M/s Moral Trading & Investment Ltd., New Delhi V. ITO, New Delhi

ITA 3047/DEL/2011

• Counselvise Citation: 304720114 RSA 2011
• Duration Of Justice: 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 18-01-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 09-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R S NEGI
• Assessee Lawyers: MRS SWEETY K OTHARI CAS
• Keywords: Business income; Depreciation; Earning of tax free income; Tax effect
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E NEW DELHI. BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL I.T.A. NO.3047(DEL)/2011 ASSESSMENT YEAR: 2008-09 M/S MORAL TRADING & INVESTMENT INCOM E-TAX OFFICER, LTD., 81, SAINIK FARMS, VS. CIRCLE 5(4), NEW DELHI. M.B. ROAD, NEW DELHI. PAN: AAACM 1076B (APPLICANT) (RESPONDENT) APPELLANT BY : SHRI VINOD KUMAR BINDAL, & MRS. SWEETY KOTHARI, C.AS RESPONDENT BY: SHR I R.S. NEGI, SR. D.R. DATE OF HEARIN G: 18.01.2012 DATE OF PRONOUN CEMENT: 25.01.2012. ORDER PER K.G. BANSAL : A.M THE ASSESSEE HAS TAKEN UP THREE SUBSTANTIVE GROU NDS, WHICH READ AS UNDER:- (I) THE LD. CIT(A) ERRED IN LAW AND ON FACT IN CONFIR MING AN ADDITION OF RS. 2,66,554/- U/S 14A OF THE ACT IGNO RING THE FACTS AND SUBMISSIONS PLACED ON RECORD THAT NO EXPENSE S WERE INCURRED TO EARN THE SAID INCOME AND ALSO IGNORIN G THE FACT THAT INCURRENCE OF SOME EXPENSES WAS STATUTORILY RE QUIRED FOR MAINTAINING A COMPANY. THUS, THE ADDITION SO MAD E SHOULD BE DELETED. (II) WITHOUT PREJUDICE TO ABOVE GROUND NO. 1, THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN NOT RESTRICTING THE DISALLOW ANCE U/S 14A TO ITA NO. 3047(DEL)/2011 2 THE EXTENT OF RS. 2,00,849/- BEING THE TOTAL EXPEN SES CLAIMED BY THE ASSESSEE FOR THE YEAR IGNORING THE FACT THAT DISALLOWANCE U/S 14A FOR EXPENSES RELATING TO EXEMPT INCOME CANNOT EXCEED THE TOTAL EXPENSES CLAIMED BY THE ASSESSEE IN ANY MA NNER. THUS, THE DISALLOWANCE SHOULD BE RESTRICTED TO RS. 2,00,849/ - AND THE ADDITION IN EXCESS TO THE SAID AMOUNT SHOULD BE DELETED. (III) WITHOUT PREJUDICE TO ABOVE GROUND NO. 1 AND 2, TH E LD. CIT(A) ERRED IN LAW AND ON FACTS IN NOT ALLOCATING THE TO TAL EXPENSES BETWEEN THE TAXABLE AND EXEMPT INCOME AS THE EN TIRE EXPENSES CANNOT BE CONSIDERED AS INCURRED FOR EARNING EX EMPT INCOME. THUS, THE EXPENSES SHOULD BE PROPORTIONATELY ALLO CATED AMONG THE TAXABLE AND NON-TAXABLE INCOME. 2. THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO T HE SUBMISSIONS MADE BEFORE THE AO IN THE ASSESSMENT PROCEEDINGS. IT WAS SUBMITTED THAT THE EXPENSES CLAIMED BY THE ASSESSEE TOTAL UP TO RS. 1 ,47,759/-, THEREFORE, THE ONLY EXPENDITURE THAT CAN BE DISALLOWED UNDER THE PROVISION IS IN RESPECT OF THE SALARIES, WHICH SHOULD ALSO BE RESTRICTE D TO THE EXTENT OF THE EXPENDITURE RELATABLE TO EARNING OF THE DIVIDEND INCOME, WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME OF THE ASSESSEE. HOWEVER, THE AO DID NOT ACCEPT THE AFORESAID SUBMISSION. HE REFERRED T O THE PROVISIONS CONTAINED IN SECTION 14A OF THE AND RULE 8D OF THE INCOM E TAX RULES, 1962. THEREAFTER, HE COMPUTED THE AMOUNT TO BE DISALL OWED AT RS. 2,66,554/-. 2.1 THEREAFTER, HE REFERRED TO THE FINDINGS OF THE LD. CIT(APPEALS) IN THE IMPUGNED ORDER. THE SUBMISSIONS OF THE ASSESSEE BEFORE THE AO HAVE BEEN ITA NO. 3047(DEL)/2011 3 SUMMARIZED AND IT IS ALSO MENTIONED THAT INVEST MENT IN SHARES AS ON 31.03.2008 AMOUNTED TO RS. 5,20,20,372/-. IN THE S UBMISSIONS IT WAS REITERATED THAT THE TOTAL EXPENSES AMOUNT TO RS. 1,59,533/-. THIS INCLUDES EXPENSES INCURRED IN STATUTORY COMPLIANCE AND F OR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. THEREFORE, THE AO SHOU LD HAVE RESTRICTED THE DISALLOWANCE OF THE EXPENSES TO ONLY THOSE EXPENS ES WHICH HAVE BEEN INCURRED IN EARNING THE TAX-FREE INCOME. THE LD . CIT(APPEALS) CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFOR E HIM. HE CAME TO THE CONCLUSION THAT THE PROVISIONS CONTAINED IN RULE 8D ARE APPLICABLE TO THIS YEAR (ASSESSMENT YEAR 2008-09), AS HELD BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, (2010) 194 TAXMAN 203. THEREFORE, THE AO HAD NO OPTION BUT TO WORK OUT THE DISALLOWANCE IN ACCORDANCE WITH THE AFORE SAID PROVISIONS. ACCORDINGLY, THE APPEAL OF THE ASSESSEE HAS BEEN DISMISSED. 3. BEFORE US, IT IS SUBMITTED THAT THE ASSESS EE EARNED DIVIDEND INCOME OF RS. 3,848/- ONLY ON INVESTMENTS IN SHAR ES OF ABOUT RS. 5.20 CRORE. IT WAS SUBMITTED THAT NO EXPENDITURE HA S BEEN INCURRED IN EARNING THE DIVIDEND INCOME. THE WHOLE OF THE INVESTMENT HAS BEEN MADE OUT OF OWN FUNDS. THEREFORE, NO AMOUNT COULD BE DISALLOW ED IN COMPUTING THE ITA NO. 3047(DEL)/2011 4 BUSINESS INCOME. THE TOTAL EXPENDITURE DEBITED T O PROFIT AND LOSS ACCOUNT AMOUNTS TO RS. 2,38,786/-, WHICH ALSO INCLUDES DEP RECIATION OF RS. 37,937/-. THE ASSESSEE HAD EARNED TOTAL INCOME OF RS. 5,41 ,451/-, OUT OF WHICH DIVIDEND INCOME AMOUNTED TO RS. 3,848/- ONLY. AS AGAINST THE TOTAL EXPENDITURE AND DEPRECIATION OF RS. 2,38,786/-, THE LD. CIT(APPEALS) HAS DISALLOWED A SUM OF RS. 2,68,554/-. IN OTHER WOR DS, THE DISALLOWANCE MADE IS MORE THAN THE TOTAL EXPENDITURE INCURRED, WHICH IS PATENTLY INCORRECT ON THE FACE OF THE RECORD. IT IS REI TERATED THAT NO EXPENDITURE HAS BEEN INCURRED IN EARNING THE DIVIDEND INCOME, T HEREFORE, NOTHING CAN BE DISALLOWED IN COMPUTING THE TOTAL INCOME OF THE AS SESSEE. 3.1 IN REPLY, THE LD. SENIOR DR RELIED ON THE ORD ERS OF THE AUTHORITIES BELOW. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. SUB-SECTION (1) OF SECTION 14A PROVI DES THAT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITURE INCURRE D BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TH E TOTAL INCOME UNDER THIS ACT. FROM THE LANGUAGE OF THE SECTION, IT IS CL EAR THAT ONLY THAT EXPENDITURE CAN BE DISALLOWED FROM THE TOTAL EX PENDITURE WHICH HAS BEEN ITA NO. 3047(DEL)/2011 5 INCURRED FOR EARNING TAX-FREE INCOME. SUB-SECTI ON (2) PROVIDES THAT IF THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORR ECTNESS OF THE CLAIM OF THE ASSESSEE IN THIS BEHALF, HE SHALL DETERMINE THE AM OUNT OF EXPENDITURE INCURRED IN RELATION TO EARNING SUCH INCOME. FRO M THE PLAIN STATUTORY LANGUAGE IT FOLLOWS THAT THE ASSESSING OFFICER HAS TO CONSIDER THE CLAIM OF THE ASSESSEE WITH REFERENCE TO THE ACCOUNTS AND THE METHOD PRESCRIBED FOR DETERMINING THE DISALLOWANCE HAS TO BE FOLLOWED ONLY IF HE IS NOT SATISFIED WITH THE CLAIM MADE BY THE ASSESSEE. THIS PROCEDURE ALSO APPLIES IN A CASE WHERE IT IS CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED, AS PROVIDED IN SUB-SECTION (3). IT WILL BE CLEAR FRO M THE AFORESAID THAT THE ASSESSING OFFICER HAS TO FIRST EXAMINE THE CLAIM MADE BY THE ASSESSEE WITH REFERENCE TO BOOKS OF ACCOUNT. IF HE IS NOT S ATISFIED THAT THE CLAIM IS CORRECT, THEN, HE MAY RESORT TO THE PROVISION CONTAINED IN RULE 8D. NEITHER THE ASSESSING OFFICER NOR THE LD. CIT(APP EALS) HAS EXAMINED THE CLAIM OF THE ASSESSEE OF NIL EXPENDITURE WITH REFERENCE TO THE ACCOUNTS OF THE ASSESSEE, SO MUCH SO THAT THE DISALLOWANCE EXCEEDS THE TOTAL EXPENDITURE DEBITED IN THE BOOKS OF ACCOUNT. A N EXPENDITURE WHICH HAS NOT BEEN CLAIMED CANNOT BE DISALLOWED SIMPLY BECA USE THE WORKING AS PER RULE 8D LEADS TO A PARTICULAR AMOUNT OF DISALLO WANCE. THEREFORE, IN ANY CASE THE DISALLOWANCE COULD NOT HAVE EXCEEDED TH E SUM OF RS. 2,38,786/-. ITA NO. 3047(DEL)/2011 6 FURTHER, THE LOWER AUTHORITIES HAVE NOT MET WITH THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE IS DISALLOWABLE UNDER AFORES AID PROVISION. THE JURISDICTION TO INVOKE RULE 8D CAN BE ASSUMED ONLY AFTER REJECTING THE CLAIM OF THE ASSESSEE ON PROPER BASIS. IN A SIT UATION LIKE THIS, THE MATTER SHOULD NORMALLY BE RESTORED TO THE FILE OF THE AO WHERE THE IRREGULARITY HAS TAKEN PLACE. HOWEVER, SINCE THE TAX EFFECT IS NIL, WE THINK IT FIT TO ACCEPT THE CONTENTION OF THE ASSESSEE THAT NO EX PENDITURE SHOULD HAVE BEEN DISALLOWED. IT IS ORDERED ACCORDINGLY. 5. IN THE RESULT, THE APPEAL IS ALLOWED. SD/- SD/- (RAJPAL YADAV) (K.G. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER SP SATIA COPY OF THE ORDER FORWARDED TO:- (I) MORAL TRADING & INVESTMENT LTD., NEW DELHI. (II) ITO, CIRCLE 5(4), NEW DELHI. (III) CIT(A) (IV) CIT (V) THE D.R., ITAT, NEW DELHI. ASSISTANT REGISTRAR.