VARDHMAN SPECIAL STEELS LTD.,LUDHIANA vs. DCIT, CIRCLE-1, LUDHIANA

Q: Which sections of the Income-tax Act were involved?

Section 14A, Section 115JB, Section 36(1)(iii), Section 57, Section 143(3), Section 270A

ITA 79/CHANDI/2024Status: DisposedITAT Chandigarh20 May 2025AY 2018-1914 pages

AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the AO erred in invoking Rule 8D without recording satisfaction based on cogent reasons. The assessee had made a suo-moto disallowance of Rs. 556/- based on a proportionate method, which was supported by judicial pronouncements, including the assessee's own case. The AO's reliance solely on Rule 8D without examining the assessee's methodology was incorrect. Therefore, the disallowance under Section 14A was deleted. Regarding the interest expenditure disallowance under Section 36(1)(iii), the Tribunal noted that the AO had not clearly established whether borrowed funds were used for investments not related to business. The assessee argued that the expenditure should be allowed under Section 57. The Tribunal found merit in this argument and directed that the issue of allowing interest expenditure under Section 57 be examined. The issue of importing Section 14A disallowance into Section 115JB was not explicitly decided as the primary disallowance was deleted.

What were the facts?

The assessee, Vardhman Special Steels Ltd., filed its income tax return for Assessment Year 2018-19, declaring nil total income, a long-term capital loss, and exempt income. Taxes were paid under MAT provisions. The case was selected for scrutiny. The Assessing Officer (AO) disallowed Rs. 1,78,314/- under Section 14A read with Rule 8D, considering investments that could yield exempt income, despite the assessee's suo-moto disallowance of Rs. 556/-. The AO also disallowed Rs. 8,16,010/- as interest expenditure on investments under Section 36(1)(iii), deeming them not for business purposes. The assessee appealed to the CIT(A)/NFAC, which upheld the AO's order. The assessee is now appealing to the ITAT.

What were the issues?

1. Whether the National Faceless Appeal Centre/CIT(A) erred in upholding the disallowance of Rs. 1,78,314/- under Section 14A of the Income Tax Act, 1961, read with Rule 8D, ignoring the assessee's contentions? - Assessee's contention: The AO erred by not recording satisfaction with cogent reasons before invoking Rule 8D and by not accepting the assessee's proportionate method of expense allocation for suo-moto disallowance. The assessee relied on its own case and associate companies' cases decided by the ITAT. - Revenue's contention: Not recorded. 2. Whether the National Faceless Appeal Centre/CIT(A) erred in importing the disallowance made under Section 14A into the calculation of book profits under Section 115JB of the Act? - Assessee's contention: Not recorded. - Revenue's contention: Not recorded. 3. Whether the National Faceless Appeal Centre/CIT(A) erred in upholding the disallowance of interest expenditure of Rs. 8,16,010/- on a notional basis on investments under Section 36(1)(iii) of the Act? - Assessee's contention: The investments were made from own funds and the interest expenditure should be allowed as a deduction under Section 57 against income from other sources. - Revenue's contention: Not recorded. 4. Whether the National Faceless Appeal Centre/CIT(A) erred in not allowing the interest expenditure under Section 57 of the Act and setting it off against income from other sources? - Assessee's contention: The interest expenditure should be allowed under Section 57 against income from other sources. - Revenue's contention: Not recorded.

Which sections of the Income-tax Act were involved?

Section 14A,Section 115JB,Section 36(1)(iii),Section 57,Section 143(3),Section 270A

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances

आयकर अपीलीय अधिकरण, चण्डीगढ़ न्यायपीठ “B”, चण्डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “बी”, CHANDIGARH HEARING THROUGH: PHYSICAL MODE श्री ललित कुमार, न्यायिक सदस्य एवं श्री कृणवन्त सहाय, लेखा सदस्य BEFORE: SHRI. LALIET KUMAR, JM & SHRI. KRINWANT SAHAY, AM आयकर अपील सं. / ITA No. 79 /Chd/2024 निर्धारण वर्ष / Assessment Year : 2018-19 Vardhman Special Steels Ltd. Vardhman Premises, Chandigarh Road, Ludhiana, Punjab-141010 स्थायी लेखा सं./ PAN NO: AADCV4812B अपीलार्थी/Appellant बनाम The DCIT Cirlce-1, Ludhiana प्रत्यर्थी / Respondent निर्धारिती की ओर से/Assessee by : Shri Tejmohan Singh, Advocate राजस्व की ओर से / Revenue by : Dr. Ranjit Kaur, Addl. CIT, Sr. DR सुनवाई की तारीख/Date of Hearing : 06/03/2025 उदघोषणा की तारीख / Date of Pronouncement : 20/05/2025

आदेश/Order

PER KRINWANT SAHAY, A.M: This is an appeal filed by the Assessee against the order of the Ld. CIT(A)/NFAC Delhi dt. 29/11/2023 pertaining to Assessment Year 2018-

19.2.

In the present appeal Assessee has raised the following grounds:

That the Order passed by the National Faceless Appeal Centre / Ld. CIT(A) is contrary to law and also have been passed without appreciation of facts of the case.

That the National Faceless Appeal Centre / Ld. CIT(A) erred in law and on facts in upholding the disallowance of Rs.1,78,870/- (though restricted to Rs.1,78,314/- after allowing credit of suo-moto disallowance of Rs.556/-) under Section 14A of The Income Tax Act, 1961 read with Rule 8D ignoring the contention of the assessee.

That the National Faceless Appeal Centre/Ld. CIT(A) erred in law and on facts in importing the disallowance made u/s 14A into the scheme of calculation of book profits as per Section 115JB of the Act.

That the National Faceless Appeal Centre /Ld. CIT(A) has erred in law and on facts while upholding the disallowance of interest expenditure on notional basis amounting to Rs.8,16,010/- on investments under the provisions of Section 36(1) (iii) of The Act.

Without pre-judice to ground no.4, the National Faceless Appeal Centre /Ld. CIT(A) has erred in not allowing the above mentioned interest expenditure under Section 57 of The Act and setting off the same against income from other sources.

That the appellant craves leave to add/alter/amend any ground of appeal on or before the due date of hearing of appeal.

Briefly the facts of the case are that Vardhman Special Steels Limited, a public limited company engaged in manufacturing and exporting steel billets, rolled bars, and rods, filed its original income tax return for the A.Y. 2018-19 on 09/10/2018, declaring a total income of "Nil," a long-term capital loss of Rs.29,69,207/-, and exempt income of Rs.1,41,656/-. A revised return was filed on 30/03/ 2019, maintaining the total income as "Nil," with a reduced long-term capital loss of Rs. 26,69,207/- and exempt income of Rs.1,42,194. Taxes of Rs.5,78,97,933/- were paid on book profits of Rs.27,12,91,436/- under the MAT provisions in both returns. The case was selected for complete scrutiny under the E-assessment Scheme, 2019, focusing on issues such as claims under Schedule BP, investments/advances/loans, ICDS compliance, and investment in immovable property. Notices under Section 143(2) were issued by the National e-Assessment Centre (NeAC) on 22/09/2019, and the case was later transferred to the Regional e-Assessment Centre (ReAC) on 15/10/2020, for faceless assessment. Further notices under Section 142(1) were issued on 27/01/2020, 24/12/2020, and 22/02/2021, to which the assessee responded with the required details.

1 Regarding disallowance under Section 14A read with Rule 8D, the AO noted that the assessee had investments of Rs.8,14,98,234, potentially yielding exempt income. The assessee disallowed Rs.556 under Section 14A, attributing it to expenses paid to PMS proportionate to the dividend income of Rs.1,42,194. However, the AO did not accept the assessee's explanation. He referred to Rule 8D changed from 02.06.2016 and a CBDT circular from 2014, which say that expenses must be disallowed if investments could give tax-free income, even if no such income was actually received. The AO calculated the disallowed amount as 1% of the average value of these investments amounting to Rs.1,78,86,781.75, which came to Rs.1,78,870/-. Since the assessee had already disallowed Rs.556/-, the remaining Rs.1,78,314/- was added back to the taxable income. The AO also started penalty proceedings under Section 270A for under-reporting income.

2 The AO disallowed interest under Section 36(1)(iii), stating that the assessee's investment of Rs.8,14,98,234/- in shares and mutual funds was not for business purposes, as the company's main business was steel manufacturing. Although the assessee claimed it used its own funds and cited various decisions to support this, the AO argued that it was unclear whether borrowed or own funds were used. The AO referred to a Supreme Court decision and said that interest can only be claimed as a deduction if the borrowed money is used for business. Since that wasn't clearly shown, the AO disallowed Rs.8,16,010/- calculated at 12% for one month and also started penalty proceedings under Section 270A.The AO added this disallowance, along with Rs. 1,78,314/-under Section 14A, to the revised returned income of Rs.14,69,49,564/-, resulting in a total income of Rs.14,79,43,888/-. However, after setting off earlier year losses of Rs.87,88,41,731/-, taxable income became nil. For MAT purposes, book profit was revised to Rs.27,14,69,750/-. The assessment was completed under Section 143(3), and a demand notice was issued.

Against the order of the AO the assessee went in appeal before the Ld. CIT(A) who has since dismissed the appeal of the Assessee.

Against the order of the Ld. CIT(A) the assessee preferred an appeal before the Tribunal.

During the course of hearing the Ld. Counsel for the Assessee submitted brief submissions which read as under: Ground No. 1 - General in nature Ground No. 2 That the National Faceless Appeal Centre/Ld. CIT(A) erred in law and on facts in upholding the disallowance of Rs.1,78,870/- (though restricted to Rs.1,78,314/- after allowing credit of suo-moto disallowance of Rs.556/-) under Section 14A of The Income Tax Act, 1961 read with Rule 8D ignoring the contention of the assesse.

AO's Action That Ld. AO disallowed a net amount of Rs.1,78,314/- u/s 14A of the Act after deducting suo-moto disallowance of Rs.556/- made by the assesse.

Breakup of Disallowance made by the AO Disallowance u/s 14A r.w Rule 8D(2)(ii) Less – Suo-moto Disallowance by the assesse Balance Disallowance

Rs.1,78,870/- Rs.556/- Rs.1,78,314/-

CIT(A)'s Action - That Ld. CIT(A) / National Faceless Appeal Centre upheld the disallowance made u/s 14A of the Act by simply relying on AO's order.

Assesse's Submission:

Brief Facts:

The assessee during the year under consideration earned dividend income of Rs.1,42,194/- by making investments through PMS (Portfolio Management Service) / AIF(Alternative Investment Fund) only.

Since, the assessee, earned both exempt income and taxable income during the year under consideration through PMS/AIF, accordingly, the assessee had disallowed Rs.556/- u/s 14A by allocating the expense paid to PMS/AIF in the ratio of income received from it. Calculation of disallowance made by assessee is enclosed vide separate Paperbook at page 30. Thus, Out of total PMS/AIF expenses of Rs.1,20,116/-, the assessee allocated Rs.556/- in proportionate manner.

Submissions:

No satisfaction recorded based on cogent reasons before invoking Rule 8D.

reproduced hereunder:

calculated. There is no other method prescribed under the tax laws.”

reference;