TaxTMI 
TaxTMI 
TaxTMI 
2018 (8) TMI 1851
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....e disallowance u/s 14A r.w. Rule 8D amounting to Rs. 39,84,218/- made by the AO and directing to reduce it to Rs. 22,37,456/- by taking 20% of the exempt income as ad-hoc allowance u/s 14A. 1.(b) "Whether on the facts and in the circumstances of the case and in law, the Id.CIT(A) erred in making ad-hoc estimation of disallowance u/s 14A and directing the AO to disallow 20% of the exempt income and thereby failing to appreciate that once the principle of the expenditure incurred for earning tax free income is accepted, then the disallowance u/s 14A is necessarily required to be computed by the methodology provided by Rule 8D." 2.(a) "Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in allowing deduction of an amount of Rs. 2,10,11,032/- which has been disallowed by the AO as pre-operative expenditure. 2.(b) "Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in holding that the business of the assessee has commenced during the previous year and overruling the findings of the AO that the activities of the assessee were at pre-operative stage. 2.(c) "Whether on the facts and in the circumstances of....
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....xpenditure incurred in relation to earning of an exempt income be not made. The assessee submitted before the AO during assessment proceedings conducted u/s 143(3) r.w.s. 143(2) of the 1961 Act that expenses were incurred wholly and exclusively for the purposes of business of the assessee. It was also submitted by the assessee before the AO that total expenses of Rs. 3,38,41,890/- were incurred while expenses amounting of Rs. 1,28,62,629/- were voluntarily disallowed in the computation of income filed with Revenue while rest of the expenses to the tune of Rs. 2,10,11,032/- were revenue expenses incurred wholly and exclusively for the purposes of business of the assessee which ought to be allowed as deduction while computing income within the provisions of the 1961 Act. It was submitted that these expenses have direct nexus with the business of the assessee company and these expenses have not been incurred in relation to holding of investments in shares, the income whereof being exempt from the tax. The AO rejected the contentions of the assessee and observed that that assessee has not attributed any expenses which have been incurred to earn exempt income and some expenses must nece....
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....2}(ii) 3. i. Average value of investments- Opening balance of investments + Closing balance of investments / 2 NIL + 1593687282 = Rs. 796843641 2 - 8D (2)(iii) ii. Disallowance An amount equal to one half per cent of the average of the 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. iii. 0.5% of Rs. 796843641/- 39,84,218 4. Total disallowance 39,84,218 5. Aggrieved by the assessment order dated 07.02.2014 passed by the AO u/s 143(3), the assessee filed first appeal with learned CIT(A) . The assessee submitted before learned CIT(A) that it received dividend income of Rs. 1,11,87,282/- which was claimed as an exempt income u/s. 10(34) of the 1961 Act. The assessee submitted that it received share application money of Rs. 165.74 crores from its J.V. partners which was temporarily deployed by making investments of Rs. 165 crores in the units of Tata Liquid Super High Investment fund on 21.02.2011 , from which dividend income of Rs. 1.12 crores was received . It was submitted that the assessee redeem....
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.... heard counsels for both the parties at length and we have also perused the material placed on record as well as the orders passed by revenue authorities. As per the facts of the present case, the assessee has received dividend income of Rs. 11,87,282/- which has been claimed exempt u/s 10(34) of the I.T. Act. As the assessee had not made any disallowance against the dividend income and the AO while invoking rule 8D(2)(iii) of I.T. Rules had made disallowance of Rs. 39,84,218/-. Ld. AR submitted that the assessee had not incurred expenditure for the purpose of making investment in the units of mutual funds and holding thereof as the year end. It was also submitted that AO should not have invoked the provisions of section 14A and rule 8D for making any disallowance as no expenditure was incurred for the investments in mutual funds. Ld. AR further submitted that the assessee had acquired funds from share capital which was not immediately required to utilize for the business purposes, therefore, it had invested in the mutual funds. Ld. AR further submitted that the AO had not recorded any satisfaction as to the correctness of the claim of the assessee having regard to the account of....
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....nditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8D if he is not satisfied with the correctness of the assessee's claim. To put it simply, the further disallowance u/s.14A is called for when the AO is not satisfied with the assessee's claim of having incurred no expenditure or some amount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the AO that it incurred a particular expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. From the assessment order, it is observed that the AO simply kept the assessee's submissions on record without appreciating as to whether these were correct or not. He proceeded on the premise as if the disallowance as per Rule 8D is automatic irrespective of the genuineness of the assessee's claim in respe....
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....d by the AO independently in accordance with law. Resultantly, this ground is allowed for statistical purposes." Thus , keeping in view aforesaid decision for AY 2011-12 itself, the end of justice will be met in the instant appeal if the issue concerning disallowance of expenditure u/s 14A of the 1961 Act is set aside and restored back to the file of the AO for fresh adjudication of the issue denovo in accordance with the direction given by the tribunal in ITA no. 2144/Mum/2016 for AY 2011-12 in assessee‟s appeal vide tribunals order dated 12.01.2018, which order of the tribunal for AY 2011-12 itself is reproduced above . We do not find any reasons to deviate from the aforesaid orders of the tribunal. These grounds of appeal bearing no 1(a) and 1(b) are, thus, allowed for statistical purposes as indicated above with similar directions as were given by tribunal in ITA no. 2144/Mum/2016 vide orders dated 12.01.2018. We order accordingly. 7. Now we come to second issue in Revenue‟s appeal vide ground no. 2(a) to (c) filed with memo of appeal filed with the tribunal. The assessee claimed Rs. 2,10,11,032/- as revenue expenses as deduction from income in the return of incom....
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....nd not for acquisition of any asset. (f) The assessee company had commenced the work for production of finished products. (g) Hence, the above factors clearly establish that the assessee company has commenced its business during the year and hence, revenue expenses amounting to Rs. 2,10,11,032/- have been rightly claimed as an allowable deduction." 8. The AO observed from the submissions as were made by the assessee before him during the course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the 1961 Act, as under:- "a. The assessee has effected the first sales on 04.05.2011. b. The assessee was still at pre-operative stage on 31.03.2013. c. Perusal of expenses of Rs. 2,10,11,032/- claimed by the assessee reveal that the same are administrative in nature and the expenditure are pertaining to production. The same are reproduced here under:- S.No. Particulars Amount (Rs) Remarks 1 Personnel Expenses (a] Salaries and allowances 8138161 Salaries paid to employees (b) Contribution to provident fund and allied funds 177169 Company's share of contribution to provident fund (c) Staff welfare expenses 121849 Welfare expense....
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.... the assessee is merely at a pre-operative stage which led the AO to hold that the expenses are pre-operative expenses being capital in nature which cannot be allowed as Revenue expenses and hence the same were disallowed by the AO while framing assessment vide assessment order dated 07.02.2014 passed u/s 143(3) of the 1961 Act. 9. Aggrieved by the decision of the AO vide assessment order dated 07.02.2014 passed u/s. 143(3) of the 1961 Act, the assessee filed first appeal with learned CIT(A). The learned CIT(A) considered the submission of the assessee and granted relief to the assessee by allowing the appeal of the assessee , vide appellate order dated 29.01.2016, by holding as under:- "7.1 On the other hand the appellant submitted that it has debited Rs. 3.38 Crore in the P&L A/c out of which it has already disallowed Rs. 1.29 Crore as pre-operative expenses and disallowed in the computation of income; as expenses incurred towards share application expenses etc. The remaining Rs. 2.10 Crore are the expenses of revenue nature which is allowable as business expenses. The appellant submitted that the company has acquired purchase order on 18.02.2011 and TAMAL has acquired orders ....
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....d non commencement of production by the manufacturing unit being set up by the assessee at Hyderabad to make his point as to non allowability of expenses as Revenue expenses while computing income chargeable to income-tax. The Ld. AR on the other hand vehemently and strenuously argued that business of the assessee was in fact set-up by the end of the previous year and the assessee is entitled for claiming expenses to the tune of Rs. 2,10,11,032/- as revenue expenses . Our attention was drawn to page no.7 of the paper book wherein written submissions dated 25.12.2013 as were submitted before the AO during assessment proceedings u/s 143(3) r.w.s. 143(2) are placed to contend that assessee was executing purchase order for the Center Wing Box and Empennage tooling , a revenue generating activity. Our attention was drawn to Provisions of Section 3 of Act and it was submitted that all the expenses which are incurred post-setting up of the business are to be allowed as business expenses which is mandate of Section 3 of the 1961 Act and commencement of business has no relevance . Our attention was also drawn to page no. 83 to 85 of the paper book wherein detailed nature of activities carr....
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....no. 77 to 78 of the paper book wherein purchase orders dated 05-03-2011 issued by assessee in favour of Tata Consultancies Services Limited and Tata Technologies Limited for center wing box is placed. Our attention was also drawn to page no. 86 of the paper book where the flow charts of processes for assembly operations , tools for center wing box activity carried during the year ended 31st March, 2011 is placed. The assessee relied on the decision of Hon‟ble Bombay High Court in the case of Western India Vegetable Products Limited v. CIT reported in (1954) 26 ITR 151(Bom.) . The assessee also relied upon decision of ITAT, Mumbai in the case of Hagwoods Commercial Developers P. Ltd. & Orss in ITA no. 1306/Mum/2015 & Ors. for AY 2012-13 , vide consolidated order dated 08.02.2017 , wherein both of us were the members of the Division Bench who passed the aforesaid consolidated order dated 08.02.2017. Reliance was also placed by learned counsel for the assessee onto the decision of ITAT, Mumbai in the case of ACIT v. Reliance Defence & Offshore Engineering Co. Ltd. in ITA no. 4692/Mum2014 and ITA no. 372/Mum/2015 for AY 2008-09 & 2009-10, vide consolidated order dated 31.08.2017.....
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....l precedents. We place on record our appreciation for both the counsel for their sincere efforts in arguing their case before us on this issue. 11. We have considered rival contentions and perused the material on record including case laws cited by both the rival parties before us. The brief facts of the case are that the assessee company was incorporated on 5th April, 2010 with the main object of doing business of assembly, manufacture and supply of advance space, aviation, homeland security and defence related technologies. The assessee entered into Joint Venture agreements with Lockheed Martin Aerostructure Corporation ,USA a wholly owned subsidiary of Lockheed Martin Corporation of USA for the purpose of assembling, manufacturing and supplying of C130/C130J aircraft structural articles i.e. empennages and center wing box (finished products). The assessee is a J.V company formed by Tata Advanced Systems Ltd. and Lockheed Martin Aerostructure Corporation(LMAC), wherein Tata‟s hold 74% and Lockheed Martin Aerostructure Corporation, USA holds 26% of the equity of the assessee company. The assessee company is setting up manufacturing unit at Adibatla Village, Hyderabad to ass....
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....ent fund and allied funds 177169 Company's share of contribution to provident fund (c) Staff welfare expenses 121849 Welfare expenses 2 Office and administrative expenses (a) Rent 1552580 Rent paid in respect of office in bengumpet. Hyderabad. (b) Electricity charges 185770 Electricity charges incurred for begumpet, Hyderabad (c) Rates and taxes 104485 Taxes paid to government and local authorities, ROC filing fee (d) Legal and professional charges 5757293 Fees paid for management consultancy, legal consultancy, chartered accountant services, company secretary services etc. (e) Travelling and conveyance expenses 4405805 Travelling expenses, boarding & lodging expenses of employees on official tours. (f) Communication expenses 124879 Telephone, mobile and internet charges (g) Audit fees 75000 Statutory audit fee (h) Business promotion expenses 43644 Expenses incurred towards business promotion etc. (i) Printing and stationery 221104 Printing and stationery expenses incurred. (j) Miscellaneous expenses 103242 Membership and subscription charge....
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....artin Aerostructure Corporation,USA shared necessary engineering drawings , drawings and specifications along with source book for manufacturing/assembling of tools/jigs, based on which assembly operation sheets are prepared. These assembly operation sheets are categorized in sub assembly, major assembly and final integration. These assembly operation sheets are required in assembly processes for Center Wing Box and Empennages . These assembly operation sheets acts as guide to staff for various operations involved in the assembly process and also acts as tracker for various functions involved in a process. The assessee company placed orders with TCS and Tata Technologies Limited on 5th March 2011 , for development of assembly operations sheets and the said assembly operations sheets were reviewd by the employees of the assessee company. These operational details are extracted from written submissions filed before the authorities below(pb/page 1-6) . The written submissions with respect to nature of activities carried on by the assessee. which were submitted by the assessee before learned CIT(A) vide submissions dated 22.12.2015 (page 79/pb) as Annexure B (page 83/pb) is reproduced ....
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.... Tata Consultancy Services Limited on 5th March, 2011[Refer Page Nos. 93 to 96 of Paper Book No.I]. Note: On 4lh May, 2011, the appellant has raised its first invoice against Center Wing Box Tooling for US$ 18,15,587.90. By end of March 2013, the appellant has completed tooling activity in Center Wing Box and invoiced to Lockheed Martin the agreed value as per PO [Refer Page No. 91 of Paper Book No.I]. 4. Manufacturing / Assembly: (a) Lockheed Martin has shared engineering drawings and specifications along with source book, based on which the Assembly Operation Sheets (AOS) are prepared. AOS are categorized in sub assembly, major assembly and final integration. (b) Assembly Operation Sheets are required in assembly for finished products. AOS act as guide to staff for various operations involved in the assembly process and also acts as tracker for various functions involved in a process. The appellant placed order with Tata Consultancy Services Limited and Tata Technologies Limited on 5th March, 2011, for development of Assembly Operation Sheets and the' AOS so prepared were reviewed by the employees of the appellant [Refer Page Nos. 98 & 99 of Paper Book No.I]. 5. Fro....
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....4% of equity capital while 26% is held by Lockheed Martin Aerostructure Corporation, USA. The JV agreement provided that the assessee company will assemble, manufacture and supply C130/130J aircraft structural articles i.e.center wing box and empennages to Lockheed Martin Aerostructure Corporation,USA and / or its affiliates. The manufacturing/assembly unit of the assessee company for manufacturing/assembly of center wing box and empennage for C130/C130J aircrafts was being set up at Hyderabad which did not become operational till the end of the previous year relevant to the impugned assessment year. The item to be assembled/manufactured namely center wing box and empennages for C130/C130J aircraft being highly specialised, technical , complex and guarded technology, the Lockheed Martin Aerostructure Corporation ,USA was to undertake the job of implementing the project vide agreement entered into with the assessee which , inter-alia, provided for supply of engineering designs, drawings, tools , jigs , technical knowhow etc. . Thus, on the one hand Lockheed Martin Aerostructure Corporation, USA was equity shareholder of assessee company infusing 26% capital and at same time was invo....
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....contract within the main contract was carved out and assigned by Lockheed Martin Aerostructure Corporation, USA to assessee itself as sub-contract to manufacture these tools and jigs required for the project indigenously of course for which technical specification, designs and drawings were supplied by Lockheed Martin Aerostructure Corporation, USA and ultimate technical supervision and other responsibilities vested with Lockheed Martin Aerostructure Corporation, USA for successful implementation of supplies of tools and jigs for the project under implementation which were manufactured indigenously by assessee through sub-sub contractors/ vendors namely TCS etc. appointed by the assessee to supply to its own assembly/manufacturing unit being set up at Hyderabad which had not become operational even by year end and not even trial runs started by the end of the relevant previous year. The assessee on its part on receipt of the said sub-contract from Lockheed Martin Aerostructure Corporation,USA for supplying some of the tools and jigs which were to be consumed/utilised by the assessee itself in its manufacturing/assembly unit being set up at Hyderabad further outsourced the said job....
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....nit being set up at Hyderabad for manufacturing/assembly of center wing box and empennages for C130/C130J aircraft. Thus, we conclude that the assessee never intended to set up any business of manufacturing/assembly of tools and jigs required for supplies to be made to its assembly/manufacturing unit being set up at Hyderabad which was under implementation as at year end for which even trial run did not started by year end. The activities of supply of tools/jigs by the assessee as sub-contractor/vendor to Lockheed Martin Aerostructure Corporation, USA which was executed by assessee through sub-sub contractors/vendors namely TCS etc for ultimate supply of tools/jigs to the assessee itself to be used for its manufacturing/assembly unit at Hyderabad which was under implementation at the year end were all inextricably linked to the assessee‟s main activity of setting up of manufacturing /assembly unit at Hyderabad for manufacture / assembly of center wing box and empennages for C130/C130J aircraft and which in itself is not an independent activity per-se to be categorised as separate business activity. The assessee claims that it kept highly technical and supervisory staff to ove....
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....is decision the Hon‟ble High Court of the Bombay held that the previous year of the business will commence from setting up of business which is relevant for claiming deduction of expenses as business expenses. There is no dispute as to this proposition of law is concerned but in the instant case we have held that the assessee by taking sub-contract from Lockheed Martin, USA for indigenously manufacturing /assembling of tools and jigs to be ultimately supplied to itself to be used/consumed in its project for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircraft had never intended to set up business of assembling/manufacturing of tools and jigs which ultimately it sub-sub contracted to TCS etc. as the business it intended to set up was for manufacturing /assembling of center wing boxes and empennages for C130/C130J aircraft at Hyderabad which was not ready to commence production even by year end. b) The decision of ITAT, Mumbai in the case of Hagwoods Commercial Developers P. Ltd. & Orss in ITA no. 1306/Mum/2015 & Ors. For AY 2012-13 , vide consolidated order dated 08.02.2017. The assessee has relied upon this case and it contended that even when ....
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.... of center wing boxes and empennages for C130/C130J aircraft and not for setting up manufacturing /assembly units for tools/jigs. d) The decision of Hon‟ble Gujarat High Court in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd.(1972) 91 ITR 170,(Guj. HC) . In this case , the taxpayer was engaged in manufacture and sale of cement. The taxpayer obtained mining lease for quarrying limestone and started mining operations. The limestone was raw material for manufacturing of cement. It was held that this activity of extracting limestone by quarrying the leased land was necessary for the purposes of acquiring raw material to be utilised in manufacturing of cement.The second activity constituted the activity of manufacturing of cement by user of plant and machinery set up for that purpose and the third category consisted of selling manufactured cement. All these three activities constituted business of the taxpayer. It was held that it is not necessary that all the three activities should commence , then the business was deemed to be set up. It was held that with the commencement of first activity business was set up as it laid foundation for the second activity and ....
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....ss shall be deemed to be set up and expenses allowable from date when orders were secured by the taxpayer although factory has not commenced production which shall be allowable. This case is distinguishable as the assessee although secured orders for center wing boxes and empennages for C130/C130J aircraft even prior to setting up of unit at Hyderabad for manufacturing/assembling of center wing boxes and empennages for C130/C130J but the difference is that the assessee has undertaken job of getting tools and jigs which were required in its unit under implementation at Hyderabad manufactured/assembled through sub-sub contractors namely TCS etc and we have held that it could not be intention of the assessee to set up business of manufacturing/ assembly of tools and jigs. The assessee in the instant case did not purchase any raw material etc rather it was implementing setting up of unit for manufacturing / assembling of center wing box and empennages for C130/C130J aircraft wherein tools and jigs required for the manufacturing/assembling unit was got indigenously supplied by the assessee through sub-sub contractors namely TCS etc wherein the main contract was awarded by the assessee t....