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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’ NEW DELHI
Before: SH. H.S. SIDHU & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: These two appeals by the assessee and the Revenue respectively are directed against the order dated 13/08/2013 of 2 & 6064/Del/2013 AY: 2010-11 learned Commissioner of Income-tax (Appeals)-XI, New Delhi for assessment year 2010-11. As both the appeals emanate from the same order, both are heard together for the sake of convenience and disposed of by this consolidated order. 2. The grounds raised
by the assessee in the appeal are as under:
1. That the CIT(A) erred on facts of the case and in law in upholding the action of the assessing officer in disallowing an amount of Rs.61,80,689/- under section 14A of the Income-tax Act, 1961 (‘the Act’) read with Rule 8D of the Income-tax Rules, 1962 (‘Rules’), without appreciating that Rule 8D was not applicable in the present case. 1.1 That the CIT(A) erred on facts of the case and in law in upholding the action of the assessing officer in making aforesaid disallowance under section 14A of the Act read with Rule 8D(2)(iii) of the Rules without appreciating that the appellant had suo motu disallowed expenses amounting to Rs.24,55,186 under said section, which were computed by following a reasonable and scientific method regularly and consistently followed by the appellant. 1.2 That the CIT(A) erred on facts of the case and in law in upholding the action of the assessing officer in making aforesaid disallowance without appreciating that the assessing officer had not recorded his satisfaction as to incorrectness of appellant’s suo motu claim of disallowance under section 14A of the Act. 1.3 That the CIT(A) erred on facts and in law in holding that: (a) dissatisfaction of the assessing officer with the claim of the assessee was not relevant since application of Rule 8D of the Rules was inevitable; and (b) such dissatisfaction could even be recorded by the CIT(A). 1.4 That the CIT(A) erred on facts of the case and in law in upholding the action of the assessing officer in making aforesaid disallowance without properly appreciating that 3 & 6064/Del/2013 AY: 2010-11 such disallowance could be made by assessing officer only after establishing/ specifying the nexus of aforesaid expenditure with earning of exempt dividend income.
Without prejudice, the CIT(A) erred on facts of the case and in law in upholding the action of the assessing officer in making aforesaid disallowance, without appreciating that the total amount of disallowance under no circumstance can exceed the expenditure of Rs.37,19,979, actually incurred by the appellant during the relevant assessment year. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal
at or before the time of hearing.
3. The grounds raised by the Revenue in the appeal are as under:
1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in allowing assessee’s appeal and restricting the addition on account of disallowance u/s 14A of the Income Tax Act, 1961 to 61,80,689/- from Rs.7,20,91,704/-.
2. The appellant craves to amend, modify, alter, add, for forego any ground(s) of the appeal at any time before or during this hearing of this appeal.
The facts in brief are that the assessee company was engaged in the business of finance and return of income for the year under consideration was filed on 23/09/2010 declaring total income of Rs.98,46,067/-. The case was selected for scrutiny and assessment under section 143(3) of the Income- tax Act, 1961 (for short “the Act’) was completed on 18/01/2013 making disallowance of Rs.7,20,90,704/- under section 14A of the Act invoking Rule 8D of the Income Tax 4 & 6064/Del/2013 AY: 2010-11 Rules, 1962. The Assessing Officer observed exempt income of Rs.7,01,09,845/- being dividend income on long-term investment and current investment. The assessee in the return of income filed made suo motu disallowance of Rs.24,55,186/- under section 14A of the Act. The Assessing Officer made disallowance of Rs.6,83,66,201/- under Rule 8D2(ii) for proportionate interest disallowance and disallowance of Rs.61,80,689/- under Rule 8D2(iii) as 0.5% of average investment towards administrative expenses., and thus after reducing the disallowance declared by the assessee itself, net addition of Rs.7,20,91,704/- was made to the returned income. Aggrieved, the assessee filed appeal before the learned Commissioner of Income-tax (Appeals), who after considering the submission of the assessee allowed relief in respect of disallowance of proportionate interest of Rs.6,83,66,201/- following the decision of the Tribunal in assessment year 2006- 07 but sustained disallowance of Rs.61,80,689/- under Rule 8D2(iii) of the Income Tax Rules. Aggrieved, both the assessee and the Revenue are in appeal raising grounds as reproduced above.
First we take up grounds in the appeal of the assessee. In ground No. 1 where the assessee has challenged disallowance of Rs.61,80,689/- on the ground that Rule 8D of the Income Tax Rules, was not applicable as the Assessing Officer had not recorded his satisfaction as to incorrectness of assessee’s suo motu claim of disallowance under section 14A of the Act and no such dissatisfaction could have been recorded by the Ld. Commissioner of Income-tax( Appeals).
5 & 6064/Del/2013 AY: 2010-11 6. The learned Authorized Representative of the assessee referred to the pages 1 to 3 of the assessee’s paper book and submitted that the assessee bifurcated the total expenses claimed in profit and loss account as expenses related directly to financial activity of Rs.11,03,90,466/- and indirect expenses of Rs.37,19,979/-. Further, the assessee segregated deployment of funds towards loans and advances (34%) and investments (66%). The assessee applied the ratio 66% over the indirect expenses of Rs.37,19,979/- and computed disallowance of Rs.24,55,186/- under section 14A of the Act. The learned Authorised Representative of the assessee further submitted that the Assessing Officer has not recorded satisfaction as to incorrectness of disallowance made by the assessee and made disallowance directly invoking the Rule 8D of the Income Tax Rules, which is not allowed in law as held by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd vs. Commissioner of Income Tax, reported in 347 ITR 272. Further, the learned Authorised Representative objected to the satisfaction recorded by the learned Commissioner of Income- tax (Appeals) on the ground of having coterminous power with Assessing Officer. According to the learned Authorised Representative, recording of satisfaction by the Assessing Officer is sine qua none for invoking Rule 8D of the Income Tax Rules, and the learned Commissioner of Income-tax (Appeals) cannot substitute his satisfaction in place of the satisfaction of the Assessing Officer.
Further, with reference to ground No. 2 of the assessee’s appeal, the learned Authorized Representative of the assessee, 6 & 6064/Del/2013 AY: 2010-11 without prejudice to the ground No. 1, submitted that under no circumstances disallowance could exceed the expenditure of Rs.37,19,797/- actually incurred by the assessee during the relevant assessment year. He further submitted that in assessment year 2012-13, the learned Commissioner of Income-tax (Appeals) following the judgment of the Hon’ble Delhi High Court in the case of ACB India Ltd Vs. ACIT reported in 347 ITR 108 restricted the disallowance under Rule 8D2(iii) restricted at the rate of 0.5% of the average investment, which actually resulted in exempt dividend income. Accordingly, in the year under consideration, also disallowance under Rule 8D2(iii) cannot be made more than the 0.5% of average investment, which actually resulted in exempt dividend income.
With respect to ground No. 1 of Revenue’s appeal in allowing relief by the learned Commissioner of Income-tax (Appeals) for proportionate disallowance of interest amounting to Rs.6,83,66,201/- the learned Authorized Representative of the assessee submitted that in the assessment year 2006-07, the Tribunal in the case of the assessee has already held that borrowed funds have been utilized only toward finance activity and, therefore, no disallowance for interest towards earning exempt income was upheld. In the year under consideration also the learned Commissioner of Income-tax (Appeals) after analyzing the borrowed funds and deployment thereon observed that the Assessing Officer has not established any nexus of the interest-bearing borrowings and consequent interest expenses with the investments resulting into tax free dividend income. The learned Commissioner of Income-tax 7 & 6064/Del/2013 AY: 2010-11 (Appeals) has followed finding of the Tribunal in the assessment year 2006-07. Further, the learned Authorised Representative of the assessee submitted that no such disallowance has been made by the Assessing Officer in the preceding assessment year 2009-10 as well as in assessment year 2013-14, and, therefore, in view of the rule of consistency no addition could have been made in the year under consideration.
On the other hand, the learned Senior Departmental Representative, as far as the grounds of the assessee’s appeal are concerned, relied on the findings of the authorities below and submitted that due satisfaction as to the incorrectness of the assessee’s claim of disallowance under section 14A of the Act was made by the Assessing Officer. As regard to the ground No. 2 of the assessee’s appeal, she submitted that in the indirect expenses computed, the assessee has not included legal and professional expenses and therefore the claim of the assessee that expenses of Rs. 37,19,979/- were only actually incurred during the year and, therefore, disallowance under Rule 8D2(iii) cannot exceed the said amount, is not tenable. As regard to the grounds raised
in the appeal of the Revenue, she relied on the finding of the Assessing Officer on the issue in dispute.
10. We have heard the rival submissions and perused the material on record including the paper book submitted by the assessee. In ground No. 1, the assessee has challenged invoking of Rule 8D on the ground that no satisfaction as to incorrectness of the assessee’s claim of disallowance under section 14A of the Act was recorded by the Assessing Officer.
8 & 6064/Del/2013 AY: 2010-11 However, on perusal of the para-3.1 of assessment order we find that the Assessing Officer specifically asked to provide explanation vide order sheet entry dated 16/10/2012, about the working of the disallowance under section 14A made by the assessee. The assessee submitted working of disallowance amounting to Rs. 24,55,186/- in its written submission dated 17/11/2012. The Assessing Officer did not find this explanation of the assessee acceptable. This fact has been clearly recorded by the Assessing Officer. The relevant paragraph of the assessment order is reproduced as under: “3.1 The assessee has claimed exempt income of Rs.7,01,09,845/- being dividend on long term investment and current investment. During the course of assessment proceedings assessee was specifically asked vide order sheet entry dated 16.10.2012 about the working of disallowance u/s 14A read with rule 8D. The assessee company through its Authorized Representative has filed written submission dated 17.11.2012 and furnished working of disallowance u/s 14A, as per para 3 and its Annexure A and B and worked out disallowance at Rs. 24,55,186/- and stated that the same amount has already been offered in the computation of income as per return. The A.R. has further submitted written submission on 16.01.2013 wherein total disallowance has been worked out at Rs. 61,60,689/-. The explanation and offer of the assessee is not acceptable in view of the provisions of section 14A of the IT Act, 1961.”
After recording above dissatisfaction, the Assessing Officer invoked Rule 8D of the Income Tax Rules and computed the disallowances accordingly, therefore, in our view this ground of the assessee is not sustainable and accordingly we dismiss grounds No. 1 to 1.2 of the appeal of the assessee.
9 & 6064/Del/2013 AY: 2010-11 12. Further, since we have already held that satisfaction as to incorrectness of the assessee’s claim under section 14A has been duly recorded by the Assessing Officer, we are not considering the arguments of the learned Authorised Representative of the assessee whether the learned Commissioner of Income-tax (Appeals) could have recorded the said satisfaction as the issue is rendered only academic. Thus, ground No. 1.3 of the appeal is dismissed as infructuous.
In ground No. 1.4, the assessee has raised the issue that the disallowance as under Rule 8D2(iii) could be made by the Assessing Officer only after establishing/specifying the nexus of the expenditure with the earning of the exempt income. We find that, the assessee itself has accepted the fact of nexus of expenditure with the earning of the exempt income by disallowing a portion of the expenses suo motu, though not under Rule 8D, but albeit by adopting a different method, which the assessee thought to be reasonable. In such circumstances, in our opinion, no further action is required on the part of the Assessing Officer to establish the nexus of expenditure with the exempt income, when he has invoked the Rule 8D of the Income Tax Rules. Thus, the ground No. 1.4 of the appeal is also dismissed.
As regard to the ground No. 2 of the assessee’s appeal requesting to restrict the disallowance to the expenditure of Rs.37,19,979/-, we find that the assessee segregated total expenses under the profit and loss account as direct expenses related to finance activity and indirect expenses. The direct expenses of finance activity include expenses on legal and 10 & 6064/Del/2013 AY: 2010-11 professional charges of Rs.17,37,225/-. The assessee has not submitted detail of the expenses as how the same are related only to finance activity. In such circumstances, the claim of the assessee that disallowance cannot exceed Rs.37,19,979/-, is not tenable. The learned Commissioner of Income-tax (Appeals) has observed that in the year under consideration in this case, the Auditor approved a prescribed formula for allocating the expenses and, thus, the assesses quantified it to Rs.37,19,979/-, was not acceptable, as Rule 8D of the Income Tax Rules, does not subscribe to such bifurcations and same has been linked to a percent (0.5%) of average value of investment, accordingly, rejected the formula of bifurcations adopted by the assessee having no legal sanctity. In para-8.10 of the impugned order the learned Commissioner of Income-tax (Appeals) has further observed as under: “8.10 So far as the appellant’s another ground of appeal relating to the quantum of disallowance exceeding the actual claim of its expenses is concerned, the same is not true as the appellant has not considered the other notional and incidential expenses, viz., Director’s remuneration etc. which were definitely attributable to the generation of tax free dividend income. Therefore, this plea of the appellant is also rejected.”
In view of the discussion, we find no infirmity in the findings of the learned Commissioner of Income-tax (Appeals) on the issue in dispute.
The learned Authorised Representative has also taken plea that the disallowance under Rule 8D2(iii) may be restricted to 0.5% of the investment which actually have resulted in exempt 11 & 6064/Del/2013 AY: 2010-11 dividend income. We find that Hon’ble Delhi High Court in the case of ACB India Ltd Vs. ACIT (supra), it is held that only those investment which actually have resulted in exempt dividend income, have to be considered for the purpose of computing the disallowance as per Rule 8D of the Income-tax Rules. The assessee has given a computation of disallowance in view of the decision of the Hon’ble Delhi High Court in the case of ACB India Ltd (supra), on pages 232 and 233 of the paper book, working out the disallowances Rs. 41,97,833 /-. Since the details submitted by the assessee are not available on the record of the Assessing Officer, we respectfully following the above decision of the Hon’ble Delhi High Court, direct the Assessing Officer to compute the disallowance under Rule 8D(iii) of the Income-tax Rules at the rate of 0.5% of the investment which actually have resulted in exempt dividend income rather than 0.5% of the average of total investment. Thus, the ground of the assessee is partly allowed. 16. With regard to the ground of the Revenue’s appeal, we find that the learned Commissioner of Income-tax (Appeals) has decided the issue as under: “8.7. Keeping these financial results in mind, now, the AO's computation of disallowance u/s 14A is analyzed, as under: (a) The AO has observed that there are no directly attributable expenses in respect of tax free dividend income. The appellant has also reiterated the same. Therefore, as far as disallowance u/s 14A of the Act read with Rule 8D(2)(i) of the I.T. Rules is concerned, the same has been rightfully accepted as NIL.
12 & 6064/Del/2013 AY: 2010-11 (b) There has been a difference of opinion regarding the attributability of interest expenses in respect of tax free dividend income. This is the main bone of contention of the appellant company. The AO has attributed interest amounting to Rs. 10,61,78,431/- (entire interest expenses debited in P & L Account) as relatable to tax free dividend income of Rs.7.01 crores shown by the appellant, and following the Rule 8D(2)(ii) the disallowance has been computed at Rs. 6,83,66,201/-. On the other hand, the appellant very elaborately has given the complete details of its interest income and payment of interest as debited in the profit and loss account. The appellant has established that the activity of financing from which major portion of income amounting to Rs. 11.93 crores has been earned, the same has been earned through differential rate of interest in borrowing on which the interest amounting to Rs. 10.61 crores has been paid and advancing the same at a slightly higher rate of interest to the corporate entities, including its group companies. The appellant has categorically established the complete flow of funds from its borrowings at a lower rate of interest and their destination to different corporate entities at a slightly higher rate of interest. The details have been furnished on the basis of appellant's bank account with the Punjab National Bank through which all these funds have travelled. Therefore, the appellant has clearly established the nexus of interest expenses with its main activity of financing and there was not a single amount of interest bearing borrowings which could be related to the investments which yielded tax-free dividend income. On the other hand, the AO has not established any nexus of the interest bearing borrowings and consequent interest expenses with the investments resulting into tax-free dividend income. Similar issue has arisen in the appellant's own case in the AY 2006-07, wherein although Rule 8D was not into existence but no such attributability of interest expenditure relating to tax free dividend income was found at the level of Hon'ble ITAT. The Hon'ble ITAT has given categorical finding in the appellant's case as under:
13 & 6064/Del/2013 AY: 2010-11 “Nothing stopped the AO from determining the expenditure incurred in relation to the exempt income earned by the asses see. But for doing so, a "reasonable basis" had to be adopted. And the most reasonable basis, rather, the first reasonable basis for such determination can be none else than the nexus between the expenditure incurred and the exempt income earned. Now, evidently, the AO did not establish any such nexus between the expenditure incurred and the exempt income earned by the assessee company. Even the CIT(A), though he restricted the disallowance from Rs.47,33,200/- to Rs.16,54,531/-, did not establish any such nexus and it was merely observed that this amount related to the investment activity of the assessee company, without clarifying as to how it was found to be so.” In appellant's own case for AY 2009-10 also, no such finding was given by the AO, although Rule 8D was applied by the AO. There was no disallowance under Rule 8D(2)(ii) of the I.T. Rules during the preceding year.Therefore, in view of the various decisions as quoted by the appellant in its written submissions and the decision of Hon'ble ITAT in appellant's own case, no disallowance under Rule 8D(2)(ii) of the I.T. Rules is called for.
We find that the assessee has successfully demonstrated complete flow of funds from its borrowing at a lower interest rate to the destination to different corporate entities at a slightly higher rate of interest and, therefore, the nexus of the interest expenses with activity of financing has been substantiated by the assessee and there is not a single amount of interest-bearing borrowings has been found to be related to the investment, which yielded tax free dividend income. The Assessing Officer has failed to establish any nexus between the interest-bearing borrowed funds and the investment in assets yielding tax-free income.
In our opinion, the findings of the learned Commissioner of Income Tax (Appeals) on the issue in dispute is well reasoned and no interference is required on our side. Further, 14 ITA Nos. 5656 & 6064/Del/2013 AY: 2010-11 the Assessing Officer in the assessment year 2009-10, has also accepted the fact of having no nexus between the borrowed funds and the investment in assets yielding tax-free income and accordingly has not made any disallowance under Rule 8D2(ii) of the Act. Thus, the rule of consistency also demand that no disallowance under section Rule 8D2(ii) of the Act can be made in the year under consideration. In view of above, we uphold the findings of the learned Commissioner of Income-tax (Appeals) on the issue in dispute and the ground of the appeal of the Revenue is dismissed.
In the result, appeal of the assessee is partly allowed and appeal of the Revenue is dismissed. The decision is pronounced in the open court on 5th September, 2016.