M/s. Kherani Paper Mills Pvt. Ltd. v. Dy. CIT, Central Circle-3, Surat
[Citation -2016-LL-0923-131]

Citation 2016-LL-0923-131
Appellant Name M/s. Kherani Paper Mills Pvt. Ltd.
Respondent Name Dy. CIT, Central Circle-3, Surat
Court ITAT-Ahmedabad
Relevant Act Income-tax
Date of Order 23/09/2016
Assessment Year 2007-08
Judgment View Judgment
Keyword Tags apportionment of expenditure • proportionate interest • tax free income
Bot Summary: Even where the assessee claims that no expenditure has been incurred in relation to Income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. 2007-08 to 2010-11 not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Counsel for the assessee stated that so far as assessment year 2007- 08 is concerned, it is a settled proposition of law that Rule 8D is not applicable as the same is made applicable from A.Y. 2008-09. Counsel further stated that in respect of other assessment years since the own funds of the assessee are far in excess of the investment, no disallowance is to be made. Since these factual aspects have not been considered by the lower authorities, in the interest of justice and fair play, we restore this issue to the files of the A.O. The Assessee is directed to prove that assessee was having sufficient interest free own funds qua the investments. The A.O. is directed to consider the claim of the assessee and decide the issue afresh after giving a reasonable opportunity of being heard to the assessee.


IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI S.S. GODARA, JUDICIAL MEMBER) IT(SS)A Nos: 553 to 556/AHD/2012 (Assessment Years: 2007-08 to 2010-11) M/s. Kherani Paper Mills V/S Dy. CIT Central Circle-3, Pvt. Ltd. 410-416, Raheja Surat th Plaza, 4 Floor, 15B, Shah Industrial Estate, Next to Afcons, Andheri West Mumbai-400058 (Appellant) (Respondent) PAN: AAACK9923D Appellant by :Shri P.M. Mehta with G.M.Thakor, A.R. Respondent by : Shri R.I. Patel, CIT D.R. ORDER Date of hearing : 21 -09-2016 Date of Pronouncement : 23 -09-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. above captioned appeals by assessee are directed against consolidated order of Ld. CIT(A)-II, Ahmedabad dated 30.08.2012 pertaining to A.Ys. 2007-08 to 2010-2011. 2 IT(SS)A No. 553 to 556/Ahd/2012 . A.Ys. 2007-08 to 2010-11 2. As all appeals were decided by First Appellate Authority by consolidated order, itself show that issues are common and facts are identical in all these captioned appeals. Therefore, all these appeals were heard together and are being disposed of by this common order for sake of convenience. 3. common grievance of assessee in all these appeals relates to disallowance made u/s. 14A of Act. which can be appreciated by following chart:- A.Y. Interest disallowance Administrative Total disallowance disallowance 14A 2007-08 442424 58585 5,01,009 2008-09 1072421 105123 11,77,544 2009-10 1359172 108803 14,67,976 2010-11 1313196 108788 14,21,985/- 4. When impugned additions were agitated before ld. CIT(A), ld. CIT(A) observed and decided as under:- 3.1 During course of appellate proceedings, ld. ARs appearing on behalf of appellant, have argued that so far as A.Y. 2007-08 is concerned, no disallowance u/s. 14A can be made applying rule 8D as such rule was not on statute in relevant assessment year and such rule applied from A.Y. 2008-2009. For remaining assessment years, it was argued; that even though rule 8D is applicable from A.Y. 2008-2009 as observed by Hon'ble Bombay High court in case of Godrej & Boyce Manufacturing Company Limited but as said decision has been challenged before Hon'ble Supreme Court, to keep issue alive, addition u/s 14A has been challenged. Ld ARs have not disputed working of disallowance made u/s 14A of Act applying rule 8D for all assessment years and have not denied that interest bearing funds were not utilized in making investment in shares from which exempt income is earned. 3 IT(SS)A No. 553 to 556/Ahd/2012 . A.Ys. 2007-08 to 2010-11 3.2 I have carefully considered assessment orders and submission filed by appellant. Assessing Officer has disallowed expenditure u/s 14A of Act applying rule 8D of Act For A.Y. 2007-2008, appellant has argued that no disallowance u/s 14A can be made in current year, as rule 8D is applicable from A.Y. 2008-2009. However, this argument of appellant cannot be accepted as appellant has earned tax free income by making investment in shares and appellant has not proved that no interest bearing borrowed funds were utilized for making investment in shares or no other expenditure was incurred for making such investment hence disallowance u/s 14A is necessary. Further, Hon'ble Bombay High court in case of Godrej & Boyce Manufacturing Company Limited V/s DCIT 328 ITR 81 has held as under:- "Section 14A of Income-tax Act 1961 read with rule 8 of Income- tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income - Assessment year 2002-03 - Whether provisions of sub- sections (2) and (3) of section 14A are constitutionally valid - Held, yes - Whether provisions of rule 8D as inserted by Income-tax (Fifth Amendment) Rules, 2008 are not ultra vires provisions of section 14A, more particularly sub-section (2) and do not offend article 14 of Constitution - Held, yes - Whether provisions of rule 8D which have been notified with effect from 24-3-2008 are not retrospective in nature and shall apply with effect from assessment year 2008-09 - Held, yes - Whether even prior to assessment year 2008-09, when rule 8D was not applicable, Assessing Officer had to enforce provisions of sub-section (1) of section 14A and for that purpose, Assessing Officer was duty bound to determine expenditure which had been incurred in relation to income which did not form part of total income under Act by adopting reasonable basis or method consistent with ail relevant facts and circumstances - Held, yes" 4 IT(SS)A No. 553 to 556/Ahd/2012 . A.Ys. 2007-08 to 2010-11 Further, Hon'ble Delhi High court in case of Maxopp Investment Ltd V/s CIT 203 Taxmann 364 has held as under: 42. Thus, fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that assessing officer is not to satisfy himself with correctness of claim of assessee with regard to such expenditure. If he is satisfied that assessee has correctly reflected amount of such expenditure, he has to do nothing further. On other hand, if he is satisfied on objective analysis and for cogent reasons that amount of such expenditure as claimed by assessee is not correct, he is required to determine amount of such expenditure on basis of reasonable and acceptable method of apportionment. It would be appropriate to recall words of Supreme Court in Walfort Share & Stock Brokers (P.) Ltd. (supra) to following effect:- theory of apportionment of expenditure between taxable and non- taxable has, in principle, been now widened under section 14 A." So, even for pre-Rule 8D period, whenever issue of section 14A arises before Assessing Officer, he has, first of all, to ascertain correctness of claim of assessee in respect of expenditure incurred in relation to income which does not form part of total income under said Act. Even where assessee claims that no expenditure has been incurred in relation to Income which does not form part of total income, assessing officer will have to verify correctness of such claim. In case, assessing officer is satisfied with claim of assessee with regard to expenditure or no expenditure, as case may be, assessing officer is to accept claim of assessee insofar as quantum of disallowance under section 14A is concerned. In such eventuality, assessing officer cannot embark upon determination of amount of expenditure for purposes of section 14A(1). In case, assessing officer is 5 IT(SS)A No. 553 to 556/Ahd/2012 . A.Ys. 2007-08 to 2010-11 not, on basis of objective criteria and after giving assessee reasonable opportunity, satisfied with correctness of claim of assessee, he shall have to reject claim and state reasons for doing so. Having done so, assessing officer will have to determine amount of expenditure incurred in relation to income which does not form part of total income under said Act. He is required to do so on basis of reasonable and acceptable method of apportionment" In present case, appellant while filing return of income has not disallowed any expenditure in relation to investment in shares which has resulted into tax free income. Even appellant has not established that no interest bearing funds were utilized for making such investments nor submitted any other reasonable method for apportionment of expenditure as held by Hon'ble Delhi and Bombay High court supra. Therefore, rule 8D framed for giving formula for disallowance of proportionate interest and other expenditure relating to exempt income is correctly applied by (5) Assessing Officer even in A.Y. 2007-2008 because such formula take care of availability of both interest free funds and interest bearing funds available with appellant and disallowance worked out on such basis is reasonable and acceptable method of apportionment. Considering same, disallowance u/s I4A made by Assessing Officer in A.Y. 2007-2008 is upheld. 5. Aggrieved by this, assessee is before us. At very outset, ld. counsel for assessee stated that so far as assessment year 2007- 08 is concerned, it is settled proposition of law that Rule 8D is not applicable as same is made applicable from A.Y. 2008-09. ld. Counsel further stated that in respect of other assessment years since own funds of assessee are far in excess of investment, no disallowance is to be made. It is say of ld. Counsel that even administrative expenses cannot be disallowed because of strategic investment. Per contra, ld. D.R. strongly stated that 6 IT(SS)A No. 553 to 556/Ahd/2012 . A.Ys. 2007-08 to 2010-11 factual claim of ld. counsel does not emanate from orders of authorities below. Representatives of both sides agreed for restoration of issues to files of A.O. for consideration of factual claims made by ld. counsel. 6. Having heard rival contentions, we have carefully perused orders of authorities below. We have also gone through annual accounts of assessee placed before us in form of paper book. 7. So far as assessment year 2007-08 is concerned, it is now settled position that applicability of Rule 8D is with effect from assessment year 2008-09, therefore, Rule 8D is not at all applicable for assessment year 2007-08. Even in subsequent years where Rule 8D is applicable, contentions of ld. counsel that own funds are far in excess of investment cannot be brushed aside lightly. Further, if investments are made for strategic purposes, in our understanding of law, no disallowance should be made. 8. However, since these factual aspects have not been considered by lower authorities, in interest of justice and fair play, we restore this issue to files of A.O. Assessee is directed to prove that assessee was having sufficient interest free own funds qua investments. Secondly, assessee is directed to establish that investment was for strategic purposes. A.O. is directed to consider claim of assessee and decide issue afresh after giving reasonable opportunity of being heard to assessee. 7 IT(SS)A No. 553 to 556/Ahd/2012 . A.Ys. 2007-08 to 2010-11 9. Before parting, we find that similar disallowances were made by A.O in subsequent assessment years i.e. A.Y. 2011-12 & 2012-13. We also find that disallowances made by A.O. have been deleted by First Appellate Authority. We have been told that revenue has accepted findings of ld. CIT(A). We direct A.O. to consider this fact also while deciding issue. 10. In result, appeals of Assessee are treated as allowed for statistical purposes. Order pronounced in Open Court on 23 - 09- 2016. Sd/- Sd/- (S. S. GODARA) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad: True Copy Rajesh Copy of Order forwarded to:- 1. Appellant. 2. Respondent. 3. CIT (Appeals) 4. CIT concerned. 5. DR., ITAT, Ahmedabad. 6. Guard File. By ORDER Deputy/Asstt.Registrar ITAT,Ahmedabad M/s. Kherani Paper Mills Pvt. Ltd. v. Dy. CIT, Central Circle-3, Surat
Report Error