SHIRDI STEEL RE-ROLLERS PRIVATE LIMITED,CUNCOLIM vs. THE INCOME TAX OFFICER, WARD - 5, MARGAO

O R D E R

PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:

Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 4. Brief facts of the case are that the assessee is engaged in the business of manufacturing of iron and steel products. It filed its return of income on 28.09.2013 reporting total income of Rs. 2,93,84,260/-. Statutory notices were issued which were complied with by the assessee by filing and submitting the requisite details. Assessment was completed by the Ld. AO u/s 143(3) r.w.s 92CA of the Act wherein the following four additions/disallowances were made: i) Cessation of Liability u/s 41(1) Rs. 8,55,400/- ii) disallowance u/s 37 transportation charges Rs. 12,000/- capitalized iii) Disallowance u/s 37 donation debited to profit Rs. 44,550/- and loss account iv) Disallowance u/s 14A read with Rule 8D(2)(iii) Rs. 33,844/-

Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 payment was withheld by the assessee. Finally the assessee wrote off the said amount of Rs. 8,55, 400/- due to the supplier in the FY 2016- 17 relevant to AY 2017-18 for which relevant ledger extract and the income tax return acknowledgment for AY 2017-18 are placed in the paper book. Ld. Counsel thus submitted that once the assessee himself has written off the amount in AY 2017-18 and offered it to tax the addition made by the Ld. AO in the year under consideration leads to taxing the said amount twice and therefore the addition so made u/s 41(1) of the Act by the Ld. AO ought to be deleted. He further submitted that there was no write off in the current year under consideration and the unilateral act by the Ld. AO is not warranted. ii) In respect of second issue relating to disallowance of Rs. 12,000/- towards transportation charges capitalized it was submitted that these charges were incurred by the assessee towards storage racks purchased from Presto Systems which has been duly capitalized to the asset under office equipment and forms part of the gross block of assets in the financial statement of the assessee. Relevant voucher and debit note are placed in the paper book. Ld. Counsel thus submitted that the assessee has never claimed this amount as an expenses in its profit and loss account and therefore the disallowance made by the Ld. AO is on absolute misconception of the facts and therefore ought to be deleted. iii) In respect of third issue which relates to the disallowance made in respect of donation debited in profit and loss account for Rs. 44,550/-, Ld. Counsel referred to the income tax return form placed in the paper book to demonstrate that the assessee had suo-moto disallowed this amount in its return and never claimed it as an allowable expenditure. Accordingly Ld. Counsel submitted that this disallowance also ought to be deleted.

Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 iv) In respect of fourth disallowance made u/s 14A of the Act read with Rule 8D(2)(iii) of Rs. 33,844/-, Ld. Counsel submitted that assessee made investment in equity shares of listed and private companies out of its own funds. He stated that the assessee had interest free capital, reserves and surplus of Rs. 33,81,80,474/- as on 31.03.2013 for which reference was made to the financial statements placed on record in the paper book. Ld. Counsel also claimed that assessee had not incurred any expenditure to earn the exempt income and Ld. AO has not recorded any dissatisfaction having regard to the books of accounts of the assessee.

Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 for the purpose of making a disallowance without complying with the requirements of Section 14A to record a satisfaction having regard to the books of account of the assessee. Ld. AO has not brought on record the proximate relationship between the expenditure and the tax exempt income. We note that application of Section 14A read with Rule 8D(2) is not automatic and it is mandatory on the part of Ld. AO to record an objective satisfaction before resorting to computation of disallowance under rule 8D(2). Accordingly, we direct the Ld. AO to delete the disallowance of Rs. 33,844/- made by applying Rule 8D(2)(iii). While directing so, we find force from the decision of Hon’ble Jurisdictional High Court of Bombay, Panaji Bench in the case of CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) (2020) 429 ITR 358 (Bom.) wherein it has held 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 Shirdi Steel Re-rollers Pvt. Ltd. A.Y. 2013-14 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.

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. SB, Sr.PS. Copy to:

1. 1. The Appellant: Shirdi Steel Re-rollers Pvt. Ltd.

2. The Respondent: ITO, Ward-5, Margao 3. The CIT, Concerned, 4. The CIT (A) Concerned, 5. The DR Concerned Bench