VIKRAM BODHRAJ TANNAN,MUMBAI vs. ACIT, CC-3(2), MUMBAI

This appeal by the assessee is directed against order dated 15.01.2024 passed by the Ld. Commissioner of Income-tax (Appeals) – 51, Mumbai [in short ‘the Ld. CIT(A)’] for assessment year 2020-21, raising following grounds:

1. The CIT(A) erred in confirming the invocation of section 14A by the 1. The CIT(A) erred in confirming the invocation of section 14A by the 1. The CIT(A) erred in confirming the invocation of section 14A by the Assessing Officer, and in holding that the disallowance was to be Assessing Officer, and in holding that the disallowance was to be Assessing Officer, and in holding that the disallowance was to be computed in accordance computed in accordance with rule 8D.

2. The CIT(A) failed to appreciate that the appellant had claimed deduction 2. The CIT(A) failed to appreciate that the appellant had claimed deduction 2. The CIT(A) failed to appreciate that the appellant had claimed deduction only for expenditure towards earning the professional income, which had only for expenditure towards earning the professional income, which had only for expenditure towards earning the professional income, which had no nexus with earning of exempt income which was from personal no nexus with earning of exempt income which was from personal no nexus with earning of exempt income which was from personal investments. 3. The CIT(A) fail 3. The CIT(A) failed to appreciate that the disallowance u/s 14A read with ed to appreciate that the disallowance u/s 14A read with rule 8D would result in an absurd amount of disallowance of almost the rule 8D would result in an absurd amount of disallowance of almost the rule 8D would result in an absurd amount of disallowance of almost the entire expenditure. entire expenditure. 4. The CIT(A) failed to appreciate that no disallowance u/s 14A of the Act 4. The CIT(A) failed to appreciate that no disallowance u/s 14A of the Act 4. The CIT(A) failed to appreciate that no disallowance u/s 14A of the Act can be made since the appellant m can be made since the appellant maintains separate books of accounts for aintains separate books of accounts for his professional activities, and had not claimed deduction of any his professional activities, and had not claimed deduction of any his professional activities, and had not claimed deduction of any expenditure incurred relating to exempt income earned during the year. expenditure incurred relating to exempt income earned during the year. expenditure incurred relating to exempt income earned during the year. 5. The CIT(A) erred in not appreciating that though the appellant had 5. The CIT(A) erred in not appreciating that though the appellant had 5. The CIT(A) erred in not appreciating that though the appellant had incurred expense towards earning exempt income, such expenditure had expense towards earning exempt income, such expenditure had expense towards earning exempt income, such expenditure had never been claimed as deduction by the appellant. never been claimed as deduction by the appellant. 6. The order of the CIT(A) resulted in an enhancement of the assessed 6. The order of the CIT(A) resulted in an enhancement of the assessed 6. The order of the CIT(A) resulted in an enhancement of the assessed income, which was income, which was not permissible without the issue of a show cause not permissible without the issue of a show cause notice to the appellant. o the appellant. 2. Briefly stated, facts of the case are that the assessee was Briefly stated, facts of the case are that the assessee was Briefly stated, facts of the case are that the assessee was engaged in professional activity of providing consultancy. For the engaged in professional activity of providing consultancy. For the engaged in professional activity of providing consultancy. For the year under consideration, the assessee filed return of income on year under consideration, the assessee filed return of income on year under consideration, the assessee filed return of income on 15.02.2021 declaring total income at Rs.17,5 15.02.2021 declaring total income at Rs.17,59,60,400/ 9,60,400/-. The return of income filed by the assessee was selected for scrutiny and of income filed by the assessee was selected for scrutiny and of income filed by the assessee was selected for scrutiny and statutory notices under the Income statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) tax Act, 1961 (in short ‘the Act’) were issued and complied with. In the assessment completed u/s were issued and complied with. In the assessment completed u/s were issued and complied with. In the assessment completed u/s 143(3) of the Act on 08.03.2022, the A 143(3) of the Act on 08.03.2022, the Assessing Officer made one of ssessing Officer made one of the disallowance of Rs.10,00,000/ the disallowance of Rs.10,00,000/- invoking section 14A of the Act invoking section 14A of the Act r.w.r. 8D of the Income r.w.r. 8D of the Income-tax Rules, 1962 (in short ‘the Rules’). tax Rules, 1962 (in short ‘the Rules’).

3. On further appeal, the Ld. CIT(A) affirmed the action of On further appeal, the Ld. CIT(A) affirmed the action of On further appeal, the Ld. CIT(A) affirmed the action of Assessing Officer of invoking Rule Assessing Officer of invoking Rule 8D, however, rejected the lump 8D, however, rejected the lump- sum disallowance of Rs.10,00,000/ sum disallowance of Rs.10,00,000/- made by the AO and directed made by the AO and directed him to compute the disallowance applying the Rule 8D of the Rules. him to compute the disallowance applying the Rule 8D of the Rules. him to compute the disallowance applying the Rule 8D of the Rules.

4. Aggrieved, the assessee is in appeal before the Tribunal by way Aggrieved, the assessee is in appeal before the Tribunal by way Aggrieved, the assessee is in appeal before the Tribunal by way of raising grounds as repro of raising grounds as reproduced above.

6.1 On the contrary, the Ld. Departmental Representative (DR) On the contrary, the Ld. Departmental Representative (DR) On the contrary, the Ld. Departmental Representative (DR) referred to Paper Book filed by the assessee and submitted that the ferred to Paper Book filed by the assessee and submitted that the ferred to Paper Book filed by the assessee and submitted that the Assessing Officer has repeatedly asked the assessee to provide Assessing Officer has repeatedly asked the assessee to provide Assessing Officer has repeatedly asked the assessee to provide details of the expenditure incurred in relation to exempted income details of the expenditure incurred in relation to exempted income details of the expenditure incurred in relation to exempted income and due to failure on the part of the assessee, the Ld. Assessing and due to failure on the part of the assessee, the Ld. Asse and due to failure on the part of the assessee, the Ld. Asse Officer was satisfied that claim of the assessee of incurring Officer was satisfied that claim of the assessee of incurring Officer was satisfied that claim of the assessee of incurring expenditure for earning exempted income was not correct and expenditure for earning exempted income was not correct and expenditure for earning exempted income was not correct and therefore, he validly invoked Rule 8D of the Rules. However, the therefore, he validly invoked Rule 8D of the Rules. therefore, he validly invoked Rule 8D of the Rules. Assessing Officer erred by making a Assessing Officer erred by making a lumpsum disallowance of ₹10,00,000, which is not stipulated under Rule 8D. Consequently, ,00,000, which is not stipulated under Rule 8D. Consequently, ,00,000, which is not stipulated under Rule 8D. Consequently, the Learned CIT(A) appropriately directed the Assessing Officer to the Learned CIT(A) appropriately directed the Assessing Officer to the Learned CIT(A) appropriately directed the Assessing Officer to recalculate the disallowance in accordance with the provisions of recalculate the disallowance in accordance with the provisions of recalculate the disallowance in accordance with the provisions of Rule 8D.

6.2 We have heard rival submission of the parties an We have heard rival submission of the parties an We have heard rival submission of the parties and perused the relevant material on record. The assessee has earned exempt relevant material on record. The assessee has earned exempt relevant material on record. The assessee has earned exempt income of Rs.8,32,39,368/ income of Rs.8,32,39,368/- from investment in shares and security from investment in shares and security of more than Rs.2,88,89,95,457/ of more than Rs.2,88,89,95,457/-. The Assessing Officer during the . The Assessing Officer during the course of assessment proceedings questioned the assessee for course of assessment proceedings questioned the a course of assessment proceedings questioned the a providing detail of the expenditure incurred for earning exempt providing detail of the expenditure incurred for earning exempt providing detail of the expenditure incurred for earning exempt income vide questionnaire dated 11.11.2021, a copy of which is income vide questionnaire dated 11.11.2021, a copy of which is income vide questionnaire dated 11.11.2021, a copy of which is placed on Paper Book page placed on Paper Book pages 44 and 45. In response, the assessee 44 and 45. In response, the assessee provided detail of exempt income however, in provided detail provided detail of exempt income however, in of exempt income however, in respect respect of respect expenditure, the assessee submitted that no expenditure was expenditure, the assessee submitted that no expenditure was expenditure, the assessee submitted that no expenditure was claimed for incurring any exempt income and hence question of any for incurring any exempt income and hence question of any for incurring any exempt income and hence question of any disallowance u/s 14A of the Act did not arise. The copy of the said disallowance u/s 14A of the Act did not arise. The copy of the said disallowance u/s 14A of the Act did not arise. The copy of the said reply of the assessee available on Paper Book page 49. Again, the reply of the assessee available on Paper Book page 49. Agai reply of the assessee available on Paper Book page 49. Agai Assessing Officer vide notice u/s 142(1) of the Act dated 11.01.2022 Assessing Officer vide notice u/s 142(1) of the Act dated 11.01.2022 Assessing Officer vide notice u/s 142(1) of the Act dated 11.01.2022 issued questionnaire to the assessee as why the disallowance issued questionnaire to the assessee as why the disallowance issued questionnaire to the assessee as why the disallowance should not be made invoking Rule 8D of the Rules. The relevant should not be made invoking Rule 8D of the Rules. The relevant should not be made invoking Rule 8D of the Rules. The relevant question which is available on Paper book page 58 is reproduced as question which is available on Paper book page 58 is rep question which is available on Paper book page 58 is rep under:

“6. You have not provided the working of disallowance under section 14A You have not provided the working of disallowance under section 14A You have not provided the working of disallowance under section 14A r.w.r. 8D of the l T Rules, 1962 by observing that you have not incurred or r.w.r. 8D of the l T Rules, 1962 by observing that you have not incurred or r.w.r. 8D of the l T Rules, 1962 by observing that you have not incurred or claimed any expenditure for earning exempt income. In this regard, it is claimed any expenditure for earning exempt income. In this regard, it is claimed any expenditure for earning exempt income. In this regard, it is stated that a num stated that a number of items of expenditure claimed are in the nature of ber of items of expenditure claimed are in the nature of administrative activities necessary to earn the said income and therefore, administrative activities necessary to earn the said income and therefore, administrative activities necessary to earn the said income and therefore, the provisions of section 14A are squarely applicable. Therefore, you are the provisions of section 14A are squarely applicable. Therefore, you are the provisions of section 14A are squarely applicable. Therefore, you are requested once again to furnish the working of dis requested once again to furnish the working of disallowance u/s 14A allowance u/s 14A r.w.r. 8D.” 6.3 In response, the assessee again rendered that no expenditure In response, the assessee again rendered that no expenditure In response, the assessee again rendered that no expenditure was incurred for earning exempt income. The relevant submission was incurred for earning exempt income. The relevant submission was incurred for earning exempt income. The relevant submission of the assessee is available on Paper Book page 61 is reproduced as of the assessee is available on Paper Book page 61 is reproduced as of the assessee is available on Paper Book page 61 is reproduced as under:

“Point 6: Disallowance Point 6: Disallowance under section 14A Details of exempt income earned during AY 2020 Details of exempt income earned during AY 2020-21 are as under: 21 are as under: Particulars Amount (INR) Dividend from Indian companies (upto INR 10,00,000) Dividend from Indian companies (upto INR 10,00,000) 9,99,904 Interest income 4,03,61,681 Buyback of equity shares of Universal Medicare Pvt. Ltd. Buyback of equity shares of Universal Medicare Pvt. Ltd. 2,81,02,563 Buyback of 1302 shares of KOTAK Buyback of 1302 shares of KOTAK - TECH MAHINDRA 1,56,240 Dividend income from mutual funds Dividend income from mutual funds 1,36,18,979 Total 8,32,39,368

With respect to claim of expenses, it is submitted that with respect of income With respect to claim of expenses, it is submitted that with respect of income With respect to claim of expenses, it is submitted that with respect of income by way of professional fees offered to by way of professional fees offered to tax under the head 'profits and gains tax under the head 'profits and gains from business or profession', from business or profession', the assessee has claimed only expenses which the assessee has claimed only expenses which are in the nature of business expenses or expenses which are wholly and are in the nature of business expenses or expenses which are wholly and are in the nature of business expenses or expenses which are wholly and exclusively incurred for the purpose of business. We enclose herewith the exclusively incurred for the purpose of business. We enclose herewith the exclusively incurred for the purpose of business. We enclose herewith the copy of statement of income and expenditure for your goodself's r copy of statement of income and expenditure for your goodself's r copy of statement of income and expenditure for your goodself's ready reference as Annexure 4. On a perusal of the same, it would be appreciated reference as Annexure 4. On a perusal of the same, it would be appreciated reference as Annexure 4. On a perusal of the same, it would be appreciated that no expenses which are towards earning of investment income have been that no expenses which are towards earning of investment income have been that no expenses which are towards earning of investment income have been claimed and only expenses claimed are in the nature of business expenses. claimed and only expenses claimed are in the nature of business expenses. claimed and only expenses claimed are in the nature of business expenses. The expenses claimed by the The expenses claimed by the assessee are in nature of entertainment assessee are in nature of entertainment expenses, motor car expenses, membership and subscription, professional expenses, motor car expenses, membership and subscription, professional expenses, motor car expenses, membership and subscription, professional fees relating to audit, etc. telephone charges, travelling, meeting expenses, fees relating to audit, etc. telephone charges, travelling, meeting expenses, fees relating to audit, etc. telephone charges, travelling, meeting expenses, rent, depreciation, salary, etc. which is in relation to professio rent, depreciation, salary, etc. which is in relation to professio rent, depreciation, salary, etc. which is in relation to profession carried out by him and does not have any relationship with his investment activity. him and does not have any relationship with his investment activity. him and does not have any relationship with his investment activity. Since the assessee has not claimed any expenses for earning of investment Since the assessee has not claimed any expenses for earning of investment Since the assessee has not claimed any expenses for earning of investment income (whether exempt or taxable), the question of making disallowance income (whether exempt or taxable), the question of making disallowance income (whether exempt or taxable), the question of making disallowance under section 14A of the under section 14A of the Act does not arise. In this regard attention is invited to the decision of Mumbai Tribunal in case of In this regard attention is invited to the decision of Mumbai Tribunal in case of In this regard attention is invited to the decision of Mumbai Tribunal in case of Justice Sam P Bharucha v Add Justice Sam P Bharucha v Addl. CIT (25 taxmann.com 381), wherein the . CIT (25 taxmann.com 381), wherein the Tribunal has held as under: Tribunal has held as under: "Averting to the facts of the case in hand, the assessee "Averting to the facts of the case in hand, the assessee "Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for earing the claim that no expenditure has been incurred or claimed for earing the claim that no expenditure has been incurred or claimed for earing the exempt income. The details of the expenditure, makes it clear that the exempt income. The details of the expenditure, makes it clear that the exempt income. The details of the expenditure, makes it clear that the expenditure incurred and claimed by the assessee has direct nexus expenditure incurred and claimed by the assessee has direct nexus expenditure incurred and claimed by the assessee has direct nexus with the professional income of the a with the professional income of the assessee. It is not the case of the ssessee. It is not the case of the revenue that the assessee has used his official machinery and revenue that the assessee has used his official machinery and revenue that the assessee has used his official machinery and establishment for eaming the exempt income. The Assessing Officer establishment for eaming the exempt income. The Assessing Officer establishment for eaming the exempt income. The Assessing Officer has not given any finding of fact that any of the expenditure that is has not given any finding of fact that any of the expenditure that is has not given any finding of fact that any of the expenditure that is incurred and claimed by incurred and claimed by the assessee is attributable for earing the the assessee is attributable for earing the exempt income. In other words, the Assessing Officer has not exempt income. In other words, the Assessing Officer has not exempt income. In other words, the Assessing Officer has not indicated that certain expenditure is not incurred for eaming the indicated that certain expenditure is not incurred for eaming the indicated that certain expenditure is not incurred for eaming the professional income, but is incurred in relation to dividend income or professional income, but is incurred in relation to dividend income or professional income, but is incurred in relation to dividend income or such expendit such expenditure is incurred for inseparable and indivisible activities ure is incurred for inseparable and indivisible activities comprising professional as well as the activities on which is exempt comprising professional as well as the activities on which is exempt comprising professional as well as the activities on which is exempt income has been eamed by the assessee. In the absence of any such income has been eamed by the assessee. In the absence of any such income has been eamed by the assessee. In the absence of any such instance of expenditure, finding of Assessing Officer or any m instance of expenditure, finding of Assessing Officer or any m instance of expenditure, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the assessee show that the expenditure incurred and claimed by the assessee show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for eaming the exempt against the taxable income has any relation for eaming the exempt against the taxable income has any relation for eaming the exempt income, the provisions of section 14A cannot be applied" income, the provisions of section 14A cannot be applied" income, the provisions of section 14A cannot be applied" Copy of the judgment is enclosed as Annexure 5 Copy of the judgment is enclosed as Annexure 5” 6.4 Thereafter, the Assessing Officer issued further notice to the ter, the Assessing Officer issued further notice to the ter, the Assessing Officer issued further notice to the assessee why the d assessee why the disallowance should not be made a isallowance should not be made as per the section 14A read with read with Rule 8D. A copy of said questionnaire is Rule 8D. A copy of said questionnaire is available on Paper Book page 65. In response, the assessee further available on Paper Book page 65. In response, the assessee further available on Paper Book page 65. In response, the assessee further rendered that advisory fee and demat charges incurred by the hat advisory fee and demat charges incurred by the hat advisory fee and demat charges incurred by the assessee in relation to investment activity had not been routed assessee in relation to investment activity had not been routed assessee in relation to investment activity had not been routed through income and expenditure account and no expenses were through income and expenditure account and no expenses were through income and expenditure account and no expenses were incurred other than the said expenses. However, without prejudice, incurred other than the said expenses. However, without incurred other than the said expenses. However, without the assessee made proportionate disallowance under various made proportionate disallowance under various made proportionate disallowance under various expenses debited in profit and loss account like professional fee, expenses debited in profit and loss account like professional fee, expenses debited in profit and loss account like professional fee, telephone expenses, travelling and convenience, salary paid etc. telephone expenses, travelling and convenience, salary paid etc. telephone expenses, travelling and convenience, salary paid etc. which was computed at was computed at Rs.5,19,971/-. The relevant submission of . The relevant submission of the assessee is reproduced as under: s reproduced as under:

“Point 2: It is seen from the details on record that you have earned exempt Point 2: It is seen from the details on record that you have earned exempt Point 2: It is seen from the details on record that you have earned exempt income of Rs.8,32,39,368/ Rs.8,32,39,368/- and had shown investments and had shown investments in shares & securities of more securities of more than Rs. 250 crores. In response to the earlier notices issted 250 crores. In response to the earlier notices issted to you, you have claimed that you have not claimed or incurred any to you, you have claimed that you have not claimed or incurred any to you, you have claimed that you have not claimed or incurred any expenditure for earning exempt income. In this regard, it is stated that a expenditure for earning exempt income. In this regard, it is stated that a expenditure for earning exempt income. In this regard, it is stated that a number of items of expenditure claimed in the nature of administrative number of items of expenditure claimed in the nature of administrative number of items of expenditure claimed in the nature of administrative activities necessary to earn the said inco activities necessary to earn the said income and therefore the provisions of me and therefore the provisions of section 14A are squarely applicable. Therefore, you are requested once again section 14A are squarely applicable. Therefore, you are requested once again section 14A are squarely applicable. Therefore, you are requested once again to furnish working of disallowance u/s 14A r.w.r. 8D. to furnish working of disallowance u/s 14A r.w.r. 8D. In this regard, we wish to reiterate our submission dated 19 January 2022. In this regard, we wish to reiterate our submission dated 19 January 2022. In this regard, we wish to reiterate our submission dated 19 January 2022. Details of exempt income earned during AY 2020 empt income earned during AY 2020-21 are as under: 21 are as under: Particulars Amount (INR) Dividend from Indian companies (upto INR 10,00,000) Dividend from Indian companies (upto INR 10,00,000) 9,99,904 Interest income 4,03,61,681 Buyback of equity shares of Universal Medicare Pvt. Ltd. Buyback of equity shares of Universal Medicare Pvt. Ltd. 2,81,02,563 Buyback of 1302 shares of KOTAK shares of KOTAK - TECH MAHINDRA 1,56,240 Dividend income from mutual funds Dividend income from mutual funds 1,36,18,979 Total 8,32,39,368 On a perusal of the above, it would be appreciated that the exempt income is On a perusal of the above, it would be appreciated that the exempt income is On a perusal of the above, it would be appreciated that the exempt income is earned from investment activities of the assessee. earned from investment activities of the assessee. With respect to claim of expenses, it is submitted that with respect of income With respect to claim of expenses, it is submitted that with respect of income With respect to claim of expenses, it is submitted that with respect of income by way of professional fees offered to tax under the head 'profits and gains by way of professional fees offered to tax under the head 'profits and gains by way of professional fees offered to tax under the head 'profits and gains from business or profession', the assessee has claimed only expenses which from business or profession', the assessee has claimed only expenses which from business or profession', the assessee has claimed only expenses which are incurred wholly and e are incurred wholly and exclusively for the purpose of business. We enclose xclusively for the purpose of business. We enclose herewith the copy of statement of income and expenditure for your goodself's herewith the copy of statement of income and expenditure for your goodself's herewith the copy of statement of income and expenditure for your goodself's ready reference as Annexure 3. The total expenses claimed by the assessee ready reference as Annexure 3. The total expenses claimed by the assessee ready reference as Annexure 3. The total expenses claimed by the assessee are only Rs. 1,17,60,294/ are only Rs. 1,17,60,294/- which are less 10% of the income by way of ncome by way of professional fees. The assessee has also incurred expenditure on investment professional fees. The assessee has also incurred expenditure on investment professional fees. The assessee has also incurred expenditure on investment advisory fee of Rs. 1,18,000/ advisory fee of Rs. 1,18,000/-and demat charges which are neither routed and demat charges which are neither routed through the income and expenditure account nor. claimed by the assessee as through the income and expenditure account nor. claimed by the assessee as through the income and expenditure account nor. claimed by the assessee as evident from the evident from the statement of income and expenditure itself. Since the statement of income and expenditure itself. Since the assessee has not claimed any expenditure incurred in connection with assessee has not claimed any expenditure incurred in connection with assessee has not claimed any expenditure incurred in connection with investment activity, any question of disallowance under section 14A does not investment activity, any question of disallowance under section 14A does not investment activity, any question of disallowance under section 14A does not arise. On a perusal of the same, it would be appreciate On a perusal of the same, it would be appreciated that no expenses which are d that no expenses which are towards earning of investment income have been claimed and only expenses towards earning of investment income have been claimed and only expenses towards earning of investment income have been claimed and only expenses claimed are in the nature of business expenses. The expenses claimed by the claimed are in the nature of business expenses. The expenses claimed by the claimed are in the nature of business expenses. The expenses claimed by the assessee are in nature of entertainment assessee are in nature of entertainment expenses, motor car expenses, expenses, motor car expenses, membership and subscription, professional fees relating to audit, etc. membership and subscription, professional fees relating to audit, etc. membership and subscription, professional fees relating to audit, etc. telephone charges, travelling, meeting expenses, rent, depreciation, salary, telephone charges, travelling, meeting expenses, rent, depreciation, salary, telephone charges, travelling, meeting expenses, rent, depreciation, salary, etc. which is in relation to profession carried out by him and does not have etc. which is in relation to profession carried out by him and does not have etc. which is in relation to profession carried out by him and does not have any relationship with his inves any relationship with his investment activity: Since the assessee has not claimed any expenses for earning of investment Since the assessee has not claimed any expenses for earning of investment Since the assessee has not claimed any expenses for earning of investment income (whether exempt or taxable), the question of making disallowance income (whether exempt or taxable), the question of making disallowance income (whether exempt or taxable), the question of making disallowance under section 14A of the Act does not arise. under section 14A of the Act does not arise. In this regard attention is invited to the decisi In this regard attention is invited to the decision of Mumbai Tribunal in case of on of Mumbai Tribunal in case of Justice Sam P Bharucha v Addl. CIT (25 taxmann.com 381), wherein the Justice Sam P Bharucha v Addl. CIT (25 taxmann.com 381), wherein the Justice Sam P Bharucha v Addl. CIT (25 taxmann.com 381), wherein the Tribunal has held as under: Tribunal has held as under: "Averting to the facts of the case in hand, the assessee had made a "Averting to the facts of the case in hand, the assessee had made a "Averting to the facts of the case in hand, the assessee had made a claim that no expenditure has been incurred or claimed for claim that no expenditure has been incurred or claimed for claim that no expenditure has been incurred or claimed for earning the exempt income. The details of the expenditure, makes it clear that the exempt income. The details of the expenditure, makes it clear that the exempt income. The details of the expenditure, makes it clear that the expenditure incurred and claimed by the assessee has direct nexus expenditure incurred and claimed by the assessee has direct nexus expenditure incurred and claimed by the assessee has direct nexus with the professional income of the assessee. It is not the case of the with the professional income of the assessee. It is not the case of the with the professional income of the assessee. It is not the case of the revenue that the assessee has used revenue that the assessee has used his official machinery and his official machinery and establishment for earning the exempt income. The Assessing Officer establishment for earning the exempt income. The Assessing Officer establishment for earning the exempt income. The Assessing Officer has not given any finding of fact that any of the expenditure that is has not given any finding of fact that any of the expenditure that is has not given any finding of fact that any of the expenditure that is incurred and claimed by the assessee is attributable for earning the incurred and claimed by the assessee is attributable for earning the incurred and claimed by the assessee is attributable for earning the exempt income. In othe exempt income. In other words, the Assessing Officer has not r words, the Assessing Officer has not indicated that certain expenditure is not incurred for earning the indicated that certain expenditure is not incurred for earning the indicated that certain expenditure is not incurred for earning the professional income, but is incurred in relation to dividend income or professional income, but is incurred in relation to dividend income or professional income, but is incurred in relation to dividend income or such expenditure is incurred for inseparable and indivisible activities such expenditure is incurred for inseparable and indivisible activities such expenditure is incurred for inseparable and indivisible activities compris comprising professional as well as the activities on which is exempt ing professional as well as the activities on which is exempt income has been earned by the assessee. In the absence of any such income has been earned by the assessee. In the absence of any such income has been earned by the assessee. In the absence of any such instance of expenditure, finding of Assessing Officer or any material to instance of expenditure, finding of Assessing Officer or any material to instance of expenditure, finding of Assessing Officer or any material to show that the expenditure incurred and claimed by the show that the expenditure incurred and claimed by the show that the expenditure incurred and claimed by the assessee against the taxable income has any relation for earning the exempt against the taxable income has any relation for earning the exempt against the taxable income has any relation for earning the exempt income, the provisions of section 14A cannot be applied" income, the provisions of section 14A cannot be applied" income, the provisions of section 14A cannot be applied" Without prejudice, it is submitted that even if disallowance under section 14A Without prejudice, it is submitted that even if disallowance under section 14A Without prejudice, it is submitted that even if disallowance under section 14A read with rule 8D were to be made, the same read with rule 8D were to be made, the same can be made only to the extent can be made only to the extent of expenditure actually incurred by the assessee, which is clear from the of expenditure actually incurred by the assessee, which is clear from the of expenditure actually incurred by the assessee, which is clear from the proviso to rule 8D(2), which states that the amount referred to in clause (i) and proviso to rule 8D(2), which states that the amount referred to in clause (i) and proviso to rule 8D(2), which states that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the ass clause (ii) shall not exceed the total expenditure claimed by the ass clause (ii) shall not exceed the total expenditure claimed by the assessee. We have tabulated below, various expenses incurred and claimed by the have tabulated below, various expenses incurred and claimed by the have tabulated below, various expenses incurred and claimed by the assessee, our comments on nature of such expenses and as to how the same assessee, our comments on nature of such expenses and as to how the same assessee, our comments on nature of such expenses and as to how the same has no connection with the exempt income earned. We have also worked out has no connection with the exempt income earned. We have also worked out has no connection with the exempt income earned. We have also worked out in table below, the apportionment in table below, the apportionment of expenses for earning exempt income and of expenses for earning exempt income and for earning non for earning non- exempt income, on a without prejudice basis. Please note that exempt income, on a without prejudice basis. Please note that the exempt income earned during the year is Rs. 8,32,39,368/ the exempt income earned during the year is Rs. 8,32,39,368/ the exempt income earned during the year is Rs. 8,32,39,368/-and total income offered to tax in the return of income is Rs. 17,59,60,4 income offered to tax in the return of income is Rs. 17,59,60,4 income offered to tax in the return of income is Rs. 17,59,60,400/- thereby totalling upto Rs. 25,91,99,768. Therefore, the ratio of exempt income to total totalling upto Rs. 25,91,99,768. Therefore, the ratio of exempt income to total totalling upto Rs. 25,91,99,768. Therefore, the ratio of exempt income to total income works out to 32.11%. income works out to 32.11%. Particulars Amount (Rs.) Amount (Rs.) Remarks Amount of expenditure relating to earning of exempt income (without prejudice) Entertainment 14,06,249 14,06,249 The The expenditure expenditure is is in in respect respect of of expenses meetings and conferences with various meetings and conferences with various existing and prospective customers, existing and prospective customers, distributors, suppliers and vendors, distributors, suppliers and vendors, business partners, bankers, regulators business partners, bankers, regulators and other stakeholders in connection and other stakeholders in connection with its business and accordingly cordingly incurs expenditure on hosting lunch, incurs expenditure on hosting lunch, dinner dinner and and banquets banquets for for the the stakeholders including small expenses stakeholders including small expenses on gift items/ tokens to be provided as on gift items/ tokens to be provided as goodwill goodwill gesture. gesture. Details Details of of such such expenses were provided vide letter expenses were provided vide letter dated 21 December 2021. These Expenses are exclusively incurred in nses are exclusively incurred in connection with the activity of earning connection with the activity of earning of professional income and has no of professional income and has no connection with earning of exempt connection with earning of exempt income. Motor car 5,03,667 5,03,667 Expenses on running; maintenance Expenses on running; maintenance expenses and repairs of motor car. Details of the and repairs of motor car. Details of the expenses have been submitted vide expenses have been submitted vide letter dated 21 December 2021. These These expenses. expenses. are are exclusively exclusively incurred in connection with the activity incurred in connection with the activity of earning of professional income and of earning of professional income and has no connection with earning of has no connection with earning of exempt income. Membership 11,93,991 11,93,991 The The expenditure expenditure is is in in respect respect of of and membership and annual fees for key membership and annual fees for key subscription clubs/ gymkhana, etc. As a part of clubs/ gymkhana, etc. As a part of development development of of business, business, it it is is important for our client to connect with important for our client to connect with various various stakeholders stakeholders at at various various corporate corporate and and social social events. events. The The memberships provide an opportunity ships provide an opportunity for introduction and interaction with for introduction and interaction with key key business business contacts contacts and and such such stakeholders, who frequent visits to stakeholders, who frequent visits to clubs/ common gymkhanas. It is a clubs/ common gymkhanas. It is a practice practice for for the the businessman/ businessman/ professionals and their organisations professionals and their organisations Hold memberships to be able be able to to participate in various events hosted participate in various events hosted and increase interactions with various and increase interactions with various Business contacts. Details of such Business contacts. Details of such expenses were provided vide letter expenses were provided vide letter dated dated 21 21 December December 2021. 2021. These These expenses are exclusively incurred in expenses are exclusively incurred in connection with the activity of earning earning professional professional income income and and has has no no income. connection with earning of income. connection with earning of exempt Professional 1,95,000 1,95,000 Fees for tax audit and filing of return of Fees for tax audit and filing of return of 62,615 fees income; advisory, etc. and not incurred income; advisory, etc. and not incurred in connection with the earning of in connection with the earning of exempt income. Without prejudice, the disallowance is dice, the disallowance is worked out @ 32.11% of Rs. Telephone 96,953 96,953 Expenses for telephone in respect of Expenses for telephone in respect of 31,131 expenses profession carried out and not incurred profession carried out and not incurred in connection with the earning of in connection with the earning of exempt income. Without prejudice, disallowance @ 32.11% works out to Rs. 31,131 Travelling and 5,84,401 5,84,401 Expenses on travelling and conveyance Expenses on travelling and conveyance 1,87,651 Conveyance for professional purposes and not for professional purposes and not incurred in connection with the earning incurred in connection with the earning of exempt income. Without prejudice, disallowance @ 32.11% works out to Rs. 1,87,651 Salary paid 7,42,992 7,42,992 Salary to administrative staff and not Salary to administrative staff and not 2,38,574 incurred in connection with the earning incurred in connection with the earning of exempt income. Without prejudice, disallowance @ Without prejudice, disallowance @ 32.11% works out to Rs. 2,38,574 Meeting 3,62,783 3,62,783 The expenditure is is in in respect respect of of expenses meetings and conferences with various meetings and conferences with various existing and prospective customers, existing and prospective customers, distributors, suppliers and vendors, distributors, suppliers and vendors, business partners, bankers, regulators business partners, bankers, regulators and other stakeholders in connection and other stakeholders in connection with its business and accordingly with its business and accordingly incurs expenditure on hosting lunch, on hosting lunch, dinner dinner and and banquets banquets for for the the stakeholders including small expenses stakeholders including small expenses on gift items/ tokens to be provided as on gift items/ tokens to be provided as goodwill gesture: These expenses are goodwill gesture: These expenses are exclusively incurred in connection with exclusively incurred in connection with the activity of earning of professional the activity of earning of professional no connection with income and has no connection with earning of exempt income. Rent for premises used for profession Rent Paid 41,10,592 41,10,592 Rent for premises used for profession carried out. Not connected with earning carried out. Not connected with earning of exempt income. Depreciation 25,63,636 25,63,636 Depreciation Depreciation on on motor motor car. car. Not Not connected with earning of exempt connected with earning of exempt income.

6.5 In light of the aforementioned details, it is apparent that the In light of the aforementioned details, it is apparent that the In light of the aforementioned details, it is apparent that the assessee has not succeeded in demonstrating that the expenses assessee has not succeeded in demonstrating that the expenses assessee has not succeeded in demonstrating that the expenses related to investment activities were not recorded in the profit and related to investment activities were not recorded in the profit and related to investment activities were not recorded in the profit and loss account for professional income. Given the Assessing Officer's loss account for professional income. Given the Assessing Off loss account for professional income. Given the Assessing Off dissatisfaction with the assessee’s assertion of incurring no dissatisfaction with the assessee’s assertion of incurring no dissatisfaction with the assessee’s assertion of incurring no expenses towards earning exempt income, the invocation of Rule 8D expenses towards earning exempt income, the invocation of Rule 8D expenses towards earning exempt income, the invocation of Rule 8D was justified and has been correctly upheld by the Learned CIT(A). was justified and has been correctly upheld by the Learned CIT(A). was justified and has been correctly upheld by the Learned CIT(A). However, subsequent to invoking Rule 8D, the Assessing Officer However, subsequent to invoking Rule 8D, the Assessing However, subsequent to invoking Rule 8D, the Assessing was mandated to calculate the disallowance in accordance with the was mandated to calculate the disallowance in accordance with the was mandated to calculate the disallowance in accordance with the specific formula outlined in Rule 8D. The rule does not provide for a specific formula outlined in Rule 8D. The rule does not provide for a specific formula outlined in Rule 8D. The rule does not provide for a lump-sum estimation of disallowance. Hence, the direction issued sum estimation of disallowance. Hence, the direction issued sum estimation of disallowance. Hence, the direction issued by the Learned CIT(A) for recalculation of the by the Learned CIT(A) for recalculation of the disallowance in line disallowance in line with Rule 8D is correct. We, therefore, affirm the findings of the with Rule 8D is correct. We, therefore, affirm the findings of the with Rule 8D is correct. We, therefore, affirm the findings of the his issue. Consequently, Ground Nos. 1 to 5 of Learned CIT(A) on this issue. Consequently, Ground his issue. Consequently, Ground the assessee's appeal are dismissed. the assessee's appeal are dismissed.

Order pronounced in the open Court on nounced in the open Court on 31/07/2024. /07/2024.