… Appellant In Tca.nos.785, 787, 788, 790, 793 To 797 & 812 To 814 Of 2018 v. M/S.j.k.fenner (India) Limited (Formerly Known As M/S.fenner (India) Limited, Madurai-16

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM : THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMAND THE HONOURABLE MR.JUSTICE N.SATHISH KUMAR TAX CASE APPEAL NOS.785, 787, 788, 790,793 TO 797, 812 TO 814 & 947 TO 953 OF 2018 & CMP.NOS.19267, 19276, 19282, 19464, 19466,19611, 19613, 19616, 19929, 19931, 19933, 22532, 22533, 22535, 22538, 22539 & 22540 OF 2018 The Commissioner of Income Tax, Corporate Circle 1, Madurai … Appellant in TCA.Nos.785, 787,788, 790, 793 to 797 & 812 to 814 of 2018Vs. M/s.J.K.Fenner (India) Limited(formerly known as M/s.Fenner(India) Limited, Madurai-16.....Respondent inTCA.Nos.785, 787,788, 790, 793to 797 & 812 to 814 of 2018 & Appellant in TCA.Nos.947 to953 of 2018 The Joint Commissioner of Income Tax/Assistant Commissioner of Income Tax,Corporate Range 1, Madurai-16....Respondent inin TCA.Nos.947 to 953 of 2018 APPEALS under Section 260A of the Income Tax Act, 1961against the common order dated 12.3.2018 made in ITANos.1272/Chny/2016, 1883/ Chny/2017, 947/Chny/2017, 1059/Chny/2016, 1061/Chny/2016, 1076/ Chny/2016, 1846/Chny/2017, 1060/Chny/2016, 1078/Chny/2016, 1063/ Chny/2016, 1077/Chny/2016 and967/Chny/2017 on the file of the Income Tax Appellate TribunalChennai 'C' Bench for the assessment years 2012-13, 2014-15,2013-14, 2008-09, 2010-11, 2008-09, 2014-15, 2009-10, 2010-11,2012-13, 2009-10 and 2013-14 respectively (appeals filed by theRevenue). https://hcservices.ecourts.gov.in/hcservices/ APPEALS under Section 260A of the Income Tax Act, 1961against the common order dated 12.3.2018 made in ITANos.1060/Chny/2016,1059/Chny/2016,1846/Chny/2017,1063/Chny/2016,947/Chny/2017,1062/Chny/2016and1061/Chny/2016 respectively for the assessment years 2009-10,2008-09, 2014-15, 2012-13, 2013-14, 2011-12 and 2010-11 (appealsfiled by the assessee). against the order of the Commissioner of Income Tax(Appeals)-I, Madurai in I.T.A.Nos.0092/16-17, 0207/16-17,0052/15-16, 0054/12-13, 0008/13-14, 0054/12-13, 0207/16-17,0066/12-13, 0008/13-14, 0052/15-16, 0066/12-13 and 0092/16-17order dated 27.01.2017, 25.05.2017, 25.02.2017, 29.01.2016,29.01.2016, 29.01.2016, 25.05.2017, 29.01.2016, 29.01.2016,25.02.2016, 29.01.2016 and 27.01.2017 respectively and againstthe order of the Deputy Commissioner of Income Tax, CorporateCircle(1), Madurai, Income Tax Officer Ward-II(1), Kolkata andAssistant Commissioner of Income Tax, Corporate Circle(1),Madurai made in PAN.No. , order dated 23.03.2015,31.12.2016, 30.03.2016, 31.12.2010, 07.03.2013, 31.12.2010,31.12.2016, 30.12.2016, 07.03.2013, 23.03.2005, 30.12.2010 and30.03.2006 for the Assessment Years 2012-13, 2014-15, 2013-14,2008-09, 2010-11, 2008-09, 2014-15, 2009-10, 2010-11, 2012-13,2009-10 and 2013-14 respectively. against the order of the Commissioner of Income Tax(Appeals)-I, Madurai made in I.T.A.Nos.0066/12-13, 0054/12-13,0207/16-17, 0052/15-16, 0092/16-17, 0075/14-15, and 0008/13-14,order dated 29.01.2016, 29.01.2016, 25.05.2017, 25.02.2016,27.01.2017, 29.01.2016, and 29.01.2016 respectively and againstthe order of the Income Tax Officer Ward-II(1), Kolkata,Assistant Commissioner of Income Tax, Corporate Circle(1),Madurai, Deputy Commissioner of Income Tax Circle-II, Maduraiand Joint Commissioner of Income Tax, Range-I, Madurai made inPAN.No.AAACJ7230Norderdated30.12.2011,31.12.2010,31.12.2016, 23.03.2015, 30.03.2016, 21.03.2014 & 07.03.2013 forthe Assessment Years 2009-10, 2008-09, 2014-15, 2012-13, 2013-4,2011-12 and 2010-11 respectively. There are 19 appeals in this bunch of cases, twelve of whichare filed by the Revenue and seven appeals are filed by theassessee under Section 260A of the Income Tax Act, 1961 https://hcservices.ecourts.gov.in/hcservices/ There are 19 appeals in this bunch of cases, twelve of whichare filed by the Revenue and seven appeals are filed by theassessee under Section 260A of the Income Tax Act, 1961 https://hcservices.ecourts.gov.in/hcservices/ (hereinafter called the Act) against the common order dated12.3.2018 passed by the Income Tax Appellate Tribunal (forshort, the Tribunal), 'C' Bench Chennai in ITA.Nos.1059 to1063/Chny/ 2016 and 947 and 1846/Chny/2017 for the assessmentyears 2008-09 to 2014-15 as well as ITA.Nos.1076 to 1078 and1272/Chny/2016 and 967 and 1883/Chny/2017 for the assessmentyears 2010-11 and 2012-13 to 2014-15. 2. The twelve appeals filed by the Revenue are numbered asTCA.Nos.785, 787, 788, 790, 793 to 797 and 812 to 814 of 2018 byraising the following substantial questions of law : “i. Whether the Income Tax AppellateTribunal was right in holding that theexpenditure relating to setting up of newunit at Sriperumbudur as revenue expenditurewhen the same is capital expenditure ?(assessment year 2008-09) ii. Whether the Income Tax AppellateTribunal is correct in allowing theunabsorbed depreciation of previous yeareven if it relates to beyond eightassessment years ? (assessment years 2008-09to 2010-11) iii. Whether the Income Tax AppellateTribunal is correct in holding that thedisallowance under Section 14A should berestricted to the dividend income earned forthe relevant assessment year ? (allassessment years) and iv. Whether the Income Tax AppellateTribunal is correct in law in directing theAssessing Officer not to include thedisallowance made under Section 14A whilecalculating the book profit under Section115J? (all assessment years) ” 3. In the seven appeals filed by the assessee, the followingsubstantial questions of law are framed for consideration : “Common Questions in TCA.Nos.947 to 953of 2018 : i. Whether the provisions of Section 14A read with Rule 8D(2)(ii) and (iii) can beinvoked in the absence of requirement of a https://hcservices.ecourts.gov.in/hcservices/ satisfaction in the Assessing Officer thathaving regard to the accounts of theassessee, as placed before him, it is notpossibletogeneratetherequisitesatisfaction with regard to the correctnessof the claim of the assessee ? ii. Whether the Assessing Officer havingnot disclosed any basis establishing areasonable nexus between the expendituredisallowed and the dividend income received,the provisions of Section 14A read with Rule8D could be invoked ? iii. Whether the Tribunal was right inlaw in confirming the disallowance underSection 14A read with Rule 8D(2) withoutappreciatingthattheassesseehadsufficient own funds and investments weremade out of own funds and no borrowings wereused for making investments ? And Additional Question in TCA.Nos.948 to953 of 2018 : iv. Without prejudice to the above,whether the Tribunal ought to have directedthat disallowance under Section 14A shouldbe restricted only to investments from whichexempt income were earned during the year ?” 4. We have heard Mr.M.Swaminathan, learned Senior StandingCounsel for the Revenue and Mr.V.K.Vijayaraghavan, learnedcounsel appearing on behalf of the assessee. iii. Whether the Tribunal was right inlaw in confirming the disallowance underSection 14A read with Rule 8D(2) withoutappreciatingthattheassesseehadsufficient own funds and investments weremade out of own funds and no borrowings wereused for making investments ? And Additional Question in TCA.Nos.948 to953 of 2018 : iv. Without prejudice to the above,whether the Tribunal ought to have directedthat disallowance under Section 14A shouldbe restricted only to investments from whichexempt income were earned during the year ?” 4. We have heard Mr.M.Swaminathan, learned Senior StandingCounsel for the Revenue and Mr.V.K.Vijayaraghavan, learnedcounsel appearing on behalf of the assessee. 5. In so far as the first substantial question of law raisedby the Revenue is concerned, it pertains to the expenditureincurred by the assessee for establishing their unit atSriperumbudur and whether the same to be treated as revenueexpenditure or capital expenditure and the assessment is for theassessment year 2008-09. We have perused the findings recordedby the Tribunal in paragraph 23 of the common impugned order andwe find that the Tribunal rightly followed the judgment of thisCourt in the case of CIT Vs. Rane (Madras) Limited [reported in(2007) 293 ITR 459] and the decision in the case of CIT Vs.Sakthi Sugars Limited [reported in (2011) 339 ITR 400]. Byapplying the said decisions, the Tribunal was right inconcluding that the expenditure incurred by the assessee has to be treated as a revenue expenditure. Accordingly, the findingrendered by the Tribunal is confirmed and substantial questionof law No.1 raised by the Revenue is answered against theRevenue. 6. The second substantial question of law raised by theRevenue is regarding unabsorbed depreciation for the previousyears. 7. The Revenue contends before us that the eight yearslimitation in respect of carry forward of the depreciation hadexpired and therefore, the assessee was not permitted to carryforward. This order was reversed by the CIT(A) on an erroneousground, which was confirmed by the Tribunal without consideringthe fact that Section 32(2) of the Act is a substantiveprovision and not a procedural one. 8. It is further contended by the Revenue that the findingrendered by the Tribunal is not acceptable, as, in the case ofPeerless General Finance and Investment Company Limited Vs. CIT[reported in (2016) 380 ITR 165], the Hon’ble Supreme Court heldthat the unabsorbed depreciation can be set off only againstbusiness income for a period of eight years only. 9. Per contra, the learned counsel for the assessee contendsthat the provision pertaining to the relevant assessment yearshould be taken into consideration and therefore, the decisionof the jurisdictional High Court has decided in favour of theassessee after taking note of the decision in the case ofPeerless General Finance and Investment Company Limited. 10. Before the Tribunal, the assessee referred to thedecisions of the High Court of Gujarat in the case of CIT Vs.Gujarat Themis Biosyn Limited [reported in (2014) 105 DTR 72]and in the case of General Motors India (P) Ltd. Vs. DCIT[reported in (2013) 354 ITR 244]. 11. The learned Senior Standing Counsel for the Revenuewould contend that the decision could not have been arrived atby the Tribunal without reference to the decision of the Hon’bleApex Court in the case of Peerless General Finance andInvestment Company Limited. 12. We have gone through the order passed by the Tribunaland we find that this issue was dealt with by the Tribunal inparagraph 28. The Tribunal held that the issue is squarelycovered by the principles laid down by the High Court of Gujaratin the aforementioned decisions. However, the factual aspect hasnot been gone into nor there is a discussion as to how theTribunal was satisfied that the decisions of the Gujarat High 11. The learned Senior Standing Counsel for the Revenuewould contend that the decision could not have been arrived atby the Tribunal without reference to the decision of the Hon’bleApex Court in the case of Peerless General Finance andInvestment Company Limited. 12. We have gone through the order passed by the Tribunaland we find that this issue was dealt with by the Tribunal inparagraph 28. The Tribunal held that the issue is squarelycovered by the principles laid down by the High Court of Gujaratin the aforementioned decisions. However, the factual aspect hasnot been gone into nor there is a discussion as to how theTribunal was satisfied that the decisions of the Gujarat High https://hcservices.ecourts.gov.in/hcservices/ Court would apply to the assessee’s case and that the decisionof the jurisdictional High Court would not apply and as to whythe decision of the Hon’ble Supreme Court in the case ofPeerless General Finance and Investment Company Limited cannotbe applied to the facts and circumstances of the case.Therefore, we hold that the Tribunal should have assignedreasons however brief it may be and recorded satisfaction as tohow the decisions of the Gujarat High Court would be squarelyapplicable to the case of the assessee. 13. Therefore, we are of the considered view that this issuerelating to unabsorbed depreciation has to be reconsidered bythe Tribunal after due opportunity to the Revenue and theassessee to enable them to place all the decisions on thispoint. Accordingly, the finding rendered by the Tribunal withregard to carry forward of the unabsorbed depreciation relatingto the assessment year 1997-98 is set aside and the matters areremanded to the Tribunal for a fresh decision on merits and inaccordance with law. Accordingly, substantial question of lawNo.2 raised by the Revenue is left open. 14. Substantial question of law Nos.3 and 4 raised by theRevenue pertain to disallowance under Section 14A of the Act. Onthis issue, the assessee is also on appeal before us not beingsatisfied with the relief granted by the Tribunal. The Tribunal,in paragraph 12 of the impugned order, recorded that it wasfairly agreed by both sides that the issue was settled by thedecision of the High Court of Delhi in the case of M/s.JointInvestments Private Limited Vs. CIT [reported in (2015) 372 ITR694]. This is seriously disputed by the learned counsel oneither side and the Departmental Representative was notauthorized to give any such concession nor the AuthorizedRepresentative of the assessee. 15. It is the submission of the Revenue before us that theTribunal erred in directing the Assessing Officer to restrictthe disallowance under Section 14A of the Act by applying Rule8D of the Income Tax Rules, 1962 (for brevity, the Rules) to theextent of exempt income even without considering the fact thatthe assessee had not discharged the onus cast upon it and in theabsence of accounts maintained by the assessee in regard to itsinvestments, the Tribunal was not right in interfering with suchorder. 16. On the other hand, the assessee is also aggrieved by thefinding rendered by the Tribunal and more particularly inparagraph 15 of the order. 17. The learned counsel for the assessee submits thatconfirmation of the disallowance of expenditure attributable to https://hcservices.ecourts.gov.in/hcservices/ 16. On the other hand, the assessee is also aggrieved by thefinding rendered by the Tribunal and more particularly inparagraph 15 of the order. 17. The learned counsel for the assessee submits thatconfirmation of the disallowance of expenditure attributable to https://hcservices.ecourts.gov.in/hcservices/ earning dividend income on notional basis by invoking theprovisions of Section 14A of the Act read with 8D of the Ruleswithout pointing out any specific expenditure incurred to earndividend income and without rejecting the assessee's contentionis incorrect. It is further contended that the expression'expenditure incurred' in Section 14A of the Act refers toactual expenditure and not some imaginary expenditure, inrelation to or in connection with or pertaining to exempt incomeand that unless the Assessing Officer establishes that specificexpenditure has been incurred by the assessee for earning exemptincome, there can be no disallowance under Section 14A of theAct. 18. It is also contended by the assessee that under Section14A(2) of the Act, expenditure can be determined as prescribedunder Rule 8D of the Rules only where the Assessing Officer,having regard to the accounts of the assessee, is not satisfiedwith the correctness of the claim that the expenditure made bythe assessee in relation to income, which does not form part oftotal income under the Act. 19. It is further contended by the assessee that theassessee already disallowed an expenditure for the relevantassessment years for earning dividend income and hence, nofurther notional expenditure could be deducted from the saidincome. He again submits that the Assessing Officer is bound togive cogent reasons in terms of Section 14A(2) of the Act withregard to his satisfaction with the correctness of the claim ofthe assessee in respect of such expenditure, which does not formpart of the total income. 20. The learned counsel for the assessee has placed relianceon the decision of the Hon'ble Supreme Court in the case ofGodrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [reported in(2017) 394 ITR 449] wherein it has been held as follows : “We do not see how in the aforesaid factsituation a different view could have beentaken for the Assessment Year 2002-2003.Sub-Sections (2) and (3) of Section 14A ofthe Act read with Rule 8D of the Rulesmerely prescribe a formula for determinationof expenditure incurred in relation toincome which does not form part of the totalincome under the Act in a situation wherethe Assessing Officer is not satisfied withthe claim of the assessee. Whether suchdetermination is to be made on applicationof the formula prescribed under Rule 8D orin the best judgment of the AssessingOfficer, what the law postulates is the requirement of a satisfaction in theAssessing Officer that having regard to theaccounts of the assessee, as placed beforehim, it is not possible to generate therequisite satisfaction with regard to thecorrectness of the claim of the assessee. Itis only thereafter that the provisions ofSection 14A(2) and (3) read with Rule 8D ofthe Rules or a best judgment determination,as earlier prevailing, would becomeapplicable.” 21. The learned counsel for the assessee submits that interms of Rule 8D(2)(ii) of the Rules, if to be applied, theremust be an expenditure by way of interest, which is not directlyattributable to any particular income or receipt. Therefore, itis submitted that the interest expenditure incurred for earningtaxable income cannot be reckoned for disallowance under Rule 8D(2)(ii) of the Rules. Reliance is placed on the decision of theHigh Court of Delhi in the case of CIT Vs. Bharti OverseasPrivate Limited [ITA.No. 802/2015 dated 17.12.2015]. 21. The learned counsel for the assessee submits that interms of Rule 8D(2)(ii) of the Rules, if to be applied, theremust be an expenditure by way of interest, which is not directlyattributable to any particular income or receipt. Therefore, itis submitted that the interest expenditure incurred for earningtaxable income cannot be reckoned for disallowance under Rule 8D(2)(ii) of the Rules. Reliance is placed on the decision of theHigh Court of Delhi in the case of CIT Vs. Bharti OverseasPrivate Limited [ITA.No. 802/2015 dated 17.12.2015]. 22. The learned counsel for the assessee has placed relianceon the High Court of Bombay in the case of CIT Vs. HDFC BankLtd. [89 CCH 185] wherein it has been held that where theassessee's capital, profit reserves, surplus and current accountdeposits were higher than the investments in tax freesecurities, it would have to be presumed that the investmentsmade by the assessee would be out of the interest free fundsavailable with the assessee and no disallowance was warrantedunder Section 14A of the Act. 23. Reliance is also placed by the assessee on the decisionof the Gujarat High Court in the case of CIT Vs. Gujarat StateFertilizers & Chemicals Ltd [reported in 85 CCH 273] to supporthis argument that if the assessee has sufficient funds availablewith it, no adhoc disallowance of dividend income under Section14A of the Act could be made. Further, according to theassessee, while computing disallowance under Section 14A of theAct, only those investments made in the current assessment yearthat yielded dividend income should be taken. 24. With these submissions, the learned counsel for theassessee contends that specific questions of law were raisedbefore the Tribunal. However, the Tribunal has not consideredthe same, but disposed of the matter by following the decisionof the Delhi High Court in the case of M/s. Joint InvestmentsPrivate Limited. 25. In our considered view, the disallowance under Section14A of the Act has been a point of dispute in several cases.Therefore, we opine that the Tribunal shall reconsider the saidissue factually taking note of the precedents relied upon byboth the Revenue as well as the assessee and take a reasoneddecision so that they could be applied in future cases as well.Considering the above, we are of the view that substantialquestion of law Nos.3 and 4 raised by the Revenue i.e. the issuepertaining to disallowance under Section 14A of the Act for allthe assessment years requires to be redone. 26. For all the above reasons, the appeals filed by both theRevenue as well as the assessee are allowed and the matters areremanded to the Tribunal to take a fresh decision on the saidissue after sufficient opportunity to both the Revenue as wellas the assessee and also after considering the decisions, whichmay be cited before the Tribunal both by the Revenue as well asthe assessee. Accordingly, the substantial questions of lawraised by the Revenue and the assessee on this issue are leftopen. 27. In the result, the appeals filed by the Revenue arepartly allowed and the appeals filed by the assessee are allowedfor the reasons set out in the preceding paragraphs. No costs.Consequently, the connected CMPs are closed. Sd/- Assistant Registrar(CS VIII) //True Copy// Sub Assistant Registrar Rs To 1.The Income Tax Appellate Tribunal, Chennai 'C' Bench. Chennai 'C' Bench. 2.The Joint Commissioner of Income Tax/ Assistant Commissioner of Income Tax, Corporate Range 1, Madurai-16. 3.The Commissioner of Income Tax (Appeals)-1, Madurai Madurai 4.The Deputy Commissioner of Income Tax, Corporate Circle(1), Madurai. Corporate Circle(1), Madurai. 5.The Assistant Commissioner of Income Tax, Corporate Circle(1), Madurai. Corporate Circle(1), Madurai. 6.The Joint Commissioner of Income Tax, Range -I, No.2, V.P.Rathinasamy Nadar Road, Bitikulam,Madurai-02 Range -I, No.2, V.P.Rathinasamy Nadar Road, Bitikulam,Madurai-02 Sd/- Assistant Registrar(CS VIII) //True Copy// Sub Assistant Registrar Rs To 1.The Income Tax Appellate Tribunal, Chennai 'C' Bench. Chennai 'C' Bench. 2.The Joint Commissioner of Income Tax/ Assistant Commissioner of Income Tax, Corporate Range 1, Madurai-16. 3.The Commissioner of Income Tax (Appeals)-1, Madurai Madurai 4.The Deputy Commissioner of Income Tax, Corporate Circle(1), Madurai. Corporate Circle(1), Madurai. 5.The Assistant Commissioner of Income Tax, Corporate Circle(1), Madurai. Corporate Circle(1), Madurai. 6.The Joint Commissioner of Income Tax, Range -I, No.2, V.P.Rathinasamy Nadar Road, Bitikulam,Madurai-02 Range -I, No.2, V.P.Rathinasamy Nadar Road, Bitikulam,Madurai-02 7.The Deputy Commissioner of Income Tax, Circle I, Madurai. Circle I, Madurai. 8.The Income Tax Officer, Ward – II (1), Kolkata. Ward – II (1), Kolkata. +2cc to M/s.Subbaraya Aiyar Padmanaban, Advocate, S.R.No.86116, 86117+1cc to Mr.M.Swaminathan, Advocate, S.R.No.85375TCA.No.785 of 2018 etc.casesCP(CO)CS/31/01/2019