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Income Tax Appellate Tribunal, “A”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI RAVISH SOOD, JM
आदेश / O R D E R PER R.C.SHARMA (A.M): These are the appeals filed by Revenue against the order of CIT(A) for the assessment years 2004-2005 to 2009-2010 and the appeal filed 2 Ms. Aishwarya Rai Bachchan by assessee for A.Y.2004-05 in the matter of orders passed u/s.143(3) r.w.s. 147 / 250 / 143(3) of the IT Act. ITA NO.3791 & 3796/Mum/2013 (A.Y.2004-05 & 2005-06) 2. In these appeals, Revenue is aggrieved for reopening of assessment which was after four years from the end of the relevant assessment year. Facts in brief are that the assessee is a renowned model-cum-actress. For the assessment year 2004-05 the assessee filed her return of income on 01.11.2004 declaring total income at Rs.16,24,25,699/-. The Return of Income was accompanied by the audited financial statements along with annexures thereto and tax audit report u/s.44AB in Form No.3CB and 3CD. The return was processed u/s.143(1) of the Income Tax Act, 1961 wherein a demand of Rs. 76,88,239/- was raised. The Ld. AO in the intimation u/s 143(1) did not grant the relief of Rs.52, 83,630/- u/s.90 claimed by the assessee in her return of income. The assessee filed an application u/s.154 before the Ld. A.O seeking to rectify the intimation u/s.143(1) wherein the assessee claimed the relief u/s.90 of Rs.52,83,630/-. The assessee filed second application u/s 154 on 29.07.2005. The Ld. AO passed the order u/s.154 on 13.07.2005 rejecting the appellant's claim of relief u/s.90 amounting to Rs.52,83,630/- and also charged interest of Rs.76,882/- u/s.220(2).
In an appeal filed by assessee against the order passed u/s.154, the Ld. CIT (A) vide order dated 16.11.2005 directed the Ld. AO to allow the relief u/s 90 at Rs.49,19,740/- and held that the withholding of tax to the extent of Rs. 3,63,8871- is related to earlier assessment year and 3 Ms. Aishwarya Rai Bachchan therefore the claim of assessee is not allowable to the extent of TDS Certificate amounting to Rs.3,63,887/-.
The department filed appeal before the Hon 'ble ITAT and Hon 'ble ITAT vide order dated 21.11.2008 in IT A No. 48/MUM/2006 dismissed the departmental appeal.
Subsequently the case was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued by the Ld. AO. In response to the said notices the assessee’s representative appeared before the Ld. AO and filed various details required by the Ld. AO. The first letter is dated 20,01. 2006 wherein the assessee filed the details of foreign professional receipts brought into India, the details of bank account including EEFC account maintained by the assessee, copy of bank statements wherein foreign professional receipts were credited. The second letter is dated 27.06.2006 wherein the assessee once again filed the details of 17 foreign inward remittances brought into India by the assessee, the details of TDS on foreign professional receipts, in two different formats. The third letter was filed before the Ld. AO on 17.11.2006 enclosing therewith 17 original certificates in Form No. 10H. All the documents filed before AO clearly show that the foreign professional receipts were offered to tax by the assessee at net off withholding tax in the countries situated outside India. 6.The regular assessment u/s 143(3) was completed on 29.12.2006 determining the total income at Rs. 17,55,47,418/- after making the following additions:-
4 Ms. Aishwarya Rai Bachchan 1. Disallowance of deduction u/s 80RR amounting to Rs.1, 18,30,848/-. 2. Disallowance of Short term capital loss of Rs.2, 77,066/- by invoking the provisions of section 94(7). 3. Estimated disallowance @20% out of motor car expenses, depreciation on motor car, telephone expenses, tours & travel expense, business promotion expenses and dress and apparels expenses.
The Ld. CIT(A) vide appellate order dated 13.07.2007 allowed the deduction u/s.80RR in respect of foreign professional receipts from stage shows and acting in the film (Bride and Prejudice) and confirmed the disallowance in respect of professional receipts from product endorsement (Brand Ambassador). The Ld. CIT (A) also confirmed the addition of Rs.2,77,066/- made by the A.O. by invoking the provisions of section 94(7). The Ld. CIT (A) also restricted the estimated disallowance to the extent of 10% instead of 20% made by the A.O.
The department filed appeal challenging the action of CIT (A) in grating the deduction u/s 80RR in respect of foreign professional receipts from stage shows and acting in the film (Bride and Prejudice). The assessee filed CO challenging the Ld. CIT (A) 's action in not granting deduction u/s 80RR in respect of foreign professional receipts from product endorsement (Brand Ambassador) as well as the Ld. CIT(A)'s action in not deleting the entire estimated 'disallowances made by the A.O. 9. The Hon'ble ITAT vide order dated 08.02.2010 in and CO No 55/Mum/2007 has allowed the deduction u/s 80RR on the foreign professional receipts from product endorsement, stage shows and acting in film and consequently allowed the grounds relating to deduction u/s 5 ITA Nos._3791,3795,3796,3814-3816/2013 Ms. Aishwarya Rai Bachchan 80RR of the CO filed by the assessee and dismissed the Revenue's grounds relating to deduction u/s 80RR. The Hon'ble ITAT also restricted the estimated disallowance made by the A.O to Rs.1,00,000/- as against 10% restricted by the Ld. CIT(A). 10. Subsequently the assessment was reopened u/s 147 of the 1. T Act 1961 by issue of notice u/s 148 dated 17.03.2011. The assessee filed return of income in response to notice u/s 148 of the I.T Act 1961 on 18.04.2011 declaring total income of Rs. 16,31,42,722/-. The Ld. A.O in the impugned order has determined the total income at Rs. 16,88,55,364/- after making the following additions / disallowance. 1. Addition of Rs. 52, 83, 630/- on account of withholding of tax in the countries outside India on foreign professional receipts. 2. Disallowance ofRs.12,21,556/- uls.14A read with Rule8D.
Aggrieved by the Ld. A.O's action in reopening the assessment and making the above additions / disallowance the assessee preferred an appeal before the CIT(A) and submitted as under:-
Re: A.O's action of reopening the assessment u/s. 147 of the Income Tax Act, 1961 (Ground Nos. 1 & 2) The Ld. AO reopened the assessment u/s. 147 by issue of notice u/s. 148 dated 17/0312011 on the ground that the tax deducted at source in the countries outside India was not included in the income of the appellant. The notice dated 17/0312011 issued u/s. 148 seeking to reopen the assessment u/s. 147 is illegal, without and 1 or in excess of jurisdiction, void and otherwise and in law. It is submitted that the appellant has offered to tax the professional fees derived by her from persons resident outside India net of tax in view of the decision of the Ld. CIT(A) in the 6 Ms. Aishwarya Rai Bachchan appellant's own case for the A.Y 2000-01. The copy of the order dated 2010112004 passed by the Ld. CIT (A) for the' A.Y 2000- 01 is placed at page No.25,39 of the paper book It is submitted that in the Income & Expenditure Account filed along with return of income the appellant has credited an amount of Rs. 7,37,25,6561 - on account of professional fees from foreign sources which is net of tax (Page no. 47 of the paper book). In the said Income and Expenditure account the gross professional receipt was shown at Rs. 8,98,84,130/- in respect of services rendered in India (Page No. 47 of the paper book). In the capital account filed along with the return of income the appellant debited tax deducted at source of Rs. 65,04,630/- in respect of tax deducted in India on professional fees (Page No. 48 of paper book). However, in the capital account the tax deducted at source in the countries outside India amounting to Rs.52,83,630/- was not debited but the same was claimed separately under the head "TDS" in the computation of total Income filed along with the return of Income (Page No. 44 and 45 of paper book). It is therefore submitted that the appellant had disclosed foreign professional fees net of tax in her return of income, which is established from her computation of total income, Income & Expenditure Account and Capital Account field along with the return of income. During the course of original assessment proceedings the appellant filed before the Ld. AO the. copy of bank statements wherein' the foreign professional receipts of Rs. 7,37,25,656/- - were credited and details of professional receipt in convertible foreign exchange, which clearly established that foreign professional fees was offered to tax at net of withholding taxes abroad. Further along with return of income the appellant filed the withholding tax certificates in respect of Tax Deducted at Source in the countries outside India. All these evidences filed along with return of income and 1 or filed during the original assessment proceedings clearly established the fact that the appellant has offered to tax the professional fees received by her in convertible foreign exchange from the person's resident outside India at net of tax which is accepted by the Ld. AO in the original assessment proceedings. The fact that the foreign professional receipts was disclosed in the return of income by the appellant at net of tax are fully and truly disclosed in the return of income and or during the course of original assessment proceedings and therefore the assessment reopened by the Ld. AD by invoking the provisions of section 147 is clearly barred by the limitation in view of the first proviso to section 147 of the Income Tax Act, 1961.
The action of the Ld. A.O is based on mere change of opinion and therefore the same cannot be sustained. It may be noted that the Ld. A.O must ensure that he has significant reasons to believe that the income escaped assessment for the fault on the part of the assessee and there is essentially failure of the assessee to disclose the income that affects the assessment proceedings. The judiciary has time and again thrown light on the meaning of the term 'reason to believe '. The standard laid down has been that of a reasonable person, who will act on a reasonable ground and come to a rational conclusion. The very important conclusion that has been time and again laid drawn by the judiciaries is that mere change of opinion will not give the officer reason to reopen the assessment proceedings. If the Ld. A.O forms an opinion during the original assessment proceedings on the basis of material facts and subsequently finds it to be erroneous,' it is not a valid reason under the law to reopen assessment. If at the time of the original proceedings, the A.O has examined all the facts on record and the belief on his part that there was some error in the decision and used this as a basis for reopening of the proceedings, the reopening cannot be sustained. Further the term "reason to believe" is not a subjective satisfaction of the A.O,. it means an objective view that is required to be disclosed in a particular case. The term is to be interpreted as a "reason to believe and not a "reason to suspect". This means that the mere instinct of the Ld. A.O that there has been some error in the original assessment cannot be the reason to reopen assessment under section 147 of the Income Tax Act 1961. It has to be noted that the section 34 of the Income tax Act, 1922 which dealt with reopening of assessments proceedings, made use of the word "definite information" this was amended in 1948. Non usage of these words however does not mean that the information used as a basis for reopening can be vague. The A.O. is expected to act mechanically and deduce what amounted to non-disclosure, when he makes our case for re-opening of assessment proceedings. The use of the words "change in opinion” is therefore to act as an internal check of exercise the powers of the A.O. It has been observed that the function of the assessing officer is to administer the Act with solicitude for public treasury and with fairness of the taxpayers. If the conclusive and final judicial decision of the of the Hon'ble ITAT, Mumbai in the appellant own case is holding the field then the identical issue cannot be a subject matter of the administrative decision under section 147 and 148 of the Income Tax Act, 1961 and therefore 8 Ms. Aishwarya Rai Bachchan the impugned order under section 143(3) r.w.s.147 and reasons recorded in support thereof is liable to be quashed and set aside. It is to be noted that the reasons recorded by the AD as stated in the assessment order has been picked up by the Ld. A 0 from the details filed by the assessee along with the return of income and during the course of regular assessment proceedings. In the above background without prejudice to our contention that reopening is based on change of opinion, we reproduce below the first proviso to Sec. 147:- "Provided that where an assessment under sub-section(3) of Section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Sec. 139 or in response to a notice, issued under sub-section (1) of Sec. 142 or Sec.148 or to disclose fully and truly all material facts necessary for his assessment, for the assessment year. " In the instant case, the original assessment u/s.143(3) was completed on 29.12.2006 and there was no failure on the part of the appellant to disclose fully and truly all material facts necessary for its assessment, for the assessment year 2004-05 Therefore, no action can be taken u / s.147 after the expiry of four years from the end of relevant assessment year. It is therefore, submitted that the time limit for initiation of action u/s.147 has expired on 31.03.2009 and in the instant case the notice u/s.148 has been issued on 17. 03.2011. Therefore, it is submitted that the issue of notice u / s.148 and the consequent assessment u/ s.143(3) r. w.s, 147 are illegal as the same is barred by limitation in view of the first proviso to Sec. 147 and therefore, the same is liable to be quashed. This proposition is duly supported by following the decisions of the Hon'ble jurisdictional High Court.
IPCA Laboratories Ltd., vs. Gajanand Meena, DCIT & Others (No.2) reported in 251 ITR 416.
ICICI Bank Ltd., vs. K.J. Rao and another reported in 268 ITR 203 9 ITA Nos._3791,3795,3796,3814-3816/2013 Ms. Aishwarya Rai Bachchan 3. Hindustan Lever Ltd., vs. R.B.Wadkar, ACIT and others (No.1) reported in 268 ITR 332 4. Devidayal Rolling Mill and Another vs. Y.R.Saini, ACIT and others reported in 285 ITR 514 In view of the above provisions of law and decisions of the jurisdictional High Court, it is respectfully prayed before your Honour to quash the impugned order passed u/s.143(3)r.w.s.147 of the Income Tax Act.
On merit, AO made an addition of Rs.52,83,630/- in the assessment year 2004-2005 on account of tax deducted at source in the countries outside India.
By the impugned order CIT(A) quashed the reopening after observing as under:- The AO reopened the assessment u/s.147 by issue of notice u/s.148 dated 17/03/2011 on the ground that the tax deducted at source in the countries outside India was not included in the income of the appellant. The appellant has offered to tax the professional fees derived by her from persons resident outside India net of tax in view of the decision of the Ld. CIT(A) in the appellant's own case for the A.Y.2000-01. In the Income & Expenditure Account filed along with return of income the appellant has credited an amount of Rs.7,3 7 ,25,656/- on account of professional fees from foreign sources which is net of tax. In the said Income and Expenditure account the gross professional receipt was shown at Rs.8,98,84,130/- in respect of services rendered in India. In the capital account filed along with 'the return of income the appellant debited' tax deducted at source of Rs.65,04,630/- in respect of tax deducted in India on professional fees, However, in the capital account the tax deducted at source in the countries outside India amounting to Rs.52,83,630/- was not debited but the same was claimed separately under the head "TDS" in the computation of total Income filed along with the return of Income. Therefore, the appellant had disclosed foreign professional fees net of tax in her return of income, which is established from her computation of total income, Income & Expenditure Account and capital 10 Ms. Aishwarya Rai Bachchan Account field along with the return of income. During the course of original assessment proceedings the appellant filed before the AO the copy of bank statements wherein the foreign professional receipts of Rs.7,37,25,656/- were credited and details of professional receipt in convertible foreign exchange, which clearly established that foreign professional fees was offered to tax at net of withholding taxes abroad. Further along with return of income the appellant filed the withholding tax certificates in respect of Tax Deducted at Source in the countries outside India. All these evidences filed along with return of income and/ or filed during the original assessment proceedings clearly established the fact that the appellant has offered to tax the professional fees received by her in convertible foreign exchange from the person's resident outside India at net of tax which is accepted by the AO in the original assessment proceedings. The fact that the foreign professional receipts was disclosed in the return of income by the appellant at net of tax are fully and truly disclosed in the return of income and or during the course of original assessment proceedings. The action of the A.O. is based on mere change of opinion and therefore the same cannot be sustained. It may be noted that the A.O. must ensure that he has significant reasons to believe that the income escaped assessment for the fault on the part of the assessee and there is essentially failure of the assessee to disclose the income that affects the assessment proceedings. The judiciary has time and again thrown light on the meaning of the term 'reason to believe'. The standard laid down has been that of a reasonable person, who will act on a reasonable ground and come to a rational conclusion. The very important conclusion that has been time and again laid drawn by the judiciaries is that mere change of opinion will not give Assessing Officer to reason to reopen the assessment proceedings. If the A.O.' forms an opinion during the original assessment proceedings on the basis of material facts and subsequently finds it to be erroneous; it is not a valid reason under the law to reopen assessment. If at the time of the original proceedings, the A.O has examined the facts on record and the belief on his part that there was some error in the decision and used this as a basis for reopening of the proceedings, the reopening cannot be sustained. Further the term "reason to believe" is not a subjective satisfaction of the A.O; it means an objective view that is required to be disclosed in a particular case. The term is to be 11 Ms. Aishwarya Rai Bachchan interpreted as a "reason to believe" and not a "reason to suspect". This means that the mere instinct of the A.O. that there has been some error in the original assessment cannot be the reason to reopen assessment under section 147 of the Income Tax Act 1961. It is to be noted that the reasons recorded by the A.O. as stated in the assessment order has been picked up by the A.O. from the details filed by the assessee along with the return of income and during the course of regular assessment proceedings. In the instant case, the original assessment u/s.143 (3) was completed on 29.12.2006 and there was no failure on the part of the appellant to disclose fully and truly all material facts necessary for its assessment, for the assessment year 2004-05. Therefore, no action can be taken u/s.147 after the expiry of four years from the end of relevant assessment year. Therefore, the time limit for initiation of action u/s.147 has expired on 31.03.2009 and in the instant case the notice u/s.148 'has been issued on 17.03.2011. Therefore, the issue of notice u/s.148 and the consequent assessment u/s.143(3) r.w.s. 147 are illegal as the same is barred by limitation in view of the first proviso to Sec.147. However, the case requires to be adjudicated on merit also. Therefore, I proceed to the next ground of appeal.
14. Assessments for 2004-05 to 2007-08 have been reopened on the ground that gross foreign income should be taxed and not net foreign income and for assessment in all these years additions were also made u/s.14A. In the Assessment Years 2008-09 and 2009-10 additions have been made u/s.14A.
We have considered rival contentions and gone through the orders of authorities below and the materials placed before us. From the record we found that issue of taxing net professional fees was raised by assessee first time in AY 2000-01. ClT(A) had accepted assessee's claim vide order dated 21.01.2004. In an appeal filed before the ITAT, ITAT dismisses departments appeal vide order dated 13.05.2007.
12 Ms. Aishwarya Rai Bachchan 16. In respect of assessment year 2004-2005 to 2007-2008, assessments were completed under scrutiny u/s.143(3). In the assessment year 2004- 2005, scrutiny assessment was completed on 29/12/2006. Scrutiny assessment for 2005-2006 completed on 05.02.2008. Scrutiny assessment for 2006-2007 completed on 30.12.2008 and Scrutiny assessment for 2007-2008 completed on 20.11.2009.
We found that in all the years under consideration, details of foreign income have been filed for all years in support of the claim of deduction u/s 80RR. Assessing Officer while completing the above assessment was fully aware of the claim and has not made any addition inspite of the fact that he has consciously granted credit of the foreign TDS in view of the order for the Asst Year 2000-10 as will be seen from the note on credit for taxes at the end of the original and also the reopened assessment orders.
In the assessment years 2004-2005, 2005-2006, CIT(A) has held the reopening as invalid, illegal and barred by limitation not only because of change of opinion but also on the plea that reopening was beyond 4 years and there is no failure on the part of the assessee to disclose fully and truly all materials facts necessary for assessment. He has also confirmed that the claim of the assessee is based on its order for the Asst. Year 2000-01. He further observed that the reasons for reopening do not allege any failure on the part of the assessee, hence the assessment cannot be reopened beyond 4 years. The CIT(A) further observed that 14A disallowance is not a part of the reasons for reopening for any assessment year.
13 Ms. Aishwarya Rai Bachchan 19. In the assessment year 2006-07 and 2007-08, the CIT(A) has held that reopening was merely on change of opinion since the AO has consciously allowed the claim of foreign TDS in the original assessment framed u/s.143(3). However in the assessment year 2006-07 in respect of 14A the Assessing Officer has made a specific query and thereafter made no disallowance in the original assessment.
In the assessment year 2008-09 and 2009-10 after having a detailed working, the CIT(A) has worked out the disallowance u/s.14A on the basis of a ratio of expenses which may be considered as partly relatable to exempt income and the taxable and tax free income.
From the record we found that during the course of original assessment all materials were filed before the AO, such as bank statements filed, details of professional receipts in convertible foreign exchange filed, details of withholding tax filed, and details of claim for TDS filed which claim was rejected in 143(1) assessment and the matter travelled to Tribunal against the order u/s 154. Order of CIT(A) is dt. 13/01/2007 and order of ITAT is dt. 08/02/2010.
Learned AR relied on the following judicial pronouncements with regard to disallowance made u/s.14A. Maxopp Investment ltd Vs.ClT (347 ITR 272t the Hon'ble Delhi High Court has expressed the view that the Assessing Officer has to first reject the claim of the assessee with regard to the extent of expenditure by having regard to the accounts of the assessee and such rejection must be for disclosed cogent reasons. It is only then that the question of determination of expenditure u/s 14A by the assessing officer would arise.
14 Ms. Aishwarya Rai Bachchan DCIT vs. Jindal Photo Ltd. (Delhi ITAT) - Held that Rule 8D r.ws. 14A(2) can be invoked only 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 expenditure incurred" in relation to tax-free income. The burden is on the Assessing Officer to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance under section 14A. There cannot be any presumption that the assessee must hove incurred expenditure to earn tax free income. i. Justice Sam Bharucha vs. ACIT (lTAT Mumbai) - No 14A disallowance in absence of "live nexus" between expenditure & tax-free income The assessee earned tax-free income from shares and units and claimed that he had not incurred any expenditure on earning the tax-free income and so no disallowance u/s 14A was permissible. The AO & ClT(A} rejected the claim and disallowed Rs. 2.26 lakhs u/s 14A as expenditure incurred to earn the tax-free income. On appeal by the assessee to the Tribunal, HELD: 5. 14A has within it implicit notion of apportionment in cases where expenditure is incurred for composite/indivisible activities in which taxable and non-taxable income is received. But when it is possible to determine the actual expenditure in relation to exempt income or when no expenditure has been incurred in relation to exempt income, then the principle of apportionment embedded in s. 14 A has no application. For s. 14A to apply, there should be a proximate relationship between the expenditure and the tax-free income. If the assessee claims that no expenditure has been incurred for earning the exempt income, it is for the AO to determine as to whether the assessee had incurred any expenditure in relation to the tax- free income and, if so, to quantify the extent of disallowance. In order to disallow the expenditure u/s 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the tax-free income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made u/s 14A merely because some tax exempt income is received by the assessee. On facts, from the details of the expenditure, it is clear that the 15 Ms. Aishwarya Rai Bachchan expenditure incurred by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and establishment for earning the exempt income. The AO has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. Consequently, s. 14A disallowance is not permissible (Pawan Kumar Parmeshwarlal (ITAT Mumbai) & Auchtel Products [lTAT Mumbai] followed). ii. Auchtel Products ltd vs ACIT (ITAT Mumbai) 08-03-12, AY 08-09 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. If 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 AO 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 AO. 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 AO gets satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the AO 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 80 will operate. Ill. CIT vs. K. Raheja Corporation Pvt Ltd (Bombay High Court) August, 2011 No disallowance of interest on borrowed funds, u/s. 14A, if AO does not show nexus between borrowed funds & tax-free investment. In AY 2000-01 the assessee had investments in shares & mutual funds of Rs. 20 crores on which it earned tax-free dividend of Rs. 13.35 lakhs. The assessee 16 Ms. Aishwarya Rai Bachchan also had borrowed funds on which it claimed deduction of interest of Rs. 8.70 crores. The AO disallowed interest of Rs.2.79 crores on the ground that it was relatable to earning tax- free dividend. The Tribunal deleted the disallowance on the ground that the investments had been made out of the assessee's own funds and not out of the borrowed funds. The department filed an appeal before the High Court. HELD dismissing the appeal: Counsel for the Revenue could not point as to how interest on borrowed funds to the extent of RS.2.79 crores was attributable to earning dividend income which are exempt u/s 10(33) of the Act. Therefore, in the absence of any material or basis to hold that the interest expenditure directly or indirectly was attributable for earning the dividend income, the decision of the Tribunal in deleting the disallowance of interest made u/s 14A cannot be faulted. iv. Wallfort Shares & Stock Brokers Ltd- vs- I.T.O. 310 ITR 421 (Bom) In this case, the assessee purchased units of a mutual fund in response to a public advt. on which it earned tax free dividend income of Rs.1.82 cr. Within few days, it also sold the said units by way of redemption which resulted in loss of Rs.2.09 cr. While computing the total income, it claimed exemption in respect of dividend income u/s 10(33) and loss on sale of units was claimed as business loss to be set off against other income. The AO/ClT(A) rejected the claim of assessee in respect of loss. However, the Tribunal accepted the claim. On further appeal, the revenue raised various contentions which inter alia included an alternate contention that loss on sale of units constituted expenditure in relation to income not forming part of total income and therefore, the same was disallowable u/s 14A. Rejecting the alternate contention, the Hon'ble High Court held as under: '57. The alternative argument of the Revenue is that the loss arising from the transaction in question is liable to be treated as an expenditure incurred for earning the tax free income and hence disallowable under s. 14A of the IT Act. There is no merit in this contention. Sec. 14A deals with the expenditure incurred for earning tax free income. Admittedly, no expenditure is incurred in purchasing the dividend bearing units. It is only because the units are sold at a loss immediately after receiving the dividend income, the Revenue wants to treat the loss as a deemed expenditure incurred for earning tax free dividend income. What s. 14A contemplates is the expenditure actually incurred for earning tax free income and not assumed 17 Ms. Aishwarya Rai Bachchan expenditure or deemed expenditure. In these circumstances, the decision of the Tribunal in rejecting the alternate argument of the Revenue cannot be faulted.' The above view has been upheld, on appeal, by the Hon'ble Supreme Court vide judgment dated 6.7.2010 (not yet reported) by holding at page 31 as under: "For attracting Section 14A, there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Pay-back or return of investment is not such proximate cause, hence, Section 14A is not applicable in the present case. Thus, in the absence of such proximate cause for disallowance, Section 14A cannot be invoked." v. CIT Vs. Gujarat Power Corporation (Gujarat HC)- The assessee had demonstrated that a majority of the investment in tax-free security were made before the borrowing. The Assessee had other sources of investment and that no part of the borrowed fund could be stated to have been diverted to earn tax free income. As borrowed funds were not used for earning tax-free income, applying s. 14A was not justified. vi. DCIT vs. Maharashtra Seamless Ltd. (ITAT Delhi) -In the absence of anything brought by the AO to rebut the assessee's stand that the investment in the tax free bonds had been made out of the own funds, no disallowance u/s.14A could be made. vii. CIT v Winsome Textile Industries Limited 319 ITR 204, the court decided that when shares were acquired by way of own fund and no interest incurred as there was no borrowed fund, then there cannot be any disallowance under section 14A of the Income Tax Act, 1961. viii. Rajasthan State Warehousing Corp. vs. CIT [242 ITR 450 (2000), the Supreme Court reversing the decision of the High Court held that in view of the fact that income from various ventures was earned in the course of one indivisible business, apportionment of the expenditure and allowing deduction of only that proportion of it which was referable to taxable income was unsustainable. ix. CIT vs. Hero Cycles (P & H High Court) Even under Rule 8D of S. 14A, disallowance can be made only if there is actual nexus between tax-free income and expenditure The assessee earned dividend income on shares which was exempt from tax. The AO took the view that the investment in shares was made 18 Ms. Aishwarya Rai Bachchan out of borrowed funds on which interest expenditure was incurred and consequently made a disallowance u/s 14A. This was partly upheld by the ClT(A). On further appeal by the assessee, the Tribunal deleted the disallowance by noting that the assessee had proved that the investment in shares was made out of non-interest bearing funds. It held that unless there was evidence to show that the interest - bearing funds had been invested in the tax - free investments and the nexus was established by the Revenue, s. 14A could not be applied on mere presumption. The Revenue appealed to the High Court and claimed that in view of s. 14A (2) and Rule 8D (1) (b), a disallowance could be made even if the assessee claimed that no expenditure had been incurred in respect of the tax - free income. HELD, dismissing the appeal: i. If the investment in the shares is out of the non-interest bearing funds, disallowance u/s 14A is not sustainable; ii. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted; iii. Disallowance u/s 14A requires a finding of incurring of expenditure. If it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A cannot stand iv. The contention of the revenue even if the assessee has made investments in shares out of its own funds, the said own funds are merged with the borrowed funds in a common kitty and, therefore, disallowance u/s 14A can be made is also not justified. x. DCIT vs. Jindal Photo Ltd. (Delhi ITAT) : Held that Rule 8D r. w.s. 14A(2) can be invoked only 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 expenditure incurred" in relation to tax-free income. The burden is on the Assessing Officer to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance under section 14A. There cannot be any presumption that the assessee must have incurred expenditure to earn tax free income. xi. "ACIT v. Eicher Ltd." 01 TIJ 369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s. 14A of IT Act.
19 Ms. Aishwarya Rai Bachchan xii. "Maruti Udyog v. DCIT 92 ITD 119 (Del.], it has been held that before making any disallowance u/s. 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. DCIT vs. Jindal Photo Ltd. (Delhi ITAT)' For s. 14A disallowance, even under Rule 8D, onus on AO to show nexus between expenditure & tax-free income In AY 2007-08 the assessee earned exempt dividend income of Rs. 17,97,010 in respect of mutual fund investments and made a suo moto disallowance of RS.173038 u/s 14A. The AO applied Rule 8D and computed the disallowance at Rs.32,18,475. The CIT (A) deleted the disallowance made by the AO. On appeal by the department, HELD dismissing the appeal: (i) The AO applied Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses as adopted by the assessee. The assessee had maintained separate books of account for each unit & HO. Common expenses incurred at the head office and the branches were attributed to all the units including the HO. Investment in mutual funds, which gave rise to exempt dividend income, was done through the HO. It was the case of the assessee that to earn such dividend income, no direct expenditure was required and no expenses were incurred to make investment of surplus amounts in mutual funds. The suo moto disallowance was made keeping in consideration s.14A; (ii) Rule 8D r.w.s. 14A(2) can be invoked only if the AO "having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred" in relation to tax-free income. However, the assessment order did not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee. As such, Rule 8D was not appropriately applied by the AO. The AO merely made an ad hoc disallowance. The onus was on the AO to establish that expenditure was incurred to earn tax-free income. This onus has not been discharged. S. 14A requires a clear finding of incurring of expenditure and no disallowance can be made on the basis of presumptions (CIT vs. Hero Cycles 323 ITR 518 (P&H). The burden is on the AO to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance u/s14A (ACIT vs. Eicher Ltd 101 DJ (Del) 369). Before making any 20 ITA Nos._3791,3795,3796,3814-3816/2013 Ms. Aishwarya Rai Bachchan disallowance u/s14A, the onus to establish the nexus of the same with the exempt income, is on the revenue (Maruti Udyog vs. DCIT 92 ITD 119 (Del)). There is be no presumption that the assessee must have incurred expenditure to earn tax free income (Wimco Seedlings vs. DCIT 107 ITD 267 (Del.)(TM)).
While framing assessment for assessment year 2004-05 u/s.143(3) r.w.s.147, the AO made addition of Rs.52,83,630/- on account of tax deducted at source in the countries outside India.
Facts in brief are that the assessee has filed her return of income in response to notice issued u/s.148 declaring total income at Rs.16,31,42,722/-, which is the finally assessed income after giving effect to the order passed by the Hon'ble ITAT. The A.O. in the assessment order has made an addition of Rs.52,83,630/- on account of Tax deducted at source in the countries outside India. The A.O. has alleged that during the course of assessment proceedings for A.Y.2008-09 it was detected that the appellant has suppressed foreign earning and on being confronted, she admitted that the she has not disclosed the entire foreign receipts but had declared in her return of income only the foreign earning net of tax. The fact remains that the assessee was offering foreign professional receipts net of withholding of taxes abroad was duly declared in the return of income for the A.Y.2004-05, the details of which were also filed during the course of assessment proceedings. The issue as to whether the foreign professional receipts is assessable at gross or net of tax came up for consideration before the Id. CIT (A) in assessee's own 21 Ms. Aishwarya Rai Bachchan case for the A.Y. 2000-01 and the Id. CIT (A) vide his Appellate Order dated 20/01/2004 has decided the issue in para 5.3 and 5.4 as under:- '5.3 I have carefully considered the facts of the case and the legal issues involved in this as rightly held by the Hon'ble Jurisdictional High Court in the case of CIT Vs. Late Tulsidas Kilachand reported in 210 ITR 844 as well as by the Hon'ble MP High Court in the case of CITvs. Yawar Rashid and Others reported in 218 ITR 699, the tax deducted at source outside India relating to foreign income is not part of total income. In the above referred decision of Hon'ble High Court of Madhya Pradesh, the decision of Bombay High Court in the case of CIT vs. Late Tulsidas Kilachand has been followed and the Hon'ble High Court has observed as under: "According to section 5 of the Income-tax Act, 1961, the total income of the previous year of the assessee who is a resident in India includes all income from whatever source, i.e., which is received or deemed to be received in' India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year. A distinction has to be made among the three clauses of section 5 of the Act. Clause (c) of Section 5 is different from both clauses (a) and (b) of section 5. In clauses (a) and (b), the words used are "is received or is deemed to be received or accrues or arises or is deemed to accrue or arise in India in Clause (c) is in the present tense and makes it clear that the actual income which accrues or arises to him from outside India shall be counted, i.e. the gross income in clause (c) is not to be counted, but actual income which is received at the hands of the assessee, is to be counted. Section 198 states how tax deducted should be included in the gross income under the various provisions of the Income Tax Act. There is no inclusion under section 198 of the Act of the sums deducted at source abroad.' There is no provision which mandates that if any tax has been deducted at source abroad then that amount should also be computed for the purpose of arriving at the gross total income of the assessee for tax liability. A harmonious reading of section 5 and 91 shows that if any income accrues or arises to any India, resident, from abroad and it does not fall in clause (c) under section 5(1) which talks about the total income, then there is no question of claiming the benefit of section 91 of the Income tax act of double taxation of that income. Hence, tax deducted at source outside India from foreign dividends and interest income is not part of total income ".
5.4.In view of the above decisions, I am inclined to agree with the AR that the tax deduced abroad cannot be part of total income in India and therefore, the Assessing Officer is directed to exclude the amount of tax deducted in UK. and Canada from the total income of the appellant.
We also found that since the Id. CIT(A) has held that foreign professional receipts is assessable net of tax in assessee's own case for the A.Y:2000-01 vide order dated 20/01/2004 the appellant offered the foreign professional receipts net of tax in her return of income from the assessment year 2004-05 onwards. Further, Hon'ble ITAT has upheld the above findings of the Id. CIT(A) to the effect that foreign professional receipts is assessable net of tax vide order dated 13.05.2007 with the following observation in para 13. We have considered the rival submissions, perused the materials on record and have gone through the orders of authorities below and judgments cited by both sides. As per the Judgments of Hon'ble Apex Court rendered in the case of Goetze (India) Ltd. (supra), power of the Assessing Officers is held to be restricted; but it is observed by Hon'ble Apex Court in the same judgment that this judgment does not impinge the power of the Tribunal ul s. 254. We, therefore, admit this claim of the assessee by respectfully following the Judgement of Hon'ble Apex Court rendered in the case of NTPC LTD.(Supra) because facts are on record; since, claim was filed by the assessee before the Assessing Officer before completion of the assessment order. On merit, we find that this issue has been decided by learned CIT(A) by following various judgements relied upon by learned counsel of the assessee before him as noted by us as above i.e. Judgments in the case of Tulsidas Kilachand (supra) also in the case of Yawar Rashid (supra) and Nadir Rashid (supra). Following these judgments, we uphold the order of learned CIT(A) in principle but to verify the claim of the assessee that TDS was deducted in foreign countries and income returned by the assessee was inclusive of this TDS amount, we feel that for this limited purpose of verifying this contention of the assessee this matter 23 ITA Nos._3791,3795,3796,3814-3816/2013 Ms. Aishwarya Rai Bachchan should go back to the file of the Assessing Officer; and hence, we restore this matter back to the file of the Assessing Officer for the limited purpose of verifying the facts and if it is found that the contention of the assessee is correct, amount of tax deducted at source in foreign countries should not be included in the income of the assessee. The Assessing Officer should pass necessary order as per law after verifying this factual aspect and after providing adequate opportunity of being heard to the assessee. This ground of the revenue is partly allowed for statistical purposes. "
The AO subsequently while giving effect to the above order of the Hon’ble ITAT has assessed the foreign professional receipt at net of tax.
We also found that subsequently, the department sought to rectify the above order passed by the Hon'ble ITAT by filing Miscellaneous Application u/s. 254(2) vide MA.NO.80/MUM/2001 and the Hon'ble ITAT vide order dated 15/06/2011 has dismissed the Miscellaneous Application filed by the department. In view of above, the action of A.O. in this regard is not sustainable in the eyes of Law, hence the addition made on this count is hereby deleted. 28. In view of the above discussion, we do not find any infirmity in the order of CIT(A) for annulling the reopening since it was on the basis of change of opinion. Detailed finding recorded by CIT(A) with regard to taxing of foreign receipts, after considering various judicial pronouncements are as per material on record therefore, do not require any interference on our part. 29. In the A.Y.2004-05, the AO also disallowed a sum of Rs.12,21,556/ - by invoking the provisions of section 14A read with Rule 8D. In the original assessment order there was no such disallowance u/s.14A. The 24 Ms. Aishwarya Rai Bachchan Hon'ble jurisdictional High Court has held that Rule 8D is not retrospective but prospective in nature applicable with effect from assessment year 2008- 09 onwards. Further the Hon'ble ITAT Delhi in the case of Dy. CIT vs. Jindal Photo Ltd held that Rule 8D r.w.s.l4A (2) can be invoked only 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 expenditure incurred" in relation to tax-free income. The burden is on the Assessing Officer to establish nexus of expenses incurred with the earning of exempt income, before making any disallowance under section 14A. There cannot be any presumption that the assessee must have incurred expenditure to earn tax free income. In view of the above decision no further disallowance can be made u/s. 14A in the given case. Therefore the AO's action of making disallowance of Rs.12,21,556/- by invoking the provisions of section 14A read with Rule 8D is not justified. Accordingly, we do not find any infirmity in the action of CIT(A) deleting the disallowance made u/s.14A r.w.r.8D. 30. Facts in brief for assessment year 2006-07 are that the assessee filed return of income on 31.10.2006 declaring total income at Rs.17,08,05,806/- and the same was processed u/s.143(1). The regular assessment u/s.143(3) was completed on 03.05.2007 determining the total income at Rs.17,38,47,830/-. 31. Reopening for A.Y.2004-05 & 2005-06 was beyond a period of four years from the end of relevant assessment years, therefore, not only covered by the proviso to Section 147 but also was due to change of 25 Ms. Aishwarya Rai Bachchan opinion. However, in the A.Y.2006-07 reopening was within five years for which proviso to Section 147 was not applicable. Nowhere CIT(A) has annulled to the reassessment under proviso to Section 147, therefore, ground taken by revenue is misconceived. CIT(A) on the basis of change of opinion recorded detailed finding and held that reopening was not valid in so far as issue was considered by AO in the original assessment proceedings after relying on the decision of Tribunal in assessee’s own case for the A.Y. 2001-02.
Disallowance u/s.14A by invoking Rule 8D was held to be not justified for A.Y.2005-06 to 2007-08 in so far as Rule 8D was effective from A.Y.2008-09.
In the A.Y.2006-07, the Assessing Officer has disallowed a sum of Rs.30,86,008/- by' invoking the provisions of section 14A read with Rule 8D. In the original assessment order there was no such disallowance u/s.l4A. The CIT(A) deleted the disallowance observing that the Hon'ble jurisdictional High Court has held that Rule 8D is not retrospective but prospective in nature applicable with effect from assessment year 2008- 09 onwards. Further the, Hon'ble ITAT Delhi in the case of Dy. CIT vs. Jindal Photo Ltd decided that it was held that Rule 8D r.w.s.14A (2) can be invoked only 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 expenditure incurred" in relation to tax-free income. The burden is on the Assessing Officer to establish nexus of expenses incurred with the earning of exempt income, before making any 26 Ms. Aishwarya Rai Bachchan disallowance under section 14A. There cannot be any presumption that the assessee must have incurred expenditure to earn tax free income. In view of the above decision no further disallowance can be made u/s: 14A in the given case. Therefore the AO's action of making disallowance of Rs.30,86,008/- by invoking the provisions of section 14A read with Rule 8D was held to be not justified by CIT(A). Hence, the addition made on this count was correctly deleted by CIT(A) 34. In the A.Y.2009-10 revenue has challenged disallowance worked out by CIT(A) under Rule 8D(2)(iii) we found that CIT(A) has properly bifurcated the expenditure attributable to taxable income vis-à-vis exempt income. The CIT(A) has worked out the total expenditure which may be considered as relatable to exempt income at Rs.13,26,032/-, which may be apportioned between the taxable income and the exempt income in the ratio of gross income, which is 132997327:33310149. Therefore the expenditure which may be considered as relatable to exempt income would be as under: 1326032/ 166307476 * 33310149 Rs.265594/ - In view of detailed finding given by CIT(A), there is no infirmity in the order of CIT(A) restricting the disallowance made u/s.14A to Rs.2,65,594/-.
In the A.Y.2008-09, the CIT(A) has worked out the total expenditure which may be considered as relatable to exempt income is Rs.1699045/-, which may be apportioned between the taxable income and the exempt income in the ratio of gross income, which is 180592213:142542788.
27 Ms. Aishwarya Rai Bachchan Therefore the expenditure which may be considered as relatable to exempt income would be as under: 16990451 323135001 * 142542788 Rs.7,49,490/- 36. We have considered rival contentions and found that after giving detailed finding CIT(A) has worked out disallowance at Rs.7,49,690/- by relating the expenditure incurred on exempt income vis-à-vis taxable income. The finding of CIT(A) is as per material on record which do not require any interference on our part. (A.Y.2004-05) 37. In Assessee’s appeal, assessee is aggrieved for charging of interest u/s.234D. However, the provisions of Section 234D is applicable when refund is granted to the assessee u/s.143(1) which exceeds the amount refundable on regular assessment. In the instant case we found that the A.O has not granted any refund while processing the return u/s 143(1) and on the contrary has raised demand of Rs.76,88,239/- which is evident from the copy of the intimation u/s.143(1) which is placed at page no 139 of the paper book.
In view of the above factual position, we restore the matter back to the file of the AO for deciding afresh as per law after verifying the factual position of any refund if granted u/s.143(1). We direct accordingly.