Maruti Suzuki India Ltd., New Delhi V. DCIT, circle-16(1), New Delhi

ITA 7578/DEL/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 9072 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: E
• Assessment Year: 2007-2008
• Appeal Filed On: 29-11-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Opportunity of being heard; Earning of tax free income; Capital expenditure; Rule 8D
• Section: 14A

Judgement Text

Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI “E” BENCH: NEW DELHI (THROUGH VIDEO CONFERENCING ) BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER & SHRI PRADIP KUMAR KEDIA, ACCOUNTANT MEMBER ITA No.7578/Del/2018 [Assessment Year : 2007-08] Maruti Suzuki India Ltd., Plot No.1, Nelson Mandela Road, Vasant Kunj, New Delhi-110070. PAN-AAACM0829Q vs DCIT, Circle-16(1), New Delhi APPELLANT RESPONDENT Appellant by Sh. Ajay Vohra, Adv., Sh.Rohit Jain, Adv. & Ms. Soumya Jain, CA Respondent by Ms. Sarita Kumar, CIT DR Date of Hearing 01.12.2021 Date of Pronouncement 10.02.2022 ORDER PER KUL BHARAT, JM : This appeal filed by the assessee for the assessment year 2007-08 is directed against the order of Ld. CIT(A)-6, Delhi dated 10.09.2018. The assessee has raised following grounds of appeal:- I. “That the Commissioner of Income-tax Appeals ['CIT(A)'] erred on facts and in law in upholding the disallowance to the extent of Rs.484,62.000 made under section 14A of the Income-Tax Act. 1961 ('the Act'). 1.1 That the CIT(A) erred on facts and circumstances of the case and in law in holding that the assessing officer had recorded proper satisfaction regarding incorrectness of the claim of the assessee under section 14A of the Act. Page | 2 1.2 That the CIT(A) failed to appreciate that the assessing officer exceeded his jurisdiction in enhancing disallowance under section 14A while passing order under section 254/143(3) of the Act, in excess of the disallowance made in the first round. 1.3 That the CIT(A)/assessing officer failed to appreciate that no part of administrative expenditure was incurred in relation to exempt income so as to warrant any disallowance under section 14A of the Act. 1.4 Without prejudice, the CIT(A)/ assessing officer grossly erred in computing disallowance under section 14A of the Act by, inter alia, wrongly including investments not actually yielding exempt income during the relevant year. 2. Without prejudice, the CIT(A)/ AO erred on facts and circumstances of the case and in law in not appreciating that disallowance under section 14A resulted in double disallowance inasmuch as disallowance under that section had already been made in the original assessment order dated 12.4.2012 passed under section 143(3)1l44C of the Act. 3. That the CIT(A) erred on facts and in law not deleting interest charged under section 234C of the Act. The appellant craves leave to add, amend, alter or vary the above grounds of appeal at or before the time of hearing.” 2. The only effective ground in this appeal is against the sustaining the disallowance paid u/s 14A of the Income Tax Act, 1961 (“the Act”). 3. Facts giving rise to the present appeal are that this is second round of litigation and in earlier round, the Tribunal in ITA No. 5720/Del/2011 and 2564/Del/2014 pertaining to Assessment Year 2007-08, both dated 20.05.2016 after considering the material placed before it was pleased to remit the matter to the Assessing Officer (“AO”) with the following directions:- Page | 3 17.19. “Considering the above submissions, there is no doubt that Rule 8D was not applicable during the year under consideration, however, the application of the provisions laid down under sec. 14A of the Act is justifiable when the Assessing Officer is not satisfied that there is proximate cause for disallowance, stating the relationship of expenditure with income which does not form part of the total income. In the present case, the Assessing Officer has simply applied procedure laid down in Rule 8D to compute the amount disallowable under sec. 14A of the Act. The contention of the assessee in the present case remained that it is an operating company engaged in manufacture of automobile. The entire expenditure incurred was in relation to the manufacturing operation of the assessee and the Assessing Officer failed to bring on record any evidence/material to demonstrate that any part of such expenditure was relatable to the exempt income. It was further contended that borrowed funds available with the assessee as a matter of fact were utilized for business operation and not used for making the investments. It was further contended that interest free own fund available with the assessee for exceeded the investment made in shares/securities on which exempt dividend income was received. The Hon'ble jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd. – 347 ITR 272 (supra) relied upon by the Learned AR has been pleased to hold that before making disallowance under sec. 14A of the Act, it is mandatory on the part of the Assessing Officer to record his satisfaction that explanation made by the assessee on the applicability of the provisions under sec. 14A of the Act. We thus in the interest of justice set aside the matter to the file of the Assessing Officer to decide the issue afresh following the ratios laid down by the Hon'ble jurisdictional High Court in the case of Maxopp Investment Ltd. (supra) after affording opportunity of being heard to the assessee. The ground is accordingly allowed for statistical purposes.” 4. In pursuance to the direction of the Tribunal, the AO passed the impugned assessment order dated 12.05.2017 u/s 254 r.w.s. 143(3)/144C of Page | 4 the Act. Thereby, the AO yet again made disallowance u/s 14A of the Act of Rs.5,66,45,019/-. 5. Aggrieved against this, the assessee preferred appeal before Ld.CIT(A) who sustained the disallowance to the extent of Rs.4,84,62,000/-. The Ld.CIT(A) deleted the disallowances related to interest expenditure however, sustained the disallowance of administrative expenses. 6. Now, the assessee is in appeal before this Tribunal. 7. Ld. Counsel for the assessee vehemently argued that the authorities below were not justified in making the disallowance. He submitted that the law is clear and there is no ambiguity under the law. The AO has to record his satisfaction, having regard to the accounts of the assessee qua the correctness of the claim of the assessee in respect of such expenditure incurred in relation to income which does not form part of the total income under the Act. He submitted that there is no satisfaction by the AO. He further submitted that in the light of the judgement of Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co.Ltd. vs DCIT 394 ITR 449 (SC) and the judgement in the case of Maxopp Investment Ltd. vs CIT 402 ITR 640 (SC). Further, he placed reliance on the judgement of Hon’ble Delhi High Court in the case of Coforge Ltd. vs ACIT 436 ITR 546 (Del.) & H.T.Media Ltd. vs PCIT 399 ITR 576 (Del.) in support of contention that if the satisfaction is not recorded, no disallowance can be sustained. He further submitted that the issue even otherwise is also covered by the decision of the Tribunal and the order of the Hon’ble Delhi High Court pertaining to Assessment Year 2005-06 in assessee’s own case. He drew Page | 5 our attention to the order of the Tribunal enclosed with the Paper Book. Further, he submitted that the Tribunal in Assessment Year 2006-07 in assessee’s own case had restored the issue of disallowance u/s 14A of the Act to the assessing authority to decide in accordance with the judgement of Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. 347 ITR 272 (Del.). He contended that the assessing authority could have invoked the provisions of Rule 8D of the Income Tax Rules, 1962 only w.e.f Assessment Year 2008-09, but in the present case, the assessment is qua the Assessment Year 2007-08. 8. On the contrary, Ld. CIT DR vehemently opposed these submissions and supported the orders of the authorities below. 9. We have heard the rival contentions and perused the material available on record and gone through the orders of the authorities below. We find that the Ld. CIT(A) has affirmed the view of the assessing authority by observing as under:- 4.2.4. “In view of the guiding principle laid down by the Hon’ble Apex court in the above judgment, it is imperative that expenditure be apportioned relating to income which does not form part of the total income. Also, according to the above judgment, the contention of the appellant that investments are either strategic or to have controlling power on the group concerns/ subsidiaries is immaterial so far application of section 14A is concerned. It is also apparent that the amount to be disallowed cannot be computed in accordance with the manner prescribed under rule 8D since the said rule had no applicability for the year under consideration which is A.Y. 2007-08. Hence, the amount to be disallowed has to be computed in a reasonable manner. The Hon'ble Bombay High Court in the case of CIT vs. Page | 6 Godrej Agrovet Ltd. [ITA 934 of 2011 dated 08/01/2013] have held that disallowance based on the basis of percentage of exempt income can constitute a reasonable basis for disallowance to be made under section 14A prior to A.Y. 2008-09. 4.2.5 Having established that disallowance is to be made under section 14A, looking at the quantum of disallowance computed, it is noted that the AO has also proportionately disallowed interest expenditure incurred. It has been submitted that the appellant has substantial free reserves and surplus which far exceeds the amount of entire investment made. It has also been submitted that the borrowings of the appellant are granted for specified business purpose only, i.e, for capital expenditure or for meeting the working capital requirement as per the terms and conditions of the borrowings and are not granted and are not used for investments which yield exempt income. From the details submitted it is seen that the opening and closing funds available with the appellant by far exceeded the total average investment of Rs. 807.7 crores. Hence, expenditure on account of interest cannot be taken into consideration while computing the said disallowance. 4.2.6 On the issue of proportionate administrative expenses which are to be disallowed since rule 8D is not applicable for the year under consideration, a reasonable basis has to be adopted for computing the proportionate disallowance to be made. The appellant has submitted that the disallowance, without prejudice to the main contention, should be restricted to some reasonable proportion of expenses incurred by the finance Department and an alternative computation has been prepared. The said disallowance has been prepared taking into consideration 5.5% of the total cost of the finance Department which comes to Rs. 60,58,237/-. The computation given by the appellant is reproduced below: CALCULATION OF AMOUNT OF DISALLOWANCE Particulars Amount Salaries cost 38,67,750 Proportionate Administrative costs relating to CFP Department 21,90,488 Total disallowance u/s 14A 60,58,237 Page | 7 CALCULATION OF AMOUNT OF DISALLWOANCE U/S 14a- ADMISNTRATIVE COSTS Total administrative cost of finance 3,98,27,048 %age of exp incurred for investment activity 5.50% Administrative cost allocated to investment activity 21.90,488 Workings Part of Salary Department Amount GT 2303 Balance Other than CFP 396,92,341 9,03,939 387,88,402 CFP 19,01,653 8,63,007 10,38,646 Grand Total 415,93,994 17,66,946 398,27,048 %age of exp incurred for investment activity 21,90,488 CFP Department Payment 10,38,646 4.2.7 From the above computation which has been given it is noted that a percentage of 5.50% has been adopted for expenditure incurred for investment activity and that too restricted to the CFP Department. No basis for adopting the said 5.50% is seen. There is nothing on the record to show how apportionment taking 5.50% is reasonable and that it would cover the expenses incurred in relation to earning exempt income. It is now settled that expenditure relating to income which does not form part of the total income has to be apportioned. Since there is nothing on record to show how the method and the percentage of 5.50 adopted by the appellant is reasonable/has a scientific basis, the disallowance worked out by the AO considering 0.6% of the average of the value of the investment cannot be faulted. 4.2.8 In view of the discussion above, it is held that in view of the fact that the appellant has claimed exempt income of Rs. 1,52,74,13,328/-, disallowance is required to be made under section 14A in light of the decision of the Hon'ble Supreme court in the case of Maxopp investment Ltd. (supra). Further, since it has been held that no disallowance can be made on account of interest expenditure, the disallowance is restricted to 0.6% of the average of the value of investment computed at Rs. 807.7 crores which comes to Rs.4,84,62,000/-. Grounds of appeal Nos. 2 to 2.7 are partly allowed.” Page | 8 10. There is no dispute with regard to the fact that Rule 8D of Income Tax Rules, 1962 (“the Rules”) is not applicable for the Assessment Year under appeal. We find that Ld.CIT(A) erroneously affirmed the action of the Assessing Officer regarding disallowance of administrative expenses applying the Rule 8D of the Rules. This approach of authority below is not justified. The law mandates and it is incumbent upon the Assessing Officer to make disallowance u/s 14A of the Act having regard to accounts of the assessee if he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act. So far interest expenditure is concerned, the Ld.CIT(A) has given finding on fact that from the details submitted, it was seen that the opening and closing funds available, with the appellant assessee far exceeded the total average investment of Rs.807.7 crores. This finding on fact is not assailed by the Revenue. However, the disallowance regarding administrative expenditure is under challenge before this Tribunal. Undisputedly, the Assessing Officer made disallowance by applying Rule 8D of the Rules, this Rule came into vogue with effect from Assessment Year 2008-09. Hence, the Assessing Officer erred in law by applying the Rule 8D of the Rules for disallowance. Therefore, looking to the quantum of investment, business of the assessee and material placed before us, we are of the considered view that it would sub-serve the interest of justice if the disallowance is restricted to a sum of Rs.2,50,00,000/-. As it cannot be presumed that for handling, overseeing and making investment, no expenditure could be incurred. The assessee has failed to demonstrate how much administrative expenditure was incurred qua the investment that earned tax free income. Therefore, a fair Page | 9 estimation is made for such disallowance. The grounds raised by the assessee are partly allowed. 11. In the result, the appeal of assessee is partly allowed. Order pronounced in the open Court on 10 th February, 2022. Sd/- Sd/- (PRADIP KUMAR KEDIA) (KUL BHARAT) ACCOUNTANT MEMBER JUDICIAL MEMBER *Amit Kumar* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI