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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: SHRI G.S. PANNU (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the assessee against order dated 01/12/2015 passed by the Ld. Commissioner of Income Tax (Appeals)-33, Mumbai, for the assessment year 2006-07, whereby the Ld. CIT (A) has partly allowed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee a partnership firm engaged in the business of export of textiles readymade garments, made ups, fabrics and handicraft items, filed its return of income for the assessment year under consideration declaring the total income of Rs. 4,20,77,640/-. Since the case was selected for scrutiny, notice u/s 143 (2) along with questionnaire was issued and in response thereof the authorized representative of the assessee attended the proceedings time to time and also filed the details called for by the 2 Assessment Year: 2006-07 AO. It was seen from the profit and loss account that the assessee had received dividend income of Rs. 4,43,256/- and the same was claimed as exempt u/s 10(34) of the Act. The assessee was asked to explain as to why disallowance be not made u/s 14A of the Act and as per rule 8D of the Income Tax Rules, 1962 (for short ‘Rules’). After hearing the assessee the disallowance was computed at Rs. 1,10,031/-. The AO also made disallowance of interest income of Rs. 5,74,440/- holding that on the one hand, the assessee’s paying interest on loans and other hand, it is advancing loan to its sister concern covered u/s 40(A)(2)(b) of the Act and the assessee has failed to given a details related to the rate of interest paid by it, however, admitted that it was around 12%. The AO also made disallowance of Rs. 2,25,284/- out of the total expenses claimed by the assessee, telephone expenses of Rs. 26,479/- out of the total expenses claimed of Rs. 26,47,941/-, Motorcar expenses of Rs. 1,59,490/- out of total Motorcar expenses claimed of Rs. 6,73,362/- and depreciation of Rs. 9,21,546/-, Rs. 1,00,000/- out of Rs. 38,86,232/- claimed as staff welfare expenses and Rs. 1,00,000/- out of Rs. 37,22,228/- claimed as business promotion expenses. Accordingly, the AO determined the total income of the assessee at Rs. 4,31,18,640/- (rounded off). In the first appeal the Ld. CIT (A), partial relief.
Still aggrieved by the order of Ld. CIT (Appeals), the assessee has preferred this appeal before the Tribunal on the following effective grounds:-
1. “On facts and in law, the learned Commissioner of Income-tax (Appeals) [hereinafter referred to as “Ld. CIT (A)”] had erred in confirming the addition of Rs. 1,10,031/- u/s 14A without appreciating the facts of the case. Under the facts and circumstances of the matter, there should not be any disallowance u/s 14A of the I.T. Act.
3 Assessment Year: 2006-07
2. On facts and in law, the Ld. CIT (A) had erred in confirming the disallowance out of Travelling expenses amounting to Rs. 75,284/- even though no personal/pleasure advantage was availed by the persons who travelled abroad. Under the facts and circumstances of the matter, the Ld. CIT (A) ought not be have confirmed the disallowance of Rs. 75,284/- made by the learned Assessing Officer (hereinafter referred to as “LAO”) in the impugned assessment order.
3. On facts and in law, the Ld. CIT (A) had erred in confirming the disallowance out of telephone expenses amounting to Rs. 26,479/- on ad-hoc basis (10%) without appreciating the facts of the case. Under the facts and circumstances of the matter, the Ld. CIT (A) ought not to have confirmed the said disallowance of Rs. 26,479/- made by the LAO in the impugned assessment order. 4. On facts and in law, the Ld. CIT (A) had erred in confirming the disallowance out of Motor Car expenses amounting to Rs. 1,59,490/- on ad-hoc basis (10%) without appreciating the facts of the case. Under the facts and circumstances of the matter, the Ld. CIT (A) ought not to have confirmed the said disallowance of Rs. 1,59,490/- made by the LAO in the impugned assessment order.”
The first ground pertains to disallowance u/s 14A of the Act. The Ld. counsel for the assessee submitted that the Ld. CIT (A) has wrongly confirmed the addition made by the AO on account of disallowance u/s 14A by applying rule 8D of the Rules as Rule 8D was not applicable during the assessment year under consideration. The Ld. counsel further submitted that no investment was made by the assessee during the year relevant to the assessment year under consideration and the dividend received was in respect of the investment made in the previous years. The Ld. counsel further submitted that the investments were made from surplus funds available with the assessee during the relevant years and no expenditure was incurred to earn dividend in question, hence, no disallowance is required to be made under section 14A of the Act.
4 Assessment Year: 2006-07
On the other hand, the Ld. Departmental Representative (DR) relying on the order passed by the authorities below submitted that since the AO has made a reasonable addition in accordance with the observations of the Hon’ble Bombay High Court in Godrej & Boyce Pvt. Ltd. vs. DCIT 328 ITR 81 (Bom), there is no merit in the contention of the assessee, therefore the appeal is liable to be dismissed being devoid of merits.
We have heard the rival submissions and carefully gone through the material on record. The contention of the assessee is that the AO has calculated the disallowance by applying rule 8D of the Income Tax Rules, 1962, whereas the application of rule 8D came into being w.e.f. the assessment year 2008-09 as per the judgment of the Hon’ble Bombay High Court passed in Godrej & Boyce Pvt. Ltd. (supra). We notice that the assessee has received dividend income of Rs.4,43,256/-in the assessment year under consideration and the AO has computed the disallowance at Rs. 1,10,031/-, under section 14A read with Rule 8D(2) of the Act. No doubt, Rule 8D was brought on the statute in the year 2008, however, in the light of the findings of the Hon’ble jurisdictional High Court in Godrej & Boyce Co Ltd.(supra), AO is within its jurisdiction to work out the disallowance u/s 14A(1) on reasonable basis pertaining to the assessment years prior to assessment year 2008-09. So, in the present case, AO had jurisdiction to determine the disallowance on reasonable basis. As per the settled law, sub-sections (2) and (3) of section 14A as well as Rule 8D are prospective and not applicable retrospectively, however, even prior thereto, section 14A required the AO to first reject the claim of the assessee with regard to the extent of such expenditure for cogent reasons and then to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment.
5 Assessment Year: 2006-07
In the present case the AO has applied Rule 8D to determine the disallowance without rejecting the claim of the assessee. Perusal of Balance sheet attached with the paper book ending 31st. March 2005, shows that the assessee had sufficient funds to justify the claim of the assessee that the investments were made from its surplus funds. It further reflects that investment of the assessee as on 31st. March 2006 was nil. Hence, there is no justification in making disallowance under Rule 8D(2)(ii) in the light of the decision of the Hon’ble High Court of Bombay rendered in Reliance Utilities and Power Ltd. 313 ITR 340 (Bom). Hence, we delete the addition Rs. 81,085/- made under Rule 8D(2)(ii). However, we sustain the addition of Rs. 28,946/- made under Rule 8D(2)(iii) holding that the disallowance on account of administrative and general expenses upheld by the Ld. CIT(A) is reasonable despite the fact that AO has computed the same as per the method prescribed under Rule 8D. We, therefore, partly allow this ground of appeal
of the assessee.
8. Ground Nos. 2, 3 and 4 pertain to disallowance of Rs. 75,284/-, Rs. 26,479/- and Rs. 1,59,490/- out of travelling expenses, telephone expenses and Motorcar expenses respectively claimed by the assessee. The Ld. counsel for the assessee submitted before us that all these expenses are subjected to fringe benefit tax and the assessee has already filed the return of fringe benefits for the assessment year under consideration. Therefore, the additions confirmed by the Ld. CIT (A) are required to be deleted.
We notice that the assessee has filed the return of fringe benefits for the assessment year under consideration, which are place at page 11 to 14 of the Paper Book. The assessee has also placed on record the assessment order passed by the AO. Since, the issue has already been dealt with by the AO in fringe benefits return, we deleted the additions confirmed by the Ld. CIT (A) and allow these grounds of appeal.
6 Assessment Year: 2006-07 In the result, appeal filed by the assessee for assessment year 2006- 2007 is partly allowed.