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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
(ASSESSMENT YEAR 2020-21) [ Sicpa India Private Limited, Asst. CIT, 308-312, Mercantile House, Circle -22(2), 15 K.G. Marg, Vs. Delhi. Delhi-110001. PAN-AADCS6121L (Appellant) (Respondent) Assessee by Shri Akash Singhal, CA Department by Shri Rajesh Kumar Dhanesta, Sr. DR Date of Hearing 22/07/2025 Date of Pronouncement 17/10/2025 O R D E R
PER MANISH AGARWAL, AM:
This appeal is filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals)-24, New Delhi [CIT(A), in short] dated 28.11.2024 in Appeal No. NFAC/2019-20/10183865 arising out of order passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’) dated 30.09.2022 for Assessment Year 2020-21.
Brief facts of the case are that assessee is a company engaged in the business of manufacturing and distribution of security inks. The return of income for the year under appeal was e-filed on 15.02.2021 declaring total income at Rs.6,74,74,000/-. The case of the assessee was taken up for scrutiny and the order was passed u/s 143(3) on 30.09.2022 wherein disallowance of Rs.23,09,391/- was made on account of Dividend Distributions Tax and Educational Cess claimed by the assessee as Sicpa India Private Limited vs. ACIT expenses and further disallowance u/s 14A of Rs.25,56,078/- was made and the total income of the assessee was assessed at Rs.7,71,05,940/-.
Against the said order, the assessee preferred an appeal before the Ld. CIT(A) wherein it is stated that the issue with respect to the disallowance u/s 14A is covered by the decision of the Co-ordinate Benches in preceding assessment years in assessee’s own case in its favour, however, the Ld. CIT(A) has not accepted the contentions of the assessee and confirmed the additions made by the AO u/s 14A of the Act.
Aggrieved the said order, the assessee is in appeal before the Tribunal by taking the following grounds of appeal: 1(a) That on the facts and in the circumstances of the case, the Ld. Assessing Officer (here-in-after referred to as 'AO') /Hon'ble Commissioner of Income-tax Appeals (here-in-after referred as 'CIT(A)'), has grossly erred in carrying out confirming disallowance of INR 25,06,578/- by invoking the provisions of section 14A of the Income-tax Act, 1961 (Act') read with Rule 8D of the Income-tax Rules, 1961 ('Rules') without appreciating the fact that no expenditure was actually incurred by the Appellant to earn the exempt Income. 1(b). Without prejudice to Ground No 1(a) above, Ld. AD/Hon'ble CIT(A) has grossly erred and in law in mechanically applying Rule 8D(2) (iii) of the Rules in complete disregard of the facts of the case 1(c). Without prejudice to Ground No.1(a) and 1(b), the Ld. AO has grossly erred in making disallowance under section 14A of the Act without recording his satisfaction about the correctness of the claim made by the Appellant that no expenditure has actually been incurred to earn the exempt income.
2. That on the facts and in the circumstances of the case, the Ld. AO has grossly erred in proposing to initiate proceedings under section 270A of the Act r.w.s 274 of the Act.
3. That the learned AO has further erred in levying interest u/s 234C of the Act which is not applicable on the facts of the instant case.
4. That the Appellant craves leave to add, to amend, modify, rescind, supplement, or alter any of the grounds stated here-in-above, either before or at the time of hearing of this appeal.
Sicpa India Private Limited vs. ACIT 5. Before us, the Ld. AR submits that the Assessing Officer has not recorded any satisfaction before invoking the provisions of section 14A of the Act and simply proceeded to make the disallowance by observing that assessee is having exempt income, therefore, the expenditure related to earn such income should be disallowed u/s 14A of the Act. The Ld. AR submits that the assessee had invested the excess funds available with it in tax free bonds and securities and there was no direct or indirect nexus between the interest paid or any other expenditure for which provisions of section 14A could be invoked. He, therefore, submits the Co-ordinate Bench of the Tribunal in assessee’w own case for Assessment Year 2008-09 in vide order dated 18.08.2023 has allowed the appeal of the assessee by following the order of the Co-ordinate Bench in assessee’s own case for Assessment Year 2009-10 wherein the Co-ordinate Bench has held that where no satisfaction was recorded before invoking the provisions of section 14A of the Act, and therefore, held that no disallowance could be made to earn exempt income. He further submits that following the said order, the Co-ordinate Bench has deleted the disallowance made u/s14A of the Act in Assessment Year 2016-17, 2017-18 and 2018-19 in terms of the order dated 07.03.2025. Since, the issue is fully covered in favour of the assessee by the decision of Co-ordinate Bench, therefore, the disallowance made deserves to be deleted. He prayed accordingly.
On the other hand, ld. Sr. DR supports the order of the lower authorities and submits that once the assesse is having exempt income in the shape of tax-free interest, the provisions of section 14A should be invoked and, therefore, he requested for the confirmation of the disallowance made u/s 14A of the Act.
Heard the parties and perused material available on record. At the outset, it is seen that identical issue was came up for consideration before the Tribunal in ITA Sicpa India Private Limited vs. ACIT No. 704/Kol/2015 for Assessment Year 2009-10 wherein the Co-ordinate Bench of ITAT, Kolkata vide order dated 31.01.2020 has held as under: “21. AO/CIT(A) made disallowance of Rs.40.79 lakhs, Rs.45.60 lakhs & Rs.4.71 lakhs for AYs 2009-10, 2010-11 & 2011-12 respectively by invoking the provisions contained u./s 14A of the Act r/s Rule 8D(2)(iii) of the Rules. Undisputedly, assessee has earned exempt income to the tune of Rs.5.22 crores, Rs.5.24 crores & Rs.3.24 crores for AYs 2009-10, 2010-11 & 2011-12 respectively by investing in debt oriented mutual funds. The assessee has come up with pointed argument that since primary business of assessee company is manufacturing and selling of printing inks and its entire manpower is engaged in carrying out main activities and only idle funds have been invested in pre-decided investment avenues to earn the reasonable income, thus has not incurred any additional expenses to earn the dividend income. It is also the case of the assessee company that it has earned taxable income by way of capital gains during the year under assessments and brought on record details thereof. It is also argued by the Id. AR for the assessee that no proper satisfaction has been recorded by the AO before invoking the provisions contained under Rule 8D and relied upon the decisions of Eicher Motors Ltd. vs. CIT 398 ITR 51 (Del.) and HT Media Ltd. vs. PCIT 399 ITR 576 (Del.). However, on the other hand, Id. DR for the Revenue relied upon the orders passed by the AO as well as ld. CIT (A).
First of all, when we examine the satisfaction recorded by the AO for all the three assessment years i.e. 2009-10, 2010-11 & 2011-12 in order to invoke the provisions contained under Rule 8D, no satisfaction has been recorded by the AO that the working provided by the assessee company that no expenditure has been incurred to earn the dividend income except with general observations that, "a company cannot earn dividend without its existence and management. Investment decisions are very complex in nature which are generally taken by management personnel or other professional experts employed for the purpose for which administrative, managerial and administrative expenses are incurred." 22.1 To our mind, this is no satisfaction rather AO proceeded on the basis of assumptions and guesswork. In AY 2011-12, AO while invoking the provisions contained under Rule 8D recorded that, "since the assessee has not maintained any separate books of account for accounting of expenses incurred in relation to income not includible in its total income the amount of expenses actually incurred cannot be ascertained from the assessee's books of account satisfactorily and proceeded to invoke the provisions contained u/s 14A of the Act r/w Rule 8D of the Rules."
Hon'ble Apex Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT-394 ITR 449 (SC) thrashed the issue in controversy as to invoking of the provisions contained under Rule SD of the Rules by observing as under :- 37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule SD of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form Sicpa India Private Limited vs. ACIT part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule &D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule SD of the Rules or a best judgment determination, as earlier prevailing, would become applicable."
Hon'ble Delhi High Court in case of HT Media Lid. vs. Pr. CIT (supra) also held that broad and general nature of observation made by the AO are not enough to invoke the provisions contained under Rule SD. So, we are of the considered view that when AO has failed to comply with the mandatory provisions of section 14A (2) of the Act r/w Rule 8D(1)(a) of the Rules to record a valid satisfaction, provisions contained under Rule SD(2)(iii) cannot be invoked.
Moreover, it is categoric case of the assessee company that it has invested in debt oriented mutual fund as is evident from page 41 of the paper book for AY 2009-1-. So, this investment has earned taxable income in the capital gain in which case provisions contained under section 14A are otherwise not attracted.
Identical issue has been decided by the coordinate Bench of the Tribunal in favour of the assessee in case of Avshesh Mercantile (P) Ltd. vs. ITO 148 TTJ 607 (ITAT Mumbai) by following the judgment of Hon'ble Bombay High Court in Delite Enterprises Pvt. Ltd. (ITA No.110 of 2009) by returning following findings:- "22. We have heard the rival submissions and also perused the relevant material on record. It is observed that the proceeds of premium notes (OCPN) on which the impugned redemption premium was paid by the assessee had been invested in the shares/debentures of RUPL and although the dividend income and income from long term capital gain from the said investment was exempt from tax u/s 10(23G), perusal of the copy of relevant Notification issued u/s 10(23G) placed at page No. 24 of the paper book, shows that such exemption was initially granted only for the specific period i.e. assessment year 1999-2000 to 2001-2002. No doubt, the said exemption was further extended upto assessment year 2004-05 as submitted by the learned DR, a perusal of the copy of relevant notification placed at page No. 29 of the paper book clearly shows that such extension was granted subject to satisfaction of certain conditions. Keeping in view all these uncertainties and contingencies, we are inclined to agree with the contention of the learned counsel for the assessee that the premium paid by the assessee on redemption of premium notes (OCPN) utilized for making investment in the shares/debentures of RUPL cannot be regarded as expenditure incurred exclusively in relation to earning of exempt income so as to invoke the provisions of section 141. Moreover, the said investment had the potential of generating taxable income also as explained by the Sicpa India Private Limited vs. ACIT learned counsel for the assessee in the form of short term capital gains etc. In this regard, the learned DR has submitted that no such taxable income however was actually earned by the assesses during the years under consideration. The learned counsel for the assessee on the other hand has pointed out that no exempt income from the said investment was also actually earned by the assessee in the years under consideration. He has also relied on the decision of coordinate bench of this Tribunal in the case of Delite Enterprises Pvt. Ltd. (supra) as affirmed by the Hon'ble Bombay High Court stating that in the similar facts and circumstance, disallowance made under section 14A was held to be not sustainable."
So, an amount of Rs.89.68 lakhs, Rs.32.44 lakhs and Rs.17.76 lakhs in AY 2009-10, 2010-11 & 2011-12 respectively earned by the assessee as capital gain from debt oriented mutual funds cannot be placed in the category of exempt income u/s 14A of the Act and in these circumstances, Rule 8D(2) cannot be invoked.
Moreover, AO himself has excluded the investment from which non-exempt income has been earned by the assessee company in AY 2011-12 for purpose of computing average investment under Rule 8D(2)(iii) of the Rules.
So, we are of the considered view that disallowance made by the AO and sustained by the Id. CIT (A) u/s 14A of the Act r/w Rule 8D(2)(iii) of the Rules is not sustainable, hence ordered to be deleted. Consequently, ground No.3 of AY 2009-10, Ground No.1 of AY 2010- 11 & Grounds No.1 & 2 of AY 2010-11 in assessee’s appeals are allowed.”
It is seen that disallowance of identical nature by making similar observations were made in Assessment Year 2008-09 and further in Assessment Years 2016-17 to 2018-19 wherein the Co-ordinate Bench of ITAT, Delhi deleted the disallowance made by following the aforesaid order of Tribunal in Assessment Year 2009-10 in ITA No.704/Kol/2015.
Admittedly the facts in the year under appeal are the same where the assessee’s claim was that no expenditure was incurred to earn exempt income and further there no satisfaction was recorded before invoking the provisions of section 14A of the Act, thus, by respectfully following the aforesaid decisions of coordinate benches of Tribunal in assessee’s own case, we allow the grounds of appeal No.1(a)
Ground of appeal No.2 is with respect to initiation of penalty proceedings u/s 270A of the Act which is premature and Ground of appeal No.3 is with respect to levy of interest u/s 234C of the Act. Since the interest u/s 234C is to be charged on the returned income thus the AO is directed to charge the interest u/s 234C accordingly on the income declared in the return of income filed.