Commissioner of Income Tax vs RKBK Fiscal Services (P) Ltd.

Girish Chandra Gupta, J.—This appeal preferred by the Revenue is directed against a judgment and order dt. 28th Feb., 2007 by which the order of the CIT dt. 4th Sept., 2006 passed under s. 263 of the IT 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 AO. The CIT in exercise of power under s. 263 directed the AO to pass a fresh order in accordance with law and to make appropriate disallowance under s. 14A of the IT Act. The reasons assigned by the CIT are as follows:

Under the provisions of s. 14A, the AO 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 AO has failed to take recourse to the provisions of s. 14A. On this basis alone the assessment order is erroneous in as much 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 under s. 14A of the IT Act.

The assessee''s contention that this is a case where the estimate of the AO is being substituted by the estimate of the CIT is not correct. As mentioned above, this is actually a case in which the AO 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.

The learned Tribunal reversed the order of the CIT 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 s. 14A of the IT 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 s. 263 of the IT 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 s. 263 of the IT 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.

Therefore, two-fold questions arise for consideration: (A) whether the provisions of s. 14A of the IT 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?

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 w.e.f. 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 r. 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 CIT is merely on the basis of a change of opinion and, therefore, this Court should refrain from interfering with the order under challenge.

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

We are of the opinion that the AO in its order dt. 28th Jan., 2005 did not make provision for disallowance of expenditure in terms of s. 14A of the IT 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.

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.

The learned Tribunal did not realize the facts and circumstances correctly. The requirement of the provision of s. 14A of the IT Act, 1961 has not been satisfied. The interference by the CIT was based on facts and not any change of opinion.

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

The order passed by the Tribunal is set aside and the order of the CIT is restored. The appeal is thus allowed.