Allahabad High Court Judgement

Allahabad High Court Judgement

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JUDGEMENT HEADLINE : If Assessing Officer Is Not Satisfied With The Correctness Of Claim Of Expenditure Incurred, He Has To Proceed In The Manner Prescribed In Rule 8D(2)
JUDGEMENT TITLE : M/S Dhampur Sugar Mills Ltd., Bijnor Vs. Commissioner Of Income Tax, Bareilly And Another On 01/09/2014 By Allahabad High Court
CASE NO : INCOME TAX APPEAL NO. 131 OF 2014
CORAM : Hon'ble Dhananjaya Yeshwant Chandrachud,Chief Justice And Hon'ble Dilip Gupta,J.

HIGH COURT OF JUDICATURE AT ALLAHABAD

A.F.R.
Chief Justice's Court

Case :- INCOME TAX APPEAL No. - 131 Of 2014

Appellant :- M/S Dhampur Sugar Mills Ltd., Bijnor
Respondent :- Commissioner Of Income Tax, Bareilly And Another
Counsel For Appellant :- Suyash Agarwal
Counsel For Respondent :- C. S. C.

Hon'ble Dr. Dhananjaya Yeshwant Chandrachud, Chief Justice
Hon'ble Dilip Gupta, J.

The Appeal By The Assessee Arises From A Decision Of The Income Tax Appellate Tribunal At Lucknow1 Dated 31 January 2014. The Assessment Year To Which The Appeal Relates Is A.Y. 2008-09. Out Of A Total Disallowance Of Rs.67.75 Lacs Made By The Assessing Officer Under Section 14A Of The Income Tax Act, 19612, The Tribunal Has Deleted A Disallowance Of Rs.66.79 Lacs And Has Confirmed Disallowance Of The Balance Of Rs.96,000/-. The Assessee Is To That Extent In Appeal.
The Following Questions Of Law Have Been Formulated By The Assesse :-
(i) Whether ITAT Was Justified In Determining The Disallowance Of Rs.0.96 Lac On Account Of Other Expenditure To The Extent Of 0.5% Of Average Value Of Investment, When The Assessing Officer Had Not Brought Any Material Or Evidence On Record To Establish That Any Expense Was Incurred To Earn Any Tax Free Income And Had Also Not Recorded Any Satisfaction To The Effect That The Claim Of The Assessee That No Such Expenditure Had Been Incurred Was Not Correct; And
(ii) Whether ITAT Is Justified In Adding The Proportionate Disallowance Of Rs.0.96 Lac Under Section 14A In Computing The Book Profit When The Assessing Officer Has Neither Discussed Nor Mentioned Any Reason Or Justification For Making Such Addition.

The Assessing Officer, In An Order Of Assessment Under Section 143(3) Of The Act, Observed That The Assessee Had Invested A Certain Amount Of Its Funds In Shares And The Dividend Received Or As Was Receivable On These Investments Did Not Form A Part Of The Total Income. However, The Assessee Had Claimed Certain Expenses On Account Of Interest Etc. Which Were Directly Attributable To The Exempt Income. Since The Exempt Income Did Not Form A Part Of The Total Income, The Expenditure Which Was Directly Related To This Income, It Was Held, Could Not Be Debited To The Profit And Loss Account In View Of The Provisions Of Section 14A Of The Act. The Assessing Officer, Accordingly, Applied The Provisions Of Rule 8D Of The Income Tax Rules, 19623 And Made A Total Disallowance Of Rs.67.75 Lacs Which Was Computed As Follows:
"Computation Of Disallowance U/s 14A (Rule 8D)
A)
Interest Expense In F.Y. 2007-08 (as Per P & L A/c)

(Rs. In Lacs)
Rs.5938.68
B)
Average Value Of Investment
Previous F.Y. 2006-07
Rs.1374.88

Current F.Y. 2007-08
Rs.2447.07

Rs.1910.98
C)
Average Value Of Total Assets
Previous F.Y. 2006-07
Rs.153123.00

Current F.Y. 2007-08
Rs.186702.18

Rs.169912.59

I. Thus, Amount Of Expenditure Directly Related To Income Comes To:
A X B/C=5938.68 X 1910.98 / 169912.59 = Rs.66.79 Lacs
II. 0.05% Of Average Value Of Investment
Of Which Income Does Not Form Part Of Total Income Rs.0.96 Lacs
Total Amount Of Disallowance Rs.67.75 Lacs"
The Assessee Filed An Appeal Before The CIT (A). By An Order Dated 26 May 2011, The CIT (A) Deleted The Disallowance. In Appeal, The Tribunal Affirmed The Deletion Of The Disallowance To The Extent Of Rs.66.79 Lacs (out Of A Disallowance Of Rs.67.75 Lacs Made By The Assessing Officer Under Section 14A) But Confirmed The Disallowance To The Extent Of Rs.96,000/-.
The Tribunal Has Observed That The Entire Borrowed Funds On Which Interest Was Paid Were Used For Business Purposes And No Portion Was Used For Making Investments. Hence, The Amount Of Interest Expenditure Could Not Be Considered For Proportionate Disallowance Under Rule 8D Of The Rules. On This Ground, The Disallowance Of Rs.66.79 Lacs Out Of Interest Expenditure Was To That Extent Deleted. The Balance Of The Disallowance Of Rs.96,000/- Was On Account Of Other Expenditure Incurred By The Assessee And Which, As Noted Above, Has Been Confirmed By The Tribunal.
The Submission Of The Assessee Is That Under Section 14A(2), The Assessing Officer Can Quantify The Disallowance, If He Is Not Satisfied With The Correctness Of The Claim Of The Assessee Having Regard To The Accounts Of The Assessee. In The Present Case, It Has Been Submitted That No Such Satisfaction Was Recorded By The Assessing Officer And, Hence, The Disallowance Could Not Have Been Made.
Sub-section (1) Of Section 14A Provides That For The Purpose Of Computing The Total Income Under Chapter IV, No Deduction Shall Be Allowed In Respect Of Expenditure Incurred By The Assessee In Relation To Income Which Does Not Form Part Of The Total Income Under The Act. Consequently, Where An Assessee Has An Income Which Does Not Form Part Of The Total Income Under The Act, No Deduction Can Be Made In Respect Of Expenditure Which Is Incurred By The Assessee In Relation To Such Income. Sub-section (2) Of Section 14A Allows The Assessing Officer To Determine The Amount Of Expenditure Which Is Incurred In Relation To Such Income Which Does Not Form Part Of The Total Income Under The Act In Accordance With Such Method As May Be Prescribed, If The Assessing Officer, Having Regard To The Accounts Of The Assessee, Is Not Satisfied With The Correctness Of The Claim Of The Assessee In Respect Of Such Expenditure In Relation To Income Which Does Not Form Part Of The Total Income Under The Act.
Rule 8D Of The Rules Provides For Method Which Is To Be Used For Determining The Amount Of Expenditure In Relation To Income Not Includible In The Total Income. Rule 8D Provides As Follows:
"8D. (1) Where The Assessing Officer, Having Regard To The Accounts Of The Assessee Of A Previous Year, Is Not Satisfied With:
(a) The Correctness Of The Claim Of Expenditure Made By The Assessee; Or
(b) The Claim Made By The Assessee That No Expenditure Has Been Incurred, In Relation To Income Which Does Not Form Part Of The Total Income Under The Act For Such Previous Year, He Shall Determine The Amount Of Expenditure In Relation To Such Income In Accordance With The Provisions Of Sub-rule (2).
(2) The Expenditure In Relation To Income Which Does Not Form Part Of The Total Income Shall Be The Aggregate Of Following Amounts, Namely:
(i) The Amount Of Expenditure Directly Relating To Income Which Does Not Form Part Of Total Income;
(ii) In A Case Where The Assessee Has Incurred Expenditure By Way Of Interest During The Previous Year Which Is Not Directly Attributable To Any Particular Income Or Receipt, An Amount Computed In Accordance With The Following Formula, Namely:
A X B/C
Where A = Amount Of Expenditure By Way Of Interest Other Than The Amount Of Interest Included In Clause (i) Incurred During The Previous Year;
B = The Average Of Value Of Investment, Income From Which Does Not Or Shall Not Form Part Of The Total Income, As Appearing In The Balance Sheet Of The Assessee, On The First Day And The Last Day Of The Previous Year;
C = The Average Of Total Assets As Appearing In The Balance Sheet Of The Assessee, On The First Day And The Last Day Of The Previous Year;
(iii) An Amount Equal To One-half Per Cent Of The Average Of The Value Of Investment, Income From Which Does Not Or Shall Not Form Part Of The Total Income, As Appearing In The Balance Sheet Of The Assessee, On The First Day And The Last Day Of The Previous Year."

Now At This Stage, It Would Be Necessary To Note That To Determine The Amount Of Expenditure Incurred In Relation To Such Income Which Does Not Form Part Of The Total Income Under The Act, By Applying The Method Which Is Prescribed In Rule 8D, The Assessing Officer Must Not Be Satisfied With The Correctness Of The Claim Of The Assessee, Having Regard To The Accounts Of The Assessee. The Same Provision Is Contained In Sub-rule (1) Of The Rule 8D Which Stipulates That The Assessing Officer, If He Is Not Satisfied, Having Regard To The Accounts Of The Assessee With The Correctness Of The Claim Of The Expenditure Made By The Assessee Or The Claim Of The Assessee That No Expenditure Has Been Incurred, Shall Determine The Amount Of Expenditure In Relation To Such Income In Accordance With The Provisions Of Sub-rule (2) Of Rule 8D. In The Present Case, The Submission Is That There Is Nothing In The Order Of The Assessing Officer To Indicate That The Assessing Officer Was Not Satisfied With The Correctness Of The Claim Of The Assessee.
Now Both Under Sub-section (2) Of Section 14A And Under Sub-rule (1) Of Rule 8D, The Assessing Officer Is Empowered To Apply The Method As Prescribed In The Rules If, Having Regard To The Accounts Of The Assessee, He Is Not Satisfied With The Correctness Of The Claim Of The Assessee In Respect Of That Part Of The Expenditure Which Is Incurred In Relation To Income Which Does Not Form Part Of The Total Income. Whether Or Not, The Assessing Officer Is Not Satisfied With The Correctness Of The Claim Of The Assessee Has To Be Deduced From The Assessment Order And There Is No Straight Jacket Formula Requiring The Assessing Officer To Use Any Particular Language Or Form. So Long As The Order Of Assessing Officer Indicates That He Is Not Satisfied With The Correctness Of The Claim Of The Assessee Or The Claim Of The Assessee That No Expenditure Has Been Incurred, The Assessing Officer Has To Proceed In The Manner Indicated By Rule 8D(2).
In The Present Case, The Assessing Officer Has Noted That The Assessee Had Invested A Certain Amount Of Its Funds In Shares And That The Dividend Which Has Been Received Or Receivable Did Not Form Part Of The Total Income. The Assessing Officer Noted That There Were Certain Expenses On Account Of Interest Etc. Which Were Directly Attributable To The Exempt Income. The Assessee Had Debited The Entire Expenditure To The Profit Or Loss Account. The Assessing Officer Noted That Since The Exempt Income Does Not Form Part Of The Total Income, The Expenditure Which Is Directly Related To Income Which Does Not Form Part Of The Total Income Could Not Be Debited To The Profit Or Loss Account In View Of The Provisions Of Section 14A Of The Act. This, In Our View, Constituted A Clear Fulfillment Of The Requirement In Sub-section (2) Of Section 14A As Well As Sub-rule(1) Of Rule 8D That The Assessing Officer Was Not Satisfied With The Correctness Of The Claim Of The Assessee, On The Basis Of The Accounts Of The Assessee. The Assessing Officer Has Applied His Mind To The Accounts Of The Assessee As Is Ex Facie Apparent From The Order Of Assessment Under Section 143(3).
In This View Of The Matter, The Order Of The Tribunal To The Extent To Which It Confirms The Disallowance To The Extent Of Rs.96,000/- Is Unexceptionable. The Tribunal Has, As We Have Already Noted Earlier, Deleted The Disallowance To The Extent Of Rs.66.79 Lacs On The Ground That On This Aspect The Borrowed Funds Were Used For Business Purposes And No Part Thereof Was Used For Making Investment And, Hence, The Interest Expenditure Could Not Be Considered For Proportionate Disallowance Under Rule 8D. The Remaining Disallowance Of Rs.96,000/- Was On Account Of Other Expenditure. In Making This Allowance, Representing 0.5% Of The Average Value Of The Investment, The Assessing Officer Had Applied The Provisions Of Rule 8D(iii). The Disallowance Which Was Made In The Aforesaid Terms Of Rs.96,000/- Has Been Confirmed By The Tribunal. The Tribunal Has Relied Upon An Earlier Decision. The Position, However, Is That The Disallowance Under Rule 8D(iii) Which Was Made By The Assessing Officer Was Entirely In Consonance With The Prescribed Method And Was, Therefore, Correctly Affirmed By The Tribunal. The Computation Of Book Profits Under Section 115JB Of The Act Is Consequential.
In View Of This Position, The Appeal Will Not Give Rise To Any Substantial Question Of Law. It Is, Accordingly, Dismissed.
There Shall Be No Order As To Costs

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