M/S Fingrowth Cooperative Bank Limited, Parijatak, New Colonypanch Batti, M.i. Road, Jaipur v. Assistant Commissioner Of Income Tax, Circle 1, Ncr Buildingstatue Circle, Jaipur

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 9/2020 M/s Fingrowth Cooperative Bank Limited, Parijatak, New ColonyPanch Batti, M.i. Road, Jaipur Through Its Managing Director ShriA.k. Shah ----Appellant Versus Assistant Commissioner Of Income Tax, Circle 1, Ncr BuildingStatue Circle, Jaipur ----Respondent For Appellant(s) : Mr. Gunjan Pathak with Mr. Kanishk Singhal For Respondent(s): Mr. Anuroop Singhi with Mr. N.S. BhatiMr. N.S. Bhati HON'BLE THE CHIEF JUSTICE AUGUSTINE GEORGE MASIH HON'BLE MR. JUSTICE SAMEER JAIN Order 24/08/2023 ORAL 1.Being aggrieved and dissatisfied with the impugned orderdated 26.07.2019, passed by the learned Income Tax AppellateTribunal, Jaipur Bench, Jaipur (for short “ITAT”) in ITA No.618/JP/2019, whereby the disallowance of 0.5% of the averageinvestment was confirmed by the ITAT under Section 14A of theIncome Tax Act, 1961 (for short “IT Act ”) read with Rule 8D(2)(iii) of the Income Tax Rules, 1962 (for short “IT Rules”), thepresent appeal has been filed by the appellant-assessee underSection 260A of the IT Act. 2.The appellant-assessee is engaged in the business of bankingand the period under consideration in the present appeal is of Assessment Year 2015-2016. During the year under consideration,the appellant-assessee had filed its return of income declaring atotal income of Rs. 7,56,84,730/-. The appellant-assessee hadinvestments of Rs. 3,77,93,000/- as brought forward from theearlier years in Tax Free Bonds on which an exempt income of Rs.31,16,026/- was earned. Upon reassessment, the AssessingOfficer (for short “AO”) made disallowance of Rs. 74,55,025/-under Section 14A of the IT Act read with Rule 8D of the IT Rules,which was subsequently rectified and reduced to Rs. 18,68,136/-.Upon appeal, the Commissioner of Income Tax Appeal-I, Jaipur,vide order dated 22.03.2019, partly allowed the appeal of theassessee and set aside the additions made by the AO underSection 14A of the IT Act but the disallowance in respect ofindirect administrative expenditure equivalent to 0.5% of averageinvestment under Rule 8D(2)(iii) of the IT Rules was sustained.The ITAT further upheld the appellate order against which theappellant-assessee has preferred the present appeal. 3.Learned counsel for the appellant-assessee contends that thelearned ITAT has erred in confirming the disallowance of 0.5% ofthe average investment as disallowances under Section 14A of theIT Act on account of indirect administrative expenditures as perRule 8D(2)(iii) of the IT Rules without there being any direct orindirect nexus between the exempted income earned andexpenditures incurred thereupon. It is contended that a bareperusal of the Section 14A of the IT Act would reveal that therehas to be direct and proximate nexus/link between theexpenditure actually incurred and the earning of the exempt income, whereas the learned ITAT has confirmed the disallowancewithout appreciating that no direct expenditure has been actuallyincurred by the appellant-assessee in relation to income whichdoes not form part of the total income of the appellant-assessee.In support of his contention, learned counsel for the appellant-assessee has placed reliance on Hon’ble Supreme Court judgmentof Maxopp Investment Ltd. vs. Commissioner of Income Tax(Neutral Citation: 2018/INSC/131) reported in (2018) 301CTR 0489 (SC) wherein it was held that if an expenditureincurred has no casual connection with the exempted income,then such an expenditure would be treated as not related to theincome that is exempted from tax, and such expenditure would beallowed as business expenditure. income, whereas the learned ITAT has confirmed the disallowancewithout appreciating that no direct expenditure has been actuallyincurred by the appellant-assessee in relation to income whichdoes not form part of the total income of the appellant-assessee.In support of his contention, learned counsel for the appellant-assessee has placed reliance on Hon’ble Supreme Court judgmentof Maxopp Investment Ltd. vs. Commissioner of Income Tax(Neutral Citation: 2018/INSC/131) reported in (2018) 301CTR 0489 (SC) wherein it was held that if an expenditureincurred has no casual connection with the exempted income,then such an expenditure would be treated as not related to theincome that is exempted from tax, and such expenditure would beallowed as business expenditure. 4.Per contra, learned counsel for the respondent-revenue hassupported the impugned order and contends that no substantialquestion of law worth consideration arises in the present appeal asthe learned ITAT had duly considered and dealt with allcontentions raised by the appellant-assessee raised in the presentappeal. 5. Heard the arguments advanced by both the sides, scannedthe record of the appeal and considered the judgments cited at Bar. 6.The solitary ground raised by the appellant-assessee beforethe learned ITAT, which is the solitary ground herein, is reproduced as under: “That on the facts and in the circumstances of the caseand under law the ld. CIT(A) erred in upholding adisallowance of Rs. 1,88,965/- -u/s 14A r/W rule 8D(iii) towards 0.5% of average value of investment, incomefrom which does not or shall not form part of totalincome.” 7.Since the issue pertains to Section 14A of the IT Act and Rule 8D of the IT Rules, the same are reproduced as under: “-Income Tax Act, 1961 Section 14A Expenditureincurred in relation to income not includible in totalincome (1) Notwithstanding anything to the contrary contained inthis Act, for the purposes of computing the total incomeunder this Chapter, no deduction shall be allowed inrespect of expenditure incurred by the assessee inrelation to income which does not form part of the totalincome under this Act. (2) The Assessing Officer shall determine the amount ofexpenditure incurred in relation to such income whichdoes not form part of the total income under this Act inaccordance with such method as may be prescribed, if theAssessing Officer, having regard to the accounts of theassessee, is not satisfied with the correctness of the claimof the assessee in respect of such expenditure in relationto income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply inrelation to a case where an assessee claims that noexpenditure has been incurred by him in relation toincome which does not form part of the total incomeunder this Act: (2) The Assessing Officer shall determine the amount ofexpenditure incurred in relation to such income whichdoes not form part of the total income under this Act inaccordance with such method as may be prescribed, if theAssessing Officer, having regard to the accounts of theassessee, is not satisfied with the correctness of the claimof the assessee in respect of such expenditure in relationto income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply inrelation to a case where an assessee claims that noexpenditure has been incurred by him in relation toincome which does not form part of the total incomeunder this Act: Provided that nothing contained in this section shallempower the Assessing Officer either to reassessunder section 147 or pass an order enhancing theassessment or reducing a refund already made orotherwise increasing the liability of the assesseeunder section 154, for any assessment yearbeginning on or before the 1st day of April, 2001.Explanation.--For the removal of doubts, it ishereby clarified that notwithstanding anythingto the contrary contained in this Act, theprovisions of this section shall apply and shallbe deemed to have always applied in a casewhere the income, not forming part of thetotal income under this Act, has not accruedor arisen or has not been received during theprevious year relevant to an assessment yearempower the Assessing Officer either to reassessunder section 147 or pass an order enhancing theassessment or reducing a refund already made orotherwise increasing the liability of the assesseeunder section 154, for any assessment yearbeginning on or before the 1st day of April, 2001.Explanation.--For the removal of doubts, it ishereby clarified that notwithstanding anythingto the contrary contained in this Act, theprovisions of this section shall apply and shallbe deemed to have always applied in a casewhere the income, not forming part of thetotal income under this Act, has not accruedor arisen or has not been received during theprevious year relevant to an assessment year and the expenditure has been incurred duringthe said previous year in relation to suchincome not forming part of the total income.-Income Tax Rules, 1962 Rule 8D Method fordetermining amount of expenditure in relation to incomenot includible in total income (1) Where the Assessing Officer, having regard to theaccounts of the assessee of a previous year, is notsatisfied with- (a) the correctness of the claim of expendituremade by the assessee; or (b) the claim made by the assessee that noexpenditure has been incurred, in relation to income which does not form part of the totalincome under the Act for such previous year, he shalldetermine the amount of expenditure in relation to suchincome in accordance with the provisions of sub-rule (2).(2) The expenditure in relation to income which does notform part of the total income shall be the aggregate offollowing amounts, namely: - (i) the amount of expenditure directly relating to income which does not form part of total income;and (ii) an amount equal to one per cent of the annualaverage of the monthly averages of the openingand closing balances of the value of investment,income from which does not or shall not form partof total income: Provided that the amount referred to inclause (i) and clause (ii) shall not exceed thetotal expenditure claimed by the assessee.” 8.It is also deemed necessary to reproduce the operative part of the impugned ITAT order dated 26.07.2019, which is as under: (i) the amount of expenditure directly relating to income which does not form part of total income;and (ii) an amount equal to one per cent of the annualaverage of the monthly averages of the openingand closing balances of the value of investment,income from which does not or shall not form partof total income: Provided that the amount referred to inclause (i) and clause (ii) shall not exceed thetotal expenditure claimed by the assessee.” 8.It is also deemed necessary to reproduce the operative part of the impugned ITAT order dated 26.07.2019, which is as under: “However, the disallowance made on account of indirectadministrative expenditure as per rule 8(D)(2)(iii) ofIncome Tax Rules was sustained by the ld. CIT(A) byholding that the machinery/manpower of the assesseewas also involved in decision making regardinginvestment. We find that indirect administrativeexpenditure has to be allocated if the expenditureincurred by the assessee in managing the investmentportfolio is found from the record. There is no dispute thatthe assessee is a cooperative bank engaged in thebanking business and therefore, the assessee is requiredto maintain the Treasury Department to manage various investments to be made by the bank as per RBIguidelines and the investments in Tax Free Bonds are alsoas per requirements of the RBI guidelines andinstructions. Therefore, it cannot be said that noexpenditure was incurred by the assessee in respect ofthe investments made in the tax free bonds which yieldedtax free income to the assessee. Hence, the indirectexpenditure incurred in maintaining the TreasuryDepartment and looking after the investments ofthe bank is attributable for earning exempt incomeand consequently, the disallowance is required tobe computed as per Rule 8D(2)(iii) of the IncomeTax Rules being 0.5% of average investment. Theassessee has not disputed the correctness of the amountdisallowed under rule 8D(2)(iii) of the Income Tax Rules.Hence, we do not find any error or illegality in the orderof the ld. CIT(A) qua this issue.” 9.The learned ITAT, after having considered the rivalsubmissions, dismissed the appeal of the appellant-assessee afterobserving that: a)the indirect administrative expenses have to be allocated inthe expenditure incurred by the assessee in managing theinvestment portfolio, if found from the record; b)as the appellant-assessee is a cooperative bank, theappellant-assessee is required to maintain the TreasuryDepartment as per RBI Guidelines and is further required to makeinvestment in Tax Free Bonds as per requirements of RBI; c)the appellant-assessee did incur indirect expenditure inmaintaining the Treasury Department to look after the investmentof the bank; d)the expenditure incurred in maintaining the TreasuryDepartment and the department who was taking care of theinvestment of the bank was directly attributable for earningexempted income and therefore the disallowance was rightly madeunder Rule 8D(2)(iii) of the IT Rules. 10.An appeal from the order of the learned ITAT can only beadmitted on a substantial question of law. The law on admitting anappeal from an order of a tribunal, on substantial question of law,has been clarified by the Hon’ble Supreme Court in SteelAuthority of India Ltd. vs. Designated Authority,Directorate General of Anti-Dumping and Allied Duties and Ors. (Neutral Citation: 2017/INSC/356) reported in (2017)13 SCC 1, wherein the Apex Court has held that if the tribunal, onconsideration of the material and relevant facts, had arrived at aconclusion which is a possible conclusion, the same must beallowed to rest even if the higher Courts are inclined to takeanother view of the matter. 10.An appeal from the order of the learned ITAT can only beadmitted on a substantial question of law. The law on admitting anappeal from an order of a tribunal, on substantial question of law,has been clarified by the Hon’ble Supreme Court in SteelAuthority of India Ltd. vs. Designated Authority,Directorate General of Anti-Dumping and Allied Duties and Ors. (Neutral Citation: 2017/INSC/356) reported in (2017)13 SCC 1, wherein the Apex Court has held that if the tribunal, onconsideration of the material and relevant facts, had arrived at aconclusion which is a possible conclusion, the same must beallowed to rest even if the higher Courts are inclined to takeanother view of the matter. 11.In our considered view, the learned ITAT has passed a well-reasoned speaking order and after consideration of materialaspects, arrived at a logical conclusion. This Court is in completeagreement with the reasoning adopted by the learned ITAT. Thereis no violation of principles of natural justice and no palpable errorhas crept in the order of the learned ITAT, warranting interferenceby this Court. 12.Consequently, the present appeal is dismissed. Pendingapplication(s), if any, shall stand disposed of. (SAMEER JAIN),J(AUGUSTINE GEORGE MASIH),CJ Raghu/30