NATIONAL SECURITIES DEPOSITARY LTD, MUMBAI V. ASST COMM OF INCOME TAX-7(2)(2), MUMBAI

ITA 287/MUM/2023

AI Insights

The case involves M/s. National Securities Depository Ltd., which appealed against the order of the Commissioner of Income Tax (Appeals), Delhi, confirming the disallowance made by the AO under section 14A read with rule 8D of the Income Tax Act, 1961. The disallowance was related to expenses incurred in earning exempt income. The assessee had already made a suo-moto disallowance of INR 27,10,703, which was not accepted by the AO, who then made a further disallowance of INR 4,58,89,000. The Tribunal examined whether the AO had validly recorded his dissatisfaction with the assessee's disallowance and whether the application of rule 8D was justified.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 301110 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 18-05-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 30-01-2023
• Other Referred Cases: Pr. CIT vs. Bombay Stock Exchange Ltd., Maxopp Investment Ltd. vs. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D; Set aside
• Section: 144; 14A; 115JB; 113

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “B”, MUMBAI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI GAGAN GOYAL, ACCOUNTANT MEMBER ITA No.287/M/2023 Assessment Year: 2017-18 M/s. National Securities Depository Ltd., 4 th Floor, A Wing, Trade World, Kamala Mills Compound, Senapati Bapat Marg, Lower Parel, Mumbai – 400 013 PAN: AADCN9802F Vs. Assistant Commissioner of Income Tax-7(2)(2), Room No.134, 1 st Floor, Aayakar Bhavan, M.K. Road, Mumbai – 400 020 (Appellant) (Respondent) Present for: Assessee by : Shri Madhur Agarwal, A.R. Revenue by : Shri Chetan Kacha, Sr. A.R. Date of Hearing : 19 . 05 . 2023 Date of Pronouncement : 31 . 05 . 2023 O R D E R Per : Kuldip Singh, Judicial Member: The assessee by filing the present appeal, sought to set aside the impugned order dated 02.12.2022 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment year 2017-18 on the grounds inter-alia that :- “General in nature 1.1. On the facts and circumstances of the case and in law, the Learned CIT (A) has erred in upholding the addition made by the learned ACIT ITA No.287/M/2023 M/s. National Securities Depository Ltd. 2 to the returned income vide assessment order amounting to INR4,58,89,000 under normal provisions of the Act. 2. Ground No. 2: Additional disallowance made under section 14A of the Act read with Rule 80 of the Rules. A. Under normal provisions of the Act 2.1. The Learned CIT (A), has erred in upholding the additional disallowance amounting to INR 4,58,89,000 under section 14A of the Act read with Rule 8D of the Rules made by the learned ACIT in relation to the exempt Income without appreciating the fact that the Appellant has already dis-allowed a sum of INR 27,10,703 on suo-moto basis. 2.2. The learned CIT(A) has erred in concluding that the Appellant has paid substantial amount as interest expenditure without taking into consideration the fact that the Appellant is a totally debt free company and the investments have been made by it from owned funds which can be evidenced from the financial statements for the captioned year. 2.3. The Learned CIT (A) has merely relied on the order of the learned ACIT with respect to the requirement of recording the satisfactory reasons in relation to the aforesaid dis-allowance and failed to appreciate the fact that the onus of recording the reason for dis- satisfaction after the verification and examination of the books and accounts lies with the leaned ACIT. 2.4. The Learned CIT (A) erred in not appreciating the fact that the amendment made to section 144 of the Act vide Finance Act 2022 is prospective in nature. 2.5. Without prejudice to the above, the Learned CIT (Appeal) has erred in ignoring the several judicial precedents and not considering the fact that the said matter is covered in Appellant's own case for AY 2013-14, AY 2014-15 and AY 2015-16 wherein the Commissioner of Income Tax (Appeals) has deleted the further dis-allowance made by the learned AO and granted relief to the Appellant. B. Under section 115JB of the Act 2.6. The Indian Revenue authorities (IRA) have erred in computing book profit in accordance with section 115JB of the Act i.e. increasing the adjusted book profit by making the addition for dis-allowance of INR 4,58,89,000 made under section 14A of the Act read with Rule 8D of the Rules. 2.7. The IRA at lower level have erred in appreciating the fact Explanation 1 to section 115JB of the Act explicitly provides that adjustments under clauses (a) to (1) to the above explanation are to be increased by, if it has been debited to the statement of profit and loss and no adjustments other than the adjustments provided in section 115JB of the Act can made to the Book Profits. ITA No.287/M/2023 M/s. National Securities Depository Ltd. 3 The Appellant craves to leave to submit such further facts at any time before or at the time of hearing of the appeal, so as to enable the Learned Income Tax Appellate Tribunal (ITAT) to decide this appeal according to law.” 2. Briefly stated facts necessary for consideration and adjudication of the issues at hand are : the assessee company is into the business of providing infrastructure for dematerialization of securities and facilitating electronic settlement of trades in Indian Securities market. During scrutiny proceedings the Assessing Officer (AO) noticed from the financials of the assessee company that the assessee has earned exempt income to the tune of Rs.20,94,70,146/- and suo-moto disallowance of Rs.27,10,703/- being expenses directly related to earn exempt income. Declining the contentions raised by the assessee, the AO proceeded to make disallowance of Rs.4,58,89,000/- by making following computation: Sr. No Particulars Amount (in Rs. lakhs) 1 Amount of expenses directly related to the income Nil 2 Average value of monthly average value of investment 48599.6 3 1 % of the average value of investment 485.99 Disallowance under Section 14A (1 + 3) 485.99 Less: Disallowance suo moto made in R.O.I. 27.10 Disallowance u/s. 14A r.w. Rule 8D to be made 458.89 Therefore disallowance u/s 14A r.w.Rule 8D of Rs.4,58,89,000/- is hereby made and added to total income of the assessee.” ITA No.287/M/2023 M/s. National Securities Depository Ltd. 4 3. The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has confirmed the addition by partly allowing the appeal. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee has come up before the Tribunal by way of filing present appeal. 4. We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto. 5. Undisputedly during the year under consideration the assessee company has earned exempt income of Rs.20,94,70,146/-. It is also not in dispute that the assessee has suo-moto disallowed an amount of Rs.27,10,703/- being the expenses directly related to earn exempt income under section 14A of the Income Tax Act, 1961 (for short ‘the Act’). It is also not in dispute that the assessee has earned the exempt income by making investments in debentures or bonds, mutual funds and also earned exempt income on account of interest on tax fee bond to the tune of Rs.17,47,21,997/-, interest on zero coupon bonds of Rs.54,20,166/- and dividend income of Rs.2,93,27,983/-. It is also not in dispute that the assessee has not incurred any interest expenses during the year under consideration to earn the exempt dividend income. 6. In the backdrop of the aforesaid facts and circumstances of the case the Ld. A.R. for the assessee contended that the AO has proceeded to make the disallowance on the basis of conjecture and surmises without examining the working given by the assessee for ITA No.287/M/2023 M/s. National Securities Depository Ltd. 5 making suo-moto disallowance of Rs.27,10,703/- by making valid dissatisfaction and relied upon the decision rendered by Hon’ble Bombay High Court in case of Pr. CIT vs. Bombay Stock Exchange Ltd. (2020) 113 taxmann.com 303 (Bombay). The Ld. A.R. for the assessee also contended that in the earlier year for A.Y. 2013-14 the Ld. CIT(A) himself deleted the addition made by the AO under section 14A by accepting the appeal filed by the assessee, which order has already been accepted by the Revenue Department. The assessee has also brought on record working of disallowance under section 14A of the Act. The assessee has also brought on record working of disallowance under section 14A of the Act showing direct expenditure which is extracted for ready perusal as under: ITA No.287/M/2023 M/s. National Securities Depository Ltd. 6 7. However, on the other hand, the Ld. D.R. for the Revenue in order to repel the argument addressed by the Ld. A.R. for the assessee relied upon para 4.2 of the assessment order wherein the AO stated to have recorded his satisfaction and para 5.7 of the impugned order passed by the Ld. CIT(A). 8. In the backdrop of the aforesaid undisputed facts we have examined para 4.2 of the assessment order vide which the AO has not accepted the suo-moto disallowance made by the assessee but proceed to compute his own disallowance under section 14A. For ready perusal para 4.2 of the assessment order is extracted as under: “4.2 The submission of the assessee is perused and the contention of the assessee company has been carefully examined, however, the same cannot be acceptable for the following reasons:- i. Rule 8D envisages a situation where the assessee claims that he has not made any expense with relation to an exempt income or the assessing officer is not satisfied with this claim. A fair and reasonable method of calculating the disallowance is therefore charted out by the Rules. ii. It is well known that capital has cost and that element of cost is represented by interest. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. The assessee company is paying substantial amounts as interest expenditure. It is using these interest bearing funds for investments yielding exempt income iii. The term expenditure occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative. managerial or financial. The Phraseology used in section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with the exempt income. This is based on the principle that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income.” ITA No.287/M/2023 M/s. National Securities Depository Ltd. 7 9. Bare perusal of the para 4.2 extracted above goes to prove that the AO has recorded generic findings inter-alia that when there is a reasonable method of calculating the disallowance under rules claim of the assessee is not acceptable; that to earn an exempt income no expense has been incurred that element of cost is represented by interest and; that as the assessee company is paying substantial amount as interest expenditure and has also been using these interest bearing funds for investment yielding exempt income; and that under section 14A not only direct expenditure but also all forms of expenditure whether direct-indirect, administrative managerial, or financials are to be taken into account for making disallowance. 10. Aforesaid dissatisfaction recorded by the AO is not sustainable in the eyes of law because he has neither examined nor questioned the working given by the assessee in its audited financials for making suo-moto disallowance. Consequently the AO has also lost sight of the fact that the assessee has not incurred any interest bearing funds for investment to earn the exempt dividend income. Because in form No.3CD at page 89 while making suo-moto disallowance of Rs.27,10,703/- the assessee has given an auditor note that though it has not incurred any expenditure which is inadmissible under section 14A but without prejudice to the company’s claim the assessee has reported 5% of the allocable part of the salary earned by the top management amounting to Rs.1894481/- and 43% of the allocable salary is considered as administrative, operating and other charges as inadmissible to earn exempt income amounting to Rs.1,86,222/- and thereby made the total suo-moto disallowance of ITA No.287/M/2023 M/s. National Securities Depository Ltd. 8 Rs.27,10,703/-. When the AO has not recorded any valid dissatisfaction as to not accepting the suo-moto disallowance computed by the assessee nor rejected the books of accounts, disallowance made by the AO is not sustainable in the eyes of law. 11. Hon’ble Bombay High Court in case of Bombay Stock Exchange Ltd. (supra) decided the identical issue in favour of the assessee by returning following findings: “9. We note that it is evident from the extracted part of the assessment order referred to hereinabove that the Assessing Officer has come to the conclusion that the disallowance claimed by the Respondent was not consistent with Rule &D of the said Rules. It is only in view of the disallowances not being worked out as per Rule 8D of the Rules, that the Assessing Officer is not satisfied with the disallowance offered by the Respondent. This, to our mind, is putting the cart before the horse. The Assessing Officer must first record a conclusion that having regard to the accounts of the assessee, he is not satisfied with the disallowance offered by the Respondent in terms of section 14A12) of the Act only on being dissatisfied with the abuse, does Rule 8D of the Rules can be invoked to compute the disallowance. 10. Mr. Vaidya, learned counsel appearing for the Respondent is correct in his submission that satisfaction which was to be recorded by the Assessing Officer has to be clear and on an objective basis without any reference to Rule 8D. In support of his contention, our attention is drawn to the judgment of this Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy CIT [2010] 194 Taxman 2030328 IIR 81 while dealing with constitutional validity of Rule SD of the said Rules, negatived the challenge to its validity by, inter alia, recording as under: “57. Now in dealing with the challenge it is necessary to advert to the position that Sub-section (2) of Section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It therefore merits emphasis that Sub-section (2) of Section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the ITA No.287/M/2023 M/s. National Securities Depository Ltd. 9 basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill 2006 and the CBDT circular dated 28 December 2006 state that since the existing provisions of Section 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between tax payers and the department on the method of determining such expenditure. It was in this background that Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub- section (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income. 58. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated".-M.A. Rasheed v. The State of Kerala AIR 1974 SC 2249 (at para 7 page 2252). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under Article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under Sub-section (2) of Section 14A. As we shall note shortly hereafter, Sub-rule (1) of Rule 8D has also incorporated the essential requirements of ITA No.287/M/2023 M/s. National Securities Depository Ltd. 10 Sub-section (2) of Section 14A before the Assessing Officer proceeds to apply the method prescribed under Sub-rule (2)." (emphasis supplied) 11. Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper.” 12. So in the instant case the AO has not recorded any valid dissatisfaction with the suo-moto disallowance made by the assessee rather recorded the incorrect facts that the assessee has paid substantial amounts as interest expenditure and has also recorded generic reasons that to arrive at correct disallowance under section 14A, rule 8D provides a fair and reasonable method of calculating the disallowance. Not a word has been written as to how and under what circumstances the working given by the assessee for making suo-moto disallowance is not correct. 13. Hon’ble Supreme Court has also held in Maxopp Investment Ltd. vs. CIT 301 CTR 489 that only after recording satisfaction under section 14A(2) the provisions contained under rule 8D of the Rules for apportionment of expenses can be applied by returning following findings: “41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a ITA No.287/M/2023 M/s. National Securities Depository Ltd. 11 satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.” 14. In view of what has been discussed above, we are of the considered view that disallowance made by the AO and confirmed by the Ld. CIT(A) under section 14A read with rule 8D apart from suo-moto disallowance made by the assessee to the tune of Rs.27,10,703/- is not sustainable in the eyes of law, hence ordered to be deleted. 15. Resultantly, the appeal filed by the assessee is allowed for statistical purposes. Order pronounced in the open court on 31.05.2023. Sd/- Sd/- (GAGAN GOYAL) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 31.05.2023. * Kishore, Sr. P.S. Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// By Order Dy/Asstt. Registrar, ITAT, Mumbai.