Whether disallowance can be made u/s 14A of the Income Tax Act if no expenditure is incurred in relation to the exempt income?

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCHES : “A” NEW DELHI

ITA no. 2484/Del/2012

Assessment Year: 2008-09

Bengal & Assam Co.Ltd.

Link House, 4th Floor

3, Bahadur Shah ZafarMarg

New Delhi 110002

PAN: AABCB 0970 C

Appellant

Versus

ITO, Ward 2 (4)

New Delhi

Respondent

Appellant by:- Sh. V.P.Gupta, Adv. & Sh.Anurav Kumar, Adv.

Respondent by:-Mrs.Y.Kakkar, Sr.D.R.

BEFORE SHRI J.SUDHAKAR REDDY, AM

AND SHRI A.T.VARKEY, JM

O R D E R

PER J.SUDHAKAR REDDY, AM

This is an appeal filed by the assessee directed against the order of the Ld.CIT(Appeals)-V, New Delhi dated 12.03.2012 pertaining to the Assessment Year 2008-09.

2. Facts in brief:- The assessee is a Non-Banking Finance Company. It is in the business of investments in shares and securities, money lending and finance. Page 1 of the assessment order states that 10 companies merged with the assessee company w.e.f. 1.4.2007, vide order of the Hon‘ble Delhi High Court dt. 22.8.2008. The assessee filed its original return declaring loss of Rs.1,90,84,382/- on 30.9.2008. It filed a revised return at an income of Rs.2,43,19,331/- on 30.9.2009.

3. During the year the assessee earned dividend income of Rs.7,81,04,411/-. This was claimed as exempt u/s 10(34) of the Act. The assessee made a suo- -moto disallowance of Rs.1,73,45,967/- being interest expenditure incurred during the Previous Year on the ground that it is directly attributable to the earning of dividend interest. The assessee did not make any disallowance of administrative expenses. The Assessing Officer applied Rule 8’D’(2)(iii) of the Act and disallowed 0.5% of the average value of investments which came to Rs.88,76,330/-. Aggrieved the assessee carried the matter in appeal. The First Appellate Authority dismissed this appeal of the assessee.

3.1 Aggrieved the assessee is in appeal before us on the following grounds.

“1. That the CIT(Appeals) erred in upholding the disallowance of Rs.2,62,22,197/- u/s 14A read with Rule 8D as against disallowance of Rs.1,73,45,967/- offered by the appellant.

2. That the CIT(Appeals) failed to appreciate the legal position that only such expenses could be disallowed u/s 14A(1) which were incurred directly in relation to earning of exempt income and no disallowance could be made on proportionate or adhoc basis.

3. That the CIT(Appeals) also erred in not appreciating, that provisions of subsection (2) of section 14A and Rule 8D could be applied by the Assessing Officer only if he is not satisfied with the correctness of claim of the assessee, having regard to the accounts, in respect of such expenditure in relation to income which does not form part of total income.

4. That the CIT(Appeals) erred in not appreciating the facts that most of the expenditure had been incurred by the appellant on statutory compliances. The appellant craves leave to submit additional grounds and/or amend or alter the grounds already taken either at the time of hearing of the appeal or before.”

4. We have heard Mr.V.P.Gupta, the Ld.Counsel on behalf of the assessee and Mrs.Y.Kakkar, the Ld.Sr.D.R. on behalf of the Revenue.

5. The sum and substance of the contentions of the assessee are that most of the expenditure was incurred for statutory compliances/legal fees, professional charges etc. for the process of amalgamation. It was submitted that the expenditure incurred towards statutory compliance cannot be disallowed. It was further argued that these expenditure cannot said to have been incurred for the purpose of earning exempt income and under such circumstances, the disallowance is bad in law. The details of the expenditure and the purpose for which it is incurred were furnished in the form of a chart and it was contended that the nature and purpose of expenditure demonstrates that it cannot be disallowed under Rule 14’A’.

6. Reliance was placed on the following case laws.

1. CIT vs. Ganga Properties Ltd., 199 ITR 94 (Cal.)

2. Daljit Exports (India) P.Ltd. vs. ITO, 38 TTJ (Del) 564

3. Udhav Holdings Pvt.Ltd. vs. ACIT, (2014) (1) TMI 1134 - ITAT Mumbai and other cases.

7. The Ld.Sr.D.R. Mrs.Y.Kakkar, on the other hand supported the order of the Assessing Officer and submitted that the assessee failed to disallow any amount on account of administrative expenditure and the Assessing Officer had followed the law by applying Rule 8’D’. She vehemently contended that the rule has been brought to the Statute to avoid these problems of ascertaining by estimation the expenditure to be disallowed and to streamline the disallowance and hence it cannot be diluted by claiming that certain expenditure does not fall within the ambit of disallowance u/s 14’B’. She relied on the following case laws.

- 347 ITR 372 in the case of CIT vs. Birla Janahit Trust [1994] (Cal.)

- 330 ITR 556 in the case of Catholic Syrian Bank Limited vs. CIT

In reply the Ld.Counsel for the assessee submits that Rule 8’D’ has been considered by the Tribunal as well as the High Court in various decisions including JK Investors (Bombay) Ltd. and others vs. ACIT (2013) (5) TMI 580 – ITAT Mumbai. He relied on the principles that have been laid down in all these decisions.

To read the full judgment, please find the attached file :

Attached file:

http://www.itatonline.in:8080/itat/upload/-848076882443537574913$5%5E1REFNOITA_2484.pdf