TaxTMI 
TaxTMI 
2018 (12) TMI 911
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 veri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....wings 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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- 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/D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e. 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. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g 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 in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessing 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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 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 order....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 du....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en 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 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 cou....