INCOME TAX APPELLATE TRIBUNAL,MUMBAI - `E' BENCH.
[^ .., Û Û],
Before S/Sh.I.P.Bansal, Judicial Member & Rajendra,Accountant Member
/.ITA No.7606/Mum/2012,[ [/Assessment Year-2009-10
T.L.Palani Kumar, JCIT Range 19(3)
701, Kiara Apartments, 3 Golf Mumbai.
Links, Bandra West,
(/ Appellant) (× / Respondent)
[ / Assessee by : Shri Bhavesh S. Shah
/ Revenue by : Shri Neil Philip
/ Date of Hearing : 18-09-2014
/ Date of Pronouncement : 01-10-2014
, 1961 ( 1 ) 254 Û[
Order u/s..254(1)of the Income-tax Act,1961(Act)
Per Rajendra,AM Û] :
Challenging the order dated 28.09.2012 of Commissioner of Income Tax (Appeals)-30,Mumbai
the assessee has filed following grounds of appeal:
"The Learned Commissioner of Income Tax (Appeals) -30erred on facts in law and in the
circumstances of the case and has erred in dismissing the case without considering the facts of the
case for making addition of Rs. 3,65,011/- on account of expenditure incurred in earning exempt
Income under section 14A read with rule 8D.
The Learned Joint Commissioner of Income Tax in its Assessment Order u/s 143(3) states
that as per section 14A (3) of the Income Tax Act, the provisions of subsection (2) shall also apply
in 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.
Accordingly, The Learned Joint Commissioner of Income Tax had quantified the
disallowance under section 14A of Income Tax Act, 1961 amounting to Rs. 3,65,011/-. The
Learned Joint Commissioner of Income Tax has not noticed suo moto disallowance of Rs.
39,06,369/- out of expenses which were transferred to Capital account for expenses towards
investments and of personal in nature. By making suo moto disallowance by way of debiting to the
Capital Account, the Appellant has made much greater disallowance than quantified by the
Learned Joint Commissioner of Income Tax. Further the decision of confirming the disallowance
by Learned Commissioner of Income Tax (Appeals)-30 and dismissing our Appeal is not justified.
These suo moto disallowances are even greater than the exempt Income earned by the Appellant
during the year under consideration.
The Learned Joint Commissioner of Income Tax has accepted the Books of Accounts of the
Appellant. While passing the order under section 143(3), The Learned Joint Commissioner of
Income Tax has made the addition on account disallowance under section 14A read with Rule 8D
of the Income Tax Act, 1961. However the Appellant contest that there was no basis for the
addition of expenditure under section 14A read with Rule 8D of Income Tax Act, 1961 since the
Respondent fails to find out particular expenses directly or indirectly related to earning of an
2 ITA No. 7606/Mum/2012 T.L.Palani Kumar
In view of the above, the appellant prays that the order of the Commissioner of Income
Tax (Appeals) - 30 on the above grounds be set aside and that of the additions made by The
Learned Joint Commissioner of Income Tax in his assessment order should be dropped.
The Appellant craves leave to add, alter or amend ground of appeal set out hereinabove or
to submit additional ground which may be necessary."
2.Assessee,an individual,working as Senior Advisor and Management Consultant filed his return
of income on 29.09.2009 declaring income of Rs.2,82,72,800/-.The Assessing Officer(AO)
finalised the assessment on 25.11.2011 determining his income at Rs.2,86,37,810/- u/s.143 (3) of
The effective ground of appeal is about addition made by the AO,u/s.14A r.w.rule 8D of the
Income tax Rules,1962(Rules),amounting to Rs.3.65 lakhs.During the assessment proceedings,the
AO found that year under appeal, the assessee had shown income from salary, house
property,income from profession and other sources,that he had received dividend income which
was exempt,that he had made investment in mutual funds, shares, etc.,that income earned from
those investment would also be exempt,that in the P&L A/c he had claimed several expenses
including interest expenses,that no expenditure had been disallowed in relation to earning of
exempt income in the computation of income. During the course of assessment proceedings, the
assessee was asked by to explain as to why disallowance u/s 14A r.w. Rule 8D should not be
made. The assessee furnished a reply vide letter dtd. 22.11.2011 before the AO. He considered the
said reply of the assessee and held that the basic object of introduction of Sec.14A into the Act
was to disallow the direct and indirect expenditure incurred in relation to the income which did
not form the part of the total income irrespective of the fact that the business was composite or not
and hence in effect override the rulings of the Supreme Court in the case of Indian Bank and
Rajasthan State Warehousing Corpn. Thereafter, the AO worked out the disallowance under Rule
8D of the I.T. Act at Rs.3,65,011/-.
Aggrieved by the order of the AO,the assessee filed an appeal before the First Appellate Authority
(FAA). Before him the assessee stated that there had to be nexus between the earning of Exempt
Income and Expenditure incurred to earn Exempt Income,that all the expenditure which was
incurred specifically for the Consultancy Profession of the Assessee the AO had not pointed any
Expenditure from Income & Expenditure Account which was incurred to earn Exempt Income
and thereby to invoke section 14A,that disallowance under section 14A could only be made if the
expenditure is incurred in relation to earn the exempt Incom,that the AO could proceed in
invoking the provision of Rule 8D as prescribed as per Section 14A if he was not satisfied with
the correctness of the claim of the assessee and before invoking the Provision of Rule 8D,that the
AO had to bring the fact on record or note down the expenditure which had nexus and
direct/Indirect bearing in earning the tax free Income. The assessee relied upon the matter of Hero
Cycles Limited of the Hon'ble Punjab & Haryana High Court (323 ITR581).
After considering the submission of the assessee,the FAA held that the assessee had
earned dividend income which was claimed exempt,that he had also made investment in mutual
funds, shares, etc., that the income from which was exempt,that he had not disallowed any
expenditure in relation to earning of exempt income in the computation of total income,that
provisions of Sec. 14A of the Act were clearly applicable.FAA referred to case of assessee. Daga
3 ITA No. 7606/Mum/2012 T.L.Palani Kumar
Capital & Management Pvt. Ltd. and Godrej & Boyce Manufacturing Co. Ltd.(234CTR1) and
held that Rule 8D was applicable from the A.Y.2008-09 onwards and was a prospective
section,that the AO was quite justified in invoking the provisions of Sec. 14A and working out the
disallowance as per the Rule 8D of the Rules,that the AO had given adequate reasonings for doing
so in the Assessment Order, that the AO had also quoted the relevant case laws,that the reasonings
given by the assessee in his submissions were, devoid of any merits and hence the same were not
convincing.Finally,he upheld the order of the AO.
the assessee is dismissed.
We have heard the rival submissions and perused the material before us, we find that
while deciding the appeal, the FAA had not passed a reasoned order he has simply endorsed the
views of the AO. On the other hand, he has rejected the arguments advanced by the assessee by
saying that same were not convincing.Why were the reasons furnished by the assessee were not
convincing has not been mentioned.FAA being a judicial authority is required to and supposed to
pass a speaking order.In our opinion the order of the FAA does not fall under the category of a
reasoned order.In the matter before him the assessee had made a claim that no expenditure was
incurred that certain percentage of expenditure(90%)of the personal expenditure on two items was
disallowed by himself,that there was no borrowal.The FAA did not give any finding about the
submissions made by the assessee.We are of the opinion that provisions of the said section cannot
be invoked and applied mechanically.The AO had held that the Hon'ble P &H High Court had not
interpreted the law correctly.In our opinion,such an observation cannot be endorsed.But,the FAA
has upheld such an order. Therefore, in the interest of justice we are remitting back the matter to
the file of the FAA for fresh adjudication. He has directed to decide the issue after affording
reasonable opportunity of hearing and after considering the submission made by him and pass a
reasoned and speaking order. It is unclear as to whether the assessee himself had made any
disallowance as per the audit report or not.Secondly,we are unable to find the amount of tax free
income not forming part of the total income of the assessee i.e. the dividend income earned by the
assessee during the year under consideration.
Here,we would like that while passing a reasoned order,the FAA should also take notice of
the matters of Glenmark Pharmaceutical Ltd.(351ITR359) and Deepak Mittal(361ITR131)the
Hon'ble Bombay and P & H High Courts respectively.
Effective ground of appeal is allowed is decided in favour of the assessee,in part.
As a result, appeal filed by the assessee stands partly allowed.
Order pronounced in the open court on 1st,October2014.
Û 1 vDVw,2014
(.. /I.P. Bansal) (Û]/Rajendra)
Û /JUDICIAL MEMBER /ACCOUNTANT MEMBER
/Copy of the Order forwarded to :
1. Assessee / 2. Respondent /×
4 ITA No. 7606/Mum/2012 T.L.Palani Kumar
3. The concerned CIT(A)/ ,4.The concerned CIT /
5. DR "E" Bench, ITAT, Mumbai / ,..Û.
6. Guard File/[ × //True Copy//
/ BY ORDER,
/ Dy./Asst. Registrar
, /ITAT, Mumbai