THE LAXMI SALT CO. LTD.,KOLKATA vs. INCOME TAX OFFICER, WARD - 4(1), KOLKATA, KOLKATA

Brief facts of the case are that the assessee is a non Banking Financial Company. Assessee derives income from business, house property, capital gains and other sources which includes income from dividends which is exempt from income tax. During this year, according to assessee, the interest derived by them from Fixed Deposits was Rs. 17,19,626/- whereas the interest paid by them was Rs. 2,26,082/- which was also directly attributable to the income which is not exempt. Assessee on their own disallowed a sum of Rs.49,235 on account of actual direct expenses of STT and on an estimate basis a further sum of Rs.15,000/- which includes an amount of Rs.6,901/- direct expense pertaining to depository charges. On 26.09.2009, assessee filed the return of income for the AY 2009-10. While processing the same under Section 143(3) of the Act, learned AO calculated the disallowance under section 14A of the Act read with Rule 8D of the I. T. Rules, 1962 (hereinafter referred to as the “Rules”) and added a sum of Rs.8,87,670/- over and above, which was added by the Assessee. Challenging the same, the Assessee carried the matter in appeal before the learned CIT(A) and the learned CIT(A) by way of impugned order confirmed the finding of the learned AO on this aspect. Hence, this appeal on the following grounds:

Submissions of the learned AR are many fold. Firstly, he submits that the Assessee was having sufficient own funds from which investment could have been made and no part of the loan was utilized for this purpose. Secondly, interest received during the year is much more than the interest paid as such there is no question of incurring interest on the funds invested to earn the exempt income. There is no common interest expenditure which is neither specifically attributable to taxable income nor attributable to exempt income. Lastly, he submits that if the learned AO does not agree with the disallowance made by the Assessee in the return of income, in the Assessment Order the learned AO should have recorded the reasons and, therefore, mechanical application of section 14A of the Act read with Rule 8D of the Rules is bad under law. Basing on these arguments, he prayed to allow the appeal and to quash the orders or the authorities below.

Learned DR, on the other hand, argued that the Assessee has not been maintaining separate accounts for deriving the exempt and non exempt income, as such, in view of the expenses in this case which are spreading over a large number of voluminous activities, it is not possible for the authorities below to calculate the interest and administrative expenses attributable to the exempt income without resorting to section 14A of the Act read with Rule 8D of the Rules. While arguing so, he heavily relied on the orders of the authorities below.

In the context of above arguments and facts, the point that arises for our consideration is whether the authorities below are justified in disallowing a sum of Rs. 8,87,670/- over and above which was added by the Assessee under section 14A of the Act read with Rule 8D of the Rules?

Now coming to Rule 8D(2)(iii) of the Rules, according to the assessee, total administrative expenses incurred by them during AY 2009-10 was only Rs.12,58,755/, out of which the assessee themselves disallowed a sum of Rs. 9,88,053/- towards building expenses and corporate tax, as such what remains to be considered is only Rs.2,70,702/-, assessee offered a sum of Rs. 15,000/- which includes a sum of Rs.6,901/- pertaining to depository costs, towards indirect expenses. The AO should have considered this fact while computing the disallowance. However, he did not do so. He mechanically recorded the following :

Now turning to the argument of the learned AR that in order to apply Rule 8D, recording of satisfaction by the AO under this section is sine qua non and the absence of such recording of satisfaction renders the application of Rule 8D vitiated, is concerned, 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).

Therefore, it is clear from the above that when the assessee himself disallowed some amounts in respect of the expenses attributable to the exempt income, the learned AO 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. Ld. AR placed reliance on 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. For this proposition he also placed reliance on the decisions reported in 347 ITR 272 (Del), 361 ITR 131(P&H), 372 ITR 694(Del), 376 ITR 390(Del), AND 378 ITR 240 (Del).

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:

From the above discussion, we conclude that own funds of the assessee are sufficiently in excess of investments and the legal requirement of the AO to record the reasons for resorting to Section 14A of the Act read with Rule 8D of the Rules in this matter are conspicuously absent. Viewing from any angle, we are convinced that there is no justification for the authorities below to sustain disallowing a sum of Rs.8,87,670/- over and above which was added by the Assessee under section 14A of the Act read with Rule 8D of the Rules.

In the result, the appeal of assessee is allowed.

Order is pronounced in the open court on 23.09.2016