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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI JOGINDER SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2008-09. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)- 18, Mumbai and arises out of the order u/s 143(3) of the Income Tax Act,1961 (the ‘Act’).
The grounds of appeal filed by the assessee read as under:-
i. The Commissioner of Income Tax (Appeals) erred in law in confirming the disallowance of Rs. 1,89,07,310/- u/s 14A of the Income tax Act, 1961 in addition to disallowance of Rs. 76,29,734/- as admitted by the appellant itself. ii. He failed to appreciate that mechanical disallowance as made by AO u/s 14A r.w.r. 8D without considering the facts of the case is totally unjustified. iii. The appellant prays that the disallowance u/s 14A as computed by the AO mechanically following Rule 8D is unjustified and the addition made on this account ought to be deleted.
The assessee is a Non-Banking Financial Company (NBFC) engaged in the business of syndicating finance, trading in shares and securities. It had earned dividend income of Rs.1,51,69,132/- which it claimed as exempt. In its computation of income, the assessee- company itself disallowed a sum of Rs.76,29,734/- u/s 14A of the Act. The Assessing Officer (AO) followed the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Ltd. 328 ITR 81 (Bom) and made a disallowance of Rs.2,65,37,044/- u/s 14A r.w.r. 8D of the Income Tax Rules, 1962. He calculated the disallowance as under:
(i) The amount of expenditure As discussed in Rs. 5,96,472/- directly relating to income clause (x) of para which does not form part of 3.6 above total income (ii) Proportionate of interest As discussed in Rs. 2,47,64,986/- expenditure computed in clause (ix) of accordance with the formula para 3.6 above given in Rule 8D(2)(ii) (iii) Amount equal to one-half As discussed in Rs. 11,75,586/- percent of the average of the clause (xi) of value of investment, income para 3.6 above from which does not or shall not form part of the total income as appearing in the Balance Sheet of the assessee, on the first day and the last day of the previous year. Total expenditure disallowed u/s 14A Rs. 2,65,37,044/-
Aggrieved by the order of the AO, the assessee filed an appeal before the Ld. CIT(A). We find that the Ld. CIT(A) has followed the decision in the case of Godrej & Boyce Mfg. Ltd.(supra) and dismissed the appeal filed by the assessee.
Before us, the Ld. Counsel of the assessee filed a paper book containing inter alia (i) Profit and Loss A/c derived from the ledger accounts of trading activity, (ii) Profit and Loss A/c derived from the ledger accounts of investments activity, (iii) Copy of interest expense ledger related to investments, (iv) Copy of interest expenses ledger related to trading activity, (v) Details of Purchases of Asian Plaints Ltd. shares as investments, (vi) Details of Purchases of Asian Plaints Ltd. shares as stock- in- trade, (vii) Copy of Bombay High Court merger order dated 14.03.2008 for merger of Ashwin Holdings Pvt. Ltd.
Reliance was placed by him on the judgment of the Hon'ble Bombay High Court in the case of CIT vs. India Advantage Securities Ltd. [ITA No. 1131 of 2013 dated 17.03.2015].
Per contra the Ld. DR relied on the order of the Ld. CIT(A) confirming the disallowance of Rs.2,65,37,044/- made by the A.O.
We have heard the rival submissions and perused the relevant material on record. In the case of India Advantage Securities Ltd. (supra), the Hon'ble Bombay High Court has held that disallowance, if any, to be made u/s 14A r.w.r. 8D should only be made with regard to investments and not with regard to shares held as stock-in-trade. This decision has been followed by the Co-ordinate Bench in the case of Devkant Synthetics (India) (P.) Ltd. (ITA Nos 2663 to 2665/Mum/2015 dated 28.10.2015 for A.Y. 2009-10 to2011-12) wherein at para 12 and 13 thereof it has been held as under:—
"12. We heard the parties and perused the record. We notice that the Hon'ble Karnataka High Court has held in the case of CCI Ltd. (supra) that the shares held as stock in trade should be excluded for the purpose of computing disallowance u/s 14A of the Act, since they cannot be said to be "investment" made for the purpose of earning dividend income. In the case of India Advantage Securities Ltd. (supra), the Hon'ble Bombay High Court has noticed that the CIT(A) took into account the words of the Rule and found that the figures as derived by the Assessing officer cannot be taken into consideration. The Ld CIT(A) had observed that, one can at best disallow the expenses which are incurred for earning dividend income and for that purpose, the figures under the head "Investment" could be taken and some charges apportioned for the purpose of computing expenses. The decision rendered by the Tribunal in the case of India Advantage Securities Ltd. (supra) was found to be neither perverse nor vitiated by any error of law apparent on the face of record by Hon'ble Bombay High Court. We further notice that the decision rendered in the case of CCI Ltd (supra) has been followed by the co-ordinate benches of Tribunal in the case of India Advantage Securities Ltd (ITA No.6711/Mum/2011 and Ganjam Trading Co. Pvt Ltd (supra).
In the case of Ganjam Trading Co. P. Ltd. (supra), the Tribunal took note of the decision rendered by the Special Bench of the Tribunal in the case of ITO v. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum.)(SB) also. However, following the decision of Hon'ble Karnataka High Court in the case of CCI Ltd. (supra), the Tribunal held that the disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be made.'
It is the contention of the learned counsel that the assessee is engaged in the business of trading in shares and securities and also in investment activity. We find that the documents mentioned at para 5 here-in-above has not been examined either by the AO or the Ld. CIT(A). In view of the above, the order of the Ld. CIT(A) is set aside and the same is restored to the file of the AO with a direction to make a fresh assessment as per provisions of the Act after giving reasonable opportunity of being heard to the assessee. The AO would take into consideration the judgment of the Hon'ble Bombay High Court in the case of India Advantage Securities Ltd. (supra) and the order of the Co-ordinate Bench in Devkant Synthetics (India) (P.) Ltd. (supra). The assessee is directed to file the relevant details before the AO.
In the result, appeal is allowed for statistical purposes.
Order pronounced in the open Court on 24/04/2017