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Income Tax Appellate Tribunal, MUMBAI BENCH “C” MUMBAI
ORDER PER RAVISH SOOD, J.M: The present appeal filed by the assessee is directed against the order passed by the CIT(A)-8, Mumbai dated 12.09.2019, which in turn arises from the order passed by the A.O u/s 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 29.01.2016. The assessee has assailed the impugned order on the following grounds before us: “1.(a) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeal) ("the CIT(A)") erred in confirming action of the Ld, Assessing officer of making disallowance to the extent of Rs. 10,12,526/- by invoking the provisions of section 14A read with Rule 8D of the Income Tax Rules, 1962 without appreciating that the Ld. Assessing Officer failed in recording any reason for non-satisfaction with the correctness of the claim of Rs.27,382/- suo-moto disallowed by the Appellant u/s. 14A and doing so is wrong
2 M/s Puja Traders & Investments Pvt. Ltd. Vs. DCIT-3(2)(2)
& contrary to the facts of the case, provisions of the Act, and the Rules made thereunder. 1.(b) The Id. CIT(A) ought to have restricted the disallowance u/s 14A to Rs. 27,382/- as computed by the appellant being fair and reasonable and correct claim having regards to accounts of the appellant company and not doing so is wrong and contrary to the facts and circumstances of the case the provisions of the Income Tax Act, 1961 and the Rules made thereunder. 1.(c) Without prejudice to the above, the Ld. CIT(A) erred in confirming the action of the learned Assessing Officer of disallowing proportionate interest expenditure u/s. 14A r.w.r BD(2)(ii) and doing so is wrong and contrary to the facts and circumstances of the case the provisions of the Income Tax Act,I961 and the Rules made thereunder. 1.(d) Without prejudice to the above, the Ld. CIT(A) erred in confirming the action of the learned Assessing Officer of disallowing proportionate administrative expenditure u/s. 14A r.w.r 8D(2)(iii) and doing so is wrong and contrary to the facts and circumstances of the case the provisions of the Income Tax Act,1961 and the Rules made thereunder. 1.(e) Without prejudice lo the above, the Ld. CIT(A) erred in confirming the action of the learned Assessing Officer of reckoning investments in Gold Bar for the purpose of computing average value of investments in terms of Sec. 14A r.w.r 8D(2) and doing so is wrong and contrary to the provisions of the Income Tax Act,1961 and the Rules made thereunder, 1.(f) Without prejudice to the above, the Ld. CTT(A) ought to have not reckoned those investments which have not generated any exempt income for the purpose of calculating average value of investments in terms of section 14A r.w.r. 8D(2) and not doing so H wrong and contrary to the provisions of the Act, and the Rules made there under. The appellant craves leave to add, amend, alter, modify and/or delete any of the above grounds of appeal on or before the date of hearing.”
2. Briefly stated, the assessee company which is engaged in the business of merchant banking, underwriting, project financing etc. had e-filed its return of income for A.Y. 2013-14 on 26.09.2013, declaring a total loss of Rs.57,04,980/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the Act.
During the course of the assessment proceedings, it was observed by the A.O that the assessee during the year under consideration had received exempt
3 M/s Puja Traders & Investments Pvt. Ltd. Vs. DCIT-3(2)(2) dividend income of Rs.12,22,065/- as regards which it had offered a suo motto disallowance u/s 14A of an amount of Rs.27,382/-. Observing, that the asessee had failed to compute the disallowance as per Sec. 14A r.w Rule 8D, the A.O called upon it to put forth an explanation as regards the same. Having perused the explanation of the assessee, the A.O not finding favor with the same computed the disallowance u/s 14A r.w Rule 8D at Rs.10,12,526/-, viz. (i) U/rule 8D(2)(ii): Rs. 5,90,444/-; and (ii) U/rule 8D(2)(iii): Rs.4,22,082/-. As the assessee had already offered a suo motto disallowance of Rs. 27,382/-, therefore, the A.O restricted the additional disallowance u/s 14A at Rs. 9,85,144/-. After making the aforesaid disallowance u/s 14A r.w Rule 8D the A.O vide his order passed u/s 143(3), dated 29.01.2016 assessed the income of the assessee company at a loss of (-) Rs.42,75,897/-.
Aggrieved, the assessee carried the matter in appeal before the CIT(A). However, the CIT(A) not finding favor with the contentions advanced by the assessee sustained the additional disallowance that was made by the A.O u/s 14A r.w Rule 8D and dismissed the appeal.
The assessee being aggrieved with the order passed by the CIT(A) has carried the matter in appeal before us. It was submitted by the ld. Authorized Representative (for short „A.R‟) for the assessee that the A.O without recording any dissatisfaction as regards the correctness of the disallowance that was offered by the assessee u/s 14A had most arbitrarily and in a mechanical manner substituted the same by that as was computed by him u/s 14A r.w Rule 8D. In order to buttress his aforesaid claim the ld. A.R took us through the relevant observations of the A.O. It was submitted by the ld. A.R that the A.O without giving any reason for not accepting the correctness of the assessee‟s claim for disallowance u/s 14A had mechanically substituted the same by triggering the mechanism provided for computing the same in Rule 8D. It was submitted by the ld. A.R that as the A.O had wrongly assumed jurisdiction and made the additional
4 M/s Puja Traders & Investments Pvt. Ltd. Vs. DCIT-3(2)(2) disallowance u/s 14A r.w Rule 8D, therefore, the same could not be sustained and was liable to be vacated. In support of his aforesaid contention the ld. A.R had relied on the judgments of the Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC) and Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). Also, support was drawn by the ld. A.R from a host of judicial pronouncements to which our attention was drawn. Alternatively, it was submitted by the ld. A.R that as the assessee had sufficient own funds and interest free funds amounting to Rs. 10.93 crores, viz. (i). Share capital of Rs. 7.95 crore; and (ii). Reserves & Surplus of Rs. 2.98 crore to make investments in the exempt income yielding shares of Rs. 7.44 crores, therefore, in the backdrop of the presumption that in case of availability of mixed funds the assessee would have utilized such interest free funds for making the aforesaid investments, no disallowance qua the interest expenditure under Sec. 14A r.w Rule 8D(2)(ii) could have validly been made. In support of his aforesaid contention the ld. A.R had relied on the judgments of the Hon‟ble High Court of Bombay in the case of viz. (i). CIT Vs. Reliance Utilities and Power Ltd. (2009) 178 Taxman 135 (Bom); and (ii). HDFC Bank Ltd. Vs. DCIT-2(3), Mumbai (2016) 67 taxmann. Com 42 (Bom). Apropos the disallowance that was made by the A.O towards administrative expenses under Sec. 14A r.w Rule 8D(2)(iii), it was submitted by the ld. A.R that the A.O without dislodging the assessee‟s claim for disallowance of Rs. 27,382/- that was attributed by it qua the specific heads of administrative expenses for earning of the exempt dividend income, had without giving any reason for not accepting the same therein wrongly worked out the disallowance to the said effect.
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,
5 M/s Puja Traders & Investments Pvt. Ltd. Vs. DCIT-3(2)(2) as well as 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 has assailed the very assumption of jurisdiction by the A.O for dislodging its claim of disallowance u/s 14A of the Act, and substituting the same by that as was computed by him as per the methodology contemplated in Rule 8D of the Income-tax Rules, 1963. It is the claim of the assessee that the A.O without recording his dissatisfaction as regards the correctness of the suo motto disallowance under Sec. 14A that was offered by the assessee in its return of income had most arbitrarily dislodged and substituted the same by an amount that was computed by him as per Sec.14A r.w Rule 8D. On a perusal of the assessment order, we find, that the assessee had vide its letter dated 14.01.2016, Annexure-6, having regard to its accounts, therein furnished before the A.O the very basis for attributing an amount of Rs. 27,382/- (out of the „administrative expenses‟) towards earning of the exempt dividend income during the year under consideration. Apart from that, the assessee had vide its “Note on disallowance u/s 14A” at Sr.No.1.2 submitted before the A.O that as sufficient own funds and interest free funds of Rs. 10.93 crore were available with it, therefore, no part of the interest expenditure could have been related to earning of the exempt dividend income. However, we find, that the A.O had summarily discarded the aforesaid explanation of the assessee and computed the disallowance as per the mechanism provided in Rule 8D. As is discernible from the assessment order, the A.O had most arbitrarily brushed aside the aforesaid details that were filed by the assessee with him in support of its claim of disallowance u/s 14A of the Act. As such, the A.O without recording his satisfaction that having regard to the accounts of the assessee as were placed before him, it was not possible for him to generate the requisite satisfaction with regard to the correctness of the assessee‟s claim of disallowance u/s 14A, had in a mechanical manner rejected the same and substituted it by the amount that was computed by him by triggering the 6 M/s Puja Traders & Investments Pvt. Ltd. Vs. DCIT-3(2)(2) mechanism provided in Rule 8D. In our considered view, the A.O without recording his dissatisfaction as regards the correctness of the assessee‟s claim of disallowance u/s 14A of the Act could not have validly resorted to and substituted the said disallowance as per Sec. 14A(2) and (3) r.w Rule 8D. Our aforesaid view is supported by the judgment of the Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Limited Vs. DCIT (2017) 394 ITR 449 (SC). In its said order, it was observed by the Hon‟ble Apex Court that an A.O remains under a statutory obligation to arrive at a satisfaction that having regard to the accounts of the assessee, as placed before him, it is not possible for him to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. As therein observed, it is only after recording of such satisfaction that the A.O can take recourse to the provisions of Sec.14A(2) and (3) r.w Rule 8D of the Income-tax Rules, 1963. The Hon‟ble Apex Court while observing as hereinabove had held as under :
"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 8D 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 8D 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 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable." In fact, the aforesaid view had thereafter once again been reiterated by the Hon‟ble Supreme Court in the case of Maxopp Investment Ltd. VS. CIT (2018) 402 ITR 640 (SC). In the aforesaid case, it was observed by the Hon‟ble Supreme Court that if the A.O was not satisfied with the disallowance that was offered by the assessee, then, he remained under a statutory obligation to record
7 M/s Puja Traders & Investments Pvt. Ltd. Vs. DCIT-3(2)(2) his dissatisfaction to the said effect, as it was only thereafter that he could assume jurisdiction and take recourse to and work out the disallowance as per sub-section (2) and (3) of Sec. 14A of the Act.
Now, in the backdrop of the aforesaid settled position of law, we shall herein deal with the claim of the ld. A.R that the A.O without recording his dissatisfaction as regards the correctness of the assessee‟s claim for disallowance u/s 14A of the Act, had wrongly assumed jurisdiction and substituted the same by the amount of disallowance that was computed by him as per the methodology prescribed in Rule 8D. As is discernible from the assessment order, the assessee‟s claim for disallowance u/s 14A of Rs. 27,382/- that was offered in its return of income was rejected by the A.O for two fold reasons, viz. (i). that as per the CBDT circular No. 5/2014, dated 11.02.2014 disallowance u/s 14A qua the exempt income yielding securities held by an assessee had to be worked out irrespective of the fact as to whether or not the assessee had earned any exempt income during the year; and (ii). that as held by the Hon‟ble High Court of Bombay in the case of Godrej & Boyce Manufacturing Co. Ltd. in Writ Petition No. 785 of 2010 in ITXA 626/10 and the order of the ITAT, Mumbai in Daga Capital Management Pvt. Ltd., the provisions of sub-section (2) and (3) of Sec. 14A were constitutionally valid and would be applicable w.e.f A.Y 2008-09. Apart from that, it was observed by the A.O that the assesee‟s claim of not having utilized any part of the borrowed funds for making non-current investments was found to be incorrect as the „balance sheet‟ of the assessee on 31.03.2013 revealed total assets or liabilities of Rs. 14,73,00,878/-, while for the investments made in non-current assets were of an amount of Rs.7,43,79,307/-. It was, thus, on the basis of the aforesaid general observation that the A.O had on an ad hoc basis taken the interest expenses @50% of the total interest expenditure for computing the disallowance as per Rule 8D. On a perusal of the aforesaid observations, we are of the considered
8 M/s Puja Traders & Investments Pvt. Ltd. Vs. DCIT-3(2)(2) view, that prior to taking recourse to working out the disallowance as per sub- section (2) and (3) of Sec. 14A of the Act and triggering the methodology for computing the disallowance as per Rule 8D, the A.O had failed to observe that that having regard to the accounts of the assessee, as were placed before him, it was not possible for him to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. In fact, the aforesaid fallacy on the part of the A.O becomes all the more grave in the backdrop of the fact that the assessee had in the course of the assessment proceedings, vide its letter dated 14.01.2016, Annexure-6, therein furnished before him the very basis for attributing an amount of Rs. 27,382/- out of the „administrative expenses‟ for earning of the exempt dividend income during the year under consideration. Also, we find, that the A.O had most arbitrarily bypassed the “Note on disallowance u/s 14A” at Sr.No. 1.2 that was submitted by the assessee in order to support his claim that as sufficient own funds and interest free funds of Rs. 10.93 crore were available with it, therefore, no disallowance of any part of the interest expenditure was called for in its hands. In the totality of the aforesaid facts, the A.O in our considered view without recording his dissatisfaction as regards the correctness of the suo motto disallowance under Sec. 14A that was offered by the assessee in its return of income could not have dislodged and substituted the same by an amount that was computed by him by triggering the mechanism provided in Rule 8D. Our aforesaid view is fortified by the judgments of the Hon‟ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC) and Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). On appeal, we find that the CIT(A) had though dealt with the various other facets of the disallowance u/s 14A, viz. (i). that there was no exception as regards computing the disallowance u/s 14A with respect to investments made by an assessee by way of strategic investments or held as stock-in-trade; (ii). that the disallowance u/s 14A cannot exceed the amount of exempt income; and (iii). that as to whether or not the investments that had not 9 M/s Puja Traders & Investments Pvt. Ltd. Vs. DCIT-3(2)(2) yielded any exempt income were to be considered for the purpose of computing the disallowance as per the methodology contemplated in Rule 8D; however, the aforesaid material aspect, viz. validity of the disallowance made by the A.O as per the mechanism provided in Rule 8D without recording of an objective satisfaction with regard to the incorrectness of the suo-motto claim of disallowance that was offered by the assessee u/s 14A of the Act, we find, despite having been specifically raised by the assessee before him was however not addressed and therein answered by the CIT(A) in the right perspective. Be that as it may, we are of the considered view, that as the A.O having regard to the accounts of the assessee, as were placed before him, had failed to record his dissatisfaction as regards the correctness of the suo motto disallowance that was offered by it under Sec. 14A in its return of income, therefore, he could not have validly resorted to sub-section (2) and (3) of Sec. 14A and computed the said disallowance as per the mechanism contemplated in Rule 8D. Accordingly, not being persuaded to accept the view taken by the CIT(A), we herein set-aside his order and vacate the additional disallowance of Rs. 9,85,144/- made by the A.O. As we have quashed the disallowance made by the A.O under Sec. 14A r.w Rule 8D for want of jurisdiction, therefore, we refrain from adverting to and therein adjudicating the other contentions raised by the assessee on the basis of which the validity of the said disallowance has been assailed before us, which thus are left open.
Resultantly, the appeal filed by the assessee is allowed in terms of our aforesaid observations.
Order pronounced in the open court on 26.07.2021