Income Tax Appellate Tribunal - Mumbai
M/S Edelwiss Rural & Corporate Services ... vs Acit Central Circle-1(2), Mumbai on 31 March, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "E" MUMBAI
BEFORE SHRI ABY T VARKEY (JUDICIAL MEMBER)
AND
SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER)
ITA No. 2471/MUM/2022
Assessment Year: 2016-17
M/s Edelweiss Rural & ACIT Central Circle-1(2),
Corporate Services Pvt. Ltd., R. No. 906, 9th floor, Old
Edelweiss House, Off CST Road, Vs. CGO Building Annexe,
Kalina, Santacruz (East), Maharshi Karve Road,
Mumbai-400098. Churchgate,
Mumbai-400020.
PAN No. AAKCS 7311 R
Appellant Respondent
Assessee by : Mr. Jitendra Jain, AR
Revenue by : Mr. Sanjeev Kashyap, CIT-DR
Date of Hearing : 09/03/2023
Date of pronouncement : ___/03/2023
ORDER
PER OM PRAKASH KANT, AM
This appeal by the assessee is directed against order dated 26/07/2022 passed by the Ld. Commissioner of Income- tax(Appeals)-47, Mumbai [in short 'the Ld. CIT(A)'] for assessment year 2016-17, raising following grounds:
1. (i) The CIT(A) erred in upholding the action of the AO in making disallowance of Rs. 4,34,79,702/- being loss incurred on sale of Mentha Oil to two parties namely Ms. Barabanki Trading Co. Limited and Sharp Mint Limited at a M/s Edelweiss Rural & Corporate Services Ltd. 2 ITA No. 2471/M/2022 price lesser than the market price holding the same as artificially lly created loss.
(ii) The CIT(A) erred in upholding the action of the AO in substituting the selling price of the commodities with the market price of the commodities.
The Appellant submits that it has sold the commodities and incurred the loss in the normal course of business activities; hence, the loss disallowed by the AO shall be deleted as well as A0's action of substituting the selling price with market price shall be quashed.
2. (i) The Commissioner of Income Tax (Appeals) - 47, [hereinafter referred as CIT(A)] erred in upholding Mumbai [hereinafter the action of the Deputy Commissioner of Income Tax, 1(1) [AO] in making disallowance w/s 14A of Central Circle -1(1) Income Tax Act, 1961 (Act) r.w. Rule 8D D of the Income Tax d satisfaction Rules. 1962 (Rules) without recording his dis-satisfaction with fault correctness of the claim of the Appellant having regard to its books of accounts.
(ii)) The CIT(A) erred in upholding the action of the A in considering all investment for the purposes of making disallowance as per rule 8D(2) of the Rules as against only those investment on which Appellant has actually earned the exempt income and excluding the investment on which no exempt income is earned during subjected year. The Appellant craves leave to add, amend, modify, substitute the above abo grounds of appeal.
2. Briefly stated facts of the case are that the assessee company was mainly engaged in the business of activity of trading in commodities for itself and its clients through physical mode as well as on commodity exchange. For the year under consideration, the assessee filed its return of income electronically on 30/11/2016 declaring total income at ₹109,26,62,140/-,, which was on 21/03/2018. The subsequently revised to ₹105,45,28,560/-on return of income filed by the assessee was selected for scrutiny and M/s Edelweiss Rural & Corporate Services Ltd. 3 ITA No. 2471/M/2022 statutory notices under nder the Income-tax Income Act, 1961 (in in short 'the Act') were issued and complied with. In the case of the assessee, assessee in view of international transactions transact carried out by the assessee with its associated enterprises, a reference was made to the transfer pricing officer, however no adjustment was recommended to the value of the international transactions. In the case of the assessee accounts were audited by the special auditor in terms of section 142(2A) of ct. On the certain observations by the special auditor in the Act.
relation to trading in Mentha oil, the Assessing Officer made addition to the returned income along with other additions and completed the assessment on 12/02/2020 assessing the total income at ₹113,21,14, in terms of section 143(3) of the Act. On 113,21,14,176/-in further appeal, the Ld. CIT(A) dismissed the grounds raised by the assessee. Aggrieved with the finding of the Ld. CIT(A), the assessee is in appeal tax Appellate Tribunal (in ppeal before the Income-tax ( short the 'Tribunal')) raising the grounds as reproduced above.
3. Before us the assessee also filed an additional ground on 25/11/22 stating that impugned assessment order is barred by limitation as provided ed under section 153 of the Act,hence hence deserve to er, during hearing of the appeal before us, the be quashed. However, Ld. counsel of the assessee submitted that assessee was not erested in pursuing that additional ground.. In view of the written interested request filed, the additional ground raised by the assessee is accordingly dismissed as not pressed.
M/s Edelweiss Rural & Corporate Services Ltd. 4 ITA No. 2471/M/2022 3.1 Before us the Ld Counsel of the assessee filed a paper book containing pages 1 to 45.
4. The ground No.2 of the appeal relates allowance of loss relate to disallowance on trading in Mentha oil.
5. The brief facts qua the issue in dispute are that the special auditor in his report observed that assessee incurred loss on trading in 'Mentha Mentha oil' 126/-. The assessee oil amounting to ₹1,39,01,126/ explained that purchase and sale transactions were transacted at different dates and at the prevailing market rate as per Multi (MCX) and this loss which is 1.35% of the commodity exchange (MCX) total sales turnover, was merely incidental. The learned learne Assessing served that substantial number of the transactions of sale Officer observed had been carried out by the assessee at the prevailing market rate, but few transactions were carried out below the prevailing market cer rejected such a prices to regular sale parties. The Assessing Officer loss of Rs.4,34,79,702/ 702/-incurred incurred in relation to transactions with two parties namely m/s ''Barabanki trading Co Ltd' and m/s 'Sharp Mint Ltd'.. Before the Ld. CIT(A) the assessee submitted that books of accounts of the assessee has not been rejected by the Assessing Officer and therefore he was not justified in tempering the book results except as provided under deeming provisions 40A(2) of the ct in case of transactions with related parties. The Ld. CIT(A) Act law relied upon.
rejected the contention of the assessee and case laws He followed his finding in preceding assessment year 2012-13 2012 M/s Edelweiss Rural & Corporate Services Ltd. 5 ITA No. 2471/M/2022 wherein the trading loss on transactions of the sale of the jew jewelry below the market price was rejected. The Ld. CIT(A) in assessment 13 observed that assessee carried out circular trading in year 2012-13 gold business with the help of group members of the assessee with active involvement of INTL commodities DMCC and Kaloti Kal jewelry International DMCC ((buyer parties),, where everyone benefited except the assessee, and thus the loss generated was artificial. Relying on his finding in assessment year 2012 13, the Ld. CIT(A) 2012-13, rejected the loss on sale of the Mentha oil during the t year under consideration observing as under:
"6.3 6.3 In the instant year AY 2016-17 2016 17 too, identical situation exists. The appellant has incurred losses by selling "Mentha Oil" to Barabanki Trading Co. and Sharp Mint Limited at a prevailing Market price. The price much lower than the prevailing following table will demonstrate, as extracted from the reply to the Spl. Auditor:
Month Average Price to Barabanki Trading Average proce shown as Co. and Sharp Mint Limited per the MCX April, 15 801.31/KG 1053.24/KG July, 15 948.22/KG 1082.92/KG Aug, 15 917.98/KG 1049.38/KG Sept, 15 916.74/KG 1045.76/KG Oct, 15 868.66/KG 1016.77/KG Nov, 15 890.25/KG 1046.35/KG Dec, 15 1029.60/KG 1039.68/KG Jan, 16 873.30/KG 1024.29/KG Feb, 16 895.59/KG 1049.97/KG
6. Before us the Ld. counsel of the assessee submitted that in assessment year 2012 2012-13, the Tribunal in ITA No. 1040/Mum/2022 allowed the appeal of the assessee on the legal ground of the validity of the reassessment and therefore the issue of M/s Edelweiss Rural & Corporate Services Ltd. 6 ITA No. 2471/M/2022 loss on sale of the jewelry below the market price was not adjudicated being rendered as academic only. The learned learne consul however before a submitted that the transactions of the sale and purchase were made in the course of normal business activity of the assessee and the buyer parties are not related parties as defined are under section 40A(2) of the Act and therefore there was no ower authorities to disallow the loss claimed in the occasion for the lower course of normal business transactions unless books of accounts of the assessee are rejected.
rejected The learned consul submitted that transactions are carried out below the market price by the assessee keeping in view of the other business consideration. It was submitted that M/s Barabanki trading Co Ltd. had made Co. Ltd assessee and was one of the substantial purchases with the assessee customers, which the assessee never wanted to lose. He prominent customers, essing Officer cannot substitute the transacted submitted that Assessing price with the market price unless the transaction is carried out with related parties or the Assessing Officer could demonstrate with evidence any under hand transfer of the cash in the transaction. The learned counsell of the assessee relied on the decision of the ribunal in the case of Flipkart India Private Limited in IT Tribunal ITA No. 202/Bang/2018 for assessment year 2015-16, wherein it is held that the Assessing Officer cannot disregard the profit or o loss as disclosed in the profit and loss account, unless he invokes the provision of section 145(3) of the Act and can't substitute the transaction price with the market price ignoring the real price faced M/s Edelweiss Rural & Corporate Services Ltd. 7 ITA No. 2471/M/2022 as what can be tax is the only the income which accrue to the assessee as laid down in section 5 of the A588ct.
7. The Ld. Departmental Representative on the other hand relied on the order of the lower authorities.
8. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. The assessee transacted with two parties for sale of Mentha oil in normal course of the business and suffered loss of ₹4,34,79,702/-.. The contention of the Assessing Officer is that those transactions have been carried out at the below the market price and therefore loss cannot be allowed to the assessee. On perusal of the order of the lower authorities it is evident that there is no adverse evidence against the assessee except that transactions have been carried out below the market price. Before us the assessee contended that transactions were carried out below market price because was in dire need of finance and also wanted tto o retain the customer. Under ions of the Act in section 40A(2) , it has been provided the provisions that if transactions with related parties are carried out below the market price, then Assessing Officer can substitute the market price of the products with the transacted price, however in case of unrelated party the Assessing Officer cannot invoke section 40A(2) ubstitute the 'transacted price' with the 'market of the Act and substitute price' unless books of accounts of the assessee are rejected invoking ct and profit or loss of the business is section 145(3) of the Act M/s Edelweiss Rural & Corporate Services Ltd. 8 ITA No. 2471/M/2022 estimated/recasted by the Assessing Officer. In this case, the Assessing Officer has neither pointed out any defects in the books no rejected the books of accounts of accounts of the assessee and nor and thus Assessing Officer is prohibited from rejecting such transactions although carried out below the market price. The assessee has to arrange his business affair keeping in view the best interest of the business including retaining of the customers and Assessing Officer cannot doubt the business transactions merely on ground that same is below the market price, without bringing on ribunal in the case of record any malafide in transactions. The Tribunal Flipkart India Private Limited (supra) on the issue of substituting transaction price by the market price by the Assessing Officer, Officer observed as under:
"52. Supreme Court in the case of
52. As laid down by the Hon'ble Supreme Calcutta Discount Company(supra), when one trader transfers his goods to another trader at a price less than the market price, the taxing authority cannot take into consideration the market price of those goods, ignoring the real price fetched. As price laid down by the Hon'ble Supreme Court in the case of A.Raman & Co. (supra), income which has accrued or arisen can only be subject matter of total income and not income which could have been earned but not earned. The decision of the Hon'blele Karnataka High Court in the case of A.Khader Basha (supra) is squarely applicable to the facts of the present case. The facts of the Assessee's case and the facts of the case decided by the Hon'ble Karnataka High Court were Karnataka High Court held following identical. The Hon'ble Karnataka Hon'ble Supreme Court decision in the case of Calcutta Discount Co. Ltd., reported in 1973(91) ITR 8 (SC) that where a trader transfers his goods to another trader at a price less than the market price and the transaction is a bonafide one, the taxing authority cannot take into account the market price of those goods, ignoring the real price fetched to ascertain the M/s Edelweiss Rural & Corporate Services Ltd. 9 ITA No. 2471/M/2022 profit from the transaction. The Hon'ble Court explained that the only exception was if Section 40(A)(2)(a) of the Act applies viz., where the parties to the transaction are related. Following the aforesaid decisions, we hold that the AO was not right in proceeding to ignore the books results of the Assessee and resorting to a process of estimating total income of the Assessee in the manner in which he did. We find force in the submission of the learned counsel for the Assessee that what can be taxe is only income that accrues or ITA Nos.202 & 693/B/18 arises as laid down in Sec.5 of the Act. Nothing beyond Sec.5 of the Act can be brought to tax. As contended by him there was nothing to show accrual of income so as to disregard the loss declared by the Assessee in the return of income filed. As we have already seen there is no provision in the Act by which the AO can ignore the sale price declared by an Assessee and proceed to enhance the sale price without material before him to show that the Assessee has in fact realized higher sale price. As ccontended ontended by the learned counsel for the Assessee, wherever the legislature wanted to tax income not earned, it had made specific provisions in the Act by way of deeming fiction like provisions of Sec.43CA(1, Sec.45(4) and Sec.50C(1) of the Act.
53. In view of the above conclusion, there may not be any necessity to deal further with the manner in which the AO has proceeded to compute total income of the Assessee and we can conclude by holding that the loss returned by the Assessee has to be accepted and the manner of determination of total income as done by the AO is not in accordance with law. Nevertheless, we shall also address the issue as to whether the conclusions of the AO that the Assessee incurred expenses in creating intangibles/brand or goodwill and also the question whether the conclusion of the AO that to the extent the Assessee has foregone his profit margin, he can be said to have incurred expenditure in creating intangibles/brand or goodwill."
goodwill.
8.1 We observed that sales by the assessee to 'Barab Barabanki trading company' and 'Sharp Sharp Mint Ltd' 623/- for 5,38,105 Ltd is of ₹49,47,21,623/ kgs which constitutes 48.31 percent of the tota totall sales value of the Mentha oil,, thus the contention of the assessee of carrying out M/s Edelweiss Rural & Corporate Services Ltd. 10 ITA No. 2471/M/2022 transactions in the below market price for retaining retaining the customer is having some basis which cannot be ignored. Respectfully, Respectfully following the ratio of the Tribunal in the case of Flipkart India Private Limited (supra), we hold that in case of unrelated party transactions,, the Assessing Officer cannot substitute s the transaction price with the market price unless he invokes provisions of section 145 (3) of the Act and thus, we set aside the finding of the Ld. CIT(A) on the issue in dispute and delete disallowance of loss by the Assessing Officer.
Officer. The ground grou No. 2 of the appeal of the assessee is accordingly allowed.
8.2 The ground No. 1 of the appeal relates to the disallowance tax Rules 1962 (in under section 14A real with Rule 8D of Income-tax short 'the Rules').
). It is the contention of the assessee that while making this disallowance allowance, the Assessing Officer has not recorded dissatisfaction with the correctness of the claim of the assessee having regard to its books of accounts. It is also contended that g the decision of the special bench in the case of Vireet following investment Private Limited in ITA No. 502/Del/2012 dated 16/06/2017 for AY 2008-09, 2008 for or the purpose of making allowance under rule 8D(2) only those investment should be disallowance considered on which assessee has actually earned the exempted assessee income and investment on which no exempt income is earned during the subject year year, should be excluded.
M/s Edelweiss Rural & Corporate Services Ltd. 11 ITA No. 2471/M/2022 8.3 The brief facts qua the issue in dispute are that during the year under consideration assessee received dividend income of ₹6,91,13,757/- on shares held in stock in trade and ₹1,82,000/-on preferential shares held as non non-current s current investments. The scrip wise dividend reported by the assessee is as under:
Sr. No. Name of the scrips Dividend Amount Balance on Balance on 31/03/2016 31/03/2015
1. Edelweiss Securities 1,82,000 26,00,00,000 26,00,00,000 Limited
2. Indiabulls Mutual 6,91,13,757 - -
Funds Total 6,92,95,757 26,00,00,000 26,00,00,000 8.4 suo moto disallowance of ₹15,59,662/-
The assessee made suo-moto considering employee cost incurred for earning exempt income. The Ld. Assessing Officer rejected the contention and invoked invoke Rule 8D of 'Rules' observing as under:
7.3 In response to the said notice, the assessee, vide "7.3 reply dated 03.02.2020, has stated stated that no further disallowance should be made us 14A of the IT Act. The submission of the assessee has been perused, however the same is not acceptable. The case records and the replies submitted by the assessee have been perused. It is assessee cannot earn Exempt income to the a fact that the assessee 6,92,95,7571 without any systematic tune of Rs. 6,92,95,7571-without management of its investment. Further, investment decisions being complex in nature require market research, day to day analysis and planning. Furthermore, the assessee has not maintained separate accounts for its taxable and exempt income. Hence, the present case is a fit case to invoke Rule 8D of the I T Rules.
7.4 In view of the above, Rule 8D of the IT Rules is invoked and the disallowance us 14A of the IT Act is worworked out M/s Edelweiss Rural & Corporate Services Ltd. 12 ITA No. 2471/M/2022 following the ruling of the Apex court in the case of Maxopp Investments [(2018) 402 ITR 0640 (SC)].
Rule 8D (i) Nil
Rule 8D(ii) Nil
Rule 8D(iii) 0.5% of Rs.7133115170 3,56,65,576/-
Disallowance u/s 14A as per Rule 8D 3,56,65,576/-
Less Disallowance already made 15,59,662/-
Total disallowance u/s 14A 3,41,05,914/-
8.5 The Ld. CIT(A) upheld the disallowance observing as under:
7.3 I have carefully considered the facts of the case. As "7.3 per provisions of Section14A of the Act, the expenditure incurred by a taxpayer in relation to income that excludes total income as per the provisions of the Act should not be deduction while computing the total income considered as deduction of the taxpayer. It is relevant to mention over here that the AO in his assessment order has stated that, he is not satisfied with the assessee's claim that no expenditure has been incurred to earn exempted income, since some expenditure would definitely have been incurred for making and maintaining such investments. With respect to the expenses incurred for earning exempt income, the assessee submitted that, assessee has earned exempt which assessee has not income in the form of dividend for which incurred any expenditure and was therefore not required to calculate any disallowance of gh, expenses w/s. 14A rwr. 8D of the act. On perusal of Capital a/c of the assessee, the A noticed that, expenses incurred includes demat charges and other suchexpenses which have been debited. Further, AO was also not satisfied with the contention of the assessee that, no expenditure was incurred to earn exempt income. It is a common knowledge that a person cannot make investment without due nce and necessary analysis and the investment diligence decisions are very complex in nature which require substantial market research, day day analysis of day-to-day market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate appropriat time.
Therefore, being not satisfied about claim of assessee, he worked out the disallowance at Rs. 3,56,65,576/-
3,56,65,576/ as per rule 8D read with sec 14A of the Act @ 1% of average M/s Edelweiss Rural & Corporate Services Ltd. 13 ITA No. 2471/M/2022 value of investment in assets, income from which was claimed as exempted and added added back to the total income of the assesse.The assessee had argued that, it has not incurred expenses in excess of Rs.34,46,555/-
Rs.34,46,555/ towards earning exempt income during the year and therefore the disallowance should be restricted to Rs. 15,59,662/-.
15,59,662/ However, the AO did not agree with that.
7.4 Here, it is relevant to mention that, Hon'ble Bombay High Court decision dated 12.08.2010 and Hon'ble Supreme Court decision dated 8 2017 in the case of 8-5-2017 Godrej & Boyce Mfg. Co. Ltd. v/s DCIT in Civil Appeal No.7020 of 2011, has examined this issue in great length and has upheld the constitutional validity of the provision of sec. 14A as also of the rule 8D. The relevant part of the said decision Hon'ble Bombay High Court is as under:
sections (2) and (3) of Section "iii)) The provisions of sub sections 14A of the Income Tax Act 1961 are constitutionally valid;
iv)The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more icularly sub section (2) and do not offend Article 14 of particularly the Constitution;
v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09;2008
vi)Even prior to A 09, when Rule 8D Assessment Year 2008-09, was not applicable, the Assessing Officer has to enforce the BC 121 ITXA626.10 provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been b incurred in relation to income which does not form part of the total income under the Act.
74. Our conclusions in this judgment are as follows :
i)) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Ta Act 1961, as was applicable for Assessment Year 2002-03 2002 is not includible in computing the total income of the M/s Edelweiss Rural & Corporate Services Ltd. 14 ITA No. 2471/M/2022 assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1);"
7.5 Further, the principles laid down by Hon'ble Supreme Court are relevant while disposing of this ground. While deciding the first question before the Hon'bl Hon'ble e Supreme Court that Sec. 14A would apply to dividend income on 115 0 of the Act, it is enunciated which tax is payable u/s 115-0 by the Apex Court that:-
that:
"The literal meaning of Section 14A, far from giving rise to any absurdity, appears to be wholly consistent with the scheme of the Act and the object/purpose of levy of tax on income. Therefore, the well entrenched principle of interpretation that where the words of the statute are clear and unambiguous recourse cannot be had to principles of other than the literal view will apply. While interpretation other answering the said question this Court considered the object of insertion of Section 14A in the Income Tax Act by Finance Act, 2001, details of which have already been noticed. Noticing the objects and reasons beh behind introduction of Section 14A of the Act this Court held that: "Expenses allowed can only be in respect of earning of taxable income." In paragraph 17, this Court went on to observe that: "Therefore, one needs to read the words "expenditure incurred" in section 144 in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability bility to tax"
7.6 Further, the CBDT vide Circular No. 5/2014, Dated - 11.02.2014 clarified that,"Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt incom e." The relevant portion of the circular is income."
reproduced as under:-
under:
"Thus, legislative intent is to allow only that expenditure relatable to earning of income and it therefore which is-relatable M/s Edelweiss Rural & Corporate Services Ltd. 15 ITA No. 2471/M/2022 follows that the expenses which are relatable to earning exempt income havehave to be considered for disallowance, irrespective of the fact whether such income has been earned during the financial financial-year year or not. 4' The above position is further clarified by the usage of term 'includible' section 14A of the Act and-also-the in the Heading to section-14A and heading-to of T.Rules,!962 which indicates that to "Rule 8D of-I-T.Rules,!962 it is not necessary that exempt income should necessarily be included in a particular years income, for disallowance to be triggered. Also, section 14A of the Act does not the word "income of the year" but "income under the Act". This also indicates that invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration"
7.7 Further the issue of strategic investments in group concerns has been decided by the Hon'ble Supreme Court In case of Maxopp Investments Ltd. Vs CIT402 IT 640 9 SC). In this judgment the Hon'ble Court held that making strategic investment does not absolve the assessee from allowance us 14A and that such disallowance should disallowance be made in accordance with the expenditure incurred in proportion to the exempted income. For clarity the relevant portion of the judgment is reproduced as under :
"Fact remains that such dividend income isis non taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and can not be treated as a business expenditure. Keeping this objective ive behind section 14A in mind, the said provision has to be interpreted particularly the word ' in relation to income' that does not form part of the total income.Considered in this hue, the principle ofapportionment of expenses comes into play as that is the principle which is engrained in section 14A."
"intentions of Holding Investment is irrelevant for computation of disallowance us 14A. The strategic investment claimed by assessee in inconsequential - all investments must be considered for 14A disallowance disallow as per plain and clear language of Rule 8D."
M/s Edelweiss Rural & Corporate Services Ltd. 16 ITA No. 2471/M/2022 7.8Apart from that the Chennai Bench of the Income Income-tax Appellate Tribunal in the case of Mr. M. A. Alagappan vide order dated 03.04.2017 has held that, even in cases where no expenditure has been incurred, the tax authority Income tax Rules, 1962 for the has to apply Rule 8D of the Income-tax disallowance of expenditure under Section 14A of the tax Act. The relevant para of the said decision is as Income-tax under:
"6. We considered the arguments of both the sides in l. Sec.14A(1) declares the law that the expenditure detail.
incurred by the assessee in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the assessee. Sec. 14A( 2) provides for 14A(2) determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision as far as sec.14A is concerned. In that provision. it has been provided that if the Assessing Officer is not th the correctness of the computations made by satisfied with an assessee. he shall compute the quantum in accordance with ITA No3290./16: 6 -:: the method that may be prescribed. For this matter. Rule 8D has already been prescribed.Sub prescribed.Sub-sec. (3) further provides that even in a case where an assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditure as provided under sub- sub sec.(2) read with Rule prescribed. Therefore, it becomes clear that even in a case where th e assessee claims that the no expenditure was so incurred, the statute has provided for a presumptive expenditure which has to be disallowed by force of the statute. In a distant manner. Literally speaking, it may even be considered for the purpose of nce as a deeming provision.When such deeming convenience provision is made on the basis of statutory presumption, the requirement of factual evidence is replaced by statutorypresumption and the Assessing Officer has to follow the consequences stated in the statute. It means that even in a case where no expenditure is stated to have been incurred, the assessing authority has to apply Rule 8D. As the statutory presumption substitutes the requirement of factual evidence, the question of enquiry M/s Edelweiss Rural & Corporate Services Ltd. 17 ITA No. 2471/M/2022 does not arise. In the result the appeal of the assessee is result dismissed."
7.9 I am of the considered view that, all the assets which either yield exempted income or could yield exempted income should to be considered for working out the disallowance under rule 8D. As stated above, the constitutional validity of the rule 8D has been upheld by the Hon'ble Bombay High Court in the case of Godrej and Boyce manufacturing Company Limited, later upheld by the Hon'ble Supreme Court in the same case.
7.10 It is also noted that, vide notification notification no. 43/2016, the method of computation of disallowance us 14A r.w.r. 8D is amended with effect from02.06.2016. The amended provisions read as under:
Rule 8D(2) applicable we.f 02.06.2016 [As per Notification No 43/2016, dated 02.06.16.J expenditure in relation to income which does not (2) The expenditure 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; and per cent of the annual average
(ii) an amount equal to one per of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income :
Provided that the amount referred to in clause (i) and clause (i) shall not exceed the total expenditure claimed by the assessee.
7.11 The above amendment has been brought on statutory we.f. 02.06.2016which states that an amount equal to 1% of the average investments income from which does not or shall not form part of the total income and that the total expenditure. The disallowanceshall not exceed the total amended rule does not say that, only those assets wherefrom exempted income is earned, should be considered. The use of the "Shall" in addition to "does not"
takes within its fold those investments too, which have not M/s Edelweiss Rural & Corporate Services Ltd. 18 ITA No. 2471/M/2022 exemptt income during the year under vielded any exemp consideration.
7.12 The assessee's claim that, the disallowance should have been computed only on investments from which exempted income was earned is erroneous. The provision says that "even those investments income from whi which shall not form part of the total income have to be considered and not only the ones from which it is earning exempted income."
7.13 The above proposition is confirmed by Hon'ble Mumbai Tribunal in the case of Apurva Natvar Parikh & Co. Pvt. Ltd. bearing IT.A. No. 1704/Mum/2020 in following words-
words 2.3 Another argument is that while computing the disallowance, only those investments are to be considered which have yielded exempt income during the year. This plea is also to be rejected since after amendment to Rule 8D w.e.f.02/06/2016, the computation u/r 8D has undergone change and it has been made clear that the amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income, shall be disallowed. Therefore, post 02/06/2016, the plea to exclude the non-income non yielding investment is to be rejected.
7.14 Apart from that even before the amendment took Court in the case of United place, Hon'ble Karnataka High Court Breweries Ltd. Vs Dy. CIT (2016) 72 taxmann. com 102 (Kar.) had held that section 14A is applicable even where motive of acquiring shares is to obtain controlling interest in companies. Also in cases where pre-amended pre amended provisions apply, Hon'ble Mumbai ITAT in the case of Mrs. mimt. or Varsha R. Taurani vs ACIT (2013) 40 taxmann.com 517 (Mum - Trib.) has held as "The marginal note to section 144 clearly states that exenditure incurred in relation to income not "includible" in total income which means that if the income is not includible in total income whether it is actually earned or not, the corresponding expenditure has to be disallowed."
M/s Edelweiss Rural & Corporate Services Ltd. 19 ITA No. 2471/M/2022 In view of the above, the contention of the assessee in this regard, is rejected.
Therefore, the computation done by the AO is found to be fully in accordance with the law following above judicial precedence and hence deserved to be upheld.
7.15 Finally, the Finance Bill 2022 has again amended and inserted an Explanation to section 14A of the Act, to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or the previous year relevant to has not been received during the an assessment year and the expenditure has been incurred during the said previous year in relation to such exempt income. This amendment has nullified several judgements as relied by the appellant wherein it was held sallowance u/s 14A of the Act could be made in that no disallowance respect of any expenditure incurred in earning any exempt income, in the absence of any exempt income.
7.16 In the light of the foregoing discussion, I am convinced that, all the assets which have either yielded yield exempt income during the year or could have yielded exempted income will be considered for working out the disallowance under rule 8D. All contentions of the appellant in this regard deserved to be dismissed. Also the appellant are distinguishable case laws relied upon by the appellant on facts as well as recent changes in the law. Accordingly, 3,56,65,576/ made by AO us. 14A the disallowance of Rs. 3,56,65,576/-made is upheld. The grounds no. 3 is accordingly dismissed."
dismissed.
8.5 Before us the Ld. counsel of the assessee contested the disallowance on two grounds. Firstly, according to him before invoking Rule 8D of the Rules,, the Assessing Officer was required to record dissatisfaction on the claim of the assessee having regard to its books of accounts. Secondly, following finding of Vireet Vi Investments P. (supra), the disallowance should have been Ltd (supra), restricted to investments, which has yielded dividend income.
M/s Edelweiss Rural & Corporate Services Ltd. 20 ITA No. 2471/M/2022 According to the learned learne counsel, the Assessing Officer has not verified the expenses already disallowed by the assessee particularly parti in the view of the expenses debited in the books of accounts. The Assessing Officer has as made only presumption of expenses for systematic management of the investment and market research, whereas the assessee earned dividend of Rs.6,91, 91,13,757/-mainly from the investment in 'India Bulls mutual funds'.
funds The learned counsell of the assessee submitted that the learne learned Assessing Officer for invoking Rule 8D of the Rules has recorded general statement asserting exempt income cannot be earned without incurring g expenses, without recording as how the disallowance made by the assessee was not correct. The learned learne counsel submitted that as per the provisions of section 14A of the Act the 14A Assessing Officer shall determine the amount disallowable as per Rule 8D, if he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to exempt income. It is the contention of the assessee that the Assessing Officer has nowhere in the body of the assessment order discussed discus his dissatisfaction on the claim made by the assessee.
8.6 Further the Ld. counsel of the assessee submitted that in view of the decision of the special bench in the case of Vireet Vire investment supra) only the investment yielding exempted private Limited (supra) exempt income were to be considered for the purpose of computation of the disallowance under Rule 8D of the Rules and there being no India Bulls mutual fund', opening and closing stock of 'India fund the M/s Edelweiss Rural & Corporate Services Ltd. 21 ITA No. 2471/M/2022 disallowance wance computed under rule 8D(2) 8D(2),, corresponding to dividend ncome from India bulls Mutual fund works out to nil. As far as income disallowance for remaining di end income of Rs. 1,82,000/-, dividend 1,82,000/ the suo-moto moto disallowance by the assessee being exceeding the exempted income, no disallowance was called for in view of the decision dated 2/09/2015 of the Hon'ble Delhi High Court in the case of Cheminvest P Ltd in ITA 749 of 2014.
9. The Ld. DR on the other hand, relied on the order of the lower authorities.
10. We have heard rival submission of the parties on the issue in dispute and perused the relevant material on record. We find that 757/-the assessee against the dividend income earned of ₹6,92,95,757/ oto disallowance of ₹15,59,662/--considering the has made sou-moto employee cost incurred for earning exempted income. The detail of the disallowance computed by the assessee is reproduced as under:
Particulars Amount debited to Expenses Basis of allocation profit and loss disallowance u/s account 14A Employee Cost 36,31,97,672/ 36,31,97,672/- 10,00,000 Proportionate employee cost of an employee Auditor 23,08,270 6,355.41 % of employee cost Remuneration Communication 96,27,773 26,508.36 % of employee cost Computer Exp 1,94,58,253 53,574.83 % of employee cost Electricity Exp 3,49,10,427 96,119.63 % of employee cost Office Expenses 7,95,62,364 2,19,060.78 % of employee cost Printing and 28,22,308 7,770.72 % of employee cost Stationery Rent 5,34,83,120 1,47,256.23 % of employee cost Miscellaneous 10,95,530 3,016.35 % of employee cost M/s Edelweiss Rural & Corporate Services Ltd. 22 ITA No. 2471/M/2022 expenses Total 1,59,662 14A of the Act, the 10.1 As per the provisions of the section 14 Assessing Officer can invoke the rule 8D of the Rules for computing disallowance, if he's not satisfied with the correctness of the claim of the assessee in respect of expenditure for earning exempt income.
We find that the Assessing Officer did not record a specific satisfaction as why the claim of the assessee of disallowance in terms of the employee cost was not correct. The Assessing Officer only recorded that assessee cannot earn exempt income without ystematic management of its investments which being any systematic complex in nature require market research, data analysis and planning. Whereas the assessee has duly itself disallowed the various expenses out of the employee cost, auditor remuneration, communication, computer omputer expenses, electricity electricity expenses, office expenses etc,, which according to the assessee were part of the expenses which ought to have been incurred as proposed by the Assessing Officer. In view of the above facts and circumstances, we on that the Assessing Officer has not fulfilled the are of the opinion requirement of the recording dissatisfaction under provisions of the section 14A of the Act and therefore invoking of the rule 8D is not in accordance with law. The second argument of considering Only the investment which income,, for the purpose ich has yielded exempted income of computation off disallowance under rule 8D(2) 8D(2), is rendered we are not adjudicating the same.
academic only and therefore we same The M/s Edelweiss Rural & Corporate Services Ltd. 23 ITA No. 2471/M/2022 finding of the Ld. CIT(A) on the issue in dispute is set aside and the disallowance made by the Assessing Officer is deleted. The ground of the appeal of the assessee is accordingly allowed.
11. In the result, the appeal of the assessee is allowed.
/03/2023.
Order pronounced in the open Court on 31/03/2023.
Sd/- sd/--
(ABY
ABY T VARKEY)
VARKEY OM PRAKASH KANT)
(OM KANT
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai;
Dated: 31/03/2023
Rahul Sharma, Sr. P.S.
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent.
3. CIT
4. DR, ITAT, Mumbai
5. Guard file.
BY ORDER,
//True Copy//
(Assistant Registrar)
ITAT, Mumbai
M/s Edelweiss Rural & Corporate Services Ltd. 24 ITA No. 2471/M/2022 Date Initials Original dictation pad is enclosed at the end of file
1. Draft dictated on: 31.03.2023 Sr. PS/PS
2. Draft placed before author: 31.03.2023 Sr. PS/PS
3. Draft proposed & placed before the JM/AM second member:
4. Draft discussed/approved by Second JM/AM Member:
5. Approved Draft comes to the Sr. Sr. PS/PS PS/PS:
6. Order pronounced on: Sr. PS/PS
7. File sent to the Bench Clerk:
8. Date on which file goes to the Head Sr. PS/PS Clerk:
9. Date on which file goes to AR