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Income Tax Appellate Tribunal, ‘B’ BENCH : CHENNAI
Before: SHRI ABRAHAM P.GEORGE & SHRI GEORGE MATHAN
आदेश / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER
These are appeals filed by the assessee directed against orders dated 31.03.2016 and 22.05.2017 respectively of ld. Commissioner of Income Tax (Appeals)-2, Chennai.
ITA Nos.1515/16 & 1666/17 :- 2 -:
Assessee has altogether taken twelve grounds in its appeal 2. for assessment year 2012-2013 and eight grounds in its appeal for assessment year 2013-2014. Out of the former, first seven grounds are against addition of Rs.1,13,47,742/- made u/s.14A of the Income Tax Act (in short ‘’the Act’’), and grounds eight to twelve are against a disallowance of Rs.10,21,295/- for non deduction of tax at source on late payment charges. In assessee’s appeal for assessment year 2013- 14, there is only one issue, which is on an addition under section 14A of the Act, raised through eight grounds.
Ld. Counsel for the assessee submitted that viz-a-viz grounds assailing disallowance u/s.14A of the Act, he was pressing only the ground for restriction of such disallowance, to the quantum of exempt dividend income claimed in the respective assessment years. As per the ld. Authorised Representative, dividend income claimed as exempt was Rs.2,56,203/- for assessment year 2012-13 and � 1,13,460/- for assessment year 2013-2014. As per the ld. Authorised Representative by virtue of judgment of Hon’ble Delhi High Court in the case of Joint Investment P. Ltd vs. CIT 372 ITR 694, disallowance u/s.14A of the Income Tax Act, 1961 (in short ‘’the Act’’) could not exceed the exempt income claimed. Reliance was also placed on the judgment of Hon’ble Jurisdictional High Court in the case of Regindton (India ) Ltd v. JCIT. (2016) 97 CCH 219.
ITA Nos.1515/16 & 1666/17 :- 3 -:
Viz-a-viz the grounds assailing the disallowance u/s.40(a)(ia) 4. of the Act, which appear in assessee’s appeal for assessment year 2012-2013, submission of the ld. Authorised Representative was that assessee was a dealer in shares. According to him, M/s. Sharekhan Ltd and M/s.Kotak Securities Ltd, share brokers while paying amounts due to the assessee on futures & options trading had deducted late payment charges. As per the ld. Authorised Representative these were direct debits made by the concerned brokers in assessee’s account maintained with them and was not interest payments. Contention of the ld. Authorised Representative was that such late payment charges would not come within the definition of ‘’interest’’ as set out in Sec.2(28A) of the Act. According to him, there being no interest payment made by the assessee, there was no question of deduction of tax at source. Thus, as per ld. Authorised Representative, disallowance u/s.40(a)(ia) was not warranted. Reliance was placed on the decision of Hyderabad Bench of the Tribunal in the case of Sri Venkatesh Paper Agencies (Hyd) (P) Ltd vs. DCIT (in dated 22.06.2012) in support of his contention that payment which had direct and immediate nexus with a trading liability would not fall in the category of interest as given in Sec.
2(28A) of the Act.
ITA Nos.1515/16 & 1666/17 :- 4 -:
Per contra, ld. Departmental Representative strongly 5.
supporting the orders of the ld. Commissioner of Income Tax (Appeals) submitted that Circular No.5/2014, dated 11.02.2014 of CBDT, enabled the Assessing Officer to make disallowance under section 14A of the Act, irrespective of the quantum of the exempt income. Viz-à-viz the disallowance u/s.40(a)(ia) of the Act, contention of the ld. Departmental Representative was that assessee, though he was a share dealer, had debited late payment charges in its Profit and Loss account and such late payments charges were on account of its failure to make periodical settlement of its dues to M/s. Sharekhan Ltd and M/s.Kotak Securities Ltd. As per the ld. Departmental Representative, this was nothing but interest. Assessee having failed to deduct tax at source, as per the ld. Departmental Representative the disallowance was rightly made.
6. We have considered the rival contentions and perused the orders of the authorities below. First taking up the issue regarding disallowance u/s.14A of the Act, the only contention pressed by the ld. Authorised Representative is for restriction of such disallowance to the quantum of exempt income claimed by the assessee for the respective assessment years. Ld. Authorised Representative fairy submitted that if this claim was allowed he was not serious on other grounds raised by the assessee with regard to the disallowance
ITA Nos.1515/16 & 1666/17 :- 5 -: u/s.14A of the Act. The question whether disallowance u/s.14A of the Act has to be restricted to the exempt income claimed by an assessee had come up before the Hon’ble Delhi High Court in the case of Joint Investment P. Ltd (supra). Their lordships had held as under at para 4 to 9 of their judgment:
‘’4. The Income-tax Appellate Tribunal upheld the orders of the authorities below and held, inter alia, that (page 38 of 33 ITR (Trib)) : "Now, we come to various other arguments by the learned counsel wherein he has disputed the quantum of the disallowance worked out by the Assessing Officer. The assessee's counsel has contended that the various expenses, viz., filing fees, house tax, conveyance, insur ance of building and cars, electricity, building repair, printing and sta tionery, telephone expenses, audit fees, office rent, vehicles expenses, depreciation, etc., were not incurred for earning of exempt income. From the working of the disallowance by the Assessing Officer which is already reproduced earlier in our order, it would be evident that all those expenses have not been considered by the Assessing Officer. In Part (i), the Assessing Officer has considered Rs. 2,97,440 which the assessee himself has admitted as a direct expenditure incurred for earning the exempt income, viz., securities transaction tax, depository charges and custodian fees. In Part (ii), only the interest has been considered and in Part (iii) half per cent. of the average investment has been considered. Therefore, these expenses which the assessee claimed to have been not incurred for earning of exempt income have not been considered by the Assessing Officer at all. The assessee has also disputed the correctness of the disallowance of interest at Rs. 34,08,582. However, we find that the disallowance as per Part (iii) itself is Rs. 65,36,743. The assessee's counsel has not disputed the value of investment as taken by the ITA Nos.1515/16 & 1666/17 :- 6 -:
Assessing Officer for the purpose of computing the disallowance at half per cent. as provided by rule 8D(2)(iii). The disallowance at half per cent. of the investment is Rs. 65,36,743 while finally, the Assessing Officer restricted the disallowance to Rs. 52,56,197. Therefore, whether the working of the disallowance of interest as per rule 8D(2)(ii) is correct or not is of aca demic interest and, therefore, we do not wish to go into the details of the assessee's arguments with regard to the correctness of the dis allowance of interest. At the cost of repetition, we reiterate that the disallowance worked out by the Assessing Officer which was the aggregate of three components as prescribed under rule 8D(2) was Rs. 99,45,325. But, finally, the Assessing Officer restricted the dis allowance to Rs. 52,56,197. Therefore, in our opinion, no relief is due to the assessee from the disallowance made by the Assessing Officer at Rs. 52,56,197. The same is sustained and the assessee's appeal is dismissed."
Learned counsel urges that the mandate of section 14A (especially the section 14A(2)) escaped the attention of the Income-tax Appellate Tribunal as well as that of the Assessing Officer and the Commissioner of Income- tax (Appeals). It was urged that in the present case since Rs. 2,97,440 was volunteered as disallowance, the Assessing Officer was under a duty to first consider the merits of that claim and, thereafter, for valid grounds, if any, reject the contention before proceeding under section 14A(3) read with rule 8D(2). Learned counsel highlighted that the sum volunteered, i.e., Rs. 2,97,440 was in addition to ad hoc disallowance which was offered and accepted without scrutiny by the Assessing Officer.
Learned counsel for the Revenue contended that given the structure and phraseology of rule 8D, the interpretation of the Commissioner of Income- tax (Appeals) and the Income-tax Appellate Tribunal cannot be faulted.
ITA Nos.1515/16 & 1666/17 :- 7 -:
During the course of hearing, counsel for the petitioner had relied upon a decision of this court in CIT v. Taikisha Engineering India Ltd. (I. T. A. No. 115 of 2014, decided on November 25, 2014) [2015] 370 ITR 338 (Delhi). The court had, in that judgment, highlighted the necessity in view of the peculiar wording of section 14A(2) that computation or disallowance of the assessee, or claim that no expenditure was incurred for earning exempt income should be examined with reference to the accounts and only if the assessee's explanation is unsatisfactory, can the Assessing Officer proceed further.
8. The court in Taikisha Engineering (supra) pertinently observed (page 347) : "Thus, section 14A(2) of the Act and rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub-rule (2) to rule 8D of the Rules is to be made. We need not, therefore, go on to sub-rule (2) to rule 8D of the Rules until and unless the Assessing Officer has first recorded the satisfaction, which is mandated by sub-section (2) of section 14A of the Act and sub-rule (1) of rule 8D of the Rules." 9. In the present case, the Assessing Officer has not firstly disclosed why the appellant-assessee's claim for attributing Rs. 2,97,440 as a disallowance under section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the Assessing Officer—an aspect which is completely unnoticed by the Commissioner of ITA Nos.1515/16 & 1666/17 :- 8 -:
Income-tax (Appeals) and the Income-tax Appellate Tribunal. The third and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent. of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can section 14A or rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case’’.
We also find that Hon’ble Jurisdictional High Court also considered almost similar an issue in the case of Regindton (India) Ltd (supra).
Observations of their lordships at paras 14 to 16 of this judgment are reproduced hereunder:-
‘’14. Nothing much turns on the use of the word includable� and the phrase under the act� in s. 14A and we are not persuaded to accept the emphasis laid or the interpretation of the same by the Revenue. An assessment in terms of the Income tax Act is specific to an assessment year and the related previous year. S.4 of the Act, which imposes the charge to tax reads thus:
Charge of income-tax (1) Where any Central Act enacts that income �tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:
ITA Nos.1515/16 & 1666/17 :- 9 -:
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income tax shall be charged accordingly. Thus, where the statute indented that income shall be recognized for taxation in respect of any previous other than that immediately preceding the relevant assessment year, the provision shall expressly state so. The provisions of s.10 in Chapter III of the Act dealing with Incomes not included in total income� commences with the phrase. In computing the total income of a previous year, any income falling within any of the following clauses shall not be included .....'
The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd vs. CIT (225 ITR 802)). The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.
In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs’’. Accordingly, we are of the opinion that disallowance u/s.14A of the Act cannot exceed exempt income claimed by the assessee. We restrict the disallowance made for assessment year 2012-13 to �2,56,203/-
ITA Nos.1515/16 & 1666/17 :- 10 -: and disallowance made for assessment year 2013-14 to �1,13,460/-.
Related grounds of the assessee are treated as partly allowed.
This leaves us with the question whether disallowance u/s.40 7.
(a) (ia) of the Act was warranted on what was called as late payment charges. Admittedly, a sum of �10,21,295/- was shown by the assessee as late payment charges in its profit and loss account. As per the assessee, these amounts were debited by the share brokers M/s.
Sharekhan Ltd and M/s.Kotak Securities Ltd on dues arising to them on F& O transactions. However, nothing is available on record to show what was the basis for these charges and how these were worked out by the two share brokers. How the share brokers treated the amount in their books is also relevant in deciding the question whether interest was camouflaged as late payment charges. No doubt, Hyderabad Bench of the Tribunal in the case of Sri Venkatesh Paper Agencies (Hyd) (P) Ltd (supra) had held that payment which had direct link and immediate nexus with trading liability, being connected with delay in making purchase payments, will not fall within the category of interest as defined in Sec.2(28A) of the Act. However, in the case before us, none of the authorities below had verified whether the late payment charges were due to any trading liability connected with any purchases done by the assessee. In the circumstances, we are of the view that the issue whether assessee had failed to deduct
ITA Nos.1515/16 & 1666/17 :- 11 -: tax at source on such charges, requires a fresh look by the ld. Assessing Officer. We set aside the orders of the lower authorities on this issue and remit it back to the ld. Assessing Officer for consideration afresh in accordance with law. Grounds taken by the assessee on this issue for assessment year 2012-2013 are allowed for statistical purposes.
To summarize the result, appeal of the assessee for assessment year 2012-13 is partly allowed for statistical purpose whereas and that for assessment year 2013-2014 is partly allowed.
Order pronounced on Thursday, the 21st day of December, 2017, at Chennai.