Salil Agarwal, Adv. for the Assessee Revenue by Sh. Parikshist Singh, Sr. DR for the Revenue. Parikshist Singh, Sr. DR for the Revenue.

The present appeal has been filed by the assessee against the order of the ld. CIT(A)-20 , New Delhi dated 19 .01.2017.

2. Following grounds have been raised by the assessee:

“1. That the learned Commissioner of Income Tax (Appeals) has erred in sustaining the disallowance of Rs. 7 ,38,963/- failing to appreciate that aforesaid disallowance has been made mechanically applying the provisions o f Rule 8D(2)(iii) (of Income Tax Rules, 1962) and without recording a satisfaction vis- a-vis books of the accounts of the assessee as envisaged under the provisions of Sub-sections (2) and (3) of Section 14A (of Income Tax Act, 1961) and hence the disallowance made of Rs. 6 ,93,610/- is wholly unsustainable in law and deserves to be deleted.

1.1 That the learned Commissioner o f Income Tax (Appeals) has erred in sustaining the disallowance failing to appreciate that while making the a foresaid disallowance learned Assistant Commissioner of Income Tax has not established the nexus between the specific expenditure and the income which does not form part of the total income despite the fact that the appellant has speci fically submitted that no expenditure has been earned for earning the exempt income.

2. That the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining a disallowance of Rs. 2 ,22 ,649/- on account of interest expenses claimed on car loan.

2.1 That in doing so , the learned Commissioner o f Income Tax (Appeals) has failed to appreciate the fact that requisite documents/evidences were filed and explanation were tendered before the learned ACIT explaining the aforesaid expenditure , but the learned ACIT based his decision purely on suspicion, surmises and con jectures and as such, the disallowance so made should be deleted.

3. That the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining a disallowance o f Rs. 1,92 ,186/- on account of so ftware expenses.

3.1 That in doing so , the learned Commissioner of Income Tax (Appeals) has failed to appreciate the fact that requisite documents/evidences were filed and explanation were tendered before the learned ACIT explaining that the so ftware expense claimed of Rs. 4 ,80,465/- is a revenue expenditure , but the learned ACIT based his decision purely on suspicion, surmises and con jectures and as such, the capitalization of the said expenditure and allowance of depreciation at the rate o f 60% is highly un just and untenable in law.

4. That the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining an adhoc disallowance of Rs. 2,62 ,484/- on account of interest expenses claimed on car loan.

4.1 That in doing so , the learned Commissioner of Income Tax (Appeals) has failed to appreciate the fact that requisite documents/evidences were filed and explanation were tendered before the learned ACIT explaining the aforesaid expenditure , but the learned ACIT based his decision purely on suspicion, surmises and con jectures and as such, the disallowance so made should be deleted.

5. That the learned Commissioner of Income Tax (Appeals) has grossly erred in recording adverse findings which are perverse and have been recorded without considering the factual substratum of the case and hence such findings are vitiated and deserves to be deleted.”

3. The assessee has earned income exempt from tax amounting to Rs.24 ,62,098/- from dividend u/s 10(34) (of Income Tax Act, 1961) and Rs.12 ,90,604/- under the head “LTCG” on listed securities u/s 10(38) (of Income Tax Act, 1961). The assessee was asked on 15.09 .2015 to give de tails and justify the claim in view o f Section 14A (of Income Tax Act, 1961) read wi th rule 8D (of Income Tax Rules, 1962) with re ference to the exempt income. After considering the submissions, the AO re ferring to the case o f CIT Vs Wal ford Shares & Stock Brokers Pvt. Ltd. disallowed Rs .7,38,963/- u/s 14A (of Income Tax Act, 1961).

4. The ld . CIT (A) confirmed the order of the AO.

5. At the outset, it was brought to our notice that a similar issue has been adjudicated by the Co-ordinate Bench of ITAT Delhi in ITA No . 5822/Del/2015 for the earlier years. It was submitted that except the quantum of the amount involved, the issue stands similar the fact which counsels from both the sides not controverted.

6. We have gone through the facts of the case and find it similar to the earlier years. We have also gone through the order o f the Co-ordinate Bench o f ITAT Delhi and find the ratio squarely applicable to the year in question. The relevant part o f the said order is as under:

“13. On ground no . 3 assessee challenged the disallowance of Rs. 6,08 ,180/- u/s 14A (of Income Tax Act, 1961) o f the Act read with Rule 8D(2)(iii) of the Income Tax Rules, 1962. The AO noted that assessee has earned income exempt from tax amounting to Rs. 21 ,26,012/- from dividends. The assessee was asked to give details and justify the claim in view of section 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962) with reference to the dividend income. The assessee submitted that he has not claimed any expenses against earning of the said income. Therefore , above provisions are not applicable in the case of the assessee . The assessee relied upon the following decisions:

1. “CIT vs . Wimco Seedlings – ITA No . 1367/2008, 1368/2008 & ITA No. 1391/2008;

2. ACIT vs. Sun Investments Pvt. Ltd. (2011) 48 SOT 159 (Delhi);

3. Relaxo Footwear Ltd . vs . Addl . CIT, Range-15, New Delhi (2012) 50 SOT 102 (Delhi).”

14. The AO, however, noted that the basic object of section 14A (of Income Tax Act, 1961) is to disallow the direct and indirect expenditure incurred in relation to income which does not form part o f the total income. AO referred to judgment o f the Supreme Court in the case of CIT vs Walfort Share and Stock Brokers P. Ltd. 326 ITR 1. The AO also noted that AO has to adopt a reasonable basis or method consistent with all the relevant facts and circumstances for making a disallowance . The assessee has not provided any separate amount for earning of exempt income . The assessee has made very heavy investments for earning exempt income throughout the year. The AO, there fore, following section 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962) disallowed expenditure of Rs. 6 ,08,180/- which is attributed to the earning of exempt income .

15. The addition was challenged be fore Ld. CIT(A). The written submission o f the assessee is reproduced in the appellate order in which it was stated that AO has not speci fied or pointed out any expenses, whatsoever claimed by assessee for earning the said dividend income. The assessee relied upon the decisions o f Delhi High Court in the cases of CIT vs. Taikisha Engineering India Ltd. 275 CTR (Del.) 316 and Joint Investments (P) Ltd. vs. CIT 275 CTR 471. The Ld. CIT(A), however, confirm the addition and dismiss the appeal of assessee.

16. After considering the rival submissions , we are of the view that addition is wholly un justified. Ld. Counsel for assessee submitted that similar issue was considered by ITAT Delhi ‘D’ Bench in the case of assessee for AY 2009-10 vide order dated 15 .11.2018 (supra) and similar addition has been deleted. The findings of the Tribunal in para 8 of the order above is reproduced as under:

“8. We have gone through the findings o f the Ld. Assessing Of ficer on this aspect. Ld. Assessing Officer recorded that the assessee made heavy investments for earning o f exempt income and being a busy pro fessional, he requires the management o f such a portfolio by incurring expenses , diversion o f man-power/staff for indulging in investment activities to various activities like visiting banks, use of vehicle and telephone , use o f Internet if portfolio management is web-based, cost of computer and its depreciation, computer operator, consequent electricity , use of of fice premises, fee charged by mutual fund agents/bankers (annual fee), portfolio record maintenance and its tracking to ensure timely sale/purchase o f mutual fund units etc. Except making this statement and reading all the possible expenses that involve in investment process, Ld. Assessing Officer is not specific as to what exactly the probable expenditure in this matter the assessee could have incurred. According to the assessee the investment was made in mutual funds and the expenses were already directed by the operators and a certi ficate to that extent was submitted be fore the Ld. Assessing Officer. Further, the instructions are that the dividend income will be directly credited to the bank account o f the assessee so that no probable expenditure at the end o f the assessee for deposit of the dividend in bank could have occurred. Having regard to this set of facts and circumstances involved in this matter, we are o f the considered opinion that instead of making a sweeping enumeration of the probable expenses involved in investment process, Ld. Assessing Officer could have taken legal exercise to veri fy the correctness or otherwise of the certi ficate that was issued by the asset management companies or the Citibank in this respect. We, there fore, find that there is no proper record of satisfaction as to the expenses incurred by the assessee for earning the exempt income . By following the decision reported in CIT vs. Taikisha Engineering India Ltd. 275 CTR (Del.) 316 and Joint Investments (P) Ltd. vs. CIT 372 ITR 694 (Del .), we are of the opinion that the AO at the first instance should have examined the correctness of the statement made by the assessee that no expenses were incurred for earning the exempt income during the year and i f and only if the Ld. AO is not satisfied on this account after making reference to the accounts, he is entitled to adopt the method under Rule 8D (of Income Tax Rules, 1962). We , there fore, while allowing the plea o f the assessee direct the Ld. Assessing Of ficer to delete the addition made on this score also .”

Copy o f the order is provided to the Ld. DR who did not dispute the same .

17. Considering the facts o f the case , in the light of the findings o f the Tribunal in AY 2009-10 (supra), we are o f the view that issue is covered in favour o f the assessee by above order o f the Tribunal in the case of the same assessee. Following the reasons for the decision of the same , we set aside the orders of the authorities below and delete the addition.”

7. Since, the facts remain unaltered, in the absence of any change in the position o f law, following the ratio laid down in the order of the Co-ordinate Bench o f ITAT , we hereby delete the addition made by the AO u/s 14A (of Income Tax Act, 1961).

Interest on Car Loans:

8. Ground No. 2: The AO held that income and expenditure account of the assessee for the year under consideration, it was seen that the assessee has debited interest paid o f Rs.2 ,22,649/- on account of vehicle loan. Further, it was observed that the assessee had advanced loans and advances to various parties including related parties and no interest is charged. The AO disallowed the interest on the loan taken for the purchase of vehicle on the grounds that the assessee has extended interest free advance for property o f Rs.6.89 crs. and hence the interest on the vehicle should be disallowed.

9. The ld. CIT (A) confirmed the action o f the Assessing Officer relying on the order o f the Hon’ble Jurisdictional High Court in the case Pun jab Stainless Steel Industries Ltd. Vs. CIT 324 ITR 396.

10. It was brought to our notice that a similar issue has been adjudicated by the Co-ordinate Bench of ITAT Delhi in ITA No. 5822/Del/2015 for the earlier years. It was submitted that except the quantum o f the amount involved, the issue stands similar the fact which counsels from bo th the sides not controverted.

11. We have gone through the facts of the case and find it similar to the earlier years. We have also gone through the order o f the Co-ordinate Bench o f ITAT Delhi and find the ratio squarely applicable to the year in question. The relevant part o f the said order is as under:

“After considering the rival submission, we are o f the view that addition is wholly un justified .

9. Ld. Counsel for assessee pointed out that the AO noted in the assessment order that issue is similar as has been considered in AY 2009-10. He has submitted that assessee preferred appeal be fore ITAT ‘D’ Bench in AY 2009-10 and appeal of assessee has been allowed on the similar ground, vide order dated 15.11.2018 in which the Tribunal in para 6 held as under:

“6. Ld. AR submitted that this car loan was the only interest-bearing loan that was taken by the assessee during the year and all the other funds are either interest free loans or the balance o f capital account available with him. We find force in the submission of Ld. AR that the car loan o f Rs. 50 lacs is no match against the amounts advanced during the year under consideration which are to the tune of Rs . 2 .98 crores by the assessee . Further, it is not the case of the Ld. Assessing Of ficer that the car loan was diverted for any other purpose, because there isno denial o f the statement o f the assessee that the loan amount was directly disbursed to the seller o f the car. Inasmuch as the loan was for the purpose of business and no question of diversion of such funds had taken place , merely because the assessee placed his own funds and also the interest free loans for some other purposes, is not open for the Ld. Assessing Of ficer to disallow the interest on the amount taken for business purpose. We , there fore , direct the Assessing Officer to delete this addition.”

10. Copy o f the above order is provided to the Ld. DR who did not dispute the same .

11. In view o f the above , it is clear that AO disallowed the interest because the issue is similar as has been considered in AY 7 ITA No. 5822/Del/2015 2009-10. In AY 2009-10 the Tribunal deleted the similar additions . We , therefore , following the reasons for decision for AY 2009-10 (supra) found that issue is covered in favour of the assessee . We , accordingly, set aside the orders of the authorities below and delete the addition.”

12. Since, the facts remain unaltered, in the absence of any change in the position o f law, following the ratio laid down in the order of the Co-ordinate Bench o f ITAT , we hereby delete the addition made by the AO u/s 14A (of Income Tax Act, 1961). Software Expenses:

13. Ground Nos . 3 & 3 .1: The assessee has debited Rs.4 ,80,465/- as so ftware expenses in income and expenditure account. The counsel of assessee vide order sheet noting dated 20.11.2015 was asked to explain why computer and software expenses which are debited in P&L a/c should not capitalized.

14. The AO has disallowed the claim o f the assessee of treating so ftware expenses as revenue expenses and treated it as capital expenditure and depreciation @ 60% was allowed and 40% o f the expenses were disallowed on account o f so ftware expenses being capital in nature .

15. The issue o f depreciation of the so ftware and the computer accessories has been adjudicated a number of cases by this Tribunal wherein depreciation @60% has been allowed. However, since the AO and the ld. CIT (A) have categorically mentioned that the assessee did not produce the relevant evidences for the purchase o f software, we, accordingly, set aside the orders of the authorities below and restore this issue to the file of AO with direction to re-decide the issue after giving an opportunity of being heard to the assessee , after veri fying the bills and vouchers produced on this issue. This ground is allowed for statistical purposes .

Disal lowance of Persona l Expenditure:

16. Ground No. 4: The AO noted that assessee has claimed telephone and telex, vehicle running and maintenance expenses and depreciation on vehicle in profit and loss account. The total expenses are amounting to Rs. 34,93,780/-. The AO noted that the personal element o f these expenses cannot be ruled out. Hence , 1/10th of these expenses was disallowed u/s 37(1) (of Income Tax Act, 1961) being of personal nature . The AO, therefore , made addition of Rs. 3,49,378/-. The Ld. CIT(A) gave a remission of Rs .86,890/- and confirmed disallowance of Rs.2 ,62,484/-. A similar matter has also been adjudicated in the case of the assessee for the assessment year 2011-12.

17. After considering the rival submission, we are o f the view that the entire addition is wholly un justified. The AO has not pointed out on which items personal element was involved in claiming the aforesaid expenses. AO has not pointed out any speci fic item which is used by the assessee for personal purposes. It is ad hoc addition made by the AO by disallowing 1/10th out of these expenditures. It is well settled law that ad hoc addition cannot be sustained unless AO has pointed out any speci fic item in which personal element is involved. There was thus, no justi fication to make any disallowance out o f these expenditures. We, accordingly, set aside the orders o f the authorities below and delete the entire addition.

18. In the result, the appeal of the assessee is allowed.

Order Pronounced in the Open Court on 12/10/2020.

Sd/- Sd/-

(Bhavnesh Saini) (Dr. B. R. R. Kumar)

Judicial Member Accountant Member

Dated: 12/10/2020