MARTECH PERPHERALS PRIVATE LIMITED,CHENNAI vs. ACIT, CHENNAI

M/s. Martech Peripherals Pvt. Ltd., the assessee, is in the business of financing and trading. While making the assessment for assessment year 2011-12, the Assessing Officer invoking Section14A read with Rule 8D(iii) disallowed Rs.6,53,861/-. Aggrieved against that order, the assessee filed an appeal before the CIT(A) and the ld.CIT(A) dismissed the appeal. Aggrieved against that order, the assessee filed this appeal.

The ld.AR submitted that as against Rs.10,22,278/- dividend income admitted by the assessee, the Assessing Officer invoking Section 14A r.w.r.8D(iii) has made a disallowance of Rs.6,53,861/- which represents 64% of the exempt income. Therefore, the disallowance itself indicates that it is an adhoc disallowance without merits and hence pleaded that the Assessing Officer may be required to compute proportionate disallowance. Inviting our attention to the financial statement ending 31st March 2011, the ld.AR submitted that the assessee admitted interest income of Rs.11,79,91,641/- and other income of Rs.16,66,186/-, total receipt admitted for assessment being Rs.11,96,57,827/-. He submitted that the other income of Rs.16,66,186/- comprises dividend income of Rs.10,22,278/- against the total receipt of Rs.11,96,57,827/-. The assessee has claimed personal expenses, administrative and other expenses at Rs.36,92,451/- only. Against such claim, the Assessing Officer disallowed Rs.6,53,861/- towards exempt income of Rs.10,22,278/-, which is disproportionate and hence, the ld.AR pleaded to allow the appeal. Per contra, the ld.DR supported the orders of the lower authorities and submitted that the Assessing Officer has correctly invoked Rule 8D(3) and disallowed the amount.

We heard the rival submissions. Since the assessee has made investments in mutual funds, the dividend income of which is exempt from taxation, the expenditure incurred by the assessee in relation to such exempt income should not be allowed. Therefore, the Assessing Officer invoked correctly Rule 8D(iii). However, it appears that the Assessing Officer has committed an error in quantifying the average of investments which is apparent from the following extract:- Investment as on 31/03/2010 : 8,85,27,512 Investment as on 31/03/2011 : 7,13,71,058 Average of the investments : 13,07,72,285 0.5% of the above : 6,53,861 Therefore, we direct the Assessing Officer to arrive the correct average of the investment and disallow 0.5% of such average of the investments. To this extent, the assessee’s appeal is allowed.

In the result, the appeal of the assessee is allowed to the above extent.