Principal Commissioner Of Income Tax )(Central) v. M/S Jsw Energy Ltd.jsw Centre, Bandra Kurla Complex, Bandra (E), Mumbai 400 051

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTIONINCOME TAX APPEAL NO. 266 OF 2018 Principal Commissioner Of Income Tax )(Central)-4,Aaykar Bhavan, M. K. Road,)Churchgate, Mumbai 400 020) ..Appellant Versus M/s JSW Energy Ltd.JSW Centre, Bandra Kurla Complex, Bandra (E), Mumbai 400 051 )))..Respondent---- Mr. Suresh Kumar for Appellant.Mr. Priyanka Jain a/w Mr. Pankaj Soni & Mr. Devansh Jain i/bVaishAssociates for Respondent. ---- CORAM : K.R. SHRIRAM & FIRDOSH P. POONIWALLA, JJ.DATED : 21[st] JUNE 2023 (ORAL JUDGMENT PER K .R. SHRIRAM J.) : 1The assessee filed the original return of income for A.Y.-2009-2010 on30[th] September 2009 declaring income of Rs.317,47,69,697/- after claimingdeduction under Section 80-IA of the Income Tax Act 1961 (the Act) ofRs.330,87,38,322/-. The taxable income under Section 115JB wascalculated under Section 115JB at Rs.666,76,27,404/-. Subsequently, asearch and seizure action under Section 132 of the act was carried out atJSW Group. In response to notice dated 24[th] October 2011 under section153A of the Act, the assessee filed on 29[th] January 2011 its return of incomefor A.Y.-2009-2010 declaring total income of Rs.317,47,69,697/- andincome under Section 115JB at Rs.666,76,27,404/-. The assessment under Section 143(3) read with Section 153A was completed on 28[th] March 2013by determining assessee’s income at Rs.317,47,69,698/- and taxable incomeunder Section 115JB of the Act was assessed at Rs.726,11,02,264/-.Additions were made on account of disallowance of claim of assessee oncapitalization of expenses of Rs.68,15,702/- incurred during the yeartowards one M/s Gremach Infrastructure Equipments And Projects Ltd.Further disallowance of Rs.59,34,74,860/- under Section 14A of the Actread with Rule 8(d) of Income Tax Rules 1962 (the said Rules) was made asagainst a disallowance of Rs.13,59,67,318/- made by the assessee in thereturn of income under normal provisions of the Act and disallowance underSection 14A of the Act read with Rule 8(d) of the said Rules amounting toRs.59,34,74,860/- was made while computing under Section 115JB of theAct. 2Aggrieved by the order of the Assessing Officer, assessee filed anappeal before the Commissioner of Income Tax (Appeals) [CIT (A)]. By anorder dated 24[th] December 2014 CIT(A) partly allowed assessee’s appeal.Aggrieved by the order of CIT(A) revenue filed an appeal before the ITAT.The ITAT dismissed the appeal by an order dated 6[th] January 2017 which isimpugned in this appeal. 3The following substantial questions of law are proposed: SUBSTANTIAL QUESTIONS OF LAW “(a) Whether on the facts and circumstances of the case and in law the ITAT is right in restricted the disallowance made u/s.14A of theI.T. Act from Rs. 59,34,74,860/- to Rs. 13,59,67,318/- by holding thatno exempt income received or receivable by the assessee during therelevant previous year.? (b) Whether on the facts and circumstances of the case and in law. theITAT was justified in deleting the disallowance u/s.14A for AY 2009-10 without considering the circular No.5 of 2014 dated 11th February2014, issued by the Central Board of Direct Taxes which clearlyprovides for disallowance of the expenditure even where taxpayer in aparticular year has not earned any exempt income ? c) Whether on the facts and circumstances of the case and in law. theITAT was justified in directing the AO to delete the addition workedout u/s. 14A r.w. Rule 8D of the Act while computing the book profitsunder section 115JB of the Act relying on its own decision in theassessee's own case for A.Y. 2006-07 without considering that as perExplanation 1(f) to Section 115JB, the book profits have to beincreased by the expenditure incurred for earning the exemptincome?" 4As regards question (b) proposed, Mr. Suresh Kumar in fairness stated c) Whether on the facts and circumstances of the case and in law. theITAT was justified in directing the AO to delete the addition workedout u/s. 14A r.w. Rule 8D of the Act while computing the book profitsunder section 115JB of the Act relying on its own decision in theassessee's own case for A.Y. 2006-07 without considering that as perExplanation 1(f) to Section 115JB, the book profits have to beincreased by the expenditure incurred for earning the exemptincome?" 4As regards question (b) proposed, Mr. Suresh Kumar in fairness stated that no submissions were made regarding Circular No.5 of 2014 before theIncome Tax Appellate Tribunal (ITAT). Therefore, we will not go into thatquestion, but deal only with the other two questions proposed. 5Section 14A of the Act reads as under: Expenditure incurred in relation to income not includible in totalincome. 14A. (1) Notwithstanding anything to the contrary contained in thisAct, for the purposes of computing the total income under thisChapter no deduction shall be allowed in respect of expenditureincurred by the assessee in relation to income which does not formpart of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditureincurred in relation to such income which does not form part of thetotal income under this Act in accordance with such method as maybe prescribed, if the Assessing Officer, having regard to the accountsof the assessee, is not satisfied with the correctness of the claim of theassessee in respect of such expenditure in relation to income whichdoes not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to acase where an assessee claims that no expenditure has been incurredby him in relation to income which does not form part of the totalincome under this Act: Provided that nothing contained in this section shall empower theAssessing Officer either to reassess under section 147 or pass anorder enhancing the assessment or reducing a refund already madeor otherwise increasing the liability of the assessee under section 154,for any assessment year beginning on or before the 1st day of April,2001. Rule 8D of the said Rules that was inserted w.e.f. 24[th] March 2008 by the Income Tax (5[th] Amendment Rules) 2008, reads as under: “8D.-(1) Where the Assessing Officer, having regard to the accounts ofthe assesse of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee;or (b) the claim made by the assessee that no expenditure has beenincurred in relation to income which does not form part of the totalincome under the Act for such previous year, he shall determine theamount of expenditure in relation to such income in accordance withthe provisions of sub-rule (2). 2) The expenditure in relation to income which does not form part ofthe total income shall be the aggregate of following amounts,namely:- (i) the amount of expenditure directly relating to income which doesnot form part of total income; and (ii) an amount equal to one per cent of the annual average of themonthly averages of the opening and closing balances of the value ofinvestment, income from which does not or shall not form part oftotal income: Provided that the amount referred to in clause (i) and clause (ii) shallnot exceed the total expenditure claimed by the assessee.] 6In sub-Section (2) of Section 14A and Rule 8D it is provided that if the Assessing Officer is not satisfied with the correctness of the claim in respectof expenditure made by assessee in relation to income which does not formpart of the total income under this Act, he shall determine the amount ofexpenditure in relation to such income in accordance with the provisionsprescribed. (ii) an amount equal to one per cent of the annual average of themonthly averages of the opening and closing balances of the value ofinvestment, income from which does not or shall not form part oftotal income: Provided that the amount referred to in clause (i) and clause (ii) shallnot exceed the total expenditure claimed by the assessee.] 6In sub-Section (2) of Section 14A and Rule 8D it is provided that if the Assessing Officer is not satisfied with the correctness of the claim in respectof expenditure made by assessee in relation to income which does not formpart of the total income under this Act, he shall determine the amount ofexpenditure in relation to such income in accordance with the provisionsprescribed. 7Therefore, the most fundamental requirement is the Assessing Officershould record his dis-satisfaction with the correctness of the claim of theassessee in respect of the expenditure and to arrive at such dis-satisfactionhe should give cogent reasons. 8Ms Jain relied upon three judgments of this court, viz., PrincipalCommissioner of Income Tax Vs. Bajaj Finance Ltd.[1], PrincipalCommissioner of Income Tax-2 Vs. Bombay Stock Exchange Ltd.[2] andPrincipal Commissioner of Income Tax Vs. Godrej & Boyce Mfg. Co. Ltd.[3] tosubmit that the Assessing Officer must first record a conclusion that havingregard to the accounts of the assessee, he is not satisfied with thedisallowance offered by the assessee in terms of Section 14A (2) of the Actand it is only on being dissatisfied with the disallowance offered by theassessee, can Rule 8D of the Rules be invoked to compute the disallowance. 9Paragraph 9 of Bajaj Fiance Ltd. (Supra) reads as under: “9. Question No. (ii) pertains to disallowance made by the AssessingOfficer under Section 14A of the Act read With Rule SD. TheTribunal, however, deleted the disallowance on the ground that theAssessing Officer had not recorded the necessary satisfaction for notaccepting the disallowance offered by the assessee. As is well theamount of expenditure incurred in relation to income which isexamined for tax if he is not satisfied with the correctness of theclaim of the assessee in respect of such expenditure. The satisfactionof the Assessing Officer about the correctness of the expenditureoffered for disallowance by the assessee therefore is a pre-condition.In the present case, we have perused the order of assessment inwhich the Assessing Officer had called assessee to justify the limiteddisallowances voluntarily offered. The assessee made detailedrepresentation upon the inter alia pointed out that the assessee hadnot made any expenditure in the nature of administrative expenses. 1. (2019) 110 taxmann.com 303 (Bombay) 2. (2020) 113 taxmann.com 303 (Bombay) 3. (2023) 149 taxmann.com 222 (Bombay) However, to avoid proceedings, a suo motu disallowance was made.The Assessing Officer did not in any manner reject this explanation ofthe assessee but merely proceeded to make disallowance by invokingSection 14A and applied Rule 8D which the Tribunal correctlyreversed.” Paragraph 9 of Bombay Stock Exchange (Supra) reads as under: “9. We note that it is evident from the extracted part of theassessment order referred to hereinabove that the Assessing Officerhas come to the conclusion that the disallowance claimed by theRespondent was not consistent with Rule 8D of the said Rules. It isonly in view of the disallowances not being worked out as per Rule8D of the Rules, that the Assessing Officer is not satisfied with thedisallowance offered by the Respondent. This, to our mind, is puttingthe cart before the horse. The Assessing Officer must first record aconclusion that having regard to the accounts of the assessee, he isnot satisfied with the disallowance offered by the Respondent in termsof section 14A(2) of the Act. It only on being dissatisfied with theabove, does Rule 8D of the Rules can be invoked to compute thedisallowance.” Paragraph 11 of Godrej & Boyce Mfg. Co. Ltd. (Supra) reads as under: Paragraph 11 of Godrej & Boyce Mfg. Co. Ltd. (Supra) reads as under: “11. In the present case, the assessee had earned an exempt incomeof Rs. 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 income. Further, the AO has notrecorded any satisfaction that the working of inadmissibleexpenditure u/s14A is incorrect with regard to the books of accountof the assessee. The proviston u/s 14(2) does not empower the AO toapply Rule 8D straightaway without considering the correctness ofthe 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 ofassessee's claim with reference to the books of account. Consequently,the disallowance made by applying the Rule 8D is not only againstthe statutory mandate but contrary to the legal principles laid down.In our view too, the CIT (A) has rightly deleted the addition made onaccount of interest expenditure as the assessee had sufficient interestfree surplus fund to make the investment and the ITAT has rightlydeleted the disallowance made by the AO u/s 14A r.w Rule 8D.Consequently we hold that, the interest expenditure cannot bedisallowed u/s 14A r.w. Rule 8D(2)(ii) under any circumstances.” 10Now let us examine the assessment order to see whether thismandatory conclusion that the Assessing Officer is not satisfied with thedisallowance made by the assessee, has been arrived at. The only placewhere the Assessing Officer has come to his findings is at paragraph 5.2 of the assessment order, which reads as under: 5.2. The said submission has been considered. In the assessment orderpassed u/s 143(3) dated 20.10.2010, the AO has worked out thedisallowance u/s 14A as per Rule 8D at Rs.29,66,81,836/-. Theassessee has also furnished working u/Rule 8D (though underprotest) which amounts to Rs.44,03,33,135/-. Rule 8D is to be appliedin the present case based on the various discussions and findings ofthe AO in the original assessment order passed. However, since theamount worked out by the assessee is higher, the same has beenconsidered for disallowance. 11The Assessing Officer has not expressed his satisfaction in the way itshould have been. The Assessing Officer does not say he is not satisfied andwhy he was not satisfied. There are no reasons given. Moreover, Ms Jain submitted that the Assessing Officer, in paragraph5.2 of the impugned order quoted above, has relied upon some discussionsand findings of some original assessment order passed, but the firstassessment order ever to have been passed is the impugned order dated28[th] March 2013 where the Assessing Officer has reduced the disallowance.Therefore, it only indicates clear non application of mind by the AssessingOfficer. This was not controverted. We would agree with the submissions ofMs Jain since CIT(A) in his order dated 9[th] December 2014 records “Thoughnot mentioned in assessment order, admittedly a notice u/s 143(2) was Moreover, Ms Jain submitted that the Assessing Officer, in paragraph5.2 of the impugned order quoted above, has relied upon some discussionsand findings of some original assessment order passed, but the firstassessment order ever to have been passed is the impugned order dated28[th] March 2013 where the Assessing Officer has reduced the disallowance.Therefore, it only indicates clear non application of mind by the AssessingOfficer. This was not controverted. We would agree with the submissions ofMs Jain since CIT(A) in his order dated 9[th] December 2014 records “Thoughnot mentioned in assessment order, admittedly a notice u/s 143(2) was issued and assessment proceedings were pending on the date of searchwhich came to be abated. In response to notice u/s 153A dated 24.10.2011appellant filed return of income on 29.1.2011 declarting Total income ofRs.317,47,69,697/- and Book Profit u/s115JB Rs.666,76,27,404/- In theassessment order dated 28.3.2013 passed u/s 153A r.w.s. 143(3), theAssessing Officer has made certain additions / disallowance which aresubject matter of this appeal”. The assessment order dated 28[th] March 2013is the order that was impugned before the CIT(A). Therefore it clearlyindicates that the Assessing Officer’s finding in paragraph 5.2 of theassessment order is based relying upon a non existent assessment order andthat indicates clear non application of mind. 12As regards proposed question (c), we do not even find any discussionin the impugned order relating to Section 115JB of the Act. Mr. SureshKumar states that question was raised in the appeal filed by the revenue butit has not been discussed. Well, that cannot be still a ground for a substantialquestion of law and the revenue could have moved the ITAT by filing a MiscApplication. It appears, that has not been done.13In the circumstances, we are satisfied that no substantial question oflaw arises. Appeal, therefore, dismissed. (FIRDOSH P POONIWALLA, J.) (K.R. SHRIRAM, J.)