Referred Sections:
Section 14A of the IT Act,
Section 14A(2)
Section 10 of the Income-tax Act, 1961
Sub-sections (2) and (3)
Referred Cases / Judgments:
Maxopp Investment Ltd. vs. CIT – (2012) 347 ITR 272 (Del.)
CIT vs. Hero Cycles Ltd. - 323 ITR 518
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH `D' : NEW DELHI)
BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER
and
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
ITA No.3797/Del./2015
(ASSESSMENT YEAR : 2010-12)
M/s. ACE Insurance Brokers Pvt. Ltd., vs. ACIT, Circle 1,
B 17, Ashadeep Building, New Delhi.
9, Hailey Road,
New Delhi 110 001.
(PAN : AADCA9488L)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri D.C. Aggarwal, Advocate
REVENUE BY : Ms. Naina Soin Kapil, Senior DR
Date of Hearing : 21.08.2019
Date of Order : 11.09.2019
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
Appellant, M/s. ACE Insurance Brokers Pvt. Ltd. (hereinafter
referred to as the `assessee') by filing the present appeal sought to set
aside the impugned order dated 18.03.2015 passed by the Commissioner
of Income - tax ( Appeals ) - I, New Delhi qua the assessment year
2010-11 on the grounds inter alia that :-
"1. The impugned order passed by the Learned
Commissioner (Appeals) to the extent it confirms disallowance of
Rs.2,18,970.00 under section 14A is bad in law on facts and has
been passed in a mechanical order on the basis of conjectures
and surmises.
2 ITA No.3797/Del./2015
2. The learned Commissioner (appeals) has erred in
disallowing expenses under section 14A without appreciating
that the learned A.O had applied rule 8D for purpose of
disallowance u/s 14A without arriving at satisfaction or
complying with mandatory requirement of section 14A(2) of rule
8D (1)."
2. Briefly stated the facts necessary for adjudication of the issue at
hand are : During the year under assessment, assessee company has
shown dividend income of Rs.1,91,750/- from shares and claimed the
same as exempt income under section 10 of the Income-tax Act, 1961
(for short `the Act'). Assessing Officer (AO) by invoking the provisions
contained u/s 14A read with Rule 8D proceeded to make disallowance
to the tune of Rs.2,18,970/- on the ground that the expenses connected
with exempt income have to be disallowed and computed the same as
under:-
"Calculation of disallowance under Rule 8D
i. The amount of expenditure incurred during the year
directly relating to exempt income - Nil
ii. The interest on borrowings made for investment in
mutual funds - NIL
iii. 0.5% of average value of investment income from which
does not form part of total income on the first & last day'
of the previous year- Applicable
Accordingly, the disallowance upto 0.5% of the average of
the value of investments u/s 14A read with Rule 8D is calculated
as under:
Opening Investment (a) : Rs.2,77,89,926/-
Closing Investment (b) : Rs.5,97,98,313/-
Average Investment : Rs.4,37,94,119/- ([(a)+(b)]/2)
0.5% of Average Investment : Rs.2,18,970/- (0.5% of
Rs. 4,37,94,119/-)
3 ITA No.3797/Del./2015
Accordingly, an amount of Rs.2,18,970/- is hereby
disallowed in view of the provision of section 14A of the IT Act,
1961 and is added back to the income of the assessee.
(Addition of Rs.2,18,970/-)"
3. Assessee carried the matter by way of an appeal before the ld.
CIT (A) who has confirmed the addition by partly allowing the appeal.
Feeling aggrieved, the assessee has come up before the Tribunal by way
of filing the present appeal.
4. We have heard the ld. Authorized Representatives of the parties
to the appeal, gone through the documents relied upon and orders passed
by the revenue authorities below in the light of the facts and
circumstances of the case.
5. Undisputedly, assessee has earned dividend income to the tune of
Rs.1,91,750/- during the year under assessment and claimed the same as
exempt income u/s 10 of the Act. It is also not in dispute that the
assessee has filed categoric reply before AO as well as ld. CIT (A) to the
show-cause notice that the company had not incurred any expenditure
for earning the dividend income.
6. When we examine the aforesaid undisputed facts and
circumstances of the case in the light of the settled principle of law that
without recording his dissatisfaction as to the working out made by the
assessee that no expenses have been incurred, provisions contained u/s
14A read with Rule 8D are not attracted. In the instant case, the AO has
merely recorded the general principle that the assessee has himself taken
4 ITA No.3797/Del./2015
the decision to invest in shares for which Board Resolution in this regard
has been passed and necessary formalities are required to be performed
and for all these activities, assessee must have used some experts
entailing some expenditure. However, a word has not been minced by
the AO that the evidence brought on record by the assessee wherein it is
mentioned that no expenditure has been incurred to earn the exempt
income is incorrect in his satisfaction rather mechanically proceeded to
invoke the provisions contained under Rule 8D of the Act.
7. Hon'ble Delhi High Court in the case of Maxopp Investment
Ltd. vs. CIT (2012) 347 ITR 272 (Del.) while deciding the
identical issue has held as under :-
"Section 14A even prior to the introduction of sub-sections
(2) and (3) would require the Assessing Officer to first reject
the claim of the assessee with regard to the extent of such
expenditure and such rejection must be for disclosed cogent
reasons. It is then that the question of determination of such
expenditure by the Assessing Officer would arise. The
requirement of adopting a specific method of determining
such expenditure has been introduced by virtue of .sub-
section (2) of section 14A . Prior to that, the assessee was free
to adopt any reasonable and acceptable method. So, even for
the pre-rule 80 period, whenever the issue of section 14A
arises before an Assessing Officer, he has, first of all, to
ascertain the correctness of the claim of the assessee in
respect of the expenditure incurred in relation to income
which does not form part of the total income under the Act.
Even where the assessee claims that no expenditure has been
incurred in' relation to income which does not form part of
the total income, the Assessing Officer will have to verify the
correctness of such claim. In case, the Assessing Officer is
satisfied with the claim of the assessee with regard to the
expenditure or no expenditure, as the case may be, the
Assessing Officer is to accept the claim of the assessee in so
far as the quantum of disallowance under section 14A is
concerned. In such eventuality, the Assessing Officer cannot
embark upon a determination of the amount of expenditure
for the purposes of section 14A(1). In case, the Assessing
5 ITA No.3797/Del./2015
Officer is not, on the basis of the objective criteria and after
giving the assessee a reasonable opportunity, satisfied with
the correctness of the claim of the assessee, he shall have to
reject the claim and state the reasons for doing so. Having
done so, the Assessing Officer will have to determine the
amount of expenditure incurred in relation to income which
does not form part of the total income under the Act. He is
required to do so on the basis of a reasonable and acceptable
method of apportionment."
8. Moreover, before ld. CIT (A), the assessee has come up with
specific plea that it has not paid any sitting fee to the Board
Members so as to decide and making investment in shares but this
contention of the assessee has also not been taken into account by
the ld. CIT (A). So, when the AO has failed to prove on record
material to show that such and such expenditure has been incurred
by the assessee to earn exempt income, disallowance u/s 14A read
with Rule 8D is not permissible.
9. Hon'ble High Court of Punjab & Haryana in case of CIT vs.
Hero Cycles Ltd. - 323 ITR 518 held that disallowance u/s 14A is
not permissible where there is no nexus between expenditure
incurred and income generated by returning following findings :-
"Held, dismissing the appeal, that the expenditure on interest
was set off against the income from interest and the investment
in the shares and funds were out of the dividend proceeds. In
view of this finding of fact, disallowance under section 14A was
not sustainable. Whether, in a given situation, any expenditure
was incurred which was to be disallowed, was a question of fact.
The contention of the Revenue that directly or indirectly some
expenditure was always incurred which must be disallowed
under section 14A and the impact of expenditure so incurred
could not be allowed to be set off against the business income
which may nullify the mandate of section 14A, could not be
6 ITA No.3797/Del./2015
accepted. Disallowance under section 14A required finding of
incurring of expenditure and where it was found that for earning
exempted income no expenditure had been incurred,
disallowance under section 14A could not stand. Consequently,
the disallowance was not permissible."
10. In view of what has been discussed above, we are of the
considered view that the ld. CIT (A) has erred in confirming the
disallowance made by the AO u/s 14A read with Rule 8D, hence
disallowance made by the AO and confirmed by the ld. CIT (A) is
ordered to be deleted. Consequently, appeal filed by the assessee is
hereby allowed.
Order pronounced in open court on this 11th day of September, 2019.
Sd/- sd/-
(PRASHANT MAHARISHI) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 11th day of September, 2019
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT(A)-I, New Delhi.
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.
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