M/S ATLANTA LTD,MUMBAI vs. DCIT CIRCLE- 9 (1)(2), MUMBAI

These are cross-appeals directed against the order, dated 30.09.2019, passed by the Ld. Commissioner of Income Tax (Appeals)-16, Mumbai [hereinafter referred to as „the CIT(A)‟] under Section 250 of the Income Tax Act, 1961 [hereinafter referred to as „the Act‟] for the Assessment Year 2016-17, whereby the Ld. CIT(A) had partly allowed the appeals filed by the Assessee against the Assessment Order, dated 26.03.2018, passed under Section 143(3) of the Act.

The Grounds of Appeal raised by the Revenue in Appeal (ITA No. 7695/Mum/2019) are as under:

Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in restricting the disallowance u/s. 14A of the Income Tax Act, 1961 to the extent of exempt income, without appreciating the facts that in the case of Maxopp Investment Limited the issue whether disallowance u/s.14A was to be restricted to the quantum of exempt income was not decided by Supreme Court, and in the case of Joint Investments (P) Limited, the SLP was not filed against HC decision due to low tax effect?

Whether in the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance u/s. 14A to the Book Profit computed u/s.115JB of the Act without appreciating the fact that the same requires to be added to Book Profit as per clause (f) to Explanation 1 of section 115JB of the Act?

Grounds of Appeal raised by the Assessee in appeal (ITA No. 7749/Mum/2019) are as under:

Disallowance u/s. 14A restricted to Rs. 65,44,468/- being amount of exempt income.

Brief facts of the case are that the Assessee filed return of income for the Assessment Year 2016-17 declaring income of INR 4,91,74,730/- under normal provisions of the Act and book profits of INR 2,68,66,344/- as per Section 115JB of the Act. The Assessing Officer framed assessment under Section 143(3) of the Act at income of INR 25,99,78,226/- under normal provisions of the Act and INR 15,08,96,314/- under section 115JB of the Act. For the purpose of computing income under normal provisions of the Act, the Assessing Officer made addition of INR 8,67,73,526/- on account of bogus purchases, and INR 12,40,29,970/- under Section 14A of the Act. Whereas, while computing Book Profits under Section 115JB of the Act the Assessing Officer increased Book Profits by the amount disallowed under section 14A of the Act.

Being aggrieved, the Assessee filed appeal before CIT(A). The CIT(A) partly allowed the appeal of the Assessee by restricting the disallowance (a) on account of bogus purchases to INR 1,08,46,691 being 12.5% of purchases, and (b) under Section 14A of the Act to INR 65,44,468/- being the amount of exempt income. The CIT(A) also deleted the addition to book profits on account of disallowance under Section 14A of the Act for the purpose of computation of Book Profits under Section 115JB of the Act. Assessment Year: 2016-17

While, the Assessee was not satisfied with the relief granted by CIT(A), the Revenue was aggrieved by the relief granted to the Assessee, and therefore, both, the Assessee and the Revenue are in appeal before us.

We would first take up Ground No. 1 & 2 of Revenue‟s Appeal and Ground No. 1 to 1(c) of Assessee‟s Appeal relating disallowance on account of bogus purchase.

The relevant facts as emanating from material on record are that Information was received from the Investigation Wing that the Assessee had indulged in bogus transactions with Rameshwar Trading & Co. in relation to Nagpur Project and Ropar Project of the Assessee and on 21.03.2017 a survey was conducted on the Assessee under Section 133A of the Act. When the case of the Assessee was selected for scrutiny a letter, dated 24.11.2017, was sent to the Assessee which read as under: “The DDIT(Inv.) Unit-5(2), Mumbai vide his letter dated 16.11.2014 has informed that:

Thereafter, notices under Section 143(2) and 142(1) were issued to the Assessee on 03.07.2017, 12.10.2017, 24.11.2017 and 08.01.2018. In response to the same, the Assessee filed replies/submissions dated 06.10.2017 and 12.02.2018. Vide letter, dated 08.01.2018, the Assessee was directed to produce documentary evidence such as bills, invoices, octroi receipts, delivery challans, bank statement reflecting the payments, and ledger accounts to prove genuineness of the transaction. Further, the Assessee was also directed to produce the parties before the Assessing Officer as the notices sent to Rameshwar Trading & Co. under Section 133(6) of the Act on the addresses Assessment Year: 2016-17

The Learned Authorised Representative for the Appellant appearing before us started submissions by challenging the validity of the Assessment Order on the ground of non- application of mind. Referring to Letter, dated 24.11.2017 sent by the Assessing Officer, he submitted that the Assessing Officer has failed to appreciate that the assessment proceedings were regular scrutiny proceedings and has proceeded as if the proceedings were re-assessment proceedings initiated under Section 148 of the Act which shows complete non-application of mind. Even the name of the parties is stated in the aforesaid letter as Atlanta Ltd. (Nagpur Project) and Atlanta Ltd. (Ropar Project) – without making any inquiry/verification. Further, the Appellant had submitted all the relevant documents related to the purchases aggregating to INR 8,67,73,528/- made from Rameshwar Trading & Co., however, without any application of mind, the Assessing Officer had made addition of 100% of alleged bogus purchases solely because the Assessee failed to produce the vendor during the assessment proceedings. Referring to the documents placed before us forming part of the paper- book (a) Invoice dated Assessment Year: 2016-17

2016 raised by Rameshwar Trading Co along with delivery challan and transport challan (page 6-8), material receipt note (page 9), Bill Certification Form with invoice details (Page 10-11), Purchase Order dated 18.03.2016 (Page 12-18), Invoice dated 21.12.2015 raised by Rameshwar Trading Co. along with delivery challan and transport challan (19-21), material receipt note (Page 22), relevant extract of stock audit report (Page 23-48), and Credit Rating Report of Rameshwar Trading Co. (Page 49-58), the Ld. Authorised Representative for the Appellant submitted that these documents were filed before the Assessing Officer, however, the Assessing Officer neither challenged the veracity of the documents nor made any enquiries from third parties like the transporter. The Learned Authorised Representative submitted that finding returned by the Assessing Officer in paragraph 5.6(e) of the Act are factually incorrect. All payments were made by the Assessee through the banks and there is no statement substantiating the allegation that the Assessee has received back any cash against payments made for purchases through banks. He submitted that the Assessing Officer and CIT(A) have erred in holding that Rameshwar Trading & Co. was not existing as the notices issues under Section 133(6) of the Act were returned back with remarks „left‟ which shows that the vendor was existed and had office at some point in time but had „left‟. To support this contention, he relied upon the Bills of Exchange and Letter of Credit issued by Bank in favour of the Rameshwar Trading & Co. as well as report of credit rating agency. He submitted that additions cannot be made merely on the basis of information received from the Sales Tax Department without conducting further inquiry or bring on record some material to Assessment Year: 2016-17

Per contra, the Learned Departmental Representative vehemently argued that the Assessing Officer was justified on making addition of INR 8,67,73,528/- and that the CIT(A) had erred in restricting the addition to 12.5%. He submitted that the purchases were bogus, clear information was received from the investigation wing that the Assessee was involved in bogus purchase transactions with Reameshwar Trading & Co. in respect of purchases made for Nagpur and Ropar projects leading to further inquiry and survey. The Assessee had failed to produce relevant documents to substantiate the purchases during the assessment proceedings. Even the paper-book filed before the Tribunal contains only some invoices/transport documents and on the basis of the same it cannot be concluded that the purchases were genuine. The Assessee was granted opportunity during the assessment and appellate proceedings before CIT(A) to produce the vendor/party, however, the Assessee failed to produce the vendor/party. The Credit Rating Report of Rameshwar Trading & Co. supports the claim of Revenue as it records that relevant information was not shares by the proprietor with the credit rating agency. Even the basic Assessment Year: 2016-17

We have given thoughtful consideration to the rival submissions, perused the material on record and examine the legal position. The submissions made by the learned authorised representative for the Appellant, though convincing at the first blush, did not hold good scrutiny of the documents placed on record to show genuineness of the purchases. Through the communication, dated 24.11,2017, the Assessing office has shared the information regarding bogus purchases and the fact that the summons issued under Section 131 of the Act were returned back with remarks „not found‟. The Assessment has been framed under Section 143(3) of the Act. We note that the Assessing Officer had made the disallowance as according to the assessing officer the Assessee had failed to substantiate the claim of purchases with the relevant documentary evidence and had failed to produce the concerned party which was not traceable at the address provided. While restricting the Assessment Year: 2016-17

We note that the Assessee has placed at 9 of the Paper-book the Material Receipt Note (MRN 5070), dated 12.03.2016, issued by the Assessee showing receipt of material against Challan No. 800 (39 Metric Tons), 802 (38 Metric Tons), 805 (39 Metric Tons), 807 (38 Metric Tons) and 810 (39 Metric Tons) pertaining to receipt of TMT Steel of 36 to 39 metric tons against each challan. At page 10 and 11 of the Paper-book the Assessee has filed Bills Certification Form issued by the Assessee along with details of invoices for supply of steel to Nagpur Project which correspond to the aforesaid challans wherein Invoices numbers have been mentioned as 800, 802, 805, 807 and 810 with 10.03.2016 as date of issue of each of the aforesaid invoice. In relation to this the Assessee has placed on record only Invoice No. 800 dated 10.03.2016 along with corresponding delivery Challan No. 800, dated 10.03.2016 for supply of 39 Metric Tonns of TMT Bars and Goods Consignment Note issued by Suraj Roadways Logistics, dated 10.03.2016, a third party transporter. Similarly, in respect of Goods Receipt Note, dated 23.12.2015 (at Page 22 of the Paper-Book), wherein six challan numbers have been Assessment Year: 2016-17

Accordingly, Ground No. 1 & 2 of Revenue‟s Appeal (ITA No. 7695/Mum/2019) and Ground No. 1 to 1(c) of Assessee‟s Appeal (ITA No.7749/Mum/2019) are dismissed.

Next we would take up Ground No. 3 & 4 of Revenue‟s Appeal and Ground No. 2 to 2(c) of Assessee‟s Appeal relating disallowance under Section 14A of the Act while computing income under normal provisions of the Act.

The Assessing Officer also noted that the Assessee had earned exempt dividend income of INR 7,139/- on investment in shares of Dombivali Sahakari Bank Ltd. and profit of INR 65,44,468/- from partnership firms and joint ventures (forming part of Assessment Year: 2016-17

Being aggrieved, the Assessee carried the issue before CIT(A). Vide order, dated 30.09.2019, the CIT(A) granted relief to the Assessee by restricting the amount of disallowance made by the Assessing Officer under Section 14A of the Act to the amount of INR 65,44,468/- being profits from partnership firm and joint ventures of the Assessee.

Both, the Assessee and the Revenue, are in appeal before us against the abovesaid order of the CIT(A) on this issue. The contention of the Assessee is that the entire addition made under Section 14A of the Act should have been deleted by the CIT(A) whereas the Revenue is aggrieved by the relief granted by the CIT(A) to the Assessee by restricting the disallowance under Section 14A to the amount of exempt income, i.e. INR 65,44,468/-.

The Learned Authorised Representative for the Appellant appearing before us raised multiple contentions to support Assessment Year: 2016-17

Per contra, the Ld. Departmental Representative submitted that addition/disallowance of INR 12,40,29,970/- made by the Assessing Officer should have been sustained by the CIT(A). He submitted that appropriate satisfaction was recorded by the Assessing Officer before invoking provision of Rule 8D of the Rules. The Assessee had not made any suo-moto disallowance or filed any computation. The Assessee had not maintained separate accounts for investment activities and investments were made from common pool of funds. The fact that there has been no change in the amount of investment made during the relevant previous year is of no relevance. He further submitted that the disallowance under Section 14A of the Act was correctly computed by the Assessing Officer as per Rule 8D of the Rules and that the CIT(A) erred in restricting the disallowance to INR 65,44,468/-. He relied upon paragraph 7.1 Assessment Year: 2016-17

Having considered the rival submissions and on perusal of records. We are of the view that the appropriate satisfaction was recorded by the Assessing Officer before invoking the provision of Section 14A of the Act. The Assessee had submitted that no expenses have been incurred for earning the exempt income and therefore, no disallowance was warranted. The Assessing Officer after taking note of the fact that separate accounts were not maintained by the Assessee in respect of investment activity and business activity (in paragraph 7.2 of the assessment order) concluded that the provisions of Section 14A of the Act would be attracted in the case of the Assessee in paragraph 7.3 of the Assessment Order the relevant extract of which read as under:

In the facts and circumstances of the case, we are of the view that it cannot be said that the Assessing Officer has failed to record his dissatisfaction having regard to the accounts of the Assessee. We note that the Assessing Officer has made disallowance of INR 10,75,20,365/- under Section 14A read with Rule 8D(ii) and INR 1,65,09,605/- under Section 14A read with Rule 8D(iii). Assessment Year: 2016-17

While the Ld. Authorised Representative for the Appellant has raised the multiple contentions, as regards disallowance on INR 10,75,20,365/- made by the Assessing Officer in terms of Section 14A read with Rule 8D(ii) of the Act is concerned we note that the issue stands decided in favour of the Assessee by the judgment of the Hon‟ble Bombay High Court relied upon by the Learned Authorised Representative of the Appellant in view of the fact that the own funds of the Assessee are more than the investments. A perusal of the Balance Sheet of the Assessee placed on record shows that the aggregate of Non- Current Investments and Current Investment is less than Share Capital and Reserves of the Assessee-Company as on 31.03.2015 and 31.03.2016. As per the Assessing Officer the Investment as on 31.03.2015 and 31.03.2016 were 330.07 Crores and 330.31 Crores, respectively. As per the Balance Sheet, the Share Capital and Reserves of the Assessee stood at INR 373.02 Crores and INR 379.26 Crores as on 31.03.2015 and 31.03.2016, respectively. The juri ictional High Court has in the case of HDFC Bank Ltd. Vs. DCIT-2(3), Mumbai : 366 ITR 505 (Bombay) held that where interest free funds and interest- bearing funds are available, and the interest free funds are more than the investments, the presumption is that such investments would been made from the interest free funds. The aforesaid view stands approved by the Hon‟ble Supreme Court in the case of South Indian Bank Ltd. Vs. Commissioner of Income-tax : 438 ITR 1 (SC). In view of the aforesaid, no disallowance is warranted in terms of Section 14A of the Act read with Rule 8D(2)(ii) of the Act. Assessment Year: 2016-17

as regards disallowance on INR 1,65,09,605/- made by the Assessing Officer in terms of Section 14A read with Rule 8D(ii) of the Act, It has been contended by the Assessee that only investment which has yielded exempt income are to be included for the purpose of computing average value of investment for arriving at the quantum of disallowance in terms of Rule 8D(2)(iii) of the Rules. We note that the Special Bench of the Tribunal in the case of Assistant Commissioner of Income Tax, Circle 17(1), Delhi vs. Vireet Investment (P.) Ltd : 58 ITR(T) 313 (Delhi - Trib.) (SB) has held only those investments are to be considered for computing average value of investment which yielded exempt income during the year. As per paragraph 4.22 of the submissions filed by the Assessee before the CIT(A) reproduced on page no. 18 of 59 of the order passed by the CIT(A), the investment of in ARSS-Atlanta Joint Venture and Atlanta-ARSS Joint Venture yielded exempt income during the relevant previous year. Accordingly, we direct the Assessing Officer to verify the investments which have yielded the exempt income and re-compute the amount of disallowance as per Section 14A read with Rule 8D(2)(iii) of the Rules by taking into account the same as per the decision of the Special Bench of the Tribunal in the case of Vireet Investments (P) Ltd. (supra).

In view of the above, Ground No. 3 & 4 of Revenue‟s appeal (ITA No. 7695/Mum/2019) are dismissed whereas Ground No. 2 to 2(c) of the Assessee‟s appeal (ITA No.7749/Mum/2019) are partly allowed. Assessment Year: 2016-17

We would now take up Ground No. 5 of Revenue‟s Appeal relating to including/excluding amount of disallowance computed under Section 14A of the Act Read with Rule 8D of the Income Tax Rules, 1962 while computation of book profits under Section 115JB of the Act. We note that CIT(A) had decided this issue in favour of the Assessee by relying upon the decision of Special Bench of the Tribunal in the case of Vireet Investment (P.) Ltd (supra) and the judgment of juri ictional High Court in the case of CIT Vs JSW Energy Ltd.: 379 ITR 36 (Bombay) and holding that disallowance under Section 14A of the Act read with Rule 8D of the Rules cannot be added while computing book profits in terms of Section 115JB of the Act. In view of the aforesaid, we do not find any infirmity in the order passed by the CIT(A) and are not inclined to interfere with the same on this issue. Accordingly, Ground No. 5 of Revenue‟s appeal (ITA No. 7695/Mum/2019) is dismissed.

In the result, Revenue‟s appeal (ITA No. 7695/Mum/2019) is dismissed and Assessee‟s appeal (ITA No.7749/Mum/2019) is partly allowed.