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Facts
The assessee, VTL Investments Limited, filed a return declaring nil income. During assessment, the AO observed substantial investments and exempt income. The assessee suo motu disallowed a portion of expenses under Section 14A. The AO, dissatisfied with the allocation method, invoked Section 14A read with Rule 8D.
Held
The Tribunal held that the CIT(A) erred in not providing the assessee with an opportunity for a personal hearing, which is a statutory obligation. The matter was remitted back to the CIT(A) for this purpose.
Key Issues
Whether the CIT(A) erred in upholding the disallowance under Section 14A read with Rule 8D without providing a personal hearing to the assessee. Whether the disallowance under Section 14A could be imported into the computation of book profits under Section 115JB.
Sections Cited
14A, 8D, 143(2), 115JB
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Order PER LALIET KUMAR, J.M This is an appeal filed by the Assessee against the order of the Ld. CIT, Appeal Addl/JCIT(A)-6, Kolkata dt. 13/09/2024 pertaining to Assessment Year 2017-18. 2. In the present appeal Assessee has raised the following grounds :
1. That the Order passed by the Ld. ADDL/JCIT(A) is contrary to law and also have been passed without appreciation of facts of the case.
2. That Ld. ADDL/JCIT(A) erred in law in not following the procedure laid down under the 'Faceless Appeal Scheme' as such opportunity of being heard by way of 'Virtual Hearing' not provided to the assessee.
3. That the Ld. ADDL/JCIT(A) erred in law and on facts in upholding the disallowance of Rs. Rs. 6,78,441/- (though restricted to Rs. 4,61,470/- after allowing credit of suo-moto disallowance of Rs. 2,16,971/-) under section 14A of The Income Tax Act, 1961 read with Rule 8D ignoring the contention of the assessee.
4. That the Ld. ADDL/JCIT(A) erred in law and on facts in importing the disallowance made u/s 14A into the scheme of calculation of book profits as per section 115JB of the Act.
2 5. That the appellant craves leave to add/alter/amend any ground of appeal on or before the due date of hearing of appeal.
3. Briefly, the facts of the case are that the assessee, VTL Investments Limited, filed its return of income for the Assessment Year 2017–18 declaring nil income under normal provisions. Thereafter the case was selected for scrutiny under CASS, and notice under Section 143(2) was issued. 3.1 During the course of assessment proceedings, the AO observed that the assessee had made substantial investments amounting to Rs.38.72 crore as on 31.03.2017, out of which Rs.7.28 crore pertained to investments yielding exempt income. The assessee had earned exempt income of Rs.12.56 crore during the relevant previous year. 3.2 The assessee, in its computation, had suo motu disallowed Rs.2,16,971/- under Section 14A, on the basis of proportionate allocation out of total expenses of Rs.10,25,937/-. 3.3 The AO, upon examination of the balance sheet and the nature of expenses, noted that a major portion of the expenses comprised professional fees relating to Portfolio Management Services (PMS), with minimal employee benefit expenses. The AO opined that the assessee had not maintained separate accounts delineating expenses relatable to taxable and exempt income and that the allocation adopted by the assessee was not reasonable. 3.4 The AO, after recording dissatisfaction with the assessee’s working, invoked the provisions of Section 14A read with Rule 8D, and determined the disallowance as follows: Disallowance under Rule 8D(2)(ii): Rs.0. Disallowance under Rule 8D(2)(iii) (1% of average exempt-investment): Rs.6,78,441.
3 3.5 After reducing the suo motu disallowance of Rs.2,16,971 by the assessee, the net disallowance was computed at Rs.4,61,470, which was added back to the total income.
Against the order of the AO the assessee went in appeal before the Ld. CIT(A). 4.1 In appeal before the Ld. CIT(A), the assessee contended that its method of proportionate allocation was reasonable, and that the AO had failed to record proper satisfaction as mandated under Section 14A(2). 4.2. The Ld. CIT(A), upon consideration of the assessment order and the assessee’s submissions, held that the AO had duly recorded dissatisfaction with the correctness of the assessee’s claim in the assessment order, thereby satisfying the statutory requirement under Section 14A(2). 4.3. The Ld. CIT(A) further observed that the assessee had earned exempt income through PMS and that the related expenses predominantly pertained to such services. Given that no separate accounts were maintained by the assessee for taxable and exempt income, and considering the binding nature of Rule 8D once dissatisfaction is recorded, the Ld. CIT(A) upheld the disallowance made by the AO. 4.4. The reliance placed by the assessee on earlier decisions of the Tribunal in the case of Vardhman Holdings Ltd. and Devakar Investment & Trading Co. Pvt. Ltd. was held to be distinguishable on facts, as those cases involved different factual matrices, particularly where disallowance exceeded actual expenditure incurred. 4.5. Accordingly, the appeal of the assessee was dismissed by the CIT(A).
Against the order of the Ld. CIT(A) the assessee is in appeal before the Tribunal.
4 5.1 During the course of hearing, the Ld. AR reiterated that the assessee had consistently followed a proportionate basis for allocation of expenses relating to taxable and exempt income, which had been upheld in earlier years by the Hon’ble ITAT and the CIT(A). 5.2. It was further contended that the AO failed to record cogent and detailed reasons for dissatisfaction with the assessee’s claim, and that mere observations regarding the composition of expenses do not satisfy the pre- condition stipulated under Section 14A(2) for invoking Rule 8D. 5.3. The assessee relied upon judicial precedents, inter alia, ACIT v. Vardhman Holdings Ltd. and Devakar Investment & Trading Co. Pvt. Ltd., to support the reasonableness of its allocation method. 5.4. The assessee also challenged the inclusion of the disallowance made under Section 14A in the computation of book profits under Section 115JB, submitting that Section 115JB is a self-contained code, and disallowance under Section 14A cannot be imported therein, relying on Vireet Investment Pvt. Ltd. (SB) and Vardhman Textiles Ltd. 5.5 Lastly, the Ld. AR had submitted that the assessee has requested the CIT to grant the personal hearing through video conferencing and these aspects have been duly mentioned in the impugned order at page 9. However, despite the request, the Ld. CIT has not granted the personal hearing to the assessee.
Per contra, the Ld. DR relied on the orders of the lower authorities. 6.1 The Ld. DR submitted that the AO had, in fact, recorded dissatisfaction with the assessee’s allocation method and had properly invoked Rule 8D after noting the skewed nature of the expense allocation. 6.2 It was further submitted that the assessee’s failure to maintain separate accounts justified the invocation of Rule 8D, and that the earlier cases cited by the assessee were not applicable to the present facts.
5 6.3. With regard to the book profit computation under Section 115JB, the DR submitted that the matter was covered against the assessee as per the prevailing departmental stance. With respect to grant of personal hearing it was submitted that it is not a matter of right for the assessee to claim the personal hearing however in a given case where the assessee was able to establish that the personal hearing is required, the Ld. CIT(A) is duty bound to grant the personal hearing as per the Facelless Appellate Rules 2021.
I have heard the rival contention and perused the material available on the record. In the present case, the primary issue for adjudication is the disallowance made under Section 14A read with Rule 8D amounting to Rs.4,61,470. 7.1. I find that the AO has specifically noted his dissatisfaction with the assessee’s method of allocation in the assessment order, highlighting that the bulk of expenses related to PMS and that the allocation was not proportionate. This satisfies the statutory mandate of Section 14A(2) as laid down by the Hon’ble Supreme Court in Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2017) 394 ITR 449 (SC). 7.2. The assessee has not maintained separate accounts to demarcate expenses attributable to exempt and taxable income. Once the AO records dissatisfaction with the correctness of the assessee’s claim, the application of Rule 8D becomes mandatory. 7.3 The assessee has specifically requested the grant of a personal hearing, contending that the facts of the present case are identical to those of earlier assessment years and, therefore, the principle of consistency must be followed. In view of the assessee’s request and the statutory obligation to afford an effective opportunity of being heard, I am of the considered opinion that the Ld. CIT(A) was duty-bound to grant such a hearing in accordance with the law and the procedural rules governing appellate proceedings.