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Income Tax Appellate Tribunal, “A” BENCH,
Before: Shri N.Vasudevan, & Shri M. Balaganesh
This appeal of the assessee arises out of the order of the Learned CIT(A)-VI, Kolkata in Appeal No. 308/CIT(A)-VI/Circle-6/11-12/Kol dated 08-01-2013 for the Asst Year 2009-10 passed against the order of assessment framed by the Learned AO u/s 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 in the facts and circumstances of the case, the disallowance u/s 14A of the Act could be made in the sum of Rs. 12,24,192/-.
AllBank Finance Ltd 1
The brief facts of this issue is that the assessee had derived the following exempt income :- Dividend from Mutual Funds 1,61,72,775 Dividend from Shares 14,19,096 Tax free interest 3,84,725 --------------- 1,79,76,596 The assessee voluntarily disallowed a sum of Rs. 4,67,484/- u/s 14A of the Act in the revised computation of income filed before the completion of assessment proceedings together with workings for the same. The Learned AO ignoring the said workings, directly proceeded to make disallowance u/s 14A of the Act to the extent of Rs. 12,24,192/- by making the following observations:-
“It is noticed that the assessee company has claimed exempted dividend income. But in the computation, there was no such disallowance made in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income.”
In the assessment order, the Learned AO had not furnished the workings of arriving at the disallowance u/s 14A of the Act and no details of investments held by the assessee were spelt out by the Learned AO in the order. On first appeal, the Learned CIT(A) upheld the addition made by the Learned AO. Aggrieved, the assessee is in appeal before us on the following grounds:- 1. That, on facts as well as on law, the Learned Commissioner of Income Tax (Appeals) - VI, Kol has erred in confirming the disallowances amounting to Rs.12,24,192 under section 14A without bringing on record any cogent reasons for disregarding and rejecting the estimate including the manner of making estimate of disallowances amounting to Rs.4,67,484 offered by the appellant itself.
2. That, on facts as well as on law, the Learned Commissioner of Income Tax (Appeals) - VI, Kol has erred in restricting the AllBank Finance Ltd 2
disallowances under section 14A to Rs.12,24,192 instead of Rs 4,67,484 offered by the appellant which is most reasonable expenses in relation to earning of tax- free income.
3. That, on facts as well as on law, the Learned Commissioner of Income Tax (Appeals) - VI, Kol has erred in disregarding the order of Learned CIT(A) - VI, Kolkata in respect of assessment years 2006-07 and 2007-08 in the appellant's own case (Appeal No. 850/CIT(A)- VI/Cir-6/Kol/2009-10 and Appeal No. 569/CIT(A)-VI/Cir-6/Kol/2008- 09 respectively and Orders dated 29/11/2010) in which 1 % of the tax- free income was held to be reasonable expenses for the purpose of disallowances under section 14A.
That, on facts as well as on law, the Learned Commissioner of Income Tax (Appeals)-VI, Kol has erred in disallowing 0.5% of tax- free investments in accordance with the provision of Rule 8D read with section 14A(2) of the Income Tax Act, 1961 even though the amount of most reasonable expenses was offered to tax in relation to earning of tax-free income in computation of total income.”
4. The Learned AR argued that the Learned AO had not given the basis with workings for invoking the disallowance u/s 14A of the Act. The assessee had made disallowance u/s 14A of the Act to the tune of Rs. 4,67,484/- by adopting the following basis :-
- The investment decision of the company was taken by the Managing Director , CEO and one Assistant Vice President of the company. Therefore a part of their salary has been considered as amount of expenses attributable to earning of exempt income. - Total salary paid to these persons during the financial year 2008-09 relevant to Asst Year 2009-10 amounted to Rs. 19,16,408/-. (A) - Total exempt income derived by the assessee is Rs. 1,79,76,596/- (B) - Total investments held by the assessee is Rs. 11,97,37,137/-. (C )
AllBank Finance Ltd 3
- Disallowance u/s 14A is worked out in the following manner:- (i) Salary paid to aforesaid persons * Exempt income / total investments (A) * (B) / (C )= Rs. 2,87,718/- (ii) For indirect expenses – 1% of exempt income – Rs. 1,79,766/-
Total disallowance u/s 14A = Rs. 4,67,484/- ( 287718+179766)
The Learned AR argued that the Learned AO did not record any satisfaction contemplated in section 14A read with Rule 8D(1) of the Rules as to why the disallowance figure quoted by the assessee is not correct. Without recording satisfaction in terms of Rule 8D(1) of the Rules, the Learned AO cannot proceed to invoke Rule 8D(2) of the Rules. The Learned AO without prejudice to his main argument, argued that even assuming if disallowance u/s 14A is made in terms of Rule 8D of the Rules, then only the investments yielding exempt income should alone be considered for the purpose of Rule 8D of the Rules. In response to this, the Learned DR vehemently supported the orders of the lower authorities.
We have heard the rival submissions and perused the materials available on record. We find that the assessee had voluntarily disallowed a sum of Rs. 4,67,484/- u/s 14A of the Act with some basis. We find that the assesee does not have any debt funds and hence no interest is debited. The fact is that no investments were made during the previous year relevant to Asst Year 2009-10 out of the money borrowed from outside the company. Thus there is no element of interest cost involved in connection with investment made during the year. The Learned AO without controverting the said workings and without recording
AllBank Finance Ltd 4 his satisfaction with cogent reasons as to why the said figure is incorrect, directly embarked on invoking Rule 8D(2) of the Rules. In our opinion, this action of the Learned AO is not in accordance with law. We hold that the satisfaction need to be recorded in terms of Rule 8D(1) by the Learned AO and not by the Learned CITA. We would like to place reliance in this regard on the following decisions :-
CIT vs Ashish Jhunjhunwala in G.A.No. 2990 of 2013 in ITAT No. 157 of 2013 dated 8.1.2014 rendered by Calcutta High Court
" While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case, it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT (A)".
CIT vs R.E.I. Agro Ltd in GA 3022 of 2013 in ITAT 161 of 2013 dated 23.12.2013 rendered by Calcutta High Court
“The Assessing Officer also disallowed the expenditure under section 14A of the Income Tax Act, 1961 without first recording that he was not satisfied with the correctness of the claim as regards the claim that “no expenditure” was made by the assessee.
Challenging the order of the tribunal, the present appeal has been filed.
We have heard Mr.Bhowmik and are of the opinion that no point of law has been raised. Therefore, this appeal is dismissed”.
AllBank Finance Ltd 5 5.1. We also find lot of force in the alternative arguments of the Learned AR that only investments yielding exempt income should be considered for the purpose of disallowance u/s 14A read with Rule 8D of the Rules. Reliance in this regard is placed on the following decisions:-
• Alliance Infrastructure Projects Pvt Ltd vs DCIT in & 1043 (BNG.)/2013 for Asst Years 2009-10 & 2010-11 dated 12.9.2014 (Bangalore Tribunal) • Balarampur Chinni Mills Ltd vs CIT reported in 140 TTJ (Kol) 73 (Kolkata Tribunal) • CIT vs Corrtech Energy Pvt Ltd reported in 352 ITR 97 (Guj) • CIT vs Shivam Motors in ITA No. 88 of 2014 dated 5.5.2014 rendered by Allahabad High Court
• CIT vs Lakhani Marketing in of 2008 rendered by Punjab & Haryana High Court
• CIT vs Delite Enterprises in of 2009 rendered by Bombay High Court The decision of special bench of Tribunal in the case of Cheminvest Ltd vs CIT reported in 121 ITD 318 had held that disallowance u/s 14A could be made even in an year in which no exempt income was earned or received by the assessee. But this decision has been overruled by Bangalore Tribunal , Gujarat High Court and Allahabad High Court as stated supra. Moreover we also find that the special bench decision in Cheminvest Ltd vs CIT has been overruled by the recent decision of the Delhi High Court in Cheminvest Ltd case itself and AllBank Finance Ltd 6 hence it is no longer good law. Hence we hold in favour of the assessee the alternative argument of the Learned AR that only investments yielding dividend income during the year should be considered for disallowance u/s 14A of the Act.
5.2. In view of the aforesaid facts and circumstances and respectfully following the aforesaid judicial precedents, we have no hesitation in directing the Learned AO to delete the addition made u/s 14A of the Act and accept the disallowance offered thereon to the extent of Rs. 4,67,484/-. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced on 13-01-2016