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Income Tax Appellate Tribunal, MUMBAI “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI Dr. A.L. SAINI, HON’BLE
Assessee by : Shri N.R. Agarwal–CA. Department By : Shri Saurabhkumar Rai – DR Date of hearing : 18/06/2018. Date of pronouncement : 27/06/2018. O R D E R PERDr.A.L. SAINI, ACCOUNTANT MEMBER By way of this appeal, the assessee appellant has challenged correctness of the order dated 14/10/2016 passed by the learned CIT(A)-9, Mumbai, in the matter of assessment under section 143(3) of the Income Tax Act 1961, for the assessment year 2012-13.
(Mangal Keshav Securities Ltd.)
2.However, in this appeal, the assessee has raised a multiple grounds of appeal, but at the time of hearing the main grievances of the assessee have been confined to the following issues:- 1) Disallowance under section 14A read with rule 8D of the Income Tax Rules, 1962 to the tune of Rs. 33,54,498/-. 2) The addition of Rs. 26,33,944/- as business income on account of unreconciled AIR transactions (26AS); and 3) Denial of set off of brought forward business losses of the earlier assessment years.
3. We shall take first issue raised by the assessee, which relates to disallowance of Rs. 33,54,498/- under section 14A read with rule 8D of the I.T. Rules, 1962.
4.The facts of the case which can be stated quite shortly are as follows: On perusal of the balance sheet, the Assessing Officer observed that the assessee had made substantial investments in shares, which gave rise to exempt dividend income. In the computation of income, the assessee had disallowed, suo-moto, a sum of Rs. 2,64,000/- under section 14A of the Act, being salary paid to one of its employee, who was solely responsible to look into the investment affairs of the assessee. However, the Assessing Officer noted that in addition to the salary offered for (Mangal Keshav Securities Ltd.) disallowance, there were other administrative expenses incurred by the assessee. It cannot be ruled out that the assessee must have made the expenditure towards making and managing such investments. Therefore such expenditure incurred should be disallowed under section 14A of the Act and accordingly disallowance was made by AO under section 14A read with rule 8D(2)(ii) & (iii) of the Income Tax Rules, as follows:-
(i) The amount of expenditure directly As disallowed by 2,64,000/- relating to income which does not form the assessee in part of total income. the return of income. (ii) Proportionate of interest expenditure (A X B/C) NIL computed in accordance with the formula given in Rule 8D(2)(ii) (iii) Amount equal to one-half percent of the 33,54,498/- average of the value of investment income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. Investment as on 01/04/2011 (opening) 69,33,99,550/- after given effect to the High Court order approving the scheme of amalgamation. Investment as on 31/03/2012 (Closing) 64,83,99,570/- 67,08,99,56 x 0.5% Average Total expenditure disallowed u/s. 14A 36,18,498 As noted in the table above, the Assessing Officer computed the disallowance under section14A read with rule 8D, in relation to expenditure attributable to the earning of exempt income to the tune of Rs.36,18,498/-. Since the assessee has disallowed suo- motu under section 14A, read with rule 8D to the tune of Rs. 2,64,000/-therefore, the balance amount of Rs. 33,54,498/-( (Mangal Keshav Securities Ltd.)
Rs.36,18,498 – Rs.2,64,000), has been disallowed under section 14A of the Act and added back to the total income of the assessee.
Aggrieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld.CIT(A), but without success. The ld. CIT(A) observed thatduring the appellate proceedings, the assessee has not been able to rebut the calculation made by the Assessing Officer with regard to disallowance under section 14A read with rule8D(2) (iii) of the I.T. Rules. That is, the assessee did not disallow the amount under rule 8D (2) (iii), correlating with the calculation of expenses to earn the dividend income.Therefore, ld. CIT(A) confirmed the order of the Assessing Officer.
Aggrieved by the order of the ld. CIT(A), the assessee is in further appeal before us.
Ld. Authorized Representative (AR) of the assesseehas submitted before us that the assessee has raised additional ground of appeals which reads as follows: “The learned CIT (Appeals) erred in not giving relief for disallowance U/s 14A by restricting the disallowance to (Mangal Keshav Securities Ltd.)
Rs.40,068/-, to the extent of the dividend earned though assessee himself disallowed Rs.2,64,000/- by mistake or misconception.”
The ld AR for the theassessee, explained the Bench that assessee had disallowed under section 14A read with rule 8D,suo-motu to the tune of Rs.2,64,000/-, which is more than the total exempted income of Rs. 40,068/-.The ld AR pointed out that assessing officer disallowed Rs. 33,54,498/- under Rule 8D (2) (iii) of I.T. Rules, which is not acceptable and it should be restricted up to the total exempted income of Rs. 40,068/- and for the he relied on the decision of the Coordinate Bench of this Tribunal in the case of Tata Industries Ltd. Vs. ITO[2016]181 TTJ 600 (Mum.), wherein it was held as follows:-
“Even otherwise, the entire interest expenditure can not be attributed to earning of exempt dividend income only. Even an investor normally does not invest merely for earning of dividends. It also takes into consideration the possibility of rise in price of shares which may result into taxable capital gains also. The Hon'ble Delhi High Court in the case of Joint Investment Private Limited (supra) has held that section 14A of the Act or rule 8D cannot be interpreted so as to mean that the entire tax exempt income of the assesseeis to be disallowed. That the window for disallowance is indicated in Section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income. This proportion or portion of the taxexempt income surely cannot swallow the entire amount of tax exempt income. Similar view has been taken by the Hon'ble Punjab & Haryana High Court in the case of 'PCIT vs. Empire Package Pvt. Ltd. '(supra).(Para 27) The Hon'ble Delhi High Court in the case of "M/s Cheminvest Ltd. vs. CIT" (2015) 61 taxman.com 118, wherein also the (Mangal Keshav Securities Ltd.) assessee had made strategic investments in subsidiaries/Group Companies for retaining control over them but has not received any dividend income from such investments, has held that section 14A will not apply if no exempt income is received or receivable during the relevant previous year and that the expression 'does not form part of the total income' in section 14A of the Act envisages that there should be an actual receipt of income which is not included in the total income during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. (Para 27) In view of the overall facts and circumstances of the case, as discussed above, and in the light of the above decisions of the higher courts, which are otherwise binding on this Tribunal, the court was of the view that disallowance u/s 14A in this case cannot exceed than the tax exempt income earned by the assessee during the year. (Para 29) So far as the contention that the assessee itself has offered disallowance in the return of income more than the exempt income earned is concerned, the Id. AR has relied upon various case laws as mentioned in the written submissions dated 21.06.2016 to stress the point that even if the assessee under a mistake or misconception has over assessed itself in the return of income, the Tribunal can give relief to the assessee to the extent the assessee is over assessed and direct the lower authorities to tax the assessee as per the provisions of law. (Para 30) Respectfully following the above decisions of higher courts and that of co-ordinate benches of the tribunal, we direct the AO to restrict the disallowance u/s 14A to the extent of exempt income earned by the assessee during the year. (Para 31)”
The Ld. Authorized Representative for the assessee submitted that above cited judgment of the coordinate Bench in the case of Tata Industries Ltd (supra), is squarely applicable to the assessee under consideration and therefore, prayed the Bench that (Mangal Keshav Securities Ltd.) disallowance U/s 14A should be restricted to Rs.40,068/-, to the extent of the dividend earned, though the assessee himself disallowed Rs.2,64,000/- by mistake.
8.On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.
9.We have heard learned counsels on both sides and perused the material available on record, we note that the requirement for attracting Sec.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.Earlier to the introduction of sub-sections (2) and (3) of Section 14A of the Act, such a determination was required to be made by the Assessing Officer in his best judgment.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 (Mangal Keshav Securities Ltd.) 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. We note that the Hon'ble Delhi High Court in the case of Joint Investments Pvt Ltd. Vs. CIT 372 ITR 694 (Del)held that by no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. The relevant quote of the said judgment is given below:
“7. During the course of hearing, counsel for the petitioner had relied upon a decision of this Court in Commissioner of Income Tax VI v. Taikisha Engineering India Ltd., (ITA 115/2014, decided on 25.11.2014). The court had, in that judgment, highlighted the necessity in view of the peculiar wording of Section 14A (2) that computation or disallowance of the assessee, or claim that no expenditure was incurred for earning exempt income should be examined with reference to the accounts and only if the assessee’s explanation is unsatisfactory, can the AO proceed further.
The Court in Taikisha Engineering (supra) pertinently observed: - “Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made. 13. We need not, therefore, go on to sub Rule (2) to Rule 8D of the Rules until and unless the Assessing Officer has first recorded (Mangal Keshav Securities Ltd.)
the satisfaction, which is mandated by sub Section (2) to Section 14A of the Act and sub Rule (1) to Rule 8D of the Rules.”
In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing Rs.2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs.52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.”
10. We note that in the light of the above judgment of the Coordinate Bench in the case of Tata Industries Ltd.Vs. ITO [2016] 181 TTJ 600 (Mum.), relied by assesseee, (supra), we are of the view that disallowance u/s 14A in this case cannot exceed than the tax exempt income of Rs.40,068/-, as earned by the assessee during the year. So far as the contention that the assessee itself has offered disallowance in the return of income more than the exempt income earned is concerned, we note that the said issue has also been dealt with the Coordinate Bench, that is, even if the assessee under a mistake or misconception has over assessed itself in the return of income, the Tribunal can give relief to the assessee to the extent the assessee is over assessed and direct the lower authorities to tax the assessee as per the provisions of law.
(Mangal Keshav Securities Ltd.)
Therefore, respectfully following the above binding precedent, we uphold the contention of the assessee and direct the Assessing Officer to restrict the disallowance under section 14A read with rule 8D toRs.40,068/-.
The issue No.2 raised by the assessee relates to addition of Rs. 26,33,944/- as business income on account of un-reconciled AIR transactions.
Brief facts qua the issue are that during the course of assessment proceedings, the assessee was required to reconcile income earned and TDS claimed, that is, the income shown in the audited financials should tally with AIR/26AS transactions. In response, the assessee furnished the details vide letter dated 10/03/2015 and on perusal of the details, it was noted that the following transactions which are reported in AIR/26AS transactions, but not shown in the Audited Financials:- Party Name Income as Income as per Short in the per financials AIR/ 26AS financials Choron Diamonds 3,03,347 25,98,380 22,95,033 India Pvt. Ltd. Dawn 0 27,358 27,358 Infrastructure Ltd. Magnum Silk Mill 44,144 3,55,697 3,11,553 Pvt. Ltd. Total 3,47,491 29,81,435 26,33,944 The assessee submitted before the assessing officer, that the respective parties, as mentioned above, had incorrectly applied (Mangal Keshav Securities Ltd.)
PAN of the assessee and therefore, the income is shown in the AIR/26AS transactions. However, the assessing officer noted that the assessee failed to submit the reconciliation and rectified TDS returns to explain that these incomes do not belong to him therefore, a sum of Rs. 26,33,944/- was added to the total income of the assessee.
Aggrieved by the stand, so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), but without success. During the course of appellate proceedings, the assessee has submitted some additional evidences before the ld. CIT(A) stating that the three parties namely; Choron Diamonds (India) Pvt. Ltd., Dawn Infrastructure Ltd. and Magnum Silk Mills Pvt. Ltd., who had wrongly reported transactions aggregating to Rs. 26,33,944/- under PAN of the assessee company instead of reporting it under the correct PAN of the parties, to whom such transactions actually pertain to. However, the ld CIT(A) noted that the assessee has not made any prayer for admission of additional evidence under Rule 46A of the I.T. Rules, 1962 and the assessee has not explained as to how the conditions laid down in Rule 46A are satisfied by him, so as to admit its additional evidences at this stage. Therefore ld.CIT(A) held that when the evidences were available with the assessee at the initial stage, (Mangal Keshav Securities Ltd.) which were not produced before the AO and the assessee had failed to explain sufficient cause, as to why he had not submitted these additional evidences before the AO, therefore, ld CIT(A) did not accept the additional evidences and upheld the order passed by the Assessing Officer.
Aggrieved by the order of the ld. CIT(A), the assessee is in further appeal before us. The Ld. Authorized Representative for the assessee has submitted that the additional evidenceswere produced before the ld. CIT(A), but these evidences have not been considered by him. The ld CIT(A) also failed to send these additional evidences to Assessing Officer forhis examination and verification. The ld.CIT(A) has co-terminious power, that is, he has all the powers as the assessing officer have, therefore, he could examine these additional evidences himself. The assessee, during the course of appellate proceedings explained the circumstances as to how the conditions laid down in Rule 46A are satisfied to admit the additional evidences at the appellate stage, even then the ld. CIT(A) did not admit the additional evidence.
Learned Departmental Representative did not have much to say but he nevertheless relied upon the orders of the authorities below.
(Mangal Keshav Securities Ltd.)
We have given a careful consideration to the rival submissions and perused the material available on record. We note that vide paper book at page No. 15 which is a confirmation from Choron Diamond India Pvt. Ltd. wherein it is mentioned that the transactions were done with the assessee, and TDS thereon was deducted as per the revised return for quarter-4 and they had rectified the mistake. Similarily, vide paper book at page No. 16, M/s Dawan Infrastructure Ltd. had provided the confirmation to the assessee stating followings: “…….We further confirm that a sum of Rs.27,358 was wrongly credited to the account of Mangal Keshav Securities Limited and accordingly, wrongly reported in the e-TDS return filed by us for the relevant quarter. We are now in the process of revising our e- TDS returns for the relevant quarter of financial year 2011-12 to rectify the same.”
It is abundantly clear from the above confirmations/ rectification statements that assessee has reconciled and rectified the TDS transactions and submitted before the ld CIT(A). The assessee also explained the reasons that why he had not submitted these confirmations/ rectification statements at the initial stage, during the assessment proceedings. Inspite of this, the ld CIT(A) has not admitted these additional evidences. The assessee has produced the reconciliation before the ld. CIT(A) by providing party-wise details and confirmations of transactions (Mangal Keshav Securities Ltd.) and the TDS deducted wrongly in respect of some transactions, but the ld.CIT(A) has not admitted these additional evidences nor sent themto the Assessing Officer for his examination. The ld. CIT(A) ought to take remand report on these additional evidences and adjudicate the issue in accordance with law, but ld. CIT(A) neither examined himself nor he sent them to the Assessing Officer for his examination. We note that the ld. CIT(A) has not followed the procedure prescribed in Rule 46A of the Income Tax Rules, therefore, we are of the view that this issue requires to be set-aside to the file of the assessing officer.Accordingly, we set aside the order of ld CIT(A) and restore the issue to the file of the assessing officer, with a direction, to examine the TDS Confirmations and reconciliations and adjudicate the issue in accordance with law. Thus, this ground of appeal raised by the assessee is allowed for statistical purposes.
16. The third ground of appeal raised by the assessee relates to denial of set off of brought forward losses of earlier assessment years.
17. Brief facts qua the issue are that during the course of assessment proceedings, the Assessing Officer noted that the assessee has claimed brought forward losses to the extent of Rs.55,97,291/-, aggregating for the Assessment Years 2006-07, (Mangal Keshav Securities Ltd.)
2007-08,2009-10,2010-11 and 2011-12. The Assessing Officer reviewed the assessment orders for these assessment years and noted that there had been certain disallowances in the assessment orders which have been subsequently upheld by the ld. CIT(A) orders. Accordingly, the AO held that the returned loss is not same as assessed loss. Only assessed loss is allowed to be set off against the income of current year. Assessment Year wise details of the returned and assessed losses are as follows:-
A.Y. Business loss as per return Business loss as per of income assessment order 2006-07 29,500 29,500 2007-08 11,94,639 1,93,739 2008-09 0 0 2009-10 30,95,495 0 2010-11 9,61,114 0 2011-12 3,16,543 0 Total 55,97,291 2,23,239 The AO noted that assessee has claimed Rs. 53,74,052/-( Rs.55,97,291 – Rs.2,23,239), over and above assessed loss, which is not allowed to be set off. The same was added to the total income of the assessee.
Aggrieved by the stand, so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A), but without success. The ld. CIT(A) noted that assessee had not (Mangal Keshav Securities Ltd.) been able to rebute the findings given by assessing officer, therefore, he confirmed the order of the Assessing Officer.
Aggrieved by the order of the ld. CIT(A), the assessee is in further appeal before us. Ld. Authorized Representative of the assessee has submitted that assessee is entitled to carry forward the losses as per the provisions of law, and for that, assessee has submitted the details of the business loss as per the return of income and as per the assessment orders. We note that the ld.CIT(A) has not given instruction to the Assessing Officer to examine the set off of brought forward losses as per the provisions of the Act. The assessee is entitled to claim the benefit of carry forward of losses, therefore, we think it appropriate to direct the Assessing Officer to examine the claim of the assessee with regard to carry forward of business losses in accordance with law. Accordingly, we do so. Thus, this ground of appeal
raised by the assessee is allowed for statistical purposes.
20. In the result, appeal filed by the assessee is partly allowed. Order Pronounced in open Court on this day of 27th June, 2018.