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Facts
The assessee, engaged in exporting readymade garments, earned exempt dividend income and long-term capital gains from mutual fund investments. The assessee made a suo motu disallowance of Rs. 12,58,032/- under Section 14A, but the Assessing Officer rejected this, applying Rule 8D to disallow Rs. 1,65,99,778/-. The NFAC confirmed this disallowance.
Held
The tribunal held that the Assessing Officer erred by applying Rule 8D without first recording proper satisfaction regarding the correctness of the assessee's suo motu disallowance, as required by Section 14A(2). The AO did not examine the assessee's accounts or provide reasons for dissatisfaction, which is a prerequisite before invoking Rule 8D.
Key Issues
Whether the Assessing Officer can disallow expenses under Rule 8D without first expressing dissatisfaction with the assessee's own computation and examining the assessee's accounts, as per Section 14A.
Sections Cited
Section 14A, Rule 8D, Section 10(34)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI ‘F’ BENCH,
Before: SHRI N.K. BILLAIYA, & MS ASTHA CHANDRA
PER N.K. BILLAIYA, ACCOUNTANT MEMBER:-
This appeal by the assessee is preferred against the order dated 25.07.2022 by the NFAC, Delhi pertaining to A.Y. 2018-19.
The sum and substance of the grievance of the assessee is that the NFAC erred in confirming the disallowance of Rs. 1,65,99,778/- made by the Assessing Officer u/s 14A of the Income-tax Act, 1961 [the Act, for short] r.w.r 8D of the Rules.
Representatives of both the sides were heard at length. Case records carefully perused. Relevant documentary evidence brought on record duly considered in light of Rule 18(6) of the ITAT Rules.
Briefly stated, the facts of the case are that the assessee is engaged in the business of export of readymade garments. Turnover for the year under consideration was at Rs. 330.824 crores with profit at Rs. 59.9056 crores.
Return was e-filed on 31.10.2018 declaring an income of Rs. 39,34,58,980/-. Return was selected for scrutiny assessment and accordingly, statutory notices were issued and served upon the assessee.
While scrutinizing the return of income, the Assessing Officer noticed that the assessee had closing balance of investments under the head ‘Non-current investment’ in mutual funds amounting to Rs. 1,47,11,94,917/- and further investment under ‘Current investment’ at Rs. 1,84,87,60,702/-.
The Assessing Officer further noticed that the assessee has earned dividend income of Rs. 2,04,382/- and has claimed as exempt u/s 10(34) of the Act. The Assessing Officer further found that the assessee has also earned exempt long term capital gains on mutual funds/securities amounting to Rs. 18,82,27,607/-. The Assessing Officer observed that the assessee has suo motu made disallowance u/s 14A of the Act of Rs. 12,58,032/-.
Not satisfied with the suo motu disallowance, the Assessing Officer sought clarification from the assessee.
The assessee filed detailed reply explaining the disallowance of expenses related to exempt income as under;
Sr. Particulars Amount No. 1. Salaries paid to staff 7,86,000 2. Portfolio Management Fee 3,94,000 3. Conveyance expenses 50,000 4. Telephone expenses 20,000 5. Securities Transaction Tax 8,032 Total 12,58,032
However, computation as per Rule 8D of the Rules comes to Rs. 1,65,99,778/-.
The assessee was asked to justify its claim of suo motu disallowance.
The assessee filed detailed reply which did not find any favour with the Assessing Officer.
The operative part of the Assessing Officer, heavily relied upon by the ld. DR reads as under:
“5.4 Submission of the assessee company is considered in the light of information available on record. It is noted that the assessee company has made huge investment in mutual fund under the head non-current investment as well as current investment as detailed above. It also not in dispute that the assessee company has earned substantial amount of dividend a well as Long Term Capital Gain in holding or sale of such investments. It is also a fact that the assessee has incurred substantial amount of employee benefit expenses amounting to Rs. 33,34,000/-. The assessee has also claimed other expenses which include telephone internet, postage, conveyance expenses etc. It is apparent that to manage huge investments made by the assessee, one of the Directors engaged for coordinating with the portfolio management company & maintaining all the records and related work hence salary paid, portfolio management fee, etc. were used towards manage these investments. It is a settled position of law that not only direct expenses but also indirect and proximate expenses relatable to earning of exempt income are liable to be disallowed in terms of section 14A read with rule 8D. Thus, the claim of the assessee that direct expenses has already been disallowed and so no further disallowance is required, does not have any merit. Actually, rule 8D specifies for disallowances as per rule 8D(2)(i), 8D(2)(ii) and 8D(2)(iii) f which direct expenses are covered by rule 8D(2)(i) whereas indirect expenses are covered by rule 8D(2)(ii) & 8D(2)(iii), which the assessee has ignored. However, it is explicit from the , discussions in foregoing paras that the assessee was having investments from which exempt income was earned and the assessee company has incurred expenses under the head employees benefit expenses and other expenses, part of which were used for earning exempt income and so the assessee was liable to disallow relatable expenses towards earning of exempt income. However, as the assessee has not debited any interest expenses, the disallowance is considered only under rule BO(2)(iii) of the I.T. Act,1961.”.
The Assessing Officer went on to compute the disallowance as
per the formula given in Rule 8D and computed total disallowance at Rs. 1,78,57,810/- and deducting the disallowance made by the assessee at Rs. 12,58,032/-, the Assessing Officer made addition of Rs. 1,65,99,778/- .
15. The assessee carried the matter before the ld. CIT(A) but without any success.
Before us, the ld. counsel for the assessee vehemently stated that the assessee has given segmental reporting which was part of the audited financial statement. It is the say of the ld. counsel for the assessee that the expenses related to mutual funds are directly shown attributable in the segmental report and the Assessing Officer has not pointed out any error or defect in the computation of disallowance made by the assessee.
The ld. counsel for the assessee further added that the Assessing Officer has not recorded any satisfaction before computing the disallowance u/r 8D and before dismissing the claim of the assessee.
We have given thoughtful consideration to the orders of the authorities below. It is true that the assessee has furnished segmental reporting statement which is part of audited financial statements wherein complete bifurcation of expenses between different segments has been given.
We are of the considered view that the assessee has given complete details for suo motu disallowance of Rs. 12,58,032/-. It is a fact that the Assessing Officer while drawing support from the formula given in Rule 8D has not pointed out any error or defect in the computation of suo motu disallowance by the assessee.
It would be pertinent to mention here that the assessee had engaged professional company M/s Bharat Bhushan & Co for rendering portfolio management services. These services pertained to managing portfolio of funds and other administrative tasks like documentation, submission of documents to asset management companies of various mutual funds. This fact has also been acknowledged by the Assessing Officer at Para 5.3 of his order.
Since the assessee has engaged a portfolio manager, it is safe to presume that apart from paying the portfolio management fees, the assessee must have not incurred any expense in earning dividends from mutual funds. The long term capital gains on shares/mutual funds/securities may be part of the exempt income but holding period has to be more than 12 months for being eligible for long term assets and, therefore, it can be safely presumed that these mutual funds/ securities were not purchased during the year under consideration, but in earlier years.
It would be pertinent to refer to the decision of the Hon'ble Jurisdictional High Court of Delhi in the case of Coforge Limited 436 ITR 546. The relevant findings of the Hon'ble Jurisdictional High Court read as under:
“A careful perusal of section 14A(2) of the Income-tax Act, 1961, would show that the Assessing Officer is required to make a determination of the expenditure incurred, in relation to income which does not form part of the total income, if the Assessing Officer is not satisfied, having regard to the accounts of the assessee, as to the correctness of claims made by the assessee about such expenditure. The satisfaction has to be arrived at by the Assessing Officer having regard to the assessee's accounts and not otherwise.
(ii) That there was nothing on record to suggest that the Assessing Officer had examined the accounts from the perspective of section 14A. Furthermore, because the assessee had itself offered an amount which could be disallowed under section 14A of the Act, the onus shifted onto the Revenue to ascertain, after examination of the accounts, whether or not the assessee's claim was correct. The Tribunal in calculating the disallowance in terms of the provisions of rule 8D(2)(iii) o(the Income-tax Rules, 1962, was not in order.
Similarly, in the case of Security printing and Mining Corporation of India Ltd 154 Taxmann.com 554, the Hon'ble Jurisdictional High Court of Delhi held as under:
“8. Like any other claim under the Act, the acceptance of assessee's claim qua the disallowance under Section 14A of the Act is subject to satisfaction of the Assessing Officer and that satisfaction has to be on the basis of section 14A of the Act, 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 qua the exempt income, he shall determine the amount of expenditure incurred in relation to the exempt income in accordance with the method prescribed in that regard and this principle also applies to the cases where the assessee contends that no expenditure has been incurred in relation to earning of exempt income.
Admittedly, before recording the aforesaid disbelief, the Assessing Officer did not examine even a shred of accounts of the respondent/assessee. Without looking into accounts of the respondent/assessee, the Assessing Officer held that the respondent/ assessee had infused funds by way of equity in the joint venture company and also held that it was not believable that no expenditure had been incurred in relation to the assets, income 'wherefrom does not form part of total income. Completely ignoring the version of the respondent/assessee that being a cash rich company, it did not have to deploy any person by way of any special effort which could be treated as expenditure to earn the exempted income, the Assessing Officer recorded a conclusion that the respondent/assessee had infused significant funds by way of equity in the joint venture company. No cogent reasons, much less supported by data extracted from accounts of the respondent/assessee were advanced by the Assessing Officer to explain why the case set up by the respondent/assessee 'was not believable. Even the quantification of the disallowance was carried out under Rule 8D(iii) of the Rules without scrutinizing the accounts of the respondent/assessee and by jumping over the mandate to first proceed under Section 14A of the Act.
Considering the totality of the facts in light of judicial decisions discussed hereinabove, we find merit in the appeal of the assessee and direct the Assessing Officer to delete the impugned addition of Rs. 1,65,99,778/-. Ground No. 1 is, accordingly, allowed.
Other grievances of the assessee become infructuous.
In the result, the appeal of the assessee in is allowed.
The order is pronounced in the open court on 28.02.2024.