Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH: ‘E’, NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI O.P. KANT
This appeal by the assessse is directed against the order dated 22.06.2016 passed by the learned Commissioner of Income Tax (Appeals), 22, New Delhi [in short ‘learned CIT(A)’] raising the following grounds:
1. That the Commissioner of Income Tax (Appeals) [‘CIT(A)’] erred on facts and in law in holding that a sum of Rs.37,47,358/-, being 5% of the exempt dividend income earned by the appellant during the relevant previous year was disallowable under section 14A of the Income-tax Act, 1961 [The Act’]. 1.1 That the CIT (A) erred on facts and in law in holding as aforesaid without establishing any proximate relationship between the expenditure incurred and the dividend income earned and not appreciating that no expenditure was actually incurred in earning the exempt dividend income. 1.2 Without prejudice, that the disallowance if any should have been restricted to Rs.5,83,685/- as per calculation provided by the appellant.
That, without prejudice, the CIT(A) erred on facts and in law in not restricting the disallowance under section 14A of the Act to Rs.23,55,952/-, being the amount disallowed in the original assessment proceedings. 2.1 That the CIT(A) erred in law in stating that once the matter is restored back to the file of the AO for de-novo assessment, the AO’s discretion is not limited to the addition made in the original assessment unless the 1TAT specifically mentions in its order. The appellant craves leave to add, to alter, amend or vary the above grounds of appeal at or before the time of hearing.
2. Briefly stated facts of the case are that the assessee filed return of income on 29.10.2007, declaring total income of Rs.4,36,49,710/-. The assessment under section 143(3) of the Income-tax Act, 1961 (in short “the Act”) was completed on 30.03.2015 at total income of Rs.4,76,80,22,462/-, wherein disallowance of license fees of Rs.40,07,44,800/- and disallowance under section 14A, amounting to Rs.23,55,952/- was made. On further appeal, the ld. CIT(A) vide his order dated 04.07.2012 deleted the disallowance of license fees of Rs.40,07,44,800/-, however, upheld the disallowance under Section 14A to Rs.22,14,685/-. On further appeal by the assessee the Tribunal in and 4670/Del/2012, dated 03.01.2014 dismissed the appeal of the Department in respect of license fees but restored the issue of disallowance under Section 14A of the Act to the Assessing Officer for deciding de-novo after giving reasonable opportunity to the assessee of being heard. In compliance to the direction of the Tribunal, the Assessing Officer allowed various opportunities to the assessee. Though initially no compliance was made by the assessee of the opportunity granted by the Assessing Officer vide his letter dated 23.07.2014 and 20.01.2015, however, at the end of the proceedings representative of the assessee attended and filed submission. He identified the expenses of Rs.5,83,685/- by apportioning cost of running the treasury operations of the assessee for disallowance u/s 14A of the Act. The suo motu disallowances of Rs.5,83,685/- proposed by the asessee was not accepted by the Assessing Officer and he proposed the disallowance in proportion of the exempt income to the total income plus exempt income. The ld. Assessing Officer arrived at the proportion of 1.68% which he applied over the interest expenses and administrative expenses and worked out disallowance of Rs.1,01,656/- towards interest expenses indirectly attributable to earning of the exempt income and Rs. 1,80,87,686/- as administrative expenses attributable to exempt income. The computation of disallowance made in para 7 of the assessment order is reproduced as under:
2.1 On further appeal, the ld. CIT(A) deleted the addition of Rs.1,01,656/- out of interest payment following his finding in the case of the assessee for assessment year 2001-12. Regarding the administrative expenses, the ld. CIT(A) rejected the contention of the assessee of disallowance not exceeding Rs.31,833/-. The break-up of disallowance was given by the assessee as under:
Particulars Amount (in Rs.) Exempt Income (A) 74,9,47,000 Gross Receipts as per P & L Add: Excise Duty 3025,77,58.000 Total Receipts (B) 119,35,89,000 Proportion (Aim 024% Disallowance: Interest Expense 60,51,000 14,4 19 Administrative Expenses 107,66,48,000 8,283 Treasury Staff Cost 38,31,879 9.131 Total Disallowance 31,831 2.2 The ld. CIT(A) rejected the basis of calculation of the disallowance by the assessee in para 5.1 of the impugned order which is reproduced as under:
“5.1 As evident from the above, it is not understood how the above figure has been arrived at. As far as the figure of Rs.9131/- is concerned, it is 0.24% of the treasure staff cost of Rs.38,31,879/-. However, the figure of treasury staff cost is not verifiable. As regards the figure of Rs.8283/- the administrative expenses have been mentioned in the above table as Rs.107,66,48,000/- and Rs.8283/- is only .0008% of the same.
2.3 Being not satisfied with the computation of disallowance of administrative expenses, the CIT(A) estimated 5% of the dividend income of Rs.7,49,47,159/- which was worked out to Rs.37,47,358/- towards the earning of exempt income. The relevant para of the impugned order is reproduced as under:
“5.2 Considering the above factual background and the argument of the appellant that the total administrative expenses of Rs.107,66,48,000/- also included various expenses which have no connection with the earning of exempt dividend income like contract manufacturing charges, training expenses, insurance rates and taxes, rent, etc. the method adopted for computation of disallowance by the AO is substituted by an estimated disallowance out of the exempt income earned. Therefore, the disallowance is confirmed at 5% of the dividend income earned of Rs.7,49,47,159/- which comes to Rs.37,47,358/-“
Before us, the ld. counsel of the assessee field a paper- books containing pages 1 to 118 and submitted that the ld. Assessing Officer has made disallowance even more than the amount which was disallowed in the original assessment proceedings. He submitted that the Assessing officer was not justified in computing the disallowance of administrative expenses in proportion of the exempt income. He submitted that even calculation made by the Assessing Officer is also not correct. He further submitted that there is no basis of estimation of 5% of the dividend income as expenses related to the exempt income by the ld. CIT(A). The ld. Counsel referred to page 41 of the paper-book wherein the basis of the suo motu disallowance made before the AO of Rs.5,83,685/- has been worked out. The Ld. counsel for the assessee further submitted that the assessee has segregated the cost of the staff engaged in treasury operations on the basis of the estimated time spent by them in the investment activity in the mutual fund. He submitted that in case of estimated time spent by officer, 18.75% is treated towards mutual fund activity whereas in case of the other treasury staff time is estimated at 6.75% towards mutual fund activity. He further submitted that other expenses have also been estimated in respect of the staff cost. According to him, the assessment year being prior to assessment year 2008-09, the disallowance is to be computed on reasonable basis rather than under Rule 8D. He submitted that the disallowance made by the assessee on scientific basis must be accepted.
On the other hand, ld. DR submitted that the Assessing Officer has provided ample opportunity to the assessee, however, the assessee only at the fag end of the proceeding, provided the calculation of disallowance of Rs.5,83,687/-. She referred to relevant pages of the paper-book and submitted that no scientific basis has been provided for estimating the number of persons engaged in the treasury staff and percentage of the time spent by them on the mutual fund activity. She submitted that the percentage time spent has been estimated without any basis. She also submitted that the basis of estimation of other expenses towards earning exempt income is also not proper. She submitted that in Rule 8D administrative expenses are disallowed in percentage terms of investment of the tax payers. In view of the arguments, she submitted that the estimation of 5% of exempt income is most reasonable and the same should be upheld.
We have heard the rival submissions of the parties and perused the relevant material on record. In first round of the proceedings, no suo motu disallowance was made by the assessee under section 14A and the Assessing Officer made disallowance of Rs.23,55,952/-. In second round of proceedings, the Assessing Officer has estimated the disallowance of administrative expenses in proportion to the exempt income to the total income plus exempt income. This calculation has been rejected by the ld. CIT(A), however, he confirmed 5% of the dividend income towards disallowance for administrative expenses. The contention of the assessee that it has worked out the disallowance of administrative expenses on scientific and reasonable manner. The working of the assessee available on page 41 of the paper-book is reproduced as under:
Whether Estimated Time Proportionate Treasury Staff Staff Cost involved in MF spent for MF Expenses activity (Y/N) Activity * • Treasurer 1,653,196 y 6.25% 103,325 Manager 717,034 y 6.25% 44,815 Executive 789,572 y 6.25% 49,348 Officer 579,057 y 18.75% 108,573 Officer 93,020 N NA NA 3,831,879 306,061 Other Expenses Other Staff related expenses 2,070.021 Preparation Expense 214,515 Electricity Expense 27,505 49,132 Rent Expense Profession and legal Expenses 510.472 Building Maintenance 100,524 Telecommunication Expenses 90,915 Postage Expense 55,323 Office Expenses 54,850 Travelling Expense 164,689 Training & Meeting Expenses 116,498 Other Expenses 21,405 3,475,849 ## 277,624
Total Expense 583,685 * The company does not have employees who are exclusively involved in the activities related to earning dividend income. ## Other expenses have been allocated in the ratios of staff cost.
5.1 On perusal of the above table, we find that the assesee has segregated staff cost of Rs.38,31,879/-. Further time spent for mutual fund activity in case of three Staffs (Treasure, Manager, Executive) have been estimated to 6.25% and in case of one person (officer) has been estimated to 18.75% but no basis has been given for adopting the time spent by those persons. No such details were even produced before the Assessing Officer. The disallowance of Rs.2,22,674/- out of other expenses has been estimated in ratio of staff cost but no details of the calculation in this regard has been provided in the table. 5.2 We find that the assessee as well as the ld. AO/CIT(A) has made disallowance on estimate basis. As the assessee has not maintained separate books of account or not identified expenses separately towards earning the exempt income, there is no alternative expect estimation. The assessee has estimated the disallowance on the basis of estimation of man hours spent towards the investment in mutual fund activity. The ld. AO has estimated the expenditure for earning exempt income in proportion of exempt income to total income including exempt income. The ld. CIT(A) has estimated the disallowance at 5% of exempted income. We find the legislature has approved the similar disallowance for administrative expenses w.e.f. assessment year 2008-09 under Rule 8D(2)(iii) as (0.5%) of average investment in assets yielding exempt income. The Hon’ble Delhi High Court in the case of ACB India Ltd. Vs. ACIT [ITA No. 615 of 2014, Order dated 24th March, 2015] and the Special Bench of the Tribunal in ACIT Vs. Vireet Investment Pvt. Ltd. (ITAT-Delhi) (Special Bench) [ITA No. 502/Del/2012 (for AY: 2008-09), Order date 16.06.2017], has restricted the disallowance towards administrative expenses under Rule 8D(2)(iii) to 0.5% of the assets which yielded exempt income during the year. In our opinion, the estimation of 0.5% of assets which yielded exempted income during the year would be a most reasonable estimate for identifying the administrative expenditure for earning the exempt income. We, accordingly, direct the Assessing Officer to compute the disallowance in view of our above direction, however, the disallowance, if any, computed in this manner should be restricted to disallowance of Rs.23,55,952/-, which was made by the Assessing Officer in original assessment proceedings. The grounds of appeal are accordingly allowed partly for statistical purposes.
6. The appeal of assessee is accordingly allowed for statistical purposes. Order pronounced in the open court on 17th January, 2020.