Sh. Pradeep Khanna, New Delhi V. ITO, New Delhi

ITA 1250/DEL/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 7568 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 2 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 05-04-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 05-03-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Earning of tax free income
• Section: 14A; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : F NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO: 1250/DEL/2014 AY : - 2009-10 PRADEEP KHANNA VS. ITO W-60, GREATER KAILASH-1 WARD-23(1) NEW DELHI 110 048. N EW DELHI. PAN AAQPK0771J (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAJESH MAHNA , ADV. DEPTT. BY : SHRI SHARVAN GOTRU, SR. DR DATE OF HEARING : 5.4. 2016 DATE OF PRONOUNCEMENT : 2.6. 2016 O R D E R PER PRASHANT MAHARISHI, ACCOUNTANT MEMBER 1. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER OF LD. CIT(A)-XXIII NEW DELHI VIDE ORDER DATED 29.1.2014 ON THE FOLLOW ING GROUNDS : 1. (A)THE LD. ASSESSING OFFICER WARD 23(1) NEW DELHI HAS ERRED IN LAW AND ON FACTS IN MAKING OF DISALLOWANCE OF EXPENDITURE U NDER SECTION 14A OF INCOME TAX ACT, 1961 OF RS. 1,46,271/- WITHOUT RECO RDING ANY SATISFACTION OR RELYING ON THE EVIDENCE OF EXPENDITURE SO INCURR ED ON THE SCRUTINY OF THE ACCOUNTS. (B) FURTHER THE CIT(A) HAS FURTHER FAILED TO APPREC IATE THAT THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE AGAINST THE EARNIN G OF EXEMPTED INCOME AND THE EXPENDITURE CAN NOT BE PRESUMED AS THE ENTI RE INVESTMENT HAS BEEN MADE FROM THE PERSONAL A/C OF THE APPELLANT. 2. THAT THE CIT(A) AND AO BOTH HAVE FAILED TO APPRECIA TE THAT ALL THE INVESTMENT HAVE BEEN MADE BY THE APPELLANTS OUT OF THE SPARE FUNDS AVAILABLE WITH THE APPELLANTS AND THERE ARE NO PRES UMPTION OF EXPENDITURE REFERENCE ITA NO. 1250/DEL/2014 2 20X5 ACIT VS. MAXXOP LTD 347 ITR 272 (DELHI) 3. THE ORDER OF THE CIT(A) AND AO ARE BAD IN LAW AND A GAINST THE FACTS OF THE CASE. 2. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A N INDIVIDUAL FILED RETURN OF INCOME DECLARING INCOME OF RS. 18,72,890/- ON 29.2. 2009. ASSESSEE IS ENGAGED IN THE BUSINESS OF EXPORT OF LADIES GARMENT S. DURING THE YEAR ASSESSEE HAS EARNED EXEMPT INCOME AND THEREFORE LD. AO ASKED THE ASSESSEE TO FURNISH DETAILS OF DISALLOWANCE U/S 14A READ WITH RULE 8D OF THE INCOME TAX RULES 1962. ASSESSEE STATED THAT IT HAS NOT INCURRED ANY EXPENDITURE ON EARNING EXEMPT INCOME. HOWEVER LD. A O APPLIED RULE 8D AND DISALLOWED RS. 1,46,271/- U/S 14A OF THE ACT. A GGRIEVED BY THIS ASSESSEE PREFERRED AN APPEAL BEFORE CIT(A) AND SUBMITTED THA T RULE 8D IS NOT APPLICABLE AND AO HAS NOT RECORDED ANY SATISFACTION ABOUT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE BEFORE INVOKING PROVISION S OF RULE 8 D OF THE IT RULES 1962. IT WAS STATED THAT IN ABSENCE OF SUCH S ATISFACTION SUCH DISALLOWANCE CANNOT SURVIVE. HOWEVER LD. CIT(A) REJ ECTED THE CONTENTION OF THE ASSESSEE AND HELD THAT AS IN THE PAST YEAR ASS ESSEE HAS ACCEPTED THE DISALLOWANCE U/S 14A OF THE ACT THE ARGUMENT OF TH E ASSESSEE FOR THE CURRENT YEAR CANNOT BE ACCEPTED AND THEREFORE THE D ISALLOWANCE WAS UPHELD. ASSESSEE AGGRIEVED BY THE ORDER OF CIT(A) HAS FILE D AN APPEAL BEFORE US. 3. THE FIRST GROUND OF APPEAL IS THAT LD. AO BEFORE MA KING ANY DISALLOWANCE U/S 14A APPLYING RULE 8D HAS NOT RECORDED ANY SATISFACT ION THAT THERE IS NO EXPENDITURE DISALLOWABLE U/S 14A AS CLAIMED BY APPE LLANT IN HIS RETURN OF INCOME. LD. AR OF THE ASSESSEE SUBMITTED THAT NOW T HIS ISSUE IS COVERED BY ITA NO. 1250/DEL/2014 3 20X5 THE DECISION OF HONBLE DELHI HIGH COURT IN THE CAS E OF TAIKISHA ENGINEERING PVT. LTD. THEREFORE, THE DISALLOWANCE IS NOT SUSTAI NABLE. 4. LD. DR RELIED ON THE ORDERS OF THE LOWER AUTHORITY. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. ON READING OF THE ASSESSMENT, ORDER WE DO NOT FIND THAT AO HAS RECORD ED ANY SATISFACTION ON THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS B EEN INCURRED WHICH IS DISALLOWABLE U/S 14A OF THE ACT. HONBLE DELHI HIGH COURT IN CASE OF CIT V TAIKISHA ENGINEERING PVT. LTD. [ 370 ITR 338 (DEL) ] HAS HELD AS UNDER :- 11. SECTION 14A OF THE ACT IS RELEVANT AND REPRODUC ED BELOW : '14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL I NCOME UNDER THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESPECT O F EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NO T FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACCORDANCE WITH SUCH METHO D 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 INCOM E WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE HAS BE EN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THIS ACT: PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHA LL EMPOWER THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREA DY 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.' SECTION 14A OF THE ACT POSTULATES AND STATES THAT N O DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY AN AS SESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. UNDER SUB-SECTION (2) OF SECTION 14A OF THE ACT, THE ASSE SSING OFFICER IS REQUIRED TO EXAMINE THE ACCOUNTS OF THE ASSESSEE AND ONLY WH EN HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF EXPENDITURE IN RELATION TO EXEMPT INCOME, THE ASSES SING OFFICER CAN DETERMINE THE AMOUNT OF EXPENDITURE WHICH SHOULD BE DISALLOWED IN ACCORDANCE WITH SUCH METHOD AS PRESCRIBED, I.E., RU LE 8D OF THE RULES ITA NO. 1250/DEL/2014 4 20X5 (QUOTED AND ELUCIDATED BELOW). THEREFORE, THE ASSES SING OFFICER AT THE FIRST INSTANCE MUST EXAMINE THE DISALLOWANCE MADE B Y THE ASSESSEE OR THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE WAS I NCURRED TO EARN THE EXEMPT INCOME. IF AND ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED ON THIS COUNT AFTER MAKING REFERENCE TO THE ACCOUNTS, THAT HE IS ENTITLED TO ADOPT THE METHOD AS PRESCRIBED, I.E., RULE 8D OF THE RULE S. THUS, RULE 8D IS NOT ATTRACTED AND APPLICABLE TO ALL ASSESSEES WHO HAVE EXEMPT INCOME AND IT IS NOT COMPULSORY AND NECESSARY THAT AN ASSESSEE MU ST VOLUNTARILY COMPUTE THE DISALLOWANCE AS PER RULE 8D OF THE RULE S. WHERE THE DISALLOWANCE OR NIL DISALLOWANCE MADE BY THE ASSESS EE IS FOUND TO BE UNSATISFACTORY ON EXAMINATION OF ACCOUNTS, THE ASSE SSING OFFICER IS ENTITLED AND AUTHORISED TO COMPUTE THE DEDUCTION UN DER RULE 8D OF THE RULES. THIS PRE-CONDITION AND STIPULATION, AS NOTIC ED BELOW, IS ALSO MANDATED IN SUB-RULE (1) OF RULE 8D OF THE RULES. 12. RULE 8D OF THE RULES, AGAIN FOR THE SAKE OF CON VENIENCE, IS REPRODUCED BELOW : 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 MAD E BY THE ASSESSEE ; OR (B) THE CLAIM MADE BY THE ASSESSEE THAT NO EXPENDIT URE HAS BEEN INCURRED, IN RELATION TO INCOME WHICH DOES NOT FORM PART OF T HE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANC E WITH THE PRO VISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AM OUNTS, 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 EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRE CTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORD ANCE WITH THE FOLLOWING FORMULA, NAMELY :- A * B - C ITA NO. 1250/DEL/2014 5 20X5 WHERE A = AMOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PRE VIOUS YEAR ; B = THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARI NG IN THE BAL ANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; C = THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE-SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR ; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT. OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH 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. (3) FOR THE PURPOSES OF THIS RULE, THE 'TOTAL ASSET S' SHALL MEAN, TOTAL ASSETS AS APPEARING IN THE BALANCE-SHEET EXCLUDING THE INC REASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS.' SUB-RULE (1) CATEGORICALLY AND SIGNIFICANTLY STATES THAT THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNT OF THE ASSESSE E AND ON NOT BEING SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF EXPE NDITURE MADE BY THE ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, CAN GO ON TO DETERMINE THE DISALLOWANCE UNDER SUB-RULE (2) TO RU LE 8D OF THE RULES. SUB-RULE (2) WILL NOT COME INTO OPERATION UNTIL AND UNLESS THE SPECIFIC PRE- CONDITION IN SUB- RULE (1) IS SATISFIED. THUS, SECT ION 14A(2) OF THE ACT AND RULE 8D(1) IN UNISON AND AFFIRMATIVELY RECORD THAT THE COMPUTATION OR DISALLOWANCE MADE BY THE ASSESSEE OR CLAIM THAT NO EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME MUST BE EXAMINED WIT H REFERENCE TO THE ACCOUNTS, AND ONLY AND WHEN THE EXPLANATION/CLAIM O F THE ASSESSEE IS NOT SATISFACTORY, COMPUTATION UNDER SUB-RULE (2) TO RUL E 8D OF THE RULES IS TO BE MADE. 13. WE NEED NOT, THEREFORE, GO ON TO SUB-RULE (2) T O RULE 8D OF THE RULES UNTIL AND UNLESS THE ASSESSING OFFICER HAS FIRST RE CORDED THE SATISFACTION, WHICH IS MANDATED BY SUB-SECTION (2) OF SECTION 14A OF THE ACT AND SUB- RULE (1) OF RULE 8D OF THE RULES. 6. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE DELH I HIGH COURT WE ARE OF THE VIEW THAT DISALLOWANCE OF RS. 1,46,271/- MADE BY TH E LD. AO AND CONFIRMED BY THE LD. CIT(A) AS UNSUSTAINABLE. HENCE WE REVERS E THE FINDING OF LD. CIT(A) AND DELETE THE ABOVE DISALLOWANCE. ITA NO. 1250/DEL/2014 6 20X5 7. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 ND JUNE 2016. SD/- SD/- (H.S. SIDHU) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: THE 2 ND JUNE, 2016 VEENA COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER AR REGISTRAR