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Income Tax Appellate Tribunal, DELHI BENCH: ‘B’, NEW DELHI
Before: SHRI SUDHANSHU SRIVASTAVA & SHRI O.P. KANT
Date of hearing 23.07.2019 Date of pronouncement 31.07.2019 ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 03/10/2016 passed by the Ld. Commissioner of Income-tax (Appeals)-35, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2013-14, raising the ground as under:
Action of the CIT(A) in confirming the action of A.O. in making a disallowance of Rs.6,05,176/- u/s 14A of Income Tax Act, 1961 as expenses for earning dividend is unjust, illegal, arbitrary and against the facts and circumstances of the case.
Briefly stated facts of the case are that the assessee was engaged in the business of automobile dealership, workshop etc.
30/09/2013, declaring total income of Rs.12,77,25,100/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and complied with. The assessment under section 143(3) of the Act was completed on 04/03/2016 after making disallowance of Rs.6,05,176/- under section 14A of the Act read with rule 8D of Income Tax Rules, 1962. On further appeal, the Ld. CIT(A) upheld the disallowance. Aggrieved, the assessee is in appeal before the Tribunal raising the ground as reproduced above.
Before us, the Ld. counsel of the assessee filed a paper book containing pages 1 to 74. The paper book filed contains order of the first appellate authority and Tribunal in the case of the assessee for earlier years. The Ld. counsel of the assessee relied on the order of the Tribunal for earlier years and submitted that following the same, the disallowance in the instant year might be deleted.
On the other hand, the Ld. DR submitted that the Tribunal in assessment years earlier to the year under consideration has relied on the decision of the Tribunal for assessment year 2004- 05. The Ld. DR further submitted that w.e.f. assessment year 2008-09, the rule 8D has been introduced and therefore the ratio of the decision in the case of the assessment year 2004-05 cannot be imported. He further submitted that under rule 8D disallowance has been made only in respect of sub rule (2)(iii) for administrative expenses and thus the argument of Ld. counsel that own funds have been utilized for purchase of shares, is no longer relevant. He further submitted that the argument of the Ld. counsel for not making any disallowance under section 14A of Act in respect of strategic investment in subsidiaries, he submitted that decisions relied upon by the Ld. counsel are no longer valid after the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT, 402 ITR 640 (SC).
We have heard the rival submissions and perused the relevant material on record. The assessee shown dividend income of Rs.12,92,735/- on account of investment in shares and securities of Tata Motors Ltd., Tata Consultancy Ltd. and Mudra Port and claimed the same as exempt. The assessee made disallowance of Rs. 14A of the Act amounting to Rs.1,29,274/- at the rate of 10% of the dividend income earned. The Assessing Officer asked the assessee as why the disallowance may not be made in terms of Rule 8D of the Income Tax Rules, 1962. Not satisfied with the submission of the assessee, the Assessing Officer invoked Rule 8D of Income Tax Rules and computed disallowance as under:
S. No Particulars Amount in Rs. (i) Expenses directly attributable Nil (ii) Interest Expenses A*B/C Nil (iii) 0.5% of the average investments = :0.5% of B 7,34,450 Less: Amount already disallowed u/s I4A in Return of 1,29,274 income filed for AY 2013-14 Disallowance Expenses 6,05,176 A Total Interest - Opening of investment 5,15,64,939 Closing of investment 24,22,14,939 B Average value of the investment 14,68,89,393 Opening value of the Asset 3,55,66,43,527 Closing value of the Asset 4,72,23,40,603 C Average value of the Asset 4,13,94,92,065 6,05,176 Disallowance u/s 14A of the I.T. Act, 1961 (i + ii -t-iii)
5.1 It is evident that the Assessing Officer has not made any disallowance towards interest and only disallowance has been 0.5% of the average investment which is to cover the administrative expenses incurred by the assessee . 5.2 The Ld. CIT(A) has recorded that the assessee made suo- moto disallowance of Rs.1,29,274/- to avoid controversy and unnecessary litigation and nowhere it explained as how the assessee arrived at figure of Rs.1,29,274/- to justify the expenditure incurred for earning exempt income. 5.3 Before us, the Ld. Counsel of the assessee has relied on the order of the Tribunal in for assessment year 2004-05, which is available on page 31 of the paper book. The relevant finding of the Tribunal is reproduced as under:
5. As regards third ground deleting the addition of Rs. 13,363/- made under section 14A of the Act, the Assessing Officer held that the assessee had incurred administrative expenditure of more than Rs.6 crores and financial expenses of Rs.3,77,64,000/- and a part of which is contributed to the exempt income. He accordingly estimated 10% of the total dividend income as expenditure on account of administrative expenses. CIT (Appeals) deleted the addition by observing that the dividend income was only from two companies and only three dividend warrants were received; out of which two dividends from Tata Motors Limited were received from ECS and the same were directly credited by the dividend paying company to the bank account of the assessee for which no expenses were incurred. Only one dividend warrant of Rs.4800/- was received by cheque and deposited in bank and no expenses were incurred for collection of this one dividend warrant and no interest was also paid for investment in shares. It was noticed that a disallowance of Rs.l lac was made by the Assessing Officer in assessment year 2001 -02 wherein the disallowance, was deleted by the Tribunal in assessee’s own case in similar circumstances. That order of the Tribunal is in dated 31.5.2007 wherein the Tribunal has deleted the addition by observing inv paragraph 5 as under: “5. We have heard both the parties and perused the material available on record. The assessee has earned dividend income of Rs.35,07,915/- which is exempt under section 10 (33) of the Act. Under section 14A any expenditure inclined for earning exempted income will be disallowed. The assessee has not maintained investment division for investment of funds and monitoring the income from exempted sources. The Assessing Officer has not brought any material on record so as to prove that Rs.l,00,000/- was incurred by way of expenditure to earn the exempted income. The contention of assessee is that in one case the dividend income was transferred through ECS mechanism. In the absence of any nexus between the expenditure incurred and income earned, disallowance under section 14A cannot be justified. The expenditure relatable to earning of exempted income can be disallowed under section 14 A of the Act. Therefore, in our considered view the authority below was not justified in confirming the ad-hoc disallowance of Rs.1,00,000/-. We, therefore, decide the appeal in favour of the assessee.
Fact and circumstances being similar, we uphold the order of the CIT(Appeals) on this issue following the aforesaid decision of the Tribunal.”
5.4 On perusal of the above, it is evident that said decision is for the period prior to introduction of the Rule 8D of Income Tax Rules, 1962. According to the provisions of section 14A(2) of the Act relevant for year under consideration, if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure related to exempted income, he shall determine such expenditure in accordance with the method prescribed. The said method has been prescribed under Rule 8D of the Income Tax Rules, 1962. Thus, under the provision, wherein the Assessing Officer is satisfied that claim of the assessee of disallowance under section 14A is not correct, he is bound to follow the method prescribed for computing the disallowance under section 14A of the Act. The said method prescribed has been held to be effective prospectively from assessment year 2008-09 by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd reported in 247 CTR 162 (Delhi). 5.5 Since the decisions relied upon by the assessee relate to assessment year 2004-05, which is prior to the assessment year 2008-09, the ratio of the said decision cannot be imported into the facts of the instant year. 5.6 The Ld. counsel submitted that no disallowance under section 14A read with Rule 8D can be made in case of strategic investment in shares of the company, which was for not earning exempt, income could be made. In support he relied on the following decisions:
• Integrated Enterprises Vs. CIT (ITAT, Delhi) • REI Agro (ITAT, Kolkata) • J M Financial Ltd. (ITAT, Mumbai) • Gareware Wall Ropes (ITAT, Mumbai)
5.7 We find that Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs CIT reported in 402 ITR 640 (SC) has held as under:
“34. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word ‘in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. “The next phrase is, “in relation to income which does not form part of total income under the Act”. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. xxx xxx xxx The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A.”
The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab & Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would be applicable in cases where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed.” 5.8 In view of the above decision of the Hon’ble Apex Court, the contention of the Ld. counsel of the assessee that no disallowance under section 14A of the Act can be made in respect of investment in the shares of the subsidiary for strategic investment, are rejected.
5.9 In our opinion, there is no error in the order of the lower authorities in making disallowance under section 14A of the Act read with Rule 8D of Income Tax Rules, 1962. 6. The grounds raised by the assessee are accordingly dismissed.
7. In the result, the appeal of the assessee is dismissed.
Order is pronounced in the open court on 31st July, 2019.