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Income Tax Appellate Tribunal, DELHI BENCH ‘B’: NEW DELHI
Order
: 22.09.2025 O R D E R
PER S. RIFAUR RAHMAN, ACCOUNTANT MEMBER :
The assessee has filed appeal against the order of the Learned Addl./JCIT (A)-7, Kolkata [“Ld. JCIT(A)”, for short] dated 19.01.2024 for the Assessment Year 2015-16 raising following grounds of appeal :-
1. The learned CIT (A) erred in law and on facts in confirming the disallowance of vehicle running expenses amounting to Rs.4,00,204/- though evidences placed on record. Thus, the addition made on surmises and conjectures must be deleted.
2. The learned CIT (A) erred in law and on facts in confirming the disallowance of club expenses amounting to Rs.6,04,196/- on adhoc basis though evidences placed on record. Thus the addition made on surmises and conjectures must be deleted.
The first appellate authority erred in not granting any virtual hearing to the assessee before disposing off the appeal knowing well that the assessee is stationed at New Delhi and could not appear in person at Kolkata where the appeal was transferred by CPCP and the AO was DCIT, Circle 7 (1), New Delhi.”
At the time of hearing, ld. AR of the assessee brought to our notice that during assessment proceedings, Assessing Officer noticed that an amount of Rs.4,00,204/- was incurred by the assessee for the purpose of maintenance of vehicles which was paid to Patel Auto Services Pvt. Ltd. Since the abovesaid expenditure was incurred by one of the Directors of the assessee company, AO treated the same as personal expenses and accordingly he disallowed the same under section 37 of the Income-tax Act, 1961 (for short ‘the Act’). Similarly, AO further noticed that the assessee has claimed club expenses incurred by the Directors and employees of the assessee company to the extent of Rs.6,04,196/-. This expenditure was also disallowed by the Assessing Officer treating the same as personal in nature. He submitted that aggrieved with the above order, assessee preferred an appeal before the ld. CIT (A) and ld. CIT (A) also sustained the addition made by the Assessing Officer.
3. At the time of hearing, ld. AR brought to our notice similar disallowances were made by the Assessing Officer in the earlier assessment years also and brought to our notice order of ld. CIT (A)-34, New Delhi wherein ld. CIT (A) has considered the submissions of the assessee and allowed both the expenditure by observing as under :- “VEHICLE EXPENDITURE 4.4 I have considered the facts of the case, findings of the AO and detailed submissions of the appellant. The AO has made the disallowance on the basis of the repairing bill of the car which is used by the Director of the company Sh. Anurag Dalmia. Appellant has filed the copy of form 12BA showing particulars of the perquisites, other fringe benefits or amenities and profits in lieu of salary with value thereof. It is evident from the Form 12BA that value of perquisites in the hands of the Director on account of vehicle was considered at Rs.11,31,665/-. Since, appellant has treated the expenditure incurred on vehicle running and maintenance for the vehicle used by the Director as perquisites in his hand, no further disallowance is called for. Keeping in view the above facts, addition made by the AO at Rs.6,00,146/- is not sustainable and it is hereby deleted.” CLUB EXPENDITURE 7.3 The investments made, being a conscious decision and having deployment of funds clearly brings in to picture expenditure by way of cost of funds invested, The Hon’ble Bombay High Court, in its judgement delivered on 12.08.2010 In ITXA. No. 626/2010 & Writ Petition No. 753/2010 in the case of Godrej & Boyce Manufacturing Co. Limited, Mumbai vs Dy.CIT- 10(2), Mumbai & others; has ruled in favour of the Department as regards the applicability of Rule 8D for and from A.Y. 2008-09 onwards The assessee's plea that it has not earned any exempt income on its vestments, hence the provision of Section 14A is not applicable to case, is not acceptable in view of the clear position of law that the nomenclature of the heading before Rule 8D of the Rules, 1962 provides for method for determining amount of expenditure in relation to income not includible in total income. The words used are "income not includible in total income”, it is not "income not included in total income". There is a difference between the terms "not includible" and "not included" as such. Moreover, part 'B' of clause (i) of sub-rule (2) of Rule 8D also prescribes the average of value of investment, income from which does not or shall not form part of the total income, appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. Thus, the intent of legislature is very much clear from the wordings used in the heading as well as Rule 8D itself so as to cover all the investments which might generate such an income either in the present or even in future, which is not includible in total income of the assessee. Circular No.5/2014 Ministry of Finance, CBDT states that:
"The matter has been examined in the Board. It is pertinent to mention that section 144A of the Act-was introduced by the Finance Act, 2001 with retrospective effect from 01.04.1962. The purpose for introduction of section 14A with retrospective effect since inception of the Act was clarified vide Circular No.14 of 2001 as under: "Certain incomes are not includible while computing the total income, as these exempt under various provisions of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expenses incurred to earn the exempt income against taxable income. This against the basic principles of taxation whereby only the net income i.e., gross income minus the expenditure, is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to -the earning of taxable income. Thus, legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows, that the expenses which are relatable to earning of exempt income have to be considered for disallowance, irrespective of the fact whether any such income has been earned during the financial year or not. The above position is further clarified by the usage of term "includible in the Heading to section 144 of the Act and also the Heading to Rule 8D of IT Rules, 1962 which indicates that it is not necessary that exempt income should necessarily be included in a particular year's income, for disallowance to be triggered. Also, section 14A: of the Act does not use the word "income of the year" but "income under the Act" This also indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt, income during the FY under consideration. The above position is further substantiated by the language used in Rule 8D[2 (ii) & 8D (2)(iii) of the IT Rules which are extracted below: "(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula,, namely: A*B/C Where... B=the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous years; ..(i) an amount equal to one-half percent of the average or the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee on the first day and the last day of the previous year. Emphasis added thus, in light of above, Central Board of Direct Taxes, in exercise of its powers under section 119 of the Act hereby clarifies that Rule 8D r.w. section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. " 7.4 If there is material to establish that there is direct nexus between the expenditure incurred and the income not forming part of total income disallowance would be justified even where there is no receipt of exempt income u/s. 10 in the year under consideration, in view of the latest decision of the Hon'ble Delhi ITAT vide order dated 09.0726S Tor, AY 2008-09 in the case of Technopak Advisors Private Limited 2012] 50 SOT 31, wherein it has been held that as per provisions: of Section 144, actual earning of income is not sine qua non for deciding deduction of expenditure laid out or expended wholly or exclusively for purpose of such income. The Hon'ble Tribunal adjudicated upon the question of law in affirmative as to whether, where investment had been made in shares, Which did not yield any dividend in the year under consideration, expenditure incurred for earning income was deductible notwithstanding the fact that no such income had been earned.”
Since these expenses are allowable expenditure, he prayed that the same may be allowed.
On the other hand, ld. DR of the Revenue relied on the findings of the lower authorities.
Considered the rival submissions and material available on record. We observe that assessee is incurring expenditure for the purpose of running its business and these expenditures are incurred for the benefit of employees as well as for the purpose of business. We observe that with regard to vehicle maintenance, assessee has submitted details before lower authorities that these expenditures were allowed to the employees of the assessee as prerequisites and the same were declared in Form 12BA and also the abovesaid perquisites were subject to TDS provisions. The above facts were appreciated by the ld. CIT (A) in his order for AY 2013-14 and similar issue was involved in the present assessment year. We do not see any reason to disturb the erstwhile decision of the ld. CIT (A) in AY 2013-14. Accordingly, we allowed the claim of the assessee by raising ground in this appeal.
7. With regard to club expenditure, we observe that the club expenditures were also allowed by the erstwhile ld. CIT (A) for AY 2013-14 after verifying the club expenditures incurred and since the assessee also treated the same as perquisites in the hands of the employees, therefore, the same is allowable in this assessment year also. We also observe that in AY 2013-14, ld. CIT (A) has sustained certain club expenditure due to non-availability of details in that assessment year. In the present assessment year, however we observe that assessee has submitted all the related information before the Assessing Officer, the same are reproduced in the assessment order. Therefore, we are inclined to allow the above claim of the assessee as incurred for the purposes of business and these were incurred as a matter of commercial expediency and exigency to the business of the assessee.
In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on this 22nd day of September, 2025.