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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 Revenue directed against orders dated 07.08.2017 of ld. Commissioner of Income Tax (Appeals)- 6, Chennai.
Grievance raised by the Revenue is that ld. Commissioner of 2.
Income Tax (Appeals) restricted disallowance made u/s.14A of the / 2462/Mds/17 :- 2 -: Income Tax Act, 1961 (in short ‘’the Act’’) to the amount of dividend income claimed by the assessee as exempt.
Ld. Assessing Officer had considered application of Sec.14A 3. r.w.r 8D as automatic. Assessee had earned dividend income of Rs.2,76,61,437/- for assessment year 2008-09 and Rs.5,52,99,194/- for assessment year 2009-2010. Ld. Assessing Officer by applying Sec.14A r.w.r.8D made a disallowance of Rs.8,07,86,170/- for assessment year 2008-09 and Rs.10,10,18,135/- for assessment year 2009-2010.
When the matter reached the ld. Commissioner of Income Tax (Appeals), ld. Commissioner of Income Tax (Appeals) relying on the judgment of Hon’ble Delhi High Court in the case of Joint Investments P. Ltd vs. CIT, 372 ITR 694 held that disallowance u/s.14A of the Act had to be restricted to the exempt income claimed by the assessee, for the respective assessment years.
Ld. Departmental Representative strongly assailing the order of the 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. / 2462/Mds/17 :- 3 -:
Per contra, ld. Authorised Representative strongly supported 6.
the order of the ld. Commissioner of Income Tax (Appeals).
We have considered the rival contentions and perused the orders of the authorities below. According to us, the issue, as on date stands fully covered in favour of the assessee by the judgment of Hon’ble Delhi High Court in the case of Joint Investments P. Ltd (supra). Their lordships has 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.
/ 2462/Mds/17 :- 4 -: 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 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."
5. 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. / 2462/Mds/17 :- 5 -: 6. 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.
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."
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 / 2462/Mds/17 :- 6 -: 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 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’’.
Hon’ble Jurisdictional High Court also considered almost similar an issue in the case of Regindton (India ) Ltd vs. JCIT (2016) 97 CCH
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 / 2462/Mds/17 :- 7 -: 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:
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’’.
/ 2462/Mds/17 :- 8 -: Accordingly, we are of the opinion that ld. Commissioner of Income Tax (Appeals) was justified in restricting the disallowance made u/s.14A of the Act, to the exempt income claimed by the assessee. We do not find any reason to interfere with the order of the ld.CIT(A) for both the years.
In the result, the appeals of the Revenue are dismissed.
Order pronounced on Thursday, the 21st day of December, 2017, at Chennai.