Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, KOLKATA ‘B’ BENCH, KOLKATA
Before: SRI SANJAY GARG & SRI SANJAY AWASTHI
order
: July 31st, 2024 ORDER
Per Sanjay Awasthi, Accountant Member:
The appellant is a society registered under the West Bengal Societies Registration Act, 1961. The income tax return for the year under consideration was filed on 13.02.2018 showing a total income of Rs. 29,22,220/-. The case was picked up for limited scrutiny and vide order dated 29.12.2019 the assessment was completed at Rs. 72,84,840/-. It is seen that the enhancement to taxable income happened mainly on account of disallowance u/s 14A of the Income Tax Act, 1961 (in short the 'Act') read with Rule 8D of the Income Tax Rules, 1962. The Assessing Officer (hereinafter referred to as ld. 'AO') found that the assessee had earned income I.T.A. No.: 616/KOL/2024 Assessment Year: 2017-18 Eastern India Educational Institution. exempt from taxation to the tune of Rs. 6,38,83,379/-, mainly from dividend and interest on tax-free bonds. The AO duly noted that the assessee had himself disallowed Rs. 12,723/- on estimate basis to account for expenses which could be directly related to exempt income and thus, hit by the provisions of u/s 14A of the Act. Thereafter, disbelieving the contention of the assessee regarding the appropriateness of his suo moto disallowance of Rs. 12,723/-, the AO proceeded to compute the disallowance under Rule 8D(2) Clause (i) & (ii) of the Rules. This resulted in an addition of Rs. 43,62,620/-. 1.1. Aggrieved with this action, the assessee approached the Commissioner of Income Tax (Appeals)-NFAC, Delhi [hereinafter referred to as ld. 'CIT(A)'] who did not accept the contention of the assessee that in the computation of income there was already a very substantial amount disallowed and added back by the assessee on his own and some remaining expense were directly attributable to the running of the school, which was listed as one of the major activities of the appellant Trust. In fact, it is seen that ld. CIT(A) relied on the case of Maxopp Investment Ltd. vs. CIT reported in [2018] 402 ITR 640 (SC) and upheld the action of the AO. 1.2. Once again aggrieved with the action of ld. CIT(A) the appellant is before us through the following grounds of appeal: “1. That the order dated 27.02.2024 passed by learned CIT (Appeals)(NFAC) is bad in law as well as on facts.
2. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in not holding that only a sum of Rs. 12,723 can be subject matter of disallowance u/s,14A as offered by the appellant.
3. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in not holding that disallowance u/s.!4A cannot exceeds total expenses debited to Income and Expenditure Account for the year.
4. That on the facts and in the circumstances of the case, the learned CIT (Appeals) erred in not holding that the expenses of Rs. 12,53,373 relating to running of Girls’ School had no relevance with earning of exempt income and thus the same was required to be excluded from total expenses for the purpose of computing disallowance u/s. 14A of Income Tax Act. That the appellant craves leave to, add to, alter, amend and / or withdraw all or any of the grounds at or before the hearing of the appeal.” Page 2 of 6 I.T.A. No.: 616/KOL/2024 Assessment Year: 2017-18 Eastern India Educational Institution. 1.3. It may also be pertinent to mention that along with the grounds of appeal the appellant has filed a narration which contains the facts as also the crux of his arguments. Since this narration of facts and arguments has a critical bearing on the decision it would be prudent to extract the relevant portion from the same: “But while computing the total income for the year, the learned DCIT has in a mechanical manner and without appreciating the facts of the case, has further allocated sum of Rs.43,49,897 (Rs.43,62,620 - Rs.12,723) as amount disallowable u/s. 14A. The learned DCIT should have considered a fact that out of total amount of Rs.5,17,91,280 debited to Income & Expenditure Account, expenses aggregating to Rs.5,03,92,456 (Donation Rs.5,00,40,000 + Depreciation Rs.3,52,456) has already been treated as disallowable by the appellant itself, leaving a balance sum of Rs.13,98,874 which include Rs.12,25,373 incurred for running a school. Therefore without prejudice almost the learned DCIT could have disallowed balance sum of Rs.1,73,451 only u/s 14A of I.T. Act. (emphasis added)”
2. Before us, the ld. A/R argued on the basis of a paper book running into 41 pages and demonstrated the method adopted by him in arriving at the figure of Rs. 12,723/- which he had disallowed u/s 14A of the Act on his own. He pointed out that under certain heads of expense they had estimated 10% as being directly relatable to the earning of exempt income as (a) 10% of expenses claimed under general expenses (Rs. 31,872/-), (b) conveyance expenses (Rs. 35,427/-), (c) electricity charges (Rs. 2,536/-), (d) professional fees (Rs. 28,750/-), (e) legal charges (Rs. 14,950/-), (f) printing & stationary (Rs. 12,882/-) and (g) postage & telephone (Rs. 807/-). He pointed out that depreciation charges of Rs. 3,72,723/- have justifiably not been included for computing disallowance u/s 14A of the Act. It was also averred that the addition made by the AO and upheld by the ld. CIT(A) was far in excess of the actual expenditure which could be reasonably attributable to the earning of exempt income. He relied on two cases as under: a) The Punjab Produce & Trading Co. Pvt. Ltd. Vs. ACIT [ITAT Kolkata] (ITA No. 518/Kol/2022) b) DCIT Vs. M/s. Trade Apartment Ltd. [ITAT Kolkata] (ITANo. 1277/Kol/2011)
I.T.A. No.: 616/KOL/2024 Assessment Year: 2017-18 Eastern India Educational Institution. 2.1. The ld. D/R relied on the order of the authorities below and stated that the appellant had adopted a method which was convenient to him, whereas the AO had adopted a legally sound method for arriving at his conclusion.
The rival contentions have been considered, along with documents placed before us. It would be appropriate to understand that Section 14A of the Act was inserted by the Finance Act, 2001 with retrospective effect from 01.04.1962. It provided that no deduction shall be made in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. By the Finance Act, 2006, with effect from 01.04.2007, sub-sections (2) & (3) were inserted to provide that the amounts disallowable u/s 14A of the Act will be calculated in accordance with the method prescribed under Rule 8D of the Rules. Rule 8D of the Rules provides that where the AO is not satisfied with the correctness of the claim of the expenditure made by the assessee or even where there is claim that no expenditure has been incurred in relation to income not forming part of total income, the disallowable expenditure shall be computed in accordance with sub-Rule (2) of Rule 8D of the Rules. We find that in this case the undeniable fact is of the assessee earning substantial excess income. It is also seen that the assessee has estimated the disallowance of Rs. 12,723/- by adopting a value of 10% from certain heads of expenditure mentioned (supra). In fact, it is clearly visible that in the income and expenditure account filed in the paper book while he has deducted 10% from certain items of expenditure mentioned (supra) he has for some reason omitted to deduct any amount from audit fees of Rs. 25,960/-. This fact is mentioned merely to illustrate the point that there appears to be a degree of adhocism in terms of choosing the amounts from which 10% has been deducted and shown as suo moto disallowance u/s 14A of the Act. It is clear from a reading of the law on the subject that with effect from 01.04.2008 a clear-cut method has been provided for deducing expenditure relatable to earning of exempt income, especially when such expenditure is not clearly demarcated. However, it is also a fact that there are a catena of judgements which indicate that the exercise under Rule 8D of the Rules is not a mechanical and mindless exercise which can produce any figure I.T.A. No.: 616/KOL/2024 Assessment Year: 2017-18 Eastern India Educational Institution. for addition. Due care has to be taken to actually ensure that the disallowance is on a realistic basis from expenditure which can be attributed to the earning of exempt income. In this case, the passage extracted from the written submissions made by the appellant (supra) have considerable persuasive value in as much as out of total expenditure of Rs. 5,17,91,280/- the assessee has himself added back Rs. 5,03,92,456/- thereby leaving a balance of Rs. 13,98,874/- which includes Rs. 12,25,373/- as expenditure incurred for running the school. Accordingly, the ends of justice would be served if the disallowance u/s 14A of the Act is restricted to Rs. 1,73,451/- as has been computed by the assessee himself and is mentioned in the extract from his written submission (supra), as an alternative argument. At this stage, it deserves to be mentioned that the two authorities cited by the assessee in his favour are clearly distinguishable on facts and hence, are of not much help in deciding the issue at hand. It is reiterated that the disallowance u/s 14A of the Act is directed to be restricted to Rs. 1,73,451/-, with consequential relief on the impugned addition.