SEAWIND INVESTMENTS AND TRADING CO.LTD,MUMBAI vs. ASST CIT RG 1(3), MUMBAI

2. Facts leading to the dispute are that the assessee, being resident corporate assessee engaged in trading, investment & Neem Plantation, was assessed for impugned AY u/s 143(3) at Rs.1,29,99,257/- under normal provisions before set-off of brought forward losses and at Rs.1,07,39,856/- u/s 115JB as against returned income of Rs.57,85,040/- filed by assessee on 20/10/2004. Since assessee earned exempt dividend income of Rs.120.27 Lacs against investment in Shares / mutual funds etc. for Rs.75.38 crores, it made suo-moto disallowance of Rs.32.17 Lacs u/s 14A against the same which was computed as per ratio of exempt income to total income. To have better understanding of the working done by assessee during the impugned AY, the total expenses and income reflected in the Profit & Loss Account are tabulated below:-

The Assessee suffered another disallowance to the extent of 90% of balance expenditure of Rs.24.61 Lacs out of management expenses & other expenses, as the same, in the opinion of Ld. AO, remain Seawind Investments and Trading Co. Ltd Assessment Year-2004-05 unsubstantiated and the assessee failed to show any receipt of service against those expenses. The disallowance thus worked out was Rs.22.15 Lacs.

The third issue, in the appeal is related with computation of book profit u/s 115JB. The assessee, although deducted exempt income while arriving at book profits u/s 115JB but did not added back the disallowance u/s 14A, which, in the opinion of Ld. AO was includible in view of the fact that the assessee deducted exempt income while computing the book profits. Accordingly, the disallowance of Rs.82.16 Lacs worked out by AO was added back to arrive at book profits u/s 115JB.

The assessee contested all the additions / disallowances before Ld. CIT(A) without any success vide impugned order dated 18/08/2010, against which the assessee in appeal before us. The Ld. CIT(A), in the said order directed the Ld. AO to apply Rule 8D, being retrospective in nature to arrive at disallowance u/s 14A. The disallowance u/s 37(1) and adjustment to book profits u/s 115JB were confirmed by the Ld. CIT(A).

The Ld. Counsel for assessee [AR] while drawing our attention to the documents placed in the paper-book, contended that similar issue of interest disallowance cropped up in assessee’s own case for AY 2001- 02 & 2002-03 and the Tribunal in both the years have settled the issue partly in favor of assessee and therefore, following the same, view could be taken in the impugned matter so far as disallowance u/s 14A was concerned. Qua disallowance of Rs.22.15 Lacs from management fees / other expenses u/s 37(1), the Ld. AR contended that the assessee did not have any space or manpower of its own and therefore availed the ITA No.7841/M/2010 Seawind Investments and Trading Co. Ltd Assessment Year-2004-05 services from its parent / associated concern namely Bombay Burmah Trading Corporation Limited and paid all those expenses and therefore, allowable to the assessee. Moreover, the assessee incurred certain expenses against Neem plantation business which has been capitalized in the books of account and hence, the expenditure claimed in the profit & loss account was fully justifiable.

Per contra, Ld. DR placed reliance on the findings of Ld. CIT(A) and contended that the assessee paid heavy management fees of Rs.33.60 Lacs to its associated concern but could not demonstrate receipt of any service against those fees. Moreover, no agreement in this regard could ever been produced by the assessee and therefore, rightly been disallowed since the assessee was mainly engaged in Shares Trading business only and as much as more than 30% of the total income earned by the assessee were by way of exempt dividend income.

We have heard rival contentions and perused relevant material on record. It is noted that the issue of interest disallowance arose in assessee’s own case for 2001-02 & 2002-03 which reached up-to the level of Tribunal. A perusal of Tribunal’s order for AY 2001-02 order dated 28/06/2007 reveals that the since the assessee acquired the additional shares between 27/02/2001 and 23/03/2001, Tribunal directed the AO to restrict the interest disallowance for this period only. Further, Tribunal in ITA No. 6528/Mum/2004 for AY 2002-03 order dated 21/02/2008, confirmed the action of Ld. CIT(A) in computing the said disallowance by applying average cost of unsecured loans excluding zero percentage investment bond to additional purchase ITA No.7841/M/2010 Seawind Investments and Trading Co. Ltd Assessment Year-2004-05 of shares during FY 2001-02 for Rs.8,98,74,155/-. We find the same to be a reasonable / plausible view and inclined to follow the judicial precedent. We find that the assessee has paid interest of Rs.71,25,923/- during impugned AY and unsecured loans as on 31/03/2004 as per financial statements produced before us, stood at Rs.980.25 Lacs which translates into average cost of fund being 7.27%. Applying the same to the figures of additional investment in shares for Rs.898.74 Lacs, the disallowance thus works out to be Rs.65.33 Lacs, which the assessee shall suffer and which is fair and reasonable also keeping in view the capital structure of the company as on 31/03/2004 which is as follows:- Liabilities Amount (Rs. in Lacs) Assets Amount (Rs. in Lacs) Shareholders’ Fund 78.20 Fixed Assets 8.97 Loan Funds 7585.05 Investments 7538.95 Net Current Assets 67.72 Profit & Loss A/c 47.61 TOTAL 7663.25 7663.25 We find that against loan funds of Rs.7585.05, investments stands at Rs.7538.95 Lacs and both these items constitute substantial liabilities and assets respectively of the assessee company. This being the factual position, we confirm the interest disallowance u/s 14A to the extent of Rs.65.33 Lacs, as worked out in the above manner.

So far as the disallowance of management fees / other expenses is concerned, whether u/s 14A or u/s 37(1), we are of the opinion that whatever are the expenses, they should, at the threshold, first pass the test of laid out or expended wholly and exclusively for the purpose of business as envisaged by Section 37(1). Upon perusal of factual matrix, we find that these expenses have remained unsubstantiated at all levels. Even before us, the Ld. AR could not provide the details of management Seawind Investments and Trading Co. Ltd Assessment Year-2004-05 fees of Rs.33.60 Lacs and also could not prove the factum of actual receipt of any services backed by any agreement / arrangement and made a simple assertion that the same were mere reimbursement in nature, with which we are not convinced as identical expense of Rs.33.60 Lacs has been claimed in the immediately preceding year also. It could also not be shown whether TDS provisions were complied with against the payment of management fees. Therefore, on the facts of the case, we deem it fit to restore the matter back to the file of Ld. AO for verification of the expenses claimed by the assessee and re-adjudicate the matter of their admissibility u/s 37(1) and 14A. The assessee is also directed to substantiate his claim forthwith in this regard failing which the Ld. AO shall be at liberty to decide the issue on the basis of material available on record. Accordingly, Ground Nos. 1 & 2 of assessee’s appeal stands partly allowed.

So far as the adjustment of Section 14A disallowance from book profits u/s 115JB is concerned, Ld. AR brought to our notice the fact that in view of contrary Tribunal decisions, the matter is pending with the Special Bench but fairly conceded that at present, the matter stood covered against the assessee by the judgment of Hon’ble Delhi High Court in CIT Vs Federal-Mogul Goetze (India) Ltd. ITA No 1979/2010 order dated 09/12/2013, which we have considered. This being the factual position, respectfully following the decision of Hon’ble Delhi High Court, this issue stands decided against the assessee. Even otherwise, the assessee has deducted exempt income while arriving at book profits u/s 115JB and therefore there was no logic not to adjust the related Seawind Investments and Trading Co. Ltd Assessment Year-2004-05 expenses in the similar manner. Accordingly, this ground of assessee’s appeal stands dismissed.

The Ld. AO is directed to re-compute income of the assessee under normal provisions as well as under Section 115JB and also rework brought forward / set-off of losses, if required.

In nutshell, the assessee’s appeal stands partly allowed.