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Case Number

I.T.A No. 1097.Ahd/2011, Assessment Year: 2007-08

Advocates

Appellant by: -None- (adjournment Application)
Respondent by: Shri Samir Tekriwal, Sr. D.R

Judges

Mukul Kr. Shrawat, J.M
A.K Garodia, A.M

Acts

Article 14 of the Constitution; v) The provisions of Rule 8D of the Income Tax Rules
provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961
provisions of Section 14A, more ITA No.1097/Ahd/2011 Ankit Financial Services
provisions of section 14-A of the I.T.Act along with Rule 8-D
Section 14-A as also the provisions of Rule 8D
provisions of Rule 8D of the Income Tax Rules
provisions of sub section (1) of Section 14A.
Section 10(33) of the Income Tax Act 1961,
provisions of Section 10(33). Income
FINANCE ACT 2001

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Smart Summary

Concise Analytical Summary — ITA No.1097/Ahd/2011: Ankit Financial Services Ltd. vs. Dy.CIT (Assessment Year 2007-08)

Factual and Procedural Background

This appeal arises from the order of the Learned CIT(Appeals)-VI, Ahmedabad dated 03/02/2011 in respect of Assessment Year 2007-08. The assessee filed an adjournment application which the Tribunal rejected because the additions were small and one issue was already settled; the matter was decided ex parte qua the assessee after hearing the learned Senior Departmental Representative (Sr.DR).

Two principal contested grounds are recorded in the opinion:

Ground No.2: Challenge to confirmation of a disallowance of Rs. 5,446 made by the Assessing Officer under section 14A of the Income Tax Act, invoked together with Rule 8D of the Income Tax Rules. Facts in the assessment order state that the assessee earned exempt dividend income of Rs. 60,687; investments of Rs. 89,293 were made while loans of Rs. 66,454 were taken (no interest claimed). The AO concluded that administrative/other expenses must be attributable to the exempt dividend and computed an addition of Rs. 5,446, which the CIT(A) confirmed.
Ground No.3: Challenge to confirmation of disallowance of repair expenses of Rs. 64,873. The assessee contended the property was used as a business office for most of the year because a tenant vacated; repairs were carried out in Jan–Mar 2007 and income from house property was said to be only for a three month period. The Assessing Officer held that the property had been let and that repairs were already accounted for by allowing the standard 30% deduction under section 24 while computing income from house property; the CIT(A) affirmed disallowance and the assessee appealed to the Tribunal.

Legal Issues Presented

Whether the disallowance under section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules, 1962 in respect of exempt dividend income was sustainable on the facts of the case and whether the Assessing Officer/AO followed the procedure mandated by higher judicial authority in determining such disallowance.
Whether repair expenses of Rs. 64,873 could be disallowed as business expenses where the property had been assessed partly as house property (with a 30% deduction under section 24) and the assessee claimed the premises became business premises after a tenant vacated.

Arguments of the Parties

Appellant's Arguments

As to Ground No.3 (repairs): The assessee explained that the tenant vacated the premises and thereafter the premises were used as a business office; the income from house property related only to the period 01/04/2006 to 31/06/2006 (three months) and repairs were undertaken in January, February and March 2007. (These factual assertions were advanced before the Assessing Officer.)
As to Ground No.2 (section 14A): The text of the opinion does not record detailed arguments advanced by the assessee specifically contesting the invocation of section 14A / Rule 8D; the Tribunal records the AO's factual findings and the fact that the appellate authorities relied on Rule 8D and section 14A in making/confirming the addition.

Respondent's / Revenue's Arguments

With respect to Ground No.2, the Assessing Officer invoked section 14A read with Rule 8D, noting exempt dividend income of Rs. 60,687 and, despite the assessee taking a loan and not claiming interest, concluded that administrative and other expenses were incurred to earn the exempt income and made an average-based addition of Rs. 5,446. The first appellate authority (CIT(A)) upheld that Rule 8D was rightly invoked and confirmed the disallowance.
With respect to Ground No.3, the Assessing Officer and the CIT(A) both took the view that the property had been let for part of the year and that a standard deduction under section 24 (30%) was allowed while computing income from house property; because repairs were effectively reflected in that computation, the repair expenses could not also be claimed as a business expense. The Assessing Officer noted contradictions and lack of documentary evidence from the assessee to prove sustained business use of the premises.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Godrej & Boyce Mfg. Co. Ltd. Mumbai vs. Dy.CIT, Income Tax Appeal No.626 of 2010 and Writ Petition No.758 of 2010; reported as 328 ITR 81 (Bom)	Clarified applicability of section 14A and Rule 8D; emphasized need to determine whether investments were made out of own funds or borrowed funds and the existence of a nexus between investments and borrowings; held that AO must exercise section 14A(1) by determining and quantifying expenditure attributable to exempt income after giving the assessee an opportunity to produce accounts and relevant material; held Rule 8D applies from AY 2008-09.	The Tribunal relied on this decision to conclude that the matter concerning disallowance under section 14A/Rule 8D should be remanded for fresh consideration (i.e., to be decided afresh by the CIT(A) / AO in light of the Bombay High Court's directions).
Sridev Enterprises (reported decision referenced in the opinion)	Referenced for the general principle that revenue should maintain consistency and definiteness in approach across years (as cited in the opinion).	The Tribunal noted that the reasoning in Sridev Enterprises (and similar decisions) would not apply where Section 14A introduced a material statutory change; consequently those consistency-based principles were held not to be determinative in the face of Section 14A's statutory disallowance.
Munjal Sales Corporation (reported decision referenced in the opinion)	Referenced for the general principle that there must be consistency and definiteness in revenue's approach across years.	Similarly, the Tribunal observed that the statutory change brought by Section 14A meant prior-year Tribunal decisions would not preclude disallowance under Section 14A for later years; thus the Munjal Sales line was not applicable to defeat Section 14A disallowance in the present context.
Radhasoami Satsang (reported decision referenced in the opinion)	Referenced as another decision establishing the consistency principle of revenue approach.	The Tribunal held that the Radhasoami Satsang line of authority did not restrain the exercise of Section 14A for the year under consideration because Section 14A effected a material statutory change.

Court's Reasoning and Analysis

The Tribunal proceeded in two distinct analytical strands corresponding to the two principal grounds:

Ground No.2 — Section 14A / Rule 8D disallowance (Rs. 5,446)

The Tribunal examined the applicable law as expounded by the Hon'ble Bombay High Court in Godrej & Boyce (328 ITR 81 (Bom)). The High Court required an enquiry into whether investments were made out of own funds or borrowed funds and whether a nexus existed between borrowings and investments.
The High Court's analysis emphasized that under section 14A(1) it is for the Assessing Officer to determine whether the assessee incurred any expenditure in relation to exempt income and, if so, to quantify the disallowance — but only after giving the assessee an opportunity to place its accounts and relevant material on record.
The Bombay High Court clarified temporal applicability: Rule 8D was inserted by notification with effect from 24 March 2008 and therefore applies with effect from Assessment Year 2008-09; prior to AY 2008-09 the AO must enforce sub-section (1) of section 14A using a reasonable basis consistent with facts and after giving opportunity to the assessee.
Applying these principles, the Tribunal concluded that the issue had to be decided afresh in light of the High Court's directions: the matter was remitted to the stage of the Learned CIT(A) to be decided de novo as per the guidelines laid down by the Bombay High Court.
Because the Tribunal directed remand and de novo consideration under the clarified legal framework, it treated the ground as allowed for statistical purposes (i.e., decision not finally adverse to the assessee in the Tribunal's order), while directing fresh adjudication in accordance with the High Court's guidelines.

Ground No.3 — Repair expenses (Rs. 64,873)

The AO found the property was let out for part of the year and that the assessee had been allowed a 30% standard deduction under section 24 when computing income from house property; the AO therefore disallowed the repair expenses claimed as business expenses.
The assessee's explanation before the AO (recorded in the order) was that the tenant vacated and the premises were used as business office for the remainder of the year, with repairs undertaken in Jan–Mar 2007. The AO found contradictions and absence of documentary evidence showing business use.
The CIT(A) affirmed the AO on the basis that once repairs/maintenance were effectively allowed under section 24 in the computation of house property income, the assessee could not again claim the same repairs as business expenditure.
The Tribunal, after hearing the Sr.DR, found no reason to interfere: the assessee had not discharged the primary onus of proving business use of the property and the Revenue's factual finding that the deduction under section 24 had already accounted for repairs was sustained. Consequently, the Tribunal confirmed the orders below and dismissed this ground of appeal.

Holding and Implications

Holding:

The appeal is treated as allowed but for statistical purposes.
Ground No.2 (section 14A / Rule 8D disallowance of Rs. 5,446): Restored to the stage of the Learned CIT(A) to be decided de novo in accordance with the Bombay High Court decision in Godrej & Boyce (328 ITR 81 (Bom)) — i.e., AO/CIT(A) must determine whether expenditures were incurred in relation to exempt income, establish nexus with borrowings (if any), quantify the disallowance after furnishing the assessee a reasonable opportunity and apply Rule 8D only to the extent it is applicable by its notified effective date.
Ground No.3 (repair expenses of Rs. 64,873): The Tribunal confirmed the findings of the lower authorities and dismissed the challenge; the repair expenditure disallowance stands.

Implications:

The direct consequence for the parties is procedural: the section 14A issue is to be reconsidered afresh by the CIT(A) / Assessing Officer in light of the Bombay High Court's directions — the AO must give the assessee an opportunity to place accounts and material on record and then determine and quantify any disallowance on a reasonable basis consistent with facts and circumstances. Rule 8D applies prospectively as clarified by the High Court (applicable from AY 2008-09 by notification).
The Tribunal did not purport to lay down a new legal precedent; it applied the Bombay High Court's existing decision to the facts and remanded for fresh consideration. The repair expenses issue is finally resolved against the assessee on the present record.

Bench: (A.K. Garodia) Accountant Member; (Mukul Kr. Shrawat) Judicial Member. Order dated 21/12/2011. The Tribunal recorded that the appeal was decided ex parte qua the assessee after rejecting an adjournment application; the Sr.DR Mr. Samir Tekriwal appeared for the Revenue.

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Ankit Financial Services Ltd. 30, Omkar House Swastik Cross Road Navrangpura Ahmedabad v. The Dy. Cit Circle-1 Ahmedabad .

PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER : This is an appeal of the Assessee arising from the order of the Learned CIT(Appeals)-VI,Ahmedabad dated 03/02/2011 passed for Assessment Year 2007-08.

2. An adjournment application was moved by the appellant, however, considering the smallness of the additions involved and one of the issue ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08 being settled we have though it proper to reject the adjournment and to decide this appeal ex-parte qua the assessee, after hearing the ld.Sr.DR Mr.Samir Tekriwal who has placed reliance on the orders of the authorities below.

2. Ground No.2 reads as under:-

2. That the learned CIT(A) has erred in law and facts by confirming disallowance of Rs.5446/- under section 14A of the Act, and therefore the learned AO should be directed to not to make the said disallowance. 2.1. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the I.T.Act, 1961 dated 27/11/2009 are that the assessee-company is in the business of finance, Investment & Trading in Shares. By invoking the provisions of section 14-A of the I.T.Act along with Rule 8-D of the IT Rules,1962, the Assessing Officer had noted that the assessee earned dividend of Rs.60,687/-. The dividend was exempt from tax for the year under consideration. The Assessing Officer has also noted that an investment of Rs.89,293/- was made, as against that loan of Rs.66,454/- was taken, however no interest was claimed. In spite of the said fact, the Assessing Officer has noted that some administrative and other expenses might have been incurred by the assessee to earn the said tax free income. Consequence thereupon, an average of the investment and the dividend income earned was calculated and an addition of Rs.5,446/- was made. The matter was carried before the first appellate authority who has found that Rule 8D was rightly invoked by the Assessing Officer, hence the addition was confirmed. ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08

3. On careful perusal, it is now settled that the issue of applicability of Section 14-A as also the provisions of Rule 8D stood settled by a latest decision of Hon'ble Bombay High Court pronounced in the case of Godrej & Boyce Mfg. Co.Ltd. Mumbai vs. Dy.CIT in Income tax Appeal No.626 of 2010 and Writ Petition No.758 of 2010 order dated 12/08/2010 [now reported as 328 ITR 81(Bom)]. In this judgement at the end, the Hon'ble Court has also recapitulated the conclusion and pronounced that a finding is required whether the investment in shares is made out of own funds or out of borrowed funds. A nexus is required to be established between the investments and the borrowings. In section 14A of the Act expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Rather, the Court was very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation. It has also been made clear that the proviso to section 14A of the Act was effective from 2001-02. The Hon'ble Court has also pointed out the importance of Rule 8D of the

I.T.Rules, 1962. It was made clear that sub-section (1) to section 14a was inserted with retrospective effect from 01/04/1962, however, sub- sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001, however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008, relevant findings are reproduced below:- ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08

a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallowability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case, no such exercise has been carried out and, therefore, the Tribunal was justified in remanding the matter.

b) Section 14A was introduced by the Finance Act 2001 with retrospective effect from 1 April 1962. However, in view of the proviso to that Section, the disallowance thereunder could be effectively made from assessment year 2001-2002 onwards. The fact that the Tribunal failed to consider the applicability of Section 14A in its proper perspective, for assessment year 2001-2002 would not bar the Tribunal from considering disallowance under Section 14A in assessment year 2002-2003.

c) The decisions reported in Sridev Enterprises (supra), Munjal Sales Corporation (supra) and Radhasoami Satsang (supra) holding that there must be consistency and definiteness in the approach of the revenue would not apply to the facts of the present case, because of the material change introduced by Section 14A by way of statutory disallowance in certain cases. There, the decisions of the Tribunal in the earlier years would have no relevance in considering disallowance in assessment year 2002- 2003 in the light of Section 14A of the Act.

73. For the reasons which we have indicated, we have come to the conclusion that under Section 14A(1) it is for the Assessing Officer to determine as to whether the assessee had incurred any expenditure in relation to the earning of income which does not form part of the total income under the Act and if so to quantify the extent of the disallowance. The Assessing Officer would have to arrive at his ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08 determination after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination. Conclusion :

74. Our conclusions in this judgment are as follows ;

i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of section 14a(1); ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis; iii) The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid; iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08 particularly sub section (2) and do not offend Article 14 of the Constitution;

v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09; vi) Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A. For tht purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; vii) The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.

4. Since a view has already been taken that this matter has to be decided afresh in the light of the directions of the Hon'ble Bombay High Court, therefore, on the same lines, we deem it justifiable to restore this ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08 ground as well back to the stage of Learned CIT(Appeals) to be decided de novo as per the guidelines. In the result, the ground raised by the Assessee may be treated as allowed but for statistical purposes.

5. Ground No.3 reads as under:-

3. That the learned CIT(A) has erred in law and facts by confirming the disallowance of Repair expenses of Rs.64,873/-, and therefore the learned AO should be directed to delete the said addition. 5.1. A sum of Rs.64,873/- was debited to Profit & Loss account under the head Repairs. It was explained that to maintain the property, certain expenditure were incurred. It was found by the Assessing Officer that the property was let out. Because of that reason, the Assessing Officer has opined that the assessee has claimed repairs expenses from the rental income, however, at the same time claiming 30% deduction against the income from house property. Before Assessing Officer, an another plea of the assessee was that the tenant had vacated the said premises and thereafter the assessee had started using the said premises as business premises. It was explained to the Assessing Officer that the income from house property was only for three months; i.e. 01/4/2006 to 31/06/2006 and for the rest of the period, it was used as business office. As per assessee, repairs were undertaken in the months of January, February and March-2007. The Assessing Officer had rejected the said explanation and held that there was contradiction in the submissions of the assessee and the assessee had not brought any evidence on record to show that the property was utilized for the office, ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08 hence finally disallowed the claim of expenditure. The matter was carried before the first appellate authority.

6. The Learned CIT(Appeals) has affirmed the view of the Assessing Officer and held that the property was given on rent for a part period and for that reason 30% was claimed as repairs and maintenance. Once the claim of repairs and maintenance had already been allowed while computing the property income, then the assessee should not be allowed to claim repair expenses as business expenses. The Learned CIT(Appeals) has also mentioned that the assessee has not furnished any information about the use of the property alleged to be for the business purposes. He has opined that in view of the deduction granted u/s.24 of the I.T.Act while computing the rental income under the head house property, the repairs expenses to the extent of 30% were allowed, therefore there was no basis for allowing the expenditure of the like nature under any other head. The action of the Assessing Officer was confirmed and now the assessee is further in appeal.

7. Having heard the submissions of ld.Sr.DR Mr.Samir Tekriwal, we are not inclined to interfere with the findings of the authorities below. Revenue Authorities have given a finding that there was no evidence produced from the side of the assessee to establish that for part of the year the property in question was used for business purposes as an office. Therefore, the Revenue Authorities have taken a stand that the property in question was assessed under the head property income and, thereupon, the deduction u/s.24 of the I.T.Act was allowed towards ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08 repairs and maintenance. According to us, on one hand the assessee has not discharged it primary onus to establish that the property in question was used for the purpose of business so as to allow repair expenses and on the other hand, that very property has earned rental income on which the repairs and maintenance expenses were allowed as per the prescribed rate u/s.24 of the I.T.Act while computing the income under the head property income, therefore we find no fallacy in the view taken by the Revenue Authorities to disallow the impugned claim. We hereby confirm the findings of Learned CIT(Appeals) and dismiss this ground.

8. Rest of the grounds are general in nature need no independent adjudication.

9. In the result, Assessees appeal is treated as allowed but for statistical purposes. Sd/- Sd/- ( A.K. GARODIA ) ( MUKUL Kr. SHRAWAT ) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 21/ 12 /2011 3.., .../T.C. NAIR, Sr. PS ITA No.1097/Ahd/2011 Ankit Financial Services Ltd. vs. Dy.CIT Asst.Year - 2007-08 - 10 -

1 7 7 /Copy of the Order forwarded to :

1. - / The Appellant

2. /- / The Respondent.

3. 9 / Concerned CIT

4. 9() / The CIT(A)-VI, Ahmedabad

5. 7 , , / Learned Departmental Representative, ITAT, Ahmedabad

6. / Guard file. / BY ORDER, /7 //True Copy// / (Dy./Asstt.Registrar) , / ITAT, Ahmedabad

1. Date of dictation..19.12.11

2. Date on which the typed draft is placed before the Dictating Member 19.12.11 Other Member

3. Date on which the approved draft comes to the Sr.P.S./P.S..

4. Date on which the fair order is placed before the Dictating Member for pronouncement

5. Date on which the fair order comes back to the Sr.P.S./P.S21/12/2011

6. Date on which the file goes to the Bench Clerk 21/12/2011

7. Date on which the file goes to the Head Clerk.

8. The date on which the file goes to the Assistant Registrar for signature on the order..

9. Date of Despatch of the Order

Ankit Financial Serv... v. The Dy. Cit Circle-1...