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TMI Blog2020 (9) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... r on the facts and in the circumstances of the case, the Ld. CIT (A) is justified in deleting the addition made by Assessing Officer under the head 'disallowance of punitive charges' to the tune of Rs. 34,25,485/-. 3. Whether on the facts and in the circumstances of the case, the Ld. CIT (A) is justified in deleting the addition made by Assessing Officer under the head 'disallowance of interest' to the tune of Rs. 37,17,885/- utilised for giving interest-free loans. 4. Whether on the facts and in the circumstances of the case, the Ld. CIT (A) is justified in deleting the addition made by Assessing Officer under the head 'disallowance of peripheral development charges' to the tune of Rs. 3,99,28,438/-." 5. Grounds raised in A.Y,. 2013-14 read as under: "1. Whether on the facts and in the circumstances of the case, the Ld. CIT (A) is justified in deleting the addition made by Assessing Officer towards 'disallowance of donation" to the tune of Rs. 1,75,00,000/-. 2. Whether on the facts and in the circumstances of the case, the Ld. CIT (A) is justified in deleting the addition made by Assessing Officer under the head 'disallowance of commission& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to oversee smooth execution thereof, in order to avoid hassles. The whole process of executing supply involves planning of dispatches to various locations, keeping track of various modes of transport, proper receipt at the buyers' site, acceptance of materials as per specifications etc. As such the agents provide their services and are paid commission at pre-determined rate. After being satisfied with the service rendered, the assessee pays them, after deducting Income tax at source. Some of the agents are also registered under the provisions of Service Tax and charge accordingly. All of the agents are Income tax assesses. All details in respect of the agents were provided by the assessee during the assessment stage which were fully verifiable. However, the entire amount of expenditure was disallowed on the ground that some of the buyers denied the involvement of agents. As submitted, it was the assessee who engaged the agents and not the buyers. It was the assessee, who paid the agents and not the buyers. As such, it is humbly submitted that the buyers didn't have any stake in the assesse's business policies and their submission that no agents were involved hardly g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices rendered as per understanding. I tend to agree with the contention of the assessee in this regard. Only because the payments of commission have been made to HUFs, the same cannot be considered to be not genuine unless it is proved that the commission payment has been made without rendering any services. Moreover, it is for the AO to find out whether the commission receipts could be accepted as income of the HUFs or its karta/member and take appropriate action in the hands of the HUFs. The assessee cannot be penalized by way of disallowance of commission payment if the payment has been made for services actually rendered. The AO has not brought on record any evidence to show that the commission payment in question is bogus or is a ploy adopted by the assessee to reduce the taxable profit. 2.3 The AO in the assessment order has given a list of commission agents, letters issued to whom have not been replied. Since all the relevant details relating to commission payments were given by the assessee, the onus cast on the assessee appears to have been fully discharged. Thereafter, it was for the AO to compel the commission agents to reply to his letters by resorting to various pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e distinguishable on facts, hence, have no application in the case of the assessee. Therefore, he urged that the finding of ld first appellate authority deleitng the addition recorded by the ld CIT(A) be upheld for both the assessment years. 13. We have heard rival submissions and perused the record placed before the Tribunal, inter alia, decisions of the Tribunal relied upon by ld counsel for the assessee and order of this Bench dated 31.8.2017 in ITA No.142/CTk/2015 for A.Y. 2010-11 in assessee's own case/appeal filed by the revenue. 14. On vigilant perusal of decision of Hon'ble High Court of Bombay in the case of Suresh Kumar G. Hundia(supra), we find that in this case the Tribunal recorded finding that the assessee who was in the business of import & export of bullion, claimed deduction of commission paid the HBL on the ground that services of director of HBL were used for purchasing bullion. However, on enquiries made by the Tribunal, assessee stated that no such commission was paid in earlier or subsequent year to HBL and the assessee could have procured/imported bullion without assistance of any agent. The assessee could not produce director of HBL and there was no suppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... name of the buyer without the address. In some other cases, letters issued to commission agents u/s. 133(6) of IT.Act, 1961 were returned unserved by the postal authorities with remark "not known/left/addressee refused." In some cases, commission agents did not mention anything about the agents and only pleaded that they have executed work only for Indrani Patnaik. Thereafter, the Assessing Officer observed that it is seen that while making payment towards commission, assessee has deducted tax at source as required u/s.194H of the Act. He observed that mere deduction of tax at source does not establish that the claim of expenses is genuine. By making provision of TDS, the assessee only loses 10% of the expenses, whereas claim of expenses gives the benefit of 90% to the assessee. He further observed that commission agents against whom tax has been deducted at source are bifurcating the commission income and reflecting the same in their individual capacity as well as in the capacity of HUF and also in the name of family members to keep the income below taxable limit. Lastly, he observed that the commission agents are generating refund through this TDS amount. Further, the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. It also provided copies of the acknowledgements of returns submitted by the agents, which carry their addresses, PAN., details of Jurisdictional assessing officers etc. If due to some reason, the letters were returned unserved, it is submitted, the appellant was not at fault. c. Rs. 69,14,054/- have been disallowed on the ground that the department didn't receive any communication from the agents/buyers. The assessee reiterates its stand that it provided all necessary details of the agents and buyers and it may not be treated to be at fault for their failure to respond to the departmental notices. Rs. 29,21,476/- have been disallowed on the ground that the agents failed to furnish names of buyers. It is humbly submitted that the assessee submitted all details before the ld AO including bills raised by the gents, copies of their returns, details of service tax paid, wherever applicable, details of tax deducted at source , details of buyers etc and as such it discharged its onus as regard the genuinity of the expenditure incurred by it." 5. The CIT(A) after considering the submissions of the assessee deleted the addition. 6. Ld D.R. supported the order of the Assessin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts/goods sold, relevant business factors, etc. Benefits from the agency arrangement accrue to both the principal and agent. Principals can extend market reach without incurring major fixed personnel costs, and agents can earn compensation based on their productivity. Some agents may represent more than one principal. All of the above mean that the agent is more reactively dependent on the principal being part of a direct arrangement than with the clients/buyers/customer which relationship is more proactive and hence independent. While, commission agents depend on customers in generating their compensation, the compensation itself is paid by the principal after the customer/buyer pays the principal the proceeds of the sale or other transaction. While some agents may be aggressive, they also depend on satisfied customers for repeat business and are motivated to that end; it is in this connection that some of them may keep track of buyers/customers in their own interests. Such tracking and retrieval of customer details upon demand, as the AO has insisted upon, is not. part of a mandatory or statutorily stipulated nature of duties of all agents. d) There are Commission agents who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttle reason for the buyers to make enquiries about the agents and certify the genuineness or veracity of the latter in the matter of supplies of materials. I All the buyers were concerned with was the timely delivery of quality-tested goods/products as specified by them. All the Appellant expected from the agents was total adherence to the terms of the agreement/arrangement between them. f) Therefore, the express non-remembrance of the agents in the creative-proactive awarenesses of the buyers alone will not negate the fact of the impugned transactions and the truth and character of the Commission payments. The AO has not carried out any investigations or inquires, on unearthed/discovered any evidences that suggest that the transactions and payments were not what they seemed to be. The decision to disallow has been made on presumption, surmise, conjecture, supposition, and a summary and unilateral conclusion based on rudimentary facts (of the buyers being presumably non-existent or apparently unaware of the agents and the agents being unable to list the buyers) taken in prejudiced isolation and based on a spurious implied "transcendental" principle that seeks to cover/fill the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n line with its business needs and commercial practices. If the agreements and appointments are wholly and exclusively for the purpose of business, and the payments made in the said regard are fully billed/vouched, accounted for and audited, then there is little scope for Revenue to take a prejudicial view. j) The AO has not been able to show that the payments have not been made to the purported agents and that these payments are not relatable to the carrying out the business and for other business purposes. The AO has merely leaped to conclusions (in the cases of Categories II, III and IV) that the seeming absence of buyers (as ostensibly evidenced by letters addressed to them returning unserved), or the negations or disavowals by such buyers of any knowledge or nexus with the agents or the inability of the Commission agents to list the actual buyers would automatically disentitle the agents of their status and rights to receive Commission payments. In the scheme set in place by the Appellant, the buyers directly transacted with her; the agents did not enroll them and therefore in most cases would not know them. The agents would be able to only provide some names of buyers in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue was whether the payments were made to the HUFs concerned. Whether the payments were assessable as incomes in the hands of the kartas or in the hands of the HUFs themselves is a separate matter. The AO's ground that an HUF could not seemingly 'physically' receive the commission amounts is not one that automatically disallows the expense in the hands of the payer. Separately, the conclusion of the AO that HUFs are not "physical entities" display a lack of understanding/appreciation of the plain meanings of the word "physical" which inclusively connotes a corporeal, material, phenomenal and temporal existence or state of being. When there is no technical meaning defined of a word employed in the statute, the general meaning of the same in a plain and inclusive sense needs to be employed. m) The word "physical" does not lend itself to easy definition or connotation. It means different things to different people. When undoubtedly 'physical' man inhabits a 'physical' world, it stands to deductive reason that groups of such men such as Associations of Persons (AoPs) and Bodies of Individuals (Bols) too are 'physical' in essence. Employing the canonic principle of noscitur a socii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission income, the following may be considered. Where the karta is a partner representing the HUF in a firm and salary or commission is paid to such partner, the issue arises whether such salary or commission should be assessed in the hands of HUF or as personal income of the karta. The test laid down by the Honourable Supreme Court in Kumar Singh Hukam Singhji 78 ITR 33 (1970) (SC) is whether such payment has been made because of investment in the firm or as a compensation for the services rendered. In case of the former, it will be assessed as income of the HUF while in case of the latter, it will be assessed as the personal income of the karta. This proposition of law has been reiterated in Prem Nath-vs-CIT 78 ITR 319 (1970)(SC) and has been followed in CIT-vs-Lachliman Dass Bhatia 162 Taxmann 118 (Del). These decisions mean that HUFs can earn commission incomes that are assessable in its hands (as against those of the karta) under certain conditions. In any event, in this case, the payment has been made and whether the same is to be assessed in the hands of the HUFs or their respective kartas is a decision to be taken by the respective AOs possessed of the jurisdiction of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sworn statements from the buyers and not obtaining these from the Commission agents themselves is an asymmetric exercise, and the latter would have revealed the k-true picture to the AO. s) The enhancement made of Rs. 7,09,10,967/- on the said count is consequently deleted and the Appeal allowed." 8. Ld D.R. could not point out any specific error in the findings of the CIT(A) that at times commission agent when approaches the purchasers, he does not identify himself as an agent of the seller and merely identifying himself as representative of the seller, in such circumstances, the buyer cannot be aware that the person who has approached is employee of the seller or agent of the seller. Further, the CIT(A) observed that the commission may be paid to an agent for facilitating the trade even when the orders are directly given to the sellers by the purchasers. Further, nonservice of letters to the buyers or non-compliance of the letters by the buyers does not show that the payment of commission was not genuine when the relative sale was considered genuine. Further, non-furnishing of the name of the buyers by agent in compliance to the notice does not necessarily mean that the agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-14 under consideration. Hence, we are compelled to accept and follow the findings recorded by this Bench in the order dated 4.9.2019. 20. We also find that the ITAT Cuttack in the case of Tarini Mineral (P) Ltd., (supra) on similar facts have upheld the decision of the ld CIT(A) following the judgement of Hon'ble Supreme Court in the case of S.A. Builders ltd vs CIT 88 ITR 1 (SC). 21. Ld CIT D.R. also could not point out any specific error, ambiguity or perversity in the findings of the CIT(A) that at times commission agent when approaches the purchasers, he does not identify himself as an agent of the seller and merely identifying himself as representative of the seller, in such circumstances, the buyer cannot be aware that the person who has approached is employee of the seller or agent of the seller. Further, the CIT(A) observed that the commission may be paid to an agent for facilitating the trade even when the orders are directly given to the seller(assessee) by the purchasers. Further, non-service of letters to the buyers or non-compliance of the letters by the buyers does not show that the payment of commission was not genuine when the relative sale was considered genuin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of any law. Hence, clearly it is not a penalty for breach of law. The nomenclature punitive charges cannot lead to disallowance u/s.37 if the payment is not for any purpose which is an offence or which is prohibited by law." 25. Ld CIT DR supported the order of the Assessing Officer. He submitted that the act of the assessee in overloading the wagon was an act which was against public policy for which punitive charges are levied. He drew our attention to section 73 of the Railway Act, 1989 which reads as follows :- " 73. Punitive charge for overloading a wagon.-Where a person loads goods in a wagon beyond its permissible carrying capacity as exhibited under sub-section (2) or sub section (3), or notified under sub-section (4), of section 72, a railway administration may, in addition to the freight and other charges, recover from the consignor, the consignee or the endorsee, as the case may be, charges by way of penalty at such rates, as may be prescribed, before the delivery of the goods: Provided that it shall be lawful for the railway administration to unload the goods loaded beyond the capacity of the wagon, if detected at the forwarding station or at any place before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of Karnataka Muncipal Corporation Act and hence, the offence was compounded on payment of compounding fine. In the case at hand, there is no fine imposed for excess loading in the ship. The excess payment is known as punitive charges. In the present case there is no offence whatsoever and there is no compounding fee paid and claimed as deduction. 31. We find in the case of Runga Mines Ltd (supra), Kolkata ITAT under similar facts held that overloading charges may, in its terminology, be termed as punitive charges but such payments appear to be routine payments in nature of additional freight charges for overloading and the punitive charges cannot be characterized as expenditure incurred for any purpose which is an offence or which is prohibited by law and, therefore, explanation 37(1) is not attracted. 32. From the aforesaid facts, we observe that punitive charges for overloading were actually in the nature of additional freight for transporting goods beyond the permissible carrying capacity which cannot be categorized as an expenditure incurred for any purpose which is an office or infringement of law. We also find that after considering the detailed submissions, the C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the case of CIT v HDFC Bank (2014) 366 ITR 505, it has been held by the Hon'ble Bombay High Court that where the assessee's capital, net profit, reserves, surplus and current account deposits are higher than the investment in tax free security, it would have to be presumed that the investment made by the assessee would be out of interest free funds available with the assessee. The decision in this case is squarely applicable to the case of the assessee because she has huge capital balance and profits. In this view of the matter, it is not at all justified to hold that interest bearing loans have been diverted in the form of interest free loans and advances to sister concerns. Accordingly, the disallowance of Rs. 37,17,885/- is deleted." 37. We have heard the rival submissions and perused the record of the case. Ld CIT DR supported the order of the Assessing Officer. He submitted that there is no documentary evidence furnished by the assessee that the loans and advances are given to parties out of her capital. He submitted that when the assessee has taken loan from the bank and paid interest thereon, then how can it possible to give interest free loans and advances out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pheral development charges". 43. Apropos this Ground, ld CIT DR, supporting the action of the Assessing Officer, drew our attention towards para 9 at pages 5-6 of the assessment order, submitted that the AO by following the decision of Hon'ble Supreme Court in the case of Travancore Titanium Products Ltd vs CIT, 1966 SCR (3) 321, has rightly disallowed the claim of the assessee towards peripheral development charges by observing that he is unable to verify whether peripheral development charges is the expenditure incidental to the business and must have been necessitated or justified by commercial expediency or not in the case of the assessee as the assessee has failed to justify the peripheral development charges with supporting documents/evidences. Ld CIT DR submitted that the ld CIT(A) has granted relief to the assessee without any reasonable cause and justified findings ignoring the facts and circumstances of the case, under which the assessee has claimed expenses towards peripheral development charges. Therefore, the impugned order of the ld CIT(A) on this point, may kindly be set aside by restoring that of the order of the AO. 44. Replying to above, ld AR drew our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, the expenditure must be incidental to the business and must be necessitated or justified by the commercial expediency. Precisely, it can be said that there must be inter-connection between the expenditure claimed by the assessee and business operation by the assessee. 46. In the present case, undisputedly, the assessee is a mines owner and the mines are located in the deep forest and obviously the mining activities in the mines area affects the periphery of the mines, where several villagers are residing in the villages located in the periphery. When a miner extracts material from the mines, then, he is duty bound to ensure that there should be minimal disturbance and destruction in the periphery and there should be no nuisance to the villagers residing around the area of operation by the mining activities. At the same time, it is also a requirement of the miner that there must be good road in the periphery for smooth movement of materials, which is also used by the forest department officials and other government officials and the villagers residing in the periphery. 47. On perusal of assessment order, we observe that the Assessing officer has made addition by observing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the periphery area i.e. M/s. Keonjhar Infrastructure Dev. Company Ltd. On receipt of above explanation, the AO without pointing out any defect in the quantum of expenses spent by the assessee and mode of payment adopted by the assessee for making payment and without verifying from the recipient contractor regarding receipt of payment and rendering of services towards upgradation of roads proceeded to make disallowance and addition. The AO was duty bound to issue show cause notice to the assessee and if he was not satisfied with the reply, he could have issued notice to the recipient contractor who was paid the impugned the amount regarding the work of upgradation or construction of roads on the direction of the assessee in the periphery area of the mines owned by the assessee but no such exercise had been undertaken. Therefore, the allegation made by the AO that the assessee has failed to justify the expenses without evidences/documents has no legs to stand. 50. On careful perusal of the findings of the ld CIT(A) (supra), we do not find any infirmity in his findings to interfere with the same and, accordingly, we uphold and dismiss Ground No.4 of revenue for assessment year 2012 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er may kindly be set aside that of restoring the order of the AO. 53. Replying to above, ld A.R. placed reliance on the order of the ITAT Kolkata 'B' Bench in the case of EBIW Info Analytics Pvt Ltd vs ITO in ITA No.582/Kol/2019 order dated 13.11.2019 for A.Y. 2014-15 and submitted that the Co-ordinate Bench of this Tribunal by following another order of ITAT Kolkata in the case of Narbheram Vishram in ITA No.s42 & 43/Kol/2018 for A.Ys 2013-14 & 2014-15, has allowed the claim of donation u/s.35(1)(ii) made to SHG&PH. Therefore, the findings recorded by the ld CIT(A) in para 2.2 of the impugned order may kindly be upheld accepting the claim of the assessee towards making donation to same organisation/institution. Ld AR submitted that the AO has not brought any material on record to show that the amount of donation given by the assessee was refunded back to the assessee by the donee in cash, per contra, the documents relied by the AO clearly shows that the AO has verified the genuineness of the approval obtained by the Organisation for the purpose of section 35(1) from the competent authority and only thereafter has given donation for scientific research. Ld AR strenuously contended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... research as per the provisions of section 35(1). Of course, subsequently certain office bearers/executives of the school have stated in the course of survey operation U/S.133A that the school used to receive donations through agents which were being refunded back in ."cash to the donors in exchange of 8% commission. From the statements recorded from these office bearers of the school, it is seen that they have given a generalized statement and nowhere have stated that the donation of Rs. 1 crore given by the assessee was refunded back to the assessee in cash. Certain documents lying on records show that the assessee has verified the genuineness of the approval obtained by the school for the purpose of section 35(1) from the competent authority and only thereafter has given the donation for scientific research. The assessee cannot be held responsible for the misdeeds of the school and the fraud committed by them by helping assesses to evade tax by way of bogus donation. Since there is no evidence brought on record to show that the assessee has got back the donation money from the school on payment of commission, the donation cannot be treated as bogus. The donation has been given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l of Income tax authorities u/s.35(1) of the Act during F.Y. 2012-13. It is also in dispute that the survey proceedings u/s.133A of the Act was conducted on the donee organisation much after grant of donation by the assessee on 27.1.2015. 56. From conjunct reading of assessment order and order of ld CIT(A), we are of the considered views that undisputedly, donation has been given by the assessee to SGH&PH through banking channel and this organisation/institution was duly approved by the competent income tax authorities for accepting donation for scientific research as per the provision of section 35(1) of the Act at the time of grant of donation by the assessee. 57. It is also not in dispute that subsequently office bearers of school have stated during the course of survey operation u/s.133A of the Act on 27.1.2015 accepted that the donations are received through agents and refunded the donation to the respective donors in exchange of 7% to 8% commission. Ld CIT(A) rightly observed that from the statement of office bearers of donee organisation/school, it is seen that they have given generalised statement and nowhere the donation given by the assessee was refunded back to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. Ld A.R. submitted that though the appellant has not claimed any expenditure, the AO made addition merely on presumption of incurring expenses against exempt income, without recording any reason as per requirement of section 14A of the Act. Ld A.R. submitted that the key words in sub-section (2) of Section 14A of the Act are that "if the AO, having regard to the account of the assessee, is not satisfied with the correctness of the claim of the assessee, in respect of such expenditure". Ld A.R. further submitted that sub-section(3) of Section 14A of the Act further provides that the provision of sub-section (2) shall also apply in relation to a case where the assessee claims that no expenditure has been incurred by him in relation to income, which does not form part of the total income. Ld A.R. further pointed out that hence, it implies that method prescribed under Rule 8D of Income tax Rules, 1961 (in short 'the Rules') is applicable, where the AO has to record reasons for such non-satisfaction about the claim as well as accounts of the appellant after the verification and examination of books of accounts and financial statement of the assessee. Ld A.R. has placed reliance on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee would be out of interest free fund, available with the assessee. Ld AR pressing into service this proposition rendered by Hon'ble High Court submitted that the ld CIT(A) concluded that interest bearing loan from bank have been utilised for the creation of asset i.e. windmills and it has not been diverted and this fact has not been controverted by the AO in any manner. Ld A.R. vehemently pointed out that the assumption of the AO that interest bearing loans has been utilised for investment in shares has no base in view of the findings recorded by the ld CIT(A) in para 6.1 at page 6 of first appellate order. Ld A.R. also contended that the AO has not demonstrated in the assessment order that on examination of account he could be able to locate any expenditure incurred or attributable to earn exempted income and also he has not recorded his dissatisfaction on account of the claim of the assessee that no expenditure has been incurred for earning exempt income as provided in sub-section (3) of Section 14A of the Act. Ld A.R also submitted that the appellant has sufficient funds in her capital account and total investment in Mutual funds, share, deposit and payment to insur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loan amount, for which the assessee had paid interest and claimed in the profit and loss account. Therefore, the AO was correct in making addition and ld CIT(A) was also justified in confirming the same. Drawing further our attention towards para 5 & sub-para 2 & 3 of the assessment order, ld CIT DR submitted that the expenditure is attributable to such earing is not ascertainable, the only method available for such claim under Rule 8D of I.T. Rules and the AO rightly computed the presumptive amount of disallowance u/s.14A of the Act as per Rule 8D of I.T. Rules and there is no defect or deficiency in the calculation made by the AO in this regard. Ld CIT DR concluded his arguments by submitting that the orders of lower authorities may kindly be upheld by confirming the addition. 68. Placing rejoinder to above, ld A.R. submitted that in the case of M.A. Alagappan (supra), the Tribunal held that where the assessee claimed that no expenditure is incurred by the assessee in relation to income which does not form a part of total income under the Income tax Act, statue has provided for presumptive expenditure which has to be disallowed by force of the Statute. Ld A.R. submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended that from the observations of the AO in the assessment order and findings recorded by the ld CIT(A) in the impugned order clearly reveals that the authorities below have not made substantial compliance of mandate of statutory provisions of section 14A r.w Rule 8D of I.T.Rules. Therefore, the order of ITAT Delhi in the case of Delhi Towers (supra) are not applicable in favour of the revenue in the present case having dissimilar facts and circumstances. 70. Ld A.R. vehemently pointed out that the ld CIT DR has not shown any judgment of Hon'ble Supreme Court and Hon'ble High Court favouring his stand that before making disallowance and consequent addition u/s.14A r.w Rule 8D of I.T.Rules, showing that no satisfaction is required to be recorded by the AO regarding the claim of expenditure attributable to earning of exempt income or claim of no expenditure of the assessee or dispensing the compliance of requirement of sub-section (2) & (3) of Section 14A of the Act. Per contra, there are number of judgments by Hon'ble Supreme Court, Hon'ble High Courts and Co-ordinate Benches of this Tribunal to support the contention of the assessee that for making substantial compliance and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee towards earning of exempt income or claim that no expenditure has been incurred for earning of exempt income is rejected. 74. Further placing reliance on the decision of Hon'ble Supreme Court in the case of Maxopp Investment Ltd (supra), ld A.R. drew our attention to para 41 of the judgement and submitted that having regard to the language of section 14A(2) of the Act, r.w. Rule 8D of the Rules, Their Lordships have made it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under section 14A was not correct. Ld A.R. further pointed out that sub-section(2) of Section 14A of the Act talks about suo moto disallowance or expenditure shown by the assessee towards earning of exempt income and sub-section(3) of Section 14A provides that the provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act and the present assessee's case falls within the ambit of sub-section(3) of Section 14A of the Act. 75. Reliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, 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 such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :" 79. In our humble understanding, the mandate of section 14A of the Act has been based on the theory that there must be proximate cause based on relationship of expenditure that tax exempt income is established, only then a disallowance has to be made u/s.14A of the Act. The onus to establish proximate cause based on the relationship of the expenditure that the exempt income is established is on the revenue. Thus, the application of provisions of sub-section (2) & (3) of Section 14A of the Act r.w Rule 8D is not automatic in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has not claimed any expenditure in respect of such income, hence, no disallowance is required to be made, the AO without complying with the mandate of sub-section (2) & (3) of Section 14A directly jumped to an imaginary conclusion "that the assessee has not claimed any expenditure for such exempt income, there is every possibility that the investment from which such exempt income is earned might have been made out of the loan amount, for which the assessee paid interest". 82. Thus, there is no whisper or mention by the AO in the assessment order para 5 complying with the mandate of sub-section(2) & (3) of Section 14A of the Act, which requires that the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method, as may be prescribed, viz; Rule 8D of I.T.Rules, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness that the claim of the assessee in respect of such expenditure, in relation to exempt income. Thus, we safely presume that the AO has not made or undertaken any exercise as per mandate of sub-section (2) & (3) of Section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned might have been made out of loan account, for which assessee paid interest. But there is no exercise as per mandate of sub-section (2) & (3) of Section 14A of the Act by the AO, having regard to the accounts of the assessee, is not satisfied with the correctness that the assessee has not incurred any expenditure for such exempt income. 87. From the vigilant reading of ld CIT(A) order para 3.2, it is vivid that no such exercise has been undertaken by the ld CIT (A) before confirming the disallowance made by the AO as per mandate of sub-section (2)& (3) of the Section 14A of the Act. 88. Before reaching to any conclusion, we also find it appropriate and necessary to consider the ratio of case laws cited by both the parties. 89. Ld CIT DR has placed reliance on the order dated 6.1.2017 of ITAT Delhi Bench in the case Delhi Towers Ltd (supra), wherein, it was held that where the AO proceeded to make disallowance under section 14A of the Act r.w. Rule 8D in respect of exempt dividend income earned by the assessee, mere fact that AO did not expressly record his satisfaction while making said disallowance, would not per se destroy mandate of Section 14A of the Act. He placed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee was not satisfactory, computation under sub-rule (2) to Rule 8D of the Rules was to be made. We need not, therefore, go on to sub-rule (2) to Rule 8D of the Rules until and unless the AO has first recorded the satisfaction, which is mandated by sub-section (2) to Section 14A of the Act and sub-Rule (1) to Rule 8D of the Rules." 92. In the case of Sesa Goa Ltd.,(supra), Co-ordinate Bench of ITAT Panaji allowed the ground of the assessee challenging the addition made under section 14A of the Act r.w Rule 8D of I.T.Rules by observing that before making any disallowance under section 14A, AO is required to record a satisfaction, having regard to accounts of assessee, that claim of the assessee that expenditure incurred is not related to the income, which is forming part of total income, is incorrect. 93. In view of foregoing discussion and after considering the prepositions and interpretation laid down by various judgments including the judgment of Hon'ble Supreme Court in the case of Maxopp Investment Ltd (supra) and judgment of Hon'ble Gujarat High Court in the case of CIMS Hospital Pvt Ltd (supra), it is imperative that the AO can invoke Rule 8D of the I.T.Rules only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions relied upon by ld CIT DR have been passed by Coordinate Benches of Chennai and Delhi ITAT in the year 2017. Subsequently, the judgment of Hon'ble Supreme Court in the case of Maxopp Investment Ltd (supra) dated 12.2.2018 has expressly cleared all the clouds and doubts on the issue and categorically held that the AO needs to record satisfaction that having regard to the claim of assessee's suo moto disallowance u/s.14A was not correct. In that eventuality, it will have to record its satisfaction, oblivious in the assessment order, to this effect prior to proceeding to make disallowance. Similar view has been expressed by Hon'ble Gujarat High Court in the recent judgment in the case of CIMS Hospital Pvt Ltd (supra). The judgement of Hon'ble Supreme Court in the case of Maxopp Investment Ltd (supra) and Hon'ble Gujarat High Court in the case of CIMS Hospital Pvt Ltd (supra) are binding on all the authorities below including the Tribunal. Therefore, respectfully following the same we hold that the addition made by the AO and confirmed by the ld CIT(A) under section 14A of the Act r.w. Rule 8D of I.T.Rules is not valid and sustainable. Therefore, we direct the AO to delete the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency, hence, ld CIT(A) has rightly disallowed the same. As regards the amount of donation of Rs. 4 lakhs, ld CIT(A) submitted that the donation to Social Health Education Development Society for water shed development does not fulfil the business compulsion. 100. On careful consideration of the rival submissions, we find that the assessee has distributed 51,000 mosquitoes to the resident of mining area to prevent them from malaria for an amount of Rs. 1,24,39,665/-. We do not find any positive ground that expenses towards distribution of mosquito nets etc against malaria eradication fulfil the criteria the test of commercial expediency. We observe that the ld CIT(A) while confirming the addition held as under: "The assessee has explained that 51,000 mosquito nets were "distributed among the inhabitants of the surrounding villages in the periphery of the mining areas belonging to the assessee. The total expenditure incurred on purchase of mosquito nets amounts to Rs. 1,24,39,665/- including entry tax. This expenditure does not fulfil the test of commercial expediency since there appears to be no business compulsion to distribute mosquito nets. There was also no direction from the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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