The order of the Bench was delivered by
Sanjay Arora, A. M.-These are a set of two Appeals by the Assessee and the Revenue, i.e., determination of quantum and levy of penalty for the assessment year (A.Y.) 2008-09 consequent to the disposal of its appeals for the said year by the Commissioner of Income Tax (Appeals)-37, Mumbai ('CIT(A)' for short) vide his separate orders in the relevant proceedings, being dated 16.03.2011 and 29.11.2011 for the quantum and the penalty proceedings respectively.
I.T.A. No.3123/Mum/2011(By the Assessee)
2.1 We shall take up the quantum appeal, which is by the assessee, first. Vide ground No.1, the assessee agitates the confirmation of the disallowance in respect of clearing expenses for Rs.1,92,810/-. The same stood claimed at a total of Rs.3,85,620/-. The mode of payment was both, i.e., by way of cash and by cheque. The cash payments being not supported by third partly vouchers, and in the absence of the assessee being able to substantiate its claim of the expenses being incurred for and on behalf of the various customers, so that the same in fact stood recovered from them, the Assessing Officer (A.O.) disallowed the entire sum.
2.2 In appeal, the ld. CIT(A) found that this was a subsisting issue in the assessee's case. For A.Ys. 2006-07 and 2007-08, the disallowance had been restricted to 50% of the claimed expenses on the same set of facts. Accordingly, a deviation in decision was not permissible in the absence of any change in the facts. He, accordingly, directed for restriction of the disallowance to 50% of the claimed amount, i.e., at the impugned amount of Rs.1,92,810/-. Aggrieved, the assessee is in second appeal.
3. We have heard the parties, and perused the material on record. No improvement in its case has been brought out by the assessee-appellant, while no infirmity in the impugned order could be pointed out by either of the parties. Accordingly, we find no reason to interfere with the impugned order; the ld. CIT(A) having taken a reasonable view in consistence with the past history of the case. We decide accordingly, and the assessee's relevant ground stands dismissed in result.
4. Ground Nos. 2 & 3 concern the disallowance in the sum of Rs.47,34,478/- effected u/s.14A r/w r. 8D of the Act. The assessee, a company in the logistics business, received dividend income in the sum of Rs.51,05,222/- for the relevant year. The same being claimed exempt u/s. 10(34) of the Act, the assessee suo motu disallowed a sum @ 10% thereof, i.e., Rs.5,10,522/-, u/s.14A. As no basis for the same, i.e., apart from a similar disallowance having been sustained for the preceding year/s, stood advanced by the assessee, in view of the A.O. rule 8D would apply, the disallowance per which admittedly worked to an amount of Rs.52.45 lacs. Accordingly, the difference of Rs.47,34,478/- (Rs.52,45,000 - Rs.5,10,522) stood disallowed by him. The same stood confirmed in appeal on principally the same basis. The appellant had not been able to substantiate its claim qua the amount disallowable u/s.14A at Rs.5,10,522/- in any manner. No bifurcation of the said amount stood submitted, and neither was it able to establish the nexus between the interest bearing borrowings and its utilization for business purposes, so that the prescription of r. 8D(2)(ii), on the presumption of the investment having been made from the common hotchpotch of funds, would obtain. The onus to prove that the expenses as claimed were not incurred in relation to the earning tax exempt income, i.e., as claimed, is on the assessee, and which it could not. Under the circumstances, the A.O. being not satisfied with the correctness of the said claim, proceeded to estimate the disallowance by invoking rule 8D. The same is consistent with the decision in the case of Godrej & Boyce Manufacturing Company Ltd. vs. Dy. CIT reported in [2010] 328 ITR 81 (Bom), which also considers the argument of the interest claimed being allowable u/s. 36(1)(iii), as also advanced by the assessee before him, so that the disallowance as made was, under the given facts and circumstances, in accordance with law. Aggrieved, the assessee is in second appeal.
5.1 Before us, the ld. AR questioned the very basis of the impugned disallowance inasmuch as the assessee had itself disallowed 10% of the dividend income in consistence with the past assessments. Placing the copies of the orders by the Tribunal for the preceding years on record, he would submit that while for A.Y. 2005-06 (in ITA No.6697/Mum/2008) a disallowance of 5% (of dividend) was confirmed by the tribunal, the same was considered reasonable at 10% for the subsequent years, i.e., A.Ys. 2006-07 and 2007-08. The assessee having followed the same percentage for the current year, how could the same be now considered not reasonable and, therefore, unacceptable? Merely because a higher amount is workable under rule 8D, does not imply that a disallowance with reference thereto had to be mandatorily made. The A.O. has to first record his non-satisfaction with the assessee's claim for disallowance, be it in a positive sum, as in the instant case, or even at nil amount, before he could proceed to disturb the same - the assessee's estimate - and apply rule 8D. The said non-satisfaction, as explained by the higher courts of law, viz. Maxopp Investment Ltd. vs. CIT [2012] 347 ITR 272 (Delhi) and Godrej & Boyce (supra), has to be for cogent reasons. No dissatisfaction having been recorded by the A.O. in terms of section 14A(2), much less stating cogent reasons, the impugned disallowance could not stand, as was also found by the co-ordinate Bench of the tribunal in J. K. Investors (Bombay) Ltd. vs. ACIT (OSD) (in ITA No.7858/Mum/2011 dated 13.03.2013). The dissatisfaction of the A.O. cannot be inferred, as was done by the ld. CIT(A) in the instant case. The same constitutes a fundamental flaw, so that the matter could not be remitted back to the assessing authority, for which he would refer to pg.290 of the decision in the case of Maxopp Investment Ltd. (supra).
5.2 The ld. DR, on the other hand, would submit that the very fact that the assessee had made an ad hoc disallowance of a part of its dividend income, would be sufficient to exhibit that it had no objective basis for making the claim of expenditure stated to have been incurred in relation thereto, i.e., to income not forming part of the total income. The disallowance of the expenditure, to which there is no reference by the assessee, much less as to how the same has been identified and quantified, would be of no assistance to the assessee. It is under these circumstances that the A.O. proceeded to determine the disallowance in terms of the method prescribed by law, i.e., rule 8D, which has been held as both constitutional and reasonable by the hon'ble jurisdictional High Court in Godrej & Boyce (supra). In any case of the matter, the ld. CIT(A) has discussed the matter in sufficient detail, stating that the initial onus to prove that no expenditure, or to the extent claimed only, as the case may be, stands incurred in respect of such income, is on the assessee, which has not been discharged, with it even falling before him to support its claim in any manner.
5.3 In rejoinder, it was submitted by the ld. AR that once the law obliges the A.O. to do a particular thing or act, it is only he who could do so in law, and the first appellate authority cannot step into his shoes. Toward this, reliance was placed by him on the decisions in the case of M.V. Kibe vs. Commissioner of Wealth-tax [1988] 169 ITR 40 (AP), M.V. Kibe vs. Commissioner of Wealth-tax [1987] 168 ITR 82 (MP) and Rattan Chand & Sons vs. Wealth-tax Officer [1983] 5 ITD 508 (Chd.).
6. We have heard the parties, and perused the material on record.
6.1 As would be evident from the foregoing, while the assessee makes out a legal claim, i.e., qua the non-maintainability of the disallowance in the absence of the A.O. having not impugned its suo motu disallowance with cogent reasons, the Revenue bases its case on facts, i.e., of the assessee's suo motu disallowance being not valid, so that the same could not be accepted.
6.2 The first question before us is as to the nature of the obligation cast on the A.O. u/s. 14A(2) r.w.s. 14A(3), which reads as under:
"Expenditure incurred in relation to income not includible in total income.
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 assessment year beginning on or before the 1st day of April, 2001."
The obligation aforesaid has been subject to judicial review, as by the hon'ble jurisdictional High Court in Godrej & Boyce (supra), holding as under: (Pg.109)
"The satisfaction envisaged by sub-section (2) of section 14A is an objective satisfaction that has to be arrived at by the Assessing Officer having regard to the accounts of the assessee. The safeguard introduced by sub-section (2) of section 14A for a fair and reasonable exercise of power by the Assessing Officer, conditioned as it is by the requirement of an objective satisfaction, must, therefore, be scrupulously observed. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event he comes to the conclusion that he is not satisfied with the claim of the assessee."
6.3 It is, therefore, clear that the initial onus, even as stated by the ld. CIT(A), to make a claim in respect of the expenditure incurred in relation to the income that does not form part of the total income, is on the assessee. Once the assessee makes such a claim with reference to its accounts, the A.O. is bound to examine the same for the purpose of satisfying himself with regard to its correctness or otherwise, and where not satisfied, determine the same in accordance with the prescribed method. Further, therefore, though there is no specific requirement of recording dissatisfaction, it is incumbent on A.O. to do so, as in its absence it cannot be ascertained if he had actually examined the assessee's claim or proceeded mechanically. Two, his order being appealable, it is only where it bears his reasons, could the validity thereof and, thus, of his action of disallowance u/r. 8D, be subject to judicial review. It is in this context that it has been held that the said dissatisfaction has to be explicit and informed. The same, thus, is not a jurisdictional requirement, but toward completing the inbuilt fairness of the procedure as provided for. The requirement of recording dissatisfaction predicates on the discharge of the onus cast on the assessee, and which may not always obtain. The Revenue on its part could only extend opportunity to the assessee for the discharge of the said onus. In a particular case, the assessee may not produce the accounts. How could the A.O. possibly verify the correctness of the assessee's claim in such a case? In another, the assessee does not state the basis of its claim or makes the same de hors the expenses incurred and claimed. The A.O. could not possibly verify the correctness of such an incoherent or infirm claim. True, he should state this in as many words, but then, could one say that his action fails for want thereof where his dissatisfaction otherwise flows from the factual matrix of the case or is otherwise patent or self-evident. The claim (toward disallowance), it needs to be appreciated, is a matter of fact, and so, consequentially, is its verification. The decision as regards its correctness or otherwise thus is essentially an issue which turns on facts. The law postulates a disallowance on the assessee's part, and fairness or procedure requires informing the basis of the adjustment, so as to enable the assessee to meet it where the A.O. does not accept the assessee's estimate. As long as these ingredients are satisfied, or alternatively incapable of being so, the A.O.'s action in effecting the disallowance under rule 8D cannot be assailed.
6.4 Coming to the facts of the case, the assessee's claim is without reference to the expenses incurred and claimed, much less as to which expenditure is included and to what extent. There is no break-up of the expenditure disallowed into direct or indirect expenditure. There is, further, no indication of interest, if any, included therein, and which could be both in the form of direct and/or indirect expenditure. When questioned in its respect in the assessment proceedings, all that the assessee in effect does is to furnish a working of the disallowance under r.8D (refer para 4.2 of the assessment order), further making the following claims (refer assessee's letter dated Dec, 2010 / PB pgs. 17- 25):-
1) major share holding is in shares of subsidiary and group companies;
2) an investment in mutual fund during the year is financed by sale of shares of a company, to which the travel division had been sold, receiving shares in part consideration, so that no cash flow of the company had been used;
3) the number of transactions of purchase and sale (i.e., in shares & units) during the year is very nominal;
4) the interest claimed is allowable u/s.36(1)(iii); and 5) the disallowance at 10% of the dividend was accepted in assessment proceedings u/s.143(3) for A.Y. 2007-08.
There being, therefore, admittedly no explanation on facts, i.e., qua the expenditure claimed to be incurred in relation to the tax-free income; the assessee itself having made an ad hoc claim; rather, as it appears, exclusive of the interest component, being allowable u/s. 36(1)(iii), how could one may ask, as also stated earlier, the A.O. possibly verify the correctness of such a claim, i.e., made de hors the accounts and the expenditure being claimed as incurred. This is precisely what the ld. CIT(A) explains vide para 3.3.1 of his order, before whom also the assessee does not substantiate its claim on facts in any manner.
6.5 As regards the assessee's claim with reference to the deductibility of interest u/s.36(1)(iii), the same is met by the ld.CIT(A) with reference to the decision in Godrej & Boyce (supra); the said aspect or contention, also raised in that case, having been considered by the hon'ble court (refer para 3.3.3 of the impugned order). It explains, with reference to the reliance by the assessee-appellant on the decision, inter alia, in CIT vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom), that the fact that the investments (yielding tax-free income) stood made by utilizing own funds would no longer, i.e., after cooption of section 14A on the statute-book, be dispositive of the question as to whether the assessee had incurred any expenditure in relation to the income which does not form part of the total income, and that the disallowance of interest expenditure would have to be made, which is what the A.O. is to determine (para 85,86/pgs.135-137). This aspect stands also clarified by the tribunal in the case of Dy. CIT vs. Damani Estates & Finance Pvt. Ltd. (in ITA No.3029/Mum/2012 dated 17.07.2013/ refer para 5.4). In other words, as also stated by the ld. CIT(A), the onus is on the assessee, and unless it is able to show that the borrowed funds have been utilized for specified purposes, as in the case of dedicated funds, viz. term loans, working capital advances, etc., the general pool of funds hypothesis shall prevail, and the disallowance of the interest to the proportionate extent, ensue. Reference in this context is also made to the decision in the case of Hercules Hoists Ltd. vs. Asst. CIT [2013] 22 ITR (Trib) 527 (Mum) (para 48, at pg. 563 & 564 of the reports). The matter is principally factual, to be decided on the facts as led by the assessee. It is only in that circumstance, whether the assessee claims the expenditure liable to be disallowed u/s.14A to be at nil or in a positive sum, that the A.O. is obliged, nay, duty bound, under law to verify the correctness of the assessee's said claim. The decisions in the case of Maxopp Investment Ltd. (supra) & Godrej & Boyce (supra), clarifying on this aspect of the matter, and on which there is no, nor could be, any quarrel or difference, are premised on the assumption of the assessee making a proper claim u/s. 14A, i.e., as envisaged per the said section, implying being supported by facts and figures, and not a bald claim, without reference to its accounts and the expenditure incurred and claimed, so that it is incapable of being verified.
6.6 The only basis of the assessee's claim in the instant case, i.e., at 10% of the dividend income, is that the same found acceptance by the Revenue for A.Y. 2007-08. The claim, notwithstanding its acceptance for that year and, in fact, even for the earlier years, is fundamentally flawed. Section 14A is qua disallowance of expenditure, and which is per se independent of income. There is, therefore, no basis to say, and which is said de hors the expenditure incurred, that the expenditure claimed for the relevant year in relation to the income that does not form part of the total income, is at 90% of such income for that year. The expenditure is incurred for the purpose of earning income, but by itself does not guarantee income, much less generate it in a pre-defined ratio (as at 10/9 as claimed in the instant case). As such, except in situations where income arises contractually at a specified percentage of the costs, or specified costs, the dynamics, imperatives and determinants of income are different. The expenses only measure the cost in financial terms of the inputs made for the purpose of generating output or revenue. For example, goods are produced, incurring all the relevant costs, which however are found defective or not meeting the specified quality standards, so that the same (goods) have to be discarded/scrapped. The expenditure stands incurred, and is allowable, even as no income is generated. The funds are borrowed to buy shares and, accordingly, interest expenditure is incurred. But could one say as to how much income, whether on sale of shares subsequently or by way of dividend income thereon, would arise? Pre-determining or limiting the expenditure with reference to income, if any, finally earned, is misconceived and notional. This aspect stands explained at length by the Special Bench of the tribunal in the case of Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (Del) (SB). And to think that it is this inherently erroneous and flawed claim, without any basis in law or fact, that the assessee seeks the A.O.'s verification on, impugning his dissatisfaction on the ground of not being explicit or based on cogent reasons! Not only that, it, on the same being pointed out by the first appellate authority, rather than answering those objections on merits, questions the legality thereof on the ground of competence. So much for legal ingenuity. We can understand the assessee having made out a case, i.e., on a factual basis, before the ld. CIT(A), and which stands met by him rather than requiring the A.O. to examine the same first. However, in the absence of any factual basis to the assessee's claim, which position continues before us, the assessee's claim would not in fact even qualify to be termed as one, much less one which is to be subject to the procedure as laid down u/s.14A(2). That the same stood accepted for another year, even by the tribunal, would not detract from the merits of the case for the current year. Put differently, it is only the action for those years, i.e., if at all, that is not consistent with the law, so that no benefit there-from could be derived by the assessee. As explained in Godrej & Boyce (supra), failure to consider the applicability of section 14A in its proper perspective would not bar the authorities from so considering the same for any other, later year. Also, the prescription of a method (per rule 8D - which is effective from the current year), to be uniformly applied, removing it from the realm of subjective satisfaction and discretion of the assessing authority, except of-course where the assessee makes out a case with reference to its accounts, i.e., on facts, informing an objective basis, in which case it would prevail, i.e., if correct, effectively gives a firm and definite course to be followed, thereby changing the discourse by introducing the concept of statutory disallowance. No doubt it stands explained that section 14A represents the first serious attempt by the Parliament to address the issue of apportionment of expenses between taxable and non-taxable incomes arising from a composite business. And, further, that the theory of apportionment stands widened by the introduction of section 14A. The same, subject to the caveat provided therein, would apply. The stated objection has been found by us as not obtaining for the current year. The decision in the case of Maxopp Investment Ltd. (supra) as well as in the case of Godrej & Boyce (supra), explains the position of the law, on which, as aforesaid, there is no dispute. The same posits on the assessee's claim being based on facts. The order of the tribunal in the case of J. K. Investors (Bombay) Ltd. (supra) is again without reference to and de hors the facts of that case, and solely on the basis of the legal position, and on which there is no quarrel. In the absence of any reference to facts, the only inference would be of the legal validity of the assessee's claim u/s.14A, which we have found as not so in the instant case, as also by the ld. CIT(A).
6.7 So however, a mere browse of the assessee's balance-sheet for the relevant year- end (PB pgs.4-16), reveals term loans (from banks) at Rs.2864.87 lacs and working capital advances (from banks) at Rs.1401.12 lacs. The corresponding year-end balances of fixed assets (net of depreciation) and net current assets are at Rs.5237.52 lacs and Rs.3328.29 lacs respectively, signifying complete absorption of the borrowed funds for the specified purposes, i.e., for which they stand contractually availed. The assessee, therefore, in our view, has a strong prima facie case of entire bank borrowings being applied for the respective purposes, so that no part thereof could be said to have been invested in relevant securities yielding tax-free income. If so, no part of the interest expenditure thereon could be attributed to the said investments on the assumption of the same comprising the general pool of funds. The matter, accordingly, is to be restored to the file of the A.O., who shall confirm the utilization of the borrowed funds for the specified purposes for the entire year, returning a finding in the matter. Where so, the proportionate formula would apply by excluding the corresponding assets. As such, if an asset of Rs.100/- is financed by bank borrowings to the extent of Rs.75/-, assets to that extent (Rs.100/-) would stand excluded in computing the proportionate formula under rule 8D; the financing of the said asset having been established.
7. In our clear view, therefore, the initial onus to state its case qua the claimed disallowance u/s.14A is on the assessee, which is to be made with reference to its accounts and/or other records, with the A.O. obliged to allow the assessee an opportunity to prove the same. Then the A.O. is to examine the same with a view to satisfy himself as to its correctness, stating the reasons for his objective satisfaction, or not so, as the case may be, and proceed accordingly. In the instant case, the said initial onus having been clearly not discharged by the assessee, which finding has been endorsed by us, the disallowance cannot be impugned for want of non-compliance of the procedure laid down u/s.14A(2). Again, however, as we observe, none of the parties or their representatives have even as much as cared to look at the facts, which prima facie reflect an apparent case of bank borrowings having been availed for and utilized for specified purposes, so that the interest thereon could not be subject to apportionment on the basis of general pool of funds hypothesis, which would otherwise prevail. We can only express our anguish at this clear disregard for facts, which are of prime relevance in deciding any case; on the contrary, raising a host of irrelevant legal issues before us. The matter must, therefore, travel back to the file of the A.O. to allow the assessee an opportunity to state its case in the matter, who shall decide the same in accordance with the law, issuing definite findings of fact. The relevant grounds are decided accordingly.
8. The only other issue agitated per the assessee's appeal raised per its grounds 4 & 5, is in respect of non-allowance of the claim for the balance amount of TDS, that the assessee claims at Rs.8,98,517/-. During the hearing, it was explained by the assessee that the non-credit in its respect had arisen as the assessee was unable to furnish the relevant TDS certificates, and which position obtained even before the first appellate authority, resulting in his dismissal of the assessee's claim. The assessee is now in a position to furnish the same, an opportunity for which was prayed for. The ld. DR did not raise any specific objection to the assessee's request. The claim for TDS is to be firstly substantiated with the necessary evidence and, secondly, is to be allowed in respect of the income which stands brought to tax for the relevant year (section 199). The matter is, accordingly, remitted back to the file of the A.O. for necessary examination and adjudication in accordance with law. We decide accordingly.
I.T.A. No.951/Mum/2012 (By the Revenue)
9. With regard to the Revenue's appeal, the penalty stands levied only in respect of the disallowance effected u/s.14A r/w r. 8D.
10. We have heard the parties, and perused the material on record. The facts and circumstances stand delineating in sufficient detail while discussing the assessee's appeal per paras 6.4 to 6.7 of our order in respect of the assessee's appeal (in ITA No. 3123/Mum/2011). We are unable to comprehend the Revenue's case insofar as the levy of penalty u/s. 271(1)(c) is concerned. The assessee, per its return, made an estimated disallowance at 10% of the dividend income received for the year, as accepted in the past, i.e., the two immediately preceding years. In fact, for the years prior thereto, a lower percentage by half, i.e., @ 5%, was found acceptable, with the matter having travelled upto the tribunal. The issue arising is whether the rule of apportionment as prescribed would apply for this year or could the assessee claim a different amount. The assessee though unable to substantiate its claim was yet found in quantum proceedings to have a prima facie case on the basis of its accounts, i.e., the annual accounts, forming part of its return of income. The matter stands, accordingly, remitted back to the file of the A.O. In this view of the matter, so that there was a suo motu disallowance u/s.14A as found acceptable for the preceding years, coupled with complete disclosure of facts, it would take the case away from the ambit of levy of penalty for concealment and/or furnishing inaccurate particulars of income. The decision in the case of CIT vs. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158 (SC) would directly apply in the facts and circumstances of the case. We decide accordingly.
11. In the result, the assessee's appeal is partly allowed for statistical purposes and the Revenue's appeal is dismissed.
The order pronounced in the open court on August 14, 2013.