Rocket Engineering Corporation ... vs Assessee

Addl.CIT, Range-1, Kolhapur .. Respondent

Assessee by : Shri M.K. Kulkarni Department by : Shri B.C. Malakar Date of Hearing : 28-04-2015 Date of Pronouncement : 30-04-2015

ORDER

PER R.K. PANDA, AM :

This appeal filed by the assessee is directed against the

order dated 26-08-2013 of the CIT(A), Kolhapur relating to

Assessment Year 2010-11.

2. Grounds of appeal No.1 to 3 by the assessee are as under :

"Without prejudice to each other :

1) On the facts and circumstances of the case and in law the Ld. CIT(A) erred in confirming the addition of Rs. 34,10,881/- made by the A.O. invoking Ss. 36(1)(iii) and 40A(2)(b) of the Act without passing a 'speaking order' by properly dealing with the arguments of the appellant and solely relying on the A.O.'s version for A. Y. 2009-

10. Since the invoked provisions of S. 36(1)(iii) & 40A(2)(b) are not applicable to the facts of the case the addition confirmed by CIT(A) be deleted.

2) On the facts and circumstances of the case and in law the Ld. CIT(A) was not justified in confirming the addition made by the A.O. invoking the provisions of S. 36(1)(iii) r.w.s. 40A(2)(b) of the Act, saying that the assessee-company itself offered the same for taxation. The 'offering to tax' was under certain misconception of law. The addition is not sustainable and the same be deleted. 2

3) On the facts and circumstances of the case and in law the amount was offered to tax in A. Y. 2009-10 without appreciating the statutory presumption that the advances/loans covered by S. 40A(2)(b) were given out of own funds which are interest free. The income declared in the return itself exceeds the amount of loans paid to persons covered by S. 40A(2)(b). In view of the statutory presumption advances/loans were presumed to have been given out of the current income of the year on which tax is already paid which goes to build up the interest free funds. The addition of Rs.34,10,881/- is unwarranted and it be deleted."

3. The Ld. Counsel for the assessee at the outset submitted

that the issue stands decided against the assessee by the decision

of the Tribunal in assessee's own case for the immediately

preceding assessment year. We find the Tribunal in assessee's

own case vide ITA No.849/PN/2013 order dated 11-08=2014 for

A.Y. 2009-10 has decided the issue by observing as under :

"6. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer disallowed an amount of Rs.33,37,059/- being excess interest paid to the Directors, Members and related parties by invoking the provisions of section 40A(2)(b) of the I.T. Act. While doing so, he had also considered the offer of the assessee for addition of Rs.33,37,059/- for taxation . The assessee after giving in writing to the Assessing Officer regarding the reasons for payment of excess interest @21% to the specified persons has categorically stated that to buy peace of mind he wants to offer the interest paid over and above the bank rate for taxation. Therefore, having offered the same to tax in writing and by giving the individual details for calculating the disallowance the assessee is now agitating on the ground that there was misconception of law.

6.1 In our opinion, it is not a legal issue and is purely a factual issue. The Assessing Officer had clearly brought on record the rate of interest paid to outside creditors at 9%, to the banks at 14.75% and 21% paid to the related parties. Since there was huge difference between the rate of interest paid to the bank and the rate of interest paid to the related parties, the Assessing Officer had asked the assessee to justify the reasonableness of such huge interest paid to the Directors. The assessee had given the reasons and thereafter to buy peace of mind had offered the excess interest paid to tax. Therefore, there is no question of any legal misconception which the assessee had foregone by way of concession. It is purely a factual matter. Therefore, we do not find any merit in the grounds raised by the Ld. Counsel for the assessee challenging the disallowance of addition of Rs.33,37,079/-.

3 6.2 So far as the decisions relied on by the Ld. Counsel for the assessee are concerned, none of the case relates to a situation where the assessee having offered for taxation of the excess amount of interest has got relief. No doubt, the banks ask lot of formalities for sanctioning of loan which are not required for loans obtained from private parties. However, in the instant case, the assessee has also obtained loan from private parties and has paid interest @9%. The assessee itself has calculated the interest to be paid to the Directors and related parties @15.60% and offered the balance amount for taxation. Therefore, under the facts and circumstances of the case, the various case decisions relied on by the Ld. Counsel for the assessee are not applicable.

6.3 We further find that the assessee in the grounds has mentioned that it has sufficient interest free funds available which are far in excess of the loans advanced to persons covered u/s.40A(2)(b). In the instant case, there is no question of disallowance of interest on account of interest free advances given to related parties. It is a reverse case wherein the assessee has obtained the loan from related parties by paying exorbitant rate of interest for which the Assessing Officer disallowed the excess interest paid to the related parties by invoking the provisions of section 40A(2)(b) of the I.T. Act. Since the assessee itself has agreed for the addition of Rs.33,37,059/- to tax being excess interest paid to the related parties covered u/s.40A(2)(b), therefore, the CIT(A) in our opinion was fully justified in upholding the addition made by the Assessing Officer. The grounds raised by the assessee are accordingly dismissed."

4. Facts being similar, therefore, following the decision of the

Tribunal the above grounds by the assessee are dismissed.

5. Ground of appeal No.4 by the assessee reads as under :

"4) On the facts and circumstances of the case and in law the Ld. CIT(A) 1962. There is no finding to the effect that any expenditure was incurred for earning the exempt dividend income. The assessee-

company had sufficient non-interest bearing funds to make the investment on which the tax exempt income has been earned. In view of this no disallowance is called for u/s 14A of the Act r.w.r. 8D of I. T. Rules, 1962. The addition be deleted."

6. After hearing both the sides, we find the assessee company

has shown dividend income of Rs.2,25,517/- on account of

investment in shares in Indian Companies and claimed the same

as exempt u/s.10(34) of the I.T. Act. No expenditure has been

debited for earning this income before claiming the exemption.

On being questioned by the AO it was submitted that no

expenditure has been incurred for earning this income. Following 4

the order for the preceding assessment year the AO disallowed an

amount of Rs.93,288/- u/s.14A r.w. Rule 8D of the I.T .Act.

7. In appeal the Ld.CIT(A) upheld the action of the AO. While

doing so, he observed that no income is earned without making

any expenditure. According to him expenses have to be incurred

for observing the formalities while applying for shares, man hours

devoted by the staff deputed to keep account of investment, bank

charges etc. If assessee's case is that such expenses are less than

the amount of disallowance, he has to furnish the details of all

these expenses. Since the assessee has failed to do so, he held

that the AO was right in disallowing 0.5% of average investment

as expenditure attributable to earning of exempt income.

8. Aggrieved with such order of the CIT(A) the assessee is in

appeal before us.

9. We have considered the rival arguments made by both the

sides. We find an identical issue had come up before the Tribunal

in assessee's own case for the A.Y. 2009-10. The Tribunal vide

ITA No.849/PN/2013 order dated 11-08-2014 has dismissed the

grounds raised by the assessee by observing as under :

"10. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the CIT(A) and the Paper Book filed on behalf of the assessee. From the copy of the assessment order, we find on being questioned by the Assessing Officer to explain as to why proportionate disallowance should not be made for claiming the dividend income as exempt u/s.10(34), the assessee in its reply vide submission dated 17-08-2011 has replied as under :

" The company has earned a dividend of Rs.1,60,976/- from Indian Companies which is claimed as exempt u/s 10(34) of the I. T. Act. However, the expenditure incurred regarding the same is negligible and cannot be correctly ascertained".

10.1 We further find similar disallowances were made in the assessment orders passed for A.Yrs. 2006-07 and 2008-09 by the Assessing Officer and nothing was brought to our notice as to the outcome of such disallowance made by the Assessing Officer. The 5

relevant observations of the Assessing Officer at para 4.2 and 4.3 of the assessment order read as under :

"4.2 Since the explanation of the assessee as above was not acceptable in pursuance to the provisions of section 14A of the Act rwr 8D of the I, T. Rules, 1962, and further that disallowance was made in this regard in the assessment orders passed for A. Y. 2006- 07 and 2008-09 by the A.Os. on 05/12/2008 and 23/12/2010 respectively, vide Annexure to the notice u/s 142(1) of the Act dt. 30/08/2011, the assessee company was asked to explain as under:-

"Please refer to the assessment order passed for A. Y, 2006-07 and 2008-09 by the AOs on 05/12/2008 and 23/12/2010. Please state as to why identical view should not be taken for disallowance of interest on payments s towards share application money and also disallowance of proportionate expenses for exempted income (i.e. Dividend)".

4.3 In response to the above, the assessee company , vide submission dt. 12/09/2011, in Sr. No. 11, the assessee company replied as under:

"11. Regarding the disallowance of interest on share application money, I would like to state before your honour that, the share application . money paid for IPO's of various companies remain with those companies for a very short period, and dividend if any received on the shares allotted from such companies is credited in the books of accounts. I, therefore request your honour, not to disallow of interest on share application money. I also bring to your honors kind notice that, no heavy expenses have been debited towards exempted income (i.e. dividend) and therefore, I request your honour not to disallow any expenses in this regard."

10.2 Since the assessee itself had admitted that it has incurred certain expenses although the same is negligible which cannot be correctly ascertained and since certain additions were made during A.Y. 2006-07 and 2008-09 by the Assessing Officer u/s.14A and nothing has been brought on record as to the outcome of the same including the quantum, therefore, we do not find any infirmity in the order of the CIT(A) upholding the disallowance made u/s.14A r.w. Rule 8D for the impugned assessment year. The case decision relied on by the Ld. Counsel for the assessee is of no help to it in absence of giving full details and to explain as to how the said ratio is applicable to the facts of the present case. This ground by the assessee is accordingly dismissed."

10. In view of the order of the Tribunal in assessees own case

upholding the order of the CIT(A) on this issue in the preceding

assessment year and in absence of any contrary material brought

to our notice against the order of the Tribunal, we find no

infirmity in the order of the CIT(A). Accordingly, the same is

upheld and the ground raised by the assessee is dismissed. 6

11. Ground of appeal No.5 by the assessee reads as under :

"5) On the facts and circumstances of the case and in law the Ld. CIT(A) was not justified in confirming the ad-hoc disallowance of Rs.1,32,400/- made by the A. 0. The ad-hoc disallowance be deleted."

12. Facts of the case, in brief, are that the AO during the course

of assessment proceedings observed that the assessee has debited

an amount of Rs.13,23,995/- under the heads postage and

telephone, furniture repairs and maintenance and cartage. While

verifying the bills and vouchers, the AO noticed that some of the

expenses were not supported by proper vouchers and are

supported by self made vouchers which were not fully verifiable

as to the business nexus of the assessee. No telephone call

register was maintained to ensure that the entire expenses under

this head were incurred for the purpose of business. The AO,

therefore, disallowed 10% of the expenses on estimate basis being

personal in nature and accordingly made addition of

Rs.1,32,400/- to the total income of the assessee. In appeal the

Ld.CIT(A) upheld the action of the AO.

13. Aggrieved with such order of the CIT(A) the assessee is in

appeal before us.

14. After hearing both the sides, we find an identical issue had

come up before the Tribunal in assessee's own case in the

immediately preceding assessment year. The Tribunal vide ITA

No.849/PN/2013 order dated 11-08-2014 has restricted such

disallowance to 5% by observing as under :

"12. We have considered the rival arguments made by both the sides. There is no dispute to the fact that certain bills and vouchers were supported by only self-made vouchers and were not amenable for verification for which the Assessing Officer made adhoc disallowances. We find similar disallowances were made in the preceding year and the assessee has not objected to the same. However, none of the parties has brought to our notice regarding the 7

amount of disallowance. Considering the totality of the facts of the case, we are of the considered opinion that the disallowance at 10% on adhoc basis appears to be on the higher side. We therefore direct to restrict such disallowance to 5% of the expenses. We hold and direct accordingly. The ground raised by the assessee is accordingly partly allowed."

15. Following the same reasonings we direct the AO to restrict

such disallowance to 5% of the expenses claimed as against 10%

made by him and upheld by the CIT(A). This ground by the

assessee is accordingly partly allowed.

16. Ground of appeal No.6 by the assessee reads as under :

"6) On the facts and circumstances of the case and in law the levy of interest u/s 234A, 234B and 234C is not justified. The levy of interest be quashed."

17. After hearing both the sides, we are of the considered

opinion that levy of interest u/s.234A, 234B and 234C is

mandatory and consequential in nature. Therefore, this ground

by the assessee is dismissed.

18. Ground of appeal No.7 being general in nature is dismissed.

19. In the result, the appeal filed by the assessee is partly allowed.

Pronounced in the open court on 30-04-2015.

Sd/- Sd/- (VIKAS AWASTHY) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER satish Pune Dated: 30th April, 2015

Copy of the order forwarded to :

1. Assessee 2. Department 3. CIT(A), Kolhapur 4. CIT, Kolhapur 5. The D.R, "B" Bench 6. Guard File

By order // True Copy // Assistant Registrar ITAT, Pune Benches, Pune