M/s. Molecular Connections Private Limited, Bangalore V. Joint Commissioner of Income tax(OSD), Circle - 4(1)(2), Bangalore

ITA 156/BANG/2022

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 5091 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2017-2018
• Appeal Filed On: 03-03-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D; Capital Gains
• Section: 14A; 201; 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “A’’ BENCH: BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No.156/Bang/2022 Assessment Year : 2017-18 M/s. Molecular Connections Private Limited No.59/2, Heritage Building, Block B, 100 Feet Ring Road Kadirenhalli, BSK II Stage Bengaluru 560 070 PAN NO : AACCM5956A Vs. JCIT Circle 4(1)(2) Bengaluru. APPELLANT RESPONDENT Appellant by : Shri K. Sheshadri, C.A Respondent by : Shri Sankar Ganesh K., DR Date of Hearing : 06.06.2022 Date of Pronouncement : 21.07.2022 O R D E R PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER: This appeal by the assessee is against the order of CIT(A), National Faceless Appeal Centre (NFAC), Delhi dated 18.3.2021 for the assessment year 2017-18 with the following grounds of appeal:- 1. “The orders of the Hon’ble National Faceless appeal Centre/CIT (Appeal)- 4,/ AO in so far as they are against the appellant are opposed to law, weight of evidence, natural justice, probabilities, facts and circumstances of the appellant’s case. 2. The appellant denies itself to be assessed on a total income of Rs.29,89,35,760/- as against the returned income of Rs.29,23,79,900/- for the year under consideration. ITA No.156/Bang/2022 Page 2 of 10 3. At the outset, the appellant submits that the order passed by the learned AO is against the provisions of the law, in so far as rejecting the contention of the appellant and making the additions to the returned income and the same is not in accordance with the provisions of the Income Tax Act, 1961. 4. The appellant submits that the impugned order has been passed without following due process of law. The appellant submits that the impugned order passed by the learned authorities in so far as making the additions to the returned income is concerned, is contrary to the law and facts, arbitrary and deserves to be deleted. 5. The learned respondent erred by invoking section 14A, where there is a proper justification for the non-incurrence of any expenditure towards earning exempt income. 6. The learned respondent erred by invoking Section 14A, where there is a proper justification for the non incurrence of any expenditure towards earning exempt income. 7. The learned respondent has not provided proper opportunity to present the facts in the better perspective, which is against the principle of natural justice. 8. For these and other grounds that may be urged at the time of hearing of the appeal the appellant prays that the appeal may be allowed. 9. The appellant craves leave to add, alter, delete or substitute any of the grounds urged above. 10. In view of the above and other grounds that may be urged at the time of the hearing, the assessee prays that the objections be considered in the interest of equity and justice.” 2. Main grounds in this appeal which are to be adjudicated in this appeal are ground Nos.2 & 5 and rest are general in nature. First we take up ground No.2 for adjudication. 2.1 Facts of the case are that the assessee is a Private Limited Company incorporated on 6.6.2001 under the provisions of the Companies Act, 1956 and is engaged in the business of Bio Information, Molecular Biology and Biotechnology. The assessee company filed its return of income for AY 2017-18 on 5.10.2017 declaring total income of Rs.29,23,79,900/-. Subsequently the case was selected scrutiny under CASS. Notice u/s 143(2) of the Income-tax Act,1961 ['the Act' for short] dated 5.9.2018 was issued in response to which assessee furnished details wherein it was seen that in ITR that the assessee has offered short term capital gains of Rs.1,51,19,291/- from debt mutual funds at special tax rates u/s ITA No.156/Bang/2022 Page 3 of 10 111A of the Act. Special tax rate of 15% as per section 111A of the Act is applicable only for equity oriented mutual funds. Therefore, this claim of assessee was disallowed by the AO and the income is taxed at normal rates. 2.2 Further, it was observed by the AO that assessee has investments in subsidiary company and tax free bonds amounting to Rs.17,48,05,000/-. There is current investments amounting to Rs.22,77,94,204/- spread across 10+ funds. During the year, the assessee has earned dividend income of Rs.98,87,744/- from the investments. Ld. AO made it clear that investment portfolio requires significant manpower to ensure consistent return. Assessee has claimed that its own funds were enough for the investment. But it is seen by the AO that the assessee has incurred finance cost of Rs.8,29,164/-. Details of computation of disallowance u/s 14A of the Act were sought from assessee. However, the company did not furnish the details. Hence, disallowance was computed by the AO using the investment values from balance sheet. 2.3 Further, assessee has claimed set off of short term capital loss of Rs.20,78,371/- with brought forward short term capital loss from AY 2011-12. Upon perusal of ITR filed by the assessee for AY 2011-12, AO observed that the assessee had long term capital loss of Rs.37,67,616/- during the year and had short term capital gain of Rs.2,08,090/-. As per section 74 of the Act long term capital loss can be set off only with long term capital gain. Hence, claim of set off was disallowed by the AO. 2.4 Against this, assessee is in appeal before Ld. CIT(A), NFAC challenging the addition made u/s 14A of the Income Tax Act. ITA No.156/Bang/2022 Page 4 of 10 1961,who in turn dismissed the appeal of the assessee. Now the assessee is in appeal before us. 2.5 Ld. A.R. submitted that the assessee filed the return of income for the FY relevant to AY 2017-18 declaring a total gain of Rs.29,23,79,900/-. The assessment was concluded on 30.11.2019 with additions amounting to Rs.65,61,071/- to the returned income. In the said impugned order dated 3.11.2019, the AO had made the additions of Rs.65,61,071/- by disallowing certain expenditure claimed by the assessee and the details of the same are captured in the table as below: Sl.No. Particular Amount (Rs.) 1 Disallowance u/s 14A of the Act for non- disallowance of expenditure incurred towards earning exempt income 44,82,700 2 Disallowance of claim of set off of short term capital gain with brought forward short term capital loss 20,78,371 Total 65,61,071 2.6 The ld.AR filed case law paper book contiang page nos.1 to 39, which is placed on record. The ld. A.R. prayed for deletion of addition made by the AO. 3. Ld. D.R. supported the order of the Ld. CIT(A) sustaining the additions made by the Ld. AO. He further submitted that assessee has received exempt income and the AO has made disallowance which is lower than the exempt income received by the assessee. AO calculated the disallowance as per Rule 8D(ii) of the IT Rules. The argument of the ld.AR that he had sufficient own funds and own funds have been utilized for the purpose of making investments for earning exempt income is also not correct. The CIT(A) has rightly dealt this issue in his order. ITA No.156/Bang/2022 Page 5 of 10 4. We have heard the rival submissions and carefully considered the same along with the order of the authorities below as well as the documents referred to and relied on before us during the course of the hearing. Ground No.1,8,9,10 is general in nature and does not require adjudication. 4.1 Ground No2. raised by the assessee is difference of assessed income on regular assessments and returned income declared by the assessee, which comes to Rs.65,55,860/. The difference is disallowance u/s 14A of Rs.44,82,700/- and disallowance claim of Set off of short term capital gain with brought forward short term capital loss of Rs.20,78,371/- and the rest amount of Rs.5,211/- how the assessee has taken it was not explained. On perusal of the CIT(A) order the assessee had raised the ground before him only to disallowance of sec. 14A of Rs.44,82,700/- and the same also been raised before us. Accordingly, we have to decide disallowance made by the AO u/s 14A of the Act. 4.2 Ground No.3,4,5 & 6 in all these grounds the sole issue involved in regard to disallowance made u/s 14A of the Act. In this regard we observe that the AO has made disallowance as per 8D(ii) of the Act by considering the 1% of the average investments as held by the assessee of Rs.44,82,69,812/- . During the course of assessment the assessee did not file details as required by the AO. On perusal of Rule8D(ii) which is applicable for the relevant assessment year as under:- ii. An amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income ITA No.156/Bang/2022 Page 6 of 10 4.3 On careful reading of the above rule for computation of disallowance it is clear that the only those investments have to be considered in which the assessee has earned/yielded exempt income which does not form part of the total income during the relevant previous year, whereas, it appear that the AO has considered the entire investments for want of not submitting details by the assessee. The ld.AR of the assessee also did not furnish details of the investments made on which the assessee has received exempt income as required under Rule 8D(2)(ii) . Accordingly, we direct to the assessee that he will submit the details of the investments in which the assessee has received exempt income during the assessment year and the AO shall calculate the disallowance as per Rule 8D(2)(ii) for the relevant assessment year. A similar issue has been decided by the ITAT Cuttak Bench in the case of M/s. Sankalp, in ITA Nos.415/CTK/2018 and 237/CTK/2019 for the assessment years 2015-16 & 2016-17 respectively vide order dated 21/10/2021, wherein at para 9, it is held as under:- “9. ------------------------ However, in respect of disallowance u/r 8D(iii), no specific ground or plea has been taken by the ld A.R. on behalf of the assessee, therefore, we hold it sustainable in view of express mandate of law. At this stage, keeping in view the facts related to ITA No.4 15/ CTK/ 201 8 Assessm ent Year : 2015-16 ITA No.2 37/ CTK/ 201 9 Assessm ent Year : 2016-17 P a g e 9 | 12 the remaining issue of mandatory disallowance u/s.14A r.w. Rule 8D(2)(iii), we are consistently following the view expressed by this Bench in the case of NALCO vs ACIT, Corporate Circle in ITA Nos.106 & 110/CTK/2018 order dated 23.9.2019, wherein, it was held thus : “11. Invoking the provisions of Section 14A r.w.Rule 8D, the AO has made the disallowance of Rs.6,82,43,072/- by observing that the disallowance suo-moto made by the assessee is very less compared to the administrative and employee cost devoted to earn the exempt income. In appeal, the CIT(A) has confirmed the disallowance as there may not be any direct expense and that the assessee has not made any interest payments related to earning of exempted dividends and accordingly, the only way disallowance can be computed proportionately as per Rule 8D(2)(iii) of I.T.Rules. 12. Ld. AR before us submitted that the assessee has already added the sum of Rs.82,378/- in the computation of income with the (return of income) u/s.14A of the Act in respect of expenses incurred relating to its exempted income and Rule 8D is not ITA No.156/Bang/2022 Page 7 of 10 applicable. Ld. AR further submitted that this issue has been decided by the Tribunal in ITA No.211/CTK/2016 along with other connected appeals, order dated ITA Nos.106&110/CTK/2018 CO No.30/CTK/2018 12 29.06.2018 for the assessment year 2013-2014. On the other hand, ld. DR relied on the order of AO. 13. We find that this issue has been decided by the Tribunal in assessee’s own case for the assessment year 2010-2011 in ITA No.211/CTK/2016 along with other connected appeals, order dated 29.06.2018 for the assessment year 2013-2014, wherein the Tribunal relying its earlier order dated 27.04.2018, passed in ITA No.352/CTK/2016 for the assessment year 2010-2011 along with other connected appeals has observed as under :- 22. From the above judicial decisions, we find that the Tribunal has restored the disputed issue to the file of AO for re-examination and reverification and apply the provisions of Section 14A r.w.rule 8D and in the instant case, the issue being similar, we find that the AO has not complied with the mandatory requirement of Section 14A (2) of the Act read with Rule 8D (1) (a) of the Rules and we respectfully follow the above judicial decision of the Tribunal and remit the disputed issue to the file of AO for re-examination and verification and to decide the issue on merits after complying the mandatory requirement of the provisions of Section 14A of the Act and this ground of appeal is allowed for statistical purposes. 14. From the orders both the authorities below, we observe that the assessee is earning income under different heads, as mentioned above. During the year, the assessee has received dividend of Rs.110,068,076/- and claimed such income as exempt income. The assessee has only made disallowance at Rs.1,20,828/- u/s.14A to earn the exempt income. The Assessing Officer has applied section 14A read with Rule 8D and disallowed the expenditure as per formula provided under rule 8D. The assessee is stated to have made no fresh investments out of borrowed funds. The Assessing Officer appears to have calculated the disallowance as per Rule 8D(2)(iii) observing that administrative expenses cannot be denied to earn exempt income. We, however, find that the Assessing Officer has considered average total investment appearing on the first day and last day of the financial year, which in our opinion is not justified. These investments may also include such investments from which no exempt income would have been earned by the assessee. As is clear from the Rule itself, the average of only such investments have to be taken into account, which yielded the income not forming part of the total income. Therefore, the AO was required to work out the average of such investment, the income from which did not form part of the total income instead of total value of investment. For this view, our stand is fortified by the decision of Special Bench in the case of ACIT vs. Vireet Investment (P) Ltd., (2017) 82 Taxman.com 415 (Delhi Trib.)(SB). None of the parties before us, however, have laid any details to examine as to which of the investments have yielded such income which did not form part of the total income. We, therefore, restore the matter back to the file of the Assessing ITA No.156/Bang/2022 Page 8 of 10 Officer for calculating the disallowance u/s. 14A read with Rule 8D afresh, in the light of observations made in the body of this order above. Accordingly, ground No.4 is allowed for statistical purposes. “ In the present case also, none of the parties before us, have submitted any details to examine as to which of the investment yield such exempt income which did not form part of total income. We, therefore, restore the issue to the file of the AO for limited purpose i.e. for calculation of the disallowance u/s.14A r.w. Rule 8D(2)(iii) of the Rules, in the light of our conclusions recorded hereinabove. Thus, the issue is restored to the file of the AO for recomputation of disallowance u/s.14A of the Act r.w. Rule 8D(2)(iii) in terms of our directions given hereinabove and the appeal for assessment year 2015-16 is partly allowed for statistical purposes. 4.4 However, the case cited by us is before the amendment made in the Rule 8D(2)(ii). The Rule 8D(2)(ii) has been amended by the IT (Fourteenth Amdt.) Rules 2016 w.e.f 2/6/2016 , which has been cited supra. Considering the case law cited by the ld.AR and also on the facts of the case, we rely on the above cited decision and remit this issue to the file of the AO for recomputation of disallowance u/s14A of the Act r.w. Rule 8D(2)(ii). The assessee is directed to provide the necessary details/ documents to substantiate his case and not to seek unnecessary adjournment for early disposal of the case. 5. The ground No.7 is with regard to not given proper opportunity of hearing by the CIT(A). On perusal of the order, the appeal was instituted on 27.12.2019 and passed order on 18.3.2021. The ld.AR could not bring any material so that it can be decided that the proper opportunity was not given to the assessee. Accordingly, this ground is dismissed. ITA No.156/Bang/2022 Page 9 of 10 6. In the result, the appeal of the assessee is allowed for statistical purposes. Order pronounced in the open court on 21 st July, 2022. Sd/- (Beena Pillai) Judicial Member Sd/- (Laxmi Prasad Sahu) Accountant Member Bangalore, Dated 21 st July, 2022. Vms Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore. ITA No.156/Bang/2022 Page 10 of 10 1. Date of Dictation ............................................. 2. Date on which the typed draft is placed before the dictating Member ......................... 3. Date on which the approved draft comes to Sr. P. S ................................... 4. Date on which the fair order is placed before the dictating Member .................... 5. Date on which the fair order comes back to the Sr. P.S. ....................... 6. Date of uploading the order on website................................... 7. If not uploaded, furnish the reason for doing so ................................ 8. Date on which the file goes to the Bench Clerk ....................... 9. Date on which order goes for Xerox & endorsement.......................................... 10. Date on which the file goes to the Head Clerk ......................... 11. The date on which the file goes to the Assistant Registrar for signature on the order ..................................... 12. The date on which the file goes to dispatch section for dispatch of the Tribunal Order ............................... 13. Date of Despatch of Order. ..................................................... 14. Dictation note enclosed..........................................