IT : Where assessee diverted expenditure relating to investment activity including those providing tax free income, to his capital account, it could not be said to be case of nil expenditure enabling revenue to apply rule 8D
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[2013] 38 taxmann.com 111 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'H'
Harendra J. Thanawala
v.
Assistant Commissioner of Income-tax , 21(1)*
B.R. MITTAL, JUDICIAL MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
AND SANJAY ARORA, ACCOUNTANT MEMBER
IT APPEAL NO. 1278 (MUM.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
JUNE 7, 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 chargeable to tax [Rule 8D] - Assessee having principal business of bill discounting and consultancy, invested in tax free bonds and claimed that no expenditure was incurred towards earning of tax free income - Assessing Officer made disallowance at rate of 0.5 per cent of average investment of year - Assessee had allocated his business expenditures to profit and loss account and all other expenditures which he considered not for business including those relating to investment, to capital account - Whether since assessee, by bifurcating or allocating expenditure, had made out a prima facie case, instant case could not be said to be a case of nil expenditure and, hence, revenue's stand for application of rule 8D on ground that assessee had not affected any suo motu disallowance, could not hold good, - Held, yes - Whether, therefore, matter was to be remanded for further adjudication - Held, yes [Para 3.4] [In favour of assessee]
FACTS
| ■ | The assessee was in the business of bill discounting and consultancy charges which constituted its principal business and for which all expenses stood incurred by the assessee. It had also made investments in tax free bonds and claimed that it had not incurred any expenditure in relation to earning of tax free income. | |
| ■ | The Assessing Officer noted that the assessee had not allocated any expenditure in relation to share activities on his own and made disallowance qua indirect expenditure at rate of 0.5 per cent of average investment for the year without recording any dissatisfaction with regard to assessee's claim. | |
| ■ | The Commissioner (Appeals) sustained the order passed by the Assessing Officer. | |
| ■ | On second appeal: |
HELD
| ■ | There could be no disallowance in the absence of the assessee having incurred any expenditure, qua which only the disallowance is to be made, with rule 8D only providing a uniform basis for estimating the same, i.e., the disallowance under section 14A(1) in respect of the relevant expenditure. [Para 3.1] | |
| ■ | The quantum of income, which does not form part of the total income, earned by assessee for the relevant year, is not a criterion for determining the extent of expenditure incurred by the assessee in relation thereto. The incurring of the expenditure by itself does not ensure income, much less to a particular or definite extent. That is, there is no direct correspondence between the expenditure incurred and the income that would arise thus, in which case estimation would be reduced to a simple exercise of adopting a mathematical formula to arrive at the expenditure that would have been incurred in relation to such income. On the contrary, it may lead to no income at all, even as the expenditure has nevertheless been/is to be incurred, and being in relation to tax free income, the same could not be deducted in computing the total income under the Act, so that appropriate disallowance in its respect is to be made. In a particular case an investment in shares may lead to dividend, to whatever extent, while not in the other. Again, it may be that in one case the investment is financed out of own capital, while in the other is wholly out of interest bearing debt. The indirect expenditure incurred may again vary from case to case, investment being a subject matter of decision making at the top echelons of the management in one case, while on the basis of market reports, based on newspaper reporting, by an individual assesseee in another. [Para 3.2] | |
| ■ | The matter, in other words, is essentially factual. Further, while the disallowance qua direct or even interest expenditure is with reference to the expenditure actually incurred, that in respect of indirect expenditure follows - in terms of rule 8D - from the very fact of having incurred such expenditure, where claimed in the computation of total income. [Para 3.3] | |
| ■ | Coming to the facts of the present case, the average value of the investment in the securities yielding tax-free income, which in fact is also the value of the opening as well as the closing investment, is at Rs.714.75 lakhs. The assessee's balance-sheet, on the other hand, shows the closing value of investment in shares at Rs.53.72 lakhs only. The assessee also has investment in tax-free bonds, at Rs.203 lakhs as at the year-end. It is in fact on these bonds that the tax free income of Rs.6.95 lakhs stands received. Taking this investment also into account would increase the amount of such investments to Rs.256.72 lakhs, which though is still far below the average investment adopted by Assessing Officer, and which is not disputed. The other such investment that which would stand to be considered is the investment is mutual funds at Rs. 637.08 lakhs, adding up which raises the level of investments to Rs.893.80 lakhs. One would have inferred of an increase in the investment during the year leading to a higher closing investment as at the year-end. However, as noted earlier, the average figure is equal to the investment volume obtaining as at the beginning and the end of the year, so that there has been no incremental investment during the current year. The figure of investment, though not in dispute, does not agree with the assessee's balance-sheet. In fact, the financial statement also shows profit on their sale, so that the investment/s has been subject to turnover during the year. | |
| ■ | Further, even as observed during the hearing, the assessee has incurred expenditure by way of PMS management fee in the sum of Rs. 1,98,249 which stands debited to the capital account. In fact, the assessee has debited as well as credited various expenditures and incomes respectively directly to the said account. The figure of Rs.694922, stated to be by way of dividend, is in fact interest on tax free bonds, investment in which only at Rs.203 lakhs, i.e., as against the adopted investment figure at Rs.714.75 lakhs. Apart therefrom, there is dividend income on mutual funds and shares at Rs.43.84 lakhs and Rs.0.77 lakhs respectively, on which income, as noted hereinbefore, is credited directly to the capital accounts (in accounts). That being the case, the assessee's reliance on the profit and loss account of its business, reflecting a net profit at Rs.984646,assumes significance. [Para 3.3] | |
| ■ | No doubt disallowance under section 14A(1) could only be qua actual expenditure incurred by assessee, so that where no such expenditure has been incurred, no disallowance could possibly be made. The preliminary onus, however, to make out its case in this regard, with reference to its accounts, substantiating its claim with some supporting materials, is only on the assessee. It is only where it shows so, that the onus to rebut the same, i.e., the assessee's claim, shifts to the Assessing Officer, who, where not positively satisfied therewith, is empowered by law to make the disallowance. The Assessing Officer may record his reasons for dissatisfaction, which would in fact enable the appellate authority in review proceedings to examine the same. At the same time, there being no express requirement in law for recording the reasons, his dissatisfaction may be implicit. The reasons guiding the same must though emanate from the assessment order, as otherwise addressing the grievance, if any, therewith, would become impossible and, in any case, lest the 'dissatisfaction' reduce to a farce or be subject to arbitrariness. | |
| ■ | In the instant case, the assessee has segregated the expenditure, debiting the same, where relating to his business, as claimed, to the profit and loss account, and where not so, to his capital account. How has this bifurcation been made, or the basis thereof, is not known, as the disallowance made is only in respect of indirect expenditure; the direct expenditure being discernable from its very nature (e.g. PMS expense), while the interest expenditure, where so, is also stipulated for a proportionate disallowance. So, however, it cannot be denied that the assessee, by bifurcating or allocating the expenditure has made out a prima facie case of no expenditure in relation to tax-free income having been claimed as per return of income, so that the revenue's stand for application of rule 8D, i.e., that the assessee has not affected any suo motu disallowance was untenable and cannot hold good; the assessee having ostensibly debited such expenditure to the capital account. [Para 3.4] | |
| ■ | Reliance on section 14A(3), referred to by the Assessing Officer, would also not come to the rescue of the revenue. This is as all it says is that section 14A(2) would apply even where the assessee's claims of having not incurred any expenditure at all in relation to the income which does not form part of the total income. That is, section 14A(2) would apply irrespective of whether the assessee claims to have incurred expenditure in relation to the tax-free income in a positive sum or even at nil. In fact, the instant case cannot be said to be a case of nil expenditure inasmuch as the assessee has diverted all such expenditure, which he considers as not for business, as, for example, on the investment activity, to his capital account. The correctness of the assessee's claim though is another matter, and in relation to which no exercise has been undertaken by the revenue on the mistaken premise of the assessee having not made out any prima facie case in this regard. [Para 3.4] | |
| ■ | Therefore, it would be fit and proper under the circumstances to restore the matter back to the file of the Assessing Officer to consider the matter afresh in accordance with law, pass a speaking order after affording reasonable opportunity of hearing to the assessee to present his case. [Para 3.5] |
CASES REFERRED TO
Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom) (para 2.3), Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB) (para 3.2) and CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) (para 3.3)
Nishit Gandhi for the Appellant. Rajarsh Dwivedy for the Respondent.
ORDER
Sanjay Arora, Accountant Member - This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-32, Mumbai ('CIT(A)' for short) dated 05.12.2011, partly allowing the assessee's appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2008-2009 vide order dated 20.12.2010.
2.1 The only issue involved in this appeal is the confirmation of the disallowance in the sum of Rs.3,57,375/- made by Assessing Officer (A.O.) u/s. 14A of the Act r.w.r. 8D of the Income Tax Rules,1962 (in short 'the Rules') by the ld. CIT(A).
2.2 Arguing the assessee's case, it was submitted by the ld. AR, the assessee's counsel, that the impugned disallowance has been made by the Revenue applying rule 8D mechanically, i.e., without satisfying itself with regard to the incurring of the expenditure in the first place, and with reference to which only a disallowance u/s. 14A (1) could be made. Toward this, he would, placing a copy of the balance-sheet and profit & loss account on record, refer to the financial statements for the relevant year (ending 31.03.2008), submitting that the assessee is in the business of bill discounting (by way of bill rediscounting) and consultancy charges, which constitute, as would be evident therefrom, its principal source/s of income, and for which all the expenses stand incurred by it. As such, there is no scope for inferring of any expenditure, incurred by him for the current year, as being in relation to earning dividend income, which stands received at Rs.6,94,922/-. In fact, he would continue, it was incumbent on the AO to have recorded his dissatisfaction, if so, with the correctness of the assessee's claim in this regard, i.e., of having not incurred any expenditure in relation to the tax-free (dividend) income, in terms of section 14A(2) of the Act, prior to proceeding to effect a disallowance in its respect, so that in its absence the disallowance made is not maintainable in law. This formed the substance of the assessee's case before us.
2.3 The ld. DR, on the other hand, would submit that the rule 8D of the Rules is mandatory in its application for the current year, even as clarified by the hon'ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom), and as also observed by the ld. CIT (A). The specific objection being raised by the ld. AR, i.e., non-observance of s. 14A (2) by the AO, stood also made before, and has been accordingly met by, the ld. CIT(A) with reference to the said decision, reproducing the relevant part therefrom in his order (pg.7), further stating that assessee having not allocated any expenditure in relation to share activities on his own, the disallowance qua indirect expenditure at the rate of 0.5% of the average investment for the year, as prescribed by rule 8D(2)(iii), and to which the disallowance u/s. 14A(1) is limited, is valid.
3. We have heard the parties, and perused the material on record.
3.1 Clearly, there could be no disallowance in the absence of the assessee having incurred any expenditure, qua which only the disallowance is to be made, with r.8D only providing a uniform basis for estimating the same, i.e., the disallowance u/s. 14A(1) in respect of the relevant expenditure.
3.2 In this regard, we may firstly clarify that the quantum of income, which does not form part of the total income, earned by assessee for the relevant year, is not a criterion for determining the extent of expenditure incurred by the assessee in relation thereto. The incurring of the expenditure by itself does not ensure income, much less to a particular or definite extent. That is, there is no direct correspondence between the expenditure incurred and the income that would arise thus, in which case estimation would be reduced to a simple exercise of adopting a mathematical formula to arrive at the expenditure that would have been incurred in relation to such income. On the contrary, it may lead to no income at all, even as the expenditure has nevertheless been/is to be incurred, and being in relation to tax free income, the same could not be deducted in computing the total income under the Act, so that appropriate disallowance in its respect is to be made. In a particular case an investment in shares may lead to dividend, to whatever extent, while not in the other. Again, it may be that in one case the investment is financed out of own capital, while in the other is wholly out of interest bearing debt. The indirect expenditure incurred may again vary from case to case, investment being a subject matter of decision making at the top echelons of the management in one case, while on the basis of market reports, based on newspaper reporting, by an individual assesseee in another. This aspect has been clarified by the Special Bench of the Tribunal, per its decision in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Delhi)(SB), applying the decision by the hon'ble apex court in the case of CIT v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC).
The matter, in other words, is essentially factual. Further, while the disallowance qua direct or even interest expenditure is with reference to the expenditure actually incurred, that in respect of indirect expenditure follows - in terms of r.8D - from the very fact of having incurred such expenditure, where claimed in the computation of total income.
3.3 Coming to the facts of the present case, the average value of the investment in the securities yielding tax-free income, which in fact is also the value of the opening as well as the closing investment, is at Rs.714.75 lacs (page 4 of the assessment order). The assessee's balance-sheet, on the other hand, shows the closing value of investment in shares at Rs.53.72 lacs only. The assessee also has investment in tax-free bonds, at Rs.203 lacs as at the year-end. It is in fact on these bonds that the tax free income of Rs. 6.95 lacs stands received. Taking this investment also into account would increase the amount of such investments to Rs.256.72 lacs, which though is still far below the average investment adopted by AO, and which is not disputed. The other such investment that we observe which would stand to be considered is the investment is mutual funds at Rs.637.08 lacs, adding up which raises the level of investments to Rs.893.80 lacs. One would have inferred of an increase in the investment during the year leading to a higher closing investment as at the year-end. However, as noted the earlier, the average figure is equal to the investment volume obtaining as at the beginning and the end of the year, so that there has been no incremental investment during the current year. The figure of investment, though not in dispute, does not agree with the assessee's balance-sheet. In fact, the financial statement also shows profit on their sale, so that the investment/s has been subject to turnover during the year.
Further, even as observed during the hearing, the assessee has incurred expenditure by way of PMS management fee in the sum of Rs.1,98,249/-, and which stands debited to the capital account. In fact, the assessee has debited as well as credited various expenditures and incomes respectively directly to the said account. The figure of Rs.694922, stated to be by way of dividend, is in fact interest on tax free bonds, investment in which only at Rs.203 lacs, i.e., as against the adopted investment figure at Rs.714.75 lacs. Apart therefrom, there is dividend income on mutual funds and shares at Rs.43.84 lacs and Rs.0.77 lacs respectively, on which income, as noted hereinbefore, is credited directly to the capital accounts (in accounts). That being the case, the assessee's reliance on the profit and loss account of its business, reflecting a net profit at Rs.984646, assumes significance.
3.4 No doubt disallowance u/s. 14(A) (1) could only be qua actual expenditure incurred by assessee, so that where no such expenditure has been incurred, no disallowance could possibly be made. The preliminary onus, however, to make out its case in this regard, with reference to its accounts, substantiating its claim with some supporting materials, is only on the assessee. It is only where it shows so, that the onus to rebut the same, i.e., the assessee's claim, shifts to the AO, who, where not positively satisfied therewith, is empowered by law to make the disallowance. The A.O. may record his reasons for dissatisfaction, which would in fact enable the appellate authority in review proceedings to examine the same. At the same time, there being no express requirement in law for recording the reasons, his dissatisfaction may be implicit. The reasons guiding the same must though emanate from the assessment order, as otherwise addressing the grievance, if any, therewith, would become impossible and, in any case, lest the 'dissatisfaction' reduce to a farce or be subject to arbitrariness. In the instant case, the assessee has segregated the expenditure, debiting the same, where relating to his business, as claimed, to the profit and loss account, and where not so, to his capital account. How has this bifurcation been made, or the basis thereof, is not known. We say so as the disallowance made is only in respect of indirect expenditure; the direct expenditure being discernable from its very nature (e.g. PMS expense), while the interest expenditure, where so, is also stipulated for a proportionate disallowance. So, however, it cannot be denied that the assessee, by bifurcating or allocating the expenditure has made out a prima facie case of no expenditure in relation to the tax-free income having been claimed per the return of income, so that the Revenue's stand for application of rule 8D, i.e., that the assessee has not affected any suo motu disallowance, is untenable and cannot hold; the assessee having ostensibly debited such expenditure to the capital account.
We may also clarify that reliance on section 14A(3), referred to by the AO, would also not come to the rescue of the Revenue. This is as all it says is that section 14A(2) would apply even where the assessee's claims of having not incurred any expenditure at all in relation to the income which does not form part of the total income. That is, section 14A(2) would apply irrespective of whether the assessee claims to have incurred expenditure in relation to the tax-free income in a positive sum or even at nil. We have, in fact, already clarified that the instant case cannot be said to be a case of nil expenditure inasmuch as the assessee has diverted all such expenditure, which he considers as not for business, as, for example, on the investment activity, to his capital account. The correctness of the assessee's claim though is another matter, and in relation to which no exercise has been undertaken by the Revenue on the mistaken premise of the assessee having not made out any prima facie case in this regard.
3.5 We, therefore, only consider it fit and proper under the circumstances to restore the matter back to the file of the A.O. to consider the matter afresh in accordance with law, per a speaking order and after affording reasonable opportunity of hearing to the assessee to present his case. Reference in this regard is also invited to the decision in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), wherein the issue has been deliberated at length, laying down guidelines in the matter, including with regard to section 14A(2), the requirement of which has to be satisfied on an objective examination of the assessee's claim/s by the A.O. We may again clarify that we are not issuing any finding on the merits of the assessee's claim/s, which would be the subject matter of consideration by the assessing authority in the set aside proceedings. The A.O. shall, we may though add, restrict his examination only to the profit and loss account of the assessee's business, as it is only in case the same bears any (indirect) expenditure qua income that does not form part of the total income, that disallowance u/r.8D could be made by him. Further, we may also clarify, if only to reduce the scope of any litigation, that where the assessing authority is not satisfied with the assessee's claim, he has no option in the matter of estimation of the disallowance, for which he would have to necessarily adopt the prescription of r. 8D (w.e.f. A.Y. 2008-09). Finally, again, by way of abundant caution, we may clarify that the scope of the set aside proceedings is only to determine the disallowance, if any, as per law, in relation to indirect expenditure; the Revenue having not made any disallowance u/s. 14A(1) qua direct expenditure or interest, so that there is no dispute of the assessee having not claimed the said expenditure. We decide accordingly.
4. In the result, the assessee's appeal is allowed for statistical purposes.
Regards
Prarthana Jalan
__._,_.___
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