$~21
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 1467/2018
Date of decision: 18th December, 2018
THE PR. COMMISSIONER OF INCOME TAX-9 ..... Appellant
Through: Mr.Ruchir Bhatia, Sr. Standing
Counsel with Mr. Sanampreet Singh,
Adv.
Versus
VEDANTA LIMITED. ..... Respondent
Through: Mr. Sachit Jolly and Mr. Siddharth
Joshi, Advs.
CORAM:
HON'BLE MR. JUSTICE SANJIV KHANNA
HON'BLE MR. JUSTICE ANUP JAIRAM BHAMBHANI
SANJIV KHANNA, J. (ORAL)
CM APPL. 53243/2018(for condonation of delay) in ITA 1467/2018
This is an application for condonation of delay of 59 days in filing of
the appeal. The application is not opposed by counsel for the respondent.
Accordingly the application is allowed and delay is condoned.
ITA 1467/2018
This appeal by the Revenue under Section 260A of the Income-tax
Act 1961 (for short `Act') in the case of Vedanta Ltd (Formerly known as
Madras Aluminium Co. Ltd.) relates to the assessment year 2010-2011 and
arises from the order dated 10th April, 2018 passed by the Income-Tax
Appellate Tribunal ('Tribunal', for short).
ITA 1467/2018 Page 1 of 8
2. The issue raised by the Revenue relates to the disallowance under
Section 14A of the Act. It is an accepted and admitted position that the
respondent assessee had earned dividend income of Rs.8.97 crores which
was exempted under Section 10(34) of the Act. The said dividend was paid
by group companies. The assessee had made self disallowance of Rs.
9,07,453/-.
3. The assessing officer, without examining and referring to the
disallowance or recording his dissatisfaction on disallowance made, had
invoked and applied Rule 8D of the Income Tax rules, 1962(`Rules', for
short) as if it was mandatory. This is clear from the relevant portion of the
assessment order under the heading expenditure incurred in relation to
income not includible in total income under section 14A read with Rule 8D,
which for the sake of completeness and clarity is reproduced below:-
"The assessee company filed its return electronically
on 28.09.2010 admitting an income of Rs. 81,99,030/-
under normal computation and Rs. 168,14,36,980/-
u/s 115B of the Act, The return was e-processed U/s
143(1) of the I.T. Act. The case was selected for
scrutiny and notice u/s 143(2) of the I.T. Act was
issued on 29.08.2011 which was duly served on the
assessee company on 06.09.2011.
In response to the above notice and subsequent
hearing notice, Sh. Rajkumar Bashak, authorized
representative of the assessee company attended from
time to time and produced books of account and other
details called for. The books of account and details
produced were examined.
The assessee company has income from business and
income from Short Term Capital Gains during the
financial year. The assessee had also claimed
ITA 1467/2018 Page 2 of 8
deduction u/s 80IA of the I.T. Act on the income
generated from eligible unit limited to business
income. It is further observed during the examination
of books of account that the assessee had not worked
out deduction as per Section 14A read with Rule 8D
with regard to the expenditure in relation to dividend
income on which exemption u/s 10(34) has been
claimed. Therefore, the total income as per regular
computation has been assessed as follows:-
Expenditure Incurred In Relation To Income Not Includible In
Total Income Under Section 14A Read With Rule 8D:-
(i) Direct Expenditure Rs. 9,07,453/-
(ii) Interest Expenditure to the extent not
directly attributable to any particular
Income(A) Rs.12,26,00,000
Average Value of Investment (B)
Average value of investment in exempted income as
Per the balance sheet as on 01.04.2009 and 31.03.2010
Investment in exempted income as on
01.04.2009 Rs. 72,91.40.000/-
Investment in exempted income as on
31.03.2010 Rs. 107,03,70,000/-
Total Rs. 179,95,10,000/-
Average Value of Investment (B)
Average Value of Total Assests(C)
Value of total assets as Rs. 693,77,70,000/-
On 01.04.2009
Value of total assets as Rs. 756,35,60,000/-
On 31.03.2010
Average Value of total assets (C)
Rs.1450,13,30,000
Rs.725,06,650,000
Therefore interest expenditure to be disallowed
AxB/C=12,26,00,000x89,97,55,000 =Rs.1,52,13,771
725,06,65,000
ITA 1467/2018 Page 3 of 8
(iii) Half percentage of average value of
Investment(B) =Rs. 44,98,775
Aggregate of (i), (ii) and (iii)=
907453+15213771+4498775 =Rs.2,06,19,999
Therefore, audition to the tune of Rs.2,06,19,999/- is
made to the income of assessee company."
4. The Commissioner of Income-Tax (Appeals) deleted the said addition
on two accounts; firstly, he held that the Assessing Officer had failed to
record his objective satisfaction whether the disallowance made by the
assessee was appropriate and in accordance with law. He observed that the
Assessing Officer had mechanically applied Rule 8D without recording any
satisfaction for invoking the said rule. The Rule 8D can be applied only if
the assessing officer is not satisfied with the correctness of the claim made
by the assessee in respect of the expenditure which the assessee claims to
have been incurred in relation to income which does not form part of his
total income.
5. The second reason given by the Commissioner of Income-Tax
(Appeals) was facts specific. He had recorded the following findings:-
"Further I found disallowance has been worked out
mechanically without considering the submissions or
referring to the accounts of the assessee. I have examined
the annual report of the appellant and it is seen that
As on 31st March, 2010 the appellant had the total
investment in assets giving rise to tax free income at Rs.
107.03 crores and against that the appellant had own
funds of Rs. 22.50 crores as share capital and Rs.
493.41 crores as reserves and surplus. Thus own
funds/interest free funds amounting to Rs. 515.91 crores
ITA 1467/2018 Page 4 of 8
are much more as compared to investments of Rs.
107.03 crores yielding tax free income.
Further during the current year the investments have
increased from Rs. 72.91 crores as on 31.03.2009 to Rs.
107.03 crores as 31.03.2010 however there is no
corresponding increase in loans. In fact loans have
declined from Rs. 4.46 crores as on 31.03.2009 to Rs.
1.04 crores as on 31.03.2010. Thus it cannot be said
that borrowed funds had been used to make fresh
investments.
The interest expenses of Rs. 12.26 crores debited to the
profit and loss account. Out of this a sum of Rs.
12.02crores is interest paid to Tamilnadu Electricity
Board and interest paid on cash credits is Rs. 8.9 lakhs.
Thus, it is clear that, interest paid is used for business
purposes as the bifurcation of the interest cost in the
following table shows:
Particulars Rs.
Million
Interest provides as 120.21
per supreme Court
order on Belated
Payments made to
Tamilnadu
Electricity Board
Interest on cash 0.89
credit accounts of
Bank grid other misc
interest
Bank Charges 1.50
Total interest 122.60
considered by AO
"
6. Commissioner of Income Tax (Appeals) on examining facts had held
that the assessee had not used interest bearing funds for making investment
that had yielded tax free income. He referred to decisions of different High
ITA 1467/2018 Page 5 of 8
Courts. Reference was also made to clause (iii) to Rule 8D(2) to observe that
the assessing officer had not examined the question whether the
disallowance of Rs. 9,07,453/- was sufficient and in accordance with law.
The final finding recorded by the Commissioner of the Income-Tax
(Appeals) was:
"Thus respectfully relying of the above referred
decision of Hon'ble ITAT, it is held that the rejection
of appellant's claim by A.O. u/s 14A is not as per law
as no satisfaction is recorded for invoking Rule 8D
and the rejection of appellant's claim is not supported
by material evidence that expenses debited to the
accounts of the appellant have proximate connection
with the earning of the exempt income. Therefore, the
disallowance of expenses under Rule 8D(2) is not in
accordance with law and is liable to be deleted."
7. The Tribunal adopts and accepts the reasoning given by first appellate
authority, holding that the findings did not call for any interference.
8. It is apparent that the Assessing Officer without examining,
commenting and rejecting the disallowance made by the respondent-
assessee had applied Rule 8D as compulsory and universally applicable rule
where the assessee has earned exempt income. However, Rule 8D cannot be
invoked and applied unless the Assessing Officer records his dissatisfaction
regarding correctness of the claim made by the assessee in relation to
expenditure incurred to earn exempt income. This is the mandate and pre-
condition imposed by sub-section (2) to Section 14A of the Act. Rule 8D is
in the nature of best judgment determination i.e. determination in default and
on rejection of the explanation of the assessee in relation to expenditure
ITA 1467/2018 Page 6 of 8
incurred to earn exempt income. Rule 8D is not applicable by default but
only if and when the Assessing Officer records his satisfaction and rejects
the explanation of the assessee regarding the disallowance of expenditure. In
the present case the assessment order proceeds on a wrong assumption that
Rule 8D would applies to all cases and is mandatory. Finding of the
Tribunal affirming the order of the Commissioner of Income Tax (Appeals)
is in accordance with the law.
9. Legal principle and ratio is no longer res integra and is settled by the
judgment of the Supreme Court in Godrej & Boyce Manufacturing Co.
Ltd. Vs. Deputy Commissioner of Income-Tax and another [2017] 394 ITR
449 (SC) in which it has been held as under:-
"37. We do not see how in the aforesaid fact situation
a different view could have been taken for Assessment
Year 2002-2003. Sub-sections (2) and (3) of Section
14-A of the Act read with Rule 8-D of the Rules
merely prescribe a formula for determination of
expenditure incurred in relation to income which does
not form part of the total income under the Act in a
situation where the assessing officer is not satisfied
with the claim of the assessee. Whether such
determination is to be made on application of the
formula prescribed under Rule 8-D or in the best
judgment of the assessing officer, what the law
postulates is the requirement of a satisfaction in the
assessing officer that having regard to the accounts of
the assessee, as placed before him, it is not possible
to generate the requisite satisfaction with regard to
the correctness of the claim of the assessee. It is only
thereafter that the provisions of Sections 14-A(2) and
(3) read with Rule 8-D of the Rules or a best
judgment determination, as earlier prevailing, would
become applicable."
ITA 1467/2018 Page 7 of 8
10. As the legal issue is settled, no substantial question of law arises for
consideration in the present appeal, which is dismissed.
SANJIV KHANNA, J
ANUP JAIRAM BHAMBHANI, J
DECEMBER 18, 2018/rr
ITA 1467/2018 Page 8 of 8
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