INDUS TOWERS LTD,GURUGRAM vs. DCIT, CIRCLE 4(2), NEW DELHI

The present appeal and Stay Application has been filed by assessee against the order of National Faceless Appeal Centre (NFAC), Delhi dated 15.02.2023.

The assessee has raised the following grounds of appeal:

That the CIT(A) erred on facts and in law in not admitting/ allowing certain additional grounds/ claims/ deductions raised/ made by the appellant merely on the ground that the same were not made in the return of income but only during first appellate proceedings.

That the CIT(A) erred on the facts and in law not directing the assessing officer to restrict the levy of the dividend distribution tax (DDT) on the dividend distributed/ paid to non-resident shareholder(s) to lower rate(s) of tax on dividend given in respective Double Taxation Avoidance Agreements as against effective rate 20.35765 % charged under section 115-O of the Act.

During the year under consideration, the assessee earned following exempt incomes:

The ld. AO without recording any satisfaction as to why the suo-motu disallowance made by the assessee is incorrect having regard to the accounts of the assessee, directly proceeded to apply the computation mechanism provided in 3rd limb of Rule 8D(2) of the Income Tax Rules by considering 1% of average value of investments and disallowed a sum of Rs.62,28,97,678/- in the assessment.

The ld. CIT(A) upheld the action of the ld. AO by stating that the assessee had considered only the direct expenses by taking the cost of the company of 2 employees and had not considered any indirect expenses while making the suo-motu disallowance. The ld. CIT(A) accordingly attributed 20% of such expenses towards indirect expenses and made further enhancement of Rs.2,84,000/- (Rs.14,20,000 × 20%) and upheld the action of the ld. AO. In this regard, we find that the assessee vide ground no. 2.1 raised before us had stated that the ld. CIT(A) before resorting to enhance the income of the assessee had not issued mandatory enhancement notice in terms of Section 251(2) of the Act and hence enhancement of sum of Rs.2,84,000/- would have no legs to stand.

We have gone through the order of the ld. CIT(A) and nowhere there is even a whisper as to the issuance of any enhancement notice in terms of Section 251(2) of the Act by the ld. CIT(A). As per the Act, the ld. CIT(A) is having co-terminus powers and has got power of enhancement of income. But before resorting to do so, the ld. CIT(A) is duty bound to issue enhancement notice to the assessee in terms of Section 251(2) of the Act, give adequate opportunity of hearing to the assessee and then pass a reasoned order after duly considering the submissions thereon. Since, no enhancement notice was issued by the ld. CIT(A), the assessee did not have any occasion to address the purported query of the ld. CIT(A) and accordingly, we hold that the enhancement made by the ld. CIT(A) in the sum of Rs.2,84,000/- is liable to be deleted and is accordingly deleted.

With regard to upholding of the disallowance of expenses u/s 14A of the Act. r.w.r. 8D(2) of the Income Tax Rules, we find that there is absolutely no recording of objective satisfaction with cogent reasons by the ld. AO or by the ld. CIT(A) as to why the suo-motu disallowance made by the assessee is incorrect. When this fact was put to ld. DR., the ld. DR vehemently argued that there is no manner provided in the statute for recording satisfaction. The mere fact that ld. AO had resorted to the computation mechanism provided in Rule 8D(2) of the Rules itself indicates the satisfaction of the ld. AO that he has not agreed with the workings given by the assessee. The ld. DR also filed his written submission in this regard. The essence of such written submission is that in the opinion of the ld. DR, it is enough that the ld. AO’s inherent satisfaction could be inferred and that the ld. AO should have only prima facie satisfaction that assessee’s workings are incorrect. Once such satisfaction is arrived at, the only recourse available to the ld. AO is to apply computation mechanism provided in Rule 8D(2) of the Rules. We are unable to comprehend ourselves to accept the proposition of the ld. DR as apparently the same is in gross violation of provisions of Section 14A(2) of the Act r.w. Rule 8D(1) of the Income Tax Rules. For the sake of convenience, the same are hereby reproduced:-

Further, non-recording of objective satisfaction with cogent reasons having regard to the accounts of the assessee as mandated in the Act referred (supra) was also subject matter of deliberation before the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT reported in 402 ITR 640 (SC) wherein the Hon’ble Apex Court categorically held that recording of such satisfaction is mandatory on the part of the ld. AO before resorting to the computation mechanism provided in Rule 8D(2) of the Rules. The same view has also been reiterated in the decision of Hon’ble Jurisdictional High Court in the case of H. T. Media Ltd. Vs. PCIT reported in 399 ITR 576 and Coforge Ltd. Vs. ACIT reported in 436 ITR 546.

In view of the aforesaid observations and respectfully following the judicial precedents relied upon hereinabove, we hold that the disallowance made by the ld. AO u/s 14A of the Act in the sum of Rs.62,28,97,678/- is bad in law. We have already held that the enhancement made by the ld. CIT(A) in the sum of Rs.2,84,000/- is liable to be deleted. Accordingly, the disallowance u/s 14A of the Act would only be Rs.14,20,000/- which was the suo motu disallowance made by the assessee in the return of income. Accordingly, the ground nos. 1 to 2.1 raised by the assessee are allowed.

During the course of First Appellate proceedings, the assessee made certain additional claims by seeking deduction of Rs.1,58,25,191/- towards capital work-in-progress written off and refund of excess Dividend Distribution Tax paid on dividend to non-resident shareholders applying tax rates provided under respective DTAA for dividend. These issues were not even adjudicated by the ld. CIT(A) by applying the decision of Hon’ble Supreme Court in the case of Goetze India Ltd reported in 284 ITR 323 (SC). This action of the ld. CIT(A) is grossly illegal in view of the decision of Hon’ble Apex Court in the case of Goetze India Ltd itself wherein it was very clearly mentioned in the said decision that the decision was restricted to the power of the Assessing Authority to entertain a claim for deduction otherwise than by a revised return and the same did not impinge on the power of the Appellate Authority to permit a new claim. Hence, we hold that the ld. CIT(A) ought to have adjudicated these additional claims made by the assessee before him on merits. Since, the same was not done by him, we deem it appropriate to restore the grounds raised by the SA No. 386/Del/2023 Indus Towers Ltd. assessee in ground nos. 3 to 5 to the file of the ld. CIT(A) for de novo adjudication therein in accordance with law. Accordingly, the ground nos. 3 to 5 raised by the assessee are allowed for statistical purpose.

Ground no. 6 raised by the assessee is general in nature and does not require any specific adjudication.

Since, the appeal is disposed off herein, the adjudication of Stay Petition of the assessee becomes infructuous.

In the result, the appeal of the assessee is allowed for statistical purposes and the Stay Petition of the assessee is hereby dismissed as infructuous.