Raj Shipping Agencies Ltd, Mumbai vs Assessee

Present for: Assessee by : Shri M.M. Golvala, A.R. & Shri Amey Wagle, A.R. Revenue by : Shri Love Kumar, D.R.

Date of Hearing : 10.03.2015 Date of Pronouncement : 27.05.2015

ORDER

Per Sanjay Garg, Judicial Member:

The present appeal has been preferred by the assessee against the order dated 07.06.2012 of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] relevant to assessment year 2009-10. The sole issue taken by the assessee through its grounds of appeal is relating to the disallowance of Rs.5,73,253/- under section 14A read with Rule 8D of the Income Tax Act (hereinafter referred to as the Act).

2. The brief facts of the case are that the assessee company is engaged in the business of hiring and operation of vessel and has opted for tonnage tax scheme in respect of such income. During the assessment proceedings, the Assessing Officer (hereinafter referred to as the AO) noticed that the assessee 2 ITA No.5403/M/2012 M/s. Raj Shipping Agencies Ltd.

had earned dividend income but it had not allocated any expenditure towards earning of tax exempt or dividend income. He therefore applied the provisions of section 14A read with Rule 8D of the Act and computed the disallowance at Rs.4,03,171/- and added the same into the income of the assessee.

The Ld. CIT(A) also confirmed the disallowance so made by the AO. The assessee, thus, has come in appeal before us.

3. We have heard the rival contentions of the Ld. Representatives of both the parties and have also gone through the records. Admittedly, in this case no expenditure has been disallowed by AO under Rule 8D(2)(i) relating to expenditure directly attributable to exempt income. Similarly, no disallowance has been made under Rule 8D(2)(ii) in relation to interest expenditure. The only disallowance made by the AO under Rule 8D(2)(iii) in relation to administrative expenses at the rate of 0.50% of overage investment value is amounting to Rs.5,73,253/-.

4. The assessee, before us, has submitted that a major part of its income was subject to tonnage tax scheme under the provisions of section 115V of the Act. No borrowed funds had been used for the purpose of investment. So far as the administrative expenses were concerned, the same have already been disallowed under the computation of tax under tonnage tax scheme and thus no separate disallowance was called for under section 14A. He has further submitted that the AO has not recorded any satisfaction regarding the contention of the assessee that it has not incurred any expenditure in relation to earning of exempt income. The AO could have resorted to the provisions of Rule 8D, if he would not have been satisfied about the contention of the assessee after making reference to the accounts of the assessee. The Ld. A.R. has further produced a chart showing the analysis of receipts during the year 3 ITA No.5403/M/2012 M/s. Raj Shipping Agencies Ltd.

and the working of the administrative expenditure. The Ld. A.R. has demonstrated before us that the tonnage income of the assessee for the year under consideration was Rs.35,22,17,530/- which constituted 71.36% of the total income which was claimed as exempt under the tonnage tax provisions and the relative expenditure relating to the said income under the provisions of the Act had already been disallowed. The assessee during the year earned non tonnage income of Rs.9,02,38,859/- which constituted 18.28% of the total income. Apart from that the assessee had earned other business income of Rs.2,82,36,111/-, short term capital gains of Rs.5,16,790/- and interest on bank FDRs of Rs.2,02,32,282/- which constituted 5.72%, 0.10% and 4.10% respectively of the total income. The other exempt income earned by the assessee was dividend income of Rs.21,67,042/- which constituted 0.44% of the total income of Rs.49,36,08,614/-. The assessee has further demonstrated that the total exempt receipts inclusive of tonnage tax receipts constitute 71.79% of income whereas the taxable receipts for the year were at 28.21%. Further, the assessee had shown that the administrative expenses disallowed in relation to tonnage income were at Rs.1,50,67,404/- which constituted 79.68% of the total administrative expenses incurred by the assessee. The assessee had claimed only Rs.38,42,491/- as expenditure in relation to tonnage income which constitute only 20.32% of the total expenditure. He has further submitted the details of the administrative expenses to show that the administrative expenses claimed were in relation to the non tonnage income and other income of the assessee and were not relatable to the earning of exempt income. Assessee, during the year, had earned dividend income in relation to investments made in five entities. He, therefore, has stressed that no further disallowance, even on account of administrative expenses, was called for. He has relied upon the decision of the Hon'ble Delhi High Court in the case of "CIT vs. Taikisha engineering India Ltd." wherein the Hon'ble Delhi 4 ITA No.5403/M/2012 M/s. Raj Shipping Agencies Ltd.

High Court has held that until and unless the AO, having regard to the accounts of the assessee, does not record the satisfaction that the claim of the assessee of suo-moto expenditure or of no expenditure is not correct, he cannot go on to determine the disallowance under Rule 8D.

The Ld. D.R., on the other hand, has relied upon the findings of the lower authorities.

5. We have considered the rival contentions of the Ld. representatives of the parties. Admittedly, the AO, in this case, has straight away applied Rule 8D for computation of disallowance under section 14A. He has not considered the submissions of the assessee regarding the disallowance made by it under tonnage tax scheme and that no expenditure was incurred by the assessee in relation to earning of dividend income. It may be observed that in the case of 'Godrej & Boyce Manufacturing Co. Ltd.' 328 ITR 81, the Hon'ble Bombay High Court has held that under section 14A of the Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect such expenditure is correct. The satisfaction of the Assessing Officer must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place 5 ITA No.5403/M/2012 M/s. Raj Shipping Agencies Ltd.

on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee.

6. We may further observe that the Hon'ble Delhi High Court in a recent decision has further given a similar view in the case of "CIT vs. Taikisha engineering India Ltd." (supra) wherein the Hon'ble Delhi High Court has held that the AO, having regard to the accounts of the assessee, is required to record his satisfaction that the self or voluntarily expenditure offered by the assessee or claim that no expenditure has been incurred by the assessee in relation to earning of exempt income, was not correct or the same was unsatisfactory on examination of the accounts of the assessee. Without recording such a satisfaction he cannot proceed to apply Rule 8D for the computation of disallowance under section 14A. However, a perusal of the assessment order reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the hon'ble Bombay high Court in the case of Godrej & Boyce (supra) while making the disallowance. He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act. The ld. CIT(A) also ignored the mandate of the provisions of section 14 A, while confirming the disallowance.

7. As observed above, the Ld. A.R. has demonstrated before us that the assessee has already disallowed 79.68% of administrative expenses under the tonnage tax scheme. The non tonnage income of the assessee constituted only 20.32% of the total income. Having regard to the details of the administrative expenditure and the other details as discussed above, we are of the view that the disallowance made by the AO by way of applying Rule 8D without examination of the accounts of the assessee and without recording any 6 ITA No.5403/M/2012 M/s. Raj Shipping Agencies Ltd.

dissatisfaction about the correctness of the claim of the assessee cannot be held to be justified and the same is accordingly set aside. However, having regard to the investments made and dividend income, in our view, some reasonable disallowance on account of administrative expenses is required to be made which we quantify at Rs.20,000/-. So in view of our observations made above, the disallowance made under section 14A is restricted to Rs.20,000/- only.

8. In the result, the appeal of the assessee is thus allowed in part.

Order pronounced in the open court on 27.05.2015.

Sd/- Sd/- (B.R. Baskaran) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 27.05.2015. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.