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TMI Blog2011 (5) TMI 489X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,000/-. However, he disallowed the payment made to the said company on the ground that in earlier years as well as in the subsequent years, the licence fees paid to the said company was disallowed and further no specific break-up of the services rendered and the cost for each such service has been provided by the assessee. On appeal, the ld. C.I.T.(A) following the orders of the Tribunal in the case of the assessee for assessment years 1997-98 to 2001-02 & 2003-04 held that the payment of licence fees to M/s. RPG Enterprises Ltd. was an allowable business expenditure. He, therefore, deleted the addition made by the A.O. in this regard. 2.2. We have heard the parties and perused the material placed on record. It was submitted by the learned counsel for the assessee that the issue is squarely covered, under similar facts and circumstances of the case, by the orders of this Tribunal in the case of the assessee itself for assessment years 1997-98 to 2003-04, the copies of which are placed in the paper book, wherein the Tribunal has accepted the claim of the assessee. That being so, we do not find any reason to interfere with the order of ld. C.I.T.(A) in deleting the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ious cities of India. The employees and the officers of the assessee-company use the facilities of these guest houses while on official tours. According to the A.O., it was difficult to accept that the entire expenditure was laid out wholly and exclusively for the business purpose. He, therefore, disallowed 25% of the total expenses incurred in this respect, which came to Rs. 13,22,883/-. On appeal, the ld. C.I.T.(A) following the order of the Tribunal for A.Y. 2001-01 as also the order of ld. C.I.T.(A) for A.Y. 2003-04 in the assessee's own case deleted the disallowance. 4.2. At the time of hearing, the learned counsel pointed out that on an identical disallowance of expenditure, the ld. C.I.T.(A) vide order dated 16/5/2006 for assessment year 2003-04 has deleted the addition and the department did not prefer any appeal before the Tribunal on this issue, although on other issues the department preferred appeal before the Tribunal. He further pointed out that the Tribunal in the assessee's own case for A.Y. 2000-01, under similar set of facts & circumstances of the case, has allowed the claim of the assessee. In view of the above and respectfully following the aforesaid order of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax (Appeals) erred in enhancing the disallowance on account of expenses allegedly as relatable to earning of exempt income by resorting to Rule 8D of the Income Tax Rules on the facts and in the circumstances of the case. 2. For that the Commissioner of Income Tax (Appeals) should have seen that the provisions of Rule 8D were not applicable on the facts and in the circumstances of the case." 7.1. The A.O. observed that the assessee during the year under appeal had earned dividend and interest on UTI tax free bonds aggregating to Rs. 42,12,853/- and claimed it as an exempt income. The A.O. by holding that some expenditure was incurred by the assessee to earn the said exempt income, estimated the expenses @ 1% of the total exempt income of Rs. 42,12,853/- which came to Rs. 42,130/- and added back the same to the total income of the assessee for the assessment year under appeal. On appeal, the ld. C.I.T.(A) following the Special Bench decision of the I.T.A.T., Mumbai in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 restricted the expenditure in relation to exempt income to Rs. 10,28,900/-, as against disallowance made by the A.O. of Rs. 42,130 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de out of its own fund. Upon the introduction of section 14A which clearly states that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income. Therefore, as some expenditure is incurred to earn the said exempt income, the AO thought it reasonable to estimate the expenses @1% of the total exempt income, i.e. Rs. 42,130/- and added back to the total income of the assessee. 3. On appeal, the Ld. CIT(A) has enhanced the disallowance under section 14A by applying Rule 8D to Rs. 9,86,770/- by observing as under: "I have carefully perused the submission of the A/R of the appellant. I, however, do not agree with the submissions made of the appellant with respect to Rule 8D(2)(iii). I also find that the Special Bench of the Mumbai Tribunal in the case of Daga Capital Management Pvt, Ltd. in ITA No. 8057/Mum/03 dated 20.10.08 has held that Rule 8D is retrospective in nature. Respectfully therefore following the decision of the Special Bench (Supra). I hold that expenditure in relation to exempt income should be Rs. 10,28,900/- as against Rs. 42,130/- considered in the assessment. The income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t expenditure has been incurred to earn the same. 7.1 I want to discuss the various judicial pronouncements relating to this issue. Retrospective Aplicability of Section and Rule 8D In view of clear enunciation in the Memorandum Explaining the Provisions of the Finance Bill, 2006 and further clarification by CBDT vide Circular No. 14 of 2006, sub- section (2) of section 14A is applicable from asst. yr. 2007-08 onwards, and the provisions of rule 8D which have been notified w.e.f. 24th March, 2008 are applicable with effect from asst. yr. 2008-09. Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT & Anr. [2010] 234 CTR (Bom.) 1 : [2010] 328 ITR 81 (Bom.). No Power to Consider Applicability of section 14A, in the Absence of Any Adverse Finding Finding of the CIT(A) and the Tribunal that only the investment in the shares of ZI was made by assessee out of loan and, therefore, interest could be disallowed under section 14A only to this extent is a finding of fact and hence, no substantial question of law arises for consideration. CIT v. Ms. Sushma Kapoor [2009] 319 ITR 299 (Del.) Where in relation to the investment in shares, no claim for exemption was made by the assessee, section 14A can h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue is dismissed whereas the Cross Objection of the Assessee is allowed, as indicated above. Per Bench: - Since there is a difference of opinion between us constituting "A" Bench of I.T.A.T., Kolkata in respect of the ground in Cross objection, the following question is referred to the Hon'ble President, ITAT under section 255(4) of the I.T. Act, 1961 to consider to nominate a Third Member. "Whether, in the facts and circumstances of the case, the disallowance of Rs. 2 lakhs on ad hoc basis proposed by Ld. J.M. or disallowance of expenses to 1% of the total exempted income proposed by Ld. A.M. is justified under section 14A of the I.T. Act, 1961." THIRD MEMBER ORDER G.D. Agrawal, Vice President (As a Third Member) - Since there was a difference of opinion between the Ld. Members constituting "B" Bench of I.T.A.T., Kolkata in respect of the aforesaid Cross Objection, I was nominated as Third Member by the Hon'ble President, I.T.A.T. u/s.255(4) of I.T. Act, 1961. The question referred to me reads as under :- "Whether, in the facts and circumstances of the case, the disallowance of Rs. 2 lakhs on ad hoc basis proposed by Ld. J.M. or disallowance of expenses to 1% of the total e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enhancing the disallowance u/s. 14A of the Act, the assessee filed Cross-Objection No. 39 (Kol.)/2009, arising in ITA No. 566/Kol./2009, raising the following grounds:- "1. The Commissioner of Income Tax (Appeals) erred in enhancing the disallowance on account of expenses allegedly as relatable to earning of exempt income by resorting to Rule 8D of the Income Tax Rules on the facts and in the circumstances of the case. 2. For that the Commissioner of Income Tax (Appeals) should have seen that the provisions of Rule 8D were not applicable on the facts and in the circumstances of the case." On perusal of the above grounds of cross objection, I find that the assessee has only challenged the order of the ld. C.I.T.(A) objecting to application of Rule 8D for the purpose of making disallowance u/s. 14A of the Act and enhancement of the amount disallowed by the A.O. Therefore, it appears that the assessee per se did not object to the disallowance of Rs. 42,130/- made by the A.O. u/s. 14A of the Act in the assessment order. 4. On perusal of the orders proposed by both the Ld. Members, I find that both the Ld. Members have in principle agreed that Rule 8D of the Rules was not applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. himself. On the other hand, the learned Departmental Representative, relied on the order proposed by Ld. J.M. 7. I have considered the submissions of both the parties and perused the orders proposed by Ld. Members. The dispute in the present reference is in narrow compass. In the assessment order the A.O. disallowed administrative expenses of Rs. 42,130/- u/s. 14A of the Act calculated @ 1% of the tax-free income. The ld. C.I.T.(A) by applying Rule 8D of the Rules directed the A.O. to disallow Rs. 10,28,900/-, thereby enhanced the total income by Rs. 9,86,770/-. In the grounds of cross objection the assessee objected to the order of the ld. C.I.T.(A) only on the issue of application of Rule 8D for the purposes of making disallowance u/s 14A of the Act. Perusal of the grounds of cross objection showed that the assessee did not challenge the disallowance made by the A.O. at Rs. 42,130/-, but objected only to the application of Rule 8D which in its opinion was not applicable for assessment year under consideration, i.e. A.Y. 2004-05. I find merit in the submissions of the learned counsel for the assessee that the assessee never challenged the A.O's order disallowing Rs. 42, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... majority view. ORDER B. R. Mittal, Judicial Member - Since there was a difference of opinion between the ld. Members constituting the Division Bench of ITAT, Kolkata with regard to the following question, the matter was referred to Third Member under section 255(4) of the I.T. Act, 1961 for his opinion :- "Whether in the facts and circumstances of the case, the disallowance of Rs. 2 lakhs on ad hoc basis proposed by ld. J.M. or disallowance of expenses to 1% of the total exempted income proposed by ld. A.M. is justified under section 14A of the I.T. Act, 1961". 2. Hon'ble President, ITAT nominated Shri G.D. Agrawal, Hon'ble Vice President (AZ/KZ) as Third Member. The Hon'ble Third Member vide his order dated 27.05.2011 has concurred with the findings of ld. Accountant Member by observing as under :- "7. I have considered the submissions of both the parties and perused the orders proposed by Ld. Members. The dispute in the present reference is in narrow compass. In the assessment order the A.O. disallowed administrative expenses of Rs. 42,130/- u/s. 14A of the Act calculated @ 1% of the tax-free income. The ld. C.I.T.(A) by applying Rule 8D of the Rules directed the A.O. to dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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