JAIKISHAN BHAGCHANDKA ,MUMBAI vs. DCIT 24(2), MUMBAI

The Appellant has raised following grounds of appeal:

1. The ld. CIT(A) erred in confirming the disallowance u/s 14A Assessment Year: 2016-17 of the Act r.w.r. 8D of the IT Rules, 1962. 1.i In doing, so, the ld. CIT(A) did not appreciate that no expenditure was claimed which could be disallowed u/s 14A of the Act in as much as the expenses incurred in respect of investment activities were debited to personal capital a/c & were not claimed in the computation of total income and the items debited to Profit & Loss a/c were in respect of derivative transactions which items were not expenses per se but were part & parcel of derivative transactions and in any event the said derivatives transactions are not capable of generating any exempt income warranting the disallowance u/s 14A of the Act.

The brief facts of the case are that the Appellant is an individual engaged in the business of trading in derivatives which generates income taxable in the hands of the Appellant. The Appellant also makes investments which result in exempt income in the hands of the Appellant. For the Assessment Year 2016-17, the return filed by the Appellant was selected for scrutiny and assessment under Section 143(3) of the Act was framed on the Appellant vide Assessment Order, dated 24.12.2018. The Assessing Officer made an addition of INR 3,84,418/- under Section 14A of the Act against which the Appellant preferred appeal before CIT(A). Vide order dated, 28.10.2022, the CIT(A) dismissed the aforesaid appeal. 2 Assessment Year: 2016-17

Now the Appellant is before us in appeal challenging the addition of INR 3,84,418/- made by the Assessing Officer under Section 14A of the Act and confirmed by the CIT(A). All the grounds raised by the Appellant, reproduced in paragraph 2 above, pertain to the aforesaid addition and are, therefore, taken up together hereinafter.

The Ld. Authorised Representative for the Appellant submitted that during the course of assessment proceedings, in response to notice dated 16.12.2018, issued under Section 142(1) of the Act, the Appellant filed letter, dated 19.12.2018, making detailed submissions and bringing on record relevant facts to show that no disallowance under Section 14A of the Act was warranted. No expenditure related to exempt income earned from investments made by the Appellant have been debited to the Profit & Loss account and therefore, no deduction has been claimed in respect of the same. It was explained to the Assessing Officer that all the expenses debited to the Profit & Loss Account pertained to the derivative transactions undertaken by the Appellant and formed part and parcel of derivative transactions. Expenses incurred in respect of investments activities were debited directly to the personal capital account of the Appellant. The Assessing Officer erred in disallowing INR 3,84,418/- under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 [hereinafter referred to as the „Rules‟]. He submitted that the Assessing Officer failed to appreciate the aforesaid submissions of the Appellant and without recording any satisfaction as required under Section 14A(2)of the Act, made the disallowance of INR 3,84,418/- under Section 14A of the Act read with Rule 8D(2)

In response, the Ld. Departmental Representative relied upon the order passed by the Assessing Officer and the CIT(A). She submitted that the Appellant had earned exempt income of INR 12,75,760/-. However, no disallowance was offered by the Appellant under Section 14A of the Act read with Rule 8D of the Rules. Referring to paragraph 6.6 and 6.7 of the order passed by the CIT(A) she submitted that undoubtedly some expenditure, though indirect, must have been incurred by the Appellant and therefore, the Assessing Officer was justified in invoking provisions of Section 14A read with Rule 8D of the Rules.

Having considered the rival submissions and perused the material on record, we are of the view that, both, the Assessing Officer and the CIT(A) have grossly erred in law and have failed to appreciate the facts of the case. In the present case the Assessee has accounted for expenses incurred for earning income from the business of trading in derivatives resulting in income liable to tax in the hands of the Appellant separately from the expenses incurred for earning exempt income from the investments. A perusal of Profit & Loss Assessment Year: 2016-17 Account for the previous year ended 31.03.2016 relevant to the Assessment Year 2016-17 (placed at page 18 of the paper- book) shows that (a) Security Transaction Tax of INR 2,58,706/- , (b) Stamp Duty Charges of INR 1,03,199/-, (c) Transaction & Other Charges of INR 3,01,142/, and (d) Professional Tax Charges of INR 2,500/, and Audit Fee Expenses of INR 23,000/- were debited to the Profit & Loss Account. These expenses pertained to the business of trading in derivatives. A perusal of the Capital Account for the previous year ending 31.03.2016 relevant to the Assessment Year 2016-07 (placed at page 18 of the paper-book) shows that the expenses incurred for earning exempt income from investments have been debited directly to the capital Account. Thus, the Appellant had accounted for expenses incurred for earning exempt income separately and had not claimed deduction for the same in the return of income. Therefore, in our view, the question of making any disallowance by invoking provisions of Section 14A of the Act did not arise in the facts of the present case. It is also not the case of the Revenue that the expenses incurred for earning exempt income have been incorrectly debited to the Profit & Loss Account. In fact, in paragraph 5.1 the Assessing Officer had noted that no expenditure has been claimed by the Appellant against the exempt income of INR 12,75,760/-.

Further, we also find merit in the contention advanced by the Ld. Authorised Representative for the Appellant that the Assessing Officer was under obligation to record satisfaction before invoking provisions of Section 14A of the Act. The Hon‟ble Supreme Court had, in the case of Maxopp Investments Ltd. Vs CIT, Delhi : 402 ITR 640 (SC), held as under: 5 Assessment Year: 2016-17 “41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.” (Emphasis Supplied)

As held by the Hon‟ble Supreme Court, the Assessing Officer ought to have recorded satisfaction, having regard to the accounts of the Appellant, that the suo-motu disallowance offered by the Appellant was not correct. In the present case the Appellant had not claimed deduction for expenses incurred for earning exempt income which were debited to the Capital Account of the Appellant. Thus, in effect, the Appellant had suo-motu offered disallowance in respect of the aforesaid expenses. The Assessing Officer acted in a mechanical manner without recording satisfaction under Section 14A(2) of the Act as mandated by the judgment of the Hon‟ble Supreme Court in the case of Maxopp Investments Ltd. (supra) and therefore, we hold that the Assessing Officer incorrectly invoked the provisions of Section 14A of the Act read with Rule 8D of the Rules.

In view of the above, we overturn the order, dated 28.10.2022, passed by CIT(A) and delete the addition of INR 3,84,418/- made by the Assessing Officer by incorrectly invoking the Assessment Year: 2016-17 provisions of Section 14A of the Act read with Rule 8D of the Rules.