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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI RAJENDRA, AM & SHRI AMARJIT SINGH, JM
Assessee by: Shri Niraj Sheth Department by: Shri V. Jenardhanan (DR) Date of Hearing: 31.10.2017 Date of Pronouncement: 15.01.2018 O R D E R
PER AMARJIT SINGH, JM:
The revenue has filed the above mentioned appeals against the different order passed by the Commissioner of Income Tax (Appeals)- 22, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment years 2010-11 & 2011-12.
The Revenue has filed the present appeal against the order dated 10.06.2016 passed by the Commissioner of Income Tax & 5114/M/16 A.Y. 2001-11&2011-12 (Appeals)-22 Mumbai, [hereinafter referred to as the “CIT(A)”] relevant to the assessment years 2010-11. 3. The revenue has raised the following grounds:- “
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) is erred in restricting the disallowance u/s 14A r.w. Rule 8D to Rs.15,00,000/- as against the disallowance of Rs.98,47,723/- u/s 14A r.w.r. 8D(2)(iii) of the I.T. Rules, 1962.
2. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the assessing officer be restored. “
4. The brief facts of the case are that the assessee filed its return of income on 14.10.2010 declaring total income to the tune of Rs.4,45,49,862/-. The return was accompanied with balance-sheet and profit & loss account. The case was selected for scrutiny. Thereafter, notice u/s 143(2) of the Act dated 24.08.2011 and notice u/s 142(1) of the Act dated 20.07.2012 were issued and served upon the assessee. The case of the assessee was referred for transfer-pricing scrutiny for the current assessment year. Accordingly, a reference was made u/s 92CA(1) of the I.T. Act, 1961, to the ACIT (TPO)-1(7), Mumbai vide office letter dated 15.01.2013 by the DCIT-10(1), Mumbai. The assessee company is an asset Manager to BNP Paribas Mutual Fund and is into Portfolio Management services to other clients. The issues of depreciation and disallowance u/s 14A of the Act were emerged during the time of assessment and after consideration of above said issues. The income of the assessee was assessed to the tune of Rs.5,39,82,876/-. The computation of book profit u/s 115JB of the Act & 5114/M/16 A.Y. 2001-11&2011-12 was assessed @ 15% u/s 115JB of the Act book profit of Rs.11,20,48,833/- to the tune of Rs.1,68,07,325/-. The assessee was not satisfied on account of the issues of depreciation and disallowance U/s 14A. Therefore, the assessee filed an appeal before the CIT(A) who allowed the claim of the assessee, therefore, the revenue has filed the present appeal before us.
ISSUE NO.1:- 5. The revenue has raised the only one issue which is in connection with the restricting of disallowance u/s 14A r.w. Rule 8D of the Act to the tune of Rs.15,00,000/- as against the disallowance of Rs.98,47,723/- u/s 14A r.w. Rule 8D (2)(iii) of the I.T. Rules, 1962. The appellant suo-moto disallowed the expenditure to earn the exempt income to the tune of Rs.9,87,882/-. The AO computed the disallowance u/s 14A r.w. Rule 8D (2)(iii) of the Act to the tune of Rs.98,47,723/-. The CIT(A) has restricted the disallowance to the extent of 15,00,000/-. Before going further we deemed it necessary to advert the finding of the CIT(A) on record:- “6.3. I have considered the facts and circumstances of the case. It is seen that the appellant had made suo moto disallowance of Rs.9,87,882/- as expenses incurred for earning exempt dividend income of Rs.8,41,33,838/-. I find that the Assessing Officer proceeded to compute disallowance u/s 14A by invoking Rule 8D without recording the reasons for dissatisfaction with the disallowance made by the appellant. It is seen that in the cases relied upon by the appellant in its submission, the various Courts have held that Rule 8D is not automatic and that the Assessing Officer must record his & 5114/M/16 A.Y. 2001-11&2011-12 reasons for dissatisfaction with the disallowance made by the assessee before invoking Rule 8D. However, this would not absolve the appellant altogether from the provisions of section 14A. Various courts have held lime and again That earning of exempt income is not automatic and requires efforts and administrative expenses. Expenses in respect of earning exempt income would have to be attributed u/s 14A of the Act. Perusal of the working of disallowance of Rs.9,87,382/- made by the appellant shows that the appellant had considered 1% of various expenses of Rs.9,87,83,230/- for disallowance in respect of the exempt income. I find that the various expenses of Rs.9,37,88,230/- includes salary of the fund Manager of Rs.60,00,000/- I find that only 1% disallowance of the salary of the fund Manager is not reasonable. Even assuming that the fund Manager would have to perform other functions besides looking after the investments from which exempt income was earned, I am of the considered view that it would be reasonable to consider 25% of The salary of the fund Manager which comes to Rs.15,00,000/- as being attributable to the exempt income over and above the suo moto disallowance made by the appellant. The disallowance of Rs88,59,841/- made by [he Assessing Officer u/s 14A of the Act is, therefore, confirmed to the extent of Rs.15,00,000/-. The appellant's ground of appeal on this issue is partly allowed.”
6. On appraisal of the above mentioned finding, we noticed that the Assessing Officer nowhere recorded his satisfaction before arriving at this conclusion that the assessee has incurred expenses to the tune of Rs.9,87,882/-. The assessee suo-moto assess the expenditure to earn the exempt income to the tune of Rs.9,87,882/- which was the 1% of the various expenses of Rs.9,87,88,230/-. The CIT(A) considered the salary expenditure to the extent of 25% finding 1% very less. The CIT(A) restricted to the extent of 15,00,000/- u/s 14A r.w. Rule 8D of the Act. At the time of argument, the Ld. Representative of the assessee has placed reliance upon the decision & 5114/M/16 A.Y. 2001-11&2011-12 of Hon’ble ITAT in the assessee’s own case in the dated 17.02.2017. The finding of the said decision is hereby reproduced below:-
“We have heard the rival contentions and perused available material on record including the cited case laws. We find that during assessment proceedings, AO vide question number 35 of Annexure to notice u/s 142(1) dated 05/10/2011 called for details of expenditure incurred in relation to exempt incomes as per Section I4A and Rule 8D The assessee, vide its reply dated 18/10/2011, gave detailed reply to the same to justify that no expenditure was incurred to earn the exempt incomes and relied upon various judicial pronouncements. However, in the assessment order, no reference has been made to these contentions and the AO's views / opinion against the same. Prima facie, it appears that AO did not apply us mind to the contentions of the assessee and judicial pronouncement relied upon by the assessee. Similar contentions objections were raised by the assessee before Ld. CTT(A) in his reply dated 10/01/2013. We find that as per Section 14A clause (2), the AO was required to determine the disallowance only if AO, having regards to the accounts of the assessee, was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Clause (3) applied these provisions to cases where no expenditure is claimed to have been incurred by the assessee. Rule 8D(1) reiterates the same condition and restricts the power of AO to straightway compute disallowance as per Rule 8D(2) without arriving at satisfaction having regards to the accounts of the assess. At this juncture, it would be prudent to quote the relevant observations of the Delhi High Court in the cited case law which primarily refers upon the judgment of same court in Moxopp Investment (P) Ltd. vs. CIT [2012 347 ITR 272]:- Having heard the learned counsel for the. parties, the Court finds that the AO has indeed proceeded on the erroneous premise that the invocation of Section 14A is automatic and comes into operation as soon as the dividend income is claimed exempt. In Moxopp Investment (P) Ltd. (Supra) this Court held:
& 5114/M/16 A.Y. 2001-11&2011-12
Sub-section (2) of section 14A of the said Act provides the manner in which the Amassing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provisions carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to 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 the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure Therefore, the condition precedent for the Assessing Officer ensuring upon a determination of the of the expenditure incurred in relation to exempt income. is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assesses in respect of such expenditure Sub-section (3) is nothing but an offshoot of sub-section (2) of section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income with does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in rule 8D of the said Rules. While rejecting the claim of the assessee with & 5114/M/16 A.Y. 2001-11&2011-12 regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. (emphasis supplied) 9. In CIT vs. Taikisha Engineering India Litd. 370 ITR338 (Del), in similar circumstances, the Court disapproved of an AO invoking section 14A read with Rule 8D(2) of the Rule without recording his satisfaction and noted that the recording of satisfaction as to why “the voluntary disallowance made by the assessee was unreasonable and unsatisfactory” is a mandatory requirement of law. Similar analogous observations have been made by co- ordinate bench of the Tribunal Kolkata in DCIT vs. REI Agro Ltd. [ITA No. 1811/Kol/2012] order dated 14/05/2013] which has since been approved by the Calcutta High Court in ITAT 161 of 2013 order dated 23/12/2013 by way of dismissal of revenue’s appeal.
Therefore, following the binding judicial precedence and on the facts and circumstances of the case, we are of the considered opinion that the mandatory requirements of Section 14A read with Rule 8D were not fulfilled by the AO which vitiates the application of Rule 8D(2)(iii). Hence, we allow the assessee's appeal by deleting the impugned additions. The revenue's appeal stand dismissed.”
In view of the said decision and the facts record by CIT(A) while deciding the issue, we are of the view that the CIT(A) has passed the order judiciously and correctly which is not liable to be interfere with at this appellate stage. Accordingly, the appeal of the revenue is hereby ordered to be dismissed.
ITA NO.5114/M/2016:-
The revenue has filed the present appeal against the order dated 10.06.2016 passed by the Commissioner of Income Tax (Appeals)-22, & 5114/M/16 A.Y. 2001-11&2011-12 Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the assessment year 2011-12. 9. The revenue has raised the following grounds:- “
1. On the facts and circumstances of the case and in law, the Ld. CIT(A) is erred in restricting the disallowance u/s 14A r.w. Rule 8D to Rs.15,00,000/- as against the disallowance of Rs.96,59,601/- u/s 14A r.w.r. 8D(2)(iii) of the I.T. Rules, 1962.
2. The appellant prays that the order of CIT(A) on the above grounds be set aside and that of the assessing officer be restored.”
10. The facts of the present case are that quite similar to the facts of the case as narrated in the above mentioned appeal bearing no. 5113/M/2016 for the A.Y.2010-11, therefore, there is no need to repeat the same. However, the figures are different. The issues are the same which is in connection with the restriction of disallowance u/s 14A r.w. Rule 8D of the Act to the extent of Rs.15,00,000/- as against the disallowance of Rs.96,59,601/- u/s 14A r.w. Rule 8D(2)(iii) of the I.T. Act, 1962 assessed by the AO. This issue has already discussed and decided while deciding the issue no.1 above in ITA. No. 5113/M/2016. This issue is accordingly decided in favour of the assessee against the revenue on the basis of the similar lines. & 5114/M/16 A.Y. 2001-11&2011-12