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Income Tax Appellate Tribunal, DELHI BENCH ‘E’ : NEW DELHI
Before: HON’BLE, SHRI G.D. AGRAWAL & SHRI KULDIP SINGH
way of consolidated order to avoid repetition of discussion.
The appellant, Deputy Commissioner of Income-tax, Circle 6 (1), New Delhi and Deputy Commissioner of Income-tax, LTU, New Delhi (hereinafter referred to as ‘the Revenue’) by filing the present appeals, sought to set aside the impugned orders dated 07.01.2010, 25.01.2010, 07.12.2011 & 02.05.2012 passed by Ld. CIT (Appeals)-IX, New Delhi & CIT (Appeals)-LTU, New Delhi 2009-10 respectively.
The appellant, M/s. Mawana Sugars Limited (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned orders dated 15.09.2010 & 02.05.2012 passed by Ld. CIT-LTU, New Delhi qua the assessment years 2008-09 & 2009-10 respectively.
The Objector, M/s. Mawana Sugars Limited, by filing the present cross objections in ITA No.751/Del./2012, ITA No.752/Del./2012 & ITA No.2921/Del./2012, challenging the impugned orders dated 07.12.2011 & 02.05.2012 passed by the Ld. CIT (Appeals)-18, New Delhi qua the assessment years 2007-08, 2008-09 & 2009-10 respectively.
BRIEF FACTS OF FOR AY 2005-06 AND FOR AY 2006-07
In AY 2005-06, Assessing Officer made addition of Rs.24,29,687/- shown by the assessee as other income and categorized as per amount of loan written back. But assessee has reduced the same from taxable income during computation of working capital requirement, the same has been claimed as deduction in the form of expenses and other claims debited earlier to the profit & loss account. AO further made disallowance of Rs.1,47,67,361/- (subsequently rectified as Rs.1,23,90,639/-) and Rs.42,18,000/- in AY 2005-06 and 2006-07 respectively on account of proportionate interest on investment made in shares of Siel Holding Ltd. on interest free advances to its subsidiaries/sister concerns.
Assessee carried the matter by way of appeals before the ld. CIT (A) who has deleted the additions in both the appeals for AYs 2005-06 and 2006-07 by accepting the appeals filed by the assessee.
BRIEF FACTS OF FOR AY 2007-08 CO NO.153/DEL/2012 FOR AY 2007-08
AO made addition of Rs.381.20 lakhs on account of sale proceeds of sugar and Rs.32.20 lakhs on account of sale of scrap on the ground that the aforesaid receipt cannot be adjusted against the cost incurred by the company during the trial run period and made further addition of Rs.76.10 lakhs on account of interest income on short term deposit as the “Income from other sources”.
AO further made addition of Rs.1,05,000/- by invoking the provisions contained u/s 14A read with Rule 8D on account of disallowance in respect of dividend income.
Assessee carried the matter by way of appeal before the ld. CIT (A) who has deleted the additions of Rs.381.20 lakhs and Rs.32.20 lakhs on account of sale proceeds of manufactured goods and sale proceeds of scrap etc. respectively, however, confirmed the addition of Rs.76.10 lakhs made by the AO on account of income chargeable to tax under the head “Income from other sources”.
BRIEF FACTS OF FOR AY 2007-08 ITA NO.752/DEL2012 FOR AY 2008-09 CO NO.154/DEL/2012 FOR AY 2008-09 ITA NO.2921/DEL/2012 FOR AY 2009-10 CO NO.379/DEL/2012 FOR AY 2009-10
AO by invoking the provisions contained u/s 14A read with Rule 8D made addition of Rs.29,23,375/- , Rs.1,79,80,000/- and In AY 2007-08, AO further made disallowance of Rs.48,787/- on account of interest free advances by the assessee to its subsidiary/ sister concerns by following earlier order for AY 2006-07.
Assessee carried the matter by way of appeals before the ld. CTI (A) who has restricted the disallowance of Rs.1,79,80,000/- to Rs.13,20,073/- and Rs.1,78,60,000/- to Rs.17,19,600/- in AY 2008- 09 and 2009-10 respectively, however, ld. CIT (A) has confirmed the disallowance of Rs.29,23,375/- made by the AO u/s 14A in AY 2007-08 and also confirmed the addition of Rs.48,787/- in AY 2007-08, by partly allowing the appeals.
Assessee by filing cross objections in AY 2008-09 and 2009- 10 challenged the disallowance of Rs.13,20,073/- and Rs.17,19,600/- respectively sustained by the ld. CIT (A) by filing cross objections
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
FOR AY 2005-06 (REVENUE’S APPEAL) AND FOR AY 2006-07 (REVENUE’S APPEAL)
Ground No.1 in AY 2005-06 and for AY 2006-07 is general in nature, hence does not require any specific adjudication.
GROUNDS NO.2, 2.1 & 2.2 IN FOR AY 2005-06 (REVENUE’S APPEAL)
Grounds No.2, 2.1 & 2.2 are reproduced as under :-
“2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in restricting the addition of Rs.15.17 lacs as against RS.24.29 lacs made by the AO on account of the sum received by the assessee as a result of waiver of loan by M/s. FITL. 2.1 The Ld. CIT (A) ignored the fact that as whole of the waiver amount has been received during the year and is taxable u/s 41 (1) of the Act. 2.2 The Ld. CIT (A) ignored the fact that the assessee has got the net benefit to the extent of Rs.24.29 lacs including the interest components on the waiver of loan scheme.”
Undisputedly, amount of Rs.24,29,687/- was waived off by IDBI which has been shown by the assessee as other income in the category principal amount of loan “written back”. AO made the addition on the sole ground that waiver of the loan had resulted invoked section 41 (1) of the Act. It is also not in dispute that the assessee company has taken over running business of sugar factories as per scheme of arrangement w.e.f. 01.10.2002 in accordance with the order of Hon’ble High Court dated 26.08.2007 and at that time, total loan payable to IDBI as on 01.10.2002 was Rs.104 lakhs. It is also not in dispute that in respect of aforesaid loan, interest of Rs.9.12 lakhs had also become due and payable for the period 01.10.2002 to 31.09.2003 which was converted into zero coupon FTIL and on conversion, the interest amount has also become part of the loan. It is also not in dispute that resultantly, there is total waiver of loan of Rs.24.29 lakhs.
In the backdrop of the aforesaid facts and circumstances of the case, order passed by ld. Revenue authorities below, arguments advanced by ld. AR for the parties, the question arises for determination in this case is :-
“as to whether the amount remitted on account of loan liability was on capital account and hence not taxable u/s 41(1) of the Act as contended by the assessee?”
Mahindra Ltd. - 261 ITR 501 in order to work out as to how section 41 (1) of the Act is to be applied has held as under :-
“That in order to apply section 41(1), an assessee should have obtained a deduction in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee. The assessee has not obtained such allowance or deduction in respect of expenditure or trading liability. The assessee has paid interest at 6 per cent over a period of ten years on Rs.57,74,064. In respect of that interest, the assessee never got deduction under section 36(1)(iii) or section 37. In the circumstances, section 41(1) of the Act was not applicable. Secondly, even assuming that the assessee had got deduction on allowance section 41(1) was not applicable because such deduction was not in respect of loss, expenditure or trading liability. Lastly the toolings constituted capital assets and not stock-in- trade. Therefore, taking into account all the above facts, section 41 (1) of the Act was not applicable.”
Applying the law laid down by the Hon’ble Bombay High Court in case cited as Mahindra and Mahindra Ltd. (supra), we are of the considered view that waiver of loan cannot be chargeable to tax u/s 41 (1) of the Act, however the amount of interest converted into zero coupon FTIL to the tune of Rs.9.12 lakhs is certainly chargeable to tax u/s 41 (1) of the Act, deduction on this amount has been allowed u/s 43B of the Act. So, we find no illegality or perversity in restricting the deduction to Rs.15.17 lakhs as against Rs.24.29 lakhs by the ld. CIT (A), hence grounds no.2, determined against the Revenue.
GROUND NO.3 & 3.1 IN FOR AY 2005-06 (REVENUE’S APPEAL) GROUND NO.2 & 2.1 IN FOR AY 2006-07 (REVENUE’S APPEAL) GROUND NO.1 IN FOR AY 2007-08 (ASSESSEE’S APPEAL)
Grounds mentioned in the aforesaid appeals are identical except the difference in amount, therefore, for the sake of brevity, Grounds No.3 & 3.1 in AY 2005-06 are reproduced as under :-
“3. On the facts and in the circumstances of the case and in law, the learned CIT (appeals) has erred in deleting the addition of RS.1,23,90,639/- made by AO by disallowing proportionate interest on account of investment made in the sister concern by the assessee company. 3.1 The Ld. CIT (A) ignored the fact that each year is unique in itself and the assessee is paying interest on borrowed capital and has advanced interest free loans to sister concerns and made other investments with sister concerns.”
Undisputedly, assessee has made investment of Rs.1,47,67,361/-, Rs.42,18,000/- and Rs.8.05 lakhs in shares of M/s. Siel Limited and given interest free advances to its subsidiary respectively. It is also not in dispute that assessee has taken over the assets and liabilities to run two sugar factories from Siel Limited under scheme of arrangement approved by Hon’ble High Court vide order dated 26.08.2003 w.e.f. 01.10.2002. It is also not in dispute that as a result of operation of sugar unit during the period appointed between 01.10.2002 to effective date 26.08.2003, an amount of Rs.1563.88 lakhs was payable by Siel Limited to the assessee company when business was actually transferred to the assessee and subsequently, the amount reduced to Rs.1270.33 lakhs as on 31.03.2005 as a result of payment adjustment made during 26.08.2003 to 31.03.2005. It is also not in dispute that the assessee has made investment of Rs.5.20 crores in M/s. Siel Limited in terms of SOA with the approval of Corporate Debt Restructuring Cell (CDR Cell). It is also not in dispute that loan of Rs.788.90 lakhs to Siel Holding Limited was also given for the purpose of repaying loans to banks and financial institutions by M/s. Siel Holding Limited in terms of SOA.
It is the case of the assessee that no disallowance on account of interest in case of investments/advances can be made as the same has been given out of its own surplus funds and no borrowed aforesaid undisputed facts and contentions raised by ld. AR for the assessee as well as ld. DR, the ld. CIT (A) deleted the aforesaid additions by returning following findings as under :-
“4.5 The submissions of the Ld ARs have been carefully considered. From the details filed by the appellant it is observed that advance of Rs.1270.33 lakhs to Siel Limited is brought forward from earlier years and no disallowance was made in assessment years 2003-04 and 2004-05. Investment of Rs.520 lacs in shares of Siel Limited had been made out of proceeds of right issue made by the appellant company in accordance with the SOA and appellant was permitted by the COR Cell to raise right issue of Rs.8.50 crores for the purpose of making investment in above shares of Siel Limited. Advance of Rs.788.12 lacs to Siel Holdings Limited has also been made in accordance with the SOA. Further, the funds on account of share capital and reserves to the extent of Rs.116.68 crores which is much higher than the above mentioned investments / loans to sister concerns were available with the appellant. Current year's profit of the company were also Rs.40.15 crores. Case law relied upon by the Ld. ARs also supports the claim of the company. In view of the facts of the case and the judgements relied upon by the AR I am afraid I cannot agree with the action of the AO in disallowing interest in respect of investment made in Siel Limited as well as loan / advances receivable from Siel Limited and Siel Holdings Limited. Hence, AO is directed to delete the disallowance of Rs.1,23,90,639/-.”
Hon’ble Delhi High Court in case cited as CIT vs. Tosha 22.
International Ltd. – 331 ITR 440 (Delhi) held that when the assessee has provided interest free advances to its subsidiary relevant time the assessee was having adequate non-interest bearing funds in the form of share capital and reserves, the advances made to subsidiary on business consideration are nothing but commercial expediencies of the assessee.
We are of the considered view that when it is not in dispute that advance of Rs.1270.33 lakhs to M/s. Siel Limited was brought forward from earlier years and no such disallowance was made in AYs 2003-04 and 2004-05 and investment of Rs.520 lakhs in shares of Siel Limited had been made out of the proceeds of right issue in terms of SOA as permitted by CDR Cell and the assessee has reserves of Rs.116.68 crores and current year’s profit of company was Rs.40.15 crores which is higher than the aforesaid investment/loans to the sister concerns, the ld. CIT (A) has rightly deleted the disallowance of Rs.1,23,90,639/-. So, Grounds No.3 & 3.1 in AY 2005-06 are determined against the Revenue.
Since facts in AY 2006-07 for making investment and providing interest free advances to subsidiary companies are identical to that of AY 2005-06, the aforesaid findings returned by the Bench are applicable to AY 2006-07 also. So, we are of the disallowance of Rs.42,18,000/- in AY 2006-07. So, Grounds No.2 & 2.1 in for AY 2006-07 are determined against the Revenue.
So far as disallowance of interest expenses of Rs.48,787 in for AY 2007-08 is concerned, the Ld. CIT (A) has merely confirmed the disallowance on the ground that, “when the ARs were specifically requested to establish their claim that the advances/investments were made out of own funds, they could not do so. Under the circumstances, I am unable to agree with the decision taken by my Ld. Predecessor.” We accept the contentions raised by the ld. AR for the assessee that this issue is covered by assessee’s own case for AY 2005-06 and 2006-07 which is not controverted by the ld. DR for the Revenue. However we dispose of this ground with a direction to the AO to verify the case at hand that advances/investments were made out of own interest free surplus funds by the assessee and if it is so, then disallowance shall be deleted otherwise CIT (A)’s finding shall stand confirmed. So, Ground No.1 in ITA No.5614/Del/2010 for AY 2007-08 is determined in favour of the assessee for statistical purposes.
GROUNDS NO.1, 2 & 3 IN FOR AY 2007-08 (REVENUE’S APPEAL) AND GROUNDS NO.1 & 1.1 IN CO NO.153/DEL/2012 FOR AY 2007-08 (ASSESSEE’S CO)
Grounds No.1, 2 & 3 in for AY 2007- 08 is reproduced as under :-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of RS.381.20 lakhs being amount of sale proceeds of sugar and Rs. 32.20 Lakhs being amount of sale of scrap etc., which were received during the period of trial run.
2. On the facts and in the circumstances of the case, the Ld. CIT (Appeals) has erred in holding that the receipts referred to in Ground No. (1) above are required to be capitalized and adjusted against the cost of projects, without appreciating the fact that these amounts had been received after the assessee had started production.
3. On the facts and in the circumstances of the case, the Ld. CIT (Appeals) has erred in holding that the Supreme Court's decision in the case of CIT vs. Bokaro Steels Ltd (236 ITR 315) is applicable to the facts of this case.”
Grounds No.1 & 1.1 in CO No.153/Del/2012 for AY 2007-08 is reproduced as under :-
“1. That on facts and in law the CIT(A) erred in upholding the taxability of interest income of Rs.76.10 as income chargeable to tax under the head "income from other sources". 1.1 That on facts and in law the CIT(A) erred in not appreciating that the above Interest income was in the nature of "capital receipt" (i.e. operational, trial run period income) and hence not exigible to tax.” the assessee has received pre-operative interest income of Rs.79,61,000/- (the correct amount is Rs.76.10 lakhs) and has sold sugar of Rs.3,81,20,000/- termed as income from trial run of the new sugar units; and has further received misc. income of Rs.32,20,000/- (total comes to Rs.4,84,01,000/-) on which no tax has been offered. AO by relying upon the decision rendered by Hon’ble Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT – 227 ITR 172 proceeded to conclude that income from short term deposit with the banks in operation period is chargeable to tax under the head ‘income from other sources’ and consequently the interest income of Rs.76.10 lakhs is brought to tax under the head ‘income from other sources’. AO also brought to tax misc. income of sale of sugar on trial run under the head ‘income from other sources’ as the assessee has not incurred any expenditure u/s 57 of the Act and made total addition of Rs.4,84,01,000/-.
When the assessee carried the matter before the ld. CIT (A) by way of filing the appeal he has deleted the addition made by the assessee on account of sale proceeds of Rs.381.20 lakhs on manufacturing goods and sale proceeds of scrap etc. of Rs.32.02 Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra) confirmed the addition of Rs.76.10 lakhs being interest on short term deposits by treating the same as income from other sources.
Both Revenue as well as assessee have come up in appeal as well as cross objections by challenging the impugned addition before the Tribunal.
Undisputedly, during the pre-operative period, assessee has neither claimed nor allowed any depreciation. It is also not in dispute that during the said period, cost is more than expenditure, as is evident form para A at page 42 of the written submissions made by the assessee before the AO.
It is the case of the assessee that the company has borrowed loan for its business purpose on which interest of Rs.171.30 million was paid and in order to reduce the burden on account of heavy interest payments, the amount of loans not immediately required by the assessee were kept in the fixed deposits with the bank. Since availing of the loan by the assessee company for business purpose and keeping part of the said loan in fixed deposits being not required at that moment are having business nexus as temporary from other sources.
It is also the case of the assessee that during the period of expansion apart from purchase of machinery/equipments and services, the assessee has also incurred expenditure on account of salaries and wages for the employees involved in expansion, power & fuel, stores & spares, insurance, interest on term loan etc. which were not debited to the profit & loss account and shown separate as pre-operative expenditure. However, those expenditure were later on allocated on the assets capitalized. Assessee explained that during the period under consideration, the assessee has received certain receipts which are netted off with expenditure while capitalization and given the details thereof as under :-
SI Particulars Expenses/ Expenses/ Expenses/ No . receipts receipts up to receipts for up to the 31.03.2007 period. 30.09.2006 01.10.2006 to 31.03.2007 1. Expenses other than 210.80 142.29 68.60 . interest 2. Interest 248.97 77.67 171.30 Total A 459.77 219.96 239.90 Less: a. Interest received 19.69 12.08 7.61 b. Income from trial run 38.12 0.00 38.12 c. Misc Income 3.72 0.50 3.22 Total B 61.53 12.58 48.95 Total expenses(A-B) 398.24 207.38 190.86 amount of Rs.76.10 lakhs earned by the assessee as interest income during the pre-operative period cannot be brought to tax under the head ‘income from other sources’ as the same was part of the composite transaction when the assessee company after availing huge loan has kept some part thereof being not required at that moment in the fixed deposits.
Hon’ble Madras High Court in case cited as Commissioner 35. of Income-tax v. VGR Foundations- [2008] 298 ITR 132 (Mad) held that the expenses incurred prior to the commencement of the business – interest income from out of fixed deposits with bank for period prior to commencement of business, the interest income can be set off against the expenses and as such, the said income cannot be treated as ‘income from other sources’ to be brought to tax.
So far as question of deleting the addition of Rs.381.20 lakhs and Rs.32.20 lakhs on account of sale proceeds of sugar and scrap respectively by the ld. CIT (A) is concerned, we are of the considered view that the sale of the manufactured goods and sale of scrap being linked to the expenditure incurred by the assessee company during the trial period cannot be treated as income from other sources to brought the same to tax.
Steel Ltd. - 236 ITR 315 (SC) while deciding the identical issue held that in case the assessee receives any amount which are inextricably linked with the processing of setting of its plant and machinery, such receipts will go to reduce the cost of assets and these receipts are of capital nature and cannot be treated as income.
(supra) is reproduced for ready perusal as under :-
“Held, dismissing the appeal, that the first three heads of income were (i) the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii), interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which by the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They has, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.” following the law laid down by Hon’ble Supreme Court in CIT vs. Bokaro Steel Ltd. (supra), we are of the considered view that sale of sugar and scrap in the pre-operative period as well as interest income from FDRs bought by the assessee in the pre-operative period out of the loan taken on heavy interest being not required for the time being are directly connected with the completion of the project and as such, cannot be brought to tax by treating the same as income from other sources. So, ld. CIT (A) has rightly deleted the addition of Rs.381.20 and Rs.3.20 lakhs on account of sale of sugar and scrap etc. respectively.
However, ld. CIT (A) has erred in confirming the addition of Rs.76.10 lakhs being the interest on short term deposits made by the assessee company by relying upon Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (supra), hence findings of ld. CIT (A) confirming the addition of Rs.76.10 lakhs is ordered to be deleted, so Grounds No.1, 2 & 3 in for AY 2007-08 is determined against the Revenue and Grounds No.1 & 1.1 in CO No.153/Del/2012 for AY 2007-08 are determined in favour of the assessee.
Ground No.2 in CO No.153/Del/2012 for AY 2007-08 has been first time raised before the Tribunal by the assessee.
However, ld. AR for the assessee has not pressed this ground keeping in view the smallness of the addition, hence determined accordingly.
GROUNDS NO.3 & 4 IN CO NO.153/DEL/2012 FOR AY 2007-08 (ASSESSEE’S CO)
Grounds No.3 & 4 in CO No.153/Del/2012 for AY 2007- 08 are general in nature, hence do not require any specific adjudication.
GROUNDS NO.2, 2.1, 2.2 & 3 IN FOR AY 2007-08 (ASSESSEE’S APPEAL) GROUNDS NO.1 & 2 IN ITA NO.752/DEL/2012 FOR AY 2008-09 (ASSESSEE’S APPEAL)
GROUNDS NO.1, 2, 3 & 4 IN CO NO.154/DEL/2012 FOR AY 2008-09 (ASSESSEE’S CO) GROUND NO.1 IN FOR AY 2009-10 (REVENUE’S APPEAL)
GROUNDS NO.1, 2, 3 & 4 IN CO NO.379/DEL/2012 FOR AY 2009-10 (ASSESSEE’S CO) except the difference in amount, therefore, for the sake of brevity, Grounds No.1 & 2 in for AY 2008-09 are reproduced as under :-
“1. On the facts and the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in restricting the disallowance of Rs. 179.80 made by the AO u/s 14A of the Act to Rs.13,20,073/- 2. On the facts and in the circumstances of the case, the Ld. CIT (Appeals) has erred in taking into account the stand alone balance sheet of M/s Siel Ltd. as on 31.3.2007, when the merger of the erstwhile company of Mawana Sugars Ltd. with the assessee company has taken place on 1.10.2006 , i.e. during the previous year relevant to AY. 2007-08, when assessment in relation to any period after 1.10.2006 is to be made in the case of assessee company only; and the entire amount of interest paid has be claimed as deduction in the case of the assessee company only.”
Grounds mentioned in the aforesaid cross objections raised by the assessee are identical except the difference in amount, therefore, for the sake of brevity, Grounds No.1, 2, 3 & 4 in CO No.154/Del/2012 for AY 2008-09 are reproduced as under :-
“1. That on facts and in law the C1T(A) erred in upholding disallowance of Rs.13,20,073 (i.e Rs 3,20,073/- out of interest cost and Rs.10,00,000/- out of administrative expenses) under section 14A of the Income Tax Act
2. That on facts and in law the CIT(A) erred in erred in upholding the assumption of jurisdiction u/s 14A r/w Rule 80(2) by the AO.
3. That on facts and in law to the Commissioner of Income Tax (Appeals) {herein above referred to as 25 1479 & 5614/Del/2010 ITA No.751 & 752/Del/2012 CO No.153, 154 & 379/Del/2012 ITA No.2921/Del/2012 "CIT(A)"} erred in upholding the order of AO partly and not allowing complete relief as claimed.
4. That on facts and in law the order passed by Assessing Officer {herein above referred to as "AO"} is void ab initio and bad in law.
AO by invoking the provisions contained u/s 14A made addition of Rs.29,23,375/-, Rs.179.80 lakhs and Rs.1,78,60,000/- in AYs 2007-08, 2008-09 and 2009-10 respectively, which has been confirmed by the ld. CIT (A) in AY 2007-08 but given part relief in AYs 2008-09 & 2009-10. For AY 2008-09 and 2009-10, assessee filed cross objections upholding the disallowance of Rs.13,20,073/- and Rs.17,19,600 for AY 2008-09 & 2009-10 respectively. It is the case of the assessee that during the year under assessment, no exempt income has been earned and as such, section 14A is not attracted to make disallowance.
When the assessee has come up with categoric defence that it has not earned any exempt income during the year under assessments, the AO was required to record his dissatisfaction as to the working made by the assessee, rather proceeded to invoke the provisions contained u/s 14A by relying upon the decision of Daga Capital Management Pvt. Ltd. 312 ITR (AT) 01.
Hon’ble jurisdictional High Court in case cited as Cheminvest Ltd. vs. CIT - (2015) 378 ITR 33 (Delhi) wherein it is held as under :-
“Held, that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee was not in doubt, no disallowance could be made under section 14A.”
Hon’ble Apex Court in Godrej & Boyce Manufacturing 47.
Company Ltd. vs. DCIT – 394 ITR 449 (SC) thrashed the issue in controversy as to invoking of the provisions contained under Rule 8D of the Rules by observing as under :-
“37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”
In view of the decisions rendered by Hon’ble Delhi High Court in case cited as Cheminvest Ltd. vs. CIT and Godrej & Boyce Manufacturing Company Ltd. vs. DCIT (supra), when the AO has not recorded his dissatisfaction as to the working that assessee has not earned any dividend income nor incurred any expenses on interest for the year under assessments, provisions contained u/s 14A are not attracted. So, AO/CIT (A) have erred in making disallowance u/s 14A.
However, AO shall verify the facts that the assessee has not earned any exempt dividend income nor incurred any expenses on interest during the year under assessments if this confirmation is found to be correct then disallowance shall be treated as deleted otherwise impugned orders passed by ld. CIT (A) shall follow.
Consequently, Grounds No.2, 2.1, 2.2 & 3 in for AY 2007-08 are determined in favour of the assessee. Grounds No.1 & 2 in ITA No.752/DEL/2012 for AY 2008-09 and Ground No.1 in ITA No.2921/Del/2012 for AY 2009- 10 are determined against the Revenue. Grounds No.1, 2, 3 & 4 in CO No.154/Del/2012 for AY 2008-09 and Grounds No.1, 2, 3 & 4 of the assessee.
751/Del/2010, 752/Del/2010 and 2921/Del/2010 filed by the Revenue are dismissed and filed by the Nos.153/Del/2012, 154/Del/2012 & 379/Del/2012 filed by the assessee are allowed. Order pronounced in open court on this 28th day of May, 2018.