Shapoorji Pallonji & Co. Ltd vs. DCIT (ITAT Mumbai)

(i) The assessee company made investment by reflecting the same in the balance-sheet. The investments are largely in the group companies and the primary activity is construction, infrastructure development and the investment are in support of the main business. In the assessment proceedings for Assessment Year 2008-09 to 2011-12 (impugned year) the ld. Assessing Officer accepted the working of disallowance, out of interest and for indirect expenses, he applied rule-8D of the Rules. As mentioned earlier, the issue of disallowance of interest was considered by the Ld. Commissioner of Income Tax (Appeal) as well as by the Tribunal and decided the issue in favour of the assessee. The assessee has identified and quantified specific amount of interest expenses and also the investment with borrowed funds in the past and the investments have been co-related. It is also noted that even the Ld. Assessing Officer, as in the past, allowed the interest. The Assessing Officer was satisfied with the disallowances, suo-moto made by the assessee. It is noted that in all the earlier years i.e. Assessment Year 2008-09 to 2010-11, the issue of disallowance was considered by the Ld. Commissioner of Income Tax (Appeal) as well as the Tribunal. On the issue of disallowance, out of interest expenses, the Ld. Commissioner of Income Tax (Appeal) reduced the disallowance to Rs.10 lakh and the Tribunal affirmed the order of the First Appellate Authority. For the year under appeal, the Ld. Commissioner of Income Tax (Appeal) affirmed the order of the Assessing Officer on the point of disallowance out of expenses. The Ld. Commissioner of Income Tax (Appeal) issued enhancement notice dated 20/02/2015, asking the assessee to file the reply. The assessee requested for adjournment but the request was denied and order was passed by the Ld. CIT (Appeal) applying Rule-8D(ii) in respect of disallowance of interest. Considering the totality of facts, we find that so far as the disallowance out of indirect expenses is concerned, as claimed by the assessee, the issue is covered by the decision of earlier years.

(ii) So far as, the issue of disallowance of other amount out of interest by applying rule-8D(ii) is concerned, we find that the amounts are identified and quantified and specific amount of interest expenses were incurred towards investment. The assessee duly maintained the books and followed the appropriate method. The method adopted by the assessee can only be rejected with objective reasons based upon books of accounts of the assessee. Except for saying that the investment are more than own funds, the Ld. CIT (Appeal) has not pointed any error in the working of the assessee. Hon’ble Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del.) clearly held that Rule-8D can only be applied if the objective reasons are given for rejection of method, adopted by the assessee. From pages 103 to 129 (copy of balance sheet and investment) it is evidently clear that the investment are very old and no much time and energy was employed by the assessee while making the investment or in collection of dividend. Section 14A of the Act says, where the assessee has made suo-moto disallowance, then the books of accounts has to be looked into. So far as, the dissatisfaction is concerned, it cannot be merely on the basis of volume as was held by Hon’ble jurisdictional High Court in various decisions which will be discussed in later part of this order, like Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.) and East India Pharmaceutical Works Ltd. vs CIT (224 ITR 624)(SC) and Gujarat High Court in CIT vs Suzlon Energy Ltd. (354 ITR 630)(Guj.) and also by Hon’ble Delhi High Court in COMMISSIONER OF INCOME TAX vs. TAIKISHA ENGINEERING INDIA LTD.(2015) 275 CTR 0316 (Del) : (2015) 114 DTR 0316 (Del) : (2015) 370 ITR 0338 (Delhi) : (2015) 229 TAXMAN 0143 (Delhi).

(iii) In the aforesaid decision, Hon’ble High Court duly analyzed section 14A of the Act r.w.r 8D of the Rules. Reference was also made to the decision from Hon’ble Delhi High Court in CIT vs Tin Box Company (2003) 260 ITR 637 (Del.) by holding that when the assessee had sufficient funds and non-interest funds were advanced to sister concern, no disallowance was justified. Even the Hon’ble jurisdictional High Court in CIT vs Reliance Utilites and Power Ltd. (2009 313 ITR 340 (Bom.), had similarly held that when sufficient non-interest funds were available for investment then no disallowance of interest should be made. The Hon’ble High Court placed reliance upon the decision from Hon’ble Apex Court in East India Pharmaceutical Works Ltd. vs CIT (1997) 224 ITR 624 (SC) to the effect that if the assessee had sufficient non-interest bearing funds, then investment made in shares and securities resulting in exempt income should not lead to disallowance of interest expenditure as there was no question of attributing any interest to such investment. Reference can also be made to the decision from Hon’ble Gujarat High Court in CIT vs Suzlon Energy Ltd. (2013) 354 ITR 630 to the same effect.

(iv) Section 14A of the Act postulates and states that no deduction shall be allowed in respect of expenditure incurred by an assessee in relation to income which does not form part of the total income under the Act. Under sub Section (2) to Section 14A of the Act, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, he can determine the amount of expenditure which should be disallowed in accordance with such method as prescribed, i.e. Rule 8D of the Rules (quoted and elucidated below). Therefore, the Assessing Officer at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt income. If and only if the Assessing Officer is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i.e. Rule 8D of the Rules. Thus, Rule 8D is not attracted and applicable to assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D of the Rules. Where the disallowance or ‘nil’ disallowance made by the assessee is found to be unsatisfactory on examination of accounts, the assessing officer is entitled and authorised to compute the deduction under Rule 8D of the Rules. This pre-condition and stipulation as noticed below is also mandated in sub Rule (1) to Rule 8D of the Rules.

(v) Sub Rule (1) categorically and significantly states that the Assessing Officer having regard to the account of the assessee and on not being satisfied with the correctness of the claim of expenditure made by the assessee or claim that no expenditure was incurred in relation to income which does not form part of the total income under the Act, can go on to determine the disallowance under sub Rule (2) to Rule 8D of the Rules. Sub Rule (2) will not come into operation until and unless the specific pre-condition in sub Rule (1) is satisfied. Thus, Section 14A(2) of the Act and Rule 8D(1) in unison and affirmatively record that the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income must be examined with reference to the accounts, and only and when the explanation/claim of the assessee is not satisfactory, computation under sub Rule (2) to Rule 8D of the Rules is to be made.

(vi) Now, we shall analyze scope of sub-section (2) and (3) of Section 14A of the Act. Sub-section (2) of Section 14 A of the Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer, embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A of the Act. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same.

(vii) Rule 8D, as we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is – “such method as may be prescribed”. We have already mentioned above that by virtue of Notification No.45 of 2008, dated March 24, 2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the asses see; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year. The Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D.

(viii) We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Subsections (2) and (3) of Section 14A of the Act, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. 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.

i. The first component being the amount of expenditure directly relating to income which does not form part of the total income.

ii. 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 not or shall not form part of the total income, to the average of the total assets of the assessee.

iii. 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 the 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 it is this amount 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) The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D and

(b) 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 expenditure 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.”

(ix) Even earlier the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. versus Deputy Commissioner of Income Tax (2010) 328 ITR 81 (Bom.) had referred to Section 14(2) of the Act

(x) The sum and substance of the foregoing discussion is that section 14A of the Act postulates and states that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act. Under sub-section (2) of Section 14A of the Act, the Assessing Officer is required to examine the accounts of the assessee and only when he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to exempt income, the Assessing Officer can determine the amount of expenditure, which should be disallowed in accordance with such method as prescribed i.e. Rule-8D of the Rules, therefore, the Assessing Officer at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt income. If and only if the Assessing Officer is not satisfied on the count after making reference to the accounts only then he is entitled to adopt the method as prescribed under Rule-8D of the Rules, thus, Rule-8D is not attracted and applicable in a situation, where, the assessee has voluntarily computed the disallowance as per Rule-8D of the Rules.

(xi) So far as the argument of the assessee with respect to rule of consistency is concerned, we note that in the previous and subsequent assessment years, the Assessing Officer treated the assessee as an investor, therefore, we are of the view that unless and until contrary facts are brought on record by the Revenue, no U-turn is permissible. The learned Assessing Officer is bound by rule of consistency. The ratio laid down in following cases supports the case of the assessee:-

i. Parshuram Pottery Works Ltd. vs ITO 106 ITR 1 (SC)

ii. CIT vs A.R.J. Security Printers 264 ITR 276(Del.)

iii. CIT vs Neo Polypack Pvt. Ltd. 245 ITR 492 (Del.)

iv. CWT vs Allied Finance Pvt. Ltd. 289 ITR 318 (Del.)

v. Berger Paints India Ltd. vs CIT 266 ITR 99 (SC)

vi. DCIT vs United Vanaspati (275 ITR 124) (AT)(Chandigarh ITAT)

vii. Union of India vs Kumudini N. Dalal 249 ITR 219 (SC)

viii. Union of India vs Satish Pannalal Shah 249 ITR 221

ix. B.F.Varghese vs State of Kerala 72 ITR 726 (Ker.)

x. CIT vs Narendra Doshi 254 ITR 606 (SC)

xi. CIT vs Shivsagar Estate 257 ITR 59 (SC)

xii. Pradip Ramanlal Seth vs UOI 204 ITR 866 (Guj.)

xiii. Radhaswamy Satsang vs CIT 193 ITR 321 (SC)

xiv. Aggarwal warehousing & Leasing Ltd. 257 ITR 235 (MP)

(xii) The sum and substance of the aforesaid judicial pronouncements is that on the basis of principle of judicial discipline, consistency has to be followed and once in a particular year, if any view is taken, in the absence of any contrary material, no contrary view is to be taken as finality to the litigation is also a principle which has to be followed. Before us, no contrary facts or any adverse material was brought on record by the Revenue, therefore, on the principle of consistency also, the assessee is having a good case in her favour. The Hon’ble Delhi High Court in the case of CIT vs A.R.J. Security Printers 264 ITR 276(Del.) held as under:-