J. M FIANANCIAL & INVESTMENT CONSULTANCY SERVICES P.LTD,MUMBAI vs. ACIT(OSD)-3, MUMBAI

Briefly stated the facts are that, the Assessing Officer while completing the assessment noticed that during the year under (A.Y: 2012-13) J.M. Financial & Investment Consultancy Services P. Ltd., consideration assessee has received dividend income and income from long term capital gain and claimed as exempt u/s. 10 of the Act. Assessing Officer also noticed that in the computation of income assessee has u/s.14A r.w. Rule 8D of I.T. Rules suomoto disallowed ₹.19,20,394/- as the expenses attributable for earning exempt income which include direct expenses of ₹.4,52,090/-. According to the Assessing Officer since suomoto disallowance made by the assessee was not in accordance with provisions of Rule 8D of I.T. Rules, assessee was asked to explain as to why disallowance u/s. 14A r.w. Rule 8D should not be made. In response, assessee has furnished working of suomoto disallowance of ₹.19,20,394/- and submitted that no further disallowance is warranted.

However, the Assessing Officer was of the view that the suomoto working of disallowance of expenses as provided by the assessee is not satisfactory and by invoking provisions of Rule 8D he computed the disallowance u/s. 14A of the Act at ₹.49,17,810/. However, since the assessee has already made suomoto disallowance of ₹.19,20,394/- in its computation the Assessing Officer restricted the disallowance to ₹.29,97,416 which comprise of direct expenses of ₹.4,52,090/- and administrative expenses being 0.5% of average value of investment at ₹.25,45,326/-.

Before us, Ld. Counsel for the assessee Shri K. Shivram submitted that in the course of the assessment proceedings assessee furnished working of suomoto disallowance of expenses made u/s. 14A r.w. Rule 8D of I.T. Rules which is placed at Page No. 36 of the Paper Book. Referring to the said working it is submitted that the disallowance was made on a scientific basis. It is submitted that assessee had not only considered direct expenses but it also considered proportionate employee cost and indirect expenses. It is submitted that apart from direct expenses in the form of Security Transaction Tax of ₹.3,32,265/- and demat charges of ₹.1,19,825/- assessee has also allocated proportionate salary of an employee who was looking after the investment activities. Similarly, indirect expenses were also allocated while computing the disallowance made u/s. 14A of the Act.

It is further submitted that on similar circumstances this Tribunal in assessee’s group concerns namely JM Financial Investment Managers Limited and JM Financial Products Limited for A.Y. 2010-11 held that no (A.Y: 2012-13) J.M. Financial & Investment Consultancy Services P. Ltd., proper satisfaction was recorded. Reliance was placed on the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg., Co. Ltd., v. CIT [328 ITR 81]. Ld. Counsel for the assessee strongly placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of Pr.CIT v. Bombay Stock Exchange Ltd., (2020) 185 DTR 390 (Bom) in support of his above contentions.

Ld. Counsel for the assessee further submits that Ld.CIT(A) did not consider the alternative argument of the assessee regarding not reducing average value of investments from which no dividend income was earned.

Ld. DR on the other hand submitted that Assessing Officer has recorded his satisfaction properly in Para No. 4.3 to 4.6 of the Assessment Order. Therefore, it is not correct to state that there is no proper satisfaction recorded by the Assessing Officer. Ld. DR vehemently supported the orders of the authorities below.

We have heard the rival submissions, perused the orders of the authorities below and the decisions relied on. It is not in dispute that the assessee has furnished working for suomoto disallowance of expenses u/s. 14A r.w. Rule 8D of I.T. Rules. This fact was also recorded by the Assessing Officer in the Assessment Order. On a perusal of the (A.Y: 2012-13) J.M. Financial & Investment Consultancy Services P. Ltd., Assessment Order we find that Assessing Officer has not recorded any satisfaction as to why this break up of suomoto disallowance of expenses of ₹.19,20,394/- made by the assessee is not satisfactory except stating that assessee is unable to establish beyond doubt the demarcation between the expenses incurred in the course of the business and those incurred for earning exempt income to the satisfaction of the Assessing Officer. The Assessing Officer has not gone into the breakup of expenses submitted by the assessee and has not recorded as to why it is not satisfactorily explained by the assessee the said expenditure incurred is insufficient for earning exempt income.

In the case of Godrej & Boyce Mfg., Co. Ltd., v. CIT (supra) the Hon'ble Bombay High Court held as under: - “……..What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the VBC 32 ITXA626.10 accounts of the assessee. The satisfaction of the (A.Y: 2012-13) J.M. Financial & Investment Consultancy Services P. Ltd., Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law…….”

Further, identical issue came up before Hon'ble Bombay High Court in the case of Pr.CIT v. Bombay Stock Exchange Ltd., (supra), and the Hon'ble Bombay High Court considering the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd., v. CIT [402 ITR 640] held as under: - “11. Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper.

The ratio of this decision squarely applies to the facts of the assessee’s case as in the case in hand also the Assessing Officer has not carried out any exercise as to why the breakup of expenses given by the assessee cannot be accepted as the expenses attributable for earning exempt income before invoking Rule 8D of I.T. Rules for making disallowance u/s. 14A r.w. Rule 8D of I.T. Rules. Respectfully following the said decision, we delete the disallowance made u/s. 14A of the Act.

In the result, appeal of the assessee is allowed.