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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri P. M. Jagtap, AM & Shri K. Narasimha Chary, JM]
For the Appellant: Shri Girish Sharma, FCA, AR For the Respondent: Shri Amitabha Choudhury, JCIT ORDER
Per Shri K. Narasimha Chary, JM:
This appeal by assessee is arising out of revision order of Ld. CIT-VI, Kolkata vide M. No.11/CIT(A)-VI/10-11/Kol dated 19.08.2013. Assessment was framed by DCIT, Circle-5, Kolkata u/s. 143(3) & 115WE(3) of the Income-tax Act, 1961(hereinafter referred to as the “Act”) for AY 2008-09 vide his order dated 19.04.2010.
Brief facts of the case are that the assessee is a non banking finance company carrying on the business of loans and advances and share trading. It derives its income from other sources like mutual fund, derivatives transactions and speculation in shares besides dividend income. For the Assessment Year 2008-09, the assessee filed their return of income on 30-09-2008 declaring an income of Rs.97,11,735/- and Book Profit under section 115 of the Act at Rs. 10,67,913/-. During this Assessment Year, the Assessee earned Rs.48,04,057/- and Long Term Capital Gains of Rs. 3,24,19,990/-. Assessee offered Rs.8,050/- being the amount of expense relatable to dividend and disallowed under section 14A of the Act. However, the Assessing Officer computed the disallowance under section 14A of the Act read with Rule 8D of the Rules and calculated the same at Rs. 11,93,031/-, and after deducting Rs.8,050/- disallowed by the assessee, added back a sum of Rs. 11,84,981/- to the income of the assessee.
Challenging the said assessment, the assessee went in appeal before the learned CIT(Appeals), and the learned CIT(Appeals), by way of the impugned order confirmed the addition made under section 14A of the Act read with Rule 8D of the Rules to a tune of Rs.
Exim Scrips Dealers Pvt. Ltd., AY 2008-09 11,17,890/- and after deducting Rs.8,050/- disallowed by the assessee, it came to Rs.11,09,840/-.
Aggrieved by the said impugned order, the assessee carried the matter in this appeal on the following grounds:
1. That on the facts and circumstances of the case Ld. Commissioner (Appeals) erred in disallowing Rs. 11,17,890/- as per Rule 8D read with Section 14A of the Income Tax Act, 1961.
2. That the Appellant craves leave to add, alter, amend, delete, substitute any of the grounds and/or take additional ground/s before or at any time of hearing of this appeal.
Argument of the learned AR is that in order to apply Rule 8D, recording of satisfaction by the AO under section is sine qua non and the absence of such recording of satisfaction renders the application of Rule 8D vitiated. For this purpose he placed reliance on decisions of coordinate Benches of Tribunal in M/s Balarampur Chini Mills Ltd vs DCIT (2011) 140 TTJ 73, Hindustan Paper Corporation Ltd vs. DCIT (2012) ITA No. 47/Kol/2012. He also placed reliance on a decision reported in Maxopp Investment Ltd. & Ors Vs. CIT (2012) 247 CTR 0162 (Del), and the decision of the jurisdictional High court in CIT Vs. Ashish Jhunjhunwala, G.A. No. 2990 of 2013. On the other side, Argument of the learned DR is that the learned CIT(Appeals) dealt with this matter and vide paragraph no 7 he gave cogent reasons and this appeal is devoid of any merits.
We have gone through the record in the light of the law on the aspect. Observations in the order of the Assessing Officer for invoking provisions under section 14A of the Act read with Rule 8D of the Rules are as follows: “Reg: Disallowance u/s 14A of Rs. 11,84,981/- The assessee has earned dividend income u/s10(34) of Rs.48,04,057/- & LTCG u/s 10(38) of Rs. 3,24,18,990/-. Therefore, a query was raised by order-sheet noting dated 08/02/2010 as to why not expenditure related to earning of exempt income be disallowed by following Rule 8D which has been incorporated by Income Tax (%th amendment) Rules, 2008. The assessee submit reply stating – “That we have offered Rs.8,050/- in our computation being the amount of expense related to dividend and disallowed u/s 14A. In our opinion no other expenses can be categorized with earning of dividend.” The reply of the assessee is not accepted. The Hon’ble ITAT (Spl. Bench) Mumbai has already decided in the case of M/s Daga Capital that application of Rule 8D is retrospective in nature. The disallowance u/s 14A as per Rule 8D is as follows:”
Exim Scrips Dealers Pvt. Ltd., AY 2008-09 7. It was argued before the Learned CIT (Appeals), as could be seen from his order at page No 3, that while framing the Assessment order the Assessing Officer arbitrarily and mechanically applied Rule 8 D of the IT Rules and disallowed expenses of Rs. 11,93,031/- without recording any dissatisfaction about the correctness of the claim of the assessee and reliance on a decision of a coordinate Bench of this Tribunal in DCIT Versus Ashish Jhunjhunwala, was placed. However, learned CIT(Appeals) observed that,
“It may be mentioned that prior to introduction of Rule 8D, jurisdictional bench of Tribunal in a number of cases taken 1% of exempted income to be reasonable estimate for expenditure relatable to exempt income. Even by that yard stick the claim of having incurred expenditure of Rs. 8,050/- in relation to dividend income of Rs. 48,04,057/- and “Long Term Capital Gain” Rs. 3,24,18,990/- appears to be quite meagre. I am, therefore, satisfied that the claim of expenditure incurred and shown by the appellant with regard to the accounts is not correct”.
Basing on this observation of the learned CIT(Appeals), learned DR argues that here is sufficient compliance of recording of satisfaction for invoking provisions under section 14A of the Act read with Rule 8D of the Rules.
On the aspect of recording of satisfaction, Section 14A(2) mandates that 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. Rule 8D(1) of the Rules stipulates that for determining amount of expenditure in relation to income not includible in total income, where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). It is, therefore, clear from the provisions of law that when the assessee himself disallowed some amounts in respect of the expenses attributable to the exempt income, Assessing
Exim Scrips Dealers Pvt. Ltd., AY 2008-09 Officer assumes jurisdiction to invoke section 14A of the Act read with Rule 8D of the Rules only when he reaches a conclusion that the claim of expenditure made by the assessee is not correct. He is required by law to record his non-satisfaction having regard to the accounts of the assessee of the previous year, failing which his assumption of jurisdiction under section 14A of the Act read with Rule 8D of the Rules becomes non est in the eye of law.
Our above understanding is fortified by a decision reported in Maxopp Investment Ltd. & ors. Vs. Commissioner of income tax (2012) 247 CTR 0162 (Del) for the principle that even prior to the introduction of sub-ss. (2) and (3), Section 14A would require the AO to first reject the claim of the assessee with regard to the extent of such expenditure, such rejection must be for disclosed cogent reasons and it is only then that the question of determination of such expenditure by the AO would arise. Further, in Commissioner Of Income Tax, Central-I, Calcutta Versus Ashish Jhunjhunwala G.A. No. 2990 of 2013, wherein the Hon’ble Jurisdictional High Court of Calcutta confirmed the following observations of this Tribunal in ITA No 1809/Kol/2012:
“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. Investors (Bombay) Ltd., supra, we uphold the order of CIT (A)”
When law invests a power in an authority subject to his satisfaction as to the existence of certain conditions, it is the satisfaction of that authority as to the existence or non-existence of such conditions alone that legitimates the exercise of power, but not the satisfaction of appellate authority that would relate back to validate the otherwise invalid orders. For the purpose of provisions under section 14A of the Act read with Rule 8D of the Rules, it is a sine qua non that the Assessing Officer 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, which is conspicuous in this matter. We, therefore, have no hesitation to hold that it is the satisfaction of Assessing Officer and Assessing Officer alone that infuses life into the order of Assessment in respect of disallowance of deductions, and none other much less the learned CIT(Appeals) can substitute his opinion for that of the Exim Scrips Dealers Pvt. Ltd., AY 2008-09 Assessing Officer to validate otherwise invalid order of Assessing Officer. With this view of the matter we hold that the order of the authorities cannot be sustained and the additions made on account of invocation of Section 14A of the Act read with Rule 8D of the Rules shall be deleted. We accordingly allow the appeal.
In the result, appeal of the assessee is allowed.