Income Tax Appellate Tribunal - Mumbai
Nerka Chemicals P.Ltd, Gujrat vs Dcit Cen Cir 6(3), Kalyan on 14 February, 2019
Aayakr ApIlaIya AiQakrNa " SMC " nyaayapIz maM u b a[- mao .
IN THE INCOME TAX APPELLATE TRIBUNAL " SMC" BENCH, MUMBAI
श्री महावीर स हिं , न्याययक दस्य के मक्ष ।
BEFORE SRI MAHAVIR SINGH, JUDICIAL MEMBER
Aayakr ApIla saM . / ITA No. 3923/Mum/2017
(inaQa- a rNa baYa- / Assessment Year 2012-13)
Nerka Chemicals Private The Dy. Commissioner of
Limited Income Tax, Central Circle -
50-51, B-11, GIDC Estate, Vs. 6(3), 19 t h Floor, Air India
Vapi, Dist Valsad, Gujarat - Building, Nariman Point,
396195 Mumbai-400 021
(ApIlaaqaI- / Appellant) .. (p`%yaqaaI- / Respondent)
स्थायी ले खा िं . / PAN No. AAACN9337Q
अपीलाथी की ओर े / Appellant by : Shri Kirit Kamdar, AR
प्रत्यथी की ओर े / Respondent by : Shri Kailash Kanojiya, DR
न
ु वाई की तारीख / Date of hearing: 14.02.2019
घोषणा की तारीख / Date of pronouncement : 14.02.2019
AadoSa / O R D E R
महावीर स हिं , न्याययक दस्य/
PER MAHAVIR SINGH, JM:
This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-54, Mumbai [in short CIT(A)], in appeal No. CIT(A)-54/DCCC-6(3)/IT-126/15-16 vide dated 02.02.2017. The Assessment was framed by the Dy. Commissioner of Income Tax, 2 ITA s no. 3 92 3 / Mu m /2 0 17 Central Circle-6(3), Mumbai (in short 'ACIT/ITO/ AO') for the A.Y. 2012-13 vide dated 26.03.2015 under section 143(3) of the Income Tax Act, 1961 (hereinafter 'the Act').
2. The only issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of expenses relatable to exempt income made by AO by invoking the provisions of section 14A of the Act, read with Rule 8D of the Income Tax Rules, 1962 (hereinafter the 'Rules'). For this assessee has raised the following grounds: -
"1.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) ['CIT(A)] erred in confirming the disallowance made by the Assessing Officer (AO') under section 14A of the Income-tax Act. 1961 (Act) as per Rule 80 while computing the total income.
1.2 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO in applying Rule 8D, even though there was no recording of any non-satisfaction with the disallowance computed by the appellant.
1.3 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that investments made by the appellant were strategic investments made in group companies for holding controlling stake 3 ITA s no. 3 92 3 / Mu m /2 0 17 and not to earn dividend income which is only incidental 1.4 On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the disallowance under section 14A cannot be lower than Rs.43,68,365/- as suo moto computed by the appellant in the return of income.
1.5 On the facts and in the circumstances of the case and in law the ClT(A) erred in not appreciating that amount of disallowance under section 14A ought to be restricted to Rs 20,13,394/- as submitted during the assessment proceedings or in the alternative to Rs 43,68,365/- as made in the return of income.
1.6 On the facts and in the circumstances of the case and in law, it is submitted that the disallowance under Rule 8D(iii) ought to be restricted to Rs. 16,30,025/- being expenses debited to Profit and Loss Account excluding interest expenditure.
1.7 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the AO in not appreciating the fact that the provisions of Rule 80 are not applicable for computing the 4 ITA s no. 3 92 3 / Mu m /2 0 17 disallowance in respect of expenditure relatable to exempt income while computing the book profits under section 11 5JB of the Act."
3. Briefly stated facts are that the assessee has earned dividend income of ₹ 18,76,89,600/- and made suo moto disallowance under section 14A of the Act read with Rule 8D of the Rules at ₹ 43,68,365/- while computing the total income. The AO after considering the submissions of the assessee computed the disallowance under section 14A of the Act read with Rule 8D of the Rules at ₹ 82,28,143/-, and after allowing set off of suo moto disallowance made by the assessee, he worked out the disallowance at ₹ 38,59,778/-. The AO further restricted the disallowance at ₹ 13,11,907/- in view of the fact that the expenditure debited in the P&L Account was less than the disallowance computed by the Assessing Officer. Thereafter, he restricted the disallowance at ₹ 13,11,907/-. Aggrieved, assessee preferred the appeal before CIT(A), who confirmed the action of the AO partly by directing the AO to recompute the disallowance under section 14A read with Rule 8D of the rules after considering the investments which have yielded the exempt income during the year. The CIT(A) also directed the AO to recompute the disallowance but it was clarified that the disallowance under section 14A read with section 8D of the Rules cannot be less than the sum of ₹ 43,68,365/- as computed and disallowed by the assessee suo moto in the return of income. The CIT(A) also confirmed the action of the AO in regard to computing the disallowance while computing the book profit under section 115JB of the Act. Aggrieved, assessee is in second appeal before Tribunal.
5ITA s no. 3 92 3 / Mu m /2 0 17
4. I have heard the rival contentions and gone through the facts and circumstance of the case. I find from the facts of the case and that the arguments from both the sides that the assessee argued that there is no satisfaction recorded by the AO while invoking the provisions of section 14A read with Rule 8D of the Rules. The learned Counsel for the assessee drew my attention to the specific finding of AO in the assessment order which reads as under: -
"On perusal of the return of income and audited financial accounts of the assessee for the year under consideration, it is noticed that the assessee earned dividend income of ₹ 18,76,89,600/-. The assessee has made disallowance under section 14A of ₹ 43,68,365/- while computing the total income. As such, I am not satisfied with the disallowance made by the assessee in the return of income. Accordingly, the assessee company was asked to explain why expenses should not be disallowed under section 14A read with Rule 8D of the Income Tax Act, 1961."
5. The learned Counsel for the assessee stated that assessee has specifically filed detailed disallowance suo moto which is as under: -
Sr. Particulars Amount
No.
1. Demat Charges 5,000
2. Interest debited to Profit and Loss Account 43,63,365
Total 43,68,365
6
ITA s no. 3 92 3 / Mu m /2 0 17
6. Further, the assessee revised the computation of disallowance and computed the disallowance only in respect of shares which have yield dividend income and the same was filed during the course of assessment proceedings as under: -
Sr. Particulars Amount
No.
1. Demat Charges 5,000
2. Interest debited to Profit and Loss Account 20,13,394
Total 20,18,394
7. The learned Counsel for the assessee stated that there is no satisfaction or objective satisfaction as to how the assessing officer rejected the conclusion that the suo moto disallowance made by the assessee i.e. revised disallowance is wrong. There is no satisfaction. The learned Counsel for the assessee relied on the decision of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC), wherein the Hon'ble Supreme Court in regard to satisfaction reads as under:-
"41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to 7 ITA s no. 3 92 3 / Mu m /2 0 17 record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the AO."
8. The learned Counsel for the assessee also drew our attention to the Tribunals order in the case of Sajjan India Ltd. vs. ACIT (2018) 89 taxmann.com 21 (Mumbai-Trib), wherein it is held that disallowance under section 14A of the Act can be reduced lower than the amount of suo moto computed by the assessee in the return income and he referred to the following Para 5 of the Tribunals order as under: -
"5. Aggrieved, both assessee and Revenue have come in appeal before the tribunal. Heard both the rival parties , perused the orders of authorities below, order of the tribunal in assessee's own case for preceding year and other material on record. The assessee is engaged in the business of manufacturing and export of dyes and dye intermediates and other chemicals. The whole controversy revolves around computation of disallowance u/s 14A of the 1961 Act. The assessee having earned dividend income of Rs. 1,60,62,485/- had claimed the same to be an exempt income. The assessee has suo motu offered disallowance u/s 14A of Rs. 37,55,126/- u/r 8D(2)(iii). The AO has made disallowance u/s 14A r.w.r 8D of Rs. 84,47,344/-, while learned CIT(A) deleted disallowance u/r 8D(2)(ii) as it is brought on record 8 ITA s no. 3 92 3 / Mu m /2 0 17 that the assessee has availed bank loans of Rs. 4.64 crores towards export credits and paid interest of Rs.22.18 lacs towards loans towards export limits. The assessee's own funds are to the tune of Rs. 377.55 crores being share capital of Rs. 3.81 crores and reserves and surplus of Rs. 373.74 crores. The investments are to the tune of Rs. 150.65 crores as at 31-03-2011 while the same was Rs. 164.69 crores as at 31-03-2010. The audited financial statements are placed in paper book, which supports this contention of the assessee. The presumption shall apply as is held by Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Limited (2009) 313 ITR 0340(Bom HC) and also HDFC Bank Limited (2016) 67 taxmann.com 42(Bom. HC)) that the assessee has invested its own interest free funds for making investments. There is no infirmity in the appellate order of learned CIT(A) deleting the addition u/r 8D(2)(ii) r.w.s. 14A, keeping in view factual matrix of the case as firstly the funds were borrowed from bank by the assessee for export credit limits on which interest was paid and hence interest on borrowings have direct nexus with export credit facilities granted by the bank, secondly own interest free funds available with the assessee are much higher than investments and hence presumption will apply. The Revenue fails on this ground. We order accordingly. The second controversy is w.r.t. the disallowance of administrative and other expenses 9 ITA s no. 3 92 3 / Mu m /2 0 17 u/r 8D(2)(iii) r.w.s. 14A. The learned counsel for the assessee has claimed that the assessee's has different divisions such as Head office and factories etc. It is claimed that the assessee has maintained separate books of accounts for each division. It is claimed that the investments are only monitored, controlled, maintained and managed from HO and other divisions have no role to play in dealing with the investments, which can be verified by Revenue. It is claimed that the AO can look into books of accounts and after verifications can be conducted by the AO and the AO should consider HO expenses only for disallowance u/r 8D(2)(iii) r.w.s. 14A. It is claimed that this ground was raised before the learned CIT(A) but doors of justice was shut by learned CIT(A) as no revised return was filed by the assessee. It is claimed that since the assessee never raised this issue in preceding year i.e. 2010- 11, the ITAT had no occasion to deal with the same but the assessee did raise this issue in earlier years i.e. 2007-08 to 2009-10, wherein ITAT had set aside the matter to the AO for necessary verifications. The learned counsel for assessee will rely on judgment of Hon'ble Bombay High Court in the case of CIT v. Pruthvi Brokers and Shareholders Private Limited (2012) 349 ITR 0336(Bom HC) and CIT v. B G Shirke Construction Technology Private Limited (2017) 395 ITR 0371(Bom HC) to contend that even if revised return of income was not filed but the appellate authorities can always look into these 10 ITA s no. 3 92 3 / Mu m /2 0 17 grounds agitated before them. We find merit in the contention of the assessee but the claim raised by the assessee need verification and the matter is restored to the file of the AO to verify the HO expenses incurred which are to be taken cognisance for making disallowance u/r 8D(2)(iii).
The AO shall also verify the contention of the assessee that only HO is involved in making investments and other divisions/factories have no role to play in making, controlling, managing and/or monitoring investments. The onus is on the assessee to prove its contentions to get relief. We order accordingly. The next contention of the assessee is that there are certain Mutual funds held by the assessee which did not declare dividend as per their original scheme of investment. These MF will disburse capital at the termination of scheme which is charged to capital gain tax as per scheme of the 1961 Act is the contention of the assessee. It is claimed that since no exempt income will ever arise on these MF, they shall be excluded from the computing average investments for computing disallowance u/r 8D(2)(iii) r.w.s. 14A. We again find merit in the contentions of the assessee as if there is no exempt income likely to arise from investment instruments keeping in view their scheme of subscription, its inclusion for purposes of disallowance u/s 14A r.w.r. 8D(2)(iii) is not warranted. The AO shall verify all such instruments and its scheme of subscription and remove them for 11 ITA s no. 3 92 3 / Mu m /2 0 17 computing disallowance u/s 14A r.w.r. 8D(2)(iii) if it is found that these MF will never dividend which is going to be exempt and only disbursement is at the termination of scheme wherein the capital gains arising there from shall be chargeable to tax. We order accordingly. The next contention of the assessee is that only those investments should be considered for inclusion for computing average investments for computing disallowance u/s 14A r.w.r. 8D(2)(iii) which have actually yielded exempt income during year under consideration and it is claimed that the said issue is covered by decision of Special Bench of the Delhi-tribunal in the case of Vireet Investment Private Limited v. ACIT ( 2017) 82 taxmann.com 415(Del SB). The learned DR fairly agreed that this issue is covered by decision of Special Bench, Delhi ITAT in the case of Vireet Investment Private Limited (supra). We direct the AO to decide this issue in the light of decision of Special Bench in the case of Vireet Investment Private Limited(supra), wherein only those instruments/securities which yielded exempt income during the previous year relevant to the impugned assessment year shall be considered for computing disallowance u/s 14A r.w.r. 8D. The Special Bench in para 11.16 held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. We are bound by decision of Special Bench and Respectfully following the same, we direct the 12 ITA s no. 3 92 3 / Mu m /2 0 17 AO to compute disallowance u/s 14A r.w.r. 8D(2)(iii) in accordance with the ratio of law laid down by Special Bench - ITAT, Delhi in the case of Vireet Investment Private Limited(supra). We order accordingly.
The next contention is w.r.t. computation of book profits u/s 115JB vis-avis disallowance u/s 14A. The issue is now decided by Special Bench, Delhi ITAT in the case of Vireet Investment Private Limited (supra). Both the parties fairly agreed that issue is covered by decision of Special Bench of ITAT, Delhi in the case of Vireet Investment Private Limited(supra). The AO is directed to decide the issue in the light of ratio of decision of Special Bench in the case of Vireet Investment Private Limited(supra). We order accordingly. The last grievance under these appeal is of the assessee as to whether the disallowance u/s 14A can fall below disallowance suo motu voluntarily made by the assessee in the return of income filed with the Revenue. The assessee has claimed that if his several contentions are favourably considered by tribunal keeping in view legal position, the disallowance u/s 14A can fall below the voluntary disallowance made by the assessee suo motu in return of income filed with the Revenue. The assessee has relied on decision of Hon'ble Gujarat High Court in the case of Principal CIT v. UTI Bank Limited (2017) 398 ITR 514(Guj) and decision of 13 ITA s no. 3 92 3 / Mu m /2 0 17 ITAT, Mumbai in the case of Rupee Finance and Management Private Limited v. DCIT (2017) 57 ITR(Trib.) 205(Mumbai). We find merit in the contention of the assessee that once tribunal has adjudicated matter in assessee's favour then merely because disallowance was made in return of income voluntarily under a wrong belief, the assessee cannot resile from its position is not acceptable . The mandate of the 1961 Act is to tax real income and not an income which was never the income chargeable to tax in the hands of the assesseee but was declared under a wrong belief or notion . The mandate of the 1961 Act is to tax real income and tax can only be levied under the authority of law. Thus, if after verifications and following the ratio of law decided by the tribunal in the instant case , if the disallowance falls below the disallowance u/s 14A offered by the assessee in return of income, be it may the Revenue cannot charge tax on income which never was the income of the assessee chargeable to tax within the mandate and provisions of the 1961 Act as the tax can only be levied by the authority of law. The Hon'ble Andhra Pradesh High Court in the case of CIT v. Bakelite Hylam Limited(1999) 237 ITR 392(AP) as well Hon'ble Gujarat High Court in the case of Gujarat Gas Company Limited v. JCIT reported in (2000) 245 ITR 84(Guj) has taken a similar view. Hon'ble Gujarat High Court in the case of Gujarat Gas Company Limited(supra) has arrived at the said 14 ITA s no. 3 92 3 / Mu m /2 0 17 decision after considering CBDT circular No. 549 dated 31-10-1989 (1990) 182 ITR (st) 1 while arriving at the said decision that assessed income can fall below returned income in proceedings u/s 143(3) r.w.s. 143(2). The Hon'ble Supreme Court decision in the case of CIT v. Sun Engineering Work Private Limited (1992) 198 ITR 297(SC) was in context of re-assessment proceedings initiated u/s 147 wherein Hon'ble Supreme Court held that reassessment proceedings initiated u/s 147 are for the benefit of revenue and not the assessee, wherein the mandate is to bring to tax income which has escaped assessment while presently we are concerned with proceedings initiated u/s 143(3) r.w.s. 143(2). We order accordingly."
9. The learned Counsel for the assessee also argued that the disallowance while computing the book profit under section 115JB of the Act cannot be made under Rule 8D of the Rules in view of the decision of Vireet Investment Private Limited (supra). On the other hand, the learned Sr. Departmental Representative relied on the order of CIT(A) and that of the Assessing Officer.
10. I find from the above submissions and case laws relied on by the assessee that there is no satisfaction recorded by the AO while computing the disallowance that how the suo moto disallowance made by the assessee is wrong. Secondly also agree with the argument of the learned Counsel that the disallowance under section 14A of the Act can be reduced below the amount suo moto computed by the assessee in the return of income as it has not to be charged to tax in any case. This view 15 ITA s no. 3 92 3 / Mu m /2 0 17 has already been taken by this Tribunal in the case of Sajjan India Ltd. (supra), hence, I direct the AO to restrict the addition to the extent of revised computation of suo moto disallowance by the assessee i.e. only ₹ 20,18,394/- in respect to shares which has yielded dividend income. As regards to the computation of book profit under section 115JB of the Act no disallowance can be made in relation to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. Hence, I also direct the AO to delete the addition while computing book profit. Accordingly, the appeal of the assessee is decided and partly allowed.
11. In the result, the appeal assessee is partly allowed.
Order pronounced in the open court on 14.02.2019. Aado S a kI Gaao Y aNaa Ku l ao mao idnaM k 14.02.2019 kao kI ga[- .
Sd/-
(महावीर स ह िं /MAHAVIR SINGH) (न्याययक दस्य/ JUDICIAL MEMBER) मुिंबई, ददनािंक/ Mumbai, Dated: 14.02.2019 सुदीप सरकार, व.निजी सचिव / Sudip Sarkar, Sr.PS 16 ITA s no. 3 92 3 / Mu m /2 0 17 आदे श की प्रनिलिपप अग्रेपिि/Copy of the Order forwarded to :
1. अपीलाथी / The Appellant
2. प्रत्यथी / The Respondent.
3. आयकर आयुक्त(अपील) / The CIT(A)
4. आयकर आयुक्त / CIT
5. ववभागीय प्रयतयनधि, आयकर अपीलीय अधिकरण, मुिंबई / DR, ITAT, Mumbai
6. गार्ड फाईल / Guard file.
आदे शािस ु ार/ BY ORDER, त्यावपत प्रयत //True Copy// उप/सहायक पंजीकार (Asstt. Registrar) आयकर अपीिीय अचिकरण, मुिंबई / ITAT, Mumbai