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Income Tax Appellate Tribunal, DELHI BENCH ‘A’ : NEW DELHI
Before: SHRI N.K. SAINI & SHRI KULDIP SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH ‘A’ : NEW DELHI) BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER and SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.2358/Del./2013 (ASSESSMENT YEAR : 2008-09) M/s. Amar Packaging Pvt. Ltd., vs. ITO, Co.Ward 1(4), D – 91/4, Okhla Indl. Area – II, New Delhi. New Delhi. (PAN : AAACA5760G) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri Ved Jain, Advocate REVENUE BY : Shri K.K. Jaiswal, DR Date of Hearing : 13.04.2016 Date of Order : 29.04.2016 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, M/s. Amar Packaging Pvt. Ltd. (hereinafter referred to as ‘the assessee’), by filing the present appeal, sought to set aside the impugned order dated 12.12.2012 passed by Ld. CIT(A)-IV, New Delhi qua the assessment year 2008-09 on the grounds inter alia that:- “1. That on the facts and in the circumstances of the case, the Learned CIT (Appeals)-IV erred in confirming the order of Ld. A.O. for disallowing the expenses of Rs.71,44,183/- incurred in relation to earning the tax free income during the year by invoking section 14A r.w.r. 8D of Income Tax Act, 1961 without considering the facts and circumstances of the case.
The appellant craves leave to add, amend or alter and substitute any of the above mentioned grounds of appeal
before or at the time of hearing of appeal.”
2. Briefly Stated, the facts of this case are : during the scrutiny proceedings, the assessee shown to have earned exempt income in the form of dividend under section 10(34) of the Income-tax Act, 1961 (hereinafter ‘the Act’) for Rs.7,01,194/- on account of investment in the shares. On the query raised by the Assessing Officer, the assessee has computed the expenses relatable to the exempt income at Rs.22,05,762/- and offered the same for disallowance u/s 14A of the Act. However, the AO by invoking the provisions of Rule 8D of the Income-tax Rules, 1962 (hereinafter ‘the Rules’) disallowed the amount of Rs.71,44,183/- being the expenses relatable to earning of exempt income u/s 14A read with Rule 8D of the act and assessed the total income at Rs.20,25,146/- 3. Assessee has carried the matter before the ld. CIT (A) who has dismissed the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
The ld. AR for the assessee challenging the impugned order contended inter alia that the assessee on its own submitted before the AO explaining disallowance u/s 14A shown the disallowance figure at Rs.54,217/- while computing its taxable income which includes one person salary and its conveyance along with proportionate charges of D-mat charges; that the AO has wrongly recorded the figure of Rs.54,217/- as Rs.22,05,762/- and this error has further been perpetuated by the CIT (A); that the AO has applied the provisions of Rule 8D of the Rules without recording its satisfaction and made disallowance of Rs.71,44,183/-; that the disallowance cannot be more than exempt income earned during the year as has been done by the AO/CIT(A) in this case.
However, on the other hand, the ld. DR for the revenue relied on the orders passed by the AO/CIT(A).
Undisputedly, assessee earned exempt income by way of dividend to the tune of Rs.7,01,194/- (inclusive of Rs.55,000/- dividend from the investment in shares and claimed the same as exempted u/s 10(34) of the Act). Detailed computation of income has been brought on record by the assessee, lying at page 1 of the paper book.
However, the AO being not satisfied with the computation made by the assessee made the disallowance u/s 14A read with Rule 8D computed as under :- Rule 8D (2) : Aggregate of (i) Nil (ii) AxB/C A = 1,35,45,453 (Net) Interest B = 3,45,71,230 Average Investment C = 6,71,72,713 Average Assets 1,35,45,453 x 3,45,71,230 / 6,71,72,713 = 69,71,327/- (iii) ½% of Avg Investment = ½% of 34571230 = 172856 Total Disallowance 69,71,327 + 1,72,856 = 71,44,183
In view of the above a sum of Rs.71,44,183/- is disallowed towards expenses relatable to earning of exempt income u/s 14A (r/w Rule 8D) of the Income Tax Act.”
Perusal of the order passed by the AO as well as ld. CIT (A) apparently goes to prove that they have computed the disallowance without recording their satisfaction and without recording reason to reject the computation made by the assessee. So, we are of the considered view that since the AO has not recorded objective satisfaction as required under sub-section (2) of section 14A that he is not satisfied with the correctness of the claim made by the assessee in respect of the expenditure qua the exempt income and in these circumstances, the AO is not empowered to invoke Rule 8D to compute the disallowance.
Even otherwise, so far as exempt income is concerned, it is settled principle of law that the disallowance cannot exceed in any case the exempt income earned during the year by the assessee. In the instant case, assessee has undisputedly earned the exempt income of Rs.7,01,194/- whereas the AO has computed the disallowance at Rs.71,44,183/- which exceeds exempt income. This issue has been dealt with by the Hon’ble jurisdictional High Court in judgment cited as Joint Investments Pvt. Ltd. vs. CIT – (2015) 372 ITR 694 (Del.).
The operative part of the judgment in case of Joint Investment Pvt. Ltd. (supra) is reproduced for ready reference as under :-
“Disallowance under Section 14A read with Rule 80 - assessee volunteered – Rs.2,97,440/- as attributable under Section 14A for the purpose of disallowance - AO on the basis of his own understanding of Rule 8D of the Income Tax Rules disallowed the sum of Rs.52,56,197/- Held that:- In the present case, the AO has not firstly disclosed why the appellant/assessee's claim for attributing Rs.2,97,440/- as a disallowance under Section 14A had to be rejected. In Taikisha [2014 (12) TMI 482 - DELHI HIGH COURT] says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee's claim or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs.48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs.52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.”
Ratio of the judgment in case of Joint Investment Pvt. Ltd. (supra) is applicable to the facts and circumstances of the case because, in the instant case also, the AO by computing the disallowance exceeded the amount of income earned by the assessee; that no objective satisfaction has been recorded to reject the computation made by the assessee who has voluntarily made the disallowance u/s 14A to the tune of Rs.54,217/-; that the assessee has sufficient funds to invest in the tax free investment which was part of its business activities; that the ld. CIT (A) has taken hypothetical figure of Rs.22,05,762/- as voluntary disallowance made by the assessee u/s 14A as against the actual disallowance made by the assessee u/s 14A to the tune of Rs.54,217/- and this fact goes to prove that the CIT (A) has proceeded to affirm the disallowance made by the AO without going into the merit.
In the instant case, AO worked out the disallowance as per section 14A read with Rule 8D of the Income-tax Rules which is not sustainable in the view of law laid down by Hon’ble jurisdictional High Court in judgment cited as Joint Investments Pvt. Ltd. vs. CIT (supra) discussed in preceding para 11, as the disallowance cannot exceed the income claimed by the assessee as exempt income. We, therefore, restrict the disallowance of Rs.7,01,194/-, particularly when the assessee has not proved on record as to how his figure of Rs.54,217/- was worked out. Consequently, the present appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in open court on this 29th day of April, 2016.