M/S KHODAY INDIA LTD vs. THE ASSISTANT COMMISSIONER OF INCOME-TAX

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 16TH DAY OF AUGUST 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.391 OF 2012 BETWEEN: M/S. KHODAY INDIA LTD. REP BY ITS DIRECTOR SRI. K.L. SWAMY BREWERY HOUSE 7TH MILE, KANAKAPURA ROAD BANGALORE - 560 062. ... APPELLANT (BY SRI. A. SHANKAR, SR. ADV. FOR SRI. V. CHANDRASHEKAR, ADV.,) AND: THE ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE 11 (5) R.P. BHAVAN, OPP. RBI NRUPATHUNGA ROAD BANGALORE - 560 001. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 18.07.2012 PASSED IN ITA NO.211/BANG/2012 FOR THE ASSESSMENT YEAR 2008-09, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE.

2 (ii) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY THE TRIBUNAL IN ITA NO.211/BANG/2012 DATED 18.07.2012. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee against the order dated 18.07.2012 passed by Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The subject matter of the appeal pertains to the Assessment year 2008-09. The appeal was admitted by a bench of this Court on the following substantial questions of law: (i) Whether the tribunal was justified in law in not holding that the learned Assessing Officer has not recorded satisfaction as per provisions of Section 14A of the Act consequently the addition of Rs.59,11,624/- under Section 14A is liable to set aside on the facts and circumstances of the case?

3 (ii) Whether the tribunal was justified in law in confirming the disallowance of Rs.59,11,624/- under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income-Tax Rules, 1962 on the facts and circumstances of the case? (iii) Whether the tribunal was justified in law in not appreciating that the partnership firm incurred loss in the impugned assessment year, consequently the appellant is not liable for disallowance under Section 14A of the Act read with Rule 8D on the facts and circumstances of the case? (iv) Whether the tribunal failed to appreciate that the amount adjusted as capital contribution in the firm of M/s Lakshmi Estate due to business expediency cannot be treated as investment in accordance with Section 14A of the Income- tax Act read with Rule 8D of the Income-Tax Rules on the facts and circumstances of the case?

4 2. Facts leading to filing of this appeal briefly stated are that the assessee is a public limited company and carrying on the business of manufacture and trade of Indian Made Foreign liquor, glass, paper and trading of computers etc. The assessee filed the return of income for Assessment Year 2008-09 on 30.09.2008 and subsequently filed revised return of income on 14.10.2008 in which income of the assessee was declared as Rs.10,94,29,682/-. The return was selected for scrutiny. The Assessing Officer passed an order under Section 143(3) of the Act and additions were made on account of 50% of sales promotion expenses, disallowance under Section 14A read with Rule 8D of the Rules, disallowance of interest on advance for capital goods and ESI contributions under Section 36(1)(va) of the Act to the extent of Rs.22,42,507/-, Rs.59,11,624/-, Rs.23,72,716/- and Rs.32,71,855/- respectively. 3. The assessee filed an appeal before the Commissioner of Income Tax (Appeals) who by an order

5 dated 30.11.2011 upheld the additions made by the Assessing Officer, except disallowance of interest on advance for capital goods. The assessee thereupon preferred an appeal before the tribunal. The tribunal by an order dated 18.07.2012 partly deleted the addition made with regard to sales promotion expenses, deleted the additions with regard to PF and ESI contributions under Section 36(1)(va) of the Act and upheld the addition with regard to disallowance under Section 14A of the Act read with Rule 8D of the Rules. In the aforesaid factual background, this appeal has been filed. 4. Learned Senior counsel for the assessee submitted that the Assessing Officer has not recorded the satisfaction which is a mandatory requirement as prescribed under Section 14A of the Act. It is also submitted that it ought to have appreciated that the assessee has not earned any exempt income under Section 10(2A) of the Act from the partnership as the firm had incurred loss. It is also submitted that the

6 assessee had interest free funds in excess of amounts of investments and therefore, disallowance under Section 14A of the Act was not called for. It is also urged that for the Assessment Years 2009-10, 2010-11, 2011-12 and 2012-13 in the case of the assessee itself, the tribunal had set aside the order passed by the Assessing Officer and had remitted the matter to him to examine whether the claim that 'no borrowed funds were utilized for making any investment'. Thereafter, the Assessing Officer after examination of the matter by an order dated 29.03.2019 held that no disallowance under Section 14A of the Act read with Rule 8D of the Rules is called for. In support of aforesaid submissions, reliance has been placed on decisions in 'KODAGU DISTRICT CO-OPEARTIVE CENTRAL BANK LTD. VS. ACIT IN ITA NO.318/2016 DATED 19.01.2021, 'PCIT VS. STERLING DEVELOPERS P.LTD. IN ITA NO.685 OF 2015 DATED 04.02.2021 (KAR.), 'CIT S. QUEST GLOBAL ENGINEERING SERVICES PVT. LTD IN ITA

7 NO.133 OF 2015 DATED 15.02.2021 (KAR.), 'CIT VS. ALLIANCE INFRASTRUTURE PROJECTS PVT. LTD', ITA NO.74/2015 DATED 21.06.2021 (KAR.), 'PRAGATHI KRISHNA GRAMIN BANK VS. JCIT', (2018) 95 TAXMANN.COM 41 (KAR.), 'PCIT VS. CARAF BUILDERS & CONSTRUCTION (P.) LTD.', (2019) 112 TAXMANN.COM 322 (SC), 'CIT VS. MICROLABS LTD.', (2017) 79 TAXMANN.COM 368 (KAR.), 'CIT VS. RELIANCE UTILITIES & POWER LTD.', (2009) 178 TAXMAN 135 (BOM.) and 'CIT VS. HDFC BANK LTD.', (2014) 49 TAXMANN.COM 355 (BOM.). 5. On the other hand, learned counsel for the revenue submitted that condition for recording satisfaction as prescribed under Section 14A of the Act is not attracted to the facts of the case as there is no suo motu disallowance. In this connection, reliance has been placed on decision of the Supreme Court in 'MAXOPP INVESTMENT LTD. VS. COMMISSIONER OF INCOME

8 TAX, NEW DELHI', (2018) 91 TAXMANN.COM 154 (SC). It is further submitted that the assessee had never raised the contention before the authorities under the Act that investments have not been made by it from the borrowed funds and therefore, for the first time, the said issue cannot be raised in this appeal and an enquiry has to be made to ascertain the factual aspect. 6. We have considered the rival submissions made on both sides and have perused the record. Before proceeding further, it is apposite to take note of Section 14A of the Act, which reads as under: Expenditure incurred in relation to income not includible in total income. 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

9 (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, 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 relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year

10 beginning on or before the 1st day of April, 2001. 7. Thus, it is evident that Assessing Officer can determine the amount of expenditure incurred in relation to an exempt income if the Assessing Officer having regard to accounts of the assessee is not satisfied with the correctness of the claim of the assessee but it has not incurred any expenditure in order to earn exempt income. The Assessing Officer is therefore, required to record its satisfaction that it has not incurred any expenditure in order to earn exempt income. 8. The assessee has claimed before the Assessing Officer that it has not incurred any expenditure towards earning exempt income, which has been reproduced by the Assessing Officer in para 5 of its order. However, from scrutiny of the order passed by the Assessing Officer, it is evident that the Assessing Officer has not recorded satisfaction with regard to claim

11 of the assessee that it has not incurred any expenditure in order to earn exempt income. Therefore, the condition precedent for invoking Rule 8D of the Rules as per Section 14A of the Act is not fulfilled. For the aforementioned reasons, the first substantial question of law is answered in favour of the assessee and against the revenue. 9. So far as the claim of the assessee that it has not earned any exempt income is concerned, it is pertinent to note that the Assessing Officer had held that investment in the partnership firm M/s Lakshmi Estates will yield income in the nature of profit from partnership firm which is exempt under Section 10(2A) of the Act. The Commissioner of Income Tax (Appeals) and the tribunal recorded a finding that even in a case where there is no tax free income actually received, disallowance under Section 14A of the Act has to be made. In the instant case, the assessee had not received any share or profit from the partnership firm

12 during the year and in fact the partnership firm had incurred the loss of Rs.11,97,926/- and no exempt income was earned by the assessee. In the absence of any exempt income during the year, there could not be any disallowance under Section 14A of the Act. [SEE: STERLING DEVELOPERS (P) LTD. AND QUEST GLOBAL ENGINEERING SERVICES PVT. LTD. SUPRA]. For the reasons assigned by us supra, second and third substantial questions of law are also answered in favour of the assessee. 10. The assessee had made fake advances to M/s Lakshmi Estate and later became a partner to the extent of 75% share in the partnership firm from the year 2003 onwards. It is claimed by the assessee that it had not borrowed funds for the purpose of making original advances to M/s Lakshmi Estate, requires adjudication of facts and therefore, in the facts and circumstances of the case, we deem it appropriate to remit the matter to the Assessing Officer to decide the claim of the assessee

13 whether or not it had used borrowed funds for the purposes of making original advances to M/s Lakshmi Estate for the Assessment Year 2008-09. Therefore, it is not necessary for us to answer the fourth substantial question of law. In the result, the orders passed by the Assessing Officer, Commissioner of Income Tax (Appeals) and the tribunal to the extent it contains the finding against the assessee and the matter is remitted to the Assessing Officer to determine the claim of the assessee whether or not it had used borrowed funds for making original advance to M/s Lakshmi Estate for the Assessment Year 2008-09. In the result, appeal is disposed of. Sd/- JUDGE Sd/- JUDGE ss