TMI Blog2018 (10) TMI 1288X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance made towards disallowance of pooja expenses. Payments to relatives of deceased employees to be allowed. Disallowance of expenditure in relation to exempt income u/s 14A - Held that:- We find that the co-ordinate bench has considered similar issue for AY 2001-02 wherein by following the decision of Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg Co Ltd [2010 (8) TMI 77 - BOMBAY HIGH COURT] has restored the matter back to the file of the AO for fresh consideration. Disallowance of loss on compensation of enforcement of security - deduction u/s 37(1) claimed - Held that:- We do not find any merit in the findings of the AO for the reason that the AO has not denied the fact that the assessee has borrowed loan from M/s ILFS for the purpose of its business. In the process, the assessee has pledged NOCIL shares held by two of its subsidiary companies with the lender for security of loan. As per the contractual agreement between the parties, the assessee has reimbursed loss incurred by two subsidiary companies. Therefore, said loss is incurred wholly and exclusively in connection with the business of the assessee and accordingly, the AO was incorrect in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 38,00,000 (d) Repal Apparel P. Ltd. 75,76,557 (e) Silvia Apparel Ltd. 80,00,000 (0) Sushmita Holdings Ltd. 4,75,02,610 (g) Mafatlal Engineering Industries Limited (MEIL) 3,91,15,000 00 MEIL by Mafatlal Fine Spg. and Mfg, Co.Ltd 2,77,50,000 Total: 15,00,95,377 2. The learned Commissioner (Appeals) ought to have appreciated that the Assessing Officer was not justified in charging to tax notional interest of ₹ 2,25,14,307 which had not at all accrued to the appellant. 3. The learned Commissioner Appeals) ought to have appreciated that the advances to the above parties were for the purpose of business of the appellant. 4. The learned Commissioner (Appeals) erred in not appreciating that the above amounts were advanced in the course of the appellant's business of entrepreneurship and project promotion. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of valuation of closing stock of finished goods. Disallowance of Pooja expenses 14. The learned Commissioner (Appeals) erred in confirming disallowance in respect of Pooja expenses of ₹ 1,63,210. Disallowance of payments to relatives of deceased employees 15. The learned Commissioner (Appeals) erred in not specifically allowing the payments made to relatives of deceased employees of ₹ 49,260. Disallowance under section 14A 16. The learned Commissioner (Appeals) erred in confirming disallowance of interest expenses of ₹ 6,79,30,000 on an estimate basis under section 14A for earning income not forming part of total income. 17. The learned Commissioner (Appeals) ought to have appreciated that the learned Assessing Officer estimated and disallowed interest expenses of ₹ 6,79,30,000 without establishing any nexus between investments generating tax-free income and borrowed funds. 18.The learned Commissioner (Appeals) ought to have appreciated that no specific borrowings had been made for the purpose of making investments. 19. Without prejudice to the above, the learned Commissioner (Appeals) erred in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowances towards interest in respect of advances to companies / other concerns, revaluation of closing stock of finished goods, disallowance of pooja expenses, disallowance of payments to relatives of deceased employees, disallowance of expenditure incurred in relation to exempt income u/s 14A, non exclusion of CPC grant from total income, disallowance of loss on compensation on enforcement of security and disallowance of penalty and fine and also disallowance of forex loss. 3. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has challenged additions made by the AO towards various disallowances and filed elaborate written submissions. The Ld.CIT(A), after considering relevant submissions of the assessee partly allowed appeal filed by the assessee wherein he has deleted addition made by the AO towards disallowance of forex loss; however, confirmed remaining additions including interest in respect of advances to companies, disallowance of expenditure in relation to exempt income, addition towards revaluation of closing stock, disallowance of pooja expenses, payment to relatives of deceased employees, non exclusion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra). 8. The next issue that came up for our consideration is adjustment to closing stock of finished goods. The Ld.AR for the assessee submitted that this issue is covered against the assessee by the decision of ITAT in assessee s own case for AY 2001-02 in ITA No.4598/Mum/2005 where the co-ordinate bench, by following its earlier order held that adjustment made by the AO towards inclusion of excise duty for valuation of closing stock of finished goods is in accordance with law. However, further stated that once adjustment is made to closing stock, the AO is bound to make adjustment to give effect to the opening stock. Otherwise it gives a distorted figure. The relevant observations of the ITAT is extracted below:- 7. We are of the view that this issue has to be allowed in favour of assessee by giving direction in regard to alternative claim that the addition to closing stock of finished goods made by the AO should be given consequential effect to the opening stock of next year also. We find that the Tribunal in ITA No.4029/Mum/2009 for assessment year 2003-04 vide order dated 29.4.2011 has given some direction vide para Nos.5 6 as under: 5. Ground No .2 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of facts, the ITAT has allowed the claim of payments made to relatives of deceased employees. The relevant observations of the ITAT is extracted below:- 20. The next issue in this appeal of assessee is against the order of the CIT(A) disallowing the claim of payment made to relatives of deceased employees. For this, assessee has raised following ground Nos. 14, 15 16 : Payment to relatives of deceased employees 14. The learned Commissioner (Appeals) erred in not specifically allow the appellant's claim in respect of amount of ₹ 57,684 being payment made to relatives of deceased employees. 15. The learned Commissioner (Appeals) erred in holding that the claim of the appellant of ₹ 57,684 in respect of payment to relatives of deceased employees was allowable if the payments have been made in pursuance of written agreements with the employees. 16. The learned Commissioner (Appeals) ought to have appreciated that the Commissioner (Appeals) in the assessment years 1987-88, 1988-89, 1991-92 and the Income-tax Appellate Tribunal in the appellant's own case for the assessment years 1985-86 and 1986-87 had in fact deleted the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the provisions of section 14A the assessee cannot claim expenditure of interest for earning exempt income which is not forming part of the total income. Obviously, the assessee borrowed the funds from outside and invested it. The assessee also earned dividend income and claimed expenditure as deductible business expenditure. On perusal of the decision rendered by the Hon'ble Jurisdictional High Court; the Hon'ble High Court observed and held that: Even prior to assessment year 2008-09, when rule 8O was not applicable, the Assessing Officer has to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; The proceedings for assessment year 2002-03 shall stand remanded back to the Assessing Officer, The Assessing Officer snail determine as to whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per which, in case the subsidiary companies incurred loss on account of enforcement of security by ILFS, the assessee needs to compensate such loss and accordingly, a clause in memorandum of understanding has been provided to indemnify the subsidiary companies. Accordingly, a mortgage agreement has been executed between the assessee, subsidiary companies and the bank. Since the assessee could not repay the loan borrowed from ILFS, the lender has enforced the security of aforesaid NOCIL shares which was pledged by M/s Mishapar Investment Ltd Vibhadeep Investment Trading Ltd. The lender, ILFS has sold shares of NOCIL held by M/s Mishapar Investment Ltd Vibhadeep Investment Trading Ltd and recovered ₹ 12,60,000 and ₹ 1,58,40,000, respectively. The assessee has provided loss incurred by subsidiary companies on account of sale of shares by ILFS by taking into account cost of shares, as per books of account of subsidiary companies and sale proceeds received by ILFS from sale of shares and ascertained total loss to be reimbursed to two subsidiary companies at ₹ 7,15,39,300. The assessee claims that since the loss incurred on account of enforcement of security ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard, he relied upon the decision of Hon ble Supreme Court in the case of Badridas Daga vs CIT 34 ITR 10 (SC) and CIT vs Nainital Bank Ltd 54 ITR 109(SC). 20. On the other hand, the Ld.DR strongly supported the order of the Ld.CIT(A). 21. We have heard both the parties, perused material available on record and gone through the orders of authorities below. The assessee has claimed loss incurred by two subsidiary companies M/s Mishapar Investment Ltd Vibhadeep Investment Trading Ltd on the ground that the said loss has been incurred wholly and exclusively in connection with its business for borrowing loan from ILFS. The AO disallowed loss claimed by the assessee on account of compensation paid to two subsidiary companies on the ground that the said loss is in the nature of capital expenditure which is incurred in connection with repayment of loan borrowed from two subsidiaries, therefore, the said loss cannot be allowed as expenditure. The AO has analysed the facts in the light of evidences filed by the assessee to come to the conclusion that the said expenditure is not incurred wholly and exclusively in connection with the business, therefore, merely for the reason th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on cost of shares held by two subsidiary companies from the date of acquisition of such shares or the cost as on the date of pledging the shares with ILFS for security of loan has to be ascertained. In case, the assessee has computed loss by taking into account cost of NOCIL shares as per its books of account and then applied the benefit of indexation to arrive at the loss as on the date of sale of shares of ILFS, then such claim cannot be allowed, because the benefit of indexation is only for the purpose of computation of capital gain, but not for the purpose of arriving at real loss incurred on account of sale of shares. In case, the assessee has arrived at a loss by taking into account the price of shares of NOCIL as on the date of pledging such shares with ILFS and reduced from the sale price of shares, then the total loss claimed by the assessee can be allowed in total. The facts are not clear. Though the assessee has filed copies of returns filed by two subsidiary companies for AY 2002-03, on perusal of statement of long term capital loss computed by the companies, it appears that the companies have applied the benefit of indexation to arrive at a loss. Therefore, we are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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