TAMILNADU NEWSPRINT AND PAPERS LTD.,CHENNAI vs. ACIT, CHENNAI

PER MAHAVIR SINGH, VICE PRESIDENT: These two cross appeals one by Revenue and one by the assessee for the assessment year 2012-13 are arising out of order of Commissioner of Income Tax (Appeals)-13, Chennai in ITA No.197/CIT(A)-11/AY 2012-13, dated 09.02.2017. The assessment was framed by the ACIT, Corporate Circle-3(1), Chennai u/s.143(3) of the Income-tax Act, 1961 (hereinafter the ‘Act’) vide order dated 27.03.2015.

Assessee’s Appeal in ITA No.1048/CHNY/2017, AY 2012-13 2. The first issue in this appeal of assessee for the assessment year 2012-13 is as regards to the order of CIT(A) confirming the action of AO in disallowing expenses relatable to exempt income by invoking the provisions of section 14A of the Act, read with Rule 8D(2)(ii) of the Income Tax Rules, 1962. For this, assessee has raised following grounds:- 2. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Rs.4,85,997/- u/s.14A by applying Rule 8D. 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that if there are interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available.

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2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that only the surplus funds with the assessee is utilized for making investments in Mutual funds. The administrative and interest expenditures were incurred only with reference to the business activities of the assessee and are in no way attributable to the investment activities.

2.3 The Commissioner of Income tax (Appeals) ought to have appreciated that in the present case the accounts of the assessee clearly evidence the fact that no expenditure was incurred by the assessee for earning the income by way of dividend, which does not form part of the total income.

2.1 Brief facts are that the AO noted from the investment port folio of the assessee as on 31.03.2012 and the computation of income that the assessee has earned dividend income of Rs.10,18,047/- and the claimed the same as exempt u/s.10(34) of the Act. The assessee has suo-motto quantified the disallowance u/s.14A r.w.rule 8D(2)(iii) i.e., administrative expenses at Rs.57,023/-. The AO by applying formula prescribed under Rule 8D(2)(ii) of the Rules also made disallowance under Rule 8D(2)(ii) i.e., interest disallowance at Rs.4,85,995/-. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of AO. Aggrieved, assessee is in appeal before the Tribunal.

2.2 Now before us, the ld.counsel for the assessee stated that he is interested in arguing only the disallowance of interest under Rule

4 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 8D(2)(iiii) i.e., amounting to Rs.4,85,995/-. The ld.counsel for the assessee before us filed copy of balance sheet and stated that the assessee has availability of own interest free funds in the shape of share capital and reserves & surplus as on 31.03.2012 amounting to Rs.97068.63 lakhs and non-current investment is Rs.114.05 lakhs. The ld.counsel stated that the AO has nowhere proved any nexus that the interest bearing funds are invested in the instruments giving rise to exempt income and once there is no such finding in the assessment order, the presumption go in favour of assessee, in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Ltd., 366 ITR 505. The ld.counsel for the assessee took us through the assessment order and the order of CIT(A).

2.3 When these facts were confronted to ld. Senior DR, he could not controvert the above fact situation but he argued that the formula prescribed under Rule 8D(2) is final and it has to be invoked in any eventuality because the assessee has earned exempt income.

2.4 After hearing rival contentions and going through the facts, it is noted that the assessee has own interest free funds in the shape

5 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 of share capital and Reserves & Surplus to the tune of Rs.97068.63 lakhs and non-current investment i.e., investment giving rise to exempt income is only Rs.114.05 lakhs. It means that the assessee has more interest free funds available with it for making investment in instruments giving rise to exempt income. Neither the AO nor the CIT(A) has recorded any finding that the interest bearing funds have been invested in the instruments giving rise to exempt income. Once the AO has not established that the interest bearing funds have gone into these investments which give exempt income, no disallowance can be made in case the assessee has more interest free funds available with it and claims that the investment is out of those funds which give rise to exempt income. The presumption in view of Hon’ble Bombay High Court in the case of HDFC Ltd., supra clearly goes in favour of the assessee. Hence, respectfully following Hon’ble Bombay High Court’s decision, we allow this ground of assessee’s appeal.

6 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 3. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Carbon credit amounting to Rs.39,21,338/-

3.1 The Commissioner of Income tax (Appeals) ought to have held that carbon credit earned is in the capital field and hence a capital receipt not subject to tax.

3.2 Without prejudice, if the carbon credit receipts are held as revenue receipts, the CIT(A) erred in holding the assessee is not entitled to deduction u/s.80IA in respect of income earned from sale of carbon credit.

3.3 The commissioner of Income tax (Appeals) ought to have appreciated that assessee has earned credit on the basis of reduction of emission, achieved with improved technology and machinery and hence inextricably connected with generation of electricity.

3.4 The Commissioner of Income tax (Appeals) ought to have appreciated that the Carbon Credit is earned out of Wind Farm project (eligible business), the same qualifies for deduction U/sec.80IA of the Act. The appellant relies on the decision of Andhra Pradesh High Court in the case of CIT Vs. My Home Power Ltd, Reported in 365 ITR 82(AP).

3.1 Brief facts are that the AO noted that the assessee has first credited the receipts from carbon credit in the profit & loss account and then claimed deduction u/s.80IA of the Act. According to AO, the assessee cannot claim deduction u/s.80IA of the Act in regard to carbon credit and thereby carbon credit of Unit-II amounting to Rs.39,21,338/- is removed from the claim of deduction u/s.80IA of the Act and made addition. Aggrieved assessee preferred appeal before CIT(A), who also confirmed the action of AO. Aggrieved, assessee came in appeal before the Tribunal.

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3.2 We have heard rival contentions and gone through facts and circumstances of the case. We noted that now the assessee has claimed this carbon credit receipt amounting to Rs.39,21,338/- was wrongly credited in the profit & loss account and he agreed that the assessee is not eligible for claim of deduction u/s.80IA of the Act, but he stated that this carbon credit issue has been considered by the Hon’ble Madras High Court in the case of PCIT vs. Chemplast Sanmar Ltd., in TCA No.525 of 2021, order dated 25.11.2021, wherein the Hon’ble Madras High Court had considered the following question of law:- 1. Whether on the facts and circumstances of the case and in law, the Tribunal is legally correct in holding that the sale of Carbon Emission Reduction (CER) also known as Carbon Credits is to be considered as capital receipt and not liable to tax?

The Hon’ble High Court held the receipts from carbon credits as capital receipt and answered the substantial question of law in favour of assessee by observing in para 37 to 39 as under:- 37.Further, it was pointed out that under our fiscal jurisprudence, we may regard the Appellate Authorities as exercising quasi judicial functions in the same sense, as a tax officer does. But, even so, the proceedings before them lack the basic elements of adversary proceedings. It, therefore, follows that the discussion and the scope of the appellate jurisdiction of the Tribunal and the other authorities under the tax code cannot be pursued by drawing a parallel to civil litigation with particular reference to appeal from decrees,

8 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 and the like. Further, it was pointed out that in the case of Mahalakshmi Textile Mills Ltd., the Hon’ble Supreme Court observed that the Tribunal is not precluded from adjusting the tax liabilities of the assessee in the light of its findings merely because, the findings are inconsistent with the case pleaded by the assessee. The decision of the Hon’ble Full Bench of this Court in the case of State of Tamil Nadu vs. Arulmurugan & Co., [(1982) 51 STC 381] was referred to wherein, it was held that the Appellate Authorities perform precisely the same functions, as the assessing authority. The above decision and the findings rendered are a clear answer to the arguments raised before us by the Revenue contending that substantial question of law no.4, as framed has to be decided against the assessee. We, thus, have no hesitation to hold that the Tribunal failed to exercise its power in a proper prospective as a final fact finding authority and examining as to whether there is any adjustment required to be made in the assessee’s tax liability qua the various decisions of the Court, which have held that receipt on account of sale of carbon credit is capital in nature.

38.In the instant case, the assessee while preferring appeal before the CIT(A), has specifically raised a contention that the receipts from sale of carbon credit is a capital receipt and cannot be included in the taxable income. Though this ground raised by the assessee before the CIT(A) has been recorded in the order, the CIT(A) did not take a decision on the same. Similar ground was raised by the assessee before the Tribunal, which was not considered by the Tribunal, though the Tribunal refers to all the decisions relied on by the assessee, but would pin the assessee to his claim made under Section 80IA of the Act and accordingly, negatives it. This finding of the Tribunal is wholly erroneous and perverse. The Tribunal was expected to apply the law and take a decision in the matter and if the CIT(A) or the Assessing Officer had failed to apply the law, then the Tribunal was bound to apply the law. This is so because, in the light of the decisions referred above, the receipt by way of sale of carbon credit has been held to be capital receipt. Therefore, it is of a little consequence as to the claim made by the assessee under Section 80IA of the Act or in other words, the question of taking a decision as to whether the deduction is admissible under Section 80IA of the Act is a non-issue. If the receipt from the sale of carbon credit is a capital receipt, then it will go out of the purview of the gross total income as defined under Section 80B(5) of the Act, which expression is found in Section 80IA of the Act. Thus, if the receipts by sale of carbon credit will not fall within the definition of total

9 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 income, the same cannot be included under Section 80IA of the Act. Therefore, even if the assessee has made such a claim, that cannot be a reason for the Tribunal to non-suit the assessee.

39.One more important factor to be noted is that Section 115BBG of the Act was introduced by Finance Act, 2017 with effect from 01.04.2018, prior to which, there was no such provision and Mr.V.S.Jayakumar, learned counsel for the assessee would submit that the assessees were under utter confusion as to under which provision of the Act, they should make a claim for deduction and having left with no other option, had been making the claim under Section 80IA of the Act and merely because the assessee due to uncertainty in the legal position, had made a claim under Section 80IA of the Act that cannot be a reason to deny a benefit granted in favour of the assessee. The submission, made by Mr.V.S.Jayakumar, learned counsel for the appellant, in this regard, is well found and accepted.

3.3 The ld.Senior DR heavily relied on the assessment order and the order of CIT(A) and stated that once the assessee has credited the receipts in the profit & loss account, now he cannot go back and he has to claim this only through revised return for which now the time limit has expired.

3.4 After hearing rival contentions and going through the facts of the case, this issue is fully covered in favour of assessee and against Revenue by the decision of Hon’ble Madras High Court in the case of Chemplast Sanmar Ltd., supra, wherein the Hon’ble Madras High Court has categorically held that carbon credit is in the nature of capital receipts and it cannot be added to the return of income of

10 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 the assessee or it cannot be part of profit & loss account and in any case, it is part of profit & loss account, then it can be claimed as deduction. Accordingly, we reverse the orders of lower authorities on this issue and allow this ground of assessee’s appeal.

4.1 The commissioner of Income tax (appeals) erred in confirming the disallowance of forward premium by wrongly treating the same as capital expenditure by applying the provisions of sec 43A.

4.1 Brief facts of the case are that the assessee has claimed expenses of Rs.10,56,75,723/- as forex forward premium charges relating to forward contract taken for hedging of foreign currency notes. The AO noted that foreign currency notes were taken for capital expenditure purpose and according to him, expenditure

11 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 incurred for forex forward premium charges is capital expenditure and it has tobe capitalized as per the provisions of section 43A of the Act. Aggrieved assessee preferred appeal before CIT(A). The CIT(A) also disallowed simply by going through the assessment order and by observing as under:- I have gone through the order of the AO and aubmiasion made by the ld.AR, As submitted by the Assessee the sum of Rs. 10,56,75,723/- represents the prorate premium payable to the Banks on account of the forward contracts taken to cover the exchange risk in respect of foreign currency liability under various heads. However the fact remains that the foreign currency loans were taken for capital expenditure purpose therefore the provisions of sec 43A are clearly applicable to the amount claimed by the Assessee. Hence the AO has rightly disallowed sum Rs.10,56,75,723/- under sec 43A of the Act. Assessee's appeal on this issue is accordingly dismissed.

Aggrieved, now assessee is in appeal before the Tribunal.

4.2 W have heard rival contentions and gone through facts and circumstances of the case. We noted that it is disputable fact that the details of forex forward charges are before the AO which are filed by assessee before us now as Annexure A in its paper-book pages 1 to 3. The ld.counsel for the assessee argued that neither the AO nor the CIT(A) has gone into these details but observed that “it is also seen that the foreign currency loan were taken for capital expenditure purposes”. The ld.counsel for the assessee fairly stated

12 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 that the matter can go back to the file of the AO to examine the nature of expenditure and to verify the details of expenses and then decide accordingly. He stated that even the CIT(A) has not gone into the details.

4.3 After hearing both the sides and going through the facts, we are of the view that none of the authorities below had adjudicated this issue or gone into the details filed before us by assessee now i.e., page Nos.1 to 3 in Annexure ‘A’. The assessee is directed to file these details before AO and the AO will go into these details and decide this issue accordingly. Hence, this issue of assessee’s appeal is allowed for statistical purposes.

Revenue’s Appeal in ITA No.1077/CHNY/2017, AY 2012-13 6. Coming to Revenue’s appeal for assessment year 2012-13 in ITA No.1077/Chny/2017. The only issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the disallowance of expenses relatable to Corporate Social Responsibility (CSR) to the

13 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 tune of Rs.3.71 crores. For this Revenue has raised following grounds:- 2.1 The ld.CIT(A) erred in deleting the disallowance of expenses said to be relating to Corporate Social Responsibility to the tune of Rs.3.71 Crores without examining the facts such as the actual expenses incurred, place and purpose for which the money was spent and whether it is related to the business activities of the assessee.

2.2 The ld.CIT(A) has failed to provide the clear findings that how the expenses were interlinked with the business activities of the assessee company and failed to verify the details of the development works carried out by the assessee and to establish the business connection of the said expenses.

2.3 The CIT(A) ought to have seen that as per the explanatory notes to the Finance Act, 2014 relating to the expenses on Corporate Social Responsibility, these expenses are only application of income and hence not an allowable expenditure for the purpose of arriving at taxable income.

2.4 The CT(A) ought to have seen that the Explanation (2) to section 37(1) has been brought in only to clarify the position of law on expenses on Corporate Social Responsibility and hence the explanation is applicable to the case in hand retrospectively.

6.1 Brief facts are that the AO noted from the accounts of the assessee that it has spent an amount of Rs.3.71 crores as corporate social responsibility expenses. The AO noted that the expenses were towards conducting services which were in the nature of giving back to the society. According to AO, the expenses towards CSR are not for the purpose of business and accordingly he disallowed

14 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 the expenses at Rs.3.71 crores. Aggrieved, assessee preferred appeal before CIT(A).

6.2 The CIT(A) after hearing the assessee noted that the assessee’s business is of manufacturing and printing papers for which substantial amount water is required in the process and it generates hazardous, which has to be treated by a few and treatment plant. The treated water is used for irrigation by the farmers. To mitigate the hardships faced by the villagers, the assessee has to protect the general interest of the community in order to run its business. He noted that to main cordial relationship with the affected communities, the assessee owes the civil duty to provide various facilities namely laying off roads, other basic infrastructure facility and other community development expenses. These expenses are incurred to run its business smoothly. Therefore, the CIT(A) held that these CSR expenses are incurred for commercial expediency, in order to improve the image of the company and to facilitate carrying on the business. He relied on the decision of Hon’ble Karnataka High Court in the case of CIT vs. Infosys Technology Ltd., 360 ITR 714 and held that the CSR expenditure facilitates the business and hence, allowable

15 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 expenditure under section 37 of the Act. He finally allowed the claim of assessee by observing as under:- I have carefully considered the appellant submissions and find that the CSR expenditures are incurred to facilitate the assessee's business and hence respectfully following the judgement on the issue of CSR expenses of the honourable Karnataka High Court in the case of CIT Vs enforces technology Ltd, 2014, 360 ITR 714, the CSR expenditure is our expenditure which facilitates the business hence allowable expenditure under section 37 of the act. The ground of appeal on this issue is accordingly allowed. Aggrieved, now Revenue is in appeal before the Tribunal.

6.3 Before us, ld. Senior DR, Shri P. Sajit Kumar argued that as per Companies Act, 2013, the expenses relating to Corporate Social Responsibility w.e.f. 01.04.2014 is not be allowed. The ld. Senior DR stated that once the Companies Act specifically barred the allowance of expenses relating to Corporate Social Responsibility, vice-versa the Income Tax cannot allow these expenses. On the other hand, the ld.counsel for the assessee Shri Vikram Vijayaraghavan argued that the Companies Act, section 135 dealing with CSR was not notified from 01.04.2014 and CSR Rules were notified w.e.f. 01.04.2014. He argued that the Income Tax Act and the Companies Act are entirely different and the claim of deduction disallowed u/s.37(1) of the Act has to be read with the provisions of Income Tax Act only. He stated that Explanation (2) to section 37(1) of the Act was inserted w.e.f. 01.04.2015 and was specifically

16 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 held to be prospective by the Co-ordinate Raipur Bench of this Tribunal in the case of ACIT vs. Jindal Power Ltd., in ITA No.99/BLPR/2012, order dated 23.06.2016 and also by the Hon’ble High Court of Karnataka in the case of CIT vs. Infosys Technologies Ltd., (2014) 360 ITR 714. The ld.counsel stated that the amendment brought in by the Finance Act, 2014 w.e.f. 01.04.2015 by inserting Explanation (2) to section37(1) of the Act, categorically held to be prospective and not retrospective. In view of the above, the ld.counsel stated that the issue is fully covered by the decision of Co-ordinate Bench of Raipur Bench in the case of Jindal Power Ltd., supra and Hon’ble High Court of Karnataka in the case of Infosys Technologies Ltd., supra.

6.4 We have heard rival contentions and gone through the facts and circumstances of the case. We noted that this issue stand covered in favour of assessee and against Revenue by the decision of Hon’ble Karnataka High Court in the case of Infosys Technologies Ltd., supra wherein the Hon’ble Karnataka High Court has observed in para 25 as under:- 25. Therefore in the instant case, admittedly the assessee is having their establishment at Bannerghata Circle. Nearly about 500 employees are working in the said Unit. There was severe traffic congestion. Employees had to wait for longer time to reach the office. It seriously affected the

17 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 business of the assessee, resulting in delay in completing the project. In order to facilitate its employees to reach their establishment safely and early, the assessee has installed traffic signals at Bannerghata Circle. Though it is the responsibility of the State and in particular, the Police Department either to install the traffic signal or control the traffic, the fact remains that in the absence of traffic signal or traffic police being positioned at Circles, the traffic congestion is a regular phenomenon. It seriously affects the free movement of public and in the instant case, the employees of the assessee. The assessee also has corporate social responsibility. In this background, in order to discharge their corporate social responsibility which also facilitates their business if the employees were to reach the place early, they thought of incurring the expenditure for installing the traffic signal at Bannerghata Circle. This expenditure is laid out or expended wholly and exclusively for the purpose of business. Therefore, the said expenditure incurred is allowable as deduction under Section 37(1) of the Act. That is precisely what the Tribunal has held. The aid finding is in accordance with law and based of legal evidence. Therefore no case for interference is made out. Hence the said substantial question of law is answered in favour of the assessee and against the Revenue.

As the issue is squarely covered in favour of assessee and nothing adverse was brought before us, respectfully following the decision of Hon’ble Karnataka High Court in the case of Infosys Technologies Ltd., supra, we confirm the order of CIT(A) and dismiss this issue of Revenue’s appeal.

Revenue’s Appeal in ITA No.630/CHNY/2019, AY 2013-14 7. This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-7, Chennai in ITA No.110(T)/CIT(A)-7/2016-17 dated 14.12.2018. The assessment

18 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 was framed by the ACIT, Corporate Circle 3(1), Chennai for the assessment year 2013-14 u/s.143(3) of the Act vide order dated 28.03.2016.

7.1 The only issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the disallowance of expenses relatable to Corporate Social Responsibility to the tune of Rs.2.37 crores. The facts and issue is exactly identical to the issue raised by the Revenue in assessment year 2012-13 in ITA No.1077/CHNY/2017. Since, we have already decided the issue in favour of assessee in earlier assessment year 2012-13 vide para 6.4, taking a consistent view, we confirm the order of CIT(A) and dismiss the Revenue’s appeal.

Assessee’s Appeal in ITA No.3499/CHNY/2018, AY 2014-15 8. This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-11, Chennai in ITA No.261/16-17 dated 11.10.2018. The assessment was framed by the ACIT, Corporate Circle 3(1), Chennai for the assessment year 2014-15 u/s.143(3) of the Act vide order dated 12.12.2016.

19 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 8.1 The first issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in disallowing expenses relatable to exempt income by invoking the provisions of section 14A of the Act, read with Rule 8D(2)(ii) of the Income Tax Rules, 1962 amounting to Rs.4,06,526/-.

8.2 Brief facts are that the AO noted from the investment port folio of the assessee as on 31.03.2014 and the computation of income that the assessee has earned dividend income of Rs.6,02,992/- and claimed the same as exempt u/s.10(34) of the Act. The assessee has suo-motto quantified the disallowance u/s.14A r.w.rule 8D(2)(iii) i.e., administrative expenses at Rs.57,023/-. The AO by applying formula prescribed under Rule 8D(2)(ii) of the Rules also made disallowance under Rule 8D(2)(ii) i.e., interest disallowance at Rs.4,06,526/-. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) also confirmed the action of AO. Aggrieved, assessee is in appeal before the Tribunal.

8.3 Now before us, the ld.counsel for the assessee stated that he is interested in arguing only the disallowance of interest under Rule 8D(2)(iiii) i.e., amounting to Rs.4,06,526/-. The ld.counsel for the

20 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 assessee before us filed copy of balance sheet and stated that the assessee has availability of own interest free funds in the shape of share capital and reserves & surplus as on 31.03.2014 amounting to Rs.114597.40 lakhs and non-current investment is Rs.114.05 lakhs. The ld.counsel stated that the AO has nowhere proved any nexus that the interest bearing funds are invested in the instruments giving rise to exempt income and once there is no such finding in the assessment order, the presumption go in favour of assessee, in view of the decision of Hon’ble Bombay High Court in the case of CIT vs. HDFC Ltd., 366 ITR 505. The ld.counsel for the assessee took us through the assessment order and the order of CIT(A).

8.4 When these facts were confronted to ld. Senior DR, he could not controvert the above fact situation but he argued that the formula prescribed under Rule 8D(2) is final and it has to be invoked in any eventuality because the assessee has earned exempt income.

8.5 After hearing rival contentions and going through the facts, it is noted that the assessee has own interest free funds in the shape of share capital and Reserves & Surplus to the tune of Rs.114597.40

21 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 lakhs and non-current investment i.e., investment giving rise to exempt income is only Rs.114.05 lakhs. It means that the assessee has more interest free funds available with it for making investment in instruments giving rise to exempt income. Neither the AO nor the CIT(A) has recorded any finding that the interest bearing funds have been invested in the instruments giving rise to exempt income. Once the AO has not established that the interest bearing funds have gone into these investments which give exempt income, no disallowance can be made in case the assessee has more interest free funds available with it and claims that the investment is out of those funds which give rise to exempt income. The presumption in view of Hon’ble Bombay High Court in the case of HDFC Ltd., supra clearly goes in favour of the assessee. Hence, respectfully following Hon’ble Bombay High Court’s decision, we allow this ground of assessee’s appeal.

22 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 40(a)(ia) of the Act. For this, assessee has raised following grounds:- 3. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Rs.1,18,37,355/- being Commission paid to non residents u/s.40(a)(ia) of the Act on the ground that assessee has not complied with the provisions of Section 195 of the Act.

3.1 The Commissioner of Income tax (Appeals) ought to have found that similar disallowance made in the earlier assessment years 2006-07, 2007- 08 has been deleted by the Hon'ble Income Tax Appellate Tribunal vide Order in ITA No.554/Mds/2011 dt 30.06.2011 & ITA No.555/Mds/2011 dated 02-12-2011.

3.2 The Commissioner of Income tax (Appeals) ought to have appreciated that The commission was paid for procurement of export orders and the foreign agent has not rendered any services.

9.1 Brief facts are that the assessee company has paid commission of Rs.1,18,37,355/- to Jupiter Trading Company, Colombo, Srilanka. The AO noted that since the commission paid to a non-resident, assessee has to deduct TDS u/s.195 of the Act. The assessee has not deducted any TDS, hence invoking the provisions of section 40(a)(i) of the Act made disallowance of commission amounting to Rs.1,18,37,355/- and added back to the total income of the assessee. Aggrieved assessee preferred appeal before CIT(A).

9.2 The CIT(A) confirmed the disallowance vide para 8 as under:-

23 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 “8. As above, the issue has been held against the assessee by the Hon’ble ITAT, Chennai, as per citations quoted by assessee. The facts of the current year are similar to that of the facts of the previous year. In view of the same, the disallowance is sustained. The grounds on this issue are rejected.” Aggrieved assessee is in appeal before the Tribunal.

9.3 We have heard rival contentions and gone through facts and circumstances of the case. We noted that during the year under consideration the assessee has claimed agency commission paid to non-residents amounting to Rs.1,18,37,355/- for procuring export order. During assessment proceedings, the AO disallowed the commission paid to non-residents u/s.40(a)(i) of the Act on the ground that the Department had made a similar disallowance in the earlier years. Before CIT(A), the assessee submitted that the commission was paid for procurement of export orders. The foreign agent has not rendered any service except procuring export orders. Hence, the payment to foreign agent is their business profits and not fees for any technical services rendered by them. The assessee further submitted that the agent does not have a PE in India, no part of commission accrues in India and is therefore not taxable. Therefore no tax is required to be deducted u/s.195 of the Act. The income in the form of commission do not accrue, arise to those non- residents through or from any asset or sources of income in India or

24 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 through transfer of capital asset situated in India, accordingly, the provisions of section 9(1)(i) of the Act are not applicable. We further noted that a similar disallowance made in assessee’s own case in earlier assessment years 2006-07 & 2007-08 was deleted by the Tribunal in ITA No.554/Mds/2011 dated 30.06.2011 and 555/Mds/2011 dated 02.12.2011, wherein it is held as under:- “8. We have perused the orders of authorities below and heard the rival contentions. There is no doubt that assessee had paid the commission to overseas parties and there is also no dispute that such overseas agents had no PE in India. There is no dispute also that such overseas agents rendered services outside India for procuring export orders. Amendment harped on by the Revenue in Section 9(1) of the Act may be substitution of Explanation coming under sub-section (2) of Sec.9 by Finance Act, 2010 with retrospective effect on 01.06.1976. This is the only amendment made in Sec.9 by Finance Act, 2010. Such substituted explanation reads as under:-

“Explanation- For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause(v) or clause (vi) or clause(vii) of sub-section(1) and shall be included in the total income of the nonresident, whether or not, -

(i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.”

Here in the case before us, there is nothing on record shown by the Revenue for coming to a conclusion that the concerned non-resident agents had rendered any services in India or had a residence or place of business or business connection in India. Assessee having found that income of the non-residents were not chargeable to tax in India was justified in making the remittances without any deduction of tax at source. It is fully supported in this regard by the decision of Hon’ble apex Court

25 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 in the case of GE Technology Centre Pvt. Ltd (supra). We therefore, do not find any infirmity in the order of the Commissioner of Income Tax(A) in deleting the disallowance. Ground No.3 of the Revenue stands dismissed.

9.4 Respectfully following the Co-ordinate Bench decision in assessee’s own case, we reverse the orders of lower authorities and allow the claim of assessee and delete the disallowance. This issue of assessee’s appeal is allowed.

26 I.T.A. Nos.1048 & 1077/Chny/2017, 3499/Chny/2018 & 630/Chny/2019 of Rs.30,14,712/-. The facts and issue is exactly identical to the issue raised by the Assessee in assessment year 2012-13 in ITA No.1048/CHNY/2017. Since, we have already remanded back the issue to the file of AO in earlier assessment year 2012-13 vide para 4.3, taking a consistent view, we remand this issue back to the file of AO with similar directions. This issue of assessee’s appeal is allowed for statistical purposes.

Order pronounced in the open court on 22nd July, 2022 at Chennai.

Sd/- Sd/- (महावीर �सह ) (मनोज कुमार अ�वाल) (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा�य� /VICE PRESIDENT लेखा सद�य /ACCOUNTANT MEMBER चे�ई/Chennai, �दनांक/Dated, the 22nd July, 2022 RSR आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. िनधा�रती/Assessee 2. राज�व/Revenue 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.