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Income Tax Appellate Tribunal, “C” BENCH : KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Hon’ble Shri M.Balaganesh, AM ]
ORDER Per M.Balaganesh, AM
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-XII, Kolkata [in short the ld CIT(A)] in Appeal No.181/XII/R- 11/12-13 dated 25.09.2014 against the order passed by the ACIT,Range-11, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 29.01.2013 for the Assessment Year 2010-11.
The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in upholding the disallowance made u/s 14A of the Act read with Rule 8D(2) of the Rules.
2 M/s IMC Ltd. A.Yr.2010-11 3. The brief facts of this issue is that the assessee is engaged in the business of purchasing and selling of Molasses, leather goods, handling of liquid cargo and bulk liquid storage, banking, lending etc. The return of income for the assessment year 2010- 11 was filed by the assessee company on 30.09.2010 declaring total income of Rs. 38,96,90,480/- . In the course of assessment proceedings two notices were sent to the assessee calling for various details as is evident from the paper book furnished by the assessee before us. The assessee derived dividend income of Rs. 1,63,69,009/- and claimed the same as exempt in the return of income. No disallowance was made u/s 14A of the Act by the assessee in the return of income. The tax auditor in his tax audit report had reported the disallowance figure of Rs. 31,96,716/- to be made u/s 14A of the Act. The Ld. AO without raising query to the assessee with regard to the issue of disallowance u/s 14A of the Act, directly proceeded to make disallowance of Rs. 31,94,716/- u/s 14A of the Act by merely placing reliance on the tax audit report of the assessee.
Before the Ld. CIT(A), the assessee pleaded that the interest charged in the profit and loss account pertains to loans which have been taken for the purpose of construction of storage terminals at Haldia and Kandla Port. The Ld. CIT(A) on verifying supporting details filed in that regard accepted the plea of the assessee that no part of these loans were used for making investments. Accordingly, he directed that no disallowance could be made under Rule 8D(2)(ii) of the Rules. He directed to make disallowance under Rule 8D(2)(iii) @ 0.5% of average value of investment as the provisions of Rule 8D are applicable for the assessment year 2010-11. Aggrieved the assessee is in appeal before us on the following ground: 1. That on the facts and circumstances of the case, the learned CIT(Appeals) erred in confirming the action of the assessing officer in disallowing the expenditure incurred for earning exempt income under section 14A of the Act read with Rule 8D of the Income Tax Rules.
3 M/s IMC Ltd. A.Yr.2010-11 5. We have heard the rival submissions. We find that the ld. AR had argued that there was no query raised by the Ld. AO with regard to issue of disallowance u/s 14A of the Act in the entire assessment proceedings. This we find to be correct from the perusal of questionnaire issued by the Ld. AO which are enclosed in pages 62 and 63 of the paper book. We also find that the Ld. AO had merely made the disallowance u/s 14A by placing reliance on the tax audit report without even going into the very basis of the workings of the said amount arrived at by the tax auditor. During the year under appeal, it is not in dispute that the provisions of Rule 8D are applicable. Then it is the duty of the Ld. AO to record satisfaction in terms of section 14A(2) read with Rule 8D(1) of the Rules, before proceeding to make disallowance as per Rule 8D(2) of the Rules. In the instant case, we find that the assessee has claimed that no expenditure has been incurred for the purpose of earning exempt income which is quite evident from the fact that no disallowance u/s 14A of the Act has been made by the assessee in the return of income. Once it is done by the assessee, it is the duty of the Ld. AO first to disturb such belief of the assessee by recording proper satisfaction having regard to the accounts of the assessee in terms of section 14A (2) of the Act read with Rule 8D(1) of the Rules. We find no such satisfaction has been recorded by the Ld. AO in the instant case. This issue is now settled in favour of the assessee by the various decisions of Hon’ble Jurisdictional High Court in the following cases: i) CIT vs. R.E.I. Agro Ltd. in GA No. 3022 of 2013 ITAT No. 161 of 2013 dated 23.12.2013 ii) CIT vs. Ashish Jhunjhunwala in GA No. 2990 of 2013 ITAT No. 157 of 2013 dated 08.01.2014. We find that in both the decisions it has been held that it is the duty of the Ld. AO first to record satisfaction having regard to accounts of the assessee that the claim made by the assessee with regard to non-incurrence of any expenditure for the purpose of earning income, is incorrect with cogent reasons thereon. Without recording such satisfaction, the Ld. AO cannot proceed to make disallowance u/s14A of the Act read with Rule 8D 3
4 M/s IMC Ltd. A.Yr.2010-11 of the Rules. In these facts and circumstances, we hold that no disallowance u/s 14A of the Act could be made in the instant case. Accordingly, ground no. 1 raised by the assessee is allowed.
The next issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in upholding the disallowance made towards leave encashment in the sum of Rs. 86,12,113/-, in the facts and circumstances of the case.
The brief facts of this issue is that the assessee has made provision for leave encashment in the sum of Rs. 86,12,113/- and claimed the same as allowable expenditure in the return of income. The Ld. AO disallowed the same u/s 43B(f) of the Act. This action of the Ld. AO was upheld by the Ld. CIT(A). Aggrieved, the assessee is in appeal before us on the following ground:- 2. That on the facts and circumstances of the case, the learned CIT(Appeals) erred in confirming the action of the assessing officer in disallowing the leave encashment under section 43B of the Act.
We have heard the rival submissions. We find that though the Hon’ble Calcutta High Court in the case of Exide Industries Ltd vs Union of India reported in 292 ITR 470 (Cal) had struck down the provisions of section 43B(f) of the Act as unconstitutional, the revenue had carried the matter further to the Hon’ble Supreme Court which initially in Special Leave to Appeal (Civil) CC 12060 / 2008 dated 8.9.2008 had held as under:-
The petition was called on for hearing today. Upon hearing counsel the court made the following Order. Issue Notice. In the meantime, there shall be stay of the impugned judgement, until further orders.
Later the Hon’ble Supreme Court in Special Leave to Appeal (Civil) No(s). CC 22889 / 2008 dated 8.5.2009 had held as under:-
Leave granted.
Pending hearing and final disposal of the Civil appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the department to recover that amount in case Civil Appeal of the department is allowed.
We further make it clear that the assessee would, during the pendency of this Civil Appeal , pay tax as if Section 43B(f) is on the statute book but at the same time it would be entitled to make a claim in its returns.”
Hence from the aforesaid Supreme Court judgement, it could be inferred that the Hon’ble Supreme Court had not stayed the judgement of the Calcutta High Court during Leave proceedings. But the Hon’ble Supreme Court had only passed an interim order on the impugned issue. Hence we deem it fit and appropriate , in the interest of justice and fair play, to set aside this issue to the file of the ld AO to pass orders based on the outcome of the main appeal on merits by the Hon’ble Supreme Court as stated supra. Accordingly Ground No. 2 raised by the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the Court on 10.01.2018