Case Law Details

Case Name : Kalyani Steels Ltd. Vs Addl. Commissioner of Income Tax (ITAT Pune)
Appeal Number : ITA No. 1733/PN/2012
Date of Judgement/Order : 30/01/2014
Related Assessment Year : 2008- 09
Courts : All ITAT (5374) ITAT Pune (154)

In this case, assessee has earned by way of dividends a sum of Rs. 5,45,58,685/-, which is exempt u/s 10(38) of the Act and thus the same does not form part of the total income under the Act. In the computation of income, assessee having regard to section 14A of the Act, determined the amount of expenditure incurred in relation to such income at Rs. 5,00,000/-. The Assessing Officer has not found it acceptable and has instead determined the amount of expenditure in relation to such income by applying rule 8D of the Rules. Ostensibly, the action of the Assessing Officer cannot be upheld unless he has complied with the pre-requisite of invoking rule 8D of the Rules, namely, recording of an objective satisfaction with regard to the claim of the assessee that an expenditure of Rs.5,00,000/- has been incurred in relation to the exempt income, is incorrect. In order to examine the aforesaid compliance with the pre- condition, we have perused the para 4 to 4.2 of the assessment order and find that no reasons have been advanced as to why the dis allowance determined by the assessee was found to be incorrect, having regard to the accounts of the assessee. The only point made by the Assessing Officer is to the effect that “the said dis allowance was not acceptable”. In-fact, we find that the assessee made detailed submissions to the Assessing Officer, which have been reproduced by the CIT(A) in para 3.2.1 of his order. As per the assessee, the determination of dis allowance u/s 14A of the Act of Rs. 5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the dis allowance is “not acceptable”. Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable. Accordingly, the orders of the authorities below are set-aside on this aspect and the Assessing Officer is directed to retain the dis allowance u/s 14A of the Act to the extent of Rs.5,00,000/-, as returned by the assessee.

INCOME TAX APPELLATE TRIBUNAL, PUNE

ITA No. 1733/PN/2012

(Assessment Year : 2008-09)

Kalyani Steels Ltd.,

Vs.

Addl. Commissioner of Income Tax

Date of pronouncement : 30-01-2014

ORDER

PER G. S. PANNU, AM : This appeal by the assessee is directed against an order of the Commissioner of Income-tax (Appeals)-I, Pune dated 09.02.2012 which, in turn, has arisen from an order dated 27.12.2010 passed by the Assessing Officer u/s 143(3) of the Income-tax Act, 1961 (in short “the Act”), pertaining to the assessment year 2008-09.

2. In this appeal, the solitary dispute raised by the assessee is that the income-tax authorities are not justified in enhancing the dis allowance u/s 1 4A of the Act to Rs.1,05,46,918/- instead of Rs. 5,00,000/- disallowed by the assessee company in its computation of total income.

3. In brief, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is inter-alia engaged in the business of manufacture and sale of hot metal, pig iron, steel billets, and generation of power, etc.. For the assessment year under  consideration, it filed its return of income on 27.09.2008 declaring total income of Rs. 58,17,36,890/-.For the assessment year under consideration, the total income declared included a sum of Rs. 5,45,58,685/- representing dividend income which was exempt u/s 10(38) of the Act. In the computation of income, the assessee had offered a sum of Rs.5,00,000/- for dis allowance u/s 14A of the Act on the ground that such expenditure was incurred in relation to the exempt income. The Assessing Officer did not find the dis allowance acceptable and instead calculated a dis allowance of Rs. 1,05,46,918/-. In doing so, the Assessing Officer applied the provisions of rule 8D of the Income Tax Rules, 1962 (in short “the Rules”). The dis allowance of Rs.1,05,46,918/- has been worked out as per sub-clause (iii) of sub-rule(2) of rule 8D of the Rules. Since assessee had already disallowed a sum of Rs.5,00,000/- in computation of income, the balance of Rs.1,00,46,918/- was disallowed and added to the total income. Such enhancement of dis allowance by the Assessing Officer u/s 14A of the Act was carried in appeal before the CIT(A).

4. In appeal, assessee submitted that the Assessing Officer was not justified in applying rule 8D of the Rules in order to compute the dis allowance inasmuch as the pre- requisite for invoking rule 8D of the Rules is not satisfied in the present case. According to the assessee, it was a pre- requisite for the Assessing Officer to record a satisfaction about the in-correctness of the claim of expenditure made by the assessee in relation to the exempt income, because in the present case assessee had suo motu disallowed a sum of Rs.5,00,000/- as having been incurred in relation to the exempt dividend income. The assessee further justified the quantum of dis allowance of Rs.5,00,000/- by pointing out that most of the investments which have yielded the exempt income were made in preceding years and the other investments were made out of profits for the year under consideration and therefore the amount of dis allowance made by the assessee on an application of section 14A of the Act was adequate. It was also pointed out before the CIT(A) that in  assessee’s own case for assessment year 2007-08, it has been held that 5% of the exempt income can be considered as a fair and reasonable estimate of expenditure incurred for earning such income and if it is so applied for the year under consideration the dis allowance u/s 1 4A of the Act could at best be to the tune of Rs.27,27,934/-. Apart from the aforesaid, assessee asserted before the CIT(A) that there is a composite business consisting of activities generating tax-free as well as taxable income and the business being indivisible, expenses could not be apportioned between the two activities and a part of it be disallowed. Moreover, it was pointed out that there is no expenditure having direct nexus with expenditure and the earning of the tax-free income. It was, further, explained that even if a portion of expenditure is to be considered for having been incurred for earning the exempt income then factually speaking it could be a very small amount like employee cost, conveyance expenditure incurred for depositing the dividend charges in the bank, etc.. For all the above reasons, assessee assailed the action of the Assessing Officer in computing the dis allowance u/s 14A of the Act r.w. rule 8D of the Rules of Rs.1,05,46,918/- as against Rs.5,00,000/- determined by the assessee in its computation of income.

5. The CIT(A) has dismissed the appeal of the assessee and has instead upheld the dis allowance made by the Assessing Officer. Firstly, as per the CIT(A), the Assessing Officer in para 4.1 of the assessment order has derived her satisfaction in respect of the incorrectness of the dis allowance computed by the assessee u/s 14A of the Act. Secondly, as per the CIT(A), the Assessing Officer was justified in applying rule 8D of the Rules as the same was mandatory from assessment year 2008-09. For the said reasons, the dis allowance made by the Assessing Officer has been retained. Not being satisfied with the order of the CIT(A), assessee is in further appeal before us.

6. Before us, the learned counsel for the assessee has vehemently argued that the CIT(A) erred in confirming the dis allowance made by the Assessing Officer when it was apparent that the Assessing Officer has not recorded any satisfaction in the assessment order about the incorrectness of the computation of dis allowance made by the assessee. It was, further, canvassed that recording of such satisfaction in terms of section 1 4A(2) of the Act was mandatory as per law laid down by the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, 328 ITR 81 (Bom). The learned counsel has pointed out that during the course of assessment proceedings, assessee had furnished the reasons and the justification for the dis allowance of Rs. 5,00,000/- computed by the assessee in terms of section 14A of the Act and the submissions of the assessee have been partly accepted, inasmuch as the Assessing Officer has accepted the plea of the assessee that there was no interest expenditure incurred in relation to the exempt income as there was no dis allowance made out of interest expenditure as per clause (ii) of sub-rule (2) of rule 8D of the Rules. The learned counsel pointed out that no reason has been advanced by the Assessing Officer as to why he has rejected the assessee’s claim of the dis allowance of Rs. 5,00,000/- u/s 14A of the Act. Further, explaining the factual position a reference was made to para 4.3.1 of the order of the CIT(A) wherein is reproduced the explanation furnished by the assessee. On that basis it is sought to be made out there was no fresh investments made during the year in shares which would result in exempt income. The said proceeds of mutual funds were invested in buying of debentures, which in any case resulted in taxable interest income. It was, thus, pointed out that all the investments which have yielded exempt income have been made in the past year and there was no fresh investments made and therefore it would show that the only expenditure which can be relatable to such income would only relate to the activity of deposit of dividend cheques or other small overheads, etc.. For that purpose the disallowance of Rs.5,00,000/- made by the assessee was sufficient.

7. On the other hand, the learned Departmental Representative appearing for the Revenue has pointed out that the CIT(A) correctly interfered that the required satisfaction about the in-correctness of the assessee’s claim was derived by the Assessing Officer. In the alternative, the learned Departmental Representative pointed out that in the present case no separate accounts have been maintained for the earning of the exempt income and therefore there is a implied satisfaction contemplated u/s 1 4A(2) of the Act. According to the learned Departmental Representative, the computation of dis allowance by invoking rule 8D of the Rules in the present case is quite justified.

8. We have carefully considered the rival submissions. Section 14A of the Act contemplates that for the purposes of computing the total income, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Sub-section (2) of section 14A of the Act prescribes that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed, such prescribed method being contained in rule 8D of the Rules. However, the aforesaid empowerment of the Assessing Officer to invoke application of rule 8D of the Rules is superscribed by a condition contained in sub-section (2) of section 14A of the Act which is to the effect that the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to the income which does not form part of the total income. Therefore, the invoking of rule 8D of the Rules in order to compute the dis allowance u/s 1 4A of the Act is neither automatic and nor is triggered merely because assessee has earned an exempt income. The  invoking of rule 8D of the Rules is permissible only when the Assessing Officer records the satisfaction in regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. In other words, section 1 4A(2) of the Act envisaged a condition precedent for invoking rule 8D of the Rules and computing disallowance thereof only if the Assessing Officer records that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, having regard to the account of the assessee. In this context, it would be appropriate to refer to the following observations of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) :-

“70. Now, in dealing with the challenge it is necessary to advert to the position that sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It, therefore, merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill, 2006, and the Central Board of Direct Taxes circular dated December 28, 2006, state that since the existing provisions of section 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between taxpayers and the Department on the method of determining such expenditure. It was in this background that sub¬section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub-section (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income.

71. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer “Courts will not readily defer to the conclusiveness of an executive authority’s opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated”. (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub-section (2) of section 14A. As we shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2).

[underlined for emphasis by us]

9. The aforesaid observations of the Hon’ble High Court clearly show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of rule 8D of the Rules in order to compute the dis allowance u/s 1 4A of the Act is to be understood as being conditional on the objective satisfaction of the Assessing Officer with regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. At this stage, we may also touch-upon a similar view expressed by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. & Ors. vs. CIT, (2012) 247 CTR 162 (Del), wherein reference has been made to the judgment of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra). As per the Hon’ble Delhi High Court, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income in term of rule 8D of the Rules would be triggered only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. According to the Hon’ble Delhi High Court, sub-section (2) of section 14A of the Act deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the Act and sub-section (3) applies to cases where the assessee asserts that no expenditure has been incurred in relation to such exempt income. Explaining further, as per the Hon’ble High Court in both the cases the recourse to rule 8D of the Rules is possible only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure.

10. In the aforesaid background, now, we may examine the facts of the present case. In this case, assessee has earned by way of dividends a sum of Rs. 5,45,58,685/-, which is exempt u/s 10(38) of the Act and thus the same does not form part of the total income under the Act. In the computation of income, assessee having regard to section 14A of the Act, determined the amount of expenditure incurred in relation to such income at Rs. 5,00,000/-. The Assessing Officer has not found it acceptable and has instead determined the amount of expenditure in relation to such income by applying rule 8D of the Rules. Ostensibly, the action of the Assessing Officer cannot be upheld unless he has complied with the pre- requisite of invoking rule 8D of the Rules, namely, recording of an objective satisfaction with regard to the claim of the assessee that an expenditure of Rs.5,00,000/- has been incurred in relation to the exempt income, is incorrect. In order to examine the aforesaid compliance with the pre- condition, we have perused the para 4 to 4.2 of the assessment order and find that no reasons have been advanced as to why the dis allowance determined by the assessee was found to be incorrect, having regard to the accounts of the assessee. The only point made by the Assessing Officer is to the effect that “the said dis allowance was not acceptable”. In-fact, we find that the assessee made detailed submissions to the Assessing Officer, which have been reproduced by the CIT(A) in para 3.2.1 of his order. As per the assessee, the determination of dis allowance u/s 14A of the Act of Rs. 5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the dis allowance is “not acceptable”. Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned dis allowance is untenable. Accordingly, the orders of the authorities below are set-aside on this aspect and the Assessing Officer is directed to retain the dis allowance u/s 1 4A of the Act to the extent of Rs. 5,00,000/-, as returned by the assessee.

11. Before parting, we may refer to the objection of the learned Departmental Representative, which is to the effect that since assessee was not maintaining separate accounts with regard to the activity of earning exempt income, the satisfaction contemplated u/s 14A of the Act be considered as implied. In our considered opinion, the aforesaid objection is contrary to how the implications of sub-section (2) of section 14A of the Act have been understood and explained by the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) and also by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. (supra).

12. In conclusion on the basis of the aforesaid discussion, we hold that the lower authorities were not justified in enhancing the dis allowance u/s 1 4A of the Act to Rs.1,05,46918/- against Rs.5,00,000/- disallowed by the assessee company in its return of income.

13. In the result, the appeal of the assessee is allowed, as above.

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Category : Income Tax (28058)
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Tags : ITAT Judgments (5554) rule 8D (103) Section 14A (280)

0 responses to “S. 14A Recording of satisfaction is pre-requisite for invoking rule 8D”

  1. CA Rajesh Pabari says:

    Very Useful.
    A must read for all dealing with Investments.

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