ITA No. 2434/Kol/2013 Laxmi Salt Co. Ltd. AY 2009-10 IN INCOME TAX APPELLATE TRIBUNAL BENCH: KOLKATA [Before Shri M. Balaganesh, AM & Shri K. Narasimha Chary, JM] I.T.A No. 2434/Kol/2013 Assessment Year: 2009-10 Laxmi Salt Co. Ltd. Vs. Income-tax Officer, Wd-4(1), Kolkata (PAN: AAACT9721G) (Appellant) (Respondent) Date of hearing: 28.07.2016 Date of pronouncement: 23.09.2016 For Appellant: Shri N. Acharya Baduri, AR For Respondent: Shri S.M. Das, JCIT, Sr. DR ORDER Per Shri K. Narasimha Chary, JM: This appeal by assessee is arising out of order of CIT(A)-IV, Kolkata vide Appeal No. 220/CIT(A)-IV/11-12 dated 24.06.2013. Assessment was framed by ITO, Ward-4(1), Kolkata u/s. 143(3) of Income Tax Act, 1961 (hereinafter referred to as Act ) for AY 2009-10 vide his order dated 16.12.2011. 2. Brief facts of case are that assessee is non Banking Financial Company. Assessee derives income from business, house property, capital gains and other sources which includes income from dividends which is exempt from income tax. During this year, according to assessee, interest derived by them from Fixed Deposits was Rs. 17,19,626/- whereas interest paid by them was Rs. 2,26,082/- which was also directly attributable to income which is not exempt. Assessee on their own disallowed sum of Rs.49,235 on account of actual direct expenses of STT and on estimate basis further sum of Rs.15,000/- which includes amount of Rs.6,901/- direct expense pertaining to depository charges. On 26.09.2009, assessee filed return of income for AY 2009-10. While processing same under Section 143(3) of Act, learned AO calculated disallowance under section 14A of Act read with Rule 8D of I. T. Rules, 1962 (hereinafter referred to as Rules ) and added sum of Rs.8,87,670/- over and above, which was added by Assessee. Challenging same, Assessee carried matter in appeal before learned CIT(A) and learned CIT(A) by way of impugned order confirmed finding of learned AO on this aspect. Hence, this appeal on following grounds: 2 ITA No. 2434/Kol/2013 Laxmi Salt Co. Ltd. AY 2009-10 1. For that Ld. CIT(A) grossly erred both in law and in fact in not deleting addition of Rs.8,87,670/- made by A.O. by applying Rule 8D though said Rule is not applicable in facts of present case. 2. For that Ld. CIT(A) grossly erred in not considering that in facts of case when assessee suo motto added expenditure relating to exempt income in computation, there was no necessity for Assessing Officer to apply section 14A read with Rule 8D without even disputing correctness of claim of assessee, with reasons. 3. For that Ld. CIT(A) grossly erred in not considering that AO was wrong to have made addition on account of interest though same was not paid in respect of dividend income but in connection with Assessee s business as NBFC. 3. Submissions of learned AR are many fold. Firstly, he submits that Assessee was having sufficient own funds from which investment could have been made and no part of loan was utilized for this purpose. Secondly, interest received during year is much more than interest paid as such there is no question of incurring interest on funds invested to earn exempt income. There is no common interest expenditure which is neither specifically attributable to taxable income nor attributable to exempt income. Lastly, he submits that if learned AO does not agree with disallowance made by Assessee in return of income, in Assessment Order learned AO should have recorded reasons and, therefore, mechanical application of section 14A of Act read with Rule 8D of Rules is bad under law. Basing on these arguments, he prayed to allow appeal and to quash orders or authorities below. 4. Learned DR, on other hand, argued that Assessee has not been maintaining separate accounts for deriving exempt and non exempt income, as such, in view of expenses in this case which are spreading over large number of voluminous activities, it is not possible for authorities below to calculate interest and administrative expenses attributable to exempt income without resorting to section 14A of Act read with Rule 8D of Rules. While arguing so, he heavily relied on orders of authorities below. 5. In context of above arguments and facts, point that arises for our consideration is whether authorities below are justified in disallowing sum of Rs. 8,87,670/- over and above which was added by Assessee under section 14A of Act read with Rule 8D of Rules? ISSUE: 3 ITA No. 2434/Kol/2013 Laxmi Salt Co. Ltd. AY 2009-10 6. Now during relevant year Assessee debited to P&L account total interest amount of Rs.2,26,082/-. Assessee offered Rs. 49,235/- which is directly attributable to earning of exempt income. Hence 8D(i) is satisfied. Now coming to interest component, we have carefully gone through submissions of both side, perused material available in paper book submitted by assessee and orders of lower authorities. Assessee produced details of investment, reserves, Balance Sheet, profit and loss account and expenses details for year ending with 31.03.2009 by way of paper book. It clearly shows net worth of share capital and reserves of Assessee as Rs.10,53,11,697/-, Rs. 16,89,43,308/- and Rs.16,75,02,472/- as on 1.4.2008, 1.4.2009 and 1.4.2010 respectively, whereas increase in investments was Rs. 31,74,793/- and Rs. 5,16,58,794/- during years 2008 and 2009 respectively. In this factual scenario, we find that decision reported in COMMISSIONER OF INCOME TAX vs. HDFC BANK LTD (2014) 366 ITR 0505 (Bom) applies on all fours. In that decision it was held that when assessee's capital, profit reserves, surplus and current account deposits were higher than investment in tax-free securities, it would have to be presumed that investment made by Assessee would be out of interest-free funds available with Assessee, and additions made by AO under Rule 8D(2)(ii) by disallowing expenditure, have to be deleted. 7. Now coming to Rule 8D(2)(iii) of Rules, according to assessee, total administrative expenses incurred by them during AY 2009-10 was only Rs.12,58,755/, out of which assessee themselves disallowed sum of Rs. 9,88,053/- towards building expenses and corporate tax, as such what remains to be considered is only Rs.2,70,702/-, assessee offered sum of Rs. 15,000/- which includes sum of Rs.6,901/- pertaining to depository costs, towards indirect expenses. AO should have considered this fact while computing disallowance. However, he did not do so. He mechanically recorded following : As per return for AY 2009-10, assessee had earned dividend income during relevant AY. calculation of disallowance u/s. 14A of Income Tax Act towards expenses attributable to earning of exempt income is given below: 1. Expenses directly attributable to (STT) Rs. 49,235/- earning of exempt income Depository charges Rs. 6,901/- 2. A. Interest paid debited to P&L A/c Rs. 2,26,082/- B. Average Investments Rs.13,14,73,655/- C. Average Assets Rs.17,06,63,775/- AxB 4 ITA No. 2434/Kol/2013 Laxmi Salt Co. Ltd. AY 2009-10 C 0.5% Average Investment Rs.1,74,166/- 3. Rs.6,57,368/- Total of (1+2+3) Rs.8,87,670/- 8. Now turning to argument of learned AR that in order to apply Rule 8D, recording of satisfaction by AO under this section is sine qua non and absence of such recording of satisfaction renders application of Rule 8D vitiated, is concerned, Section 14A(2) mandates that Assessing Officer shall determine amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed, if Assessing Officer, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. Rule 8D(1) of Rules stipulates that for determining amount of expenditure in relation to income not includible in total income, where Assessing Officer, having regard to accounts of assessee of previous year, is not satisfied with (a) correctness of claim of expenditure made by assessee; or (b) claim made by assessee that no expenditure has been incurred, in relation to income which does not form part of total income under Act for such previous year, he shall determine amount of expenditure in relation to such income in accordance with provisions of sub-rule (2). 9. Therefore, it is clear from above that when assessee himself disallowed some amounts in respect of expenses attributable to exempt income, learned AO assumes jurisdiction to invoke section 14A of Act read with Rule 8D of Rules only when he reaches conclusion that claim of expenditure made by assessee is not correct. He is required by law to record his non-satisfaction having regard to accounts of assessee of previous year. Ld. AR placed reliance on decision reported in MAXOPP INVESTMENT LTD. & ORS. vs. COMMISSIONER OF INCOME TAX (2012) 247 CTR 0162 (Del) for principle that even prior to introduction of sub-ss. (2) and (3), Section 14A would require AO to first reject claim of assessee with regard to extent of such expenditure, such rejection must be for disclosed cogent reasons and it is only then that question of determination of such expenditure by AO would arise. For this proposition he also placed reliance on decisions reported in 347 ITR 272 (Del), 361 ITR 131(P&H), 372 ITR 694(Del), 376 ITR 390(Del), AND 378 ITR 240 (Del). 5 ITA No. 2434/Kol/2013 Laxmi Salt Co. Ltd. AY 2009-10 10. In COMMISSIONER OF INCOME TAX, CENTRAL-I, CALCUTTA Versus ASHISH JHUNJHUNWALA G.A. No. 2990 of 2013, wherein Hon ble Jurisdictional High Court of Calcutta confirmed following observations of this Tribunal in ITA No 1809/Kol/2012: While rejecting claim of assessee with regard to expenditure or no expenditure, as case may be, in relation to exempted income, AO has to indicate cogent reasons for same. From facts of present case, it is noticed that AO has not considered claim of assessee and straight away embarked upon computing disallowance under Rule 8D of Rules on presuming average value of investment at % of total value. In view of above and respectfully following coordinate bench decision in case of J.K. Investors (Bombay) Ltd., supra, we uphold order of CIT (A) 11. From above discussion, we conclude that own funds of assessee are sufficiently in excess of investments and legal requirement of AO to record reasons for resorting to Section 14A of Act read with Rule 8D of Rules in this matter are conspicuously absent. Viewing from any angle, we are convinced that there is no justification for authorities below to sustain disallowing sum of Rs.8,87,670/- over and above which was added by Assessee under section 14A of Act read with Rule 8D of Rules. For these reasons, while answering this issue in negative, we hold that authorities below are not justified in disallowing sum of Rs.8,87,670/- over and above which was added by Assessee under section 14A of Act read with Rule 8D of Rules, and any addition on such score has to be deleted. We order accordingly. 12. In result, appeal of assessee is allowed. 13. Order is pronounced in open court on 23.09.2016 Sd/- Sd/- (M. Balaganesh) (K. Narasimha Chary) Accountant Member Judicial Member Dated : 23rd September, 2016 Jd.(Sr.P.S.) 6 ITA No. 2434/Kol/2013 Laxmi Salt Co. Ltd. AY 2009-10 Copy of order forwarded to: 1. APPELLANT Laxmi Salt Co. Ltd., 21, Strand Road, Kolkata-700 001. 2 Respondent ITO, Ward-4(1), Kolkata. 3. CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar. Laxmi Salt Co. Ltd. v. Income-tax Officer, Wd-4(1), Kolkata