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Priya Exhibitors Pvt. Ltd. v. Cit
Tribunal Summary — Appeal against order of Ld. CIT(A)-XVII, New Delhi (Assessment Year 2008-09)
Factual and Procedural Background
This appeal was filed by the assessee against the order of Ld. CIT(A)-XVII dated 31.10.2011 for assessment year 2008-09. The assessee, a private limited company, filed its return of income on 26.9.2008 declaring total income of Rs. 1,85,58,070/-. The case was selected for scrutiny.
During assessment, the Assessing Officer (AO) observed that the assessee held investments of Rs. 19,09,17,153/- in shares from which dividend income (exempt) arose. Although the assessee itself disallowed interest of Rs. 79,82,413/- attributable to investments, the AO applied Rule 8D and added back Rs. 8,90,039/- (computed as 0.5% of average investment) as disallowance under section 14A of the Income Tax Act, 1961.
The assessee appealed to the Ld. CIT(A), which upheld the AO's disallowance relying on Rule 8D and judicial authority. The assessee thereafter filed an appeal before the Tribunal challenging the confirmation of the disallowance and raising other related grounds (including challenge to interest charged under section 234D).
Legal Issues Presented
- Whether the disallowance of Rs. 8,90,039/- made under section 14A read with Rule 8D (computed as 0.5% of average investment) was correctly made by the Assessing Officer and upheld by the Ld. CIT(A).
- Whether Rule 8D may be mechanically applied or whether the Assessing Officer must first be satisfied, on the basis of the assessee's accounts and evidence, that the assessee's claim about not incurring expenditure in relation to exempt income is incorrect before resorting to Rule 8D.
- Whether the Ld. CIT(A) erred in not deleting interest charged under section 234D (this ground being raised by the assessee).
Arguments of the Parties
Assessee's (Appellant's) Arguments
- The disallowance under section 14A in respect of expenses other than interest (Rs. 8,90,039/-) was without basis because hardly any non-interest expense was incurred for earning the exempt dividend income and no specific expenditure was identified by the AO.
- From the accounts and supporting schedules placed in the paper book, there were no direct administrative or managerial expenses attributable to earning the dividend income; major heads of professional expenses did not show such managerial expenses.
- The exempt income was negligible (Rs. 163/-) whereas the disallowance was substantial (Rs. 8,90,039/-); further, there was no major trading activity in shares during 1.4.2007–31.3.2008 (investments remained largely unchanged except for a specific addition).
- Section 14A is not mandatory (relying on Daga Capital Special Bench, Mumbai and Punjab & Haryana High Court decisions). The assessee also relied on the decision in CIT v. Hero Cycles Ltd. to argue that a disallowance under section 14A requires a finding that expenditure was actually incurred and cannot be made on presumption.
- The CIT(A) erred in upholding the AO's addition without the AO having recorded satisfaction that the assessee's claim about expenditure was incorrect.
- The assessee sought deletion of interest charged under section 234D (ground raised before authorities).
Revenue's (Respondent's) Arguments
- The AO's disallowance was justified because management of substantial investments necessarily involves some expense; decisions about investments and their sale are taken at a high management level and some portion of expenses debited to profit & loss must be attributable to earning exempt income.
- The Ld. CIT(A) considered the matter and correctly applied Rule 8D and relevant judicial pronouncements in upholding the AO's computation.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Daga Capital Pvt. Ltd. (Special Bench, Mumbai) — 312 ITR 1 (St.) (as cited) | Submitted by the assessee to support that section 14A is not mandatory / its application is not automatic. | The Tribunal recorded that the assessee relied on this authority as part of its contention that section 14A's application is not automatic; the decision was part of the assessee's argument but the Tribunal's disposal rested on analysis of Rule 8D and whether AO recorded satisfaction. |
| Haryana Land Reclamation & Development Corpn. v. CIT (Punjab & Haryana High Court) — [2008] 302 ITR 218 / [2007] 159 Taxman 271 (as cited) | Submitted by the assessee in support of the proposition concerning the non-mandatory aspect / limitations on section 14A disallowances. | Referred to by the assessee; the Tribunal noted the citation among the authorities relied upon by the appellant in arguing that disallowance cannot be made without specific findings. |
| Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (Bombay High Court) — [2010] 194 Taxman 203 (as cited) | Held that disallowance under section 14A has to be made in accordance with Rule 8D (i.e., Rule 8D prescribes the method of computation). | The Ld. CIT(A) relied on this authority to uphold the AO's use of Rule 8D. The Tribunal examined the cited passage and observed that the cited judgment also emphasizes that the AO's jurisdiction to apply the prescribed method arises when the AO is not satisfied with the assessee's claim and that the AO must first determine the correctness of the assessee's claim having regard to accounts — a point the Tribunal found the AO did not satisfy in the present case. |
| CIT v. Hero Cycles Ltd. (Punjab & Haryana High Court) — [2010] 323 ITR 518 / 189 Taxman 50 (as cited) | Holds that section 14A requires a finding of incurring of expenditure and that where it is found no expenditure was incurred for earning exempt income, disallowance under section 14A cannot be made. | The Tribunal relied on this authority to support the proposition that disallowance under section 14A requires a clear finding that expenditure was incurred in relation to exempt income and cannot be based on mere presumptions. The Tribunal applied this principle in concluding that the AO had not recorded such a finding. |
Court's Reasoning and Analysis
The Tribunal conducted a focussed review of the material on record and the orders of the lower authorities. Its reasoning proceeded in the following steps (as set out in the opinion):
- Examination of Accounts and Paper Book: The Tribunal examined the balance sheet (as on 31.3.2008) and schedules of expenditure placed in the paper book. It observed that there was no significant sale or purchase activity in respect of shares during the year (investment balances were largely unchanged apart from a specific addition), and that the schedules did not disclose any direct expenses incurred for earning exempt dividend income.
- Assessment of AO's Conduct: The Tribunal noted that the AO did not point to any specific direct expense attributable to exempt income and did not record any satisfaction that the assessee's claim (that no expenditure was incurred in relation to exempt income) was incorrect. Instead, the AO applied Rule 8D on a plain reading of section 14A and computed 0.5% of average investment.
- Analysis of Judicial Authorities: Although the Ld. CIT(A) relied on the Bombay High Court decision in Godrej & Boyce to uphold application of Rule 8D, the Tribunal carefully read the cited passage from that judgment and emphasized that Godrej & Boyce itself articulates that the AO's jurisdiction to apply the prescribed method under subsection (2) of section 14A arises only after the AO is not satisfied with the assessee's claim and that satisfaction must be objectively recorded having regard to the assessee's accounts.
- Application of Principle from Hero Cycles: The Tribunal also referred to the Hero Cycles decision (cited by the assessee) which holds that disallowance under section 14A requires a clear finding that expenditure was incurred and disallowance cannot be made on presumptions. The Tribunal found this reasoning applicable to the facts before it.
- Conclusion on Legal Burden: The Tribunal concluded that the AO had not discharged the onus of recording a reasoned satisfaction that the assessee's claim regarding non-incurrence of expenditure was incorrect. Because the statutory method under Rule 8D is to be invoked only when the AO is not satisfied with the assessee's claim, and because no such objective satisfaction was recorded or supported by analysis of the accounts, the disallowance could not be sustained.
Holding and Implications
APPEAL ALLOWED
Holding (direct effect): The Tribunal held that no disallowance under section 14A read with Rule 8D could be made in the present case because the Assessing Officer did not record a finding of dissatisfaction with the assessee's claim and did not determine the matter having regard to the assessee's accounts. Consequently, the addition of Rs. 8,90,039/- was set aside and the appeal filed by the assessee was allowed.
Implications: The immediate consequence is that the specific disallowance of Rs. 8,90,039/- made by the AO and confirmed by the CIT(A) is deleted. The opinion notes that the remaining grounds were consequential and did not require separate adjudication. The Tribunal's decision rests on application of existing authorities and the facts of the case; the opinion does not purport to lay down a new, broader precedent beyond the application of the principle that Rule 8D may be invoked only after the AO records satisfaction on the basis of the assessee's accounts.
Note: This summary is prepared exclusively from the contents of the provided opinion; no outside facts or inferences beyond the opinion text have been introduced.
T.S. Kapoor, Accountant Member - This is an appeal filed by the assessee against the order of Ld CIT(A)-XVII, New Delhi dated 31.10.2011 for assessment year 2008-09. The grounds raised by the assessee are as under:-
1. That on the facts and law involved the Ld CIT(A) has erred in confirming the disallowance of Rs. 8,90,039/- out of expenses other than interest u/s 14A in relation to exempt income i.e. dividends. On facts, hardly any expense other than interest was incurred for earning of non taxable income i.e. dividend on investments. There is no specific identification of any such expenditure for earning of such non taxable income identified by the Assessing Officer. As such and otherwise too the expenditure assumed to be incurred on non taxable income cannot be disallowed. That the said disallowance of expense has been made on erroneous views and/or non appreciation of facts, law evidences, submissions and case law relied upon by the assessee in its favour.
2. That on the facts and in law involved the Ld CIT(A) has erred in applying Rule 8D and confirming the disallowance inter alia as under:-
(i) Rejecting the appellant's claim with regard to expenditure incurred in relation to dividend income without giving valid reasons why he was not satisfied with the correctness of the appellant's claim.
(ii) Determining the expenditure in relation to dividend income by recourse to sub section (2) of section 14A read with Rule 8D without giving any valid reason why such expenditure could not be determined or was incorrectly excluded having regard to the accounts of the appellant.
3. That the Ld CIT(A) has erred on facts and in law not deleting the interest charged u/s 234D.
4. That the grounds of appeal As herein are without prejudice to each other.
5. That the assessee respectfully craves leave to add, amend alter and or forego any ground(s) at or before the time of hearing.
2. The Brief facts of the case are that the assessee is a private limited company and it has filed its return of income on 26.9.2008 for the assessment year 2008-09 declaring total income of Rs. 1,85,58,070/-. The case was selected for scrutiny. During assessment proceedings, the Assessing Officer observed that the assessee had investments of Rs. 19,09,17,153/- in shares from which the income being dividends is exempt. The Assessing Officer further observed that though the assessee had itself disallowed interest of Rs. 79,82,413/- being directly attributable to the investment in shares, it has not disallowed any expenditure relating to administrative and managerial services and in view of that he added back an amount of Rs. 8,90,039/- being 0.5% of average investment in shares as per provisions contained in Rule 8D.
3. Aggrieved the assessee filed an appeal before Ld CIT(A) and submitted that Assessing Officer had made disallowance without any basis and pleaded that from the combined reading of section 14A and Rule 8D, it is apparent that the disallowance u/s 14A can be done only if the Assessing Officer is not satisfied about the claim of expenses made by assessee.
4. The Ld AR Also pleaded before Ld CIT(A) that section 14A is not mandatory as per the decision of the Special Bench, Mumbai in the case of Daga Capital 312 ITR 1 (St.) (Mum.) and also in view of the judgment of Hon'ble Punjab & Haryana High Court in Haryana Land Reclamation & Developemnt Corpn. v. CIT [2008] 302 ITR 218 /[2007] 159 Taxman 271. Ld AR submitted that entire investment of appellant is in group companies and these are one time fixed investments only. Ld AR also argued that similar addition made in assessment year 2007-08 was deleted by the Tribunal.
5. The CIT(A) did not agree with the contention made by the assessee and upheld the decision of the Assessing Officer. The relevant portion of CIT(A) order is reproduced below:-
"I have carefully considered the facts of the case and the submissions made by the Ld AR. It is seen that the appellant itself has disallowed interest of Rs. 79,82,413/-. Now it is settled law that Rule 8D provides for computation of the disallowance u/s 14A and Rule 8D is applicable from the assessment year 2008-09 i.e. the year under appeal. Rule 8D provides the procedures by which disallowance u/s 14A is to be computed.. The Assessing Officer has computed the disallowance as per the procedure provided in Rule 8D. The submission of the appellant that the Hon'ble ITAT has deleted the addition in assessment year 2007-08 is not of much help as Rule 8D was not applicable in the assessment year 2007-08. The Hon'ble Mumbai High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. has held that the disallowance u/s 14A of the Income Tax Act, 1961 has to made in accordance with Rule 8D. In the case under consideration, the Assessing Officer has made disallowance under Rule 8D by computing 0.5% of average investment. I am of the considered opinion that Rule 8D has been correctly applied by the Assessing Officer. Therefore, the plea of the appellant cannot be accepted. In view of the legal position and judicial pronouncements on the issue, I hold that disallowance made by the Assessing Officer under Rule 8D is correct and thus no interference is called for in this regard. Accordingly, these grounds of appeal are rejected."
6. Aggrieved the assessee filed appeal before this Tribunal. The Ld AR pleaded that no particular expense was brought before the notice of assessee which could have been incurred for the purpose of earning exempt income. He took us to page 23 of the paper book wherein details of allocation of expenses was placed. The Ld AR also took us to page 31 of paper book wherein break up of major head of expenditure of professional expenses was placed and argued that there is no such expenses of managerial nature which could be attributed towards earning of exempt income. He further brought to our notice that exempt income was only Rs. 163 /- against which disallowance of Rs. 8,90,039/- has been made Ld AR took us to page 13 of paper book wherein a portion of balance sheet dated 31.3.2008 was placed. He pointed out the fact that from 1.4.2007 to 31.3.2008 no activity of sale & purchase was done in respect of shares as the figures investments as on 31.3.2007 and 31.3.2008 was same except an addition of Rs. 2,58,20,400/- in respect of partly paid share warrants of PVR Ltd.
7. The Ld DR relied upon the order of the order of the Assessing Officer and reiterated that management of such huge investments cannot be done without making any expenditure. As the decision of making investment and selling thereof are taken at the highest level of management, some expenses debited in the Profit & Loss Account must be attributed to the earning of exempt income. Ld DR further pointed out that Ld CIT(A) has passed the order after carefully considering the facts of the case and is based upon various judicial pronouncements.
8. The Ld. counsel invited our attention to written submissions filed by him saying that section 14A is not mandatory as was held by the Special Bench, Mumbai in the case of Daga Capital Pvt. Ltd. (supra) and also on the judgment of Hon'ble Punjab & Haryana High Court in the case of Haryana Land Reclamation & Development Corn. (supra ). He further invited our attention to the case of CIT v. Hero Cycles Ltd., [2010] 323 ITR 518/ 189 Taxman 50 as decided by Hon'ble Punjab & Haryana High Court that section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income, no expenditure has been incurred, disallowance u/s 14A cannot be made.
9. We have heard the rival parties and perused the material on record. From the balance sheet as on 31.3.2008 filed in the paper book and pointed out by the Ld AR, it is found that no major activity of sale & purchase of shares were done. Similarly, from analysis of Schedule 12,13 & 5 relating to expenditure placed at page 10 of the paper book and as has been pointed out by the Ld AR, it is observed that no direct expense has been incurred for earning exempt income. Moreover, the Assessing Officer has not specifically pointed out any direct expense and has not given any finding regarding the correctness of claim of the assessee that no expenditure has been incurred for earning exempt income. He has simply relied upon the plain reading of section 14A read with Rule 8D without properly analysing it. The CIT(A) has upheld the decision of the Assessing Officer regarding disallowance u/s 14A by relying upon the Hon'ble Bombay High Court judgment in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203 wherein it was held that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of total income. We have gone through the citation which was used by CIT(A) to upheld the decision of Assessing Officer. Their Lordships has held as under:-
"Under sub-section (2), the Assessing Officer required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of total income under the Act in accordance with such method as may be prescribed. The method having regard to the meaning of expression prescribed in section 2(33) must be prescribed by Rule made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of total income in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not form part of total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at having regard to the accounts of the assessee. Hence, sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rule straightaway without considering whether the claim made by the assessee in respect of expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must in the first instance determine whether the claim of the assessee in that regard is correct and determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee that the legislature directs him to follow the method that may be prescribed".
10. From the careful study of the observations made in the above case, it is apparent that first the Assessing Officer has to determine the claim of assessee regarding expenses which neither the Assessing Officer nor the CIT(A) has done in the present case. In fact, the citation cited by the Ld CIT(A) 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. In the present case, the Assessing Officer has not fulfilled his onus of recording his findings. This point has also been considered in various other judicial pronouncements of Hon'ble High Court specifically in the case of Hero Cycles Ltd.'s case (supra) citation by Hon'ble Punjab & Haryana High Court in 2009 wherein under similar circumstances, it was held that the disallowance under section 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions.
11. In view of the above, we hold that no disallowance u/s 14A read with Rule 8D can be made in the present case.
12. Rest of the grounds of appeals are consequential in nature and do not require any adjudication.
13. In the result, the appeal filed by the assessee is allowed.
SKJ
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