DCIT 3(2)(1), MUMBAI V. M/S. JINDAL DRUGS PVT. LTD., MUMBAI

ITA 5915/MUM/2024

AI Insights

The case involves appeals by both the assessee, M/s Jindal Drugs Pvt. Ltd., and the Revenue against the order of the Commissioner of Income-tax (Appeals) pertaining to the assessment order for the Assessment Year 2013-14. The primary issues revolved around the allowance of a hedging loss and the disallowance of expenses under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962. The Tribunal examined the correctness of the disallowances made and the application of Rule 8D in the context of the assessee's financial activities, including investments yielding exempt income.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 33960 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2025
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: F
• Assessment Year: 2013-2014
• Other Referred Cases: Maxopp Investment Ltd vs CIT, CIT vs Microlabs Ltd, CIT vs UTI Bank Ltd, South Indian Bank Ltd. vs CIT, ACIT vs Vireet Investments Pvt. Ltd.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAHUL HAKKANI
• Assessee Lawyers: SUNIL MATHEWS
• Keywords: Speculation loss; Earning of tax free income; Rule 8D
• Section: 143(3); 13; 14A; 115JB

Judgement Text

"IN THE INCOME-TAX APPELLATE TRIBUNAL “F” BENCH, MUMBAI BEFORE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER & SHRI PRABHASH SHANKAR, ACCOUNTANT MEMBER ITA No. 5915/MUM/2024 (A.Y. 2013-14) Deputy Commissioner of Income Tax 3(2)(1),AayakarBhawan, Room No. 608 Mumbai – 400020, Maharashtra v/s. बनाम M/s Jindal Drugs Pvt. Ltd., 12th Floor, BakhtawarRamnathGoenka Marg, Nariman Point Mumbai - 400 021, Maharashtra स्थायी लेखा सं./जीआइआर सं./ PAN/GIR No: AAACJ1000A Appellant/अपीलार्थी .. Respondent/प्रतिवादी ITA No. 5763/MUM/2024 (A.Y. 2013-14) M/s Jindal Drugs Pvt. Ltd., 12th Floor, BakhtawarRamnathGoenka Marg, 229Nariman Point Mumbai - 400 021, Maharashtra v/s. बनाम Assistant Commissioner of Income Tax 3(2)(1), AayakarBhawan, Room No. 608 Mumbai – 400 020, Maharashtra स्थायी लेखा सं./जीआइआर सं./ PAN/GIR No: AAACJ1000A Appellant/अपीलार्थी .. Respondent/प्रतिवादी Appellant by : Shri Rahul Hakkani,AR Respondent by : Shri Sunil Mathews (Sr. DR) Date of Hearing 15.01.2025 Date of Pronouncement 21.01.2025 आदेश / O R D E R PER PRABHASH SHANKAR [A.M.] :- The above captioned appeals have been filed by the assessee as well as the Revenue against the order of even date as passed by the Learned Commissioner of Income-tax (Appeals), CIT (A) 56, Mumbai [hereinafter P a g e | 2 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. referred to as “CIT(A)”] pertaining to assessment order passed u/s. 143(3) r.w.s. 144Cof the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Years [A.Y.] 2013-14. Since the issues are common and interlinked, these appeals are taken up together for adjudication vide this composite order for the sake of brevity.We take up the appeal of the assessee first. ITA No. 5763/MUM/2024(Assessee) 2. The grounds of appeal are as under:- Ground No. 1: Incorrect remand of matter relating to allowance of hedging loss of INR 1,89,24,728.The Learned CIT(A) has erred in directing the Learned AO to examine/verify the records relating claim of hedging loss from trading in Mentha and Commodity verify the records relating1,89,24,728.The Learned CIT(A) has failed to appreciate that Learned AO in his order has not doubted the amount of hedging loss claimed by the Appellant for the year under consideration and therefore, remanding the matter to verify the claim is unwarranted.The Learned CIT(A) has erred in remanding the matter despite accepting that facts and circumstances of the current year is covered by the decision of Hon'ble Bombay High Court in Appellant's own case for A.Y 2006-07, ΑΥ 2007- 08, ΑΥ 2008-09 & AY 2009-10, wherein the Hon'ble Bombay High Court has accepted that hedging contracts were a part of the Appellants P a g e | 3 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. business activity of manufacturing act and accordingly allowed such loss to be set off against business profits. 2.1In the course of appeal hearing,however,the ld.AR of the assessee did not press the ground.It is submitted that the AO while giving effect to the appellate order in his order dated 7.11.2024 has already allowed the claim ofthe assessee.Accordingly,it is submitted that this ground may be treated as infructuous.In view of these facts,the ground is treated as withdrawn and dismissed. 3.Ground No. 2: Disallowance of expenses under Section 14A of the Act read with Rule 8D(2) of the Income-tax Rules, 1962 The Learned CIT(A) has erred in confirming the disallowance of INR 48,51,700/- made by the Learned Assessing Officer u/s 14A of the IT Act applying rule 8D of the IT Rules.The CIT(A) has failed to appreciate that Appellant has suo-motto computed and disallowed expenses amounting to INR 6,384/- u/s 14A of the IT Act and in the facts and circumstances of the case provisions of Rule 8D are not applicable and hence the disallowance u/s 14A may be restricted to INR 6,384/-. 3.1Without prejudice to the above, the Ld. CIT(A) erred in confirming addition u/s 14A r.w.r. 8D of INR 48,51,700/-without appreciating that AO has not reached objective satisfaction about the incorrectness of the P a g e | 4 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. Appellant's claim u/s 14A of the IT Act, before invoking Section 14A r.w.r. 8D and hence, the addition may be deleted.Without prejudice to the above further, the Ld CIT(A) has failed to appreciate that interest expense of INR 26,94,579/- is erroneously disallowed u/s 8D(2)(ii) as the Appellant had surplus funds, and the interest expenses incurred are for earning taxable income, and it has not accepted any general borrowings and borrowings appearing in the financial statements are specific borrowings linked to working capital i.e. PCFC credit and bill discounting, and therefore, no disallowance of interest u/s 14A r.w.r. 8D(2)(ii) is warranted.Without prejudice to the above further, the Ld CIT(A) has failed to appreciate the fact that the AO has erred in considering taxable investment in the calculation of total investment u/s 14A r.w.r. 8D(ii)& (iii) without appreciating the fact that disallowance u/s 14A r.w.r. 8D is warranted only on investments which generate exempt income. 4. In the subsequent appeal, the ld.CIT(A)observed that the appellant claimeddividend income of Rs.47,37,915/- as exempt from tax. Itsuo-mottodisallowed u/s. 14A of the Act, an amount of Rs.6,384/- being direct expenditure tothe above exempt dividend income of Rs. 47,37,915/- .During the course of assessment proceedings, the AO found that theappellant had an investment portfolio of Rs.70.48 cr. and there was also addition of Rs.57.80 cr. during the year under consideration, and P a g e | 5 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. from these investments,the assessee earned dividend income of Rs.47,37,915/- which was claimed exempt.The AO was notsatisfied with the working of disallowance given by the appellant, which is mentionedin the assessment order.While making the disallowance, the AO observed that the sole purpose of theinvestments made by the appellant was to earn exempt income. The AO also noted that the working of disallowance under section 14A r.w. Rule 8D given by the appellant was not correct. Thus, applying the Rule 8D, the AO computed the totaldisallowance under section 14A of the Act at atRs.48,51,700/- and added back to the total income of the appellant. 4.1 The ld.CIT(A) further observed that in the appellate proceedings, the appellant reiterated its contention,which was submitted before the AO during the course of assessment proceedings.Having considered the submissions of the appellant, and keeping in mind thecase laws relied upon by the appellant, it was observed that while making the disallowance under section 14A r.w. Rule 8D, the AO did examine the accountsof the appellant, and found that the investments made by the appellant were onlytowards earning the exempt income.With regard to the claim of the appellant that nointerest expenditure can be considered towards earning the exempt income, as was done by the AO while working out the disallowance u/s. 14A read with P a g e | 6 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. Rule 8D, it was noticed by himthat the appellant had not established, as tohow the surplus funds were infused in the investments to earn the exempt incomeand it had not utilized the interest bearing funds in the investments, which gave rise to exempt income. As a result, the incurring of expenditure towards making theinvestment, which gave rise to exempt income to the appellant, could not be ruled out. In view of these facts, the decision of the Hon'ble ITAT, Mumbai in the appellant'sown case for A.Y. 2011-12 and other case laws so relied upon by the appellant,it could not be said to be applicable to the facts and circumstances of the appellant's casefor the year under consideration. He upheld the working of disallowance under section14A r.w. Rule 8D made by the AO in the assessment order for making disallowance at Rs. 48,58,084/- to becorrect and justified.Consequently, the disallowance was upheld. 5. In the course of hearing before us,theLd.DR has relied on the orders of authorities below.On the other hand,the ld.AR has made an elaborate arguments and also made written submissions in this regard.He has drawn attention to the detailed submissions both on facts and on legal issue made before the AO and also the ld.CIT(A) stating that none of them took due cognizance of the same.It is contented that the ld.AO failed to record a satisfaction to the effect that the disallowance made by the P a g e | 7 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. assessee was incorrect.He drew attention to the decision in the case of MaxoppInvestment LTD vs CIT 91 Taxmann.com 154(SC).The AO made certain opinion and observations that the disallowance offeredsuo motto as administrative expenses was not correct in view of the fact that there was addition to the extent of Rs 57.80 cr in the investment portfolio and the assessee also earned huge amount of dividend.It is further stated that no disallowance under Rule 8D(ii) is justified as the assessee had sufficient surplus funds in hand and all investments were made from the surplus fund and not from borrowed funds.It had Reserve and surplus of Rs 677.55 cr. as evident in the balance sheet as on 31.3.2013.It is submitted that the Authorities did not appreciate that the company had no common or general purposes borrowings.As such there was no common interest expenses and no porting of interest expenses incurred towards export business could be allocated towards investment.It is also submitted that in assesses own case,hon’ble Bombay High Court in AY 2008-09 upheld the decision of ITAT held in its favour where facts were identical as share capital and general reserve of the company were far more than the investments in securities yielding dividend income. The subsequent appeal of the Department was dismissed by the Court which has also beenaccepted by it.As far as disallowance u/r 8D(ii) of Rs 21.57 lakh is concerned,it is submitted that the assessee did not have to incur P a g e | 8 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. any expenses to earn exempt income as any income is directly credited to its bank account after the investment is made.As an alternative arguments, it is submitted that following the decision of hon’ble Supreme Court in PCIT vs Caraf Builders and Constructions Ltd 112 Taxmann.com 322(SC) only those investment which yielded exempt income should be considered.The assessee has in alternative, worked out disallowance of Rs 2,33,744/-.It is also stated that this Tribunal in assessee’s own case restricted the disallowance u/r 8D(iii) at 5% in AYs 2011-12 and 2012-13 where facts were identical as those prevailing in the year under consideration. 6. We have duly considered the above facts,position of law emerging from cited decisions.It is observed that the AO has mechanically applied Rule 8D without appreciating facts of the case in correct perspective.The authorities below did not appreciate the detailed submissionsmade by the assesseeand gave too much thrust to huge amount of dividend and fresh investments madewithoutproper justification and rebutting the contentions of the assessee.Neither the AOrecorded any proper satisfaction before rejecting the correctness of the quantification of the accounts vis-a-vis exempted income as relied upon by the assessee .A casual kind of compliance about dissatisfaction is not envisaged in section 14A(2). Merely writing in the assessment order P a g e | 9 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. that he is not satisfied with the claim of the assessee is not sufficient, but he has also to give reasons after examining the accounts of the assessee that the claim of disallowance made by the assessee is not enough or is not adequately related to exempted income. The compliance of dissatisfaction has to be substantive and not merely a pretence.iii) The concept of \"having regard to the accounts of the assessee\" requires examination of the accounts of the assessee and a finding is required from the AO whether (i) expenditure incurred against exempt income is shifted to taxable income for claiming its allowability (ii) expenditure incurred against exempt income are recharacterized so that it is allowed in the profit and loss account (iii) expenditure incurred against exempt income and expenditure incurred against taxable income are so mixed that their separation and relationship with exempt income is not possible (iv) the two kind of expenditures are either unvouched or cannot be proved (v) the accounts are defective by citing specific reasons. In nutshell the physical examination of the accounts is a must before recording satisfaction u/s 14A(2). (iv) Satisfaction required to be recorded should be in an objective manner by giving a notice to the assessee asking him to place on record all the relevant facts including his accounts and thereafter, recording of reasons by the AO in the event he comes to conclusion that he is not satisfied with the claim of the assessee.The P a g e | 10 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. satisfaction must reflect the fairness and fair procedure adopted by the AO in rejecting the claim of the assessee.Hon’ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640 (SC) has held that proper satisfaction ought to have been recorded by the AO while making the disallowance u/s 14A of the Act. Held that the disallowance u/s 14A r.w. rule 8D of Income Tax Rule has been made by the AO in a mechanical manner and without recording proper satisfaction as envisaged u/s 14Ar.w. rule 8D of the I.T. Rules. Consequently, the interest expenditure cannot be disallowed under Section 14A read with Rule 8D(2)(ii) under any circumstances. 6.1 The Hon'ble Karnataka High Court in the case of CIT -Vs- Microlabs Ltd., [2016] 383 ITR 490 (Karn) summed up the law on the issue after noticing the availability of own funds as per Balance Sheet of the assessee and after digesting all decisions on the subject, the Court noticed the decision of the Hon'ble Bombay High Court in Reliance Utilities & Power Ltd 313 ITR 340 (Bom), which was later confirmed by the Hon'ble Supreme Court in SLP No. 37/2019 vide order dated 02-01-2019, wherein it was held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can bemade. The P a g e | 11 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. Hon'ble Court referred to the Judgment of Hon'ble Bombay High Court in CIT Vs. HDFC Bankin ITA No.330 of 2012 dated 23.7.2014, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. The Hon'ble Court accepted the ratio laid down in these decisions and held that no disallowance can be made u/s.14A of the Act, when own funds available were far more than the investments made by the Assessee.Hon'ble Supreme Court in the case of CIT -Vs- UTI Bank Ltd. reported in [2022] 142 taxmann.com 136 held that where interest free own funds available with assessee exceeded their investments in tax free securities, investments would be presumed to be made out of assessee’s own funds and proportionate disallowance was not warranted u/s.14A of the Act. Hon’ble Supreme Court in South Indian Bank Ltd. v. CIT [2021] 438 ITR 1held that since interest free own funds available with assessee exceeded their investments in tax-free securities, investments would be presumed to be made out of assessee's own funds and proportionate disallowance was not warranted under section 14A of the Act.Since interest free own funds available with assessee exceeded their investments; investments would be presumed to be made out of P a g e | 12 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. assessee's own funds and proportionate disallowance was not warranted under section 14A on ground that separate accounts were not maintained by assessee for investments and other expenditure incurred for earning tax-free income.Respectfully following the above judicial precedents rendered by Hon’ble Apex Court and various High Courts, we hold that the disallowance made is legally not tenable and liable to be deleted. 6.2 In the present case,the AO has neither examined the accounts nor the correctness of the claim of the calculation given by the assessee.He simply rejected the disallowance offered by the assessee.In view of the alternative submission of the ld.AR, we consider it reasonable and fair to accept its proposition for restricting the disallowance u/r 8D(iii) at 5% of the dividend income respectfully following decisions of the co-ordinate bench in assessee’s own case in AYs 2011-12 and 2012- 13 where facts were identical as those prevailing in the year under consideration. 7. In the result, the appeal of the assessee inITA No. 5763/Mum/2024is partly allowed. P a g e | 13 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. ITA No. 5915/MUM/2024(Revenue) 8.Ground of appeal before ITAT (i) Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in accepting the loss of Rs.1,89,24,728/- created by hedging in Mentha Oil in commodity exchange as business loss without appreciating the fact that the same is speculative loss. 9. In the course of appeal hearing,it was submitted that the AO while giving effect to the appellate order in his order dated 7.11.2024 has already allowed the claim ofthe assessee.Theld.DR did not object to it.The ground(i) above taken by the Revenue is dismissed. 10. (ii) Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is right in allowing the disallowance of Rs.48,51,700/- u/s 14A r.w. rule 8D of the Act, not to be part of section 115JB(2) of the Act in the computation of income. 11. In this connection,at the outset, the ld AR stated that this issue is covered in favour of assessee and against Revenue by the decision of Special Bench of this Tribunal in the case of Asstt. CIT v. Vireet Investments (P.) Ltd. [2017] 165 ITD 27/82 taxmann.com 415 (Delhi - Trib.) (SB) wherein the Tribunal has clearly held that no disallowance under section 14A of the Act r.w.r 8D of the Rules can be P a g e | 14 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. made while computing book profit under section 115JB of the Act. The ld.DR could not controvert the above proposition. Accordingly, we are of the view that this issue is no more res-integra since the same is settled by the Special Bench decision in the case of ACIT vs. Vireet Investments Pvt. (supra) wherein it was held as follows: ‘… The question is, whether the amount or amounts of expenditure relatable to exempt income as contemplated in clause (f) to Explanation 1 to section 115JB(2) could be arrived at by resorting to provisions of section 14A or not.The department, contention, is the object of section 14A and clause (1) to Explanation 1 to section 115JB(2) is same and, therefore, it cannot be disputed that section 14A can be resorted to for finding out the expenditure relatable to any income which is exempt. [Para 6.2]When the question arises as to the applicability of similar provisions in different parts of the statute, then it is not only legitimate but proper to read both the provisions in their context. If context is same, different meaning cannot be assigned. It is to be found out that what mischief was intended to be remedied by Inserting a particular section. The intention of the legislature once is manifested in a particular section in the statute then said intention cannot be given a different meaning, if a similar provision has been incorporated in a different section in the statute. The intention of the Legislature must be found out by reading the statute as a whole. [Para 6.3) Literal meaning cannot always be followed logically, because sometimes it tends to defect the obvious intention of the Legislature and results in producing a wholly unreasonable result. (Para 6.4)Thus, the submission of Department is that when basic object and purpose of section 14A and clause (1) to Explanation 1 to section 115JB(2) is same, then it cannot be said that merely because section 14A has not been mentioned in clause (f), it has no application. The mode of computation with same purpose cannot be differently made merely because section 115JB creates a deeming section. The object of deeming provisions is to substitute the total income computed under normal provisions by that computed under MAT provisions. Submission of department is that this cannot be extended to computation for same items under normal as well as MAT provisions. Under the provisions of section 14A, both direct and indirect expenses in relation to earning of exempt income are to be reduced. Therefore, different meaning cannot be ascribed in clause (1) and, therefore, the submission of the assessee that only directly relatable expenditure is to be reduced, cannot be accepted. P a g e | 15 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. [Para 6.10] In view of above discussion, the computation undIn view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB (2), is to be made without resorting to the computaConsidering entire issue in detail and respectfully following the above Judgements by different High Courts, Special Bench of Delhi ITAT and also assessee’s own case cited supra, we have no hesitation in confirming that the provisions of section 14A cannot be applied for computing the book profit u/s. 115JB of the Act and thereby delete the addition made by the AO. Thus the Ground raised by the Revenue is devoid of merits and liable to be dismissed. 12. In view of the above facts and the decision of Hon’ble Special Bench(supra) the ground no.(ii)taken by the Revenue is dismissed. 13. In the result,appeal of the Revenue in ITA No.5915/Mum/2024 is dismissed. Order pronounced in the open court on 21/01/2025. Sd/- Sd/- SANDEEP GOSAIN PRABHASH SHANKAR (न्याययकसदस्य /JUDICIAL MEMBER) (लेखाकारसदस्य/ACCOUNTANT MEMBER) Place: म ुंबई/Mumbai ददनाुंक /Date.21.01.2025 Lubhna Shaikh / Steno आदेश की प्रयियलयि अग्रेयिि/Copy of the Order forwarded to : 1. अपीलार्थी / The Appellant 2. प्रत्यर्थी / The Respondent. 3. आयकर आयुक्त / CIT 4. विभागीय प्रविविवि, आयकर अपीलीय अविकरण DR, ITAT, Mumbai 5. गार्ड फाईल / Guard file. P a g e | 16 ITA No. 5763 & 5915/Mum/2024 A.Y. 2013-14 M/s Jindal Drugs Pvt.Ltd. सत्यावपि प्रवि //True Copy// आदेशानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीलीय अयधकरण/ ITAT, Bench, Mumbai. "