Thomas Philips vs ITO: Section 14A Disallowance on Exempt Income for AY 2016-17

Thomas Philips vs ITO: Section 14A Disallowance on Exempt Income for AY 2016-17

In a notable judgment delivered on October 14, 2020, the Income Tax Appellate Tribunal (ITAT) Delhi ‘SMC-2’ Bench, consisting of Shri Bhavnesh Saini, Judicial Member, and Shri Ramit Kochar, Accountant Member, addressed the case of Thomas Philips vs ITO, Ward-61(5), New Delhi. The case, which pertains to the assessment year 2016-17, revolves around the disallowance of expenses under Section 14A of the Income Tax Act, 1961, related to the earning of exempt income.

Background of the Case

The appellant, Thomas Philips, is a professional doctor who earned income from various sources, including his medical practice, which he incorrectly declared under the head ‘Income from Other Sources’. Additionally, he earned exempt income in the form of dividends amounting to Rs. 11,47,898 during the assessment year 2016-17. The dispute in this case arose when the Assessing Officer (AO) applied Rule 8D of the Income Tax Rules, 1962, to disallow Rs. 4,74,191 as expenses allegedly incurred in relation to the earning of this exempt income.

The appellant contended that no expenses were incurred in relation to the earning of the exempt income, and therefore, no disallowance under Section 14A should be made. However, the AO, followed by the Commissioner of Income Tax (Appeals) [CIT(A)], disagreed with this contention, leading to the appeal being filed before the ITAT.

Issues Raised in the Appeal

The grounds of appeal raised by the appellant were as follows:

• The CIT(A) erred in failing to observe that the appellant did not claim any expenditure in the computation of income, and therefore, the invocation of Section 14A read with Rule 8D was incorrect.
• The CIT(A) further erred in confirming the addition of Rs. 4,74,191 under Section 14A, despite the fact that no expenditure was claimed by the appellant in the return of income.
• The appellant reserved the right to add, amend, vary, omit, or substitute any of the grounds of appeal at any time before or during the hearing of the appeal.

Arguments and Observations

During the hearing, the appellant’s counsel, Shri S. Srinivasan, argued that the appellant had not made any expenditure related to the earning of exempt income and had not claimed any deductions for such expenses. He contended that the authorities below had failed to verify this claim, leading to an incorrect disallowance under Section 14A.

The Revenue, represented by Shri Ved Prakash Mishra, Senior Departmental Representative (DR), suggested that the matter be remanded back to the AO for fresh adjudication, allowing for a proper verification of the appellant’s claims.

ITAT’s Decision

After hearing both parties, the ITAT found that the appellant had indeed declared his professional income under the wrong head, ‘Income from Other Sources’, rather than under ‘Profit or Gain from Business or Profession’. The tribunal noted that the authorities below had not adequately examined whether the appellant had claimed any expenditure related to the exempt income. In light of this, the ITAT deemed it appropriate to remand the case back to the AO for fresh adjudication.

The tribunal directed the AO to provide the appellant with a proper opportunity to present details of income earned from various sources, including the professional income declared under ‘Income from Other Sources’. The AO was instructed to verify whether any expenses were claimed by the appellant in relation to the earning of the exempt income and to adjudicate the issue of disallowance under Section 14A read with Rule 8D accordingly.

Conclusion

The appeal was allowed for statistical purposes, with the ITAT remanding the case back to the AO for a thorough examination of the facts. The tribunal emphasized the need for a fair and just resolution, ensuring that the appellant’s claims are properly verified and that the disallowance under Section 14A is applied only if warranted by the evidence.

This case serves as a reminder of the complexities involved in tax assessments, particularly when dealing with the disallowance of expenses related to exempt income. It underscores the importance of accurate income declarations and the need for careful verification by tax authorities before making any disallowances.

The judgment also highlights the ITAT’s role in ensuring that tax disputes are resolved based on a comprehensive examination of the facts, with due consideration given to the arguments and evidence presented by both parties.

Thomas Philips vs ITO: Section 14A Disallowance on Exempt Income for AY 2016-17