M/S MANIPAL TECHNOLOGIES LIMITED,UDUPI vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, UDUPI

Per Beena Pillai, Judicial Member

The present appeal is filed by the assessee against the order dated 20/2/2023 passed by the NFAC for the assessment year 2012-13 on following ground of appeal:- ” I. The order of the learned Commissioner of Income tax (Appeals) [CIT(A)] of National Faceless Appeal Centre (NFAC) is opposed to law and on facts of the case. II. a) The learned CIT(A) of NFAC, has erred in law in confirming the disallowance made by the Assessing Officer to the extent of Rs.10,80,499/- under Section 14A read with Rule 8D(2)(iii) of the Income tax Act, 1961, as expenditure

ITA No.325/Bang/2023 Page 2 of 11

pertaining to exempted income (0.5% of average value of investment in shares). b) The learned CIT(A)-l0, Bengaluru has overlooked the following decisions relied on by the Appellant. i) CIT Vs. Karnataka State Industrial & Infrastructure Development Corporation Ltd. (65 Taxmann.com 295) (Kar) ii) CCI Limited vs. JCIT [250 ITR 291] (Kar) iii) DCIT Vs. Subramanya Constructions & Development Corporation Ltd. (ITA No.404/2013), dated 20.2.2013 (ITAT Bangalore). iv) Manipal Prakashan Private Limited Vs. DCIT, Circle - 1, Udupi in ITA No. 1208/Bang/2012, order dated 30.8.2013 (ITAT Bangalore). v) Manipal Media Network Limited Vs. DCIT, Circle -1, Udupi in ITA No. 1266/Bang/2012, order dated 25.10.2013 (ITA T Bangalore). vi) ACIT Vs. Jindal Aluminium Ltd. (ITA No. 799/Bang/2012, dated 30.4.2013) (ITAT Bangalore). III. The Appellant craves leave to add, amend or alter any of the forgoing grounds. IV. For these and any other grounds that may be urged before the Hon'ble ITAT, it is prayed that the Hon'ble ITAT may allow the appeal with cost.” 2. The assessee is a domestic company, engaged in the business of Printing Activities. For the assessment year 2012-2013, the assessee had duly filed the return of income on 26.9.2012, declaring loss of Rs.6,26,56,730 and book profit computed under section 115JB. Subsequently, filed revised return of income on 26.3.2013 for giving effect to additional TDS as per 26AS. The return was initially processed under Section 143(1) of the Act. 2.1 Subsequently, the original assessment was concluded under section 143(3) on 20.2.2015, wherein the Ld.AO has disallowed sum of Rs.1,16,51,365 under section 14A of the Act read with Rule 8D, as expenditure

ITA No.325/Bang/2023 Page 3 of 11

pertaining to exempted income was not disallowed by the assessee. The Ld.AO also added the same to the adjusted book profit computed under section 115JB. 3. Aggrieved by the order of the ld.AO, the assessee filed appeal before this Tribunal. 4. The ld.CIT(A) vide order dated 0.9.2010 allowed assessee’s appeal. 4.1 Against the said order by the Ld.CIT(A), the revenue filed appeal before this Tribunal. The Co-ordinate Bench of this Tribunal vide its order dated 28.2.2019 in ITA No.334/PAN/2016 remanded the matter back to the Ld.AO for re-examination by relying on its own order in ITA No.890/Bang/2013 for assessment year 2010-2011 in assessee's own case. 4.2 In the remand proceedings the Ld.AO disallowed Rs.1,16,51,365/- u/s 14A read with Rule 80D(2)(ii) and (iii). 5. Aggrieved with the above order, the assessee preferred an appeal before the Ld.CIT(A). The Ld.CIT(A) through National Faceless Appeal Centre (NFAC), New Delhi, partly allowed the appeal filed by the assessee by deleting the disallowance of Rs. 1,05,70,866/- made under Rule 8D(2)(ii) and confirmed the disallowance made to the extent of Rs.10,80,499/- made under Rule 8D(2)(iii).

ITA No.325/Bang/2023 Page 4 of 11

ITA No.325/Bang/2023 Page 5 of 11

satisfaction of the claim having regards to the accounts of the assessee. The ld.CIT(A) deleted the disallowance by observing that the Ld.AO did not point out any specific direct and indirect expenses which was incurred wholly and exclusively for earning the taxable income. The relevant observation of the Ld.CIT(A) for deleting the disallowance under Rule 8D(2)(ii) for assessment year 2010-11 in the remand proceedings have been reproduced by the coordinate bench of this Tribunal for assessment year 2013-14, which is placed at page no.49-55 of the paper book. The relevant para being para 8.3 of the Tribunal order for assessment year 2013-14. She thus, prayed for deletion for the disallowance made by the Ld.AO under consideration under Rule 8D(2)(ii). 7. On the contrary, the Ld.DR submitted that in the present facts of the case, the issue of non recording of satisfaction cannot arise, as this is in the remand proceedings of the AO. The ld.AO made disallowance under Rule 8D(2)(ii)/(iii). 7.1 The Ld.DR submitted that on perusal of the assessment order, it is very clear that the Ld.AO referred to the accounts of the assessee and the financial data has been extracted in order to determine the disallowance under both limbs of Rule 8D(2). The Ld.DR, further submitted that, there is categorical observation by the

ITA No.325/Bang/2023 Page 6 of 11

Ld.AO regarding the assessee having not made any disallowance in respect of the exempt income earned. He thus submitted that the argument of the Ld.AR of not recording satisfaction in order to make disallowance u/s 80D(2) cannot be appreciated. 7.2 In respect of the disallowance being deleted by the ld.CIT(A) under Rule 8D(2)(ii), the Ld.DR did not arise any arguments, how so ever, in respect of 3rd limb of Rule 8D(2), he submitted that, the assessee had intention of earning profits from the investments made and earned dividend income from such investments against which no disallowance was made by the assessee. He thus, supported the disallowance computed by the Ld.CIT(A). 8. We have perused the submissions by both the sides. We know that the Ld.CIT(A) considered the issue by observing as under:- “6. I have carefully considered the grounds of appal, statement of facts and the contents of assessment order along with submission of the assessee. I have perused the order u/s 143(3) r.w.s. 254 dated 28.12.2017 for A.Y. 2011-12 wherein the AO has held that on detailed verification of the details furnished/produced, it is seen that the assessee had not utilized the loan fund, where he is paying interest, for the purpose of investment in shares and debentures. Therefore, no disallowance was made by the AO in AY 2011-12 under rule 8D(2)(ii). The only disallowance made by the AO in AY 2011-12 was disallowance of Rs. 9,02,079/- under rule 8D(2)(iii) which was also deleted by the CIT(A) vide order dated 21.03.2019. 6.1 For AY. 2013-14, the AO in the order u/s 143(3) dated 29.03.2016 had made addition of Rs. 1,61,85,201/- u/s 14A read with rule 8D as expenditure pertaining to exempt income. The CIT(A),

ITA No.325/Bang/2023 Page 7 of 11

Mangaluru vide his order dated 27.11.2017 has deleted the addition of Rs. 1,61,85,201/-. 6.2 Thus as per orders of AO or CIT(A) available on record, it is found that no disallowance was finally made/sustained. in AY 2011-12 and AY 2012-13 u/s 14A r.w.r. 8D. 6.3 In the present AY 2012-13, the exempt dividend received by the appellant was only Rs. 91,055/-. The opening and ;closing investment in shares and mutual funds were Rs. 16,72,70,470/- and Rs. 26,49,06,800/- and thus the additional investment made during the year was Rs. 9,76,36,330/-. Before the AO, it was claimed by the assessee that investments upto 31St March,2Q11 has been explained to the AO and the AO has accepted their claim in the order giving effect to the order of the ITAT for AY 2011-12. It was also explained that the company has raised share capital of Rs. 3,29,06,780/- and share premium of Rs. 88,46,70,000/- during the year under consideration. However, the AO applied Rule 8D and computed disallowance of Rs. 1,05,70,866/- u/r 8D(2)(ii) and Rs. 10,80,499/- u/r 8D(2)(iii). 6.4 As stated above, disallowance u/s 14A was finally not made /sustained in AY 2011-12 & AY 2013-14. I also find that during AY 2012-13, a majority portion of earlier investment is continuing and the assessee has explained the source of additional investment out of interest free fund of share capital and share premium raised during the year. Therefore, it is held that no disallowance u/r 8D(2)(ii) is justified. However, the disallowance u/r 8D(2)(iii) is found to be justified for the reason that the appellant must have incurred certain direct and indirect expenses related to employees, Office and infrastructure of the assessee to continue the old investment and to make fresh investment for which the law authorizes disallowance u/r 8D(2)(iii). In view of above, the disallowance of Rs. 1,05,70,866/- made u/r 8D(2)(ii) is hereby deleted and the disallowance of Rs. 10,80,499/- made u/r 8D(2)(iii) is hereby confirmed. The grounds of appeal are partly allowed. 8.1 We note that during the year under consideration, the assessee shown investments in mutual funds and shares amounting to Rs.26,49,17,950/-. The ld.CIT(A) in para 6.3 reproduced herein above observed that the opening balance of the investment during the year under consideration was Rs.167270470/-.

ITA No.325/Bang/2023 Page 8 of 11

8.2 Thus, the investments that was made by the assessee for the year under consideration was Rs.9,76,36,330/-. 8.3 In our view the ld.CIT(A) rightly deleted the disallowance made by the ld.AO under Rule 8D(2)(ii), as assessee has sufficient own funds for making such investments during the year under consideration. However, in respect of Rule 8D(2)(iii), the disallowance has been confirmed at Rs.10,80,499/- being 0.5% of Rs.21,60,99,785/-, which in our view is not correct. We draw reference to the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd., Vs. CIT reported in (2018) 91 Taxmann.com 154, wherein Hon’ble Supreme Court in paragraph 40 and 41 observed as under:- "40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as ‘stock-in-trade’, it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits.

ITA No.325/Bang/2023 Page 9 of 11

41) 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. (emphasis supplied)" 8.3 In another decision of Hon’ble Madras High Court in the case of CIT(A) Vs. Chettinad Logistics Pvt. Ltd. reported in (2017) 80 Taxmann.com 221, Hon’ble Court had held that, disallowance u/s 14A cannot go beyond exempt income earned. The relevant observation of Hon’ble Madras High Court is as under:- “"4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with Rule 8D of the Rules can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year.” 8.3 All the above decision have reiterated one proposition that satisfaction need to be recorded by the Ld.AO where he does not agree with the suo moto disallowance made by the assessee u/s 14A of the Act having regards to the accounts maintained by such assessee. In the present facts of the case, the assessee has not disallowed any expenditure suo moto therefore,

ITA No.325/Bang/2023 Page 10 of 11

not recording any satisfaction in any case does not arise. How so ever, the Ld.AO while computing disallowance under Rule 8D considered the relevant extracts of the accounts of the assessee for the year under consideration. We, therefore, reject this arguments advanced by the Ld.AR. 8.4 This does not mean that we agree with the disallowance upheld by the ld.CIT(A) under Rule 8D(2)(iii) as it has exceeded the exempt income earned by the assessee. We, therefore, restrict the disallowance under Rule 8D(2)(iii) to the exempt income earned by the assessee by following the ratio laid down by the Hon’ble Karnataka High Court in the case of Pragati Krishna Grameena Bank reported in (2018) 95 Taxamnn.com 41. In view of the above, we hold that the disallowance under Rule 8D(2)(iii) is restricted to the amount of exempt income earned by the assessee for the year under consideration. Accordingly, the amounts raised by the assessee stand partly allowed.

ITA No.325/Bang/2023 Page 11 of 11

Bangalore, Dated, 7th July, 2023 / vms /

Copy to:

Asst. Registrar, ITAT, Bangalore.