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INCOME TAX APPELLATE TRIBUNAL “A” BENCH, MUMBAI
I.T.A. No. 27/Mum/2012 Assessment Year: 2008-09
Asha Lalit Kanodia (Appellant) vs. Addl. CIT (Respondent)
Date of Order: 17-02-2016
ORDER
Per Sanjay Arora, A. M.:
This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-23, Mumbai (‘CIT(A)’ for short) dated 12.10.2011, partly allowing the Assessee’s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the assessment year (A.Y.) 2008-09 vide order dated 06.12.2010.
2. The dispute in the present case revolves around the validity or otherwise in law, and in the facts and circumstances of the case, of the disallowance u/s. 14A, at Rs.4,90,371/-, in respect of the assessee’s tax-exempt income, being dividend on units, shares and securities (Rs.56.25 lacs) and long-term capital gain (LTCG), at Rs.5.92 lacs. The assessee has also earned another Rs.2,62,431/- as dividend income in a proprietary concern, M/s. Datamatics Financial Software Services Ltd., claimed exempt u/s. 10(34) of the Act and, two, the figure of Rs.56.25 lac includes Rs.77,994/- by way of interest (tax free) on securities (computation of income at PB pgs. 15-21).
3. The disallowance effected by the Assessing Officer (A.O.) and sustained by the ld. CIT(A), is u/s. 14A r/w rule 8D(2)(iii), i.e., toward indirect administrative expenditure, for which the rule prescribes a rate of 0.5% of the relevant investment held during the year. The assessee’s case, relying on, among others, CIT vs. Hero Cycles Ltd. [2010] 323 ITR 518 (P & H) (PB pgs. 33-36) and J. K. Investors (Bombay) Ltd. (in ITA Nos. 7858/Mum/2011 and 7851/Mum/2011 dated 13.03.2013/PB pgs. 37-57), is that no disallowance could be made where, as claimed in the instant case, no expenditure has been incurred by the assessee in the first place. The assessee had maintained two sets of accounts, i.e., for personal transactions and her business of recruitment agency. No expenditure has been claimed in the personal accounts, reflecting an investment in tax-free securities, i.e., securities yielding or liable to yield income which is tax-exempt, at Rs.867.61 lacs; the direct expenditure in the form of depository charges (Rs.2,669/-) and securities transaction tax/service charges (Rs.46,453/-) being debited to her capital account (PB pg. 22). As regards the accounts of the business, as evident from the balance-sheet (as on 31.3.2008) of M/s. Datamatics Financial Software Services Ltd.(PB pgs. 23-32), the expenditure pertains only to the assessee’s business. There could be no presumption with regard to the assessee having incurred expenditure in relation to the income not forming part of the total income, i.e., merely because the assessee had earned such income. The A.O. could not proceed mechanically to apply rule 8D, but has to record his dissatisfaction with the correctness of the assessee’s claim, giving cogent reason for not accepting the same. This sums up the assessee’s case.
4. We have heard the parties, and perused the material on record.
4.1 Section 14A reads as under:
‘Expenditure incurred in relation to income not includible in total income.
14A. (1) For the purposes of computing the total income 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 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, 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.
Provided ……..’
Clearly, it is only where the expenditure has been incurred in the first place, that there could be a disallowance u/s. 14A, which is only of expenditure – direct or indirect, incurred by the assessee, in-so-far as and to the extent it relates to the income not forming part of the total income, i.e., qua the activity yielding or liable to yield such income. The statement is in fact axiomatic, on which there could be no dispute or two views. The question is one of onus. True, a claim by the assessee, including as to no expenditure having been incurred, is to be rebutted by the A.O. where not satisfied, with reference to the assessee’s accounts. This is as only its’ accounts could reveal the existence of expenditure – direct or indirect, that could be said to be incurred by the assessee toward or in pursuing such activity. The assessee’s claim, however, cannot be a bald claim, made in the face of expenditure being incurred and claimed. How could, one may ask, the correctness of a bald claim be examined? Such a claim has no sanction in law, and no cognizance could be given therein to it. It is only where the claim, again, with reference to its accounts, is made by the assessee that the A.O. could, having regard thereto, examine the same as to its correctness and express his satisfaction or, as case may be, dissatisfaction therewith, proceeding to invoke rule 8D in case of the latter. Rule 8D is toward an estimation of such expenditure, and mandatory in its application, so that the A.O. has no discretion in the matter once the rule gets attracted. The plea of no expenses having been incurred cannot, therefore, be lightly made, much less without any substance, as in the present case. It is toward this that the assessee’s accounts are relevant and gain primacy. The disallowance u/s. 14A, it needs to be appreciated, is a statutory disallowance. The issue also has been examined, in the fact situation of the given case by the tribunal in different decisions, and toward which we may advert to its order in AFL P. Ltd. vs. Asst. CIT [2013] 28 ITR (Trib) 263 (Mum), reproducing from its relevant part:
‘6.3 It is, therefore, clear that the initial onus, even as stated by the ld. CIT(A), to make a claim in respect of the expenditure incurred in relation to the income that does not form part of the total income, is on the assessee. Once the assessee makes such a claim with reference to its accounts, the A.O. is bound to examine the same for the purpose of satisfying himself with regard to its correctness or otherwise, and where not satisfied, determine the same in accordance with the prescribed method. Further, therefore, though there is no specific requirement of recording dissatisfaction, it is incumbent on A.O. to do so, as in its absence it cannot be ascertained if he had actually examined the assessee’s claim or proceeded mechanically. Two, his order being appealable, it is only where it bears his reasons, could the validity thereof and, thus, of his action of disallowance u/r. 8D, be subject to judicial review. It is in this context that it has been held that the said dissatisfaction has to be explicit and informed. The same, thus, is not a jurisdictional requirement, but toward completing the inbuilt fairness of the procedure as provided for. The requirement of recording dissatisfaction predicates on the discharge of the onus cast on the assessee, and which may not always obtain. The Revenue on its part could only extend opportunity to the assessee for the discharge of the said onus. In a particular case, the assessee may not produce the accounts. How could the A.O. possibly verify the correctness of the assessee’s claim in such a case? In another, the assessee does not state the basis of its claim or makes the same de hors the expenses incurred and claimed. The A.O. could not possibly verify the correctness of such an incoherent or infirm claim. True, ……….’
True, no disallowance would ensue in the absence of any nexus or proximity between the expenditure and the related activity. The law does not presume a nexus or proximity – which is a matter of fact; but where one is inferable or not excluded on the facts, sanctions apportionment of the expenditure. This aspect stands abundantly clarified by the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 (Bom), on which extensive reliance is placed, stating that the theory of apportionment has since been widened, i.e., by the introduction of section 14A, further relying on the decision in the case of CIT vs. Walfort Shares & Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC). Reliance toward this is also placed on the decisions by the tribunal, as in the case of Dy. CIT vs. Damani Estates and Finance P. Ltd. [2013] 25 ITR (Trib) 683 (Mum) and Kunal Corporation vs. Asst. CIT [2013] 28 ITR (Trib) 277 (Mum).
4.3 Coming to the facts of the present case, the disallowance u/s. 14A is only toward indirect administrative expenditure. The assessee, per the accounts of its proprietary concern, claims expenditure at Rs.665.34 lacs (including on staff cost at Rs.480.66 lacs), a significant part of which is indirect in nature, viz. on rent, electricity, telephone, internet, travel and conveyance, data entry, postage and stationery, etc. The assessee has a sizeable investment portfolio, which certainly requires being, and is being, managed. This would entail making new as well as disposing investments already made. Even the decision to hold an investment requires a periodic review of its performance as well as of the investment environment/scenario. Could this be without any associated cost? Even as much as maintaining and keeping the records, including safe-keeping of the securities (where not dematerialized), entails cost. A meeting of the ‘assessee’ with his investment consultant or broker in relation to a IPO or any other emerging investment option is to be conducted (say). This would require visit by the consultant to the assessee’s premises or vice versa. This explains the appropriation of the expenditure claimed on telephone, electricity, conveyance, etc. The job may itself be assigned - wholly or partly, to some staff, even as a part of his duties, so that the staff cost may also be involved. Even ignoring staff and advertisement cost, leaves a balance expenditure at Rs.184 lacs. It may be argued that the expenditure incurred and claimed is as per the books of the assessee’s business. The argument is to no moment. Firstly, the assessee holds investment (Rs.140.59 lacs) including tax-free investments, in its business. Two, and more importantly, the assessee is one entity, undertaking both, business – yielding taxable income, and investments – yielding both taxable and tax-free incomes. The manner or the account from which common expenditure, i.e., which could be ascribed to both sets of activities, is incurred or routed, is immaterial, being borne by and claimed by the assessee. Further, the personal balance-sheet includes investment in business (M/s. Datamatics Financial Software Services Ltd.) at Rs.265.53 lacs, which includes investments held in the books of the business. The argument is thus not valid. Further, there is no incurring and, consequently, disallowance of interest expenditure, direct or indirect, so that the plea of the investments being financed by own capital is to no consequence. The assessee has, besides the two decisions afore-discussed, also relied upon the other decisions as well, viz. CIT vs. UTI Bank Ltd. [2013] 32 taxmann.com 370 (Guj); CIT vs. Gujarat State Fertilizers & Chemicals ltd. [2013] 217 Taxman 343 (Guj); CIT vs. Taikisha Engineering India Ltd. [2015] 370 ITR 338 (Del) and Dy. CIT vs. Jammu & Kashmi Bank ltd. [2013] 142 ITD 553 (Amritsar-Trib). The same clarify that the suo motu disallowance by the assessee or its’ claim of no expenditure having been incurred to earn tax exempt income is to be found non-satisfactory by the A.O. before resort to computation (of disallowance) under rule 8D(2) could be made. This, as afore-stated, is the statutory prescription, on which therefore there is no quarrel. Then, it is further stated that sufficiency of interest-free funds would operate to the non invocation of the disallowance u/s. 14A/rw Rule 8D(2). No disallowance on account of interest obtains in the instant case. In fact, the finding of sufficient funds could only be with regard to the assessee’s accounts, with reference to which, as explained, the satisfaction or dissatisfaction of the assessee’s claim is to be made. The reliance on the said decisions would, thus, be of no assistance to the assessee.
4.4 Under the circumstances and, in view of the foregoing, we find little merit in the assessee’s case and, accordingly, uphold that of the Revenue, dismissing the assessee’s appeal. We decide accordingly.
5. In the result, the assessee’s appeal is dismissed
(Joginder Singh) (Sanjay Arora)
Judicial Member Accountant Member
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