AJIT SINGH ARORA,MUMBAI vs. JCIT 20(1), MUMBAI

order ,dated 30.03.2014,of the CIT(A)-31,Mumbai,the assessee has filed present appeal.Assessee,an individual is engaged in the business of manufacturing of industrial gears and labour job.Return of income was filed on 21/09/2011,declaring total income of Rs.2.52 crores.The Assessing Officer(AO)completed the assessment u/s. 143 (3) of the Act on 23/12/2011,determining his income at Rs.2.66 crores. 2.Effective ground of appeal is about disallowance made u/s.14A of the Act r.w.r.8D amounting to Rs.6.04 lakhs.During the assessment proceedings,the AO found that assessee had earned dividend income and had claimed the same as exempt.He observed that ordinarily some expenditure would have been incurred for earning exempt income,that in the P&L account certain expenses had been claimed.Referring to the provisions of section 14A r.w.r 8D(2),he made a disallowance of Rs.6,04,709/-. 2.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him it was argued that the expenditure claimed in the P&L account included only those expenses which were directly related to business income, that none of them related directly/indirectly to exempt income, that the AO had not pointed out any expenditure which could be related to taxable as well as tax exempt receipt, that he had not brought on record not produced any figure to substantiate that the assessee had infact any expenditure for earning exempt income.After considering the submission of the assessee and the assessment order the FAA held that the AO had made the disallowance w.r.t. indirect expenditure i.e. 0.5% of the average value of the investment, that there was difference

4062/M/14(09-10)- Ajit Singh Arora between the opening and closing balances of the investments during the year under consideration,that the assessee had not made any disallowance on its own.Finally,the FAA upheld the order of the AO. 3.During the course of hearing before us,the Authorised Representative(AR)stated that assessee had sufficient own finds to make investment, that AO had not record the satisfaction before invoking the provisions of Rule 8D(2)(iii), that the total investment had reduced from Rs.13.53 crores to Rs.10.62crores.He referred to page No.47 and 48 of the PB.He relied upon the cases of Walfort Share & Stock Brokers Ltd.(326 ITR 1),Nicholas Piramal (India) Ltd. (69taxmann.com164).The Departmental.Represntative(DR)relied on the order of the FAA .

4.We have heard the rival submissions and perused the material before us.We find that assessee had not claimed any expenditure against exempt income,that AO had made a disallowance of Rs.6.04 lakhs invoking provisions of section 14A r.w.r.8D,that there was reduction in investment made by assessee during the year under consideration, that the AO had included all the investments i.e. personal and business investments,while making the disallowance.Section 14A stipulates that no expenditure could be allowed against exempt income.The basic purpose behind the introduction of the section was to prevent the double deduction availed by the assessees i.e.claiming expenditure against exempt income.To prevent the misuse of exemptions it was stipulated that no expenditure would be allowed if income does not form part of taxable income.However,incurring of expenditure is pre- requisite for making any disallowance.We would like to reproduce certain paragraphs of the judgment of Hon’ble Supreme Court delivered in the case of Walfort Share & Stock Brokers Ltd.(supra) and it reads as under : Section 14A of the Income-tax Act, 1961, clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to exempt income and partly to taxable income. In the absence of section 14A , the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear : it desires to curb the practice of claiming deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing the total income because these are exempt under certain provisions of the Act. The basic principle of taxation is to tax the net income, i.e., gross income minus expenditure.On the same analogy, exemption is also in respect of net income. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A .

4062/M/14(09-10)- Ajit Singh Arora

A pay back is not an expenditure in the scheme of section 14A ;for attracting section 14A there has to be a proximate cause for disallowance, which is in relationship with the tax exempt income. Pay back or return of investment is not such proximate cause.” Considering the peculiar facts and circumstances of the case,especially the fact that there was ‘no proximate cause of disallowance’,we hold that FAA was not justified in upholding the disallowance made by the AO.So, reversing her order,we decide the effective Ground of appeal in favour of the assesse.