DEPUTY COMMISSIONER OF INCOME TAX, VADODARA V. JAYANT SHANTILAL SANGHVI, VADODARA

ITA 1134/AHD/2023

• Counselvise Citation: [2024] 100 COUNSELVISE.COM (IT) 0741 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 21-07-2024
• Assessment Year: 2016-2017
• Appeal Filed On: 28-12-2023
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD BEFORE Ms. SUCHITRA RAGHUNATH KAMBLE, JUDICAL MEMBER & SHRI NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER आयकर अपील सं./I.T.A. No. 1134/Ahd/2023 ( नधा रण वष / Assess ment Ye ar : 2016-17) De pu ty C o mmi ss io ner o f In co me T ax Va do dar a बनाम/ V s . Jay a nt S ha nt ila l S an gh vi Pra th a m, Ma kr an d Des ai Ro ad, G ot ri , Va do d ara , Gu jar at 3 90 00 7 थायी लेखा सं./जीआइआर सं./P A N / G IR N o . : A N R P S 3 6 5 1 F (Appellant) . . (Respondent) अपीलाथ ओर से /Appellant by : Shri Ashesh R Rewar, Sr. DR यथ क ओर से/Respondent by : Shri Milin Mehta, A.R. D a t e o f H e a r i n g 22/07/2024 D a t e o f P r o n o u n c e m e n t 26/07/2024 O R D E R PER SHRI NARENDRA PRASAD SINHA, AM: This appeal is filed b y the Revenue against the order of National Faceless Appeal Centre ( NFAC), Delhi, (i n short ‘the CIT( A) ’) dated 06.11.2023 for the Assessment Year 2016-17. 2. The brief facts of the case are that the assessee, an individual, e-filed return of income for A.Y. 2016-17 on 29.09.2016 declaring total income of Rs.13,82,36,020/-. In the course of assessment, the AO found that the assessee had declared exempt income of Rs.4,02,26,125/- in respect of profit ITA No. 1134/Ahd/2023 [DCIT vs. Jayant Shantilal Sanghvi] A.Y. 2016-17 - 2 – from various firms, capital gain under Section 10(38) of the Income Tax Act, 1961 (in short ‘the Act’), interest on PPF, dividend from shares and dividend from mutual funds. However, no disallowance was made under Section 14A of the Act by the assessee. The AO, therefore, made addition of Rs.1,51,18,278/- under Section 14A read with Rule 8D of IT Rules. 3. Aggrieved with the order of the AO, the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order. The Ld. CIT(A) held that no satisfaction had been recorded by the AO as mandated under Section 14A(2) r.w.s. 14A(3) of the Act and Rule 8D (1) of the IT Rules and that the disallowance was worked out mechanically by the AO. He, therefore, deleted the entire addition of Rs.1,51,18,278/- made under Section 14A of the Act. 4. Now, the Revenue is in appeal before us. 5. The following grounds have been taken in this appeal: “ 1 . " Wh e t h e r L d . C I T (A ) w a s j u s t i f i e d i n d e l e t i n g th e d i s a l l o w a n c e u n d e r s e c t i o n 1 4 A r e a d w i t h R u l e 8 D o f t h e A c t w i t ho u t a p p r e c i a t i n g t h e f a c t t h a t t h e A O h a s d r a w n d u e s a t i s f a c t i o n f o r i n v o k i n g p r o v i s i o n s o f s e c t i o n 1 4 A r e a d w i t h R u l e 8 D o f t h e A c t a n d h a s a l s o i s s u e d s p e c i f i c S h o w C a u s e N o t i c e t o t h e a s s e s s e e , w h i l e p a s s i n g a s s e s s m e n t o r d e r ? 2 . T h e a p p e l l a n t c r a v e s l e a v e s t o a d d , m o d i f y , a m e nd o r a l t e r a n y g r o u n d s o f a p p e a l a t t h e t i m e o f , o r b e f o r e , t h e h ea r i n g o f a p p e a l . ” 6. Shri Ashesh R Rewar, Sr. DR appearing for the Revenue submitted that the Ld. CI T( A) did n ot exa mine the merit of the addition made under Section 14A of the Act and that he has ITA No. 1134/Ahd/2023 [DCIT vs. Jayant Shantilal Sanghvi] A.Y. 2016-17 - 3 – deleted the entire addition only on t he ground that no satisfaction was recorded b y th e AO. The Ld. Sr . DR has drawn our attention to Para 5.1 of the assessment o rder wherein the AO had categorically reco rded his satisfaction regarding disallowance under Section 14A of the Act and, thereafter, had also allowed opportunity to the assessee to explain wh y the said disallowance should not be ma de. In view of t hese facts, the Ld. S r. DR submitted that the finding as given by the Ld. CI T(A) was not correct. He further submitted that the disallowance was made b y the AO in accorda nce with the work ing as provided under Rule 8D of the I T Rules. 7. Per contra, Shri Milin Mehta, Ld. AR for the asse ssee submitted that no expenditure was incurred by the as sessee for earning the exempt income and this fact was brought to the notice of the AO in the course of assessment proceedings. The AO without examining the contention of the assessee on merits had mechanicall y disallowed Rs.1,51,18,278/- under Section 14A of the Act, whereas , the total expenditure debited to P&L account of the assessee wa s Rs.55,87,108/- only. The Ld. AR has drawn our attention to the details of all the expenses as debited to P&L account and submi tted that none of t he expenses were i ncurred or laid out for earning of the exe mpt in co me . The Ld . AR supported the order of the Ld. CI T(A) and reli ed upon the decision of the Hon’ble Supre me court in the case o f Maxopp Investment Ltd. vs. CIT, (2018) 91 taxmann.com 154 (SC). ITA No. 1134/Ahd/2023 [DCIT vs. Jayant Shantilal Sanghvi] A.Y. 2016-17 - 4 – 8. We have carefull y considered the rival submissions and the facts of the case . The provision of S ection 14A stipulates that 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 of the assessee. This section also empowers the AO to deter mine the a mount of expenditure incurred in relation to such income which does not for m p art of the total inco me, if the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not for m part of the tota l inco me. The co ntention of the assessee is th at no expenditure was incurred for earning of the exe mpt inco me. It is found that the AO did not exa mine the clai m of the assessee and has made the disallowance under Section 14A of the Act in a mechanical manner. The ass essee had clai med expenditure of Rs.30,17,711/- in respect of interest on margin funding in its P&L account. However, the AO had worked out the disallowance of Rs.34,64,991/- in respect of interest expenditure. The disallowance on account of interest could never have been more t han the actual interest expense claimed b y the assessee as deduction. Further, the AO had also disallowed Rs.1,16,53,287/- on account of admi nistrative expenses @ 0.5% of average value of invest ment. Th e disallowances as made b y the AO is not found to be correct. The interest of Rs.3 0,17,711/- on margin funding was not incurred for earning of any exe mpt income . The assessee had explained that the income fr o m margin funding was utilized in option trading and the assessee had ITA No. 1134/Ahd/2023 [DCIT vs. Jayant Shantilal Sanghvi] A.Y. 2016-17 - 5 – offered inco me o f Rs.10,88,19,185/- derived fro m t he option trading for tax. Fro m the details of the interest and finance charges as brought on record, it is apparent that no part of interest and finance charging was utilized towards earning of any exe mpt income . 9. The other expenditure debited to P&L account were ad ministrative expense of Rs.20,65,427/- and depreciation of Rs.4,26,403/-. It is found that the ad ministrative expense co mprises of audit fee, legal and professional charges and donation. The e ntire donation a mount of Rs.12,45,500/- was added to the income in the co mputation of income b y the assessee hi mself. Other e xpenses in respect of audit fee, legal and professional charges as well as de preciation cannot be held as incurred towards earning of any ex e mpt inco me . Therefore, we find merit in the sub mission of the assessee that no part of expenditure debited to P& L a ccount of the assessee wa s incurred for earning of an y exe mpt inco me. It has been hel d b y the Hon’ble Supre me Court in the case of Maxopp Investment Ltd. (supra) that if the expenditure incurred has no casual c onnection with exe mpt income , such expenditure would be trea ted as not related to the income that is exe mpt ed fro m the tax and that such expenditure would be allowed as business expenditure. To reproduce fro m the said order: “ 3 2 . I n t h e f i r s t i n s t a n c e , i t n e e d s t o b e r e c o g n i se d t h a t a s p e r s e c t i o n 1 4 A ( 1 ) o f t h e A c t , d e d u c t i o n o f t h a t e x p e n di t u r e i s n o t t o b e a l l o w e d w h i c h h a s b e e n i n c u r r e d b y t h e a s s e s s e e " i n r e l a t i o n t o ITA No. 1134/Ahd/2023 [DCIT vs. Jayant Shantilal Sanghvi] A.Y. 2016-17 - 6 – i n c o m e w h i c h d o e s n o t f o r m p a r t o f t h e t o t a l i n c o m e u n d e r t h i s A c t " . A x i o m a t i c a l l y , i t i s t h a t e x p e n d i t u r e a l o n e w h i c h ha s b e e n i n c u r r e d i n r e l a t i o n t o t h e i n c o m e w h i c h i s i n c l u d i b l e i n t ot a l i n c o m e t h a t h a s t o b e d i s a l l o w e d . I f a n e x p e n d i t u r e i n c u r r e d h as n o c a u s a l c o n n e c t i o n w i t h t h e e x e m p t e d i n c o m e , t h e n s u c h a n ex p e n d i t u r e w o u l d o b v i o u s l y b e t r e a t e d a s n o t r e l a t e d t o t h e i nc o m e t h a t i s e x e m p t e d f r o m t a x , a n d s u c h e x p e n d i t u r e w o u l d b e a ll o w e d a s b u s i n e s s e x p e n d i t u r e . T o p u t i t d i f f e r e n t l y , s u c h ex p e n d i t u r e w o u l d t h e n b e c o n s i d e r e d a s i n c u r r e d i n r e s p e c t o f o t h e r i n c o m e w h i c h i s t o b e t r e a t e d a s p a r t o f t h e t o t a l i n c o m e . ” 10. The contention of the Revenue is that the Ld. CI T(A) was not correct in del eting the addition onl y on the ground that no satisfaction was recorded by the AO as mandated under Section 14A(2) of the Act. It is found that the AO had invoked the provision of Section 14A r.w. Rule 8D of IT Rule aft er drawing due satisfaction and issuing specific show cause notice to the assessee. So, the finding of the Ld. CIT( A) to that extent cannot be held as correct. At the sa me ti me , the AO has not drawn an y casual connection of the expenses debited to the accounts with the exe mpt inco me and, therefore, t he disallowance as made b y the AO cannot be sustained. The pr ovision of the Act does not e mpower the AO to make the disallowance in a mechanical manner. The AO had to first rebut t he clai m of the as sessee that no expenditure was incurred for earning of the exe mpt income. Fro m the nature o f the expenses debited to the accounts and the discussions as afo resaid, we do not find an y casual c onnection between the expenses debited to the account and the exe mpt income . Therefor e, the AO was not correct in making the disallowance under Section 14A of the Act. The order of the Ld. ITA No. 1134/Ahd/2023 [DCIT vs. Jayant Shantilal Sanghvi] A.Y. 2016-17 - 7 – CIT( A) deleting the disallowance under Section 14A(2) of the Act is, there fore, upheld for this reason. 11. In the result, appeal preferred b y the Revenue is dismi ssed. This Order pronounced on 26/07/2024 Sd/- Sd/- (SUCHITRA RAGHUNATH KAMBLE) (NARENDRA PRASAD SINHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 26/07/2024 S. K. SINHA True Copy आदेश क त ल प अ े षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त(अपील) / The CIT(A)- 5. "वभागीय &त&न ध, आयकर अपील)य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड/ फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील$य अ%धकरण, अहमदाबाद / ITAT, Ahmedabad