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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri Waseem Ahmed & Shri S.S.Viswanethra Ravi
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
Both appeals by the assessee are directed against the different orders of Commissioner of Income Tax (Appeals)-XII, Kolkata of dated 12.03.2013 & 14.03.2013. Assessments were framed by DCIT, Circle-11, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his orders dated 30.08.2010 & 17.01.2011 for assessment years 2008-09 & 2009- 10 respectively.
Both the appeals are heard together and are being disposed of by way of common order for the sake of convenience.
ITA No.2028-29/Kol/2013 A.Ys 2008-09 & 2009-10 Avis Tie Up Pvt. Ltd. v. DCIT Cir-11, Kol. Page 2 Shri S.M.Surana & Shri Sunil Surana L’d Authorized Representatives appeared on behalf of assessee and Shri Amitabha Roy, L’d Departmental Representative appeared on behalf of Revenue. First we take up ITA No.2028/Kol/2013 for A.Y 08-09. 3. Sole issue raised by assessee in its appeal is that L’d CIT(A) erred in confirming the action of Assessing Officer by disallowing a sum of ₹79,219/- under Rule 8D(2)(ii) of the Income Tax Rules, 1962 (“IT Rule” for short) and some of ₹17,31,535/- under Rule 8D(iii) r.w.s. 14A of the Act.
Facts in brief are that assessee in this present case is a Private Limited Company and holding license of Non Banking Financial Corporation (NBFC for short) issued by Reserve Bank of India. The assessee is engaged in business of loan, investment and real estate development. The assessee has filed its return of income on 28.07.2008 declaring total income of ₹2,62,49,220/- for the year under consideration. Thereafter case was selected for scrutiny and notice issued u/s 143(2) of the Act was issued. The assessee, during the year earned tax exempted income in the form of dividend income of ₹16,00,385/- and Long Term Capital Gains (LTCG for short) of ₹60,47,303/-. The AO during the course of assessment proceedings observed that no expenditure has been disallowed by assessee in its books of account under section 14A of the Act in relation to the exempted income. Accordingly, AO issued show cause notice to assessee for invoking the provision of Sec. 14A r.w.s. Rule 8D of IT Rule. In compliance to the notice, assessee submitted that no expenditure in relation to exempt income has been incurred. Therefore the question of making disallowance u/s 14A r.w.s. 8D of IT Rule does not arise. However, assessee under protest has submitted that interest earned during the year is of Rs. ₹ 2,80,98,214/- and interest paid is of Rs. ₹ 1,04,235/-. The interest earned exceeds the interest expenses by Rs. ₹ 2,79,93,979/- and therefore the disallowance under Rule 8D(2)(ii) of IT Rule is not warranted. With regard to disallowance under Rule 8D(2)(iii), assessee has worked out the disallowance at ₹17,31,535/-. However, AO has disregarded the claim of
ITA No.2028-29/Kol/2013 A.Ys 2008-09 & 2009-10 Avis Tie Up Pvt. Ltd. v. DCIT Cir-11, Kol. Page 3 assessee by holding that interest expense is indirectly attributable to the earning of tax exempted income of the assessee. Therefore, the provision of Rule 8D(2)(ii) of the IT Rule is very much attracted. Accordingly, disallowance was worked out under clause Rule 8D(2)(ii) of ₹ 79,219/-. With regard to disallowance under Rule 8D(2)(iii), the AO observed that assessee has not objected on the disallowance of the expenditure and assessee agreed for making the disallowance vide its reply dated 10.08.2010 for ₹17,31,535/-. Accordingly, AO disallowed the total sum of ₹18,10,754/- and added back to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A), where assessee submitted that no part of expenditure is directly attributable to earn exempt income and dividend earned during the year have directly been electronically credited in the accounts of assessee by the companies paying the dividend. The borrowings have been utilized for the purpose of making loans in the ordinary course of assessee’s business. Assessee further submitted that it was necessary to provide the segment reporting in terms of Accounting Standard 18 Notified under the Rule, 2006. Accordingly, the company has identified two segments – namely granting of loan and trading in share / security / derivative. Out of total expenditure incurred a sum of ₹ 31,05,032/- has been allocated to securities / derivative trade and a sum of ₹ 9,25,279/- towards the granting of loans. The balance expense of ₹ 27,10,247/- has been left over as un-allocable corporate expense comprising the following:- Nature Amount (Rs) a) Auditor’s fees 67,416/- b) depreciation 9,22,643/- c) charity and donation 8,00,000/- d) miscellaneous expenses 2,95,728/- e) interest 1,04,235/-
ITA No.2028-29/Kol/2013 A.Ys 2008-09 & 2009-10 Avis Tie Up Pvt. Ltd. v. DCIT Cir-11, Kol. Page 4 f) securities transaction tax 5,20,225/- 27,10,046/-
Out of above expenses depreciation being statutory allowance and outside the purview u/s 14A of the Act. Similarly, STT, charitable to donation has already been suo motu disallowed in the computation of income, the interest claimed on expenditure has no nexus with this exempted income and therefore it is allowable expense u/s 36(1)(iii) of the Act. Finally, assessee submitted that balance expenses of ₹3,63,114/- can be at the most subject to the provision of Sec. 14A of the Act r.w.s 8D of the IT Rules.
The assessee also submitted that AO has not recorded any satisfaction before invoking the provision of Rule 8D of the IT Rule as required u/s 14A(2) of the Act. The AO can make the disallowance only after having regard to the accounts of the assessee and is not satisfied with the correctness of the claim of assessee. However, Ld. CIT(A) disregarded the claim of assessee by holding as under:- “4. I have considered the finding of the AO in his order dt. 30.08.2010 and the written submission filed by the AR during the appellate proceedings. Appeal on ground no. 1 is against the disallowance of Rs.79219/- under rule 8D(2)(ii) and Rs.1731535/- under rule 8D(2)(iii) read with Sec. 14A of the IT Act, 1961. During the assessment year under consideration the assessee has earned dividend income of Rs.1600388/- and long term capital gain of Rs.6047303/-. But the assessee has not shown any expenditure for earning the exempted income on the ground that there was no direct expenditure for earning the same. The AR further claimed that since the interest receipt was more than interest outgo, therefore, no disallowance was to be computed under rule 8D(2)(ii). During the assessment proceeding the AR suo moto filed a computation of disallowance under rule 8D(2)(ii) at Rs.1731535/- which was fund to be correct calculation by the AO and the AO accepted it. The appeal has been filed for addition of Rs.79219/- made y the AO on the basis of expenditure calculated by the AO u/s8D(2)(ii) and also 2007 the word used in Sec. 14A(2) is “the assessing officer shall determine the amount of expenditure....”. thus, in my opinion the AO has no option but to calculate the expenses for earning the exempt income under rule 8D read with Sec. 14A of the IT Act, 1961 w.e.f. 01-04-2007. Therefore, the AO is justified in making additions under rule 8D(2)(ii) and 8D(2)(iii) read with Sec. 14A of the IT Act 1961 in order to earn the exempted income. Accordingly, assessee’s appeal on ground no. 1 is dismissed.”
ITA No.2028-29/Kol/2013 A.Ys 2008-09 & 2009-10 Avis Tie Up Pvt. Ltd. v. DCIT Cir-11, Kol. Page 5 Being aggrieved by this order of L’d CIT(A) assessee preferred second appeal before us.
Before us Ld AR reiterated the submission made before the lower authorities that no satisfaction was recorded in the assessment order hence no disallowance can be made and satisfaction has to be having regard to the accounts of the assessee. He cited the reference case law in ITA No.1318/Kol/2013 in the case of Rajma Projects, Lucas Estates in CA No. 65/Kol/2014 and the co-ordinate Bench has decided u/s 14A in ITA No. 1331/Kol/2011 subsequently affirmed by Hon’ble jurisdictional High Court. Ld. AR further stated that own capital was sufficient to cover the investment in shares hence no disallowance of interest can be made and is covered by the decision of co-ordinate Bench in the case of Rajma Projects (supra). Further, he stated that there was no net interest payment since interest received was more than interest paid and hence otherwise also no disallowance can be made and regarding in this question, cited in the case of Trade Apartments Ltd. in ITA No. 1277/Kol/2011 dated 30.03.2012. Ld. AR stated that disallowance of Rs.17,31,535/- was not justified since no satisfaction was recorded and alternatively considering the volume of other business transactions and the fact that in AY 2009-10 entire business of granting of loans and advances could be carried out for Rs.4.45 lakhs and disallowance of Rs.17,31,535/-- was not justified. Again, Ld. AR argued that AY 2009-10, the assessee itself disallowed Rs.56,502/- u/s. 14A out of the total claim of Rs.4.45 lakhs but AO further disallowed Rs.15,76,109/- under Rule 8(D)(2)(ii) of the IT Rule and further disallowance of Rs.17,612,279/- which also included disallowance form interest of Rs.1,85,270/-. He invited our attention that AO has even disallowed the amount far in excess of the actual expenditure claimed in the profit and loss a/c for which AO has not applied his mind without recording satisfaction. On the other hand, L’d DR vehemently relied on the orders of Authorities Below.
ITA No.2028-29/Kol/2013 A.Ys 2008-09 & 2009-10 Avis Tie Up Pvt. Ltd. v. DCIT Cir-11, Kol. Page 6 8. We have heard the rival contentions and perused the materials available on record. From the foregoing discussion, we find that the AO has invoked the provision of Sec. 14A r.w.s. Rule 8D and made a total disallowance of ₹ 18,10,754/- which was subsequently confirmed by L’d CIT(A). Now the question before us arise so as to whether the disallowance made by the AO u/s 14A of the Act is corrected in the aforesaid facts and circumstances of the case. At the outset, we find that AO while making the disallowance u/s 14A r.w.s. Rule 8D of the IT Rule has not recorded the satisfaction as required under the Sec. 14A(2) of the Act. At this juncture, we find it pertinent to reproduce the same:- “[14A. Expenditure incurred in relation to income not includible in total income. [(1)].... ... [(2) 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.”
From a bare reading of the said Section we find that AO has to record the satisfaction having regard to its books of account. In our view AO has not recorded the requisite satisfaction before making the disallowance u/s. 14A(2) of the Act. We also find that from the Memorandum Explaining the provision of Finance Bill, 2006 and CBDT in its Circular dated 28 of 2006 states that since the existing provision of Sec. 14A did not provide a method of calculating the expenditure incurred in relation to income which did not form part of the total income of assessee. There was a considerable dispute between the taxpayers and the Department for determining such expenditure as per section 14A of the Act. It was in this background, that sub-section (2) of Sec. 14A of the Act was inserted so as to provide an uniform method applicable in the situations where Assessing Officer is not satisfied with the correctness of the claim of assessee and such sub-section (3) of Sec. 14A of the Act clarify that the application of method would be attracted even under a situation where the
ITA No.2028-29/Kol/2013 A.Ys 2008-09 & 2009-10 Avis Tie Up Pvt. Ltd. v. DCIT Cir-11, Kol. Page 7 assessee claimed that no expenditure at all was incurred in relation to earning of non-taxable income. In our considered view, it was necessary for the AO to arrive at applying the provision of the Act 14A of the Act to record the ‘satisfaction’ after having regard to its books of account. In this connection, we are relying on the following judgments:- a) Auchtel Products Ltd v. ACIT (2012) 52 SOT 39 (Bom) b) ACIT vs. Sil Investment Ltd. 54 SOT 69 (Trib. Delhi) c) Relaxo Footwears Ltd. V. ACIT (2912) 18 taxmann.com 333 (Del) d) Balarampur Chini Mills Ltd. Vs. DCIT (2012) 20 taxmann.com 117 (Kol) e) ACIT vs. Elcher Ltd. (2006) 101 TTJ 369 (Del) f) ACIT vs. Jindal Saw Pipes Ltd (2008) 118 TTJ 228 (Del) g) CIT vs. Metalman Auto P. Ltd. (2011) 336 ITR 434 (P & H) h) CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P & H) i) DCIT vs. Jindal Photo Ltd.ITA No.4539/Del/2010 dated 22.12.2010 j) Godrej & Byoce vs. DCIT 328 ITR 81 (Bom) The relevant extract of the order of Hon’ble Delhi Tribunal in the case of ACIT vs. Elcher Ltd. (2006) 101 TTJ 369 (Del) is reproduced below.
“A look at the language of s. 14A shows that the AO can disallow only expenditure "incurred" by the assessee in relation to the exempt income. The word "incurred" clearly implies that it must be shown as a fact that some expenditure was in fact incurred by the assessee to produce exempted income. It was open to the legislature to confer power upon the AO to assume that a part of the expenditure must have necessarily been incurred to produce exempted income which the AO can estimate and disallow and accordingly use suitable expressions in the section conferring such power upon the AO. One such instance is s. 38(2) which gives the power to the AO to restrict certain deductions under ss. 30, 31 and 32 "to a fair proportionate part thereof which the AO may determine having regard to the user of such building, machinery, plant or furniture for the purposes of the business or profession". Another such instance is of s. 40A(2)(a) which gives power to the AO to determine, based on his own opinion, as to how much expenditure incurred by the assessee in respect of which payment is made to closely related persons or concerns, is excessive or unreasonable having regard to the fair market value of goods, services or facilities for which the payment is made or the legitimate needs of the business or the benefit derived by the assessee from the expenditure. But, when s. 14A has not given such specific power to the AO, he has no authority to estimate the expenditure which the assessee would have, in the opinion of the AO, incurred in relation to the exempted
ITA No.2028-29/Kol/2013 A.Ys 2008-09 & 2009-10 Avis Tie Up Pvt. Ltd. v. DCIT Cir-11, Kol. Page 8 income. The words "in relation to" income which is exempt under the Act, no doubt, appear to be broad at first impression, but on deeper examination, and read in conjunction with the word "incurred", it seems that these are restrictive words, restricting the power of the AO to estimate a part of the expenditure incurred by the assessee as relatable to the exempted income. It seems that implicit in the expression "in relation to" is the concept that the AO should be in a position to pin point, with an acceptable degree of accuracy, the expenditure which was incurred by the assessee to produce non-taxable income. The word "incurred" signifies that the expenditure must have been actually incurred, not notionally. Reading both the abovementioned expressions together, the conclusion seems inescapable that the expenditure which the AO seeks to disallow under s. 14A should be actually incurred and so incurred with a view to producing non-taxable income. If this much is clear from the section, it follows that it is the duty of the AO to pin point such expenditure on the basis of the material on record. Sec. 14 only removes the disability on the part of the AO to disallow such expenditure, a disability to which he was subjected by the three judgments of the Supreme Court. The mere removal of the disability statutorily, however does not ipso facto authorize him to assume that a part of the expenditure has been incurred by the assessee in relation to the exempted income and to proceed to disallow the same on estimate. The section does not relieve the AO of the burden of proving, on the basis of evidence or material on record that the assessee has in fact incurred expenditure which has relation to the exempted income. There is no dispute that the entire dividend of Rs. 83,02,635 which is exempt under s. 10(33) was received from EM Ltd. by a single dividend warrant and no effort or expenses were necessary or were incurred to earn such income. There is also no material brought to show that the assessee’s contention that no part of the interest can be attributed to the earning of the dividend income since the shares were acquired from the own funds in the earlier years and not from borrowed funds, is factually incorrect. In these circumstances, there is no material on the basis of which the AO would estimate and disallow a sum of Rs. 5 lakhs by invoking s. 14A. Only actual expenditure incurred by the assessee to earn exempted income can be disallowed by the AO under s. 14A.—CIT vs. United General Trust Ltd. (1994) 116 CTR (SC) 194 : (1993) 200 ITR 488 (SC) distinguished; Maruti Udyog Ltd. vs. Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 ITD 119 (Del) relied on.
Expenditure which the AO seeks to disallow under s. 14A should be actually incurred; there being no material with the AO to show that any expenditure was incurred in earning dividend income, nothing could be disallowed under s. 14A on estimate basis.”
Respectfully following the proposition laid down in the aforesaid judgments and in the facts and circumstances of the present case, we are inclined to reverse the impugned orders of Authorities Below and to the contrary ground raised by assessee is allowed.
ITA No.2028-29/Kol/2013 A.Ys 2008-09 & 2009-10 Avis Tie Up Pvt. Ltd. v. DCIT Cir-11, Kol. Page 9 9. In the result, assessee’s appeal is allowed. Coming to ITA 2029/Kol/2013 for AY 09-10. 10. Assessee has raised following ground per its appeal, which reproduced below:- “1. For that on the facts and in relation to the circumstances of the case the Ld. Commissioner of income (Appeals)-XII was not justified in confirming the disallowance of Rs.18,18,898/- u/s 14A by applying Rule 8D(2)(iii) which is in the nature of deemed expenses and not out of specific expenditure incurred.”
The facts of the case in the year under appeal are identical to the facts for AY 09-10 except the amount involved and the Sec.14A r.w.s 8D(2)(iii) under which the order has been passed. As the rest of the facts and circumstances are similar following our order for AY 08-09, we decided the effective ground of appeal for under appeal against the Authorities Below. We hold accordingly. 12. In the result, assessee’s appeal is allowed. 13. In combined result, both appeals of assessee stand allowed. Order pronounced in open court on 15/07/2016 Sd/- Sd/- (S.S.Viswanethra Ravi) (Waseem Ahmed) Judicial Member Accountant Member *Dkp �दनांकः- 15/07/2016 कोलकाता / Kolkata आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. आवेदक/Assessee-Avis Tie Up Pvt. Ltd. 11/1 Sarat Bose Road, Kolkata-20 2. राज�व/Revenue-DCIT, Circle-11, P7, Chowringhee Square, Kolkata-69 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त- अपील / CIT (A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता