Income Tax Appellate Tribunal - Panji
D. B. Bandodkar & Sons Pvt. Ltd., Panaji vs Department Of Income Tax on 15 April, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
PANAJI BENCH, PANAJI
BEFORE SHRI P.K. BANSAL, HON'BLE ACCOUNTANT MEMBER
AND SHRI D.T. GARASIA, HON'BLE JUDICIAL MEMBER
:
ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10)
Asst. Commissioner of Income tax, Vs. M/s. D.B. Bandodkar & Sons
Circle-1(1), Panaji, Goa. Pvt. Ltd., 2nd floor,
(Appellant) Atmaram Commercial Complex,
Dr. A.B. Road, Panaji, Goa
PAN : AAACD5984F (Respondent)
Assessee by : Agnelo Remedios, CA
Revenue by : Smt. Sonal L. Sonkavde, Ld. DR
Date of Hearing : 15/04/2014
Date of Pronouncement : 23/05/2014
ORDER
PER P.K. BANSAL
1. This appeal has been filed by the Revenue against the order of CIT(A) dt. 17.9.2013 by taking the following effective grounds of appeal :
"1. The order of the Ld CIT(A) is opposed to law and facts of the case.
2. The Ld CIT(A) erred in deleting the disallowance of Rs.10.19 lakhs on account of additional depreciation in respect of iron ore extracted and processing when the activities carried out by the assessee do not amount to manufacture or production as defined in section 2(29BA).
3. The Ld CIT(A) erred in deleting the additions of Rs.6.71 lakhs made u/s. 14A of the Income tax Act in accordance with Rule 8D of the Income Tax Rules, as provided by the decision given by the Mumbai Special Bench of ITAT in the case of ITO vs Daga Capital Management Pvt. Ltd. (2009) 117 ITD 169.
4. The Ld CIT(A) erred in deleting addition on account of undervaluation of stock by admitting fresh evidence and also without verification."2 ITA NO. 376/PNJ/2013
(ASST. YEAR : 2009-10)
2. Ground no. 1 is general in nature and therefore does not require any adjudication.
3. Ground no. 2 relates to the claim of additional depreciation by the Assessee on the plant and machinery used in the manufacture/production of iron ore.
3.1 We have heard the rival submissions and carefully considered the same. It is an undisputed fact that the Assessee is engaged in extraction and processing of iron ore. This issue is duly covered in favour of the Assessee by the decision of this Bench in ITA Nos. 72/PNJ/2012 & 85/PNJ/2012 in the case of Sesa Goa vs. ACIT in which this Tribunal vide its order dt. 8.3.2012 has in the following paragraphs taken a view in favour of the Assessee :
"46. Grounds nos.10 & 11 in assessee‟s appeal relate to disallowance of depreciation claimed u/s 32(1)(iia). The brief facts of the case are that the assessee claimed additional depreciation amounting to Rs.10,91,79,435/- and Rs.10,01,21,951/- in respect of iron ore division and Rs.90,57,484/- for Metallurgical Coke Division. The AO took the view that the assessee was not engaged in the manufacture or production of any article or thing and therefore, the decision of the Hon‟ble Supreme Court in the case of the assessee 271 ITR 331 relating to additional depreciation is not applicable. The said decision relate prior to 1.4.1999. According to him, there is no change either in the name or in the composition of the iron ore before extraction and after extraction and processing and the conditions as laid down u/s 2(29BA) are not fulfilled. Similarly, it was held that in the case of conversion of coal into coke there is no different chemical composition or integral structure in the new article and it has no different character and use. Reliance was placed on the decision of the Supreme Court in the case of CIT Vs Gem India Manufacturing Co., 249 ITR 307(2001) and Lucky Minerals (P) Ltd., 116 Taxman 1(SC). The assessee went in appeal before the CIT(A). The CIT(A) also took the view that the assessee primarily engaged in the process of converting coal to coke essentially there is not much of difference in the physical and chemical characteristic of coal and coke. The division is not associated with any kind of extraction of coal or any other ore as part of its business activity. In the case of CIT Vs Sesa Goa Ltd., 271 ITR 331(SC) the Hon‟ble Apex Court held that 3 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) for an activity to be production, it should comprise of both extraction of iron ore and its processing. The learned AR reiterated the submissions made before the CIT(A). It was contended that the assessee engaged in the business of extraction and processing of iron ore. The assessee is processing the iron ore not only one which is extracted out of its own mines, but also the one which is extracted from the mines which are hired. The Hon‟ble Supreme Court has clearly held that the extraction and processing of iron ore amounts to production. There is no subsequent amendment in this regard or introduction of the definition of the word production in the Act. Sec.32(1)(iia) used both the word „manufacture‟ or „production‟ and does not require that the assessee should be engaged in the manufacture and production. Sec.2(29BA) of the Act defines the word „manufacture‟. The CIT(A) took the view that the iron ore processing plant at Codli, Amona and Chitradurga do not amount to either „manufacture‟ or „production‟. The revenue is fully aware of that in these plants, the assessee has used the iron ore extracted from its mines and also from other mines taken on lease for processing to make it marketable for export. Sec.32(1)(iia) only requires that the assessee must be engaged in the business of manufacture or production of any article or thing. Thus, the assessee must be allowed investment allowance so far as it relates to plant and machinery used in iron ore division. In respect of claim of the assessee for the additional depreciation for the plant and machinery installed in metallurgical coke division, the assessee contended that sec.32(1)(iia) nowhere requires that the new plant and machinery must be acquired or installed for manufacture or production. The only condition subject to the proviso therein is that the assessee must be engaged in the business of manufacture or production or article or thing. The learned AR also tried to explain the process of coke division to prove that the coke division is engaged in the production of an article or thing. The learned DR on the other hand relied on the order of the CIT(A).
46.1 We have carefully considered the rival contentions alongwith the order of the tax authorities. Sec.32(1)(iia) laid down as under;
" iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005 by an assessee engaged in the business of manufacture or production of any article or thing (or in the business of generation or generation and distribution of power ) a further sum equal to twenty percent of the actual cost of such machinery or plant shall be allowed as deduction under clause(ii):
Provided that no deduction shall be allowed in respect of-
a) Any machinery or plant which, before its installation by the Assessee, was used either within or outside India by any other person; or 4 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10)
b) Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest house; or
c) Any office appliances o road transport vehicles; or
d) Any machinery or plant, the whole of the actual cost of which is allowed as a deduction(whether by way of depreciation or otherwise) in computing the income chargeable under the head „Profits and gains of business or profession" of any one previous year".
46.2 From the provisions of the section, it is apparent that the assessee is entitled in the case of any new machinery or plant which has been acquired or installed by him after 31.03.2005 for the additional depreciation if the assessee is engaged in the business of manufacture or production of any article or thing. Proviso to section denies the deduction to an assessee of the additional depreciation in certain cases. From the balance sheet and all other evidences filed before us it is apparently clear that the assessee is engaged primarily in the business of extraction of ore and its processing. The authorities below interpreted the provisions of section, correctly taking the view that the plant and machinery should be installed for the production of an article or thing. The assessee‟s plants at Codli, Amona and Chitradurga whether engaged for the manufacture or production independently, in our view, is not relevant. The relevant consideration is that the assessee must be engaged in the business of manufacture or production of any article or thing and the new plant and machinery must be acquired and installed. The assessee has extracted the iron ore and also processed it. The case of the assessee is duly covered by the decision of the Hon‟ble Supreme Court in assessee‟s own case reported in 271 ITR 331(SC) (supra). This section used the word „business of manufacture or production‟ not the word „manufacture and production‟. We do not agree with the revenue that the case of the assessee is not covered by the decision of the Hon‟ble Supreme Court in assessee‟s own case. Respectfully following the decision of the Hon‟ble Supreme Court in assessee‟s own case, we delete the disallowance and allow the additional depreciation to the assessee amounting to Rs.10,91,75,435/-."
No contrary decision was brought to our knowledge by the ld. DR. We, therefore, respectfully following the aforesaid decision of this Bench in the case of Sesa Goa (supra) confirm the order of CIT(A) allowing the additional depreciation to the Assessee. Thus, ground no. 2 stands dismissed.
4. Ground no. 3 relates to the deletion of the addition by CIT(A) made by the AO u/s 14A. The brief facts relating to this ground are that the AO disallowed a sum of Rs.6,71,219/- in addition to a sum of Rs.4,49,905/- already 5 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) disallowed by the Assessee u/s 14A while computing taxable income of the Assessee. The Assessee went in appeal before the CIT(A). CIT(A) deleted the disallowance of Rs.6,71,219/- by holding as under :
"8.4 I have gone through the assessment order and submission and factual argument of the appellant. It is true that the A.O. has not recorded his dissatisfaction prior to invoking of Rule 8D. the AO‟s remarks are general in nature. The it that has been paid by the appellant company, is mostly to its own ex- staff-members and the interest payment that can be attributed to loans are a paltry Rs.1,74,000/-. In view of the above facts, in my opinion, the disallowance voluntarily made by the appellant amounting to Rs.4,49,905/- is sufficient to take care of the expenses relatable to earning exempt income, and no further disallowance is needed. The A.O is directed to delete the addition amounting to Rs.6,71,219/- and this Ground of Appeal of the appellant is allowed accordingly."
4.1 We have heard the rival submissions and carefully considered the same. The issue involved in this ground is duly covered in favour of the Assessee by our decision in the case of Sesa Goa in ITA Nos. 72 & 85/PNJ/2012 dt. 8.3.2013 in which this Tribunal under para 14 to 18 has held as under :
"14. We have carefully considered the rival submissions along with the order of the authorities below. We have also gone through various case laws and the provisions of the IT Act in this regard. The issue involved before us relate to the disallowance made by the AO by applying the provisions of sec.14A of the IT Act read with Rule 8D of the IT Rules. Sec.14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. Originally this sec. provides that in computing the total income of the assessee no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Subsequently, by Finance Act, 2002 with retrospective effect from 11/5/2001 proviso was added which states that this sec. shall not empower the AO either to re-assess or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee for any assessment year beginning on or before 1/4/2001. With effect from 1/4/2007 by Finance Act, 2006 sub-sec. (2) empowers the AO to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with the method as may be prescribed. Such power is to be exercised if the AO having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of the expenditure mentioned in sub-sec.(1). Before applying Rule 8D, it is apparent that the AO must be satisfied with the correctness of the 6 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) claim of the assessee having regard to the accounts of the assessee. Such satisfaction is an objective satisfaction that it has to be judicious and based on the material on record. It cannot be an impression that it is much more than the gossip or hearsay, it means judgment or belief that it is a belief or a connection resulting from what one thinks on a particular question. It must be based on the reasons and ground as seems good to him and while making such satisfaction, the AO must give regard to the accounts of the assessee. He must record deficiency in the accounts with regards to the claim of the assessee. Sub-sec.(3) provides that provisions of sub-sec.(2) shall also apply where assessee claims that no expenditure had been incurred in relation to income not forming part of the total income. This is not the case of the assessee as in the case of the assessee, assessee himself estimated the expenses relating to the exempt income and disallowed the same. Rule 8D was inserted by gazette notification dated 24/3/2008 in view of the power conferred under sub-sec (2). This Rule prescribes the method for computing the expenditure incurred in relation to the income not forming part of the total income. This is an undisputed fact that in this case, the assessee has invested in debts mutual funds. The assessee computed disallowance u/s 14A(2) at Rs.25,78,156/- and disallowed the same, while computing its total income. The working of the said disallowance claimed by the assessee is given herein above in the submissions made by the assessee. The AO was not satisfied with the correctness of the claim of the assessee especially the explanation of the assessee that no administrative expenditure incurred on earning the dividend income. Considering the magnitude of the investments and the dividend income received, the AO was of the view that the disallowance made by the assessee u/s 14A of the IT Act towards the administrative expenditure is low on comparing the magnitude of purchase and sales made by the assessee and the investments of large magnitude cannot be made without proper analysis of the market condition/stock movement etc. The revenue was of the opinion, that the assessee has worked out the administrative expenditure and had not considered all the administrative expenditure. Both the parties before us vehemently relied on the decision of Godrej Boyce Mfg Co. Ltd. Vs DCIT 328 ITR 81 (Mum).
15. We have gone through this decision and we noted that in this case, the assessee claimed exemption in respect of dividend income of 34.34 crores u/s 10(33). The AO issued notices for disallowance of interest u/s 14A of the IT Act. The explanation of the assessee was that (i) 95% of the shares were bonus shares for which no cost was incurred; (ii) No investment in shares was made in the current year and no disallowance was made in earlier years and (iii) There were sufficient interest free funds available in the form of share capital, reserves etc. which were more than investment in shares. The AO was not satisfied with the explanation of the assessee and he made disallowance u/s 14A on prorata basis. The CIT(A) following his orders for earlier years, accepted the appeal of the assessee. The Tribunal following the decision of the Special Bench in the case of ITO Vs Daga 7 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) Capital Management (P) Ltd 117 ITD 169 (SB) restored the matter to the file of the AO for the consideration in the light of the provisions of sub-sec.(2) & (3) of Sec.14A of the IT Act. The assessee, being aggrieved, filed appeal as well as Writ Petition challenging the constitutional validity of sub-sec. (2) & (3) and Rule D. The Hon‟ble High Court gave the following findings;
1. The provisions of sec. 14A and Rule 8D are constitutionally valid.
2. The provisions of sub-sec. (2) & (3) of Sec.14A and Rule 8D are prospective and not retrospective, in nature and therefore, would apply from assessment year 2007-
08.
3. The basic object of Sec.14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income (page
21).
4. The insertion of sec.14A was curative and declaratory of the intent of the Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income (pages 22-23).
The test which has been enunciated in Wallfort for attracting the provisions of sec.14A is that there has to be a proximate cause for disallowance which has its relationship with the tax exempt income. Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under section 14A (page 28)
5. What merits emphasis is that the jurisdiction of the AO to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the AO is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not form part of the total income. Moreover, the satisfaction of the AO has to be arrived at, having regard to the accounts of the assessee. Hence, sub-sec (2) does not ipso facto enable the AO to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the AO 8 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) not being so satisfied that recourse to the prescribed method is mandated by law (pages 31-32).
6. In the event that the AO is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion (page-79).
7. The effect of sec.14A is to widen the theory of the apportionment of expenditure (page 49).
8. The expression „expenditure incurred; in Sec.14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (page-
50).
9. Sub-sections (2) & (3) of Sec.14A are intended to enforce and implement the provisions of sub-sec (1) (pages 50).
10. Even in the absence of sub-section (2) of sec.14A the AO would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The AO would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all relevant facts and circumstances".
The said decision of the jurisdictional High Court is binding on us. While deciding this case, the decision of the Hon‟ble Supreme Court in the case of CIT Vs Wallfort Shares & Stock Brokers Ltd., 233 CTR (SC) 42 was referred to. In this decision, we noted that the Hon‟ble Supreme Court in that case upheld the view of the Hon‟ble Mumbai High Court in the case of Wallfort Shares & Stock Brokers Ltd. Vs ITO 310 ITR 421. The Hon‟ble Supreme Court in this decision, at page-31 of the order held as under;
"To attract Sec.14A there has to be proximate cause for disallowance which has its relationship with the tax exempt. Pay back or return of investment is not such proximate cause. Hence, Sec.14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Sec.14A cannot be invoked".
16. The Hon‟ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DCIT (supra) therefore at page-28 has clearly laid down that there must be proximate cause based on the relationship of the expenditure that tax exempt income is established, only then a disallowance would have to be effected u/s 14A of the IT Act. Therefore, in view of the decision of the jurisdictional High Court and the decision of the Hon‟ble Supreme Court, we are of the view that sec.14A cannot be applied unless there is a proximate cause for disallowance. The onus to establish that there is proximate cause based on the relationship of the expenditure with the exempt income in our opinion is on the Revenue. Thus, the application of the provisions of sec. (2) & (3) of Sec.14A and Rule 8D is not automatic in each and every case, where there is income not forming part of the total income. Sub-sec. (2) & (3) are intended to enforce and implement the provisions of sub-sec. (1). Therefore, it is necessary for the AO first to ascertain whether there is proximate 9 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) connection between the expenditure incurred and the income not forming part of the total income. If such proximate connection is established with the exempt income, the AO would be justified in applying the provisions of sub-sec (2) & (3) of sec.14A and Rule 8D of the IT Act, 1961. The expenditure incurred u/s 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income u/s 10 in the year under consideration in view of the decision of Special Bench in the case of Cheminvest Ltd. 124 TTJ 577 (Del)(SB).
17. The basic principle of taxation is to tax the net income. On the same analogy, the exemption is also to be allowed on net basis i.e. gross receipts minus related expenses. Therefore, if any expenditure is directly related to exempted income, it cannot be allowed to be set off against taxable profit. On the same analogy, in our opinion, if any expenditure is directly related to taxable income, it cannot be allowed to be set off against the exempted income merely because some incidental benefit has arisen towards exempted income. Before making any disallowance u/s 14A, the AO is required to record a satisfaction, having regard to the accounts of the assessee, that claim of assessee that expenditure incurred is not related to the income forming part of the total income is incorrect. Such satisfaction must be arrived at on the objective basis. He is also required to record the reasons for arriving at such satisfaction. The assessing officer in this case, we noted is not satisfied with the correctness of the disallowance made by the assessee even though he has accepted the explanation of the assessee that no interest is incurred with regard to exempt income. He rejected the explanation of the assessee that no administrative expenditure incurred on earning dividend income considering the magnitude of the investments and dividend income received and the disallowance according to him made by the assessee u/s 14A towards administrative expenditure is very less. The assessing officer nowhere pointed out the proximate connection of other expenses not apportioned by the assessee for the earning of the dividend income. He merely observed that the administrative expenses disallowed by the assessee is very less but how they are less and how the other expenses incurred by the assessee related to the dividend income has not been brought on record. Even the AO has not pointed out the expenses excluded by the assessee for disallowance has proximate connection with dividend income. In our opinion, the assessing officer before rejecting the disallowance computed by the assessee must give a clear cut finding having regard to the accounts of the assessee how the other expenditure claimed by the assessee out of non exempt income is related with the exempt income. No discrepancy in the claim of the assessee was pointed out. The assessing officer in our opinion in view of the jurisdictional High Court decision is bound to record satisfaction as to how the expenses claimed by the assessee have been incurred on earning dividend income were not sufficient and correct. We have already held that 10 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) the onus to prove in this regard lies on the assessing officer. Although the Ld. DR had vehemently contended and tried to build up his case by substituting the reasons given by the CIT(Appeal) in place of the AO, but failed to bring any cogent material or evidence in this regard which may prove that the other expenses claimed by the Revenue for apportionment had proximate connection with the earning of the dividend income. In our opinion until and unless this is proved or established by the revenue, the assessing officer does not have any power to reject the accounts of the assessee and take the shelter of Rule 8D for computing the disallowance out of the exempt income. We are not at all convinced with the submission of the Ld. DR relying on the decision of CIT(Appeal) in respect of Explanation bb to sec. 80HHC that 10% of the receipts under the sources mentioned therein are deemed to be the expenditure. This in our opinion will strengthen the case of the assessee as Explanation bb to sec. 80HHC does not recognize amount of the investment made in other receipt to be the basis of computing the expenditure being incurred for the earning of that income. Similar views have been taken by Hon‟ble Tribunal in the following decisions also.
In the case of DCIT Vs. Jindal Photo Ltd. held in I.T.A.T. Delhi bench dated 7.1.2011 it was held as follows:
"Now as per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee‟s total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been done by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an adhoc disallowance was made. The onus was on the AO to establish any such expenditure. This onus has not been discharged. In "CIT Vs. Hero Cycles" (P&H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions. In "ACIT Vs. Eicher Ltd.", 101 TTJ (Del.) 369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s 14A of the Act. In "Maruti Udyog Vs. DCIT, 92 ITD 119 (Del.), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In "Wimco Seedlings Limited Vs. DCIT", 107 ITD 267 (Del.) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in:11 ITA NO. 376/PNJ/2013
(ASST. YEAR : 2009-10)
1. Punjab National Bank Vs. DCIT, 103 TTJ 908 (Del.);
2. Vidyut Investment Ltd., 10 SOT 284 (Del.); and
3. D.J. Mehta Vs. Income Tax Officer, 290 ITR 238 (Mum.) (AT) In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground no.3 is thus rejected."
In the case of Jindal Photo Ltd. Vs. DCIT held in I.T.A.T. Delhi bench dated 23.9.2011 it was held as follows:
"In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee‟s calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the Assessing Officer is a pre- requisite to invoke the provisions of Rule 8D of the Rules. The Learned CIT(A), therefore, erred in partially approving the action of the Assessing Officer."
In the case of Avshesh Mercantile P. Ltd. Vs. DCIT in I.T.A.T. Mumbai Bench (I.T. Act No.5779/Mum/2006 & 208/Mum/2009) it was held as follows:
"At the time of hearing, the contention raised by the learned DR in this regard is that the appeal of the Revenue on the issue having been dismissed by the Hon'ble Bombay High Court merely observing that no question arises, it cannot be treated as a decision rendered by the Hon'ble High Court on the merit of the issue which is binding on this Tribunal. We are unable to accept this contention of the learned DR. It is well settled proposition of judicial precedents that is appeal the Hon'ble High Court considers facts pertaining to the issue and gives approval to the decision of the lower forum, the decision of lower forum gets merged with the judgment and order of the High Court and it becomes binding precedent even though approval to decision of lower forum/court is summarily recorded. Similar situation had arisen for consideration before the Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. 283 ITR 402 wherein the effects of summary disposal of appeal by the High Court were analysed and explained by their Lordships. It was clarified that while hearing an appeal even for deciding whether substantial question of law arises or not from the order of the Tribunal, the High Court does not exercise either the original jurisdiction or the jurisdiction to issue writs and the only jurisdiction exercised by the High Court in the first instance decides whether or not substantial question of law arises from the order of the Tribunal, it cannot be said that the High Court does not exercise the appellate powers or that there is no decision on merit when the high court dismisses an appeal holding that no substantial question of law arises from the order of the Tribunal. It was held that whenever an order of the subordinate forum is carried in appeal before the higher appellate forum/court, operative part thereof merges into the judgment, decision or order of the higher court after the confirmation, modification or reversal, as the case may be, and the 12 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) decision of the lower court or forum has no independent existence thereafter in relation to the issue which was carried before the appellate court or forum. It was held that where the High Court comes to the conclusion that no substantial question of law arises on a particular issue, it cannot be stated that the subject matter of controversy between the parties has not been dealt with by the High Court. It was held that when the decision of the Tribunal is affirmed on the issue brought before the High Court, it is the decision of the High Court which becomes operative and which is capable of being given effect to for all intents and purposes. Keeping in view the decision of Hon'ble Gujarat High Court in the case of Nirma Industries Ltd. (supra), we have no hesitation to hold that the decision of the Hon'ble Bombay High Court in the case of Delite Enterprise Ltd. (supra) is a decision on merit which is binding precedent on us. As the issue involved in the present cases as well as all the material facts relevant thereto are similar to that of the case of Delite Enterprise (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the AO and confirmed by the learned CIT(A) on account of premium paid by the assessees on redemption of premium notes (OCPN) by invoking the provisions of section 14A of the Act. As regards the case laws cited by the Learned DR, it is observed that in none of these cases, the facts involved were similar to the case of the present assessees in as much as the investment made therein was not found to be capable of earning taxable as well as exempt income which was actually not earned by the assessee in the relevant period as are the facts of the present case or that of the case of Delite Enterprise (supra) decided by the Hon'ble Bombay High Court. Accordingly, we decide the common issue involved in all these appeals in favour of the assessees following the decision of jurisdictional High Court in the case of Delite Enterprises (supra) and allow the appeals of all the assessees."
18. We have also gone through the decision relied upon by the learned DR also. The decision of ACIT Vs CITICORP Finance (Ind.) Ltd., 108 ITD 457 (Bom.) is no more relevant, in view of the decision of the Hon‟ble Mumbai High Court in the case of Godrej Boyce Mfg Co. Ltd. (Supra). The decision of SPIC Vs DCIT 93 TTJ (Chennai) 161 is not applicable to the facts of the case. As in that case, the assessee was regularly investing in the shares. The assessee has not disallowed any expenditure with regard to the earning of the dividend income. Under these facts, the Hon‟ble Tribunal held that whether to invest or not to invest is a very strategic decision and top management involve in taking the decisions. This decision relate to assessment year 2000-01 much prior to the insertion of provision of sec.14A(2) of the IT Act,1961. The decision of ACIT Vs Premium Consolidated Capital Trust 83 TTJ (Bom.) relates to assessment year 1991-92 prior to insertion of 14A(2) hence will not assist the revenue. The other decision relied on are also not applicable to the facts of the case, except the decision of jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs DC IT & Another 328 ITR 81(Bom.).
13 ITA NO. 376/PNJ/2013(ASST. YEAR : 2009-10) In view of our aforesaid discussion and respectively following the decision of the jurisdictional High Court in the case of Godrej & Boyce Mfg. co. Ltd. Vs. DCIT & another 328 ITR 81 (Bom), we delete the disallowance made u/s 14A r.w. Rule 8D and accordingly, the ground taken by the assessee in this regard is allowed."
In view of our aforesaid decision we are of the view that recording of the satisfaction of the AO is a pre-requisite to invoke the provisions of Rule 8D of the Income Tax Rules r.w.s 14A. Since in this case the AO has not recorded his dissatisfaction prior to invoking of Rule 8D and this fact has not been disputed by the ld. DR, we, therefore, confirm the order of CIT(A) on this issue and dismiss this ground taken by the Revenue.
5. Ground no. 4 relates to the deletion by the CIT(A) of the addition made by the AO on account of undervaluation of the stock. The brief facts relating to this addition are that the Assessee is engaged in production of iron ore and is also purchasing iron ore. The Assessee has computed the closing stock separately in respect of iron ore produced and iron ore purchased. The iron ore purchased is further screened by the Assessee. The AO was of the view that the screening cost incurred by the Assessee is part of the prime cost of the iron ore purchased by the Assessee and therefore while valuing the closing stock relating to the iron ore purchased, the screening cost incurred by the Assessee per ton should also be added in the closing stock. The screening cost was arrived at Rs. 13.57/ton. The Assessee was holding the inventory to the extent of 77,322 tons out of the entire iron ore purchased by him. The AO, therefore, added a sum of Rs.10,49,259/- (77322 x 13.57). The Assessee went in appeal before CIT(A). Before CIT(A) the Assessee contended that the AO was under erroneous presumption that the screening cost was not taken as part of the value of the stock of purchased iron ore. The Assessee while valuing the closing stock has duly taken into account the screening charges incurred by it in respect of the iron ore purchased. The Assessee submitted before the CIT(A) a summary 14 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) statement showing the month-wise ore screened out of own production and purchased ore. He has also submitted details of the screening charges as well as transportation charges incurred by the Assessee. CIT(A), on this basis itself, deleted the addition by holding as under :
"7.4 I have gone through the assessment order and facts of this case. It is clear that the A.O. has made this addition on unsubstantiated presumption and therefore has no basis. The assessee has already loaded an amount of Rs.28,11,332/- as screening charges on purchased ore. In view of the above factual position, further addition on account of screening charges on purchased ore was not warranted. The addition amounting to Rs.10,49,259/- is deleted accordingly and this Ground of Appeal of the appellant is allowed."
5.1 We have heard the rival submissions and carefully considered the same. In our opinion, the screening cost has to be part of the cost of the iron ore purchased by the Assessee and therefore while valuing the iron ore purchased, it should form part of the prime cost. The Assessee claims that he has already included the screening charges while valuing the closing stock in respect of purchased iron ore. The Assessee submitted the details for the first time before the CIT(A). The AO was not given any opportunity by the CIT(A) to verify the details so filed, which, in our opinion, is fresh evidence. The AO must have given opportunity to the AO or remand report must have been called from the AO. Under the facts and circumstances of the case, we set aside the order of CIT(A) on this issue and restore this issue to the file of AO with the direction that the AO shall verify whether the screening cost is duly included in the value of the closing stock relating to the iron ore purchased. In case the AO finds that the screening cost is duly included, no addition should be made. In case the AO finds that the screening cost is not included, the addition be sustained to the extent the screening cost is incurred by the Assessee in respect of the material lying in closing stock at the end of the year out of the iron ore purchased by the Assessee during the year. The AO is directed to give a proper and sufficient 15 ITA NO. 376/PNJ/2013 (ASST. YEAR : 2009-10) opportunity to the Assessee to adduce evidence on which the Assessee may rely. The Assessee is also directed to co-operate with the AO and furnish all the relevant materials and evidences on which he relies. Thus, this ground is allowed for statistical purpose.
6. In the result, the appeal filed by the Revenue is partly allowed for statistical purpose.
7. Order pronounced in the open court on 23.05.2014.
Sd/- Sd/-
(D.T.Garasia) (P.K. Bansal)
Judicial Member Accountant Member
Place : PANAJI / GOA
Dated : 23.05.2014
*SSL*
Copy to :
(1) Appellant
(2) Respondent
(3) CIT concerned
(4) CIT(A) concerned
(5) D.R
(6) Guard file
True copy, By order