S. GANESH,MUMBAI vs. ACIT 11(2), MUMBAI

आदेश / O R D E R PER BENCH:

ITA No.2025/Mum/2017 (Assessment Year:2009-10) This appeal in for A.Y.2009-10 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-5, Mumbai in appeal Nos. IT-60/15-16 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.2032/Mum/2017 (Assessment Year:2010-11) This appeal in 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.

Shri S. Ganesh.

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 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).

ITA No.6745/Mum/2017 (Assessment Year: 2013-14) This appeal in for A.Y.2013-14 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-5, Mumbai in appeal Nos. IT-119/2016-17/135/2017-18 dated 17/10/2017 (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 30/03/2016 by the ld. Asst. Commissioner of Income Tax 16(2),Mumbai (hereinafter referred to as ld. AO).

Shri S. Ganesh.

First let us take up A.Y.2008-09.

Shri S. Ganesh.

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 declared by the assessee for which no corresponding expenditure has been disallowed in the return of income and upheld the action of the ld. AO in applying the computation mechanism provided under Rule 8D(2)(iii) of the Rules for disallowance of indirect / administrative expenses u/s.14A of the Act. Aggrieved, the assessee is in appeal before us.

3.2. The assessee in person argued that the entire dividends on shares and mutual funds are directly credited into the designated bank account No.226 with HDFC Bank, Churchgate Branch at Mumbai through Electronic Clearing Services (ECS) mode except dividends received from three companies where cheques are physically deposited into the same bank account. He argued that since substantial portion of dividend amounts are directly credited in the bank account, there was no occasion for incurring any expenses for the said purpose. He also submitted that his entire investment portfolios were looked after by his father residing in Shri S. Ganesh.

Mumbai to whom no compensation was paid by him. It was vehemently argued that no part of the expenses incurred by the assessee in Delhi, being the place of his professional practice, had anything to do with his investments and dividend income received in Mumbai. He also argued that he has got no office set up or any practice in Mumbai. He also argued that there are no churning out of investments and assessee had received only incidental income in the form of dividend from the said investments in shares and mutual funds. Hence, he argued that no disallowance of administrative expenses be made on an arbitrary basis by applying the third limb of Rule 8D(2) of the rules. The assessee in person further argued that it is the duty of the ld. AO to individually identify the list of expenses debited by the assessee in the profit and loss account and establish the proximate connection of the same with the investments and dividend income received by the assessee. According to assessee, in the instant case, no such action was carried out by the ld. AO or by the ld. CIT(A). The assessee further submitted that the ld. AO directly applied the computation mechanism provided under Rule 8D(2) of the rules without recording any satisfaction contemplated in terms of Section 14A(2) of the Act r.w.Rule 8D(1) of the Rules having regard to the correctness of the accounts of the assessee with cogent reasons. He also submitted 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:-

Shri S. Ganesh.

(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 Rule 8D(2) of the Rules, he argued that assessee was given due opportunity by the ld. AO vide letter dated 23/08/2013 as to why no disallowance u/s.14A of the Act be made in the facts of the instant case. The ld DR further argued that the validity of provisions of Rule 8D of the rules which was introduced from A.Y.2008- 09 onwards had been upheld by the decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce reported in 328 ITR 81 pursuant to which the ld. AO had sought to compute the disallowance u/s.14A of the Act in terms of Rule 8D of the Rules. This, in the opinion of the ld. DR, tantamount to proper recording of satisfaction by the ld. AO with cogent reasons. He argued that once there was no disallowance of expenses made by the assessee u/s 14A of the Act for the purpose of earning exempt income, the ld AO is bound to apply the only computation method provided in Rule 8D(2) of the Rules, which cannot be faulted with. He further argued that even the ld. CIT(A) had provided sufficient opportunity to the assessee by raising a specific question as to whether any expenditure was debited by the assessee in his capital account where

Shri S. Ganesh. the dividend incomes were credited. To this query, the assessee had replied that no expenditure was debited in his capital account. In this scenario, the only option left with the ld. CIT(A) is to confirm the action of the ld. AO who had applied the computation mechanism provided in Rule 8D(2)(iii) of the Rules for disallowance of indirect expenses. He also argued that in the aforesaid decisions relied upon by the assessee in person, the Hon’ble Apex Court had also held that both direct and indirect expenses are to be considered for working out the disallowance u/s 14A of the Act. With these arguments, he prayed for upholding of the action of the lower authorities.

3.4. In rejoinder, the assessee, in person, submitted that merely giving opportunity to assessee by way of show cause notice for the purpose of assessment, does not tantamount to recording of satisfaction in terms of Section 14A(2) of the Act read with Rule 8D(1) of the Rules. Further, with regard to observation made by the ld. CIT(A) that assessee was unable to furnish the details of expenses incurred for earning exempt income is concerned, the assessee reiterated that all the expenses were incurred by him only in Delhi which has got nothing to do with investments 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 Shri S. Ganesh. 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 available on record including the judicial pronouncements relied upon by both the parties at the time of hearing. At the outset, we find that assessee has not raised any ground before us challenging the assumption of jurisdiction by the ld. AO u/s.154 of the Act. Hence the argument advanced by the assessee in person, at the time of hearing before us, that this disallowance u/s.14A of the Act is a debatable issue, in the facts and circumstances of the instant case, cannot be done in the proceedings u/s.154 of the Act are not tenable and need not be adjudicated upon by us. We find from the perusal of the grounds raised by the assessee that all the grounds raised are only on merits of the disallowance u/s 14A of the Act and not on the assumption of jurisdiction by the AO u/s 154 of the Act.

3.5.1. It is not in dispute that assessee had earned substantial exempt income in the form of dividends from investments in shares and mutual funds. It is not in dispute that assessee had not disallowed any expenditure u/s 14A of the Act for the purpose of earning such exempt income either in the return of income or even during the course of assessment proceedings. Further, the assessee neither in the return of income nor in the computation of total income has substantiated the reason for making no disallowance. At the outset, we find that the Shri S. Ganesh. reliance has been placed by the assessee in his own case on the decision of Co-ordinate Bench of this Tribunal for A.Y.2007-08 in dated 16/11/2012. We find that a specific finding has been recorded by this Tribunal for A.Y.2007-08 wherein in para 26 of the said order, this Tribunal had stated as under:-

“26. …………………………………………………………………………..The authorities below have applied the provisions of Rule 8D without fulfilment of requirement of sub-Section 2 & 3 of Section 14A of the Act. The department has not brought any facts that assessee has incurred directly any expenditure in earning the dividend income which is exempt from tax under the provisions of the Act. We agree with the assessee that the facts of the case for the year under consideration are identical to the facts of the assessment year 2006-07. Respectfully following the earlier order of the Tribunal dated 8.12.2010(supra), we hold that the disallowance of Rs.50,000/- on account of some time devoted by 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:-

been cited before us, some of which have already been taken note of above.

Shri S. Ganesh. 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 expenditure between taxable and non- taxable has, in principle, been now widened under section 14A." (Underlining provided by us)

Shri S. Ganesh. 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. (Underlining provided by us) 3.5.3. We find that in the aforesaid 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 by the assessee towards indirect expenses u/s.14A of the Act. We are afraid that if the stand of the Shri S. Ganesh. assessee is to be accepted, then the very purpose of introduction of provisions of Section 14A of the Act would stand defeated. Hence, we dismiss this line of argument of recording of satisfaction by the assessee in the peculiar facts and circumstances of the instant case.

3.5.4. However, we appreciate the arguments of the assessee that the ld. AO had not brought out the proximate connection of the expenses incurred vis-à-vis the exempt income by clearly identifying the list of expenses. From the perusal of the income and expenditure account of the assessee for the year ended 31/03/2008. We find that the following expenses would have proximate relation to the exempt income:-

Description Amount (in Rs.) Salary 4,54,519/- Travelling Expenses 2,88,681/- Telephone and Mobile Expenses 96,557/- Miscellaneous Expenses 8,82,782/- Audit Fees 14,972/- General repairs, computer repairs 3,26,104/- and electric repairs Bank charges 18,550/-

Shri S. Ganesh.

Accountant charges 10,000/- 3.5.5. We find that the assessee had submitted that his entire investment portfolio was looked after by his father in Mumbai and accordingly no expenditure incurred by him in Delhi has anything to do with earning of exempt income in Mumbai. In the present day world, investments could be made anywhere in the country sitting at one place in online mode. Merely because no compensation was paid by the assessee to his father for managing the investments of the assessee , it does not mean that there would be absolutely no expenditure that were incurred by the assessee for making the said investments. In any case, the onus is primarily on the assessee to prove that no expenditure was incurred for the purpose of making investments and earning exempt income thereon. Merely making a statement that the expenses debited in the income and expenditure account are incurred only in Delhi and only related to his taxable income would not suffice. We hold that it cannot be definitely ruled out that certainly some time and energy should have been devoted by the assessee for the purpose of his investments with or without the assistance of his father. At least, the assessee would have certainly spoken to his father over phone advising his father to make investments in the specific company shares and mutual funds. By doing so, telephone

Shri S. Ganesh. 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) of the Rules resulting in absurdity in as much as majority of the expenses debited in the income and expenditure account getting disallowed thereon, considering the fact that substantial exempt income was derived by the assessee and considering the fact that definitely some time and energy

Shri S. Ganesh. would have been devoted by the assessee for monitoring the accounts tracking the investments and additionally incurring certain common indirect expenses , we hold that 25% of the aforesaid expenditure (i.e as per list above) to be attributable for the purpose of earning exempt income of the assessee which would meet the ends of justice in the peculiar facts and circumstances of the instant case. 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.Y.2008-09 are partly allowed.

ITA No.2025/Mum/2017 (Assessment Year:2009-10) & (Assessment Year:2010-11)

action of the ld. CIT(A), the assessee has not raised any ground before us challenging the validity of reopening. Hence, the arguments made by the assessee before us in person vis-à-vis assumption of jurisdiction u/s 147 of the Act by the ld. AO are not adjudicated herein and are hereby dismissed. Hence, we proceed to adjudicate the issue on merits.

4.1. We find that the assessee had held investments to the tune of Rs 62.38 crores as on 31.3.2009 and derived exempt income in the form of dividends during the Asst Year 2009-10. We find that the assessee had received dividend income of Rs 3,18,60,529/- and Rs 5,60,42,225/- and claimed the same as exempt u/s 10(34) of the Act during 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.

Shri S. Ganesh.

ITA No.6384/Mum/2017 (Assessment Year: 2012-13) & Year: 2013-14)

Shri S. Ganesh.

Order pronounced in the open court by way of proper mentioning in the notice board on 08/ 07 / 2020