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Income Tax Appellate Tribunal, “D” Bench, Mumbai
Before: Shri Shamim Yahya (AM) & Shri Amarjit Singh (JM)
O R D E R Per Shamim Yahya (AM) : This appeal by the assessee is directed against the order of learned CIT(A) dated 11.9.2017 and pertains to A.Y. 2012-13.
Grounds of appeal read as under : a. Under the facts and circumstances of the case and in law the Learned Commissioner Of Income Tax (Appeals)-6, Mumbai [hereinafter referred to as CIT(A) ] is not justified in upholding the order of The Deputy Commissioner of Income Tax, Circle-l(l)(2), Mumbai (hereinafter referred to as AO) for the disallowance of ? 31,69,823 under section 14A of the Income Tax Act. The CIT (A) has not appreciated the fact that the AO has failed to discharge the onus casted on him under sub section (2) of section 14A before invoking the provisions of Rule 8D.
b. Under the facts and circumstances of the case and in law the CIT(A) erred in not appreciating the fact that the Appellant has not incurred any expenses for earning the exempt income and that no expenses have been claimed by the appellant while computing the total income. c. Under the facts and circumstances of the case and in law the CIT(A) erred in relying on the case of ACIT Range 10(1), Mumbai vs City Corp Finance (I) Limited (2007) 12 SOT 248 (Mum), as his reliance is based on surmises and presumptions and has failed to prove the nexus between expenditure incurred and the exempt income received d. Under the facts and circumstances of the case and in law the CIT(A) erred in not considering the decisions in case of Maxopp Investment Ltd & Ors v/s CIT (2011)347 ITR 272 (Del)(HC) and Kodak India Pvt.Ltd. v/s ACIT (2013) 155 TTJ 697 (Mum)(Trib). e. Without prejudice to the above, under the facts of the case, the CIT(A) erred in not giving clear directions to the AO in re-computing the disallowance under clause (iii) of the Rule 8D.
Relief claimed.
The Appellant prays that the AO be given suitable directions in the matter after considering the Appellant's submissions in the matter
The appellant craves leave to add, amend, alter, modify or change any/all ground/s of appeal before or at the time of hearing as may be advised.
The AO, in his order, has observed that assessee has earned exempt income of Rs. 1,43,44,065/- from dividend of Rs.7,18,30,269/- from capital gain. He has further observed that the assessee has shown host of investment in instruments linked to exempt income as afore mentioned. He has also observed that the assessee has shown gross professional income of Rs.7,63,89,735/- and indirect income of Rs. 18,40,22,465/-. Total expenses at Rs.65,37,909/- have been claimed against professional receipts and net income from business/profession have been declared at Rs.6,98,51,826/-. He observed from the computation that the appellant had not disallowed any expense u/s 14A on account of exempt income. Accordingly, AO asked the assessee regarding disallowance u/s 14A, which was replied vide letter dated 17.03.2015 mentioning therein that they had made enough cash withdrawal, and expenses if any, which were relatable to earning of the exempt income, may be treated to be made out of the said cash expenses only. AO did not find such explanation of the assessee as acceptable and referring to the decision of Hon'ble ITAT Special Bench, Mumbai in the case of Daga Capital Management Private Limited and others (119 ITR 289) and the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Limited vs DCIT, Range-10(2)(234 CTR 1/328 ITR 81) and further referring to CBDT Circular No.5/2014, invoked Rule 8D of Income Tax Rules and worked out a disallowance of Rs.31,69,8237- and added to the total income of the assessee.
Upon assessee’s appeal learned CIT(A) noted the assessee’s submissions as under :
The appellant, in his submission, has contended that he has not incurred any amount of interest on loans or overdrafts and that the AO has failed to appreciate the basic distinction between business expenses and personal expenses. The appellant has relied on the decision in the case of Maxopp Investment Limited and others vs CIT 347 ITR 272 (Del) (High Court), Kodak India Private Limited vs ACIT 155 TTJ 697 (ITAT Mumbai) and have contended that the appellant is not a corporate body and only in the case of body corporate there is no element of personal income. It has been further contended that the Assessing Officer has failed to prove any nexus between the expenses incurred for earning exempted income. It has been further contended that Rule 8D cannot be applied directly and before applying the AO must be satisfied with the correctness of claim of the assessee having regard to the accounts of the assessee. In respect of the reliance placed by the AO on the decision of Godrej & Boyce Manufacturing Company Limited (supra), the appellant has contended that he is not engaged in the business of earning of dividend income, and that he is not holding huge investment and that the appellant has not incurred administrative and other expenses to monitor and manage the investments which have yielded exempt dividend. Accordingly the appellant has sought to distinguish the decision relied upon by the AO. It has also been contended that the AO is duty bound to determine the expense which had been incurred in relation to income which does not form part of the total income under the Act and that the AO should have seen the reasonableness and circumstances of the case and looking to the accounts, should not have resorted to Rule 8D for working out the disallowance. Referring to the provisions of section 14A(2), it has been contended that the appellant had invested from his own funds and that he is holding the investments for a long time and has not spent any amount of interest while making the investments. Accordingly and looking to the fact that the dividend earned is just 3.55 per cent of the returned income, it was contended that the disallowance at Rs.31,69,8237- is huge. Without prejudice to such submissions, it has been contended that the AO has considered bank charges of Rs.6,573/- as direct expenses which does not relate anyways to earning of the dividend income. Rather such charges are expenses debited by the banks as their commission for collecting foreign remittances received by the appellant from foreign companies as management consultancy fees, or directors' fees which has already been offered to tax. It has also been contended that while calculating average value of investment, AO has taken Rs.70.77 crores as the value on investment 31.03.2012 and Rs.55.76 crores for 31.03.2011 and it has been contended that AO has taken wrong figures and has included items which should not have been considered. Accordingly, it has been contended that the AO has not applied his mind properly and therefore disallowance should be deleted.
However, learned CIT(A) convinced. He did not accept the contention that no expenditure has been incurred to earn exempt income. He held that the assessee must have incurred some expenses in this regard. He also rejected the assessee’s submission that the assessee has prepared two sets of profit and loss account. One profit and loss account was in personal capacity and investments were also made in personal capacity. It was claimed that no expense has been incurred therein. However, learned CIT(A) opined that the assessee must have incurred expenses out of audit fees, consultancy charges, mobile phone expenses, repairs and maintenance and salary. Accordingly, he proceeded to sustain Assessing Officer’s disallowance. However, he granted some relief by accepting that some of the investment figures have not been taken correctly. He gave directions to the Assessing Officer accordingly.
Against this order, assessee is in appeal before us.
We have heard both the counsel and perused the records. Learned Counsel of the assessee vehemently submitted that the assessee has not incurred any expenses to earn exempt income. He submitted that the assessee is an individual and investments are made in his personal capacity that the investments are long term and no expenses is incurred in this regard. He further reiterated that the assessee has sufficient cash withdrawals and some minor expenses on telephone etc. can very well take care of that. He submitted that Assessing Officer has not at all rebutted this submission. He further submitted that the Assessing Officer has made disallowance in a mechanical manner without an iota of satisfaction that the assessee has actually incurred any expenses in this regard. He submitted that it is already accepted by the authorities that the assessee has sufficient own funds and hence no disallowance on account of interest has been rightly done. For the proposition that no disallowance of expense incurred for earning exempt income is warranted in this case, learned Counsel of the assessee placed reliance upon following case laws :- Justice Sam P. Bharucha Vs. Addl.CIT (25 taxmnn.com 381) Pawan Kumar Parmeshwarlal Vs. ACIT (ITA No. 530/Mum/2009) CIT Vs. Shivam Motors P. Ltd. (55 taxmnn.com 262 Cheminvest Ltd. Vs. CIT (234 Taxman 761) CIT Vs. Hero Cycles Ltd. (189 Taxman 50) Maxopp Investments Ltd. Vs. CIT 203 taxman 264 PCIT Vs. Sintax Ind. (2018) taxmann.com 24 CIT Vs. India Gelatine & Chemicals Ltd. (376 ITR 553)
Referring to the above, learned Counsel of the assessee stated that no disallowance in this regard need to be done u/s. 14A of the Act.
Per contra, learned DR relied upon the orders of the authorities below.
Upon careful consideration, we find that the assessee in this case in an individual. He has sufficient own funds to make investments. No disallowance has been made on account of interest for making investment. However, adhoc disallowance for administrative expenses incurred for earning exempt income has been done by the Assessing Officer without any satisfaction whatsoever that the assessee has actually incurred any expenses in this regard. The assessee has duly prepared profit and loss account for personal account as well as professional account. Assessee’s investments are in personal account even then the assessee has submitted that the assessee has withdrawn sufficient cash to meet some sundry expenses in this regard. The Assessing Officer has dismissed this contention without any cogent basis.
Learned CIT(A) on this other hand has passed a hypothetical order that the assessee might have incurred expenses for earning exempt income out of expenditure incurred on audit fees, travelling expenses, repairs and maintenance etc. We find that the disallowance on account of administrative expenses for earning exempt income cannot be made by guess work by learned CIT(A). Facts of the case duly indicate assessee’s submission that no expenses have been incurred has sufficient cogency. Moreover, on similar facts in earlier years no disallowance has been done. Hence, without any satisfaction that the assessee has incurred any expenses to earn exempt income by the Assessing Officer, disallowance in this regard is not sustainable. This is upheld by Hon'ble Hon'ble Jurisdictional High Court as well as Hon'ble Apex Court in the case of Godrej and Boyce Manufacturing Co. Ltd. Furthermore, case laws referred by learned Counsel of the assessee duly support the case of the assessee. In these circumstances, we set aside the orders of the authorities below and delete the disallowance.
In the result, assessee’s appeal stands allowed. Order has been pronounced in the Court on 28.3.2019.