Income Tax Appellate Tribunal - Delhi
Pisces Portfolio Pvt. Ltd., New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL Delhi BENCH "F"
BEFORE SHRI U.B.S. BEDI,JM & SHRI A N PAHUJA,AM
ITA no.937/Del./2010
Assessment Year:-2004-05
Pisces Portfolio Pvt. Ltd., V/s Income Tax Officer,
H-72, Connaught Circus, W ard 14(2),
New Delhi Delhi
[PAN:AAACP 7952 R]
[Appellant] [Respondent]
Assessee by :- Shri Amit Goel, AR
Revenue by:- Shri Rohit Garg, DR
Date of hearing 17-01-2012
Date of pronouncement 17-01-2012
ORDER
A.N.Pahuja:- This appeal filed on 05.03.2010 by the assessee against an order dated 14.01.2010 of the ld. CIT(A)-XVII, New Delhi for the AY 2004-05, raises the following grounds:-
1. "On the facts and the circumstances of the case and in law, the Commissioner of Income-tax(Appeal) erred in confirming addition/disallowance to the extent of ```9,76,466/- u/s 14A of Income-tax Act, 1961. The addition made by A.O. was not sustainable and CIT(A) should have deleted the entire addition/disallowance made u/s 14A of the Income-tax Act, 1961.
2. On the facts and circumstances of case and in law, the CIT(A) erred in giving retrospective effect to Rule 8D of Income-tax Rules 1962.
The appellant craves leave to add one or more ground of appeal or to alter, modify the existing ground before or at the time of hearing of appeal."
2 I.T.A. no.937/Del./2010
2. Facts, in brief, as per relevant orders are that return declaring income of ```7,96,610/- filed on 30th October, 2004 by the assessee, engaged in the business of sale/purchase of shares, after being processed on 10.2.2005 u/s 143(1) of the Income-tax Act, 1961 (hereinafter referred to as the Act), was selected for scrutiny with the service of a notice u/s 143(2) of the Act, issued on 4.10.2005. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed that though the assessee reflected tax free dividend income of ``18,49,757/- and incurred financial charges of ``20,40,412/-, it did not offer any disallowance u/s 14A of the Act .To a query by the AO, the assessee did not offer any explanation. Accordingly, the AO disallowed proportionate financial expenses amounting to ``10,22,674/-, having recourse to provisions of section 14A of the Act.
3. On appeal, the learned CIT(A) reduced the disallowance by ``48,208/- in the following terms:-
"3. I have carefully considered the facts of the case and the submissions made by the learned AR. It is noted that the special Bench of Mumbai ITAT in the case of M/s Daga Capital Management (P) Ltd. (2008) 119 TTJ (Mum.)(SB) 289 has clearly settled the controversy regarding the applicability of Rule 8D by holding that being procedural in nature it is applicable with retrospective effect. The decisions cited by the learned AR are not applicable to the appellant's case as they were given on different facts. Therefore, those decisions are clearly distinguishable on facts and are of not any help to the appellant's case. I am, therefore, of considered opinion that this Rule will apply in the instant case also. It is a fact that the appellant company's managerial and administrative manpower has been utilized in taking the complicated decisions regarding the investments which have yielded exempt income. Accordingly, disallowance u/s 14A is necessary in the instant case. Now coming to the issue of amount of disallowance u/s 14A, it is seen from perusal of the details available on the record that the disallowance works out to ``9,76,466/- as under:-
A Average of Investment [In``]]
Opening investment 26,00,000
Closing investment 14,20,56,923
3 I.T.A. no.937/Del./2010
Average value of investment 14,20,56,923+2600000
2
= 7,23,28,461
B Average of total assets
Opening balance of total assets:5828590+2600000+ 2267+1152 =84,32,009 Closing balance of total assets:6820900+142056923 +144387365+576105 =29,38,41,293 Average of total assets =8432007+293841293 2 =15,11,36,650 C Interest Disallowable =2040412x72328461 15,11,36,650 =9,76,466/-
In view of the above, the Assessing Officer is directed to restrict the disallowance to ```9,76,466/-. As a result, the appellant gets relief of ```48,208/-."
4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, both the parties are agreed that the matter required readjudication in the light of decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. vs. CIT,328 ITR 81(Mom.), holding that Rule 8D was not applicable in the year under consideration.
5. We have heard both the parties and gone through the facts of the case as also the aforesaid decision. We find that Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. (supra) while adjudicating a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded that 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 only w.e.f AY 2008-09. For 4 I.T.A. no.937/Del./2010 the assessment years 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 the facts and circumstances, the Hon'ble High Court concluded.
5.1 W e find that Hon'ble Supreme Court in their decision dated 6.7.2010 in CIT v. W alfort Share & Stock Brokers (P.) Ltd.,326 ITR 1, inter alia, observed that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon'ble Apex Court observed in the context of provisions sec.14A of the Act in the following terms:
"17. The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22- 11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses 5 I.T.A. no.937/Del./2010 allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of thenature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to
37).................."
5.2 Hon'ble Punjab & Haryana High Court in their decision in CIT vs. Hero Cycles Ltd.,323 ITR 518 have observed that disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand.
5.3 In the light of view taken in the aforesaid decisions, Hon'ble jurisdictional High Court in a recent decision dated 18.11.2011 in Maxopp Investment Ltd. vs. CIT,[2011] 15 taxmann.com 390 (Delhi) held as under:
"40. From the above discussion, it is clear that, in effect, the provisions of sub sections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was
6 I.T.A. no.937/Del./2010 no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable.
How is Section 14A to be worked for the period prior to the introduction of Rule 8D?
41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method.
42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share & Stock Brokers (P.) Ltd. (supra) to the following effect:-
"The theory of apportionment of expenditure between taxable and non- taxable has, in principle, been now widened under section 14 A."
So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correcteness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such 7 I.T.A. no.937/Del./2010 eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment."
6. In view of the foregoing, especially when the ld. CIT(A) invoked rule 8D of the IT Rules,1962,following the decision of Special Bench in Daga Capital Management (P) Ltd.,119 TTJ(Mum.)(SB) 289 and did not have the benefit of aforesaid decision of the Hon'ble jurisdictional High Court, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue of disallowance u/s 14A raised in the ground no. 1 in this appeal, afresh in accordance with law in the light of aforesaid judicial pronouncements after allowing sufficient opportunity to both the parties , bringing out clearly as to whether or not borrowed funds had indeed been utilised in investment in shares for earning exempt income. W ith these observations, ground no. 1 in the appeal is disposed of while ground no. 2 is allowed.
7. No additional ground having been raised before us in terms of residuary ground in the appeal, accordingly, this ground is dismissed.
8. No other submission or argument was made before us.
9. In result, appeal is allowed but partly for statistical purposes.
Order pronounced in Open Court
Sd/- Sd/-
(U.B. S. BEDI) (A.N. PAHUJA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
8 I.T.A. no.937/Del./2010
NS
Copy of the Order forwarded to:-
1. Pisces Portfolio Pvt. Ltd., H-72, Connaught Circus, New Delhi.
2. Income Tax Officer, Ward 14(2), New Delhi.
3. CIT (Appeals)-XVII, New Delhi
4. The CIT concerned.
5. The DR, ITAT,'F' Bench, New Delhi
6. Guard File.
By Order, Deputy/Asstt.Registrar ITAT, Delhi