TCA.No.431 of 2018 IN HIGH COURT OF JUDICATURE AT MADRAS DATED : 22.7.2020 CORAM HONOURABLE MR. JUSTICE T.S.SIVAGNANAM AND HONOURABLE MRS. JUSTICE V.BHAVANI SUBBAROYAN TAX CASE APPEAL NO.431 OF 2018 (heard through video conferencing) M/s.FLSmidth Pvt. Ltd., Chennai-603103. Appellant Vs Deputy Commissioner of Income Tax, Corporate Circle-2(1), Chennai. Respondent APPEAL under Section 260A of Income Tax Act, 1961 against order dated 20.3.2018 made in ITA.No.2087/Chny/2017 on file of Income Tax Appellate Tribunal, Chennai D Bench for assessment year 2009-10. 1/18 http://www.judis.nic.in TCA.No.431 of 2018 For Appellant : Ms.Sri Niranjani & Mr.G.Baskar For Respondent : Mr.Karthik Ranganathan, SSC Assisted by Mr.S.Rajesh, JSC Judgment was delivered by T.S.SIVAGNANAM,J We have heard Ms.Sri Niranjani, learned counsel and Mr.G.Baskar, learned counsel appearing for appellant assessee and Mr.Karthik Ranganathan, learned Senior Standing Counsel assisted by Mr.S. Rajesh, learned Junior Standing Counsel appearing for respondent Revenue. 2. This appeal by Revenue under Section 260A of Income Tax Act, 1951 (for short, Act) is directed against order dated 20.3.2018 made in ITA.No.2087/Chny/2017 on file of Income Tax Appellate Tribunal, Chennai D Bench (for brevity, Tribunal) for assessment year 2009-10. 3. appeal has been admitted on 10.8.2018 on following substantial question of law : Whether, on facts and in circumstances of case, Income Tax Appellate Tribunal was right in law in confirming disallowance made by 2/18 http://www.judis.nic.in TCA.No.431 of 2018 Assessing Officer under Section 14A of Act in absence of any cogent satisfaction for disregarding voluntary disallowance made by appellant ? 4. assessee, which is manufacturing company, filed its return of income on 30.9.2009 for assessment year 2009-10 admitting total income of Rs.2,00,46,53,580/-. return was processed under Section 143(1) of Act. Subsequently, revised return was filed on 28.3.2011 declaring total income of Rs.2,02,56,55,520/- and same was processed on 31.3.2012. demand of Rs.91,86,31,420/- was raised. In meanwhile, case was selected for scrutiny and notice under Section 143(2) of Act dated 23.8.2010 was issued to assessee. 5. Assessing Officer, among other issues, considered disallowance under Section 14A of Act read with Rule 8D of Income Tax Rules, 1962 (for short, Rules). assessee held investments in shares and mutual funds to tune of Rs.1,32,39,84,480/- and earned dividend income to tune of Rs.11,48,08,342/- from such investments and claimed entire amount as exempt. assessee, on their own accord, debited amount of Rs.1,44,000/- as expenditure for earning exempt 3/18 http://www.judis.nic.in TCA.No.431 of 2018 income, which was disallowed under Section 14A of Act in income computation statement. 6. Assessing Officer, noting quantum of investments held by assessee and dividend income earned from such investments, was, prima facie, not satisfied with working provided by assessee for arriving at disallowance under Section 14A of Act. Therefore, show cause notice was issued to assessee calling upon them to explain as to why Rule 8D of Rules should not be invoked to compute expense attributable for earning exempt income. assessee, vide letter dated 18.12.2012, stated that dividend income was earned from investments in mutual funds, which were made from surplus funds available with company, that only salary cost of personnel involved in buying and selling of mutual funds amounting to Rs.1,44,000/- was incurred for earning such dividend income and that therefore, same was disallowed under Section 14A of Act. 7. Assessing Officer was not convinced with explanation offered by assessee and held that portion of managerial remuneration and directors remuneration should also be attributed towards dividend earning activity by assessee. Accordingly, 4/18 http://www.judis.nic.in TCA.No.431 of 2018 Rule 8D of Rules was pressed into service and disallowance of Rs.52,72,554/- was made. 8. Aggrieved by order of assessment dated 27.3.2013, assessee preferred appeal before Commissioner of Income Tax (Appeals)-9, Chennai-34 [hereinafter called CIT(A)]. assessee contended that Section 14A of Act read with Rule 8D of Rules had no application to assessee s case, that what were invested were surplus funds generated from business activity of assessee and that assessee had not incurred any other cost apart from amounts specified in return filed. CIT(A) was not convinced with contentions advanced by assessee and accordingly dismissed appeal by order dated 30.5.2017 and confirmed findings of Assessing Officer. With regard to other issues, appeal filed by assessee was partly allowed, as against which, Revenue filed appeal before Tribunal. In that, assessee filed cross objection with regard to disallowance under Section 14A of Act. 9. Tribunal considered submissions of assessee and found that disallowance as computed by Assessing Officer by applying formula under Rule 8D(2)(iii) of Rules did not call for 5/18 http://www.judis.nic.in TCA.No.431 of 2018 any interference. Ultimately, both appeal filed by Revenue as well as cross objection filed by assessee stood dismissed by impugned order dated 20.3.2018. As against order of dismissal, assessee alone is before us. 10. questions to be decided by us in this appeal are as to whether disallowance made by Assessing Officer was proper and as to whether assessee was right in contending that there were no cogent reasons recorded by Assessing Officer with regard to his satisfaction as to correctness of voluntary disallowance made by assessee. 11. Both learned counsel appearing for assessee have drawn attention of this Court to findings recorded by Assessing Officer, CIT(A) and Tribunal and submit that satisfaction of Assessing Officer has to be objectively arrived at on basis of accounts and after considering all relevant facts and circumstances. method prescribed under Rule 8D of Rules would be applicable only when claim made by assessee, in respect of expenditure, which is relatable to earning of income and which does not form part of total income under Act, is found to be incorrect. 6/18 http://www.judis.nic.in TCA.No.431 of 2018 12. It is further submitted by learned counsel for assessee that non satisfaction with disallowance offered by assessee has to be arrived at on basis of accounts submitted by assessee. It is also submitted that in instant case, all that Assessing Officer had done is guess work and he did not record conclusion as to why he was not satisfied with disallowance offered by assessee. 13. In support of their contention, learned counsel for assessee have relied upon decisions (i) of Hon ble Supreme Court in case of Maxopp Investment Ltd. Vs. CIT, New Delhi [reported in (2018) 402 ITR 640]; (ii) of Hon ble Supreme Court in case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [reported in (2017) 81 Taxmann.com 111]; (iii) of Bombay High Court in case of PCIT-3, Mumbai Vs. Reliance Capital Asset Management Ltd. [reported in (2018) 400 ITR 217]; and 7/18 http://www.judis.nic.in TCA.No.431 of 2018 (iv) of Bombay High Court in case of PCIT-2 Vs. Bombay Stock Exchange Ltd. [reported in (2020) 113 Taxmann. Com 303]. 14. Therefore, it is submitted by both learned counsel for assessee that concurrently all three authorities erroneously applied provisions of Rule 8D of Rules without recording satisfaction, which is mandated under Section 14A(2) of Act. They, while explaining nature of transaction done by assessee, have referred to statement of accounts and submitted that surplus funds available with assessee are being invested in mutual funds and expenditure incurred has been rightly arrived at and nothing more was incurred by assessee. It is further submitted that Assessing Officer committed error, which goes to root of matter and prayed for setting aside order passed by Tribunal as well as Authorities below. 15. Per contra, Mr.Karthik Ranganathan, learned Senior Standing Counsel assisted by Mr.S.Rajesh, learned Junior Standing Counsel appearing for Revenue submits that satisfaction should be recorded by Assessing Officer in terms of Section 14A(2) of Act in regard to assets of assessee and with regard to 8/18 http://www.judis.nic.in TCA.No.431 of 2018 correctness of claim made by assessee in respect of such expenditure in relation to income, which does not form part of total income. 16. To explain subtle difference between satisfaction to be recorded by Assessing Officer under Section 14A(2) of Act and satisfaction to be recorded under Section 145(3) of Act as quite distinct, Section 145(3) of Act is referred to. It is submitted by learned Senior Standing Counsel appearing for Revenue that decisions relied upon by learned counsel appearing for assessee would not apply to facts of case, because, in those cases, Assessing Officer straight away resorted to computation machinery provided under Rule 8D of Rules without recording satisfaction under Section 14A(2) of Act whereas in case on hand, Assessing Officer recorded satisfaction, which has been confirmed by CIT(A) as well as Tribunal and therefore, there is no error in decision making process by Assessing Officer or decision itself. With above submissions, learned Senior Standing Counsel appearing for Revenue has prayed for sustaining decision of Tribunal and answering question against assessee. 9/18 http://www.judis.nic.in TCA.No.431 of 2018 17. We have carefully considered submissions of learned counsel on either side. 18. Now, what we are required to examine is as to whether such satisfaction has been arrived at by Assessing Officer having regard to suo motu disallowance claimed by assessee in context of its accounts. Further, what we will have to examine is factual position. 19. As noticed above, assessee was issued show cause notice calling upon them to explain as to why provisions of Rule 8D of Rules should not be invoked to compute expenses attributable for earning exempt income. While issuing show cause notice, Assessing Officer, prima facie, recorded his dis-satisfaction, which is evident from reading of assessment order wherein Assessing Officer stated that he was not satisfied with quantum of expenses claimed by assessee as attributable for earning exempt income. 20. In other words, issuance of show cause notice calling upon assessee to explain pre-supposes prima facie opinion formed by Assessing Officer with regard to accounts of assessee. Therefore, once show cause notice is issued, assessee is 10/18 http://www.judis.nic.in TCA.No.431 of 2018 informed about prima facie view of Assessing Officer. However, Assessing Officer cannot have closed mind while issuing show cause notice. assessee rightly understood prima facie opinion formed by Assessing Officer with regard to expenses claimed by assessee attributable for earning exempt income and precisely for such reason, assessee submitted reply dated 18.12.2012. In said reply, assessee took stand that they incurred expenses of Rs.1,44,000/- being cost of personnel involved in buying and selling of mutual funds. 21. Assessing Officer examined said submission of assessee having regard to accounts of assessee and rejected stand taken by assessee. reasons are contained in paragraph 5.3 of impugned order, which we quote for easy reference, as hereunder : assessee s submissions were carefully considered. Though assessee is not in business of making investments in shares, assessee keeps more than 1/3rd of its assets in form of investments. As seen from balance sheet as on 31.3.2009, total value of assets is Rs.514,25,32,150/-, 11/18 http://www.judis.nic.in TCA.No.431 of 2018 out of which, investments are held to tune of Rs.132,39,84,480/-. Considering volume of investments held by assessee and amount of exempted income earned out of it and management skill required to maintain such investment portfolio, quantum of expenditure computed by assessee is not acceptable. Further, assessee incurs routine expenditure to maintain its establishment and towards administration, portion of which can be attributed towards activity of earning dividend. assessee also incurs managerial remuneration and claims whole of same as expenditure. managerial staff and directors are involved in making decisions on investments. Such being case, portion of this managerial remuneration and directors remuneration should also be attributed towards dividend earning activity by assessee. 22. Assessing Officer noted details, which obviously have been culled out from books of accounts and other records placed by assessee namely that (i) assessee was not in business of investment in shares; (ii) more than 1/3rd assets of assessee 12/18 http://www.judis.nic.in TCA.No.431 of 2018 were in form of investments; and (iii) total value of assets was Rs.514,25,32,150/-, from which, investments were to tune of Rs.132,39,84,480/-. Thus, taking note of volume of investments held by assessee and amount of exempt income earned, Assessing Officer came to conclusion that managerial skill is required to maintain such investment portfolio and that quantum of expenditure computed by assessee was not acceptable. Further, Assessing Officer examined materials placed before him and pointed out that assessee incurred routine expenditure to maintain its establishment and towards administration, portion of which could be attributed towards activity of earning of dividend. 23. Assessing Officer noted that assessee also incurred managerial remuneration and claimed whole of same as expenditure. Therefore, he concluded that portion of managerial remuneration and directors remuneration should also be attributed towards dividend earning activity by assessee. Thus, in our considered view, Assessing Officer recorded his satisfaction having regard to accounts of assessee. 24. Obviously, we cannot expect Assessing Officer to write judgment. correctness of findings of Assessing Officer was 13/18 http://www.judis.nic.in TCA.No.431 of 2018 tested by CIT(A). assessee argued that mutual funds were entirely managed by fund managers, that only minimum management was required by investor and that assessee made rational estimate of time spent and other related administration cost in management of investments and accordingly made voluntary disallowance of Rs.1,44,000/-. CIT(A), after pointing out that as per working given by assessee, time spent in year was 3 days, 9 days and 17 days for senior, manager and subordinates respectively. But, assessee did not even enclose profit and loss account to verify salary cost was correctly taken. Further, CIT(A) noted that disallowance of Rs.1,44,000/- was meagre when compared to dividend income earned by assessee on investment. 25. Further, CIT(A) considered as to whether Assessing Officer recorded reasons before invoking procedure under Rule 8D of Rules and found that Assessing Officer recorded reasons. Further, decision of Punjab and Haryana High Court cited by assessee in case of CIT Vs. Hero Cycles Ltd. [reported in 189 Taxman 50] was distinguished; so also decision of Chennai Bench of Tribunal of in case of Allied Investments 14/18 http://www.judis.nic.in TCA.No.431 of 2018 Housing P. Ltd. Vs. DCIT [ITA.No.305/Mds/2013] and it was held that Assessing Officer recorded reasons and sum disallowed in comparison to investment was not adequate. 26. other decisions of Delhi Bench of Tribunal in case of Minda Investments Ltd. Vs. DCIT [ITA.No.4046/Del/ 2009] and in case of DCIT Vs. Jindal Photo Ltd. [ITA.No. 814/2011] were also distinguished. By referring to decision of Chennai Bench of Tribunal in case of Visual Graphics Computer Services India (P) Ltd. [reported in (2012) 21 Taxmann.com 145], CIT(A) held that no income was gratuitous, that every income was earned after incurring certain expense and that reasonable portion of management expenditure should be attributed to earning of dividend income. CIT(A) also referred to decision of Chennai Bench of Tribunal in case of Southern Petrochemical Industries Vs. DCIT [reported in 93 TTJ (Chennai) 161] wherein it was held that investment decisions were very strategic decisions, in which, top management was involved and that therefore, proportionate management expenses were required to be deducted while computing exempt income from dividend. reference was also made to decision of Mumbai 15/18 http://www.judis.nic.in TCA.No.431 of 2018 Bench of Tribunal in case of ACIT-10(1) Vs. Citi Corp Finance (India) Ltd. [ITA.No.5832/Mum/2003 (AY 2000-01) dated 27.11.2006]. With these reasons, CIT(A) affirmed view taken by Assessing Officer. 27. assessee, in their cross objections filed before Tribunal, reiterated their earlier stand that Assessing Officer nowhere recorded satisfaction and that disallowance made was not sufficient. 28. correctness of such stand was independently tested by Tribunal. We find from impugned order that assessee filed calculation sheet as to how they computed Rs.1,44,000/-. After referring to same, Tribunal pointed out that there was nothing available on record to show as to how assessee estimated time spent per day by senior manager as five minutes and manager as fifteen minutes for managing to tune of Rs.1,32,39,84,480/-. Tribunal noted that salary cost mentioned in tabulated statement was only approximation without any scientific basis. Further, noting decision in case of Godrej & Boyce Manufacturing Company Ltd., Tribunal held that Assessing Officer recorded satisfaction. 16/18 http://www.judis.nic.in TCA.No.431 of 2018 29. As mentioned above, in preceding paragraph, we held that Assessing Officer considered explanation offered by assessee vide letter dated 18.12.2012 and recorded his satisfaction as to how disallowance voluntarily made by assessee was not acceptable. Hence, we find that Assessing Officer had rightly followed procedure under Section 14A(2) of Act and only thereafter, recorded his dis-satisfaction on correctness of claim made by assessee and having regard to accounts of assessee, proceeded to follow procedure under Rule 8D of Rules. Hence, we find that there is full compliance of what is required to be done by Assessing Officer as pointed out by Hon ble Supreme Court in case of Maxopp Investment Ltd. For above reasons, we hold that assessee has not made out case for interference in order passed by Tribunal. 30. Accordingly, above tax case appeal is dismissed. substantial question of law framed is answered against assessee. No costs. 22.7.2020 RS 17/18 http://www.judis.nic.in TCA.No.431 of 2018 T.S.SIVAGNANAM, J AND V.BHAVANI SUBBAROYAN, J RS To 1.The Income Tax Appellate Tribunal, Chennai D Bench. 2.The Deputy Commissioner of Income Tax, Corporate Circle-2(1), Chennai. TCA.No.431 of 2018 22.7.2020 18/18 http://www.judis.nic.in FLSmidth Pvt. Ltd. v. Deputy Commissioner of Income-tax, Corporate Circle-2(1), Chennai