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Income Tax Appellate Tribunal - Delhi

Jay Pee Ventures Pvt. Ltd., New Delhi vs Department Of Income Tax

           IN THE INCOME TAX APPELLATE TRIBUNAL
                (DELHI BENCH 'D' : NEW DELHI)

            SHRI R.P. TOLANI, JUDICIAL MEMBER
                            and
       BEFORE SHRI B.C. MEENA, ACCOUNTANT MEMBER

                           ITA No.811/Del./2011
                      (ASSESSMENT YEAR : 2006-07)

DCIT, Circle 4 (1),            vs.          M/s. Jay Pee Ventures Pvt. Ltd.,
New Delhi.                                  1095, Sector A, Pocket A,
                                            Vasant Kunj, New Delhi.

                                            (PAN : AAACI2356L)

      (APPELLANT)                                 (RESPONDENT)

                ASSESSEE BY : Shri V.K. Garg, Advocate
                   REVENUE by : Ms Y. Kakkar, DR

                                         ORDER

PER B.C. MEENA, ACCOUNTANT MEMBER :

This appeal filed by the assessee arises out of the order of the CIT (Appeals)-VII, New Delhi dated 01.12.2010 for the assessment year 2006-07.

The grounds of appeal read as under :-

"01. The order of the Learned CIT (A) is erroneous & contrary to facts and law.

02. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals) has erred in restricting the addition under section 14A of the Income-tax Act Rs.31,03,972/- as against Rs.1,49,23,692/- made by the A.O.

2.1 The Ld. CIT (A) ignored the fact that the disallowance under section 14A was correctly made by the A.O. in accordance with the provisions of Rule 8D of I.T. Rules, 1961.

03. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of hearing."

2. The only issue involved in the ground is relating to the deletion of part of the addition made u/s 14A of the Income-tax Act. The Assessing Officer disallowed Rs.1,49,23,692/- on the basis of making the calculation as per the provisions of Rule 8D of Income-tax Rules. The CIT (A) confirmed the addition of Rs.31,03,972/- on account of direct nexus of the interest to the tax free dividend income. This finding has been given in his order in para 3.6 which reads as under :-

"3.6 For all these reasons, the expenditure which has been incurred in relation to income which does not form part of the total income under the Act has to be determined. The appellant submitted the detailed working showing that interest amounting to Rs.31,03,972/- has direct nexus with the tax free dividend income which is found to be reasonable. It is also worth mentioning that the above working has not been controverted by the Assessing Officer in the remand proceedings. After having considered the totality of the facts and circumstances of the case, the proportionate disallowance under section 14A of the Act is restricted to Rs.31,03,972/- As a result, the appellant gets a relief of Rs.1,49,23,692/- (Rs.1,80,27,664/- minus Rs.31,03,972/-) and grounds of appeal No.1 & 2 are partly allowed."

3. The revenue's ground is that the disallowances were made as per provisions of Rule 8D of Income-tax Rules.

4. After hearing both the sides, we find that Hon'ble Mumbai High Court's decision in the case of Godrej & Boyce vs. DCIT, 328 ITR 81 (Mum.), is the only High Court decision available on the applicability of the 3 ITA No.811/Del./2011 Rule 8D. Hon'ble Mumbai High Court in the aforesaid case observed as under :

"Rule 8D r.w. S. 14A (2) is not arbitrary or unreasonable but can be applied only if assessee's method not satisfactory. Rule 8D is not retrospective and applies from AY 2008-09. For earlier years, disallowance has to be worked out on "reasonable basis" u/s 14A (1) In AY 2002-03, the assessee claimed that no disallowance u/s 14A in respect of the tax-free dividend earned by it could be made as it had not incurred any expenditure to earn the dividend. The AO rejected the claim and made a disallowance u/s 14A. This was deleted by the CIT (A). On appeal by the department, the Tribunal followed the judgement of the Special Bench in Daga Capital 117 ITD 169 (Mum) (where it had been held that s. 14A(2) & (3) & Rule 8D are procedural in nature and have retrospective effect) and remanded the matter to the AO for re-computing the disallowance. The assessee challenged the decision of the Tribunal. HELD:

(1) The argument that dividend on shares / units is not tax-free in view of the dividend-distribution tax paid by the payer u/s 115-O is not acceptable because such tax is not paid on behalf of the shareholder but is paid in respect of the payer's own liability;

(2) S. 14A supersedes the principle of law that in the case of a composite business expenditure incurred towards tax-free income could not be disallowed and incorporates an implicit theory of apportionment of expenditure between taxable and non-taxable income. Once a proximate cause for disallowance is established - which is the relationship of the expenditure with income which does not form part of the total income - a disallowance u/s 14A has to be effected;

(3) The argument that a literal interpretation of s. 14A leads to absurd consequences is not acceptable. S 14A is founded on a valid rationale that the basic principle of taxation is to tax net income i.e gross income minus expenditure;

(4) The argument that the method in Rule 8D r.w.s 14A (2) for determining expenditure relating to the tax-free income is arbitrary and violative of Article 14 is not acceptable because there is an adequate safeguard before Rule 8D can be invoked.

The AO cannot ipso facto apply Rule 8D but can do so only where he records satisfaction on an objective basis that the assessee is unable to establish the correctness of its claim. Also a uniform method prescribed to resolve disputes between assessees and the department cannot be said to be arbitrary or oppressive. There is a rationale in Rule 8D and its method is "fair & reasonable". It cannot be said that there is "madness" in the method of Rule 8D so as to render it unconstitutional;

(5) 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;

(6) For the AYs where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all facts and circumstances;

(7) On facts, though in the earlier years, the Tribunal had held that the tax-free investments had been made out of the assessee's own funds, this did not mean that there was no expenditure incurred to earn tax-free income. Even though Rule 8D did not apply to AY 02-03, the AO had to consider whether disallowance could be made u/s 14A (1). Also, the principle of consistency would not apply as s. 14A had introduced a material change in the law."

In view of Mumbai High Court decision in the case of Godrej Boyce vs. DCIT, cited supra, provisions of Rule 8D are applicable to assessment year 2008-09 as the rule is inserted w.e.f. 24.03.2008. Hon'ble High Court also held that Rule 8D is not applicable retrospectively. The assessment year under consideration is 2006-07. Since the CIT (A) has disallowed the amount which was directly related to the tax free income, therefore, , we find no fault in the order of the CIT (A) and accordingly, uphold the order of the CIT (A).

5. In the result, the appeal of the revenue is dismissed.

Order pronounced in open court on this 9th day of November, 2011.

                   Sd/-                                     sd/-
            (R.P. TOLANI)                             (B.C. MEENA)
          JUDICIAL MEMBER                         ACCOUNTANT MEMBER

Dated the 9th day of November, 2011
TS

Copy forwarded to:
     1.Appellant
     2.Respondent
     3.CIT
     4.CIT (A)-VII, New Delhi.
     5.CIT(ITAT), New Delhi.
                                                                  AR, ITAT
                                                                 NEW DELHI.