Income Tax Appellate Tribunal - Delhi
Sir Sobha Singh & Sons Pvt. Ltd., New ... vs Dcit, New Delhi on 20 March, 2018
INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "G": NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No.742/Del/2015
Assessment Year: 2009-10
Sir Sobha Singh & Sons Pvt. DCIT
Ltd. Circle-8(1)
Baikunth, Vs. New Delhi.
A-1, Janpath,
New Delhi - 110 011
PAN AAACS0008F
(Appellant) (Respondent)
Assessee by: Shri K. Sampat, Advocat
Department by : Shri S.S. Rana, CIT(DR)
Date of Hearing 14/03/2018
Date of 20/03/2018
pronouncement
ORDER
PER AMIT SHUKLA, J.M.:
The aforesaid appeal has been filed by the assessee against order dated 29.7.2013, passed by Ld. CIT (Appeals) - XI, in relation to the proceedings u/s 154 for the assessment year 2009-10. In various grounds of appeal assessee has challenged mainly the disallowance made u/s 14A r.w. Rule 8D at Rs. 4,25,836/- which was stated to have been added back by mistake in the computation of income by the assessee.
2. Brief facts and background of the case are that assessee company had filed its return of income on 23.9.2009, wherein the it sou moto had added an amount of Rs. 4,25,836/- in the computation of income towards disallowance u/s 14A. During the course of the assessment proceedings the assessee objected to such disallowance by way of a letter dated 19th September, 2011, categorically stating that there has been mistake in computation of the disallowance u/s 14A and requested the AO to take into cognizance and rectify it by passing the order, because, no interest has been paid by the assessee and consequently no disallowance of interest can be made under the provisions of 14A. However the AO instead of verifying the assessee's claim as made in the said letter /application rejected the same after observing and holding as under :-
"4. The assessee's claim w.r.t. rectification of disallowance u/s 14A made by it is not accepted for the simple reason that this office is of the view that as per provisions of the Act there must be disallowance as per Rule 8D against the tax free income claimed by the assessee. There have been number of decisions confirming the stand taken by the department on this issue. Moreover, this is not a mistake apparent from record and therefore does not come under the purview of section 154 of the Act. Any relief against the original return of income can be claimed by the assessee only by 2 revising its return of income and not otherwise. Thus, the claim of the assessee cannot be adhere to and rejected accordingly."
3. The assessee aggrieved by the said assessment order, filed first appeal before the Ld. CIT(A), wherein this issue of disallowance of section 14A was specifically raised before the Ld. CIT(A) which is evident from the submissions noted in the appellate order which for the sake of ready reference is reproduced hereunder:-
"2. Section 14A provides that where tax free income has been earned, any expenses incurred to earn such income are required to be disallowed. Two issues are involved in the addition made by the Assessing Officer. Firstly, even though there were no expenses which were relatable to the investments made from which tax free dividends had been earned, a disallowance had erroneously been made by the assessee under rule 8B. Before the Assessing Officer it was submitted that this was an error committed by the assessee because while computing his income he had not correctly understood the provisions of section 14A and was under the mistaken notion that it had to be applied on a mandatory basis. The correct position as explained in the statement of facts and the case law cited is that it applies only if there are any expenses directly related to tax free income. Our investment of 8.48 crores on which dividends were earned were funded entirely from our own resources (refer schedule 5). There were no secured loans 3 and the unsecured loans were on account of (a) advance for use of land pending sale Rs. 24.11 lakhs and (b) Non refundable security from Simla Hills, a tenant Rs. 49.56 lakhs (Schedule 3). A review of expenses (Schedule 14) clearly shows that there was no expenditure on account of interest and there is no other expense which is directly or indirectly relatable to the earning of dividends from our investments. We have cited case law stating that the Assessing Officer has the power to correctly compute the income of the assessee and if he did so the incorrect addition made by the assessee under section 14A should have been deleted. However, the Assessing Officer incorrectly held that Rule 8D was mandatory. Case law has been given and the Hon'ble Supreme Court of India has clearly held that it is the duty of the Assessing Officer to arrive at the correct taxable income. This implies that if deductions have been incorrectly claimed they should be added back and similarly if additions have been made incorrectly these should be deducted from the taxable income. The Supreme Court has held that the Assessing Officer is duty bound to make a correct computation of taxable income. The rule of equity and justice provides that you can only tax what is the correct income as per the law prevailing; no more and no less. Secondly, case law has also been filed to show that only those expenses which are directly attributable to the earning of tax free income are 4 required to be disallowed. Since this is not so in our case since no amount was borrowed to purchase/acquire the Investments on which dividend income was earned, the question of any disallowance under section 14A by applying Rule 8B does not arise.
3. A copy of our accounts and submission made before the Assessing Officer to accept the withdrawal of the amount mistakenly added by us under section 14A is also enclosed."
4. Ld. CIT (A), instead of deciding the issue which he was required under the law to do so as the issue which was specifically contested/ raised before him, directed the AO to pass separate order disposing of the rectification application filed by the assessee. The relevant observation and finding of Ld. CIT (A) in this regard reads as under:-
"Ground No. 5 is in r/o addition of Rs. 4,25,836/- on a/c of disallowance u/s 14A read with Rule 8D. The AO in the order has simply stated that as per the provisions of the Act there must be disallowance as per Rule 8D if tax free income has been claimed by the appellant.
The facts on this issue are that the appellant had himself added an income of Rs. 4,25,836/- in his computation of income as disallowance u/s 14A. Subsequently the appellant move an application u/s 154 stating that it had wrongly suo moto made a 5 disallowance u/s 14A. The AO instead of passing a separate order in r/o the rectification application filed by the appellant simply wrote in the asstt. order that the appellants plea was not acceptable. No addition has been made in the order of this issue. The AO is therefore directed to pass a separate order disposing off the rectification application filed by the appellant."
5. The assessee in pursuance of such direction by the CIT (A) again filed an application u/s 154 before the AO, vide letter dated 21.9.2012, relevant extract of which has been incorporated in the impugned order passed by the AO u/s 154 dated 28.1.2013. However the Ld. AO rejected the assessee's petition/ application after observing and holding as under:-
"4. There was no order on the date of application on which action for revision/rectification/amendment could be exercised. As a result there was no cause for the assessee for filing the application u/s 154. As such, filing of application by the assessee during the course of assessment proceedings was premature action on the part of the assessee.
4.1 The assessee had filed its original return for the assessment year under consideration i.e. 2009-10 with in the due time and had privilege under the act to revise its return of income up to the prescribed time period under section 139(5) which was not opted 6 by the assessee. This inaction on the part of the assessee is a proof in itself to conclude that the assessee was fully conversant with the legal provisions including disallowances made u/s 14A read with rule 8D against exempt income."
6. Again this matter was raked appeal in appeal filed before the first appellate authority, however the Ld. CIT (A) after incorporating the assessee's detail submissions, has dismissed the assessee's appeal on the ground that, the point in issue cannot be raked up in proceeding u/s 154, because during the course of original assessment proceedings, the assessee had made a claim before the AO on which AO has given his decision, right or wrong but the matter had attained finality from his stage. Ld. CIT(A) even find fault with his predecessor's earlier order of the Ld. CIT(A) in the quantum proceedings wherein he had held that, this issue should be dealt separately u/s 154. He observed that, this issue cannot be termed as mistake apparent from record and subject to rectification u/s 154. Since, earlier in quantum proceedings Ld. CIT(A) had not decided the issue on merits and matter got matured in the assessment proceedings on which AO has also given his findings, therefore, this is beyond the purview of rectification proceedings u/s 154. He further held that, whether any interest bearing funds were actually invested for deriving tax free income is the issue which cannot be examined u/s 154 by AO and now that there is 7 difference of opinion, i.e., by the AO in assessment order, therefore review of the decision of the AO u/s 154 is not permissible under the law. He held that all the decisions relied upon by the assessee would have helped the assessee in the appeal against assessment order u/s 143(3), but are of no consequence as this issue cannot be adjudicated u/s 154.
7. We have heard both the parties extensively and also perused the relevant findings given in the impugned orders as well as material referred to before us. From the facts as discussed above we find that, even though by mistake assessee had disallowed the interest expenditure u/s 14A, but during the course of assessment proceedings, assessee immediately made the claim before the AO that interest expenditure cannot be disallowed, because assessee has not paid any interest and there were no direct expenses relating to earning of tax free income; and assessee's investment in which dividend income has been earned were entirely from assessee's own sources, i.e., interest free surplus funds and there were no secured loans. Only unsecured loans on account of advance for use of land pending sale; non refundable security from a tenant, were shown in balance sheet on which no interest was payable. Once there is no expenditure incurred on account of interest, then where is the question of disallowance of interest u/s 14A. Such a letter written to the AO was 8 given in the form of rectification application which AO instead of taking cognizance of such a claim and verifying the claim, whether sustainable or not, simply rejected the assessee's application on the ground that it is not mistake apparent from the record and assessee should have claimed relief by revising its return of income. In the first appeal against the said finding, Ld. CIT (A), instead of deciding the issue on legal and factual grounds, through the ball from his court to the AO on the ground that AO should have pass a separate order in respect of the rectification application and accordingly, directed the AO to pass a separate order. The assessee left with no alternative and following the said direction, again knocked the door of the AO and filed a rectification application and who instead of carrying out the direction of the ld. CIT (A) shut down the door of remedy on the ground that such a claim is now beyond the purview and scope of rectification application u/s 154. Again aggrieved by such an action of the AO assessee went in appeal before the Ld. CIT (A) who though incorporated assessee's extensive submissions from pages 2 to 13 of the appellant order, but instead of providing any remedy, he first of all found fault in the order of his predecessor that he should not have directed the AO to pass a separate order and then after such an observation he comes to the conclusion that assessee should have taken up this issue before the Tribunal or High Court against the order of such quantum. The manner in which the authorities below 9 have tried to shut the door of remedy to the assessee on technical grounds right from the first stage and for continuous more than seven years, assessee has been running from one authority to other on very simple issue, whether disallowance should have been made at all for the purpose of section 14A in the light of the facts and material on record. We are of the firm opinion that the Ld. CIT (A) in the first round of proceedings should have decided this issue in accordance with the law, because if AO has rejected the claim on the ground that assessee should have file a revised return, then it was incumbent upon the Ld. CIT (A) to deal and decide such a claim and or direct the AO to verify and allow the same. Instead he directed the AO to pass a separate order which has led to great hardship and jeopardy to the assessee to carry out such a prolonged litigation, because assessee was complying with direction of CIT (A) who then had held that remedy lied with the AO. Even though it is held that the issue of allowability of interest may not be looked into within the scope and purview of section 154; however when the assessee had specifically raised this issue and challenged the mater in the first appellate authority, then same should have been adjudicated.
8. Now in light of the peculiar circumstances and in the interest of substantial justice and equity, we think that instead of blanket setting aside the issue or remanding back the matter to the AO to decide the 10 issue afresh, we deem fit to decide the matter on the basis of material facts available on record. First of all, we find that in the return of income, the assessee in the computation of income had shown tax free income of Rs. 4,23,434/-, consisting of Rs. 85,531 on UTI US-64 (Tax free bonds) and dividends on mutual funds of Rs. 3,37,903. The assessee for the purpose of disallowance u/s14A has disallowed sum of Rs. 4,25,836/-. In the course of the assessment proceedings, the assessee brought to the notice of AO that no expenses have been incurred which can be relatable to the investments made for earning of tax free income, because, firstly, assessee has not paid any interest expenditure on secured loans and all the unsecured loans were on account of advance and non refundable security received from tenants; and secondly, assessee has made investment out of his own surplus funds. This fact is duly borne out from the submissions which have been incorporated above. When the assessee has not incurred any expenditure on any loan then ostensibly no disallowance of interest expenditure can be worked out in the given formula of rule 8D. Otherwise also, when assessee has made the entire investments out of his own surplus funds, then also, in view of the settled proposition of law, such disallowance of interest under rule 8D is uncalled for. Accordingly, we direct for the deletion of such disallowance of interest expenditure u/s 14A. Since nothing is borne out of the element of indirect expenditure, therefore, AO is directed to examine and decide 11 only the indirect/administrative expenses which can be said to be attributable for the earning of exempt income having regard to the accounts and nature of expenditure debited and in accordance with the law. Thus the issue of disallowance u/s 14A is treated as partly allowed for statistical purposes.
9. Before us the Ld. DR had raised objection that, firstly, it is beyond the scope of provision of section 154; and secondly, such a claim could have only be made by way of revised return. So far as the first objection is concerned, we have already taken a note of this fact and this being a very peculiar case where assessee has suffered grave injustice and prolonged litigation due to incorrect understanding of law by the Ld. CIT (A) in the first round of proceedings as he had only directed the AO to consider this claim and pass a separate order, the assessee under a bonafide belief did not file any appeal before the Tribunal. It is in the light of this peculiar fact; we have decided to decide the appeal on merits at our stage only. So far as the issue that such a claim could have been made by way of revised return, now it is well a settled proposition by the judgment of Hon'ble Supreme Court in the case of Goetz India, 284 ITR 323, that such a claim can be made before the appellate authorities and this principle has been reiterated and clarified in the catena of judgment including that of Hon'ble Delhi High Court in the case of Commissioner of Income-tax v. 12 Jai Parabolic Springs Ltd. [2008] 306 ITR 42 (Del). Accordingly, we reject the contention of the Ld. DR and grant relief to the assessee. However as a caveat we clarify that the finding given above is peculiar to the facts and circumstances of the present case and looking to the hardship faced by the assessee at various rounds of litigation before the authorities below, hence it shall not have binding precedent on any other case.
10 In the result the appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the Open Court on 20th March, 2018.
sd/- sd/-
(PRASHANT MAHARISHI) (AMIT SHUKLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 20/03/2018
Veena
Copy forwarded to
1. Applicant
2. Respondent
3. CIT
4. CIT (A)
5. DR:ITAT ASSISTANT REGISTRAR
ITAT, New Delhi
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