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TMI Blog2025 (1) TMI 863X X X X Extracts X X X X X X X X Extracts X X X X ..... part of the addition made by Ld. A.O. without considering the fact that the all the expenses were incurred wholly and exclusively for earning taxable income and no expenses were incurred in relation to investments made by the assessee. The expenses which directly attributable to investments were already disallowed by the appellant in its ITR. 1.4 confirming the addition of Rs.8,55,037/-, out of total addition of Rs. 23,20,009/- made by Ld. A.O. u/s 14A of the Act, which is to the extent exempt dividend income earned by appellant. 2. The appellant prays for leave to Add, to amend, to delete, or modify the all or any grounds of appeal on or before the hearing of appeal." 3. Succinctly, the fact as culled out from the records are that the case of the assessee was selected for Complete Scrutiny assessment under the Eassessment Scheme, 2019 on the following issues: S. No. Issues i. Short Term Capital Gains u/s 111A ii. Expenditure of Personal Nature iii. Refund Claim iv. Duty Drawback 3.1 The appellant-assessee filed return of income for AY 2018-19 on 27.07.2018, declaring total income of Rs. 11,07,21,870/- under normal provision of Income Tax Act and Rs. 11,28,92,617/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of own funds was not considered as the assessee had common pool of funds and composite books of account from where it was not possible to exactly identify that the tax-free investment was made from surplus & reserves available with company during the year under reference. Further, ld. AO noted that the assessee had not proved nexus between interest free investment out of surplus & reserves available. So, based on CBDT's Circular No. 5/2014 dated 11.02.2014 that section 14A of the Act does not use the word "income of the year but "income under the Act" therefore, to invoke disallowance u/s. 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. The onus of the assessee had not been proved and therefore, ld. AO found that there was a clear nexus between the investments made and expenses claimed by the assessee. Ld. AO thus went on to observe that invocation of section 14A is automatic and comes into operation without any exception even if exempt income is not earned during the year if investment is such which would generate exempt income. The possibility of incurring certain expenditure under the head adminis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble ITAT Jaipur Bench in the case of Road Infrastructure Development Company of Rajasthan Ltd. I have considered the above submissions and the relevant decisions quoted by the appellant. Respectfully, following the decisions in the above case, I hereby hold that the maximum disallowance us/ 14A can be restricted to the amount of exempt income earned by the appellant. In the present case, the appellant had earned exempt income of Rs.8,55,037/- and the disallowance can be restricted to the same amount. Hence, this ground of appeal is treated as partly allowed." 5. As the assessee did not receive the relief in full and was considered in part by the ld. CIT(A), the assessee has preferred the present appeal before this Tribunal on the grounds as reproduced hereinabove. To support the various grounds so raised by the ld. AR of the assessee filed the written submissions which are reproduced herein below: 3. Submission of Appellant on grounds of appeal: - 3.1 Ground No. 1: - Regarding the addition made u/s 14A of the Income Tax Act, 1961. 3.1.1 Finding of Ld. A.O: - The finding of ld. AO is at Page No. 4 and 5 (Para 4.4 to 4.6) of the assessment order. On the basis of h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplicability of section 14A, we have to view the items of expenditure first. If these have resulted in exempt income, only then the disallowance is to be considered. In other words, the starting point for applying section 14A is to consider the amount of expenditure and then moving forward for examining if it has resulted in the exempt income or not. The language of sub-section (1) of section 14A clearly provides that no deduction shall be allowed "in respect of expenditure incurred by the assessee in relation to income which does not from part of the total income under this Act". On going through the simple and plain language, it is abundantly clear that the relation has to be seen between the exempt income and the expenditure incurred in relation to it. What is relevant is to work out the expenditure in relation to the exempt income. On going through subsection (1), it can be clearly noticed that the exercise of making disallowance starts with firstly tracing out the exempt income and then initiating the process of working out the expenditure incurred in relation to such exempt income. 2. The object behind the insertion of section 14A in the said Act is apparent from the Memora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). In case of assessee no such expenses have been identified by Ld. A.O. and also the claim of assessee of not incurred any further expenses was disproved by the Ld. A.O. In the regard the following finding of ld AO in para 4.5 page 5 of Astt Order is relevant to be mention: - 4.5 The invocation of Section 14A is automatic and comes into operation without any exception even if exempt income is not earned during the year if investment is such which would generate exempt income. The possibility of incurring certain expenditure under the head administrative expenditure for earning dividend income cannot be ruled out. While allocating expenses relating to exempt income not only the direct expenses like receiving and depositing the dividend warrant has to be taken into consideration but also the indirect expenses including major managerial/ clerical expenses which are involved in making and implementing the decision are also to be disallowed. The disallowance of administrative expenses and interest expenses on earning of dividend income claimed exempt is also held/permitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only in 10 companies' shares and for long term capital gain only in 3 companies shares (PB page 3). In the assessment order also the Ld. A.O. could not point out any such expenses, which might be incurred by the assessee for investment activities. 5. During the course of assessment proceedings, the assessee had submitted that it has not incurred any expenses, over & above to whatever already disallowed by itself in computation of Total Income (PB page 2), for making the investments or earning the income there from and the Ld. A.O. could not disprove to this fact. Hon'ble Supreme Court in the case of CIT V/s Walfort Shares & Stock Brokers Pvt. Ltd (326 ITR 1)( Case Law Paper Book page 1-11) it was held that for attracting section 14A, there has to be a proximate cause for disallowance which is its relationship with the tax-exempt income. 6. The ld. A.O. on the basis of surmises and conjecture hold that the possibility of incurring certain expenditure under head administrative expenditure for earning dividend income cannot be ruled out but he did not bring any positive material to disprove the claim of the assessee. 7. Invocation of provisions of section 14A are not aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002- 2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the AO, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the Assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. - Decided in favour of the assessee Thus, the onus was on Ld. A.O. to disprove the claim of the assessee regarding non incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oximate relationship between the expenditure and the tax-exempt income. Only then would a disallowance have to be effected. This Court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section l4A and rule 8D is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer." d) Reliance is placed on following case where it is held that the provisions of section 14A are not automatic i) Hon'ble Supreme Court of India in Maxopp Investment Limited V. Commissioner of Income Tax (2018) 91 Taxmann.com 154 (SC) has examined the scope of Rule-14A vis-a-vis Rule-8D in detail. The pertinent part of the judgment of Hon'ble Apex Court is reproduced below for your kind perusal. "32. In the first instance, it needs to be recognised that as per section 14A(1) of the Act, deduction of that expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heard the rival submissions and carefully considered the same along with orders of tax authorities below,. I noted that the AO noted that the assessee had paid interest @ 9% on the investment made against the share application money. The bank statement of the assessee revealed that the payment of Rs. 80,00,000/- was made by the assessee on 13.2.2008 and another payment of Rs. 80,00,000/- was made on the same date against the share application money of M/s. Career Point Infosystem Ltd. No shares were allotted against the investment in share application money. The amount of Rs 1,60,00,000/- was returned back on 28.8.2008. The AO, therefore, worked out the interest @ 9% on the investment made against share application money from 1.4.2008 to 28.8.2008 at Rs. 6,00,000/- and disallowed the same under section 14A. It is the undisputed fact that the assessee has not claimed any disallowance in relation to the investment made in share application money under the provisions of section 14A. The provisions of section 14A(1) states that no deduction shall be made in respect of the expenditure incurred by the assessee in relation to income which does not form part of the total income. Sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g on fact by the Revenue is not controverted by placing any material on record. Moreover there is no dispute with regard to fact that the assessee has earned exempt income of 27,006/- against which disallowance of expenditure amounting to 42,22,857/- was made. The AO has not recorded his satisfaction as to how the expenditure disallowed by the assessee of 629878/- towards administrative expenses is not reasonable. Further we find that the assessee has demonstrated by placing sufficient material on record that no borrowed funds were utilized for making investment and wherefrom the exempt income is earned. In our considered view, the provisions of section 14A of the Act read with rule 8D of Income Tax Rules, cannot be invoked in mechanical way by AO. As per section 14A(2), the AO is required to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act and in accordance with rule 8D of Income Tax Rules, 1961 if the AO having regarding to the accounts, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to such exempt income, is empowered for making disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich concerned investments had been made, disallowance under Section 14A is not justified." The SLP filed against the said judgment has been dismissed by Hon'ble Supreme Court of India, in Principal Commissioner of Income Tax-IV, Ahmedabad V. Sintex Industries Ltd (2018) 93 taxmann.com 24 (SC). (vii) Emtici Engineering Ltd. Versus ACIT (OSD). Anand Circle, Anand 2016 (3) TMI 186 - ITAT Ahmedabad. "It was noted from records that the assessee was having share holding funds to the extent of 2607.18 crores and the investment made by it was to the extent of Rs. 195.10 crores. In other words, the assessee had sufficient funds for making the investments and it had not used the borrowed funds for such purpose. This aspect of huge surplus funds is not disputed by the revenue which earned it the interest on bonds and dividend income. With regard to disallowance of 1% of administrative expenses averred to have incurred on account of the earning of interest, there is nothing on record to indicate that there has been in fact any actual expenditure incurred by the assessee for earning tax free income of Rs. 14 crores. It is also to be noted that out of the total amount of exempt income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Anr. [2017] 394 ITR 449 45-57 Hon'ble Rajasthan High Court 7 PCIT-Kota V/s Prakash Gwalera 2018 (11) TMI 877 58-63 8 Vijay Solvex Limited V/s ACIT 2018 (1) TMI 1629 64-67 9 Commissioner of Income Tax Vs. Vijay Solvex Ltd. 274 CTR 384 Rajasthan (2015) 59axmann 294 68-71 Other Non-Jurisdictional High Court 10 Commissioner of Income Tax v. Sociedade De Fomento Industrial (P.) Ltd [2020] 429 ITR 358 (Bom) 72-79 11 Hon'ble High Court of Gujarat passed in Principal Commissioner of Income Tax-4 V/s intex Industries Ltd (2017) 82 taxmann.com 171 (Gujarat). 80-84 12 CU Vs Hero Cycles Ltd (323 ITR 518) 85-87 13 Commissioner of Income-tax, Bangalore v. Karnataka State Industrial & Infrastructure Development Corpn. Ltd. [2016] 237 Taxman 240 (Karnataka) 88-92 14 Commissioner of Income-tax-I v. Gujarat State Fertilizers & Chemicals Ltd[2013] 358 ITR 323 (Gujarat) 93-99 Hon'ble ITAT Jaipur Bench 15 Career Point Limited Versus The Principal Commissioner of Income-Tax, Udaipur ITA No. 242/JPR/2023 A.Y. 2018-19 order dated 25-08-2023 100-132 16 M/s. Ruby Merry Enterprises (P) Ltd. vs. JCIT (OSD) Central Circle-3, Jaipur 2016 (10) TMI 1278 133-136 17 DCIT Circle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stries Ltd (supra) is not applicable in the case of the appellant and clearly distinguishable with the fact." Ld. DR for the revenue has argued that the assessee had exempt income but the assessee did not disallow correct expenditure and other administrative expenditure, as per section 14A r.w.r. 8D of the Act, and therefore Assessing Officer was right in making the addition. 9. We have heard rival contentions and perused the material placed on record. In the present appeal, the assessee has taken four different grounds challenging the addition sustained by the ld. CIT(A). Though we have discussed the basis of making the addition in the earlier part of this order, the point in dispute is that assessee filed return of income declaring total income of Rs. 11,07,21,870/- under normal provision of Income Tax and Rs. 11,28,92,617/- u/s 115JB of the Act. The case was selected for scrutiny under CASS. In that scrutiny proceeding ld. AO noted that assessee invested in equities shares to the amount of Rs. 27,00,23,608/-. That investment generate exempt income in the form of dividend income, to earn that income the managerial / administrative cost for arranging such a type of investment c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of Rs. 16,604/- for demate charges, share transactions charges for an amount of Rs. 6,27,788/- and interest relating to the transaction of shares undertaken by the assessee for an amount of Rs. 81,153/-, totalling Rs. 7,25,545/- against the exempt income of Rs. 8,85,086/- and, therefore, the same amount which is already considered for disallowance is required to be deducted but the same was not considered while sustaining of the addition by ld CIT(A). Even otherwise, the learned counsel argued that Assessing Officer failed to appreciate that the assessee has enough interest free fund in form of capital to make investment yielding exempt income, therefore, addition under section 14A of the Act was not attracted. As is clear from the fact that assessee made total investments of Rs. 27,06,23,113/- (PB page 15) as against that shareholder fund and reserve and surplus as per Note No. 2 & 3 of the audited financial statement as on 31/03/2018 (Copy at PB Page No. 15) is Rs. 67,14,10,652/- which is more than total investment in equity shares as on 31/03/2018 is of Rs 27,06,23,112/-. Thus, shareholder fund is sufficient to make investment. Facts of the case are similar to the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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