Case Law Details
Leena Kasbekar Vs ACIT (ITAT Mumbai)
The assessing officer invoked provisions of Rule 8D(2)(iii) and disallowed 0.5% of average value of investments towards expenditure in relation to earning exempt income. According to the assessing officer, from assessment year 2008-09 onwards, in view of specific provisions provided by way of Rule 8D(2) to determine the disallowance of expenditure incurred in relation to exempt income, the assessee cannot take a stand that there is no expenditure incurred to earn exempt income. The assessee claims that she had not incurred any expenditure to earn exempt income and the expenditure claimed in the P&L Account is directly attributable to her professional income. The assessee further claims that the assessing officer has not arrived at a satisfaction before invoking the provisions of Rule 8D which is a pre-condition for determination of disallowance, as per the provisions of Rule 8D when there is no expenditure is claimed against earning exempt income. In the absence of any satisfaction as to incorrectness of claim of the expenditure, the assessing officer cannot determine disallowance of expenditure by invoking the provisions of Rule 8D(2). We find force in the argument of the assessee for the reason that the provisions of section 14A(2) makes it mandatory on the part of the assessing officer to arrive at a satisfaction with regard to the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income under the Act. In this case, the assessee claims that she did not incur any expenditure to earn exempt income. When the assessee claims no expenditure has been incurred to earn exempt income, the assessing officer has to establish a nexus between expenditure claimed by the assessee to the exempt income. In this case, on perusal of the details filed by the assessee, we find that the assessee has maintained separate books of account for her professional income. We further observe that the assessee has not claimed any indirect expenditure in relation to earning exempt income. On further verification of the P&L Account, we find that the assessee has claimed a minimum expenditure of Rs.3 lakhs against gross receipt of Rs.28,25,000 which are in the nature of administrative expenses directly attributable to her professional activity except demat charges of Rs.574. Therefore, we are of the view that in the absence of any direct nexus between expenditure claim to the exempt income, the assessing officer cannot invoke the provisions of section 14A row with rule 8D(2) to disallow expenditure. Hence, we direct the assessing officer to delete disallowances made under section 14A row with rule 8D except demat charges of Rs.574 which is directly incurred in relation to earning exempt income.
Full Text of the ITAT Order is as follows:-
These two appeals filed by the assessee are directed against separate, but identical orders of Commissioner (Appeals)-3, Mumbai dated 25-7-2013 and 31-7-2013 for the assessment years 2009-10 & 2010-11. Since, facts are identical and issues are common, they were heard together and are disposed of by this common order for the sake of convenience.
2. The brief facts of the case extracted from ITA No.5620/Mum/2013 for assessment year 2009-10 are that the assessee, an individual and advocate by profession, filed her return of income on 31-7-2008 declaring total income of Rs.27,82,472. The case was selected for scrutiny under CASS and accordingly, statutory notices under section 143(2) and 142(1) were issued. In response to notices, the authorized representative of the assessee attended from time to time and furnished necessary details, as called for. The assessment was completed under section 143(3) on 22-11-2010, determining total income at Rs.34,42,550, inter alia making additions towards difference on account of AIR information, disallowance of expenditure incurred to earn exempt income under section 14A of the Act and ad hoc disallowance of certain expenditures. Aggrieved by the assessment order assessee preferred appeal before Commissioner (Appeals).
3. Before Commissioner (Appeals), the assessee has challenged the additions made by the assessing officer towards disallowance of expenditure under section 14A. The assessee submitted that she had not incurred any expenditure in relation to earning exempt income and the assessing officer has failed to establish nexus between the expenditure incurred and the exempt income before disallowing expenditure by invoking provisions of Rule 8D. The Commissioner (Appeals), after considering relevant submissions of the assessee and also relying upon certain judicial precedents, observed that the assessing officer is under no obligation to record satisfaction, where the assessee has claimed that no expenditure has been incurred for earning exempt income. The Commissioner (Appeals) further held that onus to prove that the expenditure incurred by the assessee are directly related to her professional income is on the assessee. In the absence of any such evidence, the assessing officer was well within his jurisdiction to invoke the provisions of Rule 8D. In the circumstances, the assessing officer has rightly invoked the provisions of Rule 8D(2)(1ii) to disallow expenditure incurred in relation to exempt income. Aggrieved by the order of Commissioner (Appeals), the assessee is in appeal before us.
4. The learned Authorised Representative for the assessee submitted that the learned Commissioner (Appeals) erred in confirming the additions made by the assessing officer in makingad hoc disallowance under section 14A without there being any nexus between the expenditure claimed by the assessee and earning exempt income. The learned Authorised Representative further submitted that the assessee has maintained separate books of account for her profession which is evident from the fact that all expenditure debited to P&L Account are directly attributable to her profession and no part of the expenditure is relatable to earning exempt income. The assessing officer, without recording his satisfaction as to the incorrectness of claim made by the assessee simply invoked the provisions of Rule 8D(2) to disallow on ad hoc basis which is incorrect. In support of her argument, she relied upon the decision of Hon’ble Supreme Court in the case of Rajasthan Warehousing Corpn. v. CIT (2000) 242 ITR 450 : 109 Taxman 145 an also the decision of Hon’ble Punjab & Haryana High Court in the case of CIT v. Hero Cycles Ltd. (2010) 323 ITR 518 : 189 Taxman 50.
5. On the other hand, the learned Departmental Representative supported the order of the Commissioner (Appeals). The learned Departmental Representative further submitted that the assessing officer is under no obligation to record a satisfaction where the assessee has claimed that no expenditure was incurred for earning exempt income. The learned DR further submitted that the assessee has earned exempt income; however, failed to disallow any expenditure in relation to earning exempt income which is mandatory in nature even though the assessee claims that no expenditure has been incurred for earning exempt income in view of the specific provisions provided under section 14A(3). The assessing officer has rightly invoked the provisions of Rule 8D(2)(iii) to disallow expenditure and his order should be upheld.
6. We have heard both the parties and perused the material available on record. The assessing officer invoked provisions of Rule 8D(2)(iii) and disallowed 0.5% of average value of investments towards expenditure in relation to earning exempt income. According to the assessing officer, from assessment year 2008-09 onwards, in view of specific provisions provided by way of Rule 8D(2) to determine the disallowance of expenditure incurred in relation to exempt income, the assessee cannot take a stand that there is no expenditure incurred to earn exempt income. The assessee claims that she had not incurred any expenditure to earn exempt income and the expenditure claimed in the P&L Account is directly attributable to her professional income. The assessee further claims that the assessing officer has not arrived at a satisfaction before invoking the provisions of Rule 8D which is a pre-condition for determination of disallowance, as per the provisions of Rule 8D when there is no expenditure is claimed against earning exempt income. In the absence of any satisfaction as to incorrectness of claim of the expenditure, the assessing officer cannot determine disallowance of expenditure by invoking the provisions of Rule 8D(2). We find force in the argument of the assessee for the reason that the provisions of section 14A(2) makes it mandatory on the part of the assessing officer to arrive at a satisfaction with regard to the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income under the Act. In this case, the assessee claims that she did not incur any expenditure to earn exempt income. When the assessee claims no expenditure has been incurred to earn exempt income, the assessing officer has to establish a nexus between expenditure claimed by the assessee to the exempt income. In this case, on perusal of the details filed by the assessee, we find that the assessee has maintained separate books of account for her professional income. We further observe that the assessee has not claimed any indirect expenditure in relation to earning exempt income. On further verification of the P&L Account, we find that the assessee has claimed a minimum expenditure of Rs.3 lakhs against gross receipt of Rs.28,25,000 which are in the nature of administrative expenses directly attributable to her professional activity except demat charges of Rs.574. Therefore, we are of the view that in the absence of any direct nexus between expenditure claim to the exempt income, the assessing officer cannot invoke the provisions of section 14A row with rule 8D(2) to disallow expenditure. Hence, we direct the assessing officer to delete disallowances made under section 14A row with rule 8D except demat charges of Rs.574 which is directly incurred in relation to earning exempt income. On further verification of the P&L Account, we find that the assessee has claimed a minimum expenditure of Rs.3 lakhs against gross receipt of Rs.238,25,000 which are in the nature of administrative expenses directly attributable to her professional activity except demat charges of Rs.574. Therefore, we are of the view that in the absence of any direct nexus between expenditure claim to the exempt income, the assessing officer cannot invoke the provisions of section 14A r.w. with rule 8D(2) to disallow expenditure. Hence, we direct the assessing officer to delete disallowances made under section 14A row with rule 8D, except demat charges of Rs.574 which is directly incurred in relation to earning exempt income.
7. In the result, appeal of the assessee inITA No.5620/Mum/2013 is partly allowed.
8. With regard to the other appeal inITA No.5621/Mum/2013 for assessment year 2009-10, the facts are identical to ITA No.5620/Mum/2013, where we have held that disallowance made under section 14A row with rule 8D except demat charges which is directly incurred in relation to earning exempt income, should be deleted. Therefore, since the facts are identical, following our order for assessment year 2008-09, we direct deletion of disallowances made under section 14A row with rule 8D, except demat charges of Rs.574 which is directly incurred in relation to earning exempt income, should be deleted. Therefore, since the facts are identical, following our order for assessment year 2008-09, we direct deletion of disallowances made under section 14A row with rule 8D, except demat charges which is directly incurred in relation to earning exempt income.
9. In the result, this appeal of the assessee inITA No5621/Mum/2013 for assessment year 2009-10 is also partly allowed.
10. In the result, both the appeals filed by the assessee are partly allowed.
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