Modern Info Technology Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 4294/DEL/2012

• Counselvise Citation: 429420114 RSA 2012
• Duration Of Justice: 2 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2009-2010
• Appeal Filed On: 07-08-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K JAIN
• Assessee Lawyers: SURESH ANANTHARAMAN
• Keywords: Business income; Earning of tax free income
• Section: 14A; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: E NEW DELHI BEFORE SHRI J.SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SHRI RAJPAL YADAV, JUDICIAL MEMBER ITA NO: 4294/DEL/2012 ASSESSMENT YEAR : - 2009-10 MODERN INFO TECHNOLOGY P.LTD. VS. ITO, WARD 5(4) 305, 3 RD FLOOR, BHANOT CORNER NEW DELHI PAMPOSH ENCLAVE, GK I NEW DELHI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SURESH ANANTHARAMAN, C.A. RESPONDENT BY : SHRI SK JAIN, SR.D.R. O R D E R PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AG AINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 17.7 .2012 FOR THE ASSESSMENT YEAR 2009-10. 2. FACTS IN BRIEF:- THE ASSESSEE IS A PRIVATE LIMI TED COMPANY. IT FILED ITS RETURN OF INCOME ON 26.9.2009 DECLARING A LOSS OF RS.26,498/-. THE ASSESSEE COMPANY HAD DIVIDEND INCOME OF RS.41,82,22 0/-, WHICH CLAIMED AS EXEMPT UNDER SECTION 10(34) OF THE INCOM E TAX ACT, 1961. THE ONLY OTHER INCOME ASSESSEE HAD WAS BANK INTERES T OF RS.19,941/-. THE ASSESSEE CAPITALIZED THE INTEREST EXPENDITURE A ND HAD NOT CLAIMED THE SAME AS AN EXPENSE EITHER IN THE PROFIT & LOSS A/C OR IN ITS INCOME TAX COMPUTATION. THE ASSESSING OFFICER MADE A DISA LLOWANCE UNDER 2 SECTION 14A READ WITH RULE 8D ON AN AMOUNT OF RS.45 LAKHS BEING INTEREST PAID TO ICICI BANK ON PURCHASE OF SHARES O F UFLEX LTD. AND A FURTHER AMOUNT OF RS.6,51,918/- BEING % OF AVERAGE INVESTMENT UNDER RULE 8D(2). 3. ON APPEAL THE FIRST APPELLATE AUTHORITY UPHELD T HE ORDER OF THE ASSESSING OFFICER. FURTHER AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD.COUNSEL FOR THE ASSESSEE MR.SURESH ANANTH ARAMAN SUBMITTED THAT RS.45 LAKHS IS ADDED TO THE INCOME O F THE ASSESSEE, UNDER SECTION 14A, THOUGH THE ASSESSEE HAS NOT CLAIMED TH E SAME AS AN EXPENSE. HE ARGUED THAT AN AMOUNT CANNOT BE DISALL OWED WHEN THE SAME IS NOT CLAIMED. ON THE SECOND ISSUE HE POINTE D OUT THAT THE ASSESSEE HAD INCURRED AND CLAIMED EXPENDITURE OF RS .45,977/- BEING AUDIT FEES, GENERAL EXPENSES AND CONVEYANCE AND HEN CE THE DISALLOWANCE OF A HIGHER AMOUNT BY APPLYING THE RULE 8D(2) IS BAD IN LAW. HE ARGUED THAT ONLY ACTUAL EXPENSES CAN BE DISALLOWED. HE RE LIED ON THE FOLLOWING CASES:- I. CIT VS. GILLETTE GROUP INDIA P.LTD. VS ACIT (ITA NO.267DEL/2012) DELHI C BENCH ORDER DT. 23.3.2012. II. M/S SEARCH ENVIRO LTD. VS. ACIT VS. JINDAL PHOT O LTD. IN ITA 3464/MUM/2011, MUMBAI E BENCH ORDER DT. 2.3.2012 5. THE LD.D.R. ON THE OTHER HAND RELIED ON THE ORDE R OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND SUBMITTED THAT THE ASSESSEE HAS WRONGLY CAPITALIZED THE INTEREST OF RS.45 LAKHS . HE ARGUED THAT THE 3 ASSESSEE SHOULD HAVE CLAIMED THE INTEREST ON AN YE AR TO YEAR BASIS, AS WAS HELD BY THE TRIBUNAL IN A NUMBER OF CASES. ON THE DISALLOWANCE BY APPLICATION OF RULE 8D, HE SUBMITTED THAT THE SAME IS MANDATORY. 6. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERA TION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, A PERUSAL OF THE MA TERIAL AVAILABLE ON RECORD AND CASE LAWS CITED, WE HOLD AS FOLLOWS. 7. NO AMOUNT CAN BE DISALLOWED, WHEN IT IS NOT C LAIMED AS AN EXPENSE. THE ASSESSEE HAS NOT CLAIMED RS.45 LAKHS AS AN EXPENSE WHILE COMPUTING ITS INCOME. UNDER THE CIRCUMSTANCES, MAK ING A DISALLOWANCE UNDER SECTION 14A IS BAD IN LAW. WE DO NOT UNDERST AND HOW AN EXPENDITURE CAN BE DISALLOWED, WHEN THE SAME HAS NO T BEEN CLAIMED AS A DEDUCTION. 8. IF THE DEPARTMENTS ARGUMENT THAT THE ASSESSEE S HOULD HAVE CLAIMED THE EXPENSE IS ACCEPTED, THEN THE REVENUE S HOULD SHOW THIS AMOUNT OF EXPENDITURE AS A DEDUCTION, IN THE COMPUT ATION OF INCOME AND THEN, ONLY DISALLOW THE SAME UNDER SECTION 14(A) OF THE ACT. THIS WOULD RESULT IN NIL ADDITION. 9. IF THE REVENUE IS OF THE OPINION THAT THE ASSESS EE HAS WRONGLY CAPITALIZED THE INTEREST EXPENDITURE, IT SHOULD B E LOOKED INTO AND EXAMINED WHEN THE ASSESSEE DECLARES CAPITAL GAINS/L OSS ON THE TRANSACTION. LOOKING AT THE ISSUE FROM ANY ANGLE, WE HAVE TO ALLOW THIS GROUND OF THE ASSESSEE AND DELETE THE DISALLOWANCE OF INTEREST EXPENDITURE. 4 10. COMING TO THE SECOND ISSUE, WE FIND THAT THE AS SESSEE HAS CLAIMED THAT IT HAD INCURRED TOTAL EXPENDITURE OF RS.45,977 /- DURING THE YEAR. WHILE SO THE ASSESSING OFFICER HAS DISCLOSED RS.6,5 1,918/-. THUS THE DISALLOWANCE IS FOR IN EXCESS OF THE ACTUAL EXPENDI TURE IN THIS CASE. 11. THE MUMBAI J BENCH OF THE TRIBUNAL IN THE CAS E OF JUSTICE SAM P BHARUCHA VS ACIT, ORDER DT. 25 TH JULY, 2012 HAD HELD AS FOLLOWS. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS RELEVANT MATERIAL ON RECORD. SECTION 14A HAS WITHIN IT IMPLICIT NOTION OF APPORTIONMENT IN THE CASES WHERE THE EXPE NDITURE IS INCURRED FOR THE COMPOSITE/INDIVISIBLE ACTIVITIES I N WHICH TAXABLE AND NON-TAXABLE INCOME IS RECEIVED. BUT WHEN IT IS 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. THUS, THE EXPENSES INCURRED TO EARN EXEMPT INCOME CANNOT BE ALLOWED AND THE EXPENSES SHALL BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATED TO THE EARNING OF TAXAB LE INCOME. IF THERE IS EXPENDITURE DIRECTLY OR INDIRECTLY INCURRE D IN RELATION TO EXEMPT INCOME, THE SAME CANNOT BE CLAIMED AGAINST THE INCOME WHICH IS TAXABLE AS IT IS HELD BY THE HONOURABLE SU PREME COURT IN CASE OF COMMISSIONER OF INCOME-TAX V. WALFORT SH ARE AND STOCK BROKERS P. LTD. REPORTED IN 326 ITR 1 THAT FO R ATTRACTING THE PROVISIONS OF SECTION 14 A, THERE SHOULD BE PRO XIMATE CAUSE FOR DISALLOWANCE WHICH AS RELATIONSHIP WITH THE TAX EXEMPT INCOME. 5.1. THE EXPENDITURE INCURRED IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME HAS TO BE DISALL OWED. HOWEVER, IT SHOULD BE PROXIMATE RELATIONSHIP BETWEE N THE EXPENDITURE AND THE INCOME, WHICH DOES NOT FORM PAR T OF TOTAL INCOME. ONCE SUCH PROXIMITY RELATIONSHIPS EXIST, TH E DISALLOWANCE IS TO BE EFFECTED. IN CASE THE ASSESSE E HAD CLAIMED THAT NO EXPENDITURE HAS BEEN INCURRED FOR E ARNING THE EXEMPT INCOME, IT WAS FOR THE ASSESSING OFFICER TO DETERMINE AS TO WHETHER THE ASSESSEE HAD INCURRED ANY EXPENDITUR E IN RELATION TO INCOME WHICH DID NOT FORM PART OF TOTAL INCOME AND IF SO TO QUANTIFY THE EXTENT OF DISALLOWANCE. THUS, IN ORDER TO DISALLOW THE EXPENDITURE UNDER SECTION 14A THERE MU ST BE A LIVE 5 NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE INCO ME NOT FORMING PART OF TOTAL INCOME. NO NOTIONAL EXPENDITU RE 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 EXPENDIT URE 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 EXEM PT INCOME IS RECEIVED BY THE ASSESSEE. 5.2 AVERTING TO THE FACTS OF THE CASE IN HAND, THE ASSESSEE HAD MADE A CLAIM THAT NO EXPENDITURE HAS BEEN INCUR RED OR CLAIMED FOR EARNING THE EXEMPT INCOME. FROM THE DET AILS OF THE EXPENDITURE IT IS CLEAR THAT THE EXPENDITURE INCURR ED AND CLAIMED BY THE ASSESSEE HAS DIRECT NEXUS WITH THE P ROFESSIONAL INCOME OF THE ASSESSEE. IT IS NOT THE CASE OF THE R EVENUE THAT THE ASSESSEE HAS USED HIS OFFICIAL MACHINERY AND ESTABL ISHMENT FOR EARNING THE EXEMPT INCOME. THE ASSESSING OFFICER HA S NOT GIVEN ANY FINDING THAT ANY OF THE EXPENDITURE INCURRED AN D CLAIMED BY THE ASSESSEE IS ATTRIBUTABLE FOR EARNING THE EXE MPT INCOME. IN OTHER WORDS WHEN THE ASSESSING OFFICER HAS NOT P OINTED OUT THAT CERTAIN EXPENDITURE IS NOT INCURRED FOR EARNIN G THE PROFESSIONAL INCOME: BUT ARE INCURRED IN RELATION T O DIVIDEND INCOME OR SUCH EXPENDITURE IS INCURRED FOR INSEPARA BLE AND INDIVISIBLE ACTIVITIES COMPRISING PROFESSIONAL AS W ELL AS THE ACTIVITIES ON WHICH IS EXEMPT INCOME HAS BEEN EARNE D BY THE ASSESSEE, THEN IN THE ABSENCE OF ANY SUCH INSTANCE OF EXPENDITURE, FINDING OF ASSESSING OFFICER OR ANY MA TERIAL TO SHOW THAT THE EXPENDITURE INCURRED AND CLAIMED BY T HE ASSESSEE AGAINST THE TAXABLE INCOME HAS ANY RELATIO N FOR EARNING THE EXEMPT INCOME, THE PROVISIONS OF SECTIO N 14A CANNOT BE APPLIED. 5.3. IN THE CASE OF SILICONE, PERMISSIBLE LAL VERS US ACIT SUPRA THIS TRIBUNAL HAS CONSIDERED AND DECIDED AN I DENTICAL ISSUE IN PARA 4 AS UNDER: '4. AFTER HEARING THE ASSESSEE IN PERSON AND ARGUME NTS OF THE LEARNED DR WE ARE OF THE OPINION THAT NO DISALLOWAN CE IS CALLED FOR UNDER SECTION 14A OBVIOUSLY THE ASSESSEE IS MAI NTAINING SEPARATE BOOKS OF ACCOUNT FOR PURPOSE OF BUSINESS A ND THESE INVESTMENTS ARE IN HIS PERSONAL CAPACITY. THE AO AL SO HAS NOT DISALLOWED ANY EXPENDITURE OF PERSONAL NATURE OUT O F THE INCOME FROM BUSINESS OR PROFESSION IN THE COMPUTATI ON OF INCOME IN THE ASSESSMENT ORDER. IN VIEW OF THIS WE ARE OF THE OPINION THAT THE EXPENDITURE CLAIMED IN THE BUSINES S OF SHARE DEALINGS CANNOT BE CORRELATED TO THE INCOMES EARNED IN PERSONAL CAPACITY THAT TOO ON DIVIDEND, PPF INTEREST AND TAX FREE INTEREST 6 ON RBI BONDS. IN VIEW OF THIS, WE ARE OF THE OPINIO N THAT ESTIMATION OF EXPENDITURE OF RS. 20, 000/- OUT OF B USINESS EXPENDITURE CLAIMED IN BUSINESS ACTIVITY CANNOT BE CONSIDERED FOR BEING INCURRED FOR THIS EARNING OF TAX FREE INC OME OF ABOVE NATURE, IN VIEW OF THIS DISALLOWANCE SO MADE UNDER SECTION 14A OF ('20.000/- IS DELETED. NOT ONLY THAT THE CLT(A) DIRECTED THE ASSESSING OFFICER TO CONSIDER THE ALLOWANCE INVOKI NG RULE 80. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO, LTD, VS. DCIT 328 ITR 81 HAS CONSIDERED RU LE 80 TO BE APPLICABLE PROSPECTIVE AND SINCE THE ASSESSMENT YEA R INVOLVED IS BEFORE THE INTRODUCTION OF SUB-SECTION (2) & (3) OF SECTION 14A THERE IS NO QUESTION OF DISALLOWING THE AMOUNTS INV OKING RULE8D, THEREFORE, THE CLT(A)'S DIRECTION ON THIS I S SET ASIDE AND THE ADDITIONS SO MADE BY THE AO, IN THE COMPUTATION OF BUSINESS INCOME IS DELETED, GROUND IS CONSIDERED AL LOWED.' 5.4 SIMILARLY IN CASE OF AUCHTEL PRODUCTS LTD (SU PRA) IT WAS HELD BY THIS TRIBUNAL IN PARA 15 AS UNDER: '15. A BARE PERUSAL OF THE ABOVE PROVISIONS INDICAT ES THAT THE AO SHALL DETERMINE THE AMOUNT DISALLOWABLE AS PER R ULE 8D IF HE 'IS NOT SATISFIED WITH THE CORRECTNESS OF THE CL AIM OF THE ASSESSEE' IN RESPECT OF SUCH EXPENDITURE IN RELATIO N TO EXEMPT INCOME. EVEN IF THE ASSESSEE CLAIMS THAT NO EXPENDI TURE WAS INCURRED IN RESPECT OF EXEMPT INCOME THE AO IS SUPP OSED TO FOLLOW THE MANDATE OF RULE 8D IF HE IS NOT SATISFIE D WITH THE CORRECTNESS OF THE ASSESSEE'S CLAIM. TO PUT IT SIMP LY, THE FURTHER DISALLOWANCE U/S. 14A IS CALLED FOR WHEN THE AO IS NOT SATISFIED WITH THE ASSESSEE'S CLAIM OF HAVING INCURRED NO EXP ENDITURE OR SOME AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT IN COME. SATISFACTION OF THE AO AS TO THE INCORRECT CLAIM MA DE BY THE ASSESSEE IN THIS REGARD IS SINE QUA NON FOR INVOKIN G THE APPLICABILITY OF RULE 8D, SUCH SATISFACTION CAN BE REACHED AND RECORDED ONLY WHEN THE CLAIM OF THE ASSESSEE IS VER IFIED. IF THE ASSESSEE PROVES BEFORE THE AO THAT IT INCURRED A PA RTICULAR EXPENDITURE IN RESPECT OF EARNING THE EXEMPT INCOME AND THE AO GETS SATISFIED THEN THERE IS NO REQUIREMENT TO STIL L PROCEED WITH THE COMPUTATION OF AMOUNT DISALLOWABLE AS PER RULE 80. FROM THE ASSESSMENT ORDER IT IS OBSERVED THAT THE AO SIM PLY KEPT THE ASSESSEE'S SUBMISSIONS ON RECORD WITHOUT APPRECIATI NG AS TO WHETHER THESE WERE CORRECT OR NOT. HE PROCEEDED ON THE PREMISE AS IF THE DISALLOWANCE AS PER RULE D IS AUTOMATIC I RRESPECTIVE OF THE GENUINENESS OF THE ASSESSEE'S CLAIM IN RESPECT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. IT IS AN INC ORRECT COURSE ADOPTED BY THE AO. THE CORRECT SEQUENCE. IN OUR CON SIDERED OPINION. FOR MAKING ANY DISALLOWANCE U/S. 14A IS TO FIRSTLY EXAMINE THE ASSESSEE'S CLAIM OF HAVING INCURRED SOM E EXPENDITURE OR NO EXPENDITURE IN RELATION TO EXEMPT INCOME. IF 7 THE AO GETS SATISFIED WITH THE SAME THEN THERE IS N O NEED TO COMPUTE DISALLOWANCE AS PER RULE 80. IT IS ONLY WHE N THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE IN RESPECT OF SUCH EXPENDITURE OR NO EXPENDITURE HAVIN G BEEN INCURRED IN RELATION TO EXEMPT INCOME THAT THE MAND ATE OF RULE 8D WILL OPERATE. IN THE INSTANT CASE THE AUTHORITIE S BELOW HAVE DIRECTLY GONE TO THE SECOND STAGE OF COMPUTING DISA LLOWANCE U/S. 14A AS PER RULE 8D WITHOUT RENDERING ANY OPINI ON ON THE CORRECTNESS OR OTHERWISE OF THE ASSESSEE'S CLAIM IN THIS REGARD. WE THEREFORE SET ASIDE THE IMPUGNED ORDER ON THIS I SSUE AND RESTORE THE MATTER TO THE FILE OF AO TO R;-COMPUTE DISALLOWANCE, IF ANY, IN ACCORDANCE WITH OUR ABOVE OBSERVATIONS A FTER DULY EXAMINING THE ASSESSEE'S CLAIM IN THIS REGARD. 6 IN VIEW OF THE ABOVE DISCUSSION AND FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE CONSIDERED OPINION THAT NO DISALLOWANCE UNDER SECTION 14A IS CALLED FOR WHE N THE ASSESSEE HAS NOT INCURRED AND CLAIMED ANY EXPENDITU RE FOR EARNING THE EXEMPT INCOME. 12. BY APPLYING THE PROPOSITIONS LAID DOWN, TO THE FACTS OF THE CASE WE HOLD THAT THE DISALLOWANCE CANNOT EXCEED THE TOTAL ACTUAL EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE. IN THIS CASE THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE IN THE PROFIT AND LOSS ACCO UNT IS RS.45,977/-. THUS THE DISALLOWANCE SHOULD BE RESTRICTED TO THIS AMOUNT. THUS WE ALLOW THIS GROUND IN PART. 12. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS AL LOWED IN PART. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH OCTOBER, 2012. SD/- SD/- (RAJPAL YADAV) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBE R DATED: THE 19 TH OCTOBER, 2012 *MANGA 8 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CIT (A); 5.DR; 6.GUARD FILE BY ORDER DY. REGISTRAR