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TMI Blog2017 (8) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... in light of the decision of this Court in CIT v. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del)?" 3. While admitting ITA No. 549 of 2015 on 15th October 2015, the following question was framed for consideration: "Whether the Assessing Officer recorded a proper satisfaction in terms of Section 14A (2) and Rule 8 (D) of the Income Tax Rules, 1962 and, in calculating the disallowance at 0.5% of average value of investments as per clause (iii) of Rule 8 D (2) of the Income Tax Rules, 1962?" 4. The Appellant-Assessee is engaged in the business of printing and publishing newspapers and periodicals. For the AY in question, the Assessee filed its return on 30th September 2008 declaring a total income of Rs. 1,61,78,06,133/-. Thereafter, it filed a revised return on 30th March 2010 declaring a total income of Rs. 1,60,96,08,330/-. Proceedings before the Assessing Officer 5. The return was picked up for scrutiny and notice was issued by the Assessing Officer ('AO') to the Assessee under Section 143 (2) of the Act on 4th August 2009. Due to a change in AO, another notice under Section 143(2) of the Act, along with a questionnaire under Section 142 (1) of the Act, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incidental expenses of collection, telephone, follow-up, research etc. Therefore, expenses in relation to earning of income are embedded in direct expenses. The AO, accordingly, held that the Assessee had incurred expenses to manage its investments and had failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income. The AO computed the total disallowance under Rule 8D (2) as Rs. 8,97,49,579/- comprising Rs. 3 lakhs being the amount of expenditure directly incurred relating to exempt income under clause (i) of Rule 8D (2); Rs. 6,86,27,884/- being the interest expenditure incurred under clause (ii) of Rule 8D (2); and Rs. 2,08,21,695/-, being the amount equal to 0.5% of the average value of investments under clause (iii) of Rule 8D (2). Order of the CIT (A) 10. The Assessee went in appeal before the Commissioner of Income Tax (Appeals) ['CIT (A)']. By the order dated 15th December 2011, the CIT (A) held that the documents placed on record by the Assessee showed that the term loan taken from State Bank of India (SBI) had been utilized for repayment of earlier loans. It could not be said that any amount of the term loan had been u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding year, i.e., AY 2007-08 for deleting such disallowance under Section 14A could not be applied from AY 2008-09 onwards, when Rule 8D had come into force. It was held that the ends of justice would be adequately met if the impugned order on this issue was set aside and the matter restored to the file of AO for deciding this aspect afresh. 13. As regards the administrative expenses, again it was held that once Rule 8D had come into force the disallowance was required to be computed with reference to mandate of Rule 8D (iii). The CIT (A) had sustained the disallowance under clause (iii) of Rule 8D (2) of the Rules at 0.5% of the average of the value of investment, which amount was obviously much less than the actual expenditure incurred and claimed as deduction by the Assessee. The said disallowance could not be further reduced "to a lower level on an ad hocism." The disallowance of Rs. 2,08,21,695 as directed by the AO was accordingly upheld. 14. However the ITAT reversed the order of the AO to the extent that Rs. 3 lakhs already disallowed by the Assessee was once again disallowed by the AO. The ITAT further noted that during the AY in question, the Assessee had earned a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arn exempt income under Section 14A of the Act on account of interest. Mr. Vohra pointed out that, despite the Assessee explaining in detail in its letter dated 15th November 2010 addressed to the AO that no interest bearing funds had been utilised for making investments during the AY in question, the AO failed to consider the said submissions in the assessment order dated 27th December 2010. The factual finding of the CIT (A) that no loans had been utilized for the purpose of investments and that the position for the AY in question was no different from AYs 2005-06, 2006-07 and 2007-08 was not found to be incorrect by the ITAT. 19. Mr. Vohra further pointed out that the ITAT had erred in recording that the Assessee had contended that its own funds were more than the investments and, therefore, there should be no disallowance under Section 14 A of the Act. In fact the Assessee's contention, which was accepted by the CIT (A), was that during the AY in question no interest bearing funds had been utilised for making investments. 20. Mr. Vohra submitted that the ITAT had also wrongly understood and applied the ratio of decision of this Court in CIT v. Taikisha Engineering India L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had not considered the written note submissions and details provided by the Assessee regarding investment and nature thereof in the assessment order. Mr. Vohra further submitted that in, both, Maxopp Investment Limited v. CIT [2012] 347 ITR 272 (Del) as well as the decision of the Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd v. CIT [2010] 328 ITR 81 (Bom), it was emphasized that "while rejecting the claim of the Assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the AO would have to indicate cogent reasons for the same." It was also emphasized that the satisfaction of the AO "must be arrived at on objective basis." 23. Mr. Vohra submitted that the calculation for the amount of Rs. 3 lakhs claimed as the administrative expenses had been submitted by the Assessee, along with the letter dated 15th November 2010 to the AO. This was relatable to the cost of the finance department at the corporate office. Even in the earlier AYs 2005-06 to 2007-08, it had been held by the ITAT that disallowance for administrative expenses is to be determined with reference to the cost of the finance department. It is pointed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (supra) on this aspect has in fact been upheld by the Supreme Court. (iv) The history of Section 14A and Rule 8D showed that they were applied to apportion expenditure for earning exempt and non-exempt incomes when the Assessee carried a composite and indivisible business. Therefore, Rule 8D, being a general rule, could not be expected to produce an accurate amount in every case. Some variance was inevitable. In any event, hardship and inequity are no grounds for interference by this Court in matters of taxation. (v) It is submitted that the three sub-clauses of Rule 8D(2) fulfil the "proximate cause" test and "nexus" test. Each of the three sub-clauses was directly or indirectly in relation to income which did not form part of the total income under the Act. It is, accordingly, submitted that no interference is called for with the judgment of the ITAT. Analysis of relevant provisions 25. It is necessary in the first place to re-visit the statutory provisions that are involved, viz., Section 14 A of the Act and Rule 8 D of the Rules. "14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively from April 1, 1962, and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years." 27. In cases involving Section 14 A of the Act, the constant tug-of-war lies in the Revenue wanting to increase the expenditure incurred to earn exempt income for the purpose of disallowance, while the Assessee seeks to establish the opposite. In CIT v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC), the Supreme Court noted that legislative intent behind Section 14A was not to allow deduction in respect of any expenditure incurred by an Assessee in relation to exempt income, i.e. income which does not form part of the total income under the said Act, against the taxable income. The Supreme Court observed as under: "In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... la, namely: A x B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = the average of total assets as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year; (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year. (3) For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance-sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets." 30. Rule 8 D (1) states more or less what Section 14 A (2) of the Act states. It requires the AO to first examine the accounts of the Assessee and then record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer is not satisfied with the claim of the Assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the Assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the Assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law." 31.3 The Bombay High Court further observed as under: "Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the Assessee, having regard to the accounts of the Assessee. When a statute postulates the satisfaction of the Assessing Officer "Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total turnover. On that basis the disallowance in AY 2005-06 was upheld by CIT (A) at Rs. 1 lakh. The disallowance for this AY was worked out as Rs. 1,42,404/- and since the Assessee had already made a disallowance of Rs. 3 Lacs, no further disallowance was called for. 35. In order to disallow this expense the AO had to first record, on examining the accounts, that he was not satisfied with the correctness of the Assessee's claim of Rs. 3 lakhs being the administrative expenses. This was mandatorily necessitated by Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules. 36. In para 3.2 of the assessment order, the AO records that, in answer to the query posed by the AO requiring it to produce calculation for disallowances, the Assessee "submitted that they have not incurred any expenditure for earning the dividend income." Thereafter, in para 3.3, the AO records "I have considered the submissions of the Assessee and found not to be acceptable." Thereafter, the AO proceeded to deal with the said provisions of Section 14A and Rule 8D and observed, in para 3.3.1, that making of investment, maintaining or continuing investment and time of exit from investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imply reproduced para 3.3.6 of the assessment order where, again, no reasons have been provided but only a conclusion has been reached that the AO was "satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses." 40. Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. The question framed in ITA 549 of 2015 is answered accordingly. Disallowance of interest expenses 41. As far as disallowance of interest expenses were concerned, the said question arises and has been framed in ITA 548 of 2015. The stand of the Assessee was that no interest bearing fund was utilised during the AY in question for making investments which yielded exempt income. Therefore, no disallowance on that score was warranted. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding for depreciation of Rs. 26,363.04 lakhs and the net cash funds of the Assessee stood at Rs. 14,427.69 lakhs. Therefore, after making all disbursements, including the investments made during the year, funds to the tune of Rs. 6966.96 lakhs were available at year end under the heads 'cash' and 'bank deposits'. Therefore, the Assessee had substantial funds of its own to make investments under reference. 45. What is plain from the explanation offered by the Assessee, which was not discarded by the AO on facts, was that there was no part of the interest expenditure which did not bear a direct nexus to a loan that was already borrowed in some earlier year. As explained by this Court in Principal Commissioner of Income Tax v. Bharti Overseas Pvt. Ltd. (supra), if there is no interest expenditure "which is not directly attributable to any particular income or receipt", then "the question of applying the formula" under Rule 8D (ii) of the Rules will not arise. In other words, one of the pre-requisites for the applicability of the formula Rule 8 D (2) (ii) of the Rules for determining the extent of disallowance of interest, is that there must some interest expense which is not attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see in respect of expenditure incurred in relation to exempt income, the AO can determine the amount of expenditure which should be disallowed in accordance with the method prescribed under Rule 8D of the Rules. The Court explained that, unless such dissatisfaction was recorded in the manner indicated under Section 14A of the Act, the question of invoking Rule 8D of the Rules and the formula there under does not arise. 46.6 On facts, this Court held that two factors were crucial in deciding the issue in favour of the Assessee. One was the failure of the AO to record his satisfaction and the second was the factual finding of the CIT (A) as well as the ITAT that "the Assessee had sufficient funds for making investments in shares and mutual funds." 46.7 The Court explained that for the purposes of Rule 8D (2) (ii), the AO was required to examine whether "the assessee has incurred expenditure by way of interest in the previous year and secondly whether the interest paid was directly attributable to particular income or receipt. In case the interest paid was directly attributable to any particular income or receipt, then the interest on loan amount to this extent or in entirety as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x is payable under Section 115-O of the Act and income on units and mutual funds on which tax is payable under Section 115 R of the Act. However, the Supreme Court reversed the Bombay High Court on the second question viz., the applicability of Section 14 A to the appellant in that case. 50.2 In the process of discussing the second question, the Supreme Court observed that, irrespective of whether sub-sections (2) and (3) of Section 14A of the Act were retrospective, "what cannot be denied is that the requirement for attracting the provisions of Section 14A (1) of the Act is proof of the fact that the expenditure sought to be disallowed/deducted had actually been incurred in earning the dividend income." On facts, it was noted that, in all of the AYs 1998-99, 1999-2000 and 2001-02, "the Revenue had failed to establish any nexus between the expenditure disallowed and the earning of the dividend income in question." 50.3 The Supreme Court found no mention of the reasons which had prevailed upon the AO to hold that the claims of the Assessee, that no expenditure was incurred to earn dividend income, cannot be accepted and why the order of the ITAT for the earlier AYs were not accept ..... X X X X Extracts X X X X X X X X Extracts X X X X
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