Mr.Prakash Gurbaxani, Bangalore V. Deputy Commissioner of Income-Tax, Bangalore

ITA 2069/BANG/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7637 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-09-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 28-11-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B R RAMESH JT BENGALURU
• Assessee Lawyers: RAJESWARI S
• Keywords: Earning of tax free income
• Section: 142(1); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI LALIET KUMAR, JUDICIAL MEMBER AND SHRI MANJUNATHA G, ACCOUNTANT MEMBER ITA NO.2069/BANG/2016 ASSESSMENT YEAR : 2011-12 SHRI PRAKASH GURBAXANI, 249, PALM MEALDOWNS, AIRPORT WHITEFIELD ROAD, RAMAGONDANAHALLI, BENGALURU 560 034. PAN: AAUPG 9363Q VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 5(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : MS. RAJESWARI S., CA RESPONDENT BY : SHRI B.R. RAMESH, JT. CIT(DR)(ITAT), BENGALURU DATE OF HEARING : 04.09.2017 DATE OF PRONOUNCEMENT : 06.09.2017 O R D E R PER MANJUNATHA G., ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF CIT(APPEALS)-IV, BANGALORE DATED 30.08.2016 AND IT PERTAINS TO AY 2011- 12. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS AN INDIVIDUAL, DERIVES INCOME FROM PROFESSION, CAPITAL GAINS AND O THER SOURCES, FILED HIS RETURN OF INCOME FOR THE AY 2011-12 DECLARING TOTAL INCOME OF ITA NO.2069/BANG/2016 PAGE 2 OF 7 RS.25,19,332. THE CASE HAS BEEN SELECTED FOR SCRUT INY AND ACCORDINGLY NOTICES U/S. 143(2) & 142(1) OF THE INCOME-TAX ACT, 1961 [THE ACT] WERE ISSUED. IN RESPONSE TO THE NOTICES, THE AR OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FILED NECESSARY DETAILS AS CALLED FOR. 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAS EARNED EXEMPT INCOME IN THE NATURE OF DIVIDEND FROM SHARES, HOWEVER, FAILED TO DISALLOW EXPENDITURE INC URRED IN RELATION TO EXEMPT INCOME. THEREFORE, HE ISSUED A SHOW CAUSE N OTICE AS TO WHY THE EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME S HALL NOT BE DISALLOWED UNDER THE PROVISIONS OF SECTION 14A R.W. RULE 8D OF THE INCOME-TAX RULES, 1962 [THE RULES]. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE FILED HIS REPLY. THE ASSESSEE SUBMITTED THAT HE DI D NOT CLAIM ANY EXPENDITURE AGAINST THE EXEMPT INCOME, HENCE DISALL OWANCE OF EXPENDITURE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 14A R. W. RULE 8D OF THE RULES HAS NO APPLICATION. THE AO AFTER CONSIDERING THE E XPLANATION OF THE ASSESSEE OBSERVED THAT THE ASSESSEE EXPLAINED THAT NO EXPENDITURE HAS BEEN INCURRED TOWARDS EXEMPT INCOME IS NOT ACCEPTAB LE FOR THE REASON THAT ASSESSEE HAS NOT MAINTAINED SEPARATE BOOKS OF ACCOU NT FOR INVESTMENT ACTIVITY. THE AO FURTHER OBSERVED THAT EXPENSES IN THE NATURE OF TELEPHONE AND COMMUNICATION EXPENSES, BANK CHARGES, AUDIT FEE S, TRAVEL EXPENSES, ETC. ARE COMMON EXPENDITURE INCURRED FOR BOTH THE A CTIVITIES, THEREFORE, INVOKED THE PROVISIONS OF SECTION 14A AND COMPUTED THE DISALLOWANCE UNDER RULE 8D(1) AND WORKED OUT THE DISALLOWANCE OF RS.3,83,969 AND ITA NO.2069/BANG/2016 PAGE 3 OF 7 ADDED TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEV ED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(APPEALS). 4. BEFORE THE CIT(APPEALS), THE ASSESSEE HAS REITER ATED HIS SUBMISSIONS MADE BEFORE THE AO. THE CIT(APPEALS), AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE OBSERVED THAT SECTION 1 4A R.W. RULE 8D(III) PROVIDES THE LEGAL MANDATE FOR WORKING OUT THE INDI RECT COST ATTRIBUTABLE TOWARDS EXEMPT INCOME. AS PER CLAUSE (III), DISALL OWANCE OF INDIRECT EXPENDITURE IN RELATION TO EXEMPT INCOME SHOULD BE WORKED OUT @ 0.5% OF THE AVERAGE VALUE OF INVESTMENTS. SINCE THE ASSESS EE HAS FAILED TO FILE BREAK-UP OF EXPENDITURE INCURRED IN RELATION TO EXE MPT INCOME AND NORMAL PROFESSIONAL ACTIVITY, THE AO HAS APPROPRIATELY APP LIED THE RELEVANT PROVISIONS OF SECTION 14A R.W. RULE 8D(III) AND WO RKED OUT DISALLOWANCE OF RS.3,83,969. THE CIT(APPEALS) ACCORDINGLY UPHELD TH E ADDITION MADE BY THE AO TOWARDS DISALLOWANCE OF EXPENSES IN RELATION TO EXEMPT INCOME. AGGRIEVED BY THE CIT(APPEALS) ORDER, THE ASSESSEE I S IN APPEAL BEFORE US. 5. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE L D. CIT(APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF EXPENDITURE U/S. 14A R.W. RULE 8D(2)(III) OF THE RULES, EVEN THOUGH THE ASSESSEE H AS PROVED WITH NECESSARY EVIDENCE THAT NO EXPENDITURE HAS BEEN INC URRED IN RELATION TO EXEMPT INCOME. THE LD. AR FURTHER SUBMITTED THAT T HE AO HAS DISALLOWED EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 1 4A AND COMPUTED DISALLOWANCES UNDER RULE 8D(2)(III) WITHOUT ESTABLI SHING THE NEXUS BETWEEN ITA NO.2069/BANG/2016 PAGE 4 OF 7 THE EXPENDITURE INCURRED IN RELATION TO EARNED EXEM PT INCOME. THE ASSESSEE BEING A PROFESSIONAL HAS MAINTAINED BOOKS OF ACCOUNT FOR THE PROFESSIONAL ACTIVITY AND ALL EXPENDITURE HAVING NE XUS WITH HIS PROFESSIONAL INCOME. THE ASSESSEE HAS NOT DEBITED ANY EXPENDITU RE IN RELATION TO EXEMPT INCOME TO THE PROFIT & LOSS ACCOUNT, NOR CRE DITED EXEMPT INCOME TO THE PROFIT & LOSS ACCOUNT. THE ASSESSEE HAS ROUTED ALL HIS INVESTMENT ACTIVITY THROUGH CAPITAL ACCOUNT, THEREFORE DISALLO WING EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 14A R.W. RULE 8D IS INCORRECT. 6. THE LD. DR STRONGLY SUPPORTED THE ORDER OF CIT(A PPEALS). 7. WE HAVE HEARD BOTH THE SIDES AND CONSIDERED THE MATERIAL AVAILABLE ON RECORD. THE AO DISALLOWED EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT AND COMPUTED DISALLOWANCES UNDER RULE 8D(2)(III) OF THE RULES. ACCORDING TO THE AO, THE ASSESSEE HAS FAILED TO MAINTAIN SEPARATE BOOKS OF A CCOUNT FOR INVESTMENT ACTIVITY AND HENCE THE COMMON EXPENDITURE INCURRED LIKE TELEPHONE & COMMUNICATION EXPENSES, BANK CHARGES, AUDIT FEES AN D TRAVELLING EXPENSES, ETC. ARE NATURALLY INVOLVED INVESTMENT AC TIVITY AND THEREFORE, THE ASSESSEE NECESSARILY HAS TO DISALLOW THE EXPENDITUR E INCURRED IN RELATION TO EXEMPT INCOME. HE, THEREFORE, WORKED OUT THE DISAL LOWANCES UNDER THE PROVISIONS OF RULE 8D(2)(III) OF THE RULES. 8. THE ASSESSEE CLAIMS THAT NO SPECIFIC EXPENDITURE HAS BEEN INCURRED IN RELATION TO EXEMPT INCOME. THE ASSESSEE FURTHER CLAIMS THAT HE HAS ITA NO.2069/BANG/2016 PAGE 5 OF 7 MAINTAINED BOOKS OF ACCOUNT FOR HIS PROFESSIONAL AC TIVITY AND INVESTMENT ACTIVITY HAS BEEN ROUTED THROUGH CAPITAL ACCOUNT. ALL EXPENDITURE DEBITED TO PROFIT & LOSS ACCOUNT ARE HAVING NEXUS WITH PROFESS IONAL INCOME. THEREFORE, THE AO WAS INCORRECT IN DISALLOWING EXPE NSES BY INVOKING RULE 8D(2)(III). 9. HAVING HEARD BOTH THE SIDES, WE DO NOT FIND ANY MERIT IN THE ARGUMENTS OF THE ASSESSEE FOR THE REASON THAT AS PE R THE PROVISIONS OF SECTION 14A(3) OF THE ACT, SUB-SECTION (2) SHALL AL SO APPLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDITURE H AS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT. IN THIS CASE, THE ASSESSEE HAS EARNED E XEMPT INCOME AND MAINTAINED COMMON BOOKS OF ACCOUNT FOR HIS PROFESSI ONAL ACTIVITY AND INVESTMENT ACTIVITY. THE ASSESSEE HAS CLAIMED CERT AIN COMMON EXPENDITURE LIKE TELEPHONE AND COMMUNICATION EXPENS ES, TRAVELLING EXPENSES, BANK CHARGES AND AUDIT FEE ETC. ALL THES E EXPENSES ARE COMMON IN NATURE AND THE POSSIBILITY OF USING THE C OMMON EXPENDITURE FOR THE INVESTMENT ACTIVITY CANNOT BE RULED OUT. ONCE THERE IS A COMMON EXPENDITURE AND THE ASSESSEE FAILED TO FURNISH SEPA RATE EXPENDITURE IN RELATION TO EXEMPT INCOME, THE AO HAS TO WORK OUT D ISALLOWANCES UNDER THE PROVISIONS OF SECTION 14A OF THE ACT BY INVOKING TH E PROVISIONS OF RULE 8D(2)(III) OF THE RULES. ITA NO.2069/BANG/2016 PAGE 6 OF 7 10. THE PROVISIONS OF RULE 8D(2)(III) PROVIDES FOR DISALLOWANCE OF INDIRECT EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME @ 0.5 OF THE AVERAGE VALUE OF INVESTMENT. IN THIS CASE, THE AO HAS WORKED OUT THE DISALLOWANCES OF EXPENDITURE UNDER THE PROVISIONS O F RULE 8D(2)(III) OF THE RULES. THEREFORE, WE ARE OF THE CONSIDERED VIEW TH AT THE AO HAS RIGHTLY INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT R. W. RULE 8D(2)(III) OF THE RULES TO WORK OUT THE DISALLOWANCES OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME. THE CIT(APPEALS) AFTER CONSIDERED T HE RELEVANT PROVISIONS OF THE ACT HAS RIGHTLY UPHELD THE ADDITIONS MADE BY THE AO. WE DO NOT FIND ANY ERROR IN THE ORDER OF CIT(APPEALS). HENCE, WE ARE INCLINED TO UPHOLD THE ORDER OF CIT(APPEALS) AND DISMISS THE APPEAL FI LED BY THE ASSESSEE. 11. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS DI SMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 6 TH DAY OF SEPTEMBER, 2017. SD/- SD/- ( LALIET KUMAR ) ( MANJUNATHA G.) JUDICIAL MEMBER A CCOUNTANT MEMBER BANGALORE, DATED, THE 6 TH SEPTEMBER, 2017. / D ESAI S MURTHY / ITA NO.2069/BANG/2016 PAGE 7 OF 7 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.