KALYANI STEELS LTD. vs. ADDITIONAL COMMISSIONER OF INCOME-TAX,,

आदेश / ORDER

PER ANIL CHATURVEDI, AM :

This appeal filed by the assessee is emanating out of the order 1. of Commissioner of Income Tax (A) – 7, Pune dt.21.01.2016 for the assessment year 2009-10.

2.1 Assessee is a company stated to be engaged in the business of manufacturing of steel and steel based products, forgings etc.,

Assessee filed its return of income for A.Y. 2009-10 on 30.09.2009

declaring loss of Rs.12,37,08,857/-. The case was selected for

scrutiny and thereafter, assessment was framed u/s 143(3) of the Act

vide order dt.23.12.2011 and the total loss was determined at

Rs.11,35,96,545/-. Aggrieved by the order of AO, assessee carried

the matter before Ld.CIT(A), who vide order dt.21.01.2016 (in appeal

No.PN/CIT(A)-7/R-11/91/2014-15) granted partial relief to the

assessee. Aggrieved by the order of Ld.CIT(A), assessee is now in

appeal before us and has raised the following grounds :

“1.1 The learned CIT(A) erred in confirming disallowance of an additional amount of Rs. 83,67,445/- (over and above of Rs.5,00,000/- disallowed by the Appellant Company in its Statement of Total Income) as expenditure incurred in relation to income which does not form part of the total income u/s.14A by applying Rule 8D while assessing total income as per regular provisions of the Income Tax Act, 1961 and book profit u/s 115JB of the Income Tax Act, 1961. 1.2. The learned CIT(A) failed to appreciate that the learned Assessing Officer had not recorded any satisfaction in the assessment order about the correctness or otherwise of the claim of expenditure made by the assessee in relation to income which does not form part of the total income under the Act for such previous year and hence, there was no reason to apply the provisions of rule 8D for making the disallowance u/s.14A and accordingly, the entire addition of Rs.83,67,445/- confirmed by the learned CIT(A) may kindly be deleted.

assessee has raised various grounds but the sole controversy is with

respect to disallowance u/s 14A r.w. Rule 8D of the Income Tax Act.

assessee had claimed income from dividend of Rs.2,34,67,758/- as

being exempt from tax u/s 10(33) of the Act and had suo motu

disallowed expenses of Rs.5,00,000/- under Sec.14A r.w. Rule 8D of

the Income Tax Rules. Assessee was asked to justify the claim of

disallowance worked out by it. Assessee inter-alia submitted that the

investments are out of internal accrual and it had not borrowed any

loans for making any new investments. It was further submitted that

the tax free income has been earned from long term investments and

that no expenses were incurred for earning exempt income but

however, assessee had suo motu disallowed the expenses of

Rs.5,00,000/-. The submission of the assessee was not found

acceptable to AO. AO by following the methodology prescribed under

Rule 8D of the Income Tax Rules worked out the disallowance u/s

14A of the Act at Rs.93,67,445/-. Aggrieved by the order of AO,

assessee carried the matter before Ld.CIT(A), who granted partial relief

to the assessee by holding as under :

“4.1 I have carefully considered the facts of the case and law apparent from the record. The only dispute is in respect of disallowance under rule 8D(2)(iii). The rule 8D(2)(iii) takes care of administrative expense or other expenses which might incur to earn exempt income. The appellant itself has disallowed expense of Rs. 5 Lakh towards the general /administrative expenses in earning the dividend income. 4.2 The AO has stated that, in Para 4.1 of the Assessment order dated 23.12.2011 that,

“The disallowance of Rs. 5 Lakh is stated to have been computed on the basis of nature of expenses and estimates applied in the allocation of the expenditure including the interest to the indentified exempt income earned by the assessee. It is further claimed that the tax auditor has also reviewed the said computation on the basis of estimates applied to identify expenses. It was brought to the notice of the assessee's representative that having regard to the accounts of the assessee, "I am not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of total income under the I. T. Act. The assessee's auditor in his report has also given a note that the computation is subject to scrutiny by the Assessing Officer at the time of Income tax assessment proceedings. The assessee was therefore, asked to submit the computation of disallowance u/s. 14A as per rule 8D of the I. T. Rules. The assessee's representative has submitted the computation as under:- "Amount of deduction in admissible in terms of section 14A in respect of the expenditure incurred in relation to

tax free income which does not form part of the total income…………..”

And assessee submitted calculation of disallowance under rule 8D of Rs.88,67,445/- to Assessing Officer. 4.3 The appellant has not given bifurcation of disallowance of Rs.5 Lakh to the AO. The auditor also given certificate with rider that computation is subject to scrutiny. This shows that the disallowance of Rs.5 Lakh is subject to scrutiny. The appellant has not given the exact basis of the disallowance. Due to these fact the case of the appellant for AY 2008-09 & 2010-11 is different. Though, amount of disallowance of Rs.5 Lakh is same. Further, the appellant has given to AO the amount disallowance of Rs. 88,67,445/- as per rule 8D. 4.4 The appellant has stated that there was no dominant and immediate connection between the expenditure incurred and exempted income. Therefore there cannot be any ad-hoc disallowance by taking sub ground no. 1.2. The contention of the appellant has no force as the appellant itself has disallowed amount of Rs.5 Lakh. The appellant also contends that disallowance under rule 8D gives un realistic figure of expenditure, The constitutional validity of rule 8D r.w.s section 14A has been upheld in case of Godrej Boyce Mfg. Co. Ltd Vs DC IT (2010) 328 ITR 81 (B0M). In circumstances not accepting disallowance made by the assessee, AO is bound to disallow expenditure in accordance with rule 8D and hence sub ground no. 1.2 is dismissed.

4.5 The appellant also contents that disallowance of Rs.5 Lakh is adequate. The auditor of appellant also doubted the adequacy of the inadmissible expenses in relation to tax free income. Which remain unexplained and the AO being satisfied invoked rule 8D. In view of these actions of AO officer invoking rule 8D is upheld and sub ground no. 1.1 is dismissed.

4.6 The appellant contends that the AO disallowed under rule 8D of Rs. 88,67,445/-. Over and above the AO also added Rs. 5 Lakh already disallowed by appellant and taken sub ground no. 1.3 . The disallowance under rule 8D is restricted to 88,67,445/- There is no need for separate disallowance of Rs.5 Lakh. The AO is directed to compute income accordingly and sub ground no. 1.3 is allow.”

Aggrieved by the order of Ld.CIT(A), assessee is now in appeal before

us.

and Ld.CIT(A) and further submitted that in assessment years 2008-

09, 2010-11 and 2011-12 on identical facts, the issue has been

decided by the Tribunal in assessee’s favour. He placed on record the

copy of the aforesaid decisions. He further submitted that in the

present case, no satisfaction has been recorded by the AO before

proceeding to disallow the expenses u/s 14A of the Act. He submitted

that in the absence of any satisfaction being recorded by the AO, no

disallowance u/s 14A of the Act is called for and for this proposition,

he relied on the decision rendered by the Hon’ble Punjab and Haryana

High Court in the case of Punjab Tractors Limited Vs. CIT reported in

(2017) 398 223 (P & H). He also placed reliance on the decision of

Hon’ble Apex Court in the case of Godrej & Boyce Manufacturing

Company Limited Vs. DCIT reported in (2017) 394 ITR 449 (SC). He

further submitted that assessee has sufficient interest free funds for

making the investments and in support of which, he pointed to the

copy of Balance Sheet placed at page Nos. 20 to 50 of the Paper Book.

us through the findings of AO and supported the order of lower

authorities.

on record. The issue in the present ground is with respect to

disallowance of expenses u/s 14A r.w. Rule 8D of the Act. We find

that identical issue arose in assessee’s own case in A.Y. 2008-09,

2010-11 and 2011-12. We find that the Co-ordinate Bench of the

Tribunal in assessee’s own case while deciding the issue in A.Y. 2011-

12 in ITA No.441/PUN/2015 order dt.20.09.2017 has decided the

issue in favour of the assessee by holding as under :

“7. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to disallowance

of Rs.38,12,500/- u/s 14A of the Act. The perusal of the Balance- Sheet which is placed at Page 31 of the Paper Book reveals that the interest free funds in the form of Share capital and Reserves and surplus aggregated to Rs.321.42 crores as against the investments of Rs.83.24 crores meaning thereby that the availability of interest free funds are far in excess of the investments. When the interest free funds are in excess of investments, there is presumption that the investments are out of interest free funds and therefore no disallowance on amount of interest is called for.

“15. It is clear that for the first time in the case of HDFC Bank Ltd. (Supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities and Power Ltd. (Supra) with regard to investment in tax free securities coming out of assessee’s own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd.(Supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (Supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (Supra) on the above issue has also been accepted by the Revenue inasmuch as even though they have filed an appeal to the Supreme Court against that order on the other issue therein, viz., broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities and Power Ltd. (Supra) in its application to Section 14A of the Act. Therefore, the issue which arose for consideration before the Tribunal had not been decided by this Court in Godrej and Boyce Manufacturing Co. Ltd. (Supra). It arose and was so decided for the first time by this Court in HDFC Bank Ltd. (Supra). Thus, there is no conflict as sought to be made out by the impugned order. Thus, impugned order has proceeded on a fundamentally erroneous basis as the ratio decidendi of the order in Godrej and Boyce manufacturing Co. Ltd. (Supra) had nothing to do with the rest of presumption canvassed by the petitioner before the Tribunal on the basis of the ratio of the decision of this Court in HDFC Bank Ltd. (Supra).

the Assessment order on 22nd December, 2010 under section 143(3) of the Act. The CIT(A) passed an order on 21st November, 2011 dismissing the petitioner’s appeal. On both the dates, when the orders were passed by the Assessing Officer and CIT(A), the authorities did not have the benefit of the order of this Court in HDFC Bank Ltd. (Supra) rendered on 23rd July, 2014. Once the issue is settled by the decision of this Court in HDFC Bank Ltd. (Supra), there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of the interest free funds. Consequently, we do not find any merit in the above submission made at the hearing on behalf of the Revenue.”

“11.Section 14A specifies the circumstances in which the Assessing Officer is entitled to determine the amount of expenditure incurred in relation to exempt income in accordance with such method as may be prescribed. The method prescribed is in rule 8D of the Income-tax Rules, 1962 which was introduced with effect from the assessment year 2008-09. The conditions specified in sub-sections (2) and (3) of section 14A must exist in order to entitle the Assessing Officer to invoke rule 8D. This is clear from the language of these sub-sections. Sub- section (2) provides that the Assessing Officer shall determine the amount of expenditure incurred in respect of exempt income in accordance with the method prescribed, i.e., rule 8D "if”' having regard to the accounts of the assessee, he is not satisfied with the correctness of the assessee's claim in respect of such expenditure in relation to exempt income. The word "if" indicates that to invoke the method prescribed namely rule 8D, the Assessing Officer must not be satisfied with the correctness of the assessee's said claim.

The Hon’ble High Court further observed as under

"Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been used to earn tax- free income. The satisfaction to be recorded must be based upon credible and relevant evidence ... "

only if the Assessing Officer records his reasons for his not being satisfied in writing.”

We further find that the Co-ordinate Bench of the Tribunal, Pune in ITA No.2114/PN/2012 dt.27.05.2014 in the case of ACIT Vs. Magarpatta Township Development and Construction Company Limited has also held that when AO did not record any satisfaction as required by Sec.14A(ii), disallowance u/s 14A r.w.r. 8D was unjustified. Considering the totality of the aforesaid facts and relying on the aforesaid decision of Hon’ble Punjab & Haryana High Court, we are of the view that in the present case in the absence of recording of satisfaction by AO for disallowing the expenses, no disallowance u/s 14A over and above that has been suo-moto disallowed by assessee is called for. We therefore set aside the additional disallowance u/s 14A of the Act made by AO. Thus, the grounds of the assessee is allowed.

Revenue to support its contention nor has pointed out any

distinguishing feature in the facts of the case for the year under

consideration and that of A.Y. 2011-12. We therefore relying on the

decision of Tribunal in assessee’s own case, hold that no disallowance

of expenses over and above the suo motu disallowance of Rs.5 lacs as

made by assessee is called for. We therefore set aside the order of

Ld.CIT(A). Thus, the grounds of the assessee are allowed.

Order pronounced on 23rd day of February, 2018.

Sd/- Sd/- (SUSHMA CHOWLA) (ANIL CHATURVEDI) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER

पुणे Pune; �दनांक Dated : 23rd February, 2018. Yamini

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to :

आदेशानुसार/ BY ORDER

// // True Copy // व�र�ठ �नजी स�चव / Sr. Private Secretary आयकर अपील�य अ�धकरण ,पुणे / ITAT, Pune.