Chennai v. The Deputy Commissioner Of Income Tax, Corporate Circle-2(1),Chennai

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMAND THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN TAX CASE APPEAL NO.431 OF 2018 (HEARD THROUGH VIDEO CONFERENCING) M/s.FLSmidth Pvt. Ltd., Chennai-603103. ...Appellant Vs The Deputy Commissioner of Income Tax, Corporate Circle-2(1),Chennai. ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961against the order dated 20.3.2018 made in ITA.No.2087/Chny/2017on the file of the Income Tax Appellate Tribunal, Chennai ‘D’Bench for the assessment year 2009-10. against the order under section 250(6) of the Income TaxAct, 1961, passed by the Commissioner of Income Tax (A)-9,Chennai, dated 30.05.2017 made in ITA.No.66/CIT(A)-9/2013-14,and against the Assessment order passed by the AssistantCommissioner of Income Tax dated 2713 of 2013 made in AAACP4997N. For Appellant :Ms.Sri Niranjani & Mr.G.Baskar For Respondent :Mr.Karthik Ranganathan, SSC Assisted by Mr.S.Rajesh, JSC Judgment was delivered by T.S.SIVAGNANAM,J We have heard Ms.Sri Niranjani, learned counsel andMr.G.Baskar, learned counsel appearing for the appellant –assessee and Mr.Karthik Ranganathan, learned Senior StandingCounsel assisted by Mr.S.Rajesh, learned Junior Standing Counselappearing for the respondent – Revenue. 2. This appeal by the Revenue under Section 260A of theIncome Tax Act, 1951 (for short, the Act) is directed against https://hcservices.ecourts.gov.in/hcservices/ the order dated 20.3.2018 made in ITA.No.2087/Chny/2017 on thefile of the Income Tax Appellate Tribunal, Chennai ‘D’ Bench(for brevity, the Tribunal) for the assessment year 2009-10. 3. The appeal has been admitted on 10.8.2018 on thefollowing substantial question of law : “Whether, on facts and in thecircumstances of the case, the Income TaxAppellate Tribunal was right in law inconfirming the disallowance made by theAssessing Officer under Section 14A of theAct in the absence of any cogentsatisfaction for disregarding the voluntarydisallowance made by the appellant ? 4. The assessee, which is a manufacturing company, filedits return of income on 30.9.2009 for the assessment year 2009-10 admitting a total income of Rs.2,00,46,53,580/-. The returnwas processed under Section 143(1) of the Act. Subsequently, arevised return was filed on 28.3.2011 declaring a total incomeof Rs.2,02,56,55,520/- and the same was processed on 31.3.2012.A demand of Rs.91,86,31,420/- was raised. In the meanwhile, thecase was selected for scrutiny and a notice under Section 143(2)of the Act dated 23.8.2010 was issued to the assessee. 5. The Assessing Officer, among other issues, consideredthe disallowance under Section 14A of the Act read with Rule 8Dof the Income Tax Rules, 1962 (for short, the Rules). Theassessee held investments in shares and mutual funds to the tuneof Rs.1,32,39,84,480/- and earned a dividend income to the tuneof Rs.11,48,08,342/- from such investments and claimed theentire amount as exempt. The assessee, on their own accord,debited an amount of Rs.1,44,000/- as expenditure for earningthe exempt income, which was disallowed under Section 14A of theAct in the income computation statement. 5. The Assessing Officer, among other issues, consideredthe disallowance under Section 14A of the Act read with Rule 8Dof the Income Tax Rules, 1962 (for short, the Rules). Theassessee held investments in shares and mutual funds to the tuneof Rs.1,32,39,84,480/- and earned a dividend income to the tuneof Rs.11,48,08,342/- from such investments and claimed theentire amount as exempt. The assessee, on their own accord,debited an amount of Rs.1,44,000/- as expenditure for earningthe exempt income, which was disallowed under Section 14A of theAct in the income computation statement. 6. The Assessing Officer, noting the quantum ofinvestments held by the assessee and the dividend income earnedfrom such investments, was, prima facie, not satisfied with theworking provided by the assessee for arriving at thedisallowance under Section 14A of the Act. Therefore, a showcause notice was issued to the assessee calling upon them toexplain as to why Rule 8D of the Rules should not be invoked tocompute the expense attributable for earning exempt income. Theassessee, vide letter dated 18.12.2012, stated that the dividendincome was earned from investments in mutual funds, which weremade from the surplus funds available with the company, thatonly salary cost of personnel involved in buying and selling of mutual funds amounting to Rs.1,44,000/- was incurred for earningsuch dividend income and that therefore, the same was disallowedunder Section 14A of the Act. 7. The Assessing Officer was not convinced with theexplanation offered by the assessee and held that a portion ofmanagerial remuneration and directors’ remuneration should alsobe attributed towards the dividend earning activity by theassessee. Accordingly, Rule 8D of the Rules was pressed intoservice and a disallowance of Rs.52,72,554/- was made. 8. Aggrieved by the order of assessment dated 27.3.2013,the assessee preferred an appeal before the Commissioner ofIncome Tax (Appeals)-9, Chennai-34 [hereinafter called the CIT(A)]. The assessee contended that Section 14A of the Act readwith Rule 8D of the Rules had no application to the assessee’scase, that what were invested were surplus funds generated fromthe business activity of the assessee and that the assessee hadnot incurred any other cost apart from the amounts specified inthe return filed. The CIT(A) was not convinced with thecontentions advanced by the assessee and accordingly dismissedthe appeal by order dated 30.5.2017 and confirmed the findingsof the Assessing Officer. With regard to other issues, theappeal filed by the assessee was partly allowed, as againstwhich, the Revenue filed an appeal before the Tribunal. In that,the assessee filed a cross objection with regard to disallowanceunder Section 14A of the Act. 9. The Tribunal considered the submissions of theassessee and found that the disallowance as computed by theAssessing Officer by applying the formula under Rule 8D(2)(iii)of the Rules did not call for any interference. Ultimately, boththe appeal filed by the Revenue as well as the cross objectionfiled by the assessee stood dismissed by the impugned orderdated 20.3.2018. As against the order of dismissal, the assesseealone is before us. 10. The questions to be decided by us in this appeal areas to whether the disallowance made by the Assessing Officer wasproper and as to whether the assessee was right in contendingthat there were no cogent reasons recorded by the AssessingOfficer with regard to his satisfaction as to the correctness ofthe voluntary disallowance made by the assessee. 11. Both the learned counsel appearing for the assessee https://hcservices.ecourts.gov.in/hcservices/ 10. The questions to be decided by us in this appeal areas to whether the disallowance made by the Assessing Officer wasproper and as to whether the assessee was right in contendingthat there were no cogent reasons recorded by the AssessingOfficer with regard to his satisfaction as to the correctness ofthe voluntary disallowance made by the assessee. 11. Both the learned counsel appearing for the assessee https://hcservices.ecourts.gov.in/hcservices/ have drawn the attention of this Court to the findings recordedby the Assessing Officer, the CIT(A) and the Tribunal and submitthat the satisfaction of the Assessing Officer has to beobjectively arrived at on the basis of the accounts and afterconsidering all the relevant facts and circumstances. The methodprescribed under Rule 8D of the Rules would be applicable onlywhen the claim made by the assessee, in respect of theexpenditure, which is relatable to the earning of income andwhich does not form part of the total income under the Act, isfound to be incorrect. 12. It is further submitted by the learned counsel forthe assessee that the non satisfaction with the disallowanceoffered by the assessee has to be arrived at on the basis of theaccounts submitted by the assessee. It is also submitted that inthe instant case, all that the Assessing Officer had done is aguess work and he did not record a conclusion as to why he wasnot satisfied with the disallowance offered by the assessee. 13. In support of their contention, the learned counselfor the assessee have relied upon the decisions(i) of the Hon’ble Supreme Court in thecase of Maxopp Investment Ltd. Vs. CIT, NewDelhi [reported in (2018) 402 ITR 640];(ii) of the Hon’ble Supreme Court in thecase of Godrej & Boyce Manufacturing Co.Ltd. Vs. DCIT [reported in (2017) 81Taxmann.com 111];(iii) of the Bombay High Court in thecase of PCIT-3, Mumbai Vs. Reliance CapitalAsset Management Ltd. [reported in (2018)400 ITR 217]; and (iv) of the Bombay High Court in thecase of PCIT-2 Vs. Bombay Stock ExchangeLtd. [reported in (2020) 113 Taxmann. Com303]. 14. Therefore, it is submitted by both the learned counselfor the assessee that concurrently all the three authoritieserroneously applied the provisions of Rule 8D of the Ruleswithout recording satisfaction, which is mandated under Section14A(2) of the Act. They, while explaining the nature oftransaction done by the assessee, have referred to the statementof accounts and submitted that the surplus funds available withthe assessee are being invested in mutual funds and theexpenditure incurred has been rightly arrived at and nothingmore was incurred by the assessee. It is further submitted that https://hcservices.ecourts.gov.in/hcservices/ the Assessing Officer committed an error, which goes to the rootof the matter and prayed for setting aside the order passed bythe Tribunal as well as the Authorities below. 15. Per contra, Mr.Karthik Ranganathan, learned SeniorStanding Counsel assisted by Mr.S.Rajesh, learned JuniorStanding Counsel appearing for the Revenue submits that thesatisfaction should be recorded by the Assessing Officer interms of Section 14A(2) of the Act in regard to the assets ofthe assessee and with regard to the correctness of the claimmade by the assessee in respect of such expenditure in relationto income, which does not form part of total income. https://hcservices.ecourts.gov.in/hcservices/ the Assessing Officer committed an error, which goes to the rootof the matter and prayed for setting aside the order passed bythe Tribunal as well as the Authorities below. 15. Per contra, Mr.Karthik Ranganathan, learned SeniorStanding Counsel assisted by Mr.S.Rajesh, learned JuniorStanding Counsel appearing for the Revenue submits that thesatisfaction should be recorded by the Assessing Officer interms of Section 14A(2) of the Act in regard to the assets ofthe assessee and with regard to the correctness of the claimmade by the assessee in respect of such expenditure in relationto income, which does not form part of total income. 16. To explain the subtle difference between satisfaction tobe recorded by the Assessing Officer under Section 14A(2) of theAct and satisfaction to be recorded under Section 145(3) of theAct as quite distinct, Section 145(3) of the Act is referred to.It is submitted by the learned Senior Standing Counsel appearingfor the Revenue that the decisions relied upon by the learnedcounsel appearing for the assessee would not apply to the factsof the case, because, in those cases, the Assessing Officerstraight away resorted to the computation machinery providedunder Rule 8D of the Rules without recording satisfaction underSection 14A(2) of the Act whereas in the case on hand, theAssessing Officer recorded satisfaction, which has beenconfirmed by the CIT(A) as well as the Tribunal and therefore,there is no error in the decision making process by theAssessing Officer or the decision itself. With the abovesubmissions, the learned Senior Standing Counsel appearing forthe Revenue has prayed for sustaining the decision of theTribunal and answering the question against the assessee. 17. We have carefully considered the submissions of thelearned counsel on either side. 18. Now, what we are required to examine is as to whethersuch a satisfaction has been arrived at by the Assessing Officerhaving regard to the suo motu disallowance claimed by theassessee in the context of its accounts. Further, what we willhave to examine is the factual position. 19. As noticed above, the assessee was issued a show causenotice calling upon them to explain as to why the provisions ofRule 8D of the Rules should not be invoked to compute theexpenses attributable for earning exempt income. While issuingthe show cause notice, the Assessing Officer, prima facie,recorded his dis-satisfaction, which is evident from a readingof the assessment order wherein the Assessing Officer statedthat he was not satisfied with the quantum of expenses claimedby the assessee as attributable for earning exempt income. 20. In other words, issuance of show cause notice callingupon the assessee to explain pre-supposes a prima facie opinion https://hcservices.ecourts.gov.in/hcservices/ formed by the Assessing Officer with regard to the accounts ofthe assessee. Therefore, once a show cause notice is issued, theassessee is informed about the prima facie view of the AssessingOfficer. However, the Assessing Officer cannot have a closedmind while issuing a show cause notice. The assessee rightlyunderstood the prima facie opinion formed by the AssessingOfficer with regard to the expenses claimed by the assesseeattributable for earning exempt income and precisely for such areason, the assessee submitted a reply dated 18.12.2012. In thesaid reply, the assessee took a stand that they incurredexpenses of Rs.1,44,000/- being cost of personnel involved inbuying and selling of mutual funds. 21. The Assessing Officer examined the said submission ofthe assessee having regard to the accounts of the assessee andrejected the stand taken by the assessee. The reasons arecontained in paragraph 5.3 of the impugned order, which we quotefor easy reference, as hereunder : 21. The Assessing Officer examined the said submission ofthe assessee having regard to the accounts of the assessee andrejected the stand taken by the assessee. The reasons arecontained in paragraph 5.3 of the impugned order, which we quotefor easy reference, as hereunder : “Theassessee’ssubmissionswerecarefully considered. Though the assessee isnot in the business of making investments inshares, the assessee keeps more than 1/3[rd] ofits assets in the form of investments. Asseen from the balance sheet as on 31.3.2009,thetotalvalueofassetsisRs.514,25,32,150/-,outofwhich,investments are held to the tune ofRs.132,39,84,480/-. Considering the volumeof investments held by the assessee and theamount of exempted income earned out of itand the management skill required tomaintain such investment portfolio, thequantum of expenditure computed by theassessee is not acceptable. Further, theassessee incurs routine expenditure tomaintain its establishment and towardsadministration, a portion of which can beattributed towards the activity of earningdividend.Theassesseealsoincursmanagerial remuneration and claims the wholeof the same as an expenditure. Themanagerial staff and the directors areinvolved in making decisions on investments.Such being the case, a portion of thismanagerialremunerationanddirectorsremuneration should also be attributedtowards the dividend earning activity by theassessee.” 22. The Assessing Officer noted the details, which obviouslyhave been culled out from the books of accounts and otherrecords placed by the assessee namely that (i) the assessee wasnot in the business of investment in shares; (ii) more than 1/3[rd]assets of the assessee were in the form of investments; and(iii) the total value of assets was Rs.514,25,32,150/-, fromwhich, the investments were to the tune of Rs.132,39,84,480/-.Thus, taking note of the volume of investments held by theassessee and the amount of exempt income earned, the AssessingOfficer came to the conclusion that managerial skill is requiredto maintain such investment portfolio and that the quantum ofexpenditure computed by the assessee was not acceptable.Further, the Assessing Officer examined the materials placedbefore him and pointed out that the assessee incurred routineexpenditure to maintain its establishment and towardsadministration, a portion of which could be attributed towardsthe activity of earning of dividend. 23. The Assessing Officer noted that the assessee alsoincurred managerial remuneration and claimed whole of the sameas an expenditure. Therefore, he concluded that a portion of themanagerial remuneration and directors’ remuneration should alsobe attributed towards dividend earning activity by the assessee.Thus, in our considered view, the Assessing Officer recorded hissatisfaction having regard to the accounts of the assessee. 24. Obviously, we cannot expect the Assessing Officer towrite a judgment. The correctness of the findings of theAssessing Officer was tested by the CIT(A). The assessee arguedthat the mutual funds were entirely managed by the fundmanagers, that only a minimum management was required by theinvestor and that the assessee made a rational estimate of timespent and other related administration cost in the management ofthe investments and accordingly made a voluntary disallowance ofRs.1,44,000/-. The CIT(A), after pointing out that as per theworking given by the assessee, the time spent in a year was 3days, 9 days and 17 days for senior, manager and subordinatesrespectively. But, the assessee did not even enclose the profitand loss account to verify the salary cost was correctly taken.Further, the CIT(A) noted that the disallowance of Rs.1,44,000/-was meagre when compared to dividend income earned by theassessee on the investment. 25. Further, the CIT(A) considered as to whether theAssessing Officer recorded reasons before invoking the procedureunder Rule 8D of the Rules and found that the Assessing Officerrecorded reasons. Further, the decision of the Punjab andHaryana High Court cited by the assessee in the case of CIT Vs.Hero Cycles Ltd. [reported in 189 Taxman 50] was distinguished;so also the decision of the Chennai Bench of the Tribunal of inthe case of Allied Investments Housing P. Ltd. Vs. DCIT [ITA.No.305/Mds/2013] and it was held that the Assessing Officerrecorded reasons and the sum disallowed in comparison to theinvestment was not adequate. 26. The other decisions of the Delhi Bench of the Tribunalin the case of Minda Investments Ltd. Vs. DCIT [ITA.No.4046/Del/2009] and in the case of DCIT Vs. Jindal Photo Ltd. [ITA.No.814/2011] were also distinguished. By referring to the decisionof the Chennai Bench of the Tribunal in the case of VisualGraphics Computer Services India (P) Ltd. [reported in (2012) 21Taxmann.com 145], the CIT(A) held that no income was gratuitous,that every income was earned after incurring certain expense andthat a reasonable portion of management expenditure should beattributed to earning of dividend income. The CIT(A) alsoreferred to the decision of the Chennai Bench of the Tribunal inthe case of Southern Petrochemical Industries Vs. DCIT [reportedin 93 TTJ (Chennai) 161] wherein it was held that the investmentdecisions were very strategic decisions, in which, topmanagement was involved and that therefore, proportionatemanagement expenses were required to be deducted while computingthe exempt income from dividend. A reference was also made tothe decision of the Mumbai Bench of the Tribunal in the case ofACIT-10(1)Vs.CitiCorpFinance(India)Ltd.[ITA.No.5832/Mum/2003 (AY 2000-01) dated 27.11.2006]. With thesereasons, the CIT(A) affirmed the view taken by the AssessingOfficer. 27. The assessee, in their cross objections filed before theTribunal, reiterated their earlier stand that the AssessingOfficer nowhere recorded satisfaction and that the disallowancemade was not sufficient. 28. The correctness of such a stand was independently testedby the Tribunal. We find from the impugned order that theassessee filed a calculation sheet as to how they computedRs.1,44,000/-. After referring to the same, the Tribunal pointedout that there was nothing available on record to show as to howthe assessee estimated the time spent per day by a seniormanager as five minutes and manager as fifteen minutes formanaging to the tune of Rs.1,32,39,84,480/-. The Tribunal notedthat the salary cost mentioned in the tabulated statement wasonly an approximation without any scientific basis. Further,noting the decision in the case of Godrej & Boyce ManufacturingCompany Ltd., the Tribunal held that the Assessing Officerrecorded satisfaction. 29. As mentioned above, in the preceding paragraph, we heldthat the Assessing Officer considered the explanation offered bythe assessee vide letter dated 18.12.2012 and recorded hissatisfaction as to how the disallowance voluntarily made by theassessee was not acceptable. Hence, we find that the AssessingOfficer had rightly followed the procedure under Section 14A(2) of the Act and only thereafter, recorded his dis-satisfaction onthe correctness of the claim made by the assessee and havingregard to the accounts of the assessee, proceeded to follow theprocedure under Rule 8D of the Rules. Hence, we find that thereis full compliance of what is required to be done by theAssessing Officer as pointed out by the Hon’ble Supreme Court inthe case of Maxopp Investment Ltd. For the above reasons, wehold that the assessee has not made out a case for interferencein the order passed by the Tribunal. 30. Accordingly, the above tax case appeal is dismissed. Thesubstantial question of law framed is answered against theassessee. No costs. of the Act and only thereafter, recorded his dis-satisfaction onthe correctness of the claim made by the assessee and havingregard to the accounts of the assessee, proceeded to follow theprocedure under Rule 8D of the Rules. Hence, we find that thereis full compliance of what is required to be done by theAssessing Officer as pointed out by the Hon’ble Supreme Court inthe case of Maxopp Investment Ltd. For the above reasons, wehold that the assessee has not made out a case for interferencein the order passed by the Tribunal. 30. Accordingly, the above tax case appeal is dismissed. Thesubstantial question of law framed is answered against theassessee. No costs. Sd/- Assistant Registrar(CS III)//True Copy// Sub Assistant RegistrarRSTo 1.The Income Tax Appellate Tribunal, Chennai ‘D’ Bench.2.The Deputy Commissioner of Income Tax, Corporate Circle-2(1),Chennai. 3.The Commissioner of Income Tax(A)-9,Chennai.4.The Assistant Commissioner of Income Tax,Chennai. +1cc to Mr.G.Baskar, Advocate, S.R.No.25115 TCA.No.431 of 2018EV(CO)CS/12/08/2020