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TMI Blog2019 (1) TMI 1913X X X X Extracts X X X X X X X X Extracts X X X X ..... lated to advances to suppliers for purchase of material, staff advances, security deposit etc. - AO observed that only bad debt incurred due to sale of produce were allowable as an expense and in the instant case of the assessee the nature of expenses do not fall within the purview of section 36(1)(Viii), therefore, he has disallowed these expenses and added to the total income of the assessee - HELD THAT:- As observed that as per the ledger account of the assessee in the case of M/s Sellora Enterptise it had purchased finish goods on principle to principal basis and also paid to the supplier on their behalf. The assessee was purchasing the goods since April 2006 from the said party and also paid to the supplier on their behalf, however, the balance turned to debit which was not paid by the said party therefore it was written off in the books. In respect of staff loan the assessee has advanced loan during the period of services of the employees and monthly recovery of loan was also made from the salary paid but the company could not recovered final settlement amount against due to resignation of its employees. Therefore, the company has written off of the unrecovered amount. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Disallowance on account of administrative expenses incurred towards earning exempt income - HELD THAT:- As noticed that assessee was having sufficient interest free fund as against the investment made on which exempt income was earned. We have gone through working of disallowance made u/s. 14A r.w. Rule 8D of the I.T. Rule and it is noticed that major part of the disallowance was made by the assessing officer to the amount of ₹ 20,57,946/- being 0.5% of the average investment for administrative expenditure. After considering the nature of investment made in the form of Bonds securities we are of the view that it will be appropriate to restrict the disallowance on account of administrative expenses incurred towards earning exempt income. - 2334/Ahd/2015, 2397/Ahd/2015, 3666/Ahd/2015, CO No. 04/Ahd/2016 (In ITA No. 3666/Ahd/2015), 3667/Ahd/2015 and CO No. 05/Ahd/2016 (in ITA 3667/Ahd/2015) - - - Dated:- 30-1-2019 - Shri Rajpal Yadav, Judicial Member And Shri Amarjit Singh, Accountant Member For the Revenue : Shri Lalit P. Jain, Sr. D.R. For the Assessee : Shri P.F. Jain, A.R. ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:- These four appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee has debited an amount of ₹ 1,56,13,031/- as liability for damaged goods under the head other expenses. On verification of the past record of the assessee, the assessing officer noticed that claim on account of liability for damaged goods has been disallowed for assessment year 2003-04 to 2009-10 and accordingly the assessee was asked to show cause why this claim be not disallowed for the year under the consideration as in previous year. The assessee made detailed submission and contended that this expenditure was allowable as per decision of Tribunal in the case of the assessee itself. The assessee has also referred the decision of Supreme Court in the case of Rotork Control India Pvt. Ltd. vs. CIT, Chennai (180 taxman 422) wherein the supreme Court has held that such type of liability by way of provisions will be allowable. The assessing officer has not accepted the submission of the assessee stating that similar submissions were made during the course of earlier assessment years wherein the assessee had relied primarily on the Central Government Notification no. 9949 dated 25th Jan, 1996 and the decision of Supreme Court in the case of Rotork Control India Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect him to adjudicate the issue afresh in light of the decision of the Tribunal quoted above and after allowing proper opportunity of hearing to the assessee. Thus, this ground of appeal of the Revenue is allowed for statistical purposes. It is seen that during the year under consideration appellant had made provision of Rs. ₹ 1,89,45,235/-under the head liability for damaged goods . In view of the decision of Hon'ble ITAT for A.Y. 2005-06, A.O. is directed to verify the actual expenditure incurred in the subsequent year by the appellant out of the said amount of Rs. ₹ 1,89,45,235/-, if expenditure is equal to or more than the said amount, the A.O. shall delete the entire disallowance. If the actual expenditure is less than the said sum, disallowance of the extent of shortfall will survive and balance disallowance will be deleted. Hon'ble ITAT, Ahmedabad in ITA No.2491/Ahd/2009 for AY 06-07 in the appellant case has, followed its earlier decisions and given the decision, in appellant favour. Thus, subject to verification, this ground of appeal is allowed. Honourable ITAT Ahmedabad has further adjudicated that since Id. CIT appeal has followed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue is squarely covered by the decision of the Tribunal in assessee s own case for previous years, the facts being exactly identical in the case on hand also. 7. It is required to be noted that there is a change in the method of accounting employee}.during the years under review from that of employed during the immediately preceding year. We have also considered the Government Notification No. 9949 dated 25.01.1996 whereby certain accounting standards for assessees following mercantile system of account have been made compulsory from A.Y. 1997-98 and find that the case of the assessee is covered by the same. The decisions cited by learned advocate for the assessee also applies on the facts and circumstances of the present case. 8. The Apex Court in the case of Rotork Controls India (P.) Ltd (supra) observed that a provision is a liability which can be measured only by using a substantial degree of estimation and that a provision is recognized when (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation and (c ) reliable estimate can be made of the amount of the oblig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding as quoted above in the A.Y. 2003-04 and 2004-05. The revenue j/n those years had accepted the finding of the learned Commissioner of Income-tax (Appeals) and had not filed appeal before the Tribunal against the finding of the learned Commissioner of Income-tax (Appeals). The learned Departmental Representative could not point out any distinguishing features in the above year under appeal. Therefore, we do not find any good reason to interfere with the order of the Learned commissioner of Income-tax (Appeals) which is confirmed and the ground of appeal of the revenue is dismissed. Therefore, respectfully following the Hon'ble Tribunal decision, A.O. is directed to delele the above addition on non-compete territory right for the year under appeal i.e. assessment year 2010-2011. Accordingly, this ground of appeal is allowed subject to the final decision of Hon'ble Gujarat High Court. 10. We have heard the rival contentions and perused the material on record on this issue. During the course of appellate proceedings, it was brought to our notice that he Co-ordinate Bench of the ITAT Ahmedabad vide ITA No. 574 575/Ahd/2013 for assessment year 2005-06 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut principles of consistency do play an important role in all walks of life as much as in the income tax proceedings. As observed by Hon'ble Supreme Court, in the case of Parashuram Pottery Works Ltd Vs ITO [106 ITR 1), ......we have to bear in mind that the policy of law is that there must be a point of finality in all legal proceedings, that stale issues should not be reactivated beyond a particular stage and that lapse of time must induce repose in and set at rest judicial and quasi-judicial controversies as it must in other spheres of human activity... . In any case, there is not even a whisper of the reason for corning to the conclusion, on merits, as to why the depreciation on the intangible assets in question has been declined. We have no occasion to deal with the merits, and the case of the Assessing Officer simply hinged on the outcome of Hon'ble High Court's decision for the assessment year 2002- 03 but then this judgment is, as evident from our perusal of the same, is not on merits at all. In three subsequent assessment years also, this disallowance is deleted by the CIT(A), action confirmed by a coordinate bench of the Tribunal in one of the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the submissions of the Id. AR. I have also gone through the decisions relied on by the Id. AR. Appellant is engaged in the business of manufacturing and trading of Fruit Drinks concentrate under the brand name Rasna . The appellant had advanced At the beginning of the year on 01/04/2009, the advance to Status Enterprise was ₹ 7,03,377/- and during the mid of the year under consideration further advance of ₹ 30 was given to purchase the goods for the forthcoming season however it was not happened and thereby advance became irrecoverable. Assessee also granted educational loan to Mr. O.P. Sharma and also given the advance to meet Various expanse's in performing the job outside Head quarter. From the copy of ledger account filed it is seen that ₹ 2,72,981/- comprises of interest and loan advanced to Mr. O.P.Sharma during the period of his service with the assessee. It is also seen that monthly recovery of loans is also made from the salary paid but company could recover only final settlement amount against the balance due to him on his resignation likewise in case of Mr. Pramod Vasvani also assessee had advanced loan during his employment with company and reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and small parts related to staff advance of ₹ 6,48,406/ freight deposit of ₹ 28,928 and security deposit of ₹ 90,800/. The assessee was engaged in the business of manufacturing and trading of fruit drinks and used to get the goods manufactured through job work and on a principal to principal basis. With the assistance of the ld. counsel we have gone through the material on record and observed that as per the ledger account of the assessee in the case of M/s Sellora Enterptise it had purchased finish goods on principle to principal basis and also paid to the supplier on their behalf. The assessee was purchasing the goods since April 2006 from the said party and also paid to the supplier on their behalf, however, the balance turned to debit which was not paid by the said party therefore it was written off in the books. In respect of staff loan the assessee has advanced loan during the period of services of the employees and monthly recovery of loan was also made from the salary paid but the company could not recovered final settlement amount against due to resignation of its employees. Therefore, the company has written off of the unrecovered amount. The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of Sec.41(1) of the I.T.Act. In my considered view the provisions of Sec.41(1) can be invoked, if the following conditions are fulfilled :- (i) In the assessment of an assessee, an allowance or deduction has been made in respect of any loss, expenditure or trading liabilities incurred by the appellant. (ii)(a) any amount is obtained in respect of such loss or expenditure, or ' (b) any benefit is obtained in respect of such trading liability by way of remission or cessation thereof., (iii) such amount or benefit, is obtained by the assessee and (iv) such amount or benefit is obtained in a subsequent year! 8.2 To invoke provisions of sec.41(1), the above said conditions should be fulfilled. It is specifically held by the Hon'ble Jurisdictional High Court in the case of CIT vs Pranlal P.I Doshi (1993) reported at 201 ITR 756 (Guj) and CIT vs Bharat Iron Steel Industries (1993) 199 ITR 67 (Guj;), that Sec.41(1) jcreates a legal fiction. Therefore, facts necessary by way of condition precedent for raising the legal fiction have to be established first and they can be established only on the basis of evidence On record. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween the parties on account of which payment has been held. Similarly in the provision of expenses, there was outstanding balance being C/F in the account of following parties:- 1. Polad Traders Pvt. Ltd. ₹ 35,19,844/- 2. Milap Agency ₹ 3,l 7,426/-. 3. TPH Sons ₹ 22,01,529/- After considering the decision of on the Hon ble jurisdictional High Court of Gujarat in the case of Commissioner of income tax -3 versus Bhogilal Ramjibhai Atara (2014)43 taxmann .com 55( Gujarat) it is noticed that there was nothing on record to suggest that there was a remission or cessation of liability that too during the previous year relevant to the assessment year in the case of the assessee. In the light of the above facts, material on record and detailed finding of the learned CIT appeal we considered that outstanding were disputed liability was not ceased to exist, therefore, we do not find any infirmity in the decision of the Ld. CIT(A) therefore the appeal of the revenue is dismissed. 17. In the result, appeal ITA 2397/Ahd/2015 filed by revenue is dismissed. ITA No. 3666/Ahd/2015 filed by revenue 18. On identical issues and facts the Ground nos. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provisions of sec. 14A(2) further provides that the A.O. shall make disallowance for the purposes of sec.14A as per the provisions of rule 8D of I. T.Rules, 1962. This way, provisions of sec. 14A r.w. Rule 8D are mandatory and in my considered view the A.O. had rightly followed provisions of sec.14A r.w. rule 8D of the I.T.Rules, 1962. It is also a matter of record that the appellant has not pointed out any defect in the computation of disallowance as per the provisions of rule 8D as adopted by the Ld. A.O. The A.O. has kept the directions of CIT(A) given in earlier years while calculating disallowance under rule 8D. Accordingly, the computation for disallowance u/s. 14A as adopted by the A.O. is taken correct for the purpose of this order. 4.4 It is seen that Id AR has relied upon various cases. A Perusal of these cases reveals that the Hon'ble IT AT allowed the appeal of the appellant as the A.O. has not recorded his satisfaction that the expenses claimed by the assessee is incorrect and the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest bearing funds. In view of these facts I am not inclined to agree with the contentions of the Ld. A.R. The appellant also contended that disallowance u/s. 14A should be made on net interest and not at the gross interest expenditure. I am also not inclined on this issue with the appellant since section 14A refers to interest expenditure on rent, taxes, salaries, interest etc. in respect of which allowances are provided for. These deductions are for the debits in the real sense. The pay back does not constitute expenditure incurred in terms of section 14A. In view of these facts, I hold that disallowance for the purpose of section 14A is to be made against interest expenditure debited in the Profit Loss account. This way, I am inclined to agree with the disallowance made by the Id. A.O. Further in the case of M/s. Dhanuka Sons 339 ITR 319 Hon'ble Kolkata High Court has held that, it is for the assessee to show thq source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. Hon'bie Ahmedabad Bench in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the firm and partners are separately assessable to tax, despite the position of law under the Partnership Act that the firm is a compendium or collective name. The CBDT has recently issued circular no 5/2014 dated 11 February 2014, through which it has taken view that disallowance of expenditure for earning exempt income under section 14A read with rule 8D would be attracted even if the corresponding exempt income has not been earned during the financial year, thereby superseding a few decisions rendered in this regard. In view of detailed discussion in above paragraphs, the contention of appellant is not acceptable. The stand taken by the A.O. of applying rule 8D is accordingly found to be correct. The appeal on this ground is dismissed. Respectfully following the decision of my predecessor for A.Y.2010-11, the contention of the appellant is not acceptable. The step taken by A.O. for application of rule 8D is the correct method and way forward for quantifying the disallowance U/S.14A r.w. Rule 8D. However the A.O. is directed to recalculate the disallowance u/s. 14A, r.w. Rule 8D correctly taking into consideration the correct figures as submitted by the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- and income from tax free Bonds of ₹ 27,36,234/- claimed as exempt. The assessing officer has asked the assessee why the expenses incurred for earning of exempt income should not be disallowed under section 14 A of the act. The assessee s explained that no expenses was incurred in earning tax-free income therefore no disallowance was made under section 14 A of the act. The assessing officer's has not accepted the explanation of the assessee and stated that similar disallowance on similar issue was also made in the earlier assessment. Thereafter, the assessing officer has worked out disallowance as per section 14A rw Rule 8D to the amount of ₹ 23,82,284/- and after reducing an amount of ₹ 80,490/- already disallowed by the assessee itself and added the remaining amount of ₹ 23,01,794/- to the total income of the assessee. 26. Aggrieved assessee has filed appeal before ld. CIT(A). The ld. CIT(A) has dismissed this ground of appeal of the assessee. Relevant part of the decision of ld. CIT(A) is as under:- 4.2 I have carefully considered the rival contentions. I have also perused various case laws relied upon by the appellant. It is seen that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as enough interest free funds which far exceed the investments made by him, therefore, no allocation of interest expenditure can be made towards earning of interest free income. In this regard, it is seen from the assessment order that appellant has not furnished any evidence to show that investments were made from interest free funds. This issue has been dealt in the case of Gujarat Gas Financial Services Ltd., Hon'ble Special Bench of ITAT Ahmedabad 115 ITO 218 the issue of disallowance u/s.14A has been discussed in para 101 of the order of the Hon'ble ITAT Special Bench as under :- there is no dispute and there cannot be any doubt, that some expenditure is incurred for making or earning from dividend. In case of Mixed Accounting the expenditure is not identified as such is directly is relate to earning of dividend. But that cannot be aground to say that no expenditure is incurred for earning dividend income or that no expenditure could be related to that income. Upon hearing both parties and considering material available on record interest of justice will be served if 10% of the expenditure is allocated for earning dividend and disallowed u/s. 14A of the I.T. Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny exempt income in AY 2007-08. ITAT noted that while disposing the appeal for the earlier year, the ruling of the Special Bench in Cheminvest was not considered by ITAT and hence, that ruling was incorrect. In the earlier year, ITAT had held that the disallowance for interest paid on loans borrowed for making investment in shares was not applicable, as the assessee did not earn any dividend from such investment. In the case of Technopack Advisors P Ltd K2012) 50 SOT 31 (Delhi)(URO)1it is held that Even if the investment in {shares did not yield any dividend in the year under consideration, the disallowance u/s14A on the expenditure incurred for earning income was disallowable, notwithstanding the fact that no such income was earned. Honable Kerala HC in case of Popular Vehicles Services Ltd [(2010)325 ITR 523 (Ker)1 has held The assessee borrowed funds from banks, which were diverted to partnership firms, in which it was a partner. HC noted that the assessee did not receive any interest from those firms. The only benefit derived was share of profit, which was exempt u/s 10(2A). HC sustained the disallowance of interest by invoking provisions of Sec.14A. similarly in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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