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Income Tax Appellate Tribunal, KOLKATA BENCH ‘D’, KOLKATA
Before: Shri P.M. Jagtap, AM & Shri S.S. Viswanethra Ravi, JM]
order
: January 12, 2018 ORDER
Per P.M. Jagtap, AM
This appeal is preferred by the revenue against the order of Ld. CIT(Appeals) – 10, Kolkata dated 28.03.2016 whereby he deleted the disallowance made by the A.O. under section 14A of the Income Tax Act 1961while computing the total income of the assessee under the normal provisions of the Act as well as book profit under section 115JB of the Act.
The assessee in the present is a company which is engaged in the business of finance, investment and paper trading. The return of income for the year under consideration was filed by it on 30.09.2008 declaring a total income at Nil. In the said return, the dividend income of Rs. 98,40,214/- received during the year under consideration was Assessment Year: 2008-09 M/s. ISG Traders Ltd. claimed to be exempted by the assessee company. Expenditure incurred in relation to the said income as computed by applying Rule 8D of Income Tax Rules 1962 at Rs. 39,28,799/- was disallowed by the assessee company as per section 14A of the Act. As noted by the A.O. during the course of assessment proceedings, the said disallowance however was worked out by the assessee company by taking into consideration the investment made in those shares only on which dividend income was actually earned during the year consideration. According to him, the entire investment made by the assessee in shares was required to be considered while computing the expenditure to be disallowed under section 14A r.w.r. 8D. He accordingly recomputed the disallowance to be made under section 14A r.w.r. 8D at Rs. 74,59,433/- and made a further disallowance of Rs. 34,16,409/-. He also added back the entire disallowance made under section 14A while computing the book profit of the assessee company under section 115JB of the Act. 3. The addition made by the A.O. by way of additional disallowance under section 14A while computing its income under the normal provisions of the Act as well as while computing book profit under section 115JB was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the further disallowance of Rs. 34,16,409/- made by the A.O. under section 14A r.w.r. 8D for the following reasons given in his impugned order:
Assessment Year: 2008-09 M/s. ISG Traders Ltd. “Upon examination of the facts of the case, and the action of the AO and his findings, as well as the various point emanating from the arguments of the appellant-company/ Ld A.R which have been listed, I find that the assessee has been able to work out precisely the basis of the suo moto disallowance u/s 14A on the precise basis of the funds invested in shares of those companies which had actually declared dividend during the relevant year. The claim of exempted income u/s 10(3a) has been claimed by the appellant only on the basis of these declared dividends, and therefore there is merit in the contentions of the appellant that only these should go towards the working out of the Sec 14A disallowance. I find that this has not been mentioned and overruled by the AO by giving any positive findings to controvert the working submitted by the appellant, and that the AO has simply disregarded the computation rendered by the assessee-appellant. This would not be permissible as the AO is required to record a positive finding as to why the computation is unacceptable before the Section 14A read with Rule BD is invoked in any case. Hon'ble Courts have been overemphasizing repeatedly that unless the AO records positive satisfaction that calculation has to be made u/s. L4A read with Rule 8D he cannot apply the provisions of section 14A mechanically. In addition to the decisions relied upon by the Ld. A.R., the decision of the Hon'ble Jurisdictional Kolkata Bench of the ITAT in the case of Micro Management Ltd. in dated 21.05.2012, in the case of DCIT v Ashish Jhunjhunwala in I.T.A. No. 1809/Kol/2012 pronounced on 14.05.2013, Hon’ble Delhi Tribunal in the case of DCIT v Jindal Photo Ltd. in ITA No. 814/Del/2011 pronounced on 23.09.2011, also bring forth the same ratio. ln the case of Apollo Finance Ltd the ITAT(Delhi) observed that the recording of satisfaction is not a mere formality but is must, in the case of Rajesh D Nandu HUF the Mumbal Bench of ITAT held that recording of satisfaction by the AO is an absolute prerequisite judicial ruling in the matter apart, I also find adequate merit in the claims of the appellant / Ld A.R on pure facts that and merits as the computation of disallowance has been made with reference to investments which had actually produced tax free dividend during the relevant year. Therefore I find that the decision of the Hon'ble Jurisdictional Calcutta High Court in the case of CIT Vs REI Agro Ltd (ITAT No. 220 of 2013 dated 09.O4.2014) upholding the decision of the ITAT Kolkata Bench in 144 ITD 141 wherein it was held that no disallowance u/s 14A red with Rule BD is permissible with reference to funds invested which did not produce any tax exempt dividend income during the relevant previous year, is applicable to the facts of the appellant's case. As such I Assessment Year: 2008-09 M/s. ISG Traders Ltd. am unable to sustain the disallowance made by the AO, and direct that the disallowance made under Sec 14A be restricted to Rs.39,28,799/-,as has already been done suo moto by the appellant.”
The Ld. CIT(A) also deleted the addition made by the A.O. by way of disallowance under section 14A while computing the book profit of the assessee company on the ground that the provisions of sub-section (2) and (3) of section 14A could not be imported into clause (f) of Explanation to Section 115JB to disallow any expenditure related to exempt income. Aggrieved by the order of the Ld. CIT(A), the revenue has preferred this appeal before the Tribunal on the following grounds:
1. Whether on the facts and circumstances of the case, Ld. CIT(A) has erred in law in holding that only dividend yielding investments are to be taken into account while calculating the disallowance u/s 14A of the I.T. Act?
2. Whether on the facts of the case, Ld. CIT(A) erred in appreciating the clarification made in CBDT Circular No. 5 of 2014?
3. Whether in the facts and circumstances of the case, Ld. CIT(A) has erred in law by not appreciating the Explanation 1(f) to Section 115JB of the IT Act?
5. We have heard the arguments of both the sides and also perused the relevant material available on record. As regards the common issue involved in ground no 1 and 2 of the revenue’s appeal relating to the deletion of the Ld. CIT(A) of the additional disallowance made by the A.O. under section 14A r.w.r. 8D, it is observed that the relief on this issue was given by the Ld. CIT(A) inter alia by relying on the decision of this Tribunal in the case of REI Agro Ltd. (supra) wherein it was held that the disallowance to be made Assessment Year: 2008-09 M/s. ISG Traders Ltd. under section 14A by applying Rule 8D could be computed only by taking into consideration the investment which had given rise to the exempt income during the relevant year. As submitted by the learned counsel for the assessee, the said decision of this Tribunal in the case of REI Agro Ltd. has been subsequently upheld by the Hon’ble Kolkata High Court vide its order dated 9th April, 2014 passed in ITAT No. 220 of 2013. This issue thus is squarely covered in favour of the assessee by the decision of the Hon’ble Kolkata High Court in the case of REI Agro Ltd. (supra) and respectfully following the same, we uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue. Ground no 1 and 2 of the revenue’s appeal are accordingly dismissed.
6. As regards the issue involved in ground no 3 relating to the deletion by the Ld. CIT(A) of the addition made by the A.O. on account of disallowance under section 14A r.w.r. 8D while computing the book profit of the assessee company under section 115JB of the Act, it is observed that the same is also covered in favour of the assessee by the decision of Special Bench of this Tribunal of Delhi in the case of ACIT vs Viveet Investment Pvt. Ltd. 165 ITD 27 wherein it was held that the computation under clause (f) of Explanation 1 to Section 115JB (2) has to be made without resorting to the computation as contemplated under section 14A r.w.r. 8D of Income Tax Rule 1962. Respectfully following the said decision of the Special Bench of this Tribunal, we uphold the impugned order of the Ld. CIT(A) deleting the addition made by the A.O. by way of disallowance u/s 14A r.w.r.