ACIT, RORUKELA CIRCLE, ROURKELA vs. INDRANI PATNAIK, ROURKELA

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

P a g e 31 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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

old roads. Therefore, this expenditure is inextricably linked with the

business of the assessee which is allowable.

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

P a g e 32 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

between the expenditure claimed by the assessee and business operation

by the assessee.

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.

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 33 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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

P a g e 34 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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 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.

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.

No.390/CTK/2017 reads as under:

“ Whether on the facts and in the circumstances of the case, the ld CIT(A) is justified in deleting the addition made by AO towards ‘disallowance of donation’ to the tune of Rs.1,75,00,000/-“

P a g e 35 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

submitted that the assessee, during the relevant financial period, has made

claim of donation given to School of Human Genetics & Population Health

(SHG&PH). Ld CIT DR submitted that on receipt of enquiry report of

Investigation Wing of Kolkata, a show cause notice was issued to the

assessee on 22.1.2016. In response to the same, the assessee vide written

submission dated 2.2.2016 stated that the assessee has made donation

through proper banking channel after being satisfied with their genuinity.

The assessee has made donation out of her hard earned tax paid money

with genuine benevolence to help the organisation doing yeomen service.

It was not possible for the assessee to enquiry about the mal activities done

by the office bearers and officers of the said organisation. Therefore, the

assessee is not a position to comment on the findings in survey. Ld CIT DR

vehemently pointed out that from the enquiry report and statement of the

Secretary and the Treasurer of the SHG&PH, it was clearly established that

this institution is not involved in any scientific research activities and they

used to receive bogus donation through cheque, RTGS & simultaneously

returns money after deducting 7% to 8% of donation amount as

commission. Ld CIT DR submitted that during statement, the assessee

herself accepted that she has not verified the scientific activity of SHG&PH

and she has given donation without knowing the institution. Ld CIT DR

submitted that the assessee has not given any explanation on the

P a g e 36 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

statement of the Secretary and the Treasurer of SHG&PH on the issue of

bogus donation. Therefore, the AO was right in making

disallowance/addition in the hands of the assessee treating the same as

bogus donation, which was received back by the assessee. Ld CIT DR

pointed out that the claim of donation u/s.35(1)(ii) of the Act was rightly

disallowed and added back to the total income of the assessee. Ld CIT DR

prayed that the ld CIT(A) has granted relief without any reasonable cause

and basis, therefore, the impugned order may kindly be set aside that of

restoring the order of the AO.

Kolkata ‘B’ Bench in the case of EBIW Info Analytics Pvt Ltd vs ITO in ITA

No.582/Kol/2019 order dated 13.11.2019 for A.Y. 2014-15 and submitted

that the Co-ordinate Bench of this Tribunal by following another order of

ITAT Kolkata in the case of Narbheram Vishram in ITA No.s42 &

43/Kol/2018 for A.Ys 2013-14 & 2014-15, has allowed the claim of donation

u/s.35(1)(ii) made to SHG&PH. Therefore, the findings recorded by the ld

CIT(A) in para 2.2 of the impugned order may kindly be upheld accepting

the claim of the assessee towards making donation to same

organisation/institution. Ld AR submitted that the AO has not brought any

material on record to show that the amount of donation given by the

assessee was refunded back to the assessee by the donee in cash, per

contra, the documents relied by the AO clearly shows that the AO has

P a g e 37 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

verified the genuineness of the approval obtained by the Organisation for

the purpose of section 35(1) from the competent authority and only

thereafter has given donation for scientific research. Ld AR strenuously

contended that the assessee cannot be held liable for misdeeds of the

school and the fraud committed by them by helping assessee to evade tax

by way of bogus donation unearthed during survey conducted after passage

of long time. Ld AR again drew our attention to para 2.1 & 2.2 of the

CIT(A) order and submitted that no evidence has been brought on record

that the assessee has got back the donation money from the donee

organisation on payment of commission, the donation cannot be treated as

bogus unless and until, it is established by way of concrete reliable and

adverse material/documents that the amount of donation given was

returned back in cash or any other modeto the assessee after deducting

some amount as commission by the office bearers/secretary or treasurer of

the donee organisation. Para 2.1 & 2.2 of the impugned order read as

follows:

‘ 2.1 In the course of appeal hearing, through a written submission has contended as under:

"1. Donation: Rs.1,75,00,000/- claimed u/s 35(l)(ii) of the I.T.Act, disallowed by the learned A.O. on the ground that upon a sur^ conducted on the donee institution, the office bearers thereof had that it was not a genuine organization. The appellant had categorically submitted before the A.O. that at this time when the donation was given, the organization in question was approval from the Income Tax authorities. The appellant had communicated the organization and after being thoroughly satisfied about its status approved organization that she made the donation through proper banking

P a g e 38 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

channel. It is reiterated that once the assessee had satisfied herself about veracity of the organization, her role ended and that she had given the donation under bonafide belief. As such, it is the earnest submission of the appellant the she can't be expected to keep a track of the activities of the donee organization and the disallowance of the donation is unjustified and fully deserves to be deleted. Copies of the submission before the A.O. are attached. 2.2 I have considered the matter with reference to the facts on record. It is a fact that the assessee has given a donation of Rs.1,75,00,000/- to an organization in Kolkata by name School of Human Genetics & Population Health (SHG&PH) and the donation has been given through cheque. This organization/school is duly approved by the competent authority for accepting donations for scientific research as per the provisions of section 35(1). Of course, subsequently certain office bearers/executives of the school have stated in the course of survey operation U/S.133A that the school used to receive donations through agents which were being refunded back in ."cash to the donors in exchange of 8% commission. From the statements recorded from these office bearers of the school, it is seen that they have given a generalized statement and nowhere have stated that the donation of Rs.1 crore given by the assessee was refunded back to the assessee in cash. Certain documents lying on records show that the assessee has verified the genuineness of the approval obtained by the school for the purpose of section 35(1) from the competent authority and only thereafter has given the donation for scientific research. The assessee cannot be held responsible for the misdeeds of the school and the fraud committed by them by helping assesses to evade tax by way of bogus donation. Since there is no evidence brought on record to show that the assessee has got back the donation money from the school on payment of commission, the donation cannot be treated as bogus. The donation has been given to the aforesaid school which has approval from the competent authority as a scientific research institution eligible for accepting donation u/s.35(1) and, therefore, the assessee is entitled to the benefit of weighted deduction u/s.35(1)(ii). Accordingly, the disallowance of Rs.1,75,00,000/- is deleted.” ••■ 54. Ld AR submitted that the survey action u/s.133A of the Act was

carried out on 27.1.2015 at the registered office of SHG&PH, the donee by

the Investigation Wing, Kolkata subsequently and not before granting of

donation by the assessee and the assessee had granted donation to the

donee SHG&PH much prior during financial year 2012-13 to the date of

survey which was carried on 27.1.2015. Therefore, the claim of the

P a g e 39 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

assessee for donation towards scientific research cannot be denied or

dismissed on the basis of subsequent survey action against the donee after

passage of about two years’ time without any adverse material against the

assessee regarding receiving back entire or part amount of donation in

cash.

para 4 of the assessment order, we observe that the AO has disallowed the

claim of the assessee towards donation by holding that the donee SGH&PH

is not involved in any scientific research activities and they used to receive

bogus donation through cheque, RTGS & simultaneously returns money

after deducting 7% to 8% of donation amount as commission. During first

appellate proceedings, the assessee through written submission contended

that the AO has disallowed claim of the assessee u/s.35(1)(ii) of the Act on

the ground upon a survey operation conducted on the donee institution on

27.1.2015, the office bearers had admitted that it was not a genuine

organisation. It was also submitted that at the point of time when the

donation was given, the organisation during A.Y,. 2012-13 was enjoying

approval from the Income tax authorities to receive donation u/s.35(1)(ii) of

the Act and the appellant had granted donation to the organisation after

being thoroughly satisfied about its status as an approved organisation for

receiving donation for the purpose of scientific research to be claimed

u/s.35(1)(ii) of the Act. It has not been controverted that the assessee has

P a g e 40 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

given donation through banking channel and at the time of granting

donation, the donee organisation was enjoying the approval of Income tax

authorities u/s.35(1) of the Act during F.Y. 2012-13. It is also in dispute

that the survey proceedings u/s.133A of the Act was conducted on the

donee organisation much after grant of donation by the assessee on

27.1.2015.

we are of the considered views that undisputedly, donation has been given

by the assessee to SGH&PH through banking channel and this

organisation/institution was duly approved by the competent income tax

authorities for accepting donation for scientific research as per the provision

of section 35(1) of the Act at the time of grant of donation by the assessee.

have stated during the course of survey operation u/s.133A of the Act on

27.1.2015 accepted that the donations are received through agents and

refunded the donation to the respective donors in exchange of 7% to 8%

commission. Ld CIT(A) rightly observed that from the statement of office

bearers of donee organisation/school, it is seen that they have given

generalised statement and nowhere the donation given by the assessee was

refunded back to the assessee in cash. At the same time, we also note that

the assessee has submitted certain statement before the authorities below,

which shows that the assessee has verified the genuineness of the approval

P a g e 41 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

obtained by the school for the purpose of section 35(1) from the competent

authority and only thereafter has given the donation for scientific research.

We are in agreement with the findings of the ld CIT(A) that there is no

evidence brought on record to show that the assessee has got back the

donation money from the school on payment of commission, therefore, the

donation cannot be treated as bogus. At the time of granting donation, the

assessee was very much aware that the donee institution was enjoying the

status of scientific research organiasation/insrtitution eligible for receiving

donation u/s.35(1) of the Act and, therefore, we are unable to see any

ambiguity and perversity in the findings of the ld CIT(A) and hence, we

uphold the same. Ground No.1 of appeal for A.Y. 2013-14 is dismissed.

deletion of addition made by the AO under the head “disallowance of

peripheral development charges” of Rs.1,85,46,330/-.

and circumstances for A.Y. 2013-14 are similar to the facts and

circumstances for the assessment year 2013-14 on the issue of disallowance

of periphery development charges. While deciding the Ground No.4 of

appeal for A.Y. 2012-13 on similar issue, we have dismissed the ground

No.4 of appeal of revenue and our conclusion drawn therein would apply

mutatis-mutandis to Ground No.4 of appeal for A.Y. 2013-14. Hence,

Ground No.4 of appeal of revenue is dismissed.

P a g e 42 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

ITA Nos.393 & 394/CTK/2017 for A.Y. 2012-13 & 2013-14 – Assesse’s appeal. 60. Ground No.1 of appeal for A.Y. 2012-13 & 2013-14 are general in

nature.

disallowance under section 14A of the Act. Hence, we proceed to

adjudicate the facts for the assessment year 2012-13.

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

P a g e 43 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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).

regards to the assessee is not satisfied with the amount of 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

P a g e 44 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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

P a g e 45 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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 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.

of CIT vs Reliance Industries Ltd., in Civil Appeal No.10 of 2019 order

P a g e 46 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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. “

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.

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

P a g e 47 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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

P a g e 48 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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 case of M.A. Alagappan (supra) is against the

law and mandate of section 14A of the Act.

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)

P a g e 49 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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

P a g e 50 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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.

P a g e 51 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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.

P a g e 52 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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,

P a g e 53 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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.

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.

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

P a g e 54 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

challenging the confirmation of disallowance by the ld 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 :”

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

P a g e 55 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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

P a g e 56 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.”

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”.

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

P a g e 57 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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.

net income and the exemption has to be allowed on the net basis i.e. gross

P a g e 58 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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.

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 59 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

correctness that the assessee has not incurred any expenditure for such

exempt income.

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.

necessary to consider the ratio of case laws cited by both the parties.

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.

ld A.R., then we find that in the recent judgment order dated 25.2.2020 in

P a g e 60 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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 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.”

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.

P a g e 61 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.”

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 prepositions 93.

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

P a g e 62 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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

P a g e 63 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

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 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

P a g e 64 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

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.

Ground No.3 of assessee for A.Y. 2013-14.

challenged the disallowance of expenditure of Rs.1,28,39,665/- towards

periphery development charges as partly confirmed by the ld CIT(A).

of Rs.1,85,46,330/- towards periphery development charges incurred by the

assessee towards renovation and development of roads in around the

mining area for better movement of transportation, the deletion of

disallowance by the CIT(A) has been upheld by us in earlier part of this

order in the appeal filed by the revenue. However, the assessee has

challenged the confirmation of addition of Rs.1,28,39,665/- by the ld CIT(A)

towards the amount incurred for purchase of mosquito nets of

Rs.1,24,39,665/- and donation to Social Health Education Development

Society towards watershed development, for which, the assessee is in

appeal before us.

case of the Tribunal.

P a g e 65 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

assessee is carried in the Tribal area being surrounded by the dense forest

where, the residents are generally affected by Malaria. He submitted that

the forest area being wetland, which is the breeding ground of mosquitoes,

generally affected the resident in this disease. That is the vital ground for

distributing the mosquitoes to the people of mining area for their safety and

the assessee had purchased 51,000 mosquito nets for Rs.1,24,39,665/- for

distribution among the resident of mining area. The expenses incurred by

the assessee were on welfare schemes only which are for malaria

eradication for which, the assessee distributes mosquito nets. He also

submitted that amount of Rs.4,00,000/- has been given to Social Health

Education Development Society for water shed development as donation,

which is for the business purposes of the assessee. He submitted that the

order of the ld CIT(A) on this count be reversed by allowing the appeal of

the assessee.

mosquitoes has not satisfied the test of commercial expediency, hence, ld

CIT(A) has rightly disallowed the same. As regards the amount of donation

of Rs.4 lakhs, ld CIT(A) submitted that the donation to Social Health

P a g e 66 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

Education Development Society for water shed development does not fulfil

the business compulsion.

assessee has distributed 51,000 mosquitoes to the resident of mining area

to prevent them from malaria for an amount of Rs.1,24,39,665/-. We do

not find any positive ground that expenses towards distribution of mosquito

nets etc against malaria eradication fulfil the criteria the test of commercial

expediency. We observe that the ld CIT(A) while confirming the addition

held as under:

“The assessee has explained that 51,000 mosquito nets were “distributed among the inhabitants of the surrounding villages in the periphery of the mining areas belonging to the assessee. The total expenditure incurred on purchase of mosquito nets amounts to Rs.1,24,39,665/- including entry tax. This expenditure does not fulfil the test of commercial expediency since there appears to be no business compulsion to distribute mosquito nets. There was also no direction from the district periphery development committee constituted by the Govt. of Odisha to incur such expenditure. Hence, this expenditure cannot be allowed as business expenditure. Similarly, the donation of Rs.4 lacs given to Social Health Education Development Society for water shed development cannot be considered as incurred for the purpose of business.”

except pointing out that mosquitos are distributed among the resident of

mining areas for the eradication of malaria. We also find that there is no

P a g e 67 | 68

Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

business connection of the assessee for donating Rs.4 lakhs for water shed

development to Social health Education Development Society, hence, we

affirm the findings of the ld CIT(A) in confirming the addition of

Rs.1,28,39,665/-. Ground No.3 of assessee for A.Y. 2013-14 is dismissed.

2013-14 are dismissed and appeal for the assessment year 2012-13 is

allowed whereas appeal for A.Y. 2013-14 is partly allowed.

Order pronounced on 26 /08/2020.

Sd/- sd/- (Laxmi Prasad Sahu) (Chandra Mohan Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER Cuttack; Dated 26 /8/2020 B.K.Parida, SPS Copy of the Order forwarded to : 1. The assessee: Smt. Indrani Patnaik A-6, Commercial Estate, Civil Township, Rourkela

By order

Sr.Pvt.secretary ITAT, Cuttack

P a g e 68 | 68