heard the parties and considered the material available on record. Sec. 36(1)(iv) provides as under:
"(iv) any sum paid by the assessee as an employer by way of contribution towards a recognized provident fund or an approved superannuation fund, subject to such limits as may be prescribed for the purpose of recognizing the provident fund or approving the superannuation fund, as the case may be; and subject to such conditions as the Board may think fit to specify in cases where the contributions are not in the nature of annual contributions of fixed on some definite basis by reference to the income chargeable under the head "Salaries" or to the contributions or to the number of members of the fund."
Reading the aforesaid section it is clear that to claim deduction by way of contribution to a recognized provident fund, it has to be demonstrated that the contribution is towards a recognized provident fund. The phrase "Recognized Provident Fund" is defined in sec.
2(38) of the Act. As per the definition it means a provident fund, which has been and continues to 10 ITA nos.130 & 923/Del./2011 be recognized by the Chief Commissioner or Commissioner in accordance with rules contained in Part A of the Fourth Schedule, and includes a provident fund established under a scheme framed under the Employees' Provident Funds Act, 1952. Since as per the letter issued by CIT, Delhi-III dated 28.05.1976 the provident fund is considered as fund to which Provident Fund Act, 1925/1952 applies, it amounts to a "Recognized provident fund" within the meaning of sec. 2(38) of the Act and hence in terms of sec. 36(1)(iv) the contribution to "recognized provident fund" is allowable as such. Since there is no dispute that the amount was paid within the due dates prescribed, the disallowance is to be deleted. We, therefore, delete the disallowance of Rs.
15,22,234/-."
21. Respectfully following the aforesaid Tribunal's order passed in A.Y. 2003-04, we are inclined to uphold the order of ld. CIT(A) in deleting the addition on account of contribution to Provident Fund Account.
13.1 In the light of view taken by the ITAT in their aforesaid decisions for the AYs 2003-04 & 2005-06 on identical facts and circumstances, we do not find any reason to interfere with the findings of the ld. CIT(A) in allowing the claim for deduction of contribution towards Provident Fund. Therefore, ground no.4 in the appeal of the Revenue is dismissed.
14. Ground no.5 in the appeal of the Revenue and ground nos.1A & 1B in the appeal of the assessee relate to disallowance u/s 14A of the Act. During the course of assessment proceedings, the AO noticed that the assessee earned dividend income of ``2,10,68,730/-. To a query by the AO regarding working of disallowance u/s 14A of the Act read with Rule 8D of the I.T. Rules, 1962, the assessee replied that no expenses were incurred for earning the exempt dividend income. It was further pointed out that the assessee had large interest free funds at its disposal while interest was paid only in relation to packing credit for export of sugar. However, the AO did not accept the submissions of the 11 ITA nos.130 & 923/Del./2011 assessee and disallowed an amount of ``2,10,50,189/-[1,00,32,018+1,10,18,171] in terms of provisions of Rule 8D of the I.T. Rules, 1962.
15. On appeal, the learned CIT(A) adjudicated the issue in the following terms:-
"7.1 Finding on Ground No.5:-
As regards the issue that whether interest expenditure is attributable to earning of the exempt income, it is seen that an amount of ``2,34,21,496/- has been debited to the income and expenditure a/c. The AR has filed the ledger a/cs from which it is noted that the break up of the same is Bank interest ``24,89,451/- and ``209,32,045/- being interest paid to factories.
It has been submitted by the appellant that interest has been paid to factories towards advance taken by the assessee for import of sugar. The assessee had agreed to receive payment for rake- wise quantities by DD to be deposited in FDR and the interest was subsequently passed on to factories concerned. It has been noted that as against interest paid to factories, there is a contra item on receipt side as interest on term deposits for ``2,20,35,762/-. The assessee's contention is found acceptable on this account and hence interest paid to factories is not to be considered for proportionate disallowance u/s 14A as this payment of ``2,09,32,045/- is directly related to sugar business.
As regards bank interest ``24,89,451/-, the AR filed sanction letters of loan from Maharashtra State Cooperative Bank, Standard Chartered Bank, ICICI Bank, ledger a/c along with photocopies of all the vouchers being bank debit advices. As per the sanction letter of the bank itself, it is clearly mentioned that the assessee has been provided packing credit facility and not cash credit or overdraft facility. Further, the assessee has also filed confirmations/certificate from ICICI Bank, Maharashtra State Cooperative Bank and Syndicate Bank confirming that there is no cash credit/overdraft facility and interest in relation to export packing credit limits were enjoyed by the assessee. Moreover, it is pertinent to mention that the packing credit loan can only be liquidated from export proceeds. Even in assessment year 2001-02, the CIT(A) in appeal No.266/03- 04 had after considering the facts of the case wherein only packing credit facilities were availed by the assessee, had deleted disallowance of interest. This order was confirmed by the Hon'ble ITAT in appeal No.1566/D/04 and 1042/D/05 as observed in para 8.1 of the order:-
12 ITA nos.130 & 923/Del./2011 "We are unable to agree with this argument of the learned DR for the reason that the whole of the interest was paid in relation to packing credit limit for which additional evidence was filed before /the CIT(A), and which was rightly admitted by him. He decided the matter after hearing the matter. His finding could not in any way be displaced by the learned DR before us. Therefore, it is held that no part of interest expenditure could be disallowed u/s 14A."
Since in this year also the facts are same that and the bank interest is only towards packing credit facilities for export of sugar, I hereby hold that no proportionate disallowance of interest is to be made from this payment of Rs 24,89,451/-.
Additionally on going through the Balance Sheet of the appellant it is observed that the Opening General Fund (Reserves) of the appellant as on 31/3/2005 is Rs 218.62 Crores and Closing General Fund as on 31/3/2006 is Rs 231.59 Crores The Investments of the assessee as at 31/3/2005 is Rs 191.77 Crores and 31/3/2006 is Rs 209.51 Crores respectively.
In Reliance Utilities & Power Ltd. 313 ITR 340 (Born) (supra), the High Court has held that "if there be interest free funds available to an assessee sufficient to meet its investments and that at the same time the assesse had raised a loan it can be presumed that the investment were from the interest free funds available"
From the above discussions of the financials of the appellant it is observed that the ratio of the decision of Reliance Utilities is applicable and therefore there is no question of attribution of "interest expenditure" for earning of tax exempt income u/s 14A in appellant's case.
7.2 The other issues to be considered is whether or not provisions of section 14A of the Act can be applied to disallow part of administrative expenditure on a reasonably estimated ba\sis in absence of the assessing officer pointing out any specific/particular expense or drawing any direct nexus between the expense incurred and earning of the dividend income. Viewed differently, it is also to be decided as to whether a reasonable estimate u/s 14A of the IT Act, after the decision of Bombay High Court in M/s Godrej & 13 ITA nos.130 & 923/Del./2011 Boyce Vs ClT wherein it has been held that the Rule 8D which has been inserted w.e.f. 24.03.08, is not retrospective in operation. This decision dated 12.08.20I0 has overruled ITAT decision in Daga Capital Management P. Ltd. (supra) on the issue of retrospective opinion of Rule 8D.
7.3 The Bornaby High Court in the case of Godrej & Boyce Mfg.
Co. Ltd. , Murnbai Vs DCIT ITA No. 626 of 2010 and Writ Petition No.758 of 2010, has inter alia held in para 43 of its order that:
'In order to conclude the discussion on this aspect of the case, we would proceed to recapitulate our conclusions.
Section 14A was enacted by Parliament in order to overcome the judgments of the Supreme Court in the case of Indian Bank, Maharashtra Sugar and Rajasthan Warehousing Corporation in which it was held that in the case of a composite and indivisible business, which results in earning of taxable and Non taxable income, it is impermissible to apportion the expenditure between that which was laid out for the earning of taxable as opposed to non taxable income;
The effect of Section 14A is to widen the theory of the apportionment of expenditure.
From this it would follow that Section 14A has implicit within it a notion of apportionment. The principle of apportionment which prior to the amendment of Section14A would not have applied to expenditure incurred in a composite and indivisible business which results in taxable and nontaxable income, must after the enactment of the provisions apply even to such a situation;
The expression "expenditure incurred" in Section 14A refers to expenditure on rent, taxes, salaries, interest etc. in respect of which allowances are provided for;
Even in the absence of sub-section (2) of Section 14A, the Assessing Officer would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The Assessing Officer would have to follow a reasonable method of apportioning the expenditure consistent with what the 14 ITA nos.130 & 923/Del./2011 circumstances of the case would warrant and having regard to all ..... (para 43) the relevant facts and circumstances;
Further in para nos 49,67 & 74. of this judgment the Hon'ble High Court Mumbai has made the following judgments : -
Hence, the intention of Section 14A is clearly to disallow all expenses relating to the nontaxable income, and to curb the practice (claiming allowances for expenditures on exempt income. All that is required is to show that there is a 'proximate cause' between the expenditure incurred and the exempt income. A 'proximate cause' connotes a relationship between the expense and the exempt income (Walfort supra). So understood, even indirect expenses may have a proximate cause to the exempt income, and the same must hence be disallowed. For example. if the staff employed in an office partake in both manufacturing and dividend business, that proportion of the staff (indirect) expenses incurred in relation to the dividend business will be disallowed. However, if the assessee does not maintain separate accounts, it would be necessary for the Assessing Officer to determine the proportion of expenditure incurred in relation to the dividend business (i.e. earning exempt income) .........(para 49) Even in the absence of sub sections (2) and (3) of Section 14A and of Rule 8D, the Assessing Officer was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub section (1) of Section 14A which provide that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Consequently. dehors the provisions of Sections (2) and , (3) of Section 14A and Rule 8D, the Assessing Officer was entitled to determine by the application of a reasonable method what quantum of the expenditure incurred by the assessee would have to be disallowed on the ground that it was incurred in relation to the earning of income which does not form part of the total income under the Act. Undoubtedly in determining what would constitute a reasonable method for effecting the disallowance, the Assessing Officer would have to give due regard to all the facts and 'circumstances of the case. The change which is brought about by the insertion of sub sections (2) and (3) into Section 14A by the Finance Act of 2006 with effect from 1 April 2007 is that in a situation where the Assessing Officer is not satisfied with the correctness of the claim of the assessee in regard to the 15 ITA nos.130 & 923/Del./2011 expenditure incurred by it in relation to the nontaxable income, the Assessing Officer would have to follow the method which is prescribed by the rules. The rules were notified to come into force on 24 March 2008. It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April. Consequently. Rule 8D which has been notified on 24 March 2008 would apply with effect from Assessment Year 2008-09 (Para 67) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;
The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment (Para 74). "
In terms of the above observations of Bombay High Court in case of Godrej Boyce (Supra) it is observed that for making disallowance under section 14A there needs to be a reasonable and proximate nexus between the expenditure and the exempt income and that the AO is not precluded from making apportionment in a case where the assessee does not maintain separate accounts.
It would be relevant to consider the details of the various expenses incurred under the head Administrative Expenses to determine whether was any proximate nexus between the expenditure incurred and the exempt income.
On a perusal of the details of administrative expenses and performed by the personnel, I find that the administrative expenses would mostly relate to the carrying on of the normal and primary business activities of the appellant 16 ITA nos.130 & 923/Del./2011 However, even the appellant has admitted vide submission dated 26.11.2010 and 12.12.2010 to the fact of part of such expenses having been Incurred to earning exempt income In fact the appellant has also provided it's own working of such expenses related to Head office at Ansal Plaza, Delhi only , as investment in tax exempt instruments are taken only at Head Office and not at appellant's office at Mumbai or Port Offices at Chennai, Kolkata or Kandala which can be attributed to earning of exempt income. The contention of the appellant that expenses at the Port offices cannot be proximately related to their investment decisions at Head Office is reasonable and therefore acceptable. Accordingly only such of the administrative expense which are made at Head Office and which can be reasonably co related to earning of exempt income are considered for disallowance. These expenses are in the nature of Printing & Stationary (Rs. 5,19,675/-) , Travelling & Conveyance (Rs 537399/-) and Motor Car expenses (Rs 5,50,052/-), Telephone, Postage & Telegram (Rs 15,48,444/-), Depreciation (Rs 44,46,391/-), Maintenance & Repair (Rs 43,02,792/-), Electricity & Water (Rs 9,84,643/-), Miscellaneous Expenses (Rs 16,30,743/-), Rates & Taxes Rs 49,10,687/-). The total of these expenses comes to Rs. 19962349/-.
As regards the issue of attributing the expenditure on account of managerial remuneration is concerned it is observed that the appellant admittedly has a GM and Dy. GM whose gross salary and allowance for the year are Rs 4,18,488/- and Rs 2,01,528/- respectively. Further salary paid to Accounts Department personnel at Head Office is Rs 8,43,553/- .Apart from this the proportionate contribution on account of PF by the appellant company in case of GM, DM and Accounts Department is Rs 37,646/-, 18,129/-, and Rs 75,884/- respectively. Likewise proportionate welfare expenses in favour of GM, DM & Accounts Department is Rs 95,858/-, 46,162/- and 1,93,222/- respectively. The appellant has itself allocated 10% of such salary, contribution to PF and employees welfare expenses in case of GM & Dy. Manager.
Further the Bombay High Court in the case of Godrej & Boyce (supra) has also held that disallowance under section 14( I) can be made on a reasonable basis and that expenses can be apportioned for the above purpose, as per the 17 ITA nos.130 & 923/Del./2011 extensive quotations from the relevant portions of the said judgment.
Considering the fact that there has been an additional investment of Rs 17.73 Crores in shares and mutual funds during the year, in my opinion, it would be reasonable to disallow under section 14A of the Act 15% of salary & remuneration paid to the GM & Dy Manager of the Company. The total remuneration paid them (Which includes salary, employers contribution to PF and employee welfare expenses) is Rs.8,17,811/- and 15% thereof works out to Rs.1,22,672/- which is disallowed under Section 14A of the IT Act. Further a 10% disallowance on salary, employer's contribution to PF and employee's welfare payment to personnel of Accounts Department (Total Rs.11,12,660/-) which works out to Rs.1,11 ,266/-is also made. Further, out of the total administrative expenses as discussed in preceding para for Rs1,99,62,349/- an amount of 3% thereof (The appellant has in its submission dated 26.11.2010/02.12.2010 has allocated 1% of such expenses) is reasonably attributed to earning of exempted income. This works out to Rs.5,98,870/- which is disallowed u/s 14A of the IT Act. Thus the total disallowance u/s 14A of the IT Act and as discussed above would work out to Rs. 8,32,808/-(Rs 1,22,672/-+ Rs.111266/-+ Rs.5,98,870/-). Apart from this disallowance which is calculated and confirmed above ``8,32,808/-, the disallowance of ``2,10,50,189/- made by the Assessing Officer on this issue in his order is directed to be deleted."
16. The Revenue is now in appeal before us against the deletion of disallowance while the assessee is in appeal against the upholding of disallowance to the extent of ``8,32,808/-.he learned DR while inviting our attention to the findings of learned CIT(A) that "however, even the appellant has admitted vide submission dated 26.11.2010 and 12.12.2010 to the fact of part of such expenses having been incurred to earning of exempt income. In fact the appellant has also provided it's own working of such expenses related to Head office at Ansal Plaza, Delhi only, as investment in tax exempt instruments are taken only at Head office and not at appellant's office at Mumbai or Port Offices at Chennai, Kolkata or Kandala which can be attributed to earning of exempt 18 ITA nos.130 & 923/Del./2011 income, " contended that since the assessee itself admitted in their submissions dtated 26.11.2010 and 12.12.2010 before the learned CIT(A) that part of expenses under the head administrative expenses were incurred in earning exempt income, the disallowance upheld by the learned CIT(A) was correct. On the other hand, learned AR on behalf of the assessee reiterated their submissions before the learned CIT(A) while referring to decision dated 15.11.2011 of the ITAT.
17. We have heard both the parties and gone through the facts of the case. We find that while adjudicating a similar issue, the ITAT upheld the findings of ld. CIT(A) in the preceding assessment year in their order dated 15.11.2011 ,in the following terms:-
"28. We have heard both the parties and perused the material on record. On perusal of AO's order, we find that the AO has worked out the proportionate expenses incurred for earning the exempted income at Rs. 6,45,404/-. However, he disallowed the sum of Rs.10 lakh in the light of the disallowance sustained by ld. CIT(A) in A.Y. 2002-03. However, in the present assessment year, the ld. CIT(A) has worked out the disallowance, by allocating the various expenses to exempt income, at Rs. 6,49,336/- which is more than the working of Rs. 6,45,404/- worked out by the AO. The AO's action in disallowing the expenses to the extent of Rs. 10 lakh on estimate is found to be without any basis. The ld. CIT(A) has sustained the addition of Rs. 6,49,336/- after giving his working. In the course of hearing of this appeal, the ld. counsel for the assessee has not been able to point out any irregularity or defect in working given by the ld. CIT(A). It is not in dispute that the assessee has incurred various expenses for earning exempt income. The expenditure incurred by the assessee in earning exempt income has been worked out by the ld. CIT(A) at Rs. 6,49,336/- on a reasonable basis. We, therefore, find no reason to interfere with the order of ld. CIT(A) in sustaining the disallowance to the extent of Rs. 6,49,336/-. Thus, this ground raised by both revenue as well as by assessee is rejected. "
17.1. In the year under consideration, as regards disallowance out of interest, the ld. CIT(A) concluded that interest has been paid to factories towards 19 ITA nos.130 & 923/Del./2011 advance taken by the assessee for import of sugar. As against interest paid to factories, there is a contra item on receipt side as interest on term deposits for ``2,20,35,762/-. Therefore, the ld. CIT(A) accepted the contention of the assessee that interest paid to factories is not to be considered for proportionate disallowance u/s 14A of the Act. As regards bank interest ``24,89,451/-, the ld. CIT(A) on perusal of sanction letters of loan from Maharashtra State Cooperative Bank, Standard Chartered Bank, ICICI Bank, ledger a/c along with photocopies of all the vouchers ,bank debit advices etc. found that the assessee had been provided packing credit facility and not cash credit or overdraft facility while the packing credit loan can be liquidated only from export proceeds. Even in assessment year 2001-02, the CIT(A) in appeal No.266/03-04, after considering the facts of the case found that only packing credit facilities were availed by the assessee and deleted the disallowance of interest. This order was confirmed by the Hon'ble ITAT in appeal No.1566/D/04 and 1042/D/05.. In the light of these undisputed findings of the ld. CIT(A),especially when the ld. DR did not place any material before us so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A) that no disallowance out of interest can be made in terms of provisions of sec. 14A of the Act and that Rule 8D is not applicable in the year under consideration in view of aforesaid decision of Hon'ble Bombay High Court.
17.2 As regards disallowance out of various expenses to the extent of ``8,32,808/-, we do not find any infirmity in the approach of the learned CIT(A) in upholding the disallowance to that extent especially when the assessee admitted in his submissions dated 26.11.2010 and 12.12.2010 before the ld. CIT(A) to the fact of part of such expenses have been incurred for earning exempt income and accordingly, provided its own working of such expenses relating to Head office at Ansal Plaza, Delhi There is no material before us to take a different view in the matter. In the course of hearing of this appeal, the ld. AR on behalf of the assessee did not point out any irregularity or defect in working given by the ld. CIT(A). It is not in dispute that the assessee has 20 ITA nos.130 & 923/Del./2011 incurred various expenses for earning exempt income. The expenditure incurred by the assessee in earning exempt income has been worked out by the ld. CIT(A) at ``8,32,808/- on a reasonable basis. We, therefore, find no reason to interfere with the order of ld. CIT(A) in sustaining the disallowance to the extent of ``8,32,808/-
17.3 In view of the foregoing, ground nos.1A & 1B in the appeal of the assessee and ground no.5 in the appeal of the Revenue are dismissed.
18. Ground No.2 in the appeal of the assessee relates to disallowance of ``526 towards interest on late payment of TDS. The learned CIT(A) upheld the disallowance, treating the interest penal in nature. The learned AR on behalf of the assessee did not make any submissions on this ground . In this situation, keeping in view the smallness of the amount, ground no.2 in the appeal of the assessee is also dismissed.
19.. Ground No.1 in the appeal of the Revenue being general in nature, does not require any separate adjudication while no additional ground having been raised before us in terms of residuary ground no.6 in the appeal of the Revenue or ground no.4 in the appeal of the assessee, all these grounds are dismissed.
20. No other submission or argument was made before us.
8. In the result, both the appeal of the assessee and the Revenue are dismissed.
Order pronounced in Open Court
Sd/- Sd/-
(R.P. TOLANI) (A.N. PAHUJA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
21 ITA nos.130 & 923/Del./2011
NS
Copy of the Order forwarded to:-
1. Indian Sugar Exim Corpn. Ltd., C-Block, 2 n d Floor, Ansal Plaza,August Kranti Marg, New Delhi-49
2. Dy. CIT, Circle-11(1), New Delhi
3. CIT (Appeals)-XIII, New Delhi
4. The CIT concerned.
5. The DR, ITAT,'C' Bench, New Delhi
6. Guard File.
By Order, Deputy/Asstt. Registrar ITAT, Delhi