DY. COMMISSIONER OF INCOME TAX, CIRCLE-4, LUDHIANA, - vs. ROCKMAN INDUSTRIES LTD, -

7. In the foregoing we upheld the order of Ld. CIT(A) and dismiss the appeal of the Revenue with direction as per aforesaid.

Brief factual Matrix

9.1 The A.O. during the assessment proceedings noticed that the R&D expenses were claimed for Ludhiana Unit (which was not an eligible unit for deduction u/s 80IC) but no R&D expenses were claimed for Haridwar Unit (eligible unit for deduction u/s 80IC). The AO concluded that R&D expenses were to be apportioned among the two unit in proportion to the turnover and bifurcated the R&D expenses in the ratio of 24:76 among Ludhiana and Haridwar Uint. Consequently the claim of deduction u/s 80IC if the Income Tax Act, 1961 was reduced.

9.2 It transpired later that the assessee had claimed deduction u/s 80IC of Rs. 1,04,45, 13,879/- wrongly. While calculating the eligible profit, deduction was claimed on Misc. Income of Rs. 65,59,819/- which was not to be included for calculating deduction u/s 80IC. 9.3 Thereafter, the case was selected under scrutiny on the following reason. 9.4 Failure on the part of the assessee to correctly compute deduction u/s 80IC.

11. Assessee income was accordingly computed as under:

Total income as per order u/s 143(3) Rs. 25,27,80,365/- Addition: Rs. 65,59,819/- Total assessed income Rs. 25,93,40,184/-

12. That the aforesaid assessment order of Ld. AO to bear No. ITBA/AST/S/147/2021-22/ 1041622251(1) dt. 26/03/2022 which was passed under section 147 r.w.s 144/144B of the Act.

13. That the assessee company being aggrieved by the aforesaid assessment order prefers first appeal before Ld. CIT(A) who by the order bearing No. ITBA/NFAC/S/250/2023-24/1059109232(1) dt. 27/12/2023 has allowed the appeal and has in para 6.6 and 7 has held as under:

6.6. In view of the same and respectfully following the judgment of the Hon'ble ITAT's in the appellant own case the A.O. is directed to recompute the deduction u/s 80IC of Income Tax Act as directed in the Hon'ble ITAT's decision in dated 20/08/2020. The Grounds of appeal filed by the appellant are allowed.

7. The appeal is allowed.

The above order is hereinafter referred to as “impugned order”

14. The Revenue being aggrieved by the impugned order has filed an appeal before this Tribunal and interalia has raised following grounds of appeal in Form No. 36:

1. That the Ld. CIT (A) NFAC New Delhi has erred in deciding that the disallowances of deduction claimed U/s 80IC done by the Assessing officer is against the law and facts of the case. That based on the facts and circumstances of the case the Ld. CIT (A) is 2. not justified in deleting disallowance of misc.other expenses and consequent reduction of 801C deduction. That the Appellant craves, leave for permission to add, amend, or alter any 3. ground of appeal at the time of hearing.

Record of Hearing

15. The hearing in the matter took place before this Tribunal on 14/08/2024 and 27/08/2024 when both the Ld. AR for the assessee and Ld. DR for Revenue appeared before us. The Ld. DR supported the order of Ld. AO and interalia contended that Ld. CIT(A) has wrongly allowed the appeal of the assessee by passing the impugned order and prayed for setting aside the same on ground that disallowance of deduction claimed u/s 80IC done by Assessing Officer is not against law and facts of the case further that based on the facts and circumstances of the case the Ld. CIT(A) is not justified in deleting disallowance of Miscellaneous / other expenses and consequent reduction of 80IC deductions.

16. Per contra Ld. AR of the assesse has contended before us that ld. AO for purpose of calculation of deduction under section 80IC ought not to have reduced “cash discount earned on the purchases” made for the purpose of manufacturing which was recorded under the head “miscellaneous income” at Rs. 65,59,819/- for purpose of calculation of deduction u/s 80IC. It was contended before us by ld. DR of Revenue that ground no. 4 before the Ld. CIT(A) when the assesse was in the first appeal was “that the ld. AO has wrongly computed the deduction u/s 80IC at Rs. 961581259/- by not allowing the deduction u/s 80IC on the miscellaneous income credited to the profit & loss account. That the Ld. AO has wrongly ignored the decision of Hon’ble ITAT relevant for A.Y. 2012-13. Therefore now the impugned order of CIT(A)should be set aside as the said ground No. 4 of assessee was wrong and bad in law save and except this nothing else was contended by the Ld. DR on merits.

17. Observations, Findings & Conclusions 17.1 We now examine the legaility, validity and the proprietary of the impugned order.

17.2 We observe that it is a recorded fact in the impugned order that during the reassessment proceedings, the assessee had claimed the deduction u/s 80IC on the profit of Haridwar unit. The NFAC has reduced the deduction on account of “cash discount earned” on the purchases made for the purpose of manufacturing by separately recording as income as “cash discount” which was clubbed under the head “Miscellaneous Income” instead of reducing the same from cost of material, to calculate the actual cost of material for closing stock. The assessee company had obtained the cash discount on the purchases of raw material required for manufacturing of items by making early payment. The cash discount earned is directly related to the cost of material used for manufacturing and had a direct link for the profit derived by an undertaking as required u/s 80IC. In this particular case, if the “cash discount” is reduced form the cost of purchases, even than the gross total income of the assessee would remain the same. The purchases against which the cash discount has been earned having direct link with the purchases was procured to manufacture or produce the article on which the deduction u/s 80IC had been allowed. It is an income derived by an undertaking from the business carried on by it. A cash discount is a reduction in the amount of an invoice that the seller allows the buyer. The guidance note on terms used in financial statement published by institute of Chartered Accountants defines the “cash discount” as under:

“A reduction granted by supplier from the invoice price in consideration of immediate payment or payment within the stipulated period.” 17.3 This income has been shown as part of “profit and gain of business” and that the same has been accepted as such in past years too. There is no dispute that it is not a “business income” nor the same has been assessed as “income from other sources”. The “ Income from other sources” can only be considered if the income is not assessable under the other “ heads of income”.

17.4 Moreover this point has already been considered by the Ld. AO while framing the assessment u/s 143(3) (supra) and has accepted the assessee’s contention by not reducing from the profit for the purpose of deduction u/s 80IC.

17.5 In view of what is stated in Para 8.2, 8.3 and 8.4 with regard to the issue in hand and in view of judgment of jurisdictional High Court reported in case of CIT Vs. Metalman Auto (P) Ltd. reported in (2011) 11 taxmann.com 51/19 Taxman 149(Mag)(P&H) wherein it has been held that deduction is allowable in respect of miscellaneous receipts, rebate / discounts and balance written off etc which are incidental to profits and gains derived from eligible business and couple of other orders / decisions / judgement of other High Courts too enumerated in the impugned order we do not find any justifiable and plausible argument is canvassed by Revenue in appeal on meritorious grounds to dislodge the impugned order. Further assessee has placed reliance on decision of this Tribunal that too in there own case in dt. 20/08/2020 for A.Y. 2012-13 wherein following is held and that the same is reproduced in the impugned order:

“ the weighted deduction of 200% in relation to the expenses incurred on Research & Development as per the provisions of section 35 (2AB) of the Act is given with the intention on the Government to boost up the Research & Development facility in India. Therefore, the allocation of expenses incurred on R &D activity for the purpose of reducing the weighed deduction, in our view, is not justified. The reduction of 80IC deduction in this case, on similar grounds, in our view is not justified. However, so far as the allocation expenses under the head director meeting fee, audit fee are concerned, these expenses, in our view, are relating to all the units and the expense under these heads should be allocated for all the units in equal proportion. So far as the Misc. expenses are concerned, there is nothing brought on record that the same are relatable to any other unit. In view of this, we set aside the order of the lower authorities in allocating the R & D expenses and Misc. expenses of the R&D Unit at Ludhiana to other unit. However, the expenses under the heads, directors meeting and audit fee are to be allocated in a full proportion to all units. This issue is accordingly decided partly in favour of the assessee."

17.6 Basis above we upheld the finding of Ld. CIT(A) in the impugned order which are as follows:

“6.6. In view of the same and respectfully following the judgment of the Hon'ble ITAT's in the appellant own case the A.O. is directed to recompute the deduction u/s 80IC of Income Tax Act as directed in the Hon'ble ITAT's decision in dated 20/08/2020. The Grounds of appeal filed by the appellant are allowed.

7. The appeal is allowed.

17.7 In the result Revenue appeal is dismissed as same is devoid of any merits.

A.Y. 2014-15 Brief Relevant Factual Matrix limited to controversy 18. The assessee filed its return of income for A.Y 2014-15 on 28/11/2014 showing income of Rs. 84,30,10,720/- which was initially processed u/s 143(1). Subsequently the case was selected for scrutiny through CASS.

22.2 That the assessee has during the year under consideration has incurred and claimed financial cost of Rs. 4,97,26,846/-.

22.3 That the expenditure incurred in relation to the investment was required to be added back to the income of the assessee as per section 14A of the I.T. Act, 1961.

22.4 That the Assessee was provided opportunity vide order sheet entry dated 12/12/2016 to explain why disallowance u/s 14A in the respect of the expenditure in relation to the investment may not be made.

22.5 That the assessee in relation in his reply dated 22/12/2016 submitted working of disallowance already done by him in the computation of income which is reproduced below:

“Regarding disallowance u/s 14A read with Rule 8D, it is submitted that the assessee company has already disallowed a sum of Rs. 1,85,53,26/- in the computation of income which is as per Section 14A read with Rule 8D. The calculation of same is given in Annexure 15 to TAR.” 22.6 That the reply of the Assessee has been considered and that the same is untenable. The assessee’s is working of disallowance u/s 14A r.w. Rule 8D is not accepted as it is not clear from the working that which interest had been taken for disallowance. Since the assessee has not given any direct nexus between the funds used for investment or any other specific expenditure whole of the interest expenditure qualified for working of disallowance. The assessee has also not provided any documents to prove the nexus of flow of funds. The funds are of mixed nature and hence whole of the interest is taken for working of disallowance u/s 14A r.w. Rule 8D. The provisions of Section 14A take into account old investments as well as new for calculation of disallowance as per Rule 8D. Thus, the fact that old investments are outstanding does not matter for calculation of disallowance u/s 14A. Moreover the assessee has not contested the addition made on this issue in previous assessment years.

22.7 Further in the assessment order dt. 29/12/2016 the Ld. AO n para 4.8 to 4.13 has observed as under:

4.8 Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved i n taking these decisions. This decision- making process is very complicated and requires very careful analysis. For the purpose of making investment at thereafter control of investment as well as purchase, sale of shares, assessee has used its office and its staff. This activity is intermingled with its other activities. Moreover, the assessee has to keep track of various dividend incomes declared the invested companies and. also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerably management attention.

In the absence of separate accounts by way of which the management and administrative expenditure could be segregated, there is no dispute and there cannot be any doubt that some expenditure is incurred for making or earning, the income from dividend. In case of mixed accounting the expenditure is not identifiable as such, which directly related to earning of dividend but that cannot be a ground to say that no expenditure is incurred for earning dividend income on that no expenditure could be related to that income.

4.9 The appellant has not shown any direct nexus of borrowed funds with any particular income or expenditure. This is therefore apparent that there was a mixed use of borrowed funds and it is not possible to link the borrowed funds with any particular income or receipt. In these circumstances, the only logical inference is that there was a mixed use of interest bearing funds and that some of the funds were used for investments in busiess while a part of the funds was used towards investment.

4.10 As such Rule 8D(ii) is attracted in the appellant's case. As discussed above the appellant has not been able to prove that the investments in relation to earning exempt income were made only out of interest free funds and no amount of burrowed funds were used towards this purpose. The mere fact that there was surplus interest free funds does not mean that interest bearing funds were not used. This claim of the appellant is therefore not correct. Therefore, having regard to the accounts of the appellant the claim of the appellant wi t h regard to the expenditure incurred in relation to income which does not form part of total income is not correct. In these circumstances, as provided in section 14A(2) the expenditure incurred in relation to income which does not form part of total income has to be determined in accordance with Rule 8D read with section 14A.

4.11 Also, in light of Section 14A(3), which says that disallowance needs to be calculated as per Rule 8D even if the assessee claims that no expenditure has been incurred, the contention of the assessee is not acceptable. As has already been discussed in detail earlier, rule 8D bifurcates expenses into direct and indirect expenses as in rule 8D(ii). If expenses could be directly attributed to the exempt income then there would have been no need to statutorily bifurcate the expenses into direct and indirect. 4.12 Again, the main point to be highlighted in this case is that, to take care of a situation where there is a mixed use of borrowed funds, the legislature has provided for Rule 8D(ii). If the provisions of section 14A are interpreted in a way to mean that only expenses directly relating to earning exempt income are to be disallowed u/s 14A and expenses of the nature of interest on borrowings which are not directly attributable to any particular income or receipt are not covered. It would be contrary to the purpose and intention of section 14A and would make Rule 8D(ii) redundant. Such an interpretation is therefore not correct.

4.13 Accordingly, disallowance u/r 8D is computed as under:-

(i) The amount of expenditure directly relating to income which does not form part of total income;

(ii) Interest during the previous year which is not directly attributable to any particular income or receipt:

A = amount of expenditure by way of interest other than the amount of interest included in cl. (i) incurred during the previous year = 42343582

B (the average of value of investment, income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee. on the first day and the last day of the previous year ) = 290768987

Investment, Income from which does not or shall not for part of the Total Income As Appearing in The Balance Sheet of The Assessee Average Value On The First Day of The On the Last Day of The Previous Previous Year Year 148693289 432844686 290768987

C(the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year) = 8460561292

Total Assets as appearing in the Balance Sheet of the assessee As Appearing in The Balance Sheet of The Assessee Average Value On The First Day of The On the Last Day of The Previous Previous Year Year 7255979082 9665143502 8460561292 interest during the previous year which is not directly attributable to any particular income or receipt A x B / C = 1455246 (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. = 0.5% X B = 1453845 Thus a total of Rs. 29,09,091/- is to be disallowed u/s 14A of the I.T. Act wherein Rs. 18,55,326/- has already been made by the assessee. Less: Already disallowed = 18,55,326/- Total disallowance of Rs. 10,43,765/- is therefore being made u/s 14A of the I.T. Act, 1961.

22.8 That since the assessee was aggrieved by the aforesaid assessment order of Ld. AO dt. 29/12/2016 they preferred an appeal before Ld. CIT(A) on ground no. 2 which was that the Ld. DCIT has wrongly disallowed a sum of Rs. 2909091/- under section 14A and added back “Rs. 10,43,765/-“ u/s 14A to the returned income after substracting the suomotto disallowance of Rs. 18,55,326/-. The 1st appeal on ground No. 2(a) was that the Ld. DCIT failed to record proper satisfaction and established the nexus of interest relating to investment whose income is not chargeable to tax.

22.9 The calculation of disallowance under section 14A is as under:

Particulars As per Assessee As per AO Interest 1855326 1455246 Indirect expenses 0 1453845 Total 1855326 2909091 Net addition 1043765 22.10 That the Ld. CIT(A) has recorded as under in respect of above contention of assessee which is reproduced below:

3 No dividend has been received by the assessee company during the year nor there is any exempt income.

4. While filing its return, the assessee has suomotto made a disallowance of interest at Rs. 1855326/- based on the case laws available at that time. However, during discussion, a request was made for not disallowing any interest as there was no nexus of funds borrowed and investment made. However, as emphasized above, the assessee does not have any interest that is attributable to investment yielding exempt income. The Hon'ble Supreme Court in the case of CIT v/s Reliance Industries Ltd, 410 ITR 466 (SC), has held that - "where interest free funds available with the assessee are sufficient to meet investments, then the presumption can be made that the investment was out of interest free funds and no disallowance of interest can be made."

5. The shareholder fund as on 31/3/2013 is at Rs. 456.47 crores and Rs. 553.57 crores as on 31/3/2014, whereas the total investments as on 31/3/2014 is at Rs. 43.28 crores only, which is mainly in subsidiary company from which no Dividend is received.

Investments 31/03/2008 31/03/2009 Investment in Equity Mutual Funds 27,38,84,429 10,07,33,096 Own Funds 31/3/2008 31/3/2009 Capital 15,15,63,640 15,15,63,640 Reserves 111,62,00,432 121,19,07,985 Total 126,77,64,072 136,34,71,625 Income of the year Income as per P&L Account 19,17,03,490 10,95,35,851

Claim of depreciation Total 7,02,08,335 16,14,73,763 Total 26,19,11,875 27,10,09,614 Since, it could be clearly decipherable from the table that the assessee has got sufficient own funds, we hereby hold that no disallowance under Rule 8D(2)(ii) is required and decline to interfere in the order of the Ld. CIT(A). In respect of the disallowance of interest u/s14A, for the purpose of disallowance of expenses under Rule 8D(2) (iii), the Hon'ble IT AT at Para 6 has held as under:- "We have heard the arguments of both the sides and fully support the decision of the Ld. CIT(A) on this issue. However, keeping in view the judgment in the case of Vireet Investments Pvt. Ltd in dated 16/6/2017, we hereby direct the AO to compute the disallowance taking into consideration the dividend yielding investments only." We have heard the arguments of both the sides and fully support the decision of the Ld. CIT(A) on this issue. However, keeping in view the judgment the case of Vireet Investments P Ltd in dated 16/6/2017, we hereby direct the AO to compute the disallowance taking into consideration the dividend yielding investments only."

11. In AY 2010-11, the Hon'ble ITAT followed its order of AY 2009-10.

12. In AY 2012-13, the AO had made the disallowance only under Rule 8D(2)(iii). The Ld CIT(A) in her appeal no 37/IT/CIT(A)-ll/Ldh/15-16 dated 9/8/2018 partially allowed the relief to assessee company at para 6.2 of his order. The department had filed an appeal before Hon'ble ITAT in ITA no. 1264/chd/2018. The Hon'ble IT AT had decided the issue vide order 20/8/2020 and held at para 4 as under:- 13. "At the outset, the Ld. Counsel for the assessee has submitted that while computing the disallowance on account of administration expenses incurred for earning of tax exempt income, the Ld. Assessing Officer had taken into account all the investments made by the assessee, whereas, as per the settled position of law for calculating the disallowance of administrative expenses u/s 14A read with Rule 8E(2)(iii), only the investments yielding dividend income had to be considered. The Ld. Counsel in this respect has relied upon the decisions of the Hon'ble Delhi high court in the case of Joint Investments Private Limited vs CIT dated 25.02.2015 and further in the case of 'ACB India Limited vs ACIT ITA No. 615/2014 dated 24.03.2015, wherein, it is held that for computing the average value u/s 14A of the Act read with rule 8D(2)(iii), only the investment yielding non-taxable income have to be considered and not the entire investment. In view of this, the Assessing Officer is directed accordingly to consider only the investments yielding tac exempt income for computation of disallowance under Rule 8D(2)(iii) of the I.T. rules." Thus from the above, it is clear that the disallowance of interest was made in AY 09-10, 10-11 & 12-13 made by the Ld. A.O had been deleted and the orders of Hon'ble ITAT have been accepted by the department.

13. Reference may be made to the following where it has been held that in the absence of any exempt income no disallowance u/s 14A can be made:-

(i) PCIT v/s Oil Industry Development Board, 262 Taxman 102 (SC),where it is held that - "in the absence of any exempt income, no disallowance can be made." The Hon'ble Supreme Court has confirmed the decision of Hon'ble Delhi Court and the same case reported in 103 Taxman.com 325 in dated 16/2/2018. (ii) PCIT v/s Caraf Builders & Constructions P Ltd, [2019] 414 ITR 122 (Del) (iii) PCIT v/s Mcdonald India P Ltd, [2019] 101 Taxman.com 86 (Del) (iv) PCIT v/s Vardhman Chemtech P Ltd, 261 Taxman 233 (P&H) (v) PCIT v/s GVK Project & Technical Services Ltd (2019), 106 Taxman.com 181 (SC) (vi) Biocon Ltd v DCIT (Karn), 431 ITR 326 Even no satisfaction has been recorded by the Ld. A.O. in establishing the 14. nexus borrowing and investment, as held by Hon'ble Apex Court in the of Maxopp Investment Ltd. Based on the above facts decision of Hon'ble ITAT in assessee's own case, decisions of Hon'ble Supreme Court and following the consistency, the disallowance of interest u/s 14A may be deleted, as the facts are same as of early years. Indirect expenses under Rule 8D(2)(iii) 15. The assessee has not disallowed any expenses in the computation of taxable income.

16. The Ld. A.O. had not recorded any satisfaction but disallowed a sum of Rs. 1453845/-.

22.11 The Ld. CIT(A) in the impugned order has held as under:

4.2.1 Vide ground Nos. 2 of appeal, the appellant has challenged the action of the Assessing Officer in making addition of Rs. 10,43,765/- in this case on account of disallowance u/s 14A. The reason for making the impugned addition "was that the assessee company has made investment and claimed financial cost of Rs. 4,97,26,846/-. The Assessing Officer is of view that the disallowance u/s 14A is to be made in respect of the expenditure in relation to the investment.

The appellant in its submission has placed reliance on the decision of the 4.2.2 Hon'ble ITAT in its own case in dated 16/04/2019 for AY 2009-10. The Hon'ble ITAT in this judgment has observed as under> "The assessee has got sufficient own funds available investment in the equity and mutual funds. ----------------- we hereby hold that no disallowance under Rule 8D(2)(ii) is required." The appellant has also cited the judgment of the Hon'ble ITAT Chandigarh 4.2.3 in its own cases in A.Y. 10-11 and ITA No. 1264/chd/2018 a.Y. 12-13 dated 20/8/2020 wherein the Hon'ble ITAT has accepted the contention of the appellant and directed to consider only the investments yielding exempt income for calculating the disallowance u/s 14 A. The appellant has also relied upon the judgment of the Hon'ble Supreme 4.2.4 Court in the case of Oil Industry Development Board (2019), held as under:- 4.2.5 In view of the same and respectfully following the judgments of the Hon'ble ITAT's in the appellant own cases for A.Y. 09-10, 10-11 and 12-13 and also the Hon'ble Supreme Court in the case of Oil Industry Development Board (2019), the ground nos. 2 filed by the appellant are allowed and the AO is directed to delete the addition u/s 14A of the appellant, if the appellant does not have any exempt income during the year.

22.12 That the Revenue being aggrieved by the findings as recorded by Ld. CIT(A) has preferred an appeal before us and has raised ground No. 2 as under in above factual context:

“ 2. That based on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in holding CBDT Circular No. 5/2014 dt. 11/02/2014 to be illegal whereas Circular No. 5 of 2014 propounds that section 14A is triggered for disallowance of expenditure incurred which is relatable to tax exempt income even though no tax exempt income under the Act has been earned during a particular year.” Record of Hearing on ground 2 before Tribunal 22.13 The Ld. DR has repeated and reiterated that Section 14A is triggered for disallowance of expenditure which is relatable to tax exempted income even though no tax exempted income under the act has been earned during a particular year. Reliance was placed on section 14A which deals with the expenditure incurred in relation to income not includible in total income. The Ld.

AR in respect of Ground No. 2(supra) have submitted in writing by way written submission as under:

1. The calculation of disallowance made by the Ld. AO is as under: Particulars Amount Under Rule 8D(2)(ii) 1455246 Under Rule 8D(2)(iii) 1453845 Total 2909091 2. The investments and the financial position of the assessee is as under:- Investments 31/3/2013 31/3/2014 Investment in securities/mutua! funds 432844686 148693289 Own funds Share Capital 151563640 151563640 Reserve & Surplus 5384210759 4413162088 Total 5535774399 4564725728 3. As no dividend income/exempt income has been earned by the assessee during the year, therefore there is no investment which have yielded exempt income, no disallowance is called for. 4. The CIT(A) has relied upon the submissions placed before him and deleted the above disallowance in view of the above facts and the decision of the Hon'ble I TAT for AY 2009-10, 2010-11 & 2012-13. Since own funds of the assessee are sufficient for making the investments, 5. no disallowance under Rule 8D(2)(ii) is called for. Similarly there is no investment yielding any exempt income during the year, therefore none of the investments to be considered for calculating average investments under Rule 8D(2)(iii] and therefore no disallowance is called for.

23.1 We basis above premises set out hereinabove and after examing and hearing the rival contentions of parties are of the view that there is no infirmity in the findings and decision of Ld. CIT(A) in so far as above ground No. 2 is concerned. The Ld. CIT(A) has rightly relied upon the decision of this Tribunal in Assessee’s own case in dt. 16/04/2019 for A.Y. 2009-10 wherein the Hon’ble ITAT on their judgment has correctly observed as under:-

“ The assessee has got sufficient own funds available investment in the equity and mutual funds …….we hereby hold that no disallowance under Rule 8D(2)(ii) is required.” We also note from ITAT Chandigarh Benches decision in the assessee’s own case in A.Y. 2010-11, and A.Y 2012-13 dt. 20/08/2020 wherein the Hon’ble ITAT Chandigarh Benches has accepted the contention of the assessee and directed to consider only the investments yielding exempt income for the purpose of calculating the disallowance u/s 14A.

23.2 We also hold that the Ld. CIT(A) in his impugned order has rightly held that in view of the judgment of Hon’ble Supreme Court of India in case of Oil Industry development board case has held that “ In the absence of any exempt income, no disallowance can be made.”

23.3 We therefore find no infirmity in the findings in respect of ground no. 2 and reject the appeal of the Revenue on ground no. 2.

24.1 The Revenue in appeal before us at Ground no. 3 which reads “that based on the facts and circumstances of the case the Ld. CIT(A) is not justified in deleting disallowance done u/s 36(i)(iii) of the Act. The assessee before CIT(A) in 1st appeal had raised in ground no. 3 that the Ld. DCIT has wrongly calculated the interest at Rs. 9,53,68,105/-(net) by wrongly applying the interest @ 12% on the additions made to fixed assets and CWIP which were for the purpose of business. 3(b)- That the LD. DCIT has failed to establish any nexus of amount borrowed and invested in any fixed assets and CWIP. 3(c)- that the Ld. DCIT has wrongly presumed that he total additions made under these heads is out of borrowed funds. 3(d) that the Ld. DCIT has wrongly not accepted the company’s argument that the interest free surplus funds available with the company is much more than the additions made in these assets. The Assessee ineralia contended before Ld. CIT(A) which is recorded in the impugned order as under:

1. The Ld. A.O. calculated the interest @12% on estimated basis on CWIP, Capital Advances and additions to Plant & Machinery at Rs. 96853125/- whereas the appellant company had already capitalized the interest at Rs. 1485020/- by adopting the interest @0.18% for which calculation was filed with the AO based on the total interest paid and the net assets owned by the company, as per view at that time.

2. The assessee company had not borrowed any funds for acquiring the assets which are appearing under the head 'Capital Work-in-progress' but used its own interest free funds to create such assets.

3. The Reserve & Surplus as on 31/3/2014 is at Rs. 553.57 crores which is much higher than the principle amount on which interest has been calculated by the Assessing Officer u/s 36(1)(iii) proviso. 4. The Hon'ble ITAT in assessee's own case in Assessment Year 2009-10 in dated 16/7/2019 & IT A No. 590/chd/2018 for AY 2010-11 deleted the addition on the facts that the assessee company has got sufficient own funds and has not borrowed any amount on which interest been paid for acquiring Capital Assets, as mentioned in Para 9. Copy of a consolidated IT AT Order for both the years as mentioned is enclosed herewith.

5. In AY 12-13, the disallowance made u/s 36(1) (Hi) by the Ld. AO at Rs. 5780990/-, which has been deleted as per para 7.2 of CIT (A) order. The department has accepted this issue and no appeal on this issue was filed before the Hon'ble IT AT. The Grounds of Appeals filed by the department has been mentioned in IT A T's Order which is attached herewith.

6. As mentioned above, there is no borrowing for this purpose nor any nexus has been established. The profit of the company as per books before depreciation and taxes is at Rs. 174.93 crores. Thus even the internal accruals is much more than the amount considered by the Ld. AO for calculating this disallowance.

7. The free funds available with the assessee company as on 31/3/2013 at Rs. 456.47 crores & Rs. 553.57 crores as on 31/3/2014.

8. The Ld. A.O. has not established any nexus for capitalization of interest with the amount borrowed & total payment made for Plant & Machinery & CWIP. He has presumed that the total payment made for acquisition of these assets including advances are out of borrowings only. The total addition was for the business purposes. Reference may be made to the decision of Hon'ble Supreme Court in the case of CIT v/s Reliance Industries Ltd, 410ITR 466 (SC), has held that - "where interest free funds available with the assessee are sufficient to meet investments, then the presumption can be made that the investment was out of interest free funds and no disallowance of interest can be made."

9. The assessee company had already capitalized the interest at Rs. 1485020/- suomotto in the books of account, which has been increased by the Ld. A.O. while calculating the capitalization of interest.

10. If your honour held that the interest is to be capitalized as per proviso to section 36(1)(iii), then the addition should be considered separately while computing the income of Haridwar Unit for allowing the deduction u/s 80IC.

24.2 The LD. CIT(A) basis above in para 4.3 & 4.3.1 has held as under in the impugned order:

“4.3 In its ground of appeal nos. 3 and 4 the appeal has assailed the action of AO in making addition u/s 36(l)(iii) of Rs. 9,53,68,105/-. The Assessing Officer was of the view that the interest expense on assets which have not been put to use for business purposes cannot be allowed as revenue expenses in view of provision of section 36(1)(iii) of the Act and needs to be capitalized. On the Other hand, the assessee company has submitted that the assessee company has not borrowed any funds for acquiring the assets which have been shown under the head 'capital work in progress' but used its own interest free funds to create such assets. The assessee company has also relied on the decision of the Hon'ble ITAT in its own case in dated 16/04/2019 for AY 2009-10. The Hon'ble ITAT in this judgment has observed as under:- ,: "On careful consideration of the rival contentions, I find a lot of force in the contentions of the learned AR of the assessee company as far as the availability of interest free funds with the assessee company for acquiring/creating------------- ------ as the assessee company has shown assets under the head 'Capital Work in Progress' at Rs. 147,74,84,081/- which are yet to be used for business purposes cannot be said to be justified and as such the addition of RS. 2,12,98,089/- made by the Assessing Officer on account of capitalization of interest expenses is, therefore, direct to be deleted."

4.3.1 Respectfully following the judgments of the Hon'ble ITAT's in the appellant own cases for A.Y. 09-10, 10-11 and 12-13 respectively, the addition of Rs. 9,53,68,105/- made by the Assessing Officer in this case by invoking provision of section 36(1)(iii) of the Act is directed to be deleted on the basis of above judgments. In the result, the ground Nos. 3 and 4 of appeal taken by the assessee company is allowed. “

24.3 The Ld. AR in his written submission has contended as under:

1. The Hon'ble ITAT in the assessee's own case for AY 2009-10 has held that the assessee has sufficient own funds and has not borrowed any money on which interest has been paid and accordingly confirmed the order of CIT(A). Page 8

Similarly, the Hon'ble ITAT has confirmed deletion of disallowance u/s 36(l)(iii) in AY 2010-11. Page 8

2. The assessee company had not borrowed any funds for acquiring the assets appearing under the head 'CWIP' and used its own interest free funds. The interest free funds available as on 31/3/2014 is at Rs. 553.57 crores which is much higher than the principal amount on which interest has been calculated by the AO u/s 36(l)(iii).

3. The Ld. AO has not established any nexus for capitalization of interest with amount borrowed and total payment made for plant and machinery and CWIP. Reliance may be placed on the decision of the Hon'ble Supreme Court in the case of CIT v Reliance Industries Ltd 410 ITR 466 (SC) where it has been held that -

"where interest free funds available with the assessee are sufficient to meet investments, then the presumption can be made that the investment was out of interest free funds and no disallowance of interest can be made."

4. The assessee company has suomoto capitalized interest at Rs. 1485020/- in th books of accounts by following Accounting Standards.

5. The Ld. CIT(A) at para 4.3.1 following the judgment of Hon'ble ITAT in the appellants own case of AY 09-10, 10-11 & 12-13 had deleted the addition mad by the AO.

Findings & Conclusions in respect of Ground No. 3 (supra)

24.4 We basis above premises laid down and after examining and hearing the rival contentions are of the considered view that there is no legal infirmity or otherwise in the finding of Ld. CIT(A) impugned order and that his findings and observations are plausible in accordance with law. Revenue has failed to establish and canvass any grounds on merits to dislodge the findings. The Ld. CIT(A) has dislodged addition of Rs. 9,53,68,105/- made by Ld. AO on meritorious grounds that the assessee company has not borrowed any funds for acquiring the assets but used its own interest free funds to create such assets. We thus restrain ourself to interfere with findings of Ld. CIT(A) on this ground no. 3 as Revenue has failed to justify on merits and have not placed any arguments. Revenue has failed in assailing the impugned order on any tangible materials. Precedent decisions of this Tribunal (supra) are correctly applied and Revenue has failed to distinguish the same.

24.5 We therefore find no infirmity in the finding in respect of ground no. 3 and reject the appeal of the Revenue on this ground.

1. The assessee company had established unit at Haridwar in earlier years to which deduction u/s 80IC at Rs. 36,35,75,535/- was claimed on the profits of Haridwar Unit. The Ld. Assessing Officer has allowed the deduction at Rs. 35,86,75,315/- Thus the deduction had been reduced by Rs. 49,00,220/- (363575535-358675315) while calculating the Total Income.

2. The assessee company has maintained books of accounts on mercantile basis and all the expenses has been incurred by the respective unit for their business purposes.

3. Both these units are independent on account of source of supply of Raw Material, Bank transactions, staff, different items being manufactured, different suppliers / buyers, different PF/ ESI account, different TAN account, different CFO/ independent set up etc. 4. The Ld. A.O. has not pointed out any instance where expenses of one Unit has been recorded as an expenses of another unit particularly to increase the profit of Haridwar Unit for claiming higher deduction u/s 80IC. 5. The Ld. A O . considered the following expenses debited in the books of Ludhiana Unit as proportionately belonging to Haridwar Unit on turnover basis without any nexus:-

Particulars Ludhiana Unit Haridwar Unit Total R&D Expenses 34496291 0 34496291 Total 34496291 0 34496291 The above expenses have been apportioned by the Ld. AO on turnover basis as under:- Particulars Ludhiana Unit Haridwar Unit Total R&D Expenses 9658961 24837330 34496291

All other expenses have been accepted as such. R&D Expenses 6. During the assessment proceedings, the assessee has explained the purpose of R&D expenses incurred by the company which has been reproduced in Assessment Order at Para 6.3 as under:- "Regarding R&D activities it is submitted that as per earlier years, the assessee company at its Ludhiana Unit is carrying on R&D activities where more than 100 different parts are being manufactured. At Haridwar Unit only few parts are being manufactured for the Hero Moto Corp. The plant of Haridwar Unit was set up at the end of Assessment Year 2009-10. The assessee company has maintained its books of accounts on the computer on SAP system in which the R&D Unit is separately identified. All the expenses incurred for this R & D unit is being directly booked under this head. The detail of expenses booked, head wise, is enclosed. The company had maintained all the vouchers. On of latest techniques used by automobile cos, the co had to had R&D center to meet their requirements and to avoid the competitions amongst the suppliers. The R&D is a continuous process and is as per the requirement of the buyer for the development of their parts. Many times the company is able to develop the design and parts for the buyers and sometimes developed parts are accepted or rejected. The R&D department keeps on trying in development of the parts in the competitive market of automobile industry. The company has maintained complete record of R&D activities. The activity of R&D had been carried on the products being manufactured at Ludhiana as different products are being manufactured not only for one buyer but also for different buyers. However some of development made by R & D is enclosed. The objective of R&D unit is to develop the dies and new parts for automobile companies as per their requirement. During the year the co had carried out the R&D in the following areas. 1) Designing. 2) Tools and dies 3) New chain development 4) Assembly shop 5) Raw Material 6) HDPC Area. During the year the company done the research in Heat Treatment Process for better strength and better wear resistance along with other activities on parts being manufactured at Ludhiana only. The company also continuously developing the old parts being supplied to the parties to avoid the competition from other competitors who are in line to supply the material to our buyers on account of better technology. The objective of this Unit also includes - Development & improvement of production processes - To reduce production time - To improve quality - To develop of alternative materials for existing products - To develop the products to increase strength - To develop the material to reduce the weight - To develop the parts with a view to reduce the noise while in-operation The old Unit of the company is situated at Ludhiana where the R&D Centre is also established. The company is manufacturing different parts for different suppliers whereas in Haridwar Unit only specific parts are being manufactured for Hero MotoCorp Ltd as per their design. Even the plant & machinery established at Haridwar Unit was the latest in technique, since it was established in 2009. There is no requirement of any R&D for the products being manufactured there as the parts are being manufactured as per specification of the company and cannot change any design. Therefore there is no need for any R&D there. There being less suppliers at Haridwar, the company had to supply more quantities by which the turnover is higher. At Ludhiana there are more parts with less quantities i.e. the turnover is less."

8. The Ld. A.O. has not pointed out any expenditure which has been incurred on the development of any part of Haridwar Unit nor established any nexus between the parts manufactured & R&D activities carried out by Haridwar Unit.

9. The assessee company has started its unit at Haridwar mainly for supply of parts to Hero Motocorp Ltd, who has established their New Unit there.

10. The detail of R&D expenses incurred is enclosed herewith.

11. The detail of employees to whom salary and wages has been paid is enclosed. All such employees are duly registered and appearing in the books of Ludhiana Unit & attendance sheet is also marked at Ludhiana Unit. TDS is also deducted on salary payment made by Ludhiana Unit and not Haridwar Unit.

"In the above said order, the Coordinate Bench of the Tribunal has categorically observed that the weighted deduction of 200% in relation to the expenses incurred on Research & Development as per the provisions of section 35(2AB) of the Act is given with the intention of the Government to boost up the Research & development facility in India. Therefore, the allocation of expenses incurred on R&D activity for the purpose of reducing the weighted deduction, in our view, is not justified. The reduction of 80IC deduction in this case, on similar grounds, in our view is not justified. However, so far as the allocation expenses under the head directors meeting fee, audit fee are concerned, these expenses, in our view, are relating to all the units and the expenses under these heads should be allocated for all the units in equal proportion. So far as the Misc. expenses are concerned, there is nothing brought on record that the same are relatable to any other unit. In view of this, we set aside the order of the lower authorities in allocating the R&D expenses and misc. expenses of the R&D Unit at Ludhiana to other unit. However, the expenses under the heads, director meeting and audit fee are to be allocated in a full proportion to all units. This issue is accordingly decided partly in favour of the assessee." Therefore in view of the above, as the R&D expenditure appearing in the books & claimed may be accepted.

25.2 The Ld. CIT(A) in the impugned order basis above in para 4.4, 4.4.1, 4.4.2 has held as under:

4.4 Vide ground Nos. 5 of appeal, the appellant has challenged the action of the Assessing Officer in restricting the claim of the assessee company under section 80IC of the Act to Rs. 35,86,75,315/- as against claim of the assessee at Rs. 36,35,75,535/- by reallocating the expenses claimed by the assessee company. The reasons for restricting the claim under section 80IC of the Act have been given in detail in the assessment order. The main reason for making the impugned addition was that the 'R&D expenses' as well as expenses under the heads directors meeting fee, Audit fee and miscellaneous expenses of all the units of the assessee company, in the opinion of the Assessing Officer, had benefited each unit and as such these expenses should also be reallocated on the basis of turnover or respective units of the assessee company.

4.4.1 The appellant in his submission has placed reliance on the decision of the of the Hon'ble ITAT in its own case in dated 20/08/2020 for AY 2012-13. The Hon'ble ITAT in this judgment has observed as under:- "the weighted deduction of 200% in relation to the expenses incurred on Research & Development as per the provisions of section 35 (2AB) of the Act is given with the intention on the Government to boost up the Research & Development facility in India. Therefore, the allocation of expenses incurred on R &D activity for the purpose of reducing the weighed deduction, in our view, is not justified. The reduction of 80IC deduction in this case, on similar grounds, in our view is not justified. However, so far as the allocation expenses under the head director meeting fee, audit fee are concerned, these expenses, in our view, are relating to all the units and the expense under these heads should be allocated for all the units in equal proportion. So far as the Misc. expenses are concerned, there is nothing brought on record that the same are relatable to any other unit. In view of this, we set aside the other or the lower authorities in allocating the R & D expenses and Misc. expenses of the R&D Unit at Ludhiana to other unit. However, the expenses under the heads, directors meeting and audit fee are to be allocated in a full proportion to all units. This issue is accordingly decided partly in favour of the assessee." 4.4.2 In view of the same and respectfully following the judgment of the Hon'ble ITAT's in the appellant own case the A.O. is directed to recompute the deduction u/s 80IC of Income Tax Act as directed in the Hon'ble ITAT's decision in dated 20/08/2020. The Ground nos. 5 of appeal filed by the appellant are allowed.

25.3 The Ld. AR in his written submissions dt. 22/08/2024 has contended as below before us:-

Claim u/s 80IC made by the assessee - 364256035 1. Claim u/s 80IC allowed by the AO - 358675315 2. The R&D expenses claimed by the assessee – Expenses Ludhiana Unit Haridwar Unit Total R&D Expenses 34496291 0 34496291 3. Expenses Allocated by AO- Expenses Ludhiana Unit Haridwar Unit Total R&D Expenses 9658961 24837330 34496291 * Refer Page 48

4. Facts mentioned by CIT(A) in his order. Page 61- 6 4 5. Decision by CIT(A) at para 4.4.1 & 4.4.2 at Page 70 6. The Ld. CIT(A) directed to re-compute the deduction u/s 80-IC of the Act as directed by the Hon'ble ITAT in A.Y.2012-13. The Hon'ble ITAT in para 7 Page 17 of P.B has mentioned as under:-

"In view of the above, the action of the lower authorities in allocating the expenditure of R&D Unit to the 80IC eligible unit at Dehradun cannot be held justified, hence the said action of the AO is set aside. In the above said order, the Coordinate Bench of the Tribunal has categorically observed that the weighted deduction of 200% in relation 10 the expenses incurred on Research & Development as per the provisions of section 35(2AB) of the Act is given with the intention of the Government to boost up the Research & Development facility in India. Therefore, the allocation of expenses incurred on R&D activity for the purpose of reducing the weighed deduction, in our view, is not justified. The reduction of 80IC deduction in this case, on similar grounds, in our view is not justified. However, so far as the allocation expenses under the head directors meeting fee, audit fee are concerned, these expenses, in our view, are relating to all the units and the expenses tinder these heads should be allocated for all the units in equal proportion."

7. The expenses under following heads considered for proportionate disallowance by the Ld. AO in different years - 6. Assessment Year Particulars 2010-11 (i) Administration expenses (ii) Miscellaneous expenses 2011-12 Allowed as claimed 2013-14 Miscellaneous income (cash discount earned) 2014-15 R&D expenses 2015-16 (i) R&D expenses (ii) Administration expenses (iii) Miscellaneous expenses 2016-17 (i) R&D expenses (ii) Miscellaneous expenses 2017-18 Allowed as claimed 2018-19 Allowed as claimed

Precedent decision of this Tribunal are correctly followed by CIT(A) in the impugned order.

26.2 We therefore find no infirmity in the impugned order in respect of Ground No. 5 (before us ground no. 4) and reject the appeal of Revenue on this ground too.

32.2 That during the year under consideration, the non current investment of the assessee company stands at Rs. 11,79,40,00,000/- whereas on the other hand the company has paid a sum of Rs. 85,00,000/- as interest expense.

32.3 The legislative intent is to allow only that expenditure which is relatable to earning of income and therefore it follows that the expenses which are relatable to earnings of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. The Central Board of Direct Taxes, vide Circular No.05/2014 dated 11.02.2014, in exercise of its powers under section 119 of the I.T.Act, clarified that Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. Investment decisions are very complex in nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. It is therefore not correct to say that exempt income can be earned by incurring no or nominal expenditure. It is difficult to accept that a company can earn substantial dividend income without incurring any expenses, whatsoever, including management or administrative expenses as investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. The term "expenditure" occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. As such I am not satisfied with the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for the year under consideration. Sub-section (1) of Section 14A provides in unequivocal terms for not allowing deduction in respect of expenditure incurred by the assessee in relation to exempt income and sub-section (2) lays down the mechanism for determining such amount of expenditure incurred in relation to exempt income in accordance with method as prescribed under Rule 8D wherein the method of working out the disallowance has been provided. Reliance in this regard is placed on the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg.Co.Ltd. Vs DCIT &Anr., reported in 234 CTR (Bom) 1 (2020).

32.4 In this regard, the disallowance to be made u/s.14A is calculated as per Rule 8D of the Income Tax Rules. It is clarified here that though Rule 8D has been inserted by the Finance Act, 2006 w.e.f. 01.04.1962. Therefore, the corresponding disallowance is being worked out as per Rule 8D of the Income Tax Rules and same is computed as under:

32.5 After discussion, the income of the assessee is recomputed as under:

Total income Rs. 153,65,65,490/- Addition as discussed in para-7 above Rs. 12,07,04,500/- Total assessed income Rs.165,72,69,990/- 32.6 The aforesaid assessment order of Ld. AO bears No. ITBA/AST/S/143(3)/2021-22/1032349899(1) dt. 12/04/2021 u/s 143(3) of the Act.

32.7 That the assessee company being aggrieved by the aforesaid assessment order dt. 12/04/2021 preferred first appeal u/s 246A of the Act before Ld. CIT(A) and interalia has raised following grounds of appeal in Form No. 35:

1. The Ld. AO has wrongly assessed the total income at Rs. 1657269990/- against the returned income of Rs. 1536565490/- thereby making an addition of Rs. 120704500/-u/s 14A.

2. The Ld. AO has wrongly disallowed a sum of Rs. 120704500/- under section 14A read with Rule 8D being 1 percent of the average of opening and closing investment of the assessee instead of calculating the same at 1 percent of the annual average of the monthly average of investments, income from which does not form part of total income and Rs. 85 lakhs of other borrowing cost. 2(b) The Ld. AO has wrongly considered the wrong figures of opening and closing investments in the body of assessment order at Rs.1064.69 crores and 1179.40 crores respectively against correct the opening investment as per the audited balance sheet at Rs. 96.59 crores and closing investment at 218.06 crores respectively. Which has also been considered by the assessee company for calculating the disallowances u/s 14A.

3. The Ld. AO has failed to consider the disallowance calculated by the assessee company in the tax audit report and computation of taxable income at Rs. 645833/- based on the amended Rule 8D applicable from the year under consideration without recording proper satisfaction. The Ld. AO has wrongly considered other borrowing cost at Rs. 8500000/- 4. for the disallowance whereas the company total investment outstanding as on 31/3/2017 was at Rs. 218.06 crores against which the company has the shareholders fund at the year end at Rs. 873.78 crores. Alternatively, the Ld. AO has failed to consider the facts that the exempt 5. income earned by the assessee during the year was only 2842340/- which is much less the disallowance u/s 14A made by him.

The Ld. AO has failed to calculate the MAT credit u/s 115JB and 6. considered the credit available to the company while creating the demand on the above addition. 7. The appellant craves leave for reserving the right to amend, modify or add any ground (s) of appeal at any time or during the hearing of appeal.

8. That the order is bad in law and on facts.

32.8 That the Ld. CIT(A) in the impugned order dt. 16/10/2023 has held as under in respect of above grounds urged by the assessee which are as under:

“6. Decision The ground of appeal 1 is general so is not being commented upon. 6.1 6.2 The appellant in its grounds of appeal 2, 3, 4 and 5 has assailed the action of AO in making addition to its returned income after recalculating the disallowance u/s 14A. The same are being taken together for the sake of convenience and to avoid repetition. From perusal of the available records, assessment order, rectification orders and submission of the appellant it has been found that the income assessed u/s 143(3) dated 12/04/2021 had been adopted at Rs. 165,72,69,990/- against the returned income of Rs. 153,65,65,490/-. The appellant in its appeal has assailed the AO for making an addition of Rs. 12,07,04,500/- u/s 14A of the Income Tax Act.

In between the appellant has also filed a rectification request to the 6.2.1 concerned AO on 28.02.2022. The AO has passed an order u/s 154 of the IT Act vide dated 23.03.2022 in which he has deleted the addition of Rs. 85,00,000/- being observed that the borrowing cost of Rs. 85,00,000/- was not directly related to investment yielding exempt income and the assessee company has total share-holders funds itself Rs. 873,78,00,000/- which was way higher than the investment. 6.2.2 Further the AO has also recalculated the addition u/s 14A of Rs. 1,50,86,167/-from 12,07,04,500/- mentioning that the then AO had erroneously taken the opening and closing balance of "total assets" as reflected in the balance sheet. Rather opening and closing of only those investments which had the potential of generating tax free income. 6.3 The appellant in its submission has placed reliance on the decision of the of the Hon'ble ITAT in its own case in dated 16/04/2019 for AY 2009-10. The Hon'ble ITAT in this judgment has observed as under:- "The assessee has got sufficient own funds available investment in the equity and Mutual funds ______________we hereby hold that no disallowance under Rule 8D(2)(ii) is required."

The appellant has also cited the judgment of the Hon'ble ITAT Chandigarh 6.3.1 in its own cases in A.Y. 10-11 and dated 20/8/2020 wherein the Hon'ble ITAT has accepted the contention of the appellant and directed to consider only the investments yielding exempt income for calculating the disallowance u/s 14 A. 6.3.2 The appellant has also placed reliance on the decision of Hon'ble Supreme Court in the case of South Indian Bank Ltd Civil Appeal no. 9606 of 2011 dated 09.09.202 held as under:- "The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax free bonds/securities which yield tax free dividend and interest to assessee banks in those situations where, interest free own funds available with the assessee exceeded their investment. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favoring the assessee." 6.4 In view of the same and respectfully following the judgments of the Hon'ble ITAT's in the appellant own cases for A.Y. 09-10, 10-11 and 12-13 and also the Hon'ble Supreme Court in the case of South Indian Bank Ltd, the grounds no. 3 and 5 filed by the appellant are allowed and the AO is directed to consider the judgments of ITAT in the appellants own case as cited above and the judgment of Hon'ble Supreme Court in the case of M/s South Indian Bank Ltd. vs. CIT for calculating the disallowance u/s 14 A. However, it is pertinent to mention here that ground nos. 2 and 4 raised by the appellant have already been rectified (reduced to Nil) u/s 154 r.w.s 143(3) of the IT Act by the AO vide order dated 23.03.2022 hence the same is dismissed as infructuous.

7. Appeal is partly allowed.

32.9 That the Revenue being aggrieved by the impugned order of CIT(A) dt. 16/10/2023 has preferred appeal u/s 253 before this Tribunal and has raised following grounds of appeal in Form 36 which are as under:-

1. That the Ld. CIT (A) NFAC New Delhi has erred in deciding that the disallowance done by the Assessing officer is against the law and facts of the case.

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT (A) is justified in holding CBDT Circular No. 5/2014 dated 11.02.2014 to be illegal whereas Circular No. 5 of 2014 propounds that section I4A is triggered for disallowance o expenditure incurred which is relatable to tax exempt income even though no tax-exempt income under the Act has been earned during a particular year.

3. Whether section 14A (I) of the Income Tax Act, 1961 would stand attracted even if the tax-exempt income is not actually earned during a particular year subject to expenditure rela table to such income having been incurred during the year.

5. That the appellant craves leave to add or amend any ground of appeal before it is finally disposed off. Record of hearing

All grounds are related to disallowance u/s 14A.

1. The Ld. A.O. calculate the disallowance under Rule 8D(2)(ii), originally at Rs 12,07,04,500/- and subsequently rectified at Rs.1,50,86,167/- by considering all the investments irrespective of yielding any exempt income or not.

3. According to the Rule 8D(2)(ii), the monthly average of investment yielding exempt income is to be considered for computing the disallowance. The assessee calculated the disallowance u/s 14A at Rs. 645833/- by 1% of the annual average of the monthly averages of value of investments yielding exempt income filed along with Income Tax return and mentioned in Tax Audit Report. The calculation was made as under:- Para 7 page 16

The investments outstanding on which exempt income earned Month Opening Closing Monthly balance Balance average April - 0 - May - 26,00,00,000 13,00,00,000 June 26,00,00,000 - 13,00,00,000 July - 18,00,00,000 9,00,00,000 August 18,00,00,000 23,50,00,000 20,75,00,000 September 23,50,00,000 - 11,75,00,000 October - - - November - - - December - - - January - - - February - • 8,00,00,000 4,00,00,000 March 8,00,00,000 4,00,00,000 6,00,00,000 Yearly Average - - 6,45,83,333 1% of yearly average 6,45,833 Total disallowance 6,45,833 4. The Ld. C1T(A) at para 6.3.1 of his order at page 14 of his order has mentioned as under:- "The appellant has also cited the judgment of the Hon'ble ITAT Chandigarh in its own cases in A.Y. 10-11 and dated 20/8/2020 wherein the Hon'ble ITAT has accepted the contention of the appellant and directed to consider only the investments yielding exempt income for calculating the disallowance u/s 14 A. Page 21

Facts has been mentioned in CIT(A) order at Para 1 to 22. Page 15 to 19 5.

6. The Ld. CIT(A) at Para 6.4 (page 21) had directed to consider the judgment of Hon'ble ITAT in the appellant's own case for calculating the disallowance u/s 14A by considering the average investments which have yielded the exempt income only.

Findings & Conclusions

34.1 We basis above are of the considered view that Revenue has not been successful enough to assail the impugned order of Ld. CIT(A) factually as well as legally. We find no legal infirmity in the impugned order of Ld. CIT(A) and accordingly upheld the same. We hold that Ld. CIT(A) has rightly followed the precedent laws and in particular the orders of Chandigarh Bench of this Tribunal in assessee’s own case in dt. 16/04/2019 for A.Y. 2009-10 wherein this Hon’ble ITAT has observed as under:

“The assessee has got sufficient own funds available investments in equity and mutual funds……….we hereby hold that no disallowance under Rule 8D(2)(ii) is required.” In assessee’s own case this Tribunal in for A.Y. 2010-11 and dt. 20/08/2020 has further accepted the contention of the assessee corporation and has directed the Revenue to consider only the investments yielding exempt income for calculating the disallowance under section 14A.

The assessee has also rightly placed reliance on decision of Hon’ble Supreme Court of India in case of South India Bank Ltd. wherein following is held

“ The aforesaid discussion and cited judgment advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax free bonds / securities which yield tax free dividend and interest to assessee banks in those situations where, interest free own funds available with the assessee exceeded their investments. With this conclusions, we unhesitantly agree with the view taken by the ld. ITAT favouring the assessee” 34.2 We hold that Ld. CIT(A) has correctly held in para 6.4 which we repeat and reiterate once again as under:

“6.4 In view of the same and respectfully following the judgments of the Hon'ble ITAT's in the appellant own cases for A.Y. 09-10, 10-11 and 12-13 and also the Hon'ble Supreme Court in the case of South Indian Bank Ltd, the grounds no. 3 and 5 filed by the appellant are allowed and the AO is directed to consider the judgments of ITAT in the appellants own case as cited above and the judgment of Hon'ble Supreme Court in the case of M/s South Indian Bank Ltd. vs. CIT for calculating the disallowance u/s 14 A. However, it is pertinent to mention here that ground nos. 2 and 4 raised by the appellant have already been rectified (reduced to Nil) u/s 154 r.w.s 143(3) of the IT Act by the AO vide order dated 23.03.2022 hence the same is dismissed as infructuous.”

1. That the Ld. CIT (A), NFAC New Delhi has erred in deciding that the disallowances done by the Assessing Officer is against the law and facts of the case.

2. That, based on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in holding CBDT Circular No.5/2014 dated 11.02.2014 to be illegal whereas Circular No. 5 of 2014 propounds that section 14A is triggered for disallowance of expenditure incurred which is relatable to tax exempt income even though no tax-exempt income under the Act has been earned during a particular year.

3. That the Ld. CIT(A) has erred on facts and law ignoring the distinction between provision of section 36(l)(va) r.w.s 43V and provisions of section 36(l)(va) r.w.s 2(24)(x) of the Income Tax Act, 1961, which clearly provide for different treatment. While the delay payment of employer's contribution is allowable if found before the filing of return wherever employee's contribution is disallowed for once and all if payment is delay beyond the prescribed time. 4. That the Hon'ble Supreme Court of India vide its order sated 12.10.2022 in Civil Appeal No. 2833 of 2016 in the case of Checkmate Services Pvt. Ltd. Vs. Commissioner of Income Tax-1 has interpreted all the relevant provision of section 36(l)(va) and section 4313 of the Income Tax Act, 1961 and decided the issue in favour of Revenue. 5. That the Appellant craves, leave for permission to add, amend, or alter any ground of appeal at the time of hearing.

39. Broadly speaking the Revenue has challenged the impugned order of Ld. CIT(A) on two counts (i) Disallowance u/s 14A (ground no. 2) (ii) Disallowance u/s 36(i)(va)(ground no. 3 & 4).

40. In so far as disallowance u/s 14A is concerned the Ld. AO had disallowed u/s 14A read with Rule 8D(2)(ii) sum of Rs. 1,92,97,586/- on new investments made at 1,92,97,58,600/- during the year which have not yielded any exempt income. That the company had not earned any dividend income during the year and therefore there is no investment which yielded the exempt income.

41. That the Ld. CIT(A) in respect of disallowance u/s 14A has recorded as below in the impugned order:

1. The assessee company had not made any disallowance u / s 14A in the computation of taxable income on the basis of "No Exempt Income earned" during the year.

2. The Ld AO has not brought any income on record which is in the exempt nature to which the provisions of section 14A would apply.

4. Also letter dated 2/12 / 21 at the end of para 3 reads as under:- "During the year under consideration, the assessee company has received no income which is exempt. Hence provisions of section 14A are not applicable."

6. The particulars of the above letters has been reproduced in the body of assessment order at para 7.

7. The assessment unit has made the disallowance u/s 14A on the basis that the revenue has filed an SLP before the Supreme Court which is pending.

8. As on date all the decisions mentioned by him are in favour of the assessee that no disallowance is required to be made when there is no exempt income.

9. As per the Audited Financials, the total investment made by the company and outstanding as on 31/3 / 20 is at Rs. 210.29 crores whereas the total equity including Reserve & Surplus as on 31/3 / 20 and 3 1 / 3 / 1 9 is as under:-

Particular 31/3/2019 31/3/2020 Reserve & Surplus 1053.67 Cr. 1084.66 Cr. 10. Thus the assessee's own available funds is much more and this fact that the assessee has utilized its own funds have already been confirmed by the Hon'ble ITAT while deciding the appeal for AY 2009-10, 10-11 & 12-13. Copies of which are already been filed for the appeals pending before your honour for the AY 14-15 & 15-16 etc.

12. Reference may kindly be made to the following decisions where similar view has been taken that where there is no exempt income earned, no disallowance is called for. (1) CIT v/s Corrtech Energy P Ltd, 223 Taxmann 130 (Guj) (ii) CIT v Winson Textile Industries Ltd, 319 ITR 204 (Pb.) (iii) Principal Commissioner of lncome-tax-1, Chandigarh v. Vardhman Chemtech (P.) Ltd [2019] 102 taxmann.com 132 (Punjab & Haryana).is 6. (iv) Delhi International Airport (P) Ltd, [2022] 144 Taxmann.com 80 (Del)

As held by Hon'ble Delhi High Court in the case of M / s Era Infrastructure 13. India Ltd 141 taxman.com 289 that the amendment brought in by the Finance Act 2022 to Section 14A by inserting a non obstante clause and explanation will take effect from 1/4 / 22 AY 2022-23. Even if there is a Circular, once the law is disclosed by the High 14. Court/Supreme Court, the same is to be followed. Refer M / s Hindustan Aeronautics Ltd v CIT, 110 Taxmann 311 (SC). The Hon'ble Supreme Court in the case o f M / s Chettinad Logistics P Ltd, 15. [2018] 95 Taxmann.com 250 (SC) dismissed SLP against High Court ruling that Section 14A cannot be invoked where no exempt income was earned by the assessee in relevant assessment year.

6.4 Vide ground Nos. 4 and 5 of appeal, the appellant has challenged the action of the Assessing Officer in making addition of Rs. 1,92,97,586/- in this case on account of disallowance u/s 14A. The reason for making the impugned addition was that the assessee company has increased its investment during the year of Rs. 51,50,00,000/-. The Assessing Officer was of the view that the disallowance u/s 14A is to be made in respect of the expenditure in relation to the investment.

6.4.2 The appellant in its submission has placed reliance on the decision of the Hon'ble ITAT in its own case in dated 16/04/2019 for AY 2009-10. The Hon'ble ITAT in this judgment has observed as under:-

"The assessee has got sufficient own funds available investment in the equity and mutual funds. - we hereby hold that no disallowance under Rule 8D(2)(ii) is required." 6.4.3 The appellant has also cited the judgment of the Hon'ble ITAT Chandigarh in its own cases in A.Y. 10-11 and A.Y. 12-13 dated 20/8/2020 wherein the Hon'ble ITAT has accepted the contention of the appellant and directed to consider only the investments yielding exempt income for calculating the disallowance u/s 14 A. 6.4.4 The appellant has also relied upon the judgment of the Hon'ble High Court of Punjab and Haryana in the case of Vardhman Chemtech (P.) Ltd., held as under:- "Section 14A provides for disallowance of expenditure in relation to income not 'includible' in total income." 6.4.5 In view of the same and respectfully following the judgments of the Hon'ble ITAT's in the appellant own cases for A.Y. 09-10, 10-11 and 12-13 and also the Hon'ble High Court of Punjab and Haryana in the case of Vardhman Chemtech (P.) Ltd.), the ground nos. 4filed by the appellant are allowed and the AO is directed to restrict the addition to the extent of exempt income earned during the year and delete the same if there is no exempt income during the year. The ground of appeal 4 and 5 are allowed for statistical purpose.

43. In so far as disallowance u/s 36(1) (va) is concerned the assessee company had filed the tax return showing loss of Rs. 37,05,71,039/- whereas the total income determined by Ld. AO is of Rs. 34,45,38,284/-. The loss is reduced by Rs. 2,60,32,755/-.

43.1 That the disallowance made u/s 36(1) (va) is Rs. 37,85,915/-.

43.2 That there are other disallowance on account of depreciation of Rs. 29,49,254/- and disallowance u/s 14A is of Rs. 1,92,97,586/-. The aggregate comes to Rs. 2,60,32,755/-.

43.3 That the working of payment made after the due date of respective acts has been given by Ld. CIT(A) at page 28 of the impugned order/ paper book according to which Rs. 665906/- are made after the due date.

43.4 That a sum of Rs. 445094/- of EPF which was due on 15/09/2019 was deposited on 16/09/2019 being Sunday on 15/09/2019. As per general clauses Act, the due date will be next working day if due date is holiday thus the payment made on 16/09/2019 to be treated with due date.

43.5 That the Ld. CIT(A) in the impugned order has considered the entire issue at para 6.1 to 6.2.5 and has decided the issue in para 6.2.6 by giving the direction to verify the date of payment of EPF and ESI by the assessee company and if such payments have made before filing of return the same to be allowed. However as per the judgment of Hon’ble Supreme Court of India in case of M/s Checkmate Services Pvt. Ltd. Vs. CIT reported in 329 CTR(SC)1, the disallowance to be made for payments made after the due dates under respective acts except the payment of Rs. 44,50,94/- of EPF which has been paid before the due date by copying general clauses act. Thus the amount to be disallowed is Rs. 220812 (665906-445094).

43.6 The Ld. CIT(A) in respect of two broad issues (supra) in so for as disallowance u/s 14A is concerned has held as under while allowing the ground of the assessee company in para 6.4.5 of impugned order and has directed the Ld. AO to restrict the addition to the extent of exempt income earned during the year and delete the same if there is no exempt income during the year. This ground is allowed for statistical purpose.

43.7 That the Ld. CIT(A) in so far as other broad issue of payment of ESI/EPF are concerned has in para 6.2.6 has held that “Respectfully following the judgment of Hon'ble Court's as mentioned above, the AO is directed to verify the date of payment of employees contribution of PF and ESI by the appellant and if such payments have been made before the date of filing of return give the benefit of the same to such extent. The ground of appeal 2 is allowed for statistical purpose”.

Findings & Conclusions

In so far as disallowance u/s 14A is concerned we sustain the finding of Ld. CIT(A) made in the impugned order. We hold that decisions of this Tribunal as recorded in para 6.4,6.4.2,6.4.3,6.4.4 and 6.4.5 are correctly made. The binding judicial precedents on Ld. CIT(A) is /are correctly followed. We do not see any justification to add anything more to already well reasoned and meritorious finding. The Ld. DR has failed to bring on any submissions to dislodge the findings of Ld. CIT(A) either legally or otherwise.

44.1 In the result order of CIT(A) is sustained as passed and the appeal of the Revenue is partly allowed for statistical purposes.

Sr. No. ITA No. & Assessment Year Party Name decision / order 1 DCIT, C-4, Ludhiana Vs. M/s Partly allowed for A.Y. 2010-11 Rockman Industries Limited Statistical purposes 2 Asst. CIT, C-4, Ludhiana Vs. Dismissed M/s Rockman Industries Limited A.Y. 2013-14 3 ITA No. 817/Chd/2023 DCIT, C-4, Ludhiana Vs. M/s Dismissed Rockman Industries Limited A.Y. 2014-15 4 ITA No. 818/Chd/2023 DCIT, C-4, Ludhiana Vs. M/s Dismissed Rockman Industries Limited A.Y. 2015-16 5. ITA No. 794/Chd/2023 DCIT, C-4, Ludhiana Vs. M/s Dismissed Rockman Industries Limited A.Y. 2016-17 DCIT, C-4, Ludhiana Vs. M/s Dismissed Rockman Industries Limited A.Y. 2018-19 8. ITA No. 84/Chd/2024 DCIT, C-4, Ludhiana Vs. M/s Partly allowed for A.Y. 2020-21 Rockman Industries Limited Statistical purposes

Order pronounced in the open Court on 25/11/2024.