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TMI Blog2020 (7) TMI 500X X X X Extracts X X X X X X X X Extracts X X X X ..... nst the order of assessment passed u/s.143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 20/03/2015 by the ld. Asst. Commissioner of Income Tax 16(2),Mumbai (hereinafter referred to as ld. AO). ITA No.2032/Mum/2017 (Assessment Year:2010-11) This appeal in ITA Nos.2032/Mum/2017 for A.Y.2010-11 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-5, Mumbai in appeal Nos. IT-61/15-16 dated 06/12/2016 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 147 of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 20/03/2015 by the ld. Asst. Commissioner of Income Tax 16(2),Mumbai (hereinafter referred to as ld. AO). ITA No.6384/Mum/2017 (Assessment Year: 2012-13) This appeal in ITA Nos.6384/Mum/2017 for A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-5, Mumbai in appeal Nos. IT-78/2015-16/95/17-18 dated 01/08/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/03/2015 by the ld. Joint. Commissioner of Income Tax 11(2),Mumbai (hereinafter referred to as ld. AO). IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) observed that assessee was given an opportunity by the ld. AO during the course of 154 proceedings vide office letter dated 23/08/2013, which was not complied with by the assessee. Accordingly, the ld. AO had proceeded to compute the disallowance made u/s.14A of the Act in the manner by applying the third limb of Rule 8D(2) of the Rules. 3.1. During the course of appellate proceedings also, the assessee submitted that he had incurred total expenditure of Rs. 44,70,295/- out of which depreciation claimed is Rs. 16,24,037/-. If the depreciation component is reduced, remaining expenditure claimed by the assessee as deduction would work out only to Rs. 28,46,258/- which, in the opinion of the assessee, was incurred only for the purpose of earning taxable income and not exempt income. We find that the ld. CIT(A) had specifically asked a question to the assessee as to whether any expenditure incurred for earning exempt income was debited by him in the capital account, where dividend income was credited. In response thereto, the assessee submitted that no expenditure was debited in his capital account. Accordingly, the ld. CIT(A) observed that substantial exempt income has been decl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that at the time of assessment proceedings, the assessee had given detailed explanation as to why no expenditure need to be disallowed u/s.14A of the Act for the purpose of earning exempt income and the ld. AO had neither dealt with those explanations nor rejected those explanations. He accordingly submitted that in the absence of recording such satisfaction, no disallowance u/s.14A of the Act could be made by directly applying the computation mechanism in Rule 8D(2) of the Rules. The assessee in person at the time of hearing placed reliance on the following decisions of the Hon'ble Apex Court:- (a) Godrej & Boyce Manufacturing Company Ltd., vs. DCIT reported in 394 ITR 449 (SC) by drawing specific reference to para No.37 & 38 of the said judgment. (b) CIT vs. Walfort Share and Stock Brokers Pvt. Ltd., reported in 326 ITR 1 (SC) by drawing specific attention to last 8 lines of the said judgment in page 17 of the said judgement. (c) Maxopp Investments Company Ltd., reported in 402 ITR 640 (SC) by drawing specific attention to para 32 of the said judgement. 3.3. Per contra, the ld. DR submitted that with regard to satisfaction to be recorded by the ld. AO before invoking Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments made in Mumbai. While this is so, there is no question of assessee furnishing any details of expenses for earning exempt income. He further submitted that the ld. AO is duty bound to bring proximate connection of expenses incurred vis-à-vis exempt income and relied on the Hon'ble Supreme Court decisions referred to supra. He further reiterated that if the computation mechanism provided in Rule 8D(2) of the rules is to be applied, then, it would result in absurdity in as much as the entire 60% to 70% of the total expenses claimed by the assessee in the profit and loss account would get disallowed. This is a case wherein assessee had ensured that 99% of the dividends are getting directly credited in the designated bank account in Mumbai through ECS and only three cheques were physically deposited in the said bank account. He submitted that all these investments were made since 1970's and no advice is being taken from anyone for making these investments, accordingly he prayed that no disallowance of indirect / administrative expenses could be made in the facts and circumstances of the instant case. 3.5. We have heard the rival submissions and perused the materials ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for monitoring the accounts tracking the investments as well as re-investments during the year will be sufficient and reasonable considering the volume of dividend income and investments made by the assessee. Hence, we restrict the disallowance of Rs. 50,000/- as against Rs. 18,81,658/- sustained by the ld. CIT(A). Therefore, the ground Nos. 15 to18 are allowed in part." 3.5.2. We find that the Hon'ble Apex Court in the case of Maxopp Investments Company Ltd., reported in 402 ITR 640 (SC) after considering the various decisions of High Courts and Hon'ble Supreme Court more particularly in the case of CIT vs. Walfort Share and Stock Brokers Pvt. Ltd., reported in 326 ITR 1 (SC) and Godrej & Boyce Manufacturing Co. Ltd., reported in 328 ITR 81 among others had held as under:- 31. We have given our thoughtful consideration to the argument of counsel for the parties on both sides, in the light of various judgments which have been cited before us, some of which have already been taken note of above. 32. In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share & Stock Brokers (P.) Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. ** ** The theory of apportionment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foresaid decision of the Hon'ble Supreme Court, the objective behind introduction of provisions of Section 14A of the Act had been clearly dealt with. Accordingly, disallowance of expenses need to be made if the assessee had not disallowed any expenses for earning of any exempt income. Further, we find from the perusal of para 41 of the judgment of Hon'ble Supreme Court in the case of Maxopp Investments Company Ltd., referred to supra that the question of recording of satisfaction by the ld. AO as contemplated in Section 14A(2) of the Act r.w.Rule 8D(1) of the Rules would apply only when suo-moto disallowance is made by the assessee in the return of income. In such scenario, the ld. AO has to examine correctness of the said suo-motu disallowance having regard to the books of account maintained by the assessee. If, the assessee neither makes any disallowance in the return of income nor furnishes the reason for doing so, the AO cannot be expected to record his satisfaction in vacuum. This, in our humble opinion, is the law propounded by the Hon'ble Supreme Court in paragraph 41 of Maxopp decision (supra). We find that in the instant case before us, no suo-motu disallowance was made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al funds. By doing so, telephone charges would have been incurred by the assessee. For this purpose, even the funds are to be transferred online for which purpose, the bank would definitely charge the assessee towards service charges. These examples stated by us are not exhaustive. All these expenses have been claimed by the assessee as related only to his taxable income, which in our considered opinion, is not correct. We find that both direct and indirect expenses are to be considered for the purpose of earning exempt income. In the instant case, admittedly, there is no direct expenditure incurred for the purpose of earning exempt income. Hence only the indirect / administrative expenses are to be considered for working out the disallowance. We find that the assessee had held investments to the tune of Rs. 66.92 crores as on 31.3.2008 and derived exempt income in the form of dividends during the Asst Year 2008-09 . 3.5.6. Considering the intention behind introduction of provisions of section 14A of the Act, the law laid down in various supreme court decisions referred to supra , considering the fact that computation of disallowance of indirect expenses in terms of Rule 8D(2)(iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Asst Years 2009-10 and 2010-11 respectively. On merits of the disallowance made u/s.14A of the Act, the decision rendered by us for the assessment was 2008-09 would apply with equal force for A.Yrs. 2009-10 and 2010-11 also except with variance in figures. The ld. AO is directed to identify the list of expenses as has been listed out by us for A.Y.2008-09 hereinabove and such other items of indirect expenditure of similar nature, if any, and disallow 25% of the said expenditure for A.Yrs. 2009-10 and 2010-11 which would meet the ends of justice. We hold that this decision would not fall as binding precedent for other cases due to its peculiar facts and circumstances. Accordingly, the grounds raised by the assessee for A.Yrs. 2009-10 and 2010-11 are partly allowed. ITA No.6384/Mum/2017 (Assessment Year: 2012-13) & ITA No.6745/Mum/2017(Assessment Year: 2013-14) 5. We find that these are regular scrutiny assessments framed u/s.143(3) of the Act by the ld. AO, wherein the disallowance u/s.14A of the Act had been made by applying computation mechanism provided in Rule 8D(2) of the Rules. We find that the assessee had derived exempt income in the form of dividends during the Asst ..... X X X X Extracts X X X X X X X X Extracts X X X X
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