TMI Blog2013 (7) TMI 993X X X X Extracts X X X X X X X X Extracts X X X X ..... The Assessee went in appeal. CIT(A) decided in favour of the Assessee. After hearing the rival submissions, we noted that this issue is duly covered by the decision of Hon'ble Delhi High Court in the case of CIT vs. Orient Ceramics and Industries [2011 (1) TMI 26 - DELHI HIGH COURT ]. No contrary decision was brought to our knowledge.Respectfully following the decision of the Hon'ble Delhi High Court, we confirm the order of CIT(A). Thus, this ground stands dismissed. Disallowance made u/s 14A r/w Rule 8D - Held that:- Respectively following the decision of the jurisdictional High Court in the case of Godrej & Boyce Mfg. co. Ltd. Vs. DCIT & another [2010 (8) TMI 77 - BOMBAY HIGH COURT ] we delete the disallowance made u/s 14A r.w. Rule 8D Non deduction of tds u/s 195 - disallowance towards the payment of the sales commission to the non-resident agents - Held that:- In the present case, it is significant to note that assessee is an established iron ore exporter and has been exporting iron ore to the same countries year after year for substantially long time. It is also observed that the assessee has been transacting with known business concerns and therefore, there was no re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 25,35,800/- incurred on repair of Khodginim road when there is no proximate nexus‟ between the business of the assessee. 2. The ld. CIT(A), Panaji erred in allowing excess depreciation claimed on purchase of UPS as the technology involved in making of UPS is not developing so rapidly to make it obsolete in a short span of time as in the case of computers. ITA NO. 50/PNJ/2013 (Revenue s appeal) : 2. The ground no. 1 in Revenue‟s appeal relates to deletion of the addition of ₹ 25,35,800/- being incurred by the Assessee as his share for the repair of Khodginim road. 2.1 The brief facts relating to this ground are that the AO during the course of the assessment noted that the Assessee has debited a sum of ₹ 25,35,800/- as contribution to Goa Infrastructure Development Corporation towards repair of Khodginim road. The said road was in dilapidated condition and was very crucial to the Assessee for movement of iron ore extracted from its Pissurlem mines in Goa. The Government of Goa asked the mine owners who own mines in Pissurlem area to repair the road as the road was used by them for transportation of mineral ore. The Government claimed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugar factory and oil mills (125 ITR 293) where in it is held that when a road is constructed in order to facilitate transport of sugarcane to sugar factory and the outflow of the manufactured sugar to the market, such construction facilitates the business operation of the assessee and enables the assessee to conduct the business more efficiently and profitably. Though the advantage may be of long duration as the roads would last long, nevertheless, it would not be an advantage in the capital field, as no tangible or intangible asset was acquired by the assessee, nor was there any addition to, or expansion of the profit-making apparatus of the assessee. That judgement was delivered by a three-judge bench of the apex court.). Another decision relied upon by the assessee is Madras High court in the case of Coats vyella india Ltd. 127 ITR 333 wherein it is held that contribution to government for construction of a new bridge is allowable as revenue expenditure u/s 37(1). Bridge is essential to provide access to assessee‟s factory. It is not owned by the assessee nor assessee acquired any rights in the short-term or in the long run by the reason of the contribution. Bridge mearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee‟s ground of appeal is allowed.) 2.2 We have heard the rival submissions and carefully considered the same. We noted that CIT(A) while deleting the said disallowance relied on the decision of the Hon'ble Supreme Court in the case of L.H. Sugar Factory vs. CIT, 125 ITR 293 (SC) (supra) and that of CIT vs Coats Vyella India Ltd., 253 ITR 667 (supra). He also relied on the decision of the ITAT, Panaji Bench in ITA No. 163/PNJ/2006 in the case of Chowgule Co. Ltd. vs. ACIT in which the Hon'ble Tribunal held that the contribution to Goa Infrastructure Development Co. for repair and maintenance of the roads frequently used by the company to transport its goods is not a capital expenditure but the expenditure has been incurred for the purpose of the business. It is a social obligation demanded by the local community which cannot be overlooked by the Assessee. Even though the ld. DR vehemently relied on the order of the AO, no contrary decision was brought to our knowledge and no material or evidence was brought to our knowledge which may prove that the road belonged to the Assessee and it represents capital expenditure incurred by the Assessee. Under these cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als were rendered at the door step of the Assessee. Accordingly, he worked out the disallowance by applying Rule 8D in respect of the interest not directly attributable to any particular income as per clause (ii) and (iii) of Rule 8D as under : (ii) In a case where the assessee has incurred expenditure by way of interest during the previous year which Is not directly attributable to any‟ particular Income or receipt, an amount computed in accordance with the following formula, namely: [AxB]/C= 43,05,983[A1 x ₹ 22,64,68,127/- [B]. ₹ 17,96,64,593/-[C] A. Amount of expenditure by way of Interest other than the amount of interest included In clause (i) incurred during the previous year = 43,05,983 [A]. B. The average of value of investment, income from which does not or shall not form part of the total Income, as appearing in the balance sheet of the assessee, on the first day and the last day of previous year: Opening Investment ₹ 10,62,79,579/- Closing Investment Rs.34,66,56,674/- Average Investment Rs.22,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly because tax on such income had been charged from the company. This shifting of manner of collection of tax on Dividend income from shareholder to the company was done with the object of ease of collection from a single point i.e. from company rather than each individual shareholder. It was also submitted that exempt income for this purpose can only be income in respect of which no tax is payable. In respect of Dividend income, in fact, tax was payable as per the provisions of Sec. 115-O. It was also submitted before the CIT(A) that the AO has computed the average asset value at ₹ 17,96,64,593/- wrongly. Similarly, the average investment was also calculated at ₹ 22,64,68,127/- wrongly. During the year 2006-07 the Assessee had only one mutual fund investment of ₹ 1,54,49,979/- and three mutual fund investment in F.Y 2007-08 amounting to ₹ 19,87,05,184/-. Thus, the average investment in the mutual funds works out to only ₹ 10,70,77,582/- and not ₹ 22,64,68,127/-. Even the application of Rule 8D was wrong. The total interest was ₹ 43,05,983/- while the disallowance was calculated at ₹ 54,27,713/-. Similarly, it was stated that the dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income which does not form part of the total income. The satisfaction must be with regard to the accounts of the Assessee. Attention was drawn towards Sec. 14A(2). It was pointed out that without recording the satisfaction about the incorrectness of the claim of the Assessee, the AO cannot straightaway apply Rule 8D of the Income Tax Act. Our attention was drawn towards para 6.3, 6.4 and 6.5 of the Assessment Order and it was pointed out that the AO has nowhere recorded any satisfaction about the discrepancy in the accounts of the Assessee with regard to the expenditure incurred in relation to the Dividend income. The AO merely observed that from A.Y 2008-09 onwards the position is that in all cases where the AO is not satisfied with the correctness of the claim of the Assessee in respect of expenditure incurred on earnings that do not form part of the total income, the expenditure on this account will need to be computed as per Rule 8D of the Income Tax Act. Our attention was also drawn towards the decision of Godrej Boyce Manufacturing Co. Ltd. vs. DCIT, 328 ITR 81 (Mum). Reliance was also placed on the submissions made before the CIT(A). Reliance was also placed on the decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. vs. DCIT, 328 ITR 81 (Mum) (supra) holding that Rule 8D pertains to both direct and indirect expenditure incurred on earning tax exempt income and in the judgement it was held that no deduction shall be allowed in respect of expenditure incurred by the Assessee in relation to such income which does not form part of the total income under the Act by virtue of provisions of Sec. 14A(1) and Rule 8D of the Income Tax Rules and accordingly, the AO computed the disallowance in accordance with Rule 8D for which also the AO accepted in the Remand report mistakes in certain figures relating to the interest expenditure taken while computing the disallowance under Rule 8D(2) and on the basis of which CIT(A) has restored this issue to the file of the AO to work out the disallowance correctly. CIT(A), we noted, has also not dealt with the submissions of the Assessee with regard to the satisfaction being recorded by the AO before applying Rule 8D but directed the AO to re-work the disallowance. The main contention of the Assessee while is that there cannot be any disallowance under this provision. We have gone through the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... must give regard to the accounts of the assessee. He must record deficiency in the accounts with regards to the claim of the assessee. Sub-sec.(3) provides that provisions of sub-sec.(2) shall also apply where assessee claims that no expenditure had been incurred in relation to income not forming part of the total income. This is not the case of the assessee as in the case of the assessee, assessee himself estimated the expenses relating to the exempt income and disallowed the same. Rule 8D was inserted by gazette notification dated 24/3/2008 in view of the power conferred under sub-sec (2). This Rule prescribes the method for computing the expenditure incurred in relation to the income not forming part of the total income. This is an undisputed fact that in this case, the assessee has invested in debts mutual funds. The assessee computed disallowance u/s 14A(2) at ₹ 25,78,156/- and disallowed the same, while computing its total income. The working of the said disallowance claimed by the assessee is given herein above in the submissions made by the assessee. The AO was not satisfied with the correctness of the claim of the assessee especially the explanation of the assessee t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form part of the total income (page 21). 4. The insertion of sec.14A was curative and declaratory of the intent of the Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income (pages 22-23). The test which has been enunciated in Wallfort for attracting the provisions of sec.14A is that there has to be a proximate cause for disallowance which has its relationship with the tax exempt income. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under section 14A (page 28) 5. What merits emphasis is that the jurisdiction of the AO to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the AO is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not form part of the total income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se, the decision of the Hon'ble Supreme Court in the case of CIT Vs Wallfort Shares Stock Brokers Ltd., 233 CTR (SC) 42 was referred to. In this decision, we noted that the Hon'ble Supreme Court in that case upheld the view of the Hon'ble Mumbai High Court in the case of Wallfort Shares Stock Brokers Ltd. Vs ITO 310 ITR 421. The Hon'ble Supreme Court in this decision, at page-31 of the order held as under; To attract Sec.14A there has to be proximate cause for disallowance which has its relationship with the tax exempt. Pay back or return of investment is not such proximate cause. Hence, Sec.14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Sec.14A cannot be invoked . 16. The Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. Vs DCIT (supra) therefore at page-28 has clearly laid down that there must be proximate cause based on the relationship of the expenditure that tax exempt income is established, only then a disallowance would have to be effected u/s 14A of the IT Act. Therefore, in view of the decision of the jurisdictional High Court and the decision of the Hon'ble Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied with the correctness of the disallowance made by the assessee even though he has accepted the explanation of the assessee that no interest is incurred with regard to exempt income. He rejected the explanation of the assessee that no administrative expenditure incurred on earning dividend income considering the magnitude of the investments and dividend income received and the disallowance according to him made by the assessee u/s 14A towards administrative expenditure is very less. The assessing officer nowhere pointed out the proximate connection of other expenses not apportioned by the assessee for the earning of the dividend income. He merely observed that the administrative expenses disallowed by the assessee is very less but how they are less and how the other expenses incurred by the assessee related to the dividend income has not been brought on record. Even the AO has not pointed out the expenses excluded by the assessee for disallowance has proximate connection with dividend income. In our opinion, the assessing officer before rejecting the disallowance computed by the assessee must give a clear cut finding having regard to the accounts of the assessee how the other ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been done by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an adhoc disallowance was made. The onus was on the AO to establish any such expenditure. This onus has not been discharged. In .CIT Vs. Hero Cycles. (P H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions. In .ACIT Vs. Eicher Ltd.., 101 TTJ (Del.) 369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s 14A of the Act. In Maruti Udyog Vs. DCIT, 92 ITD 119 (Del.), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In Wimco Seedlings Limited Vs. DCIT., 107 ITD 267 (Del.) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ginal jurisdiction or the jurisdiction to issue writs and the only jurisdiction exercised by the High Court in the first instance decides whether or not substantial question of law arises from the order of the Tribunal, it cannot be said that the High Court does not exercise the appellate powers or that there is no decision on merit when the high court dismisses an appeal holding that no substantial question of law arises from the order of the Tribunal. It was held that whenever an order of the subordinate forum is carried in appeal before the higher appellate forum/court, operative part thereof merges into the judgment, decision or order of the higher court after the confirmation, modification or reversal, as the case may be, and the decision of the lower court or forum has no independent existence thereafter in relation to the issue which was carried before the appellate court or forum. It was held that where the High Court comes to the conclusion that no substantial question of law arises on a particular issue, it cannot be stated that the subject matter of controversy between the parties has not been dealt with by the High Court. It was held that when the decision of the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2000-01 much prior to the insertion of provision of sec.14A(2) of the IT Act,1961. The decision of ACIT Vs Premium Consolidated Capital Trust 83 TTJ (Bom.) relates to assessment year 1991-92 prior to insertion of 14A(2) hence will not assist the revenue. The other decision relied on are also not applicable to the facts of the case, except the decision of jurisdictional High Court in the case of Godrej Boyce Mfg. Co. Ltd. Vs DC IT Another 328 ITR 81(Bom.). In view of our aforesaid discussion and respectively following the decision of the jurisdictional High Court in the case of Godrej Boyce Mfg. co. Ltd. Vs. DCIT another 328 ITR 81 (Bom), we delete the disallowance made u/s 14A r.w. Rule 8D and accordingly, the ground taken by the assessee in this regard is allowed. 19. Ground no. 2 relates to sustenance of the disallowance of ₹ 9,88,29,729/- towards the payment of the sales commission to the non-resident agents. The assessing officer disallowed the commission paid to the sales agents u/s 40(a)(i) of the Income-tax Act for the reason that the assessee had not deducted tax u/s 195 of the I.T. Act on such payment. When the matter went before the CIT(A), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssary to refer to the order of the CIT(Appeal) for the assessment year 2006-07 in connection with the allowability of commission payment. During the year 2005-06 (relevant for assessment year 2006-07) commission was paid to three concerns including, ₹ 15,21,98,212/- to Mitsui Co., Japan, ₹ 2,71,86,975/- to Ahmed Jaffar Co. Ltd., Karachi and ₹ 66,86,324/- to Arimpeks Dis Ticaret Ve Mum Ltd. In this regard, in the order of the CIT (Appeal), it was held that since the assessee company is dealing with the purchasers of iron ore year after year, exports are made directly; payments are received directly without being routed through the commission agents. There is apparently no justified reason for payment of commission without substantiating the authenticity of the commission agents and without having furnished reasonable proof of correspondence and adequacy of services rendered by the commission agents. Therefore, for the assessment year 2006-07 the CIT (Appeal) had held that there was no necessity for engaging the commission agents and accordingly, the commission payment was not held to be allowable as business expenditure u/s 37 of the I.T. Act. 6.5 In the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r expended wholly and exclusively for the purpose of the business has to be decided on the facts and in the light of the circumstances in each case. The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the ITO to hold that payment was made exclusively and wholly for the purpose of the assessee s business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the ITO to consider the relevant factors and determine for himself whether commission said to have been paid to the selling agents or any part thereof is properly deductible u/s 37 of the IT Act . 6.6 In the present case, it is significant to note that assessee is an established iron ore exporter and has been exporting iron ore to the same countries year after year for substantially long time. It is also observed that the assessee has been transacting with known business concerns and therefore, there was no real necessity for an agent to render any service for promoting sales with such concerns with whom the assessee has been transacting for long. As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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