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Income Tax Appellate Tribunal, DELHI BENCH “E”: NEW DELHI
Before: SHRI H.S.SIDHU & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 01. This appeal is preferred by revenue against the order of Ld. Commissioner of Income Tax (Appeals) – VII, New Delhi dated 14/11/2013 in case of assessee for assessment year 2005 – 06. In this appeal the revenue has raised following grounds of appeal:- 1) whether on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the addition of Rs. 123227834/– out of disallowance of Rs. 123427834/– made by the AO under section 14. A read with rule 8D by observing that prior to assessment year 2008 – 09 disallowance under section 14. A read with rule 8D could not be made whereas Hon’ble bench of Mumbai ITAT held that rule 8D is applicable Page | 1 retrospectively and is mandatory to adopt by the assessing officer as well as by the assessee. 2) That the order of the Ld. CIT A is erroneous and is not tenable on facts and in the law.
The brief facts of the cases that the assessee filed his return of income showing income of Rs. 1 688547067/– on 31/10/2005. Subsequently its revised return was filed on 6/02/2007 wherein income of Rs. 1664929730/– was shown. The assessment was framed under section 143 (3) of the income tax act on 31/12/2008 at Rs. 1777672730/–.
Subsequently the case of the assessee was reopened by issue of notice under section 148 of the income tax act as assessee has earned income of Rs. 3 566 4468/– on UTI bonds which is exempt from tax and no disallowance has been offered under section 14 A read with rule 8D of the income tax act. While filing the return of income in response to notice under section 148 of the income tax act on 11/10/2010 the assessee has offered as a sum of Rs. 2 Lacs on estimated basis towards amount disallowable under section 14A of the act against the exempt income earned by the appellant during the year. Thereafter the Ld. assessing officer passed assessment order under section 143 (3) read with section 148 of the income tax act on 06/07/2011 whereby disallowance of Rs. 123427834/– was made under section 14 A read with rule 8D.
Aggrieved by the order of the Ld. AO assessee preferred an appeal before the Ld. CIT A, who by order dated 14/11/2013 deleted the disallowance under section 14 A of the income tax act relying on the decision of the Hon’ble Delhi High Court in case of Max of investments limited. Revenue aggrieved by the order of the Ld. CIT A has preferred an appeal before us.
The Ld. departmental representative relied upon the order of the Ld. assessing officer and held that rule 8D is also applicable prior to Page | 2 assessment year 2008 – 09. He further stated that in spite of this estimated amount of disallowance should have been made by the assessing officer and therefore the order of the Ld. assessing officer may be upheld.
Ld. authorized representative submitted that the provisions of rule 8D do not apply to the assessment year as there applicable from the assessment year 2008-09 and not for assessment year 2005 – 06 therefore there is no infirmity in the order of the law made CIT appeal. He further submitted that assessee itself has offered disallowance of Rs. 2 Lacs on estimated basis towards amount disallowable under section 14 A of the income tax act against the exempt income on by the appellant during the year. There is no satisfaction recorded by the Ld. assessing officer during the course of assessment proceedings under section 148 of the income tax act about the correctness of the claim of the assessee. Therefore, he submitted that even in that case the disallowance could not be upheld.
We have carefully considered the rival contentions. The Hon’ble Delhi High Court in Maxopp investments limited versus CIT in 347 ITR 272 (Delhi) (2012) has held as under:-
From the above discussion, it is clear that, in effect, the provisions of sub-sections (2) and (3) of section 14A would be workable only with effect from the date of introduction of rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of section 14A remained unworkable. How is section 14A to be worked for the period prior to the introduction of rule 8D ? 42. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfilment of a condition precedent is also implicit in section 14A(1) (as it Page | 3 now stands) as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the Assessing Officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub- section (2) of section 14A. Prior to that, the assessee was free to adopt any reasonable and acceptable method.
Thus, the fact that we have held that sub-sections (2) and (3) of section 14A and rule 8D would operate prospectively (and, not retrospectively) does not mean that the Assessing Officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort [2010] 326 ITR 1 (SC) to the following effect (page 17) : "The theory of apportionment of expenditure between taxable and non- taxable has, in principle, been now widened under section 14A." So, even for the pre-rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the Assessing Officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the asses see with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance under section 14A is concerned. In such even tuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the Assessing Officer is not, on the basis of the objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportion ment.”