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Income Tax Appellate Tribunal, “C”, BENCH KOLKATA
Before: SHRI N.V.VASUDEVAN & DR. A.L.SAINI, AM
O R D E R
Per Dr. Arjun Lal Saini, AM:
1. The captioned appeal filed by the assessee, pertaining to the assessment year 2011-2012, is directed against the order passed by ld. Commissioner of Income Tax (Exemptions), Kolkata, dated 29.3.2016, u/s.263 of the I.T.Act.
2. Brief facts of the case qua the assessee are that the assessment u/s. 143(3) of the Income Tax Act, 1961 for the AY. 2011-12 was completed an 18.03.2014 determining the total income at Rs. 20,35,850/- . On further verification of records, it has been found that dividend income at Rs.3,21,19,822/- was earned by the assessee and claimed exempt u/s. 10(34) of the I.T. Act, 1961. As per provisions of section 14A of the I.T.Act, 1961, expenditure incurred in relation to income which do not form part of total income requires to be disallowed in accordance with the provisions of Rule 8D of the I. T. Rules, 1962. The computation of such disallowance was made in the assessment order, which was determined as Rs.18,83,837/-. However, the disallowance was restricted to Rs.6,07,359/-, being the expenditure incurred at the head office. However, the expenditure debited to l/E accounts was Rs.15,97,444/-. It appears from record that during the assessment proceedings, an explanation was submitted by the assessee regarding disallowance u/s.14A, in which the entire expenditure was divided into two segments based an nature of expenses, viz. expense incurred at head office and at school, which have been shown to be Rs.6,07,369/- and 9,90,075/- respectively. But there is no supporting evidence found on record substantiating such segregation of expense or application of income. Hence, such restriction of disallowance in accordance with the provisions of Rule 8D(2)(iii) to the head office expense cannot find its justification without any factual evidence and based on simple precluded and assumed concept. In this aspect, the order passed by the AO found to be erroneous and prejudicial to the interest of revenue.
3. Ld. Commissioner of Income Tax (Exemptions), while passing order U/s 263, observed the followings :-
From the Balance sheet and Income & Expenditure account of the assessee, it appears that the assessee trust was mainly engaged in the business of investment in shares and mutual funds (out of total fund of Rs. 40,49,08,468/-, investment in shares and mutual fund was Rs. 39,62,43,481/- and out of total income of Rs. 4,32,85,926/-, Rs.3,21,19,822/- was earned from dividend) from which exempt income has been derived. In summary, the assessee trust has earned income under normal business procedure, a majority of which is covered by the provision of section 10(34) to be claimed as exempt. It can be further segregated into two types of income, viz. taxable income of Rs.14,33,311/- and exempt income of Rs. 3,21,19,822/-. The income generating options are divided between taxable and non- taxable income in the ratio of 1:22. From the above discussion, it is clear that the major part of the income is exempt income. The administrative and other expenses should also be accounted for in the same proportion. Total expenditure debited in the I/E Account of Rs.15,97,444/-. Therefore, the expenditure should also be allocated in the ration of 1:22 for taxable and exempt income. However, the same estimation for allocation of expenses cannot be followed in straight line method since for earning certain income more expenses are incurred and vice versa.
Since there is no specific straight line method for determining expenditure related to earning of exempt income, Rule 8D is formulated for the purpose of determining disallowance of expenditure u/s. 14A. Mere offer of disallowance of on approximation basis does not qualify for determination of amount of disallowance u/s. 14A, though there is specific provision for determination of the same in the Income Tax Rules.
The inherent proposition behind the contents of Section 14A is disallowance of expenditure in relation to income which does not form part of the total income is that expenditure incurred is not allowable for the purpose whether the assessee claims that no expenditure has been incurred during the previous year. Section 14A(2) of the Income Tax Act states 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 .... ".
In view of the above, disallowance u/s. 14A offered by the assessee is not satisfied and required to be recomputed. The disallowance U/s 14A is determined in accordance with the provisions of Rule 8D(2) specifically designed for the purpose. Reference is also made to the adjudications of Hon'ble High Court of Calcutta in the case of Dhanuka and Sons Vs. CIT(Central)-I, Kolkata [(2011) 244 CTR 511 (CAL)] and Hon'ble ITAT Mumbai Bench (SMC) in the case of Rhythm Exports P. Ltd Vs. ITA [(2005) 2 SOT 429 MUM (SMC)].
Reference is made to the decision of Hon'ble Court in I.T.O -vs- Daga Capital Management [P] Ltd 117 ITD 169 (SB), where it has been held that -
1. It was unanimously held that provisions of section 14A would override the provisions for computing the total income of an assessee. Thus, disallowance would be justified u/s 14A even if the expenditure incurred in relation to income forming part of total income is otherwise allowable u/s 36(1)(iii)/57(iii).
It was also unanimously held that provisions of sub sections (2) & (3) of section 14A are procedural provisions for computing the amount of expenditure incurred in relation to the income forming part of total income and, therefore, would have retrospective effect. Rule 8D was also held to be retrospective in nature on the same reasoning.
3. It was also the unanimous view that in case where expenditure is incurred by the assessee as an investor in shares, the disallowance under section would be justified since the income arising in form of dividend would not form of total income.
Furthermore, The Hon'ble High Court has found the following observation in the case of Godrej & Boyce Mfg Co Ltd -vs-DCIT (ITA 626 & WP 758 of 2010) that-
The provisions of section 14A and Rule 8D are constitutionally valid.
2. The provisions of sub sections (2) & (3) of Sec 14A and Rule 8 are prospective, and not retrospective, in nature and therefore, would apply from assessment year 2007-08.
The basic object of Section 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income.
4. The insertion of Section 14A was curative and declaratory of the intent of the Parliament. The basic principle of taxation is that only net income, namely, gross income minus expenditure that is taxable. Expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. The test which has been enunciated in Walfort for attracting the provisions of Section 14A is that "there has to be a proximate cause for disallowance which is its relationship with the tax exempt income". Once the test of proximate cause, based on the relationship of the expenditure with tax exempt income is established, a disallowance would have to be effected under Section 14A.
In the recent circular issued by the CBDT Circular No. 5/2014 dated 11.02.2014, it has been clarified that disallowance of 14A is applicable for exempt earning investments also even if there is no real income derived in the current year.
The AO has determined disallowance u/s. 14A in accordance to the provisions of Rule 8D(2)(iii) as Rs.18,83,837/-, but the disallowance was restricted to Rs.6,07,359/- without any supporting evidence. Hence, it is concluded that the basis of ascertaining disallowance u/s. 14A adopted by the method is wrong and to be revised strictly abiding by the Rules in this regard without any scope of ascertaining the disallowance on assumption basis, where any concrete document supporting estimation/ assumption is not available, the method of determination of disallowance u/s. 14A in accordance to Rule 8D(2) supersedes over others. On the basis of above observation, it is found the order passed u/s. 143 (3) of the Income Tax Act, 1961 is erroneous and prejudicial to the interest of revenue. Hence, keeping in view of the above, the order passed by AO u/s. 143(3) is set-aside to the file of AO. The Assessing Officer is directed to modify the earlier order and do fresh assessment after consideration and verification of the issue and giving due opportunity to the assessee.
Not being satisfied with the order of CIT(E), the assessee is in appeal before us and has taken the following grounds of appeal :-
1. That on the facts and in the circumstances of the case, the assessment made by the learned ITO neither erroneous nor prejudicial to the interest of revenue and therefore the learned CIT (Exemption) was not justified in invoking the provisions of Section 263.
2. That the order u/s.263 is bad in law and, therefore, the same is liable to be quashed. 3. That on the facts and in the circumstances of the case, the Ld.CIT(Exemption) was not justified in holding that the disallowance computed by the learned ITO to the extent of Rs.607359 was without any supporting evidence and is wrong and further directed the AO to revise the disallowance strictly in accordance with Rule 8D. 4. That the Ld. CIT (Exemption) failed to appreciate that the basis of ascertaining disallowance u/s.14A adopted by the AO was a correct and justified method on facts and circumstances of the case. That the appellant society craves leave to, add to, alter, amend and/ or withdraw all or any of the above grounds at or before the hearing of the appeal.
5.Although, in this appeal, the assessee has raised multiple grounds of appeal, but at the time of hearing the main grievance of the assessee has been confined to the issue that the order passed by the ld. CIT(E) u/s.263 is bade in law and, therefore, the same is liable to be quashed.
6. The assessee did not press the ground No.3 and Ground No.4, therefore, the same are dismissed in limine.
7. Ld. AR for the assessee has submitted that the expenses to the extent of Rs. 6,07,369/- pertains to school at Amrapur to bear cost of educational material provided to the student, salary of teaching and other stuffs, running & maintaining hostel facilities etc. Details/ documents relating these expenses were also produced to the learned ITO as is apparent from the assessment order. The vouchers/ supporting are being produced again for your perusal. Since free education is being provided by our school and expenses are borne to meet the day to day affairs, no surplus fund pertaining to school was ever available with the society which could have been invested for earning exempt income and therefore the Ld. ITO has rightly computed the disallowance u/s. 14A read with Rule 8D(2)(iii) at Rs.6,07,369/- i.e. after excluding the expenses pertaining to the school. As per provisions of section 14A, disallowance of expenditure incurred in relation to income, which do not form part of total income was not quantified, leaving such estimation based on merit. An assessee having income from different sources, has to make expenditure for earning the same. The quantum of expenditure for earning income from a source depends on various constraints like nature of business and others.
There is no absolute method for quantification of expenditure for earning income in the field of earning of dividend income from investment made, since several factors may influence the pattern. Considering the difficulties in estimation of the disallowance, provisions of Rule 8D(2) is applied, which provides a method for estimation of such disallowance.
Ld. AR for the assessee has also relied on the judgment of Tribunal in the case of Britania Industries Ltd., dated 02.03.2016, wherein the Tribunal observed the followings :-
We have given a careful consideration to the rival submissions. The provisions of section 14A of the Act as originally introduced and as amended from time to time as well as the insertion of Rule 8D was subject-matter of several decisions rendered by various Benches of the ITAT as well as the Hon'ble High Courts. The Hon'ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT (2011 )203 Taxman 364(Del) and the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 328 ITR 81 (Bom.) have taken a view that Rule 8D of the IT. Rules will apply only for A.Ys. 2008-09 and subsequent assessment years. It has also been laid down that the assessee has to make a claim (including a claim that no expenditure was incurred) with regard to expenditure incurred for earning income which is not chargeable to tax. Such a claim has to be examined by the AO and only if on an objective satisfaction arrived at by the AO that the claim made by the assessee is not correct, can the AO proceed to apply the computation mode as specified in Rule 8D(2) of the Rules. If the AO comes to the conclusion that claim made by the assessee is not correct, it is only thereafter that the AO can proceed to make the disallowance in terms of Rule 8D of the Rules. Even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. By applying the Rule 8D of the Rules blindly sometimes absurd disallowances would result. In our view, therefore while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. It is for this reason that the satisfaction of the AO regarding expenses incurred for earning exempt income is to be objective satisfaction. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. It cannot therefore be said that once the AO rejects the mode of computation of disallowance u/s.14 of the Act as made by the Assessee, he has no other option but to resort to Rule 8D of the Rules.
Besides the above, we are also of the view that the AO has adopted one of the possible course open to him in law. The CIT cannot invoke jurisdiction u/s.263 of the Act just because he does not agree with the view of the AO. In other words u/s.263 of the Act, the CIT cannot substitute his view with that of the AO. The decision relied upon by the learned counsel for the Assessee clearly supports the stand taken by the Assessee in this regard.
9. We therefore hold that the order of the AO was neither erroneous nor prejudicial to the interest of the revenue and therefore jurisdiction u/s.263 of the Act ought not to have been invoked by the CIT. We therefore quash the order u/s.263 of the Act and allow the appeal by the Assessee.
8. On the other hand, Ld. DR for the revenue has primarily reiterated the stand taken by the AO, which we have already noted in our earlier para and the same is not being repeated for the sake of brevity.
Having heard the rival submissions, perused the material available on record, we are of the view that there is merit in the submissions of the assessee, as the propositions canvassed by the ld. AR for the assessee are supported by the decision of the Tribunal in case of Britannia Industries Ltd. (supra) and the facts narrated by him above. Ld. AR has pointed out that the AO has adopted one of the possible course open to him in law. The CIT cannot invoke jurisdiction u/s.263 of the Act just because he does not agree with the view of the AO. In other words u/s.263 of the Act, the CIT cannot substitute his view with that of the AO.
The decision relied upon by the learned counsel for the assessee clearly supports the stand taken by the assessee in this regard. We, therefore, held that the order of the AO was neither erroneous nor prejudicial to the interest of the revenue and therefore, jurisdiction u/s.263 of the Act ought not to have been invoked by the CIT. We, therefore, quash the order passed u/s.263 and allow the appeal of the assessee.
In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on this 07/12/2016.