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TMI Blog2019 (9) TMI 992X X X X Extracts X X X X X X X X Extracts X X X X ..... s and in the circumstances of the case, the Ld. CIT(A) has erred in law to hold that disallowance under section 14A read with rule 8D will not apply where no exempt income is received or receivable during the relevant previous year by ignoring the provision of Rule 8D that provides for computation of expenditure in respect of not only those investments income from which does not form part of total income but also those investments income from which share not form part of total income. 2. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in reducing the disallowance of Rs. 22,76,575/- to Rs. 4,831/- u/s. 14A read with Rule 8D cannot be made in a year in which no exempt income has been earned or received by the assessee without considering the CBDT's Circular no. 5/2014 dated 11.02.2014. 3. That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in reducing the disallowance of Rs. 22,76,575/- to Rs. 4,831/- u/s 14A read with Rule 8D by interpreting these provisions wrongly as taken up in previous two grounds. 4. The Ld.CIT (Appeals)-21/Kolkata erred in deleting the disallowance of Rs. 4,60,032/- on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading in shares & securities, selling and marketing of insurance products as commission agent and earned interest income against loans. During the year under consideration the assessee earned dividend income of Rs. 5,229/-, which the assessee claimed to be an exempt income u/s 10(34) of the I T Act. During the assessment proceedings, on being confronted regarding disallowance of expense relatable to earning of exempt income u/s 14A read with rule 8D, the assessee company submitted that no expense was incurred for earning exempt income and no borrowed fund was utilised for making investment in shares. However, the assessing officer rejected the explanation given by the assessee and held that assessee had failed to establish that no borrowed fund was utilised for making investment in shares. Therefore, assessing officer relying on the CBDT's Circular No. 5 of 2014, computed the disallowance u/s. 14A read with Rule 8D, which is given below: 1. The amount of expenditure directly relating to income which does not form part of total income = Nil 2. In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 01-04-2011 Closing Value as on 31-03-2012 1. HDFC CM Treasury Advantage Plan 18,24,636/- 1,07,639/- The Ld Counsel also pointed out that no new investment was made during the year in the dividend yielding scrip. On the other hand, investments worth Rs. 17,16,997/- were sold off during the year. Hence, no loan funds can be said to be diverted for the purpose of investment in the dividend yielding scrip and accordingly no interest expense can be disallowed in the present case. Therefore, the disallowance under Rule 8D (2) (ii) made by AO was without any base. So far the disallowance under Rule 8D (2) (iii) is concerned, only the dividend bearing securities can be considered. During the appellate proceedings, the assessee submitted the calculation of disallowance under section 14A read with rule 8D and ld CIT(A) having examined the calculation of assessee, restricted the disallowance to the tune of Rs. 4,831/-. Therefore, the disallowance, if any, should be restricted to Rs. 4,831/- only. 9. We have heard both the parties and perused the material available on record. We note that only the expenditure incurred in relation to exempt income can be disallowed u/s. 14A. In the pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DR for the Revenue submitted before us that Ld.CIT (Appeals) was erred in deleting the disallowance of Rs. 4,60,032/- ( Rs. 1,11,321 + Rs. 3,48,711) on account of delayed payment of employees contribution towards PF by wrongly invoking provision of section 43B of the Act which is relating to employer's contribution to PF while employees contribution to PF is governed by section 36(1)(va) read with section 2(24)(x) of the Act. Thus, ld CIT(A) deleted the addition without taking into consideration the position of law at present that both provisions are operative and contributions have to be paid in accordance with the provisions of law as contained under section 36(1)(va) of the Act and explanation thereto read with section 2(24)(x) of the Act for Employee's contribution and Employer's contribution comes under the provisions of section 43B of the Act. The ld DR also pointed out that the amount received towards contribution to the employee was money belonging to the employee and the assessee was not entitled to utilize the said fund and therefore, it is separately governed by the provisions of section 36(1)(va) read with section 2(24)(x) of the Act, hence addition made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oking Ltd [ 139 TTJ 192 (Kol)] ( which in turn relied on ITC Ltd [ 112 ITD 57 (Kol)(SB) where it was held that s. 43B does not apply to employee's contribution). However, the Tribunal declined to follow that law and allowed the appeal by relying on Sabari Enterprises [298 ITR 141 (Kar) and P.M. Electronics Ltd [ 220 CTR 635 (Del) where it was held that s. 43B applied also to employees' contribution to ESI and PF and that if a payment was made within the due date u/s. 139(1) of filing the ROI, the disallowance cannot be made. On appeal by the department to the High Court, HELD dismissing the appeal: "The only issue involved in this appeal is as to whether the deletion of the addition by the AO on account of employees' contribution to ESI and PF by invoking the provision of s. 36(1)(va) read with s. 2(24)(x) of the Act was correct or not. In CIT vs. Alom Extrusion Ltd 390 ITR 306 the Supreme Court has held that the amendment to the second proviso to s. 43(B) as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988. Such being the position, the deletion of the amount paid by the Employees' Contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the loan fund has been utilized for non-business purpose. In this regard a show-cause notice dated 19.03.2015 & 20.03.2015 was issued & served on the assesse requiring it to show cause as to why the said interest payment of Rs. 5,31,41,590/- should not be disallowed, being non-business expenditure. 19. In reply to the show cause notice the assessee submitted that as per Schedule 14 to the notes to accounts, details of 'Short term loans & advances' are given in the audited accounts and as per audited books of accounts a sum of Rs. 46,09,34,000/- is shown as 'share application money'. As far as advances of Rs. 4.62 crores are made, these advances have been given to associates/sister concern of the assessee company in the normal course of business out of the fund sourced from internal accruals like credit balance in sundry creditors viz BMA Wealth Creators Ltd. The assessee has taken interest bearing loan to the tune of Rs. 42.32 crores out of which Rs. 18.05 cores have been utilized on interest bearing advances and the rest of Rs. 24.29 crores have been used for business purpose in the form of dealing in shares and securities (including share application money, forming part of tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business, the expenditure shall be allowed. Accordingly, it was prayed by the assessee company that interest expenditure of Rs. 5,31,58,032/- be allowed. 20. However, the assessing officer rejected the contention of the assessee and noted that during the year under consideration the turnover of the assesse is Rs. 11.64 crores comprising business income of Rs. 22,476/- on the account of share trading and the balance amount is income from commission, interest on loan and income from other sources. Thus, the business income from share trading is negligible in comparison to commission income and income from other sources. The borrowed fund has been utilized for making payment in share application. Utilisation of borrowed fund in share application did not form part of stock-intrade. The assessee company's main source of income is commission and other sources income, therefore, the application of borrowed fund in share application is purely in the nature of investment. Thus, the borrowed fund utilized for payment towards share application money cannot be said to be applied for the purpose of business. Moreover, the nexus between the expenditure on account of interest and the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in share application money and interest free loans given was made out of own funds of the company and no part of the borrowed funds were diverted for the same. The Counsel submitted a copy of the assessment order for AY 2011-12. The ld Counsel also stated that during the current year, fresh investments were made of Rs. 27,09,74,000/- and Rs. 3,62,00,000/- which comes to a total of Rs. 30,71,74,000/- (Rs. 27,09,74,000 + Rs. 3,62,00,000). The said fresh investments of Rs. 30,71,74,000/- were not made out of interest bearing loan funds to warrant the disallowance of interest expenses. Therefore, the order passed by the ld CIT(A) on this issue should be sustained. 24. We have heard both the parties and perused the material available on record. We note that assessee company was availing stock broking services from BMA Wealth Creator Ltd, a sister concern of the assessee company. As such, the ledger of BMA Wealth Creator Ltd was grouped under the head "Trade Payables" in the books of the assessee. However, during the year, in the normal course of business, the assessee company had also received interest free advances from BMA Wealth Creator Ltd and part of these advances were repaid a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-12. The same is evident from the assessment order passed for the immediately preceding year i.e. AY 2011-12, wherein no disallowance of interest expense was made out of own funds of the company and no part of the borrowed funds were diverted for the same. We note that the Revenue has accepted same interest expenses based on the same facts and circumstances in the assessment year 2011-12, ( as noted above) as business expenditure and no any disallowance was made. (vide assessment order for A.Y. 2011-12-paper book page 77-80). It is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular's view or proposition in the past, it is not open for the Revenue to take a entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the Assessing Officer on the basis of change in facts. For that we rely on the order of the Hon'ble Supreme Court in RadhasoamiSatsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows: "We are aware of the fact that, strictly speaking, res judicata does not apply to income tax pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ire outstanding amount of Rs. 31,00,67,000/- was received by the assesse during the year as interest free advances from BMA Wealth Creator Ltd. Therefore, applying the ratio laid by the Hon'ble Bombay High Court in Reliance Utility and Powers Ltd. vs CIT 312 ITR 340 (Bom.) wherein their lordship held where the assessee is possessed of mixed funds which includes its own funds in sufficient quantity, the presumption that its own funds were utilized for the advances is to be drawn. We note that the Ld. CIT(A) has not appreciated the fact that the assessee had its own interest free funds which were received by the assessee during the year as interest free advances from BMA Wealth Creator Ltd. We note that in case there are both interest bearing loans and interest free loans a presumption would arise that investments were made out of the interest-free funds available with the company, if the interest-free funds were sufficient to meet the investments. For that we also rely on the judgment of the Hon`ble Calcutta High Court in the case of Woolcumbers of India Ltd vs CIT (134 ITR 219)(Calcutta High Court), wherein it was held as follows: "That, on the facts of the case, the profits were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression ''for the purpose of business" occurring in s. 10(2)(iii) and also in s. 10(2)(xv) is wider in scope than the expression "for the purpose of earning income, profits or gains" occurring in s. 12(2) and, therefore, the scope for allowing a deduction under s. 10(2)(iii) or s. 10(2)(xv) would be much wider than the one available under s. 12(2).- CIT vs. Malayalam Plantations Ltd. (1964) 53ITR 140 (SC) relied on." We note that section 10(2)(iii) of the old Income Tax Act, 1922 is similar to section 36(1)(iii) of the Income Tax Act, 1961. In view of the above we confirm the order of ld CIT(A) in deleting the addition of Rs. 3,59,52,944/-. 27. Ground No. 9 raised by the Revenue relates to deletion of disallowance of Rs. 30,68,635/- made by AO on account of sale promotion expenses. 28. Brief facts qua the issue are that during the year under consideration the assesse incurred Rs. 61,18,696/- towards sales promotion expenses. In order to verify the genuineness of transactions regarding business/sales promotion expenses notices u/s. 133(6) of the Act, were issued by AO on test check basis to the following parties at the given address provided by the assesse:- 1). M/s. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee relied on the submissions made before the authorities below. 31. We have heard both the parties and perused the material available on record, we note that during the year, the assessee had claimed sales promotion expenses to the tune of Rs. 61,18,696/-. In order to verify the genuineness of the expenses, show cause notice u/s 133(6) of the Act was issued on a test check basis by the learned AO to the following parties. 1) M/s Mahalaxmi Info Services - Rs. 18,20,155/- 2) Shri Amit Kumar - Rs. 8,32,343/- 3) Shri Rajiv Kumar- Rs. 4,16,137/- However, the above notices were returned unserved by the postal authority and accordingly AO made addition. We note that for marketing and selling the insurance products, the company has to perform various activities which include Lead Generation Activities, Direct Mailers Distributions, Road Shows and Customer Meets. However, instead of performing all these activities itself, the company used to hire vendors to provide these services. Accordingly, the above three vendors were also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenses are not genuine. The contention of the learned AO is based on sheer suspicions and conjectures without any material evidence on record. On the other hand, the assessee has duly submitted all the supporting vouchers in support of the sales promotion expenses incurred. In view of the above, we do not find any infirmity in the order of ld CIT(A). 32. We note that the AO has nowhere denied that expenditure under the head sales promotion is not to be accepted. AO's only objection is that expenditure under this head could not be verified u/s 133(6) of the Act. We note that Assessing Officer has not pointed out any specific defects in the books of accounts of the assessee. Moreover, the books of accounts have been duly audited, the details were submitted before the Assessing Officer. The Assessing Officer has not invoked section 145(3) of the Act and he has not rejected the books of account of the assessee. Under the circumstances, adhoc disallowance is without any basis. We note that the AO has brought on record anything to disprove the claim of the assessee. The only reason that the claim expenditure could not be verified by issuing notice U/s 133(6) should not be the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e only. Hence, it is quite obvious that the salary component would be high. Income from insurance business has been increased significantly during the year. The Company has received Rs. 6.73 crores as insurance commission and Rs. 3.03 crores as income from assisting in marketing of the products by the company and the same has been shown as other income. Salary paid during the year under review amounting to Rs. 7.82 crores is much lower as compared to income generated of Rs. 9.76 crores from this vertical. As discussed above, sale of insurance product is carried out with the help of personal net work and direct relationship with the customer. The employee has to move all around to procure the business hence there is no need of dedicated office. However, wherever this is needed company uses rent free office space of sister concern. 36. However, on perusal of the list of employees, the assessing officer noted that the name of particular employee was appearing more than once for a particular month. The number of employees against whom PF and ESI has been collected and deposited to the respective authorities are much below than the total strength of the employees who are on regular pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has deleted the impugned addition. Aggrieved, the Revenue is in appeal before us. 39. Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee relied on the submissions made before the authorities below. 40. We have heard both the parties and perused the material available on record, we note that assessing officer disallowed the expenditure incurred towards employee benefit of Rs. 7.82 crores solely on the reason that said expenses appeared to him to be excessive in comparison to the volume of business, the assessee company had. Thus, AO noted that it was an indicative that all the employees were not on regular pay roll and the assessee company claimed a bogus expenditure to some extent in the form of salary. The AO also noted the irregularity in deducting EPF and ESI in respect of number of employees. Therefore, 50% of expense towards salary was disallowed which comes to Rs. 3,86,08000/- (50% of Rs. 77215993/-). The ld Counsel submitted before us a brief note in respect of Employees` Providend Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st whom PF and ESI has been collected and deposited to the respective authorities are much below than the total strength of the employees who are on regular pay roll, is not correct. We note that there are many cases in the statement of salary where salary component are not for the full month and those are actually outside the purview ESI & PF. We further note that there are employees who have been recruited as trainees and have been paid stipend and the payment of the same has been clubbed with salary. The assessing officer failed to examine these areas and made addition on ad-hoc basis which is not acceptable. The assessee`s books of accounts are audited by chartered accountant and books of accounts of the assesse company are not rejected by the assessing officer therefore, we do not accept the ad hoc addition made by AO. The assessing officer failed to bring any cogent evidence on record to prove that salary expenses claimed by the assessee were inflated and bogus. 41. We note that assessee company is a non-banking financial company registered with Reserve Bank of India. Apart from carrying out NBFC activity, company is also a corporate agent of Birla Sun Life Insurance Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e increases the AO has his doubts. We note that assessing officer has not pointed out any specific defects in the books of accounts of the assessee. Moreover, the books of accounts have been duly audited, the details were submitted before the Assessing Officer. The Assessing Officer has not invoked section 145(3) and he has not rejected the books of account. The Assessing Officer has made a guess work and disallowed 50% salary which we do not accept. We note that assessing officer can not make an assessment based of pure guess, surmise and conjecture, for that we rely on the judgment of the Hon`ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. Vs. Commissioner of Income Tax, 26 ITR 775 (SC), wherein it was held as follows: "Though it is agreeable that the ITO is not fettered by technical rules of evidence and pleadings, and that he is entitled to act on material which may not be accepted as evidence in a Court of law, but there the agreement ends; because it is equally clear that in making the assessment under sub-s. (3) of s. 23, the ITO is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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