MANOJ VASUDEV WADHWA,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX 19(3), MUMBAI

We heard the parties and perused the record. This is second round of proceeding. In the original assessment proceeding, the AO had computed disallowance u/s 14A of the Act by applying the provisions of Rule 8D of 2 & 325/Mum/2018 Shri Manoj Vasudev Wadhwa the I.T rules. Since the Hon’ble Bombay High Court has held in the case of Godrej & Boyce Mfg. Co. Ltd (328 ITR 81) that the provisions of Rule 8D shall apply prospectively from AY 2008-09, the matter of determination of disallowance u/s 14A was restored to the file of the AO by the ITAT. In the set aside proceedings, the AO made the very same disallowance of Rs.135.60 lakhs, however, without referring to the provisions of Rule 8D. In the appellate proceedings, the Ld CIT(A) restricted the disallowance to the amount of exempt income of Rs.39,28,114/- by following the decision rendered by Hon’ble Delhi High Court in the case of Joint Investments Ltd vs. CIT (ITA No.117/2015).

The revenue is aggrieved by the decision of Ld CIT(A) in granting partial relief to the assessee, while the assessee is aggrieved by the decision of Ld CIT(A) in partially sustaining the addition u/s 14A.

We shall first take up the appeal filed by the revenue. The exempt income received by the assessee during the year under consideration was Rs.39,28,114/- and we notice that the Ld CIT(A) has followed the decision rendered by Hon’ble Delhi High Court in the case of Joint Investments Ltd (supra). Since the Ld CIT(A) has followed the decision of Hon’ble Delhi High Court, we do not find merit in the appeal of the revenue.

We shall now take up the appeal filed by the assessee. The Ld A.R submitted that the assessee is engaged in trading of shares, derivatives etc. He submitted that the common expenses incurred by the assessee was Rs.8,19,504/-. He submitted that, if the above said expenditure is apportioned in the ratio of receipts of various income, the expenditure allocable to the exempt income works out to Rs.7,030/- only. However, on a perusal of the Profit and Loss account, we notice that the assessee has not considered certain expenses like Securities Transaction tax, Service tax, brokerage on loan, interest expenses etc. Hence we are unable to agree with the workings given by the assessee.

In the case of Godrej & Boyce Manufacturing Co. Ltd (supra), the Hon’ble Bombay High Court has held that the disallowance u/s 14A for the 3 & 325/Mum/2018 Shri Manoj Vasudev Wadhwa assessment years prior to the AY 2008-09 should be computed on reasonable basis. In the instant case, the main objective of the assessee was to make gains in trading in shares in respect of shares held as stock in trade and accordingly it was submitted that the receipt of dividend income was incidental. We notice that the assessee has held certain shares as its investments also.

The Hon’ble Supreme Court has held in the case of Maxopp Investments Ltd (402 ITR 640) that the exemption claimed on dividend income would trigger the provisions of sec. 14A of the Act. It was also held that the objective to have controlling interest in making investments is also not relevant for computing disallowance u/s 14A of the Act. We notice that the assessee has taken certain grounds relating to strategic investments and shares held as stock in trade. The Ld A.R fairly conceded that those grounds go against the assessee in view of the decision rendered by Hon’ble Supreme Court in the case of Maxopp Investments Ltd (supra).

We notice that the total loan funds of the assessee stand at Rs.3369.29 lakhs and the value of investments stand at Rs.256.72 lakhs. We have noticed that the assessee is having negative capital and his entire activity has been financed by loan funds only. We notice that the assessee has incurred interest expenses of Rs.201.20 lakhs. Hence interest expenditure relating to investments which yielded dividend income is required to be disallowed. Hence, on a conspectus of the matter, we are of the view that the disallowance u/s 14A may be restricted to 30% of the dividend income and, in our view, the same would meet the requirements

In the result, the appeal filed by the revenue is dismissed and the appeal of the assessee is partly allowed.