Viney Krishan Chaudhari, New Delhi V. ACIT, New Delhi

ITA 2669/DEL/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6607 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-02-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 26-10-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 03-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: O P MEENA
• Assessee Lawyers: RAKESH NARELA
• Keywords: Business income; Earning of tax free income; Source of fund
• Section: 14A; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H NEW DELHI BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SH. SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 2669/DEL/2013 AY: 20 09-10 VINEY KRISHAN CHAUDHRI, VS ASSTT. COMMI SSIONER OF INCOME TAX, 80/1, WHS, KIRTI NAGAR, CIRCLE 16 (1), NEW DELHI. NEW DELHI-110015 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI RAKESH NARELA, CA RESPONDENT BY : SHRI O.P.MEENA, SR. DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER THE PRESENT APPEAL, FILED BY THE ASSESSEE, IS DIREC TED AGAINST THE ORDER DATED 4.2.2012 PASSED BY THE LD. CIT (A)- 19 NEW DELHI FOR ASSESSMENT YEAR 2009-10. THE GROUNDS OF APPEAL CHALLENGE THE DISALLOWANCE U/S 14A OF THE INCOME TAX ACT, 196 1 UPHELD AND ENHANCED BY THE LD. CIT (A). 2. THE ASSESSEE IS A DIRECTOR OF M/S TIP TOP GEN ERAL AGENCIES PVT. LTD. HE IS ALSO THE PROPRIETOR OF THE CONCERN M/S TRIMBLESH N SAVAS, DEALING IN TRADING OF EARTHMOVERS TYRES . DURING THE YEAR, THE ASSESSEES SOURCES OF INCOME WERE SALARY, SHORT TERM CAPITAL GAINS, LONG TERM CAPITAL GAINS, BUSINESS & PROFESSIONAL INCOME AND INCOME FROM OTHER SOURCES. THE ASSESSEE ALSO I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 2 EARNED EXEMPT INCOME IN THE FORM OF DIVIDEND AND LO NG TERM CAPITAL GAINS. EXEMPT DIVIDEND IN PERSONAL CAPACITY WAS RS.14,30,530/- AND AS THE PROPRIETOR OF M/S TRIMBLE SH N SAVAS, IT WAS RS.19,87,946/-. AGAINST THE TOTAL EX EMPT INCOME OF RS.34,18,476/-, THE ASSESSEE HAD SHOWN THE EXPENDIT URE INCURRED TO EARN THE EXEMPT INCOME AT NIL. THE ASS ESSEE WAS ISSUED A SHOW CAUSE NOTICE PRIOR TO THE APPLICATION OF RULE 8D READ WITH SECTION 14A OF THE INCOME TAX ACT, 1961 ( HEREINAFTER CALLED THE ACT) AND LATER A DISALLOWANCE OF RS.4, 31,815/-, CALCULATED @0.5% OF THE AVERAGE INVESTMENTS, WAS MA DE BY APPLYING RULE 8D. 3. ON APPEAL BEFORE THE FIRST APPELLATE AUTHORITY, THE LD. CIT (A) NOT ONLY CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BUT ALSO DIRECTED THE AO TO WORK OUT THE DI SALLOWANCE IN RESPECT OF EXEMPT INCOME AND ASSETS HELD IN PERSONA L CAPACITY. THUS, IN EFFECT, WHILE DISALLOWING THE ASSESSEES A PPEAL, THE DISALLOWANCE WAS ENHANCED. 4. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE A SSESSEE HAD INVESTED THE SURPLUS FUNDS GENERATED FROM THE BUSIN ESS IN MUTUAL FUNDS, BONDS AND SHARES AND HAD EARNED INCOM E ON SUCH INVESTMENTS IN THE FORM OF DIVIDENDS AND INTEREST. IT WAS FURTHER I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 3 SUBMITTED THAT THE ASSESSEE HAD ALREADY DISALLOWED SECURITY TRANSACTIONS TAX AMOUNTING TO RS.81,192/- DEBITED I N PROFIT/LOSS ACCOUNT ON HIS OWN INITIATIVE IN THE COMPUTATION OF INCOME. IT WAS ALSO SUBMITTED THAT THE ASSESSEE IS THE PROPRIE TOR AND HE MANAGES THE INVESTMENT RELATED WORK HIMSELF. HE AL SO SUBMITTED THAT THERE IS A FACTUAL MISTAKE IN THE FIGURES QUOT ED BY THE LD. CIT (A). IT WAS POINTED OUT WITH REFERENCE TO PAGE S 2 TO 6 OF THE PAPER BOOK THAT THE TOTAL EXPENDITURE DEBITED TO TH E PROFIT/LOSS ACCOUNT HAS BEEN TAKEN AT RS.2,83,53,900/- WHICH IN FACT IS THE TOTAL OF THE DEBIT SIDE INCLUDING THE PROFIT OF RS. 2,25,56,261/- AND THE TOTAL EXPENDITURE IS ONLY RS.57,97,639/-. IT W AS ALSO POINTED OUT THAT THE PROFIT/LOSS ACCOUNT HAD ALSO BEEN DEBI TED WITH RS.1,39,205/- BEING LOSS ON SALE OF MUTUAL FUNDS AN D THE SAME HAS ALREADY BEEN ADDED BACK BY THE ASSESSEE IN THE COMPUTATION OF INCOME. IT WAS ALSO POINTED OUT THAT THE PROFIT /LOSS ACCOUNT ALSO SHOWS IN ITS DEBIT SIDE EXPENSES OF RS.22,713/ - ON ACCOUNT OF TENDER FEES, RS.22,52,929/- ON ACCOUNT OF DIFFER ENCE IN EXCHANGE RATE AND RS.26,75,000/- ON ACCOUNT OF COMP ENSATION FOR WARRANTY CLAIM. THESE EXPENSES WERE PURELY REL ATED TO THE BUSINESS INCOME AND HAD NO CONNECTION WITH THE EXEM PT INCOME. THUS, THE BALANCE OF OTHER COMMON EXPENSES COME TO I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 4 RS.6,26,596/- ONLY WHICH INCLUDES RS.2,86,664 RELAT ING TO BANK CHARGES IN RESPECT OF TYRE BUSINESS. THE LD. AR AL SO SUBMITTED THAT THERE WAS NO COLLECTION COST FOR THE EXEMPT DI VIDEND INCOME. IT WAS SUBMITTED THAT IN THE PROPRIETORSHIP CONCERN , THE DIVIDEND RE-INVESTED AUTOMATICALLY IN MUTUAL FUNDS WAS RS.18 ,19,404/- AND CREDITED IN THE BANK DIRECTLY THROUGH ECS WAS R S. 1,68,542/- TALLYING WITH THE TOTAL DIVIDEND EARNED OF RS.19,87,946/-. SIMILARLY, IN RESPECT OF THE DIVID END EARNED IN PERSONAL CAPACITY, THE DIVIDEND REINVESTED AUTOMATI CALLY BY MUTUAL FUNDS AMOUNTED TO RS.13,44,425/- AND DIVIDEN D CREDITED DIRECTLY THROUGH ECS AMOUNTED TO RS. 96,167/- THUS TALLYING WITH THE TOTAL DIVIDEND EARNED OF RS. 14,40,592/-. 5. THE LD. DR IN RESPONSE RELIED ON THE ORDER OF LD . CIT (A). 6. THE SCHEME OF SECTION 14A HAS WITHIN IT IMPLICIT NOTION OF APPORTIONMENT IN THE CASES WHERE THE EXPENDITURE IS INCURRED FOR THE COMPOSITE/INDIVISIBLE ACTIVITIES IN WHICH TAXAB LE AND NON- TAXABLE INCOME IS RECEIVED. BUT WHEN IT IS POSSIBLE TO DETERMINE THE ACTUAL EXPENDITURE IN RELATION TO THE EXEMPT IN COME OR WHEN NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO THE EXEMPT INCOME, THEN PRINCIPLE OF APPORTIONMENT EMBEDDED IN SECTION 14 A HAS NO APPLICATION. THE OBJECTIVE OF SECTION 14 A IS NOT ALLOWING I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 5 TO REDUCE TAX PAYABLE ON THE NORMAL EXEMPT INCOME B Y DEBITING THE EXPENDITURE INCURRED TO EARN THE EXEMPT INCOME. THUS, THE EXPENSES INCURRED TO EARN EXEMPT INCOME CANNOT BE A LLOWED AND THE EXPENSES SHALL BE ALLOWED ONLY TO THE EXTENT TH EY ARE RELATED TO THE EARNING OF TAXABLE INCOME. IF THERE IS EXPEN DITURE DIRECTLY OR INDIRECTLY INCURRED IN RELATION TO EXEMPT INCOME , THE SAME CANNOT BE CLAIMED AGAINST THE INCOME, WHICH IS TAXA BLE AS IT IS HELD BY THE HONBLE SUPREME COURT IN CASE OF COMMIS SIONER OF INCOME-TAX V. WALFORT SHARE AND STOCK BROKERS P. LT D. REPORTED IN 326 ITR 1 (SC) THAT FOR ATTRACTING THE PROVISION S OF SECTION 14 A, THERE SHOULD BE PROXIMATE CAUSE FOR DISALLOWANCE WHICH AS RELATIONSHIP WITH THE TAX EXEMPT INCOME. THE EXPEN DITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT F ORM PART OF TOTAL INCOME HAS TO BE DISALLOWED. HOWEVER, IT SHOU LD BE PROXIMATE RELATIONSHIP BETWEEN THE EXPENDITURE AND THE INCOME, WHICH DOES NOT FORM PART OF TOTAL INCOME. ONCE SUCH PROXIMITY RELATIONSHIPS EXIST, THE DISALLOWANCE IS TO BE EFFE CTED. IN CASE THE ASSESSEE HAD CLAIMED THAT NO EXPENDITURE HAS BEEN I NCURRED FOR EARNING THE EXEMPT INCOME, IT IS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED A NY EXPENDITURE IN RELATION TO INCOME WHICH DID NOT FOR M PART OF TOTAL I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 6 INCOME AND IF SO, TO QUANTIFY THE EXTENT OF DISALLO WANCE. THUS, IN ORDER TO DISALLOW THE EXPENDITURE UNDER SECTION 14A , THERE MUST BE A LIVE NEXUS BETWEEN THE EXPENDITURE INCURRED AN D THE INCOME NOT FORMING PART OF TOTAL INCOME. NO NOTIONAL EXPEN DITURE CAN BE APPORTIONED FOR THE PURPOSE OF EARNING EXEMPT INCOM E UNLESS THERE IS AN ACTUAL EXPENDITURE IN RELATION TO EARNI NG THE INCOME NOT FORMING PART OF TOTAL INCOME. IF THE EXPENDITUR E IS INCURRED WITH A VIEW TO EARN TAXABLE INCOME AND THERE IS APP ARENT DOMINANT AND IMMEDIATE CONNECTION BETWEEN THE EXPEN DITURE INCURRED AND TAXABLE INCOME, THEN NO DISALLOWANCE C AN BE MADE UNDER SECTION 14A MERELY BECAUSE SOME TAX EXEMPT INC OME IS RECEIVED BY THE ASSESSEE. 7. ON GOING THROUGH THE RECORDS AND HEARING THE RIV AL SUBMISSIONS, IT IS SEEN THAT THE ASSESSEE HAS BEEN CLAIMING THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION TO EAR NING OF EXEMPT INCOME. HE HAS FILED RELEVANT DOCUMENTS BEF ORE THE AUTHORITIES BELOW BUT THE SAME HAVE NOT BEEN CONSID ERED AND ADJUDICATED UPON. IN THE PRESENT CASE, THE ASSESSI NG OFFICER DID NOT BRING ANY EVIDENCE ON RECORD TO ESTABLISH THAT ANY EXPENDITURE HAD BEEN INCURRED BY THE ASSESSEE FOR E ARNING THE EXEMPT INCOME. IN THE ABSENCE OF SUCH EVIDENCE, IT WAS PATENTLY I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 7 WRONG ON THE PART OF THE ASSESSING OFFICER TO COMPU TE DISALLOWANCE U/S 14A OF THE ACT BY MECHANICALLY APP LYING RULE 8D. WE FIND THAT THE AUDIT REPORT ON FORM 3CB REPO RTS THAT THE EXPENSES IN RESPECT OF EXEMPT INCOME WERE SHOWN AT NIL. THE ASSESSING OFFICER HAS PRESUMED THAT THE ASSESSEE MU ST HAVE INCURRED SOME EXPENDITURE FOR EARNING THE EXEMPT IN COME. THE ASSESSING OFFICER HAS ADOPTED THE FORMULA FOR ESTIM ATING EXPENDITURE ON THE BASIS OF INVESTMENTS BUT THE JUS TIFICATION FOR CALCULATING THE DISALLOWANCE IS MISSING. THE ASSES SEE HAD NOT CLAIMED ANY EXPENDITURE IN THE PROFIT/LOSS ACCOUNT, SO THE ONUS WAS ON THE ASSESSING OFFICER TO PROVE THAT OUT OF T HE EXPENDITURE INCURRED UNDER VARIOUS HEADS, SOME WERE RELATED TO EARNING OF EXEMPT INCOME. 8. OUR VIEW IS SUPPORTED FROM THE FOLLOWING JUDICIA L PRONOUNCEMENT:- 8.1 THE HON'BLE DELHI HIGH COURT IN THE CASE OF MAX OPP INVESTMENT LTD. VS CIT (I.T.A. 687/2009) HAS OPINED IN PARA 29 OF THE ORDER AS UNDER:- 29. SUB-SECTION (2) OF SECTION 14 A OF THE SAID ACT PROVIDES THE MANNER IN WHICH THE ASSESSING OFFICER IS TO DETERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 8 INCOME. HOWEVER, IF WE EXAMINE THE PROVISION CAREFU LLY, WE WOULD FIND THAT THE ASSESSING OFFICER IS REQUIRE D TO DETERMINE THE AMOUNT OF SUCH EXPENDITURE ONLY IF TH E 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 EXPENDITUR E IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, THE REQUIREMENT OF THE ASSESSING OFFICER EMBARKING UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME WOULD BE TRIGGERED ONLY I F THE ASSESSING OFFICER RETURNS A FINDING THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE. THEREFORE, THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER ENTER ING UPON A DETERMINATION OF THE AMOUNT OF THE EXPENDITU RE INCURRED IN RELATION TO EXEMPT INCOME IS THAT THE ASSESSING OFFICER MUST RECORD THAT HE , IS NOT SATI SFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE. SUB-SECTION (3) IS NOT HING BUT AN OFFSHOOT OF SUB-SECTION (2) OF SECTION 14A. SUB- SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE CLA IMS THAT NO EXPENDITURE HAS BEEN INCURRED IN RELATION T O INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID ACT. IN OTHER WORDS, SUB-SECTION (2) DEALS WITH CASES WHERE THE ASSESSEE SPECIFIES A POSITIVE AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE SAID AC T AND SUB-SECTION (3) APPLIES TO CASES WHERE THE ASSESSEE ASSERTS THAT NO EXPENDITURE HAD BEEN INCURRED IN RELATION TO EXEMPT INCOME. IN BOTH CASES, THE ASSES SING OFFICER, IF SATISFIED WITH THE CORRECTNESS OF THE C LAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, CANNOT EMBARK UPON A DETERMINATION OF THE AMOUNT OF EXPENDITURE IN ACCORDANCE WITH ANY PRESCRIBED METHOD, AS MENTIONED IN SUB-SECTION (2) OF SECTION 14A OF THE SAID ACT. IT IS ONLY IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, IN BOTH C ASES, THAT THE ASSESSING OFFICER GETS JURISDICTION TO DET ERMINE THE AMOUNT OF EXPENDITURE INCURRED IN RELATION TO S UCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 9 UNDER THE SAID ACT IN ACCORDANCE WITH THE PRESCRIBE D METHOD. THE PRESCRIBED METHOD BEING THE METHOD STIPULATED IN RULE 8D OF THE SAID RULES. WHILE REJE CTING THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE OR NO EXPENDITURE, AS THE CASE MAY BE, IN RELATION TO EXEMPT INCOME, THE ASSESSING OFFICER WO ULD HAVE TO INDICATE COGENT REASONS FOR THE SAME. 8.2 SIMILARLY, THE HON'BLE HIGH COURT OF PUNJAB & HARYANA IN THE CASE OF CIT-II VS HERO CYCLES LTD. IN I.T.A. NO . 331 OF 2009 (O&M) HAS HELD IN PARA 4 OF THE JUDGMENT THAT, THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPEND ITURE IS ALWAYS INCURRED WHICH MUST BE DISALLOWED U/S 14A AND THE I MPACT OF EXPENDITURE SO INCURRED CANNOT BE ALLOWED TO BE SET OFF AGAINST THE BUSINESS INCOME WHICH MAY NULLIFY THE MANDATE OF SE CTION 14A, CANNOT BE ACCEPTED. DISALLOWANCE U/S 14A REQUIRES FINDING OF INCURRING OF EXPENDITURE. WHERE IT IS FOUND THAT F OR EARNING EXEMPTED INCOME, NO EXPENDITURE HAS BEEN INCURRED D ISALLOWANCE U/S 14A CANNOT STAND. 8.3 MUMBAI J BENCH OF THE ITAT HAS HELD IN THE CA SE OF JUSTICE SAM P. BHARUCHA VS ACIT IN I.T.A. NO. 3889/MUM/2011 THAT NO DISALLOWANCE U/S 14A OF THE ACT IS CALLED FOR WHEN THE ASSESSEE HAS NOT INCURRED AND CLAIMED ANY EXPENDITURE FOR EA RNING THE EXEMPT INCOME. I.T.A. 2669/DEL/2013 ASSESSMENT YEAR 2009-10 10 8.4 THEREFORE, ON AN OVERALL CONSIDERATION OF THE F ACTS OF THE CASE AND RESPECTFULLY FOLLOWING THE RATIO OF THE JU DGMENTS AS AFOREMENTIONED, WE HOLD THAT THE DISALLOWANCE U/S 1 4A WAS MADE WITHOUT DUE DELIBERATION AND ANALYSIS BY THE A SSESSING OFFICER AND THE LD. CIT(A) WAS ALSO PATENTLY WRONG IN CONFIRMING, NAY, ENHANCING THE DISALLOWANCE. THE ORDER OF THE LD. CIT (A) IS QUASHED. THE GROUND RELATING TO INITIATION OF PENA LTY PROCEEDINGS U/S 271(1)(C) OF THE ACT BEING PREMATURE IS DISMISS ED. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 24/2/2 016. SD/- SD/- (J. SUDHAKAR REDDY) (SUDHANSHU SRIVAS TAVA ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: THE 24TH OF FEBRUARY, 2016 GS COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER ASSTT. REGISTRAR