Cera Sanitaryware Ltd , Ahmedabad V. NFAC Delhi (The ACIT Circcle-1(1)(1) Ahmedabad), Delhi

ITA 145/AHD/2022

AI Insights

Cera Sanitaryware Ltd. appealed against the order of the National Faceless Appeal Centre (NFAC), which had confirmed the disallowance of Rs. 40,79,796 under Section 14A read with Rule 8D of the Income Tax Act. The disallowance was initially made by the Assessing Officer during the assessment proceedings for the year 2018-19, based on the application of Rule 8D due to alleged expenses incurred in relation to earning exempt income. The Tribunal examined whether the Assessing Officer had appropriately recorded his dissatisfaction with the assessee's claim that no such expenses were incurred, which is necessary before invoking Rule 8D. The Tribunal concluded that the Assessing Officer's dissatisfaction was not properly substantiated, leading to the decision to allow the appeal and delete the disallowance.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131367 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-10-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 05-07-2023
• Assessment Year: 2018-2019
• Appeal Filed On: 05-05-2022
• Other Referred Cases: PCIT vs. Sintex Industries, CIT vs. Torrent Power Ltd, Essilor India (P) Ltd. vs. DCIT, South Indian Bank vs. CIT
• Laws Referred To: Income Tax Act, Income Tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Tax effect; Rule 8D
• Section: 14A; 250

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH Before: Ms. Annapurna Gupta, Accountant Member And Ms. Madhumita Roy, Judicial Member Cera San itary ware Ltd. , 2 n d Flo or, Madhu sud an Hou se, Opp Nav rangpu ra Tele Exchang e, Navrangp ura, Ah medabad -3 80006 PAN: AA BCM92 44N (Appellant) Vs NF AC, Delhi (The ACIT, Circle-1(1)(1 ), Ah med abad) (Resp ondent) Asses see b y : Shri Dhinal Shah, A. R. Revenue by : Shri V. K. M angla, Sr. D. R. Date of hearing : 06-07 -2 023 Date of pronouncement : 03-10 -2 023 आदेश/ORDER PER : ANNAPURNA GUPTA, ACCOUNTANT MEMBER:- This is an appeal filed by the assessee against the order of National Faceless Appeal Centre, (Delhi), (hereafter referred to as Ld.CIT(A)) in proceeding u/s. 250 vide order dated 28/04/2022 passed for the assessment year 2018-19. ITA No. 145/Ahd/2022 Assessment Year 2018-19 I.T.A No. 145/Ahd/2022 A.Y. 2018-19 Page No. Cera Sanitaryware Ltd. vs. NFAC Delhi (The ACIT Circle 1 (1)(1) Ahmedabad) 2 2. The grounds of appeal raised is as under:- “1. The learned CIT(A) has erred in confirming addition of Rs 40,79,796 under Section 14A read with Rule 8D on the ground that the assessee has debited finance cost to profit and loss account in as much as the CIT(A) has ignored the submission made by the assessee by letter dated 28-12-2021 to the effect that the finance cost incurred is for the purpose of business and not for making the investment and that the investment is made out of interest free funds and that the assessee has suo moto disallowed Rs 5,11,370 towards administrative expenditure on scientific basis at the time of assessment proceedings. 2. The learned CIT(A) has erred is not following Judicial precedents on the ground that there is no change in law and that only calculation formula under Rule 8D had changed. Total Tax Effect : Rs. 14,27,926/-” 3. As is evident from the above the solitary issue arising in the present case relates to disallowance of expenses pertaining to the earning of exempt income as per the provisions of section 14A of the Act. 4. The brief facts relating to the issue are that the assessee had earned exempt income by way of dividend and profit on sale of mutual funds amounting in all to Rs. 1,39,35,259/- during the year. No disallowance of expenses relating to the earning of such exempt income, as per the provisions of section 14A of the Act, was made by the assessee in the return of income filed. However during assessment proceedings the assessee suo moto offered expenses of Rs.5,11,370/- as disallowable u/s 14A of the Act. The Assessing Officer was not satisfied with the claim of the assessee and I.T.A No. 145/Ahd/2022 A.Y. 2018-19 Page No. Cera Sanitaryware Ltd. vs. NFAC Delhi (The ACIT Circle 1 (1)(1) Ahmedabad) 3 accordingly invoking Rule 8D of the Income Tax Rules,1962,(hereinafter referred to as Rules)he computed the expenses disallowable u/s 14A of the Act at Rs. 40,79,796/- resulting in an addition to the said extent to the income of the assessee . The said disallowance was challenged before the National Faceless Appeal Centre (NFAC) who confirmed the disallowance made by the Assessing Officer. 5. Before us, the primary argument of the ld. counsel for the assessee was that the invocation of Rule 8D of the Rules for computing the disallowable expenses u/s 14A of the Act was in complete violation of the provisions of law as contained in section 14A of the Act. He contended that courts have interpreted the provisions of section 14A, particularly section 14A(2) of the Act, and held that prior to invoking Rule 8D for computing the disallowance to be made u/s. 14A of the Act, the Assessing Officer has to be satisfied that the claim of the assessee to expenses disallowable u/s. 14A of the Act is not correct and that dissatisfaction has to be arrived by the Assessing Officer considering the accounts of the assessee. He has pointed out that courts have interpreted section 14A of the Act to have imposed the condition of the Assessing Officer being dissatisfied with the claim of the assessee of expenses disallowable before invoking Rule 8D of the Rules for computing the disallowance ,as a safeguard against arbitrary application by Assessing Officer of Rule 8D .In this regard he drew our attention to various case laws of the Hon’ble High Courts including that of the jurisdictional High Courts as under:- (i) PCIT vs. Sintex Industries (2018) 403 ITR 418 (Guj) I.T.A No. 145/Ahd/2022 A.Y. 2018-19 Page No. Cera Sanitaryware Ltd. vs. NFAC Delhi (The ACIT Circle 1 (1)(1) Ahmedabad) 4 (ii) CIT vs. Torrent Power Ltd (2014) 363 ITR (Guj) (iii) Essilor India (P) Ltd. vs. DCIT (2022) 137 taxman.com 60 (Karnataka) He contended that in the present case, the Assessing Officer had failed to record any dissatisfaction with the claim of the assessee and therefore the invocation of Rule 8D was not in accordance with law. He drew our attention to the assessment order pointing out that during assessment proceedings the assessee had submitted all the details of its exempt income as also the complete details of investments made by it during the year pointing out that it had earned dividend income of Rs. 1.39 crores from investments in equity investments, preferential shares, limited liability partnership firms, Government securities and mutual funds to the tune of Rs. 139.17 crores made out of its internal accrual comprising of share capital and reserves amounting to Rs. 404.61 crores. He further contended that the assessee had also demonstrated that its total borrowings was only 24.34 crores which has resulted in financial cost of Rs. 5.23 crores ;that there was reduction in total borrowings as also financial cost during the year. It was also pointed out that out of the total investments of 139.17 crores, 118.78 crores was the outstanding balance of preceding year which were made out of its internal accruals of Rs. 404.61 crores. The ld. counsel for the assessee pointed out that despite having stated so, the Assessing Officer noted that the assessee had indeed incurred intangible expenses which could not be easily quantified even though it is stated to be internal accrual. He drew our attention to para 5 of the Assessing Officer’s order wherein he noted the fact that the assessee had submitted all investments ,amounting to Rs. 139.17 I.T.A No. 145/Ahd/2022 A.Y. 2018-19 Page No. Cera Sanitaryware Ltd. vs. NFAC Delhi (The ACIT Circle 1 (1)(1) Ahmedabad) 5 crores, as being made out of internal accruals. He also drew our attention to para 6 wherein the Assessing Officer notes the borrowings of the assessee as to Rs. 24.34 crores and the interest cost of Rs. 5.23 crores and thereafter he drew our attention to para 7 to 8 of the assessment order wherein the Assessing Officer noted his alleged dissatisfaction with the claim of the assessee and thus invoked Rule 8D of the Rules for computing expenses disallowable u/s 14A of the Act. The contents of the paras 5 to 9 are reproduced hereunder:- “5. From the above it could be seen that the assessee has made investment of Rs 139.17 crore and has claimed the sources to be from internal accrual. 6. It is further seen the assessee as on 31/03/2018 has a borrowing of Rs.2434.63 lakhs. This resulted in a finance cost of Rs 523.88 lakhs which has been debited to the accounts. 7. From the above it is apparent that the assessee has indeed incurred an intangible expenses which cannot be easily quantified even though it is stated to be internal accrual. The assessee therefore comes under the provisions of S.14A which helps to work out the expenditure incurred in relation to income which does not form part of the total income and assessee claims that no expenditure has been incurred by him in relation to that exempt income. 8. The assessee also gave an alternative proposal of disallowing of Rs.5,11,370 u/s 14A(2). However it is seen that there is no basis of working out such a disallowance under the provision of the Income Tax Act/Rules. 9. Since I am not satisfied with the claim made by the assessee that no expenditure has been incurred in the background of the fact that there has been an interest cost claimed in the accounts vide under the provisions of rule 8D(2) of the Income Tax rules an amount equal I.T.A No. 145/Ahd/2022 A.Y. 2018-19 Page No. Cera Sanitaryware Ltd. vs. NFAC Delhi (The ACIT Circle 1 (1)(1) Ahmedabad) 6 to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment is taken to be the cost which needs to be disallowed.” The ld. counsel for the assessee contended that despite the assessee demonstrating that the entire investments were made out of internal accruals, the Assessing Officer still went on to record his dissatisfaction with the claim of the assessee without giving any basis and invoked rule 8D of the Rules which he contended was clearly in violation of the provisions of law as interpreted by courts. He stated therefore that the disallowance computed by the Assessing Officer as per Rule 8D of the Rules amounting to Rs. 40,79,796/- needed to be deleted. He further drew our attention to the order of the NFAC at page 11 wherein they record their finding to the effect that the Assessing Officer had invoked Rule 8D after recording satisfaction that assesses claim of no expenditure incurred on exempt income is not the correct picture of affairs, as under:- “The issue in hand is whether the assessee has incurred any expenditure in any form for earning this exempted income or not. As the assessee did not offer any disallowances under Sec 14A in its IT return, the AO invoked the Sec 14A after recording his satisfaction that no expenditure incurred on exempted income is not the correct picture of the affairs.” 6. The ld. Departmental Representative vehemently supported the finding of the ld. CIT(A) pointing out that in view of the fact that no expenditure had been claimed by the assessee as having incurred for the earning of exempt income, the Assessing Officer was rightly satisfied I.T.A No. 145/Ahd/2022 A.Y. 2018-19 Page No. Cera Sanitaryware Ltd. vs. NFAC Delhi (The ACIT Circle 1 (1)(1) Ahmedabad) 7 interalia that this was not the affairs and had validly invoked Rule 8D for computing the same. 7. We have heard both the parties and have also gone through the orders of authorities below and as also case laws referred before us. There is no dispute vis a vis the proposition of law as laid down by the Jurisdictional High Court as also by various other High Courts that for invoking Rule 8D of the Rules for the purpose of computing expenses which are liable to be disallowed u/s. 14A of the Act, the Assessing Officer first has to to be dissatisfied with the claim of the assessee of the expenses liable to be disallowed, which dissatisfaction has to be arrived at having regard to the accounts of the assessee. This is clearly brought out in section 14A(2) of the Income Tax Act and has been interpreted so by Hon’ble High Courts in various case laws as cited by ld. counsel for the assessee. The ld. Departmental Representative does not dispute this position of law. 7.1 The only matter in dispute before us is whether the Assessing Officer had duly recorded his dissatisfaction with the claim of the assessee. In the facts of the present case , the assessee had offered disallowance of expenses u/s 14A during assessment proceedings to the tune of Rs. 5,11,370/- claiming the same to have been incurred for earning exempt income. The dissatisfaction recorded by the Assessing Officer in his assessment order, we have noted emanates from the data pertaining to the assessee’s claim of all investments amounting to Rs. 139.14 crores having been made out of internal accruals, while the Assessing Officer noting that the assessee also had borrowed funds to the tune of Rs. 24.34 crores and having incurred I.T.A No. 145/Ahd/2022 A.Y. 2018-19 Page No. Cera Sanitaryware Ltd. vs. NFAC Delhi (The ACIT Circle 1 (1)(1) Ahmedabad) 8 financial cost of 5.23 crores. At para 7 of his order, the AO clearly notes his dissatisfaction with this claim of the assessee that all investments were made out of internal accruals. Therefore, the dissatisfaction of the Assessing Officer related only to the claim of interest expenditure incurred on making investments which earned exempt income. 7.2 The Assessing Officer, however, excepts for stating that he does not agree with the claim of the assessee that all investments were made out of internal accrual and no expenditure can be attributable therefore to the exempt income earning investments, gives no basis for arriving at this finding. The proposition of law in this regard is clearly settled by the Hon’ble Apex Court that where own funds are available, the presumption is that the own funds have been used for making investment calling for disallowance of interest u/s 14A of the Act as settled by the Hon’ble Apex Court in the case of South Indian Bank vs. CIT (2021) 130 taxman.com 178 (SC). 7.3 In view of the above, it is clear that the dissatisfaction with the claim of the assessee of the Assessing Officer was simply an arbitrary dissatisfaction. In fact, there could not have been any dissatisfaction with respect to interest expenses pertaining to the earning of exempt income in the facts and circumstances of the case of the present case as per law settled by the Hon’ble Apex Court as noted by us above. We are in complete agreement with the ld. counsel for the assessee, therefore, that the satisfaction noted by the Assessing Officer was not a satisfaction at all .The invocation of Rule 8D of the Rules in the present case for computing I.T.A No. 145/Ahd/2022 A.Y. 2018-19 Page No. Cera Sanitaryware Ltd. vs. NFAC Delhi (The ACIT Circle 1 (1)(1) Ahmedabad) 9 disallowance of expenses u/s. 14A of the Act is therefore , we agree with the Ld. Counsel for the assessee, not in accordance with law. The disallowance therefore made of Rs. 40,79,796/- u/s. 14A of the Act and confirmed by ld. CIT(A) is directed to be deleted. The appeal of the assessee is allowed. 8. In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 03-10-2023 Sd/- Sd/- (MADHUMITA ROY) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 03/10/2023 आदेश क त ल प अ े षत / 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 अपील य अ धकरण, अहमदाबाद