IN INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D : NEW DELHI) BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER and SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No.3797/Del./2015 (ASSESSMENT YEAR : 2010-12) M/s. ACE Insurance Brokers Pvt. Ltd., vs. ACIT, Circle 1, B 17, Ashadeep Building, New Delhi. 9, Hailey Road, New Delhi 110 001. (PAN : AADCA9488L) (APPELLANT) (RESPONDENT) ASSESSEE BY : Shri D.C. Aggarwal, Advocate REVENUE BY : Ms. Naina Soin Kapil, Senior DR Date of Hearing : 21.08.2019 Date of Order : 11.09.2019 ORDER PER KULDIP SINGH, JUDICIAL MEMBER : Appellant, M/s. ACE Insurance Brokers Pvt. Ltd. (hereinafter referred to as assessee) by filing present appeal sought to set aside impugned order dated 18.03.2015 passed by Commissioner of Income - tax ( Appeals ) - I, New Delhi qua assessment year 2010-11 on grounds inter alia that :- 1. impugned order passed by Learned Commissioner (Appeals) to extent it confirms disallowance of Rs.2,18,970.00 under section 14A is bad in law on facts and has been passed in mechanical order on basis of conjectures and surmises. 2 ITA No.3797/Del./2015 2. learned Commissioner (appeals) has erred in disallowing expenses under section 14A without appreciating that learned A.O had applied rule 8D for purpose of disallowance u/s 14A without arriving at satisfaction or complying with mandatory requirement of section 14A(2) of rule 8D (1). 2. Briefly stated facts necessary for adjudication of issue at hand are : During year under assessment, assessee company has shown dividend income of Rs.1,91,750/- from shares and claimed same as exempt income under section 10 of Income-tax Act, 1961 (for short Act ). Assessing Officer (AO) by invoking provisions contained u/s 14A read with Rule 8D proceeded to make disallowance to tune of Rs.2,18,970/- on ground that expenses connected with exempt income have to be disallowed and computed same as under:- Calculation of disallowance under Rule 8D i. amount of expenditure incurred during year directly relating to exempt income - Nil ii. interest on borrowings made for investment in mutual funds - NIL iii. 0.5% of average value of investment income from which does not form part of total income on first & last day' of previous year- Applicable Accordingly, disallowance upto 0.5% of average of value of investments u/s 14A read with Rule 8D is calculated as under: Opening Investment (a) : Rs.2,77,89,926/- Closing Investment (b) : Rs.5,97,98,313/- Average Investment : Rs.4,37,94,119/- ([(a)+(b)]/2) 0.5% of Average Investment : Rs.2,18,970/- (0.5% of Rs. 4,37,94,119/-) 3 ITA No.3797/Del./2015 Accordingly, amount of Rs.2,18,970/- is hereby disallowed in view of provision of section 14A of IT Act, 1961 and is added back to income of assessee. (Addition of Rs.2,18,970/-) 3. Assessee carried matter by way of appeal before ld. CIT (A) who has confirmed addition by partly allowing appeal. Feeling aggrieved, assessee has come up before Tribunal by way of filing present appeal. 4. We have heard ld. Authorized Representatives of parties to appeal, gone through documents relied upon and orders passed by revenue authorities below in light of facts and circumstances of case. 5. Undisputedly, assessee has earned dividend income to tune of Rs.1,91,750/- during year under assessment and claimed same as exempt income u/s 10 of Act. It is also not in dispute that assessee has filed categoric reply before AO as well as ld. CIT (A) to show-cause notice that company had not incurred any expenditure for earning dividend income. 6. When we examine aforesaid undisputed facts and circumstances of case in light of settled principle of law that without recording his dissatisfaction as to working out made by assessee that no expenses have been incurred, provisions contained u/s 14A read with Rule 8D are not attracted. In instant case, AO has merely recorded general principle that assessee has himself taken 4 ITA No.3797/Del./2015 decision to invest in shares for which Board Resolution in this regard has been passed and necessary formalities are required to be performed and for all these activities, assessee must have used some experts entailing some expenditure. However, word has not been minced by AO that evidence brought on record by assessee wherein it is mentioned that no expenditure has been incurred to earn exempt income is incorrect in his satisfaction rather mechanically proceeded to invoke provisions contained under Rule 8D of Act. 7. Hon ble Delhi High Court in case of Maxopp Investment Ltd. vs. CIT (2012) 347 ITR 272 (Del.) while deciding identical issue has held as under :- Section 14A even prior to introduction of sub-sections (2) and (3) would require Assessing Officer to first reject claim of assessee with regard to extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that question of determination of such expenditure by Assessing Officer would arise. requirement of adopting specific method of determining such expenditure has been introduced by virtue of .sub- section (2) of section 14A . Prior to that, assessee was free to adopt any reasonable and acceptable method. So, even for pre-rule 80 period, whenever issue of section 14A arises before Assessing Officer, he has, first of all, to ascertain correctness of claim of assessee in respect of expenditure incurred in relation to income which does not form part of total income under Act. Even where assessee claims that no expenditure has been incurred in' relation to income which does not form part of total income, Assessing Officer will have to verify correctness of such claim. In case, Assessing Officer is satisfied with claim of assessee with regard to expenditure or no expenditure, as case may be, Assessing Officer is to accept claim of assessee in so far as quantum of disallowance under section 14A is concerned. In such eventuality, Assessing Officer cannot embark upon determination of amount of expenditure for purposes of section 14A(1). In case, Assessing 5 ITA No.3797/Del./2015 Officer is not, on basis of objective criteria and after giving assessee reasonable opportunity, satisfied with correctness of claim of assessee, he shall have to reject claim and state reasons for doing so. Having done so, Assessing Officer will have to determine amount of expenditure incurred in relation to income which does not form part of total income under Act. He is required to do so on basis of reasonable and acceptable method of apportionment. 8. Moreover, before ld. CIT (A), assessee has come up with specific plea that it has not paid any sitting fee to Board Members so as to decide and making investment in shares but this contention of assessee has also not been taken into account by ld. CIT (A). So, when AO has failed to prove on record material to show that such and such expenditure has been incurred by assessee to earn exempt income, disallowance u/s 14A read with Rule 8D is not permissible. 9. Hon ble High Court of Punjab & Haryana in case of CIT vs. Hero Cycles Ltd. - 323 ITR 518 held that disallowance u/s 14A is not permissible where there is no nexus between expenditure incurred and income generated by returning following findings :- Held, dismissing appeal, that expenditure on interest was set off against income from interest and investment in shares and funds were out of dividend proceeds. In view of this finding of fact, disallowance under section 14A was not sustainable. Whether, in given situation, any expenditure was incurred which was to be disallowed, was question of fact. contention of Revenue that directly or indirectly some expenditure was always incurred which must be disallowed under section 14A and impact of expenditure so incurred could not be allowed to be set off against business income which may nullify mandate of section 14A, could not be 6 ITA No.3797/Del./2015 accepted. 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. Consequently, disallowance was not permissible. 10. In view of what has been discussed above, we are of considered view that ld. CIT (A) has erred in confirming disallowance made by AO u/s 14A read with Rule 8D, hence disallowance made by AO and confirmed by ld. CIT (A) is ordered to be deleted. Consequently, appeal filed by assessee is hereby allowed. Order pronounced in open court on this 11th day of September, 2019. Sd/- sd/- (PRASHANT MAHARISHI) (KULDIP SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated 11th day of September, 2019 TS Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(A)-I, New Delhi. 5.CIT(ITAT), New Delhi. AR, ITAT NEW DELHI. ACE Insurance Brokers Pvt. Ltd. v. ACIT, Circle-1, New Delhi