VINEY KRISHAN CHAUDHARI,NEW DELHI vs. ACIT, NEW DELHI

The present appeal, filed by the assessee, is directed against the order dated 4.2.2012 passed by the Ld. CIT (A)-19 New Delhi for Assessment Year 2009-10. The grounds of appeal challenge the disallowance u/s 14A of the Income Tax Act, 1961 upheld and enhanced by the Ld. CIT (A).

The assessee is a director of M/s Tip Top General Agencies Pvt. Ltd. He is also the proprietor of the concern M/s Trimblesh “N” Savas, dealing in trading of earthmovers’ tyres. During the year, the assessee’s sources of income were salary, short term capital gains, long term capital gains, business & professional income and income from other sources. The assessee also I.T.A. 2669/Del/2013 Assessment Year 2009-10 earned exempt income in the form of dividend and long term capital gains. Exempt dividend in personal capacity was Rs.14,30,530/- and as the proprietor of M/s Trimblesh “N”

On appeal before the first appellate authority, the Ld. CIT (A) not only confirmed the disallowance made by the Assessing Officer but also directed the AO to work out the disallowance in respect of exempt income and assets held in personal capacity.

The Ld. AR for the assessee submitted that the assessee had invested the surplus funds generated from the business in mutual funds, bonds and shares and had earned income on such investments in the form of dividends and interest. It was further 2 I.T.A. 2669/Del/2013 Assessment Year 2009-10 submitted that the assessee had already disallowed security transactions tax amounting to Rs.81,192/- debited in profit/loss account on his own initiative in the computation of income. It was also submitted that the assessee is the proprietor and he manages the investment related work himself. He also submitted that there is a factual mistake in the figures quoted by the Ld. CIT (A). It was pointed out with reference to pages 2 to 6 of the paper book that the total expenditure debited to the profit/loss account has been taken at Rs.2,83,53,900/- which in fact is the total of the debit side including the profit of Rs.2,25,56,261/- and the total expenditure is only Rs.57,97,639/-. It was also pointed out that the profit/loss account had also been debited with Rs.1,39,205/- being loss on sale of mutual funds and the same has already been added back by the assessee in the computation of income. It was also pointed out that the profit/loss account also shows in its debit side expenses of Rs.22,713/- on account of tender fees, Rs.22,52,929/- on account of difference in exchange rate and Rs.26,75,000/- on account of compensation for warranty claim. These expenses were purely related to the business income and had no connection with the exempt income. Thus, the balance of other common expenses come to I.T.A. 2669/Del/2013 Assessment Year 2009-10 Rs.6,26,596/- only which includes Rs.2,86,664 relating to bank charges in respect of tyre business. The Ld. AR also submitted that there was no collection cost for the exempt dividend income.

The Ld. DR in response relied on the order of Ld. CIT (A).

The scheme of section 14A has within it implicit notion of apportionment in the cases where the expenditure is incurred for the composite/indivisible activities in which taxable and non- taxable income is received. But when it is possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14 A has no application. The objective of section 14 A is not allowing 4 I.T.A. 2669/Del/2013 Assessment Year 2009-10 to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. Thus, the expenses incurred to earn exempt income cannot be allowed and the expenses shall be allowed only to the extent they are related to the earning of taxable income. If there is expenditure directly or indirectly incurred in relation to exempt income, the same cannot be claimed against the income, which is taxable as it is held by the Hon’ble Supreme Court in case of Commissioner of Income-tax v. Walfort Share and Stock Brokers P. Ltd. reported in 326 ITR 1 (SC) that for attracting the provisions of section 14 A, there should be proximate cause for disallowance which as relationship with the tax exempt income. The expenditure incurred in relation to the income which does not form part of total income has to be disallowed. However, it should be proximate relationship between the expenditure and the income, which does not form part of total income. Once such proximity relationships exist, the disallowance is to be effected. In case the assessee had claimed that no expenditure has been incurred for earning the exempt income, it is for the assessing officer to determine as to whether the assessee had incurred any expenditure in relation to income which did not form part of total I.T.A. 2669/Del/2013 Assessment Year 2009-10 income and if so, to quantify the extent of disallowance. Thus, in order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure is incurred with a view to earn taxable income and there is apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance can be made under section 14A merely because some tax exempt income is received by the assessee.

On going through the records and hearing the rival submissions, it is seen that the assessee has been claiming that no expenditure has been incurred in relation to earning of exempt income. He has filed relevant documents before the authorities below but the same have not been considered and adjudicated upon. In the present case, the Assessing Officer did not bring any evidence on record to establish that any expenditure had been incurred by the assessee for earning the exempt income. In the absence of such evidence, it was patently I.T.A. 2669/Del/2013 Assessment Year 2009-10 wrong on the part of the Assessing Officer to compute disallowance u/s 14A of the Act by mechanically applying Rule 8D. We find that the audit report on Form 3CB reports that the expenses in respect of exempt income were shown at NIL. The Assessing Officer has presumed that the assessee must have incurred some expenditure for earning the exempt income. The Assessing Officer has adopted the formula for estimating expenditure on the basis of investments but the justification for calculating the disallowance is missing. The assessee had not claimed any expenditure in the profit/loss account, so the onus was on the Assessing Officer to prove that out of the expenditure incurred under various heads, some were related to earning of exempt income.

Our view is supported from the following judicial pronouncement:-

In the result, the appeal of the assessee is partly allowed.