TMI Blog2013 (5) TMI 580X X X X Extracts X X X X X X X X Extracts X X X X ..... to relate to exempt income, nor gave afinding that assessee claim is not correct for any reason. Rule 8D can not be invoked directly without satisfying about the claims or otherwise. Consequently, the disallowance was not permissible. In favour of assessee. Disallowance u/s 40(a)(ia) - non deduction of TDS on payment in lieu of profession fee - Held that:- It is a case of reimbursement of amount paid to Raymond Ltd. who made payment to Mr. Dinesh Kumar, which has no income element in so far as the recipient, i.e. Raymond Ltd. is concerned. TDS provisions can only be invoked if a receipt by the recipient from the payer has an element of generation of income. If the element of income cannot be established, provisions of section 40(a)(ia) cannot be invoked. In favour of assessee. Professional fee paid to Mahajan & Aibara disallowed - Held that:- Before the revenue authorities, the assessee did not make any effort to establish the seriousness and genuineness of the project and expense incurred thereon. Merely making a statement that a feasibility report was got prepared for a proposed line of business, which finally was aborted, cannot qualify for the allowance of an expense, bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10,000 We hereby submit that our expenses in respect of exempted income are mainly of interest. During the year total interest payment was of Rs.2,02,00,988. Out of which Rs.1,52,38,592 relates to the investment made in shares. Therefore, Rule 8D is not applicable in our case since besides the above expense no other expenses are required to be incurred for the investment made . From the submissions made before AO, assessee claimed to have disallowed Rs.1,52,38,592, Rs.2,96,018 and Rs.10,000. 4. AO on considering the submissions, objected to the quantum of Rs.10,000 as administrative expenses, because, according to him, on investment of Rs.202,25,40,632 even Portfolio Management Service Companies (PMS) would have charged fee @ 2%. He, therefore, invoked Rule 8D of the Income Tax Rules and computed the disallowance of Rs.2,39,02,840 from which he deducted expenses already written back by assessee at Rs.1,55,44,610 (Rs.1,52,38,592 + Rs.2,96,018) and made a further disallowance of Rs.83,58,230 being the balancing figure (Rs.2,39,02,840 Rs.1,55,44,610). 5. Assessee took the issue before the CIT (A) who sustained the disallowance made by AO, placing reliance on the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds. AO therefore, submitted that there was no reason to target Rs.10,000 debited as administrative expenses to re-compute the disallowance invoking Rule 8D. 9. The learned AR also pointed out from the short submission placed in the paper book wherein it was submitted that the investment did not change in character and that the entire holding is old and primarily for securing controlling interest over those companies. The AR therefore, submitted that disallowance made by AO was on erroneous facts. 10. The learned DR placed reliance on the observations of the Revenue authorities. 11. We have heard the arguments of the parties and have perused the material placed before us. The issue as carved out by the AR is with respect to Rs.10,000 only, but on the contrary, the issue before us is on the applicability of Rule 14A and computation of disallowance as per Rule 8D. The relevant portion read out by the AR from the decision in the case of Godrej Boyce Mfg. Co. Ltd vs. DCIT (supra) in Para 70 of the order pertains to the correctness of computation of disallowance and giving valid reasons for such computation. The crux of argument of AR is with reference to Section 14(2) which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2) .. (emphasis supplied) 13. The same opinion was expressed by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd and Others v. CIT 247 CTR 162 wherein reliance was placed on the decision of the Hon'ble Supreme Court in the case of CIT vs. Walfort Share Stock Brokers Pvt. Ltd 326 ITR 1 (SC) and the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Company Ltd vs. DCIT (328 ITR 81). The relevant portions of the judgment of Hon'ble Delhi High Court are as under: 29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already mentioned above that by virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the Assessing Officer shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-rule (2) of Rule 8D. We may observe that Rule 8D(1) places the provisions of Section 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken. 41. Sub-section (2) of section 14A, as we have seen, stipulates that the Assessing Officer shall determine the amount of expenditure incurred in relation to income which does not form part of the total income "in accordance with such method as may be prescribed". of course, this determination can only be undertaken if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. This part of section 14A(2) which explicitly requires the fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) and (3) would require the assessing officer to first reject the claim of the assessee with regard to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon'ble Supreme Court in case of Commissioner of Income-tax v. Walfort Share and Stock Brokers P. Ltd. reported in 326 ITR 1 that for attracting the provisions of section 14 A, there should be proximate cause for disallowance which as relationship with the tax exempt income. 5.1 The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, it should be proximate relationship between the expenditure and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it was for the assessing officer to deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 14A. Obviously the assessee is maintaining separate books of account for purpose of business and these investments are in his personal capacity. The A.O. also has not disallowed any expenditure of personal nature out of the income from business or profession in the computation of income in the assessment order. In view of this, we are of the opinion that the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. In view of this, we are of the opinion that estimation of expenditure of Rs.20,000/- out of business expenditure claimed in business activity cannot be considered for being incurred for this earning of tax free income of above nature. In view of this disallowance so made under section 14A of Rs.20,000/- is deleted. Not only that the CIT(A) directed the A.O. to consider the allowance invoking Rule 8D. The Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT 328 ITR 81 has considered Rule 8D to be applicable prospective and since the assessment year involved is before the introduction of subITA section (2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, that the mandate of Rule 8D will operate. In the instant case, the authorities below have directly gone to the second stage of computing disallowance u/s. 14A as per Rule 8D without rendering any opinion on the correctness or otherwise of the assessee s claim in this regard. We, therefore, set aside the impugned order on this issue and restore the matter to the file of AO to re-compute disallowance, if any, in accordance with our above observations after duly examining the assessee s claim in this regard. 6 In view of the above discussion and facts and circumstances of the case, we are of the considered opinion that no disallowance under section 14A is called for when the assessee has not incurred and claimed any expenditure for earning the exempt income. 16. Similar views were also expressed by the Coordinate Benches in the case of Relaxo Footwears Ltd, vs. Addl. CIT (2012) 50 SOT 102 and Priya Exhibitors (P) Ltd vs. ACIT (2012) 54 SOT 356. In the case of Relaxo Footwears Ltd, it was held as under: The Assessing Officer should have considered the claim of the assessee that no expenditure has been incurred in relation to earning the exempt income. If the claim was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on was recorded by AO in this case. It was noticed that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8D on the presumption that port folio management involves atleast 2% of charges. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. We notice that assessee itself disallowed the interest which is directly applicable, Dmat charges and administrative exp on estimation totaling to Rs.1,55,44,610. Assessee is a hundred crore turnover company. Ao has not examined any expenditure claimed in P L account so as to relate to exempt income, nor gave afinding that assessee claim is not correct for any reason. Rule 8D can not be invoked directly without satisfying about the claims or otherwise. Consequently, the disallowance was not permissible. We therefore, allow the ground of appeal. 19. Ground No.2 pertains to disallowance of Rs.18,92,784 under section 40(a)(ia) of the Income Tax Act. 20. From the facts as submitted by the AR, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in 247 ITR 417 (AP), wherein the Hon'ble Andhra Pradesh High Court has held as under: "{iii] That the feasibility report submitted by Tata Sons had not resulted in establishing a new unit. The object of this expenditure incurred by the assessee and the amount paid to Apex Geological Service Pvt. Ltd. was effective utilization of the surplus funds of the existing business and to explore avenues for investment of such funds. In other words, the assessee had utilized its surplus funds for the purpose of putting it to effective and profitable use. Therefore, it was wholly connected with its existing business and it was wholly and exclusively incurred for the purpose of carrying on its existing business. There was nexus between the expenditure incurred and the business it was carrying on and hence the expenditure was an allowable expenditure under section 37 of the Act". 29. Placing reliance of the above decision, he submits that the expense was meant for expansion of business, which ultimately had to be aborted. Nevertheless, since the expanse was for the purpose of business, it had to be allowed. 30. The DR placed his reliance on the decision of the revenue authorities. 31. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed income in accordance with law. The ground is, therefore, allowed for statistical purpose. 35. In the result, the appeal filed by the assessee is partly allowed. ITA no. 7851/Mum/2011 36. The only issue involved is holding the compensation received on amenities provided as income from other sources instead of income from house property, as claimed by the assessee. The facts and the conclusion, as found recorded in the order are: (a) The appellant is owner of property at Mahindra Towers (2nd and 3rd Floor). The appellant entered into agreement with Raymond Limited to lease the premises at a monthly lease rent of Rs 41,06,080/- together with a monthly compensation of Rs10,26,520/- for use of amenities and facilities. Copies of the agreements are enclosed along with this appeal and marked collectively as Annexure "A". During the previous year relevant to assessment year under appeal, the appellant received a sum of Rs 6,15,91,200/- as income from letting out of the aforesaid property. The appellant offered the same for tax under the head "Income from house property". However, the Assessing Officer treated the compensation received by the appellant amounting to Rs1,23,18,240 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its that the Bombay High Court in the case of Bhaktauiar Constructions Pvt Ltd (1986) 162 ITR 452 (Bom) has held that where the building was let out to tenants under lease agreements and the tenants were provided with air- conditioning facilities, there was no letting of installation of air-conditioning plant. Therefore, there was no letting of installation of airconditioning plant. Therefore, there was no inseparable letting of the machinery so as to bring the case under section 56(2)(iii). The Court held that the income was taxable under the head "Income from house property". Similar is the case of the appellant where there is not separate letting of the amenities and facilities by the appellant. In fact the facilities are provided by the builder themselves which are a part of the premises let out. Accordingly, the compensation received from the use such facilities partakes the character of income from letting out of property and therefore taxable as income under the head income from house property. The appellant submits that on the similar facts the learned CIT(A) has allowed appellant's appeal for AY 2000-01,2001-02, 2002-03, 2004-05, 2005-06, 2006- 07 and 2007-08. Copies o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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