ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH: `C': NEW DELHI)
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
AND
SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER
ITA No:- 5144/Del/2015
(Assessment Year: 2011-12)
Dr. Ashok Seth, ACIT,
B-30, Geetanjali Enclave, Vs. Circle-61(1),
New Delhi. New Delhi.
PAN No: AARPS1432R
APPELLANT RESPONDENT
Assessee by : Sh. T.R. Talwar, Adv.
Revenue by : Sh. Amit Katoch, Sr. DR
ORDER
PER: ANADEE NATH MISSHRA, AM
This appeal by the Assessee is filed against the order dated 08.06.2015 of
Learned Commissioner of Income Tax (Appeals)-20, New Delhi, for Assessment Year
2011-12. The grounds of appeal are as under:-
"On the facts and circumstances of the case, the learned ACIT has erred:-
1.a) In confirming the disallowance of Rs. 5,26,256/- u/s 14A of the Income Tax Act,
1961 r.w. Rule 8D of the Income Tax Rules 1962 in respect of investment made in
securities when no direct or indirect expenditure in relation to investment in
securities has been claimed or debited in the Profit & Loss Account by the appellant.
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
b) In disallowing Rs. 5,26,256/- u/s 14A of the Income Tax Act, 1961 r.w. Rule 8D of
the Income Tax Rules 1962 when no proximate nexus has been established
between the expenditure claimed and exempt income by the A.O.
c) In ignoring the fact that the expenditure incurred and claimed by the appellant has
direct nexus with the professional income of the appellant and none of the
expenditure claimed by the assessee is in relation to the exempt income.
d) In ignoring the fact that disallowance made u/s 14A has already allowed by Hon'ble
ITAT, Delhi in A.Y. 2009-10 & A.Y. 2010-11 on the similar grounds.
e) In not following the ITAT Bombay Bench decision in the case of Justice Sam P.
Bharucha vs. Additional CIT (2012) 53 SOT 192 (Mumbai) (URO).
2. a) In reverting back to the Ld. AO for further verification of disallowance of audit
fees payable of Rs. 2,27,529/- by ignoring the fact that the same has already been
disallowed by the appellant in the computation of income u/s 40(a)(ia) of the
Income Tax Act, 1961 for A.Y. 2011-12 and all the supporting documents have
been submitted by appellant during the assessment proceedings before Ld. AO as
well as during the appellate proceedings before hon'ble CIT(A)-20, New Delhi.
b)In reverting back to the Ld. AO for further verification of disallowance of audit
fees payable to Rs. 2,23,357/- by ignoring the fact that the same pertains to A.Y.
2010-11 and has not been claimed as an expense in Profit and Loss A/c in A.Y.
2011-12 and Ledger A/c of Audit Fee payable and Profit & Loss A/c for A.Y. 2011-12
have already been submitted by the appellant during the assessment proceedings
before Ld. AO as well as during the appellant proceedings before Hon'ble CIT(A) -
20, New Delhi.
The appellant craves leave to add, modify, alter, substitute and delete any of the
grounds of appeal on or before the date of hearing."
(1.1) In this order, the following abbreviations have been used:
Assessing Officer as AO
Commissioner of Income Tax (Appeals) as CIT(A)
Departmental Representative as DR
Dated as dtd.
Income Tax Act,1961 as I.T. Act,1961
Income Tax Rules, 1962 as I.T. Rules,1962
Income Tax Appellate Tribunal as ITAT
Learned as Ld.
Under Section as U/s
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
(2) The 1st Ground of appeal, including sub grounds 1. a), 1. b), 1. c), 1. d), 1. e)
are related to disallowance made by the AO U/s 14 of I.T. Act, ready with Rules 8D of
Income Tax Rules, 1962. The relevant portion of the Assessment Order is reproduces
as under:-
" 5. Disallowance u/s 14A of the I.T. Act,1961, rAv Rule 8D of I.T. Rules, 1962
5.1 The assessee has earned exempt income as dividend of Rs. 34,89,727/- and Long
Term Capital Gain of Rs. 97,46,225/-. The assessee was asked vide order sheet entry
dated 08.01.2014 to give the "details of LTCG & dividend. To provide copy of
accounts/' Books of account in relation to expenses incurred for earning exempt
income. Any of the documents in relation to this may also be produced".
5.2 The assessee, vide his reply dated 21.01.2014 has stated as under:-
"The detail of Long Term capital Gain of Rs. 97,46,225/- and of dividend income
is enclosed herewith. Further, it is submitted that the Long Term Capital Gain is
not from the sale of debt mutual funds and same is out of equity funds only. The
support in respect of the same is enclosed herewith. Regarding the expenses
incurred for earning exempted income, it is submitted that the assessee has not
debited any expense to the P&L a/c for earning the exempted income and all the
expenses incurred for earning exempted income have been shown as drawings
of the assessee. "
5.3 The basic object of section 14A is to disallow the direct and indirect expenditure
incurred in relation to income which does not form part of the total income.
The following principles would emerge from Section 14A and the decision in CIT v.
Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC):
(a) The mandate of section 14A is to prevent claims for deduction of expenditure in
relation to income which does not form part of the total income of the assessee;
(b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of
earning taxable income are allowed ;
(c) The principle of apportionment of expenses is widened by section 14A to include
even the apportionment of expenditure between taxable and non-taxable income
of an indivisible business;
(d) The basic principle of taxation is to tax net income. This principle applies even for
the purposes of section 14A and expenses towards non-taxable income must be
excluded;
(e) Once a proximate cause for disallowance is established-which is the relationship of
the expenditure with income which does not form part of the total income-a
disallowance has to be effected.
5.4 All expenditure incurred in relation to income which does not form part of the total
Income under the provisions of the Act has to be disallowed under section 14A.
Section 10 provides for incomes which shall not be included in computing the total
income of a previous year of any person. Plainly dividend income and Long Term
Capital Gain from mutual funds & shares are incomes which by virtue of the provisions
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
of section 10 do not form part of the total income under the Act. Expenditure incurred
in relation to the earning of such income has to be disallowed under section 14A. The
expression "income which does not form part of the total income" under the Act must
receive its plain and grammatical construction. Such income is income which is not
includible in computing the total income of the assessee under the provisions of the
Act for a previous year. Income-tax is a tax on income in the hands of the assessee.
Hence, when section 14A disallows expenditure incurred by the assessee in relation to
income which does not form part of the total income, it would include categories of
income such as dividend from shares and income from mutual funds etc. which under
section 10 are not to be included in the total income.
5.5 Sub-sections (2) and (3) of section 14A were inserted by an amendment brought
about by the Finance Act of 2006 with effect from April 1, 2007. Under sub-section (2),
the Assessing Officer is required to determine the amount of expenditure incurred by
an assessee in relation to such income which does not form part of the total income
under the Act in accordance with such method as may be prescribed. Sub-section (2)
was inserted so as to provide a uniform method applicable where the Assessing Officer
is not satisfied with the correctness of the claim of the assessee. Parliament has
provided an adequate safeguard to the invocation of the power to determine the
expenditure incurred in relation to the earning of non-taxable income by adoption of
the prescribed method. The invocation of the power is made conditional on the
satisfaction of the Assessing Officer in regard to the correctness of the claim of the
assessee, having regard to the accounts of the assessee. Sub-rule (1) of rule 8D of the
Income-tax Rules, 1962, has also incorporated the essential requirements of sub-
section (2) of section 14A before the Assessing Officer proceeds to apply the method
prescribed under sub-rule (2). The provisions of subsections (2) and (3) of section 14A
of the Act, are constitutionally valid. The provisions of rule 8D of the Rules, are not
ultra vires the provisions of section 14A, more particularly sub-section (2) and do not
offend article 14 of the Constitution. Rule 8D has essentially put into place an artificial
method of estimating the expenditure that can be regarded as being relatable to
income that does not form part of the total income under the Act. The rules were
notified to come into force on March 24, 2008. Consequently, rule 8D which has been
notified on March 24, 2008, would apply with effect from assessment year 2008-09.
5.6 The Assessing Officer has to adopt a reasonable basis or method consistent with all
the relevant facts and circumstances after furnishing a reasonable opportunity to the
assessee to place all germane material on the record. In the instant case, the assessee
contended that it had not incurred any expenditure for earning the exempt income and
that no disallowance was warranted. The contention of the assessee is not acceptable
in view of the fact that the insertion of section 14A was curative and declaratory. The
assessee has not provided any separate account for earning of exempt income. The
assessee has made investments for earning exempt income and managing such a
large portfolio entail expenses right from diversion of manpower/staff for indulging in
investment activities to various activities like visiting banks, use of vehicle and
telephone, use of internet if portfolio management is web based, cost of computer &
its depreciation, computer operator, consequent electricity, use of office premises, fee
charged by Mutual Fund agents/bankers (Annual Fee), portfolio record maintenance
and its tracking to ensure timely sale/purchase of mutual fund units, etc. As per the
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
AR's submission dated 09.01.2013, assessee has incurred expenses of Rs. 1,913.15/-
as directly relatable for earning the exempt income which has been taken in personal
drawings.
5.7 Since, no disallowance has been done by the assessee and as per the facts and
circumstances of the case, I have reasons to arrive at the satisfaction for disallowance
u/s 14A of the Act, r/w Rule 8D of the Rules, that there are expenses relatable to the
earning of exempt income by the assessee. Since, the assessee has invested its money
for such investment of shares, which is capable to generate income which does not or
shall not form part of total income of the assessee and indirect cost in the form of
administrative expenditures etc. is involved in this process. There is direct and
proximate nexus between the exempted income, which the investments shall generate
and the expenditures directly or indirectly involved in earning the said income. Further,
facts of the Case Laws on which the AR has placed its reliance are in difference with
the present case and thus, not applicable. Hence, I am fully satisfied to invoke the
provisions of section 14A read with Rule 8D to work out disallowance of expenditures.
5.8 In view of the facts and circumstances of the case, legal position on the issue under
consideration and reasons recorded in this case, as discussed above, a disallowance of
Rs. 5,26,256/- u/s 14A of the Act, r/w Rule 8D of the Rules as worked out as under is
being made and added to the income of the assessee:-
Disallowance as per 14A r/w Rule
8D
Rule 8D(2)(i) 0
Rule 8D(2)(ii) 0
Rule 8D(2)(iii) 5,26,256/-
Total 5,26,256/-.
(2.1) The Assessee filed appeal against the above disallowance amounting to Rs.
5,26,256/- U/s 14A of I.T. Act, read with Rule 8D of I.T. Rules, 1962. Vide order dated
08/06/2015, Ld. CIT(A) confirmed the disallowance made by the Assessing Officer. The
relevant portion of the order of the Ld. CIT(A) is as under:-
"{7} Grounds of appeal No. 3 (a to c ) are directed against disallowance of expenses of
Rs.5,26,256/- under section 14A. In this regard, the appellant vide letter dated 29.05.2015
filed written submissions as under:-
3. The Ld. Assessing Officer erred in disallowing Rs. 5,26,256/- u/s 14A of the
Income Tax Act, 1961 r.w. Rule 8D of the Income Tax Rules, 1962 in respect of
expenditure incurred for investment made in shares and mutual funds. In this
respect, it is submitted that the said addition u/s 14A was also made in A. Y. 2009-
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
10 and 2010-11 and the appellant has challenged the same in both the assessment
years. Hon'ble IT AT (Delhi Bench-A) deleted the said addition and decided
the case in favor of the appellant vide its order dated 13.03.2015. [ITA No.
554/Del./2013 for A.Y. 2009-10 & IT A No. 5298/Del./2013 for A.Y. 2010-11].
Therefore, the addition of Rs. 5,26,256/- made u/s 14A should be deleted. Copy of
the HAT order is enclosed herewith. (End-VI)
Further, it is submitted as under:
(a) That the appellant has not claimed any such direct or indirect expenditure
relating to investment in shares and mutual fund in the Profit & Loss A/c and all such
expenditure has been shown in personal withdrawals. The expenditure claimed in the
Profit & Loss A/c by the appellant has direct nexus with the professional income of the
appellant and is not having any nexus with the investment made in shares and mutual
funds.
(a) That the appellant has earned dividend income of Rs. 34,89,728/- and long
term capital gain of Rs. 97,46,225/- which is exempt u/s 10. The expenses incurred for
earning this exempt income are in the form of DP charges of Rs. 538/- paid to Frontline
Capital Services Ltd. and STT of 1,13,361/- paid on purchases and sale of shares and
units of mutual fund. The said expenses have been shown in Personal Drawings A/c
and debited to appellant's capital account in the Balance Sheet. The said expenses
have not been charged to Profit & Loss A/c. Copy of Capital A/c and Profit & Loss A/c is
enclosed herewith in support of the same. (End-VII)
The Purpose for introduction of section 14A with retrospective effect since the inception
of the Act was clarified vide Circular No. 14 of 2001 as under:
"Certain incomes are not includible while computing the total income, as these are
exempt under various provisions of the Act. There have been cases where deductions
have been claimed in respect of such exempt income. This in effect means that the tax
incentive given by way of exemptions to certain categories of income is being used to
reduce also the tax payable on the non exempt income by debiting the expenses
incurred to earn the exempt income against taxable income. This is against the basic
principles of taxation whereby only the net income, i.e. gross income minus the
expenditure, is taxed. On the same analogy, the exemption is also in respect of the net
income. Expenses incurred can be allowed only to the extent they are relatable to the
earning of taxable income. "
Thus, legislative intent is to disallow the expenditure which is relatable to exempt
income and are claimed as deduction from the taxable income. However, in the
relevant case, the appellant has not debited any expenditure in Profit & Loss Account
which relates to exempt income. The expenditure claimed by the appellant in the Profit
& Loss A/c is the expenditure incurred for earning the professional income.
Since the investment in shares and mutual funds made by the appellant in his personal
capacity out of his own capital funds, no disallowance is called for u/s 14 A.
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
Thus, in order to disallow the expenditure u/s 14 A, there should be proximate cause for
disallowance, which has relationship with the tax exempt income.
Reliance is also placed on the following case laws
(i) IT AT Mumbai Bench in the case of Justice Sam P Bharucha vs. Additional CIT
delivered on 25.07.2012.[53 SOT 192 (Mumbai)(URO).
(ii) ITAT Mumbai Bench decision dated 11.01.2011 in the case of Pawn Kumar
Parameshwarlal vs. AC1T (ITA No. 530/Mum. /2009) cited in the case mentioned (i)
Supra.
In view of the above facts, submissions and case laws relied upon, the disallowance of
5,26,256/- u/s 14A of the Income Tax Act, 1961 is uncalled for and { CO J requires to be
deleted.
7.1 I have carefully considered the assessment order and submissions thereof. The facts of
the case as per assessment order are that the assessee has earned exempt income as
dividend of Rs.34,89,727/- and as Long Term Capital of Rs.97,46,225/-. The Assessing
Officer invoked the provisions of Section 14A to disallow the direct and indirect expenditure
incurred in relation to income which does not form part of total income. He held that the
assessee did not provide a separate account for earning of exempt income. The assessee had
maintained a large portfolio and for this purpose had to entail expenses right from diversion
of Man Power to indulging in various activities like visiting banks, use of vehicle and
telephone, use of Internet, use of computer and thus the depreciation, need of a Computer
Operator electricity expenses, Office premises, fees charged by Mutual Fund Agents, Portfolio
record management etc. The Assessing Officer therefore disallowed Rs.5,25,256/- under rule
8D(2)(iii).
7.2 In appeal the appellant stated that:
i) The assessing officer has made ad-hoc disallowance of expenses by applying Rule 8D on
the ground that provisions of that Rule are procedural in nature,
ii) That only direct expenses, having proximate nexus, with earning of exempt income can
be disallowed under section 14A of the Act,
iii) The actual expenditure incurred for earning exempt income only should be disallowed,
iv) No other expenditure has also been incurred for earning dividend income.
v) The appellant relied upon the decision of the Hon'ble' ITAT in its own case for A.Y. 2009-
10 and 2010-11.
The taxpayer has also relied upon the other decisions on the issue:
The main argument of Ld. AR has been that the provision of section 14A clearly
postulates disallowance of expenditure only in a case where it is proved that the
expenses incurred have a real relationship with the income which does not form part of
the total income. Therefore, before proceeding for working out disallowable as per Rule
8D, the AO has to satisfy that claim of taxpayer of expenditure/ no expenditure for
earning exempt income, is not correct. The order of the Hon'ble ITAT in the case of the
appellant shows that the addition has been deleted in the earlier years on the basis
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
· The Assessing Officer has not satisfied himself regarding the correctness of the
claim of the assessee that no expenditure has been debited in the Income &
Expenditure account relating to the exempt income
· Expenditure relating to STT and Brokerage were shown in the withdrawals.
· The assessee had personal drawings of Rs.27,97,024/- and thus was not debiting
expenses relating to exempted income in its income and expenditure account.
· The revenue has failed to pin point any specific instance in this regard.
7.3 In the year under consideration the perusal of the assessment order shows that
The assessee has exempt income of not only long termed capital gain but also
dividend income.
The Assessing Officer has specifically recorded his satisfaction that expenses
relating to earning of exempt income has been debited to the Income and
Expenditure Account and there is direct and proximate between exempt income
and expenses incurred.
The drawings made by the assessee do not show any expenses on brokerage,
only expense relating to STT has been taken to the personal account.
The appellant is maintaining a common bank account for his professional income
and exempt income.
The expenditure account shows expense on establishment , office expenses,
interest in bank charges, Staff hire charges, Office repair and maintenance, Tour
& Travelling, Audit Fees, Membership and subscription fees, telephone expenses-
which are not exclusively associated with the appellant's medical professional
income and are also related to his exempt income
In the case of Maxopp Investments Ltd.(Supra), similar argument as at (ii) above was
raised by the taxpayer but the same has not been found favour by Hon'ble Delhi High
Court, has observed as under:
"28 It was contended that unless and until there was actual expenditure for
earning the exempted income, there could not be any disallowance under section
14A. While we agree that the expression "expenditure incurred" refers to actual
expenditure and not to some imagined expenditure we would like to make it clear
that the `actual' expenditure that is in contemplation under section 14A(1) of the
said Act is the `actual' expenditure in relation to or in connection with or pertaining
to exempt income............ "
The Hon'ble Delhi High Court in the same case has further observed that:
"30.......... the condition precedent for the Assessing Officer to himself determine the
amount of expenditure is that he must record his dissatisfaction with the correctness
of the claim of expenditure made by the taxpayer or with the correctness of the
claim made by the taxpayer that no expenditure has been incurred. It is only when
this condition precedent is satisfied that the Assessing Officer is required to
determine the amount of expenditure in relation to income not includable in total
income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules.
31. It is therefore, dear that determination of the amount of expenditure in relation
to exempt income under Rule 8D would only come into play when the AO rejects the
claim of the taxpayer in this regard."
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
Thus, it is clear that the claim of the taxpayer that no expenditure has been incurred
for earning exempt income is not important. In this regard law is very clear in view
of provisions of the section 14A(3) that the provisions of sub section (2) will apply
even where taxpayer claims that no expenditure have been incurred. The Hon'ble
Delhi High Court has also observed very clearly that Assessing Officer will proceed to
determine the amount of expenditure in relation to exempt income once he is
dissatisfied with the correctness of the claim of expenditure/ no expenditure by the
taxpayer and for such determination he has to necessarily apply Rule 8D. The AO
has recorded a satisfaction in the assessment order that he is not satisfied with the
correctness of the claim of the taxpayer for invoking provisions of section 14A(2) of
the Act.
In the instant case the Assessing Officer has taken expenses `directly attributable for
earning of exempt income' namely dividend as Nil. He has also taken indirect interest
expenses as nil. Thus, submissions of the taxpayer has been correctly taken care of by
the Assessing Officer as he has taken first two component as per Rule 8D as Nil. He
has worked out third component at Rs.5,26,256/- as per Rule 8D. Thus, as far as
quantification of disallowance is concerned, it is held that the Assessing Officer has
worked out the amount based on proper methodology and therefore, the disallowance
made by the Assessing Officer is upheld.
(2.2) The present appeal before us has been filed by the Assessee against aforesaid
order dated 08.06.2015 of the Ld. CIT(A).
(2.3) In the course of appellate proceedings in ITAT, the Assessee filed Paper Book
consisting of the following particulars:
1. Audited accounts for the AY 2011-12
2. Details of TDS payable (FY 2010-11)
3. Details of expenses disallowed u/s 40 (a)(ia)
4. Audit fee payable FY 2010-11
5. Submissions dated 29.05.2015 before CIT(A)
6. ITAT Order dated 13.03.2015 in the case of the
Assessee for AY 2009-10 & 2010-11.
(2.4) At the time of hearing before us, the Ld. Counsel for Assessee relied on the
order of ITAT, dated 13.03.2015, in assessee's own case, for A.Y. 2009-10 and 2010-11
in ITA Nos.- 554/Del/2013 and 5298/Del/2013. The Ld. Counsel for Assessee also relied
on the ITAT Bombay Bench decision in the case of Justice Sam P. Bharucha vs.
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
Additional CIT (2012) 53 SOT 192 (Mumbai) (URO). The Ld. Counsel for
assessee also drew our attention to the various contentions raised in the grounds of
appeal on this issue. He also submitted that all the direct expenses attributable to
earning of exempt income has been met out of personal drawings made by the
assessee; and further, that no interest expenses have been incurred for earning of
exempt income. In view of these facts and circumstances, and placing heavy reliance
on aforesaid order of ITAT, dated 13.03.2015, in assessee's own case, for A.Y. 2009-10
and 2010-11 in ITA Nos.- 554/Del/2013 and 5298/Del/2013; the ld. Counsel for assessee
submitted that the disallowance u/s 14A of I.T. Act should be deleted.
(2.5) On the other side, the Ld. DR relied on the order of the Ld. CIT(A).
(2.6) We have perused all the material available on record. We have heard both sides
attentively. We have also considered the judicial precedents brought to our notice, and
/ or referred to in the records. It will be useful to refer to the relevant portion of order of
ITAT, dated 13.03.2015, in assessee's own case, for A.Y. 2009-10 and 2010-11 in ITA
Nos.- 554/Del/2013 and 5298/Del/2013; on which the Ld. Counsel for Assessee placed
heavy reliance. The relevant portion is reproduced as under:
ITA No.-554/Del/2013
"9. In the ground no.3, the issue involved is confirming the disallowance of Rs.3,54,086/-
4A of the Act r/w Rule 8D of the Income-tax Rules, 1962.
10. Ld. AR submitted that no direct and proximate nexus between the exempted income
and the expenditure claimed was established. He relied on the decision of ITAT, Mumbai
Bench in the case of Justice Sam P Bharucha vs. Addl. CIT-(2012) 53 SOT 192 (Mumbai). Ld.
AR submitted that the assessee has earned only Rs. 76,660/- as exempted income. Further,
the assessee is having personal drawings of Rs.27,97,024/- which is evident from the capital
account of the assessee placed at page 23 of the paper book. The STT charges and
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
brokerages have also been paid by the assessee from his personal account. The revenue has
failed to pinpoint any expenditure debited in the income & expenditure account for the
profession of the assessee. He also pleaded that since the assessee has not incurred any
expenditure and revenue has failed to pinpoint any specific instance, therefore, the conditions
invoking the provisions of section 14A r/w Rule 8D are not fulfilled. These provisions can be
invoked only when the Assessing Officer has satisfied himself that the correctness of the claim
of the assessee with regard to the expenditure that no expenditure has been debited in the
Income & expenditure account relating to exempted income.
11. Ld. DR relied on the orders of the authorities below.
12. We have heard both the sides on the issue. We find that the expenditure related to the
earning of exempted income like STT and brokerage were shown in the withdrawals. The
assessee is also having personal drawings of Rs.27,97,024/- for the year under consideration.
All these facts show that the assessee is not debiting the expenditure related to the exempted
income in its Income & expenditure account and the revenue has failed to pinpoint t any
specific instance in this regard. Therefore, we allow this ground of assessee's appeal."
ITA No.- 5298/Del/2013
"14. This appeal filed by the assessee emanates from the order of the CIT (Appeals)-XXVIII,
New Delhi dated 22.07.2013 wherein the only issue involved is regarding the disallowance of
Rs. 2,54,149/- u/s 14A of the Income-Tax Act, 1961 r/w Rule 8D of the Income-Tax Rules,
1962.
15. The assessee claimed that there was no direct and proximate nexus between the
exempted income and the expenditure claimed. It was pleaded that none of the expenditure
incurred and claimed by the assessee is in relation to the exempted income in its Income &
expenditure account.
16. We have heard both the sides on this issue. For the similar reasons as stated above in
the assessment year 2009-10, we allow this ground of assessee's appeal as the revenue is
failed to pinpoint any expenditure in the Income& expenditure account. Further, the
assessee is incurring such expenses from his personal drawings. Accordingly, this ground of
assessee's appeal is allowed."
(2.6.1) On perusal of the impugned order of the Ld. CIT(A), it is noticed that it is
based on the order of Hon'ble Jurisdictional High Court in the case of Maxopp
Investment Ltd. V. CIT[2012] 347 ITR 272 (Delhi). The appeal against the order
of Hon'ble Jurisdictional High court in the case of Maxopp Investment Ltd. V. CIT
[2012] 347 ITR 272 (Delhi) has been dismissed by Hon'ble Supreme Court in recent
decision reported at Maxopp Investment Ltd. Vs. CIT 402 ITR 640 (SC). Further,
Page 11 of 18
ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
on perusal of the impugned order dated 08.06.2015 of Ld. CIT(A), we find that the Ld.
CIT(A) has distinguished the facts of this year with the facts of A.Ys. 2009-10 and
2010-11 in paragraphs 7.2 and 7.3 of the impugned order. Ld. CIT(A) has thus made
out a strong case for departure from the order of ITAT in the case of the Assessee vide
dated 13.03.2015 in ITA Nos.- 554/Del/2013 and 5298/Del/2013 on the basis of
distinguishable facts and circumstances. Moreover, the order of the AO is based on the
decision of the Hon'ble Supreme Court in the case of CIT vs. Walfort Share and
Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC). [Relevant portions of the orders of
the Ld. CIT(A) and the AO have already been reproduced earlier.] Moreover, on
specific query from the Bench in the course of hearing before us, the Ld. Counsel for
Assessee informed that the assessee does not maintain personal books of accounts
separately; and further, that separate books of accounts are also not maintained in
respect of exempt income; and moreover, that the books of accounts are common for
investments (resulting in exempt income) as well as for the business/profession
(resulting in taxable income) of the Assessee. The Ld. Counsel, in response to another
query from the Bench in the course of hearing, further informed that no suo-moto
disallowance U/s 14A of I.T. Act was made by the Assessee in the Return of Income.
We also note from the perusal of the Assessment Order and the order of the Ld. CIT(A)
that the AO, taking note of the fact that no disallowance has been done by the
Assessee U/s 14A of I.T. Act; has specifically recorded his satisfaction for the
disallowance U/s 14A of the I.T. Act read with Rule 8D of I.T. Rules, 1962, to the effect
that there are expenses relatable to the earning of exempt income by the Assessee, in
Page 12 of 18
ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
the facts and circumstances of the case. The AO has held that the assessee has made
investments for earning exempt income and managing such a large portfolio entail
expenses right from diversion of manpower/staff for indulging in investment activities to
various activities like visiting banks, use of vehicle and telephone, use of internet if
portfolio management is web based, cost of computer & its depreciation, computer
operator, consequent electricity, use of office premises, fee charged by Mutual Fund
agents/bankers (Annual Fee), portfolio record maintenance and its tracking to ensure
timely sale/purchase of mutual fund units, etc. In view of these specific findings of the
AO, the Assessee's claim that no direct or indirect expenditure in relation to investment
in securities has been claimed or debited in the Profit & Loss Account by the appellant;
that no proximate nexus has been established between the expenditure claimed and
exempt income by the AO; and that the expenditure incurred and claimed by the
appellant has direct nexus with the professional income of the appellant and none of
the expenditure claimed by the assessee is in relation to the exempt income must be
rejected.
(2.6.2) Provisions of Section 14A of I.T. Act and Rule 8D of I.T. Rules are reproduced
below for ease of reference:
Section 14A of I.T. Act:
14A. (1) For the purposes of computing the total income under this Chapter, no deduction
shall be allowed in respect of expenditure incurred by the assessee in relation to income
which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to
such income which does not form part of the total income under this Act in accordance with
such method as may be prescribed, if the Assessing Officer, having regard to the accounts
of the assessee, is not satisfied with the correctness of the claim of the assessee in respect
Page 13 of 18
ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
of such expenditure in relation to income which does not form part of the total income
under this Act.
(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:
Provided that ............before the 1st day of April, 2001.
Rule 8D of I.T. Rules:
"8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a
previous year, is not satisfied with----
(a) The correctness of the claim of expenditure made by the assessee; or
(b) The claim made by the assessee that no expenditure has been incurred, in relation to
income which does not form part of the total income under the Act for such previous
year, he shall determine the amount of expenditure in relation to such income in
accordance with the provisions of sub-rule (2).
(2) The expenditure in relation to income which does not form part of the total income
shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of
total income;
(ii) in a case where the assessee has incurred expenditure by way of interest during the
previous year which is not directly attributable to any particular income or receipt, an
amount computed in accordance with the following formula, namely:-
A X B/C
Where A= amount of expenditure by way of interest other than the amount of interest
included in clause (i) incurred during the previous year;
B= the average of value of investment, income from which does not or shall not form
part of the total income, as appearing in the balance sheet of the assessee, on the forst
day and the last day of the previous year;
C= the average of total assets as appearing in the balance sheet of the assessee, on the
first day and the last day of the previous year;
(iii) an amount equal to one-half per cent of the average of the value of investment,
income from which does not or shall not form part of the total income, as appearing in
the balance sheet of the assessee, on the first day and the last day of the previous year."
(2.7) In the facts of the case before us, the AO has specifically recorded, in Para 5.6 of
the Assessment Order, that the assessee has made investments for earning exempt
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ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
income and managing such a large portfolio entail expenses right from diversion of
manpower/staff for indulging in investment activities to various activities like visiting
banks, use of vehicle and telephone, use of internet if portfolio management is web
based, cost of computer & its depreciation, computer operator, consequent electricity,
use of office premises, fee charged by Mutual Fund agents/bankers (Annual Fee),
portfolio record maintenance and its tracking to ensure timely sale/purchase of mutual
fund units, etc. Moreover, the AO, at Para 5.7 of the Assessment Order has also recorded
his satisfaction in these words. "Since, no disallowance has been done by the assessee
and as per the facts and circumstances of the case, I have reasons to arrive at the
satisfaction for disallowance u/s 14A of the Act, r/w Rule 8D of the Rules, that there are
expenses relatable to the earning of exempt income by the assessee. Since, the assessee
has invested its money for such investment of shares, which is capable to generate
income which does not or shall not form part of total income of the assessee and indirect
cost in the form of administrative expenditures etc. is involved in this process. There is
direct and proximate nexus between the exempted income, which the investments shall
genearate and the expenditures directly or indirectly involved in earning the said
income...." In view of these facts and circumstances, the requirements under Rule 8D(1)
of I.T. Rules read with Section 14A(2) and Section 14A(3) are fulfilled and accordingly
disallowance made by the AO in accordance with under Rule 8D(2) of I.T. Rules, 1962
read with Section 14A of I.T. Act, is held to be consistent with law under these facts and
circumstances. Moreover, the facts and circumstances of this year are clearly
distinguishable from facts and circumstances of AY 2009-10 and 2010-11, as clearly
Page 15 of 18
ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
brought out by the Ld. CIT(A) in Paragraphs 7.2 and 7.3 of the impugned order. We have
already noted, that the Ld. CIT(A) has made out a strong case for departure from the
order of ITAT in the case of the Assessee vide dated 13.03.2015 in ITA Nos.-
554/Del/2013 and 5298/Del/2013. We have also already noted that the order of the Ld.
CIT(A) is based on the order of Hon'ble Jurisdictional High Court in the case of Maxopp
Investment Ltd. V. CIT[2012] 347 ITR 272 (Delhi), and further, that the appeal
against the order of Hon'ble Jurisdictional High court in the case of Maxopp Investment
Ltd. V. CIT [2012] 347 ITR 272 (Delhi) has been dismissed by Hon'ble Supreme Court in
recent decision reported at Maxopp Investment Ltd. Vs. CIT 402 ITR 640 (SC). We
have furthermore already noted that the order of the AO is based on the decision of the
Hon'ble Supreme Court in the case of CIT vs. Walfort Share and Stock Brokers P.
ltd. [2010] 326 ITR 1 (SC). Relevant portions of the orders of the Ld. CIT(A) and the
AO have also already been reproduced earlier. In view of the foregoing, and further in
view of the facts and circumstances of this year being clearly distinguishable from facts
and circumstances of AY 2009-10 and 2010-11, as clearly brought out by Ld. CIT(A) in
Paragraphs 7.2 and 7.3 of her Order; and further, in view of the aforesaid order of
Hon'ble Jurisdictional High court in the case of Maxopp Investment Ltd. V. CIT
[2012] 347 ITR 272 (Delhi); and furthermore, in view of the aforesaid Orders of
Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT 402 ITR 640
(SC) and CIT vs. Walfort Share and Stock Brokers P. ltd. [2010] 326 ITR 1 (SC);
and moreover, for reasons stated in detail in the impugned order dated 08.06.2015 of the
Ld. CIT(A); the disallowance made by the AO under Rule 8D of I.T. Rules read with
Page 16 of 18
ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
Section 14A of I.T. Act, and confirmed by the Ld. CIT(A), are hereby upheld. Accordingly,
1st Ground of appeal, including sub grounds 1. a), 1. b), 1. c), 1. d) and 1. e) are hereby
dismissed.
(3) The 2nd Ground of appeal, including sub-grounds 2. a) and 2. b) were not
pressed by the Ld. Counsel for Assessee at the time of hearing before us. Accordingly,
2nd Ground of appeal, including sub-grounds 2. a) and 2. b) are hereby dismissed, being
not pressed.
In the result, the appeal of the Assessee is dismissed.
Order pronounced in the open court on 7/12/2018.
Sd/- Sd/-
(AMIT SHUKLA) (ANADEE NATH MISSHRA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 7/12/.2018
(Pooja)
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Page 17 of 18
ITA No.-5144/Del/2015.
Dr. Ashok Seth, New Delhi.
Date of dictation
26.11.2018.
Date on which the typed draft is placed before the
dictating Member
27.11.2018
Date on which the typed draft is placed before the
Other Member
Date on which the approved draft comes to the Sr.
PS/PS
Date on which the fair order is placed before the .11.18
Dictating Member for pronouncement
Date on which the fair order comes back to the Sr.
PS/PS
Date on which the final order is uploaded on the
website of ITAT
Date on which the file goes to the Bench Clerk
Date on which the file goes to the Head Clerk
The date on which the file goes to the Assistant
Registrar for signature on the order
Date of dispatch of the Order
Page 18 of 18
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