Kesoram Industries Limited v. Principal Commissioner Of Income Tax 2 ………

Form No. IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE PRESENT:THE HON’BLE JUSTICE T.S. SIVAGNANAMAnd THE HON’BLE JUSTICE HIRANMAY BHATTACHARYYA ITAT/43/2021IA NO:GA/1/2021 KESORAM INDUSTRIES LIMITEDVS.PRINCIPAL COMMISSIONER OF INCOME TAX 2……… ITA/148/2018 KESORAM INDUSTRIES LIMITEDVS.PRINCIPAL COMMISSIONER OF INCOME TAX 2, KOLKATA For the appellant: Mr. Debasish Chowdhury, Adv., Mr. Madhu Jana, Adv.… for Appellant For the respondent: Mr. J. P. Khaitan, Sr. Adv., Ms. Nilanjana Banerjee [Paul], Adv. Heard on : January 19, 2022. Judgement on : January 19, 2022. T.S. SIVAGNANAM, J. : These appeals have been filed by theassessee under Section 260A of the Income Tax Act, 1961, (the Act, inbrevity) challenging the orders passed by the Income Tax Appellate Tribunal, Kolkata (Tribunal). There were four orders, which aresubject matter of challenge before us in these two appeals.ITA/148/2018 is directed against the consolidated order dated26.4.2018 passed by the Tribunal in ITA/1037/Kol/2012 and773/KOL/2013 for the assessment years 2008-09 and 2009-10respectively. The order impugned in ITAT/43/2021 is the orderpassed by the Tribunal in ITA/1195 and 1176/Kol/2019 for theassessment year 2011-12. The Tribunal in its order dated 21.10.2020,which is impugned in ITAT/43/2021 followed the order impugned inITA/148/2018 and disposed of the appeal and, therefore,ITA/148/2018 is taken as the lead case which deals with theassessment years 2008-09 and 2009-10. ITA/148/2018 was admittedon 14.09.2018 on the following substantial questions of law. a.Whether rule 8D of the Income Tax Rules 1962 can beinvoked without examining the correctness of theassessee’s claim of expenditure incurred in relation toexempt income and without recording reasons as to why,having regard to the assessee’s accounts, such claim wasnot correct or acceptable?invoked without examining the correctness of theassessee’s claim of expenditure incurred in relation toexempt income and without recording reasons as to why,having regard to the assessee’s accounts, such claim wasnot correct or acceptable? b.Whether on the facts and in the circumstances of theinstant case, the mechanical invocation and application ofrule 8D of the Income Tax Rules, 1962 for computing thedisallowance under Section 14A of the Income Tax Act,1961 was justified?instant case, the mechanical invocation and application ofrule 8D of the Income Tax Rules, 1962 for computing thedisallowance under Section 14A of the Income Tax Act,1961 was justified? In ITAT/43/2021 the appellant has also raised identicalsubstantial questions of law for consideration. Thus, we proceed tohear out and decide the aforesaid appeals by passing a commonjudgment and order. We have heard Mr. Khaitan, learned senior counsel assisted byMs. Nilanjana Banerjee (Paul) counsel for the appellant and Mr.Debasish Chowdhury, learned senior standing counsel and Mr.Madhu Jana, learned junior standing counsel for therespondent/revenue. In ITAT/43/2021 the appellant has also raised identicalsubstantial questions of law for consideration. Thus, we proceed tohear out and decide the aforesaid appeals by passing a commonjudgment and order. We have heard Mr. Khaitan, learned senior counsel assisted byMs. Nilanjana Banerjee (Paul) counsel for the appellant and Mr.Debasish Chowdhury, learned senior standing counsel and Mr.Madhu Jana, learned junior standing counsel for therespondent/revenue. The issue involved in the instant case is whether rule 8D of theIncome Tax Rules, 1962 could have been invoked by the AssessingOfficer without examining the correctness of the assessee’s claim ofexpenditure in relation to exempt income and without recordingreasons as to why such a claim was not correct or acceptable. Thesubsidiary question would be whether the Assessing Officer canmechanically invoke and apply rule 8D of the Rules for computing thedisallowance under Section 14A of the Act. For the assessment years2008-09 and 2009-10 the Assessing Officer in paragraph 11 of theassessment order dated 31.12.2010 the Assessing Officer hasobserved that the assessee has earned dividend income ofRs.3,58,81,107/-, which is exempt under Section 10(34) and theywere called upon to explain why expenses related to dividend earnedfrom shares held as investment be disallowed under Section 14A, asper formula provided in rule 8D of the Rules. The assessee had statedthat they had voluntarily made a disallowance of Rs.10 lakhs.However, on going through the order of assessment dated 31.12.2010 we find that the Assessing Officer has not noticed this fact and notedonly the argument of the assessee that no expenditure has beenincurred by them for earning the exempt dividend and interestincome. The Assessing Officer in a single line stated that thecontention of the assessee is not acceptable and proceeded to applyrule 8D and disallowed the total amount of Rs.61,47,311/- for theassessment year 2008-09 and a sum of Rs.1,99,90,545/- for theassessment year 2009-10. Aggrieved by the same, the assesseepreferred appeal before the Commissioner of Income Tax (Appeals)(CIT(A)). It was contended before CIT(A) that the Assessing Officererred in disallowing the amount mentioned above under Section 14Aby automatically applying computation method prescribed in rule 8Dwithout giving any reasons for non-acceptance of the claim of theappellant. Without prejudice to the said contention the assesseesubmitted even assuming but not admitting that the said amountcould be disallowed under Section 14A, the Assessing Officer erred inadding the entire amount to the returned income which resulted indouble disallowance as the assessee had voluntarily disallowed a sumof Rs.10 lakhs for the assessment year 2008-09. So far as theassessment year 2009-10, the Assessing Officer noted that theassessee has disallowed a sum of Rs.15 lakhs but has not recordedany finding as to why the said disallowance voluntarily made by theassessee was not acceptable. The assessee further contended thatsub-section (2) of Section 14A does not enable the Assessing Officer toapply the method prescribed under rule 8D without determining inthe first instance the correctness of the claim of the assessee, having regard to the accounts of the assessee. The assessee placed relianceon the decision in the case of Godrej & Boyce Mfg. Co. Ltd. –Vs-DCIT reported in 328 ITR 081. Further, the assessee contended thatthe disallowance has been computed by automatically applying themethod prescribed in rule 8D of the Rules without recording anyreasons on the non-satisfaction of the claim of the appellant. regard to the accounts of the assessee. The assessee placed relianceon the decision in the case of Godrej & Boyce Mfg. Co. Ltd. –Vs-DCIT reported in 328 ITR 081. Further, the assessee contended thatthe disallowance has been computed by automatically applying themethod prescribed in rule 8D of the Rules without recording anyreasons on the non-satisfaction of the claim of the appellant. We have perused the order passed by CIT(A) and we aresurprised to note that no specific finding has been recorded by theCIT(A) on the ground canvassed by the assessee, the method ofapplying rule 8D and under what circumstances it could be done. Theassessee filed appeal before the Tribunal as against the order of theCIT(A) for the assessment year 2008-09. Before the Tribunal thegrounds which have been canvassed, before the CIT(A) were reiterated.However, we find that the Tribunal did not examine as to whether theAssessing Officer had mechanically followed the mechanism providedunder rule 8D without recording any satisfaction. However, theTribunal granted relief to the assessee with regard to the interestportion alone. As against the said portion of the order where relief wasgranted to the assessee, the Revenue is not on appeal before us. Sincethe order of the Tribunal was available when the appeal was taken upfor hearing by the CIT(A) for the assessment year 2011-12, the CIT(A)granted relief to the assessee with regard to the interest portion alone.Thus, the assessee is before us once again canvassing the samegrounds, which were canvassed before the CIT(A) as well as before theTribunal. The law on the issue is no longer res integra and we areguided by the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd.-Vs-Commissioner of Income Tax reported in [2018] 402 ITR 640 (SC). Paragraphs 34 and 41 would be ofrelevance to the case on hand, which is quoted hereinbelow for betterappreciation: “34Having clarified the aforesaid position, the first andforemost issue that falls for consideration is as to whether thedominant purpose test, which is pressed into service by the assesseeswould apply while interpreting section 14A of the Act or we have to goby the theory of apportionment. We are of the opinion that thedominant purpose for which the investment into shares is made by anassessee may not be relevant. No doubt, the assessee like MaxoppInvestment Limited may have made the investment in order to gaincontrol of the investee-company. However, that does not appear to bea relevant factor in determining the issue at hand. The fact remainsthat such dividend income is non-taxable. In this scenario, ifexpenditure is incurred on earning the dividend income, that much ofthe expenditure which is attributable to the dividend income has to bedisallowed and cannot be treated as business expenditure. Keepingthe objective behind section 14A of the Act in mind, the said provisionhas to be interpreted, particularly, the words “in relation to theincome” that does not form part of total income. Considered in thishue, the principle of apportionment of expenses comes into play asthat is the principle which is engrained in section 14A of the Act. Thisis so held in Walfort Share and Stock Brokers P. Ltd., relevant passagewhereof is already reproduced above, for the sake of continuity ofdiscussion, we would like to quote the following few lines therefrom: “The next phrase is, `in relation to income which does notform part of total income under the Act’. It means that if anincome does not form part of total income, then the relatedexpenditure is outside the ambit of the applicability of section14A….The theory of apportionment of expenditure betweentaxable and non-taxable has, in principle, been now widenedunder section 14A”. “The next phrase is, `in relation to income which does notform part of total income under the Act’. It means that if anincome does not form part of total income, then the relatedexpenditure is outside the ambit of the applicability of section14A….The theory of apportionment of expenditure betweentaxable and non-taxable has, in principle, been now widenedunder section 14A”. “41Having regard to the language of section 14A(2) of the Act,read with rule 8D of the Rules, we also make it clear that beforeapplying the theory of apportionment, the Assessing Officer needs torecord satisfaction that having regard to the kind of the assessee, suomotu disallowance under section 14A was not correct. It will be inthose cases where the assessee in his return has himself apportionedbut the Assessing Officer was not accepting the said appointment. Inthat eventuality, it will have to record its satisfaction to this effect.Further, while recording such a satisfaction, the nature of the loantaken by the assessee for purchasing the shares/making theinvestment in shares is to be examined by the Assessing Officer”. Two important issues have been pointed out in theaforementioned decision. Firstly that the provisions of Section 14Ahas to be interpreted, particularly, the words that “in relation to theincome” that does not form part of total income. Therefore, it was heldthat the principle of apportionment of expenses comes into play asthat is the principle which is incorporated in Section 14A of the Act.With regard to as to how the power under Section 14A(2) read withrule 8D of the Rules could be invoked it was pointed out that the assessing officer needs to record satisfaction that having regard to thekind of the assessee suo motu disallowance under Section 14A wasnot correct and it will be in those cases where the assessee in hisreturn has himself apportioned but the assessing officer was notaccepting the said apportionment. In any event, the assessing officerwill have to record its satisfaction to the said effect. As pointed outearlier the assessing officer has not recorded satisfaction and whenthis was pointed out before CIT(A) the same was not decided by theCIT(A), the issue was also not decided by the Tribunal when theassessee raised the same, though the grounds have been noted. TheTribunal has not rendered any decision on the said point but grantedpartial relief to the assessee with regard to the interest alone. We alsotake note of the decision of this Court in the case of Commissioner ofIncome Tax, Central I, Calcutta Versus Ashish Jhunjhunwalareported in 2015(12) TMI 905, Calcutta and the decision in PrincipalCommissioner of Income Tax, Kolkata – 3, Kolkata VersusBritannia Industries Limited, ITAT/45/2017 dated 19[th] July, 2018.It was pointed out that the assessee has to make a claim (including aclaim that no expenditure was incurred) with regard to theexpenditure incurred for earning income which is not chargeable totax. Such a claim has to be examined by the assessing officer andonly if on an objective satisfaction is arrived at by the assessing officerthat the claim made by the assessee cannot be accepted, theassessing officer can then proceed to apply computation mode asprovided in rule 8D (2) of the Rules. We also take into considerationthe decision of the Hon’ble Supreme Court in Godrej and Boyce Manufacturing Company Limited Vs. Deputy Commissioner ofIncome Tax, Mumbai; 2017(7) SCC 421, wherein it was held thatthe law postulates the recording of satisfaction as the requirement tobe complied with by the assessing officer. The law on the subject asnoted has been reiterated in several subsequent decisions as well,and, therefore, the issue has to be decided by the Tribunal, before theTribunal can remand the matter to the assessing officer to do thecomputation as directed to be done in paragraphs 11 and 12 of theorder passed by the Tribunal dated 26[th] April, 2018 inITAT/373/Kol/2013 etc. However, we make it clear that so far as therelief which was granted to the assessee with regard to the interestportion shall remain intact for all the three assessment years and thematter is remanded to the Tribunal to consider as to whetherassessing officer had followed the mandate in Section 14A(2) of the Actand while doing so, the Tribunal shall take note of the decisions whichwe have referred to above which has laid down the procedure to beadopted by the assessing officer. For the above reasons, the appeals are allowed and substantialquestions of law are answered in favour of the assessee, and thematter stands remanded to the Tribunal to decide the aforementionedissue namely with regard to whether the assessing officer hasrecorded his satisfaction as required to be done under Section 14A(2)before invoking the computation mode as specified in Rule 8D(2)(iii).As observed earlier, the relief granted to the assessee by the Tribunalfor assessment years 2008-2009 and 2009-2010 by the CIT (A) for the assessment years 2011-2012 with regard to the interest portion shallstand affirmed. We also note that the Tribunal while remanding the matter tothe assessing officer particularly directed consideration of theinvestment which yielded dividend income to the assessee forcomputing the disallowance under Section 14A read with R. 8D (2) ofthe Rules. Whatever relief has been granted to the assessee by theTribunal under the said head shall remain intact. Nevertheless, theTribunal will examine the larger issue with regard to the recording ofsatisfaction by the assessing officer as mandated under Section 14Aand anything to be done later shall depend upon the conclusion thatthe Tribunal may arrive at. (T.S. SIVAGNANAM, J.) I agree. (HIRANMAY BHATTACHARYYA, J.)