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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI V. DURGA RAO & SHRI G. MANJUNATHA
आदेश /O R D E R Per G. MANJUNATHA, AM: These two appeals filed by the assessee are directed against separate but identical orders of the Commissioner of Income Tax (Appeals)-7, Chennai, dated 21.02.2019 and pertains to assessment years 2013-14 & 2014-15. Since the facts are identical and issues are common, for the sake of
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convenience these appeals are heard together and are being disposed of by this consolidated order.
The assessee has more or less raised common grounds of appeal for both the assessment years. Therefore for the sake of brevity, grounds of appeal filed for assessment year 2013-14 are reproduced as under:- 1. The learned Commissioner of Income-tax (Appeals) erred in sustaining the disallowance made u/s 14A read with Rule 8D(2)(iii) of the Income-tax Rules in the appellant’s case. 2. The learned Commissioner of Income-tax (Appeals) is not justified in relying on the order of the ITAT in the appellant’s case for the assessment year 2012-13 as the same has not become final and is subjected to further appeal under section 260A before the Hon’ble High Court at Chennai. 3. The appellant submits that he has not incurred any expenditure for making the investment in shares and therefore no part of the expenses claimed under profession could be disallowed u/s 14A of the Act. 4. The authorities below ought to have appreciated the fact that the major investments in the shares were made when the appellant was an employee without incurring any expenditure for making the investment. 5. The appellant submits that all the expenses claimed by him under profession wholly relate to the profession carried on by him and no part of the same can be attributed to earning of exempted dividend income. 6. The appellant submits that the expenses specifically relatable to taxable income cannot be disallowed u/s 14Ar/w Rule 8D. 7. The appellant therefore prays that the disallowance of Rs. 11,16,301/- made under section 14A r/w Rule 8D(2)(iii) of the Rules may be deleted and justice rendered
The brief facts of the case are that the assessee is a Management Consultant, filed his return of income for the
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assessment year 2013-14 on 28.09.2013 declaring total income of Rs.3,54,66,200/-. The case was selected for scrutiny and during the course of assessment proceedings AO noticed that the assessee has received dividend income of Rs.1,83,81,799/- and claimed the same as exempt u/s.10(34) of the Income Tax Act, 1961 (hereinafter the ‘Act’), however not made any suo moto disallowance towards expenditure in relation to exempt income u/s.14A of the Act. Therefore the AO called upon the assessee to explain as to why expenses in relation to exempt income shall not be computed u/s.14A r.w.rule 8D of the Income Tax Rules 1962 (hereinafter the ‘Rules). In response, the assessee submitted that he has not incurred any expenditure for earning dividend income. The expenditure claimed against professional income was related to his professional activity and no part of expenditure is attributable to earning of exempt income. Therefore, no disallowance can be made towards expenses in relation to exempt income u/s.14A of the Act. The AO however was not convinced with the explanation of the assessee and according to him as per Section 14A of the Act, no deduction should be allowed in respect of expenditure incurred in relation to income which does not form part of total income. He further noted that disallowance of expenses u/s.14A of the Act shall be
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computed in accordance with Rule 8D of the Rules even in case where the assessee claims that no expenditure has been incurred for earning exempt income. Accordingly computed total disallowance of Rs.13,86,126/- under Rule 8D(2)(ii) and 8D(2)(iii) of the Rules.
Being aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), the assessee submitted that he had not incurred any expenditure for earning exempt dividend income, as the investment in shares were made when he was in employment. The assessee further submitted that expenditure debited in to the profit & loss accounts are in relation to his profession of Management Consultant and hence unless there is a direct nexus between expenses incurred and exempt income, no disallowance can be made u/s.14A of the Act. The ld.CIT(A) after considering the relevant submissions of the assessee deleted additions made by the AO towards interest expenditure on the ground that no part of interest expenditure is relatable to exempt income because the assessee has taken loan and paid interest during the current financial year, whereas investments in shares were made in earlier financial years, when he was in employment.
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As regards disallowance of expenses under Rule 8D(2)(iii) of the Rules, the ld.CIT(A) after considering working filed by the assessee directed the AO to exclude investments which do not yield exempt income for the purpose of computation of average value of investments, however rejected the arguments of the assessee that he did not incur any expenditure for earning exempt income. Accordingly directed the AO to verify the computation filed by the assessee and delete excess disallowance made u/s.8D(2)(iii) of the Rules. Aggrieved against the CIT(A) order, the assessee is in appeal before us.
The ld.AR for the assessee submitted that the ld.CIT(A) has erred in sustaining the disallowance made u/s.14A r.w.r.8D(2)(iii) of the Rules without appreciating that there is no direct nexus between the expenses debited in to the profit & loss account and dividend income earned for the year. The ld.AR further referring to the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd vs. CIT, 402 ITR 640, submitted that unless the AO records satisfaction having regard to the books of accounts of the assessee as required u/s.14A(2) of the Act that suo moto disallowance or no disallowance made u/s.14A of the Act was not correct, he cannot invoke Rule 8D of the rules to compute
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disallowance u/s.14A of the Act. The ld.AR further referring to the decision of ITAT Mumbai in the case of Justice Sam P. Bharucha in ITA no.3889/Mum/2011, submitted that unless there is direct nexus between expenditure debited in to the profit & loss account and dividend income, no disallowance can be made u/s.14A of the Act merely for the reason that the assessee has maintained common books of account for professional income and exempt income. In this regard, he relied upon the following judgments:- 1) Supreme Court decision in the case of Maxopp Investment Ltd (402 ITR 640) 2) ITAT Chennai in the case of M/s. City Union Bank Ltd in ITA Nos.1129 & 1130/Chny/2018 3) ITAT Mumbai in the case of Justice Sam P. Bharucha in ITA No.3889/Mum.2011 4) Delhi High Court in the case of CIT vs. Om Prakash Khaitan in ITA No.416 of 2015.
The ld.DR on the other hand supporting the order of ld.CIT(A) submitted that the issue is covered against the assessee by the decision of the ITAT Chennai ‘D’ Bench in the assessee’s own case for the assessment year 2012-13, where the Tribunal has rejected arguments of the assessee that no expenditure has been
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incurred in relation to exempt income in light of the provisions of Section 14A of the Act, that disallowance contemplated u/s.14A of the Act is a deeming fiction where a question of incurring actual expenses does not arise and what is relevant is income which do not form part of total income and total expenses claimed by the assessee. Therefore, he submitted that there is no merit in the arguments of the assessee that no disallowance can be made u/s.14A r.w.r.8D of the Rules unless there is a direct nexus between expenditure incurred in relation to exempt income.
We have heard both the parties, perused the materials on record and gone through the orders of the authorities below along with case laws cited by the ld.counsel for the assessee. As regard applicability of disallowances contemplated u/s.14A of the Act, we find that this Tribunal has considered the arguments of the assessee that unless there is a direct nexus between the expenses incurred and exempt income, no disallowance can be made u/s.14A of the Act by invoking Rule 8D of the Rules and held that since provisions of Section 14A is a deemed fiction where direct nexus between expenditure debited to the profit & loss account and exempt income is not necessary. Therefore, we reject the arguments taken by the
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assessee that there is no nexus between expenses debited to profit & loss account and exempt income earned for the year.
As regards another argument taken by the assessee in light of the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd vs. CIT, unless AO records satisfaction having regard to books of accounts that suo moto disallowance or no disallowance made by the assessee is not correct and he cannot proceed to compute disallowance u/s.14A of the Act, we find that the Hon’ble Supreme Court has considered the issue of satisfaction in the above case and held that where the AO is not satisfied with suo moto disallowance made by the assessee having regard to books of accounts that suo moto disallowance made by the assessee is not correct, he cannot invoke provisions of Rule 8D of the Rules. In this case on perusal of facts available on record, we find that the AO has recorded satisfaction as required u/s.14A(2) of the Act and applied Rule 8D(2) of the Rules to compute disallowance. Therefore the arguments taken by the assessee that no satisfaction is recorded by the AO is rejected. We further note that the Tribunal had already considered the issue for earlier assessment year in assessee’s own case in ITA No.3280/Mds/2016 vide order dated 03.04.2017 and hence the arguments once again taken by the
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assessee in light of Hon’ble Supreme Court decision in the case of Maxopp Investment Ltd vs. CIT, supra is rejected. In so far as, disallowance computed by the AO and modified by the ld.CIT(A) on the basis of revised computation filed by the assessee during appellate proceedings, we are of the considered view that once Rule 8D(2) of the Rules is applicable for computation of disallowance then the AO has to take net investments recorded in the books of accounts which yield exempt income for the purpose of determining disallowance under Rule 8D(2)(iii) of the Rules. The ld.CIT(A) has considered revised computation filed by the assessee and has directed the AO to exclude investments which do not yield exempt income for the purpose of computation of average value of investments and delete excess disallowance made under Rule 8D(2)(iii) of the Rules. We therefore are of the opinion that there is no error in the findings recorded by the CIT(A) to confirm / modify disallowance of expenditure in relation to exempt income u/s.14A r.w.rule 8D(2)(ii) of the Rules. Hence, we are inclined to uphold findings of the CIT(A) and dismiss the appeal filed by the assessee.
ITA No.908/CHNY/2019 The facts and issues involved in this appeal are identical to the facts and issues which we had considered in ITA
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No.907/CHNY/2019 for the assessment year 2013-14. The reasons given by us in preceding paras in ITA No.907/CHNY/2019 shall mutatis mutandis apply to this appeal as well. Therefore for similar reasons, we dismiss the appeal filed by the assessee for the assessment year 2014-15.
In the result, both appeals filed by the assessee are dismissed.
Order pronounced on 17th December, 2020 at Chennai.
Sd/- Sd/- (वी दुगा� राव) (जी. मंजुनाथ) (V. Durga Rao) (G. MANJUNATHA) लेखा सद�य /ACCOUNTANT MEMBER �याियक सद�य/Judicial Member चे�ई/Chennai, �दनांक/Dated, the 17th December, 2020 RSR आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A) 4. आयकर आयु� /CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.