Even prior to assessment year 2008-09, when rule 8D was not applicable, the AO had to enforce the provisions of sub-section (1) of section 14A

LIC Housing Finance Ltd Vs DCIT (ITAT Mumbai)-

Issue 1 – Whether where all the facts regarding the amount written off for non-convertible debentures are considered by the AO in the original assessment, reassessment proceedings cannot be initiated by issuing notice u/s 148 merely on change of opinion-?

Hon’ble jurisdictional High Court in the case of Asian Paints Ltd. Vs. DCIT and Others, 308 ITR 195 has held that issuance of notice u/s 148 of the Act for the reason that some material which was available on record while making assessment was inadvertently excluded from consideration amount to reopening of assessment u/s 147. Reopening of assessment merely on the basis of change of opinion is not permissible under the law. The CIT(A) has relied on the decision of the Tribunal in the case of CIBA India P. Ltd., Vs.  ITO(supra) wherein the assessment was made u/s 143(1) and subsequently it was reopened whereas, in the present case, the assessment was made u/s 143(3) of the Act and subsequently it was reopened on the same facts and material. The facts of the case under consideration are entirely different from the facts of the case relied upon by the CIT(A). Therefore, respectfully following the ratios laid down by the Hon’ble Supreme Court in the case of Kelvinator India ltd.(supra) and the Hon’ble Jurisdictional High Court in the case of Asian Paints Ltd. (supra), we hereby quash the reopening assessment made by the Assessing Officer u/s 147 of the Act. Accordingly, the ground of appeal raised by the assessee in this regard is allowed.

Issue 2 –  Whether dis allowance cannot be made u/s 14A by applying rule 8D for the period prior to A.Y. 2008-09?

The provisions of rule 8D of the Rules which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the AO had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record.

IN THE INCOME TAX APPELLATE TRIBUNAL

MUMBAI BENCH “A”, MUMBAI

ITA Nos. 3533, 3534 & 3535/Mum/2010

Assessment Years: 2001-02, 200 1-02 & 2003-04

LIC Housing Finance Ltd. Vs. Dy. Commissioner of Income-tax

ORDER

PER V. DURGA RAO, J.M.:

These appeals pertaining to same assessee are directed against the orders of CIT(A)- for the assessment years 200 1-02 and 2003-04. Since identical issues are involved in these appeals, these appeals were heard together and, therefore, a common order 1s passed for the sake of conven1ence.

ITA No. 3533/Mum/2010

2. The ground raised in this appeal is in respect of section 14A of the Act.

3. Briefly the facts of the case are that the Assessing Officer had disallowed expenses of Rs. 9,94,23,807/- and the CIT(A) following the special decision of ITAT in the case of Daga Capital Investment Ltd., 26 SOT 603 (Mum)(SB) directed the Assessing Officer to work out the disallowance in pursuance to the said decision and in accordance with the provisions of Rule 8D r.w. section 14A of the Act. Aggrieved the assessee carried the matter in appeal before the CIT(A).

4. At the time of hearing before us, the learned representatives of the parties have agreed that this issue is covered by the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd., [2010] 328 ITR 81 (Bom.) wherein the Hon’ble Court held as under:-

“That the provisions of rule 8D of the Rules which have been notif ied with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the AO had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances af ter furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the AO. The AO should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The AO can adopt a reasonable basis for effecting the apportionment. While making that determination, the AO should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.”

5. In view of the ratio laid down by the Hon’ble jurisdictional High court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), we remit the matter back to the file of the AO with a direction decide the issue afresh in the light of the said judgment of the Hon’ble Jurisdictional High court after providing reasonable opportunity of being heard to the assessee.

6. In the result, the appeal of the assessee is allowed for statistical purposes.

ITA NO. 3534/Mum/2010

7. In this appeal the assessee has raised the following ground of appeal:-

“The learned CIT(A) erred, in not accepting the appellant’s plea that full disclosure was made with regard to non-convertible debentures written off in the amount of Rs. 4,68,34,997/- as irrecoverable as recorded in the original assessment and as such the reopening under section 147 of the Act, 1961 constituted change of opinion which is not permissible as per the latest larger bench decision of Supreme Court in Kelvinator of India ltd. (2010 TIOL 06).

8. Briefly the facts of the case are that the assessee filed its return of income on 31/10/2001 declaring total income of Rs. 87,84,10,820/-. Assessment was completed u/s 143(3) of the Act on 26/02/04 determining the total income of the assessee at Rs. 89,23,61,930/-. Thereafter, the Assessing Officer served notice u/s 147 dated 27/07/04 for escaping assessment on the ground that the assessee had claimed a deduction of Rs. 20,15,06,237/- towards write off not charged to P&L A/c, which included an amount of Rs. 4,68,34,997/- against non-convertible debentures and Rs. 99,99,999/- against inter corporate deposits. The balance of Rs. 14,46,71,241/- against main activity of the company. Since the main business of the company was financing for purchase/construction of residential premises, investment in non-convertible debentures was in the nature of investment and did not constitute ordinary course of business. Therefore, the assessee had reduce this amount of Rs. 4,68,34,997/- from provisions for contingencies. Before the learned CIT(A) the assessee filed written submissions wherein it was stated that in view of disclosure of full facts with regard to the nonconvertible debentures written off as irrecoverable as brought out in paragraph 4 of the original assessment order, therefore, the proceedings initiated u/s 147 are not valid. It was further stated that since there being no change in the relevant facts, any proposal to withdraw or disallow the deduction under proceedings u/s 147 would tantamount to a mere change of opinion. For this contention, the assessee placed reliance on various case laws including the judgment of the Hon’ble Delhi High Court in the case of CIT Vs. Kelvinator of India Ltd., 256 ITR 1. The learned CIT(A) following the decision of the Tribunal in the case of CIBA India P. Ltd., Vs. ITO [2009] 31 DTR 374 wherein the claim for deduction u/s 35(1)(iv) was allowed in the original assessment order. Later the assessee found to be engaged in scientific research not for itself but for its group companies. It was held that reopening was valid by holding the condition to disclose fully and truly all material facts necessary for assessment is inapplicable to the reassessment proceedings initiated within four years from the end of relevant assessment year. In view of the above and after considering the submissions of the assessee, the CIT(A) held that there was no infirmity in the action of the Assessing Officer in assuming jurisdiction u/s 147 of the Act. On being aggrieved, the assessee carried the matter in appeal before the ITAT.

9. The learned counsel for the assessee has submitted that the assessee has disclosed fully and truly all the material facts before the Assessing Officer and the Assessing Officer had discussed the issue in respect of non-convertible debentures in paragraph 4 of his order and there is no new material found by the assessee, therefore, initiation of proceedings u/s 147 would tantamount mere change of opinion and reopening of assessment u/s 147 is not valid in the eye of law.

10. On the other hand, the learned Departmental Representative has supported the order passed by the Assessing Officer.

11. We have heard the learned representatives of the parties and perused the record. In the present case, the assessment was completed u/s 143(3) of the Act, after considering the material on record. The Assessing Officer reopened the assessment for income escaping the assessment on the ground that the assessee had claimed a deduction of Rs. 20,15,06,237/- towards ‘write off not charged to P&L A/c, which included an amount of Rs. 4,68,34,997/- against non-convertible debentures and Rs. 99,99,999/- against inter corporate deposits and the balance of Rs. 14,46,71,241/-. The Assessing Officer held that since the main business of the company was financing for purchase/construction of residential premises, investment in non-convertible debentures was in the nature of investment and did not constitute ordinary course of business. He further held that the assessee had reduce the said amount of Rs. 4,68,34,997/- from the provisions for contingencies, which is not in order. From the above, it is very clear that the Assessing Officer has reopened the assessment on the ground that acquiring debentures is not normal business activity of the assessee company. We find that there is no additional material on record before the Assessing Officer to come to the above conclusion and reopening the assessment u/s 147 for the reason that the income of the assessee had escaped assessment. The learned CIT(A) has also not disputed this fact that the assessee had not disclosed fully and truly all the material facts necessary for the assessment. According to the learned CIT(A) reopening is valid even if the assessee has disclosed fully and truly all the material facts that are necessary for assessment if the reopening is within 4 years. In our considered opinion this finding of the CIT(A) is contrary to the law laid down by the Hon’ble Supreme Court and also the Hon’ble Jurisdictional High Court. The Hon’ble Supreme Court in the case of CIT Vs. Kelvinator India Ltd., 320 ITR 561 held that after 1st April, 1999 the Assessing Officer has power to reopen the assessment u/s 147 of the Act provided the Assessing Officer has reason to believe that the income has escaped assessment and there is a tangible material to come to the conclusion that there is an escapement of income. Mere change of opinion cannot per-se be the reason to reopen the assessment. In the similar circumstances, the Hon’ble jurisdictional High Court in the case of Asian Paints Ltd. Vs. DCIT and Others, 308 ITR 195 has held that issuance of notice u/s 148 of the Act for the reason that some material which was available on record while making assessment was inadvertently excluded from consideration amount to reopening of assessment u/s 147. Reopening of assessment merely on the basis of change of opinion is not permissible under the law. The CIT(A) has relied on the decision of the Tribunal in the case of CIBA India P. Ltd., Vs.  ITO(supra) wherein the assessment was made u/s 143(1) and subsequently it was reopened whereas, in the present case, the assessment was made u/s 143(3) of the Act and subsequently it was reopened on the same facts and material. The facts of the case under consideration are entirely different from the facts of the case relied upon by the CIT(A). Therefore, respectfully following the ratios laid down by the Hon’ble Supreme Court in the case of Kelvinator India ltd.(supra) and the Hon’ble Jurisdictional High Court in the case of Asian Paints Ltd. (supra), we hereby quash the reopening assessment made by the Assessing Officer u/s 147 of the Act. Accordingly, the ground of appeal raised by the assessee in this regard is allowed.

12. In the result, the appeal of the assessee is allowed.

ITA No. 3535/Mum/10

13. The ssessee has raised the following grounds of appeal:

“1. The learned CIT()A) erred on the facts and in the circumstances of the case and in law, in not accepting the appellant’s plea that the provisions of section 14A of the Act, 1961 are not applicable to the tax free dividend and interest income earned by the appellant.

 2. Without prejudice to the above ground, the appellant contends that Rule 8D of the Income tax rules was not applicable to the appellant in assessment year under appeal and that it was applicable only prospectively with effect from 24/03/2008.”

14. Briefly the facts of the case are that the assessee claimed dividend and interest income from tax free bonds u/s 10(33) & 10(15) of the Act amounting to Rs. 3,39,38,675/- which were exempt from tax. The assessee contended that provisions of section 14A were not applicable in its case as well as the investments of the company had been made out of its own funds. It was contended that the borrowings of the company were mainly LIC, Banks NHB and through issue of Non-convertible debentures and in all these cases there was a provision in the loan agreement/offer documents that money will be used for the purpose of the business of the company i.e. lending for purchases or construction of residential house. The Assessing Officer noted that the claim that all the borrowings had only been utilized for the advancing loans for purchase and construction of residential house only, had not been substantiated by giving statement of utilization of the specific borrowings, the statement of accounts prepared by the assessee included item of expenditure which had been utilized for earning income including income classified as exempt. The major source of the funds for the assessee was borrowings on which interest was paid. Accordingly, the Assessing Officer worked out by apportioning the interest expenditure of Rs. 652,35,72,508/- to all the activities of the assessee in proportion to the income earned from each activity. Thus, the dis allowance was worked out u/s 14A at Rs. 2,92,15,306/-. Aggrieved, the assessee carried the matter in appeal before the CIT(A).

15. Before the CIT(A), the assessee filed written submissions wherein, inter-alia, it was stated that whatever tax free dividend accrued to the assessee was attributable to short term investments made out of internal funds. Reliance was placed on CIT Vs. Hero Cycles (P&H). After considering the submissions of the assessee, the CIT(A) following the special bench decision of ITAT in the case of ITIO Vs. Daga Capital Investment Ltd. [2008] 26 SOT 603 (Mum)(SB), directed the Assessing Officer to verify the correctness of the working of dis allowance of Rs. 6,30,15,147/- submitted by the assessee on the basis of figures available in the Balance Sheet and the profit and loss account at his end and in the light of the formula provided in rule 8D. The amount so worked out in terms of Rule 8D would substitute the amount disallowed as per the assessment, resulting in enhancement of the dis allowance made by the Assessing Officer. Aggrieved the assessee is in appeal before the ITAT.

16. At the time of hearing before us, the learned representatives of the parties have agreed that this issue is covered by the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd., [2010] 328 ITR 81 (Bom.) wherein the Hon’ble Court held as under:-

“That the provisions of rule 8D of the Rules which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the AO had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the AO. The AO should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The AO can adopt a reasonable basis for effecting the apportionment. While making that determination, the AO should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.”

17. In view of the ratio laid down by the Hon’ble jurisdictional High court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), we remit the matter back to the file of the AO with a direction decide the issue afresh in the light of the said judgment of the Hon’ble Jurisdictional High court after providing reasonable opportunity of being heard to the assessee.

18. In the result, the appeal of the assessee is allowed for statistical purposes.

Pronounced in the open court on this day of 29^th April, 2011.