DEPUTY COMMISSIONER OF INCOME TAX 8(1)(2), MUMBAI vs. SAJJAN INDIA LTD, MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER; 1. This appeal by Revenue is directed against the order of ld. Commissioner of Income-tax (Appeals)-14, Mumbai (the ld. CIT(A) dated 29.09.2016 for Assessment Year 2012-13. The revenue has raised the following grounds of appeal: (i) The Learned CIT(A) has erred on facts and in law by deleting the disallowance made u/s. 14A r.w Rule 8D(2)(ii) and under Rule 8D(2)(iii) of Rs. 95,81,260/- without properly appreciating the factual and legal matrix of the case as clearly brought out by the Assessing Officer in the Assessment Order. (ii) The Ld. CIT(A)’s order is contrary to law and on facts and deserves to be set aside. Mum 2017-M/s Sajjan India Ltd.

related with disallowance under Rule 8D(2)(iii).

12. 6. On the other hand, the ld. Departmental Representative (DR) for the revenue submits that the issue for disallowance under Rule 8D(2)(iii) may be restored to the file of Assessing Officer for verification of facts and to pass the order for verification of facts as per the direction in order dated 28.11.2017 and compute the fresh disallowance under Rule 8D(2)(iii). Mum 2017-M/s Sajjan India Ltd.

“ITA No. 5550/Mum/2015 and 5751/Mum/2015-AY 2011-12 2. The assessee is aggrieved by the disallowance made by the learned assessing officer( hereinafter called as "the AO") u/s 14A of the Income-tax Act, 1961(hereinafter called "the Act") r.w.r. 8D(2)(ii) and (iii) of the 1962 Rules, vide assessment order dated 29-01-2014 u/s 143(3), which was later confirmed by learned Commissioner of Income-tax(Appeals) (hereinafter called "the CIT(A)) vide appellate orders dated 30-10-2015 both under the normal provisions as well under the provisions of Section 115JB concerning computation of book profits for determining minimum alternate tax (MAT). The assessee has raised grounds of appeal in memo of appeal challenging disallowance u/s 14A as well additional grounds of appeal are raised before the Income Tax Appellate Tribunal(hereinafter called as "the tribunal") challenging computation of book profits u/s 115JB for computing disallowance under MAT provisions, The Revenue is aggrieved by the relief granted by learned CIT(A) vide his appellate order in deleting disallowance to the tune of Rs. 46,92,218/- u/r 8D(2)(ii) and 8D(2)(iii) of Income-tax Rules, 1962 r.w.s. 14A.

3. The assessee is engaged in the business of manufacturing and export of dyes and dye intermediates and other chemicals. The assessee has received dividend income of Rs. 1,60,62,485/- which was claimed exempt. The assessee has voluntarily disallowed Rs. 37,55,126/- u/r 8D(2)(iii) r.w.s. 14A. The assessee claimed that no disallowance u/r 8D(2)(ii) r.w.s. 14A is warranted as the assessee has borrowed funds for export business vide bank loan of Rs. 4.64 crores for export credit facility on which interest was paid which was debited to Profit and Loss Account. The assessee submitted that it paid interest of Rs. 22.18 lacs to bank on export credit facilities and had received interest of Rs. 9.11 lacs from bank and hence no interest is disallowable. The assessee submitted that it is , inter-alia, also having investment in Mutual funds on which no dividend is receivable and on which only capital gain will be receivable which is taxable and hence the same should be excluded. It was also claimed that there are investments in subsidiaries companies which should also be excluded. The AO made disallowance u/r 8D(2)(ii) and 8D(2)(iii) r.w.s. 14A of Rs.84,47,344/- and Mum 2017-M/s Sajjan India Ltd.

since the assessee has made disallowance of Rs. 37,55,126/- , the additions to the tune of Rs. 46,92,218/- was sustained by the AO vide assessment order dated 29-01-2014 passed u/s 143(3). The similar additions being disallowance u/s 14A was also made to book profit by the AO u/s 115JB to compute MAT liability of the assessee.

4. Aggrieved, the assessee carried the matter in appeal before learned CIT(A). The learned CIT(A) followed the ITAT order in assessee’s own case in ITA no, 449/Mum/2011 for AY 2007-08, for AY 2008-09 and ITA no 5856/Mum/2012 for AY 2009-10 wherein the tribunal held that if investments are made out of surplus funds and borrowed funds are used the disallowance u/r 8D(2)(ii) is to deleted. The learned CIT(A) also followed decision of his predecessor for AY 2010-11 to come to conclusion that interest paid on bank loans for export credit is to be excluded while computing disallowance u/r 8D(2)(ii) r.w.s. 14A and hence consequently the addition of Rs.5,64,004/- made by the AO u/r 8D(2)(ii) was deleted by the learned CIT(A). While for disallowance u/r 8D(2)(iii) r.w.s. 14A , the assessee raised additional ground of appeal that disallowance should be Rs. 32.33 lacs instead of Rs. 37.55 lacs as expenses of HO and remuneration is to be considered for disallowance on proportionate basis, which was rejected by learned CIT(A) as the assessee did not filed revised return of income . The revised ground of appeal raised by the assessee to that effect was rejected by the learned CIT(A) relying on Hon‟ble Supreme Court decision in the case of Goetze India Limited v. CIT 284 ITR 323(SC). The learned CIT(A) ordered deletion of mutual funds, quoted and unquoted investments and investment in subsidiary companies for the purposes of computing average investment for computing disallowance u/r 8D(2)(iii) r.w.s. 14A , as the same were subject to tax u/s 45 on capital gains. The learned CIT(A) ordered that investment in partnership firm amounting to Rs. 3,08,53,421/- subject to verification shall be included for the purposes of computing average investment for computing disallowance u/s 14A r.w.s. 8D(2)(iii) and directions were issued to the AO to compute disallowance , vide appellate orders dated 30-10-2015 passed by learned CIT(A).

The assessee is engaged in the business of manufacturing and export of dyes and dye intermediates and other chemicals. The whole controversy revolves around computation of disallowance u/s 14A of the 1961 Act. The assessee having earned dividend income of Rs. 1,60,62,485/- had claimed the same to be an exempt income . The assessee has suo motu offered disallowance u/s 14A of Rs. 37,55,126/- u/r 8D(2)(iii). The AO has made disallowance u/s 14A r.w.r 8D of Rs. 84,47,344/- , while learned CIT(A) deleted disallowance u/r 8D(2)(ii) as it is brought on record that the assessee has availed bank loans of Rs. 4.64 crores towards export credits and paid interest of Rs.22.18 lacs towards loans towards export limits. The assessee‟s own funds are to the tune of Rs. 377.55 crores being share capital of Rs. 3.81 crores and reserves and Mum 2017-M/s Sajjan India Ltd. surplus of Rs. 373.74 crores. The investments are to the tune of Rs. 150.65 crores as at 31-03-2011 while the same was Rs. 164.69 crores as at 31-03- 2010. The audited financial statements are placed in paper book, which supports this contention of the assessee. The presumption shall apply as is held by Hon‟ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Limited (2009) 313 ITR 0340(Bom HC) and also HDFC Bank Limited (2016) 67 taxmann.com 42(Bom. HC)) that the assessee has invested its own interest free funds for making investments. There is no infirmity in the appellate order of learned CIT(A) deleting the addition u/r 8D(2)(ii) r.w.s. 14A, keeping in view factual matrix of the case as firstly the funds were borrowed from bank by the assessee for export credit limits on which interest was paid and hence interest on borrowings have direct nexus with export credit facilities granted by the bank, secondly own interest free funds available with the assessee are much higher than investments and hence presumption will apply. The Revenue fails on this ground. We order accordingly.

The second controversy is w.r.t. the disallowance of administrative and other expenses u/r 8D(2)(iii) r.w.s. 14A. The learned counsel for the assessee has claimed that the assessee’s has different divisions such as Head office and factories etc. . It is claimed that the assessee has maintained separate books of accounts for each division. It is claimed that the investments are only monitored , controlled , maintained and managed from HO and other divisions have no role to play in dealing with the investments, which can be verified by Revenue .It is claimed that the AO can look into books of accounts and after verifications can be conducted by the AO and the AO should consider HO expenses only for disallowance u/r 8D(2)(iii) r.w.s. 14A. It is claimed that this ground was raised before the learned CIT(A) but doors of justice was shut by learned CIT(A) as no revised return was filed by the assessee. It is claimed that since the assessee never raised this issue in preceding year i.e. 2010-11 , the ITAT had no occasion to deal with the same but the assessee did raise this issue in earlier years i.e. 2007-08 to 2009-10 , wherein ITAT had set aside the matter to the AO for necessary verifications. The learned counsel for assessee will rely on judgment of Hon‟ble Bombay High Court in the case of CIT v. Pruthvi Brokers and Shareholders Private Limited (2012) 349 ITR 0336(Bom HC) and CIT v. B G Shirke Construction Technology Private Limited (2017) 395 ITR 0371(Bom HC) to contend that even if revised return of income was not filed but the appellate authorities can always look into these grounds agitated before them. We find merit in the contention of the assessee but the claim raised by the assessee need verification and the matter is restored to the file of the AO to verify the HO expenses incurred which are to be taken cognizance for making disallowance u/r 8D(2)(iii). The AO shall also verify the contention of the assessee that only HO is involved in making investments and other divisions/factories have no role to play in making, controlling, managing and/or monitoring investments. The onus is on the assessee to prove its contentions to get relief. We order accordingly.

The next contention of the assessee is that there are certain Mutual funds held by the assessee which did not declare dividend as per their original scheme of investment. These MF will disburse capital at the termination of scheme which is charged to capital gain tax as per scheme of the 1961 Act is the Mum 2017-M/s Sajjan India Ltd. contention of the assessee. It is claimed that since no exempt income will ever arise on these MF, they shall be excluded from the computing average investments for computing disallowance u/r 8D(2)(iii) r.w.s. 14A. We again find merit in the contentions of the assessee as if there is no exempt income likely to arise from investment instruments keeping in view their scheme of subscription , its inclusion for purposes of disallowance u/s 14A r.w.r. 8D(2)(iii) is not warranted. The AO shall verify all such instruments and its scheme of subscription and remove them for computing disallowance u/s 14A r.w.r. 8D(2)(iii) if it is found that these MF will never dividend which is going to be exempt and only disbursement is at the termination of scheme wherein the capital gains arising there from shall be chargeable to tax . We order accordingly.

The next contention of the assessee is that only those investments should be considered for inclusion for computing average investments for computing disallowance u/s 14A r.w.r. 8D(2)(iii) which have actually yielded exempt income during year under consideration and it is claimed that the said issue is covered by decision of Special Bench of the Delhi-tribunal in the case of Vireet Investment Private Limited v. ACIT ( 2017) 82 taxmann.com 415(Del SB). The learned DR fairly agreed that this issue is covered by decision of Special Bench , Delhi ITAT in the case of Vireet Investment Private Limited (supra). We direct the AO to decide this issue in the light of decision of Special Bench in the case of Vireet Investment Private Limited(supra), wherein only those instruments/securities which yielded exempt income during the previous year relevant to the impugned assessment year shall be considered for computing disallowance u/s 14A r.w.r. 8D. The Special Bench in para 11.16 held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. We are bound by decision of Special Bench and Respectfully following the same , we direct the AO to compute disallowance u/s 14A r.w.r. 8D(2)(iii) in accordance with the ratio of law laid down by Special Bench - ITAT, Delhi in the case of Vireet Investment Private Limited(supra). We order accordingly.

The next contention is w.r.t. computation of book profits u/s 115JB vis-a- vis disallowance u/s 14A . The issue is now decided by Special Bench, Delhi ITAT in the case of Vireet Investment Private Limited (supra) . Both the parties fairly agreed that issue is covered by decision of Special Bench of ITAT, Delhi in the case of Vireet Investment Private Limited(supra). The AO is directed to decide the issue in the light of ratio of decision of Special Bench in the case of Vireet Investment Private Limited(supra). We order accordingly.

The last grievance under these appeal is of the assessee as to whether the disallowance u/s 14A can fall below disallowance suo motu voluntarily made by the assessee in the return of income filed with the Revenue. The assessee has claimed that if his several contentions are favourably considered by tribunal keeping in view legal position, the disallowance u/s 14A can fall below the voluntary disallowance made by the assessee suo motu in return of income filed with the Revenue. The assessee has relied on decision of Mum 2017-M/s Sajjan India Ltd.

Hon‟ble Gujarat High Court in the case of Principal CIT v. UTI Bank Limited (2017) 398 ITR 514(Guj) and decision of ITAT, Mumbai in the case of Rupee Finance and Management Private Limited v. DCIT (2017) 57 ITR(Trib.) 205(Mumbai) . We find merit in the contention of the assessee that once tribunal has adjudicated matter in assessee’s favour then merely because disallowance was made in return of income voluntarily under a wrong belief , the assessee cannot resile from its position is not acceptable . The mandate of the 1961 Act is to tax real income and not an income which was never the income chargeable to tax in the hands of the assessee but was declared under a wrong belief or notion. The mandate of the 1961 Act is to tax real income and tax can only be levied under the authority of law. Thus, if after verifications and following the ratio of law decided by the tribunal in the instant case, if the disallowance falls below the disallowance u/s 14A offered by the assessee in return of income, be it may the Revenue cannot charge tax on income which never was the income of the assessee chargeable to tax within the mandate and provisions of the 1961 Act as the tax can only be levied by the authority of law. The Hon‟ble Andhra Pradesh High Court in the case of CIT v. Bakelite Hylam Limited (1999) 237 ITR 392(AP) as well Hon;ble Gujarat High Court in the case of Gujarat Gas Company Limited v. JCIT reported in (2000) 245 ITR 84(Guj) has taken a similar view. Hon‟ble Gujarat High Court in the case of Gujarat Gas Company Limited(supra) has arrived at the said decision after considering CBDT circular No. 549 dated 31-10-1989 (1990) 182 ITR (st) 1 while arriving at the said decision that assessed income can fall below returned income in proceedings u/s 143(3) r.w.s. 143(2). The Hon‟ble Supreme Court decision in the case of CIT v. Sun Engineering Work Private Limited (1992) 198 ITR 297(SC) was in context of re-assessment proceedings initiated u/s 147 wherein Hon‟ble Supreme Court held that reassessment proceedings initiated u/s 147 are for the benefit of revenue and not the assessee, wherein the mandate is to bring to tax income which has escaped assessment while presently we are concerned with proceedings initiated u/s 143(3) r.w.s. 143(2). We order accordingly.

7. The assessee is in appeal for AY 2012-13 wherein similar issues are involved as were in AY 2011-12, our decision in AY 2011-12 shall apply mutatis mutandis to the decision in AY 2012-13. We order accordingly.

8. Considering the decision of Tribunal in assessee’s own case for Assessment Year 2011-12, on disallowance under Rule 8D(2)(iii), the Assessing Officer is directed to follow the direction of Tribunal for Assessment Year 2011-12 and passed the order afresh in accordance with 8 Mum 2017-M/s Sajjan India Ltd. law. Needless to order that before deciding the issue the Assessing Officer shall grant sufficient opportunity to the assessee.

Order pronounced in the open court on 29/01/2019.