M/S.FLSMIDTH PVT.LTD vs. THE DEPUTY COMMISSIONER OF

TCA.No.431 of 2018 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 22.7.2020 CORAM THE HONOURABLE MR. JUSTICE T.S.SIVAGNANAM AND THE HONOURABLE MRS. JUSTICE V.BHAVANI SUBBAROYAN TAX CASE APPEAL NO.431 OF 2018 (heard through video conferencing)

M/s.FLSmidth Pvt. Ltd., Chennai-603103. ...Appellant Vs The Deputy Commissioner of Income Tax, Corporate Circle-2(1), Chennai. ...Respondent

APPEAL under Section 260A of the Income Tax Act, 1961 against the order dated 20.3.2018 made in ITA.No.2087/Chny/2017 on the file of the Income Tax Appellate Tribunal, Chennai ‘D’ Bench for the assessment year 2009-10.

1/18 http://www.judis.nic.in TCA.No.431 of 2018 For Appellant : Ms.Sri Niranjani & Mr.G.Baskar

For Respondent : Mr.Karthik Ranganathan, SSC

Assisted by Mr.S.Rajesh, JSC

Judgment was delivered by T.S.SIVAGNANAM,J We have heard Ms.Sri Niranjani, learned counsel and Mr.G.Baskar, learned counsel appearing for the appellant – assessee and Mr.Karthik Ranganathan, learned Senior Standing Counsel assisted by Mr.S. Rajesh, learned Junior Standing Counsel appearing for the respondent – Revenue. 2. This appeal by the Revenue under Section 260A of the Income Tax Act, 1951 (for short, the Act) is directed against the order dated 20.3.2018 made in ITA.No.2087/Chny/2017 on the file of the Income Tax Appellate Tribunal, Chennai ‘D’ Bench (for brevity, the Tribunal) for the assessment year 2009-10. 3. The appeal has been admitted on 10.8.2018 on the following substantial question of law :

“Whether, on facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in confirming the disallowance made by the 2/18 http://www.judis.nic.in TCA.No.431 of 2018 Assessing Officer under Section 14A of the Act in the absence of any cogent satisfaction for disregarding the voluntary disallowance made by the appellant ? 4. The assessee, which is a manufacturing company, filed its return of income on 30.9.2009 for the assessment year 2009-10 admitting a total income of Rs.2,00,46,53,580/-. The return was processed under Section 143(1) of the Act. Subsequently, a revised return was filed on 28.3.2011 declaring a total income of Rs.2,02,56,55,520/- and the same was processed on 31.3.2012. A demand of Rs.91,86,31,420/- was raised. In the meanwhile, the case was selected for scrutiny and a notice under Section 143(2) of the Act dated 23.8.2010 was issued to the assessee. 5. The Assessing Officer, among other issues, considered the disallowance under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (for short, the Rules). The assessee held investments in shares and mutual funds to the tune of Rs.1,32,39,84,480/- and earned a dividend income to the tune of Rs.11,48,08,342/- from such investments and claimed the entire amount as exempt. The assessee, on their own accord, debited an amount of Rs.1,44,000/- as expenditure for earning the exempt 3/18 http://www.judis.nic.in TCA.No.431 of 2018 income, which was disallowed under Section 14A of the Act in the income computation statement. 6. The Assessing Officer, noting the quantum of investments held by the assessee and the dividend income earned from such investments, was, prima facie, not satisfied with the working provided by the assessee for arriving at the disallowance under Section 14A of the Act. Therefore, a show cause notice was issued to the assessee calling upon them to explain as to why Rule 8D of the Rules should not be invoked to compute the expense attributable for earning exempt income. The assessee, vide letter dated 18.12.2012, stated that the dividend income was earned from investments in mutual funds, which were made from the surplus funds available with the company, that only salary cost of personnel involved in buying and selling of mutual funds amounting to Rs.1,44,000/- was incurred for earning such dividend income and that therefore, the same was disallowed under Section 14A of the Act. 7. The Assessing Officer was not convinced with the explanation offered by the assessee and held that a portion of managerial remuneration and directors’ remuneration should also be attributed towards the dividend earning activity by the assessee. Accordingly, 4/18 http://www.judis.nic.in TCA.No.431 of 2018 Rule 8D of the Rules was pressed into service and a disallowance of Rs.52,72,554/- was made. 8. Aggrieved by the order of assessment dated 27.3.2013, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals)-9, Chennai-34 [hereinafter called the CIT(A)]. The assessee contended that Section 14A of the Act read with Rule 8D of the Rules had no application to the assessee’s case, that what were invested were surplus funds generated from the business activity of the assessee and that the assessee had not incurred any other cost apart from the amounts specified in the return filed. The CIT(A) was not convinced with the contentions advanced by the assessee and accordingly dismissed the appeal by order dated 30.5.2017 and confirmed the findings of the Assessing Officer. With regard to other issues, the appeal filed by the assessee was partly allowed, as against which, the Revenue filed an appeal before the Tribunal. In that, the assessee filed a cross objection with regard to disallowance under Section 14A of the Act. 9. The Tribunal considered the submissions of the assessee and found that the disallowance as computed by the Assessing Officer by applying the formula under Rule 8D(2)(iii) of the Rules did not call for 5/18 http://www.judis.nic.in TCA.No.431 of 2018 any interference. Ultimately, both the appeal filed by the Revenue as well as the cross objection filed by the assessee stood dismissed by the impugned order dated 20.3.2018. As against the order of dismissal, the assessee alone is before us. 10. The questions to be decided by us in this appeal are as to whether the disallowance made by the Assessing Officer was proper and as to whether the assessee was right in contending that there were no cogent reasons recorded by the Assessing Officer with regard to his satisfaction as to the correctness of the voluntary disallowance made by the assessee. 11. Both the learned counsel appearing for the assessee have drawn the attention of this Court to the findings recorded by the Assessing Officer, the CIT(A) and the Tribunal and submit that the satisfaction of the Assessing Officer has to be objectively arrived at on the basis of the accounts and after considering all the relevant facts and circumstances. The method prescribed under Rule 8D of the Rules would be applicable only when the claim made by the assessee, in respect of the expenditure, which is relatable to the earning of income and which does not form part of the total income under the Act, is found to be incorrect. 6/18 http://www.judis.nic.in TCA.No.431 of 2018 12. It is further submitted by the learned counsel for the assessee that the non satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. It is also submitted that in the instant case, all that the Assessing Officer had done is a guess work and he did not record a conclusion as to why he was not satisfied with the disallowance offered by the assessee. 13. In support of their contention, the learned counsel for the assessee have relied upon the decisions (i) of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT, New Delhi [reported in (2018) 402 ITR 640];

(ii) of the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [reported in (2017) 81 Taxmann.com 111]; (iii) of the Bombay High Court in the case of PCIT-3, Mumbai Vs. Reliance Capital Asset Management Ltd. [reported in (2018) 400 ITR 217]; and

7/18 http://www.judis.nic.in TCA.No.431 of 2018 (iv) of the Bombay High Court in the case of PCIT-2 Vs. Bombay Stock Exchange Ltd. [reported in (2020) 113 Taxmann. Com 303]. 14. Therefore, it is submitted by both the learned counsel for the assessee that concurrently all the three authorities erroneously applied the provisions of Rule 8D of the Rules without recording satisfaction, which is mandated under Section 14A(2) of the Act. They, while explaining the nature of transaction done by the assessee, have referred to the statement of accounts and submitted that the surplus funds available with the assessee are being invested in mutual funds and the expenditure incurred has been rightly arrived at and nothing more was incurred by the assessee. It is further submitted that the Assessing Officer committed an error, which goes to the root of the matter and prayed for setting aside the order passed by the Tribunal as well as the Authorities below. 15. Per contra, Mr.Karthik Ranganathan, learned Senior Standing Counsel assisted by Mr.S.Rajesh, learned Junior Standing Counsel appearing for the Revenue submits that the satisfaction should be recorded by the Assessing Officer in terms of Section 14A(2) of the Act in regard to the assets of the assessee and with regard to the 8/18 http://www.judis.nic.in TCA.No.431 of 2018 correctness of the claim made by the assessee in respect of such expenditure in relation to income, which does not form part of total income. 16. To explain the subtle difference between satisfaction to be recorded by the Assessing Officer under Section 14A(2) of the Act and satisfaction to be recorded under Section 145(3) of the Act as quite distinct, Section 145(3) of the Act is referred to. It is submitted by the learned Senior Standing Counsel appearing for the Revenue that the decisions relied upon by the learned counsel appearing for the assessee would not apply to the facts of the case, because, in those cases, the Assessing Officer straight away resorted to the computation machinery provided under Rule 8D of the Rules without recording satisfaction under Section 14A(2) of the Act whereas in the case on hand, the Assessing Officer recorded satisfaction, which has been confirmed by the CIT(A) as well as the Tribunal and therefore, there is no error in the decision making process by the Assessing Officer or the decision itself. With the above submissions, the learned Senior Standing Counsel appearing for the Revenue has prayed for sustaining the decision of the Tribunal and answering the question against the assessee. 9/18 http://www.judis.nic.in TCA.No.431 of 2018 17. We have carefully considered the submissions of the learned counsel on either side. 18. Now, what we are required to examine is as to whether such a satisfaction has been arrived at by the Assessing Officer having regard to the suo motu disallowance claimed by the assessee in the context of its accounts. Further, what we will have to examine is the factual position. 19. As noticed above, the assessee was issued a show cause notice calling upon them to explain as to why the provisions of Rule 8D of the Rules should not be invoked to compute the expenses attributable for earning exempt income. While issuing the show cause notice, the Assessing Officer, prima facie, recorded his dis-satisfaction, which is evident from a reading of the assessment order wherein the Assessing Officer stated that he was not satisfied with the quantum of expenses claimed by the assessee as attributable for earning exempt income. 20. In other words, issuance of show cause notice calling upon the assessee to explain pre-supposes a prima facie opinion formed by the Assessing Officer with regard to the accounts of the assessee. Therefore, once a show cause notice is issued, the assessee is 10/18 http://www.judis.nic.in TCA.No.431 of 2018 informed about the prima facie view of the Assessing Officer. However, the Assessing Officer cannot have a closed mind while issuing a show cause notice. The assessee rightly understood the prima facie opinion formed by the Assessing Officer with regard to the expenses claimed by the assessee attributable for earning exempt income and precisely for such a reason, the assessee submitted a reply dated 18.12.2012. In the said reply, the assessee took a stand that they incurred expenses of Rs.1,44,000/- being cost of personnel involved in buying and selling of mutual funds. 21. The Assessing Officer examined the said submission of the assessee having regard to the accounts of the assessee and rejected the stand taken by the assessee. The reasons are contained in paragraph 5.3 of the impugned order, which we quote for easy reference, as hereunder : “The assessee’s submissions were carefully considered. Though the assessee is not in the business of making investments in shares, the assessee keeps more than 1/3rd of its assets in the form of investments. As seen from the balance sheet as on 31.3.2009, the total value of assets is Rs.514,25,32,150/-, 11/18 http://www.judis.nic.in TCA.No.431 of 2018 out of which, investments are held to the tune of Rs.132,39,84,480/-. Considering the volume of investments held by the assessee and the amount of exempted income earned out of it and the management skill required to maintain such investment portfolio, the quantum of expenditure computed by the assessee is not acceptable. Further, the assessee incurs routine expenditure to maintain its establishment and towards administration, a portion of which can be attributed towards the activity of earning dividend. The assessee also incurs managerial remuneration and claims the whole of the same as an expenditure. The managerial staff and the directors are involved in making decisions on investments. Such being the case, a portion of this managerial remuneration and directors remuneration should also be attributed towards the dividend earning activity by the assessee.”

22.7.2020 RS 17/18 http://www.judis.nic.in TCA.No.431 of 2018 T.S.SIVAGNANAM, J AND V.BHAVANI SUBBAROYAN, J

RS To 1.The Income Tax Appellate Tribunal, Chennai ‘D’ Bench. 2.The Deputy Commissioner of Income Tax, Corporate Circle-2(1), Chennai.

TCA.No.431 of 2018

22.7.2020 18/18 http://www.judis.nic.in