DCIT Vs NSE Clearing Ltd. (ITAT Mumbai)
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT), in DCIT Vs NSE Clearing Ltd., examined the validity of disallowances made under Section 14A read with Rule 8D of the Income-tax Rules for Assessment Years 2010–11 and 2011–12. For AY 2010–11, the assessee earned tax-free interest income of ₹5,68,63,151 and dividend income from mutual funds of ₹56,29,22,965. Against this exempt income, the assessee voluntarily disallowed ₹26,11,925 under Section 14A. However, the Assessing Officer recomputed the disallowance at ₹5,07,63,520 by invoking Rule 8D. The CIT(A) rejected the computation on the ground that the Assessing Officer had not recorded proper dissatisfaction with the assessee’s working.
The Tribunal observed that Section 14A(2) requires the Assessing Officer to record objective dissatisfaction with the correctness of the assessee’s claim, having regard to its accounts, before invoking Rule 8D. Although the Assessing Officer discussed the investments, exempt income and expenditure incurred, he failed to identify any specific defect in the detailed computation submitted by the assessee. The Tribunal held that merely rejecting the percentage adopted for allocating expenditure, without demonstrating why the computation was incorrect, did not satisfy the statutory requirement. Accordingly, it upheld the CIT(A)’s decision rejecting the Assessing Officer’s Rule 8D disallowance and dismissed the Revenue’s appeal.
The Tribunal further examined the assessee’s cross-objection challenging the ad hoc disallowance of 1% of exempt income made by the CIT(A). It held that, following the amendment to Section 14A(2) effective from 1 April 2007, an arbitrary percentage could not be substituted for the statutory computation. Once the Assessing Officer’s dissatisfaction was found inadequate, the CIT(A) was not justified in enhancing the disallowance by applying an ad hoc rate. Consequently, the Tribunal directed deletion of the additional 1% disallowance and allowed the assessee’s cross-objection.
For AY 2011–12, the Tribunal observed that the material facts, the manner of recording dissatisfaction by the Assessing Officer and the CIT(A)’s application of an ad hoc 1% disallowance were identical to those considered for AY 2010–11. Therefore, the findings for the earlier assessment year were applied to AY 2011–12. Both Revenue appeals, ITA Nos. 6726 and 6727/Mum/2019, were dismissed, while both assessee cross-objections, C.O. Nos. 49 and 50/Mum/2021, were allowed.
Cases Discussed
- NSE Clearing Ltd. (assessee’s own case), ITA No. 706/Mum/2013, order dated 14.07.2017: Followed on the requirement to record proper dissatisfaction under Section 14A(2).
- PCIT v. Reliance Capital Asset Management Ltd., 400 ITR 217 (Bombay High Court): Cited by the assessee.
- HT Media Ltd. v. PCIT, 399 ITR 576 (Delhi High Court): Cited by the assessee.
- The Suvarna Nagari Patsanstha Ltd. v. ITO, ITA No. 520/PN/2014: Cited by the assessee.
- Tata Lockheed Martin Aerostructures Ltd. v. DCIT, ITA No. 2837/Mum/2018: Cited by the assessee.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. These two appeals by the Revenue are directed against the order of Commissioner of Income Tax (Appeals)-13, Mumbai [ in short ‘the CIT(A)] for the Assessment Year 2010-11and 2011-12, respectively. Both the impugned orders are of even date i.e. 27/08/2019. The assessee has filed Cross Objections No.49 & 50/Mum/2021 in the respective appeals of the Revenue. Since, the issue raised in both the appeals and the cross objections emanate from same set of facts, therefore, these appeals and cross objections are taken up together for adjudication and are decided by this common order.
2. For the sake of convenience the facts are narrated from the appeal of Revenue in ITA No.6726/Mum/2019 for Assessment Year 2010-11.
ITANo. 6726/Mum/2019, A.Y. 2010-11
3. Shri Mayank Chouhan appearing on behalf of the assessee submitted that the assessee /respondent is a wholly owned subsidiary of National Stock Exchange of India Limited(NSEL). The assessee is a recognized clearing house u/s. 4 r.w.s 8A of Securities Contract (Regulation) Act, 1956 ( in short ‘SCRA’ ). The assessee was set up in terms of the Securities Exchange Board of India (SEBI) Circular dated 19/01/1996 as a separate clearing house for clearing and settlement of all trades executed on NSEL. The assessee assumes the counterpart risk of each member and guarantees financial settlement in accordance with the relevant regulations.
The assessee in order to carry out its function is required to have funds and as a result earns tax free income on investments in Treasury Bills, Central Government Security and Liquid Mutual Fund Schemes. These investments are made in accordance with predefined investment prudential norms formulated by Treasury Department of NSEL and approved by the Board of the assessee company. The investment policy is drafted taking into consideration the investments to be made towards Settlement Guarantee Funds as per the requirements of SEBI.
The ld. Authorized Representative for the assessee submitted that for carrying out investment activities the respondent/assessee does not maintain any separate or dedicated investment department. All investment activities are carried out by in house Finance & Accounts Department.
4. During the period relevant to assessment year under appeal, the assessee earned tax free income to the tune of Rs. 5,68,63,151/- as interest on tax free bonds and Rs.56,29,22,965/- as dividend from mutual funds. The assessee made suo-motu disallowanceof Rs.26,11,925/- u/s 14A of the Income Tax Act, 1961 ( in short ‘the Act’). In scrutiny assessment proceedings, the Assessing Officer recomputed disallowance u/s 14A r.w.r. 8D and made disallowance of Rs.5,07,63,520/-. The ld. Authorized Representative for the assessee submitted that while recomputing disallowance u/s. 14A of the Act, the Assessing Officer has failed to record his dissatisfaction on suo-motu disallowancemade by the assessee. The Assessing Officer has merely reproduced the submissions of the assessee and has held that the same are not acceptable. The provisions of Section 14A(2) of the Act mandate, that if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim in respect of expenditure in relation to earning of exempt income, the Assessing Officer shall recompute the amount of expenditure incurred in relation to earning of tax free income. In the present case, the Assessing Officer has failed to record his dissatisfaction in respect of correctness of claim of the assessee viz-a-viz the accounts of the assessee . In other words, the Assessing Officer has failed to record his dissatisfaction in respect of assessee’s suo -motu disallowance as envisaged under the provisions of section 14A (2) of the Act. The ld. Authorized Representative for the assessee referred to the details of expenditure incurred pertaining to Investment Department during financial year 2009-10(relevant to Assessment Year 2010-11) at page 42 of the Paper Book. The ld. Authorized Representative for the assessee pointed that in Assessment Year 2008-09 and 2009-10 the Assessing Officer rejected assessee’s computation of disallowance u/s 14A of the Act and recomputed the disallowance u/s 14A r.w.r. 8D in identical manner. The ld. Authorized Representative for the assessee referred to the assessment order dated 01/12/2010 for Assessment Year 2008-09 at pages 48 to 56 of the paper book to show the manner of recording dissatisfaction by Assessing Officer while making disallowance u/s. 14A in Assessment Year 2010-11 similar to the dissatisfaction recorded by Assessing Officer in 2008-09. The ld. Authorized Representative for the assessee submitted that in Assessment Year 2008-09 the assessee after being unsuccessful before the CIT(A) carried the issue before the Tribunal in ITA No.706/Mum/2013. The Tribunal vide order dated 14/07/2017 held that the Assessing Officer has not recorded his dissatisfaction with regard to the books of account filed by the assessee. The Tribunal deleted the addition made by Assessing Officer u/s. 14A r.w.r. 8D on the ground of inappropriate satisfaction recorded by the Assessing Officer. In the instant case, the CIT(A) after having examined the manner in which the Assessing Officer has recorded his dissatisfaction in respect of suo-motu disallowance made by assessee u/s. 14A of the Act, rightly held that the dissatisfaction recorded by the Assessing Officer is not proper. The Revenue is in appeal against the findings of CIT(A) in rejecting the alleged dissatisfaction recorded by the Assessing Officer u/s. 14A of the Act.
To further buttress his submissions the ld. Authorized Representative for the assessee placed reliance on following decisions:
(i) PCIT vs. Reliance Capital Assert Management Ltd, 400 ITR 217 (Bom)
(ii)HT Media Ltd. vs.PCIT, 399 ITR 576(Del)
(iii)The Suvarna Nagari Patsanstha Ltd. vs. ITO[ITA No.520/PN/2014]
(iv)Tata Lockheed Marti Aerostructures Ltd. vs. DCIT1(3),Mumbai {ITA No.2837/Mum/2018]
5. The ld. Authorized Representative for the assessee vehemently supported the findings of CIT(A) in rejecting the manner of recording dissatisfaction by the Assessing Officer and deleting the disallowance made u/s. 14A of the Act by the Assessing Officer . The ld. Authorized Representative for the assessee prayed for dismissing the appeal of the Revenue.
6. Per contra, Shri K.P.R.R. Murthy representing the Department vehemently supported the assessment order and the dissatisfaction recorded by the Assessing Office. The ld. Departmental Representative pointed that the Assessing Officer after having examined the accounts gave a categorical finding that percentage applied by assessee for making disallowance u/s. 14A is arbitrary. The ld. Departmental Representative specifically referred to the observations of the Assessing Officer in para 4.5 of the assessment order.
7. We have heard the submissions made by rival sides and have examined the orders of authorities below. The solitary issue raised by the Revenue in its appeal is with respect to deleting of disallowance made u/s. 14A of the Act by the CIT(A) after rejecting the dissatisfaction recorded by the Assessing Officer and enhancing disallowance u/s. 14A of the Act.
8. In the instant appeal the short issue is whether the dissatisfaction recorded by the Assessing Officer for making disallowance u/s. 14A of the Act r.w.r 8D is in accordance with the mandate as envisaged u/s. 14A(2) of the Act. There is no specific prescribed format for recording satisfaction u/s. 14A(2) of the Act, however, the basic principle as culled out from bare perusal of sub-section (2) to section 14A of the Act is that where the assessee has made suo-motu disallowance and the Assessing Officer is not satisfied with the correctness of the claim of assessee in respect of expenditure incurred in relation to earning of tax free income vis -a-vis accounts, the Assessing Officer shall recompute the quantum of disallowance of expenditure incurred for earning of tax free income. In short, the provisions of section 14A(2) of the Act mandate disallowance would be made in respect of expenditure incurred for earning tax free income having regard to the accounts of assessee. The Assessing Officer has to record his dissatisfaction on an objective basis.
In the instant case, we find that the Assessing Officer has made elaborate discussion in the assessment order for making disallowance u/s. 14A of the Act. The Assessing Officer has reproduced the submissions of the assessee , pointed the suo- motu disallowance made by assessee u/s. 14A of the Act, tax free income earned during the relevant period, the extent of investment made and finally rejected the percentage applied by the assessee on various expenditure for earning of exempt income. The Assessing Officer has failed to record the reason as to why the rate of percentage adopted by assessee on various expenses incurred for earning exempt income is not acceptable having regard to the accounts of the assessee.
9. The assessee had furnished detailed working of disallowance u/s.14A of the Act including the details of direct expenditure, salary cost of personnel involved in investment activities, proportionate administrative cost ( such as insurance, rates to taxes, telephone, printing and stationery, electricity charges, Auditors remuneration, depreciation, etc.) by applying ratio of said salary to the total salary, notional rent for the space occupied by the investment department. The Assessing Officer rejected the working of assessee without pointing specific expenditure that has not been considered or quantified by the assessee. The Assessing Officer has simply invoked the provisions of Rule 8D without pointing defects in the working of disallowance computed by the assessee.
Thus, we are of the considered view that the dissatisfaction recorded by the Assessing Officer for making disallowance u/s. 14A of the Act falls short of the mandate for recording dissatisfaction u/s. 14A(2) of the Act. We find no error in the order of CIT(A) in rejecting the dissatisfaction of Assessing Officer. Consequently, the impugned order is upheld and appeal by the Revenue is dismissed being devoid of any merit.
C.O.49/Mum/2021:
10. The assessee in cross objections has assailed the order of CIT(A) in making arbitrary disallowance u/s. 14A r.w.r. 8D to 1% of the exempt income earned by the assessee. The ld. Authorized Representative for the assessee pointed that after insertion of amended provisions of section 14A(2) of the Act by the Finance Act, 2006 w.e.f. 01/04/2007 once it is held that the dissatisfaction recorded by the Assessing Officer is not proper, adhoc percentage cannot be applied for making disallowance u/s. 14A of the Act.
11. The ld. Departmental Representative submitted that the CIT(A) has applied adhoc 1% disallowance u/s. 14A of the Act following the order of Tribunal in assessee’s own case for Assessment Year 2008-09 in ITA No.706/mum/2013(supra).
12. Both sides heard. The assessee in cross objections has assailed the order of CIT(A) in making adhoc disallowance of 1% exempt income earned by the assessee during the period relevant to the assessment year under appeal. It is no more res- integra that after Assessment Year 2008-09 onwards no disallowance u/s 14A of the Act can be made on adhoc- rate. The CIT(A) after having rejected the manner of recording dissatisfaction by the Assessing Officer in respect of suo-motu disallowancemade by assessee has erred in applying adhoc rate of 1% for enhancing disallowance u/s. 14A of the Act. Thus, in view of the settled position the adhoc rate of 1% adopted by CIT(A) for making disallowance of expenditure u/s 14A of the Act is legally unsustainable. We find merit in the ground raised by the assessee in cross objections. The adhoc disallowance of 1% u/s. 14A of the Act made by CIT(A) is directed to be deleted. The assessee succeeds in the Cross Objections.
13. In the result, appeal by the Revenue is dismissed and the cross objections by assessee are allowed.
14. Both sides are unanimous in stating that the facts in Assessment Year 2011- 12 are identical to the facts in Assessment Year 2010-11 except for the quantum of suo-motu disallowanceand disallowance recomputed by the Assessing Officer u/s. 14A r.w.r. 8D. However, the manner of recording dissatisfaction by the Assessing Officer in Assessment Year 2011-12 by the Assessing Officer is the same. Further, in first appellate proceeding the CIT(A) has made adhoc disallowance u/s.14A @ 1% for identical reasons.
15. Thus, in view of the fact that the manner of recording dissatisfaction for making disallowance u/s. 14A r.w.r. 8D by the Assessing Officer is same, the detailed findings given by us while adjudicating the appeal of Revenue for Assessment Year 2010-11 and the C.O of the assessee in 2010-11 would mutatis mutandis apply to the Assessment Year 2011-12.
16. In the result, appeal of the Revenue is dismissed and cross objections of the assessee are allowed.
17. To sum up, appeals by the Revenue in ITA No.6726 & 6727/Mum/2019 are dismissed and Cross Objections by the assessee in C.O No.49&50/Mum/2021 are allowed.
Order pronounced in the open court on Monday, 3 January 2022.
