IN INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH KOLKATA Before Shri S.S.Godara, Judicial Member and Dr. A.L. Saini, Accountant Member ITA No.2216/Kol/2013 & ITA No.18/Kol/2017 Assessment Years 2008-09 & 2009-10 Florence Investech Ltd. V/s. Addl. CIT, Range-10, (earlier known as J.K. / DCIT, Circle-5(2),P- Agri Genetics Ltd) 7, 7, Chowringhee Council House Street, Square, Kolkata-69 Kolkata-700 001 [PAN No. AACCR3859F] /Appellant Respondent ITA No.2128/Kol/2013 Assessment Year :2008-09 DCIT, Circle-10, V/s. M/s J.K. Agri Genetics P-7, Chowringhee Ltd. 7, Council House Square, 3 r d Floor, Street, Kolkata-700 001 Kolkata-69 [P No. AACCR 3859 F] Appellant Respondent By Assessee Shri D.S. Damle, FCA /By Revenue Shri Rabin Chowdhury, CIT-DR Date of Hearing 25-07-2019 Date of Pronouncement 18-09-2019 ORDER PER S.S.Godara, Judicial Member:- instant batch of three cases pertains to single assessees M/s Florence Investech Ltd. earlier known as M/s J.K. Agri Genetices Ltd. Assessment Year 2008-09 contains Revenue and assessee s cross- ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 2 appeals ITA No.2128/Kol/0213 and 2216/Kol/2013 arising against Commissioner of Income Tax (Appeals)-XII, Kolkata s order dated 12.03.2013 passed in case No.361/XII/Ci-10/10-11. Latter assessment year 2009-10 comprises only taxpayer s appeal ITA No.18/Kol/2017 directed against CIT(A)-10 Kolkata s order dated 05.10.2016 passed in case No.485/CIT(A)- 10/11-12/2014-15/Kol. Relevant proceedings in both assessment year(s) are u/s 143(3) of Income Tax Act, 1961; in short Act . Heard both parties. Case file(s) perused. 2. We come to Revenue s appeal ITA No.2128/Kol/2013. Its sole substantive grievance is that CIT(A) has erred in law and on facts in reversing Assessing Officer s action disallowing aassessee s scientific expenditure incurred on research and development amounting to 1,85,49,462/- during course of assessment. CIT(A) s findings under challenge to this effect read as follows:- 4. I have considered finding of A.O. in his order dt. 31-12-2010 and written submission filed by A.R. during appellate proceeding. Appeal on ground no. is against non-consideration of revised income by A.O. during appellate proceeding A.R. submitted that assessee does not intend to press this ground. Accordingly, appeal on this ground is dismissed. 5. Appeal on grounds no. 2, 3 and 4 are against disallowance of Rs. 44,29,779/- as depreciation on WDV of intangible asset being trade mark and brand. A.O has given his finding that cost attributed towards intangible assets is not brand but goodwill and no depreciation is allowable on same. A.O. has further held that no evidence is there to prove that intangible asset is trade mark or brand. AR. has submitted that during A.Y. 2003-04 CIT, Kol-IV, Kolkata had issued notice u/s. 263 on same issue and after examining submissions and evidences produced CIT was satisfied that depreciation u/s. 32(1l(ii) was allowable in this case have considered finding of AO. and 'the written submission. I think that on actual cost of trade mark and brand name depreciation on WDV is allowable. It is known fact that J.K. Brahd is famous in field of seeds of agro products. Therefore, it cannot be denied that it is brand in itself, accordingly, allowability of depreciation' on WDV of actual cost is required in this field. Thus, AO's appeal, on' grounds no. 2, 3 and 4 are allowed. 6. Appeal on grounds no. 5, 6 and 7 are, against disallowance of sundry creditors. AO.' has given his findings that assessee did not file all required details during assessment proceeding. Therefore, Assessing Officer disallowed Rs. 9053492/- u/s. 68 of I.T.Act, 1961. AR. has submitted written submission explaining that due to paucity of time assessee was unable to provide certain documentary evidence in respect of creditors. So in appellate proceeding that has been filed. mater was referred to AO for verification and remand report. AO. has filed remand report vide letter no. DClT, Cir- 1O/Kol/Report/2011-12/1025 dt. 24-08-2011. AO has submitted that on addresses provided by AR. existence of many parties are not established. ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 3 AO. has further submitted in remand report that ledger accounts of many suppliers in books of accounts in assessee has been subsequently adjusted. So it is not possible to comment on genuineness of such creditors. I have considered finding of AO. in assessment order as well as in remand report and written submission filed by AR. From remand report it is clear that in many cases existence of creditors' on given address have not been found. Similarly, in case of suppliers, genuineness regarding their transactions has not been proved beyond doubt. Therefore, assessee's appeal on grounds no. 5, 6 and 7 are dismissed. 7. Appeal on grounds no. 8 to 11 are against disallowance of Rs. 79,42,598/- made by AO. under Rule 8D read with Sec 14A of IT. Act, 1961 as expenses in order to earn exempted income. AR. has submitted that assessee has not incurred expenditure in order to earn exempted income. I have considered finding of A.O. and written submission filed by A.R. I find that assessee's argument on this issue cannot be accepted. Because after amendment in Sec.. 14A inserted in Finance Act, 2006 w.e.f. 01-04-2007 Act says 11 Assessing Officer shall determine amount of expenditure lncurrec in relation to such income ..... " Thus, it is clear that this provision is mandatory as per statue book. Therefore, calculation of expenditure under Rule 8d read with Sec. 14A w.e.f. A.Y. 2008-09 is justified. Hence, assessee's appeal on grounds no. 8 to 11 are dismissed. 8. Appeal on ground no. 12 to 14 are against disallowance of Rs.10665536/- u/s. 40(a)(ia) in respect of cash discount allowed to customers. A.O. in assessment order has given his finding that discount is in nature of commission/brokerage. Therefore, TDS should have been there u/s. 194H of IT. Act, 1961. During appellate proceeding A.R. has submitted that in order to reduce dependence of bank borrowings and reduce interest burden and to improve liquidity company follows practice of offering prepayment/ cash discounts to its customers to pay invoice value ahead of credit period of 90 days. I have considered finding of A.O. and written submission filed by A.R. I think cash incentives for full invoice payment before credit period may be treated as incentive and by no stretch of imagination it can be called commission/brokerage. Therefore, assessee's appeal on grounds no., 12 to 14 are allowed. 9. Appeal on ground no. 15 to 18 are against disallowance of Rs. 7419691/- being notional interest on interest free .advance to suppliers. A.O has made addition on presumption that such interest free advances might have been paid from borrowed funds. A.R. during appellate proceeding has submitted that in line of business of assessee giving and receiving interest free advances to suppliers and purchasers is normal practice. A.R. has also brought on record that during year assessee has given advances to its suppliers and business associates amounting to Rs. 61830760/- and it has also received interest free advances against its own supplies to purchasers amounting to Rs 283059000/-. I have considered finding; of AO and written submission filed by AR. I find that giving and received advances in assessee's line of business is normal practice. In fact assessee has received more advances than it has given to its own suppliers. Therefore, AO is not justified to make addition of notional interest on this ground. Accordingly, assessee's appeal on ground no: 15 to 18 are allo.wed . 10. Appeal on ground no. 19 to 21 are against disallowance of Rs.1,13,52,917/- on account of failure to deduct" tax u/s. 194H of I.T. Act, 1961. A.O. has held that real character of transaction between assessee and seed growers is of principle agent nature of relationship. Therefore, assessee should have ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 4 deducted TDS on payments to seed growers. During appellate proceeding AR. has submitted that although there is arrangement/understanding between appellant and growers. But all acts, deed and things relating to cultivation ad harvesting of un processed seeds are carried out by growers in their own right at their own cost and risk and on their own land. I have considered finding of A.O and written submission filed by AR. I find that it is true that all acts, deeds and things relating to cultivation, harvesting and processing of seeds are carried out by cultivators on their own risk, on their own land and at their own' cost. But there is no denying facts that cultivators do so with understanding/contract between assessee and themselves (seed growers/cultivators). Therefore, assessee should have deducted tax at source u/s. 194H of I.T. Act, 1961 in this case. Accordingly, assessee's appeal on grounds no. 19 to 21 ore dismissed. 11. Appeal on ground no. 22 to 26 are against disallowance of deduction u/s. 35 of Rs. 18549462/-. AO has given his finding that equipments used by assessee at its research centers of development of new hybrid seeds can also be used by assessee in ordinary course of business as well. Therefore, such equipments would not qualify for deduction u/s. 35 of IT. Act, 1961. AR. during appellate proceeding has submitted that -finding of AO. is on basis of his apprehension and not on some concrete finding. I have considered finding of AO and submission filed by AR. I think AO has disallowed deduction u/s35 of I. T Act. 1961 without giving any specific finding of dual use of machines. Therefore, AOP's action cannot be justified on basis of apprehension only. Accordingly, assessee s appeal on ground No. 22 to 26 are allowed. 3. Mr. Chowdhury, vehemently contends during course of hearing that CIT(A) has erred in law and on facts in deleting impugned disallowance. His case is that Assessing Officer had rightly rejected assessee s deduction claim since it had purchased corresponding R & D items for carrying out its normal business activity than that any scientific research and development (R&D only). We find no merit in Revenue s instant grievance. relevant assessment order dated 31.12.2010 nowhere indicates that assessee had put to use impugned plant and machinery in regular business operations and vice versa. It is made clear that Department of Scientific and Industrial Research (DSIR) had duly granted approval to taxpayer s capital expenditure as per rules. We conclude in this factual backdrop that CIT(A) has rightly deleted impugned scientific research and development disallowance of 1,85,49,462/- made u/s 35(1)(i) made during course of assessment without any material but on assumptions and presumptions. Revenue s instant sole grievance as well main appeal ITA No.2128/Kol/2013 fail accordingly. ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 5 4. Next comes assessee s cross appeal ITA No.2216/Kol/2013. Its first and foremost substantive ground challenges sec. 68 addition of bogus / sundry liability of 92,53,492/- treated as unexplained during course of assessment as well as lower appellate proceedings. 5. assessee-company is manufacturer / producer of hybrid seeds. It carried out research, production & marketing of hybrid seeds as well. There is further no quarrel that assessee had very wide portfolio of all major crops including bajra, jowar, cotton, hybrid rice, maize, sunflower as well as vegetables tomato, chilli, ladiesfinger brinjal, gourds &melons etc. in latter line of seed development business. 6. Case file suggests that assessee had submitted list of 246 parties / payees. Assessing Officer s observed in his assessment order dated 31.12.2010 that assessee had not furnished complete addresses of 109 out of said 240 parties involving sum in question of 90,53,492/-.He therefore was of view that said 109 parties could not be put to confirmation either u/s 131 summons u/s 133(6) notice. And also that assessee had not placed on record their PAN details & bank statements as well. assessee s gross credit figure in case of all 109 parties involved sum of 6,21,48,167/- against closing balance of 90,53,492/-. Assessing Officer therefore treated latter sum as unexplained sec. 68 of Act. CIT(A) has upheld same in his lower appellate discussion. 7. We have given our thoughtful consideration to rival pleadings on instant first issue. assessee-company; admittedly engaged in seed development and procurement thereof in various crops and vegetable, does not own any land for purpose of field trials in research development. Learned departmental representative fails to rebut clinching fact that assessee has to conduct field trials of all foregoing crops and vegetables throughout country by way of its engagement with farmers / growers. assessee is therefore required to issue modified / processed seed to ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 6 growers by way of incentive and said growers are supposed to return entire seed produce at higher incentives rates than only minimum support price shall produce involving seeds are yet to be introduced in market. We find that lower authorities have failed to consider this cumbersome process involved in assessee s line of seed processing and production business. 8. Learned departmental representative at this stage invited our attention to pages 9 to 14 in assessment order that Assessing Officer could not have issued relevant factual verification process to 109 parties on account of their incomplete addresses. We find that only 24 out of said 109 creditors did not contain complete addresses. It further emerges that Assessing Officer is himself very fair in making it clear in his assessment order that total credit figure in respect of these 109 parties was 6,21,48,167/- as against closing balance in issue (supra) which stand treated as bogus. This action of Assessing Officer part is hardly acceptable being instance of mutual contradictory findings. We make it clear that Assessing Officer has treated differential figure of 530,94,675/- in case of very parties as correct. fact also remains that assessee has not completely discharged its onus of proving liability by filing all necessary particulars as well. Faced with this peculiar situation, we deem it appropriate that lump sum disallowance of 5 lac only than 90,53,743/- in issue would meet ends of justice with rider that same shall not be treated as precedent in any other assessment year; as case may be. assessee s first substantive grievance partly succeeds to 85,53,942/-. Necessary computation to follow as per law. 9. Next comes second issue of sec. 14A r.w.s. Rule 8D disallowance of 79,42,598/- comprising of proportionate interest and administrative expenditure figure(s) of 46,08,448/- and 3,34,150 under Rule 8D(2)(ii) &(iii) of Income Tax Rules, 1962; respectively. There is no dispute that ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 7 assessee s relevant exempt income derived from dividend reads amount of 416,41,398/- as against its suo motu disallowance of 3.26 lac only. Paper book page 43 suggests that assessee had held shares in M/s J.K.Paper Ltd. M/s Ashim Investment Co. Ltd., J.K. Industries Ltd. & JK Lakshmi Cement Ltd. involving 6675248, 758057, 4525553 and 6822520 units earning dividends of 2.25, 1, 2.7 and 2 per share; respectively. Suffice to say, both lower authorities have computed impugned proportionate interest and administrative expenditure disallowance as per statutory formula in Rule 8D of Income-tax Rules, 1962. 10. Learned authorized representative vehemently submits during course of hearing that both lower authorities have erred in law and on facts in invoking impugned disallowance u/s.14A r.w.s Rule 8D disallowance during course of assessment as well as in lower appellate proceedings. We are taken to pages 44 to 81 in paper book containing relevant amalgamation scheme(s) approved by hon'ble jurisdictional high court in company application No.16 of 2003 regarding transfer of investments of above stated first entity M/s J.K. Industries Ltd. to assessee and hon'ble Karnataka high court s order in company application No. 58 of 2003 to this effect. assessee appears to have acquired shares of M/s J.K. Industries Ltd. and M/s J.K. Paper Ltd. including 667524 and 4525553 units; respectively. It derived dividend income in respect of these two companies in assessment year 2004-05 as well. CIT(A) s corresponding lower appellate order dated 09.09.2014 page 82 to 93 and more particularly at pages 92 held that above stated amalgamation scheme involved zero coupon bonds and zero coupon preference shares not including any interest at all. This clinching fact has not been rebutted in either of lower proceedings nor before us. We therefore direct Assessing Officer to delete impugned proportionate interest expenditure disallowance in respect of assessee s dividend income of 150,19,308 and 7,58,057/- relating to these two entities; respectively. ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 8 11. Coming to assessee s remaining dividend income in respect to M/s Ashim Investment Co. Ltd., & JK Lakshmi Cement Ltd. it emerges that Assessing Officer has nowhere given clear-cut finding about its non interest bearing fund available at time of making tax free income yelding investments. We therefore deem it appropriate to restore instant remaining component of proportionate interest disallowance back to Assessing Officer for finalizing consequential computation as per law in view of interest free funds available in taxpayer s balance-sheet. Necessary computation to follow as per law. 12. We now advert to latter limb of disallowance of administrative expenditure amounting to 33,34,150/- (supra). Page 11 of paper book reveals that assessee s other income and income from investments. Mr. Damle submits that assessee s other income relating to investments read figure of 4.16 lac out of which it had itself disallowed 3.26 lac (supra) @ 78.33% on pro rata basis. We make it clear that impugned head of administrative expenditure is indirect one wherein necessary computation pro rata basis cannot be faulted. We hold in these facts that both lower authorities have erred in going by statutory computation than taking into consideration relevant actual figure(s) hereinabove. We therefore direct Assessing Officer to delete impugned administrative expenditure disallowance. This second substantive grievance is taken as partly accepted in foregoing terms. 13. Next comes assessee s third and last grievance of sec. 194H r.w.s 40(a)(ia) disallowance of 1,13,52,917/- on account of its failure in deducting TDS on seed purchases treated as brokerage and commission payments in both lower proceedings. CIT(A) s detailed discussion on issue reads as under:- 10. Appeal on ground no. 19 to 21 are against disallowance of Rs.1,13,52,917/- on account of failure to deduct tax u/s. 194H of I.T. Act, 1961. AO has held that real character of transaction between assessee and seed growers is ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 9 of principle agent nature of relationship. Therefore, assessee should have deducted tDS on payments to seed growers. During appellate proceeding AR has submitted that although there is arrangement/understanding between appellant and growers. But all act, deed and things relating to cultivation and harvesting of unprocessed seeds are carried out by growers in their own right, at their own cost and risk and n their own land. I have considered finding of AO and written submissions filed by AR. I find that it is true that all acts, deeds and tings relating to cultivation, harvesting and processing of seeds are carried out by cultivators on their own risk, on their own land and at their own cost. But there is no denying facts that cultivators do so with understanding/contract between assessee and themselves (seed growers/cultivators). Therefore, assessee should have deducted tax at source u/s. 194H of I.T. Act, 1961 in this case. Accordingly assessee s appeal on grounds no. 10 to 21 are dismissed. 14. It therefore emerges that both lower authorities haves treated assessee s payments to its growers for purpose of crops / seeds trials as commission / brokerage payments requiring TDS deduction u/s. 194H of Act. We find that CIT(A) himself is very fair in holding that growers / recipients enjoy title on their own agricultural lands, they have themselves carried out all activities of cultivation, harvesting and seed processing at their own risk. It is therefore instant of outright purchase of seed produce between assessee and said seed growers without involving agent or middleman. This tribunal s co-ordinate bench s decision in (2011) 46 SOT 133 (Visakh.)/10 taxmann.com 47 (Visakh.-ITAT) Additional Commissioner of Income-tax, Rang-4, Visakhapatnam vs. Pearl Bottling (P) Ltd. holds that 194H does not apply in case of principal-to-principal relationship between buyer and recipient . We therefore direct Assessing Officer to delete impugned sec. 194H disallowance of 1,13,52,917/- on this count alone. assessee s cross-appeal ITA No.2216/Kol/2013 is partly allowed in above terms. 15. Mr. Damle invites our attention assessee s latter appeal ITA No.18/Kol/2017 for assessment year 2009-10 raising sole substantive issue of Sec. 194H r.w.s. 40(a)(ia) disallowance of 90,24,062/- involving payments to farmers / growers without deducting TDS identical to our foregoing discussion in preceding assessment year. We adopt judicial consistency to accept impugned sole grievance raised in main appeal. ITA No. 2216, 2128/K/13 & 18/Kol/2017 A.Ys. 08-09 & 09-10 Flourence Investech Ltd/M/s J.K.Agri Genetics Ltd. Vs. DCIT, Cir-10/5(2) Kol. Page 10 16. To sum up, Revenue s appeal ITA No.2128/Kol/2013 for assessment year 2008-09 is dismissed. assessee s cross-appeal ITA No.2216/Kol/2013 is partly allowed and latter appeal ITA No.18/Kol/2017 for assessment year 2009-10 is allowed in above terms. Order pronounced in open court 18/09/2019 Sd/- Sd/- A.L.Saini) (S.S.Godara) (Accountant Member) (Judicial Member) Kolkata, *Dkp ) - 18/09/2019 / Copy of Order Forwarded to- 1. Assessee-Florence Investech Ltd.7, Council House Street, Kolkata-001 M/s J.K. Agri Genetics Ltd.,7, Council House St, Kolkata-001 2. Revenue-ACIT, Range-10/DCIT, Circle-5(2),/DCIT, Cir-10, P-7, Chowringhee Square, Kolkata-69 3. Concerned CIT Kolkata 4. CIT (A) Kolkata 5. DR, ITAT, Kolkata 6. Guard file. By order, True Copy 4 , Florence Investech Ltd. (earlier known as J.K. Agri Genetics Ltd.) v. Addl. CIT, Range-10, / DCIT, Circle-5(2), Kolkata