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Facts
The assessee filed two cross-appeals for AY 2012-13. The assessee's appeal challenged a disallowance under Section 14A for exempt income from an AOP, which the AO applied without recording satisfaction. The Revenue's appeal challenged the CIT(A)'s deletion of an addition made under Section 68 for unexplained cash deposits, which the assessee claimed were withdrawals from the AOP.
Held
For the Section 14A disallowance, the Tribunal held that the AO failed to record objective satisfaction as mandated by Section 14A(3) and Rule 8D(1) before applying Rule 8D, making the disallowance unsustainable. For the Section 68 addition, the Tribunal upheld the CIT(A)'s deletion, finding that the assessee had satisfactorily explained the source of cash from the AOP, establishing identity, genuineness, and creditworthiness.
Key Issues
1. Whether disallowance u/s 14A can be made without the AO recording objective satisfaction. 2. Whether an addition u/s 68 for cash deposits is justified when the source (AOP withdrawal) is explained and verified.
Sections Cited
14A, 8D, 143(3), 68
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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI YOGESH KUMAR U.S.
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in filed by the assessee and AY 2012-13, arise out of the order of the Commissioner of Income Tax (Appeals)-30, New Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. 56/14-15/1633 dated 22.05.2015 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated Page | 1 24.03.2014 by the Assessing Officer, DCIT, Central Circle-4, New Delhi (hereinafter referred to as „ld. AO‟). As these are cross appeals, they are taken up together and disposed of by this common order for the sake of convenience. for AY 2012-13 (assessee’s appeal)
The assessee has raised the additional grounds which are actually supporting the original grounds of appeal. Hence, those additional grounds are admitted and taken up along with original grounds of appeal.
3. The only issue to be decided in this appeal of the assessee is challenging the disallowance made u/s 14A of the Act read with Rule 8D(2) of the Income Tax Rules, 1962.
We have heard the rival submissions and perused the material available on record. The assessee is a limited company, engaged interalia, in the business of manufacturing the paper, having its plant at Rampur, Uttar Pradesh. The return of income for AY 2012-13 was filed by the assessee on 28.09.2012 declaring loss of Rs. 3,19,61,946/-, which was later revised on 03.04.2013 whereby the capital gains declared in the original return was sought to be revised. The assessee is a member of Association of Persons (AOP) styled as M/s Shiv Shakti Traders. Being a member of AOP, the assessee had derived share of profit from AOP of Rs. 41,57,028/- which was claimed as exempt in the return of income. This is the only exempt income claimed by the assessee. Against this exempt income, the ld AO invoked the provisions of Section 14A of the Act charging the assessee as to why the expenditure incurred for the purpose of earning such exempt income should not be disallowed in terms of Section 14A read with Rule 8D(2) of the Rules. The assessee responded that it had not incurred any expenditure for the purpose of earning share of profit from AOP and there is no need for the assessee to incur any expenditure as the entire expenditure had been incurred by the AOP. Accordingly, there is no need to make any disallowance u/s 14A of the Act. The ld AO completely ignored this submission of the assessee and proceeded to make disallowance of expenditure by applying the computation mechanism provided in Rule 8D(2) of the Rules under the 2nd and 3rd limb thereon and made disallowance u/s 14A of the Act in the sum of Rs. 3,54,45,358/- by considering all the investments made by the assessee. In appeal, the assessee also pleaded that only those investments which had actually yielded exempt income should be considered for the purpose of disallowance on without prejudice basis. Further, it was pointed out that the investments made by the assessee in AOP had turned negative in view of excess drawings made by the assessee from the AOP and that the computation mechanism provided in Ruled 8D(2) of the Rules fails for both 2nd and 3rd limb. Apart from this, the assessee also objected to the disallowance made u/s 14A of the Act on the ground that no objective satisfaction without cogent reasons was recorded by the ld AO on the plea made by the assessee that no expenditure was indeed incurred by the assessee for the purpose of earning the exempt income in the form of share of profit from AOP. The ld CIT(A) however disregarded the contentions of the assessee and confirmed the disallowance made by the ld AO.
At the outset, from the above narration of facts, it is very clear that the ld AO had simply resorted to make the disallowance u/s 14A of the Act applying the computation mechanism provided under Rule 8D(2) of the Rules, by completely ignoring the statement made by the assessee. The assessee had made varied submissions which are narrated hereinabove.
None of the submissions were even bothered to be addressed by both the lower authorities. We find that this is a classic case of non recording of objection satisfaction by the ld AO in terms of Section 14A(3) of the Act read with Rule 8D(1) of the Rules as to why the computation mechanism provided in Rule 8D(2) of the Rules need to be applied having regard to the accounts of the assessee. The recording of satisfaction is mandated in section 14A of the Act as well as in Rule 8D(1) of the Rules. Non recording of such satisfaction would become fatal to the disallowance per se. Reliance in this regard is placed on the decision of Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd Vs. DCIT (2017) 394 ITR 449 (SC) wherein it was held as under:-
“37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.
Further, the Hon‟ble Jurisdictional High Court in the case of PCIT Vs. Hindustan Clean Energy Ltd in of 2018 dated 05.07.2018 had held as under:-
“In the present case, however, the Assessing Officer ('AO') without recording required satisfaction on "having regard to the accounts of the Assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the Assessee", had invoked and applied Rule 8D as a mandatory provision applicable in Page | 4 all cases of exempt income. Action of the AO was contrary to law and, therefore, there is no merit in the present appeal. We would, however, clarify that we have not affirmed and accepted the view expressed by the Commissioner of Income Tax (Appeals) that provisions of Section 14A and Rule 8D cannot be invoked in case the assesesee was an investment company, or the shares were procured for the purpose of the strategic investments, in view of the decision of the Supreme Court in Maxopp Investment Ltd. v. Commissioner of Income Tax, [2018] 402 ITR 640(SC). Recording the aforesaid, the appeal is dismissed in limine, without notice being issued.”
Respectfully following the same, we hold that this is not fit case to make disallowance u/s 14A of the Act. In view of this decision, the other propositions argued by the ld AR need not be gone into and they are left open. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee in is allowed.
The only effective issue to be decided in this appeal is as to whether the ld CIT(A) was justified in deleting the addition of Rs. 13.95 crores made by the ld AO on account of unexplained cash deposit u/s 68 of the Act in the facts and circumstances of the instant case.
We have heard the rival submissions and perused the material available on record. During the course of survey conducted at the office of M/s Ginni Arts at Chandni Chowk, Delhi, ledger of the assessee in the books of account of M/s. Shiv Shakti Traders was found and impounded evidencing cash payment of Rs. 13.95 crores by M/s. Shiv Shakti Traders to the assessee. During the course of assessment proceedings, a show cause notice vide letter dated 06.12.2013 was issued to the assessee to explain the entire transactions which was impounded. In response to the same, the assessee submitted that it is a member of AOP M/s. Shiv Shakti Traders w.e.f. 01.04.2011 vide Memorandum of Association duly executed between the said AOP and its members. It was also clearly pointed out that the assessee become a member of AOP only w.e.f 01.04.2011 and not earlier. The assessee company for its own purpose, in its capacity as a member of AOP had withdrawn a sum of Rs. 13.95 crores in cash from AOP from the funds available with the said AOP on various dates. It was submitted that the said AOP had rightly debited the account of the member i.e. assessee herein, to the extent of withdrawals made by its member. The assessee submitted the copy of its ledger account as appearing in the books of AOP which was also found during the course of search. The assessee made an initial contribution of Rs. 5 lakhs in cash in the said AOP while become member. During the course of survey on 01.12.2012, Memorandum of Association (MOA) dated 01.04.2008 amongst various members of AOP was found and seized. It was specifically pointed that in this Memorandum of Association, the assessee name does not figure as it was not a member of the AOP up to 31.03.2011 and that it became member of the AOP only from 01.04.2011. So, the assessee withdrew cash from the AOP on various dates during the year under consideration and deposited the same in its bank account to the extent of Rs. 13.95 crores. It was also pointed out that the AOP is engaged in the business of retail vending of liquor and that all the members of the AOP were possessing licenses in their individual names and accordingly had become member of the AOP. Pursuant to the licenses held by individual members of the AOP, the AOP based on mutual consent of the members had executed and carried out the business of retail vending of liquor. The entire liquor proceeds were reflected in the books of accounts of the AOP and in their income tax returns. During the year under consideration, the AOP had reflected sales of Rs. 552.75 crores which is evident from their profit and loss account enclosed in page 112 of the Paper Book. It is not in dispute that in the business of retail vending of liquor carried out by AOP, the sales were made in cash. Hence, the capacity of the AOP to hold huge cash is established beyond reasonable doubt. It is also pertinent to note that both the assessee as well as the AOP are assessed by the very same AO and the scrutiny assessment order of the AOP for AY 2012-13 was framed u/s 143(3) of the Act on 07.08.2014 accepting the return of income of Rs. 13,00,16,350/-. The transaction of withdrawal of cash by the assessee from the AOP have been duly reflected in the books of AOP by proper debit to the assessee‟s account. Having such cash withdrawals as a source, the assessee had deposited the said cash in its bank account to the extent of Rs. 13.95 crores. Hence, the cash deposits made by the assessee in its bank account to the extent of Rs. 13.95 crores stands properly explained with adequate sources. Hence, the same cannot be subject matter of any unexplained cash deposit u/s 68 of the Act. The identity of the person from whom the cash was withdrawn by the assessee i.e. AOP is established by the scrutiny assessment order framed by the very same AO on 07.08.2014 for the year under consideration. The genuineness of the transaction of withdrawal of cash from the AOP and assessee‟s transaction with the AOP have been duly reflected in books of account by both the parties which have been examined and accepted by the very same AO in the scrutiny assessment proceedings. As stated earlier, since the AOP was engaged in retail vending of liquor where sales have been made in cash to the extent of Rs. 552.75 crores, the capacity and creditworthiness of the AOP to hold huge cash and enable the assessee company to withdraw the said cash in the capacity of member of AOP stand established beyond reasonable doubt. Hence, all the 3 ingredients of section 68 of the Act had been duly fulfilled by the assessee in the instant case. The ld CIT(A) had duly appreciated all these facts and had deleted the addition made u/s 68 of the Act, on which we do not find any infirmity. Further it is also pertinent to note that the ld AO had accepted the fact that assessee is a member of AOP and had indeed derived exempt income in the form of share of profit from AOP, while making the disallowance u/s 14A of the Act which is the subject matter of appeal by the assessee. Whereas, when it comes to withdrawal of cash by the assessee from the said AOP, the same is sought to be disbelieved on the ground that there is no proof brought on record by the assessee that it is a member of the AOP. On the contrary, the assessee had duly filed the Memorandum of Association dated 1.4.2011 stating that it had become member of AOP only on 1.4.2011. Hence reliance placed by the ld AO on the seized document at the time of survey containing the old Memorandum of Association is totally misplaced. Accordingly, the grounds raised by the revenue are dismissed.
To sum up, the appeal of the assessee is allowed and the appeal of the revenue is dismissed.