BISWANATH HOSIERY MILLS LTD.,KOLKATA V. ACIT, CIR. 4(2), KOLKATA

ITA 470/KOL/2024

AI Insights

The case involves Biswanath Hosiery Mills Ltd., which appealed against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance made under Section 14A read with Rule 8D of the Income Tax Act. The disallowance was related to expenses incurred in earning exempt dividend income. The Tribunal examined whether the disallowance under Section 14A should exceed the exempt income received, referencing several judicial precedents, including a significant Supreme Court decision. The Tribunal concluded that the disallowance should be limited to the amount of exempt income, which was Rs. 3,75,000, the total dividend received by the assessee.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 43630 (ITAT-KOLKATA)
• Duration Of Justice: 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2024
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 07-11-2024
• Assessment Year: 2017-2018
• Appeal Filed On: 07-03-2024
• Other Referred Cases: Maxopp Investment Ltd. vs. CIT, Pr. CIT, Patiala Vs. State Bank of Patiala, CIT (Central-1) Vs. Chettinad Logistics Pvt. Ltd., REI Agro Ltd. v. Deputy Commissioner of Income-tax, Joint Investments (P.) Ltd. v. CIT, Eveready Industries India Ltd. v. Principal Commissioner of Income-tax, ACIT v. Gold Rush Sales and Service Ltd, Godrej & Boyce Manufacturing Co. Ltd. v. DCIT, CIT v. Cheminvest Ltd., CIT v. Shivam Motors (P.) Ltd., CIT vs Delite Enterprise, CIT vs. Corrtech Energy Pvt. Ltd., CIT v. Winsome Textile Industries Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHARE YOGESH PRABHAKAR
• Assessee Lawyers: AAYUSH KEDIA
• Keywords: Set aside; Opportunity of being heard; Principle of natural justice; Search and seizure; Earning of tax free income; Rule 8D
• Section: 143(3); 142(1); 143(2); 250; 153; 14A

Judgement Text

"Hdh IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH KOLKATA BEFORE SHRI ANIKESH BANERJEE, JUDICIAL MEMBER AND SHRI RAKESH MISHRA, ACCOUNTANT MEMBER ITA No. 470/KOL/2024 Assessment Year: 2017-18 Biswanath Hosiery Mills Ltd. 39, Shree Centre, Kali Krishna agore Street, Malapara, Kolkata-700007, West Bengal Vs CIT (Appeals), Kolkata-27 110, Shanti Pally, Aaykar Bhavan Poorwa, Kolkata- 700107, West Bengal (Appellant) (Respondent) PAN: AABCB5179R Present for: Appellant by : Shri Aayush Kedia, AR Respondent by : Shri Mahare Yogesh Prabhakar, DR Date of Hearing : 07.11.2024 Date of Pronouncement : 25.11.2024 O R D E R PER RAKESH MISHRA, ACCOUNTANT MEMBER: This appeal filed by the assessee is against the order of the Ld. Commissioner of Income Tax [hereinafter referred to as “the Ld. CIT (A)”] passed u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2017-18 dated 09.01.2024, which has been passed against the assessment order u/s 143(3) of the Act, dated 16.12.2019. 2. The grounds of appeal raised by the assessee are reproduced as under: “1. That a search and seizure was conducted in the case of appellant and group entities from 21-09-2023 to 24-09-2023 and the last panchnama has been drawn on 15-11-2023. Thereafter, post search proceedings continued till 08-01-2024. Hence the appellant was sufficiently precluded from representing its case before the Ld. Commissioner of Income Tax (Appeals), Kolkata-27 [hereinafter referred to as the Ld. CIT(Appeals)]. That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) has erred Page | 2 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd in making the ex-parte order in haste without giving a reasonable opportunity of being heard to the appellant, which is against the principle of natural justice. 2. That on the facts and in the circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals), Kolkata 27, is bad in law and is not based on correct appreciation of facts of the case of the assessee. 3. That on the facts and in the circumstances of the case, the Commissioner of Income Tax (Appeals), Kolkata - 27 has erred in upholding addition of Rs. 14,94,650/- made by The Assistant Commissioner of Income Tax, Central Circle 4(2), Kolkata vide its order u/s 143(3) dated 16-12-2019. 4. That the appellant craves right to add, alter or modify any of the ground of appeal before or at any time during the course of hearing of the appeal.” 3. Brief facts of the case are that the assessee filed its original return of income for the A.Y. 2017-18 on 28.10.2017 and had declared loss of Rs.3,75,711/-. The case of the assessee was selected through Computer Assisted Scrutiny Selection (CASS) for limited scrutiny followed by validly serving notices u/s. 143(2) and 142(1) of the Act along with detailed questionnaire. Thereafter, a show cause notice dated 09.12.2019 was issued to the assessee. Ld. AO observed that during the year, the assessee had received dividend income of ₹3,75,000/-. Ld. AO asked the assessee to explain the nature and source of the alleged sum. However, the assessee failed to file any satisfactory explanation before the Ld. AO and also did not appear on various dates of hearing. Accordingly, the Ld. AO completed the assessment after making addition u/s 14A of the Act read with Rule 8D of the I.T. Rules, 1962 (in short “the Rules”) for Rs.14,94,650/- to the total income of the assessee. 4. Aggrieved with the assessment order, the assessee preferred an appeal before the ld. CIT (A), who dismissed the same by giving his finding as under: Page | 3 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd “6.2. Discussion and decision: 6.2.1. I have perused the assessment order as well as the submission of the assessee. On examining the same, it is noted that the assessee had earned dividend income of Rs.3,75,000/- against the investment of Rs.15,00,00,000/- in preferential shares of ‘LUX Industries Ltd.’ It is also observed that the said dividend income was declared exempted u/s 10(34) of the Act by the assessee. However, the assessee had suo moto disallowed Rs.5,350/- as expenditure u/s 14A of the Act. It is pertinent to mention that the assessee had only considered its investments in the scrips of 'M/s Kamala Tea Ltd.', 'M/s Bala Techno Synthetics Limited', 'M/s Sundaram Finance Limited', 'M/s Unispin India Limited' & 'M/s West Bengal Hosiery Park Ltd.' for calculating the expenditure for suo moto disallowance u/s 14A of the Act. However, none of the above investments had yielded any exempt income for the assessee in the subjected AY. Rather, the assessee had received exempted dividend income from the investments of the 'LUX Industries Ltd. ' in preferential shares of Rs. 15,00,00,000/-, for which the assessee had failed to disallow direct related expenses u/s 14A of the Act. Hence, the stand of the AO is rightly vindicated as per the assertations of Rule 8D of the Act. Reliance may be placed on the judgement of the Apex Court in the case of 'Maxopp Investment Ltd. vs. CIT 12/02/2018 SC', where the Hon'ble Apex Court clearly analyzed section 14A(1) and held that \"In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee \"in relation to income which does not form part of the total income under this Act\". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed.\" 6.2.2. Additionally, it is noteworthy to mention that the judicial pronouncement of the Apex Court relied by the assessee in the cases of 'Pr. CIT, Patiala Vs. State Bank of Patiala' is an isolated case law and the facts are not identical to the assessee. Further, the case of 'CIT (Central-1) Vs. Chettinad Logistics Pvt. Ltd.' which was relied by the Assessee in its support, is also based on non-identical issue as compared to the present case of the assessee as there was no 'dividend income' earned by the assessee in the subjected AY which was liable to be exempted. However, in the present case, a dividend income of Rs.3,75,000/- prevails. 6.2.3. Hence, in view of the above discussions, the addition of Rs.14,94,650/- made by the AO u/s 14A of the Act is confirmed. Therefore, this ground of appeal raised by the assessee is dismissed.” 5. At the time of hearing, Ld. Counsel for the assessee though raised as many as four grounds of appeal but at the outset he Page | 4 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd contended that the Ld. CIT(A) confirmed the order of the Ld. AO ex parte without affording reasonable opportunity of hearing to the assessee. Hence, he prayed before the Bench to set aside the order of the Ld. CIT(A) and restore the matter to his file for fresh adjudication. 6. On the other hand, the Ld. CIT, DR opposed this prayer of the assessee. 7. We have heard the rival contentions and perused the written submissions and the judicial pronouncements relied upon by the assessee. The Ld. AO noted that the assessee had made suo moto disallowance of Rs. 5,350/- u/s 14A of the Act. The Ld. AO further noted that the assessee had received dividend income of Rs. 3,75,000/- and had not disallowed the direct expenses relating to exempt income nor had it taken into consideration 1% of the annual average of the monthly averages of opening and closing balance of the value of the investment which yielded exempt income during the year. The disallowance was found to be unsatisfactory as the assessee had not followed Rule 8D for calculating the disallowance u/s14A of the Act. The assessee was required to furnish details and the Ld. AO noted that the assessee had made investment in Lux Industries Ltd. and the investment of Rs. 15,00,00,000/- in preference share of Lux Industries Ltd. should have been considered for calculation of 1% of the annual average of the monthly average of opening and closing balance of investment. Since the details of 1% of the annual average as required were not available, he considered the value of investment for 11 months as value on 31.03.2016 and for the 12 months as the value of investment as on 31.03.2017 and worked out the amount of 1% of annual average of Page | 5 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd monthly average of opening and closing balance on the value of investment at the value of Rs. 15,00,000/-. Besides this, the direct expenses of Rs. 17,81,22,191/- claimed under the head ‘legal and professional charges’ were also included and the total disallowance was worked out at Rs. 32,81,222.91 and as the assessee had made suo moto disallowance of Rs. 5,350/-, a sum of Rs. 32,75,872.91 was worked out as the net disallowance and a show cause notice was issued to the assessee as to why the disallowance should not be made. The assessee disputed the inclusion of legal and professional charges for calculating the disallowance and further submitted that the disallowance of Rs. 15,00,000/- calculated on the basis of 1% on the average investment should be restricted to Rs. 3,75,000/- being the amount of dividend received during the year under consideration. The Ld. AO excluded the amount related to legal and professional charges and worked out the disallowance at Rs. 14,94,650/- after excluding Rs. 5,350/- suo moto disallowed by the assessee. 7.1. Aggrieved with the assessment order, the assessee filed an appeal before the Ld. CIT(A) who confirmed the disallowance. The relevant extract of the order of the Ld. CIT(A) is as under: “6.2. Discussion and decision: 6.2.1. I have perused the assessment order as well as the submission of the assessee. On examining the same. It is noted that the assessee had earned dividend income of Rs.3.75,000/- against the investment of Rs. 15,00,00,000/- in preferential shares of LUX Industries Ltd. It is also observed that the said dividend income was declared exempted us 10(34) of the Act by the assessee. However, the assessee had suo moto disallowed Rs.5,350/- as expenditure u/s 14A of the Act. It is pertinent to mention that the assessee had only considered its investments in the scrips of 'Mis Kamala Tea Ltd., M/s Bala Techno Synthetics Limited', 'M/s Sundaram Finance Limited', 'M/s Unispin India Limited & M/s West Bengal Hosiery Park Ltd. for calculating the expenditure for suo moto Page | 6 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd disallowance u/s 14A of the Act. However, none of the above investments had yielded any exempt income for the assessee in the subjected AY. Rather, the assessee had received exempted dividend income from the investments of the 'LUX Industries Ltd. in preferential shares ofRs. 15,00,00,000/-, for which the assessee had failed to disallow direct related expenses uis 14A of the Act. Hence, the stand of the AO is rightly vindicated as per the assertations of Rule BD of the Act. Reliance may be placed on the judgement of the Apex Court in the case of 'Maxopp Investment Ltd. vs. CIT 12/02/2018 SC', where the Hon'ble Apex Court clearly analyzed section 14A(1) and held that \"In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee \"in relation to income which does not form part of the total income under this Act\". Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed.\" 6.2.2. Additionally, it is noteworthy to mention that the judicial pronouncement of the Apex Court relied by the assessee in the cases of 'Pr. CIT, Patiala Vs. State Bank of Patiala' is an isolated case law and the facts are not identical to the assessee. Further, the case of 'CIT (Central- 1) Vs. Chettinad Logistics Pvt. Ltd.' which was relied by the Assessee in its support. is also based on non-identical issue as compared to the present case of the assessee as there was no 'dividend income earned by the assessee in the subjected AY which was liable to be exempted. However, in the present case, a dividend income of Rs.3.75,000/- prevails. 6.2.3. Hence, in view of the above discussions, the addition of Rs.14,94,650/- made by the AO u/s 14A of the Act is confirmed. Therefore, this ground of appeal raised by the assessee is dismissed.” 7.2. Before us, the assessee made submissions that the assessee was precluded from representing his case before the Ld. CIT(A). It was stated that the return was filed relying on the decision of Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT. The submission in this regard is as under: “Your Honour, in the present case, the appellant filed a return on 28.10.2017. Relying on the decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. V CIT wherein it was held that Sec 14A does not apply to shares bought for strategic purposes and various other judicial decisions, the appellant believed that disallowance under Section 14A Page | 7 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd read with Rule 8D should apply only to non-strategic investments held by the appellant company. Based on this view, the appellant made a disallowance of Rs. 5,350/- in its computation of total income. The details of calculation of disallowance made by the appellant is as follows:- Particulars Amount Amount Total Non-Strategic Investments 53,50,000 Kamala Tea Ltd 2,00,000 Bala Techna Synthetics Ltd 1,00,000 Sundaram Finance Ltd 30,000 Unispin India Ltd 2,00,000 West Bengal Hosiery Ltd 5,000 1 % on above 5,350 Your honour subsequent to the filing of return by the appellant, the Hon’ble Apex Court passed a judgment on 12.02.2018 in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi, [2018] 91 taxmann.com 154 (SC), wherein the Hon’ble Apex Court held that any strategic investment should also be considered while computing the disallowance under the disallowance made under Section 14A of the Act, however, shares held as ‘stock in trade’ should not be considered while computing the disallowance under Section 14A of the Act as any exempt dividend income earned from such investment is ‘quirk of fate’. Relying on this ruling and the Hon'ble ITAT Kolkata decision in REI Agro Ltd. v. Deputy Commissioner of Income-tax [2013] 35 taxmann.com 404 (Kolkata - Trib.), the Learned Assessing Officer (AO) recalculated the disallowance under Section 14A, using the annual average of the monthly average of opening and closing balances of investments from which exempt income was earned. Accordingly, the AO made a disallowance of Rs. 15,00,000 under Section 14A, read with Rule 8D, specifically considering investments in preference shares of M/s Lux Industries Ltd., from which the appellant had earned an exempt dividend of Rs. 3,75,000. Given that the appellant had already disallowed Rs. 5,350, the AO added the remaining Rs. 14,94,650/- in the assessment order. This is despite the fact that the exempt income earned by the appellant is only Rs 3,75,000/-. The AO’s calculation was as follows: • Total of monthly average of opening and closing values of investments in preference shares of Lux Industries Limited: Rs. 180,00,00,000 • Annual average: Rs. 180,00,00,000 1 12 — Rs. 15,00,00,000 • 1% of annual average: Rs. 15,00,000 Page | 8 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd Your honour while doing so, the LD officer erred in ignoring the well- established principle of law upheld by the Hon’ble Apex Court in the case of Pr. CIT v. State Bank of Patiala [(2018) 99 taxmann.com 286 (SC)[ that disallowance under Section 14A should not exceed the exempt income earned by the assessee. Your honour the Hon’ble Apex Court has reaffirmed its above rulings in subsequent cases, including CIT v. Oil Industry Development Board, reported in [2019] 103 taxmann.com 326 (SC) & PCIT-2 v.v Caraf Builders & Constructions (P) Ltd, reported in [2019] 112 taxmann.com 322 (SC). In the Oil Industry Development Board case, the Supreme Court upheld the same principle, ruling that Section 14A disallowance cannot be invoked if no exempt income is reported in the relevant financial year whereas in Caraf Builders & Construction (P) Ltd, the Hon’ble Apex Court held that upper disallowance cannot exceed exempt income of the relevant year. This position of law was also upheld in various other rulings across multiple High Courts. At this juncture it is also important to mention that observations of the LD CIT(A)-27, Kolkata that case of PR CIT, Patiala Vs State Bank of Patiala is an isolated case law is totally incorrect. Furthermore, the Learned CIT(A)-27’s observation that the facts in Pr. CIT v. State Bank of Patiala and CIT (Central-1) are non-identical is unfounded. The principle of exempt income applies in both these cases, irrespective of the form it takes in each case.” 7.3. With regard to the finding of the Ld. CIT(A) that the decision of State Bank of Patiala (supra) was an isolated case, the assessee submitted that in several judicial decisions the principles from PCIT vs. State Bank of Patiala applied, and the submission are reproduced as under: “1. Price waterhouse Coopers (P.) Ltd v Assistant Commissioner of Income Tax, Circle-2(2), Kolkata, 127 taxmann.com 825 (Kolkata - Trib.) - Disallowance under section 14A was to be restricted to extent of exempt income earned by assessee-company during relevant year. 2. Deputy Commissioner of Income-tax v. Forum Projects (P.) Ltd, 153 taxmann.com 19 (Kolkata - Trib.) - Disallowance of expenses under section 14A read with rule 8D shall not exceed exempt income earned during relevant assessment year. Page | 9 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd 3. Joint Investments (P.) Ltd. v. CIT [59 taxmann.com 295 (Delhi HC)]: In this landmark case, the Delhi High Court ruled that disallowance under Section 14A cannot exceed the total exempt income earned by the taxpayer. The Court emphasized that applying Rule 8D in a mechanical manner, leading to disallowance exceeding the exempt income, is unreasonable and contrary to the intent of Section 14A. This judgment reinforced that the disallowance should be proportionate to the actual exempt income.” 7.4. It was further stated that there are several other judicial pronouncements that emphasize that the disallowance u/s 14A is not applicable in the cases where there is no exempt income. The cases relied upon are as under: 1) “Eveready Industries India Ltd. v. Principal Commissioner of Income-tax, Kol (Kolkata ITAT, Bench ‘A’, 114 taxmann.com 610 (Kolkata - Trib.) 2) ACIT v. Gold Rush Sales and Service Ltd, 156 taxmann.com 514 (Kolkata - Trib.) 3) Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (Bombay High Court, 2010) 4) CIT v. Chettinad Logistics (P.) Ltd. [80 taxmann.com 221 (Madras HC)] 5) Cheminvest Ltd. v. CIT [378 ITR 33 (Delhi HC)] 6) CIT v. Shivam Motors (P.) Ltd. [97 DTR 81 (Allahabad HC)] 7) Joint Investments (P.) Ltd. v. CIT [59 taxmann.com 295 (Delhi HC)] 8) CIT vs Delite Enterprise (2009) (Bombay High Court) ITA No. 110 of 2009 (BomHC) 9) CIT vs. Corrtech Energy Pvt. Ltd. (2014) 223 Taxman 130 (Gujrat High Court) 10) CIT v. Winsome Textile Industries Ltd. [(2009) 319 ITR 204 (P&H)]” 8. We have considered the rival submissions. The Ld. AO had rightly disagreed with the disallowance made by the assessee as even the strategic investments have to be considered while computing the disallowance under Rule 8D r.w.s. 14A of the Act. However, in view of the decision of the Hon'ble Supreme Court in the Page | 10 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd case of State Bank of Patiala (supra), the disallowance u/s 14A has to be restricted to Rs. 3,75,000/- which was the amount of dividend received by the assessee. The contention of the Ld. CIT(A) that it was an isolated case and the facts are not identical to the facts of the case of the assessee does not appear to be correct as in that case Hon’ble Supreme Court had dismissed the Special Leave Petition both on the ground of delay as well as on merits and the order of the Hon’ble Punjab and Haryana High Court which upheld the order of the Tribunal that amount of disallowance under section 14A could be restricted to amount of exempt income only and not a higher figure was thereby confirmed and the decision of the Hon’ble Supreme Court is binding on the High Court as well as the Tribunal. Hence, Ground Nos. 2 & 3 of the appeal are allowed and the Ld. AO is directed to restrict the disallowance of Rs. 3,75,000/- in place of Rs. 14,94,650/- disallowed. 8.1. During the course of hearing, Ground no. 1 has not been pressed by the ld. AR, hence, this ground is dismissed as ‘not pressed’. 8.2. Ground no. 4 is general in nature and does not require any separate adjudication. 9. In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 25th November, 2024. Sd/- Sd/- [Anikesh Banerjee] [Rakesh Mishra] Judicial Member Accountant Member Dated: 25.11.2024 Bidhan (P.S.) Page | 11 ITA No.470/KOL/2024 A.Y. 2017-18 Biswanath Hosiery Mills Ltd Copy of the order forwarded to: 1. Biswanath Hosiery Mills Ltd. 2. CIT (Appeals). 3. CIT(A)-27, Kolkata. 4. CIT- 5. CIT(DR), Kolkata Benches, Kolkata. 6. Guard File. //True copy // By order Assistant Registrar ITAT, Kolkata Benches Kolkata "