MR. M J ARAVIND ,BANGALORE vs. INCOME TAX OFFICER WARD-2(3)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI ARUN KUMAR GARODIA, ACCOUNTANT MEMBER AND SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER

ITA No. 614/Bang/2019 Assessment Year : 2014-15 Shri M.J. Aravind, Nirvana, 329, 18th Cross, The Income Tax Officer, Ideal Homes Layout, Phase I, Vs. Ward – 2 (3) (1), Rajarajeshwari Nagar, Bangalore. Bangalore – 560 098. PAN: ACBPA0889J APPELLANT RESPONDENT Assessee by : Shri Shyam Ramadhyani, CA Revenue by : Dr. P.V. Pradeep Kumar, Addl. CIT (DR) Date of hearing : 10.07.2019 Date of Pronouncement : 31.07.2019

O R D E R Per Shri A.K. Garodia, Accountant Member This appeal is filed by the assessee and the same is directed against the order of ld. CIT(A)-2, Bangalore dated 16.01.2019 for Assessment Year 2014-15. 2. The grounds raised by the assessee are as under. “1. On the facts and circumstances of the cases, the learned Commissioner of Income Tax (appeals) has erred in not accepting the contentions of the assessee that various expenses incurred by the assessee viz., PMS charges, professional fees, salary is integral to the investment activity undertaken by him and to earn the income returned in the return of income for the previous year. In view of this, the assessee believes that the expenses claimed under Section 57 of Rs.18,60,702/- as a deduction from the total income is fully justifiable. 1.1 Commissioner of Income 'Fax (Appeals) has also not appreciated the fact that certain class of assets may not earn income in a certain year viz., investment in unlisted equities and foreign investments and that this fact will not hamper the allowability of the expenditure incurred to manage and maintain the portfolio. Since some of the income may be exempt under the Income Tax Act, the assessee has voluntarily disallowed expenditure to an extent of income not includible in total income as computed below:

ITA No. 614/Bang/2019 Page 2 of 9 Investments Amount in Rs. Investments as on 01/04/2013 40,73,02,270 Investments as on 31/03/2014 52,91,94,474 Average Investments 46,82,48,372 0.5% of Average Investments u/s 14A (foreign securities and unlisted securities 23,41,242 from which no income has been earned has been excluded)

1.2 The above amount of Rs. 23,41,242/- is the amount computed under section 14A of the Income Tax Act, 1961. While claiming the deduction u/s 57, the above amount has been reduced as under:

50,72,474 Total Direct Expenses 23,41,242 Less : 0.5% of average investment 27,31,232 Expense claimed under section 57 Amount restricted to the income under 18,60,702 the head Income From Other Sources

1.3 The amount of Rs. 18,60,702/- has been claimed as deduction to the extent of Income shown under the head Income from Other Sources. In view of above grounds, the assessee believes that the expenses, claimed under Section 57 as a deduction from the total income is fully justifiable and learned Commissioner of Income Tax (Appeals) has erred in disallowing the said claim under Section 57 2. Without prejudice to the foregoing contentions even assuming but without admitting that the action of the learned Commissioner of Income Tax (Appeals) upholding the disallowance to be in order, The learned commissioner ought to have either considered an appropriate sum as cost of acquisition of securities for the purposes of computation of capital gains in the event of sale or as expenditure incurred wholly and exclusively in connection with the transfer of securities during the year thereby entitling the assessee relief under section 48 of the Income Tax Act, 1961. The assessee also wishes to state that the expenses claimed are clearly outgoings and in the most unlikely event of your honor not considering the claim as above the said amount have to be capitalized on the various investments that he is holding so that the necessary claim can be made when the said investment are transferred and tax liability arises in accordance with the scheme of the Act. Your appellant seeks leave to add to, to amend any of the foregoing grounds as and when considered necessary/at the time of hearing.” 3. It was submitted by ld. AR of assessee that although the Tribunal order in assessee’s own case for Assessment Year 2012-13 in ITA No.

ITA No. 614/Bang/2019 Page 3 of 9 1991/Bang/2016 dated 20.04.2018 is against the assessee but in this year, the Tribunal order is on this basis that the assessee has made general arguments and submitted general details but no specific details were furnished before the Tribunal also. He submitted that because of this finding of the Tribunal in assessee’s own case in Assessment Year 2012-13, the assessee is submitting additional evidence before the Tribunal under Rule 29 of ITAT Rules, 1963 and assessee is requesting for admission of evidence containing pages 125 to 217 in a separate paper book filed regarding the additional evidence. He submitted that the additional evidence should be admitted and the issue should be decided after considering the same. Regarding the details of expenses incurred and claim in the present year, he submitted that on page no. 2 of the assessment order, the AO has reproduced the details of expenses incurred and claim by the assessee of Rs. 50,72,474/- out of which the AO has made disallowance of Rs. 23,41,242/- u/s. 14A to the extent of 0.5% of average investments and out of the balance expenses of Rs. 27,31,232/,- the AO has held that claim of the expenses has been restricted to Rs. 18,60,702/- which is equal to the total income under the head ‘Other sources’ before such deduction. He also submitted that the assessee is also having investment in foreign equities and in this regard, he submitted that on pages 31 and 32 of the paper book is the details of investment in First State Regional China Fund of Rs. 1,30,10,170/- and in Fidelity Latin America Fund of Rs. 67,68,750/-. He submitted that the investment in foreign funds or foreign equity is yielding taxable income and therefore, deduction should be allowed u/s. 57(3) against this taxable income under the head income from other sources. The ld. DR of revenue supported the orders of authorities below. He also submitted that the issue in the present case is squarely covered against the assessee by the Tribunal order in assessee’s own case for Assessment Year 2012-13 and therefore, respectfully following the same, the issue in the present year should also be decided against the assessee on same line. 4. We have considered the rival submissions. We find that as per the assessment order, it is noted by the AO that the assessee is having investment of Rs. 40,73,02,270/- as on 01.04.2013 and Rs. 52,91,94,474/-

ITA No. 614/Bang/2019 Page 4 of 9 as on 31.03.2014 and he worked out the average investment of Rs. 46,82,48,372/- and held that 0.5% of such average investment is to be disallowed u/s. 14A. We also find that the balance sheet of the assessee as on 31.03.2014 is available on page no. 20 of the paper book and as per the same, there is investment in Indian Securities of Rs. 54,16,19,374/- and investment in Foreign Securities of Rs. 13,19,01,518/- and as per the assessment order, the AO has considered the investment as on 31.03.2014 as Rs. 52,91,94,474/-. Hence it is seen that only investment in Indian Securities has been considered by the AO for the purpose of making disallowance u/s. 14A and he has not considered the investment in foreign securities for the purpose of disallowance u/s. 14A of the IT Act. Now we reproduce the details of expenses as has been noted by the AO on page no. 2 of the assessment order and the same is as under. The major heads on section 57 expenses are given below. S.No Head of Expense u/s 57 Rs. 1. PMS charges 13,26,690 2. Salaries and bonus 17,08,280 3. Professional charges 13,28,748 4. Vehicle maintenance 2,76,186 5. Travel - official 11,064 6. Computer maintenance 51,778 7. Printing and stationery 4,064 8. Telephone charges 1,64,911 9. Bank charges 2,00,757 Total 50,72,474

ITA No. 614/Bang/2019 Page 5 of 9 learned Commissioner of Income-tax (Appeals), Bengaluru - 2 dated January 16, 2019. The only issue in the said appeal, is the disallowance of expenses under section 57 of Income Tax Act, 1961 of Rs.18,60,702/- claimed in his return of income. 2. During the year under consideration, the appellant incurred an expenditure of Rs. 50,72,474/- out of which a sum of Rs.23,41,242/- was excluded in terms of section 14A. The balance amount claimable works out to Rs 27,31,232/. The claim for deduction under section 57 was however restricted to Rs. 18,60,702/ representing the total income from other sources. The details of expenses incurred during the year ended March 31, 2014 is as under: Nature of Expenses Amount PMS charges 1,326,690 Salaries & bonus 1,708,280 Professional Charges 1,328,748 Vehicle Maintenance 276,186 Travel expenses 11,064 Computer Maintenance 51,778 Printing & Stationary 4,060 Telephone Charges 164,911 Bank Charges 200,757 Total 50,72,474 Less: Disallowance under section 23,41,242 14A Net amount claimable under 27,31,232 section 57 Claim restricted to amount of 18,60,702 income under other sources 3. During the assessment proceedings, the appellant substantiated the allowability of expenses claimed under section 57 by furnishing a detailed breakup of the total expenses and explaining the nature of each expense. Ledger extracts of the expenses and other documents were not sought from the assessee and accordingly the same were not filed. 4. The assessment was completed by the Assessing Officer on December 29, 2016 by disallowing an aggregate amount of Rs 18,60,702/- under section 57.

ITA No. 614/Bang/2019 Page 6 of 9

ITA No. 614/Bang/2019 Page 7 of 9 amount of Rs. 13,26,690/- is debited during the present year. As per the narration available in this ledger account, it is seen that it is debited on account of management fees for various quarters, brokerage for various quarters and custodian fees for various quarters. This is not the case of the assessee by filing any specific detail that such brokerage, PMS and other charges is paid in respect of foreign securities from which taxable dividend is earned. As per the Portfolio Management Services Agreement available on pages 150 to 181 of the paper book, it is noted in para 5.2 of this agreement that such investment can be equity, stock and preference share of Indian companies, debentures, bonds and secured premium notes, including tax exempt bonds of Indian companies and corporations, Government securities and trustee securities, units and other instruments of mutual funds, Bank deposits, commercial papers, trade bill, treasury bills, certificate of deposit and usance bills, options, futures, swaps and such other derivatives as may be permitted from time to time and Warrants of both listed and unlisted securities etc. There is no mention about any investment in foreign securities in this PMS agreement. This is also seen that as per the balance sheet, the investment in Indian companies is only about securities and not any bank deposit, income of which is taxable. Hence on the entire investment of the assessee through PMS, the only income which can be earned is dividend income or capital gain and none of these two incomes is taxable under the head ‘Income from other sources’ and therefore, such expenses is not allowable u/s. 57(iii) of the IT Act. Hence, the additional evidence filed by the assessee is not rendering any help to assessee in the present case. The second major head of expenses is Salary of Rs. 17,08,280/- and on pages 129 to 131 of the paper book is the ledger account of salaries and bonus. In the narrations given in the ledger account, the name of the employees is given and, there is no such detail as to what work is entrusted to these employees and whether the work entrusted to these employees is regarding earning of income taxable under the head ‘Income from other sources’. Hence, this expenditure on Salaries and bonus is not correlated by assessee with earning of income taxable under the head ‘Income from other sources’ and therefore, this expenditure of Salaries and bonus is also not allowable u/s. 57(iii) of the IT Act. 8. The next major head of expenses is Professional charges and ledger copy of this account is available on page 132 of the paper book and in the same, only detail available is this as to whom it was paid and for which period. There is no such detail available as to whether such professional charges is in respect of earning of income taxable under the head ‘Income from other sources’ and therefore, even after considering the additional evidence, these expenses of Professional charges also cannot be held to be allowable u/s. 57(iii) of the IT Act. Hence, it is held that these three expenses i.e.

ITA No. 614/Bang/2019 Page 8 of 9 PMS charges, Salaries and bonus and Professional charges are not allowable u/s. 57(iii) of the IT Act and the remaining expenses is very small and less than the amount of expenses already allowed by the AO of Rs. 18,60,702/- because out of Rs. 27,31,232/-, the AO has allowed deduction of Rs. 18,60,702/- being the amount equal to the total income declared by the assessee under the head ‘Income from other sources’. Hence, even after considering the additional evidence filed by the assessee, we find that assessee does not get any help from the said additional evidence. 9. Now we reproduce the relevant para nos. 8, 9 and 12 from the earlier Tribunal order in assessee’s own case for Assessment Year 2012-13. These paras are as under. “8. As per the provisions of section 57(iii) of IT Act, any expenditure not being in the nature of capital expenditure laid out or expended wholly and exclusively for the purpose of making or earning such income under the head ‘income from other sources’ is allowable. In addition to that, in respect of income excluding exempt income being interest on securities, any reasonable sum paid by way of commission or remuneration to banker or any other person for the purpose of realising such dividend or interest on behalf of the assessee is allowable as per clause (i) of section 57. Apart from these two clauses i.e. clause (i) & (iii), other clauses of section 57 are not applicable in the present case. The assessee’s claim is this that as per section 14A of IT Act, ½% of the investments has to be disallowed and the balance has to be allowed and the assessee computed the disallowance in that manner and claimed balance amount as deduction. In this regard, we observe that section 14A comes into picture in respect of those expenses which are otherwise allowable and therefore, the assessee has to first establish this that the expenses claimed by the assessee is allowable under any provisions of the law. For that, the assessee has to show that the claim of the assessee is allowable u/s. 57 of IT Act because the expenses are incurred in earning of income from other sources. As per the details of the expenses claimed by the assessee, it is available on table 2 of written submissions filed by the assessee before the CIT(A) as reproduced above, it is seen that there is no claim regarding any expenses specified in clause (i) of section 57 i.e. commission or remuneration to banker or any other person for the purpose of realising dividend or interest income because the assessee has claimed deduction on account of PMS charges,Salaries, Professional charges, vehicle maintenance, travel, computer maintenance, printing and stationery, telephone charges and bank charges. Hence no deduction is allowable in the present case under clause (i) of section 57. 9. Regarding the allowability of deduction under clause (iii) of section 57, it has to be established by the assessee that expenditure has been exclusively laid out or expended wholly and exclusively for the purpose of making or earning such income taxable under the head ‘income from other sources ‘and a categorical finding has been given by CIT (A) in para no. 6.2 of his order as reproduced above that no such detail was

ITA No. 614/Bang/2019 Page 9 of 9 furnished by the assessee. Before us also, the assessee has made general arguments and has submitted general details but no specific details were furnished before us also. Hence, we hold that no deduction is allowable u/s 57 (iii). 12. Now we deal with and decide the alternative argument of ld. AR of assessee that even if expenses are held as not allowable against income from other sources, the same should be allowed against income from capital gain in the present year or future years. Regarding this argument, we would like to observe that for computing income from capital gains, deduction is allowable u/s. 48 and expenses which can be allowed as per this section are expenses incurred wholly and exclusively in connection with transfer of asset or cost of acquisition of asset or cost of any improvement of the concerned capital asset only. The claim of expenses in the present case is not for those expenses which are incurred on account of cost of transfer of asset or cost of acquisition of asset or cost of any improvement of asset and therefore, this alternative claim also has no merit and accordingly rejected.” 10. From the above Tribunal order, it comes out that the issue involved in the present year is squarely covered against the assessee by this Tribunal order in assessee’s own case and we have already seen that the additional evidence filed by the assessee in the present year is not rendering any help to assessee in the present year. Hence, we decline to interfere in the order of ld. CIT(A). 11. In the result, the appeal filed by the assessee is dismissed. Order pronounced in the open court on the date mentioned on the caption page. Sd/- Sd/- (PAVAN KUMAR GADALE) (ARUN KUMAR GARODIA) Judicial Member Accountant Member Bangalore, Dated, the 31st July, 2019. /MS/ Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, Income Tax Appellate Tribunal, Bangalore.