Sushil Kumar, New Delhi V. ACIT, New Delhi

ITA 5830/DEL/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 4588 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2012-2013
• Appeal Filed On: 27-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHRAVAN GOTRU
• Assessee Lawyers: ASHOK KUMAR RAI
• Keywords: Earning of tax free income; Retrospective amendment
• Section: 143(3); 14A; 10

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D : NEW DELHI BEFORE SHRI H.S.SIDHU , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 5830/DEL/2015 (ASSESSMENT YEAR: 2012 - 13 ) SUSHIL KUMAR, D - 3/16, BASEMENT, ANSARI ROAD, 16, DARYA GANJ, NEW DELHI PAN:AAIPK4093K VS. ACIT, CIRCLE - 61(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ASHOK KUMAR RAI, ADV REVENUE BY: SHRI SHRAVAN GOTRU, SR. DR DATE OF HEARING 29/08 / 2017 DATE OF PRONOUNCEMENT 04 / 0 9 / 2017 O R D E R PER PRASHANT MAHARISHI , A. M. 1. THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) 20, NEW DELHI DATED 28/08/2015 WHEREIN DISALLOWANCE MADE BY THE LD. ASS ESSING OFFICER UNDER SECTION 14 A OF THE INCOME TAX ACT OF RS. 108194/ WAS UPHELD. 2. THE SOLITARY GROUND OF APPEAL OF THE ASSESSEE IS AGAINST DISALLOWANCE CONFIRMED BY THE LD. COMMISSIONER O F INCOME TAX (APPEALS) OF RS. 108194/ UNDER SECTION 14 A OF THE INCOME TAX ACT. 3. IN THE PRESENT CASE ASSESSEE, INDIVIDUAL FILED HIS RETURN OF INCOME ON 29/ 09/2012 SHOWING INCOME OF RS. 5314 2920/ WHICH WERE SUBSEQUENTLY REVISED ON 24/10/2012. DURING THE YEAR UNDER CONSIDERATION, THE LD. ASSESSING OFFICER HAS NOTED THAT THE ASSESSEE IS SHOWN EXEMPT INCOME OF RS. 1145710/ UNDER SECTION 10 OF THE INCOME TAX ACT, 1961. THEREFORE, THE LD. AO PASSED ASSESSEE AS TO WHY EXPENSES SHOULD NOT BE DISALLOWED FOLLOWING THE PROVISIONS OF SECTION 14 A OF THE INCOME TAX ACT READ WITH RULE 8D OF THE INCOME TAX RULES. ASSES SEE SUBMITTED REPLY ON 15/11/2011 CLAIMING THAT NO EXPENDITURE WAS INCURRED TO EARN EXEMPT INCOME. THE LD. ASSESSING OFFICER REJECTED THE EXPLANATION OF THE ASSESSEE AND APPLIED THE PROVISIONS OF SECTION 14A, READ WITH RULE 8D OF THE INCOME TAX ACT AND MAD E A DISALLOWANCE OF RS. 108194/ AND ASSESSMENT ORDER UNDER SECTION 143(3) WAS PASSED ON 04/02/2015 DETERMINING TOTAL INCOME OF RS. 43272100/ . THEREFORE, P A G E | 2 ASSESSEE AGGRIEVED WITH THE ORDER OF THE LD. AO PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHO CONFIRM E D THE ADDITION UNDER SECTION 14 A. THEREFORE, ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. AO HAS SUBMITTED BEFORE US THAT THE ASSESSEE HAS SUBMITTED THAT NO EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE AND LD. AO WITHOUT REJECTING THE CONTENTION OF THE ASSES SEE BY PUTTING SATISFACTION AS APPLIED THE PROVISIONS OF RULE 8D OF THE INCOME TAX ACT FOR MAKING DISALLOWANCE. HE SUBMITTED THAT IN ABSENCE OF THE SATISFACTION OF THE LD. ASSESSING OFFICER THAT DISALLOWANCE CANNOT BE MADE. 5. THE LD. DEPARTMENTAL REPRESENTAT IVE VEHEMENTLY RELIED UPON THE ORDERS OF THE LOWER AUTHORITIES. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS. WE HAVE ALSO PERUSED THE ORDERS OF THE LOWER AUTHORITIES. UNDISPUTEDLY, THE ASSESSEE HAS EARNED ANY EXEMPT INCOME UNDER SECTION 10 OF T HE IN COME TAX ACT OF RUPEES 114 5710/ . HOWEVER, THE ASSESSEE HAS NOT OFFERED ANY DISALLOWANCE UNDER SECTION 14 A OF THE ACT. IT WAS THE CLAIM OF THE ASSESSEE BEFORE THE ASSESSING OFFICER THAT IT HAS NOT INCURRED ANY EXPENDITURE FOR EARNING ANY EXEMPT INCOME. HO WEVER, THE LD. ASSESSING OFFICER WITHOUT RECORDING HIS SATISFACTION THAT HOW THE EXPLANATION OF THE ASSESSEE IS INCORRECT APPLIED THE PROVISIONS OF RULE 8D OF THE INCOME TAX ACT, 196 1 , AND WORKING OUT DISALLOWANCE UNDER SECTION 14 A OF THE INCOME TAX ACT O F RS. 108194/ - . HONBLE DELHI HIGH COURT IN 84 TAXMANN.COM IN PR. CIT VS. I & L E NERGY LIMITED AS HELD AS UNDER: - 11. AT THE OUTSET, IT REQUIRES TO BE NOTICED THAT WE ARE CONCERNED WITH THE AY 2011 - 12 AND, THEREFORE, THE QUESTION OF THE APPLICABILITY OF RU LE 8D, WHICH WAS INSERTED WITH EFFECT FROM 24TH MARCH 2008, IS NOT IN DOUBT. 12. SECTION 14A OF THE ACT, WHICH WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 1ST APRIL 1962, PROVIDES FOR DISALLOWANCE OF THE EXPENDITURE INCURRED IN RELATION TO INCOME EXEMPTED FROM TAX. FROM 11TH MAY 2001, A PROVISO WAS INSERTED IN SECTION 14A TO CLARIFY THAT IT COULD NOT BE USED TO REOPEN OR RECTIFY A COMPLETED ASSESSMENT. SUB - SECTIONS (2) AND (3) OF SECTION 14A WERE INSERTED WITH EFFECT FROM 1ST APRIL, 2007 TO PROVIDE FOR METH ODOLOGY FOR COMPUTING OF DISALLOWANCE UNDER SECTION 14A. HOWEVER, THE ACTUAL METHODOLOGY WAS PROVIDED IN TERMS OF RULE 8D ONLY FROM 24TH MARCH 2008. THERE WAS A FURTHER AMENDMENT TO RULE 8D WITH EFFECT FROM 2ND JUNE 2016 LIMITING THE DISALLOWANCE THE AGGRE GATE OF THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME AND AN AMOUNT EQUAL TO ONE PER CENT OF THE ANNUAL AVERAGE OF THE MONTHLY AVERAGE OF THE OPENING AND CLOSING BALANCES OF THE VALUE OF INVESTMENT, INCOME F ROM WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IT IS ALSO PROVIDED THAT THE AMOUNT SHALL NOT EXCEED THE TOTAL EXPENDITURE CLAIMED BY THE ASSESSEE. 13. IN THE ABOVE BACKGROUND, THE KEY QUESTION IN THE PRESENT CASE IS WHETHER THE DISALLOWANCE OF THE EXPEN DITURE WILL BE MADE EVEN WHERE THE INVESTMENT HAS NOT RESULTED IN ANY EXEMPT INCOME DURING THE AY IN P A G E | 3 QUESTION BUT WHERE POTENTIAL EXISTS FOR EXEMPT INCOME BEING EARNED IN LATER AYS. 14. IN THE EXPLANATORY MEMORANDUM TO THE FINANCE ACT 2001, BY WHICH SECTIO N 14A WAS INSERTED WITH EFFECT FROM 1ST APRIL 1962, IT WAS CLARIFIED THAT 'EXPENSES INCURRED CAN BE ALLOWED ONLY TO THE EXTENT THEY ARE RELATABLE TO THE EARNED INCOME OF TAXABLE INCOME' . THE OBJECT BEHIND SECTION 14A WAS TO PROVIDE THAT ' NO DEDUCTION SHALL BE MADE IN RESPECT OF ANY EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE INCOME TAX ACT' . 15. WHAT IS TAXABLE UNDER SECTION 5 OF THE ACT IS THE 'TOTAL INCOME' WHICH IS NEITHER NOTIONAL NOR SPECULATIVE. IT HAS TO BE 'REAL INCOME'. THE SUBSEQUENT AMENDMENT TO SECTION 14A DOES NOT PARTICULARLY CLARIFY WHETHER THE DISALLOWANCE OF THE EXPENDITURE WOULD APPLY EVEN WHERE NO EXEMPT INCOME IS EARNED IN THE AY IN QUESTION FROM INVESTMENTS MADE, NOT I N THAT AY, BUT EARLIER AYS. 16. RULE 8D (1) OF THE RULES IS HELPFUL, TO SOME EXTENT, IN UNDERSTANDING THE ABOVE ISSUE. IT READS AS UNDER: '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 ACCO RDANCE WITH THE PROVISIONS OF SUB - RULE (2).' 17. THE WORDS 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT FOR SUCH PREVIOUS YEAR' IN THE ABOVE RULE 8 D (1) INDICATES A CORRELATION BETWEEN THE EXEMPT INCOME EARNED IN THE AY AND THE EXPENDITURE INCURRED TO EARN IT. IN OTHER WORDS, THE EXPENDITURE AS CLAIMED BY THE ASSESSEE HAS TO BE IN RELATION TO THE INCOME EARNED IN 'SUCH PREVIOUS YEAR'. THIS IMPLIES THAT IF THERE IS NO EXEMPT INCOME EARNED IN THE AY IN QUESTION, THE QUES TION OF DISALLOWANCE OF THE EXPENDITURE INCURRED TO EARN EXEMPT INCOME IN TERMS OF SECTION 14A READ WITH RULE 8D WOULD NOT ARISE. 18. THE CBDT CIRCULAR UPON WHICH EXTENSIVE RELIANCE IS PLACED BY MR. HOSSAIN DOES NOT REFER TO RULE 8D (1) OF THE RULES AT ALL BUT ONLY REFERS TO THE WORD 'INCLUDIBLE' OCCURRING IN THE TITLE TO RULE 8D AS WELL AS THE TITLE TO SECTION 14A. THE CIRCULAR CONCLUDES THAT IT IS NOT NECESSARY THAT EXEMPT INCOME SHOULD NECESSARILY BE INCLUDED IN A PARTICULAR YEAR'S INCOME FOR THE DISALLO WANCE TO BE TRIGGERED. 19. IN THE CONSIDERED VIEW OF THE COURT, THIS WILL BE A TRUNCATED READING OF SECTION 14 A AND RULE 8D PARTICULARLY WHEN RULE 8D (1) USES THE EXPRESSION 'SUCH PREVIOUS YEAR'. FURTHER, IT DOES NOT P A G E | 4 ACCOUNT FOR THE CONCEPT OF 'REAL INCOM E'. IT DOES NOT NOTE THAT UNDER SECTION 5 OF THE ACT, THE QUESTION OF TAXATION OF 'NOTIONAL INCOME' DOES NOT ARISE. AS EXPLAINED IN COMMISSIONER OF INCOME TAX V. WALFORT SHARE AND STOCK BROKERS PVT. LTD [2010] 326 ITR 1 (SC), THE MANDATE OF SECTION 14A OF THE ACT IS TO CURB THE PRACTICE OF CLAIMING DEDUCTION OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME BEING TAXABLE INCOME AND AT THE SAME TIME AVAIL OF THE TAX INCENTIVES BY WAY OF EXEMPTION OF EXEMPT INCOME WITHOUT MAKING ANY APPORTIONMENT OF EXPENSES INCURRED IN RELATION TO EXEMPT INCOME. CONSEQUENTLY, THE COURT IS NOT PERSUADED THAT IN VIEW OF THE CIRCULAR OF THE CBDT DATED 11TH MAY 2014, THE DECISION OF THIS COURT IN CHEMINVEST LTD. ( SUPRA ) REQUIRES RECONSIDERATION. 20. IN M/S. REDINGTON ( INDIA ) LTD. V. THE ADDITIONAL COMMISSIONER OF INCOME TAX, COMPANY RANGE V, CHENNAI (ORDER DATED 23RD DECEMBER, 2016 OF THE HIGH COURT OF MADRAS IN TCA NO. 520 OF 2016), A SIMILAR CONTENTION OF THE REVENUE WAS NEGATED. THE COURT THERE DECLINED TO APPLY THE CBDT CIRC ULAR BY EXPLAINING THAT SECTION 14A IS 'CLEARLY RELATABLE TO THE EARNING OF THE ACTUAL INCOME AND NOT NOTIONAL INCOME OR ANTICIPATED INCOME.' IT WAS FURTHER EXPLAINED THAT, 'THE COMPUTATION OF TOTAL INCOME IN TERMS OF RULE 8D IS BY WAY OF A DETERMINATION INVOLVING DIRECT AS WELL AS INDIRECT ATTRIBUTION. THUS, ACCEPTING THE SUBMISSION OF THE REVENUE WOULD RESULT IN THE IMPOSITION OF AN ARTIFICIAL METHOD OF COMPUTATION ON NOTIONAL AND ASSUMED INCOME. WE BELIEVE THUS WOULD BE CARRYING THE ARTIFICE TOO FAR.' 2 1. THE DECISIONS IN CIT V. M/S LAKHANI MARKETING INC. 2014 SCC ONLINE P&H 20357 , CIT V. WINSOME TEXTILE INDUSTRIES LIMITED [2009] 319 ITR 204 (P&H), CIT V. SHIVAM MOTORS ( P ) LTD. [2014]272 CTR (ALL) 277 HAVE ALL TAKEN A SIMILAR VIEW. THE DECISION IN TAIKISHA ENGINEERING INDIA PVT. LTD. ( SUPRA ) DOES NOT SPECIFICALLY DEAL WITH THIS ISSUE. 22. IT WAS SUGGESTED BY MR. HOSSAIN THAT, IN THE CONTEXT OF SECTION 57(III), THE SUPREME COURT IN COMMISSIONER OF INCOME TAX, WEST V. RAJENDRA PRASAD MOODY [1978] 115 ITR 519 ( SC ) EXPLAINED THAT DEDUCTION IS ALLOWABLE EVEN WHERE INCOME WAS NOT ACTUALLY EARNED IN THE AY IN QUESTION. THIS ASPECT OF THE MATTER WAS DEALT WITH BY THIS COURT IN M/S CHEMINVEST LTD. ( SUPRA ) WHERE IT REVERSED THE DECISION OF THE SPECIAL BENCH OF THE ITAT BY OBSERVING AS UNDER: '20. SINCE THE SPECIAL BENCH HAS RELIED UPON THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY ( SUPRA ), IT IS CONSIDERED NECESSARY TO DISCUSS THE TRUE PURPORT OF THE SAID DECISION. IT IS NOTICED TO BEGIN WITH THAT THE ISSUE BEFORE THE SUPREME COURT IN THE SAID CASE WAS WHETHER THE EXPENDITURE UNDER SECTION 57 (III) OF THE ACT COULD BE ALLOWED AS A DEDUCTION AGAINST DIVIDEND INCOME ASSESSABLE UNDER THE HEAD 'INCOME FROM OTHER SOURCES'. UNDER SECTION 57 (III) OF THE A CT DEDUCTION IS ALLOWED IN RESPECT OF ANY EXPENDITURE LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME. THE SUPREME COURT EXPLAINED THAT THE EXPRESSION 'INCURRED FOR MAKING OR EARNING SUCH INCOME', DID NOT MEAN TH AT P A G E | 5 ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A CONDITION PRECEDENT FOR CLAIMING THE EXPENDITURE. THE COURT EXPLAINED: 'WHAT S. 57(III) REQUIRES IS THAT THE EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EAR NING INCOME. IT IS THE PURPOSE OF THE EXPENDITURE THAT IS RELEVANT IN DETERMINING THE APPLICABILITY OF S. 57(III) AND THAT PURPOSE MUST BE MAKING OR EARNING OF INCOME. S. 57(III) DOES NOT REQUIRE THAT THIS PURPOSE MUST BE FULFILLED IN ORDER TO QUALIFY THE EXPENDITURE FOR DEDUCTION. IT DOES NOT SAY THAT THE EXPENDITURE SHALL BE DEDUCTIBLE ONLY IF ANY INCOME IS MADE OR EARNED. THERE IS IN FACT NOTHING IN THE LANGUAGE OF S. 57(III) TO SUGGEST THAT THE PURPOSE FOR WHICH THE EXPENDITURE IS MADE SHOULD FRUCTIFY I NTO ANY BENEFIT BY WAY OF RETURN IN THE SHAPE OF INCOME. THE PLAIN NATURAL CONSTRUCTION OF THE LANGUAGE OF S. 57(III) IRRESISTIBLY LEADS TO THE CONCLUSION THAT TO BRING A CASE WITHIN THE SECTION, IT IS NOT NECESSARY THAT ANY INCOME SHOULD IN FACT HAVE BEEN EARNED AS A RESULT OF THE EXPENDITURE.' 21. THERE IS MERIT IN THE CONTENTION OF MR. VOHRA THAT THE DECISION OF THE SUPREME COURT IN RAJENDRA PRASAD MOODY ( SUPRA ) WAS RENDERED IN THE CONTEXT OF ALLOWABILITY OF DEDUCTION UNDER SECTION 57(III) OF THE ACT, WH ERE THE EXPRESSION USED IS 'FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME.' SECTION 14A OF THE ACT ON THE OTHER HAND CONTAINS THE EXPRESSION 'IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME.' THE DECISION IN RAJENDRA PRASAD MOODY ( SUP RA ) CANNOT BE USED IN THE REVERSE TO CONTEND THAT EVEN IF NO INCOME HAS BEEN RECEIVED, THE EXPENDITURE INCURRED CAN BE DISALLOWED UNDER SECTION 14A OF THE ACT.' 23. THE DECISIONS OF THE ITAT IN ACIT V. RATAN HOUSING DEVELOPMENT LTD. ( SUPRA ) AND RELAXO FOOTWEAR LTD. V. ADDL. CIT ( SUPRA ), TO THE EXTENT THAT THEY ARE INCONSISTENT WITH WHAT HAS BEEN HELD HEREINBEFORE DO NOT MERIT ACCEPTANCE. FURTHER, THE MERE FACT THAT IN THE AUDIT REPORT FOR THE AY IN QUESTION, THE AUDITORS MAY HAVE SUGGESTED THAT T HERE SHOULD BE A DISALLOWANCE CANNOT BE DETERMINATIVE OF THE LEGAL POSITION. THAT WOULD NOT PRECLUDE THE ASSESSEE FROM TAKING A STAND THAT NO DISALLOWANCE UNDER SECTION 14 A OF THE ACT WAS CALLED FOR IN THE AY IN QUESTION BECAUSE NO EXEMPT INCOME WAS EARNE D. 24. FOR ALL OF THE AFOREMENTIONED REASONS, THIS COURT IS OF THE VIEW THAT THE CBDT CIRCULAR DATED 11TH MAY 2014 CANNOT OVERRIDE THE EXPRESSED PROVISIONS OF SECTION 14A READ WITH RULE 8D. 7. THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE DEL HI HIGH COURT WHEREIN IT IS HELD THAT THE SATISFACTION OF THE ASSESSING OFFICER IN TERMS OF SECTION 14A (2) OF THE ACT IS MANDATORY. SAME VIEW HAS BEEN TAKEN BY THE HONBLE DELHI HIGH COURT IN CIT VS. TAIKISAH ENGINEERING INDIA LTD 370 ITR 338 (DELHI). HENCE, WE ARE OF THE OPINION THAT DISALLOWANCE MADE BY THE LD. ASSESSING OFFICER OF RS. P A G E | 6 108194/ UNDER SECTION 14A OF THE INCOME TAX ACT , WITHOUT RECORDING SATISFACTION THAT THE CLAIM OF THE ASSESSEE IS INCORRECT ABOUT NOT INCURRING ANY EXPENDITURE FOR EARNING EXEMPT INCOME, NO DISALLOWANCE CAN BE MADE. IN VIEW OF THIS WE REVERSE THE FINDING OF THE LOWER AUTHORITIES AND DIRECT THE LD. ASSESSING OFFICER TO D ELETE THE DISALLOWANCE OF RS. 1 08194/ MADE UNDER SECTION 14A OF THE INCOME TAX ACT . 8. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 0 4 / 0 9 / 2017 . - S D / - - S D / - ( H.S.SIDHU ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 4 / 0 9 / 2017 A K KEOT COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI