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Income Tax Appellate Tribunal, “C” Bench, Mumbai
Before: Shri Ravish Sood & Shri N.K. Pradhan
Appellant by: Shri Mayur Kisnadwala, A.R Respondent by: Shri Abi Rama Kartikiyan, D.R Date of Hearing: 27.03.2019 Date of Pronouncement: 03.04.2019 O R D E R
PER RAVISH SOOD, JM
The present appeals filed by the assessee are directed against the respective orders passed by the CIT(A)-51, Mumbai for A.Y 2012- 13 and A.Y 2013-14, each dated 04.12.2017, which in turn arises from the respective assessment orders passed under Sec. 143(3) of the Income Tax Act, 1961 (for short „I.T Act‟), dated 31.03.2016. As common issues are involved in the aforementioned appeals, therefore, the same are being taken up and disposed off together by way of a consolidated order. We shall first advert to the appeal filed by the assessee for A.Y. 2012-13. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal: “Being aggrieved by the order passed by the Learned Assessing Officer (A.O) u/s 143(3) of the Income-tax Act (the Act), as confirmed by Learned Commissioner of Income Tax (Appeals)-51 [CIT (A)], your appellant prefers P a g e | 2 & 1688/Mum/2018 AYs. 2012-13 & 2013-14 Patel Engineering Ltd. Vs. DCIT, CC -3(4) an appeal on the following grounds , which it is prayed, may be considered without prejudice to one another:
1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of administrative expenses under section 14A r.w.r. 8D(2)(iii) and directing A.O to compute disallowance by considering the average value of investments disposed off during the year, though the dividend received is Nil.
2. On the f acts and circumstances of the case and in law, the CIT(A) erred in confirming interest u/s. 234B and 234C by the AO.
3. Your appellant craves leave to add, alter, amend, delete or modify any of the above referred grounds of appeal.”
2. Briefly stated, the assessee company which is engaged in the business of civil contractor & property developer had e-filed its return of income for A.Y. 2012-13 on 28.11.2012, declaring total income at Rs.23,09,96,770/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the I.T Act.
3. During the course of the assessment proceedings the A.O observed that the assessee had during the year made investments in shares, mutual funds etc. and was maintaining a common pool of funds and accounts for all its activities. In the backdrop of the aforesaid facts the A.O called upon the assessee to explain as to why disallowance under Sec.14A r.w. Rule 8D may not be worked out in its case. The assessee tried to impress upon the A.O that no disallowance under Sec.14A was called for in its hands on multiple grounds viz. (i) that the investments made by the assessee were in the nature of strategic investments made in its subsidiaries/associate companies; (ii) that as the investments with the related parties were permanent in nature, therefore, in the absence of any requirement of monitoring the same no disallowance u/rule 8D(2)(iii) was liable to be made; (iii) that as the assessee had substantial own funds by way of capital and reserves aggregating to Rs.125 crores and other non- interest bearing funds which were more than 5 times the value of the P a g e | 3 & 1688/Mum/2018 AYs. 2012-13 & 2013-14 Patel Engineering Ltd. Vs. DCIT, CC -3(4) investments in shares, hence no disallowance of any part of the interest expenditure under Rule 8D(2)(ii) was called for in its hands; (iv) that as the assessee had not incurred any direct expenses to earn the exempt income, therefore, no disallowance under Rule 8D(2)(i) could be made. Alternatively, it was submitted by the assessee that as the investments decisions were taken by the Vice President Finance and President in consultation with the Board of directors, therefore, considering their work profile and having regard to the accounts of the assessee, 0.5% of the remuneration payable to them was reasonably allocable for the investments functions. On the basis of his aforesaid submissions the assessee worked out the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) at Rs.44,985/-. However, the aforesaid contention of the assessee did not find favour with the A.O who worked out the disallowance under Sec.14A r.w. Rule 8D at Rs.24,83,627/- and added back the same to the total income of the assessee.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). In the course of the appellate proceedings it was inter alia submitted by the assessee that as it had not received any dividend income during the year under consideration, therefore, no disallowance under Sec.14A was liable to be made in its case. However, the CIT(A) did not find favour with the aforesaid contention of the assessee and declined to accept the same. Insofar the contention advanced by the assessee that no disallowance was called for in respect of the strategic investments made by it was concerned, it was observed by the CIT(A) that if an expenditure was incurred by the assessee on account of new acquisitions/disposals during the year, then appropriate disallowance under Sec.14A r.w. Rule 8D (2)(iii) was required to be made. In the backdrop of the aforesaid observations it was noticed by the CIT(A) that as the assessee during the year had P a g e | 4 & 1688/Mum/2018 AYs. 2012-13 & 2013-14 Patel Engineering Ltd. Vs. DCIT, CC -3(4) disposed off some of its strategic investments, therefore, the same were required to be considered while computing the disallowance under Sec.14A r.w. Rule 8D(2)(iii). On the basis of his aforesaid deliberations the CIT(A) partly accepted the contentions advanced by the assessee insofar the quantification of the disallowance under Sec. 14A r.w Rule 8D (2)(iii) was concerned.
5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee at the very outset of the hearing of the appeal submitted that as the assessee during the year had not received any dividend income, therefore, no disallowance under Sec.14A was called for in its hands. In support of his aforesaid contention the ld. A.R relied on the judgment of the Hon‟ble High Court of Delhi in the case of PCIT, New Delhi Vs. McDonalds India (P) Ltd. (2019) 101 taxmann.com 86 (Del). It was submitted by the ld. A.R that in the aforementioned appeal the High Court had upheld the order of the Tribunal which had deleted the disallowance made by the A.O under Sec.14A for the reason that the assessee had not earned any exempt income during the relevant assessment year. Further, the ld. A.R relied on the order of a coordinate bench of the Tribunal viz. ITAT, Mumbai Bench “J” in the case of Tata Industries Ltd. Vs. ITO, Ward 2 (3)(3), Mumbai (2016) 181 TTJ 600 (Mum). It was thus submitted by the ld. A.R that as the assessee had not earned any dividend income during the year under consideration, therefore, no disallowance u/s 14A was called for in its hands.
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the orders of the lower authorities.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material P a g e | 5 & 1688/Mum/2018 AYs. 2012-13 & 2013-14 Patel Engineering Ltd. Vs. DCIT, CC -3(4) available on record. Admittedly, the assessee during the year under consideration had not earned any dividend income. Insofar the contention of the ld. A.R that in the absence of any dividend income earned by the assessee during the year no disallowance under Sec.14A could have been made, we are persuaded to subscribe to the same. In our considered view as the assessee had not earned any exempt income during the year under consideration, therefore, no disallowance under Sec.14A could have been made in its hands. Our aforesaid view is fortified by the judgments of the Hon‟ble High Court of Delhi in the case of Cheminvest Ltd. Vs. CIT (2015) 378 ITR 33 (Delhi) and CIT Vs. Holicum India (P) Ltd. (2015) 57 taxmann.com28 (Del). Further, we find that the Hon‟ble High Court of Delhi had recently in the case of PCIT, New Delhi vs. McDonald India (P) Ltd. (2019) 101 taxmann.com 86 (Delhi) had upheld the order of the Tribunal which had deleted the disallowance made by the A.O under Sec. 14A for the reason that the assessee had not earned any exempt income during the relevant assessment year. The Hon‟ble High Court while concluding that the amount of the disallowance under Sec. 14A cannot exceed the amount of the exempt dividend income had observed as under:- “9. The position becomes clear and beyond doubt when w refer to the factual position in the appeal preferred by the Revenue against the decision of the Punjab and Haryana High Court in the case of Pr. CIT Vs. State Bank of Patiala [2017]. 391 ITR 218/245 Taxman 273/78 taxman.com 3 which as also decided with the decision in Maxopp Investment Ltd. (Supra). In State Bank of Patiala (Supra) the assessing Officer had applied Rule 8D of the Income Tax Rules 1962, but had restricted the disallowance to the amount claimed as exempt income. The Commissioner of Income-tax (Appeals) had enhanced and increased this disallowance as per Rule 8D of the Income Tax Rules, 1962. The said disallowance was more than exempt income. The Tribunal had reversed the finding of the Commissioner of Income-tax (Appeals) and restored the disallowance as made by the Assessing Officer i.e restricted the disallowance to the extent of exempt income. Decision in the case of State Bank of Patiala (supra) of the Punjab and Haryana High Court was affirmed by the Supreme Court as the correct conclusion, though the Supreme Court did not agree with the reasoning of the Punjab & High court on the theory of dominant intention. It was held that the view of the Commissioner of the P a g e | 6 & 1688/Mum/2018 AYs. 2012-13 & 2013-14 Patel Engineering Ltd. Vs. DCIT, CC -3(4) Income Tax (Appeals) disallowance expenditure beyond and above the exempt income earned by applying Rule 8D was clearly untenable and rightly rejected by the Tribunal.” Apart there from, we find that a coordinate bench of the Tribunal i.e ITAT, Mumbai „J‟ bench in the case of Tata Industries Ltd. Vs. ITO, Ward 2(3)(3), Mumbai (2016) 181 TTJ 600 (Mum), had observed that the disallowance under Sec.14A cannot exceed the tax exempt income earned by an assessee during the year. We thus in the backdrop of the fact that the assessee during the year under consideration had not received any dividend income, respectfully follow the view taken in the aforementioned judicial pronouncements and vacate the disallowance made by the A.O under Sec. 14A as had been sustained by the CIT(A). The order of the CIT(A) is set aside in terms of our aforesaid observations.
The appeal of the assessee is allowed. AY. 2013-14 9. We shall now advert to the appeal of the assessee for the A.Y 2013-14. The assessee assailing the order of the CIT(A) has raised before us the following grounds of appeal: “Being aggrieved by the order passed by the Learned Assessing Officer (A.O) u/s 143(3) of the Income-tax Act ('the Act'), as confirmed by Learned Commissioner of Income Tax (Appeals)-51 [CIT (A)], your appellant prefers an appeal on the following grounds, which it is prayed, may be considered without prejudice to one another:
1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming the disallowance of administrative expenses under section 14A r.w.r. 8D(2)(iii) and directing A.O to compute disallowance considering investments from which the dividend income received in the impugned year.
2. On the facts and circumstances of the case and in law, the learned CIT(A) erred in directing AO to consider for computation of disallowance u/s. 14A, an amount of dividend received of Rs.1.78 crores as against the dividend received of Rs.NIL.)
3. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming interest u/s. 234B and 234C by the A.O.
P a g e | 7 & 1688/Mum/2018 AYs. 2012-13 & 2013-14 Patel Engineering Ltd. Vs. DCIT, CC -3(4)
Your appellant craves leave to add, alter, amend, delete or modify any of the above referred grounds of appeal
.”
10. Briefly stated, the assessee company had filed its return of income for A.Y. 2013-14 on 30.11.2013, declaring total income at Rs.23,68,77,700/-. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec. 143(2) of the I.T Act.
11. During the course of the assessment proceedings the A.O declined to accept the explanation of the assessee that no disallowance under Sec.14A was liable to be made, and worked out the disallowance at Rs.26,06,171/-.
12. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) concluded that as the assessee had received a dividend income of Rs.1.78 crores during the year under consideration, therefore, he directed the A.O to identify the investments of the assessee on which such dividend income was earned and include the same for working out the disallowance under Sec.14A r.w. Rule 8D(2)(iii).
13. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorised Representative (for short „A.R‟) for the assessee at the very outset of the hearing of the appeal submitted that the CIT(A) had wrongly observed that the assessee had during the year earned dividend income of Rs.1.78 crores. It was submitted by the ld. A.R that the assessee during the year under consideration i.e A.Y. 2013-14 had received nil dividend income. It was further submitted by the ld. A.R that the assessee had in the computation of income filed along with its return of income worked out the disallowance under Sec. 14A at Rs.89,614/-. Insofar the disallowance made by the A.O under Sec.14A at Rs. 26,06,171/- was concerned, it was submitted by the ld. A.R P a g e | 8 & 1688/Mum/2018 AYs. 2012-13 & 2013-14 Patel Engineering Ltd. Vs. DCIT, CC -3(4) that as the assessee had not received any dividend income during the year, therefore, no disallowance under Sec.14A r.w. Rule 8D was called for in its hands. In sum and substance, it was the claim of the ld. A.R that in the absence of any dividend income having been earned by the assessee during the year, no disallowance could have been made under Sec.14A of the I.T Act.
Per contra, the ld. Departmental representative (for short „D.R‟) relied on the orders of the lower authorities.
We find that the facts and the issue involved in the present appeal remains the same as was there before us in the appeal of the assessee for the immediately preceding year i.e A.Y. 2012-13 in . However, we find that the observation of the CIT(A) that the assessee during the year had received dividend income of Rs.1.78 crores clearly militates against the contention of the ld. A.R that the assessee had not received any dividend income during the said year. The ld. A.R in order to buttress his aforesaid contention has also drawn our attention to the submissions to the said effect which were filed by the assessee with the CIT(A), wherein it was emphasised that the assessee had received Nil dividend income during the year under consideration [Page 3 - Para 5.1(1)] of the CIT(A) order. We are of the considered view that in the backdrop of the aforesaid conflicting observations, the fact as to whether the assessee had received any dividend income during the year under consideration is not discernible from the orders of the lower authorities. As such, in our considered view the matter in all fairness requires to be restored to the file of the A.O for fresh adjudication as per the extant law. Insofar the working of the disallowance under Sec. 14A in respect of the exempt dividend income is concerned, the A.O in the course of the set aside proceedings after verifying the amount of dividend income received by P a g e | 9 & 1688/Mum/2018 AYs. 2012-13 & 2013-14 Patel Engineering Ltd. Vs. DCIT, CC -3(4) the assessee during the year shall restrict the disallowance to the extent of such exempt dividend income. Needless to say, the A.O shall during the course of the set aside proceedings afford a reasonable opportunity of being heard to the assessee. The matter is restored to the file of the A.O in terms of our aforesaid observations.
The appeal of the assessee is allowed for statistical purposes in terms of our aforesaid observations.
The appeal of the assessee for A.Y. 2012-13 i.e A.Y. 2013-14 i.e is allowed for statistical purposes in terms of our aforesaid observations.