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2017 (3) TMI 432 - ITAT KOLKATA

2017 (3) TMI 432 - ITAT KOLKATA - TMI - Revision u/s 263 - addition u/s 14A - Held that:- AO had sought to make disallowance u/s 14A of the Act having regard to the accounts of the assessee in terms of section 14A(2) of the Act and we hold that he need not resort to Rule 8D always for the purpose of making disallowance. Admittedly, the Rules cannot prevail over the Act as it is only a subordinate piece of legislation. When the Act clearly stipulates the point that the ld AO is entitled to make d .....

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e u/s 14A of the Act which has been accepted by the ld AO. Hence it could be safely concluded that the ld AO had taken a possible view and this action had not caused any prejudice to the interest of the revenue but on the contrary as stated above, it had only caused prejudice to the interest of the assessee. Hence, the dual conditions stipulated in section 263 of the Act are not satisfied cumulatively. - The most celebrated judgement of Gee Vee Enterprises vs Addl CIT (1974 (10) TMI 29 - DEL .....

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J.P.Khaitan, Sr. Advocate & Shri S. Jhajharia, FCA For the Respondent : Shri G. Mallikarjuna, CIT, DR ORDER Per Shri M. Balaganesh, AM: This appeal by assessee is arising out of revision order of Pr. CIT-1, Kolkata vide Pr. CIT-1/15-16/U/s.263/Umang/2011-12/12574-76 dated 28.03.2016. Assessment was framed by DCIT, Circle-2, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for Assessment Year 2011-12 vide his order dated 06.03.2014. 2. The only issue to b .....

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ssessee was in receipt of dividend of ₹ 9,45,55,748/- ; profit on sale of long term investments of ₹ 28,65,62,101/- and Profit on sale of current investments of ₹ 62,60,745/-. The ld AO observed that the assessee had voluntarily disallowed a sum of ₹ 9,95,65,228/- u/s 14A of the Act as expenditure incurred for the purpose of earning income which do not form part of the total income. The assessee made the disallowance u/s 14A of the Act voluntarily in the return of income .....

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these examination of accounts, the ld AO accepted the disallowance made by the assessee in the sum of ₹ 9,95,65,228/- The ld AO discussed this issue of disallowance u/s 14A of the Act in detail in the assessment order. The ld CIT sought to invoke revisionary jurisdiction u/s 263 of the Act on the ground that the said order passed by the ld AO is erroneous in as much as it is prejudicial to the interests of the revenue . According to ld CIT, the disallowance made u/s 14A of the Act should b .....

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as against which investment in securities yielding tax free income stood at ₹ 183.02 crores. Thus as on 31.3.2011, investment in securities yielding tax free income was excess by ₹ 77.40 crores when compared to the net worth. Thus, average investment in securities yielding tax free income in excess of net worth during the financial year 2010-11 stood at ₹ 99.12 crores and the excess has been financed out of borrowings on which interest has been paid which interest needs to be d .....

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14A of the Act was also furnished before the ld CIT during revision proceedings u/s 263 of the Act. With regard to disallowance made towards administrative expenses, it was submitted that the assessee had disallowed ₹ 4,40,585/- being 25% of total administrative expenses. It was submitted that the assessee being a Non-Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI) and engaged in the activity of investment in shares and also granting of loans. Thus the assess .....

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8377; 26,538/- on account of incremental provision for gratuity / leave salary and ₹ 552/- on account of demat charges leaving a balance of ₹ 17,35,800/-. 16.17% of ₹ 17,35,800/- works out to ₹ 2,80,679/- being the indirect expenses attributable to dividend income. As against this, the assessee has itself added back ₹ 4,40,585/- which was much more than ₹ 2,80,679/- and hence the ld AO had rightly accepted the said disallowance towards indirect expenses. 4.1. .....

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; 150 crores specifically towards purchase of bonds in March 2010. The said bonds were held during the financial year 2010-11 and were sold only in December 2010 and Feb 2011. As such, the interest of ₹ 11,63,01,170/- pertaining to the loan of ₹ 150 crores taken for purchase of bonds needs to be first reduced from gross interest expense of ₹ 37,76,73,248/- leaving behind the balance of ₹ 26,13,72,078/- (i.e ₹ 37,76,73,248 minus ₹ 11,63,01,170) . From this S .....

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s of the revenue. 4.3. In other words, it was pleaded that in respect of disallowance of interest as per Rule 8D(2)(ii) of the Rules, the figure worked out above comes to ₹ 7,20,14,634/- but whereas the assessee company itself had voluntarily disallowed ₹ 9,91,24,091/-. In respect of disallowance of indirect expenses as per Rule 8D(2)(iii) of the Rules, the figure worked out above comes to ₹ 2,80,679/- but whereas the assessee company itself had voluntarily disallowed ₹ 4 .....

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calculating disallowance under Rule 8D(2)(ii) of the Rules and proceeded to arrive at the disallowance figure thereon at ₹ 18,83,15,804/- . He further adopted 0.5% of average value of total investments of the assessee company and arrived at the disallowance figure of ₹ 98,53,465/- under Rule 8D(2)(iii) of the Rules. Accordingly, he proposed to make additional disallowance of ₹ 9,86,04,041/- ( 18,83,15,804 + 98,53,465 - 9,95,65,228) and non-consideration of the said additional .....

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well as before Ld. PCIT as well. 2. For that in view of the facts and in the circumstances, the order u/s. 263 is wholly bad, illegal and void ab initio and such order u/s 263 has been made by the Ld. PCIT without properly taking into consideration the submission made by your petitioner by letter dated 26.02.2016 and in view of the facts and in the Circumstances such order u/s 263 may kindly be quashed/cancelled. 3. For that in view of the facts and in the circumstances, the AO having taken a p .....

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s not the subject matter of notice u/s 263 and in view of the facts the order so passed by Ld. PCIT is wholly bad and illegal. 6. Without prejudice to ground No. 5 above, the disallowance made u/s 14A cannot be in excess of exempt income and in view of the facts the Ld. PCIT failed to appreciate the law settled in such respect and in view of the facts and in the circumstances it may kindly be held accordingly. 7. For that in view of the facts and in the circumstances and without prejudice to gro .....

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w of the facts and in the circumstances, the order so passed by the Ld. PCIT u/s 263 wherein he has set aside the order passed by the AO u/s 143(3) is without bringing any material on record as to the manner in which the AO's order is erroneous and prejudicial to the interest of revenue and in view of the facts and in the circumstances the order so passed by the Ld. PCIT is liable to be quashed / cancelled. 9. For that your petitioner craves the right to put additional grounds and / or to al .....

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the Paper Book as below:- 13. Please state why the disallowance u/s 14A in relation to the exempted income (i.e Dividend income of ₹ 9,45,55,748/- and LTCG of s. 42,72,57,122/-) is not made following the Rule 8D. In response to the same, the assessee filed reply to the said questionnaire on 4.3.14 which is enclosed in Pages 100 -103 of Paper Book. The assessee also filed complete details of capital gains wherein in respect of sale of unlisted bonds of Aditya Birla Retail Limited (ABRL) on .....

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ere then subsequently held in demat mode. On 20.12.2010, the assessee sold 1,00,00,000 bonds and on 18.2.2011, it sold remaining 50,00,000 bonds and total sale consideration amounted to ₹ 150,41,09,589/- thereby resulting in short term capital gain of ₹ 41,09,589/- on sale of these bonds of ABRL. The relevant papers in this regard are part of pages 98 to 99 of the Paper Book. We find that the assessee had also earned interest income of ₹ 21,91,781/- for the period from 1.10.201 .....

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and total value of assets is logical and since it is not in dispute that the said bonds were purchased out of borrowed funds, the proportionate interest element attributable to ₹ 150 crores loan deserves to be eliminated from the gross interest paid by the assessee. This is to be done in view of the fact that only interest paid on loans relatable to investments yielding tax free income alone would be the subject matter of disallowance under Rule 8D(2)(ii) of the Rules. 6.1. We find that t .....

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dd: Disallowance under section 14A 9,95,65,228 30,33,58,721 Less: Dividend income exempt u/s 10 9,45,55,748 Book Profits u/s 115JB 20,88,02,973 We do not find any infirmity in the said computation of book profits u/s 115JB of the Act. 6.2. With regard to the other comment made by the ld CIT in his order u/s 263 of the Act that the ld AO had not bothered to probe into the details of interest paid in the huge sum of ₹ 37.76 crores by not calling for the details of the same, we find that the .....

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on loans in the assessment proceedings. The ld AR even informed the bench that the ld AO had also sent notices u/s 133(6) of the Act to those parties and cross verified the loan statements with their records and no adverse inferences were drawn by the ld AO in the assessment proceedings. Accordingly, the ld AR argued that the ld AO after having elaborate enquiries on the issue of disallowance u/s 14A of the Act thought it fit that the disallowance made thereon by the assessee itself is much mor .....

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Ltd reported in (2014) 366 ITR 593 (Cal) ; (b) Hon ble Jurisdictional High Court in the case of CIT vs Mulchand Bagri reported in (1993) 68 Taxman 215 (Cal) ; (c) Hon ble Supreme Court in the case of CIT (Central) vs Max India Ltd reported in (2007) 295 ITR 282 (SC) 6.3. The ld DR argued that the ld AO simply reproduced the version and explanation of the assessee in the assessment order and that does not tantamount to making any enquiries with regard to the issue of disallowance u/s 14A of the .....

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nts of the assessee in terms of section 14A(2) of the Act and we hold that he need not resort to Rule 8D always for the purpose of making disallowance. Admittedly, the Rules cannot prevail over the Act as it is only a subordinate piece of legislation. When the Act clearly stipulates the point that the ld AO is entitled to make disallowance u/s 14A(2) of the Act having regard to the accounts of the assessee , then no error could be attributed on that aspect in the order of the ld AO. Moreover, we .....

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prejudice to the interest of the revenue but on the contrary as stated above, it had only caused prejudice to the interest of the assessee. Hence, the dual conditions stipulated in section 263 of the Act are not satisfied cumulatively. 6.5. We find that the ld AR had placed reliance on the following decisions :- (a) Hon ble Jurisdictional High Court in the case of CIT vs J.L.Morrison (India) Ltd reported in (2014) 366 ITR 593 (Cal), wherein it was held :- 85. He also drew our attention to a judg .....

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s to whether the Assessing Officer had examined any issue or not. The assessee has no control over the way an assessment order is drafted. The assessee on its part had produced enough material on record to show that the matter had been discussed in detail by the Assessing Officer. The least that the Tribunal could have done was to refer to the assessment record to verify the contentions of the assessee. Instead of doing that, the Tribunal has merely been swayed by the fact that the Assessing Off .....

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ting the claim of the assessee qua the amount of ₹ 10 lakhs on account of discrepancy in stock. Not only this, he has even gone a step further and appended an office note with the assessment order to explain why the addition for alleged discrepancy in stock was not being made. In the absence of any suggestion by the Commissioner as to how the inquiry was not proper, we are unable to uphold the action taken by him under section 263 of the Act." 86. Whether the assessment order dated 28 .....

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acts have been regularly performed;" 87. Therefore, the Court has to start with the presumption that the assessment order dated 28th March 2008 was regularly passed. There is evidence to show that the assessing officer had required the assessee to answer 17 questions and to file documents in regard thereto. It is difficult to proceed on the basis that the 17 questions raised by him did not require application of mind. Without application of mind the questions raised by him in the annexure t .....

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ly affect any right of the assessee nor was any civil right of the assessee prejudiced. He was as such under no obligation in law to give reasons. 96. The function of an Assessing Officer is to estimate the income of the assessee and to recover tax on the basis of such estimate as laid down by the Apex Court in the case of S.S Gadgil (supra). Their Lordships opined that the income tax proceedings do not partake the character of a judicial proceeding between the State and the citizen. Therefore, .....

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no obligation to record anything in his assessment order. It is not in the first place a fact that he has not recorded anything. From the assessment order, the following facts and circumstances appear:- "Return was filed on 29/11/06 showing total income of ₹ 3,80,66,940/-. In response to notices u/s. 143(2) and 142(1) of the I. T. Act, 1961, Sri P. R. Kothari, A/r appeared from time to time and explained the return. Necessary details and particulars were filed. The business of the ass .....

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le Jurisdictional High Court in the case of CIT vs Mulchand Bagri reported in (1993) 68 Taxman 215 (Cal) wherein it was held that :- 13. There can be no doubt that if the ITO accepted the assessee's case without any enquiry about the sale of silver utensils, the Commissioner was entitled to come to the conclusion that the assessment order was erroneous and prejudicial to the interest of the revenue. Even if similar utensils were sold in the earlier years and some enquiries were made in the e .....

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e 21. Having regard to the facts of the case, we are of opinion that even on merits the provisions of section 263 cannot be invoked on the facts of the present case before us." 14. This finding has not been challenged by the Commissioner as perverse in this case. There is no allegation of any misdirection of law. In other words, the finding of the Tribunal was that the ITO had actually made an enquiry into the sale of silver utensils. Therefore, the Commissioner was not right in his conclus .....

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d made enquiries about the sale of the silver utensils. Therefore, the Commissioner was not right in coming to the conclusion that the order passed by the ITO was prejudicial to the interest of the revenue because he had not made the necessary enquiry in this regard. So long as this finding of fact stands, it has to be held that the Commissioner's decision to revise the order of the ITO under section 263 was erroneous. (c) Hon ble Supreme Court in the case of CIT (Central) vs Max India Ltd r .....

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ated as prejudicial to the interest of the revenue. For example, when the Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law. According to the learned Additional Sol .....

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