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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI PAVAN KUMAR GADALE
आदेश / O R D E R PER PAVAN KUMAR GADALE - JM:
The assessee has filed these two appeals against the separate orders of CIT(A)-5,Mumbai passed under section 143(3) r.w.s. 254 and 250 of the Income Tax Act, 1961 (for short ‘the Act’) for A.Y. 2010-11 and under section 143(3) and 250 of the Act for the A.Y. 2014-15.
- 2 - & 5874 /Mum /2019-Ms. Fereshte D. Sethna. Since, the issues in these appeals are identical and similar, hence are clubbed, heard and consolidated order is passed.
For the sake of convenience, we shall take up ITA No. 5873/Mum/2019 for AY 2010-11 as a lead case and facts narrated therein. The assessee has raised the following grounds of appeal: That in the facts and circumstances of the case and in law, the Assessing Officer ("AO”) and the Commissioner of Income Tax (Appeals) [‘CIT(A)’] [collectively, hereinafter referred to as “Lower Authorities”] erred in law, in assessing total income of the Appellant by disallowing a sum of Rs.4,59,614/- on grounds more particularly detailed here in under.
1. That the CIT(A) erred in making a disallowance of Rs.3,85,856/-, under section 14A of the Income-Tax Act, 1961 (“Act”) read with Rule 8D of the Income Tax Rules, 1962 (“Rules”) without appreciating that the Appellant has not incurred any expenditure to earn exempt income.
2. That the Lower Authorities erred in not appreciating the fact that the investments giving rise to exempt income were made out of internal accruals / own funds of the assessee and therefore absent any direct nexus between expenditure and exempt income, AO could not invoke provisions of section 14A.
3. The learned CIT(A) has erred in not appreciating the fact that the AO invoked the provisions of section 14A read with Rule 8D, without giving proper finding on why he was not satisfied with the appellant's books of accounts and submissions that Assessee did not incur any expenditure for earning the exempt income.
That the AO has failed to appreciate the fact that the investments giving rise to exempt income were fully covered by own funds / interest free funds of the - 3 - & 5874 /Mum /2019-Ms. Fereshte D. Sethna. assessee and therefore, AO could not invoke provisions of section 14A to disallow the interest expenses of Rs.73,758/- under Rule 8D(2)(ii) of the Rules.
The Brief facts of the case are that, the assessee is a lawyer and is working as a legal advisor under the firm name M/s Dunmorr Sett. The assessee has filed the return of income for the A.Y.2010-11 on 14-10-2010 disclosing a total income of Rs.65,15,110/-The assessment was completed under section 143(3) of the Act dated 31-12-2012 with the assessed total income of Rs.73,31,610/- including the disallowance u/sec 14A r.w.r 8D in respect of interest expenditure of Rs.1,81,606/- under Rule 8D(ii) and Rs.3,85,856/- under Rule 8D(iii) of I T Rules.
4. Aggrieved by the Assessing Officer (A.O.) order, the assessee has filed an appeal before the CIT(A) and the CIT(A) has sustained the disallowance. Against the order of the CIT(A), the assessee has preferred an appeal before the Honble Tribunal, whereas the Tribunal in dated 09.11.2006 has restored the disputed issue to the file of the AO for fresh examination and adjudication of issue of whether or not disallowance under section 14A r.w.r. 8D of the I T rules is necessary. As per the directions, the A.O. has issued notice under section 142(1) of the Act. In compliance, the Ld.AR of the assessee appeared and filed a letter dated 28.11.2017 along with Bank Statement of ICICI Bank reflecting the interest paid on Car loan debited to Profit & Loss A/c - 4 - ITA No. 5873 & 5874 /Mum /2019-Ms. Fereshte D. Sethna. and such interest was directly on the loan obtained for the purchase of the car and cannot be disallowed. The assessee has filed a letter from M/s Barclays Bank stating that the assessee is holding the investment with bank since October/December 2008 and the advisories services offered by the Bank was “Execution only”. The assessee has explained that the proportionate disallowance of interest under section 14A r.w.r 8D is Rs.1,81,601/- out of the interest claimed in the Profit & Loss account. The interest component includes interest on Car loan which cannot be disputed. The A.O. observed that the assessee has not established that no interest bearing funds were utilized for the purpose of investments which yield exempt income and made proportionate disallowance of interest expenses under Rule 8D(2)(ii) of the I T Rules. In respect of disallowance of administrative expenditure, the assessee has filed a letter on 28.11.2017 explaining that it is directly attributable to the profession and the investments made by the assessee are out of own funds and the bank has not levied any charges for the investment transactions.
The assessee has referred to the nature of execution services and terms and conditions. But the A.O. was not satisfied with the explanations and is of the opinion that all the transactions are through the bank and based on the specific instructions of the assessee. Hence the disallowance u/sec14A r.w.r 8D(2)(iii) of the IT Rules are - 5 - & 5874 /Mum /2019-Ms. Fereshte D. Sethna. invoked.The A.O. also observed that the disallowance under section 14A r.w.r 8D mandated as per the CBDT Circular even, where if there is no dividend income earned/ received. Finally the A.O. considering the facts and the transactions of the assessee has worked out the proportionate interest disallowance U/sec14A r.w.r 8D(2)(ii) of Rs.73,758/- and based on the Average value of investments, the A.O. has computed disallowance U/sec14A r.w.r 8D(2)(iii) of I T Rules Rs.3,85,856/- and assessed the total income of Rs. 72,22,760/- and passed the order under section 143(3) r.w.s. 254 of the Act dated 23.12.2017.
Aggrieved by the A.O. order, the assessee has filed an appeal with the CIT(A). Whereas the CIT(A) has considered the grounds of appeal, findings of the assessing officer and the submissions of the assessee on the disputed issue and confirmed the disallowance u/sec14A r.w,r.8D(2) and partly allowed the assessee’s appeal. Aggrieved by the CIT(A) order, the assessee has filed appeal before the Honble Tribunal.
7. At the time of hearing, the Ld.AR submitted that the CIT(A) has erred in overlooking the facts that the assessee has not claimed any expenditure in the profit &loss account in respect of investments in shares and securities and also earning the dividend income. Further the investments are out of own funds and the provisions of section 14A r.w.r 8D does not apply. The Ld.AR - 6 - & 5874 /Mum /2019-Ms. Fereshte D. Sethna. supported the submissions with the judicial decisions and paper book and prayed for allowing the appeal. Contra, the Ld.DR supported the order of CIT(A).
We have heard the rival submissions and perused the material available on record. The sole crux of the disputed issue as envisaged by the Ld. AR is with respect to non applicability of provisions of section 14A r.w.r 8D, where the assessee has not claimed or debited any expenditure in relation to earning dividend income or investment transactions and the investments are made out of own funds. The Ld.AR demonstrated the Audited financial statements for the financial year (F.Y.) 2009-10 in particular at page 13 of the paper book, audited income &expenditure account, the assessee has claimed administrative & other expenditure (Schedule 9) placed at page 15 of the Paper book. We on perusal of Administrative expenses account find that the assessee has claimed expenditure in relation to the profession as a lawyer. The Ld.AR emphasized on the capital account of the assessee as on 31-03-2010 Schedule 1 at page 14 of the paper book. We on perusal of capital account find that the assessee has debited demat & other charges of Rs.7,520/-.We, based on the audited financial statements produced in the course of hearing observe that there is no claim of expenditure in respect of investments in shares & securities and earning the dividend income, which is in the nature of personal expenses was debited - 7 - & 5874 /Mum /2019-Ms. Fereshte D. Sethna. in the income and expenditure account for the year ending 31-03-2010, In fact the assessee capital account was debited in respect of demat & other charges. The submissions of the Ld.AR are realistic and duly supported with the material papers and judicial decisions are appreciated. We are of the substantive view that the applicability of the provisions of Sec14A r.w.r 8D(2) are invoked only when the expenses are claimed in the books of accounts.We support our view relying on the ratio of decision of the Co-ordinate Bench of the Honble Tribunal on similar issue in ITA No.5024/Mum/2017- ACIT 16(2) Vs. Shri Janak Dilip Dwarkadas. A.Y. 2013-14 dated 04.02.2019 at page 3 Para 8, which is read as under:
“8. The next issue relates to disallowance made u/s. 14A of the I.T. Act. We noticed that the assessee did not claim any expenditure relating to share investment activity in his profit and loss account. The assessee has charged all expenditure relating to share investment activity to his capital account. When the assessee did not claim any expenditure in the profit and loss account relating to share investment activity, in our view, the question of making any disallowance u/s. 14A of the Act does not arise. We noticed that an identical issue was considered by the Coordinate Bench in A.Y. 2012-13 (referred supra), and it has also taken view that the disallowance u/s. 14A of the Act is not called for, in the facts and circumstances of the case. The facts, being identical in this year also, we uphold the view taken by Ld CIT(A) on this issue by following the decision of co-ordinate bench rendered in the assessee’s own case, referred supra.”
9. Similarly in ACIT 16(2) Vs. Shri Janak Dilip Dwarkadas A.Y.2011-12 dated - 8 - ITA No. 5873 & 5874 /Mum /2019-Ms. Fereshte D. Sethna. 13.10.2017 Honble Tribunal has observed at page 4 & 5 Para 8 to 10 which is read as under:
“8. Second ground pertains to addition u/s 14A of the Act. The Ld. DR submitted that the Ld. CIT (A) has wrongly deleted the addition without taking into consideration the entire facts of the case. The Ld. DR further submitted that though in audit report the expenses in respect of such income was shown as nil, yet the overall supervisory use of manpower and infrastructure used to earn exempt income cannot be ruled out. Therefore, the Ld. AO has rightly made addition of .5% of average value of the investment u/s 14A read with rule 8D (2) of the Income Tax Rules.
We have gone through the entire material on record including the cases relied upon by the authorities below. We notice that the co- ordinate Bench of the Tribunal in ACIT vs. Iqbal M Chagla (supra) has decided the identical issue in favour of the assessee. The relevant portion of the decision reads as under:-
“The Assessee had not claimed any expenditure in its P & L A/c so the onus was on the Assessing Officer to prove that out of the expenditure incurred under various heads a part of some expenses were related to earning of exempt income. He is just adopted the formula of estimating expenditure on the basis of investments. But the justification for calculating the disallowance is missing. Provision of Rule 8D cannot and should not be applied in a mechanical way. Facts of the case have to be analyzed before invoking the provisions. We are of the opinion that the Assessing Officer had not deliberated upon the facts of the case before making the disallowance, whereas the FAA has decided the issue on merits. Therefore confirming his order, we decide the effective ground of appeal against the Assessing Officer.”
10. In the present case since, the assessee had not claimed any expenditure in P&L Account the onus was on the Assessing Officer to prove that out of the expenditure incurred under various heads, a part of some expenses were related to earning of exempt income. However, the AO has calculated the disallowance without pointing out as to which part of the expenses relates to exempt income. Since, the facts of the present case are identical to the facts of the - 9 - & 5874 /Mum /2019-Ms. Fereshte D. Sethna. case relied upon by the Ld. CIT (A) and the Ld. CIT (A) has deleted the addition in question by following the decision of the Mumbai Tribunal aforesaid, we do not find any reason to interfere with the findings of the Ld. CIT (A). We accordingly uphold the findings of the Ld. CIT (A) and dismissed this ground of appeal of the revenue.”
We find the assessee has not claimed the expenditure in the Audited financial statements. Further the assessee in the Balance Sheet as at 31-03-2015, placed at page 12 of the paper book has disclosed the shares and securities as investments under schedule 5 and not as trading asset. We considering the facts, circumstances, provisions of law and judicial decisions are of the opinion that the assessee cannot be subjected to disallowance under section14A r.w.r 8D(2)(ii)&(iii) of the I T rules. Accordingly, we set aside the order of the CIT(A) to the extent of disputed issues and direct the Assessing officer to delete the disallowance u/sec section14A r.w.r 8D(2)(ii)&(iii) and allow the grounds of appeal in favour of the Assessee.
ITA No. 5874/Mum/2019 AY 2014-15
The facts of the case are similar to the earlier Assesseement year (expect figures) discussed in above paragraph, therefore, the decision rendered in for AY 2010-11 shall equally apply mutatis mutandis for this case also. Accordingly, the Assessing officer is directed to delete the disallowance - 10 - ITA No. 5873 & 5874 /Mum /2019-Ms. Fereshte D. Sethna. u/sec14A r.w,r8D(2)(iii) of the I T Rules and allow the grounds of appeal in favour of the assessee.
In the result, the appeal filed by the assessee’s for the A.Y.2010-11 & A.Y.2014-15 are allowed.
Order pronounced in the open court on 02.03.2022.