DATAMATICS GLOBAL SERVICES LTD,MUMBAI vs. DCIT-1(3)(1), MUMBAI

2025 is filed by the assessee against the order passed by the Learned Commissioner of Income-tax (Appeals)/National Faceless

1 The Learned CIT(A) has erred in considering the entire administrative

2 While concluding as above, the Learned CIT(A) has completely disregarded the fact that there were no direct expenses incurred by the appellant as the investments in question were made entirely out of the Appellant’s own

3 While arriving at the above conclusion, the Learned CIT(A) has failed to demonstrate any nexus between such expenses and the earning of exempt income, since, as explained in point 1.2 above, there were no such expenses incurred by the appellant in the absence of borrowed funds

4 However, the appellant has, in compliance with section 14A r.w.r 8D, added back an amount of INR 5,91,103 as a disallowance.

5 The Appellant submits that in the absence of any direct or proximate nexus, attributing administrative or interest expenses to the earning of exempt income is wholly unjustified and contrary to settled law.

1 Without prejudice to the above ground of appeal, the Learned CIT(A) has erred in maintaining disallowance under Section 14A of the Act by holding that the administrative and interest expenses debited to the Profit & Loss Account are directly attributable to the earning of exempt income, without quantifying such expenses.

2 The Appellant submits that the observations of the Learned CIT(A) are based on mere assumptions, without any verification of the Appellant’s books of account or the actual nature of expenses and are therefore unsustainable in law. 2.3 The Appellant prays to your Honours that the Learned CIT(A) be directed to consider INR 5,91,103 as calculated by the appellant as the appropriate

1 Without prejudice to the above grounds of appeal, the Learned CIT(A) has erred in making adverse observations on administrative and interest expenditure without raising any specific questions with respect to the same during the course of the appellate proceedings.

2 The Appellant submits that no opportunity was provided to rebut or clarify these observations, thereby denying the Appellant its right to be heard

3 The action of the Learned CIT(A) is in gross violation of the principles of natural justice and is therefore liable to be set aside.

1 Without prejudice to the above grounds, the Hon’ble CIT(A) has erred in upholding the Learned AO’s contention of considering the annual average of the monthly average investments amounting to INR 5.91.10.200 as exempt income for calculating the 14A disallowance. The same appears to be inadvertent in nature.

2 The Appellant submits that exempt income earned during the year is INR 1,39,84,207 which is duly disclosed in Schedule BP of its returns.

3 The Appellant prays to your Honours that the Learned CIT(A) be directed to rectify the order to reflect the correct and appropriate amount of INR

All the above stated grounds of appeal pertain to the disallowance made by the AO u/s 14A of the Act. As such,a of them are being considered together.Brief facts of the case are that the AO while completing the assessment u/s 143(3) f the Act made a disallowance of Rs 38,12,211/- under section 14A of the Act which was agitated before the ld.CIT(A).It was contended before him that the NeAC/AO has inadvertently calculated disallowance of Rs 38,12,211/- as against the correct amount of Rs 5,91,103/-worked out by the assessee. It was submitted that section 14A of the Act r.w.r. 8D of the Income-tax Rules, 1962provides for the method of calculation of disallowance. Rule 8D of the rules states that the expenditure directly related to earning exempt income and investments yielding exempt income are to be considered for calculating the disallowance under section 14A of the Act. The relevant extract of Rule 8D of the Rules is reproduced below:

1 It was further stated that on Perusal of Rule 8D (2) (ii), it is abundantly clear that only investment income which does not or shall not form part of total income needs to be considered while calculating disallowance under Section 14A of the Act.It was submitted that the AO has inadvertently considered the entire investment amount as appearing

The ld.CIT(A) observed that the AO had computed the disallowance expenses of Rs. 38,12,211/- u/s 14A of the Act. The contention of appellant was that the NeAC had inadvertently considered the entire investment amount as appearing inthe financials whereas, under Rule 8D of the Income-tax Rules, while computing disallowance under Section 14A of the Act, only investments which earn exempt income needed to be considered. The assessee further placed reliance on the judicial precedents to support its contentions that only investments yielding exempt income ought to be considered for calculating disallowance under Section 14A of the Act. Further, the AO observed that assessee had shown Investment in Mutual funds of Rs. 11,14,89,794/- and other investments shown in ITR of Rs.

1 The ld.CIT(A) further stated that contention of the assessee was correct that under Rule 8D, the amount of disallowance of expenditure would be an amount equal to one per cent 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.Thus, the AO was directed to recalculate the total disallowance u/s 14A read with rule 8D by taking 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 rather than taking whole value of investment. If this correct value comes less than the addition made by the AO, then give the relief up to that amount.

The 1d.AR in this regard submitted that in respect of the disallowance under section 14A of the Act, the ld. CIT(A) held as under:

1 Before us,it is stated the ld. CIT(A) has presumed that the interest expenditure debited to the profit and loss account of the year under consideration, pertained to investments generating exempt income.This finding is stated to be incorrect, unsubstantiated and arbitrary as no amount is specified by him as the amount related to the exempt income earned.Nature of interest/administrative expenses requires factual reverificationIt is further stated that the entire interest cost debited to the Profit and Loss Account aggregating

2 As can be noted from the above, all expenditure pertains to routine business related activities and is incurred to fund operations and working capital requirements.Therefore, it is clear that there is no nexus

The ld.DR on the other hand placed reliance on the orders of the authorities below.

We have carefully considered the facts of the case.It is evident that the issue of disallowance u/s 14A r.w Rule 8D has already been set aside before the AO by the ld.CIT(A) giving specific directions.The AO is accordingly required to reexamine the claim of the assesee.Since the matter is already before the AO,we do not find any reason for giving any separate direction.The AO would allow the assessee to make necessary compliance in the matter and would rework the disallowance in terms of Rule 8D of the Act. Thus,the grounds of appeal are allowed for statistical

In the result, the appeal is allowed for statistical

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