PRAJ INDUSTRIES LIMITED,PUNE vs. DCIT, CENTRAL CIRCLE 1(1), PUNE, PUNE

PER ASTHA CHANDRA, JM :

1. The Learned CIT(A) erred in confirming the disallowance of Rs.33,20,874/- u/s 14A r.w.r. 8D.

2. The Learned CIT(A) failed to appreciate the fact that : a) The appellant has suo-moto computed disallowance u/s 14A at Rs.51,41,522/- in accordance with law and hence no further disallowance was called for. b) Disallowance u/s 14A r.w. Rule 8D cannot be applied mechanically, the appellant had incurred & debited expenses to P&L which have direct nexus to the business of the appellant which cannot be disallowed u/s 14A r.w.r. 8D over and above sum already disallowed by the appellant.

3. The Learned CIT(A) ought not to have confirmed the disallowance of Rs.33,20,874/-.

4. The disallowance of Rs.33,20,874/- u/s 14A r.w. Rule 8D requires to be deleted.

The appellant craves leave to add, amend, alter or modify its ground or grounds of appeal before the hearing.”

3. Briefly stated the assessee is engaged in the business of Process and Project Engineering and caters to domestic and international markets and also provides design and engineering services. It filed its e-return for AY 2017-18 on 29.11.2017 declaring loss of Rs.4,54,62,786/- but filed revised return on 27.03.2019 declaring income of Rs.20,29,22,330/-. The case was selected for complete scrutiny and statutory notice u/s 143(2) of the Income Tax Act, 1961 (the “Act”) was issued on 21.08.2018 which was duly served upon the assessee. During the assessment proceedings the Ld. Assessing Officer (“AO”) found that the assessee had declared exempt dividend income of Rs.4,33,65,925/- u/s 14A of the Act. He sought justification for its claim of disallowance to which the assessee replied on 18.12.2019 which is reproduced by the Ld. AO in para 4 of the assessment order. The explanation given by the assessee was not acceptable to the Ld. AO who for the reasons recorded in para 4.2 of the assessment order came to be conclusion in para 4.3 that he is not satisfied with the contention of the assessee that no expenditure is incurred in addition to what has been disallowed by the assessee in relation to the exempt income. Accordingly, holding that provisions of sub-sections (2) and (3) of section 14A r.w. Rule 8D were applicable proceeded to compute the disallowance which according to him worked out to Rs.82,62,396/- reducing there from suo- moto disallowance of Rs.51,41,522/-, he made disallowance of Rs.33,20,874/- u/s 14A of the Act. Thus, the Ld. AO completed the assessment on 30.12.2019 u/s 143(3) of the Act on total income of Rs.30,56,32,980/- as per the normal provisions including therein disallowance of Rs.33,20,874/- u/s 14A and disallowance of Rs.9,93,89,776/- u/s 35(2AB) of the Act. He assessed total income at Rs.63,90,41,897/- u/s 115JB including therein disallowance of Rs.33,20,874/- u/s 14A of the Act.

4. Aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A). He deleted the disallowance made by the Ld. AO u/s 14A while computing the book profit for the purpose of section 115JB of the Act and restricted the disallowance to Rs.30,55,256/- u/s 35(2AB) of the Act but confirmed the disallowance of Rs.33,20,874/- u/s 14A r.w. Rule 8D by observing and recording his findings as under :-

“7. I have considered the facts of the case and the submissions made by the appellant. The scheme of section 14A is that the sub-section (1) provides that no expenses incurred by the assessee in relation to exempt income will be allowed. Sub-section (2) of section 14A provides that if the assessing officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, the assessing officer shall determine the amount of expenditure incurred in relation to exempt income as per such method prescribed i.e. Rule 8D of Income Tax Rules 1962. Further, it is a well settled judicial position that after A Y. 2008-09, in case, the assessing officer is not satisfied with the correctness of the claim of the assessee, disallowance shall be computed as per Rule 80 of Income Tax Rules, 1962.

8. In the present case, the assessee has disallowed an amount of Rs.51,41,522/- u/s 14A of the Act. A perusal of working given by the assessee suggests that the assessee has made disallowance on account of salary of 4 employees working in Treasury Department amounting to Rs.49,41,522/-. Further, administrative expenses amounting to Rs.2,00,000/- were also attributed towards earning of exempt income by stating that no real administration expenses were incurred by the company for making investments. On the other hand, the Assessing Officer in para 4.2 has mentioned that for making investment, substantial market research including the day-to-day analysis of market is required to be done. The assessing officer at page 8 of the assessment order has further mentioned that making of investments and earning of exempt income requires efforts and the administrative & other expenses are incurred by the assessee company to facilitate earning of exempt income. By observing above, the assessing officer in para 4.3 of the assessment order has specifically recorded that he is not satisfied with the contention of the assessee that no expenditure in addition to what it has already disallowed, was incurred.

10. Further, it is a well settled judicial position that in case, the assessing officer is not satisfied with the correctness of the claim of the assessee, disallowance shall be computed as per Rule 80 of Income Tax Rules, 1962. Reliance in this regard is placed on following case-Iaws:- i) Hon'ble Madras High court in the case of FLSmidth (P.) Ltd. vs DCIT [2020] 118 taxmann.com 272 (Madras) held as under:- 29. As mentioned above, in the preceding paragraph, we held that the Assessing Officer considered the explanation offered by the assessee vide letter dated 18-12-2012 and recorded his satisfaction as to how the disallowance voluntarily made by the assessee was not acceptable. Hence, we find that the Assessing Officer had rightly followed the procedure under section 14A(2) of the Act and only thereafter, recorded his dis-satisfaction on the correctness of the claim made by the assessee and having regard to the accounts of the assessee, proceeded to follow the procedure under Rule 80 of the Rules. Hence, we find that there is full compliance of what is required to be done by the Assessing Officer as pointed out by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. For the above reasons, we hold that the assessee has not made out a case for interference in the order passed by the Tribunal. ii) Hon'ble Delhi high Court in the case of H T Media Limited vs PCIT [2022] 145 taxmann.com 219 (Delhi) held where assessee- company offered suo-moto disallowance of expenditure under section 14A with respect to exempt dividend income earned by it, since assessee had admittedly not furnished particulars of actual expenditure incurred by it and Assessing Officer had duly recorded his dissatisfaction regarding computation of suo-moto disallowance made by assessee after examining accounts of assessee, AO was justified in rejecting ad hoc disallowance offered by assessee under section 14A and recomputing same as per rule 8D.

11. Considering the facts of the case, provisions of section 14A and above case-laws, the action of the assessing officer in computing the disallowance as per Rule 80 is upheld. The addition of Rs.33,20,874/- made by the Assessing Officer is accordingly, confirmed.”

6.1 It was explained to the Ld. AO that all investments in relation to exempt income have been made by the assessee company out of it internal accruals/surplus funds. No investments are made out of borrowing from bank or any financial institutions. It was also explained that interests bearing borrowed funds have been utilized for purposes of business only.

6.2 It is submitted by the Ld. AR that it was explained to the Ld. AO that very minor activities are required for investments in mutual funds. The procedural formalities are so miniscule that there are no administration expenses incurred. However, considering that certain administrative expenses may be related to exempt income, the assessee suo-moto disallowed Rs.51,41,522/- u/s 14A of the Act. Over and above no disallowance is called for.

6.3 The Ld. AR pointed out that in the preceding year the suo-moto disallowance made by the assessee has been accepted. The Ld. AO has not recorded satisfaction as envisaged under law. He argued that disallowance u/s 14A r.w. Rule 8D cannot be applied mechanically. In support judicial precedent were cited. However, the Ld. AO made the impugned disallowance u/s 14A r.w. Rule 8D which has been confirmed by the Ld. CIT(A) by placing reliance on the decision of Hon’ble Delhi High Court in the case of H.D. Media Ltd. Vs. DCIT reported in 145 taxmann.com 219 (Delhi) which is distinguishable on facts.

8.1 Perusal of the assessment order would show that the Ld. AO has not recorded his satisfaction having regard to the accounts of the assessee. He has applied Rule 8D to the case of the assessee as in his view if section 14A is attracted, the disallowance has to be made as per Rule 8D. However, this is not so. The Ld. AO has to be satisfied with the correctness of the claim of the assessee having regard to the assessee’s account. The Hon’ble Delhi High Court in the case of CIT Vs. Taikisha Engineering India Ltd. reported in 54 taxmann.com 109 (Del.) has held that it is only when voluntary disallowance made by assessee u/s 14A is found to be unsatisfactory on examination of accounts, that AO is entitled and authorized to compute deduction under Rule 8D. Similar view has been taken by the Hon’ble Bombay High Court in the case of Pr. CIT Vs. Reliance Capital Asset Management Ltd. reported in (2018) 400 ITR 217 (Bom.). We are therefore inclined to accept the claim of the Ld. AR that the Ld. AO has not recorded satisfaction as per mandate of law provided under sub-section (2) of section 14A of the Act. Accordingly, the submission of the Ld. DR in this regard is rejected.

8.2 We also do not find any substance in the contention of the Ld. DR that the details of employees handling the investments of the company were not furnished. We notice that in its note (copy at page 92 of the paper book) the assessee has stated that the company had identified the expenses which are attributed to the activities of the investments in mutual funds. It was pointed that the company has a separate Treasury Department operated by four qualified employees under the guidance of Chief Financial Officer. Considering that certain administrative expenses may be related to exempt income, the assessee disallowed Rs.49,41,522/- being gross salary of employees working in Treasury Department and Rs.2,00,000/- out of general administrative expenses aggregating to Rs.51,41,522/-. The suggestion of the Ld. DR to send back the matter to the Ld. AO is without any merit as, in our opinion, no useful purpose would be served by doing so.

9. Before the Ld. AO, the assessee had asserted that all investments in relation to exempt income are made by company with its internal accruals/surplus funds. Company’s reserves as on 31.03.2017 were stated to be Rs.678.99 crores. The details of interest expenses incurred during the year were furnished (copy of which is at page 95 of the paper book). It was the contention of the assessee that interests bearing borrowed funds were used for business purpose only. It was also submitted that no investments were made out of borrowings from the banks or any financial institutions. No adverse comment has been made either by the Ld. AO or by the Ld. CIT(A). The claim of the assessee that in the preceding year suo-moto disallowance made by the assessee has been accepted, has not been refuted by the Revenue.

Order pronounced in the open court on 27th June, 2024.