KRISHIRAJ TRADING LTD,MUMBAI vs. DCIT 6(2), PALGHAR

आदेश / O R D E R

PER RAVISH SOOD, JUDICIAL MEMBER

“The ground or grounds of appeal are without prejudice to one another. 1.i) On the facts and in the circumstances of the case and in law, the id. CIT(A) erred in confirming the addition to the extent of Rs. 44,63,736/- made by the AO to the income of Appellant by way of disallowing proportionate Finance charges alleged to have been incurred relating to exempt income invoking the provisions of section 14A r.w. rule 8D. ii) The ld. CIT(A) failed to appreciate that:- (a) there is no reason and basis in reaching to dis-satisfaction with the correctness of the claim of the Appellant that no expenditure other than Demat charges ofRs. 93,692/- was incurred in relation to dividend income which does not form part of the total income; and (b) that the investment in shares are made out of own capital and the shareholders funds were more than investment in shares; and (c) the net result of interest account (i.e. received-paid) was surplus. iii) In reaching to the conclusion and confirming such addition the Id. CIT(A) omitted to consider relevant factors, considerations, principles and evidences while he was overwhelmed, influenced and prejudiced by irrelevant considerations and factors.

P a g e | 3 & 2663/Mum/2016 AY: 2011-12 Krishiraj Trading Ltd. Vs. DCIT The Appellant craves leave to add, alter, amend or delete any or all of the above grounds of appeal

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2. Briefly stated, the facts of the case are that the assessee company which is engaged in the business of trading in fabrics & derivatives and investment in shares had e-filed its return of income for A.Y: 2011-12 on 20.01.2011, disclosing a loss of Rs. 11,62,57,458/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. The case of the assessee was thereafter taken up for scrutiny assessment under Sec. 143(2).

3. The A.O observed during the course of the assessment proceedings that though the assessee had received dividend income of Rs.5,46,27,122/- from its exempt income yielding investments in shares, however, no expenditure was apportioned and offered as a disallowance towards earning of the said exempt income. The A.O being of the view that some expenses had to be appropriated towards earning of the exempt income, therefore, applied the provisions of Sec. 14A r.w. Rule 8D and made a disallowance of Rs.4,20,64,448/- in the hands of the assessee, as under:

DETERMINING AMOUNT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME AGGREGATE OF THE FOLLOWING AMOUNTS i. The amount of expenditure directly relating to income which does Rs. 93,692 not form part of total income ii. In a case where the assessee has incurred expenditure by way of Rs. 44,63,736 interest during the previous year which is not diredtly attributable to any particular incoen or receipt, an amount computed in accordance with the following formula, namely A x B/C A. amount of expenditure by way of interest 5121392 P a g e | 4 & 2663/Mum/2016 AY: 2011-12 Krishiraj Trading Ltd. Vs. DCIT other that the amount of interest included in (i) incurred during the previous year B. the average of value of investment, 7501404079 income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year C. the average of total assets as appearing in 8606609587 the balance sheet of the assessee, on the first day and the last day of the previous year; iii. An amount equal to one-half percent of the average of value of 3,75,07,020 investment, income from which does not or shall not from part of the total income, as appearing in the balance sheet of the assessee , on the first day and the last day of the previous year. Total amount of expenditure related to income which does not 4,20,64,448 form part of total income.

The A.O on the basis of his aforesaid observations assessed the total loss of the assessee at Rs. 7,41,93,010/-.

We find that the AO made a disallowance of Rs.3.12 crores as against the total expenses of Rs.4.14 lakhs incurred by the assessee, that the AO had not given any reason or basis for disallowing the said amount, that the AO and the FAA had mechanically applied provisions of Rule 8D.Disallowance u/s.14A could he made if the assessee claimed some expenditure against the exempt income. The reason behind the section 14A and Rule 8D is to deny double benefit to the assessee i.e. claiming exemption on one hand and claiming expenditure on the other. But it was never intended by the legislature that disallowance should be made in a routine manner without considering the basic fact i.e. amount of expenditure incurred by the assessee. The assessee had advanced certain arguments that are listed at para 4.2 at pg No.3 of the order of the FAA. We find that the FAA has not dealt with the submissions made by the assessee. In these circumstances, we are of the opinion that the matter needs further verification and investigation. Therefore, in the interest of justice we are rendering back the issue to the file of AO for fresh adjudication who would decide the issue after considering the latest judicial pronouncement of -the Hon’ble Jurisdictional High Court and the Hon'ble Delhi High Court. First effective ground is decided in favour of the assessee, in part.

We find that the issue as regards the disallowance under Sec. 14A, Rule 8D(2)(i) and 8D(2)(ii), as is there before us in the present case, was not there before the Tribunal. We find that in the case before us, the issue as regards the mechanical disallowance of Rs. 3,75,07,020/- made by the A.O under Sec. 14A r.w Rule 8D(2)(iii) as against the administrative expenses of Rs.13,53,850/-incurred by the assessee towards administrative expenses had already been restored by the CIT(A) to the file of the A.O for readjudicating the same in the backdrop of his specific directions. We thus are of the considered view that the observations recorded by the Tribunal while disposing of the appeal of the assessee for A.Y 2009-10 in dated 02.03.2016, as relied upon by the ld. A.R, would not be of any assistance for adjudicating the issue as regards the validity of P a g e | 8 ITA Nos. 1141 & 2663/Mum/2016 AY: 2011-12 Krishiraj Trading Ltd. Vs. DCIT disallowance made under Sec. 14A r.w Rule 8D(2)(i) and 8D(2)(ii) in the case before us.

No. 1(ii)(b) & (c) are allowed for statistical purposes.

9. We now take up the claim of the assessee that the CIT(A) had erred in sustaining the disallowance made by the A.O under Sec. 14A r.w Rule 8D(2)(i) in respect of the demat charges of Rs.93,692/-. We find that though the assessee had assailed before us the validity of the disallowance of the demat charges of Rs. 93,692/- made by the A.O, but however, a perusal of the order of the CIT(A) reveals that the assessee on the contrary had agreed before him that the same were P a g e | 9 & 2663/Mum/2016 AY: 2011-12 Krishiraj Trading Ltd. Vs. DCIT the direct expenses incurred in relation to its exempt income. We thus are of the considered view that in the backdrop of the aforesaid concession of the assessee, the grievance of the assessee as regards the sustaining of the disallowance by the CIT(A) does not survive. Before parting, we may herein observe that nothing had been averred before us which could persuade us to conclude that the observations of the CIT(A) as regards the concession made by the assessee before him were perverse. Be that as it may, in the backdrop of the aforesaid state of facts we are unable to persuade ourselves to accept the aforesaid contention of the assessee. We thus uphold the order of the CIT(A) to the extent he had sustained the disallowance of the demat charges of Rs. 93,692/- under Sec. 14A(2) r.w Rule 8D(2)(i). The Ground of appeal No. 1(ii)(a) is dismissed.

8. The appeal of the assessee is partly allowed for statistical purposes. ITA No 2663/Mum/2016 AY:2011-12

9. We shall now take up the appeal of the department. The department assailing the order of the CIT(A) had raised before us the following grounds of appeal:-

“1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has exceeded her jurisdiction in restoring the matter of disallowance u/s 14A(2) r.w.r.8D(2)(ii) of Rs.3,75,07,020/- by giving direction to the A.O. to verify its expenses and find out if it is wholly and exclusively for the business of trading in the fabric and if the nature of expenses is indivisible i.e. whether it is for earning both the incomes, viz taxable and non taxable and thus erred in not considering the fact that the disallowance was made by the AO, as per the rule prescribed in 8D.

P a g e | 10 & 2663/Mum/2016 AY: 2011-12 Krishiraj Trading Ltd. Vs. DCIT 10. We find that the revenue had assailed before us the order of the CIT(A) on the ground that he had erred in restoring the disallowance of Rs.3,75,07,020/- made under Sec. 14A(2) r.w. Rule 8D(2)(iii) to the file of the A.O for fresh adjudication. We find that the assessee had averred before the CIT(A) that the administrative expenses of Rs.13,53,850/- (excluding demat charges of Rs. 93,692/-) were not incurred for earning of exempt income. We find that the CIT(A) taking cognizance of the aforesaid claim of the assessee and further observing that the disallowance of Rs. 3,75,07,020/- made by the A.O under Sec. 14A(2) r.w. Rule 8D(2)(iii) was highly pitched, had thus restored the matter to the file of the A.O for making necessary verifications. We find that the CIT(A) while restoring the matter to the file of the A.O had directed him to verify the veracity of the claim of the assessee that expenses to the extent of Rs.13,53,850/- were not related to earning of exempt income and were incurred wholly and exclusively for its business of trading in fabric. We further find that the CIT(A) had directed the A.O that in case the expenses were found to have been incurred by the assessee for earning of both the taxable and exempt income and the nature of expenses is indivisible, then only proportionate amount of the related expenses were to be disallowed. We have given a thoughtful consideration to the aforesaid observations of the CIT(A). We are of the considered view that the CIT(A) keeping in view the claim of the assessee that the administrative expenses to the extent of Rs. 13,53,850/- were not incurred in relation to earning of exempt income, and no expense was incurred for earning of the exempt income, had thus rightly directed the A.O to make necessary verifications as regards the said claim of the assessee and readjudicate the disallowance under Sec. 14A r.w Rule 8D(2)(iii). We are of the considered view that no infirmity emerges from the aforesaid P a g e | 11 ITA Nos. 1141 & 2663/Mum/2016 AY: 2011-12 Krishiraj Trading Ltd. Vs. DCIT observations of the CIT(A). We thus finding no reason to dislodge the view arrived at by the CIT(A), therefore, uphold the same.