DCIT, CIRCLE-5(1), KOLKATA, KOLKATA vs. M/S SHREE CAPITAL SERVICES LTD., KOLKATA

D.C.I.T., Circle-5 (1) . -vs.- Shree Capital Services Ltd. Kolkata Kolkata [PAN : AAGCS 5082 D] (Respondent) (Appellant) Assessment Year : 2010-11 Shree Capital Services Ltd. -vs- D.C.I.T., Circle-5(1), Kolkata Kolkata [PAN : AAGCS 5082 D] (Respondent) (Appellant) For the Department : Shri Saurabh Kumar, Addl. CIT, For the Assessee : Shri Navin Verma, AR Date of Hearing : 07.05.2018 Date of Pronouncement : 15 .05.2018 ORDER Per Shri M.Balaganesh, AM

2 and 1808/Kol/2017 Shree Capital Services Ltd. A.Yr.2010-11 3. The brief facts of this issue is that the assessee is a non banking finance company (NBFC) engaged in the business of truck hiring, renting, financing and investment in shares and securities. The assessee earned dividend income of Rs.14,70,96,573/- and claimed the same as exempt. The ld. AO observed that the assessee had made huge investments as on 31.03.2010 and the average investments was worked out at Rs.113,90,02,815/-. The assessee made disallowance of Rs.5,13,033/- on account of expenses linked to exempt income u/s 14A of the Act in the return of income. The ld. AO proceeded to compute the disallowance under first and third limb of Rule 8D(2) of the Rules as under :- Under Rule 8 (2) (i) : Rs. 1,05,692/- Under Rule 8D(2)(iii) : Rs.56,95,014/- Rs.58,00,706/- The ld.AO added the said disallowance amount of Rs.58,00,706/- u/s 14A of the Act while computing the book profits u/s 115JB of the Act and a sum of Rs 51,81,981/- under normal provisions of the Act. The ld CITA upheld the action of the ld AO of disallowance u/s 14A of the Act in the sum of Rs 51,81,981/- under normal provisions of the Act. However, the ld CITA deleted the disallowance of Rs 58,00,706/- u/s 14A of the Act while computing the book profits u/s 115JB of the Act, by placing reliance on the decision of this Tribunal in the case of Integrated Coal Mining Ltd vs DCIT in ITA No.1146/Kol/2012 dated 30.11.2015; among other decisions. Aggrieved both assessee as well as the revenue are in appeal before us on the following grounds :- Assessee’s grounds of appeal

“1.0 That on the facts and in the circumstances of the case, the Ld CIT (Appeals) was not justified and erred in upholding the disallowance of Rs. 51,81,981/- being notional expenses incurred towards earning exempt income u/ s 14A as computed by applying Rule 8D, without appreciating the fact that actual expenditure incurred towards earning exempt income has already been added back by appellant while computing Total Income.

3 and 1808/Kol/2017 Shree Capital Services Ltd. A.Yr.2010-11 2.0 That on the facts and in the circumstances of the case, the Ld. CIT(Appeals) was not justified in upholding the action of the AO in applying Rule 8D on the basis of wrong finding of fact that appellant has offered disallowance u/ s 14A on adhoc basis.

3.0 That on the facts and in the circumstances of the case and without prejudice to Ground No. 1.0 & 2.0 taken here-in-above, necessary directions may be given to AO. to compute disallowance u/s 14A as per Rule 8D by excluding investments in group companies which have been made for the purpose of acquiring controlling stake and for business expediency and not for the purpose of earning exempt income.

4.0 That on the facts and in the circumstances of the case and without prejudice to Ground No. 1.0 & 2.0 taken here-in-above, necessary directions may be given to AO. to compute disallowance u/s 14A read with Rule 8D(2)(iii) by excluding the investment made in bonds the income from which forms part of total income.

5.0 That the appellant craves leave to add, amend, modify, rescind, supplement or alter any of the grounds stated here-in-above either before or at the time of hearing of the appeal.

Revenue’s grounds of appeal

1. "Whether on the facts and in the circumstances of the case, the Ld.ClT(A) erred in considering disallowance u/s.14A of the I.T.Act. read with Rule 80 while computing book profit u/s. 115JB on the basis of some judicial decisions favouring the assessee's case."

2. "Whether on the facts and in the circumstances of the case, the Ld.ClT(A) erred in not considering the judicial decisions in favour of Revenue of disallowance u/s. 14A while computing book profit u/s.115JB.

3. "Whether on the facts and in the circumstances of the case, the Ld.ClT(A) erred in allowing the contention of the assessee regarding the taxability of book profit u/s.115JB.. “

4. "That the appellant craves for leave to add, delete amend or modify any ground before or at the time of appellate proceedings."

4 and 1808/Kol/2017 Shree Capital Services Ltd. A.Yr.2010-11 in the instant case. We find that the assessee had already disallowed a sum of Rs.5,13,033/- u/s 14A of the Act under normal provisions of the Act. The assessee has also disallowed the direct expenses of Rs.1,05,692/- representing Security Transaction Tax (STT) separately in the return of income. Hence there is no need to again disallow the same u/s 14A r.w.r. 8D(2)(i) of the rules. We direct the ld. AO to delete the same accordingly. We find that the total common indirect expenses of the assessee are as under :- a) Staff cost : Rs.22,94,975/- b) Administrative expenses : Rs.29,96,994/- Rs.52,91,969/- The assessee had given the workings for disallowing Rs.5,13,033/- u/s 14A of the Act by identifying the staff cost paid to Mr.S.K.Rathi and taking 25% of printing and stationery as common expenses. This, in our considered opinion, does not suit the purpose behind introduction of section 14A of the Act and computation mechanism provided under Rule 8D is to be invoked in the instant case, in as much as the workings of disallowance of 14A of the assessee are improper and incomplete. We hold that only investments that had yielded dividend income are to be considered for the purpose of computing disallowance under the third limb of Rule 8D(2) of the rules in consonance with the decision of this Tribunal in the case of REI Agro Ltd vs DCIT 144 ITD 141 (Kol). However, while computing such disallowance, the amount already disallowed by the assessee in the sum of Rs.5,13,033/- should be reduced. We also hold that the disallowance of indirect expenses under the third limb, cannot by any stretch of imagination exceed the total indirect expenses debited by the assessee in its profit and loss account. The total indirect expenses debited by the assessee in the profit and loss account is Rs.52,91,969/-. In view of this we hereby direct the ld. AO to re-compute the disallowance under the third limb of Rule 8D(2) by considering 0.5% of the dividend bearing investments as reduced by Rs.5,13,033/- subject to maximum of total indirect

5 and 1808/Kol/2017 Shree Capital Services Ltd. A.Yr.2010-11 expenses of Rs.52,91,969/- under the normal provisions of the Act. Accordingly grounds raised by the assessee are allowed for statistical purposes. Now let us take up the revenue’s appeal.

5. The only issue to be decided in this appeal is as to whether disallowance u/s 14A of the Act can be made while computing the book profits u/s 115JB of the Act.

by the revenue are partly allowed.

6. In the result, the appeal of the assessee is allowed for statistical purposes and appeal of the revenue is partly allowed.

Order pronounced in the Court on 15.05.2018