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Income Tax Appellate Tribunal, “D”, BENCH MUMBAI
Before: SHRI G. MANJUNATHA & SHRI RAVISH SOOD
Date of Hearing 10/12/2019 Date of Pronouncement 10/12/2019 आदेश / O R D E R आदेश आदेश आदेश PER G.MANJUNATHA (A.M):
This appeal filed by the assessee is directed against, the order of the Ld. Commissioner of Income Tax (Appeals)–34, Mumbai, dated 01/03/2018 and it pertains to Assessment Year 2011-12. 2. The assessee has raised the following grounds of appeal: 1) On the facts & in the circumstances of the case and in law, the Learned Assistant Commissioner of Income Tax , Circle 19(1) Mumbai erred in disallowing Rs.6,65,786/- as per calculation u/s 14. A Rule 8D against Total expenditure of Rs. 33,799/-, incurred by your appellant for business purposes only. This Section is not applicable to the appellant. 2) The Learned Assistant Commissioner of Income Tax has ignored the fact that all of the expenses claimed, have a direct co-relation to the business of your appellant namely, trading in shares , securities und Brokerage , and as such, the same should be allowed to be set off against the substantial business income, earned by the appellant. Out of Dhanesh B Raheja the Total Expenses of Rs.33,799/- all of the expenses paid relates only to earning of Business Income of Rs.4,63,860/-. 3) The appellant prays that Section 14A-Rule8D is not applicable at all as he has not incurred any expenses towards earning tax free income and has used his own funds for all his investments, further no loan or overdraft were taken for any investments made whether taxable or tax free income. 4) Your appellant further submits that the Learned Assistant Commissioner of Income Tax Circle 19(1) Mumbai has worked out the disallowance mechanically, without reducing the items where no tax free income / exempt income is received and even taken Taxable bonds, Debentures, PPF Amount, Cash & Bank Balances, Advances & Life Insurance as Investments in its calculations(Including Previous year) . Further without appreciating that Section 14A of the Income Tax Act is based on the principle that expenses must be allocated to that income to which they relate, to avoid distortions in the computation of both taxable as well as exempt income. The Learned Assistant Commissioner of Income Tax has failed to appreciate that such mechanical determination of the disallowance, as has been done in the instance ease, has resulted in the computation of a higher than actual expenses which is not the intension of the said provisions.(Total Expenses Rs. 33,799/- and Disallowed u/s Section 14A Rs,6,65,786/-) 5) Further the Learned Assistant Commissioner of Income Tax has disallowed an amount of Rs: 5,378/- paid being shown as "Penalty M F Global Sify" whereas the amount paid relates to Collateral Charges/Handling Charges which is our normal business expenses. 6) Submission of CBDT Circular dt: 02nd June 2016 not considered during appeal proceedings where in clearly stated that disallowance shall not exceed expenditure claimed by assesses amount of Rs: 33,799/- 7) Your appellant craves leave to add, amend, alter vary and or withdraw any or all of the grounds of appeal before or at the time of hearing
3. The brief facts of the case are that the assessee is an individual, derives income from salary, house property, business and other sources, filed his return of income for AY 2011-12 on 15/07/2011, declaring total income of Rs. 62,32,387/-. The case was selected for scrutiny and during the course of assessment proceedings, the Ld. AO noticed that the assessee has earned tax free income being dividend from shares, interest on tax free bonds and interest on PPF aggregating to Rs.12,02,753/-, but did not made suo-moto disallowances of any expenditure incurred in relation to exempt income. Therefore, he called upon the assessee to furnish
Dhanesh B Raheja necessary details, including nature of exempt income earned and related expenditure incurred thereon. In response, the assessee vide letter dated 19/12/2013 submitted that it has earned tax free income being dividend from shares and interest income, however did not incurred any specific expenditure, including interest on loans borrowed, if any and hence, the question of disallowances of expenditure in relation to exempt income does not arise. The Ld. AO after considering relevant submissions of the assesee and also by following the decision of Hon’ble Bombay High Court, in the case of Godrej and Boyce manufacturing company Limited vs DCIT 234 CTR 1 (bom.) held that from AY 2008-09 on wards disallowances of expenditure in relation to exempt income shall be determined in accordance with prescribed method provided under Rule 8D and accordingly, determined total disallowances of expenses @0.5% of average value of investments and made disallowances of Rs.6,65,786/-. The assessee carried the matter in appeal before the Ld.CIT(A), but could not succeed . The Ld.CIT(A) for detailed reasons recorded in his assessment order, confirmed additions made by the Ld. AO and dismissed appeal filed by the assesee. Aggrieved by the Ld.CIT(A) order, the assesee is in appeal before us.
The Ld.AR for the assessee submitted that the Ld.CIT(A) was erred in confirming disallowances made by the Ld. AO of Rs.6,65,786/- without considering the explanation offered by the assesee, in light of total expenditure claimed for the year amounting to Rs.33,799/-. The Ld. AR, further, submitted that when, total expenditure debited into the profit and loss account is at Rs.33,799/-, the Ld. AO is erred in disallowed a sum of Rs. 6,65,786/-. The Dhanesh B Raheja Ld.CIT(A) without appreciating these facts has simply confirmed additions made by the Ld.AO.
The Ld. DR, on the other hand, strongly supporting order of the Ld.CIT(A) submitted that if, you go by plain reading of section 14A r.w.Rule 8D, it does not speaks about actual expenditure incurred in relation to exempt income, but what is required to be seen is whether is there any exempt income and corresponding expenditure in relation to such exempt income. Further, once it is noted that there is expenditure, then disallowances contemplated u/s 14A shall be determined in accordance with Rule 8D. Therefore, there is no error in findings of the Ld. AO, as well as the Ld.CIT(A) and hence, their order should be upheld.
We have heard both the parties and perused the material available on record. We find that the Ld. AO has determined total disallowances of expenditure in relation to exempt income u/s 14A at Rs. 6,65,786/-, as against total expenses debited into the profit and loss account amounting to Rs. 33,799/-. There is no dispute, from assessment year 2008-09 onwards section 14A disallowances shall be determined in accordance with Rule 8D of I.T.Rules, 1962. But, it does not mean that such disallowances shall exceed expenses debited into the profit and loss account. The purpose of determination of expenses relatable to exempt income is to bifurcate common expenses incurred by the assessee towards exempt income and taxable income, when the assesee has not maintained separate books of accounts. However, it does not mean that such disallowance shall go beyaond expenses debited into profit and loss account or expenditure incurred by the assessee. In this case, there
Dhanesh B Raheja is no dispute with regard to fact that the assesee has debited total expenditure into the profit and loss account amounting to Rs.33,799/-. If you go through the nature of expenses debited into profit and loss account, there are direct expenses relatable to exempt income being DMAT charges and penalty M F Global Sify. The other expenses debited into profit and loss account like audit fee, bank charges, depreciation, office insurance, professional tax and Scooter insurance are common expenses, which needs to be allocated to exempt income and taxable income. Therefore, even if you consider 100% direct expenses and 50% ther expenses for disallowances, then total disallowance required to be made u/s 14A cannot be more than Rs. 15,000/-. We, therefore, considering totality of facts and circumstances of this case, and also total expenses debited into the profit and loss account, are of the considered view that an adhoc disallowances of sum of Rs. 15,000/- would meet the ends of justice. Hence, we direct the Ld. AO to restrict disallowances quantified under Rule 8D(2)(iii) of the I.T.Rules, 1962 to the extent of Rs.15,000/- and the balance amount of disallowance is directed to be deleted.
In the result, appeal filed by the assessee is partly allowed.
Order pronounced in the open court on this 10 /12/2019