NAWSHIR H MIRZA,MUMBAI vs. ASST CIT 11(3), MUMBAI

The only issue in this appeal of assessee is against the order of CIT(A) confirming the action of the AO in disallowing the expenses relatable to exempted income by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules 1962 (hereinafter the ‘Rules’).

Briefly stated facts are that the assessee has earned dividend income, interest and long term capital gains and maturity value of Insurance policy, in aggregate to Rs. 1,80,81,075/- and claimed the same as exempt. As the assessee has claimed exempt income, the AO required the assessee to explain as to why the disallowance be not made under section 14A of the Act read with rule 8D of the Rules. The assessee explained that he had not claimed any direct expenses relating to earning of exempt income and expenses like portfolio management fee, Demat charges etc. have been debited to the capital account and not claimed as expenses. The AO invoking the Rule 8D (2)(iii) of the Rules and disallowed an amount of 0.5% of average investment of the assessee. Hence, he added back a total disallowance of Rs.12,88,476/- to the return income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A) who also confirmed the action of the AO. Aggrieved, now assessee is in second appeal before Tribunal.

We have heard the rival contentions and gone through the facts and circumstances of the case. We find from the facts of the case that assessee has suo motu disallowed a sum of Rs.4,89,272/-, which was debited to the capital account of the assessee. For this learned Counsel for the assessee filed a copy of personal balance sheet of the assessee. The details of expenses debited to personal capital account of the assessee are as under: - Particulars Custody Management Investment Handling Total Fees Fees advisory & others Rs. fees fees DSP Merill Lynch Ltd. 2,709 48,219 50,928 Reliance Capital Asst. 7,034 1,36,400 1,43,434 Management Ltd. PMS Deustche Bank 2,24,922 2,24,922 BNP Paribas 2,584 2,584 Total Rs. 7,034 3,61,322 5,293 48,219 4,21868 HDFC Asst Management Co. Ltd –PMS (Due to oversight it was not included in the note submitted to AO) 67,404 67,404 Total Rs. 4,28,726 5,293 48,219 4,89,272

The assessee also filed copies of audited accounts and summary of various personal bank accounts prepared for working out his income. We find that the profit and loss account maintained for profession by assessee includes only professional receipts and expenses. It is a fact that the assessee has invested his surplus funds mainly in share of public limited Company and in mutual funds. The assessee does not have any borrowed funds and entrusted management of funds to various portfolio managers. Admittedly, the assessee has claimed the expenses relatable to exempt income at Rs.4,89,272/- but it was not claimed in the profit and loss account and not claimed as deduction but it was debited to the personal capital account of the assessee. In such circumstances, we find that the assessee has not claimed any expenditure in his Page 2 of 3 profit and loss account and now onus is on AO to prove that out of the expenditure incurred under various heads, the same relates to earning of exempted income.

In view of the above facts, we are of the view that the AO has applied provision of Rule 8D of the Rules in a mechanical manner without analyzing the facts of the case. In our opinion the AO has not deliberate upon the facts of the case before making disallowance and not even CIT(A). Going into the facts of the case and the provisions of the Act i.e. provisions of the Section 14A of the Act and Rule 8D of the Rules, we are of the view that no disallowance can be attributed to the exempted income in the present case because the assessee has not at all claim the same. Moreover, the assessee himself has attributed a sum of Rs. 4,89,272/- towards exempted income and debited the same from the capital account of the assessee. Even otherwise, the AO has not recorded any satisfaction for invoking the provisions of section 14A of the Act read with rule 8D of the Rules and hence on this count also the appeal of the assessee is to be allowed. Accordingly, the appeal of the assessee is allowed. 7. In the result, the appeal of assessee is allowed. Order pronounced in the open court on 09-03-2017.