BHARAT BHARI UDYOG NIGAM LTD.,KOLKATA vs. THE CIT, KOLKATA-4, KOLKATA

The captioned appeal filed by the assessee, pertaining to Assessment Year 2010-11, is directed against an order passed by the Commissioner of Income Tax, Kolkata-4, dated 31.03.2015.

The assessee has raised the following grounds of appeal: “1.The order passed by the Principal Commissioner of Income Tax u/s263 of the Income Tax Act, 1961, is arbitrary, erroneous, void, invalid and bad in law. 2.On the facts and in the circumstances of the case, the ld. Pr. CIT erred in holding that the A.O. had grossly erred in applying Section14A of the I.T. Act, 1961, read with Rule 8D(iii) of the I. T. Rules, 1962, and had thereby framed an order which was erroneous and prejudicial to the interest of revenue.

The brief facts qua the issue are that the assessee company is a PSU under Ministry of Heavy Industries and Public Enterprises. It is a Holding Company with 4 subsidiaries. As a Holding Company, it provides services to its subsidiaries in the area of financial management including disbursement of Government fund, engineering, technical, commercial and personnel disciplines and export of goods. The assessee also directly executes the export order and construction order. The assessee-company filed its return for the Assessment Year 2010-11 on 17.09.2010 declaring a total income of Rs.32,70,296/-. The return was processed U/s.143(1) on 22.07.2011. Later on, the assessee`s return was selected for scrutiny u/s.143(2) of the Act and the Assessing Officer completed the assessment by making addition u/s.14A read with Rule 8D at Rs.7,75,481/-. The assessee company has earned dividend income of Rs.7,67,404/- which is exempted, under the Income Tax Act. The Assessing Officer disallowed the expenditure in relation to the earning of exempted dividend income. The Assessing Officer observed that provision of Section 14A states that “for the purpose of computing the total income 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 the Act. Sub-section (2) of 14A states Page | 2 Bharat Bhari Udyog Nigam Ltd. Assessment Year: 2010-11 that 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 prescribed. The Assessing Officer after taking all the facts into consideration disallowed the following expenses under Rule 8D, which is as under: (i) Expenditure directly relating to exempt income Rs.7,981/- (ii) Amount of expenditure by way of interest Rs. Nil (iii) 0.5% of Average value of investment on which can Yield exempt(Dividend) Income is Rs.99,29,903/- The Assessing Officer observed that assessee has claimed total expenses under the head other expenses of Rs.84.54/- lakh in its profit and loss account during the year. After considering the expenses which are directly related with assessee’s normal business, the amount of Rs.7,67,500/- is disallowed by the Assessing Officer. This way, the Assessing Officer, computed the total disallowance under Rule 8D at Rs.7,75,481/- ( 7,67,500 +7981).

Subsequently, the ld. CIT has exercised his jurisdiction u/s 263 of the I.T. Act. The ld. CIT observed that the Assessing Officer computed a sum of Rs.99,29,903/- being ½% of average value of investment for the purpose of disallowance under section 14A of the I. T. Act Read with Rule 8D(2) of the I.T. Rules and the so computed amount was not ultimately added back in the computation of total income and therefore this resulted under assessment of income of Rs.99,29,903/-. Therefore, ld CIT noted that the order dated 28.09.2012 made by the Assessing Officer u/s 143(3) of the I.T. Page | 3 Bharat Bhari Udyog Nigam Ltd. Assessment Year: 2010-11 Act was erroneous and prejudicial to the interest of revenue. Therefore, ld CIT issued a notice, to the assessee company U/s 263 of the I. T Act, on 24.12.2014.

The assessee, in response to the notice of the CIT, replied that in the computation of total income, the Assessing Officer had calculated 0.5% of average value of investments which can yield exempt (dividend) income at Rs.99.29 lakhs. But the AO in his footnote in the computation, had clearly mentioned that he disallowed Rs.7,67,500/- being expenses not directly attributable to the taxable income. That is, as per AO amount of Rs.7,67,500/- was not attributable to the taxable income of the assessee therefore he disallowed the same. The assessee has claimed total expenses under the head ‘Other expenses’ of Rs.84.54 lakhs in its P & L A/c. The Assessing Officer on an independent analysis of the books of accounts, considering the nature of business of the assessee company and on a scrutiny of the Schedule “Other Expenses” amounting to Rs.88.54 lakhs figured out that out of total expenses of Rs.88.54 lakhs claimed in the P/L A/c., an amount of Rs.80.87 lakhs is directly attributable to earning of taxable income i.e. expenses which conveys a direct nexus with the taxable income and hence excluded the same in the computation of disallowance u/s 14A of the Act and thus arrived at a figure of Rs.7,67,500/- (88.54 – 80.87) to be disallowed under this provision. The Assessing Officer has consciously and having regard to the accounts of the assessee company arrived at the figures of Rs.80.87 lakhs which directly pertains to earning of taxable income and Rs.7.67 lakhs, being the remaining expenses which Page | 4 Bharat Bhari Udyog Nigam Ltd. Assessment Year: 2010-11 cannot be directly allocated to taxable income was disallowed u/s14A of the Act. The same is duly stated by a qualification note in the assessment order. Therefore, once the Assessing Officer had computed the expenses which has a direct bearing on the taxable income, no portion of such expense can be disallowed u/s14A.

However, the ld. CIT after going through the assessee’s reply, observed that submissions of the assessee company was not in accordance with the facts given in the assessment order. The ld. CIT observed that it was seen that the Assessing Officer while passing order u/s 143(3) of the I. T. Act had calculated 0.5% of Average value of investment which can yield exempt income (dividend) at Rs.99,29,903/- and disallowed a sum of Rs.7,75,481/- u/s 14A of the I.T. Act, after considering the other expenses of Rs.88.54 lakh, which was directly related with the assessee`s normal business. However, it was not clear that on which the Assessing Officer had figured out that out of Rs.88.54 lakh claimed in P & L Account as other expenses, an amount of Rs.80.97 lakhs is directly attributable to earning of taxable income(directly nexus with the taxable income) and difference of Rs.7,67,500/-(Rs.88.54 – Rs.80.87 lakh) related to exempt income. The ld. CIT also held that as per section 14A read with 8D (2) (iii) of the Income Tax Rules, it was evident that Assessing Officer had grossly erred in applying section 14A and the facts referred in the assessment order, and thereby framing an order which stand erroneous and prejudicial to the interest of revenue. Thereafter, the ld. CIT held that the assessment order framed by Page | 5 Bharat Bhari Udyog Nigam Ltd. Assessment Year: 2010-11 the AO deserves to be set aside and further he directed the AO, to recalculate the disallowance u/s 14A of the Act.

Not being satisfied with the order of CIT, the assessee is in appeal before us. The ld. Counsel for the assessee has submitted before us that Assessing Officer had disallowed Rs.7,67,500/, without any base. The Counsel pointed out that the detail of ‘other expenses’ of Rs.88.54 submitted by the assessee before the CIT should be read as 84.54 lakhs, because the assessee mentioned inadvertently in the written submissions before the CIT, the figure at Rs.88.54 lakhs therefore it should be read at Rs.84.54 lakhs for the purpose of subsequent discussion. The ld Counsel produced before us Schedule-19 of the Balance Sheet, which contains the details of ‘other expenses’ and explained us that in the said details of ‘other expenses’ of Rs.84.54 lakhs, not even a single expense relates to exempted income. That is, there was no any expenditure in these details (‘other expenses’ of Rs.84.54 lakhs) which is attributable to section 14A of the Act. The Assessing Officer had disallowed Rs.7,67,500/- based on conjecture and surmise. In the said detail of ‘other expenses’ of Rs.84.54 lakhs, the assessee has not shown Directors` Salary and staff salary who normally looks after the investment portfolio of the Company, therefore there is no any expenditure in the said detail of ‘other expenses’ which relate to exempted income. All expenses shown in the said detail of ‘other expenses’ relate to normal business of the assessee. Section 14A r.w.r. 8D talks about the expenses which relate to exempt income but in Page | 6 Bharat Bhari Udyog Nigam Ltd. Assessment Year: 2010-11 fact the expenses incurred by the assessee, which is shown in the Schedule 19 – ‘Other Expenses’, were related to the assessee’s normal business. Again the ld. Counsel has submitted that Schedule 19 – ‘Other Expenses’ which contains the details of expenses relating to assessee’s normal business and this Schedule does not contain any expenses which pertains to the exempt income. It does not contain even salary of the Directors or staff. The ld. Counsel also pointed out that Schedule 19 relating to ‘other expenses’ was available before the Assessing Officer, during the assessment proceedings and he has examined the details of ‘other expenses’ of Rs.84.54 lakhs. Therefore, the order passed by the Assessing Officer was neither erroneous nor prejudicial to the interest of the revenue. The ld. Counsel for the assessee relied on judgment of Hon`ble ITAT, Kolkata in the case of JCIT Vs. M/s. Pilani Investment & Industries Corpn. Ltd. in I.T.A No.653/Kol/2012 dated 4th February,2013, wherein it was held that once it is found that an expense is specifically relatable to a taxable income, as is the undisputed position in this case, no portion of such an expense can be disallowed u/s. 14A. The allocation of general expenses vis-i-vis tax exempt income and taxable income can only be made in respect of expenditure which cannot either be wholly allocated to taxable income, then or which cannot be wholly allocated to tax exempt income; the allocation can be made, even on the basis of formula set out in Rule 8D (2)(iii), in respect of such expenses which do not fall any of these categories. Page | 7 Bharat Bhari Udyog Nigam Ltd. Assessment Year: 2010-11 The ld. Counsel for the assessee also relied on judgment of Hon`ble ITAT, Kolkata in the case of Justice Sam P Bharucha Vs. ACIT, Mumbai in ITA No.3889/Mum/2011 dated 25th July 2012 wherein it was held that the AO shall determine the amount disallowable as per Rule 8D, if he, "is not satisfied with the correctness of the claim of the assessee" in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8D if he is not satisfied with the correctness of the assessee’s claim. To put it simply, the further disallowance u/s.14A is called for when the AO is not satisfied with the assessee’s claim of having incurred no expenditure or some amount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. lf the assessee proves before the AO that it incurred a particular expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. From the assessment order, it is observed that the Assessing Officer simply kept the assessee’s submissions on record without appreciating as to whether these were correct or not. He proceeded on the premise as if the disallowance as per Rule 8D is automatic irrespective of the genuineness of the assessee’s claim in respect of expenses incurred in relation to exempt income. It is an incorrect course adopted by the Page | 8 Bharat Bhari Udyog Nigam Ltd. Assessment Year: 2010-11 Assessing Officer. The correct sequence, in our considered opinion, for making any disallowance u/s.14A is to, firstly, examine the assessee’s claim of having incurred some expenditure or no expenditure in relation to exempt income if the Assessing Officer gets satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate. In the instant case, the authorities below have directly gone to the second stage of computing disallowance u/s.14A as per Rule 8D without rendering any opinion on the correctness or otherwise of the assessee’s claim in this regard. Therefore, no disallowance u/s 14A is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income.

On the other hand, ld DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

We have given a careful consideration to the rival submissions. The law with regard to exercise of jurisdiction u/s.263 of the Act on the ground that the AO failed to make enquiries which he ought to have made in the given circumstances of a case is well settled. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive Page | 9 Bharat Bhari Udyog Nigam Ltd. Assessment Year: 2010-11 in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income-tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word "erroneous" in section 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. We derive support for the proposition as stated above from the decision of the Hon’ble Delhi High Court in the case of Gee Vee Enterprises 99 ITR 375 (Del). Since in the present case the CIT has exercised jurisdiction u/s.263 of the Act on the ground that the AO while completing the assessment proceeding did not add the disallowance made by him U/s 14A. It is clear from the submissions and material available on record with regard to the disallowance U/s 14A, the assessee submitted the details of ‘Other expenses’ in Schedule-19 and the AO made the required inquiries in respect of amount of Rs.84.54 Lakhs. That is, during the assessment proceedings the assessee has submitted the details of ‘other expenses’ of Rs.84.54 lakhs and details relating to exempt income and the expenses incurred in relation to exempt income. The assessee had suo moto disallowed the expenses directly relating to exempt income at Rs.7,981/-. For making any disallowance u/s.14A is to, firstly, examine the assessee’s claim of having incurred some expenditure or no expenditure in relation to exempt income if the Assessing Officer gets satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when Page | 10