Select Holiday Resorts Ltd., New Delhi vs Department Of Income Tax

I.T.A. No. 5439/DEL/2012 A.Y. : 2006-07 Dy. Commissioner of Income Tax, M/s Select Holiday Resorts Circle 8(1), VS. Ltd., Room No. 163, CR Building, Suite 101-103, 1st floor, New Delhi Kanchenjunga Building, 18, Barakhamba Road, New Delhi (PAN: AAACS3260M) (APPELLANT) (RESPONDENT)

Department by : Sh. B.R.R. Kumar, Sr. DR Assessee by : Sh. Gaurav Jain, Adv.

Date of Hearing : 10-02-2015 Date of Order : 16-02-2015

ORDER

PER H.S. SIDHU : JM

Revenue has filed this Appeal against the impugned order dated 18.7.2012 passed by the Ld. CIT(A)-XI, New Delhi relevant to assessment year 2006-07.

2. The following grounds have been raised :-

"1. The Ld. CIT(A) erred on facts and in law in deleting the disallowance of Rs. 1,00,94,103/- made by the AO under section 14A of the I.T. Act, 1961.

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2. The appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal."

3. At the time of hearing, Ld. Counsel of the assessee stated that the issue in dispute is identical and is squarely covered by the decision of the ITAT, 'B"Bench, Delhi passed in ITA Nos. 494, 729 & 730/Del/2011 (AY. 2006-07 and 2007-08) on 10.9.2014 in the case of Consolidated Finvest & Holdings Ltd. vs. ACIT. He has also filed a copy of the aforesaid Order dated 10.9.2014 passed by this Tribunal and requested that appeal filed by the Revenue may be dismissed. Ld. Counsel of the assessee also filed a Paper Book containing pages 1 to 152 having the details of revised computation; method of computation of disallowance; segment wise financial statements; statement of capital gains; audited financial; audit report and copy of decisions of ITAT, Hon'ble High Court and Hon'ble Supreme Court of India in support of his contention.

3.1 On the contrary, Ld. DR relied upon the order passed by the Assessing Officer.

4. We have heard both the counsel and perused the relevant records, especially the orders passed by the Revenue authorities alongwith the Order dated 10.9.2014 passed by the ITAT, 'B"Bench, Delhi in ITA Nos. 494, 729 & 730/Del/2011 (AY. 2006-07 and 2007-

08) on 10.9.2014 in the case of Consolidated Finvest & Holdings Ltd. vs. ACIT.

5. In this case the return of income was filed by the assessee on 27.11.2006 declaring total income at Rs. 1,28,57,983/- under the provisions of MAT. On 7.4.2007, revised return was filed declaring an income at Rs. 94,29,542/- under MAT. Assessment was

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completed u/s. 143(3) of the I.T. Act on 30.12.2008 at an income of Rs. 1,95,23,645/-. The additions were made u/s. 14A read with Rule 8D and disallowance on account of unpaid statutory liability u/s. 43B. These were challenged in appeal. The Ld. CIT(A) vide order Appeal No. 217/08-09 dated 12.5.2009 restricted the disallowance as per clause (ii) of Rule 8D to Rs. 93,11,704/- as against Rs. 1,30,09,324/- thereby giving the assessee a relief of Rs. 36,11,704/-. However, on the issue of unpaid statutory liability, the Ld. CIT(A) deleted the disallowance of Rs. 4,49,365/- u/s. 43B. The total was assessed as a result of this CIT(A) order vide order u/s. 250 w.r.s. 143(3) of the I.T. Act dated 23.7.2009 at a profit u/s. 115JB of Rs. 1,58,26,025/-. Against this order of the Ld. CIT(A) the revenue went in appeal before the ITAT and the asessee had also filed cross objection. The ITAT vide its order in ITA No. 3476/Del/2009 & CO No. 339/Del/2009 (ITA No. 3476/Del/2009) restored the matter back to the file of the AO. Also in assessee's own case for A.Y. 2005-06 and A.Y. 2006-07 the Hon'ble High Court in ITA No. 1024/2011 and ITA No. 8903/2011 remanded the issue of Section 14A of the Act to the AO to decide in accordance with the directions as held in the judgment of Hon'ble High Court in ITA No. 687/2009 titled Maxopps Investment Ltd. vs. CIT, New Delhi Judgment dated 18.11.2011. Thereafter, the AO in the order 30.12.2011 passed u/s. 254 stated that "since the order of the Hon'ble High Court has recently been received in this office and the issue is still unsettled, the order on the issue of disallowance u/s. 14A would be passed when it gets finality. Accordingly, no decision is taken on this issue in this order." The AO made disallowance u/s. 14A read with Rule 8D of an amount of Rs. 1,00,94,103/- vide order dated 30.12.2011 u/s. 254/143(3).

6. Aggrieved by the aforesaid order of the Assessing Officer dated 30.12.2011 passed u/s. 254/143(3), assessee filed an appeal

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before the Ld. First Appellate Authority, who vide impugned order dated 18.7.2012 had decided the issue in dispute in favor of the assessee by allowing the appeal of the Assessee. The finding of the Ld. First Appellate Authority at Pages 7 to 11 which are reproduced below:-

I have considered all the documents on record and the submissions of the appellant. In this case there were two directions for the AO for deciding the issue of 14A for the relevant AY. One from the Hon'ble ITAT in the appellant own case to consider the Bombay High Court decision in the case of Godrej Boyce Mfg. Co. Ltd. while deciding the disallowance u/s. 14A. The other direction was from the Hon'ble High Court of Delhi in the appellant's own case to consider the case of Maxopp Investment Ltd. vs. CIT while computing the disallowance u/s. 14A. However, from the order passed by the AO it is seen that none of the above two directions were complied with by the AO. The AO has merely made the disallowance u/s 14A of an amount of Rs.1,OO,94,103/- after stating that since the issue was still unsettled, the disallowance u/s 14A would be passed once its gets finality.

I have perused the order of the Hon'ble Bombay High Court in the case of Gordrej Boyce Mfg Co. Ltd v DCIT & Anr. 328 ITR 81 (2010) the Court observed as under:-

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"The following principles would emerge from Section 14A and the decision in Walfort:

(a) The mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee;

(b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed;

(c) The principle of apportionment of expenses is widened by Section 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business;

(d) The basic principle of taxation is to tax net income. This principle applies even for the purposes of Section 14A and expenses towards non-taxable income must be excluded;

(e) Once a proximate cause for disallowance is established - which' is the relationship of the expenditure with income which does not form part of the total income - a disallowance has to be effected. All expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed under Section 14A. Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation."

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Memorandum Explaining the Provisions of the Finance Bill, 2006 states that "this amendment will take effect from 1st April, 07, and will accordingly apply in relation to the AY 07-08 and subsequent years" - CBDT has clarified the position vide Circular No.l4 of 2006 that the amendment would be applicable "from the AY 07-08 onwards". This can be regarded as a reasonable interpretation of the provision - Even in the absence of sub-ss. (2) and (3) of s. 14A and of r. 8D, the AO was not precluded from making apportionment - Provisions of r.8D have been inserted by IT (Fifth Amendment) Rules, 2008, which were notified to come into force on 24th March, 2008 - Law which would apply to an asstt year is the law prevailing on the. first day of April - Consequently, r.8D is applicable w.e.f. AY 08-

09."

I have also perused the order of the Hon. Delhi High Court in the case of Maxopp Investment Ltd v CIT (Delhi HC) (2011),. 5 TaxCorp (DT) 49842 (DELHI). The relevant portions of the order are as under:-

"We are of the view that Rule 8D would operate prospectively. We agree with the submissions made by Dr. Rakesh Gupta that if the said Rule were to have retrospective effect, nothing prevented the CBDT from saying so particularly in view of the fact that it had the power to make a rule retrospective by virtue of Section 295(4) of the said Act. Instead of making Rule 8D retrospective, clause 1(2) of the IT (Fifth Amendment) Rules, 2008 made it clear that 6 ITA NO. 5439/Del/2012

the rules would come into force from the date of their publication in the official Gazette. It is therefore clear that Rule 8D which was introduced by virtue of the Notification No.45/2008 dated 24/03/08 was prospective in operation and cannot be regarded as being retrospective. We may also point out that we have had the benefit of the decision of the Bombay High Court in of Godrej Boyce Mfg. Co. Ltd v DCIT (2010) 328 ITR 81 (Born.) wherein it has, inter alia, been held that the provisions of Rule 8D of the said Rules has prospective effect and shall apply w.e.f. AY 08-09 onwards."

Rule 8D

30. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already mentioned above that by virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 80 in the said Rules. The said Rule 80 also makes it clear that 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 7 ITA NO. 5439/Del/2012

under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 80. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, 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 includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules.

31. 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 Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three

components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second 8 ITA NO. 5439/Del/2012

component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income."

How is Section 14A to be worked for the period prior to the introduction of Rule 8D?

41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed", Of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription 9 ITA NO. 5439/Del/2012

with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee' with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is than that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub- section (2) of sec 14A. Prior to that, the assessing was free to adopt any reasonable and acceptable method.

42. Thus, the fact that we have held that sub- sections (2) & (3) of section 14A and Rule would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the

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words of the Supreme Court in Walfort (supra) to the following effect:-

"The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A."

So, even for the pre-Rule 8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which, does not form part of the total income under the said Act. Even where the assessee claims 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. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will 11 ITA NO. 5439/Del/2012

have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment."

Therefore it is clear that Rule 8D will not be applicable to the case of the appellant since it pertains to AY 06-07.

A reading of the two decisions makes it clear that Rule 8D cannot be applied retrospectively Section 14A however would be applicable for pre Rule 8D period, thus whenever the issue of 14A arises the AO should ascertain the correctness of the claim of the appellant in respect of expenditure incurred or not incurred in relation to income which does not form part of the total income under the Act.

In the case the AO is satisfied with the claim of the appellant. The AO should accept the claim of the appellant so far as the quantum of disallowance is concerned. In case the AO after giving the appellant an opportunity of being heard, is not satisfied with the correctness of the claim of the appellant, he should reject the claim after giving reasons. The AO is to then determine the amount of expenditure incurred in relation to income which does not form part of the total income .

The language of sub section 14A(1) is abundantly clear that relation has to be seen

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between the exempt income and expenditure incurred in relation to it. The AO has not shown any relation between the exempt income and expenditure incurred.

The AO has not applied the two decisions in the matter to determine the disallowance u/s 14A.

I would again reiterate that the crux of the matter is that the AO has not followed the directions of the Hon. ITAT and the Hon. High Court of Court of Delhi in the appellant's case. The AO was to consider the two cases of Godrej Boyce Mfg. Co. Ltd and Maxopp Investment Ltd while deciding the issue. The AO did not consider the two judgments while finalizing the matter. In view therefore I am deleting the addition made by the AO of Rs.1,OO,94,103/-."

7. We find that this Tribunal in ITA No.494/Del/2011 in Revenue's Appeal for AY 2007-08 has considered the similar issue. The Tribunal vide its Order dated 10.9.2014 vide para no. 15 to 16 has adjudicated the issue as under:-

"15. We have carefully considered the submissions of both the sides and perused relevant material placed before us. Now, it is settled law that Rule 8D is applicable for and from AY 2008-09 and not for earlier years. While taking this view, the CIT(A) has relied upon the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg.Co.Ltd. in ITA No.626 of 2010 and W.P. No.758 of 2010. However, now this issue has also been set at rest by Hon'ble Jurisdictional High Court in the case of Maxopp Investment Ltd. Vs. CIT, New Delhi -

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[2012] 347 ITR 272 (Delhi). Therefore, there is no infirmity in the order of learned CIT(A) holding that Rule 8D was not applicable. Now, coming to the quantum of disallowance under Section 14A of the Act, Section 14A reads as under:-

"14A. [(1)] For the purposes of computing the total income under this Chapter, 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 this Act.]

[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this 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 this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act

[Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any

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assessment year beginning on or before the 1st day of April, 2001.]."

16. From sub-section (1) of Section 14A, it is evident that the legislature has provided that no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to income which does not form part of total income. Therefore, incurring of some expenditure by the assessee in relation to exempt income is essential so as to invoke the provisions of Section 14A(1) by the Assessing Officer. As per sub- section (2) of Section 14A, the Assessing Officer is empowered to determine the expenditure incurred in relation to exempt income provided he is not satisfied with the correctness of the claim of the assessee in relation to the incurring of expenditure for earning of exempt income. As per sub-section (3), the Assessing Officer is empowered to determine the expenditure even when the assessee claims that no expenditure has been incurred by him in relation to earning of exempt income provided the Assessing Officer is not satisfied with the correctness of the claim of the assessee. From a combined reading of sub-section (2) & (3) of Section 14A, it is evident that first the assessee has to state whether any expenditure was incurred by him for earning of exempt income, if yes, then, he has to specify the expenditure which was incurred for earning of exempt income. Thereafter, the Assessing Officer is required to examine the assessee's claim with regard to incurring of no expenditure or with regard to the amount of expenditure claimed to have been incurred by the assessee for earning of exempt income. If the Assessing Officer is satisfied with the claim of the assessee, then, no further action under 16 ITA-729, 730 & 494/D/2011

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Section 14A is required except to disallow the amount of expenditure, if any, which assessee claimed to have incurred for earning of exempt income. However, when the Assessing Officer is not satisfied with the claim of the assessee with regard to incurring of no expenditure or the amount of expenditure specified by the assessee for earning of exempt income, then, he is required to determine the amount of expenditure incurred by the assessee in relation to earning of exempt income. Such expenditure is to be determined by him in accordance with such method as may be prescribed. In this case, the assessee has worked out the disallowance under Section 14A at ` 7,73,525/-. The Assessing Officer did not record any satisfaction that such working is wrong. He simply says that disallowance is to be worked out as per Rule 8D. We have already held that for AY 2007-08, Rule 8D was not applicable and therefore, disallowance need not be computed as per Rule 8D. The Assessing Officer has not recorded any satisfaction with regard to any mistake in the working of disallowance under Section 14A at `7,73,525/- by the assessee. On these facts, we do not find any justification to interfere with the order of learned CIT(A). The same is sustained and Revenue's appeal is dismissed."

8. Keeping in view the facts and circumstances of the case and

precedent relied upon by the Ld. Counsel of the assessee, we find

that Ld. CIT(A) has rightly observed that that Rule 8D will not be

applicable to the case of the assessee since it pertains to AY 06-07.

We also find that Ld. CIT(A) has also observed that a reading of the

two decisions as mentioned above of the Hon'ble High Courts make

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it clear that Rule 8D cannot be applied retrospectively, Section 14A

however would be applicable for pre Rule 8D period, thus whenever

the issue of 14A arises the AO should ascertain the correctness of

the claim of the assessee in respect of expenditure incurred or not

incurred in relation to income which does not form part of the total

income under the Act. Ld. CIT(A) noted that the AO is satisfied with

the claim of the assessee and he further noted that the AO should

accept the claim of the assessee so far as the quantum of

disallowance is concerned. Ld. CIT(A) has further observed that the

AO after giving the assessee an opportunity of being heard, is not

satisfied with the correctness of the claim of the assessee, he should

reject the claim after giving reasons and then AO should determine

the amount of expenditure incurred in relation to income which does

not form part of the total income. Ld. CIT(A) further observed that

the language of sub section 14A(1) is abundantly clear that relation

has to be seen between the exempt income and expenditure

incurred in relation to it. The AO has not shown any relation between

the exempt income and expenditure incurred. The AO has not

applied the two decisions in the matter to determine the

disallowance u/s 14A. Therefore, Ld. CIT(A) has rightly held that the

AO has not followed the directions of the ITAT and the Hon. High

Court of Court of Delhi in the assessee's case and the AO has to

consider the two cases of Godrej Boyce Mfg. Co. Ltd and Maxopp

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Investment Ltd while deciding the issue, but the AO did not consider

the two judgments while finalizing the matter. We find that Ld.

CIT(A), in view of the above, has rightly deleted the addition made

by the AO of Rs.1,OO,94,103/- which does not need any interference

on our part. Accordingly, we uphold the order of the Ld. CIT(A) and

dismiss the Appeal filed by the Revenue.

9. In the result, the Appeal filed by the Revenue stands dismissed.

Order pronounced in the Open Court on 16/2/2015.

Sd/- Sd/-

[J.S. REDDY] [H.S. SIDHU] ACCOUNTANT MEMBER JUDICIAL MEMBER

Date 16/2/2015 "SRBHATNAGAR" Copy forwarded to: - 1. Appellant -

2. Respondent - 3. CIT 4. CIT (A) 5. DR, ITAT

TRUE COPY By Order,

Assistant Registrar, ITAT, Delhi Benches

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