Prasad Film Laboratories Private Limited Vs ACIT (ITAT Hyderabad)
Summary: Prasad Film Laboratories Private Limited, engaged in post-film production activities, filed its return for AY 2016-17 declaring a loss of Rs.2,95,28,869/-. The Assessing Officer completed assessment under Section 143(3) at a loss of Rs.2,85,37,337/- after making a disallowance of Rs.9,91,532/- under Section 14A read with Rule 8D(2)(iii), computed at 1% of the average value of investments. The assessee contended that no indirect expenditure had been incurred for earning exempt income and that the amended Rule 8D effective from 02.06.2016 could not apply to AY 2016-17. The CIT(A) nevertheless confirmed the disallowance.
ITAT Hyderabad held that recording satisfaction by the Assessing Officer regarding the incorrectness of the assessee’s claim was a condition precedent to invoking Section 14A read with Rule 8D. Despite the assessee’s specific assertion that no indirect expenditure had been incurred to earn exempt income, the Assessing Officer had recorded no satisfaction explaining why that assertion was incorrect. The Tribunal further held that the amended Rule 8D effective from 02.06.2016 operated prospectively and applied from AY 2017-18 onwards.
For computing the average value of investments under the applicable unamended Rule 8D, only investments which actually yielded exempt income were to be considered. The CIT(A)’s order was therefore set aside and the matter remitted to the Assessing Officer to first record the requisite satisfaction and thereafter, if warranted, recompute the Section 14A disallowance under the unamended Rule 8D. The assessee’s appeal was allowed for statistical purposes.
Cases Discussed
- Joint Investments Pvt. Ltd. vs. CIT (Delhi High Court) — 374 ITR 694 (Delhi).
- ACB India Ltd. Vs. Assistant Commissioner of Income Tax (Delhi High Court) — 374 ITR 108 (Delhi).
- Marg Ltd. Vs. CIT (Madras High Court) — 318 CTR (Mad.) 148.
- CIT Vs. Shriram Ownership Trust (Madras High Court) — 318 CTR (Mad.) 233.
- Pragathi Krishna Gramin Bank Vs. Jt.CIT (Karnataka High Court) — 95 Taxman.com 41 (Kar.).
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
This is an appeal filed by the assessee directed against the order of the Commissioner of Income Tax (Appeals) – 6, Hyderabad dated 24.05.2019 for the assessment year 2016-17.
2. The brief facts of the case are that the appellant is a private limited company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of Post-Film Production activities viz. printing and processing of cinematographic films, dubbing, editing, recording, telecine and projecting, hiring of outdoor equipment / cameras etc. The appellant filed return of income for the A.Y. 2016-17 on 05.10.2016 declaring a loss of Rs.2,95,28,869/-. Against the said return of income, the assessment was completed by the Assessing Officer vide order dt.25.12.2018 passed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) at a total loss of Rs.2,85,37,337/-. While doing so, the Assessing Officer made disallowance u/s 14A r.w.r. 8D(2)(iii) of Rs.9,91,532/- rejecting the contention of the appellant that no indirect expenditure was incurred to earn any exempt income. While doing so, the Assessing Officer computed the amount of disallowance at 1% of the average value of the investments.
3. Being aggrieved by the above assessment order, an appeal was preferred before the learned CIT(A) contending that the amended rule 8D is applicable w.e.f. 02.06.2016 has only the prospective operation. No indirect expenditure was incurred to rn any exempt income, therefore, the question of disallowance does not arise. However, the CIT(A) placing reliance on several judicial pronouncements confirmed the action of the Assessing Officer.
4. Being aggrieved by the order of learned CIT(A), the assessee company is in appeal before us.
5. Before us, the contentions raised by the learned authorised representative on behalf of the appellant company are that the assessing authority has made disallowance u/s 14A without recording a satisfaction having regard to the books of account as to how the contention of the appellant that no indirect expenditure was incurred for the purpose of earning the exempt income. Secondly, urged that the amended rules have prospective operation w.e.f. 02.06.2016 i.e., from A.Y. 2017-18 onwards and for the purpose of computing the average value of investments, any investment which yielded exempt income alone should be considered.
6. On the other hand, learned Sr.D.R. placing reliance on the order of CIT(A) said the amended rules on 8D have a retrospective operation and can therefore be applied to the pending assessments.
7. We have heard the rival submissions and perused the material on record. The issue in the present appeal relates to the disallowance of indirect expenditure u/s 14A of the Income Tax Act. It is settled position of law that the Assessing Officer before invoking the provisions of Section 14A r.w.r 8D, it is a condition precedent that he should record a satisfaction as to how the contention of the appellant that no indirect expenditure was incurred to earn the exempt income. From perusal of the assessment order, it is clear that the appellant had asserted before the Assessing Officer that no indirect expenditure was incurred to earn the exempt income, despite of the fact that the Assessing Officer had not recorded any satisfaction as to how the contention of the appellant is incorrect. Further the amended rules of Rule 8D inserted w.e.f. 02.06.2016 are prospective in operation and are applicable for A.Y. 2017-18 onwards. Furthermore, for the purpose of computing the average value of the investments, the investments which yielded exempt income alone has to be considered in the light of the law laid down by the Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. vs. CIT 374 ITR 694 (Delhi), the decisions of Hon’ble Madras High Court in the cases of ACB India Ltd. Vs. Assistant Commissioner of Income Tax, Marg Ltd. Vs. CIT, 318 CTR (Mad.) 148 and CIT Vs. Shriram Ownership Trust 318 CTR (Mad.) 233 and also by the Hon’ble Karnataka High Court in the case of Pragathi Krishna Gramin Bank Vs. Jt.CIT, 95 Taxman.com 41 (Kar.)
8. In the light of the above settled position, the order of CIT(A) cannot be sustained in law. Therefore, respectfully following the law laid down by the hon’ble High Courts referred to above, we remit the matter back to the file of Assessing Officer with a direction to comply the condition precedent i.e. recording satisfaction as to how the contention of the assessee that no indirect expenditure was incurred to earn the exempt income is incorrect and after recording such satisfaction, the Assessing Officer shall proceed to compute the amount of disallowance u/s 14A under unamended rules of Rule 8D by considering value of those investments which yielded the exempt income alone for the purpose of computing the average value of the investments. Thus, the appeal filed by the assessee stands allowed for statistical purposes.
9. In the result, the appeal filed by the assessee is allowed for statistical purposes.
Order pronounced in the Open Court on 22nd February, 2022.
