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Income Tax Appellate Tribunal, BENCH ‘A’ KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ]
IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH ‘A’ KOLKATA [Before Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM ] ITA No.1560/Kol/2013 A.Y 2009-10 M/s. Thakur Prasad Sao & Vs. DCIT, CC-XVII, Kolkata Sons Pvt. Ltd PAN: AABCT9410G (Appellant/Assessee) (Respondent/Department)
For the Appellant/Assessee:Shri Amit Kumar ACA For the Respondent/Department: Shri Sallong Yaden, Addl.CIT, ld.DR
Date of Hearing : 08.03.2016 Date of Pronouncement :23.03.2016
ORDER SHRI.M.BALAGANESH, AM
This appeal of the assessee arises out of the order of the Learned CIT(A), Central-1, Kolkata in Appeal No. 27/CC-XVII/CIT(A),C-I/11-12 dated 18.3.2013 for Asst Year 2009-10, against the order of assessment framed us 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
The only issue to be decided in this appeal is as to whether the disallowance u/s 14A of the Act could be made in the facts and circumstances of the case.
The brief facts of this issue is that the assessee derived dividend income of Rs. 12,51,249/- . No disallowance of expenditure incurred in relation to such exempt income was made by the assessee. Therefore, the Learned AO invoked the provisions of section 14A of the Act read with Rule 8D of the IT Rules. The Learned AO applied Rule 8D(2)(iii) being 0.5% of average value of investments and disallowed a sum of Rs. 9,89,313/- u/s 14A of the Act. It was argued by the assessee that the investments were made out of surplus fund in mutual funds. It was argued that number of transactions of purchase and redemption was 7 and that of switching between funds was 4. The total number of transactions during the year was 11. Hence it was argued
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that the provisions of Rule 8D cannot be applied in the case of the assessee. The disallowance made u/s 14A of the Act was confirmed by the Learned CIT(A). Aggrieved, the assessee is in appeal before us on the following grounds:- 1) That the Ld.CIT(A)-C-I, Kolkata, erred in confirming that disallowance of Rs.9,89,313/- u/s 14A read with Rule 80 of the I. Tax Rule in a routine manner without properly considering the facts of the case. The disallowance was made in respect of the investments made in mutual funds. Such investments require hardly any expenses. Hence, the disallowance, so made, needs to be deleted.
2) The appellant craves leave to add, alter, amend or withdraw any ground or grounds of appeal before or at the time of hearing.
The Learned AR argued that the lower authorities erred in directly invoking Rule 8D(2) of the IT Rules without recording satisfaction in terms of Rule 8D(1) of the Rules . He placed reliance on the decision of the co-ordinate bench decision of this tribunal in the case of REI Agro Ltd , Kolkata vs DCIT in ITA No. 1331 / Kol / 2011 dated 19.6.2013 reported in (2013) 35 taxmann.com 404 (Kolkata-Trib.). In response to this, the Learned DR vehemently supported the order of the lower authorities.
We have heard the rival submissions. We hold that the Learned AO without appreciating the various contentions raised by the assessee had mechanically applied the provisions of Rule 8D(2)(iii) of the IT Rules without recording his satisfaction in terms of Rule 8D(1) of IT Rules as to why the contention of the assessee that no expenditure was incurred for earning exempt income is incorrect having regard to the accounts of the assessee. The language of Rule 8D(1) is very clear in this regard. We place reliance on the following decisions in this regard:-
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(a) Decision of the co-ordinate bench of Mumbai Tribunal in the case of Fali S Nariman vs Addl. CIT reported in (2015) 56 taxmann.com 155 (Mumbai – Trib) dated 30.1.2015, wherein it was held that :
“4. We have heard the parties and perused the material on record. We are wholly unimpressed with the assessee’s argument supporting his working of the expenditure relatable to income not forming part of total income under the Act on the ground that ‘mind’ is his principal asset. So be it; every economic activity, particularly in today’s extremely competitive environment, entails some degree of cerebral activity. There is, however, no corresponding expenditure, or claim in its respect, while the issue at hand is the apportionment of such expenditure. Income, which may or may not arise on incurring expenditure, and again with no certainty as to its quantum, cannot by itself form the basis of either incurring or allocation of expenditure. So however, we consider the Revenue’s reading of r.8D as equally misplaced. The estimate per r. 8D(2) is only qua expenditure relatable to tax exempt income/s. The expenditure claimed stands debited in the assessee’s accounts, which could be inquired into as to their purpose. For all we know, the assessee may be managing his investments in instruments yielding tax exempt incomes, which are at a healthy sum of Rs. 21.71 cr. i.e on an average for the year, on his own, or could also be assisted by personnel, who stand remunerated. No inquiry in this regard stands made, while the assessee has maintained proper accounts, duly audited and, further, bases his claim of having incurred a lower expenditure than that per the statutory prescription of r. 8D, thereon. The expenditure observed as relatable to the income not forming part of the total income by the Revenue are : salary (Rs. 3.54 lacs); printing and stationery (Rs. 0.11 lacs); and bank charges (Rs. 0.10 lacs), without specifying the relationship, so that the same is inferably casual. Even the claim of depreciation (Rs. 7.26 lacs) we observe as principally on law books.
The ingredients of s. 14A(2) r/w r.8D(1) are clearly not satisfied in the instant case. We accordingly find no infirmity in the assessee’s claim of disallowance u/s 14A(1) at Rs. 1,00,000/- . We decide accordingly. “"
(b) Decision of the co-ordinate bench of Kolkata Tribunal in the case of REI Agro Ltd , Kolkata vs DCIT in ITA No. 1331 / Kol / 2011 dated 19.6.2013 reported in (2013) 35 taxmann.com 404 (Kolkata-Trib.) wherein it was held that :
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“6. We have considered the rival submissions. A perusal of the provisions of section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, when filing the return, then if subsection (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee. In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate bench of this Tribunal in the case of Balarampur Chini Mills Ltd. referred to supra, no disallowance under section 14A can be made. 7. Now coming to the merits of the issue. A perusal of the provision of section 14A(1) clearly shows the wordings, “in relation to the income which does not form part of the total income under this Act”. In the present case, this income, which does not form part of the total income under the Act, is the dividend income of Rs.1,32,638/-. Therefore, if any disallowance is to be made in respect of expenditure incurred, it should be in relation to this dividend income of Rs.1,32,638/-. If an assessee has invested in shares, which could get dividend or there is investment which generates dividend income or exempt income as also investment which does not generate exempt income, it is only such investments in respect of which the dividend income or exempted income has been earned which can be considered when computing the disallowance under section 14A read with rule 8D. A perusal of the provisions of rule 8D also talks of satisfaction in sub-rule (1). Rule 8D(2) has three sub-parts. The first sub-part i.e. (i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. That issue is not in dispute here and therefore, we do not go into it in this case. In second sub-part i.e.(ii), it is a computation provided in respect of expenditure incurred by the assessee by way of interest
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during the previous year which is not directly attributable to any particular income or receipt. This clearly means that if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee’s case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks nor the AO that the loan funds have been diverted for making the investment in shares or for non-business purposes. Further rule 8D(2)(ii) clearly is worded in the negative with the words “not directly attributable”. Thus for bringing any interest expenditure, claimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipt. Why we say here that it is to be shown by the AO is on account of the words in Rule 8D(1) being “where the Assessing Officer, …… is not satisfied with. (a) …….. (b) ……..
in relation to income……., he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
In the assessee’s case, admittedly, the assessee has substantial capital. The increase in the capital itself is to an extent of Rs.4 crores and in respect of reserves and surplus, the increase is Rs.112 crores. The loans taken during the year admittedly are for the letters of credit and the assessee is bound to provide the bank stock statement and other details to show the utilization of the loans. No bank would permit the loan given for one purpose to be used for making any investment in shares. The ld. CIT(A), it is noticed that after considering these facts that the assessee had not used any of its borrowings for purchasing the shares, has deleted the disallowance. On this ground itself, the deletion as made by the ld. CIT(A) is liable to be confirmed and we do so”.
(c ) Decision of Hon’ble Delhi High Court in the case of Joint Investments (P) Ltd vs CIT reported in 372 ITR 694 (Delhi), wherein it was held that : “9. In the present case, the AO has not firstly disclosed why the appellant/assessee’s claim for attributing `2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to proceed further and determine amounts is derived after examination of the accounts and rejection if any of the assessee’s claim
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or explanation. The second aspect is there appears to have been no scrutiny of the accounts by the AO - an aspect which is completely unnoticed by the CIT (A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is `48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., `52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case”.
In view of the aforesaid facts and circumstances and respectfully following the various judicial precedents relied upon hereinabove, we hold that the addition u/s 14A of the Act could not be made without recording satisfaction in terms of Rule 8D(1) of the IT Rules. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 23.03.2016
Sd/- Sd/- [N.V.Vasudevan ] [ M.Balaganesh ] Judicial Member Accountant Member Dated : 23.03.2016 Copy of the order forwarded to: 1.. The Appellant/Assessee: M/s. Thakur Prasad Sao & Sons Pvt. Ltd ‘Avani Signature’2nd floor, Kolkata-700 016. 2 The Respondent/Department: The DCIT, CC-XVII, Kolkata Aaykar Bhawan (Poorva) 110 Shantipalli, Kol-107. Bhawan, Matigara, Siliguri. 3 /The CIT, 4.The CIT(A) DR, Kolkata Bench 5.
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Guard file. True Copy, By order, Asstt Registrar **PRADIP SPS
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