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Income Tax Appellate Tribunal, IN THE INCOME TAX APPELLATE TRIBUNAL,
Before: MANISH BORAD & MANISH BORAD & MANISH BORAD
per Audit Report. As such, that satisfies the requirement of the CBDT’s Instruction on the issue.
Ld A.R. submitted that the Apex Court directed CEC to make enquiry without referring to Shah Commission’s Report. Justice Shah Commission followed the same by collecting data from the H -1 Form, supplied by the Department of Mining and other Government offices. The data submitted lost its credential as enquiry was not made as per the Enquiry Act. Thus, Supreme Court appointed a Committee namely CEC. The committee was directed by the Supreme Court to find out production in violation of Mining and other laws, without referring to the Shah Commission Report. In between the Mining Dept. and Vigilance Dept, tried to induct the assessee for illegal mining for the Financial Year 2008 – 09 and 2009 – 10. Without the knowledge of the assessee, they measured a pit inside the Mines and applied wrong conversion ratio, which resulted astronomical production figure. Against the above action of the Mining Department, the assessee filed a revision petition before the Mining Tribunal, Government of India to squash the notice and concluded that there is no excess production in comparison to the production disclosed by the assessee. The Government of Odisha, filed a writ application in the High Court of Odisha against the order of the Mining Tribunal (Revision Authority). The Hon’ble Odisha High Court dismissed the writ petition being, devoid of merit. In the meanwhile, CEC submitted its Report to the Hon’ble Supreme Court. The production figure
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disclosed by the Respondent-assessee in her Books of Account, tallied with Form H – 1 and the CEC Report. Only in one year the Respondent- assessee made production in excess of Environmental Clearance (EC), for which the Supreme Court directed the Respondent to pay compensation to the State Government which shall be utilized for local area development. The wild allegation made by the AO, that the assessee in past involved in illegal mining, is completely baseless.
As regards the figure given to IBM, which as alleged by the revenue is not correct, ld A.R. submitted that IBM has been designated to perform action on any particular issue, then it is only IBM alone who should do that action. If any misreporting made in Form H – 1, then only IBM can take action. The Income Tax Authority has no legal locus standi to take action by using the cost of production to find out total production volume which is prohibited in the Form itself. Hence, the Ld. Assessing Officer has acted beyond his power to utilize the provisional costing figure to find out excess production. On the same assumption, he also finds out excess turnover as disclosed in the Books of Account of the Respondent-assessee. He presumed that the excess productions are sold in a clandestine manner, resulting an addition of Rs.121,76,53,164/-, to total disclosed income of the Respondent-assessee.
We have heard the rival submissions and perused the record of the case. In this case, the short question which arises for adjudication is as to P a g e 15 | 62
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whether the undisclosed production done by the assessee, as alleged by the AO in the assessment order on the basis of Form H-1 submitted to the IBM, and Deputy Director of Mines under MMDR Act is correct or not?. In this case, the Assessing Officer noticed that the assessee had claimed raising charges of Rs.374,49,56,013/- for the relevant previous year whereas M/s. Triveni Earthmovers Pvt Ltd., had submitted raising bills of Rs.378,66,54,729/-. This is the main bone of contention of the Assessing Officer to doubt the figures submitted by the assessee, which causes the difference to the extent of 4,90,953 MT and treated the same as undisclosed production by the assessee. To clarify the difference, it was the contention of the assessee that as per agreement with M/s. Triveni Earthmovers Pvt Ltd., raising bills were being submitted by them on the basis of minerals dispatched and not on the basis of production. The assumption that the assessee in collusion with M/s. Triveni Earthmovers Pvt Ltd.,was involved in unaccounted production of minerals has no basis or evidence on record except that the relatives of the assessee are directors and consultant in that company.
For better appreciation of facts, we note that the assessee is regularly maintaining her Books of Account as provided in section 145 (1), in mercantile system. She also complied with Accounting Standard, as and when notified. The Ld. Assessing Officer verified the Books of Account including Stock Register and Stock Reconciliation statement. He has not detected a single mistake in the Books of Accounts. He has not rejected the account and applied section 145(3) of
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the Income Tax Act. For this proposition, the assessee relied on the decision of Hon’ble Madras High Court in the case of PCIT Vs. Marg Ltd., delivered on 20.07.2017, reported in 396 ITR 580. The relevant portion of the judgement reads as under:
“In para 45 (3) of the above order, it is mentioned that where the AO is not satisfied about the correctness or completion of the account of the assessee, or where method of account provided in sub section (1) has not been regularly followed by the assessee or income has not been computed in accordance with the standards notified under subsection (2), the AO may make an assessment in the manner provided in section 144. Therefore, it is sine qua non that the AO come to a conclusion that Books of Accounts maintained by the assessee are incorrect or incomplete or unreliable and rejects the books of Accounts before proceeding to make his own assessment. In instant case, there is no reference in the Assessment order of the AO regarding rejection of the Books of Account. In the concluding paragraph of the order, it is mentioned that “owning to all that have been stated, there is no merit whatsoever, in the appeal filed by the Revenue as addition of income on estimate basis, has conceded by the revenue before the ITAT, being done without scrutiny and without rejecting Books of Account”. 19. We once again reiterate that the Ld. AO after verifying all the Books of Account, including Stock Register has not detected a single mistake. He has also started computation from the profit, disclosed by the assessee. As per section 145 (3) and order of the Madras High Court in the case of Marg Ltd(supra), he cannot proceed further without rejecting Books of Account to make any addition to the profit derived, by taking a provisional costing figure, submitted by the appellant herself before the IBM.
We note that the assessee being raising the Iron Ore from the lease hold land, each and every Iron Ore moves from the Mine’s area with a permit issued
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by the Mining Department. The movement of materials is made with permits until it reaches its destination. The permit contains name of the buyer, mode of transportation, quality, Nature of material and also the name of the quarry. Copy of the permit issued to the DDM of various places through which the material shall be moved including, the Station Master of that place. There is no scope for production and sale of materials outside the Books, could be maintained. Hence, there is absolutely no base for computation of excesses production of material, which is computed by provisional cost of production and dividing the same with production expenditure to derive absurd production figure and utilize the same against the respondent to compute production.
Ld CIT DR relied on the decision of Hon’ble Madras High Court in the case of Commissioner of Income Tax relied upon the case of Commissioner vs N. Swamy 241 ITR 366, and Delhi High Court, in case of Shruti Fastener (P) Ltd. (2016) ITL 1152, (Del).
In the case of N. Swami (supra), it is held as under:
“The assessee’s income is to be assessed by the ITO on the basis of the material which is required to be considered for the purpose of assessment and ordinarily not on the basis of the statement which the assessee may have given to a third party unless, there is material to corroborate that statement of the assessee given to a third party, even if it be a burden a bank. The mere fact that the assessee had made such a statement by itself cannot be treated as having resulted in an irrebuttable presumption against the assessee. The burden of showing that the assessee had undisclosed income is on the Revenue. That burden cannot be said to be discharged by merely referring to the statement given by the assessee to a third party in connection with a transaction which was not directly related to the assessment and
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making that the sole foundation for a finding that the assessee has deliberately suppressed his income. That the burden is on Revenue to prove that the income sought to be taxed in within the taxing provisions and there was in fact income, are proposition which are well settled. The rejection of the explanation was a matter for the Tribunal. The Tribunal has exercised its jurisdiction and the question decided by it is a question of facts.
In the case of Shruti Fasteners Ltd. (supra), it is held as under:
“In the impugned order the ITAT has given cogent reason as to why the case of the of the Revenue cannot be accepted inter alia. It is pointed out that no evidence was found which could substantiate the Revenue’s contention that there was either purchases or sales, outside the Books of Account. There was no evidence that the assessee maintained parallel Books of Account.”
Hence, both the cases are applicable to the case of the assessee, being income is to be assessed on the basis of material which is required to be considered for the purpose of the assessment and not on the basis of the statement which the assessee, may have given to the third party. Similarly, no evidence was found which could substantiate the Revenue’s contention that there was either purchase or sale outside the Books of account. The is no evidence that the Respondent has maintained any parallel Books of Account.
In view of above foregoing discussion, we do not find any infirmity in the well reasoned findings of the ld CIT(A), which we hereby uphold and dismiss Ground No.1 of the revenue.
Ground No.2 of Revenue reads as under:
“ 2.1 – The Learned CIT (A) was not justified in deleting the disallowance of Rs. 8,82,76,775/-, made by the Assessing Officer towards “Depreciation on Beneficiation Plant”, totally ignoring the findings of the Assessing Officer that the process of beneficiation was not undertaken by P a g e 19 | 62
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the assessee’s own plant, but through a contractor Triveni Earthmovers (P) Ltd., vide Work Order dated 24.02.2013 (Annexure – C to SOF). 2.2 The Learned CIT (A) was not justified in deleting the disallowance of Rs. 8,82,76,775/-, made by the Assessing Officer towards “Depreciation on Beneficiation Plant by giving a wrong finding of fact that an amount of Rs.1,96,04,270/- was incurred on running of the beneficiation plant ignoring the fact that such electricity expense3s were for general lighting and other related expenses at the mining site in Barbil and for her office building in Rourkela. 2.3 The Learned CIT (A) was not justified in deleting the disallowance of Rs. 8,82,76,775/-, made by the Assessing Officer towards “Depreciation on Beneficiation Plant ignoring the binding decision of Bombay High Court in the case of Dinesh Kumar Gulabchand Agarwal vs CIT, (2004) 267 ITR 768 (Bom) which has been upheld by the Supreme Court by dismissing the SLP reported in (2004) 266 ITR (st) 106-Ed.”
Facts as emerged from the impugned order on the above issue are that the Assessing Officer noticed that the assessee had claimed depreciation on beneficiation plant of Rs.8,82,76,775/-. The assessee had installed beneficiation plant for beneficiation of minerals raised in her mines. The assessee had given raising contracts for mining of minerals to M/s. Thriveni Earthmovers Pvt Ltd., and the AO noticed from the work order given to that company by the assessee that as per the work order, the company was required to undertake necessary activities for screening and crushing of iron ore to different sizes as specified by the assessee and also to further reprocess the product if required by the assessee after inspection. The AO further observed from the work order that the raising contractor was to deploy and maintain all the necessary machines and equipments including drills, dozers, water tankers, sprinklers, crusher and screens
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alongwith trained manpower. The AO observed that as per the work order, the role of the assessee in the entire operation was supervisory in nature and no operational, even for beneficiation operation which was evidently been undertaken by the contractor as per scope of the work in the work order. The AO concluded that the beneficiation work was undertaken by M/s. Thriveni Earthmovers Pvt Ltd., and that the beneficiation plant was not used by the assessee in her business, therefore, the depreciation claimed on the plant was not allowable. Accordingly, the AO disallowed the depreciation claimed by the assessee of Rs.8,82,76,775/- on the beneficiation plant.
Before the ld CIT(A), the assessee submitted a written submissions, the gist of which is as under:
i) The beneficiation plant installed by the assessee was put to use to process the minerals. ii) The assessee had invested Rs.63.62 crores in installing the beneficiation plant, which was meant to be used for her business. iii) During the year 2014-15, the assessee paid Rs.1,96,04,270/- towards electricity charges, which establishes the running of the beneficiation plant. iv) If the plant & machinery are kept ready for use, depreciation is allowable.
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The ld CIT(A) after considering the submissions of the assessee deleted the disallowance, inter alia, observing as under: ‘ I have considered the matter and taken into account the relevant facts and materials on record. In the work order issued by the assessee to the raising contractor M/s. Thriveni Earthmovers Pvt Ltd., there is no stipulation that the raising contractor has to provide the beneficiation plant for the beneficiation of the minerals. In the work order at para-F, there is mention of various machineries to be provided by the raising contractor but there is no mention therein that the raising contractor has to install the beneficiation plant also. The AO has mentioned in the assessment order that M/s. Thriveni Earthmovers (P) Ltd. has undertaken the beneficiation work without verifying the actual facts from that company as to whether the beneficiation work was done in the beneficiation plant installed by the assessee or in the company's own beneficiation plant. The assessee has claimed that the beneficiation work was handled by the raising contractor in the beneficiation plant installed by the assessee and there was no reason to doubt this claim of the assessee without proving the same as false by making necessary enquiries with M/s. Thriveni Earthmovers (P) Ltd. The assessee has installed the beneficiation plant by incurring a substantial investment of Rs.63.62 crores for the purpose of her mining business and the plant having been used for beneficiation of the minerals through the raising contractor M/s. Thriveni Earthmovers (P) Ltd., there is no reason to disallow the depreciation claimed on the same referring to the work order issued by the assessee herself and stating that it was the contractor's job to install the beneficiation plant. Under what terms and conditions, the assessee would engage a raising contractor are entirely in the domain of the assessee and the AO cannot question the wisdom of the assessee in this regard. Moreover, the fact that the beneficiation plant of the assessee was being run during the relevant previous year is evident from the fact that the assessee had incurred electricity charges of Rs. 1,96,04,270/- on running of the same. It is relevant to mention here that the AO has not questioned the payment of electricity charges on the beneficiation plant and has disallowed only the depreciation claimed on the same. On the facts of the case, there is no justification to disallow the claim of depreciation on the beneficiation plant. The reasons given by the AO for disallowance of the same are not at all convincing. The AO's presumption while disallowing the claim of depreciation is not a fact. Considering the facts stated above, the disallowance of depreciation of Rs.8,82,76,775/- is deleted.”
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Ld CIT DR supported the assessment order and further submitted that there is no evidence on record to the effect that beneficiation plant owned by the assessee was used by M/.s. Triveni Earthmovers Pvt Ltd., in mining operations. On the contrary, the para –F of contractual agreement dated 24.2.2013 between the assessee and M/s. Triveni Earthmover Pvt Ltd., does prove that said contractor had employed its own machines in the mining operations. Ld CIT DR further submitted that the ld CIT(A) has given an erroneous finding that an expenditure of Rs.1,96,04,270/- was incurred on the running of beneficiation plant by ignoring the fact that such electricity expenses were incurred for general lighting at mining site at Barbil and office building at Rourekla. He submitted that the above aspect has not been examined by the ld CIT(A).
Ld CIT DR submitted that the issue is covered in favour of the revenue by the following decisions, wherein, it was held that before claiming the depreciation, the assessee had to show the actual use of machines.
i) Dineshkumar Gulabchand AgarwalCIT vs (267 ITR 768) II) Joit Kumar Jain (48 taxmann.com 240) (ITAT, Mumbai) iii) CIT vs J.K.Transport, 231 ITR 798 (MP) 32. Replying to above, ld AR supported the order of the ld CIT(A). Ld AR submitted that the assessee has installed the beneficiation plant in the
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mining area, which was used by the contractor M/s. Triveni Earthmovers Pvt Ltd., and for this purpose, the assessee invested Rs.63.62 crores. Nowhere, the Assessing Officer has proved that the contractor whose main function is to raise the iron ore has installed the beneficiation plant. The beneficiation plant used for generating high grade iron ore from the mines. Ld A.R.submitted that the beneficiation plant was in operation during the assessment year 2014-14 but started function during the assessment year 2015-16. Ld A.R. submitted that for functioning of beneficiation plant, the assessee has incurred Rs.1,96,04,270/- towards electricity, which itself proves the claim of the assessee.
We have heard the rival submissions and perused the record of the case. The sole dispute in this ground is that whether the ld CIT(A) was justified in deleting the depreciation claimed by the assessee. It is not disputed that the assessee has installed beneficiation plant by investing Rs.63.62 crores and the installation of beneficiation plant meant for iron ore processing and beneficiation, which enable the iron ore mines to increase their output and efficiency. The mere fact that the contractor has used the beneficiation plant does not mean that the assessee will be debarred from claiming the depreciation. It is the wisdom of the assessee to engage any contractor for this work. It is also noted that the assessee has incurred Rs.1,96,04,270/- towards electricity charges for running the beneficiation plant installed by it. The decisions relied by ld CIT DR are distinguishable on fact as in those cases, the
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assessee had to show the actual use of the machines for claiming the depreciation but in the present case, the assessee has herself installed the beneficiation plant for the use of minerals in its mines. Beneficiation Plant has been installed only in the mining area. Beneficiation is a different activity, which is not included in a work order. Low grade materials are available in the mining site from the overburdens. These overburdens are processed through Beneficiation Plant to recover high grade materials. As explained by ld A.R, the Mining Contractor in his plant and machinery list as contained in his work order has not included Beneficiation Plant. The respondent-assessee, being the owner of the Mine, has established the Beneficiation Plant to recover high grade Iron ore from the waste materials. When mining activity is being carried out through contractor, then obviously, the plant has to be used by the contractor for the business and benefit of the contractee-assessee and thus, agreeing with the conclusion drawn by the ld CIT(A), we safely presume that the plant was used by the contractor for the business purpose and benefit of the assessee. In the schedule of fixed assets and depreciation, under the head “Plant & Machinery”, there is Beneficiation Plant as opening balance, the value of which amounts to Rs.58,85,09,830.27 and depreciation on the same amounts to Rs.8,82,76,475/-. Since the assessee is the owner of the Beneficiation Plant and producing concentrate Ore, she is entitled to claim depreciation on the Beneficiation Plant. The contractor Triveni Earthmovers (P) Ltd., has claimed depreciation on the Plant & Machinery acquired by it only and not on
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beneficiation plant. Hence, there is no reason to disallow the depreciation claimed by the assessee. Therefore, we do not find any infirmity in the order of the ld CIT(A) in deleting the disallowance in respect of depreciation claimed by the assessee. Accordingly, ground No.2 of the revenue is dismissed.
Ground No:3 & 4 – Disallowance of Peripheral Development Expenses of Rs.9,44,35,647/- 3.1 The ld CIT(A) was not justified to delete the disallowance of Rs.9,44,35,647/- made by the AO towards “peripheral Development expenditure” totally ignoring the findings of the AO that the expenditure was not incurred in line with the Government of Odisha, Department of Steel and Mines, Notification dated 15th January, 2004 (Annexure-D to SOF) and that documentary evidence of such payments had not been produced before him. 3.2 The ld CIT(A was not justified to delete the disallowance of Rs.9,44,35,647/- made by the AO towards peripheral development expenditure by admitting 18 pages of (Annexure-E to SOF) fresh evidence in violation of Rule 46A of I.T.Rules, 1962 without giving opportunity to the AO to rebut the contents of such evidence. 4.1 The ld CIT(A) was not justified in allowing expenditure of Rs.9,05,73,508/- incurred on construction of bituminous road of 7 kms even though such expenditure was of capital in nature and had not been authorized by the District Committee set up under the Notification dated 15.1.2004 of the Govt. of Odisha. 35. Pressing into service Ground No.3.2 of the Revenue, ld CIT DR submitted that the ld CIT(A) was not justified by admitting 18 pages of fresh evidences (Annexure –E to SOF) in violation of Rule 46A of I.T.Rules, 1962 without giving an opportunity to the AO to rebut the contents of such evidence.
Replying to above, ld A.R. drew our attention towards second part of para 8.2 of the impugned order of the ld CIT(A) and submitted that it has been noted by the ld CIT(A) that copies of all bills in support of claim of expenses
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towards Peripheral Development expenses which were filed before the AO have also been filed at the time of first appeal hearing. Ld A.R. strenuously contended that these observations have not have been controverted by way of showing assessment records or by way of affidavit by the AO and no such exercise has been carried out by the revenue to support this contention that ld CIT(A) has admitted 18 pages of fresh copies without confronting the same to the AO.
In view of rival submissions and materials placed on record before the Tribunal as well as unrebuted certification given by the ld A.R. on the paper book, we are unable to agree with the contention of ld CIT DR that the ld CIT(A) has admitted fresh evidences of 18 pages i.e. (Annexure-E to SOF)without confronting the same to the AO. When the relevant documents were filed before the AO during the assessment proceedings and again same were filed before the ld CIT(A), then it was not required from the ld CIT (A) to again confront the same to the AO before admitting and considering the same. Thus, we are unable to agree with the contention of ld CIT DR that the ld CIT(A) has admitted and considered 18 pages of Annexure-E in contravention of Rule 46A of I.T.Rules, 1962. Therefore, Ground No.3.2 of the Revenue being bereft of merits, is dismissed.
Now, we proceed to adjudicate Ground No.3.1 and Ground No.4 on merits, wherein, it has been contended that the ld CIT(A) was not justified in deleting the part disallowance made by the AO towards peripheral development P a g e 27 | 62
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expenses ignoring the finding of the AO that the expenditure was not incurred in line with the Government of Odisha, Department of Steel and Mines, Notification dated 15.1.2004 and documentary evidences of such payments had not been produced before him.
Ld CIT DR drew our attention towards relevant para 9 of the assessment order and submitted that the AO has categorically noted that as per Notification of Government of Odisha, Department of Steel and Mines dated 15.1.2004 published in the Odisha Gazettee on 20.2.2004, the expenditure towards peripheral development expenses should be spent through the District Committee/Society with the Collector as a head within a radius of 50 kms of the Schedule area for the development of health, education, communications, irrigation and agriculture. Ld CIT DR submitted that no documentary evidence was produced by the AO before the AO during the assessment proceedings and thus, the assessee failed to substantiate as to whether peripheral development expenditure was incidental to the business and must have necessitated or justified by commercial expediency or not. Ld CIT DR submitted that the assessee failed to justify the claim of peripheral development charge with supporting documents/evidence, therefore, the AO was right in making the disallowance which was deleted by the ld CIT (A) without any justified reasons and basis. Therefore, it was his contention that the impugned order of the ld CIT(A) may kindly be set aside by restoring the order of the AO.
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Replying to above, ld AR took us through relevant paras 8 to 8.2.1 of CIT(A) order and submitted that the assessee submitted all the relevant bills, vouchers and documentary evidence in support of the incurring of peripheral development expenses before the AO as well as ld CIT(A) at the time of appeal hearing and this fact has been noted by the ld CIT(A) in his order at para 8.2. Ld A.R.submitted that the AO disallowed the entire expenditure by observing that it is not possible that the expenditure was incidental to the business of the assessee and must have necessitated or justified by commercial expediency. The AR also submitted that payments have been made through banking channels and major amount was incurred during the year under consideration for repair of roads in the peripheral areas of the mines area. Ld A.R. submitted that the amount incurred is very much incidental to the assessee’s business to maintain the roads in and around the mines area in good condition involving transportation of minerals. Ld A.R. submitted that an amount of Rs.9,08,53,508/- is incurred for the repair and construction of road and all details were furnished before the AO. The ld AR also contended that in the policy decision para 8 clause (e) roads have not been mentioned and the assessee is not claiming that she incurred the impugned expenditure on repair and construction of roads in compliance with the Notification/order of Govt. Of Odisha but continuously claiming the same. She incurs the expenditure for the purpose of her mining business. He also contended that the ld CIT DR is making a new allegation or argument of capital expenditure which has not been
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taken by the AO in the assessment order and the revenue cannot be allowed to make a new case on new basis at this belated stage before the Tribunal. Ld A.R. further explained that Rs.4,70,000/- was incurred for digging of bore wells, Rs.5,55,600/- on civil works and Rs.25,56,549/- on health helpdesk at Keonjhar and Cuttack, which was as per the direction of the Government of Odisha. Ld A.R. submitted that by taking a very balance approach, ld CIT(A) has made part disallowance of Rs.35,82,149/- allowing remaining amount treating the same as business expenditure under business expediency. Therefore, the order of the ld CIT(A) may kindly be upheld disallowing Ground of the revenue.
Ld AR lastly submitted that the issue is covered in favour of the assessee by the order of the Tribunal dated 26.8.2020 in assessee’s own case for the assessment year 2012-13 & 2013-14 in ITA Nos.389 & 390/CTK/2017, wherein, on similar issue, the deletion made by the ld CIT(A) has been confirmed by the Tribunal. Ld A.R. drew our attention towards paragraphs 42 to 50 of said order of the Tribunal and submitted that facts and circumstances being similar to the present assessment year, therefore, Ground No.3.2 of revenue may kindly be dismissed.
On careful consideration of the rival submissions, we observe that the ld CIT(A) has granted part relief to the assessee with the following findings:
8.2 I have considered the matter carefully. The AO has disallowed the entire expenditure under the above head observing that it is not possible to verify whether the expenditure is incidental to the business of the assessee and necessitated or justified by commercial expediency. In the course of assessment proceeding, the assessee is found to have furnished all the P a g e 30 | 62
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details relating to the expenditure incurred under the above head of Rs.9,44,35,647/-. The break-up of the details of the expenses are as under
SI.N Name of the Party Nature of Work Amount(Rs.) o. 1 Thriveni Earthmovers (P) Construction of Road 90,573,508.00 Ltd. 2 Gram Panchayat Tax Local Tax Paid 280,000.00 3 Vamsi Krishna Borewells Diqqinq of Borewell 470,000.00 4 Md Nasim Civil Works 555,600.00 5 SS Earthmovers and Health Help Dest at 2,556,549.00 Logistics Keonjhar & Cuttack TOTAL 94,435,657.00 The copies of all the bills in support of the above expenses which were filed before the AO have also been filed at the time of appeal hearing. From the details of the expenses and the bills, it is seen that the major amount of Rs.9,05,73,508/- was spent during the year on construction and repairs of roads in the peripheral areas of the assessee's mines and the entire work was done through the contractor M/s. Thriveni Earthmovers (P) Ltd. The amount was paid to the contractor through banking channels and tax was duly deducted at source as per law on the payments made to the contractor. 8.2.1 The assessee has to maintain the roads in her mines areas in good condition for the sake of her mining business. Though classified as periphery development expenses, the expenditure incurred during the relevant previous year on construction and repair of roads in the peripheral areas of the assessee's mines has to be considered as incidental to the business of the assessee and spent on business compulsion. Of course, there was no direction from the so-called district committee for doing such works, but it is a fact that it is very much incidental to the assessee's business to maintain the roads in and around the mines areas in good condition for smooth running of her business involving transportation of minerals. It is not understood, what business expediency, the AO was looking for to allow the expenses incurred on repair and construction of roads of Rs.9,05,73,508/-. It is also seen from the details that the assessee has paid an amount of Rs.2,80,000/- by way of payment to the Gram Panchayat Office, Palasa falling under Joda Block of Keonjhar district. This amount was paid on the demand of Gram Panchayat Office and the assessee was under obligation to pay the same to the Gram Panchayat for various developmental activities to be carried out by the Gram Panchayat. This payment obviously has to be considered as legitimate business expenditure of the assessee. However, the other expenses claimed under the head periphery development expenses such as digging borewells (Rs.4,70,000), expenditure on civil works (Rs.5,55,600) and expenditure on
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health helpdesk at Keonjhar and Cuttack (Rs.25,56,549) appear to be gratuitous in nature and not incurred on account of any business expediency. Hence, the same cannot be allowed as business expenses. Accordingly, out of the total expenditure of Rs.9,44,35,657/- expenses incurred on repair and construction- of roads of Rs.9,05,73,508/- and payment made to Gram Panchayat Office of Rs.2,80,000/- totaling Rs.9,08,53,508/- are to be allowed as business expenses and deleted from the disallowance made by the AO. To sum up, out of the disallowance of Rs.9,44,35,657/-, an amount of Rs.9,08,53,508/- is deleted and the balance of Rs.35,82,149/- is confirmed.”
Undisputedly rather admittedly, the assessee is in mining business and has declared huge income from mining activities. In the totality of facts and circumstances of this issue, the claim of the assessee revolves on the strength of contentions that it is very much incidental to main road in the mining area to keep in good condition for smooth transportation of minerals from the mining area. On the strength of this fact, it has also been contended that this expenditure obviously is business expenditure of the assessee, which was rightly considered in the right perspective by the ld CIT(A).
On perusal of the Tribunal order in assessee’s own case for the assessment year 2012-13 dated 26.8.2020 (supra), we are of the considered view that similar issue has been decided in favour of the assessee in the appeal filed by the revenue against the order of the ld CIT(A).
The relevant paras 42 to 50 of the order of the ITAT dated 26.8.2020 reads as follows:
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“42. Ground No.4 of appeal for assessment year 2012-13 is against the deletion of Rs.3,99,28,438/- made under the head “disallowance of peripheral development charges”. 43. Apropos this Ground, ld CIT DR, supporting the action of the Assessing Officer, drew our attention towards para 9 at pages 5-6 of the assessment order, submitted that the AO by following the decision of Hon’ble Supreme Court in the case of Travancore Titanium Products Ltd vs CIT, 1966 SCR (3) 321, has rightly disallowed the claim of the assessee towards peripheral development charges by observing that he is unable to verify whether peripheral development charges is the expenditure incidental to the business and must have been necessitated or justified by commercial expediency or not in the case of the assessee as the assessee has failed to justify the peripheral development charges with supporting documents/evidences. Ld CIT DR submitted that the ld CIT(A) has granted relief to the assessee without any reasonable cause and justified findings ignoring the facts and circumstances of the case, under which the assessee has claimed expenses towards peripheral development charges. Therefore, the impugned order of the ld CIT(A) on this point, may kindly be set aside by restoring that of the order of the AO. 44. Replying to above, ld AR drew our attention towards explanation of the assessee and submitted that during assessment proceedings before the AO, as has been recorded by the AO in para - 9 of the assessment order, it was submitted that the assessee is a mines owner and the mines are located in the forests and operation in the mines area affects the periphery in which several villages are located. Ld A.R. further explained that to compensate the damage happening to the local amenities due to operation of the mines, the assessee is required to undertake periphery development expenses as per the provisions of law. Therefore, the amount has been spent or incurred for upgradation of the roads in the periphery through Keonjhar Infrastructure Development Co. Ltd. Ld A.R. submitted that all relevant copies and documents were submitted before the AO reflecting that at the time of making payment, tax has been deducted at source as per the provisions of the Income tax Act, 1961 and Income tax Rules, 1962. Ld A.R. also explained that mines are located in the deep forest and by the passage of time the roads constructed by the Government are fully damaged during rainy and other natural reasons and, therefore, for smooth facilitation of vehicles used by the assessee for transportation of materials and also to facilitate the local people and villagers, forest department officials and government officials, the assessee has repaired/upgraded the P a g e 33 | 62
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old roads. Therefore, this expenditure is inextricably linked with the business of the assessee which is allowable. 45. On careful consideration of the rival submissions alongwith para 9 of the assessment order and para 7.2 of the CIT(A) order, we are of the considered view that the nature of business carried on by the assessee must be evaluated and accepted as per the commercial expediency and trading principles. The expenditure claimed by the assessee must be incidental to the business and must be necessitated or justified by the commercial expediency and must be directly and intimately connected with the business and must be incurred by the prudent business man/taxpayer. For the purpose of smooth running of business, the characteristic of permissible deduction, there must be a direct and interlinked connection with the business of the assessee, meaning thereby, the amount inextricable claimed by the assessee and mode of business of the assessee, in order to justify the deduction, the expenditure must be incidental to the business and must be necessitated or justified by the commercial expediency. Precisely, it can be said that there must be inter- connection between the expenditure claimed by the assessee and business operation by the assessee. 46. In the present case, undisputedly, the assessee is a mines owner and the mines are located in the deep forest and obviously the mining activities in the mines area affects the periphery of the mines, where several villagers are residing in the villages located in the periphery. When a miner extracts material from the mines, then, he is duty bound to ensure that there should be minimal disturbance and destruction in the periphery and there should be no nuisance to the villagers residing around the area of operation by the mining activities. At the same time, it is also a requirement of the miner that there must be good road in the periphery for smooth movement of materials, which is also used by the forest department officials and other government officials and the villagers residing in the periphery. 47. On perusal of assessment order, we observe that the Assessing officer has made addition by observing that he is unable to verify as to whether periphery development charge is the expenditure incidental to the business and must have been necessitated or justified by commercial expediency or not in the case of the assessee. He also noted that the assessee has failed to justify the peripheral development charge with supporting documents/evidences. From these observations, we safely observe that the AO has not disputed the quantum of expenses or any other compliance required as per the provisions of Income tax Act at the P a g e 34 | 62
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time of making payment and he simply disallowed the claim of the assessee by observing that he is unable to verify the claim of the assessee in absence of supportive evidences/documents. 48. Further from para 7.2 of the CIT(A), we observe that the ld CIT(A) has granted relief to the assessee by observing as follows: “7.2 I have considered the mater carefully. The AO has disallowed the entire expenditure under the above head observing that it is not possible to verify whether the expenditure is incidental to the business of the assessee and necessitated or justified by commercial expediency. In the course of assessment proceedings, the assessee is found to have furnished all the details relating to the expenditure incurred under the above head of Rs.3,99,28,438/-. The entire amount has been paid to M/s. Keonjhar Infrastructure Dev. Company Ltd for improvement of roads in the mines areas of the assessee. The assessee has to maintain the roads in her mines areas for the sake of her mining business. Though classified as periphery dev. Expenses, the expenditure has actually been incurred for construction and maintenance of roads in the periphery of the mines belonging to the assessee. Of course, there was no direction from the so called district committee for doing such works. But it is a fact that it very much incidental to the assessee’s business to maintain the roads in and around the mines areas for smooth running of her business. It is not understood, what business expediency, the AO was looking for to allow the expenses. In this view of the matter, the disallowance of Rs.3,99,28,438/- under the above head is deleted.” 49. In view of above, from the explanation submitted by the assessee before the AO dated 5.2.2015, it is clear that the assessee informed the name of contractor, who was paid the impugned amount for upgradation of roads in the periphery area i.e. M/s. Keonjhar Infrastructure Dev. Company Ltd. On receipt of above explanation, the AO without pointing out any defect in the quantum of expenses spent by the assessee and mode of payment adopted by the assessee for making payment and without verifying from the recipient contractor regarding receipt of payment and rendering of services towards upgradation of roads proceeded to make disallowance and addition. The AO was duty bound to issue show cause notice to the assessee and if he was not satisfied with the reply, he could have issued notice to the recipient contractor who was paid the impugned the amount regarding the work of upgradation or construction of roads on the direction of the assessee in the periphery area of the mines owned by the assessee but no P a g e 35 | 62
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such exercise had been undertaken. Therefore, the allegation made by the AO that the assessee has failed to justify the expenses without evidences/documents has no legs to stand. 50. On careful perusal of the findings of the ld CIT(A) (supra), we do not find any infirmity in his findings to interfere with the same and, accordingly, we uphold and dismiss Ground No.4 of revenue for assessment year 2012-13. 46. Therefore, keeping in view order of the Tribunal dated 26.8.2020 in assessee’s own case in the appeal filed by the Revenue for the assessment year 2012-13 (supra) we are compelled to hold that the issue is covered in favour of the assessee by earlier order of the Tribunal in assessee’s own case. Thus, we safely hold that the AO has not disputed the quantum of expenses or any other compliance required as per the provisions of Income tax Act at the time of payment but he simply denied the claim of the assessee by observing that the assessee failed to furnish documentary evidence in support of the claim which were very much available with him during the course of assessment proceedings as well as before the ld CIT(A). Regarding issue of non- compliance of Notification of Govt. Of Odisha dted15.1.2004, we agree with the contention of ld A.R. that these are applicable to welfare expenditure and not at the time of incurring of business expenditure for the purposes of business of the assessee. The ld CIT(A) has allowed expenditure incurred on the repair of roads which was incurred for construction and repair of road in the surrounding area of the mines. Thus, we are unable to see any valid reason to interfere in the order of ld CIT(A) in deleting the part additions by allowing expenditure incurred by the assessee on repair and construction of roads in the surrounding
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area of mines. We are in agreement with the contention of ld A.R. that the allegation of capital expenditure was not taken by the AO and in policy decision in Notification dtd.15.1.2004, para 8 clause (e) roads have not been stated. Therefore, we are unable to see any infirmity in the conclusions arrived at by the ld CIT(A) on this issue. Hence, Ground No.3.1 and Ground No.4 of the revenue are dismissed.
Ground Nos.5 of the revenue reads as under:
“ 5.1 The ld CIT(A) was not justified to delete the disallowance of Rs.5,31,69,709/- made by the AO on account of compensatory afforestation charge by admitting fresh evidence filed before him in violation of Rule 46A of the I.T.Rules, 1962. Copies of such fresh evidence running to 12 pages are enclosed herewith as Annexure-F to SOF. 5.2 The ld CIT(A) was not justified to delete the addition of Rs.5,31,69,709/- made by the AO, even though the fresh evidence produced before him ere of such nature to prove that such expenditure were giving rise to an advantage having enduring nature thereby falling in the capital field as under:
(i) An amount of Rs.2.66 crores had been paid for acquisition of 64.3320 hectares of non-forest land in lieu of forest land falling within the mining area of the assessee. (ii) Rs.2.24 lakhs had been paid as conversion charges to the Tahasildar, barbil for conversion of 3.060 acres of land in Unchgabali mines area from agricultural to non-agricultural purposes. (iii) Rs.2.62 crores had been paid to Forest Department on account of compensatory afforestation without which the income earning source of the assessee from mining would have been stopped as her mines were located on forest land. 5.3 The ld CIT(A) was not justified to delete the disallowance of Rs.5,31,69,709/- made by the AO ignoring the binding decisions of Supreme Court and various High Courts as under:
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i) Assam Bengal Cement Co.Ltd vs CIT, 27 ITRT 34 (SC) ii) Bharat Colleries Ltd vs CIT, 40 ITR 67 (SC) iii) Pingle Industries Ltd vs CIT, 40 ITR 67 (SC) iv) KTMTM Abdul Kayoom vs CIT, 44 ITR 689 (SC) 48. Facts of the issue are that the Assessing Officer noticed that in the profit and loss and account for the year ending 31.3.2015, the assessee had debited a sum of Rs.5,31,69,709/- towards “compensatory afforestation charges”. However, he observed that in the previous year, no such expenses were claimed. Therefore, the AO required the assessee to furnish details of such expenses with documentary evidence. In response, the assessee only stated that the payments were made to Divisional Forest Officer, Collector and Tahasildar and such expenditure were incidental to the business of the assessee. In the absence of any documentary evidence, the AO disallowed the claim of the assessee.
On appeal, the ld CIT(A) deleted the addition relying on the copies of the orders of the Collector, Keonjhar, Divisional Forest Officer, keonjhar and Tahasildar, Banspal, which were furnished by the assessee during the course of appeal proceedings.
Ld CIT DR submitted that the details which were produced by the assessee during the first appeal, were not furnished to the AO despite being asked to the assessee. Hence, these details were considered fresh evidence, which were accepted by the ld CIT(A) in contravention and violation of Rule 46A of I.T.Rules, 1962 without confronting the same to the Assessing Officer. P a g e 38 | 62
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Ld A.R. referred to para 9.1 of the impugned order, wherein, the ld CIT(A) stated that evidence of payments made to the concerned authorities were produced during the assessment proceedings, hence, it cannot be said that the ld CIT(A) has admitted fresh evidence. Ld A.R. referred to the decision of this Tribunal in the case of ACIT vs M/s. Orissa Mining Corporation Ltd in ITA No.372/CTK/.2010 for A.Y. 2007-08 order dated 27.5.2011, wherein, on similar facts, the appeal filed by the revenue was dismissed. Hence, it was his contention that the issue is covered in favour of the assessee.
We are not in agreement with ld A.R. of the assessee that the relevant details were furnished before the AO during the course of assessment proceedings as nothing has been recorded by the AO in this regard in the assessment order. In para 9.1, the ld CIT (A) has not made any observation but simply reproduced the submission of the assessee which cannot be relied regarding submission of 12 pages of Annexure-F to SOF. Therefore, we are of the considered opinion that the ld CIT(A) has admitted fresh evidence without confronting the same to the Assessing officer by calling comment and a remand report from the AO in this regard in violation of Rule 46A of the I.T.Rules, 1962. In view of above, we allow Ground No.5.1 of the revenue.
With regard to Ground No.5.2 and 5.3, we are of the considered opinion that on merits, this issue needs to be restored back to the file of the ld CIT(A) for re-adjudication after calling a remand report from the AO in respect of pages 1 to 12 of Annexure-F to SOF as under: P a g e 39 | 62
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i) Order of the Collector, keonnjhar dtd.11.3.2015 to deposit premium/land cost of Rs.2,66,95,200/- for alienation of non-forest land admeasuring 64.3320 hectres. ii) Payment of Rs.2,32,70,486/- (Rs.90,40,000 + Rs.64,85,095 + Rs.73,05,000 + Rs.4,40,391/-) to the DFO, Keonjhar for diversion of additional 68.157 hectares of forest land within the Unchabali Mines of Smt. Indrani Patnaik. iii) Payment of Rs.29,71,155/- towards compensatory afforestation fund. iv) Conversion fee of Rs.2,24,868/- 54. We also observe that the above amounts were paid to different departments of State Government but verification by the AO is mandate of the law. As these were not submitted before the AO, we set aside the order of the ld CIT(A) and restore the issue back to his file (Ld CIT(A) for fresh adjudication after calling the remand report from the AO with proper verification and allow due opportunity of hearing to the assessee.
Hence, Ground Nos.5.2 and 5.3 of the revenue are allowed for statistical purposes.
Now, we proceed to dispose the appeal of the assessee in ITA No.366/CTK/2018. 56. First of all, it was pointed out by ld A.R. that the assessee has filed application on 5.10.2020 requesting for admission of additional ground relating to Ground No.2 i.e. disallowance towards sales to associated enterprise.
On being asked by the bench, ld A.R. could not point out any plausible reasons as to why this ground was not agitated before the ld CIT(A) and while filing the appeal before the Tribunal, it was not mentioned in Form No.36.
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Therefore, the application for admission of additional ground being bereft of merits, is dismissed.
Ground No.1 of the assessee reads as under:
“ For that on the facts and under the circumstances of the case, the ld CIT(A) is not justified in confirming the addition of Rs,.81,63,498/- as profit from real estate business.”
Facts of the case are that the Assessing Officer noticed that the assessee had sold a property in Delhi at Rs.1,75,00,000/- and the sale so made was not disclosed either in the P&L accounts or in the computation of income. When this fact was confronted to the assessee, it was submitted that capital gains on the sale of this property had inadvertently been omitted to be disclosed in the computation of income. The assessee offered for taxation at the time of assessment the capital gains arising out of above transaction of Rs.32,19,123/-. The calculation details of the capital gains were filed by the assessee before the AO. However, the AO did not accept the contention of the assessee and proceeded to tax the profit on sale of property calculated at Rs.81,63,498/-, which was confirmed in first appeal.
Ld A.R. submitted that the ld CIT (A) was not justified in confirming the addition of Rs.81,63,498/- as profit from real estate business, therefore, same may kindly be dismissed.
Replying to above, ld CIT DR drew our attention towards para 6 of the assessment order and submitted that the assessee had not disclosed the sale of P a g e 41 | 62
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flat in the computation of income and also in the profit and loss account. Therefore, the AO was right in making the addition. Ld CIT DR further drew our attention to paras 5.1 & 5.2 of the CIT(A)’s order and submitted that the AO has rightly treated the impugned sale consideration as a business venture since the land on which the flat has been constructed was shown as an asset in the business balance sheet of the assessee and the assessee has construted a whole building on her business land, the construction of which is not disclosed in the business balance sheet. Ld CIT DR submitted that the assessee has not given any details regarding construction cost in the calculation sheet furnished in respect of capital gains, therefore, the orders of both the revenue authorities be confirmed.
On careful consideration, we are of the considered opinion that the contention of ld CIT DR have merits as the AO has rightly added the sale of flats as business venture as the land, on which the flat was constructed has been shown as an asset in the balance sheet of the assesseee. Even the cost of construction of the flat was not disclosed in the books of account of the assessee and the assessee failed to give details to substantiate the cost of construction of the property shown in the calculation sheet submitted before the AO. In these circumstances, we are in fully agreement with the conclusions arrived at by the AO as well as ld CIT(A) that the sale of flat has to be treated as business income of the assessee. Hence, we uphold the findings of the AO as well as of ld CIT(A) and dismiss Ground No.1 of the assessee.
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Ground No.2 of appeal of the assessee reads as under:
“For that on the facts and under the circumstances of the case, the ld CIT(A) is not justified in confirming the addition of Rs.4,69,77,608/- towards sales affected to associated enterprise.”
Ld A.R. of the assessee submitted that from the relevant part of the assessment order, it is apparent that the AO has not allowed an opportunity to explain the stand of the assessee before making the addition. Ld A.R. drew our attention to para 8.0 of the assessment order and submitted that only one notice to the assessee dated 3.11.2017 to the assessee which was properly relied and the AO had not asked any further information/explanation or documentary evidence before making addition on the basis of a higher rate for which, he is not empowered. Ld A.R. submitted that the assessee was not allowed to explain and substantiate the consideration of arms length price with the associated enterprise in compared with similar transaction with non- associated parties under similar circumstances for similar products. Ld A.R. further submitted that there is no basis or factual reasons for confirming this addition and the ld CIT(A) has also confirmed the same without any logical findings and reasonings merely reiterating the observation of the AO. Therefore, it was his prayer that the addition may kindly be deleted or the issue be restored to the file of the AO for fresh adjudication after allowing due opportunity to the assessee.
Replying to above, ld CIT DR supported the orders of lower authorities.
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On careful consideration of the rival submissions, from the relevant part of the assessment order, we observe that the assessee was not afforded due opportunity to explain her stand before making the addition by the AO regarding sale of iron ore to M/s. Tarini Minerals pvt Ltd. It is noted that the assessee had arrangement with M/s. Tarini Minerals Pvt Ltd., one of the customers among all, to sell the iron ore as per negotiation depending upon the several factors. We also find that the AO has not made any enquiry regarding the sale price of iron ore of similar area. In view of above, we set aside the orders of lower authorities on this issue and restore the same to the file of the AO to enquiry the sale price of flat in the area during the period when sale is effected and decide the issue afresh after allowing the opportunity to the assessee. Hence, ground no.2 of the assessee is allowed for statistical purposes.
Ground No.3 of the assessee reads as under:
“For that on the facts and under the circumstances of the case, the ld CIT(A) is not justified in confirming the of Rs.35,82,149/- under the head “periphery development expenses”. 68. While adjudicating the similar issue in the appeal filed by the revenue, we have upheld the findings of the ld CIT(A) allowing part relief to the assessee. We also observe that the ld CIT(A) has given uncontroverted findings in disallowing the addition of Rs.35,82,149/-. In the earlier para of this order, we have confirmed the order of the ld CIT(A), wherein, addition of Rs.35,82,149/- has been confirmed. Hence, this ground No.3 of the assessee
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fails and thus same is dismissed. Issue is having similar set of facts and thus, we follow our findings noted in paras 34 to 46 of this order (supra)
Ground No.4 of appeal of the assessee reads as under:
“For that on the facts and under the circumstances of the case, the ld CIT(A) is not justified in confirming the addition of Rs.4,23,13,578/- made u/s.14 of the Act.”
Ld counsel for the assessee submitted that this issue is covered in favour of the assessee by the decision of the ITAT Cuttack in assessee’s own case for the assessment year 2012-13 & 2013-14 in ITA No.389 & 390/CTK/2017 order dated 26.8.2020, the copy of which is available in APB paras 60 to 94 and pages 37 to 59.
Ld CIT DR, in all fairness, conceded that the similar issue has been decided in the appeal filed by the assessee by order dated 26.8.2020 (supra) However, he submitted that in view of the decision of Hon’ble Gujarat High Court in the case of Devarsons Industries Pvt Ltd vs ACIT (2017) 84 taxmann.com 244 (Guj), whether the AO gave detailed reasons for discarding assessee’s theory that to earn assessable income, assessee incurred no expenditure whatsoever, mere fact that the AO did not arrive at satisfaction in a particular manner while making said disallowance, would not per se destroy mandate of section 14A of the Act. Further, Placing reliance on the judgment of Hon’ble Delhi High Court in the case of Indiabulls Financial Services Ltd vs. DCIT (2016) 76 taxmann.com 268 (Delhi), ld CIT DR submitted that whether
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the AO carried out elaborate analysis and followed steps enacted in statute and then determined amount of expenditure incurred for earning tax exempt income, merely because he did not expressly record his dissatisfaction about assessee’s calculation, his conclusion could not be rejected.
Placing rejoinder, ld A.R drew our attention to relevant para 11 of the assessmen order and submitted that the assessee has not claimed any expenses in respect of earning tax free income, therefore, provisions of setion 14A are not applicable. Ld AR further submitted that the case laws relied by ld CIT DR are not applicable to the present case as in the present assessment order, the AO has not given any detailed reasons for making disallowance and have not elaborately analysed and followed the steps enacted required by the Statute for making disallowance u/s.14A r.w 8D of I.T.Rules.
On careful consideration of the rival submissions, from first part para 11 of the assessment order, we observe that the AO noted that the assessee has not claimed any expenses in respect of tax free income and it was also submitted by her that the provisions of section 14A are not applicable. In the second para, without giving any detailed reasons for making the disallowance and without carrying out any elaborate or logical analysis on the books of account and financial statement of the assessee and without following the steps enacted in the Statute, ld AO jumped to the conclusion that the assessee has not claimed any expenses for such exempt income, but there is every possibility that the investment from which such exempt income is earned might have been made out P a g e 46 | 62
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of the loan amount, for which the assessee paid interest,which has been debited in the P&L account and accordingly, the provisions of section 14A is applicable. The AO has not carved out any definite finding in this regard on the basis of material available before him. When all audited books of account and financial statements were before the AO, then who prevented him from making enquiry regarding any interest amount paid by the assessee towards making investment to earn exempt income. These observations clearly show that the AO proceeded to make the disallowance without giving detailed reasons and without any elaborate and logical analysis of the facts and books of account of the assessee and without following the steps enacted in the Statute for making the disallowance u/s.14A r.w 8D of I.T.Rules. Therefore, the AO directly jumped to make conclusion on the amount of disallowance. In view of foregoing discussion, we respectfully hold that in view of para 11 of the assessment order, we are in agreement with the contention of ld A.R. that the benefit of proposition rendered by Hon’ble Gujarat High Court in the case Devarsons Industries Pvt Ltd(supra) and the decision of Hon’ble Delhi High Court in the case of Indiabulls Financial Services Ltd(supra) are not applicable in favour of the revenue to the present case, wherein, the AO has not given any detailed reasons or logical analysis and steps enacted by the Statute before making the disallowance u/s.14A of the Act r.w 8D of I.T.Rules. Therefore, the contention of ld CIT DR is not plausible and acceptable. At the same time, we further observe that the Tribunal in assessee’s own case order dated 26.8.2020 (supra) deleted the similar disallowance, on
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identical and similar facts and circumstances, made u/s.14A r.w. 8D of I.T.Rules with the following findings:
“61. Ground No.2 for A.Y. 2012-13 and A.Y. 2013-13 is common i.e. disallowance under section 14A of the Act. Hence, we proceed to adjudicate the facts for the assessment year 2012-13. 62. Ld A.R., challenging the action of the Assessing Officer in making the addition u/s.14A of the Income tax Act, (in short ‘the Act’) submitted that the ld CIT(A), in his order in para 3.2 noted that the contention of the appellant that she has not incurred any expenditure for earning of dividend income , cannot be accepted. Ld A.R. submitted that though the appellant has not claimed any expenditure, the AO made addition merely on presumption of incurring expenses against exempt income, without recording any reason as per requirement of section 14A of the Act. Ld A.R. submitted that the key words in sub-section (2) of Section 14A of the Act are that “if the AO, having regard to the account of the assessee, is not satisfied with the correctness of the claim of the assessee, in respect of such expenditure”. Ld A.R. further submitted that sub- section(3) of Section 14A of the Act further provides that the provision of sub-section (2) shall also apply in relation to a case where the assessee claims that no expenditure has been incurred by him in relation to income, which does not form part of the total income. Ld A.R. further pointed out that hence, it implies that method prescribed under Rule 8D of Income tax Rules, 1961 (in short ‘the Rules’) is applicable, where the AO has to record reasons for such non-satisfaction about the claim as well as accounts of the appellant after the verification and examination of books of accounts and financial statement of the assessee. Ld A.R. has placed reliance on the following judicial pronouncements: i) Sesa Goa Ltd vs JCIT, 60 sot 121 (Pan) ii) JK Investors Ltd vs ACIT (ITA No.7858/Mum/2011) iii) Joint Investments Pvt Ltd vs CIT, 372 ITR 694 (Delhi) iv) Maxopp Investment Ltd vs CIT, 402 ITR 640 (SC) v) DCIT vs Integrated Coal Mining Ltd (ITA No.1031/Kol/2017).
Furthermore, ld A.R. submitted that therefore, if the AO, having regards to the assessee is not satisfied with the amount of P a g e 48 | 62
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the claim of the assessee, in respect of such expenditure in relation to exempt income, which does not form part of the total income, as per the provision of section 14(2) and 14(3) of the Act, the AO is bound to record his dissatisfaction about the claim of expenditure or claim of no expenditure against exempt income from the books of account. Drawing our attention towards finding record by the authorities below, ld A.R. submitted that in the instant case, the AO without recording any observation or finding that, having regard to the accounts of the assessee that he is not satisfied with the correctness of the claim of assessee in respect of such claim of expenditure or no expenditure, observed that “though the assessee has not claimed any expenditure for such exempt income, there is every possibility that the investments from which such exempt income is earned might have been made out of loan account, for which assessee paid interest. Ld A.R. further drew our attention towards relevant para 6.1 at page 6 of the CIT(A) order and submitted that the ld CIT(A) in his order mentioned that “during assessment proceeding, the appellant had explained that she has a capital balance of Rs.441.11 crores as on 31.3.2012 and funds borrowed was exclusively utilised for the purpose for which those were obtained”. Ld A.R. further explained that the term loan of Rs.84.74 crores raised from HDFC Bank was utilised for acquiring windmills to the extent of Rs.90.00 crores and there was no scope for appellant to utilise the loan fund otherwise or for making investment for earning exempt income. 64. Further, ld A.R. placed reliance on the judgment of Hon’ble Bombay High Court in the case of CIT vs HDFC Bank, 366 ITR 505 (Bom), wherein, it is held that where the assessee’s capital net profit, reserve, surplus and current account deposit were higher than investment in tax free securities, it would have to be presumed that the investment made by the assessee would be out of interest free fund, available with the assessee. Ld AR pressing into service this proposition rendered by Hon’ble High Court submitted that the ld CIT(A) concluded that interest bearing loan from bank have been utilised for the creation of asset i.e. windmills and it has not been diverted and this fact has not been controverted by the AO in any manner. Ld A.R. vehemently pointed out that the assumption of the AO that interest bearing loans has been utilised for investment in shares has no base in view of the findings recorded by the ld CIT(A) in para 6.1 at page 6 of first appellate order. Ld A.R. also contended that the AO has not demonstrated in the assessment order that on examination of account he could be able to locate any expenditure incurred or attributable to earn exempted income and also he has
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not recorded his dissatisfaction on account of the claim of the assessee that no expenditure has been incurred for earning exempt income as provided in sub-section (3) of Section 14A of the Act. Ld A.R also submitted that the appellant has sufficient funds in her capital account and total investment in Mutual funds, share, deposit and payment to insurance is less than the amount of capital, therefore, there is no possibility or chance of investment of borrowed funds in shares, Mutual Funds and deposit, therefore, the AO on wrong assumption without recording dissatisfaction switched over and jumped to Rule 8D of Income tax Rules to computed the disallowance, which is not sustainable and valid as per mandate of section 14A of the Income tax act, 1961. 65. Ld A.R. further submitted that the Hon’ble Supreme Court in the case of CIT vs Reliance Industries Ltd., in Civil Appeal No.10 of 2019 order dated 2.1.2019 heard and disposed of with the observations noted as under: “The interest free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that investments were made from the interest free funds available with the assessee. “
Ld A.R. lastly submitted that the observations of the AO as well as ld CIT(A) are only assumption that the appellant might have incurred certain expenses to earn exempt income. He submitted that without recording dissatisfaction having regard to the accounts of the assessee about the claim of the assessee that no expenditure has been incurred for earning exempt income, on assumption only, the disallowance u/s.14A of the Act r.w Rule 8D of the Rules, it is not correct and sustainable and the AO was not correct in making addition and ld CIT(A)is not justified in confirming the same. He finally prayed that the addition made by the AO and confirmed by the ld CIT(A) be ordered to be deleted. 67. Replying to above, ld CIT DR submitted that under section 14A of the Act, statue provide for presumptive expenditure which has to be disallowed by force of statue. He placed reliance on the order of the ITAT Chennai in the case of M.A. Alagappan vs ACIT, 82 Taxmann.com 276 (Che.Trib). Ld D.R. further placed reliance on the decision of ITAT Delhi in the case of Delhi Towers Ltd vs DCIT, 78 taxmann.com 56 (Del) and submitted that the mere fact that the AO did not expressly recorded his satisfaction, while making the disallowance, would not per se destroy mandate of section 14A of
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the Act. Ld CIT DR supporting the orders of lower authorities submitted that the assessee has not claimed any expenditure towards earning of exempt income, hence, there is every possibility that the investment from which such exempt is earned might have been made out of the loan amount, for which the assessee had paid interest and claimed in the profit and loss account. Therefore, the AO was correct in making addition and ld CIT(A) was also justified in confirming the same. Drawing further our attention towards para 5 & sub-para 2 & 3 of the assessment order, ld CIT DR submitted that the expenditure is attributable to such earing is not ascertainable, the only method available for such claim under Rule 8D of I.T. Rules and the AO rightly computed the presumptive amount of disallowance u/s.14A of the Act as per Rule 8D of I.T. Rules and there is no defect or deficiency in the calculation made by the AO in this regard. Ld CIT DR concluded his arguments by submitting that the orders of lower authorities may kindly be upheld by confirming the addition. 68. Placing rejoinder to above, ld A.R. submitted that in the case of M.A. Alagappan (supra), the Tribunal held that where the assessee claimed that no expenditure is incurred by the assessee in relation to income which does not form a part of total income under the Income tax Act, statue has provided for presumptive expenditure which has to be disallowed by force of the Statute. Ld A.R. submitted that the ITAT Chennai in this order has relied upon the judgement of Hon’ble Delhi High Court in the case of Pradeep Khanna vs ACIT in ITA Appeal No.953 of 2015 order dated 11.8.2016 and the decision of Coordinate Bench of ITAT in the case of Justice Sam P. Bharucha vs Addl. CIT, 53 SOT 192. In the case of Justice Sam P. Bharucha (supra), in para 5.1, it has been clearly mentioned that no notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure and the income not forming part of total income and in para 5.2, it has also been mentioned that the AO has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. Hence, section 14A cannot be applied to the above case. In para 6, it has been mentioned that sub-section(3) further provides that even in case where an assessee claims that no expenditure was incurred, the Assessing Authority has to presume that the incurring of such expenditure as provided with sub-section (2) read with Rule 8D. Ld A.R. submitted that neither in section 14A nor in Rule 8D of I.T.Rules, there is no mentioning of mandate that the AO is entitled for making presumptive disallowance. Therefore, the observation of the Chennai ITAT in the
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case of M.A. Alagappan (supra) is against the law and mandate of section 14A of the Act. 69. Further, ld A.R. submitted that the order of ITAT Delhi in the case of Delhi Towers (supra) is not applicable in the present case at hand. Ld A.R. comparing the facts and circumstances of the case of Delhi Tower (supra) with the present case submitted that in para 11 of the said order of ITAT Delhi, a calculation of disallowing expenditure was given in the paper book and the Tribunal, from the balance sheet and profit and loss account, observed that there is no fresh investment that has been made by the assessee during the year under consideration and the dividend income has been earned from old investment. Thereafter, the Tribunal observed that the ld CIT(A) was not correct in confirming the entire disallowance made by the AO and restricted the disallowance to the tune of exempt income earned by the assessee. Ld A.R. submitted that in the present case, the assessee has not submitted any calculation regarding disallowance under section 14A r.w. 8D of I.T.Rules a. The ld A.R. strenuously contended that from the observations of the AO in the assessment order and findings recorded by the ld CIT(A) in the impugned order clearly reveals that the authorities below have not made substantial compliance of mandate of statutory provisions of section 14A r.w Rule 8D of I.T.Rules. Therefore, the order of ITAT Delhi in the case of Delhi Towers (supra) are not applicable in favour of the revenue in the present case having dissimilar facts and circumstances. 70. Ld A.R. vehemently pointed out that the ld CIT DR has not shown any judgment of Hon’ble Supreme Court and Hon’ble High Court favouring his stand that before making disallowance and consequent addition u/s.14A r.w Rule 8D of I.T.Rules, showing that no satisfaction is required to be recorded by the AO regarding the claim of expenditure attributable to earning of exempt income or claim of no expenditure of the assessee or dispensing the compliance of requirement of sub-section (2) & (3) of Section 14A of the Act. Per contra, there are number of judgments by Hon’ble Supreme Court, Hon’ble High Courts and Co-ordinate Benches of this Tribunal to support the contention of the assessee that for making substantial compliance and sustainable addition u/s.14A r.w. Rule 8D, the AO is mandatorily required to record his dissatisfaction, having regard to the accounts of the assessee, that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure in relation to income which does not form part of the total income under this Act.
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Ld A.R. placed reliance on the decision of ITAT Panaji in the case of Sesa Goa Ltd (supra) to submit that before making any disallowance under section 14A of the Act, the AO is required to record his satisfaction having regard to the accounts of the assessee, that claim of the assessee that expenditure incurred is not related to income forming part of total income is incorrect and such satisfaction may be arrived at an objective basis. Ld A.R. further submitted that in this order, the Tribunal has held that the AO is required to record reasons for arriving at such satisfaction. In the instant case, the AO has not made such exercise before proceeding to make disallowance u/s.14A r.w Rule 8D. 72. Further drawing our attention towards order of ITAT Mumbai in the case of J.K. Investors (supra), ld A.R. submitted that it is imperative that the AO can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. Therefore, the condition precedent for AO entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the AO must record that, having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, in relation to exempt income. 73. Further, placing on the decision of Hon’ble Delhi High Court in the case of Joint Investment Pvt Ltd (supra), ld A.R. submitted that as per sub-section (2) of Section 14A of the Act, the jurisdiction to proceed further and determine the amount of disallowance could be derived only after examination of the accounts and rejection of the assessee’s claim or explanation. Ld A.R. further pointed out that in this judgment, Hon’ble High Court has clearly laid down the proposition that the AO can proceed to make disallowance u/s.14A r.w Rule 8D only when the AO rejects the claim of the assessee that expenditure claimed by the assessee towards earning of exempt income or claim that no expenditure has been incurred for earning of exempt income is rejected. 74. Further placing reliance on the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra), ld A.R. drew our attention to para 41 of the judgement and submitted that having regard to the language of section 14A(2) of the Act, r.w. Rule 8D of the Rules, Their Lordships have made it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under section 14A was not correct. Ld A.R. further pointed out that P a g e 53 | 62
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sub-section(2) of Section 14A of the Act talks about suo moto disallowance or expenditure shown by the assessee towards earning of exempt income and sub-section(3) of Section 14A provides that the provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act and the present assessee’s case falls within the ambit of sub-section(3) of Section 14A of the Act. 75. Reliance has also been placed by the ld AR on the decision of ITAT Kolkata in the case of M/s. Integrated Coal Mining Ltd (supra) to submit that in this case, it was observed that the AO has not examined the accounts of the assessee and there was no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same, he invoked Rule 8D of I.T.Rules. It was also held that while rejecting the claim of assessee with regard to expenditure in relation to exempt income, the AO has to indicate cogent reasons for the same but no such exercise has been undertaken. Ld A.R. submitted that the AO had straight away embarked upon computing disallowance under Rule 8D of the Rules and it was concluded that the AO is bound to record his dissatisfaction only from books of account of the assessee before proceeding to make disallowance under section 14A of the Act r.w. Rule 8D of the Rules. 76. Ld A.R. also placed reliance on the decision of ITAT Cuttack in the case of ACIT vs Patnaik Minerals Pvt Ltd in ITA No.231/CTK./2015 for A.Y. 2011-12 order dated 3.8.2017 to support his contention. 77. Ld A.R. also drew our attention towards recent decision of Hon’ble Gujarat High Court in the case of Principal CIT vs CIMS Hospital Pvt Ltd (2020) 4 NYPCTR 244 (Guj) order dated 25.2.2020 and submitted that the AO can apply Rule 8D only if the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure in relation to the exempted income and consequently, it was held that the Tribunal was justified in deleting the disallowance. Therefore, the disallowance made by the AO and confirmed by the ld CIT(A) for both the assessment year may kindly be deleted. 78. On consideration of above noted rival submissions, first of all, we are of the view that it would be appropriate to reproduce relevant section 14A of the Act for proper adjudication of the ground of the assessee challenging the confirmation of disallowance by the ld
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CIT(A) made by the AO u/s.14A of the Act r.w. Rule 8D, which reads as under: “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 part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :”
In our humble understanding, the mandate of section 14A of the Act has been based on the theory that there must be proximate cause based on relationship of expenditure that tax exempt income is established, only then a disallowance has to be made u/s.14A of the Act. The onus to establish proximate cause based on the relationship of the expenditure that the exempt income is established is on the revenue. Thus, the application of provisions of sub-section (2) & (3) of Section 14A of the Act r.w Rule 8D is not automatic in each and every case, where there is income not forming part of total income, the assessee is earning exempt income. In our considered opinion, sub-section (2) & (3) of Section 14A of the Act are intended to enforce and implement the provisions of sub-section (1) of Section 14A of the Act. As per sub-section (2), it is necessary for the AO first to ascertain where there is proximate connection between the expenditure incurred and the income not forming part of the total income. Under this Act, in accordance with such method , as may be prescribed, if the AO having regard to the accounts of the assessee, is not satisfied with the correctness with the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income under this Act, then, the AO would be justified in applying provisions of sub-section(2) & (3) of Section 14A of the Act r.w. Rule 8D for making the disallowance. P a g e 55 | 62
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Keeping in view above mandate of section 14A of the Act, we proceed to adjudicate the ground of the assessee challenging the disallowance made by the AO under section 14A of the Act r.w Rule 8D. From the relevant para 5 of the assessment order, we observe that in sub para (1), the AO noted that the assessee has shown investment that yield tax free income and he show caused the assessee to explain as to why provisions of section 14A shall not be resorted to. In response to said show cause notice, ld A.R. of the assessee stated that the assessee has not incurred nor claimed any expenditure in respect of such income, hence, no disallowance is warranted for. Thus, the case of the assessee falls within the ambit of sub-section (3) of Section 14A of the Act. Further, from sub para (2) of para 5, we observe that the AO observed as under: “Though the assessee has not claimed any expenditure for such exempt income, there is every possibility that the investment from which such exempt income is earned might have been made out of the loan amount, for which assessee paid interest.”
Thereafter, the AO mentioned the provisions of Rule 8D in the next sub-para (3) and immediately after recording said provisions, he proceed to calculate the disallowance under Rule 8D of the I.T.Rules. From above noted analysis of relevant paras of the assessment order, it is clear that after receiving reply of show cause notice from the assessee that the assessee has not claimed any expenditure in respect of such income, hence, no disallowance is required to be made, the AO without complying with the mandate of sub-section (2) & (3) of Section 14A directly jumped to an imaginary conclusion “that the assessee has not claimed any expenditure for such exempt income, there is every possibility that the investment from which such exempt income is earned might have been made out of the loan amount, for which the assessee paid interest”. 82. Thus, there is no whisper or mention by the AO in the assessment order para 5 complying with the mandate of sub- section(2) & (3) of Section 14A of the Act, which requires that the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method, as may be prescribed, viz; Rule 8D of I.T.Rules, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness that the claim of the assessee in respect of such expenditure, in relation to exempt income. Thus, we safely presume that the AO has not made or undertaken any exercise as per mandate of sub-section (2) & (3) of P a g e 56 | 62
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Section 14A before proceeding to make disallowance while invoking or resorting to Section 14A of the Act r.w Rule 8D. 83. From the relevant part of the CIT(A) order, i.e. para 3.2, we observe that the ld CIT(A) has confirmed the addition by observing that the contention of the assessee that it has not incurred any expenditure for earning of dividend income cannot be accepted and there has to be expenditure incurred for such earning. Hence, provisions of section 14A are clearly attracted. Thereafter, ld CIT(A) further observed that since the expenditure attributable to such earning is not ascertainable, the only method available for such calculation is Rule 8D of the I.T.Rules and the AO has computed the expenditure as per Rule 8D and such calculation appeared to be correct, as the assessee has not pointed out any error in such calculation. Lastly, ld CIT(A) noted that similar disallowance has been confirmed by ld CIT(A)-2 for assessment year 2010-2011 by order dated 28.1.2015, therefore, the disallowance made by the AO is confirmed. 84. In our considered opinion, the basic principles of taxation is to tax net income and the exemption has to be allowed on the net basis i.e. gross receipts (-) related expenditure. Hence, if the expenditure is directly related to exempt income, it cannot be allowed to set off against the taxable profit and if any expenditure is directly related to taxable income, it cannot be allowed to set off against the exempt income merely because some incidental benefit has arisen towards exempted income. 85. On vigilant and careful understanding of intention of the legislature and the mandate given in section 14A of the Act, we are of the humble view that before making disallowance u/s.14A of the Act, the AO is required to record satisfaction that having regard to the accounts of the assessee, he is not satisfied with the correctness that the claim of the assessee in respect of such expenditure, in relation to exempt income not forming part of total income is incorrect. Such satisfaction must be arrived at on the objective basis. 86. As we have noted above, in the instant case, the AO simply show caused the assessee and after taking on record reply of the assessee merely observed that though the assessee has not claimed any expenditure for such exempt income that there is every possibility that the investments from which such exempt income is earned might have been made out of loan account, for which assessee paid interest. But there is no exercise as per mandate of sub-section (2) & (3) of Section 14A of the Act by the AO, having regard to the accounts of the assessee, is not satisfied with the P a g e 57 | 62
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correctness that the assessee has not incurred any expenditure for such exempt income. 87. From the vigilant reading of ld CIT(A) order para 3.2, it is vivid that no such exercise has been undertaken by the ld CIT (A) before confirming the disallowance made by the AO as per mandate of sub-section (2)& (3) of the Section 14A of the Act. 88. Before reaching to any conclusion, we also find it appropriate and necessary to consider the ratio of case laws cited by both the parties. 89. Ld CIT DR has placed reliance on the order dated 6.1.2017 of ITAT Delhi Bench in the case Delhi Towers Ltd (supra), wherein, it was held that where the AO proceeded to make disallowance under section 14A of the Act r.w. Rule 8D in respect of exempt dividend income earned by the assessee, mere fact that AO did not expressly record his satisfaction while making said disallowance, would not per se destroy mandate of Section 14A of the Act. He placed another order of ITAT Chennai in the case of M.A.Alagappan (supra), order dated 3.4.2017, wherein, it was held that even no expenditure is incurred by an assessee in relation to income which does not form part of total income under the Act, statute has provided for presumptive expenditure which has to be disallowed by force of statute, the assessing authority has to apply Rule 8D of the i.T.Rules. 90. When we respectfully consider the ratio of the judgment relied on by ld A.R., then we find that in the recent judgment order dated 25.2.2020 in the case of CIMS Hospital Pvt Ltd (supra), Hon’ble Gujarat High Court held that the AO can apply Rule 8D only if the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure in relation to the exempted income. As we have noted above in earlier para of the order, the AO in the present case did not record such satisfaction prior to invoking of Section 14A of the Act r.w Rule 8D of I.T.Rules, he could not have made any disallowance. Further in the judgment of Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra), Their Lordships speaking for the Apex Court held in para 41 thus: “Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording P a g e 58 | 62
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such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”
Furthermore, Hon’ble Delhi High Court in the case of Joint Investments Pvt Ltd (supra) in para 8 held thus: “The court in Taikisha Engineering (supra) pertinently observed 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 was not satisfactory, computation under sub-rule (2) to Rule 8D of the Rules was to be made. We need not, therefore, go on to sub-rule (2) to Rule 8D of the Rules until and unless the AO 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.”
In the case of Sesa Goa Ltd.,(supra), Co-ordinate Bench of ITAT Panaji allowed the ground of the assessee challenging the addition made under section 14A of the Act r.w Rule 8D of I.T.Rules by observing that before making any disallowance under section 14A, AO is required to record a satisfaction, having regard to accounts of assessee, that claim of the assessee that expenditure incurred is not related to the income, which is forming part of total income, is incorrect. In view of foregoing discussion and after considering the 93. prepositions and interpretation laid down by various judgments including the judgment of Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra) and judgment of Hon’ble Gujarat High Court in the case of CIMS Hospital Pvt Ltd (supra), it is imperative that the AO can invoke Rule 8D of the I.T.Rules only when he records his satisfaction in regard to correctness of the claim of the assessee viz; suo moto disallowance of expenditure or no expenditure, having regard to the accounts of the assessee. The conditions precedent created by the legislature for the AO entering upon the determination of the accounts of expenditure incurred in relation to exempt income is that the AO himself record that he is not satisfied with the correctness of the claim of the assessee in respect of suo moto disallowance or claim of no expenditure for earning exempt income.
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Obviously, while rejecting the claim of the assessee in regard to suo moto disallowed expenditure or no expenditure, as the case may be, in relation to exempt income, the AO has to indicate cogent reason for the same and for recording such cogent reasons, it is required that the AO has to examine the accounts of the assessee first and then if he is not satisfied with the correctness of such claim, only then he can invoke the provisions of section 14A of the Act r.w Rule 8D of the I.T.Rules. in the present case, as we have discussed above, that neither from the assessment order nor from the first appellate order, the authorities below have not considered the claim of the assessee that no expenditure has been incurred for earning exempt income as per mandate of section 14A of the Act From the relevant part of the assessment order, it is clearly discernible that the AO has not considered the claim of the assessee filed in response to the show cause notice that no expenditure has been incurred for earning exempt income and he straightforward embarked upon and jumped to compute the disallowance under Rule 8D of Rules on the presumption that there is every possibility that the investments made from which such exempt income is earned might have been made out of loan amount, for which the assessee has paid interest. The disallowance u/s.14A of the Act requires findings of the AO that the claim of the assessee pertaining to suo moto disallowance or no expenditure is not correct having regard to the accounts of the assessee and thereafter only the AO is validly entitled to compute disallowance under Rule 8D of the Rules. In absence of such exercise, the disallowance made by the AO cannot be held as valid and sustainable in view of mandate given by the legislature for invoking provisions of Section 14A of the Act. 94. The decisions relied upon by ld CIT DR have been passed by Co-ordinate Benches of Chennai and Delhi ITAT in the year 2017. Subsequently, the judgment of Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra) dated 12.2.2018 has expressly cleared all the clouds and doubts on the issue and categorically held that the AO needs to record satisfaction that having regard to the claim of assessee’s suo moto disallowance u/s.14A was not correct. In that eventuality, it will have to record its satisfaction, oblivious in the assessment order, to this effect prior to proceeding to make disallowance. Similar view has been expressed by Hon’ble Gujarat High Court in the recent judgment in the case of CIMS Hospital Pvt Ltd (supra). The judgement of Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra) and Hon’ble Gujarat High Court in the case of CIMS Hospital Pvt Ltd (supra) are binding on all the authorities below including the Tribunal. Therefore, respectfully following the same we hold that the addition made by the AO and
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confirmed by the ld CIT(A) under section 14A of the Act r.w. Rule 8D of I.T.Rules is not valid and sustainable. Therefore, we direct the AO to delete the addition. Our conclusion on this issue would apply mutatis mutandis to the assessment year 2013-14. Hence, Ground No.2 of appeal for both the assessment years is allowed. 74. Facts being identical, respectfully following the decision of the Tribunal in assessee’s own case dated 26.8.2020 for the A.Y. 2012-134 & 2013-14 (supra), we allow this ground No.4 of appeal of the assessee.
Cross objection of the assessee in C.O. No.01/CTK/2019.
Ld A.R. submitted that the cross objection filed by the assessee is in support of the order of the ld CIT(A).
We have adjudicated the appeal filed by the revenue in preceding paragraphs. In view of our decisions in the revenue’s appeal, the cross objections filed by the assessee are rendered infructuous and same are dismissed.
In the result, appeals of the revenue and assessee are partly allowed for statistical purposes. Cross objection of the assessee is dismissed.
Order pronounced u/s. 34(4) of I.T.A.T.Rules, 1963 on 10 / 12/2021.
Sd/- sd/- (Manish Borad) (Chandra Mohan Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER Cuttack; Dated 10 / 12/2021 B.K.Parida, SPS (OS)
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ITA No.373/CTK/2018 ITA No.366/CTK/2018 C.O. No.01/CTK/2019 Assessment Year : 2015-16
Copy of the Order forwarded to : 1. The appellant: Indrani Patnaik, A/6, Commercial Estate, Civil Township, Rourkela-769004 2. The Revenue: Asst. Commissioner of Income Tax, Rourkela Circle, Rourkela 3. The CIT(A)-, Sambalpur 4. Pr.CIT-, Sambalpur 5. DR, ITAT, Cuttack 6. Guard file. //True Copy// By order
Sr.Pvt.secretary ITAT, Cuttack
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