Thriveni Earth Movers Private Ltd., ... vs Assessee

This appeal of the assessee is directed against the order of

Commissioner of Income Tax (Appeals), Salem, dated 28.11.2014

and pertains to assessment year 2011-12.

2 I.T.A. No.308/Mds/15

2. The first issue arises for consideration is with regard to

disallowance of expenditure incurred by the assessee for earning

exempted income under Section 14A of the Income-tax Act, 1961

(in short 'the Act').

3. Shri G. Baskar, the Ld.counsel for the assessee, submitted

that the Assessing Officer has disallowed `91,28,736/- being the

expenditure incurred for earning exempted income. According to

the Ld.counsel, the assessee has incurred direct expenses towards

wages and salaries to the extent of `13,19,500/-. The Assessing

Officer has also estimated the proportionate interest on the average

investments to the extent of `38,47,355/-. According to the

Ld.counsel, the assessee has not received any dividend income

from four companies. Therefore, there is no justification in

disallowing any claim of the assessee. The Ld.counsel placed his

reliance on the decision of this Bench of the Tribunal in ACIT v. Mr.

M. Baskaran in I.T.A. No.1717/Mds/2013 dated 31.07.2014. The

Ld.counsel further submitted that apart from mutual funds, the

assessee has invested funds in its subsidiary company which is

also in the nature of same line of business as that of the assessee.

According to the Ld.counsel, no investment was made with an

intention to earn dividend income. According to the Ld.counsel, the 3 I.T.A. No.308/Mds/15

intention was to diversify the business through sister concern.

Therefore, according to the Ld.counsel, the provisions of Section

14A of the Act are not applicable. The Ld.counsel has placed

reliance on the decisions of this Bench of the Tribunal in EIH

Associated Hotels Limited v. DCIT in I.T.A. No.1503/Mds/2012

dated 17.07.2013 and Mumbai Bench of this Tribunal in ACIT v.

Smart Chip Ltd. (2014) 41 CCH 0392 and J.M. Financial Ltd. v.

Addl. CIT in I.T.A. No.4521/Mum/2012 dated 26.03.2014. The

Ld.counsel has also placed reliance on the decision of Interglobe

Enterprises Ltd. v. DCIT (2014) 40 CCH 022. The Ld.counsel

submitted that the Assessing Officer may be directed to exclude the

investment made in share capital of the subsidiary company M/s

Maa Tarani Logistics Ltd.

4. Shri G. Baskar, the Ld.counsel further submitted that the

Assessing Officer has disallowed a portion of the salary applying

Rule 8D of the Income-tax Rules, 1962 to the extent of .5% of

average investments. The Ld.counsel submitted that no borrowed

funds are utilized for making investments. According to the

Ld.counsel, only the investment in the exempted asset should be

reckoned and not the entire investments in shares and mutual

funds. The Ld.counsel placed his reliance on the judgment of Delhi 4 I.T.A. No.308/Mds/15

High Court in the case of ACB India Limited v. ACIT in ITA

615/2014 dated 24.03.2015. A copy of the order has been filed by

the assessee.

5. The Ld.counsel for the assessee further submitted that the

assessee is mainly engaged in providing contract mining services at

various mines located in remote and tribal areas of Odisha.

According to the Ld.counsel, these villages, where the assessee

was carrying on mining operation, have no adequate drinking water,

medical facilities, schools, etc. The Ld.counsel further submitted

that these villages have no proper road facilities also. The iron ore

mining operations require clearances from Pollution Control Board

and other statutory authorities. Whenever permission was sought

for renewal of existing quantity of production, it is mandatory for the

District Collector to hold public hearing to ascertain the view of the

villagers. According to Ld.counsel, this public hearing was

conducted by Collector with an intention to ensure that the operation

of the assessee-company enhances the socio economic condition

of public in the local community. In order to win the goodwill of the

people and to enhance their socio economic status, the assessee-

company undertook various projects for upliftment of the poor

villages and tribals. The consent of the Government to continue the 5 I.T.A. No.308/Mds/15

mining operation is dependent on the positive impact created by the

assessee-company in the locality. Therefore, according to the

Ld.counsel, several programmes were carried out to take care of

the local public. In fact, according to the Ld.counsel, the assessee

has incurred expenditure in repair, renovation and maintenance of

hospitals, schools, colleges and co-operative society which are

located in the mines area where the assessee operates. According

to the Ld.counsel, the expenditure was incurred by the assessee for

maintaining hospitals, schools and colleges and providing medical

facilities and education facilities to the villages surrounding the area

where the mining operation was carried on by the assessee. This

expenditure would go to extend the confidence, trust and goodwill of

the local community. Therefore, the expenditure incurred by the

assessee has to be allowed as revenue expenditure. The

Ld.counsel placed reliance on the judgment of the Madras High

Court in the case of CIT v. Velumanickam Lodge (2009) 317 ITR

338 and submitted that the assessee before the Madras High Court

in Velumanickam Lodge (supra) has constructed hockey stadium in

the District Collectorate complex for the use of public at large. The

expenditure incurred by the assessee for construction of hockey

stadium was allowed as revenue expenditure. Therefore, the

expenditure incurred by the assessee on repairing, renovation and 6 I.T.A. No.308/Mds/15

maintenance of hospitals, schools, colleges and co-operative

society's building also needs to be allowed as revenue expenditure.

6. On the contrary, Sh. P. Radhakrishnan, the Ld. Departmental

Representative, submitted that the assessee declared dividend

income to the extent of `3,35,49,162/- as exempt from taxation.

However, no expenditure was shown for earning this income. The

assessee claimed before the Assessing Officer that the investments

had been made out of free reserves and profits and no part of the

borrowed funds was used for making such investments. The

assessee further claimed the direct expenditure in the form of

salaries and wages to the extent of `13,19,500/- and at the best, the

assessee admitted before the Assessing Officer that the indirect

expenditure attributable to earning the exempted income would be

to the extent of `6,00,000/-. Referring to Section 14A(1) of the Act,

the Ld. D.R. pointed out that no expenditure would be allowed as

deduction in respect of exempted income. Referring to Section

14A(2) of the Act, the Ld. D.R. submitted that there is a statutory

obligation on the part of the Assessing Officer to determine the

expenditure incurred to earn the exempted income in accordance

with Rule 8D of the Income-tax Rules, 1962. Therefore, the

Assessing Officer computed the expenditure under Section 14A(2) 7 I.T.A. No.308/Mds/15

r.w.r 8D of the Income-tax Rules, 1962. Accordingly, the total

expenditure determined by the Assessing Officer was ` 91,28,736/-.

7. We have considered the rival submissions on either side and

perused the relevant material on record. Admittedly, the assessee

claimed dividend income of `3,35,49,162/- as exempted from

income-tax. However, no expenditure was shown for earning such

exempted income. The claim of the assessee before this Tribunal is

that no dividend was received from the investments made in four

companies. Therefore, there was no justification in disallowing the

claim of the assessee under Section 14A of the Act. If no dividend

was received by the assessee from the four companies, it is not

known from where the assessee has received exempted income to

the extent of `3,35,49,162/-. The assessee claimed that the entire

investments were made from reserves and profits available with the

assessee and no part of the borrowed funds was used for making

the investments. The details of the borrowed funds and availability

of free reserves and profits are not available on record. We have

also carefully gone through the case laws relied on by the

Ld.counsel for the assessee. For applying those case laws, it is

necessary to find out whether the investments were made from the

borrowed funds or from interest free funds available with the 8 I.T.A. No.308/Mds/15

assessee. It is also necessary to find out whether the assessee has

received exempted income from those investments. Only after

ascertaining those facts, the case laws relied on by the Ld.counsel

would be applied. In the absence of details on the file of this

Tribunal, this Tribunal is of the considered opinion that the matter

needs to be reconsidered by the Assessing Officer. Accordingly,

the orders of the lower authorities are set aside. The entire issue of

disallowance under Section 14A of the Act is remitted back to the

file of the Assessing Officer. The Assessing Officer shall reconsider

the issue afresh after considering the interest free funds available

with the assessee, including the profits and the extent of borrowed

funds, and the extent of the exempted income earned by the

assessee and thereafter decide the issue in accordance with law

after giving reasonable opportunity to the assessee.

8. Now coming to the expenditure incurred by the assessee to

the extent of `55,73,062/-, the assessee claims that the expenses

were incurred for repair, renovation and maintenance of hospitals,

schools, colleges and co-operative society building. However, the

Assessing Officer found that apart from maintaining hospitals,

schools, colleges and co-operative society building, the assessee

also donated to Amruth Development Society and Kudimi Vikas 9 I.T.A. No.308/Mds/15

Parishad. The assessee also made payments to Saraswathi Sishu

Mandir, Adarsh Odisha Foundation and Adivasi Vikas Samithi. The

Assessing Officer disallowed this claim on the ground that the claim

of the assessee has no justification and the payments made by the

assessee were to the institutions which were not recognized under

Section 80G of the Act. Since the main issue of disallowance under

Section 14A of the Act is remitted back to the file of the Assessing

Officer, this Tribunal is of the considered opinion that the issue of

disallowance of `55,73,062/- also needs to be reconsidered by the

Assessing Officer. Accordingly, the orders of the lower authorities

are set aside. The issue of disallowance of `55,73,062/- is also

remitted back to the file of the Assessing Officer. It is needless to

point out that while reconsidering the issue, the Assessing Officer

shall take into consideration the judgment of Madras High Court in

the case of Velumanickam Lodge (supra) and other materials that

would be filed by the assessee and thereafter decide the issue in

accordance with law after giving reasonable opportunity to the

assessee.

9. In the result, the appeal of the assessee is allowed for

statistical purposes.

10 I.T.A. No.308/Mds/15

Order pronounced on 29th May, 2015 at Chennai.

sd/- sd/- (A.Mohan Alankamony) (N.R.S. Ganesan) (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) लेखा सद य/Accountant Member या यक सद य/Judicial Member

चे नई/Chennai, th 4दनांक/Dated, the 29 May, 2015.

Kri.

आदे श क. , त5ल6प अ7े6षत/Copy to: 1. अपीलाथ+/Appellant 2. ,-यथ+/Respondent 3. आयकर आयु8त (अपील)/CIT(A), Salem 4. आयकर आयु8त/CIT, Salem 5. 6वभागीय , त न ध/DR 6. गाड' फाईल/GF.