M/S. MOONSTAR SECURITIES TRADING & FINANCE CO. PVT. LTD.,,NEW DELHI vs. ACIT, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E”: NEW DELHI BEFORE, SHRI R.P.TOLANI, HON’BLE VICE PRESIDENT AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No.621, 622 & 623/Del/2013 (Assessment Year: 2008-09, 2009-10 and 2010-11)

Moonstar Securities Trading and Vs. ACIT, Finance Co. Pvt Ltd, Central Circle-13, Room No. 20, E Block 4th Floor, Intl New Delhi Trade Tower, Nehru Place, New Delhi PAN:AAACN8415A (Appellant) (Respondent)

Assessee by : Sh. Ashwani Kumar, CA Sh. Aditya Kumar, CA Sh. Rahul Chaurasiya, CA Revenue by: Sh. HK Chadhoury, CIT DR Date of Hearing 07/06/2017 Date of pronouncement 09/06/2017

O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the appeals filed by the assessee against the order of the ld CIT(A)-1, New Delhi dated 02.01.2013 for the Assessment Year 2008-09, 2009-10 and 2010- 11. 2. The assessee has raised the following grounds of appeal in ITA No. 621/Del/2013:- “1. That the order dated 02-01-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) I, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned ACIT, Central Circle 13, New Delhi in passing the order u/s 153A of the Income Tax Act, 1961 by not appreciating the facts that the order passed by the Ld Assessing Officer was without jurisdiction and bad in law as the jurisdiction u/s 153A was vitiated. 2. That the order dated 02-01-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) I, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned ACIT, Central Circle 13, New Delhi in sustaining addition of Rs. 2,43,40,709/- under the provisions of Section 14A of the Income-tax Act, 1961 read together with Rule 8D of the Income Tax Rules, 1962 on account of expenses incurred for earning exempt income by ignoring the fact that the Appellant Company had already disallowed a sum of Rs. 2,19,88,109/- u/s 14A of the Income Tax Act, 1961 resulting in double disallowance of the said amount.

Page 2 of 9 3. That the order dated 02-01-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) I, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned ACIT, Central Circle 13, New Delhi in sustaining the disallowance u/s 14A which was to be added in the book profits as declared by the Company for the purposes of computation of MAT liability.” 3. The assessee has raised the following grounds of appeal in ITA No. 622/Del/2013:- “1. That the order dated 02-01-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) I, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned ACIT, Central Circle 13, New Delhi in passing the order u/s 153A of the Income Tax Act, 1961 by not appreciating the facts that the order passed by the Ld Assessing Officer was without jurisdiction and bad in law as the jurisdiction u/s 153A was vitiated. 2. That the order dated 02-01-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) I, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned ACIT, Central Circle 13, New Delhi in sustaining the addition of Rs 2,89,97,064/- under the provisions of Section 14A of the Income Tax Act, 1961 read together with Rule 8D of the Income Tax Rules, 1962 on account of expenses incurred for earning exempt income. 3. That the order dated 02-01-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) I, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned ACIT, Central Circle 13, New Delhi in sustaining the addition of Rs 2,89,97,064/- on account of expenditure on earning of exempt income to the Book Profit for the purpose of computation of MAT liability u/s 115 JB of the Income Tax Act, 1961. 4. The assessee has raised the following grounds of appeal in ITA No. 623/Del/2013:- “1. That the order dated 02-01-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) I, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned ACIT, Central Circle 13, New Delhi in sustaining the addition of Rs 13,56,44,550/- under the provisions of Section 14A of the Income Tax Act, 1961 read together with Rule 8D of the Income Tax Rules, 1962 on account of expenses incurred for earning exempt income. 2. That the order dated 02-01-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) I, New Delhi is against law and facts on the file in as much as he was not justified to uphold the action of the Learned ACIT, Central Circle 13, New Delhi in sustaining the addition of Rs 13,56,44,550/- on account of expenditure on earning of exempt income to the Book Profit for the purpose of computation of MAT liability u/s 115JB of the Income Tax Act, 1961.” 5. Firstly we take up the appeal for the AY 2008-09 succinctly stated the facts of the case is that the search and seizure operation u/s 132(2) of the Income Tax Act was carried out on 03.03.2010 in Bhushan Steel Group and therefore, notice u/s 153A for AY 2008-09 was issued to the assessee. The returns for this assessment year was

Page 3 of 9 processed on 27.10.2009. The assessee filed its return of income at a loss of Rs. 208403653/- on 24.11.2010. The ld Assessing Officer noted that for earning exempt income assessee has only disallowed Rs. 927175/- u/s 14A of the Act. Therefore, show cause notice regarding applicability of Rule 8D was issued on 09.08.2011. The assessee submitted that it has earned long term capital gain of Rs. 231221639/- and dividend of Rs. 4749499/- and disallowed u/s 14A a sum of Rs. 927175/- has been made in the return of income. The ld Assessing Officer relying on the decision of coordinate bench in case ACIT Vs. Cheminvest Ltd 317 ITR 86 computed the disallowance of Rs. 25267884/- under Rule 8D and consequently, disallowed a sum of Rs. 24340709/- and passed assessment order computing the total income of assessee at a loss of Rs. 184062943/-. The assessee aggrieved with the order preferred appeal before the ld CIT(A) who dismissed the appeal of the assessee, therefore, the assessee is in appeal before us. 6. The ld AR submitted that impugned order it passed u/s 153A of the Income Tax Act and disallowance u/s 14A has been made without being any incriminating material. He further relied on the decision of the Hon'ble Delhi High Court of Shri Kabul Chawla Vs. CIT 380 ITR 573. 7. The ld DR vehemently supported the orders of the lower authorities. 8. We have carefully considered the rival contentions and also perused the orders of the lower authorities. The impugned assessment order is admittedly passed u/s 153A of the Act. as held by the Hon'ble Delhi High Court vide para no. 37 of the order CIT Vs. Kabul Chawla 380 ITR 573 the completed assessment can be interfered only on the basis of incriminating material unearth during the course of search or requisition of the documents or undisclosed income, or property discovered in the course of search which were not produced or not already disclosed or made known in the course of original assessment. It is not the case of the Revenue that assessee has not disclosed the exempt income and disallowance u/s 14A of the Act. Further, no incriminating material was shown to us and the ld AO which could have resulted into disallowance u/s 14A of the Act pointed none out. in view of this respectfully following the decision of the Hon'ble Delhi High Court we reverse the finding of ld CIT(A) and direct AO to delete the disallowance u/s 14A of the Act of Rs. 24340709/-. In view of this appeal NO. 621/Del/2013 for AY 2008-09 filed by the assessee is allowed. 9. Now we come to the appeal of the assessee for AY 2009-10 in ITA No. 622/Del/2013. The order is also passed u/s 153A of the Income Tax Act however, at the time of search this assessment was not completed and hence abated. The return

Page 4 of 9 of income was filed by assessee at loss of Rs. 63391883/- on 27.11.2010 and assessee has earned dividend income of Rs. 5128390/- and made disallowance u/s 14A of Rs. 1925142/-. The ld Assessing Officer applying the decision of the coordinate bench in 317 ITR 86 computed the disallowance under Rule 8D of Rs. 30922206/- and made net disallowance of Rs. 28997064/-. Consequently, the assessment u/s 153A read with Section 143(3) of the Act was passed on 30.12.2011 making the above disallowance. The assessee contested the assessment order before the ld CIT(A) unsuccessfully. Therefore, this appeal. 10. The ld AR submitted that assessee itself has disallowed a sum of Rs. 1925142/- u/s 14A of the Act and AO without examining the same and recording a satisfaction about the incorrectness of the claim of the assessee has applied Rule 8D and made the disallowance. He submitted that in view of absence of satisfaction the addition is unwarranted. The ld DR vehemently contested the claim of the assessee. 11. We have carefully considered the rival contentions and perused the orders of the lower authorities. In the present case the assessee has earned exempt income of Rs. 5128390/- and disallowed on its own Rs. 1925142/-. The ld Assessing Officer straightway asked the assessee vide letter dated 09.08.2011 that vide Rule 8D shall not be applied in the case of the assessee. According the provisions of section 14A(2) the AO is duty bound to examine the claim of the assessee having regard to the accounts of the assessee should record his satisfaction about the correctness of the claim. In the present case we do not find any such satisfaction recorded by the ld Assessing Officer. Hon'ble Delhi High Court in case of CIT Vs. Taikisha Engineering India Ltd. 370 ITR 338 has held as under:- “14. The view and the legal ratio expressed above is not being elucidated for the first time. The Delhi High Court in Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272 (Delhi), has observed (page 290) : "Scope of sub-sections (2) and (3) of section 14A Sub-section (2) of section 14A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision relation to income which does not form part of the total income under the said carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if 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 in Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the

Page 5 of 9 Assessing Officer must record that he is not satisfied with the correctness of the claim of the asses see in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) 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 said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. As we have already noticed, sub-section (2) of section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is-'such method as may be prescribed'. We have already mentioned above that by virtue of Notification No. 45 of 2008, dated March 24, 2008, the Central Board of Direct Taxes introduced rule 8D in the said Rules. The said rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of rule 8D. We may observe that rule 8D(1) places the provisions of section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of sub-sections (2) and (3) of section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in the total income in the manner indicated in sub-rule (2) of rule 8D of the said Rules. It is, therefore, clear that determination of the amount of expen diture in relation to exempt income under rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of rule 8D, we find that the method for determining

Page 6 of 9 the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest (other than the amount of interest included in clause (i)) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure—one half per cent. of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A of the said Act. It is, therefore, clear that in terms of the said rule, the amount of expenditure in relation to exempt income has two aspects—(a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half per cent. of the average value of the investment, income from which does not or shall not form part of the total income, is taken." 15. Even earlier the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT [2010] 328 ITR 81 (Bom) had referred to section 14(2) of the Act and observed (page 100) : "Under sub-section (2), the Assessing Officer is required to deter mine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression 'prescribed' in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction

Page 7 of 9 in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub- section (3) of section 14A provides for the application of sub-section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1, 2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154." 16. Equally illuminating are the following observations in Godrej and Boyce Mfg. Co. Ltd. (supra) (page 117 of 328 ITR) : "However, if the assessee does not maintain separate accounts, it would be necessary for the Assessing Officer to determine the pro portion of expenditure incurred in relation to the dividend business (i.e., earning exempt income). It is for exactly such situations that a machinery/method for computing the proportion of expenditure incurred in relation to the dividend business has been provided by way of section 14A(2)/(3) and rule 8D." 17. More important and relevant for us are the observations in Godrej and Boyce Mfg. Co. Ltd. (supra) on requirement and stipulation of satisfaction being recorded by the Assessing Officer with reference to the accounts under section 14(2) of the Act and rule 8D(1) of the Rules. It was observed (page 120 of 328 ITR) : "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 '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 sub-section (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)." 18. It is in this context we feel that the findings recorded by the Commissioner of Income-tax (Appeals) and the Tribunal are appropriate and relevant. The clear findings are that the assessee had sufficient funds for making investments in shares and mutual funds. The said findings coupled with the failure of the Assessing Officer to hold and record his

Page 8 of 9 satisfaction clinches the issue in favour of the respondent-assessee and against the Revenue. The self or voluntary deductions made by the assessee were not rejected and held to be unsatisfactory, on examination of accounts. The judgments in Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) would be relevant if the satisfaction of the Assessing Officer is in issue, and such question of satisfaction is with reference to the accounts. 19. However, the decisions relied upon by the Tribunal in the case of Tin Box Co. (supra), Reliance Utilities and Power Ltd. (supra), Suzlon Energy Ltd. (supra) and East India Pharmaceutical Works Ltd. (supra) could not be now applicable, if we apply and compute the disallowance under rule 8D of the Rules. The said rule in sub-rule (2) specifically prescribes the mode and method for computing the disallowance under section 14A of the Act. Thus, the interpretation of clause (ii) to sub-rule (2) of rule 8D of the Rules by the Commissioner of Income-tax (Appeals) and the Tribunal is not sustainable. The said clause expressly states that where the assessee has incurred expenditure by way of interest in the previous year and the interest paid is not directly attributable to any particular income or receipt then the formula prescribed would apply. Under clause (ii) of rule 8D(2) of the Rules, the Assessing Officer is required to examine whether the assessee has incurred expenditure by way of interest in the previous year and, secondly, whether the interest paid was directly attributable to a particular income or receipt. In case the interest paid was directly attributable to any particular income or receipt, then the interest on loan amount to this extent or in entirety, as the case may be, has to be excluded for making computation as per the formula prescribed. Pertinently, the amount to be disallowed as expenditure relatable to exempt income, under sub rule (2) is the aggregate of the amount under clause (i), clause (ii) and clause (iii). Clause (i) relates to direct expenditure relating to income forming part of the total income and under clause (iii) an amount equal to 0.5 per cent. of the average amount of value of investment, appearing in the balance-sheet on the first day and the last day of the assessee has to be disallowed. 20. However, in the present case, we need not refer to sub-rule (2) of rule 8D of the Rules as conditions mentioned in sub-section (2) of section 14A of the Act read with sub-rule (1) of rule 8D of the Rules were not satisfied and the Assessing Officer erred in invoking sub-rule (2), without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked sub-rule (2) of rule 8D of the Rules and made the re-computation. Therefore, the respondent-assessee would succeed and the appeals should be dismissed. 12. Therefore, in view of the above decision we are of the opinion that in absence of any satisfaction recorded by the ld AO as provided u/s 14A(2) of the Act the disallowance u/s 14A applying provisions of Rule 8D cannot be sustained. In view of this we reverse the order of the ld CIT(A) we direct the ld Assessing Officer to delete the disallowance of Rs. 28997064/-. In the result, the appeal filed by the assessee is allowed.

Page 9 of 9 13. Now we come to the appeal of the assessee for the AY 20010-11 in ITA No. 623/Del/2013 for which the assessee has filed return of income on 29.09.2010 declaring Nil income. During the year the assessee has earned exempt income of Rs. 4988797/- on account of dividend and disallowed Rs. 26635/- u/s 14A of the Act. The ld AO issued questionnaire on 09.08.2011 about the applicability of provisions of Rule 8D for disallowance u/s 14A of the Act. Further, he computed the disallowance of Rs. 135671185/- and made a final disallowance of Rs. 135644550/-. The assessment u/s 153A of the Act was passed at Rs. 135644550/- on 30.12.2011, which was challenged before the ld CIT(A) unsuccessfully and hence, this appeal. 14. Before us the ld AR repeated the similar arguments, which were raised for the appeal for AY 2009-10 and the ld DR, supported the orders of the lower authorities. 15. We have carefully considered the rival contentions and also perused the orders of the lower authorities. Identically to the facts noted in AY 2009-10 in this case also the ld AO did not record satisfaction after verification of the books of account about the correctness of the claim of disallowance made by the assessee before invoking provisions of Rule 8D as provided u/s 14A(2) of the Act. Therefore, respectfully following the decision of the Hon'ble Delhi High Court in CIT Vs. Taikisha Engineering Pvt. Ltd (supra) and for the reasons given by us in appeal of assessee for AY 2009-10, we reverse the finding of the ld CIT(A), and direct the AO to delete the disallowance of Rs. 135644550/-. In the result appeal filed by the assessee is allowed. 16. In the result, all the three appeals filed by the assessee are allowed. Order pronounced in the open court on 09/06/2017. -Sd/- -Sd/- (R.P.TOLANI) PRASHANT MAHARISHI) VICE PRESIDENT ACCOUNTANT MEMBER Dated: 09/06/2017 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi