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Income Tax Appellate Tribunal, SURAT BENCH, SURAT
Before: SHRI PAWAN SINGH, JM &DR. A.L.SAINI, AM
�नधा�रती क� ओर से / Assessee by : Shri Mehul Shah, C.A राज�व क� ओर से / Respondent by : Shri Vinod Kumar– Sr.DR सुनवाईकीतारीख/ Date of Hearing : 22/11/2022 घोषणाकीतारीख/Date of Pronouncement : 09/12/2022 आदेश / O R D E R PER DR. A. L. SAINI, ACCOUNTANT MEMBER: Captioned appeal filed by the assessee, pertaining to the assessment year 2014-15, is directed against the order passed by the Learned Commissioner of Income Tax(Appeals)-Valsad [for short ‘CIT(A)’] dated 06.04.2018, which in turn arises out of an assessment order passed by the Assessing Officer (‘AO’ for short) u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide order dated 26.12.2016.
Grounds of appeal
raised by the assessee are as follows: “1. On the facts and in circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has erred in partly confirming the addition of Rs.11,52,036/- out of Rs.12,49,430./- made by Assessing Officer u/s 14A read with rule 8D.
2. It is therefore prayed that the above addition confirmed by the CIT(A) may please be deleted.”
3. The relevant material facts, as culled out from the material on record, are as follows. The assessee before us is a partnership firm and is engaged in the business of manufacturing of textile machineries and related spare parts and also engaged in labour job work to its ancillary business. The assessee-firm filed its return of income declaring total income of Rs.19,33,38,980/- on 25.11.2014 and subsequently filed its revised return declaring a revised income of Rs.18,78,37,840/-. Both these return were processed under section 143(1) of the Act by CPC Bangalore. Thereafter, assessee`s case was selected for scrutiny through CASS. The assessing officer, a perusal of books of accounts filed by the assessee-firm, observed that in the year under consideration, the assessee has debited interest expenses on borrowed funds, while on the other hand, has invested in instruments that yield / shall yield exempt income. The assessee was asked to show cause as to why the proportionate interest expenditure should not be disallowed as per provisions of section 14A of the Act.
4. In response to the show cause notice, the assessee furnished a reply on dated 23.12.2016, which is reproduced below: “Regarding disallowance u/s 14A It is respectfully submitted that the assessee-firm had not incurred any expenditure specifically for making investments and carrying out activities for earning income in form of dividend from shares. The firm’s main business was altogether different and it was engaged in the business of manufacturing of machineries etc. and it had made various investments in shares for deployment of surplus fund and it was not required to incur any expenditure specifically for carrying out investments activities for the reason that all the investments in shares were made through brokers who were providing door step free services for investment related activities and all investments were made directly from bank account by transferring surplus funds from time to time. Therefore, such investments were made without incurring any specific expenditure related to such investments were made without incurring any specific expenditure related to such investments and it was just made in the routine course. However, assessee had voluntarily made disallowance of Rs.48,697/- (i.e. 1% of dividend income) as estimate expense related to exempt income in its computation of income while filling the return of income. Your honour will appreciate that the quantum of income on such investment was not so big as compared to the income from main business activities of the assessee-firm. Thus, it is very clear that the assessee-firm was not required to incur any specific expenditure as all such investment activities were carried out during normal office activities and no special efforts and no specific staff deployment was required for carrying out these activities. It may also please be noted that the assessee-firm has not incurred any interest expenditure or financial charges for carrying out investment activities in shares. Under such circumstances, no disallowance u/s 14A is called for.
5. However, the assessing officer has rejected the contention of the assessee and held that assessee has not provided any specific details as to how the amount of 48,697/- was arrived at being relatable to the exempt income. Even the new amended provisions of section 14A of the Act, dated 02.06.2016 is not applicable with retrospective effect. In the absence of any specific details, the calculation of disallowance as per section 14A r.w.s. Rule 8D was worked out by the assessing officer as follows: I. Expenses relating to the exempt income does not form part of the total income Rs.48,697/- …(I) II. Expenses by way of interest which are not directly attributable to any particular income or receipt or 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. A =amount of interest paid net of interest received : Rs.Nil B= average value of investment from which exempt income is earned: Rs.24,01,46,608/- C= Average of total asserts: Rs.80,54,64,165/- Therefore A*B/C = Rs.Nil ….(II) III. 0.5% of average value of investments Particulars Opening amount Closing amount Total investments Rs.22,56,24,264/- Rs.30,29,81,228/- in shares
Average investments Rs.24,01,46,608/- 0.5% of average investments Rs.12,00,733 (III) Thus, disallowance u/s 14A read with rule 8D was made by AO at [ = (I) +(II) +(III)] Rs.12,49,430/-
Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the Ld. CIT(A), who has confirmed the action of the Assessing Officer observing as follows: “After considering the findings of the Assessing Officer and submissions of the appellant, I find that the appellant has challenged disallowance of Rs.12,49,430/- u/s 14A r.w.Rule 8D on the ground that the AO did not record any satisfaction that the appellant’s claim for expenditure incurred pertaining to exempt income was incorrect. In the assessment order, the AO had show- caused the appellant as to why disallowance u/s 14A of the Act should not be made after considering the fact that there was interest expense on borrowed fund whereas the appellant had invested in the instrument yielding exempt income. The appellant’s contentions before the AO regarding voluntary disallowance of Rs.48,697/- (1% of the dividend income), was not accepted on the ground that the appellant had not given specific details as to how Rs.48,697/- only was relatable to exempt income. Thereafter, the AO proceeded to compute disallowance as per Rule 8D(iii) @ 0.5% average value of investments which worked out to Rs.12,00,733/-. The total disallowance of Rs.12,49,430/- (Rs.12,00,733)/- + Rs.48,697/-) was made and added to the total income. On the other hand, the appellant did not record any satisfaction for computation of disallowance u/s 14A of the Act and referred to several court decisions to support its contentions that satisfaction of the AO as to the incorrect claim made by the appellant was sine qua non for invoking the applicability to the Rule 8D. After going through the assessment order, I find that the AO has mentioned in para 4.2 of the assessment order that the disallowance by the appellant amounting to Rs.48,967/- was not acceptable as the same was not explained by the appellant as to how only this much expenses were incurred for earning exempt income of Rs.48,69,690/-. Thus, it is apparent that, the AO was not explained by the appellant as to how only this much expenses were incurred for earning exempt income of Rs.48,69,690/-. Thus, it is apparent that, the AO was not satisfied with the correctness of the claim of expenses of Rs.48,967/-. This fulfils the requirement of provision of sec. 14A(2) of the Act. Even the appellant has claimed that the voluntary disallowance u/s 14A of the Act was made @ 1% of the dividend income meaning thereby that this was not actual expenses but merely ad hoc disallowance. Thus, the assessment regarding the claim of only Rs.48,697/- pertaining to exempt income. Further, all the court decisions refers to only the requirement of satisfaction of the AO regarding the claim of only Rs.48,697/- pertaining to exempt income. Further, all the court decisions refers to only the requirement of satisfaction of the AO regarding correctness or otherwise of claim of expenses pertaining to exempt income. There is no specific format for recording of such satisfaction. Hence, I hold that the AO has clearly brought out his non- satisfaction regarding the expenses of Rs.48,697/- claimed to be pertaining to exempt income. Therefore, I do not find any merit in the submission of the appellant with regard to no recording of satisfaction before proceeding with disallowance u/s 14A of the Act. It is undisputed fact that the appellant had exempt dividend income from various investments and it is also undisputed that the appellant itself had some acceptance about expenses incurred pertaining to the except income. This prompted the appellant to disallow voluntarily 1% of the exempt income. However, the appellant could not explain before the AO or before the undersigned as to how
only Rs.48,697/- was the expense pertaining to exempt income. In such a situation when the appellant is unable to justify the claim of expense pertaining to exempt income, Sec. 14A and Rule 8D comes into play to work out the disallowance. The appellant has no option but to work out the disallowance as per sec. 14A of the Act. The appellant has to show and justify actual expense incurred or compute the disallowance as per sec.14A and Rule 8D of the Act.In view of these facts, the AO has rightly restored to disallowance u/s 14A r.w Rule 8D. The disallowance worked out by the AO as per Rule 8D(iii) of Rs.12,00,733/- whereas the appellant had already disallowed Rs.48,697/- on ad hoc basis. Hence, the disallowance u/s 14A r.w Rule 8D will be of Rs.11,52,036/- (Rs.12,00,733/- - Rs.48,697/-). Accordingly, the addition of Rs.12,49,430/- is reduced to Rs.11,52,036/- only. Appellant’s get partial relief.
5.Shri Mehul Shah, Learned Counsel for the assessee argued that assessee has disallowed the expenses related to exempt income which is given on page-13 of the paper book filed by the assessee. The assessee has submitted the computation of total income and copy of income tax return which is placed at pages-9 & 10. The assessee also submitted the summary of average investments, which is placed at paper book pages-33, as per the summary, the total average investment comes to the tune of Rs.19,28,88,443/-. The ld Counsel submitted that assessing officer has not recorded satisfaction before invoking provisions of section 14A of the Act, read with Rule 8D of the Rules. The ld Counsel submitted that assessee was already having its own surplus funds and out of such surplus funds the investments were made, hence there was no question of making any disallowance of expenditure in respect of interest and administrative expense u/s 14A of the Act. To bolster his stand, ld.Counsel relied on the judgment of Hon'ble jurisdictional High Court in the case of PCIT vs. Sintex Industries Ltd. [2017] 83 taxmann.com 171 (Guj) and contended that considering assessee`s facts no disallowance under section 14A of the Act should be made.
On the other hand, Ld. Sr.D.R for the Revenue, pleads that in assessee`s case the disallowance under section 14A is required as per old Rule of 8D on the Rules. The Assessing Officer made disallowance at the rate of 0.50% of average value of investments which is correct as per the scheme of the Act. The ld DR pointed out that there is no format to record the satisfaction, yet assessing officer has recorded satisfaction, as the Assessing Officer noted that assessee has not computed the Page | 5 correct disallowance as per provisions of section 14A of the Act. Therefore, ld DR contended that addition made by the assessing officer may be upheld.
We have heard the rival parties and have gone through the material placed on record. We note that assessee has disallowed the expense related to exempt income which is given on page-13 of the paper book filed by the assessee. We note that assessee has submitted the computation of total income and copy of Income Tax Return, which is placed at pages-9 & 10 of the paper book. The assessee also submitted the summary of average investments, which is placed at paper book pages-33 and as per assessee the average investment comes to the tune of Rs.19,28,88,443/-. We do not agree with the arguments of ld Counsel to the effect that since the assessee was already having its own surplus funds therefore disallowance on account of average investments at the rate of 0.5% should not be made. Such arguments of ld Counsel are applicable when there is a disallowance under 2nd limb of old Rule 8D, where interest expenses are linked with exempt income. In 3rd limb of Rule 8D the disallowance is made at the rate of 0.5% of average investments, which does not have any relation with own surplus funds of the assessee, which are invested by the assessee to earn exempt income. In 3rd limb of Rule 8D the disallowance is made at the rate of 0.5% of average investments, which yield the exempt income.
We do not agree with the contention of ld Counsel that Assessing Officer has not recorded satisfaction. In this regard, ld CIT(A) has rightly observed that Assessing Officer has mentioned in para 4.2 of the assessment order that the disallowance by the appellant amounting to Rs.48,967/- was not acceptable as the same was not explained by the appellant as to how only this much expenses were incurred for earning exempt income of Rs.48,69,690/-. Thus, it is apparent that, the Assessing Officer was not explained by the appellant as to how only this much expenses were incurred for earning exempt income of Rs.48,69,690/-. Thus, it is apparent that, the Assessing Officer was not satisfied with the correctness of the claim of expenses of Rs.48,967/-. This fulfils the requirement of provision of sec. 14A(2) of the Act. Page | 6
We note that judgment relied on by ld Counsel is distinguishable on facts. In case of judgment of Hon`ble Gujarat High Court in the case of Sintex Industries Ltd (supra), it has been held that where assessee was already having its own surplus fund against which small investment was made, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under section 14A. This judgment says about small investments. In the assessee`s case the investment is big enough. The Hon`ble Gujarat high Court delivered this judgment based on combined concept of interest and administrative expenses. We note that disallowance of interest expenses fall under 2nd limb of Rule 8D of the Rules and administrative expenses fall under 3rd limb of Rule 8D. Thus, the judgment of Hon`ble Gujarat High Court in the case of Sintex Industries Ltd (supra) relates to small investments therefore does not apply to the facts of the assessee under consideration.
However, we find force in the contention of ld Counsel that disallowance in 3rd limb of Rule 8D should be restricted up to 0.50% of those investments which yield exempted income. The ld Counsel submitted the working of average investments which yield exempt income at Rs.19,28,88,483/- (vide paper book page no.33), the 0.50% of the said amount comes to Rs.9,64,442/- (0.50% of Rs. 19,28,88,483). We agree with ld Counsel that disallowance should be restricted up to 0.50% of those investments which yield exempted income, therefore, we note that the disallowance under Rule 8D of the Rules should be sustained to the tune of Rs.Rs.9,64,442/-. Since the assessee has already disallowed Rs.48,697/- therefore the net disallowance comes to Rs.9,15,745/- (9,64,442 -48,697). Hence, disallowance under Rule 8D is restricted to Rs.9,15,745/-. 11. In the result, assessee`s appeal is partly allowed in above terms. Order pronounced on 09/12/2022 by placing the result on the notice board. Sd/- Sd/- (PAWAN SINGH) (Dr. A.L. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER Surat/िदनांक/ Date: 09/12/2022 Dkp Outsourcing Sr.P.S.