TMI Blog2016 (9) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... balance 50 per cent. of 20 per cent. i.e. 10 per cent. additional depreciation on these plant and machinery which were installed during the preceding assessment year after 30th September. There is no dispute about the working of the additional depreciation. There is no dispute that the assessee was entitled for additional depreciation in the plant and machinery acquired and installed in the preceding assessment year. In our opinion, now this issue is duly covered by the decision of the hon'ble Karnataka High Court in the case of CIT v. Rittal India P. Ltd. [2016 (1) TMI 81 - KARNATAKA HIGH COURT]. Thus Additional depreciation being 50 per cent. of 20 per cent. of the cost of new plant and machinery installed by the assessee during the preceding assessment year after September 30, 2010 as has been allowed to the assessee in the preceding assessment year i.e. the assessment year 2011-12 allowed - Decided in favour of assessee. Addition u/s 14A read with rule 8D(2)(ii) - - Held that:- The provisions of section 14A(2) are explicitly clear. This provision does not empower the Assessing Officer to disallow any expenditure by just applying directly, rule 8D. No contrary decision was b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th September of the year and rest in ensuing year. So, the disallowance is bad in law and deserves to be deleted. 2. Because the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in interpreting the spirit contained in the provisions of section 32(1)(iia) and so the appellant-company places reliance in the judgment delivered by the honourable High Court of Karnataka in the case of CIT v. Rittal India (P.) Ltd. (No. 1) (I. T. A. No. 268/2014 dated November 24, 2015 reported in [2016] 380 ITR 423 (Karn). 3. Because the learned Commissioner of Income-tax (Appeals) has erred in law and on facts in confirming the addition of ₹ 9,76,395 being disallowance under section 14A of the Income-tax Act read with rule 8D(2)(iii) of the Income-tax Rules, particularly when the appellant is not in receipt of exempt income during the year. 4. Because the learned Commissioner of Income-tax (Appeals) has erred in law and on facts that orders of the honourable High Court and the Supreme Court have overriding effect over the circulars/instructions issued by the Central Board of Direct Taxes irrespective of the fact whether the particular circular/instruction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plant and machinery installed after 30th September and the rest in the ensuing year. The facts relating to these grounds are that the Assessing Officer found that the assessee has claimed additional depreciation amounting to ₹ 1,62,66,215 on the plant and machinery which has been acquired and installed in the assessment year 2011-12. The Assessing Officer did not allow the additional depreciation during the impugned assessment year as the new plant and machinery were acquired and installed during the assessment year 2011-12. The assessee went in appeal before the Commissioner of Income- tax (Appeals) who interpreted the provisions of section 32(1)(ii)(a) and took the view that as per this said provision if the plant and machinery purchased during the previous year has been used for less than 180 days, the deduction under this sub-section in respect of such plant and machinery shall be restricted to 50 per cent. of the amount calculated at the percentage prescribed for an asset under clause (i) or clause (ii) or clause (ii)(a) as the case may be. Therefore, he took the view that there is nothing in the statute to provide for the balance 50 per cent. of allowable additional de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 per cent. can be claimed in one year, if plant and machinery is put to use for less than 180 days in the said financial year. This would necessarily mean that the balance 10 per cent. additional deduction can be availed of in the subsequent assessment year, otherwise the very purpose of insertion of clause (iia) would be defeated because it provides for 20 per cent. deduction which shall be allowed. 5.1. No contrary decision was brought to our knowledge by the learned Departmental representative. In view of the aforesaid decision of the hon'ble Karnataka High Court, we set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow additional depreciation to the assessee being 50 per cent. of 20 per cent. of the cost of new plant and machinery installed by the assessee during the preceding assessment year after September 30, 2010 as has been allowed to the assessee in the preceding assessment year i.e. the assessment year 2011-12, the copy of which is filed before us. Thus, ground Nos. 1 and 2 taken by the assessee stand allowed. 6. Ground Nos. 3, 4 and 5 in the assessee's appeal relate to the sustenance of disallowance a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the disallowance of ₹ 45,80,445. Against the deletion of the said addition, the Revenue is in appeal whereas against the sustenance of disallowance the assessee is in appeal. 8. We have heard the rival submissions, carefully considered the same along with the orders of the tax authorities below as well as the material available on record and as has been referred during the course of hearing. We noted that this is a case where the Assessing Officer made the disallowance under section 14A read with rule 8D while the assessee claims that it has not incurred any expenditure by way of interest or otherwise for earning of exempt income. The assessee claims that it is a case where the Assessing Officer has not recorded any satisfaction as is required as per the provisions of section 14A of the Act. The assessee also claims that no satisfaction has been recorded by the Assessing Officer about the claim of the assessee that it has not incurred any expenditure for the earning of the income with reference to the books of account maintained by the assessee. The learned authorised representative of the assessee in this regard vehemently relied before us on the decision of this Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer to embark upon the formula stipulated in rule 8D in order to compute the amount of expenditure incurred in relation to exempt income, is that the Assessing Officer must record a clear finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure to earn income not includible in total income of the assessee. The assessee's case is that it has not incurred any expenditure to earn income not includible in the total income and so no disallowance under section 14A of the Act is warranted. As per the provision of section 14A of the Act, even if the assessee's claim is that no expenditure has been incurred by him relating to income which does not form part of total income, then as per sub-section (3) of section 14A recourse can be taken by the Assessing Officer of sub-section (2) of section 14A and in this case when the assessee assert that no expenditure had been incurred in relation to the earning of exempt income then the Assessing Officer has to record his dissatisfaction in respect to the correctness of the claim of the assessee that no expenditure has been incurred by the assessee for earning exempt income an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order without which we are unable to take any reliance on the same. However, we have to disagree with the proportion or law as noted by the Assessing Officer and wherein it is stated that when the taxpayer does not offer any disallowance on his own, the provision of section 14A(2) read with rule 8D can be invoked without there being any need of any express satisfaction about incorrectness of such claim. We must say that the bare reading of section 14A does not support such an interpretation and we are not in agreement with such proposition of law and the order of the Assessing Officer is vitiated on this count. From a bare reading of section 14A of the Act, it is clear that before making the disallowance the following conditions need to exist. (i) there must be income taxable under the Act ; (ii) The said income must not form part of the total income under the Act ; (iii) there must be an expenditure incurred by the assessee ; and (iv) the said expenditure must have a relation to the income which does not form part of the total income under the Act. In the present case, we note that the assessee had earned dividend income to the extent of ₹ 2,22, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm part of the total income in accordance with the method as may be prescribed. Such power is to be exercised if the Assessing Officer having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of the expenditure mentioned in sub-section (1). Before applying rule 8D, it is apparent that the Assessing Officer must be satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee. Such satisfaction is an objective satisfaction that it has to be judicious and based on the material on record. It cannot be an impression that it is much more than the gossip or hearsay, it means judgment or belief that it is a belief or a connection resulting from what one thinks on a particular question. It must be based on the reasons and ground as seems good to him and while making such satisfaction, the Assessing Officer must give regard to the accounts of the assessee. He must record deficiency in the accounts with regards to the claim of the assessee. Sub-section (3) provides that provisions of sub-section (2) shall also apply where the assessee claims that no expenditure had been incurred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re than investment in shares. The Assessing Officer was not satisfied with the explanation of the assessee and he made disallowance under section 14A on pro rata basis. The Commissioner of Income-tax (Appeals) following his orders for the earlier years, accepted the appeal of the assessee. The Tribunal following the decision of the Special Bench in the case of ITO v. Daga Capital Management P. Ltd. [2009] 312 ITR (AT) 1 (Mum) [SB] ; [2009] 117 ITD 169 [SB] restored the matter to the file of the Assessing Officer for the consideration in the light of the provisions of sub-sections (2) and (3) of section 14A of the Income-tax Act. The assessee, being aggrieved, filed appeal as well as writ petition challenging the constitutional validity of sub-sections (2) and (3) and rule 8D. The hon'ble High Court gave the following findings : 1. The provisions of section 14A and rule 8D are constitutionally valid. 2. The provisions of sub-sections (2) and (3) of section 14A and rule 8D are prospective and not retrospective, in nature and therefore, would apply from the assessment year 2007-08. 3. The basic object of section 14A is to disallow the direct and indirect expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law (pages 31-32). 6. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion (page 79). 7. The effect of section 14A is to widen the theory of the apportionment of expenditure (page 49). 8. The expression expenditure incurred in section 14A refers to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for (page 50). 9. Sub-sections (2) and (3) of section 14A are intended to enforce and implement the provisions of sub-section (1) (pages 50). 10. Even in the absence of sub-section (2) of section 14A the Assessing Officer would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The Assessing Officer would have to follow a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the exempt income, the Assessing Officer would be justified in applying the provisions of sub-sections (2) and (3) of section 14A and rule 8D of the Income-tax Act, 1961. The expenditure incurred under section 14A would include direct and indirect expenditure, but relationship with exempted income must be proximate. If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income then disallowance would be justified even where there is no receipt of exempted income under section 10 in the year under consideration in view of the decision of the Special Bench in the case of Cheminvest Ltd. v. ITO [2009] 317 ITR (AT) 86 (Delhi) [SB] ; [2009] 124 TTJ 577 (Del) (SB). The basic principle of taxation is to tax the net income. On the same analogy, the exemption is also to be allowed on net basis i.e. gross receipts minus related expenses. Therefore, if any expenditure is directly related to exempted income, it cannot be allowed to be set off against taxable profit. On the same analogy, in our opinion, if any expenditure is directly related to taxable income, it cannot be allowed to be set off against the exem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tituting the reasons given by the Commissioner of Income-tax (Appeals) in place of the Assessing Officer, but failed to bring any cogent material or evidence in this regard which may prove that the other expenses claimed by the Revenue for apportionment had proximate connection with the earning of the dividend income. In our opinion until and unless this is proved or established by the Revenue, the Assessing Officer does not have any power to reject the accounts of the assessee and take the shelter of rule 8D for computing the disallowance out of the exempt income. We are not at all convinced with the submission of the learned Departmental representative relying on the decision of the Commissioner of Income-tax (Appeals) in respect of Explanation (bb) to section 80HHC that 10 per cent. of the receipts under the sources mentioned therein are deemed to be the expenditure. This in our opinion will strengthen the case of the asses see as Explanation (bb) to section 80HHC does not recognise amount of the investment made in other receipt to be the basis of computing the expenditure being incurred for the earning of that income. Similar views have been taken by hon'ble Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Ltd. v. ITO [2006] 10 SOT 284 (Delhi) ; and 3. D. J. Mehta v. ITO [2007] 290 ITR (AT) 238 (Mumbai) In view of the above, finding no error with the order of the Commissioner of Income-tax (Appeals) on the point at issue, the same is hereby confirmed. Ground No. 3 is thus rejected.' In the case of Jindal Photo Ltd. v. Deputy CIT held in the Income- tax Appellate Tribunal Delhi Bench dated September 23, 2011 it was held as follows : 'In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the Assessing Officer regarding the assessee's calculation being incorrect. Even so, rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the Assessing Officer is a pre-requisite to invoke the provisions of rule 8D of the Rules. The learned Commissioner of Income-tax (Appeals), therefore, erred in partially approving the action of the Assessing Officer.' In the case of Avshesh Mercantile P. Ltd. v. Deputy CIT in the Income-tax Appellate Tribunal Mumbai Bench (I. T. A. Nos. 5779/Mum/2006 and 208/Mum/2009 dated March 15, 2012) it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that no substantial question of law arises on a particular issue, it cannot be stated that the subject matter of controversy between the parties has not been dealt with by the High Court. It was held that when the decision of the Tribunal is affirmed on the issue brought before the High Court, it is the decision of the High Court which becomes operative and which is capable of being given effect to for all intents and purposes. Keeping in view the decision of the hon'ble Gujarat High Court in the case of Nirma Industries Ltd. [2006] 283 ITR 402 (Guj), we have no hesitation to hold that the decision of the hon'ble Bombay High Court in the case of Delite Enterprise Ltd. (supra) is a decision on the merits which is binding precedent on us. As the issue involved in the present cases as well as all the material facts relevant thereto are similar to that of the case of Delite Enterprise Ltd. (supra), we respectfully follow the said decision of the jurisdictional High Court and delete the disallowance made by the Assessing Officer and confirmed by the learned Commissioner of Income-tax (Appeals) on account of premium paid by the assessees on redemption of premium notes (OCPN) b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... delete the disallowance made under section 14A read with rule 8D and accordingly, the ground taken by the assessee in this regard is allowed. 8.3 No contrary decision was brought to our knowledge by the learned Departmental representative which may take a view that the Assessing Officer can compute the disallowance under rule 8D without recording the non-satisfaction about the creditworthiness of the claim of the assessee in respect of the expenditure in relation to the income which does not form part of the total income on the basis of the account of the assessee. Respectfully following the aforesaid decision, we set aside the order of the Commissioner of Income-tax (Appeals) so far it relates to the sustenance of disallowance of ₹ 9,76,395 and confirm the order of Commissioner of Income-tax (Appeals) so far it relates to deletion of disallowance of ₹ 45,80,445. Thus, grounds 3 to 5 of the assessee's appeal are allowed and grounds 1 and 2 of the Revenue's appeal are dismissed. 9. Ground Nos. 3 and 4 in the Revenue's appeal relate to the deletion of disallowance made by the Assessing Officer under section 36(1)(va) of the Act amounting to ₹ 4,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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