Income Tax Appellate Tribunal - Delhi
M/S Dhanashree Developers P. Ltd.,, ... vs Dcit, New Delhi on 6 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:- 1849/Del/2016
(Assessment Year: 2011-12)
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 2011-12. 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 ITA No: - 1849/Del/2016 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 of purchases which are entirely reflected in work in progress.
4. Learned CIT(A) erred in law and on facts in confirming disallowance of Rs 62,36,940/- 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 20.03.2014 was passed by the AO under section 143(3) of the Income Tax Act, 1961. In this assessment order, the Assessing Officer made a further disallowance of Rs. 62,36,940/-
under section 14A of the Income Tax Act r.w.r. 8D Income Tax Rules in addition to suo moto disallowance of Rs. 62,36,940/- made by the assessee under section 14A. Further the Assessing Officer disallowed an amount of Rs. 62,36,940/- out of deduction under section 80IC of Income Tax Act, 1961 amounting to Rs. 10,47,50,610/- 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 Page | 2 ITA No: - 1849/Del/2016 information received, M/s Dhanshree Develpers Pvt. Ltd. during the financial year 2010-11 relevant to assessment year 2011-12 has availed accommodation bills totaling to Rs. 1,85,90,353/- from the following persons who are engaged in providing bogus bills (hawala dealers):-
S. Name of the hawala PAN No. F.Y. in Amount of
No. dealer which bill
bills
availed
1 Mahavir Sales AMMPM3778R 2010-11 54,85,740
Corporation
2 Tisha Enterprises AGVPP0871D 2010-11 70,76,341
3 Kumar Enterprises ADBPJ3671N 2010-11 60,22,350
4 Shubham Enterprises AGUPJ3270D 2010-11 5922
Total 18590353
6. Vide show cause notice dated 26.02.2014 and order sheet entry dated 20.03.2014, the AR of the assessee was categorically 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. 1,85,90,353/- should not be added to the total income of the assessee. The information in possession of this office was also communicated to the assessee.
7. The assessee vide reply dated 06.03.2014 send by speed post and received in this office on 18.03.2014 submitted as under:
"We have gone through your letter and in connection with the allegation raised by your honour we have to submit that we have not availed any accommodation bills from any one and the alleged purchases of Rs. 1,25,62,08/- from M/s Mahavir Sales Corporation and M/s Tisha Enterprises. We have to submit that these are genuine purchases and said purchases are ultimately appearing in closing work in progress during A.Y. 2011-12.
We therefore submit that the aforesaid genuine purchase cannot be disallowed and added back to the income of the company. However, if your honour has decided to add back the same without considering our legal submission, then your may permit us to cross examine these parties by us as your intention of treating genuine purchases as bogus will definitely be against the principle of natural justice. It is further submitted that in view of following decision no addition may kindly be made.
1. Pardeshi Developers & Infrastructure (P) Ltd. vs. CIT 351 ITR 8 (Delhi)(2013).
2. ITO vs. Paramanand (2007) 107 TTJ (JD) 395"
Page | 3 ITA No: - 1849/Del/2016
8. Further, in response to the query raised vide note sheet entry dated 20.03.2014, the AR filed a written reply dated 24.03.2014 stating as under:-
"Purchases from Ms Mahavir Sales Corporation, M/s Tisha Enterprises and M/s Kumar Enterprises:-The assessee company had not availed any accommodation bill and the alleged purchases of Rs. 1,25,62,081/- from M/s Mahavir Sales Corporation and M/s Tisha Enterprises and Rs. 60,22,350/- from Kumar Enterprises are genuine purchases and have been included in the closing work in progress during the A.Y. 2011-12. We are enclosing copies of few of the bills from these parties as sample evidence in support of our contention. "
9. The submission of the assessee has been carefully considered. It is clear from the submission of 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.
10. 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. Haresh S. Parmar, who is the proprietor of M/s Tisha 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.)-27, Mumbai in the statement recorded on 20- 01-2012, Sh. Haresh S. Parmar has admitted that he has not carried out any business as well as he has not sold any goods to anyone. Copy of statement dated 20-01-2012 is enclosed as Annexure A-1.
10.1 Similarly, Sh. Jang Bahadur Singh director in M/s Shivani Hot Rolled Steels (P) Ltd. and M/s Pratima Steels (P) Ltd. has confessed in his statement recorded u/s 131 of the Income Tax Act at camp office at M-5/A, Mezzanine Floor, Giriraj Building, S.T. Road, Iron Market, Mumbai-400009 on 23-11-2012, during the course of survey action u/s 133A of the Act taken by the investigation Wing, Mumbai that he had obtained accommodated purchase bills from many parties including M/s Kumar Enterprises. He also agreed that no actual purchases are made from these parties and these are only paper transaction to show the turnover of the company viz. M/s Shivani Hot Rolled steels (P) Ltd. These are only paper transactions and there is no actual purchase, movement of goods and sale thereof and that the purchases from the above concerns are non-genuine purchases. The information has been supplied by the Maharastra VAT Department to the DGIT (Inv,), Mumbai arid from there it has been disseminated to this office.
10.2 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) Page | 4 ITA No: - 1849/Del/2016 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 hawaia dealer, PAN No. of the hawaia 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.
10.3 From the above it is clear that the assessee has inflated its purchases by an amount of Rs, 1,85,90,353/- by availing bogus/non-genuine bills from hawala dealers as mentioned above during the F.Y. 2010-11 relevant to A, H.2011-12. Therefore, purchases amounting to Rs. 1,85,90,353/- are disallowed and added to the total income of the assessee being bogus purchase made during the year from hawala dealers. Penalty proceedings u/s 27I(l)(c) are being initiated separately.
(Addition of Rs. 1,85,90,353/-) 11, During the of assessment proceedings 'Individual Transaction Statement' in the case of the assessee company has been generated through system, A perusal of statement reveals that the assessee company has earned interest income as well as contractual income during the financial year 2010-11. Assessee was asked to reconcile the TDS claimed vis-a-vis receipts shown/credited in P&L A/c. During verification it has been noticed that the assessee has earned interest income from Sh. Hemraj Deyat Bhanushaii and M/s Vishal Constructions amounting to Rs.8,62,166/- and Rs.5,49,000/- respectively. When the issue was confronted with the assessee, vide letter dated 24-03-2014, it simply submitted that both these parties had paid interest to the assessee and deducted lax on the same, the interest income arid TDS have been considered in FY-2011-12 relevant to A.Y.2012-13. The submissions of the assessee duly considered but found not tenable. The assessee could not file any evidence in support of its claim. Since the assessee company is following mercantile system of accounting it has to offer interest income earned during financial year 2010-11 on accrual / due basis i.e. FY-2010-1I relevant to assessment year 2011-12. In view of the above facts, interest income of RsJ4,11,166/- which has not been accounted for in computing net taxable income, is added to the taxable income of the assessee company.
(Addition of Rs. 14,11,166/-) I am satisfied that the assessee has furnished inaccurate particulars of his income, accordingly penalty proceedings u/s 271(1 )(e) of the LI 1961 are being initiated separately.
12. From the balance sheet of the assessee for the year ending 31-03-2011, it is seen' that the assessee company had made investments aggregating to Rs. 124,73,88,005/- 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 Page | 5 ITA No: - 1849/Del/2016 provisions of section 14A be not invoked. The assessee has submitted the following reply "The list of investment contains the purchase of non cumulative preference shares of Amaya Infrastructure (P) Ltd. amounting to Rs. 124 crore. As the said investment is in non cumulative preference shares not earning any dividend in past and mi likely so in future, in our opinion the investment in the said shares should not f ought not to he considered while calculating the disallowance as envisaged u/s 14A of the Act".
13. I have considered the reply filed by the assessee. I do ml 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:-
"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, 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 part 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."
14. 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. 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 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. 62,36,940/- 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 from part of the total income shall be the aggregate of following amounts namely:
(i) The amount of expenditure directly relating to income which does not form part of total income Nil Page | 6 ITA No: - 1849/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 to any particular income or receipt an amount computed in accordance with the following formula, namely:
A. Interest Expenses NIL
B. Average Investment Rs.l24,73,88,005/-
C. Average Assets Rs.300,04,81,748/-
A x B/C NIL
(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.
0.5% of average value of investment i.e. B Rs. 62,36,940/-
Total [(i)+(ii)+(iii) Rs. 62,36,940/-
15. Since the assessee has not disallowed the expenses incurred for earning exempt income, in view of the provisions of 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 u/s 271(1)(c) of the I.T. Act, 1961 are being initiated separately.
With the above remarks, total income of the assessee company is computed as under:-
Income as per return Rs. 7,85,12,150/-
Add:
-Addition on account of bogus purchases (as discussed above) Rs. 1,85,90,353/-
-Addition as discussed above Rs. 14,11,166/- -Disallowance u/s 14A of the Act (as discussed above) Rs. 62,36,940/- Total Income Rs. 10,47,50,609/- Rounded off Rs. 10,47,50,610/-
Assessed at an income of Rs. 10,47,50,610/-. Tax accordingly. Give credit for prepaid taxes. Charge interest. Issue demand notice and challan. Penalty proceedings u/s 271(1)(c) are being initiated separately."
[C] The assessee filed appeal before the learned CIT(A), who confirmed both the aforesaid additions. The relevant portions of the Page | 7 ITA No: - 1849/Del/2016 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 28.03.2014 at total income Rs. 10,47,50,610/-, as against the returned income of Rs. 7,85,12,150/-, after making the following additions:
(i) On account of bogus purchases : Rs. 1,85,90,323/-
(ii) On account of disallowance u/s 14A : Rs. 62,36,940/-
(iii) On account of interest payment on : Rs. 14,11,166/-
However, the appellant has challenged only the first two additions in this appeal.
4. Ground no. 1 is general in nature and does not require any specific adjudication.
5. Grounds no. 2 is relating to the addition of Rs. 1,85,90,353/-, 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. Notice u/s 143 (2) of the Income Tax Act, 1961 was issued on 08- 08-2012 which was duly served on the assessee by speed post. Detailed questionnaire alongwith notice u/s 142(1) of the Income Tax Act, 196! was issued on 19-08-2013. In response thereto, Sh. Dhananjay Paranjape, CA and AM of (he assessee company attended the proceedings from time to time and the case was discussed with him. Written reply furnished has been perused and placed on record.
3. The stated main objects of the assessee company are infrastructure contractors, promoters, builders and developers. 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 DTT (Inv.) - I, Delhi vide letter F.No. DIT (Inv.)-l/MVAT/Del/20l2-13/87 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 DGlT (Inv.), Mumbai who in turn Page | 8 ITA No: - 1849/Del/2016 received the same from the VAT Department, Mumbai. According to the information received, M/s Dhanshree Developers Pvt. Ltd. during the financial year 2010-11 relevant to assessment year 2011-12 has availed accommodation bills totaling to Rs. 1,85,90,353/- from the following persons who are engaged in providing bogus bills (hawala dealers) S. No. Name of the PAN No. F.Y. in Amount of hawala dealer which bills bill availed
1. Mahavir Sales AMMPM3778R 2010-11 5485740 Corporation
2. Tisha AGVPP0871D 2010-11 7076341 Enterprises
3. Kumar ADBPJ3671N 2010-11 6022350 Enterprises 4 Shuham AGUPJ3270D 2010-11 5922 Enterprises Total 18590353
6. Vide show cause notice dated 20-03-2014, the AR of the assessee was categorically 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. 1,85,90,353/- should not be added to the total income of the assessee. The information in possession of this office was also communicated to the assessee.
7. The assessee vide reply dated 06-03-2014 send by post and received in this office on 18-03-2014 submitted as under:
"We have gone through your letter and in connection with the allegation raised by your honour we have to submit that we have not availed any accommodation bills from any one and the alleged purchases of Rs. 1,25,62,081/- from M/s Mahavir Sales Corporation and M/s Tisha Enterprises. We have to submit that these are genuine purchases and said purchases are ultimately appearing in closing work in progress during A. Y. 2011-12.
We therefore submit that the aforesaid genuine purchase cannot be disallowed and added back to the income of the company.
However, if your honour has decided to add back the same without considering our legal submission, then your may permit m to cross examine these parties by us as your intention of treating genuine purchases as bogus will definitely be against the principle of natural justice. It is further submitted that in view of following decision no addition may kindly be made.
Page | 9 ITA No: - 1849/Del/2016
1. Pardeshi Developers & Infrastructure (P) Ltd. Vs. CTT 351 1TR 8 (Delhi) (2013).
2. ETC) Vs. Paramanand (2007) 107 TTJ (JD) 395. "
8. .Further, in response to the query raised vide note sheet entry dated 20-03- 2014, the AR of the filed a written reply dated 24-03-2014 staling as under:-
"Purchases from M/s Mahavir Saks Corporation, M/s Tisha Enterprises and M/s Kumar .Enterprises:-The assessee company had not availed any accommodation bill and the alleged purchases of Rs. 1,25,62,081/- from M/s Mahavir Sales Corporation and M/s Tisha Enterprises and Rs. 60,22,350/- from Kumar Enterprises are genuine purchases and have been included in the closing work in progress during the A.Y. 2011-12. We are enclosing copies of few of the bills from these parties as sample evidence in support of our contention.
9. 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.
10. 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. Haresh S. 1 armor, who is the proprietor of M/s Tisha Enterprises in his statement categorically confessed to providing only bills. In response to the specific question raised by the Assistant Commissioner of Sale Tax (lnv.)-27, Mumbai in the statement recorded on 20-01-2012, Sh. Haresh S. Parrnar has admitted that he has not carried out any business as well as he has not sold any goods to anyone. Copy of statement dated 20-01-2012 is enclosed as Annexure A-1.
10.1 Similarly, Sh. Jang Bahadur Singh director in M/s Shivani Hoi Rolled Steels (P) Ltd. and M/s Pratima Steels (P) Ltd. has confessed in his statement recorded u/s 131 of the Income Tax Act at camp office at M-S/A, Mezzanine Floor, Giriraj Building. S/I Road, Iron Market, Mumbai-400009 on 23-11-2012, during the course of survey action u/s 133A of the Act taken by the Investigation Wing, Mumbai that he had obtained accommodated purchase bills from many parties including M/s Kumar Enterprises. He also agreed that no actual purchases are made from these parties and these are only paper transaction to show the turnover of the company viz. M/s Shivani Hot Rolled steels (P) Ltd. These are only paper transactions and there is no actual purchase, movement of goods and sale thereof and that the purchases from the above Page | 10 ITA No: - 1849/Del/2016 concerns are non-genuine purchases. The information has been supplied by the Maharastra VAT Department to the DGJT (Inv/), Mumbai and from there it has been disseminated to this office.
10.2 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 assesses 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 assesses. The assesses has failed to prove the genuineness of the purchases made from these hawala dealers.
10.3 From the above it is clear that the assesses has inflated its purchases by an amount ofRs. 1,85,90,353/- by availing bogus/non- genuine bills from hawala dealers as mentioned above during the F.Y. 2010-11 relevant to A.Y.2011-12. Therefore, purchases amounting to Rs. 1,85,90,353/- are disallowed and added to the total income of the assesses being bogus purchase made during the year from hawala dealers. Penalty proceedings u/s 27l(l)(c) are being initiated separately.
(Addition of Rs. 1,85,90,353/-)"
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 for AY 2011-12 against addition on account of alleged bogus purchases of Rs. 1,85,90,353/-.
1. The learned AO referred to the information received from DTI'(Investigation}- 1 Delhi which was in turn received from DGIT (lnv) Mumbai which farther had received the information from VAT Department. The learned AO referred to the purchases made from following parties and held that the purchases are not genuine and made addition on account of bogus purchases-
Mahavir Sales Corporation Tisha Enterprises Kumar Enterprises Shubham Enterprises
2. The above information was confronted to the appellant almost by the end of the assessment proceedings. The information was not confronted specifically by providing the statements of the parties nor any opportunity of cross examination was granted to the appellant. The appellant asked for the Page | 11 ITA No: - 1849/Del/2016 opportunity of cross examination before the learned AO which was not allowed. The appellant had contended before the AO that the purchases are reflected in the closing stock and no expenditure was claimed during the year.
3. The explanation of the appellant was rejected without verification, it is submitted that the entire impugned purchases are reflected in closing WIP as on 31st March 2011. A detailed working of closing WIP has been furnished which shows that the purchases are reflected in closing WIP. The appellant has not claimed any expenditure in respect of the impugned purchases and therefore no disallowance can be made during the year.
4. The learned AO has purely proceeded on the basis of information received from the Investigation wing and had not applied his mind independently. The purchases are genuine purchases and all the bills/ invoices have been produced before Your Honours. The bills contains their address as also (he parties are registered Dealers with VAT Department. The payments have been mode by account payee cheques.
5. The learned AO refers to statements recorded from Shri Haresh Parrnar Director of Tisha Enterprises. The learned AO further refers to statement Shri. Jang Bahadur Singh Director of M/s Shivani Hot Rolled Steels P Ltd. and Pratima Steels P Ltd who have no connection with the appellant. The learned AO does not refer to other parties from whom the purchases are alleged to be bogus, ft is not known as to on what basis the purchases from Mahavir Sales Corporation and Shubham Enterprises are alleged to be bogus.
6. It is submitted that on the basis of third parly's statement, no addition could be made without any corroborative material. The learned AO did not even make any effort to find out any corroborative material nor any opportunity of cross examination was granted. The appellant has discharged its burden by producing the bills, addresses, VAT numbers as also the fact that payments were made through banking channels. This proves the identify of the parties.
Reliance is placed on the following decisions- ACIT VShri Kamila Shah ITA No. 5246/MUM/20I3 Ramesh Kumar and Co V ACIT ITA No. 2959/M.UM/2014 DC IT VShri Rajeev Kalathi ITA No. 6727/MUM/2012 Shri GanpatrajA Sanghavi VACIT ITA No. 2826/MUM/2013 In the above decisions, addition on account of bogus purchases has been deleted. It is submitted that the above decisions squarely apply to the case of the appellant which deals with the additions based on information from VAT Department.
Page | 12 ITA No: - 1849/Del/2016
7. Reliance is placed on decision of Bombay High Court in case of Babulal Bor and Vs. ITO 282 ITR 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 hooks, no addition can be made.
8. 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) Ltd reported in 216 Taxman 171 wherein the Hon High Court held that once sales are accepted, the purchases cannot he 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.
9. In ACIT v. KishanLal Jewels (P.) Ltd (2012) 147 TTJ 308 (Del.) (Trib.) it is held that the assesses 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 assesses 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.
10. In CAT v. M.K. Bros. (1987)163 ITR 249 (Guj.) (HC), it is held that Purchases made by assesses. Subsequent statements by sellers in Sales 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.
11. Hon'ble Supreme Court in the case of Tin Box Co. v. CIT (2001) 249 ITR 216 (SC) "an assessment made without giving the assessee an opportunity of setting out his case was liable to be set aside ".
12. 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.
13. 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 be supplied the contents of all such evidence both oral and documentary, so that he can prepare to meet the ease against him. This necessary also postulates that he should cross- examine the witness hostile to him.
Page | 13 ITA No: - 1849/Del/2016
14. 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 SEP by revenue the Court held that if the AO wants to use some statement made before him, then on request by the assessee, is hound to put the deponent for cross 'examination.
15. In Kishinchand Che liaram 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 Us reliance. Opportunity of cross examination must be given. The consequence of breach of natural justice is that either the addition is void or matter may have to be to be remanded to lower authorities.
16. In G. G. Diamond International v Dy. CIT (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 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 be the criteria for deciding the matter.
17. In DCIT vs. Shri. Rajeev G. Kalaihil, (Mum) (Trib) (ITA No. 6727/M/2012 dt. 20/8/2014, Bench 'D' AY .2009-10) Suspicions 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 farther investigation and to take it to its logical end. But, the AO left the job at initial point itself It was farther 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 at count, We also enclose the party wise ledger accounts, copies of invoices 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, ease laws relied upon and oral arguments of Ld. AR. The objections/arguments of the appellant are discussed as under:-
Page | 14 ITA No: - 1849/Del/2016
(i) As per the assessment order, the A.O. has given findings that payments were made to 4 alleged bogus parties/hawala dealers, amounting to Rs.
1,85,90,353/- 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 alleged 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 10, 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, Mumbai, that the alleged purchases from 4 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. 1,85,90,353/-.
(iii) During the appellate proceedings, the appellant 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 4 parties for bogus purchase, as against the total purchases of Rs. 117,49,44,780/- debited in the P&L a/c. Further, in the assessment proceedings, the appellant was allowed the opportunity to substantiate its claim from 15.03.2013 to 28.03.2013 and therefore, contention of the appellant that no adequate opportunity was allowed, is not found to be correct.
CONCLUSION:
In view of the above, it is clear that the appellant failed to substantiate the claim of alleged bogus purchases from 4 hawala dealers amounting to Rs. 1,85,90,353/-, before the A.O. and as well as in the appellate proceedings. Therefore, I do not find any infirmity in the AO's order and addition of Rs. 1,85,90,353/- on account of bogus purchases, is 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:-
Page | 15 ITA No: - 1849/Del/2016 "I am satisfied that the assessee has furnished inaccurate particulars of his income, accordingly penalty proceedings u/s 271(1)(c) of the I.T. Act, 1961 are being initiated separately.
12. From the balance sheet of the assessee for the year ending 31-03-2011, it is seen that the assessee company had made investments aggregating to Rs.
124,73,88,005/- 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:-
"The list of investment contains the purchase of non cumulative preference shares of Amaya Infrastructure (P) Ltd. amounting to Rs. 124 crore. As the said investment is in non cumulative preference shares not earning any dividend in past and not likely so in future, in our opinion the investment in the said shares should not / ought not to be considered while calculating the disallowance as envisaged u/s 14A of the Act".
13. 1 have considered the reply filed by the assesses, 1 do not- find any force in the reply submitted by the asses see. Provision of section 14A are mandatory in nature. Section J4A of the Act reads as under :-
"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 pari 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 part 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. "
14. 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 (hat 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 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 any suo-motto disallowance it/s HA of the Income Tax Act and has contended (hat no expenditure has been incurred in relation to the income not includible in the total income, 1 am left with no alternative than to invoke the provision of section J4A of the Income Tax Act. I therefore, make a disallowance Page | 16 ITA No: - 1849/Del/2016 of Rs. 62,36,940/- 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 from part of the total income shall be the aggregate of 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 Nil B. Average Investment Rs. 124,73,88,005/-
C. Average Assets Rs. 300,04,81,748/-
AxB/C Nil
(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.
0.5% of average value of investment i.e. B Rs. 62,36,940/-
Total [(i)+(ii)+(iii)] Rs. 62,36,940/-
15. Since the assessee has not disallowed the expenses incurred for earning of exempt income, in view of the provisions of 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 u/s 271(1)(c) of the I.T. Act, 1961 are being initiated separately."
6.2 During the appellate proceedings, Ld. AR has filed written submission/objection vide letter dated 16.10.2015. The relevant portion is reproduced as under:-
"SUBMISSION REGARDING DISALLOWANCE U/S 14A OF INCOME TAX ACT
1. During the course of Assessment Proceedings, the learned AO observed that in the Balance Sheet for the year ended up to 31.3.2011, the appellant had made investment in equity shares in non-cumulative Redeemable Preference Shares of Rs 1,24,73,88,005/-. According to him, as these investments yield Page | 17 ITA No: - 1849/Del/2016 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 8D 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 sue 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 62,36,940/-.
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 16,28,000/- Model Coop Bank Ltd 2,98,010/- 33,410/- Ashtadashan Vyavharak Pvt. Ltd. 25,00,000/-
2. It is submitted that the appellant has received dividend income of Rs. 32780/- 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 was 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.
3. The appellant Company received share application money from following Companies in different years as under-
Name of the Company FY Amount
M/s Ankita Mercantile P 2007-08 99,90,00,000/-
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
Page | 18
ITA No: - 1849/Del/2016
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 bearing funds were not used for making above investments. The investment was made in earlier years.
4. 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 Rs. 23,70,736/-. 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.
5. Section 14A of the Act is relevant and reproduced below:- "14A. (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 pan 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 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.
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 stales 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 the 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 (he amount of expenditure which should be disallowed in accordance with such method as prescribed, i.e. Rule 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 Page | 19 ITA No: - 1849/Del/2016 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 81) of the Rules. Where the disallowance or 'nil' disallowance made by the assessee is found to be unsatisfactory on examination or accounts, the assessing officer is entitled and authorized to compute the deduction under Rule 8D 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;
(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.
Page | 20 ITA No: - 1849/Del/2016 (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. "
. 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 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 Page | 21 ITA No: - 1849/Del/2016 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 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.
8. 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 part 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, Page | 22 ITA No: - 1849/Del/2016 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 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 part of the total income, is taken.
9. 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.
9. 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.
10. 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 ITD 309 (Mum) (TM) has also taken similar view.
13. The Delhi ITAT 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 Page | 23 ITA No: - 1849/Del/2016 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 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.
13. 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
15. 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:
Page | 24 ITA No: - 1849/Del/2016 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...............
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:
Page | 25 ITA No: - 1849/Del/2016 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:-
(i) In the assessment proceedings, the appellant has stated that, dividend of Rs. 32,780/- 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. 32780/-. Therefore, the A.O. invoked the provision of section 14A for making the disallowance and computed the same at Rs. 62,36,940/-, u/r 8D.
(ii) During the appellate proceedings, it has been submitted by the appellant that investment of Rs. 124,87,52,000/-, 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 6 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:
Page | 26 ITA No: - 1849/Del/2016 • 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 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 8D), 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. 62,36,940/-, 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 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 upon the order of the Assessing Page | 27 ITA No: - 1849/Del/2016 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).
[E] In view of the foregoing discussion, the appeal filed by the assessee is dismissed. 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 appeals in ITAT, the matter will be considered in accordance with law having regard to the facts and circumstances.
Page | 28 ITA No: - 1849/Del/2016 [F] In the result, appeal filed by the Assessee is dismissed.
Order pronounced in open court on 06/12/2019.
Sd/- Sd/-
(AMIT SHUKLA) (ANADEE NATH MISSHRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 06.12.2019
SH
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
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