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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Per Amarjit Singh (AM): The present appeal filed by the assessee is directed against the order passed by the Pr. CIT-6, Mumbai, which in turn arises from the order passed by the A.O u/s 143(3) of the Act for A.Y. 2017-18. The assessee has raised the following grounds before us:
“1. The learned Principal Commissioner of Income-tax (Pr. CIT) erred in passing an order u/s 263 and directing the Assessing Officer to modify the order dated 16/12/2019 passed u/s 143(3) of Income Tax Act, 1961. Your Appellants submit that the order of the Pr. CIT is illegal, bad in law and void and the same ought to be quashed.
ITA No.1134/Mum/2022 AY. 2017-18 2 M/s Bhupati Investments and Finance Pvt. Ltd. Vs. Pr.CIT-6
The Appellants submit that the order of the Assessing officer is not erroneous and is not prejudicial to the interest of the Revenue Your Appellants therefore submit that the order of the Pr. CIT be quashed
The Appellants had not received any notice for hearing proceedings u/s. 263. As a result, the Appellants being unaware about any such proceedings could not file any reply to the notice dated 03/03/2022 issued by the learned Pr. CIT. Your Appellants submit that they were not provided adequate opportunity of being heard and thus the order passed u/s. 263 is illegal, bad in law and void and the same ought to be quashed.
The learned Pr. CIT failed to appreciate the fact that the learned Assessing Officer has correctly considered the working of Disallowance u/s. 14A as per Rule 8D,
The learned Pr. CIT erred in holding that the Disallowance u/s. 14A accepted by the Assessing officer in the original Assessment order passed is not as per Rule 8D. The learned Pr. CIT further erred in holding that only those Investments which have earned exempt income during the year were considered while working out Disallowance u/s. 14A as per Rule 8D. Your Appellants submit that the Assessing officer has correctly accepted the Disallowance u/s 14A as per Rule 8D as worked by the Appellants. Your Appellants submit that the learned Pr. CIT is incorrect and the order passed us. 263 needs to be set aside.
Your Appellants further reserve the rights to add, amend or alter the aforesaid grounds of appeal as they may think fit by themselves or by their representatives.”
Fact in brief is that return of income declaring total income of Rs. nil was filed on 10.10.2017. The case was subject to scrutiny assessment and assessment u/s 143(3) of the was finalized on 16.12.2019 assessing the total income at Rs.nil under the normal provision of the Act and Rs.14,57,824/- u/s 115JB of the Act. The book profit was determined at Rs.14,53,824/- after making disallowance of Rs.15,03,383/- and Rs.9,53,542/- on account of profit on sale of investment /assets and disallowance u/s 14A of the Act r.w.rule 8D respectively. Subsequently, the ld. Pr.CIT on perusal of the assessment record observed that the claim of the assessee company regarding disallowance u/s 14A of the Act was allowed by the A.O without taking into account the provisions of Sec. 14A of the Act r.w.rule 8D and the instructions by the CBDT which were binding on the revenue. The ld. Pr.CIT was of the view that the method
ITA No.1134/Mum/2022 AY. 2017-18 3 M/s Bhupati Investments and Finance Pvt. Ltd. Vs. Pr.CIT-6 adopted by the assessee company for computing disallowance under Rule 8D(2)(iii) was not in accordance with the provision of Sec. 14A of the Act r.w.rule 8D rendering the assessment order liable for revision u/s 263 of the Act. The ld. Pr.CIT stated that notice u/s 263 of the Act was issued on 03.03.2022. However, the assessee had not made compliance. The ld. Pr.CIT stated that assessee company had made total disallowance of Rs.9,59,846/- u/s 14A of the Act r.w.Rule 8D, however, he observed that as per the audited balance sheet assessee company was having total non-current investment on Rs.44.70 crores as on 31.03.2017, the ld. Pr.CIT was of the view that all these investments were liable to general exempt income by way of long term capital gain. The ld. Pr.CIT also stated that CBDT vide its circular no. 5/2014 dated 11.02.2014 has clarified that disallowance related to the expenditure incurred to earn exempt income shall be made even where tax payer in a particular year had not earned any exempt income. Thereafter, after referring the provision of Sec. 14A in rule 8D the ld. Pr. CIT stated that the working of disallowance by the A.O u/s 14A of the Act was not in accordance with provision of the said section. The ld. Pr.CIT has further pointed out that assessee company had considered only those expenses incurred in relation to the investment which had yielded exempt income of Rs.67,38,970/- during the year under consideration. The ld. Pr.CIT has also referred explanation 2 to the Section 263 of the Act. Therefore, the ld. Pr.CIT held that the assessment order passed by the A.O was erroneous insofar as it is prejudicial to the interest of revenue and set aside the order on this issue to the file of the A.O.
During the course of appellate proceedings before us, the ld. Counsel contended that assessee had suo moto disallowed an amount of Rs.9,59,846/- u/s 14A while computing its total income as per normal
ITA No.1134/Mum/2022 AY. 2017-18 4 M/s Bhupati Investments and Finance Pvt. Ltd. Vs. Pr.CIT-6 provision of the Act. She further submitted that during the course of scrutiny assessment A.O has issued notice u/s 142(1) dated 06.08.2019 and called specific detail on the working of disallowance made u/s 14A of the Act. She further submitted that assessee had given the detailed working vide its reply dated 21.09.2019 and A.O had verified the disallowance computed in accordance with Section 14A r.w.rule 8D of the I.T. Rule and made not further addition. The ld. Counsel had also submitted that the A.O has computed the book profit u/s 115JB to the amount of Rs.14,53,824/- after adding the amount disallowed u/s 14A of Rs.9,59,846/-. The ld. Counsel also submitted that assessee was also having no knowledge of the revision proceedings u/s 263 of the Act as the notice dated 03.03.2022 was not received by the assessee. During the course of appellate proceedings the ld. Counsel has also placed reliance on the decision of Hon’ble Bombay High Court in the case of CIT Vs. Future Corporate Resources ltd. (2021) taxmann.com 173 (Bombay), wherein Hon’ble High Court held as under: “INCOME TAX: Where Commissioner invoked revision juri iction and set aside order of Assessing Officer with directions to frame a fresh assessment. order on ground that Assessing Officer failed to make a disallowance of interest under provisions of section 14A read with rule 8D in view of fact that view taken by Assessing Officer of not making disallowance of interest under section 14A on ground that same had been incurred for purpose of business, was a possible view, same could not have been interfered with under section 263.” On the other hand, the ld. D.R supported the order of ld. Pr.CIT.
Heard both the sides and perused the material on record. Without reiterating the fact as elaborated above it is noticed that during the course of assessment proceedings u/s 143(3) of the Act, the A.O has issued noticed u/s 142(1) of the Act dated 06.08.2019. As per annexure to the notice the A.O has categorically called for the following detail from the assessee specifically in respect of disallowance made u/s 14A of the ITA No.1134/Mum/2022 AY. 2017-18 5 M/s Bhupati Investments and Finance Pvt. Ltd. Vs. Pr.CIT-6
Act. The relevant operating para of the query made by the A.O vide the aforesaid notice is reproduced as under:
“Please explain the basis and working of disallowance made u/s 14A at Rs.9,59,846/- Please show cause as to why the disallowance should not be made as per Rule 8D and also submit working accordingly. Further, it appears that the Disallowance u/s 14A added in computation of Book Profits u/s 115JB is at Rs.6.304/- only, as against disallowance of Rs.9,59,846/- made while calculating income under normal provisions, which please explain.” In response the assessee has made detailed submission vide letter dated 20.09.2019. The relevant operating para of the reply made by the assessee in respect of disallowance made u/s 14A r.w.Rule 8D is reproduced as under Sr. No. Particulars Amount (Rs.)
Expenditure directly related to exempt income – Rule 8D(2)(i) Securities Transaction Tax – Rs. 107.00 6,304 Depository Service Exp. – Rs.6,197.00
Disallowance out of Interest –Rule 8D(2)(ii)
Disallowance out of expenses (Indirect 9,53,542 expenditure) – Rule 8D(2)(iii)* Total 9,59,846 “At the outset it is submitted that as the disallowance was already made as per Rule 8D, no further disallowance is required to be made under section 14Arw.r&D, Rule is not automatic and Assessing Officer can visit to method of Rule 8D only if he is not satisfied with correctness of claim of expenditure made by the assessee. The attention is invited to Section 14A(2) of the Income Tax Act, 1961 which reads as under: “14A(2) The Assessing Officer shall determine the amount of expenditure carried in relation to such come which does not form part of the total income under this Act in accordance with such method as may be presented if the Assessing Officer haring regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee un respect of such expenditure in relation to income which does not form part of the total income under this Act.” As per the understanding of the above mentioned section, the Assessing officer can make disallowance u/s 14A if he believes that the assessee claim is incorrect, and further the Assessing Officer has to demonstrate with reasons why the working made by the assessee is not correct. Sec. 14A(2) empowers the Assessing Officer to determine the amount of expenditure incurred in relation to tax-free income if, “having regard to the ITA No.1134/Mum/2022 AY. 2017-18 6 M/s Bhupati Investments and Finance Pvt. Ltd. Vs. Pr.CIT-6
accounts of the assessee, he is not satisfied with the correctness of the claims of the assesser”. The satisfaction of the Assessing Officer as to the incorrect claim made by the assessee is sine qua non for invoking the applicability of Rule 8D The satisfaction can be reached only when the claim of the assessee is verified. Further, we have considered all those investments earning exempt income relevant for calculations of Disallowance as per Sec 14A r.w.r. 8D Reliance is placed on decision of Dell Special Bench of the Hon’ble Tribunal in case of ACIT v. Vireet Investments P Ltd SMC Bench (ITA No 502/Del/2012) dated 16/06/2017 wherein it is held that “only there investments are to be considered for computing average value of investment which yielded exempt income during the year.” The rationale behind this judgment is that only those investments are to considered for computing average investment under rule 8D(2)(iii) which actually yielded and received exempt income during the relevant assessment year. Therefore, it is clear from the above sections that the amount of Rs 9,59,846/- disallowed by us is sufficient and we have duly discharged our duty of explaining the working of disallowance u/s 14A. NOTE ON COMPUTATION OF BOOK PROFITS US. SEC 115JB At the outset, it is submitted that we have computed book profits as per the provisions of Section 115JB and added back the amount of Rs. 6,304/ being the direct expenditure incurred for earning exempt income debited to profit and loss account and hence no further disallowance is required to be made u/s 14A. Further, in the our own case vs. ITO Mumbai (ITA no. 6291/M2010 & 5174/M/2012). The Hon'ble IIAT Mumbai has passed the order in favour of the appellant and directed the assessing officer to delete the disallowance u/s 14A r.w.r 80(2)(i) to the Book Profits u/s 115B As per section 115JB Explanation 1 (f) the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply. It refers to those expenses which have been debited to Profit and Loss account and directly relatable for earning exempt income. Section 14A prescribes disallowance of expenditure incurred by the assessee in relation to income which does not form part of total income. However, section 115JB provides for disallowance of expenditure relatable to income to which section 10 applies. Thus it is submitted that disallowance u/s 14A does not necessarily imply disallowance u/s 115JB and it is for the AO to establish that expenditure has actually been incurred and is relatable to earning of such exempt income. The said onus has not been discharged by the AO. Further, we submit that the disallowance worked out under Rule 8D cannot be deemed to be the amount required to be added under Sec 115JB
ITA No.1134/Mum/2022 AY. 2017-18 7 M/s Bhupati Investments and Finance Pvt. Ltd. Vs. Pr.CIT-6
The provision of Sec 14A(2) prescribes the specific method for computing the disallowance in case if the Assessing Officer is not satisfied with the correctness of the claim of the assessee. However, no such method is prescribed for the purpose of computing the disallowance u/s 115JB, although the said provision was on the statute book prior to introduction of s.14A of the Act. In other words, there is no express provision for computation of disallowable expenditure u/s 115JB of the Act. This itself shows that the mechanism of s. 14A (2) cannot be extended to s. 115JB of the Act. Further, as held by the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT [255 ITR 273 (SC)] the Assessing Officer, while computing the income under section 115] (now s 115JB), has very limited powers. What applies to calculation of book profit can reasonably be said to apply also to the quantification of the adjustments provided in various clauses of the Explanation 1. Thus, there is no scope for making any artificial disallowance and expenditure if on the face of it can be said to be relatable to the earning of exempt income only in such a case disallowance can be made… Reliance is placed on the following decisions in which it has been held that the disallowance worked out under Rule 8D cannot be deemed to be the amount required to be added while computing book profits under section 115JB of the Income Tax Act, 1961: Delhi Special Bench of the Tribunal in case of ACIT v. Vireet Investments P. Ltd. SMC Bench dated 16/06/2017 it is held that computation under clause (of Explanation 1 of section 115JB(2) is to be made without resorting to the computation as contemplates 14A r.w.r 8D.” In our own case ie. Bhupati Investments P. Ltd. v. ITO ITAT Mumbai (ITA no 6291/M/2010 & 5174/M/2012) wherein they have relying on the decision of SMC bench in case of Virect Investments deleted the addition made on account of disallowance u/s 14A to the Book Profits u/s 115JB. Therefore, it is clear from the above sections and case laws that the amount added back to book profits of Rs. 6,301/- disallowed by us u/s 14A is sufficient.” In the light of the above facts, findings and circumstances, the ld. Counsel has categorically established that A.O has made the specific query in respect of disallowance made u/s 14A r.w.rule 8D. In this regard it is observed that ld. Pr.CIT has not controverted the above referred detailed inquiry made by the A.O and the corresponding submission made by the assessee during the course of assessment proceedings. It is further noticed that the A.O has specifically discussed the disallowance u/s 14A r.w.rule 8D of Rs.9,53,542/- at para 4 of the ITA No.1134/Mum/2022 AY. 2017-18 8 M/s Bhupati Investments and Finance Pvt. Ltd. Vs. Pr.CIT-6 assessment order and also considered submission made by the assessee. In view of the above, we considered that the A.O has verified the working of disallowance u/s 14A in the original assessment as discussed supra in this order and these facts were not disproved by the ld. Pr.CIT during the course of proceedings u/s 263 of the Act. The ld. Pr.CIT had failed to substantiate in his findings that how the order passed u/s 143(3) was erroneous. Therefore, we consider that decision of the ld. Pr.CIT to treat the order passed u/s 143(3) of the Act as erroneous and it is prejudicial to the interest of revenue is not justified. Therefore, we set aside the order of Pr.CIT and allow the appeal of the assessee.
In the result, the appeal of the assessee is allowed. Order pronounced in the open court on 17.10.2022 (Aby T Varkey) Accountant Member Place: Mumbai Date 17.10.2022 Rohit: PS
ITA No.1134/Mum/2022 AY. 2017-18 9 M/s Bhupati Investments and Finance Pvt. Ltd. Vs. Pr.CIT-6
आदेश की प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपीलाथी / The Appellant 2. प्रत्यथी / The Respondent. आयकर आयुक्त(अपील) / The CIT(A)- 3. आयकर आयुक्त / CIT 4. 5. विभागीय प्रविवनवध, आयकर अपीलीय अवधकरण DR, ITAT, Mumbai 6. गार्ड फाईल / Guard file.
सत्यावपि प्रवि //// आदेशानुसार/ BY ORDER,
उि/सहायक िंजीकार (Dy./Asstt.