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Income Tax Appellate Tribunal, BENCH “A”, KOLKATA
Before: Hon’ble Shri N.V.Vasudevan, JM & Shri M.Balaganesh, AM]
This is an appeal by the Assessee against the order dated 30.1.2013 of CIT, Kolkata-III, Kolkata, passed u/s.263 of the Income Tax Act, 1961 (Act) relating to AY 2008-09.
The Assessee is a company. It is engaged in the business of manufacturing and trading of bakery products. For AY 2008-09 the Assessee filed return of income on 29.9.2008 declaring total income of Rs.99,74,64,581/-. In the course of assessment proceedings u/s.143(3) of the Act, the AO noticed that the Assessee had on his own disallowed a sum of Rs.26,07,177/- u/s.14A of the Act, being expenditure incurred by the Assessee in earning income which does not form part of the total income under the Act. The AO called upon the Assessee to explain the basis on which the aforesaid sum was quantified by the Assessee. The Assessee gave details of the basis of its quantification as below:
Britannia Industries Ltd. A.Yr.2008-09 Position Nature of Amount Estimate Estimated cost Expenses percentage of that can be time devoted apportioned Officer Salary 4,82,278 100% thereof 492,778 Telephone 6,000 Rs.492,778 Medical Premium 4,500 Manager Salary 789,443 50% thereof 443,472 Travelling 75,000 Rs.443,472 Telephone 18,000 Medical Premium 4,500 Treasury Salary 6,570,211 25% thereof 1,670,928 Head Travelling 100,000,9000 Rs.1,670,928 Telephone Medical 4,500 Premium Total 8,063,432 2,60,178
The AO was of the view that the calculation given by the Assessee was reasonable. He however was of the view that the time devoted by the Treasure head towards monitoring of investments and maintaining accounting records thereof was on the lower side. He estimated that 40% of the treasury head time was to be considered as having been utilized towards monitoring of investments and maintaining accounting records thereof. The disallowance in respect of treasury head was worked out by the AO at 40% of Rs.66,83,711 viz., Rs.26,73,484/-. As a consequence the disallowance u/s.14A of the Act was recomputed by the AO at Rs.36,09,734/- in the order dated 24.12.2010 passed by the AO u/s.143(3) of the Act.
The CIT in exercise of his powers u/s.263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue. According to him once the basis of estimation of disallowance as done by the Assessee is not accepted by the AO, than the AO has no other option but to resort to make disallowance in accordance with Rule 8D of the Income Tax Rules, 1962 (Rules) and he could not substitute the estimation of the Assessee by his own estimation.
Britannia Industries Ltd. A.Yr.2008-09 4.1. To the show cause notice issued by the CIT u/s.263 of the Act, the Assessee gave reply pointing out that the view taken by the AO was a possible view and the same was not erroneous or prejudicial to the interest of the revenue. The Assessee placed reliance on the decision of the Hon’ble Supreme Court in the case of Malabar Industrial Co. Vs. CIT 243 ITR 83(SC). The Assessee also submitted that even in a case where the AO rejects the basis of disallowance by an Assessee it is not necessary that the AO should mandatorily resort to Rule 8D of the Rules for making disallowance u/s.14A of the Act. Reference was made to the decision of ITAT Kolkata in the case of Balarampur Chini Mills Ltd. Vs. DCIT dated 29.7.2011 for AY 2008-09.
4.2. The CIT however held that if the AO was not satisfied with the method of disallowance u/s.14A of the Act as done by the Assessee he has no other option but to resort to make disallowance in accordance with Rule 8D of the Rules. He set aside the order of the AO and directed the AO to compute disallowance u/s.14A of the Act by applying Rule 8D of the Rules.
Aggrieved by the order of the CIT the Assessee is in appeal before the Tribunal.
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’ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT (2011)203 Taxman
Britannia Industries Ltd. A.Yr.2008-09 364(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. 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 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 u/s.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 Britannia Industries Ltd. A.Yr.2008-09 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.
We therefore hold that the order of the AO was neither erroneous nor prejudicial to the interest of the revenue and therefore jurisdiction u/s.263 of the Act ought not to have been invoked by the CIT. We therefore quash the order u/s.263 of the Act and allow the appeal by the Assessee.
In the result appeal by the Assessee is allowed.
Order pronounced in the court on 02.03.2016.