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Income Tax Appellate Tribunal, DIVISION BENCH’A’, CHANDIGARH
Before: SHRI SANJAY GARG & DR. B.R.R. KUMAR
PER DR.B.R.R.KUMAR, A.M. :
The present appeal has been filed by the Revenue against the order of the Ld. CIT(A)-1, Ludhiana dt. 28/03/2016.
In the present appeal Revenue has raised only one effective ground which reads as under:
“ Whether upon facts and circumstances of the case, the Ld. CIT(A) was justified in deleting the disallowance made under section 14A of the Income Tax Act,1961 , r/w Rule 8D of Income Tax Act,1962 ?”
Brief facts of the case are that the return was filed declaring a total income of Rs. 2,25,71,660/-. The assessee earned dividend income amounting to Rs. 2,69,51,703/-. The assessee has earned taxable income of Rs. 3,21,92,636/- . The Assessing Officer has made a total disallowance of Rs. 61,90,287/- and brought to tax an amount of Rs. 39,34,633/- in addition to the amount of Rs. 22,54,654/- disallowed by the assessee suo-moto under section 14A .
Aggrieved the assessee filed the appeal before the Ld. CIT(A), who deleted the addition based on the judgment of Coordinate Bench of ITAT Chandigarh in the assessee’s own case for the Assessment Year 2008-09.
Before us the Ld. DR submitted the arguments in the written form which are as under and prayed that the disallowance may be upheld:
S. 14A has been amended by introduction of sub section (2) and (3) and rule 8D w.e.f. A.Y. 2008-09. The amended provision of 14A states that if the AO is not satisfied with the correctness of assessee's claim in respect of expenditure in relation to exempt income or where an assessee claims that no expenditure has been incurred in relation to exempt income, then rule 8D(2) is mandatory and shall be invoked to determine such expenditure relatable to earning exempt income. Rule 8D(2)(ii) pertains to determination of interest expenditure in case of mixed funds. Rule 8D(2)(ii) leaves no scope for presumption as a mathematical formula has been prescribed. Various courts have held that amendments to S 14A and insertion of rule 8D are prospective. Thus the judicial interpretation S 14A for A.Ys prior to A.Y. 2008-09 has no relevance while determining the disallowance u/s 14A rw rule 8D for A.Y. 2008-09 onwards. Reliance is place on following decision.
(i) Hon'ble Punjab & Haryana High Court decision in the case of Punjab Tractors Ltd vs CIT ITA No. 458 of 2015 dated 03/02/2017 for A.Y. 2008-09.
The relevant extract of the decision is as under:
"2. The appeal is admitted on the following substantial questions of law framed by us:- i) Whether the Assessing Officer had recorded satisfaction that the appellant- assessee's claim was incorrect? ii) Whether the Income Tax Appellate Tribunal had erred in upholding the application of Rule 8D of the income Tax Rules, 1962? Hi) Whether the Tribunal erred in applying the provisions of Rule 8D(2)(ii) to the interest paid as opposed to the net interest earned by the appellant?
Regarding Questions (i) and (ii) the decision of Hon'ble court is as under:
The Assessing Officer on not being satisfied with the correctness of the claim by the assessee in respect of the expenditure incurred to earn exempt income ought to have applied Rule 8D which he did not. Instead he made an estimate on the basis that he considered to be reasonable. This he was not entitled to do. Where an Assessing Officer is not satisfied with correctness of the claim of the assessee, in this regard, he is bound by the provisions of sub section (2) of Section 14A to follow the prescribed method which at the relevant time was Rule 8D.
Questions (i) and (ii) are, therefore, answered in favour of the Revenue.
Regarding Questions (iii) the decision of Hon'ble court is as under: 46. We leave the question as to whether such a presumption is valid and if valid whether it arises in this case open. The Assessing Officer must determine the same after taking all the provisions of law and the precedents into consideration.
If the Assessing Officer justifiably is not satisfied with the correctness of the assessee's claim regarding the expenditure, he must resort to Rule 8D entirely for the determination of the expenditure incurred with respect to the exempt income for the purpose of section 14A. For instance, if the assessee claims that he has not incurred any interest expenditure but has incurred administrative expenses or vice-versa and the Assessing Officer disagrees with either claim, Rule 8D cannot be applied only in respect of any particular clause of sub-rule (2) of Rule 8D. He must then determine the amount of expenditure incurred in relation to exempt income in accordance with Rule 8D.
48—
In the circumstances, questions (i) and (ii) are answered in favour of the respondent-revenue. It is agreed that the computation under Rule 8D shall be carried out in the first instance by the Assessing Officer. Needless to add that the parties are always at liberty to question the same in accordance with law.
Question (iii) is answered as per the clarification furnished by us above."
(ii) Hon'ble Punjab and Haryana High Court decision in the case of Avon Cycles Ltd vs CIT, in ITA No. 227 of 2013 dated 20/08/2014 for A.Y. 2008-09.
In this case the Hon'ble High Court upheld the disallowance of interest expenditure computed as per rule 8D(2)(ii) for mixed funds. The Hon'ble High Court distinguished the decision of Bombay High Court in case of Reliance utilities (313 ITR 340) and Punjab & Haryana High Court in case of Hero Cycles (323 ITR 528) for the proposition that when interest free funds are available with the assessee then it will be presumed that such funds have been invested in various investment. The relevant extract of the judgement is as under:
"Learned counsel for the appellant refers to Bombay High Court judgement reported as Commissioner of Income Tax Vs. Reliance Utilities and Power Ltd. (2209) 313 ITR 340 as well as a Division Bench judgement of this Court in Commissioner of Income Tax Vs. Hero Cycles Ltd. (2010) 323 ITR 518, to contend that in view of the balance-sheet produced by the assessee, shall be presumed that the funds available with the assessee were sufficient to meet the investments out of its own funds and that borrowed funds were not utilized for investment. Therefore, interest, if any, paid on borrowed funds cannot be disallowed in terms of Section 14A .
In Reliance Utilities and Power Ltd. case (supra), the Revenue was in appeal before the Bombay High Court against an order passed by the Income Tax Appellate Tribunal, where negating the argument of the Revenue that share holders funds to the tune of over Rs. 172 crores was utilized for the purpose of fixed assets in terms of the balance-sheet. It was found that a clear finding of fact was recorded that assessee had interest free funds of its own which had been generated in the year in question , which has been invested for earning exempt income."
Similarly, in Hero cycles Ltd. Case (supra), again the Revenue was in appeal. The Court has noticed that the Tribunal has held that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of finding of fact, disallowance under Section 14A of the Act was not found to be sustainable. The Court observed that as to whether any expenditure incurred was to be disallowed is a question of
fact. It was held to the following effect: "In view of the finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, it is a question of fact ........................... "
In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this court."
It is being argued that the decision of Avon Cycle is not relevant as Hon'ble Punjab & Haryana High Court in later judgement in the case of CIT vs Max India 110, ITA No. 186 of 2013 dated 06/09/2016 has upheld the principle of presumption in case of mixed fund. In this regard it is submitted decision of Max India pertaining to A.Y. 2002-03 and is hence not applicable to the present facts.
(iii) Hon'ble ITAT Chandigarh decision in the case of Munjal Sales Corporation vs ACIT in ITA No. 274/Chd/2015 dated 07/07/2015 for A.Y. 2009-10
Hon'ble ITAT has held that the amendment to S 14A and rule 8D is prospective and that judgements rendered for AYs prior to AY 2008-09 will not be applicable in every situation. Hon'ble ITAT also upheld the disallowance made u/s 14A rw rule 8D and dismissed the appeal of assessee. The relevant extract of the decision is as under:
"9. From the above it emerges that decisions of Hon'ble Punjab & Haryana High Court in the case of CIT vs Hero Cycles Ltd., 323 ITR 518(P&H) and CIT Vs. Winsome Textile Industries Ltd. in 319 ITR 203 (P&H) were found to be distinguishable because these decisions were rendered for assessment year 2004-05 and further there were certain findings of facts which may not be applicable in every situation. Secondly, to solve problem of quantum of interest to be disallowed and expenditure from common pool of interest and expenditure, Rule 8D has been introduced so that reasonable disallowance is made. In the above findings, the theory of proportionate disallowance as confirmed by Hon'ble Punjab & Haryana High Court in the case of CIT-1 vs Punjab Station Industrial Development Corporation Ltd in Income Tax Appeal No. 565 of 2006 vide order dated 18.7.2011 has been discussed in above noted pasras. Justification of Rule 8D as given by Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd Vs. DCIT 328 ITR 81 (Bom.) has also been discussed. In conclusion it can be said that Rule 8D is applicable from assessment year 2008-9 and, therefore, issue arising in this ' appeal have to be discussed on the premise that Rule 8D was applicable.
From the above it becomes clear that Hon'ble Court has confirmed that once there are mixed funds, Rule 8D has to be resorted. The same principle would apply in the case of expenditure incurred in earning exempt income."
(iv) Hon'ble Delhi High Court decision in the case of India bulls Financial services Ltd vs DCIT, ITA No. 470 of 2016 dated 21/11/2016.
The relevant extract is reproduced as under:
"7. Undoubtedly, the language of Section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. At the same time Section 14A (2) as indeed Rule 8D(i) leave the AO equally with no choice in the matter inasmuch as the statute in both these provisions mandates that the particular methodology enacted should be followed. In other words, the AO is under a mandate to apply the formulae as it were under Rule 8D because of Section 14A(2). If in a given case, therefore, the AO is confronted with a figure which, prima facie, is not in accord with what should approximately be the figure on a fair working out of the provisions, he is but bound to reject it. In such circumstances the AO ordinarily would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted."
The next issue is regarding the satisfaction of the AO as per S 14(2) and (3). In this respect various courts have held that the law does not envisage express recording of satisfaction. Reliance is placed on following case laws.
(i) Hon'ble Delhi High Court decision in the case of India bulls Financial services (supra). The relevant extract is as under:
"8. In this instance the elaborate analysis carried out by the AO - as indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumstances, would not per se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO's conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would in fact destroy the mandate of Section 14A.
(v) Hon'ble Punjab & Haryana High Court decision in the case of Punjab Tractors vs CIT (supra). The relevant extract is as under:
"33. In our view it is sufficient if the Assessing Officer comes to the conclusion that the claim of the assessee in this regard is not correct. It is not necessary for him to decide the extent or the quantum of the incorrect claim. He must, however, correctly conclude that the claim of the assessee is incorrect. It is necessary for the Assessing Officer to rightly come to the conclusion that the claim of the assessee is incorrect. The language of Section 14(2) is "is not satisfied with the correctness of the claim" and not "reasonably doubts it" or "has reasons to doubt the correctness of the claim".
It follows, therefore, that Mrs. Suri's submission that a determination means an actual quantification of the expenditure incurred for earning exempt income is erroneous. As Mr.Klar rightly pointed out an Assessing Officer can on the basis of inferences, adverse inferences and reasonable presumptions come to the conclusion that the claim of the assessee in relation to such expenditure is not correct.
In the case before us, the Assessing Officer cannot be faulted for not being satisfied with the claim of the assessee. As we noted earlier the Assessing Officer was entirely justified in presuming that the assessee had incurred expenditure towards administrative activities necessary to earn the exempt income. If the presumption or inference is correct, as we have held it is, the Assessing Officer is entitled to resort to Rule 8D."
2.1. In the present case attention is drawn to para 4.8 page 9 and para 4.12 page 15 of the assessment order wherein the AO has expressly stated that no separate account is being maintained in regard to the surplus fund utilized for investment and that the assesee has failed to produce direct evidence of expense incurred to earn exempt income; hence Rule 8D was invoked.
In view of the above submissions it is prayed that the disallowance made u/s 14A by the AO may kindly be upheld.
Against the argument of the Ld. DR, the Ld. AR relied on the order of the Ld. CIT(A) and the order of the ITAT for the assessment year 2008-09 in the case of Vardhman Holdings Ltd. in ITA No. 550/CHD/2015 dt. 04/09/2015, and also on the order of the ITAT in the case of Hero Cycles Ltd. in ITA No. 314/CHD/2013 dt. 16/02/2016.
We have gone through the arguments on the record before us. We find that certain facts which are required to be adjudicate the issue are as under:
The total amount of tax free income earned by the assessee is Rs. i. 2,69,51,703/-. ii. The taxable income earned by the assessee is Rs. 3,21,92,636/-. iii. The total expenses debited in the P&L Account by the assessee is Rs. 56,91,320/-. iv. The expenses debited suo-moto by the assessee is Rs. 22,55,654/- i.e; 49% of expenses. v. The assessee disallowed expenses in the proportion of dividend income to total income.
In the light of the above facts wherein the assessee has disallowed 49% of expenses under section 14A, we are not in agreement with the observation of the Assessing Officer that invoking of Rule 8D is a mandate and has an automatic application as the Assessing Officer’s dissatisfaction with the correctness of claim of the assessee in respect of expenditure in relation to the income which does not form part of the total income under the Act is conspicuously absent. In any case when 49% of expenses have disallowed on a scientific basis by the assessee, disallowance of Rs. 61,90,287/- against the total expenditure of Rs. 56,91,320/- do not instill any confidence in enforcement of the Act. This is not a case where the assessee claims that no expenditure has been incurred by them with relation to the income which does not form part of the
total income. Keeping in view the facts and circumstances of the case,and the case laws referred by the revenue are not applicable to the issue in the instant case, we decline to interfere in the order of the Ld. CIT(A) who has rightly ordered to delete the disallowance.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open Court.
Sd/- Sd/- (SANJAY GARG) (DR. B.R.R. KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 24/04/2018 AG Copy to: 1.The Appellant, 2. The Respondent, 3. The CIT(A), 4. The CIT, 5. The DR