Income Tax Appellate Tribunal - Ahmedabad
Gujarat Fluorochemicals Ltd.,, Baroda vs Assessee on 7 November, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH - AHMEDABAD
(BEFORE SHRI D.K. TYAGI, JM AND SHRI A. MOHAN ALANKAMONY, AM)
ITA No.4/Ahd/2007
AY: 2003-04
The A. C. I. T., Circle-1(1), Vs Gujarat Fluorochemicals Ltd.,
Aayakar Bhavan, 2nd Floor, ABS Tower,
Race Course Circle, Old Padra Road, Baroda
Baroda P. A. No. AAACG 6725 H
(Appellant) (Respondent)
ITA No.33/Ahd/2007
AY: 2003-04
Gujarat Fluorochemicals Ltd., Vs The A. C. I. T., Circle-1(1),
2nd Floor, ABS Tower, Aayakar Bhavan,
Old Padra Road, Baroda Race Course Circle,
P. A. No. AAACG 6725 H Baroda
(Appellant) (Respondent)
Department by Shri Shelley Jindal, CIT DR
Assessee by Shri S. N. Soparkar with
Ms. Urvshi Shodhan, AR
Date of hearing: 07-11-2012
Date of pronouncement:14-12-2012
ORDER
PER A. MOHAN ALANKAMONY: These two cross appeals - one by the revenue and the other by the assessee are filed aggrieved by the common order of the learned CIT(A)-I, Baroda dated 06-10- 2006 in appeal No.CAB/I-43/06-07, for assessment year 2003-04 passed u/s 250 read with section 143(3) of the IT Act. Both the appeals were heard together and are being disposed off by this consolidated order.
ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 2Gujarat Flurochemicals Ltd.
ITA No.4/Ahd/2007(Revenue's appeal for AY: 2003-04)
2. The assessee is a Company engaged in the business of manufacturing refrigerant gases filed its return of income on 10th October, 2003 for the assessment year 2003-04 declaring net taxable income of Rs.32,14,22,050/- along with report u/s 44AB of the Act and auditors report for claiming deduction u/s 80 HHC of the Act. Initially, the return was processed u/s 143(1) of the Act and subsequently the assessment was completed u/s 143(3) of the Act on 24-03-2006 wherein various additions were made by the learned AO by disallowing certain claims. On appeal by the assessee, the learned CIT(A) partly allowed the appeal by deleting certain disallowances/additions made by the learned AO. Aggrieved, the revenue and the assessee are in appeal before us against the order of the learned CIT(A).
3. The revenue has raised five elaborate grounds in its appeal wherein grounds No. 5 is general in nature and do not survive for adjudication. Surviving four grounds are briefly stated as under:
"1. The learned CIT(A) erred by deleting disallowance of village development expenses of Rs.7,41,376/- though they were not expended for the purpose of business.
2. The learned CIT(A) erred by deleting the disallowance for the contribution made to REGMA amounting to Rs.20,96,137/- though the expense was not wholly incurred for the purpose of business.
3. The learned CIT(A) erred in directing the AO to exclude sales tax of Rs.1,96,37,874/- and excise duty of Rs.5,42,20,184/- from the total turnover for computing deduction u/s 80 HHC.ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 3
Gujarat Flurochemicals Ltd.
4. The learned CIT(A) erred by directing the AO not to exclude Rs.20,85,582/- for the debit note issued by the customers on its export turnover from the export turnover and total turnover for computing deduction u/s 80 HHC of the Act.
4. Ground No.1:- Deleting the disallowance of village development expenses for Rs.7,41,376/-. During the course of assessment proceedings the learned AO noticed that the assessee had claimed Rs.7,41,376/- in its profit & loss account against village development expenses, but on perusal of the details it was revealed that almost the entire expenses were in the nature of gratuitous payment incurred on account of construction/repair of village roads, assistance to schools and contributions towards local festivals and other related activities of the surrounding villages of the assessee's factory situated at Halol, Dist. Panchmahal. When the learned AO required the assessee to substantiate its claim, the assessee explained as under:
"Our factory is located in the remote village. Being we are in manufacture of the industrial chemicals it is necessary to maintain cordial relationship with the villagers for smooth running of the business, to discharge social and environmental responsibility. We have to undertake various welfare measures. We have claimed in Profit & Los Account, the 'village development expense" amounting to Rs.7,41,386/-. We submit that these expenses were incurred for the welfare measures in surrounding village and other type of works of similar nature.
Such expenses, although disallowed in assessment order in earlier years, were allowed latter in appeal stage and as well as at the Appellate Tribunal."
The learned AO did not find the explanation of the assessee to be tenable since the assessee was not under compulsion to incur such ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 4 Gujarat Flurochemicals Ltd.
expenditure in the nature of donation or gratuitous payments and disallowed the claim of the assessee and added the same to the income of the assessee.
5. On appeal by the assessee, the learned CIT(A) deleted the addition by observing in Para 12 and 13 of his order as under:
"12. The third ground of appeal is regarding the expenditure incurred under the head 'village development expenses' of Rs.7,41,376/-.
This issue is covered, on the basis of identical facts, by the order of the ITAT in the appellant's own case for the assessment year 1993-94 which has been followed by the CIT(A) for assessment year 1994-95 and 2001-02. The issue has been decided in favour of the appellant and the entire expenditure has been allowed.
13. In view of the above, and following the earlier orders this disallowance of Rs.7,41,376/- is cancelled and the addition so made is deleted."
Aggrieved by the aforesaid findings of the learned CIT(A), the revenue is now in appeal before us.
6. At the time of hearing the learned DR supported the order of the learned AO. On the other hand, the learned AR relied on the order of learned CIT(A) and submitted that the issue in appeal is covered by the various decisions of the ITAT Ahmedabad Benches in assessee's on case in earlier instances and hence, the same may be decided in favour of the assessee. The learned DR could not controvert to the submission of the assessee by any cogent material evidence.
ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 5Gujarat Flurochemicals Ltd.
7. We have heard the rival submissions, perused the orders of the authorities below and also carefully considered the materials on record along with the paper book submitted by the assessee. On perusal of the paper book, it is apparent that this issue has been decided by the ITAT Ahmedabad "A" Bench in departmental appeal in ITA No.3748/Ahd/2003 for AY 2000-01 in assessee's on case in its favour vide order dated 17-02-2012 (paper book page 22 and 23). The relevant portion of the said order is reproduced hereunder:
"25. As regards ground No.3 of the Revenue, the brief facts are that the Assessing Officer has stated in the order that this expenditure was in the nature of gratuitous payment incurred on account of repair of village roads, assistance to schools, contributions to local festivals and other village activities. In the various villages surrounding the assessee's factory at Halol, the assessee stated that this was incurred to maintain cordial relations with the villagers as well as to protect their crops from pollution. The expenditure was incurred for business expediency. The Assessing Officer, however, held that these are gratuitous payment for which there was no compulsion. Similar additions were deleted by the ITAT for A. Y. 1993-94 and by Ld. CIT(A) in A. Y. 1994-95 onwards. As the Department has not accepted these decisions, the expenses are disallowed this year also. The Ld. CIT(A) allowed the relief to the assessee following his order in the preceding year and the ratio of the decision by the Tribunal.
26. Learned Counsel for the assessee relied upon the decision of ITAT "D" Bench Ahmedabad dated 30-11-11 in the case of Gujarat Environ Protection and Infrastructure Ltd. v. ITO in ITA No.151/Ahd/2007 where the ITAT allowed the claim of the assessee. The learned Counsel for the assessee also relied upon the decision of Hon'ble Madras High Court in the case of CIT v. Madras Refineries Ltd. (2004) as reported in 266 ITR 170 (Mad).ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 6
Gujarat Flurochemicals Ltd.
27. Ld. CIT DR on the other hand, relied upon the order of the Assessing Officer.
28. On perusal of the facts and arguments by both the parties, we are of the view that repair of the village roads, assistance to schools, contributions to local festivals and other village activities surrounding the factory of the assessee is meant to include within its fold to crate expression of care and concern for the society at large and the people of the locality in which the business of the assessee is located in particular, thereof creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Therefore, the said expenditure in view of the decision of Hon'ble Madras High Court in the case of Madras Refineries Ltd.(supra) and the facts of the present case, cannot be said to be outside the ambit of business of the assessee. Therefore we find no infirmity in the order of Ld. CIT(A). Thus, ground No.3 of the Revenue is dismissed.
7.1 In the assessment year 2001-02 also, Ahmedabad "A" Bench in departmental appeal in ITA No.2460/Ahd/2004 vide order dated 06th July, 2012 in assessee's own case has decided this issue in favour of the assessee and against the revenue by following the aforesaid order of the Tribunal cited supra for AY 2000-01 dated 17-02-2012. The relevant portion of the above order is extracted herein under:
"9. As per ground No.3, the dispute is regarding direction of Ld. CIT(A) to reduce village development expenses from the total income. This issue is also decided in favour of the assessee in the same tribunal order in assessee's own case for assessment year 2000-01 and the relevant paras are 25-28 of the tribunal order. Since no difference in facts could be pointed out by the Ld. D.R. in the present year, we do not find any reason to interfere in the order of Ld. CIT(A) on this issue also. Therefore, this ground of revenue is also rejected."ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 7
Gujarat Flurochemicals Ltd.
7.2 Considering the facts of the case, submissions of the learned AR, decision of the Hon'ble Madras High Court and the aforesaid orders of our Co-ordinate Benches cited supra, we hereby hold that the expenditure incurred on account of village development expense of Rs.7,41,376/- is an allowable deduction. Accordingly, order of the learned CIT(A) on this issue is sustained. Therefore, we hereby dismiss this ground of appeal of the revenue.
8. Ground No. 2:- Deleting the disallowance of the contribution amounting to Rs.20,96,137/- made to Refrigerant Gas Manufacturer Association (REGMA). The assessee had debited Rs.20,96,137/- in its profit & loss account as contribution to REGMA. The learned AO asked the assessee to explain as to why the same should not be disallowed as it was not incurred for the purpose of business of the assessee. The assessee vide its letter dated 27-02- 2006 submitted as under:
(i) The assessee mainly manufactures refrigerant gases and is monitored by Ozone Cell. Companies engaged in similar business formed association to solve common business problem and better compliance.
(ii) The association was engaged in activities beneficial to its members including the GFL.
(iii) Association collects contribution from its members including the assessee to meet its expenses. The assessee contributed Rs.20,96,137/- to the association.
(iv) This is recurring contribution and it has resulted in creation of any asset neither for the association nor for the assessee.ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 8
Gujarat Flurochemicals Ltd.
(v) Earlier though this expenses were disallowed at assessment stage, but the same were allowed at the appellate stage. Hence, the same may be allowed in the present year also.
The learned AO however, did not accept the explanation of the assessee and added Rs.20,96,137/- to the income of the assessee by disallowing its claim for expenses incurred on account of contribution to REGMA. When the matter was carried before the learned CIT(A), he considering the submission of the assessee and the decision of his predecessor in the earlier years and deleted the addition made by the AO. Now, the revenue is in appeal before us against the order of the learned CIT(A).
9. The learned DR relied on the order of the learned AO. On the other hand the learned AR supported the order of the learned CIT(A). Reiterating the submissions made before the authorities below, the learned AR further stated that in assessment year 2001-02 the learned CIT(A) allowed this issue on the ground that the amount collected from the members of the association was used for the purpose of defraying expenses of the association and the assessee had no right over the amount so collected and no capital asset had been build up by the association. It was further submitted by the learned AR that against the order of the learned CIT(A) the revenue went in appeal before the Tribunal and the ITAT Ahmedabad "A" Bench while disposing off the their appeal in ITA No.2460/Ahd/2004 for AY 2001-02 held this issue in favour of the assessee and against the revenue. Accordingly, the assessee prayed that the issue may be decided in its favour in the present year also.
ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 9Gujarat Flurochemicals Ltd.
10. We have heard the rival submissions, carefully perused the orders of the authorities below and considered the materials on record before us along with the paper book submitted by the assessee. On perusal of the records, it is apparent that this issue has been decided by ITAT Ahmedabad "A" Bench while adjudicating revenue's appeal in ITA No.3748/Ahd/2003 in assessee's case for AY 2000-01 cited supra in favour of the assessee and against the revenue vide order dated 17-02-2012 where in the Tribunal in Para 31 of the order has held as under:
"31. We have heard the rival contentions and perused the facts of the case. We concur with the view of the Ld. CIT(A) for the reasons that the payment is not a one-time contribution but a recurring one and such contributions have not resulted in creation of any asset for the assessee nor even for the association. There are very few members as only few companies are manufacturing refrigerant gases. Hence, the pro rata expenditure is large. They have enclosed balance-sheet and income expenditure account of the association to show that there has been no creation of any capital asset. On going through the income and expenditure account and balance- sheet of REGMA, the assets are mainly kept in the bank account and the expenses are for advertisement investigation charges, traveling etc., there is a positive balance left over which is kept in the bank account. The other members besides the assessee are SRF Ltd. of Delhi, M/s. Chemplast Sanmar Ltd. of Chennai, Naveen Flouorine Industries in Mumbai. In short, it is an association on the lines of trade association which look after the welfare of its members and takes up the issues relating to their activities. They call for contributions the basis of projected expense. For this, also correspondence was filed before the Ld. CIT(A) to show that these amounts are requested by circular letters after taking a decision during REGMA meetings. The amounts are duly paid by cheques to ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 10 Gujarat Flurochemicals Ltd.
the association which is based in New Delhi. The details in these correspondences show that the association which is a new one has put away Rs.5 lakhs which is in a corpus fund and the balance has been kept for meeting earlier expenses back- log and current and projected expenses. In short, the association keeps making a collection and calling it a corpus from which it incurs the expenditure. In our view, whatever name called the amount is collected for the purpose of defraying expense of the association. The assessee has no right to any of the sums. No capital asset is being build up in the association from which the assessee can derive any benefit. Therefore, such payment has to be treated as expenditure in the line of business and deductible u/s. 37(1). It is not the AO's contention that relevant services were not rendered or that there was any other motive for making such payment. In the circumstances and facts, we find no infirmity in the order of Ld. CIT(A). Thus ground No.4 of the Revenue is dismissed."
10.1 Since the facts of the present case on this issue are similar and identical as in the assessment years 2000-01 and 2001-02, following the decision of our Co-ordinate Bench in AY 2000-01 and 2001-02 cited supra, we uphold the order of the learned CIT(A) and dismiss this ground of appeal of the revenue.
11. Ground No.3:- Exclusion of sales tax of Rs.1,96,37,874/- and excise duty of Rs.5,42,20,184/- from total turnover for computing deduction u/s. 80 HHC. For computing deduction u/s 80 HHC of the Income Tax Act, 1961 the assessee had excluded excise duty and sales tax from the total turnover since these items do not form part of turnover. The excise duty and sales tax so excluded by the assessee amounted to Rs.5,42,20,184/- and Rs.1,96,37,874/- respectively. However, the learned AO rejected the contention of the assessee ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 11 Gujarat Flurochemicals Ltd.
relying on various case laws and accordingly gross turnover of the business was taken by including the elements of excise duty and sales tax for the working of deduction u/s 80 HHC of the Act. When the matter cropped up before the learned CIT(A), the learned CIT(A) held that the additions so made on account of sales tax and excise duty being added to the total turnover for the purpose of computing deduction u/s 80 HHC of the Act is deleted. The learned CIT(A) arrived at the above conclusion following the order of his predecessor for the assessment year 2001-02 who in turn had relied on the decision of the Special Bench of the ITAT Calcutta Bench in the case of IFB Agro Industries Ltd.
12. The learned DR supported the order of the learned AO and on the other hand, the learned AR relied on the order of the learned CIT(A). He further submitted that the ITAT Ahmedabad "B" Bench in the assessee's own case in departmental appeal in ITA No.1694/Ahd/2001 for AY 1998-99 relying on the decision of the Hon'ble Apex Court in the case of CIT Vs. Laxami Machine Works, 290 ITR 667 (SC) has decided this issue in favour of the assessee by dismissing the revenue's appeal. It was further submitted that the same issue was decided by ITAT Ahmedabad "B" Bench in assessee's own case for AY 1999-2000 in ITA No.3039/Ahd/2002 order dated 29-01-2010 in its favour. The learned DR could not controvert to the submissions of the learned AR with any cogent material evidences.
ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 12Gujarat Flurochemicals Ltd.
12.1 On perusal of the materials on record, it is apparent that as contended by the learned AR, ITAT Ahmedabad "B" Bench in the assessee's own case in departmental appeal in ITA No.1694/Ahd/2001 for AY 1998-99 relying on the decision of the Hon'ble Apex Court in the case of CIT Vs. Laxami Machine Works, 290 ITR 667 (SC) cited supra has decided this issue in favour of the assessee by dismissing the revenue's appeal by holding in Para 11 of the said order (paper book page 8 dated 02-11-2009) as under:
"11. The second issue relates to the exclusion of the excise duty and sales tax collected from the customers as a part of total turnover for the purpose of computing deduction u/s. 80 HHC of the Act. At the time of hearing, it was agreed hat the matter sands settled by the decision by the Apex Court in the case of CIT vs. Laxami Machine Works, 290 ITR 667 (SC), so that the same admits of no argument, or discussion at our end. The Revenue's ground, therefore, stands dismissed."
12.2 Further, ITAT Ahmedabad "B" Bench in assessee's own case in ITA No.3039/Ahd/2002 for AY 1999-2000 has decided this issue in its favour by following the aforesaid decision of the Hon'ble Supreme Court cited supra. The relevant portion of the order is reproduced herein under for reference:
"5. Ground No.2 relates to issue whether sales tax and excise duty form part of total turnover for claiming deduction under Section 80 HHC. The issue is now covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT Vs. Lakshmi Machine Works 290 ITR 667 (SC), wherein it is held as under: (Head notes) "Section 80HHC of the Income-tax Act, 1961 is a beneficial Section: it was intended to provide incentive to promote exports. The intention was to exempt profits ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 13 Gujarat Flurochemicals Ltd.
relatable to exports. Just as commission received by the assessee is relatable to exports and yet it cannot form part of "turnover" for the purpose of section 80HHC, excise duty and sales tax also cannot form part of "turnover". Just as interest, commission, etc., do not emanate from the "turnover" so also excise duty and sales tax do not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover such taxes had to be excluded. Commission, interest, rent etc., do yield profits, but they do not partake of the character of turnover and therefore they are not includible in the "total turnover". If so, excise duty and sales tax also cannot form part of the "total turnover"
under section 80HHC (3).
One cannot interpret the words "total turnover" with reference to the definition of the word "turnover" in other laws like the Central sales tax or as defined in accounting principles.
Excise duty and ales tax are indirect taxes. They are recovered by the assessee on behalf of the Government.
By the Court: The principal reason for enacting a formula in section 80HHC of the Income-tax Act, 1961, is to disallow a part of the concession thereunder when the entire deduction claimed cannot be regarded as relating to exports. Therefore, while interpreting the words "total turnover" in the formula in section 80 HHC one has to give a schematic interpretation. The various amendments made therein show that receipts by way of brokerage, commission, interest, rent, etc., d not form part of business profits as they have no nexus with the activity of export. The amendments made from time to time indicate that they became necessary in order to make the formula workable. If so, excise duty and sales tax also cannot form part of the "total turnover" under section 80 HHC(3):
otherwise the formula becomes unworkable.
5. Accordingly, this ground of the assessee is allowed."ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 14
Gujarat Flurochemicals Ltd.
12.3 Considering the above discussions and in view of the above decisions of the Hon'ble Supreme Court cited supra and the orders of the Tribunal (supra), we do not find any reason to interfere with the findings of the learned CIT(A). We hereby confirm his order and dismiss this ground of appeal of the revenue.
13. Ground No.4:- Negating the reduction of Rs.20,85,582/- from the export turnover as well a total turnover in the computation of deduction u/s 80 HHC. The assessee did not reduce the export shortage claim of Rs.20,85,582/- from export turnover and total turnover. Since the assessee had refunded this amount towards shortage claims by way of credit notes to its foreign buyers, the learned AO reduced the said amount from the total turnover as well as export turnover of the assessee considering it to be reduction of export turnover. The learned CIT(A) following the order of his predecessor for AY 2001-02 on this issue, directed the learned AO not to reduce the amount of Rs.20,85,582/- for the purpose of computation of deduction u/s 80 HHC. The revenue has come in appeal before us against the order of the learned CIT(A).
14. The learned DR supported the order of the learned AO and on the other hand, the learned AR relied on the order of the learned CIT(A). The learned AR further submitted that this issue is covered in favour of the assessee by the order of the ITAT Ahmedabad "A" Bench in departmental appeal in ITA No.2460/Ahd/2004 for the assessment year 2001-02 dated 06-07-2012. The learned DR fairly conceded to the submission of the learned DR.
ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 15Gujarat Flurochemicals Ltd.
15. We have heard the rival submissions and carefully perused the orders of the authorities below along with the materials before us. As contend by the learned AR we find that the ITAT Ahmedabad "A" Bench has decided this issue in favour of the assessee while disposing off the revenue's appeal for AY 2000-01 in the case of the assessee in ITA No.3748/Ahd/2003 order dated 17-02-2012 cited supra in its favour and against the revenue. Relevant Para 24 of the above order are reproduced hereunder for reference:
"24. We have heard the rival submissions and perused the facts of the case. We concur with the view of Ld. CIT(A) that the export turnover remains Rs.80.40 crores and this figure is verifiable from the report in Form No.10CCAC (Annexure "A") when the adjusted export turnover which is the manufacturing turnover is clearly shown at Rs.80.4 crores. The assessee has also provided invoice-wise FOB value realized for the whole year and the same totals up to 80.10 crores. This proves that the claim of shortage of Rs.87.51 is further paid as compensation which makes the cost of exports higher, but actually does not reduce the export turnover. In fact, this is a normal business practice in all trades where shortage in handling is compensated by payment, but does not mean that goods were not cleared or payment not received for the full amount of export turnover. Therefore, in the circumstances and facts of the case Rs.87.51 lakh should not be reduced from the total turnover. Thus, ground No.2 of the Revenue is dismissed."
15.1 Considering the above discussions and the orders of our Co- ordinate Bench on the issue, when the facts of the present case is similar and identical to the facts of AY 2000-01, we feel no reason to interfere with the order of the learned CIT(A). Accordingly, we sustain his order on this issue and dismiss ground No.4 of the appeal of the revenue.
ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 16Gujarat Flurochemicals Ltd.
16. In the result, revenue's appeal in ITA No.4/Ahd/2007 for AY 2003-04 is dismissed.
ITA No.33/Ahd/2007(Assessee's appeal for AY 2003-04)
17. The assessee in its appeal has raised the following grounds:
"In facts and circumstance of the case and in Law, the learned CIT(A) erred in confirming various disallowances and observations relating thereto as under:
1. In confirming the disallowance of Rs.60,00,000/- out of expenditure on professional fees and confirming that the same is not allowable under any head of income.
Your appellant submits that the disallowance is not justified and prays that the same be deleted.
2. In confirming the disallowance of Rs.81,653/- being professional fee paid for portfolio management services for securities on the ground that such expenses are not allowable.
Your appellant submits that the disallowance is not justified and prays that the same be deleted.
3. In confirming the disallowance of Rs.9,60,000/- being charges for extension of time for construction of building at Noida by confirming that the payment was made to protect the title of the land and hence clearly capital expenditure.
Your appellant submits that the disallowance is not justified and prays that the same be deleted.
4. In confirming the disallowance to the extent of 3% of the dividend earned for the purpose of computing deduction under section 80 M on net amount (Gross dividend earned minus expenses relating to the dividend income earned).
Your appellant submits that the disallowance is not justified and prays that the same be deleted."
ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 17Gujarat Flurochemicals Ltd.
18. Ground No.1:- Disallowance of Rs.60,00,000/- out of expenditure on professional fees. During the course of the assessment proceedings the learned AO observed that the assessee had paid an amount of Rs.60 lacs to M/s. Krishnadeep Housing Development Pvt. Ltd. On being enquired the assessee replied that this payment was made towards management consultancy services rendered by the recipient. It was further explained that the Assessee Company had huge funds and they had to be managed in such a manner which is most beneficial to the interest of the company and, therefore, services from specialized consultants had to be engaged. However, the learned AO disallowed this amount of Rs.60 lacs for the following reasons:
(i) As per the Memorandum/Articles of Association of the Company the assessee is in the business of manufacturing and sale of refrigerant gases, therefore, this expenditure is prima facie not expenditure incurred for the purpose of the business.
(ii) The activity of investment would result in income chargeable to tax under the head "Capital Gains" or under the head "income from other source". Therefore, the expenditure incurred for the purpose of investment cannot be written off as business expenditure. The same has to be included in the cost of acquisition of the asset or treated as an allowable deduction as per the provisions contained under the head "income from other source", as the case may be.
19. This issue was brought up before the learned CIT(A). The learned CIT(A) confirmed the order of the learned AO with the following remarks:
(i) The findings of the learned AO are in order and, therefore, upheld.ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 18
Gujarat Flurochemicals Ltd.
(ii) Further, the assessee had failed to show as to how and in what way any particular part of the expenditure of Rs.60 lacs is inextricably linked with the earning of income under the head "Capital Gain" and incurred in connection with the transfer of any particular capital asset.
(iii) Similarly, the assessee had failed to show as to how and in what way the expenditure has been incurred wholly and exclusively for the purpose of earning income under the head "income from other source" in order to claim deduction u/s 57 (3) of the Act.
20. The learned CIT(A) further distinguished the order of the learned CIT(A) for the assessment year 2001-02 and based on the above reasoning confirmed the order of the learned AO by disallowing Rs.60 lacs as deductible expenditure.
21. Before us, the learned AR reiterated his submissions made before the authorities below and prayed that the disallowance may be allowed. On the other hand, the learned DR supported the orders of the authorities below and submitted that the issue has been decided by the ITAT Ahmedabad "A" Bench in the case of the assessee for AY 2001-02 in revenue's appeal in ITA No.2460/Ahd/2004 order dated 06-07-2012 against the assessee and in favour of the revenue and further submitted that the same may be followed in this year also.
22. We have heard the rival submission and carefully gone through the materials available on record. We find that as submitted by the learned DR, ITAT Ahmedabad "A" Bench has decided this issue in AY 2001-02 in revenue's appeal in the case of the assessee cited ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 19 Gujarat Flurochemicals Ltd.
supra in favour of the revenue. The relevant portion of the said order dated 06-07-2012 is reproduced herein below for reference:
"16. We have considered the rival submissions, perused the material on record and have gone through the orders of the authorities below. We find that initially, the disallowance was made by the A. O. of Rs.46.10 lacs out of payment of professional fees. The same included the amount of Rs.1.10 lacs as payment of professional fee to Shri Arun Mohan and this disallowance was upheld by Ld. CIT(A). The remaining amount of Rs.45 lacs was paid as consultancy fees to Kriishnadeep Housing Development Pvt. Ltd. and Ascon Maangement for investment advisory services. It was the submission of the assessee before Ld. CIT(A) that firstly, the assessee company has invested in fixed assets, debentures, advances, ICD and bank deposits, immovable property and shares and mutual funds etc. and therefore, it cannot be said that the services rendered by these two persons is in respect of investment in shares. Ld. CIT(A) has confirmed the disallowance of Rs.2,63,972/- being 10% of the dividend income and deleted the balance disallowance. From the assessment order, we find that the assessee has earned dividend income of Rs.27,23,178/- and interest on tax free bonds of Rs.10.50 lacs totaling to Rs.37.73 lacs. In addition to this, no income is reported by the assessee under the head 'income from other sources, being on account of investment other than investment in shares for which this payment of professional fee of Rs.45 lacs was said to have been paid by the assessee. Ld. CIT(A) has based his findings on this basis that the assessee has declared capital gain of Rs.1.09 crores. The payment of professional fee is not allowable for computing capital gain because it is neither the cost of acquisition nor the cost of improvement of capital asset or cost of transfer and, therefore, the entire payment of professional fee has to be considered towards earning of dividend income in the absence of any other income from any other investment being shown by the assessee. Even this is not shown that any such other investment was made but no income was earned. We, therefore, reverse the order of the Ld. CIT(A) on this issue and ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 20 Gujarat Flurochemicals Ltd.
restore that of the A. O. This additional ground of the revenue is allowed."
22.1 Considering the facts and issue of the present case before us, we find that they are identical to the facts and issues in the case for the AY 2001-02, cited supra. We, therefore, are bound by the decision of our Co-ordinate Bench cited supra, and, therefore, find no reason to interfere in the order of the learned CIT(A) and the learned AO. Accordingly, this ground raised by the assessee is dismissed.
23. Ground No.2:- Disallowance of Rs.81,653/- being professional fees paid for portfolio management services for securities:- The learned AO noticed from the details of legal and professional charges filed by the assessee that the assessee paid Rs.81,653/- to PN Vijay on account of management portfolio services for purchase and sale of securities. The assessee offered the income from purchase and sale of securities under the head capital gain. The learned AO did not accept this expenditure as incurred for the purpose of assessee's business and disallowed the claim of the assessee. The learned CIT(A), for the same reasoning given in respect of the payment of professional fees for Rs.60 lacs made to M/s. Krishnadeep Housing Development Society Pvt. Ltd., cited supra, confirmed the order of the learned AO.
24. We have heard the rival submissions and carefully perused the materials on record. From the orders of the authorities below, it is apparent that the assessee had paid Rs.81,653/- to Shri P. N. Vijay for obtaining management portfolio services in respect of purchase ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 21 Gujarat Flurochemicals Ltd.
and sale of securities. This issue is identical to the issue decided by our Co-ordinate Bench for the assessment year 2001-02 based on which a similar disallowance is confirmed by us for an amount of Rs.60 lacs paid to M/s. Krishnadeep Housing Development Society Pvt. Ltd. hereinabove. Therefore, following the same decision, we hereby confirm the orders of the revenue and accordingly this ground raised by the assessee is dismissed.
25. Ground No.3:- Disallowance of Rs.9,60,000/- being charges for extension of time for construction of building at Noida:-
During the course of assessment proceedings the learned AO noticed that the assessee claimed Rs.9,60,000/- against charges paid for extension of time for construction in Noida. The assessee was required to furnish the nature and details of expenditure and the reason for allowability. The assessee vide its letter dated 26-02-2006 submitted that the payment was made by the assessee company for extension of time limit due to deferment of the construction plan and hence it can be treated as annual maintenance charges after acquisition of the capital asset. Hence, this expenditure is revenue in nature and allowable as business expenditure. The learned AO rejected the submission of the assessee as the payment was made to protect title of the land and, therefore, treated the same as capital in nature. The learned AO also held that the payment was made as penalty due to breach of contract. Accordingly, the learned AO disallowed the claim of the assessee and added the same to its income. The learned CIT(A) confirmed the disallowance made by the learned AO by holding in Para 19 of his order as under:ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 22
Gujarat Flurochemicals Ltd.
"19. I have given a careful consideration to the rival submissions. It is clear that the payment is not of a regular nature in the form of any annual maintenance charges after the acquisition of the capital assets. It has been paid to protect the capital asset on which no construction has yet taken place. It has brought benefit of enduring nature. It is clearly in the nature of capital expenditure and has been correctly so held by the Assessing Officer. The addition made of Rs.9,60,000/- is confirmed."
26. The learned DR reiterated the submissions made before the authorities below. On the other hand, the learned AR submitted that the expenditure was incurred is in the nature of maintenance expenses on its assets and hence the same may be treated as revenue expenditure.
27. We have heard the rival submissions and carefully perused the materials on record. It is apparent from the above that the payment of Rs.9,60,000/- is made by the assessee for seeking extension of time for construction of building at Noida. The deferment of the construction plan was for various commercial reasons. It is also evident that if this requisite fee is not paid the allotment of the land may stand cancelled. This clearly establishes that this amount is paid for retaining the title of the land or either to protect the title of the land. In these circumstances, the amount of Rs.9,60,000/- paid to the authorities is capital expenditure and accordingly, it has to be capitalized with the cost of the asset. Thus, we are in conformity with the orders of the revenue authorities and dismiss this ground raised by the assessee.
ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 23Gujarat Flurochemicals Ltd.
28. Ground No.4:- Disallowance to the extent of 3% of the dividend earned for the purpose of computing deduction under section 80 M. The learned AO noticed that the assessee had declared Rs.1,43,87,123/- as dividend income and in the computation of income the same amount had been claimed as income distributed for deduction u/s 80 M of the Act. The assessee was asked to furnish the details of dividend income, dividend distributed and details of expenses incurred for earning the dividend income. The assessee was also required to explain as to how deduction u/s 80 M should be granted on the entire gross dividend amount and why expenses incurred for earning such dividend should not be considered for calculating deduction u/s 80 M of the Act. It was submitted by the assessee that it had earned Rs.1,43,87,123/- and as per u/s 80 M of the Act dividend paid by the assessee amounting to Rs.3,47,34,000/- was deductible in the AY 2003-04. It was further submitted by the assessee that TDS on dividend was deducted and more than 95% of the dividend was received from single company on preference shares for which investments were made from internal accruals of the assessee company and hence, no specific expenditure was incurred to earn such dividend. The learned AO was of the opinion that the assessee had claimed the investment in the shares as stock in trade and claimed the same as business expenditure. The assessee had also not made any submission regarding any expenses related to earning of dividend. Accordingly, the learned AO relying on the decision of the Hon'ble Apex Court in the case of CIT Vs United General Trust Pvt. Ltd. reported in 200 ITR 488 (SC) treated 10% of the dividend amount as expenses for earning such income and ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 24 Gujarat Flurochemicals Ltd.
disallowed an amount of Rs.14,38,712/- and added the same to the income of the assessee. The learned CIT(A) considering the submissions made before him and the fact that assessee had earned more than 95% of the dividend income from its sister concern, held that 10% disallowance of dividend income is not justifiable and reduced the disallowance to 3% amounting to Rs.3,31,617/-. The assessee is now in appeal before us against the order of the learned CIT(A).
29. The learned AR reiterated the submissions made before the authorities below and argued that no disallowance can be made on ad hoc basis and, therefore, the disallowance may be deleted. On the other hand, the learned DR supported the order of the learned CIT(A) and pleaded that his order may be sustained.
30. We have heard the rival submissions and perused the orders of the authorities below and considered the materials on record along with the paper book filed by the assessee. It was submitted by the learned AR that this issue has been decided in favour of the assessee by ITAT Ahmedabad "C" Bench in the case of Sagar Drugs & Pharmaceuticals (P) Ltd. in ITA No.3179/Ahd/2009 in AY 2006-07 vide order dated 03-06-2011. The relevant portion of the findings of the Tribunal in Para 6 of the order are reproduced herein below:
"6. We have heard the rival parties. In our considered view the position of law in relation to disallowance of administrative expenses is now clear. Such disallowance cannot be made prior to Asst. Year 2007-08 unless there is a direct nexus established by the AO. It has held that rule 8D is not ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 25 Gujarat Flurochemicals Ltd.
retrospective and would be applicable for and from Asst. Year 2007-08 and, therefore, it cannot be applied in Asst. Year 2006- 07which is before us and, therefore, calculation as per rule 8 D cannot be done for disallowance of administrative expenses, unless of course a direct nexus is established which has not been done in the present case. Accordingly, the addition made by the AO and enhanced by the ld. CIT(A) is deleted and the appeal filed by the assessee is allowed.
30.1 The facts of the case cited above by the assessee are quite different from the facts of the present case. Our Co-ordinate Bench in ITA No.3179/Ahd/2009 for the assessment year 2006-07 have rendered the aforesaid decision with respect to addition u/s 14A of the Act and Rule 8D of the Income Tax Rules, while as the case before us falls under different provisions of the Act. Allocation of expenses to an activity is a primary principle to determine the correct income of the assessee which may be sometimes cumbersome, however, inevitable. The assessee ought to have allocated its expenses for earning the dividend income which it failed to do so. Therefore, the revenue had no other option but to make an addition on estimate basis. The learned CIT(A) was gracious to reduce the disallowance from 10% of the dividend earned to 3%. Considering the facts and circumstances of the case and in the interest of justice and equity, we are of the opinion that such disallowance of 1% on the dividend earned will suffice. Accordingly, this ground raised by the assessee is partly allowed.ITA No.4 and 33/Ahd/2007 (AY- 2003-04) 26
Gujarat Flurochemicals Ltd.
In the result, the appeal of the revenue is dismissed and the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 14-12-2012.
Sd/- Sd/-
(D. K. TYAGI) (A. MOHAN ALANKAMONY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Lakshmikanta
Lakshmikant Deka/--
a Deka/
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Asst. Registrar, ITAT, Ahmedabad
1. Date of dictation: 02-11-12/07-11-12/05-12-12-12 (direct on computer)
2. Date on which the typed draft is placed before the Dictating Member: 05-12-12 other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the Dictating Member for pronouncement:
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk:
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the Assistant Registrar for signature on the order:
9. Date of Despatch of the Order: