L & T EMPLOYEES WELFARE FOUNDATION, MUMBAI V. ACIT CIR 15(1), MUMBAI

ITA 4814/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3449 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-06-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 15-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: HEENA DOSHI
• Keywords: Earning of tax free income; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI . . , ! ' #'' '$ , % ! & BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER . : 4814 / / 2011 A.Y. 2008-09 ITA NO. : 4814/MUM/2011 (ASSESSMENT YEAR : 2008-09) L&T EMPLOYEES WELFARE FOUNDATION, L&T HOUSE, N.M. MARG, BALLARD ESTATE, .: PAN: AAATL 3350 J VS THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE 15(1), ROOM NO. 546, 5 TH FLOOR, AAYAKAR BHAVAN, MUMBAI -400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : MISS HEENA DOSHI RESPONDENT BY : SHRI MANOJ KUMAR /DATE OF HEARING : 05-06-2013 !' / DATE OF PRONOUNCEMENT : 12-06-2013 * O R D E R #'' '$ , : PER VIVEK VARMA, JM: THE APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A)- 26, MUMBAI, DATED 08.03.2011, WHEREIN THE FOLLOWING GROUNDS HA VE BEEN TAKEN: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) [CIT( A)] ERRED IN CONFIRMING THE DISALLOWANCE OF CERTAIN AMOUNT OF IN TEREST AND ADMINISTRATIVE EXPENDITURE ALLEGEDLY ATTRIBUTED TO INCOME EARNED ON INVESTMENTS MADE IN EQUITY SHARES AND MUTUAL FUNDS UNDER SECTION 14A OF THE ACT BY INVOKING PROVISIONS OF RULE 8D. 2. WITHOUT PREJUDICE TO GROUND NO. 1, THE LEARNED C IT(A) ERRED IN CONFIRMING THE PROPORTIONATE INTEREST EXPENDITURE F OR THE PURPOSE OF DISALLOWANCE UNDER SECTION 14A DISREGARDING THE FAC T THAT THE SAID INTEREST EXPENDITURE HAS DIRECT NEXUS TO THE INTERE ST INCOME EARNED AND OFFERED TO TAX BY THE APPELLANT IN RETURN OF INCOME . 3. WITHOUT PREJUDICE TO GROUND NOS. 1&2, THE LEARNE D CIT(A) ERRED IN NOT RESTRICTING THE DISALLOWANCE UNDER SECTION 14A TO T HE TOTAL EXPENDITURE CLAIMED IN THE RETURN OF INCOME. $ . . . 4814 /%% / 2011 L&T EMPLOYEES WELFARE FOUNDATION ITA NO. 4814/MUM/2011 2 2. THE ONLY ISSUE, AS PER VARIOUS GROUNDS RAISED PERTAIN ED TO DISALLOWANCE OF EXPENSES U/S 14A READ WITH RULE 8D. 3. THE FACTS ARE THAT THE ASSESSEE DURING THE YEAR UN DER CONSIDERATION CLAIMED INTEREST INCOME OF RS. 39,33,586/- AS E XEMPT. SINCE THE RELEVANT ASSESSMENT YEAR IS 2008-09, THE AO IN VOKED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D AND COMPUTED THE DISALLOWANCE OF EXPENSES AT RS. 1,98,32,034/- AGAINST THE T OTAL EXPENDITURE DEBITED IN THE INCOME & EXPENDITURE ACCOUNT AT RS. 43,13,896/-. IN THE ASSESSMENT PROCEEDINGS, THE ASSESSEE POINTED OUT THAT OUT OF THIS EXPENSE, EXPENSE OF RS. 39,33,586/- HAS DIRECT NEXUS WITH THE INTEREST INCOME, AND ONLY RS. 3,80,310/- IS THE E XPENSE THAT IS OTHERWISE CLAIMED. THE AO, HOWEVER, PROCEEDED TO COMPU TE THE DISALLOWANCE. 4. THE ASSESSEE BEING AGGRIEVED, REPRESENTED BEFORE THE CIT(A), BUT THE CIT(A) SUSTAINED THE DISALLOWANCE, AS COMPUTED BY THE AO. 5. AGGRIEVED, THE ASSESSEE IS NOW BEFORE THE ITAT. 6. BEFORE US, THE AR SUBMITTED THAT REVENUE AUTHORITIES HAVE MECHANICALLY INVOKED THE IMPUGNED PROVISIONS, WHEREIN, THE A O, NEITHER WENT INTO THE ACCOUNTS OF THE ASSESSEE, NOR, DID HE RECORD HIS SATISFACTION, AS TO WHY HE IS INVOKING THE RELEVANT RULE. THIS , IS AGAINST THE RELEVANT PROVISIONS, AS HELD IN THE CASE OF J K INVEST ORS (BOMBAY) LTD. VS ACIT, ITA NO. 7856/MUM/2011, WHEREIN IN PARA 18 O F THE ORDER, IT HAS BEEN HELD, AFTER CONSIDERING THE PRINCIPLES LAID DOWN BY VARI OUS JUDGMENTS, IT IS IMPERATIVE THAT THE ASSESSING OFFICER CAN INVOKE RU LE 8D ONLY WHEN HE RECORDS SATISFACTION IN REGARD TO THE CORRECTNESS O F THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE. THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTERING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITURE INCURRED IN RELATION TO E XEMPT INCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. WHILE REJECTING THE CLAIM OF THE ASSESSEE WITH REGA RD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WOULD HAVE TO INDICATE COGENT REA SONS FOR THE SAME. $ . . . 4814 /%% / 2011 L&T EMPLOYEES WELFARE FOUNDATION ITA NO. 4814/MUM/2011 3 THEREFORE, IT IS ALL THE MORE NECESSARY THAT AO HAS TO EXAMINE THE ACCOUNTS OF ASSESSEE FIRST AND THEN IF HE IS NOT SA TISFIED WITH THE CORRECTNESS OF THE CLAIM, ONLY HE CAN INVOKE RULE 8 D. NO SUCH EXAMINATION WAS MADE OR SATISFACTION WAS RECORDED B Y AO IN THIS CASE. IT WAS NOTICED THAT THE ASSESSING OFFICER HAS NOT C ONSIDERED THE CLAIM OF THE ASSESSEE AT ALL AND HE HAS STRAIGHTWAY EMBARKED UPON COMPUTING DISALLOWANCE UNDER RULE 8D ON THE PRESUMPTION THAT PORTFOLIO MANAGEMENT INVOLVES AT LEAST 2% OF CHARGES. DISALLO WANCE UNDER SECTION 14A REQUIRED FINDING OF INCURRING OF EXPEND ITURE AND WHERE IT WAS FOUND THAT FOR EARNING EXEMPTED INCOME NO EXPEN DITURE HAD BEEN INCURRED, DISALLOWANCE UNDER SECTION 14A COULD NOT STAND. WE NOTICE THAT ASSESSEE ITSELF DISALLOWED THE INTEREST WHICH IS DIRECTLY APPLICABLE, DMAT CHARGES AND ADMINISTRATIVE EXPENSES ON ESTIMAT IONS, TOTALING TO RS.1,55,44,610. ASSESSEE IS A HUNDRED CRORE TURNOVE R COMPANY. AO HAS NOT EXAMINED ANY EXPENDITURE CLAIMED IN P&L ACCOUNT SO AS TO RELATE TO EXEMPT INCOME, NOR GAVE A FINDING THAT ASSESSEE CLA IM IS NOT CORRECT FOR ANY REASON. RULE 8D CAN NOT BE INVOKED DIRECTLY WIT HOUT SATISFYING ABOUT THE CLAIMS OR OTHERWISE. CONSEQUENTLY, THE DI SALLOWANCE WAS NOT PERMISSIBLE. WE THEREFORE, ALLOW THE GROUND OF APPE AL. 7. THE AR, THEREFORE, PLEADED THAT SINCE THE ISSUE HAS NO T BEEN DEALT WITH CORRECTLY BY THE AO, IT MUST BE RESTORED TO HIM WITH THE APPROPRIATE DIRECTIONS. 8. THE DR RELIED UPON THE ORDERS OF THE REVENUE AUTHORITIES. 9. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES. ON G OING THROUGH THE RELEVANT PROVISION OF SECTION 14A(2) AND THE CASE CITED BY THE AR, WE ARE OF THE VIEW THAT THE AO CANNOT INVOKE TH E PROVISIONS OF RULE 8D UNTIL AND UNLESS, HE GIVES A SPECIFIC AND COGENT REA SONS WHICH WOULD ACCORD HIS SATISFACTION, THAT THE ACCOUNTS CANNOT B E RELIED UPON. THIS ASPECT HAS BEEN DEALT WITH COMPREHENSIVELY IN THE C ASE OF J K INVESTORS (SUPRA), (WHERE ONE OF US WAS A PARTY) , TO HOLD, RULE 8D CANNOT BE INVOKED DIRECTLY, WITHOUT SATISFYING ABOUT THE CLAIMS OR OTHERWISE. CONSEQUENTLY, THE DISALLOWANCE WAS NOT PERMI SSIBLE. IN THIS JUDGMENT, THE WORDS, IF AO HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM , HAS BEEN EXAMINED. THE COORDINATE BENCH EXPLAINED, THAT BEFORE GOING TO THE COMPUTATION, THE AO HAS TO CROSS THE BARRIER OF THE SATISFACTION WITH THE CORRECTNESS OF THE CLAIM, THE AO CAN BE PERMITTED TO STRAIGHTWAY APPLY THE COMPUTATION UNDER RULE 8D. IT HAS TO BE MENTIONED THAT EVEN THE $ . . . 4814 /%% / 2011 L&T EMPLOYEES WELFARE FOUNDATION ITA NO. 4814/MUM/2011 4 JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MA NUFACTURING CO. LTD. VS DCIT, REPORTED IN 328 ITR 81 (BOM), HAS EMPHAS IZED THAT THE SATISFACTION OF THE AO HAS TO BE OBJECTIVELY AR RIVED AT ON THE BASIS OF THOSE ACCOUNTS .. WHILE CONCLUDING THE COORDINATE BENCH HAS MADE THE FOLLOWING OBSERVATION ; SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INSER TED BY AN AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006 WITH EFFEC T FROM APRIL 1, 2007. UNDER SUB-SECTION (2), THE ASSESSING OFFICER IS REQ UIRED TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED BY AN ASSESSEE IN RE LATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. S UB-SECTION (2) WAS INSERTED SO AS TO PROVIDE A UNIFORM METHOD APPL ICABLE WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECT NESS OF THE CLAIM OF THE ASSESSEE. PARLIAMENT HAS PROVIDED AN ADEQUATE SAFEG UARD TO THE INVOCATION OF THE POWER TO DETERMINE THE EXPENDITUR E 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 RE GARD TO THE ACCOUNTS OF THE ASSESSEE. THESE SAFEGUARDS WHICH AR E IMPLICIT IN THE REQUIREMENTS OF FAIRNESS AND FAIR PROCEDURE UND ER ARTICLE 14 MUST BE OBSERVED BY THE ASSESSING OFFICER WHEN HE A RRIVES AT HIS SATISFACTION UNDER SUB-SECTION (2) OF SECTION 14A. SUB-RULE (1) OF RULE 8D OF THE INCOME-TAX RULES, 1962, HAS ALSO INC ORPORATED THE ESSENTIAL REQUIREMENTS OF SUB-SECTION (2) OF SECTIO N 14A BEFORE THE ASSESSING OFFICER PROCEEDS TO APPLY THE METHOD PRESCRIBED UNDER SUB-RULE (2) .. (EMPHASIS SUPPLIED) 10. IN THE INSTANT CASE, WE DO NOT FIND ANY BASIS OR SAT ISFACTION HAVING BEEN RECORDED BY THE AO, AS PER THE RELEVANT PR OVISIONS OF THE ACT, AND EVEN AS PER THE OBSERVATIONS MADE BY THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (SUPRA). THE AO HAS NOWHERE MADE ANY REFERENCE WITH REGARD TO THE CLAIM OF THE ASSES SEE, CONCERNING EXPENSES, HAVING DIRECT NEXUS WITH THE EXEMPT INCOME. THIS, IN OUR OPINION IS NOT IN LINE WITH THE RATIOS LAID DOWN IN GODREJ & BOYCE BY HONBLE BOMBAY HIGH COURT AND IN THE CASE OF J K INVESTORS, ITAT, MUMBAI. 11. IN SUCH CIRCUMSTANCES, WE SET ASIDE THE ORDER OF THE CIT(A) & DIRECT THE AO TO DELETE THE DISALLOWANCE WORKED OUT BY H IM AT RS. 1,98,32,034/-, IN ACCORDANCE WITH THE PROVISIONS OF SECTION 14A(2) READ WITH RULE 8D. $ . . . 4814 /%% / 2011 L&T EMPLOYEES WELFARE FOUNDATION ITA NO. 4814/MUM/2011 5 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH JUNE, 2013. SD/- SD/- ( .. ) ( #'' '$ ) ! ! (P.M. JAGTAP) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 12 TH JUNE, 2013 / COPY TO:- 1) / THE APPELLANT. 2) / THE RESPONDENT. 3) $ $ ( ( ) - 26, MUMBAI / THE CIT (A)-26, MUMBAI. 4) $ $ ( 15, MUMBAI / THE CIT15, MUMBAI, 5) *+, - . , $ - , %/ / THE D.R. A BENCH, MUMBAI. 6) ,0 1 COPY TO GUARD FILE. $23 / BY ORDER / / TRUE COPY / / [ 4 / 5 6 $ - , %/ DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI *895 . . * CHAVAN, SR. PS