TaxTMI 
TaxTMI 
2018 (8) TMI 1851
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....and on law, the Ld. CIT(A) erred in not accepting the 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-o....
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....ion 14A r.w.r. 8D of the 1962 Rules and asked assessee to explain why the disallowance of expenditure 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 attribu....
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....rage of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year -Rule 8D(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....
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.... AY 2011-12 vide orders dated 12-01-2018, wherein the tribunal restored the matter to the file of AO with specific directions which are reproduced as hereunder:- " 4. We have 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, ....
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.... "15. A bare perusal of the above provisions indicates that the AO shall determine the amount disallowable as per Rule 8D, if he, "is not satisfied with the correctness of the claim of the assessee" in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure 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 ass....
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....e order of assessment, the AO shall provide sufficient opportunity of hearing to the assessee. Before parting, we may make it clear that our decision to restore the matter back to the file of AO shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated 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 ....
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....olved in assembling the finished products (i.e. review of Assembly Operation Sheets), being an essential activity for carrying on the business of the assessee company. (e) The expenditure which has been incurred during the year is for the activities as mentioned in para No. (b)(ii) to (v) which related to the carrying on or conduct of the business as the same related to profit earning process and 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 ....
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...., machinery and raw material. 6.4 The above facts clearly reveal that no manufacturing activity was carried out by the assessee and it is merely at pre-operative stage . Hence , the expenses are treated as pre-operative and treated as capital in nature . Since, Rs. 39,84,218/- has been disallowed and treated as capital in nature. The disallowance on this score works out to Rs. 1,70,26,814/-" Thus, the AO concluded that no manufacturing activity was carried out by the assessee during the entire previous year relevant to impugned assessment year under consideration and 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 ap....
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....ur attention was drawn to provisions of Section 3 of the 1961 Act to contend that since no business of the assessee commenced even as at the end of the previous year , the expenses cannot be allowed as deduction as Revenue expenses while computing income chargeable to income-tax within provisions of the 1961 Act. Our attention was also drawn to page 83-85 of paper book filed by the assessee with the tribunal wherein detailed note is placed as to the nature of activities carried on by the assessee company. Thus, reliance was placed by learned DR on the assessment order framed by the AO u/s 143(3) and 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 b....
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....tself . It is pertinent to mention that in the said invoice so far as port of loading and port of discharge as well final destination is shown to be not applicable and the consignee is assessee itself. Our attention was also drawn to page no. 84 of the paper book to contend that assessee has set up the business and hence assessee was entitled for expenses as revenue expenses . It was submitted that the assessee is engaged in execution of purchase orders for Center Wing Box and empennages for C130/C130J aircraft to contend that it is a revenue generating activity. Our attention was also drawn to page 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 ....
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....g of Section 3 of the 1961 Act and no distinction can be drawn . It was vehemently and strongly argued by learned DR that the assessee is not entitled for relief by way of allowability of expenses as revenue expenses as is claimed by the assessee , thus prayers are made to uphold assessment order of learned AO and to set aside appellate order of learned CIT(A). Thus, in nut-shell both learned AR and learned DR has made very strenuous contentions strongly arguing that the appeal be decided in their favour based on factual matrix of the case and legal propositions as are contained in statute and judicial 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 wit....
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.... administrative and office expenses can be allowed as business expenses as the business of the assessee has not yet been set up till the end of relevant previous year and these expenses being pre-operative expenses partake the character of capital expenditure which are not allowable as deduction while computing income of the assessee within the mandate of the 1961 Act. The details of said expenses are as 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 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 ....
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....on 18th February 2011 for US$ 25,93,697/- and US $ 1,27,68,133/- respectively(pb/page 5) in favour of the assessee company . The copies of the said PO‟s were enclosed and are as part of paper book(pb/page 12 and 40). The assessee company instead of manufacturing the said tools and jigs itself initiated the tool/jigs manufactured/assembled by outsourcing the same to indigenous manufacturers and suppliers viz. TAL Manufacturing Solutions Limited, Tata Technologies Limited and Tata Consultancy Services Limited. The said sub-sub-contracts awarded by the assessee company to these three vendor companies are part of paper book filed by the assessee with the tribunal(pb /page 70-74). Lockheed Martin 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....
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....outsourcing the same to various-indigenous manufacturers and suppliers, which is explained as under:- (i) Placed orders with TAL Manufacturing Solutions Limited for manufacture, supply, installation and commissioning of tools required for both Center Wing Box and Empennage Structures on 28th February 2011 for 477.32 lakhs. Accordingly, the appellant paid an advance of Rs. 84.85 lakhs to TAL Manufacturing Solutions Limited on 7th March 2011 as per the PO terms to start the tool manufacturing activity [Refer Page No. 92 of Paper Book \ No.1]. (ii) Tool design and digitization of drawings is a part of tooling activity for both Center Wing Box and Empennage Structures and the appellant has placed orders for this activity on Tata Technologies Limited and 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]. ....
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...., being an essential activity for carrying on the business of the appellant. (d) The expenditure which was incurred during the year is for the activities as mentioned in Para No. (b)* (ii) to (v) which related to the carrying on or conduct of the business as the same related to profit earning process and not for acquisition of any asset. (e) The appellant had commenced the work for production of finished products. (f) Hence, the above factors clearly established that the appellant had set-up and commenced its business during the year. 6. Process flow chart is enclosed to explain the flow of activities carried out during the year ended 31st March, 2011" So , in nutshell what transpires in short is that the assessee company is a JV company formed by Tata Advanced Systems Limited and Lockheed Martin Aerostructure Corporation, USA, wherein Tata‟s hold 74% 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 C....
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....ng supplied at the time of or before setting up of the project are part of capital assets which needs to be capitalised. The said Lockheed Martin Aerostructure Corporation, USA who was , inter-alia, under an obligation to supply engineering designs, drawings, tools , jigs etc. but Lockheed Martin Aerostructure Corporation , USA instead of supplying some of the tools and jigs itself instead awarded the work to manufacture/assemble these tools and jigs to the assessee indigenously by way of sub-contract for which necessary designs and drawings were supplied by Lockheed Martin Aerostructure Corporation, USA. The ultimate responsibility for execution of the agreement for setting up manufacturing/assembly unit at Hyderabad rested with Lockheed Martin Aerostructure Corporation, USA under the main contract awarded by the assessee to Lockheed Martin Aerostructure Corporation, USA but certain portion of the 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 w....
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....es for C130/C130J aircraft at Hyderabad for which main contract was awarded by the assessee in favour of the same Lockheed Martin Aerostructure Corporation, USA. Under these circumstances, can it be said that the assessee company who participated in the setting up of its own manufacturing/assembly unit at Hyderabad under a sub-contract from Lockheed Martin Aerostructure Corporation, USA for which main contract was awarded by the assessee itself in favour of the same Lockheed Martin Aerostructure Corporation , USA wherein the assessee by getting some of the tools/jigs manufactured/ assembled by further sub-sub-contracting to TCS, Tata Technologies Limited and TAL Manufacturing Supplies Limited ever intended to enter into an business of manufacturing /assembly or supplies of tools and jigs rather its activities and efforts were all directed towards the business of setting up of manufacturing /assembly unit 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/man....
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....ucture Corporation, USA, as all these are pre-operative expenses which needed to be capitalised as part of the cost of the project because there was no possibility of commencing production/manufacturing/assembly unless the unit is ready to commence production which in the instant case even by the year end unit was neither installed nor trial runs commenced. We have carefully gone through the case laws cited by learned counsel for the assessee and we have observed that those case laws were decided on their own factual matrix which has no applicability so far as peculiar factual matrix as is applicable to the assessee in the instant case . However, for the sake of completeness , we will now refer to all the case laws relied upon by the assessee : a) 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.) . In this 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 ....
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....nts for supplies of ship building for which the taxpayer purchased steel for ship building . Various activities started towards ship building and on those factual matrix , it was held that the assessee has set up the business and expenses were allowed. But in the instant case before us, it is observed that the assessee is to indigenously supply tools and jigs under a sub-contract from Lockheed Martin, USA which supplies are to be utilised/consumed by the assessee itself in its manufacturing/ assembly unit being set up at Hyderabad which was under implementation as at the year end and not even trial run commenced till the end of previous year. Thus, on that factual matrix it is held that the assessee never intended to set up any business for supply of tools and jigs for its own units as its efforts for supply of tools and jigs are directed towards setting up its own manufacturing/assembly units for manufacture and assembly 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) 9....
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....his case, Hon‟ble Court distinguished between set up of business and commencement of business and held that expenses shall be allowable from the date business is set up. This case we are afraid is of no help to the assessee as in the instant case before us , we have held that the assessee never intended to set up business of manufacturing/assembling of tools and jigs. f) The decision of Hon‟ble Gujarat High Court in the case of Prem Conductors P. Ltd. v. CIT (1976) 108 ITR 654(Guj. HC). The strong reliance is placed by learned counsel for the assessee on this case. In this case the assessee took over running concern from its promoters. It was not a case of setting of new industrial undertaking. The taxpayer secured orders from Electricity Boards, purchased raw material etc to keep things ready for production once the machineries are installed etc. . Under these circumstances Hon'ble Gujarat High Court held that business 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 orde....