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Sushil Kumar Versus ACIT, Circle-61 (1) , New Delhi

2017 (9) TMI 471 - ITAT DELHI

AO disallaowed expenses u/14A incurred for earning exempt income- CIT(A) upheld decision of AO - Aggreived assessee filed appeal against order of CIT(A) - Held that:- Tribunal is of the opinion that disallowance made by the Ld. AO u/s 14A , without recording satisfaction that the claim of the assessee is incorrect about not incurring any expenditure for earning exempt income,no disallowance can be made.Following the decision of the Hon’ble Delhi High Court wherein it is held that the satisfactio .....

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disallowance made by the Ld. assessing officer under section 14A of the Income Tax Act of ₹ 108194/- was upheld. 2. The solitary ground of appeal of the assessee is against disallowance confirmed by the Ld. Commissioner of income tax (Appeals) of ₹ 108194/- under section 14A of the income tax act. 3. In the present case assessee, individual filed his return of income on 29/09/2012 showing income of ₹ 53142920/- which were subsequently revised on 24/10/2012. During the year unde .....

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ion of the assessee and applied the provisions of section 14A, read with Rule 8D of the income tax act and made a disallowance of ₹ 108194/- and assessment order under section 143(3) was passed on 04/02/2015 determining total income of ₹ 43272100/-. Therefore, assessee aggrieved with the order of the Ld. AO preferred an appeal before the Ld. CIT(A) who confirmed the addition under section 14A. Therefore, assessee is in appeal before us. 4. The Ld. AO has submitted before us that the .....

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ntentions. We have also perused the orders of the lower authorities. Undisputedly, the assessee has earned any exempt income under section 10 of the income tax act of rupees 1145710/-. However, the assessee has not offered any disallowance under section 14 A of the act. It was the claim of the assessee before the assessing officer that it has not incurred any expenditure for earning any exempt income. However, the Ld. assessing officer without recording his satisfaction that how the explanation .....

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t. 12. Section 14A of the Act, which was inserted with retrospective effect from 1st April 1962, provides for disallowance of the expenditure incurred in relation to income exempted from tax. From 11th May 2001, a proviso was inserted in Section 14A to clarify that it could not be used to reopen or rectify a completed assessment. Sub-sections (2) and (3) of Section 14A were inserted with effect from 1st April, 2007 to provide for methodology for computing of disallowance under Section 14A. Howev .....

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It is also provided that the amount shall not exceed the total expenditure claimed by the Assessee. 13. In the above background, the key question in the present case is whether the disallowance of the expenditure will be made even where the investment has not resulted in any exempt income during the AY in question but where potential exists for exempt income being earned in later AYs. 14. In the Explanatory Memorandum to the Finance Act 2001, by which Section 14A was inserted with effect from 1s .....

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nor speculative. It has to be 'real income'. The subsequent amendment to Section 14A does not particularly clarify whether the disallowance of the expenditure would apply even where no exempt income is earned in the AY in question from investments made, not in that AY, but earlier AYs. 16. Rule 8D (1) of the Rules is helpful, to some extent, in understanding the above issue. It reads as under: "8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a .....

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ncome under the Act for such previous year" in the above Rule 8 D (1) indicates a correlation between the exempt income earned in the AY and the expenditure incurred to earn it. In other words, the expenditure as claimed by the Assessee has to be in relation to the income earned in 'such previous year'. This implies that if there is no exempt income earned in the AY in question, the question of disallowance of the expenditure incurred to earn exempt income in terms of Section 14A re .....

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ll be a truncated reading of Section 14 A and Rule 8D particularly when Rule 8D (1) uses the expression 'such previous year'. Further, it does not account for the concept of 'real income'. It does not note that under Section 5 of the Act, the question of taxation of 'notional income' does not arise. As explained in Commissioner of Income Tax v. Walfort Share and Stock Brokers Pvt. Ltd [2010] 326 ITR 1 (SC), the mandate of Section 14A of the Act is to curb the practice of .....

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issioner of Income Tax, Company Range - V, Chennai (order dated 23rd December, 2016 of the High Court of Madras in TCA No. 520 of 2016), a similar contention of the Revenue was negated. The Court there declined to apply the CBDT Circular by explaining that Section 14A is "clearly relatable to the earning of the actual income and not notional income or anticipated income." It was further explained that, "The computation of total income in terms of Rule 8D is by way of a determinati .....

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view. The decision in Taikisha Engineering India Pvt. Ltd. (supra) does not specifically deal with this issue. 22. It was suggested by Mr. Hossain that, in the context of Section 57(iii), the Supreme Court in Commissioner Of Income Tax, West v. Rajendra Prasad Moody [1978] 115 ITR 519 (SC) explained that deduction is allowable even where income was not actually earned in the AY in question. This aspect of the matter was dealt with by this Court in M/s Cheminvest Ltd. (supra) where it reversed th .....

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ome from other sources". Under Section 57 (iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income", did not mean that any income should in fact have been earned as a condition precedent for claiming the expenditure. The Court explained: "What s. 57(iii) requires is that the expendit .....

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nguage of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure." 21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajend .....

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