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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Amarjit Singh
This appeal by the assessee is directed against the order of the CIT(A)- 3, Mumbai dated 21.10.2013 for A.Y. 2010-11.
The facts of the case, briefly, are as under: - 2.1 The assessee, an advocate by profession filed her return of income for A.Y. 2010-11 on 14.10.2010 declaring income of `65,15,110/- from profession, capital gains and income from other sources. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 31.12.2012, wherein the inc0me of the assessee was determined at `73,31,610/- in view of the following disallowances: - `53,931/- (i) From business promotion expenses `29,999/- (ii) Out of motor car expenses `1,08,296/- (iii) Out of Depreciation on motor car (iv) Out of Telephone expenses `56,800/- `5,67,458/- (v) Under section 14A r.w. Rule 8D Ms. Fereshte Sethna 2.2 Aggrieved by the order of assessment dated 31.12.2013 for A.Y. 2010-11, the assessee preferred an appeal before the CIT(A)-3, Mumbai who dismissed the assessee’s appeal vide the impugned order dated 21.10.2013. 3. The assessee has preferred this appeal, which is directed against the order of the CIT(A)-3, Mumbai dated 21.10.2013 for A.Y. 2010-11, raising the following grounds: - “
1. On the facts and in the circumstances of the case and in law, the Learned CIT(A) has erred in upholding the disallowance of a sum of Rs.5,67,458/- under the provisions of section 14A of the Income Tax Act, 1961. (a) Without considering the fact that the said figure of disallowance included interest paid of Rs.181,607/- on purchase of motor car and for balance expenses of Rs.385,856/-, there is no proximate cause for disallowance. (b) Without considering the fact that the appellant’s portfolio was managed by ABN Amro and Barclays Bank for which no charges have been paid to them and (c) Without considering the various judgements quoted by the appellant.
2. Hence, the total income be reduced by Rs.5,67,458/- by deleting the addition made under the provisions of section 14A of the Income Tax Act, 1961 read with Rule 8D(iii) thereto.”
4. Grounds 1 & 2 – Disallowance under section 14A r.w. Rule 8D 4.1.1 The grounds raised by the assessee in this appeal (supra) pertain to the single issue of challenging the disallowance under section 14A r.w. Rule 8D. According to the learned A.R. of the assessee, in the year under consideration, the assessee had earned exempt dividend income of `12,84,516/- and that no expenditure was incurred for earning the same. On being queried by the Assessing Officer (AO) in this regard, the assessee submitted that a detailed explanation to the AO vide letter dated 05.11.2012 (copy placed at pg. 1 to 5 of the paper book) stating, inter alia, that all investments were routed through her banker ABN Amro Bank who do not charge their clients any fees for such services rendered. It is contended that even though in the above letter, all the factual and legal Ms. Fereshte Sethna circumstances were explained as to why no administrative expenditure was incurred by the assessee for earning the said exempt income and why no borrowed funds were used for such investments, the AO has not at all addressed the assessee’s contentions therein and in para 7 of the order of assessment has made a factually incorrect statement that the assessee offered the disallowance of Rs.5,67,458/- under section 14A of the Act. It was further contended that this disallowance comprised of interest under Rule 8D(2)(ii) r.w.s. 14A of `2,36,417/-, which was interest paid on car loan to ICICI Bank, which had nothing at all to do with the funds utilised by the assessee for investment in instruments which generated exempt income and details of which had been furnished to the AO vide the above referred letter dated 02.11.2012. He further questioned the disallowance under Rule 8D(2)(ii) of administrative expenses in the light of the disallowances already made by the AO out of motor car expenses, depreciation on motor car, telephone charges, business promotion expenses, etc. According to the learned A.R. of the assessee these disallowances have no nexus, whatsoever, with the earning of exempt income. 4.1.2 It was urged that in the light of the averments put forth in para 4.1 (supra), it is amply clear that the AO made the said disallowance under section 14A r.w. Rule 8D not only on the factually incorrect premise that the assessee offered the said disallowance but also as the disallowances made were without any application of mind as the same were not warranted, being made on a wrong assumption of facts/items and without addressing the factual and legal submissions put forth by the assessee. 4.1.3 The assessee contends that even on appeal, the learned CIT(A) mechanically confirmed the disallowance under section 14A r.w. Rule 8D made by the AO without addressing the assessee’s contentions of the judicial pronouncements cited. 4.1.4 In written submission placed before us in the course of hearing it was contended that the disallowance under section 14A r.w. Rule 8D is not automatic. In order to invoke Rule 8D, the AO firstly in accordance with the procedure laid down in section 14A of the Act, it is a prerequisite that Ms. Fereshte Sethna he has to record his satisfaction having regard to the accounts of the assessee that he is not satisfied with the correctness of the assessee’s claim that no expenditure was incurred to earn the said exempt income. The onus was on the AO to prove that expenditure was incurred in relation to earning of exempt income. It is contended that in the case on hand, the AO has not followed the procedure mandated and therefore the disallowance of `5,67,458/- under section 14A r.w. Rule 8D made by the AO is not sustainable either in law or on facts as submitted earlier. In support of these contentions, the learned A.R. of the assessee, inter alia, cited and placed reliance on the following judicial pronouncements: - (i) Godrej & Boyce Manufacturing Co. Ltd. vs. UOI (2010) 328 ITR 81 (Bom) (ii) Maxopp Investment Ltd. & Ors. Vs. CIT (2012) 347 ITR 272 (Del.) (iii) ACIT vs, Iqbal M. Chagala (2014) 34 ITR (Trib) 636 (Mum) (iv) Auchtel Products Ltd. vs. ACIT (2012) 22 taxmann.com 99 (Mum Trib) (v) Justice Sam P. Bharucha vs. Addl. ACIT (2012) 25 taxmann.com 381 (Mum Trib) 4.2 Per contra, the learned D.R. supported the orders of the authorities below on this issue. 4.3.1 We have heard the rival contentions on the issue of the disallowance under section 14A r.w. Rule 8D made by the AO and perused and carefully considered the material on record; including the judicial pronouncements cited. The facts that emanate from the record are that in the year under consideration the assessee had earned exempt income of `12,84,516/- which does not form part of the total income and claimed that no expenditure was incurred for earning the same. On being queried by the AO in this regard, the assessee vide letter dated 05.11.2012 (copy placed at pg. 1 to 5 of the paper book) submitted that, inter alia, all investments were routed through ABN Amro Bank, her banker, who do not charge their clients any fees for such services rendered and therefore no disallowance was called for. We observe that there is no mention or addressal of the assessee’s explanation in the order of assessment. Rather it is seen that the AO states that the assessee agreed for the disallowance of `5,67,458/-; which averment is strongly Ms. Fereshte Sethna contested by the assessee as being factually incorrect and this assertion by the assessee has not been controverted by Revenue before us. As contended by the assessee, we find that the AO’s lack of clarity and application of mind further extends to the working of the break-up of the disallowance under section 14A of `5,67,458/-. Firstly, under Rule 8D(2)(ii) disallowance of interest of Rs.2,36,417/-made, was in respect of interest on car loan from ICICI Bank which had no nexus with the investments made by the assessee. Further; (ii) the assessee’s question as to whether the disallowance under Rule 8D(2)(ii) of `3,85,856/- administrative expenses is called for, when the AO has separately disallowed expenditure of `2,49,036/- claimed on account of motor car expenses, depreciation thereon, telephone expenses and business promotion expenses has not been addressed in the impugned order of learned CIT(A). All these facts, in our considered view, established an abject lack of application of mind, non consideration of the assessee’s submissions, factually incorrect assumptions, non rendering of any cogent reasons for his action and abject failure on the part of the AO to follow the procedure mandated by the provisions of section 14A of the Act in order to trigger the invocation of the provisions of Rule 8D of the I.T. Rules, 1962 before making any disallowance thereunder. The impugned order of the learned CIT(A) too, in our view, is a non speaking order. 4.3.2 Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. The provision thereof reads as under: - “14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
Ms. Fereshte Sethna (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.” 4.3.3 A plain reading of the provisions of section 14A (supra) indicate that the AO shall determine the amount of expenditure disallowable under section 14A following the method prescribed in this regard under Rule 8D; if he is not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee. Satisfaction of the AO as to the incorrect claim of the assessee in this regard is a pre-requisite for invoking the applicability of Rule 8D and such satisfaction can be reached and recorded only when the claim of the assessee is examined and verified having regard to the accounts of the assessee. From a perusal of the order of assessment, we observe that the AO totally ignored and did not address the assessee’s detailed submissions placed before him vide letter dated 05.11.2012 (copy placed at pg. 1 to 5 of paper book) without appreciating whether they were correct or not, having regard to the accounts of the assessee. The disallowance was made totally ignoring the assessee’s averments and on the premise that the assessee had offered the disallowance; which has been contested as being factually incorrect. This contention of the assessee has not been controverted before us by the Revenue. As mentioned by us earlier; even the breakup of the disallowance under Rule 8D(2)(ii) reveals a distinct lack of application of mind and appreciation of facts as it appears to be made on interest paid on car loan from ICICI Bank, which has no nexus with the investments made by the assessee; and under Rule 8D(2)(iii) of administrative expenses, which the assessee challenged before the learned CIT(A) on the ground that whether such disallowance was called for when separate disallowances were made by the AO from out of expenditure claimed as telephone charges, motor car expenses and depreciation thereof, business promotion, etc. It appears to us that the AO proceeded to invoke Rule 8D and make the disallowance thereunder on the premise that disallowance thereunder is automatic, irrespective of the genuineness of the assessee’s claim in respect of expenses incurred in relation to exempt income; and the learned CIT(A)