DEVA LEASE & FINANCE PVT LTD,KOLKATA vs. I.T.O WD - 3(1),KOLKATA, KOLKATA

This is an appeal by the Assessee against the order dated 26.03.2013 of CIT, Kolkata-1, Kolkata, relating to AY 2008-09 passed u/s 263 of the Income Tax Act, 1961 (Act).

The circumstances under which order u/s 263 of the Act was passed by the CIT are as follows :- The Assessee is a company. It is engaged in the business of investment and finance. During the previous year the assessee received dividend income of Rs.42,30,536/-. The said dividend income was not chargeable to tax under Chapter III of the Act and therefore u/s 14A of the Act expenditure incurred in earning the expenditure incurred in earning exempt income had to be disallowed as deduction in computing total income of the Assessee. In the course of assessment proceedings u/s 143(3) of the Act, in response to a query by the AO in this regard, the assessee submitted before the AO that it had investments both in quoted and unquoted shares and also filed a statement showing a sum of Rs.1,57,930/- as expenditure incurred in earning exempt income. The basis on which the same arrived at by the assessee was as follows :-

The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO making disallowance u/s 14A of the Act was erroneous and prejudicial to the interest of revenue. According to CIT for A.Y.2008-09 Rule 8D of the Income Tax Rules, 1962 (Rules) was applicable and that rule provides the basis of making disallowance u/s 14A of the Act. According to CIT the AO ought to have made disallowance u/s 14A of the Act in terms of Rule 8D of the Rules and if the AO had done so, the disallowance u/s 14A would have been as follows :- “However, as per provision of Section 14A of the l.T. Act read with Rule 8D the amount of disallowances would be at Rs.44,28,370/-. Thus, the A.O has failed to add- bad, amount of Rs.40,05,263/-, as per the following working:- In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely: A x B/C, where, A = amount of expenditure by way' of interest other than the amount of interest included in Point no. (i) incurred during the previous year. B= the average of value of Investment, income from which does not or shall not form part of the total income, as appearing ill the Balance sheet of the assessee, on 'he first day and the last day of tire previous year. C= the average of total Assets as appearing in the Balance sheet of the assessee, on the first day and the last day of the previous year. Here, A = Rs.8949049/- B= (Rs.90859491+Rs. 71231695) /2= Rs.8 1045593/- and So the resultant figure of A x B/C = Rs.4023089/- Lease & Finance )P)Ltd.-A.Y.2008-09 C= (Rs.186635229+173934045)/2 = Rs.180279637/- The error made by the A.O resulted in under assessment of income of Rs.40,05,263/- rendering the assessment order erroneous and prejudicial to the interest of revenue.

In view of the facts narrated above it is clear that the A.O. has failed to take notice of the above facts and failed to apply the relevant provisions of Section 14A read with Rule 8D . He has therefore failed to apply his mind and discharge his duty as an assessing officer during the scrutiny proceedings u/s. 143(3) of the LT. Act. Hence the order passed by the A.O. u/s.143(3) was erroneous in so far us it is prejudicial to the interest of revenue .”

In response to the show cause notice issued by the CIT on lines indicated above the assessee submitted that the AO after considering the facts and all aspects has taken possible view for disallowance to be made u/s 14A of the Act and the CIT in exercise of powers u/s 263 of the Act, the CIT cannot substitute his view with that of the AO. The assessee also submitted that invoking of Rule 8D is not automatic and u/s 14A(2) of the Act the AO’s satisfaction with regard to the amount to be disallowed can be material and only if the AO is so satisfied resort to the provision of Rule 8D have to be made.

CIT however did not agree with the contentions as put forth by the asssessee and he held as follows :- “13. In this case the A.O. has failed to make correct disallowances u/s.14A of the Act read with Rule 8D(I) of LT. Rules 1962 resulted in under assessment of income of Rs 400,5263/-. Therefore, the order passed by him is erroneous and prejudicial to the interest of revenue. In view of the above the order passed by the A.O. is set aside with the direction that he should pass the assessment order after examining the issue in the context of provision of Section 14A read with Rule 8D(1) of I. T. Rules 1962. The A.O should pass speaking order after providing reasonable opportunity to the assessee and verifying documents and evidences connected with the issue of disallowances u/s. 14A read with Rule 8D(l) of I. T. Rules 1962. Hence the order passed by the A.O. u/s. 143(3) of the LT. Act, 1961 for the assessment year 2008-09 is set aside to be framed de-novo as per direction contained in the above parts of this order.”

Aggrieved by the order of CIT the assessee has preferred the present appeal before the Tribunal.

We have heard the rival submissions. The provisions of section 14A as originally introduced and as amended from time to time as well as the insertion of Rule 8D was subject-matter of several decisions rendered by various Benches of the ITAT as well as the Hon’ble High Courts. The Hon’ble Delhi High Court in the case of Maxopp Lease & Finance )P)Ltd.-A.Y.2008-09 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, can the AO proceed to apply the computation mode as specified in Rule 8D(2) of the Rules.

In the present case, the assessee, in so far it relates to common expenses [falling within the ambit of Rule 8D(2)(iii) of the Rules, 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. The question is whether it is mandatory for the AO to apply Rule 8D of the Rules, the moment he rejects the basis of disallowance as made by the AO. We are of the view that even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. If Rule 8D of the Rules is blindly by the AO sometimes it will lead to absurd results. The AO examining the claim of the assessee regarding expenditure incurred in earning the exempt income, is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income.

For the reasons given above we are of the view that invoking of Rule 8D of Rules is not automatic and that the AO u/s 14A of the Act has the discretion to Lease & Finance )P)Ltd.-A.Y.2008-09 substitute the computation of disallowance u/s 14A as made by the assessee is under estimation. The satisfaction contemplated u/.s 14A (2) of the Act is not merely restricted to rejecting the claim made by the assessee and the disallowance to be made u/s 14A of the Act but also includes substituting the claim made by the assessee on any other reasonable basis as the AO deem it fit. In such circumstances the correctness of the AO’s judgment can be reviewed but it cannot be said that the AO had no jurisdiction to do so and AO ought to resort only to the provision of Rule 8D of the Rules. In other words Rule 8D is not automatic and can be resorted to by the AO only as a measure of last resort. For the reasons given above, We quash the order u/s 263 and allow the appeal of the assessee.

In the result the appeal of the assessee is allowed. Order pronounced in the Court on 01.06.2016.