TaxTMI 
TaxTMI 
2021 (11) TMI 377
X X X X Extracts X X X X
X X X X Extracts X X X X
....the "Act") of Rs. 1,01,751/- and not doing so is wrong and contrary to the provisions of the Act, and the Rules made there under. 2. The ld. CIT(A) ought to have restricted the disallowance u/s 14A to Rs. 1,01,751/- as re-computed by the appellant being fair and reasonable having regards to the accounts of the appellant company and not doing so is wrong and contrary to the provisions of the Act, and the Rules made there under. 3. Without prejudice to above ground of appeal, on the facts and in the circumstances of the case and in law, the ld. CIT(A) ought to have not reckoned the investment of Rs. 1,08,52,67,828/- in equity shares of subsidiary company, being Oriental Containers Limited, though dividend income have been earned during the year, without appreciating the fact that investment made in said subsidiary company was old strategic investment held as such without incurring any expenditure to earn dividend income there from and subsequently merged with appellant company and hence the Ld. CIT(A) ought to have given direction to Ld. A.O to exclude the said investments for the purpose of disallowances under section 14A r.w.r. 8D(2)(iii) and not doing so is wrong....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Disallowance u/s 14A r.w Rule 8D(2)(iii) Rs. 1,01,751/- It was the claim of the assessee that as major investments of the company were long term investments made in its subsidiaries and Associate companies, therefore, much efforts were not required to handle the investment related activities. Elaborating on his said contention, it was submitted by the assessee that though the Managing director, company secretary and accountant were responsible for the day to day administrative duties of the company, however, 1% of their salary was considered towards its investment related activities. It was the claim of the assessee, that though no specific cost was incurred in relation to earning of exempt income, however, it had most reasonably as per its revised working offered a disallowance u/s 14A out of employee costs and other expenses of Rs. 1,01,751/-. However, the A.O neither found favour with the disallowance made by the assessee u/s 14A in its return of income, nor with that that offered by him by way of a revised working in the course of the assessment proceedings. It was observed by the A.O, that the disallowance offered by the assessee was not as per the provision....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the assessee had failed to deposit the same within the stipulated time period. Accordingly, the A.O vide his order passed u/s 143(3), dated 21.12.2018 assessed the income of the assessee company at Rs. 4,10,69,169/-. 4. Aggrieved, the assessee assailed the assessment order before the CIT(A). Insofar the disallowance worked out by the A.O u/s 14A r.w Rule 8D(2)(iii) at Rs. 2,49,43,005/- was concerned, the CIT(A) after considering the multiple contentions of the assessee directed the A.O that the investments which were acquired by the assessee on account of merger /demergers be excluded while computing the said disallowance. In respect of the balance investments, the CIT(A) directed the A.O to re-compute the disallowance u/s 14A r.w Rule 8D(2)(iii) after considering, viz. (i). those investments wherein during the year there have been acquisitions/disposals; (ii). those investments wherein dividend income has been earned during the year; and (iii). investments in quoted shares. As regards the disallowance made by the A.O under Sec. 36(1)(va) r.w Sec. 2(24)(x), the CIT(A) being of the view that as the judicial pronouncements that had been pressed into service by the assessee were in....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is not possible for him to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is the claim of the ld. A.R, that as the A.O had dispensed with the aforesaid statutory obligation that was cast upon him and had mechanically worked out the disallowance u/s 14A by resorting to the methodology contemplated u/Rule 8D(2)(iii), therefore, the same cannot be sustained and is liable to be struck down on the count of invalid assumption of jurisdiction by the A.O. 7. Before adverting to the issue in question i.e as to whether or not the A.O had rightly assumed jurisdiction and dislodged the assessee"s claim of disallowance u/s 14A of the Act, we think it apt to first cull out the position of law as regards the same. The Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC) had, inter alia, held, that the A.O is obligated to mention the reasons while concluding that the assessee"s claim of disallowance of expenditure incurred to earn the exempt dividend income was not to be accepted. It was observed by the Hon"ble Apex court that sub-section (2) and (3) of Sec. 14A of the Act r.w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While It is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case." Also, the aforesaid view was once again reiterated by the Hon"ble Apex Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC). In its aforesaid order, it was, inter alia, observed by the Hon"ble Court that before taking recourse to the theory of apportionment and computing t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rd reveals, the Assessee received dividend income of Rs. 13,85,03,376/-. It was exempted under the IT Act. The Assessee claimed that he did not incur any expenditure to earn that dividend. It is said to have invested surplus funds through the bankers and other financial institutions. The mutual fund officials used to come to the Assessee's doorstep to fill up the forms and to do all other things necessary in that regard. The Assessee only issued the cheques. The AO disagreed. He reckoned that without devoting time and without analysing the nature of the investment, the Assessee could not have invested in the mutual funds. The AO took the view that section 14A clearly applied to the Assessee's case. The AO accordingly invoked Rule 8D and computed the disallowance at 0.5% of Rs. 381,67,09,7317-, the average investment. Then, he disallowed Rs. 1,90,83,548/-. The Assessee appealed to the CIT(A). Indeed, the appellate authority confirmed the AO's disallowance. Of course, the Tribunal reversed it. Let us see whether the Tribunal's view is sustainable. 12. Section 14A, inserted by the Finance Act 2001 with retrospective effect from 1 April 1962, aims to disallow e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ising author Arvind P. Datar has an interesting word about this 'inequitable and unfair1 provision. According to Kanga & Palkhiwala, on a cursory reading, section 14A seeks to prevent a deduction that may result when income does not form part of the taxable income. But the expenditure incurred to earn that income is allowable as a deduction. However, this section and Rule 8D have been amended several times. Those amendments have resulted in highly unfair consequences for Assessees who earn dividend income. The object of exempting dividend income under section 10(34) and income from mutual funds under section 10(33) was to encourage investments in shares and promote savings. 15. Dividends are not taxed in the hands of the shareholder, but it would be incorrect and anomalous, according to the revising author, to state that dividends are a category of income which does not suffer any tax. The object of section 14A is to disallow expenditure on income which has not suffered tax. That said, under section 115-O, the dividend is taxed at the time of distribution at the prescribed rate. That means, tax is paid by the company irrespective of whether an Assessee has income below....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e AO only discussed the provisions of section 14A(I) but has not justified how the expenditure the Assessee incurred during the relevant year related to the income not forming part of its total income. The AO, according to the Tribunal, straightaway applied Rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax-exempt income. Only then would a disallowance have to be effected. This Court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section I4A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer. 20. We may further reiterate that before rejecting the disallowance computed by the Assessee, the Assessing Officer must give a clear finding with reference to the Assessee's accounts as to how the other expenditure ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t as to why the disallowance u/s 14A offered by the assessee was not to be accepted. In our considered view, the A.O by referring to the accounts of the assessee, as were there before him, ought to have pointed out the expenditure which were claimed by the assessee as a deduction against its non-exempt income, but the same as per him were attributable to earning of the exempt income. As held by the Hon"ble High Court of Bombay in the case of Sociedade De Fomento Industrial Pvt. Ltd. (2020) 429 ITR 358 (Bom), the A.O before triggering the determination of disallowance u/s 14A as per the mechanism provided in Rule 8D, remained under an obligation to have given a clear finding with reference to the assessee"s accounts as to how the other expenditure claimed by it in respect of its non-exempt income was related to its exempt income. However, as observed by us hereinabove, the A.O had most casually dispensed with his aforesaid statutory obligation, and by merely drawing support from the fact that the assessee had not maintained separate accounts for exempt income yielding investments, had summarily, taken recourse to working of the disallowance u/s 14A r.w Rule 8D(2)(iii). After deliber....
X X X X Extracts X X X X
X X X X Extracts X X X X
....- under Sec. 36(1)(va) r.w.s 2(24)(x) of the Act. In support of his aforesaid contention the ld. A.R had relied on the judgments of the Hon"ble High Court of Bombay in the case of CIT Vs. Ghatge Patil Transports Limited (2015) 53 taxman.com 141 (Bom) and Geekay Security Services (P) Ltd. Vs. DCIT (2019) 101 taxman.com 192 (Bom). It was submitted by the ld. A.R, that as the assessee had deposited the employees contributions to Provident Fund & Employee State Insurance Corporation before 17.10.2016 i.e the "due date" of filing of its return of income for the year in question, thus, no disallowance under Sec.2(24)(x) r.w.s 36(1)(va) was called for in its hands. 12. Per contra, the ld. D.R relied on the orders of the lower authorities. 13. Before us, it is the claim of the ld. A.R that as the employees contribution to Provident Fund and Employee State Insurance Corporation of Rs. 2,84,472/- were deposited by the assessee before the "due date" of filing of its return of income for the assessment year under consideration i.e A.Y 2016-17, therefore, no disallowance was therein liable to be made. We have given a thoughtful consideration to the aforesaid contention of the ld. A.R and ....