Income Tax Appellate Tribunal - Pune
Bharat Forge Ltd, Pune vs Assessee on 23 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCHES "B", PUNE
BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER
AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER
ITA No.340/PN/2012
(Assessment Year : 2007-08)
Bharat Forge Ltd.,
Mundhwa,
Pune - 411 036
PAN : AAACB8519L .... Appellant
Vs.
Addl. Commissioner of Income Tax,
Range - 1, Pune .... Respondent
Appellant by : Mr. Nikhil Pathak
Respondent by : Mr. S. C. Sarangi
Date of hearing : 23-09-2013
Date of pronouncement : 30-09-2013
ORDER
PER G. S. PANNU, AM
This appeal by the assessee is directed against an order of the Commissioner of Income Tax (Appeals)-I, Pune dated 11.08.2011 which, in turn, has arisen from an order dated 10.12.2009 passed by the Assessing Officer, under Section 143(3) of the Income Tax Act, 1961 (in short "the Act"), pertaining to the assessment year 2007-08.
2. The first Ground in this appeal is with regard to the action of the CIT(A) in setting-aside the issue regarding the disallowance under Section 14A of the Act to the file of the Assessing Officer. In brief, the relevant facts are that assessee was found to have earned dividend income of Rs.16,20,65,249/- which was exempt under Section 10(34) of the Act. In the return of income filed assessee had not shown any inadmissible expenditure against the aforesaid exempt income in terms of Section 14A of the Act. The Assessing Officer, however, was of the opinion that the provisions of Rule 8D of the 2 ITA No.340/PN/2012 A.Y. 2007-08 Income Tax Rules, 1962 (in short "the Rules") read with Section 14A of the Act was attracted and therefore he disallowed a sum of Rs.1,15,20,158/- being 0.5% of average investments as amount disallowable in terms of Rule 8D of the Rules out of the indirect expenses. The CIT(A) noted that application of Rule 8D of the Rules was contrary to the judgement of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom.) wherein it was opined that Rule 8D of the Rules was applicable only with effect from assessment year 2008-09. The CIT(A) further noticed that in the course of assessment proceedings, assessee had suo motto offered for disallowance a sum of Rs.20,96,382/- out of specific finance and accounts personnel salaries and other costs, which were allocable to the earning of exempt dividend income. After negating the action of the Assessing Officer to apply Rule 8D of the Rules following the judgement of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra), the CIT(A) set- aside the matter back to the file of the Assessing Officer to recompute the disallowance under Section 14A of the Act, with an observation that the disallowance would not be less than Rs.20,96,382/-, which has been offered by the assessee in the course of assessment proceedings. Not being satisfied with the order of the CIT(A), assessee is in further appeal before us.
3. Before us, the principal grievance of the assessee is that the CIT(A) erred in not appreciating that no disallowance was required to be made under Section 14A of the Act inasmuch as the assessee had pointed out that no separate staff or employees were deployed for management of mutual fund investments, which had given rise to the impugned exempt dividend income. It was also pointed out that there was no separate administrative costs incurred in relation to the exempt dividend. Further, it was pointed out that the investments in mutual fund were mainly out of the funds raised by way of Global Depository Receipts (GDRs) which is nothing but 'equity' and hence there is no interest cost incurred in relation to the earning of exempt dividend 3 ITA No.340/PN/2012 A.Y. 2007-08 income. Notwithstanding the principal plea, the learned counsel pointed out the disallowance worked out by the assessee was fair and proper, reference was made to the workings placed at page 53 of the Paper Book. As per the said working, the assessee apportioned the salary costs relating to specific finance/accounts personnel and other costs in proportion to the percentage of dividend income vis-à-vis the total income of the assessee, thereby depicting an amount of Rs.20,96,382/- which could be attributable to the earning of exempt dividend income. It was contended that in case the Tribunal does not allow the plea that no disallowance at all is merited, then the disallowance be restricted to Rs.20,96,382/- instead of upholding CIT(A)'s action of setting- aside the matter to the Assessing Officer.
4. On the other hand, the learned Departmental Representative appearing for the Revenue has relied upon the order of the CIT(A) in support of the case of the Revenue.
5. We have carefully considered the rival submissions. Ostensibly, having regard to the judgement of the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra) it is clear that Rule 8D of the Rules cannot be invoked in the present assessment year to determine the disallowance under Section 14A of the Act as the same is applicable from assessment year 2008-09 onwards. Therefore, invoking of Rule 8D of the Rules by the Assessing Officer has been rightly set-aside by the CIT(A).
6. Further, in our view, having regard to the discussion made by the Assessing Officer in para 6.3 of the assessment order, it is found that he was not satisfied with the plea of the assessee that no expenditure has been incurred in relation to earning of the exempt income. The satisfaction so recorded by the Assessing Officer, in our view, deserves to be upheld and no cogent arguments to the contrary have been advanced by the appellant before 4 ITA No.340/PN/2012 A.Y. 2007-08 us. In so far as the amount of disallowance under Section 14A of the Act is concerned in this assessment year, in the absence of Rule 8D of the Rules, the same is required to be calculated on a reasonable basis; and, in the course of assessment proceedings, assessee itself computed such disallowance at Rs.20,96,382/- out of the salaries and general expenses. Notably, in so far as the interest cost is concerned, assessee offered an explanation to the effect that the investments in question were made out of the GDRs which did not carry any interest cost and such explanation has been accepted inasmuch as no disallowance out of interest expenditure was made by the Assessing Officer. Therefore, for the present, we are concerned with the determining the amount of disallowance under Section 14A of the Act out of general expenses. In this background, we have examined the workings made by the assessee, a copy of which has been placed at page 53 of the Paper Book. In terms thereof the expenses out of specific finance/accounts personnel salaries and other expenses relating to telephone expense, printing, etc. have been proportionately allocated to the exempt income on the basis of the ratio of the exempt income vis-à-vis the total income of the assessee. Notably, while rejecting such calculation, Assessing Officer has not advanced any reason and even before us, there is no argument taken as to how the calculation of disallowance under Section 14A worked out by the assessee is unreasonable or incorrect. Therefore, considering the facts and circumstances of the case, we find that working made by the assessee to determine expenses attributable to earning of exempt income at Rs.20,96,382/- is fair and reasonable and can be applied so as to compute the disallowance under Section 14A of the Act. Therefore, we set-aside the order of the CIT(A) and direct the Assessing officer to disallow a sum of Rs.20,96,382/- as an expenditure incurred for earning of the exempt income in terms of Section 14A of the Act.
7. Thus, on this ground, assessee partly succeeds.
5 ITA No.340/PN/2012
A.Y. 2007-08
8. The second issue in this appeal is with regard to a disallowance of Rs.33,85,562/- being one time payment for software licenses, which was held by the Assessing Officer to be 'capital expenditure' not 'revenue expenditure', as claimed by the assessee.
9. In this connection, the details of the Computer Software Expenses in dispute amounting to Rs.33,85,562/- reads as under :-
Sr No Name of the Party Particulars Amount
1 Sonata Information Office pro win 32 Licenses 23,08,305
Technology
2 Softcell Technologies Autocad LT full version 2,49,000
3 Parametric Technologies Pro Engineering Foundation 3,00,196
4 DESIGNTECH Systems 21 Hyperworks- Hypermesh 3,60,000
5 Ansys Software Ansys Mechanical 7.0 1,68,059
10. The Assessing Officer had disallowed of Rs.37,72,107/- out of Computer Software Expenses treating the same to be capital expenditure, out of which the CIT(A) allowed Rs.3,86,545/- as 'revenue expenditure' and the balance of Rs.33,85,562/- was treated as 'Capital expenditure'; as detailed above. Before us, the learned counsel has made a solitary plea based on the judgement of the Hon'ble Bombay High Court in the case of CIT vs. Raychem RPG Ltd. (2011) 64 DTR 57 (Bom) to point out that where the software acquired by the assessee did not form part of the profit-making apparatus, the same was liable to be allowed as 'revenue expenditure'. Considering the aforesaid judgement of the Hon'ble Bombay High Court in the case of Raychem RPG Ltd. (supra), we find that the expenditure incurred by the assessee of Rs.23,08,305/- in order to acquire the 'Office pro win 32 Licenses' software is liable to be considered as a 'revenue expenditure'. Ostensibly, the appellant is engaged in the manufacture and sale of steel forgings, etc. and the impugned software is to facilitate trading operations or enabling it to conduct its business profitably and is not a part of profit-making apparatus. In so far as the other expenditure on softwares amounting to Rs.10,77,255/- are concerned, the learned counsel fairly pointed out that the same pertained to 6 ITA No.340/PN/2012 A.Y. 2007-08 the manufacturing activity being carried on and therefore the same, in our view, is liable to be considered as capital expenditure following the ratio of Hon'ble Bombay High Court in the case of Raychem RPG Ltd. (supra). Thus, in conclusion, we direct the Assessing Officer to delete the addition of Rs.23,08,305/- and sustain the balance of Rs.10,77,255/-. On this Ground, assessee partly succeeds.
11. The last Ground in this appeal is with regard to a disallowance of Rs.39,22,912/- made by the Assessing Officer invoking Section 40(a)(ia) of the Act. The lower authorities have made the disallowance on the ground that the requisite tax was not deducted at source on such payments and therefore, the corresponding expenditure was disallowable in terms of Section 40(a)(ia) of the Act.
12. The fist limb of the disallowance is with regard to an expenditure of Rs.3,50,000/- on account of Director Sitting Fees. The assessee did not deduct any tax at source on such payments. As per the Assessing Officer, in terms of Section 194J of the Act, tax was deductible at source on such payments, being payments in the nature of professional services. In this connection, the learned counsel pointed out that in the assessee's own case for assessment year 2007-08 vide ITA No. 1357/PN/2010 dated 31.01.2013 the Tribunal held that no tax was required to be deducted under Section 194J of the Act in relation to the payment of Director Sitting Fees. Following the said decision, a copy of which has been placed on record, we hold that the disallowance under Section 40(a)(ia) of the Act is not warranted. Accordingly, the same is directed to be deleted.
13. The second limb of the disallowance is with respect to a sum of Rs.86,948/- representing Testing Inspection Fees paid. In this context, the Assessing Officer noted that the tax was required to be deducted under 7 ITA No.340/PN/2012 A.Y. 2007-08 Section 194J of the Act, being payments for professional services whereas the assessee had deducted the tax in terms of Section 194C of the Act treating the same to be contractual payments. Since as per the Assessing Officer, there was a shortfall in deduction of tax at source, he, therefore, disallowed the corresponding expenditure of Rs.86,948/- by invoking Section 40(a)(ia) of the Act.
14. Before us, the learned counsel pointed out that the Tribunal in its order dated 31.01.2013 (supra) in the assessee's own case, held that the action of the assessee in deducting the tax under Section 194C in relation to the payments by way of Testing Inspection Fee was justified. Following the aforesaid decision, therefore, it has to be held that there was no default on the part of the assessee in deducting the tax at source under Section 194C of the Act in the present case and therefore, the Assessing Officer wrongly invoked Section 40(a)(ia) of the Act to make the disallowance, which is hereby deleted.
15. The third limb of the disallowance is an amount of Rs.20,68,111/- representing crane hire charges. In this regard also, the only difference between the assessee and the Revenue is the section under which the tax was liable to be deducted at source. Assessee deducted the tax under Section 194C of the Act whereas the Assessing Officer opined that the tax was deductible under Section 194J of the Act. For the said reason the expenditure was disallowed by invoking Section 40(a)(ia) of the Act. On this aspect also the assessee has relied upon the order of the Tribunal dated 31.01.2013 (supra) in own case to support the stand to the effect that tax was deductible under Section 194C of the Act on crane hire charges. Following the said precedent, in assessee's own case, we find that the Assessing Officer erred in making the impugned disallowance under Section 40(a)(ia) of the Act. The same is liable to deleted, we hold so.
8 ITA No.340/PN/2012
A.Y. 2007-08
16. The other two limbs of the disallowance are out of Die Repairs and Motor Rewinding Expenses amounting to Rs.2,63,260/- and 2,54,609 respectively. In both these cases the disallowance was made under Section 40(a)(ia) of the Act on the ground that assessee had short deducted the tax at source. The point made out by the assessee is the Section 40(a)(ia) can be invoked only in case of non-deduction of tax at source but not in cases which involve short-deduction tax at source.
17. We have carefully considered the rival submissions. Ostensibly, the point made out by the assessee, is to the effect that Section 40(a)(ia) of the Act can be invoked only in cases where there is a non-deduction of tax at source and not in cases where there is short-deduction of tax at source. In the present case, the charge made by the Assessing Officer is that assessee has not deducted tax at appropriate rate under Section 194C of the Act. Without going into the merits of the rival claims, for the present, it is sufficient to observe that the assessee has been held to be an assessee in default for the reason that it deducted tax at source on payments made by way of Die Repairs and Motor Rewinding Expenses which was lower than the rate prescribed in law, as per the view of the Assessing Officer. The controversy is as to whether in such a situation, provisions of Section 40(a)(ia) of the Act can be attracted so as to disallow the corresponding expenditure, which according to the Assessing Officer has suffered deduction at lower rate of tax at source.
18. To answer the aforesaid controversy, one may notice the crucial expression in Section 40(a)(ia) of the Act which prescribes that the expenditure specified therein shall be disallowed "on which tax is deductible at source under chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub- section (1) of Section 139." Clearly, the phraseology to Section 40(a)(ia) of the Act seeks to disallow an expenditure only in situations where the tax is deductible at source and such tax has not been deducted or after deduction 9 ITA No.340/PN/2012 A.Y. 2007-08 has not been paid as per the period prescribed therein. The phraseology used in Section 40(a)(ia) of the Act clearly removes from its purview cases where tax has been short-deducted. Therefore, the inference drawn by the CIT(A) is borne out of a plain reading of Section 40(a)(ia) of the Act. Moreover, the decisions of the Pune Bench of the Tribunal in the case of Sandvik Asia Ltd. vs. JCIT 146 TTJ 644 (Pune); and, also the Mumbai Bench of the Tribunal in the case of Chandabhoy & Jassobhoy vide ITA No.20/Mum?2010 dated 08.07.2011 support the aforesaid premise. Thus, in the present case the provisions of Section 40(a)(ia) of the Act are not attracted as this is a case of short-deduction of tax at source under Section 194C of the Act and not a case of non-deduction of tax at source. The disallowance out of Die Repairs and Motor Rewinding Expenses is hereby set-aside.
19. Resultantly, appeal of the assessee is partly allowed.
Order pronounced in the open Court on 30 th September, 2013.
Sd/- Sd/-
(R.S. PADVEKAR) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune, Dated: 30 th September, 2013
Sujeet
Copy of the order is forwarded to: -
1) The Assessee;
2) The Department;
3) The CIT(A)-I, Pune;
4) The CIT-I, Pune;
5) The DR, "B" Bench, I.T.A.T., Pune;
6) Guard File.
By Order
//True Copy//
Sr. Private Secretary
I.T.A.T., Pune