Income Tax Appellate Tribunal - Delhi
M/S Dhanashree Developers P. Ltd.,, ... vs Dcit, New Delhi on 5 December, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH: 'G': NEW DELHI)
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND
SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER
ITA No:- 1848/Del/2016
(Assessment Year: 2010-11)
Dhanashree Developers P. DCIT, Central Circle-4
Ltd., 303, Western Edge-1, Vs. New Delhi
Wester Express Highway,
Above Metro Mall, Borivali,
(East), Mumbai
PAN-AACCD6182F
APPELLANT RESPONDENT
Appellant by None
Respondent by Sh. Saras Kumar, Sr. DR
ORDER
PER ANADEE NATH MISSHRA, AM
[A]. This appeal has been filed by the assessee against the order dated 20.01.2016 passed by Learned Commissioner of Income Tax(Appeals)-30, New Delhi [in short, "Ld.CIT(A)"] pertaining to assessment year 2010-11.
The Assessee has raised following grounds of appeal:-
1. The learned CIT(A) erred in law and on facts in confirming an addition of Rs 72,50,159/- on account of bogus purchases on the basis of information received from investigation department which in turn relied on information from VAT Department without appreciating that the purchases were fully supported and verifiable by invoices and payments were made by account payee cheques.
2. The learned CIT(A) erred in law and on facts in confirming the disallowance by relying on the statements of the dealers without giving any opportunity of cross examination as also without bringing any corroborative material apart from the statements.
3. Without Prejudice to the above grounds, the learned CIT(A) erred in law and on facts in confirming disallowance to the extent of ITA No: - 1848/Del/2016 Rs 29,94,307/- and Rs 4,11,961/- reflected in work in progress and VAT credit respectively which was not debited to the Profit and Loss Account.
4. Learned CIT(A) erred in law and on facts in confirming disallowance of Rs 90,42,612/- u/s 14A r.w.s. Rule 8D without recording any satisfaction that any expenditure was incurred for earning exempt income.
5. Learned CIT(A) erred in not appreciating that there was no exempt income earned during the year as also no interest bearing funds were utilized for making investments for tax free income.
6. Learned CIT(A) erred in law and on facts in confirming the disallowance u/s 14A in absence of any nexus of expenditure with tax free income.
[B]. Assessment order dated 28.03.2013 was passed by the Assessing Officer ("AO", for short) under section 143(3) of the Income Tax Act, 1961.
In this assessment order, the AO made a further disallowance of Rs.
90,42,612/- under section 14A of the Income Tax Act r.w.r. 8D of Income Tax Rules in addition to suo moto disallowance of Rs. 90,42,612/- made by the assessee under section 14A of I.T. Act. Further, the Assessing Officer disallowed an amount of Rs. 90,42,612/- out of deduction under section 80IC of Income Tax Act, 1961 amounting to Rs. 32,49,88,100/-
claimed by the assessee. The relevant portions of the assessment order are reproduced below for ease of reference:-
"5. Information has been received from the DIT(Inv.)-1, Delhi vide letter F. No. DIT (Inv.)-1/MVAT/Del/2012-13/87 dated 26.02.2013 enclosing therewith details of non-genuine / bogus bills availed by the assessee M/s Dhanshree Developers Pvt. Ltd. This information was received by the DIT (Inv.), Delhi from DGIT (Inv.), Mumbai who in turn received the same from the VAT Department, Mumbai. According to the information received, M/s Dhanshree Develpers Pvt. Ltd. during the financial year 2009-10 relevant to assessment year 2010-11 has availed accommodation bills totaling to Rs. 72,50,159/- from the following persons who are engaged in providing bogus bills (hawala dealers):-
S. Name of the hawala PAN No. F.Y. in Amount
No. dealer which of bill
Page | 2
ITA No: - 1848/Del/2016
bills
availed
1 Supreme Enterprise AKRPM9147P 2009-10 2007980
2 Newzone Multi trade AAECM7719B 2009-10 30758
Pvt. Ltd.
3 Mahalaxmi AACPD7542C 2009-10 334409
Corporation/Pragati
Corporation
4 Darshan Trade AVIPP6026G 2009-10 732472
Corporation
5 Ambika Trade Impex BPRPS5234M 2009-10 237456
6 Rohit Enterprises AAIPV8196J 2009-10 782097
7 Hariom Traders ADMPL1842L 2009-10 3124987
Total 7250159
The assessee vide order sheet entry dated 15.03.2013 was asked to clarify its position regarding obtaining of the above mentioned bogus bills and also to show cause as to why the above mentioned amount of Rs.72,50,159/- should not be added to the total income of the assessee. The information in. possession of this office was also communicated to the assessee.
5.1. The assessee vide reply dated {8.03.2013 send by speed post and received in this office on 28.03.2013 vide Dv. No.759 submitted as under:
"With reference to above, our representative Mr, AJ Dighe, Chartered Accountant appeared before your honor on 15.03.2013 and 16.03,2013 and submitted the information asked for and has discussed the case. During the course of hearing, as informed to our All it has communicated to us that your are in possession of certain information received from Sales Tax Department, Mumbai according to which our company has communicated by the Sales Tax Department has booked fictitious purchases amount to Rs. 72,50,159/- and AR was asked to submit his say on this. The time was asked by AR till 19.03.2013 on which we have to send our reply to reach you by 2P' March, 2013. We would like to submit as under:
i. During the PI Y. 2009-10, we were carrying some labour some labour contracts and certain Government Projects. The total purchases or labour contract expenses were around 117 crores. The list of alleged fictitious purchases as received by you from Sales Tax Department shown to AR contains purchases from six parties amounting to Rs. 72,50,159/-
ii. We are verifying the said transactions with purchase department and at sites. During the F.Y. 2009-10 we were carrying projects of Borivali Sty Walk, ES1C and Nashik.
iii. We have prepared a stale merit showing the details of above purchases, VAT paid on the same and how much was charged to Profit and Loss Account and how much is carried to Work In Page | 3 ITA No: - 1848/Del/2016 Progress. We are enclosing herewith chart showing the details o f purchases and amounts charged to Profit and Loss Account etc. It is our practice that only that percentage of purchases is charged to Profit and Loss Account on which revenue is declared and balance is included in the amount of Work in Progress at the end of the year. iv. iv. As such, it will he seen from the chart enclosed that Rs.38,43,891/- is debited to Profit and Loss Account and Rs,29,94,307/- is included in the figure of Work in Progress os at the end of the year. The figure of Rs. 4,11,961/- which is VAT is considered separately. In this situation total figure of 72,50,159/- can in no circumstances be disallowed, while computing taxable income. We would like to request as follows:
a. The. information received from Sales Tax Depart men1 w informed to our AR on 16.03.2013 which is at the fag end of the assessment proceedings for which we have very limited time to justify our case, as our office is at Mumbai and the Assessing Officer is stationed at Delhi.
b. We are verifying that transactions and can revert only after conducting deep investigation in the matter.
c. Further time may please be allowed for submission of the details called for d. Besides, the party concerned may be called for Cross examination to find out the truth regarding the Sale of materials to us. Besides, the material has been used in our site and the payment has been made by Account payee cheque only.
e. Without prejudice to what is stated hereinabove, in the event of your making any additions it shall be definitely based on the chart presented by us and the total purchases may not be disallowed in assessment, considering that some part of purchases has gone in Work in Progress even though we do not agree with this proposition at all. "
5.2. The submission of the assessee has been carefully considered. It is clear from the submission that the assessee has no specific clarification to offer in its defence. So far as the claiming of expenditure by way of the above mentioned bills is concerned, the same has not been disputed. The assessee has only submitted that the entire purchases from the above parties have not been claimed as expenditure in the profit & loss account. It has been contended that a part of the purchases have been debited to the project work in progress account. Instead of getting the purchases verified by producing the parties, the assessee had asked for more time for verifying the Transactions. It can be seen from the records that the assessee was given time from15.03.2013 till 28.03.2013 to reconcile its accounts and file its reply. However, the assessee failed to do so.
Page | 4 ITA No: - 1848/Del/2016 5.3. As per the information received by this office, statements of the above mentioned hawala dealers were recorded by the Investigation Wing of the Maharastra Sale Tax / VAT Department. Sh. Munish Rajnikant Modi, who is the proprietor of M/s Supreme Enterprises in his statement categorically confessed to providing only bills. In response to the specific question raised by the Assistant Commissioner of Sale Tax (Inv.) m the statement recorded on 18-11-2008 his reply was as under
"Q No, 28 - Do you carry on any real business of sale or purchase of goods?
Ans. No. I don't know anything about the business. I have not carried any business what ever done is by Mr. Hemant Muni and Mr. Mahesh his men. / once again confirm that 1 have not sold or purchase any goods.
Similarly, Sh. Hashmukh H. Panchal proprietor of M/s Darshan Trade Corporation vide his letter dated 08-12-2011 submitted to the Assistant Commissioner of Sale lax (1-28)(Inv.-B), Mumbai admitted that he had not done any genuine business and had issued only tax invoices. He also mentioned that he is willing to submit his affidavit regarding his business activity. His Sale Tax Registration, was also cancelled by the Mumbai VAT Department. A copy of affidavit dated 09-12-2011 submitted by him has also been received by this office. Similar information has also been received in respect of Sh. Kamlesh K. Seth Proprietor of M/s Ambica Trade Impex and in respect of other hawaia dealers. The information has been supplied by the Maharastra VAT Department to the DGI.T (Inv.), Mumbai and from there it has been disseminated to this office.
5.4 The information received from the Maharastra VAT Department is specific and not general or vague. The information contains the details of the beneficiaries party, in the present ease assessee M/s Dhanshree Developers (P) Ltd. (formerly known as M/s Pearls Dhanshree Infrastructure (?) Ltd.), PAN no. of the beneficiary, name of the hawala Dealer, TIN No. of the hawala dealer, PAN No. of the hawala dealer and the amount of bogus bills of purchases obtained from the hawala dealers. The information was confronted to the assessee. The assessee has failed to prove the genuineness of the purchases made from these hawala dealers.
From the above it is clear that the assessee has inflated its purchases by an amount of Rs.72.50,159/- by availing bogus/non-genuine bills from hawala dealers as mentioned above during the F.Y. 2009-10 relevant to A.Y.2010-11. Therefore, purchases amounting to Rs.72,50,159/- are disallowed and added to the total income of the j assessee being bogus purchase made during the year from hawala dealers. Penalty proceedings ii/s 271 (1)(c) are being initiated separately.
(Addition of Rs.72.50,159/-)
6. Perusal of the P&L accounts reveal that the assessee has debited an amount of Rs.56.356/- on account of interest on late payment of VAT amounting and Rs. 59,167/- on account of interest on late payment of TDS. Since these payments are of penal in nature, the same are disallowed and added to the total income of the assessee.
Page | 5 ITA No: - 1848/Del/2016 (Addition of Rs.72.50,159/-)
7. From the balance sheet of the assesses for the year ending 31-03-2010, it is seen that the assessee company had made investments aggregating to Rs. 124,60,24,010/- in equity shares and in non cumulative Redeemable preference shares, Since, the investments made by the assessee will yield income which is not includible in the total income of the assessee under the provision of income tax Act, the assessee was asked to explain as to why the provisions of section 14A be not invoked. The assessee has submitted the following reply:-
"This is to submit that the company has received the tax free income in the form of dividend amounting to Pm, 33,410/-. This dividend is received on the shares of Model Co. operative Bank. The company has mailed the loan from the hank and it is the pre condition of the loan that the shares of certain amounts has to be purchased by the borrower from the bank The shares are not purchased as investments or to earn the dividend or tax free income. It is also to be noted that there is no any expenditure incurred for purchase of these share of the bank.
Considering the above, the provisions of section 14A of the IT. Act are not attracted in this case and pending on this there is no disallowance made while filing the return of income".
8. I have considered the reply filed by the assessee, 1 do not find any force in the reply submitted by the assessee, Provision of section 14A. are mandatory in nature. Section 14A of the Act .reads as under-
Section 14A of the Act states:-
"For the purpose of the computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under this Act.
The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, p me Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not part of the total income under this Act.
The provision of subsection (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. "
9. From the above, it is evident that the provision of section 14 A are mandatory in nature. The provisions are also applicable to a case where assessee claims that no expenditure was incurred in earning of the income not includible in total Income. Further, Rule 8D of the Income Tax Rules provides the basis of computing the expenditure relating to earning of income which is not included ill the total income. During the year under consideration, assessee derived tax exempt income in the Page | 6 ITA No: - 1848/Del/2016 form of dividend. Since, the assessee has not made any suo-motto disallowance u/s 14A of the Income Tax Act and has contended that no expenditure has been incurred in relation to the income not includible in the total income, I am left with no alternative than to invoke the provision of section 14A of the income Tax Act. I therefore, make a disallowance of Rs. 90,42,612/- u/s 14A of the act, computed in accordance with the provision of Rule ED of the Income Tax Rules as under: -
The expenditure in relation to income which does not from part of the total income shall be aggregate of the following amounts namely:
(i). The amount of expenditure directly relating to income Which does not form part of total income Nil
(ii) In a case where the assessee has incurred expenditure By way of interest during the previous year which is not Directly attributable to any particular income or receipt An amount computed in accordance with the following formula, namely:
A. interest Expenses Rs. 44,01,462/-
B. Average Investment Rs. 120,46,24,010/-
C. Average Assets Rs. 175,59,59,525/-
AXB/C Rs. 30,19,492/-
(iii) An amount equal to one half percent 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.
0.5% of average value of investment i.e. B Rs.60,23.120/-
Total [(i)+(ii)+f(iii)] Rs.90,42,612/-
Therefore, I make a disallowance of Rs. 90,42,612/- in accordance with the provisions of Section 14A of the Income Tax Act.
Since the assessee has not disallowed the expenses incurred for earning of exempt income, in view of the provisions of the section 14A read with Rule 8D of the Income Tax Rules, hence, I am satisfied that the assessee has furnished inaccurate particulars of his income, accordingly penalty proceedings are initiated u/s 271(1) (c) of the I.T. Act, 1961 separately.
With this remarks, the total income of the assessee company is computed as under:
Income returned as per revised return Add:
-Addition on account of bogus purchases (as discussed above) Rs. 72,50,159/-
-Addition as per para 6 above Rs. 1,15,523/-
-Disallowance u/s 14A of the Act
Page | 7
ITA No: - 1848/Del/2016
(as discussed above) Rs. 90,42,612/-
Total Rs. 8,27,24,554/-
Assessed at an income of Rs. 8,27,24,554/-. Give credit for prepaid taxes. Tax accordingly. Charge interest U/s 234A & 234B of the act as applicable. Penalty proceeding u/s 271(1)(c) of the I.T. Act, 1961 have been initiated separately as discussed above. Issue necessary forms."
[C] The assessee filed appeal before the learned CIT(A), who confirmed both the aforesaid additions. The relevant portions of the aforesaid impugned appellate order dated 20.01.2016 are reproduced as under for the ease of reference:-
"3. Brief facts of the case are as follows. In this case, assessment order u/s 143(3) was completed vide order dated 28.03.2013 at total income Rs. 8,27,24,554/-, as against the returned income of Rs.
6,63,16,260/-, after making the following additions:
(i) On account of bogus purchases : Rs. 72,50,159/-
(ii) On account of disallowance u/s 14A : Rs. 90,42,612/-
(iii) On account of interest payment on : Rs. 1,15,523/-
late payment of VAT/TDS However, the appellant has challenged only the first two additions in this appeal.
4. Ground no. 1 is genera! in nature and does not require any specific adjudication.
5. Grounds no. 2 is relating to the addition of Rs. 72,50,159/-, on account of fictitious/bogus purchases on the basis of information received from Investigation Department.
5.1 The A.O. has made the above addition and findings of the A.O, in assessment order u/s 143(3) dated 28.3.2013, are reproduced as under;-
"2. The case was selected for scrutiny and the first notice U/s 143(2) was issued by the Income tax Officer 9(1)(3). Mumbai on 25.08.2011. Further notice U/s 143(2) of Income tax Act along with a detailed questionnaire was issued on 30.11.2012. In response to the notice Shri A. J. Dighe, Chartered Accountant and Authorized representative of the assessee attended from time to time and discussed the case and submitted replies.
Page | 8 ITA No: - 1848/Del/2016
3. The Assessee is engaged in the business of redevelopment of Housing Societies in the area in and around Mumbai and this is the fourth year of the Company. It has also carried out the work allotted by the local Authorities viz. MMRDA for the Skywalk project etc. During the year the assessee has also executed labour contracts.
4. The AR submitted the details called for and also accounts of the company. From the various discussions held as well as the details filed by the assesses, the income of the assessee is assessed as under.
5. Information has been received from the DIT (Inv.) - I, Delhi vide letter F.No. DIT (lnv.)-l/MVAT/Del/2012-13/87 dated 26.02.2013 enclosing therewith details of non- genuine/bogus bills availed by the assessee M/s Dhanshree Developers Pvt. Ltd. This information was received by the DIT (Inv.), Delhi from DGIT (lnv.), Mumbai who in turn received the same from the VAT Department, Mumbai. According to the information received, M/s Dhanshree Developers Pvt, Ltd. during the financial year 2009-10 relevant to assessment year 2010-11 has availed accommodation bills totaling to Rs. 72,50,159/- from the following persons who are engaged in providing bogus bills (hawala dealers):-
S. No. Name of the hawala PAN no. F. Y, in which Amount of dealer bills availed bill 1 Supreme Enterprise AKRPM9147P 2009-10 2007980 2 Newzone Multi trade AAECM7719B 2009-10 30758 Pvt. Ltd.
3 Mahalaxmi AACPD7542C 2009-10 334409 Corporation/'Pragati Corporation 4 Darshan Trade AVIPP6026G 2009-10 732472 Corporation 5 Ambika Trade Impex BPRPS5234M 2009-10 237456 6 Rohit Enterprises AAIPV8196J 2009-10 782097 7 Hariom Traders ADMPL1842L 2009-10 3124987 Total 7250159 The assessee vide order sheet entry dated 15.03.2013 was asked to clarify its position regarding obtaining of the above mentioned bogus bills Page | 9 ITA No: - 1848/Del/2016 and also to show cause as to why the above mentioned amount of Rs.
72,50,159/- should not be added to the total income of the assessee. The information in possession of this office was also communicated to the assessee.
5.1. The assessee vide reply dated 18.03.2013 send by speed post and received in this office on 28.03.2013 vide Dy. No. 759 submitted as under:
"With reference to above, our representative Mr. A.J. Dighe, Chartered Accountant appeared before, your honor on 15.03.2013 and 16.03.2013 and submitted the information asked for and has disc used the case. During the course of hearing, as informed to our AR it has communicated to us that you are in possession of certain information received from Sales Tax Department, Mumbai according to which our company has communicated by the Sales Tax Department has booked fictitious purchases amount to Rs.72,50,1597/- and AR was asked to submit his say on this. The time was asked by AR till 19.03.2013 on which we have to send our reply to reach you by 21st March, 2013. We would like to submit as under:
i. During the F.Y. 2009-10, we were carrying some labour contracts and certain Government Projects. The total purchases or labour contract expenses were around 117 crores. The list of alleged fictitious purchases as received by you from Sales Tax Department shown to AR contains purchases from six parties amounting to Rs. 72.50,159/-.
ii. We are verifying the said transactions with purchase department and at sites. During the F.Y. 2009-10 we were carrying projects of Borivali Sky Walk, ES1C and Nashik.
iii. We have prepared a statement showing the details of above purchases, VAT paid on the same and how much was charged to Profit and Loss Account and how much is carried to Work In Progress. We are enclosing herewith chart showing the details of purchases and amounts charged to Profit and Loss Account etc. It is our practice that only that percentage of purchases is charged to Profit and Loss Account on which revenue is declared and balance is included in the amount of Work in Progress at the end of the year.
iv. As such, it will be seen from the chart enclosed that Rs. 38,43,891/- is debited to Profit and Loss Account and Rs.29.94,307/- is included in the figure of Work in Progress as at the end of the year. The figure of Its 4 11,961/- which is VAT is considered separately. In this situation total figure of 72,50,159/- can in no circumstances be disallowed while computing taxable income. We would like to request as follows:
a. The information received from Sales Tax Department is informed to our AR on 16. 03.2013 which is at the fag end of the assessment Page | 10 ITA No: - 1848/Del/2016 proceedings for which we have very limited time to justify our case, as our office is at Mumbai and the Assessing Officer is stationed at Delhi.
b. We are verifying that transactions and can revert only after conducting deep investigation in the matter.
c. Further time may please be allowed for submission of the details called for.
d. Besides, the party concerned may be called for Cross examination to find out the truth regarding the Sale of materials to us. Besides, the material has been used in our site and the payment has been made by Account payee cheque only.
e. Without prejudice to what is stated hereinabove, in the event of your making any additions it shall he definitely based on the chart presented by us and the total purchases may not be disallowed in assessment, considering that some part of purchases has gone in Work in Progress even though we do not agree with this proposition at all. "
5.2. The submission of the assesses has been carefully considered. It is clear from the submission that the asses see has no specific clarification to offer in its defence. So far as the claiming of expenditure by way of the above mentioned bills is concerned, the same has not been disputed. The assesses has only submitted that the entire purchases from the above parties have not been claimed as expenditure in the profit & loss account. It has been contended that a part of the purchases have been debited to the project work in progress account. Instead of getting the purchases verified by producing the parties, the assessee had asked for more lime for verifying the transactions. It can be seen from the records that the assessee was given time from 15,03.2013 till 28.03.2013 to reconcile its accounts and file its reply. However, the assessee failed to do so.
5.3. As per the information received by this office, statements of the above mentioned hawala dealers were recorded by the Investigation Wing of the Maharashtra Sale Tax/VAT Department. Sh. Munish Rajnikani Modi, who is the proprietor of MS Supreme Enterprises in his statement categorically confessed to providing only bills. In response to the specific question raised by the Assistant Commissioner of Sale Tax (Inv.) in the statement recorded on 18-11-2008 his reply was as under:-
"Q No. 28 - Do you carry on any real business of sale or purchase of goods?
Ans No. I don't know anything about the business. / have not carried any business what ever done is by Mr. Hemant Muni and Mr. Mahesh his men. 1 once again confirm that /have not sold or purchase any goods.
Page | 11 ITA No: - 1848/Del/2016 Similarly, Sh. Hashmukh H. Panchal proprietor of M/s Darshan Trade Corporation vide his letter dated 08-12-2011 submitted to the Assistant Commissioner of Sale Tax (I- 28)(Inv.-B), Mumbai admitted that he had not done any genuine business and had issued only tax invoices. He also mentioned that he is willing to submit his affidavit regarding his business activity. His Sale Tax Registration was also cancelled by the Mumbai VAT Department. A copy of affidavit dated 09-12-2011 submitted by him has also been received by this office. Similar information has also been received in respect of Sh. Kamlesh K. Seth Proprietor of M/s Ambica Trade Impex and in respect of other hawala dealers. The information has been supplied by the Maharastra VAT Department to the DGTT (Inv.), Mumbai and from there it has been disseminated to this office.
5.4 The information received from the Maharastra VAT Department is specific and not general or vague. The information contains the details of the beneficiaries party, in the present case assessee M/s Dhanshree Developers (P) Ltd. (formerly known as M/s Pearls Dhanshree Infrastructure (P) Ltd.), PAN no. of the beneficiary, name of the hawala dealer, TIN No. of the hawala dealer, PAN No. of the hawala dealer and the amount of bogus bills of purchases obtained from the hawala dealers. The information was confronted to the assessee. The assessee has failed to prove the genuineness of the purchases made from these hawala dealers.
From the above it is clear that the assessee has inflated its purchases by an amount of Rs. 72,50.159/- by availing bogus/non-genuine bills from hawala dealers as mentioned above during the F. Y. 2009-10 relevant to A.Y.2010-11. Therefore, purchases amounting to Rs. 72,50,159/- are .disallowed and added to the total income of the assessee being bogus purchase made during the year from hawala dealers. Penalty proceedings ids 271(l)(c) are being initiated separately.
5.2 During the appellate proceedings, Ld. AR has filed written submission / objections vide letter dated 18.01.2016. The relevant portion is reproduced as under:-
"Submissions in respect of addition on account of bogus purchases of Rs. 72,50,159/-
1. It is submitted that the learned AO has referred to three dealer's statement of M/s Supreme, Enterprises, M/s Darshan Trade Corporation and M/s Ambika Trade Impex. The learned AO has disallowed purchases from Newzone Multi Trade Pvt. Ltd, Mahaiaxmi Corporation, Rohit Enterprises and Hariom Traders but the learned AO does not refer to any material whatsoever regarding these parties in the assessment order. It is therefore submitted that the purchases have been disallowed without even bringing any material relating to these parties.
Page | 12 ITA No: - 1848/Del/2016
2. The learned AO has confronted the information at the fag end of the assessment proceedings. The learned AO did not grant any opportunity of cross examination. Merely on the basis of statement of third party without any corroborative material, no disallowance can be made.
3. The appellant has produced the bills of purchases as also the payments have been made by account payee cheques. The bills contain addresses, VAT numbers of the suppliers. The learned AO did not make any further enquiry. The identity of the suppliers has been proved. It was incumbent on the AO to have gathered some corroborative material in order to show that the purchases are bogus.
Reliance is placed on the following decisions-
ACIT V Shri Ramila Shah ITA no. 5246/Mum/2013 Ramesh Kumar and Co V ACIT ITA No. 2959/Mum/2014 DCIT V Shri Rajeev Kalathi ITA No. 6727/Mum/2012 Shri Ganpatraj A Sanghavi V ACIT ITA No. 2826/Mum/2013
4. Reliance is placed on decision of Bombay High Court in case of Babulal Borana V 1TO 282 I.TR 251 wherein the Bombay High Court held that where the identity of the persons from whom goods are purchases has been explained, payment are made by account payee cheques, transactions are recorded in books, no addition can be made.
5. The learned AO has not rejected sales in case of the appellant. The learned AO has accepted the books results. Simply on the basis of information from the sales tax Department, the learned AO directly proceeded to disallow the purchases. Reliance is placed on the decision of Bombay High Court in case of Nikunj Eximp Enterprises (P) Lid reported in 216 Taxman 171 wherein the Hon High Court held that once sales are accepted, the purchases cannot be treated as ingenuine in those cases where the appellant had submitted all details of purchases and payments were made by cheques, merely because the sellers/suppliers could not be produced before the AO.
6. In AC IT v, Kishanlal Jewels (P.) Ltd. (2012) 147 TTJ 308 (Del) (Trib.) it is held that the assessee while furnishing necessary information regarding the transactions and the aforesaid parties like purchase bills issued against goods purchased, sales- tax registration numbers of the parties, PANs, their confirmations and Bank statements showing the debit of the amount paid through Account payee Cheques to them in the account of assessee and credited in the Bank Account of sellers, had discharged its primary onus, thereafter the onus shifted on the department to rebut the same. Addition under section 69C was held to be not justified.
7. In CIT v. U.K. Bros. (1987)163 ITR 249 (Guj.)(IlC). it is held that Purchases made by assessee. Subsequent statements by sellers in Sales Page | 13 ITA No: - 1848/Del/2016 Tax proceedings that they had issued bogus vouchers. No evidence that bogus vouchers were issued to assessee. Payments by account payee cheques. Amount represented purchases cannot be disallowed.
8. Hon'ble Supreme Court in the case of Tin Box Co. vs. CIT (2001) 249 ITR 216 (SC) "an assessment made without giving the assessee an opportunity of setting out his case was liable to he set aside".
9. The Hon'ble Supreme Court observed in the case of Dhakeswari Cotton Mills Ltd. v. CIT (1954) 26 ITR 775 (SC), if the AO proposes to use any material against the assessee, which is obtained by private enquiry, it should have been communicated to the assessee so as to know full particulars of the case and the failure to do so vitiates the case of the Revenue.
10. CIT v. 'Eastern Commercial Enterprises (1994)210 ITR 103 (Cal) (HC) The assessee is entitled to cross-examine the person who was examined by the A.O. Cross - examination is the sine qua non of due process of taking evidence and no adverse inference can be drawn against a party unless the party is put on notice of the case made out against him. He must he supplied the contents of all such evidence both oral and documentary, so that he can prepare to meet the case against him. This necessary also postulates that he should cross -examine the witness hostile to him.
11. In CIT v. J M D. Communications P. LTD (2010) 320 ITR 17 (ST) (SC) (ITA NO 106 OF 2007 DT16-1-2009(Delhi)(HC) it is held that the Person who has issued the bills has given the statement that he was carrying on the business of issuing bogus accommodation bills on commission basis with the assessee, and this was not put to the assessee for rebuttal or cross- examination, High Court held no substantial question of law. On SLP by revenue the Court held that if the AO wants to use. some statement made before him, then on request by the assessee, is bound to put the deponent for cross .examination.
12. In Kishinchand Chellaram v. CIT (1980) 125 ITR 713 (SC) Supreme Court held that though the proceedings under the Income-tax Act are not governed by the strict rules of evidence, the department is bound to afford an opportunity to controvert and cross examine the evidence on which the department places its reliance. Opportunity of cross examination must be given. The consequence of breach of natural justice is that either the addition is void or mailer may have to he to be remanded to lower authorities.
13. In G. G. Diamond International v Dy. CAT (2006) 104 TTJ 809 (Mum.) (Trib.) it is held That it is not case of the Revenue that the assessee is not maintaining books of account. The purchases are recorded in the books of account. Payments are made by cheque to the immediate purchasers. They Page | 14 ITA No: - 1848/Del/2016 accepted and confirmed the sale. To hold otherwise, there should be some evidence in The possession of The Revenue. Suspicion, however strong, cannot take the place of evidence and that alone cannot he the criteria for deciding the matter.
14. In DCIT v. Shri Rajeev G. Kalaihil, (Mum) (Trib) (ITA No. 6727/M/2012 dt. 20/8/2014. Bench 'D' AY .2009-10) Suspicious purchases - Name on website of Sales Tax Department as hawala dealer not enough to disallow purchases. Held, the AO had made the addition as one of the suppliers was declared a hawala dealer by the VAT department. The Tribunal observed that this was a good starting point for making further investigation and to take it to its logical end. But, the AO left the job at initial point itself. It was further held that suspicion of highest degree cannot take place of evidence and the AO could have called for the details of the bank accounts of the suppliers to find out whether there was any immediate cash withdrawal from their account We also enclose the detail of purchases with copies invoices and detail of party wise ledger accounts and copies of bank statements referring to the payments made to these parties.
We humbly request your honour to consider above and rest we leave to your honour's fine sense judgment."
5.3 Findings:- The findings are as under:
5.4 I have carefully considered assessment order, written submissions, case laws relied upon and oral arguments of Ld, AR. The objections/arguments of the appellant are discussed as under:-
(i) As per the assessment order, the A.O, has given findings that payments were made to 7 alleged bogus parties/hawala dealers, amounting to Rs, 72,50,159/- by the assessee. This finding of the A.O. was based on the information received from the VAT Department, Mumbai through DIT(Inv.)-l, Delhi. Therefore, the A.O. allowed the opportunity to substantiate the claim of alleged purchases made, on account of which payments were made to the alleged hawala dealers, The assessee has filed its submission vide letter dated 18.3.2013, which is reproduced by the A.O. in the assessment order. However, the A.O. was not satisfied with the submission since the assessee could not get verified the bogus purchases by producing these alleged parties and the sufficient time was allowed to do so.
(ii) In the statement recorded by the VAT Department, Mumbai, which is again reproduced in the assessment order in para 5,3, it is clear that the alleged parties denied any business activities carried out for the appellant. There was a specific information from the VAT Department, Page | 15 ITA No: - 1848/Del/2016 Mumbai, that the alleged purchases from 7 parties have been made from hawala dealers and therefore, same are not genuine. Therefore, the A.O. came to the conclusion that the appellant failed to prove the genuineness of purchases made from these alleged hawala dealers and made the addition of Rs, 72,50,159/-.
(iii) During the appellate proceedings, the appellant has submitted that no material has been referred by the A.O. in assessment order and also no opportunity was given to cross-examine. This argument of the appellant is not acceptable since the A.O. has referred only 7 parties for bogus purchase, as against the total purchases of Rs. 116,84,02,349/-
debited in the P & L a/c. Further, in the assessment proceedings, the appellant was allowed the opportunity to substantiate its claim from 15.3.2013 to 28.3.2013 and therefore, contention of the appellant that no adequate opportunity was allowed, is not found to be correct.
CONCLUSION:
From the above, it is clear that the appellant failed to substantiate the claim of alleged bogus purchases from 7 hawala dealers amounting to Rs. 72,50,159/-, before the A.O. and as well as in the appellate proceedings. In the sub-ground no. 2.4, it has been claimed without prejudice by the appellant that the A.O. ought to have restricted the addition to the extent of Rs. 38,43,891/-, since an amount of Rs. 34.06,268/- (Rs. 29,94,307./- + Rs. 4,11,961/-), is actually not debited in the P & L a/c.
In view of the above, I do not find any infirmity in the A.O's order and addition of Rs. 72,50,159/- on account of bogus purchase, i s hereby confirmed.
Accordingly, ground no. 2, is hereby dismissed.
6. Grounds no. 3 is relating to the addition of Rs. 90,42,612/-, by invoking the provisions of section 14A of Income Tax Act and under Rule 8D.
6.1 The A.O. has made the above addition and findings of the A.O. in assessment order u/s 143(3) dated 28.3.2013, are reproduced as under:-
"7. From the balance sheet of the assessee for the year ending 31-03- 2010, it is seen that the assessee company had made investments aggregating to Rs. 124,60,24,010/- in equity shares and in non cumulative Redeemable preference shares. Since, the investments made by the Page | 16 ITA No: - 1848/Del/2016 assessee will yield income which is not includible in the total income of the assessee under the provision of Income tax Act, the assessee was asked to explain as to why the provisions of section 14A be not invoked. The assessee has submitted the following reply:-
"This is to submit that the company has received the tax free income in the form of dividend amounting to Rs, 33,410/-. This dividend is received on the shares of Model Co. operative Bank. The company has availed the loan from the bank and it is the pre condition of the loan that the shares of certain amounts has to be purchased by the borrower from the bank. The shares are not purchased as investments or to earn the dividend or tax free income. It is also to be noted that there is no any expenditure incurred for purchase of these share of the bank.
Considering the above, the provisions of section 14A of the IT, Act are not attracted in this case and pending on this there is no disallowance made while filing the return of income
8. I have considered the reply filed by the assessee. / do not find any force in the reply submitted by the assessee. Provision of section 14A are mandatory in nature. Section 14A of the Act reads as under
Section 14A of the Act states:-
"For the purpose of the computing the total income under this Chapter, no deduct ion shall he allowed in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under this Act.
The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not par! of the total income under this Act.
The provision of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. "
9. From the above, it is evident that the provision of section 14A are mandatory in nature. The provisions are also applicable to a case where assessee claims that no expenditure was incurred in earning of the income, not includible in total income.
Page | 17 ITA No: - 1848/Del/2016 Further, Rule 8D of the Income Tax Rules provides the basis of computing the expenditure relating to earning of income which is not included in the total income. During the year under consideration, assessee derived tax exempt income in the form of dividend. Since, the assessee has not made ant suo-motto disallowance u/s 14A of the Income Tax Act and has contended that no expenditure has been incurred in relation to the income not includible in the total income, I am left with no alternative than to invoke the provision of section 14A of the Income Tax Act. I therefore, make a disallowance of Rs. 90,42,612/- u/s 14A of the act, computed in accordance with the provision of Rule 8D of the Income Tax Rules as under:-
The expenditure in relation to income which does not form part of the total income shall be aggregate of the following amounts namely:-
(i) The amount of expenditure directly relating to income which does not form part of total income.
(ii) In a case where the assessee has incurred expenditure By way of interest during the previous year which is not Directly attributable to any particular income or receipt An amount computed in accordance with the following Formula, namely:
A. Interest Expenses Rs. 44,01,462/-
B. Average Investment Rs. 120,46,24,010/-
C. Average Assets Rs. 175,59,59,525/-
A x B/C Rs. 30,19,492/-
(iii) An amount equal to one half percent 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.
0.5% of average value of investment i.e. B Rs. 60,23,120/-
Total [(i)+(ii)+(iii)] Rs. 90,42,612/-
Therefore, I make a disallowance of Rs. 90,42,612/- in accordance with the provisions of Section 14A of the Income Tax Act.
Since the assessee has not disallowed the expenses incurred for earning of exempt income, In view of the provisions of the section I4A read with Rule 8D of the Income Tax Rules hence, I am satisfied that the assessee has furnished inaccurate particulars of his income accordingly penalty proceedings are initiated u/s 271(1) (c) of the IT.Act,1961 separately."
Page | 18 ITA No: - 1848/Del/2016 6.2 During theappellate proceedings, Ld. AR has filed written submission/objections vide letter dated 16.10.2015. The relevant portion is reproduced as under:-
"1. During the course of Assessment Proceedings, the learned AO observed that in the Balance Sheet for the year ended up to 31.3.2010, the appellant had made investment in equity shares in non-cumulative Redeemable Preference Shares of Rs 1,24,60,24,010/-, According to him, as these investments yield income not includible in income of the appellant, the provisions of Section 14A are applicable. The appellant contended before the learned AO that there is no expenditure incurred for earning any tax free income and therefore the provisions of Section 14A are not applicable. The learned AO concluded in para 9 that the provisions of Section 14A read with Rue SB are mandatory, since the appellant had earned (tax free income in the form of dividend. The learned AO further observed that the appellant has not made any suo moto disallowance and claimed that there is no expenditure is incurred for earning any tax free income, the provisions of Section 14A have to be mandatorily invoked. The learned AO therefore computed the disallowance as per clause (ii) of Rs 30,19,492/- and (Hi) of Rs 60,23,120/- of Rule 8D.
2. The investment in shares and the dividend income at the end of the year under consideration is as under-
Name Amount Dividend Amaya Infrastructure Pvt Ltd. 1,24,08,26,000/- - Prodyon Tech Pvt. Ltd. 20,00,000/- - Grace Plasto Fab Pvt Ltd 15,00,000/- - Punjab & Maharashtra Coop Bank 14,00,000/- Model Coop Bank Ltd 2,98,010/- 33,410/-
3. It is submitted that the appellant has received dividend income of Rs. 33,410/- on shares of a cooperative bank from which the appellant has availed a loan facility. The investment in shares was made as a precondition of loan facility, Further the investment in Preference Shares wav made out of paid up capital of Rs 20 crores and share premium Account of Rs 180 Crores which was made In the earlier years. The entire investment in preference shares therefore is made from own funds of the appellant. There is no nexus with the borrowings and the investment in preference shares. The ledger account of extracts of Share capital account and share premium account with the investment in preference shares as also bank statement showing receipt of funds and disbursement for investment in preference shares, form part of paper book.
4. The appellant Company received share application money from following Companies in different years as under-
Page | 19
ITA No: - 1848/Del/2016
Name of the FY Amount
Company
M/s Ankita 2007-08 99,90,00,000/-
Mercantile P Ltd
PACL India Ltd 2007-08 41,00,00,000/-
PACL India Ltd 2008-09 54,00,00,000/-
Total 1,94,90,00,000/-
From the aforesaid amount the assessee purchased shares of M/s Amaya Infrastructure Pvt. Ltd., as under-
FY Amount
2007-08 1,05,55,50,000/-
2008-09 11,05,26,000/-
2009-10 7,47,50,000/-
Total 1,24,08,26,000/-
The above details show that the interest hearing funds were not used for making above investments. The investment was made in earlier years.
5. In so far as the interest paid during the year are concerned, the total interest paid and debited to P & L A/c for the year under consideration is Rs44,01,000/-. This interest is paid on total loans of Rs 52 crores of which more than Rs 40 Crores were raised during the year whereas the investment in Preference shares of other companies is very old and made in earlier years. The borrowing funds have been used for business purpose of the appellant Company.
6. Section 14A of the Act is relevant and reproduced below:-
"14.4, (1) For the purposes of computing the total income under this Chapter no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act:
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by Mm in Page | 20 ITA No: - 1848/Del/2016 relation to income which does not form part of the total income under this Act.
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001."
7. Section 14A of the Act postulates and states that no deduction shall be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the. total income under the Act. Under sub Section (2) to Section 14A of the Act, the Assessing Officer is required to examine (he accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, the Assessing Officer can determine the amount of expenditure which should be disallowed in accordance with such method as prescribed, i.e. Ride 8D of the Rules (quoted and elucidated below). Therefore, the Assessing Officer at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt income. If and only if the Assessing Officer is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i. e. Rule 8D of the Rules. Thus, Rule 81) is not attracted and applicable to all assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D of the Rules. Where the disallowance or 'nil' disallowance made by the assessee is found to be unsatisfactory on examination of accounts, the assessing officer is entitled and authorized to compute the deduction under Rule 80 of the Rules. This pre-condition and stipulation as noticed below is also mandated in sub Rule (I) to Rule 8D of the Rules.
12. Rule 8D of the Rules, again for the sake of convenience, is reproduced below:-
"8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with--
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
The expenditure in relation to income which does not form part of the total income shall he the aggregate of following amounts, namely;--
(i) the amount of expenditure directly relating to income which does not form part of total income;
Page | 21 ITA No: - 1848/Del/2016
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable so am particular income or receipt, an amount computed in accordance with the following formula, namely: -- A x B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (if incurred during the previous year;
B = the average of 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;
C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
(iii) 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.
(3) For the purposes of this rule, the "total assets" shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. "
7. Sub Rule (I) categorically and significantly stales that the Assessing Officer having regard to the account of the assessee and on not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income under the Act, can go on to determine the disallowance under sub Rule (2) to Rule 8D of the Rules. Sub Rule (2) will not come into operation until and unless the specific pre- condition in sub Rule (1) is satisfied. Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made.
8. The Delhi High Court in Maxopp Investment Ltd. vs. Commissioner of Income Tax [2012] 347ITR 272, has observed:-
"Scope of sub-sections (2) and (3) of Section 14A Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if Page | 22 ITA No: - 1848/Del/2016 we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act, In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of (he claim of the assessee in respect of such expenditure Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of subsection (2) of Section 14A, Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act, In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form pan of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act, It is only if (he Assessing officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 81) of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent, reasons for the same.
Rule 8D:
As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed", We have already mentioned above that by virtue of Notification No.45 of2008, dated March 24, 2008, the Central Board of Direct Taxes introduced Ride 8D in the said Rules, The said Rule SD also makes it clear that where the Assessing Officer, having regard to the Page | 23 ITA No: - 1848/Del/2016 accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the. claim of expenditure made by the asses see; or (h) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A.(2) and (3) in the correct perspective. As we have, already seen, while discussing the provisions of Sub-sections (2) and (3) of Section I.4.A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in toted income in the manner indicated in sub-rule (2) of Ride 81) of the said Rules.
9. It is, therefore, dear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form pari of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure byway of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing- in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14 A. of the said Act.
It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by Page | 24 ITA No: - 1848/Del/2016 way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form pari of the total income, is taken.
10. The above decision has been subsequently followed by Delhi High Court in case of CTT V Taikisha Engineering India Ltd 3 70 1TR 338 Del and held that We need not, therefore,. go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules.
11. In view of the above decisions, it is submitted that the learned AO has not recorded any satisfaction about the expenditure being incurred to earn exempt income. The learned AO neither has examined the books of accounts to arrive at. the satisfaction. On the contrary, the learned AO proceeded on the presumption that once there is exempt income, the provisions of Section 14A are mandatory. In our respectful submission, the above view of the learned AO is legally incorrect in view of the law laid down in various decisions.
12. In respect of interest expenditure, it is submitted that interest expenditure is directly attributable to exempt income. If there is no nexus, the disallowance u/s 14A would not be applicable, Bombay High Court in CAT vs. HDFC Bank Ltd., 366 1TR 505 held that where assessee's capital, profit reserves, etc., were higher than investment in tax free securities, it would have to be presumed that investment made by assessee would be out of interest free funds available with assessee and, consequently, no disallowance could be made u/s J4A. The Hon'ble Bombay High Court in CTT vs. Reliance Utilities and Power Ltd. 313 1TR 340 (Bom) has held that if there are interest free, funds available with the assessee sufficient to meet its investment and, at the same lime, loan has been raised, it can be presumed that (he investments were from interest free finds and, resultantly. no disallowance of interest can be made. Third Member in Visen Industries Ltd. Vs. Addl. C1T 136 TED 309 (Mum) (TM) has also taken similar view.
13. The Delhi IT AT in case of ACIT V Mohan Exports Pvt Ltd 132 ITD 108 Del held that the lower authorities were expected to examine, whether the interest paid in this year is or is not directly attributable to any particular income or receipt. There is a finding that the interest is not directly related to receipts by way of dividends. Therefore, it follows that the payment of interest is in respect of income other than dividend income. In such a situation, the interest cannot be said to be a kind of general expenditure incurred for earning of various kinds of incomes. Therefore, the provision contained in Rule 8D(2)(ii) is not applicable. It was also the argument of the Id. senior DR that the AO has followed the procedure laid down in the case Page | 25 ITA No: - 1848/Del/2016 of Maxopp Investments Ltd. The decision is that the AO has to examine the expenditure and its nexus with the earning of tax-free income, as provided in sub-section (2) of section 14A. If there is no such nexus, the disallowance cannot be made, otherwise the disallowance can be computed as prescribed under Ride 8D. In view of the finding of the Id. CAT (Appeals), no interest expenditure had been incurred for earning tax-free income. Therefore, the provision contained in Rule 8D(2)(ii) cannot be invoked.
14. In Add Cit V Dhampur Sugar Mill Pvt Ltd 370 ITR 194, the Allahabad High Court held that where the entire interest expenditure was attributable to business in which resultant income was assessable to tax, disallowance u/s 14A is not warranted.
15. Reliance is also placed on following decisions- Magarpatla Town Development and Construction Co ltd 152 IT'D 469 Pune. Priya Exibitors Pvt Ltd V AC IT 54 SOT 356 Del DC1T V International Travel House Ltd 40 CCH 211 Del
16. To summarize, it is humbly requested to consider following points:
a) There is no satisfaction recorded by learned AO for disallowance u/s 14A and it is only stated by the learned. AO in the assessment order that the provisions of the said section are mandatory, hence in absence of proper recording of satisfaction the addition made needs to be deleted.
b) There is no nexus between funds borrowed and investment in shares yielding tax free income and the fact that the owned funds are much more than the amount invested in shares. As such the provisions of section 14A of Income Tax Act in our opinion are not attracted. "
Subsequent to the above, Ld. AR has filed further written submission vide letter dated 18.01.2016, which is reproduced as under- "A letter of confirmation from the Model Cooperative Bank is attached wherein the Bank has confirmed the payment of dividend to the assessee company. Also find attached a copy of hank statement of the assessee company showing the entries for such dividend credited to the bank account.
Dividend income is exempt u/s 10(34) of the Income Tax Act 1961 which reads as under 10(34) Any income by way of dividend referred to I section 115-0. Section 115-0 refers to Tax on distributed profits of domestic companies and is reproduced below :
115-0. [(I) Notwithstanding anything contained in any other provision of (his Act and subject to the provisions of this section, in addition to the income- tax chargeable in respect of the total income of a domestic company for any assessment year, any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of April, 2003, whether out of current or accumulated profits shall be charged to additional income-tax (hereafter referred to as tax on distributed profits) at the rate of Page | 26 ITA No: - 1848/Del/2016 Therefore, any dividend to be taxable should be received from a domestic company and dividend distribution tax should have been paid on such dividend.
In the instant case the dividend is received from Model Cooperative bank Ltd., which is not a company but a cooperative society governed by the laws of cooperative society. A part of Annual Report of the Model Cooperative Rank Ltd, is attached for your perusal. In the section AUDIT: It has been made very clear that Auditors are appointed by the Cooperative Dept. Mumbai, which is a clear evidence that Model Cooperative Bank Ltd is a Cooperative society and is not a domestic company. Co operative Banks in India are registered under the Co-operative Societies Jet and are taxed as an AOP and not as a domestic company. Therefore the dividend earned is not exempt from tax.
Since there is no dividend income exempt earned during the year, no disallowance u/s 14A can be made. Reliance is placed on decision in case of Cheminvest V CIT dt 2nd September 2015, the Hon Delhi High Court held as under-
(i) The expression "does not form part of the total income" in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year. The decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(Hi) of the Act, where the expression used is "for the purpose of making or earning such income Section 14A of the Act on the other hand contains the expression "in relation to income which does not form part of the total inc. n 1 The decision in Rajendra Prasad Moody cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act, The decisions of Delhi High Court squarely applies to the case of the appellant and therefore no disallowance can he made.
As there is no exempt income earned section 14A. of the Income Tax Act 1961 cannot, be invoked and therefore, prayed that addition on account disallowance u/s 14A be deleted. "
6.3 Findings:- The findings are as under:
6.4 I have carefully considered assessment order, written submissions, case laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant are discussed as under:-
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(i) In the assessment proceedings, the appellant has stated that, dividend of Rs. 33,410/- was received on shares of M/s. Model Co, Operative Bank Ltd. and the shares were purchased by the assessee as a precondition for obtaining the loan from the bank. Therefore, it was submitted by the assessee that purchase of share is not an investment in order to earn the dividend income. However, this argument of the assessee did not find favour with the A.O., as the provision of section 14A are mandatory, since assessee claimed that no expenditure has been incurred in relation to this exempt income of dividend amounting to Rs. 33,410/-, Therefore, the A.O. invoked the provision of section 14A for making the disallowance and computed the same at Rs. 90,42,612/- , u/s 813.
(ii) During the appellate proceedings, it has been submitted by the appellant that investment of Rs. 124,60,24,010/-, in share was made in 5 companies, which includes investment of Rs. 2,98,010/-, in M/s. Model Co. Operative Bank Ltd. also. However, the appellant received dividend only from 1 company M/s. Model Co. Operative Bank Ltd. Therefore, from these facts it is not correct to claim that the investment in shares in all the 5 companies, were made as a compulsion on account of loan,
(iii) During the appellate proceedings, it was claimed by the appellant for first time in the appellate proceedings, that dividend paid by M/s. Model Co. Operative Bank Ltd is taxable, as same is not exempt u/s 10(34).
This argument of the appellant is not acceptable for the reason that:
> The appellant has claimed it as exempt in the return of income not only A.Y. 2010-11, but also in subsequent assessment years. > The auditor has also not suggested in the audit report that this dividend income is taxable.
> This argument was never taken before the A.O. in the assessment proceedings.
In view of the above and also the fact that documents furnished by the appellant in the appellate proceedings, do not substantiate its claim made in the appellate proceedings.
(iv) Further, if the assessee has earned any income, which does not form part of total income, then as per section 14A(1), of the Act, no deduction shall be allowed, in respect of expenditure incurred in relation to such exempt income. In the case of the appellant, no expenditure directly or indirectly has been worked out and disallowed in the computation of income Med along with return of income, in relation to such exempt income.
The argument of the appellant that no expenditure has been incurred for earning such exempt income, is not acceptable for the reason that:
• That decision of the senior management person(s) is/are required to decide the investment, for earning such exempt income and for this purpose, conscious decision has to be taken by the Page | 28 ITA No: - 1848/Del/2016 management/concerned person(s). Such senior management official/person(s), are always paid in form of remuneration, consultancy etc. • It is not possible to employ a person in the company, who is not paid by the company.
• It is not possible for a person to engage and involve, in the business activities/decision making, without compensating them directly or indirectly. This implies that any investment decision for earning exempt income, suo-moto is not possible, as human intervention is always required.
In view of the above facts and circumstances, the alleged claim of the appellant that no expenditure is incurred, is not acceptable. The expenditure incurred, in relation to exempt income, has to be determined as per Rule 8D of the I.T. Rules, 1962, as the appellant has failed to provide details of such expenditure incurred in relation to exempt income. Accordingly, the AO, is justified, in invoking Rule 81), to determine the amount of expenditure, in relation to the exempt income.
CONCLUSION In view of the above, the arguments of the appellant are not acceptable and I do find any infirmity in the calculation made under rule 8D by the AO in determining the disallowance u/s 14A. Therefore, disallowance of Rs. 90,42,618/-, made by the AO u/s 14A, is hereby confirmed.
Accordingly, ground no. 3, is hereby dismissed.
7. In the result, the appeal is dismissed."
[D]. This present appeal has been filed by the assessee in Income Tax Appellate Tribunal ("ITAT", for short) against the aforesaid impugned appellate order dated 20.01.2016 of the Ld. CIT(A). At the time of hearing, Revenue was represented by Shri Saras Kumar, the Ld. Departmental Representative (in short 'Ld. DR'). However, none was present from the assessee's side. In the absence of any representation from assessee's side, at the time of hearing before us, we heard the Ld. DR. The Ld. DR relied Page | 29 ITA No: - 1848/Del/2016 upon the order of the Assessing Officer and the aforesaid impugned order dated 20.01.2016 of the Ld. CIT(A). After perusal of the order of the AO and the aforesaid impugned order dated 20.01.2016 of the Ld. CIT(A), we find that the Ld. CIT(A) has passed speaking order on merits. Relevant portion of the impugned order of the Ld. CIT(A) has already been reproduced in foregoing paragraph (C) of this order. We find that the Ld. CIT(A) has given detailed reasons for his decision on merits in the aforesaid impugned appellate order dated 20.01.2016 of Ld. C1T(A).
During appellate proceedings in Income Tax Appellate Tribunal ("ITAT", for short) no material has been brought for our consideration to persuade us to take a view different from the view taken by the Ld. CIT(A) in the impugned order on merit. After hearing the Ld. DR and after perusal of materials on record, and further, in view of the foregoing discussion, we decline to interfere with the aforesaid impugned appellate order dated 20.01.2016 of Ld. CIT(A); and this appeal filed by the assessee is dismissed.
[E] Before we part; we explicitly clarify that the assessee will be at liberty to approach ITAT for restoration of the appeal in accordance with Proviso to Rule 24 of Income Tax (Appellate Tribunal), Rules, 1963. If the assessee does approach ITAT for restoration of the appeal in ITAT, the matter will be considered in accordance with law having regard to the facts and circumstances.
Page | 30 ITA No: - 1848/Del/2016 [F] In the result, appeal filed by the Assessee is dismissed.
Order pronounced in open court on 05/12/2019.
Sd/- Sd/-
(AMIT SHUKLA) (ANADEE NATH MISSHRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 05.12.2019
SH
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Draft dictated 18.11.2019
Draft placed before author
Approved Draft comes to the Sr.PS/PS
Order signed and pronounced on
File sent to the Bench Clerk 05.12.2019
Date on which file goes to the AR
Date on which file goes to the Head Clerk.
Date of dispatch of Order.
Date of uploading on the website 05.12.2019
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