DAMANI SHIPPING PVT LTD.,MUMBAI vs. ACIT CIR-2(1)(1), MUMBAI

In this appeal, the assessee has raised the following grounds:-

The only dispute raised by the assessee is against the disallowance of expenditure computed by the Revenue under section 14A of the Act.

The brief facts of the case pertaining to this issue, as emanating from the record, are: The assessee is engaged in the business as a customs house agent. For the year under consideration, the assessee filed its return of income on 29/09/2013 declaring a total income of Rs. 5,15,46,140. The return filed by the assessee was selected for scrutiny and statutory notices under section 143(2) as well as section 142(1) of the Act were issued and served on the assessee. During the first round of assessment proceedings, it was noticed that the assessee has earned a dividend income of Rs. 1,11,57,291, i.e. dividend on mutual funds of Rs.1,07,47,843 and dividend from Indian companies of Rs.4,90,448, and the same has been claimed as exempt by the assessee. It was further noticed that the assessee has made suo moto disallowance of Rs.2,03,999 under section 14A of the Act while computing its total income. Since the disallowance computed by the assessee is not as per

The Assessing Officer (“AO”) vide order dated 25/02/2016 passed under section 143(3) of the Act did not agree with the submissions of the assessee and held that the assessee has not submitted any document to establish that all the investments which yield exempt income were managed by the Wealth Management services and that no investments were managed by the assessee itself. The AO further held that some resources of the assessee must have been used for making the investments. Accordingly, the AO computed the disallowance of Rs.18,21,811 under section 14A read with Rule 8D after considering the suo moto disallowance offered by the assessee. In further appeal, the learned CIT(A) dismissed the ground raised by the assessee on this issue and upheld the disallowance made by the AO under section 14A read with Rule 8D. The coordinate bench of the Tribunal vide order dated Page | 3

Following the directions of the coordinate bench, the AO granted the opportunity of hearing to the assessee and issued notice under section 142(1) of the Act. In response thereto, the assessee submitted that the only expense incurred to earn tax-free income is the management fees paid of Rs.2,03,999, which has been disallowed in the computation of income. The AO vide order dated 17/12/2019 passed under section 143(3) read with section 254 of the Act did not agree with the submissions of the assessee and held that the assessee is having non-current investment of Rs.38,67,85,915 as on 31/03/2013 and Rs.37,84,48,458 as on 31/03/2012, however, the assessee has not produce any documentary evidence to prove that assessee’s staffs, offices, and infrastructures are not at all used in any way for managing the investments. The AO further held that the assessee has incurred expenditures on electricity, legal and professional expenses, and office expenses which are common expenses and need to be apportioned for the purpose of managing investments, which could potentially yield exempt income. The AO further noted that the dividend income constitutes 3.49% of the total receipts of the assessee, while the expenses suo moto disallowed by the assessee under section 14A of the Act is only 0.08% of the total expenses in the Profit and Loss account. The AO held that it is satisfied that the disallowance under section 14A as per Rule 8D has to be made and disallowance made by the assessee is not as per Rule 8D of the Rules. Accordingly, the AO computed the disallowance of Rs.18,21,811 under section 14A read with Rule 8D(2)(iii) of the Rules. Page | 4

The learned CIT(A), vide impugned order, dismissed the ground raised by the assessee on this issue and upheld the disallowance made by the AO under section 14A read with Rule 8D. Being aggrieved, the assessee is in appeal before us.

We have considered the submissions of both sides and perused the material available on record. In the present case, it is undisputed that the assessee has earned dividend income on mutual funds of Rs.1,07,37,843 and dividend on shares from Indian companies of Rs.4,19,448, which has been claimed as exempt under section 10(34) of the Act. In this regard, the assessee suo moto computed the disallowance of Rs.2,03,999 under section 14A of the Act, while computing its total income. It is the claim of the assessee that it has availed the services of HDFC Asset Management Co Ltd in respect of investment in shares of various Indian companies and paid management fees, which has been offered for disallowance under section 14A of the Act. It is further the plea of the assessee that apart from the aforesaid expenditure no other expenditure has been incurred by the assessee for earning the dividend income. As per the assessee, the investment in mutual funds constitutes 92% of the total investment, for which no expenditure has been incurred by it which requires disallowance under section 14A of the Act.

From the record, it is evident that the only dispute, in the present case, pertains to the disallowance of Rs.18,21,811 computed by the AO under section 14A read with Rule 8D(2)(iii) of the Rules. Admittedly, while computing the aforesaid disallowance, the AO has only considered the exempt income- yielding investments. It is the plea of the assessee that the disallowance under Page | 5

In the present case, the disallowance computed by the AO under Rule 8D(2)(i) is the suo moto disallowance offered by the assessee, which is the management fees paid for Wealth Management services. Further, it is undisputed that the AO has not computed any disallowance under Rule 8D(2)(ii) of the Rules. Under Rule 8D(2)(iii) of the Rules, expenditure in relation to income which does not form part of the total income was computed by the AO in the present case. It is pertinent to note that Rule 8D(2)(iii) of the Rules provides a computation mechanism whereby 0.5% of the average value of investment, income from which does not form part of the total income, as appearing in the balance sheet on the first and last day of the previous year is considered as the expenditure for the purpose of section 14A of the Act. Accordingly, the AO computed disallowance of Rs.18,21,811, being 0.5% of Rs.36,43,62,204 under section 14A read with Rule 8D.

During the hearing, the learned Authorised Representative for the assessee placed reliance upon the decision of the coordinate bench of the Tribunal in DCIT v/s Reliance Capital Asset Management Ltd., ITA No.8625/Mum./2010, dated 17/10/2014. From the perusal of the aforesaid decision, we find that the taxpayer was making the investment mainly in various schemes of Reliance mutual fund and also in other group concerns.

Therefore, in view of our aforesaid findings, we find no infirmity in the impugned order upholding the disallowance under section 14A read with Rule 8D(2)(iii) of the Rules. Accordingly, the impugned order is upheld. Further, the levy of interest under section 234B of the Act is consequential in nature. As a result, the grounds raised by the assessee are dismissed.