Income Tax Appellate Tribunal - Delhi
Arihant Advertising Pvt. Ltd., New ... vs Department Of Income Tax on 4 March, 2011
1 ITA No.2750/Del/2011
A.Y. 2007-08
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH `A' NEW DELHI
BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER
AND
SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER
I.T.A.No.2750/Del/2011
Assessment Year : 2007-08
Income Tax Officer, vs M/s Arihant Advertising Pvt. Ltd.,
Ward 2(1), Room No. 381, 84, Daryaganj,New Delhi-110002
C.R. Building,
New Delhi.
(Appellant) (Respondent)
Appellant by: Mrs. Anusha Khurana, Sr.DR
Respondent by : Shri Ved Jain, Ms Rano Jain,Sh.Vebnkatesh Mohan
ORDER
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
This appeal has been preferred by the Revenue against the order of Commissioner of Income Tax(A)-V, New Delhi dated 4.3.2011 for AY 2007-08. The only ground in this appeal reads as under:-
"The ld. Commissioner of Income Tax(A) has erred on facts and in law in restricting the disallowance u/s 14A read with Rule 8D to Rs.68,385/- as against disallowance of Rs.33,07,764/-. ld. Commissioner of Income Tax(A) has failed to take cognizance of sub- section (3) of section 14A which specifies that even if the assessee makes a claim that no expenditure has been incurred in earning the exempted income, sub-section (2) of section 14A shall apply, meaning thereby, disallowance u/s 14A(1) is called for."2 ITA No.2750/Del/2011
A.Y. 2007-08
2. Brief facts of the case giving rise to this appeal are that the assessee company submitted its return declaring total loss of Rs.8,98,920. The return was processed u/s 143(3) of the Income Tax Act, 1961(hereinafter referred to as the Act). The case was selected for scrutiny and a notice u/s 143(2) of the Act was issued and served on the assessee. The Assessing Officer noted that the assessee has earned income from sale, purchase of shares and securities and also dividend income. On perusal of details, the Assessing Officer noted that while allocating expenses related to exempt income, not only the direct expenses but also indirect expenses including managerial and clerical were also to be taken note of. The Assessing Officer made a disallowance of expenditure u/s 14A of the Act in accordance with Rule 8D of the Income Tax Rules amounting to Rs.33,07,764/-. The assessment was finalized with a total income assessed at Rs.24,04,840.
3. Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax(A)-V. The appeal was partly allowed with the following observations and findings:-
"3. Ground No.1: Disallowance u/s 14A r.w.r 80 of I.T. Act The A.D disallowed an amount of Rs 33,07,764 under see 14A read with rule 8D as the appellant had earned tax free dividend income of Rs 16,54,640 during the year. The appellant on its own calculated an amount of RS.68,385 to be the amount said to be incurred for earning the exempt income.3 ITA No.2750/Del/2011
A.Y. 2007-08 3.1 The A/R present for the appellant submitted that Rule 8D of the IT Rules gives only the method of determining amount of expenditure in relation to income which do not form part of total income and is a procedural provision hence it is effective from 24/03/2008 i.e. from A.Y 08-09. During the previous year company has earned RS.16.55 lacs as dividend which includes dividend from the shares held as investment. The company, during the course of assessment proceeding has itself disallowed RS.68,385/- u/s 14A of the IT Act by filing Revised Computation of Tax. The Expenses includes DMAT expenses, proportionate interest expenses. Further, interest on Loan of RS.114.58 Lacs, which is directly attributable to Investment, is capitalised along with the Investment and not charged to P&L Account. The procedure adopted is very logical and defined and the Assessee has not charged Interest Expenses attributable to Investment to P&L account. Hence no hypothetical figure can be worked out for any disallowances.
3.2 It was also submitted that disallowance with respect to Rule 8D of IT Rules can be invoked after satisfying under prevalent section 14A of Income Tax Act, 1961. The rules can not override the section. The disallowance u/s 14A can be invoked "where Assessing Officer is not satisfied with the correctness of claim of expenditure made by the assessee or no expenditure has been incurred". Disallowances u/s 14A cannot be made for an amount more than incurred for earning the exempted income. Therefore it is necessary to work out the actual expenses incurred in this regard. No hypothetical formula for calculating the expenses can be applied. Therefore interest payment which has got no relation with the investment, cannot be disallowed. Similarly any adhoc % on investment cannot be disallowed. More so when no substantial expenses have been incurred for earning tax exempted income.4 ITA No.2750/Del/2011
A.Y. 2007-08 Reliance was placed on the following judgements by the appellant;
1. Godrej & Boyce vs. DCIT (Bombay High Court) Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax-free income. It applies w.e.f. AY 2008-09;
2. DCIT vs. Maharashtra Seamless Ltd (ITAT Delhi)
3. Minda Investments Ltd Vs DCIT New Delhi ( Delhi ITAT )
4. Honourable Supreme Court has also reiterated the same proposition in the Godreg & Boyce Manufacturing Co. Ltd ( Un reported)
5. DCIT vs. Jindal Photo Ltd (ITAT Delhi) 3.3 It was also submitted that in the case of a dealer in shares, the dominant object of acquiring shares is not to earn dividend and consequently sec. 14A does not apply. The AO did not establish any nexus between the borrowed funds and the investments in the tax free bonds. Further, Interest Expenses on Loan taken for Investment is already capitalised with the Investment and not claimed as Business Expenses by the assessee Therefore, the apportionment on a pro rata basis is improper in the absence of anything brought by the AO. Also Section 14A r.w.r. 80 would be applied for AY 2008-09 and not for earlier years.
3.4 I have gone through the assessment order as well as the written submission of the appellant and also the case laws relied on by the appellant. It has been held in the case of Godrej and Boyce that rule 8D is applicable from A.Y 08-09. However for earlier years, disallowance has to be worked out on reasonable basis u/s 14A(1) and the A.O will have to determine the quantum of 5 ITA No.2750/Del/2011 A.Y. 2007-08 disallowable expenditure by a reasonable method having regard to the facts and circumstances which has not been done in this case. After consideration of the facts of the case and the fact that interest expenses on loans taken for investment is already capitalized, in my view the amount of Rs.68,385/- computed by the appellant has to be taken as reasonable disallowance in the absence of any other finding by the AO. The addition is therefore limited to this extent."
Now, the Revenue is in appeal before this Tribunal.
4. We have heard rival argument of both the parties in the light of material on record before us and carefully considered the same. Ld. DR submitted that the Assessing Officer rightly relied on the judgment of Hon'ble Supreme Court in the case of Commissioner of Income Tax vs United General Trust 200 ITR 488(SC) for making disallowance u/s 14A of the Act r/w Rule 8D of the Income Tax Rules 1962. He further submitted that the assessee company paid interest of Rs.41,08,181 and the Assessing Officer rightly considered the average value of investment, asset and properly disallowed the amount of Rs.33,07,764. The ld. DR also submitted that the Commissioner of Income Tax(A) deleted the disallowance ignoring the peculiar facts and circumstances of the case and wrongly held that disallowance has to be worked out on reasonable basis u/s 14A(1) of the Act. The DR finally submitted that the Commissioner of Income Tax(A) was also wrong in limiting the disallowance to Rs.68,385 in this regard. 6 ITA No.2750/Del/2011
A.Y. 2007-08
5. The assessee's representative submitted that the Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd. rightly held that Rule 8D of the Income Tax Rules inserted w.e.f. 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax free income and it applies w.e.f. AY 2008-09. He also submitted a copy of the judgment of ITAT Delhi 'G' Bench in the case of ITA No. 4539/Del/2010 DCIT vs Jindal Photo Ltd. and supported the impugned order.
6. The assessee's representative submitted that Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs DCIT (2010) 328 ITR 81 (Bombay) has held that the provisions of Rule 8D are not retrospective in nature and shall apply w.e.f. A.Y. 2008-09. He further submitted that this proposition has been reiterated by the Hon'ble Supreme Court by dismissing appeal of the revenue against this order.
7. On careful consideration and perusal of the relevant citations submitted before us, we observe that Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) has held that the provisions of Rule 8D of the Rules which have been notified w.e.f. 24.3.2008 are not retrospective in nature and shall apply w.e.f. AY 2008-09; even prior to AY 2008-09 when Rule 8D was not applicable, the Assessing 7 ITA No.2750/Del/2011 A.Y. 2007-08 Officer had to enforce provisions of sub-section (1) of Section 14A of the Act for the purpose. It was also held that the Assessing Officer was duty bound to determine expenditure which had been incurred in relation to income which did not form part of total income under the Act by adopting reasonable basis or method consistent with all relevant facts and circumstances. The case in hand is related to AY 2007-08. The ld. Commissioner of Income Tax(A) in para 3.4 of the impugned order rightly held that Rule 8D of the Rules is applicable from AY 2008-09. However for earlier years, disallowance has to be worked out on reasonable basis u/s 14A(1) and the Assessing Officer was duty bound to determine the quantum of disallowance expenditure by a reasonable method having regard to the facts and circumstances of the case and which had not been done in this case.
8. The assessee's representative also submitted that in the case of Commissioner of Income Tax vs Walfort Share & Stock Brokers (P) Ltd.(2010) 192 Taxman 211(SC), it was held that the words "expenditure incurred" in Section 14A of the Act refer to expenditure on rent, taxes, salaries, interest, etc., in respect of which allowances are provided for under sections 30 to 37; a return of investment or a payback is not under the ambit of 'expenditure incurred' in terms of section 14A of the Act. The AR also 8 ITA No.2750/Del/2011 A.Y. 2007-08 submitted that in this case, the Hon'ble Apex Court held that for attracting section 14A, there has to be a proximate cause for disallowance which is its relationship with tax exempt income and since payback or return of investment is not such proximate cause, section 14A is not applicable in such cases. He has drawn our attention towards the assessment order para 4.4 wherein the Assessing Officer noted that the assesseE company has capitalized interest amounting to Rs.1,14,58,536.74 enhancing the cost of investment in his balance sheet. Therefore, disallowance made by the Assessing Officer on the basis of surmises and conjectures was rightly deleted by the ld. Commissioner of Income Tax(A). Ld. DR did not dispute the fact that the Assessing Officer noted that substantial amount of interest paid on loan taken for investment has been capitalized by the assessee during the year under consideration which is clearly reflected in the balance sheet and final accounts of the assessee but the DR submitted that apart from interest, other expenses have to be disallowed u/s 14A(1) of the Act.
9. In view of above submissions, we observe that in the case of Commissioner of Income Tax vs Hero Cycles Ltd.(2010) 323 ITR 158 (P&H), their lordships held that disallowance u/s 14A of the Act requires finding of incurring of expenditure and where it is found that for earning exempted income, no expenditure has been incurred, then the disallowance 9 ITA No.2750/Del/2011 A.Y. 2007-08 u/s 14A of the Act cannot stand. In the present case, the assessee himself submitted detail of Rs.68,385 as dividend earning expenses and accepting the same, the ld. Commissioner of Income Tax(A) limited the disallowance to this extent only by taking notice of this fact that the interest expenses on loan taken for investment has already been capitalized by the assessee.
10. In view of above discussion, we are inclined to hold that the disallowance made by the Assessing Officer was based on hyper technical approach and also ignoring the essence of Section 14A(1). The Assessing Officer also ignored this fact that the assessee has capitalized substantial amount of interest paid on loans taken for investment and the same was not claimed as business expenses by the assessee. Therefore, the apportionment on a pro rata basis was improper in the absence of anything brought by the Assessing Officer to establish a nexus between the expenses incurred and the exempted income earned on the investment which was a paramount requirement for making a disallowance u/s 14A(1) of the Act.
11. On the other hand, the ld. Commissioner of Income Tax(A) rightly held that the disallowance made by the Assessing Officer was not proper and justified and he limited the disallowance to the extent of Rs.68,385/-. We are unable to see any reason to interfere with the impugned order. 10 ITA No.2750/Del/2011
A.Y. 2007-08 Accordingly, we hold that this appeal by the revenue is devoid of merits and deserves to be dismissed.
12. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 21.9.2012.
Sd/- Sd/-
(S.V. MEHROTRA) (CHANDRAMOHAN GARG)
ACCOUNTANT MEMBER JUDICIAL MEMBER
DT. 21st SEPTEMBER 2012
'GS'
Copy forwarded to:-
1. Appellant
2. Respondent
3. CIT(A)
4. CIT 5. DR
By Order
Asstt. Registrar