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TMI Blog2021 (3) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... proper method for working out the disallowance need to be arrived at in the said two years i.e. 2006-07 and 2007-08. This issue, therefore, also needs reconsideration at the end of the Ld. CIT(A). Therefore, all the appeals are restored back to the Ld. CIT(A) with the direction to rework the amount of disallowance of expenses u/s. 14A for all the assessment years in accordance with law, giving a clear finding of the nature of the expenses disallowed. Application of Rule 8D for calculating disallowance of expenses u/s. 14A of the Act, is restored back to the Ld. CIT(A) with the directions to calculate the same as per appropriate method, in accordance with law. - ITA Nos. 275 to 279/Chd/2020 - - - Dated:- 4-3-2021 - Diva Singh, Member (J) And Annapurna Gupta, Member (A) For the Appellant : A. K. Jindal, CA For the Respondents : Meenakshi Vohra, Addl. CIT ORDER The above appeals relate to the same assessee challenging two consolidated orders of the Commissioner of Income Tax (Appeals), Panchkula relating to assessment years 2006-07 2007-08 and 2008-09 to 2010-11 both dated 13.03.2020 passed u/s. 250(6)) of the Income Tax Act, 1961 (hereinafter referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014-15 rendered in accordance with the view of the Hon'ble jurisdictional High Court in the case of PCIT vs. Empire Package Pvt. Ltd. (2017) 81 taxmann.com 108 (P H). That the disallowance was accordingly restricted in the impugned years as under: Asstt . Year Disallowance restricted to the extent of Exempt Income 2006-07 ₹ 2,97,432/- 2007-08 ₹ 2,48,224/- 2008-09 ₹ 5,10,594/- 2009-10 ₹ 4,44,910/- 2010-11 ₹ 3,27,060 (suo moto by assessee 1,14,791 additional disallowance 2,11,270) 5. The Ld. Counsel for the assessee drew our attention to the findings of the Ld. CIT(A) in his order passed in assessment year 2006-07, pointing out that his finding for the subsequent years also was identically worded. The relevant findings of the Ld. CIT(A) at paras 5.2 and 5.2.1 of his consolidated order is as under: 5.2 HELD: I have perused the order of the Assessing Officer and examined the reply of the assessee. Identical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elation to tax exempt income'- Accordingly, the tax exempt income cannot be disallowed entirely. Supreme Court has dismissed SLP of the Department against the judgment of Delhi High Court. Similar view has been taken by the jurisdictional High Court in the case of Principal Commissioner of Income-tax-I, Chandigarh vs. Empire Package (P.) Ltd. [2017] 81 taxmann.com 108 (Punjab Haryana) Dated 12.01.2016. The facts of the case are that income from dividend had been shown at ₹ 1,11,564 whereas disallowance under section 14A read with rule 8D of the Rules worked out by the Assessing Officer came to ₹ 4,09,675. The Hon'ble High Court has held that when the assessee claimed that it had not made any expenditure on earning exempt income, the Assessing Officer in terms of sub-section (2) of section 14A was required to collect such material evidence to determine expenditure if any incurred by the assessee in relation to earning of exempt income. The Assessing Officer disallowed the entire tax exempt income which is not permissible as per settled position of law. In view of decision in CIT vs. Deepak Mittal [2013]38 taxmann.com 83/219 Taxman 314/[2014] 361 ITR 131 (Punj. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/- which is highly unjustified and uncalled for. 7. It was pointed out that for assessment years 2008-09, 2009-10 and 2010-11 the assessee had raised the solitary ground challenging the order of the Ld. CIT(A) on merits, as raised in assessment years 2006-07. For the sake of convenience the ground raised in A.Y. 2008-09 is reproduced hereunder: 1. That the CIT(A) has erred in law facts of the case in upholding the disallowance to the extent of ₹ 4,33,381/- over and above the disallowance of ₹ 77,213/- made by the assessee which is highly unjustified and uncalled for. 8. Taking up first the issue raised in ground No. 1 of the Appeals pertaining to assessment years 2006-07 and 2007-08, relating to the applicability of Rule 8D for calculating the disallowance of expenses u/s. 14A of the Act, the Ld. Counsel for the assessee contended that the said rules were not in force for the impugned year and, therefore, the disallowance of expenses made by applying the said Rules ought to be deleted in entirety. The Ld. Counsel for the assessee drew our attention to his submissions made in this regard before the Ld. CIT(A) as under: At the very outset we would l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Thereafter on the merits of the case, the Ld. Counsel for the assessee contended that in the facts of the case no disallowance of expenses was liable to be made since it had been demonstrated to the authorities below that the investments made were very old, having been made some 20-25 years back out of interest free funds in the form of share capital invested by the Government in the assessee's concern. That the matter regarding the source of funds already stood settled by the ITAT in the assessee case in A.Y. 2003-04 2004-05 and the AO after due verification had deleted the disallowance of interest in those years. Our attention was drawn to the submissions made before the Ld. CIT(A) in this regard as under: However on merits we submit as under:- During the year the assessee has earned dividend income of ₹ 2,97,432/- i.e. ₹ 5760/- from Uni Products Limited, ₹ 1,25,000/- from GRM Overseas Limited, ₹ 1,25,632/- from JBM Auto Components Ltd. And ₹ 41,040/- from Industrial development bank of India. The divided income received during the year has been declared as exempt income as per the provisions of Income Tax Act. During the year t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 49 (SC) (para 36)..... Again in the judgment of Maxopp Investment Ltd. v. Commissioner of Income Tax (2018) 402 ITR 640 (SC) vide para 32 In view of the above, the first condition to apply provisions of sec. 14A of the Act is that the assessee must have incurred expenditure which can be said to be related to exempt income is not being fulfilled. Secondly, The Assessing Officer has not brought on record any expenditure which has been incurred by the assessee to earn the exempt income. Instead has simply applied Rule 8D of the Rules in a mechanical manner as a formula and calculated the disallowance which is not applicable to the year under consideration. It is well settled that before any disallowance is made by the assessing officer, the AO should bring on record certain expenditure which must have been incurred by the assessee, which in the present case is missing. For this reliance is placed on the following:- Maxopp Investment Ltd. Ors. Vs. CIT (2012) 247 CTR (Del) 162 (2012) 347 ITR 272 (Delhi) In view of the above it is stated that the AO has erred in making disallowance without bringing on record any expenditure which has been incurred for earning e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in shares. The entire income from which dividend was earned during the year was from the investments which were existing as on 01.04.2005. In the case, where the assessee had enough own surplus funds for the purpose of making the said investments which were interest free, no disallowance can be made u/s. 14A read with Rule 8D. For this reliance is placed on the following:- The Hon'ble Punjab and Haryana High Court in the case of CIT vs. Max India Ltd., ITA No. 186 of 2013 (O M) dated 6.9.2016,........... CIT vs. Winsome Textile Industries Limited 319 ITR 204 (P H).......... Principal Commissioner of Income Tax vs. India Gelatine And Chemicals Ltd. (2015) 93 CCH 253 GUJHC....... Further it has been settled by the Apex Court that no disallowance on account of interest expense if borrowed funds have not been used for investments........ Thus, the AO has erred in making disallowance on account of interest as per the provisions of Rule 8D(2)(ii) of the Income Tax Act. Therefore, we request that the addition made be deleted. Without prejudice to the above we submit as under: It is well settled that the disallowance cannot exceed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sec. 14A was required to collect such material evidence to determine expenditure if any incurred by the assessee in relation to earning of exempt income. The Assessing Officer disallowed the entire tax exempt income which is not permissible as per settled position of law. In view of decision in CIT vs. Deepak Mittal [2013] 38taxmann.com 83/219 Taxman 314/2014] 361 ITR 131 (Punj. Har) holding that the window for disallowance is indicated in section 14A, and is only to the extent of disallowing expenditure 'incurred by the assessee in relation to the tax exempt income', the disallowance under sec. 14A read with rule 8D as worked out by the assessing Officer was not in accordance with law and as such working was not sustainable. By respectfully following the above decisions disallowance exceeding the exempt income is deleted. In view of the aforesaid judgments wherein it has been categorically held that the disallowance cannot exceed dividend income and also exempt income cannot be disallowed entirely, it is requested that the disallowance be restricted to the exempt income as the assessing officer has disallowed ₹ 53,03,657/- u/s. 14A as against dividend income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance was not tenable in law, more particularly when the ITAT had in the first round held that in the light of the fact that the assessee had earned exempt income, section 14A of the Act was attracted and the AO was only required to work out the disallowance as per the provisions of law. 16. Having held so, however, we are of the view that the incorrect application of formula by the AO for the impugned years needs to be looked into and a proper method for working out the disallowance need to be arrived at in the said two years i.e. 2006-07 and 2007-08. This issue, therefore, also needs reconsideration at the end of the Ld. CIT(A). 17. For the aforesaid reasons, therefore, all the appeals are restored back to the Ld. CIT(A) with the direction to rework the amount of disallowance of expenses u/s. 14A for all the assessment years in accordance with law, giving a clear finding of the nature of the expenses disallowed. 18. In effect in ITA Nos. 275 276/Chd/2020, ground No. 1 challenging the application of Rule 8D for calculating disallowance of expenses u/s. 14A of the Act, is restored back to the Ld. CIT(A) with the directions to calculate the same as per appropriate met ..... X X X X Extracts X X X X X X X X Extracts X X X X
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