T.R.Meena, Member (A) -
(1.) THE ITA No. 278/JP/2009 filed by the assessee as well as cross appeal No. 436/JP/2009 by the Revenue are against the order dated 24/03/2009 of the learned C.I.T. (A) -II, Jaipur for the A.Y. 2004 -05. The grounds of assessee's appeal as well as the Revenue are as under: -
Grounds of ITA No. 278/JP/2009
"1(i) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in upholding the applicability of the provision of section 14A and thereby upholding the disallowance of proportionate interest and estimated administrative expenditure of the banking business of the appellant bank.
(ii) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in quantifying the disallowance u/s. 14A at a sum of Rs. 11,21,00,000/ -.
(iii) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has further erred in calculating the amount of disallowance u/s. 14A in terms of provisions of Rule 8D. He has also erred in applying these provisions of Rule 8D for the year under consideration as the same have been introduced on 24/03/2008.
(2.) UNDER the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of Rs. 6,98,07,032/ - made by the Assessing Officer by disallowing the depreciation on investment in respect of securities shifted from 'Held for Trading' category to 'Available for Sale' category. Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in confirming the addition of Rs. 5,86,050/ - by reducing the appellant's claim of depreciation u/s. 32.
4(i) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in confirming the disallowance of prior period expenses of Rs. 34,23,944/ -. He has further erred in not directing the A.O. to allow this claim in the preceding respective assessment years.
(ii) Under the facts and circumstances of the case, learned Commissioner of Income Tax (Appeals) has erred in not a lowing the relief in respect of disallowance of alleged prior period rent and other miscellaneous expense of Rs. 28,85,358/ - and sending it back to A.O. for verification."
Ground of ITA No. 436/JP/2009
"On the facts and in the circumstances of the case and in law the learned CIT(Appeals) has erred in -deleting the addition of Rs. 4,56,60,998/ - made by the A.O. taking the interest income on Government and other securities on accrual basis instead of due basis as shown by the assessee."
2. Ground No. 1 of the assessee's appeal is against confirming the disallowance U/s. 14A of the Income Tax Act, 1961 (hereinafter referred as the Act) read with Rule 80D of the Income Tax Rules (in short the Rules) of Rs. 11,21,00,000/ -. The Assessing Officer observed that the assessee is an associate bank of State Bank of India. It is engaged in all banking operations and trading in government and other securities. The assessee derives income from interest, dividend, trading and securities etc. It was found during the assessment proceedings that the assessee's income includes substantial income, which is not charged to tax as under: -
The learned Assessing Officer gave reasonable opportunity of being heard on dividend income of Rs. 17,11,94,151/ -, which was availed by the assessee vide letter dated 26th December, 2004. After considering the assessee's reply, the Assessing Officer held that Section 14A of the Act in case of assessee is applicable. There is no dispute that the assessee bank had earned dividend income from mutual fund, interest income from tax free bonds, income from infrastructure lending and income by way of dividends. The corresponding income is exempt U/s. 10(33), 10(23G) and Section 10(34) of Chapter -III of the Act, which provides details of various exempted income, and those income, which had been form part of total income. When the assessee has taxable as well as non -taxable income, the expenses is to be apportioned on the basis of total receipts under both the heads and disallowance U/s. 14A of the Act is required to be made by the Assessing Officer. The assessee had claimed that its business is indivisible but the assessee runs various divisions and different branches and the expenditures usually can be worked out by the assessee. The appellant arguments of interest free fund available with him were not found tenable to the Assessing Officer that there is no direct nexus has been established by the appellant between both that tax free fund were utilized in investment in shares. The Assessing Officer held that there is no doubt about the fact that part of the interest can certainly be attributed to the tax free income. The total interest earned by the assessee is Rs. 1573,57,13,330/ - as against total interest expenditure incurred by the assessee at Rs. 857,13,41,288, thus, he calculated the ratio of total interest expenditure over total interest earned i.e. Rs..5447. As regard the administrative expenses, he estimated 5% of tax free interest receipt as administrative expenses. Thus, he made addition of Rs. 10,18,09,800/ - U/s. 14A of the Act.
3. Being aggrieved by the order of the learned Assessing Officer, the assessee carried the matter before the learned CIT(A). The learned CIT(A) enhanced the disallowance U/s. 14A of the Act by observing as under: -
"I have considered facts of the case and arguments taken by Sh. Jhanwar and Sh. Parwal quite carefully. How the contention of AR that no expenditure is relatable to such exempt income to be disallowed U/s. 14A of I.T. Act is not acceptable has been discussed in detail by CIT(A) -II, jaipur in para 3.5 and para 3.6 of the appellate order dated 30/3/2005 for A.T. 2003 -04 and since facts of the case and arguments taken by the AR are more or less similar therefore, for the similar reasons as stated in the aforesaid appellate order of the appellant bank for A.Y. 2003 -04 for this year also I hold that expenditures are relatable to such exempt income which are to be disallowed U/s. 14A of I.T. Act. Now the question arises that what should be the quantum of disallowance and whether such disallowance made by A.O. is justified. Earlier, there was no mechanism to compute such relatable expenditure with reference to exempt income and because of this the Assessing Officer and CIT(A) has adopted different formulas to work out such expenditures to be disallowed U/s. 14A of the I.T. Act. Now Rule 8D is introduced which prescribes the mechanism and method to work out relatable expenditures with reference to exempt income to be disallowed U/s. 14A of I.T. Act. When the mechanism is prescribed in the income tax rule then obviously in my considered view it has to be followed in preference to any formula adopted by Assessing Officer and by earlier CIT(A) in their own wisdom. As far as argument of Sh. Parwal is concerned that committee of dispute vide their meeting dated 16/10/2008 has denied the permission to the income tax department to file the appeal before ITAT for A.Y. 2001 -02 to 2003 -04 it has to be appreciated that the insertion of Rule 8D on this issue was not before COD while taking said decision and keeping in view the fact that now income tax rules prescribes such mechanism to compute relatable expenditure with reference to exempt income to be disallowed U/s. 14A of I.T. Act then only as per this rule the disallowance has to be worked out. With this discussion and by rejecting the arguments taken by Sh. Parwal which were taken in response to opportunity given I hereby direct the Assessing Officer to adopt such disallowance at Rs. 11,21,00,000/ - as against such disallowance adopted by Assessing Officer in the assessment order at Rs. 10,18,09,800/ -."
Now the assessee is in appeal before us.
(3.) THE learned A.R. for the assessee has submitted that the learned CIT(A) made disallowance by applying Rule 8D of the Rules. Rule 8D is applicable prospectively from A.Y. 2008 -09 as held by the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT : 328 ITR 81, therefore, the disallowance made by the learned CIT(A) by applying Rule 8D of the Rules is incorrect. He further relied upon the following case laws:
(i) CIT Vs. Walfort Share and Stock Brokers (P) Ltd. : 326 ITR 1.
(ii) Maxopp Investments Ltd. & Ors. Vs. CIT : 347 ITR 272 (Del.).
(iii) DCIT Vs. Maharashtra Seamless Ltd., 52 DTR 005 (Del.)(Trib.).
(iv) CIT Vs. Metalman Auto (P) Ltd. : 199 Taxman 149 (P & H) (Mag)
(v) Bunge Agribusiness (India) (P) Ltd. Vs. DCIT : 132 ITD 549 (Mum)
(vi) CIT Vs. Hero Cycles Ltd., 31 DTR 301 (P & H).
(vii) ACIT Vs. Mohan Exports (P) Ltd., 138 ITD 108 (Del.)
(viii) ACIT Vs. SIL Investment : 73 DTR (Del.)(Trib.) 233.
He has further drawn our attention on assessee's own case for A.Y. 2001 -02 to 2003 -04 and argued that by following the Hon'ble ITAT order in assessee's own case, no disallowance of interest pertaining to the investment, which has related both the exempted as well as taxable income can be made under Rule 8D has been allowed. He has also worked out total disallowance as per Rule 8D of the Rules at Rs. 7.06 crores. Therefore, he requested to set aside the order of the learned CIT(A) to recomputed the disallowance U/s. 14A of the Act.;