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Income Tax Appellate Tribunal, “H”
Before: SHRI AMARJIT SINGH, JM & SHRI G. MANJUNATHA, AM
O R D E R
PER AMARJIT SINGH, JM:
The above mentioned appeals have been filed by the Revenue against the order dated 21.03.2018 passed by the Commissioner of Income Tax (Appeals)-10, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Ys.2011-12, 2012-13 & 2013-14.
The revenue has filed the present appeal against the order dated 21.03.2018 passed by the Commissioner of Income Tax (Appeals)-10, ITA. Nos.4036 to 4038/M/2018 A.Ys. 2011-12, 2012-13 & 2013-14 Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2011- 12.
The Revenue has raised the following grounds: - “
1 "Whether on the facts and circumstances of the case and in Law, the Ld. CIT(A) was justified in deleting the addition made u/s 14A r. w. Rule 8D of the Income Tax Rules. 1962. holding that disallowance cannot exceed exempt income, without appreciating the fact that CBDT after analyzing section 14A vis-à-vis Rule 8D has clarified in Circular no.5/2014 dated /11.02.2014 that Rule 8D read with section 14A of the Income tax Act, 1961 provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income. 1 The appellant prays that the order of the Ld. CIT(A) be set aside and the order of the AO be restored.
2. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary.”
4. The brief facts of the case are that the assessee filed its return of income on 29.11.2011 declaring total income to the tune of Rs.27,51,95,960/-. The return was processed u/s 143(1) of the I.T. Act, 1961. Thereafter, the case was selected for scrutiny. Notices u/s 143(2) & 142(1) of the Act were issued and served upon the assessee. The assessee company was engaged in the business of Manufacturing of cut and polished diamonds and diamonds studded jewellery. On verification, it was found that the assessee received the dividend income of Rs.8,20,050/- and claimed exempt u/s 10(34) of the I.T. Act, 1961. The AO applied the provisions u/s 14A of the Act r.w. Rule 8D of the I.T. Rules and assessed the expenditure to earn the exempt income in sum of Rs.2,85,72,585/-. The total income of the assessee was assessed to the tune of Rs.30,60,85,625/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who ITA. Nos.4036 to 4038/M/2018 A.Ys. 2011-12, 2012-13 & 2013-14 restricted the disallowance u/s 14A of the Act r.w. Rule 8D of the I.T. Rules to the extent of exempt income, the revenue was not satisfied, therefore, the revenue has filed the present appeal before us.
We have heard the argument advanced by the Ld. Representative of the parties and perused the record. The CIT(A) has given the consolidated finding on the issues which is hereby reproduced as under: - “6.3.2 As discussed above, during the year A.Y.2011-12, the assessee has earned dividend income of Rs. 8,20.050/- and has claimed it exempt u/s. 10(34) of the IT Act 1961. However, the appellant has not allocated any expenses towards the activity of investment in assets yielding income exempt under the Act. During the year A.Y.2012-13, the assessee has earned dividend income of Rs. 29,99,387/- and has claimed it exempt u/s. 10(34) of the IT Act 1961 and the appellant has suo-moto disallowed an amount of Rs. 29,99,387/- as expenses incurred towards the activity of investment in assets yielding income exempt under the Act. During the year A.Y.2013-14. the assessee has earned dividend income of Rs. 1460,078/- and has claimed it exempt u/s. 10(34) of the IT Act 1961 and the appellant has suo-moto disallowed an amount of Rs. 14.60,078/- as expenses incurred towards the activity of investment in assets yielding income exempt under the Act. During the year A.Y.2014-15, the assessee has earned dividend income of Rs. 76,77,552/- and has claimed it exempt u/s. 10(34) of the IT Act 1961 and the appellant has suo-moto disallowed an amount of Rs. 76.77.552/- as expenses incurred towards the activity of investment in assets yielding income exempt under the Act. However, the appellant has not provided any justification as regards expenses incurred towards the activity of investment in assets yielding income exempt under the Act. The Hon'ble Tribunal in the case of Assistant Commissioner of Income Tax, Range 10(1). Mumbai v. Citicorp Finance (India) Ltd. [2007] 12 SOT 248 (Mum.) has held that 'It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses.' Further, it has been held by the Hon’ble] ITAT, Chennai’s Bench in the case of Southern Petro Chemical Industries Vs. Deputy Commissioner Of Income Tax (2005) 93 TTJ 0161 :(2005) 3 SOT 0157. 'Whether to invest or not to invest and whether to retain the investments or to liquidate the same are very strategic decisions which the management is called upon to take. These are mind-boggling decisions to 4038/M/2018 A.Ys. 2011-12, 2012-13 & 2013-14 and top management is involved in taking these decisions. This decision- making process is very complicated and requires very careful analysis. Moreover. the assessee has to keep track of various dividend incomes declared by the investee companies and also to keep track of the dividend income having been regularly received by the assessee. This activity itself calls for considerable management attention and cannot be left to a junior clerk. Thus, proportionate management expenses are required to be deducted while computing the dividend income. 6.3.3 In Godrej & Boyce Co. Ltd. (: (2010) 328 ITR 0081), the Hon'ble Bombay High Court has explained 8D(2)(iii) as under: As regards r. 8D(2)(iii), if has been submitted that some mechanism or formula had to be adopted for attributing part of the administrative /managerial expenses to tax exempt investment income. The administrative expenses attributable to tax-free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under portfolio management schemes (PMS) the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded, on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. The justification that has been offered in support of the rationale for r. 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method'. 6.3.4 In view of the aforesaid, it can be held that the AO has justifiably invoked Rule 8D of the Income Tax Rule 1962 for the purpose of making disallowance u/s 14A of the Act and the addition made by the AO ought to be sustained. 6.3.5 However, I find merit in the plea of the appellant that the disallowance u/s 14A cannot exceed exempt income. The plea of the appellant finds supports from various judicial pronouncements. The Hon'ble Delhi High Court, vide the judgment dated 25.02.2015, in the case of Joint Investment Pvt. Ltd Vs. CIT (2015) 372 ITR 694, has held that the disallowance u/s 14A cannot exceed the amount of exempt income and further in the case of CIT vs. Holcim India Pvt. Ltd (2014) 90 CCH 0081 — Del-HC, it has been held that there can be no disallowance u/s 14A in the absence of any exempt income. In CIT v. to 4038/M/2018 A.Ys. 2011-12, 2012-13 & 2013-14 State Bank of Patiala [393 ITR 476 (P&H)]. the amount of disallowance u/s 14A was restricted to the amount of exempt income only and the Hon'ble Supreme Court of India in the decision dated February 12, 2018 in the case of Maxopp Investment Ltd. Vs Commissioner of Income Tax, New Delhi & Others (supra) has upheld this view as under: 40) We note from the facts in the State Bank of Patiala cases that the AO, while passing the assessment order, had already restricted the disallowance to the amount which was claimed as exempt income by applying the formula contained in Rule 8D of the Rules and holding that section 14A of the Act would be applicable. In spite of this exercise of apportionment of expenditure carried out by the AO, CIT(A) disallowed the entire deduction of expenditure. That view of the CIT(A) was clearly untenable and rightly set aside by the ITAT. Therefore, on facts, the Punjab and Haryana High Court has arrived at a correct conclusion by affirming the view of the ITAT. 6.3.6 Thus an inference can be drawn from these judgments that the amount of disallowance u/s 14A cannot exceed the exempt income. the AO has worked out the disallowances under section 14A of the Act, by invoking Rule 8D of the Income Tax Rule 1962 as under:
6.3.7 It is observed that appellant has considered the amount to the extent of income claimed exempt u/s 10(34) for the purpose of disallowance u/s 14A, for A.Y.2012-13. A.Y.2013-14 & A.Y.2014-15, therefore the addition made by the AO cannot be sustained for A.Y.2012- 13. A.Y.2013-14 & A.Y.2014-15 and hence deleted. 6.3.8 During the year A.Y.2011-12, the assessee has earned dividend income of Rs. 8.20,050/- and has claimed it exempt u/s. 10(34) of the IT Act 1961. Therefore, the addition made by the AO for AY 2011-12 is restricted to Rs. 8,20,050/- and the appellant gets a relief of Rs. 2,77,52,535/-.” to 4038/M/2018 A.Ys. 2011-12, 2012-13 & 2013-14
On appraisal of the above mentioned finding, we noticed that the CIT(A) has restricted the disallowance u/s 14A of the Act r.w. Rule 8D of the I.T. Rules to the extent of exempt income in view of the law mentioned in the order i,e Joint Investment Pvt. Ltd. Vs. CIT (2015) 372 ITR 694, CIT Vs. Holcim India Pvt. Ltd. (2014) 90 CCH 0081 (Del), CIT Vs. State Bank of Patiala (393 ITR 476) (P&H) & Maxopp Investment Ltd. Vs. CIT 91 taxmann.com 154 (SC) (2018). The factual position is not distinguishable at this stage. No law contrary to the law relied by the Ld. Representative of the assessee has been produced before us. Taking into account all the facts and circumstances of the case, we are of the view that the CIT(A) has decided the matter of controversy judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, we affirm the finding of the CIT(A) on this issue and decided this issue in favour of the assessee against the revenue. In the result, the appeal filed by the revenue is hereby dismissed.
The facts of the present case are quite similar to the fact of the case as narrated above while deciding the ITA. No.4036/M/2018, therefore, there is no need to repeat the same. However, the figure is different. The matter of controversy is also the same. The finding given above while deciding the appeal of the assessee bearing ITA. No.4036/M/2018 is quite applicable to the facts of the present case as mutatis mutandis. Accordingly, we confirm the finding of the CIT(A) on the issues raised therein. ITA. NO.4038/M/2018:- to 4038/M/2018 A.Ys. 2011-12, 2012-13 & 2013-14
The revenue has filed the present appeal against the order dated 21.03.2018 passed by the Commissioner of Income Tax (Appeals)-10, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2011- 12.
The Revenue has raised the following grounds: - “
1. "Whether on the facts and circumstances of the case and in Law, the Ld. CIT(A) was justified in deleting the addition made u/s 14A r. w. Rule 8D of the Income Tax Rules. 1962. holding that disallowance cannot exceed exempt income, without appreciating the fact that CBDT after analyzing section 14.4 vis-à-vis Rule 8D has clarified in Circular no.5/2014 dated /11.02.2014 that Rule 8D read with section 14A of the Income tax Act, 1961 provides for disallowance of the expenditure even where tax payer in a particular year has not earned any exempt income.
2. Whether on the facts and in the circumstances of the case and in law, in' Ld. CIT(A) erred in not confirming the disallowance made us 14A r. w.r. 8D to Book Profit as per clause (f) to Explanation I u/s 115JB of the Income Tax Act, 1961, overlooking the judgement of Hon’ble Delhi Court in the case of CIT (Central Circle-II) Vs. Goetz (India) Ltd. In dated 09.12.2013.
3. The appellant prays that the order of the Ld. CIT(A) be set aside and the order of the AO be restored.
2. The appellant craves leave to amend or alter any ground or add any other grounds which may be necessary.” The facts of the present case are quite similar to the fact of the case 10. as narrated above while deciding the ITA. No.4036/M/2018, therefore, there is no need to repeat the same. However, the figure is different ISSUE NO. 1
11. The revenue has challenged the finding of the CIT(A) in which the CIT(A) has restricted the addition u/s of 14A of the Act r.w. Rule 8D of the to 4038/M/2018 A.Ys. 2011-12, 2012-13 & 2013-14 I.T. Rules to the extent of dividend income. In this regard, the finding has already been given by us above while deciding the ITA. No.4036/M/2018 in which the restriction of expenses to earn the dividend income u/s 14A of the Act r.w. Rule 8D of the I.T. Rules was held to the extent of dividend income justifeable, hence, the finding given above is quite applicable to the facts and circumstances of the present case also as mutatis mutandis. Accordingly, this issue is decided in favour of the assessee against the revenue.
ISSUE NO. 2
Under this issue the revenue has challenged the finding of the CIT(A) in which it is specifically held that the no disallowance u/s 14A of the Act r.w. Rule 8D of the I.T. Rules is required to book profit as per the clause-f to Explanation-1 u/s 115JB of the Act. The Ld. Representative of the revenue has argued that the finding is against the decision of the Hon’ble Delhi High Court in case of CIT (Central Circle-II) Vs. Goetz (India) Ltd. In dated 09.12.2013, therefore, the finding is liable to be set aside. However, on the other hand, the Ld. Representative of the assessee has strongly relied upon the order passed by the CIT(A) in question. Before going further, we deem it necessary to advert the finding of the CIT(A) on record: - “8.3.1 I have carefully considered the submissions of the appellant. The Hon'ble High Court of Bombay in the case of CIT vs. Bengal Finance & Investments Pvt. Ltd in ITA No. 337 of 2013 has held that an amount disallowed under Section 14A of the Act cannot be added to arrive at book profit for purposes of Section 115J8 of the Act in the following words: