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Income Tax Appellate Tribunal, ‘’ A’’ BENCH, AHMEDABAD
Before: SHRI MAHAVIR PRASAD & SHRI WASEEM AHMED
आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the order of the Learned Commissioner of Income Tax (Appeals)-6, Ahmedabad, dated 10/11/2017 (in short “Ld.CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2013-2014.
The assessee has raised the following grounds of appeals:
The learned CIT(A) has erred both in law and on the facts of the case in confirming the action of the AO of invoking the provisions of Rule 8D without recording any dissatisfaction to the claim of appellant.
2. The learned CIT(A) has erred both in law and on the facts of the case in confirming the action of AO in disallowing Rs.70,55,064/-u/s.14A of the Act r.w.r. 8D of the Income-tax Rules, 1962. 3. The learned CIT(A) has erred both in law and on the facts of the case in confirming the action of AO of disallowing deduction Rs.3,50,00,000/- u/s.35(l)(ii) of the Act. 4. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 5. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest U/S.234A/B/C of the Act. 6. The learned CIT(A) has erred in law and on facts of the case in confirming action of the ld.AO in initiating penalty u/s.271(1)(c) of the Act. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
3. The first issue raised by the assessee vide ground nos. 1 & 2 is that the learned CIT(A) erred in confirming the action of AO by invoking the provisions of section 14A r.w.r. 8D of Rules without recording dissatisfaction about its claim.
4. The brief fact of the case on hand is that the assessee is a private limited company and engaged in the business of manufacturing of various grade of precipitated Silica. The assessee in the year under consideration claimed exemption of Rs. 1,61,84,338/- under section 10(34) of Act with respect to its dividend income. The assessee also claimed interest expenses of Rs. 287.10 lakh in the return of income. But there was no expense disallowed by the assessee under section 14A of the Act against such exempted income. On question by the AO during the assessment proceeding, the assessee submitted that it had made fresh investment in share for 32.35 crore only during the year which was financed from cash received from operation. The assessee in support of its contention filed the cash flow statement.
4.1 The assessee further contended that the learned CIT (A), in its own case for A.Ys. 2009-10, 2008-09 and 2007-08 has held that the investment in share were made out of interest free fund available with it (the assessee). Accordingly the assessee claimed that there was no requirement to make any disallowances under section 14A r.w.r. 8D of the Rules against the exempted income.
4.2 However, the AO rejected the contention of the assessee by holding that assessee has not provided any documentary evidence establishing the link between investment and sources of fund. Further the impugned issue decided in favour of the assessee in earlier A.Ys by the CIT (A) are in appeal before the higher forum. Thus the AO invoked the provisions of rule 8D of the Rule and worked out the amount of disallowances at Rs. 70,55,067 being Rs. 49,37,315 lakh on account of interest and Rs. 21 lakh on account of administrative expenses which was added to the total income of the assessee.
Aggrieved assessee preferred an appeal before the learned CIT (A).
5.1 The assessee before learned CIT (A) submitted that in the identical facts and circumstance for the A.Y. 2011-12, the ld. CIT-A deleted the similar addition.
5.2 The assessee also claimed that during the year under consideration investment in share were increased whereas borrowing fund decreased substantially which proves that the borrowed fund was not utilized for the purpose of investment. The assessee also reiterated that it has substantial interest free owned fund in form of capital and reserve which exceeds the amount of investment in shares.
However the learned CIT (A) confirmed the order of the AO by relying on the order of his predecessor for the A.Y. 2012-13 in the own case of the assessee.
7. Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
8. The learned AR before us filed a paper book running from pages 1 to 91 and submitted that the own fund of the assessee exceeds the amount of investment. Therefore there cannot be any disallowance of interest expense. Similarly, the ld. AR also contended that there was no satisfaction recorded by the AO before invoking the provisions of section 14A r.w.r. 8D of Income Tax Rule which was mandatory. The ld. AR reiterated the submission made before the lower authorities.
On the other hand, the learned DR before us submitted that the assessee failed to establish based on the documentary evidence that the borrowed fund was not utilized in the investments. The ld. DR vehemently supported the order of the authorities below.
We heard the rival contention of the both parties and perused the materials available before us. The fact of the case has been elaborated in previous paragraph, hence for the sake of brevity we are not inclined to repeat the same. At the outset we note that the AO has made the addition on two folds i.e. on account of interest expenses and on account of administrative expenses.
10.1 Regarding the addition made on account of interest expenses, we note that the assessee has substantial amount of interest free fund in the form of share capital and reserve which exceeds the amount of investment. This fact can be verified from the balance sheet of the assessee. The relevant page of the balance sheet, placed on page number 6 of paper book, is extracted below:
Rs. In lacs 1 Share Holders Funds (a)Share Capital 2 600 540.00 (b)Reserves and Surplus 3 17,702.69 14,840.41 Sub-total (1) 18,302.60 15,380.41 XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX ================page 6 of paper book =========== 2 Current Assets (a)Current investments 16 5,878.24 2,578.01 10.2 In view of the above, it can be presumed that the assessee has used its own fund in the impugned investment and therefore there cannot be any disallowance on account of interest expenses. Regarding this the Hon’ble Courts have held that where own interest free fund of the assessee is sufficient enough to meet the investment then no any disallowances on account of interest is warranted under section 14A r.w.r. 8D of the Act. In this respect we draw support from the judgment of Hon’ble jurisdictional High court in the case of CIT vs. Torrent Power Ltd reported in 363 ITR 474 where it was held as under: It was noted from records that the assessee was having share holding funds to the extent of 2607.18 crores and the investment made by it was to the extent of`Rs.195.10 crores. In other words, the assessee had sufficient funds for making the investments and it had not used the borrowed funds for such purpose. This aspect of huge surplus funds is not disputed by the revenue which earned it the interest on bonds and dividend income. [Para 7] 10.3 Respectfully following the same we set aside the finding of the ld. CIT-A and direct the AO to delete the addition made on the account of interest expenses.
10.4 Coming to the second fold of addition i.e. addition on account of administrative expenses, in this regard we note that the learned AR before us contended that the disallowance has been made by the AO without recording the satisfaction as provided under the provisions of section 14A read with rule 8D of Income Tax Rule. Accordingly, it was pointed out that there cannot be any disallowance of administrative expenses. However, we find that the AO has derived his satisfaction by raising a query for making the disallowance under section 14A read with rule 8D, which is reproduced as under: In the instant case, the explanation of the assessee company is not satisfactory and accordingly the method of determining amount of expenditure in relation to income not includable in the total income specified in the Rule 8D of the Income Tax rules 1962 is followed.
10.5 The ld. AR has also not submitted before us any details of the expenditure suggesting/ justifying that no expenditure was incurred by the assessee in connection with the impugned exempted income. As such the onus lies upon the assessee to provide the documentary evidence that it has not incurred any expense against the exempted income. In the absence of such details, the AO had no option except to resort to the provisions of section 14A read with rule 8D for making the disallowance against the exempted income. Accordingly, we confirm the disallowance made by the AO which was subsequently confirmed by the learned CIT (A) towards the administrative expenses. Thus the grounds of appeal raised by the assessee is partly allowed.
11. The second issue raised by the assessee in ground no. 4 is that learned CIT (A) erred in confirming the action of AO by disallowing the deduction of Rs.3,50,00,000/- claimed u/s 35(1)(ii) of the Act.
The AO received the information that there was a survey under section 133A of the Act conducted by investigation wing of Kolkata in the case of ‘‘School of Human Genetics and Population Health (here in after SHGPH)”. In the survey it was accepted by the office bearer and chartered accountant of the above said institution that the SHGPH has been working as entry provider through bogus bills and donation. As such the institution is receiving bogus donation through the banking channel and thereafter remitting the amount in cash to donor. The assessee has also donated a sum of Rs. 2 crores to SHGPH during the year.
12.1 Accordingly a question was raised to the assessee by the AO during the assessment to establish the genuineness of the donation made by it. In response, the assessee requested for material found during the survey by investigation wing and also requested for cross examination. The AO written to the DDIT investigation unit Kolkata about the same but there was no reply received by him (the AO). Hence the AO proceeded with the available information and issued show cause notice that why the donation given to SHGPH not be added to the total income to the assessee.
12.2 The assessee in response to the show cause submitted it has given donation after verifying all document as detailed below: The assessee also contended that there was not any adverse remarks by the government against the institution that it is engaged in the activity of entry operator. The assessee further contended that there cannot be any disallowance for the donation made by it without complying the provisions of natural justice i.e. providing the materials found during survey for the rebuttal as well as opportunity for the cross examination.
12.3 However, the AO disagreed with the contention of the assessee and made the disallowance of the donation made by it by observing as under: 5. After considering the submissions of the assessee and on examination of materials/evidences available on record, I find that the whole transaction is not genuine. The DIT Kolkata has given a categorical finding after carrying out survey operation that the said organization was accepting the donation in cheque and returning the cash to the respective donors. In the reply to show cause notice, the assessee has denied having received any cash. However, for such return of cash there cannot be any operators/bogus billers were engaged in bogus donation syndicate. The aforesaid institution i.e school of Human Genetics and Population Health accepted that they have facilitated the bogus donation in lieu of commission. Therefore, deduction deduction claimed by the assessee company to the tune of Rs.3.50 Crore is disallowed and added to the total income of the Company.
Aggrieved assessee preferred an appeal to the learned CIT (A) who has also confirmed the order of the AO by observing as under: 6.3.4 As can be seen from above, the earlier notification declaring School of Human Genetics and Population Health, Kolkata as eligible institute has been rescinded with retrospective effect from 1.04.2007. thus after the above notification the payments made to School of Human Genetics and Population Health, Kolkata are not eligible for deduction u/s.35(1)(ii) of the Act. And this applies to all payments made after 1.4.2007. Hence, the appellant is not entitled for deduction of Rs.3,50,00,000/- u/s.35(1)(ii) of the Act. Therefore, the AO has rightly disallowed the deduction. The case laws relied on by the appellant are not applicable as the facts are different. Accordingly, I uphold the action of the AO in disallowing deduction of Rs.3,50,00,000/- claimed u/s.35(1)(ii) of the Act. The ground of appeal is dismissed.
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us submitted that the registration certificate at the time of donation was very much valid. Furthermore, there cannot be made any addition of the donation based on the survey statement as the same has no evidentiary value. Likewise, the survey material used for the addition was not provided to the assessee for the rebuttal. Similarly, the opportunity of the cross verification of the party was not accorded to the assessee despite having made the specific request.
On the other hand the learned DR before us vehemently supported the stand of the authorities below by reiterating the findings contained in the respective orders which we have already adverted to in the preceding paragraph. Therefore we are not repeating the same for the sake of brevity.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the assessee has made donation to SHGPH which was registered under section 80G(5)(vi) of the Act. Accordingly the assessee claimed the deduction in its income tax return. However, the deduction claimed by the assessee was denied by the AO on the reasoning that it was established during the survey operation at SHGPH that it was engaged in the activity of entry operator. In other words the institution was accepting the donation through the banking channel and remitting the cash to the donors. The action taken by the AO was subsequently confirmed by the learned CIT (A).
17.1 Admittedly, the basis of disallowance was the material gathered during the survey under section 133A of the Act at SHGPH but the same was not supplied as well as no opportunity of cross examination was provided to the assessee despite the specific request made to the AO. It is the settled law that there cannot be any addition/disallowances of the claim made by the assessee until and unless the materials on the basis of which the addition/disallowance was proposed, provided to the assessee for the rebuttal and cross-examination. In this regard we find support and guidance from the judgment of Hon’ble Supreme court in case of Maneka Gandhi vs. Union of India reported in AIR 1978 SC 597 wherein Hon'ble Supreme Court has laid down that rule of fair hearing is necessary before passing any order. We also take guidance and support from the order of the Hon’ble Supreme Court in case of I.C.D.S. Ltd vs. CIT reported in 117 taxmann.com 723 wherein the Hon’ble court held as under: Be it noted that one of the issues involved is about not extending opportunity to the appellant to cross-examine the witnesses relied upon by the Assessing Officer. If the Department wants to rely on their evidence, it may be necessary to provide opportunity of cross- examination of these witnesses to the appellant, which can be done by the First Appellate Authority itself, 17.2 Similarly, we also note that the revenue has not brought anything on record suggesting that the assessee has received any cash against the donation made by it to SHGPH which was very vital to establish that the assessee has made bogus claim.
17.3 We also note that this tribunal in the case of SG Vat Care P. Ltd vs. ITO in ITA no- 1943/Ahd/2017 involving identical facts and circumstances has decided the issue in favour of the assessee vide order dated 05-01-2019. The relevant extract of the order is reproduced as under: 6. We have duly considered rival contentions and gone through the record carefully. The AO is harping upon an information supplied by the survey tem of Calcutta. He has not specifically recorded statement of representatives of the donee. He has not brought on record a specific evidence wherein donee has deposed that donations received from the assessee was paid back in cash after deducting commission. On the basis of a general information collected from the donee, the donation made by the assessee cannot be doubted. Neither representatives of the donee have been put to cross-examination, nor any specific reply deposing that such donation was not received, or if received the same was repaid in cash, has been brought on record. In the absence of such circumstances, donation given by the assessee to the donee, on which the assessee no mechanism to check the veracity, can be doubted, more particularly, when certificate to obtain donation has been cancelled after two years of the payment of donation. It is fact which has been unearthed subsequent to the donations. Therefore, there cannot be any disallowance on this issue. We allow this ground.
17.4 We also find that the Hon’ble Gujarat High Court in the case of PCIT vs. M/s Thakkar Govindbhai Ganpatlal HUF in R/Tax Appeal No. 881 of 2019 has confirmed the view taken by the tribunal. The relevant extract is reproduced as under:
In the facts of the present case, the CIT (Appeals) has given the finding of the fact that the amount of donation was transferred to the Herbicure through Bank channel and there is no evidence that the same is returned back in cash.
It is also found that the Herbicure foundation has confirmed that the amount has been utilized for scientific research vide confirmation dated 29.09.2016. Accordingly, the onus placed upon the assessee was discharged. 9. In view of the aforesaid findings of the fact given by both the authorities below, no interfere in the impugned order passed by the Tribunal is required to be made. No substantial question of law arise from fails and is hereby, dismissed.
17.5 The facts of the case on hand are identical to the facts of the case as discussed above. The learned DR at the time of hearing has also not pointed out any factual difference in the case on hand viz a viz in the case as discussed above. Accordingly, respectfully following the same we set aside the order of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is partly allowed. 18.
Order pronounced in the Court on 04/01/2021 at Ahmedabad.