DCIT 2(1)(1), MUMBAI vs. BSE LTD, MUMBAI

AadoSa / O R D E R महावीर स िंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM:

This appeal filed the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-6, Mumbai [in short CIT(A)], in appeals No. CIT(A)-6/IT-20/176/2016-17 vide order dated 22.08.2017. The Assessment was framed by the Dy. Commissioner of Income Tax, Central Circle 2(1)(1), Mumbai (in short ‘DCIT’/ ‘ITO’/ AO’) for the A.Y. 2012-13 vide order dated 29.01.2016 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).

2. On the facts & in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating that from AY 2008-09, the disallowance u/s 14A is required to be computed as per Rule 8D as held by the Bombay High Court in Godrej & Boyce and the method adopted by the assessee is not a valid method.”

3. Briefly stated facts are that the assesse has declared an exempt income of dividend at Rs. 15.68 crores and interest on tax free bonds of Rs. 12,49,89,164/-. The assesse claimed that the same was exempt and does not form part of the total income of the assessee. The assesse has read with Rule 8D of the Rules at Rs. 41,75,000/- but subsequently, revised the same to Rs. 41.64 lacs. The AO has noted the reasons for disallowance vide Para 5.3 as under: - “5.3 The assessee has debited expenses under major heads such as computer technology related expenses, employee costs, administration and other expenses. Expenses indicated under various heads such as administration and other expenses debited to the P&L A/c were incurred by the assessee company for earning both taxable and exempt income. The assessee, in its computation of total income, has disallowed an amount of ₹ 41,75,000/- under section 14A r.w.r 8D. Subsequently assessee has filed a revised working of disallowance under section 14A which comes to ₹ 41,64,000/-. The assessee has requiested to consider the correct amount an dreduce the disallowance by a sum of ₹ 11,000/-. The same is duly considered. However, the said disallowance shown at ₹ 41,64,000/- is not as per section 14A r.w.r 8D as prescribed by the provisions of I.T. Act, 1961 and I.T. rules 1962.”

And finally, applied the Rule 8D of the Rules in mechanical manner and made disallowance of direct expenses under Rule 8D(2)(i) at Rs. 15,06,000/- and administrative expenses under Rule 8D(2)(iii) i.e. disallowance of 0.5% of average value of investment at Rs. 3,92,14,750/- . Hence, he computed the disallowance at Rs. 4,07,20,750/- and accordingly, the same was added. Aggrieved, assesse came in appeal before CIT(A).

It is the contention of the learned Counsel for the assessee that in terms with section 14A(2), the Assessing Officer must record correct. Though, recording of satisfaction as provided in sub–section (2) was brought to statute by Finance Act, 2006, w.e.f. 1 st April 2007, and applicable for assessment year 2007–08, but, as held by Hon'ble Delhi High Court, in Maxopp Investment Ltd. (supra), even prior to introduction of sub–section (2) to section 14A, the Assessing Officer is required to record his satisfaction regarding correctness of assessee’s claim. In the present case, on a perusal of the assessment order, it is very much clear that the Assessing Officer has not recorded any such satisfaction regarding the correctness of assessee’s claim with regard to its books of account. On reading of the assessment order, it is patent and obvious that the Assessing Officer has rejected assessee’s computation of disallowance under section 14A, simply for the reason that it is not in terms with the method prescribed under rule 8D. In view of the aforesaid, we have no hesitation in holding that satisfaction recorded by Assessing Officer with regard to correctness of assessee’s claim is without valid reasons. Now, coming to the merits of the disallowance worked out by the assessee as well as the Assessing Officer, it is observed that the assessee has worked out the disallowance by taking into consideration the direct expenditure relating to salary paid to three employees in–charge of treasury department and interest expenditure of Rs.6,11,913 and Rs. 2,62,158 respectively. As far as indirect expenditure of `Rs.63,78,70,998, debited to the Profit & Loss account, the assessee has allocated expenditure of Rs. 7,20,993, for earning exempt income by taking into consideration the area occupied by the treasury department. As far as the disallowance worked out by the Assessing Officer is concerned, it is noticed that the Assessing Officer has no dispute with regard to direct expenses as he has accepted the amount worked out by the assessee. Only in respect of indirect expenses, the Assessing Officer has applied rule 8D(2)(iii) by making disallowance of 0.5% of the total average investment. In our view, the disallowance of indirect expenses made by the because rule 8D(2)(iii) is not applicable for the impugned assessment and secondly, when the Assessing Officer accepts the direct expenses relating to salary paid to three employees of the treasury department and also the interest expenditure, he cannot consider such method applied to be unreasonable when it comes to indirect expenses. Moreover, the method adopted by the assessee for allocation of indirect expenses by taking into consideration the total area occupied by treasury section cannot be considered to be totally unacceptable, as the Tribunal has accepted such method in some other cases. A reference in this regard can be had to the decision of the Tribunal, Mumbai Bench, in Voltas Ltd. (supra). In view of the aforesaid, we do not see any reason to uphold the disallowance of indirect expenses made by the Assessing Officer by applying a provisions of rule 8D(2)(iii).

The facts of the case and methodology adopted by the appellant remains the same as in the past and therefore respectfully following the decision of the Hon’ble ITAT in the appellant’s for AY 2007-08, the additional disallowance made by the AO under section 14Aof the Act is directed to be deleted. Accordingly, this ground of appeal is allowed.”

Aggrieved, Revenue is in appeal before us.