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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
O R D E R
PER PAVAN KUMAR GADALE JM:
The assessee has filed the appeal against the order of the Commissioner of Income Tax (Appeals)-16, Thane passed u/s 143(3) and 250 of the Act. The assessee has filed the following grounds of appeal:
1. Disallowance under section 14A read with Rule 8D on securities are held stock in trade 1.1 On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeals) ('CIT(A)') erred in considering the securities held as stock in trade for Mr. Manoharlal Tandon., Mumbai. - 2 - computing disallowance under section 14 of the Act read with Rule 8D of the Income tax Rule 1962 ('the Rules'). 1.2 On the facts and circumstances of the case and in law, the CIT(A) has failed to appreciate that the appellant does not have any investment from which the appellant has earned exempt income. 1.3 On the facts and circumstances of the case and in law, the appellant prays that the addition under section 14A of the Act is bad in law and unjustified, therefore the said addition should be deleted.
2. Without prejudice to Ground 1, the disallowance computed by learned AO and affirmed by CIT(A) is incorrect 2.1. On the facts and circumstances of the case and in law, the CIT(A) has erred affirming the disallowance of Rs. 3,72,08,900 under section 14A of the Act read with rule 8D(2) of the Rules. 2.2. Without prejudice to the above, on the facts and circumstances of the case and in law, the CIT(A) has erred in considering the total purchases of shares instead of closing stock in trade for the purpose of calculation of average investments as per Rule 8D(2)(ii) of the Rules. 2.3. On the facts and circumstances of the case and in law, the CIT(A) erred in stating the appellant has not placed any arguments in support of its claim. 2.4. On the facts and circumstances of the case and in law, the CIT(A) has erred in considering the value of assets and liabilities as appearing in the personal balance sheet of the appellant instead of the assets and liability balance of the business of the appellant. 2.5 The Appellant submits that the Ld. CIT(A) Ld. AO be directed to recomputed its total income accordingly.
General
Mr. Manoharlal Tandon., Mumbai. - 3 -
The appellant craves to add, alter, amend, substitute and/or modify in any manner whatsoever modify all or any of the foregoing grounds of appeal at or before the hearing of the appeal.
2. The brief facts of the case are that the assessee is engaged in the business of trading of securities and derives income from salary, business and income for other sources. The assessee has filed the return of income electronically on 15.10.2016forthe A.Y 2016-17 declaring a total loss of Rs.9,10,22,986/- and the return of income was processed u/s 143(1) of the Act. Subsequently the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act are issued. Whereas the Assessing officer (A.O) on perusal of the computation of income found that the assessee has claimed the loss in business and accordingly dealt on the facts and made a disallowance of loss on account of sale of mutual funds u/s 94(7) of the Act. Whereas, in respect of disallowance u/s 14A of the Act the A.O. found that the assessee has investment of Rs. 47, 23,508/- as on 31.03.2015 and Rs. 39,41,81,158 as on 31.03.2015 in exempt income yielding financial assets and in the current financial year the assessee has earned the dividend income of Rs. 10,70,45,394/- and Mr. Manoharlal Tandon., Mumbai. - 4 - claimed exempted u/s 10(34) of the Act. The A.O is of the opinion that assessee has not attributed any expenses which have been incurred to earn exempt income. The A.O dealt on the provisions of Sec. 14A r.w.r 8D of the IT Rules. The assessee has filed the submissions as under:
6.2 In this regard, during the course of assessment proceedings vide notice u!s.142(1) dated 31.10.2018, the assessee was asked to show cause why expenses attributable to investment in exempt-income yielding assets, should not be disallowed u/s.14A r.w. Rule 8D of the Income-tax Rule, 1962. In response to the same, the assessee has vide letter dated 14.11.2018 submitted that the Rule 8D has been amended wherein disallowance of interest has been deleted and 1% of average investment has been provided. Further there are no direct expenses incurred for this unit. In view of this fact no interest can be disallowed. 6.3 The submission made by the assessee has been considered however the same is acceptable as the assessee has not worked out the disallowance as mandated by Rule 8D of the I. T. Rules,1962 read with section 14A of the Act and the amendment in the said rule is applicable from F.Y. 2016-17 relevant to A.Y. 2017-18. Therefore, the submission of the assessee is not acceptable.
3. The A.O was not satisfied with the explanations and worked out the disallowance u/s 14A r.w.r 8D(2)(i),(ii)&(iii) of Rs. 3,72,08,900/- and assessed the Mr. Manoharlal Tandon., Mumbai. - 5 - total income of Rs. Nil after setoff of business loss and passed the order u/s 143(3) dated 30.11.2018.
Aggrieved by the order, the assessee has filed an appeal with the CIT(A). Whereas the CIT(A) has considered the grounds of appeal, submissions of the assessee and findings of the A.O. whereas in respect of disputed issue of disallowance U/sec14A of the Act, the CIT(A) has dealt at Para 4.2.2 to 4.2.5 of the order as under and partly allowed the assessee appeal.
4.2.2 I have considered the submissions of the appellant and perused the materials available on record. The appellant has claimed interest expenses in its P & L account and has not provided the details of expenses attributable to the exempt income! investments. The appellant has also not maintained any separate account relevant or the exempt income/ investments and for letting and finance business, to support As claim that no expenditure was incurred for making investments. The appellant is under obligation to establish the extent of expenditure out of all the accounts debited to the Profit and Loss Account as such appellant would not make investment in isolation. The HonbIe ITAT Delhi in the case of Joint Investments Pvt. Ltd. reported in 50 Taxmann.com 271 has held that for making disallowance u/s. 14A it is mandatory to consider all the limbs of rule 8D(2). The appellant has not considered the provisions of rule 8D(2)(iii) as prescribed for making disallowance s. 14A r.w.r. 8D. 4.2.3 Reliance has placed regards on the following case
Mr. Manoharlal Tandon., Mumbai. - 6 - laws: The Hon'ble Tribunal the para 10 of their decision has held as follows: 10. From the above, we find the disallowance has three components and the aggregate of all the three components is the amount which is to be disallowed. The appellant has considered only the first component, i.e the amount of expenditure directly relating to exempt income. He has not considered clauses (ii) and (iii) of rule 8D(2). In view of the above, we are of the opinion that the computation made by the appellant for disallowance u/s. 14A('2) was not in accordance with rule 8D and the AO has duly noted it in the assessment order and thereafter proceeded to compute the disallowance as per rule 8D." 4.2.4 Further, the ITAT Chennaj bench in the case of K. H. Arind Pvt. Ltd. (64 taxmann.com 409 dated 26.06.2015) has held that when appellant itself admitted that the disallowance had to be made with regard to expenditure for earning of income which was exempted from taxation under the Act, such expenditure had to be computed not on adhoc basis by estimating same but as per method prescribed in the rule 8D(2). The relevant portion of the judgment is reproduced as under: "For the purpose of applying rule 8D, the AO has to record his finding that the accounts of the appellant do not satisfactorily explain the expenditure incurred for earning the income, which does not form part of the total income the appellant itself claimed before the AO that it had made a disallowance of 10% of the income earned from the partnership-firm under rule 8D. When the appellant itself admitted that a disallowance has to be made with regard to earning of the income which is exempted from taxation under the Income Tax Act in view of the language employed by the Parliament in section 14A(2) that an AO 'shall determine', the method prescribed in sub-rule (2) of Mr. Manoharlal Tandon., Mumbai. - 7 - rule 8D has to be adopted. Since the Parliament and rule making authority employed the language 'shall determine', it is obligatory on the part of the AO to determine the expenditure as provided in sub-rule (2) of rule 8D. Therefore, estimation of expenditure at 10% may not be in accordance with provisions of sub-rule (2) of rule 8D." 4.2.5 In view of the above, the disallowance is required to be made as per the provisions of section 14A read with Rule 8D. From, the appellant submission it is seen that the appellant has neither taken the whole off interest expenditure while calculating the disallowance, nor it has explained the reason for not doing so. Therefore, I am satisfied with the working of disallowance as done by the Ld. AO.
Aggrieved by the order of the CIT(A), the assessee has filed an appeal before the Hon’ble Tribunal.
At the time of hearing the Ld. AR of the assessee submitted that the CIT(A) erred in confirming the disallowance made by the A.O irrespective of the fact that no expenditure was incurred by the assessee in making the investments decisions. The contention of the Ld. AR are that the assessee has made systematic investments and supported the submissions with judicial decisions and paper book and prayed for allowing the appeal.
Mr. Manoharlal Tandon., Mumbai. - 8 -
Contra, the ld. DR supported the order of the CIT(A) and submitted that the judicial decisions relied by the Ld.AR are pertaining to the banks and are distinguishable.
We heard the rival submissions and perused the material on record. The sole matrix of the disputed issue envisaged by the Ld. AR that the CIT(A) has confirmed the disallowance u/s 14A r.w.r 8D(2) irrespective of the facts that the assessee has not incurred any expenditure for making investments in exempt income yielding financial assets. The Ld.AR emphasized that the assessee has been maintaining the investments systematically and submitted the Audited financial statements as at 31 march 2015 and 31 March 2016. On perusal, we find the assessee has been maintaining the accounts for trading account and personal account. The contentions are that when the securities are disclosed as stock in trade no disallowance U/sec14A r.w.r 8D(2) is warranted though the tax free /exempt income is received on stock in trade. The Ld.AR relied on the judicial decisions pertaining to the banks where the income on securities is offered as business income and same
Mr. Manoharlal Tandon., Mumbai. - 9 - analogy cannot be applied by the assessee, as in one hand the assessee is claiming exemption U/sec10(34) of the Act and not offering as business income. Therefore the submissions are not realistic and cannot be accepted. Whereas, in the balance sheet as at 31.03.2015 the assessee has disclosed sundry debtors, loans and bank balances and no where the investment part is disclosed and the dividend income received during the year is Rs. 8,791/-, which is in comparison to the current year is substantially very low. Further the balance sheet of the assessee as on 31.03.2016 reflects the closing stock of securities of Rs 2,13,89,026/- but the calculation of the assessing officer under rule 8D(2) is reflecting the different amount. We find the assessee is maintaining two accounts being (i) Trading and (ii) personal account. On perusal of the assesseement order, the facts as discussed above are not found and dealt by the assessing officer. We considering the overall facts, circumstances are of the opinion that the disallowance u/sec14A r.w.r 8D(2) has to be reworked. Accordingly, to meet the ends of justice and the principles of natural justice, we provide one more
Mr. Manoharlal Tandon., Mumbai. - 10 - opportunity to the assessee to substantiate with the material evidences on the disputed issue before the Assessing officer. Accordingly, we remit the issue to the file of Assessing officer for limited purpose to examine the facts and decide on merits. The assessee should be provide adequate opportunity of hearing and shall cooperate in submitting the information and allow the grounds of appeal of the assessee for statistical purposes.
In the result the appeal filed by the assessee is allowed for statistical purposes.