IN INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE SHRI JASON P. BOAZ, AM AND SHRI SANDEEP GOSAIN, JM . I.T.A. No. 314 Mum 2015 ( Assessment Year: 2011-12) Vishal Ashok Ramsinghani DCIT, Circle 3(1). 903, Raheja Chambers, Mumbai. 213, Nariman Point, Free Press Journal Marg, Vs. Mumbai-400 021. . . PAN GIR No. AAAPR 5595H ( Appellant) : ( Respondent) Appellant by : Shri Vimal Punmiya Respondent by : Shri Rajneesh K. Arvind : 21 09 2016 Date of Hearing : 07 10 2016 Date of Pronouncement ORDER Per Sandeep Gosain, Judicial Member: Present Appeal has been filed by assessee against order of Commissioner of Income Tax (Appeals)- 7, dated 31.10.2014 on grounds of appeal mentioned herein below. 2 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT 1.1 Learned Commissioner of Income Tax (Appeals) 7, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in confirming disallowance of expenses u s 14A of Rs 5,80,904 . 1.2 Learned Commissioner of Income Tax (Appeals) 7, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in confirming disallowance of expenses u s 14A of Rs 5,80,904 without considering fact that your appellant's indirect expenses (excluding depreciation) were only Rs 1,92,507. disallowance u s 14A cannot exceed expenditure incurred by your appellant. 1.3 Learned Commissioner of Income Tax (Appeals) 7, Mumbai hereinafter referred to as CIT(A) erred on facts and in law in not considering fact that no disallowance can be made in respect of depreciation as it is statutory allowance u s 32 and not expenditure. 7. above grounds of appeal are without prejudice to one another. 3: Appellant craves leave to add, alter, amend and or delete any of above grounds of appeal. 2. brief facts of case are that return of income was filed by assessee on 26.09.2011 declaring total income of Rs.48,60,140 -. case was selected for scrutiny and after serving statutory notice and seeking reply of assessee, assessment order was passed by DCIT thereby making disallowance additions while assessing total income of assessee. AO also made disallowance u s 14A read with rule 8D of Income Tax Act of Rs.5,80,904 -. 3. Aggrieved by order of AO, assessee preferred appeal before CIT(A) however CIT(A) after hearing both parties had partly allowed appeal of assessee. However, CIT(A) confirmed additions made by AO u s 14A read with Rule 8D of Rs.5,80,904 -. 3 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT 4. Aggrieved by order of CIT(A), assessee preferred present appeal before us on ground mentioned here in above. Ground No.1.1 to 1.3 5. Since all grounds raised by assessee are inter-connected and inter- related therefore we thought it fit to dispose off same through present common order. At very outset, ld. AR appearing on behalf of assessee submitted that assessee had earned exempt income of Rs.14,99,008 - as dividend income on shares and Rs.1500 - on account of interest on FD s. It was further submitted that assessee had made suo motto disallowance of Rs.32,643 - u s 14A of Act with respect to expenditure relatable to exempt income. Ld. AR further submitted that major investments made by assessee were in group companies only. activities relate to investment in shares of quoted company and tax from investments were managed by assessee himself. Ld. AR further submitted that sub section (2) of section 14A of said Act provides manner in which AO is to determine amount of expenditure in relation to income which does not form part of total income. It was also argued that AO was required to determine amount of such expenditure only if AO, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income. It was further 4 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT argued that in present case AO has not recorded his satisfaction and has not even indicated cogent reasons for making disallowance u s 14A read with Rule 8D. whereas AO was duty bound to list down reasons for rejecting claim of assessee. Ld. AR further relied upon following citations namely: 1. J.K. Investors (Bombay) Ltd. vs. ACIT in ITA No.7858 Mum 2011 for AY 2008-09. 2. Maxopp Investment Ltd. vs. CIT 2011 203 Taxman 364 3. Raj Shipping Agencies Ltd vs. ACIT [2013] 38 Taxmann.Com 345 [Mum] 4. DCIT vs DBH International (P.) Ltd [2015] 55 taxmann.com 424 (Delhi- Trib.) 5. Kalyani Steels Ltd. vs Add. CIT ITA No.1733 PN 2012 6. DCIT vs. Jindal Photo Limited ITA Nos. 814 Del. 2011. 6. Apart from above, ld. AR submitted that revenue authorities have applied section 14A read with Rule 8D in mechanical manner whereas it is mandatory to apply section 14A and compute disallowance under Rule 8D after giving reasons for rejecting assessee s claim. Ld. AR further submitted that AO fail to consider that total indirect expenses (excluding depreciation) of Rs.1,92,507 - (the details have already been given at page no.29 of paper book). Ld. AR further argued that section 14A deals only with expenditure and 5 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT not with statutory allowances admissible to assessee and more particularly statutory allowances u s 32 is not expenditure. 7. On other hand, ld. DR relied upon orders passed by Revenue Authorities. 8. We have heard counsels for both parties on this ground and we have also perused material placed on record as well as orders passed by revenue authorities. Before we decide merits of case it is necessary to evaluate orders passed by CIT(A) while dealing with said issue: Ground No.2 I find that appellant has earned exempt income of Rs.14,99,008 - on account of dividend on shares. appellant has made suo motu disallowance of Rs.32 ,643 - u s. 14A. In Maxopp Investment Ltd. v. CIT [2011] 15 taxmann.com 390 (Delhi), Court explained method prescribed by Rule 8D(2) as under: If one examines sub-rule (2) of rule 8D, it is found that method for determining expenditure in relation to exempt income has three components. first component being amount of expenditure directly relating to income which does not form part of total income. second component being computed on basis of formula given therein in case where assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. formula essentially apportions amount of expenditure by way of interest [other than amount of interest included in clause (ill incurred during previous year in ratio of average value of investment, income from which does not or shall not form part of total income to average of total assets of assessee. 6 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT third component is artificial figure-O.5% of average value of investment income from which does not or shall not form part of total income, as appearing in balance sheets of assessee, on first clay and last day of previous year. It is aggregate of these three components which would constitute expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A. It is, therefore, clear that in terms of said rule, amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of rule 8D. indirect expenditure, where it is by way of interest, is computed through principle of apportionment, as indicated above. In cases where indirect expenditure is not by way of interest, rule of thumb figure of 0.5% of average value of investment, income from which does not or shall not form part of total income, is-taken. In View of above, AO has rightly computed disallowance u s.14A r.w.r. 8D at Rs.6,13,547 -. As assessee has made adhoc disallowance of Rs. 32,643 -, AO has rightly made addition of balance amount of Rs.5,80,904 - (Rs.6,13,547 - Rs.32,643) u s.14A. Thus addition of Rs.5,80, 904 - made by AO is confirmed. 9. After considering afore mentioned order passed by CIT(A) as well as hearing both parties we are of considered view that it is undisputed fact that assessee had earned Rs.14,99,008 - as dividend on shares and Rs.1500 - as interest on FD s which are reflected in documents submitted by assessee. In present case assessee had made suo motto disallowance of Rs.32,643 - being expenditure relatable to exempt income. However ld. AO made disallowance of Rs.5,80,904 -. However, while passing said order AO has not recorded 7 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT satisfaction with regard to correctness of claim of assessee and moreover it is prerequisite regarding invocation of section 14A read with Rule8D that AO has to examine accounts of assessee first and then, if he is not satisfied with correctness of claim, only then, AO could invoke rule 8D. However no such examination was made or satisfaction is recorded by AO in this case. It was noticed that AO has not recorded his satisfaction regarding correctness of claim of assessee but he has embarked upon computing disallowance under Rule 8D. We have noticed that assessee itself made disallowance but AO has not indicated cogent reasons while rejecting claim of assessee with regard to expenditure or no expenditure. In entire order AO has not recorded any finding with regard to any deficiency or defect in books of accounts nor any deficiency or defect was recorded in respect of claim of assessee u s 14A. We have also noticed that AO has not recorded any satisfaction that assssee s claim u s 14A was incorrect. Similarly CIT(A) while dealing with said issue has only recorded judgment in case of Maxopp Investment Ltd. vs. CIT [2011] 15 Taxman.com 390 (Delhi) ld. CIT(A) has also failed to appreciate whether AO has rightly computed disallowance u s 14A read with Rule8D and had confirmed addition made by AO. ld. CIT(A) has also failed to appreciate whether AO has not recorded any objective satisfaction with regard to correctness of claim which is 8 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT mandatory requirement in terms of section 14A of Act and therefore, action of invoking rule 8D to compute impugned disallowance is untenable. We found reliance in following judgments: 1. J.K. Investors (Bombay) Ltd. vs. ACIT in ITA No.7858 Mum 2011 for AY 2008-09 which held as under: After considering principles laid down by various judgements, it is imperative that AO can invoke Rule 8D only when he records satisfaction in regard to correctness of claim of assessee, having regard to accounts of assessee. condition precedent for AO entering upon determination of amount of expenditure incurred in relation to exempt income is that AO must record that he is not satisfied with correctness of claim of assessee in respect of such expenditure. While rejecting claim of assessee with regard to expenditure or no expenditure, as case may be, in relation to exempt income, Assessing Officer would have to indicate cogent reasons for same. Therefore, it is all more necessary that AO has to examine accounts of assessee first and then if he is not satisfied with correctness of claim, only he can invoke Rule 8D. No such examination was made or satisfaction was recorded by AO in this case. It was noticed that Assessing Officer has not considered claim of assessee at all and he has straightway embarked upon computing disallowance under Rule 8D on presumption that portfolio 9 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT management involves at least 2% of charges. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. We notice that assessee itself disallowed interest which is directly applicable, Dmat charges and administrative exp on estimation totaling to Rs.1,55,44,610. Assessee is hundred crore turnover company. AO has not examined any expenditure claimed in P& L account so as to relate to exempt income, nor gave finding that assessee claim is not correct for any reason. Rule 8D cannot be .invoked directly without satisfying about claims or otherwise. Consequently, disallowance was not permissible. We therefore, allow ground of appeal." 2. Maxopp Investment Ltd. vs. CIT 2011 203 Taxman 364 which held as under: While rejecting claim of assessee with regard to expenditure or no expenditure, as case may be, in relation to exempt income, AO would have to indicate cogent reasons for same. 3. Raj Shipping Agencies Ltd vs. ACIT [2013] 38 Taxmann.com 345 [Mum] which held as under: Expenditure incurred in relation to income not includible in total income [Conditions precedent] - Assessment year 2008-09 - Whether Assessing Officer 10 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT has to examine accounts of assessee first and then if he is not satisfied with correctness of claim, only he can invoke rule 8D - Held, yes - Whether further, disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand - Held, yes - Whether where Assessing Officer had not recorded any satisfaction with reference to accounts of assessee or claim that no expenditure was incurred, invocation of rule 8D for disallowing expenditure under section 14A on estimation presumptive basis did not arise - Held, yes 4. DCIT vs. DBH International (P.) Ltd [2015] 55 taxmann.com 424 which held as under: Held- Commissioner (Appeals) has rightly observed that Assessing Officer did not find any deficiency in books of account nor any deficiency in respect of claim of assessee under section 14A. it is also found that Assessing Officer has not expressed satisfaction with assessee's claim under section 14A was incorrect (Delhi - Trib.) and which is sine qua non before invoking provisions of section 14A. It is not found any infirmity whatsoever in reasoned order passed by Commissioner (Appeals) and therefore order of Commissioner (Appeals) is confirmed and so departments appeal fails and so is dismissed. [Para 8] 11 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT 5. Kalyani Steels Ltd. Vs Add. CIT ITA No. 1733 PN 2012 which held as under: Assessing Officer has not recorded any objective satisfaction in regard to correctness of claim of assessee, which is mandatorily required in terms of section 14A(2) of Act and therefore his action of invoking rule BD of Rules to compute impugned disallowance is untenable. Accordingly, orders of authorities below are set- aside on this aspect and Assessing Officer is directed to retain disallowance u s 14A of Act to extent of Rs.5,00,000 -, as returned by assessee. 6. DCIT v. Jindal Photo Limited ITA Nos. 814 Del. 2011which held as under: for invoking Rule 8D AO must record satisfaction as to how claim of assessee is incorrect. If that is not done, provisions of Rule 8D cannot be invoked. ad hoc disallowance cannot be made under Rule BD. onus is on AO to establish that expenditure has been incurred for earning exempt income. Disallowance u s.14A cannot be made on basis of presumption that assessee must have incurred expenditure to earn tax-free income. Since AO had not recorded satisfaction regarding assessee's calculation being incorrect and since such satisfaction is pre-requisite for invoking Rule 8D, CIT(A) erred in partially approving action of AO. 12 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT 10. In view of afore mentioned facts and circumstances we are of considered view that Section 14A read with rule 8D had been applied in mechanical manner by AO and no objective satisfaction was recorded. Because of reason mentioned above, we are of considered view that order of revenue authorities making disallowance is set aside and matter is remanded back to file of AO with direction to record his objective satisfaction regarding correctness of claim of assessee which is mandatory requirement of section 14A (2) of Act and to pass fresh order of assessment after keeping in view directions issued from time to time by judicial authorities as mentioned above and after providing reasonable opportunity of hearing to assessee. In result, assessee s appeal is allowed for statistical purposes. Order pronounced in open court on 7th October, 2016. Sd - Sd - (Jason P. Boaz) (Sandeep Gosain) Accountant Member Judicial Member Mumbai; Dated : 07.10.2016 Ps. Ashwini 13 ITA No. 314 Mum 2015(A.Y. 2011-12) Vishal Ashok Ramsinghani vs . DCIT Copy of Order forwarded to : 1. Appellant 2. Respondent 3. ( ) CIT(A) 4. CIT - concerned 5. , , DR, ITAT, Mumbai 6. Guard File BY ORDER, (Dy. Asstt. Registrar) , ITAT, Mumbai Vishal Ashok Ramsinghani v. DCIT, Circle 3(1). Mumbai