Dy. CIT v. Philips Carbon Black Ltd.

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The Tax Publishers2012 TaxPub(DT) 0600 (Kol-Trib) : (2011) 133 ITD 0189 : (2012) 146 TTJ 0175 : (2012) 070 DTR 0267 INCOME TAX ACT, 1961 --Exempt income--Disallowance under section 14AApplicability of rule 8D--During the relevant previous year, the assessee earned tax-free income of Rs. 42,12,853 by way of dividend and interest on UTI tax-free bonds. Before the assessing officer the assessee claimed that no expenditure was incurred in relation to earning of such tax-free income. The assessee also claimed that investments were acquired out of its own fund and, therefore, the assessee claimed that no expenditure including interest was disallowable under section 14A. The assessing officer, however, held that some expenditure must have been incurred by the assessee to earn the tax-free income and, therefore, he reasonably estimated 1% of the gross tax-free income, i.e., Rs. 42,130 as expenditure incurred by the assessee in relation to earning of exempt income and disallowed the same under section 14A. The assessee preferred appeal before the Commissioner (Appeals). The Commissioner (Appeals) in Para 6.2 of his appellate order agreed with the assessee that since no borrowed funds were utilized for acquiring investments, interest paid on such borrowed funds was not required to be disallowed under section 14A. As regards administrative expenses, however, the Commissioner (Appeals) held that even for monitoring the earning of tax-free income and its accounting, some expenditure out of common business establishment expenses was required to be incurred. The Commissioner (Appeals) then noted that rule 8D was notified in the IT Rules, 1962 w.e.f. 24-3-2008 for the purpose of making disallowance under section 14A. As per rule 8D(2)(iii) of the Rules, 0.5% of the average investment was to be disallowed out of common business establishment expenses. The Commissioner (Appeals) further noted that the Special Bench of ITAT, Mumbai in the case of Daga Capital Management (P) Ltd. had held that rule 8D was retrospective in nature. The Commissioner (Appeals), therefore, held that expenditure of Rs. 10,28,900, determined in the manner prescribed in rule 8D(2)(iii) of the Rules, should have been disallowed under section 14A as against Rs. 42,130 disallowed by the assessing officer. He, accordingly, directed the assessing officer to disallow Rs. 10,28,900 under section 14A as against Rs. 42,130 disallowed by the assessing officer, resulting in enhancement of Rs. 9,86,770. Held: Rule 8D was not retrospective in application and neither assessee nor department had challenged estimation and quantification before the Tribunal hence estimation of expenditure made by the assessing officer was to be upheld. Perusal of the grounds of cross-objection showed that the assessee did not challenge the disallowance made by the assessing officer at Rs. 42,130, but objected only to the application of Rule 8D which in its opinion was not applicable for assessment year under consideration, i.e. assessment year 2004-05. Merit in the submissions of the assessee that the assessee never challenged the assessing officer's order disallowing Rs. 42,130 under section 14A but it objected only to the enhancement made by the Commissioner (Appeals) by resorting to rule 8D of the Rules. It appeared from the orders proposed by both the Members that both of them agreed that rule 8D was not applicable to the assessee's case since the year under appeal was assessment year 2004-05, whereas rule 8D was applicable prospectively from assessment year 2008-09. In support of this finding both the Members relied on the decision of Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.. Therefore, once both the Members agreed with the submissions of the assessee that rule 8D of the Rules was not applicable and disallowance under section 14A could not be made with reference to said rule 8D in assessment year 2005-06, then the question remains whether it was open for the Tribunal to estimate amount disallowable on any basis other than the basis adopted by the assessing officer. The assessee in its cross-objection did not per se challenge the disallowance made by the assessing officer under section 14A in the assessment order but only objected to the enhancement of disallowance by the Commissioner (Appeals) by reference to rule 8D of the Rules. Once both the Members agreed that rule 8D was not applicable to the assessee's case for assessment year 2004-05, then the direction of the Commissioner (Appeals) for making disallowance as per rule 8D was required to be vacated. Since the assessee did not challenge the order of the assessing officer making the disallowance under section 14A calculating the amount disallowable @ 1% of the total exempt income, then it was not open for the Tribunal to go into the question of quantification of amount disallowable, because neither the assessee nor the revenue had challenged the estimation of amount disallowable, as made by the assessing officer in the assessment order. In these circumstances, the Tribunal cannot go into the question of reasonableness of the estimate of the amount disallowable made by the assessing officer because neither the assessee nor the revenue had challenged the findings of the assessing officer making the disallowance under section 14A at Rs. 42,130. Considering the totality of the facts and circumstances of the case, the findings of the AM that the amount disallowable under section 14A should have been 1% of the total exempt income is agreed. [Para 7] SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 0600 (Kol-Trib) : (2011) 133 ITD 0189 : (2012) 146 TTJ 0175 : (2012) 070 DTR 0267

INCOME TAX ACT, 1961

--Exempt income--Disallowance under section 14AApplicability of rule 8D--During the relevant previous year, the assessee earned tax-free income of Rs. 42,12,853 by way of dividend and interest on UTI tax-free bonds. Before the assessing officer the assessee claimed that no expenditure was incurred in relation to earning of such tax-free income. The assessee also claimed that investments were acquired out of its own fund and, therefore, the assessee claimed that no expenditure including interest was disallowable under section 14A. The assessing officer, however, held that some expenditure must have been incurred by the assessee to earn the tax-free income and, therefore, he reasonably estimated 1% of the gross tax-free income, i.e., Rs. 42,130 as expenditure incurred by the assessee in relation to earning of exempt income and disallowed the same under section 14A. The assessee preferred appeal before the Commissioner (Appeals). The Commissioner (Appeals) in Para 6.2 of his appellate order agreed with the assessee that since no borrowed funds were utilized for acquiring investments, interest paid on such borrowed funds was not required to be disallowed under section 14A. As regards administrative expenses, however, the Commissioner (Appeals) held that even for monitoring the earning of tax-free income and its accounting, some expenditure out of common business establishment expenses was required to be incurred. The Commissioner (Appeals) then noted that rule 8D was notified in the IT Rules, 1962 w.e.f. 24-3-2008 for the purpose of making disallowance under section 14A. As per rule 8D(2)(iii) of the Rules, 0.5% of the average investment was to be disallowed out of common business establishment expenses. The Commissioner (Appeals) further noted that the Special Bench of ITAT, Mumbai in the case of Daga Capital Management (P) Ltd. had held that rule 8D was retrospective in nature. The Commissioner (Appeals), therefore, held that expenditure of Rs. 10,28,900, determined in the manner prescribed in rule 8D(2)(iii) of the Rules, should have been disallowed under section 14A as against Rs. 42,130 disallowed by the assessing officer. He, accordingly, directed the assessing officer to disallow Rs. 10,28,900 under section 14A as against Rs. 42,130 disallowed by the assessing officer, resulting in enhancement of Rs. 9,86,770. Held: Rule 8D was not retrospective in application and neither assessee nor department had challenged estimation and quantification before the Tribunal hence estimation of expenditure made by the assessing officer was to be upheld.

Perusal of the grounds of cross-objection showed that the assessee did not challenge the disallowance made by the assessing officer at Rs. 42,130, but objected only to the application of Rule 8D which in its opinion was not applicable for assessment year under consideration, i.e. assessment year 2004-05. Merit in the submissions of the assessee that the assessee never challenged the assessing officer's order disallowing Rs. 42,130 under section 14A but it objected only to the enhancement made by the Commissioner (Appeals) by resorting to rule 8D of the Rules. It appeared from the orders proposed by both the Members that both of them agreed that rule 8D was not applicable to the assessee's case since the year under appeal was assessment year 2004-05, whereas rule 8D was applicable prospectively from assessment year 2008-09. In support of this finding both the Members relied on the decision of Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd.. Therefore, once both the Members agreed with the submissions of the assessee that rule 8D of the Rules was not applicable and disallowance under section 14A could not be made with reference to said rule 8D in assessment year 2005-06, then the question remains whether it was open for the Tribunal to estimate amount disallowable on any basis other than the basis adopted by the assessing officer. The assessee in its cross-objection did not per se challenge the disallowance made by the assessing officer under section 14A in the assessment order but only objected to the enhancement of disallowance by the Commissioner (Appeals) by reference to rule 8D of the Rules. Once both the Members agreed that rule 8D was not applicable to the assessee's case for assessment year 2004-05, then the direction of the Commissioner (Appeals) for making disallowance as per rule 8D was required to be vacated. Since the assessee did not challenge the order of the assessing officer making the disallowance under section 14A calculating the amount disallowable @ 1% of the total exempt income, then it was not open for the Tribunal to go into the question of quantification of amount disallowable, because neither the assessee nor the revenue had challenged the estimation of amount disallowable, as made by the assessing officer in the assessment order. In these circumstances, the Tribunal cannot go into the question of reasonableness of the estimate of the amount disallowable made by the assessing officer because neither the assessee nor the revenue had challenged the findings of the assessing officer making the disallowance under section 14A at Rs. 42,130. Considering the totality of the facts and circumstances of the case, the findings of the AM that the amount disallowable under section 14A should have been 1% of the total exempt income is agreed. [Para 7]