Section 80IAC deduction allowable on sale of scrap

ACIT Vs Finolex Cables Limited (ITAT Pune)

The solitary issue involved in the appeal of the Revenue for A.Y. 2012-13 relating to the assessee‟s claim for deduction u/s 80IC of the Act in respect of sale of scrap is squarely covered in favour of the assessee by various decisions of Tribunal rendered in assessee‟s own case including the latest decision of the Tribunal rendered for A.Y. 2014-15 vide its order dated 27.01.2020 passed in ITA No.2257/PUN/2017, wherein similar claim of the assessee for deduction u/s 80IC of the Act in respect of sale of scrap was allowed by the Tribunal vide paragraph No.3 of its order which reads as under:-

“3. Heard both parties and perused the material available on record. The AO denied the claim of assessee in claiming deduction u/s. 80IC of the Act in respect of income from sale of manufacturing scrap at Roorkee Plant. The CIT(A) by placing reliance on the order dated 06-03-2012 of this Tribunal in assessee‟s own case for A.Y. 2003-04 and also for A.Ys. 2002-03, 2004-05 and allowed the claim of assessee by holding that the income earned from sale of scrap is an eligible business and the assessee is entitled to claim the said income as deduction u/s. 80IC of the Act vide para 5.2 of impugned order. No contrary order was brought on record by the appellant-revenue. Therefore, we find no infirmity in the order of CIT(A) and it is justified. Thus, only ground raised by the Revenue is dismissed.”

As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to the earlier years including A.Y. 2014-15, we respectfully follow the orders of Tribunal for the said years and uphold the order of ld. CIT(A) directing the Assessing Officer to allow the claim of assessee for deduction u/s 80IC of the Act in respect of sale of scrap.

FULL TEXT OF THE ITAT JUDGEMENT

Out of these three appeals, two appeals being ITA Nos.2256/PUN/2017 (Revenue’s Appeal) and ITA No.1998/PUN/2017 (Assessee’s appeal) are cross appeals for A.Y. 2012-13 while third appeal being ITA No.1999/PUN/2017 is the appeal filed by the assessee for A.Y. 2014-15. Since all these three appeals are directed against a common order of CIT(A), Pune-11, dated 27.07.2017 and involve some common issue, the same have been heard together and are being disposed of by a single consolidated order.

2. First, we take up the appeal of Revenue for A.Y. 2012-13 being ITA No.2256/PUN/2017 which involve a solitary issue relating to deletion by the ld. CIT(A) of the disallowance made by the Assessing Officer on account of assessee’s claim for deduction u/s 80IC of the Income-tax Act, 1961 (hereinafter referred to as ^„the Act’) in respect of income earned from sale of scrap.

3. The assessee in the present case is a company which is engaged in manufacture and sale of insulated wires, cables, etc. The return of income for the year under consideration i.e. A.Y. 2012-13 was filed by the assessee on 28.09.2012 declaring a total income of Rs.15,51,58,240/- after claiming a deduction of Rs.77,78,90,760/- u/s 80IC of the Act for the entire profit of its LDC Division at Roorkee. During the course of assessment proceedings, the claim of assessee for deduction u/s 80IC of the Act was examined by the Assessing Officer. On such examination, he found that deduction u/s 80IC of the Act was claimed by the assessee even in respect of sale of scrap amounting to Rs.2,97,84,396/-. In this regard, it was submitted on behalf of the assessee company that the sale of scrap was eligible for deduction u/s 80IC of the Act as the same was derived from the eligible undertaking which was engaged in the business of manufacturing and sale of various types of cables, etc., from which the scrap was generated. This submission of assessee company was not found acceptable by the Assessing Officer. According to him, scrap generated during the course of manufacturing process was not the by-product of the assessee company and the sale of scrap so generated therefore did not constitute the income derived by the industrial undertaking of the assessee company, which was eligible for deduction u/s 80IC of the Act. He therefore, disallowed the claim of assessee for deduction u/s 80IC of the Act to the extent of Rs.2,97,84,396/- being the sale of scrap.

4. The disallowance made by the Assessing Officer on account of its claim for deduction u/s 80IC of the Act in respect of sale of scrap amounting to Rs.2,97,84,396/-was challenged by the assessee in the appeal filed before the ld. CIT(A) and the ld. CIT(A) vide his appellate order dated 27.07.2017 deleted the said disallowance by following the orders of Tribunal passed in assessee’s own case for A.Ys. 2002-03, 2003­04 and 2004-05, wherein a similar claim of the assessee for deduction u/s 80IB of the Act in respect of sale of scrap was allowed by the Tribunal. Keeping in view that the provisions of section 80IC of the Act are analogous to the provisions of section 80IB of the Act, the ld. CIT(A) followed the decision of Tribunal rendered in assessee’s own case for A.Ys. 2002-03, 2003-04 and 2004-05 and directed the Assessing Officer to allow the claim of assessee for deduction u/s 80IC of the Act in respect of sale of scrap for A.Y. 2012-13. Aggrieved by this relief allowed by the ld. CIT(A) to the assessee, the Revenue has preferred this appeal before the Tribunal.

5. We have heard the arguments of both sides and perused the material available on record. As agreed by the ld. Authorized Representatives of both sides, the solitary issue involved in the appeal of the Revenue for A.Y. 2012-13 relating to the assessee‟s claim for deduction u/s 80IC of the Act in respect of sale of scrap is squarely covered in favour of the assessee by various decisions of Tribunal rendered in assessee‟s own case including the latest decision of the Tribunal rendered for A.Y. 2014-15 vide its order dated 27.01.2020 passed in ITA No.2257/PUN/2017, wherein similar claim of the assessee for deduction u/s 80IC of the Act in respect of sale of scrap was allowed by the Tribunal vide paragraph No.3 of its order which reads as under:-

“3. Heard both parties and perused the material available on record. The AO denied the claim of assessee in claiming deduction u/s. 80IC of the Act in respect of income from sale of manufacturing scrap at Roorkee Plant. The CIT(A) by placing reliance on the order dated 06-03-2012 of this Tribunal in assessee‟s own case for A.Y. 2003-04 and also for A.Ys. 2002-03, 2004-05 and allowed the claim of assessee by holding that the income earned from sale of scrap is an eligible business and the assessee is entitled to claim the said income as deduction u/s. 80IC of the Act vide para 5.2 of impugned order. No contrary order was brought on record by the appellant-revenue. Therefore, we find no infirmity in the order of CIT(A) and it is justified. Thus, only ground raised by the Revenue is dismissed.”

6. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to the earlier years including A.Y. 2014-15, we respectfully follow the orders of Tribunal for the said years and uphold the order of ld. CIT(A) directing the Assessing Officer to allow the claim of assessee for deduction u/s 80IC of the Act in respect of sale of scrap. The appeal of the Revenue for A.Y. 2012-13 is accordingly dismissed.

7. Now, we take up the appeal of assessee for A.Y. 2012-13 being ITA No.1998/PUN/2017 which involves a solitary issue relating to the disallowance of Rs.1,13,44,967/- made by the Assessing Officer and confirmed by the ld. CIT(A) u/s 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as ^„the Rules‟).

8. In the return of income filed for the year under consideration, dividend income of Rs.12.52 crores received during the year under consideration was claimed to be exempt by the assessee company and the disallowance of Rs.3,47,208/- was also offered by the assessee on account of expenses incurred in relation to the earning of said exempt income as required by the provisions of section 14A of the Act. As noted by the Assessing Officer during the course of assessment proceedings, substantial expenditure on account of interest aggregating to Rs.26.07 crores was claimed by the assessee company. In this regard, it was explained on behalf of the assessee company that the entire investment in shares was made out of its own funds available in the form of share capital and free reserves and there being no utilization of interest bearing borrowed funds for making the said investment, no disallowance on account of interest expenditure u/s 14A of the Act was called for. It was also explained on behalf of the assessee company that out of total investment of Rs.12.52 crores made in the shares, investment to the extent of Rs.12.60 crores was made in the shares of one sister concern company viz. Finolex Industries Limited and since the said investment in shares was held in Dmat format and dividend income was directly credited to the bank account by the concerned company, hardly any efforts were required to be made or expenses were required to be incurred for maintaining the portfolio of investment in shares and earning the dividend income. This explanation offered on behalf of the assessee company was not found acceptable by the Assessing Officer and applying rule 8D of the Rules, he worked out the expenses incurred by the assessee in relation to earning of exempt income at Rs.1,16,92,175/-. Since the assessee company had already offered disallowance of Rs. 3,47,208/-, a further disallowance of Rs. 1,13,44,967/- was made by the Assessing Officer u/s 14A of the Act read with rule 8D of the Rules in the assessment completed u/s 143(3) of the Act vide an order dated 04.02.2015.

9. The disallowance made by the Assessing Officer u/s 14A of the Act read with rule 8D of the Rules was challenged by the assessee in the appeal filed before the ld. CIT(A). During the course of appellate proceedings before the ld. CIT(A), it was inter-alia, contended on behalf of the assessee that the Assessing Officer was not justified in invoking rule 8D of the Rules to make disallowance u/s 14A of the Act without first demonstrating as to how the disallowance made by the assessee company suo motu was incorrect. The ld. CIT(A) did not find merit in this contention as well as other contentions raised on behalf of the assessee company and rejecting the same, he proceeded to confirm the disallowance made by the Assessing Officer u/s 14A of the Act read with rule 8D of the Rules. Aggrieved by the same, the assessee has preferred this appeal before the Tribunal.

10. We have heard the arguments of both sides and perused the material available on record. It is observed that a similar issue as involved in the year under consideration i.e. A.Y. 2012-13 relating to the disallowance made u/s. 14A of the Act read with rule 8D of the Rules had come up for consideration before the Tribunal in assessee‟s own case for earlier years i.e. A.Ys. 2008-09 to 2011-12 and vide its common order dated 28.11.2017 passed in ITA Nos.327 to 330/PUN/2016, the Tribunal decided the said issue in favour of assessee deleting the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) u/s 14A of the Act read with rule 8D of the Rules vide paragraph Nos.5 to 14 of its order, which read as under:-

“5. We have heard the submissions made by the representatives of rival sides and have perused the orders of the authorities below. The solitary issue raised in all the appeals by the assessee is against confirming of disallowance u/s. 14A r.w. Rule 8D. It is an admitted fact that the assessee had made strategic investment in group concern. By virtue of such investment the assessee has earned dividend income. The assessee has made suo-moto disallowance u/s. 14A in all the assessment years under appeal, however, the Assessing Officer in assessment proceedings enhanced the disallowance by invoking the provisions of Rule 8D. The details of exempt income received, suo-moto disallowance made by assessee and disallowance u/s. 14A r.w. Rule 8D made by Assessing Officer are as under :

6. The Assessing Officer made disallowance u/s. 14A by invoking the provisions of Rule 8D(2)(ii) and 8D(2)(iii). In first appeal the Commissioner of Income Tax (Appeals) deleted disallowance made under the provisions of Rule 8D(2)(ii) and confirmed disallowance under Rule 8D(2)(iii). The assessee in appeal before Tribunal has assailed the Assessing Officer’s action of invoking the provisions of Rule 8D without recording satisfaction.

7. Before proceedings to decide this issue it would be relevant to first refer the relevant provisions of section 14A of the Act.

“Expenditure incurred in relation to income not includible in total income.

14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) 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 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:”

A bare perusal of sub-section (2) to section 14A makes it clear that recording of satisfaction by Assessing Officer to the effect that the claim made by assessee in respect of expenditure in relation to income which does not form part of the total income under the Act is correct or otherwise is one of the pre-conditions. Thus, the road to Rule 8D passes through sub-section (2) to section 14A of the Act. The satisfaction of Assessing Officer as to incorrect claim made by assessee is sine-qua-non for invoking the provisions of Rule 8D. Such satisfaction can be reached and recorded only when the claim of assessee is verified.

8. In the present case we observe that during the course of assessment, the Assessing Officer after considering the submissions of assessee proceeded on to working of disallowance u/s. 14A r.w. Rule 8D without commenting or recording satisfaction qua suo-moto disallowance made by assessee. The right course of action for the Assessing Officer is to first examine correctness of assessee’s claim of disallowance made u/s. 14A. If the Assessing Officer is not satisfied with the correctness of the claim made by assessee, the Assessing Officer after recording objective satisfaction should have invoked the provisions of Rule 8D. In the instant case the Assessing Officer has not deliberated in his order as to what was the disallowance made by assessee, and as to why the disallowance made by assessee is incorrect. The Assessing Officer directly proceeded on to compute disallowance under Rule 8D without even taking note of suo-moto disallowance made by the assessee. 9. In First Appellate Proceedings the assessee raised the objections before Commissioner of Income Tax (Appeals) qua non-compliance of provisions of sub-section (2) of section 14A. The Commissioner of Income Tax (Appeals) rejected the contentions of assessee by observing as under :

“5.7. …………..The fact that the appellant had considered certain amount as disallowable does not come out from the appellant’s submissions reproduced in the asst order. It appears from the asst order that before the AO the appellant assessee had claimed that no expenditure was incurred to earn the dividend income. The AO has discussed the issue of applicability of Rule 8D in great detail in his order. Thus the satisfaction of the AO regarding applying Rule 8D is there.”

To support his reasoning, the Commissioner of Income Tax (Appeals) placed reliance on the decision of Pune Bench of Tribunal in the 7 ITA Nos. 327 to 330/PUN/2016, A.Ys. 2008-09 to 2011-12 case of Lap Finance & Consultancy Pvt. Ltd. in ITA Nos. 1522 to 1525/PN/2013 decided on 06-11-2015.

10. We find that the Commissioner of Income Tax (Appeals) has erred in coming to conclusion that the Assessing Officer has recorded satisfaction regarding applying Rule 8D. We further observe that reliance placed by the Commissioner of Income Tax (Appeals) on the decision of Co-ordinate Bench of the Tribunal in the case of Lap Finance & Consultancy Pvt. Ltd. (supra) is misplaced, as the facts of aforesaid case are distinguishable. In the said case, the assessee had not made any self disallowance of expenditure against exempt income earned. The assessee was given opportunity to explain the reasons.

11. A perusal of assessment order reveals that the Assessing Officer at the outset asked the assessee to furnish explanation as to why proportionate amount of interest expenditure should not be disallowed under Rule 8D r.w. section 14A of the Act, instead of first examining the suo-moto disallowance made by assessee and seeking explanation from the assessee the manner of computation of such disallowance. The Assessing Officer proceeded on the premise as if disallowance u/s. 14A r.w. Rule 8D is automatic irrespective of the genuineness of claim made by assessee.

12. The Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs. Ultra Tech Cement Ltd. (supra) held that the Assessing Officer is required to record objective satisfaction for making disallowance of expenditure u/s. 14A. The relevant extract of the findings of Hon’ble High Court reads as under :

“5. It is undisputed position before us that for the subject assessment year. r. 8D of the Rules would be applicable in view of the decision of this 8 ITA Nos. 327 to 330/PUN/2016, A.Ys. 2008-09 to 2011-12 Court in Godrej &. Boyce Mfg. Co. Ltd. vs. Dy. CIT (2010) 234 CTR (Born) 1: (2010) 43 DTR (Bom) 177: (2010) 328 ITR 81 (Bom). However, we further note that the non-satisfaction of the AO with regard to the disallowance of expenditure done by the respondent-assessee has to be an objective satisfaction which entails recording of reasons as held by this Court in Godrej and Boyce (supra) in para 55 while recording summation of its conclusion as under: “

(ix) The satisfaction envisaged by sub-s. (2) of s. 14A is an objective satisfaction that has to be arrived at by the AO having regard to the accounts of the assessee. The safeguard introduced by sub-so (2) of s. 14A for a fair and reasonable exercise of power by the AO, conditioned as it is by the requirement of an objective satisfaction, must, therefore, be scrupulously observed. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the AO in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee:”

6. Thus no fault can be found with the impugned order of the Tribunal holding that the AO should show fallacies in the computation of disallowance done by the respondent-assessee. Thus, there is no reason to discard the disallowance done by the respondent-assessee.”

13. The Hon’ble Jurisdictional High Court in a recent decision in the case of Pr. Commissioner of Income Tax Vs. Reliance Capital Asset Management Ltd. reported as 86 com 200 has held that where Assessing Officer has not commented upon the correctness or otherwise of the assessee’s working of expenditure, formula prescribed in Rule 8D(2)(iii) could not have been applied to work out disallowance u/s. 14A.

14. Thus, in view of the facts of the case and the ratio laid down by Hon’ble Jurisdictional High Court, we are of considered view that the Assessing Officer has made disallowance u/s. 14 r.w. Rule 8D in violation of the provisions of sub-section (2) to section 14A. Hence, the disallowance made by Assessing Officer is not sustainable. Accordingly, ground Nos. 2 9 ITA Nos. 327 to 330/PUN/2016, A.Ys. 2008-09 to 2011-12 and 3 raised in the appeal by the assessee in all the assessment years under appeal are allowed.

15. The ld. AR of the assessee has stated at the Bar that he is not pressing ground No. 1 raised in the appeals for the impugned assessment years. Accordingly, the same is dismissed as not pressed.”

11. As the issue involved in the year under consideration as well as all the material facts relating thereto are similar to A.Ys.2008-09 to 2011-12, we respectfully follow the common order of the Tribunal dated 28.11.2017 (supra) deciding a similar issue in favour of the assessee for the said years by relying inter-alia, on the decision of the Hon’ble Jurisdictional High Court in the case of Commissioner of Income Tax Vs. Ultra Tech Cement Ltd. (supra) and delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) u/s 14A of the Act read with Rule 8D of the Rules. The appeal of assessee for A.Y. 2012-13 is accordingly allowed.

12. This leaves us with the appeal of assessee for A.Y. 2014-15 being ITA No.1999/PUN/2017 which involves a solitary issue relating to the disallowance made by the Assessing Officer and confirmed by ld. CIT(A) u/s 14A of the Act read with rule 8D of the Rules which is similar to the one involved in assessee’s appeal for A.Y. 2012-13, which has already been decided by us. Since all the material facts relating to the said issue as involved in A.Y. 2014-15 are similar to A.Y. 2012-13, we follow the conclusion drawn by us in A.Y. 2012-13 and delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(A) u/s 14A of the Act read with rule 8D of the Rules. The appeal of assessee for A.Y. 2014-15 is accordingly allowed.

13. In the result, appeal of Revenue for A.Y. 2012-13 is dismissed while the appeals of assessee for A.Ys. 2012-13 and 2014-15 are allowed.

Order pronounced in the open Court on 2^nd December, 2020