SRF LTD.,GURGAON vs. JCIT (OSD), NEW DELHI

Brief facts of the case are that the assessee is a company organized into different businesses like Industrial Synthetics Business-manufacture of Nylon Tyre Cord Fabric; Industrial Fabric Business-manufacture of Belting Fabrics; Chemical Business-production of flurochemicals and chloremethanes; and Packaging Film Business-manufacture of packaging films. For AY 2006-07, the assessee filed return of income on 30.11.2006 declaring total income of Rs.1,27,93,49,010/- and during scrutiny proceedings u/s 143(3) of the Income Tax Act, 1961 (in short “Act”), the AO found that with a total investment of Rs.14,752.96 lacs. The assessee earned a dividend income of Rs.2,57,75,960/- which is exempted from tax. The AO recorded that no expenditure pertaining to the earning of the exempt income has been allocated by the assessee as such while calculating the exempt income by following Rule 8D of the Income Tax Rules, 1962 (in short “Rules”), the AO made an addition of Rs.1,11,31,085/-. Assessee carried the matter in appeal before the Ld. CIT(A) challenging the addition made u/s 14A of the Act. In appeal, by way of additional ground, the assessee also preferred claim to the tune of Rs.2,67,71,10,198/- in respect of the receipt from transfer of Certified Emission Reduction (in short “CER”) as capital receipt. It is argued before the Ld.CIT(A) that the AO recorded that no expenditure for earning the exempt income was allocated by the assessee but, as a matter of fact, the assessee himself offered Rs.1,29,776/- as the expenditure incurred for earning the exempt income but the AO without considering the same and recording factually incorrect statement proceeded to applying the formula under Rule 8D.

In so far as the plea of the assessee that they have voluntarily offered a sum of Rs.12,97,726/- towards the expenses incurred in relation to earning of dividend income is concerned, such a plea was taken by the assessee before Ld.CIT(A) and the Ld.CIT(A) took note of the same. However, before us the assessee had taken a plea that for want of record of reasons as to the dissatisfaction of the AO in respect of the expenditure incurred by the assessee, having regard to the books of accounts of the assessee, the addition is bad. Ld. Counsel submits that the very fact that though the assessee had offered 12.97 lacs, AO failed to notice the same but directly jumped to the application of Rule 8D of the Rules to the case of the assessee. It is shows the non-application of mind on the part of the AO and vitiates the proceedings. He placed reliance on CIT vs Hero Management Service Ltd. (supra). Ld. DR placed reliance on Indiabulls Financial Services Ltd. vs DCIT [2016] 76 taxmann.com 268 (Delhi) & Vipin Malik vs ACIT 45 ITR 589 (ITAT, Del) and submitted that merely because the AO did not record his dissatisfaction about the assessee’s calculation, the conclusions cannot be rejected. However, on a reading of the judgement in Indiabulls Financial Services Ltd. vs DCIT (supra), we find that in that case, but for recording the dissatisfaction, the AO followed the procedure as required u/s 14A of the Act and the important steps indicated by him in the order shows that all the elements were present in his mind, as such merely because he did not expressly record his dissatisfaction would not per se justify any conclusion that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO’s conclusion. But unfortunately there is nothing on record in the case on hand to indicate that the AO had examined the issue with reference to the books of accounts of the assessee inasmuch as he failed to notice that in fact a sum of Rs.12.97 lacs was offered by the assessee while filing the return of income itself. On facts, we find that the decision in Indiabulls Financial Services Ltd. vs DCIT (supra) is not applicable to this case.

Ld. CIT(A) had examined all the books of accounts found that out of Rs.691.43 lacs of interest expenses only a sum of Rs.195.75 lacs allow for earning the taxable income inasmuch as the remaining Rs.495.68 lacs pertains to the late payments of suppliers and on this score, Ld.CIT(A) re-computed the interest component under 8D(2)(ii) of the Rules at Rs.2.96 lacs. Under Rule 8(2)(iii), Ld.CIT(A) had taken an average investment for earning exempt income of Rs.37.6042 lacs whereas according to the Ld.AR, the average value of the investment is erroneously calculated by taking into consideration Rs.245.45 lacs in the bonds of UTI which are not tax free investment.

Be that as it may, on the question of non-recording of reasons, we find that the AO failed to comply with the requirements of recording of satisfaction with reference to the books of accounts of the assessee, and on that ground any addition made in violation of the statutory requirement cannot survive. In this matter, the assessee voluntarily offered Rs.12,97,726/- towards the expenses incurred in relation to earning dividend income which was enhanced by the Ld.CIT(A) to Rs.21.76 lacs. We, therefore, delete the enhanced amount in excess of Rs.12,97,726/- and restrict the disallowance u/s 14A r.w. Rule 8D of the Rules to such sum as offered by the assessee.

Before Ld.CIT(A), the assessee argued that in view of the decision reported in My Home Power Ltd. vs DCIT [2012] 27 taxmann.com 27 151 TTJ 616 and confirmed by the Hon’ble Andhra Pradesh High Court in CIT vs My Home Power Ltd. [2014] 365 ITR 82, an amount of Rs.267.71 crores on account of CER was a capital receipt and cause of action had arisen to assessee to claim the same on the declaration of law by the Hon’ble High Court. It was argued that the tax authorities do not get any jurisdiction to bring to tax any amount offered by the assessee under a mistaken impression or not being properly instructed. The assessee submits that their balance sheet and P&L A/c as on 31.03.2008 reflects the same. For these reasons, the assessee claimed that the amount on account of CERs transferred was not a revenue receipt but a capital receipt and cannot be brought to tax. Ld.CIT(A) dismissed this ground on the ground that the assessee had calculated the taxable income considering the receipt from transfer of CERs as revenue receipt, and they never rised any dispute during the assessment proceedings as such the same was liable to be dismissed.

Per contra, Ld. DR submitted that an additional ground for claiming deduction u/s 80IA of the Act, cannot be allowed by the Tribunal when no claim was before the original authority, and though no claim was made before the authorities below, the plea of non-taxability shall be presumed to have been considered. He further submitted that the income on sale of CERs would fall within the definition of income u/s 2(24)(vd) of the Act and thus chargeable to tax and where the assessee engaged in business of power generation, received carbon credit for generating power through non-conventional source involving non-emission of carbon, the assessee was not entitled to deduction u/s 80IA of the Act in respect of the said income. For this purpose, he placed reliance on Ultratech Cement Ltd. vs ACIT [2017-TIOL-785-HC-MUM-IT]; ACIT vs Gurjargravures (P.) Ltd. [1978] 111 ITR 1 (SC); Apollo Tyres Ltd. vs CIT 47 taxmann.com 416, 31 ITR(T) 477; and S.P Spinning Mills (P.) Ltd. vs ACIT [2017] 81 taxmann.com 34 (Chennai-Trib.).

On this aspect of sale of CER, we agree with the Ld. AR that in view of their plea that because of the decision in My Home Ltd. (supra) cause of action had arisen to them, Ld.CIT(A) should not have refused to adjudicate the additional grounds on merits. In view of the settled principle of law in Jute Corporation of India [1991] 187 ITR 688, this ground requires adjudication. It is submitted on behalf of the assessee that for financial year ending 31.03.2008, the assessee transferred 34,50,000 CERs to foreign companies for Rs.2,67,71,10,198/- and this is reflected in the balance sheet and P&L account. However, the question whether the case of the assessee is covered by the decision in My Home (supra) and the consequential relief to which the assessee is entitled to, requires verification at the end of the AO. We, therefore, find it a fit case to set aside this ground to the AO to consider the case of the assessee whether it is covered by the decision in My Home Ltd. (supra). We therefore, restore this issue to the file of AO for considering afresh in the light of the above decision, by giving an opportunity to the assessee.

In the result, the appeal of the Revenue is dismissed, and the appeal of the assessee is allowed in part for statistical purpose.