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M/S. Joint Investmen... v. Assistant Commission...
Structured Summary of the Opinion
Factual and Procedural Background
This is an appeal by the assessee against the order of the learned Commissioner of Income-tax (Appeals) A-VIII, New Delhi dated 28 December 2012 for the assessment year 2009-10. The assessee challenged the confirmation by the Commissioner of Income-tax (Appeals) of a disallowance computed by the Assessing Officer (AO) under section 14A read with rule 8D of the Income-tax Rules. The grounds of appeal raised by the assessee included (a) that rule 8D is not mandatory, (b) that a disallowance of Rs. 99,45,325 computed under rule 8D read with section 14A was wrongly sustained when the assessee had voluntarily disallowed expenses of Rs. 2,97,440, and (c) that the Assessing Officer erred in making an addition of Rs. 52,56,197 under section 14A and assessing business loss at nil against a declared loss of Rs. 52,56,197. At the assessment stage the AO issued a show-cause notice, the assessee replied, the AO computed disallowance under rule 8D totaling Rs. 99,45,325 but restricted the disallowance to Rs. 52,56,197 (the declared business loss), and the Commissioner (Appeals) upheld the AO's order, leading to the present appeal.
Legal Issues Presented
- Whether rule 8D of the Income-tax Rules is mandatory for the Assessing Officer when determining expenditure in relation to exempt income under section 14A(2) of the Income-tax Act.
- Whether the Assessing Officer was required, and in fact did, record the satisfaction contemplated by section 14A(2) before invoking section 14A(2) and rule 8D.
- Whether the computation and quantum of disallowance under rule 8D read with section 14A (aggregate Rs. 99,45,325, restricted by the AO to Rs. 52,56,197) were correctly determined and sustained.
Arguments of the Parties
Appellant's (Assessee's) Arguments
- The Assessing Officer could not invoke section 14A(2) (and consequentially rule 8D) without recording the satisfaction contemplated by sub-section (2) of section 14A that he was not satisfied with the assessee's claim regarding expenditure attributable to exempt income; no such satisfaction appears in the assessment order.
- The method in rule 8D is therefore not attracted in the appellant's case because the statutory pre-condition (recording of satisfaction) was not met.
- The working of disallowance under rule 8D was incorrect — many listed expenses (filing fees, house tax, conveyance, insurance, electricity, repairs, printing & stationery, telephone, audit fees, office rent, vehicle expenses, staff welfare, interest, establishment, depreciation, etc.) cannot be said to be related to earning exempt income and thus should not have formed part of disallowance.
- The assessee had voluntarily disallowed expenses of Rs. 2,97,440 (security transaction tax, depository charges, custodian fee) and claimed that no further disallowance was warranted.
- The assessee's counsel relied on several authorities in support of these contentions (see precedents table below).
Respondent's (Revenue's) Arguments
- The Revenue relied upon the orders of the authorities below and submitted that for assessment year 2009-10 rule 8D had come into effect and the Assessing Officer had applied rule 8D in computing the disallowance.
- The assessee had not pointed out any discrepancy in the AO's working under rule 8D.
- The AO had recorded the requisite satisfaction that he was not agreeable with the assessee's claim that only Rs. 2,97,440 related to exempt income; hence the AO was entitled to proceed under section 14A(2) and rule 8D.
- The AO computed total disallowance as Rs. 99,45,325 under rule 8D but reduced it to Rs. 52,56,197 because the assessee had declared a business loss of that amount, and therefore the disallowance was restricted to the declared loss.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Maxopp Investment Ltd. v. Commissioner of Income-Tax, New Delhi [2012] 347 ITR 272 (Delhi) | Relied on by the assessee to support the contention that AO must record satisfaction before invoking section 14A(2) / rule 8D. | The court recorded that the assessee relied on this decision but after examining the assessment record held that the AO had recorded satisfaction and proceeded correctly under section 14A(2) and rule 8D; the assessee's contention based on this precedent was not accepted. |
| Dy. CIT v. Jindal Photo Ltd. (IT Appeal No. 814 (Delhi) of 2011, dated 23-9-2011) | Relied on by the assessee in support of the pre-condition of recording satisfaction before invoking rule 8D. | The court noted reliance on this order, but on facts found that the AO had recorded satisfaction; consequently the court did not find for the assessee on that premise. |
| Dy. CIT v. Ashish Jhunjhunwala (IT Appeal No. 1809 (Kol.) of 2012, order dated 14-5-2013) | Relied on by the assessee for similar propositions regarding invocation of rule 8D / section 14A(2). | The court acknowledged the precedent was relied upon but concluded that the AO's show-cause, consideration of the assessee's reply and recorded findings satisfied section 14A(2)'s requirement in the present case. |
| Kalyani Steels Ltd. v. Addl. CIT (IT Appeal No. 1733 (PN) of 2012, order dated 30-1-2014) | Relied on by the assessee (cited in their list of authorities). | The court recorded that it was cited by the assessee; the court did not adopt it as a basis to allow relief, finding the AO's action to be in order on the facts before it. |
| Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bombay) | Relied on by the assessee in support of objections to the invocation or application of rule 8D. | The court noted reliance on this authority but, on the present facts (AO having recorded satisfaction and computed rule 8D components), affirmed the AO's approach and sustained the reduction to Rs. 52,56,197. |
| Asstt. CIT v. SIL Investment Ltd. [2012] 54 SOT 54 (Delhi) | Relied on by the assessee to argue that certain expenses should not be treated as relating to exempt income and thus should not be disallowed under rule 8D. | The court noted reliance on this tribunal decision but observed that the AO had not included those contested expenses in his clause (i) computation; the AO's three-part computation under rule 8D was otherwise correctly applied on the facts. |
| Vishnu Anant Mahajan v. Asstt. CIT [2012] 137 ITD 189 (Ahd.) (SB) | Relied on by the assessee for the proposition that various routine office/establishment expenses are not directed to earning exempt income. | The court recorded the reliance; however it observed these items were not part of the AO's clause (i) direct-expenditure figure, and overall sustained the AO's computation restricted to the declared loss. |
| Bharat Hari Singhania v. CWT [1994] 207 ITR 1 | Principal authority relied on by the court to support the proposition that where statute prescribes a method using mandatory language the prescribed method must be followed. | The court expressly derived support from this Apex Court decision for holding that rule 8D (being the prescribed method under section 14A(2), which uses "shall") is mandatory for the Assessing Officer. |
Court's Reasoning and Analysis
The court proceeded through the issues in structured fashion:
-
Ground (a) — Mandatory nature of rule 8D:
The court first noted that counsel did not press argument (a) at hearing, but dealt with it on merits and concluded rule 8D is mandatory. The court reasoned from the plain language of section 14A(2) which provides that the Assessing Officer "shall determine" the amount of expenditure in relation to exempt income in accordance with such method as may be prescribed. The Legislature prescribed rule 8D (with effect from 24 March 2008) as that method. Because the statute uses the word "shall" the court held the AO and other statutory authorities are required to determine such expenditure according to the prescribed method. The court derived support from the Apex Court decision in Bharat Hari Singhania v. CWT.
-
Grounds (b) and (c) — Whether AO recorded satisfaction and correctness/quantum of disallowance:
The court accepted the legal proposition that section 14A(2) can be invoked only if the AO records dissatisfaction with the assessee's claim. The court then examined the assessment order and the sequence of events: AO noticed exempt dividend income, issued a show-cause to the assessee (entry dated 22-11-2011), the assessee replied (letter dated 30-11-2011), and the AO formally considered the reply and recorded findings in the order. The AO recorded that the assessee had disallowed only Rs. 2,97,440 (security transaction tax, depository charges, custodian fee) whereas rule 8D requires aggregation of three components (i) direct expenditure relating to exempt income, (ii) an interest-based apportionment computed as A x (B/C), and (iii) one-half percent of the average value of relevant investments. The court reproduced the AO's computation: clause (i) Rs. 2,97,440; clause (ii) (interest apportionment) Rs. 34,08,582 (A = 41,36,661; B = 1,30,73,48,758; C = 1,58,66,00,278); clause (iii) one-half percent = Rs. 65,36,743; total Rs. 99,45,325. The AO, however, restricted the disallowance to Rs. 52,56,197 because that was the declared business loss.
On these facts the court concluded that the AO had recorded the requisite satisfaction and had properly proceeded to compute disallowance as per rule 8D. The court also addressed the assessee's contention that many of the listed operating and establishment expenses were not attributable to exempt income: it observed these items were not part of the AO's clause (i) figure (which was limited to the items the assessee admitted) and that clause (ii) and (iii) formed the bulk of the AO's computation. Since the one-half percent component alone (Rs. 65,36,743) exceeded the ultimate restricted disallowance and because the AO had restricted the computed disallowance to the declared loss, the court found it unnecessary to enter into detailed scrutiny of the interest-apportionment computation and rejected the assessee's objections to the quantum of disallowance.
-
Conclusion of reasoning:
Given the AO's recorded satisfaction, the mandatory nature of rule 8D under section 14A(2), and the AO's computation (with the final restriction to the declared loss), the court found no error in the approach of the authorities below and dismissed the appeal.
Holding and Implications
Holding: The appeal is dismissed.
Direct consequences for the parties:
- The court held that rule 8D of the Income-tax Rules is mandatory for Assessing Officers in computing expenditure in relation to exempt income under section 14A(2).
- The Assessing Officer had recorded the satisfaction required by section 14A(2) and properly invoked rule 8D; the total disallowance computed under rule 8D amounted to Rs. 99,45,325 but was restricted by the AO to Rs. 52,56,197 (the assessee's declared business loss), and that restricted disallowance was sustained.
- Accordingly, the addition/disallowance of Rs. 52,56,197 made under section 14A (read with rule 8D) stands.
Broader implications: The opinion emphasises the mandatory application of rule 8D where section 14A(2) is engaged and records reliance on Bharat Hari Singhania for the proposition that a prescribed statutory method must be followed. The decision sustains application of rule 8D on the facts of this assessment year and does not purport to create any broader novel precedent beyond these conclusions.
Result: Appeal dismissed; disallowance of Rs. 52,56,197 upheld.
Delivered by: G.D. Agrawal, Vice-President. (Order dated as in the provided opinion.)
ORDER
G.D. Agrawal, Vice-President - This appeal by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)A-VIII, New Delhi, dated December 28, 2012, for the assessment year 2009A-10.
2. The assessee has raised the following grounds of appeal :
3. At the time of hearing before us, learned counsel for the assessee argued at length and claimed that before invoking the provisions of section 14A(2), the Assessing Officer was required to record that he is not satisfied with the correctness of the claim of the assessee that Rs. 2,97,440 only have been incurred for earning exempt income. Since no such satisfaction is available in the assessment order, the Assessing Officer could not have invoked section 14A(2) and consequentially, rule 8D which is linked to section 14A is not attracted in the case of the appellant. In support of this contention, he relied upon the following decisions :
4. Learned counsel further disputed the correctness of the working of disallowance under rule 8D and pointed out that expenses like filing fees, house tax, conveyance, insurance of building and cars, electricity, building repair, printing and stationery, telephone expenses, audit fees, office rent, vehicle expenses, staff welfare expenses, interest, establishment and depreciation, etc., cannot be said to be related to earning of exempt income. In support of this contention, he relied upon the decision of the Income-tax Appellate Tribunal in the case of Asstt. CIT v. SIL Investment Ltd. [2012] 54 SOT 54/26 taxmann.com 78 (Delhi) and of the Income-tax Appellate Tribunal, Ahmedabad Bench, in the case of Vishnu Anant Mahajan v. Asstt. CIT [2012] 137 ITD 189/22 taxmann.com 88 (Ahd.) (SB) . He, therefore, submitted that the disallowance made by the Assessing Officer and sustained by the learned Commissioner of Income-tax (Appeals) should be deleted.
5. The learned Departmental representative, on the other hand, relied upon the orders of the authorities below and he stated that the assessment year under consideration is 2009-10. In this year, rule 8D had come into operation. That the Assessing Officer had worked out the disallowance as per rule 8D. The assessee has not pointed out any discrepancy in the working of the Assessing Officer as per rule 8D. He further submitted that the Assessing Officer had duly recorded the satisfaction that he is not agreeable with the working of disallowance by the assessee at Rs. 2,90,440 only. He further submitted that as per rule 8D, the total disallowance worked out to Rs. 99,45,325 but the Assessing Officer had reduced the disallowance to Rs. 52,56,197 only because the assessee had claimed the loss to that extent.
6. We have carefully considered the arguments of both sides and perused relevant material placed before us. By way of ground No. (a), the assessee has challenged the finding of the learned Commissioner of Income-tax (Appeals) wherein he has held rule 8D of the IncomeA-tax Rules, 1962, as mandatory. Though at the time of hearing before us no specific arguments were advanced against this ground of appeal, therefore, technically, this ground is deemed to have been not pressed by learned counsel for the assessee. Even otherwise, we are of the opinion that rule 8D is mandatory. It would be evident from a plain reading of section 14A(2). Section 14A(2) provides that the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income in accordance with such method as may be prescribed. The Legislature has prescribed rule 8D with effect from March 24, 2008, as the method for determination of amount of expenditure incurred in relation to exempt income. By using the word "shall" in subA-section (2) of section 14A, the Legislature has made it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to exempt income as per the prescribed method. Before the insertion of rule 8D, the Assessing Officer had the discretion to determine such expenditure on a reasonable and acceptable method of apportionment of expenditure between the taxable income and exempt income. But, when the Legislature has provided in rules the method for apportionment of the expenditure between the exempt income and taxable income, in our opinion, the Assessing Officer as well as the other statutory authorities under the Income-tax Act are also required to determine the amount of expenditure in relation to exempt income as per the method prescribed in the rules. While taking this view, we derive support from the decision of the Apex Court in the case of Bharat Hari Singhania v. CWT [1994] 207 ITR 1/73 Taxman 3 . Accordingly, ground No. (a) of the assessee's appeal is rejected.
7. Ground Nos. (b) and (c) are interconnected. They are with regard to computation of disallowance made by the Assessing Officer.
8. The assessee has disputed the disallowance firstly on the ground that no satisfaction is recorded by the Assessing Officer as envisaged by sub-section (2) of section 14A and, therefore, the Assessing Officer was not empowered to modify the disallowance proposed by the assessee. So far as the legal proposition put forth by learned counsel is concerned, there is no dispute. As per section 14A(2), the Assessing Officer can embark upon determination of amount of expenditure incurred in relation to exempt income only if he records a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Now, the question is whether in this case, the Assessing Officer has recorded the satisfaction as required by section 14A(2). The relevant portion of the assessment order in this regard reads as under :
'3. On perusal of the profit and loss account and other details submitted it was noticed that the assessee has received exempt dividend income of Rs. 48,90,000. Thus, the assessee is liable for disallowance under the provisions of section 14A, read with rule 8D. Vide order sheet entry dated November 22, 2011, the assessee was asked to show cause as to why the disallowance under section 14A should not be made. In response the assessee submitted its reply vide letter dated November 30, 2011. The reply of the assessee is reproduced below :
'Rule 8D of the Income-tax Rules can be invoked in the circumstances where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income or the claim of expenditure made by the assessee is not correct.
In this connection we draw your kind attention to computation of income. From the perusal of said statement your goodself will observe that the assessee-company has disallowed all those expenses which are of disallowable by nature. Total expenditure including loss on sale of investment as per profit and loss is amounting to Rs. 13,13,47,713. The assessee-company itself has voluntarily added back a sum of Rs.12,16,59,778 as disallowable, while computing the business income. Only those expenses which are directly related to earn the business income and also to keep the separate legal entity of the company to perform its activities have been claimed.
Further, your kind attention is also drawn to the fact that the total interest income debited to profit and loss account is Rs. 41,36,661 whereas interest income from bank and corporate deposits comes to Rs. 44,31,429. Therefore, it could not be said that any interest expenditure has been incurred to earn the exempt income. Also reserves and surplus of the company are sufficient to make the investments from its own funds.'
3.1 The reply of the assessee has been considered. In this regard, it is relevant to take note of the provisions of section 14A of the Income-tax Act, 1961. As per the provisions of the Act the disallowance is to be calculated in accordance with the provisions of rule 8D. However, in the present case, the assessee has disallowed only the following expenses in the computation of income.
| S.No. | Disallowance | Amount (Rs.) | |
| 1. | Security transaction tax | 1,77,305 | |
| 2. | Depository charges | 7,090 | |
| 3. | Custodian fee | 1,13,045 | |
| Total | 2,97,440 |
3.2 The disallowance under section 14A, read with rule 8D is computed as under :
| S. No. | Disallowance | Amount (Rs.) | |
| 1. | The amount of expenditure directly relating to income which does not form part of total income. | 2,97,440 (as per details given above. The disallowance has already been made by the assessee in the return of income. Hence, no further disallowance). | |
| 2. | In a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula- A x (B/C) Where, A = amount of expenditure by way of interest other than the amount of interest included in clause (1) incurred during the previous year ; B = the average value of investment, income from which does not or shall not form part of the total income appearing in the balance sheet of the assessee, on the last day and the last day of the previous year ; C = the average value of total assets as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. | A = 41,36,661 B = 1,30,73,48,758 C= 1,58,66,00,278 Hence, disallowance = 34,08,582 | |
| 3. | 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. | ½% of average investment of Rs.1,30,73,48,758 = 65,36,743 | |
| Total disallowance | Rs. 99,45,325 |
3.3 Accordingly an amount of Rs. 99,45,325 is to be disallowed. However, the total loss under the head "Business" is declared as Rs.52,56,197. Thus, the disallowance is restricted to the loss of Rs.52,56,197.'
9. From the above, it is evident that the Assessing Officer noted that the assessee has received substantial exempt income and, therefore, the disallowance under section 14A, read with rule 8D is called for. The Assessing Officer issued show-cause notice to the assessee in this regard. The assessee furnished the reply. Thereafter, the Assessing Officer considered the assessee's reply and found that the disallowance proposed by the assessee was only Rs. 2,97,440 which included the expenditure which is directly related to the earning of exempt income which was only one part of the disallowance to be made as per rule 8D. The assessee had not considered the other part of rule 8D and, therefore, the Assessing Officer had worked out the disallowance as per rule 8D. In view of the above, we are unable to accept the assessee's contention that the Assessing Officer failed to record the satisfaction as envisaged by section 14A(2). On the other hand, we find that as per rule 8D(1), the disallowance is to be computed as per rule 8D(2) which reads as under :
"(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :—
10. From the above, we find that the disallowance has three components and the aggregate of all the three components is the amount which is to be disallowed. The assessee has considered only the first component, i.e., the amount of expenditure directly relating to exempt income. He has not considered clauses (ii) and (iii) of rule 8D(2). In view of the above, we are of the opinion that the computation made by the assessee for disallowance under section 14A(2) was not in accordance with rule 8D and the Assessing Officer has duly noted it in the assessment order and thereafter proceeded to compute the disallowance as per rule 8D. In view of the above, the assessee's objection that the Assessing Officer has not recorded the satisfaction as envisaged by section 14A(2) cannot be accepted.
11. Now, we come to various other arguments by learned counsel wherein he has disputed the quantum of the disallowance worked out by the Assessing Officer. The assessee's counsel has contended that the various expenses, viz., filing fees, house tax, conveyance, insurance of building and cars, electricity, building repair, printing and stationery, telephone expenses, audit fees, office rent, vehicles expenses, depreciation, etc., were not incurred for earning of exempt income. From the working of the disallowance by the Assessing Officer which is already reproduced earlier in our order, it would be evident that all those expenses have not been considered by the Assessing Officer. In clause (i), the Assessing Officer has considered Rs. 2,97,440 which the assessee himself has admitted as a direct expenditure incurred for earning exempt income, viz., securities transaction tax, depository charges and custodian fees. In clause (ii), only the interest has been considered and in clause (iii), half per cent of average investment has been considered. Therefore, these expenses which the assessee claimed to have been not incurred for earning of exempt income have not been considered by the Assessing Officer at all. The assessee has also disputed the correctness of the disallowance of interest at Rs. 34,08,582. However, we find that the disallowance as per clause (iii) itself is Rs. 65,36,743. The assessee's counsel has not disputed the value of investment as taken by the Assessing Officer for the purpose of computing the disallowance at half per cent. as provided by rule 8D(2)(iii). The disallowance at half per cent. of the investment is Rs. 65,36,743 while finally, the Assessing Officer restricted the disallowance to Rs. 52,56,197. Therefore, whether the working of the disallowance of interest as per rule 8D(2)(ii) is correct or not is of academic interest and, therefore, we do not wish to go into the details of the assessee's arguments with regard to the correctness of the disallowance of interest. At the cost of repetition, we reiterate that the disallowance worked out by the Assessing Officer which was the aggregate of three components as prescribed under rule 8D(2) was Rs. 99,45,325. But, finally, the Assessing Officer restricted the disallowance to Rs. 52,56,197. Therefore, in our opinion, no relief is due to the assessee from the disallowance made by the Assessing Officer at Rs. 52,56,197. The same is sustained and the assessee's appeal is dismissed.
12. In the result, the appeal of the assessee is dismissed.
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