APURVA NATVAR PARIKH & CO. P. LTD.,MUMBAI vs. THE DY CIT CC-7(1), MUMBAI

O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by assessee for Assessment Year (AY) 2016-17 arises out of the order learned Commissioner of Income-Tax (Appeals)- 49, Mumbai [CIT(A)], dated 24/01/2020 in the matter of assessment framed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s. 147 on 28/12/2018. The effective grounds read as under: - 1. The Ld. Commissioner of Income-tax (Appeals) ('CIT(A)') has erred in making disallowance under section 14A read with rule 8D of the Income-tax Rules, 1962 2. The Ld. Commissioner of Income-tax (Appeals) erred in not treating the one time membership entrance fees as capital receipt.

It is admitted position before us that ground No.2 is to be decided against the assessee keeping in view the orders of Tribunal in earlier years. Therefore, Ground No.2 stand dismissed. The facts as well as adjudication to Ground Nos. 1 & 3 would be as follows: - 2. Disallowance u/s 14A 2.1 The assessee is stated to be engaged in service sector and entertainment industry. The assessee earned exempt dividend income of Rs.96.29 Lacs and offered suo-moto disallowance of direct expenses for Rs.0.07 Lacs in the return of income. However, Ld. AO making a contrary observation that the assessee did not offer any disallowance, computed aggregate disallowance of Rs.11.88 Lacs as per Rule 8D which is direct expense disallowance u/r 8D(2)(i) for Rs.0.07 Lacs and disallowance u/r 8D(2)(ii) being 1% of the annual average of the monthly averages value of investments, income from which does not or shall not form part of total income. The action of Ld. AO, upon confirmation by Ld. CIT(A), is in further challenge before us. 2.2 One of the arguments raised by Ld. AR is that Ld. AO did not consider the suo-moto disallowance made by the assessee and did not recorded objective satisfaction before applying Rule 8D. Upon perusal of assessment order, we find that though suo-moto disallowance has not been considered by Ld. AO, however, in para 7.3, the Ld. AO has recorded such satisfaction and thereafter computed the disallowance u/r 8D. Therefore, this plea is to be rejected.

2.3 Another argument is that while computing the disallowance, only those investments are to be considered which have yielded exempt income during the year. This plea is also to be rejected since after amendment to Rule 8D w.e.f. 02/06/2016, the computation u/r 8D has undergone change and it has been made clear that the amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income, shall be disallowed. Therefore, post 02/06/2016, the plea to exclude the non-income yielding investment is to be rejected. 2.4 Proceeding further, we find that though the assessee has identified direct expenses towards earning of exempt income but it has not made any disallowance of indirect expenditure. In our opinion, the application of Rule 8D would not be automatic or mechanical and the disallowance has to be computed having regards to the accounts of the assessee. Therefore, considering the facts and circumstances of the case, the matter of disallowance u/s 14A r.w.r. 8D stand restored to the file of Ld. AO for de novo adjudication in the light of our above observations. This ground stand partly allowed for statistical purposes.