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| DATE: | June 24, 2013 (Date of publication) |
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| Click here to download the judgement (REI_agro_14A_Rule_8D_disallowance.pdf) |
No s. 14A disallowance if satisfaction not recorded with reference to A/cs. Under Rule 8D(2)(ii) loans for specific business purposes cannot be included. Under Rule 8D(2)(ii) & (iii) investments which have not yielded income cannot be included
In AY 2008-09, the assessee invested Rs.103 crores in shares on which it earned tax-free dividends of Rs. 1.3 lakhs. The assessee claimed that though its borrowings had increased by Rs. 122 crores, the said investments were funded out of own funds like capital and profits. It claimed that no expenditure had been incurred to earn the dividends and no disallowance u/s 14A could be made. The AO applied Rule 8D and computed the disallowance at Rs. 4 crore. On appeal by the assessee, the CIT(A) reduced the disallowance to Rs. 26 lakh. On cross appeals, HELD by the Tribunal:
(i) When the AO does not accept the assessee’s claim regarding the non-applicability/ quantum of disallowance u/s 14A, he has to record satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It has is to be done with regard to the accounts of the assessee. On facts, as there is no satisfaction by the AO, no disallowance u/s 14A can be made (Balarampur Chini Mills 140 TTJ (Kol) 73 (included in file) followed);
(ii) Rule 8D(2)(ii) is a computation provision in respect of expenditure incurred by way of interest which is not directly attributable to any particular income or receipt. This clearly means that interest expenditure which is directly relatable to any particular income or receipt is not to be considered under rule 8D(2)(ii). The AO has to show that the interest is not directly attributable to any particular income or receipt. In the assessee’s case, the interest has been paid on loans taken from banks for business purpose. There is no allegation that the loan funds have been diverted for making investment in shares or for non-business purposes. The loans are for specific business purposes and no bank would permit the loan given for one purpose to be used for making any investment in shares. Also, the assessee has substantial capital & reserves. Accordingly, the interest on the loans cannot be included in Rule 8D(2)(ii);
(iii) Further, in Rule 8D(2)(ii), the words used in numerator B are “the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year“. The AO was wrong in taking taken into consideration the investment of Rs.103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term “average of the value of investment” is used to take care of cases where there is the issue of dividend striping;
(iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is ½ percentage of the numerator B in rule 8D(2)(ii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in rule 8D(2)(ii). Thus, not all investments become the subject-matter of consideration when computing disallowance u/s 14A read with rule 8D. The disallowance u/s 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income.
This Cal ITAT Decision is really very good because, it has analysed the language of the Calculation Provision Rule 8D(ii) and (iii). It clearly lays down that, in the numerator B, only the Investment pertaining to the Tax Free Income has to be considered. Therefore, it also supports the view that, if there is no Dividend, then the disallowance should be Nil. Because, the numerator B will be Zero. Really Very Good Study of the Language.
The Order is very disturbing. The ITAT has overlooked that the ITAT Special Bench in the case of M/s Cheminvest Ltd vs ITO (2009) 121 ITD 318 ( Special Bench) (Delhi) had itself held as under:
“Whether disallowance u/s 14A of the I.T. Act can be made in a year in which no exempt income has been earned or received by the assessee?”
Held: When prior to introduction of section 14A, an expenditure both u/s 36 and 57 was allowable to an assessee without such requirement of earning or receipt of income, we cannot import any such condition when it comes for disallowance of the same expenditure u/s 14A of the Act.”
Thus not only did the ITAT ignore the binding decision of the Delhi Special Bench, it also ignored the Supreme Court case law of CIT Vs Rajendra Prasad Moody 115 ITR 519 (SC) which was relied upon by the Special Bench also. In Moody case it was held that for claiming deduction under section 57(iii) it is not necessary that related income must also have been earned by the assessee.
Further this decision has not explained why it did not follow the cited case of ACIT, Circle 10, Kolkata v. Champion Commercial Co. Ltd. [2012] 139 ITD 108 (Kol.) where it was held as under:
“Held: When assessee himself offers a disallowance under section 14A, Assessing Officer need to record its satisfaction for invoking rule 8D but when assessee claims that there was no expenditure incurred to earn exempt income, Assessing Officer, to invoke rule 8D, need not express any satisfaction as to correctness of claim of assessee.”
The Balarampur Chini Mills Ltd. 140 TTJ (Kol) 73 is an older decision and its facts were totally different. In that case the assessee had earned Dividend Income of Rs. 1,08,72,574/- which was exempt U/s. l0(34)/(35) of the Income Tax Act, 1961 and the assessee in its Return of income had suo moto offered for Disallowance a sum of Rs. 1,49,995/- as reasonable expenditure relating to earning of its exempt Dividend Income.
Perhaps the real impact of this decision will be to create more confusion and litigation.
I agree with Mr. Sharma. This decision of Kolkata bench has opened up the controversy on this burning subject and has opened up doors for more and more litigation. With Special bench decision detailing the law and analysing the same from various angles, this later decision has opened up scope for more confusion and legal battle between the assessees and tax authorities.