ACIT, Circle-61(1), New Delhi V. Gautam Khaitan, New Delhi

ITA 4205/DEL/2019

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1233 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 12-09-2022
• Assessment Year: 2012-2013
• Appeal Filed On: 07-05-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Business expenditure; Earning of tax free income; TDS; Rule 8D
• Section: 147; 10; 14A

Judgement Text

Page | 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘H’, NEW DELHI Before Sh. C. N. Prasad, Judicial Member Dr. B. R. R. Kumar, Accountant Member ITA No. 2705/Del/2019 Asstt. Year : 2012-13 Gautam Khaitan, L/H of Late Om Prakash Khaitan, B-1, Defence, Colony, New Delhi Vs ACIT, Circle-61(1), New Delhi (APPELLANT) (RESPONDENT) PAN No. AHJPK7370H ITA No. 4205/Del/2019 Asstt. Year : 2012-13 ACIT, Circle-61(1), New Delhi Vs Gautam Khaitan, L/H of Late Om Prakash Khaitan, B-1, Defence, Colony, New Delhi (APPELLANT) (RESPONDENT) PAN No. AHJPK7370H Assessee by : Shri S. P. Agrwal, FCA Revenue by : Shri Rajesh Kumar, CIT(DR) Date of Hearing: 13.09.2022 Date of Pronouncement: 11.10.2022 ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the Assessee and revenue against the order of the ld. CIT(A)-34, New Delhi dated 15.02.2019 for Assessment Year 2012-13. 2. The Assessee has raised the following grounds of appeal in ITA No. 2705/Del/2019: “1. On the facts and in circumstances of the case the ld. Commissioner of Income Tax (Appeals)-34, has erred in confirming additions towards disallowance u/s 14A amounting to Rs. 21,38,981/- calculated as per provisions of rule 8D of Income Tax Rules.” Page | 2 3. Facts as taken from the orders are as under: 4. The assessee has made investments in shares/mutual funds/bonds etc. During the year under consideration, earned dividend on shares and mutual funds amounting to Rs. 25,98,155/-, Rs. 36,46,831/- under the head Long Term Capital Gain on Mutual Fund and Rs. 67,7261- under the head Interest on GOI Bonds, which were treated as exempt. During the course of assessment proceedings, the assessee was specifically asked, vide note sheet entry dated 10.03.2015 to give note on Section 14A of the IT Act read with Rule 8D of IT Rules. 5. The AR of the assessee filed reply vide letter dated 16.03.2015 which is stated as under: "The assessee has not incurred any direct or indirect expenditure in connection with investments made in securities and mutual funds where he has earned exempted income as dividend or capital gain. We enclose herewith a confirmation from M/s Pioneer Client Associates Pvt. Ltd. analyst and portfolio manager to the effect that they have not charged any management fees from Mr. O.P. Khaitan. Disallowance towards STT Paid amounting to Rs.50,521/- is already made in the computation of Income. Since the assessee has not incurred any direct or indirect expenses in connection with investments in securities etc., no disallowance is required to be made u/s 14A of Tax Act read with Rule8D of Income Tax Rules." 6. The AO held that the basic object of section 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. Based on the decision in CIT v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC) it was held that, (a) The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed Page | 3 (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business; (d) The basic principle of taxation is to tax net income. This principle applies even for the purposes of section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance is established- which is the relationship of the expenditure with income which does not form part of the total income-a disallowance has to be effected. 7. The AO held that all expenditure incurred in relation to income which does not form part of the total income under the provisions of the Act has to be disallowed under section 14A. Section 10 provides for incomes which shall not be included in computing the total income of a previous year of any person. Plainly dividend income and Long Term Capital Gain from mutual funds & shares are incomes which by virtue of the provisions of section 10 do not form part of the total income under the Act. 8. The Expenditure incurred in relation to the earning of such income has to be disallowed under section 14A. The expression "income which does not form part of the total income" under the Act must receive its plain and grammatical construction. Such income is income which is not includible in computing the total income of the assessee under the provisions of the Act for a previous year. 9. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. Page | 4 Sub-section (2) was inserted so as to provide a consistent method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Rule 8D has essentially put into place an undisputable method of estimating the expenditure that can be regarded as being relatable to income that does not form part of the total income under the Act. 10. The Assessing Officer has to adopt a method consistent with all the relevant facts and circumstances after according an opportunity to the assessee to place all material on the record. 11. In the instant case, the assessee contended that it had not incurred any expenditure for earning the exempt income and that no disallowance was warranted. The AO held that the assessee has not provided any separate account for earning of exempt income. 12. Since, there was no disallowance except STT (a Statutory tax), the AO invoked provisions of Section 14A(2) and determined the disallowance in accordance with Rule 8D(iii). CALCULATION OF AMOUNT DISALLOWABLE U/S. 14A READ WITH RULE 8D(2)(III) 31.03.12 31.03.11 Rs. Rs. Details of investments: Investment in NHAI Tax Free Bonds 91,96,047 - Shares and Debentures 6,92,10,798 6,87,81,247 Mutual Funds 41,68,74,115 29,15,30,367 Net Investment in Shares & Mutual Funds from which exempt income is 49,52,80,963 36,03,11,614 Average value of investments ((49,52,80,963 + 36,03,11,614)/2) 42,77,96,289 One half (0.5%) percentage of the above amount 21,38,981 Page | 5 Disallowance as per 14A r/w Rule 8D Rule 8D(2)(i) 0 Rule 8D(2)(ii) 0 Rule 8D(2)(iii) 21,38,981/- Total 21,38,981/- 13. Aggrieved, the assessee filed appeal before the ld. CIT(A). The order of the ld. CIT(A) confirming the disallowance made by the AO is as under: “7.4 I have considered the facts of the case, finding of the AO and submission of the appellant. The appellant has earned dividend on shares and mutual fund amounting to Rs. 25,98,155/-, and shown long term capital gain on mutual fund at Rs. 36,46,831/- and interest on Govt. of India Bonds at Rs. 67,726/-. The appellant has only added STT paid at Rs.50,521/- in the computation of income as expenses against the exempt income. The contention of the appellant that no direct or indirect expenses in connection with investment and securities incurred is not acceptable as AO has recorded his satisfaction in para 4.6 in the Assessment Order that appellant has not provided any separate account for earning of exempt income. It is mentioned in the order by the AO that appellant has made investment for earning exempt income and managing such a large portfolio entail expenses right from diversion of manpower / staff for indulging in investment activities like visiting banks, use of vehicle and telephone, use of internet if portfolio management is web based, cost of computer and its depreciation, computer operator, consequent electricity, use of office premises, fee charged by mutual fund agents/bankers, portfolio record maintenance and its tracking to ensure timely sale / purchase of mutual fund unit etc. The disallowance made by the appellant is only related to statutory taxes and not a single penny was debited by the appellant on account of administrative expenses incurred for earning exempt income and no detail of expenses were provided even specifically asking for the same by the AO. 7.5 The provisions of section 14A is reproduced as under:- Section 14A (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total Page | 6 income under this Act in accordance with such method 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 income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act. Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already 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. 7.6 Sub section (2) of section 14A provides the manner in which the assessing officer is to determine the expenditure incurred in relation to income which does not form that part of total income. The said Rule 8D also makes it clear that 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 the expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the assessing office shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub rule (2) of Rule 8D. The condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his satisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied with the assessing officer that the assessing officer is required to determine the amount of expenditure in relation to income not includible in total income in the manner indicated in sub rule (2) of Rule 8D of the said rules. In the case of the appellant, AO has recorded his satisfaction regarding the disallowance of expenditure as appellant has not made any disallowance in relation to exempt income earned during the year as per the provision of section 14A except added back STT in the computation of income. 7.7 In the case of the appellant, AO has worked out the disallowance as per the procedure laid down in Rule 8D(2)(iii) and worked out the disallowance of administrative expenses on the basis of the average investment. As per the provisions of section 14A(2), AO can determine the Page | 7 expenses related to exempt income if appellant has not made any disallowance suo moto. In the instant case, appellant has earned huge exempt income and claim of the appellant that no direct or indirect expenses are involved in earning the same is not acceptable and AO has correctly worked out disallowance as per the provisions of section 14A read with Rule 8D. Hon'ble Apex Court in the Maxopp Investment (2018) 402 ITR 640 case held that, "the dominant purpose for which the investment into shares made by an assessee may not be relevant. That does not appeared to be relevant factor and determining the issue at hand. Fact remains that such dividend income is not taxable. In this scenario, if, expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure." 14. In this case, we are guided by the order of the Hon’ble Jurisdictional High Court in assessee’s own case for the A.Y. 2009-10 in ITA NO. 416/2015 order dated 21.07.2015 wherein the Hon’ble High Court relying on the judgment in the case of Justice Sam P. Bharucha vs. Addl. CIT 2013 [TaxPub(DT) 0425 (Mum-Trib) : (2013) 049 (II) ITCL 0502] held that in order to disallow the expenditure there must be a nexus between the expenditure incurred and the income not forming the total income. The Hon’ble High Court ruled in the favour of the assessee in the said case. 15. For the sake of ready reference, the relevant part of the order in the case of Justice Sam P. Bharucha vs. Addl. CIT is reproduced as under: “--Disallowance under section 14A--Expenditure against exempt income--Assessee had earned dividend from mutual funds and from shares besides interest on RBI tax free bonds which were exempt income. Assessing officer disallowed a sum under section 14A by applying rule 8D of Income Tax Rules by following the decision of this Tribunal in case of M/s Daga Capital Management (P) Ltd. Commissioner (Appeals) also confirmed the disallowance made by assessing officer under section 14A. Assessee contended that he had not incurred any expenditure on earning the dividend and other exempt income and also the expenses claimed by assessee were in the nature of expenditure for earning professional income. Therefore, all expenses incurred and claimed by assessee were in the nature of expenditure for earning professional income and no expenses had been incurred in Page | 8 relation to the dividend income from mutual funds. Held: Section 14A has within it implicit notion of apportionment in the cases where the expenditure was incurred for the composite/indivisible activities in which taxable and non-taxable income was received. But when it was possible to determine the actual expenditure in relation to the exempt income or when no expenditure has been incurred in relation to the exempt income, then principle of apportionment embedded in section 14A has no application. The objective of section 14A is not allowing to reduce tax payable on the normal exempt income by debiting the expenditure incurred to earn the exempt income. In order to disallow the expenditure under section 14A, there must be a live nexus between the expenditure incurred and the income not forming part of total income. No notional expenditure can be apportioned for the purpose of earning exempt income unless there is an actual expenditure in relation to earning the income not forming part of total income. If the expenditure was incurred with a view to earn taxable income and there was apparent dominant and immediate connection between the expenditure incurred and taxable income, then no disallowance could be made under section 14A merely because some tax exempt income was received by assessee. Therefore, it was held that no disallowance under section 14A was allowed when assessee had not incurred and claimed any expenditure for earning the exempt income.” 16. Since, the matters covered in the assessee’s own case by the Hon’ble Jurisdictional High Court, we hereby allow the instant appeal. ITA No. 4205/Del/2019 (Revenue Appeal) 17. The revenue has raised the following grounds of appeal: “1) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs. 15,54,19,255/- on account of credit balances in assessee’s client accounts by ignoring the decision of the Hon’ble ITAT in the case of CIT Chennai Vs. India Equipments Leasing Limited 111ITDS 37 wherein it was adjudicated that hybrid system of accounting is permissible before April 1, 1997.” 18. With regard to the revenue appeal relating to credit balances in the account, the department has continuously accepted the Page | 9 accounting policy followed by the assessee on the dispute for the year 2009-10 has been travelled upto the Hon’ble High Court (ITA No. 416/2015 dated 21.07.2015) wherein the Hon’ble Jurisdictional High Court held that wherein the assessee was consistently following a certain system of accounting which has been accepted by the department and when there is no change of system of accounting followed by the assessee during the year, allowing the department to adopt a different stands in the assessment year would result in a anomalous situation as far as the assessee is concerned. 19. Since, the matters covered in the assessee’s own case by the Hon’ble Jurisdictional High Court, we hereby dismiss the instant appeal. 20. In the result, the appeal of the assessee is allowed and that of the Revenue is dismissed. Order Pronounced in the Open Court on 11/10/2022. Sd/- Sd/- (C. N. Prasad) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 11/10/2022 *Ajay Kumar Keot, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR