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Income Tax Appellate Tribunal, ‘A’ BENCH, MUMBAI
Before: SHRI G.S. PANNU, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R
PER RAVISH SOOD, JUDICIAL MEMBER
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-9, Mumbai, dated 07.12.2015, which in itself arises from the order passed by the A.O u/s. 143(3) r.w.s. 254 of the Income Tax Act, 1961 (in short ‘the Act’), dated 30.03.2013 for the P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT A.Y. 2007-08. The assessee had assailed before us the order of the CIT(A) on the following grounds of appeal:-
1. Learned CIT(A) erred in law and on facts and in circumstances of the case in upholding disallowance to the extent of Rs.10,00,000/- against disallowance of Rs. 10,03,105/- made by Learned Assessing Officer.
Learned CIT(A) erred in law and on facts and in circumstances of the case in not adjudicating on the issue that Learned A.O is making repeat addition of Rs.10,03,105/- U/s 14A, whether Rule 8D is applied or not, ignoring directions given by Tribunal in its order dated 5th August, 2011. 3. The order of CIT(A) being contrary to law, evidence and facts should be set aside, amended or modified in light of grounds deduced above and decision of Bombay High Court in case of Godrej & Boyce Mfg. Co. Ltd. 4. Each ground of appeal
hereinabove is independent and without prejudice to each other.
5. Appellant craves leave to reserve to itself the right to add, alter, or amend any of the grounds of appeal at or before the time of hearing and to produce such further evidences, documents and papers as may be necessary.
2. Briefly stated, the facts of the case are that the assessee company which is a Share & Stock Broker had e-filed its return of income for A.Y. 2007-08 on 19.10.2007, declaring total income of Rs. 8,60,26,502/-. The case of the assessee was taken up for scrutiny proceedings under Sec. 143(2) of the ‘Act’. The A.O framed assessment under Sec. 143(3) at an income of Rs. 12,02,66,734/- after making certain disallowances, including a disallowance under Sec. 14A r.w.r 8D of Rs. 10,03,105/-. The assessee carried the matter in appeal before the CIT(A), who confirmed the disallowance. That on further appeal, the Tribunal vide its order passed in /2010, dated.05.08.2011, restored the issue of disallowance under Sec. 14A to the file of the A.O, with a direction to rework out the reasonable expenditure under Sec. 14A in the light of the principles laid down by the Hon’ble High Court of Bombay in Godrej & Boyce Mfg. Co. Ltd. Vs. Deputy Commissioner of Income Tax & And anr.
P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT (2010) 328 ITR 0081 (Bom) and the order of the ITAT, Mumbai, in the case of Yatish Trading Co. (P) Ltd. vs. Assistant commissioner of income tax (2011) 129 ITD 0237. The Tribunal while restoring the issue pertaining to disallowance under Sec. 14A to the file of the A.O, had observed as under:
“4. In view of the above, we remit this issue to the record of the Assessing Officer for fresh adjudication as per law and in view of the decision of the jurisdictional High Court in the case of Godrej & Boyce Mfg. P. Ltd. (supra) as well as the decision relied upon by ld. A.R in the case of Yatish Trading Co. P. Ltd. (supra).
In the result, the appeal filed by the assessee is allowed for statistical purposes.”
The A.O passed an order under Sec. 143(3) r.w.s 254, dated. 30.03.2013, giving effect to the aforesaid order of the Tribunal, dated. 05.08.2011. The A.O in the course of the set aside proceedings sustained the addition which was earlier made by the A.O under Sec. 14A in the original assessment order passed under Sec. 143(3). That on appeal before the CIT(A), the assessee assailed the repeat disallowance of Rs. 10,03,105/- made in its hands, on the ground that the A.O had failed to give effect to the directions of the Tribunal, which had while restoring the matter to the file of the A.O specifically directed that the issue pertaining to disallowance under Sec. 14A be adjudicated afresh, as per law, keeping in view of the decision of the jurisdictional High Court in the case of Godrej & Boyce Mfg. P. Ltd. (supra) as well as the order of the Tribunal in the case of Yatish Trading Co. P. Ltd. (supra). The assessee submitted at length before the CIT(A) that despite the fact that the judicial pronouncements P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT which the A.O was to consider while readjudicating the issue pertaining to disallowance under Sec. 14A clearly provided that it was the factual expenditure incurred by the assessee in earning the dividend income that was to be disallowed, and there was neither any scope for any estimate of expenditure, nor any notional expenditure could be allocated for the purpose of earning the income, however, the A.O had acted in a most whimsical manner and without identifying the indirect expenditure incurred by the assessee on the basis of the material or evidence made available on record, had repeated the disallowance on the basis of estimate, conjectures and surmises. The assessee further referring to the order of the Hon’ble High Court of Bombay in the case of Godrej & Boyce Mfg. P. Ltd. (supra), submitted that though the Hon’ble High Court had categorically observed that the A.O while making a disallowance under Sec. 14A remained under a statutory obligation to establish a proximate relationship between the expenditure and the income which did not form part of the total income of the assessee, however, the A.O despite specific directions of the Tribunal to consider the principle laid down by the Hon’ble High Court, had however, failed to establish any live nexus between indirect expenses and the income which did not form part of the total income of the assessee, and had merely on the basis of a guess work dislodged the claim of the assessee and concluded that the assessee must had incurred certain variable and certain other expenses for managing its portfolio/investments.
The assessee submitted before the CIT(A) that the A.O while computing the disallowance under Sec. 14A @ 0.5% of Rs. 20,06,21,007/-, i.e the average value of the investment in shares and securities (including those held by the assessee as ‘stock in trade’), had blindly followed the procedure given in Rule 8D, which was clearly P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT contrary to the judgment of the Hon’ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. (supra). It was submitted by the assessee that the only expenditure incurred for earning of the dividend income was part of the salary of one of the employee who would keep a track of the payment of dividend and some telephone, conveyance and incidental expenses, all aggregating to Rs. 72,116/-, which were identified by the assessee, as under: S.No. Particulars of expense Amount 1. Out of Salary Rs. 60,000/- 2. Out of Administrative expenses for Telephone, conveyance and other Rs. 12,116/- incidental expense. Total Rs. 72,116/-
5. The assessee submitted before the CIT(A) that the A.O could not have dislodged its aforesaid claim without establishing a proximate connection of the incurring of expenses over and above those identified by the assessee for earning of the exempt income by the assessee. It was further averred by the assessee that as the dividend income was directly credited by the companies in the bank account of the assessee through ECS, therefore, no cost was involved in collection and deposit of the dividend in its bank account. Alternatively, it was submitted by the assessee that the A.O even otherwise while computing the disallowance under Sec. 14A had wrongly stretched the same to the shares and securities held by the assessee as stock-in- trade. The CIT(A) after deliberating at length on the contentions of the assessee, though agreed with the assessee that Rule 8D(2)(iii) may not be strictly applied in its case for A.Y. 2007-08, however, held that the disallowance of the expenses out of the indirect expense remained P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT within the purview of the jurisdiction of the A.O. The CIT(A) being of the view that as the assessee had failed to point out as to how the expenses disallowed by the A.O were on the higher side and unreasonable, therefore, upheld the disallowance by principally agreeing with the A.O, but however, restricted the quantum of disallowance of Rs. 10,03,105/- made by the A.O, to an approximate figure of Rs. 10,00,000/-.
The assessee being aggrieved with the order of the CIT(A) had carried the matter in appeal before us. The Ld. Authorized representative (for short ‘A.R’) for the assessee submitted that the A.O had erred in passing the order under Sec. 143(3) r.w.s 254, without following the directions of the Tribunal. It was submitted by the ld. A.R that the A.O despite specific directions given by the Tribunal while restoring the matter to the file of the A.O, had however failed to readjudicate the matter in conformity with the specific directions of the Tribunal, and thus gravely erred in bypassing the judgment of the jurisdictional High Court in the case of Godrej & Boyce Mfg. P. Ltd. (supra), as well as the order of the Tribunal in the case of Yatish Trading Co. P. Ltd. (supra). The ld. A.R averred that the A.O without establishing any proximate connection of any expense incurred by the assessee and the earning of the dividend income, over and above that shown by the assessee, had thus most arbitrarily made an exorbitant disallowance of an amount of Rs. 10,03,105/-, which thereafter had been sustained by the CIT(A) to the extent of Rs. 10,00,000/-. Per contra, the ld. Departmental representative (for short ‘D.R’) submitted that the A.O while passing the order under Sec. 143(3) r.w.s 254, had followed the decision of the Hon’ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. (supra).
P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT 7. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the earlier order passed by the Tribunal in dated. 05.08.2011, wherein the issue pertaining to the disallowance under Sec. 14A was restored to the file of the A.O with certain specific directions, as well as have deliberated on the material available on record. We have perused the orders of the lower authorities and are of a strong conviction that neither of the authorities below had in letter and spirit followed the specific directions which were given by the Tribunal, vide its order passed in ITA No. 4669/Mum/2010, dated. 05.08.2011, while restoring the matter pertaining to disallowance of expenses under Sec. 14A to the file of the A.O. We find that the A.O except for referring to the fact that the Hon’ble High Court had in the case of Godrej & Boyce Mfg. Co.(supra) held that where it was not possible to determine the actual expenditure incurred by the assessee in relation to the tax free income, the indirect expenses incurred by the assessee were to be apportioned, however, failed to give effect to the said judgment in totality. We are afraid to say, the A.O had absolutely failed to appreciate the judgment of the Hon’ble High Court in the right perspective. We further find that the A.O despite specific directions by the Tribunal to also look into the order of the Tribunal in the case of Yatish Trading Co. P. Ltd. (supra), had however in all his wisdom most whimsically bypassed the said direction of the Tribunal also. We find that the CIT(A) while disposing of the appeal had failed to appreciate that the A.O while passing the order u/s 143(3) r.w.s 254 had lost sight of the directions of the Tribunal in the backdrop of which the issue was required to be adjudicated, and thus by so doing had allowed the mistake on the part of the A.O to perpetuate.
P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT 8. Be that as it may, we now advert to the facts of the case leading to the issue under consideration. We find that the assessee who is a share & stock broker had earned dividend income in respect of the shares held by him, both by way of ‘Investments’ as well as ‘Stock in trade’. That as observed by us hereinabove, the assessee had identified certain expenses, viz. part of salary of an employee, telephone expenses, conveyance expenses and certain other incidental expenses, as pertaining to the earning of the dividend income. The A.O while passing the order under Sec. 143(3) r.w.s 254 had repeated the disallowance of Rs. 10,03,105/- by working out the indirect expenses as per Rule 8D(2)(iii), i.e @ 0.5% of the average value of the investments in share and securities (including those held by the assessee as stock in trade), therein aggregating to Rs. 20,06,21,007/-. We are of the considered view that pursuant to the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. India Advantage Securities Ltd. (2016) 380 ITR 0471 (Bom), no disallowance under Sec. 14A could have been validly made by the A.O in respect of the dividend earned by the assessee on the shares which were held by it as stock in trade. We thus, in the backdrop of our aforesaid observations vacate the disallowance made by the A.O in respect of the shares which were held by the assessee as stock in trade.
We now advert to the validity of the disallowance made by the A.O under Sec. 14A by relying on the methodology contemplated under Rule 8D(iii). We find that the A.O without assigning any cogent reason as to why the correctness of the claim of the assessee that an indirect expenditure of Rs. 72,116/- (supra) pertaining to certain expenses, viz. part of the salary of one of the employee who would keep a track of the payment of dividend, telephone expenses, P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT conveyance expenses and other incidental expenses only were incurred for earning of the aforesaid exempt income, had however discarded the said claim of the assessee and worked out such indirect expenses in terms of the methodology contemplated in Rule 8D(2)(iii), i.e @ 0.5% of the average value of the investments in share and securities (including those held by the assessee as stock in trade) of Rs. 20,06,21,007/-. We find that the A.O while passing the order under Sec. 143(3) r.w.s 254 had failed to establish any live nexus between the indirect expenses and the income which did not form part of the total income of the assessee. We find that the A.O had merely on the basis of a guess work worked out the disallowance of Rs. 10,03,105/- by presuming that the assessee must had incurred certain variable and other expenses for managing the portfolio/investments. We are unable to persuade ourselves to be in agreement with the very basis of making of the disallowance of the indirect expenses by the A.O in respect of earning of the dividend income by the assessee. We are of the considered view that the disallowance of expenditure under Sec.14A presupposes the existence of a proximate relationship between the expenditure and the earning of the tax free income. We are of the view that now when it was the case of the assessee that no expenses except for those aggregating to Rs. 72,116/-(supra) were incurred for earning of the exempt income, therefore, it was obligatory on the part of the A.O to have dislodged the said claim of the assessee by assigning certain cogent reason, before embarking on the exercise of estimating the said expenses. We find ourselves to be in agreement with the contention of the ld. A.R that no notional expenditure could be apportioned by the A.O towards earning of the exempt income, unless there was an actual expenditure in relation to earning of the tax free income. We do not find ourselves as being in agreement with the disallowance carried out by the A.O u/s P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT 14A, without recording of a specific finding by him as to how and which all expenses over and above those aggregating to Rs. 72,116/- (supra) were related to earning of the exempt income by the assessee. We find that the restoring of the matter by the Tribunal vide its order passed in dated. 05.08.2011, to the file of the A.O, with a specific direction to readjudicate the same in the backdrop of the judgment of the Hon’ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co.(supra) and the order of the Tribunal in the case of Yatish Trading Co. Ltd. (supra), was specifically keeping in view the said fallacy in the original order of the A.O.
We have given a thoughtful consideration to the facts of the case and are unable to persuade ourselves to subscribe to the view of the lower authorities. We would look into the proposition canvassed before us by the ld. A.R, as regards the requirement of a satisfaction on the part of the A.O, in respect of the correctness of the claim of the assessee that only an expenditure of Rs. 72,116/- (supra) was incurred in relation to the earning of the exempt income. We find that the Hon’ble High Court of Delhi in the case of : Maxopp Investment Ltd. & Ors. Vs. CIT (2012) 247 CTR 162 (Del), after deliberating on the scope of Sec. 14A, had emphasized that where an assessee claims that no expenditure had been incurred in relation to an income which does not form part of his total income, then the A.O shall first verify the correctness of the said claim of the assessee. It is only where on the basis of an objective criteria and affording reasonable opportunity to the assessee, the A.O is however not satisfied with the correctness of the claim of the assessee, it is only then that he gets vested with the jurisdiction to reject the same, and after stating the reasons for doing so, proceed with and determine the amount of expenditure incurred in relation to such income which does not form P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT part of the total income. The Hon’ble High Court in its aforementioned judgment had observed as under:- “Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO will have to verify the correctness of such claim. In case, the AO is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the AO is to accept the claim of the assessee insofar as the quantum of disallowance under s. 14A is concerned. In such eventuality, the AO cannot embark upon a determination of the amount of expenditure for the purposes of s. 14A(1). In case, the AO is not, on the basis of 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 AO 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 apportionment”.
We further find that recently the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Limited Vs. Dy. Commissioner Of Income-Tax & Anr (Civil Appeal No. 7020 of 2011; dated. 08.05.2017)(S.C), dealing with the statutory requirement of a satisfaction on the part of the A.O as regards not accepting the correctness of the claim of the assessee in respect of the expenses claimed by him to have been incurred in relation to income which does not form part of the total income of the assessee, had held as under:- “Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”
We are of the considered view that in the backdrop of the aforesaid judgment of the Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Limited (supra), the issue as regards requirement of a satisfaction of the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee, is obligatory and cannot be dispersed with by the A.O, thus stands settled and is no more res integra. We thus in the backdrop of the aforesaid judgment of the Hon’ble Apex Court are of the considered view that now when the assessee in the present case had identified certain expense aggregating to Rs. 72,116/- (supra) as having been incurred in relation to the income which did not form part of its total income, then the A.O only after being satisfied that having regard to the accounts of the assessee, as placed before him, it was not possible for him to generate the requisite satisfaction with regard to the correctness of the claim of the assessee, thus, only after rejecting the said claim of the assessee, after complying with the aforesaid statutory obligations as stood cast upon him, could have validly proceeded with and determined the amount of expenditure incurred in relation to such income which did not form part of his total income. We however find that in the case of the present assessee the A.O had carried out the disallowance under Sec. 14A, in terms of the methodology provided in Rule 8D(2)(iii), only on the basis of a general observation that a P a g e | M/s H.J. Securities Pvt. Ltd.Vs. DCIT plausible nexus of certain expenses incurred by the assessee with the earning of the exempt income could not be ruled out. We are of the considered view that the aforesaid general observation of the A.O can by no means partake the color and character as that of a satisfaction, which as per the mandate of law is required to be arrived at by him with regard to the correctness of the claim of the assessee in respect of the expenses claimed to have been incurred in respect of income which did not form part of the total income of the assessee, having regard to the accounts of the assessee, as were placed before the A.O. We thus being of the considered view that as the A.O had summarily carried out the disallowance contemplated under Sec. 14A, as per the methodology provided in Rule 8D(2)(iii), without satisfying the statutory requirement of first arriving at a satisfaction as required by the mandate of law, having regard to the accounts of the assessee as placed before him, therefore, we are unable to persuade ourselves to uphold the disallowance of Rs. 10,00,000/- which had been sustained by the CIT(A). The order of the CIT(A) sustaining the disallowance of Rs. 10,0,000/- under Sec. 14A is thus set aside.
The appeal of the assessee is allowed.