UMA RAJENDRA AGARWAL,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-25(1) , MUMBAI

The facts relating to the case are stated in brief. The assessee is engaged in the business of trading in textiles through her proprietary concern M/s. Lotus Fabrics. During the year under consideration, the assessee has also undertaken job works for weaving of textile in the looms. Besides the above, the assessee also makes investment in shares. The 2 Uma Rajendra Agarwal assessee has maintained separate books of account for her business and for personal activities including investment activities.

The first issue relates to disallowance made under section 14A of the Act. During the year under consideration the assessee has received dividend income of Rs. 8,46,531/- and long term capital gains of Rs. 6,31,075/-. The assessee claimed both the above said income as exempt. However, the assessee did not disallow any expenditure under section 14A of the Act. Hence, the Assessing Officer disallowed a sum of Rs.12,59,952/- under rule 8D read with section 14A of the Act. Breakup of the same is given below :

With regard to the disallowance of direct expenses under rule 8D(2)(i), the learned AR submitted that the assessee has maintained separate books of account for her business activities and for investment activities. All the direct expenses mentioned by the Assessing Officer, viz., Demat charges, STT expenses, professional fees and share transaction expenses have not been debited to the profit and loss account of the business concern. He submitted that these expenses have been debited to the Capital account of the assessee in her personal books. Since, the assessee has not claimed these expenses as deduction anywhere, the Ld A.R contended that there is no requirement of making any disallowance under rule 8D(2)(i) of the Rule.

We heard learned DR on this issue and perused the record. We noticed that the assessee has furnished copy of personal income and expenditure account, which included only personal transactions, at page No. 26 of the 3 Uma Rajendra Agarwal paper books. Out of the personal profit and loss account, the assessee has offered taxable portion of income fully in the Statement of Total income. We noticed that the assessee has not claimed these expenses as deduction against any income. Hence, there is merit in the contention of the assessee that the direct expenses aggregating to Rs. 1,26,993/- do not require disallowance as required under rule 8D(2)(i) of the Rule. Accordingly we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to delete the disallowance of Rs. 1,26,993/- made under rule 8D(2)(i) of the I.T. Rules.

With regard to the interest expenses disallowed under rule 8D(2)(ii), learned AR submitted that the assessee has not claimed any interest expenditure against here investment activities. Referring to the personal balance sheet placed at page No. 25 of the paper book, the learned AR submitted that the assessee is having own funds of Rs. 17.80 crores whereas, the investment stands at Rs. 4.64 crores. He further submitted that the term loan availed by the assessee in her business purpose has been fully utilised for business purposes only and it has not been diverted to her investment/personal purposes. Accordingly, the learned AR contended that there was no requirement of making any disallowance out of interest expenditure also.

The Learned DR, on the contrary, submitted that the assessee has taken term loan and hence a portion of interest expenditure is required to be disallowed.

Having heard the rival contentions, we are of the view that there is merit in the submissions of the assessee. Personal balance sheet placed at page No. 25 of the paper book would show that the assessee is having own capital at Rs.17.80 crores, while the investment made by the assessee stands at Rs. 4.65 crores. Thus own fund available with the assessee exceeds value

The Next issue relates to the disallowance of expenses under rule 8D(2)(iii). The Assessing Officer had disallowed 0.5% of average value of investment. The Learned AR contended that the assessee has not incurred any expenditure which is required to be disallowed under rule 8D(2)(iii). Since the assessee has been carrying on business, it cannot be ruled out that the assessee would have utilised establishment and other facilities of the business for carrying out her investment activities. Hence we are of the view that the some expenses are required to be disallowed under section 14A of the Act. In our view the same is required to be estimated, since provision of rule 8D cannot be applied in the facts of the present case. Accordingly, we are of the view that disallowance of Rs. 50,000/- on estimated basis would meet the requirement of sec. 14A of the Act. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and direct the Assessing Officer to restrict the disallowance under section 14A to Rs. 50,000/-.

The next issue relates to adhoc disallowance made out of Electricity expenses. During the year under consideration the assessee has purchased certain looms and has carried out job work. The looms have been installed in 5 Uma Rajendra Agarwal the premises belonging to a sister concern named M/s Donear Industries Ltd. It was noticed by the AO that the electricity was provided to the assessee from a common electricity connection obtained by M/s. Donear Industries Ltd. It is the submission of the assessee that a sub-meter was provided to the area allocated to the assessee. Based on the reading of sub-meter, M/s Donear Industries Ltd had raised debit notes and the assessee had paid electricity charges of Rs. 15,69,280/- during the year under consideration. It is pertinent to note that the assessee has also paid lease rent for the premises occupied by it.

The Assessing Officer took the view that the assessee has not furnished any bank proof to support the payments. Further he took the view that electricity expense of Rs. 15,59,280/- claimed by the assessee is disproportionate to total turnover of Rs.78,94,803/-. Accordingly, he disallowed 20% of the electricity expenses under section 37(1) of the Act, which worked out to Rs. 3,11,856/-. The learned CIT(A) also confirmed the same.

In the result, appeal filed by the assessee is partly allowed.