Samvardhana Motherson International Ltd., New Delhi V. ACIT, New Delhi

ITA 2343/DEL/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 5312 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2012-2013
• Appeal Filed On: 19-04-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S S RANA
• Keywords: Depreciation; Earning of tax free income; TDS; Rule 8D
• Section: 271(1)(c); 143(3); 244A; 14A

Judgement Text

SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 1 OF 12 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. MEENA, ACCOUNTANT MEMBER . . /. I.T.A NO.2343/DEL/2017 / ASSESSMENT YEAR:2012-13 SAMVARDHANA MOTHERSON INTERNATIONAL LTD. F-7, BLOCK B-1, 2 ND FLOOR, MOHAN COOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI. VS. ACIT CIRCLE 22(1), NEW DELHI. PAN NO. AAICS6115R APPELLANT / RESPONDENT /ASSESSEE BY SHRI K.M. GUPTA, ADV. /REVENUE BY SHRI S.S. RANA, CIT (DR) / DATE OF HEARING: 06.11.2019 /PRONOUNCEMENT ON 03.02.2020 /O R D E R PER AMIT SHUKLA, J.M.: THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE IMPUGNED ORDER DATED 20.01.2017 PASSED BY THE L D. CIT(APPEALS)-15, DELHI FOR THE QUANTUM OF ASSESSMEN T PASSED U/S 143(3) OF THE ACT FOR THE AY 2012-13. SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 2 OF 12 1. IN REVISED GROUNDS OF APPEAL, THE ASSESSEE HAS RAIS ED THE FOLLOWING GROUNDS: 1. THE LD. CIT(A) ERRED IN CONFIRMING THE ACTION OF THE LD. AO IN INVOKING RULE 8D OF THE RULES FOR COMPUTING DISALLO WANCE U/S 14A OF THE ACT WITHOUT RECORDING SATISFACTION WITH RESPECT TO THE SUO MOTO DISALLOWANCE MADE BY THE APPELLANT AS MANDATED IN SECTION 14A OF THE ACT. 2. THE LD.CIT(A)/AO FAILED TO APPRECIATE THAT THE APPE LLANT HAS BEEN CONSISTENTLY MAKING THE SUO MOTO DISALLOWANCE U/S 14A OF THE ACT BY FOLLOWING THE SAME COMPUTATIONAL METH ODOLOGY SINCE AY 2008-09 TO 2011-12. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO/LD. CIT(A) ERRED IN MAKING/UPHOLDIN G AN ADDITION OF RS. 2,26,13,434/- U/S 14A OF THE ACT RE AD WITH RULE 8D(2)(III) OF THE RULES IN THE IMPUGNED ASSESS MENT ORDER. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) GROSSLY ERRED IN UPHOLDING THE ACTION OF THE LD. AO OF MAKING AN ADDITION U/S 14A OF THE ACT BY MECHANICALLY APPLYING THE PROVISION OF RULE 8D(2)(I II) WHICH RESULTED INTO MORE DISALLOWANCES THAN EXPENSES (NON - OPERATIONAL/ADMINISTRATIVE EXPENSES) CLAIMED BY THE APPELLANT DURING THE YEAR. 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) FAILED TO APPRECIATE THAT THE A PPELLANT BEING AN INVESTMENT COMPANY WHO MADE INVESTMENTS IN ITS SUBSIDIARY COMPANIES AND JOINT VENTURE COMPANIES TO HOLD BUSINESS INTERESTS AND NOT TO EARN EXEMPT INCOME AN D MOST SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 3 OF 12 OF INVESTMENTS IN ITS SUBSIDIARY COMPANIES DOES NOT YIELD EXEMPT INCOME. 6. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO GROSSLY ERRED IN WITHDRAWING INTERE ST U/S 244A OF THE ACT. 7. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO GROSSLY ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT ON THE PURPORT ED GROUND THAT THE APPELLANT HAD FURNISHED INACCURATE PARTICU LARS OF ITS INCOME. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF INVESTMENT AND CONSULTANCY. DURI NG THE COURSE OF THE ASSESSMENT PROCEEDINGS, AO NOTED THAT ASSESSEE HAS EARNED EXEMPT DIVIDEND INCOME AND THEREFORE, DI SALLOWANCE U/S 14A IS TO BE INVOKED. IN RESPONSE TO THE SHOW C AUSE NOTICE THE ASSESSEE SUBMITTED THAT IT HAS MADE SUO MOTO DISALLOWANCE OF RS. 16,95,69,008/-,THE WORKING OF WHICH HAS BEEN IN CORPORATED AT PAGES 2 & 3 OF THE IMPUGNED ASSESSMENT ORDER. T HE LD. AO AFTER DETAILED DISCUSSION, HELD THAT THE WORKING OF THE DISALLOWANCE MADE BY THE ASSESSEE AS PER RULE 8D(II I) AT RS. 3,53,49,023/- IS LESS THAN 0.5% OF THE AVERAGE VALU E OF THE INVESTMENT AND THE CORRECT FIGURE SHOULD BE RS. 5,7 9,62,456/-. SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 4 OF 12 HE, THUS, CALCULATED THE DISALLOWANCE AS PER RULE 8 D(2) AT RS. 19,21,82,442/- IN THE FOLLOWING MANNER: CLAUSE PARTICULAR CALCULATION AMOUNT I. EXPENDITURE DIRECTLY RELATED TO EXEMPT INCOME RS. 1,45,69,045/- RS. 1,45,69,045/- II. DISALLOWANCE OF INTEREST EXPENDITURE: RS. 12,92,60,080/- A. INTEREST EXPENDITUR E INCURRED DURING THE YEAR. B. AVERAGE VALUE OF INVESTMENT . (11933238158 + 11251744332)/2 =RS. 11,59,24,91,245/- C. AVERAGE OF TOTAL ASSETS (12939869948 + 12107093339)/2 =RS.12,52,34,81,644/- DISALLOWANCE = A*B/C (129260080 X 11592491245/2=12523481644 =RS. 11,96,50,940/- RS. 11,96,50,940/- III. AGGREGATE OF OPENING & CLOSING VALUE OF INVESTMENT (AVERAGE VALUE OF INVESTMENT) % OF ABOVE AS PER RULE 8D RS. 11,59,24,91,245 X 0.5% =RS. 5,79,62,457/- RS. 5,79,62,457/- TOTAL DISALLOWANCE (I+II+III) AS PER RULE 8D RS. 19,21,82,442/- SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 5 OF 12 3. SINCE, ASSESSEE HAD SUO MOTO DISALLOWED RS. 16,95,69,008/-, THEREFORE, THE DIFFERENCE AMOUNT OF RS. 2,26,13,434/- WAS ADDED BY THE ASSESSING OFFICER. 4. LD. CIT(A) HELD THAT THOUGH THERE IS NO DIFFERENCE IN COMPUTATION OF DISALLOWANCE UNDER RULE 8D(2)(I) & 8 D(2)(II), HOWEVER, THE ONLY DISPUTE IS WITH REGARD TO DISALLO WANCE COMPUTED UNDER RULE 8D(2)(III). HE OBSERVED THAT, OUT OF TOTAL EXPENSES OF RS. 48,69,70,574/- CLAIMED BY THE ASSES SEE IN THE PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAS BIFURCATE D THE EXPENSES AS PER THE SEPARATE CHART AGAINST OPERATING INCOME AND NON- OPERATING INCOME AT RS. 12,21,51,889/- AND RS. 36,4 6,47,858/- RESPECTIVELY AND THE CASE OF THE ASSESSEE IS THAT T HE DISALLOWANCE UNDER RULE 8D CANNOT EXCEED THE EXPENSES WHICH AGAI NST NON- OPERATING INCOME. HOWEVER, THE LD. CIT (A) HAS CONF IRMED THE COMPUTATION MADE BY THE AO. 5. BEFORE US, LD. COUNSEL SUBMITTED THAT MAJORITY OF T HE SHARES HAS BEEN HELD IN THE HOLDING COMPANY AND OUT OF 42 CRORES OF DIVIDEND INCOME; RS. 38 CRORES HAS COME F ROM THE HOLDING COMPANY. THE ASSESSEE ITSELF HAS GIVEN A VE RY DETAIL WORKING FOR THE SUO MOTO DISALLOWANCE OF RS. 16,95,69,008/- AND THE ONLY DISPUTE IS WITH REGARD TO DISALLOWANCE UND ER RULE SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 6 OF 12 8D(2)(III). THE ASSESSEE HAS EXCLUDED THE EXPENDIT URE RELATING TO INTEREST INCOME, CONSULTANCY INCOME AND DIVIDEND. OUR ATTENTION WAS DRAWN TO PAGE 39 OF THE PB TO POINT OUT THE REV ENUE FROM OPERATIONS AND OTHER INCOME AND ALSO THE FINANCIAL COST AND OTHER EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOU NT. HE ALSO POINTED OUT THE EXPENDITURE WHICH CAN BE HELD TO BE ATTRIBUTABLE IN RELATION TO THE EARNING OF DIVIDEND INCOME; THE WORKING OF THE SAME HAS BEEN PLACED IN THE PB AT PAGE 26. HE FURTH ER SUBMITTED THAT THE METHODOLOGY ADOPTED BY THE ASSESSEE IN BIF URCATING THE STREAMS OF INCOME AND COST HAS BEEN ACCEPTED BY THE DEPARTMENT IN ALL THE YEARS, WHEREBY THE ASSESSEE BIFURCATED T HE TOTAL PERSONAL AND ADMINISTRATIVE EXPENSES INCURRED DURIN G THE YEAR AGAINST THE OPERATIVE INCOME AND NON-OPERATIVE INCO ME ON REASONABLE BASIS. SIMILAR BASIS OF IDENTIFICATION AND BIFURCATION OF EXPENSES WERE ADOPTED IN THE AY 2011-12 AND THE SIMILAR COMPUTATION OF THE ASSESSEE HAS BEEN ACCEPTED BY TH E AO IN THE ORDER PASSED U/S 143(3) WITHOUT ANY ADVERSE INFEREN CE ON THE SAID METHODOLOGY. THE AO WITHOUT GOING THROUGH THE NATURE OF EXPENDITURE DEBITED AND HAVING REGARD TO THE ACCOUN TS HAS MECHANICALLY APPLIED RULE 8D (2)(III) @ 0.5%. HE, F URTHER, SUBMITTED THAT THERE IS NO SATISFACTION BY THE AO O N THE SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 7 OF 12 DISALLOWANCE MADE BY THE ASSESSEE AND IN A VERY MEC HANICAL MANNER HE HAS PROVIDED TO MAKE THE DISALLOWANCE. 6. ON THE OTHER HAND, LD. CIT (DR) SUBMITTED THAT AO H AS RECORDED THE SATISFACTION IN THE FOLLOWING MANNER A S PER PARA 3.2 AS UNDER: 3.2 SINCE, THE ASSESSEE COMPANY HAS INVESTED ITS MONEY FOR SUCH INVESTMENT OF SHARES, WHICH IS CAPABLE TO GENE RATE INCOME WHICH DOES NOT OR SHALL NOT FORM PART OF TOT AL INCOME OF THE ASSESSEE COMPANY AND INDIRECT COST IN THE FO RM OF ADMINISTRATIVE EXPENDITURES AND INTEREST IS INVOLVE D IN THIS PROCESS. THERE IS DIRECT AND PROXIMATE NEXUS BETWE EN THE EXEMPTED INCOME, WHICH THE INVESTMENTS SHALL GENERA TE AND THE EXPENDITURES DIRECTLY OR INDIRECTLY INVOLVED IN EARNING THE SAID INCOME. HENCE, I AM FULLY SATISFIED TO INVOKE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D TO WORK OUT DISALLOWANCE OF EXPENDITURES. THUS, THE DISALLOWANCE MADE BY THE AO SHOULD BE UPH ELD. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS AN D ON PERUSAL OF THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER AS WELL AS THE MATERIAL REFERRED BEFORE US, WE FIND THAT ASSESSEE HAS MADE DISALLOWANCE OF EXPENDITURE IN RELATION TO THE DIVI DEND INCOME IN THE FOLLOWING MANNER: - SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 8 OF 12 EXPENDITURE IN RELATION TO DIVIDEND INCOME S.NO. PARTICULARS DETAIL AMOUNT (IN RUPEES) 1. EXPENDITURE DIRECTLY RELATING TO DIVIDEND INCOME 14,569,045 14,569,045 2. INTEREST EXPENSE ALLOCATED 129,260,080 119,650,940 3. 0.5% OF AVERAGE INVESTMENT 57,962,456 35,349,023 TOTAL AMOUNT 201,791,581 169,569,008 WHILE WORKING THE DISALLOWANCE OF EXPENSES, THE ASS ESSEE HAS REDUCED, FIRSTLY , INTEREST EXPENSES INCURRED FOR EARNING OF INTERES T INCOME; SECONDLY , EXPENSES FOR CONSULTANCY AND OTHERS; AND LASTLY , EXPENSES AS PER PROVISION OF PGBP WHICH INCLUDE DEPRECIATION, DONATION, PROVISIONS FOR DIMINUTION I N THE VALUE OF INVESTMENT, RBI PENALTY, PROVISION FOR LEAVE ENCASH MENT, IPO EXPENSES, GRATUITY PROVISIONS ETC. THE DETAILS OF SUCH EXPENSES ARE AS UNDER: TOTAL DISALLOWANCE TOTAL EXPENSES 486,970,574 LESS: INTEREST EXPENSES TO EARN INTEREST INCOME 67, 928,110 419,042,464 LESS: EXPENSES FOR CONSULTANCY & OTHERS 54,223,779 364,818,685 LESS: EXPENSES WHICH IS DISALLOWED AS PER PROVISIONS OF PGBP DEPRECIATION 170,827 DONATION 1,550,001 PROVISIONS FOR DIMINUTION IN THE VALUE OF INVESTMENT 121,500,010 SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 9 OF 12 RBI PENALTY PAID 1,000,000 PROVISION FOR LEAVE ENCASHMENT 207,649 IPO EXPENSES 75,212,296 GRATUITY PROVISIONS 568,799 INTEREST PAID ON TDS - 200,209,582 164,609,104 LESS: INTEREST EXPENSES UN ALLOCATED 129,260,080 35,349,023 BY WAY OF SUCH METHODOLOGY OF BIFURCATING TH E OPERATING AND NON-OPERATING REVENUE, EXPENSES WHICH ARE NOT CONNE CTED WITH EARNING OF THE EXEMPT INCOME HAS BEEN REMOVED. SUCH METHODOLOGY HAS BEEN ACCEPTED BY THE AO IN THE EARL IER YEARS. FROM THE BARE PERUSAL OF THE NATURE OF EXPENSES, IT CAN BE SEEN THAT, NONE OF THESE EXPENSES ARE DIRECTLY OR INDIRE CTLY ATTRIBUTABLE FOR EARNING OF EXEMPT INCOME. 8. SECTION 14A (2) PROVIDES THAT THE AO WHILE DE TERMINING THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO THE E XEMPT INCOME, FIRST OF ALL, SHOULD EXAMINE THE CLAIM OF THE ASSES SEE HAVING REGARD TO THE ACCOUNTS MAINTAINED BY THE ASSESSEE A ND THEN HE HAS TO SATISFY HIMSELF WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE INCURRED IN RELA TION TO THE EXEMPT INCOME. IF THE ASSESSEE HAVING REGARD TO THE ACCOUNTS AND NATURE OF EXPENSES DEBITED POINTS OUT THAT THESE EX PENDITURES ARE NOT CONNECTED OR ATTRIBUTABLE TO EARNING OF EXEMPT INCOME, THEN SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 10 OF 12 SAME CANNOT BE ROPED IN FOR THE PURPOSE OF DISALLOW ANCE UNDER THIS SECTION UNLESS ASSESSING OFFICER FINDS SOMETHI NG CONTRARY. WHEN THE ASSESSEE HAS GIVEN A VERY DETAILED WORKING , THEN WITHOUT POINTING OUT ANY DEFECT, THE AO IN A VERY G ENERAL MANNER HAS HELD THAT THERE IS DIRECT AND PROXIMATE NEXUS B ETWEEN THE EXPENDITURE AND THE EXEMPT INCOME. THE SATISFACTIO N OF THE AO SHOULD NOT BE MECHANICAL BUT SHOULD PRIMA FACIE INDICATE HIS APPLICATION OF MIND ON THE ACCOUNTS MAINTAINED BY T HE ASSESSEE AND THE NATURE OF EXPENDITURE DEBITED VIS--VIS ITS CO-RELATION WITH THE EARNING OF THE EXEMPT INCOME. IT IS A WELL SETTLED PROPOSITION BY THE HONBLE APEX COURT THAT SATISFAC TION OF THE AO IS MANDATORY BEFORE RESORTING TO DISALLOWANCE. THE RELEVANT OBSERVATION OF THE HONBLE SUPREME COURT IN THE CAS E OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT REPORTED IN (2017) 81 TAXMANN.COM 111 READS AS UNDER: WE DO NOT SEE HOW IN THE AFORESAID FACT SITUATION A DIFFERENT VIEW COULD HAVE BEEN TAKEN FOR THE AY 2002-03. SUB - SECTIONS (2) AND (3) OF SECTION 14A OF THE ACT READ WITH RULE 8D OF THE RULES MERELY PRESCRIBE A FORMULA FOR DETE RMINATION OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN A SI TUATION WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH T HE CLAIM OF THE ASSESSEE. WHETHER SUCH DETERMINATION IS TO BE MADE ON SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 11 OF 12 APPLICATION OF THE FORMULA PRESCRIBED UNDER RULE 8D OR IN THE BEST JUDGMENT OF THE AO, WHAT THE LAW POSTULATES IS THE REQUIREMENT OF A SATISFACTION IN THE ASSESSING OFFI CER THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, AS P LACED BEFORE HIM, IT IS NOT POSSIBLE TO GENERATE THE REQU ISITE SATISFACTION WITH REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. IT IS ONLY THEREAFTER THAT THE PROVISION S OF SECTION 14A(2) AND (3) READ WITH RULE 8D OF THE RULES OR A BEST JUDGMENT DETERMINATION, AS EARLIER PREVAILING, WOUL D BECOME APPLICABLE. 9. HERE IN THIS CASE, AS POINTED OUT EARLIER TH ERE IS NO REQUISITE SATISFACTION BY THE AO AND HE HAS MECHANICALLY APPL IED RULE 8D. UNDER THESE FACTS AND CIRCUMSTANCES AS DISCUSSED AB OVE, THE MANNER IN WHICH DISALLOWANCE UNDER RULE 8D(III) HAS BEEN MADE BY THE ASSESSING OFFICER IS NOT CALLED FOR AND, ACC ORDINGLY, THE DISALLOWANCE MADE BY THE AO OVER AND ABOVE THE SUO MOTO DISALLOWANCE MADE BY THE ASSESSEE IS DELETED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. OTHER GROUNDS ARE GENERAL IN NATURE AND HENCE, THE SAME A RE NOT ADJUDICATED UPON. SAMVARDHANA MOTHERSON INTERNATIONAL LTD. VS. ACIT/ I.T.A.NO.2343/DEL/2017/A.Y.2012-13 PAGE 12 OF 12 11. IN THE RESULT, THE APPEAL OF ASSESSEE IS A LLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 03.02.2020 SD/- SD/- (O.P. MEENA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIA L MEMBER DATED: 03.02.2020 * KAVITA ARORA, SR. P.S. COPY OF ORDER SENT TO- ASSESSEE/AO/PR. CIT/ CIT (A) / ITAT (DR)/GUARD FILE OF ITAT. BY ORDER ASSISTANT REGISTRAR, ITAT: DELHI BENCHES-DELHI