BHAGIRATH C. ARYA,MUMBAI vs. ASST CIT 18(3), MUMBAI

1. On the facts and circumstances of the case as well as in law, the Learned CIT(A) has erred in making further disallowance of Rs. 38,10,043/- u/s 14A r.w.r 8D over and above the disallowance made by the appellant itself of Rs. 39,58,846/-.

Brief facts of the case are that the assessee is an individual and deriving income from Salary and Commission from JBF Industries Ltd., Interest income, Capital Gain and Share of profit from firm M/s Arya Texturisers and Bhagirath C. Arya Twister Ltd. The assessee filed his return of income for Assessment Year 2012-13 on 26.09.2012 declaring total income of Rs. 8,97,73,100/-. The assessment was completed on 25.03.2015 under section 143(3). In the return of income, the assessee has shown dividend income of Rs. 5,59,07,914/- which is claimed as exempt income under section 10(34). In computation of income, the assessee has suo-moto disallowed Rs. 39,58,846/- under section 14A. The Assessing Officer while passing the assessment order made a further addition of Rs. 46,11,716/-. On appeal before the Ld. CIT(A), the additional disallowance under section 14A for Rs. 46,11,716/- was restricted to Rs. 38,10,043/-. Thus, further aggrieved, the assessee has filed the present appeal before us.

We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. Ground No. 1 relates to disallowance under section 14A read with Rule 8D of the Act. The Ld. AR of the assessee submits that a limited issue is involved in the present appeal that no expenses were claimed for indirect expenses and therefore the disallowance under section 14A should exceed the actual expenses claimed. In support of his submission, the Ld. AR of the assessee relied upon the decision of Tribunal in Gillette Group India (P.) Ltd. v. ACIT [2012] 22 taxmann.com 61 (Delhi-Trib.), M/s Dharmayug Investments Ltd. v. DCIT in dated 27.01.2012 and in case of ACIT v. Iqbal M. Chagala in ITA No. 877/Mum/2013 dated Bhagirath C. Arya 30.07.2014. On the other hand, the Ld. DR for the Revenue relied on the order of authorities below.

We have considered the rival submission of the parties and have gone through the orders of authorities below. During the assessment proceeding, the Assessing Officer noted that the assessee has shown the dividend income of Rs. 5,59,07,914/-. The assessee has suo-moto disallowed Rs. 39,58,846/- under section 14A. The Assessing Officer asked the assessee to furnish the working of disallowance under section 14A. The assessee vide its reply dated 12.03.2015 furnished the working of disallowance under section 14A for Rs. 39,58,439/-. The assessee further submitted that disallowance of .5% of average investment shall not be calculated as no expenditure has been claimed. The contention of the assessee was not accepted by Assessing Officer. The Assessing Officer invoked the provision of Rule 8D and made the total disallowance of Rs. 85,70,562/-. The disallowance consist of Rs. 14,02,028/- under Rule 8D(2)(i), Rs. 37,67,699/- under Rule 8D(2)(ii) and Rs. 34,00,835/- under Rule 8D(2)(iii). As the assessee has already disallowed Rs. 39,58,846/- thereby the Assessing Officer made a further addition of Rs. 46,99,716/-.

Before the First Appellate Authority, the assessee submitted that he had earned dividend income from share of Rs. 5,59,07,914/- on investment made by him, directly through Ask Managers Pvt. Ltd. in share and mutual fund of Rs. 3,46,963/- (Net of expenses), the expenditure of Rs. 2,68,173/- was adjusted against the dividend income from Portfolio Management Services (PMS), as Bhagirath C. Arya this was shown to have been exclusively incurred for earning dividend by PMS. The exempt income includes dividend on share and PPF interest and the assessee has not claimed any expenses so as to make disallowance under section 14A. The assessee further submits that the PMS expenditure was only Rs. 6,00,355/- excluding expenditure incurred on earning taxable income which was explained to the Assessing Officer. Out of this expenditure incurred for earning exempt income was only Rs. 2,68,173/- and balance of Rs. 3,32,182/- was incurred for earning taxable interest income. The expenses paid to Ask Manager was included in Rs. 6,00,355/-. The assessee further contended that as per section 14A, the total disallowance under 14A cannot exceed the total expenditure debited to the Profit & Loss Account. The assessee had already suo-moto disallowed proportionate expenditure of Rs. 39,58,846/- which include interest. The Ld. CIT(A) after considering the contention of the assessee concluded that according to assessee total expenses was incurred towards PMS was only Rs. 6,00,355/- and the amount of Rs. 2,76,954/- paid to Ask Manager is part of this amount. The assessee vide its submission dated 22.07.2016 claimed that direct expenses for earning exempt income was just Rs. 2,71,164/-, in other paragraph in the same submission, the expenses incurred for earning exempt income was only shown at Rs.2,68,173/-. Further, in a working annexed to his submission, he worked out a disallowance of Rs. 1,91,147/- for direct expenditure. The Ld. CIT(A) further observed that assessee himself is not clear as to what is the direct expenditure incurred to Bhagirath C. Arya earn the exempt income. The ld CIT(A) concluded that the assessee has not shown any taxable income from PMS or any other transactions. Therefore, the entire expenses paid to investment manager of Rs. 600355/- has to be treated to have incurred for earning of exempt income. Thus, the contention of the assessee that the disallowance of Rs.276954/- paid to Ask Manager is a part of Rs.600,355/- is accepted. The ld CIT(A) further concluded that an amount of Rs. 523,175/- which is a part of disallowance of Rs.524719/- has also been explained as demat charges debited by Kapol Bank which was reimbursed by Credit Suisee Finance India Pvt. Ltd. and the assessee has not incurred this expenses. On the basis of his observation/conclusion the ld. CIT(A) restricted the direct expenditure to Rs. 6,00,355/- thereby granted a relief of Rs. 8,01,763/-. However, other disallowance @ .5% of the average investment of Rs. 34,00,835/- [under Rule 8D(2)(iii)] and interest disallowance under Rule 8D(2)(ii) of Rs. 37,67,699/- was upheld. The co-ordinate bench of Delhi Tribunal in Gillette Group India (P.) Ltd. (supra) held that disallowance under section 14A cannot exceed expenditure actually claimed by the assessee, the SMC Bench of Mumbai Tribunal in M/s Dharmayug Investments Ltd. (supra)

In the result, appeal filed by assessee is allowed.