Amit Shukla, Member (J) -
(1.) THE present appeal has been preferred by the assessee challenging the impugned order dated 5th October 2012, passed by the learned Commissioner (Appeals) -XXXIX, Mumbai, for the quantum of assessment passed under section 143(3) of the Income Tax Act, 1961 (for short "the Act") for the assessment year 2009 -10, on the following grounds: -
1. On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the order of the Assessing Officer in disallowing the expenditure to the extent of Rs. 3,58,661 under section 14A r/w rule 8D without appreciating the facts of the case and dealing with the various grounds raised before him.
(2.) WITHOUT prejudice to the above on the facts and in the circumstances of the case and in law the learned CIT(A) failed to appreciate that the appellant in his proprietary concern carried on the business of trading in shares and the said shares were held as stock in trade and as such the expenditure was incurred for the purpose of business and not for the purpose of earning exempt income, which was incidental.
2. Facts in brief: - The assessee is an individual deriving income under the heads, "income from salary", "income from house property" and "income from business". During the year, the assessee has received exempt income of Rs. 33,21,874, on account of dividend, interest from tax free bonds and others. The Assessing Officer noted that the assessee has not allocated any expenditure for earning said exempt income and required the assessee to show cause as to why the disallowance under section 14A r/w rule 8D should not be made. In response to the same, the assessee submitted that there is no direct relationship between the expenditure claimed by the assessee and the investments made on which the tax free income has been earned. Further, there is no specific expenditure which can be held to be an allocable either on account of interest or on account of administrative expenses for the purpose of disallowance under section 14A. The Assessing Officer, after detail reasoning, held that he is not satisfied with the claim of the assessee that no expenditure has been incurred in relation to the earning of exempt income. He, accordingly, calculated the disallowance at Rs. 10,66,680, as per rule 8D after disallowing the indirect interest attributable at Rs. 6,74,7472 and administrative expenses of Rs. 3,92,208, after taking into account 0.5% of the average investment.
Before the learned Commissioner (Appeals), the assessee filed detail explanation, firstly on account of disallowance of interest on the ground that the loans taken by the assessee were entirely utilised for the business purpose and the investments which were, made were out of own funds. It was submitted that the exempt income consisted of maturity proceeds of LIC at Rs. 6,59,904, dividend of Rs. 1,22,894 & interest from tax free bonds and no borrowed funds were utilised for making any kind of investments. Regarding expenditures also, the assessee submitted that it has incurred expenditure of Rs. 3,12,304, which has been debited in the books of account and none of these expenses can be said to be attributable to earning of exempt income. The learned Commissioner (Appeals) accepted the assessee's contention on the account of disallowance of interest of Rs. 6,74,472, and directed the Assessing Officer to delete the said disallowance. However, with regard to the disallowance of administrative expenses, he held that formula of rule 8D, has to be applied and since the assessee's administrative expenses were Rs. 3,58,661, which was claimed as administrative expenses, the same amount should be disallowed.
(3.) BEFORE us, the learned counsel, Mr. Satish R. Modi, on behalf of the assessee, submitted that the assessee's tax free income is mainly from interest on tax free bonds, maturity from LIC and dividend income. For earning of this exempt income, no expenditure have been incurred and looking to the nature of expenses, as incorporated in the appellate order at Page -3, it can be seen that none of these expenses can be said to be remotely attributable to the earning of exempt income. The conditions mentioned in section 14A(2) and 14A(3) are not fulfilled in assessee's case as the Assessing Officer has not examined the assessee's nature of expenses and has simply proceeded to invoke the provisions of rule 8D. Provisions of rule 8D, can only be invoked once, the conditions mentioned in section 14A(2) and 14A(3) are fulfilled.;