Case Law Details
Future Corporate Resources Ltd. Vs. Dy. CIT (ITAT Mumbai)
The assessee argued that it had earned meager dividend income of Rs. 24,138 as against which, the assessing officer disallowed a sum of Rs. 3,36,28,000 which is more than the exempt income. The assessee further argued that dis-allowance under section 14A cannot exceed amount of exempt income.
The assessee relied upon case laws in support of its arguments. We find that the Hon’ble Delhi High Court in the case of Joint Investments (P.) Ltd. (supra) held that the window for dis allowance is indicated in section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case.
We further notice that the Hon’ble Delhi High Court in the case of CIT v. Holcim India (P.) Ltd. (2014) 272 CTR 282 (Delhi) has held that there can be no dis allowance under section 14A in the absence of exempt income. The rationale behind these judgments is that the amount of dis allowance cannot exceed exempt income. In this case, on perusal of the facts, we find that the assessee has earned exempt income of Rs. 24,138, whereas the assessing officer disallowed an amount of Rs. 3,36,28,000.
Therefore, considering the facts and circumstances of the case and also following the ratios of the case laws discussed above, we are of the view that dis allowance under section 14A cannot exceed the exempt income. Hence, we direct the assessing officer to restrict dis allowance under section 14A to the extent of exempt income earned by the assessee.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
This appeal filed by the assessee is directed against the order of Commissioner (Appeals)-16, Mumbai dated 20-5-2015 and it pertains to assessment year 2011-12.
2. The brief facts of the case are that the assessee company has filed its return of income for the assessment year 2011-12 on 29-9-2011 declaring total income of Rs. 6,76,58,135. The case was selected for scrutiny and accordingly notices under section 143(2) & 142(1) were issued. In response to notices, the authorized representative of the assessee attended from time to time and filed the details, as called for. During the course of assessment proceedings, the assessing officer noticed that the assessee was holding investments worth Rs. 2,465.47 lakhs and Rs. 390536.42 lakhs at the beginning of the year and at the end of the year, respectively, income from which does not or was not forming part of total income. The assessing officer further noticed that the assessee ought to have made dis allowance of expenditure in relation to such income which does not or was not forming part of total income as required under section 14A of the Act. However, the assessee failed to make any dis allowance of expenditure. Therefore, the assessee was asked to furnish the details of his investment and to show-cause as to why dis allowance under section 14A should not be made in accordance with the provisions of Rule 8D. In response to show cause notice, the assessee submitted that it has made investments in various subsidiary companies as a promoter and also as part of its business strategies but not to earn dividend income from such shares. The assessee further submitted that during the financial year relevant to assessment year 2011-12 it has claimed certain shares by way of amalgamation in pursuance of order of the Bombay High Court for which it has not incurred any expenditure, therefore, no expenditure was disallowed in relation to exempt income. The assessing officer, after considering the explanation of the assessee and also on analyzing the provisions of section 14A read with rule 8D observed that the company cannot earn dividend without incurring expenditure, when its existence and management and investment decisions are very complex in nature, which requires substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retentions and sale of shares at the most appropriate time for which the assessee need to deploy and employ certain resources by incurring expenditure. Therefore, there is no merit in the contention of the assessee that it has not incurred any expenditure to earn exempt income. Accordingly the assessing officer disallowed 0.5% of average value of investments under section 14A read with rule 8D of Income Tax Rules, 1962. Aggrieved by the assessment order, the assessee preferred appeal before the Commissioner (Appeals).
3. Before Commissioner (Appeals), the assessee reiterated its submissions made before the assessing officer. The assessee further contended that it has invested in various subsidiaries and associate companies as part of its business strategy to acquire control over business of group companies, but not to earn dividend income from said investments. The assessee further submitted that the intention was not to earn dividend income and in fact most of the companies have not declared dividend since their inception, which is evident from the fact that during the year it had earned meager amount of dividend of Rs. 24,138 as against which, the assessing officer has disallowed amount of Rs. 3,36,28,000 by invoking the provisions of section 14A read with rule 8D of Income Tax Rules, 1962. The assessee further contended that it has acquired certain investments by way of amalgamation in pursuance of order of the Hon’ble Bombay High Court for which it has not incurred any specific expenditure, therefore, the assessing officer was incorrect in disallowing huge amount of presumptive expenditure by invoking rule 8D(2)(iii).
4. The Commissioner (Appeals), after considering relevant submissions of the assessee observed that the assessee has not disallowed any expenditure under section 14A on account of administrative and indirect expenses while calculating total income in relation to exempt income. The assessee could not prove that there is no expense incurred while maintaining huge investments. The assessee also earned tax free dividend which, it has claimed as exempt income in its return of income. It is universal principle that if there is any income in P&L Account and there are any assets in balance-sheet of any concern, there must be some incidental direct or indirect expenses to earn such income or asset. In the instant case, the assessee failed to prove that none of the expenses incurred for earning the dividend income and making the investment. With these observations, he confirmed the additions made by the assessing officer towards dis allowance of expenditure under section 14A of the Act. Aggrieved by the order of Commissioner (Appeals), assessee is in appeal before us.
5. The learned AR of the assessee submitted that the learned Commissioner (Appeals) erred in confirming the action of the assessing officer making dis allowance under section 14A read with rule 8D of Income Tax Rules, 1962 despite the fact that the assessee’s case was not covered by section 14A of the Act. In any case, no dis allowance was called for under this section. The learned AR further submitted that when shares are held by way of amalgamation, in pursuance of a Court order, the assessee need not incur any expenditure to acquire such shares, as such, need not disallow any expenditure to earn exempt income. The learned AR further submitted that the assessee has earned a meager dividend income of Rs. 24,138 whereas the assessing officer has disallowed an amount of Rs. 3,36,286 which is more than the amount of exempt income earned by the assessee. The dis allowance provided under section 14A cannot be more than the exempt income, therefore, the assessing officer was completely erred in invoking provisions of section 14A read with rule 8D of Income Tax Rules, 1962. In support of his arguments, the learned AR relied upon following decisions :–
1. Joint Investments (P.) Ltd. v. CIT (2015) 372 ITR 694 (Delhi)
2. Pr. CIT v. Empire Package (P.) Ltd. (2016) 286 CTR 457 (Punj. & Har.)
3. DCM Ltd. v. Dy. CIT [IT Appeal No. 4467 (Delhi) 12, date 1-9-2015]
4. Greaves Leasing & Finance Ltd. v. ITO [IT Appeal No. 5634 (Mum.) of 2009, date 27-7-2012]
6. On the other hand, the learned DR strongly supporting the order of Commissioner (Appeals) submitted that the provisions of section 14A read with rule 8D of Income Tax Rules, 1962 are mandatory in nature from assessment year 2008-09 on wards and the assessing officer is bound to compute dis allowance as per the prescribed formula provided under rule 8D(2)(iii), therefore, there is no mistake in the dis allowance worked out by the assessing officer and his order should be upheld.
7. We have heard both the parties, perused the materials available on record and have gone through the orders of authorities below. There is no dispute with regard to the earning of exempt income. The assessee has earned dividend income which is claimed as exempt under section 10(34) of the Act. The only dispute is whether assessee has incurred any expenditure to earn exempt income, which needs to be disallowed, as per the provisions of section 14A read with rule 8D of Income Tax Rules, 1962. The assessee contends that it did not incur any expenditure to earn exempt income as the dividend income is earned from shares held in subsidiary and other group companies as a promoter. The shares were acquired, and made investments solely and exclusively for the purpose in the course of business as part of its business strategy. The intention was not to earn dividend income. In fact, most of the companies did not declare any dividend which is evident from the fact that it had earned a meager dividend of Rs. 24,138. The assessee further contended that it did not incur any expenditure to earn exempt income and that the exempt income is earned from shares acquired by way of amalgamation. The assessee even challenged the computation of average value of investments held as on 01st day and last day of the previous year to argue that it had taken market value of shares held by amalgamation whereas its cost price is much lower than the market price. The assessing officer has taken market value of share for the purpose of computation of dis allowance under rule 8D(2)(iii) as a result thereon will give a distorted and incorrect figure. The sum and substance of the argument of the assessee is that there shall be no dis allowance under section 14A towards expenditure as its investments are strategic investments in group companies and also the shares are held by way of amalgamation. If at all any dis allowance is warranted, then the computation made by the assessing officer by taking market value of shares held by amalgamation needs to be corrected.
8. The provision of section 14A provides for dis allowance of expenditure incurred to earn exempt income. As per the provisions of sub-section (2), the assessing officer shall determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method, as may be prescribed, if the assessing officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. As per the provisions of sub-section (3), the provisions of sub-section (2) shall also apply in the cases where the assessee claims that no expenditure has been incurred in relation to exempt income. Similarly, under rule 8D, the method is prescribed for dis allowance of expenditure in relation to exempt income. As per Rule 8D(2)(i) & (ii) provides for dis allowance of direct expenditure incurred to exempt income and interest expenses worked out on the basis of formula prescribed there under. Rule 8D(2)(iii) provides for dis allowance of expenditure on the basis of 0.5% of average value of investments. From a conjoined reading of section 14A read with rule 8D of Income Tax Rules makes it clear that the assessing officer shall compute dis allowance as per the prescribed formula, even if the assessee claims to have incurred no expenditure to earn exempt income. This legal position is further supported by the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg Co. Ltd. v. Dy. CIT (2010) 328 ITR 81 (Bom.), wherein the Hon’ble High Court held that provisions of rule 8D shall be applicable from assessment year 2008-09 on wards. Therefore, we are of the view that dis allowance under section 14A read with rule 8D is applicable, the moment assessee is having exempt income.
9. In this case, the assessee claims to have not incurred any expenditure to earn exempt income as the investments in shares held as strategic investments in group companies as a promoter, but not as investments to earn dividend income. The assessee further claims that it had investments in shares as a result of amalgamation but has not incurred any expenditure to earn exempt income. We do not find any merits in the arguments of the assessee for the reason that on perusal of financial statements filed by the assessee for the relevant financial year, we find that the assessee had various investments in shares and mutual funds including shares in subsidiary companies. Therefore, we are of the view that the assessee failed to prove its claim that it had investments only in subsidiary companies as strategic investments. Insofar as the argument of the assessee with regard to no dis allowance under section 14A, when shares are acquired by way of amalgamation, we find that the assessee had various investments in shares and mutual funds including in subsidiary companies. Therefore, the arguments of the assessee in the light of the decision of the ITAT, Mumbai Benches in the case of Greaves Leasing & Finance Ltd. v. ITO (supra) fails, because in that case, the Tribunal has recorded a categorical finding that the assessee has earned dividend income from shares held by way of amalgamation and has not incurred any expenditure to earn exempt income. In this case, the assessee has various investments including investments in subsidiaries and also it is a fact that the details filed by the assessee does not throw any light to prove that dividend income is earned form shares held by way of amalgamation only, therefore, the case laws relied upon by the assessee is not applicable to the facts of the case.
10. Coming to the second argument of the assessee, the assessee argued that it had earned meager dividend income of Rs. 24,138 as against which, the assessing officer disallowed a sum of Rs. 3,36,28,000 which is more than the exempt income. The assessee further argued that dis-allowance under section 14A cannot exceed amount of exempt income. The assessee relied upon case laws in support of its arguments. We find that the Hon’ble Delhi High Court in the case of Joint Investments (P.) Ltd. (supra) held that the window for dis allowance is indicated in section 14A and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. We further notice that the Hon’ble Delhi High Court in the case of CIT v. Holcim India (P.) Ltd. (2014) 272 CTR 282 (Delhi) has held that there can be no dis allowance under section 14A in the absence of exempt income. The rationale behind these judgments is that the amount of dis allowance cannot exceed exempt income. In this case, on perusal of the facts, we find that the assessee has earned exempt income of Rs. 24,138, whereas the assessing officer disallowed an amount of Rs. 3,36,28,000. Therefore, considering the facts and circumstances of the case and also following the ratios of the case laws discussed above, we are of the view that dis allowance under section 14A cannot exceed the exempt income. Hence, we direct the assessing officer to restrict dis allowance under section 14A to the extent of exempt income earned by the assessee.
11. In the result, the appeal filed by the assessee is partly allowed.
