TMI Blog2024 (1) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... e had retracted its disclosure which was possible only if the retraction was supported with evidence and explanation, we find that, in the present case, there was in fact no retraction made by the assessee. As noted above, what the assessee had disclosed was the profits that it estimated to earn during the year and what it had returned was its actual profits and the reasons for the fall in profits had been duly explained by the assessee, in which explanation there was no infirmity pointed out by the AO. Therefore, it is not a case of retraction of disclosure or surrender made by the assessee and even if found so the assessee has given basis for retracting the surrender. It is relevant to note that the disclosure was not based on any incriminating material found during survey which the AO had admitted. It is only when the disclosure is based on some incriminating material found with the assessee that it is required to substantiate its retraction with evidences. It is only when the Revenue has found the assessee to have not disclosed particular income supported with evidence and which the assessee surrenders, the retraction of such surrender then has to be duly supported with evid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of accounts, there has to be a specific finding by the Assessing Officer that the books are not reliable for arriving at a true and correct profits earned by the assessee. Merely making a general statement that some vouchers were unsupported or there were expenses incurred in cash by the assessee, cannot justify such adverse action of the Assessing Officer in rejecting the otherwise audited books of accounts of the assessee. Also we find that the assessee had explained reasons for fall in net profit, pointing out that while its gross profits had increased during the year, the net profit had fallen on account of increase in financial cost and huge foreign exchange losses incurred by it which were pointed out even by the auditors of the assessee-company. No anomaly in these accounts or claims of the assessee has been found by the Assessing Officer. Therefore, we completely agree with the ld. CIT(A) that the rejection of books of accounts of the assessee was totally unjustified. The addition, therefore, made by estimation of the net profits, we hold, has been rightly deleted by the ld. CIT(A). Disallowance of expenses incurred for the purpose of earning exempt income u/s 14A - C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made by the Assessing Officer. Accordingly, the assessee was questioned with regard to the same, to which the assessee submitted that no adverse material was found during survey; that the surrender made pertained to the profits which the assessee estimated to earned during the whole year, but due to exceptional adverse circumstances, the assessee was unable to earn the same; that during survey the difference in stock, which was found of Rs. 1.52 crores, was incorrect and the stock actually tallied with the books of the assessee; that therefore no separate surrender of Rs. 7 crores was made by the assessee. The Assessing Officer, however, was not convinced with the explanation of the assessee and held that the assessee has suo moto surrendered the impugned amount and the retraction was not based on any evidence or material; therefore, he added the same to the income of the assessee. 3. Further, he noted that the net profit shown by the assessee showed a major decline as compared to the preceding years. Noting certain anomalies in the books of accounts maintained by the assessee, he rejected the books of accounts of the assessee under Section 145(3) of the Act and estimated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd. Vs. ACIT decided in SLP(Civil), Diary No. 7469 dated 08.04.2019 wherein the Hon'ble Supreme Court in its decision held that mere retraction of statement at later point of time is unacceptable as the burden lies upon assessee to show that admission made by the director in his statement was wrong and such retraction had to be supported by a strong evidence showing that earlier statement was recorded under duress and coercion, which is binding and the assessee failed to substantiate its retraction through evidences. [iv] In addition to Ground No. 1, 2 3, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the fact that the assessee company has paid total advance tax of Rs. 1,77,00,000/- during the F.Y. 2011-12 relevant to AY 2012-13 which is much comparable to the disclosure amount during survey action. Later on, the assessee has reduced the net profit based on the afterthought and claimed refund thereon. 7. Ground Nos. [i] to [iv] of the Revenue s appeal relate to the issue of the addition made of Rs. 7 crores by the Assessing Officer on account of disclosure made by the assessee during survey which wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or conclusion that the said work in progress represents stock which was not recorded in the books of accounts. The AO held that the statements averred by the appellant in its submission thus, is just an afterthought and made-up story to eye wash the revenue from paying the tax liability on the admitted disclosure of Rs. 7 crores made during the course of survey. The AO also noted that on the basis of disclosure made during the course of survey, the appellant had also started to make the advance-tax payments which were due in the month of 15th September, 2011 and 15th December, 2011 proving that the company was running its business without any hurdle and the payment was made on the basis of income and disclosure made during the course of survey. The appellant before the AO had taken a plea that subsequent to the survey, the company passed through very difficult business conditions in second half year of the financial year but AO rejected the same as it had failed to bring on record any iota of evidence to prove that after survey operation, the company has faced any difficulty which causes he production/marketing of its products. The AO then went on to make an addition of Rs. 7 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recording statement u/s 131(1A) of the Act as under To cover up the issues which come up during the course of survey operations at the office and factory premises of M/S Jewel Consumer Care Pvt. Ltd., we making disclosure of estimated income as under:- F. Yr. 2010-11 Rs. 3,00,00,000/- F.Yr. 2011-12 Rs. 7,00.00.000/- Rs 10,00,00,000/- We have not paid any advance tax, either for F. Ys. 2010-11 or 2011-12. We promise to pay an amount of 1 Crore by way of SA. tax for A. Ys. 2011-12 within next 15 days and we shall pay advance tax on 15th September, December 2011 and March, 2012 on the income disclosed for FY. 2011-12. We also promise to furnish the details and documents as asked for, within the shortest possible time. (emphasis supplied) 4.4.1 Accordingly, a letter was issued to the AO dated 22.03.2022 specifically asking him to furnish a report based on the analysis of material available on record, to enumerate how the figure of Rs. 7 crore that was disclosed by the Chairman of the company at the time of survey arrived at. The sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eport based on the analysis of material available on record to enumerate that how the figure of Rs. 7 crore was arrived. During the course of survey proceedings, a statement on oath w/s 131(1A) of the I.T. Act 1961 recorded on 17.08.2011 of Shri Amit Goradia in the case of Jewel Consumer Care Pvt. Ltd. In his statement the assessee has made a disclosure of Rs. 3 crores for the FY 2010-11 and Rs. 7 crores for FY 2011-12. The assessee has also made disclosure during the course of survey w's 133A at Jewel Consumer Care Pvt. Ltd vide its letter dated 17.08.2011. Therefore, statement on oath u/s 131(1A) of the IT. Act 1961 recorded on 17.08.2011 of Shri Goradia in the case of Jewel Consumer Care Pvt. Ltd. and letter dated 17.08.2011 are submit herewith for your kind perusal and necessary action. 4.4.3 There was no whisper of any specific material on record in the form of any impounded documents or details of inventory of stock at the time of survey as compared to the entry in the books of accounts in the said reply. The assessment order is also silent about this aspect except the fact that it mentions finding of excess stock on the date of survey of Rs. 1.52 crore based on wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernible. The case was assessed u/s 143(3) of the Act vide order dated 04/03/2014. No specific addition with respect to the Rs 3,00,00,000/- disclosure made during the course of survey was made. Clearly the AO in the previous AY has accepted the income as per the books and consequentially returned, barring some small additions returned by the appellant. 4.6 For this AY, the appellant has also pleaded that the survey was conducted on 17/08/2011 much before the end of the FY. At that time an estimate for the Income of the year was made. It emphasized that no incriminating material was found during the course of survey for the period 01.04.2011 to 17.08.2011, hence the disclosure of Rs. 7 crore was purely an estimate. However, due to increased costs, finance costs and foreign exchange fluctuation losses coupled with failure to achieve targeted sales adversely affected the companies bottom line. It gave calculation chart showing that a foreign exchange fluctuation loss in this assessment year vis- -vis foreign exchange gain in AY 2011-12 is taken into consideration then its income exceeded Rs. 7 crore. The AO has not rebutted these submissions in the assessment order. The appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of statement of the Chairman of the company recorded u/s. 131(1A) of the Act. During the course of appellate proceedings the AO was given an opportunity to adduce any material on record that reflected suppression of income by the appellant which could not do. It can be safely contended that there is no material on record to suggest that any discrepancy was found during the course of survey in the form of any incriminating document or discrepancy in the inventory of the stock taken vis- -vis that recorded in the regular books of accounts. Although there is mention of quantification of stock on the date of survey of Rs. 1.52 crore but there is no evidence to suggest that the same was not disclosed/recorded in the books of account. No query related to any discrepancy found during the course of survey is found to have been made while recording the statement of Shri Amir Goradia. Further, there is no calculation/computation by the AO that how the purported disclosed figure of Rs. 7 crore for the AY 2013-14 made by the Chairman of the company in response to the last query 'do you have anything else to say of the statement u/s 131(1A) recorded on the date of survey was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated reasons, the estimated profits could not be earned by the assessee. He found the explanation of the assessee evidenced by the audited balance sheet of the assessee reflecting the aforesaid facts. Therefore, he was convinced that the disclosure made by the assessee during survey of Rs. 7 crores was not based on any incriminating material found during survey but was only on estimation of profits he had expected to earn during the year, which had drastically fallen on account of unprecedented circumstances which was evidenced by the audited financial statements of the assessee. Accordingly, he held that since there was no basis with the Assessing Officer except the disclosure made by the assessee during survey which was duly explained, the addition on account of the disclosure so made was not sustainable and he deleted the same. 10. The only pleading made by the ld. DR before us was that since the assessee had suo moto made disclosure of Rs. 7 crores during survey, he could have retracted it only on the basis of some evidences; and in the absence of the same, the addition in the hands of the assessee of the disclosure so made was justified in view of the decision of the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) has noted that the books of accounts of the assessee, taking note of these adverse circumstances faced by the assessee by way of incurring huge foreign exchange losses and interest expenditure, has not been found to be incorrect by the Assessing Officer. No discrepancies vis- -vis these accounts have been noted by the Assessing Officer despite the entire books being produced before him. 14. The Ld.DR was unable to controvert the above. 15. Therefore, the assessee s explanation for not returning the disclosure of Rs. 7 crores is a reasonable and plausible explanation which, we hold, has been rightly accepted by the ld. CIT(A). 16. We have also noted that the ld. CIT(A) found that identical disclosure made in the preceding year of Rs. 3 crores was returned by the assessee as profits of the said year which was accepted by the Assessing Officer in the assessment proceedings. The ld. CIT(A), therefore, has, we hold, rightly held that having accepted the disclosure of the assessee as representing profits of the year in the preceding year, the Assessing Officer could not have taken a different stand in the impugned year for treating the disclosure as an independent disclosure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - made as alternative addition on account of enhancement of net profit as the assessee has shown drastically low net profit as compared to preceding previous years without furnishing any cogent reason. 20. The ld. CIT(A) has dealt with this issue at paragraph Nos. 5.2 to 5.4 of his order as under:- 5.2 I have carefully considered the impugned assessment order and its effect and written submissions made by the appellant along with other material on record on this issue. The AO found that the appellant has shown steady decline in net profit rate of 0.51% for AY 2012-13, 4.87% for AY 2011-12 and 6.24% for AY 2010-11. Before him the main argument of the appellant to explain this decline was the increase of finance cost as compared to in the immediately preceding assessment year and also on account of heavy volatility in the foreign currency rates of the dollar, the company has incurred a foreign exchange loss of Rs. 278 lacs. The AO stated that there is substantial increase in repairs and maintenance of machinery, factory expenses, legal and professional expenses, etc. Books were produced for verification. He stated that of the bills and vouchers of the expense viz. communic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieve that the AO has not brought any material on record to justify the books of accounts. Further he summarily rejected the appellant's explanation of fall in Net profit, without analyzing the same. The appellant case had a justifiable reason for such change. I do not find any merit in such estimation of net profit and direct the AY to delete the addition of Rs. 3,04,33,448/- made in this regard. Ground of appeal 2 is allowed. 21. We have noted from the above that ld. CIT(A) has found the Assessing Officer s act of rejecting the books of accounts of the assessee and estimating its net profits to have been made without any basis at all. With respect of the issue of rejection of the books of accounts of the assessee, ld. CIT(A) has noted that the Assessing Officer has made some general comments without bringing on record any specific instance of what books of accounts are incorrect and incomplete. He noted that these are audited books of accounts and merely on account of claiming certain expenditures in cash, the same cannot be rejected. He observed that the Assessing Officer has brought no material to justify the rejection of books of accounts. With respect to the fall in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gree with the ld. CIT(A) that the rejection of books of accounts of the assessee was totally unjustified. The addition, therefore, made by estimation of the net profits, we hold, has been rightly deleted by the ld. CIT(A). Ground of appeal No. [v] is, therefore, dismissed. Ground No. [v] of Revenue s appeal is accordingly dismissed. 23. Ground of appeal No.[vi] relates to the issue of disallowance of expenses incurred for the purpose of earning exempt income under Section 14A of the Act. The said ground reads as under:- [vi] On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition of Rs. 1,21,905/- to Rs. 4,204/- made on account of disallowance under Rule 8D r.w.s. 14A by ignoring the fact that the assessee has failed to provide one to one nexus between the interest free fund vis- -vis its investment from which income earned is exempted. 24. The findings of the ld. CIT(A) deleting the addition are at paragraph Nos. 6.2 to 6.4 of the order as under:- 62 I have carefully considered the impugned assessment order and its effect and written submissions made by the appellant along with other material on record r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 27 . the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under Section 14A of Income Tax Act for investments made in tax free bonds securities which yield tax free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees. 28. The above conclusion is reached because next has not been established between expenditure disallowed and earning of exempt income, The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (Supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance. 29. In the above context, the following saying of Adam Smith in his seminal work - The Wealth of Nations may aptly be quoted: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 32 of the Act, the claim of depreciation was optional and could not be thrust on the assessee, if it had not claimed it; 3. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view that pre-operative expenses incurred in connection with creation of plant machinery in units which have not commenced production, are revenue in nature; 4. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view that expenditure on estimated basis cannot be reduced from dividends for deduction under Section 80M of the Act; and 5. Whether on the facts and in the circumstances of the case and in law, the High Court is correct in upholding the Tribunal's view in sustaining the deletion of the Transfer Pricing adjustment made to consultancy charges, especially when the TPO had adopted the same mark up in relation to its European associate, what the assessee itself had adopted in relation to its USA associate. Insofar as the first question is concerned, the issue raises a pure question of fact. The High Court has noted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no disallowance can be made under section 144 because dividend income from foreign subsidiaries is taxable in India Regarding the balance investment of Rs. 38 crores approximately in Indian subsidiaries, we find that interest-free own funds of the assessee is many time more than this investment because interest-free funds available with the assessee an on March 31, 2005, as per the balance-sheet as on that date is of Rs 929.57 crores. There is no fading given by the Assessing Officer regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no disallowance under section 144 can be made out of interest expenditure in the facts of the present case. Accordingly, ground Non 2 and 3 of the Revenues appeal are rejected. 2.1 From the above portion, we noticed that the Tribunal has bifurcated the expenditure into two parts, the first related to investment of Rs. 5907.18 lakhs in foreign subsidiaries, it was held that the dividend income from such subsidiaries is taxable in India and that, therefore, section 14A would have no applicability. The remaining amount pertain to investment of Rs. 38 crores (ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t income can be worked out on estimate basis or reasonableness basis after looking into the facts and circumstances of a particular case is concerned, we do not have any dispute. The amounts can be disallowed on estimate basis. In the present appeals, the assessee itself has made disallowance of Rs. 5.10 lakhs in the Asst. Year 2009-2010, and Rs. 52.000 in the A.Y 2010-11. In the A.Y 2009-2010, the exempt income is of Rs 202 Crores whereas in the AY 2010-2011, it is Rs. 22.50 lakhs. Before embarking upon the facts of the present case, we deem it pertinent to take note of the observations of the Delhi High Court recorded in para 29 of the judgment in the case of Maxopp Investment Limited [Supra). It reads as under: Scope of sub-sections (2) and (3) of Section 144. 29. Sub-section (2) of Section 144 of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. 37. According to the Hon'ble Delhi High Court, when an assessee demonstrate actual incurrence of the expenditure, then Rule 8D would not be automatically applied without looking into the explanations. In other words, when an assessee has worked out the expenditure relatable to earning of exempt income on actual basis and demonstrated to the AO the incurrence of such expenditure, then AO record a finding that he was hot satisfied with the correctness of the expenditure shown by the assessee. In other words, he has to verify the account of the assessee, and if he was not satisfied with the correctness of the claim made by the assessee, then, after assigning reasons, he would proceed to compute the expenses on the basis of the method brought in the Rule 8D. In light of the above proposition, let us examine the facts in both the years and finding recorded by the A.O. The main contention of the assessee in both the years is that it has made investment in the mutual fund with growth option . In the case of growth option, no dividends a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore particularly the fact that the assessee was already having its own surplus fund and that too to the extent of Rs. 2319.17 Crores against which investment was made of Rs. 111.09 Crores, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Act, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses of Rs. 54,39,916/- under rule 8D of he Rules. Under the circumstances and in the facts of the case, narrated hereinabove, it cannot be said that the learned Tribunal has committed any error in deleting the disallowance of expenditure of Rs. 54.39.916- incurred in respect of interest and administrative expenses under Section 14A of the Act. We are in complete agreement with the view taken by the learned: Tribunal. At this stage, decision of Division Bench of this Court in the case of Pr. CIT v. India Gelatine Chemicals Ltd. [2015] 376 ITR 553/120161 66 taxmann.com 356 needs a reference. In the said decision, it is observed and held by the Division Bench of this Court that when the assessee had sufficient interest-free funds out of which c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds decision is required to be taken by the Director of the company after considering market condition and other financial aspects. Again for making investments in share and mutual funds and for studying and monitoring the growth of such investments, time of the Directors and concerned staff members of the assessee's are also spent and therefore it cannot be said that no any part of administrative expenses and consultancy fees etc. is incurred. In view of these facts, I hold that the AO has correctly applied sec. 14A read with Rule 8D for making disallowance of administrative expenses, consultancy fees and management expenses etc. and therefore, such action of the AO is hereby confirmed. In view of this the disallowance of other expenditure (ie. the expenditure other than interest expenditure) as made by the AO in the case of appellant by applying the formula of rule 8D IT rule is hereby confirmed. Thus, the ground of appeal no.3 of the appellant is partly allowed. 6.3.1 The appellant did not agitate this issue before the ITAT in its appeal for AY 2011-12. Respectfully following the order of CIT(A)-1, Ahmedabad, I also confirm the entire disallowance made by the AO u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovide one to one nexus between the interest free fund vis-a-vis its interest free advances. 28. The ld. CIT(A) has dealt with this issue at paragraph Nos. 7.2 to 7.6 of his order. We have noted that the ld. CIT(A) had deleted this disallowance noting that sufficient owned interest free funds are available with the assessee and the fact that similar disallowance made in AY 2014-15 was deleted by the ITAT in its order passed in ITA No.2070/Ahd/2018 dated 24.06.2020. The relevant findings of the ld. CIT(A) at paragraph Nos. 7.2 to 7.6 of his order as under:- 7.2 I have carefully considered the impugned assessment order and its effect and written submissions made by the appellant along with other material on record on this issue. During the course of assessment proceedings, the AO found from the balance sheet, that the appellant had given a short-term loan to its associate concern Amigo Dispensing Solutions Pvt. Ltd., for Rs. 44,82,560/- without charging any interest therein. The opening balance of the said loan was Rs 56,82,560/- while closing balance was Rs. 44,82,560/-. The AO claimed that such money was advanced out of the borrowed funds from bank on which it had suffer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The then CIT(A)-1, Baroda following the order of his predecessor for AY 2011-12 confirmed the said addition against which the appellant went before the ITAT Ahmedabad which in its order dated 24/06/2020 vide ITA No.2070/Ahd/2018 deleted the addition and held as under- 2. The substantive ground of appeal raised by assessee read hereunder: 1. Disallowance u's 36(1)(iii) The Id. CIT(A)-1, Baroda has erred in law and facts in confirming the disallowance of Interest Expenses of Rs. 3,72,000/- u/s 36(1)(ii). The Id CIT(A)-I has followed the order of his predecessor for AY 2011-12 and confirmed the addition. The Id. CIT(A) has failed to appreciate that the Appellant had sufficient interest free funds to cover the interest free advances to the Appellant's sister concern in relation to the above disallowance. The ld. CIT(A)-I has also failed to appreciate that the said interest free advances were provided by the Appellant to its sister concern for business purpose and with a clear commercial purpose and thus the conclusion that the said funds were applied for a non-business purpose was erroneous. The ld. CIT(A)-1 has also failed to appreciate that the issue on identic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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