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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: Dr. Annie B. Road, Worli,
This appeal by the Assessee is arising out of the order of Commissioner of Income Tax (Appeals)-10, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-10/DCIT-5(2)(1)/283/2015-16 dated 28-10-2016. The Assessment was framed by the Deputy Commissioner of Income Tax, Circle 5(2)(1), Mumbai (in short DCIT) for the assessment year 2011-12 vide order dated 13-03-2015 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of expenses relatable to exempt income made by the AO by invoking the provisions of section 14A of the Narendra Ambwani (2012-13) Act read with Rule 8D of the Rules amounting to Rs. 10,44,017/-. For this assessee has raised following ground: -
“a. The learned CIT(A) erred in confirming the disallowance u/s. 14A r.w. Rule 8D of Rs. 10,44,017/- although no expenses have been incurred on earning tax free income and AO failed to establish any nexus between the expenditure incurred and the exempt income earned. b. The learned CIT(A) failed to take into consideration that the AO cannot ipso facto apply Rule 8D unless he records satisfaction on an objective basis that the assessee is unable to establish the correctness of its claim. c. The learned CIT(A) failed to take into consideration that no disallowance u/s. 14A is called for when the Appellant has not incurred and claimed any expenditure for earning the exempt income. d. The learned CIT(A) failed to take into consideration that the Assessee maintains separate books of accounts, i.e. one for personal and the other for Business purposes only. e. Without prejudice, the disallowance u/s 14A maybe restricted to the extent of Rs. 182,000/- which represents approximately 10% of the total business expenses incurred by the assessee as against the Narendra Ambwani (2012-13) disallowance of Rs 10,44,017/- which represents 60% approx. of the total business expenses.”
Briefly stated facts are that the assessee has declared dividend income of Rs. 26,85,417/- and claimed the same as exempt under section 10(34) of the Act. As there is no suo moto disallowance made by the assessee, AO computed the disallowance under Rule 8D(2)(iii) i.e. 0.5% of average investment at Rs. 10,44,017/-. Aggrieved, assessee preferred the appeal before CIT(A), who confirmed the disallowance vide Para 4.2 of his order as under: -
“4.2 I have carefully considered the facts of the case and the submissions of the Id AR. I have also gone through the decisions relied on by the AO and the ld. AR. After careful examination of the submissions made by the appellant before the AO she has not made any disallowance under limb(i) and (ii) of Rule 8D(2) but only invoked limbs (iii) of Rule 8D(2). The AO has given opportunity to the appellant to explain the expenditure relatable to exempt income. On being not satisfied with the explanation, the AO had made the disallowance by invoking provisions of s,14A r.w. Rule 8D. As per the decision in the case of Godrej & Boyce Manufacturing Company Ltd. (supra) the appellant is liable to make disallowance under sec.14A r.w. Rule 8D(2) of the AN under consideration since the appellant has made investments in the avenues yielding exempt income and Narendra Ambwani (2012-13) received dividends of Rs. 26.85 lakhs during the year. Thus, there is no dispute so far as applicability of sec. 14A r.w. Rule 8D. There is also no dispute with regard to application of limb (i) & (ii) of Rule 8D since no disallowance was made by invoking them. However, the provisions of limb (iii) of Rule 8D(2) which are general in nature are clearly applicable in appellant’s own case. Reliance is also placed on the decision in the case of escorts Ltd., 102 TTJ 522, wherein the ITAT Delhi has clearly held that indirect management and administrative expenses qualify for disallowance under section 14A and there is no decision so far by any similar forum contradicting the above findings. Similar view was also taken by ITAT Chennai in the case of Southern Petrochemical Industries (93 TTJ 161) as under: -
“…whether to invest or not to invest and whether to retain the investments or to liquidate the same very strategic decisions which the management is called upon to take. These are mind-boggling decisions and top management is involved in taking these decisions. This decision- making process is very complicated and requires very careful analysis. Moreover, the assessee had to keep track of various dividend incomes declared by the investee companies
Narendra Ambwani (2012-13) and also to keep track of the dividend income having been regularly received by the assessee. That activity itself called for considerable management attention and could not be left to a junior clerk.”
This view has been further supported by the decisions of the Hon’ble Kerala High Court in the case of Smt. Leena Ramachandran (2011) (339 ITR 293) (Kerala HC) and the latest decisions of the jurisdictional ITAT in the case of Dufon Laboratories P Ltd. (2014) 50 taxmann.com 143 and Citicorp Finance Ltd, 12 SOT 248 (Mum).”
Aggrieved, assessee is in second appeal before Tribunal.
Before us, the learned Counsel for the assessee argued that separate books of account are maintained for investment from where dividend income is earned and business carried out by the assessee. She explained that the following expenses are directly linked with the exempt income: -
Particulars Amount(₹) Management fees PMS 1,29,292 STT Paid 7,125 Service charges for shares 6,582 Service charges for MF 30,825 Commission on shares 43,979 Total 217,803 5. She explained that these expenses have not been claimed by the assessee and directly linked with the exempt income and expanded out of capital income. She further stated that the disallowance approximately 10% of the total business expenses of Rs. 18,19,217/- i.e. 1,82,000/- can
Narendra Ambwani (2012-13) be restricted under section 14A of the Act read with Rule 8D of the Rules. The learned Senior Departmental Representative heavily relied on the orders of the lower authorities.
We, after going through the facts and circumstances, are of the view that the disallowance offered by the learned Counsel for the assessee at Rs.1.82 lakhs is quite reasonable for the reason that the assessee itself has not claimed expenses of Rs. 2,17,803/- as noted above. In view of the above facts and circumstances, we are of the view that we allow the disallowance under section 14A of the Act read with Rule 8D of the Rules at Rs. 1,82,000/-. We allow the appeal partly. The appeal of the assessee is partly allowed.
In the result, the appeal of assessee is partly allowed.
Order pronounced in the open court on 16-11-2017.