NESTLE R & D CENTRE INDIA PVT. LTD.,NEW DELHI vs. DCIT, CIRCLE- 18(1), NEW DELHI

ORDER PER O.P. KANT, AM:

This appeal by the assessee is directed against the order dated 24th July, 2017 passed by the learned Commissioner of Income Tax (Appeals)-37, New Delhi, [in short ‘the learned CIT(A)’] for assessment year 2012-13, raising the following grounds: 1. That the Commissioner of Income Tax (Appeals) ['CIT(A)'] erred on facts and in law in upholding the action of the assessing officer ['AO'] in disallowing expenditure of Rs 6,50,090/- under section 14A of the Income-tax Act, 1961 ['the Act'] read with Rule 8D(2)(iii) of the Income-tax Rules, 1962 ['the Rules'] 1.1 That the CIT(A) erred on facts and in law in confirming the aforesaid disallowance without appreciating that no expenditure was actually incurred in earning the exempt dividend income. 1.2 That the CIT(A) erred on facts and in law in not appreciating that no satisfaction as required by law was recorded by the AO before resorting to Rule 8D of the Rules for purposes of making disallowance under section 14A of the Act. 1.3 That the CIT(A) erred on facts and in law in not appreciating that under section 14A of the Act and only expenses having direct/ proximate nexus with earning of the dividend income could be disallowed.

2. That the CIT(A) grossly erred on facts and in law in not allowing set off of the brought forward business loss amounting to Rs.95,88,851/- and unabsorbed depreciation amounting to Rs. 1,40,47,358/- returned by the appellant.

3. The facts in brief of the case are that the assessee filed return of income on 26.11.2012, declaring nil income after adjustment of business income/interest income amounting to Rs.2,36,36,209/- with the brought forward business losses/unabsorbed depreciation. In the scrutiny, assessment was completed under Section 143(3) of the Income-tax Act, 1961 (in short ‘the Act’), the Assessing Officer made disallowance under Section 14A of the Act and also disallowed the adjustment of business losses/unabsorbed depreciation. Aggrieved, the assessee filed an appeal before the learned CIT(A), however, it did not get any relief and thus the assessee is before the Income Tax Appellate Tribunal (in short ‘the Tribunal’), raising the grounds as reproduced above. 4. Before us, the learned DR appeared through Video Conferencing facility and relied on the orders of the lower authorities. 5. We have heard the submission of the learned DR and perused the relevant material on record. 6. In ground no. 1, the assessee has raised the issue of disallowance of Rs.6,50,090/- under Section 14A of the Act. 6.1 The facts in brief qua the issue in dispute are that the assessee had made investments in units of mutual funds amounting to Rs.15 crores. In the immediately preceding year also, the assessee has sold units of mutual funds amounting to Rs.4 crores. In the year under consideration, the assessee received dividend amounting to Rs. 1,23,14,237/- on mutual funds, which is claimed as exempt income under Section 10(35) of the Act. In the return of income filed, the assessee claimed that no expenditure was incurred for earning the said dividend income. According to the assessee, the dividend income was earned in respect of liquid mutual funds which were automatically re-invested and the same were received in bank accounts, and no additional efforts/expenses were required to be made/incurred for earning the dividend income. The assessee, further, contested that no specific employee was kept to keep the record of the dividend income. This contention of the assessee was rejected by the Assessing Officer and invoking Rule 8D of the Rules, he disallowed 0.5% of the average investment under Rule 8D(2)(iii) to Rs.6,50,000/-. On further appeal, the learned CIT(A) held that the assessment order succeeds on the criteria of recording dissatisfaction on the claim of the assessee. The learned CIT(A) further upheld the disallowance observing as under: “5.4 Thus the threshold criteria of recording satisfaction, in humble opinion of this office has been met by AO as captured supra at para 5. Now comes the quantum of disallowance. Since, a formulae has been prescribed precisely to obliterate disputes relating thereto as held in apex court decision of Godrej Boyce which has been applied by AO, in instant case. Thus, after rendering of Apex Court decision, in. humble opinion of this office, the disallowance made by AO is in order, more so as the dividend income has been earned by appellant. Even a cursory look at the annual report, and attendant notes to accounts and details of other expenses will belie the claim of appellant that no expenditure has been incurred w.r.t earning of dividend income. It’s like-a person saying that services of a General Manger (finance) were not required for monitoring of financial activity/ income relating to dividends as investments once made need not-he monitored/ reviewed. It’s not the-case of-the appellant assessee that the decision to sell/ invest in mutual funds was not taken during the year under consideration. Once the investment/relating decision (whether to hold/ sell/ acquire/ monitor) is taken, it cannot be then canvassed by assessee, as is being done, that no employee was necessary for such decisions, which plea in any case is surreal . Similar analogy for host of other related- expenditure has been tendered by appellant defeats logic. It’s difficult to distance indirect-nature of expense (like rent/ outgo on other heads / salary etc i.e. under schedule 15,17 of notes to accounts for AY 12-13-refer pb page 225 ) from earning of dividend as accounts deptt. has to look after all financial activities and a head of Organization monitors overall . Even statutory audit aspect would have to verify and vouch whether the amount of dividend received from (re) investment in MF is accurate / properly accounted for/ received and reconciled etc. Thus looked at from any angle, after the SC decision of 8/5/2017 cited herein, the disallowance

made by AO is upheld and appeal of assessee is dismissed. Further it’s important to note that in later year too, i.e. AY 13-14 of same appellant the AO has made disallowance under sec. l4A r.w. Rule 8D. The findings given for GOA no 2 subsume GOA no 2.1 & GOA no 2.2 and hence the said GOAs no 2, 2.1&2.2 are also dismissed. It’s pertinent to add that in succeeding year too (i.e. AY 13-14) the AO has made disallowance, during which year too, the appellant has earned dividend income; nowhere the appellant has submitted detailed activity sheet of its employees to support its (illogical bizarre) hypothesis that none of its employees at any point of time has anything to do with investment decision making aspect relating to MF—Foremost of all to decide to invest in MF or otherwise is itself an application of time / money/ employee cost on decision making activity related to investments per se, of which investment in MF is a subset thereof. At this very stage itself, at threshold, the plea of appellants must fail logically. Further that, in earlier years, there was no 143(3) of appellant case and hence this being first year, the matter has been aptly appreciated by AO.” 6.2 We find that the contention of the assessee that, no expenditure has been incurred for earning income, has been rejected by the lower authorities on the ground that some man power must have been required for monitoring financial activity or earning of income relating to dividends as investment. The lower authorities have held that even the statutory audit must have also been verified whether the amount of dividend received from the investment/re-investment is accurate/properly accounted for in the assessee’s books of accounts and, therefore, some expenditure of the audit also relates to the activity of earning dividend income. 6.3 In our opinion, once the Rule 8D of the Rules has been made applicable, the disallowance in terms of Rule 8D(2)(ii) is automatic and there is no option left with the Assessing Officer except to estimate the disallowance as per rules. 6.4 In view of the detailed findings of the learned CIT(A) on the issue in dispute, we do not find any error in the order of the learned CIT(A). Accordingly, we uphold the same. The ground no. 1 of the appeal is dismissed.

7. As far as the ground no. 2 is concerned, the Assessing Officer did not allow carry forward of business/unabsorbed depreciation in absence of evidences submitted by the assessee. Further, the learned CIT(A) has noticed that the assessee has already filed rectification application before the Assessing Officer which was pending. We agree with the finding of the learned CIT(A) that when the issue is already pending before the learned Assessing Officer for rectification, it is not appropriate for her to decide on that issue in appellate proceedings. We, accordingly, concur with the findings of the learned CIT(A) on the issue in dispute. The ground no. 2 of the appeal is dismissed. 7.1 However, before parting with the order, we direct the Assessing Officer that if the rectification application has not been decided as yet, the same may be decided in the interest of justice.