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Income Tax Appellate Tribunal, “A(SMC
Before: Shri A. T. Varkey, JM]
This is an appeal preferred by the assessee against the order of Ld. CIT(A)-17, Kolkata dated 04-03-2019for the assessment year 2012-13.
The sole ground of appeal of assessee is against the action of Ld. CIT(A) in confirming the disallowance to the extent of Rs.19,48,630/- out of the total disallowance of Rs.20,72,749/- made by AO u/s. 14A of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) read with Rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as the “Rules”).
3. Briefly stated facts as observed by the AO are that the assessee had received exempted income by way of dividend. According to AO, the assessee has invested money in shares i.e. non current investment to the tune of Rs.42,98,45,733/- during the FY 2011- 12. And the assessee has debited only demat charges of Rs.33,145/- and claimed that no other expenditure was incurred by it for earning this dividend income. However, the AO after asking for explanation remarked that he did not accept the claim of assessee and applied Rule 8D and computed the disallowance to the extent of Rs.20,72,749/-. Aggrieved, assessee preferred an appeal before the Ld. CIT(A) who confirmed the action of AO to the extent of Rs.19,48,630/- and deleted the disallowance to the extent of Rs.1,24,119/- out of M/s. Vistar Financiers Pvt. Ltd.,AY- 2012-13 total disallowance made by the AO of Rs.20,72,749/-. Aggrieved, assessee is before this Tribunal.
4. After hearing the rival submissions and perusing the material available on record, it is noted that the assessee is engaged in the business of dealing of shares, Govt. Securities & PSU Bonds. The assessee during the year had earned dividend income of Rs. 21,42,911/-, which is exempt from tax u/s. 10(34) of the Act. The assessee claimed that no expenditure was incurred by the assessee in earning this dividend income. The AO disallowed the expenditure amounting to Rs. 20,72,749/- alleging that the assessee debited demat charges of Rs. 33,145/- and therefore disallowances u/s. 14A r.w.r 8D is applicable in case of the assessee. The AO while disallowing Rs. 20, 72,749/- noted as under : During the course of hearing it is seen that the assessee has exempted income by way of Dividend. The assessee has invested money in shares i.e non current investment of Rs. 42,98,45,733/-. Hence applicability of disallowance u/s. 14A r.w.r 8D is applicable in this case. The A/R of the assessee was asked to file a reply why disallowance u/s. 14A of the IT Act will not be made in your case. The A/R of the assessee furnished written reply dt. 12.2.2015 in support of non applicability of section 14A read with Rule 8D which is not acceptable. Whereas in tax audit report auditor has disallowed the demat charges.”
5. Drawing our attention to this reason recorded by AO the ld. AR submitted that the AO had rejected the contention of the assessee without providing any reason for such rejection. According to him, the only reason for disallowance u/s. 14A was that the auditor of the assessee in the tax audit report had disallowed demat charges of Rs. 33,145/- u/s. 14A which was never incurred for earning dividend income. The ld. AR submitted that the AO has neither recorded any nexus between the exempt income and the expenditure so disallowed by him nor recorded his dissatisfaction with reference to the claim of the assessee that no expenditure other than already disallowed in the return was incurred by it in earning the exempt income. The ld. AR contended that no disallowance can be made if the AO does not record satisfaction with reference to assessee’s accounts that the assessee’s claim is improper and therefore he wants us to order deletion of addition made by AO and partially sustained by ld. CIT(A).
6. Per contra, the ld. DR submitted that the AO asked for explanation from assessee and after perusing the reply has recorded his dissatisfaction by recording that the A/R of the assessee was asked to file a reply why disallowance u/s. 14A of the Act will not be made in its case and AO after taking note that the A/R of the assessee furnished written reply dated
M/s. Vistar Financiers Pvt. Ltd.,AY- 2012-13 12.2.2015 in support of non applicability of section 14A read with Rule 8D was found to be not acceptable, therefore, according to ld. DR the AO has rightly invoked Rule 8D and he does not want us to interferein the order of ld. CIT(A).
In the light of the rival submissions, first of all let us have to look at the relevant provisions i.e section 14A & Rule 8D, which is reproduced 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]. Rule 8D “ (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with— (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
From a conjoint reading of section 14A r.w.r 8D reveals that the AO has to first record a finding of fact after having regard to the accounts of the assessee in relation to earning of exempt income that he is not satisfied with the correctness of the claim of expenditure. Sub-section (2) of section 14A makes it amply clear that the satisfaction of the AO as to the incorrect claim made by the assessee in this regard in sine qua for invoking the applicability of Rule 8D. In case if the assessee has not incurred any expenditure in M/s. Vistar Financiers Pvt. Ltd.,AY- 2012-13 respect of earning the exempt income and makes a claim before the AO, then the AO after verification of the accounts maintained by the assessee finds it to be correct, then he cannot resort to apply Rule 8D. In my opinion, it is clear that the disallowance as per Rule 8D is not automatic and it can be resorted to only if the AO having regard to the accounts of the assessee records his dissatisfaction as to the claim of expenses incurred by the assessee for earning the exempt income. In the instant case the AO while making the addition u/s. 14A had made no effort to examine the veracity of the claim made by the assessee company that it did not incurr any expenditure other than the demat charges suo-moto disallowed by it, which also assessee contests that the demat charges not incurred while earning the exempt income. The ld. CIT(A) also did not make any effort to examine the claim of the assessee rather has simply taken into consideration the alternate claim of the assessee without adjudicating the legal issue raised by the assessee, which omission of Ld CIT(A) cannot be countenanced. Even at the cost of repletion, according to me from a conjoint reading of section 14A & Rule 8D there are two stages envisaged by the statute which the AO has to keep in mind while examining the veracity of the expenses incurred by assessee for earning exempt income. The AO first of all is duty bound to examine the assessee’s claim of having incurred some expenditure or no expenditure in relation to exempt income. The claim of the assessee in this regard has to be examined by AO having regard to the accounts of the assessee. If the AO gets satisfied with the explanation of the assessee, then there is no need to compute disallowances as per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, then only the mandate of Rule 8D will come into operation which is the second stage of invoking Rule 8D. In the instant case the AO has directly gone to the second stage of computing disallowance as per Rule 8D without rendering any satisfaction on the correctness or otherwise of the assessee’s claim in this regard, which action is per se arbitrary and so it cannot be countenanced. I note that AO has called for explanation from the AR of the assessee, which was submitted to him. However the AO has not given any reason why he is satisfied with the explanation rendered by the assessee and has simply remarked that he is not accepting the claim of assessee that it did not incur any expenditure for earning exempt income. It has to be kept in mind that reason is the soul of any order and here it is absent. A bald assertion by AO that he is not accepting the assessee’s claim is arbitrary and so cannot be justified. The AO has not M/s. Vistar Financiers Pvt. Ltd.,AY- 2012-13 applied his mind while dealing with the issue and his action smacks of arbitrariness and therefore his action cannot be sustained. And since the ld. CIT(A)’s action of non adjudication of the legal issue raised by the ld. CIT(A) makes it unsustainable and so I am inclined to set aside the order and direct deletion of addition made by AO on this issue by invoking Rule 8D. For the reasons stated above, the appeal of assessee is allowed.
Before parting, it is noted that the order is being pronounced after the ninety (90) days of hearing. However, taking note of the extraordinary situation in the light of the COVID-19 pandemic and lockdown, the period of lockdown days need to be excluded. For coming to such a conclusion, I rely upon the decision of the Co-ordinate Bench of the Mumbai Tribunal in the case of DCIT vs. JSW Limited in & 6103/Mum/2018, Assessment Year 2013-14, order dt. 14th May, 2020.