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Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI D.T. GARASIA & SHRI O.P. MEENA
आदेश /O R D E R
PER O.P. MEENA, ACCOUTANT MEMEBR. These cross appeals filed by the assessee and the
Revenue are directed against the order of ld. Commissioner of
Income-tax (Appeals)-I, Bhopal [hereinafter referred to as the
CIT(A)] dated 11.12.2013 and pertain to assessment year
2010-11 as against appeal decided in assessment order
passed u/s 143(3) of the Act dated 25.02.2013 of Additional
CIT, Range I, Bhopal [hereinafter referred to as the AO].
The assessee has taken following grounds of appeal :-
That the ld. CIT(A) has wrongly confirmed the
addition of other expenses as disallowed by the AO
u/s 14A of the Act by applying Rule 8D of Income
Tax Rules for Rs. 46,58,063/-.
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 3 of 11 Bhaskar Industries P.Ltd., Bhopal
That the ld. CIT(A) has wrongly confirmed that the
disallowing the depreciation of Rs. 3,73,721/-.
The Ld. Counsel for the assessee did not press ground
no.2, hence, the same is dismissed as not pressed.
The Revenue has taken following grounds of appeal in
which ground no.2 is taken as additional ground of appeal :-
On the facts and in the circumstances of the case
whether the CIT(A) was justified in not providing the
opportunity of being heard to the AO before
admitting the additional evidence.
On the facts and in the circumstances of the case,
the ld. CIT(A) has erred in deleting the amount of
Rs. 3,89,68,475/- which was disallowed by the AO
treating as expenditure in relation to exempt income
u/s 14A.
As the grounds are common, we are disposing of both
these appeals by this common order for the sake of
convenience.
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 4 of 11 Bhaskar Industries P.Ltd., Bhopal
Succinctly, facts of the case are that the assessee is a
Private Limited Company engaged in the business of
manufacturing of yarn, fabric and dyed fabric. The assessee
had furnished its original return of income for A.Y. 2010-11 on
24.09.2010 declaring total income at Rs. 87,68,157/-. The
assessee had shown business income of Rs. 2,08,38,726/-
which was set off against brought forward unabsorbed
depreciation and had offered long term capital gains of Rs.
87,68,157/- to tax in the return of income. The case was
selected for scrutiny by issuing notice u/s 143(2) of the Act
and the assessment u/s 143 was completed on 25.02.2013
determining taxable income at Rs. 4,39,57,962/-. The
Assessing Officer noticed from the balance sheet that the
assessee had shown investment of Rs. 93,16,12,682/- as on
31.03.2010 in equity shares of various companies. Out of this,
major investment of Rs. 91,16,47,192/- had been made in the
equity shares of United Textiles Mills Limited. The assessee
had shown dividend of Rs. 93,42,585/- received from such
companies, which was claimed as exempt from tax in view of
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 5 of 11 Bhaskar Industries P.Ltd., Bhopal
provisions of Sec 10(34/35) of the Income-tax Act, 1961. The
Assessing Officer show caused the assessee as to why suitable
disallowance not be made in view of the provisions of Section
14A of the I.T. Act read with Rule 8D of I. T. Rules, 1962. The
assessee submitted the explanation, but the Assessing Officer
did not accept the explanation of the assessee. The Assessing
Officer made the disallowance to the extent of Rs.
4,36,26,358/-. However, the ld. CIT(A) confirmed the addition
to the extent of Rs. 46,58,063/-.
The assessee has come up in appeal stating that the
ld. CIT(A) has wrongly confirmed the addition of other
expenses as disallowed by the Assessing Officer u/s 14A of the
Act by applying Rule 8D of Income-Tax Rules for Rs.
46,58,063/-. The ld. Authorized Representative urged that the
addition should be deleted.
The Revenue has come up in appeal stating that the
ld. CIT(A) has erred in deleting the amount of Rs.
3,89,68,475/- which was disallowed by the Assessing Officer
treating as expenditure in relation to exempt income u/s 14A
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 6 of 11 Bhaskar Industries P.Ltd., Bhopal
of the Act. The ld. CIT DR also contended that the proper
opportunity of being heard to the Assessing Officer was not
given before admitting the additional evidence. The ld. CIT DR
urged that the addition may be sustained.
We have heard the rival submissions and have gone
through the orders of the lower authorities, and perused the
material available on record. The expenditure incurred in
relation to earning such exempt income is not quantified
during the course of assessment proceedings. We find that
the claim of the assessee that no expenditure has been
claimed has not been examined by the AO as he had made
disallowance by applying rule 8D of Income Tax Rules, 1962 .
We find that the Hon Delhi High Court in the case of ACB
India (2005) 374 ITR 108 [Del.] wherein the Hon'ble High
Court has laid down certain principle and procedure to be
followed while calculating the disallowance u/s.14A of the Act.
The relevant extract of said decision is reproduced as under:
“7. The question of law urged on behalf of the assessee is whether the decision of the Income-tax Appellate Tribunal as to the disallowance under section 14A of the Income-tax Act, 1961, is in error of
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 7 of 11 Bhaskar Industries P.Ltd., Bhopal
law in the circumstances of the case. For the assessment year 2008-09, the assessee—which is mainly engaged in the business of coal preparation, i.e., beneficiation of coal, transportation, loading of coal and related activities had reported a tax exempt income to the tune of Rs. 18,26,360 amongst other heads of income. The Assessing Officer added back Rs. 19,96,242 under section 14A. While doing so, the Assessing Officer applied rule 8D by taking into consideration the total quantum of interest other than that invested under section 14A in terms of rule 8D and arrived at the said figure after multiplying it with the result of the average value of investments and over average value of assets derived by him. He thus determined the disallowance of Rs. 19,96,242. The Commissioner of Income-tax (Appeals) went into the record and found that the amount of investment attributable to dividend as on March 31, 2008, was Rs. 3,53,26,800, which constituted less than 1 per cent. of the total scheduled funds. He, however, accepted the basis of calculation applied by the Assessing Officer and directed a disallowance of .05 per cent. of the amount determined to be average investment. The Income- tax Appellate Tribunal to which the Revenue appealed, restored the Assessing Officer's determination holding it to be a true calculation in terms of rule 8D. It is argued by the assessee that since the Commissioner of Income-tax (Appeals) correctly noted the facts as to the value of the investment in tax exempt investment and at the same time noticed that the ultimate result on an application of .05 per cent. disallowance would be the same. Counsel for the Revenue, on the other hand, submitted that given the determination of average value of investment, the Assessing Officer had no choice but to apply rule 8D(2) in view of the mandate of section 14A which required him to apply the prescribed method of determining disallowance.
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 8 of 11 Bhaskar Industries P.Ltd., Bhopal
The facts, as disclosed by the Assessing Officer, who expressed his opinion that the claim of the assessee for no disallowance was warranted since no expenditure was incurred had to be rejected. Therefore, the first condition for application of section 14A in this case was fulfilled. In such eventuality the Assessing Officer is required by the mandate of rule 8D to follow rule 8D(2). Clauses (1), (2) and (3) detail the methodology to be adopted. Clauses are of importance, they read as follows :
"8D. Method for determining amount of expenditure in relation to income not includible in total income.-(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with-
(a) the correctness of the claim of expenditure made by the assessee ; or
(b) the claim made by the assessee that no expenditure has been incurred,in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :-
(i) the amount of expenditure directly relating to income which does not form part of total income ; (ii) in a case where the assessee has 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 following formula, namely :-
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 9 of 11 Bhaskar Industries P.Ltd., Bhopal
A x B
__
C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ;
B = the average of 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 ;
C = the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent. of the 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. (3) For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance- sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets."
The Assessing Officer, instead of adopting the average value of investment of which income is not part of the total income, i.e., the value of tax exempt investment, chose to factor in the total investment itself. Even though the Commissioner of Income-tax (Appeals) noticed the exact value of the investment which yielded taxable income he did not correct the error but chose to apply his own equity. Given the record that had to be
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 10 of 11 Bhaskar Industries P.Ltd., Bhopal
done so to substitute the figure of Rs. 38,61,09,287 with the figure of Rs. 3,53,26,800 and, thereafter, arrive at the exact disallowance of .05 per cent.
In view of the above reasoning, the findings of the Income-tax Appellate Tribunal and the lower authorities are hereby set aside. The appeal is allowed and the matter is remitted to work out the tax effect to the Assessing Officer who shall do so after giving due notice to the party.”
We find that the AO has not examined and quantified
the expenditure incurred in relation to exempt income.
Whether the assessee has made investment in shares out of
interest bearing funds. Whether disallowance of expenses of
Rs. 4,36,26,358/- is justified as against the earning of
dividend income of Rs. 93,42,585/-. Therefore, we are of the
opinion that the issue requires re-examination in the lines of
findings of aforesaid decision. Therefore, the grounds of
assessee as well as Revenue’s grounds including additional
ground on this issue are set-aside. Therefore, following the
ratio of above decision, we remit back this issue to the file of
the A.O. to find out whether any expenditure in relation to
exempt income has been claimed in return of income and also
work out investment relating to exempt income and rework the
I.T.A.Nos.68 & 194/Ind/2014 A.Y.2010-11 Page 11 of 11 Bhaskar Industries P.Ltd., Bhopal
disallowance under section 14A Read with Rule 8D if any in accordance with law in the light of above decision. 11. In the result, both the appeals of the assessee and Revenue are allowed for statistical purposes. The order has been pronounced in open court on the 10th January, 2017.
Sd/- Sd/- (डी.ट�.गरा�सया) (ओ.पी.मीना) �या�यक सद�य लेखा सद�य (D.T.GARASIA) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER
�दनांक /Dated : 10th January, 2017.
CPU*