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Income Tax Appellate Tribunal, DELHI BENCH ‘H’ NEW DELHI
PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER This appeal has been preferred by the assessee against the impugned order dated 27.12.2012 passed by the Ld. CIT(A)-XXXI, New Delhi for assessment year 2007-08 wherein the First Appellate Authority has confirmed the disallowance of Rs. 18,65,562/- under Rule 14A of the Income Tax Act, 1961(hereinafter called the Act).
The facts, in brief, are that a search and seizure operation u/s 132 of the Act was carried out in the case of ‘Rajdarbar Group’ on 31.7.2008. Certain documents allegedly belonging to Assessment year 2007-08 the assessee concern were also seized. Accordingly, notice u/s 153C of the Act was issued, in response to which the assessee filed the return of income declaring an income of Rs. 3,46,87,130/-. During the year, the assessee had paid Rs.1,97,33,526/- as interest to bank and Rs. 18,73,847/- as interest to others. The assessee had itself disallowed an amount of Rs. 8,74,686/- u/s 14A of the Act on the ground that it represented interest paid to banks on loans taken but advanced as interest free loans to group concerns. On perusal of the Balance Sheet, the Assessing Officer noted that the assessee had made some investments in the shares of other group companies.
The Assessing Officer was of the opinion that the income or dividend from these companies would be exempt and hence a part of interest would be disallowable u/s 14A of the Act. The Assessing Officer, accordingly, by applying the provisions of Rule 8D, calculated the interest disallowable at Rs. 29,93,414/- and after taking into account the quantum of interest disallowed by the assessee itself i.e. Rs. 8,74,686/-, disallowed a further sum of Rs. 18,65,562/- and added it back to the income of the assessee.
Assessment year 2007-08 3. On appeal, the Ld. CIT (A) dismissed the appeal of the assessee by making the following observations in para 3.3 of the impugned order:-
“3.3 Further, it is true that Rule 8D came into the statute book on 24/03/2008 and it is applicable for A.Y. 2008- 09 onwards. However, sec. 14A, which has been introduced by the finance act 2001 w.e.f. 1.04.62, mandates disallowance of any expenditure in relation to income which does not form part of the total income under the Act. Thus, even though rule 8D was not available for the assessing officer in respect of A.Y. 2007- 08, he still had the duty not to allow any expenditure in relation to exempt income. In the instant case it is not disputed that the assessee has invested a sizable amount in the shares of its group concerns the income from which is exempt from taxation. Hence the expenditure relating to this activity cannot be allowed as deduction while computing the total income. The appellant has not given any working of the disallowance of Rs. 8,74,686/- made on his own under section 14A. Since the appellant has not lead evidences regarding the expenditure relating to investment activity, the assessing officer has followed the procedure laid down under rule 8D of the Act. In the absence of any other method or the working of the interest relating to this investment, some reasonable method was required to be adopted by the AO. In such view of the matter, the AO cannot be faulted for adopting the procedure laid down under Rule 8D even though there is no statutory backing for such calculation to be necessarily and compulsorily followed for A.Y. 2007-08. The procedure laid down under Rule 8D could be considered as one of the reasonable methods available before the Assessing Officer even for A.Y. 2007- 08, in the absence of any other alternative method. Hence the argument of the AR is not acceptable and the disallowance made is therefore confirmed.”
Assessment year 2007-08 4. Now, the assessee is in appeal before us and has raised the following grounds of appeal:-
“1. On the facts and the circumstances of the case whether the Ld. CIT (A)-XXXI is correct in dismissing the grounds of appeal that the assessment has not been framed on the material seized pursuant to an action taken u/s 132 of the Act but the reassessment has been made which is illegal in law in view of the decision of Hon’ble ITAT in the matter of All Cargo Global Logistics Ltd. Vs. DCIT to 5022 and 5059/M/2010.
2. That on the facts and in circumstances of the case the AO has erred in law as well as on the facts wherein he has applied Rule 8D and has made a disallowance of Rs. 2740248/-. 2.1 That the AO has wrongly applied the Rule 8D which came into effect on 24/03/2008, applicable from A.Y. 2008-09 and onwards, whereas the assessment has been done for the assessment year 2007-08 and it has been decided by the Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. V/s DCIT, reported in 328 ITR 81 (Bom) that Rule 8D cannot be applied retrospectively. 2.2 That the AO has not appreciated the fact that the assessee company has not earned any exempted income as has been held by him in his order. 2.3 That on the facts and in circumstances of the case the AO has ignored that the assessee has suo moto disallowed the interest of Rs. 874686/- in spite of the fact that the assessee has not earned any exempted income.
3. That on facts and in circumstances of the case, the Ld. CIT (A)-XXXI has erred circumstances by upholding the faulty view of the AO.
4. The assessee craves leave addition, alteration, modification of any of the grounds of appeal.”
Assessment year 2007-08 5. The Ld. AR submitted that first of all since the disallowance has been made after the initiation of proceedings u/s 153C of the Act, the same is not sustainable because there is no reference of any incriminating material found as a result of the search and, therefore, the disallowance was outside the scope of section 153C of the Act. On merits, the Ld. AR submitted that the disallowance u/s 14A was unsustainable as the assessee had not earned any dividend income/exempt income during the year. He drew our attention to the Return of Income and the Computation thereof to urge this point wherein no income has been claimed as exempt.
He relied on the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs CIT 378 ITR 33 (Del) for the proposition that section 14A will not apply where no exempt income is received or receivable during the relevant previous year.
The Ld. DR supported the orders of the authorities below and submitted that the assessee itself had made a disallowance and had not furnished any details thereof and therefore the disallowance was justified.
We have heard the rival submissions and gone through the records. It is an undisputed fact that during the year under consideration, the assessee had not received/earned any exempt Assessment year 2007-08 income and, therefore, the provisions of section 14A are not attracted. The issue is squarely covered by the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs CIT (supra) wherein in para 23, the Hon'ble Delhi High Court has held as under:- “23. In the context of the facts enumerated hereinbefore the Court answers the question holding that the expression 'does not form part of the total income' in Section 14A of the Act that there should be an actual receipt of income, which is not includible in the total income the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”
In view of the settled legal position, we allow ground nos. 2 and 3 of the assessee. We are not adjudicating ground no. 1 as it remains only of an academic interest.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the Open Court on 18/04/2016.