AO cannot go beyond the directions/ orders of CIT (A) while working under the order

Brief of the case:

In this case AO made certain addition being disagreed from the submissions of the assessee. Being aggrieved from the assessment order assessee filed appeal before CIT (A). After considering submissions of the assessee and noticing that the provisions of Section 14A has to be invoked and disallowance has to be made in accordance with rule 8D which was effective from AY. 2008- 09, he directed assessee to furnish calculation of disallowance as per rule 8D, which worked out to Rs. 92,43,413/-.
AO was directed to verify the working so given and consider the amount arrived at such working as per rule 8D for making disallowance. AO instead of verifying the claim of assessee as per direction of AO made further enhancement which was confirmed by CIT (A) subsequently. On appeal to ITAT partly allowed the appeal and held that AO’s jurisdiction is restricted to verifying the working provided by assessee and if he is not satisfied with the working, he can at best disallow the amount originally disallowed by the AO.

Facts of the case:

• Assessee is a banking company, a subsidiary of State Bank of India. In the scrutiny completed u/s 143(3), AO determined the total income at Rs. 11,08,81,44,314/- as against the returned income of Rs. 654,70,28,828/- which was revised to Rs. 558,93,59,842/-.
• In the additions made in the said order, one addition which is under dispute is with reference to the disallowance u/s 14A. AO noticed that assessee has earned an amount of Rs. 5,11,26,104/- which was claimed as exempt during the year under consideration.
• Assessee has quantified the expenditure of the treasury department at Rs. 65,50,068/- and as per the orders of CIT(A) / ITAT in earlier years, considered two months of the expenditure of the treasury as expenditure attributable to earning the exempt income. Accordingly, an amount of Rs. 10,91,681/- was disallowed by assessee against the claim of exempt income.
• AO did not agree with assessee’s contention. He therefore based on the ratio of operating expenditure and interest expenditure to the total revenue of Rs. 5,080 Crores arrived at a ratio of 80.48% of expenditure.
• Adopting the same ratio, AO determined the expenditure to be disallowed at Rs. 4,11,46,288/-.
• Assessee contested this issue before CIT(A) who noticed that the provisions of Section 14A has to be invoked and disallowance has to be made in accordance with rule 8D which was effective from AY. 2008- 09, he directed assessee to furnish calculation of disallowance as per rule 8D, which worked out to Rs. 92,43,413/-.
• AO was directed to verify the working so given and consider the amount arrived at such working as per rule 8D for making disallowance.
• AO in the consequential order passed on 30-03-2013, however, arrived at the proportionate expenses at Rs. 10,98,40,899/-.
• As there was enhancement by the disallowance of interest claim in banking operations, the matter was again carried to the CIT(A) in appeal who dismissed the appeal.

Contention of the revenue:

• Assessee has two business segments i.e., treasury operations and other banking operations, he however, noted that these are interlinked and inter-laced and accordingly proportionate expenditure on the basis of operations of banking should be disallowed towards expenditure for earning the exempt income.
• There was variation in figures and accordingly, the AO after examination, disallowed the amounts.

Contention of the revenue:

• Originally AO determined the disallowance at 80.48% of exempt income of Rs. 5.11 Crores, whereas the present AO went beyond the issue and disallowed an amount of Rs. 10.98 Crores.
• Assessee has no borrowed funds which are invested in exempt investments. It was submitted that value of exempted investments was about Rs. 249.22 Crores, whereas the cost free funds available to the bank are to the tune of Rs. 6937.23 Crores.
• Disallowance u/s. 14A requires finding of incurring of expenditure.
• Bank had adequate funds for making these investments. Therefore, disallowance of proportionate interest out of the banking operations does not arise.
• Assessee relied on the following judgments for the proposition that if the investment is out of the non-interest bearing funds, disallowance u/s. 14A is not sustainable:

1. Kerala High Court in the case of State Bank of Travancore [318 ITR 171]; and
2. Punjab & Haryana High Court in the case of CIT Vs. Hero Cycles Ltd., [233 CTR 74]

Held by CIT (A):

• CIT(A) dismissed the appeal on the reason that the impugned appeal is against the order consequential to the order of the CIT(A).
• The CIT(A) also further noted that applicability of Section 14A r.w.r. 8D had been categorically upheld by the CIT(A) and therefore, it was felt that the disallowance was in conformity with the directions of the CIT(A).

Held by ITAT:

• The original disallowance which was subject matter of appeal was only to the extent of Rs. 4,11,46,288/-. The CIT(A) while upholding the disallowance, directed the AO to examine under Rule 8D and the working given by assessee to arrive at the disallowance of Rs. 92,43,413/-.
• Instead of examining this working of assessee, the AO in our opinion exceeded the powers granted to him by the CIT(A) in arriving at the disallowance at Rs. 10,98,40,899/-.
• The order has not been set aside as the CIT(A) has no powers to set aside. The CIT(A) directed the AO to examine the working furnished by assessee under Rule 8D.
• Therefore, AO’s jurisdiction is restricted to verifying the working provided by assessee and if he is not satisfied with the working, he can at best disallow the amount originally disallowed by the AO.
• However, AO reworked out the entire amount, considered expenditure by way of interest of the banking operations into the treasury operations and disallowed interest attributable to banking operations to an extent of Rs. 10,13,20,739/- as attributable to exempt incomes.