ACIT, , SAMBALPUR vs. SMT. INDRANI PATNAIK, ROURKELA

O R D E R Per Bench : This is an appeal filed by the revenue against the order of the ld. CIT(A)-2, Bhubaneswar, dated 29.03.2023, passed in I.T.Appeal No.Bhubaneswar-2/10625/2018-19 for the assessment year 2019-2020, on the following grounds of appeal :-

2. The CIT(A) erred in deleting the addition of Rs. 10,69,56,849/- u/s 14A as the assessee has exempt income during the year.

3. The CIT(A) was not correct in deleting the addition u/s 14A holding that satisfaction is not recorded by the AO, when the assessee has not suomoto disallowed any expenditure related to earning exempt income as decided by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd dtd 12.02.2018.

4. The CIT(A) was not correct in deleting the addition u/s 14A, when the AO has given a finding in the assessment order that the assessee has shown investment that yielded tax free Rule 8D of the Act, which is the only way available to calculate, when the expenditure attributable to earning of such income is not ascertainable?

5. Any other ground of appeal that may arise at the time of hearing.

2. Briefly stated the facts of the case are that the assessee is an individual, engaged in the business of mining and power generation. A search and seizure operation u/s.132 of the Act was carried out on 11.01.2019 at the business and residential premises of the assessee. Thereafter the proceedings u/s.153A of the Act were carried out. The impugned order being the abated year, therefore, the assessment was completed u/s.143(3) of the Act, wherein certain additions/disallowances were made on the income declared by the assessee. Against the said additions, the assessee preferred appeal before the ld. CIT(A), who partly allowed the appeal of the assessee, against which the revenue is in appeal before us. Ground No.1:

3. This ground pertains to disallowance made by the ld. AO out of periphery development charges of Rs.49,49,231/- and deleted by the ld. CIT(A).

4. The ld. CIT-DR submitted that the assessee has incurred the expenses on account of beautification of Sana Ghaghra Waterfall and some amount was given to Odisha Forest Development Corporation for purchases of firewood. He submitted that these expenses are in the nature of personal expenses, and, therefore, should not be considered as business expenditure incurred for the purpose of business. He further submitted that the assessee is engaged in the business of mining and beautification of Sanaghaghara Waterfall is not related to his business activity. He further placed reliance on the decision of the Hon'ble Gujarat High Court in the case of CIT Vs. Navsari Cotton & Silk Mills Ltd. [1982]135 ITR 546 (Guj), wherein the Hon'ble High Court has laid down three essential conditions to be satisfied for claiming deduction u/s.37 of the Act. According to the ld. CIT-DR the present case passes the negative tests as laid down by Hon’ble Court, therefore, the expenses are not allowable u/s.37(1) of the Act. He, therefore, prayed for the restoration of the disallowance deleted by the ld. CIT(A).

5. On the other hand, ld. AR of the assessee submitted that the AO has made the disallowance by treating the expenses as CSR Expenses u/s.135 of the Companies Act and since the assessee is an individual, the provisions of Companies Act are not applicable in the present case. According to the ld. AR the expenses of Rs.44,77,031/- was incurred on account of development of Sanaghagara Waterfall in terms of the direction given by District Collector. Since the assessee's mining area is situated nearby, therefore, it is in the interest of the business to develop the side area for the betterment of the life of labourer employed at the work site. With regard to the payment of Rs.4,72,200/- to the forest department, the ld. AR submitted that the said amount was paid for purchase of firewood which was supplied to the local villagers. The labourer are staying nearby the mining area and to protect the forest from cutting trees for firewoods and to conserve the environment, assessee had purchased firewoods from the forest corporation and distributed the same amongst the villagers who incidentally are its labourers. In this way, the assessee had achieved two targets, first providing better facilities to its labourers who need not to go to dense forest to collect the firewoods and secondly by developing the waterfall area, providing them better environment so that they will persuade to work with assessee. He, therefore, submitted that since these expenses were incurred wholly and exclusively in the interest of business and furtherance of the day-to-day business affairs of the assessee, therefore, ld. CIT(A) has rightly deleted the same and he prayed accordingly.

6. We have considered the rival submissions and perused the material available on record. Ld. CIT(A) while allowing the appeal of the assessee on this account has made following observations in para 7.3.4 & 7.3.5 of the order :- 7.3.4 Documents reveal the following: a. As per proceedings of the review meeting held on 06.02.2018 at Durbar Hall of Collectorate, Keonjhar on C.S.R. (Anex-I), the assessee was assigned the job of beautification of Sanaghagara Water fall. Consequent to this, the assessee made these payments to different parties as given below: i. Sashwatee Construction 28.07.2018 Rs.35.14 lakhs Sashwatee Construction 06.11.2018 Rs.46,312.00 ii. Aurobinda Mohanty 13.10.2018 Rs.2.75 lakhs Total : Rs.38.36 lakhs iii. Misc. Expenses for this project Rs.6.40 lakhs Grand Total : Rs.44.76 lakhs b. The assessee further paid of RsA.72 lakhs to Orissa Forest Development Corporation. c As per Government of Odisha, Department of Steel and Mines, Notification dtd 15.1.2004 - incorporating the Policy on grant of mining lease - the amount of expenditure towards periphery development should be spent through the district committee/society, local authority for the development of health, education, communication, irrigation and agriculture. d. The assessee incurred the expenditure to comply with the provisions of Environmental Clearance (EC) The villagers staying around the mining area were in practice of collecting Fire-woods by cutting the trees, To prevent them from destroying forest and to protect environment, the appellant has been following the practice of supplying Fire-woods to the villagers. In this process, the Fire-woods has been purchased from Forest Corporation and distributed among the villagers. This is a long-standing practice to protect the environment around the mining area 7.3.5 It has been decreed by Hon'ble Supreme Court in the case of Travancore Titanium Products Ltd., an expenditure will be allowed only when it is incidental to the business & must have been necessitated by commercial expediency. In view of the above factual matrix & judicial pronouncements, I am of the considered view that this was an expenditure which has been dictated by the District, Collector and is meant to be spent towards the welfare of the adjoining areas of the mines. Further, the payment to Orissa Forest Development Corporation (OFDC) has been made to protect the environment. This expenditure is warranted to enable the assessee to continue her business in an uninterrupted & seamless manner & hence, this is definitely related to commercial expediency. Consequently, the addition on this score is deleted.

7. In this case, the assessee is engaged in the business of mining of iron ore and mining area is situated in the hill areas and in dense forest where availability of the labour is a difficult issue. For this, the assessee has to depend upon the availability of local labour and in order to procure and prevent the local labour, some benefits in the shape of their better livelihood condition has to be provided which is also in the interest of business. In this process, the assessee has spent some amount towards the development of the waterfall area which will result into better living facilities to the local residents employed with the assessee. This development was also required to be done as directed by the local administration i.e District Collector, Keonjhar with whom assessee requires various approvals/supervision on daily basis. It is in the interest of business that any such direction given by local authority needs to be followed by the assessee. Further, the assessee had provided firewoods to the local residents, which ultimately worked as its labourers and with the availability of firewood they do not require to visit dense forest for the same, therefore, such expenditure is also in the interest of the business. Now, coming to the judgment relied on by the ld CIT-DR, in the case of Navsari Cotton & Silk Mills Ltd., reported [1982] 135 ITR 546 (Guj), the Hon'ble Gujarat High Court laid down following three conditions in that order to claim deduction u/s.37(1) of the Act :-

1. 1. It must be expenditure in the nature of revenue expenditure and not in the nature of capital expenditure.

2. It must be laid out or expended wholly and exclusively for the purpose of the business or profession.

3. It must not be of the nature described in ss. 30 to 36 and s. 80 VV (which is enforced with effect from April 1, 1976). To fulfill these conditions, two tests were evolved and they called (i) Positive Test and (ii) Negative Test.

8. According to ld. CIT-DR assessee is fulfills negative tests, as these expenses are incurred for a mere altruistic consideration and to satisfy his philanthropic urges. However, in our view, as discussed above, looking to the nature of the expenditure incurred by the assessee, we find that the assessee is not qualified in none of the negative tests as laid down by Hon’ble Court. These expenses were not incurred for mere altruistic consideration of the assessee rather they were spent solely for the betterment of the business environment and for the better and smooth living conditions of the local labour. Further the same were also not incurred to satisfy philanthropic urges as discussed above. Rather the assessee's case fulfills the conditions for positive tests as described by the Hon'ble Court and accordingly all the three basic conditions to claim deduction u/s.37(1) of the Act are passed by the assessee. Thus, the expenditure incurred is wholly and exclusively for the purpose of business and, therefore, ld. CIT(A) has rightly allowed the same and the said order is hereby upheld on this score.

related to the action of ld. CIT(A) in deleting of the addition of Rs.10,69,56,849/- made by the AO u/s.14A of the Act. The AO by observing that the assessee has made investments which has yielded exempt income and further observed that assessee has claimed expenditure under the head financial charges in the profit and loss account, concluded that there must be some expenses incurred to earn such exempt income. Accordingly after invoking the provisions of Rule 8D of IT Rules, had made addition of Rs.10,69,56,849/- u/s.14A of the Act. The ld. CIT(A) after considering the facts of the case and submission of the assessee has deleted the addition. Against the order of the ld. CIT(A), the revenue is in appeal before us.

11. During the course of hearing, ld. CIT-DR contended that the ld. CIT(A) without appreciating the fact that the assessee has made AO. He further submitted that while deleting the addition made by the AO, the ld. CIT(A) has not made out any case that the assessee’s own funds were involved in making such investments nor any detailed discussion has been made in the appellate order. Solely relying upon the submission made by the assessee, the ld. CIT(A) deleted the addition, which deserves to be reversed. Thus, the ld. CIT-DR prayed for restoration of the addition made by the AO in this regard.

12. On the other hand, ld. AR of the assessee strongly supported the order of the ld. CIT(A) and submitted that the assessee is having sufficient capital for making such investments. He further submitted that disallowance of similar nature in the preceding assessment years was also made where the same was deleted by the coordinate bench of the Tribunal in A.Y.2012-2013 & 2013-2014 in & 394/CTK/2017 vide order dated 26.08.2020. He further submitted that while deleting the addition, ld. CIT(A) relied upon the abovesaid decision of this Bench of the Tribunal in the case of assessee herself. Therefore, this issue is squarely covered in favour of the assessee and he prayed for confirming the order of the ld. CIT(A).

13. We have considered the rival submissions and perused the material available on record. In this case, undisputedly, the assessee is having investments in the mutual funds and equity shares of various private limited companies. It appears that all the investments in private limited companies are the group companies. During the year the assessee has also received dividend from the mutual funds of Rs.21,50,000/-, which was claimed as exempt u/s.10(35) of the Act. From the perusal of the assessment order, we find that the AO has invoked the provisions of Rule 8D for the reason that there were investments in mutual funds and equity shares from which exempt income was earned and simultaneously assessee has paid interest, therefore, the AO was of the view that there might be some interest bearing funds involved in making investments from which such exempt income is earned. However, while observing so, no nexus between the borrowed funds and the investment made by the assessee has been established. From the perusal Balance Sheet placed in the paper book filed before us, it is seen that the assessee as on 01.04.2018 is having opening capital of Rs.1503,95,86,841.42 and investments as on 01.04.2018 at Rs.725,24,85,703.52 whereas corresponding closing capital as on 31.03.2019 was of Rs.1781,22,06,683.29 and the investments was of Rs.815,62,10,344.87. Absolutely the capital is almost double of the amount of investment made by the assessee. This capital is accumulated over the years with the assessee after payment of taxes and constitutes interest free funds available with the assessee for making any use including the investments. It is settled proposition that where the no nexus can be established between the funds borrowed and investment shape, it could be safely presumed that the interest free funds available in the shape on capital are applied for making such investments. In this regard, reliance can be Hon’ble supreme Court in the case of South India Vs. CIT, reported in [2021] 130 taxmann.com 178 (SC), wherein the Hon’ble Apex Court has held as under :- Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to exempt income not includible in total income (General) - Assessee-scheduled banks earned income from investments made in tax-free securities - Assessing Officer made proportionate disallowance of interest attributable to funds invested to earn tax free income under section 14A on grounds that separate accounts were not maintained for investment in tax-free securities - Whether since interest free own funds available with assessee exceeded their investments; investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A on ground that separate accounts were not maintained by assessee for investments and other expenditure incurred for earning tax-free income - Held, yes [Para 27] [In favour of assessee] 14. Further the Hon’ble Supreme Court in the case of Hero Cycles, reported in [2015] 379 ITR 347 (SC), has considered this issue and held as under :- Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital (Interest free loans) - Assessment year 1988-89 - Whether once it is established that there is nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself), revenue cannot justifiably claim to put itself in arm- chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case - Held, yes - Assessee filed its return claiming deduction of interest paid on borrowed sums from Bank under section 36(1)(iii) - Assessing Officer finding that assessee had used borrowed funds for giving interest free loans to its subsidiary company and directors, rejected assessee's claim - High Court upheld order of Assessing Officer - It was noted that advance to subsidiary company became imperative as a business expediency in view of undertaking given to financial institutions by assessee to effect that it would provide additional margin to subsidiary company to meet working capital for meeting any cash losses - Insofar as loans to directors were concerned, said loans were granted out of assessee's own surplus funds - Whether in view of aforesaid, impugned order passed by High Court was to be set aside - Held, yes [In favour of assessee]

15. Further the Hon’ble Supreme Court in the case of Reliance Utilities & Power Ltd., reported in [2009] 313 ITR 340 (Bombay), has held the expression as under :- Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessee-company was engaged in business of generation of power - It had made investments in its sister concern from January, 2000 to March, 2000 - Assessing Officer was of view that sum of Rs. 213 crores was invested out of assessee's own funds and Rs. 147 crores was invested out of borrowed funds - Accordingly, Assessing Officer disallowed a part of interest claimed - On appeal, assessee-company contended that it had interest-free funds worth Rs. 398 crores comprising of share capital, reserves and surplus and depreciation reserves and, thus, entire investment had been made in sister concern out of interest-free funds - Commissioner (Appeals) accepted assessee's contention and directed Assessing Officer to allow entire amount of interest under section 36(1)(iii) - Tribunal upheld order of Commissioner (Appeals) - On instant appeal, it was seen that Commissioner (Appeals) as also Tribunal had recorded a clear finding that assessee had interest-free funds of its own which had been generated in course of year commencing from 1-4-1999 - Further, in terms of balance- sheet there was an availability of Rs. 398.19 crores including Rs. 180 crores of share capital - Whether if there are funds available, both, interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of interest- free funds generated or available with company, provided said funds are sufficient to meet investments - Held, yes - Whether since, in instant case, said presumption was clearly established in view of findings recorded by Commissioner (Appeals) and Tribunal, impugned order passed by said authorities was to be affirmed - Held, yes 16. Reliance can also be placed on the decision of the Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Winsome Textile Industries Ltd., reported in [2009] 319 ITR 204 (P&H) and on the decision of Hon’ble Gujarat High Court in the case of CIT Vs. Suzlon Energy Ltd (Gujarat) in Tax Appeal No.223 of 2013, dated 03.04.2013. 17. In view of the above discussion and considering the fact that the assessee is having interest free funds available with her in the shape of own capital which is sufficient to cover the value of investments, we are of