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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SMT. ASHA VIJAYARAGHAVAN & SHRI JASON P. BOAZ
Per Asha Vijayaraghavan, Judicial Member
These appeals by the assessee company are directed against the separate orders, both dated 27.08.2014 of the CIT(Appeals)-III, Bangalore relating to assessment years 2009-10 & 2010-11. The assessee has raised common grounds of appeal for both the years, except that for AY
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2010-11 the assessee has challenged the levy of interest u/s. 234B and 234C of the Income-tax Act, 1961 [“the Act”].
The assessee is a private limited company engaged in the business of investing in real estate properties, shares of unlisted companies and unit of mutual funds. The assessee has a team/department which monitors, maintains and advices on investments.
Assessee filed its return of income for the AY 2009-10 declaring a total income of Rs 5,69,81,980. The total income was arrived at after deducting Rs 29,99,052/- under section 80G of the Income Tax Act, 1961 [hereinafter referred to as ‘Act’] from gross total income of Rs 5,99.81.035/- The gross total income was arrived at after adjusting loss under the head ‘Profits and gains of business or profession’ [Rs. 5,11,01,752] against income under the head ‘income from house property’ [Rs. 1,16,85,877] and ‘income for other sources’ [Rs. 9.93.96,910]. The assessee also claimed exemption under income to the tune of Rs.3,58.19,598.
During the assessment proceedings, the assessee was asked to explain as to why provisions of section 14A read with rule 8D should not be invoked to determine the amount of expenditure incurred in relation to the income from dividend. The assessee submitted that in computation of income from business, Portfolio Management Scheme (PMS) related expenses of Rs. 59,58,386/- and securities transaction tax (STT) Rs.
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5,87,113/- were identified as expenditure attributable to the income from dividend and were added back to the net profit. However, the Assessing
Officer made an addition of Rs 2,29,61,787 to the total income.
Before the CIT(Appeals), the assessee submitted that the allegation in the impugned assessment order that assessee had not claimed any
expenditure as incurred in relation to earning of dividend income was not correct and the AO invoked Rule 8D in an arbitrary manner.
It was further submitted that section 14A(1) states that no deduction
shall be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under this
Act. Sub-section (2) of section 14A mandates the AO to determine the expenditure incurred in relation to exempt income in accordance with
prescribed method, if he is not satisfied with the claim of the assessee vis-
à-vis expenditure incurred in relation to tax free income. The method is prescribed under Rule 8D of the Income Tax Rules, 1962. Sub-section (3)
of section 14A provides that the provisions of sub-section (2) would be applicable in cases where an assessee claims that no expenditure is
incurred in relation to tax free income. The power to determine disallowable expenditure under Rule 8D is thus available to the assessing officer under
two situations viz., (i) where the assessee claims that a certain amount has
been incurred in relation to non taxable incomes; and (ii) where the assessee claims that no expenditure has been incurred in relation to non
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taxable incomes. The power to invoke rule 8D is however subject to fulfillment of certain conditions. In order to invoke Rule 8D, the assessing
officer should record a satisfaction that the expenditure incurred in relation to non taxable income as claimed by the assessee is incorrect. The
satisfaction should be demonstrated ‘having regard to the accounts’ of the
assessee. This is the prescription of section 14A(2). In other words, section 14A(2) does not enable the assessing officer to apply Rule 8D
automatically. The assessing officer must give reasons after considering accounts of the assessee as to why the assessee’s claim is not
sustainable.
Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010) 328 ITR
81 wherein it was held that, in a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a
satisfaction in regard to the correctness of the claim of the assessee of the
expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse
to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed
method is mandated by law.
The assessee further relied on the decision in Maxopp Investment Ltd. v. CIT (2011) 347 ITR 272 wherein the amended provisions of section
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14A(2) had been explained and it was held that determination of the amount of expenditure in relation to exempt income under Rule 8D would
only come into play when the Assessing Officer rejects the claim of the assessee. Reliance was also placed on the decision of Auchtel Products
Ltd. v. ACIT (2012) 6 Taxcorp (A.T) 28301 wherein it was held that, 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
in no requirement to still proceed with computation of amount disallowable as per Rule 8D.
The assessee further relied on the decision of the Kolkata Bench of
the Tribunal in REI Agro Ltd. v. DCIT (2013) 7 Taxcorp (A.T) 32760 which was confirmed by the Calcutta High Court in 8 Taxcorp (DT) 5719 and
Bangalore Bench of the Tribunal’s decision in Mrs. Hema Ravichandar v. DCIT, ITA No.1073/Bang/2011 relying upon the decision of Godrej & Boyce
Mfg. Co. Ltd. (supra) held, the satisfaction that the claim made by the
assessee regarding expenses incurred in relation to the income which does not form part of the total income under Act, is not correct, has to be arrived
at by the AO, on an objective basis.
Reliance was placed on the following decisions for the proposition
that it is mandatory for the assessing officer before invoking rule 8D to
record an objective satisfaction that the suo moto disallowance made u/s. 14A by the assessee is incorrect:-
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- Minda Investments Ltd v DCIT (2010) Tax Corp (A.T.) 22872 (Delhi) - Cellica Developers Pvt Ltd v ITO ITA No 1101/Kol/2012 - Kodak India Pvt Ltd v ACIT (2013) 88 DTR 242
The assessee submitted before the CIT(Appeals) that the disallowance under section 14A read with rule 8D(2)(iii) has been made considering the dividends income from shares / mutual funds which are exempt at source. These dividends are directly credited to bank account of the assessee and there is no separate expenditure incurred for earning the dividend income and relied upon the decision of Hon’ble Karnataka High Court in Canara Bank v. ACIT (2014) 8 TaxCorp (DT) 56593.
Without prejudice to the above submissions, the assessee submitted that the disallowance under Rule 8D(2)(iii) is not correct as the AO has erred in not appreciating that disallowance u/s. 14A r.w. Rule 8D(2)(iii) has to be computed only with regard to investments which yield tax free income and not all the investments. The decision in the case of Rei Agro Ltd. v. DCIT (supra) was relied upon wherein it was held as follows:-
“Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income.”
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The assessee submitted that the investments of the assessee as at the first day and the last day of the previous year, ending March 31, 2009 were as follows:-
Following decisions were relied upon which have taken the view that no disallowance could be made u/s. 14A if there is no exempt income during the previous year:-
- CIT Vs. M/s. Sivam Motors Pvt. Ltd. I. T. Appeal No.88 of 2014 dated 5.5.2014 (All) - CIT Vs. Corrtech Energy Pvt. Ltd. I.T. Appeal No.239 of 2014 dated 24.3.2014 (Guj)
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- CIT Vs. Delite Enterprises TaxAppealNo.110 of 2009 dated 26.2.2009 (Bom) - ACIT v M. Baskaran I.T.A No. 171 7/Mds/2013 dated 31.07.201 (Chennai Tribunal)
The assessee therefore submitted that the disallowance of Rs. 2,29,6l,77 under section 14A read with rule 8D(2)(iii) has to be deleted fully. Alternatively and without prejudice, the investments yielding taxable income [viz., debentures, exchange traded funds and share application money] should be excluded in determining the figure of average investments under rule 8D(2)(iii).
The CIT(Appeals) observed at para 7 that “Appellant has stated that the AO is required to record satisfaction that the expenditure claimed to be incurred In respect of exempt income is inadequate. However AO has failed to record any reasons that the suomoto disallowance made by the assessee is not adequate. AR has relied on several judicial decisions in support of this contention including that of the Karnataka High Court in ITA No.382/2010C/W, ITA No.381/2010, dt.2.06.2014 in the case of Canara Bank. In my view this decision of the jurisdictional High Court relied upon by the appellant is not applicable as it relates to a period before the introduction of Rule 8D.”
Further the CIT(Appeals) for the A.Y. 2009-10 concluded at para 11.1 as follows:-
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“11.1 AO is therefore required to exclude the Investments which do not yield exempt income, for the purpose of working out disallowance u/s.14A r.w.r.8D. Taking into account the investment that yields exempt income for the purpose of working out ½ % of average Investments as per Rule 8D an amount to Rs.1,44,61,138/- is required to be disallowed, As appellant has already disallowed PMS related expenses of Rs.59,58,386/- the disallowance u/s.14A rw R8D would be an amount of Rs.85,02,752/- AO is directed to restrict the disallowance u/s. 14A rw Rule 8D to this amount. These grounds are partly allowed.”
For the A.Y. 2010-11, the CIT(Appeals) held as follows:-
“11.1 AO is therefore required to exclude the Investments which do not yield exempt income, for the purpose of working out disallowance u/s.14A r.w.r.8D. Taking into account the investment that yields exempt income for the purpose of working out ½ % of average Investments as per Rule 8D an amount to Rs.1,25,70,202/- is required to be disallowed, As appellant has already disallowed PMS related expenses of Rs.8,66,341/- the disallowance u/s.14A rw R8D would be an amount of Rs.1,17,03,861/- AO is directed to restrict the disallowance u/s. 14A rw Rule 8D to this amount. These grounds are partly allowed.”
Aggrieved, the assessee is in appeal before us and reiterated the submissions made before the lower authorities.
We have heard both the parties. We disagree with the view taken by the CIT(Appeals). The AO has not given any reasons as to why suo motu disallowance of PMS expenses of Rs.59,58,386 and STT of Rs.5,87,113 is incorrect or how and why any further expenditure is required to be disallowed. If the AO was of the view that suo motu disallowance
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made by the assessee is incorrect, then it was incumbent upon him to record his dissatisfaction about the same in the impugned order. The AO invoked Rule 8D of the I.T. Rules without fulfilling this statutory requirement. In such circumstances, the disallowance made u/s. 14A r.w. Rule 8D(2)(iii) merits deletion. The coordinate Bench of this Tribunal in the case of Mrs. Hema Ravichandar v. DCIT, ITA No.1073/Bang/2011 held as follows:-
“11. It is clear from the observations of the Hon’ble Bombay High Court referred to above that the application of Rule 8D of the Rules is not automatic. When the assessee makes the claim regarding the quantum of expenses to be disallowed in terms of section 14A of the Act, it was incumbent on the part of the AO to consider the claim of the assessee. It is only when the AO is not satisfied with the claim of the assessee he can have recourse to the provisions of Rule 8D of the Income Tax Rules. The satisfaction that the claim made by the assessee regarding expenses incurred in relation to the income which does not form part of the total income under the Act, is not correct, has to be arrived at by the AO, on an objective basis. In the present case, we find that the AO has proceeded to apply Rule 8D without giving any finding with regard to the correctness of the claim made by the assessee regarding the disallowance to be made under section 14A of the Act. The CIT(A) has also proceeded on the same basis. We are, therefore, of the view that the orders of the CIT(A) has to be set aside and the issue should be remanded to the AO for fresh consideration. The AO will consider the claim of the assessee with regard to the disallowance to be made under section 14A of the Act in the light of the decision of the Hon’ble Bombay High Court referred to above. The AO will decide the issue after affording the assessee opportunity of being heard.”
It is mandatory for the AO before invoking Rule 8D to record an objective satisfaction that suo motu disallowance u/s. 14A made by the assessee is incorrect. In this regard, the observations of the Kolkata
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Tribunal in the case of Rei Agro Ltd. v. DCIT (2013) 7 TaxCorp (AT) 32760 [confirmed by the Calcutta High Court in 8 Taxcorp (DT) 5719] are reproduced below:-
“….. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee. In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate bench of this Tribunal in the case of Balarampur Chini Mills Ltd. referred to supra, no disallowance under section 14A can be made.”
In our view, in the present cases, the AO has proceeded to apply Rule 8D without giving any finding with regard to correctness of the claim made by the assessee regarding disallowance to be made u/s. 14A of the Act. The CIT(A) has also proceeded on the same basis. We therefore set aside the orders of the CIT(Appeals) for both the years and remand the issue to the Assessing Officer for fresh consideration. The AO shall go into the other submissions of the assessee that the disallowance u/s. 14A r.w. Rule 8D has been made from the dividend income from shares/mutual funds which are exempt at source and these dividends are directly credited to the bank account of the assessee. The AO shall also examine the assessee’s claim that there is no separate expenditure for earning the dividend income in the light of the decision of the Hon’ble Karnataka High Court in Canara Bank v. ACIT (2014) 8 TaxCorp (DT) 56593. The
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assessee has also raised a ground that no disallowance could be made u/s. 14A if there is no exempt income during the previous year. The AO shall after applying his mind on the issue of satisfaction to be recorded, deal with other issues raised by the assessee separately.
With respect to another ground raised for the A.Y. 2010-11 regarding levy of interest u/s. 234B & 234C of the Act, we are of the opinion that levy of interest is mandatory and hence we dismiss this ground.
In the result, the appeals by the assessee are allowed for statistical purposes.
Pronounced in the open court on this 30th day of December, 2015.
Sd/- Sd/-
( JASON P. BOAZ ) (ASHA VIJAYARAGHAVAN ) Accountant Member Judicial Member
Bangalore, Dated, the 30th December, 2015. /D S/
Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard file
By order
Assistant Registrar, ITAT, Bangalore.