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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA, AM & SHRI AMARJIT SINGH, JM
O R D E R Per Shamim Yahya, A. M.:
This appeal by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals)-24, Mumbai (‘ld.CIT(A) for short) dated 25.09.2014 and pertains to the assessment year (A.Y.) 2006-07.
The grounds of appeal read as under:
Reopening of assessment 1. The learned CIT(A) erred in confirming the reopening of the assessment after four years from the end of the assessment year without appreciating the first proviso to section 147 of the Income-tax Act, 1961 ('Act') 2. The learned CIT(A) erred in not appreciating that in terms of the proviso to section 147 of the Act, no reassessment can be made on issue which is already a subject matter of an appeal before the Hon'ble ITAT and is pending for its disposal 3. The learned CIT(A) erred in not appreciating that no reassessment can be made on issue the proceedings of which are pending under section 154 of the Act.
4. The learned CIT(A) erred in not appreciating that the assessment cannot be reopened on the basis of audit objection.
5. The learned CIT(A) erred in not appreciating that the assessing officer has not brought any new facts / materials on record, which has resulted into the re- opening the assessment, 6. The learned CIT(A) erred in not appreciating that mere fresh application of mind on the same set of facts or mere change of opinion does not confer jurisdiction to reopen assessment under section 147 of the Act.
Disallowance under section 14A 7. The leaned CIT(A) erred in confirming the disallowance of Rs. 13,01,36,674 under section 14A of the Act read with Rule 8D of the Income tax Rules, 1962 ('I.T. Rules') 8. The learned CIT(A) erred in confirming the additional disallowance of expenses of Rs. 7,45,54,204 under rule 8D(i) of the I.T. Rules. He also erred in confirming the re-computation of the amount of average assets and average total investments for the purpose of computing disallowance under Rule 8D(ii) and 8D (iii) of the I.T. Rules.
9. The learned CIT(A) erred in confirming the action of the assessing officer to include the value of units and shares held as stock in trade for the purpose of determining average investments while calculating disallowance under section 14A read with rule 8D (ii) & (iii) of the I.T. Rules.
The learned CIT(A) erred in not appreciating that only actual expenditure that is relatable to earning income can be considered for disallowance and not notional expenditure.
The leaned CIT(A) erred in not appreciating that the provisions of Rule 8D are prospective in nature and is applicable only from the assessment year 2008-09 and hence not applicable for subject assessment year 2006-07.
Interest under section 234C 12. The learned CIT(A) erred in rejecting the ground for levy of interest under section 234C of the Act.
Brief facts of the case are as under:
Regular Assessment order u/s.143(3) of the Act dated 30/12/2008 was passed assessing the total income at Rs.81,14,92,576/- as against the returned total income of Rs.81,10,02,745/- filed on 29/11/2006. Assessee filed an appeal to the CIT(A)/LTU/Mumbai who decided the appeal vide order dated 17/7/2009 and had also adjudicated on the grounds taken up in appeal including the ground of disallowance of Rs.1,42,43,648/- instead of Rs.4,84,927/- offered u/s. 14A of IT. Act, 1961 by the assessee in return of income. CIT(A) upheld the decision of the Assessing Officer and confirmed the addition of Rs.1,42,43,648/- u/s. 14A of IT. Act, 1961 instead of Rs.4,84,927/- offered by the assessee. Assessee is in appeal against the same to ITAT, Mumbai and the appeal is pending. It may be mentioned here that the disallowance u/s. 14A of IT. Act, 1961 at Rs. 1,42,43,648/- by the Assessing Officer in assessment order u/s. 143(3) dated 31/12/2008 was with reference to (1) the tax free income quantum of interest and dividends totalling Rs.14,35,44,115/- only and with reference to 50% of direct expenses of Rs.48,49,270/- u/r. 8D(i) of IT, Rules, 1962, (2) the average value of investments at Rs.33,10,43,000/- and the average value of total assets at Rs.4,58,91,08,000/- with reference to interest expenses of Rs.6,56,97,000/- to arrive at the figure of disallowance of Rs.47,39,163/- u/r 8D(ii) of IT. Rules, 1962, and (iii) one half percentage of average of total investments at Rs. 33,10,43,000/- for working out the disallowance at Rs.16,55,215/- u/r. 8D(iii) of IT. Rules, 1962. Assessing Officer reopened the assessment order dated 30/12/2008 by issuing notice u/s. 148 of IT. Act, 1961 dated 28/03/2013 and following statutory provisions of section 147/148/149/153 IT.
Act, 1961 and recording reasons u/s. 147 of IT. Act, 1961 as follows:-
"Further, the case was reopened u/s 148 of the IT. Act, 1961. The reasons recorded for reopening of the case are as following:-
During the year the assessee received tax free income follows:- Tax Free Interest Tax Free Interest Rs. 2,19,53,805/- Term Capital Gains Rs. 10,83,082/- Long Term Capital Gains Rs.38,17,41,395/- Dividend Rs.11,79,70,619/- Total Rs.52,27,48,901/-
The assessee had suo-moto disallowed expense u/s 14A to the tune of Rs.4,87,927/-. However, on verification of the records it is seen that the disallowance works out to Rs.25,07,49,180/- as follows:
(i) Under Rule 8D(2)(i) Since the total exempted income forms 29.19% of the receipts, the disallowance ought to have been worked out at 29.19% of the expenses of Rs. 6,51,161/- since the assessee, as has been observed in the assessment itself, is fully involved in the activities of investments in share and securities and the exempt income. Accordingly the disallowance works out to Rs.1,90,073/-. (ii) Under Rule 8D(2)(ii) It was seen that the values of the Average assets and investments had been considered wrongly in the assessment order. The AO had considered the net and not gross value of assets as reduced by Current Liabilities and had not considered the average of stock of shares and securities which also has a direct bearing on the exempted incomes as held in the case of JTO vs. Daga Capital Mgmt. Pvt. Ltd. (2008) 26 SOT 603 (Mum). Accordingly the disallowance under this rule further works out to Rs. 43,058/- as follows:
Rs. 65,697/- X 3,52,636/- 53,76,197/-
(iii) Under Rule 8D(2)(iii) Accordingly the further disallowance while considering the averages of the stock in trade along with investment is worked out at Rs. 1,76,18,180/- being 0.5% of the average value of stock and investments [Rs. 35,23,636/-]
Thus, the net disallowance u/s 14A works out to Rs. 24,88,36,555/- as follows:-
Total of disallowance under rule 8D Rs. 25,07,49,180/- Less- already disallowed by assessee Rs. 4,87,927/- Less- disallowed in the assessment order Rs. 1,42,43,648/-
3. The assessee has debited the Profit and Loss account by Rs. 4,4578/- being the provisions for fall in value of stock in trade. No detail of the same was provided. Since this is a mere provision the same is not disallowed by the assessee.
As there is a failure on part of assessee to disclose fully and truly all material facts necessary for its assessment, I have reasons to believe that income chargeable to tax has excepted assessment for this assessment year, coming within the meaning of section 147 of the Income Tax Act, 1961. 5. In view of the above, notice u/s 148 is issued after Approval of the CIT- LTU, Murnbai No. aT(LTU)/148/Reopening/12-13 dated 26/03/2013 as per provisions of section 151 of the I.T. Act, 1961.
Assessing Officer issued further notices u/s 143(2) of I.T. Act, 1961 and assessee's representatives attended the hearings before the Assessing Officer and furnished details and documents. Assessing Officer examined assessee's submissions, perused the details and documents and passed reassessment order u/s. 143(3)/147 of I.T. Act, 1961 ate Rs. 92,43,79,660/- wherein additions totalling Rs. 13,01,36,674/- u/s. 14A I.T. Act, 1961 instead of Rs. 142,43,648/- made in regular assessment order dated 31/12/2008 and Rs. 4,87,927/- u/s. 14A of I.T. Act, 1961 offered in the return of income were made in paragraph 6.1 to 6.8 of reassessment order u/s. 143(3)/147 of I.T. Act, 1961 dated 29/11/2013 were made.
4. Upon the assessee’s appeal, the learned CIT-A upheld the validity of reopening as well as the merits of the addition.
Against the above order, the assessee has filed an appeal before the ITAT. The assessee has challenged both the validity of reopening as well as merits of addition.
Challenging the merits of the addition, the learned counsel of the assessee referred to ground number 11 raised in the grounds of appeal. This ground is as under:
11. The leaned CIT(A) erred in not appreciating that the provisions of Rule 8D are prospective in nature and is applicable only from the assessment year 2008-09 and hence not applicable for subject assessment year 2006-07.
The learned counsel of the assessee submitted that the addition on the basis of Rule 8D u/s.14A is not at all applicable for the impugned assessment year. He submitted that this has been so held by the Hon’ble Apex Court in the case of CIT vs. Essar Teleholdings Ltd. [2018] 401 ITR 445 (SC). In the aforesaid case, the Hon’ble Apex Court has expounded as under: (head notes only)
Every statute is prima facie prospective unless it is expressly or by neces- sary implication made to have retrospective operation. There is a presumption of prospectivity of a statute. GOVINDDAS v. ITO [1976] 103 ITR 123 (SC) and CIT v. VATIKA TOWNSHIP PVT. LTD. [2014] 367 ITR 466 (SC) relied on. Machinery provisions of a taxing statute have to give effect to its manifest purposes. But whether the machinery provision is prospective or retrospective depends on the content and nature of the statutory scheme. Section 14A was first inserted in the Income-tax Act, 1961 by the finance Act, 2001 with retrospective effect from April 1,1962. The purpose for which section 14A was introduced, as given in the explanatory memorandum issued with the Finance Bill, 2001, was that no deduction shall be made in respect of any/ expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Since section 14A was being used by Assessing Officers to reopen assessments, the Central Board of Direct Taxes clarified by Circular No. 11 of 2001 dated July 23,2002 that where proceeding? have become find before April 1, 2001 assessments should not be reopened under section 147 of the Act to disallow expenditure inclined to earn exempt income by applying the provisions of newly inserted section 14A of the Act. By the Finance Act, 2002, a proviso was inserted to section 14A to similar effect. By the finance Act, 2006, sub-sections (2) and (3) were inserted with effect from April 1,2007 to the effect that 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 the 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 and 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. The memorandum explaining the provision in the Finance Bill, 2006, in reference to the methods for allocating expenditure in relation to exempt income clearly mentions that amendments brought by the Finance Bill, 2006 would take effect from April 1, 2007, Circular dated December 28, 2006 was issued by the Department wherein paragraph 11.3 had the heading : "Applicability from assessment year 2007-08 onwards". The explanatory memorandum issued with the Finance Bill, 2006 and the CBDT circular dated December 28,2006, thus, clearly indicate that the Department understood that sub-sections (2) and (3) were to be implemented with effect from assessment year 2007-08. By notification dated March 24, 2008, the methodology for determining amount of the expenditure in addition to income not includible in total income as envisaged in section 14A(2) and (3) was for the first time prescribed by rule 8D, newly inserted. When section 14A was inserted by the Finance Act, 2001, it was with ret- rospective effect from April I, 1962 whereas when the Finance Act, 2006, inserted sub-sections (2) and (3) of section 14A, it was with effect from April 1, 2006 which was mentioned in clause 1(2) of the Finance Act, 2006. Rule 8D was brought into the statute book with effect from March 24, 2008 to implement sub- sections (2) and (3) of section 14A. It is a dear indicator of the fact that a new method for computing the expenditure was brought in by the Rules which was to be utilised for computing expenditure for the assessment year 2007-08 and onwards. The provisions of section 14A as inserted by the finance Act, 2001 were fully workable without there being any mechanism provided for computing the expenditure. The methodology as provided under rule 8D was neither a well- known nor well-settled mode of computation. The new mode of computation was brought in place by rule 8D. No Assessing Officer, even in his imagination, could have applied the methodology which was brought in place by rule 8D. Thus, the contention for giving retrospective operation to rule 8D is not tenable. CWT v. SHARVAN KUMAR SWARUP AND SONS [1994] 210 1TR 886 (SC) distinguished. The method for determining the amount of expenditure brought in force with effect from March 24, 2008 has been replaced by a new method brought into force by the Income-tax (Fourteenth Amendment) Rules, 2016, from June 2,2036. By interpreting rule 8D as retrospective, there would be a conflict in the applicability of the rule as inserted by the Income-tax (Fifth Amendment) Rules, 2008 and as substituted by the Income Tax (Fourteenth Amendment) Rules, 2016, which clearly indicates that the rule has prospective operation, which has been prospectively changed by adopting another methodology. Applying the principles of statutory interpretation for interpreting retro- spectivity of a fiscal statute and looking into the nature and purpose of subsections (2) and (3) of section 14A as well as the purpose and intent of rule 8D coupled with the Explanatory Notes to the Finance Bill, 2006 and the Departmental understanding as reflected by Circular dated December 28, 2006, rule 8D was intended to operate prospectively. Rule 8D could not liaye been applied to any assessment year prior to assessment year 2008-09.
Referring to the above, the learned counsel of the assessee submitted that the deduction u/s.14A by applying Rule8D cannot be done in any assessment year prior to assessment years 2008-09. Hence, the ld. Counsel of the assessee pleaded that the impugned assessment year being 2006-07, the disallowance u//s.14A by applying Rule 8D is not at all sustainable.
Per Contra, the ld. Departmental Representative (ld. DR) could not dispute the proposition that applicability of Rule 8D in the present assessment year is not in accordance with the Hon’ble Apex Court decision as referred above. In the background of aforesaid discussion and precedent, in our considered opinion, the submission of the learned counsel of the assessee is cogent and is duly supported by the Hon’ble Apex Court decision that disallowance u/s.14A by applying Rule 8D is not permissible for the assessment year under dispute. Hence, we set aside the orders of authorities below and delete the addition done by applying Rule8D. In this regard, we have also noted the ld. Counsel of the assessee’s submissions that the disallowance by the A.O. in the original assessment is already challenged before the appellate authorities. Our decision in this appeal shall not have any bearing on the said proceeding.
Since we have already remitted the addition on merits, the adjudication on the issue of validity of reopening is not only of academy in interest. Hence, we are not engaging into the same.
In the result, this appeal filed by the assessee is partly allowed
Order pronounced in the open court on 04.02.2019