M/s Texport Creation, Bangalore V. The Deputy Commissioner of Income Tax Circle-6(2)(1), Bangalore

ITA 2307/BANG/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 1078 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 11-03-2019
• Assessment Year: 2014-2015
• Appeal Filed On: 02-08-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S SHARATH
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER ITA NO. 2307 / BANG/201 8 ASSESSMENT YEAR : 2 0 14 - 15 M/S. TEXPORT CREATION, NO. 86, D-1, 2 ND STAGE, INDUSTRIAL SUBURB, YESHWANTHPURA, BANGALORE 560 022. PAN: AAGFT8709H VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 6 (2) (1), BANGALORE. APPELLANT RESPONDENT ASSESSEE BY : SHRI S. SHARATH, ADVOCATE R EVENUE BY : SHRI R.N. SIDDAPPAJI, ADDL. CIT (DR) DATE OF HEARING : 11 .0 3 .2019 DATE OF PRONOUNCEMENT : 15 .0 3 .2019 O R D E R PER SHRI A.K. GARODIA, ACCOUNTANT MEMBER THIS APPEAL IS FILED BY THE ASSESSEE AND THE SAME IS DIRECTED AGAINST THE ORDER OF LD. CIT (A)-6, BANGALORE DATED 24.04.2018 FOR ASSESSMENT YEAR 2014-15. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER. 1. THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) IN SO FAR AS IT IS PREJUDICIAL TO THE INTEREST OF THE APPELLANT IS NOT JUSTIFIED IN LAW AND ON FACTS AND CIRCUMSTANCES OF THE CASE. 2. AS REGARDS, DISALLOWANCE MADE UNDER SECTION 14A OF RS.73,27,710/-: 2.1. THE LEARNED CIT (APPEALS) IS NOT JUSTIFIED IN UPHOLDING THE ACTION THE LEARNED ASSESSING OFFICER IN DISALLOWING RS.73,27,710/- UNDER SECTION 14A R.W.R. 8D (2) (II) & (III), WHEN THE APPELLANT HAS NOT INCURRED ANY EXPENDITURE IN RELATION TO EARNING EXEMPT INCOME. 2.2. THE LEARNED CIT (APPEALS) HAS FAILED TO APPRECIATE THAT THE LEARNED ASSESSING OFFICER IS NOT JUSTIFIED IN MAKING AFORESAID DISALLOWANCE UNDER SECTION 14A R.W.R. 8D(2)(II) & (III) WITHOUT RECORDING ANY SATISFACTION BASED ON OBJECTIVE REASONING. 2.3. THE LEARNED CIT (APPEALS) HAS ERRED IN UPHOLDING THE ACTION OF LEARNED ASSESSING OFFICER IN CONSIDERING SHORT-TERM INVESTMENTS IN COMPUTING THE DISALLOWANCE UNDER SECTION 14A R.W. RULE 8(2) (II)/ (III), FAILING TO APPRECIATE THAT THE SHORT TERM GAINS FROM THE SAID ITA NO. 2307/BANG/2018 PAGE 2 OF 4 INVESTMENTS WERE OFFERED TO TAX. 2.4. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (APPEALS) HAS ERRED IN DIRECTING DISALLOWANCE UNDER SECTION 14A R.W.R. 8D ONLY ON A PROPORTIONATE BASIS WHEN SUCH INVESTMENTS HAVE EARNED BOTH TAX FREE AND TAXABLE INCOMES. 2.5. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT (APPEALS) HAS ERRED IN UPHOLDING THE HYPOTHETICAL DISALLOWANCE UNDER SECTION 14A R.W.R. 8D OF RS.73,27,710/- WITHOUT APPRECIATING THAT THE DISALLOWANCE CANNOT EXCEED THE EXEMPT INCOME OF RS.12,66,760/-. 3. THE LEARNED CIT (APPEALS) IS NOT JUSTIFIED IN PASSING A NON- SPEAKING ORDER BY BLINDLY DISMISSING THE APPEAL OF THE APPELLANT WITHOUT RECORDING ANY REASONS NOR ANALYSING THE MERITS OF THE CASE. 4. THE LEARNED CIT(A) IS NOT JUSTIFIED IN UPHOLDING THE LEVY OF INTEREST OF RS.4,20,690/- UNDER SECTION 234C OF IT ACT WHEN THE AFORESAID DISALLOWANCE IS NOT LEGALLY SUSTAINABLE. FOR THE ABOVE GROUNDS AND FOR SUCH OTHER GROUNDS WHICH MAY BE ALLOWED BY THE HONOURABLE MEMBERS TO BE URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE AFORESAID APPEAL BE ALLOWED. 3. AT THE VERY OUTSET, IT WAS SUBMITTED BY LD. AR OF ASSESSEE THAT GROUND NOS. 1 AND 3 ARE GENERAL AND GROUND NOS. 2.1 TO 2.4 ARE NOT PRESSED. ACCORDINGLY THESE GROUNDS ARE REJECTED AS NOT PRESSED. 4. REGARDING GROUND NO. 2.5, HE PLACED RELIANCE ON THE JUDGEMENT OF HON'BLE KARNATAKA HIGH COURT RENDERED IN THE CASE OF PRAGATHI KRISHNA GRAMIN BANK VS. JCIT AS REPORTED IN [2018] 256 TAXMAN 349 (KARNATAKA). HE SUBMITTED THAT IN THIS JUDGEMENT, IT WAS HELD BY HON'BLE KARNATAKA HIGH COURT THAT THE DISALLOWANCE U/S. 14A CANNOT EXCEED THE ACTUAL EXEMPT INCOME EARNED BY THE ASSESSEE IN THE RELEVANT YEAR. HE SUBMITTED THAT IN THE PRESENT CASE, THE ASSESSEE HAS EARNED DIVIDEND INCOME OF RS. 12,66,760/- AS NOTED BY THE AO IN PARA 3 OF THE ASSESSMENT ORDER. BUT DISALLOWANCE MADE BY THE AO U/S. 14A IS OF RS. 73,27,710/-. HE SUBMITTED THAT AS PER THIS JUDGEMENT OF HON'BLE KARNATAKA HIGH COURT, DISALLOWANCE U/S. 14A SHOULD BE RESTRICTED TO RS. 12,66,760/- BEING AMOUNT OF DIVIDEND EARNED BY ASSESSEE IN THE PRESENT YEAR. THE LD. DR OF REVENUE SUPPORTED THE ORDERS OF AUTHORITIES BELOW. ITA NO. 2307/BANG/2018 PAGE 3 OF 4 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND WE FIND FORCE IN THE SUBMISSIONS OF LD. AR OF ASSESSEE. THIS IS TRUE THAT AS PER THE NOTING BY THE AO IN PARA 3 OF THE ASSESSMENT ORDER, THE DIVIDEND INCOME BEING EXEMPT U/S. 10(34) OF IT ACT IN THE PRESENT YEAR IS ONLY RS. 12,66,760/- AND DISALLOWANCE MADE BY THE AO U/S. 14A IS TO THE EXTENT OF RS. 73,27,710/-. IN THE LIGHT OF THESE FACTS, NOW WE EXAMINE THE APPLICABILITY OF THE JUDGMENT OF HON'BLE KARNATAKA HIGH COURT CITED BY LD. AR OF ASSESSEE AS NOTED ABOVE. PARA NO. 14 OF THIS JUDGEMENT IS RELEVANT AND HENCE, WE REPRODUCE THE SAME HEREINBELOW. 14. WE MAKE IT CLEAR THAT THE EXPENDITURE FOR EARNING EXEMPTED INCOME HAS TO HAVE A REASONABLE PROPORTION TO THE INCOME, SO EARNED, GOING BY THE COMMON FINANCIAL PRUDENCE. THEREFORE, EVEN IF THE ASSESSING AUTHORITY HAS TO MAKE AN ESTIMATE OF SUCH AN EXPENDITURE INCURRED TO EARN EXEMPTED INCOME, IT HAS TO HAVE A RATIONAL NEXUS WITH THE AMOUNT OF INCOME EARNED ITSELF. DISALLOWANCE UNDER SECTION 14A OF RS. 2,48,85,000/- AS EXPENSES TO EARN EXEMPTED DIVIDEND INCOME OF RS. 1,80,30,965/- IS PER SE ABSURD AND HYPOTHETICAL. THE DISALLOWANCE UNDER SECTION 8D CANNOT EXCEED THE EXPENSES CLAIMED BY ASSESSEE UNDER THE PROVISO TO RULE 8D. THEREFORE, WHERE THE ASSESSEE CLAIMED THAT ASSESSEE DID NOT INCUR ANY SUCH EXPENDITURE DURING THE YEAR IN QUESTION TO EARN DIVIDENDS OF RS. 1,80,30,965/-, THE BURDEN WAS UPON THE ASSESSING AUTHORITY TO COMPUTE THE INTEREST ON SUCH BORROWED FUNDS WHICH WERE DEDICATEDLY USED FOR INVESTMENT IN SECURITIES TO EARN SUCH EXEMPTED DIVIDEND INCOME. THE DISALLOWANCE UNDER SECTION 14A CANNOT BE A WILD GUESSWORK BEREFT OF GROUND REALITIES. IT HAS TO HAVE A REASONABLE AND CLOSE NEXUS WITH THE FACTUALLY INCURRED EXPENSES. IT IS NOT DEEMED DISALLOWANCE UNDER SECTION I 4A OF THE ACT BUT AN ENABLING PROVISION FOR ASSESSING AUTHORITY TO COMPUTE THE SAME ON THE GIVEN FACTS AND FIGURES IN THE REGULARLY MAINTAINED BOOKS OF ACCOUNTS. THE ASSESSING AUTHORITY ALSO COULD NOT HAVE CALLED UPON THE ASSESSEE HIMSELF TO UNDERTAKE THE EXERCISE OF COMPUTING THE DISALLOWANCE UNDER SECTION 8D OF THE RULES. SUCH ABDICATION OF DUTY IN NOT PERMISSIBLE IN LAW. SINCE NO SUCH EXERCISE HAS BEEN UNDERTAKEN BY THE ASSESSING AUTHORITY, THE CASE CALLS FOR A REMAND. 6. AS PER THIS PARA OF THE JUDGEMENT REPRODUCED ABOVE, IT IS SEEN THAT IT WAS HELD BY HON'BLE KARNATAKA HIGH COURT THAT DISALLOWANCE U/S. 14A R.W.RULE 8D CANNOT EXCEED THE EXPENSES CLAIMED BY THE ASSESSEE UNDER THE PROVISO TO RULE 8D. IT IS ALSO HELD BY HON'BLE KARNATAKA HIGH COURT THAT DISALLOWANCE U/S. 14A OF RS. 248.85 LAKHS AS EXPENSES TO EARN EXEMPTED DIVIDEND INCOME OF RS. 1,80,30,965/- IS PER SE ABSURD AND HYPOTHETICAL. HENCE IN OUR CONSIDERED OPINION, THE RATIO OF THIS JUDGMENT IS THIS THAT ITA NO. 2307/BANG/2018 PAGE 4 OF 4 DISALLOWANCE U/S. 14A CANNOT EXCEED THE AMOUNT OF EXEMPT INCOME EARNED BY ASSESSEE IN THE RELEVANT YEAR. HENCE RESPECTFULLY FOLLOWING THIS JUDGEMENT OF HON'BLE KARNATAKA HIGH COURT, WE HOLD THAT DISALLOWANCE U/S. 14A CANNOT EXCEED EXEMPT INCOME OR DIVIDEND OF RS. 12,66,760/- AS NOTED BY THE AO IN PARA 3 OF THE ASSESSMENT ORDER. WE, THEREFORE, RESTRICT THE DISALLOWANCE U/S. 14A TO THIS EXTENT OF RS. 12,66,760/-. GROUND NO. 2.5 OF ASSESSEE IS ALLOWED. 7. GROUND NO. 4 IS RELATED TO CHARGING OF INTEREST U/S. 234C OF IT ACT. THIS GROUND IS CONSEQUENTIAL AND HENCE, NO SEPARATE ADJUDICATION IS CALLED FOR. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE. SD/- SD/- (LALIET KUMAR) (ARUN KUMAR GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 15 TH MARCH, 2019. /MS/ COPY TO: 1. APPELLANT 4. CIT(A) 2. RESPONDENT 5. DR, ITAT, BANGALORE 3. CIT 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, BANGALORE.