GOLDEN COMTRADE PRIVATE LIMITED,KANPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX-5, KANPUR, KANPUR

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH ‘A’, LUCKNOW BEFORE SHRI A.D. JAIN, VICE PRESIDENT AND SHRI T. S. KAPOOR, ACCOUNTANT MEMBER ITA No.81/Lkw/2021 Assessment Year: 2013-14 Golden Comtrade Private Limited, Vs. ACIT-5, 58/43, Birhana Road, Kanpur Kanpur-208001 PAN: AACCG 1622R (Appellant) (Respondent)

Appellant by Shri P.K. Kapoor, CA Respondent by Shri Harish Gidwani, DR Date of hearing 07/07/2022 Date of pronouncement 04/08/2022 O R D E R PER T.S. KAPOOR, A.M.:

This is an appeal filed by the assessee against the order of ld. CIT(A), dated 16.07.2021.The grounds of appeal taken by the assessee are reproduced below: “1. The Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi was wrong in law & on facts confirming the following additions/ disallowances as made by the Ld. Assessing Officer: a) Rs. 95,000/- -- Addition/Disallowance U/s 14A read with Section 8(2)(iii) b) Rs. 97,133/- ---Disallowance out of Salary & Wages amounting to Rs. 30,05,333/- 2. The Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi was unjustified in confirming the addition made by the Ld. Assessing Officer in invoking the provisions of section 14A of the Act & in confirming an addition of Rs. 95,000/-u/s 14A read with Rule BD(2)(iii) 3. That Ld Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi was arbitrary and unjustified in

I.T.A. No.81/Lkw/2021 2

confirming the addition of Rs. 97,133/- made by the Ld Assessing Officer without appreciating the facts that the expenses incurred were quite fair & reasonable looking to the nature & volumes of business & no disallowance out of Salary & wages expenses was called for. 4. Because various adverse observations and allegations made by the lower authorities are contrary to the facts, material & evidences available on record. 5. Because the order of Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi is against the principle of natural justice erroneous and not tenable in law and on facts. 6. Because the appellant craves leave to add, amend, delete modify and of the grounds of appeal till the final date of hearing and disposal of appeal.”

I.T.A. No.81/Lkw/2021 3

objective satisfaction so as to state as to how he was not satisfied with the disallowance/or no disallowance made by the assessee. Our attention was invited to the order of Assessing Officer where he has made such disallowance and it was submitted that Assessing Officer has held that assessee has made investments of Rs.1,90,00,000/- during the year which fact is wrong in itself as is apparent from the copy of balance sheet where the investment is appearing as same as in earlier year and therefore the finding of AO that investment was made during the year is wrong. The ld. AR submitted that in view of the above no objective satisfaction has been made by the Assessing Officer and therefore disallowance made by Assessing Officer and upheld partly by ld. CIT(A) is not sustainable. Reliance in this respect was placed on a judgment of ITAT, Lucknow Bench in the case of U.P. Electronics Corporation Ltd. vs. DCIT in ITA No. 538/Lkw/2012. 3. Arguing another ground regarding disallowance out of salary and wages, the ld. AR submitted that Assessing Officer had made disallowance on adhoc basis out of salary and wages equivalent to 5% of the total expenses, which is not in accordance with law and facts as the assessee had produced complete books of accounts and vouchers in support of the expenses. The ld. AR further submitted that on appeal before ld. CIT(A), the ld. CIT(A) has restricted the disallowance equivalent to 50% of the disallowance made by Assessing Officer which again is on adhoc basis and therefore, it was argued that since the expenses were incurred for the purpose of business, therefore sustenance of disallowance by ld. CIT(A) is not justified. 4. The ld. DR, on the other hand, regarding disallowance u/s.14A submitted that as per the provisions of Section 14A, the disallowance as per Rule 8D has to be made if there is exempt income and there is no denial that there was no exempt income and therefore the ld. CIT(A) has rightly upheld the disallowance.

I.T.A. No.81/Lkw/2021 4

I.T.A. No.81/Lkw/2021 5

respect of Dividend income (generated from such investment) shown by the assessee company would remain exempt from taxation. The assessee vide reply dated submitted as under: “The reply of the assessee is not acceptable on the basis of the facts of the case and in the light of provisions contained in the Act and it is found that the assessee has incurred expenditure by way of interest during the previous year which is not directly attributed to any particular income. Since, there is mixed fund flow, provisions of Sec. 14A read with Rule 8D are attracted and calculation of disallowance of interest have to be made in accordance with the said rule. With regard to the interest on such investments, e amount would be computed as provisions of Sec. 14A read with Rule 8D (2)(ii), the details of which are as under: a) The amount of expenditure by way of interest other than the amount of interest included in the amount of expenditure directly relating to income which does not form part of total income- A- Rs. 34,83,375/- b) The average of value of investment, income from which does not form part of the total income as appearing in the Balance Sheet of the assessee on the first day and the last day of the previous year- B- Rs. 1,90,00,000/- (Rs. 1,90,00,000 + Rs. 1,90,00,000/2). c) The average of total assets as appearing the Balance Sheet of the assessee on the first day and the last day of the previous year- C- Rs. 20,27,27,098/- (Rs.25,05,11,396 + Rs.15,49,42,800/2). The total amount of expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt as per Rule 8D(2)(ii) would be as under: A X C C 34,83,315 X1,90,00,000 20,27,27,098 = Rs. 3,26,463/

Further, as per provisions of Sec. 14A read with Rule 8D (2 )((iii), 0.5% of the average of value of investment as appearing in the Balance Sheet of the assessee on the first day and the last day of the previous year Rs. 1,90,00,000/- (Rs. 19000000+ Rs. 19000000/2) which comes to Rs. 95,000/- is also disallowed. Hence, the total disallowance as per provisions of Sec. 14A would be Rs.4,21,463/- (Rs. 3,26,463 + Rs. 95,000 which would be disallowed and added to the total income of the assessee. company.”

I.T.A. No.81/Lkw/2021 6

forward calculated the disallowance of expenditure relying on the provisions of Rule 8D(2)(iii) of the I.T. Rules. He has not even considered the arguments of assessee that disallowance, if any, cannot exceed the exempt income. Therefore, it is held that Assessing Officer made the disallowance u/s.14A of the Act without recording objective satisfaction. The Lucknow bench of the Tribunal, under similar facts and circumstances of not recording objective satisfaction, has deleted similar disallowances in ITA 538/Lkw/2012 in the case of U.P. Electronics Corporation Ltd. vs. DCIT (TDS) (Supra), by recording the following findings: “12. The issue of recording objective satisfaction by the Assessing Officer, before proceeding to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Income-tax Act, was also examined by the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT (supra) and the Pune Bench, following the judgment of the Hon'ble Bombay High Court in the case of Godrej And Boyce Mfg. Co. Ltd. vs. Dy. CIT & Another (supra), was also of the view that recording of objective satisfaction by the Assessing Officer with regard to the correctness of the claim of the assessee is mandatorily required in terms of section 14A(2) of the Act. The relevant observations of the Tribunal are also extracted hereunder:- “8. We have carefully considered the rival submissions. Section 14A of the Act contemplates that for the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Sub-section (2) of section 14A of the Act prescribes that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed, such prescribed method being contained in rule 8D of the Rules. However, the aforesaid empowerment of the Assessing Officer to invoke application of rule 8D of the Rules is super scribed by a condition contained in sub-section (2) of section 14A of the Act which is to the effect that the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to the income which does not form part of the total income. Therefore, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is neither automatic and nor is triggered merely because assessee has earned an exempt income. The invoking of rule 8D of the Rules is permissible only when the Assessing Officer records the satisfaction in regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. In other words, section 14A(2) of the

I.T.A. No.81/Lkw/2021 7

Act envisaged a condition precedent for invoking rule 8D of the Rules and computing disallowance thereof only if the Assessing Officer records that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, having regard to the account of the assessee. In this context, it would be appropriate to refer to the following observations of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) :- “70. Now, in dealing with the challenge it is necessary to advert to the position that sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It, therefore, merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill, 2006, and the Central Board of Direct Taxes circular dated December 28, 2006, state that since the existing provisions of section 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between taxpayers and the Department on the method of determining such expenditure. It was in this background that sub- section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub-section (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income. 71. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer

I.T.A. No.81/Lkw/2021 8

"Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated". (M.A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under subsection (2) of section 14A. As we shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2). [underlined for emphasis by us] 9. The aforesaid observations of the Hon’ble High Court clearly show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is to be understood as being conditional on the objective satisfaction of the Assessing Officer with regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. At this stage, we may also touch-upon a similar view expressed by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. & Ors. vs. CIT, (2012) 247 CTR 162 (Del), wherein reference has been made to the judgment of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra). As per the Hon’ble Delhi High Court, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income in term of rule 8D of the Rules would be triggered only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. According to the Hon’ble Delhi High Court, sub-section (2) of section 14A of the Act deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the Act and sub-section (3) applies to cases where the assessee asserts that no expenditure has been incurred in relation to such exempt income. Explaining further, as per the Hon’ble High Court in both the cases the recourse to rule 8D of the Rules is possible only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. 10. In the aforesaid background, now, we may examine the facts of the present case. In this case, assessee has earned by way of dividends a sum of Rs.5,45,58,685/-, which is exempt u/s 10(38) of the Act and thus

I.T.A. No.81/Lkw/2021 9

the same does not form part of the total income under the Act. In the computation of income, assessee having regard to section 14A of the Act, determined the amount of expenditure incurred in relation to such income at Rs.5,00,000/-. The Assessing Officer has not found it acceptable and has instead determined the amount of expenditure in relation to such income by applying rule 8D of the Rules. Ostensibly, the action of the Assessing Officer cannot be upheld unless he has complied with the pre-requisite of invoking rule 8D of the Rules, namely, recording of an objective satisfaction with regard to the claim of the assessee that an expenditure of Rs.5,00,000/- has been incurred in relation to the exempt income, is incorrect. In order to examine the aforesaid compliance with the pre-condition, we have perused the para 4 to 4.2 of the assessment order and find that no reasons have been advanced as to why the disallowance determined by the assessee was found to be incorrect, having regard to the accounts of the assessee. The only point made by the Assessing Officer is to the effect that “the said disallowance was not acceptable”. In-fact, we find that the assessee made detailed submissions to the Assessing Officer, which have been reproduced by the CIT(A) in para 3.2.1 of his order. As per the assessee, the determination of disallowance u/s 14A of the Act of Rs.5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is “not acceptable” . Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable. Accordingly, the orders of the authorities below are set-aside on this aspect and the Assessing Officer is directed to retain the disallowance u/s 14A of the Act to the extent of Rs.5,00,000/-, as returned by the assessee.” 13. In that case, before proceeding to determine the amount of expenditure, the Assessing Officer has recorded that the said allowance was not acceptable. The statement recorded by the Assessing Officer was not considered to be objective satisfaction by the Tribunal. In the instant case, the Assessing Officer has simply recorded that the contention of the assessee is not acceptable. Therefore, in the light of the aforesaid orders of the Tribunal and other judicial pronouncements, we are of the view that the Assessing Officer has not recorded any objective satisfaction with regard to the correctness of the claim of the assessee.

I.T.A. No.81/Lkw/2021 10

I.T.A. No.81/Lkw/2021 11

that where the expenses was not supported bills/vouchers the disallowance equivalent to 5% of such expenditure was justified. 11. In view of above facts and circumstances, we do not find any illegality or infirmity in the order of ld. CIT(A), therefore, Ground No.2 is dismissed. 12. In the result, appeal filed by the assessee is partly allowed.

(Order pronounced in the open court on 04/08/2022) Sd/- Sd/- (A.D.JAIN) ( T. S. KAPOOR ) Vice President Accountant Member Dated: 04 /08/2022 Aks Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow Asstt. Registrar