Income Tax Appellate Tribunal - Delhi
Network 18 Media & Investment Ltd., New ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'E' : NEW DELHI)
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
and
SHRI B.C. MEENA, ACCOUNTANT MEMBER
ITA No.4311/Del./2010
(Assessment year : 2007-08)
M/s. Network 18 Media & Investment Ltd., vs. DCIT, Circle 13(1),
503, 504 & 507, 5th Floor, Mercantile House, New Delhi.
15, K.G. Marg,
New Delhi - 110 001.
(PAN : AABCS2472G)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Tarandeep Singh, CA
REVENUE by : Smt. Sangeeta Gupta, CIT DR
ORDER
PER B.C. MEENA, ACCOUNTANT MEMBER :
This is an appeal filed by the assessee against the order of the CIT (Appeals)-
XVI, New Delhi dated 22.7.2010. The grounds of appeal read as under :-
"1. That on facts and in law Commissioner of Income Tax (Appeals) hereinafter referred as CIT (A) erred in upholding the disallowance of Rs.3,79,11,125/- u/s 14A of the Income-tax Act.
1.1 That on facts and in law the CIT (A) erred in upholding that the provisions of Rule 8D of the Income Tax Rules, 1962 inserted by IT (Fifth Amdt) Rules 2008 w.e.f. 24-03-2008 are applicable retrospectively.
1.2 That on facts and in law the CIT (A) erred in upholding the assumption of jurisdiction u/s 14A r/w Rule 8D(2) by the A.O. 2 ITA No.4311/Del./2010
2. That on facts and in law the orders both A.O. and CIT (A) are void ab-initio and bad in law.
That the appellant prays for leave to add, alter, amend and / or vary the ground(s) of appeals at or before the time of hearing."
2. The only issue involved in the appeal is upholding the disallowance of Rs.3,79,11,125/- u/s 14A of the Income-tax Act, 1961. The CIT (A) erred in upholding the applicability of Rule 8D of Income Tax Rules 1962 inserted by IT (Fifth Amdt) Rules 2008 w.e.f. 24-03-2008 are applicable retrospectively.
3. Both the parties were heard.
7. After hearing both the sides, we find that Hon'ble Mumbai High Court's decision in the case of Godrej & Boyce vs. DCIT 228 ITR 81 (Mum.) is the only High Court decision available on the applicability of the 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:
3 ITA No.4311/Del./2010(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;
4 ITA No.4311/Del./2010(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."
Respectfully following the same, we restore the issue to the file of Assessing Officer for working out the reasonable disallowances u/s 14A (1).
8. In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in open court on this 18th day of March, 2011.
Sd/- sd/-
(RAJPAL YADAV) (B.C. MEENA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated the 18th day of March, 2011
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)-XVI, New Delhi.
5.CIT(ITAT), New Delhi.
AR, ITAT
NEW DELHI.