TMI Blog2011 (5) TMI 489X X X X Extracts X X X X X X X X Extracts X X X X ..... nder :- "1. That on the facts and in the circumstances of the case, the ld. CIT(A) has erred in deleting the addition of Rs. 2,66,35,000/- in the absence of any evidence on rendering of actual service by RPG Enterprises Ltd." 2.1. From the details of expenses filed by the assessee, the A.O. observed that the assessee had paid licence fees to RPG Enterprises Ltd. amounting to Rs. 2,66,35,000/-. However, he disallowed the payment made to the said company on the ground that in earlier years as well as in the subsequent years, the licence fees paid to the said company was disallowed and further no specific break-up of the services rendered and the cost for each such service has been provided by the assessee. On appeal, the ld. C.I.T.(A) following the orders of the Tribunal in the case of the assessee for assessment years 1997-98 to 2001-02 2003-04 held that the payment of licence fees to M/s. RPG Enterprises Ltd. was an allowable business expenditure. He, therefore, deleted the addition made by the A.O. in this regard. 2.2. We have heard the parties and perused the material placed on record. It was submitted by the learned counsel for the assessee that the issue is squarely cov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh it is difficult to presume that the entire expenses were laid out wholly and exclusively for the purpose of business." 4.1. The A.O. found that during the assessment year under consideration, the assessee had incurred guest house expenses of Rs. 52,91,532/-. It was explained by the assessee that the assessee has plants at three different locations and also has offices warehouses in various cities of India. The employees and the officers of the assessee-company use the facilities of these guest houses while on official tours. According to the A.O., it was difficult to accept that the entire expenditure was laid out wholly and exclusively for the business purpose. He, therefore, disallowed 25% of the total expenses incurred in this respect, which came to Rs. 13,22,883/-. On appeal, the ld. C.I.T.(A) following the order of the Tribunal for A.Y. 2001-01 as also the order of ld. C.I.T.(A) for A.Y. 2003-04 in the assessee's own case deleted the disallowance. 4.2. At the time of hearing, the learned counsel pointed out that on an identical disallowance of expenditure, the ld. C.I.T.(A) vide order dated 16/5/2006 for assessment year 2003-04 has deleted the addition and the departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n view of the above and respectfully following the aforesaid decision of the Tribunal and Hon'ble Gujarat High Court upheld the order of ld. C.I.T.(A) on this issue. Therefore, this ground of the Revenue also fails. 6. In the result, the appeal of the Revenue is dismissed. CO. No. 39 (Kol.)/2009 : 7. The assessee in its cross objection has raised the following grounds: "1. The Commissioner of Income Tax (Appeals) erred in enhancing the disallowance on account of expenses allegedly as relatable to earning of exempt income by resorting to Rule 8D of the Income Tax Rules on the facts and in the circumstances of the case. 2. For that the Commissioner of Income Tax (Appeals) should have seen that the provisions of Rule 8D were not applicable on the facts and in the circumstances of the case." 7.1. The A.O. observed that the assessee during the year under appeal had earned dividend and interest on UTI tax free bonds aggregating to Rs. 42,12,853/- and claimed it as an exempt income. The A.O. by holding that some expenditure was incurred by the assessee to earn the said exempt income, estimated the expenses @ 1% of the total exempt income of Rs. 42,12,853/- which came to Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment, during the year, the assessee has earned dividend of Rs. 41,14,883/- and interest of Rs. 97,970/- on UT1 tax free bonds aggregating to Rs. 42,12,853/- and claimed it as an exempt u/s.10. The assessee has submitted that it did not incur any expenditure in earning the said income as it was received by mode of cheques payable at par and no expenses were incurred for the same as well as these investment were made out of its own fund. Upon the introduction of section 14A which clearly states that 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. Therefore, as some expenditure is incurred to earn the said exempt income, the AO thought it reasonable to estimate the expenses @1% of the total exempt income, i.e. Rs. 42,130/- and added back to the total income of the assessee. 3. On appeal, the Ld. CIT(A) has enhanced the disallowance under section 14A by applying Rule 8D to Rs. 9,86,770/- by observing as under: "I have carefully perused the submission of the A/R of the appellant. I, however, do not agree with the submissions made of the appellant with respect to Rule 8D(2)(iii). I a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total exempted income i.e. Rs. 42,130/- mainly because in the present facts of the case, in my considered opinion, no ad hoc disallowance is required, when, once he investments are made out of its own funds and there is no direct expenditure incurred by the assessee to earn the exempted income under section 10. In the similar facts and circumstances, where the exempted income is earned out of its own funds and no direct expenditure has been incurred to earn the same. 7.1 I want to discuss the various judicial pronouncements relating to this issue. Retrospective Aplicability of Section and Rule 8D In view of clear enunciation in the Memorandum Explaining the Provisions of the Finance Bill, 2006 and further clarification by CBDT vide Circular No. 14 of 2006, sub- section (2) of section 14A is applicable from asst. yr. 2007-08 onwards, and the provisions of rule 8D which have been notified w.e.f. 24th March, 2008 are applicable with effect from asst. yr. 2008-09. Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT Anr. [2010] 234 CTR (Bom.) 1 : [2010] 328 ITR 81 (Bom.). No Power to Consider Applicability of section 14A, in the Absence of Any Adverse Finding Finding of the CIT(A) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate. Since the AO has already applied 1% of the total exempted income towards the reasonable estimate of the expenses, in view of this, I find no justification to accept the ad hoc disallowance of Rs. 2 lakhs in stead of 1% as adopted by the AO. In view of the above, I am of the view that the appeal of the Revenue is dismissed whereas the CO. of the Assessee is allowed, as indicated above. 8. In the result, the appeal of the Revenue is dismissed whereas the Cross Objection of the Assessee is allowed, as indicated above. Per Bench: - Since there is a difference of opinion between us constituting "A" Bench of I.T.A.T., Kolkata in respect of the ground in Cross objection, the following question is referred to the Hon'ble President, ITAT under section 255(4) of the I.T. Act, 1961 to consider to nominate a Third Member. "Whether, in the facts and circumstances of the case, the disallowance of Rs. 2 lakhs on ad hoc basis proposed by Ld. J.M. or disallowance of expenses to 1% of the total exempted income proposed by Ld. A.M. is justified under section 14A of the I.T. Act, 1961." THIRD MEMBER ORDER G.D. Agrawal, Vice President (As a Third Member) - Since there was a dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. C.I.T.(A), therefore, held that expenditure of Rs. 10,28,900/-, determined in the manner prescribed in Rule 8D(2)(iii) of the Rules, should have been disallowed u/s. 14A of the Act as against Rs. 42,130/- disallowed by the A.O. He, accordingly, directed the A.O. to disallow Rs. 10,28,900/- u/s. 14A of the Act as against Rs. 42,130/- disallowed by the A.O., resulting in enhancement of Rs. 9,86,770/-. 3. Against the ld. C.I.T.(A)'s order, enhancing the disallowance u/s. 14A of the Act, the assessee filed Cross-Objection No. 39 (Kol.)/2009, arising in ITA No. 566/Kol./2009, raising the following grounds:- "1. The Commissioner of Income Tax (Appeals) erred in enhancing the disallowance on account of expenses allegedly as relatable to earning of exempt income by resorting to Rule 8D of the Income Tax Rules on the facts and in the circumstances of the case. 2. For that the Commissioner of Income Tax (Appeals) should have seen that the provisions of Rule 8D were not applicable on the facts and in the circumstances of the case." On perusal of the above grounds of cross objection, I find that the assessee has only challenged the order of the ld. C.I.T.(A) objecting to applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has disapproved by both the Ld. Members. He, therefore, submitted that once Rule 8D is not applicable and the order of ld. C.I.T.(A) enhancing the disallowance is quashed, thereafter what remains is the disallowance by the A.O. at 1% which was in the sum of Rs. 42,130/-. The learned counsel further submitted that the I.T.A.T. could have either upheld or reduced it, but could not estimate the disallowance at higher amount that what is disallowed by the A.O. himself. On the other hand, the learned Departmental Representative, relied on the order proposed by Ld. J.M. 7. I have considered the submissions of both the parties and perused the orders proposed by Ld. Members. The dispute in the present reference is in narrow compass. In the assessment order the A.O. disallowed administrative expenses of Rs. 42,130/- u/s. 14A of the Act calculated @ 1% of the tax-free income. The ld. C.I.T.(A) by applying Rule 8D of the Rules directed the A.O. to disallow Rs. 10,28,900/-, thereby enhanced the total income by Rs. 9,86,770/-. In the grounds of cross objection the assessee objected to the order of the ld. C.I.T.(A) only on the issue of application of Rule 8D for the purposes of making di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able made by the A.O. because neither the assessee nor the revenue had challenged the findings of the A.O. making the disallowance u/s. 14A of the Act at Rs. 42,130/-. Considering the totality of the facts and circumstances of the case, I agree with the findings of the Ld. A.M. that the amount disallowable u/s. 14A of the Act should have been 1% of the total exempt income. 8. The matter will now go to the regular Bench for passing the order as per the majority view. ORDER B. R. Mittal, Judicial Member - Since there was a difference of opinion between the ld. Members constituting the Division Bench of ITAT, Kolkata with regard to the following question, the matter was referred to Third Member under section 255(4) of the I.T. Act, 1961 for his opinion :- "Whether in the facts and circumstances of the case, the disallowance of Rs. 2 lakhs on ad hoc basis proposed by ld. J.M. or disallowance of expenses to 1% of the total exempted income proposed by ld. A.M. is justified under section 14A of the I.T. Act, 1961". 2. Hon'ble President, ITAT nominated Shri G.D. Agrawal, Hon'ble Vice President (AZ/KZ) as Third Member. The Hon'ble Third Member vide his order dated 27.05.2011 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable to the assessees case for assessment year 2004-05, then the direction of the ld. C.I.T.(A) for making disallowance as per Rule 8D was required to be vacated. Since the assessee did not challenge the order of the A.O. making the disallowance u/s. 14A calculating the amount disallowable @ 1% of the total exempt income, then it was not open for the Tribunal to go into the question of quantification of amount disallowable, because neither the assessee nor the revenue had challenged the estimation of amount disallowable, as made by the A.O. in the assessment order. In these circumstances, the Tribunal cannot go into the question of reasonableness of the estimate of the amount disallowable made by the A.O. because neither the assessee nor the revenue had challenged the findings of the A.O. making the disallowance u/s. 14A of the Act at Rs. 42,130/-. Considering the totality of the facts and circumstances of the case, I agree with the findings of the Ld. A.M. that the amount disallowable u/s. 14A of the Act should have been 1% of the total exempt income. 8. The matter will now go to the regular Bench for passing the order as per the majority view". Therefore, in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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