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Income Tax Appellate Tribunal, DELHI BENCH ‘B’ : NEW DELHI
Before: SHRI KULDIP SINGH & SHRI PRASHANT MAHARISHI
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘B’ : NEW DELHI) BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER and SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No.969/Del./2016 (ASSESSMENT YEAR : 2011-12) ACIT, Circle 1 (1), vs. M/s. DLF Info City Developers Gurgaon. (Kolkata) Limited, 3rd Floor, Shopping Mall Complex, Arjun Marg, DLF City Phase 1, Gurgaon. (PAN : AABCD9621N) CO No.167/Del/2016 (in ITA No.969/Del./2016) (ASSESSMENT YEAR : 2011-12) M/s. DLF Info City Developers vs. ACIT, Circle 1 (1), (Kolkata) Limited, Gurgaon. 3rd Floor, Shopping Mall Complex, Arjun Marg, DLF City Phase 1, Gurgaon. (PAN : AABCD9621N) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri R.S. Singhvi, CA and Shri Satyajeet Goel, CA REVENUE BY : Ms. Ashima Neb, Senior DR Date of Hearing : 28.11.2017 Date of Order : 07.12.2017 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : objections filed by the assessee challenging the impugned order are being disposed off by way of consolidated order to avoid repetition of discussion.
The Appellant, Assistant Commissioner of Income-tax, Circle 1 (1), Gurgaon (hereinafter referred to as ‘the Revenue’) by filing the present appeal sought to set aside the impugned order dated 16.12.2015 passed by the Commissioner of Income-tax (Appeals)-I, Gurgaon qua the assessment year 2011-12 on the grounds inter alia that :-
“1. Ld. CIT(A) has erred in fact and in law by not appreciating the application of Rule 8D of the Income Tax Rules, 1961, so made by the A.O while making the disallowance u/s 14A of the Income Tax Act, 1961.
2. Ld.CIT(A) has erred in fact and in law by restricting the disallowance u/s 14A of Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 from Rs.43,67,640/- to Rs.68,433/-.
3. Ld.CIT(A) has erred in fact and in law by restricting the disallowance u/s 14A of the Income Tax Act, 1961 read with Rule 80 of the Income Tax Rules, 1962 to 10% of the exempt income on the adhoc basis without any rationale.”
The Objector, M/s. DLF Info City Developers (Kolkata)
Ltd., by filing the present cross objections challenged the impugned order dated 16.12.2015 passed by the CIT (Appeals)-I, that :-
“1. That on facts and in the circumstances of the case, the ld. CIT (A) has erred in confirming the disallowance to the extent of Rs.68,433/- under section 14A read with Rule 8D of the Income Tax Act, 1961.
2. That the Ld. CIT (A0 has failed to correctly appreciate the provisions of section 14A of the Income Tax Act, 1961.” 4. Briefly stated the facts necessary for adjudication of the controversy at hand are : Assessing Officer made disallowance of Rs.43,67,640/- by invoking the provisions contained under section 14A of the Income-tax Act, 1961 (for short ‘ the Act’) read with Rule 8D of the Income-tax Rules, 1962 (for short ‘the Rules) qua exempt income earned by the assessee company during the year under assessment being dissatisfied with the assertion made by the assessee company that no expenditure has been incurred by the assessee company to earn exempt income which does not form part of the total income. AO also rejected the contention of the assessee company that none of the investment in the mutual fund has been made out of borrowed interest bearing funds.
Assessee carried the matter by way of filing appeal before the ld. CIT (A) who has restricted the addition of Rs.43,67,640/- made by the AO under section 14A read with Rule 8D to company has come up before the Tribunal by way of filing appeal and cross objection respectively by challenging the impugned order passed by ld. CIT (A).
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.
Undisputedly, the assessee company has earned dividend income to the tune of Rs.6,84,337/- which have been directly credited in the bank account of the assessee company. It is also not in dispute that AO has not given any computation of income to arrive at the disallowance of Rs.43,67,640/-.
Ld. DR for the Revenue contended inter alia that the AO, after duly recording his dissatisfaction, which is apparent from assessment order itself, worked out the disallowance under Rule 8D as per accounts rendered by the assessee company; that section 114 of the Evidence Act, 1872 raises presumption in favour of the Revenue that there was non-satisfaction of the AO and relied upon the order of the AO.
Ld. AR for the assessee company to repel the arguments addressed by the ld. DR for the Revenue contended inter alia that with Rule 8D without recording his satisfaction; that the assessee company has not incurred any expenses to earn the dividend income from investment of mutual funds; that the assessee company has substantial surplus funds; that all the investments in mutual funds out of which the assessee company has earned exempt income are old investment and in the earlier years, no disallowance was made; that ld. CIT (A) has erroneously sustained the addition of Rs.68,433/- by restricting the same to 10% of the exempt income on ad hoc basis without any basis.
First of all, the ld. AR for the assessee company to substantiate his contention that the assessee company has substantial reserve and surplus fund as on 31.03.2011 drew our attention towards balance sheet wherein reserve and surplus funds and shareholder’s funds / share capital are shown at Rs.61,46,85,927/- and Rs.25,00,000/- respectively as against investment of Rs.14,99,25,994/- made on March 31, 2010. As per balance sheet available on record, no investment has been made as on March 31, 2011 meaning thereby, the entire investment on which the assessee company has earned dividend was of earlier year. and surplus fund and shareholder’s funds / share capital to the tune of Rs.61,46,85,927/- and Rs.25,00,000/- respectively, though paid interest payment on some borrowed funds during the year under assessment, the disallowance cannot be made u/s 14A read with Rule 8D. More particularly when no investment has been made by the assessee during the year under assessment. So, in these circumstances, the presumption has to be raised in favour of the assessee that investments, if made, were made out of interest free funds available with the assessee company.
Hon’ble High Court of Bombay in case cited as CIT-2, Mumbai vs. HDFC Bank Ltd. – (2014) 49 taxmann.com 335 (Bombay) while dealing with the identical issue held that when the assessee’s own funds and other non-interest bearing funds were more than investment in tax free securities, no disallowance on account of interest payment under section 14A can be made.
Furthermore, the AO has not recorded his dissatisfaction as to the computation made by the assessee company that no expenditure has been made by the assessee company during the year under assessment to earn the interest free income rather proceeded mechanically by extracting the bare language of Rule 8D. 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.
Hon’ble Delhi High Court in HT Media Limited vs. Pr. CIT in dated 23.08.2017 decided the issue in controversy in favour of the assessee by returning the following findings :-
“39. Turning now to the order of the ITAT in para 33, it recorded the submission of the AR that the AO did 1)0t record any satisfaction about the Assessee not properly offering expenditure incurred in relation to the exempt income at Rs.3 lakhs. The ./2016 CO No.167/Del/2016 ITAT reproduced the contents of para 3.3.1 of the assessment order, which has been extracted by this Court hereinbefore, which contains general observations regarding earning of exempt income. This cannot be accepted as a recording by the AO of satisfaction regarding the claim of the Assessee after examining its accounts. Again, in para 34 of its order, the ITAT simply reproduced para 3.3.6 of the assessment order where, again, no reasons have been provided but only a conclusion has been reached that the AO was "satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses."
Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. The question framed in ITA 549 of 2015 is answered accordingly.” 16. Following the decision rendered by Hon’ble Apex Court in Godrej & Boyce Manufacture Company Ltd. (supra) and Hon’ble Delhi High Court in HT Media Ltd. (supra), we are of the considered view that the findings returned by AO that, “the claim of the assessee that the amount invested in mutual funds was only out of its own funds and no part of it was invested out of borrowed funds cannot be accepted, as entire money of a company is part of a common kitty, as was held by jurisdictional High Court in CIT sustainable because the assessee company has come up with categoric plea that it has not incurred any expenses to earn the mutual funds and that the assessee has substantial pool of share capital, reserves and surplus and no amount out of interest bearing funds have been invested to earn the exempt income.
The AO has not pointed out any defect in the computation made by the assessee company and as such, provisions contained u/s 14A read with Rule 8D are not attracted. Because sub-section (2) & (3) of section 14A with Rule 8D of the Rules has only prescribed a formula for determination of an expenditure to earn the income which does not form part of the total income under the Act, which can only be invoked if the AO is not satisfied with the claim of the assessee.
Furthermore, CIT (A) erred in sustaining the disallowance of Rs.68,433/- by restricting the same to 10% of the exempt income even despite agreeing with the assessee company that no satisfaction has been recorded by the AO that nil expenses has been incurred to earn tax free dividend income rather proceeded to sustain the addition of Rs.68,433/- on the basis of surmises and guesswork which is not sustainable. In the given circumstances, the contentions raised by ld. DR are not sustainable. the Revenue challenging to restrict the disallowance u/s 14A read with Rule 8D from Rs.43,67,640/- to Rs.68,433/- is dismissed being without merit. However, cross objections filed by the assessee are hereby allowed and addition of Rs.68,433/- is hereby ordered to be deleted. Order pronounced in open court on this 7th day of December, 2017.