FOMENTO KARNATAKA MINING COMPANY PRIVATE LIMITED (NOW AMALGAMATED WITH FOMENTO RESOURCES PRIVATE LIMITED,PANAJI vs. JOINT COMMISSIONER OF INCOME TAX, MARGAO RANGE, MARGAO

This is an appeal filed by the assessee directed against the order of ld. Commissioner of Income Tax (Appeals)-2, Panaji [‘the CIT(A)’] dated 27.08.2021 for the assessment year 2009-10.

Briefly, the facts of the case are that the appellant is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of processing and trading in the Iron Ore. The Return of Income for the assessment year 2009-10 was filed on 30.09.2009 declaring total income of Rs.26,40,77,220/-. Against the said return of income, the assessment was completed by the Joint Commissioner of Income Tax, Margao Range, Margao (‘the Assessing Officer’) vide order dated 30.12.2011 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.26,63,57,955/-. While doing so, the Assessing Officer made disallowance u/s 14A of Rs.15,49,787/-, disallowance on account of sundry creditors extracting as fictitious of Rs.7,30,948/-.

Being aggrieved, an appeal was filed before the ld. CIT(A) contending that no disallowance u/s 14A is required to be made in the absence of any expenditure incurred to earn the exempt income. It was also contended that no addition on account of outstanding creditors is required to be made, as the credits represent the opening balance. The ld. CIT(A) rejecting the contentions assessee confirmed the assessment order. 4. Being aggrieved, the appellant is in appeal before us in the present appeal. 5. It is submitted before us that without recording a satisfaction as to how the contention of the appellant that no expenditure was incurred to earn the exempt income, the Assessing Officer ought not to have made resort to the provisions of section 14A of the Act. As regards to the disallowance on account of sundry creditors, it is submitted that the credits represent the opening balance and, therefore, no addition can be made for the year under consideration. 6. On the other hand, ld. Sr. DR submits that the order of the ld. CIT(A) is reasoned one requires no interference. 7. We heard the rival submissions and perused the material on record. The ground of appeal nos.1 and 2 challenges the decision of the ld. CIT(A) confirming the disallowance of 14A of the Act. The appellant took a consistent stand that no expenditure was incurred to earn the exempt income, therefore, no disallowance can be made. However, the Assessing Officer without recording the satisfaction as to how the contention of the appellant is incorrect having regard to the books of account maintained by the appellant had proceeded with the disallowance u/s 14A of the Act. The provisions of sub- section (2) of section 14A provides that resort to disallowance u/s 14A can be made only if the Assessing Officer is not satisfied with the correctness of the claim of assessee in respect of expenditure incurred to earn the exempt income. Therefore, it is incumbent upon the Assessing Officer to record satisfaction as to the correctness or otherwise of the assessee company in contention that no expenditure was incurred to earn the exempt income. The Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (supra) held as follows :- “41. Having regard to the language of section 14A(2) of the Act, read with rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the Assessing Officer.”

The similar view was taken by the Hon’ble Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd., 370 ITR 338 (Del) and PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd, 105 taxmann.com 274. In the present case, the Assessing Officer merely observed that the assessee company made substantial investments in mutual funds and therefore, incurred substantial expenditure to earn the exempt income and in the circumstances, he was of the opinion that Rule 8D has to be applied. Therefore, the question that comes up for consideration before us is whether the above observation made by the Assessing Officer amounts to satisfaction as envisaged u/s 14A(2). It is a settled position of law that the satisfaction recorded by the Assessing Officer should be based on the objective material and cannot be subjective. From Assessing Officer had not recorded satisfaction regarding the correctness of suo motu disallowance offered by the assessee u/s 14A and mere rejection of the explanation of the assessee per se, cannot be said to be a satisfaction as envisaged u/s 14A(2) of the Act. The ratio laid down by the Hon’ble Delhi High Court in the case of PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd (supra) and PCIT vs. Keshav Power Ltd., 112 taxmann.com 323 as well as the Hon’ble Bombay High Court in the case of Pr.CIT vs. Reliance Capital Asset Management Ltd (supra) is squarely applicable. Therefore, we hold that the disallowance of Rs.15,49,787/- made by the Assessing Officer as confirmed by the CIT(A) is incorrect in law, as the Assessing Officer had failed to record the satisfaction as envisaged u/s 14A(2) of the Act. Thus, the grounds of appeal