By Sri. A. Shankar, Sr. Adv. Forsri v. Chandrashekar, Adv

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 16 DAY OF AUGUST 20271 PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’/BLE MR. JUSTICE HEMANT CHANDANGOUDAR BETWEEN: LT.A. NO.391 OF 2012 M/S. KHODAY INDIA LTD.REP BY ITS DIRECTOR SRI. K.L. SWAMYBREWERY HOUSE7TH MILE, KANAKAPURA ROADBANGALORE - 560 O62. (BY SRI. A. SHANKAR, SR. ADV. FORSRI. V. CHANDRASHEKAR, ADV.,) — APPELLANT. AND* THE ASSISTANT COMMISSIONER OF INCOME-TAXCIRCLE 11 (5)R.P. BHAVAN, OPP. RBINRUPATHUNGA ROADBANGALORE - 560 O0OO1 ~. RESPONDENT (BY SRI. K.V. ARAVIND, ADV.) THIS I.T.A. IS FILED UNDER SEC. J6O0-A OF INCOME TAXACT 1961, ARISING OUT OF ORDER DATED 18.07.2012 PASSEDIN ITA NO.211/BANG/2012 FOR THE ASSESSMENT YEAR 2008-09,PRAYING TQ: | (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW,STATED ABOVE. (ii) ALLOW THE APPEAL AND SET ASIDE THE FINDINGS TO.THE EXTENT AGAINST THE APPELLANT IN THE ORDER PASSED BY.THE TRIBUNAL IN ITA NO.211/BANG/2012 DATED 18.07.2012. THIS I.7T.A. COMING ON FOR’ HEARING, THIS’ DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (hereinafter referred to as the Act for short)has been preferred by the assessee against the order|dated 18.07.2012 passed by Income Tax AppellateTribunal (hereinafter referred to as the tribunal’ forShort). The subject matter of the appeal pertains to the|Assessment year 2008-09. The appeal was admitted bya bencn of this Court on the following substantialquestions of law:| (1) Whether the tribunal was Justified inlaw in not holding that the learned AssessingOfficer has not recorded satisfaction as perDrOVISsIOnNOf|SectionIGA|oftheActconsequently tne aadaition of Rs.59,11,624/-under Section 14A Is liable to set aside onthe facts and circumstances of the case? (11)Whnetner tne tribunal was Justifiedin law in confirming tne disallowance ofRs.59,11,624/- under Section 14A of theIncome Tax Act, 1961 read with Rule 8D ofthe Income-Tax Rules, 1962 on the facts andcircumstances of the case? (iii) Whether the tribunal was JustifiedIn law.In notappreciatingthatthepartnershipfirmincurredloss|In|theimpugned assessment year, consequentlythe appellant is not liable for disallowanceunder Section 14A of the Act read with Rule8D on the facts and circumstances of theCase? (iV) Whether the tribunal failed toappreciate that the amount adjusted ascapital contribution in the firm of M/sLakshmi Estate due to business expediencycannotbetreatedaS|Investment.In.accordance with Section 14A of the I[ncometax Act read with Rule 8D of the Income-laxRules on the facts and circumstances of theCase? 2 |Facts leading to filing of this appeal brieflystated are that the assessee is a public limited companyand carrying on the business of manufacture and trade|of Indian Made Foreign liquor, glass, paper and trading|of computers etc. The assessee filed the return ofincome for Assessment Year JOO8-09 on 30.09.2008.and subsequently filed revised return of income on.14.10.2008 In which tncome of the assessee was!declared as Rs.10,94,29,682/-. The return was selectedfor scrutiny. The Assessing Officer passed an order|under Section 143(3) of the Act and additions weremade on account of 50% of sales promotion expenses,disallowance under Section 14A read witn Rule 8D of tne|Rules, disallowance of interest on advance for capitalgoods and ESI contributions under Section 36(1)(va) ofthe Act to the extent of Rs.22,42,507/-, Rs.59,11,624/-,.Rs.23,/2,/16/- and Rs.32,/1,855/- respectively. 3.)Tne assessee filed an appeal before theCommissioner of Income Tax (Appeals) who by an order. 3.)Tne assessee filed an appeal before theCommissioner of Income Tax (Appeals) who by an order. dated 30.11.2011 upheld the additions made by theAssessing Officer, except disallowance of interest on.advance for capital goods. The assessee thereupon|preferred an appeal before the tribunal. The tribunal byan order dated 18.07.2012 partly deleted the additionmade with regard to sales promotion expenses, deleted|the additions with regard to PF and ESI contributions|under Section 36(1)(va) of the Act and upheld theaddition with regard to disallowance under Section 14A.of the Act read with Rule SD of the Rules. In the’aforesaid factual background, this appeal Nas been filed. 4Learneq Senior counsel for tne assesseesubmitted that the Assessing Officer nas not recordedthe satisfaction which is a mandatory requirement as.prescribed under Section 14A of the Act. It is also.submitted that it ought to Nave appreciated that the|assessee Nas not earned any exempt income underSection 10(2A) of the Act from the partnership as thefirm nad incurred joss. It Is also submitted tnat tne! assessee had interest free funds in excess of amounts otfinvestments and therefore, disallowance under Section|14A of the Act was not called for. It is also urged thatfor the Assessment Years 2009-10, 2010-11, 2011-12and 2012-13 in the case of the assessee itself, thetribunal had set aside the order passed by the AssessingOfficer and had remitted the matter to him to examine|whether the claim that 'no borrowed funds were utilizedfor making any investment. Thereafter, the AssessingOfficer after examination of the matter by an orderdated 29.03.2019 held that no disallowance under|Section 14A of the Act read with Rule 8D of the Rules Is/called for. In support of aforesaid submissions, reliance|Nas been placed on decisions in."KODAGU DISTRICTCO-OPEARTIVE CENTRAL BANK LTD, VS. ACIT IN|ITA NO.318/2016 DATED 19.01.2021, ‘PCIT VS.STERLING DEVELOPERS P.LTD. IN ITA NO.685 OF|2015 DATED 04.02.2021 (KAR.), ‘CIT S. QUESTGLOBAL ENGINEERING SERVICES PVT. LTD IN ITA. NO.133 OF 2015 DATED 15.02.2021 (KAR.), ‘CITVS, ALLIANCE INFRASTRUTURE PROJECTS PVT.|LTD’, ITA NO.74/2015 DATED 21.06.2021 (KAR.),"PRAGATHI KRISHNA GRAMIN BANK VS. JCIT,(2018) 95 TAXMANN.COM 41 (KAR.), ‘PCIT VS.CARAF BUILDERS & CONSTRUCTION (P.) LTD.',(2019) 112 TAXMANN.COM 322 (SC), ‘CIT VS.MICROLABS LTD.', (2017) 79 TAXMANN.COM 368(KAR.), CIT VS. RELIANCE UTILITIES & POWERLTD.', (2009) 178 TAXMAN 135 (BOM.)and'CITVS. HDFC BANK LTD.', (2014) 49 TAXMANN.COM|355 (BOM.). 5.|On the other nand, learned counsel for therevenue submitted|tnat|condition.for.recordingsatisfaction as prescribed under Section 14A of the Act isnot attracted to the facts of the case as there Is no suo.motu disallowance. In this connection, reliance nas been|placed on decision of the Supreme Court in-"MAXOPPINVESTMENT LTD. VS. COMMISSIONER OF INCOME| TAX, NEW DELHI’, (2018) 91 TAXMANN.COM 154(SC)_ It is further submitted that the assessee had§never raised the contention before the authorities under.the Act that investments have not been made by it from.the borrowed funds and therefore, for the first time, theSaid issue cannot be raised in this appeal and an enquiryhas to be made to ascertain the factual aspect. 6.|We have considered the rival submissions.made on both sides and have perused the record. Beforeproceeding further, it is apposite to take note of Section14A of the Act, which reads as under: Expenditure incurred in_ relation’ tincome not includible in total [ncome. 114. (1)For.thePUFPOSES ofcomputing the total income under thisChapter, no deduction shall be allowed inrespect of expenditure incurred by theassessee jin relation to Income which doesnot form part of the total income under thisAct. 6.|We have considered the rival submissions.made on both sides and have perused the record. Beforeproceeding further, it is apposite to take note of Section14A of the Act, which reads as under: Expenditure incurred in_ relation’ tincome not includible in total [ncome. 114. (1)For.thePUFPOSES ofcomputing the total income under thisChapter, no deduction shall be allowed inrespect of expenditure incurred by theassessee jin relation to Income which doesnot form part of the total income under thisAct. (2)TheAssessing|Officer.Shall]determinetheamount.ofexpenditureincurred tn relation to such [Income whichdoes not form part of the total income underthis Act In accordance with such method asmay be prescribed, if the Assessing Officer,Naving regard to the accounts of theASSESSECE,ISNOtSatisfiedwith thecorrectness of the claim of the assessee /[nrespect of such expenditure in relation toincome which does not form part of the totalincome under this Act. (3) The provisions of sub-section (2)Shall also apply in relation to a case wherean assessee claims that no expenditure hasbeen incurred by him in relation to incomewhich does not form part of the total incomeunder this Act : Provided that nothing contained in thissection shall empower the Assessing Officereither to reassess under section 14/7 or passan order enhancing the assessment or.reducing a refund already made or otherwiseincreasing the liability of the assesseeunder section 154, for any assessment year beginning on or before the 1st day of April,POO]. 7Thus, it is evident that Assessing Officer candetermine the amount of expenditure incurred inrelation to an exempt income if the Assessing Officer|having regard to accounts of the assessee is not!satisfied with the correctness of the claim of the’assessee but it has not incurred any expenditure inorder to earn exempt income. Tne Assessing Officer is_therefore, required to record its satisfaction that it has.not incurred any expenditure in order to earn exemptincome. 8.|TneaSS@e@SS€Nas.claimed|peforetheAssessingOfficertnat|ItNasNotincurredanyexpenditure towards earning exempt income, which Nas|been reproduced by the Assessing Officer in para 5 of its|order. However, from scrutiny of the order passed bythe Assessing Officer, it is evident that the AssessingOfficer has not recorded satisfaction with regard to claim. of the assessee that it has not incurred any expenditurein order to earn exempt income. Therefore, the condition precedent for invoking Rule 8D of the Rules as per'Section 14A of the Act Is. not fulfilled. For theaforementioned reasons, the first substantial question oflaw is answered in favour of the assessee and against|the revenue. oiSo far as the claim of the assessee that it hasnot earned any exempt income is concerned, it ispertinent to note that the Assessing Officer had held|that investment in the partnership firm M/s Lakshmi.Estates will yield Income in the nature of profit from.partnership firm whicn is exempt under Section 10(2A).of the Act. The Commissioner of Income Tax (Appeals)and the tribunal recorded a finding that even in a case|where there is no tax free income actually received,disallowance under Section 14A of the Act has to be'made. In the instant case, the assessee had notreceived any snare or profit from the partnership firm. during the year and in fact the partnership firm had|incurred the loss of Rs.11,97,926/- and no exemptincome was earned by the assessee. In the absence ofany exempt income during the year, there could not be|any disallowance under Section 14A of the Act. [SEESTERLING DEVELOPERS (P) LTD. AND QUEST|GLOBALENGINEERING|SERVICESPVT.LTD.SUPRA]. For the reasons assigned by us Supra, second|and third substantial questions of law are also answeredin favour of the assessee. during the year and in fact the partnership firm had|incurred the loss of Rs.11,97,926/- and no exemptincome was earned by the assessee. In the absence ofany exempt income during the year, there could not be|any disallowance under Section 14A of the Act. [SEESTERLING DEVELOPERS (P) LTD. AND QUEST|GLOBALENGINEERING|SERVICESPVT.LTD.SUPRA]. For the reasons assigned by us Supra, second|and third substantial questions of law are also answeredin favour of the assessee. 10. The assessee had made fake advances to M/sLakshmi Estate and later Decame a partner to the extentof 75% snare in the partnership firm from the year 2003.onwards. It is claimed by the assessee that it had notborrowed funds for the purpose of making original|advances to M/s Lakshmi Estate, requires adjudication|of facts and therefore, in the facts and circumstances ofthe case, we deem it appropriate to remit the matter to.tne Assessing Officer to decide the claim of the assessee whether or not it had used borrowed funds for the'purposes of making original advances to M/s Lakshmi.Estate for the Assessment Year 2008-09. Therefore, it is not necessary for us to answer the fourth substantialquestion of law. In the result, the orders passed by the AssessingOfficer, Commissioner of Income Tax (Appeals) and thetribunal to the extent it contains the finding against the|assessee and the matter is remitted to the Assessing|Officer to determine the claim of the assessee whether|or not it had used borrowed funds for making original|advance to M/s Laksnmi Estate for the Assessment Year|2008-09. In the result, appeal is disposed of. | Sd/-JUDGE. Sd/-—JUDGE.