Calcutta H.C : Where Assessing Officer did not consider the requirement of Section 14A . action of CIT u/s 263 is correct

High Court Of Calcutta

CIT-III, Kolkata VS. RKBK Fiscal Services (P.) Ltd.

Section : 263, 14A

Girish Chandra Gupta And Tarun Kumar Das, JJ.

IT Appeal No. 389 Of 2007

February 19, 2013

JUDGMENT

Girish Chandra Gupta, J. – This appeal preferred by the Revenue is directed against a judgment and order dated 28th February, 2007 by which the order of the C.I.T. dated 4th September, 2006 passed under Section 263 of the Income Tax Act of 1961 was reversed. The undisputed facts and circumstances of the case are as follows:-

The assessee earned a sum of Rs.2,85,08,419/- on account of dividend which is not taxable. The assessee earned interest amounting to a sum of Rs.2,68,75,491/-. The assessee paid interest amounting to a sum of Rs.4,49,02,775/-. No expenditure with respect to the aforesaid non-taxable income was shown. Out of the interest paid by the assessee, a sum of Rs.1,33,51,132/- was shown as interest paid towards the non-taxable income. On the aforesaid basis, a total loss was computed at a sum of Rs.85,93,770/- which was accepted by the Assessment Officer. The C.I.T. in exercise of power under Section 263 directed the Assessment Officer to pass a fresh order in accordance with law and to make appropriate disallowance under Section 14A of the Income Tax Act. The reasons assigned by the C.I.T. are as follows:-

“Under the provisions of Section 14A, the Assessing Officer has to disallow the expenditure in relation to the income which does not fall a part of the total income. On the other hand, it is clear from the assessment order that the Assessing Officer has failed to take recourse to the provisions of Section 14A. On this basis alone the assessment order is erroneous inasmuch as it is prejudicial to the interest of the Revenue.

The assessee company contended that its own funds as well as borrowed funds have been deployed for various activities including that of investment in shares. However, the assessee has not given one to one co-relations between the funds available and the funds deployed. The assessee alone is expected to be in the knowledge as to which fund was deployed for what purpose. No separate accounts are maintained for the purposes of taxable income and exempt income. In such a situation how the Revenue will know whether the payment of gross interest amounting to Rs.4,49,02,775/- is for the purpose of earning taxable income or the exempt income.

It is well-settled law that for claiming a certain expenditure as allowable, it is the responsibility of the assessee to submit details. In other words the burden of proof to claim interest expenditure of Rs. 4,49,02,775/- is on the assessee. Since the assessee has not given one to one co-relation between the funds available and the funds deployed, it has not discharged its onus. Therefore, the entire gross interest paid of Rs.4,49,02,775/- should have been taken for the purpose of disallowance U/s. 14A of the I.T. Act.

The assessee’s contention that this is a case where the estimate of the Assessing Officer is being substituted by the estimate of the CIT is not correct. As mentioned above, this is actually a case in which the Assessing Officer failed to appreciate the facts of the case. Therefore, the assessment order passed by him is clearly erroneous and prejudicial to the interest of the Revenue”.

2. The learned Tribunal reversed the order of the C.I.T. in an appeal preferred by the assessee on the basis of the following reasons:-

“In this case, the CIT has observed that the AO has not dealt with the issue of disallowance of interest under Section 14A of the I.T. Act. However, the above observation of CIT is not based upon appreciation of the facts involved in this case as the assessee has itself disallowed a sum of Rs.1.33 crores in its computation of income filed before the department and the AO has completed the assessment, after taking into consideration the above facts and submissions of the assessee.

We have also observed that CIT, while invoking the proceedings under Section 263 of the I.T. Act, has observed that the entire interest expenditure was supposed to be disallowed. However, such observation of CIT is not supported by any material evidence or observation on record whereas the AO has completed the assessment, after taking into consideration the relevant details and evidences and explanation filed by the assessee and such action of the AO has not been held erroneous and prejudicial to the interest of revenue by CIT with the help of any concrete material evidence or observation on record. Since the action of CIT, while initiating proceedings under Section 261 of the I.T. Act, is based on mere change of opinion, such action of CIT is devoid of any merit. We, therefore, quash such order of the CIT and as such accept the ground of the assessee.”

3. Therefore two-fold questions arise for consideration (A) whether the provisions of Section 14A of the I.T. Act were followed by the assessee by disallowing a sum of Rs.1.33 crores in its computation of income? (B) Whether the order passed by the CIT was based on a mere change of opinion?

4. Mr. Murarka, learned senior Counsel appearing on behalf of the assessee submitted that the method of determining the amount of expenditure in relation to income not includible in the total income introduced with effect from 24th March, 2008 was not there in the rules at the time when the order under challenge was passed by the Tribunal. Nonetheless, the method indicated in Rule 8D, introduced on 24th March, 2008, has been followed in this case. It is not, therefore, possible to say that the Revenue suffered any prejudice. The order of remand passed by the C.I.T. is merely on the basis of a change of opinion and, therefore, this Court should refrain from interfering with the order under challenge.

6. Md. Nizamuddin, learned advocate appearing on behalf of the appellant/revenue disputed this submission.

7. We are of the opinion that the Assessment Officer in its order dated 28th January, 2005 did not make provision for disallowance of expenditure in terms of Section 14A of the I.T. Act. The assessee has paid interest of Rs.4,49,02,775/- out of which only a sum of Rs.1,33,51,132/- was shown to be relatable to the non-taxable income. The assessee did not maintain any separate accounts for the purpose of the exempt income. The assessee did not give one to one co-relation between the funds available and the funds deployed.

8. It was, therefore, not possible to follow with any amount of certainty as to the part or portion of the sum of Rs.4,49,02,775/- paid on account of interest relatable to the exempt income. The assessee has admittedly earned interest amounting to a sum of Rs.2,68,75,491/-. The said sum could not have been set off against the sum of Rs.4,49,02,775/- because the sum of Rs.2,68,75,491/- earned on account of interest is clearly taxable. The interest paid by the assessee amounting to Rs.4,49,02,775/-is both on account of taxable income and the exempt income. It was for the assessee to furnish the actual amount of interest paid for the purpose of earning the dividend income which the assessee did not do. The assessee, as such, did not discharge its burden and, therefore, the assessee could not have claimed that only a sum of Rs. 1,33,51,132/- was relatable to interest paid for the purpose of earning the exempt income. There was, as such, reason enough to hold that the assessment was erroneous and was also prejudicial to the interest of the Revenue.

9. The learned Tribunal did not realize the facts and circumstances correctly. The requirement of the provision of Section 14A of the I. T. Act, 1961 has not been satisfied. The interference by the C.I.T. was based on facts and not any change of opinion.

10. For the aforesaid reasons, both the questions framed above are answered in the negative.

11. The order passed by the Tribunal is set aside and the order of the CIT is restored.

12. The appeal is thus allowed.

[Citation : 358 ITR 228]