ROC expense for increase of share capital not allowable
Fact and Issue of the case
The brief facts of the case are that the assessee filed Return of Income on 27.09.20 12 declaring total income of Rs. 11,44,45,780. The case was selected for scrutiny and statutory notices were issued to the assessee. During the course of assessment proceedings, it was observed by the Assessing Officer that the assessee has debited in the profit and loss account under the head ‘preliminary expenses’ and claimed deduction u/s.35D of the Act but the Assessing Officer disallowed by holding that payment to ROC for increase in capital is a capital expenditure and added to the total income of the assessee. The Assessing Officer further noticed that the assessee has received dividend of Rs.6.35 lakhs and claimed the same as exempt income u/s. 10(34) of the Income Tax Act, 1961 (‘the Act’) It was observed that there was a total investment of Rs.3 16.32 lakhs and paid interest and has received exempt income, therefore the Assessing Officer applied Rule 8D for making disallowance of Section 14A of the Act. It was observed that the assessee has debited Rs.380. 17 lakhs towards finance charges in the profit and loss account. The Assessing Officer calculated disallowance under Rule 8D(ii) of Rs.2.08 lakhs and under Rule 8D(2)(iii) of Rs. 1.56 lakhs resusltantly total disallowance was made of Rs.3.64 lakhs (Rs.2.08 lakhs + Rs. 1.56 lakhs = Rs.3.64 lakhs). Further scrutiny of the account of the assessee, it was noticed that the assessee has debited an amount of Rs.20,59,963/- towards differed employee compensation and the Assessing Officer holds that it was not an allowable expenditure under the Income Tax Act. Accordingly, he added the same into the total income of the assessee. Feeling against the order of the Assessing Officer, the assessee filed an appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee. Feeling against the order of the CIT(A), the assessee is in appeal before the ITAT.
Observation of the court
The Assessing Officer has made disallowance u/s. 14A of Rs.3,64,000 as it was calculation made under Rule 8D(ii) and 8D(iii) within the impugned assessment year, the assessee has received dividend of Rs.6,35,000 and it as exempt u/s. 10(34) of the Act; and huge finance cost debited into the profit and loss account. No suo moto any expenditure in this regard disallowed by the assessee. After considering the submissions of both sides, we find similar issue has been decided by the co-ordinate bench of this Tribunal in NSL Renewable Power Pvt. Ltd. Vs. DCIT in ITA Nos.1024/Hyd/2017 and 2031/Hyd/2018 order dt. 17.06.2021 and the case was heard on 22.4.2021. For the sake of convenience the relevant paras of the order is extracted hereunder :
After hearing both the parties, we are of the view that the CIT(A) has restricted the disallowance to the extent of dividend income of Rs. 57,60,120/-. In Cross Objections No. 09/Hyd/2020, the objection of the assessee is that CIT(A) has wrongly decided the issue and restricted the disallowance to the extent of exempt income earned by the assessee. While going through the calculation of disallowance made by the AO, the AO has taken the value of average investments of Rs. 174.87 crores, but, the contention of the assessee in the cross objections, the assessee has not received any exempt income from its subsidiaries. As per our thoughtful consideration, the disallowance u/s 14A rwr 8D(2)(ii) and (iii) the value of investments should be considered only on the investments from which the assessee has earned exempt income. In this connection, we rely on the decision of the coordinate bench of this Tribunal in the case of Transport Corporation of India Ltd. in ITA No. 117/Hyd/2016, order dated 21/09/2016, wherein the coordinate bench has held as under:
Considered the submissions of both the counsels and perused the material facts on record. The AR submitted that the assessee has sufficient own funds which are interest free to make investment. He also relied on various decisions, in particular, Reliance Utilities & Power Ltd. (supra). We cannot take this argument further because there exist interest bearing funds and it is difficult to identify the utilization of the funds in the business unless the assessee brings proper records to show that the specific interest free funds were utilized to acquire the investment which are exempt from tax. In the present case, it is difficult to identify the funds utilization considering the complicated structure of the business. To address this issue, the legislature has introduced Rule 8D for calculation of disallowance relating to direct expenses associated with the exempt income, interest relating to the investment and administrative expenses.
While carefully reading the rule 8D(2)(ii), the formula given are: A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year: B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; In particular, the notes for ‘B’ clearly states that the average value of investment, income from which does not or shall not form part of the total income. It is clear that we have to include those investments which has generated income and exclude those investments, which have not generated income. In the present case, AO had taken the total investment instead of those investments, which have generated income. Accordingly, we direct the AO to calculate the disallowance of interest as below ( as per rule 8D): Interest X Investment( which generated income) Average total assets The main reason is that as per section 14A, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which is exempt from tax. The relevance is the expenditure in relation to income. The quantification has to be undertaken in relation to the exempt income. The investment which has not generated exempt income should be excluded from the calculation of ratio to determine the disallowance.
Similarly, for the administrative expenses, 0.5% of average investments from which the exempt income is received should be considered instead of average of the total investments. considering the above discussion, we direct the AO to recalculate the disallowance as per rule 8D as per the above guidance. Accordingly, ground raised by assessee is allowed.”
We direct the AO to recalculate the disallowance as per rule 8D as per the above guidance. We further direct the AO if the disallowance u/s 14A is higher in the recalculation made by the AO, the same shall be restricted to the extent of exempt income earned by the assessee as per the case law Joint Investment Pvt. Ltd. Vs. CIT 372 ITR 694 (Del.).
Further, the revenue has raised a ground regarding the dividend income of Rs. 57,60,120/- should be treated as income from other sources is also not correct. On the one hand, the Assessing Officer himself has treated it as a dividend income which is exempt and on other hand, he has treated as daily dividend income and taxed under the income from other sources. While recalculating disallowance u/s 14A, we have restricted the disallowance to the extent of exempt earned by the assessee or less than the exempt income, whichever is lower and the same amount cannot be taxed as income from other source, which amounts double taxation in the hands of the assessee. The dividend amount received by the assessee is exempt as per section 10(35) of the IT Act. The assessee has relied on the following case law, which support the case of the assessee:
“1. PCIT Vs. Caraf Builders & Constructions (P) Ltd. (ITA No. 1260 of 2018) (Delhi H C)
2. PCIT Vs. McDonalds India Pvt. Ltd., (ITA 725/2018 (Delhi HC)
3. DCIT Vs. Pitti Electrical Equipment Pvt. Ltd. ITA No. 735/Hyd/2018.
4. Vanni Potluri Vs. DCIT, ITA No. 2263/Hyd/2017
5. Mylan Laboratories Ltd. Vs. DCIT, 180 ITD 558.”
The assessee is unable to demonstrate that on the date of investments he had sufficient own funds available. While calculating the disallowance u/s. 1 4A, only those investments should be considered which has yielded exempt income. Respectfully following the above decisions of the co-ordinate bench of the Tribunal, we are sending back to the file of Assessing Officer for recalculation of the disallowance u/s. 14A of the Act. Needless to say that reasonable opportunity of being given to the assessee and the assessee is also directed not to seek unnecessary adjournments. Accordingly this ground is allowed for statistical purposes.
In regard to disallowance of Rs.20,59,963 towards disallowance of differed employee compensation, the CIT(A) has dismissed by holding that for want of details were not provided by the assessee as per para No.9.2 of the CIT(A) order. Before us, the assessee has filed a paper book dt.23.3.202 1 and has submitted that benefit received by the employee has been added in their income as a prerequisite and properly TDS has been made and in support he has submitted Form No.16 issued to the employees and computation of income. The CIT(A) observed that the assessee did not file any details of perquisites paid to the employees to which the CIT(A) has narrated in para No.9.2 in his order. Considering the totality of facts and circumstances and paper books filed by the assessee, we remit this issue to the file of Assessing Officer for further verification and the assessee is directed to produce all the documents in support of his claim of the expenditure and the Assessing Officer is directed to provide reasonable opportunity of hearing to the assessee. The assessee is directed not to seek unnecessary adjustments. Therefore this ground of the assessee is allowed for statistical purposes.
The tribunal has allowed the appeal and ruled in favour of the assessee