VISHAL ASHOK RAMSINGHANI,MUMBAI vs. DCIT CIR 3(1), MUMBAI

आदेश / O R D E R

Per Sandeep Gosain, Judicial Member:

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT “1.1 The Learned Commissioner of Income Tax (Appeals) 7, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in confirming the disallowance of expenses u/s 14A of Rs 5,80,904 .

1.2 The Learned Commissioner of Income Tax (Appeals) 7, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in confirming the disallowance of expenses u/s 14A of Rs 5,80,904 without considering the fact that your appellant's indirect expenses (excluding depreciation) were only Rs 1,92,507. The disallowance u/s 14A cannot exceed the expenditure incurred by your appellant.

1.3 The Learned Commissioner of Income Tax (Appeals) 7, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in not considering the fact that no disallowance can be made in respect of depreciation as it is a statutory allowance u/s 32 and not an expenditure.

7. The above grounds of appeal are without prejudice to one another.

3: The Appellant craves leave to add, alter, amend and or delete any of the above grounds of appeal.”

2. The brief facts of the case are that the return of income was filed by assessee on 26.09.2011 declaring total income of Rs.48,60,140/-. The case was selected for scrutiny and after serving statutory notice and seeking reply of the assessee, assessment order was passed by DCIT thereby making disallowance/ additions while assessing total income of the assessee. The AO also made disallowance u/s 14A read with rule 8D of Income Tax Act of Rs.5,80,904/-.

3. Aggrieved by the order of AO, the assessee preferred appeal before CIT(A) however the CIT(A) after hearing both the parties had partly allowed the appeal of the assessee. However, the CIT(A) confirmed the additions made by AO u/s 14A read with Rule 8D of Rs.5,80,904/-.

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT 4. Aggrieved by the order of CIT(A), assessee preferred present appeal before us on the ground mentioned here in above.

Ground No.1.1 to 1.3

5. Since all the grounds raised by the assessee are inter-connected and inter- related therefore we thought it fit to dispose off the same through the present common order. At the very outset, ld. AR appearing on behalf of assessee submitted that the assessee had earned exempt income of Rs.14,99,008/- as dividend income on shares and Rs.1500/- on account of interest on FD’s. It was further submitted that the assessee had made suo motto disallowance of Rs.32,643/- u/s 14A of the Act with respect to expenditure relatable to the exempt income. Ld. AR further submitted that major investments made by the assessee were in group companies only. The activities relate to investment in shares of a quoted company and the tax from investments were managed by the assessee himself. Ld. AR further submitted that sub section (2) of section 14A of the said Act provides the manner in which the AO is to determine the amount of expenditure in relation to income which does not form part of the total income. It was also argued that AO was required to determine the amount of such expenditure only if the AO, 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. It was further

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT argued that in the present case the AO has not recorded his satisfaction and has not even indicated cogent reasons for making disallowance u/s 14A read with Rule 8D. whereas the AO was duty bound to list down reasons for rejecting the claim of the assessee. Ld. AR further relied upon the following citations namely:

1. J.K. Investors (Bombay) Ltd. vs. ACIT in for AY

2008-09.

2. Maxopp Investment Ltd. vs. CIT 2011 203 Taxman 364

4. DCIT vs DBH International (P.) Ltd [2015] 55 taxmann.com 424 (Delhi-

Trib.)

6. DCIT vs. Jindal Photo Limited ITA Nos. 814/Del./2011.

6. Apart from the above, ld. AR submitted that the revenue authorities have applied section 14A read with Rule 8D in an mechanical manner whereas it is mandatory to apply section 14A and compute disallowance under Rule 8D after giving reasons for rejecting assessee’s claim. Ld. AR further submitted that AO fail to consider that the total indirect expenses (excluding depreciation) of Rs.1,92,507/- (the details have already been given at page no.29 of the paper book). Ld. AR further argued that section 14A deals only with the expenditure and (A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT not with the statutory allowances admissible to the assessee and more particularly statutory allowances u/s 32 is not an expenditure.

“Ground No.2 I find that the appellant has earned exempt income of Rs.14,99,008/- on account of dividend on shares. The appellant has made a suo motu disallowance of Rs.32 ,643/ - u/s. 14A. In Maxopp Investment Ltd. v. CIT [2011] 15 taxmann.com 390 (Delhi), the Court explained the method prescribed by Rule 8D(2) as under: • If one examines sub-rule (2) of rule 8D, it is found that the method for determining the expenditure in relation to exempt income has three components. • The first component being the amount of expenditure directly relating to income which does not form part of the total income. • The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (ill incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income to the average of the total assets of the assessee.

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT • The third component is an artificial figure-O.5% of the average value of the investment income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first clay and the last day of the previous year.

• It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A. • It is, therefore, clear that in terms of the said rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. • The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. • In cases where the indirect expenditure is not by way of interest, a rule of thumb figure of 0.5% of the average value of the investment, income from which does not or shall not form part of the total income, is-taken. In View of the above, the AO has rightly computed the disallowance u/s.14A r.w.r. 8D at Rs.6,13,547/-. As the assessee has made an adhoc disallowance of Rs. 32,643/ -, the AO has rightly made an addition of the balance amount of Rs.5,80,904/- (Rs.6,13,547 - Rs.32,643) u/s.14A. Thus the addition of Rs.5,80, 904/ - made by the AO is confirmed.”

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT satisfaction with regard to the correctness of the claim of the assessee and moreover it is a prerequisite regarding invocation of section 14A read with Rule8D that the AO has to examine the accounts of the assessee first and then, if he is not satisfied with the correctness of the claim, only then, the AO could invoke rule 8D.

However no such examination was made or satisfaction is recorded by AO in this case. It was noticed that the AO has not recorded his satisfaction regarding the correctness of the claim of the assessee but he has embarked upon computing disallowance under Rule 8D. We have noticed that the assessee itself made disallowance but the AO has not indicated cogent reasons while rejecting the claim of the assessee with regard to the expenditure or no expenditure. In the entire order the AO has not recorded any finding with regard to the any deficiency or defect in the books of accounts nor any deficiency or defect was recorded in respect of claim of the assessee u/s 14A. We have also noticed that the AO has not recorded any satisfaction that the assssee’s claim u/s 14A was incorrect. Similarly the CIT(A) while dealing with the said issue has only recorded the judgment in the case of “Maxopp Investment Ltd. vs. CIT” [2011] 15 Taxman.com 390 (Delhi) The ld. CIT(A) has also failed to appreciate whether the AO has rightly computed the disallowance u/s 14A read with Rule8D and had confirmed the addition made by AO. The ld. CIT(A) has also failed to appreciate whether the AO has not recorded any objective satisfaction with regard to the correctness of the claim which is (A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT mandatory requirement in terms of section 14A of the Act and therefore, action of invoking rule 8D to compute the impugned disallowance is untenable. We found reliance in the following judgments:

After considering the principles laid down by various judgements, it is imperative that the AO can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. The condition precedent for the AO entering upon determination of the amount of the expenditure incurred in relation to exempt income is that the AO must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Therefore, it is all the more necessary that AO has to examine the accounts of assessee first and then if he is not satisfied with the correctness of the claim, only he can invoke Rule 8D. No such examination was made or satisfaction was recorded by AO in this case. It was noticed that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8D on the presumption that portfolio

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT management involves at least 2% of charges. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. We notice that assessee itself disallowed the interest which is directly applicable, Dmat charges and administrative exp on estimation totaling to Rs.1,55,44,610. Assessee is a hundred crore turnover company. AO has not examined any expenditure claimed in P& L account so as to relate to exempt income, nor gave a finding that assessee claim is not correct for any reason. Rule 8D cannot be .invoked directly without satisfying about the claims or otherwise.

Consequently, the disallowance was not permissible. We therefore, allow the ground of appeal."

While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempt income, the AO would have to indicate cogent reasons for the same.

Raj Shipping Agencies Ltd vs. ACIT [2013] 38 Taxmann.com 345 3.

[Mum] which held as under:

Expenditure incurred in relation to income not includible in total income [Conditions precedent] - Assessment year 2008-09 - Whether Assessing Officer

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT has to examine accounts of assessee first and then if he is not satisfied with correctness of claim, only he can invoke rule 8D - Held, yes - Whether further, disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand - Held, yes - Whether where Assessing Officer had not recorded any satisfaction with reference to accounts of assessee or claim that no expenditure was incurred, invocation of rule 8D for disallowing expenditure under section 14A on estimation/presumptive basis did not arise - Held, yes

Held- The Commissioner (Appeals) has rightly observed that the Assessing Officer did not find any deficiency in the books of account nor any deficiency in respect of the claim of the assessee under section 14A. it is also found that the Assessing Officer has not expressed satisfaction with the assessee's claim under section 14A was incorrect (Delhi - Trib.) and which is a sine qua non before invoking provisions of section 14A. It is not found any infirmity whatsoever in the reasoned order passed by the Commissioner (Appeals) and therefore the order of the Commissioner (Appeals) is confirmed and so the departments appeal fails and so is dismissed. [Para 8]

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT 5. Kalyani Steels Ltd. Vs Add. CIT which held as under:

Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule BD of the Rules to compute the impugned disallowance is untenable. Accordingly, the orders of the authorities below are set- aside on this aspect and the Assessing Officer is directed to retain the disallowance u/s 14A of the Act to the extent of Rs.5,00,000/-, as returned by the assessee.

An ad hoc disallowance cannot be made under Rule BD. The onus is on the AO to establish that expenditure has been incurred for earning exempt income.

Disallowance u/s.14A cannot be made on the basis of presumption that the assessee must have incurred expenditure to earn tax-free income. Since the AO had not recorded satisfaction regarding the assessee's calculation being incorrect and since such satisfaction is a pre-requisite for invoking Rule 8D, the CIT(A) erred in partially approving the action of the AO.

(A.Y. 2011-12) Vishal Ashok Ramsinghani vs. DCIT