Gulshan Polyols Ltd., , New Delhi vs Department Of Income Tax

Department by : Sh. Robin Rawal, Sr. D.R. Assessee by : None

Date of Hearing : 29-01-2015 Date of Order : 30-01-2015 ORDER

PER H.S. SIDHU : JM The Revenue has filed the present appeal against the impugned order dated 15/4/2013 passed by the Ld. Commissioner of Income Tax (Appeals)-XV, New Delhi on the following grounds:-

"1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 4,05,169/- made by the AO u/s. 14A r.w.r. 8D?

2. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in restricting the addition of Rs. 14,31,859/-

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made by the AO on account of disallowance of travelling expenses of the assessee to Rs. 5,90,464/- despite the fact that the Ld. CIT(A) has confirmed findings of AO regarding non maintenance and non furnishing of details of forex handed over to the directors and this fact itself is sufficient to prove utilization of currency for personal and non business purposes?

3. The appellant craves leave, to add, alter or amend any ground of appeal raised above at the time of the hearing."

2. The facts in brief are that the assessee is engaged in the manufacturing and marketing of sorbitol, liquid glucose and calcium carbonate. During the assessment proceedings, the Ld. AO observed that the appellant had made investment for earning dividend income and accordingly asked the appellant to explain as to why disallowance under section 14A may not be made. Therefore, invoking the provisions of Rule 8D disallowance of an amount of Rs. 405,169/- was made. Secondly, it was observed that the assessee had shown traveling expenses of Rs. 1,43,18,592/- which included foreign travel of the Directors and family members and accordingly, 10% of the total travelling expenses were disallowed for the element of personal use.

3. Being aggrieved with the assessment order dated 31.3.2009, assessee appealed before the Ld. CIT(A), who vide impugned order dated 15.4.2013 has deleted the part addition by partly allowed the appeal of the Assessee.

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4. Now the Revenue is aggrieved against the impugned order and filed the present appeal before the Tribunal.

5. Notice was sent to the assessee on the address given by it, however, none appeared on behalf of the assessee nor any request for adjournment is filed. In view of the above, we are of the considered opinion that no useful purpose would be served to adjourn the case again and again. Therefore, we are deciding the Appeal, exparte qua assessee, after hearing the Ld. DR and perusing the records available on record.

6. However, assessee has filed the Written Submissions dated 31.12.2013 and also filed a Paper Book containing pages 1 to 74 having the details/documents of the assessment and appellate stage.

7. At the time of hearing Ld. DR relied upon the order of the AO and reiterated the contentions raised by the Revenue in the grounds of appeal.

8. We have heard the Ld. DR and perused and considered the relevant record available with us specially the impugned orders passed by the Revenue Authorities; written submissions filed by the assessee alongwith the Paper Book. We find that Ld. First Appellate Authority has elaborately discussed the issues in dispute by considering the submissions of the Ld. Counsel of the assessee and adjudicated the issues in dispute as under:-

"6. Before me, the Ld. Appellate Counsel made detailed submissions. Regarding the Ground No.1 of the appeal, in respect of disallowance under section 14A, it was submitted that none of the investments 3 ITA NO. 4150/Del/2013

were made out of the borrowed funds. In this regard reliance was placed on the decision of Punjab and Haryana High Court in the case of CIT vs. Hero Cycles 323 ITR 518, in which the Hon'ble High Court has held that no disallowance under Section 14A is required unless there is evidence to show that interest free funds were invested in the investments which have generated the 'tax exempt dividend income.' The Ld. Counsel also informed that the company had made investment of RS.2 crores in the shares by utilizing the sale proceeds of investments earlier held by the appellant and therefore, pleaded that no borrowed funds were used for making investment on which disallowance under Section 14A could have been made.

6.2 On travelling expenses, vide Ground No.2 of the appeal, the appellant submitted that none of the family members of the appellant company travelled on company expense as was held by the Ld. AO. It was informed that the foreign travel expenses were incurred by company's Chairperson and Managing Director for their regular technology upgradation. It was informed that the Managing Director travelled to various European countries to hold discussion and to understand technology of setting up of site plan at Customer's Site in India which they set up with Magnum Paper, Sahibabad. It was submitted that there was no persona I element embedded in such expenses. Regarding the balance domestic expenses, it was submitted that the same was for

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business purpose and was allowable under Section 37(1} and no adverse observations were made by the auditors in this regard. The Ld. Counsel furnished travel-wise details of expenditure incurred by the Chairperson and the Managing Director of the company for various foreign visits.

7. I have carefully considered the facts of the case in the light of the submission made by the appellant and the applicable law in this regard. Regarding Ground No.1 of the appeal relating to disallowance under Section 14A, I find that the Ld. AO has applied the provisions of Rule 8D as a manner it was mandatory by law.

7.2 The provisions of Rule 8D are not applicable for each and every case and are to be applied only where the A.O. is not satisfied with the claim of the appellant, having regard to the account of the appellant in respect of such expenses which were actually incurred for earning tax exempt income. The Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. (supra) has held that the lack of satisfaction of the AO should be on cogent reasons. Therefore, before invoking Rule 8D, the AO ought to have pointed out any discrepancy in the claim made by the appellant, having regard to its accounts. In the absence of any cogent finding, the law does not allow the AO to use the provisions of Rule 80 in an automatic manner.

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7.2.2 In view of the above, I hold that the AO has not recorded any satisfaction before invoking Rule 8D on cogent reasons, as is the requirement under section 14A{2} as interpreted by the Hon'ble Delhi High Court in the case of CIT Vs Maxopp Investments Ltd. (64 DTR 122), as the claim of the appellant in this regard was not rejected by the Ld. AO on cogent grounds, the Ld. AO was not empowered to automatically invoke the provisions of Rule 80. In view of this, the addition made by the Ld. AO by invoking Rule 8D for making disallowance under section 14A is deleted.

7.3 Regarding the disallowance out of the travel expenses, I find that the AO has not identified any item of expenditure which was not allowable under Section 37{1} of the Act. He had observed that the Directors and family members have travelled abroad and by making such general observations, disallowance out of the entire travelling expenses {both foreign and domestic} was made equal to 10% of such expenses. The Ld. AR of the appellant furnished before me the details of foreign travel expenses, which show that such expenses were in respect of foreign travel of Dr. C.K. Jain, M.D of the company and Mrs. Mridula Jain, Chairperson and no other relative or family member has travelled at company's expense. Keeping in view the same, the very basis of the disallowance made by the Ld. AO was faulty. During the appellate proceedings I had asked the AR to furnish details of foreign travels

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along with its break up in air travel, hotel and other relevant expenses. I find that the appellant had incurred total amount of Rs.33,84,999 on account of foreign travel expenses. Out of this, an amount of Rs.4,32,075 was incurred towards air ticket expenses, while the balance amount of Rs.29,52,324 was for purchase of foreign exchange by the Chairperson/MD of the appellant company. The appellant did not furnish details in respect of the use of foreign currency purchased, for the purpose of business of the appellant company.

Keeping in view the same, 20% of the amount spent on purchase of foreign currency is being disallowed being for use for non-business purpose during the foreign travel.

Accordingly, the addition is confirmed to the extent of 5,90,464. The appellant, therefore gets relief of Rs.84l,394. In the absence of any adverse observation, domestic travel expenses are held as allowable to the full extent."

9. We find that CIT(A) has decided the issues in dispute in favor of the assessee after appreciating the evidence filed by the assessee as well as decision rendered by the Hon'ble High Court.

9.1 With regard to disallowance of expenditure related to

exempted income u/s. 14A Rule 8D is concerned, the provisions of

Rule 8D are not applicable for each and every case and are to be

applied only where the A.O. is not satisfied with the claim of the

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assessee, having regard to the account of the appellant in respect of

such expenses which were actually incurred for earning tax exempt

income. The Hon'ble Delhi High Court in the case of Maxopp

Investment Ltd. (supra) has held that the lack of satisfaction of the

AO should be on cogent reasons. Therefore, before invoking Rule

8D, the AO ought to have pointed out any discrepancy in the claim

made by the appellant, having regard to its accounts. In the absence

of any cogent finding, the law does not allow the AO to use the

provisions of Rule 8D in an automatic manner. Therefore, we find

that Ld. CIT(A) has rightly observed that the AO has not recorded

any satisfaction before invoking Rule 8D on cogent reasons, as is the

requirement under section 14A{2} as interpreted by the Hon'ble

Delhi High Court in the case of CIT Vs Maxopp Investments Ltd. (64

DTR 122), as the claim of the assessee in this regard was not

rejected by the Ld. AO on cogent grounds, the Ld. AO was not

empowered to automatically invoke the provisions of Rule 8D.

Therefore, the Ld. CIT(A) has deleted the addition made by the AO.

In view of the above, we are of the view that no interference is

called for in the well reasoned order passed by the Ld. CIT(A), hence,

uphold the same by dismissing the appeal filed by the Revenue.

9.2 With regard to ground related to restricting the addition of

Rs. 14,31,859/- made by the AO on account of disallowance of

travelling expenses of the assessee to Rs. 5,90,464/- is concerned,

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We find Ld. CIT(A) has found that the AO has not identified any item

of expenditure which was not allowable under Section 37{1} of the

Act. AO had observed that the Directors and family members have

travelled abroad and by making such general observations,

disallowance out of the entire travelling expenses {both foreign and

domestic} was made equal to 10% of such expenses. The Ld. AR of

the assessee furnished before the CIT(A) the details of foreign travel

expenses, which show that such expenses were in respect of foreign

travel of Dr. C.K. Jain, M.D of the company and Mrs. Mridula Jain,

Chairperson and no other relative or family member has travelled at

company's expense. Keeping in view the same, the very basis of the

disallowance made by the Ld. AO was faulty. We find that during the

appellate proceedings Ld. CIT(A) asked the AR to furnish details of

foreign travels along with its break up in air travel, hotel and other

relevant expenses. Ld. CIT(A) found that the assessee had incurred

total amount of Rs.33,84,999 on account of foreign travel expenses.

Out of this, an amount of Rs.4,32,075 was incurred towards air ticket

expenses, while the balance amount of Rs.29,52,324 was for

purchase of foreign exchange by the Chairperson/MD of the

appellant company. The Assessee did not furnish details in respect

of the use of foreign currency purchased, for the purpose of

business of the appellant company. Keeping in view the same, 20%

of the amount spent on purchase of foreign currency is being

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disallowed being for use for non-business purpose during the foreign

travel. Accordingly, the addition is confirmed to the extent of

5,90,464. The Assessee, therefore gets relief of Rs.84l,394. In the

absence of any adverse observation, domestic travel expenses are

held as allowable to the full extent. In view of the above, we are of

the view that no interference is called for in the well reasoned order

passed by the Ld. CIT(A), hence, uphold the same by dismissing the

appeal filed by the Revenue.

10. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Open Court on 30/01/2015.

Sd/- SD/-

[J.S. REDDY] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER

Date 30/01/2015 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant - 2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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