ITAT Orders Fresh Section 14A Disallowance computation for Lack of AO Satisfaction

ITAT: Upholds direction to recompute Sec. 14A disallowance sans AO’s satisfaction; Confirms capital-subsidy inclusion u/s 115JB

In a consolidated decision for Assessment Years 2013-14 and 2014-15, the Tribunal addressed multiple tax issues concerning a cement manufacturer. The key disputes included disallowance under Section 14A read with Rule 8D, additional depreciation under Section 32(1)(iia), treatment of provisions for bad and doubtful debts, characterization of government subsidies, and set-off of capital losses upon amalgamation. The Tribunal held that disallowance under Rule 8D(2)(ii) was unwarranted as sufficient interest-free own funds were available, and Rule 8D(2)(iii) could not be invoked without recording requisite satisfaction. Additional depreciation could be claimed beyond the year of installation. Provisions for bad debts were treated as actual write-offs, qualifying for deduction. Subsidies promoting industrial growth were capital receipts, though included under MAT. Finally, capital losses from an amalgamating subsidiary were allowed for set-off. Several grounds not pressed by the assessee were dismissed. The Tribunal partly allowed both Revenue and assessee appeals, emphasizing statutory compliance and purpose-based interpretation.

FACTS:

• The present batch of appeals and cross objections rise out of a common order dated 29.06.2017 passed by the Commissioner of Income Tax (Appeals)–29, New Delhi, relating to the Assessment Years 2013-14 and 2014-15. The appeals were filed by both the Revenue and the assessee, M/s Dalmia Cement Bharat Ltd., a company engaged in the manufacture of cement. Since the issues involved in both the assessment years were common, the appeals and cross-objections were heard together and disposed of by a consolidated order.
• For Assessment Year 2013-14, the assessee filed its return of income declaring inter alia exempt dividend income of Rs.19.11 crores under Sections 10(34) and 10(35) of the Income Tax Act, 1961. While computing its total income, the assessee, “M/s Dalmia Cement Bharat Ltd.” made a suo-motu disallowance of Rs.0.50 crores under Section 14A towards expenditure allegedly incurred for earning such exempt income.
• The Assessing Officer, however, was not satisfied with the correctness of the said disallowance and invoked the provisions of Rule 8D, thereby making an additional disallowance of Rs.12.86 crores, comprising Rs.5.99 crores under Rule 8D(2)(ii) towards proportionate interest and Rs.7.37 crores under Rule 8D(2)(iii) towards administrative expenditure. On appeal, the Commissioner (Appeals), by order dated 29.06.2017, partly allowed the appeal by directing the Assessing Officer to recompute the disallowance under Rule 8D(2)(iii) after excluding strategic investments, while sustaining the disallowance under Rule 8D(2)(ii). The facts for Assessment Year 2014-15 were stated to be identical.
• The assessee claimed additional depreciation under Section 32(1)(iia) in respect of eligible plant and machinery acquired on or after 01.04.2010 and installed prior to 31.03.2012, amounting to Rs.14,37,34,124/- for Assessment Year 2013-14. The Assessing Officer disallowed the claim on the ground that additional depreciation is allowable only in the year in which the asset is first put to use. The Commissioner (Appeals) allowed the claim holding that the statute does not restrict the allowance of additional depreciation only to the year of installation.
• The assessee had also debited Rs.1.34 crores towards provision for bad and doubtful debts in its Profit and Loss Account and reduced the same from sundry debtors on the asset side of the balance sheet. The Assessing Officer treated the same as a mere provision and disallowed the claim both under the normal provisions of the Act as well as while computing book profits under Section 115JB. The Commissioner (Appeals) deleted the disallowance holding that the accounting treatment amounted to actual write-off.
• The assessee had set up a new integrated cement plant of 2.5 million Tonnes Per Annum (“MTPA”) capacity at Chhinnakomeria, Kadapa District, Andhra Pradesh, with a capital investment of approximately Rs.580 crores, which was commissioned on 21.03.2009. Under the Industrial Investment Promotion Policy, 2005–2010 of the Government of Andhra Pradesh, the project qualified as a Mega Project and became eligible for fiscal incentives.
• During the relevant previous year, the assessee received Sales Tax Subsidy of Rs.9.36 crores, Power Subsidy of Rs.11.61 crores, and Fuel Surcharge Adjustment Subsidy of Rs.3.17 crores, aggregating to Rs.24,15,51,365/-. The assessee treated the said subsidies as capital receipts and excluded them both under normal provisions and while computing book profits under Section 115JB. The Assessing Officer treated the subsidies as revenue receipts and included the same in book profits. The Commissioner (Appeals) held the subsidies to be capital receipts under normal provisions but confirmed their inclusion under MAT.
• A further issue arose in respect of the amalgamation of Dalmia Cement Ventures Limited, a wholly owned subsidiary of the assessee, with the assessee company with effect from 01.04.2012, pursuant to a scheme of amalgamation approved by the Hon’ble High Court on 13.11.2013.
• The amalgamating company had brought forward long-term capital loss of Rs.3,36,45,844/, out of which the assessee claimed set-off of Rs.2,05,96,629/- in Assessment Year 2013-14. The Assessing Officer disallowed the claim on the ground that Section 72A permits carry forward only of business losses and depreciation. The Commissioner (Appeals) allowed the claim holding that, upon amalgamation, all assets and liabilities including capital losses stood transferred to the assessee.
• At the time of hearing before the Hon’ble Tribunal, the assessee did not press certain grounds relating to leave encashment and education cess, which were accordingly dismissed. The Hon’ble Tribunal thereafter adjudicated the remaining issues on merits and disposed of the appeals and cross-objections by order dated 31.12.2025, partly allowing the appeals of both the Revenue and the assessee and dismissing the cross-objections as infructuous.

ISSUES:

• Whether disallowance under section 14A read with Rule 8D was justified despite appellant had sufficient own funds out of which investments had been made and whether the Assessing Officer could invoke Rule 8D(2)(iii) and make disallowance under Section 14A?
• Whether the Assessing Officer was justified in invoking Rule 8D without recording the requisite satisfaction as to the incorrectness of the assessee’s claim regarding expenditure incurred in relation to exempt income.
• Whether additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961 can be allowed in years subsequent to the year of installation and first use of the eligible assets, or whether such benefit is restricted only to the initial year.
• Whether the provision for bad and doubtful debts, debited to the Profit and Loss Account and simultaneously reduced from sundry debtors on the asset side of the balance sheet, constitutes an actual write-off, thereby qualifying for deduction under the normal provisions of the Act.
• Whether such provision for bad and doubtful debts is liable to be added back while computing book profits under Section 115JB, on the ground that it represents an unascertained liability.
• Whether the sales tax subsidy, power subsidy and fuel surcharge adjustment subsidy received by the assessee under the Industrial Investment Promotion Policy are capital receipts or revenue receipts under the normal provisions of the Act.
• Whether the said subsidies, even if held to be capital receipts, are liable to be included in the computation of book profits under Section 115JB in the absence of any specific exclusion under the Explanation to the said section.

OBSERVATION:

• The Hon’ble tribunal on the issue of disallowance u/s 8D noted that the assessee had placed on record detailed material to demonstrate availability of sufficient interest-free own funds. It was observed that as on 31.03.2013, the assessee’s share capital and free reserves amounted to Rs.2,798 crores, whereas the total investments stood at Rs.1,752 crores.
  • Relying upon the judgment of the Hon’ble Supreme Court in South Indian Bank Ltd. v. CIT ((2021) 438 ITR 1 SC), the Hon’ble Tribunal held that where interest-free own funds exceed the value of investments, a presumption arises that the investments are made out of such own funds and no disallowance under Section 14A read with Rule 8D(2)(ii) is warranted. Accordingly, the disallowance of Rs.5.99 crores under Rule 8D(2)(ii) was directed to be deleted.
  • As regards Rule 8D(2)(iii), the Hon’ble Tribunal noted that the Assessing Officer had failed to record the mandatory satisfaction as required under Section 14A before rejecting the assessee’s computation. Reliance was placed on Godrej & Boyce Manufacturing Co. Ltd. v. DCIT ((2017) 394 ITR 449 (SC)), wherein it was held that recording of satisfaction is a sine qua non for invoking Rule 8D. The Hon’ble Tribunal also referred to its own earlier decision in Hindustan Times Ltd., (ITA No.1629/Del/2012) dated 31.01.2024. On this basis, the direction of the Commissioner (Appeals) to recompute disallowance under Rule 8D(2)(iii) was upheld and the Revenue’s ground was dismissed. The same findings were held applicable mutatis mutandis to AY 2014-15.
• The Hon’ble Tribunal recorded that the assessee had not pressed the grounds relating to disallowance of leave encashment under the normal provisions for both assessment years. Accordingly, those grounds were dismissed. However, for Assessment Year 2014-15, the Revenue had challenged the deletion of addition under Section 115JB. The Hon’ble Tribunal observed that the liability towards leave encashment was an unascertained liability and therefore fell within the ambit of Explanation 1(f) to Section 115JB. In view of the statutory provision and the withdrawal of the assessee’s challenge, the Hon’ble Tribunal allowed the Revenue’s ground on this limited aspect.
• The Hon’ble Tribunal observed that the assessee had set up a new integrated cement plant in Kadapa District, Andhra Pradesh, with a capital investment of Rs.580 crores, which was commissioned on 21.03.2009. The Assessing Officer treated the subsidies as revenue receipts on the ground that they were granted after commencement of production and were operational in nature. The Commissioner (Appeals), however, held the subsidies to be capital receipts under the normal provisions of the Act.
• The Hon’ble Tribunal upheld the findings of the Commissioner (Appeals), observing that the nature of subsidy has to be determined by applying the “purpose test”. Reliance was placed on the judgment of the Hon’ble Supreme Court in CIT v. Ponni Sugars & Chemicals Ltd. (2008) (306 ITR 392 (SC)), wherein it was held that the purpose for which the subsidy is given is decisive and not the timing or manner of its disbursement. The Hon’ble Tribunal noted that the primary object of the subsidy scheme was to promote industrial growth, generate employment and encourage investment. Accordingly, the Revenue’s ground on this issue was dismissed.
• The Hon’ble Tribunal recorded that the assessee did not press the ground relating to exclusion of profit on sale of fixed assets and investments. Accordingly, the ground stood dismissed without examination on merits.
• The Hon’ble Tribunal observed that the assessee had claimed additional depreciation on eligible plant and machinery acquired after 01.04.2010 but installed prior to 31.03.2012. The Assessing Officer disallowed the claim holding that additional depreciation is allowable only in the year of installation.
• The Hon’ble Tribunal upheld the order of the Commissioner (Appeals), who had relied upon the decision of the Hon’ble Kolkata Tribunal in DCIT v. Gloster Jute Mills Ltd. ((2017) 88 taxmann.com 738 (Kol-Trib.)). It was observed that Section 32(1)(iia), as amended with effect from 01.04.2006, does not restrict the allowance of additional depreciation only to the first year of installation. The Hon’ble Tribunal found no infirmity in the order of the Commissioner (Appeals) and dismissed the Revenue’s ground for both assessment years.
  • The Hon’ble Tribunal observed that the assessee had debited Rs.1.34 crores towards provision for bad and doubtful debts and had simultaneously reduced the same from sundry debtors on the asset side of the balance sheet. The Assessing Officer disallowed the claim treating it as a mere provision. The Hon’ble Tribunal noted that the Commissioner (Appeals) had relied upon the judgment of the Hon’ble Supreme Court in Vijaya Bank v. CIT ((2010) 323 ITR 166 (SC)), wherein it was held that when the amount of bad debt is reduced from the debtors in the balance sheet, it amounts to actual write-off.
• Further reliance was placed on the Hon’ble Tribunal’s decision in Religare Finvest Ltd. v. DCIT, ITA (No.4796/Del/2017) dated 13.07.2023 and ACIT v. Delhi State Industrial & Infrastructure Development Corporation Ltd., (ITA No.7265/Del/2019) dated 26.09.2023. Following these precedents, the Hon’ble Tribunal confirmed the deletion of disallowance under both normal provisions and MAT and dismissed the Revenue’s ground.
• The Hon’ble Tribunal observed that Dalmia Cement Ventures Ltd., a wholly owned subsidiary of the assessee, was amalgamated with the assessee with effect from 01.04.2012 pursuant to a scheme approved by the Hon’ble High Court on 13.11.2013. The amalgamating company had brought forward long-term capital loss of Rs.3,36,45,844/-, out of which Rs.2,05,96,629/- was claimed as set-off by the assessee.
• The Assessing Officer disallowed the claim relying on Section 72A. The Hon’ble Tribunal upheld the order of the Commissioner (Appeals), observing that under the approved scheme of amalgamation, all assets and liabilities stood transferred to the assessee. Reliance was placed on CIT v. T. Veerabhadra Rao ((1985) 155 ITR 152 (SC)) and the decision of the Hon’ble Pune Tribunal in ACIT v. Capgemini Technology Services Ltd., (ITA No.1857/PUN/2017) dated 30.08.2022. The Hon’ble Tribunal found no infirmity in the order of the Commissioner (Appeals) and dismissed the Revenue’s ground.