COMORO TECHNOLOGIES P.LTD,NEW DELHI V. ACIT, CIRCLE 6(1), NEW DELHI

ITA 1567/DEL/2023

AI Insights

The case involves Comoro Technologies P. Ltd., which appealed against the order of the CIT(A) sustaining an addition of Rs. 37,98,056 made by the AO under section 14A read with rule 8D of the Income Tax Act, 1961. The addition was based on the premise that the assessee had incurred expenses related to earning exempt income. However, the assessee argued that no such expenses were incurred, as no interest on borrowed funds was claimed, and no management fees were paid for managing the mutual fund portfolio. The Tribunal, referencing the Supreme Court's decision in Maxopp Investment Ltd. vs. CIT, agreed with the assessee, noting that section 14A applies only if the assessee has incurred expenses in relation to earning exempt income, which was not the case here.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 23590 (ITAT-DELHI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2017-2018
• Other Referred Cases: Maxopp Investment Ltd. Vs. CIT, H T Media Ltd vs PCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH KUMAR DHANESTA
• Assessee Lawyers: PARVESH SHARMA
• Keywords: Business expenditure; TDS; Earning of tax free income; Rule 8D
• Section: 147; 143(3); 250; 14A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘B’: NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI MANISH AGARWAL, ACCOUNTANT MEMBER ITA No.1567/Del/2023 (ASSESSMENT YEAR 2017-18) Comoro Technologies P. Ltd., 2, LSC Uday Park, New Delhi-110049 PAN-AABCC4458N Vs. Asst. CIT, Circle-6(1), New Delhi. (Appellant) (Respondent) Assessee by Sh. Parvesh Sharma, Adv. and Sh. Sushil Kumar, Adv. Department by Sh. Rajesh Kumar Dhanesta, Sr. DR Date of Hearing 24/02/2025 Date of Pronouncement 19/03/2025 O R D E R PER MANISH AGARWAL, AM: This appeal filed by the assessee against the order of the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) Delhi, having DIN No. ITBA/NFAC/S/250/2022- 23/1051238625(1), dated 24.03.2023 in appeal NO. CIT(A), Delhi- 2/10197/2019-20 for Assessment Year 2017-18, passed under section 250 of the Income Tax Act, 1961 (hereinafter referred as ‘the Act’). 2 ITA No.1567 /Del/2023 Comoro Technologies (P) Ltd. vs. ACIT 2. Brief facts of the case are that the assessee is a private limited company and filed its return of income for impugned year on 22.01.2018 declaring income of Rs.1,63,56,850/-. The case was selected for limited scrutiny under CASS where the one of the reasons was that the exempt income is significant lower than as compared to investment made to earn exempt income. The assessment was completed u/s 143(3) vide order dt. 29.09.2019 at a total income of Rs. 2,01,54,906/- by making disallowance u/s 14A at Rs. 37,98,056/-. Aggrieved by the assessment order, assessee preferred appeal before the ld. CIT(A) which stood dismissed in terms of the impugned order dt. 24.03.2023 passed by NFAC. 3. Against the said order of the NFAC, the assessee is in appeal before the Tribunal. 4. The assessee challenged the appellate order on the strength of following grounds of appeal:- “1. That on the facts and in circumstances of the case the order of the CIT (A) is bad in law. 2. That on the facts in circumstances of the case the Ld. CIT (A) erred in law in sustaining the addition of Rs. 37,98,056/- made by the Assessing Officer u/s 14A of the Act r. w. rule 8D of the Income-tax Rules 1962, by ignoring the facts that no expenditure was incurred by the appellant to earning exempt income. 3. That the Ld. CIT(A) has not establish or demonstrated any nexus of expenditure direct or indirect to the dividend earned during the year. 4. That the learned Commissioner of Income Tax (Appeals) has erred in sustaining the addition u/s. 14A to the extent of 1% of the average value of the investment made by the AO without recording the satisfaction. 3 ITA No.1567 /Del/2023 Comoro Technologies (P) Ltd. vs. ACIT 5. That the action of the CIT (A)/AO is contrary to the law laid down by the various High Courts including jurisdictional High Court. 6. That the appellant craves leave to add, delete or amend any of the grounds of appeal on or before the disposal of the present appeal.” 5. Since all the grounds of appeal are in relation to the disallowance made u/s 14A of the Act of Rs. 37, 98,056/thus the same are taken together for consideration. 6. In the present case, the AO observed that assessee has declared exempt income of Rs.43,49,026/- and LTCG of Rs.10,230/- and made investments in mutual funds. He further observed that closing value of investment is of Rs.36,43,81,719 which is up from Rs.35,62,39,020/- from las year. Accordingly, he invoked the provisions of section 14A and by applying Rule 8D has made the addition of Rs.37,98,056/- being 1% of the average value of investments. 7. Before us, Ld. AR submitted that the AO has made addition u/s.14A r.w. Rule 8D by ignoring the fact that appellant has not claimed any interest on funds borrowed nor other expenses was claimed as the fund manager has not charged any fee or remuneration. Therefore, Section 14A of the Act is not applicable and hence no disallowance under Rule 8D can be made. To support his contentions, ld. AR relied on the decision of Hon’ble Supreme court in the case of Maxopp Investment Ltd. Vs. CIT reported in 402 ITR 640(SC) wherein it is held by the Hon’ble Apex court as under: that “…as per section 14A(1) of the Act, deduction of that expenditure is not to be allowed which has been incurred by the assessee “in 4 ITA No.1567 /Del/2023 Comoro Technologies (P) Ltd. vs. ACIT relation to income which does not form part of the total income under this Act”. Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. 7.1 In the present case, the assessee has not incurred any interest expenditure in relation to earning any exempt income. For this he drew our attention to Profit & Loss Account for the year ended on 31.3.2017 placed at paper book pages 19, where the total expenditure towards Finance cost is claimed at Rs. 8,94,888/- which includes bank charges of Rs. 1,13,618/- and Rs. 7,81,270 as interest paid on TDS & Income Tax. Ld. AR further submits that the amount of Rs. 7,81,270/- was offered for taxation by including the same to the total income computed in the computation of income placed at paper book page 15. He further argued that the assessee has taken advice from the Mutual fund consultants who has not charged any amount for such advice and thus no management fee was paid for the managing the mutual fund portfolio of the assessee company. He thus submit that when no expenses were claimed to earn such exempt income, the provisions of section 14A would not apply to the facts of the assessee's case. Thus, the ld. AR prayed that the facts of the present case being similar to the to the Maxopp case cited supra, the addition u/s.14A of the Act made by the AO and confirmed by the ld. CIT(A) deserves to be deleted. 5 ITA No.1567 /Del/2023 Comoro Technologies (P) Ltd. vs. ACIT 8. Per Contra, ld. Sr. DR relied on the orders of the lower authorities and submitted that the assessee has a sizable investment portfolio which certainly requires being managed. The administrative expenses, staff cost and other associated cost cannot be brushed aside for the aforesaid activity. The assessee is having investments yielding tax free income. Thus, it was submitted that the computation made by the AO u/s.14A of the Act is just and proper to which the ld. CIT(A) has already confirmed it, therefore, the same deserves to be upheld. 9. We have heard the rival submissions and perused the material available on record. A perusal of assessment order shows that the AO has considered the amount of investment made for making addition u/s.14A of the Act which was alleged as made to earn exempt income. At this juncture the provisions of Sections 14A of the Act needs to be referred which reads as under:- , [Expenditure incurred in relation to income not includible in total income. 14A. [(1)] [Notwithstanding anything to the contrary contained in this Act, 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 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 6 ITA No.1567 /Del/2023 Comoro Technologies (P) Ltd. vs. ACIT 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 nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.] [Explanation.—For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income.] 9.1 The title of 14A, i.e. “expenditure incurred in relation to income not includible in total income” itself speaks about the existence of exempt income and then only a particular expenditure can be treated as incurred “in relation to” such income. Under Income Tax Act, expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. Thus, Section 14A is applicable if the assessee has income which is not includible in its total income and further assessee has incurred certain expenditure to earn such income. In the instant case, the assessee has not incurred any expenditure which could be related to earning exempt income though it had exempt income. The language of section 14A is not at all ambiguous and in fact very clear and by virtue of the same, only expenditure actually incurred in relation to income not includible in total income shall be disallowed. In no way, it could be interpreted that it seeks to disallow expenses on assumption basis. Therefore, 7 ITA No.1567 /Del/2023 Comoro Technologies (P) Ltd. vs. ACIT disallowance u/s 14A can be made only when assessee has actually incurred any expenses in relation to such exempt income. The Hon’ble Supreme court in the case of Maxopp Investment (supra) also expressed this view. 9.2 Further as per the provisions of section 14A(2) of the Act read with Rule 8D(1) of the Rules, the AO is duty bound to first record satisfaction in an objective manner having regard to the accounts of the assessee as to why the suo-moto disallowance made by the assessee u/s 14A of the Act is incorrect, before resorting to computation mechanism provided in Rule 8D(2) of the Rules. In this regard reliance is placed on the decision of Hon‟ble Jurisdictional High Court in the case of H T Media Ltd vs PCIT reported in 399 ITR 576 (Del) wherein it was held as under:- 30. Rule 8D(1) states more or less what Section 14 A (2) of the Act states. It requires the AO to first examine the accounts of the Assessee and then record that he is not satisfied with (a) the correctness of the Assessee's claim of expenditure or (b) the claim made by the assessee that no expenditure has been incurred. Unless this stage is crossed i.e. the stage of the AO recording that he is not satisfied with the clam of the Assessee in the manner indicated i.e. after examining the Assessee's accounts, the question of applying the formula under Rule 8D (2) does not arise. That this is a mandatory pre-requisite for applying Rule 8D (2) is fairly well-settled. ....... 34. The Assessee had explained that Rs. 3 lakhs was being disallowed voluntarily as an \"expenditure which could be attributable for earning the said income.\" The Assessee explained that the disallowance had been determined on the basis of cost of finance department in the ratio of exempt income to total turnover. On that basis the disallowance in AY 2005-06 was upheld by CIT (A) at Rs. 1 lakh. The disallowance for this AY was worked out as Rs. 1,42,404/- and since the Assessee had already made a 8 ITA No.1567 /Del/2023 Comoro Technologies (P) Ltd. vs. ACIT disallowance of Rs. 3 Lacs, no further disallowance was called for. 35. In order to disallow this expense the AO had to first record, on examining the accounts, that he was not satisfied with the correctness of the Assessee's claim of Rs. 3 lakhs being the administrative expenses. This was mandatorily necessitated by Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules. 36. In para 3.2 of the assessment order, the AO records that, in answer to the query posed by the AO requiring it to produce calculation for disallowances, the Assessee \"submitted that they have not incurred any expenditure for earning the dividend income.\" Thereafter, in para 3.3, the AO records \"I have considered the submissions of the Assessee and found not to be acceptable.\" Thereafter, the AO proceeded to deal with the said provisions of Section 14A and Rule 8D and observed, in para 3.3.1, that making of investment, maintaining or continuing investment and time of exit from investment are well informed and well coordinated management decisions that, in relation to earning of income, are embedded in indirect expenses. It is then stated in para 3.4 that, in view of the above, the provisions of sub-section (2) of Section 14A and Rule 8D of the Rules are in operation and therefore, will strictly be adhered to by the Assessee. In para 3.6 of the assessment order, after discussing Section 14A(1) read with Rule 8D and referring to the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. (supra), the AO simply stated that \"in view of the facts and circumstances and legal position on the issue as discussed above, I am satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain to ascertain the true and correct picture of its income and expenses.\" 37. In the considered view of this Court, the above observations of the AO in the assessment order are of a broad general nature not with particular reference to the facts of the case on hand. 9.3 In view of the above discussion and looking to the fact that assessee has not claimed any expenditure which was incurred in relation to earn exempt income and further before invoking the provision of section 14A along with Rule 8D, the AO has failed to record satisfaction with respect to expenses claimed as related to earn 9 ITA No.1567 /Del/2023 Comoro Technologies (P) Ltd. vs. ACIT exempt income, thus in our considered opinion the addition made at Rs. 37,98,056/- made by invoking the provisions of section 14A r.w. rule 8D of the IT Rules, 1962 is not sustainable. Accordingly, we direct to delete the same. 10. In the result appeal of the assessee is allowed. Order pronounced on 19th March, 2025. Sd/- Sd/- (SATBEER SINGH GODARA) (MANISH AGARWAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:19/03/2025 PK/Sr. Ps Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI "