Income Tax Appellate Tribunal - Chennai
K.Jawarilal Jain, Vellore vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' Bench Chennai
BEFORE SHRI ABRAHAM P GEORGE, ACCOUNTANT
MEMBER AND
SHRI V.DURGA RAO, JUDICIAL MEMBER
.....
ITA No.25/Mds./2013
Assessment year:2009-10
&
C.O. No.29/Mds./13
The Dy. Commissioner of Shri K. Jawarilal Jain,
Income Tax, No.89,Santhapet,
Circle I, Gudiyattam 632 602.
Vellore 632 001. Vs.
PAN AADPJ 3814 C
(Appellant) (Respondent/
Cross Objector)
Appellant by : Shri Guru Bashyam
JCIT D.R.
Respondent by : Shri Sanjiv Kumar
Shah, C.A.
Date of Hearing : 14.03.13
Date of Pronouncement : 21.03.13
ORDER
PER ABRAHAM P GEORGE, ACCOUNTANT MEMBER:
These are appeal of Revenue and the Cross objection of the assessee both directed against an order dated 24.09.12 of CIT(A)-IX, Chennai. Revenue assails deletion of disallowance made under section 14A of the Income Tax Act, 1961 (in short 2 ITA. 25/Mds/13 CO No.29/Mds.12 'the Act') read with Rule-8D of the Income Tax Rules, 1962. Cross objection of assessee is in support of the order of the CIT(A).
2. Facts apropos are that assessee, an individual, dealing in equity shares, plots & engaged in the business money lending, filed its return for the Assessment Year declaring an income of Rs.15,19,200/-. During the course of assessment, it was noted by the Assessing Officer that assessee had claimed interest expenditure totaling to Rs.1,62,20,921/-. As per Assessing Officer, such interest expenditure was not attributable to any particular income or receipt and therefore, Sec.14A read with Rule 8D apply. On the basis of this finding, he made a disallowance of ` 51,01,806/- under Rule 8D(2)(ii) and ` 2,00,030/- under Rule 8D(2)(iii). For working out, the pro-rata interest disallowable under Rule 8D(ii)(iii), Assessing Officer considered the average value of investments, including the value of immovable properties, shares, agricultural lands and House Property under construction, as on 01.04.08 and as on 31.03.09. He applied half percent ( ½ %) on such average value of investments.
3 ITA. 25/Mds/13 CO No.29/Mds.12
3. Assessee moved in appeal before the CIT(A) against the disallowances made under section 14A of the Act. Argument of the assessee was that Assessing Officer erroneously considered investments which gave rise to taxable income also while applying the formula prescribed under Rule 8D(2)(ii) . According to him, only such items which would yield income which was not taxable, could be considered for such calculation. Assessee pointed out that it had admitted lease rent from immovable properties, business income as well as income from house property. It had also shown income on sale of property as short term capital gains. In so far as agricultural income was concerned, assessee submitted that only net agricultural income was shown after claiming expenditure relatable to agriculture operations. Further, as per assessee, there was no borrowed funds for making investments, which would give rise to any tax free income. Reliance was placed on the decision of Hon'ble Karnataka High Court in the case of CCI Ltd Vs. JCIT (2012) 71 DTR 141.As per assessee, it had by itself made a disallowance of 5% of the dividend income as expenditure incurred for earning such income. Assessing Officer could not have applied Rule 8D without giving a finding that claim of the assessee was not correct.
4 ITA. 25/Mds/13 CO No.29/Mds.12
4. CIT(A) was appreciative of these contentions. According to him, Assessing Officer could not establish any nexus between the expenditure, if any incurred by the assessee for earning the exempt income, and the exempt income. Therefore, according to him, disallowance under Rule 8D was not called for. He deleted such disallowance.
5. Now before us Ld. Departmental Representative strongly assailing the order of CIT(A) submitted that assessee never produced proof that there was no nexus between the expenditure claimed by him in his profit and loss account and the exempt income. As per Ld. D.R, it was wrong for the assessee to say that no expenditure was incurred or that the expenditure claimed to have been incurred against earning of exempt was correct. Unless and until it was shown that the claim of assessee was correct, it was always left open to the Assessing Officer to invoke Sec 14A read with Rule 8D for making the required disallowance. Reliance was placed on the decision of Co-ordinate Bench of this Tribunal in the case of M/s.Lakshmi Ring Travellers in ITA No.2083/Mds./11 dated 2nd March, 2012. According to him, even where the assessee claimed no expenditure was incurred, there 5 ITA. 25/Mds/13 CO No.29/Mds.12 was a requirement for making a disallowance under section 14A of the Act, for a reason that it was a deeming provision.
6. We have perused the orders of lower authorities and heard rival contentions. There is no doubt that Assessment Year involved is 2008-09 and Rule 8D applied. Assessee has filed a copy of profit and loss account, balance sheet and computation statement for the relevant previous years before us. It has also been certified that such records were furnished along with his return of income. Assessee had prepared separate P&L accounts for its trading in equity shares, and for its trading in plots and buildings. There is a charge of interest of ` 1,62,20,921/- appearing in such profit and loss account. Trading account for shares, show an opening stock of ` 46,20,420/- and closing stock of ` 81,12,463/-. A look at the Balance sheet filed by the assessee which appears to be common for both its share trading business as well as for its plot business, show that its assets as on 31.03.09 were as under:-
Cash on hand 6,60,847
Bal with banks 16,87,880
Investments 2,43,000
6 ITA. 25/Mds/13
CO No.29/Mds.12
Assets (WDV) a/c 55,23,202
Loans & Advance 1,21,27,271
Deposit a/c 6,89,351
Rental advance 40,000
Stock in hand
a)Shares a/c 81,12,463
b) Plots 6,07,61,947
Sundry debtors 5,02,652
Trade debtors 64,90,074
Education loan 2,00,000
Silver a/c 36,890
Immovable properties 3,84,87,318
Shares a/c 7,87,296
NSC a/c 10,000
HA Trust 20,788
Current a/c with
Agri Books a/c 1,09,34,459
House property-own
Under construction 1,16,09,639
15,89,25,177
7 ITA. 25/Mds/13
CO No.29/Mds.12
In the first place what we find is that Assessing Officer has considered value of the shares as on 31.03.09 as well as on 01.04.08 at ` 7,87,296/- . He has obviously omitted the stock of shares ` 46,20,420/- and ` 81,12,463/-. A look at Sec.14A and Rule 8D is required at this juncture.
"Sec.14A: (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed , if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.:"
Rule-8D which explains how an Assessing Officer has to work out the disallowance, reads as under:-
"Rule 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with-
(a) the correctness of the claim of expenditure made by the assessee; or
(b) the claim made by the assessee that no expenditure has been incurred, 8 ITA. 25/Mds/13 CO No.29/Mds.12 in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of total income.
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:-
AxB C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year;
B= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year;
(iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
3. For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets."
9 ITA. 25/Mds/13 CO No.29/Mds.12
7. Two aspects, which are clear from the above is that Assessing Officer has to first reach a satisfaction that claim of the assessee in respect of the expenditure in relation to the income claimed as exempt, is not correct. Second is that when applying Rule 8D for the purpose of calculating the disallowance under Rule-8D (2) (ii), average value of investments which comes in the numerator of the formula are only those investments which will give rise to an income, which does not form a part of the total income. There is much strength in the argument of the assessee that investments on immovable property and house property will not form a part of investments mentioned in Rule-8D(2). In so far as agricultural land is concerned, as long as agricultural income returned by the assessee is net of the agricultural expenses, there is no question of any further expenditure being disallowed under section 14A of the Act. Assessing Officer himself had noted para-3 of his order that the agricultural income of ` 17,94,056/- claimed by the assessee from his holding of 69.83 acres was after considering agricultural expenses of ` 3,42,575/- . His only qualm was that expenditure claimed was in-adequate. Nevertheless for this, he had made an addition of rupees 3 lakhs to the total income. This being the 10 ITA. 25/Mds/13 CO No.29/Mds.12 case there was no room for any further allowance under section 14A, with regard to the agricultural income.
8. It is true that assessee had in his computation statement made a suo-motu disallowance of 5% of dividend income of ` 41,779/- claimed as exempt. However, Assessing Officer has noted at paragraph four of his assessment order that Sec.14A read with Rule 8D was applicable, to interest expenses also. Dissatisfaction of the Assessing Officer with regard to the claim of assessee is in our opinion writ large on the face of the assessment order, though not mentioned in so many 'words'. Suo-motu disallowance made by the assessee was only on estimates and not based on the value of investments in shares. Therefore, there was every reason for the Assessing Officer to come to a conclusion that the claim made by the assessee with regard to the expenditure against the exempt income was not in tune with the accounts of the assessee. In our opinion such a satisfaction need not be stated in so many words, but once it is discernable from the assessment order, it would suffice for invocation of Rule 8D. As for the decision of a co-ordinate Bench of this Tribunal in the case of M/s.Lakshmi Ring Travellers(supra), relied on by Ld. D.R, there the claim of the assessee was that no 11 ITA. 25/Mds/13 CO No.29/Mds.12 expenditure was incurred at all. On the other hand, here admittedly assessee had at least made a suo-motu disallowance. Therefore, that decision may not be applicable on facts here. Nevertheless, considering the entire gamut of the facts and erroneous manner in which average of value of investments was worked out by the Assessing Officer for application of Rule 8D, we are of the opinion the matter requires a fresh look. We therefore, set aside the orders of the authorities below and remit the issue of disallowance under section 14A of the Act back to the file of the Assessing Officer for consideration afresh in accordance with law.
9. In the result, appeal of Revenue is allowed for statistical purposes and Cross objection of Assessee is dismissed as infurctuous.
Order pronounced on Thursday, the 21st March, 2013 at Chennai Sd/- Sd/-
(V.DURGA RAO) (ABRAHAM P GEORGE)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Chennai,
Dated 21st March, 2013 .
K S Sundaram
Copy to: Assessee/AO/CIT (A)/CIT/D.R./Guard file 12 ITA. 25/Mds/13 CO No.29/Mds.12