Case Law Details
Wodehouse Gymkhana Ltd. Vs ITO (ITAT Mumbai)
The assessee claimed that it has earned the exempt income under the principle of mutuality. The assessee claimed its source of income on the basis of principle of mutuality and dividend / mutual fund dividend etc. and income not relating to mutual activity such as interest on bank deposits etc. which claimed as taxable income. No expenses were claimed against taxable income, therefore section 14A of the Act will not applicable.
Hon;ble ITAT held that as assessee did not claim any expenses to earn the exempt income and the income of the assessee is based upon the principle of mutuality. So CIT(A) has wrongly confirmed the additions raised by the AO in view of the Section 14A read with Rule 8D of the Act, therefore, we delete the addition.
FULL TEXT OF THE ITAT JUDGMENT
The assessee has filed the present appeal against the order dated 30.06.20 17 passed by the Commissioner of Income Tax (Appeals)-3, Mumbai [hereinafter referred to as the “CIT(A)”] relevant to the A.Y.2014- 15.
2. The assessee has raised the following grounds of appeal:-
“1. Learned CIT(A) erred in confirming addition of Rs.2,51,638/- under section 14A of Income Tax Act 1961. Appellant prays for deletion of addition of Rs.2,51 ,638/-.
2. Learned CIT(A) erred in rejecting the Ground of Appeal that provision of section 14A are not applicable in case of appellant on the ground that income is assessed under business income / income from other sources without considering the fact that major income is exempt under principal of mutuality. Appellant prays to consider that provision of section 14A are not applicable in case of appellant as income is exempt under principal of mutuality.
3. Learned CIT(A) erred in ignoring grounds of appeal that assessee should have claimed expenses disallowable u/s.14A against taxable income. Appellant prays that no expenses on exempt income is claimed against taxable income.”
3. The brief facts of the case are that the assessee filed its return of income on 27.11.2014 declaring total income to the tune of Nil. The assessment was selected for scrutiny under CASS. Notice u/s.143(2) and 142(1) of the Income Tax Act, 1961 ( in short “the Act”) were issued and served upon the assessee. The assessee showed the limited dividend income of Rs.22,07,008/- which was claimed as exempt income. The Assessing Officer applied the provision of Section 14A r.w. Rule 8D and assessed the expenditure incurred to earn the exempt income in sum of 2,5 1,638/-. The total income of the assessee was assessed to the tune of Rs.(-)7,62,575/-. Feeling aggrieved the assessee filed the appeal before the CIT(A) who confirmed the order of Assessing Officer, therefore, the assessee has filed the present appeal before us.
ISSUE NO.1 TO 3:-
4. All the issues are interconnected, therefore are being taken up together for adjudication. In fact under these issues the assessee has challenged the addition of expenditure to earn the exempt income in sum of 2,51,638/- assessed by the Assessing Officer and confirmed by the CIT(A). The basic contention of the assessee is that the expenses were not claimed against the exempt income, therefore, section 14A of the Act is not applicable. However, on the other hand the learned representative of the department has strongly relied upon the order passed by the CIT(A) in question. The assessee claimed that it has earned the exempt income under the principle of mutuality. The assessee claimed its source of income on the basis of principle of mutuality and dividend / mutual fund dividend etc. and income not relating to mutual activity such as interest on bank deposits etc. which claimed as taxable income. No expenses were claimed against taxable income, therefore section 14A of the Act will not applicable. However, in this regard the assessee has also relied upon the memorandum of explanation of the provision of finance bill of 2001 provided the following rationale for insertion of section 14A of the Act.
“Certain incomes are not includible while computing the total income as these are exempt under various provision of the Act. There have been cases where deductions have been claimed in respect of such exempt income. This in effect means that the tax incentive given by way of exemptions to certain categories of income is being used to reduce also the tax payable on the non-exempt income by debiting the expense incurred to earn the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analog, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income.”
Accordingly, the assessee did not claim any expenses to earn the exempt income and the income of the assessee is based upon the principle of mutuality.Taking into account of all the above said facts and circumstances, we are of the view that the CIT(A) has wrongly confirmed the additions raised by the AO in view of the Section 14A read with Rule 8D of the Act, therefore, we delete the addition in sum of Rs.2,51,638/- raised in view of the provision of section 14A read with Rule 8D of the Act and allowed the claim of the assessee.
8. In the result, the appeal of the assessee is Allowed.
The judgements does not discus the provisions of section 14A(3) which says that the section has to be applied even when the taxpayer claims that no expense has been incurred to earn exempt income. Is there any decision on this point?