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Income Tax Appellate Tribunal, “B” BENCH, PUNE
Before: SHRI D. KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER
PER VIKAS AWASTHY, JM :
This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-3, Pune dated 23-11-2015 confirming disallowance made u/s. 14A r.w. Rule 8D of the Act.
The brief facts of the case as emanating from records are : During the course of scrutiny assessment proceedings the Assessing Officer
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observed that the assessee has received dividend income of Rs.1,34,62,396/- in the period relevant to the assessment year 2009-10. The assessee made suo-moto disallowance of Rs.10,000/- u/s. 14A of the Act. The Assessing Officer computed disallowance u/s. 14A r.w. Rule 8D as Rs.4,86,395/-.
Aggrieved by the assessment order dated 29-11-2011, the assessee filed appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) dismissed the appeal of assessee and confirmed disallowance u/s. 14A r.w. Rule 8D.
Shri Nikhil Pathak appearing on behalf of the assessee submitted that the Assessing Officer has erred in making disallowances u/s. 14A r.w. Rule 8D without recording satisfaction as envisaged under the provisions of the Act. The Assessing Officer has not recorded reasons as to why suo- moto disallowance made by the assessee is not acceptable. The ld. AR submitted that the provisions of Sub-section (2) of section 14A mandates that the Assessing Officer has to record satisfaction before resorting to the provisions of Rule 8D. To support his submissions the ld. AR placed reliance on the following decisions : i. Godrej & Boyce Manufacturing Company Ltd. Vs. Deputy Commissioner of Income Tax, 81 taxmann.com 111 (SC); ii. Maxopp Investment Ltd. Vs. Commissioner of Income Tax, 347 ITR 272 (Delhi).
Dr. Vivek Aggarwal representing the Department vehemently defended the order of Commissioner of Income Tax (Appeals) in confirming addition. The ld. DR submitted that the Assessing Officer has made disallowances under Rule 8D in accordance with law.
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We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The solitary issue raised in the appeal is disallowance u/s. 14A r.w. Rule 8D without recording satisfaction. Before we proceed to decide the issue, it would be relevant to refer to the provisions of section 14A. The same are reproduce here-in-below : “14A. Expenditure incurred in relation to income not includible in total income.— (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, 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 in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:]”
A perusal of sub-section (2) shows that before computing disallowance under Rule 8D, the Assessing Officer has to record satisfaction as to why suo-moto disallowance made by assessee in respect of expenditure in relation to exempt income is not correct. It is imperative on the part of Assessing Officer to give reasons for rejecting suo-moto disallowance made by assessee. Thus, road to Rule 8D passes through sub-section (2) to section 14A of the Act.
The Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. Commissioner of Income Tax (supra) has held that the Assessing Officer before rejecting the claim of assessee with regard to expenditure or no expenditure, as the case may be in relation to exempt income as to indicate cogent reasons for the same. The relevant extract of the findings
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of Hon’ble High Court on the issue explaining the scope of sub-section (2) of section 14A and the application of Rule 8D are as under : “30. As we have already noticed, sub-s. (2) of s. 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is—"such method as may be prescribed". We have already mentioned above that by virtue of Notification No. 45 of 2008 dt. 24th March, 2008, the CBDT introduced r. 8D in the said Rules. The said r. 8D also makes it clear that where the AO, 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 said Act for such previous year, the AO shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-r. (2) of r. 8D. We may observe that r. 8D(1) places the provisions of s. 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of sub-ss. (2) and (3) of s. 14A, the condition precedent for the AO to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the AO is required to determine the amount of expenditure in relation to income not includible in total income in the manner indicated in sub-r. (2) of r. 8D of the said Rules.
It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under r. 8D would only come into play when the AO rejects the claim of the assessee in this regard. If one examines sub-r. (2) of r. 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in cl. (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure—one-half per cent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under s. 14A of the said Act. It is, therefore, clear that in terms of the said rule, the amount of expenditure in relation to exempt income has two aspects—(a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of cl. (i) of sub-r. (2) of r. 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one-half per cent of the average value of the
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investment, income from which does not or shall not form part of the total income, is taken. Do sub-ss. (2) and (3) of s. 14A and r. 8D apply retrospectively ? 32. While examining the legislative history of s. 14A and r. 8D, we have already noted that s. 14A, as introduced by virtue of the Finance Act, 2001, was with retrospective effect from 1st April, 1962. The proviso was inserted by virtue of the Finance Act, 2002 and it was made clear that nothing in s. 14A empowered the AO to either reassess under s. 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under s. 154, for any assessment year beginning on or before the first April, 2001. Thus, in respect of all the assessment years prior to the assessment year beginning on or before the 1st day of April, 2001, concluded assessments could not be disturbed despite the fact that s. 14A had been expressly made retrospective w.e.f. 1st April, 1962. The provisions of s. 14A, which were retrospective w.e.f. 1st April, 1962 are now encapsulated in sub-s. (1) of s. 14A. It is also clear that sub-ss. (2) and (3) of s. 14A were introduced subsequently by virtue of the Finance Act, 2006 and were introduced w.e.f. 1st April, 2007. However, although sub-ss. (2) and (3) had been introduced w.e.f. 1st April, 2007, they remained empty shells inasmuch as the expression "such method as may be prescribed" got meaning only by the introduction of r. 8D by virtue of the Income-tax (Fifth Amendment) Rules, 2008 which was notified by the CBDT by its Notification No. 45 of 2008 dt. 24th March, 2008.”
The Co-ordinate Bench of the Tribunal in the case of Kalyani Steels Ltd. Vs. Addl. Commissioner of Income Tax in ITA No. 1733/PN/2012 for the assessment year 2008-09 decided on 30-01-2014 after placing reliance on the judgment of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. Deputy Commissioner of Income Tax & Anr. reported as 328 ITR 81 (Bom.) has held that the Assessing Officer can take recourse to Rule 8D only if he records finding that he is not satisfied with the correctness of the claim of assessee in respect of such expenditure.
In the present case we find that the Assessing Officer has not recorded any reason whatsoever before making disallowance of Rs.4,86,395/-. The Assessing Officer merely mentions that the assessee has made disallowance of Rs.10,000/- u/s. 14A and thereafter computes disallowance u/s. 14A r.w. Rule 8D as Rs.4,86,395/-. Thus, there is no
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satisfaction or the reasoning recorded by the Assessing Officer for rejecting suo-moto disallowance made by assessee and for enhancing disallowance to Rs.4,86,395/-.
Thus, in view of the decisions discussed above, the mandatory provisions of section 14A and the facts of the case, we find merit in the appeal of the assessee. Accordingly, the impugned order is set aside and the appeal of assessee is allowed.
In the result, the appeal of assessee is allowed.
Order pronounced on Thursday, the 26th day of April, 2018.
Sd/- Sd/- (डी. करुणाकरा राव/D. Karunakara Rao) (ववकास अवस्थी / Vikas Awasthy) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 26th April, 2018 RK आदेश की प्रयिलऱवऩ अग्रेवषि / Copy of the Order forwarded to : अऩीऱाथी / The Appellant. 1. प्रत्यथी / The Respondent. 2. आयकर आयुक्त (अऩीऱ) / The CIT(A)-3, Pune 3. 4. The Pr. CIT-1, Pune ववभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, “बी” बेंच, 5. ऩुणे / DR, ITAT, “B” Bench, Pune. गाडड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रयत // True Copy// आदेशानुसार / BY ORDER,
यनजी सधचव / Private Secretary, आयकर अऩीऱीय अधधकरण, ऩुणे / ITAT, Pune