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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI RAJESH KUMAR & SHRI RAM LAL NEGI
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order dated 31.10.2017 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2014-15.
The only issue raised by the assessee is against the confirmation of addition of Rs.53,95,230/- by Ld. CIT(A) as made by the AO under section 14A of the Act read with rule 8D of the Act which is approximately 80.10% of the actual expenses claimed of Rs.67,35,894/-. The assessee has also challenged
The facts in brief are that AO, during the course of assessment proceedings, observed that assessee has received exempt income by way of dividend, interest and profit on sale of investments to the tune of Rs.7,98,91,254/-. The assessee has submitted during the course of assessment proceedings that out of total expenses of Rs. 1,56,74,085/- , it claimed only to the tune of Rs. 67,35,894/- and the remaining expenses to the tune of Rs.89,38,191/- were incurred exclusive in connection with the business of the assessee and relates to building and other repairs, electricity, insurance charges, donation paid, business promotion, auditor remuneration, professional fees, travelling expenses, interest on car loan and depreciation and amortization expenses. However, the AO did not accept the contentions of the assessee and calculated the disallowance at Rs.65,87,383/- and after allowing the deduction of suo-moto disallowance of Rs.64,583/- made a net addition of Rs.65,22,800/-.
In the appellate proceedings, the Ld. CIT(A) partly allowed the appeal of the assessee by working out the disallowance of Rs.53,95,230/- by taking the proportionate expenses in the ratio of exempt income to total exempt income by observing and holding as under: “4. I have considered the submission made by the appellant and the reasons recorded by the AO. So far as the first ground of appeal
is concerned, I find that the issue in hand is covered by the decision of jurisdictional Tribunal in the case of the appellant for A.Y. 2008 --
09. In its decision dated 20/10/2015 in the honourable tribunal has held that in the facts of the case of the appellant, application of rule 8D is not proper (because it gives rise to absurd results) and the disallowance should be made out of actual expenses claimed by the appellant by applying the ratio which exempt income bears to the total income of 3 M/s. Shreyas Morakhia & Family Assets Pvt. Ltd. the appellant. Therefore, I'm of the opinion that the AO is justified in making the disallowance by applying the decision of honourable Tribunal in the case of the appellant for A.Y. 2008 - 09. So far as working of the disallowance by the AO is concerned, I am in agreement with the same except that in my opinion, the AO should have excluded the depreciation amounting to Rs. 14,42,021 from the total expenses considered for disallowance in view of the decision of Honourable Tribunal in the case of Hoshang D. Nanavati Vs ACIT [20 12] 16 ITR(T) 614 (Mumbai- Tnb.). Accordingly, total expenses actually claimed in the return of income work out to Rs. 69,87,133. As per the assessment order, the exempt income is Rs. 7,98,91,254/-, the taxable income is Rs 2,23,48,643/- and the total income is Rs. 10,22, 39, 897/- . If these figures are adopted then disallowance works out to Rs. 69,87,133 x 7,98,91,254/10,22,39,897 = Rs. 54,59,813/-. Since the appellant has already disallowed amount of Rs. 64,583/- in the return of income, the disallowance to be made u/s 14A works out to Rs. 53,95,230/-. The AO is directed to restrict the disallowance accordingly. Accordingly, the appeal of the appellant is partly allowed.”
We have heard the rival submissions of both the parties and perused the material on record. We observe that total expenses as claimed in the profit & loss account were Rs.1,56,74,085/- and after excluding the expenses which were incurred and considered separately and also the suo-moto disallowances out of these expenses , the net expenses comes to Rs.67,35,894/- as per detail as under: Total Expenses as per Profit & Loss Account = 1,56,74,085/- Particulars of Expanses Amount Brief Details Less: Donation 69,10,000/- Added while computing the total income and considered separately. 14,42.021/- Less: Depreciation as per Added while computing the total Books income and considered separately. 1,86,656/- Less: Expenses relating to Added while computing the total other head of Income income. Less: Disallowance u/s 14A 64,583/- Added while computing the total income.
Less: Appeal Filing Fees 1000/- Added while computing the total income. Less: Interest on late payment 1,678/- Added while computing the total Of TDS income.
4 M/s. Shreyas Morakhia & Family Assets Pvt. Ltd. Less: Securities Transaction Tax 12,253/- Added while computing the total income. Less: Establishment Charges -.KIREF 3,20,000/- Added while computing the total IV income. 67,35,894/- Claim in return of income as an Expense
We observe that out of these expenses the majority of the expenses were not relating to the earning of exempt income as the expenses were incurred for the purpose of running of business of the assessee. Therefore, we are not in agreement with the conclusion drawn by the Ld. CIT(A) of attributing the expenses to earning of exempt income in the ratio of exempt income to total income. We, further, note that the co-ordinate bench of the Tribunal in A.Y. 2011-12 vide order dated 15.12.2017 which was an ex-parte order , has made a lump sum disallowance of Rs.10,00,000/- under rule 8D2(iii). We, further, note that the AO has failed to establish any expenses out of total expenses claimed by the assessee to be relating to the exempt income and in absence of any direct nexus between expenditure and exempt income, the AO can not invoke provisions of section 14A of the Act to disallow the said expenses as has been held in the case of Leena Kasbekar vs. ACIT (2017) 85 taxmann.com 82 (Mumbai – Trib). Therefore, under the current facts and circumstances, we are of the view that it would be reasonable if a reasonable disallowance is worked out by applying the percentage on the total expenses of Rs.67,35,894/- as has been calculated hereinabove. The Ld. A.R. during the course of hearing prayed before the Bench to apply a percentage of 2% to 5% of the said expenses, however, we are not convinced with the arguments of Ld. A.R. on this 5 M/s. Shreyas Morakhia & Family Assets Pvt. Ltd. issue. In the present scenario , we are of the view that 10% of the said expenses would be reasonable disallowance u/s 14A r.w.r. 8D(2)(iii) in this case. Accordingly, a sum of Rs.6,73,589/- is sustained by reversing the order of Ld. CIT(A) and AO is directed to delete the remaining disallowance.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 15.05.2019.