KLG Capital Services Ltd, Mumbai V. ITO, Ward-14(3), New Delhi

ITA 5893/DEL/2017

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2837 (ITAT-DELHI)
• Duration Of Justice: 6 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2014-2015
• Appeal Filed On: 15-09-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K TIWARI
• Assessee Lawyers: G S KOHLI
• Keywords: Earning of tax free income
• Section: 142(1); 14A

Judgement Text

1 ITA NO. 5893/DEL/2017 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: SMC NEW DELHI BEFORE SHRI R. S. SYAL, VICE PRES IDENT AND MS SUCHITRA KAMBLE, JUD ICIAL MEMBER ITA NO. 5893/DEL/201 7 ( A.Y 2014-15) KLG CAPITAL SERVICES LTD. SKILL HOUSE, 209, BANK STREET, CROSS LANE, FORT MUMBAI, MAHARASHTRA AAACK1063A (APPELLANT) VS ITO WARD-14(3) NEW DELHI (RESPONDENT) APPELLANT BY SH. G. S. KOHLI, CA RESPONDENT BY SH. V. K. TIWARI, SR. DR ORDER PER SUCHITRA KAMBLE, JM THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER DATED 12/07/2017 PASSED BY CIT(A) -5 NEW DELHI FOR ASSES SMENT YEAR 2014-15. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- 1. THE LD.CIT(A) WAS NOT JUSTIFIED IN CONFIRMING AN AD DITION OF RS.5,89,439/- ADDED BY A.O UNDER RULE 8D (2) (III) OF INCOME TAX RULES, 1962. 2. THAT THE LD.CIT(A) HAS GIVEN HER ESTIMATION AND ;OP INION WHICH HAS NO VALIDITY IN THE EYES OF THE LAW. DATE OF HEARING 20.03.2018 DATE OF PRONOUNCEMENT 21.03.2018 2 ITA NO. 5893/DEL/2017 3. THE LD.CIT(A) HAD FAILED TO APPRECIATE THAT IN THE ABSENCE OF NEXUS BETWEEN THE EXPENDITURE INCURRED AND EXEMPTED INCOM E AND ADVERSE ACTION U/S 14A IS NOT JUSTIFIED. 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF CONSULTANCY SERVICES DURING THE YEAR. THE ASSESSEE COMPANY FIL ED ITS RETURN FOR ASSESSMENT YEAR 2014-15 ON 31/3/2016 DECLARING INCO ME OF RS.18,74,290/-. STATUTORY NOTICE U/S 143(2) OF THE INCOME TAX ACT, 1961 DATED 26/07/2016 WAS ISSUED ALONG WITH NOTICE U/S 142(1) AND SERVED UPON THE ASSESSEE. IN RESPONSE TO THE SAID NOTICES, C.A AND AUTHORIZED RE PRESENTATIVE OF THE ASSESSEE COMPANY ATTENDED THE ASSESSMENT PROCEEDING S AND FILED THE DETAILS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASS ESSING OFFICER OBSERVED THAT THE ASSESSEE COMPANY HAD SHOWN INVESTMENT IN E QUITY SHARES OF THE DIFFERENT COMPANIES BUT NO DISALLOWANCE WAS MADE U/ S 14A BY THE ASSESSEE COMPANY. IN VIEW OF THIS, THE ASSESSEE WAS GIVEN S HOW CAUSE NOTICE DATED 14/10/2016 THAT AS TO WHY THE DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D SHOULD NOT BE MADE AS THE ASSESSEE MADE INVESTME NT. THE ASSESSEE FILED REPLY DATED 20/10/2016, THE ASSESSEE SUBMITTED THAT THE CONCERN INVESTMENT WAS MADE IN FINANCIAL YEAR 2010-11 I.E. ASSESSMENT YEAR 2011-12 & IT WAS INVESTED FROM THE SUFFICIENT FUNDS AVAILABLE WITH T HE ASSESSEE COMPANY AS SHOWN IN THE BALANCE-SHEET AS ON 31/3/2011. THE AS SESSEE FURTHER SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE ONLY UNSECURE D LOAN OUTSTANDING IN THE BALANCE SHEET IS RELATED TO M/S AVAITA PROPERTIES P VT. LTD. WHICH IS A HOLDING COMPANY AND IT WAS GIVEN FREE OF INTEREST. THE ASS ESSING OFFICER DISALLOWED RS.7,18,693/- U/S 14A CALCULATING AS PRESCRIBED UND ER RULE 8D OF THE INCOME TAX RULES 1962. 4. BEING AGGRIEVED BY THIS ORDER, THE ASSESSEE FILE D APPEAL BEFORE THE CIT(A). THE CIT(A) PARTLY ALLOWED THE APPEAL OF THE ASSESSE E. 5. THE LD. AR SUBMITTED THAT SECTION 14A IS INVOKED WHEN AN EXPENSE 3 ITA NO. 5893/DEL/2017 DIRECTLY RELATED TO EXEMPTED INCOME OR TO SAY ON SU CH EXPENSE COULD HAVE ADDED AS TAXABLE INCOME IN THE HANDS OF THE ASSESSE E. HOWEVER, IN CASE IF NO SUCH EXPENSE IS ESTABLISHED TO HAVE DIRECTLY LINKED WITH THE EXEMPTED INCOME OR ASSESSING OFFICER IS NOT AGREE TO SUCH EXPENSES SURRENDERED BY THE ASSESSEE THEN RULE 8D BE INVOKED TO DETERMINE THE E XPENSE INCURRED TO TURN EXEMPTED INCOME. THUS, IT IS EVIDENT THAT RULE 8D WILL BE APPLICABLE WHERE AN EXPENSE APPARENTLY IS NOT ESTABLISHED. HOWEVER, TH E ASSESSING OFFICER CANNOT TAKE BOTH THE OPTIONS SIMULTANEOUSLY. IN THE INSTA NT CASE, THE ASSESSING OFFICER ADDED RS.1,28,954/- BY LINKING AS DIRECT EX PENSES AS TAXABLE INCOME. THUS, HIS RIGHT TO APPLY RULE 8D DESERVES TO BE SEI ZED OR TO SAY SUCH ORDER CEASES ITS VALIDITY. THE LD. AR FURTHER SUBMITTED THAT RECORDING OF SATISFACTION BY ASSESSING OFFICER FOR APPLICABILITY OF SECTION 1 4A IS MANDATORY. IT IS AN ADMITTED FACT IN ASSESSMENT ORDER THAT NEITHER THER E IS ANY INVESTMENT NOR LOAN NOR ANY EXPENSE RELATED TO EXEMPT INCOME. THU S, THE ASSESSING OFFICER HAS NOT RECORDED ANY SATISFACTION TO ESTABLISH THE NEXUS OF EXPENSES AND THE EXEMPTED INCOME. HOWEVER, THE ASSESSING OFFICER AD DED AD-HOC RS.1,28,954/- BY TREATING AS DIRECT EXPENSE WITH DIVIDEND INCOME, WHICH NO DOUBT HAS BEEN DOUBTED BY THE CIT(A). IN THE INSTANCE CASE, THE E XPENSES WHICH THE ASSESSING OFFICER TRIED TO LINK UP AS DIRECT EXPENSES HAS BE EN DELETED BY THE CIT(A). THE ASSESSEE RELIED UPON THE DECISION OF THE HON'BLE HI GH COURT IN CASE OF H. T. LULIA VS. PRINCIPAL CIT 399 ITR 576 & EISHAR MOTORS VS. CIT(A) 398 ITR 51 AS WELL AS THE HONBLE ALLAHABAD HIGH COURT DECISION I N CASE OF CIT VS. UP ELECTRONICS CORPORATION LTD. 397 ITR 113. THE LD. AR FURTHER SUBMITS THAT THE ASSESSING OFFICER REFERRED CIRCULAR NO. 5 OF 2004 WHERE THEY VERIFIED SECTION 14A WOULD APPLY EVIDENT WHEN EXEMPTED INCOME WAS NO T EARN IN A PARTICULAR ASSESSMENT YEAR. THE CBDT CIRCULAR COULD NOT OVERR IDE EXPRESSED PROVISION OF SECTION 14A READ WITH RULE 8D THAT WOULD NOT PRE CLUDE THE ASSESSEE FROM TAKING A STAND THAT NO DISALLOWANCE U/S 14A OF THE ACT WAS CALLED FOR IN ASSESSMENT YEAR IN QUESTION BECAUSE NO EXEMPT INCOM E WAS EARN AND THE LD. AR RELIED UPON THE HONBLE DELHI HIGH COURT IN CASE OF PRINCIPAL CIT VS. IL & FS ENERGY DEVELOPMENT COMPANY LTD 399 ITR 483. THE LD. AR SUBMITTED 4 ITA NO. 5893/DEL/2017 THAT THE CIT(A)S OBSERVATION THAT TOTAL ADMINISTRA TIVE EXPENSES CLAIMED STANDS AT RS.24.41 LACKS, THEREFORE, HELD THAT RULE 8D WAS CORRECTLY APPLIED BY THE ASSESSING OFFICER. THE LD. AR SUBMITTED THAT THIS OBSERVATION IS CONTRARY TO THE FACTUAL ASPECT AS FROM NOTE NO. 18 FORMING THE PART OF BALANCE SHEET RELATED TO ADMINISTRATIVE AND GENERAL EXPENSES FOR AN AGGREGATE AMOUNT OF RS.21.41 LACKS DOES NOT INCLUDE ANY EXPENSES WHICH COULD HAVE LINKED UP WITH TAX FREE INCOME. THUS, THE ASSESSING OFFICER AS WE LL AS THE CIT(A) HAS NOT PROVED NEXUS OF ANY EXPENSE IN RESPECT OF DIVIDEND INCOME. 6. THE LD. DR SUBMITTED THAT THE CIT(A) HAS RIGHTLY TAKEN A VIEW THAT DISALLOWANCE IS PROVIDED U/S 14A READ WITH RULE 8D (2)(III) AS THE ASSESSING OFFICER HAS CORRECTLY DETERMINE THE AMOUNT IN DIRE CT EXPENDITURE (RS.5,89,439/-) STRICTLY IN ACCORDANCE WITH FORMULA PRESCRIBED IN RULE 8D (2) (III). THE LD. DR FURTHER SUBMITTED THAT THE ASSES SEE HOLDS INVESTMENT OF RS.9,94,95,600/- INCLUDING TAX FREE INVESTMENT AND INVESTMENT IN ASSOCIATE CONCERNS M/S KLG STOCK BROKERS PVT. LTD. THE ASSESS EE HAS NOT EXPLAINED HOW THE ALLOCATION OF THE COMMISSION EXPENDITURE WAS MA DE AS WELL AS THE ALLOCATION OF SALARY EXPENSES WAS MADE. IN SO FAR AS, THE INDIRECT EXPENSES ARE CONCERNED, NO DISALLOWANCE NEEDS TO BE OFFERED DO N OT APPEAR TO BE PROPER WITH REFERENCE TO THE BOOKS OF ACCOUNTS. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. THE ASSESSEE WHILE GIVING EXPLANATION BEFOR E THE REVENUE AUTHORITIES SUBMITTED THAT DURING THE YEAR, THE ASSESSEE COMPAN Y HAS NOT MADE ANY INVESTMENT. THE ENTIRE INVESTMENT WAS MADE IN THE E ARLIER YEARS FROM THEIR OWN FUNDS. THE SAME WAS NOT DISPUTED BY THE REVENU E AUTHORITIES AND IS SUPPORTED WITH THE AUDIT ACCOUNT OF THE EARLIER YEA RS TO PROVE THAT THE ENTIRE INVESTMENT WAS MADE FROM SELF GENERATED SOURCES. FURTHER, NO EXPENSE LIKE INTEREST ETC. WAS CLAIMED IN THE EARLIER YEARS AS W ELL AS IN THE PRESENT ASSESSMENT YEAR. THE MAIN FACTOR FOR INVOKING SE CTION 14A ALONG WITH RULE 8D IS TO RECORD THE SATISFACTION THAT SUCH EXPENSES ARE RELATED TO TAX FREE 5 ITA NO. 5893/DEL/2017 INCOME. HOWEVER, IF AN AMOUNT OF SUCH CLAIM IS DEB ATABLE THEN THE RULE 8D (2) (III) COMES INTO OPERATION. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEES ENTIRE INVESTMENT WAS MADE FROM THE SUFFICIENT FUNDS AVAILABLE WITH THE ASSESSEE COMPANY AND NO EXPENDITURE LIKE I NTEREST OR ANY RELATED EXPENSE WERE CLAIMED. THUS, THE APPLICATION OF PRO VISO TO SECTION 14A DOES NOT COME IN THE PICTURE. BESIDES THE SATISFACTION I S A NECESSITY FOR INVOKING SECTION 14A WHICH THE ASSESSING OFFICER HAS OVER L OOKED. MERELY, CALCULATING AS PER RULE 8D FOR DISALLOWANCE U/S 14A DOES NOT AL LOW THE ASSESSING OFFICER TO ESCAPE FROM RECORDING THE SATISFACTION. IT IS A MANDATORY CONDITION OF SECTION 14A TO REFER SATISFACTION AS TO WHY DISALLO WANCE U/S 14A HAS TO BE DONE. IN THE ENTIRE ASSESSMENT ORDER, THE ASSESSIN G OFFICER HAS NOT GIVEN A NEXUS BETWEEN THE INVESTMENT AND EXPENSES INCURRED THERETO. THE HON'BLE HIGH COURT IN CASE OF H. T. MEDIA LIMITED HELD THAT FOR THE PURPOSE OF RULE 8D (2)(II), THE ASSESSING OFFICER WAS REQUIRED TO EXAM INE WHETHER THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST IN THE PREV IOUS YEAR AND SECONDLY WHETHER THE INTEREST PAID WAS DIRECTLY ATTRIBUTABLE TO PARTICULAR INCOME OF RECEIPT. THUS, IT IS THE MANDATORY REQUIREMENT U/S 14A OF THE ACT, 1961 AND RULE 8D OF THE INCOME TAX RULES, 1962 TO RECORD SAT ISFACTION, AND IF THE SATISFACTION/REASONS ARE NOT MENTIONED THE QUESTION OF APPLYING RULE 8D DID NOT ARISE. CONSEQUENTLY, ON THE ASPECT OF ADMINIST RATIVE EXPENSES BEING DISALLOWED SINCE THERE WAS A FAILURE BY THE ASSESSI NG OFFICER TO COMPLY WITH THE MANDATORY REQUIREMENT OF SECTION 14A(2) OF THE ACT READ WITH RULE 8D (1) (A) OF THE RULES RECORD OF SATISFACTION IS REQUIRED THERE UNDER. THE QUESTION OF RE-APPLYING RULE 8D(2) (III) OF THE RULES DID NOT A RISE. IN THE PRESENT CASE ALSO, THE SAME DOES NOT ARISE. THE ASSESSING OFFICER AS W ELL AS THE CIT(A) HAVE FAILED TO TAKE INTO ACCOUNT THE EXPENSES INCURRED BY THE A SSESSEE AND THERE WAS NO SATISFACTION RECORDED BY THE ASSESSING OFFICER REGA RDING INVOCATION OF RULE 8D. THIS LEGAL ASPECT WAS OVERLOOKED BY THE ASSESSING O FFICER AS WELL AS BY THE CIT(A). THEREFORE, THE ORDER OF THE CIT(A) DOES NOT SURVIVE. THUS, THE APPEAL OF THE ASSESSEE IS ALLOWED. 6 ITA NO. 5893/DEL/2017 8. IN RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST MARCH, 2018 . SD/- SD/- (R. S. SYAL) (SUCHITRA KAMBLE) VICE PRESIDENT JUDI CIAL MEMBER DATED: 21/03/2018 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 7 ITA NO. 5893/DEL/2017 DATE 1. DRAFT DICTATED ON 20/03/2018 PS 2. DRAFT PLACED BEFORE AUTHOR 20/03/2018 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2018 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 21.03.2018 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 2 1 .03.2018 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.