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Income Tax Appellate Tribunal, “D” BENCH: KOLKATA
Before: Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]
ORDER Per Shri M. Balaganesh, AM:
This appeal by assessee is arising out of order of CIT(A)-1, Kolkata vide Appeal No. 339/CIT(A)-1/Circle-3/2014-15 dated 29.06.2016. Assessment was framed by DCIT, Circle-3, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2011-12 vide his order dated 05.03.2014.
The only issue to be decided in this appeal is as to whether the Ld. CIT(A) is justified in upholding the disallowance made u/s. 14A of the Act read with rule 8D of the I. T. Rules, 1962 (hereinafter referred to as the “Rules”) in the sum of Rs.1,16,870/- in the facts and circumstances of the case.
Brief facts of this issue are that the assessee is engaged in the business of investment in shares, securities and financial activities. The AO on perusal of the Balance Sheet and P&L Account observed that the assessee has investment in shares, debentures and other units to the tune of Rs.46,69,33,480/- as on 31.03.2011. It was also observed that the assessee had deposited total expenditure in its P&L Account to the tune of Rs.5,06,958/- and received dividend income of Rs.1,77,48,735/-. The AO also observed that the assessee had voluntarily disallowed a sum of Rs.3,90,088/- as expenditure relatable to the earning of Harsh Chemicals Ltd., AY 2011-12 dividend income u/s. 14A of the Act. The AO, however, ignored the disallowance made by the assessee and mechanically resorted to Rule 8D(2) of the Rules and arrived at the figure of Rs.22,23,684/- and finally concluded that since the total expenditure deposited by the assessee in its P&L Account was only Rs.5,06,958/- and in view of the fact that assessee itself has already disallowed a sum of Rs.3,90,088/-, he concluded that a sum of Rs.1,16,870/- alone is required to be disallowed u/s. 14A of the Act. This action of the AO was upheld by the Ld. CIT(A) in first appeal. Aggrieved, the assessee is in appeal before us on the following grounds: “
1. For that in the facts and circumstances of the case the Appellate order passed was in violation of principals of natural justice hence is bad in law and be quashed.
2. For that in the facts and circumstances of the case the AO erred in disallowing Rs.1,16,870/- by invoking provisions of Section 14A of the IT Act 1961 read with Rule 8D of the IT Rules 1962 despite the assessee providing detailed working regarding disallowance made suo moto by the assessee.
3. For that in the facts and circumstances of the Ld. Commissioner of Income Tax Appeals erred in holding that the Assessing Officer had recorded his satisfaction for invoking Rule 8D of the IT Rules 1962 in the assessment order.”
The Ld. AR placed reliance on the paper book filed before us wherein he drew our attention to the submissions made before the AO on 19.02.2014 detailing the total expenditure debited in the P&L Account and the basis of disallowance made voluntarily u/s. 14A of the Act in the return of income. He further argued that out of Rs.5,06,958/- a sum of Rs.1,16,870/- was not disallowed by the assessee in the return in view of the fact that the entire expenditure pertains to statutory filing fees and secretarial related expenses which had nothing to do with the earning of dividend income. It was also argued that the assessee had filed a detailed written submission together with various case laws before the ld AO which had been completely ignored by the AO and even without recording any satisfaction in terms of section 14A(2) of the Act read with Rule 8D(1) of the Rules as to how the figure of disallowance made by the assessee is incorrect, the ld AO had erred in mechanically applying Rule 8D(2) and made the disallowance. In response to this, the Ld. DR prayed for setting aside this issue to the file of the ld AO to examine the workings given by the assessee.
Harsh Chemicals Ltd., AY 2011-12 5. We have heard rival submissions and gone through facts and circumstances of the case. We find that the ld AO had not recorded his satisfaction as contemplated u/s. 14A(2) of the Act read with Rule 8D(1) of the Rules by cogent reasons having regard to the accounts of the assessee as to how the disallowance made by the assessee voluntarily in the return of income is incorrect. We find that the ld AO had mechanically applied rule 8D(2) of the Rules which is not in accordance with law. We place reliance on the decision of the Hon’ble Calcutta High Court in the case of CIT Vs. REI Agro Ltd. for AY 2009-10 in of 2013, wherein it was held held as under: “The Assessing Officer also disallowed the expenditure under section 14A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of the claim as regards the claim that "no expenditure” was made by the assessee. The contribution towards provident fund, even if deposited beyond the stipulated period, is allowable by virtue of the amendment and the disallowance under section 14A of the Income Tax Act, 1961 is plainly contrary to the provisions of the statute. The CIT, in the circumstances, allowed the appeal of the assessee and the Tribunal did not interfere. Challenging the order of the tribunal, the present appeal has been filed. We have heard Mr. Bhowmik and are of the opinion that no point of law has been raised. Therefore, this appeal is dismissed.”
Similar view was expressed by the Hon’ble Calcutta High Court in the case of CIT Vs. Ashish Jhunjhunwala in G.A. No. 2990 of 2013 in ITAT No. 157 of 2013 dated 08.01.2014, which reads as under: “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).”
Similar view was also taken by the Hon’ble Delhi High Court in the case of CIT Vs. Taikisha Engineering India Ltd. 370 ITR 338 (Del), wherein the Hon’ble court disapproved of an ld AO invoking Section 14A of the Act read with Rule 8D(2) of the Rules without recording his satisfaction and noted that the recording of satisfaction as to why ‘the voluntary disallowance made by the assessee was unreasonable and unsatisfactory,’ is a mandatory requirement of the law.
Harsh Chemicals Ltd., AY 2011-12 8. Respectfully following the aforesaid decisions, we hold that the disallowance of Rs.1,16,870/- made by the ld AO u/s. 14A of the Act is patently illegal and bad in law and direct the ld AO to delete the same. Accordingly, grounds raised by the assessee are allowed.
In the result, the appeal of assessee is allowed.
Order is pronounced in the open court on 02.12.2016