LEBONG INVESTMENTS PVT. LTD.,KOLKATA vs. D.C.I.T., CIRCLE-11, KOLKATA, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

This appeal by the assessee is against the order of Commissioner of Income Tax (Appeals)-XII, Kolkata dated 27.09.2013. Assessment was framed by ACIT, Range-11, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 26.09.2011 for assessment year 2009-10. 2. At the time of hearing we find that anybody neither appeared on behalf of Revenue nor filed any adjournment application. However we decided to hear this appeal in presence of Shri P.N. Rajendra, Ld. Authorized Representative on behalf of assessee. We also find that this is an old appeal

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 2 and has been fixed for hearing several times (including today’s hearing) hence, we decided to proceed for hearing this appeal in presence of Ld. AR. 3. Solitary issue raised by assessee in this appeal is that Ld. CIT(A) erred in giving relief in part to assessee u/s 14A r.w.s. Rule 8D(2)(iii) of the Income Tax Rules, 1962 (‘the Rule’ for short). The assessee has raised the following grounds of appeal. 1. That on the facts & circumstances of the case and in law, the Ld. Commissioner of Income Tax (Appeals) ought to have held that no disallowance could be made u/s 14A of the Income Tax Act, 1961 (the Act) and hence erred in directing the Assessing Officer to apply rule 8D(2)(iii) of the Income Tax Rules, 1962 (the Rules) and to re-compute the estimate of disallowance of expenses u/s. 14A of the Act in spite of his findings that the Assessing Officer has not recorded his satisfaction before invoking rule 8D of the Rules.”

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 3 exempted dividend income, proportionate disallowance of expenditure relating to the earning of such exempt income is required to be made but not in excess of total expenses incurred and claimed by the appellant. I find force in the alternative argument advanced by the appellant that the Assessing Officer in arriving at the average cost of investment ought to have considered the average of divided yielding investments in 14 companies only as on 31.03.2008 and 31.03.2009 as per Rule 8D(iii) and not the average of total investments. Moreover, the AO has also taken incorrectly the cost of non-dividend bearing investments. In this regard, reliance may be made to the decision of Hon'ble jurisdictional ITAT, Kolkata in the case of REI Agro Ltd. –Vs- DCIT [ITA No.1131/Kol/2011] wherein it has been held that for making disallowance us/s 14 read with rule 8D in respect of the income which is exempted & dos not form part of the total income, the only investment which has given rise to the exempted income should be taken into consideration and not the entire investment made by the assessee.

In the light of the above discussion and findings, considering the entire facts of the case including the appellant’s submission and respectfully following the above order of the Hon'ble ITAT, Kolkata, the AO is directed to recomputed the average value of investment considering the investment which has given rise to the exempted income only in view of working out the estimated disallowance of expenses us/s 14A @ 0.5% as per Rule 8D(2)(iii) and restrict the disallowance u/s.14A of the Act accordingly. Thus, this ground of appeal is partly allowed.”

Being aggrieved by this, assessee has come up an appeal before us. 6. Before us Ld. AR for the assessee filed paper book which is running pages from 1 to 16 and submitted that assessee has claimed administrative and other expenses to the tune of Rs.1,98,732/- only in the year under consideration. None of the expense was incurred in connection with the earning of dividend income. The ld. AR in support of assessee’s claim drew our attention on page 14 of the paper book where the detail of administrative and other expense was placed. On the other hand, Ld. DR vehemently relied on the order of Authorities Below. 7. We have gone through the submissions made by both the parties and perused the materials available on record. In the present case the AO has invoked the provisions of section 14A of the Act read with rule 8D(2)(iii) of Income Tax Rules 1962. Accordingly the AO disallowed a sum of Rs.

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 4 7,92,538/- which was reduced by the learned CIT(A) by directing the AO to work out the disallowance after considering only those investments which have yielded the dividend income to the assessee during the year. However the assessee has challenged the applicability of the provisions of section 14A of the Act on the ground that no satisfaction was recorded by the AO. On the perusal of financial statements of the assessee we find that total administrative and other expenses for Rs.1,98,732.00 was claimed in the profit and loss account which was not considered by the lower authorities for making any disallowance from the provisions of section 14 A of the Act. it is amply clear that income tax authorities can make disallowance under section 14A of the Act after having regard to the account of the assessee and the income tax authorities are not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to exempted income. In the instant case it is important to reproduce the provisions of section 14A of the Act which reads as under:- “[Expenditure incurred in relation to income not includible in total income. 14A.[(1)] For the purposes of computing the total income under this Chapter, 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 this Act.] [(2) The 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, 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 such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:] [Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]”

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 5 7.1 From the plain reading, it is clear that the Assessing Officer needs to invoke the provisions of section 14A only after considering the books of accounts of the assessee. What appears from the facts of the case before us that the AO has not considered the books of accounts of the assessee and had mechanically applied the provisions of section 14A read with rule 8D which is not permissible under the provisions of law. It is because the total expenses claimed by the assessee are much lesser than the expenses disallowed by the lower authorities. This act clearly shows that no regard was given to the books of accounts of the assessee. We find that the AO has not brought on record anything which proves that there is any expenditure incurred towards earning of this dividend income. This issue is covered by the decision of Mumbai Tribunal in the case of J. K. Investors (Bombay) Ltd. Vs. ACIT in ITA No.7858/Mum/2011, AY 2008-09 dated 13.03.2013, wherein it has been held as under: 11. We have heard the arguments of the parties and have perused the material placed before us. The issue as carved out by the AR is with respect to Rs.10,000 only, but on the contrary, the issue before us is on the applicability of Rule 14A and computation of disallowance as per Rule 8D. The relevant portion read out by the AR from the decision in the case of Godrej & Boyce Mfg. Co. Ltd vs. DCIT (supra) in Para 70 of the order pertains to the correctness of computation of disallowance and giving valid reasons for such computation. The crux of argument of AR is with reference to Section 14(2) which is as under: “The 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, if AO having regard to the accounts of assessee, is not satisfied with the correctness of the claim of assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act”. The words that need reference in the section are “if AO having regard to the accounts of assessee, is not satisfied with the correctness of the claim…” means that before going to the computation, AO has to cross the barrier of the satisfaction with the correctness of the claim, then AO can be permitted to straightaway apply the computation under Rule 8D. 12. Thus the issue in this appeal is with reference to invoking of provisions of section 14A(2) and Rule 8D. The Hon'ble Bombay High Court while upholding the constitutional validity of the section 14A and

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 6 Rule 8D has this to observe with reference to sub section 2 & 3 of section 14A: “Sub-sections (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of nontaxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. Sub-rule (1) of rule 8D of the Income-tax Rules, 1962, has also incorporated the essential requirements of sub section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2)” .. (emphasis supplied). 13. The same opinion was expressed by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd and Others v. CIT 247 CTR 162 wherein reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers Pvt. Ltd 326 ITR 1 (SC) and the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Company Ltd vs. DCIT (328 ITR 81). The relevant portions of the judgment of Hon'ble Delhi High Court are as under: 29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure 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 such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 7 of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Subsection (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub- section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.

Rule 8D.

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 8 Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules.

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 9 relation to income which does not form part of the total income "in accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) and (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub- section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method.

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 10 the 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 the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14 A has no application. The objective of section 14 A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon'ble Supreme Court in case of Commissioner of Income- tax v. Walfort Share and Stock Brokers P. Ltd. reported in 326 ITR 1 that for attracting the provisions of section 14 A, there should be proximate cause for disallowance which as relationship with the tax exempt income. 5.1 The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, it should be proximate relationship between the expenditure and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it was for the assessing officer to determine as to whether the assessee had incurred any expenditure in relation to income which did not form part of total income and if so to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 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 income not forming part of total 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 under section 14A merely because some tax exempt income is received by the assessee. 5.2 Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for earning the exempt income. From the details of the expenditure, it is clear that the expenditure incurred and claimed 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

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 11 exempt income. The Assessing Officer has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. In other words when the assessing officer has not pointed out that certain expenditure is not incurred for earning the professional income; but are incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt income has been earned by the assessee, then in the absence of any such instance of expenditure, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied. 5.3 In the case of Shri Pawan Kumar Parameshwar Lal vs. ACIT (supra) this tribunal has considered and decided an identical issue in Para 4 as under: “4. After hearing the assessee in person and arguments of the learned D.R. we are of the opinion that no disallowance is called for under section 14A. Obviously the assessee is maintaining separate books of account for purpose of business and these investments are in his personal capacity. The A.O. also has not disallowed any expenditure of personal nature out of the income from business or profession in the computation of income in the assessment order. In view of this, we are of the opinion that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. In view of this, we are of the opinion that estimation of expenditure of `.20,000/- out of business expenditure claimed in business activity cannot be considered for being incurred for this earning of tax free income of above nature. In view of this disallowance so made under section 14A of `.2O,OOO/- is deleted. Not only that the CIT(A) directed the A.O. to consider the allowance invoking Rule 8D. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 has considered Rule 8D to be applicable prospective and since the assessment year involved is before the introduction of sub section (2) & (3) of section 14A, there is no question of disallowing the amounts invoking Rule8D. Therefore, the CIT(A)’s direction on this is set aside and the additions so made by the A.O. in the computation of business income is deleted. Ground is considered allowed.”

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 12 5.4 Similarly in case of Auchtel Products Ltd (supra), it was held by this Tribunal in Para 15 has under: “15. A bare perusal of the above provisions 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. 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 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. We, therefore, set aside the impugned order on this issue and restore the matter to the file of AO to re-compute disallowance, if any, in accordance with our above

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 13 observations after duly examining the assessee’s claim in this regard.” 6. In view of the above discussion and facts and circumstances of the case, we are of the considered opinion that no disallowance under section 14A is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income.

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 14 precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Therefore, it is all the more necessary that AO has to examine the accounts of assessee first and then if he is not satisfied with the correctness of the claim, only he can invoke Rule 8D. No such examination was made or satisfaction was recorded by AO in this case. It was noticed that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8D on the presumption that port folio management involves at least 2% of charges. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. We notice that assessee itself disallowed the interest which is directly applicable, Dmat charges and administrative exp on estimation totaling to Rs.1,55,44,610. Assessee is a hundred crore turnover company. AO has not examined any expenditure claimed in P& L account so as to relate to exempt income, nor gave a finding that assessee claim is not correct for any reason. Rule 8D cannot be invoked directly without satisfying about the claims or otherwise. Consequently, the disallowance was not permissible. We therefore, allow the ground of appeal.”

We find from the facts of the above case that the AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of Income Tax Rules. While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J. K.

ITA No.2652/Kol/2013 A.Y. 2009-10 Lebong Investments Pvt. Ltd. Vs. DCIT, Cir-11, Kol. Page 15 Investors (Bombay) Ltd., (supra), we reverse the order of lower authorities. Thus, the appeal filed by the assessee is allowed. 8. In the result, assessee’s appeal stands allowed. Order pronounced in the open court 18/01/2017 Sd/- Sd/- (�या�यक सद�य) (लेखा सद�य) (N.V.Vasudevan) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp, Sr.P.S �दनांकः- 18/01/2017 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-Lebong Investments Pvt. Ltd. Camellia House, 14, Gurusaday Road, Kolkata-700 019 2. ��यथ�/Respondent-DCIT, Circle-11, Aayakar Bhawan, P7 Chowringhee Road, Kol-69 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।