IT: AO couldn't apply Rule 8D blindly despite assessee's contentions that no expenditure was incurred to earn exempt income
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[2013] 38 taxmann.com 83 (Punjab & Haryana)
HIGH COURT OF PUNJAB AND HARYANA
Commissioner of Income-tax, Jalandhar -I
v.
Deepak Mittal*
RAJIVE BHALLA AND DR. BHARAT BHUSHAN PARSOON, JJ.
IT APPEAL NOS. 105 TO 110 OF 2013 (O&M)†
SEPTEMBER 3, 2013
Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income [Dividend income] - Assessment year 2007-08 - Assessee had earned dividend income and consistent case of assessee was that he had not made any expenditure on earning such income - However, Assessing Officer disagreeing with plea of assessee, held that interest bearing funds had been invested for generating dividend income and had made an addition by making disallowance under section 14A, read with rule 8D - Whether since Assessing Officer instead of proceeding to collect material or evidence to determine expenditure incurred by assessee, relied upon rule 8D, and applied it as a formula, disallowance was to be deleted - Held, yes [Para 9] [In favour of assessee]
FACTS
| ■ | The assessee had earned dividend income and claimed that no expenses were incurred against earning of such income. The Assessing Officer disagreeing with the plea of the assessee held that interest bearing funds had been invested for generating dividend income and had made an addition by making disallowance under section 14A read with rule 8D. | |
| ■ | The Commissioner (Appeals) deleted the addition. | |
| ■ | The Tribunal also dismissed the revenue's appeal. | |
| ■ | On further appeal: |
HELD
| ■ | Perusal of section 14A leaves no manner of doubt that plea of the revenue that onus was upon the assessee to prove quantum of expenditure incurred on earning of tax-free income of dividend, is correct. [Para 8] | |
| ■ | When consistent case of the assessee, despite notice given by the Assessing Officer to give details of the expenditure made on earning of exempted income in the nature of dividend was that he had not made any expenditure on earning such income, the Assessing Officer in terms of sub-section (2) of section 14A was to proceed further to collect such material or evidence to determine expenditure, if any, incurred by the assessee but the Assessing Officer instead relying on rule 8D of the Rules applied as a formula, applicable to an assessee who has incurred expenditure by way of interest which is not directly attributable to any particular income or receipt which is not the case of the present assessee, which was clearly a wrong application introduced as a substitute for sub-section (2) of section 14A and, thus, was not permissible in law. [Para 9] | |
| ■ | In view of the above discussion, no substantial question of law arose for adjudication. [Para 12]. |
CASE REVIEW
CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 (Punj. & Har.) (para 11) followed.
Vivek Sethi for the Appellant.
ORDER
Dr. Bharat Bhushan Parsoon, J. - These six appeals under Section 260-A of the Income Tax Act, 1961 (for short, the Act) for the assessment years 2007-08, 2008-09 and 2009-10 of two assessees viz. Deepak Mittal and Amrit Sagar Mittal are directed against the common order of Income Tax Appellate Tribunal, Amritsar Branch, Amritsar (for short, the Tribunal) passed in ITA No.457(ASR)/2010, ITA No.249(ASR)/2011, ITA No.338(ASR)/2011, ITA No.456(ASR)/2010, ITA No.138(ASR)/2011 and ITA No.339(ASR)/2012 dated 17.10.2012 wherein the revenue has proposed following substantial question of law, for answer:
"Whether on the facts and in law the Hon'ble ITAT was legally justified in deleting the disallowance of Rs. 30,31,212/-under Section 14-A of the Income Tax Act, 1961 read with rule 8-D of the Income Tax Rules, by ignoring the evidence relied on by the Assessing Officer and holding that a clear nexus has not been established that the interest bearing funds have been vested for investments generating tax free dividend income?"
2. Since these appeals have common facts and issues adjudicated by the income tax authorities co-jointly, these appeals have been taken up together for adjudication.
3. The assessees are individuals deriving income from various sources including exempted income as dividend. Facts of Income Tax Appeal No.109 of 2013 pertaining to assessee Deepak Mittal for the assessment year 2007-08 have been taken up for clarity and convenience.
4. The assessee had shown dividend income under the category of exempted income, wherein no expenses against earning of such income had been shown in his return of income. The Assessing Officer disagreeing with the plea of the assessee, had made an addition of Rs. 30,31,212/- by making disallowance under Section 14-A of the Act read with Rule 8-D of the Income Tax Rules, 1962 (hereinafter mentioned as the Rules). In the appeal preferred by the assessee, Commissioner of Income Tax (Appeals) deleted the addition on the ground that the Assessing Officer was not justified in making the disallowance. In further appeal preferred by the revenue, the Tribunal dismissed the revenue appeal primarily by relying upon the decision of this Court in CIT v. Hero Cycles Ltd. [2010] 323 ITR 518/189 Taxman 50 (Punj. & Har.)
5. Sole ground taken by the revenue in these appeals is that the dividend income returned by the assessee could not have been earned by him without making direct or indirect expenses. Contention of the revenue is that Section 14-A of the Act is a special provision and in order to escape applicability of this provision, onus was upon the assessee to prove that no expenditure was incurred by him for earning this exempted income. It is further urged by the revenue that the Tribunal completely overlooked the scope of Rule 8-D of the Rules in relation to provision of Section 14-A of the Act.
6. The revenue has referred to sub-section 3 of Section 14-A of the Act, whereas the assessee has pointedly mentioned about sweep of sub-section 2 of Section 14-A of the Act to which sub-section 3, relied upon by the revenue, also makes reference.
7. For better evaluation, provision of Section 14A of the Act is reproduced as below:
"14A. Expenditure incurred in relation to income not includible in total income :— (1) For the purposes of computing the total income under this Chapter, 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 this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, 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 this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001."
8. Perusal of the aforesaid Section leaves no manner of doubt that plea of the revenue that onus was upon the assessee to prove quantum of expenditure incurred on earning of tax free income of dividend, is correct.
9. When consistent case of the assessee, despite notice given by the Assessing Officer to give details of the expenditure made on earning of exempted income in the nature of dividend, version of the assessee was that he had not made any expenditure on earning such income, the Assessing Officer in terms of sub-section 2 of Section 14-A of the Act was to proceed further to collect such material or evidence to determine expenditure, if any, incurred by the assessee but the Assessing Officer instead relying on Rule 8-D of the Rules applied as a formula, applicable to an assessee who has incurred expenditure by way of interest which is not directly attributable to any particular income or receipt which is not the case of the present assessee, which was clearly a wrong application introduced as a substitute for sub-section 2 of Section 14-A of the Act and thus was not permissible in law.
10. At this stage, reference to the impugned judgment of the Tribunal is necessary. In para 14 of its judgment, the Tribunal has observed as under:
"Before any disallowance is made, essentially there has to be certain expenditure which must have been incurred by the assessee, which in the present case is missing. The Assessing Officer has not brought on record any expense having been incurred by the assessee to earn the non-exempt income or the exempt income. In the absence of the same, it cannot be said that the assessee had actually incurred any expenditure. Therefore, whether before insertion of Rule 8-D or thereafter this fact has to be brought on record by the authorities below which in the present case has not been done.
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Having not incurred any expenditure which can be disallowed or any such expenses having not been brought on record, there cannot be any disallowance of any expenditure under Rule 8-D or otherwise against the exempt income. Our view finds support from the decision in the case of Hero Cycles Limited and Walfort Share & Stock Brokers (P) Ltd. (supra). In the circumstances and facts of the case, we find no infirmity in the findings of ld. CIT(A). Thus, ground No.2 of Revenue is dismissed."
11. At this stage, reference may be made to decision of this Court Hero Cycles Ltd.'s case (supra) wherein this controversy has been set at rest. Paras 3 and 4 of the said judgment for ready reference are given as below:
"3. Learned counsel for the appellant relies upon Section 14A (2) and Rule 8D (1) (b) to submit that even where the assessee claimed that no expenditure had been incurred, the correctness of such claim could be gone into by the Assessing Officer and in the present case, the claim of the assessee that no expenditure was incurred was found to be not acceptable by the Assessing Officer and thus disallowance was justified. We are unable to accept the submission.
4. In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in ITA No. 504 of 2008 (Commissioner of Income Tax Chandigarh II v. M/s Winsome Textile Industries Limited, Chandigarh), decided on 25.8.2009, wherein it was observed as under:—
6. Contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this Court in CIT v. Abhishek Industries Limited, (2006) 286 ITR 1 and therefore, disallowance under section 14A was justified."
In view of law laid down by judgment of this Court which is fully applicable to the facts of this case, nothing remains to be adjudicated afresh.
12. In view of the discussion made earlier, we are of the opinion that no substantial question of law arises for adjudication. The appeals are, consequently, dismissed.
POOJARegards
Prarthana Jalan
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