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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 ..... agent in compliance to the notice does not necessarily mean that the agent is not aware of the buyers. In no situation commission can be earned by a person like HUF is also not tenable. We find that no material could be brought before us to show that the person to whom commission was paid were accommodation/entry provider and the money which was paid through banking channel to them came back to the assessee in cash or through any other mode. In the circumstances, in the absence of any specific defect being pointed out in the order of the CIT(A), we find no good reason to interfere with the findings recorded by the ld first appellate authority - Decided against revenue. Addition under the head punitive charges - AO required the assessee to furnish the details of such expenses with documentary evidence and same should not be disallowed being an expenditure not allowable u/s. 37 - CIT(A) deleted the addition - HELD THAT:- Punitive charges is against overloading charges in the rake.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 incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the name of contractor, who was paid the impugned amount for upgradation of roads in 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. 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. - Decided in favour of assessee. Disallowance of donation - Donation for scientific research as per the provision of section 35(1) - as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A From the relevant part of the assessment order, it is clearly discernible that the AO has not considered the claim of the assessee filed in response to the show cause notice that no expenditure has been incurred for earning exempt income and he straightforward embarked upon and jumped to compute the disallowance under Rule 8D of Rules on the presumption that there is every possibility that the investments made from which such exempt income is earned might have been made out of loan amount, for which the assessee has paid interest. The disallowance u/s.14A of the Act requires findings of the AO that the claim of the assessee pertaining to suo moto disallowance or no expenditure is not correct having regard to the accounts of the assessee and thereafter only the AO is validly entitled to compute disallowance under Rule 8D of the Rules. In absence of such exercise, the disallowance made by the AO cannot be held as valid and sustainable in view of mandate given by the legislature for invoking provisions of Section 14A. Expenses towards distribution of mosquito nets etc against malaria eradication - HELD THAT:- No positive ground that expenses towards distribution of mosquit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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' to the tune of ₹ 85,59,687/-. 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 ₹ 2,14,37,021/- 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 ₹ 1,85,46,330/-. 6. Ground No.1 of appeal for the assessment year 2012-13 and ground No.2 of appeal for the assessment year 2013-14 is common except variance of quantum of addition made by the AO. Hence, we take into consideration the ground No.1 of appeal for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 gives any scope to disbelieve the expenditure genuinely incurred by the assessee. The learned AO also observed that some of the agents were HUFs and HUFs are not physical entities to act as commission agents. It is humbly submitted that the assessee engaged individuals and companies as agents. Some of the Individuals submitted bills as HUFs. The assessee has no business to enquire about the status of the person concerned and as far as the person concerned had rendered service, it hardly matters, if he acted on behalf of his HUF. It is further submitted that if companies can render service as agents, HUFs too can do that. 9. The ld CIT(A) deleted the disallowance made by the AO, inter alia, observing as under: 2.2 I have considered the matter carefully with reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duce 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 penal provisions of the Act. The assessee cannot be made to suffer for the failure on the part of the commission agents to reply to the AO's letters. Moreover, the assessee could have been asked to produce confirmations from them. In any case, 3 major commission agents have confirmed about receipt of commission payments and total commission payments involved in those confirmations comes to ₹ 3,22,31,516/- as against the total commission payments of ₹ 3,92,80,961/-. 2.4 It is also found that in cases of commission payments, TDS was deducted as per law and deposited into the government account. Service ta also duly paid wherever required on the commission payments. The assessee -also filed before the AO copies of the income-tax returns being filed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 supportive evidence. Keeping in view above facts and circumstances, when, we evaluated facts and circumstances, of the present case, then we find that the assessee is continuously clearing payment of commission not only during present assessment year but also during earlier and subsequent assessment years. In the present case, commission was paid by the assessee, who is a seller, directly to the agents for facilitating different services in the process of transfer of materials to various destinations of buyers/purchasers. The ld CIT DR could not controvert the fact that in the line of business of present assessee, agent is not visiting to buyers and some times known person of the company as the buyer is not paying any commission to such agents. In the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im 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 Assessing Officer observed that during the course of assessment proceedings, the situation was also confronted to the assessee in response to which the assessee stated that all the commission agents are regular assessee and their respective status has no relevance with the assessee s business. The Assessing Officer observed that it is further seen that the assesse has paid commission to corporate assessee who are loss making and self/assessment tax defaulter. The assessee has made TDS and service tax and then also it is beneficial for the commission agents as they have never rendered any services and consuming TDS components. Therefore, he held that it is established fact that commission agents have never rendered any services to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 Assessing Officer whereas ld A.R. fully justified the order of the CIT(A). 7. We have heard rival submissions, perused the orders of lower authorities and materials available on record. We find that the CIT(A) deleted the disallowance of ₹ 7,09,10,967/- out of total commission payment of ₹ 14,13,86,450/- by observing as under I have considered the content and substance of the impugned assessment order and the Grounds of Appeal preferred and the additional submissions filed by the Appellant, and accordingly decide as under: a) It is clear from the outset that the AO has not correctly understood the meaning and import of the term agent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 arrange and participate in the sales and arrange outbound- movement-and-packing, transport and logistics in the interests of the principal, and there are agents who do not. The law of agency is an area of commercial law dealing with a set of contractual, quasi Smt. contractual and non-contractual fiduciary relationships that involve a person (the agent), who is authorized to act on behalf of another (the principal) to create legal relations with a third party. Succinctly, it may be referred to as a more-or-less equal relationship between a principal and an agent whereby the principal, expressly or implicitly, authorizes the agent to w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 schism between flimsy foundations and meretricious arguments on one side and a tendentious decision on the other. This is not a scientific, professional and responsible exercise carried out by the AO. Much more homework was required to be done by the AO in discharge of his responsibilities, which he plainly failed to carry out. g) How to go about doing one s business sis the prerogative of the business man, as are the related matters like incurring expenses, making investments, obtaining loans and providing advances, etc. The decision of Hon ble Supreme Court in the case of S.A. Builders Limited vs CIT, 288 ITR 1 (SC) is rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs (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 respect of whom/which the agent would have facilitated the supply after the sales were made. Likewise, sworn depositions from the buyers that they did not know the agents would not make for adverse finding because in the minds of these buyers, they had transacted directly with the Appellant, and the person referred to as an agent would have appeared in their eyes like an employee of the Appellant or other individual engaged in facilitating the movement of the goods, and not in a formal position of engagement as an agent . k) What was needed for the AO was to prove any of the following: a) the impugned agents did not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence 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 sociis (a word is known by the company it keeps), it can be readily seen that an HUF as defined u/s 2(15) of the Income-tax Act is accompanied by other persons that include individual . It obviously cannot be the AO s case that an individual is not a physical entity , and it follows therefore that an HUF, and all the other persons mentioned therein are physical entities under the statute. n) The word physical itself is derived from the Latin word physis which meant matter in its indivisibly elemental form. However, the physical world is both tangible and intangible. The human mind inhabits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 those cases. p) The AO s pejorative statements in the assessment order that 7/ may also be recalled that an expenditure is an expenditure when the payer and the payee are two different hands and two different beings. Here it is the services which are being paid for and these services could only be provided by flesh and blood. Such income cannot be attributed to an entity like HUF as the HUF cannot perform functions of an individual being because of not existing in physical form is to be seen against the fact that the Appellant and the receivers (the HUFs) are two different hands and two di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, 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 is not aware of the buyers. Further, to hold that in no situation commission can be earned by a person like HUF is also not tenable. We find that no material could be brought before us to show that the person to whom commission was paid were accommodation/entry provider and the money which was paid through banking channel to them came back to the assessee. In the circumstances, in the absence of any specific defect being pointed out in the order of the CIT(A), we find no good reason to interfere with the order of the CIT(A), which is hereby confirmed and the ground of appeal o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 genuine and accepted by the department. Further, non Smt. furnishing of the name of the buyers by agent in compliance to the notice does not necessarily mean that the agent is not aware of the buyers. Further, to hold that in no situation commission can be earned by a person like HUF is also not tenable. We find that no material could be brought before us to show that the person to whom commission was paid were accommodation/entry provider and the money which was paid through banking channel to them came back to the assessee in cash or through any other mode. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the destination station and to recover the cost of such unloading and any charge for the detention of any wagon on this account. 26. He submitted that the statutory provision makes it clear that the punitive charges are in addition to freight and other charges and that the punitive charges are clearly referred to as penalty. Ld CIT DR relied upon the decision of ITAT Delhi Bench in the case of Arun Kumar Gupta, HUF vs ACIT (2012) 27 taxmann./com 230 (Del) and also the decision of Hon ble Karnataka High Court in the case of CIT vs Mamt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 CIT(A) took the view that payment in question was compensatory in nature and was made towards extra or overloading bringing extra benefit for assessee in the form of transportation of extra goods or material, which cannot be tagged as penal and therefore the provision to Explanation to Section 37(1) of the Act will not be applicable. We therefore uphold the order of CIT(A) and dismiss ground no.2 raised by the revenue for the assessment year 2012-13. 33. Ground No.3 of appeal for the assessment year 2012-13 and Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gher 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 ₹ 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 of own capital or interest free funds. Hence, it was urged to reverse the order of the ld CIT(A) to restore that of the AO. 38. Replying to above, ld AR supported the order of the ld CIT(A). 39. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment 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 towards explanation of the assessee and submitted that during assessment proceedings before the AO, as has been recorded by the AO in para -9 of the assessment order, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that he is unable to verify as to whether periphery development charge is the expenditure incidental to the business and must have been necessitated or justified by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2012-13. 51. Ground No.1 of appeal for assessment year 2013-14 in ITA No.390/CTK/2017 reads as under: Whether on the facts and in the circums ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the assessee cannot be held liable for misdeeds of the school and the fraud committed by them by helping assessee to evade t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 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 to the aforesaid school which has approval from the competent authority as a scientific research institu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 assessee in cash. At the same time, we also note that the assessee has submitted certain state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure, 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 the following judicial pronouncements: i) Sesa Goa Ltd vs JCIT, 60 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, 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 insurance is less than the amount of capital, therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the ITAT Chennai in this order has relie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 sustainable addition u/s.14A r.w. R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 has also been placed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 each and ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome is 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplanation/claim of the 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 Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A of the Act. 94. The decisions 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchase of mosquitoes has not satisfied the test of commercial expediency, hence, ld CIT(A) has rightly disallowed the same. As regards the amount of donation of ₹ 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 ₹ 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 ₹ 1,24,39,665/- including entry tax. This expenditure does not fulfil the test of commercial expediency since there appears to be no bu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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