M/S. S. MANSUKHLAL & CO.,MUMBAI vs. ACIT - 18(3), MUMBAI

O R D E R

PER RAVISH SOOD, JM:

2. On facts and circumstances of the case and in law, the CIT(A) erred in upholding the order of AO of disallowing expenses under Section 14A read with Rule 8D of the 1962 Rules, without recording any satisfaction as regard to any indirect or administrative expenses were incurred by the Appellant for earning exempt income from investing in mutual funds and securities; P a g e | M/s S. Mansukhlal And Co. Vs. Asst. Commissioner of Income Tax-18(3)

3. On facts and circumstances of the case and in law, the CIT(A) has erred in upholding the action of the Assessing Officer of not computing the correct taxable total income of the Appellant and determination of tax liability thereof as otherwise required under Circular No. 14 (XL-35) dated 11 April 1955 and legal precedents on the subject;

4. Without prejudice to above, on facts and circumstances of the case and in law, the CIT(A) has erred in upholding the action of A .O of computing disallowance under Section 14A of the Act read with Rule 8D of the Rules;

5. The Appellant craves, leave, to add, alter amend any ground of appeal before or at the time of hearing.”

2. Briefly stated, the assessee firm which is engaged in the business of export, import and local trading had e-filed its return of income for A.Y. 2012-13 on 29.09.2012, declaring its total income at Rs.2,95,01,970/-. Return of income filed by the assessee was processed as such under Sec.143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2).

3. In the course of the assessment proceedings, it was observed by the A.O that the assessee firm during the year was in receipt of exempt dividend income of Rs.37,79,225/- on shares and mutual funds. On a perusal of the „balance sheet‟ of the assessee firm, it was observed by the A.O that the assessee was making investments in shares year after year on which it was in receipt of exempt dividend income. On a query raised by the A.O as regards the corresponding disallowance of the expenses incurred for earning of the aforesaid exempt income under Sec. 14A r.w. Rule 8D, it was submitted by the assessee that as it had utilised its own funds for making investments in shares and mutual funds, therefore, no part of the interest expenditure was liable to be disallowed. Apart therefrom, the assessee after attributing an amount of Rs.1,29,361/- which as per him was incurred on account of custodian charges, demat charges, STT paid etc. for earning of the aforesaid exempt income, had disallowed an amount aggregating to Rs.5,52,701/- under Sec. 14A r.w. Rule 8D while computing its total taxable income. However, the A.O was not persuaded to subscribe to the aforesaid claim of the assessee. Observing, that as the assessee had failed to place on record any corroborative evidence to prove that it had used its own funds for making investments in the exempt income yielding assets, therefore, the A.O declined to accept its claim that no disallowance of the interest expenditure pertaining to the borrowed funds lying in the common kitty was called for in its hands. Also, holding a conviction that the activity of acquisition, holding and disposal of shares and mutual funds units would definitely have required some efforts on the part of the assessee, the A.O was of the view that some part of the time and efforts of the employees and P a g e | M/s S. Mansukhlal And Co. Vs. Asst. Commissioner of Income Tax-18(3) other resources of the assessee firm must have been devoted to the said activity. Accordingly, on the basis of his aforesaid observations the A.O worked out the disallowance under Sec.14A r.w. Rule 8D at an amount of Rs.14,37,013/-, as under:

1. Direct expenditure to earn exempt income Rs.1,29,361 2. Expenditure by way of interest Rs.1666475 B. Average rate of investments:- Investments as on 31.03.2011 Rs.74425771 Investment as on 31.03.2012 Rs.94910220 Average of investment : Rs.84667996 C. Average of total Assets:- Assets as on 31.03.2010 Rs.149660074 Assets as on 31.03.2011 Rs.169451456 Average value Rs.159555765 A x B 1666475 X 84667996 ------------------- = ------------------------------------ = Rs.8,84,312 C 159555765 3. 0.5% of Average value of investment i.e 0.5% of Rs.84667996/- = Rs.4,23,340 4. Total disallowance (1+2+3) Rs.14,37,013 After inter alia making the aforesaid addition/disallowance under Sec.14A r.w.Rule 8D, the A.O assessed the income of the assessee firm at Rs.3,04,86,280/-.

4. Aggrieved, the assessee assailed the assessment order in appeal before the CIT(A). After necessary deliberations, the CIT(A) finding favour with the claim of the assessee that it had sufficient own funds for making investments in the exempt income yielding assets, therefore, vacated the disallowance of the interest expenditure that was made by the A.O under Sec. 14A r.w. Rule 8D(2)(ii). However, the CIT(A) was not inclined to vacate the disallowance that was made by the A.O under Sec.14A r.w. Rule 8D(2)(iii) amounting to Rs.4,23,340/-. Also, the CIT(A) upheld the voluntary disallowance of the direct expenditure that was claimed by the assessee to have been incurred for earning of the exempt dividend income viz. custodian charges, demat charges, STT paid etc. amounting to Rs.1,29,361/-. On the basis of his aforesaid observations the CIT(A) upheld the disallowance under Sec.14A r.w. Rule 8D to the extent of Rs.5,52,701/-. Further, it was observed by the CIT(A) that the ITAT, Mumbai, vide its order passed in the assesses own case for A.Y. 2010-11 had though deleted the addition made by the A.O under Sec.14A r.w. Rule 8D(2)(ii), but had not allowed relief as regards the P a g e | M/s S. Mansukhlal And Co. Vs. Asst. Commissioner of Income Tax-18(3) voluntary disallowance that was made by the assessee under Sec.14A r.w Rule 8D(2)(iii) i.e @ 0.5% of the „average value‟ of investments.

5. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee took us through the facts of the case. It was the claim of the ld. A.R, that as the assessee had voluntarily disallowed the expenses aggregating to Rs.1,29,361/- which were actually incurred for earning of the exempt income, therefore, no further disallowance under Sec.14A r.w. Rule 8D was called for in its hands. It was averred by the ld. A.R, that due to oversight and limited understanding of Sec.14A r.w. Rule 8D the assessee firm had in addition to the aforesaid actual expenses inadvertently disallowed a further amount of Rs.4,23,340/- under Rule 8D(2)(iii). It was submitted by the ld. A.R that in the backdrop of the aforesaid facts of the case, the disallowance under Sec. 14A may be restricted to the extent of Rs.1,29,361/-. Alternatively, it was submitted by the ld. A.R that for the purpose of working out the disallowance under Rule 14A r.w.Rule 8D(2)(iii) the investments which had not yielded any exempt income during the year be excluded for working out the „average value‟ of the investments. It was the claim of the ld. A.R, that the A.O while working out the disallowance under Sec.14A r.w. Rule 8D(2)(iii) had while working out the “average value” of the investments included even the investments which had not yielded any exempt income during the year under consideration. In support of his aforesaid alternative contention, the ld. A.R had relied on the order of the „Special bench‟ of the ITAT, Delhi in the case of the ACIT Vs. Vireet Investments Pvt. ltd. (2017) 165 ITD (Del-Trib) (SB).