M/S FORUM PROJECTS P LTD,KOLKATA vs. D.C.I.T CC - II,KOLKATA, KOLKATA

The only issue to be decided in this appeal is as to whether the provisions of section 14A of the Act read with Rule 8D(2)(iii) of the IT Rules could be applied in the facts and circumstances of the case.

The brief facts of this issue is that the assessee is engaged in the business of developing properties and partly selling them and partly giving them on rent. The assessee earned dividend income of Rs. 1,31,451/- from mutual funds during the assessment year under appeal. The assessee maintains a bank account with Standard -C-AM M/s. Forum Projects P. .Ltd 1 Chartered Bank bearing Account No. 100997263. In the said bank , there is a facility of auto swap of surplus funds to the mutual fund and retransfer of fund when there is shortfall in balance. The bank automatically credits the dividend to the assessee’s account. The entire dividend income of Rs. 1,31,451/- was earned only out of this auto swap account from mutual funds. During the course of assessment proceedings, the Learned AO observed that the assessee had made investment in shares of Rs. 62,32,50,000/- during the year and based on this he directly proceeded to apply the second and third limb of Rule 8D(2) of the IT Rules and made disallowance u/s 14A of the Act. By applying the second limb of Rule 8D(2)(ii) of the Rules, a disallowance of Rs. 7,28,598/- was made which was deleted by the Learned CITA on first appeal and against which the revenue has not preferred second appeal before us. By applying the third limb of Rule 8D(2)(iii) i.e 0.5% of average value of investments, a disallowance of Rs. 23,64,132/- was made which was upheld by the Learned CITA. Aggrieved, the assessee is in appeal before us on the following ground:- “1) That the ld.CIT(A) erred in confirming addition of Rs.23,64,132/- u/s. 14A of the I.Tax Act, 1961 read with Rule 8D(2)(iii) i.e 0.5% of the average investment. The assessee made investment in Group Companies and most of the same are brought forward from earlier year. No activity for the same is required. Hence, no expenses can be attributable to the same. As such, addition confirmed by the ld.CIT(A) need not be deleted.”

The Learned AR argued that the Learned AO did not record his satisfaction in terms of Rule 8D(1) of the Rules as to why the claim made by the assessee that no expenses were incurred for earning exempt income is incorrect in the facts and circumstances of the case. He argued that without recording such satisfaction which is mandatory, the Learned AO is prevented from proceeding to invoke Rule 8D(2) of the Rules and hence pleaded for deletion of this disallowance. In support of this contention, he placed reliance on the decision of the co-ordinate bench of the tribunal in the case of DCIT vs REI Agro Ltd in dated 14.5.2013. In response to this, the Learned DR vehemently supported the order of the lower -C-AM M/s. Forum Projects P. .Ltd 2 authorities and in addition with regard to non-requirement of recording of satisfaction, relied on the decision of this tribunal in the case of ACIT vs Champion Commercial Co. Ltd reported in 139 ITD 108 (Kol ITAT).

We have heard the rival submissions and perused the materials available on record including the case laws relied upon by both the sides. We find that the only issue to be decided in this appeal is as to whether the recording of satisfaction in terms of Rule 8D(1) of the Rules is mandatory or not by the Learned AO before proceeding further to Rule 8D(2) of the Rules. We find from the facts of the instant case that the Learned AO has though had examined the accounts of the assessee with regard to the availability of own funds in the context of making separate disallowance of interest on borrowed capital u/s 36(1)(iii) of the Act , did not look into the accounts of the assessee in the context of Rule 8D(1) of the IT Rules and record his satisfaction as mandated thereon that the claim of the assessee that no expenditure was incurred for earning exempt income is incorrect. The assessee had claimed that no expenses were incurred by it for the purpose of earning the exempt income in the form of dividend as admittedly the said dividend income was earned out of auto swap funds which was done directly by the bank without any interference from the side of the assessee. Hence there was no need for the assessee to incur any expenditure thereon for earning the dividend income. We find that the Learned AO rejected the claim of assessee with regard to claim of assessee that no expenditure was incurred in relation to exempt income without indicating any cogent reasons for the same. We find that the Learned AO had straight away embarked upon computing disallowance under Rule 8D(2)(iii) of the Rules. We find that this issue has been elaborately dealt with in the following cases :- 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

In the result, the appeal of the assessee is allowed.