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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ : NEW DELHI
Before: SHRI N.K. BILLAIYA & SHRI KULDIP SINGH
ASSESSEE BY : Shri Ved Jain, Advocate REVENUE BY : Shri Amit Jain, Senior DR Date of Hearing : 18.07.2018 Date of Order : 19.07.2018
O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : The appellant, M/s. Cosmos International Limited (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 27.02.2015 passed by Ld. CIT (Appeals)-2, New Delhi qua the assessment year 2008-09 on the grounds inter alia that :-
“1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts.
On the facts and circumstances of the case, the learned CIT(A) has erred, both on facts and in law, in passing the order without giving assessee an opportunity of being heard, in clear violation of the principle of natural justice.
3(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the disallowance of an amount of Rs.21,92,022/- made by AO invoking the provision of Section 14A of the Act.
(ii) That the owned funds being more than the investments during the year, no disallowance on account of interest can be made.
(iii) That, in any case, the disallowance under Section 14A cannot be more than the tax free income earned by the assessee.” 2. Briefly stated the facts necessary for adjudication of the controversy at hand are : the assessee is into the business of export of goods against international tenders from different countries and commodities trading of future market through NCDEX. During the year under assessment, the assessee has allegedly claimed exemption of dividend income of Rs.7,25,936/- under section 10(34) of the Income-tax Act, 1961 (for short ‘the Act’), which fact has been denied by the assessee that no dividend is distributed by the various mutual funds in which investment has been made and as such, no disallowance is applicable u/s 14A of the Act.
However, declining the contention raised by the assessee, AO invoked the provisions contained u/s 14A read with Rule 8D of the Income-tax Rules, 1962 and made a disallowance with regard to the expenses incurred in earning exempt income to the tune of Rs.21,92,022/- and made addition thereof to the total income of the assessee.
Assessee carried the matter by way of appeal before the ld. CIT (A) who has confirming the addition by dismissing the appeal.
Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.
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.
Ld. AR for the assessee challenging the impugned order contended that since the assessee has not earned any dividend income during the year under assessment, the provisions contained u/s 14A read with Rule 8D of the Rules are not attracted.
However, on the other hand, the ld. DR relied upon the orders passed by AO as well as ld. CIT (A).
Undisputedly, the annual accounts, tax audit report and books of account furnished by the assessee company have not been disputed by the AO. It is also not in dispute that the assessee has also claimed no expenditure to earn the exempt dividend income during the year under consideration. It is also not in dispute that the assessee filed its return declaring total income of Rs.3,34,41,350/-.
In the backdrop of the aforesaid undisputed facts, when we examine computation of income brought on record by the assessee company, available at page no.2 of the paper book, it goes to prove the contention raised by the assessee company as to declaring total income at Rs.3,34,41,350/- as well as not to earning any exempt income. Furthermore, profit and loss account as on 31.03.2008, available at page 4 of the paper book, also goes to prove that no exempt income has been earned by the assessee during the year under assessment. However, it is very surprising as to from where the AO has picked up the figure as to earning exempt dividend income of Rs.7,25,936/- by the assessee as recorded in para 3 of the assessment order. It appears that this figure has been taken from some other case and has proceeded to compute the disallowance u/s 14A read with Rule 8D of the Act.
Para 4.2 of ld. CIT (A)’s order also goes to prove that the entire disallowance has been made u/s 14A read with Rule 8D on the basis of assumption that, “the assessee has invested an amount of Rs.2,00,00,000/- in the mutual fund at various times and by growth fund, it implies that the dividend earned every year is reinvested in the funds.” Whereas the disallowance is to be made only when the dividend is earned and the disallowance made on the basis of assumption is not sustainable in the eyes of law.
Identical issue has come up before the Tribunal in assessee’s own case for AY 2009-10 in wherein similar disallowance made by the AO and deleted by the ld. CIT (A) was upheld by the Tribunal.
Hon’ble jurisdictional High Court in case cited as Maxopp Investment Ltd. & Ors. Vs. CIT - (2012) 247 CTR 162 held that expenditure incurred in relation to section 14A are to be actual expendiut4e and not the imagined expenditure. The operative part of the judgment is as under :-
“the expression “expenditure incurred” refers to actual expenditure and not to some imagined expenditure but the ‘actual’ expenditure that is in contemplation under s.14A (1) is the ‘actual’ expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made under s.14A.” 11. Furthermore, the AO without recording dissatisfaction as to the working out made by the assessee that no expenditure has been incurred nor earned any dividend income proceeded to invoke the provisions contained u/s 14A read with Rule 8D in a mechanical manner which is not permissible.
Hon’ble Apex Court in Godrej & Boyce Manufacturing 12. 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.”
By following the law laid down by Hon’ble Apex Court in judgment cited as Godrej & Boyce Manufacturing Company Ltd. (supra) and Hon’ble High Court of Delhi in Maxopp Investment Ltd. (supra), we are of the considered view that the findings returned by AO that when the assessee has earned any dividend income forming part of the total income during the assessment year, section 14A read with Rule 8D is not attracted. So, in these circumstances, the AO as well as ld. CIT (A) have erred in making/ confirming addition of Rs.21,92,022/- on account of disallowance made u/s 14A read with Rule 8D, hence the same is ordered to be deleted. Consequently, the appeal filed by the assessee is allowed. Order pronounced in open court on this 19th day of July, 2018.