WELSPUN STEEL LTD. (SUCCESSOR IN INTEREST TO WELSPUN ENERGY PVT. LTD.),MUMBAI vs. ITO 8(3)(2), MUMBAI

The relevant facts are that the Assessee, a company engaged in the business of generation, transmission and distribution of electricity, filed return of income on 27.11.2014 which was revised on 30.03.2015 declaring income of INR 61,00,25,910/-. The case of the Assessee was selected for scrutiny and notice under Section 143(2) and 142(1) of the Act were issued to the Assessee. During the course of assessment, Assessing Officer observed that the Assessee has earned exempt dividend income of INR 52,85,697/- and has not made any disallowance under Section 14A of the Act. Accordingly, the Assessee was asked to show-cause why disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as „the Rules‟) should not be made vide order-sheet noting, dated 15.11.2016. In response to the same, the Assessee filed letter, dated 25.10.2016, stating inter alia, that borrowed funds were not utilised for the making investment which have yielded dividend income. The Assessing Officer rejected the contention of the Assessee that no expenditure had been incurred for earning the exempt income observing that the Assessee was not engaged in investment activity and , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 therefore must have incurred some expenditure for earning exempt income. The Assessing Officer proceeded to compute disallowance in accordance with Rule 8D of the Rules and made a disallowance of INR 4,98,43,035/- under the normal provisions of the Act. The Assessing Officer also added the aforesaid amount while computing book profits under the provisions of Section 115JB of the Act.

Being aggrieved, the Assessee carried this issue in appeal before CIT(A). The CIT(A) held that investments made by the Appellant was much more than the interest free own funds available with the Assessee and therefore, the Assessing Officer was justified in making disallowance under Rule 8D(2)(ii) of the Act. The CIT(A) rejected the claim of the Assessee that no expenditure was incurred for earning exempt income and concluded that disallowance was required to be made under Rule 8D(2)(iii) of the Rules. The CIT(A), however, restricted the disallowance under Section 14A of the Act to the amount of exempt income of INR 52,85,697/- earned by the Assessee. As regards, computation of books profits under Section 115JB of the Act, the CIT(A) granted relief to the Assessee following the decision of Special Bench of the Tribunal in the case of ACIT vs. Vireet Investment (P) Ltd. (2017) 82 taxmann.com 415. The CIT(A) restricted the addition to book profits in terms of Clause (f) of Explanation 1 to Section 115JB(2) of the Act to INR 5,28,570/- (being 10% of exempt dividend income of earned by the Assessee) by following the decision of the Mumbai Bench of the Tribunal in the case Reliance Natural Resources Ltd (Assessment Year 2009-10), dated 11.08.2017. , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15

Being aggrieved by the order passed by the CIT(A), both, the Assessee as well as the Revenue are in appeal before us in the present cross-appeals.

We would first take up Ground No. 1(b) raised by the Assessee in appeal as it goes to the route of the matter.

In the Ground No. 1(b), the Assessee has contended that the Assessing Officer has failed to record his dissatisfaction regarding the correctness of the claim of the Assessee that no expenditure was incurred by the Assessee in relation to exempt dividend income. He submitted that the aforesaid contention was raised before CIT(A) as ground no. 2(b), and the CIT(A) has rejected the same by confirming part of the addition/disallowance made by the Assessing Officer under Section 14A of the Act. He further submitted that the Assessing Officer has merely quoted statutory provisions and judicial precedents without making any reference to the account of the Assessee before invoking provisions of Rule 8D of the Rules for computing the amount of disallowance. On the strength of the aforesaid, the Ld. Authorised Representative for the Assessee submitted that the disallowance/addition made under Section 14A of the Act be set aside.

Per contra, the Ld. Departmental Representative submitted that dissatisfaction recorded by the Assessing Officer can be discerned from reading of paragraph 5.1 to 5.1.8. of the , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 assessment order. He submitted that the Assessee has failed to discharge the primary onus that no expenditure was incurred for earning exempt dividend income. It was submitted by the Ld. Departmental Representative that the Assessing Officer had duly recorded satisfaction as per the mandate of law before working out the disallowance under Section 14A of the Act read with Rule 8D of the Rules.

We have considered the rival contentions and perused the material on record.

The Hon'ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT: 394 ITR 449 had observed that it was only after the Assessing Officer had recorded his dissatisfaction as regards the correctness of the claim of the Assessee that the provisions of Section 14A of the Act read with Rule 8D could be invoked. It relevant observations of the Hon‟ble Supreme Court are 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 , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 judgment determination, as earlier prevailing, would become applicable." (Emphasis Supplied) Similar view was taken by the Hon'ble Supreme Court in case 13. of Maxopp Investment Ltd. vs. CIT 347 ITR 272 wherein it was held as under: "41. 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." (Emphasis Supplied) 14. Thus, it is settled legal position that before proceeding to invoke provisions of Rule 8D of the Rules for computing disallowance under Section 14A of the Act the Assessing Officer must express his dissatisfaction regarding the computation of disallowance made by the Assessee. However the fact whether such dissatisfaction has been recorded by the Assessing Officer would depend upon the facts and circumstances of each case. 15. Coming to the facts of the present case, we note that the Assessing Officer has made following observations before invoking provisions of Section 14A of the Act read with Rule 8D of the Rules: “5.1 Disallowance u/s 14A On perusal of the details filed, it is observed that the assessee has earned Dividend income of Rs. 52,85,697/- and has been claimed exempt u/s 10(34) of the I.T. Act, 1961. In the computation of total income no disallowance u/s 14A have 9 , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 been made by the assessee. The assessee vide ordersheet noting dated 15.11.2016 was requested to show cause as to why the disallowance u/s 14A r.w.r. 8D should not be made in the case of the assessee. The assessee company has vide letter dated 25.10.2016 submitted that disallowance u/s 14A should be nil as borrowed funds has not been utilized for earning dividend income. 5.1.2 The reply of the assessee has been duly considered. The assessee company is not engaged in investment activity, therefore there certainly is some expenditure attributable to earning the exempt income. The contention of the assessee that disallowance u/s 14A should be nil as borrowed funds has not been utilized for earning dividend income is not acceptable. Further the assessee vide letter dated 14.12.2016 submitted the working of disallowance u/s 14A. The onus is on the assessee to prove that there was no expenditure incurred for earning the exempt income. Consequent upon the insertion of sub-section (2) to section 14A, the disputes which had arisen between taxpayers and the revenue on the method of determining the expenditure to be disallowed have been given a quietus by adopting a uniform method of determination. However, the assessee has not worked out the disallowance as prescribed in Rule 8D of the Income-tax Rules, 1962 while determining total income at the time of filing of return of income.” (Emphasis Supplied) 16. On perusal of above, it can be seen that the Assessing Officer has rejected the contention of the Assessee that no disallowance should be made under Section 14A of the Act as borrowed funds have not been utilized for earning dividend income. While doing so, the Assessing Officer has neither referred to any interest cost and/or administrative expenses incurred/claimed by the Assessee for earning the exempt income, nor made any reference to the accounts of the Assessee. The rejection of the contention of the Assessee as aforesaid is based upon the understanding of the Assessing , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 Officer that since the Assessee is not engaged in investment activity, some expenses attributable to earning exempt dividend income must have been incurred by the Assessee. In our view, the Assessing Officer has failed to record requisite dissatisfaction as mandated by the provisions of Section 14A(2) of the Act, and therefore, as per the above judgments of Hon‟ble Supreme Court, the provisions of Section 14A of the Act read with Rule 8D of the Rules cannot be invoked for making disallowance in the hands of the Assessee. 17. In view of the above, Ground No. 1(b) raised by the Assessee is allowed and addition/disallowance of INR 52,85,697/-, made by the Assessing Officer by invoking provisions of Section 14A of the Act read with Rule 8D of the Rules to the extent confirmed by the CIT(A), is deleted. In view of the aforesaid Ground No.1 raised by the Revenue is dismissed and Ground Nos. 1(a), 1(c) and 1(d) raised by the Assessee are disposed of as being infructuous. Ground No. 2 of Assessee‟s appeal and Ground No. 2 of Revenue‟s appeal 18. Ground No. 2 raised by Revenue/Assessee pertain to computation of books profits in terms of Section 115JB of the Act. The Assessing Officer had increased book profits by INR 4,98,43,035/- being the amount of disallowance computed by the Assessing Officer by applying provisions of Section 14A of the Act read with Rule 8D of the Rules. In appeal, the CIT(A) granted relief to the Assessee and reduced the aforesaid amount of INR 4,98,43,035/- to INR 52,85,697/- being 10% of the exempt dividend income earned by the Assessee during the relevant previous year. The Revenue has contended that , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 the aforesaid decision of CIT(A) is contrary to the decision of the Tribunal in the case of Viraj Profiles Ltd. (2016) 156 ITD 72. We note that the CIT(A) has granted relief to the Assessee by following the subsequent decision of the Special Bench of the Tribunal in the case of ACIT vs. Vireet Investments Pvt. Ltd. 58 ITR (T) 313 (Del Trib.) (SB) wherein it has been held that computation under clause (f) of Explanation 1 to Section 115JB(2) of the Act is to be made without resorting to computation as contemplated under Section 14A read with Rule 8D of the Rules. Accordingly, without resorting to computation as per provision of Section 14A read with Rule 8D of the Rules, the CIT(A) computed the amount of disallowance for Clause (f) of Explanation 1 to Section 115JB(2) of the Act at INR 5,28,570/-, (being 10% of the exempt dividend income) by following the decision of Mumbai Bench of the Tribunal in the case of Reliance Natural Resources Ltd. vs. DCIT [ITA No. 6712 & 6844/Mum/2012, Assessment Year 2009-10, decided on 11.08.2017] wherein the Tribunal has accepted 10% disallowance as being reasonable. We are of the view that the amount of INR 5,28,570/- computed by the CIT(A) is reasonable given the facts and circumstances of the present case. We do not find any infirmity in the order passed by CIT(A) on this issue. The Ld. Authorised Representative for the Assessee had relied upon the decision of the Tribunal which are distinguishable on facts as in those cases the First Appellate Authority had resorted to computation as per provision of Section 14A read with Rule 8D for the purpose of determining the amount to be added to book profits in term of Clause (f) of Explanation 1 to Section 115JB(2) of the Act.

This appeal arise from the order of the CIT(A) passed on 01.02.2018 for the Assessment Year 2013-14, which in turn arose from the Assessment Order, dated 30.03.2016 passed under Section 143(3) of the Act.

The relevant facts in brief are that during the assessment proceedings the Assessing Officer noted that the Assessee had earned exempt dividend income of INR 75,32,723/- and had not offered any disallowance under Section 14A of the Act. The Assessing Officer, therefore, computed disallowance as per Rule 8D of the Rules at INR 1,58,15,456/- and added the same to the income of the Assessee. 23. In appeal the CIT(A) deleted the addition of INR 29,57,498/- made by the Assessing Officer by invoking provisions of Rule 8D(2)(ii) of the Rules by following the decision of Hon‟ble Bombay High Court in the case of HDFC Bank Ltd. Vs. DCIT : (2016) 383 ITR 529 (Bombay). The CIT(A), however, confirmed the addition made by the Assessing Officer by invoking provisions of Rule 8D(2)(iii) of the Rules by restricting the disallowance of INR 1,28,57,958/- made by the Assessing Officer to INR 75,32,723/- being the amount of exempt income earned by the Assessee during the relevant previous year.

We have perused the material on record and have considered the rival submissions. Our findings in paragraphs 12, 13, 14 and 16 apply mutatis mutandis to the issue before us in the present appeal. In our view, the Assessing Officer has failed to record requisite dissatisfaction as mandated by the provisions of Section 14A(2) of the Act, and therefore, as per the above judgments of Hon‟ble Supreme Court, the provisions of Section 14A of the Act read with Rule 8D of the Rules cannot be invoked for making disallowance in the hands of the Assessee. Accordingly, Ground No. 1(b) raised by the Assessee in the present appeal is allowed and addition of INR 75,32,723/- under Section 14A read with Rule 8D(2)(iii) of the Rules is deleted. In view of the aforesaid, Ground No. 1(a), 1(c) and 1(d) are disposed of as being infructuous while Ground No. 2 is disposed of as being consequential. The appeal filed by the Assessee is partly allowed. (Assessment Year 2014-15) 26. This appeal arise from the order of the CIT(A), passed on 01.02.2018 for the Assessment Year 2014-15, which in turn arose from the Assessment Order, dated 31.10.2016 passed under Section 143(3) of the Act. , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 27. The relevant facts in brief are that during the assessment proceedings the Assessing Officer has noted that the Assessee has earned exempt dividend income of INR 8,36,22,335/ and asked the Assessee to show cause why disallowance under Section 14A of the Act read with Rule 8D should not be computed. In response thereto the Assessee filed letter dated 26.10.2016 and submitted that apart from direct expenses of INR 6,207/- no other expenses have been incurred by the Assessee. The Assessing Officer, however, proceeded to compute disallowance as per Rule 8D(2)(iii) of the Rules at INR 1,47,52,165/- and added the same to the income of the Assessee under normal provisions of the Act as well to book profits computed as per the provisions of Section 115JB of the Act.

In appeal, the CIT(A) confirmed the above addition of INR 1,47,52,165/- made by the Assessing Officer to the income of the Assessee by invoking provisions of Section 14A read with Rule 8D(2)(iii) of the Rules under the normal provisions of the Act. CIT(A). however, granted relief to the Assessee by restricting the amount of disallowance under Section 14A of the Act to be added to book profits to INR 83,62,234/-, being 10% of the exempt income earned by the Assessee during the relevant previous year, for the purpose of computing book profits in terms of Section 115JB of the Act.

Being aggrieved, the Assessee is in appeal before us. In Ground No. 1(b) of the appeal the Assessee has challenged the additions under Section 14A of the Act read with Rule 8D(2)(iii) of the Rules on the ground that the Assessing Officer has failed , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 to record requisite dis-satisfaction as mandated by Section 14A of the Act.

We have perused the material on record and have considered the rival submissions. Our findings in paragraphs 12, 13, 14 and 16 apply mutatis mutandis to the issue before us in the present appeal. In our view, the Assessing Officer has failed to record requisite dissatisfaction as mandated by the provisions of Section 14A(2) of the Act, and therefore, as per the above judgments of Hon‟ble Supreme Court, the provisions of Section 14A of the Act read with Rule 8D of the Rules cannot be invoked for making disallowance in the hands of the Assessee. Accordingly, Ground No. 1(b) raised by the Assessee in the present appeal is allowed and addition of INR 1,47,52,165/- made under Section 14A read with Rule 8D(2)(iii) of the Rules is deleted. In view of the aforesaid, Ground No. 1(a), 1(c) and 1(d) are disposed of as being infructuous 31. Ground No. 2 raised by the Assessee is directed towards the order of CIT(A) confirming the addition to the book profits computed under Section 115JB of the Act on account of disallowance under Section 14A of the Act to the extent of INR 83,62,234/- being 10% of exempt income earned by the Assessee during the relevant previous year.

In view of our findings in paragraph 18 above, which shall apply mutatis mutandis to the issue before us in the present appeal, the Ground No. 2 raised by the Assessee is dismissed.

Ground No. 3 pertaining to levy of interest under Section 234B and 234C of the Act is disposed of as being consequential, ITA. No. 3176 , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 34. Ground No. 4 pertaining to initiation of penalty proceedings is disposed of as being without any merits as penalty proceedings are separate and distinct from the assessment proceedings.

The appeal filed by the Assessee is partly allowed. (Assessment Year 2013-14) 36. This appeal arise from the order of the CIT(A) passed on 01.02.2018 for the Assessment Year 2013-14, which in turn arose from the Assessment Order, dated 08.03.2015 passed under Section 143(3) of the Act.

The relevant facts in brief are that during the assessment proceedings the Assessing Officer noted that the Assessee had earned exempt dividend income of INR 2,55,91,251/-. In response to query from the Assessing Officer, the Assessee submitted that apart from direct expenses of INR 1,55,790/- (Dmat charges of INR 24,025/- plus STT of INR 1,31,765/-) no other expenses have been incurred by the Assessee for earning the exempt dividend income. The Assessing Officer, however, rejected the submission of the Assessee and proceeded computed disallowance as per Rule 8D of the Rules. The Assessing Officer disallowed INR 4,86,019/- in terms of Rule 8D(2)(ii) and INR 79,50,513/- in terms of Rule 8D(2)(iii) of the Rules.

In appeal the CIT(A) deleted the addition of INR 4,86,019/- made by the Assessing Officer by invoking provisions of Rule 8D(2)(ii) of the Act by following the decision of Hon‟ble Bombay High Court in the case of HDFC Bank Ltd. Vs. DCIT : (2016) 383 ITR 529 (Bombay). The CIT(A), however, confirmed the addition ITA. No. 3176 , 2784- 2786 & 2903/ Mum/2018 Assessment Years: 2013-14 & 2014-15 of INR 79,50,513/- made by the Assessing Officer by invoking provisions of Rule 8D(2)(iii) of the Rules.

Not being satisfied with the relief granted by the CIT(A), the Assessee is in appeal before us. In Ground No. 1(b)(i) of the appeal the Assessee has challenged the additions under Section 14A of the Act read with Rule 8D(2)(iii) of the Rules made by the Assessing Officer and confirmed by the CIT(A). The contention of the Assessee is that the Assessing Officer has failed to record requisite dis-satisfaction as mandated by Section 14A of the Act.

We have perused the material on record and have considered the rival submissions. Our findings in paragraphs 12, 13, 14 and 16 apply mutatis mutandis to the issue before us in the present appeal. In our view, the Assessing Officer has failed to record requisite dissatisfaction as mandated by the provisions of Section 14A(2) of the Act, and therefore, as per the above judgments of Hon‟ble Supreme Court, the provisions of Section 14A of the Act read with Rule 8D of the Rules cannot be invoked for making disallowance in the hands of the Assessee. Accordingly, Ground No. 1(b)(i) raised by the Assessee in the present appeal is allowed and addition of INR 79,50,513/- under Section 14A read with Rule 8D(2)(iii) of the Rules is deleted. In view of the aforesaid, Ground No. 1(a), 1(b)(ii), and 1(c) are disposed of as being infructuous while Ground No. 2 is disposed of as being consequential. The appeal filed by the Assessee is partly allowed.