SHANUDEEP P. LTD,MUMBAI vs. ITO 3(3)1, MUMBAI

The assessee is engaged in the business of trading in goods and also makes investments. We shall first take up the appeal filed for A.Y. 2004-05. First issue contested therein relates to disallowance made u/s. 14A of the Act.

The assessee received dividend income of Rs. 77.30 lakhs and claimed the same as exempt. The assessee did not make any disallowance u/s. 14A of the Act. The AO noticed that the assessee has claimed aggregate amount of Rs. 22.50 lakhs as expenses against total receipt of Rs. 685.44 lakhs (including dividend income). The AO disallowed proportionate expenses (proportionate of dividend income to the total receipts) u/s. 14A of the Act, which amounted to Rs. 2.76 lakhs. The Ld. CIT(A) also confirmed the same.

The Ld AR submitted that the total expenditure of Rs. 22.50 lakhs claimed by the assessee are entirely related to the trading activities carried on by the assessee and hence no disallowance u/s. 14A of the Act is called for.

On the contrary, ld DR submitted that the assessee has earned dividend income of Rs. 77.30 lakhs by using infrastructure, staff and other facilities of the assessee. Accordingly, the ld DR submitted that the disallowance of proportionate expenses disallowed by the AO should be upheld.

In the rejoinder, the Ld AR submitted that the year under consideration being A.Y. 2004-05, the provisions of Rule 8D of the I.T. Rules shall not have application. He submitted that Hon’ble Bombay High Court has considered an identical issue in the case of CIT Vs. Godrej Agrovet Ltd. (Income Tax Appeal No. 934 of 2011 dated 8.1.2013), wherein the Hon’ble Bombay High Court has confirmed the disallowance to 2% of the dividend income sustained by the Tribunal.

We have heard the rival contentions on this issue and perused the record. Admittedly, the provisions of Rule 8D shall not be applicable to the year under consideration as per the decision rendered by Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (328 ITR 81). However, disallowance has to be made on a reasonable basis as per the decision cited above. The Hon’ble Bombay High Court has held in the case of Godrej Agrovet Ltd. (supra) that disallowance of 2% of the exempt income sustained by the Tribunal could not be found fault with. Accordingly, by following the above said decision, we set aside the order passed by ld. CIT(A) on this issue and direct the AO to restrict the disallowance u/s. 14A of the Act to 2% exempt income of the assessee.

The next issue contested by the assessee in A.Y. 2004-05 relates to disallowance of guest house maintenance expenses of Rs. 92,154 and Rs. 1,66,130/- incurred for Mahabaleshwar and Lonavala Bungalows respectively.

The AO noticed that the assessee has incurred expenditure on guest house located at Mahabaleshwar and Lonavala. Though the assessee submitted that these guest houses were used for the purpose of business, yet the AO noticed that the assessee did not specify any direct business need to visit Mahabaleshwar. The AO also noticed that the assessee has also failed to show that these guest houses were used by the employees. Accordingly, the AO disallowed 50% of the expenses claimed towards Mahabaleshwar and Lonawala bungalows. The Ld CIT(A) also confirmed the same.

We have heard both the parties on this issue. Before us, ld AR reiterated that these guest houses were used by the employees during their vacation. However, he could not produce any evidence or documents to substantiate above said claim. Under these set of facts, we have no other option but to confirm the order passed by ld CIT(A) on this issue.

The next issue contested by the assessee relates to the claim of long term capital loss arising on reduction of the face value of the shares. The assessee claimed a sum of Rs. 752.52 lakhs as long term capital loss arising on account of reduction in face value of the shares. The AO disallowed the same on the reasoning that there is transfer of capital assets as defined u/s. 2(47) of the Act and hence loss should be ignored. The Ld CIT(A) also confirmed the same.

At the time of hearing, the ld AR fairly conceded that this issue has been decided against the assessee by the decision rendered by the Special Bench in the case of Bennett Coleman & Co. Ltd. (2011) 141 TTJ 777. In view of the decision of Special bench, referred above, the order passed by ld CIT(A) on this issue does not call for any interference.

We shall now take up the appeal filed by the assessee for A.Y. 2006-07.

The first issue relates to disallowance of depreciation on assets used for the purpose of earning service income. Ld AR submitted that the service income has been assessed by the AO under ‘income from other sources’ and hence depreciation is allowable on those assets u/s. 57(ii) of the Act. He submitted that the AO has rejected the depreciation on the ground that same is not related to the service provided by the assessee. Ld AR submitted that depreciation is allowable on assets if they have been used in connection with the activity of providing services.

Ld DR supported the order passed by ld CIT(A) on this issue.

Having heard the rival contention, we find merit in the contentions of the assessee. If a particular asset has been used in connection with the provision of service and if service income is assessed ‘income from other sources’, then the assessee would be entitled for depreciation u/s. 57(ii) of the Act. What is required to be seen in the instant case is whether the claim of the assessee that assets were used for providing services is correct or not. We noticed that the AO has not examined the above said claim of the assessee. Accordingly, we set aside the order passed by ld CIT(A) on this issue and restore the same to the file of the AO for examining the claim of depreciation u/s. 57(ii) of the Act afresh.

The next issue relates to disallowance made u/s. 14A of the Act. The Ld AR submitted that the AO has computed disallowance u/s. 14A of the Act by applying provisions of Rule 8D of the I.T. Rules. The Ld AR submitted that the assessment year under consideration is A.Y. 2006-07 and hence provisions of rule 8D shall not be applicable to this year as per the decision rendered by Ho’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (328 ITR 81). The Ld. AR submitted that an identical issue was considered by the Coordinate Bench in assessee’s own case in dated 26.4.2017 relating to A.Y. 2007-08 and the Tribunal

5 Shanudeep Pvt. Ltd. has restored the matter back to the file of the AO for examining the same afresh.

We heard ld DR on this issue and perused the record. We noticed that the Coordinate Bench of the Tribunal has considered an identical issue in A.Y. 2007-08 and has restored the matter back to the file of the AO, since the AO had invoked provisions of Rule 8D for computing disallowance u/s. 14A of the Act, which was contrary to the decision rendered by Ho’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra). Consistent with the view taken in A.Y. 2007-08 by the Tribunal, we set aside the order passed by ld. CIT(A) on this issue and restore the same to the file of the AO for examining this issue afresh.

The next issue contested by the assessee relates to disallowance of expenses incurred on bungalows located at Mahabaleshwar and Lonavala. Identical issue was considered by us in A.Y. 2004-05 (supra) and we have confirmed the disallowance made by the AO. Consistent with the view taken therein, we confirm the order passed by ld CIT(A) on this issue.

The Last issue contested by the assessee relates to set off brought forward long term capital loss against long term capital gain exempt u/s. 10(38) of the Act. The Ld AR submitted that the AO is not correct in law in setting off of brought forward loss arising on sale of shares (not subjected to securities transaction tax and hence not exempt) against long term capital gains arising on sale of shares, which are exempt u/s. 10(38) of the Act. In this regard, he placed reliance on the following case laws:-  CIT Vs. ANG Securities Ltd. (2013) 217 Taxman 210 (P&H)  Inductotherm (India) P. Ltd. Vs. DCIT (2017) 187 TTJ 525 (Ahd)

We have heard ld DR on this issue. It is the contention of the assessee that its claim is covered by the decision of Ho’ble P&H High Court rendered in the case of ANG Securities Ltd. (supra). Accordingly we set aside the order passed by ld. CIT(A) on this issue and direct the AO to follow the decision rendered by Ho’ble P&H High Court in the case of ANG Securities Ltd. (supra) by duly examining the facts relating to this issue.

In the result, both the appeals filed by the assessee are treated as partly allowed for statistical purposes.