TMI Blog2019 (4) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... tribunal, while the factual matrix in assessee’s case is entirely different as we have discussed in details in preceding para’s of this order. Based on our detailed discussions in the preceding para’s of this order, we are restoring the issue back to the file of the AO for fresh adjudication of disallowance of expenditure incurred in relation to the earning of an income which does not form part of the total income having regard to the accounts of the assessee. The assessee is directed to produce before the AO for verification its working of computing disallowance of expenses u/s 14A being incurred in relation to earning of an exempt income having regard to accounts of the assessee. The assessee is also directed to produce before the AO complete details as to how its investments portfolio in securities is managed and handled. AO shall give proper and adequate opportunity of being heard to the assessee in accordance with principles of natural justice in accordance with law. The evidences/explanations submitted by the assessee shall be admitted by the AO and shall be adjudicated on merits in accordance with law. This disposes of ground no. 1 to 7 raised by the assessee in its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only for actual expenditure to earn exempt income. 5. Without prejudice to the above , while computing disallowance under section 14A of the Act read with Rule 8D, investments which have not yielded exempt income during the year ought to be excluded. 6. Without prejudice to the above , while computing disallowance under section 14A of the Act read with Rule 8D, strategic investments of ₹ 9.57 crores should be excluded from the computation of total investments. 7. Without prejudice to the above , disallowance under section 14A if any, should be restricted to reasonable percentage of dividend income towards administrative expenses not exceeding 3% of the dividend income. The above grounds of appeal are distinct and separate and without prejudice to each other. The Appellant craves, to consider each of the above grounds of appeal without prejudice to each other and craves leave to add, alter, delete or modify all or any of the above grounds of appeal. 3. This appeal is filed late by 1 day beyond the limitation period as is provided u/s 253(3) of the 1961 Act. The learned counsel for the assessee submitted before the Bench that the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AIR 1970 (SC) 1953 3.3 The learned DR fairly left the matter to be decided by the Bench in accordance with law. 3.4 After hearing both the parties and perusing the material on record, we are of the considered view that delay of one day in filing this appeal with tribunal late beyond the time stipulated u/s 253(3) of the 1961 Act need to be condoned in the interest of justice. The delay on part of the asssessee is not intentional and sufficient reasons have been shown by the assessee in its affidavit explaining delay of one day. When technicalities are pitted against substantial justice, the Courts will lean towards substantial justice unless malafide or gross negligence on the part of litigant is shown. At best by admitting this appeal, the issue will be decided on merit in accordance with law instead of shutting the doors of justice to the litigant at threshold by dismissing the appeal on short ground of being filed with tribunal beyond the time prescribed u/s 253(3) of the 1961 Act, which will be contrary to cannon s of justice and equity. Thus, in the interest of substantial justice and in exercise of our powers as are provided u/s 253(5) of the 1961 Act, we condone del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 N Ramamurthy 18,11,900 20% 3 62 380 Total 23,53,723 The rationale for the disallowance of salary expenses were given by the assessee before the AO as that once investments are made, nothing further needs to be done as dividend is directly reinvested into the investment/credited to the bank account and no other transactions are affected. The rationale for disallowing proportionate salary was given and it was submitted that small amount of overhead were also disallowed correctly. 4.2 The AO went through the submissions of the assessee as to assessee s claim that it incurred ₹ 26,83,723/- as an expenses in relation to earning of an exempt income by way of dividend of ₹ 10.97 crores which needed to be disallowed u/s 14A of the 1961 Act. The AO observed that the assessee has an average investment of ₹ 9,386.55 lacs as on 31.03.2013 from which an exempt income by way of dividend is earned. It was also observed by the AO that the assessee has also made fresh investments during the year. The AO obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis for disallowance of expenses relatable to earning of an exempt income nor exact expenses which were incurred for earning of an exempt income was worked out by the assessee. The learned CIT(A) upheld the decision of the AO in invoking Rule 8D of the 1962 Rules and it was held that the additions so made by the AO u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules are in accordance with Mumbai-tribunal order in assessee s own case for AY 2008-09 to 2011-12. 6. Still Aggrieved by the appellate order dated 27.10.2017 passed by learned CIT(A) , the assessee has filed second appeal with tribunal. 7. The Ld. Counsel for the assessee submitted that the issue in this appeal concerns disallowance of expenses incurred in relation to earning of an exempt income, u/s 14A of the 1961 Act. It was submitted that no disallowance were made towards interest expenditure by invoking Rule 8D(2)(ii) of the 1962 Rules read with Section 14A of the 1961 Act, while administrative expenses were disallowed to the tune of ₹ 46,93,278/- by applying Rule 8D(2)(iii) of the 1962 Rules read with Section 14A of the 1961 Act. It was submitted that the assessee had given complete detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the tribunal has set aside the issue to the file of the AO by following aforesaid decision of co-ordinate bench of the tribunal in assessee s own case for AY 2008-09 to 2010-11. 7.3 Our attention was drawn by learned counsel for the assessee to the decision of co-ordinate benches of the tribunal in the case of ACIT v. Cyrus Investments Private Ltd., in ITA no. 6414/Mum/2016 for AY 2012-13 vide orders dated 09.05.2018 wherein one of us being Accountant Member was part of the Division Bench who decided the said appeal. It was submitted that the additions were deleted on the grounds that AO had not recorded satisfaction u/s. 14A(2) as to why disallowance made by the assessee voluntarily is not a correct disallowance and the disallowance of expenditure u/s 14A so made by the assessee suo moto were upheld. It was submitted by Ld. Counsel for the assessee that no independence satisfaction was recorded by the AO as is required u/s 14A(2) in the instant case before us. Reliance is placed on the decision of Hon ble Supreme Court in the case of Godrej Boyce Manufacturing Co. Ltd.(supra) , and it was submitted that in case no independent satisfaction is recorded by the AO , addition as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount (in crores) Composite expenses apportioned to exempt income : (g) = (e) * (b) / (c) 0.13 Employee cost apportioned to exempt income : (h) 0.24 Total expenses apportionable to exempt income: (i) = (g) + (h) 0.37 Disallowance as per Rule 8D(iii) made in Assessment order dated 16 March 2015 passed under section 143(3) of the Act Opening value of investments: (j) 45.50 Closing value of investments: (k) 142.23 Average value of investments : (1) = [(j) + (k)]/2 93.87 Disallowance of 0.5% of the average value of investments : (m) = (1) * 0.5% 0.47 Amount already disallowed in return of income : (n) 0.27 Additional Disallowance under section 14A read with Rule 8D : (o) = (m) - (n) 0.20 Excess disallowance under section 14A as per Rule 8D (p) = (m) - (1) 0. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd manufacture of towers. The assessee has earned an exempt income in the form of dividend of ₹ 10,96,66,355/- during the previous year relevant to the impugned assessment year . The assessee made suo-moto disallowance of ₹ 26,83,723/- u/s. 14A of the 1961 Act towards expenditure incurred in relation to earning of an exempt income in the return of income filed with Revenue. The break-up of these expenses which were offered for disallowance u/s 14A of the 1961 Act were furnished by the assessee before the AO, as detailed hereunder: Sr No. Nature of expenses Amount (in Rs) 1 Telephone Expenses 1,00,000 2 Stationery 2,30,000 3 Salaries (based on proportionate time spent by certain employees) 23,53,723 Total 26,83,723 The amount of salary is arrived at as under: Sr. No Name of Employee Cost to Company (Rs) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on quantitative basis, while approximation has to be done for computing disallowance The authorities below had observed that the assessee would be in receipt of various daily reports , fortnightly reports and monthly reports at regular intervals so that the assessee can take informed decision regarding deployment/redemption of its investments. The authorities below concluded that no scientific method/basis was adopted by the assessee for making disallowance of expenses incurred in relation to earning of an exempt income u/s 14A of the 1961 Act. The authorities below were of the view that the assessee has not given exact expenses incurred by the assessee for earning of an exempt income which needed to be disallowed u/s 14A of the 1961 Act and the disallowance of expenses offered by the assessee u/s 14A was rejected by the authorities below. The authorities below invoked Rule 8D of the 1962 Rules and made disallowance of administrative expenses of ₹ 46,93,278/- u/s. 14A of the 1961 Act read with Rule 8D2(iii) of the 1962 Rules . However, no disallowance of interest expenditure were made by authorities below by invoking Rule 8D(2)(ii) of the 1962 Rules read with Section 14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of administrative expenses has to be computed as per the formula provided in Rule 8D. However, the disallowance work out under Rule 8D cannot exceed the total expenditure claimed by the assessee which can be apportioned to the exempt income. Thus we set aside this issue to the record of AO for the limited purpose of computing the total expenditure incurred by the assessee for the composite/indivisible activities in which taxable and non-taxable income is received and if the disallowance work out under Rule 8D on account of administrative expenses exceeds the total claim of expenditure incurred for the composite activities resulting taxable or non-taxable income then the disallowance should be restricted to the said actual total claim of expenditure. 11. Accordingly, the AO is directed to recomputed the disallowance after considering the above aspect. Similarly, while deciding appeal for AY 2011-12 in assessee s own case in ITA No. 1018/Mum/2015 vide order dated 17.10.2016 on the issue of disallowance of administrative expenses , the tribunal has set aside the issue to the file of the AO by following aforesaid decision of co-ordinate bench of the tribunal in assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred in relation to earning of an exempt income having regards to accounts of the assessee u/s 14A of the 1961 Act. We would like to clarify that in case the AO after going through the workings as are now submitted by the assessee and which are claimed to be an expenditure incurred in relation to earning of an exempt income having regards to the accounts of the assessee , has to resort to Rule 8D(2)(iii), then in that situation only those investments shall be considered which yielded an exempt income during the year under consideration as laid down by Special Bench of ITAT, Delhi in the case of Vireet Investment Private Limited(supra). At this stage , we are reminded of the observations of Hon ble Supreme Court in the case of Godrej and Boyce Manufacturing Company Limited(supra) although it was given in context of assessment years prior to introduction of Rule 8D of the 1962 Rules, wherein Hon ble Supreme Court observed as under: 37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to what is basis of disallowing expensed to the tune of ₹ 2.41 crores u/s 14A of the 1961 Act , while the total expenses debited to Profit and Loss Account (net of voluntary disallowance of ₹ 4.13 lacs) was only ₹ 10.90 lacs. Based on peculiar factual matrix of the case, the said appeal was decided by tribunal vide its order dated 08.05.2018 wherein suo moto disallowance of 50% of the total expenses offered for disallowance u/s 14 of the 1961 Act by the tax-payer voluntary in the return of income filed with the Revenue was accepted by the tribunal, while the factual matrix in assessee s case is entirely different as we have discussed in details in preceding para s of this order. Thus, Based on our detailed discussions in the preceding para s of this order, we are restoring the issue back to the file of the AO for fresh adjudication of disallowance of expenditure incurred in relation to the earning of an income which does not form part of the total income having regard to the accounts of the assessee. The assessee is directed to produce before the AO for verification its working of computing disallowance of expenses u/s 14A being incurred in relation to earning ..... 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