Dbh International Pvt. Ltd., New Delhi vs Department Of Income Tax

DCIT DBH International Pvt. Ltd., Circle-10(1) N-75, Connaught Place, New Delhi Vs. New Delhi PAN:AAACD0085D (Appellant) (Respondent)

Appellant by : Smt. Parwinder Kaur, Sr. DR Respondent by : Sh. Gurmeet S. Grewal, CA ORDER

PER A. T. VARKEY, JUDICIAL MEMBER

This is an appeal filed by the Department arises from the order of the ld

CIT(A), VI dated 17.12.2012 and relates to Assessment Year 2008-09.

2. The solitary ground is in respect of disallowance u/s 14A of the Income

Tax Act, 1961 (herein after 'the Act') amounting to Rs.2,57,62,256/- as worked

out by the Assessing Officer as per the provisions of section 14A of the Act

read with Rule 8D of the Income Tax Rules, 1962 (herein after 'the Rules).

3. Brief facts as recorded by the ld CIT(A) is that the assessee company

belongs to Thapar group and is engaged in the mining business besides

having made investments in group companies for control purposes. During

the year, the Thapar group companies were reorganized into smaller groups

whereby the shares held by the individuals or group companies handled by

the family members were transferred to another company in the manner that

control thereof comes to the family member who is to control the company

post re-organization. The re-organization was handled by professionals and

no person from the companies or on behalf of the individuals was involved. It Page 2 of 6

was handled by the professionals because of the complexities involved. The

professionals were paid their professional fee, interest was paid on the

borrowing besides the Demat charges. The shares coming into the company

under consideration are held not for the purposes of trading but for the

purposes of management control. The assessee, in view of the provisions of

section 14A of the Act voluntarily disallowed expenditure of Rs.2,32,27,892/-

incurred as the income earned.

4. However the AO did not agree to the disallowance made by the

assessee in respect to its earned exempt income. Thereafter he made the

following observation before disallowing Rs.2,57,62,256/- in place of the

assessee's voluntary disallowance of an amount of Rs.2,32,27,892/-.

"From the reading of the above, provisions of aforesaid sections are clearly attracted in this case. During the assessment proceedings assessee was asked to give calculation of expenses (interest etc) incurred in relation to exempt income as provided u/s 14A read with Rule 8D. In response thereto the assessee claims that he has voluntarily disallowed an amount of Rs.2,03,53,938/- out of Interest and Financial charges and Rs. 28,73,954/- out of Legal and Professional Charges expenditure. Reply of assessee is considered but not acceptable because it has not disallowed the expenses as per the provisions of Section 14A of the Act read with Rule 8D. The exempt income of Rs.12,57,14,073/- has direct correlation with the interest and financial expenditure of Rs.2,03,68,251/- incurred on unsecured/ secured loans, Rs.24,71,495/- towards Legal and Professional Charges and Rs.19,22,510/- towards office and other expenses. Therefore, the provisions of section 14A of the Act read with rule 8D is clearly attracted in this case."

Page 3 of 6 5. Aggrieved by said order of the AO the assessee preferred an appeal

before ld CIT(A), who was pleased to delete the addition made by the AO

and he held as follows:-

"4.2 Now adverting to the case of the appellant company, it is seen that the appellant company itself has made the disallowance of expenditure u/s 14A r.w.r. 8D of Rs.2,32,27,892/-. The claim of disallowance made by the appellant company was examined by the AO during the course of assessment. The appellant produced the books of accounts and the evidences, which the ld Assessing Officer had verified the ld AO examined the books of accounts, evidences and records of the appellant and verified the voluntary disallowance by appellant u/s 14A of the Act. The AO has not pointed out any deficiency in the books of accounts nor in respect of claim of the appellant u/s 14A of the Act. In other words, the AO has not expressed satisfaction that the appellant's claim u/s 14A is incorrect, a prerequisite for invoking the provisions of section 14A of the Act. The Hon'ble Delhi High court in the case of Maxxop Investment Ltd. Vs. CIT (2012) 347 ITR 272 has held that :-

"the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not ineluctable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules."

The Hon'ble Court also held that the assessing officer should assign cogent reason for arriving at such satisfaction. It is observed that the AO has not found any deficiency in the suo-moto disallowance of Rs. 2.32,27,892/- of expenditure u/s 14A made by the appellant. On merits also it is observed that the difference of disallowance of Rs.6,45,557/- on account of legal and professional charges between the AO and the appellant are due to expenses which were made for the payment of consultants engaged in the mining operations which cannot be attributable by stretch imagination for the investments. Similarly, disallowance of Rs.10,00,000/- on account of donation has been made twice by the AO, So far as the financial charges are concerned the difference of Rs.14 ,313/- is on account of interest paid on late deposit of FBT. The same cannot be attributable as expenses for the investment of the appellant company. On these facts and circumstances of the case the AO is directed to delete the extra addition of Rs.25,34,364/- (Rs.2,57,62,256/- -Rs.2,32,27,595/- made u/s 14A read with Rule 8D of the IT Rules."

Page 4 of 6

6. Having considered the rival submissions and after carefully perusing the

records, we find that the AO without recording his satisfaction that the claim

of expenditure in relation to tax free income has not been correctly made by

the assessee as envisaged under section 14A(2) has invoked Rule 8D. Sub-

section (2) of section 14A of the Act provides the manner in which the AO is

to determine the amount of expenditure incurred in relation to income which

does not form part of the total income. The requirement of the AO

embarking upon a determination of the amount of expenditure incurred in

relation to exempt income would be triggered only if the AO returns a finding

that he is not satisfied with the correctness of the claim of the assessee in

respect of such expenditure. Therefore, the condition precedent for the AO

entering upon a determination of the amount of the expenditure incurred in

relation to exempt income is that the AO must record that he is not satisfied

with the correctness of the claim of the assessee in respect of such

expenditure. In other words, sub-section (2) deals with cases where the

assessee specifies a positive amount of expenditure in relation to income

which does not form part of the total income under the Act and the AO, if

satisfied with the correctness of the claim of the assessee in respect of such

expenditure cannot embark upon a determination of the amount of

expenditure in accordance with prescribed method, as mentioned in sub-

section (2) of sec. 14A of the Act. It is only if the AO is not satisfied with the

correctness of the claim of the assessee, that the AO gets jurisdiction to

determine the amount of expenditure incurred in relation to such income

which does not form part of the total income under the Act in accordance

with the prescribed method stipulated in Rule 8D of the Rules. While rejecting Page 5 of 6

the claim of the assessee with regard to the expenditure or no expenditure,

as the case may be, in relation to exempt income, the AO would have to

indicate cogent reasons for the same. It is, therefore, clear that

determination of the amount of expenditure in relation to exempt income

under Rule 8D would only come into play when the AO rejects the claim of

the assessee in this regard. (Maxopp Investment Ltd. v. CIT (2012) 397 ITR 272

(Del.).

7. In the light of the above well settled law, the ld. CIT(A) has rightly stated

that the conditions before invocation of rule 8D which is reproduced below:-

i. The AO should be satisfied that the claim of expenditure in relation to tax free income has not been correctly made by the assessee having regard to his accounts.

ii. The AO should be recording his satisfaction as to how the assessee's calculation is incorrect.

iii. Even where the assessee's claim 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.

iv. In case, the assessing officer is not satisfied with the claim of the assessee, then on the basis of objective criteria and after giving the assessee a reasonable opportunity, he shall have to reject the claim and state the reasons for doing so.

8. The ld CIT(A) has rightly observed that the AO did not find any

deficiency in the books of account nor any deficiency in respect of the claim

of the assessee u/s 14A of the Act. We also find that the AO has not

expressed satisfaction with the assessee's claim u/s 14A was incorrect and

which is a sine quo none before invoking provisions of section 14A of the Act.

We do not find any infirmity whatsoever in the reasoned order passed by the Page 6 of 6

ld CIT(A) and therefore we are inclined to confirm the order of the ld CIT(A)

and so the departments appeal fails and so is dismissed.

9. In the result the appeal is dismissed.

Order pronounced in the open court on 13.02.2015.

-Sd/- -Sd/- (S. V. MEHROTRA) (A. T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated:1302.2015 *A K Keot *Kavita

Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi