ACIT, Faridabad V. Ms. N.H.P.C. Ltd., Faridabad

ITA 424/DEL/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 97130 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 22-07-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 23-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: VED JAIN ASHISH GOEL; PRANJAL SHRIVASTAVA S
• Keywords: Depreciation; Earning of tax free income; Revised return
• Section: 14A; 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI A.T. VARKEY, JUDICIAL MEMBER ITA NO.424/DEL./2013 (ASSESSMENT YEAR : 2009-10) ACIT, CIRCLE II, VS. M/S. N.H.P.C. LIMITED, FARIDABAD. NHPC COMPLEX, SECTOR 33, FARIDABAD. (PAN : AAACN0149C) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI VED JAIN, ASHISH GOEL AND PRANJAL SHRIVASTAVA, ADVOCATES REVENUE BY : NONE DATE OF HEARING : 23.07.2015 DATE OF PRONOUNCEMENT : 26.08.2015 O R D E R PER A.T. VARKEY, JUDICIAL MEMBER : THIS APPEAL, AT THE INSTANCE OF THE REVENUE, IS DIR ECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS), FARIDABAD DATED 29.10.2012 FOR THE ASSESSMENT YEAR 2009-10. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS A PUBLIC SECTOR UNDERTAKING AND HAS BEEN ENGAGED IN THE BUSI NESS OF CONSTRUCTION OF HYDRO POWER PROJECTS, GENERATION AND DISTRIBUTIO N OF ELECTRICITY AND CONSULTANCY SERVICES. THE RETURN OF INCOME DECLARIN G NIL INCOME AFTER ITA NO.424/DEL./2013 2 CLAIMING DEDUCTION TO THE EXTENT OF RS.3,63,99,65,4 37/- U/S 80IA OF THE INCOME-TAX ACT, 1961 (HEREINAFTER THE ACT) WAS E- FILED BY THE ASSESSEE ON 26.09.2009. THE BOOK PROFIT UNDER THE PROVISIONS OF SECTION 115JB OF THE ACT WAS, HOWEVER, DECLARED AT RS.1141,51,66,920 /-. THEREAFTER, THE ASSESSEE FILED A REVISED RETURN ON 30.03.2010 REVIS ING BOOK PROFIT AT RS.1115,30,68,920/- U/S 115JB OF THE ACT. THE CASE WAS SELECTED FOR SCRUTINY THROUGH CASS AND A NOTICE U/S 143(2) OF TH E ACT WAS ISSUED ON 19.08.2010. IN THE ASSESSMENT ORDER, THE AO HAS MA DE SEVERAL ADDITIONS AND DISALLOWANCES WHILE COMPUTING THE INCOME UNDER THE NORMAL, PROVISIONS AS WELL AS UNDER SECTION 115JB OF THE, A CT, WHICH HAVE BEEN CHALLENGED BY THE ASSESSEE BEFORE THE FIRST APPELLA TE AUTHORITY. THE LD. CIT (A) ALLOWED THE APPEAL OF THE ASSESSEE. 3. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US. 4. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS OF A PPEAL :- (A) THE ORDER OF THE LD. CIT (A) IS NOT ACCEPTABL E AS THE ASSESSEE HAS FAILED TO ESTABLISH THESE PROVISIONS TO BE OF ASCER TAINED IN NATURE IN SPITE OF AMPLE OPPORTUNITIES PROVIDED BY THE A.O. RELIANCE H AS BEEN PLACED BY THE A.O. ON THE JUDGMENT OF HON'BLE SUPREME COURT IN TH E CASE OF SHREE SAJJAN MILLS IN WHICH IT HAS BEEN MENTIONED THAT NA TURE OF PROVISIONS FOR GRATUITY IS A CONTINGENT LIABILITY BECAUSE THE PAYM ENT OF GRATUITY IS MADE IN CONSIDERATION OF THE ENTIRE LENGTH OF SERVICE & IT' S ASCERTAINMENT DEPENDS UPON SEVERAL FACTORS & UNTIL UNLESS THE EMPLOYEE IS RETIRED OR HIS SERVICES ARE TERMINATED, THE RIGHT TO RECEIVE GRATUITY REMAI NS AS HIS CONTINGENT RIGHT. (B) ON THE FACTS & THE CIRCUMSTANCES OF THE CASE, THE LD. C1T(A) HAS ERRED IN DELETING THE ABOVE ADDITION OF RS.1,80,79, 857/- MADE BY THE A.O. AS THE SAME IS NOT ALLOWABLE ON UNCLASSIFIED LAND O R LEASE HOLD LAND AS PER COMPANIES ACT & ALSO THE DEPARTMENT HAS ALREADY FIL ED 2ND APPEAL BEFORE THE HON'BLE ITAT ON THE SAME ISSUE IN EARLIER YEAR. ITA NO.424/DEL./2013 3 (C) THE ORDER OF THE LD CIT(A) HAS NOT BEEN FOUND ACCEPTABLE AS A.O. HAS RIGHTLY APPLIED RULE 8D WHICH CAME INTO EFFECT W.E.F. 01.04.2008. FURTHER, ON ONE HAND THE ASSESSEE HAS MADE HUGE INV ESTMENTS FOR EARNING TAX FREE DIVIDENDS & ON OTHER HAND HUGE INTEREST HA S BEEN PAID ON LOANS. HENCE THE ASSESSEE HAS CLAIMED EXPENDITURE ON INCOM E NOT OFFERED FOR TAXATION. (D) THAT THE APPELLANT CRAVES FOR THE PERMISSION TO ADD, DELETE OR AMEND THE GROUNDS OF APPEAL BEFORE OR AT THE TIME O F HEARING OF APPEAL. 5. APROPOS GROUND 1 IS IN RESPECT OF CLAIM OF PROVI SION FOR GRATUITY AND OTHER BENEFITS WHICH ARE NOT ALLOWABLE, SINCE T HEY ARE CONTINGENT IN NATURE WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT. THE AO IN THIS REGARD NOTED THAT THE ASSESSEE WHILE COMPUTING BOOK PROFITS DID NOT CONSIDER THE FOLLOWING PROVISIONS EARMARKED FOR ADD ITION WHILE COMPUTING BOOK PROFIT U/S 115JB OF THE ACT:- SR. NO. DESCRIPTION AMOUNT 1 PROVISION FOR GRATUITY 47,66,82,534/- 2 PROVISION FOR LEAVE ENCASEMENT 20,61,51,780/- 3 PROVISION FOR EPF MATCHING CONTRIBUTION ON LEAVE ENCASHMENT 6,33,04,525/- 4 PROVISION FOR RETIRED EMPLOYEE HEALTH SCHEME 7,13,52,087/- 5 PROVISION FOR LEAVE TRAVEL CONCESSION 62,73,072/- 6 PROVISION FOR BAGGAGE ALLOWANCE ON SUPERANNUATION 19,46,240/- TOTAL 82,57,10,238/- THE AO ASKED THE ASSESSEE TO SHOW CAUSE IN THIS REG ARD AND THE ASSESSEE VIDE LETTER DATED 17.08.2011 SUBMITTED ITS EXPLANAT ION. AFTER GOING THROUGH THE SUBMISSION OF THE ASSESSEE, THE AO OBSE RVED THAT THE CONCERNED PROVISIONS ARE NOT AN ASCERTAINED PROVISI ONS I.E. A CONTINGENT ITA NO.424/DEL./2013 4 LIABILITY AND ACCORDINGLY RS.82,57,10,238/- WAS ADD ED TO THE BOOK PROFIT AS PER THE PROVISIONS OF SECTION 115JB OF THE ACT. 6. THE LD. CIT (A), AFTER GOING THROUGH THE ORDER O F THE AO AND SUBMISSIONS OF THE ASSESSEE, HELD AS UNDER :- 6. I HAVE CONSIDERED THE SUBMISSIONS OF LEARNED CO UNSEL FOR THE APPELLANT AND GONE THROUGH THE DOCUMENTS FILED ON R ECORD AS WELL AS THE JUDICIAL RULINGS RELIED UPON BY THE LEARNED COU NSEL AND THE AO. THE GROUNDS NO.1 & 7 OF APPEAL ARE GENERAL IN NATUR E AND COVERED BY THE MAIN GROUNDS OF APPEAL. IN GROUND NO. 2 OF A PPEAL, THE APPELLANT HAS CHALLENGED THE ADDITION OF RS.82,57,1 0,238/- MADE ON ACCOUNT OF THE PROVISION FOR GRATUITY, LEAVE ENCASH MENT, POST RETIREMENT MEDICAL BENEFIT, LTC, BAGGAGE ALLOWANCE AND MATCHING CONTRIBUTION ON LEAVE ENCASHMENT ETC., FOR THE PURP OSE OF COMPUTING TAX LIABILITY U/S 115JB OF THE ACT. AS DI SCUSSED IN PARA 3 OF THE ASSESSMENT ORDER, THE AO HAS ADDED THE ABOVE PROVISIONS FOR THE PURPOSE OF COMPUTING BOOK PROFIT U/S 115JB FOLL OWING THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SH REE SAJJAN MILLS VS. CIT (156 ITR 585) AFTER HOLDING THE SAID PROVIS IONS TO BE ONLY CONTINGENT AND UNASCERTAINED. THE APPELLANT HAS CON TENDED THAT THE ABOVE PROVISIONS WERE CREATED IN ACCORDANCE WITH AC COUNTING PRINCIPLES AND STANDARDS; THE VALUATION OF LIABILIT IES WAS BASED ON COMPILATION OF VARIOUS DETAILS AND BY ADOPTING ACTU ARIAL VALUATION; THE LIABILITIES WERE 'ASCERTAINED' AND THE PROFIT & LOSS ACCOUNT WAS PREPARED IN ACCORDANCE PART II AND III OF SCHEDULE- VI OF THE COMPANIES ACT. THEREFORE, THE BOOK PROFIT DECLARED AS PER THE PROFIT AND LOSS ACCOUNT SHOULD HAVE NOT BEEN DISTURBED IN VIEW OF DECISION OF HON'BLE APEX COURT IN THE CASE OF APOLLOTYRES LT D. VS. CIT (255 ITR 273). THE RELIANCE HAS ALSO BEEN PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH M OVERS LIMITED VS. CIT (112 TAXMAN 61) AND THE DECISION OF HON'BLE MUMBAI HIGH COURT IN THE CASE OF CIT VS. ECHJAY FORGINGS PVT. L TD. (116 TAXMAN 322) IN SUPPORT OF CONTENTIONS THAT WHEN THE LIABIL ITIES WERE DETERMINED ON THE BASIS OF ACTUARIAL CALCULATIONS, THE SAME REPRESENTED ASCERTAINED LIABILITIES. THE IDENTICAL ISSUE WAS ALSO INVOLVED IN THE CASE OF APPELLANT FOR A.Y.2008-09 A ND AS PER THE DETAILED DISCUSSION VIDE PARA 6.1 OF MY ORDER DATED 02.01.2012 IN APPEAL NO.276/2010-11 AFTER CONSIDERING THE PROVISI ONS OF LAW, LEGAL POSITION ON THIS ISSUE EMANATING FROM RELIED UPON J UDICIAL RULINGS AND THE DECISION OF LD. CIT (APPEALS) FARIDABAD VID E ORDER DATED 29.04.2010 IN APPEAL NO.137/2009-10 FOR A.Y.2007-08 , THIS ISSUE WAS DECIDED IN FAVOUR OF THE APPELLANT. SINCE THE I SSUE IS ALREADY COVERED BY THE DECISION FOR EARLIER YEARS, THE AO I S DIRECTED TO ITA NO.424/DEL./2013 5 COMPUTE THE BOOK PROFIT WITHOUT MAKING ANY ADDITION FOR AFORESAID PROVISIONS. THE ADDITION OF RS.82,57,10,238/- MADE BY THE AO FOR THE PURPOSE OF DETERMINING BOOK PROFIT U/S 115JB OF THE ACT IS DELETED. THE GROUND OF APPEAL IS ALLOWED. 7. AGGRIEVED BY THE DELETION OF THE SAID ADDITION M ADE BY THE AO, THE DEPARTMENT IS BEFORE US. 8. AT THE OUTSET ITSELF, THE LD. AR FOR THE ASSESSE E SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE IN ASSES SEES OWN CASE IN ITA NO.1105/DEL/2006 FOR ASSESSMENT YEAR 2002-03 ORDER DATED 21.11.2008 OF THE TRIBUNAL. HE ALSO SUBMITTED THAT FURTHER, IN ASSESSEES OWN CASE IN ASSESSMENT YEARS 2004-05, 2005-06, 2007-08 AND 2008 -09, RELYING ON THE ORDER OF THE TRIBUNAL (SUPRA), THE CO-ORDINATE BENC HES OF THE ITAT HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE. 9. WE HAVE HEARD THE SUBMISSION AND PERUSED THE MAT ERIAL ON RECORD. THE TRIBUNAL IN ITA NO.1105/DEL./2006 FOR ASSESSMEN T YEAR 2002-03 ORDER DATED 21.11.2008 HAS CONSIDERED AN IDENTICAL ISSUE AND HAD DECIDED THE MATTER IN FAVOUR OF THE ASSESSEE. THE AFORESAI D ORDER OF THE TRIBUNAL WAS FOLLOWED IN SUBSEQUENT ASSESSMENT YEARS 2005-06 , 2007-08 AND 2008- 09. SINCE IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL IN THE AFORESAID ASSESSMENT YEARS AND THE ISSUE RAISED BEF ORE US IS COVERED BY THE DECISION OF THE COORDINATE BENCHES OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 (SUPRA), WE CONFIRM THE ORDER OF THE LD. CIT (A) ON THIS ISSUE. ITA NO.424/DEL./2013 6 10. APROPOS GROUND 2 IS REGARDING DEPRECIATION ON L AND AMORTIZED WHILE CALCULATING BOOK PROFITS UNDER SECTION 115JB. THE AO NOTICED THAT ASSESSEE HAD CLAIMED AN AMOUNT OF RS. 1,80,79,857/- AS PER SCHEDULE 5 OF THE BALANCE SHEET ON ACCOUNT OF DEPRECIATION ON LAN D UNCLASSIFIED AND LEASEHOLD LAND. OUT OF THE TOTAL DEPRECIATION ON LA ND OF RS. 2,49,92,137/ -, AN AMOUNT OF RS. 1,80,79,857/ - HAD BEEN DEBITED TO PROFIT AND LOSS ACCOUNT AND BALANCE AMOUNT OF RS.69,12,280/- HAD BEEN ADDED TO THE COST OF CAPITAL WORK IN PROGRESS. THE AO CONFRONTED THE ASSESSEE WI TH THESE FACTS THAT DEPRECIATION ON THE LAND WAS NOT ALLOWED AS PER THE COMPANIES ACT AND ACCORDINGLY, WHY THE DEPRECIATION MAY NOT BE ADDED BACK TO THE SHOWN BOOK PROFIT TO WORK OUT THE BOOK PROFIT AS PER COMP ANIES ACT, 1956. THE ASSESSEE REPLIED THE SAME VIDE SUBMISSION DATED 20. 12.2011. THE AO EXAMINED THE REPLY SUBMITTED BY THE ASSESSEE AND OB SERVED THAT AS PER SCHEDULE XIV OF THE COMPANIES ACT, 1956, NO RATE OF DEPRECIATION HAS BEEN PRESCRIBED FOR LAND. HE ALSO OBSERVED THAT T HE CASE OF APOLLO TYRES LTD. VS CIT (2002) 255 ITR 273 (SC), RELIED UPON BY THE ASSESSEE, DID NOT APPLY TO THE CASE OF ASSESSEE. HE OBSERVED THAT T HE APEX COURT JUDGEMENT CLEARLY SAYS THAT BOOK PROFIT COMPUTED SHOULD BE IN ACCORDANCE WITH THE PART II AND III OF SCHEDULE VI TO THE COMPANIES ACT , 1956. HE FURTHER OBSERVED THAT AS FAR AS DEPRECIATION ON LAND WAS CO NCERNED, IT WAS NEITHER PRESCRIBED IN INCOME TAX ACT, 1961 NOR IN COMPANIES ACT, 1956. HENCE, ACCOUNTS OF THE COMPANY ARE NOT IN ACCORDANCE WITH THE PROVISION OF PART II ITA NO.424/DEL./2013 7 AND III OF SCHEDULE VI OF THE COMPANIES ACT, 1956. THUS, HE DISALLOWED THE CLAIM BEING NOT IN ACCORDANCE WITH COMPANIES AC T TO THE EXTENT OF RS.1,80,79,857/- AS THIS AMOUNT HAS BEEN DEBITED TO P & L ACCOUNT AND ACCORDINGLY, ADDED BACK TO THE FIGURE OF BOOK PROFI T. 11. WHILE ALLOWING THIS ISSUE IN FAVOUR OF THE ASSE SSEE, LD. CIT (A) HELD AS UNDER :- 6.1. THE GROUND NO. 3 OF APPEAL HAS BEEN TAKEN AGA INST THE DISALLOWANCE OF RS.L,80,79,857/- ON ACCOUNT OF AMOR TIZATION OF LAND (DEPRECIATION) WHILE COMPUTING BOOK PROFITS U/S 115 JB OF THE ACT. WHILE MAKING THE DISALLOWANCE, THE AO'S CONTENTION HAS BEEN THAT THE DEPRECIATION ON LAND IS NEITHER PRESCRIBED UNDE R THE INCOME TAX ACT NOR IN THE COMPANIES ACT, 1956 AND HENCE, THE A CCOUNTS OF THE COMPANY WERE NOT IN ACCORDANCE WITH THE PROVISION O F PART II AND IN OF SCHEDULE VI OF THE COMPANIES ACT. THE APPELLANT, ON THE OTHER HAND, HAS CONTENDED THAT AMORTIZATION OF LEASE HOLD LAND HAS BEEN MADE AS PER ACCOUNTING STANDARD 10 OF ICAI AND AMOR TIZATION OF LAND UNCLASSIFIED AS PER ACCOUNTING STANDARD 6 OF I CAI AND IN VIEW OF CAG, WHICH HAS BEEN DONE TO MEET THE REQUIREMENT OF COMPANIES ACT AND AMORTIZATION OF LAND IS PERMITTED U/S 115JB . THE IDENTICAL ISSUE WAS ALSO INVOLVED IN THE CASE OF APPELLANT FO R A.Y.2008-09 AND AS PER THE DETAILED DISCUSSION VIDE PARA 6.2 OF MY ORDER DATED 02.01.2012 IN APPEAL NO.276/2010-11, THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT. SINCE THE ISSUE IS ALREADY COVERED BY THE DECISION FOR EARLIER YEAR, THE ADDITION OF RS.1,80, 79,857 /- MADE BY THE AO FOR THE PURPOSE OF COMPUTING BOOK PROFIT U/S 115JB OF THE ACT IS DIRECTED TO BE DELETED. THE GROUND NO.3 OF A PPEAL IS ALLOWED. 12. AT THE OUTSET ITSELF, THE LD. AR FOR THE ASSESS EE SUBMITTED THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE IN ASSES SEES OWN CASE IN ITA NO.2449/DEL/2008 FOR ASSESSMENT YEAR 2004-05 ORDER DATED 30.09.2014 OF THE TRIBUNAL AND TOOK OUR ATTENTION TO PAGE 6, P ARA 7 OF THE ORDER. HE ALSO SUBMITTED THAT THE ITAT, RELYING ON THE AFORES AID ORDER DATED ITA NO.424/DEL./2013 8 30.09.2014 (SUPRA), HAS DECIDED THIS ISSUE IN FAVOU R OF THE ASSESSEE IN ASSESSEES OWN CASE IN ASSESSMENT YEARS 2007-08 AND 2008-09. 13. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE TRIBUNAL IN THE ORDER FOR ASSESSMENT YEAR 2002- 03 (SUPRA) HAS CONSIDERED AN IDENTICAL ISSUE AND HAD DECIDED THE M ATTER IN FAVOUR OF THE ASSESSEE. THE AFORESAID ORDER OF THE TRIBUNAL WAS FOLLOWED IN SUBSEQUENT ASSESSMENT YEARS 2005-06, 2007-08 AND 2008-09. SI NCE IDENTICAL ISSUE HAS BEEN CONSIDERED BY THE TRIBUNAL AND THE ISSUE R AISED BEFORE US IS IDENTICAL TO THE ISSUE COVERED BY THE COORDINATE BE NCH OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 (SU PRA) AND OTHER YEARS, RESPECTFULLY FOLLOWING THE SAME, WE CONFIRM THE ORD ER OF THE LD. CIT (A) ON THIS ISSUE. 14. APROPOS GROUND 3 IS REGARDING DISALLOWANCE UNDE R SECTION 14A OF THE ACT. THE AO NOTICED FROM THE BALANCE SHEET THAT THERE WERE DIVIDEND BEARING INVESTMENTS AND THE ASSESSEE EARNED DIVIDEN D DURING THE YEAR ON SUCH INVESTMENTS AS PER FOLLOWING DETAILS :- NAME OF THE COMPANY INVESTMENT AS ON 31.03.2009 RS. CRORES DIVIDEND RECEIVED IN RUPEES NHDC 1002.42 50,42,88,000 POWER TRADING CORP. 12.00 1,20,00,000/- INDIAN OVERSEAS BANK 0.36 12,62,800/- NATIONAL POWER EXCHANGE LTD. 0.83 - TOTAL 1015.61 51,75,50,800/ - THE AO OBSERVED FROM THE AFORESAID THAT THE ASSESSE E HAD EARNED EXEMPT INCOME TO THE TUNE OF RS. 51,75,50,800/ - DURING TH E YEAR WHICH WAS NOT ITA NO.424/DEL./2013 9 INCLUDIBLE TO THE TOTAL INCOME AND HENCE WAS REQUIR ED TO DISALLOW EXPENSES ON ACCOUNT OF SUCH INCOME AS PER THE PROVISIONS OF SECTION 14A OF THE ACT. THE AO CONFRONTED THE ASSESSEE AND THE ASSESSEE INF ORMED THAT A DISALLOWANCE OF RS.13.78 CRORES HAD ALREADY BEEN MA DE ON THIS ACCOUNT. ACCORDING TO THE AO, THE SAID DISALLOWANCE OF EXPEN DITURE MADE BY THE ASSESSEE WAS NOT SATISFACTORY AND HENCE, HE ASKED A SSESSEE AGAIN TO SHOW CAUSE VIDE ORDER SHEET ENTRY DATED 20.12.2011 AS TO WHY APPROPRIATE DISALLOWANCE AS PER THE PROVISIONS OF SECTION 14A B E NOT MADE. THE AO ALSO ASKED THE ASSESSEE TO FILE COMPUTATION AS PER RULE 8D OF THE INCOME- TAX RULES, 1962 (HEREINAFTER THE RULES) AS PROVIDE D UNDER THE PROVISIONS OF SECTION 14A FOR THIS PURPOSE. IN RESPONSE, THE A SSESSEE FILED A REPLY VIDE LETTER DATED 23.12.2011. THE AO AFTER GOING THROUG H THE REPLY FILED BY THE ASSESSEE OBSERVED THAT THAT BY APPLYING RULE 8D, TH E QUANTUM OF DISALLOWANCE COMES AT RS.29.75 CRORES AS AGAINST WH ICH THE ASSESSEE HAS MADE A DISALLOWANCE OF RS. 13.78 CRORES. ACCORDING LY, THE AO COMPUTED DISALLOWANCE AS PER RULE 8D OF RS.15.97 CRORES (I.E . RS.29.75 RS.13.78 = RS.15.97 CRORES). HOWEVER, THE AO MADE DISALLOWA NCE OF RS.5.08 CRORES (I.E. 0.5% OF THE TOTAL INVESTMENT WHICH IS RS.1015.20 CRORES) UNDER THE PROVISIONS OF SECTION 14A OF THE ACT AND ACCORD INGLY, MADE AN ADDITION OF RS.5.08 CRORES. 15. AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT (A) AND THE CIT (A) DELETED THE ADDITION BY OBSERVING AS UNDER :- ITA NO.424/DEL./2013 10 6.2. IN GROUND NO.5 OF APPEAL, THE APPELLANT HAS C HALLENGED THE ADDITION OF RS.15,97,10,866/- MADE BY INVOKING THE PROVISION S OF SECTION 14A OF THE ACT WHILE COMPUTING REGULAR INCOME OF THE ASSES SEE. THERE IS NO DISPUTE TO THE FACT THAT THE APPELLANT HAS DECLARED DIVIDEND INCOME OF RS.51.75 CRORES WHICH HAS BEEN CLAIMED EXEMPT. THE SAID DIVIDEND INCOME HAS BEEN EARNED FROM THE INVESTMENT IN SHARE S OF THE ENTITIES AS UNDER: 1. NHDC RS.1002.42 CRORES 2. POWER TRADING CORPORATION RS. 12.00 CRORES 3. INDIAN OVERSEAS BANK RS. 0.36 CRORES 4. NATIONAL POWER EXCHANGE LTD. RS. 0.83 CROR ES TOTAL RS.1015.61 CRORES THE NHDC IS A SUBSIDIARY COMPANY OF THE ASSESSEE IN WHICH INVESTMENT HAS BEEN MADE AS PER THE SANCTION ORDER OF GOVT. OF INDIA, MINISTRY OF POWER, VIDE DO NO.22/3/2000/28.3.2002 AND ORDER NO.34/1/2003/DO/NHPC DATED 29.5.2003, OUT OF BUDGET ARY SUPPORT AND EQUITY CAPITAL INVESTED BY THE GOVT. TO THE EXTENT OF RS.772.42 CRORES. THE BALANCE INVESTMENT OF RS.230.00 CRORES HAS BEEN MAD E IN THE SHARES OF SUBSIDIARY COMPANY OUT OF FUNDS RAISED FROM THE ISS UE OF 'O' SERIES BONDS. THE INTEREST AND BOND ISSUE EXPENSES AGGREGATING TO RS.13.78 CRORES CONSISTING OF INTEREST OF RS.13.67 CRORES CALCULATE D AT THE RATE OF 7.7% APPLICABLE TO BONDS AND BOND ISSUE / SERVICE CHARGE S OF RS.10.27 LACS IN RESPECT OF INVESTMENT OF RS.230.00 CRORES HAVE ALRE ADY BEEN DISALLOWED BY THE ASSESSEE U/S 14A OF THE ACT. THE INVESTMENT OF RS.12.00 CRORES IN THE SHARES OF PTC, RS.36.00 LACS IN THE SHARES OF INDIA N OVERSEAS BANK AND RS.83.00 LACS IN THE SHARES OF NATIONAL POWER EXCHA NGE HAS BEEN STATED TO BE OUT OF INTERNAL ACCRUALS. THE NECESSARY DETAILS AND SUBMISSIONS IN THIS REGARD WERE FILED BY THE ASSESSEE BUT THE AO DID NO T CONSIDER THE SUOMOTO DISALLOWANCE MADE BY THE ASSESSEE AS SATISFACTORY A ND IN ACCORDANCE WITH RULE 8D OF THE INCOME TAX RULES, 1962. THE AO HAS T HEREFORE, APPLIED RULE 8D AND WORKED OUT THE DISALLOWANCE OF RS.0.10 CRORES, 24.57 CRORES AND RS.5.08 CRORES, AGGREGATING TO RS.29.75 CRORES, UNDER CLAUSE (I), (II) AND (III) OF SUB-RULE (2) OF RULE 8D, RESPECTIVELY. THE FACT THAT THE INVESTMENT OF RS.772.42 CRORES MADE BY THE APPELLAN T IN THE SHARES OF SUBSIDIARY COMPANY NHDC WAS OUT OF BUDGETARY SUPPOR T AND EQUITY CONTRIBUTION BY THE GOVT. OF INDIA HAS NOT BEEN DIS PUTED BY THE AO. THE ADMITTED FACT THEREFORE, REMAINS THAT THE INVESTMEN T OF RS.772.42 CRORES WAS DIRECTLY FROM INTEREST FREE FUNDS CONTRIBUTED B Y THE GOVT. OF INDIA. IF THAT BEING SO, THIS AMOUNT CANNOT GO INTO THE WORKI NG OF DISALLOWANCE OF INTEREST EVEN IF RULE 8D IS APPLIED. CLAUSE (II) OF SUB-RULE (2) OF RULE 8D PROVIDES FOR WORKING OF DISALLOWABLE INTEREST IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULA R INCOME OR RECEIPT. THUS, THERE IS NO DIRECT INTEREST EXPENDITURE FOR THE INV ESTMENT OF RS.772.42 CRORES AND THE DIRECT INTEREST EXPENDITURE OF RS.13 .78 CRORES PERTAINING TO INVESTMENT OF RS.230.00 CRORES IN THE SHARES OF NHD C HAS ALREADY BEEN DISALLOWED BY THE APPELLANT. THE HON'BLE ITAT, BENC H 'F' DELHI IN THE CASE OF PRIYA EXHIBITORS PVT. LTD. VS. ACIT (27 TAX MANN.COM 88) HAS HELD ITA NO.424/DEL./2013 11 THAT THE DISALLOWANCE UNDER SECTION 14A REQUIRES A CLEAR FINDING OF INCURRING OF EXPENDITURE AND IN ABSENCE OF SAME, NO DISALLOWANCE COULD BE MADE. SIMILARLY, THE HON'BLE ITAT, BENCH 'G' DELHI IN THE CASE OF ACIT VS. SIL INVESTMENT LTD. (26 TAXMANN.COM 78) HAS HEL D THAT WHERE ASSESSING OFFICER DID NOT BRING ANY EVIDENCE ON REC ORD TO ESTABLISH THAT ANY EXPENDITURE HAD BEEN INCURRED BY ASSESSEE FOR E ARNING EXEMPT INCOME, IT WAS WRONG ON PART OF ASSESSING OFFICER TO PROCEE D TO COMPUTE DISALLOWANCE OF EXPENSES UNDER SECTION 14A BY MEREL Y APPLYING RULE 8D(2)(III). THE LEGAL IMPLICATIONS OF SUB-SECTION ( 2) AND (3) OF SECTION 14A HAVE BEEN EXAMINED BY THE HON'BLE DELHI HIGH COURT IN MAXOPP INVESTMENT LTD. VS. CIT (347 ITR 272) AND IT HAS BE EN DECIDED IN PARA 29 OF THE ORDER AS UNDER: '29. SUB-SECTION (2) OF SECTION 14 A OF THE SAID AC T PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMI NE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. HOWEVER, IF WE EXAMINE TH E PROVISION CAREFULLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF TH E ASSESSING OFFICER, HAVING REGARD TO THE ACCOUNTS OF THE ASSES SEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WO RDS, THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY IF THE ASSESS ING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITUR E. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTER ING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCU RRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. SUB-SECTION (3) IS NOT HING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB-SEC TION (3) APPLIES TO CASES WHERE THE ASSESSEE CLAIMS THAT NO EXPENDIT URE HAS BEEN INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-SECT ION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF THE TOTAL INCOME UNDER THE SAID ACT AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSES SING OFFICER, IF SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPEND ITURE IN ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB- SECTION (2) OF SECTION 14A OF THE SAID ACT IT IS ON LY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECT NESS OF THE CLAIM OF THE ASSESSEE, IN BOTH CASES, THAT THE ASSESSING OFFICER GETS JURISDICTION TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN ITA NO.424/DEL./2013 12 RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT IN ACCORDANCE WITH THE PR ESCRIBED METHOD. THE PRESCRIBED METHOD BEING THE METHOD STIP ULATED IN RULE 80 OF THE SAID RULES. WHILE REJECTING THE CLAI M OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, A S THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFF ICER WOULD HAVE TO INDICATE COGENT REASONS FOR THE SAME.' IT IS HOWEVER, OBSERVED FROM PARA 5 OF THE ASSESSME NT ORDER THAT THE AO HAS NOT ASSIGNED ANY REASON WHILE FINDING THE SUBMI SSIONS OF THE APPELLANT AS UNSATISFACTORY. THE IDENTICAL ISSUE WAS ALSO INV OLVED IN THE CASE OF APPELLANT FOR A.Y. 2008-09 AND AS PER THE DETAILED DISCUSSION VIDE PARA 6.4 OF MY ORDER DATED 02.01.2012 IN APPEAL NO.276/2010- 11 AFTER CONSIDERING THE PROVISIONS OF LAW AND LEGAL POSITION EMANATING FROM RELIED UPON JUDICIAL RULINGS, THIS ISSUE HAS BEEN DECIDED IN FA VOUR OF THE APPELLANT. SINCE THE ISSUE IS ALREADY COVERED BY THE DECISION FOR EARLIER YEAR, THE ADDITION OF RS.15,97,10,866/- MADE BY THE AO BY INV OKING SECTION 14A OF THE ACT IS DIRECTED TO BE DELETED. THE GROUND NO. 5 OF APPEAL IS ALLOWED. 16. AGGRIEVED BY THE IMPUGNED ORDER OF THE CIT(A), THE REVENUE IS BEFORE US. THE LD DR, SUPPORTED THE ORDER OF THE AO , AND TOOK US TO THE SAME AND ARGUED THAT SINCE ADMITTEDLY THE ASSESSEE IS IN RECEIPT OF EXEMPT INCOME, THE AO, RIGHTLY INVOKED RULE 8D, TO DISALLO W EXPENDITURE AS MANDATED BY THE RULE. SO, HE WANTS US TO REVERSE TH E ORDER OF CIT(A) AND RESTORE THE ORDER OF AO. ON THE OTHER HAND, LD. AR FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS SUO MOTU DISALLOWED AN AMOUNT OF RS.13.78 CRORES. HE SUBMITTED THAT THE AO MADE COM PUTATION AS PER RULE 8D, WHICH CAME TO RS.29.75 CRORES AND HE MADE DISAL LOWANCE OF RS.15.97 CRORES. LD. AR SUBMITTED THAT THIS ISSUE IS COVERE D IN FAVOUR OF ASSESSEE IN ASSESSEE'S OWN CASE FOR THE AY 2008-09 IN ITA NO.14 02/DEL./2012 DATED 17.10.2014. HE FURTHER SUBMITTED THAT WITHOUT PREJ UDICE TO AFORESAID DECISION OF THE TRIBUNAL ON THIS ISSUE, THE DISALLO WANCE MADE BY AO ITA NO.424/DEL./2013 13 INVOKING THE PROVISIONS OF SECTION 14A READ WITH RU LE 8D, REJECTING THE DISALLOWANCE MADE BY THE ASSESSEE SUO MOTU, WITHOUT GIVING ANY REASON WHY THE AMOUNT DISALLOWED BY THE ASSESSEE HIMSELF I S NOT SATISFACTORY. HE SUBMITTED THAT IT IS A SETTLED POSITION THAT BEFORE INVOKING THE PROVISIONS OF RULE 8D, THE AO HAS TO RECORD AN OBJECTIVE SATISFAC TION WITH REGARD TO THE DISALLOWANCE MADE BY ASSESSEE NOT BEING SATISFACTOR Y, WHICH HAS NOT BEEN DONE IN THIS CASE. HE FURTHER SUBMITTED THAT THIS I SSUE IS SQUARELY COVERED WITH THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH CO URT IN THE CASE OF CIT VS TAIKISHA ENGINEERING INDIA LTD. (2015) 370 ITR 3 38 (DEL). HE ALSO RELIED ON THE DECISION OF ITAT, PUNE BENCH IN THE CASE OF KALYANI STEELS LTD VS. ACIT, ITA NO.1733/PN/2012 DATED 30.01.2014. LD. AR FURTHER RELIED ON THE DECISION OF ITAT, PUNE BENCH IN THE C ASE OF BHARAT FORGE LTD. VS. ACIT IN ITA NO.795/PN/2013 DATED 30.05.2 014. HE ALSO RELIED UPON SEVEN MORE JUDGMENTS/ORDERS IN THIS REGARD. SO , HE DOES NOT WANT US TO INTERFERE IN THE ORDER OF LD CIT(A). 17. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORDS. WE FIND THAT THE ASSESSEE HAS EARNED EXEMPT INCOME TO THE T UNE OF RS.51,75,50,800/- AND HAS SUO MOTU DISALLOWED RS.13.78 CRORES UNDER SECTION 14A OF THE ACT. WE FIND THAT THE AO HAS IN VOKED RULE 8D WITHOUT SPELLING OUT THE REASON FOR NOT BEING SATISFIED WIT H THE COMPUTATION MADE BY THE ASSESSEE IN RESPECT TO EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME. WITHOUT RECORDING THE OBJECTIVE SATISFACTI ON AS REQUIRED UNDER ITA NO.424/DEL./2013 14 SUB-SECTION (2) TO SECTION 14A THAT HE IS NOT SATIS FIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDIT URE IN RESPECT TO EXEMPT INCOME, THE AO CANNOT INVOKE RULE 8D TO COMPUTE THE DISALLOWANCE UNDER THE SAID RULE. THE HONBLE JURISDICTIONAL HIGH COU RT IN THE CASE OF CIT VS. TAIKISHA ENGINEERING INDIA LIMITED REPORTED IN 370 ITR 338 (DEL.) HAS HELD AS UNDER :- SECTION 14A OF THE ACT POSTULATES AND STATES THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT. UNDER SUB SECTION (2) TO SECTION 14A OF THE ACT, THE ASSESSING OFFICER IS REQUIRED TO EXAMINE THE ACCOUN TS OF THE ASSESSEE AND ONLY WHEN HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF EXPENDITURE IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER CAN DETERMINE THE AMOUNT OF EXPENDITURE WHICH SHOULD BE DISALLOWED IN ACCORDANC E WITH SUCH METHOD AS PRESCRIBED, I.E. RULE 8D OF THE RULES (QU OTED AND ELUCIDATED BELOW). THEREFORE, THE ASSESSING OFFICER AT THE FIRST INSTANCE MUST EXAMINE THE DISALLOWANCE MADE BY THE ASSESSEE OR THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE WAS I NCURRED TO EARN THE EXEMPT INCOME. IF AND ONLY IF THE ASSESSING OFF ICER IS NOT SATISFIED ON THIS COUNT AFTER MAKING REFERENCE TO T HE ACCOUNTS, THAT HE IS ENTITLED TO ADOPT THE METHOD AS PRESCRIBED I. E. RULE 8D OF THE RULES. THUS, RULE 8D IS NOT ATTRACTED AND APPLICABL E TO ALL ASSESSEE WHO HAVE EXEMPT INCOME AND IT IS NOT COMPULSORY AND NECESSARY THAT AN ASSESSEE MUST VOLUNTARILY COMPUTE DISALLOWA NCE AS PER RULE 8D OF THE RULES. WHERE THE DISALLOWANCE OR NIL DI SALLOWANCE MADE BY THE ASSESSEE IS FOUND TO BE UNSATISFACTORY ON EXAMINATION OF ACCOUNTS, THE ASSESSING OFFICER IS ENTITLED AND AUTHORISED TO COMPUTE THE DEDUCTION UNDER RULE 8D OF THE RULES. T HIS PRE- CONDITION AND STIPULATION AS NOTICED BELOW IS ALSO MANDATED IN SUB RULE (1) TO RULE 8D OF THE RULES. AFTER GOING THROUGH THE OTHER CASES ALSO, RELIED UP ON BY THE LD. AR, WE FIND THAT THE AO HAS NOT RECORDED THE SATISFACTION ENVISAGED BY THE STATUTE BEFORE INVOKING THE COMPUTATION PROVIDED FOR UNDER RULE 8D, WHICH ITA NO.424/DEL./2013 15 VITIATES THE IMPUGNED ORDER. WE ALSO FIND THAT IN ASSESSEES OWN CASE FOR THE PREVIOUS YEAR ALSO, THE TRIBUNAL HAS DELETED TH E ADDITION MADE BY THE AO ON THIS ACCOUNT. THEREFORE, WE UPHOLD THE ORDER OF THE CIT (A) ON THIS ISSUE. THIS GROUND OF REVENUES APPEAL IS DISMISSE D. 18. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 26 TH DAY OF AUGUST, 2015. SD/- SD/- (S.V. MEHROTRA) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 26 TH DAY OF AUGUST, 2015 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT(A), FARIDABAD. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.