Case Law Details

Case Name : Vision EL Tech & Services (P.) Ltd. Vs Dy. CIT (ITAT Bangalore)
Appeal Number : I.T. Appeal No. 1519 (Bang.) of 2016
Date of Judgement/Order : 31/05/2017
Related Assessment Year : 2012-13
Courts : All ITAT (5013) ITAT Bangalore (244)

Vision EL Tech & Services (P.) Ltd. Vs DCIT (ITAT Bangalore)

From the details filed it is observed that there are several instances of fresh investment as well as sale of investment in shares, evidencing frequent movement in the assessee’s investment portfolio and accordingly it cannot be accepted that no expenditure has been incurred by the assessee for earning exempt income, then the expenditure incurred in relation to the salary/remuneration etc. of top management and higher executives involved in the process of taking decisions of purchase/sale of investments have an approximate nexus with the investment made by the assessee for earning exempt income. Therefore, it is a matter of finding of fact as to which of the expenditure can be attributable, being indirect expenditure incurred for an activity, which resulted in earning of exempt as well as taxable income. Since there is frequent movement in the investment portfolio of the assessee, therefore, question which requires to be ascertained is those particular items of expenditure debited by the assessee in its profit and loss account which can be apportioned and computed u/s 8D(2)(iii) of the Rules. In this factual matrix of the case, we are of the considered opinion that the issue of disallowance u/s 14A r.w Rule 8D(2)(iii) requires proper examination of the fact on the aspect of identifying the expenditure attributable thereunder and, therefore, set aside this issue to the file of the AO for examination and computation of the administrative expenditure incurred for earning the exempt income for making the disallowance u/s 8D(2)(iii). We make it clear that the disallowance made u/s 14 r.w Rule 8D(2)(iii) cannot exceed the actual expenditure debited by the assessee to the profit and loss account which has a nexus for earning of the exempt income.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

This appeal by the assessee is directed against the order of Commissioner of Income-tax (Appeals) -7, Bangalore dated 30/6/2016 for asst. year 2012-13.

2. Briefly stated, the facts of the case are as under:-

 2.1 The assessee company, engaged in financial and other services, filed its return for asst. year 2012-13 on 29/9/2012 declaring total income of Rs.77, 19,260/-. The case was taken up for scrutiny and the assessment was completed u/s 143(3) of the Income-tax Act, 1961 (in short ‘the Act’) vide order dated 25/2/20 15, wherein the income of the assessee was determined at Rs.82,83,090/-, in view of disallowance of Rs.5,63,830/- u/s 14A r.w Rule 8D. The assessee’s appeal was dismissed by the ld CIT(A) – 7, Bangalore vide the impugned order dated 30/6/20 16.

 3.1 Aggrieved by the order of the CIT(A)-7, Bangalore dated 30/6/2016 for asst. year 2012-13, the assessee has preferred this appeal, raising the following grounds challenging the action of the authorities below in making and sustaining the aforesaid disallowance u/s 14A r.w Rule 8D.:-

1.That the order of the Assessing Officer / CIT(Appeals) in so far as it is against the appellate is against the law, facts, circumstances, natural justice, equity and all other known principles of law.

2. That the total income computed and the total tax computed is hereby disputed.

3. The learned CIT-Appeals erred in upholding the disallowance made u/s 14A r.w.r 8D amounting to Rs. 5,63,830/-.

4. The authorities below erred in invoking sec. 14A without recording any reasons.

5. The authorities below erred in holding that the above sums were incurred for purposes of earning non-taxable income.

6. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered.”

3.2 Since all the grounds raised (Supra) pertain to the issue of disallowance u/s 14A r.w Rule 8D made and sustained by the authorities below, the same are taken together for consideration. In assessment proceedings, the Assessing Officer (‘AO’) noticed that the assessee had earned exempt dividend of Rs.15,73,300/- on account of investment in equity shares. The assessee submitted that no expenditure was incurred to earn this exempt income. The AO, on examination of the assessee’s claim with respect to the expenditure incurred for earning such exempt income, was of the view that the assessee had utilized the common kitty of funds for investment and since there was no proof of direct nexus between the funds and investments disallowance u/s 14A r.w Rule 8D(2) of IT Rules, 1962 was called for and disallowance amounting to Rs.5,63,830/- was made; Rs.5,896/- u/R 8D(2)(ii) and Rs.5,57,934/- u/R 8D(2)(iii) of the Rules. On appeal, the said disallowance was sustained by the ld CIT(A).

3.3 At the outset of the hearing, the ld AR for the assessee submitted that the grounds raised in respect of the disallowance u/s 14A r.w Rule 8D, in as much as, is in respect of the disallowance to the extent of Rs.5,896/- u/R 8D(2)(ii) is not pressed due to smallness of the amount involved. We, therefore, uphold the disallowance of Rs.5,896/-, made by the AO u/s 14A r.w Rule 8D(2)(iii) of the Rules. 3.4 In respect of the disallowance u/s 14A r.w Rule 8D(2)(iii) amounting to Rs.5,57,936/-, the ld AR for the assessee submitted that the assessee has not incurred any administrative expenditure for earning the exempt dividend income. It was further submitted that the AO has not pointed out or identified which expenditure incurred was having nexus with the earning of exempt income. In this regard, the ld AR submitted that, as per schedule 11 of the financial statements of the assessee (placed at pages 39 to 44 of paper book) at page 44 thereof reflecting other expenditure of Rs.2,1 1,411/-, the break up at page 21 of paper book would go to show that out of the sum of Rs. 1,54,777/- on account of securities transaction tax was disallowed suo moto by the assessee and reflected in its computation of income (placed at page 37 to 44 of paper book). It was contended that if at all the disallowance u/R 8D(2)(iii) was called for, it ought to be restricted to expenditure incurred on Bank charges of Rs.308/- and miscellaneous expenses of Rs.2,615/-. Relying on the decision of a co-ordinate bench in the case of M/s M.N Dastur Co. Pvt. Ltd., in ITA No.94/Bang/2014 dated 7/10/20 15 it was submitted that when the AO has neither recorded his satisfaction nor identified the expenditure which can be apportioned for earning exempt income, then the disallowance made by the AO is not sustainable.

3.5 Per contra, the ld DR for Revenue placed reliance on the decision of the authorities below.

3.5.1 We have heard the rival contentions and perused and carefully considered the material on record; including the judicial pronouncements cited. From the details filed it is observed that there are several instances of fresh investment as well as sale of investment in shares, evidencing frequent movement in the assessee’s investment portfolio and accordingly it cannot be accepted that no expenditure has been incurred by the assessee for earning exempt income, then the expenditure incurred in relation to the salary/remuneration etc. of top management and higher executives involved in the process of taking decisions of purchase/sale of investments have an approximate nexus with the investment made by the assessee for earning exempt income. Therefore, it is a matter of finding of fact as to which of the expenditure can be attributable, being indirect expenditure incurred for an activity, which resulted in earning of exempt as well as taxable income. Since there is frequent movement in the investment portfolio of the assessee, therefore, question which requires to be ascertained is those particular items of expenditure debited by the assessee in its profit and loss account which can be apportioned and computed u/s 8D(2)(iii) of the Rules. In this factual matrix of the case, we are of the considered opinion that the issue of disallowance u/s 14A r.w Rule 8D(2)(iii) requires proper examination of the fact on the aspect of identifying the expenditure attributable thereunder and, therefore, set aside this issue to the file of the AO for examination and computation of the administrative expenditure incurred for earning the exempt income for making the disallowance u/s 8D(2)(iii). We make it clear that the disallowance made u/s 14 r.w Rule 8D(2)(iii) cannot exceed the actual expenditure debited by the assessee to the profit and loss account which has a nexus for earning of the exempt income. The AO is directed to examine and adjudicate the issue of disallowance u/s 14A r.w Rule 8D(2)(iii) after affording the assessee adequate opportunity of being heard. We hold and direct accordingly.

4. In the result, the assessee’s appeal for the asst. year 2012-13 is partly allowed for statistical purposes.

Order pronounced in the open court on 31st May, 2017.

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Category : Income Tax (27233)
Type : Judiciary (11426)
Tags : ITAT Judgments (5198) rule 8D (96) Section 14A (262)

One response to “No Disallowance U/s. 14A if no expenditure incurred to earn exempt income; ITAT Restores file to AO”

  1. vswami says:

    IMPROMPTU :

    The view the itat has taken, based on the factual matrix in the given case, particularly the observations /the line of reasoning adopted by the Bangalore Bench, in paragraph 3.5.1. , do warrant a conscious note to be taken of.

    For an independent examination by anyone concerned, however, suggest to bear in mind / laser-sharp focus , the viewpoints painstakingly shared in great details, which are readily available in public domain (< refer the several posts on this website itself, besides on FB and LInkedin). That was done wprt the last delivered SC Judgment in Maxopps' case.

    Any such study may help professionals and taxpayers alike, to appreciate that, if nothing else, -in one's firm conviction, quite contrary to the expert opinion callously expressed in certain quarters,- the controversies surrounding the enactments of sec 14A and Rule 8D could not by any intelligent thinking or stretch of imagination, be rightly regarded to have been set at rest by the mentioned SC Judgment, once for all; instead, undoubtedly forebodes a procrastination and prolongation of disputes and litigation, with no end in sight.

    Over to the eminent Experts , in field practice (TAX and/or AUDIT), to share own thoughts /views, if any, materially at variance ?!

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