Ashok Kumar V. Sanghi Vs ITO (ITAT Mumbai)
ITAT Mumbai held that disallowance under section 14A of the Income Tax Act read with rule 8D cannot be more than the quantum of exempt income.
Facts-
On the basis of information received from ITD systems, reassessment proceedings in the case of assessee was initiated and notice u/s. 148 of the Act was issued on 17/03/2015 after recording of reasons. In response, assessee filed electronically return of income on 02/04/2015, declaring NIL total income.
Pursuant thereto, statutory notices u/s. 143(2) and 142(1) of the Act were issued and assessee filed its reply to the information/details sought. After considering the submissions of the assessee, AO vide order dated 10/02/2016, passed u/s. 143(3) r/w section 147 of the Act assessed the total income at Rs. 44,50,240, after making certain additions to the income returned by the assessee.
Assessee didn’t challenged invocation of jurisdiction u/s. 147 before CIT(A). However, in the present appeal, the assessee has for the first time challenged invocation of proceedings u/s. 147 of the Act.
Assessee also contested that total disallowance u/s 14A read with rule 8D(2) cannot exceed the amount of exempt income.
Conclusion-
The reasons recorded indicate the basis on which proceedings u/s. 147 of the Act were initiated in the case of the assessee. Therefore, we are of the considered view that AO had ‘reason to believe’ on the basis of tangible material for initiating proceedings u/s. 147 of the Act.
We find that Hon’ble jurisdictional High Court in Nirved Traders (P.) Ltd. v/s Dy. CIT, I.T. Appeal No.149 of 2017, vide judgement dated 23.04.2019, has held that disallowance under section 14A of the Act cannot be more than exempt income.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee challenging the impugned order dated 16/10/2019, passed under section 250 of the Income Tax Act, 1961 (“the Act”) by learned Commissioner of Income Tax (Appeals)–6, Mumbai, [“learned CIT(A)”], for the assessment year 2010–11.
2. In this appeal, the assessee has raised following grounds:
“The Grounds of Appeal mentioned hereunder are without prejudice to one another
“1. On the facts and circumstances of the case, the Learned Assessing officer erred in Issuance of Notice U/s 148 without bringing but any tangible material in the reasons recorded based on which the formation of belief as to Income has escaped Assessment.
2. On the facts and circumstances of the case, the Learned Assessing officer ought to have appreciated that only Non-filing of Return does not amounts to escapament of income and therefore, the reasons recorded for reopening only on the basis of Non-filling of Return is bad in law and therefore, the Notice issued U/s 148 is void-ab-initio
3. On the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeal) erred in confirming the addition of Rs.23,05.222/- towards Cheques deposited in the Bank Account by the Assessee without appreciating that the Rs.8.15,000/ amount were transferred from another Bank Account of the Assessee and amount of Rs.14,00,000/- was received from his wife for which confirmation and all details were filed.
4. On the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeal) erred in confirming the addition of Rs.13,51,500/- on account of Cash Deposited in the Savings Account without appreciating that the complete source of Cash along with the documentary evidences were produced before both the authorities.
5. On the facts and circumstances of the case, the Learned Commissioner of Income Tax (Appeal) erred in confirming the addition of Rs 6,31,000/- in respect of Peak Cash Deposit in HDFC Bank Account without appreciating that the calculation of Peak itself is incorrect and moreover, the Cash Deposit was properly recorded in Cash Book and was emanating from the Accounts explain the source thereof.
6. On the facts and circumstances of the case, the Learned Commissioner of Income Tax [Appeals) erred in confirming the addition of Rs.1,68,764/-under Rule 8D sub-section Z Without appreciating that the Investment made in Mutual funds and shares were old Investment and out of saving funds.
3. The issue arising in grounds No. 1 and 2, raised in assessee‟s appeal, is pertaining to initiation of proceedings under section 147 of the Act.
4. The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is an individual and is engaged in the business of trading in shares. The assessee is also Director of M/s Sanghi Corporate Service Ltd. For the year under consideration, the assessee did not file his return of income. On the basis of information received from ITD systems, reassessment proceedings in the case of assessee was initiated and notice under section 148 of the Act was issued on 17/03/2015 after recording of reasons. In response, assessee filed electronically return of income on 02/04/2015, declaring NIL total income. Pursuant thereto, statutory notices under section 143(2) and 142(1) of the Act were issued and assessee filed its reply to the information/details sought. After considering the submissions of the assessee, the Assessing Officer („AO‘) vide order dated 10/02/2016, passed under section 143(3) r/w section 147 of the Act assessed the total income at Rs. 44,50,240, after making certain additions to the income returned by the assessee. We find that in its appeal before the learned CIT(A), the invocation of jurisdiction under section 147 was not challenged by the assessee and thus there are no findings on this aspect by the learned CIT(A). However, in the present appeal, the assessee has for the first time challenged invocation of proceedings under section 147 of the Act. Though, any issue which is raised for the first time is required to be taken by way of an additional ground. However, since the present issue is the legal issue and the basic facts for deciding the same are also on record, therefore, we proceed to decide the same. The learned Departmental Representative („learned DR’), in all fairness, did not raise this technicality either.
5. During the course of hearing, learned Authorised Representative („learned AR‘) submitted that the assessee had no taxable income during the year and therefore no return of income was filed. The learned AR further submitted that merely on the basis that cash has been deposited by the assessee, proceedings under section 147 were initiated by the AO. The learned AR also submitted that the reasons recorded by the AO for issuing notice under section 148 of the Act doesn‟t provide the complete information on the basis of which such notice was issued and the same merely makes reference to some internal codes of the Department.
6. On the other hand, learned DR submitted that no return was filed by the assessee for the year under consideration and after receipt of the information from ITD system, facts were verified and it was noticed that assessee has entered into certain transactions viz. cash deposit of Rs. 50,000 and more, share transaction of Rs. 20,000, or more and TDS return in respect of interest other than interest on securities, during the year under consideration. Despite the said transactions, the assessee did not file the return of income. The learned DR also submitted that no objection was filed by the assessee against the initiation of proceedings under section 147 of the Act before the AO, even after receipt of the reasons recorded.
7. We have considered the rival submissions and perused the material available on record. In the present case, on the basis of information received from ITD systems regarding the non-filers of return of income for the assessment years 2010–11 and 2011–12, notice under section 148 of the Act was issued on 17/03/2015, after recording following reasons:
“The ITD system has generated the list of Non-filers of Returns of Income for A.Y. 2010-11 & 2011-12. After receipt of the information fron TTD system, the facts were verified & it was seen that the assessee has entered into the transaction during the F.Y. 2009-10 relevant to A.Y. 2010-11 as under:
“TDS Return-Interest other than interest on securities (Section 194A)
“Cash Deposit of Rs.50,000/- and more (CIB-184)”
“Share Transaction of Rs.20,000/- or more (CIB-321)”
As seen from the above that inspite of the above referred transaction & the assessee did not file the Return of Income for A.Y. 2010-11. Since no return has been filed and also no Books Balance Sheet, Profit & Loss Account, computation of Income Tax is available on record; I have reason to believe that the income has escaped assessment.
Therefore, the case has been reopened u/s 147 of the I.T. Act and accordingly notice u/s 148 of the Act dated 17/03/2015 has been issued.”
8. Thus, from the aforesaid it is evident that the proceedings under section 147 of the Act were initiated not only on the basis that cash has been deposited by the assessee but AO also had the information regarding the other transactions of the assessee, which in the absence of any return of income, were not disclosed by the assessee. In ACIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd, [2007] 291 ITR 500 (SC), the Hon’ble Supreme Court observed as under:
“16. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word “reason” in the phrase “reason to believe” would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers. As observed by the Supreme Court in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991] 191 ITR 662, for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfilment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is “reason to believe”, but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction ITO v. Selected Dalurband Coal Co. (P.) Ltd.
[1996] 217 ITR 597 (SC); Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC).”
9. Thus, if there is reasonable information on the basis of which reasonable person can form a requisite belief that income chargeable to tax has escaped assessment, then proceedings under section 147 of the Act can be validly initiated. Further, it is also well settled that sufficiency or correctness of the material is not a thing to be considered at the stage of recording of reasons. In the present case, it is undisputed that the assessee has not filed its return of income for the year under consideration. Since, no return was filed and no books, i.e. balance sheet, profit and loss account, computation of income, were available, the AO on the basis of information generated by ITD systems and verification of facts initiated proceedings under section 147 of the Act in the case of the assessee. It is the plea of the assessee that the complete information on the basis of which notice under section 148 of the Act was issued were not shared with the assessee as the reasons recorded mentions some codes of the Department. As per the learned DR, the codes links to the information available with the Department and the assessee never requested during the continuation of the proceedings under section 147 of the Act to share that information. The learned DR further submitted that extent of the information available with the Department will be clear when the issues on merits will be dealt. From the record, it is evident that even after receipt of the reasons recorded for issuing notice under section 148 of the Act, the assessee did not file any objections against same nor sought any other details. As noted above, the reasons recorded indicate the basis on which proceedings under section 147 of the Act were initiated in the case of the assessee. Therefore, we are of the considered view that AO had „reason to believe‟ on the basis of tangible material for initiating proceedings under section 147 of the Act. As a result, grounds No. 1 and 2, raised in assessee‟s appeal, are dismissed.
10. The issue arising in grounds No. 3 and 4, raised in assessee‟s appeal, is pertaining to addition on account of cheque and cash deposited in the bank accounts of the assessee.
11. The brief facts of the case pertaining to this issue, as emanating from the record, are: Vide notice issued under section 142 (1) of the Act assessee was asked to file the details of bank accounts held along with the copies of bank statements. The assessee was also asked to file copies of personal balance sheets, profit and loss account etc. In response, assessee disclosed the following bank accounts:
