DCIT, CIR-11(1), KOLKATA, KOLKATA vs. M/S KHAITAN INDIA LTD, KOLKATA

आदेश / O R D E R

Per Dr. Arjun Lal Saini, AM:

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 4.The Revenue has raised the following grounds of appeal (in lead case ITA No.1216/Kol/2015 Assessment Year 2008-09), are as follows:

“1.That on the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting disallowance of expenses of Rs. 25,51,838/- u/s 14A of the l. T. Act, 1961 read with Rule 8D of l. T. Rule 1962 in respect of exempted dividend income. 2.That on the facts and the circumstances of the case, Ld. CIT(A) has erred in deleting disallowance of expenses of Rs.1,03,67,798/- u/s 14A of the l. T. Act 1961 read with rule 8D(2)(ii) of the l.T Rule 1962 in respect of exempted agricultural income. 3.That on the facts and the circumstances of the case, Ld. CIT(A) has erred in deleting disallowance of expenses of Rs.20,20,841/- u/s 14A of the l.T. Act 1961 read with Rule 8D(2)(iii) of the l. T. Rule 1962 in respect of exempted agricultural income. 4.That the assessee craves for leave to add, delete or modify any of the grounds of appeal before or at the time of hearing.”

5.The first issue raised by the Revenue relates to disallowance of expenses of Rs. 25,51,838/- u/s 14A of the Income Tax Act, 1961 r.w.r 8D of I.T. Rules 1962 in respect of exempted dividend income. 5.1The brief facts qua the issue are that the filed its return of income on 30.09.2008 declaring total loss of Rs.3,27,03,470/- for the A.Y. 2008-09. The return of income was processed u/s.143(1) on 05.10.2009. The assessee’s case was selected for scrutiny u/s 143(2) of the Act, and AO had completed the assessment by making addition u/s 14A r.w.r 8D of the I.T Act. The assessee company was engaged in the business of cultivation of sugar cane, manufacturing of sugar and trading in fans and other electrical appliances during the previous year. The Assessing officer noted thatduring the assessment year under consideration, the assessee earned dividend income of Rs.33,62,011/-which is exempt from tax u/s.10(34). In the return of income the assessee hadoffered a disallowance u/s.14A amounting to Rs.7,74,043/- in respect ofexpenditure incurred in relation to such dividend income. The quantum of exemption was claimed to have been determined by applying rule 8D of the I.T. Rules.

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 On scrutiny of the computation of disallowance made by the assessee u/s. 14A, the AO found that the average value of investment as well as the average value of total assets has not been correctly taken. Having regard to the accounts of the assesseeand also in view of the assessee's own admission of incurring expensesdisallowable u/s. 14A, the correct amount of such disallowance as per rule 8D was recomputed by AO, asunder:- Disallowance as per rule 8D(2)(i) Demat Charges Rs.536/-..................(a) Disallowance as per rule 8D(2)(ii) The assessee has admitted that the other interest of Rs.1,21,52,425/- isindirectly attributable to the earning of exempt dividend income for which it has suomoto offered disallowance u/s. 14A. The correct quantum of such disallowance was recomputed as under: Total interest debited to P&L a/c Rs. 1,21,52,425/-........(A) Value of investment (as per B/S) as on 01.04.2007 Rs.11,08,42,309/- Value of investment (as per B/S) as on 31.03.2008 Rs.16,59,50,244/- Total Rs.27,67,92,553/- Average value of investment Rs.1 3,83,96,277 l- ..... (B) Value of assets (as per B/S) as on 01.04.2007 Rs. 86,02,71,056/- Value of assets (as per B/S),as on 31.03.2008 Rs. 94,65,06,232/- Total - Rs.180,67,77,288/- Average value of total assets Rs.90,33,88,644/- ..... (C) Thus, disallowance as per rule 8D(2)(ii) = (A) x (B)/ (C) = Rs.18,59,321/-............(b) Disallowance as per rule 8D(2)(iii) The assessee had computed the disallowance as per rule 8D(2)(iii) atRs.2,52,537/-. The computation was not found to be correct. The correct amountof disallowance was recomputed as under:- 0.5% of Average Value of investment = 0.5% of Rs.13,83,96,277/- = Rs.6,91,981/-................(c) Therefore, AO computed the totaldisallowance[(a) + (b) + (c)] at Rs. Rs.25,51,838/-. However, the assessee had disallowed suo moto at Rs.7,74,043/-.

5.2 Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the CIT(A), who has allowed the appeal of the assessee. The Page | 3 Page | Page | Page |

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 CIT(A) observed that the assessee, during the assessment year under considerationwas engaged in the business ofcultivation of sugarcane, manufacturing of sugar and trading in fans & other electricalappliances. The assessee maintains separate set of brooks of its three business divisions: (i) Agricultural Division, (ii) Sugar Division & (iii) Market Division. The assessee also maintains separate accounts for its corporate head office. The CIT(A) noted thatall the separate set of books of accounts are duly audited by Chartered Accountants.During the year the assessee had earned exempt income of Rs.33,62,201/- frominvestment in shares. From the details furnished on record, the CIT(A) noted that the assessee had invoked Rule 8D and disallowed a sum of Rs.7,74,703/- under Section 14A ofthe Act. The AO however disagreed with the calculation of the assessee and computed a further disallowance of Rs.25,51,838/- under Section 14A of the Act. The assessee had objected to the manner of invocation of Rule 8D and thefurther disallowance made by the AO both on legal as well as factual grounds. The assessee's case was that without specifying reasons for his dissatisfaction, the AO'sapplication of Rule 8D was unjustified. After perusing the details furnished by the assessee and the impugned order, the CIT(A) noted that no cogent reasons were recorded by the AO for disregarding or rejecting the calculation of the assessee. Although the AO has heldthat Rule 8D is applicable in the relevant AY 2008-09, but he has not recorded any satisfaction nor has pointed out specific infirmity in the claim of the assessee. The CIT(A) noted that the assessee had computed disallowance of interest under Rule 8D(2)(ii) withreference to interest whichwas not relatable to any specific source of income. Theinterest which was directly attributable to agriculture & sugar division was excludedand disallowance was computed with reference to the remaining amount of interest.The AO had not pointed out any defect in the aforesaid calculation nor in theseparate divisional books of accounts maintained by the assessee. Even in Rule8D(2)(iii), the assessee has computed disallowance @0.5% of the investments which yielded exempted income. This view of the assessee was supported by numerous decisions of High Courts as well Tribunals. Even in this regard the AO again failed to discharge his onus recording reasons or his dissatisfaction with the calculation of the assessee. Section 14A clearly lays down that the AO has to record objective satisfaction in respect of the disallowance offered by the assessee having regard to its books of accounts. The CIT(A) noted that the assessee had furnished separate audited booksof accounts Page | 4 Page | Page | Page |

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 of each division. Lt was noted that due explanation in support of theirdisallowance of Rs.7,74,703/- was also furnished by the assessee. The AO howeverseemed to have mechanically ignored the explanation stating that the submissionswas untenable in law and unacceptable. There is a lack of recording of objectivesatisfaction on the part of the AO before making further disallowance u/s 14A of theAct. The jurisdictional Calcutta High Court in the case of CIT Vs REI Agro Limited (GA 3022 of 2013) dated 16 12.2013, has affirmed the order of the lTAT, Kolkata stating that in absence of any proper and objective satisfaction being recorded by theAO in the assessment order, the AO's action of making disallowance under Section 14A by applying Rule 8D is bad in law. This proposition is further supported by thedecisions of ITAT, Kolkata in the case of ACIT Vs Champion Commercial Limited (lTA No. 644/Kol/2012) and ITAT, Pune in the case of Kalyani Steels Limited Vs Addl. CIT(lTA No. 1733/Pn/2012. Following the binding precedent of the Hon'bleCalcutta High Court and the foregoing decisions of the Hon'ble Tribunal, the CIT(A) held thatthe further disallowance of Rs.25,51,838/- made by the AO under Section 14A of theAct was bad in law and deserves to be deleted and therefore, CIT(A) deleted the addition.

5.3Not being satisfied with the order of the ld. CIT(A), the Revenue is in appeal before us. The ld DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.On the other hand, the ld. Counsel for the assessee has defended the order of the ld. CTI(A). The ld. Counsel also relied on the submissions which he made during the appellate proceedings before the ld. CTI(A).

5.4 We have given a careful consideration to the rival submissions.We are of the view that the AO has not recorded any reasons for rejecting the calculation of the assessee. Although the AO has heldthat Rule 8D is applicable in the relevant assessment year 2008-09, but he has not recorded any satisfaction nor has pointed out any specific infirmity in the claim of the assessee. Theinterest which was directly attributable to agriculture & sugar division was excludedand disallowance was computed with reference to the remaining amount of interest and we note that interest pertains to Agricultural Division and Sugar Division should not be considered for disallowance under Rule 8D.The AO has Page | 5 Page | Page | Page |

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 neitherpointed out any defect in the aforesaid calculation of the assessee nor in the separate divisional books of accounts maintained by the assessee. This view of the assessee is supported by numerousdecisions of High Courts as well Tribunals. Even in this regard the AO again failed todischarge his onus of recording reasons or his dissatisfaction with the calculation of the assessee. Section 14A clearly lays down that the AO has to record objective satisfaction in respect of the disallowance offered by the assessee having regard to its books of accounts. We note that the assessee had furnished separate audited booksof accounts of each division. lt is noted that due explanation in support of theirdisallowance of Rs.7,74,703/- was also furnished by the assessee. The AO howeverseemed to have mechanically ignored the explanation stating that the submissionswas untenable in law and unacceptable. There is a lack of recording of objectivesatisfaction on the part of the AO before making further disallowance u/s 14A of theAct. The jurisdictional Calcutta High Court in the case of CIT Vs REI Agro Limited (GA 3022 of 2013) dated 16 12.2013, has affirmed the order of the lTAT, Kolkata stating that in absence of any proper and objective satisfaction being recorded by theAO in the assessment order, the AO's action of making disallowance under Section 14A by applying Rule 8D is bad in law. This judgment also explains that the disallowance under Rule 8D(2)(ii) should be in respect of the investments which yielded exempt income. Respectfully, following the judgment of the jurisdictional Calcutta High Court, Kolkata, we find no infirmity in the order passed by the ld. CIT(A). Therefore, we confirm the order passed by the ld. CIT(A).

5.7 In the result, the appeal filed by the Revenue (in Ground No.1 of & 1217/kol/2015), is dismissed.

6.Ground No.2 and 3 raised by the Revenue relate to disallowance under rule 8D(2)(ii) and 8D(2)(iii) in respect of exempted agricultural income of Rs.1,03,67,798/- and Rs.20,20,841/- respectively.

6.1The brief facts qua the issue are that during the assessment proceedings, the AO noted,in the computation of total income, that the assessee has claimed exemption u/s. 10(1) on account of agricultural income. However, no expenditureincurred in relation to agricultural income had been offered as Page | 6 Page | Page | Page |

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 disallowance u/s.14A. The assessee was asked to show cause why the expenditure incurred inrelation to such agricultural income should not be disallowed in computing the totalincome. In response, the assessee, submitted before the AO that theywere computing the agricultural income as per the Audited divisional accounts and had not claimed grossagricultural receipts but had deducted the expenditure in relation to the agricultural income and accordingly the agricultural income had been taken to be exempt under the provisions of law. The assessee submitted that he had computed income with the figure of net profit as per audited profit and loss account, whichincludes the net profit before tax of all the divisions, as given below: Amount (i) Corporate Office : 9,06,975/- (iil Sugar Division (-) :(-) 5,94,93,867/- (iii) Agricultural Division : 88,40,807/- (iv) Marketing Division :4,24,17,170/- Total : 78,24,364/- As per audited Divisional P & L A/c. forming part of the record, the net profit of the Agricultural Division ofRs.88,40,807/- is after deducting the total expenses of Rs.3,19,13,917/- from the gross receipts of Rs.4,09,95,906/- of the said Division. While computing the income from business, the said net profit fromthe Agricultural Division has been deducted from the net profit as per Profit & Loss A/c. Thus, the grossreceipts of Rs.4,09,95,906/- as well as expenditure of Rs.3,19,13,917/- of the Agricultural Division havebeen excluded by us in computing our business income. In other words, the said expenditure ofRs.3,19,13,917/- was not claimed as a deduction by us in the computation of business income nor was ittaken as allowed as a deduction while computation of Income. The assessee submitted that he received total dividend received ofRs.33,62,011/- and made disallowance u/s. 14A at Rs.7,74,043/-.However, the AO rejected the contention of the assessee and computed the disallowance as follows: Disallowance as per rule 8D(2)(i) Direct expenses (interest) Rs. 31,05,893/- Direct expenses (other than interest) Rs.2,88,08,024/- Total Rs.3,19,13,917/-………(a) Disallowance as per rule 8D(2)(ii) Page | 7 Page | Page | Page |

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 The total interest debited to the P & L account was of Rs.2,61,45,434/- out ofwhich Rs.31,05,893/- has been considered for disallowance under rule 8D(2)(i) on account of direct expenditure. The disallowance on the balance amount of interestof Rs.2,30,39,541/- which is indirectly attributable to the earning of tax exemptagriculture income was computed by AO as under : Interest (as discussed above) Rs. 2,30,39,541/- .... (A) Investment in agriculture division as on 01.04.2007 Rs.39,94,11,260/- Investment in agriculture division as on 31.03.2008 Rs.40,89,25,106/- Total - Rs.80,83,36,366/- Average value of investment Rs.40,41,68,183/- ..... (B) Value of assets (as per B/S) as on 01.04.2007 Rs. 86,02,71,056/- Value of assets (as per B/S) as on 31.03.2008 Rs. 94,65,06,232/- Total - Rs.180,67,77,288/- Average value of total assets Rs.90,33,88,644/- ..... (C) Thus, disallowance as per rule 8D(2)(ii) = (A) x (B)/ (C) = Rs.1,03,67,793/-……………….(b) Disallowance as per rule 8D(2)(iii) 0.5% of Average Value of Investment = 0.5% of Rs.40,41,68,183/- = Rs.20,20,841/-........... (c) Thustotal disallowance computed by AO,u/s. 14A read with rule 8D[(a) + (b) + (c)]was at Rs.4,43,02,551/-.

6.2Aggrieved by the order of the AO, the assessee filed an appeal before the CIT(A) who has deleted the addition made by AO. The CIT(A) observed that the assessee was engaged in cultivation of agriculture for which it maintains separate set of books of accounts.The said books are duly audited by M/s Chaturvedi &Co., Chartered Accountants. The gross receipts from agriculture was Rs.4,09,95,906/-. The expenses incurred in this division was Rs.3,19,13,917/- and depreciation was Rs.2,41,902/-. Accordingly thenet agricultural income was computed at Rs.88,40,897/- by the assessee which was claimed as exempt under the Act. The CIT(A) observed that the assessee has already disallowed the expenses incurred in relation to earning of agriculturalincome. That is, all expenses interest and depreciation pertaining to the agricultural income were already disallowed by the Page | 8 Page | Page | Page |

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 assessee and only the "net" amount was claimed as exempt underthe Act and thereforeagricultural income. This way, ld CIT(A) held that no further disallowance should be made. Therefore, the furtherdisallowance of Rs.4,43,02,551/- in substance amounted to double disallowance by theAO. The CIT(A) also held that AO had not rejected the books of accounts and also notpointedoutanyinfirmity or defect in the separate divisional accounts maintained by the assessee. The separate divisional accounts were duly audited by a firm of Chartered Accountants. All the expenses incurred in relation to earning ofagricultural income had been debited to the Agricultural Division and had beenreduced from the gross agricultural receipts. Therefore, CIT(A) deleted the disallowance of Rs.4,43,02,551/- made by the AO.

6.3 Not being satisfied with the order of CIT(A), the Revenue is in appeal before us. The ld DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.On the other hand, the ld. Counsel for the assessee has defended the order of the ld. CIT(A).

6.4 We have given a careful consideration to the rival submissions. We note that the assessing officer was of the view that the assessee had not made any disallowance with respect to the agricultural income which stands exempted u/s 10(1) of the Act. On being queried by the Assessing Officer, the assessee filed before assessing officer an explanation to the effect that agricultural income was computed as per the debited divisional account and that after deducting expenses, the net agricultural income had been claimed as exempt under the provisions of law. The income of Rs.78,24,364/- was computed which included the net profit before tax of all the divisions, which is given below for ready reference. i. Corporate Office : Rs. 9,06,975/- ii. Sugar Division (Loss) : Rs.5,94,93,867/- iii. Agricultural Division : Rs. 88,40,807/- iv. Marketing Division :Rs.4,24,17,170/- : Rs. 78,24,364/- As per audited Divisional Profit &Loss Account,the net profit of the AgriculturalDivision of Rs.88,40,807/- is after deducting the totalexpenses of Rs.3,19,13,917/-and depreciation of Rs.2,41,902/- from the gross receipts of Page | 9 Page | Page | Page |

M/s. Khaitan India Ltd. & 1217/Kol/2015 Assessment Years: 2008-09 & 2009-10 Rs.4,09,95,906/- of the said Division. While computing the income from business, the said net profit from the Agricultural Division has been deducted from the net profit as per the Profit & Loss Account. Therefore, the gross receipts of Rs.4.09,95,906/- as well asexpenditure of Rs.3,19,13,917/- of the Agricultural Division have been excluded by the assessee in computing business income. ln other words, the said expenditure of Rs.3,19,13,917/-, and depreciation of Rs.2,41,902/-,were not claimed as a deduction by assessee in the computation of business income. These expenses were not taken by the assessee, as allowed, as a deduction while computation of income. We are of the view that the assessee engaged in cultivation of agriculture for which it maintains separate set of books of accounts.The said books are duly audited by Chartered Accountants.The gross receipts from agriculture was Rs.4,09,95,906/-. The expenses incurred in this division was Rs.3,19,13,917/- and depreciation was Rs.2,41,902/-. Accordingly thenet agricultural income was computed at Rs.88,40,897/- by the assessee which was claimed as exempt under the Act. lt is therefore evidently clear that the assessee has already disallowed the expenses incurred in relation to earning of agriculturalincome. That is, all expenses,interest and depreciation pertaining to the agricultural income were already disallowed by the assessee and only the "net" amount was claimed as exempt underthe Act, therefore, considering the factual position explained above,no further disallowance is required. We note that the AO has not rejected the books of accounts,he has also notpointedoutanyinfirmity or defect in the separate divisional accounts maintained by the assessee. The separate divisional accounts were duly audited by a firm of Chartered Accountants. Hence, considering the factual position discussed above, we do not find any infirmity in the order passed by the CIT(A) therefore, we confirm the order passed by the CIT(A).