CERA SANITARYWARE LIMITED,AHMEDABAD V. THE DCIT, CIRCLE-1(1)(1), AHMEDABAD

ITA 1334/AHD/2024

AI Insights

Cera Sanitaryware Ltd. appealed against the order of the Commissioner of Income Tax (Appeals), which confirmed the disallowance of Rs. 23,19,461 under section 14A read with Rule 8D of the IT Rules. The disallowance was initially made by the Assessing Officer, who computed the disallowance based on the provisions of Rule 8D, considering the administrative expenses attributed to earning exempt income. The Tribunal examined whether the Assessing Officer had appropriately applied Rule 8D and whether there was a recorded dissatisfaction with the assessee's computation of disallowance, which was necessary for the application of Rule 8D.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 314391 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-05-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2022-2023
• Other Referred Cases: South India Bank Ltd. vs CIT C.A.No.9606 of 2011 & Others dt 09-Sept 2021
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Earning of tax free income; Rule 8D
• Section: 143(3); 142(1); 6; 14A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH Before: Smt. Annapurna Gupta, Accountant Member And Shri T.R. Senthil Kumar, Judicial Member Cera Sanitaryware Ltd. 7th & 8th Floor, “B”: wing Privilon, Ambli BRTS Road, Iskon Cross Roads, Shilaj B.O. Taluka: Daskroi, Dist: Ahmedabad PAN: AABCM9244N (Appellant) Vs The DCIT, Circle-1(1)(1), Ahmedabad (Respondent) Assessee Represented: Shri Dhinal Shah, A.R. Revenue Represented: Smt. Malarkodi R., Sr.D.R. Date of hearing : 06-02-2025 Date of pronouncement : 08-05-2025 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:- This appeal is filed by the Assessee as against the appellate order dated 13.06.2024 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “CIT(A)”), arising out of the assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year 2022-23. ITA No. 1334/Ahd/2024 Assessment Year 2022-23 I.T.A No. 1334/Ahd/2024 A.Y. 2022-23 Page No Cera Sanitaryware Ltd. vs. DCIT 2 2. The solitary issue involved in this appeal is confirming the addition of Rs. 23,19,461/- u/s. 14A r.w. Rule 8D of the IT Rules. Brief facts of the case is that the assessee is a company engaged in the manufacturer, dealer and trader of Sanitarywares, Faucetwares, Bath Accessories, Taps, Electricity and Tiles etc. For the Asst. year 2022-23, assessee filed its Return of Income on 19- 10-2022 declaring total income of Rs. 206,33,48,260/- . The assessee has shown exempt income of Rs.1,04,87,339/- in which Rs.20,40,000/- is on account of Share of profit on investment in LLP and Rs.84,47,339/- on account of interest of tax-free bonds. The assessee suo moto disallowed of Rs. 4,77,572/- towards expenses debited to profit and loss account u/s. 14A of the Act. The A.O. requested to furnish the details of expenses by issuing a notice u/s. 142(1) of the Act. The assessee submitted that total value of investment is Rs.58,079.67 lakhs, out of which investment of Rs. 1037.87 lakhs and yielded an exempt income. The nature of investment is explained as follows: Particulars Amount (Rs. in lakhs) Taxability Non-Current Investments 1,344.33 Interest income from such investment in LLP is chargeable to tax. Investment in LLPs 1,344.33 Interest income from such investment in LLP is chargeable to tax. Investment in Debentures 1,333.56 The Interest income from such debenture is taxable and the gain arising from the transfer of such debenture is chargeable to tax as capital gain Investment in bonds 1,341.71 Out of total bonds of Rs. 1341.71, bonds of Rs. 303.85 are such that the interest income from such bonds is taxable. The other bonds ofRs.1037.87 can yield tax-free interest income to the appellant company. I.T.A No. 1334/Ahd/2024 A.Y. 2022-23 Page No Cera Sanitaryware Ltd. vs. DCIT 3 Investment in government securities - National Savings Certificate 0.13 Income from the national savings certificate is taxable. Total 4,019.74 Current Investments Investment in mutual fund 52,715.60 Dividend income from the investment in the mutual fund is taxable and all type of capital gain is chargeable to tax. Total 52,715.60 Grand Total: 58,079.67 2.1. The assessee further submitted that the above investments are out of the internal accrual, reserves and surplus and cash flow generated. The total share capital and reserves available with the assessee company as on 31-03-2022 is Rs.1,00,574.57 lakhs. So the investment, which can yield an exempt income of Rs.1,037.87 lakhs is meagre against the total interest free funds of Rs.1,00,574.57 lakhs. Thus the investments are made out of own funds and cash flow generated from the business activity during the year under consideration. The assessee has not incurred any interest cost for making such investment yielding exempt income. As there is no interest-bearing fund involved in making such an investment, the question of making any disallowance under section 14A r.w. Rule 8D does not arise. 3. Regarding administrative expenses, the assessee identified on a scientific basis, certain expenditures, which can be attributed to earning exempt income. The amount of such expenditure is Rs.4,77,572/- which was disallowed u/s. 14A by the assessee suo moto while filing the Return of Income is as follows: I.T.A No. 1334/Ahd/2024 A.Y. 2022-23 Page No Cera Sanitaryware Ltd. vs. DCIT 4 Cera Sanitaryware Limited Assessment Year 2022-23 Disallowance under section 14A Particulars Amount (Rs) Employee Cost 3,62,625 Depreciation 19.433 Other overheads [25% of (Emp. Cost + Dep)] 95,514.40 Total 4,77,572 Employees cost Total Cost Total time involved (%) Amount (Rs.) Rajesh B. Shah, CFO and COO (Fin. & Comm.) 1,31,39,648 1% 1,31,396 Vinit Jain, Asst. Manager 36,38,445 2% 72,769 Rini Bhiwaniwala 15,84,597 10% 1,58,460 Total: 1,83,62,690 3,62,625 Note: During the year under consideration, there is no addition purchase or sale transaction taken place. One tax free bond was matured during the year 4. The assessee was issued with a show cause notice to make disallowance u/s. 14A read with Rule 8D. The assessee submitted a detailed reply, the same was considered since the details of annual average of the monthly average of the opening and closing balances of the value of investment in tax free bonds comes to Rs.14,91,73,253/-. Therefore, as per section 14A r.w.r. 8D, the disallowance on this account will be 1% of the annual average of monthly average of the investments i.e. 1% of Rs. 14,91,73,253/- which will come to Rs. 14,91,733/-. 4.1 As the assessee has not furnished the monthly average of investment in LLPs, the annual average is being taken for calculation of the disallowable amount. As the opening & closing figures of investment in LLPs for the relevant assessment year is I.T.A No. 1334/Ahd/2024 A.Y. 2022-23 Page No Cera Sanitaryware Ltd. vs. DCIT 5 Rs. 12,66,27,000/- and Rs. 13,44,33,000/-respectively, the annual average comes to Rs. 13,05,30,000/-. Therefore, the disallowable amount u/s 14A r.w.r 8D will be 1% of the annual average i.e. 1% of Rs. 13,05,30,000/-, which will come to Rs. 13,05,300/-. 4.2 .Therefore, the total disallowable amount u/s 14A r.w.r. 8D will be Rs. 27,97,033/- (Rs. 14,91,733 + Rs. 13,05,300). As the assessee has already disallowed Rs. 4,77,572/- u/s 14A, the balance amount i.e. Rs. 23,19,461/- is liable to be disallowed u/s 14A r.w.r. 8D and added to the total income of the assessee. Also, penalty proceeding u/s 270A is initiated for under-reporting of income. 5. Aggrieved against the assessment order, assessee filed an appeal before Ld. CIT(A) who also confirmed the disallowance made by the Assessing Officer since there is no infirmity in the action of the Ld. A.O. Therefore the disallowance made by him was confirmed. 6. Aggrieved against the same, the assessee is in appeal before us raising the solitary Ground of Appeal: 1. The Ld. CIT(A) has erred in confirming the expenses of Rs. 23,19,461/- under section 14A read with Rule 8d inasmuch as the A.O. has not brought any cogent material to show that the expenses incurred are more than what is disallowed by the appellant company and that the A.O. has not expressed any satisfaction. 7. Heard rival submissions and perused the materials available on record. The Assessing Officer rejected the assessee’s computation and invoked Rule 8D and computed the disallowance of Rs.27,97,033/-. On perusal of the assessment order, we find that there is no specific and objective recording of dissatisfaction as I.T.A No. 1334/Ahd/2024 A.Y. 2022-23 Page No Cera Sanitaryware Ltd. vs. DCIT 6 mandated u/s. 14A(2) of the Act. The Ld. A.O. merely proceeded on a presumption that since investments were large and strategic management was done by personal in other departments, some indirect expenditure must necessarily be attributable. There is no discussion or rebuttal of assessee’s specific computation of Rs. 4,77,572/- nor has any reason assigned as to why the computation made by the assessee incorrect or unacceptable. The Jurisdiction requirement u/s. 14A(2) are interpreted by various courts is that the Assessing Officer must a record dissatisfaction with reference to the accounts of the assessee and not merely on general assumption. It is settled law that the Assessing Officer is not duty bound to apply Rule 8D in every case, he is merely empowered to do so subject to recording cogent dissatisfaction that the assessee’s working as a condition precedents. Absence of such dissatisfaction Rule 8D cannot be invoked. 8. On an identical situation in assessee’s own case for the earlier Asst. Year 2020-21 in ITA No. 1333/Ahd/2024, this Tribunal held as follows: “It is not disputed that the assessee had furnished a basis for computing the quantum of disallowance, which included primarily the administrative expenses incurred by the assessee, including the cost of employees who had devoted time towards investment operations of the assessee and other overheads. The basis for allocating salaries towards these expenses was also provided. Thus, the assessee had disallowed only salary and other expenses which were incurred for the purpose of earning the exempt income, and no disallowance was made of interest expenses incurred for the purpose of making investment. The reason for not making any interest disallowance was that the assessee had sufficient own interest free funds by way of capital and even its own profits for making investments, which was sufficiently evidenced from the financial statements of the assessee itself. We have noted the dissatisfaction recorded by the AO while invoking Rule 8D of the Rules and we find that I.T.A No. 1334/Ahd/2024 A.Y. 2022-23 Page No Cera Sanitaryware Ltd. vs. DCIT 7 in its point no.1, the AO has recorded dissatisfaction in relation to the expenses not disallowed by the assessee relating to the funds utilized for making investment, which means, the financial expenses incurred for making the investment. But the fact of the matter is, which is noted above was clearly evident from the financial statements of the assessee, that there was sufficient own interest free funds available with the assessee for making investment, and it is settled law that in such circumstances, the presumption is that the own fund has been utilized for making investments, and no disallowance of expenses is to be made under section 14A of the Act. The Hon’ble apex court in the case of South India Bank Ltd. vs CIT C.A.No.9606 of 2011 & Others dt 09-Sept 2021 that where there are mixed funds of the assessee and the own funds of the assessee are sufficient for making investment no disallowance of interest u/s 14A of the Act is warranted. Therefore, the dissatisfaction recorded by the AO with respect to financial expenses not disallowed by the assessee, we find is not correct. As for the dissatisfaction recorded by the AO with respect to the other expenses, the same, we find, is just a cursory dissatisfaction noted by him. The assessee has given the basis for allocating a certain percentage of expenses by way of salary and other expenses incurred for the purpose of earning exempt income while the AO has given no reasons to disbelieve the same from the accounts of the assessee.” 9. In view of the same, we have no hesitation in holding that the computation of disallowance in the present case under section 14A of the Act by invoking Rule 8D of the IT Rules was not in accordance with law. The disallowance made amounting to Rs.27,97,033/- is directed to be deleted. Ground No.1 raised by the assessee is allowed. 10. In the result, the appeal filed by the Assessee is allowed. Order pronounced in the open court on 08-05-2025 Sd/- Sd/- (ANNAPURNA GUPTA) (T.R. SENTHIL KUMAR) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 08/05/2025 I.T.A No. 1334/Ahd/2024 A.Y. 2022-23 Page No Cera Sanitaryware Ltd. vs. DCIT 8 आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपीलȣय अͬधकरण, अहमदाबाद "