QUESTNET ENTERPRISES INDAI PVT. LTD. ,CHENNAI vs. ACIT CIRCLE 1 , VELLORE

आदेश /O R D E R

PER M. BALAGANESH, ACCOUNTANT MEMBER:

ITA No.2031/Mds./2017 :- 2 -: read with Rule 8D of the Rules, in the facts and circumstances of the case.

2.1. The brief facts of this issue is that the assessee filed its return of income for the assessment Year 2013-14 on 30.9.2013 declaring loss of `1,32,89,903/- under normal provisions of the Act and loss of `9,99,888/- u/s 115JB of the Act. The assessee company is engaged in the business of trading of gold jewellery and other valuable jewellery. The assessee received dividend income of `10,53,146/- out of investments in mutual funds. The ld AO observed that the assessee had not disallowed any amount u/s 14A of the Act for the purpose of earning the aforesaid dividend income. Accordingly, he directly resorted to make disallowance under Rule 8D(2)(iii) of the Rules and made disallowance of `7,24,321/- (0.5% of average value of investments). The ld CITA observed that the disallowance u/s 14A of the Act read with Rule 8D of the Rules was ultimately reduced to `6,14,219/- by the ld AO which was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following grounds :-

“1. The Ld.CIT(A) erred in both in law and on the facts of the case in sustaining the following additions:- (i) Disallownace u/s.14A 7,24,321 (ii) Customs duty 21,42,227 28,66,548 2. He overlooked that the appellant had neither made any new investments nor had borrowed any money during the year.

ITA No.2031/Mds./2017 :- 3 -:

3. He overlooked that no expenditure had been incurred in respect of the dividend as it could not even been collected.

4. He overlooked the principles laid down by the Supreme Court in the case of Godrej & Boyce (394 ITR 449(SC) ).”

2.2. The ld AR argued that the assessee had not incurred any expenditure for earning dividend income from mutual funds as the same are credited through Electronic Clearing Service (ECS). There is no portfolio maintained by the assessee warranting its management and incurrence of expenditure thereon. No expenditure was incurred towards collection charges. No investments were made during the year under appeal by the assessee. These arguments were made before the ld AO and the ld AO did not whisper about the same in his order before proceeding to invoke Rule 8D(2)(iii) of the Rules. Without prejudice to the main argument that no satisfaction was recorded by the ld AO in terms of Rule 8D(1) of the Rules, he argued that only the dividend bearing mutual funds should be considered for making disallowance under the third limb of Rule 8D(2) of the Rules. On the contrary, the ld DR argued that the applicability of Rule 8D is mandatory in nature from Asst Year 2008-09 and the same has been rightly applied by the ld AO.

2.3. We have heard the rival submissions and perused the materials available on record. At the outset, it is not in dispute that the ld AO had not recorded any satisfaction in terms of section 14A(2) of the Act having

ITA No.2031/Mds./2017 :- 4 -: regard to the accounts of the assessee. The same is also mandated in terms of Rule 8D(1) of the Rules. The assessee had clearly stated that no expenses were incurred by the assessee for the purpose of earning dividend income from mutual funds in the instant case. The scheme of taxation provides for satisfaction to be recorded by the ld AO having regard to the accounts of the assessee and the correctness of the claim of the assessee and without doing the same, the ld AO cannot directly proceed to invoke the workings for disallowance as provided in Rule 8D(2) of the Rules. In case if the stand taken by the assessee are to be rejected, the same could be done only with cogent reasons by the ld AO and he cannot straight away embark upon computing disallowance under Rule 8D(2) of the Rules. Reliance in this regard is placed on the decision of the Hon’ble Calcutta High Court in the case of CIT vs R.E.I. Agro Ltd in GA 3022 of 2013 in ITAT 161 of 2013 dated 23.12.2013 wherein it was held that :-

“The Assessing Officer also disallowed the expenditure under section 14A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of the claim as regards the claim that “no expenditure” was made by the assessee. Challenging the order of the tribunal, the present appeal has been filed. We have heard Mr.Bhowmik and are of the opinion that no point of law has been raised. Therefore, this appeal is dismissed.”

Respectfully following the aforesaid decision, we hold that no disallowance could be made u/s 14A of the Act in the instant case. In ITA No.2031/Mds./2017 :- 5 -: view of this decision, the other arguments advanced by the ld AR need not be gone into. Accordingly, the grounds 1(i) , 2 to 4 raised by the assessee are allowed.

3.1. The brief facts of this issue is that the assessee paid a sum of `21,42,227/- as differential customs duty in pursuance of an order of the Hon’ble Settlement Commission and claimed it as expenses in the next year i.e Asst Year 2014-15. The assessment order was passed u/s 143(3) of the Act on 30.11.2016 for the Asst Year 2014-15 wherein the disallowance of `21,42,227/- towards customs duty was made by the ld AO, which was appealed against by the assessee before the ld CITA. The ld AO disallowed the said claim u/s 43B of the Act for the Asst Year 2014-15 on the ground that the said duty has been paid during the Asst Year 2013-14. The assessee filed additional grounds of appeal before the ld CITA for the Asst Year 2013- 14, praying that the sum of ` 21,42,227/- should be allowed u/s 43B of the Act on payment basis. The ld CITA observed that the assessee had not filed any details towards customs duty except stating that copy of order and payments received were enclosed. He observed that since the primary onus was not discharged by the assessee by proving whether the customs duty

ITA No.2031/Mds./2017 :- 6 -: was paid or not, the assessee is not entitled for deduction u/s 43B of the Act in Asst Year 2013-14. Aggrieved, the assessee is in appeal before us on the following grounds:-

“1. The Ld.CIT(A) erred in both in law and on the facts of the case in sustaining the following additions:- (i) Disallownace u/s.14A 7,24,321 (ii) Customs duty 21,42,227 28,66,548

3.2. We have heard the rival submissions. The ld AR furnished the copy of demand drafts for payment of customs duty as under:-

13.3.2013 9,90,000 13.3.2013 3,32,005 19.4.2013 8,20,222 -- -- -- -- -- -- -- -- 21,42,227 -- -- -- -- -- -- -- -- The ld DR argued that the said papers were not produced before the ld AO and prayed for examination of the same by the ld AO and the allowability of the claim u/s 43B of the Act for the Asst Year 2013-14. For this proposition, the ld AR also agreed for setting aside of this issue to the file of the ld AO.

In view of the same, we deem it fit and appropriate to remand this issue to the file of the ld AO to decide this issue afresh in accordance with law, with a direction to examine whether the customs duty has been paid for the purpose of the business of the assessee or not. If it is found to be meant for the purpose of business, then the same should be allowed u/s 43B of the Act

ITA No.2031/Mds./2017 :- 7 -: on payment basis as the first two payments above had been paid before the end of the previous year and the third payment above had been made before the due date of filing the return of income u/s 139(1) of the Act. Accordingly, the Grounds 1(ii) and 5 raised by the assessee are allowed for statistical purposes subject to directions given hereinabove.

Order pronounced on 18th January, 2018 at Chennai.