Case Law Details
Ladderup Finance Ltd. Vs ACIT (ITAT Mumbai)
ITAT Mumbai held that AO had only recorded general satisfaction but not with reference to the accounts of the assessee and hence has not satisfied the formula contained in rule 8D in order to compute disallowance u/s 14A of the Act.
Facts-
The case of the assessee was selected for scrutiny and after serving statutory notices and providing opportunity of hearing, assessment order u/s 143(3) of the I.T. Act was passed thereby making additions/disallowances u/s 14A r.w.r. 8D of the I.T. Act.
Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties, partly allowed the appeal of the assessee by restricting the disallowance of Rs. 7,11,140/-. Now before us, the assessee has preferred the present appeal.
Conclusion-
In the case of Smartchem Technologies Vrs. ACIT it was held that Where there was no reference to any of fact situation or any credible reasoning or material by AO, condition precedent for applying formula contained in rule 8D was not satisfied in order to compute disallowance u/s 14A of the Act.
From the records, we notice that since the AO had not recorded objective satisfaction in the present case, the AO had only recorded general satisfaction but not with reference to the accounts of the assessee, thus has not satisfied the formula contained in rule 8D in order to compute disallowance u/s 14A of the Act.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present Appeal filed by the assessee is against the order of Ld. CIT (Appeal) – 17, Mumbai dated 29.12.17 for AY 2013-14 on the grounds mentioned herein below:-.
1. The Id. CIT(A) erred in facts and law in –
(a) Sustaining the disallowance u/s. 14A r.w.r. 8D(2)(iii) without appreciating the explanations/submissions placed on record.
(b) Not excluding the investments made in associate/subsidiary companies and investments from which no exempt income is earned while applying the formula to compute the disallowance u/s. 14A as per Rule 8D(2)(iii).
2. On facts and circumstances of the case, the dividend distribution tax liability imposed on the appellant under section 115-0 of the Act ought to have been computed after giving effect to the provisions of section 115-0(1 A) of the Act.
3. Your appellant prays that-
(a) Disallowance u/s. 14A r.w.r 8D(2)(iii) be deleted;
(b) Dividend received from subsidiary company be allowed to be set off as per section 115-0(1 A) of the Act.
(c) Such other relief, as may be deemed fit in the matter, be granted.
4. Your appellant craves leave to add, amend, alter or drop all or any of the above grounds of appeal.
2. The brief facts of the case are that assessee is a registered non-banking finance company and is engaged in the business of granting loans and advances and derivative trading. The return of income for the year under consideration was filed on 29.09.2013 declaring a total income of Rs.1,54,22,630/-. Thereafter, the case was selected for scrutiny and after serving statutory notices and providing opportunity of hearing, assessment order u/s 143(3) of the I.T. Act was passed thereby making additions/disallowances u/s 14A r.w.r. 8D of the I.T. Act.
Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties, partly allowed the appeal of the assessee by restricting the disallowance of Rs. 7,11,140/-
Now before us, the assessee has preferred the present appeal.
Ground No. 1 (a & b)
3. This ground raised by the assessee relates to challenging the order of Ld. CIT(A) in sustaining the disallowance u/s 14A r.w.r 8D(2)(iii) of the Act made by AO.
4. At the outset, Ld. AR appearing on behalf of the assessee reiterated the same arguments as were raised by him before Ld. CIT(A) and submitted before us that during the year under consideration, the assessee had received dividend income of Rs.1,14,88,492/-, which was claimed exemption u/s. 10(34) of the Act. It was submitted that assessee disallowed a sum of Rs.1,42,952/- being expenses related to exempt income u/s. 14A of the Act. In this regard, Ld. AR drawn our attention to the written submission filed by him before Ld. CIT(A) which is contained in para no. 3 of its order, wherein assessee vide letter dated 11.01.16 submitted the expense wise explanation as to why the expenses claimed cannot be attributable towards earning of exempt income. In this way, assessee submitted that the disallowance of Rs. 1,42,952/- made u/s 14A of the Act was justified and stands explained.
Ld. AR further submitted that AO had not recorded ‘objective satisfaction’ having regard to the accounts of the assessee while making disallowance u/s 14A of the Act and relied upon judgment in the case of Smartchem Technologies Vrs. ACIT(85 taxmann.com 43) (Mum) and Aditya Birla Finance Ltd. Vrs. ACIT (83 taxmann.com 85) (Mum). It was further submitted that investment from which exempt income had been earned, should have only been considered by the AO and relied upon judgment in the case of ACIT vrs. Vireet Investment Pvt. Ltd. (82 taxmann.com 415) (Del-S.B.) and DCIT vrs. Reliance Power Ltd. (ITA No. 5975/Mum/12).
5. On the other hand, Ld. DR relied upon the orders passed by the revenue authorities.
6. We have heard the counsels for both the parties and we have also perused the material placed on record, judgment cited by the parties as well as the orders passed by revenue authorities. From the records, we notice that assessee had received dividend income of Rs.1,14,88,492/-, which was claimed exemption u/s. 10(34) of the Act and in this way assessee had suo-moto disallowed a sum of Rs.1,42,952/- being expenses related to earn exempt income u/s. 14A of the Act. In para no. 3 of the order of Ld. CIT(A), assessee vide letter dated 11.01.16 submitted in detail the expense wise explanation as to why the expenses claimed cannot be attributable towards earning of exempt income. It was also argued that the investment from which exempt income has been earned during the year, should have been considered for the purpose of calculating average value of investment. However, Ld. CIT(A) had made no reference to the factual details submitted by the assessee and had not recorded any credible reasoning having regard to the accounts of the assessee, which according to us is a condition precedent for applying formula contained in rule 8D. In this respect, we draw strength from the judgment of Tribunal in the case of Smartchem Technologies Vrs. ACIT(85 taxmann.com 43) (Mum), wherein it was held that ‘Where there was no reference to any of fact situation or any credible reasoning or material by AO, condition precedent for applying formula contained in rule 8D was not satisfied in order to compute disallowance u/s 14A of the Act’ and judgment in the case of Aditya Birla Finance Ltd. Vrs. ACIT (83 taxmann.com 85) (Mum).
7. From the records, we notice that since the AO had not recorded objective satisfaction in the present case, the AO had only recorded general satisfaction but not with reference to the accounts of the assessee, thus has not satisfied the formula contained in rule 8D in order to compute disallowance u/s 14A of the Act.
8. Be that as it may, considering the facts of the present case and keepin in view the interest of justice, we set aside the part of the order of Ld. CIT(A) in respect of sustaining the disallowance u/s 14A r.w.r. 8D (2) (iii) of the I.T. Act and remit the matter back to the file of AO with a direction to pass afresh order while keeping in view our above discussion and to record objective satisfaction having regard to the accounts of the assessee and while considering only those investment from which exempt income has been earned by the assessee during the year under consideration for calculating the average value of investments while applying the formula to compute the disallowance, if any, u/s 14A as per rule 8D(2)(iii) of the Act. It is needless here to mention that before passing afresh order of assessment, the AO shall provide sufficient opportunity of hearing to the assessee.
9. Before parting, we may make it clear that our decision to restore the matter back to the file of AO shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated by the AO independently in accordance with law. With these directions, this ground of appeal raised by the assessee is allowed for statistical purposes.
Ground No. 2
10. Since this ground raised by the assessee has not been pressed, therefore this ground raised by the assessee stands dismissed as not pressed.
Ground No. 3 & 4
11. These grounds raised by the assessee are general in nature, thus requires no specific adjudication.
12. In the net result, the appeal filed by the assessee stands
allowed with no order as to cost.
Order pronounced in the open court on 24th May, 2019.
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