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AO cannot invoke provisions of Rule 8D to make disallowance u/s 14A, without first recording dis-satisfaction with the assessee’s accounts & explanation: ITAT

2019-TIOL-1570-ITAT-CHD

IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH ‘B’ CHANDIGARH

ITA No. 37/Chd/2015
Assessment Year: 2010-11

OSWAL WOOLLEN MILLS LTD
G T ROAD, SHERPUR, LUDHIANA
PAN NO: AAACO1973F

Vs

ADDITIONAL COMMISSIONER OF INCOME TAX
RANGE – VII, AAYKAR BHAWAN
RISHI NAGAR, LUDHIANA

Sanjay Garg, JM & Annapurna Gupta, AM

Date of Hearing: July 01, 2019
Date of Decision: July 03, 2019

Appellant Rep by: Shri Navdeep Sharma, Adv
Respondent Rep by: Sh Manjit Singh, Sr.DR

Income Tax – Section 14A & Rule 8D

Keywords – Administrative expenses – Dividend income

THE assessee had filed its return for the relevant AY. During the assessment proceedings, the AO noted that the assessee had shown total investment of Rs. 58.09 cr. Subsequently, it was observed by the AO that the assessee had earned exempt dividend income of Rs. 1.06 crores. However, the assessee had suo motu disallowed an expenditure of Rs 1.33 lacs u/s 14A. On being asked to explain as to why disallowance u/s 14A be not computed as per the norms prescribed under Rule 8D, the assessee submitted that it had not incurred any expenditure to earn the tax exempt dividend income and the investments made during the relevant AY as well as in earlier years were from current accruals, reserves and surpluses available with the assessee company. The AO however, did not agree with the computation made by the assessee as he observed that while computing the disallowance on proportionate bias assessee has only taken into consideration the administrative expenses and has not considered the other expenses like rent and salary paid. Therefore, he invoked the provisions of Rule 8D and computed the interest disallowance under Rule 8D(2)(ii) and administrative expenses under Rule 8D(2)(iii) after giving the benefit of suo motu disallowance made by the assessee. On appeal, the CIT(A) upheld the decision of the AO.

On appeal, the Tribunal held that,

Whether AO can invoke provisions of Rule 8D to make disallowance u/s 14A, without recording dis-satisfaction over accounts and explanation of the assessee – NO: ITAT

Whether if no dissatisfaction is recorded by the AO qua the disallowance worked out by assessee suo moto then AO should not make extra disallowance u/r 8D(2)(i) and 8D(2)(iii) – YES: ITAT

++ in so far as the administrative expenses are concerned, the assessee has claimed it has not incurred any administrative expenses for earning of tax exempt income. The Bombay High Court in the case of Godrej & Boyce Manufacturing Co. has held that u/s 14A, “….resort can be made to Rule 8D for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure….” In a situation where the accounts of the assessee furnish an objective basis for the AO to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee;

++ the Delhi High Court in a recent decision has further given a similar view in the case of CIT vs. Taikisha engineering India Ltd and held the AO having regard to the accounts of the assessee is required to record his satisfaction the self or voluntarily expenditure offered by the assessee or claim that no expenditure has been incurred by the assessee in relation to earning of exempt income was not correct or the same was unsatisfactory on examination of the accounts of the assessee. Without recording such a satisfaction, he cannot proceed to apply Rule 8D for the computation of disallowance u/s 14A;

++ in the present case the AO has not followed the guidelines of objective satisfaction as laid down by the Bombay High Court in the case of Godrej & Boyce Manufacturing Co. while making the disallowance. Neither the AO nor the CIT(A) has pointed out any defect in the working given by the assessee in computing suo motu disallowance except that a certain part of tax relating to the personnel expenditure and other allowances were not taken into consideration. Therefore, In the working given before the Tribunal, where the proportionate amount of disallowance of expenditure to earn dividend income has been computed by including the personnel expenditure and certain other expenses. The disallowance of administrative expenses is restricted to Rs 9.36 lacs. However, the assessee will get the benefit/set off at the suo motu disallowance offered by the assessee in the return and accordingly the addition is restricted to Rs 8.02 lacs.

Assessee’s appeal partly allowed

Cases followed:

Godrej & Boyce Manufacturing Co. – 2010-TIOL-564-HC-MUM-IT

ORDER

Per: Sanjay Garg:

The present appeal has been preferred by the assessee against the order dated 29.10.2014 of the Commissioner of Income Tax-II, Ludhiana [hereinafter referred to as’ CIT(A)’ ]. Earlier the appeal of the assessee was dismissed for want of persecution vide order dated 10.8.2017. However, the said order was recalled vide order dated 9.4.2018 passed in M.A.No. 26/Chd/2018.

2. The sole issue raised in this appeal is relating to disallowance u/s 14A read with Rule 8D of the Income Tax Rules in respect of the expenditure incurred by the assessee for earning of tax exempt dividend income. During the course of assessment proceedings, the Assessing Officer noted that the assessee had shown total investment of Rs. 58.09 cores as on 31.3.2010. The Assessing Officer further noted that the assessee earned tax exempt dividend income of Rs. 1.06 crores. However, the assessee had suo motu disallowed an expenditure of Rs. 1,33,928/- only u/s 14A of the Income Tax Act, 1961 (in short ‘the Act’). Act. On being asked to explain as to why disallowance u/s 14A be not computed as per the norms prescribed under Rule 8D of the Income Tax Rule 1962, the assessee submitted that it had not incurred any expenditure to earn the tax exempt dividend income. That the investments made during the year as well as in earlier years were from current accruals, reserves and surpluses available with the assessee company. Even the assessee did not incur any administrative expenses, however, the assessee suo motu computed the disallowance on proportionate basis taking into consideration the total income of the year, the total amount of dividend income earned and total amount of administrative expenses incurred. The assessee in this respect furnished the following computation of the administrative expenses.Disallowance u/s 14-A,

In case of regular computation

1.Amount of Dividend income1,06,56,014/-
2. Operating income6,33,68,64,325/ –
3. % of dividend income0,00,168/ –
4. Amount of expenses out of administrative expenses7,96,27,747/-
5. Proportionate amount of disallowance of Administrative expense to earn dividend income1,33,928/ –

Administrative Expenses

1.Interest paid to others2,12,02,161
2. Managerial remuneration4,69,75,000/-
3. Cost Audit81,204/ –
4. Auditors remuneration9,49,271/ –
5. Directors Meeting Fee1,12,000
6. Postage, Telegram & Telephone67,19,989
7 Printing & Stationery35,88,122
 7,96,27,747/-

On the basis of above computation the assessee company has already added back Rs. 1,33,928/- u/s 14A in its return due to fear of penal consequences.”

3. The Assessing Officer, however, did not agree with the above computation made by the assessee. He mainly rested his findings on the ground that the rule 8D of the Income Tax Rules has been found valid by various Courts. Further, he observed that the assessee while computing the aforesaid disallowance on proportionate has only taken into consideration the administrative expenses and has not considered the other expenses like rent, salary paid extra. He, therefore, invoked the provisions of Rule 8D of the Income Tax Rules and computed the interest disallowance under Rule 8D(2) (ii) at Rs. 1,01,48,231/- and administrative expenses under Rule 8D(2)(iii) at Rs. 18,50,043/- totaling Rs. 1,19,98,274/-. After giving the benefit of suo motu disallowance made by the assessee of Rs. 1,33,928/-, he added a sum of Rs. 1,18,64,346/- into the income of the assessee.

4. Being aggrieved by the above order of the Assessing Officer, the assessee preferred appeal before the Ld. CIT(A). It was pleaded before the Ld. CIT(A) that the funds from which the investments were made were mixed funds. That the assessee was possessed of sufficient own/interest free funds to meet the investment in question. That as per law laid down by the Hon’ble jurisdictional High Court in the case of ‘Bright Enterprises Ltd. vs CIT’ (ITA No. 224 of 2013) dated 24.7.2015 =2015-TIOL-1714-HC-P&H-IT (supra), wherein, it has been held that if there are interest free funds available to meet the investment, a presumption would arise that investment had been made out of the interest free funds generated or available with the company, therefore, no interest disallowance was attracted. It was also pleaded that the assessee had not incurred any expenses out of the administrative expenditure for the investment yielding dividend income. That the assessee made suo motu disallowance of administrative expenses incurred vis-a-vis total income earned by the assessee. However, the Ld. CIT(A) did not agree with the above contention of the assessee and upheld the disallowance made by the Assessing Officer.

5. Before us, the Ld. Counsel for the assessee has submitted a chart to show that the assessee was having sufficient interest free own funds in the shape of capital, reserves & surplus and cash accrual to meet the investments in question. A perusal of the said chart revels that the total capital reserves and surplus of the assessee during the financial year under consideration 2009-10 were at Rs. 19405.71 lacs and the total cash accruals of the assessee during the year were at Rs. 11071.90 lacs. The total investment during the year including the own old investments were only at Rs. 5809.29 lacs, which shows that the own/interest free funds of the assessee were sufficient to meet the investments. The issue is, thus, covered by the various decisions of the Hon’ble High Courts including that of the Hon’ble Jurisdictional High Court in ‘Bright Enterprises Ltd vs CIT’ (ITA No. 224 of 2013) dated 24.7.2015 = 2015-TIOL-1714-HC-P&H-IT, wherein, it has been held that if assessee has funds/interest free funds available with it to make investment, the presumption will be that investment made by the assessee is out of own funds. The issue is also squarely covered by the recent decision of the Hon’ble Supreme Court in ‘CIT (LTU) Vs. Reliance Industries Ltd.’ [2010] 410 ITR 466 (SC) = 2019-TIOL-124-SC-IT. We, therefore, do not find any infirmity in the order of the Ld. CIT(A) on this issue.

In view of the above, no disallowance of interest expenditure is attracted in this case.

6. So far as the administrative expenses are concerned, the assessee has given a scientific formula for calculating the disallowance out of administrative expenses. However, we find that the assessee while taking the total administrative expenses has not considered the personal expenses and other allowances. The authorized representative of the assessee, before us, has submitted another chart, wherein, the personnel expenses and other allowances have been included and thereby the proportionate of disallowance out of administrative expenses has been computed as under:-“Disallowance u/s 14A

In case of regular computation Amount (In Rs.)

1.Amount of dividend income10656014
2. Operating income6336864325
3 % of dividend income0.00168
4. Amount of expenses556724538
5. Proportionate amount of disallowance of expensed to earn dividend936183

Details of expenses

a. Interest paid to others21202161
b. Administrative expenses130240267
c. Personal expenses and other allowances405282110
 556724538”

7. None of the lower authorities have pointed out any defect in the computation of proportionate disallowance computed by the assessee except that certain part of the administrative expenses were not taken into consideration which has been taken into consideration in the computation made above.

Even the assessee has claimed that it has not incurred any administrative expenses for earning of tax exempt income. The Assessing Officer in this respect has not recorded any dissatisfaction taking into consideration the accounts of the assessee. The Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co.’ 328 ITR 81 = 2010-TIOL-564-HC-MUM-IT has held that under section 14A of the Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of such expenditure is correct. The satisfaction of the Assessing Officer must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee. We may further observe that the Hon’ble Delhi High Court in a recent decision has further given a similar view in the case of “CIT vs. Taikisha engineering India Ltd.” (supra) and has held that the AO having regard to the accounts of the assessee is required to record his satisfaction that the self or voluntarily expenditure offered by the assessee or claim that no expenditure has been incurred by the assessee in relation to earning of exempt income was not correct or the same was unsatisfactory on examination of the accounts of the assessee. Without recording such a satisfaction, he cannot proceed to apply Rule 8D for the computation of disallowance under section 14A. However, as observed above, in the case in hand, the Assessing officer has not followed the guidelines of objective satisfaction as laid down by the Hon’ble Bombay High Court in the case of ‘Godrej & Boyce’ (supra) while making the disallowance. Neither the Assessing Officer nor the Ld. CIT(A) has pointed out any defect in the working given by the assessee in computing suo motu disallowance except that a certain part of tax relating to the personnel expenditure and other allowances were not taken into consideration. In the working given before us, as reproduced above, whereby, the proportionate amount of disallowance of expenditure to earn dividend income has been computed at Rs. 9,36,183/- by including the personnel expenditure and certain other expenses, as noted above. In view of this, the disallowance of administrative expenses is restricted to Rs. 9,36,183/-. However, the assessee will get the benefit/set off at the suo motu disallowance offered by the assessee in the return of income at Rs. 1,33,928/- and accordingly the addition is restricted to Rs. 8,02,255/-.

In view of our findings given above, the appeal of the assessee is treated as partly allowed.

(Order pronounced in the Open Court on 03.07.2019)

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