SMS Holdings (P) Ltd., New Delhi V. DCIT, New Delhi

ITA 5192/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3381 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 4 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 07-06-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 22-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SUMIT GOE L
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: BENCH F NEW DELHI BEFORE SRI R.K.PANDA, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA NO. 5192 /DEL/201 4 A.Y. 20 10 - 11 SMS HOLDINGS (P) LTD. VS. DCIT, CIRCLE 9(1) C/O RAJ KUMAR & ASSOCIATES, CA NEW DELHI 4435/7, ANSARI ROAD, DARYA GANJ NEW DELHI 110 002 PAN: AABCS7079R (APPELLANT) (RESPONDENT) APPELLANT BY: SH. RAJ KUMAR GUPTA & SH . SUMIT GOEL, CA RESPONDENT BY: S H. ATIQ AHMAD, SR.D.R. DATE OF HEARING: 0 7 .02.2018 DATE OF PRONOUNCEMENT : 1 9 . 0 2 . 2 0 1 8 ORDER PER BEENA A PILLAI, JUDICIAL MEMBER T HE PRESENT APPEAL HAS BEEN PREFERRED BY ASSESSEE AGAINST THE ORDER DATED 22/08/14 PASSED BY LD.CIT(A) - 12, NEW DELHI FOR ASSESSMENT YEAR 2010 - 11 ON THE FOLLOWING GROUND OF APPEAL: THAT UNDER THE FACTS AND CIRCUMSTANCES, THERE IS ABSOLUTELY NO LEGALITY AND JUSTIFICATION IN DISALLOWING RS.11,11,484/ - U/S 14A OF 2 I.T. ACT R. W. RULE 8D OF I.T. RULES AGAINST SUO - MOTTO DISALLOWANCE OF RS.30,853/ - . THE ONLY ISSUE RAISED BY ASSESSEE IS IN RESPECT OF DISALLOWANCE UNDER SECTION 14 A TO THE EXTENT OF RS.11,11,484/ - . 2. BRIEF FACTS OF THE CASE ARE AS UNDER . A SSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS.2,63,84,650/ - ON 29/09/10. THE SAME WAS PROCESSED UNDER SECTION 143 (1) O F THE ACT AND THE CASE WAS SELECTED FOR SCRUTINY. ACCORDINGLY NOTICES UN DER SECTION 143(2) WAS SENT TO ASSESSEE , ALONG WITH QUESTIONNAIRES UNDER SECTION 142(1). IN RESPONSE TO THE STATUTORY NOTICES, REPRESENTATIVE OF ASSESSEE APPEARED FROM TIME TO TIME AND SUBMITTED DETAILS WHICH WERE VERIFIED AND PLACED ON RECORD. 2.1. LD.AO OBSERVED THAT ASSESSEE HAD EARNED DIVIDEND OF RS.18,94,190/ - AGAINST WHICH SUO - MOTO DISALLOWANCE OF RS.30,853/ - WAS MADE. HOWEVER LD.AO COMPUTED DISALLOWANCE AS PER RULE 8D, AT RS. 11,42,337/ - . 2.2. AGGRIEVED BY THE ORDER OF LD. AO ASSESSEE PREFERRED APPEAL BEFORE LD. CIT (A) WHO CONFIRM ED THE FINDINGS OF LD. AO. 2.3. AGGRIEVED BY THE ORDER OF LD. CIT (A), ASSESSEE IS IN APPEAL BEFORE US NOW. 3. THE LD. AR SUBMITTED THAT ASSESSING OF FICER HAS NOT RECORDED ANY OBJECTIVE SATISFACTION FOR HOLDING THAT CLAIM OF DISALLOWANCE BY ASSESSEE IS INCORRECT. HE SUBMITTED THAT LD. AO HAS ALSO NOT NOTICED ANY EXPENSES THAT HAS BEEN INCURRED FOR EARNING EXEMPT INCOME . I T HAS BEEN SUBMITTED THAT NO DIRECT EXPENSES HAVE BEEN INCURRED TO EARN THE DIVIDEND , AND ALL THE DIVIDEND STAND CREDITED DIRECTLY TO THE BANK ACCOUNTS THROUGH ECS AND BY 3 CHEQUE . . HE SUBMITTED THAT THE DISALLOWANCE MADE BY ASSESSING OFFICER IS WITHOUT PROPER APPLICATION OF MIND. LD. AR PLACED RELIANCE UPON THE ORDER PASSED BY LD. CIT (A) IN ASSESSEE S OWN CASE FOR ASSESSMENT YEAR 2009 - 10 VIDE ORDER DATED 04/01/ 2013 , WHEREIN ON IDENTICAL FACTS, DISALLOWANCE MADE BY LD.A.O. WAS DELETED. HE REFERRED TO PAGE NO. 17 - 27 OF THE PAPER BOOK WHEREIN THE ORDER PASSED BY LD. CIT (A) FOR ASSESSMENT YEAR 2009 - 10 HAS BEEN PLACED. 3.1. ON THE OTHER HAND LD.DR REFERRING TO PARA 3.10 OF ASSESSMENT ORDER SUBMITTED THAT LD. AO HAS EXPRESSED HIS DISSATISFACTION REGARDING THE EXPENDITURE DISALLOWED BY THE ASSESSEE FOR THE INCOME EARNED WHICH IS EXEMPT. HE THUS SUPPORTED THE ORDERS PASSED BY AUTHORITIES BELOW. 4. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOTH THE SIDES IN THE LIGHT OF THE RECORDS PLACED BEFORE US. 4.1. THE PRIMARY ARGUMENT ADVANCED BY LD. AR IS REGARDING SATISFACTION REQUIRED TO BE RECORDED FOR THE PURPOSE OF COMPUTING DISALLOWANCE U/S 14A READ WITH RULE 8D, WE ARE OF THE VIEW THAT HON BLE DELHI HIGH COURT IN THE CASE OF INDIA BULLS FINANCIAL SERVICE S VERSUS DCIT, REPORTED IN (2016) 76 TAXMANN.COM 268 , HAS OBSERVED AS UNDER: 7. UNDOUBTEDLY, THE LANGUAGE OF SECTION 14A PRESUPPOSES THAT THE AO HAS TO ADDUCE SOME REASONS IF HE IS NOT SATISFIED WITH THE AMOUNT OFFERED BY WAY OF DISALLOWANCE BY THE ASSESS EE. AT THE SAME TIME SECTION 14A (2) AS INDEED RULE 8D(I) LEAVE THE AO EQUALLY WITH NO CHOICE IN THE MATTER INASMUCH AS THE STATUTE IN BOTH THESE PROVISIONS MANDATES THAT THE PARTICULAR METHODOLOGY ENACTED SHOULD BE FOLLOWED. IN OTHER WORDS, THE AO IS UNDE R A 4 MANDATE TO APPLY THE FORMULAE AS IT WERE UNDER RULE 8D BECAUSE OF SECTION 14A(2). IF IN A GIVEN CASE, THEREFORE, THE AO IS CONFRONTED WITH A FIGURE WHICH, PRIMA FACIE, IS NOT IN ACCORD WITH WHAT SHOULD APPROXIMATELY BE THE FIGURE ON A FAIR WORKING OUT OF THE PROVISIONS, HE IS BUT BOUND TO REJECT IT. IN SUCH CIRCUMSTANCES THE AO ORDINARILY WOULD EXPRESS HIS OPINION BY REJECTING THE DISALLOWANCE OFFERED AND THEN PROCEED TO WORK OUT THE METHODOLOGY ENACTED. 8. IN THIS INSTANCE THE ELABORATE ANALYSIS CARRI ED OUT BY THE AO AS INDEED THE THREE IMPORTANT STEPS INDICATED BY HIM IN THE ORDER, SHOWS THAT ALL THESE ELEMENTS WERE PRESENT IN HIS MIND, THAT HE DID NOT EXPRESSLY RECORD HIS DISSATISFACTION IN THESE CIRCUMSTANCES, WOULD NOT PER SE JUSTIFY THIS COURT I N CONCLUDING THAT HE WAS NOT SATISFIED OR DID NOT RECORD COGENT REASONS FOR HIS DISSATISFACTION TO REJECT THE AO S CONCLUSION. TO INSIST THAT THE AO SHOULD PAY SUCH LIP SERVICE REGARDLESS OF THE SUBSTANTIAL COMPLIANC E WITH THE PROVISIONS WOULD, IN FACT, DE STROY THE MANDATE OF SECTION 14A. 4.2. ON REFERRING TO THE COMPUTATION ADOPTED BY LD.AO IN PARA 3.10 OF ASSESSMENT ORDER, IT IS AMPLY CLEAR THAT ASSESSING OFFICER HAS ONLY CONSIDERED THE INVESTMENTS THAT MADE DURING THE YEAR. ADMITTEDLY HE HAS NOT CONS IDERED ANY INTEREST EXPENSES AND HAS COMPUTED THE DISALLOWANCE BASED ON THE AVERAGE VALUE OF INVESTMENTS RELATED TO THE EXEMPT INCOME. THE COMPUTATION MAKES IT AMPLY CLEAR THAT ASSESSING OFFICER HAS VERIFIED THE ACCOUNTS OF ASSESSEE , BASED ON WHICH DISALLOWANCE WAS COMPUTED. THUS AS PER THE RATIO LAID DOWN BY HON BLE DELHI HIGH COURT IN THE CASE OF INDIA BULLS FINANCIAL SERVICES LTD VERSUS DCIT (SUPRA) , WE ARE OF THE CONSIDERED OPINION THAT , ASSESSING 5 OFFICER WAS SATISFIED REGARDING T HE SUO - MOTO DISALLOWANCE BEING NOT ACCEPTABLE. THUS WE REJECT THIS ARGUMENT ADVANCED BY LD.AR. 4.3. NOW COMING TO THE 2 ND LIMB OF ARGUMENT REGARDING DISALLOWANCE COMPUTED BY LD. A.O. I T IS OBSERVED THAT ASSESSING OFFICER HAS CONSIDERED THE DISALLOWANCE ON THE BASIS OF INVESTMENTS MADE DURING THE YEAR. IN OUR CONSIDERED VIEW , DECISION TAKEN BY HON BLE DELHI HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. COMMISSIONER OF INCOME - TAX, NEW DELHI (2012) 347 ITR 272 (DEL) WOULD BE APPLICABLE HERE, WHICH IS AS UNDER: 31............... IF ONE EXAMINES SUB - RULE (2) OF RULE 8D, WE FIND THAT THE METHOD FOR DETERMINING THE EXPENDITURE IN RELATION TO EXEMPT INCOME HAS THREE COMPONENTS. THE FIRST COMPONENT BEING THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THE SECOND COMPONENT BEING COMPUTED ON THE BASIS OF THE FORMULA GIVEN THEREIN IN A CASE WHERE THE ASSESSEE INCURS EXPENDITURE BY WAY OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. THE FORMULA ESSENTIALLY APPORTIONS THE AMOUNT OF EXPENDITURE BY WAY OF INTEREST [OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I)] INCURRED DURING THE PREVIOUS YEAR IN THE RATIO OF THE AVERAGE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NO T OR SHALL NOT FORM PART OF THE TOTAL INCOME, TO THE AVERAGE OF THE TOTAL ASSETS OF THE ASSESSEE. THE THIRD COMPONENT IS AN ARTIFICIAL FIGURE ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF TH E TOTAL INCOME, AS APPEARING IN THE BALANCE SHEETS OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. IT IS THE AGGREGATE OF THESE THREE COMPONENTS WHICH WOULD CONSTITUTE THE EXPENDITURE IN RELATION TO EXEMPT INCOME AND 6 IT IS THIS AMO UNT OF EXPENDITURE WHICH WOULD BE DISALLOWED UNDER SECTION 14A OF THE SAID ACT. IT IS, THEREFORE, CLEAR THAT IN TERMS OF THE SAID RULE, THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME HAS TWO ASPECTS (A) DIRECT AND (B) INDIRECT. THE DIRECT EXPENDI TURE IS STRAIGHTAWAY TAKEN INTO ACCOUNT BY VIRTUE OF CLAUSE (I) OF SUB - RULE (2) OF RULE 8D. THE INDIRECT EXPENDITURE, WHERE IT IS BY WAY OF INTEREST, IS COMPUTED THROUGH THE PRINCIPLE OF APPORTIONMENT, AS INDICATED ABOVE. AND, IN CASES WHERE THE INDIRECT E XPENDITURE IS NOT BY WAY OF INTEREST, A RULE OF THUMB FIGURE OF ONE HALF PERCENT OF THE AVERAGE VALUE OF THE INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, IS TAKEN. 4.4. THUS AS IN THE PRESENT CASE ADMITTEDLY THERE IS NO DIRECT EXPENSES AND INTEREST EXPENSES THAT COULD BE ATTRIBUTABLE TO THE EARNING OF EXEMPT INCOME, A THUMB RULE HAS TO BE APPLIED WHICH IS ONE HALF PERCENT OF THE AVERAGE VALUE OF INVESTMENT INCOME WHICH DO NOT FORM PART OF TOTAL INCOME. 4.5. ACCORDINGL Y WE ARE INCLINED TO SET ASIDE THI S ISSUE BACK TO THE FILE OF LD. AO TO RECOMPUTE THE DISALLOWANCE BY TAKING INTO CONSIDERATION ONLY SUCH INVESTMENTS WHICH HAS LED TO THE EARNING OF EXEMPT INCOME IN THE HANDS OF ASSESSEE UNDER THE 3 RD LIMB OF RULE 8D (2). 4.6. ACCORDINGLY WE SET ASIDE THIS ISSUE BACK TO THE FILE OF LD. AO TO RECOMPUTE THE DISALLOWANCE AS PER THE ABOVE DIRECTIONS. ASSESSEE IS ALSO DIRECTED TO SUBMIT THE DETAILS OF THE INVESTMENTS MADE DURING THE YEAR WHICH HAS LED TO THE EARNING OF EXEMPT IN COME FOR THE PURPOSE OF SAME. 7 5. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 1 9 . 0 2 . 2 0 1 8 . S D / - S D / - ( R.K.PANDA ) (BEENA A PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 1 9 T H F E B . , 2018 * M V COPY FORWARDED TO: - 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5 . DR, ITAT - TRUE COPY - BY ORDER, ASSISTANT REGISTRAR ITAT DELHI BENCHES