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Income Tax Appellate Tribunal, “D” Bench, Mumbai
O R D E R
PER RAVISH SOOD, JM
The present appeal filed by the assessee is directed against the order passed by the CIT(A)-17, Mumbai, dated 08.11.2017, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟), dated 27.03.2015 for A.Y. 2012-13. The assessee has assailed the impugned order on the following grounds of appeal: “1. The learned CIT (Appeals)-17 erred in holding the provisions of section 14A of the Income-tax Act, 1961 are P a g e | M/s Mega Management Service Ltd. Vs. Deputy Commissioner of Income Tax, Circle 10(2)(2) applicable in this case in spite of the facts that no expenditure are incurred for making tax free investment in liquid mutual funds, since the investment was made out of unutilized monies available with appellant in the nature of own funds.
2. The learned CIT(Appeals)-17 further erred in confirming the disallowance of Rs.8,40,689/-mechanically made by the AO under Rule 8D(2)(ii) r.w.s. 14A of the Income- tax Act, being 0.5% of average value of investment without giving any cogent reasoning in detail and without examining the accounts of the appellant company as per rule 8D(1) of Income Tax Rules,1962.
3. The appellant craves to add to, leave to add to, alter or amend any ground before or at the time of hearing.”
2. Briefly stated, the assessee company which is engaged in the business of providing management consultancy services in financial sector had e-filed its return of income for A.Y. 2012-13 on 30.09.2012, declaring a loss of Rs.5,17,40,301/-. The return of income 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. The A.O while framing the assessment observed that though the assessee during the year had exempt dividend income of Rs.8,40,689/-, however, it had not attributed any expenses for earning of such tax free income. Accordingly, the A.O made a disallowance under Sec. 14A of Rs.63,11,803/- viz. (i) U/rule 8D(2)(ii): Rs.60,37,733/-; and (ii) U/rule 8D(2)(iii): Rs.2,74,070/-. The A.O after inter alia making the aforesaid disallowance under Sec. 14A assessed the total loss of the assessee company at Rs.4,28,86,378/-.
4. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Observing, that the assessee during the year under consideration had earned exempt dividend income of Rs.8,40,689/-, the CIT(A) restricted the disallowance under Sec.14A to the said extent. However, the contention advanced by the assessee that no P a g e | 3 AY. 2012-13 M/s Mega Management Service Ltd. Vs. Deputy Commissioner of Income Tax, Circle 10(2)(2) disallowance under Sec. 14A was called for in its case did not find favour with him.
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, at the very outset of the hearing of the appeal submitted that as no part of the expenses claimed by the assessee were incurred for earning of the exempt dividend income, therefore, no disallowance under Sec.14A was called for in its case. Alternatively, it was submitted by the ld. A.R that as the exempt dividend income earned by the assessee during the year worked out to 0.80% of its total income, therefore, the disallowance, if any, under Sec. 14A was liable to be restricted only to the said extent. Further, it was submitted by the ld. A.R that as the assessee had substantial interest free funds, therefore, no disallowance under Sec. 14A r.w. Rule 8D(2)(ii) was called for in its hands. In support of his aforesaid contention the ld. A.R relied on the judgment of the Hon’ble High Court of Bombay in the case of CIT Vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom). Also, the ld. A.R submitted that as the A.O without recording his satisfaction after referring to the accounts of the assessee had summarily dislodged its claim that no part of the expenses were incurred for earning of exempt dividend income, therefore, the disallowance made by him u/s 14A was also not sustainable on the said count.
6. Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the order of the CIT(A). The ld. D.R took us through the observations of the CIT(A) recorded in context of the disallowance made by the A.O under Sec.14A r.w. Rule 8D. Apart there from, it was submitted by the ld. A.R that as the prominent expenses claimed by the assessee were in the nature of general expenses, professional fees P a g e | M/s Mega Management Service Ltd. Vs. Deputy Commissioner of Income Tax, Circle 10(2)(2) etc., therefore, it was incorrect on the part of the assesses counsel to claim that no part of the expenses were incurred for earning of the exempt dividend income. It was submitted by the ld. D.R that as the appeal filed by the assessee was devoid of any merit, therefore, the same did not merit acceptance and was liable to be dismissed.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. As is discernible from the orders of the lower authorities the assessee which had earned exempt dividend income of Rs.8,40,689/-, had however, not attributed any part of the expenses for earning of the said tax free income. We are unable to persuade ourselves to subscribe to the contention advanced by the ld. A.R that as the assessee company had sufficient own funds, therefore, no disallowance under Sec. 14A r.w. Rule 8D(2)(ii) was called for in its case. Admittedly, the aforesaid proposition so canvassed by the ld. A.R is in absolute conformity with the settled position of law. However, we find that the facts in the case of the assessee do not fit within the four corners of the aforesaid proposition and in fact reveal a different story. A perusal of the „balance sheet‟ of the assessee for the year under consideration viz. A.Y. 2012-13 (Page 22) of the assesses „Paper Book‟ (for short „APB‟) reveals that the assessee during the year had a meagre share capital of Rs.100,700/-. Further, a perusal of the „financial statements‟ of the assessee for the year under consideration reveals that the assessee had been carrying on its business on the basis of interest bearing borrowed funds/trade payables. Accordingly, we are unable to persuade ourselves to accept the claim of the ld. A.R that as the assessee had sufficient funds for making the investments in the exempt income yielding assets, therefore, no disallowance of the interest expenditure was called for under Sec. 14A r.w. Rule 8D(2)(ii)