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 :
"(a)
That on the facts, circumstances and legal position of the case, the learned Commissioner of Income-tax (Appeals) has erred in confirming the order of the Assessing Officer in holding that rule 8D of Income-tax Rules is mandatory.
(b)
That on the facts, circumstances and legal position of the case, the learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs. 99,45,325 on the basis of rule 8D read with section 14A particularly when the assessee-company has voluntarily disallowed all those expenses which are not related to business activities or attributable to exempt income.
(c)
That the learned Commissioner of Income-tax (Appeals) has failed to appreciate the fact that the assessee-company has claimed only those expenses which are necessary to run the company as separate legal entity or which are directly related to business activities such as salary, rent, audit fee, interest, etc., and therefore erred in making addition of Rs. 52,56,197 under section 14A of the Income-tax Act 1961 and assessing the business loss at nil as against declared loss of Rs. 52,56,197."
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 :
(i)
Maxopp Investment Ltd…. v. Commissioner Of Income-Tax, New Delhi [2012] 347 ITR 272/[2011] 203 Taxman 364/15 taxmann.com 390 (Delhi).
(ii)
Dy. CIT v.
Jindal Photo Ltd. [IT Appeal No. 814 (Delhi) of 2011, dated 23-9-2011].
(iii)
Dy. CIT v.
Ashish Jhunjhunwala [IT Appeal No. 1809 (Kol.) of 2012, order dated 14-5-2013], for the assessment year 2009-10.
(iv)
Kalyani Steels Ltd. v.
Addl. CIT [IT Appeal No. 1733 (PN) of 2012, order dated 30-1-2014].
(v)
Godrej & Boyce Mfg. Co. Ltd. v.
Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.).
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 :—
(i)
the amount of expenditure directly relating to income which does not form part of total income ;
(ii)
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, namely :-
A x (B/C)
Where,
A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ;
B = the average of 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 ;
C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ;
(iii)
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."
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.
JYOTI