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TMI Blog2020 (7) TMI 500X X X X Extracts X X X X X X X X Extracts X X X X ..... tive expenses are to be considered for working out the disallowance. We find that the assessee had held investments to the tune of ₹ 66.92 crores as on 31.3.2008 and derived exempt income in the form of dividends during the Asst Year 2008-09 . Considering the intention behind introduction of provisions of section 14A of the Act, the law laid down in various supreme court decisions referred to supra , considering the fact that computation of disallowance of indirect expenses in terms of Rule 8D(2)(iii) of the Rules resulting in absurdity in as much as majority of the expenses debited in the income and expenditure account getting disallowed thereon, considering the fact that substantial exempt income was derived by the assessee and considering the fact that definitely some time and energy would have been devoted by the assessee for monitoring the accounts tracking the investments and additionally incurring certain common indirect expenses , we hold that 25% of the aforesaid expenditure (i.e as per list above) to be attributable for the purpose of earning exempt income of the assessee which would meet the ends of justice in the peculiar facts and circumstances of the instant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ai (hereinafter referred to as ld. AO). ITA No.6745/Mum/2017 (Assessment Year: 2013-14) This appeal in ITA Nos.6745/Mum/2017 for A.Y.2013-14 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-5, Mumbai in appeal Nos. IT-119/2016-17/135/2017-18 dated 17/10/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/03/2016 by the ld. Asst. Commissioner of Income Tax 16(2),Mumbai (hereinafter referred to as ld. AO). 2. Shri S. Ganesh, assessee in person appeared at the time of hearing. Both the parties submitted that identical issue is involved in all the appeals. The only effective issue to be decided in this appeal is as to whether the disallowance u/s.14A of the Act r.w.Rule 8D(2)(iii) of the rules could be made in the facts and circumstances of the case. First let us take up ITA No.2024/Mum/2017 for A.Y.2008-09. 3. The brief facts of this case are that the assessee is a designated Senior Advocate of Hon ble Supreme Court and practising in Supreme Court and other High Courts. The ld. AO found that assessee declared substantial exempt income and had not dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly, the ld. CIT(A) observed that substantial exempt income has been declared by the assessee for which no corresponding expenditure has been disallowed in the return of income and upheld the action of the ld. AO in applying the computation mechanism provided under Rule 8D(2)(iii) of the Rules for disallowance of indirect / administrative expenses u/s.14A of the Act. Aggrieved, the assessee is in appeal before us. 3.2. The assessee in person argued that the entire dividends on shares and mutual funds are directly credited into the designated bank account No.226 with HDFC Bank, Churchgate Branch at Mumbai through Electronic Clearing Services (ECS) mode except dividends received from three companies where cheques are physically deposited into the same bank account. He argued that since substantial portion of dividend amounts are directly credited in the bank account, there was no occasion for incurring any expenses for the said purpose. He also submitted that his entire investment portfolios were looked after by his father residing in Mumbai to whom no compensation was paid by him. It was vehemently argued that no part of the expenses incurred by the assessee in Delhi, being the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that with regard to satisfaction to be recorded by the ld. AO before invoking Rule 8D(2) of the Rules, he argued that assessee was given due opportunity by the ld. AO vide letter dated 23/08/2013 as to why no disallowance u/s.14A of the Act be made in the facts of the instant case. The ld DR further argued that the validity of provisions of Rule 8D of the rules which was introduced from A.Y.2008-09 onwards had been upheld by the decision of the Hon ble Bombay High Court in the case of Godrej Boyce reported in 328 ITR 81 pursuant to which the ld. AO had sought to compute the disallowance u/s.14A of the Act in terms of Rule 8D of the Rules. This, in the opinion of the ld. DR, tantamount to proper recording of satisfaction by the ld. AO with cogent reasons. He argued that once there was no disallowance of expenses made by the assessee u/s 14A of the Act for the purpose of earning exempt income, the ld AO is bound to apply the only computation method provided in Rule 8D(2) of the Rules, which cannot be faulted with. He further argued that even the ld. CIT(A) had provided sufficient opportunity to the assessee by raising a specific question as to whether any expenditure was debited b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case. 3.5. We have heard the rival submissions and perused the materials available on record including the judicial pronouncements relied upon by both the parties at the time of hearing. At the outset, we find that assessee has not raised any ground before us challenging the assumption of jurisdiction by the ld. AO u/s.154 of the Act. Hence the argument advanced by the assessee in person, at the time of hearing before us, that this disallowance u/s.14A of the Act is a debatable issue, in the facts and circumstances of the instant case, cannot be done in the proceedings u/s.154 of the Act are not tenable and need not be adjudicated upon by us. We find from the perusal of the grounds raised by the assessee that all the grounds raised are only on merits of the disallowance u/s 14A of the Act and not on the assumption of jurisdiction by the AO u/s 154 of the Act. 3.5.1. It is not in dispute that assessee had earned substantial exempt income in the form of dividends from investments in shares and mutual funds. It is not in dispute that assessee had not disallowed any expenditure u/s 14A of the Act for the purpose of earning such exempt income either in the return of income or even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not to be allowed which has been incurred by the assessee in relation to income which does not form part of the total income under this Act . Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includible in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. 33. There is no quarrel in assigning this meaning to section 14A of the Act. In fact, all the High Courts, whether it is the Delhi High Court on the one hand or the Punjab and Haryana High Court on the other hand, have agreed in providing this interpretation to section 14A of the Act. The entire dispute is as to what interpretation is to be given to the words 'in relation to' in the given scenario, viz. where the dividend income on the shares is earned, though the dominant purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een taxable and non-taxable has, in principle, been now widened under section 14A. (Underlining provided by us) 35. The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining the provisions of the Finance Bill, 2001. We, thus, agree with the view taken by the Delhi High Court, and are not inclined to accept the opinion of Punjab Haryana High Court which went by dominant purpose theory. The aforesaid reasoning would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses u/s.14A of the Act. We are afraid that if the stand of the assessee is to be accepted, then the very purpose of introduction of provisions of Section 14A of the Act would stand defeated. Hence, we dismiss this line of argument of recording of satisfaction by the assessee in the peculiar facts and circumstances of the instant case. 3.5.4. However, we appreciate the arguments of the assessee that the ld. AO had not brought out the proximate connection of the expenses incurred vis- -vis the exempt income by clearly identifying the list of expenses. From the perusal of the income and expenditure account of the assessee for the year ended 31/03/2008. We find that the following expenses would have proximate relation to the exempt income:- Description Amount (in Rs.) Salary 4,54,519/- Travelling Expenses 2,88,681/- Telephone and Mobile Expenses 96,557/- Miscellaneous Expenses 8,82,782/- Audit Fees 14,972/- General repairs, computer rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s during the Asst Year 2008-09 . 3.5.6. Considering the intention behind introduction of provisions of section 14A of the Act, the law laid down in various supreme court decisions referred to supra , considering the fact that computation of disallowance of indirect expenses in terms of Rule 8D(2)(iii) of the Rules resulting in absurdity in as much as majority of the expenses debited in the income and expenditure account getting disallowed thereon, considering the fact that substantial exempt income was derived by the assessee and considering the fact that definitely some time and energy would have been devoted by the assessee for monitoring the accounts tracking the investments and additionally incurring certain common indirect expenses , we hold that 25% of the aforesaid expenditure (i.e as per list above) to be attributable for the purpose of earning exempt income of the assessee which would meet the ends of justice in the peculiar facts and circumstances of the instant case. We hold that this decision would not fall as binding precedent for other cases due to its peculiar facts and circumstances. Accordingly, the grounds raised by the assessee for A.Y.2008-09 are partly allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. We find that these are regular scrutiny assessments framed u/s.143(3) of the Act by the ld. AO, wherein the disallowance u/s.14A of the Act had been made by applying computation mechanism provided in Rule 8D(2) of the Rules. We find that the assessee had derived exempt income in the form of dividends during the Asst Years 2012-13 and 2013-14 in the sums of ₹ 5,68,81,664/- and ₹ 5,91,32,750/- respectively. The facts of the case for these two assessment years are exactly identical to the facts of the earlier years on merits. Hence, the decision rendered by us for the assessment year 2008-09 would apply with equal force for A.Yrs. 2012-13 2013-14 also except with variance in figures. The ld. AO is directed to identify the list of expenses as has been listed out by us for A.Y.2008-09 hereinabove and such other items of indirect expenditure of similar nature, if any, and disallow 25% of the said expenditure for 2012-13 2013-14 which would meet the ends of justice. Accordingly, the grounds raised by the assessee for A.Yrs. 2012-13 2013-14 are partly allowed. 6. The grounds raised for all the assessment years with regard to chargeability of interest u/s. 234A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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