Hpp Energy (India) Pvt. Ltd., New Delhi vs Assessee

M/s HPP Energy (India) Pvt. Ltd. Vs. ACIT, Circle 12(1), B-156, Freedom Fighter Enclave, New Delhi Neb Sarai, New Delhi -110368 (PAN: AAACH1838C) (Appellant) (Respondent)

Appellant by : Sh. R.S. Adalakha, Adv. Respondent by: Sh. T. Vasanthan, Sr. DR

Date of hearing: 18.03.2015 Date of pronouncement: 20.03.2015

ORDER

PER R.S. SYAL, A.M.:

This appeal by the assessee arises out of the order passed by the CIT(A)

on 23.04.2013 in relation to the assessment year 2009-10.

2. The only issue raised before us in the extant appeal is against the

confirmation of disallowance of expenses made u/s 14A of the Income-tax Act,

1961 (hereinafter referred to as "the Act"). Briefly stated the facts of the case are

that the assessee earned certain exempt income and did not offer any

disallowance under Section 14A. During the course of assessment proceedings,

the Assessing Officer called upon the assessee to furnish the details of exempt

income and the corresponding disallowance under Section 14A of the Act. The 2 ITA No. 4138/Del /2013 AY: 2009-10

assessee submitted the reasons for not making any voluntary disallowance under

Section 14A in respect of the exempt dividend income of Rs. 18,09,961/-. The

Assessing Officer, after reproducing the assessee's explanation dealt with the

issue as under:

"The assesee's reply has been considered and found to be unacceptable. The assessee cannot deny involvement of human acumen for which an appropriate disallowance has to be made as per Rule 8D of the I.T. Act, 1961. In this case the average of opening and closing balances as on 01.04.2008 and as on 31.03.2009 respectively are Rs. 72226700/- & Rs. 77328164/-. The average comes to Rs. 74777432/-. Hence, a disallowance as per Rule 8D i.e. 0.5% of the average investments which is Rs. 378887/- is made and added back to the total income of the assessee. Since I am satisfied that the assessee has furnished inaccurate particulars of its income, penalty proceedings under Section 271(1)(c) are being initiated separately."

3. The learned CIT(A) sustained the addition.

4. We have heard the rival submissions and perused the relevant materials

on record. The assessment year under consideration is 2009-10. The provisions

of Rule 8D are applicable for this assessment year for making any disallowance

under Section 14A of the Act. However, the provisions of Section 14A are

triggered when 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 expenditure claimed to have been incurred in relation to income,

which does not form part of the total income under the Act. Section 14A(2)

categorically provides that the Assessing Officer shall determine 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 3 ITA No. 4138/Del /2013 AY: 2009-10

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". The provisions of sub-section (3) of Section 14A

provide that the provisions 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 under this Act.

A conjoint reading of sub-sections (2) and (3) of Section 14A makes it manifest

that the Assessing Officer is fully empowered to compute disallowance under

Section 14A as per Rule 8D where he is not satisfied with the correctness of the

assessee's claim of expenses incurred or not incurred in relation to exempt

income. However, the pre-requisite for invoking the mandate of Section 14A is

the recording of satisfaction by the Assessing Officer as to the incorrectness of

the claim of the assessee in respect of the expenditure incurred or not incurred in

relation to the exempt income. Unless such satisfaction is recorded, there can be

no question of computing any disallowance under Section 14A of the Act. This

proposition is subject to one caveat discussed in the ensuing para.

5. The Hon'ble Supreme Court in CIT Vs. Kanpur Coal Syndicate, (1964) 53

ITR 225 (SC) while dealing with the scope of powers of the first appellate

authority vis-à-vis the Assessing Officer has held that the powers of the CIT(A)

are co-terminus with that of the Assessing Officer inasmuch as he can do what 4 ITA No. 4138/Del /2013 AY: 2009-10

the Assessing Officer can do and also direct him to do what he has failed to do.

Similar view has been reiterated by the Hon'ble Supreme Court in the case of

Jute Corporation of India Ltd. Vs. CIT, (1991) 187 ITR 688 (SC) by providing

that power of the AAC is co-terminus with that of the ITO. In view of these

precedents, it is manifest that if some deficiency is left by the Assessing Officer

in making an assessment, then that can be made good by the CIT(A). Coming to

the context of Section 14A and the requirement of recording satisfaction before

invoking the mandate of Rule 8D, we have no hesitation in noting that if the

Assessing Officer fails to record satisfaction in terms of sub-sections (2) and (3)

of Section 14A and the learned CIT(A) makes good such deficiency by

recording proper satisfaction, then there cannot be any embargo on the making

of disallowance u/s 14A. If, however, neither the Assessing Officer nor the

CIT(A) record such satisfaction as envisaged under sub-sections (2) and (3) of

Section 14A, then the disallowance under this section cannot follow.

6. We have reproduced the relevant discussion made by the Assessing

Officer in an earlier part of the order from which it is palpable that no

satisfaction was recorded to satisfy the mandate of sub-sections (2) and (3) of

Section 14A. The position continued to remain same before the learned CIT(A)

as well, who also simply upheld the view taken by the Assessing Officer

without making good the deficiency left by the Assessing Officer. The position

which, therefore, emerges is that neither the Assessing Officer nor the learned 5 ITA No. 4138/Del /2013 AY: 2009-10

CIT(A) recorded the requisite satisfaction as required under Section 14A. In the

absence of such satisfaction, there can be no disallowance as per Section 14A. In

these peculiar facts when there is a deficiency in recording satisfaction, much

less a proper satisfaction, in terms of sub-section (3) read with sub-section (2) of

section 14A, we hold, that no disallowance could have been made or sustained

on this score. As such, we order for deletion of addition of Rs. 3.78 lac made

under Section 14A of the Act.

7. In the result, the appeal of the assessee is allowed.

The decision is pronounced in the open court on 20th March, 2015.

Sd/- Sd/- (C.M. GARG) (R.S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 20th March, 2015. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi