Sh. Navneet Chabra, New Delhi V. ACIT, New Delhi

ITA 175/DEL/2015

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5373 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 09-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S R SENAPATI
• Keywords: Business income; Depreciation; Earning of tax free income; Onus to prove
• Section: 14A

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH E, NEW DELHI BEFORE : SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 175/DEL./2015 ASSESSMENT YEAR: 2010-11 NAVNEET CHABRA, H.NO. 20, G.F. OLD NO.165, WESTERN AVENUE, SAINIK FARM, KHANPUR, KH. NO. 265-266, NEW DELHI PAN:AADPC8762C. (APPELLANT) VS. A.C.I.T., CIRCLE 20(1), NEW DELHI (RESPONDENT) ASSESSEE BY MS. ADITI GUPTA, C.A. REVENUE BY SH. S.R. SENAPATI, SR. DR ORDER PER L.P. SAHU, A.M.: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A)-XII, NEW DELHI DATED 17.10.2014 FOR THE ASSESSMENT YEAR 2010-11 ON THE FOLLOWING GROUNDS : 1. THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN SUST AINING THE DISALLOWANCE OF RS.9,74,031/- MADE BY THE LEARNED A SSESSING OFFICER UNDER SECTION 14A OF THE ACT READ WITH RULE 8D, WITHOUT G IVING CREDENCE TO THE FACT THAT THE APPELLANT DID NOT INCUR ANY EXPENDITU RE WHICH IS RELATED TO THE EXEMPT INCOME AND THAT THE APPELLANT UTILIZED H IS OWN FUNDS FOR INVESTMENT IN SHARES AND MUTUAL FUNDS. 2. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED CIT(A ) WAS NOT JUSTIFIED IN APPROVING THE METHOD USED BY THE LEARNED ASSESSING OFFICER FOR MAKING DATE OF HEARING 15.03.2018 DATE OF PRONOUNCEMENT 03 .04.2018 ITA NO. 175/DEL./2015 2 THE DISALLOWANCE UNDER SECTION 14A OF THE ACT, WHIC H IS NOT IN ACCORDANCE WITH THE METHOD PRESCRIBED AS PER RULE 8D OF THE RU LES. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE F ILED RETURN OF INCOME AT RS.56,34,400/- ON 29.09.2010. THE CASE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICES WERE ISSUED. THE MATTER RELATES T O DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S. 14A OF THE IT ACT OF RS.9,74 ,031/-. THE ASSESSEE WAS ENGAGED IN PURCHASE AND SALE OF SHARES AND DERIVED INCOME FROM HOUSE PROPERTY, INCOME FROM CAPITAL GAINS AND INCOME FROM OTHER SOURCES. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS RE CEIVED DIVIDEND FROM MUTUAL FUNDS OF RS.74,66,181/-. THE TOTAL TURNOVER OF SHARES IS OF RS.2,14,48,235/- AND THE ASSESSEE HAS INVESTED IN M UTUAL FUNDS OF RS.14,96,04,322/- DURING THE YEAR. ON PERUSAL OF TH E PROFIT AND LOSS ACCOUNT AND COMPUTATION OF INCOME FILED, THE ASSESSEE HAS C LAIMED TOTAL EXPENSES UNDER DIFFERENT HEADS OF RS.13,49,289/-, OUT OF WHI CH THE ASSESSEE HIMSELF HAS DISALLOWED EXPENSE AS PERSONAL IN NATURE OF RS.2,35 ,615/-. THUS, THE TOTAL EXPENDITURE DEBITED TO THE PROFIT AND LOSS ACCOUNT IS RS.11,13,674/-. THE ASSESSING OFFICER WHILE CALCULATING THE DISALLOWANC E U/S. 14A DID NOT APPLY RULE 8D, BUT HE DEVELOPED A FORMULA TO WORK OUT THE PROPORTIONATE EXPENDITURE RELATABLE TO BUSINESS INCOME AND THE EX PENDITURE RELATABLE TO INVESTMENT IN MUTUAL FUNDS, ON WHICH THE EXEMPT INC OME WAS EARNED BY THE ASSESSEE BY HOLDING THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SHARES. HE ITA NO. 175/DEL./2015 3 ACCORDINGLY, DISALLOWED THE EXPENDITURE OF RS.9,74, 031/- U/S. 14A. THE LD. CIT(A) IN APPEAL CONFIRMED THE ACTION OF THE ASSESS ING OFFICER. AGGRIEVED BY THE IMPUGNED ORDER, THE ASSESSEE IS IN APPEAL BEFOR E US. 3. THE LD. AR SUBMITTED THAT THE ASSESSEE IS AN IND IVIDUAL HAVING 2 PORTFOLIOS, I.E., INVESTMENT IN MUTUAL FUNDS AND TR ADING IN SHARES AND EARNED DIVIDEND INCOME OF RS.74,66,181/- ON MUTUAL FUNDS. THERE IS NO COST OF HIS TIME AND THERE IS NO BORROWING COST. TOTAL EXPENSE DEBITED TO THE PROFIT AND LOSS ACCOUNT IS RS.13,49,291/-. FOR DISALLOWANCE UN DER SECTION 14A, THE EXPENSE MUST HAVE A NEXUS WITH THE EARNING OF DIVID END INCOME. RELIANCE IS PLACED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ AND BOYCE MFG CO. LTD. VS. DCIT(2010) 328 ITR 81. THE A SSESSEE SUO MOTO DISALLOWED RS.2,35,615/- BEING 20% OF TELEPHONE AND CAR EXPENSES BEING DEPRECIATION, INSURANCE, REPAIR AND PETROL EXPENSES IN HIS COMPUTATION. NO FURTHER DISALLOWANCE IS WARRANTED, THERE BEING NO N EXUS OF THE EXPENSES INCURRED WITH THE DIVIDEND INCOME. THE QUANTUM OF D IVIDEND INCOME DOES NOT DECIDE THE DISALLOWANCE UNDER SECTION 14A. THE DISA LLOWANCE HAS BEEN MADE BY THE ASSESSING OFFICER ONLY ON PRESUMPTION THAT C ERTAIN EXPENSES MIGHT HAVE BEEN INCURRED FOR EARNING TAX-FREE INCOME. NO NEXUS BETWEEN EXPENSES AND DIVIDEND INCOME HAS BEEN ESTABLISHED BY THE ASS ESSING OFFICER. IT WAS ITA NO. 175/DEL./2015 4 LASTLY SUBMITTED THAT THE DISALLOWANCE MADE U/S. 14 A IS NOT IN ACCORDANCE WITH THE PRESCRIBED RULES. THE LD. AR STRONGLY RELI ED ON THE DECISION IN THE CASE OF ASSESSEE ITSELF FOR A.Y. 2011- 12 PASSED BY SMC OF TRIBUNAL, WHEREIN THE IDENTICAL ISSUE HAS BEEN DECIDED IN FAVOUR OF THE A SSESSEE. 4. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDE RS OF LOWER AUTHORITIES AND SUBMITTED THAT THE LD. AUTHORITIES BELOW HAVE C ORRECTLY CALCULATED THE DISALLOWANCE BECAUSE THE ASSESSEE IS ENGAGED IN SHA RE TRANSACTION BUSINESS. THE ASSESSEE HAS INCURRED EXPENDITURE BOTH FOR INVE STMENT IN SHARES AS WELL AS FOR SALE OF SHARES. THEREFORE, IT CANNOT BE SAID THAT NO EXPENDITURE ARE ATTRIBUTABLE TO THE INVESTMENT IN MUTUAL FUNDS WITH OUT MAKING IT CLEAR AS TO HOW MUCH EXPENDITURE WAS INCURRED FOR INVESTMENT IN SHARES/MUTUAL FUNDS AND HOW MUCH FOR SALE OF SHARES/MUTUAL FUNDS. THE A SSESSEE HAS NOT MADE ANY SUO MOTTO DISALLOWANCE OF EXPENDITURE U/S. 14A TOWARDS EARNING OF INCOME WHICH DOES NOT FORM THE PART OF TOTAL INCOME . THE ASSESSEE HAS DISALLOWED A SUM OF RS.2,35,615/- AS PERSONAL EXPEN DITURE. 5. AFTER HEARING BOTH THE SIDES AND PERUSING THE MA TERIALS AVAILABLE ON RECORD, WE FIND THAT SMC BENCH OF TRIBUNAL IN ASSES SEES OWN CASE ON THE SAME SET OF FACTS AND CIRCUMSTANCES, HAS ALLOWED TH E APPEAL OF THE ASSESSEE ON ITA NO. 175/DEL./2015 5 THE IDENTICAL ISSUE. IN THAT CASE, THE TRIBUNAL AFT ER CONSIDERING THE RELEVANT PROVISIONS OF SECTION 14A READ WITH RULE 8D, DECISI ON OF BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT, 328 ITE 61, DECISION OF SPECIAL BENCH OF TRIBUNAL IN ITO VS. DAGA CAPITAL M ANAGEMENT (P) LTD., 117 ITD 169 (SB), DECISION OF HONBLE SUPREME COURT IN CIT VS. WALLFORT SHARES & STOCK BROKERS LTD., 233 CTR(SC) 42, OBSERVED AS UND ER : 13. THE BASIC PRINCIPLE OF TAXATION IS TO TAX THE N ET INCOME. ON THE SAME ANALOGY, THE EXEMPTION IS ALSO TO BE ALLOWED ON NET BASIS I.E. GROSS RECEIPTS MINUS RELATED EXPENSES. THEREFORE, IF ANY EXPENDITUR E IS DIRECTLY RELATED TO EXEMPTED INCOME, IT CANNOT BE ALLOWED TO BE SET OFF AGAINST TAXABLE PROFIT. ON THE SAME ANALOGY, IN MY OPINION, IF ANY EXPENDIT URE IS DIRECTLY RELATED TO TAXABLE INCOME, IT CANNOT BE ALLOWED TO BE SET O FF AGAINST THE EXEMPTED INCOME MERELY BECAUSE SOME INCIDENTAL BENEFIT HAS A RISEN TOWARDS EXEMPTED INCOME. BEFORE MAKING ANY DISALLOWANCE U/S 14A, THE AO IS REQUIRED TO RECORD A SATISFACTION, HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THAT CLAIM OF ASSESSEE THAT EXPENDITURE I NCURRED IS NOT RELATED TO THE INCOME FORMING PART OF THE TOTAL INCOME IS INCO RRECT. SUCH SATISFACTION MUST BE ARRIVED AT ON THE OBJECTIVE BASIS. AO IS AL SO REQUIRED TO RECORD THE REASONS FOR ARRIVING AT SUCH SATISFACTION. THE ASSES SING OFFICER IN THIS CASE NOWHERE POINTED OUT THE PROXIMATE CONNECTION OF OTH ER EXPENSES NOT APPORTIONED BY THE ASSESSEE FOR THE EARNING OF THE DIVIDEND INCOME. 14. I NOTED THAT THE AO IS NOT SATISFIED WITH THE E XPENDITURE INCURRED BY THE ASSESSEE AND HE ASSUMED AS IF THE ASSESSEE HAS NOT MADE ANY DISALLOWANCE OUT OF THE DIVIDEND INCOME WHILE THE F ACT WAS ENTIRELY DIFFERENT. THE ASSESSEE HAS COMPUTED THE DISALLOWANC E AND MADE THE DISALLOWANCE AMOUNTING TO RS. 2,33,692/-. THE AO EVE N DID NOT BOTHER TO GIVE AN OPPORTUNITY TO THE ASSESSEE. HE JUST ASKED THE ASSESSEE AT THE FAG END OF THE HEARING AS TO WHY THE DISALLOWANCE SHOUL D NOT BE MADE U/S 14A READ WITH RULE 8D. THE AO HIMSELF COMPUTED THE DISA LLOWANCE ON THE BASIS OF THE TURNOVER AND MADE THE DISALLOWANCE AT RS. 12 ,89,010A EVEN IGNORING THE DISALLOWANCE MADE BY THE AO. THE AO MER ELY OBSERVED THAT THE ASSESSEE HAS CLAIMED ALL THE EXPENSES AS BUSINE SS EXPENSES WHILE THESE ITA NO. 175/DEL./2015 6 EXPENSES ARE ATTRIBUTABLE TO BOTH BUSINESS AS WELL AS INVESTMENT IN MUTUAL FUNDS. 15. EVEN THE AO HAS NOT POINTED OUT THE EXPENSES EX CLUDED BY THE ASSESSEE FOR DISALLOWANCE HAS PROXIMATE CONNECTION WITH DIVI DEND INCOME. IN MY OPINION, THE ASSESSING OFFICER BEFORE REJECTING THE DISALLOWANCE COMPUTED BY THE ASSESSEE MUST GIVE A CLEAR CUT FINDING HAVIN G REGARD TO THE ACCOUNTS OF THE ASSESSEE HOW THE OTHER EXPENDITURE CLAIMED B Y THE ASSESSEE OUT OF NON EXEMPT INCOME IS RELATED WITH THE EXEMPT INCOME . NO DISCREPANCY IN THE CLAIM OF THE ASSESSEE WAS POINTED OUT. THE ASSES SING OFFICER, IN MY OPINION, IN VIEW OF THE HON BOMBAY HIGH COURT DECIS ION IS BOUND TO RECORD SATISFACTION AS TO HOW THE EXPENSES CLAIMED BY THE ASSESSEE HAVE BEEN INCURRED ON EARNING DIVIDEND INCOME WERE NOT SUFFIC IENT AND CORRECT. I HAVE ALREADY HELD THAT THE ONUS TO PROVE IN THIS RE GARD LIES ON THE ASSESSING OFFICER. ALTHOUGH THE LD. DR HAD VEHEMENT LY CONTENDED AND TRIED TO BUILD UP HIS CASE BY SUBSTITUTING THE REASONS GI VEN BY THE CIT(APPEAL) IN PLACE OF THE AO, BUT FAILED TO BRING ANY COGENT MAT ERIAL OR EVIDENCE IN THIS REGARD WHICH MAY PROVE THAT THE OTHER EXPENSES CLAI MED BY THE REVENUE FOR APPORTIONMENT HAD PROXIMATE CONNECTION WITH THE EARNING OF THE DIVIDEND INCOME. IN MY OPINION UNTIL AND UNLESS THI S IS PROVED OR ESTABLISHED BY THE REVENUE, THE ASSESSING OFFICER D OES NOT HAVE ANY POWER TO REJECT THE ACCOUNTS OF THE ASSESSEE AND TAKE THE SHELTER OF RULE 8D FOR COMPUTING THE DISALLOWANCE OUT OF THE EXEMPT INCOME . 6. FOR THIS VIEW, THE TRIBUNAL HAS RELIED ON THE OR DER IN DCIT VS. JINDAL PHOTO LTD. (ORDER OF ITAT DATED 07.01.2011 AND AVSH ESH MERCANTILE P. LTD. VS. DCIT (ITA NO. 5779/MUM/2006 & 208/MUM/2009). THE TR IBUNAL HAS ALSO CONSIDERED THE DECISIONS RELIED BY THE LD. DR IN AC IT VS. CITICORP FINANCE (IND.) LTD., 108 ITD 457, SPIC VS. DCIT, 93 TTJ (CH ENNAI) 161 AND ACIT VS. PREMIUM CONSOLIDATED CAPITAL TRUST 83 TTJ (BOM), WH ICH HAVE BEEN SUCCESSFULLY DISTINGUISHED FROM THE FACTS OF THE CA SE. MOREOVER, THE FORMULA ADOPTED BY THE ASSESSING OFFICER IN THE INSTANT CAS E IS NOWHERE PRESCRIBED ITA NO. 175/DEL./2015 7 UNDER RULE 8D. SINCE THERE IS NO CHANGE IN THE FACT S AND CIRCUMSTANCES ATTENDING TO THE PRESENT CASE, RESPECTFULLY FOLLOWI NG THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2011-12 (SUPRA), WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. ACCORDINGLY, THE APPEAL OF THE ASS ESSEE DESERVES TO BE ALLOWED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD APRIL, 2018. SD/- SD/- (BHAVNESH SAINI) ( L.P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 3 RD APRIL, 2018 *AKS* COPY OF ORDER FORWARDED TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI