ARYA OFFSHORE SERVICES P.LTD,MUMBAI vs. DCIT CEN CIR 6(4), MUMBAI

Fist issue contested in both the appeals relates to disallowance made u/s. 14A of the Act. During the year relevant to A.Y. 2010-11, the assessee received dividend income of ` 80,000/-. The assessee suo-moto disallowed a sum of ` 5000/- u/s. 14A of the Act. However, the Assessing Officer took the view that disallowance has to be computed as per Rule 8D of the I.T. Rules and accordingly made disallowance of ` 1,12,252/- u/s. 14A of the Act.

In the year relevant to A.Y. 2012-13 also the assessee made a disallowance of ` 5000/- u/s. 14A of the Act and Assessing Officer made

The learned CIT(A) gave partial relief to the assessee in both the years by deleting the disallowance of interest expenditure under Rule 8D(2)(ii) of the I.T Rules and sustained the disallowance made out of administrative expenses under Rule 8D(2)(iii).

The Learned AR submitted that the assessee has made investment in both the years only in its subsidiary and group companies and hence all the investments fall under the category of strategic investments. The Learned AR further submitted that the assessee has made investments only in three companies in both the years under consideration. These investments have been brought forward from earlier years except the fact that the assessee has increased its investment in one of the companies during the year relevant to AY 2012-13. He submitted that the assessee has received dividend income from one of the companies only. Accordingly he submitted that there is no much activity in the investment portfolio and accordingly contended that the disallowance of Rs.5000/- made in both the years u/s 14A of the Act would meet the requirements of law. The Ld A.R also submitted that the AO has mechanically applied the provisions of Rule 8D without finding fault with the claim of the assessee and without recording satisfaction that the workings made by the assessee was not correct.

On the contrary, the Ld D.R supported the orders passed by Ld CIT(A).

We have heard rival contentions on this issue and perused the record. It was submitted that the assessee has received dividend from only one of the companies. The Ld A.R submitted that all the investments are strategic investments and hence they are required to be excluded from the value of investments as per the decision of co-ordinate bench rendered in the case of Garware wallropes Ltd (ITA No.5408/M/2012 dated 15.01.2014). If we exclude the strategic investments, then there remains no amount to be 3 Arya Offshore Services Pvt. Ltd.

We notice that the assessee has made investments only in its group concerns and they have been brought forward from earlier years except the fact that the assessee has made further investments in one of the companies during the year relevant to AY 2012-13. The assessee has also received dividend income from one of the companies only. These facts support the contentions of the assessee that there was no much activity in the investment portfolio of the assessee. Under these set of facts, we are of the view that the disallowance of Rs.5000/- made by the assessee in both the years would meet the requirements of sec. 14A of the Act. Accordingly we set aside the orders passed by Ld CIT(A) on this issue in both the years under consideration and direct the AO to restrict the disallowance u/s 14A of the Act to Rs.5000/- in each year.

The next issue contested by the assessee relates to the adhoc disallowance made by the assessing officer out of general expenses. The assessing officer made adhoc disallowance of Rs.500000/- in AY 2010-11 out of expenditure incurred under the heads Gift, Entertainment, Business Promotion and Guest house. In AY 2012-13, the AO made adhoc disallowance of Rs.5,30,875/- from out of the above said expenses. The Ld CIT(A) restricted the disallowance to 50% in both the years under consideration.

The Ld A.R submitted that the assessing officer did not give any valid reason for making adhoc disallowance in both the years. Accordingly he contended that the entire disallowance should be deleted. In the alternative, he submitted that the co-ordinate bench of Tribunal has considered an identical issue in the case of a group concern of the assessee named J.M.Baxi & Co. Vs. DCIT (ITA No.5606/Mum/2011 dated 11.07.2012) and the Tribunal

The Ld D.R, on the contrary, placed reliance on the order passed by Ld CIT(A).

We have heard rival contentions on this issue and perused the record. A perusal of the assessment order would show that the disallowance has been made on adhoc basis without given any valid reason. At the same time, we notice that the co-ordinate bench has considered an identical issue in one of the group concerns of the assessee and sustained disallowance to the extent of 25% to take care of revenue leakages. Hence, consistent with the view taken by the Tribunal in the group concern of the assessee, we direct the AO to sustain disallowance in both the years to 25% of the amount disallowed by him. The orders passed by Ld CIT(A) in both the years on this issue would stand modified accordingly.

In the result, both the appeals of the assessee are partly allowed.