TMI Blog2018 (12) TMI 911X X X X Extracts X X X X X X X X Extracts X X X X ..... I.T. Act, is held to be consistent with law under these facts and circumstances -disallowance made by the AO under Rule 8D of I.T. Rules read with Section 14A of I.T. Act, and confirmed by the Ld. CIT(A), are hereby upheld.- decided against assessee. - ITA No:- 5144/Del/2015 - - - Dated:- 7-12-2018 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER For The Assessee : Sh. T.R. Talwar, Adv. For The Revenue : Sh. Amit Katoch, Sr. DR ORDER PER: ANADEE NATH MISSHRA, AM This appeal by the Assessee is filed against the order dated 08.06.2015 of Learned Commissioner of Income Tax (Appeals)-20, New Delhi, for Assessment Year 2011-12. The grounds of appeal are as under:- On the facts and circumstances of the case, the learned ACIT has erred:- 1.a) In confirming the disallowance of ₹ 5,26,256/- u/s 14A of the Income Tax Act, 1961 r.w. Rule 8D of the Income Tax Rules 1962 in respect of investment made in securities when no direct or indirect expenditure in relation to investment in securities has been claimed or debited in the Profit Loss Account by the appellant. b) In disallowing ₹ 5,26,25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Appellate Tribunal as ITAT Learned as Ld. Under Section as U/s (2) The 1st Ground of appeal, including sub grounds 1. a), 1. b), 1. c), 1. d), 1. e) are related to disallowance made by the AO U/s 14 of I.T. Act, ready with Rules 8D of Income Tax Rules, 1962. The relevant portion of the Assessment Order is reproduces as under:- 5. Disallowance u/s 14A of the I.T. Act,1961, rAv Rule 8D of I.T. Rules, 1962 5.1 The assessee has earned exempt income as dividend of ₹ 34,89,727/- and Long Term Capital Gain of ₹ 97,46,225/-. The assessee was asked vide order sheet entry dated 08.01.2014 to give the details of LTCG dividend. To provide copy of accounts/' Books of account in relation to expenses incurred for earning exempt income. Any of the documents in relation to this may also be produced . 5.2 The assessee, vide his reply dated 21.01.2014 has stated as under:- The detail of Long Term capital Gain of ₹ 97,46,225/- and of dividend income is enclosed herewith. Further, it is submitted that the Long Term Capital Gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the total income of the assessee under the provisions of the Act for a previous year. Income-tax is a tax on income in the hands of the assessee. Hence, when section 14A disallows expenditure incurred by the assessee in relation to income which does not form part of the total income, it would include categories of income such as dividend from shares and income from mutual funds etc. which under section 10 are not to be included in the total income. 5.5 Sub-sections (2) and (3) of section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Sub-section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as directly relatable for earning the exempt income which has been taken in personal drawings. 5.7 Since, no disallowance has been done by the assessee and as per the facts and circumstances of the case, I have reasons to arrive at the satisfaction for disallowance u/s 14A of the Act, r/w Rule 8D of the Rules, that there are expenses relatable to the earning of exempt income by the assessee. Since, the assessee has invested its money for such investment of shares, which is capable to generate income which does not or shall not form part of total income of the assessee and indirect cost in the form of administrative expenditures etc. is involved in this process. There is direct and proximate nexus between the exempted income, which the investments shall generate and the expenditures directly or indirectly involved in earning the said income. Further, facts of the Case Laws on which the AR has placed its reliance are in difference with the present case and thus, not applicable. Hence, I am fully satisfied to invoke the provisions of section 14A read with Rule 8D to work out disallowance of expenditures. 5.8 In view of the facts and circumstances of the case, legal positio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant has earned dividend income of ₹ 34,89,728/- and long term capital gain of ₹ 97,46,225/- which is exempt u/s 10. The expenses incurred for earning this exempt income are in the form of DP charges of ₹ 538/- paid to Frontline Capital Services Ltd. and STT of 1,13,361/- paid on purchases and sale of shares and units of mutual fund. The said expenses have been shown in Personal Drawings A/c and debited to appellant's capital account in the Balance Sheet. The said expenses have not been charged to Profit Loss A/c. Copy of Capital A/c and Profit Loss A/c is enclosed herewith in support of the same. (End-VII) The Purpose for introduction of section 14A with retrospective effect since the inception of the Act was clarified vide Circular No. 14 of 2001 as under: Certain incomes are not includible while computing the total income, as these are exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non exempt income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting banks, use of vehicle and telephone, use of Internet, use of computer and thus the depreciation, need of a Computer Operator electricity expenses, Office premises, fees charged by Mutual Fund Agents, Portfolio record management etc. The Assessing Officer therefore disallowed ₹ 5,25,256/- under rule 8D(2)(iii). 7.2 In appeal the appellant stated that: i) The assessing officer has made ad-hoc disallowance of expenses by applying Rule 8D on the ground that provisions of that Rule are procedural in nature, ii) That only direct expenses, having proximate nexus, with earning of exempt income can be disallowed under section 14A of the Act, iii) The actual expenditure incurred for earning exempt income only should be disallowed, iv) No other expenditure has also been incurred for earning dividend income. v) The appellant relied upon the decision of the Hon'ble ITAT in its own case for A.Y. 2009- 10 and 2010-11. The taxpayer has also relied upon the other decisions on the issue: The main argument of Ld. AR has been that the provision of section 14A clearly postulates disallowance of expenditure only in a case where it is proved ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be any disallowance under section 14A. While we agree that the expression expenditure incurred refers to actual expenditure and not to some imagined expenditure we would like to make it clear that the actual expenditure that is in contemplation under section 14A(1) of the said Act is the actual expenditure in relation to or in connection with or pertaining to exempt income The Hon ble Delhi High Court in the same case has further observed that: 30 . the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the taxpayer or with the correctness of the claim made by the taxpayer that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 31. It is therefore, dear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o relied on the ITAT Bombay Bench decision in the case of Justice Sam P. Bharucha vs. Additional CIT (2012) 53 SOT 192 (Mumbai) (URO). The Ld. Counsel for assessee also drew our attention to the various contentions raised in the grounds of appeal on this issue. He also submitted that all the direct expenses attributable to earning of exempt income has been met out of personal drawings made by the assessee; and further, that no interest expenses have been incurred for earning of exempt income. In view of these facts and circumstances, and placing heavy reliance on aforesaid order of ITAT, dated 13.03.2015, in assessee s own case, for A.Y. 2009-10 and 2010-11 in ITA Nos.- 554/Del/2013 and 5298/Del/2013; the ld. Counsel for assessee submitted that the disallowance u/s 14A of I.T. Act should be deleted. (2.5) On the other side, the Ld. DR relied on the order of the Ld. CIT(A). (2.6) We have perused all the material available on record. We have heard both sides attentively. We have also considered the judicial precedents brought to our notice, and / or referred to in the records. It will be useful to refer to the relevant portion of order of ITAT, dated 13.03.2015, in assessee s o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ein the only issue involved is regarding the disallowance of ₹ 2,54,149/- u/s 14A of the Income-Tax Act, 1961 r/w Rule 8D of the Income-Tax Rules, 1962. 15. The assessee claimed that there was no direct and proximate nexus between the exempted income and the expenditure claimed. It was pleaded that none of the expenditure incurred and claimed by the assessee is in relation to the exempted income in its Income expenditure account. 16. We have heard both the sides on this issue. For the similar reasons as stated above in the assessment year 2009-10, we allow this ground of assessee s appeal as the revenue is failed to pinpoint any expenditure in the Income expenditure account. Further, the assessee is incurring such expenses from his personal drawings. Accordingly, this ground of assessee s appeal is allowed. (2.6.1) On perusal of the impugned order of the Ld. CIT(A), it is noticed that it is based on the order of Hon ble Jurisdictional High Court in the case of Maxopp Investment Ltd. V. CIT[2012] 347 ITR 272 (Delhi). The appeal against the order of Hon ble Jurisdictional High court in the case of Maxopp Investment Ltd. V. CIT [2012] 347 ITR 272 (Delhi) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent electricity, use of office premises, fee charged by Mutual Fund agents/bankers (Annual Fee), portfolio record maintenance and its tracking to ensure timely sale/purchase of mutual fund units, etc. In view of these specific findings of the AO, the Assessee s claim that no direct or indirect expenditure in relation to investment in securities has been claimed or debited in the Profit Loss Account by the appellant; that no proximate nexus has been established between the expenditure claimed and exempt income by the AO; and that the expenditure incurred and claimed by the appellant has direct nexus with the professional income of the appellant and none of the expenditure claimed by the assessee is in relation to the exempt income must be rejected. (2.6.2) Provisions of Section 14A of I.T. Act and Rule 8D of I.T. Rules are reproduced below for ease of reference: Section 14A of I.T. Act: 14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. (2.7) In the facts of the case before us, the AO has specifically recorded, in Para 5.6 of the Assessment Order, that the assessee has made investments for earning exempt income and managing such a large portfolio entail expenses right from diversion of manpower/staff for indulging in investment activities to various activities like visiting banks, use of vehicle and telephone, use of internet if portfolio management is web based, cost of computer its depreciation, computer operator, consequent electricity, use of office premises, fee charged by Mutual Fund agents/bankers (Annual Fee), portfolio record maintenance and its tracking to ensure timely sale/purchase of mutual fund units, etc. Moreover, the AO, at Para 5.7 of the Assessment Order has also recorded his satisfaction in these words. Since, no disallowance has been done by the assessee and as per the facts and circumstances of the case, I have reasons to arrive at the satisfaction for disallowance u/s 14A of the Act, r/w Rule 8D of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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