Expenditure on income not forming part of taxable income

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘A’ BENCH

BEFORE SHRI HARI OM MARATHA, JM & SHRI A.N. PAHUJA,AM

ITA No.520/Del/2012

Assessment year: 2008-09

Assistant. CIT, Circle 2(1),

Room no. 398D,CR

Building, IP Estate, New

Delhi

(Appellant)

V/s.

M/s Apollo Finance Ltd. ,

414/1, DDA Commercial

Complex, Distr ict Centre,

Janakpur i,New Delhi

[PAN: AAACA 5354J]

 (Respondent)

Assessee by: S/Shri Anoop Sharma & M.K. Gir i, ARs

Revenue by: Mrs. Geet Mala Mohananey,DR

Date of hearing 27-08-2012

Date of pronouncement 31-08-2012

O R D E R

A.N.Pahuja:-

This appeal filed on 02.02.2012 by the Revenue against an order dated 25th November, 2011 of the ld. CIT(A)-V, New Delhi, raises the following grounds:-

1. “The ld. CIT(A) has erred in reducing the disallowance made by the AO u/s 14A of the Income-tax Act to only ``10,000/-.

2. The appellant craves leave for reserving the right to amend, modify, alter, add, or forgo any grounds of appeal at any time before or during the hearing of this appeal.”

2. Facts, in brief, as per relevant orders are that return declaring loss of ``5,51,91,000/- filed on 29.09.2008 by the assessee, carrying on the business of financing, leasing and investment activities, after being processed on 05.08.2009 u/s 143 (1) of the Income-tax Act, 1961, (hereinafter referred to as the Act), was selected for scrutiny with the service of a notice u/s 143(2) of the Act, issued on 06.08.2009 During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee claimed dividend income of ``10,000/- exempt u/s 10(34) of the Act. In response to a show cause notice vide order sheet entry dated 2.8.2010 by the AO, asking as to why disallowance in terms of provisions u/s 14A of the Act r.w.r. 8D of the I.T. Rules, 1962 be not made, the assessee merely replied that no expenditure was incurred for earning dividend income. However, the assessee worked out disallowance of ``5,42,74,410/- in terms of provisions of section 14A of the Act, under protest. In the light of this reply of the assessee, the AO while relying upon decisions in CIT Vs. United General Trust, 200 ITR 488 (SC); Southern Petro Chemicals Industries (2005), 93 TTJ 161; Harish Krishnakanta Bhatt (2004), 91 ITD 311; S.G. Investments and Industries Ltd. (2004), 89 ITD 44 and Everplus Securities & Finance Ltd. (2006), 285 ITR (AT) 112 disallowed an amount of ``5,45,52,862/- in term of provisions of section 14A of the Act read with rule 8D of the I.T. Rules 1962 ,observing, inter alia, that issue is not only of the expenses incurred for receiving the dividend income but size of the investment and cost incurred on investment and management of huge investments for earning income which did not form part of total income, are also material.

3. On appeal, the ld. CIT(A) restricted the disallowance to ``10,000/- i.e to the extent of dividend income earned, in the following terms:-

“4.2 I have considered the assessment order, submissions of the appellant and various case laws relied on by the appellant as well as the Assessing Officer. The Mumbai High Court in the case of CIT Vs. Godrej and Boyce has ruled that rule 8D is applicable from assessment year 2008-09. The year under consideration in this case now is also 2008-09. In a recent decision, the ITAT Mumbai “B” bench in I.T.A. No.1050/Mum/2010 (for assessment year 2008-09) in the case of Multi Commodity Exchange of (India) Ltd. after consideration of the Hon’ble Bombay High Court in I.T.A. No.626 of 2010 in the case of Godrej & Boyce Mfg. Co. Ltd. Mumbai Vs. Dy. CIT, Range 10(2), Mumbai & Anr. 328 ITR 81 (Bom) has held that it is only when Assessing Officer is not satisfied with the claim of the assessee, he can have recourse to Rule 8D. This is the view of the jurisdictional ITAT in the latest case of Jindal Photo Ltd. Vs. DCIT in I.T.A. No.814(Del) 2011. In the case under consideration too, it is also seen that the AO has proceeded to apply Rule 8D without giving any finding with regard to the correctness of the claim of the appellant that there was no disallowable expenses. In fact, the Assessing Officer has inadvertently mentioned that he is satisfied with the claim of the assessee, however, from perusal of the order, it is seen that it is an inadvertent error. From the various judicial rulings, it is clear that the Assessing Officer cannot apply Rule 8D automatically but can do so only where he records satisfaction on an objective basis that the assessee is unable to establish the correctness of its claim. The Hon’ble ITAT Delhi Bench “D” in the case of DCIT Vs. Jindal Photo Ltd. for assessment year 2008-09 has also similarly held that without recording any findings about the assessee’s claim being incorrect and without recording satisfaction about such incorrectness of claim, to invoke Rule 8D is incorrect. The recording of satisfaction in terms of mandate in sub-section (2) of Sec 14A is not merely a formality but the reasons recorded must justify the ground on which the claim made by the assessee is not accepted. In absence of any recording of such satisfaction by AO, the facts of the case and respectfully following the decision of the Hon’ble jurisdictional Tribunal the addition is sustained only to the extent of `10,000/- which is the amount of dividend received during the year.”

4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR while referring to authorization issued u/s 253(2) of the Act by the ld. CIT on 31st January, 2012 submitted that the assessee merely claimed that no expenditure has been incurred for earning dividend income while it did not file any working//computation to show that interest of ``7,46,14,000/- and the demat expenses of ``82,000/- debited to profit and loss account were incurred for the purpose other than making investments of ``74,99,18,000/-. In the absence of any such working/computation, the AO could not comment on the correctness of the bare/cryptic claim that no expenditure was incurred for earning dividend. The initial onus was on the assessee to show that no such expenditure had been incurred for earning exempt income. Moreover, the assessee did not furnish any cash flow statement or details, evidencing that the borrowed funds had indeed been utilized for purposes other than aforesaid huge investments. Accordingly, while referring to the decision dated 6th July, 2012 of the ITAT in I.T.A. nos.1934 and 1935/Del./2012 in ACIT vs. M/s Hindustan Syringes and Medical Devices Ltd.,the ld. DR vehemently argued that the ld. CIT(A) was not justified in restricting the disallowance to ``10,000/- without any basis even when the assessee did not furnish any details before the AO.

5. On the other hand, the ld. AR on behalf of the assessee supported the findings of the ld. CIT(A) while contending that in para 3.6 of the assessment order, the AO accepted their claim that no expenditure had been incurred for  arning income which did not form part of total income. To a query by the Bench, the ld. AR did not reply as to why the amount of ``82,000/- which admittedly was directly related to income which did not form part of total income, had not been offered for disallowance suo motu nor replied as to whether huge investments outstanding as on 31.03.2008 to the extent of ``74,99,18,000/-were made out of borrowed funds or own funds and whether any cash flow statement was submitted before the AO or the ld. CIT(A). However, the ld. AR feebly argued that such details were never requisitioned nor these issues had been examined by the lower authorities.

6. We have heard for both the parties and gone through the facts of the case. Indisputably, the AO disallowed the aforesaid amount of `5,45,52,862/-, invoking provisions of section 14A(2) of the Act read with Rule 8D of I.T. Rules, 1962,without even analyzing the nature of the expenditure nor it appears that relevant details of expenditure and accounts or cash flow statement were placed before the AO or the ld. CIT(A). The assessee merely submitted that no expenditure had been incurred for earning dividend income even when huge investments were made to the extent of``74,99,18,000/- until 31.3.2008 and did not even offer for disallowance, an amount of `82,200/- which admittedly was incurred for earning income which did not form part of total income. There is nothing to suggest as to whether or not any cash flow statement or sources of the investment in the various funds by the assessee were placed before the AO or the ld. CIT(A) . Apparently, the assessee did not furnish any details of expenditure incurred for management and supervision of aforesaid huge investments even when the assessee itself stated that an expenditure of `82,000/- was incurred for earning income which did not form part of total

income. In any case, no material was placed before the AO in order to enable him to record his satisfaction while the ld.CIT(A) concluded that the AO was required to record his satisfaction on the claim of the assessee u/s 14A(2) of the Act, irrespective of the fact of filing of details or otherwise .There is no apparent basis nor there is any such provision, restricting the disallowance to dividend income received by the assessee during the year. Hon’ble Apex Court in Kantamani Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638 and again in Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC) observed that it is the duty of the assessee to bring to the notice of the Income tax Officer particular items in the books of account or portions of documents which are relevant. The law casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment for that year. Not even a whisper has been made before us as to whether or not relevant accounts were placed before the AO or the ld. CIT(A) in order to enable them to examine the claim of the assessee. The ld. CIT(A) merely referred to certain decisions in relation to the disallowance without even examining the relevant accounts or ascertaining the relevant facts and circumstances .

6.1. Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. (supra) while adjudicat ing a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded that Rule 8D, inserted w.e. f 24.3.2008 cannot be regarded as retrospect ive because i t enacts an art if icial method of est imat ing expenditure relatable to tax-f ree income. I t applies only w.e. f AY 2008-09. For the assessment years where Rule 8D does not apply, the AO wil l have to determine the quantum of disallowable expenditure by a reasonable method having regard to all the facts and circumstances, the Hon’ble High Court

concluded.

6.2 Hon’ble Supreme Court in their decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P. ) Ltd. ,326 ITR 1, inter alia, observed that for at tract ing sect ion 14A of the Act there has to be a proximate cause for disallowance, which is its relat ionship with the tax exempt income. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A, Hon’ble Apex Court concluded.

6.3 Hon’ble Punjab & Haryana High Court in thei r decision in CIT vs. Hero Cycles Ltd. ,323 ITR 518 have observed that disal lowance under sect ion 14A requi res f inding of incurr ing of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disal lowance under sect ion 14A cannot stand.

6.4 In Cheminvest Ltd. v. Income-tax Officer,317ITR(AT)86,Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of sec. 14A of the Act do not envisage any such exception.

6.5 Hon’ble jurisdictional High Court in a recent decision dated 18.11.2011 in Maxopp Investment Ltd. vs. CIT,[2011] 15 taxmann.com 390 (Delhi) held as under:

"41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in  accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing officer was free to adopt any reasonable and acceptable method.

42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort (supra) to the following effect:-

"The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A."

So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment."

.

6.6. Hon’ble Calcutta High Court in Dhanuka & Sons vs. CIT,12 Taxmann.Com 227(Cal.) held that

“After hearing the learned counsel appearing for the parties and after going through the materials on record and the decisions cited by Mr. Khaitan, we find that the Supreme Court in the cases of CIT v. Maharastra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450/109 Taxman 145 having held that where there is one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the income earned from the business is exempt from tax, section 14A of the Act was enacted to overcome those judicial pronouncements. The object of section14A of the Act is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income.

8. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction.

9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant assessment year, no interest is payable by the assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment.”

6.7 As already observed, in the instant case, the assessee denied incurring any expenditure for earning income, which did not form part of total income during the course of assessment proceedings even when huge investments were made by the assessee in securities . In terms of the aforesaid decision of the Hon’ble jurisdictional High Court in Maxopp Investment Ltd.(supra), even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the AO is required to verify the correctness of such claim. In case, the AO is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the AO has to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act, Hon’ble High Court concluded. Following the view taken in this decision, Hon’ble jurisdictional High Court in CIT vs. Machino Plastic Ltd in their decision dated 28.2.2012 in ITA no. 92 of 2011, restored the matter to the file of the AO, being handicapped because of failure of the assessee to furnish relevant details and particulars .In the instant case also, the AO was handicapped, because of failure of the assessee to furnish relevant details/particulars and accounts while making the disallowance in terms of provisions of sec. 14A of the Act. There is nothing in the assessment order or impugned order as to whether the assessee placed the relevant details & accounts before the AO nor the ld. CIT(A) seems to have undertaken any exercise to ascertain the details of expenditure objectively in managing and supervising the aforesaid huge investments in various funds & securities. In view of the foregoing, we consider i t fair and appropriate to set aside the order of the ld. CIT(A) and restore the mat ter to the f ile of the AO for deciding the issue, af resh in accordance wi th law in the light of our aforesaid observations and various judicial pronouncements, including those referred to above, af ter allowing sufficient opportunity to the assessee Needless to say that whi le redeciding the issue, the AO shall pass a speaking order, giving reasons for his sat isfact ion or otherwise, as pointed out by the Hon’ble jurisdictional High Court in thei r decision in Maxopp Investment Ltd (supra). The assessee is also directed to furnish all the relevant detai ls of expenditure actually incur red in managing and supervising the aforesaid huge investments in funds & secur it ies along wi th relevant accounts and cash f low statement . With these observat ions, ground no 1 in the appeal is disposed of.

7. No additional ground having been raised before us in terms of residuary ground no.2 in the appeal, accordingly, this ground is dismissed.

8.. No other plea or argument was made before us.

9. In the result, appeal is allowed but for statistical purposes.

Order pronounced in open Court

                                                                Sd/-                       Sd/-

                                          (HARI OM MARATHA) (A.N. PAHUJA)

                                                 (Judicial Member) (Accountant Member)

NS

Copy of the Order forwarded to:-

1. Assessee

2. Assistant . CIT, Ci rcle 2(1),Room no. 398D,CR Building, IP Estate, New Delhi

3. CIT concerned.

4. CIT(A)-V, New Delhi

5. DR, ITAT,’A’ Bench, New Delhi

6. Guard File.

By Order,

Deputy/Asstt.Registrar

ITAT, Delhi