Itxa/1029/2018 Of Pr. Commissioner Of Income Tax - 14 v. Godrej And Boyce Mfg. Co. Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.1029 OF 2018 Pr. Commissioner of Income-Tax – 14,]Aayakar Bhavan, M K Road]Mumbai 400 007.].. Appellant v/s. Godrej & Boyce Mfg. Co. Ltd.]Manufacturing Co. Ltd]Pirojshah Nagar]Vikhroli, Mumbai – 400 079].. Respondent … Mr. Suresh Kumar for the appellant. Ms. P. J. Pardiwalla, Senior Advocate a/w. Mr. Nitesh Joshi i/by Mr. AtulK. Jasani for the respondent. … CORAM : DHIRAJ SINGH THAKUR AND KAMAL KHATA, JJ.RESERVED ON : 5TH JANUARY 2023.PRONOUNCED ON : 20TH FEBRUARY 2023. J U D G M E N T [PER : KAMAL R. KHATA, J.] 1.This appeal is against the impugned order dated 5th April 2017 respondent’s appeal was partly allowed and the revenue / appellant’sappeal was dismissed. STATEMENT OF FACTS: 2.The assessee filed its return for income for A.Y. 2011-12 on21.11.2011 declaring total income at Rs.358,47,29,328/- under normalprovisions and book profit of Rs.431,48,93,079/- under section (u/s)115JB of the I.T. Act. The return was processed u/s 143(1) of the Act on23.03.2012. The case was selected for scrutiny and notice u/s 143(2) ofthe I.T. Act 1961 was issued to the assessee on 01.08.2012. The AOmade various additions/disallowances – which includes disallowancesu/s.14A r.w. Rule 8D amount to Rs.5,11,85,000/- The AO completedassessment vide order dated 03.03.2014. 3.Being aggrieved by order dated 03.03.2014, the assessee companyfiled an appeal before the CIT(A). 4.The Ld. CIT (A) by his order dated 17.04.2015 partly allowed theassessee company’s appeal. 5.Being aggrieved by order dated 17.04.2015, the Assesseecompany and the Revenue filed an appeal before the Hon’ble ITAT. 6.The Hon’ble ITAT vide order dated 05.04.2017, allowed theappeal of the Assessee company and dismissed the appeal filed by theRevenue. 7.The questions of law averred in the appeal and placed for ourconsideration are as under: a. Whether in law and on the facts of the instant case,was the Tribunal correct in holding that the AO hasnot recorded any satisfaction that the working ofinadmissible expenditure u/s.14A is incorrect havingregard to the books of accounts of the assessee,whereas in para 5 of Assessment order, the AO hasclearly mentioned that the assessee has set off interestcosts in respect of dividend income against othertaxable income which is against the matching conceptof income and expenditure. b. Whether in law and on the facts of the instant case,was the Tribunal right in endorsing the CIT(A)’s orderof presumption of own interest free funds therebyoverlooking the changed law w.e.f. 2007-08 followedby introduction of rule 8D in 2008-09 provides for amethod of calculation as a result of which there wouldbe no need to rely on any presumption of own funds.c. Whether on law and in the facts of the instant case,was the Tribunal right in deleting the addition ofinterest disallowed by the AO, in the absence of anyevidence that indicated that borrowed funds were notused for the purpose of making investments thatyielded exempt. d. Whether on law and in the facts of the instant case,was the Tribunal justified in not considering interestexpenses while calculating disallowance u/s.14A r.w.Rule 8D although assessee has not maintainedseparate account for the investment related to exemptincome. d. Whether on law and in the facts of the instant case,was the Tribunal justified in not considering interestexpenses while calculating disallowance u/s.14A r.w.Rule 8D although assessee has not maintainedseparate account for the investment related to exemptincome. 8.Mr. Suresh Kumar the learned counsel for the appellant submittedthat the Assessing Officer (AO) had clearly mentioned in paragraph no.5of the assessment order that setting-off interest costs of dividend incomeagainst other taxable income is against matching concept of income andexpenditure. He submitted that there was no need to rely on anypresumption of own funds on account of the changed law that cameinto force from 2007-08 followed by introduction of rule 8D in 2008-09 which provides for a method of calculations. It is submitted that inview of the above, the ITAT erred in endorsing the CIT(A)’s order whichdrew presumption of own interest free funds. He further submitted thatthe ITAT ought not to have deleted the addition of interest disallowed bythe AO, in the absence of any evidence that indicated that borrowedfunds were not used for the purpose of making investments that yieldedexemption. He further submitted that the ITAT ought not to have beenconsidered interest while calculating disallowance u/s. 14A read withRule 5D since the assessee had not maintained a separate account forthe investment related to exempt income. 9.Mr. Pardiwalla, learned senior counsel for the respondent took usthrough the assessment order dated 3rd March 2014, CIT(A)’s orderdated 17th April 2015 and the impugned order dated 5th April 2017 andsubmitted that the interest expenditure was rightly not disallowed u/s.14A read with Rule 8D (2)(ii) and prayed that the appeal deserves to bedismissed. In support of his submission he relied upon the judgment ofthe Apex Court in the respondent’s case namely Godrej & BoyceManufacturing Co. Ltd. Vs. Deputy Commissioner of Income-Tax AndAnother1which held as under: “36. Section 14A as originally enacted by the FinanceAct of 2001 with effect from April 1, 1962 is in thesame form and language as currently appearing insub-section (1) of Section 14A of the Act. Sections14A(2) and (3) of the Act were introduced by theFinance Act 2006 with effect from April 1, 2007. Thefindings of the Bombay High Court in the impugnedorder that sub-sections (2) and (3) of section 14A isretrospective has been challenged by the Revenue inanother appeal which is presently pending before thiscourt. The said question, therefore, need not andcannot be gone into. Nevertheless, irrespective of theaforesaid question, what cannot be denied is that therequirement for attracting the provisions of section14A(1) of the Act is proof of the fact that theexpenditure sought to be disallowed / deducted had 1[2017] 394 ITR 449 (SC) actually been incurred in earning the dividendincome. Insofar as the appellant-assessee isconcerned, the issues stand concluded in its favour inrespect of the assessment years 1998-99, 1999-2000and 2001-02. Earlier to the introduction of sub-sections (2) and (3) of section 14A of the Act, such adetermination was required to be made by theAssessing Officer in his best judgment. In all theaforesaid assessment years referred to above it washeld that the Revenue had failed to establish anynexus between the expenditure disallowed and theearning of the dividend income in question. In theappeals arising out of the assessments made for someof the assessment years the aforesaid question wasspecifically looked into from the standpoint of therequirements of the provisions of sub-sections (2) and(3) of section 14A of the Act which had by then beenbrought into force. It is on such consideration thatfindings have been recorded that the expenditure inquestion bore no relation to the earning of thedividend income and hence the assessee was entitledto the benefit of full exemption claimed on account ofdividend income. 37. We do not see how in the aforesaid fact situationa different view could have been taken for theassessment year 2002-03. Sub-sections (2) and (3) ofsection 14A of the Act read with rule 8D of the Rulesmerely prescribe a formula for determination ofexpenditure incurred in relation to income whichdoes not form part of the total income under the Actin a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether suchdetermination is to be made on application of theformula prescribed under rule 8D or in the bestjudgment of the Assessing Officer, what the lawpostulates is the requirement of a satisfaction in theAssessing Officer that having regard to the accountsof the assessee, as placed before him, it is not possibleto generate the requisite satisfaction with regard tothe correctness of the claim of the assessee. It is onlythereafter that the provisions of section 14A(2) and(3) read with rule 8D of the Rules or a best judgmentdetermination, as earlier prevailing, would becomeapplicable. 38. In the present case, we do not find any mentionof the reasons which had prevailed upon theAssessing Officer, while dealing with the assessmentyear 2002-03, to hold that the claims of the assesseethat no expenditure was incurred to earn thedividend income cannot be accepted and why theorders of the Tribunal for the earlier assessment yearswere not acceptable to the Assessing Officer,particularly, in the absence of any new fact or changeof circumstances. Neither any basis has been disclosedestablishing a reasonable nexus between theexpenditure disallowed and the dividend incomereceived. That any part of the borrowing of theassessee had been diverted to earn tax free incomedespite the availability of surplus or interest freefunds available (Rs. 270.51 crores as on April 1, 2001and Rs. 280.64 crores as on March 31, 2002) remainsunproved by any material whatsoever.” 2which held “17.In a situation where the assessee has a mixedfund (made up partly of interest free funds and partlyof interest -bearing funds) and payment is made outof that mixed fund, the investment must beconsidered to have been made out of the interest freefund. To put it another way, in respect of paymentmade out of mixed fund, it is the assessee who hassuch right of appropriation and also the right to assertfrom what part of the fund a particular investment ismade and it may not be permissible for the Revenue to make an estimation of a proportionate figure. Foraccepting such a proposition, it would be helpful torefer to the decision of the Bombay High Court in Pr.CIT v. Bombay Dyeing & Mfg. Co. Ltd. [IT Appeal No.1225 of 2015, dated 28-11-2017], where the answerwas in favour of the assessee on the question, whetherthe Tribunal was justified in deleting thedisallowance under section 80M of the Act on thepresumption that when the funds available to theassessee were both interest free and loans, theinvestment made would be out of the interest freefunds available with the assessee, provided theinterest free funds were sufficient to meet theinvestments. The resultant SLP of the Revenuechallenging the Bombay High Court judgment wasdismissed both on merit and on delay by this Court.” 2[2021] 130 taxmann.com 178 (SC) 2[2021] 130 taxmann.com 178 (SC) 11.In the present case, the assessee had earned an exempt income ofRs. 84,30,37,423/- from shares and mutual funds and submitted acomputation of inadmissible expenditure u/s 14A amounting to Rs.13,66,635/- . The assessee claimed that the disallowance made u/s14Awas as per the books of account attributable to earning of exemptincome. On a perusal of the assessment order we find that there is nodiscussion by the AO with regard to the computation of inadmissibleexpenditure made by the assessee forming part of the return of income.Further, the AO has not recorded any satisfaction that the working ofinadmissible expenditure u/s14A is incorrect with regard to the books ofaccount of the assessee. The provision u/s 14(2) does not empower theAO to apply Rule 8D straightaway without considering the correctnessof the assessee’s claim in respect of expenditure incurred in relation tothe exempt income. We agree with the view of the ITAT that in thepresent case the AO has neither examined the claim in respect ofexpenditure incurred in relation to exempt income of the assessee norhas recorded any satisfaction with regard to the correctness of assessee’sclaim with reference to the books of account. Consequently, thedisallowance made by applying the Rule 8D is not only against thestatutory mandate but contrary to the legal principles laid down. In ourview too, the CIT (A) has rightly deleted the addition made on account of interest expenditure as the assessee had sufficient interest free surplusfund to make the investment and the ITAT has rightly deleted thedisallowance made by the AO u/s 14A r.w Rule 8D. Consequently wehold that, the interest expenditure cannot be disallowed u/s14A r.w.Rule 8D(2)(ii) under any circumstances. 12.In view of the aforesaid, we find there is no substantial question oflaw that is required to be framed and accordingly dismiss the appealwith no order as to costs in favour of the assessee. (KAMAL KHATA, J.) (DHIRAJ SINGH THAKUR, J.)