Pr. Commissioner Of Income Tax -2 v. M/S. Lee & Murihead Pvt Ltd

R.M. AMBERKAR (Private Secretary) IN THE HIGH COURT OF JUDICATURE AT BOMBAYO.O.C.J.INCOME TAX APPEAL NO. 229 OF 2017 Pr. Commissioner of Income Tax -2 ..Appellant Versus M/s. Lee & Murihead Pvt Ltd ..Respondent ................... •Mr. Suresh Kumar for the Appellant ................... CORAM : AKIL KURESHI & SARANG V. KOTWAL, JJ. DATE : APRIL 2, 2019. P.C.: 1.This appeal is filed by the Revenue to challenge thejudgment of the Income Tax Appellate Tribunal (“theTribunal” for short). 2.Following questions are presented for our consideration :- “(a) Whether on the facts and in the circumstances of the caseand in law, the Tribunal has erred in excluding some of theexpenses holding as not directly related to earningdividend income which is in contravention to Rule 8D(2)(iii)of the I.T. Act, 1961?and in law, the Tribunal has erred in excluding some of theexpenses holding as not directly related to earningdividend income which is in contravention to Rule 8D(2)(iii)of the I.T. Act, 1961? (b) Whether on the facts and in the circumstances of the case and in law, the Tribunal has erred in holding that theamount deducted by the AO is admissible u/S. 37(1) of theI.T. Act, 1961 as wholly and exclusively for the purpose ofbusiness? (c) Whether on the facts and in the circumstances of the caseand in law, the Tribunal has erred in holding that assesseehas rightly written off the debts and it was clearlyadmissible as a deduction u/S. 36(1)(vi) of the I.T. Act,1961?and in law, the Tribunal has erred in holding that assesseehas rightly written off the debts and it was clearlyadmissible as a deduction u/S. 36(1)(vi) of the I.T. Act,1961? (d) Whether on the facts and in the circumstances of the caseand in law, the Tribunal has erred in dismissing the appealof the Revenue in respect of addition u/S. 40(a)(ia) of Rs.1,65,612/- in connection with leased line charges to VideshSanchar Nigam Limited relying on the Bombay High CourtJudgment in the case of Kotak Securities Ltd?"and in law, the Tribunal has erred in dismissing the appealof the Revenue in respect of addition u/S. 40(a)(ia) of Rs.1,65,612/- in connection with leased line charges to VideshSanchar Nigam Limited relying on the Bombay High CourtJudgment in the case of Kotak Securities Ltd?" 3.Question No. (a) relates to the disallowance ofexpenditure to be made in case of the respondent assesseein terms of Rule 8D(2)(iii) of the Income Tax Rules 1963 readwith Section 14A of the Income Tax Act, 1961 (“the Act” forshort). The Assessing OfÏcer and the CIT(A) had madedisallowance of Rs. 14.61 Lakhs in case of the assessee inrelation to indirect expenses for earning exempt income @0.5% of the average investments. The Tribunal in furtherappeal by the assessee retained 6.61 Lakhs by giving reliefto the assessee to the extent of Rs. 8 Lakhs on the ground that Rule 8D cannot be applied blindly when the assesseehad hardly incurred any expenses in relation to the dividendearned and substantial investments were made temporarilyin order to park the idle funds. 3.Question No. (a) relates to the disallowance ofexpenditure to be made in case of the respondent assesseein terms of Rule 8D(2)(iii) of the Income Tax Rules 1963 readwith Section 14A of the Income Tax Act, 1961 (“the Act” forshort). The Assessing OfÏcer and the CIT(A) had madedisallowance of Rs. 14.61 Lakhs in case of the assessee inrelation to indirect expenses for earning exempt income @0.5% of the average investments. The Tribunal in furtherappeal by the assessee retained 6.61 Lakhs by giving reliefto the assessee to the extent of Rs. 8 Lakhs on the ground that Rule 8D cannot be applied blindly when the assesseehad hardly incurred any expenses in relation to the dividendearned and substantial investments were made temporarilyin order to park the idle funds. 4.Learned counsel Mr. Suresh Kumar for the Revenueargued that once in facts of the case, Rule 8D applies, theTribunal, thereafter had no discretion to restrict or reduce thedisallowance. Once in terms of Section 14A of the Act, thedisallowances voluntarily made by the assessee are to bediscarded, Rule 8D of the Rules would apply. Sub-rule (2) ofRule 8D as it stood at the relevant time provided for aformula for such disallowances. Clause (iii) of Rule 8D(2) ofthe Rules pertains to disallowance of what is popularlyreferred to as administrative expenses. Though no suchexpression is used in the Rule which would be an amountequal to one-half percent of the average of the value of theinvestment. It would prima facie appear that once this ruleapplied and therefore, the said formula become applicable,the Tribunal thereafter could not have taken other factorsinto account to come to the conclusion that such disallowance was excessive. 5.However, in the present case, we are not inclined toadmit the appeal on this ground. Firstly because thedisputed amount itself is not very substantial and secondly,though not so clearly stated, the view of the Tribunal can aswell be understood and interpreted as one holding that thefacts necessary for applicability of Rule 8D, did not arise inthe present case. We may recall, sub-section (2) of Section14A of the Act provides that the Assessing OfÏcer woulddetermine the amount of expenditure incurred in relation toincome which does not form part of the total income if he isnot satisfied with the correctness of the claim of theassessee in respect of such expenditure. If the expenditurealready voluntarily disallowed by the assessee is found to bereasonable, the Assessing OfÏcer in any case could not haveresorted to Rule 8D of the Rules. 6.Question No. (b) pertains to the disallowance ofdeduction of a sum of Rs. 45.16 Lakhs claimed by theassessee under Section 37(1) of the Act. The Tribunal noted that the assessee had terminated lease and licence inrespect of two warehouses from Paras Commercial Centre.The lessor deducted a sum of Rs. 45.16 Lacs towardscompensation for premature termination of the leaseagreement. The Tribunal in such facts held that the earlytermination of the lease was a business decision and theexpenditure incurred in relation to the same was wholly andexclusively for the purpose of business. We find no error inthe view of the Tribunal. 7.Question No. (c) pertains to the assessee’s claim ofwriting off the bad debts and claiming deduction underSection 36(1)(vi) of the Act. In this respect, the Tribunalnoted that the assessee had purchased certain assets onslump sale basis. In the process, certain debts which werepart of the current assets were reduced. The assessee wroteoff sum of Rs. 1.76 Crores claiming same to be admissibleunder Section 36(1) of the Act. The Tribunal while reversingthe view of the Assessing OfÏcer and the CIT(A) in which itwas held that in the process, the assessee was claimingdouble benefit, observed as under:- 7.Question No. (c) pertains to the assessee’s claim ofwriting off the bad debts and claiming deduction underSection 36(1)(vi) of the Act. In this respect, the Tribunalnoted that the assessee had purchased certain assets onslump sale basis. In the process, certain debts which werepart of the current assets were reduced. The assessee wroteoff sum of Rs. 1.76 Crores claiming same to be admissibleunder Section 36(1) of the Act. The Tribunal while reversingthe view of the Assessing OfÏcer and the CIT(A) in which itwas held that in the process, the assessee was claimingdouble benefit, observed as under:- "...... We find that the both AO and CIT(A) had completely ignored thefact that under "Adjustment to Purchase Price" the purchaserreassigned some debits amounting to Rs. 2,44,221,60/- to theassessee and assessee reduced the same from the purchase pricewhich is clearly mentioned in para 7.1 of the assessment order. Inour view the finding of AO and the CIT(A) that the debts weretransferred as part of net current assets in the slump sale and theassessee would get double benefit if allowed deduction in respect ofwrite off the book debts were wrong and against the facts of thecase. The assessee had rightly written off the debits and the samewere admissible under section 36(1)(vi) of the Act. In view of theabove facts, the appeal of the assessee on this ground is allowedand the AO is directed accordingly." 8.Thus, the Tribunal on facts held that the assessee hadnot claimed any double benefit and the bad debt wasrequired to be allowed as an admissible deduction underSection 36(1) of the Act. We see no error in the view of theTribunal.. 9.The last question I.e Question No. (d) pertains to the disallowance under Section 40(a)(ia) of the Act on account ofnon deduction of tax at source by the assessee while makingpayment to Videsh Sanchar Nigam Limited towards leasedline charges. On merits, the Revenue had placed reliance ona decision of this Court in case of CIT Vs. Kotak Securities Ltd[1]. The Tribunal, however, held that the amount inquestion was below Rs. 10 Lakhs which was a minimummonetary limit enabling the Revenue to prefer appealagainst the Commissioner’s Appellate orders before theTribunal. Revenue argues before us that the Tribunal shouldhave seen the monetary limit of the combined appeals ofthe assessee as well as the Revenue arising out of thecommon judgment of the CIT(A) pertaining to the assesseefor the same assessment year. In our opinion, this questionis not required to be examined in view of the fact that thedecision of this Court in case of Kotal Securities Limited(supra) has been reversed by the Supreme Court in the caseof CIT Vs. Kotak Securities Ltd[2]. Resultantly, on themerits also, the Revenue would have no ground to succeed. 10. In the result, the Appeal is dismissed. [ SARANG V. KOTWAL, J. ] [ AKIL KURESHI, J ] 1[2012] 20 taxmann.com 846 (Bombay) 2[2016] 67 taxmann.com 356 (SC)