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Income Tax Appellate Tribunal, ‘C’ BENCH, KOLKATA
Before: Dr. Manish Borad & Shri Sonjoy Sarma
Per Dr. Manish Borad, Accountant Member:- This appeal at the instance of assessee for assessment year 2013-14 is directed against the order of (A.Y. 2013-14) M/s. Panchiram Nahata ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 14.02.2023, which is arising out of the order under section 143(3) of the Act on 09.02.2016 framed by ld. ACIT, Circle-44, Kolkata.
The grounds of appeal raised by the assessee read as under:-
(1)(a) That, the Ld. CIT(A), NFAC erred in upholding the disallowance of Rs.24,10,230/- simply on the ground that there is no scope for giving effect of notional income/expenditure u/s 14A r.w.r. 8D of the Rules when the Ld. A.O. on one hand found that no interest on borrowed capital from partners had been paid and at the same time purely on his superfluous interpretation/analysis held that the same was irrelevant to the computation under Rule 8D of the Rules.
(1)b) That, the Ld. CIT(A) further erred in law in upholding the disallowance of Rs.24,10,230/- u/s 14A r.w.r. 8D of the Rules in spite of the fact that dividend received from quoted shares and MF invested in earlier years and held as stock-in-trade was incidental and just by-product of the regular share trading activities and hence in view of binding decisions of the Hon’ble Supreme Court disallowance of interest expenditure on borrowed funds does not apply to such stock-in-trade.
(1)(c) That, the Ld. CIT(A) also erred in upholding the disallowance of Rs.24,10,230/- u/s 14A of the Act without considering that as per the audited accounts the assessee had paid interest of Rs.2,77,70,374/- and received interest of Rs.2,71,58,020/- on loans taken and advanced respectively and hence the net interest expenditure of Rs.6,12,354/- claimed in the ROI should be considered in computing disallowance under Rule 8D(2)(ii) of the Rules.
(1)(d) That, the Ld. C1T(A) on the facts and circumstances of the case further erred in not considering the calculation of disallowance (A.Y. 2013-14) M/s. Panchiram Nahata of Rs. 1,96,757/- if at all to be made u/s 14A r.w.r 8D(2) of the Rules offered vide submission with relevant documents e-filed on 27.01.2021 and hence the arbitrary and uncalled for disallowance upheld by him needs to be rectified accordingly 2. That, the Ld. CIT(A) erred in directing the assessee to submit loan agreement to substantiate deletion of addition of Rs.75,941/- before the A.O. being the difference between the interest charged @ 9% on genuine loan on call for a fixed period given to Sanjay Kr. Jhunjhunwala and 10.5% paid on loans taken from others by overlooking the admitted fact that except in this lone case for various factors the rate of interest received from others was @ 16- 17% and hence a genuine claim cannot be disallowed simply because the department feels that it should not have been incurred.
3. That, the Ld. CIT(A) further erred in upholding the disallowance of Rs. 1,64,998/- estimated at 20% of Rs.8,24,988/- incurred on general expenses (Rs.77,517), motor car expenses (Rs.4,22,-83), office maintenance (Rs. 1,48,014), staff welfare (Rs.79,200) and telephone (Rs.98,124) and alleging self-made vouchers and suspicion of possible personal use in spite of the fact that ledger copies of the expenses with vouchers for such business expenditure were filed, no personal element was involved and these identical business expenditure had been allowed in earlier years under same set of facts.
That, therefore, as the order of Ld. CIT(A), NFAC, Delhi on the above issues suffers from illegality and is devoid of any merit the same should be quashed and your appellant be given such relief(s) as prayed for.
That, the appellant craves leave to amend, alter, modify, substitute, add to, abridge and/ or rescind any or all of the above grounds.
Facts in brief are that the assessee is a partnership firm. It declared a loss of Rs.32,87,010/- in the return of income for A.Y. 2013-14 on 28.09.2013. The case was selected for scrutiny through CASS and notices under section 143(2) and 142(1) were duly served upon the assessee and details were called by the ld. Assessing Officer from the assessee. After considering the details, additions totaling to Rs.26,63,467/- were made, which inter alia included disallowance under section 14A at Rs.24,10,230/-, 3 (A.Y. 2013-14) M/s. Panchiram Nahata disallowance of interest expenditure at Rs.75,941/- and expenses at Rs.1,64,998/-. The assessee challenged the additions before the ld. CIT(Appeals) but failed to succeed. Aggrieved, the assessee is in appeal before the Tribunal.
4(1). Ld. Counsel for the assessee referring to the written submissions, paper book containing 69 pages, placing reliance on various decisions referred in the case laws stated that firstly addition under section 14A of the Act is not justified as the major amount of dividend income is from mutual fund and secondly the assessee has sufficient interest-free funds for the purpose of making investment in equity shares.
4(2). It is also submitted that so far as the interest disallowance is concerned, the assessee had paid interest @9.5% and charged interest @9%, but ld. Assessing Officer failed to consider the fact that the interest income on loans and advances given by the assessee has been earned on a percentage between 9% to 17%, whereas interest paid is only @ 10%. Therefore, it cannot be said that the assessee has paid interest at a higher rate.
4(3). So far as the disallowance of expenses is concerned, it is submitted that the ld. Assessing Officer has made an adhoc disallowance of 20% even when the assessee has maintained complete details of the expenditure and no discrepancy has been noticed in the claim of expenses. (A.Y. 2013-14) M/s. Panchiram Nahata 5. On the other hand, ld. D.R. supported the order of lower authorities.
We have heard the rival contentions and perused the relevant material placed on record. The first issue for our consideration is disallowance under section 14A of the Act at Rs.24,10,230/-. We notice that the assessee is in the business of purchase and sale of equity shares and also investment in Mutual Funds. It held the investment in equity shares as stock- in-trade. During the year, the assessee received dividend from Mutual Funds at Rs.35,49,234/- and dividend from remaining investment in equity shares held as stock-in-trade at Rs.18,672/- . Before us, ld. Counsel for the assessee has demonstrated that the assessee-firm has sufficient interest-free funds including the partners’ capital to cover up the investment made in the equity shares held as stock-in-trade. We notice that so far as the dividend income from Mutual Funds is concerned, it is an admitted fact that the dividends received from Mutual Funds in respect of HDFC Cash Management Fund (retail daily dividend basis), HDFC Cash Management Fund (wholesale daily dividend basis), Birla Sunlife Cash Manager (Daily dividend basis), which were regularly charging the assessee for the expenses incurred for maintaining such funds. In some cases, the charges are on monthly basis and also for every switch in and switch out mutual fund companies take charge from the investors. Therefore, for the purpose of earning exempt income from mutual funds, the assessee need not incur any other expenses regarding hiring of employee/staff for managing funds. So far as the disallowance on (A.Y. 2013-14) M/s. Panchiram Nahata account of interest expenditure is concerned, we notice that during the year the assessee had paid interest at Rs.2,77,70,374/- and received interest at Rs.2,71,58,020/-, so the net interest expenditure is only Rs.6,12,354/-, whereas the ld. Assessing Officer has adopted the figure of interest expenditure at Rs.2,77,70,374/-. If we consider the net interest expenditure of Rs.6,12,354/- and place into the formula for the purpose of computing income under Rule 8D(2), the interest disallowance will come at Rs.4,025/- only and, therefore, the interest disallowance cannot exceed this sum of Rs.4,025/-. So far as the disallowance under Section 8D(3) is concerned, which the ld. Assessing Officer has calculated @0.5% of the average investment, we notice that on the mutual fund, the assessee-firm has not incurred any expenditure since Mutual Fund Companies charge the assessee regularly and remaining amount of investment in equity shares is only Rs.12,27,627/- and 0.5% of the said investment comes to Rs.6,138/-.
In view of the above discussions and the calculation made for disallowance under section 14A of the Act read with Rule 8D(2), the total amount of disallowance needs to be sustained to Rs.10,163/- only. So the assessee gets relief of Rs.24,00,067/- and the addition is sustained at Rs.10,163/-. Thus Grounds No. 1(a), (b), (c) & (d) are partly allowed.
So far as the disallowance of interest of Rs.75,941/- is concerned, the addition in respect of the disallowance made by the lower authorities is that the assessee has paid interest (A.Y. 2013-14) M/s. Panchiram Nahata @10.5% but has charged interest @9%. However, this allegation of the revenue authorities is incorrect as the ld. Counsel for the assessee has demonstrated that it has been charging interest on the loans given in the range of 9% to 17% and, therefore, the very basis of making impugned disallowance is incorrect. We, therefore, set aside the finding of ld. CIT(Appeals) and delete the disallowance of interest expenditure at Rs.75,941/-. Thus ground of appeal no. 2 raised by the assessee is allowed.
9. Ground No. 3 is regarding disallowance of expenses estimated at the rate of 20%. We notice that the assessee is maintaining regular books of account and financial statements are duly audited. The disallowance of Rs.1,64,998/- has been made by applying the rate of 20% for the expenses incurred on general expenses, motor car expenses, office maintenance, staff welfare and telephone. We observe that the assessee has maintained regular books of account, vouchers have also been prepared, details were also filed before the ld. Assessing Officer, but no specific discrepancy has been noticed and the disallowance has been made only looking to the element of personal use and on self-made vouchers. We are thus of the view that lower authorities erred in making adhoc disallowance and accordingly delete the disallowance of Rs.1,64,998/-. Ground No. 3 raised by the assessee is allowed.
10. Grounds No. 4 & 5 are general in nature, which do not call for recording of any finding. (A.Y. 2013-14) M/s. Panchiram Nahata 11. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 11th September, 2023. Sd/- Sd/- (Sonjoy Sarma) (Manish Borad) Judicial Member Accountant Member Kolkata, the 11th day of September, 2023 Copies to :(1) M/s. Panchiram Nahata, 1st Floor, PRN House, 177, Mahatma Gandhi Road, Kolkata-700007