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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: Shri P.M. Jagtap, & Shri S.S Viswanethra Ravi
IN THE INCOME TAX APPELLATE TRIBUNAL, “A” BENCH, KOLKATA
Before : Shri P.M. Jagtap, Accountant Member, and Shri S.S Viswanethra Ravi, Judicial Member
I.T.A No. 1336/Kol/2013 A.Y. 2008-09
Gautam Kumar Mitra Vs. DCIT, Cir-54, Kolkata PAN: AIGPM 4864N (Appellant) (Respondent)
For the Appellant/assessee : S/Shri A.K.Tibrewal, FCA & Saurabh Gupta, ACA, ld.ARs For the Respondent/department: Shri Rajat Subhra Biswas, CIT, ld.Sr.DR
Date of Hearing: 03-03-2016
Date of Pronouncement: 27 - 05 -2016 ORDER
SHRI S.S VISWANETHRA RAVI, JM
This appeal of the assessee is arising out of the order of the CIT-XIX, Kolkata in CIT-XIX/Kol./Revision u/s. 263/2012-13/ dated 27-02-2013 passed u/s. 263 of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’) for the assessment year 2008-09.
In this appeal, the assessee has raised the following grounds:- 1) That on the facts and circumstances of the case and in law, the Revision Order passed the Ld. CIT-XIX, Kolkata, under section 263, setting aside the Assessment Order, passed under sec. 143(3), by holding the same to be erroneous as well as prejudicial to the interest of Revenue, concerning the applicability of 14A as well as Rule 8D, is liable to be cancelled, reversed and quashed altogether, for being founded on suppositions, misinterpretations of pertinent law and subjective view of facts.
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That on the facts and circumstances of the case and in law, the Order U/s 263, passed by the Ld. CIT, XIX, Kolkata, setting aside the Assessment Order, on the alleged grounds of omission to effect disallowance of expenses, in the assessment order, under sec. 14A and Rule 8D, to the exempt income, is liable to be annulled and reversed, without ever considering either of the mandatory prerequisites, prescribed in sub- secs. (2) and (3) of section 14A as well as sub-clauses (a) and (b) of Rule 8D (I), respectively.
Without prejudice to Ground No. 1 and 2, even otherwise, on the facts and circumstances of the case, the Revision Order, passed under sec. 263, setting aside the Assessment Order and thereupon directing the modification/revision of the Assessment Order by effecting disallowance u/s 14A/Rule 8D(2)(iii) amounting to Rs 3,95,042/- being 0.5% of concerned Average Investment , is grossly unlawful and devoid of any merit, given the proven fact of nexus of all debits in the profit and loss account , with fully taxable income from Profession.
Without prejudice to Ground No. I, 2 and 3, even otherwise, the Revision Order u/s 263, passed for the alleged omission to take cognizance of Sec. 14A/Rule 8D, prescribed disallowance and adjustment, is bad in law and fact, given the disallowances of expenses as personal expenses, to the extent of Rs 10,94,892/-, adequately encompassing the proposed disallowance of Rs 3,95,042/-.
Without prejudice to Ground No. I, 2, 3 and 4, even otherwise the Revision Order u/s 263, passed for the _alleged ground of omission to take cognizance of and apply sec. 14A/Rule 8D and thereupon disallow Rs 3,95,042/-, to the assessed income, grossly bad in law, given the notable and self-evident omission to appreciate the recovery of all expenses, pertaining to Exempt Income, from the Gross Exempt Income, by the Portfolio Managers, resulting in the consequent reflection of net exempt income in the accounts.
The Appellant craves leave to add to, withdraw, alter, modify, rectify or otherwise amend any or all of the grounds of appeal hereinbefore mentioned.
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The brief facts relevant to the issue are that the assessee is a Barrister at law and deriving his income by way of legal profession practicing law at various courts in India and abroad. He also derives his income from capital gains and other sources. The assessee filed his return of income on 29-09- 2008 showing total income of Rs.113,20,078/- . The same was processed u/s. 143(1) of the Act. The case was selected on the basis CASS section. Notices u/s. 143(2)/142(1) of the Act were issued. During the assessment proceedings the AO made various additions/disallowances.
3.1 On perusal of the P & L account, it was observed that the assessee claimed motor car running expenses and car hire charges for an amount of Rs.4,08,636/-. The AO disallowed and added the same @ 1/5 of Rs.81,727/- being personal upkeep and maintenance of the motor car.
3.2 As the assessee did not deduct the TDS as per provisions of section 194J on a/c of rent paid, the AO disallowed and added of Rs.6,00,000/- u/s. 40(a)(ia) of the Act.
3.3 Further, the AO added Rs.2,55,946/- being 5% of Rs.51,18,917/- towards assessee’s claim of office renovation.
3.4 Likewise, the AO added Rs.93,587/- being 5% expenses of Rs.18,71,735/- towards personal foreign travel/conveyance expenses.
3.5 On a/c of medical expenses the AO added Rs.65,432/- being assessee’s own expenses.
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The CIT on perusal of the relevant assessment records found that during the relevant year under consideration the assessee earned income of rs.22,18,741/- arising out of his investment in mutual funds and the UTI bonds. This income was found to have been claimed by the assessee as exempt u/s. 10. Having noticed that no expenditure attributable to the earning of such exempt income was claimed by the assessee u/s. 14A r.w.r 8 D of the I.T Rules 1962. The ld. CIT by exercising his power u/s. 263 issued notice to the assessee. In response to which the assessee filed written submission dated 03-12-2012. The ld. AR of the assessee filed the copies of judicial pronouncements in support of assessee’s submission. Before the CIT the assessee contended that he had placed certain funds with a scheduled bank that offered portfolio management services. The said bank acquired portfolio shares and submitting statements time to time showing profits and losses. So the assessee submitted that it incurred no expenditure in earning the said exempt income. This view was taken by the AO in the assessment proceeding. Considering this, the CIT disallowed Rs.3,95,042/- being 0.5% of Rs.7,90,08,333/- in pursuance of Rule 8D of the I.T Rules r.w.s 14A of the Act. Relevant portion of findings of the CIT on this issue is reproduced herein below:- “3. The arguments put forward by the Ld. AR have carefully been examined in the light of the legal provisions vis-a-vis the assessee's written submission and the assessment order. The Ld. AR has submitted that is allowance u/s 14A is not automatic, but is permissible only under certain circumstances. He contended that for the purpose of making such disallowance a nexus between the exempt income and the expenditure to be disallowed has to be established. He averred that the assessee placed certain funds with a scheduled bank that offered portfolio management services and that such management of the fund and the portfolio of the shares was exclusively carried out by the bank without requiring the assessee's personal attention and intervention. According to Ld. AR, since there was no involvement from the assessee's side, neither any time was required to be devoted by the assessee nor he had to incur
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any expenditure. However, I do not find much force behind the contention of the Ld. AR. On perusal of the assessee's balance sheet it is noticed that he had huge investments to the tune of Rs.8 crore. A significant part thereof was channelized in mutual fund and UTI bond investments which gave rise to the tax-free income in the assessee's hands. It is imperative that without proper handling and management of the assessee's portfolios the exempt income could not have been generated. Though the Ld. AR has argued that portfolio management was solely carried out by the bank, no documentary evidence to that effect could be adduced by him. It is observed that the assessee has claimed certain expenditure in his income & expenditure account. It can thus always be said that a portion of the said expenditure is undoubtedly relatable to the earning of the exempt income. It is pertinent to mention that sub-sections (2) & (3) of s. 14A of the I.T Act were inserted in the statute with effect from 01.04.2007. The sub-sec.(2) stipulates that if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of the expenditure incidental to the exempt income, he is required to determine the "amount of such expenditure in a reasonable manner. Sub-sec.(3) further spells out that the AO shall do so, even if the assessee claims that no such expenditure has actually been incurred by him in connection with the earning of the exempt income. It, therefore, transpires that the quantification of the inadmissible expenditure u/s 14A has been made mandatory by the Legislature. With effect from 01.04.2008 the Rule 8D has been introduced in the I.T. Rules which prescribes the method of ration of the inadmissible expenditure attributable to the earning of free income. Hence with effect from the A. Yr. 2008-09 the extent disallowance has been specified by the Act as well as the Rule. The Ld. AR has relied upon the judgment of the Hon'ble Punjab & Haryana High in the case of M/s Hero Cycles Ltd. and on the decision of the 'ble Apex Court in the case of M/s. Walfort Share and Stock Brokers Pvt. Ltd. cited supra. Both these judicial pronouncements, being distinguishable, are not applicable to the assessee's case, because in the first case the Hon'ble court dealt with the A.Yr. 2004-05 and in the second case the relevant A.Yr. was 2000-01, but the Rule 8D of the I.T. Rules came into operation with effect from 01.04.2008 i.e. A.Yr. 2008-09. In the assessment years which were under consideration before the Hon'ble Punjab & Haryana High Court and the Hon'ble Supreme Court the Rule 8D did not come into force and accordingly there was no question of the mandatory disallowance u/s 14A read with Rule 8D. In the instant case the AO is found to have failed to abide by the Rule 8D in the context of the
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provisions of s. 14A while framing the assessment order. It is noticed that as per the balance sheet as on 31.03.2008 the opening balance of the assessee's investment stood at'Rs.5,86,92,550/- and the closing balance hereof at Rs.9,93,24,l15/-. Hence the average investment of the assessee during the financial year 2007-08 worked out to Rs.7,90,08,333/-. In accordance with the Rule 80 of the I.T. Rules the disallowable expenditure u/s 14A(2) comes to 0.5% of Rs.7,90,08,333/- i.e . 3,95,042/-. This amount should have been disallowed by the AO in the assessment order. As the assessing officer omitted to make this disallowance, the assessment order has been rendered erroneous as well as prejudicial to the interests of the revenue. I have, therefore, no hesitation in setting aside the assessment order dated 02.06.2010 u/s 263 with the direction to the AO to frame the assessment de novo in the light of the observations made above. Needless to say that while doing so, the AO shall afford a reasonable opportunity of being heard to the assessee.
As aggrieved, the assessee before us and submits that the case of the assessee is squarely covered by the case law reported in (2011) 11 taxmann.com 51 of Hon’ble Punjab & Haryana High Court in the case of CIT Vs. Metalman Auto (P) Ltd. On the contrary, the ld.DR submits that the assessee did not submit any thing before the AO regarding exempt income and the AO did not mention anything about this in his order. The ld. DR also submits that the CIT by exercising his power u/s. 263 under revision 263 recorded his satisfaction and has rightly disallowed the expenditure relating to the exempt income. He finally prayed to dismiss the appeal of the assessee.
Heard the rival submissions and perused the material available on record. The question before us is as to whether the disallowance made u/s. 14A of the Act can be taken into account in absence of actual expenditure. As relied on the Judgment of the Hon’ble Punjab & Haryana High Court supra by the assessee before us, we are of the view that without there being any claim presumption of
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expenditure on this issue cannot be taken into account. Relevant portion of findings of the Hon’ble Court are reproduced herein below:- "25. Ground No. 4 is regarding disallowance under section 14A of the Act in relation to the exempt income earned by the assessee. In this regard, the facts are that the assessee had earned income by way of interest on UTI Bonds and dividend of Rs. 54,000 and Rs. 9,30,8912 respectively, which was exempted from tax. The Assessing Officer estimated a sum of Rs. 1,00,000 having been incurred by the assessee for earning such exempt income and accordingly, made an addition under section 14A of the Act. Out of the sum of Rs. 1,00,000, Rs. 65,000 was considered as interest expenditure relatable to the borrowed capital used for investment in the securities yielding exempt income and Rs. 35,000 was estimated out of the administrative expenses. The CIT (Appeals) has deleted the addition on the ground that the investments have been made from funds on which no interest has been paid. The CIT (Appeals) also noticed that the Assessing Officer has not backed his assertion that investments were made from combined funds of the assessee which could not be bifurcated. Against the deletion of addition, the revenue is in appeal before us.
Obviously, the issue is to be decided in the light of the judgment of the Hon'ble jurisdictional High Court in the case of Hero Cycles Ltd. (supra). As per the Hon'ble jurisdictional High Court, the disallowance under section 14A requires a finding of incurrence of expenditure for earning the exempt income. In case no expenditure has been incurred, the disallowance under section 14A is not justified. In other words, there cannot be a presumption that certain expenditure is bound to be incurred for earning the exempt income. Considered in this light, we find that there is no mistake in the order of the CIT (Appeals). Quite clearly, the Assessing Officer had only made a presumption that certain expenditures have been incurred for earning the impugned exempt incomes. Therefore, following the parity of reasoning laid down by the Hon'ble jurisdictional High Court in the case of Hero Cycles Ltd. (supra), we affirm the decision of the CIT(Appeals) and accordingly, ground raised by the revenue is dismissed.
Further, as relied on by the ld.AR on a recent order dated 02-03-2016 of the ITAT, A Bench, Kolkata in the case of Britannia Industries Ltd Vs. DCIT,
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Kolkata in ITA No. 390/Kol/2013 for the A.Y 2008-09 on applicability of Rule 8D, where if the AO was not satisfied with the method of disallowance made by the assessee u/s. 14A r.w.r 8D of the I.T Rules 1962, while quashing the order of the CIT passed u/s. 263 relevant findings of the Tribunal are reproduced here in below:-
“6. We have heard the submissions of the learned counsel for the Assessee who reiterated submissions as were made before CIT and further placed reliance on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. DLF Ltd. (2013)31 Taxmann.com 158(Del) wherein it was held that quantum of disallowance to be made u/s.14A of the Act was debatable and therefore no powers of revision can be exercised u/s.263 of the Act on such issue. The learned DR relied on the order of the CIT.
We have given a careful consideration to the rival submissions. The provisions of section 14A of the Act 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'bIe Delhi High Court in the case of Maxopp Investments Ltd. v. CIT (2011)203 Taxman Co. Ltd. 328 ITR 81(Bom.) have taken a view that Rule 8D of the LT. 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. If the AO comes to the conclusion that claim made by the assessee is not correct, it is only thereafter that the AO can proceed to make the disallowance in terms of Rule 8D of the Rules. 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. By applying the Rule 8D of the Rules blindly sometimes absurd disallowances would result. In our view, therefore while examining the claim of the assessee regarding expenditure
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incurred in earning the exempt income including a claim that no expenses were incurred, the AO 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. It is for this reason that the satisfaction of the AO regarding expenses incurred for earning exempt income is to be objective satisfaction. 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. It cannot therefore be said that once the AO rejects the mode of computation of disallowance uls.14A of the Act as made by the Assessee, he has no other option but to resort to Rule 8D of the Rules.
Besides the above, we are also of the view that the AO has adopted one of the possible course open to him in law. The CIT cannot invoke jurisdiction u/s.263 of the Act just because he does not agree with the view of the AO. In other words u/s. 263 of the Act, the CIT cannot substitute his view with that of the AO. The decision relied upon by the learned counsel for the Assessee clearly supports the stand taken by the Assessee in this regard.”
The Judgment of the Hon’ble Punjab & Haryana High Court supra are very clear that the disallowance under section 14A is not justified when no expenditure has been incurred and claimed to earn exempt income. The disallowance under section 14A requires a finding of expenditure for earning the exempt income and that finding cannot be on presumption that certain expenditure is bound to be incurred for earning the exempt income. In the present case also, we find that the assessee placed certain funds with a scheduled bank offering portfolio management services and that exclusively carried on its own for the benefit of assessee without requiring the assessee's personal attention and intervention and we see no involvement from the assessee nor any time was required to be devoted by the assessee nor he had to incur any
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expenditure. Therefore, the law laid down by the the Hon’ble Punjab & Haryana High Court supra are applicable to the case on hand and we hold that since the assessee not claimed any expenditure on exempt income and there can not be any disallowance under section 14A on mere presumption.
“A’’ Bench of Kolkata Tribunal in the case of Britannia Industries Ltd Vs. DCIT, held 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 while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO 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 the present case the assessee did not make any claim any expenditure on exempt income, the AO can not make disallowance of expenses as prescribed by Rule 8D(2) of the Rules. Regarding other view whether the CIT can exercise his power under section 263of the Act to declare the assessment order passed by the is erroneous and prejudicial to the interest of the revenue, in our view, the AO has followed the procedure available to him under lawand the view taken by following such procedure can not be a subject under review under section 263 of the Act. Therefore we hold that the view taken by the coordinate Bench supra is applicable to the facts and circumstances of the case on hand and the order of the AO is neither erroneous nor prejudicial to the interest of the revenue, Thus, the order under section 263 of the Act passed by the CIT is quashed.
In the result, the appeal of the assessee is allowed
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THIS ORDER IS PRONOUNCED IN OPEN COURT ON 27 /5/2016
Sd/- Sd/- P.M. Jagtap, S.S Viswanethra, Ravi, Accountant Member J Judicial Member
Date 27 /5/2016
Copy of the order forwarded to: 1.. The Appellant/assessee: Shri Gautam Kumar Mitra 10 Mahendra Road, Kolkata-25. 2 The Respondent/department: Deputy Commissioner of Income Tax, Cir-54, 3 Govt Place (West), Kolkata-700 001. 3 /The CIT, 4. The CIT(A)
DR, Kolkata Bench 6. Guard file. True Copy, By order, Asstt Registrar *PRADIP SPS
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