H. T. Media Limited vs. Pr CIT (Delhi High Court)
Question of law: "Applicability of sec 14 A defining what is proper recording of satisfaction for AO before proceeding to calculate dis allowance as per rule 8D and also relation between borrowed funds and exempt income must be analyse first"
Important discussions/ phrases of the judgement for easy reference:
1) It was noted that “it clearly emerges that the stipulation of the provision is to compute the amount of expenditure which is not allowable under Section 14A of the Act as is relatable to the exempt income and not in considering all the expenses one by one for ascertaining if either of them have resulted into exempt income and thereafter considering such amount as disallowable under Section 14A.” The AO referred to the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. CIT [2010] 328 ITR 81 (Bom)."
2) It was further observed that making of investment, maintaining or continuing investment, and time of exit from investment are well informed and well coordinated management decisions involving not only inputs from various sources but also acumen of senior management functionaries. Therefore, cost is inbuilt into even the so called ‘passive’ investments. There are incidental expenses of collection, telephone, follow-up, research etc. Therefore, expenses in relation to earning of income are embedded in direct expenses. The AO, accordingly, held that the Assessee had incurred expenses to manage its investments and had failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income"
3) The CIT (A) held that the AO was justified in determining the administrative cost at 0.5% of the average value of the investments,
4) The ITAT held that in view of the decision of this Court in CIT v. Taikisha Engineering India Limited (2015) 370 ITR 338 (Del), the disallowance on account of interest could not be deleted simply on the ground that the Assessee’s own capital and interest free funds were more than the funds invested in securities yielding exempt income,
5) As regards the administrative expenses, again it was held that once Rule 8D had come into force the disallowance was required to be computed with reference to mandate of Rule 8D (iii). The CIT (A) had sustained the disallowance under clause (iii) of Rule 8D (2) of the Rules at 0.5% of the average of the value of investment, which amount was obviously much less than the actual expenditure incurred and claimed as deduction by the Assessee. The said disallowance could not be further reduced “to a lower level on an ad hocism,
6) An important case was also referred "In light of the law explained in CIT v. Holcim India Pvt. Ltd. (2014) 90 CCH 681 (Del), the disallowance under Section 14A could not exceed the amount of exempt income. Accordingly the ITAT directed the AO to take the ratio of the said decision into consideration while computing finally disallowable amount under Section 14A of the Act".
7) A case of Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT which held that in case no disallowance was made in earlier years on the ground that no borrowed funds had been utilized for the purpose of earning tax free income, no disallowance can be made in later year also, following the principle of consistency. It was further held that, irrespective of the fact that Rule 8D is retrospective or not, disallowance was to be determined either on best judgment determination, as earlier prevailing, or as per Rule 8D",
8) The history of Section 14A and Rule 8D showed that they were applied to apportion expenditure for earning exempt and non-exempt incomes when the Assessee carried a composite and indivisible business. Therefore, Rule 8D, being a general rule, could not be expected to produce an accurate amount in every case. Some variance was inevitable. In any event, hardship and inequity are no grounds for interference by this Court in matters of taxation,
9) The intention of the section 14A was discussed as "It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income-tax Act 1961, that no deduction shall be made in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. The proposed amendment will take effect retrospectively from April 1, 1962, and will accordingly, apply in relation to the assessment year 1962-63 and subsequent assessment years."
10) A very important point was discussed by the learned court "Rule 8 D (1) states more or less what Section 14 A (2) of the Act states. It requires the AO to first examine the accounts of the Assessee and then record that he is not satisfied with (a) the correctness of the Assessee's claim of expenditure or (b) the claim made by the assessee that no expenditure has been incurred. Unless this stage is crossed i.e. the stage of the AO recording that he is not satisfied with the clam of the Assessee in the manner indicated i.e. after examining the Assessee's accounts, the question of applying the formula under Rule 8D (2) does not arise. That this is a mandatory pre-requisite for applying Rule 8D (2) is fairly well-settled"
11) An important case "Principal Commissioner of Income Tax v. Bharti Overseas Pvt. Ltd. , if there is no interest expenditure "which is not directly attributable to any particular income or receipt", then "the question of applying the formula" under Rule 8D (ii) of the Rules will not arise. In other words, one of the pre-requisites for the applicability of the formula Rule 8 D (2) (ii) of the Rules for determining the extent of disallowance of interest, is that there must some interest expense which is not attributable to any particular income or receipt"
For full text of the judgement please refer http://itatonline.org/archives/h-t-media-limited-vs-pr-cit-delhi-high-court-s-14a-rule-8d-entire-law-explained-on-what-constitutes-proper-recording-of-satisfaction-by-the-ao-scope-of-disallowance-of-interest-expenses-under-rule/ht-media-14a-rule-8d/
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