NOWROSJEE WADIA AND SONS LTD (SUCESSOR TO SUNFLOWER INVESTMENT AND TEXTILES PVT LTD ),MUMBAI vs. ITO WARD 2(3)(2), MUMBAI

Per contra, the Ld. DR is heard, who has submitted that the assessee is in the business of investments in group companies and has made investment for mutual funds etc., and if we look at the Profit & Loss Account of the assessee, the whole of the income has been derived in terms of dividend income and profits from redemption of mutual funds. It was accordingly submitted that the expenses therefore, are clearly in relation to exempt income though the same may not have direct nexus with earning of dividend income, but have clearly been incurred in relation to business of holding investments in group companies and other investments and, therefore, Rule 8D clearly provides for such disallowances. He accordingly supported the order and findings of the Ld.CIT(A).

We have heard the rival contentions and perused the material available on record. The AO has initially disallowed Rs 32,26,807/- u/s 14A r.w. Rule 8D and during the appellate proceedings before the Ld.CIT(A), the assessee has pleaded that the disallowance cannot exceed total expenditure claimed in the profit/loss account. The Ld.CIT(A) considering the plea of the assessee and the fact that the assessee has claimed only an amount of Rs 21,49,553 for tax purposes has restricted the disallowance to Rs 21,49,553/-. Now, before us, the assessee has pleaded that the disallowance of Rs. 21,49,553/- should be further restricted to Rs. 7,98,735/-, after excluding the professional fees of Rs. 12,43,205/- and registration charges Rs. 1,07,613/- as these expenses have no nexus with the dividend income earned by the assessee and therefore, should not suffer disallowance u/s 14A r.w. Rule 8D. It was submitted that the said contention was also raised before the Ld.CIT(A), however, the same has not been addressed by the Ld.CIT(A). In this regard, on perusal of professional expenses claimed by the assessee available at page 52 of assessee‟s paper book, we find that majority of these expenses relates to obtaining valuation certificate (Rs 505,620), company law consultancy (Rs 504,050/-) which apparently have been incurred by the assessee in relation to scheme of arrangement wherein certain other entities have merged with the assessee company and the scheme has been accorded sanction by the Hon‟ble Bombay High Court vide its order dated 27-09-2013 which have no nexus with income not forming part of total income. Further, there are regular professional charges for e-TDS return filing and company law compliances and registration and filing fees which are again required as part of meeting the ongoing statutory obligations and have to be incurred by the assessee for maintaining and running its operations and cannot therefore be subject matter of disallowance u/s. 14A r.w. Rule 8D. For attracting provisions of section 14A, there must be live nexus between the expenditure incurred and the income not forming part of total income. The fact that the assessee is an investment company, the same by default doesn‟t necessarily mean that all expenditure so incurred have been incurred in relation to earning of income not forming part of total income. In the instant case, besides the exempt dividend income, there is income on account of redemption of mutual fund units which have been offered to tax. Therefore, we find merit in the contention so advanced by the Ld.AR on behalf of the assessee and disallowance u/s. 14A r.w. Rule 8D is restricted to Rs 7,98,735/- which is over and above Rs 6,00,000/- suo-moto disallowed by the assessee.

In the result, the appeal filed by the assessee is partly allowed.