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Income Tax Appellate Tribunal, DELHI BENCH ‘F’, NEW DELHI
Before: Sh. Amit ShuklaDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assessee against the order of the ld. CIT(A)-30, New Delhi, dated 12.10.2017.
Following grounds have been raised by the assessee: “1. a) That on the facts and circumstances of the case and in law, the order of the Ld. Commissioner of Income tax Appeals 30 (hereinafter called CIT) is illegal, unjust and opposed to facts, to the extent of confirming the additions made by the Ld. AO.
b) That each grounds of appeal is without prejudice to each other.
a)That on the facts and circumstances of the case and in law, Ld. CIT has erred in sustaining the addition to the extent of Rs. 47,07,953/- u/s 14A r.w.r. 8D(2)(iii) of IT Rules 1962.
ITA No. 7604/Del/2017 2 U.K. Paints India Ltd. b) The Ld. CIT has erred in holding that the Ld. AO had recorded satisfaction before embarking upon the working under rule 8D. Ld. AO has given a long commentary of section 14A, rule 8D and other matters, but has not recorded her satisfaction in respect of the correctness of the suo-moto disallowance of Rs. 14,00,000/- with reference to the accounts of the Appellant. Since no proper satisfaction is recorded, addition of Rs. 47,07,953/- be deleted.
c) That the Ld. CIT has erred while calculating disallowance under /rule 8D(2)(iii) of IT Rules. Securities generating or which shall generate taxable income are to be excluded under rule 8D (2)(iii).
d) That non dividend paving securities are to be excluded for the working under rule 8D (2)(iii).
e) That the suo-moto disallowance of Rs. 14,00,000/- is withdrawn. It is prayed that the total addition of Rs. 47,07,953/- be deleted.
a) That on the facts and circumstances of the case and in law the Ld. CIT has misdirected himself in confirming addition of Rs. 47,58,833/- towards irrecoverable amount from NSEL.
b) That the loss suffered ,is an allowable loss u/s 28 read with section 36(2)of the IT Act, as the loss is suffered during the course of the appellant business, including money lending, carried on in the ordinary course of business.
c) Loss suffered is an allowable loss u/s 37 of the IT Act:
- In accordance with the accounting policies regularly followed, whereby known business losses, are written off in the year in which it is considered irrecoverable. Subsequent recoveries if any are treated as income.
- When income from investment with NSEL is taxable, loss suffered in the process of earning of income, is also an allowable loss.
d) That on account of widely publicized scam at NSEL, the source of earning income, seized to be recoverable and seized to generate business income, is an allowable loss.
ITA No. 7604/Del/2017 3 U.K. Paints India Ltd. e) That Ld. CIT has erred in holding that no capital asset came into existence and the capital invested was lost before its existence. Investment with NSEL is a capital asset, by virtue of scam, the said investment became bad. Loss of the said money earning capital asset, is an allowable loss.
f) That the loss of Rs. 47,58,873/- be allowed as claimed.
That the net assessed income of the appellant be reduced by Rs. 94,66,826/- (47,07,953 + 47,58,873).”
Disallowance u/s 14A:
The main grievance of the assessee is that the ld. CIT (A) erred in holding that the AO had recorded satisfaction u/s 14A(2) of the Income Tax Act, 1961 before embarking upon working under Rule 8D. The assessee’s submissions mainly revolve around the fact that the AO has given a long commentary on Section 14A and Rule 8D but has not recorded satisfaction in respect of the suo moto disallowances made by the assessee with reference to the accounts of the assessee.
The AO observed that the assessee has paid interest expenditure of Rs.3.59 cr. on the amount of investments in Mutual Fund and Equity Shares of Rs.145.70 cr. The assessee has disallowed Rs.14,00,000/- on accounts of earnings of exempt income on 3 different dates viz. part salary of the Director of Rs.8,00,000/-, part salary of the CFO, DGM and another officials of Rs.4,00,000/- and other administrative expenses of Rs.2,00,000/-.
During the hearing before us, the ld. AR specifically argued that the non-satisfaction as required u/s 14A(2) has not been recorded with reference to the claim of the assessee in respect of the expenditure in relation to the income which was not includable in the total income. On the other hand, the ld. DR vehemently argued that the AO has mentioned
ITA No. 7604/Del/2017 4 U.K. Paints India Ltd. from page nos. 3 to 12 about the dissatisfaction and the disallowances have been completed in accordance with the provisions of Rule 8D(2). He relied on the judgments in the case of Haryana Land Reclamation and Development Corporation 302 ITR 218 (P&H), Dhanuka & Sons 12 Taxmann 227 (Col.), Abhishek Industries 286 ITR 128 (P&H)
Rebutting the arguments of ld. DR, it was argued that most of the investments were made in the earlier year and from the assessee’s own funds and in the absence of invocation of Section 14A(2), no further disallowance is called for.
Heard the arguments of both the parties and perused the material available on record.
We find that while the AO has disallowed Rs.1.51 Cr. u/s 14A. The ld. CIT (A) based on the judgment of the ITAT in the case of ACIT Vs. Vireet Investments Pvt. Ltd. (2017 TOIL 923 ITAT Del) has reduced the amount to Rs.47.07 lacs by re-computing the average value of the investments yielding dividends.
We have also gone through the entire assessment order page nos. 3 to 13 and the commentary in the case laws quoted by the Assessing Officer. Infact, it is a treatise on the provisions of Section 14 which is well appreciable. However, the AO failed to follow the procedural aspects of invocation of Section 14A(2) which is a sine qua non for re-computation of the disallowance. There cannot be anything like deemed satisfaction or employed dissatisfaction while invoking the provisions of Section 14(2). There is no mention by the Assessing Officer as to how the AO is not satisfied with the correctness of the claim of the assessee. The ld. CIT (A) also while re-computing the disallowance did not consider this aspect at all.
ITA No. 7604/Del/2017 5 U.K. Paints India Ltd. 10. Provision of Section 14A reads as under: “[Expenditure incurred in relation to income not includible in total income. 14A. [(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]”
The above provision is in a sense a taxing exception to the stream of income which is otherwise exempt, i.e. tax exempt income. The principle of disallowance is stated in Section 14A(1). Section 14A(2) prescribes the mode or methodology for the disallowance and the steps for its calculation. Unlike the other part of the statute which decree or enjoin the actual methodology and are substantive, Parliament deemed it appropriate to leave it to the rule making authority to prescribe the methodology, i.e. computation. For instance, what are taxable and in what proportion and the principles applicable are embedded in the statute in certain provisions, such as Sections 28 to 43 and Sections 80A to 80HHC when it comes to
ITA No. 7604/Del/2017 6 U.K. Paints India Ltd. deductions. Instead of adopting that mode, the Parliament thought it appropriate to leave the mode to the rule making authority. In that sense, the rules are not merely procedural but are substantive and can be said to be engrafted in the statute, as is evident from the mandate of the first part of Section 14A(2). That apart, significantly, the question of applying the statutorily prescribed method would arise only and only if the AO expresses an opinion rejecting the assessee's methodology and the figure offered at the time of assessment. This is material because the jurisdiction to go into the method prescribed in the Rules arises only if the amounts the assessee offers does not have any realistic correlation with the tax exempt income. For instance, in a given case, if a tax exempt income is to the tune of Rs. 5 crores and the assessee is able to satisfy that expenditure relatable to that income or the reasonable nexus to such income is Rs. 25 lakhs, there has to be strong reasons why the said amount of Rs. 25 lakhs are to be rejected. In other words, the opinion of the assessing officer in the latter part [of Section 14A(2)] is to be based upon an appraisal of objective material relating to the assessee's voluntary disallowance of amount/amounts. Not only that, if in the course of assessment, the AO enquires from the assessee about the amounts spent, which are to be disallowed, and the assessee in fact discloses a larger amount (than the one given in the return), it is still incumbent upon the AO to enquire into such larger amounts and determine whether it has nexus with expenditure relatable to exempt income to attract Section 14A(1). Sans this procedure, Section 14A would be reduced to a mere formality which it appears to have become in the circumstances of the case. Holding this the Hon’ble Jurisdictional Court has dismissed the appeal of the revenue wherein the non-satisfaction as required u/s 14A has not been drawn/specified.
ITA No. 7604/Del/2017 7 U.K. Paints India Ltd. 12. We also find that the matter has been fairly brought to the notice of the AO who however failed to draw any dissatisfaction as to how the voluntarily disallowance was unreasonable and non-satisfactory with regard to the correctness of the claim of the assessee. Hence, we hereby hold that the disallowance which has been made in contravention with the prescribed mode, methodology and steps for calculation envisaged u/s 14A(2) is liable to be deleted.
Disallowance u/s 37:
During the year, the assessee has invested Rs.1,50,66,407/- with NSEL in the month of July 2013 and lost the amount owing to the scam. Out of which an amount of Rs.49,01,320/- is yet to be recovered. This amount has been written off in the P&L account. The Assessing Officer held that since this amount of Rs.49,01,320/- has not been taken into account while calculating the income in the previous year, the deduction u/s 36(2) is not allowable.
Before the ld. CIT (A), the assessee has taken two fold arguments, one that the amount is allowable u/s 36(2)(ii), the other being the amount is allowable u/s 28 of the Income Tax Act, 1961. The ld. CIT (A) held that since the amount has not been offered to tax hither to, it cannot be considered for application of provision u/s 36(2)(ii). The judgment of the Hon’ble Supreme Court in the case of TRF Ltd. 323 ITR 397 found to be inapplicable by the ld. CIT (A). The ld. CIT (A) has also not allowed the loss as capital loss on the grounds that there has not been any existence of a capital asset.
ITA No. 7604/Del/2017 8 U.K. Paints India Ltd. 15. During the hearing before us, the ld. AR argued mainly that if the amount is not allowable u/s 36(2)(ii), the same is still allowable u/s 28 of the Act as the amount has been invested and lost in the same year.
The ld. DR argued that the primary intention of the assessee is investment and hence at the most it can be allowed as capital loss.
Heard the arguments of both the parties and perused the material available on record.
The issue involves deduction under two specific section namely Section 28 and Section 36 and 37. There is a subtle difference between the business loss and business expenditure while loss arises from regular operation of the business, business expenditure is conscious charge in an endeavor to earn income. Sections 30 to 36 deal specifically with expenditure allowable in computing the taxable income and Section 37 is a general provision for allowing the deductions of expenditure taking into consideration the business of the assessee. The exception being capital expenditure and personal expenditure. The Hon’ble Supreme Court in the case of Quershi Vs CIT 287 ITR 547 held that explanation II Section 37 is not applicable to the case of business loss but to business expenditure. In the instant case, the assessee paid amount to Philip Commodities India Pvt. Ltd. in the month of June 2013 of Rs.1,50,66,407/- and also got the amounts till March 2014 and could not receive money of Rs.47,58,533/- owing to crash of NSEL. This gives rise to a situation where the assessee incurred business loss owing to his transaction with M/s Philip Commodities India Pvt. Ltd.
ITA No. 7604/Del/2017 9 U.K. Paints India Ltd. Hence, the loss will have to be allowable at loss incidental to the business while computing the income u/s 28. Since, it is not an expenditure, the provisions u/s 30 to 37 are not attracted in this case. We hold that loss must be during the course or of incidental to business. It is the nexus with the business which is more relevant to claim the loss (CIT Vs Textool Co. Ltd. 135 ITR 200). The loss must have a direct and proximate nexus with the business operations and the loss is incidental to it, then such loss is deductible as, without business operations, no profit can be earned. If profit is earned in such an endeavour it is to be taxed and if loss is earned it is to be allowed. Without going into the grammatical issue of debt or bad debts or receivables, since the facts clearly prove that the assessee has incurred loss by the way of his business with M/s Philip Commodities India Pvt. Ltd. and the loss has been in the current year itself, in the peculiar facts and circumstances of the case, such loss incurred in such transaction with regard to NSEL is allowable. Any subsequent recovery needs to be taken into consideration in computation of total income.
In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 27/11/2020.
Sd/- Sd/- (Amit Shukla) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 27/11/2020 *Subodh* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR