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Income Tax Appellate Tribunal, PANAJI
Before: SHRI RAVISH SOOD & SHRI JAMLAPPA D BATTULL
आदेश / ORDER
PER RAVISH SOOD, JM: The captioned appeals filed by the assessee are directed against the order passed by the CIT(Appeals), Panaji-1, dated 18.10.2017, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income-tax Act, 1961 (for short ‘the Act’), dated 26.03.2013 for assessment year(s) 2010-11 & 2012-13. As common issues are involved in the captioned appeals, therefore, the same are being taken up and disposed off together by way of a consolidated order. We shall first take up the assessee’s appeal for assessment year 2010-11, wherein the impugned order has been assailed before us on the following grounds :
“1. The learned CIT erred in upholding the action of the AO making disallowance u/s.14A read with rule 8D(2)(iii) of Rs.11,59,010/- ( Ref. Para 3.2 of Assessment order). 2. The learned CIT erred in holding that appellant’s submissions that no indirect expenditure attributable to investments was charged to profit and loss A/c was not based upon “tangible evidence” merely on the grounds that separate accounts were not maintained in regard to investments. 3. The learned CIT despite holding that the investment decisions are complex in nature and the decision as to where to invest, whether to continue the investment or to switch over
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to any other type of investment has to be at the highest levels, failed to appreciate that these decisions were in fact taken by the partners of the firm and entailed not debit to the profit and loss account of the firm. 4. For these and such other reasons that may be urged at the time of hearing it is prayed that the disallowances be set aside in entirety and the order of CIT(Appeals) be modified accordingly. 5. The appellant prays leave to add, to alter and amend any of the above grounds of appeal.”
Controversy involved in the present appeal hinges around the disallowance made by the Assessing Officer u/s.14A r.w Rule 8D(2)(iii) of Rs.11,59,010/-. During the course of the assessment proceedings, it was observed by the A.O that though the assessee firm during the year under consideration was in receipt of exempt dividend income of Rs.57,28,693.09/-, however, no disallowance of any part of expenditure was offered by it on a suo-motto basis u/s.14A of the Act. Being of the view that part of the administrative expenditure incurred by the assessee would be attributable to purchase of exempt income yielding investments and, receipt of dividend income arising therefrom, the Assessing Officer worked out the disallowance u/s. 14A of the Act by triggering the mechanism contemplated under rule 8D(2)(iii) of the Income Tax Rules, 1963 at Rs.11,59,010/-.
M/s. Ahilibai Sardessai Vs. ACIT, Circle 1(1) 4 ITA Nos.378 & 379/PAN/2017
Aggrieved, the assessee assailed the assessment order before the CIT(Appeals). During the course of the appellate proceedings, the assessee, inter alia, assailed the validity of the disallowance that was worked out by the Assessing Officer u/s.14A r.w Rule 8D(2)(iii) on the ground that the Assessing Officer had failed to record his satisfaction as to why the assessee’s claim that no part of the administrative expenditure was attributable to earning of the exempt income was not to be accepted. Also, it was the claim of the assessee that the Assessing Officer had failed to establish that there was any nexus between its exempt dividend income and the expenditure incurred. However, the CIT(Appeals) was not persuaded to subscribe to the aforesaid contentions of the assessee. Observing that the Assessing Officer had only after recording his satisfaction determined the disallowance u/s.14A of the Act, the CIT (Appeals) rejected the claim of the assessee that the Assessing Officer had without dislodging the claim of the assessee that no part of the administrative expenditure was relatable to the earning of its exempt dividend income had wrongly assumed jurisdiction and worked out the disallowance under
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the aforesaid statutory provision. As regards the claim of the assessee that the Assessing Officer had failed to establish any nexus between its exempt dividend income and the expenditure incurred, the CIT(Appeals) was of the view as the assessee had not maintained any separate account as regards its exempt income, therefore, no infirmity on the said count could be related to the order of the Assessing Officer. Accordingly, the CIT(Appeals) backed by his aforesaid observations upheld the disallowance of Rs. 11,59,090/- that was determined by the Assessing Officer u/s.14A r.w Rule 8D (2)(iii).
The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.
Admittedly, the assessee firm which during the year under consideration was in receipt of exempt dividend income of Rs.57,28,693.09, had however not attributed and therein disallowed any part of expenditure on a suo-motto basis in its return of income. On perusal of the records, we find that it is the claim of the assessee that as no part of the expenditure was attributable towards earning of
M/s. Ahilibai Sardessai Vs. ACIT, Circle 1(1) 6 ITA Nos.378 & 379/PAN/2017
the exempt dividend income, therefore, no disallowance was offered u/s.14A of the Act. On the contrary, the Assessing Officer being of the view that a part of the administrative expenditure incurred by the assessee and, claimed by it as deduction was attributable to making of investments in the exempt income yielding shares and receipt of dividend income arising therefrom, thus, triggered the mechanism contemplated under Rule 8D(2)(iii) and worked out a disallowance of Rs. 11,59,010/- u/s.14A of the Act. At this stage, we may herein observe, that the Assessing Officer had supported his aforesaid conviction, on the ground, that the assessee in the course of the assessment proceedings had itself placed on record the working of disallowance u/s.14A r.w Rule 8D.
As observed by us hereinabove, the solitary contention of the assessee before us is that the Assessing Officer had without recording his dissatisfaction as regards the assessee’s claim that no part of the expenditure was attributable to earning of the exempt dividend income, had, therein, dispensing with the said statutory obligation wrongly assumed jurisdiction and in a mechanical manner determined
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the disallowance u/s.14A of the Act by triggering the mechanism contemplated in Rule 8D(2)(iii). On a perusal of the assessment order, we find, that the Assessing Officer had without dislodging the assessee’s claim that no part of the expenditure was incurred either towards purchase of exempt income yielding investment, or, earning of dividend income, had in a most mechanical manner worked out the disallowance u/s. 14A r.w Rule 8D (2)(iii) at Rs.11,59,010/-. Admittedly, as stated by the Ld. Authorized Representative (for short ‘AR’) for the assessee, and rightly so, there is no whisper in the body of the assessment order qua the satisfaction on the part of the Assessing Officer that as to why the assessee’s claim that no part of the expenditure was attributable to earning of exempt dividend income was not to be accepted. On appeal, the CIT(Appeals) being of the view that the Assessing Officer had after duly recording his satisfaction worked out the disallowance u/s.14A of the Act, thus, rejected the aforesaid claim of the assessee. Also, the claim of the assessee that the Assessing Officer had failed to establish nexus between the exempt dividend income and the expenditure incurred did not find favour with
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the CIT(Appeals), as he was of the view that as the assessee had failed to maintain separate account as mandated in section 14A(2)/(3) of the Act, therefore, no burden was cast upon the Assessing Officer to establish the aforesaid nexus.
After having given thoughtful consideration to the aforesaid issue in hand, we are unable to persuade ourselves to subscribe the view taken by lower authorities. In our considered view, the issue as to whether or not it is obligatory for the Assessing Officer to record his satisfaction as to why the claim of the assessee in respect of expenses incurred for earning of exempt income was not to be accepted, is no more res-integra and had been settled by the Hon'ble’ Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. PCIT and Anr. (2017) 394 ITR 449 (SC). The Hon'ble Apex Court in its aforesaid decision, had observed, that it is obligatory on the part of the A.O to record his satisfaction that having regard to the accounts of the assessee, as placed before him, it was not possible to generate the reasonable satisfaction with regard to the correctness of the claim of the assessee. It was observed by the Hon'ble Apex Court that it was
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only after the A.O had recorded his dissatisfaction as regards the correctness of the claim of the assessee that the provisions of Sec.14A(2) and (3) r.w Rule 8D could be invoked. For the sake of clarity the relevant observations of the Hon’ble Apex Court are culled out as under: “37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D 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 8D 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 Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.” Also a similar view had been taken by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs CIT (2018) 402 ITR 640 (SC). In the case before us, it is a matter of fact borne from the record that there is a failure on the part of the A.O, to record his dissatisfaction, that having regard to the accounts of the assessee, as were placed before him, it was not possible on his part to generate the requisite satisfaction with regard to the correctness of the assessee‘s claim that
M/s. Ahilibai Sardessai Vs. ACIT, Circle 1(1) 10 ITA Nos.378 & 379/PAN/2017
no part of expenditure pertaining to its business could be attributed to earning of exempt dividend income. As observed by us hereinabove, the state of affairs qua the dissatisfaction as regards the claim of the assessee that no part of the expenses incurred by it with respect to its regular business could be attributed to its activity of making investments in shares and earning dividend thereform, more or less remained the same before the CIT(Appeals). In case the A.O, or, the CIT(A) in exercise of his powers which are coterminous with that of an A.O, sought to disallow the claim of the assessee that no expenses could be attributed to earning of the exempt dividend income by him, then, there was an innate obligation cast upon them to have recorded the requisite satisfaction that having regard to the accounts of the assessee, as placed before them, it was not possible to generate the requisite satisfaction with regards to the correctness of the aforesaid claim of the assessee. At this stage, we may herein observe, that the Hon'ble High Court of Bombay in the case of CIT v. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) (2020) 429 ITR 358, referring to the facts involved in the case before it, had observed, that though the
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Assessing Officer had discussed the provisions of section 14A(1) of the Act, but had not justified how the expenditure which the assessee had incurred during the relevant year related to the income not forming part of its total income and, had straightaway applied rule 8D, then, in the absence of proximate relationship between the expenditure and the exempt income the disallowance made by him was rightly vacated by the Tribunal.
Accordingly, in the backdrop of our aforesaid observations, we are of the considered view, that as there is a clear lapse on the part of the lower authorities in validly assuming jurisdiction for dislodging the assessee’s claim that no disallowance u/s.14A of the Act was called for in its hands, therefore, the disallowance of Rs. 11,59,010/- worked out by the Assessing Officer u/s 14A r.w Rule 8D(2)(iii), which thereafter, had been sustained by the CIT(Appeals) is liable to be vacated. We, thus, set-aside the order of the CIT(A) and vacate the disallowance of Rs. 22,59,010/- made by the A.O u/s 14A r.w Rule 8D(2)(iii). Thus, the Grounds of appeal No.(s) 1 to 4 are allowed in terms of our aforesaid observations.
M/s. Ahilibai Sardessai Vs. ACIT, Circle 1(1) 12 ITA Nos.378 & 379/PAN/2017
Ground No. 5 being general in nature, is dismissed as not pressed.
In the result, appeal of the assessee in ITA No.378/PAN/2017 for the assessment year 2010-11 is allowed in terms of our aforesaid observations.
ITA No.379/PAN/2017 A.Y.2012-13
As the facts and the issues involved in the present appeal remains the same as were there before us in the asssesee’s appeal for assessment year 2010-11 in ITA No.378/PAN/2017, therefore, our order therein passed while disposing off the appeal of the assessee for assessment year 2010-11 shall apply mutatis-mutandis for disposing off the present appeal in ITA No.379/PAN/2017 for the assessment year 2012-13.
In the result, appeal of the assessee in ITA No.379/PAN/2017 for the assessment year 2012-13 is allowed in terms of our aforesaid observations.
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In the result, both the appeals of the assessee are allowed in terms of our aforesaid observations.
Order pronounced in Open Court on 31st day of March, 2022.
Sd/- Sd/- JAMLAPPA D BATTULL RAVISH SOOD (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) रायपुर/ RAIPUR ; �दनांक / Dated : 31st March, 2022 *SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT(Appeals), Panaji-1 4. The Pr. CIT, Panaji 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, पणजी / DR, ITAT, Panaji. गाड� फ़ाइल / Guard File. 6. आदेशानुसार / BY ORDER, // True Copy // �नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, रायपुर / ITAT, Raipur.
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Date 1 Draft dictated on 22.02.2022 Sr.PS/PS 2 Draft placed before author 22.02.2022 Sr.PS/PS 3 Draft proposed and placed JM/AM before the second Member 4 Draft discussed/approved by AM/JM second Member 5 Approved draft comes to the Sr.PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr.PS/PS 7 Date of uploading of order Sr.PS/PS 8 File sent to Bench Clerk Sr.PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R 11 Date of dispatch of order