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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ : NEW DELHI
Before: SHRI N.K.BILLAIYA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, Lodhi Property Company Ltd., New Delhi (hereinafter referred to as ‘the assessee’), by filing the present appeal sought to set aside the impugned order dated 27.03.2018 passed by the Commissioner of Income-tax (Appeals)-3, New Delhi , for the assessment year 2014-15 on the grounds inter alia that :-
“1. (i) That on facts and circumstances of the case, the ld. CIT(A) was not justified in passing ex-parte order and dismissing the appeal of the assessee without proper opportunity and adjudication in terms of provisions of section 250(4) of the Income Tax Act, 1961.
(ii) That in the absence of proper and reasonable opportunity, the impugned order is passed in contravention to principels of natural justice and not sustainable under the law.
2. That on facts and circumstances of the case, the ld. CIT(A) was not justified in confirming disallowance of Rs. 6,64,325/- u/s 14A read with rule 8D in total disregard to facts of the case that appellant has not earned any dividend income.
That the impugned appellate order, being wrong on facts and bad in law, deserves to be quashed or, alternatively, set aside.”
Briefly stated that facts necessary for adjudication of the controversy at hand are : that the assessee is into business of hospitality and hotel management services who has made investment in equity shares of domestic subsidiaries companies.
AO while examining the investment made by the assessee in the light of the provisions contained u/s 14A of the Act called upon the assessee to exaplain as to why disallowance u/s 14A of the Act should not be made as per Rule 8D of the Income Tax Rules 1962 (for short the Rules) qua the investment shown in the balance sheet. AO being dissatisfied with the explanation furnished by the assessee company proceeded to compute the disallowance u/s 14A of the Act read with Rule 8D of the Rules as under :-
CALCULATION OF DISALLWOANCE UNDER RULE 8D S.NO. PARTICULARS AMOUNT (i) Expenditure Directly relating to income which does not form part of total income (ii) Expenditure incurred by way of interest (A*B/C)
A=Amount of Interest* NIL *Interest expenses 32,77,83,081 Less: Interest Income 74,76,74,966 Net interest expenses/(Net (41,98,91,885) interest income
B=Average Value of 13,28,65,000 Investments** Investment as on 01.04.2013 19,55,72,500 Investment as on 31.03.2014 7,01,57,500
C=Average of total Assets 1555,53,49,044 Total Assets as on 1683,13,57,013 01.04.2013 Total Assets as on 1427,93,41,075 31.03.2014
A*B/C subject to Maximum Nil of A (iii) One half % of Average value 6,64,325 of investment income from which does not form part of total income TOTAL DISALLOWANCE 6,64,325 AS PER RULE 8D PARTICULARS 31.03.2014 31.03.2013 Total Investment 1062,63,70,415 1075,17,85,415 Less : Investment in 1055,62,12,915 1055,62,12,915 equity share of DLF Global Hospitality Ltd., Cyprus as dividend income there from is chargeable to tax. Net investment 7,01,57,500 19,55,72,500 (Disallowance of Rs. 6,64,325/-)
3. So, on the basis the aforesaid calculation, AO proceeded to make disallowance to the tune of Rs. 6,64,325/- u/s 14A read with Rule 8D.
Assessee carried the matter by way of filing appeal before the Ld. CIT(A) who has dismissed the appeal ex parte. Feeling aggrieved the assessee has come up before the Tribunal by way of challenging the impugned order passed by Ld. CIT(A).
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputedly assessee has not earned any dividend / exempt income during the year under assessment on the investment made by it as is apparent from auditor’s report placed on file by the assessee. It is also not in dispute that AO without recording dissatisfaction as to the working out made by the assessee that no expenses have been incurred nor earned any dividend / exempt income, proceeded to invoke the provisions contained u/s 14A read with Rule 8D in a mechanical manner.
Hon’ble Delhi High Court in case cited as CHEMINVEST LTD. vs. Commissioner of Income Tax [2015] 378 ITR 33 (Delhi) while interpreting applicability of Section 14A held as under :
“ that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee was not in doubt, no disallowance could be made under section 14A.”
Hon’ble Delhi High Court while deciding the identical issue with regard to Section 14A read with Rule 8D in case cited as Maxopp Investment Ltd. vs. CIT(2012) 347 ITR 272 (Delhi) held as under :-
“Section 14A even prior to the introduction of sub- sections (2) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the Assessing Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of .sub-section (2) of section 14A . Prior to that, the assessee was free to adopt any reasonable and acceptable method. So, even for the prerule 80 period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the Act. Even where the assessee claims that no expenditure has been incurred in' relation to income which does not form part of the total income, the Assessing Officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance under section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the Assessing Officer is not, on the basis of the objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.”
Hon’ble Apex Court in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT - 394 ITR 449 (SC) thrashed the issue in controversy as to invoking of the provisions contained under Rule 8D of the Rules by observing 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 assessee, 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 view of what has been discussed above and by following the law laid down by Hon'ble Apex Court and High Courts in judgments cited as CHEMINVEST LTD., Godrej & Boyce Manufacturing Company Ltd. (supra) and Maxopp Investment Ltd. (supra), we are of the considered view that the findings returned by AO that, making disallowance u/s 14A by the AO by relying upon CBDT Circular dated 05/2014 dated 11.02.14 that disallowance u/s 14A is to be made even if no exempt income has earned during the year under consideration, is no longer a good law because where the assessee has not earned any dividend income forming part of the total income during the year under assessment, section 14A read with Rule 8D is not attracted. So making disallowance u/s 14A read with Rule 8D in a mechanical manner without recording any dissatisfaction as to the working out made by the assessee that he has not incurred any expenses nor earned any dividend income during the year under assessment is not permissible under law. So consequently AO as well as CIT(A) have eared in disallowing/confirming the addition made u/s 14A read with Rule 8D, which is order to be deleted.
Hence, appeal filed by the assessee is hereby Allowed. Order pronounced in open court on this 14th Day of December, 2018.