Kesoram Industries Limited vs Principal Commissioner Of Income ...
2022 Latest Caselaw 132 Cal/2

Form No.[J2]




                 IN THE HIGH COURT AT CALCUTTA
                SPECIAL JURISDICTION (INCOME TAX)
                          ORIGINAL SIDE



PRESENT:
THE HON'BLE JUSTICE T.S. SIVAGNANAM
         And
THE HON'BLE JUSTICE HIRANMAY BHATTACHARYYA



                               ITAT/43/2021
                             IA NO:GA/1/2021

                    KESORAM INDUSTRIES LIMITED
                               VS.
               PRINCIPAL COMMISSIONER OF INCOME TAX 2
                                     .........

ITA/148/2018

KESORAM INDUSTRIES LIMITED VS.

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 the

assessee under Section 260A of the Income Tax Act, 1961, (the Act, in

brevity) challenging the orders passed by the Income Tax Appellate

Tribunal, Kolkata (Tribunal). There were four orders, which are

subject matter of challenge before us in these two appeals.

ITA/148/2018 is directed against the consolidated order dated

26.4.2018 passed by the Tribunal in ITA/1037/Kol/2012 and

773/KOL/2013 for the assessment years 2008-09 and 2009-10

respectively. The order impugned in ITAT/43/2021 is the order

passed by the Tribunal in ITA/1195 and 1176/Kol/2019 for the

assessment year 2011-12. The Tribunal in its order dated 21.10.2020,

which is impugned in ITAT/43/2021 followed the order impugned in

ITA/148/2018 and disposed of the appeal and, therefore,

ITA/148/2018 is taken as the lead case which deals with the

assessment years 2008-09 and 2009-10. ITA/148/2018 was admitted

on 14.09.2018 on the following substantial questions of law.

a. Whether rule 8D of the Income Tax Rules 1962 can be

invoked without examining the correctness of the

assessee's claim of expenditure incurred in relation to

exempt income and without recording reasons as to why,

having regard to the assessee's accounts, such claim was

not correct or acceptable?

b. Whether on the facts and in the circumstances of the

instant case, the mechanical invocation and application of

rule 8D of the Income Tax Rules, 1962 for computing the

disallowance under Section 14A of the Income Tax Act,

1961 was justified?

In ITAT/43/2021 the appellant has also raised identical

substantial questions of law for consideration. Thus, we proceed to

hear out and decide the aforesaid appeals by passing a common

judgment and order.

We have heard Mr. Khaitan, learned senior counsel assisted by

Ms. Nilanjana Banerjee (Paul) counsel for the appellant and Mr.

Debasish Chowdhury, learned senior standing counsel and Mr.

Madhu Jana, learned junior standing counsel for the

respondent/revenue.

The issue involved in the instant case is whether rule 8D of the

Income Tax Rules, 1962 could have been invoked by the Assessing

Officer without examining the correctness of the assessee's claim of

expenditure in relation to exempt income and without recording

reasons as to why such a claim was not correct or acceptable. The

subsidiary question would be whether the Assessing Officer can

mechanically invoke and apply rule 8D of the Rules for computing the

disallowance under Section 14A of the Act. For the assessment years

2008-09 and 2009-10 the Assessing Officer in paragraph 11 of the

assessment order dated 31.12.2010 the Assessing Officer has

observed that the assessee has earned dividend income of

Rs.3,58,81,107/-, which is exempt under Section 10(34) and they

were called upon to explain why expenses related to dividend earned

from shares held as investment be disallowed under Section 14A, as

per formula provided in rule 8D of the Rules. The assessee had stated

that 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 noted

only the argument of the assessee that no expenditure has been

incurred by them for earning the exempt dividend and interest

income. The Assessing Officer in a single line stated that the

contention of the assessee is not acceptable and proceeded to apply

rule 8D and disallowed the total amount of Rs.61,47,311/- for the

assessment year 2008-09 and a sum of Rs.1,99,90,545/- for the

assessment year 2009-10. Aggrieved by the same, the assessee

preferred appeal before the Commissioner of Income Tax (Appeals)

(CIT(A)). It was contended before CIT(A) that the Assessing Officer

erred in disallowing the amount mentioned above under Section 14A

by automatically applying computation method prescribed in rule 8D

without giving any reasons for non-acceptance of the claim of the

appellant. Without prejudice to the said contention the assessee

submitted even assuming but not admitting that the said amount

could be disallowed under Section 14A, the Assessing Officer erred in

adding the entire amount to the returned income which resulted in

double disallowance as the assessee had voluntarily disallowed a sum

of Rs.10 lakhs for the assessment year 2008-09. So far as the

assessment year 2009-10, the Assessing Officer noted that the

assessee has disallowed a sum of Rs.15 lakhs but has not recorded

any finding as to why the said disallowance voluntarily made by the

assessee was not acceptable. The assessee further contended that

sub-section (2) of Section 14A does not enable the Assessing Officer to

apply the method prescribed under rule 8D without determining in

the first instance the correctness of the claim of the assessee, having

regard to the accounts of the assessee. The assessee placed reliance

on the decision in the case of Godrej & Boyce Mfg. Co. Ltd. -Vs-

DCIT reported in 328 ITR 081. Further, the assessee contended that

the disallowance has been computed by automatically applying the

method prescribed in rule 8D of the Rules without recording any

reasons on the non-satisfaction of the claim of the appellant.

We have perused the order passed by CIT(A) and we are

surprised to note that no specific finding has been recorded by the

CIT(A) on the ground canvassed by the assessee, the method of

applying rule 8D and under what circumstances it could be done. The

assessee filed appeal before the Tribunal as against the order of the

CIT(A) for the assessment year 2008-09. Before the Tribunal the

grounds which have been canvassed, before the CIT(A) were reiterated.

However, we find that the Tribunal did not examine as to whether the

Assessing Officer had mechanically followed the mechanism provided

under rule 8D without recording any satisfaction. However, the

Tribunal granted relief to the assessee with regard to the interest

portion alone. As against the said portion of the order where relief was

granted to the assessee, the Revenue is not on appeal before us. Since

the order of the Tribunal was available when the appeal was taken up

for 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 same

grounds, which were canvassed before the CIT(A) as well as before the

Tribunal. The law on the issue is no longer res integra and we are

guided 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 of

relevance to the case on hand, which is quoted hereinbelow for better

appreciation:

"34 Having clarified the aforesaid position, the first and

foremost issue that falls for consideration is as to whether the

dominant purpose test, which is pressed into service by the assessees

would apply while interpreting section 14A of the Act or we have to go

by the theory of apportionment. We are of the opinion that the

dominant purpose for which the investment into shares is made by an

assessee may not be relevant. No doubt, the assessee like Maxopp

Investment Limited may have made the investment in order to gain

control of the investee-company. However, that does not appear to be

a relevant factor in determining the issue at hand. The fact remains

that such dividend income is non-taxable. In this scenario, if

expenditure is incurred on earning the dividend income, that much of

the expenditure which is attributable to the dividend income has to be

disallowed and cannot be treated as business expenditure. Keeping

the objective behind section 14A of the Act in mind, the said provision

has to be interpreted, particularly, the words "in relation to the

income" that does not form part of total income. Considered in this

hue, the principle of apportionment of expenses comes into play as

that is the principle which is engrained in section 14A of the Act. This

is so held in Walfort Share and Stock Brokers P. Ltd., relevant passage

whereof is already reproduced above, for the sake of continuity of

discussion, we would like to quote the following few lines therefrom:

"The next phrase is, `in relation to income which does not

form part of total income under the Act'. It means that if an

income does not form part of total income, then the related

expenditure is outside the ambit of the applicability of section

14A....The theory of apportionment of expenditure between

taxable and non-taxable has, in principle, been now widened

under section 14A".

"41 Having regard to the language of section 14A(2) of the Act,

read with rule 8D of the Rules, we also make it clear that before

applying the theory of apportionment, the Assessing Officer needs to

record satisfaction that having regard to the kind of the assessee, suo

motu disallowance under section 14A was not correct. It will be in

those cases where the assessee in his return has himself apportioned

but the Assessing Officer was not accepting the said appointment. In

that eventuality, it will have to record its satisfaction to this effect.

Further, while recording such a satisfaction, the nature of the loan

taken by the assessee for purchasing the shares/making the

investment in shares is to be examined by the Assessing Officer".

Two important issues have been pointed out in the

aforementioned decision. Firstly that the provisions of Section 14A

has to be interpreted, particularly, the words that "in relation to the

income" that does not form part of total income. Therefore, it was held

that the principle of apportionment of expenses comes into play as

that 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 with

rule 8D of the Rules could be invoked it was pointed out that the

assessing officer needs to record satisfaction that having regard to the

kind of the assessee suo motu disallowance under Section 14A was

not correct and it will be in those cases where the assessee in his

return has himself apportioned but the assessing officer was not

accepting the said apportionment. In any event, the assessing officer

will have to record its satisfaction to the said effect. As pointed out

earlier the assessing officer has not recorded satisfaction and when

this was pointed out before CIT(A) the same was not decided by the

CIT(A), the issue was also not decided by the Tribunal when the

assessee raised the same, though the grounds have been noted. The

Tribunal has not rendered any decision on the said point but granted

partial relief to the assessee with regard to the interest alone. We also

take note of the decision of this Court in the case of Commissioner of

Income Tax, Central I, Calcutta Versus Ashish Jhunjhunwala

reported in 2015(12) TMI 905, Calcutta and the decision in Principal

Commissioner of Income Tax, Kolkata - 3, Kolkata Versus

Britannia Industries Limited, ITAT/45/2017 dated 19th July, 2018.

It was pointed out that the assessee has to make a claim (including a

claim that no expenditure was incurred) with regard to the

expenditure incurred for earning income which is not chargeable to

tax. Such a claim has to be examined by the assessing officer and

only if on an objective satisfaction is arrived at by the assessing officer

that the claim made by the assessee cannot be accepted, the

assessing officer can then proceed to apply computation mode as

provided in rule 8D (2) of the Rules. We also take into consideration

the decision of the Hon'ble Supreme Court in Godrej and Boyce

Manufacturing Company Limited Vs. Deputy Commissioner of

Income Tax, Mumbai; 2017(7) SCC 421, wherein it was held that

the law postulates the recording of satisfaction as the requirement to

be complied with by the assessing officer. The law on the subject as

noted has been reiterated in several subsequent decisions as well,

and, therefore, the issue has to be decided by the Tribunal, before the

Tribunal can remand the matter to the assessing officer to do the

computation as directed to be done in paragraphs 11 and 12 of the

order passed by the Tribunal dated 26th April, 2018 in

ITAT/373/Kol/2013 etc. However, we make it clear that so far as the

relief which was granted to the assessee with regard to the interest

portion shall remain intact for all the three assessment years and the

matter is remanded to the Tribunal to consider as to whether

assessing officer had followed the mandate in Section 14A(2) of the Act

and while doing so, the Tribunal shall take note of the decisions which

we have referred to above which has laid down the procedure to be

adopted by the assessing officer.

For the above reasons, the appeals are allowed and substantial

questions of law are answered in favour of the assessee, and the

matter stands remanded to the Tribunal to decide the aforementioned

issue namely with regard to whether the assessing officer has

recorded 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 Tribunal

for assessment years 2008-2009 and 2009-2010 by the CIT (A) for the

assessment years 2011-2012 with regard to the interest portion shall

stand affirmed.

We also note that the Tribunal while remanding the matter to

the assessing officer particularly directed consideration of the

investment which yielded dividend income to the assessee for

computing the disallowance under Section 14A read with R. 8D (2) of

the Rules. Whatever relief has been granted to the assessee by the

Tribunal under the said head shall remain intact. Nevertheless, the

Tribunal will examine the larger issue with regard to the recording of

satisfaction by the assessing officer as mandated under Section 14A

and anything to be done later shall depend upon the conclusion that

the Tribunal may arrive at.

(T.S. SIVAGNANAM, J.)

I agree.

(HIRANMAY BHATTACHARYYA, J.)

pkd/SNN/GH/KB AR(CR)