Sec 14A restrict the allowance of expenditure related to exempted income subject to the date of introduction of rule 8D

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI ‘G’ BENCH

BEFORE SMT.DIVA SINGH, JM & SHRI A.N. PAHUJA, AM

ITA No.230/D/2012

Assessment Year: 2008-09

JCIT(OSD) , Circle 9(1), Room

no. 163,CR Building, IP Estate,

New Delhi

V/s.

M/s Surya Food & Agro

(P) Ltd. ,E-67,LGF,Greater

Kailash-I I I ,Masjid Moth,

New Delhi

[PAN: AAACS3026P]

Assessee by Shri Satyam Sethi &

AT Panda, ARs

Revenue by Smt . S Mohanty,DR

Date of hearing 15-03-2012

Date of pronouncement 23-03-2012

O R D E R

A.N.Pahuja:-

This appeal filed on 13th January, 2012 by the Revenue against an order dated 3rd October, 2011 of the ld. CIT(A)-XII, New Delhi, raises the following grounds:-

1 “ The ld. CIT(A) erred in law and on the facts of the case in deleting the disallowance made by the AO u/s 14A of the Income Tax Act read with Rule 8D(ii) of the Income Tax Rules.”

2 The appellant craves to amend, modify, alter, add, or forego any ground of appeal at any time before or during the hearing of this appeal”

2. Adverting first to ground no.1 in the appeal , facts, in brief, as per relevant orders are that return declaring income of ``11,49,99,142/- filed on 30.9.2008 by the assessee, manufacturing biscuits, printed laminates rolls & corrugated boxes, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act,1961 (hereinafter referred to as the Act). During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed, inter alia, that the assessee invested sum of `13,30,00,000/- in equity shares of various companies for earning diving income from the aforesaid investments. Accordingly, the ld. AO invoked provisions of sec. 14A of the Act read with Rule 8D of the IT Rules,1962 and disallowed an amount of `15,24,320/-,relying inter alia, on the decisions in ITO vs. Daga Capital Management (P) Ltd.,117 ITD 169(Mumbai)(SB) and decision dated 5.8.2009 in ChemInvest Ltd. vs. ITO,317 ITR(AT) 86(Delhi) .

3. On appeal, the ld. CIT(A) merely accepted the submissions of the assessee and restricted the disallowance to `5,50,576/- in the following terms:

“I have considered the submissions filed by the assessee as well as facts stated by the assessing officer in the assessment order along with case laws cited by the AO. The disallowance u/s 14A is restricted to `5,50,576/- and for the balance assessee gets relief.”

4. The Revenue is now in appeal before us against the aforesaid conclusion of the ld. CIT(A).At the outset, the ld. DR while inviting our attention to the impugned order contended that the ld. CIT(A) did not record his specific findings on the issue and argued that the issue is required to be re-adjudicated in terms of decision dated 18.11.2011 of the Hon’ble jurisdictional High Court in Maxopp Investment Ltd. vs. CIT,[2011] 15 taxmann.com 390 (Delhi).On the other hand, the ld. AR on behalf of the assessee while carrying us through the balancesheet of the assessee supported the findings of the ld. CIT(A).

5. We have heard both the parties and gone through the facts of the case as also the aforesaid decision relied upon by the ld. DR. A mere glance at the impugned order reveals that the order passed by the ld. CIT (A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi- judicial body/authority must pass reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it . The application of mind to the material facts and the arguments should manifest itself in the order. Sect ion 250(6) of the Act mandates that the order of the CIT (A) while disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reasons for the decision. The requirement of recording of reasons and communication thereof by the quasi- judicial authorities has been read as an integral part of the concept of fair procedure and is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. Hon’ble jurisdictional High Court in their decision in Vodafone Essar Ltd. Vs. DRP, 196 Taxman423(Delhi) held that when a quasi judicial authority deals with alis, it is obligatory on its part to ascribe cogent and germane reasons as the same is the heart and soul of the matter and further, the same also facilitates appreciation when the order is called in question before the superior forum. We may point out that a ‘decision’ does not merely mean the ‘conclusion’. I t embraces within its fold the reasons forming basis for the conclusion. [Mukhtiar Singh Vs. State of Punjab,(1995)1SCC 760(SC) ] .

5.1. We find that Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. (supra) while adjudicating a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules, 1962 concluded that Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax-free income. It applies only w.e. f AY 2008-09. For the assessment years where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all the facts and circumstances, the Hon’ble High Court concluded.

5.2 We find that Hon’ble Supreme Court in their decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P.) Ltd. ,326 ITR 1, inter alia, observed that for attracting sect ion 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon’ble Apex Court observed in the context of provisions sec.14A of the Act in the following terms:

“17. The insert ion of sect ion 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduct ion in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22- 11-2001). In other words, sect ion 14A clarifies that expenses incur red can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incur red by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of sect ion 14A, the expenditure incur red in respect of exempt income was being claimed against taxable income. The mandate of sect ion 14A is clear. It desires to curb the practice to claim deduct ion of expenses incur red in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exempt ion of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insert ion of sect ion 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act . In the past, there have been cases in which deduct ion has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incur red to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exempt ion is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of sect ion 14A. In sect ion 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within sect ion 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". I t means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of sect ion 14A. Further, sect ion 14 specif iesfive heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sect ions 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sect ions 15 to 59 quantify the total income chargeable to tax. The permissible deduct ions enumerated in sect ions 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. I f an income like dividend income is not a part of the total income, the expenditure/deduct ion though of the nature specified in sect ions 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non-taxable has, in principle, been now widened under sect ion 14A. Reading sect ion 14 in juxtaposition with sect ions 15 to 59, it is clear that the words "expenditure incurred" in sect ion 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sect ions 30 to 37)………………”

5.3 Hon’ble Punjab & Haryana High Court in their decision in CIT vs. Hero Cycles Ltd. ,323 ITR 518 have observed that disallowance under sect ion 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under sect ion 14A cannot stand.

5.4 In the light of view taken in the aforesaid decisions, Hon’ble jurisdictional High Court in a recent decision dated 18.11.2011 in Maxopp Investment Ltd. vs. CIT,[2011] 15 taxmann.com 390 (Delhi) held as under:

“35. We are of the view that Rule 8D would operate prospectively. We agree with the submissions made by Dr Rakesh Gupta that if the said Rule were to have retrospective effect, nothing prevented the Central Board of Direct Taxes from saying so, particularly, in view of the fact that it had the power to make a rule retrospective by virtue of Section 295(4) of the said Act. Instead of making Rule 8D retrospective, clause 1(2) of the Income-tax (Fifth Amendment) Rules,

2008 made it clear that the rules would come into force from the date of their publication in the Official Gazette. It is, therefore, clear that Rule 8D, which was introduced by virtue of the Notification No.45/2008 dated 24.03.2008, was prospective in operation and cannot be regarded as being retrospective. We may also point out that we have had the benefit of the decision of the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v Dy. CIT [2010] 328 ITR 81/194 Taxman

203, wherein it has, inter alia, been held that the provisions of Rule 8D of the said Rules has prospective effect and shall apply with effect from assessment year 2008-09 onwards.

36. Insofar as sub-sections (2) and (3) of Section 14A are concerned, they have also been introduced by virtue of the Finance Act, 2006 with effect from 01.04.2007. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:-

"This amendment will take effect from 1st April, 2007 and will, accordingly,apply in relation to the assessment year 2007-08 and subsequent years."

37. Furthermore, in the Memorandum explaining the provisions in the Finance Bill, 2006 [281 ITR (ST) at pages 281-281], it is once again stated with reference to clause 7 which pertains to the amendment to Section 14A of the said Act that:-

"This amendment will take effect from 1st April, 2007 and will, accordingly ,apply in relation to the assessment year 2007-08 and subsequent years."

38. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating expenditure in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub-section (2) of Section 14A of the said Act. Paragraph 11.3 specifically provided for applicability of the provisions of subsection (2) and it clearly indicated that it would be applicable "from the assessment year 2007-08 onwards".

39. It is, therefore, clear that sub-sections (2) and (3) of Section 14A were introduced with prospective effect from the assessment year 2007-08 onwards. However, sub-section (2) of Section 14A remained an empty shell until the introduction of Rule 8D on 24.03.2008 which gave content to the expression "such method as may be prescribed" appearing in Section 14A(2) of the said Act.

40. From the above discussion, it is clear that, in effect, the provisions of sub sections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable.”

6.. As already observed, the impugned order suffers from lack of reasoning and is not a speaking order on the issue before us. In view of the foregoing, especially when the ld. CIT(A) have not passed a speaking order on the issue raised in this appeal before us nor had the benefit of aforesaid decision of the Hon’ble jurisdictional High Court, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the aforesaid issue, afresh in accordance with law in the light of aforesaid judicial pronouncement of the Hon’ble jurisdictional High Court , after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the ld. CIT (A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act. With these observations, ground no. 1 in the appeal of the Revenue is disposed of.

7. No additional ground having been raised before us in term of residuary ground no.2 in the appeal, accordingly, this ground is dismissed.

8. No other plea or argument was made before us.

9. In the result, appeal is allowed but for statistical purposes.

Order pronounced in Open Court

                                                           Sd/-                                 Sd/-

                                                 (DIVA SINGH)             (A.N. PAHUJA)

                                          JUDICIAL MEMBER   ACCOUNTANT MEMBER

NS

Copy of the Order forwarded to:-

1. M/s Surya Food & Agro (P) Ltd. ,E-67,LGF,Greater Kailas- III ,Masjid Moth, New Delhi.

2. JCIT (OSD). Circle 9(1), Room no. 163,CR Building, IP Estate, New Delhi.

3. CIT (Appeals)-XII, New Delhi

4. The CIT concerned.

5. The DR, ITAT,’G’ Bench, New Delhi

6. Guard File.

True copy

By Order,

Deputy/Asstt.Registrar

ITAT, Delhi