TARINI MINERALS PVT. LTD.,ROURKELA vs. ACIT, ROURKELA

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK

BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA No.197/CTK/2019 Assessment Year : 2012-13

Tarini Minerals Pvt ltd., A/6, Vs. ACIT, Rourkela Circle, Commercial Estate, Civil Rourkela. Township, Rourkela. PAN/GIR No.AAACT 6489 P (Appellant) .. ( Respondent)

Assessee by : Shri S.C.Bhadra, AR Revenue by : Shri Subhendu Dutta, DR

Date of Hearing : 07 /12/ 2020 Date of Pronouncement : 28/1/2021

O R D E R Per C.M.Garg,JM This is an appeal filed by the assessee against the order of the

CIT(A), Sambalpur dated 27.3.2019 for the assessment year 2012-13.

of addition of Rs.1,42,83,744/- under different heads as below:

i) Bogus sundry creditors : Rs.17,36,046/- ii) Disallowance u/s.14A : Rs.62,61,345/- iii) Commission to Subha Ispat ltd. : Rs.62,86,353/-

P a g e 1 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

the head “bogus sundry creditors”.

case. Facts are that the assessee has claimed Rs.17,36,046/- as sundry

creditor from M/s. Zodiac Enterprises. The AO issued letter to the sundry

creditor to establish the genuineness of transaction but the same was

returned back unserved. The assessee also could not furnish any

explanation regarding the sundry creditor to the satisfaction of the AO.

Hence, the AO treated the amount of Rs.17,36,046/- as bogus sundry

creditor and added the same to the income of the assessee, which was

upheld by the first appellate authority.

outstanding is against an expenditure incurred in earlier year, which was

allowed in the assessment proceeding. He also referred to the ledger copy

of the creditor, which reflects opening and closing balance at Rs.17,36,046/-

. He submitted that merely the letter was returned back unserved, cannot

by itself be treated as the creditor is bogus. Ld A.R. referred to page 3 of

the APB i.e. ledger account of Zodiac Enterprises from 1.4.2011 to

31.3.2012, wherein, it has been shown as at 1.4.2011, the amount of

Rs.17,36,046/- in opening balance as well as closing balance, therefore,

same amount has been brought forward from the preceding year.

P a g e 2 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

Assessing Officer has made addition of Rs.17,36,046/- on the ground that

the letter issued to M/s. Zodiac Enterprises was returned back. From the

ledger account of Zodiac Enterprises in the books of the assessee, it is

reflected that the amount of Rs.17,46,046/- has been shown as opening

balance and closing balance as at 1.4.2011. Hence, this amount is carried

forward from the preceding year and, therefore, there is no addition of the

creditor during the year. In view of above, we delete the addition of

Rs.17,46,046/-. Ground No.1 of appeal is allowed.

u/s.14A of the Act.

following observations:

“During the year under consideration, the assessee has shown investment that yield tax free income to the tune of Rs.1,78,26,335/- . Hence, the assessee vide show cause notice dtd.9.3.2015 was asked to explain as to why the provision of section 14A shall not be resorted to. In response to the same, the AR of the assessee stated that: “The assessee has not incurred any expenditure to earn the exempted income, hence it is submitted that no disallowance is warranted.” Assessee's reply in this regard has been carefully perused. Though, the assessee has not claimed any expenditure for such exempt income, there is every possibility that the

P a g e 3 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

investment from which such exempt income is earned might have been made out of the loan amount, for which the assessee paid interest. As per provisions of Rule 8D, the expenditure in relation to income which does not form part of the total income shall be aggregate of following amounts, namely i) The amount of expenditure directly relating to income which does not form part of total income. ii) ii) In a case where assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or 'receipt, an amount computed in accordance with the following formula A x B/C, where A = amount of exp. by way of interest other than the amount of interest included in clause (i) incurred during the P.Y., B= the avg, of value of investment, income from which does not or shall not form part of the total income, as appearing the balance sheet of the assessee, on the first day and the last day of the P.Y., C=the average of total assets as appearing in the balance sheets of the of the assessee, on the first day and the last day of the P.Y, iii) Amount equal to half per cent of the average of the value of investments as appearing in the balance sheet on the first day and the last day of the previous year,

The applicability of Rule 8D in the instant case is as under: i) The assessee has not incurred any expenditure directly related.to dividend income, ii) ii) Nil iii) Half per cent of the average value of investment comes to Rs.62,61,345/-(0.5% of Rs.125,22,69,012/-). Accordingly, the aggregate of the above (i + ii +iii) comes to Rs.62,61,345/-, which is treated as expenditure in relation to income not forming part of total income. Thus, the same is disallowed U/s.14A of the I. T. Act, 1961.” 10. On appeal, the ld CIT(A) upheld the action of the Assessing Officer.

P a g e 4 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

favour of the assessee by the decision of this Tribunal in the case of Smt.

Indrani Patnaik vs ACIT in ITA Nos.393 & 394/CTK/2017 for

Assessment Years : 2012-2013 & 2013-14 order dated

26.8.2020, whereas although ld DR relied on the orders of

lower authorities but could not controvert the submission of ld

A.R. of the assessee that the issue is covered by the decision of

the Tribunal.

orders of lower authorities, we find that this issue is squarely

covered in favour of the assessee by the decision of this Bench

in the case of Indrani Patnaik (supra), wherein, after an

exhaustive analysis of the issue, the Tribunal held thus:

P a g e 5 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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).

P a g e 6 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

P a g e 7 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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 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

P a g e 8 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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 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

P a g e 9 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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. 71. 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

P a g e 10 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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 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.

P a g e 11 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

(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 :”

P a g e 12 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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. 80. 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.”

P a g e 13 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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 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

P a g e 14 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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 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

P a g e 15 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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 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.”

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.”

P a g e 16 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

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. 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.

P a g e 17 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

of appeal of the assessee.

paid to Subh Ispat ltd.

noticed that an amount of Rs.62,86,353/- was paid to Subh Ispat ltd.,on the

ground that no reply was received regarding genuineness of the claim made

by the assessee. However, it was submitted by the assessee that Subh

Ispat Ltd has been seized by the financial institutions and their business has

closed. The above reply of the assessee did not find favour by the AO and,

P a g e 18 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

therefore, an amount of Rs.62,86,353/- was disallowed. On further appeal,

the ld CIT(A) confirmed the disallowance.

account of commission paid was deleted by the Tribunal vide its order dated

4.9.2019 in ITA No.341/CTK/2017 for the assessment year 2011-12 in

assessee’s own case. He also submitted that on same facts, the Tribunal

following the decision for the assessment year 2010-11, has deleted the

disallowance. Hence, it was his submission that the issue is squarely

covered in favour of the assessee. The ld D.R. did not controvert the

submission of ld A.R. of the assessee.

orders of lower authorities as well as the decision of the Tribunal in

assessee’s own case relied by ld A.R. of the assessee. We find that similar

disallowance was made by the revenue in the assessment year 2010-11 and

the Tribunal has deleted the disallowance made on account of commission

paid. We also find that same issue had come up for consideration before

the Tribunal in the assessment year 2011-12 in the appeal filed by the

revenue and the Tribunal following the decision for the assessment year

2010-11 has deleted the disallowance, by observing as under:

“6. At the time of hearing, ld A.R. of the assessee produced a copy of decision of the ITAT in assessee’s own case for the assessment year 2010-2011, in the appeal filed by the revenue against the deletion of addition made by the Assessing Officer.

P a g e 19 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

The Tribunal vide its order dated 31.8.2017 upheld the findings of the CIT(A) in deleting the disallowance, inter alia, observing as under: “ 7. We have heard rival submissions, perused the orders of lower authorities and materials available on record. We find that the CIT(A) deleted the disallowance of Rs.3,29,17,011/- out of total commission payment of Rs.6,94,53,756/- by observing as under”

“I have considered the content and substance of the impugned assessment order and the Grounds of Appeal preferred and the additional submissions filed by the Appellant, and accordingly decide as under:

a) In respect of the disallowance of commission payments made by the appellant to the extent of Rs.3,29,17,011/-, it appears that the AO has not correctly understood the meaning and import of the term “agent”. It is not necessary that an agent receiving Commission payments has to always be a physical go- between between the principal (the Appellant in the instant case) and his/her/its customers being buyers. An agent can carry out the business of prospecting for client-buyers which would mean that many of the intended targets may not transform into buyers or may decide to purchase the items directly from the principal instead of through the agent or even without informing the agent. An advertising agent, likewise, has only a generic target segment and no customers can be asked of such agent to be specifically identified. A procurement agent, on the contrary, may have a set of sellers from whom he/she routinely contracts for purchases. b)The Cambridge dictionary defines an agent as “someone who sells a company's products and receives a part of the money paid for the goods for doing this", which would mean that it would be unfair and unreasonable in many cases and circumstances to expect such agent to remember and provide the names of the multitude of buyers. c) It is also clear from the definition that an agent is dependent for his/her/its incomes on his/her, its principals and the sales that he/she/it helps facilitate for the latter. A commission agent derives compensation from actual sales, usually expressed as a percentage of sales. In many cases, they may facilitate in locating

P a g e 20 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

buyers for goods/services, providing information about the product, making the actual sale, and ensuring delivery and follow-up service. However, the precise nature and details of the facilitations engaged in by the agents depends upon the facts and circumstances of the arrangement/agreement entered into with the principal, the nature of the products/goods sold, relevant business factors, etc. Benefits from the agency arrangement accrue to both the principal and agent. Principals can extend market reach without incurring major fixed personnel costs, and agents can earn compensation based on their productivity. Some agents may represent more than one principal. All of the above mean that the agent is more reactively dependent on the principal being part of a direct arrangement than with the clients/buyers/customer which relationship is more proactive and hence independent. While, commission agents depend on customers in generating their compensation, the compensation itself is paid by the principal after the customer/buyer pays the principal the proceeds of the sale or other transaction. While some agents may be aggressive, they also depend on satisfied customers for repeat business and are motivated to that end; it is in this connection that some of them may keep track of buyers/customers in their own interests. Such tracking and retrieval of customer details upon demand, as the AO has insisted upon, is not. part of a mandatory or statutorily stipulated nature of duties of all agents.

d) There are Commission agents who arrange and participate in the sales and arrange outbound- movement-and-packing, transport and logistics in the interests of the principal, and there are agents who do not. The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that involve a person (the agent), who is authorized to act on behalf of another (the principal) to create legal relations with a third party. Succinctly, it may be referred to as a more- or-less equal relationship between a principal and an agent whereby the principal, expressly or implicitly, authorizes the agent to work under his or her or its control and on his or her or its behalf. The agent is, thus, required to negotiate on behalf of the principal or bring him or her and third parties into a contractual relationship. The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee

P a g e 21 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

or another person to conduct a business. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency. Importantly, a third party may rely in good faith on the representation by a person who identifies himself as an agent for another. It is not always cost effective to check whether someone who is represented having the authority to act for another actually has such authority. If it is subsequently found that the alleged agent was acting without necessary authority, the gent will generally he held liable.

e) In the instant case, the agents were relatively small and unknown players. Also, as per the terms of the agreements/understanding with the Appellant, they did not appear to have any authority to attract or enlist buyers for the Appellant. Their range of duties was limited to facilitating smooth supply of goods to the buyers.' This would mean that they were in most cases interacting with buyers who were in direct transactional and interactive relationship with the Appellant. The buyers therefore had no cause to regard the agents as purchase intermediaries (they being supply facilitators temporarily visible at a given point in time in respect of the transactions operational at that time) and the agents had no reasons to prepare iron-clad lists and details of the buyers. Therefore, there was little reason for the buyers to make enquiries about the agents and certify the genuineness or veracity of the latter in the matter of supplies of materials. I All the buyers were concerned with was the timely delivery of quality-tested goods/products as specified by them. All the Appellant expected from the agents was total adherence to the terms of the agreement/arrangement between them.

f) Therefore, the express non-remembrance of the agents in the creative-proactive awarenesses of the buyers alone will not negate the fact of the impugned transactions and the truth and character of the Commission payments. The AO has not carried out any investigations or inquires, on unearthed/discovered any evidences that suggest that the transactions and payments were not what they seemed to be. The decision to disallow has been made

P a g e 22 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

on presumption, surmise, conjecture, supposition, and a summary and unilateral conclusion based on rudimentary facts (of the buyers being presumably non-existent or apparently unaware of the agents and the agents being unable to list the buyers) taken in prejudiced isolation and based on a spurious implied “transcendental” principle that seeks to cover/fill the schism between flimsy foundations and meretricious arguments on one side and a tendentious decision on the other. This is not a scientific, professional and responsible exercise carried out by the AO. Much more homework was required to be done by the AO in discharge of his responsibilities, which he plainly failed to carry out.

g) How to go about doing one’s business sis the prerogative of the business man, as are the related matters like incurring expenses, making investments, obtaining loans and providing advances, etc. The decision of Hon’ble Supreme Court in the case of S.A. Builders Limited vs CIT, 288 ITR 1 (SC) is relevant. The Hon’ble Court held in the above ratio reiterated the settled position in the past that no businessman can be compelled to maximize his profit. While considering the claim of deduction of any expenditure, income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. Once it was established that there was nexus between the expenditure and purpose of the business, revenue cannot justifiably claim to put itself in the arm chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The authorities must look at the matter not from their own point view but that of a prudent businessman.

h) Consequently, whether to engage the services of a Commission agent or not in respect of her sales is the business prerogative of the Appellant, and even if such agents do are not able to bring in a single customer, the expenses made of the nature of Commission payments to the agents would not be ineligible.

P a g e 23 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

i) In harmony with the principles of economic neutrality, what is to be verified is whether the agents are creating economic value for the Appellant through the functions carried out, risks absorbed and assets being time and effort invested in by it, and is therefore entitled to be compensated for the same in the form of receipts of Commissions. Compensation can be denied or disallowed only if it is proved that the apparent arrangement is not germane or related to the business and/or is non-genuine and no economic value is being generated by the agent for the principal. The Appellant is free to enter into agreements with and appoint as many agents, as it seeks to, in line with its business needs and commercial practices. If the agreements and appointments are wholly and exclusively for the purpose of business, and the payments made in the said regard are fully billed/vouched, accounted for and audited, then there is little scope for Revenue to take a prejudicial view. j) The AO has not been able to show that the payments have not been made to the purported agents and that these payments are not relatable to the carrying out the business and for other business purposes. The AO has merely leaped to conclusions (in the cases of Categories II, III and IV) that the seeming absence of buyers (as ostensibly evidenced by letters addressed to them returning unserved), or the negations or disavowals by such buyers of any knowledge or nexus with the agents or the inability of the Commission agents to list the actual buyers would automatically disentitle the agents of their status and rights to receive Commission payments. In the scheme set in place by the Appellant, the buyers directly transacted with her; the agents did not enroll them and therefore in most cases would not know them. The agents would be able to only provide some names of buyers in respect of whom/which the agent would have facilitated the supply after the sales were made. Likewise, sworn depositions from the buyers that they did not know the agents would not make for adverse finding because in the minds of these buyers, they had transacted directly with the Appellant, and the person referred to as an agent would have appeared in their eyes like an employee of the Appellant or other individual engaged in facilitating the movement of the

P a g e 24 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

goods, and not in a formal position of engagement as an ‘agent’.

k) What was needed for the AO was to prove any of the following: a) the impugned agents did not exist or were not genuine agents; b) the agents had not carried out any facilitation work for the Appellant; and c) the agents had not actually received the stated Commission moneys. He has instead proceeded on presumptions and concluded on unproven inanities that the absence of information about the buyers meant that the Commission agents did not exist or were not genuine participants in the Appellants business. In respect of Category I, the buyers confirming at they had carried out direct transactions with the Appellant is well within the general and accepted scheme of things. It is not part of the role of the agent to always act as a physical intermediary between the buyers and the appellant being the sellers. Purchases were directly made from the appellant with the agent remaining in the background. The buyer is interested only in effecting the purchases; he is not duty bound to keep tax on the appellant -seller’s agents and prepare lists when called for. Buyers also interact with several agents of the same nature employed by their respective competing principals participating in the suppliers of material supplies. Such lack of awareness alone 'does not take away the character of the payments made being that of commissions or the truth and genuineness of the principal-agent transactions. The part of the order that deals with the enhancements of Commission payments appears to have framed on suspicion and presumption, and as held by the Hon’ble Supreme Court in the case of State of Kerala vs. M.M. Mathew 42 STC (1978), however strong such suspicion or presumption it could not replace legal proof. i) In consequence of all the above, it is held that the AO’s action in disallowing the impugned expenses totaling Rs. 3,29,17,011/- have been made on extremely thin and specious grounds that the buyers were not found or did not respond or disclaimed any knowledge of the agents or that the agents were not able to remember the buyers or were not able to furnish detailed particulars about them or for the reason that the Commission agents were HUFs. All of

P a g e 25 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

them are reasons that do not show any clear understanding about the reasons for and the manner in which the agents have been employed and engaged by the Appellant. The Appellant is seen to have made the necessary deductions of I DS, maintained the necessary bills, receipts certificates and other documentation, made the necessary entries in books of accounts that have been duly audited and also furnished the Income-tax particulars of the agents before the AO. Copies of some of the communications made by the Appellant to the AO in this regard have been provided on record by the Appellant.

j) The enhancement made of Rs. 3,29,17,011/- on the said count is consequently deleted and the Appeal allowed.” 8. Ld D.R. could not point out any specific error in the findings of the CIT(A) that at times commission agent when approaches the purchasers, he does not identify himself as an agent of the seller and merely identifying himself as representative of the seller, in such circumstances, the buyer cannot be aware that the person who has approached is employee of the seller or agent of the seller. Further, the CIT(A) observed that the commission may be paid to an agent for facilitating the trade even when the orders are directly given to the sellers by the purchasers. Further, non- service of letters to the buyers or non-compliance of the letters by the buyers does not show that the payment of commission was not genuine when the relative sale was considered genuine. Further, non-furnishing of the name of the buyers by agent in compliance to the notice does not necessarily mean that the agent is not aware of the buyers. We find that no material could be brought before us to show the person to whom commission was paid were accommodation/entry provider and the money which was paid through banking channel to them came back to the assessee. In the circumstances, in the absence of any specific defect being point out in the order of the CIT(A), we find no good reason to interfere with the order of the CIT(A), which is hereby confirmed and the ground of appeal of the revenue is dismissed.”

P a g e 26 | 27

ITA No.1 97/CTK/201 9 Assessm ent Y ear : 20 12- 13

we following the precedent, confirm the findings of the CIT(A) in deleting the addition made by the Assessing Officer and reject the ground of appeal taken by the revenue. 18. Since there is no change facts and circumstances of the case for the

year under consideration, following the decision of the Tribunal, we delete

the disallowance of Rs.62,86,353/- on account of commission paid to Subh

Ispat ltd and allow this ground of appeal of the assessee.

Order pronounced on 28 /1/2021.

Sd/- sd/- (Laxmi Prasad Sahu) (Chandra Mohan Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Cuttack; Dated 28 /1/2021 B.K.Parida, SPS Copy of the Order forwarded to : 1. The appellant: Tarini Minerals Pvt ltd., A/6, Commercial Estate, Civil Township, Rourkela.

By order

Sr.Pvt.secretary ITAT, Cuttack

P a g e 27 | 27