The Honorable Delhi High Court in the case of Pradeep Khanna vs. ACIT, Circle 30(1) Delhi, I.T.A. no. 953/2015 has held that Assessing Officer should always examine the accounts carefully before making dis allowance under section 14A of the Income Tax Act, 1961.
The appellant was represented through Mr. Rajesh Mahna and Mr.ManuK.Giri, Advocates. On the other hand the respondent was represented through Mr. Rahul Chaudhary (Sr.Standing Counsel) and Mr. Raghuvendra Singh (Jr. Standing Counsel).
Judgment delivered by:
Hon’ble Justice Mr. S. Ravindra Bhat and Honorable Justice Deepa Sharma passed the aforesaid judgment on 11.08.2016.
The following issue arose for consideration of the Honorable Court:
“Was the Tribunal was wrong in upholding the decision of the lower authority in connection with the dis allowance under Section 14A of the Act?”
Brief facts of the case:
The facts were that the assessee reported a tax exempt dividend income amounting to Rs. 10, 87,898/- and he did not claim any expenditure for earning the same.
In order to apply the dis allowance provided under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, the Assessing Officer added a sum of Rs. 1, 21,805/- to the taxable income.
The assessee contended that the method adopted by the revenue was erroneous. It was argued that the tax exempted income was earned interest which was credited to the bank account of the appellant and also the dividends earned went to the bank account without the intervention of any personnel.
The revenue contended that the assessee carried on business and during such business he engaged an accountant who was engaged in the job of looking after the accounts and investments which earned a sum of Rs.10,87,898/-.
The assessee had relied upon the judgment of the Hon’ble Delhi High Court in Commissioner of Income Tax vs. Taikisha Engineering Pvt. Ltd., 370 ITR 338 (Del) and the judgment of the Tribunal at Delhi for a previous year in the case of Pradeep Khanna vs. I.T.O., Ward-23 (1) New Delhi ITA No.1250/Del/2014.
In Taikisha Engineering Private Limited’s case (supra) the court had held that Sub-rule (1) categorically states that the Assessing Officer after examining the accounts of the assessee and upon not being satisfied with the genuineness of the claim of expenses made by the assessee or a claim to the effect that no expenditure was incurred in connection with the income which is not a part of the total income under the Act, can determine the dis allowance under sub rule (2) to Rule 8D of the Rules.
Sub-rule (2) will not act until the specific precondition in sub-rule (1) is fulfilled. Thus, section 14A (2) of the Act and rule 8D (1) together provide that the dis allowance made by the assessee or claim that no expenditure was incurred to earn the income that is exempt must be examined carefully with reference to the accounts.
Computation under sub rule (2) to rule 8D can be made only and when the claim of the assessee is not satisfactory.
Provisions of section 14A of the Act:
Section 14A of the Income Tax Act, 1961 was first inserted by the Finance Act, 2001 with retrospective effect on and from 1.4.1962 and it apples in relation to the assessment year 1962-1963 and all the subsequent assessment years.
The section deals with the Expenditure incurred for any income that is not included in total income of an assessee.
The section provides that for the purposes of calculating the total income of an assessee, no deduction shall be allowed for an expenditure incurred by the assessee in connection with the income that is not a part of the total income under the Act.
A new sub-section (2) was also inserted in section 14A to provide that the Assessing Officers are under the obligation to determine the amount of expenditure incurred in connection with such income which is not a part of the total income according to such method that may be prescribed. In other words, the Assessing Officer should examine all documents before making a dis-allowance.
However, the Assessing Officer has to follow the prescribed method if he is not satisfied with the genuineness of the claim of the assessee for the expenditure claimed to have been made by the assessee in relation to income which is not a part of his total income.
The provisions of sub-section (2) will applicable also to cases where an assessee claims that no expenditure has been incurred by him for earning an income which is not a part of his total income.
The judgment delivered:
In the instant case, it was observed that the AO failed to examine the accounts closely and then to determine if any expenditure could be allowed to the tax exempt interest earned by the assessee.
If the tax exempted income was earned without the help of any employee but through the advertisement of the bank the question of attributing any expenses does not arise.
In view of the circumstances, the impugned order was set aside. The matter was remitted to the Assessing Officer for fresh adjudication in accordance with the judgment of the Honorable court in the case of Taikisha Engineering Private Limited (supra).
The appeal was accordingly allowed.