SHREYAS R. METHA,MUMBAI vs. ITO 8(2)(4), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order,dated 21/04/2014,of the CIT (A)-17, Mumbai, the assessee has filed the present appeal.Assessee, an individual, engaged in arbitrage business and securities market and trading and manufacturing of diamonds, filed his return of income on 14/09/2010,declaring total income at Rs. 15.82 lakhs. The Assessing Officer(AO)completed the assessment,u/s.143(3)of the Act,determining the income of the assessee at Rs.19.22 lakhs. 2.Eeffective ground of appeal is about disallowance of Rs. 3.39 lakhs,made u/s.14- A of the Act.During the assessment proceedings,the AO found that the assessee had received dividend income of Rs. 26.96 lakhs(Rs. 25.86 lakhs+ 1.10 lakhs),that he had claimed the same as exempt u/s.10 (34) of the Act. He directed the assessee to explain as to why disallowance u/s.14 A read with rule 8D of the Income Tax Rules,1962 (Rules)should not be made. As per the AO the assessee did not submit any expression in that regard.He,after considering the available material, held that the assessee had not attributed any expenses which had been incurred to earn the exempt income,that it was an accepted fact that for earning of any income some kind of expenditure necessarily had to be 1 4495/Mum/2014(10-11(Shreyas R.Mehta)

incurred, that a company could not earn dividend without its existence and management, that investment decisions were very complex in nature, that it was not correct to say that dividend income could be earned by incurring no or nominal expenditure, that the term expenditure occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure, that the disallowance u/s.14A had to be worked out as per Rule 8D of the Rules,that the Rule had prescribed formula for calculation of disallowance and same was binding in nature.He made a disallowance of Rs. 3,39, 352/-(half percent of average investments). 3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).Before him it was argued that assessee was running a company,that the Standard Chartered Bank, where the company had current-account,would transfer the excess money into Liquid Mutual Fund and would give daily dividend,that total dividend received during the year was Rs. 1.10 lakhs as per the profit and loss account of the company, that the opening balance of Standard Chartered Bank was Rs. 1.28 Crores and closing balance of the same was Rs. 20.74 lakhs,that half percent of average investment would be Rs. 37,235/-,that disallowance u/s.14 A should be restricted to Rs. 37,235/-,that he was maintaining separate books of accounts for the company,that the books of accounts were audited u/s. 44AB of the Act,that the assessee was having investment in shares in mutual funds, that the opening balance of the same was Rs. 4.01 Crores and the closing balance was Rs. 9.56 Crores excluding PPF account balance and Bank of India FDR,that the dividend earned for the same was Rs. 25.86 lakhs, that the assessee had debited D-mat charges,sundry expenses and other expenses to the capital account,that he had not claimed the same as business expenses, that no expenses were claimed to earn the exempt income,that disallowance u/s. 14A could not be made.Alternatively,it was argued that the disallowance should be restricted to Rs.37,235/-.After 4495/Mum/2014(10-11(Shreyas R.Mehta) considering the submission of the assessee, the FAA held that the AO had rightly made the disallowance,that it was not the case of the assessee that no expenditure was incurred by him,so as not to make any disallowance. 4.Before us,the Authorised Representative(AR)argued that the assessee had not claimed any expenditure for earning exempt income, that there was no justification in making disallowance on that account.The Departmental Representative (DR) left the issue to the discretion of the bench. 5.We have heard the rival submissions.It is found that the assessee had not claimed any expenditure against the exempt income.Therefore, in our opinion, the FAA was not justified in confirming the disallowance made by the AO. We find that in the case of Joint Investments Pvt.Ltd.(372ITR694),the Hon’ble Delhi High Court has held that the window for disallowance was indicated in section 14A and was only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income.Respectfully, following the above decision,we reverse the order of the FAA,as the window was not open for disallowance in the case under appeal-the assessee had not claimed any expenditure to earn the exempt income.Effective ground of appeal, raised by the assessee, is decided in his favour.