Income Tax - Sections 14A & 143(3)

Keywords: share capital - reserve & surplus - disallowance of interest - stock in trade - suo moto disallowance & investment.

Whether in case the AO has not furnished any reasons for rejecting the suo motu disallowance computed by assessee, before invoking the formula contained in Rule 8D(2)(iii), he is permitted to make disallowances u/s 14A - NO: ITAT

The assessee is a company incorporated under the provisions of Companies Act, 1956 and is, inter-alia, engaged in the business of share and stock broking. During the year under consideration, assessee had earned dividend income of Rs.15,68,512/-, which was claimed as exempt. In the return of income, assessee had made a suo motu disallowance of Rs.50,000/- on account of expenses incurred in relation to earning of such exempt income. The Assessing Officer, however, applied the formula contained in Rule 8D of the Income Tax Rules, 1962 to compute the disallowance u/s 14A of the Act. The Assessing Officer computed disallowance under Rule 8D(2)(ii) – Rs.28,42,790/- out of interest expenditure and under Rule 8D(2)(iii) – Rs.3,75,435/- out of other expenses thereby totalling to Rs.32,18,225/-. After reducing the suo motu disallowance of Rs.50,000/- made by the assessee, balance of Rs.31,68,255/- was added to the returned income. Such disallowance has also been sustained by the CIT(A).

Having heard the matter, the Tribunal held that,

++ invoking of Rule 8D(2)(ii) to disallow the interest expenditure u/s 14A is untenable following the ratio of the Bombay HC in the case of HDFC Bank Ltd. In the context of application of Rule 8D(2)(iii) to compute the disallowance out of expenses of Rs. 3,75,435/-, AR submitted that in a somewhat similar situation in the case of Devkant Synthetics (India) Pvt. Ltd. vide ITA No. 2663, 2664 and 2655/Mum/2015 dated 28.10.2015 read with Corrigendum dated 16.11.2015, the expenses were disallowed @ 5% of such exempt income. It is also pointed out that so far as the shares held as stock-in-trade are concerned, the same are excludible for the purpose of disallowance u/s 14A. The said proposition asserted before us has been affirmed by our coordinate Bench in the case of Devkant Synthetics (India) Pvt. Ltd. In coming to the said decision, the Tribunal referring to the judgment of Karnataka HC in the case of CCI Ltd. vs. JCIT 2012-TIOL-251-HC-KAR-IT, as also the judgment of Bombay HC in the case of CIT vs. India Advantage Securities Ltd. 2015-TIOL-1202-HC-MUM-IT;

++ in our considered opinion, AO has not furnished any reasons for rejecting the suo motu disallowance of Rs.50,000/- computed by assessee before invoking the formula contained in Rule 8D(2)(iii) to compute the disallowance. Notably, the phraseology of Sec. 14A(2) itself shows that the computation of disallowance prescribed in Rule 8D of the Rules can be resorted to if the Assessing Officer is not satisfied with the correctness of the claim made by assessee. In the present case, there is no satisfaction arrived at by AO. Be that as it may, following the ratio of our coordinate Bench in the case of Devkant Synthetics (India) Pvt. Ltd., the disallowance of expenses u/s 14A is restricted to 5% of the exempt income. AO is directed to retain the addition to the extent of 5% of exempt income after allowing credit for the suo motu disallowance of Rs.50,000/- already made by the assessee.

Assessee's appeal partly allowed

2016-TIOL-2075-ITAT-DEL

Income Tax: ex-parte assessment - non prosecution - adjournment of order - reasonable opportunity of being heard - 'audi alteram partem' & AIR information

Whether in case an assessee was not able to file the documents asked for during the hearing proceedings, is it possible for CIT(A) to decide such matter without giving an opportunity of being heard to the assessee - NO: ITAT

The assessee is an individual. The main grievance of the assessee in this appeal relates to the ex-parte order passed by CIT(A) without affording reasonable opportunity of being to the assessee. AO received AIR information that the assessee had made cash deposits of Rs.12,00,000/- in saving bank account. In response to the query of the AO, the assessee filed copy of Income Tax Return showing income of Rs.1,58,115/-. The AO however framed the assessment ex-parte by making and addition of Rs.12,00,000/-. On appeal, CIT(A) also passed the ex-parte order by observing that the assessee had sought adjournments whenever the case was fixed for hearing. CIT(A) dismissed the appeal of the assessee in limine for non-prosecution and sustained the addition made by the AO.

Having heard the matter, the Tribunal held that,

++ it is noticed that CIT(A) dismissed the appeal of the assessee ex-parte for non-prosecution. He had not discussed the issue raised by the assessee on merit. It is also noticed that CIT(A) simply stated that the case was fixed for hearing on 12.01.2016 and on the said date the assessee filed adjournment application by stating that necessary documents were under preparation. The said application was rejected by CIT(A) without giving any cogent reason and the appeal was dismissed for non prosecution. It is well settled that nobody should be condemned unheard as per maxim "audi alteram partem". In the present case, the CIT(A) did not discuss the issues raised by the assessee on merit. I, therefore, deem it appropriate to set aside this case back to the file of the CIT(A) to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.

Case remanded

Income Tax - Sections 143(3), 269T, 271(1)(c), 271E & 273B

Keywords: levy of penalty - family arrangement - repayment of loan - advance - binding precedent & recording of reasons

Whether initiation of penalty proceedings u/s 271(1)(c) without being preceded by record of reasons or satisfaction u/s 271E, are bad in law and any addition based on such proceedings is liable to be deleted - YES: ITAT

The assessee is an individual. He is the proprietor of M/s. Chakraborty Enterprises, who is the husband of the assessee and Confidential Assistant of a Central Minister at the relevant period. In discharge of his duties he was traveling all over India and for running his business smoothly he used to keep some money with his wife to give it to the concern as and when need arises. According to the assessee, she was giving the amounts to M/s. Chakraborty Enterprises whenever they require. According to her, it is purely a family arrangement and has been a practice quite for a long time. However, while processing the return of income of the assessee for AY 2009-10 it was noticed that during the relevant previous year a sum of Rs.6,79,000/- was paid by the assessee to Chakraborty Enterprises by cash and i.e. in violation of provisions of section 269T. As such, u/s. 271E the JCIT levied penalty at 100% i.e. Rs.6,79,000/- by his order dated 19.02.2013. Aggrieved by such an order, assessee preferred appeal before the CIT(A), who dismissed the appeal of assessee confirming the penalty.

Having heard the matter, the Tribunal held that,

++ there is no dispute that the assessee is the wife of one Shri Tarun Chakraborty, who is the proprietor of M/s. Chakraborty Enterprises. There is also no dispute that the assessee gave the amounts in cash to M/s Chakraborty Enterprises only. However, since it was shown by the assessee in Balance Sheet as loan and advance in the liability side, the JCIT concluded that it is only repayment of loan in the form of cash attracting the penal provisions u/s. 269T r.w.s. 271E. Both the authorities below rejected the plea of the assessee that it is only a family arrangement and not otherwise. When the plea of family arrangement is taken, the transactions were between the wife and husband, and more particularly in the light of the fact that these payments were shown in the accounts of the assessee, it does not appear to be a matter to brush aside the plea of the assessee that the Accountant committed a mistake in treating the payments as repayment of loans. Should there be any mala fide intention, perhaps the assessee would not have shown these figures in the accounts itself. It was open for the AO and for that matter the JCIT to verify the contention of the assessee that a similar practice has been in vogue quite for sometime in the previous years. Assessee and her husband are independent assessee and dealing with the money of husband for the purpose of business in his absence is not an uncommon thing. Further, when it was pleaded before the authorities below it was open for them to verify the truth or otherwise of this fact with reference to the earlier year's assessments. Further, the revenue does not plead any tax effect in this matter except the penalty;

++ we are therefore, inclined to believe the contention of the assessee that casualness of the acts between the wife and husband in dealing with the money of the husband for his business purposes in his absence constitutes a reasonable cause u/s. 273B. Even otherwise the assessment order reads that penalty proceedings u/s. 271(1)(c) of the Act were initiated but there is no whisper as to the satisfaction to initiate the proceedings u/s. 271E. In view of the binding precedent of the judgment of SC in the case of Jai Laxmi Rice Mills Ambala City, supra followed by a coordinate bench of this Tribunal in the case of Vinod Kr. Agarwal, supra by respectfully following the same, we reach a conclusion that the penalty proceedings without being preceded by record of reasons or satisfaction are bad in law and any addition based on such proceedings is liable to be deleted. Therefore, either in law or on fact the orders of the authorities below cannot be sustained, as such, while answering the grounds in favour of the assessee we direct the deletion of the penalty levied u/s. 271E.

Assessee's appeal allowed