Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, I Bench, Mumbai
Before: Shri B.R. Baskaran & Shri Pawan Singh
Per B.R. Baskaran, JM Both appeals filed by the Revenue are directed against common order dated 18.5.2016 passed by the learned CIT(A)-49, Mumbai and they relate to A.Y. 2012-13 & 2013-14. In both the appeals, the Revenue is aggrieved by the decision of the learned CIT(A) in deleting the addition made by the Assessing Officer u/s. 14A of the Act. Since identical issue is urged in these appeals, they were heard together and are being disposed of by this common order, for the sake of convenience.
Both the appeals are barred by limitation by 10 days. The revenue has moved petitions requesting the bench to condone the delay. Having regard to the submissions made in the petition, we condone the delay and admit both the appeals for hearing.
The assessee is engaged in the business of trading in shares and securities. Besides that it is also engaged in the activities of acquiring interest in business organization of all types, i.e, either singly or by
2 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises entering into joint ventures in existing and/or new green field ventures in technology and other field.
In A.Y. 2012-13, the assessee earned dividend income of ` 394.67 lakhs and claimed the same as exempt. The assessee disallowed a sum of ` 6,01,184/- u/s. 14A of the Act as expenses incurred in relation to exempt income. In AY 2013-14, the assessee earned dividend income of Rs.778.13 lakhs and disallowed a sum of Rs.10.46 lakhs u/s 14A of the Act. It is pertinent to note that the assessee has held all the shares as its Stock in trade, i.e., it did not hold any shares as its investment. The AO noticed that the assessee has not computed disallowance u/s. 14A of the Act in accordance with Rule 8D of the I.T. Rules. He took the view that the assessee should have computed disallowance as per Rule 8D in terms of section 14A of the Act. The discussion made by the Assessing Officer in this regard in AY 2012-13 are extracted below :- 4. Disallowance of expenses u/s 14A of the Act r.w.r 8D of I.T Rules 1962: 4.1 On perusal of the Computation of Income, it is noticed that during the year the assessee has earned dividend income of Rs.3,94,67,098/-, which is claimed to be exempt, The assessee is showing inventories in the form of closing stock of shares, securities and claims worth Rs,243,14,97,164/-(P.Y. Rs.229,86,85,468/-) as at the end of the year under scrutiny. The assessee ought to have made disallowance of expenditure in relation to the income which does not or shall not form part of total income as required u/s. 14A in accordance with the provision of Rule 8D. 4.2 During the course of assessment proceedings, assessee was asked to explain as to why disallowance u/s 14A read with Rule 8D should not made in its case. In response to the same, assessee vide letter dated 17.12.2014 submitted the disallowance made on account of expenses related to exempt income is of Rs.6,01,184/- as per computation of total income. The assessee vide letter dated 29.12.2014 furnished working of disallowance u/s l4A (without prejudice to earlier letter dated 17.12.2014) wherein disallowance is being worked out as per provisions of section 14A read with Rule 8D of IT Rules, 1962. 4.3 The assessee company's above contentions have been considered and found to be not acceptable for the following reasons:
3 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises a) The Rule 8D has been framed according to provisions of Sub- Sec. 2 & 3 of Section 14A of the Income Tax Act. b) The Sub-Sec. 2 & 3 of Section 14A is the procedural provisions for disallowance of the expenditure in relation to income not forming part of the total income. The sub-section provides the procedure for making disallowance U/S.14A. c) The scheme of the Act shows that total income of the assessee is to be computed under various heads of income specified in section 14. The provisions for computation of income under various heads are provided in sections 15 to 57. The Legislature in its wisdom thought that expenditure in relation to income exempted from taxation should not be allowed as deduction while computing the income chargeable to tax. Accordingly, the Legislature, instead of making various provisions for disallowance under various heads, has inserted section 14A at the inception, i.e., prior to the computational provisions under various heads. Thus, intention of the Legislature is clear to disallow all the expenditures incurred in relation to income not forming part of total income. Contextual interpretation of section 14A clearly suggests that expenditure in relation to exempted income has to be disallowed, even though such expenditure would have been allowable under the computational provisions relating to various heads of income. Hence, section 14A has an overriding effect over the computational provisions under various heads. To hold otherwise would amount to rendering the provisions of section 14A as otiose/redundant which is not permissible in law. Hence, there was no force in the contention of the assessee that no disallowance could be made under section 14A if the deduction was permissible under other provisions of the Act. Consequently, in the case of an assessee carrying on a business activity, any expenditure incurred by him, even though allowable under section 36(1)(iii) or sections 37 or 57, yet can be disallowed under section 14A if such an expenditure has been incurred in relation to the income not forming part of total income. Hence assesses explanation that no interest is disallowable u/s. 14A of the Act, if the same are allowable under any other provisions of the Act is without any merit and the same is rejected. d) Also even if it is presumed that the assessee has proved that the investment was made partly out of own funds and partly from borrowed funds, still its claim of interest paid for business purpose and not for investment are unacceptable. Because the assessee has not proved that interest paid is directly attributable for advances made. So, nexus can be proved only when such comparisons are made with inflow and out flow of funds on one to one basis. In absence of any evidence to prove one to one nexus of funds received and utilized, it gives only a distorted picture and lead to incorrect conclusions. In absence of any evidence to prove one to one nexus of funds received and utilized, it can only be inferred that, interest bearing loans were also utilized for making investment in shares, the income
4 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises received on it by way of Dividend has been claimed as exempt. It is also to be stated here that even if the investment were made out of own funds, still, to hold and maintain/manage the investments, the assessee has incurred expenditure towards payment of various expenses incurred for maintenance of such investment. Since the expenditure incurred by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the formula given in Rule 8D of the I.T. Rules is clearly inadmissible in this case. e) Prior to the insertion of sub section (2) & (3) of Section 14A, the Revenue had sought to disallow the expenditure incurred in relation to exempt income. However, the Supreme Court in Maharashtra Sugar and in Rajasthan State Warehousing Corporation held that where there is one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the income earned from the business is exempt from tax. Section 14A has-been enacted to overcome these judicial pronouncements. - Section 14A was introduced by an amendment to the Finance Act of 2001 with retrospective effect from 1 April 1962. - Sub-sections (2) and (3) were inserted by the Finance Act of 2006 with effect from 1 April 2007. - Rule 8D of the Income Tax Rules prescribes the method for determining the expenditure incurred in relation to income which does not form part of the total income, where the Assessing Officer is not satisfied with the claim of the assessee. Rule 8D was notified in the Official Gazette of 24 March 2008. g. The insertion of Section 14A was curative and declaratory of the intent of the Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. However, assesses had claimed deductions in respect of income which was exempt under various provisions of the Act as a result of which the tax incentive given in respect of certain categories of income which were exempt was being utilized to reduce the tax payable on non-exempt income. This being contrary to legislative intent, Section 14A was inserted in order to restore the legal position consistent with Parliamentary intent. Declaratory or curative amendments are construed to be retrospective because they authoritatively set forth the original legislative intent. Parliament placed the matter beyond doubt by legislating upon Section 14A with retrospective effect from 1 April 1962. This was also amplified in CBDT Circular 14 of 2001. Various Courts have, time and again, held that making of investments and earning of exempt income requires efforts. The administrative and other expenses incurred by the assessee company facilitate earning of all incomes including the exempt income. The
5 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises funds of the business are a mix of own as well as interest bearing borrowed funds. The assessee has not demonstrated the utilization of interest bearing unsecured loans for the purpose of business other than making of investments. Therefore, the application of such interest bearing funds towards making investments for earning of exempt income cannot be ruled out. These are valid inferences based on the facts of the case. In this connection, reliance is placed on the following judgements/decisions : (i) Distributors (Baroda) Pvt. Ltd. [155 ITR 120 (SC) (ii) Godrej Boyce & Mfg. Co. Ltd. vs. DCIT (234 CTR 1 (Bom) (iii) Magganlal Chagganlal Pvt. Ltd. [236 ITR 456 (Bom) (iv) M/s. Gherzi Eastern Limited (ITA No. 6562/Bom/94) dated 23rd September, 2002) (ITAT, Mumbai) In the case of Godrej Boyce & Mfg. Co. Ltd. vs. ACIT, the Hon'ble Bombay High Court has upheld the constitutional validity of Rule 8D. It is observed by the Hon'ble Court that once the satisfaction is recorded by the Assessing Officer for making disallowance u/s 14A, then the procedure for computing the said disallowance is to be followed as per Rule 8D. Rule 8D lays down a mathematical formula for the computation of disallowance u/s 14A. The said judgement has considered all the angles, arguments and judicial positions and hence, in view of the said jurisdictional High Court's judgement, the applicability of various other decisions mentioned in para 4.1 supra relied upon by the assessee is distinguished. h) In the case of Cheminvest Ltd 317 ITR 86, the Delhi high court decided that disallowance under section 14A, can be made in a year in which no exempt income has been earned or received by the assessee. Provisions of section 14A are applicable with respect of dividend income earned by the assessee engaged in the business of dealing in shares and securities, on the shares held as stock in trade. In the case under consideration the assessee failed to brought on record the details of scripts shares on which dividend earned therefore all the scripts/shares have been taken being scripts /shares fetch dividend income. Provisions of sub-section (2) and (3) of section 14A are procedural in nature hence applicable retrospectively. This is to be noted here that in the above cited case the Delhi Tribunal's Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of section 14A of the Act do not envisage any such exception. The facts and judgment of the case cited above i.e. Cheminvest ltd Vs CIT 317 ITR 86, are squarely applicable to the case under consideration. i) Recently, the CBDT vide Circular No.5 of 2014 dated 11.02.2014 held that the intent of the Legislature is to allow only that
6 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. The position is further clarified by the usage of term 'includible' in the Heading to section 14A of the Act and also the Heading to Rule 8D of IT Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income for disallowance to be triggered. Also, section 14A of the Act does not use the word "income of the year" but "income under the Act". This also indicates that for invoking disallowance u/s 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. 5. Accordingly the AO computed disallowance u/s 14A of the Act for assessment year 2012-13 by applying the provisions of Rule 8D of the I.T Rules. The disallowance so made by the AO worked out to Rs.2015.08 lakhs. On identical reasons, the AO computed disallowance in AY 2013-14 also as per Rule 8D of the I.T Rules, which worked out to Rs.3131.83 lakhs.
Aggrieved by the orders passed by the AO, the assessee preferred appeals before Ld CIT(A). The assessee, inter alia, contended that the AO has applied the provisions Rule 8D without recording satisfaction against the correctness of the disallowance made by the AO. The Ld CIT(A) noticed that the assessing officer did not express his dissatisfaction over the working made by the AO, which was a mandatory condition prescribed u/s 14A(2) of the Act. Accordingly the Ld CIT(A) held that the assessing officer was not correct in law in invoking the provisions of Rule 8D of the I.T Rules. The relevant discussions made by the Ld CIT(A) in AY 2012-13 are extracted below:- “6.0 I have carefully examined the facts of the case, the stand taken by the A.O in the assessment order, the grounds of appeal and the written submissions filed by the appellant during the hearing proceedings 6.1 The A.O has observed that the appellant is engaged in the business of trading in shares and securities and also into acquiring the interest in business organisation of all types. From the assessment order it is noted that the A.O has made an elaborate discussion on the provisions of section 14A, various decisions relating
7 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises to section 14A and after considering the fact that the appellant has claimed disallowance u/s 14A of Rs.601,184/- against exempt dividend income of Rs.394,67,098/-, has proceeded to compute disallowance as per Rule 8D of Rs.20,15,08,828/~, It is noted that the amount of expenditure of Rs.601,184/- stated by the appellant to be related to exempt income has also been considered as part of disallowance under Rule 8D(2)(i) being direct expenditure to earn exempt income. However, the A.O has determined the disallowance under Rule 8D without stating that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure i.e Rs.601,184/-in relation to exempt income, having regard to the account of the appellant in terms of sub-section 2 of section 14A of the Act. The A.O has not specified what other expenses have been incurred in relation to the exempt income and how the claim of the appellant was not correct In view of the above, I am inclined to hold that the A.O was not correct in invoking Rule 8D and computing disallowance u/s 14A at Rs.20,15,08,828/-. 7. The assessee also contended that the shares are held by it as Stock in trade and hence the provisions of Rule 8D cannot be applied to it. In this regard, the assessee relied upon the decision rendered by Mumbai bench of Tribunal in the case of India Advantage Securities Ltd (ITA No.1131 of 2013) and the decision rendered by Hon’ble Karnataka High Court in the case of CCI Ltd vs. JCI (250 CTR 291). The assessee also contended that the provisions of Rule 8D would fail in its case, since it did not hold any shares as its investments. The Ld CIT(A) was also convinced with this contention of the assessee and accepted the same. The relevant observations made by Ld CIT(A) in AY 2012-13 are extracted below:- “6.2 Further, I am inclined to agree with the appellant's submission that computing disallowance under Rule 8D(2)(ii) and 8D(2)(iii) was not correct in this case, since the appellant is a trader in shares and securities and the same are not held as investments. So the value of investment in terms of Rule 8D(2) would be Nil and there would be no such disallowance. In this regard, I find that the Hon'ble Bombay High Court, vide order dated 13.04.2015, in the case of CIT vs. India Advantage Securities Ltd. [I.T No.1131 of 2013], has observed that - Both the authorities in this case have followed this judgment (i.e. decision in the case of Godrej and Boyce Mfg. Co. Ltd.) and applied section 14A of the Income Tax Act, 1961 and Rule 8D of Income Tax Rules, 1962. They have been applied correctly. In the case of India Advantage Securities Ltd., the ITAT, Mumbai, relying on the decision of Hon'ble Karnataka High Court in the case of CCL Ltd. vs JCIT [250 CTR 291], held that disallowance of interest in relation to the dividend received from trading shares could not be made and accordingly
8 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises upheld the order of the CIT(A) in deleting the disallowance u/s 14A computed by the A.O in relation to the stock-in-trade. 6.3 Reference has been made to the decision of ITAT 'D' Bench, Mumbai in the case of HDFC Bank Ltd. dated 23,9.2015, wherein the above said decision in the case of India Advantage Securities Ltd. was distinguished and disallowance under Rule 8D was upheld. The said decision has been set aside in its entirety, by the order of the Hon'ble High Court of Bombay dated 25.02.2016 in writ petition No. 1753 of 2016, in the case of HDFC Bank Ltd. vs DCIT Mumbai & others. 6.4 From above discussion, it is apparent that the High Court of Bombay has approved the finding of the ITAT, Mumbai in the case of India Advantage Securities Ltd., and has disapproved the order of the Tribunal in the case of HDFC Bank Ltd., for taking a view contrary to the earlier order of the Tribunal (i.e. in the case of India Advantage Securities Ltd.). It has also been observed that no decision was rendered by the said Court in the case of Godrej & Boyce Mfg. Company Ltd, on the issue whether disallowance under Rule 8D could be made where the investment has been made in its stock-in- trade. 6.5 I find that the appellant is in the business of trading in shares and securities which are held as stock-in-trade. The investments reflected in Schedule V to the balance sheet as on 31.03.2012 are as under: - SCHEDULE -V INVESTMENTS Painting Rs. 34.87.500 Rs. 34,87,500 This does not include investment in shares. The entire holding of shares and securities are reflected in Schedule VI - current assets, loans and advances- inventories, closing stock of shares, securities and claims of Rs.22,98,685,4687-. In view of the above said decisions of the High Court of Bombay, in the case of India Advantage Securities Ltd. and HDFC Bank Ltd., it is held that the disallowance worked out under Rule 8D amounting to Rs.20,15,08,8287-, by considering the closing stock of shares as investments in shares, was not correct. In this case, the appellant has already worked out the disallowance considering the actual expenditure of earning dividend income of Rs.601,1847- in the return of income. In view of the above discussion, the addition of Rs. 20,15,08,8287- is found to be without merits and is deleted. The grounds No. 1 & 2 taken by the appellant For A.Y 2012-13 are allowed. Since ground no. 3 is without prejudice to the grounds No. 1 & 2, the same is dismissed in view of the relief allowed with respect to these grounds.”
9 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises 8. The Ld CIT(A) deleted the additions made by the AO in AY 2013-14 also on identical reasons. Aggrieved by the orders passed by Ld CIT(A), the revenue has filed these appeals in both the years.
The Ld D.R submitted that the provisions of sec 14A(2) do not prescribe any specific format for recording dissatisfaction over the workings made by the assessee. The Ld CIT-DR further submitted that the dissatisfaction of the AO can be inferred from the observations made by the assessing officer. She further submitted that the assessing officer has invoked the provisions of Rule 8D as per the provisions of sec. 14A(2) of the Act after properly recording his dissatisfaction.
The Ld D.R further submitted that the Hon’ble Supreme Court has since held in the case of Maxopp Investment Ltd (Civil Appeal Nos.104-109 of 2015 dated 12-02-2018) has held that the exempt dividend income earned from securities held as stock-in-trade also triggers the provisions of sec.14A of the Act. She further submitted that the Hon’ble Punjab & Haryana High Court has, inter alia, held in the case of Pr. CIT vs. State Bank of Patiala (391 ITR 218) that the dividend income earned from securities held as stock-in-trade would not attract the provisions of sec.14A of the Act. She submitted that the assessing officer, in the above said case, had restricted the disallowance u/s 14A of the Act to the amount of exempt income. The Ld CIT(A), however, enhanced the disallowance by applying provisions of Rule 8D and the same was set aside by the Tribunal. The above said decision of Tribunal was upheld by the Hon’ble High Court and also Supreme Court in the case of Maxopp Investment Ltd (supra). In the hands of Banks, all the investments are treated as stock in trade as per Circular No.18/2015 (F.No.279/MISC./ 140/2015/ITJ) dated 2-11-2015. Still the AO made disallowance in the above said case. The Ld D.R also placed reliance on the decision rendered by Kolkatta bench of Tribunal in the case of DCIT vs. Teenlok Advisory Services (P) Ltd (2016)(159 ITD 991), wherein it was held that the exempt income earned from shares held as stock in trade would attract disallowance. Accordingly the Ld D.R submitted that the exempt dividend
10 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises income earned from securities held as stock in trade would attract the provisions of Sec.14A of the Act. Accordingly the Ld D.R contended that the assessing officer has rightly computed disallowance by applying provisions of Rule 8D of the I.T Rules.
The Ld A.R, on the contrary, submitted that the assessee’s main objective in purchase and sale of shares is to earn profit on sale of shares and hence the dividend income earned by it is only incidental income arising on account of holding of shares on the record date prescribed for declaration of dividend. He submitted that all the expenses incurred by the assessee are in connection with trading in shares only. The assessee shall be incurring all the expenses debited to the profit and loss account, even it does not earn any dividend income at all. Accordingly, the Ld A.R submitted that all the expenses are related to trading activity only and none of it is related to dividend income, which is exempt from taxation. The Ld A.R submitted that, despite these facts, the assessee has voluntarily disallowed a sum of Rs.6.01 lakhs and Rs.10.46 lakhs in AY 2012-13 and 2013-14 respectively to meet the requirements of sec.14A of the Act.
The Ld A.R submitted that the provisions of sec.14A(2) prescribes a mandatory condition that the AO should examine the disallowance made by the AO and he has to record his dissatisfaction, having regard to the accounts of the assessee, over the working of disallowance given by the assessee. Only if the AO records his dissatisfaction, then the AO is entitled to apply the provisions of Rule 8D of I.T Rules. The Ld A.R submitted that the AO has computed the disallowance by applying provisions of Rule 8D without following mandatory condition of recording dissatisfaction over the workings made by the AO. Hence the Ld CIT(A) was justified inholding that the disallowance so made by the AO is not justified. The Ld A.R took support of decision rendered by Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing company Ltd (Civil Appeal No.7020 of 2011 dated 08-05-2017); the decision rendered by Hon’ble Bombay High Court in the case of Pr. CIT vs. Reliance Capital Asset Management Ltd (2017)
11 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises (86 taxmann.com 200)(Bom); the decision rendered by Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra). Accordingly the Ld A.R submitted that the Ld CIT(A) was justified in holding that the AO was not legally correct in invoking the provisions of Rule 8D in the facts and circumstances of the case. He further submitted that the voluntary disallowance made by the assessee in both the years would also meet the requirements of law and hence no further disallowance is called for.
We have heard rival contentions and perused the record. The undisputed facts remain that the assessee is a trader in shares and securities and the assessee has held its entire securities as “stock in trade” only. The assessee did not hold any security as its investment. The provisions of sec.14A read as under:- “14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) 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 this 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. (3) The provisions of sub-section (2) shall also apply in relation to a case 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 : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.” Sub.sec.(2) of sec.14A is relevant for our consideration. The power to disregard the computation made by the assessee is given to the AO under sub.sec(2) of sec. 14A of the Act. It prescribes that the AO can determine the quantum of expenditure to be disallowed only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the
12 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises 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. If he is not so satisfied, then the AO has to compute the disallowance in accordance with the method prescribed, i.e., as per Rule 8D of I.T Rules. Hence the mandatory condition prescribed in sec.14(2) is that the AO, having regard to the accounts of the assessee, has to show that he was not satisfied with the correctness of working of disallowance made by the assessee. If he fails to record his dissatisfaction about the correctness of working of disallowance made by the assessee, having regard to the accounts of the assessee, the AO is not entitled to determine the disallowance in accordance with Rule 8D of I.T Rules.
The assessee has placed its reliance on various case laws to support the above said proposition. For the sake of convenience, we extract below the relevant observations made by Hon’ble Supreme Court, Hon’ble jurisdictional Bombay High Court and other High Courts, on which the assessee had placed reliance: (a) Extract from the judgment of Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Limited 394 ITR 449 (SC) "Nevertheless, irrespective of the aforesaid question, what cannot be denied is that the requirement for attracting the provisions of Section 14A(1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income." x x x x "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".
13 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises (b) Extract from the judgment of Hon'ble Bombay High Court in the case of Reliance Capital Asset Management Ltd. 86 taxmann.com 200 (Bom.) "The Assessing Officer did not specifically record that he is not satisfied with the correctness of the claim of the assessee in respect of the expenditure in relation to the income which does not form part of the total income under the Act. However, he felt obliged and going by the presence of Rule 8D that once Section 14A is attracted, the disallowance is to be made as per Rule 8D only which has been prescribed by the Legislature. The Assessing Officer has not adverted to the plain language of sub- section (2) of Section 14A. It is that mistake committed by the Assessing Officer which was partially corrected by the First Appellate Authority. The First Appellate Authority agreed with the assessee that the Assessing Officer has not commented upon the correctness or otherwise of the appellant's working of the claim. He has not specifically rejected that working and has not provided any reason for doing so. The Commissioner was of the view that before proceeding to compute the disallowance under Section 14A as per Rule 8D, the Assessing Officer should consider the working of expenses made by the assessee and when he is not satisfied with the said working and terms it as incorrect, based on objective criteria and for cogent reasons, he can then proceed to work out the disallowance under Section 14A as per Rule 8D of the Rules. We cannot find any fault with this conclusion of the First Appellate Authority based as it is on the language of sub-section (2) of Section 14A of the Act, reproduced above". (c) Extract from the judgment of Hon'ble Delhi High Court in the case of Hero Management Services Limited 360ITR 68 (Del.) "Further to invoke Rule 8D, the Assessing Officer has to first record a finding that he was not satisfied with the correctness of the claim for expenditure made by the assessee in relation to income, which did not form part of the total income under the Act. No such satisfaction has been recorded by the Assessing Officer. . . In view of the aforesaid discussion, we do not find any reason to interfere with the impugned order. The appeal has no merit and is dismissed in limine". (d) Extract from the judgment of Hon'ble Punjab & Haryana High Court in the case of Hero Cycles Ltd. 323 ITR 518 (P & H.) "In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may
14 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible". (e) Extract from the judgment of Hon'ble Calcutta High Court in the case of REI Agro Ltd. GA No. 3022 of 2013 "The Assessing Officer also disallowed the expenditure under section 14A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of the claim as regards the claim that "no expenditure" was made by the assessee... the disallowance under section 14A of the Income Tax Act, 1961 is plainly contrary to the provisions of the statue. The CIT, in the circumstances, allowed the appeal of the assessee and the Tribunal did not interfere". (f) Extract from the judgment of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. 4021TR 640 (SC) "Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO”. 15. In the instant case, we notice that the assessing officer did not record any dissatisfaction over the amount of disallowance determined by the assessee u/s 14A of the Act, having regard to the accounts of the assessee. Further, we notice that the AO has proceeded on the erroneous presumption that the application of Rule 8D is mandatory in nature. Further the AO has also made certain observations, which are inconsistent with the observations made by High Courts. (a) First of all, the assessee does not hold any security as its investment, where as the AO has proceeded to make observations on sources of funds for making investments. This fact shows that the AO has not understood the facts correctly. (b) Secondly, the AO has taken the view that the borrowed funds should be considered as used for making investments, which is
15 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises against the principles laid down by Hon’ble Bombay High Court in the case of HDFC Bank Ltd (366 ITR 505). (c) Thirdly, the AO has expressed the view that making of investments and earning of exempt income requires efforts. This is contrary to the following observations made by Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra):- “40….. It is to be kept in mind that in those cases where shares are held as stock in trade as business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimtely trade those shares by selling them to earn profits.” (d) Fourthly, the AO has observed that the Hon’ble Delhi High Court has held in the case of Cheminvest Ltd (317 ITR 86) that disallowance u/s 14A can be in a year in which no exempt income has been earned or received by the assessee. This interpretation of the AO is not correct as the Hon’ble Delhi High Court has held otherwise, i.e., no disallowance is required when there is no exempt income. Thus, we notice that the AO has proceeded to invoke the provisions of Rule 8D of the I.T rules, without showing that he was not satisfied with the workings given by the assessee having regard to the accounts of the assessee. Further, the understanding of AO with regard to the disallowance u/s 14A of the Act is inconsistent with the principles laid down by the Hon’ble High Courts and Supreme Court.
In view of the foregoing discussions, we are of the view that the Ld CIT(A) was justified in holding that the AO was not justified in invoking Rule 8D to compute disallowance u/s 14A, without showing that he was not satisfied with the amount of disallowance worked out by the assessee. Accordingly we uphold the order passed by Ld CIT(A) on this issue.
16 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises
Further, the Ld CIT(A) has noticed that the assessee has held the shares as its Stock-in trade and hence there is no “investment in shares” held by the assessee. Accordingly, the Ld CIT(A) has held that the value of investment for the purpose of Rule 8D(2)(ii) and (iii) will be NIL. In that case, there will be no disallowance under Rule 8D of the I.T Rules. These observations of Ld CIT(A) would show that even if the provisions of Rule 8D is held to be applicable for a moment, even then there will be no disallowance under the said Rule in the instant case, since the assessee did not hold any shares as its investments. In the absence of any investment, the computation provisions of Rule 8D would fail. In our view, there is merit in the above said observations made by Ld CIT(A).
The Ld CIT(A) has also taken support of the decision rendered by Hon’ble Karnataka High Court in the case of CCI Ltd (supra) and the decision rendered by co-ordinate bench in the case of India Advantage Securities Ltd (supra) to hold that the disallowance of interest in relation to the dividend received from trading shares could not be made. However, we are unable to agree with the above said observations of Ld CIT(A), in view of the following observations made by Hon’ble Supreme Court in the case of Maxopp Investment Ltd (supra):- “39. In those cases, where shares are held as stock-in-trade, the main purpose is to trade in those shares and earn profits therefrom. However, we are not concerned with those profits which would naturally be treated as ‘income’ under the head ‘profits and gains from business and profession’. What happens is that, in the process, when the shares are held as ‘stock-in-trade’, certain dividend is also earned, though incidentally, which is also an income. However, by virtue of Section 10(34) of the Act, this dividend income is not to be included in the total income and is exempt from tax. This triggers the applicability of Section 14A of the Act, which is based on the theory of apportionment of expenditure between taxable and non-taxable income as held in Walfort Share and Stock Brokers P Ltd case. Therefore, to that extent, depending upon the facts of each case, the expenditure incurred in acquiring those shares will have to be apportioned.” Hence, even if the shares are held as stock in trade, the disallowance u/s 14A shall be triggered once exempt income is earned by the assessee.
17 ITA Nos. 5207 & 5208/Mum/2016 M/s. Rare Enterprises 19. We have noticed that the assessee has disallowed a sum of Rs.6.01 lakhs and Rs.10.46 lakhs in AY 2012-13 and 2013-14 respectively u/s 14A of the Act. We have upheld the view taken by Ld CIT(A) that the assessing officer was not correct in law in applying the provisions of Rule 8D in both the years, since the AO has failed to show/record, having regard to the accounts of the assessee, that he was not satisfied with the disallowance computed by the assessee. Under these set of facts, we have upheld the order passed by Ld CIT(A) in setting aside the disallowance worked out by the AO. We have also noticed that the Hon’ble Supreme Court has held in the Maxopp Investment Ltd (supra) that the disallowance u/s 14A shall be triggered if exempt income ie. earned, even if the shares are held as stock in trade. Under these set of facts, the disallowance worked out by the assessee should be considered as meeting the requirements of sec.14A of the Act. Accordingly we uphold the order passed by Ld CIT(A) on this issue in both the years under consideration.
In the result, both the appeals of the revenue are dismissed. Order pronounced in the open court on 1st October, 2018. Sd/- Sd/- (Pawan Singh) (B.R. Baskaran) Judicial Member Accountant Member
Mumbai, Dated: 1st October, 2018
Copy to:
The Appellant 2. The Respondent 3. The CIT(A) -49, Mumbai 4. The Pr. CIT, Central-4, Mumbai 5. The DR, “I” Bench, ITAT, Mumbai By Order
//True Copy// Assistant Registrar ITAT, Mumbai Benches, Mumbai n.p.