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TMI Blog2016 (1) TMI 1433X X X X Extracts X X X X X X X X Extracts X X X X ..... s./15 & 715/Mds/2015 [A.Y. 2010-11 & 2011-12] 2. These appeals are filed by the assessee against the different order of the ld. CIT(A), Chennai for the above assessment years. Since issues involved in all these assessee's appeals are common in nature, these appeals are clubbed together, heard together, disposed off by this common order for the sake of convenience. 3. The first ground raised in these appeals of the assessee is with regard to confirmation of disallowance of amount transferred to Statutory Reserve in compliance with the mandatory provisions of Reserve Bank of India. Similar issue came up for consideration before this Tribunal for the assessment year 2003-04 to 2009-10 in I.T.A. No. 1744/Mds/2012 dated 11.04.2013, wherein, the Tribunal has given its findings as follows: "4. We have perused the orders and heard the rival submissions. Vis-à-vis ground taken by the assessee on transfer to Statutory Reserve and transfer to Reserve Fund while computing income under regular provisions and for arriving at the income under Section 115JB of the Act, respectively, the issues had already come up before this Tribunal in assessees' appeals in I.T.A. No. 701/Mds/2012 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and material on record including the orders of this Tribunal cited supra. We find that an identical issue had been considered by this Tribunal in the said orders and the appeals of the assessees were dismissed. In I.T.A. Nos. 570, 571, 806 & 807/Mds/2008, while dismissing the appeals of the assessee, the Tribunal has observed as follows: "2.11 Now, we examine the present case on the anvil of above. By no stretch of imagination, it can be said that the amount sought to be deducted has in fact not reached the assessee. The amount involved is only an appropriation out of company's own profits before declaration of dividend. The amount has very much reached and is in the business of the assessee. RBI has not attached any obligation that the fund be kept in any earmarked security nor the purpose of utilization of the fund has been specified. Even if some obligation is subsequently attached for specific appropriation of the fund, it will only be an application of income, which will need to be dealt with as per relevant tax law. The transfer of Reserve Fund in this case can certainly not be called a diversion of income by overriding charge. 2.12. .............the ratio from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the above order, we dismiss the grounds of appeal of the assessees, both on the issue of regular computation and for computation of book profit insofar as it concerns transfer to Statutory Reserve and transfer to Reserve Fund respectively." 4. Respectfully following the above order, this ground of appeal of the assessee is dismissed. 5. The next ground raised in these appeals of the assessee is with regard to allowability of interest levied under section 234D of the Income Tax Act under section 36(1)(iii) or 37 of the Act whether the above amount has been utilized for the purpose of transaction. According to the assessee, the interest chargeable during the financial year 2009-10 relevant to the assessment year 2010-11 is a deduction while computing the business income. According to the assessee, interest under section 234D has been charged while withdrawing the refund already granted under section 143(1) of the Act. Since the assessee has utilized the refund amount for the purpose of business and while withdrawing the refund, interest has been charged, the refund amount takes the character of loan availed by the assessee, interest under section 234D has to be allowed as busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of Rs. 36,729/- towards indirect cost. Assessing Officer had rejectedsuch amount for the sole reason that the amount considered by the assessees were very low when it compared to total investments made by them. Nevertheless, it is also noted that assessees had in addition also made a suo motu disallowance of interest expenses on loans attributable to investments made by them. As already mentioned by us, similar issue had come up before this Tribunal in assessees' own case for assessment year 2008-09. It was held by this Tribunal at paras 12 to 17 of its order (supra) as under:- "12. We have heard both sides, perused the materials available on record and the decisions relied on by both counsels. In the case of ACIT vs. SIL Investment Ltd. (supra), the Delhi Bench of the Tribunal in its order in para 27 held as under: "27. In the present case, the AO did not bring any evidence on record to establish that any expenditure had been incurred by the assessee company for earning the exempt income. In the absence of such evidence, it was wrong on the part of the AO to proceed to compute disallowance of the expenses u/s 14A of the Act by merely applying Rule 8D(2)(iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the material on record. During the year, the assessee had earned exempt dividend income of Rs. 17,97,010/- in respect of investment made in mutual funds. In the return of income filed, a suo moto disallowance of expenses to the tune of Rs. 1,73,038/- had been made by the assessee u/s 14A of the Act. In the assessment order, the AO made a disallowance of Rs. 32,18,475/- by applying the method provided in Rule 8D of the I.T. Rules, 1962. This was done without pointing out any inaccuracy in the method of apportionment or allocation of expenses, as adopted by the assessee. All through, the assessee was maintained that the assessee was during the year, carrying on manufacturing activities at its manufacturing units at several places. Its head office was at Delhi. The assessee had maintained separate books of account for each unit. Common expenses incurred at the head office and the branches were attributed to all the units including the head office. Investment in mutual funds, which gave rise to exempt dividend income, was done through the head office. It was the case of the assessee that to earn such dividend income, no direct expenditure was required and no expenses were incurred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee's calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the AO is a prerequisite to invoke the provisions of Rule 8D of the Rules. The ld. CIT(A), therefore, erred in partially approving the action of the AO." 14. The Hon'ble Delhi High Court in a batch of appeals in the case of MAXOPP Investment Ltd. vs. CIT & Others (supra) elaborately dealt the issue of applicability of provisions of section 14A read with Rule 8D for the assessment years prior to the assessment year 2008- 09 and also the applicability of the said provision for the assessment years subsequent to assessment years 2008-09. The Hon'ble High Court in paras 29 to 31 and 36 to 40 held as under: 29. Sub-section (2) of Section 14 A 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D 30. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already mentioned above that by virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken. Do sub-sections (2) and (3) of Section 14A and Rule 8D apply retrospectively ? 32. ........ ............... ................. ................ 33. ........ ............... ................. ................ 34. ........ ............... ................. ................ 35. ........ ............... ................. ................ 36. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have also been introduced by virtue of the Finance Act, 2006 with effect from 01.04.2007. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139- 140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee claims that no expenditure has been incurred in relation to income, which does not form part of total income. The Hon'ble High Court held that sub-section (2) deals with cases, where the assessee specifies that expenditure had been incurred in relation to income, which does not form part of total income. The Hon'ble High Court held that if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in both cases, the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income, which does not form part of total income under a prescribed method, which is Rule 8D of the Income Tax Rules. The Hon'ble High Court further held that sub-sections (2) and (3) of section 14A are workable only with effect from the date of introduction of Rule 8D i.e. 24.03.2008 because prior to that date, there was no prescribed method and subsections (2) and (3) of section 14A remain unworkable. 16. Therefore, finding of the Assessing Officer that the claim of the assessee that it had not incurred any expenditure or it had incurred only so much expenditure is incorrect is a must for invoking the provision of sub-sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances, we are of the opinion that Assessing Officer erred in rejecting the disallowance suo motu made by the assessees and imposing on them a disallowance under Rule 8D(iii) of the Act. 6. In the result, we delete the disallowance made u/s.14A while computing income, both under normal provision as well as under provisions of Section 115JB of the Act." Accordingly, this ground of the assessee is allowed. 10. In the result, the assessee's appeal in I.T.A. Nos. 711/Mds/2015, 714/Mds/2015 715/Mds/2015 are dismissed and in I.T.A. No. 712/Mds/2015 is partly allowed. I.T.A. Nos. 868/Mds/2015, 869/Mds/2015, 870/Mds/2015 &871/Mds/2015 [A.Y. 2010-11] 11. The first ground raised in the appeal of the Revenue is with regard to deletion of disallowance made by the Assessing Officer with respect to royalty payment. The ld. CIT(A) has deleted the addition treating it as revenue expenditure. After hearing both parties, we find that similar issue was considered by the Tribunal in assessment year 2009-10 in I.T.A. No. 1899/Mds/2012 dated 11.04.2013, wherein the Tribunal has observed as under: "14. We have perused the orders and heard the rival submissions. The question is regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal before the ITAT for assessment years 2004-05 and 2005- 06. 18. The ld. DR has relied on the decision of Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd vs CIT, 224 ITR 342, in support of his ground. The ld.AR has supported the order of the ld. CIT(A). 19. We have gone through the decision relied upon by the ld. DR and have found that their Lordships of Supreme Court were actually considering a case of Composite Agreement which involved an agreement to implement a turnkey project right from providing design, etc. in establishing the factory and user of the technical know-how. Thereafter, Their Lordships of Supreme Court have clearly held that payment made for the user of the logo is always revenue in nature. While coming to the above conclusion, the Hon'ble Supreme Court has referred to its various decisions in this judgment which also favour the case of the assessee. We, therefore, do not find any force in this ground of Revenue as well." For the reasons mentioned above, we are of the opinion that disallowance of royalty was not warranted. CIT(Appeals) had justly deleted such disallowance. No interference is called for. 15. Ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Further, in the present case, the Assessing Officer has not examined as to whether the debt has, in fact, been written off, in the accounts of the assessee. This exercise has not been undertaken by the Assessing Officer. Hence, the matter is remitted back to the Assessing Officer for de novo consideration of the above mentioned aspect only, that too only to the extent of written off. Moreover, in our opinion, the facts of the assessee's case squarely fit into the ratio laid down by the above judgement of the Hon'ble Supreme Court rather than the order of the Tribunal in assessee's own case cited (supra). Being so, in our view, it is appropriate to remit back the entire issue to verify whether the debt is actually written off in the Audited books of accounts passing enough entries towards written off to the individual account and then only the assessee is entitled for deduction as bad debt provided the assessee fulfils the condition such as satisfaction of Income Tax Act as contemplated under section 36(2) of the Act. We, therefore, direct the Assessing Officer to verify the requirement of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lan was governed by guidelines issued by SEBI. On the facts thus found, the Tribunal held that it was not a case of contingent liability depending on the various factors on which the assessee had no control. The expenditure in this behalf was an ascertained liability, thus the expenditure incurred being on lines of the SEBI guidelines, there could be no interference in the relief granted by the Assessing Authority for the expenditure arising on account of Employees Stock Option Plan. This expenditure incurred as per SEBI guidelines and granted by the Officer could not be considered as erroneous one calling for exercise of jurisdiction under Section 263 of the Act." Considering the above decision, we do not find any reason to interfere with the order of CIT(Appeals). 23. Ground No.5 of the Revenue is dismissed." 16. Respectfully following the above order of the Tribunal, this ground of appeals of the Revenue is dismissed. 17. In the result, all these appeals of Revenue in I.T.A. Nos. 868/Mds/2015, 869/Mds/2015, 870/Mds/2015 &871/Mds/2015 are partly allowed for statistical purposes. Assessee's Appeal in I.T.A.Nos.716/Mds./2015 & 717/Mds./2015 & Revenue's Appeal in I.T.A.Nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the close of the Financial year i.e. 31st March only be disallowed by applying the provisions of Sec.40(a)(ia) of the Act. Accordingly we direct the ld. Assessing Officer to disallow the only amount which is outstanding at the end of the close of the previous year relevant to the assessment year and accordingly for limited purpose to verify the outstanding amount towards impugned amount at the end of the close of the previous year relevant to the assessment year, we remit the issue back to the file of the ld. Assessing Officer. 21. The other ground raised in the appeal of the assessee I.T.A No.717/Mds./15 is with regard to confirming the short allowance of credit for TDS. This issue we have already decided in ITA Nos. 711,712,714 & 715/Mds./15 in the earlier para No.7 of this order. Accordingly, this ground is dismissed. 22. In the result, both these appeals of Assessee in I.T.A. Nos. 716/Mds/2015 & 717/Mds/2015 are partly allowed for statistical purposes. Revenue's Appeal in I.T.A.Nos.866/Mds./2015 & 867/Mds./2015 23. The only issue raised in the appeals of the Revenue is with regard to deletion of addition of Rs. 84,15,300/- & Rs. 92,29,428/- made towards "Royalty Paid" for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital expenditure in the case of Shriram Chits Tamilnadu Pvt. Ltd, but after hearing the assessee's objections, he dropped the proceedings initiated u/s 263 of the Act. In the case of Shriram Chits Tamilnadu Pvt. Ltd, the ld. CIT(A) has accepted the claim of the assessee by holding that this expenditure as revenue in nature and the Department has accepted this finding of the ld. CIT(A) and has not filed further appeal before the ITAT for assessment years 2004-05 and 2005-06. 18. The ld.DR has relied on the decision of Hon'ble Supreme Court in the case of Jonas Woodhead and Sons (India) Ltd vs CIT, 224 ITR 342, in support of his ground. The ld.AR has supported the order of the ld. CIT(A). 19. We have gone through the decision relied upon by the ld.DR and have found that their Lordships of Supreme Court were actually considering a case of Composite Agreement which involved an agreement to implement a turnkey project right from providing design, etc. in establishing the factory and user of the technical know-how. Thereafter. Their Lordships of Supreme Court have clearly held that payment made for the user of the logo is always revenue in nature. While coming to the above con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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