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TMI Blog2021 (11) TMI 377X X X X Extracts X X X X X X X X Extracts X X X X ..... ction that as to why the disallowance u/s 14A offered by the assessee was not to be accepted. In our considered view, the A.O by referring to the accounts of the assessee, as were there before him, ought to have pointed out the expenditure which were claimed by the assessee as a deduction against its non-exempt income, but the same as per him were attributable to earning of the exempt income As the A.O before taking recourse to the theory of apportionment and computing of the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) had neither recorded his satisfaction that the suo-motto disallowance offered by the assessee under Sec. 14A was not correct, nor referring to the assessee's accounts whispered a word as to how the other expenditure claimed by the assessee with respect to its non-exempt income were related to its exempt income, therefore, had clearly exceeded his jurisdiction for re-computing the said disallowance in the hands of the assessee. We, thus, in the backdrop of the aforesaid invalid assumption of jurisdiction by the A.O, are unable to uphold the disallowance determined by him u/s 14A r.w Rule 8D. Accordingly, we herein set-aside the order of the CIT(A) and dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,01,751/- as re-computed by the appellant being fair and reasonable having regards to the accounts of the appellant company and not doing so is wrong and contrary to the provisions of the Act, and the Rules made there under. 3. Without prejudice to above ground of appeal, on the facts and in the circumstances of the case and in law, the ld. CIT(A) ought to have not reckoned the investment of ₹ 1,08,52,67,828/- in equity shares of subsidiary company, being Oriental Containers Limited, though dividend income have been earned during the year, without appreciating the fact that investment made in said subsidiary company was old strategic investment held as such without incurring any expenditure to earn dividend income there from and subsequently merged with appellant company and hence the Ld. CIT(A) ought to have given direction to Ld. A.O to exclude the said investments for the purpose of disallowances under section 14A r.w.r. 8D(2)(iii) and not doing so is wrong any contrary to the facts and circumstances of the case, provisions of Income-tax Act, 1961 and Rules made thereunder. 4. On the facts and in circumstances of the case and in law, the ld. CIT(a) erred in confirmi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1% of Salary ₹ 89,751/- 2. Sundry Expense @ ₹ 1,000/- p.m * 12 ₹ 12,000/- Disallowance u/s 14A r.w Rule 8D(2)(iii) ₹ 1,01,751/- It was the claim of the assessee that as major investments of the company were long term investments made in its subsidiaries and Associate companies, therefore, much efforts were not required to handle the investment related activities. Elaborating on his said contention, it was submitted by the assessee that though the Managing director, company secretary and accountant were responsible for the day to day administrative duties of the company, however, 1% of their salary was considered towards its investment related activities. It was the claim of the assessee, that though no specific cost was incurred in relation to earning of exempt income, however, it had most reasonably as per its revised working offered a disallowance u/s 14A out of employee costs and other expenses of ₹ 1,01,751/-. Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 060 (i.e ₹ 9,97,72,02,119/2) Disallowance U/rule 8D(2)(iii) i.e @ 0.5% of the Average Value of Investments ₹ 2,49,43,005/- As the assessee had suo-motto offered a disallowance u/s 14A of ₹ 11,181/- in its return of income, therefore, the A.O restricted the additional disallowance to an amount of ₹ 2,49,31,824/-. Further, the A.O under Sec. 36(1)(va) r.w Sec. 2(24)(x) disallowed the assessee s claim for deduction of employees contribution to Provident Fund and Employees State Insurance Corporation as the assessee had failed to deposit the same within the stipulated time period. Accordingly, the A.O vide his order passed u/s 143(3), dated 21.12.2018 assessed the income of the assessee company at ₹ 4,10,69,169/-. 4. Aggrieved, the assessee assailed the assessment order before the CIT(A). Insofar the disallowance worked out by the A.O u/s 14A r.w Rule 8D(2)(iii) at ₹ 2,49,43,005/- was concerned, the CIT(A) after considering the multiple contentions of the assessee directed the A.O that the investments wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions. We shall first deal with the contention of the ld. A.R that the A.O had invalidly assumed jurisdiction and dislodged the disallowance that was on a suo-motto basis offered by the assessee u/s 14A of the Act, and substituted the same by that as was computed by him by triggering the mechanism provided in Rule 8D. It is submitted by the ld. A.R that before the provisions of Section 14A(2) and (3) r.w Rule 8D are triggered by the A.O, the law postulates the requirement of a satisfaction on his part, that having regard to the accounts of the assessee, as placed before him, it is not possible for him to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is the claim of the ld. A.R, that as the A.O had dispensed with the aforesaid statutory obligation that was cast upon him and had mechanically worked out the disallowance u/s 14A by resorting to the methodology contemplated u/Rule 8D(2)(iii), therefore, the same cannot be sustained and is liable to be struck down on the count of invalid assumption of jurisdiction by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. 38. In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (₹ 270.51 crores as on 1.4.2001 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the expenditure and the exempt income. It was, observed, that the application of Sec. 14A and Rule 8D is not automatic in each and every case where there is income not forming part of the assessee s total income. Also, it was categorically observed by the Hon ble High Court that the A.O is obligated to give a clear finding as to how the expenditure incurred by the assessee during the relevant year related to the income not forming part of its total income and, the same cannot be justified merely on the basis of surmises or conjectures. The observations of the Hon ble High Court qua the aforesaid issue for the sake of clarity are being reproduced as under: 11. As the record reveals, the Assessee received dividend income of ₹ 13,85,03,376/-. It was exempted under the IT Act. The Assessee claimed that he did not incur any expenditure to earn that dividend. It is said to have invested surplus funds through the bankers and other financial institutions. The mutual fund officials used to come to the Assessee's doorstep to fill up the forms and to do all other things necessary in that regard. The Assessee only issued the cheques. The AO disagreed. He reckoned that without dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 13. Rule 8D of the Income Tax Rules provides the methods for determining the amount of expenditure in relation to income not includible in the total income. But this Rule comes into play once an expenditure falls within the mischief of section 14A of the IT Act. We need not elaborate on that Rule. 14. In Kanga Palkhiwala: Law Practice of Income Tax, (Lexis Nexis, New Delhi, 11 ed. Online edition), the learned revising author Arvind P. Datar has an interesting word about this 'inequitable and unfair1 provision. According to Kanga Palkhiwala, on a cursory reading, section 14A seeks to prevent a deduction that may result when income does not form part of the taxable income. But the expenditure incurred to earn that income is allowable as a deduction. However, this section and Rule 8D have been amended several times. Those amendments have resulted in highly unfair consequences for Assessees who earn dividend income. The object of exempting dividend inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclude that the respondent borrowed the funds. Second, given the volume of investment, the respondent is said to have received charge-free services from the managers of the banks and other financial institutions with whom they have invested. So there is said to be no expenditure. 18. This Court rejected the appellant's contentions and affirmed the Tribunal's findings. Here, too, we face an identical problem, similar assertions and counter assertions, and the same result: the Tribunal reversed CIT(A)'s findings. Can our response be different here? 19. Here, on facts, the Tribunal noted that the AO only discussed the provisions of section 14A(I) but has not justified how the expenditure the Assessee incurred during the relevant year related to the income not forming part of its total income. The AO, according to the Tribunal, straightaway applied Rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax-exempt income. Only then would a disallowance have to be effected. This Court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's accounts that the other expenditure claimed by the assessee out of the non-exempt income were related to its exempt income. By merely stating, that as the assessee was maintaining consolidated accounts, therefore, in the absence of separate accounts for exempt income yielding investments and its other business activities he was precluded from establishing a one-to-one nexus between the expenses and such exempt income yielding investments, in our considered view, by no means can be taken as discharge of the statutory obligation that was cast upon the A.O of recording a satisfaction that as to why the disallowance u/s 14A offered by the assessee was not to be accepted. In our considered view, the A.O by referring to the accounts of the assessee, as were there before him, ought to have pointed out the expenditure which were claimed by the assessee as a deduction against its non-exempt income, but the same as per him were attributable to earning of the exempt income. As held by the Hon ble High Court of Bombay in the case of Sociedade De Fomento Industrial Pvt. Ltd. (2020) 429 ITR 358 (Bom), the A.O before triggering the determination of disallowance u/s 14A as per the me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,84,472/-.Observing, that the assessee had failed to deposit the employees contributions to Provident Fund and Employee State Insurance Corporation of ₹ 2,82,472 within the due dates (including the grace period), the A.O was of the view that the assessee was not eligible for deduction of the said amount under Sec. 36(1)(va) r.w.s 2(24)(x) of the Act. On appeal, the CIT(A) finding no infirmity in the view taken by the A.O upheld the aforesaid disallowance. 11. Before us, the ld. A.R submitted that both the lower authorities had erred in making/confirming the aforesaid disallowance of ₹ 2,84,472/- under Sec. 36(1)(va) r.w.s 2(24)(x) of the Act. In support of his aforesaid contention the ld. A.R had relied on the judgments of the Hon ble High Court of Bombay in the case of CIT Vs. Ghatge Patil Transports Limited (2015) 53 taxman.com 141 (Bom) and Geekay Security Services (P) Ltd. Vs. DCIT (2019) 101 taxman.com 192 (Bom). It was submitted by the ld. A.R, that as the assessee had deposited the employees contributions to Provident Fund Employee State Insurance Corporation before 17.10.2016 i.e the due date of filing of its return of income for the year in question, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct should be restricted to fresh investments during the year for the purpose of computation as per Rule 8D(2)(iii). 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in directing that amounts to be taken for calculating the disallowance u/s 14A should be restricted to investments in subsidiaries on which dividend income has been earned during the year for the purpose of computation as per Rule 8D(2)(iii) ignoring the fact that the CBDT Circular No. 5/2014, dated 11.02.2014 does not mention that the disallowance u/s 14A of the IT Act should be restricted to investments in subsidiaries on which dividend has been earned during the year for the purpose of computation as per Rule 8D(2)(iii). 16. As we have while disposing off the assessee s appeal for the year under consideration i.e A.Y 2016-17 in ITA 5454/Mum/2019 concluded that the disallowance worked out by the A.O u/s 14A r.w Rule 8D(2)(iii) cannot be sustained for want of jurisdiction on his part, therefore, the aforesaid grievances of the revenue are subsumed in our aforesaid adjudication. Accordingly, as the aforesaid grounds on the basis of which the order of the CIT(A) has been assail ..... X X X X Extracts X X X X X X X X Extracts X X X X
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