DCIT, NEW DELHI vs. M/S. DECENT FINANCIALS SERVICES (P) LTD., NEW DELHI

The facts in brief are that the assessee-company was engaged in the business of dealing of shares and securities. During the relevant previous year, assessee has earned sum of Rs.1.57 crore as dividend which was from the stock held as investment. In response to the show cause notice, before the Assessing Officer, assessee submitted that the investment in shares have been made out of surplus fund available with the assessee and from the sale proceeds of the shares held as investments. Further no significant expenditure has been incurred to earn dividend income. However, while computing the taxable income, assessee itself has disallowed sum of Rs.1,19,592/- which included proportionate expenses of salary of staff and other expenses, because it was stated that dividend has been directly credited in the account of the assessee and no other activities has been done. In so far as interest is concerned which were relating to unsecured loan attributable to investment, the assessee pointed out that it has capitalized the interest with the investments, which was to the tune of Rs.12.24 crore and has charged to P&L account only Rs.6.03 crores and therefore, formula of Rule 8D cannot be applied. The assessee’s detailed explanation has been incorporated from pages 1 to 5 in the assessment order. However, the learned Assessing Officer held that assessee has made huge investment of Rs.114.06 crore which requires a consequence decision for deployment of funds and there is a cost inbuilt even for the so called in ‘passive investment’ and also, there are an incidental expenditures of collection, telephone, follow up, etc. After applying the ratio of Special Bench in the case of Daga Capital, he calculated the disallowance of Rs.3,81,81,554/- under Rule 8D and after deducting the amount disallowed by the assessee, he made final disallowance of Rs.3,80,61,962/-.

Before the ld. CIT (A), again detailed submissions were made and various decisions were relied upon which has been dealt and incorporated in the impugned order from pages 4 to 17. Ld. CIT(A) after taking into consideration the entire submissions and material placed on record noted that assessee had paid total interest of Rs.18.27 crore out of which interest of Rs.12.24 crore have been capitalized to the investment portfolio. The Assessing Officer has worked out the disallowance of interest of Rs.3,32,32,761/- without giving any finding on this aspect. Accordingly, he deleted the disallowance of interest regarding administrative expenses of Rs.48,29,200/- made under Rule 8D(iii). He noted that the details submitted by the assessee during the course of assessment as well as appellate proceedings indicated that total expenditure of Rs.3,34,118/- has been incurred, and therefore, such a huge sum cannot be disallowed. After considering the various nature of expenditure debited, he restricted the disallowance of Rs.1,62,209/- after observing and holding as under:-

After considering the rival submissions and on perusal of the relevant finding given in the impugned order as well as material referred to before us at the time of hearing, we find that before the Assessing Officer the assessee has given a very detailed explanation not only with regard to the nature of interest expenditure debited but also the details of administrative expenses incurred by the assessee and the manner in which the exempt income has been received by the assessee after placing the entire nature of accounts. The Assessing Officer without even examining the said accounts has proceeded to simply apply the formula laid down in Rule 8D without recording his ‘satisfaction’ which is the mandatory requirement in terms of Section 14A(2) read with Rule 8D(1). Ld. CIT(A) has taken note of entire nature of expenditure debited, the amount of interest capitalized by the assessee and the nature of administrative expenditure debited and then has given a categorical finding that out of the administrative expenditure of Rs.3,34,118/- only Rs.1,62,209/- can at best be treated as expenditure attributable for earning of the exempt income. Moreover the assessee’s contention that it had huge surplus funds for making the investment has not been rebutted at any stage. Accordingly, the said finding of the ld. CIT (A) is inconsonance with the conditions laid down in Rule 14A (2) and therefore, attribution of the expenditure by him is not only correct on facts but also in law, therefore, we do not find any infirmity in such order of the ld. CIT (A). Hence the same is hereby affirmed.