IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “C”,
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) &SHRI.RAJENDRA (A.M.)
ITA NO. 6805/MUM/2010(A.Y.2007-08)
Centrum Capital Limited,
2nd Floor,
Mumbai - 400 001.
PAN:AAACC 5099G
(Appellant)
Vs.
The ACIT, Cir. 2(1),
Aaykar Bhavan,
Mumbai - 20.
(Respondent)
Appellant by: S/ Shri Jahangir Mistry / Surender Nijsule
Respondent by: Shri A.K.Nayak
Date of hearing:
Date of pronouncement:
ORDER
PER N.V.VASUDEVAN, J.M
This is an appeal by the assessee against the order dated
2. The assessee is a company engaged in the business of syndication of loans, placement of bond and other financial instruments. The assessee received dividend income of Rs. 21,09,430/-, which did not form part of the total income under the Act. In view of the provisions of section 14A of the Act which provides that any expenditure incurred in earning income which does not form part of the total income under the Act should not be allowed as deduction while computing total income. The AO examined the as to what would be the expenditure by the assessee in earning the dividend income which does not form part of the total income under the Act. The AO relying on the decision of the Hon’ble Special Bench of Mumbai ITAT in the case of ITO vs. Daga Capital Management Pvt. Ltd., wherein it was held that Rule 8D, which was introduced w.e.f. A.Y 2008-09 was retrospective in operation, made the disallowance of expenditure under section 14 A of the Act by following the mandate of the Rule 8D of the Income Tax Rules, 1962.
3. Before CIT(A) the assessee submitted that no prior expenses were incurred in earning the exempt income and gave details in this regard. The CIT(A) however held as follows:
“6. I have duly considered the submissions of the A.R and I agree with the submissions of the A.R that the assessee has not incurred any direct expenditure on earning of the exempt dividend income. In fact the A.O has himself determined the direct expenses for earning the direct income at Nil. The A.O. has only computed the indirect expenses under Rule 8D(ii) and Rule 8D(2)(m) as prescribed in the Rule. It is not correct to say that the assessee has not incurred any expenditure for earning the exempt income. Hence, the disallowance made by the A.O. is required to be confirmed. The decision of
4. Aggrieved by the order of the CIT(A) the assessee has preferred the present appeal before the Tribunal.
5. We have heard the rival submission. Ld. Counsel for the assessee argued before us that the CIT(A) himself had accepted that there are direct expenses incurred in earning exempt dividend income and, therefore, no disallowance could be made. We are of the view that the disallowance made by the AO was only with regard to indirect expenses and the issue needs to be examined only to this extent.
The Hon’ble Bombay High Court in INCOME TAX APPEAL NO.626 OF 2010 in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income Tax,Range 10(2), Mumbai & Anr. And W.P. 758/10 Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs.Dy. Commissioner of Income Tax Range 10(2), Mumbai & Ors. by Judgment dated
i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1);
ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not\ form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis;
iii)The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid;
iv)The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution;
v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from
vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record;
vii)The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.
6. In view of the aforesaid decision of the Hon’ble Bombay High Court the issue with regard to disallowance under section 14A has to be made in accordance with the principle laid down by the Hon’ble Bombay High Court. Rule 8D should not be applied and the AO has to adopt a reasonable basis or method consistent with all relevant facts and circumstances and after affording reasonable opportunity to the assessee to place all germane material on the record. We, therefore, remit the issue to the A.O for fresh consideration as stated above.
7. In the result, the appeal by the assessee is allowed for statistical purposes.
Order pronounced in the open court on the 2nd day of May, 2012
Sd/- Sd/-
(RAJENDRA) (N.V.VASUDEVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated
Copy to:
1. The Appellant
2. The Respondent
3. The CIT City –concerned
4. The CIT (A)- concerned
5. The D.R”C” Bench.
(True copy)
By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
