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आयकर अपील�य अ�धकरण, सुरत �यायपीठ, सुरत IN THE INCOME TAX APPELLATE TRIBUNAL, SURAT BENCH, SURAT BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND Dr ARJUN LAL SAINI, ACCOUNTANT MEMBER आ.अ.सं./ITA No.187/SRT/2021 (AY 2017-18) (Hearing in Physical Court) Sanjivkumar A Shah Income Tax Department, 4th Floor, Amar Arcade, Valsad Circle, Valsad Vs Halar Road, Valsad-396001 -396001 PAN : ACPPS 0794 L अपीलाथ�/Appellant ��यथ� /Respondent
�नधा�रती क� ओर से /Assessee by Ms. Vishwa Vaniwala, C.A राज�व क� ओर से /Revenue by Shri SBG Mahapatra, Sr-DR सुनवाई की तारीख/Date of hearing 16.06.2022 उ�घोषणा क� तार�ख/Date of 09.09.2022 pronouncement Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by assessee is directed against the order of ld. National Faceless Appeal Centre [for short to as “Ld. NFAC”]/Ld. CIT(A) Valsad dated 19.08.2021, which in turn arises out of an assessment order passed under section 143(3) of Income-Tax Act (Act) dated 30.11.2019 for assessment year (AY) 2017-18. The assessee has raised the following grounds of appeal: - “1.On the facts and circumstances of the case as well as law on the subject, the learned Commissioner of Income Tax (Appeals) has
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah erred in confirming the action of the learned assessing office in making disallowance of Rs.5,71,485/- on account of disallowance u/s 14A of the I.T. Act in accordance with the method prescribed under rule 8D of I.T.Rules. 2.It is therefore prayed that the above addition /disallowance made by assessing officer and confirmed by learned Commissioner of Income-tax((Appeals) may please be deleted.” 2. Brief facts of the case are that assessee is a Doctor by profession, filed his return of income for the assessment year 2017-18 declaring income of Rs.2.751 crores. The case was selected for scrutiny. During the scrutiny assessment, the Assessing Officer on perusal of record found that assessee has shown exempt income of Rs.39,26,433/- comprising dividend and interest from tax free bonds and long term capital gain. The Assessing Officer also noted that opening and closing investment, which yielded exempt income, was of Rs.4.922 crores and Rs.6.506 crores respectively. The assessee was asked to furnish the working of suo motu disallowances as per Section 14A r.w.s Rule 8D. In response thereto, the assessee filed his reply darted 06.11.2019. The reply of assessee extracted in para-4.1 of the assessment order. The assessee in his reply in sum and substances submitted that Section 14A
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah deals with the expenditure incurred in relation to income not includable in total income under section 14A was amended by the Finance Act, 2007 with effect from 01.04.2007 whereby Section 14A was renumbered. As per amended Section 14A sub-section (1)(2) & (3) were inserted. The new two sub- sections empowered by Central Board of Direct Tax (CBDT for short) to prescribe rule for determination of amount of disallowance under section 14A. Thus, Rule 8D has also be noted by CBDT. As per the conditions of Section 14A, the condition should be satisfied for attracting the disallowance of provisions of Section 14A, that it is an expenditure, such expenditure is “incurred”, such incurring of expenditure is in relation to income which does not form part of the total income under the Act, if the above conditions are satisfied, the quantum of disallowance shall be determined in accordance with sub-section (2) and (3) of Section 14A. The expression “expenditure incurred” in Section 14A refers to expenditure on rent, taxes, salaries interest etc., in respect of which allowance are provided for (i) when the disallowance of provision of Section 14A are triggered, the Assessing Officer has to proceed 3
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah under sub-section (2) and (3) to determine the quantum of the expenditure to be disallowed, (ii) Sub-section (2) and (3) of Section 14A are intended to enforce and implement the provisions of sub-section (1), (iii) The object of sub-section (2) is to provide uniformity of method where the Assessing Officer is on the basis of the accounts of the assessee, not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Income-tax Act. The assessee furnished the details of entire expenditure incurred during the year as has been recorded by the Assessing Officer on page-4 of the assessment order. On the basis of such disclosure of such expenses, the assessee claimed that during the year under consideration, the assessee had not paid any interest or incurred any expenditure in relation to the income which does not form part of the total income. The reply furnished by the assessee was not accepted by the Assessing Officer. The Assessing Officer recorded that assessee has claimed that he has earned exempt dividend and tax-free interest but has not incurred any expenditure to earn such 4
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah exempt income. The income cannot be generated in thin air without incurring any expenditure. The assessee has not disallowed any expenditure for earning exempt income. Therefore, the submission of assessee is not acceptable. The Assessing Officer recorded that the assessee has made average value of investment during the year of Rs.5.714 crores. The Assessing Officer thereby invoking the provision of Rule 8D 2(ii) and computed the disallowance @ 1% of average value of investment, thereby worked out the disallowance of Rs.5,71,485/- and added the same to the income of assessee while passing the assessment order on 30.11.2019. 3. Aggrieved by the addition / disallowance under section 14A, the assessee filed appeal Ld. CIT(A). the appeal of the assessee was migrated to NFAC. Before Ld. NFAC/Ld. CIT(A) the assessee filed his statement of fact as well as submission. The submission of assessee is recorded in para-4 of the order of NFAC/Ld. CIT(A). The assessee in his submission, reiterated the same contention as contended before the Assessing Officer. The assessee also stated that assessee has earned total exempt income of Rs.39,26,433/- (being dividend of 5
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah Rs.2,91,765/-, interest from tax free bonds of Rs.27,23,700/- and long-term capital gains of Rs.9,10,968/-). The investment were made by assessee from his own fund and no leverage cost is associated in making such investment. No borrowing is made for making the investment. The assessee before the Assessing Officer reasonably explained that no cost was incurred for earning exempt income. In computing the disallowance under section 14A, the Assessing Officer has not recorded his dissatisfaction. The Assessing Officer proceeded mechanically to make the disallowance on the basis of formula given under section 14A read with rule 8D. The assessee reiterated that he has not incurred any interest expenditure. The assessee also reiterated that the Assessing Officer has not given reasons that assessee’s account is incorrect, in absence thereof, Assessing Officer cannot proceed to computer the disallowance as prescribed for making such disallowance. The condition precedent to embarking upon the determination of the amount of expenditure incurred in relation to exempt income. The assessee also relied upon certain case laws.
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah 4. The Ld. NFAC/Ld. CIT(A) after considering the submission made by assessee held that during assessment, the Assessing Officer found that assessee has shown exempt income, which comprises dividend and tax free interest and long-term capital gain. The Assessing Officer also shown that opening and closing investments which yielded exempt income are Rs.4,92,27,321/- and Rs.6,50,69,693/- respectively. The Assessing Officer asked the assessee to furnish computation of expenses disallowance under section 14A. The assessee contended that assessee has not incurred any expense for earning exempt income. The contention of assessee was not accepted by the Assessing Officer by taking view that exempt income cannot be generated without incurring any expense. The Assessing Officer disallowed @ 1% of average investment of Rs.5.714 crores. The Assessing Officer has recorded his satisfaction with regard to correctness of the claim of assessee. On the contention whether indirect expense was rightly disallowed when there was no direct expenditure incurred by assessee. The Ld. NFAC/Ld. CIT(A) by referring the decision of Hon'ble Apex Court in the case of Maxopp Investment Ltd. vs. 7
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah CIT 402 ITR 640 (SC) and Hon'ble Delhi High Court in the case of Indiabulls Financial Services Ltd. in ITA No. 470 of 2016 dated 21.11.2016 held that a combine reading of those decisions hold that Assessing Officer is required to compute the disallowance as per section 14A r.w.s. Rule 8D. The said decisions also discussed the applicability of Section 14A(2) when the Assessing Officer is not satisfied with the correctness of the satisfaction incurred in relation to exempt income. Both the judgments emphasise power to the Assessing Officer to compute the disallowance as per Rule 8D. The ld. NFAC/Ld. CIT(A) held that Assessing Officer has not made any disallowance under Rule 8D(2)(i) and 8D(2)(ii) whereas the disallowance has been made only under Rule 8D(2)(iii) which is rightly disallowed / worked out at Rs.5,71,485/-under section 14A read with Rule 8D. Further aggrieved the assessee has filed present appeal before the Tribunal. 5. We have heard the submission of Ld. Authorized Representative (AR) for the assessee and the Ld. Senior Departmental Representative (Ld. Sr.DR) for the Revenue and have gone through the orders of lower authorities carefully. 8
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah The ld. AR for the assessee submits that assessee is a gynaecologist by profession and derived professional income. The assessee while filing his return of income declared income of Rs.2.751 crores. During the assessment, the Assessing Officer noted that assessee has derived exempt income of Rs.39,26,433/- out of which, Rs.2,91,765/- is from dividend income on mutual funds and shares, Rs.27,23,700/- is from interest on tax free bonds and Rs.9,10,968/- is from long term capital gain. The assessee has not shown expenditure in relation to such exempt income. Before the Assessing Officer, the assessee has given justification which has been duly recorded by Assessing Officer in his assessment order. The Assessing Officer was not satisfied with the reply of assessee and proceeded to make disallowance in accordance with formula prescribed Rule 8D and worked out the disallowance of Rs.5,71,485/-. Before Ld. NFAC/Ld. CIT(A), the assessee filed detailed written submission as recorded in para-4 of impugned order of Ld. NFAC/Ld. CIT(A). The Ld. AR for the assessee submits that the Assessing Officer has not recorded his dissatisfaction about the correctness of claim of assessee. 9
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah At the first instance, the Assessing Officer has to determine whether the claim of assessee is correct and the determination must be having regard to accounts of assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis and only when the Assessing Officer is not satisfied with the claim of assessee then only the Legislature directions to follow the method that may be prescribed. A bare perusal of provisions of section 14A and Rule8D indicates that the Assessing Officer shall determine the amount as per Rule 8D, if he “is not satisfied with the correctness of the claim of the assessee”. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the Assessing Officer is supposed to follow the mandate of Rule 8D only, when he is not satisfied with the correctness of the assessee’s claim. To support her submission, Ld. AR of the assessee relied on the order of ITAT Kolkata Benches in the case of Deputy Commissioner of Income-Tax Central Circle-XXVII, Kolkata vs. REI Agro Ltd. in ITA No.1811/Kol/2012 dated 14.05.2013 which has been affirmed by Hon'ble Calcutta High Court in ITA No. 161of 2013. Ld. AR for the assessee also 10
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah relied upon the order of ITAT Mumbai Benches in the case of Tata Steel Ltd. (Successor-in-Interest to the Erstwhile Kalimati Investment Co. Ltd.) vs. DCIT-2(3)(1) Mumbai in ITA No.800/Mum/2018 dated 25.10.2018 and Hon'ble Delhi High Court in the case of Deputy Commissioner of Income-tax, Circle-10(1), New Delhi vs. DBH International (P.) Ltd. (2015) 55 taxmann.com 424 (Delhi-Trib.). The Ld. AR for the assessee submits that assessee’s own funds were in far excess of the investments made for yielding exempt income then no interest of disallowance was warranted. In without prejudice submission, the ld. AR for the assessee submits that assessee has received dividend of Rs.2,91,765/- from few scripts and also the dividend is received through ECS where no human effort is involved and no expenditure is possibly incurred. In fact, such service was rendered free-of-cost by the respective banks / agents as they got a commission as a AMFI registered agent by respective mutual fund companies in lieu of their services. Further majority of exempt income derives from interest from tax free bonds which is Rs.27,23,700/-. No new investment was made during the year for consideration on the 11
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah tax-free bonds. Interest from tax free bonds is also received through ECS only. The Ld. AR for the assessee further submits that expenditure for earning exempt income has to have a reasonable proportion to the income so earned, going by the common financial prudence. If the Assessing Officer has to make an estimate of expenditure incurred for earning exempt income, it has to have a rational nexus with the amount of income earned. The disallowance under section 14A of Rs.5,71,485/- as expenses is hypothetical as there are no finance charges neither any charges with respect to collection of respective exempt income. Therefore, where the assessee claimed that assessee has not incurring any such income during the year in question to earn exempt income. The burden upon the assessing authority to compute the interest on such borrowed funds which were dedicatedly used for investment in securities to earn such exempted income. 6. The Ld. AR for the assessee also given the analysis of amended Rule 8D vis-à-vis the existing Rule 8D prior to 1st June, 2016 and submitted that as per proviso to amended Rule 8D, the amount referred to in clause (i) and (ii) of Rule 8D(2) shall not 12
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah exceed the total expenditure claimed by the assessee. The Ld. AR for the assessee submitted that she has given the total expenditure incurred by assessee during the year is only of Rs.5,71,485/-. The ld. AR for the assessee submits that on examination of financial statement of assessee, it is clear that expenses claimed by assessee in income and expenditure account are directly related to professional income earned by the assessee. The Assessing Officer was unable to point out any expenditure which can be co-related with the earning of exempt income and mechanism applied Rule 8D. To support her submission, Ld. AR for the assessee also relied upon the decision of Hon'ble Apex Court in the case of Maxopp Investment Ltd. (supra), wherein it was held that only expenses proportionate to earn exempt income would be disallowed under section 14A and on the decision of Hon'ble Delhi High Court in the case of CIT vs. Hero Management Service Ltd. Tax Appeal No.439 of 2013 dated 23.09.2013, wherein it was held that before invoking Rule 8D, the Assessing Officer has first to record that he was not satisfied with the correctness with the claim of expenditure made by 13
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah assessee in relation to income, which did not form part of total income under the Act. 7. On the other hand, Ld. Sr. DR for the Revenue supported the order of lower authorities. The Ld. Sr. DR for the Revenue submits that Rule 8D was amended from 1st June, 2016 wherein in the amended Rule 8D amount of direct expenditure relating to earning of exempt income and @ 1% of annual average of monthly average of opening and closing balance of the value of investment, income from which does not or shall not form part of the total income is to be disallowed. The Assessing Officer has not made any disallowance under Rule 8D(2)(i) and only made disallowance under Rule 8D(2)(ii). The assessee nowhere disputed the figure of average value of investment either before the Assessing Officer or before Ld. NFAC/Ld. CIT(A). So far as satisfaction on the correctness of claim of assessee on disallowance under section 14A is concerned, the Ld. Sr. DR for the Revenue submits that Assessing Officer had duly recorded his dissatisfaction about the correctness of claim of assessee. The Ld. Sr. DR for the Revenue submits that no specific language is prescribed for 14
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah recording dissatisfaction about the correctness of claim of expenditure claimed by assessee is prescribed under the Act or under Rules 8D or in section 14A. The Assessing Officer before applying the formula of Rule 8D recorded his dissatisfaction that claim of assessee is not correct and that income cannot be generated without incurring any expenditure. The Ld. Sr. DR for the Revenue also relied the order of Assessing Officer on recording the dissatisfaction with regard to correctness of claim of expenditure incurred by assessee. The ld. Sr. DR for the Revenue submits that disallowance worked out in accordance with the provision of Rule 8D(2)(ii). The ld Sr DR for the revenue submits that the contention of the ld AR of the assessee that assessee has sufficient interest free funds available with him has no applicability so far as disallowance under Rule 8D is concerned as such clause has been done away from the Rule 8D with effect from 01.06.2016. 8. In rejoinder the submission of Ld. AR for the assessee submitted that the assessee incurred expenditure of accounting fees of Rs.20,000/-, bank commission expenses of 15
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah Rs.22,156/- and commission indirect charges expenses of Rs.33,488/- which comes to total expenses of Rs.75,644/-. These expenses are common expenses incurred by assessee. The Ld. AR for the assessee submits that if reasonable expenses is to be disallowed, 10% of total common expenses of Rs.75,644/-. may be apportioned for earning exempt income. 9. We have considered the rival submission of both the parties and have gone through the orders of lower authorities carefully. We have also deliberated on various case law relied by ld. AR for the assessee. We find that Assessing Officer made disallowance under section 14A by invoking Rule 8D and worked out the disallowance at Rs.5,71,485/- being 1% of average value of investment as on 31.03.2016 and 31.03.2017 respectively as recorded above. Before Ld. NFAC/Ld. CIT(A) the assessee made detailed written submission. The Ld. NFAC/Ld. CIT(A) concurred with the disallowance made by Assessing Officer. We find that Ld. NFAC/Ld. CIT(A) while confirming the disallowance under section 14A ignored the amended Rule 8D whereas interest disallowance as existed prior to 01.06.2016 under Rule 8D(2)(ii) done away from by amending Rule 8D 16
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah w.e.f.1st June, 2016. Thus, the Assessing Officer has made disallowance under Rule 8D(2)(ii) only and not under Rule 8D(2)(iii) (as does not exist on the statute book). We find that disallowance made by the Assessing Officer are strictly in accordance with the existing provision of Rule 8D2(ii). We further note that the figure of investment for earning exempt income as on 31.03.2016 and 31.03.2017 respectively, is not disputed by ld. AR for the assessee. Therefore, we do not find any reason to interfere with the disallowance worked out by Assessing Officer. 10. So far as submission made by Ld. AR for the assessee that no satisfaction was recorded by Assessing Officer before invoking the formula of Rule 8D for making disallowance under section 14A, we are not convinced with the submission made by Ld. AR for the assessee as the Assessing Officer has duly recorded his satisfaction about the correctness of claim of assessee and held that exempt income cannot be earned without making any expenses. We find that the submission made by Ld. AR for the assessee that assessee is making more emphasis on the duty of the Assessing Officer rather to show or offer a suo motu 17
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah reasonable indirect expense incurred for earning exempt income. We find that the assessee has not even offered a token amount for suo motu disallowance except contending that no expenditure was incurred for earning exempt income. The exempt income consists of dividend income of Rs.2,91,765/-, interest from tax free bonds of Rs.27,23,700/- and long-term capital gains of Rs.9,10,968/-. We find that the assessee has only tried to explain that no expense was incurred qua interest from tax free bonds and dividend income. However, nowhere explained as to how the long-term capital gains was earned. Therefore, we do not find any reason to deviate from the disallowance worked out by Assessing Officer. In the result, the grounds of appeal raised by assessee are dismissed. 11. In the result, appeal of the assessee is dismissed. Order pronounced in the open court on 09/09/2022 and the result was also placed on the Notice Board.
Sd/- Sd/- (Dr ARJUN LAL SAINI) (PAWAN SINGH) [लेखा सद�य/ACCOUNTANT MEMBER] [�याियक सद�य JUDICIAL MEMBER] Surat, Dated: 09/09/2022 Dkp. Out Sourcing Sr.P.S
ITA No.187/SRT/2021 (A.Y 17-18) Sanjivkumar A Shah
Copy to: 1. Appellant- 2. Respondent- 3. CIT(A)- 4. CIT 5. DR 6. Guard File True copy/ By order // True Copy // Sr.P.S./Assistant Registrar, ITAT, Surat