CITY HOLDINGS LTD.,KOLKATA vs. DCIT, CIRCLE-3, KOLKATA, KOLKATA

आयकर अपील�य अधीकरण, �यायपीठ – “D” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH “D” KOLKATA Before Shri Waseem Ahmed, Accountant Member and Shri S.S.Viswanethra Ravi, Judicial Member ITA No.1626/Kol/2016 Assessment Year:2011-12 City Holdings Ltd., DCIT, Circle-3, बनाम / C/o D.J. Shah & Co. Kalyan P-7, Chowringhee V/s. Bhavan, 2 Elgin Road, Square, Kolkata-69 Kolkata-20 [PAN No.AABCC 1071 B] .. अपीलाथ� /Appellant ��यथ� /Respondent Shri Miraj D Shah, Advocate अपीलाथ� क� ओर से/By Appellant Shri Arindam Bhattarcharjee, Addl. CIT-DR ��यथ� क� ओर से/By Respondent 02-01-2018 सुनवाई क� तार�ख/Date of Hearing 05-01-2018 घोषणा क� तार�ख/Date of Pronouncement आदेश /O R D E R PER Waseem Ahmed, Accountant Member:- This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-I, Kolkata dated 29.06.2016. Assessment was framed by DCIT,Circle-3 Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 05.03.2014 for assessment year 2011-12. The grounds raised by the assessee per its appeal are as under:- “1. For that in the facts and circumstances of the case the Appellate order passed was in violation of principals of natural justice hence is bad in law and be quashed. 2. For that in the facts and circumstances erred in adding Rs.1,73,967/- by invoking provisions of Section14A of the IT Act 1961 red with Rule 8D of the IT Rules 1962 despite the assessee providing detailed working regarding disallowance made suo moto by the assessee.

ITA No.1626/Kol/2016 A.Y. 2011-12 City Holdings Ltd. Vs. DCIT, Cir-3, Kol Page 2 3. For that in the facts and circumstances of the Ld. Commissioner of Income Tax Appeals erred in holding that the Assessing Officer had recorded his satisfaction for invoking Rule 8D of the IT Rules, 196in the assessment order. 5. The appellant craves leave to press new, additional grounds of appeal or modify, withdraw any of the above grounds at the time of hearing of the appeal.” Shri Mirj D Shah, Ld. Advocate appeared on behalf of assessee and Shri Arindam Bhattacherjee, Ld. Departmental Representative appeared on behalf of Revenue. 2. The effective issue raised by assessee in its grounds of appeal is that Ld. CIT(A) erred in confirming the order of Assessing Officer by sustaining the disallowance of ₹1,73,967/- under the provision of Section 14A r.w.r. 8D of the Income Tax Rules, 1962. 3. Briefly stated facts are that assessee in the present case is a limited company and engaged in business of investment in shares, securities and financing activities. The assessee in the year under consideration has shown dividend income of ₹23,73,079/- which was claimed exempted u/s.10(34) of the Act. The assessee against such dividend income has made the disallowance of ₹4,554/- suo motu under the provision of Sec. 14A r.w.s. Rule 8D of IT Rules. 4. On question by the AO for making the disallowance as per Rule 8D of the IT Rules, the assessee submitted that it has incurred an expense of ₹1,78,521/- only and out of which a sum of ₹4,554/- has already been disallowed. The assessee in support of disallowance made by it for ₹4,554/- u/s 14A of the Act has filed the necessary working. However, AO disregarded the contention of assessee and worked out the disallowance of ₹10,12,971/- under Rule 8D(2)(iii) of IT Rules, 1962 but restricted the disallowance to actual expense claimed by assessee i.e. ₹1,73,967/- (total expense 1,78,521 – expense already disallowed by assessee of ₹4,554/-) Thus, AO made the disallowance of the balance expense claimed by assessee for ₹1,73,967/- and added to the total income of assessee. 5. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that detailed working for making the disallowance of ₹4,554/- against the dividend income of ₹23,73,049/- was filed before the AO at the time of assessment proceedings. But AO without pointing out any defect in such

ITA No.1626/Kol/2016 A.Y. 2011-12 City Holdings Ltd. Vs. DCIT, Cir-3, Kol Page 3 working has invoked the provision of Section 14A r.w.r. 8D of Income Tax Rules. The assessee being a limited company has to incur certain expenses to keep its legal status active. Thus, all the expenses incurred by assessee cannot be treated as incurred towards dividend income. The assessee also submitted that it has inter alia earned the income from its financial activities as well as from the sale of current investments. The aforesaid income cannot be earned without incurring any expense. In view of the above, assessee submitted that the provision of Section 14A r.w.r. 8D in the instant case has been invoked mechanically without recording any satisfaction as mandated under the provision of Section 14A of the Act. However, Ld. CIT(A) disregarded the contention of assessee and confirmed the order of AO by holding as under:- “I have carefully considered the material before me I find that the AO had replied provision of Sec 14A read with Rule 8D made disallowance of Rs.178521/- after considering amount of Rs.4554/- already disallowed by the Appellant. The Appellant has claimed in the written submission that the AO has not given a reasons has to why he is not satisfied with correctness of the claim of expenditure made by the assessee in relation to income which is exempt. The Appellant has also relied upon the ratios of various case laws including IT Kolkata in the case of REI Agro Ltd for 2009-2010 in IITA No.181/Kol/2012. Although, the A/R has claimed that the AO did not record its reasons for invoking provision of Rule 8D but it is observed from the assessment order that the AO has examined the details of investments in shares, debentures and other securities of Rs.131515251.44/-. Moreover, the Appellant company has not furnished any bifurcation of investments made from its own funds and borrow4ed f9unds which have yielded the dividend income either before the AO or in the Ape’s proceedings. However, I find merit in the appellant argument that the case of the assessee was covered directly by the decision of the jurisdictional ITAT in the case of REI Agro Ltd (supra) wherein it was held that only those investments could be considered for the purposes of disallowance under rule 8D(2)(iii) which had yielded tax free dividend income during the year. The Ld AR had claimed the assessment stage that no dividend income was earned by the assessee during the relevant year which has not been disputed by the AO in his impugned order. The Ld./R has retreated the same contention in course of the appellate proceedings which may be verified by the AO. It appears form the impugned assessment order that the AO has considered the entire investment while computing the disallowance. Following the decision of the jurisdictional ITAT in the case of REI Agro Ltd (supra),is directed to compute the disallowance under rule 8D(2)(iii) by considering only the investments which have yielded tax free income during the year. Ground no 2 is disposed accordingly.”

ITA No.1626/Kol/2016 A.Y. 2011-12 City Holdings Ltd. Vs. DCIT, Cir-3, Kol Page 4 Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us. 6. Before us Ld. AR for the assessee reiterated the same arguments that were placed before Ld. CIT(A) and he requested the Bench to decide the issue on merit. On the other hand, Ld. DR heavily relied on the order of Authorities Below. 7. We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the disallowance made by the AO u/s 14A r.w.r 8D(2)(iii) of the I.T Rules which was subsequently confirmed by ld. CIT(A). At this juncture we find important to reproduce the provisions of Section 14A of the Act which reads as under : “67[Expenditure incurred in relation to income not includible in total income 14A. 69[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.] 69[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed70, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :]”

From the above provision, we note that Assessing Officer can resort to make the disallowance u/s 14A of the Act r.w.r. 8D of the IT Rules, 1962 after having regard to the accounts of the assessee and feels dissatisfied with the correctness of the claim of the assessee. Thus, it is clear that the AO can make the disallowances of the expenses incurred in relation to exempt income in pursuance to the provisions as specified u/s 14A of the Act if records his satisfaction. On perusal of the facts of the present case, we note that the assessee has claimed indirect/administrative expenses during the year to the tune of Rs. 1,78,521/- only whereas the AO worked out the disallowance of Rs. 10,12,971.00 under the provisions of section 14A r.w.r. 8D but limited the disallowance to the extent of the expenses claimed by the assessee in its profit & loss account i.e. 1,73,967.00 (total expenses

ITA No.1626/Kol/2016 A.Y. 2011-12 City Holdings Ltd. Vs. DCIT, Cir-3, Kol Page 5 1,78,521.00 less expenses already disallowed Rs. 4554.00 under section 14A by the assessee) Thus it is undoubtedly clear that all the expenses claimed by the assessee are disallowed by the AO though the assessee has shown the following incomes in its Income Tax Return:- Particulars of income Amount Amount 1 Dividend from investment: a) long term 22,66,911 b) current 1,06,138 23,73,049 2 Interest & other income: a) interest 1,58,78,512 b) others 700 1,58,79,212 3 a) profit on sale of current 1,21,87,842 Investment Total 3,04,40,103

ITA No.1626/Kol/2016 A.Y. 2011-12 City Holdings Ltd. Vs. DCIT, Cir-3, Kol Page 6 3 Depreciation 37 Total 1,78,813

From the above, it is noted that the AO has presumed that all the expenses i.e. ₹1,78,521/- have been incurred by the assessee towards the dividend income. Thus, the AO has considered/presumed that the assessee has not incurred any expense against interest & other income as discussed above. In such facts & circumstances the finding of AO appears perverse and without any logical basis. In the backdrop of the present case we are of the view that all the expenses cannot be disallowed under Rule 8D(2)(iii) of IT rules. The act of making the disallowance by the AO under rule 8D(iii) shows that no reference has been made to the books of accounts of the assessee. In such a situation we are of the view that the disallowance u/s 14A viz a viz Rule 8D of the I.T Rules has been made without complying the provisions of law. No satisfaction has been recorded by the AO as mandated under section 14A of the Act. The provisions of section 14A of the Act require the Assessing Officer to record his satisfaction after having reference to the books of account of the assessee before making any disallowance in relation to the exempted income. The ld. DR has also not brought anything on record contrary to the argument advanced by the ld. AR. In this regard we find the support from the order of Hon’ble Tribunal of Kolkata in the case of DCIT vs. Ashish Jhunjhunwala in ITA No. 1809/Kol/2012 for A.Y. 2009-10 dated 14.05.2013, wherein it was held as under:- “6. We find from the facts of the above case that the AO has not examined the accounts of the assessee and there is no satisfaction recorded by the Assessing Officer about the correctness of the claim of the assessee and without the same he invoked Rule 8D of the Rules. While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½ % of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT. This appeal of revenue is dismissed.”

ITA No.1626/Kol/2016 A.Y. 2011-12 City Holdings Ltd. Vs. DCIT, Cir-3, Kol Page 7 7.1 The above order was subsequently confirmed by Hon'ble jurisdictional High Court in the case of CIT vs. Ashish Jhunjhunwala in GA No.2990 of 2013 & ITAT No. 157 of 2013. The relevant operative portion of the judgment is reproduced below:- “It is against the order of the Commissioner of Income Tax that the Revenue approached the Tribunal. The Tribunal has dismissed the appeal holding as follows: ‘While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case, it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT(A).’ We find no infirmity in the order under challenge. The appeal and the application are therefore dismissed.” Similarly, we also rely on the order of this Co-ordinate Bench in the case of DCIT vs. REI Agro Ltd. in ITA No.1811/Kol/2012 for A.Y. 2009-10 dated 14.05.2013, wherein it was held as under:- “9. We find from the facts of the above case that the AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of the Rules. While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½ % of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT(A). This ground of appeal of revenue is dismissed.” The above order was subsequently confirmed by Hon'ble jurisdictional High Court in the case of CIT vs. REI Agro Ltd. in GA No. 3022 of 2013 & ITAT No. 161 of 2013. The relevant operative portion of the judgment is reproduced below:- “The Assessing Officer also disallowed the expenditure under section 14A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of the claim as regards the claim that “no expenditure” was made by the assessee. The CIT, in the circumstances, allowed the appeal of the assessee and the Tribunal did not interfere. Challenging the order of the tribunal, the present appeal has been filed.

ITA No.1626/Kol/2016 A.Y. 2011-12 City Holdings Ltd. Vs. DCIT, Cir-3, Kol Page 8 We have heard Mr. Bhowmik and are of the opinion that no point of law ha been raised. Therefore, this appeal is dismissed.” In view of above, we conclude that AO failed to record his ‘satisfaction’ as mandated under the provision of Sec. 14A r.w.r. 8D of the Rules. Therefore, in our considered view, no addition in the aforesaid facts and circumstances without recording the satisfaction can be made under the provision of Section 14A r.w.r. Rule 8D of the Rule. Consequently, this ground assessee’s appeal is allowed. In the result, assessee’s appeal stands allowed. 8. Order pronounced in open court on 05/01/2018 Sd/- Sd/- (�या%यक सद'य) (लेखा सद'य) (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member *Dkp, Sr.P.S )दनांकः- 05/01/2018 कोलकाता / Kolkata आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-City Holdings Ltd., C/o D.J. Shah & Co Kalyan Bhavan, 2 Elgin Road,Kolkata-20 2. ��यथ�/Respondent-DCIT, Circle-3, P-7 Chowringhee Square, Kolkata-69 3. संबं,धत आयकर आयु-त / Concerned CIT 4. आयकर आयु-त- अपील / CIT (A) 5. .वभागीय �%त%न,ध, आयकर अपील�य अ,धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड2 फाइल / Guard file. By order/आदेश से, /True Copy/ Sr. Private Secretary Head of Office/DDO आयकर अपील�य अ,धकरण, कोलकाता