PRANAV MUKUND SHAH,MUMBAI vs. DCIT 4(2)(1), MUMBAI

We have heard the parties and perused the record. The assessee is a trader in shares and securities and is also carrying on investment activities.

First issue relates to disallowance of telephone, motor car, travelling and legal fees. The assessee disallowed a sum of ` 3,37,198/- out of telephone and motor car expenses towards personal nature. Aggregate amount incurred by the assessee on telephone and motor car was ` 17,78,797/-. However, while furnishing details relating to these expenses, that were called for by the 2 Mr. Pranav Mukund Shah Assessing Officer during the course of assessment proceedings, the assessee mentioned the entire figure of ` 17,78,797/- as personal in nature. Accordingly, the Assessing Officer disallowed entire amount of expenses claimed by the assessee under the head ‘telephone and motor car expenses’, treating the same as personal in nature. Similarly, expenses incurred under the head ‘travelling and professional charges’ were shown as personal in nature while furnishing details before the Assessing Officer. Hence, the Assessing Officer disallowed travelling and professional charges aggregating to ` 5,36,762/- treating the same as personal in nature. The learned CIT(A) also confirmed the same.

It is the contention of learned AR that the assessee has been incurring similar type of expenses in other years also and the same has been allowed by the Assessing Officer. With regard to telephone and motor car expenses, the ld A.R submitted that the assessee himself has voluntarily disallowed a portion of expenses treating towards personal element. He submitted that, while furnishing details of expenses before the Assessing Officer, the accountant of the assessee has inadvertently classified all expenses under the head “personal expenses”. He submitted that it is a mistake committed by the accountant of the assessee and hence, the Assessing Officer was not justified in placing reliance on the statement by disregarding the purpose of expenses.

The Learned DR, on the contrary, supported the order passed by the learned CIT(A).

Having heard the rival submissions, we are of the view that there is merit in the contentions of the assessee. The Assessing Officer, in our view, is required to examine the claim of expenses in accordance with the conditions prescribed under various provisions of the Act. It is the contention of the assessee that similar expenses have been claimed in other years and they have been allowed by the Assessing Officer. It is the contention of the assessee that he has voluntarily disallowed a portion of expenses towards personal element

Next issue relates to disallowance made by the Assessing Officer u/s. 14A of the Act. The assessee declared dividend income of ` 90.18 lakhs and claimed the same as exempt. However, the assessee did not disallow the expenditure as per requirement of section 14A of the Act. Hence, the Assessing Officer computed the disallowance u/s. 14A of the Act as per provisions of rule 8D and disallowed a sum of ` 5,77,064/- out of interest expenses under Rule 8D(2)(ii) of the I.T. Rules and further disallowed a sum of ` 4,29,982/- out of administrative expenses u/r.8D(2)(iii) of the I.T. Rules. Thus the Assessing Officer disallowed a sum of ` 10.06 lakhs u/s. 14A of the Act. The learned CIT(A) also confirmed the same.

Learned AR submitted that interest expenses incurred by the assessee during the year under consideration were ` 23.84 lakhs and entire interest expenses have been incurred on the margin money paid by it for F&O transactions. He submitted that F&O transaction does not yield any dividend income and hence the Assessing Officer was not justified in considering interest expenditure for the purpose of computing disallowance. Learned AR submitted that disallowance of interest expenditure u/r. 8D(2)(ii) of the I.T. Rules shall be made only out of indirect interest expenditure which are not 4 Mr. Pranav Mukund Shah directly related to any specific activities. Accordingly, learned AR contended that the impugned interest expenditure paid for F&O activities, being expenditure directly related to taxable activity, will not fall in the category of indirect interest expenditure to be consider for disallowance u/r. 8D(2)(ii) of the I.T. Rules. The Learned AR placed reliance on the decision rendered by Cochin Bench of the ITAT in the case of Geojit Investment Services P. Ltd. (2014) 50 taxmnn.com 150, wherein it was held that interest expenditure directly attributable to taxable income which requires to be excluded for the purpose of rule 8D(2)(ii).

In the alternative, learned AR submitted that the assessee has also earned interest income out of bank FDs, bonds, debentures etc. and the same has to be netted off for the purpose of taking interest expenditure u/r. 8D(2)(ii). In this regard, learned AR took support of the decision rendered in the case of Nirma Credit & Capital P. Ltd. Vs. ACIT (2017) 85 taxmann.com 72.

The Learned DR on the contrary supported the order passed by the learned CIT(A).

We noticed that the assessee has claimed before us that interest expenditure incurred by him for F&O activity. Income from F&O activity is taxable and also it is in the knowledge of everyone that F&O activity does not yield any dividend income. In that case, interest expenditure is not required to be considered for the purpose of computing disallowance u/r. 8D(2)(ii) as per decision rendered by Cochin Bench of the ITAT in the case of Geojit Investment Services P. Ltd. (supra). However, we noticed that this particular claim of the assessee has not been examined by the Assessing Officer. In our view that same requires examination and if the claim of the assessee is found to be correct, then entire interest expenditure should not be considered for computing disallowance u/r. 8D(2)(ii) of the I.T. Rules. Since this matter requires examination, we set aside the order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer with the 5 Mr. Pranav Mukund Shah direction to examine the claim of the assessee in the light of the decision referred supra and take appropriate decision in accordance with the law. Before the Assessing Officer the assessee is free to raise his alternative contention with regard to netting off interest.

Since we have restored the issue relating to interest expenses, we are of the view that the disallowance made out of administrative expenses u/s 8D(2)(iii) also requires fresh examination. Accordingly we restore the said addition also to the file of the AO.

In the result, appeal filed by the assessee is treated as allowed for statistical purposes. Order has been pronounced in the Court on 19.9.2018.