M/s. Network 18 Media & Investment Ltd., New Delhi V. DCIT, New Delhi

ITA 4311/DEL/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 0096 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 11-03-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 21-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANGEETA GUPTA
• Keywords: Business expenditure; Rule of consistency; Retrospective amendment; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH E : NEW DELHI) BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI B.C. MEENA, ACCOUNTANT MEMBER ITA NO.4311/DEL./2010 (ASSESSMENT YEAR : 2007-08) M/S. NETWORK 18 MEDIA & INVESTMENT LTD., VS. DCIT, CIRCLE 13(1), 503, 504 & 507, 5 TH FLOOR, MERCANTILE HOUSE, NEW DELHI. 15, K.G. MARG, NEW DELHI 110 001. (PAN : AABCS2472G) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI TARANDEEP SINGH, CA REVENUE BY : SMT. SANGEETA GUPTA, CIT DR ORDER PER B.C. MEENA, ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT (APPEALS)- XVI, NEW DELHI DATED 22.7.2010. THE GROUNDS OF AP PEAL READ AS UNDER :- 1. THAT ON FACTS AND IN LAW COMMISSIONER OF INCOME TAX (APPEALS) HEREINAFTER REFERRED AS CIT (A) ERRED IN UPHOLDING THE DISALLOWANCE OF RS.3,79,11,125/- U/S 14A OF THE INC OME-TAX ACT. 1.1 THAT ON FACTS AND IN LAW THE CIT (A) ERRED IN U PHOLDING THAT THE PROVISIONS OF RULE 8D OF THE INCOME TAX RULES, 1962 INSERTED BY IT (FIFTH AMDT) RULES 2008 W.E.F. 24-03-2008 ARE AP PLICABLE RETROSPECTIVELY. 1.2 THAT ON FACTS AND IN LAW THE CIT (A) ERRED IN U PHOLDING THE ASSUMPTION OF JURISDICTION U/S 14A R/W RULE 8D(2) B Y THE A.O. ITA NO.4311/DEL./2010 2 2. THAT ON FACTS AND IN LAW THE ORDERS BOTH A.O. AN D CIT (A) ARE VOID AB-INITIO AND BAD IN LAW. THAT THE APPELLANT PRAYS FOR LEAVE TO ADD, ALTER, A MEND AND / OR VARY THE GROUND(S) OF APPEALS AT OR BEFORE THE TIME OF H EARING. 2. THE ONLY ISSUE INVOLVED IN THE APPEAL IS UPHOLDI NG THE DISALLOWANCE OF RS.3,79,11,125/- U/S 14A OF THE INCOME-TAX ACT, 196 1. THE CIT (A) ERRED IN UPHOLDING THE APPLICABILITY OF RULE 8D OF INCOME TA X RULES 1962 INSERTED BY IT (FIFTH AMDT) RULES 2008 W.E.F. 24-03-2008 ARE APPLI CABLE RETROSPECTIVELY. 3. BOTH THE PARTIES WERE HEARD. 7. AFTER HEARING BOTH THE SIDES, WE FIND THAT HON'B LE MUMBAI HIGH COURTS DECISION IN THE CASE OF GODREJ & BOYCE VS. DCIT 228 ITR 81 (MUM.) IS THE ONLY HIGH COURT DECISION AVAILABLE ON THE APPLICABILITY OF THE RULE 8D. HON'BLE MUMBAI HIGH COURT IN THE AFORESAID CASE OBSERVED AS UNDER : RULE 8D R.W. S. 14A (2) IS NOT ARBITRARY OR UNREAS ONABLE BUT CAN BE APPLIED ONLY IF ASSESSEES METHOD NOT SATISF ACTORY. RULE 8D IS NOT RETROSPECTIVE AND APPLIES FROM AY 2008-09 . FOR EARLIER YEARS, DISALLOWANCE HAS TO BE WORKED OUT ON REASON ABLE BASIS U/S 14A (1) IN AY 2002-03, THE ASSESSEE CLAIMED THAT NO DISALLO WANCE U/S 14A IN RESPECT OF THE TAX-FREE DIVIDEND EARNED BY IT CO ULD BE MADE AS IT HAD NOT INCURRED ANY EXPENDITURE TO EARN THE DIVIDE ND. THE AO REJECTED THE CLAIM AND MADE A DISALLOWANCE U/S 14A. THIS WAS DELETED BY THE CIT (A). ON APPEAL BY THE DEPARTMENT , THE TRIBUNAL FOLLOWED THE JUDGEMENT OF THE SPECIAL BENCH IN DAGA CAPITAL 117 ITD 169 (MUM) (WHERE IT HAD BEEN HELD THAT S. 14A(2 ) & (3) & RULE 8D ARE PROCEDURAL IN NATURE AND HAVE RETROSPECTIVE EFFECT) AND REMANDED THE MATTER TO THE AO FOR RE-COMPUTING THE DISALLOWANCE. THE ASSESSEE CHALLENGED THE DECISION OF THE TRIBUNA L. HELD: ITA NO.4311/DEL./2010 3 (1) THE ARGUMENT THAT DIVIDEND ON SHARES / UNITS IS NOT TAX-FREE IN VIEW OF THE DIVIDEND-DISTRIBUTION TAX PAID BY THE P AYER U/S 115-O IS NOT ACCEPTABLE BECAUSE SUCH TAX IS NOT PAID ON BEHA LF OF THE SHAREHOLDER BUT IS PAID IN RESPECT OF THE PAYERS O WN LIABILITY; (2) S. 14A SUPERSEDES THE PRINCIPLE OF LAW THAT IN THE CASE OF A COMPOSITE BUSINESS EXPENDITURE INCURRED TOWARDS TAX -FREE INCOME COULD NOT BE DISALLOWED AND INCORPORATES AN IMPLICI T THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NO N-TAXABLE INCOME. ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLIS HED WHICH IS THE RELATIONSHIP OF THE EXPENDITURE WITH I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME A DISALLOW ANCE U/S 14A HAS TO BE EFFECTED ; (3) THE ARGUMENT THAT A LITERAL INTERPRETATION OF S . 14A LEADS TO ABSURD CONSEQUENCES IS NOT ACCEPTABLE. S 14A IS FOUNDED ON A VALID RATIONALE THAT THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET INCOME I.E GROSS INCOME MINUS EXPENDITURE; (4) THE ARGUMENT THAT THE METHOD IN RULE 8D R.W.S 1 4A (2) FOR DETERMINING EXPENDITURE RELATING TO THE TAX-FREE IN COME IS ARBITRARY AND VIOLATIVE OF ARTICLE 14 IS NOT ACCEPTABLE BECAU SE THERE IS AN ADEQUATE SAFEGUARD BEFORE RULE 8D CAN BE INVOKED. THE AO CANNOT IPSO FACTO APPLY RULE 8D BUT CAN DO SO ONLY WHERE H E RECORDS SATISFACTION ON AN OBJECTIVE BASIS THAT THE ASSESSE E IS UNABLE TO ESTABLISH THE CORRECTNESS OF ITS CLAIM . ALSO A UNIFORM METHOD PRESCRIBED TO RESOLVE DISPUTES BETWEEN ASSESSEES AN D THE DEPARTMENT CANNOT BE SAID TO BE ARBITRARY OR OPPRESSIVE. THERE IS A RATIONALE IN RULE 8D AND ITS METHOD IS FAIR & REASONABLE. IT C ANNOT BE SAID THAT THERE IS MADNESS IN THE METHOD OF RULE 8D SO AS T O RENDER IT UNCONSTITUTIONAL; (5) RULE 8D, INSERTED W.E.F 24.3.2008 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATI NG EXPENDITURE RELATABLE TO TAX-FREE INCOME. IT APPLIES W.E.F AY 2008- 09 ; ITA NO.4311/DEL./2010 4 (6) FOR THE AYS WHERE RULE 8D DOES NOT APPLY, THE A O WILL HAVE TO DETERMINE THE QUANTUM OF DISALLOWABLE EXPENDITURE B Y A REASONABLE METHOD HAVING REGARD TO ALL FACTS AND CIRCUMSTANCES; (7) ON FACTS, THOUGH IN THE EARLIER YEARS, THE TRIB UNAL HAD HELD THAT THE TAX-FREE INVESTMENTS HAD BEEN MADE OUT OF THE A SSESSEES OWN FUNDS, THIS DID NOT MEAN THAT THERE WAS NO EXPENDIT URE INCURRED TO EARN TAX-FREE INCOME. EVEN THOUGH RULE 8D DID NOT APPLY TO AY 02-03, THE AO HAD TO CONSIDER WHETHER DISALLOWANCE COULD BE MADE U/S 14A (1) . ALSO, THE PRINCIPLE OF CONSISTENCY WOULD NOT APPLY AS S. 14A HAD INTRODUCED A MATERIAL CHANGE IN THE LAW. RESPECTFULLY FOLLOWING THE SAME, WE RESTORE THE ISS UE TO THE FILE OF ASSESSING OFFICER FOR WORKING OUT THE REASONABLE DISALLOWANCE S U/S 14A (1). 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON THIS 18 TH DAY OF MARCH, 2011. SD/- SD/- (RAJPAL YADAV) (B.C. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED THE 18 TH DAY OF MARCH, 2011 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-XVI, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.