Income Tax Appellate Tribunal - Ahmedabad
Shri Ramniklal H. Ambani,, Ahmedabad vs The Deputy Commissioner Of Income Tax, ... on 15 October, 2018
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IN THE INCOME TAX APPELLATE TRIBUNAL
"SMC" BENCH, AHMEDABAD
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER
AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER
आयकर अपील सं./ ITA No. 3202/Ahd/2016
नधा रण वष /Assessment Year: 2013-14
Ramniklal H. Ambani, Vs. DCIT,
Vimal House, 7 Gadhvi Society, Circle - 5(2),
Navrangpura, Ahmedabad. Ahmedabad.
PAN No. AALPA 6303 R
अपीलाथ / (Appellant) यथ / (Respondent)
Assessee by : Shri Sameer Jani, A.R.
Revenue by : Shri Kamlesh Makwana, Sr. D.R.
सु न वाई क तार ख/ Date of Hearing : 10.09.2018
घोषणा क तार ख / Date of Pronouncement : 15.10.2018
आदे श/O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the Assessee against the appellate order of the learned Commissioner of Income-Tax (Appeals)-5, Ahmedabad ["CIT(A)" in short] relevant to Assessment Year 2013-14.
2. Assessee has raised the following grounds of appeal:-
"1. The learned CIT (A) has erred in law and on facts in partly confirming the assessment order passed by the Assessing Officer u/s 143(3) of the Act.
2. The learned CIT(A) has erred in law and on facts on the issue of disallowance under section 14A without considering the contention of the appellant. The appellant's contention that majority of the investment in shares are made before many years is neglected by the Ld.CIT(A). The Ld.CIT(A) has conveniently misrepresented the fact in his order that no bifurcation with regards to stock in trade and investments is given even though separate figures were given during appellate proceedings. The 2 ITA No.3202/Ahd/2016 Ramniklal H. Ambai vs. DCIT AY : 2013-14 addition sustained by the Ld. CIT(A) suffers from legal infirmity. The same may kindly be deleted.
3. The appellant humbly requests that cost be awarded in this appeal on account of arbitrary manner in which the order is passed by the department.
4. The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of appeal."
3. The only grievance of the assessee is that ld CIT(A) erred in confirming the disallowance made by the AO for Rs. 5,73,918/- under the provision of Section 14A r.w.r. 8D.
4. Briefly stated facts are that the assessee is an individual and engaged in the trading and investment in shares and mutual funds. The assessee during the year has earned dividend income of Rs. 21,47,943/- which was claimed as exempted u/s 10(34) of the Act. The assessee during the assessment proceedings claimed that no administrative expense has been incurred for the earning of dividend income.
4.1 The assessee also claimed that he has made investment in shares in the earlier years and there was no disallowance was made in the assessment framed u/s 143(3) of the Act pertaining to the A.Y. 2008-09 and 2009-10 after considering the issue under section 14A r.w.r. 8D of Income Tax Rules as discussed above.
However, the AO disagreed with the submission of the assessee and held that it is not possible to have made such huge investment without incurring any administrative expenses. Accordingly, the AO invoked the provision of Section 14A r.w.r. 8D and made the disallowance as detailed under:
3 ITA No.3202/Ahd/2016Ramniklal H. Ambai vs. DCIT AY : 2013-14 Sr No. Particulars Amount
1. Direct Expenses 3,569
2. Interest expenses Nil
3. Administrative Expenses 5,70,349 Total 5,73 918 The above disallowance was added to the total income of the assessee.
5. Aggrieved, assessee preferred an appeal to ld. CIT(A). The assessee before the ld CIT(A) submitted that he has not incurred any expenses in relation to such exempted income. Therefore no disallowance on account of administrative expenses can be made. The assessee in support of his claim relied on various orders / judgments which are placed in the order of ld CIT(A). However, the ld CIT(A) disregarded the contentions of the assessee and confirmed the order of AO by observing as under:
"4.3. The AO has noticed that the assessee has claimed exempt income of Rs.21,47,943/- account of share dividend. After considering the submission of the assessee, the AO is of the opinion that for such a huge investment it is beyond imagination that no administrative expenses have been spent by the assessee. Accordingly, the AO has applied the provisions of Section 14A r.w. Rule-8D and disallowed an amount of Rs.5,73,918/-.
4.4. During the course of appellate proceedings, the appellant has contended that he has an individual doing business in shares and securities and also holds equity shares, units .of mutual funds etc. as his investment. It is further contended that as against total investment of Rs.11,34,48,270/- in shares and mutual funds the assessee is having his own capital of Rs.19,79,45,419/- and interest free deposit of Rs.38,33,183/- and for earning exempt income like dividend or long term capital gain the assessee hardly requires to incur any substantial expenditure except interest. It is further contended that the appellant also trades in shares and securities and as such Section 14A doesn't apply to stock-in-trade. The appellant has relied upon certain decision as cited supra. The facts of the case and submissions are considered. The appellant has mainly contended that he has interest free funds more than enough for making investments in the long term securities. A perusal of order shows that the AO has not made any disallowance with regard to interest expenditure. The only 4 ITA No.3202/Ahd/2016 Ramniklal H. Ambai vs. DCIT AY : 2013-14 disallowance made by the AO as per Rule-8D is in respect of, administrative expenditure. The view of the AO that for such a huge investment, it cannot be accepted that no administrative expenses have been incurred is found to be; correct. Further, the: contention of the appellant that Section 14A does not applied to stock in trade cannot be accepted as no details was furnished by the appellant and no bifurcation is with regard to the stock in trade and investments. Considering the above, the disallowance made by the AO is justified and the same is confirmed."
Being aggrieved by the order of ld. CIT(A) assessee is in appeal before us.
6. The ld. AR before us filed a paper book running from pages 1-72 and submitted that the disallowance has been made under Rule 8D without making any reference in the books of accounts of the assessee.
6.1 The ld. AR further submitted that no satisfaction has been recorded by the authorities below as mandated under the provisions of section 14A of the Act before making the disallowance of the expenses in relation to dividend income.
7. On the other hand, ld. DR vehemently supported the order of authorities below.
8. We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has earned dividend income amounting to Rs. 21,47,943/- but the assessee has not made any disallowance of the expenses in relation to such income. Therefore, the AO invoked the provision of Section 14A r.w.r. 8D and worked out the disallowance of Rs. 5,73,918/-. The view taken by the AO was subsequently confirmed by the Ld CIT(A).
5 ITA No.3202/Ahd/2016Ramniklal H. Ambai vs. DCIT AY : 2013-14 8.1 At this juncture, we find relevant to refer the provision of Section 14A r.w.r. 8D of Income Tax Rule which are extracted as under:
"[Expenditure incurred in relation to income not includible in total income 5.
14A. 6[(1)] For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred 7 by the assessee in relation to 7 income which does not form part of the total income 7 under this Act.] 6[(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed 8, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply 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 :] 9[Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.]"
"8D. Method for determining amount of expenditure in relation to income not includible in total income.--(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 does 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 6 ITA No.3202/Ahd/2016 Ramniklal H. Ambai vs. DCIT AY : 2013-14 of total income ;
(ii) in a case where the assessee has incurred expenditure by way of interest during the previous year is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :--
Where A = amount of expenditure by way of interest other 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 balance-sheet of the assessee, on the first 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 of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year.
(3) For the purposes of this rule, the 'total assets' shall mean, total assets as appearing in the balance-sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets."
8.2 The provision of Rule 8D requires to make the disallowance of the expenses even if the assessee claim that he has not incurred any expense in relation to such dividend income. But the AO before making the disallowance needs to refer the books of accounts. In the instant case, we note that the assessee has claimed total administrative expenses amounting to Rs. 8,73,482/- only. The detail of the same is placed on page 64 of the paper book. Out of such expenses, there were two major expenses of Rs. 2,45,000/- and 4,69,443/- under the head loss on sale of fixed assets and travelling expenses respectively. If we exclude these two major expenses the remaining expenses are of Rs. 1,59,039/- only which can only be considered for the purpose of disallowance u/s 14A 7 ITA No.3202/Ahd/2016 Ramniklal H. Ambai vs. DCIT AY : 2013-14 r.w.r. 8D. It is because in our view the amount of expenses represented on account of loss on sale of fixed assets and travelling expenses cannot be linked with the expenses incurred for the purpose of earning the exempted income.
8.3 In view of above, we hold that the AO has made the disallowance u/s 14A r.w.r 8D without having regard to the books of accounts of the assessee as mandated under the provision of Section 14A r.w.r. 8D as discussed above. We find pertinent to reproduce the relevant portion of the AO finding on the basis of which the disallowance was made by him u/s 14A r.w.r. 8D which is extracted as under:
"It is beyond imagination to consider that for making such a huge investment, no administrative expenses have been spent by the assessee. In light of these facts, I am not satisfied with the reply of the assessee and therefore, cannot accept the same. Accordingly, provisions of Section 14A r.w. Rule 8D are applied in the following manner"
8.4 Thus, in our view, the jurisdiction to apply the provision of Section 14A of the Act contemplates satisfaction of the AO after having regard to the books of accounts of the assessee. In the case before us, the AO has exercised his jurisdiction against the provision of law i.e. without referring to the books of accounts. Therefore, in our considered view, the disallowance of the expenses cannot be made.
8.5 In holding so, we find support and guidance from the judgment of Hon'ble Allahabad High Court in the case of CIT vs. UP Electronics Corporation Ltd. reported in 397 ITR 113, wherein, it was held as under:
"24. This exposition of law prior to introduction of section 14A of the Act, 1961 was when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in the said business was deductible and in such case, principle of apportionment of expenditure relating to non-taxable income did not apply. However, where 8 ITA No.3202/Ahd/2016 Ramniklal H. Ambai vs. DCIT AY : 2013-14 business was divisible, the principle of apportionment of expenditure was applicable and expenditure apportioned to "exempt" income or income not exigible to tax was not allowable as a deduction.
25. Section 14A of the Act, 1961 after its insertion came to be considered at length in Walfort Share and Stock Brokers P. Ltd. (supra) It held that insertion of section 14A of the Act, 1961 with retrospective effect reflects serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income which does not form part of total income under the Act, 1961 against taxable income.
26. Sub-section (2) of section 14A of the Act, 1961 was considered by a Division Bench of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. Dy CIT [2010] 328 ITR 81/194 Taxman 203. Therein even validity of section 14A of the Act, 1961 and rule 8D of the Rules, 1962 was challenged. The Constitutional validity was upheld. While summing up conclusion on the interpretation of the aforesaid provision, the court in para 55(viii) and (ix) of judgment observed as under (page 109 of 328 ITR) :
"(viii) Sub-section (2) of section 14A does not enable the Assessing Officer to apply the method prescribed by rule 8D without determining in the first instance the correctness of the claim of the assessee, having regard to the accounts of the assessee. Sub-section (2) of section 14A mandates that it is only when having regard to the accounts of the assessee, the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the total income under the Act, that he can proceed to make a determination under the Rules ;
(ix) The satisfaction envisaged by sub-section (2) of section 14A is an objective satisfaction that has to be arrived at by the Assessing Officer having regard to the accounts of the assessee. The safeguard introduced by sub-section (2) of section 14A for a fair and reasonable exercise of power by the Assessing Officer, conditioned as it is by the requirement of an objective satisfaction, must, therefore, be scrupulously observed. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee."
In addition to the above, we note that the assessee has claimed Demat charges amounting to Rs. 3,569/- which are directly connected with the dividend income as envisaged in the provision of Rule 8D (2)(i) of Income Tat Rule. Therefore, we sustained the addition of Rs.3,569/- on account of Demat 9 ITA No.3202/Ahd/2016 Ramniklal H. Ambai vs. DCIT AY : 2013-14 Charges. Thus, we set aside the order of ld CIT(A) and direct the AO to delete the addition of Rs. 5,70,349/- only. Hence, the ground of appeal of the assessee is partly allowed.
9. In the result, appeal of the assessee is partly allowed.
Order pronounced in the Court on 15th October, 2018 at Ahmedabad.
Sd/- Sd/-
(RAJPAL YADAV) (WASEEM AHMED)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 15/10/2018
Priti Yadav, Sr.PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent.
3. संबं!धत आयकर आयु#त / Concerned CIT
4. आयकर आयु#त(अपील) / The CIT(A) - 5, Ahmedabad.
5. &वभागीय त न!ध, आयकर अपील य अ!धकरण, अहमदाबाद / DR, ITAT, Ahmedabad.
6. गाड फाईल / Guard file.
ु ार/ BY ORDER, आदे शानस स या&पत त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ&धकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of dictation ...12/09/2018 (PAGE-4)
2. Date on which the typed draft is placed before the Dictating Member : .. 10/10/2018
3. Other Member...........
4. Date on which the approved draft comes to the Sr.P.S./P.S...15/10/2018
5. Date on which the fair order is placed before the Dictating Member for pronouncement..............
6. Date on which the fair order comes back to the Sr.P.S./P.S......
7. Date on which the file goes to the Bench Clerk.........
8. Date on which the file goes to the Head Clerk...
9. The date on which the file goes to the Assistant Registrar for signature on the order............
10. Date of Despatch of the Order..................