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Income Tax Appellate Tribunal, DELHI BENCH ‘H’: NEW DELHI
ORDER PER M. BALAGANESH AM: 1. Both the appeals by Assessee are filed against the separate orders of Learned Commissioner of Income Tax (Appeals)-30,
New Delhi [Ld. CIT(A)”, for short], dated 30/04/2019 and HEG Ltd vs. DCIT 28/06/2019 for Assessment Years 2010-11 and 2011-12 respectively.
Grounds taken in these appeals are as under:
“1 That on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) (hereinafter ‘Ld. CIT(A)’) erred on facts and in law by upholding the assessment made by the Ld. Assessing Officer (hereinafter ‘Ld. AO’) by assessing the total income of the Appellant at Rs. 213,37,89,875/- as against the income of Rs. 213,28,15,002/- claimed by the Appellant.
2. That on the facts and in the circumstances of the case, the Ld. C1T(A) erred on facts and in law in upholding the disallowance of Rs. 9,74,876/- made by the Ld. AO under section 14A of the Income-tax Act, 1961 (hereinafter ‘the Act’) as expenditure incurred in earning exempt dividend income.
2.1. I hat on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby expenditure has been disallowed by a mechanical application of rule 8D of the Income-tax Rules, 1962 (hereinafter ‘the Rules’), without any proper recording of satisfaction as is required under section 14A of the Act. 2.2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby expenditure has been disallowed by a wrong application of Rule 8D(2) of the Rules and without following the principles laid down in various judicial precedents.
2.3. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby the order is passed without adhering to the instructions given by the Hon’ble Indore Bench of the ITAT vide the order dated 14th July 2017 in the Appellant’s own case in & 584/Ind/2013 for A.Y.s 2010-11 and 2011-12. 2.4. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO without appreciating that the Ld. AO has incorrectly applied CBDT Circular No. 05/2014 dated 11th February 201 1.
HEG Ltd vs. DCIT 2.5. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby notional expenditure has been disallowed on the basis of surmises and conjectures.
That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby the amount of tax as well as the refund due to the Appellant has been computed incorrectly.
4. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby the Ld. AO has incorrectly imposed interest under section 234C of the Act.
5. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby the Ld. AO has incorrectly imposed interest under section 220(2) of the Act.
6. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby the Ld. AO has incorrectly computed interest under section 244A of the Act.
7. That the Appellant craves leave to add to, amend and/or alter, the grounds of appeal and also adduce evidence at or before the date of hearing” for AY 2011-12
“1 That on the facts and in the circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) - 30, Delhi (hereinafter ‘Ld. CIT(A)’) erred on facts and in law by upholding the assessment made by the Ld. Assessing Officer (hereinafter ‘Ld. AO’) by assessing the total income of the Appellant at Rs.135,74,80,660/- as against the income of Rs.135,32,58,870/- claimed by the Appellant.
2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the disallowance of Rs. 42,21,790/- made by the Ld. AO under section 14A of the Income-tax Act, 1961 (hereinafter ‘the Act’) as expenditure incurred in earning exempt dividend income.
2.1 That on the facts and in the circumstances of the case, the Ld. C1T(A) erred on facts and in law in upholding the order of the Ld. AO whereby expenditure has been disallowed by a mechanical application of HEG Ltd vs. DCIT rule 8D of the Income-tax Rules, 1962 (hereinafter ‘the Rules’), without any proper recording of satisfaction as is required under section 14A of the Act.
2.2 That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby expenditure has been disallowed by a wrong application of Rule 8D(2) of the Rules and without following the principles laid down in various judicial precedents.
2.3 That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby the order is passed without adhering to the instructions given by the Hon’ble Indore Bench of the ITAT vide the order dated 14th July 2017 in the Appellant’s own case in & 584/Ind/2013 for A.Y.s 2010-11 and 2011-12. 2.4 That on the facts and in the circumstances of the case, the Ld. C'IT(A) erred on facts and in law in upholding the order of the Ld. AO without appreciating that the Ld. AO has incorrectly applied CBDT Circular No. 05/2014 dated 11th February 2011. 2.5 That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby notional expenditure has been disallowed on the basis of surmises and conjectures.
3. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in upholding the order of the Ld. AO whereby the amount of tax as well as the refund due to the Appellant has been computed incorrectly. That the Appellant craves leave to add to, amend and/or alter, the grounds of appeal and also adduce evidence at or before the date of hearing.”
3. The only identical issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in upholding the disallowance made u/s 14A of the Act in the facts and circumstances of the case.
We have heard the rival submissions and perused the materials available on record. The assessee is engaged in the HEG Ltd vs. DCIT business of manufacturing, trading and export of graphite electrode. The company is having its production facility and operational setup at multiple locations. The return of income for AY 2010-11 was filed by the assessee company u/s 139(1) of the Act on 24/09/2010 declaring a total income of Rs.213,28,15,002/-. It is not in dispute that assessee had received a sum of Rs.9,74,876/- towards dividend income, which has been claimed as exempt u/s 10 of the Act in the return of income. The assessee has not made any suo moto disallowance of expenses u/s 14A of the Act.
4.1. This is a second round of appeal before this Tribunal.
This Tribunal in the first round of proceedings in & 571/IND/2013 dated 14/07/2017 had set aside the matter to the file of the Ld. Assessing Officer (“Ld. AO”, for short) with the direction to the Ld. AO to record proper satisfaction, which is mandated in terms of section 14A (2) and 14A(3) of the Act read with Rule 8D(1) of the Income Tax Rules. We have gone through the assessment order wherein, the Ld. AO confronted with the assessee as to why disallowance of expenses could not be made u/s 14A of the Act in accordance with computation mechanism provided in Rule 8D(2) of the IT Rules. In response thereto, the assessee gave Page 5 of 9 ITA No.13/Del/2021 HEG Ltd vs. DCIT detailed submissions stating that no expenditure has been incurred by it for the purposes of earning exempt income. Accordingly, the assessee pleaded that no disallowance of expenses u/s 14A of the Act needs to be made in the instant case. The Ld. AO, however, disregarded this contention of the assessee and proceeded to directly apply the computation mechanism provided in Rule 8D(2)(iii) of the Rules and arrived at the disallowance of Rs.37,63,425/-, but restricted the said disallowance to the extent of dividend income in the sum of Rs.9,74,876/-. We find from page-3 of the assessment order that the Ld. AO had merely made general satisfaction by stating as under:
“The above submissions of the assessee have been considered but are not found acceptable because part of the common administrative expenses incurred by the assessee cannot be said as not pertaining to the earning of exempt income by the assessee and therefore the submission of the assessee that not much activity is required on earning dividend income cannot help the assessee from exonerating it from the applicability of the provisions of section 14A read with rule 8D of IT Rules. This also finds support from the CBDT Circle No. 5/2014 dated 11.02.2014 which lays down that even if no exempt income is earned during the year, disallowance u/s 14A read with rule 8D of the rules shall be applicable. I am therefore satisfied that the claim of the assessee that just because much activity is not required upon computing the disallowance under rule 8D is not acceptable. Accordingly disallowance under section 14A read with rule 8D of the rules is worked out as under:- Investment on 1st day i.e. 01.04.2009 83,54,09,000/- Investment on last day i.e. 31.03.2010 66,99,61,000/- Average investment 75,26,85,000/- Disallowance 0.5% of average investment 37,63,425/-”
HEG Ltd vs. DCIT 4.2. We find that the aforesaid satisfaction recorded by the Ld. AO cannot be construed as an objective satisfaction recorded by the Ld. AO having regard to the accounts of the assessee. The mandate of section 14A(2) and 14A(3) of the Act read with Rule 8D(1) of the Rules clearly stipulates that the Ld. AO is supposed to examine the financial statements of the assessee and from the said examination arrive at an objective satisfaction as to what expenses could be attributed towards the investment activity of the assessee.
This exercise has not been apparently done by the Ld. AO in the instant case as is evident from the manner of recording satisfaction reproduced (supra). We find that the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] reported in 402 ITR 640 (SC) had categorically held that the Ld. AO is bound to record objective satisfaction as to why the claim made by the assessee is incorrect. In the absence of mandatory objective satisfaction recorded by the Ld. AO in terms of section 14A(2)/14A(3) of the Act read with Rule 8D(1) of the IT Rules, we hold that the disallowance made u/s 14A of the Act would have no legs to stand in the eyes of law. Accordingly, we direct the AO to delete the disallowance of HEG Ltd vs. DCIT expenses u/s 14A of the Act. Accordingly, Grounds No.1, 2 and 3 raised by the assessee for AY 2010-11 are allowed.
Ground No.4 raised by the assessee for AY 2010-11 is with regard to chargeability to interest u/s 234C of the Act. The law is very well settled that interest u/s 234C of the Act could be done only on the returned income and not on the assessed income. The Ld. AO is directed accordingly.
Ground No.5 raised by the assessee is challenging the chargeability of interest u/s 220(2) of the Act. This would be consequential in nature and does not require any specific adjudication. However, AO is directed to charge interest u/s 220(2) of the Act in accordance with law.
Ground No.6 raised by the assessee is challenging the incorrect grant of interest u/s 244A of Act on refund. The Ld. AO is directed to grant interest u/s 244A of the Act in accordance with law.
The appeal of the assessee for AY 2011-12 in also contain the identical issue. Both the parties mutually agreed that the issue raised in AY 2011-12 is identical to ITA No.13/Del/2021 HEG Ltd vs. DCIT that raised in AY 2010-11. Hence, the decision rendered by us herein above for AY 2010-11 shall apply mutatis mutandis for AY 2011-12 also except which variance in figures. Accordingly, grounds raised by the assessee for AY 2011-12 are allowed.
In the result, both the appeals of the assessee are allowed.
Order pronounced in the open court on 12th April, 2023.