TMI Blog2017 (2) TMI 647X X X X Extracts X X X X X X X X Extracts X X X X ..... the presumption or inference is correct, as we have held it is, the Assessing Officer is entitled to resort to Rule 8D. AO on not being satisfied with the correctness of the claim by the assessee in respect of the expenditure incurred to earn exempt income ought to have applied Rule 8D which he did not. Instead he made an estimate on the basis that he considered to be reasonable. This he was not entitled to do. Where an Assessing Officer is not satisfied with the correctness of the claim of the assessee, in this regard, he is bound by the provisions of sub section (2) of Section 14A to follow the prescribed method which at the relevant time was Rule 8D. - Decided in favour of the Revenue. Whether assessee earned exempt income by investing its own funds and not from the interest bearing funds? - Held that:- We leave the question as to whether such a presumption is valid and if valid whether it arises in this case open. The Assessing Officer must determine the same after taking all the provisions of law and the precedents into consideration. If the Assessing Officer justifiably is not satisfied with the correctness of the assessee’s claim regarding the expenditure, he must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clared a profit of about Rs. 97.10 crores on a turnover of about Rs. 988 crores. 4. The Assessing Officer sought details of the bifurcation of the expenses incurred on exempt income and taxable income and called upon the assessee to show-cause why the expenses attributable to exempt income should not be disallowed on pro-rata basis and added to the returned income. The Assessing Officer rejected the assessee s contention that no expenditure was incurred for earning the dividend income as it received the dividend by ECS credit. He held that the assessee had invested Rs. 6 crores in different securities which being volatile in nature required the assessee to keep constant vigil on the movements of prices as well as the financial group viability of the company. This he observed would require the company to incur expenses, including the salaries of persons entrusted with the job of keeping a constant vigil on the movements of prices. He further held that separate records, including correspondence with the portfolio managers, stock exchange, would be required to be kept and statutory guidelines such as maintenance of statutory records would have to be maintained and board meetin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year in this appeal were not the same as in the assessment year 2004-05 the addition made under section 14A was deleted mainly on the ground that the investments in the shares of the Indian Companies had been made in the past years and the dividend income from those investments was claimed as exempt in the year 2004-05 and that no part of the interest expenditure was attributable to those investments. On the other hand in the assessment year 2008-09 which falls for consideration, fresh investments yielding tax free income had been made. Moreover the facts of the assessment year 2009-10 were similar to the assessment year in question and the assessee had itself disallowed certain expenses under section 14A which indicated that the assessee was of the opinion that the tax free income calls for disallowance of expenditure. The assessee expressly contended that the operating and finance expenses incurred by it had no nexus with the earning of dividend income and that all the investments were made by it out of its profits and not out of borrowed funds. This submission was sought to be supported on the basis of the assessee s audit accounts. A fund flow statement for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case laws cited by the appellant are distinguishable as rule 8D has not been apparently considered therein. Considering the entirety of the facts, I am of the opinion that the tax free income calls for disallowance under section 14A. The A.O. is directed to verify the working given by the appellant and thereafter apply rule 8D to compute the disallowance under section 14A. The A.O. during the course of assessment proceeding has made the additions u/s 14A of the I.T. Act 61 in line with previous year and initiated penal proceedings. As discussed above, because of the changed circumstances in this year, in my opinion, the addition made by the A.O. is not covered by the order of the Hb ITAT (supra) and therefore it is held that section 14A is applicable subject to application of rule 8D. Penal proceedings may be considered by A.O. as per law. 7. We will deal with these observations after referring to the impugned order passed by the Tribunal. 8. The Income Tax Appellate Tribunal rejected the contention that the Assessing Officer had not given any reasons nor pointed out which expenditure was allocable to the exempt income before invoking Rule 8D. After quoting the relevant pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was relied upon by Mr.Klar for the respondent is per-incurium. By our order dated 01.12.2016, we recorded that this appeal alongwith certain other appeals had been placed on board for further arguments in the circumstances and for the reasons stated in our order dated 30.11.2016 passed in ITA Nos. 457 and 461 of 2015. In the order dated 30.09.2016, we recorded that even on an earlier occasion Mrs. Suri requested us not to deliver the judgment in this matter as she contended that our judgment dated 19.09.2016 in ITA No. 44 of 2003 Commissioner of Income Tax, Ludhiana v. M/s Hero Cycles Ltd. relied upon by Mr.Klar was under Section 80M and was, therefore, distinguishable and in any event contrary to at least five judgments of this Court which were specifically under Section 14A of the Act. We were also to hear Income Tax Appeal No. 244 of 2016 Pr. Commissioner of Income Tax, Patiala v. State Bank of Patiala . Some of the issues that arise in these appeals also arose in those appeals. She, therefore, requested us not to deliver the judgment till after the hearing in those appeals. We accordingly heard further submissions and now proceed to deliver our judgment. By our order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- i) the amount of expenditure directly relating to income which does not form part of total income; and ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely:- A B C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year. B = the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the prev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the claim of the assessee that no expenditure has been incurred by him in relation to the income which does not form part of the total income under this Act. 13. Thus under sub sections (2) and (3) of Section 14A, an Assessing Officer can resort to Rule 8D only if he is not satisfied with the correctness of the assessee s claim in respect of the expenditure in relation to the income which does not form part of the total income under the Act or if he is not satisfied with the correctness of the assessee s claim that no expenditure has been incurred by him in relation to such income. 14. It is not necessary that the conditions specified both in sub-section (2) and sub-section(3) must be satisfied in order to enable the Assessing Officer to invoke Rule 8D. Sub-section (3) states that sub-section (2) shall also apply in relation to a case specified therein. The word also establishes this. For the purpose of invoking Rule 8D, it is not necessary, therefore, that the conditions in both the sub-sections exist. It is sufficient if the condition in either of the sub sections exist. 15. Our view is supported by the judgment of the Division Bench of the Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by law. Sub section (3) of Section 14A provides for the application of sub section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an Assessment Year beginning on or before 1 April 2001 either to reassess under Section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under Section 154. 16. A Division Bench of the Delhi High Court has taken a similar view in Maxopp Investment Ltd. v. Commissioner of Income Tax [2012] 347 ITR 272 (Delhi). The Division Bench held as under:- 41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with such method as may be prescribed . Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctness of the assessee s contentions with regard to the aspects mentioned in sub sections (2) and (3) of Section 14A. It is true that the Delhi High Court merely states that such rejection must be for disclosed cogent reasons. The disclosure, however, can only be in writing. It can hardly be suggested that the disclosure remains in the Assessing Officer s mind. The assessee is entitled to test the basis of the rejection of his contentions. This can be done only if the Assessing Officer records his reasons for his not being satisfied in writing. 22. The next question, therefore, is whether the Assessing Officer has disclosed cogent reasons for invoking the method prescribed in section 14A(1), namely Rule 8D. Mrs. Suri s submission that the Assessing Officer had not recorded his satisfaction for invoking Rule 8D is not well founded. In our view, however, he has. 23. We have already quoted the relevant part of the assessment order. The Assessing Officer concluded this aspect by observing that the assessee had deployed sufficient staff/officers to handle its investment portfolio for which it would have incurred substantial expenditure for various operations. Infact the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and not with reference to the gross amount of such dividends. 16. Admittedly, Section 80M applies only to income from other sources. Both the counsel agreed that in view of the judgment of the Supreme Court in Distributors (Baroda) P. Ltd. vs. Union of India and others, [1985] 155 ITR 120, it is the net dividend on which the deduction is to be determined for the purpose of Section 80M. 18. Mr. Mittal contended that in the present case the assessee s gross dividend is also the net dividend as the assessee has not incurred any expenses for earning the dividend received. No amount had been borrowed and no interest was paid in connection therewith. 19A. The Assessing Officer enumerated under a table the management expenses incurred by the assessee debited under the head Administrative expenses 22. The Tribunal then observed that the assessee had not incurred any expenditure to earn the dividend income and that it had not even incurred any expenditure for the purpose of realizing the dividend. It was further observed that the assessee had not claimed any deduction under section 57 of the Act and that the Assessing Officer had not allowed any deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany is bound to apply its mind as to whether it would be a prudent investment or not. Even if an investment is only for the larger benefit of the group itself or for the benefit of the particular company in the group, the management of the investing company would have to apply its mind on a variety of issues including as to whether the investment would serve this purpose; whether the investment would be detrimental to the investing company and to weigh the pros and cons of such investment for itself and for the members of the group. Further the management of the funds on a regular basis and monitoring the investment even in group companies would be imperative. It is not even the assessee s case that there was an over all policy decision by which the investments had to be made irrespective of the facts and circumstances obtaining at any given point of time. Indeed it would be difficult to envisage such a situation. In cases such as this, therefore, there would arise a justifiable presumption that some expenditure would be required for the purpose of earning dividend on such investments. The onus would then shift to the assessee to establish that no expenditure whatsoever was incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industries (supra). 29. For the same reason our judgment in Commissioner of Income Tax (Central) Ludhiana v. Hero Cycles Ltd. [2016] 74 Taxmann.com 254 (P H) cannot be said to be per-incurium in view of the judgment in Commissioner of Income Tax v. Hero Cycles Ltd. [2010] 323 ITR 518 (P H). Here again the Division Bench set out the observations of the Tribunal in considerable detail and we will presume, affirmed them. These observations make it clear that the discussion related to the utilization of funds. The assessee contended that the entire investment had been made out of the dividend proceeds, sale proceeds, debenture redemption etc. The Tribunal found that the funds flow position showed that only the noninterest bearing funds had been utilized for making the investments. The Tribunal, therefore, held that on facts it did not find any evidence to show that the assessee had incurred interest expenditure in relation to earning the tax exempt income. It is in this context that the Tribunal observed that there was no nexus established by the Revenue in this regard and therefore, on a mere presumption the provisions of Section 14A cannot be applied. These observations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the money available with the assessee was in common kitty, as held by this court in CIT v. Abhishek Industries Ltd., [2006] 286 ITR 1 and, therefore, disallowance under section 14A was justified. These observations are in the context of the nature of the funds utilized/deployed for the purpose of making investments. As is evident from the first sentence in paragraph-5, the Division Bench proceeded on the finding of fact that the investment was out of dividend proceeds i.e. the assessee s own funds. It is with respect to such a situation that the Division Bench rejected the contention on behalf of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A. The Division Bench did not deal with the issue of administrative expenses. 30. In Commissioner of Income Tax-1, Ludhiana v. M/s Abhishek Industries Ltd. Ludhiana, ITA No. 320 of 2013, a Division Bench of this Court by its judgment dated 27.01.2015 quoted the observations of the Tribunal which were quoted by the Division Bench in Commissioner of Income Tax v. Winsome Textile Industries [2009] 319 ITR 204 (P H). The Division Bench went on to hold:- Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture has been incurred by him in relation to such income is incorrect. She further submitted that in order to come to such a conclusion the Assessing Officer must first determine the amount of expenditure incurred in relation to exempt income or he must determine that no expenditure was incurred in relation to exempt income for it is only then that he would be in a position to come to the conclusion that he is not satisfied with the correctness of the assessee s claim in either case. 32. The first part of Mrs. Suri s submission is well founded but not the second. Both parts require a consideration of the nature of the lack of satisfaction required to entitle the Assessing Officer to invoke Rule 8D. The issue relates to the ambit of the expression is not satisfied . 33. In our view it is sufficient if the Assessing Officer comes to the conclusion that the claim of the assessee in this regard is not correct. It is not necessary for him to decide the extent or the quantum of the incorrect claim. He must, however, correctly conclude that the claim of the assessee is incorrect. It is necessary for the Assessing Officer to rightly come to the conclusion that the claim of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, that Mrs. Suri s submission that a determination means an actual quantification of the expenditure incurred for earning exempt income is erroneous. As Mr.Klar rightly pointed out an Assessing Officer can on the basis of inferences, adverse inferences and reasonable presumptions come to the conclusion that the claim of the assessee in relation to such expenditure is not correct. 38. In the case before us, the Assessing Officer cannot be faulted for not being satisfied with the claim of the assessee. As we noted earlier the Assessing Officer was entirely justified in presuming that the assessee had incurred expenditure towards administrative activities necessary to earn the exempt income. If the presumption or inference is correct, as we have held it is, the Assessing Officer is entitled to resort to Rule 8D. 39. We are, however, unable to agree with Mr.Klar that the assessee is estopped from challenging the Assessing Officer s application of Rule 8D, as the assessee had itself furnished its working under Rule 8D. The assessee furnished a calculation only to show that the Assessing Officer s calculation is in any event incorrect. That is not an admission by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts determined under the three sub clauses of sub-rule (2). 44. Further to establish this, the assessee is entitled to invite the Assessing Officer to raise a presumption or draw inferences permissible in law. For instance, if an assessee establishes that its interest free funds were equal to or more than the interest bearing funds, it would be open to it to contend that presumption arises that the expenditure for earning exempt income was incurred from out of its interest free funds. By our order and judgment dated 06.09.2016 in Commissioner of Income Tax, Jalandhar-1, Jalandhar v. M/s Max India Ltd. ITA No. 186 of 2013, we came to this conclusion both on principle and on authority. We referred to several judgments including of the Supreme Court, the Bombay High Court and of the Delhi High Court. We have referred to these judgments extensively. It is unnecessary to reproduce the relevant portions thereof again in this judgment. It would be sufficient to note the judgments which we referred to in that judgment, namely, East India Pharmaceutical Works Ltd. v. Commissioner of Income Tax 1997 Income Tax Reports 224 (SC), Commissioner of Income Tax v. Reliance Utilities and Power ..... X X X X Extracts X X X X X X X X Extracts X X X X
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