IN INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM ITA No.100/JP/16 Assessment Year : 2012-13 Dy. CIT, Circle-2, Jaipur M/s AU Financiers (India) Ltd. Vs. 19-A Dhuleshwar Garden, Ajmer Road, Jaipur PAN No. AAACL 2777 N Appellant Respondent Assessee by : Shri Sanjay Jhanwar (ADV) Shri Mukesh Gupta (CA) Revenue by :Shri R.A., Verma (Addl. CIT) Date of Hearing : 21.09.2016 Date of Pronouncement : 23/09/2016. ORDER PER SHRI VIKRAM SINGH YADAV, A.M. This is appeal filed by Revenue against order of ld. CIT(A)-I, Jaipur dated 16.11.2015 wherein Revenue has taken following grounds of appeal: Whether on facts and in circumstances of case and in law ld. CIT(A) has erred in deleting disallowance of Rs. 52,74,497/- made by AO u/s 14A of IT Act, 1961. 2. brief facts of case are that appellant is NBFC engaged in asset financing and channel financing business with HDFC Bank. During year under consideration, appellant company had earned dividend income to tune of Rs.1,64,921/- and in its computation of income, it has disallowed expenses related to exempt income of Rs.1,29,713/-. Considering provision ITA No. 100/JP/16 DCIT, Circle-2, Jaipur vs. M/s AU Financers (India) Ltd. Jaipur of section 14A of Act, show cause notice was issued by AO to appellant as to why expenditure pertaining to earning of income which do not form part of total income should not be disallowed u/s 14A read with Rule 8D. However, AO not satisfied with explanation of appellant, completed assessment by making addition of Rs.52,74,497/- by disallowance expenses under section 14A of Act. On appeal, ld CIT(A) has deleted disallowance and now Revenue is in appeal before us. 2.1 finding of ld. CIT(A) is given as under: I find merit and substance in contention of appellant that expenditure amounting to Rs.1,29,713/ had been incurred by it for earning exempt income, which has already been disallowed by appellant in its computation of income. Further investment has been made by it in its subsidiary company and not in shares of any unrelated party. Therefore primary object of investment is holding and controlling stake in group concern and not earning any income out of investment. Further investments, were made out of own funds for long term basis for having business control over these subsidiaries. Therefore, in view of fact that investment are in group concern, I do not find any reason to observe that appellant would have incurred any administrative expenses in holding these investments on regular basis beyond amount already disallowed by it. AO has not brought on record any material to show that appellant has incurred any expenditure in relation to income which does not form part of total income beyond said amount. Section 14A has within it implicit notion of apportionment in cases where expenditure is incurred for composite/indivisible activities in which taxable and non taxable income is received but when no expenditure has been incurred in relation to exempt income then principle of apportionment embedded in section 14A has no application. object of section 14A is not allowing to reduce tax payable on non exempt income by deducting expenditure incurred to earn exempt income. In case under consideration , it is not case of AO that appellant has incurred any direct expenditure or any interest expenditure for earning exempt income or keeping investment in question. If there is expenditure directly or indirectly incurred in relation 2 ITA No. 100/JP/16 DCIT, Circle-2, Jaipur vs. M/s AU Financers (India) Ltd. Jaipur to exempt income, same cannot be claimed against income which is taxable. For attracting provisions of section 14A of Act, there should be proximate cause for disallowance which has relationship with tax exempt income as held by Hon ble Supreme Court in case of CIT vs. Walfort Share and Stock Brokers P. Ltd. (2010) 3276 ITR 1. Therefore there should proximate relationship between expenditure and income which does not form part of total income. In instant case under consideration, appellant has already disallowed sum of Rs.1,29,713/- for exempt income, therefore it was incumbent on AO to find out as to whether assessee has incurred any expenditure beyond Rs.1,29,713/- in relation to income which does not form part of total income and if so to quantify expenditure of disallowance. AO has not brought on record any fact or material to show that any expenditure beyond Rs.1,29,713/- has been incurred on activity which has resulted into both taxable and non-taxable income. Therefore in absence of any finding that expenditure has been incurred beyond Rs. 1,29,713/- for earning exempt income, provisions of section 14A cannot be applied. In instant case under consideration, AO disallowed expenses u/s 14A and rule 8D without elucidation and explaining voluntary disallowance made by appellant was unreasonable and unsatisfactory. Therefore, ratio of case of CIT vs. Taikisha Engineering India Ltd. is clearly applicable to facts of instant case under consideration. It may be mentioned that ld. CIT(A) vide order dated 29.10.2014 and 14.11.2014 in case of appellant for assessment year 2009-10 and 2011-12 in ITA No.471/11-12 and 485/13-14 deleted addition made by AO u/s 14A of Act read with Rule 8D of IT rules. I do not find any reason to differ with findings of Ld. CIT(A) in this regard. 2.2 ld AR submitted that Hon ble ITAT, Jaipur Bench vide order in appeal No. 122/JP/2015 dated 05.05.2016 in assessee s own case for A.Y. 2011-12 have allowed relief to appellant and since there is no change in facts of case, same should be followed. 3 ITA No. 100/JP/16 DCIT, Circle-2, Jaipur vs. M/s AU Financers (India) Ltd. Jaipur 2.3 relevant findings of Coordinate Bench in decision referred supra is as under: above finding on fact by Revenue is not controverted by placing any material on record. Moreover there is no dispute with regard to fact that assessee has earned exempt income of Rs. 27,006/- against which disallowance of expenditure amounting to Rs. 42,22,857/- was made. AO has not recorded his satisfaction as to how expenditure disallowed by assessee of Rs.62,9878/- towards administrative expenses is not reasonable. Further we find that assessee has demonstrated by placing sufficient material on record that no borrowed funds were utilized for making investment and wherefrom exempt income is earned. In our considered view, provisions of section 14A of Act read with rule 8D of Income Tax Rules, cannot be invoked in mechanical way by AO. As per section 14A(2), AO is required to determine amount of expenditure incurred in relation to such income which does not form part of total income under Act and in accordance with rule 8D of Income Tax Rules, 1961 if AO having regarding to accounts, is not satisfied with correctness of claim of asessee in respect of such expenditure in relation to such exempt income, is empowered for making disallowance as per rule 8D. In case in hand, no finding is recorded by AO in this regard. On contrary, ld. CIT(A) has given finding after examining accounts of assessee. AO has not brought on record any material to show that assessee has incurred any expenditure in relation to income which do not form part of total income. Moreover it is not in dispute that assesee has earned exempt income of Rs.27,006/- and expenditure amounting to Rs.42,22,857/- in relation to this is disallowed. finding of ld. CIT(A) is not rebutted by revenue by placing any contrary materials. Therefore, we do not see any reason to interfere with order of ld. CIT(A). same is hereby upheld. ground raised by Revenue is dismissed. 2.4 We have heard rival contentions and pursued material available on record. Undisputedly, there is no change in facts and circumstances vis- a-vis facts of year which has been adjudicated by Coordinate Bench in decision referred supra. Hence, following decision of Coordinate Bench, ground taken by Revenue is dismissed. 4 ITA No. 100/JP/16 DCIT, Circle-2, Jaipur vs. M/s AU Financers (India) Ltd. Jaipur In result appeal filed by Revenue is dismissed. Order pronounced in open court on 23/09/2016. Sd/- Sd/- (KUL BHARAT) (VIKRAM SINGH YADAV) Judicial Member Accountant Member Jaipur Dated:- 23/ 09/2016 Pillai Copy of order forwarded to: s 1.The Appellant-The DCIT, Circle-2, Jaipur 2. Respondent- M/s AU Financers (India ) Ltd. Jaipur 3. CIT I, Jaipur 4. CIT(A)-I, Jaipur 5. DR, ITAT, Jaipur 6. Guard File (ITA No. 100/JP/2016) By order Assistant. Registrar 5 Dy. CIT, Circle-2, Jaipur v. M/s AU Financiers (India) Ltd