AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2018 (4) TMI 1770
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....um of Rs. 24,69,760/- being disallowance U/s. 14A on the basis of proportion of exempt income (other than Long Term Capital Gain) to total exempt income. Modified Ground of appeal No.-1(a) - The Learned CIT(A) ought to have held that no disallowance u/s.14A (2) r.w.rule 8D can be sustained in the absence of a specific recording of satisfaction by the A. a., based on cogent material and having regard to the accounts of the assessee, to the effect that the claim of the assessee is not correct." Modified Grounds : "On the facts and circumstances of the case and in law the learned 'CIT (A)' erred in : 1.a) Disallowing a sum of Rs. 24,69,760/- being disallowance U/s. 14A on the basis of proportion of exempt income (other than Long Term Capital Gain) to total exempt income. 2.a) not granting set off of the amount offered towards contingency of Rs. 60,00,000/- against disallowance u/s.14A. He erred in confirming that contingency of Rs. 60,00,000/- was correctly added by the learned A.O. even though the learned A.O. had not identified any further disallowance. ....
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....sp; 5.From the above grounds/modified grounds, the issues which require adjudication includes (1) if the disallowance made by the AO u/s.14A r.w. Rule 8D(2) of the I.T. Rules, 1962 is sustainable when there is no valid satisfaction for invoking the said provisions of the Act/Rules, (2) when the said disallowance u/s.14A of the Act is unsustainable in law, should there be any requirement of granting set off of the said disallowance against the buffer disclosure of Rs. 60 lakhs offered by the assessee during search and seizure ; (3) in the absence of any clear omissions or commissions or discrepancies made out by the AO, if the said sum of buffer disclosure of Rs. 60 lakhs could be reduced from the returned income by that amount of Rs. 60 lakhs and (4) if the claim of Gratuity is allowable if the scheme is not approved by the competent authority. We shall take up the issue-wise adjudication in the following paragraphs. 6.First issue : If the disallowance made by the AO u/s.14A r.w. Rule 8D(2) of the I.T. Rules, 1962 is sustainable when there is no satisfaction invoking the provisions of the Act/Rules ? Bringing our attention to the assessment order in....
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.... It is difficult to accept the proposition that all the tax free income has been earned without incurring these expenditures and these expenditure were incurred only for earning taxable income. Therefore, I am satisfied that the assessee has not made adequate disallowance as mandated u/s.14A of the I.T. Act and therefore, the case of the assessee is a fit case for computation of the said disallowance u/s.14A of the I.T. Act." 28.Further, Ld. AR for the assessee submitted that the above recorded satisfaction , is extremely general and it falls short of the legal requirement as provided in the judgement of Hon'ble Apex Court in the case of Godrej and Boyce Manufacturing Company Ltd vs. DCIT 394 ITR 448 (SC). Contents of Para No.37 of the said judgment is relied heavily and prayed for deletion of the addition made by the AO invoking the provisions of section 14A of the Act. 29.Ld. DR for the Revenue relied on the orders of the AO/CIT(A). 30.We heard both the parties on the issue relating to the issue of recording of satisfaction and perused the above extracted satisfaction recorded by the AO on this issue. We fi....
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.... to the Note filed by the assessee on expenditure disallowable under section 14A of the Act. The Assessing Officer thereafter, takes note of the contents of said explanation and observed as under:- "I have gone through the submissions made by the assessee. It is observed that apart from investments in the overseas subsidiaries (where there is no tax-free income since the dividend is also taxable) the investments made by the assessee are in mutual funds. The entire investment in mutual fund is in non-equity scheme. In respect of investment in mutual funds, except for growth funds, the company receives tax free dividend. The amount of dividend received by the company is substantial. This is a clear case for application of Rule 8D. Hence, the contention of the assessee cannot be accepted. The disallowance u/s 14A is required to be made by applying Rule 8D. As per the working of disallowance u/s 14A as per Rule 8D, the amount of disallowance comes to Rs. 5,68,32,323/-. The assessee has already disallowed Rs. 50,00,000/- in the computation of income." 35.The requirement of section 14(2) of the Ac....
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....count of the assessee and also having regard to the correctness of the claim of the assessee. In that sense of the matter, the satisfaction recorded by the AO is extremely generic and which falls short of the legal requirement for assuming jurisdiction u/s.14A of the Act. Considering the above position, we are of the view that the AO failed to record the sustainable satisfaction before invoking the provisions of section 14A of the Act. Therefore, the disallowance made by the AO is unsustainable technically. Accordingly, this part of the argument of Ground No.1 is allowed. We find adjudication of the other issues of the said ground relating to merits becomes an academic exercise. Therefore, the same are dismissed as academic." Following the same parity of reasoning, we allow the first issue in favour of the assessee and direct the AO to delete the disallowance of Rs. 24,69,760/- made by the AO u/s.14A of the Act. 9.Second issue : when the said disallowance u/s.14A of the Act is unsustainable on the ground of invalid satisfaction, should there be any requirement of granting set off of the said disallo....
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....to the notice of the assessee. Assessee did not raise any issue before the AO. However, before the CIT(A), assessee submits that said contingency of Rs. 1 crore should not be taxed and the same is required to be excluded from the undisclosed income offered by the assessee. CIT(A) rejected the said demand of the assessee as per the discussion given in para 13.2 of his order. Thus, CIT(A) decided this issue against the assessee. 29.To sum up his finding, in the said para, the CIT(A) held that the claim made by the assessee that such income of Rs. 1 crore may be excluded from the total income assessed by the assessee as no discrepancies were found during the assessment proceedings, cannot be accepted as the said additional income was offered voluntarily in the return of income. If accepted, the assessed income shall be lower than the returned income. The alternative claim of the assessee for set off of such contingencies against other disallowances u/s.14A of the Act made by the AO was also rejected despite the existence of the favourable decision of the Tribunal in the group cases of the assessee (M/s. Adurjee Brot....
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....Rs. 75 lakhs. Further, in the said decision, the income assessed never fell below the returned income. However, there is no discussion or decision of the Tribunal on the issue of reduction of the disclosed returned income. Therefore, we shall proceed to analyse the legal scope on this issue. Legal scope on the sanctity of returned income - if the assessed income be less than the returned income. 32.On this issue, Ld. Counsel for the assessee submitted that it is a settled legal proposition in favour of the Assessee and against the Revenue. For this, Ld counsel relied on various binding judgments of Apex Courts and others. We shall now proceed to analyse each of them here as under. 33.To start with, we will take up the Apex Court's judgment in the case of Commissioner of Income-tax v. Shelly Products [2003] 261 ITR 367 (SC), the Apex Court held in favour of refunding of the excess taxes paid (of advance tax as well as self-assessment tax) out of abundant caution or owing to error or non taxability. Held portion of this judgment is extracted as under : "However, failure or inability of....
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....ct, the jurisdiction had been exercised by the Central Board of Direct Taxes by issuing the circular and, therefore, the order of the Assessing Officer was without jurisdiction. The court had to exercise its jurisdiction under article 226. The order of the Assessing Officer to the extent it stated that the total income would be the returned income, was to be set aside, with a direction to the Assessing Officer to make assessment without keeping in mind the Central Board of Direct Taxes Circular dated 31-10-1989." 35.The same Hon'ble Gujarat High Court again in the case of CIT Vs. Milton Laminates Ltd. vide Tax Appeal No.1022 of 2010 dated 24-012012 held the issue in favour of the Assessee and against the Revenue. Revenue took the issue to the Hon'ble High Court on the issue, if the Tribunal's direction to the AO to allow complete effect to the order of the CIT(A) without restricting the income to the returned income. In this case, after giving effect to the order of the CIT(A), the income assessed has fallen below the returned income of the assessee. The Hon'ble High Court upheld the order of the Tribunal. Relevant lines from this....
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.... Ld. Counsel for the assessee filed written note on 'Contingency issue' stating that the return of income filed by the assessee constitutes a notional undisclosed income as part of the total income. The same should not become an impediment for assessing the income of the assessee based on the principles relating to the Real Income theory. According to him, the income offered by the assessee in the return of income is not sacrosanct and what matters is the AO's finding on the assessed income of the assessee. The assessed income can be lower than the returned income. Relying on the decision of Nagpur Bench of the Tribunal in the case of DCIT Vs. Sanmukhdas Wadhwani 85 ITD 734, Shri R.S. Abhyankar, Ld. Counsel for the assessee submitted that where the assessee himself returned his undisclosed income on adhoc basis without giving any break-up for the same and when the subsequent working submitted by him reveals that the undisclosed income actually assessable in the hands of the assessee is lower than the returned income, the same has to be assessed at such lower income based on the concept of Real Income. Only condition specified in the said decision relat....
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.... case of CIT Vs. Bharat General Insurance Company Ltd. 81 ITR 303 wherein it is held that when the assessee declares income in the return, the AO cannot assess merely on that basis and has to consider its liability in the light of other circumstances de hors the admission made by him in the return. Ld. Counsel for the assessee also referred to the other judgment in the case of Ester Industries Ltd. Vs. CIT 316 ITR 260 (Delhi). According to this judgment, suo moto disallowance leading to increased returned income can always be verified by the AO in the assessment and decrease the returned income, even if it falls below the amount of total income returned by the assessee in the return of income. In this case, the Hon'ble High Court restored the matter for such verification. Relevant portion of the judgment are extracted as under : "11. According to us, the Tribunal ought to have examined the issue as to whether the fact that assessee had made an admission with respect to an addition / disallowance in its original return or in the revised return would ipso facto bar the assessee from claiming an expense or disputing an addition if it is otherwise....
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....al scope of the principle relating to the lower figure of assessed income qua the returned income. Further, we have heard the parties and perused the written submissions of the Ld. Counsel for the assessee. Further also, we perused the reasoning given by the CIT(A) while dismissing the claim of the assessee. We find the contents of Para No.12 of his order are relevant. For the sake of completeness of this order, we proceed to extract Para No.13.2 of the CIT(A) : "13.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . To sum up, the fresh claim made by the appellant during the present proceedings that such income of Rs. 1,00,00,000/- may be excluded from the total income assessed by the Assessing Officer as no discrepancies were found during the assessment proceedings cannot be accepted as the additional income was offered voluntarily in the return of income. The alternate claim of the appellant for set off of such contingencies against other statutory disallowance made by the AO also cannot be accepted as discussed above. Ground of appeal No.8 stands rejected." The CIT(A) denied the claim of the assessee ignori....
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....lowance u/s.14A is unsustainable in this assessment as the same does not have strength of any incriminating material. In other words, the AO made an unsustainable addition u/s.14A of the Act and taxed the said amount of Rs. 1 crore-contingency income without making adjustment the said amount of Rs. 1 crore. In any case, we deleted said disallowance u/s.14A of the Act. Therefore, the question of adjustment is only an academic exercise. Ignoring the same, we now have to decide that the said amount of Rs. 1 crore is assessable to tax in the light of the above legal scope relating to this addition. 41.The AO has not brought any issue or facts relating to the undisclosed income specific to the said sum of Rs. 1 crore. In such circumstances, we are of the opinion that the decision of the Nagpur Bench of the Tribunal in the case of DCIT Vs. Sanmukhdas Wadhwani (supra) becomes relevant to the facts of the present case. As such, we proceed to dismiss the voluntary-centric reasoning given by the CIT(A) for denying the claim of the assessee regarding the issue of taxation of the said amount of Rs. 1 crore. Considering the above, ....