STAR CHEMICALS BOMBAY PRIVATE LIMITED ,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 3(3)(1), MUMBAI

The assessee is a company engaged in the business of manufacturing of chemicals. The assessee filed the return of income for AY 2017-18 on 16.10.2017 declaring total income of Rs. 11,12,10,730/- under the normal provisions of the Act and book profit of Rs. 11,38,95,095/- under section 115JB of the Act. For AY 2018-19 the assessee filed the return of income on 27.09.2018 declaring total income of Rs. 18,61,10,320/-.

For AY 2017-18 the AO noticed that the assessee has earned exempt income of Rs. 10,32,38,884/-. The AO further noticed that the assessee has made a suo- motu disallowance of Rs. 3,00,048/-. The AO held that the suo-motu disallowance is very meagre as compared to the exempt income earned by the assessee and accordingly made a disallowance of Rs. 1,70,74,071/- under section 14A r.w.r. 8D. The AO subsequently passed a rectification order against the petition filed by the assessee under section 154 reducing the disallowance to Rs. 68,31,057/-. On further appeal the CIT(A) confirmed the disallowance. The AO also made an adjustment to the book profits under section 115JB towards the disallowance made under section 14A. On further appeal the CIT(A), confirmed the disallowance made by the AO.

The ld.AR submitted that the AO has not examined the suo-motu disallowance made by the assessee but has simply rejected the same on the ground Star Chemicals Bombay Pvt. Ltd. that the assessee does not maintain separate set of books which is not a requirement under the Act. The ld. AR further submitted that the assessee has duly considered the expenses on scientific basis which can be attributed to the exempt income as dividend was received only once during the year and the director were not getting any remuneration. The ld. AR also submitted that the CIT(A) failed to consider that the in earlier year the Co-ordinate Bench has directed the AO to accept the suo-motu disallowance and the AO in the order giving effect has accepted the directions of the Tribunal (page no. 42 of PB). The ld. AR brought to our attention that the Co-ordinate Bench in assessee's own case for AY 2008-09 to 2011-12 considered the suo-motu disallowance and restored the matter back to the AO (page 44 to 53 of PB) and the AO in the order giving effect has restricted the disallowance to the suo-motu disallowance made by the assessee (page 56 and 59 of PB). Accordingly, the ld. AR argued that the facts for the year being identical, the lower authorities are not correct in not accepting the suo-motu disallowance made by the assessee.

The ld. DR on the other hand relied on the order of the lower authorities.

We heard the parties and perused the material on record. We notice that the similar issue in assessee's case has been considered by the Co-ordinate Bench for AY 2008-09 to 2011-12 vide order dated 07.07.2017 where it has been held that “7. We have considered rival contentions and carefully gone through the orders of the authorities below. From the record, we found that during the course of scrutiny assessment, AO made an addition of Rs.47,52,634/- to the returned income by applying the provisions of Rule 8D read with Section 14A of the Act. The A.O. has discussed the issue in para 4 of the assessment order. During the curse of assessment proceedings, the assessee company was asked to furnish details of expenses incurred for earning exempt income and also to show cause as to why the expenses incurred and claimed in respect of exempt income should not be disallowed as per the provisions of Section 14A read Star Chemicals Bombay Pvt. Ltd. with Rule 8D. We found that assessee has furnished detailed working and offered disallowance of Rs.9,90,000/-, Rs.6,93,852/-, Rs.2,41,311/- and Rs.9,91,574 for the A.Y.2008-09, 2009-10, 2010-11 & 2011-12 respectively.

In the working so furnished and placed at page 26,22,3 and 16 of the paper book of the respective assessment years, nowhere AO has pointed out that assessee has incurred expenditure more than the sum offered by the assessee. As per the verdict of Hon'ble Supreme Court Sub-Section (2) & (3) of Section 14A r.w.r. 8D prescribes 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. As per the Supreme Court, this is to be determined having regard to the accounts of the Assessee as placed before the AO and only where it is not possible to generate requisite satisfaction with regard to the correctness of the claim of the assessee, AO should go for computation as per Rule 8D.

From the record we found that method adopted by assessee for disallowance u/s.14A is consistent method which was also followed in earlier years as decided by AO u/s.143(3) of the IT Act. The method so followed by the assessee takes into account all the administrative expenses which could have been incurred to earn the exempt income. We also found that for A.Y.2008-09 & 2009-10 AO has not recorded any satisfaction for invoking Rule 8D and for A.Y. 2010-11 & 2011-12 not recorded any objective satisfaction.

We also found that dividend from Mutual Fund as a percentage of total dividend income as under:-

57% AY 2009-10

26% AY 2010-11

80% AY 2011-12

43%

Assessee has suo-moto disallowed STT expenses over and above 14A disallowance computed by assessee. However the AO has mechanically proceeded to compute the notional disallowance under Section 14A read with Rule 8D. Rule 8D can be invoked only if the AO having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee. For this proposition, reliance can be placed on Godrej & Boyce 12. Hon'ble Delhi High Court in the case of Maxopp Investment Limited ITR 347 ITR 272 held that the condition precedent for the AO to determine the amount of expenditure under Rule 8D is that he must record his satisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied, that the AO is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in Rule 8D(2). Furthermore, in view of the judicial pronouncements Section 14A read with Rule 8D is not applicable to investments which have not yielded any exempt income. Hence, while computing Rule 8D such investments must be excluded.

Keeping in view the totality of facts and circumstances of the case and applying the proposition of law laid down by Hon'ble Bombay High Court, part of which has been affirmed by the Hon'ble Supreme Court, we restore the matter back to the file of the AO for deciding afresh the disallowance warranted under Rule 8D having regard to the guidelines laid down by the Hon'ble Supreme Court in the case of Godrej And Boyce Mfg. Co. Ltd., in its order dated 08/05/2017. We direct accordingly.

Similar grounds have been taken in all the four years under consideration, following the reasoning given hereinabove, we restore the disallowance made under Rule 8D back to the file of the AO for deciding afresh in terms indicated hereinabove.”

We further notice that the AO in the order giving effect for AY 2008-09 (pg. 56 of PB) has restricted the disallowance under section 14A to the suo-motu disallowance made by the assessee. We also notice that the AO has similarly restricted the disallowance under section 14A for AY 2009-10 also (page 59 of PB). Since the facts for year under consideration are identical, we are restoring the impugned issue of disallowance under section 14A for the year under consideration also back to the AO with similar directions. Needless to say that the assessee be given a reasonable opportunity of being heard. Star Chemicals Bombay Pvt. Ltd. 9. For AY 2017-18 we notice that the AO has adjusted the book profit under section 115JB to the extent of disallowance under section 14A. This issue is settled by the decision of the Special Bench in the case of Vireet Investments Pvt. Ltd. in ITA No. 502/Del/2012 dated 16.06.2017 wherein it is held that “6.22 In view of the above discussion, we answer the question referred to us in favour of the assessee by holding that the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated ws.14A read with Rule 8D of the Income Tax Rules, 1962.”

Accordingly, we hold that the AO is not correct in adjusting the book profit with the disallowance under section 14A. We therefore, direct the AO to delete the adjustment made to the book profit under section 115JB of the Act.

For AY 2018-19, the assessee filed the return of income on 27.09.2018 declaring a total income of Rs.18,61,10,320. The assessee has made a suo-motu disallowance of Rs.7,83,490 under section 14A r.w.r.8D against the exempt income earned during the year. The AO while completing the assessment did not accept the submissions made by the assessee with regard to the disallowance made and proceeded to disallow 1% of average investments amounting to Rs.17,75,500. The AO after adjusting the suo-motu disallowance made an additional disallowance of Rs.9,92,010/- under section 14A. The CIT(A) on further appeal confirmed the disallowance made by the AO.

We heard the parties and perused the material on record. We notice that for AY 2018-19 the AO has made similar disallowance under section 14A for similar reasons as in AY 2017-18. During the course of hearing both the parties fairly agreed that the facts are identical for both the AYs. Therefore in our considered Star Chemicals Bombay Pvt. Ltd. view our decision for AY 2017-18 is mutatis mutandis applicable to AY 2018-19 also. Accordingly we restore the impugned issue back for AY 2018-19 also to the AO with similar directions. Needless to say that the assessee be given a reasonable opportunity of being heard. It is ordered accordingly.

In result, the appeals of the assessee for AY 2017-18 and 2018-19 are allowed for statistical purposes.