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Facts
The Revenue filed three appeals against the CIT(A)'s orders for AYs 2017-18, 2018-19, and 2020-21 concerning disallowances made by the AO against Nucleus Software Exports Ltd. The first set of appeals pertained to disallowances under Section 14A read with Rule 8D for expenses related to exempt income from investments, where the AO was not satisfied with the assessee's suo-moto disallowance. The third appeal related to the disallowance of a deduction claimed under Section 80G for a donation made as part of CSR activities, which the AO argued lacked a voluntary charitable character due to being an obligation under Section 135 of the Companies Act, 2013.
Held
The Tribunal dismissed all appeals filed by the Revenue. For the Section 14A disallowances, it upheld the CIT(A)'s decision, reaffirming that the AO had not recorded proper objective satisfaction to reject the assessee's suo-moto disallowance, relying on previous Tribunal and Supreme Court judgments. For the Section 80G disallowance, the Tribunal agreed with the CIT(A) that there is no co-relation between Section 37(1) and 80G, clarifying that only contributions to specific funds (Swachh Bharat Kosh and Clean Ganga Fund) made under CSR are explicitly disallowed, and other donations, even if part of CSR, qualify for deduction.
Key Issues
1. Whether the CIT(A) was correct in deleting disallowances under Section 14A and Rule 8D when the AO had not recorded objective satisfaction for rejecting the assessee's suo-moto disallowance. 2. Whether the CIT(A) was correct in deleting the disallowance of a deduction claimed under Section 80G for donations made as part of CSR activities, considering Section 135 of the Companies Act, 2013.
Sections Cited
Section 14A of the Income Tax Act, Rule 8D of the Income Tax Rules, 1962, Section 80G of the Income Tax Act, Chapter VIA of the Income Tax Act, Section 37(1) of the Income Tax Act, Section 135 of the Companies Act 2013, Section 80G(2)(a) of the Income Tax Act, Section 80G(2)(a)(iiihk) of the Income Tax Act, Section 80G(2)(a)(iiihl) of the Income Tax Act, Section 12AA of the Income Tax Act
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Income Tax Appellate Tribunal, DELHI BENCH ‘E’: NEW DELHI
PER YOGESH KUMAR U.S. JM.:-
These three appeals are filed by the Revenue challenging the orders of National Faceless Appeal Centre (‘NFAC’ for short)/Ld.
CIT(A) dated 21/08/2023 12/09/2022 respectively for Assessment Years 2017-18, 2018-19 and 2020-21.
2. The Grounds of Appeal of the Revenues are as under:
ITA No.2959/Del/2023 (A.Y 2017-18)
“1. Whether on the facts and circumstances of the case, the Ld. CIT (A) was right in deleting the disallowance of Rs. 2,23,62,028/- u/s 14A of the Act made by the AO without appreciating the fact that the AO has duly recorded his satisfaction with regard to the claim of expenditure in relation to the exempt income which does not form part of total income? 2 Whether on the facts and circumstances of the case, the Ld. CIT (A) was right in deleting the disallowances made by AO u/s 14A by following the decision of Hon'ble ITAT in own case of the assessee and not appreciating the facts that the Ld. AO has duly reported his satisfaction in the assessment order in para no. 9 to 12? 3 That the appellant craves leave to add, amend and alter the ground of appeal during the appellate proceedings.”
“1. Whether on the facts and circumstances of the case, the Ld. CIT (A) was right in deleting the disallowance of Rs. 3,01,76,803/- u/s 14A of the Act made by the AO without appreciating the fact that the AO has duly recorded his satisfaction with regard to the claim of expenditure in relation to the exempt income which does not form part of total income? 2 Whether on the facts and circumstances of the case, the Ld. CIT (A) was right in deleting the disallowances made by AO u/s 14A by following the decision of Hon'ble ITAT in own case of the assessee and not appreciating the facts that the Ld. AO has duly reported his satisfaction in the assessment order in para no. 9 to 12? 3 That the appellant craves leave to add, amend and alter the ground of appeal during the appellate proceedings.”
1. Whether on the facts and circumstances of the case, the Ld. CIT (A) was right in deleting the disallowance of Rs. 2,23,62,028/- u/s 14A of the Act made by the AO without appreciating the fact that the AO has duly recorded his satisfaction with regard to the claim of expenditure in relation to the exempt income which does not form part of total income?
2 Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in deleting the disallowances made by the AO under section 140 by following the decision of Hon'ble ITAT in the own case of the assessee and not 4 2960 & 3214/Del/2023 ACIT Vs. Nucleus Software Exports Ltd. appreciating the facts that the Id. AO has duly recorded his satisfaction in the assessment order at Page No. 6&7? 3 Whether on the facts and circumstances of the case, the Ld. CIT(A) was right in deleting the disallowing made by the AO on the basis of deduction claimed under chapter VIA on account of donation made and claimed u/s 80G amounting to Rs. 72,46,141/-? 4. That the appellant craves leave to add, amend and alter the ground of appeal during the appellate proceedings.
Since the issues involved in the above Appeals are identical, the above appeals are heard together and decided in this common order. For the sake of convenience the brief facts for Assessment Year 2017-18 has been considered.
The assessee company is engaged in the business of Software Development and IT Enabled Services. The assessee filed its return of income declaring total income of Rs. 26,05,01,130/-.
During the year under consideration, the assessee entered into international transactions amounting to Rs. 45,59,98,437/- with its Associated Enterprises (‘AE'), in respect of which a report in Form No. 3CEB was filed. In view of CBDT Instruction No. 3/16 dated TPO. Necessary details with regard to CASS reasons were obtained during the course of assessment proceedings and examined by the A.O. On perusal of the details filed by the assessee, the A.O. observed that the assessee made investment in Bonds and Mutual Funds and earned exempt income amounting to Rs. 17,66,53,783/.
The assessee made suo-moto disallowance of Rs. 60,22,621/- as express for earned exempt income. The assessee submitted a detailed accounts report on expenses for earning exempt income.
The assessee also provided other details and the working. As per the A.O., the working provided by the assessee is not acceptable as the assessee has arbitrarily attributed the percentage of time of the employee attributable to investment basis. As per the A.O.
‘investment decisions are important decisions and are generally taken up by the top management of the company and they devote a substantial portion of their time and expertise in these decisions and the Assessee has attributed five percent of the Emolument of Chief Executive Officer and Managing director and ten percent of Chief Financial Officer to Investment Activity which is not acceptable.
Moreover, the Assessee has not provided any basis of such indirect expenses to earning of exempt income. The Assessee has not provided any basis of allocation on which the cost was allocated.
Moreover, it is mentioned in the report itself under "Limitations and Disclaimers" that the report should not be construed as an audit report and it sets out observations based on a limited and specific review’. Therefore, the AO was of the opinion that the disallowance of expenses is to be computed in accordance with provisions of section 14A of the Act by applying the procedure given under rule 8D of the Income Tax Rules, 1962 as the Assessee failed to provide any sound basis and justification. Thus, the disallowance u/s 14A read with Rule 8D was computed at Rs.2,23,62,028/- and added back to the total income of the Assessee. The similar disallowances were also made in the Assessment Years 2018-19 & 2019-20.
In AY 2020-21 the A.O. disallowed the 80G claim made by the Assessee with respect to donation made to various foundations, trusts amounting to 1,44,92,281/- and the claim of 50% of eligible amount of Rs. 72,46,141/- was disallowed u/s 80G and added back to the total income of the Assessee. an Appeal before the CIT(A). The Ld. CIT(A) vide order dated 21/08/2023 for AY 2017-18 and 2018-19 and vide orders dated 14/09/2023, allowed the Appeal filed by the Assessee by deleting the additions made by the A.O. As against the orders of the Ld. CIT (A), the Revenue preferred the present Appeals on the Grounds mentioned above.
The Ground No. 1 & 2 of the Appeal filed by the Revenue in all the above three Appeals are regarding disallowance made by the A.O. u/s 14A of the Act which has been deleted by the Ld. CIT(A) and the Department of Revenue is aggrieved by the same.
The Departmental Representative submitted that the Ld. CIT (A) committed error in allowing the Appeals of the Assessee by deleting the disallowance made u/s 14A of the Act without appreciating the fact that the A.O. has not duly recorded his satisfaction with regard to the claim of expenditure in relation to the exempt income which does not form part of total income.
Per contra, the Ld. Counsel for the Assessee submitted that the Ld. CIT(A) while deleting the addition made u/s 14A of the Act for the years under consideration, relied on the order passed by the Co-ordinate Bench of the Tribunal in Assessee’s own case for Assessment Year 2016-17 in dated 09/01/2023. Thus, submitted that the order of the Ld. CIT(A) requires no interference and prayed for dismissal of the Appeal of the Revenue by following the principle of consistency.
We have heard the parties perused the material available on record. It is found from the order of the Ld. CIT(A) that, the order of the Tribunal for Assessment Year 2016-17 in Assessee’s own case in dated 09/01/2023 has been relied, wherein it is held as under:-
“6. We have heard both the parties and perused the records. The ld. Counsel for the assessee submitted that the issue involved is squarely covered in favour of the assessee by the decision of this Tribunal in Assessee’s own case for AY 2015-16 in vide order dated 30.08.2019. He submitted that the ITAT duly held that the AO has not recorded proper satisfaction in not accepting suo moto disallowance made by the AO. He submitted that the facts are identical in this year also. Hence, he submitted that the assessee deserves to succeed on this count itself. Without prejudice to the above submission, the ld. Counsel for the assessee has raised the ground that the Ld. AO be directed to compute disallowance u/s. 14A of the Act r.w.r. 8D of the Rules considering only those investments which has actually earned exempt income then also the assessee to succeed.
Per contra, the Ld. DR submitted that the AO has duly recorded the satisfaction and he relied upon the orders of the authorities below. Upon careful consideration, we note that in identical case this ITAT in assessee’s own case for AY 2015-16 in ITA No.3449/Del/2019 (Supra) has held as under:-
“9. On perusal of the assessment order we find that the Assessing Officer did not accept indirect expenses allocated by the assessee stating that he is not satisfaction with the part expenses and also observed that the investment activities require involvement of assessee’s employees and use of assessee’s official machinery the Assessing Officer has not pointed out why the suo moto disallowance made by the assessee is inadequate to cover the expenses attributable for earning exempt income. We observe that the ld. CIT (Appeals) holds that the working submitted by the assessee is general and not specified any name of the employees involving in this activity. It is the observation of the ld. CIT (Appeals) when exact time and energy of employees including middle and top management invested is not ascertainable then the only method left before the Assessing Officer to compute disallowance is under Rule 8D(2)(iii). Here we observe that provisions of section 14A of the Act contemplates recording of satisfaction by the Assessing Officer having regard to the accounts of the assessee if he is not satisfied with the claim of the assessee in respect of expenditure in relation to income which does not form part of total income. On reading of the assessment order, we find that the Assessing Officer having regard to the suo moto disallowance made by the assessee has not recorded any objective satisfaction as to why the allocation of indirect expenses made by the assessee is not sufficient to meet the expenses attributable for earning exempt dividend income.
In the case of Maxopp Investment Ltd. Vs. CIT [2018 402 ITR 640 the Hon’ble Supreme Court held as under:- “ 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 AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO 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, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”
1. Ratio of the decision is applicable to the facts of the case. Following the said decision, we hold that the Assessing Officer has not recorded any objective satisfaction in not accepting suo moto disallowance made by the assessee. Thus, we direct the Assessing Officer to accept the suo moto disallowance made by the Assessing Officer in respect of disallowance under Rule 8D(2)(iii) read with section 14A of the Act”.
1. We note that the facts are identical and no defect has been pointed out in this order. Hence, following the precedent, we hold that the 10 2960 & 3214/Del/2023 ACIT Vs. Nucleus Software Exports Ltd. additional disallowance made by the Revenue in this case is not sustainable.
2. On the alternative ground also the assessee succeeds in as much as it has been held by the Special Bench in the case of ACIT Vs Vreet Investments Pvt. Ltd. in ITA No. 502/Del/2012 for the assessment year 2008-09 for disallowance u/s 14A r.w.r.8D, only those investment should be considered which has not yielded exempt income. Accordingly, we set- aside the order of the authorities below and decide the issue in favour of the assessee.”
Since the Revenue has not pointed out any change of circumstances and the settled position of law, we find no reason to interfere with the order of the Ld. CIT(A) in deleting the disallowances made u/s 14A of the Act. Finding no merits in the Grounds No. 1 & 2 of appeals of the Revenue, we dismiss the same.
In Ground No. 3 of the Appeal filed by the Revenue for AY 2020-21, the Department is aggrieved by the order of the Ld. CIT(A) in deleting the disallowance made by the A.O. on the basis of deduction claimed under chapter VIA on account of donation made and claimed u/s 80G amounting to Rs. 72,46,141/-.
During the year under consideration, the assessee donated Rs. 1, 44,92,282/- to a trust registered u/s 12AA/80G of the Act and claimed 50% of donation i.e. Rs. 72,46,141/- u/s 80G of the Act.
The Ld. A.O. was of the opinion that the ‘sum paid by the assessee sum paid by the Assessee cannot be considered as a 'donation' for missing in it. The main characteristic of charity is that it is purely voluntary and there is no legal obligation to make that contribution.
The amounts spent on CSR activities, even though is contributed to the areas where 80G deduction is available, but the same lacks voluntary character and partakes the nature of an obligation to be fulfilled, a necessary requirement imposed by law in accordance with Section 135 of the Companies Act 2013’. Accordingly, the Ld. A.O. made the disallowance u/s 80G of the Act. The Ld. CIT (A) deleted the said addition which is under challenged by the Department.
We have heard the parties perused the material available on record. During the year, assessee donated Rs. 1,44,92,282/- to a trust registered u/s 12AA/80G of the Act. We are agree with the view taken by the Ld. CIT(A) that there is no co-relation between Section 37(1) and Section 80G. The Principles governing what is not allowable under section 37(1) have been explained in the section itself (i.e, what is allowable, the conditions subject to which it is allowable, the extent allowable under section to which it is at two Clauses (viz, section 80G(2)(a)(iiihk) and (iiihl), i.e., contributions towards Swacha Bharat Kosh and Clean Ganga Fund), where CSR expenditure is not allowable as deduction under section 80G which itself a proven fact that legislature has clear contention that apart from these two clauses, all other donations do qualify for deduction. Section 80G(2)(a) allows deduction for 'any sums paid by the assessee in the previous year as donations'. Thus, the deduction allowable is for sums paid as donation. Donations paid to the said Kosh and Fund are not allowable under section 80G(2)(a)(iiihk) and (iiihl) as explained above. What is not allowable is however amounts spent by the assessee in pursuance of CSR in pursuance of section 135 of the Companies Act 2013. Contributions to the said Kosh and Fund are CSR activities included in Schedule VII to the Companies Act 2013, The disallowance for deduction under section 80G vis-a-vis CSR can be restricted only to contributions to these Funds under CSR. It is a well-established rule of interpretation that one must look merely at what is stated in the statute; there is no scope for intendment in law. So only contributions to these two funds will not qualify for deduction infirmity in the order of the CIT(A) in directing the A.O. to allow the deduction claimed u/s 80G of the Act. Finding no merit in Ground No. 3 of the Revenue, we dismiss Ground No. 3 of the Revenue.
In the result, Appeals filed by the Revenue in ITA Nos.
2959/Del/2023, 2960/Del/2023 and 3214/Del/2023 are dismissed.
Order pronounced in the open Court on 06th August, 2024.