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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI INTURI RAMA RAO & SHRI PARTHA SARATHI CHAUDHURY
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER Sl. ITA No. Name of Appellant Name of Respondent Asst. No. Year 1-2 2402/PUN/2017 HSBC Software DCIT, Circle-11, Pune 2011-12 2403/PUN/2017 Development (India) 2012-13 Pvt. Ltd., HSBC Centre, Riverside, West Avenue, 25B, Kalyani Nagar, Pune-411006. PAN : AABCH0517M Assessee by Ms. Harshula Kharti : Revenue by : Shri Rajeev Kumar Date of hearing : 27.09.2022 Date of pronouncement : 28.09.2022 आदेश / ORDER PER INTURI RAMA RAO, AM: These are the appeals filed by the assessee against the separate orders of ld. Commissioner of Income Tax (Appeals)-1, Pune [‘the CIT(A)’] dated 13.07.2017 for the assessment years 2011-12 and 2012-13 respectively. 2. First, we shall take up the appeal in ITA No.2402/PUN/2017 for A.Y. 2011-12 for adjudication. ITA Nos.2402/PUN/2017, A.Y. 2011-12 : 3. The assessee raised the following grounds of appeal :- “1. The learned CIT(A) erred in confirming the disallowance of Rs.1,35,93,675 made by the Assessing Officer ("AO") under section 14A of the Income Tax Act, 1961 ("the Act").
2 2. The learned CIT(A) erred in making following observations which are contrary to the facts of the case and in law: ...It is seen that the appellant itself has disallowed Rs. 15,33,215/- under Section 14A of the Income Tax Act. This disallowance has been made on adhoc basis and has not been substantiated by the appellant. The fact that the appellant had made disallowance under Section 14A shows that the appellant concedes that certain amount of expenditure was incurred in respect of earning the income. ...provisions of Section 14A read with Rule 8D are applicable as there is no other method but to apply rule 8D to calculate the disallowance. The Appellant objects to the above observations made by the learned CIT(A). 3. Without prejudice to the above grounds, the learned CIT(A) erred in not dealing with the alternate ground of appeal [ground no. 7 before CIT(A)] filed by the Appellant with respect non- grant of deduction by AO under section 10B (modified to section 10A) of the Act for the above disallowance of Rs.1,35,93,675 under section 14A of the Act. The grounds no. 7 before the CIT(A) reads as under: "Without prejudice to the above, the learned AO erred in not allowing the deduction under section 10B of the Act for the above disallowance of Rs.1,35,93,675 under section 14A of the Act. Consequently, the learned AO erred in recomputing the quantum of deduction under section 10B of the Act." 4. The learned CIT(A) erred in disallowing the deduction claimed by the Appellant under section 10B of the Act. 5. Each one of the above grounds of appeal is without prejudice to the other. 4. Briefly, the facts of the case are as under: The assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of development and sale of software development services to subsidiary HSBC group. The Return of Income for the assessment year 2011-12 was filed on 25.11.2011 declaring total income of
3 Rs.31,99,35,403/-. The assessee company also reported international transactions in Form 3CEB. On noticing the above international transactions, the AO referred the matter to the Transfer Pricing Officer (TPO) u/s 92CA for the purpose of benchmarking the above international transactions. The TPO vide order dated 30.09.2014 passed u/s 92CA(3) held that the international transactions of assessee company with its AE are at arm's length price and suggested no TP adjustment. On receipt of the order u/s 92CA, the AO completed the assessment u/s 143(3) vide order dated 30.03.2015 at a total income of Rs.146,32,01,943/-. While doing so, the AO made disallowance u/s 14A read with rule 8D of Rs.1,20,60,460/- and also made disallowance of Rs.113,15,18,134/- u/s 10B(7) r.w.s. 80IA. 5. Being aggrieved by the assessment order, an appeal was filed before the ld. CIT(A), who vide impugned order held that the assessee is not entitled to deduction u/s 10B, however, allowed the alternate claim of the assessee to allow the addition u/s 10A and also upheld the addition u/s 14A rejecting the contention of the assessee company that the AO without recording satisfaction, as to incorrectness of the claim of the assessee company that only expenditure of Rs.15,33,215/- was incurred to earn the exempt income, no recourse to the provisions of section 14A can be made.
4 As regards, addition u/s 10B(7) r.w.s. 80IA, the ld. CIT(A) considering the contentions made by the assessee company that higher profits were achieved by the assessee company on account of functional efficiency of the company remained uncontroverted, deleted the addition made by the AO u/s 10B(7) r.w.s. 80IA of the Act following his order for earlier assessment year 2010-11. 6. Being aggrieved by that part of order of ld. CIT(A), wherein, he confirmed the disallowance u/s 10B r.w.s. 14A, the assessee company is in appeal before us in the present appeal. 7. The grounds of appeal No.1 and 2 challenges the addition of Rs.1,35,93,675/- u/s 14A as confirmed by the CIT(A) as Rs.1,20,60,460/-. The assessee company offered suo motu disallowance of Rs.15,33,215/- under the provisions of section 14A of the Act. It was contention of the assessee company before the AO that the assessee derived exempt income from the investments made in mutual funds for which no separate charges required to be paid by the assessee and there was no entry or exit load. Despite this fact, the assessee company had disallowed 1/3rd portion of three employees u/s 14A and offered to tax. However, the AO rejected the contention in view of the fact that the assessee company made substantial investments in mutual funds and incurred substantial expenditure to earn the exempt income and worked out the disallowance u/s 14A read with rule 8D(2)(iii) which worked to
5 Rs.1,35,93,675/-. After reducing the amount of suo motu disallowance offered by the assessee, the balance amount of Rs.1,20,60,460/- was brought to tax by the AO. On appeal before the ld. CIT(A), the ld. CIT(A) confirmed the action of AO by holding that the assessee company offered disallowance on ad-hoc basis and unable to substantiate the contention and the fact that the assessee had himself offered disallowance goes to prove that the assessee had incurred expenditure to earn the exempt income. 8. The ld. AR contended before us that the AO cannot embark upon the provisions of section 14A r.w.s. 14A(2) without recording satisfaction as to how the claim of assessee that an amount of Rs.15,33,215/- is only incurred to earn the exempt income is incorrect. In support of this proposition, the ld. AR relied on the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (2018) 402 ITR 640 (SC), the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs. DCIT and Another (2010) 328 ITR 81 (Bom) and the Hon’ble Supreme Court in the case of Godrej and Boyce Mfg. Co. Ltd. vs. Dy. CIT (2017) 394 ITR 449 (SC). The ld. AR further contended that the observation made by the AO vide para 7.6 of the assessment order does not amount to the satisfaction as envisaged under the provisions of sub-section (2) of section 14 and thus, ld. AR submits
6 that the AO was not justified in making further disallowance u/s 14A in the absence of recording any satisfaction u/s 14A(2) of the Act. 9. On the other hand, the ld. CIT-DR submits that the observation made by the AO vide para 7.6 of the assessment order is nothing but a satisfaction as to the incorrectness of the claim that only an expenditure of Rs.15,33,213/- was incurred. He further submits that once the provisions of section 14A have application, then the amount of disallowance should be computed by applying the provisions of Rule 8D of the Income Tax Rules, 1962 (‘the Rules’). 10. We heard the rival contentions and perused the material on record. The only issue in the grounds of appeal relates to the computation of the amount of disallowance u/s 14A of the Act. Admittedly, the assessee company made investments which yielded the dividend income. The assessee company itself offered suo motu disallowance of Rs.15,33,213/-. The provisions of sub-section (2) of section 14A provides that resort to disallowance u/s 14A can be made only if the AO is not satisfied with the correctness of the claim of assessee in respect of expenditure incurred to earn the exempt income. Therefore, it is incumbent upon the AO to record satisfaction as to the correctness or otherwise of the assessee company that only an expenditure of Rs.15,33,213/- was incurred to
7 earn the exempt income. The Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (supra) held as follows: “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 Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer 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, the nature of the loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the Assessing Officer.” 11. Even the Hon’ble Bombay High Court in the case of Pr.CIT vs. Reliance Capital Asset Management Ltd, 400 ITR 217 (Bom) held as under: “The AO is not entitled to make any disallowance under Rule 8D if he does not specifically record that he is not satisfied with the correctness of the assessee's claim. The fact that the CIT(A) and ITAT were not satisfied with the assessee's disallowance and enhanced it does not mean that Rule 8D becomes applicable and the disallowance should be computed as per the prescribed formula.” 12. The similar view was taken by the Hon’ble Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd., 370 ITR 338 (Del) and PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd, 105 taxmann.com 274. In the present case, the AO vide para 7.6 merely observed that the assessee company made substantial investments in mutual funds and therefore, incurred substantial expenditure to earn the exempt income and in the circumstances, he was of the opinion that Rule 8D has to be applied.
8 Therefore, the question that comes up for consideration before us is whether the above observation made by the AO amounts to satisfaction as envisaged u/s 14A(2). It is a settled position of law that the satisfaction recorded by the AO should be based on the objective material and cannot be subjective. From mere reading of para 7.6, it is clear that the AO has not recorded satisfaction regarding the correctness of suo motu disallowance offered by the assessee u/s 14A and mere rejection of the explanation of the assessee per se, cannot be said to be a satisfaction as envisaged u/s 14A(2). The ratio laid down by the Hon’ble Delhi High Court in the case of PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd (supra) and PCIT vs. Keshav Power Ltd., 112 taxmann.com 323 as well as the Hon’ble Bombay High Court in the case of Pr.CIT vs. Reliance Capital Asset Management Ltd (supra) is squarely applicable. Therefore, we hold that the disallowance of Rs.1,20,60,460/- as made by the AO as confirmed by the CIT(A) is incorrect in law, as the AO had failed to record the satisfaction as envisaged u/s 14A(2). Thus, the grounds of appeal no.1 and 4 stand allowed. 13. The grounds of appeal No.3 and 4 challenges the correctness of the decision of CIT(A) in holding that the assessee company is not entitled to deduction u/s 10B for want of Board’s approval as envisaged under Explanation to sub-section (2) of section 10B.
9 14. This issue was decided by this Tribunal in assessee’s own case for assessment year 2010-11 in ITA No.1464/PUN/2017 dated 30.08.2022 in favour of assessee company. The ld. CIT-DR had not made out case before us to take different view. Respectfully, following the decision of the Tribunal in assessee’s own case (supra), we hold that the assessee company is entitled for deduction u/s 10B of the Act. 15. In the result, the appeal in ITA No.2402/PUN/2017 for A.Y. 2011-12 stands allowed. ITA No.2403/PUN/2017, A.Y. 2012-13 16. The assessee has raised the following grounds of appeal: “1. The learned CIT(A) erred in confirming the disallowance of Rs.65,08,219 made by the Assessing Officer ("AO") under section 14A of the Income Tax Act, 1961 ("the Act"). 2. The learned CIT(A) erred in making following observations which are contrary to the facts of the case and in law: ...It is seen that the appellant itself has disallowed Rs.2,55,536/- under Section 14A of the Income Tax Act. This disallowance has been made on adhoc basis and has not been substantiated by the appellant. The fact that the appellant had made disallowance under Section 14A shows that the appellant concedes that certain amount of expenditure was incurred in respect of earning the income. ...provisions of Section 14A read with Rule 8D are applicable as there is no other method but to apply rule 8D to calculate the disallowance. The Appellant objects to the above observations made by the learned CIT(A). 3. Without prejudice to the above grounds, the learned CIT(A) erred in not dealing with the alternate ground of appeal [ground no. 6 before CIT(A)] filed by the Appellant praying that the amount of expenditure disallowed under section 14A of the Act should be restricted to the exempt income earned by the Appellant. The ground no.6 before the CIT(A) reads as under:
10 "Without prejudice to the above, the learned DCIT erred in not appreciating that the amount of expenditure disallowed under section 14A of the Act cannot be higher than the amount of exempt income earned by the Appellant." 4. Each one of the above grounds of appeal is without prejudice to the other.” 17. Briefly, the facts of the case are as under: The assessee is a company incorporated as a private limited company. The assessee company undertakes high quality value add IT services, acts as an in-house software development centre and develops IT Solutions for HSBC group companies worldwide. The return of income for the assessment year 2012-13 was filed on 30.11.2012 declaring total income of Rs.379,17,01,980/-. Against the said return of income, assessment was completed by the Assessing Officer (AO) after making disallowance u/s 14A read with rule 8D of Rs.62,52,683/-. Being aggrieved by the above disallowance, an appeal was preferred before the CIT(A), who vide impugned order had confirmed the disallowance made by the AO. 18. Being aggrieved by the order of CIT(A), the appellant is before us in the present appeal. 19. We have heard the rival contentions and perused the materials available on record. This issue was decided by us in assessee’s appeal in ITA No.2402/PUN/2017 for the assessment year 2011-12 in favour of the assessee. The said decision shall apply mutatis
11 mutandis to this appeal in ITA No.2403/PUN/2017. Thus, the grounds of appeal stand allowed. 20. In the result, the appeal in ITA No.2403/PUN/2017 for A.Y. 2012-13 stands allowed. 21. To sum up, both the appeals assessee stands allowed, as above. Order pronounced on this 28th day of September, 2022. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; �दनांक / Dated : 28th September, 2022. Sujeet आदेश क� �ितिलिप अ�ेिषत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(A)-1, Pune. 4. The Pr. CIT-1, Pune. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “A” ब�च, 5. पुणे / DR, ITAT, “A” Bench, Pune. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.