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Income Tax Appellate Tribunal, MUMBAI BENCH “J” MUMBAI
Before: SHRI JOGINDER SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-29, Mumbai [ in short ‘CIT(A)’] and arises out of the assessment completed u/s 143 (3) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal
raised by the assessee read as under:
1. The Learned Commissioner of Income Tax (Appeals) has erred in sustaining the addition u/s 14A, in spite of the fact, that, the Appellant has given evidence to substantiate the fact that investment which were made in shares M/s Symphony International were from interest free funds ¬ interest bearing funds. In light of the above said facts, the addition which is made by the Assessing Officer ought to be deleted.
2. The learned Commissioner of Income Tax (Appeals) has also erred in sustaining the ad-hoc addition of Rs.3,00,000/- made by the Assessing Officer under the pretext cash expenses have been incurred which is supported by self-made office vouchers & are not fully verifiable, in spite of the fact that these expenses are fully supported by office voucher which gives full description of the nature of expenses & the reason for incurring same hence the addition sustained by the CIT(A) ought to be deleted.
3. We begin with the 1st ground of appeal. Briefly stated, the facts of the case are that the assessee had earned dividend income of Rs.1,19,670/- and claimed the same as exempt. During the course of assessment proceedings, the Assessing Officer (AO) observed that as per section 14A of the Act, no deduction shall be allowed to the assessee in respect of expenditure incurred in relation to income, which does not form part of the total income. However, on perusal of the computation of total income, the AO found that the assessee had not made any disallowance u/s 14A. Therefore, he asked the assessee to explain why disallowance u/s 14A r.w. Rule 8D should not be made. In reply to it, the assessee submitted that investments were made from own capital and not from borrowed funds and also argued that it had not incurred any expenditure on the dividend received during the year. However, the AO was not convinced with above explanation of the assessee and relying on the decision in CIT v. Abhishek Industries Ltd. 286 ITR 1 (P&H) made a disallowance of Rs.28,78,154/- u/s 14A r.w Rule 8D.
M/s Symphony International
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) confirmed the order of the AO making disallowance u/s 14A r.w. Rule 8D. However, the Ld. CIT(A) directed the AO to verify the calculation as per Rule 8D and workout the correct disallowance.
Before us, the Ld. counsel of the assessee submits that the investments have been made from own funds and not borrowed funds and therefore, the disallowance of Rs.28,38,430/- under Rule 8D(2)(ii) is not called for. Also it is stated that the assessee has not incurred any expenditure on the dividend received during the year. Therefore, it is submitted that no addition on this account it liable to be made u/s 14A. 6. On the other hand, the Ld. DR relies on the order passed by the Ld. CIT(A). 7. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below. 7.1 Regarding the disallowance of Rs.1,987/- made by the AO under Rule 8D(2)(i), it is found from the profit and loss account for the year ended 31.03.2012 of the assessee that the same relates to D-Mat charges. As this amount of expenditure is directly related to dividend income earned by the assessee, the same is confirmed. 7.2 As regards the disallowance of Rs.28,38,430/- made by the AO under Rule 8D(2)(ii), it is found that the partner’s capital account in the current year stands at Rs.32,136,138/- whereas the investments were of Rs.7,583,012/-. In HDFC Bank Ltd. vs. DCIT [2016] 67 taxmann.com 42 M/s Symphony International (Bom), the Hon'ble Bombay High Court referring to the decision in CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) and CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 (Bom) held as under : “15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities & Power Ltd. (supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd. (supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (supra) on the above issue has also been accepted by the Revenue in as much as even though they have filed an appeal to the Supreme Court against that order on the other issue therein viz. broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities & Power Ltd. (supra) in its application to Section 14A of the Act.” As the own fund in the instant case is more than the investments, respectfully following the above decision, we delete the disallowance of Rs.28,38,430/- made by the AO under Rule 8D(2)(ii). Finally we deal with the disallowance of Rs.37,737/- made by the AO under Rule 8D(2)(iii). In Godrej & Boyce Mfg. Co. Ltd. vs. Dy. CIT (2010) 194 Taxman 203 (Bom.) the Hon'ble Bombay High Court has explained Rule 8D as under :
M/s Symphony International Rule 8D(2)(iii), it had been submitted that some mechanism or formula had to be adopted for attributing part of the administrative / managerial expenses to tax-exempt investment income. The administrative expenses attributable to tax-free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS), the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager.
While the fixed administrative expenses were excluded on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment.” 7.3 In view of the above position of law, the disallowance of Rs.37,737/- made by the AO under Rule 8D(2)(iii) is confirmed. 8. Thus the 1st ground of appeal is partly allowed.
9. Now we turn to 2nd ground of appeal. During the course of assessment proceedings, the AO observed that personal element cannot be ruled out in expenses totaling to Rs.29,87,004/-. He asked the assessee to produce the necessary details/documents, bills, vouchers to substantiate the claim. He verified the same on test check basis and observed that some of these expenses were incurred in cash and were supported by self-made vouchers and not fully verifiable. Accordingly, he disallowed a sum of Rs.3,00,000/- on ad-hoc basis to cover the personal element involved.