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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-II, Chennai, dated 14.11.2014 and pertains to assessment year 2011-12.
Shri N. Madhavan, the Ld. Departmental Representative, submitted that the only issue arises for consideration is with regard to disallowance of `37,87,806/- under Section 14A of the Income- tax Act, 1961 read with Rule 8D of Income-tax Rules, 1962. The Ld. D.R. further submitted that the assessee-company engaged itself in the business of manufacturing and exporting leather gloves. During the year under consideration, the assessee claimed investments of `3.43 Crores in the balance sheet in the year ended 31.03.2011 in the partnership firm M/s M.A. Khizar Hussain & Sons. The assessee-company claimed the income received from the said partnership firm was exempted. The assessee claimed that the provisions of Section 14A read with Rule 8D are not applicable in respect of investments made in the capital account of the partnership firm. The assessee also claimed that no expenditure was incurred in respect of the above investments. However, the Assessing Officer found that the assessee has received income from the partnership firm to the extent of `56,72,766/- on the investments made by the assessee to the extent of `3.43 Crores.
The assessee has claimed the above income of `56,72,766/- as exempted. The Ld. D.R. further submitted that the reserve of the company as per the books of account was to the extent of `48.26 loans as on 31.3.2011. Interest outgo for the year under consideration is `1.44 Crores.
The Ld. D.R. further submitted that even though the assessee showed that a portion of establishment expenses and interest expenses is attributable to the earning of the income, which does not form part of total income, the assessee has not disallowed any amount for earning that income. According to the Ld. D.R., in view of Section 14A(2) of the Act read with Rule 8D, the Assessing Officer is expected to disallow the expenditure which is relating to earning of the exempted income. Referring to Section 14A of the Act, the Ld. D.R. submitted that sub-section (2) of Section 14A of the Act mandates the Assessing Officer to determine the amount of expenditure incurred in relation to earning of exempted income in accordance with the method prescribed under Rule 8D. According to the Ld. D.R., the Legislature has used the word “shall determine”, therefore, the Assessing Officer has no other way except to determine the expenditure incurred for earning the exempt income.
Referring to Rule 8D of the Income-tax Rules, 1962, the Ld. D.R. submitted that where the Assessing Officer is not satisfied with regard to the correctness of the claim of the expenditure or the relation to income which does not form part of total income, then he shall determine the amount of expenditure in relation to such income in accordance with sub-Rule (2) of Rule 8D. Referring to sub-Rule (2) of Rule 8D, the Ld. D.R. submitted that no expenditure was incurred directly in earning the income. Therefore, first limb of Rule 8D(2) may not be applicable. Referring to second limb of Rule 8D(2), the Ld. D.R. submitted that the assessee incurred interest expenditure during the year under consideration which is not directly attributable to the particular income earned by the assessee.
Therefore, as per the second limb of Rule 8D(2), the Assessing Officer has to compute the interest expenditure which was not directly attributable to the particular income. Therefore, according to the Ld. D.R., wherever the interest is not directly attributable to earning of exempted income, then the Assessing Officer has no other way except to compute the expenditure by applying the formula prescribed in the second limb of Rule 8D(2) of the Income- tax Rules, 1962. Therefore, the CIT(Appeals) is not correct in disallowing 10% of the total income earned by the assessee.
According to the Ld. D.R., since the Legislature has used the word “shall determine”, it is mandatory for the Assessing Officer to 8D(2). Therefore, disallowance of 10% would not be justified.
On the contrary, Smt. S. Vidhya, the Ld. representative for the assessee, submitted that admittedly the assessee has earned `56,72,766/- from the partnership firm which is exempted from taxation. The assessee itself disallowed a sum of `5,67,277/- being 10% of the above income. Therefore, the CIT(Appeals) rightly found that there is no need for any further disallowance under Section 14A of the Act. The Ld.counsel further submitted that the CIT(Appeals) by referring to his own order for the assessment years 2008-09, 2009-10 and 2010-11, allowed the claim of the assessee.
The Ld.counsel further submitted that this Tribunal also confirmed the order of the CIT(Appeals) for the assessment years 2008-09, 2009-10 and 2010-11. Therefore, the CIT(Appeals) has rightly allowed the claim of the assessee.
We have considered the rival submissions on either side and perused the relevant material on record. We have also carefully gone through the provisions of Section 14A of the Act. For the purpose of convenience, we are reproducing Section 14A hereunder:-
“[Expenditure incurred in relation to income not includible in total income. 14A. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.]
(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.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act
[Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]”
Section 14A specifically says that 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 the method as would be prescribed under Rule 8D. It is not the case of the assessee that the income earned on the investments made in the capital account of the partnership was income of `56,72,766/- does not form part of total income of the assessee. Therefore, the Assessing Officer has no option except to determine the expenditure in view of the mandate of the Parliament by using the word “shall determine”.
We have also carefully gone through the provisions of Rule 8D of Income-tax Rules, 1962 which reads as follows:-
“METHOD FOR DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME (1) Where the Assessing Officer having regard to the accounts of the assessee of the previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee ; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income ; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year 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 clause(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 in the balance-sheet of the assessee, on the first day and the last day of the 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 ; (iii) an amount equal to one-half per cent. of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the "total assets" shall mean, total assets as appearing in the balance-sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.”
Under Rule 8D(1), when the Assessing Officer having regard to the accounts of the assessee of the previous year is not satisfied with the correctness of the claim of expenditure made by the assessee or the claim made by the assessee that no expenditure was incurred in relation to the total income, then he shall determine the amount of expenditure in relation to such income in accordance with applying Rule 8D, the satisfaction of the Assessing Officer with regard to accounts of the assessee is more relevant. In other words, the Assessing Officer has to record his finding that the accounts of the assessee does not satisfactorily explain the expenditure incurred for earning the income, which does not form part of the total income. We have also carefully gone through the order of the assessment. The assessee itself claimed before the Assessing Officer that it had made a disallowance of `5,67,277/- being 10% of the income earned from the partnership firm, under Rule 8D. Therefore, it is an admitted position of the assessee that a disallowance has to be made. Now the question arises for consideration is when the assessee admittedly incurred expenditure indirectly, which is attributable to earning of the income, whether such expenditure has to be computed on ad hoc basis by estimating the expenditure or as per the method prescribed under Rule 8D(2) of the Income-tax Rules, 1962? This Tribunal is of the considered opinion that when the assessee itself admitted that a disallowance has to be made with regard to earning of the income which is exempted from taxation under the Income-tax Act in view of the language employed by the Parliament in Section 14A(2) that an Assessing Officer “shall determine” and the Rule 8D(1), this sub-Rule (2) of Rule 8D has to be adopted. Since the Parliament and Rule making authority employed the language “shall determine”, it is obligatory on the part of the Assessing Officer to determine the expenditure as provided in sub-Rule (2) of Rule 8D.
Therefore, estimation of expenditure at 10% may not be in accordance with provisions of sub-Rule (2) of Rule 8D.
We have also carefully gone through the order of this Tribunal in the assessee's own case in to 197/Mds/2014 dated 28.03.2014. This Tribunal found that the assessee has interest-free own funds to the extent of `42.95 Crores and out of these, the investments were made. Therefore, this Tribunal found that the investments were made from the interest- free funds, therefore, no disallowance is required. However, the provisions of Section 14A and Rule 8D and the language employed by the Parliament “shall determine” were not brought to the notice of the earlier Bench. Therefore, this Tribunal confirmed the order of the Assessing Officer wherein 10% of the income from the firm was disallowed. In view of the discussion made earlier relating to the provisions of Section 14A of the Act, this Tribunal is of the considered opinion that it is mandatory for the Assessing Officer to 11 adopt the method prescribed in Rule 8D(2) of the Act. Therefore, the CIT(Appeals) is not justified in accepting the ad hoc expenditure on estimation of 10% of the income. Accordingly, we set aside the orders of the lower authorities and the entire issue of Rule 14A r.w. Rule 8D is remitted back to the Assessing Officer. The Assessing Officer shall determine the expenditure incurred by the assessee as per the method prescribed in the second limb of Rule 8D(2) of the Income-tax Rules, 1962, after giving reasonable opportunity to the assessee.
In the result, the appeal of the Revenue is allowed for statistical purposes.
Order pronounced on 26th June, 2015 at Chennai.