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Income Tax Appellate Tribunal, ‘B’ BENCH : BANGALORE
Before: SMT. P. MADHAVI DEVI & SHRI JASON P BOAZ
O R D E R Per Smt. P. MADHAVI DEVI, JM:
This appeal by the assessee is against the order of the CIT(A)-III, Bangalore dated 24/06/2014 for the assessment year 2008-09.
The only grievance of the assessee is against the order of the CIT(A) in sustaining the addition of Rs.7,46,956/- by applying rule 8D r.w.s. 14A of the Income-tax Act 1961 [‘the Act’].
M/s.Manyatha Promoters Pvt. Ltd. Page 2 of 8 2. Brief facts of the case are that there was a search and seizure action u/s 132 of the Act in the case of M/s.Reddy Veeranna and group on 26/06/2007. On the same day, survey u/s 133A of the Act was also undertaken in the premises of the assessee-company whose CMD, Shri Reddy Veeranna was amongst the group searched. During the course of search, many documents/records were seized. Subsequently, during the assessment proceedings u/s 143(3), the AO noticed that the assessee has invested a sum of Rs.6,00,00,000/- in Reliance Equity Fund during the financial year out of which an amount of Rs.3,02,03,144/- was claimed to be out of interest free funds available in the bank account of the assessee with the balance being accounted for from the current account of the concerned bank i.e. HDFC A/c No.5102. He, therefore observed that there is a shortfall of Rs.2,97,69,856/- in the investment and further that the assessee has sold the said shares within a period of 5 days from the date of purchase. He, therefore, held that interest on the shortfall of Rs.2,97,59,856/- for 5 days @ 12.5% i.e. Rs.50,975.78 is to be disallowed u/s 14A of the Act against the exempt dividend income of Rs.44,167.88. The AO further held that the provisions of rule 8D are applicable to the relevant assessment year and therefore the disallowance as per rule 8D(2) works out to Rs.7,46,956/-. He accordingly disallowed the same and brought it to tax M/s.Manyatha Promoters Pvt. Ltd. Page 3 of 8 3. On appeal, the CIT(A) confirmed the disallowance against which the assessee is in second appeal before us.
The learned counsel for the assessee has drawn our attention to various details filed by the assessee in the form of paper book containing pages 1 to 7. He has drawn our particular attention to page 2 which is the balance sheet for the year ended 31/3/2007 to demonstrate that there has been substantial increase in the investment during the relevant financial year. As a source for such investment, he has further drawn our attention to page 3 of the paper book viz., Profit & Loss Account for the year ended 31/3/2008 to demonstrate that the net profit during the relevant year was Rs.30,22,04,557/- as on 31/3/2007. He again drew our attention to page 4 of the paper book which is the balance sheet for the year ended 31/3/2008 to demonstrate that the investment has reduced from Rs,4,01,19,140/- to Rs.1,13,51,773/- as on 31/3/2008. Therefore, according to him, the source of investment is the profits of the assessee and not out of any borrowals carrying the burden of interest. He has also filed cash-flow statement showing the availability of funds for the assessee. He further submitted that no expenditure was incurred by the assessee for realising the dividend income and therefore no disallowance u/s 14A of the Act should be made. He further submitted that rule 8D was introduced only on 24/3/2008 and the dividend was received by the assessee prior to that date and therefore rule 8D would not be applicable. As regards the interest M/s.Manyatha Promoters Pvt. Ltd. Page 4 of 8 attributable to earning of tax-free investment, he submitted that it was only Rs.50,976/- which may be disallowed. He further submitted that application of rule 8D is not automatic but should be applied only if the AO is not satisfied with the correctness of the claim made by the assessee for which he must state reasons but since the AO has not given any reasons as to why the claim made by the assessee was not correct, application of rule 8D is not sustainable.
The learned departmental representative, on the other hand, supported the orders of the authorities below and submitted that for the relevant assessment year i.e. assessment year 2008-09, the provisions of rule 8D were applicable as held by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., reported in (2010) 194 Taxman 203 (Bom) and therefore assessment order as well as CIT(A)’s order are in accordance with law.
Having regard to the rival contentions and the material on record, as well as the decisions relied upon by the learned counsel for the assessee, we find that the dividend income of the assessee is only Rs.44,167/- whereas the disallowance computed by the AO was Rs.7,46,956/-. We find that the AO has not given the working of disallowance u/s 14A, nor has he recorded any satisfaction to the effect that the claim of the assessee that no expenditure has been incurred for earning of dividend income is M/s.Manyatha Promoters Pvt. Ltd. Page 5 of 8 not correct. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (cited supra) while holding that rule 8D is applicable prospectively, has also held that the AO should make disallowance u/s 14A read with rule 8D having regard to the books of account of the assessee. The relevant portion of judgment is reproduced hereunder:
“43. In order to conclude the discussion on this aspect of the case, we would proceed to recapitulate our conclusions. (i) Section 14A was enacted by Parliament in order to overcome the judgments of the Supreme Court in the case of Indian Bank, Maharashtra Sugar and Rajasthan Warehousing 15(1935) 3 ITR 305 VBC 49 ITXA626.10 Corporation in which it was held that in the case of a composite and indivisible business, which results in earning of taxable and non-taxable income, it is impermissible to apportion the expenditure between that which was laid out for the earning of taxable as opposed to non-taxable income; (ii) The effect of Section 14A is to widen the theory of the apportionment of expenditure. Prior to the enactment of Section 14A where the business of an assessee was not a composite and indivisible business and the assessee earned both taxable and non-taxable income, the expenditure incurred on earning non-taxable income could not be allowed as a deduction as against the taxable income. As a result of the enactment of Section 14A, no expenditure can be allowed as a deduction in relation to income which does not form part of the total income under the Act. Hence, even in the case of a composite and indivisible business, which results in the earning of taxable and non-taxable income, it would be necessary to apportion the expenditure incurred by the assessee. Only that part of the expenditure which is incurred in relation to income which forms part of the total income can be VBC 50 ITXA626.10 allowed. The expenditure incurred in M/s.Manyatha Promoters Pvt. Ltd. Page 6 of 8 relation to income which does not form part of the total income has to be disallowed; (iii) From this it would follow that Section 14A has implicit within it a notion of apportionment. The principle of apportionment which prior to the amendment of Section14A would not have applied to expenditure incurred in a composite and indivisible business which results in taxable and non-taxable income, must after the enactment of the provisions apply even to such a situation; (iv) The expression "expenditure incurred" in Section 14A refers to expenditure on rent, taxes, salaries, interest etc. in respect of which allowances are provided for; (v) Sub-sections (2) and (3) of Section 14A are intended to enforce and implement the provisions of Sub-section (1). The object of sub-section (2) is to provide a uniformity of method where the Assessing Officer is, on the basis of the accounts of the assessee, not satisfied with the correctness of the claim of the VBC 51 ITXA626.10 assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act; (vi) Even in the absence of sub-section (2) of Section 14A, the Assessing Officer would have to apportion the expenditure and to disallow the expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. The Assessing Officer would have to follow a reasonable method of apportioning the expenditure consistent with what the circumstances of the case would warrant and having regard to all the relevant facts and circumstances; (vii) Consequent upon the insertion of sub-section (2), the disputes which had arisen between tax payers and the Revenue on the method of determining the expenditure to be disallowed, have been given a quietus by adopting a uniform method of determination; (viii) Sub-section (2) of Section 14A does not enable the Assessing Officer to apply the method prescribed by Rule 8D VBC 52 ITXA626.10 without determining in the first M/s.Manyatha Promoters Pvt. Ltd. Page 7 of 8 instance the correctness of the claim of the assessee, having regard to the accounts of the assessee. Sub-section (2) of Section 14A mandates that it is only when having regard to the accounts of the assessee, the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the total income under the Act, that he can proceed to make a determination under the Rules; (ix) The satisfaction envisaged by Sub-section (2) of Section 14A is an objective satisfaction that has to be arrived at by the Assessing Officer having regard to the accounts of the assessee. The safeguard introduced by Sub-section (2) of Section 14A for a fair and reasonable exercise of power by the Assessing Officer, conditioned as it is by the requirement of an objective satisfaction, must, therefore, be scrupulously observed. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee” In the case before us, there is no recording of the AO about the correctness of the claim of the assessee having regard to books of account of the assessee. Therefore, we set aside the orders of the AO as well as the CIT(A) and direct the AO to re-compute disallowance under rule 8D in accordance with law particularly keeping in view the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg.Co.Ltd. (cited supra). Needless to mention that the assessee shall be given a fair opportunity of hearing.
M/s.Manyatha Promoters Pvt. Ltd. Page 8 of 8 6. In the result, the assessee’s appeal is treated as allowed for statistical purposes.