Tax Benefits – House Rent Allowance (HRA) Vs. Rent Free Accommodations (RFA)
Analysis of House Rent Allowance(HRA) Vs. Rent Free Accommodations (RFA)
In case the House Rent Allowance(H.R.A.) is provided then there will be a tax savings (Please refer Valuationsheet for details). The above mentionedsavings is mainly because of themethods Income tax act and Rulesemploys for valuation of taxability of H.R.A and Rent Free Accommodations (R.F.A.). The main components are explained with the help of a table given below:
| House Rental allowance(Section 10(13A) ofIncome tax act, 1961 & Rule 2A of Income Tax rules, 1962) | Rent Free accommodation(Rule 3(1) of Income Tax rules, 1962 |
Salary for this purpose consists of following components:
In this whole H.R.A received is taxable subject to the deductionof least of the following :
Please note if the rent paid iszero, exemption will be zeroand whole HRA received will become taxable. Taxability under this is dependent upon the following factors:
| v Salary for this purpose consists of following components:
v There is no separateexemption under this, least of the following is taxable (In case accommodation is hired by the employer) :
OR
Taxability under this is dependent upon the following factors:
|
Let us explain with the help of an example: Total outflow of the employer assumed to be INR 100/-
| House Rental Allowances | RENT FREE accommodation |
| Basis salary = INR 50/-HRA = INR 25/- Other allowances = INR 25/- Computation of Taxable HRA HRA received = INR 25/- Deduction will be least of the following:
INR 25 – INR 5 = INR 20/- (Please Refer Note-1) The taxable HRA comes out to be INR 5/- Income under the head salary = INR 80/- Note: 1 Rent Paid also assumed to be INR 25/-. In order to claim 100% deduction of the HRA received, the employee needs to pay Rent to the extent of HRA received plus 10% of salary. This way the whole HRA received will be exempt. | Basis salary = INR 50/-RFA(Hire charges paid) = INR 25/- Other allowances = INR 25/- Computation of Taxable RFA Least of the following will be taxable:
OR
The taxable RFA comes out to be INR 11.25/- Income under the head salary = INR 86.25/- |
Let us explain the obsrevations arising from the above analysis with the help of a diagram –
total emulements of the employee in both the cases will be inr 100/-
| House Rental Allowances | RENT FREE accommodation |
|
|
(Please note- The tax liability of the employee will be borne by the employer)
IT : Where interest free funds available with assessee were more than investment made in tax free securities, no disallowance under section 14A could be made
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[2013] 33 taxmann.com 155 (Amritsar - Trib.)
IN THE ITAT AMRITSAR BENCH
Deputy Commissioner of Income-tax, Circle-1, Jammu
v.
Jammu & Kashmir Bank Ltd.*
H.S. SIDHU, JUDICIAL MEMBER
AND B.P. JAIN, ACCOUNTANT MEMBER
AND B.P. JAIN, ACCOUNTANT MEMBER
IT APPEAL NO. 136 (ASR.) OF 2010
C.O. NO. 9 (ASR.) OF 2010
[ASSESSMENT YEAR 2002-03]
C.O. NO. 9 (ASR.) OF 2010
[ASSESSMENT YEAR 2002-03]
DECEMBER 31, 2012
Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income [Dividends] - Assessment year 2002-03 - Whether where sufficient interest free funds were available to assessee for making investment in tax free securities and Assessing Officer had not brought any expenditure which had actually been incurred by assessee on account of interest expenditure for earning exempt income, no disallowance under section 14A on account of interest expenses could be made - Held, yes [Paras 15 & 16][In favour of assessee]
FACTS
| ■ | The Assessing Officer having found that the assessee-bank had made investment in tax free securities, invoked provisions of section 14A and made disallowance on account of proportionate interest and management expenses attributable to earning exempt income. | |
| ■ | The Commissioner (Appeals) considering fact that the assessee had enough funds of its own and a portion of same would have easily been invested in exempted income, deleted disallowance made under section 14A. | |
| ■ | On second appeal: |
HELD
| ■ | The assessee has submitted details before the Assessing Officer that the assessee is having interest free funds for making investment in tax-free securities and infrastructural advances. The Assessing Officer in fact has not accepted these details and the explanation of the assessee in right spirit and has rejected the same that the assessee was required to give entry-wise details to prove that the assessee is having interest free funds and the same were invested in the exempt securities. This approach of the Assessing Officer cannot be accepted especially for the reasons that the assessee has submitted that the assessee is having interest free funds of Rs. 2265.25 crores at the beginning of the year and Rs. 2,736.65 crores at the end of the year, which indicates an increase of interest free funds to the extent of Rs. 471.40 crores. Besides this, a clear explanation was given before the Assessing Officer that the profits of the year after declaring dividend and dividend tax amounting to Rs. 237.52 crores were also pumped in such accounts. Thus, interest free funds to the extent of Rs. 708.92 crores were available to assessee-bank for making investment which far exceeded investment in tax free securities can be said to be established only when it is shown that interest free funds are not available with the assessee-bank whereas reverse is true in this case, the borrowed funds are not available for investment in tax free securities and infrastructural advances. The Assessing Officer has not brought on record that interest free funds are not available with the assessee-bank. The assessee is having borrowed funds to the extent of Rs. 11,058.54 crores whereas investment and advances are to the tune of Rs. 11,926.42 crores. The Assessing Officer has not controverted the fact that the assessee-company is not having enough funds to make investment in tax free securities. | |
| ■ | As a matter of fact, section 14A requires to determine the amount of expenditure incurred in relation to such exempt income which does not form part of total income under the Act. Therefore, the onus lies on the Assessing Officer to establish that in fact there was some expenditure actually incurred by the assessee. The Assessing Officer in the present case has not brought on record any such expenditure which has actually been incurred by the assessee on account of interest expenditure or even the management or administrative expenditure for earning the exempt income. The Commissioner (Appeals) has rightly held that statute has not left such decision on the wishes and ideas of the Assessing Officer to determine what expenditure has been incurred without establishing and identifying the same. [Para 15] | |
| ■ | Since there is nothing on record brought out by the Assessing Officer that the assessee has actually incurred any cost or expenditure in relation to the exempt income, no disallowance on account of interest, management or administrative case can be made by the Assessing Officer. Therefore, the addition being the proportionate disallowance on account of interest expenses was to be deleted. [Para 16] |
CASE REVIEW
Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 14.2) followed.
CASES REFERRED TO
CIT v. United General Trust Ltd. [1993] 200 ITR 488 (SC) (para 4.1), Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 10), Impulse (India) (P.) Ltd. v. Asstt. CIT (OSD) [2008] 22 SOT 368 (Delhi) (para 13), CIT v. Winsome Textile Industries Ltd.[2009] 319 ITR 204 (Punj. & Har.) (para 13), CIT v. Shapoorji Pallonji & Co. Ltd. [2009] 318 ITR 417 (Bom.) (para 13), Asstt. CIT v. State Bank of Travancore [2010] 124 ITD 332 (Coch.) (para 13), Asstt. CIT v. Jindal Saw Pipes Ltd. [2008] 118 TTJ 228 (Delhi) (para 13), Asstt. CITv. Eicher Ltd. [2007] 160 Taxman 80 (Delhi) (Mag.) (para 13), Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119/142 Taxman 57 (Delhi)(Mag.)(para 13), Escorts Ltd. v. Asstt. CIT [2007] 104 ITD 427 (Delhi) (para 13), Dy. CIT v. B.S.E.S. Ltd. [2008] 113 TTJ 227 (Mum.) (para 13), Wimco Seedlings Ltd. v. Dy. CIT (Asst.) [2007] 107 ITD 267 (Delhi) (TM) (para 13), Sagar Drugs & Pharmaceuticals (P.) Ltd. v. Addl. CIT [IT Appeal No. 3179 (Ahd.) of 2009, dated 2-6-2011] (para 13), Dy. CIT v. Jindal Photo Ltd. [IT Appeal No. 814 (Delhi) of 2011, dated 23-9-2011] (para 13), Minda Investments Ltd. v. Dy. CIT [2011] 48 SOT 169 (URO)/15 taxmann.com 376 (Delhi) (para 13), Dy. CIT v. Maharashtra Seamless Ltd.[2011] 48 SOT 160 (URO)/16 taxmann.com 97 (Delhi) (para 13), CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 (Punj. & Har.) (para 13), CIT v. Printers House (P.) Ltd. [2010] 188 Taxman 70 (Delhi) (para 13), Asstt. CIT v. SIL Investment Ltd. [2012] 54 SOT 54/26 taxmann.com 78 (Delhi) (para 13), Bunge Agribusiness (India) (P.) Ltd. v. Dy. CIT [2011] 132 ITD 549/14 taxmann.com 71 (Mum.) (para 13),Reliance Industries Ltd. v. Addl. CIT [2013] 55 SOT 8 (URO)/[2012] 28 taxmann.com 189 (Mum.) (para 13) and CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) (para 13).
Tarsem Lal for the Appellant. R.K. Gupta for the Respondent.
ORDER
1. This appeal of the Revenue arises from the order of the CIT(A), Jammu, dated 30.12.2009 for the assessment year 2002-03. The assessee has also filed Cross Objection.
2. The Revenue has raised following grounds of appeal:
| "1. | That the action of the Ld. CIT(A) to allow relief for statistical purposes is pre-matured keeping in view the fact that the order of Hon'ble ITAT against the order u/s 263 of CIT, J & K has not attained finality, as the department has preferred an appeal before the Hon'ble High Court of J & K, Jammu and the decision is awaited. | |
| 2. | That the Ld. CIT(A) has erred in directing the A.O. to restrict the disallowance u/s 14A to the extent of Rs. 8.10 lacs by applying the yard stock of making pro-rata disallowance based on the cost inflation index and quantum of exemption on the basis of disallowance confirmed in A.Y.1992-93 without appreciating that the exempt income u/s 10(15), 10(23) and 10(23G) amounting to Rs.36,10,19,907/- has been earned after investment. | |
| 3. | That the ld. CIT(A) has failed to appreciate that the assessee has utilized funds available with bank for earning of the said exempt income and therefore, the AO has rightly worked out the disallowance of Rs.7,05,00,000/- and Rs.2,26,00,000/- on account of proportionate interest and management expenses attributable to earning of the said exempt income. | |
| 4. | That the ld. CIT(A) has totally ignored the fact that sub-section (2) and (3) of section 14A are retrospective in nature and so is the resultant rule 8D. Hence the disallowance u/s 14A was required to be computed with reference to the mandate of there provisions. | |
| 5. | That the appellant craves leave to add or amend or alter the ground of appeal before the appeal is heard." |
3. The assessee in its C.O. has raised following grounds:
| "1. | That the worthy CIT(A) is unjustified in holding that a sum of Rs.8.10 lacs should be disallowed u/s 14A of the Income Tax Act, 1961 though the worthy CIT(A) was satisfied that even this much amount had not been incurred in relation to earning income & not forming part of total income. | |
| 2. | The Appellant craves, leave to alter and add to substitute any ground of appeal before or at the time of hearing." |
4. The brief facts in the appeal of the Revenue and C.O. of the assessee are that the A.O. during the assessment proceedings had held that proportionate disallowance u/s 14A has to be made because it did not agree with the assessee company that there was no expenditure involved in earning the exempt income. The assessee company had provided the details of the investments in tax free securities and infrastructural advances as under:
| The amount of total funds available With the bank | Rs. 14,032.71 crores |
| Out of it non interest bearing funds are | Rs. 2,974.17 crores |
| Interest bearing funds are | Rs. 11,058.54 crores |
| Total investment and advances by the bank | Rs. 12,176.42 crores |
| Out of it the amount invested in tax Free securities and infrastructural advances | Rs. 250.00 crores |
| Amount invested in earning taxable income | Rs. 11,926.42 crores |
4.1 The assessee company had averted before the A.O. that it not only had invested its interest free funds in tax free securities and infrastructural advances but had also utilized the excess in other advances and investments and income from such investments form part of total income under Chapter IV of the I.T. Act. Secondly even if any disallowance was to be made, then it was not to be made by proportionate allocation of interest and management expenses vis-a-vis exempt and taxable income but restricted to those expenses which were directly incurred in relation to earning exempt income of Rs. 36,10,19,907/-. It was also submitted before the AO that there was no related cost which could be stated to have been incurred to earn the exempted income. However, the A.O. did not accept this reasoning dismissing it to be pure guess work. He also dubbed this explanation that only assessee's own funds were enough to be invested in the exempted income as 'empty argument'. The Assessing Officer's argument is based only on the reason that assessee bank is having both interest bearing and as well as own funds in a common pool. The AO also did not accept assessee company's reliance on number of judicial pronouncements delivered by Income Tax Appellate Tribunal and Hon'ble High Courts. The AO's dismissal of these authorities was that these decisions were delivered in terms of the then prevailing section 80M of the Act. He also observed that some of these decisions rather confirm the view that proportional disallowance on the expenditure incurred for earning of exempted income has to be made. The AO was further of the opinion that it was not possible to segregate the non interest bearing funds from interest bearing funds. He also made another important observation that if no expenditure is attributed to this exempted income the assessee would avail deduction of 100% expenditure. He also referred to C.B.D.T. Circular No.780 which states that only net income has to be exempted. The AO also glanced over section 10(34) and has held that income defined there has only income and not the gross receipt. Accordingly, the AO held that there is to be an expenditure which has to be attributed to this exempted income. The AO buttressed his stand to the effect that expenditure is to be attributed to the exempted earning by referring to what he states as Management Expenses and in this connection has referred to Hon'ble SC decision in the case of CIT v. United General Trust Ltd. [1993] 200 ITR 488 and held that while allowing deduction u/s 80M, the proportionate disallowance has to be effected on management expenses. In brief A.O. was of the opinion that exempted income has to be netted after considering proportionate disallowance. The AO has referred to assessment years 2003-04 and 2004-05 and original assessment made for the assessment year under appeal before invoking section 263, therefore, after adopting a formula for computing the proportionate interest cost and management cost he made disallowances of Rs.7,05,00,000/- and Rs.2,26,00,000/- respectively.
5. Before the Ld. CIT(A), the assessee made the submissions and explanation which were made before the A.O. The Ld. CIT(A) after considering the explanation of the assessee and the arguments made by the ld. counsel for the assessee before him vide para 9 of his order observed that there is no denial to the fact that the assessee company had enough funds of its own . A portion of which would have been easily invested in the exempted income which has been done by the assessee company. The figures of the assessee-company's own funds, interest bearing funds and volume of investment made in exempted income are part of the order of the A.O. The AO has not discharged his onus by holding that this is an empty argument of the assessee that the assessee has its own funds and the AO has nowhere controverted the facts of the assessee company having enough funds to investment and fraction of the same is exempted income. The Ld. CIT(A) further observed that he was of the view that the expenditure has to be allowed which is incurred by the assessee in relation to income which does not form part of the total income under this Act. The AO has to establish the fact that the expenditure has been incurred by the assessee. The same can be established by establishing nexus between investment made and exempted income earned from same and then expenditure if any. The statute has not left it to the wishes and ideas of the AO to determine what the expenditure was without establishing and identifying the same. The CIT(A) relying upon the judgment of various courts of law and remand report of the AO was of the view that part of the expenditure can be disallowed in the form of notional proportionate interest and allowed the appeal of the assessee against disallowance of Rs.7.05 crores made by the AO.
6. As regards the disallowance of Rs. 2.26 crores, the Ld. CIT(A) following the order of the ITAT in assessee's own case retained disallowance of Rs. 8.10 lacs out of total disallowance of Rs.2.26 crores made by the A.O.
7. The Ld. DR, Mr. Tarsem Lal, mainly relied upon the order of the Assessing Officer. He argued that the assessee is having interest free funds is purely a guess work and not supported by any credible evidence. The assessee has not been able to pin-point any fund utilised through its exempted income out of own funds and not out of interest bearing funds. The decisions relied upon by the ld. CIT(A) are not applicable in the present facts and circumstances of the case. He further argued that the assessee was required to give the actual data date-wise in the form of cash flow statement where investment can be made to the availability of interest free advances. Therefore, the ld. CIT(A) is not justified in accepting the contention of the assessee which in fact has not been supported by the facts. If the order of the ld. CIT(A) is accepted that will tantamount to double deduction i.e. one in the form of exempted income and other the deduction of expenses incurred in relation to the exempted income. He invited our attention to the Circular of CBDT bearing No.780 where it is evident that it is the net income which is allowable and not the gross receipts which inter-alia means that the expenditure in relation to the earning of that income has to be reduced to arrive at net income which would be exempt. Repeating his argument that the assessee was actually required to give entry-wise detail of tax free investment by the assessee bank and its sources. The assessee has failed to prove any direct nexus of investment and income is claimed to be exempt and its source of non interest bearing funds. The assessee has failed to discharge its onus without linking the source of investment to non-interest bearing funds.
8. The Ld. DR further argued in relation to the deletion of the disallowance of management expenditure in the form of management expenses that expenditure incurred by the assessee in relation to income which does not form part of the total income should be given a wider meaning and it cannot be construed in a narrow or restricted manner. The narrow interpretation to the said expression will really defeat the object behind the provisions of section 14A of the Act, which is not the intention of the legislature to the expenditure incurred in relation to exempt income against taxable income. The Ld. DR, Mr. Tarsem Lal finally argued and suggested the Bench to restore the matter to the file of the AO so that entry-wise detail of the investment out of interest free fund is given by the assessee and the AO could re-assess the same after verifying such details to be submitted by the assessee as an alternative proposition.
9. On the other hand, the ld. counsel for the assessee, Mr. R.K. Gupta, CA, at the outset argued that ground No.1 of the Revenue is infructuous as the addition made in this respect has already been deleted by the AO by giving effect to the order of the ITAT and therefore, needs to be dismissed.
10. As regards ground No.4, it was argued before us with respect to ground Nos. 2 & 3 by the ld. counsel for the assessee Mr. R.K. Gupta, CA that there is no doubt that there is amendment in section 14A but the same is with effect from assessment year 2007-08 and not for the year prior to the said assessment year. He referred to the clarificatory note to the Finance Bill 2006 is specific reference to clause 7 which was placed on record. He further argued accordingly that this amendment in section 14A will take effect from Ist April, 2007 and will accordingly apply to the assessment year 2007-08 and subsequent years. The method as indicated in section 14A(2) stands notified through Rule 8D by CBDT on 24.03.2008 and has been inserted by IT (Fifth Amendment) Rules, 2008 and this rule is applicable w.e.f. assessment year 2008-09 and onwards. Therefore, to make disallowance as per the prescribed method in Rule 8D of the Income Tax Rules, 1962 is not applicable in the impugned year. Mr. R.K. Gupta, the ld. counsel for the assessee further relied upon the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203, placed at PB 261-302 where it has been held that Rule 8D shall be prospective and not retrospective. This decision of the Hon'ble High Court has been followed by various Benches of the ITAT and in view of no contrary judgment on the issue, Mr. R.K. Gupta prayed to dismiss the ground of the Revenue.
11. With regard to grounds No. 2 & 3, the ld. counsel for the assessee Mr. R.K. Gupta, CA relied upon the findings of the ld. CIT(A) and the submissions made before the A.O. and the ld. CIT(A). He argued that there is no dispute about the applicability of section 14A of the Act but only those expenses which have been incurred in relation to earning the exempt income have to be disallowed for computing the income under Chapter IV of the Act. He relied upon the decision of the ITAT, Amritsar Bench in assessee's own case, confirming the action of the ld. CIT(A) in ITA No.68(Asr)/1997 for the assessment year 1992-93 where it has held that there cannot be any interest cost which can be attributed as related to earn this income to arrive at net amount of dividend income which is to be allowed for claiming deduction. The ITAT, Amritsar Bench, in the said case had confirmed the order of the ld. CIT(A) for related cost to earn dividend income at Rs.25,000/- that too on account of the salary of one clerk for handling the dividends cheques. The said matter has not been agitated by the Revenue before the Hon'ble High Court.
12. It was argued by Mr. R.K. Gupta, CA that the assessee is having its own funds which have been utilized by the assessee bank for the investments for yielding income and therefore, there cannot be any interest cost which can be said to be related to earn the exempt income. He further argued that management and administrative cost of the assessee bank is fixed, whether assessee's bank earned exempt income or not. Mr. R.K. Gupta, further invited our attention at the submissions made before the A.O. which are available at pages 16 to 22 of AO's order in particular at page 21 being data for total funds available with the bank, non interest bearing funds, total investment and advances, investment in tax free securities and infrastructural advances and amount invested in earning taxable income but has also utilized the excess in other advances and investments the income earned from which forms part of the total income under Chapter-IV of the Act. The figures are factual and no controversy has been raised on the issue. The nexus between borrowed funds and infrastructural advances can be said to be established only where it is shown that interest free funds are not available with the assessee bank. He invited our attention to the investment in tax free securities and infrastructural advances at the beginning of the year and closing of the year.
13. Mr. R.K. Gupta, CA the ld. counsel for the assessee referred to the order of the A.O. and the ld. CIT(A) and argued that the order of the CIT(A) in para 9 is very relevant where each and every contention of the AO has been discussed to arrive at the conclusion that the order of the AO is not a correct order. The Ld. counsel for the assessee further relied upon the decisions of various courts of law in support of his arguments as under:
| (i) | Impulse (India) (P.) Ltd. v. Asstt. CIT (OSD) [2008] 22 SOT 368 (Delhi) | |
| (ii) | CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204 (Punj. & Har.) | |
| (iii) | CIT v. Shapoorji Pallonji & Co. Ltd. [2009] 318 ITR 417 (Bom.) | |
| (iv) | Asstt. CIT v. State Bank of Travancore [2010] 124 ITD 332 (Coch.) | |
| (v) | Asstt. CIT v. Jindal Saw Pipes Ltd. [2008] 118 TTJ 228 (Delhi) | |
| (vi) | Asstt. CIT v. Eicher Ltd. [2007] 160 Taxman 80 (Delhi)(Mag.) | |
| (vii) | Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119/142 Taxman 57 (Delhi) (Mag.) | |
| (viii) | Escorts Ltd. v. Asstt. CIT [2007] 104 ITD 427 (Delhi) | |
| (ix) | Dy. CIT v. B.S.E.S. Ltd. [2008] 113 TTJ 227 (Mum.) | |
| (x) | Wimco Seedlings Ltd. v. Dy. CIT (Asstt.) [2007] 107 ITD 267 (Delhi) (TM) | |
| (xi) | Sagar Drugs & Pharmaceuticals (P.) Ltd. v. Addl. CIT [ITA No. 3179/Ahd./2009, dated 2-6-2011] | |
| (xii) | Dy. CIT v. Jindal Photo Ltd. [ITA No. 814 (Delhi) 2011, dated 23-9-2011] | |
| (xiii) | Minda Investments Ltd. v. Dy. CIT [2011] 48 SOT 169 URO/15 taxmann.com 376 (Delhi) | |
| (xiv) | Dy. CIT v. Maharashtra Seamless Ltd. [2011] 48 SOT 160 (URO)/16 taxmann.com 97 (Delhi) | |
| (xv) | CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 (Punj. & Har.) | |
| (xvi) | CIT v. Printers House (P.) Ltd. [2010] 188 Taxman 70 (Delhi) | |
| (xvii) | Asstt. CIT v. SIL Investment Ltd. [2012] 54 SOT 54/26 taxmann.com 78 (Delhi) | |
| (xviii) | Bunge Agribusiness (India) (P.) Ltd. v. Dy. CIT [2011] 132 ITD 549/14 taxmann.com 71 (Mum.) | |
| (xix) | Reliance Industries Ltd. v. Addl. CIT [2013] 55 SOT 8 (URO)/[2012] 28 taxmann.com 189 (Mum.) | |
| (xx) | CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) |
13.1 Finally, Mr. R.K. Gupta, the ld. counsel for the assessee summed up his arguments by reading decisions of various courts of law and prayed to dismiss the appeal of the Revenue and allow the C.O. of the assessee.
14. We have heard the rival contentions and perused the facts of the case. As regards ground No.1, the same is infructuous as the addition made has already been deleted by the A.O. by giving effect to the order of the ITAT and accordingly, the appeal of the Revenue in ground No. 1 is dismissed.
14.1 As regards ground No. 4, in view of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), the Rule 8D is prospective in nature as argued by the ld. counsel for the assessee and not retrospective. The relevant part of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) in the head note is reproduced for the sake of clarity as under:
"Sub-section (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 w.e.f. April 1, 2007. Under sub-section (2) , the AO is required to determine the amount of expenditure incurred by a assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub-section (2) was inserted so as to provide a uniform method applicable where the A.O. is not satisfied with the correctness of the claim of the assessee. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure 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 regard to the accounts of the assessee. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the AO when the arrives at his satisfaction under sub-section (2) of section 14A. Sub-rule (1) of rule 8D of the Income-tax Rule, 1962, has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2). The provisions of sub-section (2) and (3) of section 14A of the Act, are constitutionally valid. The provision of rule 8D of the Rules, are not ultra vires the provision of section 14A, more particularly sub-section (2) and do not offend article article 14 of the Constitution.
Different dates have been provided in the provision of section 14A and rule 8D for their enforcement. Sub-section (1) of section 14A was inserted with retrospective effect from April 1, 1962, to overcome the decision of the Supreme Court. At the same time, the theory of apportionment of expenditure between taxable and non-taxable income has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with section 15 to 59, it has been observed that the words "expenditure incurred" in section 14A refer to expenditure on rent, tax, salary, interest, etc., in respect of which allowances are provided for. Thirdly, sub-section (2) and (3) were introduced by a legislative amendment brought about by the Financial Act of 2006. Rule 8D has essentially put into place an artificial method of estimating the expenditure that can be regarded as being relatable to income that does not form part of the total income under the Act. Sub-section (4) of section 295 empowers the rule-making authority to give retrospective effect to subordinate legislation. However, unless expressly or by necessary implication, a contrary provision is made, no retrospective effect is to be given to any rule so as to prejudicially affect the interest of the assessee. The rule were notified to come into force on March 24, 2008. It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April. Consequently, rule 8D which has been notified on March, 24 2008, would apply with effect from assessment year 2008-09.
ITO v. Daga Capital Management P. Ltd [2009] 312 ITR (AT) 1 (Mumbai) [SB] impliedly disapproved on this point.
For the assessment year 2002-03, the assessee claimed a divided of Rs. 34.34 crores as being exempt from the total taxable income. The assessee contended that it had not incurred any expenditure for earning the dividend income and that no disallowance was warranted. The Assessing Officer made a disallowance Rs. 6.92 crores towards expenses attributed to the earning of the dividend income. The Commissioner (Appeals) following earlier decisions in the case of the assessee for assessment year 1998-99 and 1999-2000 held that no expenditure was attributable to the earning of the dividend received and consequently deleted the disallowance. The assessee claimed that a major portion of its dividend amounting to Rs. 19.86 crores was received from group companies and of the total shares, 95 per cent. Consisted of bonus shares for which no cost had been incurred. The shares of GS were stated to have been acquired several year earlier, the assessee being a promoter of that company. During the year in question, the assessee claimed that it has not invested any amount in investments on which income was exempt under section 10(33) and it had disposed of some of its investments at a substantial profit. The Tribunal noted that the Assessing Officer had not examined the correctness of the claim of the assessee with reference to the accounts of the assessee, having regard to the provisions of section 14A(2). The proceedings were remanded to the Assessing Officer for a fresh examination on the basis of the provisions of section 14A(2). On appeal to the High Court:
Held, that the provision of rule 8D of the Rule which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior o assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. He Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the Assessing Officer. The Assessing Officer should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case."
14.2 Accordingly in view of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) which has been followed by various Benches of the ITAT and in view of no contrary decision brought on record by the ld. DR, the ground No.4 of the Revenue is dismissed.
15. Further, at the outset, the assessee has submitted details before the A.O. that the assessee is having interest free funds for making investment in tax-free securities and infrastructural advances. The AO in fact has not accepted these details and the explanation of the assessee in right spirit and has rejected the same that the assessee was required to give entry-wise details to prove that the assessee is having interest free funds and the same were invested in the exempt securities. This approach of the AO cannot be accepted especially for the reasons that the assessee has submitted that the assessee is having interest free funds of Rs. 2265.25 crores at the beginning of the year and Rs. 2736.65 crores at the end of the year, which indicates an increase of interest free funds to the extent of Rs. 471.40 crores. Besides, this a clear explanation was given before the AO that the profits of the year after declaring dividend and dividend tax amounting to Rs. 237.52 crores were also pumped in such accounts. Thus, interest free funds to the extent of Rs. 708.92 crores were available to assessee bank for making investment which far exceeded investment in tax free securities can be said to be established only when it is shown that interest free funds are not available with the assessee bank whereas reverse is true in this case, the borrowed funds are not available for investment in tax free securities and infrastructural advances. The AO has not brought on record that interest free funds are not available with the assessee bank. The assessee is having borrowed funds to the extent of Rs.11058.54 crores whereas investment and advances are to the tune of Rs.11926.42 crores. The AO has not controverted the fact that the assessee-company is not having enough funds to make investment in tax free securities. As a matter of fact, section 14A requires to determine the amount of expenditure incurred in relation to such exempt income which does not form part of total income under the Act. Therefore, the onus lies on the AO to establish that in fact there was some expenditure actually incurred by the assessee. The A.O. in the present case has not brought on record any such expenditure which has actually been incurred by the assessee on account of interest expenditure or even the management or administrative expenditure for earning the exempt income. The Ld. CIT(A) has rightly held in para 9 of his order that statute has not left such decision on the wishes and ideas of the AO to determine what expenditure has been incurred without establishing and identifying the same. The decisions relied upon by the Ld. CIT(A) and by the Ld. counsel for the assessee have in fact laid down the following proposition:
| (i) | Only the expenditure incurred on non-taxable receipts, will be covered by section 14A of the Act. Expenditure assumed or deemed to be incurred on non-taxable receipts cannot be disallowed. | |
| (ii) | Section 14A has not conferred specific powers on the Assessing Officer to estimate the expenditure which the assessee would have, in the opinion of the AO, incurred in relation to exempted income. | |
| (iii) | The burden or onus lies on the AO to prove the nexus between the expenditure to be disallowed on non-taxable receipts. | |
| (iv) | Section 14A does not absolve the AO of the burden of proving, on the basis of positive evidence or material on record, that the assessee has in fact incurred the expenditure which has nexus with the exempted income. | |
| (v) | Thus, it is duty of the AO to pin-point such expenditure on the basis of the material on record. | |
| (vi) | If the interest free funds available with the assessee are more than the impugned investments, then, no disallowance can be made u/s 14A of the Act. |
16. The arguments made by the ld. counsel for the assessee and submissions made before the authorities below by him are convincing to the Bench that administrative and other expenses are fixed irrespective of the fact whether or not tax free income is earned and therefore, these expenses cannot said to be relatable to exempt income. Every year is an independent year and in the present case, as held by us there is nothing on record brought out by the AO that the assessee has actually incurred any cost or expenditure in relation to the exempt income, therefore, no disallowance on account of interest, management or administrative case can be made by the AO. Therefore, the ld. CIT(A) has rightly allowed the appeal of the assessee in relation to deleting the addition of Rs.7.05 crores being the proportionate disallowance on account of interest expenses. Therefore, the Ld. CIT(A) is not justified in retaining disallowance even of Rs. 8.10 lacs out of Rs. 2.26 crores disallowed by the A.O. The A.O. is directed to allow the claim of the assessee accordingly. Thus, all the grounds of the Revenue are dismissed and solitary ground of the assessee in C.O. is allowed.
17. In the result, the appeal of the Revenue in ITA No. 136(Asr)/2010 is dismissed and the C.O. No. 09(Asr)/2010 of the assessee is allowed.
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Regards,
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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