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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: Shri D.T. Garasia & Shri G Manjunatha
Date of hearing 02-08-2017 Date of pronouncement 20-09-2017 O R D E R
Per G Manjunatha, AM :
This appeal filed by the assessee is directed against order of CIT(A)-4, Mumbai dated 20-12-2011 and it pertains to AY 2008-09. The assessee has raised following grounds of appeal:-
“1. The CIT (A) has erred in confirming action of assessing officer in making the disallowance u/s 14A r.w.rule 8D of Rs. 26,41,868/-. He failed to appreciate that the appellant had disallowed the entire PMS expenses of Rs. 31,80,727/- while calculating the 2 ITA 1217/Mum/2012 Business Income. He failed to appreciate that the assessing officer had wrongly considered PMS expenses for calculation of expenditure for earning exempt income u/s 14A as the expenses were in first place not considered while calculating Business Income under which dividend was claimed as exempt income. He failed to appreciate that the PMS expenses were claimed against calculation of Capital Gains which are taxable and hence disallowance u/s 14A was not required. Without prejudice to above he failed to appreciate that the assessing officer, if she wanted to disallow the PMS expenses, should have increased the capital gains calculation to the extent of PMS expenses claimed (treated by her as not allowable u/s 48) and taxed the amount at appropriate rate and she should not have disallowed PMS expenses u/s 14A as the same were never claimed against earning exempt income.
The brief facts of the case are that the assessee company, engaged in the business of investment in shares / securities, has filed its return of income for the AY 2008-09 on 06-10-2008 declaring total income of Rs.1,95,81,168. The case was selected for scrutiny and notice u/s 143(2) alongwith 142(1) of the Act were issued. In response to the notices, the authorized representative of the assessee appeared from time to time and filed details as called for. The assessment was completed u/s 143(3) on 30-11-2010 determining total income at Rs.2,22,23,035 by making addition towards disallowance of expenditure u/s 14A of the Income-tax Act, 1961. Aggrieved by the assessment order, the assessee preferred appeal before CIT(A), however, could not succeed in its 3 ITA 1217/Mum/2012 attempt as the CIT(A) has dismissed the appeal by upholding the addition made by the AO towards disallowance of expenditure u/s 14A of the Act.
We have heard both the parties and perused the material available on record. The AO disallowed portfolio management services (PMS) expenses and other indirect expenses u/s 14A of the Income-tax Act, 1961 by invoking Rule 8D(2)(i) and 8D2)(iii). The AO has disallowed PMS expenses on the ground that the portfolio management fees is in the nature of direct expenses incurred in relation to exempt income. The AO further observed that it is also not in the nature of cost of acquisition of shares / units nor in the nature of cost of improvement of a capital asset and hence, not allowable as deduction in terms of provisions of section 48 of the IT Act, 1961. In addition to the PMS expenses, the AO has worked out disallowance in respect of indirect expenses under rule 8D(2)(iii) and determined disallowance at Rs.14,05,534; however, restricted the disallowance to Rs.3 lakhs as the total expenses claimed by the assessee is only Rs.10.72 lakhs. Thus, the AO has made total disallowance of Rs.26,41,868 u/s 14A of the Income-tax Act, 1961.
The assessee claims that the AO was erred in disallowing PMS expenses u/r 8D(2)(i) as it amounts to double disallowance because the assessee itself has disallowed total PMS expenses while computing income from business, however, taken it as a deduction towards full value of consideration received as 4 ITA 1217/Mum/2012 a result of sale of shares and securities. The assessee further contended that insofar as indirect expenses of Rs.10.2 lakhs, the AO was incorrect in determining the disallowance of Rs.3 lakhs as most of its expenses are not related to the activity of investment in shares and securities which generates exempt income which is evident from the fact that out of the total expenses of Rs.10.72 lakhs, Rs.4,96,378 relates to sales-tax payment which is in no way connected with the investment activity of the assessee. The assessee further referring to the paper book filed submitted that the AO has worked out disallowance towards indirect expenses @0.5% of the total value of investments; however, computed incorrect amount of total investments. The assessee further submitted that if the AO wanted to disallow PMS expenses, he should have increased the capital gain calculation to the extent of PMS expenses claimed and taxed the amount at the appropriate rate. Since the AO has not done proportionate working of PMS expenses to the dividend income and income from capital gain, further disallowance of PMS expenses u/r 8D(2)(i) amounts to double disallowance which is incorrect.
Having heard both the sides and considered the material on record we find force in the arguments of the assessee for the reason that the assessee itself has disallowed total PMS expenses while computing income under the head “Income from business”. The assessee has filed paper book explaining
5 ITA 1217/Mum/2012 computation of income under the head “Income from business” and computation of income under the head “Income from capital gains”. The assessee has debited total PMS expenses of Rs.31,80,727 which is included in miscellaneous expenses in the P&L Account. We observe that in the statement of total income, the assessee has disallowed PMS expenses of Rs.31,80,727.
We further observe that the assessee has claimed deduction towards total PMS expenditure as part of cost of acquisition of shares and reduced from the total sale consideration to arrive at short term capital gain. Therefore, we are of the view that the AO was incorrect in disallowing PMS expenses of Rs.23,41,868 by invoking Rule 8D(2)(i) of I.T. Rules, 1962.
Having said so, let us examine what is the total disallowance that requires to be made u/r 8D(2)(i). It is an admitted fact that the assessee has done its investments through portfolio managers and paid management fee of Rs.31,80,727. The assessee has earned substantial income from investments in shares from PMS in the form of capital gain as well as dividend income. The expenditure incurred under the head ‘PMS’ is attributable to both, income from short term capital gain’ as well as ‘income from dividend’. Therefore, the expenditure incurred in the nature of PMS expenses should be allocated proportionately towards income from capital gain as well as income from dividends.
6 ITA 1217/Mum/2012 7. Insofar as other expenses, the AO has determined disallowance of indirect expenses by invoking Rule 8D(2)(iii) and worked out disallowance of Rs.14,05,534; however, restricted the disallowance to the extent of Rs.3 lakhs in view of the fact that the assessee has incurred indirect expenses of only Rs.10.72 lakhs. The assessee claims that out of the total indirect expenses of Rs.10.72 lakhs, a sum of Rs.4,96,375 relate to sales-tax payment which has no bearing on the investment activity of the assessee. If sales-tax payment is excluded from the total payment of indirect expenses of Rs.10.72 lakhs, the disallowance worked out by invoking Rule 8D(2)(iii) is excessive. We find force in the arguments of the assessee for the reason that though disallowances provided u/s 14A has to be worked out as per Rule 8D(2), the AO should take into account the total expenditure incurred by the assessee. In this case, the AO has worked out the disallowance which worked out to more than the exempt income earned by the assessee. At any point of time, the disallowance of expenditure incurred in relation to exempt income should not exceed the exempt income. Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of the discussion hereinabove and hence, we set aside the issue to the file of the AO and direct him to recomputed the disallowance of expenditure in relation to exempt income as provided u/s 14A of the Act. However, while computing the disallowance of 7 ITA 1217/Mum/2012 direct expenses, the PMS expenses incurred by the assessee should be proportionately allocated to dividend income and capital gains. In respect of indirect expenses, the AO is directed to exclude the expenses which has no bearing on the investment activity of the assessee. 8. In the result, appeal filed by the assessee is allowed, for statistical purpose. Order pronounced in the open court on 20th September, 2017.