|CORAM:||Challa Nagendra Prasad (JM), Ramit Kochar (AM)|
|SECTION(S):||14A, 40A(2), Rule 8D|
|CATCH WORDS:||40A(2) disallowance, Co-operative Society, Disallowance u/s 14A & Rule 8D|
|DATE:||October 31, 2016 (Date of pronouncement)|
|DATE:||December 30, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 14A/ Rule 8D disallowance applies also to dividends received from strategic investments in subsidiaries. S. 40A(2) disallowance is not applicable to co-operative societies. As per Circular No. 14 (XL-35) of 1955 dated 11.4.1955, the AO is obliged to assist the assessee and allow deduction even if not claimed|
(i) S. 14A applies also to strategic investments in subsidiaries:
The AO shall compute disallowance u/s 14A of the Act with respect to expenditure incurred in relation to earning of exempt income having regard to the accounts of the assessee as per mandate of Section 14A(2) of the Act. The primary onus is on the assessee to bring on record details of expenses incurred in relation to earning of exempt income as provided u/s 14A of the Act having regards to the accounts of the assessee. In the failure thereof the assessee to discharge primary onus, the AO shall record satisfaction and apply Rule 8D of Income-tax Rules, 1962 to compute disallowance u/s 14A of the Act of the expenditure incurred in relation to the earning of exempt income. We are also of the considered view, that strategic investment made by the assessee in its subsidiary Saraswat Infotech Limited as well in the other securities which are capable of yielding exempt income i.e. by way of dividend etc. which are exempt from tax shall be included while computing disallowance u/s 14A of the Act as per the scheme of the Act as contained in provisions of Section 14A of the Act as the statute does not grant any exemption to the strategic investments which are capable of yielding exempt income to be excluded while computing disallowance u/s 14A of the Act and hence the investment made by the assessee in subsidiary company M/s Saraswat Infotech Limited and all other securities which are capable of yielding exempt income by way of dividend etc shall be included for the purposes of disallowance of expenditure incurred in relation to the earning of exempt income , as stipulated u/s 14A of the Act. Our decision is fortified by the recent decision of Hon’ble Karnataka High Court in the case of United Breweries Limited v. DCIT in ITA No. 419/2009 vide orders dated 31-05-2016 and also decision of the tribunal in the case of ACIT v. Uma Polymers Limited in ITA no 5366/Mum/2012 and CO No. 234/Mum/2013 vide orders dated 30-09-2015.
(Impact of decisions in Garware Wall Ropes Limited v. Addl. CIT in ITA no. 5408/Mum/2012 dated 15-01-2014, EIH Associates Hotels Limited v. DCIT in ITA no. 1503/Mds./2012, Interglobe Enterprises Limited v. DCIT in ITA no. 1580/Del/2013 and J M Financial Limited v. ACIT in ITA no. 4521/Mum/2012 not considered).
(ii) S. 40A(2) is not applicable to co-operative societies. No disallowance u/s 40A(2) should be made if the tax effect is neutral i.e. the recipient is paying tax at the same rate as the payer:
The assessee is a co-operative society and has made payment for availing back end services for managing its IT infrastructure from its subsidiary company SIL. The assessee’s payment were held to be excessive and unreasonable as being payment made to related parties u/s 40A(2) of the Act and to the extent considered excessive and unreasonable , disallowances of the expenditure considered unreasonable and excessive were made by the AO, which disallowance was partly confirmed by learned CIT(A). We have considered and perused the provisions of Section 40A(2)(a) and 40A(2))b) of the Act and have observed that ‘co-operative society’ are not covered under the said provisions, while ‘association of person’ is covered under the said provision. It is also observed that while defining person u/s 2(31) of the Act, the law makers have not included ‘co-operative society’ while ‘association of person’ is included while the ‘co-operative society’ is defined u/s. 2(19) of the Act. Section 40A(2) of the Act applies to the person specifically named therein and since co-operative society does not found mention in Section 40A(2)(b) of the Act , the said section would not apply to co-operative society. The co-operative societies are governed by principles of mutuality and deductions are provided u/s 80P of the Act on fulfilling of the prescribed conditions, while the association of person is not governed by principle of mutuality. The Hon’ble Bombay High Court has in the case of CIT v. Manjara Shetkari Sahakari Sakhar Karkhana Limited (2008) 301 ITR 191(Bom) has held that provisions of Section 40A(2) of the Act are not applicable to co-operative society . While deciding the afore-stated question, the Hon’ble Court relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Shivamrut Doodh Utpadak Sahakari Sangh Maryadit in Tax Appeal No. 62 of 1999 filed by Revenue whereby Hon’ble Bombay High Court confirmed the decision of the Tribunal and held that Section 40A(2) of the Act is not applicable to cooperative society. Thus, Respectfully following the decision of Hon’ble Bombay High Court in afore-stated cases, we hold that Section 40A(2) of the Act is applicable to co-operative society and thus, the additions made based on the premise that Section 40A(2) of the Act is applicable to co-operative society is not sustainable in law and hence is ordered to be deleted. Further, it is the say of the assessee that tax effect is neutral and there is no loss to the Revenue as the said subsidiary company SIL is also paying tax at the same rate and hence no prejudice is caused to the Revenue as the Revenue has got due taxes albeit paid by SIL who is subsidiary of the assessee on the charges received from assessee.
(iii) There is no estoppel against a statute. An expenditure allowable as revenue cannot be denied deduction on the basis of the assessee’s accounting treatment. As per Circular No. 14 (XL-35) of 1955 dated 11.4.1955, the AO is obliged to assist the assessee:
We have observed that the assessee has constructed building and total land and building including capital work-in-progress as appearing in audited financial statement as placed in file by the assessee as at 31-03-2007 was Rs. 98.73 crores while the building fund held by the assessee as at 31- 03-2007 in its reserves and surplus is Rs. 113.91 crore, which is much higher than the land and building including capital work-in-progress held by the assessee. There is no finding of fact recorded by the Revenue that borrowed funds were used by the assessee, while it is the say of the assessee that no borrowed funds were utilized by the assessee for construction of Building. The assessee has debited and capitalized notional interest of Rs.61.76 lacs out of total interest incurred during the year , towards cost of construction in its books of accounts keeping in view AS-16 issued by ICAI , while later on the advise of the auditors same was claimed as revenue expenditure in the revised return of income filed with the Revenue. It is established principle that entries in the books of accounts are not decisive of the nature and character of expenses. It is not material and relevant how the assessee treated these expenses in its books of account but what is material and relevant is the allowability of these expenses as revenue expenses as per provisions of the Act. The judgment of Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT  82 ITR 363 and Hon’ble Delhi High Court in the case of CIT v. Triveni Engg. & Industries Ltd. (2009) 181 Taxman 5 (Delhi) support the contentions of the assessee in this regard. The taxes are to be collected by the authority of law which is mandate of Article 265 of the Constitution of India. Article 265 of the Constitution of India reads that “No tax shall be levied or collected except by the authority of law.” In terms of the Article 265 of the Constitution, tax can be levied only if it is authorized by law. The taxing authority cannot collect or retain tax that is not authorized. Any retention of tax collected, which is not otherwise payable, would be illegal and unconstitutional. The Hon’ble Bombay High Court in Balmukund Acharya’s v.DCIT (2009) 310 ITR 310 (Bom) held that Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected. The Hon’ble Bombay High Court in Nirmala L. Mehta v. CIT (2004) 269 ITR 1(Bom.) held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. Circular No. 14(XL-35) of 1955, dated 11.4.1955, issued by the Central Board of Direct Taxes reads as under:
“Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a tax payer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a tax payer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assessee on whom it is imposed by law, officers should –
(a) draw their attention to any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other;
(b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs”.
A reading of the circular shows that a duty is cast upon the assessing officer to assist and aid the assessee in the matter of taxation. They are obliged to advise the assessee and guide them and not to take advantage of any error or mistake committed by the assessee or of their ignorance. The function of the Assessing Officer is to administer the statute with solicitude for public exchequer with an inbuilt idea of fairness to taxpayers., ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd’s. (2007) 291 ITR 500(SC). Once the expenditure is found to be allowable as revenue expenditure as per provisions of the Act, the same are to be allowed as revenue expenditure under the Act while computing income chargeable to tax even if the tax-payer has given different treatment in its books of account by capitalizing the same in its books of account instead of debiting it to the Profit and Loss Account. This is the mandate of the Act which has to be followed as the taxes can only be collected by the authority of law.