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TMI Blog2016 (10) TMI 323X X X X Extracts X X X X X X X X Extracts X X X X ..... s v. CIT [2011 (11) TMI 267 - Delhi High Court]. The facts in the aforementioned case are clearly applicable to the facts of the case, In view of the same, we hold that the AO did not verify the accounts and claim of the assesse while applying Rule 8D and computing expenditure thereon, and, therefore, the order of the CIT-A is quashed and the grounds raised by the assesse are allowed. - I.T.A No. 2123/Kol/2013, I.T.A No. 2124/Kol/2013, CO No: 30/Kol/2014 - - - Dated:- 12-8-2016 - Shri P.M.Jagtap, Accountant Member and Shri S.S. Viswanethra Ravi, Judicial Member For The For Revenue : Shri Kalyan Nath, JCIT, Sr.DR For The Assessee : Shri D.S.Damle, FCA, ld.AR ORDER SHRI S.S. VISWANETHRA RAVI, JM Two appeals in I.T.A No. 2123/Kol/2013 and I.T.A No. 2124/Kol/2013 by Revenue A.Ys 2006-07 and 2008-09 respectively and CO No. 30/Kol/2014 by the Assessee for AY 2008-09 are directed against the separate orders of the CIT(Appeals)-XII, Kolkata dt:15-03-2013/13-03-2013. 2. Since the issues involved in these appeals and cross objections are common, therefore, heard together with the consent of the both the parties and disposed of the same by a consolidated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4/05 Fixed Assets 28219.99 29805.34 Investments 2906.53 2035.95 Current Assets, Loans Advances 39177.06 34593.78 Miscellaneous Expenditure 129.37 143.83 Total 70432.95 66578.90 Therefore, Average Total Assets ₹ 68505.92 lacs Amount disallowable as per Rule 8D(2)(ii) (AxB)/C ₹ 110.56 lacs Amount disallowable as per Rule 8D(2)(iii) 0.5% of B ₹ 12.35 lacs Therefore, Total Amount disallowable u/s. 14 r.w.r 8D Rs.122.91 lacs i.e. Rs.1,22,91,000/- 7. On first appeal, the CIT-A relying on the decision of the Hon ble Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D Agarwa, 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 AO disallowed administrative expenses of ₹ 42,130/- u/s. 14A of the Act calculated @1% of the tax-Fee income. The Id C.I. T.(A) by applying Rule 8D of the Rules directed the A.O. to disallow Rs.I0.28.900/-, thereby enhanced the total income by ₹ 9,86, 770/-. In the grounds of cross objection the assessee objected to the order of the Id 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 ₹ 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 coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct should have been 1 % of the total exempt income. 8. The matter will now go to the regular Bench for passing the order as per the majority view . 11. In view of the above, in accordance with the majority view, we hold that the expenses at 1% of the total exempt income is reasonable as disallowable u/s. I4A of the Act as held by the Third Member in ITA No. 566/Kol/09 CO 39/Kol/09 for the A.Y 2004-05 in assessee s own case supra. Therefore,, accordingly, the ground no-1 raised by the Revenue is dismissed. 12. Ground no.2 raised by the revenue is as under:- 2. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that expenditure of ₹ 85,00,000/- as flying rights charge was allowable business expenditure on the basis of decision of the CIT(A)-XXXIV, Kolkata in assessee's own case for Asst year 2005-06, when the said decision is challenged before the Hon'ble ITAT, Kolkata? 13. Brief facts of this issue are that the AO during the course of assessment proceedings found that the assessee company had incurred aircraft rent amounting to ₹ 3,40,00,000/- and the same was claimed as an expenditure in the return. The assessee has made the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT-A, now the Revenue before the Tribunal by raising by above ground. 17. At the time of hearing before us, the assessee submits that the issue involved in this appeal is squarely covered in favour of the assessee by an order dated 30th October, 2014 of the Hon ble High Court at Calcutta in GA No. 1382 of 2014 2390 of 2014/ITAT 31 of 2014 107 of 2014 in assessee s own case for the A.Y 2005-06 placed at pages 36-37 51-52 respectively of the assessee s paper book. In this case the revenue preferred appeal before the Hon ble Calcutta High Court, wherein the revenue s appeal was dismissed by upholding the order dated 13th November, 2013 of the Tribunal in ITA No. 235/Kol/2012 for the AY 2005-06 on similar issue and in ITA No.741/Kol/2012 939/K/2012 for AY 2007-08. The Ld. DR conceded that the Hon ble High Court of Calcutta dismissed their appeal. In view of the same and respectfully following , ground no-2 of revenue s appeal is dismissed. 18. Ground no.3 raised by the revenue is as under:- 3. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that expenditure of ₹ 12,26,700/- as retainer-ship fee was allowable business expenditure when the A.O made the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure 22. Aggrieved by such order of the CIT(A) now the revenue is in appeal before us by raising the above mentioned ground. 23. At the time of hearing before us, the assessee submits that the issue involved in this ground is squarely covered in favour of assessee and against the revenue by the order of the Hon ble Calcutta High Court dated 30th October, 2014 in GA No.1382 of 2014/ITAT 31 of 2014, wherein the revenue s appeal was dismissed by upholding the order dated of the Tribunal in ITA No. 235/Kol/2012 for the AY 2005-06. The Ld. DR conceded that the Hon ble High Court of Calcutta dismissed their appeal. Respectfully following the same, this ground of revenue is dismissed. 24. Ground no.4 raised by Revenue reads as under:- Whether Ld CIT(A)-XII, Kolkata. was justified in holding that expenditure of ₹ 19,33,576/- as 25/'0 of Guest House Expenses was allowable business expenditure on the basis of decision of the Hon'ble ITAT, Kolkata in assessee's own case for Asst year 2000-01 and 2001-02, whereas the Hon'ble Mumbai ITAT in the case of New India Extrusion Ltd -vs- CIT [46 SOT Mum (10 Taxman 165) held the issue in favour of revenue? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture on the basis of decision of the Hon'ble IT AT, Kolkata in assessee's own case for Asst year 2000-01 and 2001-02, whereas the Hon'ble Mumbai ITAT in the case of New India Extrusion Ltd -vs- CIT [46 SOT Mum (10 Taxman 165)] held the issue in favour of revenue? 4. Whether Ld CIT(A)-XII, Kolkata, was justified in holding that expenditure of ₹ 2,91,00,000/- as Licence Fee paid to RPG Enterprise was allowable business expenditure on the basis of decision of the Hon'ble ITA T, Kolkata in assessee's own case for Asst year 2004-05, whereas the Revenue has filed appeal before the Hon'ble ITAT, kolkata against the CIT(A)'s decision on same issue for Asst year 2004-05 ? 31. Ground nos.1 to 3 raised in ITA No.2124/Kol/2013 for the A.Y 2008-09 by the revenue are identical to that of grounds raised in ITA No.2123/Kol/2013 for the A.Y 2006-07, which have already been disposed of by us by following the decision of the Hon ble Calcutta High Court in the case of supra . Following the views taken by us herein above in ITA No.2123/Kol/2013 for the A.Y 2006-07, the grounds 1 to 3 in ITA No.2124/Kol/2013 for the AY 2008-09 being identical and similar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... center. The company started its production facility at Durgapur and had further acquired production facilities at Baroda in Gujarat and Cochin in Kerala and substantially expanded the production capacities. With these production facilities in place the company caters easily to markets in East, West and South India. Needless to mention, that there is a considerable saving that has arisen to the company. It all became possible since it enjoyed the services of experts of RPG Enterprises Ltd readily and timely, though at cost. The entire business strategy of our company in areas of exports, capacity enhancement, acquisition of capacities in other parts of India for geographical spread to have outposts in the consuming centers are all results of timely and strategic planning done by M/s RPG Enterprises Ltd for us. 34. The AO found that in past assessments similar payments made to M/s. RPG Enterprises Ltd as licence fees and were disallowed and since the nature of agreement was same in earlier years. The AO disallowed ₹ 2,91,00,000/- and added the same to the total income of the assessee. 35. On first appeal, the CIT-A after considering the various submissions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to the assessee why management expenses should not be disallowed on pro-rata basis interms of section 14A of the Act. the AR submitted that the assessee did not incur any expenditure in earning the aforesaid income, which was exempt from tax, except for the sum of ₹ 2,22,500/- which the assessee on its own added to the total income. The dividend and interest were received by cheques payable at par and no expenses were incurred even to realize the same. The ARs also submitted that the investments in shares and securities were made out of own funds from time to time and no further expenditure on the same can be attributed to earn the aforesaid income. The A/Rs further stated that against the investments of ₹ 28.06 crs held by the assessee as at 31.03.2008, the own fund stood at ₹ 242.80 crs which were far in excess of the investments in shares and securities. As such no expenses can be attributed to earning of the exempt income and disallowable u/s 14A of the Act. The submissions of the assessee are considered. However, the same is not acceptable since the assessee is bound to incur some expenditure for earning the exempt income. In view of the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance u/s 14A of the Act which has been disputed by the appellant and submitted as under: It is submitted that the only addition that can be made under clause (f) to the Explanation to section115JB are the amount or amounts of expenditure relatable to any income to which section 10 (other than the provisions contained in clause (38) thereof) or section 11 or section 12 apply . Under the provisions of section 14A no 'deduction is to be allowed in respect of' expenditure incurred by the assessee in relation to income which does not form part of total income under this Act. Since the issue of expenditure related to dividend income, falling under section 10 it is clear that the two provisions are similar in nature. Clause (f) uses the words expenditure relatable to any income , while' section 14A uses the words expenditure incurred by the assessee in relation to income . Section 14A contains sub-section (2) and (3) which do not find place in clause (f) of the Explanation to section 11SJB. Clause (f) only deals, with the direct expenses incurred in relation to income not forming part of total income. Therefore, insofar as computation of adjusted book p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .R. I think after the amendment brought in the Finance Act, 2006 w.e.f 01-04-2007 the word used are the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of total income . From this words of the statue it is clear that the AO has no option, but to determine expenses as per Rule 8D. Accordingly, the AO is justified in calculating the expenses for earning the exempted income and thus, assessee s appeal on ground no. 1 is dismissed. 44. Aggrieved by such order of the CIT-A now the assessee before the Tribunal by filing respective ground as mentioned hereinabove. 45. At the time of hearing before us the Ld.AR submits that the Asseesee suo moto disallowed an amount of ₹ 2,22,500/- and argued assessee s own funds are larger than the investments and no part of loan was utilized for investments. Further submitted that the assesse is a promoter of CEAT company and earned exempt income and relied on by the order dated 14-05-2013 of bench of Kolkata Tribunal in the case of DCIT,CC-XXVII, Kolkata Vs. REI Agro Ltd for the AY 2009-10 in ITA No.1811/Kol/2012 wherein held that invocation of Rule 8D of Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard rival submissions and gone through facts and circumstances of the case. Brief facts leading to the above issue are that during the course of assessment proceedings AO noticed that assessee has earned dividend income of ₹ 1,65,924/- and claimed the same as exempt u/s. 10(34) of the Act. The AO required the assessee to furnish the details of expenditure incurred for earning this dividend income. The assessee in reply stated that no expenditure has been incurred to earn this dividend income because no new investment was made during the year and no interest at all is paid on the investments made for earning this dividend income. Further, it was clarified by the assessee that no loans were taken for making this investment for earning this dividend income. The AO was not convinced with the reply of the assessee and made disallowance simply by making calculation by applying Rule 8D of the I. T. Rules, 1962 as under: i) Direct expenses : In the P L A/c no item of expenditure is identified which can be directly attributable to earning of such income or making of the long term investments listed above. Therefore, this figure is adopted at NIL. ii) Disallowance of Int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference in the section are if AO having regard to the accounts of assessee, is not satisfied with the correctness of the claim means that before going to the computation, AO has to cross the barrier of the satisfaction with the correctness of the claim, then AO can be permitted to straightaway apply the computation under Rule 8D. 12. Thus the issue in this appeal is with reference to invoking of provisions of section 14A(2) and Rule 8D. The Hon'ble Bombay High Court while upholding the constitutional validity of the section 14A and Rule 8D has this to observe with reference to sub section 2 3 of section 14A: Sub-sections (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Subsection (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said Rules. 31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Punjab Haryana High Court in the case of CIT vs. Hero Cycles Ltd 323 ITR 518 (P H) has also held that disallowance under section 14A could not stand where it was found that for earning exempted income no expenditure has been incurred: Held - dismissing the appeal, that the expenditure on interest was set off against the income from interest and the investment in the shares 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, was a question of fact. The contention of the Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14A and the impact of expenditure so incurred could not be allowed to be set off against the business income which may nullify the mandate of section 14A, could not be accepted. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. Consequently, the disallowance was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee. 5.2 Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for earning the exempt income. From the details of the expenditure, it is clear that the expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the revenue that the assessee has used his official machinery and Establishment for earning the exempt income. The Assessing Officer has not given any finding that any of the expenditure incurred and claimed by the assessee is attributable for earning the exempt income. In other words when the assessing officer has not pointed out that certain expenditure is not incurred for earning the professional income; but are incurred i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provisions disallowable as per Rule 8D, if he, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8D if he is not satisfied with the correctness of the assessee s claim. To put it simply, the further disallowance u/s.14A is called for when the AO is not satisfied with the assessee s claim of having incurred no expenditure or some amount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the AO that it incurred a particular expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. From the assessment order, it is observed that the AO simply kept the assessee s submissions on record wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned there will be some expenditure incurred in relation thereto. Such presumption cannot form the basis for making disallowance under rule 8D. 17. In the case of Priya Exhibitors (P) Ltd vs. ACIT (2012) 54 SOT 356 it was held as under: From the careful study of the observations made by the Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. (supra), it is apparent that first the Assessing Officer has to determine the claim of the assessee regarding expenses which neither the Assessing Officer nor the Commissioner (Appeals) has done in the instant case. In fact, the said decision goes against the department itself in so far as their Lordships has held that the Assessing Officer must in the first instance determine whether the claim of the assessee is correct and determination must be made having regard to the accounts of the assessee. The Legislature directs him to follow rule 8D only where the Assessing Officer is not satisfied with the claim of assessee. 18. After considering the principles laid down by various judgments, it is imperative that the Assessing Officer can invoke Rule 8D only when he records satisfaction in regard to the correctness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at % of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J. K. Investors (Bombay) Ltd., supra, we uphold the order of CIT(A). This ground of appeal of revenue is dismissed. 50. The facts of aforementioned case are that during the course of assessment proceedings AO noticed that assessee has earned dividend income of ₹ 1,65,924/- and claimed the same as exempt u/s. 10(34) of the Act. The AO required the assessee to furnish the details of expenditure incurred for earning this dividend income. The assessee in reply stated that no expenditure has been incurred to earn the said dividend income. The AO was not convinced with the reply of the assessee and made disallowance by making calculation by applying Rule 8D of the Rules. The Tribunal supra held that the AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of the R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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