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Income Tax Appellate Tribunal, DELHI BENCH “D” NEW DELHI
Before: SHRI S.V. MEHROTRA : & MS. SUCHITRA KAMBLE:
Date of hearing : 08/09/2015. Date of order : 05/11/2015. O R D E R PER S.V. MEHROTRA, A.M..:
This appeal, preferred by the assessee, is directed against the order dated 30-10-2013, passed by the ld. CIT(A)-XI, New Delhi in appeal no. 202/10/11/(232/13-14), relating to A.Y. 2008-09.
Brief facts of the case are that the assessee through his proprietorship concern M/s Ravina International, in the relevant assessment year was engaged in the business of export of ladies garments. Besides, he was also in 2 ITA 6643/Del/13 Pradeep Khanna Vs. ACIT receipt of inspection charges for consultancy/ certification services. The assessee had filed return of income showing total income of Rs. 26,76,240/-. The AO noticed that assessee had shown short term capital gain of Rs. 1,54,011/- on listed securities and offered to tax u/s 111A of the Income-tax Act. He further noticed that assessee had credited in the P&L A/c a sum of Rs. 10,87,898/- on account of dividend received. Besides, long term capital gain on sale of listed securities amounting to Rs. 11,36,768/- had also been shown. The dividend and long term capital gain had been claimed exempt u/s 10. The AO noticed that in the P&L A/c the assessee had claimed administrative and establishment expenses of Rs. 65,78,808/-. The AO required the assessee to furnish details of expenditure incurred in connection with income claimed exempt. The assessee filed following reply:
“That the assessee has not Incurred expenses in relation to income not includible in total Income arising by way of dividend on shares and dividend on mutual fund. Income received by way of dividend on shares and dividend on mutual fund during the year under consideration on investment made by the assessee in previous year. Therefore, provision of section 14A does not applicable in the case of assessee. Copy of account statement of mutual fund is being enclosed.”
The AO did not agree with the assessee’s reply and observed as under:
“I have considered the submission made by Ld. Counsel but do not agree with the same that no expenditure relating to investment activities have been debited in P&L Ale. The details 3 ITA 6643/Del/13 Pradeep Khanna Vs. ACIT of investment of assessee was called for and according to that. the investment in shares and mutual funds as on 01.04.2007 was Rs.2,42,50,82X/-. The value as on last day of the previous year is Rs.2,44,71,202/-. As per balance sheet of Ravina International, the total application of fund in the business of assessee is Rs.2,32,74,441/-. The difference is visible and apparent. It can be very well seen that the assessee during the year under consideration has earned huge exempt income from investment and in fact the income from business is almost equal to the income exempt U/s 10. As per the AIR details also, the assessee during the year has made investment of Rs.1,28,33,890/- in mutual fund. It is not the quantum of exempt income which is material. What important is that whether or not expenditure has been incurred on earning exempt income.”
He referred to Rule 8D and pointed out that in cases where assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the amount of expenditure in relation to such income is to be worked out in accordance with sub-rule (2) of Rule 8D.He referred to Rule 8D(2)(iii) and pointed out that proportionate expenses is to be worked out after averaging out the total of investment as on the first and last day of the relevant previous year. Therefore, it was not necessary to pin point the expenditure in case where assessee claims that no expense has been incurred for earning income. He, accordingly, computed the expenditure incurred in relation to exempt income at Rs. 1,21,805/-, as under:
(a) Value of investment as on first day of the previous year: Rs. 2,42,50,827/- (b) Value of investment on the first day of the previous year: Rs. 2,44,71,202/- (c) Total of the above: Rs. 4,87,22,029/- (d) Average value of investment Rs. 2,43,61,014/-
4 ITA 6643/Del/13 Pradeep Khanna Vs. ACIT (e) One half percent of the average value of investment: Rs. 1,21,805/- 5. Ld. CIT(A) dismissed the assessee’s appeal, inter alia, observing I para 7.2 as under:
“7.2. The appellant has also argued that the AO has not recorded his satisfaction before applying the Rule 8D of the IT Rules in the appellant's case. The facts narrated above, make it amply clear that such requirements is met by appellate authority as the appellate authority has co-terminus powers with the AO as held by the Hon'ble Supreme Court in the case of Jute Corporation of India Ltd. vs. CIT & Another (1991) 187 ITR 688 (SC).”
Being aggrieved, the assessee is in appeal before us and has take following grounds of appeal:
“1. (a) The Ld. Assessing Officer has erred in law and on facts in making of disallowance of expenditure under Section 14A of Income Tax Act, 1961 of Rs. 1,21,805/- without recording any satisfaction or relying on the evidence of expenditure so incurred on the scrutiny of the accounts. (b) Further the CIT (A) has further failed to appreciate that the assessee has not incurred any expenditure against the earning of exempted income and the expenditure cannot be presumed.
6. That the CIT (A) and AO both have failed to appreciate that all the investment have been made by the appellants out of the spare funds available with the appellants and there are no presumption of expenditure - reference
5 ITA 6643/Del/13 Pradeep Khanna Vs. ACIT ACIT Vs. MAXXOP L TO 347 ITR 272 (DELHI) 3. The order of the CIT (A) and AO are bad in law and against the facts of the case.”
We have heard rival submissions and perused the material available on record. As far as ground no. 1 raised by assessee is concerned we find from bare reading of the assessment order that AO has clearly recorded his satisfaction that the assessee’s stand that no expenditure had been incurred in earning exempt income was incorrect and such arguments were completely misconceived. The observations have specifically been made in para 7.1 of the assessment order. He clearly observed that though there were no direct expenses shown by the assessee in his books of account exclusively for earning such exempt income, but it cannot be denied that the assessee had been utilizing its administrative as well as managerial machinery for earning the exempt income in a prudent manner.
Section 14A(3) reads as under:
(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.”
In the present case also, the claim of the assessee was that no expenditure was incurred for earning exempt income, but once the AO had recorded his satisfaction in terms of sub-section (2), then the disallowance can be made as per Rule 8D(2)(iii). We, accordingly, do not find any reason to interfere with the finding of ld. CIT(A) on this count.
6 ITA 6643/Del/13 Pradeep Khanna Vs. ACIT 10. As far as ground no. 2 is concerned, the same is misconceived because AO has not made any disallowance under rule 8D(2)(i)/(ii). Accordingly, the same is dismissed.
In view of above discussion, the assessee’s appeal is dismissed.
Order pronounced in open court on 05/11/2015.