TaxTMI 
TaxTMI 
TaxTMI 
2019 (7) TMI 1267
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....Commissioner of Income Tax (Appeals)-2, Kanpur has erred in law as well as on facts and circumstances of the case in deleting the addition of Rs. 9,57,30,050/- made on account of wrong claim of additional depreciation without appreciating the facts that plant and machinery was already used in the preceding financial year though for a period of less than 180 days, therefore, not eligible for additional depreciation. 3. That the Commissioner of Income Tax (Appeals)-2, Kanpur has erred in law as well as on facts and circumstances of the case in deleting the addition of Rs. 2,22,870/- made u/s 14A read with Rule 8D(ii)/8D(iii) without considering the judgment by the Hon'ble High Court of Bombay in the case of Godrej & Boyce reported at 328 ITR 81. 4. That the order of Commissioner of Income Tax (Appeals)- II, Kanpur being erroneous in law and on facts be vacated and the order dated 16.08.2016 by the Assessing Officer u/s 143(3) of the Income tax Act 1961, be restored. 2. Apropos ground Nos.1 & 2, relating to additional depreciation, the brief facts are that the assessee-company claimed additional depreciation of Rs. 9,57,30,050/- relating to Plant & Machinery put to use for le....
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....5 of its order (copy placed at pages 130 to 152 of the paper book), dealt with the issue relating to additional depreciation claimed under section 32(1)(ii)(a) of the Act on new plant & machinery and allowed the appeal of the assessee on this issue, observing as below:- "5. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below. We noted that this is a case where the assessee has purchased and installed the new plant & machinery during the preceding assessment year i.e. assessment year 2011-12. The said new plant & machinery was purchased and installed in the preceding assessment year after 30th September 2010 and therefore, in the preceding assessment year the assessee was allowed 50% of the additional depreciation allowable @20% in respect of the new plant & machinery which has been put to use during the previous assessment year for less than 180 days i.e. in the preceding assessment year the assessee was allowed additional depreciation @10% in respect of the new plant & machinery. During the impugned assessment year the assessee claimed balance 50% of 20% i.e. @10% additional depreciation on these plant & machinery....
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...., wherein the facts, mutatis mutandis, were the same, and which order of the Tribunal has not been to shown to have been upset, or even stayed, on further appeal, we find no merit in the grounds raised by the Revenue. Accordingly, ground Nos.1 & 2 of the appeal of the Revenue are rejected. 8. As regards ground No.3, relating to deletion of addition of Rs. 2,22,870/- made under section 14A of the Act read with Rule 8D(ii)/8D(iii) of the Rules, the AO noticed from the balance sheet filed by the assessee that the assessee had made an investment of Rs. 60.03 lakhs as on 31.3.2013 as against Rs. 68.89 lakhs in the immediately preceding year. The A.O also noticed that the assessee had incurred expenditure by way of interest against borrowed fund. The A.O observed that there was a mixed fund flow interest expenditure including expenses directly attributable to earn exempt income, but no disallowance under section 14A of the Act has been made. He, therefore, issued a show cause letter dated 22/7/2016 requiring the assessee to explain as to why disallowance under section 14A of the Act read with rule 8D of the Rules should not be made. In response, the assessee vide reply dated 20/10/2015 ....
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....should be made. To this effect, the assessee has also relied upon some judicial pronouncements and contended that during the year under consideration it has not earned any exempt income, It being so, had the AO was not in agreement with the submission of the appellant he could have enquired/probed and ought to have established the factum of incurring expenditure in this respect by the appellant. However, he failed to do so. The AO did not record any specific satisfaction to the effect that the claim of the assessee is not correct or tic the assessee actually incurred some expenditure to earn any exempt income. He has mechanically proceeded to apply the provisions of Section 14A read with Rule 8D without rejecting the claimed of the assessee. I find that in the case of the appellant, Hon'ble ITAT, Lucknow in ITA No.419/2016 for assessment year 2012-13 directed for deletion of addition made U/s. 14A vide paras 8.3 of its order." 11. Aggrieved, the Revenue is in appeal before us. The ld. D.R. submitted before us that the ld. CIT(A) was not justified to delete the addition of Rs. 2,22,870/- made under section 14A read with rule 8D(ii)/8D(iii). He, therefore, prayed that the order ....
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.... "(2) (a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Provided that no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F." 8.1 This Tribunal in the case of DCIT vs. M/s Shri Laksyhmi Cotsyn Ltd. in I.T.A. No.509/Lkw/2015 vide its order dated 29/07/2016, on the interpretation of section 14A(2) vis-à-vis Rule 8D, under para 6 onwards held as under: "6. We have heard both the parties a....
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....e Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A) & Tribunal does not give rise to any substantial question of law. Hence, the deletion of the disallowance of Rs. 2,03,752/- made by the Assessing Officer was in order." In the light of the aforesaid decision of the Hon'ble Jurisdictional High Court reliance placed by the revenue on the aforesaid Coordinate Bench decision is of no assistance to them because the order of the co-ordinate bench is no longer good law and so the contention of Revenue based on the said order of Tribunal is repelled. 8. Coming to the next reasoning given by the A.O. relying on a case of Cha....
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.... provisions of the IT Act in this regard. The issue involved before us relate to the disallowance made by the AO by applying the provisions of sec.14A of the IT Act read with Rule 8D of the IT Rules. Sec.14A was inserted by the Finance Act, 2001 w.e.f. 1.4.1962. Originally this sec. provides that in computing the total income of the assessee no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act. Subsequently, by Finance Act, 2002 with retrospective effect from 11/5/2001 proviso was added which states that this sec. shall not empower the AO either to reassess or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee for any assessment year beginning on or before 1/4/2001. With effect from 1/4/2007 by Finance Act, 2006 sub-sec. (2) empowers the AO to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with the method as may be prescribed. Such power is to be exercised if the AO having regard to the accounts of the ass....
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.... was of the opinion, that the assessee has worked out the administrative expenditure and had not considered all the administrative expenditure. Both the parties before us vehemently relied on the decision of Godrej Boyce Mfg Co. Ltd. Vs DCIT 328 ITR 81 (Mum). 15. We have gone through this decision and we noted that in this case, the assessee claimed exemption in respect of dividend income of 34.34 crores u/s 10(33). The AO issued notices for disallowance of interest u/s 14A of the IT Act. The explanation of the assessee was that (i) 95% of the shares were bonus shares for which no cost was incurred; (ii) No investment in shares was made in the current year and no disallowance was made in earlier years and (iii) There were sufficient interest free funds available in the form of share capital, reserves etc. which were more than investment in shares. The AO was not satisfied with the explanation of the assessee and he made disallowance u/s 14A on prorata basis. The CIT(A) following his orders for earlier years, accepted the appeal of the assessee. The Tribunal following the decision of the Special Bench in the case of ITO Vs Daga Capital Management (P) Ltd 117 ITD 169 (SB) restore....
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....t and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the AO not being so satisfied that recourse to the prescribed method is mandated by law (pages 31-32). 6. In the event that the AO is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion (page-79). 7. The effect of sec.14A is to widen the theory of the apportionment of expenditure (page 49). 8. The expression 'expenditure incurred; in Sec.14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which....
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....of sub-sec. (1). Therefore, it is necessary for the AO first to ascertain whether there is proximate connection between the expenditure incurred and the income not forming part of the total income. If such proximate connection is established with the exempt income, the AO would be justified in applying the provisions of sub-sec (2) & (3) of sec.14A and Rule 8D of the IT Act, 1961. The expenditure incurred u/s 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income u/s 10 in the year under consideration in view of the decision of Special Bench in the case of Cheminvest Ltd. 124 TTJ 577 (Del)(SB). 17. The basic principle of taxation is to tax the net income. On the same analogy, the exemption is also to be allowed on net basis i.e. gross receipts minus related expenses. Therefore, if any expenditure is directly related to exempted income, it cannot be allowed to be set off against taxable profit. On the sa....
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.... contended and tried to build up his case by substituting the reasons given by the CIT(Appeal) in place of the AO, but failed to bring any cogent material or evidence in this regard which may prove that the other expenses claimed by the Revenue for apportionment had proximate connection with the earning of the dividend income. In our opinion until and unless this is proved or established by the revenue, the assessing officer does not have any power to reject the accounts of the assessee and take the shelter of Rule 8D for computing the disallowance out of the exempt income. We are not at all convinced with the submission of the Ld. DR relying on the decision of CIT(Appeal) in respect of Explanation bb to sec. 80HHC that 10% of the receipts under the sources mentioned therein are deemed to be the expenditure. This in our opinion will strengthen the case of the assessee as Explanation bb to sec. 80HHC does not recognize amount of the investment made in other receipt to be the basis of computing the expenditure being incurred for the earning of that income. Similar views have been taken by Hon'ble Tribunal in the following decisions also. In the case of DCIT Vs. Jindal Photo Ltd. he....
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....t is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee's calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the Assessing Officer is a pre-requisite to invoke the provisions of Rule 8D of the Rules. The Learned CIT(A), therefore, erred in partially approving the action of the Assessing Officer." In the case of Avshesh Mercantile P. Ltd. Vs. DCIT in I.T.A.T. Mumbai Bench (I.T. Act No.5779/Mum/2006 & 208/Mum/2009) it was held as follows: "At the time of hearing, the contention raised by the learned DR in this regard is that the appeal of the Revenue on the issue having been dismissed by the Hon'ble Bombay High Court merely observing that no question arises, it cannot be treated as a decision rendered by the Hon'ble High Court on the merit of the issue which is binding on this Tribunal. We are unable to accept this contention of the learned DR. It is well settled proposition of judicial precedents that is appeal the Hon'ble High Court considers facts pertaining to the issue and gives approval to the decision....
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....s as well as all the material facts relevant thereto are similar to that of the case of Delite Enterprise (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the AO and confirmed by the learned CIT(A) on account of premium paid by the assessees on redemption of premium notes (OCPN) by invoking the provisions of section 14A of the Act. As regards the case laws cited by the Learned DR, it is observed that in none of these cases, the facts involved were similar to the case of the present assessees in as much as the investment made therein was not found to be capable of earning taxable as well as exempt income which was actually not earned by the assessee in the relevant period as are the facts of the present case or that of the case of Delite Enterprise (supra) decided by the Hon'ble Bombay High Court. Accordingly, we decide the common issue involved in all these appeals in favour of the assessees following the decision of jurisdictional High Court in the case of Delite Enterprises (supra) and allow the appeals of all the assessees." 18. We have also gone through the decision relied upon by the learned DR also.....