2018 (2) TMI 2146 - AT - Income Tax

Assessee can withdraw self-made s.14A disallowance; Rule 8D compliance required, matter sent back for fresh verification

ITAT (Chandigarh) allowed the assessee's appeal for statistical purposes, holding that a suo-moto disallowance under s.14A in the return can be revisited ... Disallowance u/s 14A read with rule 8D - suo-moto act of disallowance made by the assessee - Suo moto addition was seeked to be rectified - assessee had submitted to the AO that it had incorrectly made disallowance u/s 14A suo moto, in the return of income and said disallowance had been calculated without taking into consideration its own interest free funds and considering which the disallowance should be restricted HELD THAT:- We do not agree with the same. It is well settled, having been decided on a number of occasions by the Hon'ble Supreme Court and many other Courts of our country, that the object of the income tax proceeding is to determine the taxable income of the assessee and tax payable thereon fairly and as per law only. Article 265 of the Constitution of India also provides in express terms that no tax can be collected without the authority of law. Moreover, even the Central Board of Revenue now called as the Central Board of Direct Taxes had issued a circular in 1955, guiding Assessing Officer's that they should assess the taxable income and compute tax liability of the taxpayers in accordance with law only and should not take undue advantage of the ignorance of the assessees. Therefore any claim of the assessee should be decided on the touchstone of law and not on the basis of claim made by the assessee. Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. [1971 (8) TMI 10 - SUPREME COURT] has observed that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not the view which the assessee may take. Thus, in our considered view, if the assessee is able to show that the disallowance made by it had been wrongly made, then the assessee has a legal right to resile from its return so long as he is able to demonstrate that the disallowance was not in accordance with law and requisite facts in this regard are placed on record. We reject the contention of the Revenue that the disallowance made by the assessee suo moto could not be now altered since it had been estimated by the assessee itself in the first place. The contention of the Revenue that while making the disallowance u/s 14A, the assessee itself had presumed that the investments had been made out of borrowed funds is also rejected since this relates to the facts of the case which cannot be presumed but have to be clearly brought out and with the assessee presenting a different set of facts during assessment proceedings, it is the duty of the tax authorities to look into and establish the facts of the case first and thereafter decide the issue as per law, rather than assuming the facts. As for the contention of the ld. DR that Rule 8D of the Income Tax Rules 1962, specifying the manner of computing the disallowance u/s 14A, is automatically invoked once the AO is satisfied about the incorrectness of the claim of the assessee of the quantum of disallowance u/s 14A, we find that the ld. DR has referred to decision of Punjab Tractors Limited [2017 (2) TMI 647 - PUNJAB AND HARYANA HIGH COURT] and India Bulls Financial Services Ltd. [2016 (11) TMI 1369 - DELHI HIGH COURT] in this regard. Sufficiency of own funds - Facts relevant to the said proposition, about the availability of enough interest free funds and their deployment in the impugned investments, have not been examined by the authorities below, having decided the issue solely on the basis of the act of the assessee of having made suo moto disallowance, we, therefore consider it fit to restore the issue to the CIT(A) to verify the facts of the case and thereafter decide the issue in accordance with law. On going through the orders of the authorities below, we find that this aspect of existence of satisfaction of the AO viz-a-viz the disallowance made u/s 14A has been raised for the first time before us and has never been considered or dealt with by the authorities below. For this reason also, we consider it fit to restore the issue back to file of the CIT(A) to decide the same afresh. Appeal of the assessee stands allowed for statistical purposes. ISSUES PRESENTED AND CONSIDERED 1. Whether disallowance under section 14A read with Rule 8D (Rule 8D(2)(ii) and 8D(2)(iii)) is warranted where the assessee claims that investments yielding exempt income were made out of interest-free own funds. 2. Whether an assessee who made a suo motu disallowance in its return is estopped from subsequently contending that the disallowance was wrongly made and seeking reduction/revision of that disallowance on factual/legal grounds. 3. Whether the Assessing Officer is required to record an express satisfaction before applying Rule 8D, or whether invocation of Rule 8D is mandatory once the AO is 'not satisfied' with the correctness of the assessee's claim. ISSUE-WISE DETAILED ANALYSIS - Issue 1: Applicability of s.14A/Rule 8D where sufficient own funds exist Legal framework: Section 14A disallows expenditure incurred in relation to exempt income; Rule 8D prescribes a manner of computing such disallowance including allocation of interest (8D(2)(ii)) and other expenditure (8D(2)(iii)). Precedent treatment: The Tribunal referred to a jurisdictional High Court decision holding that where sufficient own (interest-free) funds are available and used for investments yielding exempt income, no disallowance under s.14A in respect of interest is warranted; earlier ITAT practice in the assessee's prior years remitted the fact-finding for verification of availability/deployment of own funds. Interpretation and reasoning: The Court emphasises that the core inquiry is factual - whether investments were actually financed out of own interest-free funds. If the assessee establishes by evidence that own funds sufficed and were deployed for the impugned investments, the presumption that investments were financed by borrowed funds falls away and disallowance of interest under Rule 8D(2)(ii) is not warranted. The authorities below decided the issue primarily on the basis that the assessee had made a suo motu disallowance in its return and therefore treated the matter as conceded; the Tribunal rejects that approach and requires substantive factual verification. Ratio vs. Obiter: Ratio - where the assessee places on record credible material showing availability and deployment of own interest-free funds, the AO/CIT(A) must examine and determine factually whether interest disallowance under Rule 8D(2)(ii) arises; absent such factual inquiry, mechanical confirmation of disallowance is impermissible. Obiter - references to policy and older circulars about assessing taxable income fairly (used to support reasoning). Conclusions: The matter is remitted to the CIT(A) to verify facts relating to availability and deployment of own funds and to determine the correctness and quantum of any disallowance under s.14A/Rule 8D in accordance with law. ISSUE-WISE DETAILED ANALYSIS - Issue 2: Effect of suo motu disallowance made by the assessee Legal framework: Assessment proceedings must determine taxable income according to law; a return is not conclusive if inconsistent with statutory provisions or facts established in proceedings. Precedent treatment: Supreme Court and High Court authorities (as cited by the Tribunal) establish that entitlement to deduction/disallowance depends on law and facts and that erroneous accounting entries or self-assessments do not preclude correction under assessment proceedings. Interpretation and reasoning: The Tribunal rejects the Revenue's contention that an assessee is barred from resiling from a suo motu disallowance made in its return. The Court reasons that tax liability must be assessed in accordance with law and facts; therefore if the assessee adduces evidence showing the disallowance was incorrect, it has a legal right to seek revision. The mere fact that the assessee initially estimated a disallowance does not preclude later demonstration that the estimate was legally incorrect. Ratio vs. Obiter: Ratio - an assessee is not estopped from contesting a suo motu disallowance in the return where it can prove the disallowance was not in accordance with law and places requisite facts on record; the tax authorities must investigate such factual claims rather than treat the initial estimate as conclusive. Conclusions: The authorities below erred in refusing to examine the assessee's factual assertions on the ground of the suo motu nature of the original disallowance; the issue is to be re-examined on merits. ISSUE-WISE DETAILED ANALYSIS - Issue 3: Requirement of AO's satisfaction before invoking Rule 8D Legal framework: Rule 8D prescribes computation method for disallowance; jurisprudence has considered whether AO must record express satisfaction before applying the mechanical formulae of Rule 8D where an assessee's claim is disputed. Precedent treatment: The Revenue relied on decisions holding Rule 8D is to be applied where AO is not satisfied with the correctness of the assessee's claim, and that an express recording of satisfaction by the AO is not strictly necessary. The Tribunal notes these authorities but also observes that the specific question of AO's satisfaction was not considered by the lower authorities in the present case. Interpretation and reasoning: Because the point about the AO's satisfaction was raised for the first time before the Tribunal and was not adjudicated below, the Tribunal declines to decide it finally on appeal. The Tribunal directs that the CIT(A) examine afresh whether Rule 8D applicability/operation was triggered lawfully in the facts of the case, including whether the AO had or should have formed any satisfaction and whether the statutory/mode-of-proof requirements were complied with. Ratio vs. Obiter: Obiter in respect of the wider precedential debate (both sides cited); ratio - procedural requirement that factual and legal aspects about AO's satisfaction must be examined by the gestating authorities before invoking Rule 8D, if disputed by the assessee; the Tribunal will not decide the point without the factual record being considered below. Conclusions: The question of whether Rule 8D was properly invoked (including any requirement of AO's satisfaction or recording thereof) is remitted to the CIT(A) for fresh consideration after providing opportunity of hearing and examining relevant facts and precedents. DISPOSITION The assessment of disallowance under s.14A/Rule 8D is remitted to the CIT(A) for factual verification and fresh decision in accordance with law on (a) availability and deployment of own interest-free funds vis-à-vis the impugned investments (impacting Rule 8D(2)(ii) disallowance), and (b) the propriety/triggering of Rule 8D by the AO (including any satisfaction requirement). The appeal is allowed for statistical purposes and the lower authorities are to decide afresh after giving the assessee opportunity of hearing.