M/S MID VALLEY HEALTH CARE SERVICES PVT. LTD.,AHMEDABAD vs. THE DY.COMMISSIONER OF INCOME TAX,CIRCLE-2(1)(2), AHMEDABAD

In the captioned appeal, the assessee is aggrieved by the disallowance of Rs. 11,48,205/- sustained by the CIT(A) towards administrative expenses attributable to exempt income while

When the matter was called for hearing, the Ld. AR for the assessee submitted that assessee has earned dividend income of Rs. 29,30,083/- during the year which was claimed as exempt on investment held by it amounting to Rs. 29,82,54,378/- in its balance sheet. The Ld. AR submitted that the assessee has engaged one Mr. Sameer Parikh, Chartered Accountant to provide supervisory and advisory services in the areas of amounts, taxation and investment advisory services. The said employee has been paid an amount of Rs. 6,61,800/- for such services. The assessee has suo moto estimated 10% of such amount that is Rs. 66,180/- as expense attributable to exempt income. The Ld. AR thus submitted that when suo moto disallowance has been carried out by the assessee which has not been dislodged, the AO could not have applied the statutory formula under Rule 8D(2)(iii) in a mechanical manner. The Ld. AR also pointed out that the entire action of applying sec. 14A for the purpose of disallowance itself is improper and without authority of law in the absence of any satisfaction formed by the AO having regard to the accounts of the assessee as contemplated under s. 14A(2) of the Act. The Ld. AR, therefore, pleaded that the disallowance made by the AO and sustained by the CIT(A) to the extent of Rs. 13,60,848/- should be vacated.

The Ld. DR of the Revenue, on the other hand, has supported the order of the AO and contended that the legal plea of the assessee that the AO has failed to form satisfaction having regard to the accounts of the assessee is factually incorrect in view of the express

We have carefully considered the rival submissions. We note that assessee has claimed exempt income of Rs. 29,30,083/- only. The assessee was holding investment to the tune of Rs. 27.24 crores in the earlier year which has increased to Rs. 29.82 crores during the year. The assessee has made a suo moto disallowance of Rs. 66,180/- being 10% of the amount paid to a professional dedicated for monitoring investments. Thus, a basis has been provided by the assessee for suo moto disallowance. In such circumstances, on a broader consideration, we note that where the investments were largely made in the earlier years and has been carried forward in the current year with a very few movements therein, a substantial disallowance of Rs. 14,26,648/- computed under Rule 8D(2)(iii) could not possibly be justified. The assessee himself has disallowed Rs. 66,180/- against such disallowance. The CIT(A) in first appeal has brought down the disallowance from 14,26,648/- to Rs. 12,14,385/- on account of exclusion of taxable investments by way of debenture and bonds. Therefore, after taking note of the suo moto disallowance of Rs. 66,180/- the CIT(A) sustained the disallowance of Rs. 11,48,025/-.

It is trite that the AO cannot mechanically apply the formula under Rule 8D(2)(iii) without examining the merits of the assessee’s stand. We, however, agree with the plea on behalf of the Revenue that conditions of regarding satisfaction under s. 14A(2) was [M/s. Mid Valley Health Care Services Pvt. Ltd. vs. DCIT] A.Y. 2012-13 - 4 - satisfied for invoking the provision. We are of the considered view that under the circumstances the disallowance of 50% of the expenditure incurred on professional that is 50% of 6,61,800/- would be sufficient to cover appropriate disallowance towards administrative expenses. The assessee has already disallowed 10% thereof. Therefore, another disallowance of 40% on the aforesaid amount which works out to Rs. 2,64,720/- would thus meet the object in this regard. The assessee accordingly, gets partial relief.

The assessee in its grounds of appeal

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