HARBANSLAL MALHOTRA & SONS PVT. LTD.,KOLKATA vs. D.C.I.T.CENTRAL CIRCLE-XXVII, KOLKATA, KOLKATA

This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-II, Kolkata dated 29.11.2013. Assessment was framed by DCIT, Central Circle-XXVII,, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 30.01.2013 for assessment year 2010-11. The grounds raised by the assessee per its appeal are as under:-

First issue raised by assessee in its appeal is that Ld. CIT(A) erred in confirming the order of Assessing Officer by sustaining the disallowance of ₹8,80,905/- u/s 14A r.w.s Rule 8D of the IT Rules, 1962.

Facts in brief are that assessee is a Private Limited Company and engaged in manufacturer of shaving blades and various other safety razors and shaving systems. During the year under consideration, assessee has earned dividend income of ₹1,49,160/- and tax free interest from investment in HUDCO bond for ₹9,27,329/-. During the course of assessment proceedings, AO observed that as per tax audit report the assessee has disallowed a sum of ₹7,82,695/- u/s 14A of the Act. The AO also observed that assessee has disallowed less expense as per the provision of Sec. 14A r.w.s Rule 8D of the IT Rules. Accordingly, AO invoked the provision of Sec. 14A r.w.s 8D of the IT Rules and made disallowance of ₹8,80,905/- and added to the total income of assessee.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) whereas assessee submitted that a sum of ₹7,82,695/- was disallowed u/s. 14A of the Act inadvertently as such assessee has not incurred any expense for earning tax free income. Therefore, no disallowance u/s 14A r.w. Rule 8D of the IT rules is warranted for the investment made by assessee in equity shares and bond as the A.Y. 2010-11 Harbanslal Malhotra & Sons P. Ltd. vs. DCIT CC-XXVII Kol. Page 3 investment is made out of its own fund. No borrowed fund whatsoever has been used in its business. However, Ld. CIT(A) disregarded the plea of assessee and confirmed the order of AO by observing as under:- “5. I have considered the submission of the appellant and perused the assessment order. On careful consideration of the facts, I am not inclined to agree with the submission of appellant. It is observed that the tax auditor has computed the disallowance u/s. 14A by applying the provisions of Rule 8D at Rs.7,82,695/- having regard to books of account of the appellant company as the tax audit was completed by him. Therefore, it is not correct to say that the auditor has committed a mistake by computing the disallowance under Rule 8D (2)(ii) and 8D(2)(iii). Further, the disallowance u/s 14A computed by the Tax Auditor, having regard to books of account, of appellant company was also accepted by it and therefore same was added to the income as per the computation of income filed along with return of income. I am also not inclined to agree with the submission of appellant that the investment in HU9DCO Tax Free Bonds was made out of own funds as there is no evidence on record. In view of above, it is held that the AO was justified in making disallowance u/s. 14A read with Rule 8D at Rs.8,80,905/- which includes disallowance of Rs.7,82,695/- computed by the Tax Auditor and accepted by the appellant in its return of income. The disallowance made by the AO is confirmed. The ground no. 1 is dismissed.” Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us.

Before us Ld. AR submitted that the investments have been made by assessee in the group companies and all are strategic investment and therefore no disallowance should be made u/s. 14A of the Act. The assessee by mistake has made its disallowance in its computation of income. Ld. AR further submitted that investment in HUDCO bond was made out of the own fund of assessee and no borrowed fund has been utilized for that purpose. On the other hand, Ld. DR vehemently relied on the order of Authorities Below.

We have heard rival contentions of both the parties and perused the materials available on record. From the aforesaid facts, we find that assessee has made investment in its equity shares and tax free bonds. The assessee in its A.Y. 2010-11 Harbanslal Malhotra & Sons P. Ltd. vs. DCIT CC-XXVII Kol. Page 4 return of income suo moto has disallowed the expense of ₹ 7,82,695/- under the provision of Sec. 14A r.w.s. Rule 8D of the IT Rules. In this regard, Ld. AR before us submitted that these expenses were disallowed by mistake as all the investments in equity shares are strategic investment. In rejoinder, Ld DR has not brought anything contrary to the advanced argument made by Ld. AR with regard to strategic investment made by the assessee. We also find that various Tribunals have held that there should not be any disallowance u/s. 14A of the Act in relation to investment held by assessee as strategic investment. Therefore, we are inclined to reverse the order of Authorities Below in relation to investment in equity share which is strategic investment made by assessee. In this connection, we rely in the order of Hon’ble Lucknow Tribunal in the case of U.P. Electronics Corporation Ltd. Vs. DCIT (2015) 43 CCH 0068. The relevant extract of the order is reproduced below. “Income—Expenditure incurred in relation to income not includible in total income—AO made addition of Rs.40,31,477/- u/s 14A r/w/r 8D having noticed that assessee had shown dividend income of Rs.7,52,120/- which were exempted from tax—AO computed Corresponding expenditure as per rule 8D (iii) at Rs.40,31,477/- and made addition of same—CIT(A) confirmed disallowance—Held, out of total investments of Rs.82,16,45,416/-, investment in subsidiary companies were of Rs.60,90,10,559/- as per balance sheet of assessee company—Assessee has raised specific dispute with regard to invocation of provisions of rule 8D with contention that before invoking provisions of rule 8D, AO has to record objective satisfaction with regard to correctness of accounts relating to provisions of section 14A—Recording of objective satisfaction by AO with regard to correctness of claim of assessee is mandatorily required in terms of section 14A(2)—Moreover, investment was made in case of subsidiary companies, therefore, in those cases disallowance under section 1A(2) of Act cannot be worked out unless and until it is established that certain expenditures are incurred by assessee in these investments—Keeping in view totality of facts and circumstances of case invocation of rule 8D without recording objective satisfaction by AO is not proper—Assessees appeal allowed In view of above, the investment made in the group companies shall not to be considered while applying the provision of Sec. 14A of the Act. However, with regard to investment made in the interest free bonds of HUDCO. In this regard, -14 A.Y. 2010-11 Harbanslal Malhotra & Sons P. Ltd. vs. DCIT CC-XXVII Kol. Page 5 Ld. AR for the assessee has not brought anything on record to justify that such investment was made out of its own fund. At the time of hearing, Ld. AR requested the Bench to restore the matter back to the file of AO to check whether the investment was made out of the borrowed fund or own fund of assessee. To this point, Ld. DR raised no objection if the matter is restored back to the file of AO for fresh adjudication. Considering the facts and circumstances of the case and in the interest of justice and fair play we are inclined to restore the matter back to the file of AO to adjudicate the matter afresh as per law with the direction to check whether the investment in HUDCO bonds were made out of own fund of assessee. Hence, this ground of assessee’s appeal is allowed for statistical purpose.

Next issue raised by assessee in its appeal is that Ld. CIT(A) erred in confirming the order of AO by sustaining the disallowance of ₹ 1,02,130/- on account of non deduction of tax u/s 40(a)(ia) of the Act.

The assessee has claimed legal and consultancy expense without deducting the Tax Deducted at Source (TDS for short) u/s 194J of the Act. Therefore, AO disallowed the same.

Aggrieved assessee preferred an appeal before Ld. CIT(A) who confirmed the order of AO.

At the outset, Ld. AR before us submitted that payees have included in their receipts charges paid by assessee to them under the head legal and consultancy charge and requested to restore the issue back to the file of AO. To A.Y. 2010-11 Harbanslal Malhotra & Sons P. Ltd. vs. DCIT CC-XXVII Kol. Page 6 this point Ld. DR raised no objection if the matter is restored back to the file of AO for fresh adjudication. With the observation as above, and for the limited purpose set out above, the matter stands restored to the file of AO. Needless to add that any material, adverse to the assessee, will have to be confronted to the assessee by the AO, and that, in case AO intends to pass any fresh order as a result of these directions, he will do so only after giving due and fair opportunity of hearing to the assessee, in accordance with the law and by way of a speaking order.