Machina Ranjan Rao, CHENNAI V. DCIT, CHENNAI

ITA 1248/CHNY/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 8613 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2010-2011
• Appeal Filed On: 06-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: S VENUGOPALAN
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI ... , ! ', $ %& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ./ ITA NO.1248/MDS/2016 ( )( / ASSESSMENT YEAR : 2010-11 SHRI MACHINA RANJAN RAO, 39/17, MYLAI RANGANTHAN STREET, CHENNAI - 600 017. PAN : AEEPR 3513 B V. THE DEPUTY COMMISSIONER OF INCOME TAX, NON-CORPORATE CIRCLE 2(1), CHENNAI. (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SHRI S. VENUGOPALAN, CA -.+, / 0 / RESPONDENT BY : SHRI A.V. SREEKANTH, JCIT 1 / 2$ / DATE OF HEARING : 19.07.2016 34) / 2$ / DATE OF PRONOUNCEMENT : 01.09.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) 2, CHENN AI, DATED 03.02.2016 AND PERTAINS TO ASSESSMENT YEAR 2010-11. 2. SHRI S. VENUGOPALAN, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE ONLY ISSUE ARISES FOR CONSIDERATION IS 2 I.T.A. NO.1248/MDS/16 WITH REGARD TO DISALLOWANCE OF ` 6,76,638/- UNDER SECTION 14A OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). ACCORDI NG TO THE LD. REPRESENTATIVE, THE ASSESSEE INVESTED IN MUTUAL FUN DS AND SHARES. THE INVESTMENT IS ONLY TO CREATE WEALTH. IT IS NOT THE INTENTION OF THE ASSESSEE TO ENGAGE IN THE BUSINESS OF PURCHASE AND SALE OF MUTUAL FUNDS. ACCORDING TO THE LD. REPRESENTATIVE, THE AS SESSEE HAS NOT BORROWED ANY FUNDS FOR THE PURPOSE OF MAKING INVEST MENT. IN FACT, THE ASSESSEE HAS INVESTED HIS OWN FUNDS IN SHARES A ND MUTUAL FUNDS. THE LD. REPRESENTATIVE FURTHER SUBMITTED TH AT THE ASSESSEE HAS ALSO NOT INCURRED ANY EXPENDITURE FOR EARNING T HE DIVIDEND INCOME. ACCORDING TO THE LD. REPRESENTATIVE, WHEN THE ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE, THE ASSESSING OFFI CER CANNOT MAKE ANY DISALLOWANCE UNDER RULE 8D OF INCOME-TAX R ULES, 1962. REFERRING TO RULE 8D, THE LD. REPRESENTATIVE SUBMIT TED THAT THE ASSESSING OFFICER CAN DISALLOW THE EXPENDITURE IF A T ALL ANY EXPENDITURE WAS CLAIMED BY THE ASSESSEE. IN THIS C ASE, NO EXPENDITURE WAS CLAIMED BY THE ASSESSEE, THEREFORE, ACCORDING TO THE LD. REPRESENTATIVE, THE ASSESSING OFFICER IS NO T JUSTIFIED IN DISALLOWING THE EXPENDITURE. ON A QUERY FROM THE B ENCH WHETHER RULE 8D(2)(III) WOULD BE APPLICABLE TO THE ASSESSEE , THE LD. 3 I.T.A. NO.1248/MDS/16 REPRESENTATIVE CLARIFIED THAT SINCE THE ASSESSEE HA S NOT CLAIMED ANY EXPENDITURE, EVEN RULE 8D(2)(III) IS NOT APPLICABLE AT ALL. 3. ON THE CONTRARY, SHRI A.V. SREEKANTH, THE LD. DE PARTMENTAL REPRESENTATIVE, SUBMITTED THAT SECTION 14A OF THE A CT CLEARLY SAYS THAT THE ASSESSING OFFICER CAN VERY WELL DETERMINE THE EXPENDITURE INCURRED FOR EARNING THE INCOME, WHICH DOES NOT FOR M PART OF TOTAL INCOME, WITH REGARD TO CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. REFERRING TO RULE 8D, THE LD. D.R. SUBMITTED THAT THE ASSESSING OFFICER CAN VERY WELL MAKE DISALLOWANCE IN CASE HE IS NOT SATISFIED ON THE CLA IM OF THE ASSESSEE THAT NO EXPENDITURE WAS INCURRED. THEREFORE, MEREL Y BECAUSE THE ASSESSEE CLAIMS THAT NO EXPENDITURE WAS INCURRED FO R EARNING THE EXEMPT INCOME THAT CANNOT BE A REASON TO DELETE THE ADDITION MADE BY THE ASSESSING OFFICER. REFERRING TO THE ORDER O F THE ASSESSING OFFICER, THE LD. D.R. SUBMITTED THAT THE CIT(APPEAL S), BY PLACING RELIANCE ON THE DECISION OF SPECIAL BENCH IN ITO V. DAGA CAPITAL MANAGEMENT P. LTD. (2009) (117 ITD 169), CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. THE LD . D.R. FURTHER SUBMITTED THAT SECTION 14A OF THE ACT IS APPLICABLE IRRESPECTIVE OF THE FACT WHETHER THE ASSESSEE TRADES IN SHARES OR I NVESTMENT FOR CREATION OF WEALTH. 4 I.T.A. NO.1248/MDS/16 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. FROM THE ASSESSMENT ORDER, IT APPEARS THAT THE ASSESSEE HAS INVESTED DURING THE YEAR UNDER CONSIDERATION TO THE EXTENT OF ` 14,20,65,387/- IN SHARES AND MUTUAL FUNDS. THE ASSESSEE HAS ALSO REC EIVED DIVIDEND INCOME OF ` 10,53,568/-, WHICH WAS ADMITTEDLY EXEMPTED FROM TAXATION. THE ASSESSEE CLAIMS BEFORE THIS TRIBUNAL THAT NO MONEY WAS BORROWED EITHER FOR MAKING INVESTMENT OR OTHERW ISE AND NO EXPENDITURE WAS INCURRED FOR EARNING EXEMPT INCOME. THE ASSESSING OFFICER, HAVING NOT BEEN SATISFIED WITH T HE CLAIM OF THE ASSESSEE, DISALLOWED A SUM OF ` 6,76,638/-. 5. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D OF INCOME-TAX RULES, 196 2, WHICH CLEARLY SAY THAT WHEN THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE WAS INCUR RED, HE CAN ALWAYS MAKE DISALLOWANCE BY APPLYING PROVISIONS OF RULE 8D. IN THE CASE BEFORE US, THE ASSESSEE ADMITTEDLY EARNED DIVIDEND INCOME OF ` 10,53,568/-. IN OTHER WORDS, THE INVESTMENT MADE B Y THE ASSESSEE RESULTED INCOME TO THE EXTENT OF ` 10,53,568/-, WHICH WAS ADMITTEDLY EXEMPTED FROM TAXATION. EVEN THOUGH THE ASSESSEE HAS 5 I.T.A. NO.1248/MDS/16 NOT BORROWED FUNDS AND USED HIS OWN FUNDS FOR MAKIN G THE INVESTMENT, THE ASSESSING OFFICER IS EXPECTED TO CO MPUTE THE EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FO RM PART OF TOTAL INCOME AS PER THE PROVISIONS OF RULE 8D. RULE 8D(2 )(III) READS AS FOLLOWS:- 8D (1) . . . . . . . . . . . . .. . . . . . . . . . . . . . .. . . . . . . . . . . . (2) . . . . . . . . . . . . . . . . . . .. (I) . . . . . . . . . . .. . . (II) . . . . . . . . . . . . . . (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHI CH 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. 6. WHENEVER THERE WAS NO DIRECT EXPENDITURE IN RELA TION TO INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME OR THE EXPENDITURE INCURRED BY THE ASSESSEE WAS NOT DIRECTLY ATTRIBUTE D TO ANY PARTICULAR INCOME OR RECEIPT, THE DISALLOWANCE HAS TO BE COMPU TED UNDER CLAUSE (II) AND (III) OF RULE 8D(2) OF INCOME-TAX R ULES, 1962. IN CASE THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE, WHIC H WAS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME, THE N WHAT REMAINS IS CLAUSE (III) OF RULE 8D(2). UNDER RULE 8D(2)(III), AN AMOUNT EQUAL TO 0.5% OF THE AVERAGE OF THE VALUE OF INVESTMENT, INC OME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME , AS APPEARING IN 6 I.T.A. NO.1248/MDS/16 THE BALANCE SHEET AS ON FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR, HAS TO BE COMPUTED. IN THE CASE BEFORE US, C OPIES OF THE BALANCE SHEET OR PROFIT & LOSS ACCOUNT ARE NOT FILE D BY THE ASSESSEE. DURING THE COURSE OF HEARING, THE LD. RE PRESENTATIVE FOR THE ASSESSEE CLARIFIED THAT THE ASSESSEE HAS NOT PR EPARED ANY PROFIT & LOSS ACCOUNT AND BALANCE SHEET. THEREFORE, IT HA S TO BE NECESSARILY EXAMINED THE ACTUAL INVESTMENT MADE BY THE ASSESSEE BETWEEN THE FIRST DAY AND LAST DAY OF THE PREVIOUS YEAR OF THE FINANCIAL YEAR, WHICH IS RELEVANT TO ASSESSMENT YEA R UNDER CONSIDERATION. 7. THOUGH THE ASSESSING OFFICER DISALLOWED ` 6,76,638/- UNDER SECTION 14A OF THE ACT, THE EXACT WORKING OF THE SA ME IS NOT AVAILABLE ON RECORD. IT IS NOT KNOWN HOW THE ASSES SING OFFICER WORKED OUT THE AGGREGATE AMOUNT AS PROVIDED IN RULE 8D OF THE INCOME-TAX RULES, 1962. THEREFORE, THIS TRIBUNAL I S OF THE CONSIDERED OPINION THAT THE MATTER NEEDS TO BE RECO NSIDERED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL RE- EXAMINE THE PROVISIONS OF RULE 8D IN THE LIGHT OF THE SUBMISSIO N MADE BY THE ASSESSEE THAT NO EXPENDITURE WAS CLAIMED FOR EARNIN G THE EXEMPT INCOME AND NO BORROWED FUNDS WERE USED FOR MAKING T HE 7 I.T.A. NO.1248/MDS/16 INVESTMENT AND THEREAFTER DECIDE THE ISSUE AFRESH I N ACCORDANCE WITH LAW AFTER GIVING A REASONABLE OPPORTUNITY TO T HE ASSESSEE. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 1 ST SEPTEMBER, 2016 AT CHENNAI. SD/- SD/- ( ! ' ) ( ... ) (CHANDRA POOJARI) (N.R.S. GANESAN) $ / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 6 /DATED, THE 1 ST SEPTEMBER, 2016. KRI. / -278 98)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. 1 :2 () /CIT(A)-2, CHENNAI-34 4. PRINCIPAL CIT-1, CHENNAI 5. 8; -2 /DR 6. <( = /GF.