Case Law Details

Case Name : Asstt. Commissioner of Income-tax Vs M/s. Hexa Securities & Finance Co. Ltd. (ITAT Delhi)
Appeal Number : I.T. A. No.977/Del/2012
Date of Judgement/Order : 28/06/2012
Related Assessment Year : 2007-08
Courts : All ITAT (7336) ITAT Delhi (1719)

By Finance Act of 2001, the Parliament enacted section 14A of the Income-tax Act, 1961 with retrospective effect from 1.04.1962. Prior to insertion of sec. 14A, the Revenue had sought to disallow expenditure incurred in relation to exempt income. However, the Hon’ble Supreme Court in the case of Rajasthan State Warehousing Corporation vs. CIT, 242 ITR 450, held that where there was one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to e allowed even if a part of income earned from the business was exempt. The basic object of sec. 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of total income. Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, 328 ITR 81, has held that provisions of Rule 8D which have been notified with effect from 24th March, 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 provisions of sub-sec.(1) of sec. 14A. For that purpose the AO was duty bound to determine the expenditure which had been incurred in relation to income which does not form part of total income. 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 record. In the case before us the Assessment Year involved is Assessment Year 2007-08. Therefore, Rule 8D will not be applicable in the case of the assessee. However, disallowance can be made in relation to exempt income on reasonable basis. The assessee had himself disallowed Rs.1,73,98,255/- in the proportion of exempt and taxable income earned by way of dividend and interest income. This, in our view is reasonable. Since Rule 8D is not applicable for Assessment Year under consideration, the disallowance made by the assessee on proportionate basis of exempt income and taxable income in our considered opinion is justified. Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT, 203 Taxman 364, has also held that Rule 8D is not retrospective. The AO has to determine amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. Since in the instant case the assessee himself has disallowed Rs.1,73,98,255/- on proportionate basis, in our considered opinion, the learned CIT(A) is justified in upholding the disallowance to the extent of Rs.1,73,98,255/-. Accordingly, we do not find any infirmity in the order of the CIT(A).

INCOME TAX APPELLATE TRIBUNAL, DELHI

I.T. A. No.977/Del/2012 – Assessment Year: 2007-08

Asstt. Commissioner of Income-tax

Vs.

M/s. Hexa Securities & Finance Co. Ltd.

O R D E R

PER K.D. RANJAN, ACCOUNTAT MEMBER:

This appeal by the Revenue for Assessment Year 2007-08 arises out of the order of the Commissioner of Income-tax (Appeals)-VIII, New Delhi. The ground of appeal raised by the Revenue is reproduced as under:-

“Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in restricting the disallowance u/s 14A to Rs.1,73,98,255/- against Rs.2,04,25,115/- calculated by the AO.”

2. The only issue for consideration relates to disallowance u/s 14A of the Act. The facts of the case stated in brief are that during the year under consideration the assessee company had earned dividend income of Rs.5,32,09,158/- and claimed the same as exempt to tax. The Assessing Officer required the assessee to explain as to why the disallowance in terms of sec. 14A read with Rule 8D should not be made. The assessee furnished details of working of disallowance under Rule 8D. However, as against total disallowance of Rs.1,66,57,982/- worked out by the assessee, the AO made disallowance of Rs.2,04,25,115/-.

3. On appeal it was submitted by the assessee before the learned CIT(A) that disallowance of interest in terms of clause (ii) of sub-Rule (2) of Rule 8D was erroneous and similar mistake was committed in respect of administrative and other indirect expenses disallowable in terms of clause (iii) of the said Rule. The assessee filed detailed working of the disallowance under Rule 8D. It was also submitted that the assessee had bdisallowed a sum of Rs.1,73,98,255/- by proportionate interest and other expenditure on the basis of income i.e. dividend/total income. The learned CIT(A) after considering the various aspects restricted the disallowance u/s 14A of the Act to the extent of Rs.1,73,98,255/- by observing as under:-

“4. I have carefully considered the submissions made on behalf of the appellant company and the findings recorded by the Ld. AO. On consideration, I find that what the ld counsel for the appellant has pointed out with regard to the arithmetical errors committed by the AO in working out the value of average investments and average total value of assets is correct. The Ld. AO has committed an error in working out the average value of assets at Rs.52,29,05,941/-. This mistake has been committed by the AO while deducting net current assets of Rs.70400052/- from the investment of Rs.575279938/- as on 31.03.2006 and net current assets of Rs.33647941/- from the value of investments of Rs.574579938/- as on 31.03.2007. The Ld. Counsel has correctly pointed out that to arrive at the average value of total assets, the net current assets should have been added to the value of investments. Therefore, to this extent, I am in agreement with the Ld. counsel. However, I find that the provisions of Rule 8D of the IT Rules, 1962 have been held to be prospective in nature and thus, are not applicable to the subject assessment year. Therefore, in light of the judgments of Mumbai High Court and the Hon’ble Jurisdictional Delhi High Court, the decision with respect to disallowance u/s 14A has to be taken on the basis of reasonableness and individual facts of a particular case. In the present case, the appellant has suo moto disallowed a sum of Rs.17398255/- in the proportion of exempt and taxable income earned by way of dividend and interest income. In my view, the disallowance made by the assessee company in the return of income was justified and reasonable. Therefore, the AO is directed to restrict the disallowance u/s 14A of the IT Act to Rs.17398255/- and allow consequential relief to the appellant.”

4. Before us the learned Sr. DR strongly supported the order of the Assessing Officer. He submitted that the AO has rightly applied Rule 8D of the Income-tax Rules, 1962. On the other hand, the learned AR of the assessee submitted that the assessee had suo moto disallowed Rs.1,73,98,255/- in the proportion of the exempt and taxable income earned by the assessee by way of dividend and interest income. Therefore, no further disallowance was to be made. He therefore, supported the order of the CIT(A).

5. We have heard both the parties and gone through the material available on record. By Finance Act of 2001, the Parliament enacted section 14A of the Income-tax Act, 1961 with retrospective effect from 1.04.1962. Prior to insertion of sec. 14A, the Revenue had sought to disallow expenditure incurred in relation to exempt income. However, the Hon’ble Supreme Court in the case of Rajasthan State Warehousing Corporation vs. CIT, 242 ITR 450, held that where there was one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to e allowed even if a part of income earned from the business was exempt. The basic object of sec. 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of total income. Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, 328 ITR 81, has held that provisions of Rule 8D which have been notified with effect from 24th March, 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 provisions of sub-sec.(1) of sec. 14A. For that purpose the AO was duty bound to determine the expenditure which had been incurred in relation to income which does not form part of total income. 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 record. In the case before us the Assessment Year involved is Assessment Year 2007-08. Therefore, Rule 8D will not be applicable in the case of the assessee. However, disallowance can be made in relation to exempt income on reasonable basis. The assessee had himself disallowed Rs.1,73,98,255/- in the proportion of exempt and taxable income earned by way of dividend and interest income. This, in our view is reasonable. Since Rule 8D is not applicable for Assessment Year under consideration, the disallowance made by the assessee on proportionate basis of exempt income and taxable income in our considered opinion is justified. Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT, 203 Taxman 364, has also held that Rule 8D is not retrospective. The AO has to determine amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. Since in the instant case the assessee himself has disallowed Rs.1,73,98,255/- on proportionate basis, in our considered opinion, the learned CIT(A) is justified in upholding the disallowance to the extent of Rs.1,73,98,255/-. Accordingly, we do not find any infirmity in the order of the CIT(A).

6. In the result, the appeal filed by the Revenue is dismissed.

7. This decision is pronounced in the Open Court on 28-06-2012.

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