TMI Blog2018 (8) TMI 1838X X X X Extracts X X X X X X X X Extracts X X X X ..... h Workers was disallowed by the AO on the ground that the liability was not crystalized during the year - HELD THAT:- CIT(A) has directed the assessing officer to allow such expenditure in the year in which the same was actually paid. After considering the material on record and the findings of the CIT(A), we do not find any error in the order of the CIT(A) directing the assessing officer to allow the claim of the assessee on payment basis . Therefore, this ground of appeal of the assessee is dismissed. Business loss on trading of fertilizer bonds - HELD THAT:- As decided in the case of the assessee pertaining to assessment year 2008-09 we restore this issue to the file of assessing officer to allow the claim of the assessee as business loss after verification of the year in which income was offered and the loss was occurred. Accordingly the appeal of the assessee is allowed for statistical purposes. Disallowance of prior period expenses - AO disallowed the claim on the ground that assessee company was following mercantile system of accounting, therefore, it was not entitled to claim expenses which was not related to assessment year 2010-11 - HELD THAT:- ITAT in the case of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l:- The Appellant being dissatisfied with the order dated 28/02/2014 passed by the Commissioner of Income Tax-I, Baroda (learned CIT(A)), prefers this appeal against the same on the following amongst other grounds, which are without prejudice to each other: 1.0 The order passed by the learned CIT (A) is contrary to the provisions of law and facts and therefore requires to be suitably modified. It is submitted that it be so held now. 2.0 The learned CIT (A) erred in law and on facts in upholding disallowance of ₹ 2,57,76,000/- u/s 14A towards administrative and other expenditure ignoring the fact that the learned A.O. had not recorded any satisfaction having regard to the book of accounts of the appellant as required under the law and also ignoring the fact that the appellant itself had made suo moto disallowance towards such expenses and also ignoring the binding decisions of Hon'ble ITAT for the earlier Assessment Years. It is submitted that it be so held now. 3.0 The learned CIT(A) erred in law and on facts in not allowing deduction of ₹ 37,36,68,000/-being liability incurred by the appellant in terms of Memorandum of Understandin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matters have attained finality at Tribunal level and therefore thee is reasonable certainty in respect of such income. 6.1 The learned CIT (A) ought to have granted direction to provide deduction of such interest on such refund in the year in which the same is withdrawn. 7.0 The learned CIT(A) erred in law and on facts in confirming addition of ₹ 2,57,76,000/- to the book profit computed u/s 115JB of the Act in respect of proportionate expenditure out of administrative and other expense related to exempt income computed by the learned A.O. and upheld by him as per the formula prescribed under Rule 8D r.w.s. 14A of the Act. It is submitted that provisions of section 14A of the Act r.w. Rule 8D of the Rules is applicable only to computation of total income under Chapter-IV and not to book profit which is calculated under Chapter-XII-B of the Act and hence no such addition ought to have been made u/s 115JB of the Act. It is submitted that it be so held now. 3. The revenue has raised following grounds of appeal:- i. On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in deleting the disallowance of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No. 2 of assessee s appeal and ground no. 1 of revenue s appeal and ground no. 1 of assessee s cross objection 6. During the course of assessment proceedings, the assessing officer noticed that assessee has received exempt income of ₹ 19,75,14,447/- in the form of dividend and tax free interest income and assessee has not shown any expenses incurred against the exempt income. On quarry the assessee responded that the entire investment in tax free income yielding securities has been made from own interest free funds, therefore, no further disallowance u/s. 14A r.w. Rule 8D should be made. The assessing officer has not accepted the explanation of the assessee stating that assessee has not maintained separate accounts for source of funds utilized for the investment activities. Thereafter, the assessing officer has determined the disallowance according to provision of section 14A r.w. Rule 8D of IT Rule and made an addition of ₹ 8,40,91,000/- to the total income of the assessee. 7. Aggrieved assessee has filed appeal on this issue before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee by stating as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon ble ITAT in assessee s own case for assessment year 2008-09 and 2009-10 has deleted the entire interest expenditure and confirmed the administrative expenditure to the tune of ₹ 10 lacs and 15 lacs respectively. On the other hand, ld. departmental representative has supported the order of assessing officer. 9. We have heard both the sides and perused the material on record before adjudicating the appeal of the assessee, appeal of the revenue and cross objection of the assessee on the identical issues involved therein. During the course of assessment proceedings, the assessing officer has noticed that assessee has received exempt income of ₹ 19,75,14,447/- during the year under consideration. The assessing officer has disallowed on amount of ₹ 8,40,91,000/- as per provision of section 14A r.w. Rule 8D of the I.T. Rule. The ld. CIT(A) has deleted the addition of interest expenditure of ₹ 5,83,15000 u/s. 14A on the ground that the assessing officer could not prove any nexus between interest bearing borrowed funds and the investment made in the tax fee securities.The Ld.CIT(A) has also placed reliance on the decision of the ITAT and Hon ble Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that disallowance of ₹ 5 lakh may be made here itself. Considering the facts of present case and volume and quantum of investment, we feel that if disallowance of ₹ 5 lakh is made, it will meet both ends of justice. We confirm the disallowance of ₹ 5 lakh in respect of administrative expenses. This ground of Revenue's appeal is partly allowed. For A.Y. 2005-06 79. We have considered the rival submissions and gone through the orders of authorities below. In A.Y. 2004-05, we have held that no disallowance u/s. 14A of the Act is called for in respect of interest expenditure because the own funds of the assessee is much higher than the investment in share etc., Regarding other administrative expenses, we have confirmed a disallowance of ₹ 5 lakh in A.Y. 2004-05 and hence, in the present year also, we confirm the disallowance of ₹ 5 lakh regarding other administrative expenses and delete the balance disallowance. This ground of Revenue's appeal is partly allowed. For A.Y. 2007-08 8. We have considered rival submissions and perused the material available on record and gone through the order of authorities below ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch Ahmedabad as well as Hon ble Jurisdictional High Court has dealt with this issue also. 13. Co-ordinate Bench in ITA No. 729/Ahd/2010 in the case of assessee for A.Y. 2007-08 while dealing with this issue of administrative disallowance sustained the addition to lumpsum amount of ₹ 5 lakh which was previously sustained by the Tribunal in A.Y. 2004-05 A.Y. 2005-06. Disallowance of administrative expenses sustained by Tribunal at ₹ 5 lakh for A.Y. 2004-05 stands confirmed byHon ble High Court of Gujarat in Tax Appeal No. 126/2013 dated 25.06.2013. The above judgment and decision were for the assessment year preceding assessment year 2008-09. From A.Y. 2008-09 onwards amendment was brought in rule 8D thereby prescribing a method for calculation of disallowance u/s. 14A of the Act. However the condition precedent to applying Rule 8D of Income Tax rule is that the A.O. has to make a proper satisfaction from the records of the assessee that such expenses have been incurred towards making the investment and earning the exempt income.In the instant appeal no such satisfaction has been recorded by the Learned Assessing Officer pointing out any error in the calculat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and surplus of the assessee was to be amount of ₹ 21,44,12.17 lakhs as against the unsecured loan amount of ₹ 51.283.15 lacs only. In the light of the above decision , respectfully following the decision of the jurisdictional High Court and the decision of the Co-ordinate Benches in assessee own case for preceding years on identical facts we consider that the assessee s own interest free funds in the forms of share capital and reserve and surplus were much more than the investment made for earning tax fee income. The assessing officer has failed to disprove that borrowed funds were utilized for making investment to earn exempt income. In view of the above facts and finding, we do not find any infirmity in the decision of ld. CIT(A) in respect of deleting addition of interest part u/s. 14A of the Act. In respect of disallowance of administrative expenses u/s. 14A of the Act to the amount of ₹ 2,57,76,000/- the Co-ordinate Benches of the ITAT in the case of assessee for the preceding years has decided the identical issue on identical facts and restricted the adhoc disallowance to the amount of ₹ 10 lacs and ₹ 15 lacs for assessment year 2008-09 and as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2398/Ahd/2012 dated 19.11.2015 in the Gujarat Alkalies Chemicals Ltd. wherein the Tribunal sustained a lumpsum disallowance as against the disallowance made by the A.O. applying rule 8D of Income tax rule r.w.s. 14A of the Act as the assessee provided audited financial statement and no specific disallowance u/s. 14A of the Act was appearing in the Auditors report and nothing erroneous was brought on record by the A.O.. 16. We therefore in the given facts and circumstances of the case as well as in light of the judgment and decisions referred above, find that in the instant appeals Ld. A.O. has mechanically applied 0.5% of the average investments to compute administrative expenses disallowance as per the rule 8D of Income tax rules without recording any satisfaction on his part which as per the provisions of section 14A of the Act isprecedent before applying rule 8D of IT Rules. However we find that assessee has made a minor disallowance suomoto at ₹ 40,281/- ₹ 50,281/- for A.Y. 2008-09 2009-10 even though the exempted income is at ₹ 14.77 crores 19.70 crores which by no canon can be a reasonable disallowance. Even in the preceding yearslumpsum disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l representative has supported the order of assessing officer. 13. We have heard both the sides and perused the material on record carefully. The claim of deduction of ₹ 37,36,68,000/- as liabilities as per Memorandum of Understanding with Workers was disallowed by the assessing officer on the ground that the liability was not crystalized during the year. The ld. CIT(A) has directed the assessing officer to allow such expenditure in the year in which the same was actually paid. After considering the material on record and the findings of the ld. CIT(A), we do not find any error in the order of the ld. CIT(A) directing the assessing officer to allow the claim of the assessee on payment basis . Therefore, this ground of appeal of the asssessee is dismissed. Ground No. 4 and 4.1 of assessee s appeal 14. The assessee has claimed business loss on trading of fertilizer bonds during the year under consideration. During the financial year 2008-09, the assessee was allotted fertilizer bonds of face value of ₹ 1065.72 crores in lieu of the subsidy receivables by the company. Out of the allotted bonds, bonds of the face value of ₹ 604.52 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact on the part of the Revenue authority that the assessee accounts for such subsidy receivable on accrual basis which is credited to the sales account and offered as income. This subsidy account is a running account and the amount receivable at the end of the year is shown as subsidy receivable on the asset side of the balance sheet. It transpires from the records that due to cash crunch ,Government of India at a certain point of time discharged its dues of paying the subsidy by replacing cash/cheque with the fertilizer bonds. These bonds are saleable in the open market and the prices of such bonds are varying. 32. We further find that against the subsidy income duly credited in the profit and loss account,assessee received fertilizer bonds. When these bonds were sold in the open market it fetched less value than the value at which they were given to the assessee.This gave rise to a loss which has been claimed as business loss. 33. It is true that these bonds were shown as investment in the Balance sheet.Before moving further we would like to go to the judgment of Hon ble Apex Court in the case of Patnaik and Co. Ltd. wherein a company subscribed for a Govern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee as business loss after verification of the year in which income was offered and the loss was occurred. Accordingly the appeal of the assessee is allowed for statistical purposes. Ground no. 5 5.1 of assessee s appeal 17. During the course of assessment proceedings, he assessing officer has noticed that assesse has debited an amount of ₹ 311.66 lacs in the P L account as prior period expenses. The assessing officer had disallowed the claim on the ground that assessee company was following mercantile system of accounting, therefore, it was not entitled to claim expenses of ₹ 311.66 lacs which was not related to assessment year 2010-11. 18. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee by stating as under:- 7.3 The above submission of the appellant has been considered. In respect of raw material consumption of ₹ 41,540/- and stores and spares consumption of ₹ 33,14,627/-, the appellant has submitted that these two amounts have been crystallized during the year under consideration. The appellant in its above submission dated 26/02/214 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts the claim of these two expenses of ₹ 31,57,966/- and ₹ 1,62,523/- cannot be allowed to be claimed for the year under consideration on the basis of crystallization as these two expenses were pertaining to FY 2008-09 and the same were ascertained and on the basis of mercantile system of accounting the same could have been claimed only in AY 2009-10. Similar is the case of expenses of ₹ 41,540/- and expenses of ₹ 10,981/- as these two expenses are also not pertaining to the year under consideration and on the basis of mercantile system of accounting the same were required to be claimed only during the year to which the same were pertaining. Considering these facts, the total addition of ₹ 35,40,342/- (i.e. ₹ 41,540/- + ₹ 33,14,627/- + ₹ 1,73,194/- + ₹ 10,981/-) as also shown by the appellant in the submission dated 26/02/2014 furnished in the form of chart and as is reproduced in preceding paragraph is hereby confirmed. 7.4 As regards appellant's claim of prior period expenses of ₹ 2,76,25,680/- it is submitted that the entire amount has been crystallized and accounted for during the accounting year relevan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration and thereby allowable as deduction during the year under consideration. 7.5 But the above submission of the appellant is not found to be acceptable. As per appellant's claim it had imported trading materials during FY 2008-09 and the said material was delivered during FY 2008-09 itself. But it is not explained as to what was the dispute between the appellant and the party from whom goods were purchased. How the disputes were arisen and how the same were settled down between the two parties are not explained and in this regard no any details and documentary evidences have been filed by the appellant. If the liability was ascertained and crystallized during the year because of any other reason then also such reason is required to be explained and evidences in this regard is required to be filed. No copy of correspondences between the appellant and the foreign party with regard to dispute arisen in respect of payment and also with regard to settling of such disputes are furnished. It is not explained as to how the original liability of the appellant on account of import of trading material was there and how the liability was finally determined subsequently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ortunity to the assessee. Accordingly, the appeal of the assessee is allowed for statistical purposes. Ground No. 6 6.1 of assessee s appeal 21. During the course of assessment proceedings, on verification of the records, the assessing officer has noticed that assessee has received interest on refund to the amount of ₹ 1,11,81,827/- which was not shown in the income of the assessee. In response, the assessee has explained that interest is not credited to the P L account because of appeal of the assessee for the year under consideration was pending in dispute before the ITAT. The assessing officer has not accepted this contention of the assessee. He has stated that assessee has received refund in the assessment year 2006-07 along with interest u/s. 244A which has been duly en-cashed by the assessee in the year under consideration and interest on refund for the year assessment year to the extent of ₹ 10714754/- has not been taken into income for the financial year 2009-10. The assessing officer has also noticed that for assessment year 200910 there was difference of amount of interest to the extent of ₹ 4,67,073/- which was not withdrawn has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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