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Income Tax Appellate Tribunal, “A”
Before: SHRI S.S.GODARA & DR. DIPAK P. RIPOTE
ORDER
PER DR. DIPAK P. RIPOTE, AM:
This appeal filed by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeals)-8, Pune, dated 05.06.2018 for the A.Y. 2012-13 under section 250 of the Income Tax Act, 1961(in short “the Act”). The Assessee has raised the following grounds of appeal: “1. The learned CIT(A) erred in upholding the addition made by AO of Rs.5,49,458/- u/s 14A read with Rule 8D (Para 3)
2. The learned CIT (A) failed to appreciate that separate books of Accounts for business and investments were maintained.
3. The learned CIT (A) has failed to show that expenditure is incurred by the assesse for investment.
A.Y. 2012-13 Dilip H. Ambedkar (A)
The learned CIT (A) has failed to appreciate that no expenditure which is related to exempt income has been claimed in business expenditure.
5. The learned CIT (A) has erred in not appreciating the fact that the AO applied the provisions of Rule 8(D) of the income tax Act 1961 without giving any finding on why he was not satisfied with the assesse books of accounts & submissions.” 2. Brief facts of the case as mentioned in the Assessment Order are that assessee is a manufacturer of Chemicals & also business income from M/s.Chem Org, M/s.Chem Org Plast and M/s.Vyadeshwar Lodge & Commission Agency business. The assessee receives salary from Cosmo Chemicals Pvt. Ltd., and from Allways Consultancy Services Pvt. Ltd. Apart from this the assessee also received interest income on Fixed Deposits and Saving Bank, dividend from Indian companies and also claimed loss from Short term capital gain.
2.1 The only issue involved in this appeal is disallowance of Rs.5,49,458/- u/s 14A r.w.Rule 8D for AY 2012-13.
The assessee has shown exempt income under the head “Dividend from shares and mutual funds” of Rs.15,30,724/-. During the year, the assessee has made investment of Rs.1,37,87,524/- in mutual funds and shares. However, the assessee has not claimed any expenses to earn the said exempt income. During the assessment proceedings, the Assessing Officer(AO) asked the assessee to justify the claim of no expenditure. The assessee submitted before the AO
A.Y. 2012-13 Dilip H. Ambedkar (A) that assessee has maintained separate books of accounts for business entity and personal investment. There cannot be expenditure related to exempt income in the business accounts. Assessee also produced both sets of accounts before the AO. The assessee relied on various case laws. The AO merely stated the claim of the assessee is not acceptable & made disallowance of Rs.5,49,458/- applying rule 8D r.w.s 14A.
3.1 The assessee’s submissions are as under : “The invoking of Rule 8D to compute the disallowance u/s 14A is neither automatic and nor is triggered merely because assessee has earned an exempt income. The invoking of rule 8D of the Rules is permissible only when the AO records the satisfaction in regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. This recording of satisfaction is a condition precedent in accordance with the law laid down in Godrej & Boyce Manufacturing Co 394 ITR 449 (SC) & Maxopp Investment Ltd 247 CTR 162 (Del); In CIT Vs. Hero Cycle Ltd ( P&B, 323 ITR 518), it was held that “ The expression "expenditure incurred" in s. 14A refers to actual expenditure and not to some imagined expenditure. If no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s 14A” In Maxopp Investment Ltd vs CIT ( Delhi High Court ,***), it was held that “The AO cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that he is not satisfied with the correctness of the claim of the assessee. This is a condition precedent. While rejecting the claim of the assessee with regard to the expenditure or no expenditure in relation to exempt income, the AO will have to indicate cogent reasons for the same;” We also relied on latest cases in ITAT , Delhi dtd 27th April 2018 , in case of DCIT vs Hindustan Tin Works Ltd and dtd 30 August
A.Y. 2012-13 Dilip H. Ambedkar (A)
2017 in case of DCIT vs Indiabulls Real Estate Ltd.
Above both decisions are related to AY 11-12 and AY 2012-13 i.e. so after invoking Rule 8D in Finance Act. Following are some judgements on which relied on In Pawan Kumar Parmeshwarlal vs. ACIT (ITAT Mumbai), it was held that “ No section 14A disallowance for personal tax-free investments if business expenditure not disallowed on ground of being for personal purposes The assessee is maintaining separate books of account for the purpose of business. The tax-free investments are in his personal capacity. As the AO has not disallowed any expenditure of personal nature out of the business income, the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. Accordingly, the estimation of expenditure of Rs. 20,000 out of business expenditure as being incurred for earning tax free income is not acceptable.” In Godrej Industries Ltd vs. DCIT (ITAT Mumbai) it was held that “ In the case of Hero Cycles Ltd. (supra), a finding was recorded by the Tribunal that the investment in shares and funds was made by the assessee out of the dividend proceeds and not out of borrowed funds and in view of this finding of fact, it was held by the Hon’ble Punjab & Haryana High Court that the disallowance u/s 14A was not sustainable. Keeping in view the said decision of the Hon’ble Punjab & Haryana High Court in the case of Hero Cycles Ltd. (supra) and having regard to the facts of the case, we hold that the disallowance made by the A.O. out of interest expenses u/s 14A and confirmed by the Id. CIT(A) is not sustainable. The same is therefore deleted.” Also in latest Pune ITAT following decision the assessee’s stand is upheld Shri Apoorva A Patni,, vs Department Of Income Tax AY 10-11 “The A.O. has applied the Rule 8D to arrive at the disallowance of Rs.549458/-. However, disallowance u/s.14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has incurred or claimed,
A.Y. 2012-13 Dilip H. Ambedkar (A) disallowance u/s.14A cannot stand.” Refer Page no 29 item no 10. Shri Tarun Chandmal Jain ITAT Mumbai. Assessment Year 2008-2009. Assesse has not incurred any expenditure under any head and, therefore, question of making the disallowance does not arise.”
4. The Ld.CIT(A) upheld the additions, the relevant part of the order is reproduced here under : “8. Now coming to the merits of the disallowance mde, the appellant has argued that no external funds have been borrowed for the business or for personal purposes and therefore no interest expenditure has been incurred. However I find that the AO has not made any disallowance on account of interest expenditure. The disallowance has been made only at 0.5% of the investments made as provided under rule 8D. Such disallowance has been deliberately brought on the statute to take care of the administrative expenses as well as the man-hours spent to make such investments and to earn income that is exempt. Accordingly I find that disallowance of Rs.5,49,458/- is reasonable considering the investment of Rs.11,37,87,524/- made by the appellant in mutual funds and shares, and it is accordance with law.”
We have heard ld.Departmental Representative(ld.DR) of the Revenue and perused the records. None appeared on behalf of the assessee. During the proceedings, the assessee made a claim that separate books of accounts have been maintained for business entity and personal investment. This particular claim of the assessee has not been rebutted by the AO in the assessment proceedings. Also the AO has merely rejected the explanation of the assessee without giving any cogent reason and without making any comment on the books of accounts. The Hon’ble Bombay High Court in the case of A.Y. 2012-13 Dilip H. Ambedkar (A)
CIT Vs. Sociedade De Fomento Industrial (P.) Ltd, [2021] 123 taxmann.com 38 (Bombay) has held as under : Quote, “ 19. Here, on facts, the Tribunal noted that the AO only discussed the provisions of section 14A(l) but has not justified how the expenditure the Assessee incurred during the relevant year related to the income not forming part of its total income. The AO, according to the Tribunal, straightaway applied Rule 8D. Indeed, there must be a proximate 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.
We may further reiterate that before rejecting the disallowance computed by the Assessee, the Assessing Officer must give a clear finding with reference to the Assessee's accounts as to how the other expenditure claimed by the Assessee out of the non- exempt income is related to the exempt income.
So, we see no valid reasons to upset the Tribunal's well- reasoned judgment on this substantial question of law ” Unquote.
Thus, the Hon’ble Bombay High Court has categorically stated that disallowance cannot be made on surmise or conjecture. In the case under consideration, the AO without making any comments about the books of accounts merely on surmise and conjecture mechanically made disallowance under section 14A r.w.rule 8D. Therefore, in the facts and circumstances, the AO is directed to delete this allowance made under section 14A r.w.rule 8D, accordingly all five grounds of appeal which are pertaining to disallowance made under section 14A r.w.rule 8D are allowed.
A.Y. 2012-13 Dilip H. Ambedkar (A)
The last ground i.e. Ground No.6 is general in nature and no adjudication is required, hence, it is dismissed as not adjudicated.
In the result, appeal of the Assessee is Partly Allowed.
Order pronounced in the open Court on 3rd November, 2022.