Loading judgment…
No AI summary yet for this case.
Detected automatically from the text. The count shows how many other judgments on BharatTax rely on the same authority.
Income Tax Appellate Tribunal, MUMBAI BENCH “G” MUMBAI
Before: SHRI RAJESH KUMAR & SHRI RAVISH SOOD
ORDER PER RAVISH SOOD, J.M: The present appeal filed by the assessee company is directed against the order passed by the CIT(A)-14, Mumbai, dated 25.03.2017, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 29.06.2017 for A.Y. 2015-16. The assessee has assailed the impugned order on the following effective ground before us: “I. Disallowance u/s. 14A r.w Rule 8D 1. The learned CIT (A) erred in restricting disallowance u/s 14A r.w. Rule 8 D to exempt income without appreciating the fact that the Appellant had offered a sum of Rs.l3W- being demat charges as disallowance u/s 14A and Rs.4,H6,157/- STT Expense while
2 Sainath Trading Company Pvt. Ltd. Vs. ACIT-8(1)(2) filing the return of income. Also None of the administrative expenses aggregating to Rs.46,87,3HA and Finance cost aggregating to Rs.9,56,769/- listed in Note No JO of Financial Statements are incurred for earning any exempt Income so there was no question of disallowance under Rule 8D read with Section 14A. Furthermore, the Appellant had suo moto disallowed expenses of Rs.24,17,464/- out of the above sum of Rs.56,44,080/- in computation of income. Further the learned CIT(A) has rejected Appellant‟s plea that the investment as promoters holding in other companies should not be considered for calculating disallowance u/s 14A r.w Rule 8D.”
Briefly stated, the assessee company which is engaged in the business of dealing in properties had filed its return of income for A.Y 2015-16 on 23.09.2015, declaring a total income of Rs.1,49,38,500/-. The return of income filed by the assessee was processed as such u/s 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment u/s 143(2) of the Act.
During the course of the assessment proceedings, it was observed by the A.O that the assesee had during the year under consideration made certain new exempt income yielding investments, viz. (i). investment in shares of M/s Essar Ports Limited of Rs.49,50,00,322/-; and (ii). investment in shares of M/s Bhavani Renewable Energy Pvt. Ltd. of Rs.7,00,00,000/-. On a perusal of the record, it was observed by the A.O that as against the exempt dividend income of Rs.14,25,000/- the assessee had only offered for disallowance the demat charges of Rs.1,390/- u/s 14A of the Act. On being queried as to why the disallowance in its hands may not be worked out as per Sec. 14A r.w Rule 8D, the assessee filed a reply vide its letter dated 28.05.2017. However, the A.O not finding favor with the explanation advanced by the assessee in support of its claim of disallowance that was offered u/s 14A of the Act, therein, worked out the same at an amount of Rs. 62,55,014/- i.e as per the methodology contemplated in Rule 8D of the Income-tax Rules, 1963, as under :
“a. Expenditure directly attributable 0 b. Expenditure not directly attributable Interest Expenses (A) =Rs.9,56,769 (A) Avg. Value of investment = Rs.111,94,62,888 (B)
3 Sainath Trading Company Pvt. Ltd. Vs. ACIT-8(1)(2)
[(140,19,63,049 + 83,69,62,727)/2] Avg. Value of assets =Rs.160,41,15,805 (C) [(195,58,43,028 + 125,23,88,582)/2] (A) X (B)/(C) = Rs.6,67,700 c. ½ % of average investment 0.5% of Rs.111,94,62,888 = Rs.55,97,314 Aggregate Rs.62,65,014/-“
However, taking note of the fact that the total expenditure claimed by the assessee during the year amounted to Rs.32,29,857/-, the A.O after considering the suo motto disallowance of Rs.1,390/- that was offered by the assessee, therein restricted the additional disallowance to an amount of Rs.32,28,467/-. After making the aforesaid disallowance u/s 14A, the A.O vide his order passed u/s 143(3), dated 29.06.2017 assessed the income of the assessee company at Rs.1,81,66,960/-.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) was however not persuaded to accept the claim of the assessee that it was not required to incur any administrative expenses for managing its exempt income yielding investments and had only incurred the demat charges of Rs.1,390/- and STT expenses of Rs.4,86,157/- as regards the same. Also, the CIT(A) was not inclined to accept the claim of the assessee that the investments made in the group companies were not liable to be considered while computing the disallowance u/s 14A of the Act. At the same time, the CIT(A) was of the view that as the assessee had during the year under consideration earned exempt income of Rs.14,25,000/-, therefore, the disallowance u/s 14A was liable to be restricted only to the said extent. Accordingly, the CIT(A) on the basis of his aforesaid observations partly allowed the appeal.
The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for 4 Sainath Trading Company Pvt. Ltd. Vs. ACIT-8(1)(2)
the assessee Dr. K. Shivaram, Senior advocate took us through the facts of the case. It was submitted by the ld. A.R that the A.O without recording any dissatisfaction as regards the suo motto disallowance that was offered by the assessee u/s 14A of the Act, had most arbitrarily dislodged the same and in a mechanical manner substituted it by the disallowance worked out as per the methodology contemplated in Rule 8D. It was further submitted by the ld. A.R that out of the remaining administrative expenses of Rs.41,99,764/- [Rs.46,87,311/- (-) Rs.4,87,547/-] the assessee had separately disallowed an amount of Rs.19,29,917/- in its computation of income. In the backdrop of the aforesaid facts, it was submitted by the ld. A.R that the reasonableness of the suo motto disallowance that was offered by the assessee u/s 14A could safely be gathered from the fact that the same worked out at 33.62% of the exempt dividend income. Backed by the aforesaid facts, it was submitted by the ld. A.R that effectively the assessee had claimed only Rs.22,69,847/- (out of Rs. 46,87,311/-) as administrative expenses i.e 48% only. It was submitted by the ld. A.R that though the CIT(A) had observed that the assessee would have incurred some administrative expenses to earn the dividend income, however, he had failed to appreciate that the assessee had attributed a substantial amount of administrative expenses for earning of the exempt dividend income. It was submitted by the ld. A.R that the A.O is obligated to establish a proximate relationship between the expenditure and the exempt income before working out the disallowance u/s 14A. In support of his aforesaid contention the ld. A.R had relied on the judgment of the Hon‟ble High Court of Bombay in the case CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) (2020) 429 ITR 358 (Bom) and the order of the ITAT, Mumbai, in the case of JCIT Vs. M.s Rare Enterprises (2021) 187 ITD 65 (Mum). It was submitted by the ld. A.R that as the disallowance made by the A.O was not only exorbitant but also arbitrary, therefore, the same was liable to be vacated on the said count too.
5 Sainath Trading Company Pvt. Ltd. Vs. ACIT-8(1)(2)
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities.
We have heard the ld. Authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the considered the judicial pronouncements that have been pressed into service by the ld. A.R to drive home his aforesaid contentions. As observed by us hereinabove, the assessee had on a suo motto basis offered a disallowance of Rs.4,87,547/-,viz. (i) demat Charges: Rs.1,390/-; and (ii) STT expenses: Rs.4,86,157/- in its return of income. Observing, that the assessee had received exempt dividend income of Rs.14,25,000/- qua the shares of M/s Essar Ports Ltd., the A.O worked out the disallowance u/s 14A as per the methodology contemplated in Rule 8D at an amount of Rs.62,65,014/-, viz. (i) U/rule 8D(2)(ii): Rs.6,67,700/-; and (ii) U/rule 8D(2)(iii) Rs. Rs.55,97,314/-. However, as the total expenses claimed by the assessee during the year amounted to Rs.32,29,857/-, therefore, the A.O restricted the disallowance u/s 14A to the said extent. On appeal, the CIT(A) though principally upheld the view taken by the A.O, however, observing that the assessee during the year was in receipt of dividend income of Res. 14,25,000/- only, therefore, he restricted the disallowance u/s 14A to the amount of such exempt dividend income. 8. As observed by us hereinabove, the assessee has raised two fold contentions before us, viz. (i) that the AO had wrongly assumed jurisdiction and without recording his dissatisfaction qua the correctness of the disallowance that was suo motto offered by the assessee u/s 14A in its return of income, therein, mechanically substituted the same by that computed by him as per methodology contemplated in Rule 8D; and (ii) that considering the fact that the assessee had already offered a substantial amount of the administrative expenses i.e 52% of total administrative expenses qua the earning of the exempt dividend income,
6 Sainath Trading Company Pvt. Ltd. Vs. ACIT-8(1)(2) therefore, there was no justification in dislodging the said claim without any cogent reason.
We have perused the assessment order and find substance in the claim of the ld. A.R that the A.O without recording any dissatisfaction as regards the correctness of the disallowance that was offered by the assessee on a suo motto basis u/s 14A in its return of income, had mechanically substituted the same by an amount that was worked out by him as per the methodology contemplated in Rule 8D. Insofar the CIT(A) is concerned, we find, that he too on the basis of a general observation had upheld the view taken by the A.O, for the reason, that as per him the making of investments in exempt income yielding securities would not have been possible without involvement of the management, employees and infrastructure of the assessee which would have been utilized to some extent for the said purpose. In our considered view, the aforesaid observations of the lower authorities by no means can be brought within the realm of recording of the satisfaction with regard to the accounts of the assessee, as regards the correctness of its claim of expenditure attributed qua the income which did not form part of its total income. As held by the Hon‟ble Apex Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC), 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 qua the disallowance that was offered by him u/s 14A of the Act. In its aforesaid order, it was observed by the Hon‟ble Apex Court that it was only after the A.O had recorded his dissatisfaction as regards the correctness of the claim of the assessee, that only then the provisions of Sec. I4A(2) and (3) r.w. Rule 8D could be invoked. It was observed by the Hon'ble Apex Court, as under:
7 Sainath Trading Company Pvt. Ltd. Vs. ACIT-8(1)(2)
"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 SD 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 3D 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 assesses, 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 3D of the Rules or a best judgment determination, as earlier prevailing, would become applicable." As in the case before us, neither of the lower authorities had recorded their dissatisfaction as regards the correctness of the disallowance that was suo motto offered by the assesse in its return of income, having regard to the latters accounts as were placed before them, therefore, we are of a strong conviction that by dispensing with the said statutory requirement the jurisdiction for working out the disallowance under Sec. 14A r.w Rule 8D qua the exempt dividend income earned by the assessee during the year under consideration could not have been validly assumed.
We, thus, not finding favor with the view taken by the CIT(A) who had principally upheld the disallowance worked out by the A.O under Sec. 14A r.w. Rule 8D, thus, set-aside his order and vacate the disallowance made by the A.O u/s 14A r.w Rule 8D to the extent the same had been sustained by the first appellate authority.
The appeal filed by the assessee is allowed in terms of our aforesaid observations.
Order pronounced in the open court on 26.07.2021