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Income Tax Appellate Tribunal, : PANAJI BENCH: GOA
Before: SHRI CHANDRA MOHAN GARG & SHRI GIRISH AGRAWAL
IN THE INCOME TAX APPELLATE TRIBUNAL : PANAJI BENCH: GOA BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND SHRI GIRISH AGRAWAL, ACCOUNTANT MEMBER ITA No.386/PAN/2018 Assessment Year: 2012-13 M/s. Hardesh Ores Private Deputy Commissioner of Limited Income-tax, Circle-1(1), Villa Flores Da Silva, Vs. Margao, Goa. Erasmo Carvalho Street, Margao, Goa-403601. (PAN: AAACH4515J) (Appellant) (Respondent) Present for: Appellant by : Shri Nishant Thakkar, Advocate Respondent by : Shri Mayur Kamble, Sr. DR Date of Hearing : 16.06.2022 Date of Pronouncement : 02.09.2022 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: This appeal by the assessee is directed against the order of ld. CIT(A), Panaji-1 vide ITA No.461/CIT(A) PNJ-1/2014-15 dated 11.06.2018 for A.Y. 2012-13 passed against the assessment order u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) by DCIT, Circle-1, Margao dated 27.02.2015. 2. Shri Nishant Thakkar, Advocate appeared on behalf of the assessee and Shri Mayur Kamble, Sr. DR appeared on behalf of the revenue.
Grounds taken by the assessee are reproduced as under:
“1. The order of the Commissioner of Income Tax (Appeals), Panaji-1, Goa (hereinafter referred to as “The CIT(A)”] is opposed to law and facts of the case. 2(a) The CIT(A) legally erred in confirming the addition made in the sum of Rs.7,37,650/- by invoking the provisions of section 41(1) of the Income Tax Act. The whole of the addition be deleted in full.
2 ITA No.386/PAN/2018 M/s. Hardesh Ores Pvt. Ltd. A.Y: 2012-13 (b) The CIT(A) ought to have held that the provisions of section 41(1) are not applicable when in reality there is no remission or cessation of liability by the concerned creditors. 3(a) The CIT(A) erred in confirming the disallowance made by the AO under section 14A of the Act read with Rule 8D of the income Tax Rules, 1962 amounting to Rs.2,64,195/-. The whole of the addition be deleted in full.” 4. Brief facts as culled out from records are that assessee is in the business of extraction of ore. It filed its return of income on 28.09.2012 reporting total income as Nil. In the course of assessment, Ld. AO noted that certain sundry creditors were outstanding since long for which a show cause was issued proposing as to why not this to be treated as cessation of liability u/s. 41(1) of the Act. It was submitted by the assessee that assessee has not written back any of the credit balances to its P & L Account and, therefore, provisions of section 41(1) will not apply. In respect of the other issue relating to disallowance u/s. 14A of the Act read with Rule 8D, Ld. AO noted that assessee has earned dividend income of Rs.18,87,000/- claimed exempt on the investments made in various shares and mutual funds. Ld. AO show caused the assessee to explain as to why disallowance u/s. 14A should not be made for expenditure incurred to earn the exempt income in respect of which assessee made a submission that investments have been made out of the assessee’s own funds and no expenses has been incurred by it for earning the exempt income since investments in mutual funds were made on the advice of mutual fund Manager. Assessee stated that mutual funds officials used to come to the assessee who would collect the forms and render all the services. He also submitted that except for fund transfer to RTGS and accounting of statement in books of account no other activity was done by the assessee which required any cost to incur for the same. Accordingly, assessee claimed that no expenditure has been incurred for the purpose of earning exempt income and, therefore, disallowance u/s. 14A of the Act by applying Rule 8D is incorrect and not applicable to the assessee’s
3 ITA No.386/PAN/2018 M/s. Hardesh Ores Pvt. Ltd. A.Y: 2012-13 case. Ld. AO proceeded to complete the assessment by making a disallowance for which he noted that he is not satisfied with the claim made by the assessee that no expenditure has been incurred in relations to the exempt income. He also noted that it is not possible to identify that interest claimed by the assessee with reference to any particular income and, therefore, the interest and administrative expenses need to be allocated as per Rule 8D.
4.1. Aggrieved, assessee went in appeal before the Ld. CIT(A), who sustained the addition in respect of cessation of liability u/s. 41(1) of the Act of Rs.7,37,650/-. In respect of disallowance u/s. 14A of the Act, Ld. CIT(A) deleted the addition of Rs.19,671/- made under Rule 8D(2)(ii). However, he sustained the disallowance of Rs.2,64,195/- made under Rule 8D(2)(iii). Aggrieved, the assessee is in appeal before the Tribunal.
Before us, Ld. Counsel for the assessee at the outset placed on record an application for admission of additional evidence under Rule 29 of the IT(AT) Rules, 1963 in respect of addition made u/s. 41(1) of the Act. Ld. Counsel submitted that the documents in the form of additional evidence goes to the root of the matter which could not be submitted earlier before the authorities below owing to certain events which occurred after the passing of the order by Ld. CIT(A). He thus, requested for admission of additional evidence under rule 29 of the ITAT Rules. In respect of disallowance u/s. 14A of the Act read with Rule 8D(2)(iii), Ld. Counsel reiterated the submissions made before the authorities below. He pointed out that the moot point under consideration is in respect of recording of satisfaction by the Ld. AO having regard to the accounts of the assessee as placed before him. Before us, Ld. Counsel for the assessee reiterated the factual position narrated above
4 ITA No.386/PAN/2018 M/s. Hardesh Ores Pvt. Ltd. A.Y: 2012-13 5.1. He submitted that it is only after the AO has recorded his dissatisfaction as regards the correctness of the claim of the assessee that the provisions of section 14A read with Rule 8D could be invoked.
5.2. He further referred to the decision of Hon’ble jurisdictional High Court of Bombay, Panaji Bench in the case of CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (2020) 429 ITR 358 (Bom.). Ld. Counsel for the assessee referred to the substantial question of law dealt by the Hon’ble jurisdictional High Court of Bombay, according to which the issue was “Is the tribunal right in deleting the additions made by the AO u/s. 14A of the Act read with Rule 8D of the Income Tax rules?” Hon’ble Bombay High Court answered this substantial question of law in favour of the assessee, relevant extract of which are reproduced as under:
“11. As the record reveals, the assessee received dividend income of Rs. 13,85,03,376. It was exempted under the Income-tax Act. The assessee claimed that it did not incur any expenditure to earn that dividend. It is said to have invested surplus funds through the bankers and other financial institutions. The mutual fund officials used to come to the assessee's doorstep to fill up the forms and to do all other things necessary in that regard. The assessee only issued the Cheques. The Assessing Officer disagreed. He reckoned that without devoting time and without analysing the nature of the investment, the assessee could not have invested in the mutual funds. The Assessing Officer took the view that section 14A clearly applied to the assessee's case. The Assessing Officer accordingly invoked rule 8D and computed the disallowance at 0.5 per cent. of Rs.381,67,09,731, the average investment. Then, he disallowed Rs. 1,90,83,548. The assessee appealed to the Commissioner of Income-tax (Appeals). Indeed, the appellate authority confirmed the Assessing Officer's disallowance. Of course, the Tribunal reversed it. Let us see whether the Tribunal's view is sustainable. …… 19. Here, on facts, the Tribunal noted that the. Assessing Officer only discussed the provisions of section 14A(1) but has not justified how the expenditure the assessee incurred during the relevant year related to the income not forming part of its total income. The Assessing Officer, according to the Tribunal, straightaway applied rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax exempt income. Only then would a disallowance have to be effected. This court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section 14A and rule 80 is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that before rejecting the disallowance computed by the assessee, the Assessing Officer must give a clear finding with reference to
5 ITA No.386/PAN/2018 M/s. Hardesh Ores Pvt. Ltd. A.Y: 2012-13 the assessee’s accounts as to how the other expenditure claimed by the assessee out of the non-exempt income is related to the exempt income. 21. So, we see no valid reasons to upset the Tribunal’s well reasoned judgment on this substantial question of law.”
On the other hand, Ld. Sr. DR placed reliance on the orders of the authorities below.
We have heard the rival contentions and gone through the facts and circumstances of the case and the judicial precedents referred before us. We note that assessee has earned exempt income during the year as stated above. It is also a fact that assessee has not made any disallowance u/s. 14A of the Act suo moto since it claims that it has not incurred any expenditure relating to earning of said exempt income. We also note that in the case before us, it is a matter of fact borne out from the records that there is a failure on the part of the AO to record his satisfaction having regards to the accounts of the assessee, as were placed before him, and that it was not possible on his part to generate the requisite satisfaction with regard to the correctness of the assessee’s claim that no part of expenditure pertaining to its business could be attributed to earning of exempt income. This state of affairs qua the dissatisfaction as regards the claim of the assessee remained the same before the Ld. CIT(A).
7.1. In the light of the judicial precedents referred to above by the Ld. Counsel for the assessee, we note that there was an innate obligation cast upon both the Ld. AO and the Ld. CIT(A) to have recorded requisite satisfaction that having regard to the accounts of the assessee, as placed before them, it was not possible to generate the requisite satisfaction with regard to the correctness of the aforesaid claim of the assessee.
6 ITA No.386/PAN/2018 M/s. Hardesh Ores Pvt. Ltd. A.Y: 2012-13 7.2. It is also an important fact to note that Ld. CIT(A) has deleted the addition made by the AO under rule 8D(2)(ii).
Accordingly, in the backdrop of aforesaid observations and judicial precedents, we are of considered view that there is a clear lapse on the part of the authorities below in validly assuming jurisdiction for dislodging the assessee’s claim that no disallowance u/s. 14A of the Act was called for in this case. Therefore, the disallowance of Rs. 2,64,195/- computed by the Ld. AO under Rule 8D(2)(iii) read with section 14A of the Act is directed to be deleted. We thus, set aside the order of Ld. CIT(A) and delete the disallowance of Rs.2,64,195/-. Grounds of appeal of the assessee are thus, allowed.
In respect of addition made u/s. 41(1) of the Act towards cessation of liability amounting to Rs.7,37,650/-, considering the application for admission of additional evidence made under rule 29 of the IT(AT) Rules, we remit the matter back to the file of Ld. AO for the limited purpose of verification of the additional evidence adduced before us through the said application and direct the Ld. AO to consider the same for his meritorious consideration and arrive at conclusion in accordance with the provisions of law. Needless to say, assessee may be given reasonable opportunity of being heard who is also directed to be diligent in attending the assessment proceeding for its expeditious disposal. Accordingly, this ground of appeal is allowed for statistical purposes.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced under Rule 34(4) of the IT(AT) rules, 1963 on 02.09.2022. Sd/- Sd/- (CHANDRA MOHAN GARG) (GIRISH AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 02.09.2022 JD, Sr. P.S.
7 ITA No.386/PAN/2018 M/s. Hardesh Ores Pvt. Ltd. A.Y: 2012-13
Copy to: 1. The Appellant: 2. The Respondent:. 3. CIT(A), Panaji-1, Panaji 4. The CIT- Panaji. 5. The DR, ITAT, Panaji Bench, Goa //True Copy// [ By Order Senior Private Secretary