MIRC ELECTRONICS LTD,MUMBAI vs. ASST CIT CEN CIR 36, MUMBAI

Aggrieved by the assessment order dated 28-03-2014 passed by the AO u/s 143(3), the assessee filed first appeal before the learned CIT(A). During the course of appellate proceedings ,the assessee submitted that assessee has suo-motto disallowed the sum of Rs.34,692/- on account of expenditure incurred to earn exempt dividend income being Rs.0.5% of salary of General Manager(Finance). The assessee contended that no expenses were incurred apart from Rs.34,692/- to earn dividend income of Rs.44,69,167/-. It was submitted that tax auditor of the assessee had also concurred with the view of the assesee that the cost of allocation done was reasonable . The assessee relied upon the decision of the Hon’ble Madhya Pradesh High Court in the case of State Bank of Indore v. CIT 275 ITR 23 wherein it has been held that no notional expenditure can be taken into consideration for the purpose of disallowance of expenses attributable to earning of exempt income. The assessee also relied on the decision of the Hon’ble Punjab and Haryana High Court in the case of CIT v. Hero Cycles 323 ITR 518(P&H). It was submitted that the disallowance u/s 14A requires finding of incurring of expenditure by the assessee. It was submitted by the assessee that Rule 8D r.w.s. 14A can be invoked only when the A.O is not satisfied about the correctness of the claim of the assessee and since A.O has not recorded dissatisfaction no disallowance can be made by invoking Rule 8D r.w.s. 14A. It was submitted that the investment in Akash Electronics to the tune of 2624.85 lakhs is in subsidiary company/sister concern of the assessee which investment was made for increasing business of the assessee in domestic industry , thus this investment is for the purpose of the business and not with the intention to earn dividend income. It was submitted that the AO included this investment also for making disallowance u/s 14A of the Act r.w.r. Rule 8D(2)(iii) . The assessee relied upon decision of the tribunal in the case of Garware Wall Ropes Limited (ITA no. 5408/Mum/2012 ) and ACIT v. Spray Engineering Devices Limited (ITA no. 646/Chd/2009) . The learned CIT(A) rejected the contention of the assessee and upheld the disallowance of 0.5% of the average value of investments as is contemplated u/r 8D(2)(iii) r.w.s. 14A. The learned CIT(A) relied upon the decision of the Hon’ble Delhi High Court in the case of Maxoop Investment Ltd. v. CIT 347 ITR 272(Del) to hold that investments in subsidiary companies/strategic investments shall also be included for the purposes of computing disallowance u/s 14A . The learned CIT(A) also observed that assessee has incurred personnel expenses to the tune of Rs.92.25 crores, other/administrative expenses by the way of rent of Rs. 7.8 crores , rates and taxes to the tune of Rs. 4.44 crores and miscellaneous/administrative expenses to the tune of Rs. 30.85 crore which included professional fee of Rs. 3.20 crores, Printing and stationary expenses of Rs. 1.21 crore, tax-audit fee of Rs. 4 lacs , auditors remuneration of Rs. 4.68 lacs, internal audit fee of Rs. 22.2 lakhs, sitting fee of Rs.1.25 lakh etc which is attributable to the investment activity carried out by the assessee. It was observed by learned CIT(A) that assessee has only voluntarily disallowed Rs.34,692/- by applying formula of 0.5% to GM(Finance) salary which is inappropriate and thus the additions were upheld by learned CIT(A) u/s.14A r.w.r. 8D(2)(iii) to the tune of 0.5% of average value of investments as was done by the AO and the appeal of the assessee was dismissed by learned CIT(A).

Aggrieved by the decision of learned CIT(A) , the assessee has come in appeal before the tribunal . The ld. Counsel for the assessee submitted that disallowance at the rate of 0.5% of average value of investments has been made under Rule 8D(2)(iii) r.w.s. 14A by the authorities below which led to the disallowance of Rs. 16,67,098/- wherein the assessee has voluntarily disallowed Rs.34,692/- by applying disallowance @0.5% of salary of GM(Finance). It was submitted that for A.Y 2008-09 vide vide orders dated 29-05-2015 in assessee’s own case , the tribunal has held that since the AO has not brought on record that the assessee has incurred any expenditure for earning of exempt income other than disclosed in the return of income , no disallowance can be made u/s 14A. It is also submitted that for A.Y. 2010-11 , the tribunal has decided the issue vide ITA no. 4573/Mum/2014 vide orders dated 05.12.2016 in assessee’s own case, wherein further disallowance of Rs.50,000/- u/s 14A was upheld by the tribunal . The said orders of the tribunal are placed on record by the learned counsel for the assessee. The ld. DR on the other hand relied upon the order of the learned CIT(A)/AO .

We have considered rival contentions and we have perused the material on record including cited case laws and orders of the authorities below. We have observed that the assessee is engaged in the business of manufacturing of TV sets. It is also trading in certain FMCG . The assessee is also manufacturing washing machine and air conditioners. The assessee has earned dividend income of Rs.44,69,167/- which has been claimed as exempt from tax u/s 10(34). The assessee has voluntarily offered disallowance of Rs. 34,692/- u/s. 14A of the Act computed on the basis of 0.5% of salary of GM(Finance) and it is claimed by the assessee that this is the only expenses incurred by the assessee. The A.O invoked Rule 8D r.w.s.14A and made disallowance of Rs.16,67,098/- . We have observed that learned CIT(A) considered various heads of expenses incurred by the assessee which are in the nature of personnel expenses to the tune of Rs.92.25 crores, other/administrative expenses by the way of rent of Rs. 7.8 crores , rates and taxes to the tune of Rs. 4.44 crores and miscellaneous/administrative expenses to the tune of Rs. 30.85 crore which included professional fee of Rs. 3.20 crores, Printing and stationary expenses of Rs. 1.21 crore, tax-audit fee of Rs. 4 lacs , auditors remuneration of Rs. 4.68 lacs, internal audit fee of Rs. 22.2 lakhs, sitting fee of Rs.1.25 lakh etc to uphold the disallowance based on Rule 8D(2)(iii) r.w.s. 14A after arriving at the conclusion that the claim of the assessee of applying 05% to salary of GM(Finance) to arrive at disallowance u/s 14A is not correct. We have observed that during the year under consideration, investments held by the assessee at the beginning of the year was Rs.40.14 crore which has come down to Rs.26.54 crores as at the end of the year. The assessee has sold the investments during the year which comprised mutual fund which mainly led to fall in investments held by the assessee as at year end vis-a-vis held at the beginning of the year. The assessee has offered disallowance computed @0.5% of the salary of GM ( Finance) u/s. 14A . The tribunal in the preceding year i.e. AY 2010-11 has held further disallowance of Rs. 50,000/- towards administrative expenses will meet the end of the justice. The authorities below have not gone deeply into the accounts and affairs of the assessee to find out who all were responsible for handling investments and to identify the expenditure/cost incurred towards the earning of the exempt income . The authorities below did not call for minute books of directors/shareholders , copies of resolutions, investment records , books of accounts and no information were called from the investee company/entity who holds investment in demat mode, even it was not considered appropriate to record statements of the Company Secretary/Directors and/or other persons incharge of investments by the authorities below as also to delve deeply into accounts to arrive at the conclusion that the claim of the assessee in making disallowance u/s 14A is incorrect and resort has to be made to Rule 8D in the midst of incorrect claim of the assessee. Rather, a superficial examination of the expenses of the company was made by the learned CIT(A) to justify that formula prescribed in Rule 8D(2)(iii) is to be applied and claim of the assessee is not correct. The assessee is mainly dealing in the electronics products and has turnover of more than Rs.2000 crores during the impugned assessment year and exempt dividend income is merely Rs. 44.69 lacs as against the investment of Rs. 26.54 crores held at the end of the year. The assessee has undertaken activity/transactions of sale of mutual funds during the previous year relevant to the impugned assessment year which led to decline in investment as at year and necessarily expenses must have been incurred towards undertaking these transaction / activity of sale of mutual fund. Under these circumstances and keeping in view tribunal decisions in the preceding years in assessee’s own case , thus , in order to maintain consistency and judicial discipline , end of justice will be met in the instant case if further disallowance of expenditure u/s 14A is kept at an additional amount of Rs.1,00,000/- towards administrative/misc. expenses to be added to the income of the assessee . This is in view of the non recording of proper satisfaction by the authorities below as to the incorrectness of the claim of the assessee’s claim and also this disallowance u/s 14A so upheld by us is in consonance with the decision of Hon’ble Supreme Court in the case of Godrej and Boyce Manufacturing Company Ltd. v. DCIT (2017) 394 ITR 449(SC). We order accordingly.