MUKUL ROHATGI,NEW DELHI vs. JCIT, NEW DELHI

2. That the Learned CIT(Appeals) has erred in confirming the assessment of the income of the assessee at Rs.18.63,90,250 as against the returned income of Rs.18,54,95,430/-/

Besides above, the assessee has also moved an application for allowing the following additional ground for the adjudication of the ITAT:

The Learned AR submitted that the though the above ground questioning the disallowance was raised before the Learned CIT(Appeals) but the same has been rejected by the Learned CIT(Appeals) as has not been pressed by the learned authorized representative of the assessee appearing before him without any instruction in this regard by the assessee.

We are, however, of the view that since the issue is arising out of the First Appellate Order and raised in the revised grounds before the ITAT, there is no need to raise it again as additional ground before the ITAT, especially when the Learned CIT(Appeals) has dealt with the issue. As to whether the learned counsel appearing before the first appellate authority was authorized by the assessee to withdraw the issue raised in the ground will be considered while deciding ground Nos. 4 to 6 of the appeal. The application for allowing the additional ground is accordingly rejected.

Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.

The facts in brief are that assessee, a senior advocate, had shown income under the heads “income from profession” and “income from other sources”. The assessee had shown income from house property at Rs.4,78,460 and had debited interest expenses of Rs.1,18,675 on account of secure loan taken for the vehicle. The Assessing Officer asked the assessee to justify the claimed expenses in view of the fact that the assessee had made interest free advance of Rs.8.89 crores. The assessee furnished his reply but the Assessing Officer did not agree with it and accordingly he disallowed the claimed expenses of Rs.1,18,675.

The Assessing Officer also made disallowance of Rs.2,97,684 under sec. 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962. In this regard, the Assessing Officer observed that the assessee had earned income exempt from tax amounting to Rs.8,62,86,748. The assessee questioned the above disallowances before the Learned CIT(Appeals) but could not succeed.

The ground Nos. 1 and 2 are general in nature, hence, these do not need adjudication.

Ground No.3: The Assessing Officer disallowed an amount of Rs.1,18,675 on account of interest paid to HDFC Bank on car loan on the basis that the assessee had made huge interest free advances. He disallowed the proportionate interest, which has been upheld by the Learned CIT(Appeals).

In support of the ground, the Learned AR submitted that it is not the case of the Assessing Officer that assessee had diverted any interest bearing funds to some parties and had not charged any interest. The assessee admittedly had advanced the fund from own capital, hence, there was no any question of making the above disallowance. He referred page No. 37 of the paper book i.e. balance sheet of the assessee as on 31.3.2008 to support his contention that as on that date there was opening balance of the capital of the assessee at Rs.21,27,41,082 and during the year the assessee had advanced only Rs.8,89,40,627. The Learned AR cited following decisions in support of his above contention:

The Learned Senior DR on the other hand tried to justify the orders of the authorities below on the issue. He contended that assessee had not explained what was the necessity to take the loan for purchasing of the car when the assessee was having sufficient funds available. Thus, taking of the loan was not commercial expediency.

Considering the above submission, we are of the view that it is now a well established proposition of law that when assessee was having an adequate non-interest bearing fund, disallowance of interest paid on borrowed fund cannot be made since in such a case, there was no nexus between the advance given and borrowals made by the assessee. It is also not the case of the Assessing Officer that the loan was not taken for the business purposes. We thus while setting aside orders of the authorities below on the issue direct the Assessing Officer to delete the addition of Rs.1,18,675. The ground No.3 is accordingly allowed.

Ground Nos. 4 to 6: The Assessing Officer made disallowance of Rs.2,97,684 under sec. 14A read with Rule 8D. The same has been upheld by the Learned CIT(Appeals) with this finding that this ground of appeal raised before him was not pressed.

The Learned AR submitted that the assessee has never instructed his counsel appearing before the Learned CIT(Appeals) as not to contest the issue of disallowance made under sec. 14A of the Income-tax Act, 1961 read with Rule 8D of I.T. Rules, 1962. The learned counsel appearing before the Learned CIT(Appeals) had not obtained any instruction from the assessee before taking his decision of not contesting the ground. In support, the assessee has filed an affidavit dated 07.04.2015 to this effect. The Learned AR submitted that assessee was having a strong case on the issue and thus there was no question of not contesting the same before the Learned CIT(Appeals). It is a settled position of law that an assessee would not suffer on account of the mistake of his counsel. In this regard, the Learned AR cited decision of Hon'ble Madhya Pradesh High Court in the case of Mahavir Prasad Jain reported in 172 ITR 231. The Learned AR submitted further that it is also a settled position of law that there would be no estoppels against the statute and if an income is not taxable under the four corners of income-tax law, the same cannot be made taxable because of the mistake of the assessee. In support, he cited the judgment of Hon'ble Supreme Court in the case of CIT vs. V.MR.P.FIR – reported in 56 ITR 67 (S.C) wherein the Hon'ble Supreme Court has been pleased to record their observation that the doctrine of “approbate & reprobate” is only a species of estoppels, it applies only to the conduct of parties. As in the case of estoppels, it cannot operate against the provisions of a statute. If a particular income is not taxable under the I.T. Act, 1961, it cannot be taxed on the basis of stopples or any other equitable doctrine. Equity is out of place in tax law, a particular income is either exigible to tax under the taxing statute or it is not. If it is not, the ITO has no power to impose tax on the said income.

The Learned AR also referred the decision of Hon’ble jurisdictional High Court of Delhi in the case of CIT vs. Bharat General Insurance – 81 ITR 303 (Delhi) in support of the above contentions. The Learned AR submitted further that when substantial justice and technical consideration have pitted against each other, then, the cause of substantial justice would prevail.

On the merit of the disallowance in question, the Learned AR submitted that the Assessing Officer has observed that the assessee had earned an amount of Rs.8,62,86,748 as exempt income and hence Rule 8D is applicable and after applying Rule 8D, he has made the disallowance of Rs.2,97,684 which has been affirmed by the Learned CIT(Appeals). He submitted that the finding of the Assessing Officer that assessee has earned an amount of Rs.8.82 crores as exempt income is factually incorrect. He referred page No. 21 of the paper book i.e. copy of Schedule E-I of the audit report furnishing the details of exempt income i.e. income not to be included in total income with the submission that the assessee had earned an amount of Rs.15.69 lacs as dividend income. He submitted that the dividend income was shown as net income after deducting the expenditure incurred on it by the profile manager of the assessee i.e. Societe Generale (Corporate & Investment Banking). Thus, when assessee himself had disallowed expenses on account of personal use then there was no question of making further disallowance under sec. 14A of the Act read with Rule 8D of the I.T. Rules without recording his satisfaction by the Assessing Officer vis-à-vis the correctness of the account of the assessee. He submitted that books of account of the assessee are admittedly audited. The Learned AR placed reliance on the following decision:

The Learned AR submitted that the assessee had produced his books of account before the Assessing Officer during the course of assessment proceedings and the same were examined, however, the Assessing Officer did not record its satisfaction that the book results of the assessee are not trustworthy. As per the ratio of the above cited decisions, the Assessing Officer before invoking the provisions of Rule 8D has to record his satisfaction in terms of sub-section (2) of sec. 14A of the Act.

The Learned Sr. DR on the other hand placed reliance on the orders of the authorities below with this submission that undisputedly the assessee had earned exempt income on which he must have incurred expenditure by way of taking services of his employees in his office and other services.

Considering the above submission, we find that as per the above cited decisions including the decision of Hon'ble jurisdictional High Court of Delhi in the case of Joint Investment (P) Ltd. vs. CIT (supra), the Assessing Officer before invoking the provisions of Rule 8D has to record his satisfaction in terms of sub-section (2) of section 14A of the Act. In the present case, when the assessee himself had disallowed the expenditure incurred on the management of its portfolio for earning the dividend income, the Assessing Officer had to record his satisfaction first that the expenditure shown by the assessee for earning the dividend income was not satisfactory before invoking the provisions of section 14A of the Income-tax Act, 1961 read with Rule 8D of the I.T. Rules to make disallowance there under. In absence of the compliance of such mandatory requirement, the Assessing Officer was not justified in making the disallowance of Rs.2,97,684 under sec. 14A of the Act read with Rule 8D of the I.T. Rules. We, thus while setting aside orders of the authorities below in this regard direct the Assessing Officer to delete the addition of Rs.2,97,684 made by way of disallowance under the above stated provisions. The ground Nos. 4 to 6 are thus allowed. In result, the appeal is allowed.

Order pronounced in the open court on 14.10.2015