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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
For the Appellant : Shri Arindam Bhattacharjee, Addl. CIT For the Respondent : Shri P. Jhunjhunwala, Adv. Date of Hearing : 13.03.2018 Date of Pronouncement : 16.03.2018 ORDER Per Bench:
These cross appeals by the assessee as well as revenue arise out of the common order passed by the Learned Commissioner of Income Tax (Appeals) –9, Kolkata (in short the ld CITA) in Appeal No. 733/CIT(A)-9/Range-11/2014-15/Kol dated 29.02.2016 against the order passed by the JCIT(OSD),Cir-11(1), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 30.12.2010 for the Assessment Year 2008-09.
The first issue to be decided in these appeals is as to whether the Ld. CIT(A) was justified in upholding the disallowance u/s 14A of the Act read with Rule 8D(2)(iii) of
The brief facts of this issue is that the assessee is a domestic company engaged inter alia in the business of purchasing and selling of molasses, leather goods, handling of liquidity cargo and bulk liquid storage, banking, lending etc. The assessee filed its original return of income for the assessment year 2008-09 on 30.09.2008 declaring total income of Rs. 6,72,89,490/-. The assessee produced the books of accounts and relevant supporting documents before the ld. AO which were examined on test check basis. The ld. AO observed that the assessee had earned exempt dividend income of Rs. 40,83,869/- during the year under appeal and had not disallowed any amount u/s 14A of the Act in the return of income. When show caused in this regard, the assessee filed a reply that no expenditure was incurred by it for earning exempt income. The ld. AO directed the assessee to furnish the workings of amount disallowable u/s 14A of the Act. The assessee accordingly furnished the working of disallowance u/s 14A of the Act amounting to Rs. 3,42,997/-. The ld. AO did not accept to the workings of the assessee and proceeded directly to make disallowance u/s 14A of the Act by applying Second and Third Limb of Rule 8D and arrived at the disallowance figure of Rs. 38,57,077/- and added the same in the assessment. Before the ld. Ld. CIT(A) the assessee pleaded that even tax auditor in the tax audit report had certified that there has been no expenditure incurred in relation to income which does not form part of total income. The assessee further submitted that calculation of disallowance u/s 14A of the Act read with Rule 8D of the Rules made by the ld. AO suffers from computational error inasmuch as the ld. AO committed error in arriving at the opening and closing balance of investments. It was pleaded that only dividend bearing investments ought to have been taken by the ld. AO in any case by following the ratio laid down in the decision rendered by this Tribunal in the case of REI Agro Ltd. reported in 144 ITD 141. The Ld. CIT(A) placed reliance on the order of his predecessor in assessee’s own case for 2
3 M/s IMC Ltd. A.Yr.2008-09 the assessment year 2010-11 wherein disallowance under Rule 8D was made only under Third limb thereon by applying 0.5% of the average value of investments which yielded dividend income. The Ld. CIT(A) following the said order directed the ld. AO to recompute the disallowance under Rule 8D. Aggrieved, both the assessee and revenue are in appeal before us on the following grounds:
Assessee Appeal 1. That on the facts and circumstances of the case, the learned CIT(Appeals) erred in confirming disallowance, being 0.5% of average value of investment under section 14A of the Act while computing income under the normal provision of the Act. – Revenue Appeal 1. That on the facts and in the circumstances of the Ld. CIT(A) has erred in directing the AO to consider only those investments on which dividend has been earned by the assessee in arriving average value of investments and not all investments held during the relevant financial year.
The ld. AR submitted that against the order passed by the Ld. CIT(A) for the assessment year 2010-11 ( which has been relied upon by the Ld. CIT(A) in the impugned order), the assessee had preferred an appeal before this Tribunal and this tribunal in dated 10.01.2018 had held that no disallowance u/s 14A of the Act could be made in view of the fact that the ld. AO had not recorded any satisfaction in terms of section 14A(2) of the Act read with Rule 8D(1) of the Rules. He also placed a copy of the Hon’ble Jurisdictional High Court in the case of CIT vs. Ashish Jhunjhunwala in GA No. 2990 of 2013 ITAT No. 157 of 2013 dated 08.01.2014 wherein the Hon’ble High Court upheld the order of the Tribunal by observing that the ld. AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under rule 8D of the rules on presuming the average value of investment at 0.5% of the total value. This finding of the Tribunal was 3
4 M/s IMC Ltd. A.Yr.2008-09 appreciated by the Hon’ble High Court and accordingly it was held that no infirmity was found in the order under challenge. The ld. AR stated that even in the year under appeal before us, the ld. AO did not examine the accounts of the assessee in spite of the fact that books of accounts were duly produced before him and had not arrived on an objective satisfaction having regard to such accounts of the assessee with cogent reasons as to why the provisions of Rule 8D(2) are to be invoked in the instant case. In response to this, the ld. DR vehemently relied upon the order of the ld. AO and also argued that the workings filed by the assessee has been perused by the ld. AO and ignored by him which itself amounts to satisfaction recorded by the ld. AO.
We have heard the rival submissions. We find that the ld. AO is supposed to record satisfaction in an objective manner with cogent reasons having regard to the accounts of the assessee in order to refute the claim made by the assessee that no expenditure was incurred for earning exempt income. This is the mandate provided in section 14A(2) of the Act read with Rule 8D(1) of the Rules. In this regard, the reliance has been rightly placed by the ld. AR on the decision of this Tribunal in assessee’s own case for the assessment year 2010-11 in dated 10.01.2018 wherein it was held as under:
“5. We have heard the rival submissions. We find that the ld. AR had argued that there was no query raised by the Ld. AO with regard to issue of disallowance u/s 14A of the Act in the entire assessment proceedings. This we find to be correct from the perusal of questionnaire issued by the Ld. AO which are enclosed in pages 62 and 63 of the paper book. We also find that the Ld. AO had merely made the disallowance u/s 14A by placing reliance on the tax audit report without even going into the very basis of the workings of the said amount arrived at by the tax auditor. During the year under appeal, it is not in dispute that the provisions of Rule 8D are applicable. Then it is the duty of the Ld. AO to record satisfaction in terms of section 14A(2) read with Rule 8D(1) of the Rules, before proceeding to make disallowance as per Rule 8D(2) of the Rules. In the instant case, we find that the assessee has claimed that no expenditure has been incurred for the purpose of earning exempt income which is quite evident from the fact that no disallowance u/s 14A of the Act has been made by the assessee in the return of income. Once it is done by the assessee, it is the duty of the Ld. AO first to disturb such belief of the assessee by recording proper satisfaction having regard to the 4
5 M/s IMC Ltd. A.Yr.2008-09 accounts of the assessee in terms of section 14A (2) of the Act read with Rule 8D(1) of the Rules. We find no such satisfaction has been recorded by the Ld. AO in the instant case. This issue is now settled in favour of the assessee by the various decisions of Hon’ble Jurisdictional High Court in the following cases: i) CIT vs. R.E.I. Agro Ltd. in GA No. 3022 of 2013 ITAT No. 161 of 2013 dated 23.12.2013 ii) CIT vs. Ashish Jhunjhunwala in GA No. 2990 of 2013 ITAT No. 157 of 2013 dated 08.01.2014. We find that in both the decisions it has been held that it is the duty of the Ld. AO first to record satisfaction having regard to accounts of the assessee that the claim made by the assessee with regard to non-incurrence of any expenditure for the purpose of earning income, is incorrect with cogent reasons thereon. Without recording such satisfaction, the Ld. AO cannot proceed to make disallowance u/s14A of the Act read with Rule 8D of the Rules. In these facts and circumstances, we hold that no disallowance u/s 14A of the Act could be made in the instant case. Accordingly, ground no. 1 raised by the assessee is allowed.”
Respectfully following the same we direct the ld. AO not to make any disallowance u/s 14A of the Act in the instant case. Accordingly, ground no. 1 raised by the assessee is allowed and ground no. 1 raised by the Revenue is dismissed.
The next issue to be decided in the appeal of the assessee is as to whether the Ld. CIT(A) was justified in upholding the disallowance of provision for leave encashment in the sum of Rs. 29,74,020/- by applying the provision of 43B(f) of the Act, in the facts and circumstances of the case.
7. The brief facts of this issue is that the assessee has made provision for leave encashment in the sum of Rs. 29,74,020/- and claimed the same as allowable expenditure in the return of income. The Ld. AO disallowed the same u/s 43B(f) of the Act. This action of the Ld. AO was upheld by the Ld. CIT(A). Aggrieved, the assessee is in appeal before us on the following ground:-
6 M/s IMC Ltd. A.Yr.2008-09 2. That on the facts and circumstances of the case, the learned CIT(Appeals) erred in confirming disallowance of provision for leave encashment amounting to Rs 29,74,020/-, under section 43B of the Act while computing income under the normal provisions of the Act.
We have heard the rival submissions. We find that though the Hon’ble Calcutta High Court in the case of Exide Industries Ltd vs Union of India reported in 292 ITR 470 (Cal) had struck down the provisions of section 43B(f) of the Act as unconstitutional, the revenue had carried the matter further to the Hon’ble Supreme Court which initially in Special Leave to Appeal (Civil) CC 12060 / 2008 dated 8.9.2008 had held as under:-
The petition was called on for hearing today. Upon hearing counsel the court made the following Order. Issue Notice. In the meantime, there shall be stay of the impugned judgement, until further orders.
Later the Hon’ble Supreme Court in Special Leave to Appeal (Civil) No(s). CC 22889 / 2008 dated 8.5.2009 had held as under:-
“The petition was called on for hearing today. Upon hearing counsel the court made the following Order Delay condoned.
Leave granted.
Pending hearing and final disposal of the Civil appeal, Department is restrained from recovering penalty and interest which has accrued till date. It is made clear that as far as the outstanding interest demand as of date is concerned, it would be open to the department to recover that amount in case Civil Appeal of the department is allowed.
We further make it clear that the assessee would, during the pendency of this Civil Appeal , pay tax as if Section 43B(f) is on the statute book but at the same time it would be entitled to make a claim in its returns.”
Hence from the aforesaid Supreme Court judgment, it could be inferred that the Hon’ble Supreme Court had not stayed the judgment of the Calcutta High Court during 6
7 M/s IMC Ltd. A.Yr.2008-09 Leave proceedings. But the Hon’ble Supreme Court had only passed an interim order on the impugned issue. Hence we deem it fit and appropriate , in the interest of justice and fair play, to set aside this issue to the file of the ld AO to pass orders based on the outcome of the main appeal on merits by the Hon’ble Supreme Court as stated supra. Accordingly Ground No. 2 raised by the assessee is allowed for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes and appeal of the revenue is dismissed.
Order pronounced in the Court on 16.03.2018