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Income Tax Appellate Tribunal, [ DELHI BENCH “B”: NEW DELHI ]
Before: SHRI N. K. BILLAIYASHRI AMIT SHUKLA
O R D E R PER AMIT SHUKLA, J. M.
The aforesaid appeal has been filed by the assessee against the order dated 23.01.2018, passed by the ld. Commissioner of Income Tax (Appeals)–9, New Delhi (hereinafter referred to [CIT (Appeals)] for the quantum of assessment under Section 143(3) of the Income Tax Act, 1961 (the Act) for the assessment year 2013-14.
2 2. The assessee has raised the following grounds of appeal:-
“1. That on the facts and in the circumstances of the case, the learned CIT(A) has erred in law by confirming the a disallowance of expenditure made by the Ld. AO u/s 14A read with Rule 8D amounting to Rs.12,26,902/-.
That the authorities below erred in applying section 14A read with rule 8D specially when the appellant was holding only Stock in Trade and no investments.
That the Learned Assessing officer has failed to record the satisfaction that the suo moto disallowance of Rs.2,58,386 u/sl4A made by the Appellant was not correct.
4. That the Ld.CIT (A) has grossly erred in confirming the action of the AO in apportioning the entire expenses debited to the Profit and loss Account to the exempt income.
That on the facts and in the circumstances of the case, Rule 8D sub clause (2) and sub clause (3) will have no application.
That the authorities below have failed to appreciate that the interest disallowed for Purposes of Section 14A by the Appellant amounting to Rs. 38,98,695 /- represents the net interest after taking into account interest receipt of Rs.62,67,520,#/- and interest paid of Rs.1,01,66,216/-. “
3. The facts in brief are that the assessee was engaged in the business of trading in shares and securities. During the year the assessee has earned dividend income of Rs.44,47,102/- which was claimed as exempt. He also earned share profit of Rs.2,13,45,332/- and brokerage income of Rs.12,92,152/-.The assessee for the purpose of calculation of disallowance under Section 14A of the Act had suo moto disallowed Rs.2,58,386/-, working of which was given as under:-
Direct Expenses Related to Turnover Amount Rs. Depository Charges 53336 Misc. NSE & BSE Charges 87428 NSE & BSE Transaction Charges 1,00,397 SEBI Turnover Fees 7,851 STT Paid 15,40,278 Net Interest Paid 38,98,696 Total Expenses (A) 56,87,985 Equity Turnover (Sales) 2,16,26,00,636 Dividend Turnover 9,80,28,739 Ratio to Which Expenses to be Disallowed 4.54% Proportionate Expenses to be disallowed (A*B) 2,58,386
However, the ld. Assessing Officer rejected the assessee’s working and computed the disallowance at Rs.12,26,902/- in the following manner:-
Total Expenses Debited to P & L A/c. Rs. Rs. Employee Benefit Cost 34,74,595 Finance Costs 1,03,65,729 Other Expenses 1,78,75,983 Depreciation 9,95,953 3,27,12,260
Less: Expenses Considered for Disallowance 56,87,985 u/s 14A by the Assessee. Remaining Expenses being made 2,70,24,275 subjected to 14A. Proportion in which disallowance is to be 4.54% Made (as per Assessee) Further Disallowance u/s 14A. 12,26,902 (Addition / Disallowance : Rs.12,26,902/-)
5. The ld. CIT (Appeals) has confirmed such disallowance.
6. Before us, the ld. Counsel submitted that there is no dispute with regard to the direct expenses. The only dispute are that, firstly, the Assessing Officer has taken the entire finance cost, whereas the assessee has taken net of financial cost which was Rs.38,696/- whereas the gross interest of Rs.1,03,65,729/-; secondly, it was further submitted that reserves and surplus were much higher than the investment and, therefore, no disallowance should have been made. Lastly, apart from that, the ld. Assessing Officer, has taken depreciation as a part of disallowance which could not have been done. Accordingly the disallowance computed by the Assessing Officer is erroneous and arbitrarily and without application of mind.
The ld. DR relied on the orders of the Assessing Officer and the ld. CIT (Appeals).
We have heard the rival submissions and also perused the relevant findings given in the impugned order. On the perusal of the computation of income, it is seen that the assessee had shown dividend income of Rs.44,47,102/- which was claimed as exempt. The assessee for the purpose of computing the disallowance has taken direct expenses relevant to turnover in the ratio of 4.57% and thereby allocating disallowance to Rs.2,59,873/-. The ld. Assessing Officer has taken the following expenses debited to the profit and loss account for the purpose of disallowance: (1) Employee Benefit Cost. 34,74,595 (2) Finance Costs 1,03,65,729 (3) Other Expenses. 1,78,75,983 (4) Depreciation 9,95,953 After deducting the expenses considered by the assessee at Rs.56,57,985/-, AO for the remaining expenses has made the disallowance @ 4.57% as taken by the assessee.
First of all, in so far as the amount of depreciation debited to the profit and loss account of Rs.9,95,953/- cannot be said to be remotely connected with earning of exempt income. Therefore, at the outset, the same should be removed for the purpose of disallowance. In so far as the finance cost is concerned, we find that the Assessing Officer has taken the gross interest of Rs.1,03,65,729/-, whereas the assessee has also earned interest and net cost of interest is of only Rs.38,98,696/-, which alone if at all should have been taken for the disallowance. However, from the perusal of the balance sheet, we find that reserve surplus of the assessee itself is Rs.76.4 crores and share capital of Rs.31 lakhs, which is more than the investments made and accordingly there could be no finance cost which can be considered for the purpose of disallowance because if assessee has surplus interest free funds then it can cannot be presumed that assessee has invested in securities out of interest bearing funds and hence the same is directed to be removed from the computation.
Coming to the Employee Benefit Cost and Other Expenses, the same can be said to be attributable for the purpose of allocating the expenditure. However, the ratio of 4.54% which was allocated by the assessee for the direct expenses is too high to be applied for indirect expenses, because some of these expenses have already been taken by the assessee as direct expenses for the purpose of disallowance as incorporated above. The details of these expenses debited to the profit and loss account are as under:-
Most of these expenses cannot be said to be relatable or attributable for earning dividend income and, therefore, in all fairness we hold that 1% of the Employee Benefit, Directors salary and salary to the staff and 1% of the other expenses would be reasonable for 7 attributing the disallowance for the purpose of disallowance under Section 14A of the Act. Thus, the Assessing Officer is directed to be compute disallowance out of Employees expenses and other expenses @ 1 % .
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on : 31/01/2022.