Karun Carpets (P) Ltd., New Delhi vs Assessee

This appeal, preferred by the assessee, is directed against CIT(A)'s order dated 31-10-2012 relating to A.Y. 2009-10.

2. Facts of the case, in brief, are that the assessee in the relevant assessment year was engaged in the business of providing services for procurement of maize which was used in starch manufacturing companies. The assessee had filed return declaring total income of Rs. 1,25,52,516/-.

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The assessment was completed at a total income of Rs. 1,72,71,163/- after making following additions:

Addition u/s 14A Rs. 20,68,647/-

Addition on a/c of disallowance of Plane hire charges Rs. 26,50,000.

3. The assessee's appeal was dismissed by ld. CIT(A) on both counts after detailed discussion. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal:

"1. Ld. CIT(Appeals) has erred in upholding the disallowance made by the Ld. Assessing Officer of Rs. 23,70,597/- under section 14A of the Income Tax Act, 1961 against Rs. 3,02,310/- voluntarily disallowed by the appellant.

2. Ld. CIT(Appeals) has erred in upholding the disallowance made by the Ld. Assessing Officer of Rs 26,50,000/- incurred as travelling and conveyance expenses for hiring of charter plane for the Chairman of the Company."

4. Brief facts, apropos ground no. 1, are that from the balance sheet of the assessee the AO noticed that the assessee had made investment in quoted and unquoted equity shares and mutual funds. The total investment as on 31.03.2009 was Rs. 49,94,11,372/- and as on 31.03.2008 was Rs.44,89,71 448/-. The assessee has shown dividend income of Rs.1,68,68,500/- under the head other income from these investments, which was claimed as exempt u/s 10 of the IT Act. The AO further noticed from the computation of income that the assessee had disallowed a sum of Rs.3,02,310/- and added it u/s 14A while computing the taxable income for the year under 3 ITA no. 187/Del/2013 Karun Carpets P. Ltd. Vs. DCIT

consideration. He required the assessee to furnish the working on the basis of which the figure of Rs.3,02,310/- had been arrived at. The AO further show caused the assessee as to why disallowance in respect of expenditure incurred for earning of exempt income may not be calculated as per Rule 8D of the IT Rules. The assessee vide its reply dated 04.11.2011 submitted as under:-

"You have asked to show cause why disallowance be not made as per the method prescribed under Rule 80 of the Income Tax Rules. In this regard we would like to submit that the business of the assessee consists of two divisions, namely Operation Division and Investment Division for which separate books of accounts are maintained by the assessee. We are enclosing herewith the division wise Profit and Loss account of the assessee, where it can be seen that the for Investment Division, the assessee had claimed total expense of Rs.3,02,310/- which have been voluntary disallowed by the assessee u/s 14A of the Act. Hence no further disallowance is called for made u/s 14A of the Act."

The expenses of Rs. 3,02, 310/- are clearly indentified and explained through the books of accounts of the assessee which is also produced for your verification. Thus the assessee had voluntarily made the full and complete disallowance u/s 14A of the Act and hence no further disallowed shall be made u/s 14A of the Act."

5. The AO did not accept the reply for the following reasons:

The assessee explained that its business has two divisions namely 'operation division' and 'investment division', was not accepted because in the audited profit and loss account as filed with the return of income there were no separate divisions. Annexure III filed with the reply on plain paper, furnishing the details of Investment Division and Operation Division, was 4 ITA no. 187/Del/2013 Karun Carpets P. Ltd. Vs. DCIT

neither signed by any of the director or by the auditors to show that it has two divisions.

Annexure 3 was never the part of the audited account of the assessee. In view of above ad hoc disallowance made by the assessee was not acceptable and disallowance was to be calculated strictly in terms of the provisions of Rule 8D.

6. The AO accordingly worked out the disallowance as per Rule 8D at Rs. 23,70,957/- being .5% of average investment of Rs. 47,41,91,410/-. He, accordingly, made addition of Rs. 20,68,647/-.

7. Before ld. CIT(A) the assessee had, inter alia, submitted that it had explained the basis of determination of disallowance u/s 14A of the Act and had produced the evidences for examination by the AO. AO did not find any discrepancy or short coming in the books of a/c and did not express satisfaction to the effect that the claim of the assessee was incorrect and was not in order after examining the books of a/c and records. The assessee further submitted that the assessee company belonged to Thapar group and was engaged in the business of providing services for procurement of maize which is used for starch manufacturing companies, besides, having made investment in group companies for control purposes, which has been clearly shown in schedule 5 & 11 of the financial statement. It was further explained that since the assessee did not trade in shares and had just held them for control, it was not a separate business line of assessee. Therefore, the assessee did not file separate P&L a/c though it maintains the records separately for its own convenience. The shares coming into the company 5 ITA no. 187/Del/2013 Karun Carpets P. Ltd. Vs. DCIT

under consideration were held not for the purpose of trading but for the purposes of management control. The main thrust of the assessee's argument that in view of the decision of the Jurisdictional Delhi High Court in the case of Maxop Investments Ltd. Vs. CIT 203 Taxman 364 (Del.), the AO should have recorded his satisfaction in terms of section 14A(2) and (3) of the Act as to the (in) correctness of the assessee's claim of having incurred/ not incurred expenditure in relation to earning of exempt income. The AO is require to assign cogent reasons for arriving at such satisfaction. Assessee further submitted that the two terms "satisfaction" and "having regard to accounts" used in section 14A(2) of the Act are inter related and, therefore, AO should examine the books of a/c and on the basis of his examination of books of a/c arrived at a satisfaction that claim of the assessee is not correct and on being satisfied, he must state so giving cogent reasons for arriving at satisfaction of incorrect claim. The assessee further reiterated that since assessee held shares for control purpose only and not trading purpose, therefore, in the audited P&L A/c separate divisions had not been shown because this was not a separate business line of assessee.

8. As regards the AO's findings that Annexure 3 enclosed with the written submission was not part of the audited P&L A/c and not signed, the assessee submitted as under:

"We would like to state that the assessee does not maintain separate books and therefore it was not part of the financial statement. Moreover, the number specifies the annexure to the submission and not to the financial statement. We would also like to counter the second allegation that the annexure was not signed. It is hereby 6 ITA no. 187/Del/2013 Karun Carpets P. Ltd. Vs. DCIT

submitted that our covering letter was duly signed and it states that the annexure is enclosed. Therefore, there was no need to sign the annexure separately."

9. Ld. CIT(A) did not accept the assessee's contention, inter alia, observing that the investment had not been made from the common pool of funds and, therefore, the contention of the assessee that no interest expenditure had been incurred, does not hold good. He, accordingly, confirmed the computation of disallowance under Rule 8D following the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT 328 ITR 81 (Bom) and the decision of ITAT Delhi Special Bench in the case of Cheminvest Ltd. Vs. IKTO (2009) 121 ITD 318 (Delhi)(SB). He also relied on the decision of Hon'ble Supreme Court in the case of CIT Vs. Walfort Share & Stock Brokers Pvt. Ltd. (2010) TIOL-47-SC-IT.

10. Ld. counsel for the assessee reiterated the submissions made before lower revenue authorities and submitted that AO was proceeding with preconceived notion that disallowance has to be made under Rule 8D. The AO did not point out any discrepancy in the books of a/c or computation as submitted by assessee. He submitted that since the investments were made in order to have control over the companies, therefore, this could not be considered as a separate line of business, requiring segmental reporting. He submitted that AO without recording his satisfaction, as contemplated u/s 40A(2) & (3) 7 ITA no. 187/Del/2013 Karun Carpets P. Ltd. Vs. DCIT

resorted to compute the disallowance under Rule 8D. The assessee had given complete details along with his reply for computing disallowance u/s 14A. Ld. counsel has relied on the following case laws:

- Maxopp Investment Ltd. Vs. CIT 247 CTR 162 (Del.);

- CIT v. Hero Management Services Ltd. 360 ITR 68 (Del.);

- ACIT v. Bharti Teletech Ltd. 150 ITD 185 (Delhi ITAT);

- Priya Exhibitors (P) Ltd. V. ACIT 54 SOT 356 (Delhi ITAT);

- Raj Shipping Agencies Ltd. v. ACIT 146 ITD 277 (Mumbai ITAT);

- ACIT v. SIL Investment Ltd. 54 SOT 54 (Delhi ITAT);

- DCIT v. Jindal Photo Ltd. (ITA no. 814/Del/2011) (Del. ITAT); and

- DCIT Vs. DBH International (P) Ltd. [2015)] 55 Taxmann.com 424 (Delhi-Trib.).

11. Ld. DR referred to the assessment order and submitted that AO had recorded his satisfaction inasmuch as he had clearly observed that the audited P&L A/c, as filed along with the return of income, did not contain the details of expenses pertaining to separate divisions as claimed by assessee.

12. We have considered the rival submissions and have perused the record of the case. The issue that before resorting to Rule 8D, the AO is required to record his satisfaction regarding incorrectness of the claim made by the assessee, is no more res integra, as held by the Hon'ble Jurisdictional High Court in the case of Maxopp Investment Ltd. (supra). In the present case we find that AO merely rejected the assesse's claim on the ground that assessee had not given the segmental details in the audited P&L a/c though income 8 ITA no. 187/Del/2013 Karun Carpets P. Ltd. Vs. DCIT

had been shown under two heads, namely, commission received and other income. The AO did not accept the assessee's detailed explanation, as reproduced above, along with which the assessee had enclosed division-wise P&L a/c of the assessee and had clearly given basis of its claim regarding total expenses of Rs. 3,02,302/- being incurred for earning the exempt income. The AO did not consider this reply observing that this was not part of the audited account of the assessee and was also not signed by any of the director or by the auditors to show that it had two divisions.

12.1. Section 14A(2) clearly mandates that the AO should have regard to the accounts of the assessee and if from the accounts of the assessee he is not satisfied with the correctness of the claim, then only he can resort to rule 8D. If the assessee has furnished its explanation based on its accounts, then the explanation cannot be rejected merely because in the audited financial statement those details are not separately indicated. Segmental reporting is required where assessee is carrying on different lines of specific activities. However, where the investment has been made solely for the purpose of having control over the group companies, then this cannot be considered as a separate line of business. Therefore, we are in agreement with the ld. counsel for the assessee that the AO has not recorded the requisite satisfaction as mandated u/s 14A(2) and (3) of the Act. Before ld. CIT(A) detailed submissions were made on this count but we find that ld. CIT(A) has not even considered them and merely stated that investment had been made from the common pool of funds and, therefore, the contention of the assessee that no interest expenditure had been incurred, does not hold good.

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12.2. We fail to understand as to from where this finding has been recorded by ld. CIT(A), particularly when AO itself had not made any disallowance on the ground of allocation of interest expenditure. This clearly shows complete non-application of mind by ld. CIT(A) to the detailed submissions made before him by the assessee. The AO had merely made disallowance under Rule 8D(2)(iii) and not under clause (i) and (ii) of Rule 8D in regard to interest expenditure.

12.3. In view of above discussion, we delete the addition made by the AO and sustained by ld. CIT(A) on the issue in question. Ground is allowed.

13. Brief facts apropos ground no. 2 are that AO noticed from the P&L A/c that assessee had debited a sum of Rs. 30,35,477/- on account of travel and conveyance expenses, which, inter alia, included a sum of Rs. 26,50,000/- paid to Spain Air Ltd. for charter plane for chairman visit to Del-Trv-Mum-Pun-Mum from 21-10-2008 to 24.10.2008. The AO required the assessee to justify this expenditure. The assessee has filed its reply dated 4-11-2011 which is reproduced hereunder:

"You have asked for the justification of an amount of Rs. 26, 50, 000/- paid to Spain Air Ltd for the hiring of charter plane for chairman visit. In this regards we would like to state that the assessee company is promoting company of the operating companies under control of Mr Karan Thapar. This company has its major investment in Greaves Cation Ltd. & English Indian Clays Ltd Mr. Karan Thapar as group chairman visits the factories & offices to review the operations/performance of the companies for which they said expenditure on hiring the 10 ITA no. 187/Del/2013 Karun Carpets P. Ltd. Vs. DCIT

Charter plane was incurred. Thus the said expenditure relates to the business purpose. Hence it shall be business expenditure allowable under the provision of the Income Tax Act, 1961."

14. The AO did not accept the assessee's contention, inter alia, observing that since the expenditure has been incurred for review the operations/ performance of the group companies, the same could not be allowed as deduction from the income of the assessee company, as it was not incurred in connection with the business of the assessee company. He further pointed out that group companies are separate entities and any expenditure incurred to review the operation/ performance of those companies was not allowable in the hands of the assessee and should have been incurred by the said group companies.

15. Ld. CIT(A) confirmed the addition, inter alia, observing that assessee had not brought out any facts to show that the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee. On the contrary the AO has specifically brought on record the fact that the expenditure was not incurred in connection with the business of the assessee. Since the expenditure had been incurred to review the performance of the group companies, which were separate entities.

16. We have considered the submissions of both the parties and have considered the record of the case. Ld. Counsel for the assessee has filed before us a report from the "Times of India" dated 18-4-2015 to demonstrate that Gautam Thapar ld Avantha Group had security threat and, therefore, the 11 ITA no. 187/Del/2013 Karun Carpets P. Ltd. Vs. DCIT

Chairman chartered the plane for his visit. Ld. counsel has further submitted that Mr. Karan Thapar, Chairman had substantial interest in group companies and, therefore, he had gone to review the operations of Greaves Cotton Ltd and English Indian Clays Ltd. we are not inclined to accept the submission of ld. counsel for the assessee for the simple reason that, in any view of the matter, the expenditure was not at all relatable to assessee company but to Greaves Cotton Ltd and English Indian Clays Ltd. and, as rightly observed by AO, the same could be debited only in the accounts of the said companies and not in the accounts of the assessee company. Accordingly, we uphold the order of authorities below on this count. Ground is rejected.

17. In the result, assessee's appeal is partly allowed.

Order pronounced in open court on 22, 07,2015.

Sd/- Sd/- (H.S. SIDHU) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 22-07-2015. MP Copy to : 1. Assessee 2. AO 3. CIT(A) 4. CIT 5. DR (ITAT)