ABHUDAYA CO-OP BANK LTD,MUMBAI vs. DCIT- 1(1)(1), MUMBAI

However, ld. Assessing Officer rejected the assessee’s explanation on the following reasons:- “1. The assessee's suo-moto offering of disallowance u/s 14A itself suggests that the provisions of section 14A are applicable its case 2. The disallowance u/s 14A computed by the assessee is computed without any sound basis and reasoning and is ad-hoc in nature 3. As per, the CBDT circular No. 5/2014 dated 11.02.2014 it has been stated that disallowance of expenditure for earning exempt income u/s 14A read with Rule 8D would be attracted even if the corresponding exempt income has not been earned during the financial year 4. The term expenditure occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative, managerial or financial. The Abhyudaya Co-operative Bank Ltd. Phraseology used in section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with the exempt income. This is based on the principle that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income. 5. Therefore, ad-hoc disallowance u/s 14A of Rs.62,590/- worked out by the assessee company is not acceptable as meagre expenditure has been considered for earning of Rs 22,97,90,439/- as exempt income, which is not justifiable.

The ld. AO then proceeded to work out the disallowance under Rule 8D(2) of Rs.2,82,49,114/-. The ld. CIT (A) has also confirmed the addition.

Before us ld. Counsel submitted that assessee is a bank and is required to make investment in tax free bonds in Government securities as per RBI requirements for maintenance of statutory liquidity ratio. All these investments are handled by Treasury department of the bank and during the year no fresh investments were made rather some of the investments were sold. He further pointed out in A.Y.2012-13 similar show-cause notice was issued by the AO for disallowance u/s.14A and in response, assessee had given some calculation based on Abhyudaya Co-operative Bank Ltd. calculation of man hours involved by the Treasury department and other expenses to work out the disallowance u/s.14A. The same working has been accepted by the ld. AO after examining the expenses and thereafter, this working of disallowance always has accepted by the Assessing Officers not only in the A.Y. 2012- 13 and also in subsequent years. Based on past precedents, this year also assessee has given the working which is as under:- Calculation of disallowance u/s 14A of Income Tax Act, 1961. Computation of Proportionate Admin Cost Financial Year - 2017-18 TOTAL MAN HRS USED FOR MAKING - INVESTMENT IN TAX FREE BONDS (0 INVESTMENTS * 1 MAN DAY PER INVESTMENTS * 3 STAFF PER INVESTMENT* - 8 HRS) TOTAL MAN HRS USED FOR SALE OF TAX 8.00 FREE BONDS (8 INVESTMENTS * 1 MAN DAY PER INVESTMENTS * 2 STAFF PER INVESTMENT* 0.5 HRS) TIME SPENT ON MAINTAINANCE OF 44.00 INVESTMENT (0.5 HRS PER INVESTMENT * 8 24.00 INESTMENTS* 11 TIMES) (0.5 HRS PER INVESTMENT * 4 INESTMENTS* 12 TIMES) (a) TOTAL HOURS SPENT 76.00 TOTAL HOURS (235 WORKING DAYS * 8 HRS 37,600.00 (b) PER DAY*20 STAFFS) TOTAL EXPENSES 30,965,338.20 (c) PROPORATINATE EXPENSE 62,589,51 (c/ b*a Abhyudaya Co-operative Bank Ltd. Administrative cost of Treasury Dept. Rs. Particulars Amount (17-18) Salary 20,816,654.00 Postage, Telephone & Courier charges 120,514.34 Printing & Stationary 6,128.68 Repairs & Maintenance 980,955.19 Travelling & Conveyance 24,390.00 Misc Expense 8,474,896.17 Audit Fees 135,000.00 Professional fees 7,000.00 DEPRECIATION 399,799.82 Total Administrative Cost 30,965,338.20

Thus, he submitted that once such kind of working which has given almost appropriate allocation of expenses towards earning of exempt income and investment activity, then without finding any defect in such working, ld. AO cannot proceed to make the disallowance under Rule 8D. Therefore, the disallowance made by the ld. AO should be deleted.

On the other hand ld. DR strongly relied upon the order of the ld. AO and ld. CIT(A) and submitted that once assessee has earned exempt income and if ld. AO has rejected the suomoto Abhyudaya Co-operative Bank Ltd. disallowance made by the assessee, then he is required to compute the disallowance under Rule 8D. 10. After hearing both the parties and on perusal of material placed on record and the finding given by the authorities below, we find that, first of all, assessee had duly given its working of disallowance of Rs.62,590/- as per the method given above. Admittedly, such working of the disallowance has been accepted by the department since A.Y.2011-12 to 2017-18. This year also assessee had given its detailed working and pointed out that there were no investments activity in this year and therefore, for selling of the investments in this year, the working given by the assessee which is based on total man hours used by the Treasury department is most reasonable having regard to the accounts maintained by the assessee and looking to the nature of expenditure debited. The ld. AO in his order has nowhere tinkered with such working and has simply rejected that it is an adhoc disallowance and it is a very meager expenditure for earning exempt income of Rs.22.97 Crores. Nowhere, he has pointed out that what is the defect in such working and why it is not accepted having regard to the accounts or the expenses debited and why the proportionate expenses allocated for sale of tax free bonds is not acceptable so as to justify such a huge disallowance. AO has not pointed out as which other expenditure can be said to be attributable for earning of exempt income. Accordingly, application of Rule 8D without recording proper satisfaction by the AO cannot be made. Thus, the disallowance made by the ld.AO and as confirmed by ld. CIT(A) is deleted.

In the result, appeal of the assessee is allowed.