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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI PRADIP KUMAR KEDIA
The captioned appeal has been filed by the assessee against the order of the CIT(A)-2, Ahmedabad (‘CIT(A)’ in short), dated 01.01.2016 arising in the assessment order dated 16.02.2015 passed by the Assessing Officer under s. 143(3) of the Income Tax Act, 1961 (the Act) concerning A.Y. 2012-13.
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
[M/s. Mid Valley Health Care Services Pvt. Ltd. vs. DCIT] A.Y. 2012-13 - 2 - computing the taxable income under the normal provisions of the Act. Similarly, the assessee is also aggrieved by the adjustment of the aforesaid amount of disallowance carried out under s. 14A while computing book profits under s. 115JB of the Act.
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
[M/s. Mid Valley Health Care Services Pvt. Ltd. vs. DCIT] A.Y. 2012-13 - 3 - averments made by the AO himself at Page No. 3 of the assessment order. As regards quantification of disallowance, the Ld. DR submitted that the AO was justified in drawing guidance from formula prescribed in the statute by way of Rule 8D(2)(iii) of the Rules. Such disallowance according to DR, therefore, should not be tinkered.
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
has also objected to the adjustments made by the AO on account of disallowance computed under s. 14A while computing book profit under s. 115JB. We find merit in the plea of the assessee on this score. The Special Bench of Tribunal in the case of CIT vs. Vireet Investment Pvt. Ltd. 165 ITD
27. (Del)(SB) has observed that disallowance computed under s. 14A cannot be imported to the provisions of sec. 115JB. However, at the same time, the claim of the assessee that no adjustment is called for while computing book profit is voilative of Explanation
1. (f) referred to in sec. 115JB of the Act and thus cannot be entertained. No blanket exemption can be read in the Special Bench decision in Vireet’s case in this regard. Thus, the adjustment to the tune of Rs. 3,30,900 shall be taken into account by the AO for the purposes of Clause (f) to sec. 115JB in tune with disallowance sustained under normal provision. The second issue is accordingly allowed in partly.
In the result, appeal of the assessee is partly allowed.
This Order pronounced in Open Court on 29/07/2019