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Income Tax Appellate Tribunal, “F”, BENCH MUMBAI
Before: SHRI JASON P. BOAZ, AM & SHRI SANDEEP GOSAIN, JM Shri Vishesh H. Parekh, 601-A,
The present appeal has been filed by the assessee against the order of the learned CIT (A)-31, Mumbai dated 07-05-2014 passed in appeal No.CIT(A)-31/IT-376/ACIT-20(3)/11-12 for assessment year 2009- 10 on the grounds mentioned herein below:-
“1. The learned Commissioner of Income Tax, (Appeals)-31 Mumbai erred in confirming the disallowance of Rs.2,11,854/- u/s. 14A r. w. Rule 8-D without assigning any cogent reason. 1.1 Your appellant, further submits that your appellant has already submitted that no expenditure has been incurred for earning the exempt income. 1.2 Your appellant, therefore, submits that the disallowance of Rs.2,11,854/- u/s. 14-A read with rule 8D be deleted in full.
2. Your appellant craves leave to add, alter, amend, withdraw or substitute all or any of the grounds as the circumstances of the appeal may require.”
The brief facts of the case are that the assessee engaged in the business of exports of pharmaceuticals machinery spare parts, installation and repairing of pharmaceuticals machinery filed his return of income on 29-09-2009 declaring income of Rs.1,51,97,190/-. The return was processed u/s 143 (1) of the IT Act and later on the case was taken up for scrutiny assessment after statutory notices were served upon the assessee seeking certain details by the AO. During the scrutiny assessment the AO noted that the assessee earned dividend income of Rs.5,59,383/- and the same was claimed as exempt income by the assessee. The AO after seeking reply from the assessee had reached to the conclusion that some expenditure would certainly have incurred by the assessee for earning such exempt income. Therefore, by applying the provisions of section 14A (2) of the Act read with Rule 8D sub clause (2)
(iii) of the IT Rules the AO calculated the disallowance at Rs.2,11,854/- and added the same back to the total income of the assessee vide his order dated 28-12-2011. Aggrieved by the order of the AO the assessee carried the matter in appeal before the learned CIT (A) and the learned CIT (A) after hearing both the parties and considering the materials on record rejected the grounds raised by the assessee and dismiss the assessee’s appeal by upholding the action of the AO.
Aggrieved by the order of the learned CIT (A), the assessee is now in appeal before us on the aforementioned ground.
Grounds No.1 to 1.2 of the assessee’s appeal are relating to the issue of applicability of the provisions of section 14A read with Rule 8D of the IT Rules while calculating the disallowance. In this regard, the learned AR submitted that the assessee has not incurred any expenditure for earning exempt income, therefore, provisions of section 14A read with Rule 8D was wrongly applied by the AO and the addition made by the AO on account of disallowance made u/s 14A read with Rule 8D was also wrongly upheld by the learned CIT (A). Therefore, the learned AR submitted that the addition so made of Rs.2,11,854/- to the income of the assessee be deleted. The moot question raised by the learned AR before us is that since there was no expenses debited to the personal account so, question of disallowance does nor arise at all. It was further argued that the word “in relation to” in section 14A mean a “dominant and immediate connection” between the expenditure and the exempt income.
It was further argued that the onus is on the AO to establish that there was “dominant and immediate connection” between the expenditure and exempt income. Since, as per the learned AR the assessee has not spent a single rupee from the personal account, therefore, question of disallowance does not arise. It was further submitted by the learned AR that the AO did not bring any evidence on record to establish that the assessee had incurred any expenditure for earning the exempt income and in the absence of such evidence it was wrong on the part of the AO to proceed to compute the disallowance u/s 14A of the Act by applying Rule 8D (2) (iii) of the IT Rules. Although, the learned AR relied upon several judgments but, the judgment rendered by the Hon’ble Punjab & Haryana High Court in the case of CIT-II Vs M/s. Hero Cycles Ltd. dated 04th November, 2009 passed in of 2009 was referred to by him.
While drawing our attention to the said judgment it was submitted by the learned AR that the Hon’ble High Court has given a categorical finding that “whether in a given situation any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted.”
3.1 In addition, the learned AR further submitted that it is a settled law that the AO must record his satisfaction that application of Rule 8D is called for on the facts and circumstances of a case and for that purpose the AO must satisfy that expenditure has actually been incurred by the assessee for the purpose of earning dividend income and the AO cannot simply ignore the plea of the assessee that there is hardly any expenditure incurred for the purpose of earning dividend income. The learned AR further relied upon the decision in the case of (i) CIT Vs Walfort Share & Stock Brokers P. Ltd. [326 ITR 1 (SC)] rendered by the Hon’ble Supreme Court, (ii) CIT Vs Shapoorji Pallonji reported in 318 ITR 417 (Bom.)
On the other hand, the learned DR appearing on behalf of the Revenue submitted that although the reply was submitted by the assessee to the effect that he has not incurred any expenditure for the purpose of earning exempt income but, the AO was not satisfied to the correctness of the claim in respect of expenditure incurred in relation to exempt income. It was further submitted by the learned DR that in the profit & loss account, certain expenses have been claimed by the assessee and that whenever exempt income earned by the assessee then in that case the provisions of section 14A of the Act laid down that no deduction shall be allowed in respect of the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the law. It was further submitted by the learned DR that it has been laid down by sub-section (2) of section 14A of the Act that the AO shall determine the amount of expenditure incurred in relation to earning of exempt income by using the method as may be prescribed in the case. It was further submitted that at the time of investment the assessee has paid commission to the agents facilitating the investment and managing portfolio and has not debited any expenses in relation to these activities in his personal account. On that basis, the learned DR submitted that the disallowance made by the AO is correct. In support of his contentions the learned DR replied upon the decision of ITAT Chennai “D” Bench in the case of Visual Graphics Computing Services (India) (P) Ltd. Vs ACIT [ITA No.2073 (MAD.) of 2011 Order dated 17th April, 2012] wherein it has been categorically held as under:-
“…. III. Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962 – Expenditure incurred in relation to income not includible to total income – Assessment year 2007 -08 – Assessee had earned substantial amount of dividend income without incurring any direct visible expenditure – Whether no income is gratuitous and every income is earned after incurring certain expenses and, hence, a reasonable portion of management time expenditure should be attributed to earning of dividend income – Held, yes – Whether since quantification of expenditure incurred in relation to income not includible in total income, was not permissible under rule 8D for impugned assessment year, disallowance had to be made on basis of reasonableness and fairness – Held, yes [Partly in favour of assessee].”
The learned DR further relied upon the decision rendered by ITAT Bombay “C” Bench in the case of ACIT Vs Citicorp Finance (India) Ltd., 108 ITD 457 wherein it has been held as under:-
“The prohibition for allowing the deduction under section 14A for and from the assessment year 1962-63 is in respect of expenditure incurred by the assessee in relation to income which does not form par of the total income. The term ‘expenditure’ occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. The phraseology used in section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is wide enough to cover all forms of expenses provided they have some connection with the exempt income. This is based on the principle that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income [Para 12].
It is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses. By same logic, it is equally difficult to accept that the only expenses involved in earning the dividend income are those incurred on collection of dividend or on encashing a few dividend warrants. A company cannot earn dividend without its existence and management. Investment decisions are very complex in nature. They require substantial market research, day to day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. They require huge investment in shares and consequential blocking of funds. It is well-known that capital has cost and that element of cost is represented by interest. Besides, investment decisions are generally taken in the meetings of the board of directors for which administrative expenses are incurred. It is, therefore, not correct to say that dividend income can be earned by incurring no or nominal expenditure [Para 13].
Therefore, all expenses connected with exempt income have to be disallowed under section 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. [Para 14].”
We have heard both the parties and have also perused the materials on record as well as the orders of the authorities below. After perusal of the impugned order we have noticed that the disallowance made by the AO is not under Rule 8 D (2) (i) or (ii) but, on the average value of the investments as per Rule 8D (2) (iii), therefore, the nexus between the expenses claimed by the assessee and the taxable income is not relevant in the facts and circumstances of the present case. Rule 8D (2) (iii) lays down the procedure to be made for valuing the investment held by the assessee and in this situation, the statutory disallowance @ 0.5% has already been held to be reasonable by various Courts. The said mechanism was also discussed and was found to be in order by the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co.
Ltd. Vs DCIT, 328 ITR 81 and in the case of Citicorp Finance Ltd. cited supra it has been categorically mentioned that the phrase used u/s 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is wide enough to cover all forms of expenses provided they have some connection with the exempt income. In the said judgment it has categorically been mentioned that it is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses whatsoever including management or administrative expenses and, therefore, it was lastly held that the expenses connected with exempt income have to be disallowed under section 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law.
While controverting the said arguments of the learned DR, the learned AR relied upon the decision of ITAT Mumbai “I” Bench in the case of DCIT Vs M/s. India Advantage Securities Ltd. we after analyzing the said decision found that the facts of that case are different from the present case, as in that case the shares have been shown as “stock-in- trade” in the books of account and, therefore, it was in principle decided that such ‘stock-in-trade’ cannot be taken into account while computing disallowance under Rule 8D.
Considering the totality of the facts and circumstances of the present case, we are of the view that the learned CIT (A) has passed a reasonable and judicious order. Therefore, we find no reason to deviate from or interfere with the findings of the learned CIT (A). Accordingly, we uphold his order. These grounds of appeal of the assessee stand rejected.
8. Ground No.2 of the Assessee’s appeal is general in nature and hence, requires no specific adjudication.
In the result, the appeal filed by the Assessee is dismissed. Order pronounced in the open court on 25-05-2016.