Commissioner Of Income Tax, Corporate Circle – 3, Chennai v. M/S.tamilnadu Industrial Development Corporation Limited

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 07.07.2020 CORAM: THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMandTHE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal Nos.509 & 510 of 2018 Commissioner of Income Tax,Corporate Circle – 3,Chennai. .. Appellant in both TCAsversus M/s.Tamilnadu Industrial DevelopmentCorporation Limited,No.19-A, Rukmini Lakshmipathy Road,Egmore, Chennai – 600 008. .. Respondent in both TCAs Prayer:Tax Case Appeals filed under Section 260A of the IncomeTax Act, 1961, against the common order made in ITA Nos.691 &692/Mds/2017 dated 12.07.2017 passed by the Income Tax AppellateTribunal 'D' Bench, Chennai, for the Assessment Years 2011-12and 2012-13 preferred against the order of the Commissioner ofIncome Tax (Appeals)13, Chennai 34 passed in I.T.A. No. 2050/CIT(A)-13/2011-2012 and I.T.A. No. 127/CIT(A)-13/2012-2013 for theassessment year 2011-2012 and 2012-2013 dated 28.02.2017 againstthe order passed by the Assistant Commissioner of Income Tax,Company Circle III(1) Chennai dated 20.01.2014 and 22.01.2015made in PAN/GIR No. for the Assessment year 2011-2012abd 2012-2013 respectively These appeals have been filed by the revenue under Section260A of the Income Tax Act, 1961 (the 'Act' for brevity),challenging the common order passed by the Income Tax Appellate https://hcservices.ecourts.gov.in/hcservices/ Tribunal 'D' Bench, Chennai, in ITA Nos.691 & 692/MDS/2017 dated12.07.2017, for the Assessment Years 2011-12 and 2012-13. 2. The Tax Case Appeals were admitted on 21.06.2019 on thefollowing Substantial Questions of Law. “1. Whether the Tribunal was right in holdingthat the strategic investments of the assessee capableof fetching exempt income do not attract disallowanceu/s 14A even though the Section 14A read with Rule 8Ddoes not differentiate the investments as strategic ornon-strategic? 2. Whether the Tribunal was right in observingthat the Assessment Officer has not satisfied themandatory requirement of Section 14A(2)?” 3. The question to be decided in this case is as to whetherthe tribunal was right in coming to the conclusion that theAssessing Officer has not recorded his mandatory satisfaction asrequired under Section 14A(2) of the Act. 4. The respondent/assessee is a state owned undertakingwhich had filed its return of the income for the assessmentyears under consideration viz., 2011-12 and 2012-13. Theassessee had received income by way of dividend for theassessment year 2011-12 which the assessee claimed it asexemption from tax. The Assessing Officer made a disallowanceunder Section 14A, by applying Rule 8D of the Income Tax Rules,1962 (the 'Rules' for brevity) and completed the assessment. 5. Aggrieved by the said order, the assessee preferredappeals before the Commissioner of Income Tax (Appeals)-13,Chennai. By orders dated 28.02.2017, the appeals weredismissed. Aggrieved by the same, the assessee filed appealsbefore the tribunal. 6. For the assessment year 2011-12, the tribunal held thatthe Assessing Officer has straightaway proceeded to apply Rule8D for the purpose of disallowance under Section 14A withoutspecifying or complying with the mandatory requirement ofSection 14A(2) or Rule 8D(1). So holding, the tribunal heldthat the Assessing Officer having failed to comply with thestatutory requirement, he cannot proceed to make thedisallowance under Section 14A(1) of the Act. The tribunalnoted that the assessee themselves had voluntarily offeredRs.2,64,14,439/- as disallowance and accordingly, thedisallowance made by the Assessing Officer was reduced to thesaid extent. 6. For the assessment year 2011-12, the tribunal held thatthe Assessing Officer has straightaway proceeded to apply Rule8D for the purpose of disallowance under Section 14A withoutspecifying or complying with the mandatory requirement ofSection 14A(2) or Rule 8D(1). So holding, the tribunal heldthat the Assessing Officer having failed to comply with thestatutory requirement, he cannot proceed to make thedisallowance under Section 14A(1) of the Act. The tribunalnoted that the assessee themselves had voluntarily offeredRs.2,64,14,439/- as disallowance and accordingly, thedisallowance made by the Assessing Officer was reduced to thesaid extent. 7. For the assessment year 2012-13, the tribunal holds thatthe Assessing Officer had not called for any specificexplanation with regard to the fresh investment of Rs.20 Crores,which are also capable of earning dividend income. Consideringthese facts, the tribunal directed the assessee to work out theexpenditure component towards administrative and managerialaspect, so that the same shall be disallowed in the computationof income of the assessee. Accordingly, the appeal filed by theassessee was partly allowed. 8. Mr.M.Swaminathan, learned Senior Standing Counselappearing for the appellant/revenue assisted by Mrs.Pushpa,learned Standing Counsel for the appellant/revenue submittedthat the tribunal committed an error in holding that theAssessing Officer had not followed the procedure under Section14A(2) when the Assessing Officer had rightly followed theprocedure and reading of the assessment order dated 20.01.2014will clearly show that before resorting to the procedure underRule 8D, the Assessing Officer has rightly exercised his powerunder Section 14A(2) of the Act and recorded that he is notsatisfied with the correctness of the claim of the assessee inrespect of such expenditure in relation to income, which doesnot form part of total income under the Act. Therefore, it issubmitted that the finding of the tribunal is wholly erroneous. 9. In support of his contention, learned counsel placedreliance on the decision of the Division Bench in the case ofCIT Vs. J.K.Fenner (India) Limited in TCA No.785 of 2018 etc.batch dated 11.12.2018. 10. With regard to the finding of the tribunal for theassessment year 2012-13, the learned counsels pointed out thatthough the tribunal directs the assessee to work out theexpenditure component towards administrative and managerialaspect, no specific direction has been given to the assessee orto the Assessing Officer as to how to proceed further in thematter, though the tribunal has pointed out that upon workingout the expenditure by the assessee, the same should bedisallowed in the computation of income of the assessee.Therefore, it is submitted that the order passed by the tribunalsuffers from error and the Substantial Questions of Law may beanswered in favour of the revenue. 11. Per contra, Mr.R.Vijayaraghavan, learned Senior Counselappearing for the respondent/assessee placed reliance on thedecision of the High Court of Bombay in Godrej & BoyceManufacturing Company Limited, Mumbai Vs. Deputy Commissioner ofIncome Tax, reported in (2010) 328 ITR 0081, and the decision ofthe High Court of Delhi in Principal Commissioner of Income Tax https://hcservices.ecourts.gov.in/hcservices/ Vs. Vedanta Limited, reported in (2019) 261 Taxmann 0179(Delhi). 11. Per contra, Mr.R.Vijayaraghavan, learned Senior Counselappearing for the respondent/assessee placed reliance on thedecision of the High Court of Bombay in Godrej & BoyceManufacturing Company Limited, Mumbai Vs. Deputy Commissioner ofIncome Tax, reported in (2010) 328 ITR 0081, and the decision ofthe High Court of Delhi in Principal Commissioner of Income Tax https://hcservices.ecourts.gov.in/hcservices/ Vs. Vedanta Limited, reported in (2019) 261 Taxmann 0179(Delhi). 12. These decisions were referred to by the learned counselin support of his submissions with regard to the mandate ofSection 14A(2) of the Act. It is submitted that the AssessingOfficer in terms of the said provision is bound to first recordhis satisfaction as to the correctness of the claim of theassessee in respect of such expenditure in relation to income,which does not form part of the total income under the Act.Without doing so, the Assessing Officer cannot proceed underRule 8D. Therefore, it is submitted that by applying the abovementioned decisions, the order passed by the tribunal may beaffirmed. So far as the order of the tribunal with regard tothe assessment year 2012-13, it is not clear as to why therevenue has preferred the appeal before this Court, since thedirection issued by the tribunal is concluded. 13. We have heard the learned counsel for the parties atgreat length. The principle underlying Section 14A and theprocedure therein has been succinctly explained by the HighCourt of Bombay in the case of Godrej & Boyce ManufacturingCompany Limited, Mumbai [cited supra]. It is pointed out thatthe principles that emerge from Section 14A are (a) the mandate of Section 14A is to preventclaims for deduction of expenditure in relation toincome which does not form part of the total income ofthe assessee; (b) Section 14A(1) is enacted to ensure that onlyexpenses incurred in respect of earning taxable incomeare allowed; (c) The principle of apportionment of expenses iswidened by Section 14A to include even theapportionment of expenditure between taxable and nontaxable income of a indivisible business; (d) The basic principle of taxation is to tax anet income. This principle applies even for thepurposes of Section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance isestablished - which is the relationship of theexpenditure with income which does not form part oftotal income – a disallowance has to be effected. 14. It is further pointed out that under sub section 2 ofSection 14A, the Assessing Officer is required to determine theamount of expenditure incurred by the assessee in relation tosuch income, which does not form part of the total income underthe Act in accordance with such method as may be prescribed. 15. It is further pointed out that the jurisdiction of theAssessing Officer to determine the expenditure incurred inrelation to such income which does not form part of the totalincome under the Act, in accordance with the prescribed method,arises if the Assessing Officer is not satisfied with thecorrectness of the claim of the assessee in respect of theexpenditure which the assessee claims to have incurred inrelation to income which does not form part of the total income. 15. It is further pointed out that the jurisdiction of theAssessing Officer to determine the expenditure incurred inrelation to such income which does not form part of the totalincome under the Act, in accordance with the prescribed method,arises if the Assessing Officer is not satisfied with thecorrectness of the claim of the assessee in respect of theexpenditure which the assessee claims to have incurred inrelation to income which does not form part of the total income. 16. Further, the satisfaction of the Assessing Officer hasto be arrived at, having regard to the accounts of the assessee.It was further held that sub section 2 of Section 14A does notenable the Assessing Officer to apply the method prescribed bythe rules straightaway without considering whether the claimmade by the assessee in respect to the expenditure incurred inrelation to the income which does not form part of the totalincome, is correct. Therefore, at the first instance, theAssessing Officer has to determine whether the claim of theassessee in that regard is correct and that the determinationmust be made having regard to the accounts of the assessee. 17. The satisfaction of the Assessing Officer must bearrived at on an objective basis and it is only when theAssessing Officer is not satisfied with the claim of theassessee, that the legislature directs him to follow the methodthat may be prescribed. 18. Therefore, what we are required to see for theassessment year 2011-12, is whether such procedure was followedby the Assessing Officer. The Assessing Officer on consideringthe return of the income failed to note that the assessee hasreceived income by way of dividend from Indian companiesamounting to Rs.24,83,08,996, which the assessee claimed to beexempted from tax. 19. Notice dated 27.08.2013 was issued to the assesseecalling upon them to file the working sheet of the working doneby them under Rule 8D for disallowance of the said sum underSection 14A. The assessee in response to such notice, submitteda letter dated 03.10.2013 giving the working under Rule 8D. TheAssessing Officer after going through the submission made by thepetitioner pointed out that the assessee had computed thedisallowance of dividend by invoking the provisions of Rule 8D,but while doing so, ignored sub rule iii of the said rule. Itappears that this was pointed out to the assessee. However, theassessee though filed a response on 09.01.2014, the AssessingOfficer states that the assessee did not address the issue ofcomputation of the third limb of Rule 8D. 20. The finding recorded by the Assessing Officer issufficient and a clear indication of his compliance of theprocedure under Section 14A(2), the Assessing Officer at thefirst instance has considered whether the claim of the assesseeis correct and thereafter only has proceeded to determine theamount by adopting the procedure under Rule 8D. Therefore, sofar as the assessment for the year 2011-12, is concerned, itcannot be stated to be the case where there is a failure tofollow the procedure under Section 14A (2) of the Act. Havingheld so, we need to point out that the tribunal committed anerror in not only allowing the appeal of the assessee on thesaid ground, but also directed the Assessing Officer to acceptthe figure mentioned by the assessee in their returns viz.,Rs.2,64,14,439/-. If the tribunal was of the view that thisfigure is liable to be accepted, then the correctness of thepetition should have been directed to be decided by theAssessing Officer for which purpose the matter should have beenremanded. This in our view is one more error committed by thetribunal. 21. So far as the order passed for the assessment year 2012-13 is concerned, we were also of the same view as expressed byMr.R.Vijayaraghavan,learnedSeniorCounselfortherespondent/assessee and wondered as to why the revenue haspreferred the appeal. However, on a closer reading of paragraphNo.7.3 of the impugned order, we find that though the tribunaldirects the assessee to work out the expenditure componenttowards administrative and managerial aspect so that the sameshall be disallowed in the computation of income, but has notissued any specific directions to the Assessing Officer as towhat has to be done after the assessee files the working sheet.Therefore, to that extent the tribunal has committed an error.Hence, we are of the considered view that the matter should beremanded for fresh consideration of the Assessing Officer inaccordance with law. 22. For the above reasons, the Tax Case Appeals are allowedand the Substantial Questions of Law are answered in favour ofthe revenue and the matters for both the Assessment years viz.,2011-12 and 2012-13, are remitted to the Assessing Officer forfresh consideration in accordance with law. No Costs. To 1.The Income Tax Appellate Tribunal'D' Bench, Chennai'D' Bench, Chennai 2.The Commissioner of Income TaxCorporate Circle -3ChennaiCorporate Circle -3Chennai 3.The Commissioner of Income Tax (Appeals)13Chennai 34.Chennai 34. 4.The Assistant Commissioner of Income TaxCompany Circle III(1) ChennaiCompany Circle III(1) Chennai TCA Nos.509 & 510 of 2018SSV(CO)SP(29/07/2020)