Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, BENCH ‘A’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ]
ORDER PER N.V.VASUDEVAN, JM:
This is an appeal by the assessee against the order dated 12.11.2013 of CIT(A) XXXVI, Kolkata relating to AY 2008-09.
Ground No.1 raised by the Assessee reads thus: “1. The learned Commissioner of Income Tax (Appeals)-XXXVI ["CIT(A)" for short] has erred on facts and in law in upholding the disallowance of a sum of Rs. 1,36,79,358/- being the provision made for leave encashment in the current assessment year on the basis of actuarial valuation.”
The Assessee is a firm of Chartered Accountants. The registered office of the Assessee is located at 22, Camac Street, Block, 'C " 3rd floor, Ko/kata-700 016. The return of income for the year was filed on 27.09.2008 declaring a total income of Rs. 22,27,24,040. Revised return was filed on 31.3.10 declaring a total income of Rs. 22,28,27,460.
In the course of assessment proceedings the AO noticed that the Assessee while determining its income from profession has claimed as deduction a sum of M/.s. S.R.Batliboi & Associates LLP, 22, Camac Street, Kolkata-700016.
Rs.1,36,79,358 being provision for leave encashment claimed as allowable expense. The AO after making reference of the provision of section 43B(f) of the Income Tax Act, 1961 (Act) which provides that any deduction on account of expenditure on account of leave encashment benefit provided to an employee will be allowed as deduction in the hands of the employer only on actual payment, held that deduction claimed cannot be allowed. The claim of the Assessee was that in view of the decision of Hon 'ble Kolkata High Court in the case of Exide Industries Ltd. Vs. Union of India (292 ITR 470) wherein the High Court has stuck down the section 43B(f) as being arbitrary and unconscionable and de hors the apex court decision in the case of Bharat Earth Movers 245 ITR 428 (SC).
On appeal by the Assessee on the disallowance made by the AO, the CIT(A) made a reference to a decision of the Kolkata ITAT in the case of M/s. Ernst & Young Pvt. Ltd., in and another decision of Bangalore ITAT , held that order of the AO has to be upheld. In the decision of the Bangalore Bench of the ITAT referred to in the order of the CIT(A), the ITAT Bangalore Bench has noticed that against the decision of the Hon’ble Calcutta High Court in the case of Exide Industries (supra), the revenue had filed an appeal before the Hon’ble Supreme Court and the Hon’ble Supreme Court in an interim order stayed the operation of the decision of the Hon’ble Calcutta High Court and further observed that the Assessee would during the pendency of the appeal, pay tax as if section 43B(f) of the Act is on the statute book.
Aggrieved by the order of CIT(A) the assessee has raised ground no.1 before the Tribunal. We have heard the rival submissions. At the time of hearing it was brought to our notice that this Tribunal in Assessee’s own case in & 1377/Kol/2010 for AY 2006-07 & 2008-09 remanded the issue to the AO for fresh consideration after making the following observations: “5. We have considered the submissions of both the parties and have perused the record of the case. We find that Tribunal on identical issue in ITA No.1787/Kol/2008 wherein the Tribunal observed at para 12 in page 6 as under :- - M/.s. S.R.Batliboi & Associates LLP, 22, Camac Street, Kolkata-700016.
"12. Ground No. 5 of the revenue's appeal is against the relief allowed by the CIT(A) in respect 0 provision for leave encashment which was deleted by the IT(A) following the decision of the Hon 'ble jurisdictional High Court in the case of M/s. Exide Industries Ltd. (supra). It was pointed out by the Id. DR that the Hon 'ble Apex Court in SLP (Civil) 22889 of 2008 has stayed the operation of the decision of the Hon 'ble jurisdictional High Court. In view of the above, we set aside the orders 0 the authorities below on this point and restore the matter back to the file of the AO with the direction that he will readjudicate this issue as per decision of the Hon 'ble Apex Court in the case of M/s. Exide Industries Ltd. (supra)" ..
Respectfully following the same we set aside the orders of authorities below on this point and restore the matter back to the file of Assessing Officer for adjudication as per the decision of the Hon 'ble Apex Court in the case of M/s. Exide Industries Ltd. (supra)."
Respectfully following the same we set aside the orders of authorities below on this point and restore the matter back to the file of Assessing Officer for adjudication as per the decision of the Hon 'ble Apex Court in the case of M/s. Exide Industries Ltd. (supra).
Ground No.2 raised by the assessee reads as follows :- “2. The learned CIT(A) also erred on facts and in law in upholding the disallowance of a sum of Rs. 114,010 under section 14A as against Rs 50,188 added back by the appellant to avoid litigation even though the appellant had not incurred any expenses on receiving Dividend Income. 2. The order of the learned CIT(A) to the extend indicated above is contrary to the facts, law and the principles of natural justice. 3. The appellant craves leave to add, alter, amend and / or modify any of the grounds of appeal at or before the hearing of the appeal.”
9. In ground no. 2, the Assessee has challenged the estimated disallowance under section 14A of the Act. The Assessee earned dividend income of Rs.50,18,778/- during the previous year. The question for consideration before the AO was disallowance of expenses incurred in earning the dividend income which had to be disallowed u/s.14A of the Act, while computing total income of the Assessee. During the course of the assessment proceedings, upon query raised by the AO it was M/.s. S.R.Batliboi & Associates LLP, 22, Camac Street, Kolkata-700016. explained by the Assessee that I had invested the surplus funds available with it in Standard Chartered Mutual Fund from time to time from which it earned dividend income. During the current assessment year it earned dividend income amounting to Rs.50,18,778. It was further explained to the AO that these funds were not invested out of any borrowed funds but out of short term surplus fund of the assessee. The assessee has not incurred any expenses to earn dividend income of Rs.50,18,778/- received. Hence, no disallowance should be made as per the provis ions of Section I4A of Act. The Assessee also submitted that though the assessee has not incurred any expenses to earn dividend income of Rs. 50,18,778/ received, yet an expenditure of 1% of the exempt income amounting to Rs 50,188 was added back as amount disallowable U/S 14A of the Act to avoid litigation and allegation that the Assessee must have incurred some administrative expenses. The learned assessing officer in the assessment order has disallowed Rs. 1,14,010 by applying the formula laid down in Rule 8D(2)(iii) of the Income Tax Rules, 1962 (Rules).
10. On appeal by the Assessee, the CIT(A) upheld the order of the AO observing as follows: “4.3 Assessee’s submission and facts available on record is perused. During the course of appellate proceeding the appellant was asked to produce the Balance Sheet and Investment details. From the Balance sheet it is seen that the total investment in Mutual funds is more than 10 crores. Further on perusal of the investment details, it is seen that there is substantial purchase of new investment during the year i.e.
Date Amount HDFC, FMP, NFO 08.02.2008 5,00,00,000/-(5 crores)
Similarly in IDFC Liquid plus fund, there is redemption and switch in from other funds. In IDFC Liquid fund there is redemption and switch in from the funds, etc .. Considering the volume of investments, and the several competing Mutual fund schemes available in Indian market, trained person, who are adept in Mutual fund matter, is required to decide when to buy, what to buy and when to encash, and when to change from one Mutual fund investment to other. For this as the A.O. has correctly stated, expenditure under various heads as well as the salary of the person, who would have utilized at least a part of his time for monitoring the substantial investment of the M/.s. S.R.Batliboi & Associates LLP, 22, Camac Street, Kolkata-700016. assessee. As no separate account of expenditure on account of the investment has been maintained, as the appellant has only added back 1 % of exempt income on estimate basis as the disallowance u/s 14A for exempt income, the A.O. was not satisfied with the correctness of claim for exemption. So the A.O. has correctly taken recourse to the method prescribed in Rule 8D of LT. Rules. Therefore the disallowance as per Rule 8D has been correctly done. Therefore the appeal on this ground is dismissed.”
Aggrieved by the order of the CIT(A), the Assessee has raised ground No.2 before the Tribunal. We have heard the rival submissions. The ld. Counsel for the assessee submitted that the Hon’ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT 2011) 203 Taxman 364 (Del) and the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 328 ITR 81 (Bom) have taken a view that Rule 8D of the I.T. Rules will apply only for A.Ys. 2008-09 and subsequent assessment years. It has also been laid down that the assessee has to make a claim (including a claim that no expenditure was incurred) with regard to expenditure incurred for earning income which is not chargeable to tax. Such a claim has to be examined by the AO and only if on an objective satisfaction arrived at by the AO that the claim made by the assessee is not correct, can the AO proceed to apply the computation mode as specified in Rule 8D(2) of the Rules. It was submitted that in the present case, the assessee has taken a stand that a particular amount has to be disallowed as expenditure incurred in earning exempt dividend income. The AO did not agree with the claim of the Assessee and he estimated the disallowance on a different basis. According to him the rejection by the AO was without assigning any valid reasons and therefore the same should be deleted. Reference was made to certain judicial pronouncements in this regard to which we will make a reference later. The learned DR relied on the order of the CIT(A).
We have considered the rival submissions. With regard to disallowance under rule 8D(2)(iii) of the Rules is concerned, we find that neither the AO nor the CIT(A) have disputed the correctness of the claim of disallowance as computed by the Assessee but have proceeded to compute the disallowance by applying Rule 8D(2)(iii) - M/.s. S.R.Batliboi & Associates LLP, 22, Camac Street, Kolkata-700016. of the Rules without objectively examining the claim made by the Assessee. The AO without doing so, disregarded the claim of the assessee and invoked Rule 8D of the IT Rules without recording the satisfaction as required by Sec.14A(2) of the Act and has in doing so resorted to assumptions and conjectures that the Assessee would have incurred some more expenses. The law is well settled by now that with regard to expenditure in relation to exempt income, AO has to indicate cogent reasons as to why the claim of the Assessee is being disregarded. In CIT Vs. Ashish Jhunjhunwala in G.A. No.2990 of 2013 in ITAT No. 157 of 2013 dated 08.01.2014 rendered by Hon'ble Calcutta High Court, the Hon'ble court upheld order of the ITAT which held that disallowance under Sec.14A of the Act made by the AO without rejecting claim of the Assessee was bad in law. The following was the decision of the Tribunal which was upheld by the Hon’ble Calcutta High Court:-
"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 Assessing Officer 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)."
The Hon’ble Calcutta High Court in the case of CIT Vs. R.E.I.Agro Ltd., in GA 3022 of 2013 in ITAT 161 of 2013 dated 23.12.2013 also took identical view. The aforesaid two decisions by the Hon'ble jurisdictional High Court are binding on this Tribunal. Hence, we hold that the action of the AO in directly embarking on Rule 8D(2) of the rules was not proper and hence the disallowance under rule 8D(2)(iii) of the Rules is also directed to be deleted. The relevant ground of appeal is allowed. - M/.s. S.R.Batliboi & Associates LLP, 22, Camac Street, Kolkata-700016.
In the result, appeal by the Assessee is partly allowed.
Order pronounced in the Court on 03.08.2016.