Income Tax Appellate Tribunal - Kolkata
M/S Arun Distributors, Kolkata vs Ito, Ward 44(4)/ Kolkata, Kolkata on 30 August, 2017
आयकर अपील
य अधीकरण, यायपीठ - "D" कोलकाता,
IN THE INCOME TAX APPELLATE TRIBUNAL
KOLKATA BENCH "D" KOLKATA
Before Shri Waseem Ahmed, Accountant Member and
Shri S.S.Viswanethra Ravi, Judicial Member
ITA No.2375/Kol/2016
Assessment Year:2012-13
M/s Arun Distributors बनाम ITO, Ward-44(4),
12, Cossipore Road, / 3, Government Place,
Kolkata-700 002 V/s . Kolkata-001
[AAEFA 5347 E]
अपीलाथ /Appellant .. यथ /Respondent
अपीलाथ क ओर से/By Appellant Shri Rajeeva Kumar, Advocate
यथ क ओर से/By Respondent Shri Arindam Bhattacharjee, Addl. CIT-DR
सन
ु वाई क तार
ख/Date of Hearing 28-06-2017
घोषणा क तार
ख/Date of Pronouncement 30-08-2017
आदे श /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-13, Kolkata dated 09.08.2016. Assessment was framed by ITO Ward- 44(4), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') vide his order dated 30.03.2015 for assessment year 2012-13. Shri Rajeeva Kumar Ld. Advocate appeared on behalf of assessee and Shri Arindam Bhatacharjee, Ld. Departmental Representative represented on behalf of Revenue.
2. In this appeal various grounds have been raised by the assessee and out of which ground No.1 was not pressed. Therefore ground no. 1 is dismissed as not pressed. Ground No. 4 is of general in nature and does not require separate adjudication. Remaining grounds are reproduced below:-
"2) That under the facts and in the circumstances of thee case, the L. CIT(A) erred in confirming disallowance of expenditure of Rs.4,34,262/- under sec. 14A read with Rule-8D.The disallowance of expenditure is unjustified and need to be deleted.ITA No.2375/Kol/2016 A.Y. 2012-13
M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 2
3) That under the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition of the sundry balance written off of Rs.22,09,781/-. The addition is unjustified and need to be deleted."
3. First issue raised by assessee in ground No.2 is that Ld. CIT(A) erred in confirming the order of the Assessing Officer by sustaining the disallowance of ₹4,34,262/- under the provision of Section 14A r.w.s Rule-8D of the Income Tax Rules, 1962.
4. Briefly stated facts are that assessee in the present case is a partnership firm and engaged in trading business of cement, providing go-down on rent and commission agent. The AO during the course of assessment proceedings observed that assessee has made investment in shares as well as it has incurred interest expense. The assessee claimed to have made strategic investment in the company namely Arup Distributor Pvt. Ltd. for ₹1,62,48,000/- only. The assessee in the year under consideration has not earned any dividend income from the investment made in the shares of aforesaid company. However, AO was of the view that assessee needs to make the disallowance of the expenditure under the provision of Rule-8D and accordingly made the following disallowance:-
i) Rule-8D(2)(i) direct expense Nil
ii) Ruld-8D(2)(ii) interest expense 3,93,642
iii) Rule-8D(2)(iii) administrative expense 40,620
4,34,262
The above expenditure was disallowed and added to the total income of the assessee.
5. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that it has earned interest income of ₹9,68,900/- as well as incurred interest cost of ₹28,13,682/- only. Thus, the net interest expenditure of ₹18,44,782/- was claimed in the profit and loss account. The assessee further claimed that no borrowed fund has been utilized for the purpose of investment in the shares. The assessee also furnished the details of the interest expenses as detailed under:-
Sl.No Nature of loan Amount (Rs)
1 Term loan for asset 10,61,352
2 Vehicle loan 1,35,112
3 Working income 90,112
ITA No.2375/Kol/2016 A.Y. 2012-13
M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 3
4 Working income on loan 1,10,466
The assessee also submitted that no expenditure is warranted under the provision of Sec. 14A of the Act as no dividend income was earned during the year. However, Ld. CIT(A) disregarded the contention of assessee and confirmed the order of AO by observing as under:-
"4.9 For this, reliance is placed on the order in DCIT vs. V.K. Construction Works (P) Ld. (1996) 56 ITD 0399 wherein it was held that the forfeiture of the security was incidental to the business of the assessee and the deduction thereof was allowable as business expenditure.
4.10. In CIT vs. Sugar Dealers (1975) 100 ITR 0424; the Allahabad High Court, concurring with the order of the Bombay High Court in Narandas Mathuradss & Co. vs CIT (1959) 35 ITR 461 (Bom) held that the forfeiture of the security deposit, for the failure of the assessee to perform the contract, which resulted in loss could be attributed to the business carried on by the assessee a ad was allowable business expenditure. It was further held that the in order that a loss may be allowed to be deducted, two conditions have to be satisfied: (i) that the loss or the liability should have accrued in the relevant previous year; and (ii) it should be an ascertained liability-Liability accrued when the assessee was informed that his earns money is forfeited for failure to comply with stipulated terms of agreement. The assessee suffered loss at that point time.
4.11. In BOC India Ltd. versus DCIT [ITA No.131/Kol/2010], the Kolkata Bench of ITAT held that the bad advance written off was allowable as business loss. Copy of the order dt. 16.10.2015 is enclosed herewith for your perusal."
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
6. Ld. AR before us submitted that no borrowed fund has been utilized by the assessee in the impugned investment. Therefore, there is no question of making the disallowance of interest expense under Rule 8D(2)(ii) of IT Rules. Similarly, Ld. AR submitted that as there was no dividend income earned by assessee during the year that there was no question of any disallowance on account of administrative expense under Rule 8D(2)(iii) of the IT Rules. He requested the Bench to decide the issue on merit.
On the other hand, Ld. DR vehemently relied on the order of Authorities Below.
7. We have heard the rival contentions of both the parties and perused the material available on record. The instant issue relates to the disallowance made by the AO under the provision of Rule-8D r.w.s u/s 14A of the Act. The AO has invoked the provision of Rule-8D and has made the following disallowance:-
ITA No.2375/Kol/2016 A.Y. 2012-13M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 4
Vide Rule 8(D)(2)(i) - Direct expenses (demat etc) = nil
Vide Rule 8D(2)(ii)- (1844,782x 8124000) ÷ 3802671 = Rs.3,93,642/-
Vide Rule 8D(2)(iii) - ½ % of av. Investment of Rs.81,24,000 = Rs. 40,620/-
Rs.4,34,262/-
From the foregoing discussion, we find that the assessee has made investment in its associated company and therefore it can be inferred that there was no purpose of making any dividend income from such investment. However, any income if arises as dividend to the assessee which would be purely incidental on account of the impugned investment.
7.1 However, Ld. AR for the assessee before us submitted that no borrowed fund was utilized by the assessee in the impugned investment. Therefore, there is no question for making the disallowance on account of interest expense and all the borrowed funds have been utilized exclusively for the purpose of assessee's business. However, we find that the AO has not brought anything on record suggesting that the investment was made by the assessee out of its own capital and free reserve. On direct question raised to the Ld.AR from the Bench for the evidence in support his claim, it was pleaded to restore this file to AO for fresh adjudication and in accordance with law. To this point, Ld. AR assured to provide all the necessary documents before the AO to justify that no borrowed fund has been utilized in the impugned investment. In rejoinder Ld. DR agreed to the submission of Ld. AR and raised no objection if the matter is restored back to the file of AO for fresh adjudication. Therefore, we are inclined to restore the matter back to the file of AO to verify whether the investment was made out the own fund of the assessee and accordingly, AO is directed to pass a speaking order.
Similarly, we further note that the assessee has not earned any dividend income by way of dividend during the year and there is no dispute in this regard. In this connection we find that various courts have held that no disallowance shall be warranted under the provision of Rule-8D(2)(iii), if no dividend income has been earned by the assessee. In this connection, we rely on the order of this Co-ordinate Bench in the case of REI Agro Ltd. Vs. DCIT reported in [2013] 35 taxmann.com 404/144 ITD 141 (Kol.) wherein it was held as under :
"Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance ITA No.2375/Kol/2016 A.Y. 2012-13 M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 5 under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the Assessing Officer for recomputation in line with the direction given above."
Respectfully following the same we delete the addition made by AO on account of administrative expense under the provision of Rule-8D(2)(iii) of the IT Rules. Hence, this ground of assessee's appeal is partly allowed for statistical purposes.
8. Next issue raised by assessee in this appeal is that Ld. CIT(A) erred in confirming the order of AO by sustaining the disallowance of ₹22,09,781/- only on account of sundry balance written off.
9. The assessee is a Clearing & Forwarding agent of Century Cement as per the agreement between them vide dated 01.09.2004. The assessee claimed to have deposited a sum of ₹ 20 lakh with Century Cement Co., which was shown in its balance-sheet as deposited with party. The assessee made security deposit with Century Cement in the earlier year and the same was brought forward to the year under consideration. The security deposit was fetching the interest income on the principal amount and therefore it has added the interest income to the amount of security deposit in the year under consideration. The assessee showed a total amount of ₹22,09,781/- (20 lakh + 209781 interest accrued) in its balance sheet as security deposit with Century Cement.
9.1 However, assessee, during the year came to know that the security deposit has been adjusted by the principal i.e. Century Cement in the A.Y 2007-08 against the outstanding amount on the part of assessee. Thus, the assessee has written off the deposit made with the Century Cement Co. for ₹22,09,781/- in the year under consideration. As per the assessee the above fact was ascertained in the year under consideration. Therefore the liability was crystallized during the year and accordingly claimed in the profit and loss account of the current year. 9.2 However, AO observed that the amount of security deposit has already been adjusted by the assessee in the financial year 2007-08. Therefore, the AO was of the view that the security deposit cannot be written off during the year. Thus, the AO disallowed the claim of assessee and added to the total income of assessee.
ITA No.2375/Kol/2016 A.Y. 2012-13M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 6
10. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that as per clause-29 to 33 of the agreement made with Century Cement Co. vide dated 01.09.2004, it was the duty of the assessee to collect the outstanding amount from the customers / parties and immediately forward the same to the company. The assessee failed to realise the money of outstanding from the 26 parties for ₹22,26,413/- only. Therefore the amount of security deposit with Century Cement Co. was forfeited in the month of March, 2008. However, there was no communication from Century Cement Co. to the assessee for the forfeiture of such security deposit.
10.1 It is also important to note that Century Cement confirmed the credit balance in its books in the name of assessee for the security deposit of ₹20 lacs vide letter dated 19.09.2011. Subsequently assessee requested to Century Cement Co. to provide up-to- date statement of security deposit. Accordingly, Century Cement Co. vide letter dated 16.02.2012 informed that the security deposit has already been forfeited. Thus, assessee came to know that security deposit along with interest has already been adjusted by Century Cement Co. for the outstanding amount from it. 10.2 Since assessee came to know for the forfeiture of security deposit during the year, therefore, it was written off in the year under consideration. However, Ld. CIT(A) disregarded the contention of assessee and confirmed the order of AO by observing as under:-
"I have perused the claim of the appellant. Perusal of assessment order and submissions of the appellant shows that it was security deposit with the parties namely M/s Century Cement. It was not sale or purchase which was debited in the profit and loss account or the income of the same was offered in the hands of the appellant. It is also seen that the business of the appellant is not financing business where the capital can be treated as stock in trade. Neither the aforesaid capital was stock in trade. As per Section 36(2)(1)- "no such deduction shall be allowed unless such debt or part thereof has been taken into account in computing the income of the assessee of the previous year in which the amount of such debit or part thereof is written off or of an earlier previous year, or represents money lent in the ordinary course of the business of banking or money-lending which is carried on by the assessee."
Apart from above, it is also seen that M/s Century Cement has already written off the aforesaid security deposit balance and debited the profit and loss account which was out sticks against those debtors. It is also to point out that those debtors were not the appellant debtors. Once M/s Century cement has already written off and debited on its P & L account, it will tantamount to double deduction. The cases cited by ITA No.2375/Kol/2016 A.Y. 2012-13 M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 7 appellant are factually detent as the appellant is only commission agent and he has no direct trading with the party to whom security deposits was made. It was not security against goods, rather appellant was guarantor. In other cases there was direct dealing and security was against trading. Therefore, the claim of the appellant have been made to deploy deduction which is not qualified for the deduction as the same is not part of its trading rather it was capital deposit which was not the part of his computation of total income. Therefore, keeping in view the aforesaid provisions the addition is hereby upheld and the ground raised by the appellant is dismissed."
Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.
11. Ld.AR for the assessee before us submitted that as per the agreement between assessee and Century Cement Co. it was the responsibility of the assessee to recover the outstanding amount from the parties. In this regard the ld. AR relied on the copy of agreement and drew our attention on clause 29 to 31, which reads as under:-
"29. The C&F Agent will be responsible for recovery of the Company's outstanding in time from the parties to whom the cement has been sold.
30. The C&F Agent will be personally liable for payment of the price of the goods supplied pursuant to this Agreement.
31. The C&F Agent will be responsible to procure sale price of cement as and when the deal is made."
He further submitted that assessee failed to recover the outstanding amount from the 26 parties, the details of which is placed of pages 9 and 10 vide Para 4.3 in the appellate order. As the assessee failed to recover the outstanding amount, the Century Cement Co. forfeited the amount of security deposit. This fact was ascertained by Century Cement Co. vide letter No. CC/Sales/VMS/80 dated 16.02.2012. The content of the said letter is reproduced below:-
"CC/Sales/VM/80 Dated:16/02/2012
M/s Arun Distributors
12, Cossipore Road
KOLKATA-700 002
Sub: Adjustment of Security Deposit
Dear Sirs,
We hereby confirm that your Security Deposit amount Rs.20,00,000/- (Rupees twenty lacs only) had been adjusted during March 2008 against outstanding amount of various Dealers of Cossipore depot.
Hope, it will serve your purpose.
Thanking you,
Yours faithfully
For CENTURY CEMENT
ITA No.2375/Kol/2016 A.Y. 2012-13
M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 8
Sd/- VM SAHU
VM SAHU
AUTHORISED SIGNATORY"
Ld. AR further submitted that the forfeiture of security deposit was crystallized in the year under consideration and therefore it should be allowed as deduction from the current year's profit. He requested the Bench to decide the issue on merit. On the other hand, Ld. DR vehemently relied on the order of Authorities Below.
12. We have heard the rival contentions of both the parties and perused the material available on record. The issue in the instant case relates to the deduction of the forfeited amount by Century Cement Co. The assessee has made security deposit with Century Cement Co. for ₹ 20 lakh which was forfeited by Century Cement Co. due to non recovery of outstanding amount by the assessee. 12.1 From the foregoing discussion, we find that the amount of security deposit made by the assessee with Century Cement Co. is intrinsically linked with the business of assessee. Therefore the loss on account of forfeiture of security deposit is admissible being business loss while working out the profit of the company. In this connection, we find support and guidance from the judgment of various courts as detailed under:-
i) DCIT vs. Aman Sethi (2012) 32 CCH 164 Delhi Tribunal
ii) Pyoginam vs. ACIT (2010) 130 TTJ 007 (UO)
iii) CIT vs. Tarun Commercial Mills Co. Ltd. (1977) 107 ITR 172 (Guj)
iv) CIT vs. Surya Prabha Mills (p) Ltd. (1980) 123 ITR 654 (Mad)
v) Thackers H.P. & Co. vs. CIT (1982) 134 ITR 21 (MP)
vi) Narandas Mathuradas & Co. vs. CIT (1959) 35 ITR 461 (Bom) It was also observed that Century Cement Co. has made entry in its books of account on account of security deposit in the financial year 2007-08 as evident from the ledger as reproduced below:-
" CENTURY CEMENT: KOLKATA
KOLKATA A/C SDRORC
-------------------------------------------------------------------------------------------------
MEMO NO: ADJ/700021 DATE: 10/03/2008
----------------------------------------------------------------------------------------------------- S.No. PARTY CODE AND PARTDY NAME DEBIT AMT. CREDIT AMT.
------------------------------------------------------------------------------------------------------
ITA No.2375/Kol/2016 A.Y. 2012-13M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 9 1.CA039 ASHITA ENTERPRISE 36009.00 2. CJ006 JOY GURU TRADERS III 501576.00 3. CL006 LOKENATH NIRMAN & SONS 360091.00 4. CM006 M. SINGH & SONS 132460.00 5. CM046 MA MANASHA ENTERPRISE 43317.00 6. CH016 NEW DUTTA CONSTRUCTION 95784.00 7. C9063 S.S.CONSTRUCTIO 861019.00 8. RS001 SOMIA TRADING CORPN. 3383.00 9. RT003 T.GHOSH CONST.& SUPPLY AGENCY 99334.00 10. ZA002 ARUN DISTRIBUTORS 2132973.00 00/00
---------------------------------------------------------------------------------
TOTAL 2132973.00 2132973.00
--------------------------------------------------------------------------------- However, assessee was communicated the above fact by Century Cement Co. vide letter dated 16.02.2012 as discussed above. Therefore, same was written off by assessee in the year under consideration.
12.2 After considering the facts in totality, we find that assessee came to know about such forfeiture of security deposit along with interest in the year under consideration. Therefore, the action of assessee for writing off security deposit during the year is correct. However, on perusal of assessment order we find that AO has made the disallowance of the security deposit by observing as under:-
".... .. Hence, it is crystal clear that Rs.20,00,000/-assessee security deposit (assets) and interest accrued of Rs.2,09,781/- upto the year 2008-09 the year was adjusted against sundry creditor (M/s Century Cement) for the year 2007-08. Hence, further the claim of Rs.22,09,781/- as Sundry balance written off by debiting the Profit & Loss A/.c under the head sundry balances written off is uncalled for and disallowed and added to the total income of the assessee...."
The AO in his order has alleged that assessee has already claimed the deduction on account of security deposits in the financial year 2007-08. Therefore came cannot be allowed as deduction in the year under consideration otherwise it will amount to double deduction to the assessee.
From the above observation, we find that AO has not disputed on the claim made by assessee. But the AO apprehended with the double deduction of security deposit to the assessee. On specific question raised to Ld. AR from the Bench for such double deduction of security deposit, he out rightly denied and submitted that no deduction on account of security deposit written off was claimed by assessee during the financial year 2007-08. Therefore, there is no question for the double deduction of security deposit amount. However, Ld. AR failed to bring any financial statement pertaining to financial year 2007-08 to support its claim that no deduction was claimed for ITA No.2375/Kol/2016 A.Y. 2012-13 M/s Arun Distributors Vs. ITO Wd-44(4) Kol. Page 10 forfeiture of security deposit in that year. In the absence of any documentary evidence i.e., financial statement for the financial year 2007-08 we are inclined to restore this issue back to the file of AO for fresh verification for the limited purpose of verifying whether the claim was made by assessee in the financial year 2007-08 on account of forfeiture of security deposit. If yes, then the deduction in the year under consideration for the forfeiture of security deposit will not be granted to the assessee and vice versa. The AO will adjudicate the issue in accordance with the provision of law. To this point, Ld. DR raised no objection if the matter is restored to the file of AO. Assessee is directed to appear and co-operate before the AO. Hence, this ground of assessee's appeal is allowed for statistical purpose.
13. In the result, the appeal of assessee is treated as partly allowed for statistical purpose.
Order pronounced in open court on 30/08/2017
Sd/- Sd/-
( या%यक सद'य) (लेखा सद'य)
(S.S.Viswanethra Ravi) (Waseem Ahmed)
Judicial Member Accountant Member
*Dkp-Sr.PS
)दनांकः- 30/08/2017 कोलकाता / Kolkata
आदे श क त
ल प अ े षत / Copy of Order Forwarded to:-
1. अपीलाथ /Appellant-M/s Arun Distributors, 12, Cossipore Road, Kolkata-002
2. यथ /Respondent-ITO Ward-44(4), 3, Govt. Place, Kolkata-001
3. संब,ं धत आयकर आय-
ु त / Concerned CIT
4. आयकर आय-
ु त- अपील / CIT (A)
5. .वभागीय %त%न,ध, आयकर अपील य अ,धकरण कोलकाता / DR, ITAT, Kolkata
6. गाड2 फाइल / Guard file.
By order/आदे श से, /True Copy/ Sr. Private Secretary, Head of Office/DDO आयकर अपील य अ,धकरण, कोलकाता