Dr. Ashok Seth, New Delhi V. ACIT, New Delhi

ITA 5144/DEL/2015

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 0007 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-12-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2011-2012
• Appeal Filed On: 14-08-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: T R TALWAR
• Keywords: Depreciation; Earning of tax free income
• Section: 14A; 40(a)(ia); 10

Judgement Text

ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 1 OF 18 IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH: C: NEW DELHI) BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER ITA NO:- 5144/DEL/2015 ( ASSESSMENT YEAR: 2011-12) DR. ASHOK SETH, B-30, GEETANJALI ENCLAVE, NEW DELHI. VS. ACIT, CIRCLE-61(1), NEW DELHI. PAN NO: AARPS1432R APPELLANT RESPONDENT ASSESSEE BY : SH. T.R. TALWAR, ADV. REVENUE BY : SH. AMIT KATOCH, SR. DR ORDER PER: ANADEE NATH MISSHRA, AM THIS APPEAL BY THE ASSESSEE IS FILED AGAINST THE OR DER DATED 08.06.2015 OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-20, NE W DELHI, FOR ASSESSMENT YEAR 2011-12. THE GROUNDS OF APPEAL ARE AS UNDER:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LE ARNED ACIT HAS ERRED:- 1.A) IN CONFIRMING THE DISALLOWANCE OF RS. 5,26,256 /- U/S 14A OF THE INCOME TAX ACT, 1961 R.W. RULE 8D OF THE INCOME TAX RULES 1962 IN R ESPECT OF INVESTMENT MADE IN SECURITIES WHEN NO DIRECT OR INDIRECT EXPENDITURE I N RELATION TO INVESTMENT IN SECURITIES HAS BEEN CLAIMED OR DEBITED IN THE PROFI T & LOSS ACCOUNT BY THE APPELLANT. ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 2 OF 18 B) IN DISALLOWING RS. 5,26,256/- U/S 14A OF THE INC OME TAX ACT, 1961 R.W. RULE 8D OF THE INCOME TAX RULES 1962 WHEN NO PROXIMATE NEXUS H AS BEEN ESTABLISHED BETWEEN THE EXPENDITURE CLAIMED AND EXEMPT INCOME B Y THE A.O. C) IN IGNORING THE FACT THAT THE EXPENDITURE INCUR RED AND CLAIMED BY THE APPELLANT HAS DIRECT NEXUS WITH THE PROFESSIONAL INCOME OF THE AP PELLANT AND NONE OF THE EXPENDITURE CLAIMED BY THE ASSESSEE IS IN RELATION TO THE EXEMPT INCOME. D) IN IGNORING THE FACT THAT DISALLOWANCE MADE U/S 14A HAS ALREADY ALLOWED BY HONBLE ITAT, DELHI IN A.Y. 2009-10 & A.Y. 2010-11 ON THE S IMILAR GROUNDS. E) IN NOT FOLLOWING THE ITAT BOMBAY BENCH DECISION IN THE CASE OF JUSTICE SAM P. BHARUCHA VS. ADDITIONAL CIT (2012) 53 SOT 192 (MUMB AI) (URO). 2. A) IN REVERTING BACK TO THE LD. AO FOR FURTHER V ERIFICATION OF DISALLOWANCE OF AUDIT FEES PAYABLE OF RS. 2,27,529/- BY IGNORING THE FACT THAT THE SAME HAS ALREADY BEEN DISALLOWED BY THE APPELLANT IN THE COMPUTATION OF I NCOME U/S 40(A)(IA) OF THE INCOME TAX ACT, 1961 FOR A.Y. 2011-12 AND ALL THE S UPPORTING DOCUMENTS HAVE BEEN SUBMITTED BY APPELLANT DURING THE ASSESSMENT P ROCEEDINGS BEFORE LD. AO AS WELL AS DURING THE APPELLATE PROCEEDINGS BEFORE HON BLE CIT(A)-20, NEW DELHI. B)IN REVERTING BACK TO THE LD. AO FOR FURTHER VERIF ICATION OF DISALLOWANCE OF AUDIT FEES PAYABLE TO RS. 2,23,357/- BY IGNORING THE FACT THAT THE SAME PERTAINS TO A.Y. 2010-11 AND HAS NOT BEEN CLAIMED AS AN EXPENSE IN P ROFIT AND LOSS A/C IN A.Y. 2011-12 AND LEDGER A/C OF AUDIT FEE PAYABLE AND PRO FIT & LOSS A/C FOR A.Y. 2011-12 HAVE ALREADY BEEN SUBMITTED BY THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS BEFORE LD. AO AS WELL AS DURING THE APPELLANT PROCE EDINGS BEFORE HONBLE CIT(A) - 20, NEW DELHI. THE APPELLANT CRAVES LEAVE TO ADD, MODIFY, ALTER, S UBSTITUTE AND DELETE ANY OF THE GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING. (1.1) IN THIS ORDER, THE FOLLOWING ABBREVIATIONS HAVE BE EN USED: ASSESSING OFFICER AS AO COMMISSIONER OF INCOME TAX (APPEALS) AS CIT(A) DEPARTMENTAL REPRESENTATIVE AS DR DATED AS DTD. INCOME TAX ACT,1961 AS I.T. ACT,1961 INCOME TAX RULES, 1962 AS I.T. RULES,1962 INCOME TAX APPELLATE TRIBUNAL AS ITAT LEARNED AS LD. UNDER SECTION AS U/S ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 3 OF 18 (2) THE 1 ST GROUND OF APPEAL, INCLUDING SUB GROUNDS 1. A), 1. B), 1. C), 1. D), 1. E) ARE RELATED TO DISALLOWANCE MADE BY THE AO U/S 14 O F I.T. ACT, READY WITH RULES 8D OF INCOME TAX RULES, 1962. THE RELEVANT PORTION OF TH E ASSESSMENT ORDER IS REPRODUCES AS UNDER:- 5. DISALLOWANCE U/S 14A OF THE I.T. ACT,1961, RAV RULE 8D OF I.T. RULES, 1962 5.1 THE ASSESSEE HAS EARNED EXEMPT INCOME AS DIVIDEND O F RS. 34,89,727/- AND LONG TERM CAPITAL GAIN OF RS. 97,46,225/-. THE ASSESSEE WAS ASKED VIDE ORDER SHEET ENTRY DATED 08.01.2014 TO GIVE THE DETAILS OF LTCG & DIV IDEND. TO PROVIDE COPY OF ACCOUNTS/' BOOKS OF ACCOUNT IN RELATION TO EXPENSES INCURRED FOR EARNING EXEMPT INCOME. ANY OF THE DOCUMENTS IN RELATION TO THIS MA Y ALSO BE PRODUCED. 5.2 THE ASSESSEE, VIDE HIS REPLY DATED 21.01.2014 HAS STATED AS UNDER:- THE DETAIL OF LONG TERM CAPITAL GAIN OF RS. 97,46, 225/- AND OF DIVIDEND INCOME IS ENCLOSED HEREWITH. FURTHER, IT IS SUBMITTED THAT THE LONG TERM CAPITAL GAIN IS NOT FROM THE SALE OF DEBT MUTUAL FUNDS AND SAME IS OUT OF EQUITY FUNDS ONLY. THE SUPPORT IN RESPECT OF THE SAME IS ENCLOSED HEREWITH . REGARDING THE EXPENSES INCURRED FOR EARNING EXEMPTED INCOME, IT IS SUBMITT ED THAT THE ASSESSEE HAS NOT DEBITED ANY EXPENSE TO THE P&L A/C FOR EARNING THE EXEMPTED INCOME AND ALL THE EXPENSES INCURRED FOR EARNING EXEMPTED INCOME HAVE BEEN SHOWN AS DRAWINGS OF THE ASSESSEE. 5.3 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. THE FOLLOWING PRINCIPLES WOULD EMERGE FROM SECTION 14A AND THE DECISION IN CIT V. WALFORT SHARE AND STOCK BROKERS P. LTD. [2010] 326 ITR 1 (SC): (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 EXPEN SES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE ALLOWED ; (C) THE PRINCIPLE OF APPORTIONMENT OF EXPENSES IS WIDEN ED BY SECTION 14A TO INCLUDE EVEN THE APPORTIONMENT OF EXPENDITURE BETWEEN TAXAB LE AND NON-TAXABLE INCOME OF AN INDIVISIBLE BUSINESS; (D) THE BASIC PRINCIPLE OF TAXATION IS TO TAX NET INCOM E. THIS PRINCIPLE APPLIES EVEN FOR THE PURPOSES OF SECTION 14A AND EXPENSES TOWARDS NO N-TAXABLE INCOME MUST BE EXCLUDED; (E) ONCE A PROXIMATE CAUSE FOR DISALLOWANCE IS ESTABLIS HED-WHICH IS THE RELATIONSHIP OF THE EXPENDITURE WITH INCOME WHICH DOES NOT FORM PAR T OF THE TOTAL INCOME-A DISALLOWANCE HAS TO BE EFFECTED. 5.4 ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE ACT HAS TO BE DI SALLOWED 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 DI VIDEND INCOME AND LONG TERM CAPITAL GAIN FROM MUTUAL FUNDS & SHARES ARE INCOMES WHICH BY VIRTUE OF THE PROVISIONS ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 4 OF 18 OF SECTION 10 DO NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. 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. SUC H INCOME IS INCOME WHICH IS NOT INCLUDIBLE IN COMPUTING THE TOTAL INCOME OF THE ASS ESSEE UNDER THE PROVISIONS OF THE ACT FOR A PREVIOUS YEAR. INCOME-TAX IS A TAX ON INC OME IN THE HANDS OF THE ASSESSEE. HENCE, WHEN SECTION 14A DISALLOWS EXPENDITURE INCUR RED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME , IT WOULD INCLUDE CATEGORIES OF INCOME SUCH AS DIVIDEND FROM SHARES AND INCOME FROM MUTUAL FUNDS ETC. WHICH UNDER SECTION 10 ARE NOT TO BE INCLUDED IN THE TOTAL INCO ME. 5.5 SUB-SECTIONS (2) AND (3) OF SECTION 14A WERE INSER TED BY AN AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006 WITH EFFECT FROM A PRIL 1, 2007. 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 N OT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. SUB-SECTION (2) WAS INSERTED SO AS TO PROVIDE A UNIFORM METHOD APPL ICABLE WHERE THE ASSESSING OFFICER IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. PARLIAMENT HAS PROVIDED AN ADEQUATE SAFEGUARD TO THE INVOCATION OF THE POWER TO DETERMINE THE EXPENDITURE INCURRED IN RELATION TO THE EARNING OF NON-TAXABLE INCOME BY ADOPTION OF THE PRESCRIBED METHOD. THE INVOCATION OF THE POWER IS MADE CONDITIONAL ON THE SATISFACTION OF THE ASSESSING OFFICER IN REGARD TO THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE, HAVING REGARD TO THE ACCOUNTS OF THE ASSE SSEE. SUB-RULE (1) OF RULE 8D OF THE INCOME-TAX RULES, 1962, HAS ALSO INCORPORATED THE E SSENTIAL REQUIREMENTS OF SUB- SECTION (2) OF SECTION 14A BEFORE THE ASSESSING OFF ICER PROCEEDS TO APPLY THE METHOD PRESCRIBED UNDER SUB-RULE (2). THE PROVISIONS OF SU BSECTIONS (2) AND (3) OF SECTION 14A OF THE ACT, ARE CONSTITUTIONALLY VALID. THE PROVISI ONS OF RULE 8D OF THE RULES, ARE NOT ULTRA VIRES THE PROVISIONS OF SECTION 14A, MORE PAR TICULARLY SUB-SECTION (2) AND DO NOT OFFEND ARTICLE 14 OF THE CONSTITUTION. RULE 8D HAS ESSENTIALLY PUT INTO PLACE AN ARTIFICIAL METHOD OF ESTIMATING THE EXPENDITURE THAT CAN BE RE GARDED AS BEING RELATABLE TO INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE RULES WERE NOTIFIED TO COME INTO FORCE ON MARCH 24, 2008. CONS EQUENTLY, RULE 8D WHICH HAS BEEN NOTIFIED ON MARCH 24, 2008, WOULD APPLY WITH EFFECT FROM ASSESSMENT YEAR 2008-09. 5.6 THE ASSESSING OFFICER HAS TO ADOPT A REASONABLE BAS IS OR METHOD CONSISTENT WITH ALL THE RELEVANT FACTS AND CIRCUMSTANCES AFTER FURNISHI NG A REASONABLE OPPORTUNITY TO THE ASSESSEE TO PLACE ALL GERMANE MATERIAL ON THE RECOR D. 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 CONTENTION OF THE ASSESSEE IS NOT ACCEPTABLE IN VIEW OF THE FACT THAT THE INSERTION OF SECTION 1 4A WAS CURATIVE AND DECLARATORY. THE ASSESSEE HAS NOT PROVIDED ANY SEPARATE ACCOUNT FOR EARNING OF EXEMPT INCOME. THE ASSESSEE HAS MADE INVESTMENTS FOR EARNING EXEMPT IN COME AND MANAGING SUCH A LARGE PORTFOLIO ENTAIL EXPENSES RIGHT FROM DIVERSIO N OF MANPOWER/STAFF FOR INDULGING IN INVESTMENT ACTIVITIES TO VARIOUS ACTIVITIES LIKE VI SITING BANKS, USE OF VEHICLE AND TELEPHONE, USE OF INTERNET IF PORTFOLIO MANAGEMENT IS WEB BASED, COST OF COMPUTER & ITS DEPRECIATION, COMPUTER OPERATOR, CONSEQUENT ELE CTRICITY, USE OF OFFICE PREMISES, FEE CHARGED BY MUTUAL FUND AGENTS/BANKERS (ANNUAL FEE), PORTFOLIO RECORD MAINTENANCE AND ITS TRACKING TO ENSURE TIMELY SALE/PURCHASE OF MUTUAL FUND UNITS, ETC. AS PER THE ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 5 OF 18 ARS SUBMISSION DATED 09.01.2013, ASSESSEE HAS INCU RRED EXPENSES OF RS. 1,913.15/- AS DIRECTLY RELATABLE FOR EARNING THE EXEMPT INCOME WHICH HAS BEEN TAKEN IN PERSONAL DRAWINGS. 5.7 SINCE, NO DISALLOWANCE HAS BEEN DONE BY THE ASSESS EE AND AS PER THE FACTS AND CIRCUMSTANCES OF THE CASE, I HAVE REASONS TO ARRIVE AT THE SATISFACTION FOR DISALLOWANCE U/S 14A OF THE ACT, R/W RULE 8D OF THE RULES, THAT THERE ARE EXPENSES RELATABLE TO THE EARNING OF EXEMPT INCOME BY THE ASSESSEE. SINCE, TH E ASSESSEE HAS INVESTED ITS MONEY FOR SUCH INVESTMENT OF SHARES, WHICH IS CAPABLE TO GENERATE INCOME WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCOME OF THE ASSESSEE AND INDIRECT COST IN THE FORM OF ADMINISTRATIVE EXPENDITURES ETC. IS INVOLVED IN THI S PROCESS. THERE IS DIRECT AND PROXIMATE NEXUS BETWEEN THE EXEMPTED INCOME, WHICH THE INVESTMENTS SHALL GENERATE AND THE EXPENDITURES DIRECTLY OR INDIRECTLY INVOLVE D IN EARNING THE SAID INCOME. FURTHER, FACTS OF THE CASE LAWS ON WHICH THE AR HAS PLACED I TS RELIANCE ARE IN DIFFERENCE WITH THE PRESENT CASE AND THUS, NOT APPLICABLE. HENCE, I AM FULLY SATISFIED TO INVOKE THE PROVISIONS OF SECTION 14A READ WITH RULE 8D TO WORK OUT DISALLOWANCE OF EXPENDITURES. 5.8 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE , LEGAL POSITION ON THE ISSUE UNDER CONSIDERATION AND REASONS RECORDED IN THIS CASE, AS DISCUSSED ABOVE, A DISALLOWANCE OF RS. 5,26,256/- U/S 14A OF THE ACT, R/W RULE 8D OF T HE RULES AS WORKED OUT AS UNDER IS BEING MADE AND ADDED TO THE INCOME OF THE ASSESSEE: - DISALLOWANCE AS PER 14A R/W RULE 8D RULE 8D(2)(I) 0 RULE 8D(2)(II) 0 RULE 8D(2)(III) 5,26,256/- TOTAL 5,26,256/-. (2.1) THE ASSESSEE FILED APPEAL AGAINST THE ABOVE D ISALLOWANCE AMOUNTING TO RS. 5,26,256/- U/S 14A OF I.T. ACT, READ WITH RULE 8D O F I.T. RULES, 1962. VIDE ORDER DATED 08/06/2015, LD. CIT(A) CONFIRMED THE DISALLOWANCE M ADE BY THE ASSESSING OFFICER. THE RELEVANT PORTION OF THE ORDER OF THE LD. CIT(A) IS AS UNDER:- {7} GROUNDS OF APPEAL NO. 3 (A TO C ) ARE DIRECTED AGAI NST DISALLOWANCE OF EXPENSES OF RS.5,26,256/- UNDER SECTION 14A. IN THIS REGARD, TH E APPELLANT VIDE LETTER DATED 29.05.2015 FILED WRITTEN SUBMISSIONS AS UNDER:- 3. THE LD. ASSESSING OFFICER ERRED IN DISALLOWING RS. 5,26,256/- U/S 14A OF THE INCOME TAX ACT, 1961 R.W. RULE 8D OF THE INCOME TAX RULES, 1962 IN RESPECT OF EXPENDITURE INCURRED FOR INVESTMENT MADE IN SHARES AND MUTUAL FUNDS. IN THIS RESPECT, IT IS SUBMITTED THAT THE SAID ADDITION U/S 14A WAS ALSO MADE IN A. Y. 2009- ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 6 OF 18 10 AND 2010-11 AND THE APPELLANT HAS CHALLENGED THE SAME IN BOTH THE ASSESSMENT YEARS. HON'BLE IT AT (DELHI BENCH-A) DELETED THE SAID ADDITION AND DECIDED THE CASE IN FAVOR OF THE APPELLANT VIDE ITS ORDER DATE D 13.03.2015. [ITA NO. 554/DEL./2013 FOR A.Y. 2009-10 & IT A NO. 5298/DEL. /2013 FOR A.Y. 2010-11]. THEREFORE, THE ADDITION OF RS. 5,26,256/- MADE U/S 14A SHOULD BE DELETED. COPY OF THE HAT ORDER IS ENCLOSED HEREWITH. (END-VI) FURTHER, IT IS SUBMITTED AS UNDER: (A) THAT THE APPELLANT HAS NOT CLAIMED ANY SUCH DI RECT OR INDIRECT EXPENDITURE RELATING TO INVESTMENT IN SHARES AND MUTUAL FUND IN THE PROFIT & LOSS A/C AND ALL SUCH EXPENDITURE HAS BEEN SHOWN IN PERSONAL WITHDRAWALS. THE EXPENDITURE CLAIMED IN THE PROFIT & LOSS A/C BY THE APPELLANT HAS DIRECT NEXUS WITH THE PROFESSIONAL INCOME OF THE APPELLANT AND IS NOT HAVING ANY NEXUS WITH THE INVE STMENT MADE IN SHARES AND MUTUAL FUNDS. (A) THAT THE APPELLANT HAS EARNED DIVIDEND INCOME OF RS . 34,89,728/- AND LONG TERM CAPITAL GAIN OF RS. 97,46,225/- WHICH IS EXEMP T U/S 10. THE EXPENSES INCURRED FOR EARNING THIS EXEMPT INCOME ARE IN THE FORM OF DP CH ARGES OF RS. 538/- PAID TO FRONTLINE CAPITAL SERVICES LTD. AND STT OF 1,13,361/- PAID ON PURCHASES AND SALE OF SHARES AND UNITS OF MUTUAL FUND. THE SAID EXPENSES HAVE BEEN SHOWN IN PERSONAL DRAWI NGS A/C AND DEBITED TO APPELLANT'S CAPITAL ACCOUNT IN THE B ALANCE SHEET. THE SAID EXPENSES HAVE NOT BEEN CHARGED TO PROFIT & LOSS A/C. COPY OF CAPITAL A/C AND PROFIT & LOSS A/C IS ENCLOSED HEREWITH IN SUPPORT OF THE SAME. (END-VII) THE PURPOSE FOR INTRODUCTION OF SECTION 14A WITH RE TROSPECTIVE EFFECT SINCE THE INCEPTION OF THE ACT WAS CLARIFIED VIDE CIRCULAR NO. 14 OF 2001 AS UNDER: 'CERTAIN INCOMES ARE NOT INCLUDIBLE WHILE COMPUTING THE TOTAL INCOME, AS THESE ARE EXEMPT UNDER VARIOUS PROVISIONS OF THE ACT. THERE H AVE BEEN CASES WHERE DEDUCTIONS HAVE BEEN CLAIMED IN RESPECT OF SUCH EXEMPT INCOME. THIS IN EFFECT MEANS THAT THE TAX INCENTIVE GIVEN BY WAY OF EXEMPTIONS TO CERTAIN CAT EGORIES OF INCOME IS BEING USED TO REDUCE ALSO THE TAX PAYABLE ON THE NON EXEMPT INCOM E BY DEBITING THE EXPENSES INCURRED TO EARN THE EXEMPT INCOME AGAINST TAXABLE INCOME. THIS IS AGAINST THE BASIC PRINCIPLES OF TAXATION WHEREBY ONLY THE NET INCOME, I.E. GROSS INCOME MINUS THE EXPENDITURE, IS TAXED. ON THE SAME ANALOGY, THE EXE MPTION IS ALSO IN RESPECT OF THE NET INCOME. EXPENSES INCURRED CAN BE ALLOWED ONLY TO TH E EXTENT THEY ARE RELATABLE TO THE EARNING OF TAXABLE INCOME. ' THUS, LEGISLATIVE INTENT IS TO DISALLOW THE EXPENDI TURE WHICH IS RELATABLE TO EXEMPT INCOME AND ARE CLAIMED AS DEDUCTION FROM THE TAXABL E INCOME. HOWEVER, IN THE RELEVANT CASE, THE APPELLANT HAS NOT DEBITED ANY EX PENDITURE IN PROFIT & LOSS ACCOUNT WHICH RELATES TO EXEMPT INCOME. THE EXPENDITURE CLA IMED BY THE APPELLANT IN THE PROFIT & LOSS A/C IS THE EXPENDITURE INCURRED FOR EARNING THE PROFESSIONAL INCOME. SINCE THE INVESTMENT IN SHARES AND MUTUAL FUNDS MAD E BY THE APPELLANT IN HIS PERSONAL CAPACITY OUT OF HIS OWN CAPITAL FUNDS, NO DISALLOWA NCE IS CALLED FOR U/S 14 A. ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 7 OF 18 THUS, IN ORDER TO DISALLOW THE EXPENDITURE U/S 14 A , THERE SHOULD BE PROXIMATE CAUSE FOR DISALLOWANCE, WHICH HAS RELATIONSHIP WITH THE TAX E XEMPT INCOME. RELIANCE IS ALSO PLACED ON THE FOLLOWING CASE LAWS (I) IT AT MUMBAI BENCH IN THE CASE OF JUSTICE SAM P BH ARUCHA VS. ADDITIONAL CIT DELIVERED ON 25.07.2012.[53 SOT 192 (MUMBAI)(URO). (II) ITAT MUMBAI BENCH DECISION DATED 11.01.2011 IN THE CASE OF PAWN KUMAR PARAMESHWARLAL VS. AC1T (ITA NO. 530/MUM. /2009) CI TED IN THE CASE MENTIONED (I) SUPRA. IN VIEW OF THE ABOVE FACTS, SUBMISSIONS AND CASE LA WS RELIED UPON, THE DISALLOWANCE OF 5,26,256/- U/S 14A OF THE INCOME TAX ACT, 1961 IS U NCALLED FOR AND { CO J REQUIRES TO BE DELETED. 7.1 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDE R AND SUBMISSIONS THEREOF. THE FACTS OF THE CASE AS PER ASSESSMENT ORDER ARE THAT THE ASSES SEE HAS EARNED EXEMPT INCOME AS DIVIDEND OF RS.34,89,727/- AND AS LONG TERM CAPITAL OF RS.97,46,225/-. THE ASSESSING OFFICER INVOKED THE PROVISIONS OF SECTION 14A TO DI SALLOW THE DIRECT AND INDIRECT EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME. HE HELD THAT THE ASSESSEE DID NOT PROVIDE A SEPARATE ACCOUNT FOR EAR NING OF EXEMPT INCOME. THE ASSESSEE HAD MAINTAINED A LARGE PORTFOLIO AND FOR THIS PURPOSE H AD TO ENTAIL EXPENSES RIGHT FROM DIVERSION OF MAN POWER TO INDULGING IN VARIOUS ACTIVITIES LIK E VISITING BANKS, USE OF VEHICLE AND TELEPHONE, USE OF INTERNET, USE OF COMPUTER AND THU S THE DEPRECIATION, NEED OF A COMPUTER OPERATOR ELECTRICITY EXPENSES, OFFICE PREMISES, FEE S CHARGED BY MUTUAL FUND AGENTS, PORTFOLIO RECORD MANAGEMENT ETC. THE ASSESSING OFFICER THEREF ORE DISALLOWED RS.5,25,256/- UNDER RULE 8D(2)(III). 7.2 IN APPEAL THE APPELLANT STATED THAT: I) THE ASSESSING OFFICER HAS MADE AD-HOC DISALLOWA NCE OF EXPENSES BY APPLYING RULE 8D ON THE GROUND THAT PROVISIONS OF THAT RULE ARE PROC EDURAL IN NATURE, II) THAT ONLY DIRECT EXPENSES, HAVING PROXIMATE NEX US, WITH EARNING OF EXEMPT INCOME CAN BE DISALLOWED UNDER SECTION 14A OF THE ACT, III) THE ACTUAL EXPENDITURE INCURRED FOR EARNING EX EMPT INCOME ONLY SHOULD BE DISALLOWED, IV) NO OTHER EXPENDITURE HAS ALSO BEEN INCURRED FOR EARNING DIVIDEND INCOME. V) THE APPELLANT RELIED UPON THE DECISION OF THE HO N'BLE ITAT IN ITS OWN CASE FOR A.Y. 2009- 10 AND 2010-11. THE TAXPAYER HAS ALSO RELIED UPON THE OTHER DECISIO NS ON THE ISSUE: THE MAIN ARGUMENT OF LD. AR HAS BEEN THAT THE PROVI SION OF SECTION 14A CLEARLY POSTULATES DISALLOWANCE OF EXPENDITURE ONLY IN A CA SE WHERE IT IS PROVED THAT THE EXPENSES INCURRED HAVE A REAL RELATIONSHIP WITH THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THEREFORE, BEFORE PROCEEDING FOR WORKING OUT DISALLOWABLE AS PER RULE 8D, THE AO HAS TO SATISFY THAT CLAIM OF TAXPAYER OF EXPENDITURE/ NO EXPENDITURE FOR EARNING EXEMPT INCOME, IS NOT CORRECT. THE ORDER OF THE HON'BLE ITAT IN THE CASE OF THE APPELLANT SHOWS THAT THE ADDITION HAS BEEN DELETED IN THE EARLIER YEARS ON THE BASIS ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 8 OF 18 THE ASSESSING OFFICER HAS NOT SATISFIED HIMSELF REG ARDING THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE THAT NO EXPENDITURE HAS BEEN DEBITED IN THE INCOME & EXPENDITURE ACCOUNT RELATING TO THE EXEMPT INCOME EXPENDITURE RELATING TO STT AND BROKERAGE WERE SHO WN IN THE WITHDRAWALS. THE ASSESSEE HAD PERSONAL DRAWINGS OF RS.27,97,024/ - AND THUS WAS NOT DEBITING EXPENSES RELATING TO EXEMPTED INCOME IN ITS INCOME AND EXPENDITURE ACCOUNT. THE REVENUE HAS FAILED TO PIN POINT ANY SPECIFIC IN STANCE IN THIS REGARD. 7.3 IN THE YEAR UNDER CONSIDERATION THE PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE ASSESSEE HAS EXEMPT INCOME OF NOT ONLY LONG TER MED CAPITAL GAIN BUT ALSO DIVIDEND INCOME. THE ASSESSING OFFICER HAS SPECIFICALLY RECORDED HIS SATISFACTION THAT EXPENSES RELATING TO EARNING OF EXEMPT INCOME HAS BEEN DEBIT ED TO THE INCOME AND EXPENDITURE ACCOUNT AND THERE IS DIRECT AND PROXIMA TE BETWEEN EXEMPT INCOME AND EXPENSES INCURRED. THE DRAWINGS MADE BY THE ASSESSEE DO NOT SHOW ANY E XPENSES ON BROKERAGE, ONLY EXPENSE RELATING TO STT HAS BEEN TAKEN TO THE PERSONAL ACCOUNT. THE APPELLANT IS MAINTAINING A COMMON BANK ACCOUNT FOR HIS PROFESSIONAL INCOME AND EXEMPT INCOME. THE EXPENDITURE ACCOUNT SHOWS EXPENSE ON ESTABLISHM ENT , OFFICE EXPENSES, INTEREST IN BANK CHARGES, STAFF HIRE CHARGES, OFFIC E REPAIR AND MAINTENANCE, TOUR & TRAVELLING, AUDIT FEES, MEMBERSHIP AND SUBSCRIPTI ON FEES, TELEPHONE EXPENSES- WHICH ARE NOT EXCLUSIVELY ASSOCIATED WITH THE APPEL LANT'S MEDICAL PROFESSIONAL INCOME AND ARE ALSO RELATED TO HIS EXEMPT INCOME IN THE CASE OF MAXOPP INVESTMENTS LTD.(SUPRA), SIMI LAR ARGUMENT AS AT (II) ABOVE WAS RAISED BY THE TAXPAYER BUT THE SAME HAS NOT BEEN FO UND FAVOUR BY HONBLE DELHI HIGH COURT, HAS OBSERVED AS UNDER: 28 IT WAS CONTENDED THAT UNLESS AND UNTIL THERE WAS ACTUAL EXPENDITURE FOR EARNING THE EXEMPTED INCOME, THERE COULD NOT BE ANY DISALLOWANCE UNDER SECTION 14A. WHILE WE AGREE THAT THE EXPRESSION EXPENDITUR E INCURRED REFERS TO ACTUAL EXPENDITURE AND NOT TO SOME IMAGINED EXPENDITURE WE WOULD LIKE TO MAKE IT CLEAR THAT THE ACTUAL EXPENDITURE THAT IS IN CONTEMPLAT ION UNDER SECTION 14A(1) OF THE SAID ACT IS THE ACTUAL EXPENDITURE IN RELATION TO OR IN CONNECTION WITH OR PERTAINING TO EXEMPT INCOME ' THE HONBLE DELHI HIGH COURT IN THE SAME CASE HAS F URTHER OBSERVED THAT: 30. THE CONDITION PRECEDENT FOR THE ASSESSING OFFICER T O HIMSELF DETERMINE THE AMOUNT OF EXPENDITURE IS THAT HE MUST RECORD HIS DI SSATISFACTION WITH THE CORRECTNESS OF THE CLAIM OF EXPENDITURE MADE BY THE TAXPAYER OR WITH THE CORRECTNESS OF THE CLAIM MADE BY THE TAXPAYER THAT NO EXPENDITURE HAS BEEN INCURRED. IT IS ONLY WHEN THIS CONDITION PRECEDENT IS SATISFIED THAT THE ASSE SSING OFFICER IS REQUIRED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO INCOME NOT INCLUDABLE IN TOTAL INCOME IN THE MANNER INDICATED IN SUB-RULE (2) OF R ULE 8D OF THE SAID RULES. 31. IT IS THEREFORE, DEAR THAT DETERMINATION OF THE AMO UNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME UNDER RULE 8D WOULD ONLY COME INTO PLAY WHEN THE AO REJECTS THE CLAIM OF THE TAXPAYER IN THIS REGARD. ' ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 9 OF 18 THUS, IT IS CLEAR THAT THE CLAIM OF THE TAXPAYER TH AT NO EXPENDITURE HAS BEEN INCURRED FOR EARNING EXEMPT INCOME IS NOT IMPORTANT. IN THIS REGARD LAW IS VERY CLEAR IN VIEW OF PROVISIONS OF THE SECTION 14A(3) THAT THE PROVIS IONS OF SUB SECTION (2) WILL APPLY EVEN WHERE TAXPAYER CLAIMS THAT NO EXPENDITURE HAVE BEEN INCURRED. THE HONBLE DELHI HIGH COURT HAS ALSO OBSERVED VERY CLEARLY THA T ASSESSING OFFICER WILL PROCEED TO DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO EXEMPT INCOME ONCE HE IS DISSATISFIED WITH THE CORRECTNESS OF THE CLAIM OF E XPENDITURE/ NO EXPENDITURE BY THE TAXPAYER AND FOR SUCH DETERMINATION HE HAS TO NECES SARILY APPLY RULE 8D. THE AO HAS RECORDED A SATISFACTION IN THE ASSESSMENT ORDER THAT HE IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE TAXPAYER FOR INVOKI NG PROVISIONS OF SECTION 14A(2) OF THE ACT. IN THE INSTANT CASE THE ASSESSING OFFICER HAS TAKEN EXPENSES DIRECTLY ATTRIBUTABLE FOR EARNING OF EXEMPT INCOME NAMELY DIVIDEND AS NIL. H E HAS ALSO TAKEN INDIRECT INTEREST EXPENSES AS NIL. THUS, SUBMISSIONS OF THE TAXPAYER HAS BEEN CORRECTLY TAKEN CARE OF BY THE ASSESSING OFFICER AS HE HAS TAKEN FIRST TWO COM PONENT AS PER RULE 8D AS NIL. HE HAS WORKED OUT THIRD COMPONENT AT RS.5,26,256/- AS PER RULE 8D. THUS, AS FAR AS QUANTIFICATION OF DISALLOWANCE IS CONCERNED, IT IS HELD THAT THE ASSESSING OFFICER HAS WORKED OUT THE AMOUNT BASED ON PROPER METHODOLOGY A ND THEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS UPHELD. (2.2) THE PRESENT APPEAL BEFORE US HAS BEEN FILED B Y THE ASSESSEE AGAINST AFORESAID ORDER DATED 08.06.2015 OF THE LD. CIT(A). (2.3) IN THE COURSE OF APPELLATE PROCEEDINGS IN IT AT, THE ASSESSEE FILED PAPER BOOK CONSISTING OF THE FOLLOWING PARTICULARS: 1. AUDITED ACCOUNTS FOR THE AY 2011-12 2. DETAILS OF TDS PAYABLE (FY 2010-11) 3. DETAILS OF EXPENSES DISALLOWED U/S 40 (A)(IA) 4. AUDIT FEE PAYABLE FY 2010-11 5. SUBMISSIONS DATED 29.05.2015 BEFORE CIT(A) 6. ITAT ORDER DATED 13.03.2015 IN THE CASE OF THE ASSESSEE FOR AY 2009-10 & 2010-11. (2.4) AT THE TIME OF HEARING BEFORE US, THE LD. CO UNSEL FOR ASSESSEE RELIED ON THE ORDER OF ITAT, DATED 13.03.2015, IN ASSESSEES OWN CASE, FOR A.Y. 2009-10 AND 2010-11 IN ITA NOS.- 554/DEL/2013 AND 5298/DEL/2013. THE L D. COUNSEL FOR ASSESSEE ALSO RELIED ON THE ITAT BOMBAY BENCH DECISION IN THE CASE OF JUSTICE SAM P. BHARUCHA VS. ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 10 OF 18 ADDITIONAL CIT (2012) 53 SOT 192 (MUMBAI) (URO). THE LD. COUNSEL FOR ASSESSEE ALSO DREW OUR ATTENTION TO THE VARIOUS CON TENTIONS RAISED IN THE GROUNDS OF APPEAL ON THIS ISSUE. HE ALSO SUBMITTED THAT ALL TH E DIRECT EXPENSES ATTRIBUTABLE TO EARNING OF EXEMPT INCOME HAS BEEN MET OUT OF PERSON AL DRAWINGS MADE BY THE ASSESSEE; AND FURTHER, THAT NO INTEREST EXPENSES HA VE BEEN INCURRED FOR EARNING OF EXEMPT INCOME. IN VIEW OF THESE FACTS AND CIRCUMST ANCES, AND PLACING HEAVY RELIANCE ON AFORESAID ORDER OF ITAT, DATED 13.03.2015, IN AS SESSEES OWN CASE, FOR A.Y. 2009-10 AND 2010-11 IN ITA NOS.- 554/DEL/2013 AND 5298/DEL/ 2013; THE LD. COUNSEL FOR ASSESSEE SUBMITTED THAT THE DISALLOWANCE U/S 14A OF I.T. ACT SHOULD BE DELETED. (2.5) ON THE OTHER SIDE, THE LD. DR RELIED ON THE ORDER OF THE LD. CIT(A). (2.6) WE HAVE PERUSED ALL THE MATERIAL AVAILABLE ON RECORD. WE HAVE HEARD BOTH SIDES ATTENTIVELY. WE HAVE ALSO CONSIDERED THE JUDICIAL PRECEDENTS BROUGHT TO OUR NOTICE, AND / OR REFERRED TO IN THE RECORDS. IT WILL BE USEFUL TO REFER TO THE RELEVANT PORTION OF ORDER OF ITAT, DATED 13.03.2015, IN ASSESSEES OWN CASE, FOR A.Y. 2009-10 AND 2010-11 IN ITA NOS.- 554/DEL/2013 AND 5298/DEL/2013; ON WHICH THE LD. COUNSEL FOR ASSESSEE PLACED HEAVY RELIANCE. THE RELEVANT PORTION IS REPRODUCED AS UNDER: ITA NO.-554/DEL/2013 9. IN THE GROUND NO.3, THE ISSUE INVOLVED IS C ONFIRMING THE DISALLOWANCE OF RS.3,54,086/- 4A OF THE ACT R/W RULE 8D OF THE INCOME-TAX RULES, 1962. 10. LD. AR SUBMITTED THAT NO DIRECT AND PROXIMAT E NEXUS BETWEEN THE EXEMPTED INCOME AND THE EXPENDITURE CLAIMED WAS ESTABLISHED. HE RE LIED ON THE DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF JUSTICE SAM P BHARUCHA VS. ADD L. CIT-(2012) 53 SOT 192 (MUMBAI). LD. AR SUBMITTED THAT THE ASSESSEE HAS EARNED ONLY RS. 76,660/- AS EXEMPTED INCOME. FURTHER, THE ASSESSEE IS HAVING PERSONAL DRAWINGS OF RS.27,9 7,024/- WHICH IS EVIDENT FROM THE CAPITAL ACCOUNT OF THE ASSESSEE PLACED AT PAGE 23 OF THE PA PER BOOK. THE STT CHARGES AND ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 11 OF 18 BROKERAGES HAVE ALSO BEEN PAID BY THE ASSESSEE FROM HIS PERSONAL ACCOUNT. THE REVENUE HAS FAILED TO PINPOINT ANY EXPENDITURE DEBITED IN THE I NCOME & EXPENDITURE ACCOUNT FOR THE PROFESSION OF THE ASSESSEE. HE ALSO PLEADED THAT S INCE THE ASSESSEE HAS NOT INCURRED ANY EXPENDITURE AND REVENUE HAS FAILED TO PINPOINT ANY SPECIFIC INSTANCE, THEREFORE, THE CONDITIONS INVOKING THE PROVISIONS OF SECTION 14A R/W RULE 8D ARE NOT FULFILLED. THESE PROVISIONS CAN BE INVOKED ONLY WHEN THE ASSESSING OFFICER HAS SATISFI ED HIMSELF THAT THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE WITH REGARD TO THE EXPENDITURE THAT NO EXPENDITURE HAS BEEN DEBITED IN THE INCOME & EXPENDITURE ACCOUNT RELATING TO EXEMPTED I NCOME. 11. LD. DR RELIED ON THE ORDERS OF THE AUTHORITI ES BELOW. 12. WE HAVE HEARD BOTH THE SIDES ON THE ISSUE. W E FIND THAT THE EXPENDITURE RELATED TO THE EARNING OF EXEMPTED INCOME LIKE STT AND BROKERAGE W ERE SHOWN IN THE WITHDRAWALS. THE ASSESSEE IS ALSO HAVING PERSONAL DRAWINGS OF RS.27, 97,024/- FOR THE YEAR UNDER CONSIDERATION. ALL THESE FACTS SHOW THAT THE ASSESSEE IS NOT DEBIT ING THE EXPENDITURE RELATED TO THE EXEMPTED INCOME IN ITS INCOME & EXPENDITURE ACCOUNT AND THE REVENUE HAS FAILED TO PINPOINT T ANY SPECIFIC INSTANCE IN THIS REGARD. THEREFORE, WE AL LOW THIS GROUND OF ASSESSEES APPEAL. ITA NO.- 5298/DEL/2013 14. THIS APPEAL FILED BY THE ASSESSEE EMANATES FR OM THE ORDER OF THE CIT (APPEALS)-XXVIII, NEW DELHI DATED 22.07.2013 WHEREIN THE ONLY ISSUE I NVOLVED IS REGARDING THE DISALLOWANCE OF RS. 2,54,149/- U/S 14A OF THE INCOME-TAX ACT, 1961 R/W RULE 8D OF THE INCOME-TAX RULES, 1962. 15. THE ASSESSEE CLAIMED THAT THERE WAS NO DIRECT AND PROXIMATE NEXUS BETWEEN THE EXEMPTED INCOME AND THE EXPENDITURE CLAIMED. IT WA S PLEADED THAT NONE OF THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE IS IN RELATION TO THE EXEMPTED INCOME IN ITS INCOME & EXPENDITURE ACCOUNT. 16. WE HAVE HEARD BOTH THE SIDES ON THIS ISSUE. FOR THE SIMILAR REASONS AS STATED ABOVE IN THE ASSESSMENT YEAR 2009-10, WE ALLOW THIS GROUND O F ASSESSEES APPEAL AS THE REVENUE IS FAILED TO PINPOINT ANY EXPENDITURE IN THE INCOME& E XPENDITURE ACCOUNT. FURTHER, THE ASSESSEE IS INCURRING SUCH EXPENSES FROM HIS PERSON AL DRAWINGS. ACCORDINGLY, THIS GROUND OF ASSESSEES APPEAL IS ALLOWED. (2.6.1) ON PERUSAL OF THE IMPUGNED ORDER OF THE L D. CIT(A), IT IS NOTICED THAT IT IS BASED ON THE ORDER OF HONBLE JURISDICTIONAL HIGH C OURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT[2012] 347 ITR 272 (DELHI). THE APPEAL AGAINST THE ORDER OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT [2012] 347 ITR 272 (DELHI) HAS BEEN DISMISSED BY HO NBLE SUPREME COURT IN RECENT DECISION REPORTED AT MAXOPP INVESTMENT LTD. VS. CIT 402 ITR 640 (SC). FURTHER, ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 12 OF 18 ON PERUSAL OF THE IMPUGNED ORDER DATED 08.06.2015 O F LD. CIT(A), WE FIND THAT THE LD. CIT(A) HAS DISTINGUISHED THE FACTS OF THIS YEAR WIT H THE FACTS OF A.YS. 2009-10 AND 2010-11 IN PARAGRAPHS 7.2 AND 7.3 OF THE IMPUGNED O RDER. LD. CIT(A) HAS THUS MADE OUT A STRONG CASE FOR DEPARTURE FROM THE ORDER OF I TAT IN THE CASE OF THE ASSESSEE VIDE DATED 13.03.2015 IN ITA NOS.- 554/DEL/2013 AND 5298 /DEL/2013 ON THE BASIS OF DISTINGUISHABLE FACTS AND CIRCUMSTANCES. MOREOVER, THE ORDER OF THE AO IS BASED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CIT VS. WALFORT SHARE AND STOCK BROKERS P. LTD. [2010] 326 ITR 1 (SC). [RELEVANT PORTIONS OF THE ORDERS OF THE LD. CIT(A) AND THE AO HAVE ALREADY BEEN REPRODU CED EARLIER.] MOREOVER, ON SPECIFIC QUERY FROM THE BENCH IN THE COURSE OF HEAR ING BEFORE US, THE LD. COUNSEL FOR ASSESSEE INFORMED THAT THE ASSESSEE DOES NOT MAINTA IN PERSONAL BOOKS OF ACCOUNTS SEPARATELY; AND FURTHER, THAT SEPARATE BOOKS OF ACC OUNTS ARE ALSO NOT MAINTAINED IN RESPECT OF EXEMPT INCOME; AND MOREOVER, THAT THE BO OKS OF ACCOUNTS ARE COMMON FOR INVESTMENTS (RESULTING IN EXEMPT INCOME) AS WELL AS FOR THE BUSINESS/PROFESSION (RESULTING IN TAXABLE INCOME) OF THE ASSESSEE. THE LD. COUNSEL, IN RESPONSE TO ANOTHER QUERY FROM THE BENCH IN THE COURSE OF HEARING, FURT HER INFORMED THAT NO SUO-MOTO DISALLOWANCE U/S 14A OF I.T. ACT WAS MADE BY THE AS SESSEE IN THE RETURN OF INCOME. WE ALSO NOTE FROM THE PERUSAL OF THE ASSESSMENT ORD ER AND THE ORDER OF THE LD. CIT(A) THAT THE AO, TAKING NOTE OF THE FACT THAT NO DISALL OWANCE HAS BEEN DONE BY THE ASSESSEE U/S 14A OF I.T. ACT; HAS SPECIFICALLY RECO RDED HIS SATISFACTION FOR THE DISALLOWANCE U/S 14A OF THE I.T. ACT READ WITH RULE 8D OF I.T. RULES, 1962, TO THE EFFECT THAT THERE ARE EXPENSES RELATABLE TO THE EARNING OF EXEMPT INCOME BY THE ASSESSEE, IN ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 13 OF 18 THE FACTS AND CIRCUMSTANCES OF THE CASE. THE AO HA S HELD THAT THE ASSESSEE HAS MADE INVESTMENTS FOR EARNING EXEMPT INCOME AND MANAGING SUCH A LARGE PORTFOLIO ENTAIL EXPENSES RIGHT FROM DIVERSION OF MANPOWER/STAFF FOR INDULGING IN INVESTMENT ACTIVITIES TO VARIOUS ACTIVITIES LIKE VISITING BANKS, USE OF VEHI CLE AND TELEPHONE, USE OF INTERNET IF PORTFOLIO MANAGEMENT IS WEB BASED, COST OF COMPUTER & ITS DEPRECIATION, COMPUTER OPERATOR, CONSEQUENT ELECTRICITY, USE OF OFFICE PRE MISES, FEE CHARGED BY MUTUAL FUND AGENTS/BANKERS (ANNUAL FEE), PORTFOLIO RECORD MAINT ENANCE AND ITS TRACKING TO ENSURE TIMELY SALE/PURCHASE OF MUTUAL FUND UNITS, ETC. IN VIEW OF THESE SPECIFIC FINDINGS OF THE AO, THE ASSESSEES CLAIM THAT NO DIRECT OR INDIRECT EXPENDITURE IN RELATION TO INVESTMENT IN SECURITIES HAS BEEN CLAIMED OR DEBITED IN THE PR OFIT & LOSS ACCOUNT BY THE APPELLANT; THAT NO PROXIMATE NEXUS HAS BEEN ESTABLISHED BETWEE N THE EXPENDITURE CLAIMED AND EXEMPT INCOME BY THE AO; AND THAT THE EXPENDITURE I NCURRED AND CLAIMED BY THE APPELLANT HAS DIRECT NEXUS WITH THE PROFESSIONAL IN COME OF THE APPELLANT AND NONE OF THE EXPENDITURE CLAIMED BY THE ASSESSEE IS IN RELAT ION TO THE EXEMPT INCOME MUST BE REJECTED. (2.6.2) PROVISIONS OF SECTION 14A OF I.T. ACT AND RULE 8D OF I.T. RULES ARE REPRODUCED BELOW FOR EASE OF REFERENCE: SECTION 14A OF I.T. ACT : 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL IN COME 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 AMOUN T OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHICH DOES NOT FORM PART OF THE TOTAL I NCOME 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 CORRECTN ESS OF THE CLAIM OF THE ASSESSEE IN RESPECT ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 14 OF 18 OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY 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 BEFORE THE 1 ST DAY OF APRIL, 2001. RULE 8D OF I.T. RULES : 8D. (1) 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 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 ACT FOR SUCH PREVIOUS YEAR, HE SHALL DETERMINE THE AMOUNT OF EXPENDITURE IN RELATION TO SUCH INCOME IN ACCORDANCE WITH THE PROVISIONS OF SUB-RULE (2). (2) THE EXPENDITURE IN RELATION TO INCOME WHICH DOE S NOT FORM PART OF THE TOTAL INCOME SHALL BE THE AGGREGATE OF FOLLOWING AMOUNTS, NAMELY :- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME; (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPE NDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FO RMULA, NAMELY:- A X B/C WHERE A= AMOUNT OF EXPENDITURE BY WAY OF INTEREST O THER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR; B= THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALAN CE SHEET OF THE ASSESSEE, ON THE FORST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; C= THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; (III) AN AMOUNT EQUAL TO ONE-HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART O F THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. (2.7) IN THE FACTS OF THE CASE BEFORE US, THE AO HAS SPEC IFICALLY RECORDED, IN PARA 5.6 OF THE ASSESSMENT ORDER, THAT THE ASSESSEE HAS MADE IN VESTMENTS FOR EARNING EXEMPT ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 15 OF 18 INCOME AND MANAGING SUCH A LARGE PORTFOLIO ENTAIL E XPENSES RIGHT FROM DIVERSION OF MANPOWER/STAFF FOR INDULGING IN INVESTMENT ACTIVITI ES TO VARIOUS ACTIVITIES LIKE VISITING BANKS, USE OF VEHICLE AND TELEPHONE, USE OF INTERNE T IF PORTFOLIO MANAGEMENT IS WEB BASED, COST OF COMPUTER & ITS DEPRECIATION, COMPUTE R OPERATOR, CONSEQUENT ELECTRICITY, USE OF OFFICE PREMISES, FEE CHARGED BY MUTUAL FUND AGENTS/BANKERS (ANNUAL FEE), PORTFOLIO RECORD MAINTENANCE AND ITS TRACKING TO EN SURE TIMELY SALE/PURCHASE OF MUTUAL FUND UNITS, ETC. MOREOVER, THE AO, AT PARA 5.7 OF T HE ASSESSMENT ORDER HAS ALSO RECORDED HIS SATISFACTION IN THESE WORDS. SINCE, NO DISALLOWANCE HAS BEEN DONE BY THE ASSESS EE AND AS PER THE FACTS AND CIRCUMSTANCES OF THE CASE, I HAVE REASONS TO ARRIVE AT THE SATISFACTION FOR DISALLOWANCE U/S 14A OF THE ACT, R /W RULE 8D OF THE RULES, THAT THERE ARE EXPENSES RELATABLE TO THE EARNING OF EXEMPT INCOME BY THE ASSESSEE. SINCE, THE ASSESSEE HAS INVESTED ITS MONEY FOR SUCH INVESTMENT OF SHARE S, WHICH IS CAPABLE TO GENERATE INCOME WHICH DOES NOT OR SHALL NOT FORM PART OF TOT AL INCOME OF THE ASSESSEE AND INDIRECT COST IN THE FORM OF ADMINISTRATIVE EXPENDITURES ETC . IS INVOLVED IN THIS PROCESS. THERE IS DIRECT AND PROXIMATE NEXUS BETWEEN THE EXEMPTED INC OME, WHICH THE INVESTMENTS SHALL GENEARATE AND THE EXPENDITURES DIRECTLY OR INDIRECT LY INVOLVED IN EARNING THE SAID INCOME. IN VIEW OF THESE FACTS AND CIRCUMSTANCES, THE REQUI REMENTS UNDER RULE 8D(1) OF I.T. RULES READ WITH SECTION 14A(2) AND SECTION 14A(3) ARE FULFILLED AND ACCORDINGLY DISALLOWANCE MADE BY THE AO IN ACCORDANCE WITH UNDE R RULE 8D(2) OF I.T. RULES, 1962 READ WITH SECTION 14A OF I.T. ACT, IS HELD TO BE CO NSISTENT WITH LAW UNDER THESE FACTS AND CIRCUMSTANCES. MOREOVER, THE FACTS AND CIRCUMSTANCE S OF THIS YEAR ARE CLEARLY DISTINGUISHABLE FROM FACTS AND CIRCUMSTANCES OF AY 2009-10 AND 2010-11, AS CLEARLY ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 16 OF 18 BROUGHT OUT BY THE LD. CIT(A) IN PARAGRAPHS 7.2 AND 7.3 OF THE IMPUGNED ORDER. WE HAVE ALREADY NOTED, THAT THE LD. CIT(A) HAS MADE OUT A S TRONG CASE FOR DEPARTURE FROM THE ORDER OF ITAT IN THE CASE OF THE ASSESSEE VIDE DATE D 13.03.2015 IN ITA NOS.- 554/DEL/2013 AND 5298/DEL/2013. WE HAVE ALSO ALREA DY NOTED THAT THE ORDER OF THE LD. CIT(A) IS BASED ON THE ORDER OF HONBLE JURISDICTIO NAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT[2012] 347 ITR 272 (DELHI), AND FURTHER, THAT THE APPEAL AGAINST THE ORDER OF HONBLE JURISDICTIONAL HIGH CO URT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT [2012] 347 ITR 272 (DELHI) HAS BEEN DIS MISSED BY HONBLE SUPREME COURT IN RECENT DECISION REPORTED AT MAXOPP INVESTMENT LTD. VS. CIT 402 ITR 640 (SC). WE HAVE FURTHERMORE ALREADY NOTED THAT THE ORDER OF TH E AO IS BASED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WALFORT SHARE AND STOCK BROKERS P. LTD. [2010] 326 ITR 1 (SC). RELEVANT PORTIONS OF THE ORDERS OF THE LD. CIT(A) AND THE AO HAVE ALSO ALREADY BEEN REPRODUCED EARLIER. IN VIEW OF THE FOREGOING, AND FURTHER IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THIS YEAR BE ING CLEARLY DISTINGUISHABLE FROM FACTS AND CIRCUMSTANCES OF AY 2009-10 AND 2010-11, AS CLE ARLY BROUGHT OUT BY LD. CIT(A) IN PARAGRAPHS 7.2 AND 7.3 OF HER ORDER; AND FURTHER, I N VIEW OF THE AFORESAID ORDER OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENT LTD. V. CIT [2012] 347 ITR 272 (DELHI); AND FURTHERMORE, IN VIEW OF THE AFORESAID ORDERS O F HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT LTD. VS. CIT 402 ITR 640 (SC) AND CIT VS. WALFORT SHARE AND STOCK BROKERS P. LTD. [2 010] 326 ITR 1 (SC) ; AND MOREOVER, FOR REASONS STATED IN DETAIL IN THE I MPUGNED ORDER DATED 08.06.2015 OF THE LD. CIT(A); THE DISALLOWANCE MADE BY THE AO UNDER R ULE 8D OF I.T. RULES READ WITH ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 17 OF 18 SECTION 14A OF I.T. ACT, AND CONFIRMED BY THE LD. C IT(A), ARE HEREBY UPHELD. ACCORDINGLY, 1 ST GROUND OF APPEAL, INCLUDING SUB GROUNDS 1. A), 1. B), 1. C), 1. D) AND 1. E) ARE HEREBY DISMISSED. (3) THE 2 ND GROUND OF APPEAL, INCLUDING SUB-GROUNDS 2. A) AND 2. B) WERE NOT PRESSED BY THE LD. COUNSEL FOR ASSESSEE AT THE TIME OF HEARING BEFORE US. ACCORDINGLY, 2 ND GROUND OF APPEAL, INCLUDING SUB-GROUNDS 2. A) AND 2. B) ARE HEREBY DISMISSED, BEING NOT PRESSED. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 7/12/2018. SD/- SD/- (AMIT SHUKLA) (ANADEE NATH MISSHRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 7/12/.2018 (POOJA) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI ITA NO.-5144/DEL/2015. DR. ASHOK SETH, NEW DELHI. PAGE 18 OF 18 DATE OF DICTATION 26.11.2018. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 27.11.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT .1 1 .18 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER