Income Tax Appellate Tribunal - Chandigarh
Dcit, Panchkula vs M/S Sunev Pharma Solution Ltd., ... on 20 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND
SHRI Dr. B.R.R. Kumar, ACCOUNTANT MEMBER
ITA No.1157/Chd/2016
Assessment Years: 2012-13
Dy. CI T, Vs. M/s Sunev Pharma Solution Ltd.
Panchkula Circle, Plot No. 52, I ndustrial Area
Panchkula Ph-I , Panchkula
PAN No. AAKCS5651E
ITA No.1185/Chd/2016
Assessment Years: 2012-13
M/s Sunev Pharma Solution Ltd. Vs. Dy. CI T
Plot No. 52, I ndustrial Area Panchkula Circle
Ph-I , Panchkula Panchkula
(Appellant) (Respondent)
Assessee By : Shri. S.C. Gupta
Shri. Jaspal Sharma
Department By : Sm t. Chandrakanta
Date of hearing : 05/07/2017
Date of Pronouncement : 20/09/2017
ORDER
PER Dr. B.R.R. KUMAR, AM
The present appeal filed by the Revenue and the cross appeal filed by the assessee are against the common order of Ld. CIT(A), Panchkula dt. 16/09/2016.
2. The revenue has raised following ground of appeal:
1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred to allow the appeal of the assessee and restrict the disallowance to Rs. 18 lacs made u/s 14A because the assessee company has been made investment in equity share amounting to Rs. 33,56,64,000/- on the other hand assessee is paying huge interest amount.
3. In the cross appeal assessee has raised the following grounds:
1. That having regard to the facts and circumstances of the cases, the Ld. CIT(A) erred in law and facts while holding that the AO had recorded objective satisfaction as per requirement of Section 14A(2) of the Income Tax Act.2
2. That having regard to the facts and circumstances of the case, the Ld. CIT(A) has erred in having held that the appellant has failed to discharge the initial onus to furnish satisfactory explanation for non application of section 14A of the Income Tax Act.
3. That having regard to the facts and circumstances of the case, the Ld. CIT(A) has erred in having held that since common expenditure and common interest has been incurred then allocation of expenditure has to be made on proportionate basis as per provisions of section 14A read with rule 8D of the Income Tax Act without appreciating the appellant's plea that no expenses has been incurred to earn exempt dividend income.
4. That having regard to the facts and circumstances of the case, the Ld. CIT(A) has erred in having directed the AO to compute the disallowance under Rule 8D(2)(iii) however restricting the same to the extent of earning of exempt dividend income of Rs. 18,00,000/- or the amount of disallowance whichever is lower.
4. Firstly we shall deal with the Cross Appeal in ITA No. 1185/Chandi/2016 filed by the assessee.
5. Brief facts of the case are that the AO noted that the assessee had invested Rs.33.56.64.000/- in equity share. The AO asked the assessee to explain as to why proportionate disallowance of interest u/s 14 read with Rule 8D may not be made. In absence of any plausible explanation, the AO as calculated in para 3.1 of the assessment order made disallowance of Rs.57,77,206/- and added to the income of the assessee.
6. During the proceedings before the Ld. CIT(A), the counsel for the appellant submitted that the AO has made an addition of Rs.57,77,206/- u/s 14A without establishing the fact that whether any expenditure have been incurred on the investment, the income of which is exempt u/s 10 of the Act. In the case of dividend income, since the tax is collected at source, there is no logic in disallowing expenditure u/s 14A. The counsel further submitted that the AO has also not specified in the order whether any expenditure has been made to earn the exempt income and that the accounts are incorrect. The assessment order does not have evidence for any satisfaction as per section 14A(2) of the Act regarding the correctness of the claim of the assessee.
7. It was also submitted before us that net worth of a company as on 31.03.2012 was Rs.4.89 Crores and the amount of interest free unsecured loan was Rs.39.06 Crores, so the total sum of Rs.43.95 Crores was more than the amount of Rs.33.57 Crores invested by the appellant company in equity shares A 3 Further, for Rule 8D(2)(ii) to apply there has to be some expenditure by way of interest which is not directly attributable to any particular income or receipts. The detail of expenditure incurred by the assessee company under the head 'interest' was also submitted and it was explained that the interest expenditure of Rs.61.47 lacs consist of Rs.43.45 lacs, Rs.0.26 lacs, Rs. 17.76 lacs as interest on term loans, on vehicle loans and on working capital. So, out of total of Rs.61.47 incurred by the assessee under head 'interest paid the interest expenditure of Rs. 17.76 lacs only was paid by the assessee company on its working capital and since, as the amount of term loans and vehicle loans were specifically used by the assessee company for which these loans were granted, so the provisions of section 14A of the Act shall not be applied on the amount of interest expenditure incurred by the assessee company on term loans and vehicle loans. Further, the counsel for the appellant submitted that the AO failed to appreciated the fact that the assessee company had received dividend income of Rs.18 lacs only and in any case the disallowance, if any is to be made shall not exceed the amount of dividend income earned by the assessee company during the A.Y. 2012-13. The appellant relied upon various court judgments in its written submission.
8. The Ld. DR vehemently argued that there is an objective satisfaction drawn by the Assessing Officer while determining disallowance under section 14A. The Ld. DR has referred to the substantiation of objective satisfaction in the order of the Ld. CIT(A).
9. Arguments of the Ld. AR have been examined in the light of the provisions of the Section 14A and the assessment order passed by the Assessing Officer.
10. The relevant part of assessment order has been reproduced in toto which is as under:
Addition on account disallow ance of Interest u/s 14A read with Rule 8D On perusal of the details filed by the counsel of the assessee, it is noticed that the assessee company has been made investment in equity share amounting to Rs. 33,56,64,000/-. The assessee was asked to explain as to why proportionate disallowance interest under section 14A read with rule 8D may not be made. In response, no plausible explanation was submitted by the assessee. Accordingly, proportionate disallowance under section 14A read with rule 8D is calculated as below:4
a) Disallowance of Interest 61,46,557 x25,17,48,000/34,24,58,245 Expenditure: = 45,18,466/-
b) Disallowance @0.5% of Avg. = 0.5% of 25,17,48,000/-
value of Investment = 12,58,740/-
Total = 57,77,206/-
Therefore an amount of Rs. 57,77,206/- is being added to the returned income of the assessee.
11. The relevant section of the Income Tax Act pertaining to Section 14A disallowance is as under:
14A. (1) For the purpose 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 him in relation to income which does not form part of the total income under this Act.
12. A concurrent reading of the Section 14A and the order of the Assessing Officer shows that while it is mandatory to record a satisfaction for determination of expenditure the Assessing Officer has failed to do it. The sub section (3) of Section 14A further emphasis that even when assessee claims that no expenditure has been incurred by him even then also recording of satisfaction is a pre-requisite.
13. Judgment of Hon'ble High Court In the case of CIT Vs. Abhishek Industries 380 ITR 652 (P&H)held as under
"Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds , have been used to earn tax free income. The satisfaction to be recorded must be based upon credible and relevant evidence. The onus, therefore, to prove that interest bearing funds were used, lies squarely on the shoulders of the revenue. Thus, if the Assessing Officer is able to refer to relevant material while recording satisfaction that borrowed funds were used to earn interest free income as opposed to the assessee's own funds, the Assessing Officer may legitimately disallow such a claim. The Assessing Officer, however, cannot, by recording general observations, particularly where the assessee has denied using interest bearing funds, proceed to infer that interest bearing income must has been used to earn exempted income. Section 14A of the Act, being in the nature of an exception, has to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an 5 order be passed under Section 14A of the Act, disallowing such a claim cannot be accepted."
14. In the case of Godrej 394 ITR 449 the Hon'ble Supreme Court has held as under :
"2003Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable
15. We find that the CIT(A) has valiantly tried to decipher objective satisfaction of the Assessing Officer but at the same time the order of the Assessing Officer mentioned above do not even mentioned a word about 'satisfaction' hence the recomputation done by the Assessing Officer is faulty can not accepted. Since no clear recording of satisfaction could be seen in the assessment order it is held that the provision of Section 14A(2) have not been followed and the grounds of appeal raised by the assessee are allowed.
16. Since the assessee appeal is allowed, adjudication on the grounds taken by the revenue becomes infructuous as same issue is involved.
17. In the result appeal of the Revenue is dismissed and cross appeal filed by the assessee is allowed.
The order is pronounced on 20/09/2017 in the open Court.
Sd/- Sd/- (DIVA SINGH) (Dr. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER AG Copy to: 1. The Appellant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The Departmental Representative