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Income Tax Appellate Tribunal, ‘’C’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned Cross appeals have been filed at the instance of the Revenue and Assessee against the order of the Commissioner of Income Tax (Appeals)- 2, Ahmedabad [Ld.CIT(A) in short] dated 28/09/2015 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") dated 30/12/2014 relevant to Assessment Year (A.Y) 2012-13.
& 3338/AHD/2015 Asstt. Years 2012-13 2
First, we take up the appeal filed by the assessee bearing ITA 3075/AHD/2013. The assessee has raised the following grounds of appeal:
1. Ld. CIT (A) erred in law and on facts in confirming disallowance of Rs. 8, 04. 294/- u/s 14A of the Act by invoking rule 8D2(iii) ignoring fact that appellant has sufficient interest free ftinds and not incurred any expenditure for earning tax free income. Ld. CIT (A) ought to have considered submission of appellant and delete the disallowance. It be so held now.
2. Ld. CIT (A) erred in law and on facts in confirming action of AO to increase book profit u/s 115JB of the Act by disallowance of Rs, 8,04,294/- u/s 14A of the Act. Ld. CIT (A) ought to have deleted same considering various judicial pronouncement. It be so held now.
3. Levy of interest u/s 234A, 234B & 234D of the Act is unjustified.
4. Initiation of penalty proceedings u/s 271(1 )(c) of the Act is unjustified. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
The 1st issue raised by the assessee is that the Ld.CIT (A) erred in making the disallowance of Rs. 8,04,294/- under section 14A of the Act read with rule 8D(2)(iii) of Income Tax Rule.
Briefly stated facts are that the assessee is a limited company and engaged in the activity of manufacturing & trading of machinery, machinery parts, and drink Concentrates. The assessee in the year under consideration has received dividend and long-term capital gain amounting to Rs. 34,13,517/- and Rs. 47,09,778/- respectively. The assessee claimed an exemption under section 10(34) and 10(38) of the Act, with respect to such incomes. The assessee did not claim any expenditure against such impugned income. However, the AO was of the view that the assessee must have incurred certain expenses for earning such exempted income. Therefore he invoked the provisions of section 14A of the Act read with rule 8D of income tax rule and made the disallowance of Rs. 8,04,294 being 0.5% of the Page 2 of 10 & 3338/AHD/2015 Asstt. Years 2012-13 3 average value of the investment on account of administrative expenses. As a result, the AO added the above-mentioned amount to the total income of the assessee.
The aggrieved assessee preferred an appeal to the Ld.CIT (A) who confirmed the order of the AO.
Being aggrieved by the order of the Ld.CIT (A) the assessee is in appeal before us.
The Ld. AR filed before us a paper book running from pages 1 to 75 and submitted that the investments which have yielded the exempted income should only be considered for the purpose of the disallowance under rule 8D (2)(iii) of the income tax rule.
On the other hand, the Ld.DR vehemently argued based on findings culled by AO and subsequently upheld by the CIT(A) in their respective orders.
We have heard the rival contentions of both the parties and perused the materials available on record. The question in the instant case arises for the adjudication whether the investments which have yielded the exempted income in the year under consideration should only be considered for the purpose of the disallowance under rule 8D (2)(iii) of income tax rule. Regarding this we find support and guidance from the order of Calcutta Tribunal in the case of REI Agro Limited Vs. DCIT reported in 144 ITD 141 wherein it was held as under: & 3338/AHD/2015 Asstt. Years 2012-13 4
“8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case.”
6.1 We have also considered a similar judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415; passed recently wherein it was held that the disallowances u/s 14A of the Act read with rule 8D of Income Tax Rules for the administrative expenses will be determined considering only those investments which yielded exempt income during the year.
6.2 In view of the above, we direct the Assessing Officer to compute the disallowance as per Rule 8D by taking into consideration only those shares/investments, which have yielded exempted income in the year under consideration. Hence the ground of appeal of the assessee is partly allowed.
The second issue raised by the assessee in ground no. 2 is that the Ld. CIT(A) erred in making the addition of the disallowances made u/s 14A of the Act while computing book profit u/s 115JB of the Act.
The AO during the assessment proceedings was of the view that the expenditure incurred in relation to the exempted income needs to be disallowed as per clause ‘’f’’ of explanation 1 to section 115JB of the Act. Therefore, the AO has made additions of the expenses which were disallowed & 3338/AHD/2015 Asstt. Years 2012-13 5 under section 14A read with Rule 8D for Rs. 8,04,294.00 while computing book profits under MAT provisions.
The aggrieved assessee preferred an appeal to Ld. CIT(A) who has confirmed the order of the AO.
Being aggrieved by the order of the Ld. CIT(A) assessee is in appeal before us.
The Ld. AR, submitted before us that the amount disallowed under normal computation of income in relation to exempted income cannot be imported while determining the book profit u/s 115JB of the Act.
On the other hand Ld. DR submitted that the disallowance needs to be made as per clause ‘’f’’ of explanation 1 to section 115JB of the Act in relation to exempted income. Accordingly, the Ld. DR vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. It is settled law that the amount of disallowance made by the AO u/s 14A of the Act cannot be imported while determining the profit u/s 115JB of the Act. In this regard, we rely on the judgment cited by the Ld. AR for the assessee in the case of Alembic Ltd. in Tax Appeal No.1249/2014.
11.1 We also note that in the recent judgment of Special Bench of Hon’ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A of the Act r.w.r. 8D cannot be the subject matter of disallowances while determining & 3338/AHD/2015 Asstt. Years 2012-13 6 the book profit u/s 115JB of the Act. The relevant portion of the said order is reproduced below: “In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962.”
11.2 The ratio laid down by the Hon’ble Tribunal is squarely applicable to the present facts of the case. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot be applied while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act.
11.3 However, in our considered view the disallowance needs to be made as per Clause (f) to Section 115JB of the Act independently. The judgment of Hon’ble Gujarat High Court relied on by the Ld AR in the case of Alembic Ltd. (supra), does not restrict the disallowance provided under clause (f) u/s 115JB of the Act.
11.4 Thus it is clear that the disallowance needs to be made in terms of the provisions of clause (f) to section 115JB of the Act while determining the book profit. In holding so, we draw our support from the judgment of Hon’ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance about exempted income needs to be made as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- “We find computation of the amount of expenditure relatable to exempted income of the assessee must be made since the assessee has not claimed such expenditure to be Nil. Such computation must be made by applying clause (f) of Explanation 1 & 3338/AHD/2015 Asstt. Years 2012-13 7 under section 115JB of the Act. We remand the matter for such computation to be made by the learned Tribunal. We accept the submission of Mr. Khaitan, learned Senior Advocate that the provision of section 115JB in the matter of computation is a complete code in itself and resort need not and cannot be made to section 14A of the Act.” Given above, we hold that the disallowances made under the provisions of Sec. 14A r.w.r. 8D of the income tax Rules, cannot be applied to the provision of Sec. 115JB of the Act as per the direction of the Hon'ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. (Supra).
11.5 Now the question arises to determine the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. In this regard, we also note that there is no mechanism given under the clause (f) to Explanation-1 of Sec. 115JB of the Act to workout/determine the disallowance. Therefore in the given facts &circumstances, we feel that ad- hoc disallowance will service the justice to the Revenue and assessee. We, therefore, are directing for the ad-hoc disallowance to avoid the multiple proceedings and unnecessary litigation. Thus we direct the AO to make the disallowance at 1% of the exempted income as discussed above under clause (f) to Explanation-1 of Sec. 115JB of the Act. We also find to bring this fact on record that we have restored other cases involving identical issues to the file of AO for making the disallowance as per the clause (f) to Explanation-1 of Sec. 115JB of the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the & 3338/AHD/2015 Asstt. Years 2012-13 8 exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed.
11.6 The issue raised by the assessee in ground No. 3 is consequential and the issue raised in ground No. 4 is premature to decide. Therefore we dismiss both the grounds of appeal raised by the assessee.
In the result the appeal filed by the assessee is partly allowed.
Now Coming to ITA 3338/AHD/2015 for A.Y. 2012-13. The Revenue has raised the following grounds of appeal:
The Ld.CIT(A) has erred in law and on facts in deleting the additions made by the AO on account of liquidated damages amounting to Rs.10,21,707/-, without properly appreciating the facts of the case and the material brought on record.
The Ld.CIT(A) has erred in law and on facts in deleting the disallowance made u/s.40(a)(i) of the Act of Rs.23,28,587/-, without properly appreciating the facts of the case and the material brought on record.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 4. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.
At the outset, after going through the grounds of appeal and the impugned orders of the Revenue authorities being AO and Ld. CIT(A) concerned, a query was raised by the Bench as to applicability and maintainability of the appeal filed by the Revenue in view of recent CBDT Circular No.3/2018 dated 11.7.2018 restricting the filing of the appeal by the & 3338/AHD/2015 Asstt. Years 2012-13 9 Revenue where the tax effect is below Rs. 20 lakhs, the Ld. DR did not dispute the same and submitted that the issue is left to the Tribunal to be decided in accordance with law.
13. We find that the CBDT has issued Instructions bearing No. 3 of 2018 prohibiting its subordinate authorities from filing of the appeal to the Tribunal against the order of the CIT(A) where the tax effect by virtue of the relief given by the CIT(A) is less than Rs.20 lakhs. The instructions have been made applicable with retrospective effect, meaning thereby, these instructions are applicable on pending appeals also. In the present case, “tax effect” on total income assessed minus the tax that would have been chargeable had such total income been reduced by the amount of income being subject matter of appeal, is less than Rs.20 lakhs. Further, the case of the Revenue does not fall within the ambit of exceptions provided in the Circular. Thus, keeping in view the above CBDT circular and provisions of section 268A of the Income Tax Act, we are of the view that the present appeal of the Revenue deserves to be dismissed. Hence it is accordingly dismissed.
However, we find it important to note that in case on re-verification at the end of the AO it comes to the notice that the tax effect is more or Revenue’s case falls within the ambit of exceptions provided in the Circular, then the Department will be at liberty to approach the Tribunal and file an application to recall of this order. Such application should be filed within the time period prescribed in the Act. In view of the above, the appeal of the Revenue is dismissed due to the differential tax effect being lower than the prescribed amount.
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In the result, the appeal of the Revenue is dismissed.
In the combined result, the appeal filed by the assessee is partly allowed and the appeal filed by the Revenue is dismissed.
Order pronounced in the Court on 15/07/2019 at Ahmedabad.