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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य, राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ PER Rajendra A.M.- अनुसार Challenging the order dated 4/11/2013 of the CIT (A)-9, Mumbai the Assessing Officer(AO) and the assessee have filed cross appeals for the year under consideration.Assessee-company, engaged in the business of media and entertainment,filed its return of income on 23/09/2010, declaring total income at Rs. NIL.The AO completed the assessment u/s. 143 (3) of the Act, on 11/03/2012, determining its income at Rs. 88.66 lakhs.
ITA/46/Mum/2014: 2.First ground of appeal
,raised by the assessee, is about confirming the disallowance of Rs. 82.08 lakhs u/s. 14. A read with Rule 8D of the Income Tax Rules, 1962 (Rules).During the assessment proceedings, the AO found that the assessee had earned an amount of Rs. 3.13 crores as mutual fund dividend and Rs.77.74 lakhs as interest income from other sources,that it had claimed the income from mutual fund as exempt,that it had not disallowed any expenditure attributable to the exempt income in computation of income u/s. 14. A of the Act. Accordingly,he directed the assessee to show cause as to why disallowance u/s.14A r.wr.8D of the Rules should not be made. After considering the submission of the assessee,he made a disallowance of Rs.82,08,631/-(Rs. 50.69 lakhs under the head ‘interest expenditure’ + Rs. 22.38 lakhs under the head 0.5% of the investment).
46/M/14 &705/14-Narang Overseas 3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, the assessee made elaborate submissions.He referred to the order of the Tribunal, dated 30/04/2013 (ITA/3343/Mum/2012,AY.2008-09 and ITA/ 4155/Mum/2012,AY.2009-10)and held that material facts of the case under consideration were quite similar to the facts of AY.2009-10,that the assessee had claimed before the AO that it had not incurred any specific expenditure to earn exempt income,that he had not accepted the submission of the assessee,that there was no jsutification for disallowance out of interest expenditure because the deposit on which interest was paid had been invested into inter-corporate deposits which had earned interest,that there was no change in the facts even during the year under consideration.He directed the AO to delete the disallowance on account of interest as no borrowed funds were utilised for earning exempt income. With regard to disallowance under Rule 8D(iii) of the Rules,he held that the disallowance made by the AO were justified because while deciding the appeals for the AY.2009-10,the Tribunal had sustained the general disallowance.
4.During the course of hearing before us,the Departmental Representative and the Authorised Representative stated that disallowances to be made u/s. 14 A r.w.r. 8D of the Rules stands decided by the order of the Tribunal for the AY.2009-10. We would like to reproduce the relevant portion of order and it reads as under: 8. We have considered the issue and examined the facts available on record. Even though the assessee has specifically explained the facts, neither the AO nor the CIT(A) considered the same, but invoked Rule 8D and disallowed the amount. As far as interest is concerned, there is direct nexus between the loan obtained from Ms. Sabita R Narang and advancing the same to M/s Nautilus Trading & Leasing Pvt. Ltd. on which interest income was earned. Therefore, even though Assessee claimed interest payment, the same is directly relatable to the interest earned and therefore the same cannot be considered for disallowance, as there is direct nexus with taxable income. Now with reference to the other expenditure claimed by the Assessee the entire expenditure debited to the Profit and Loss Account is as under:- Account Head Amounts (Rs.) Remarks Employee Cost 1,85,446 Paid to office Secretary and assistant to look after day to day affairs of the office work Auditor’s Remuneration 35,000 Statutory payment Appeal Fees 292 Statutory payment Bank charges 1,961 Debited by bank on account of specific services Conveyance 43,409 Paid to office Secretary and assistant to look after day to day affairs of the office work Car Insurance 4,426 To insure the care used in the business. Demat Fees 8,060 Fixed charge incurred for holding the investments in non physical mode. Electricity Expenses 6,183 Part of office expenses Filing fees 3,000 Statutory payment Loss on sale of Motor cars 2,18,928 …. Loss on sale of mutual funds 14,064 …. 2
46/M/14 &705/14-Narang Overseas
Legal and Professional Fees 6,56,230 Fees paid to Advocates Membership Fees 60,628 Part of office expenses Motor Car expenses 76,021 Part of office expenses Office Expenses 43,081 General office running expenses Printing & Stationery 9,523 General office running expenses Repairs & Maintenance 1,64,600 General office running expenses Building Repairs and Maintenance 1,41,926 General office running expenses Others Security charges 63,000 Offfice Security Society charges 2,31,880 General office running expenses Staff Welfare 27,308 General office running expenses Telephone Expenses 88,107 General office running expenses Transportation Expenses 75 General office running expenses Travelling Expenses 90,180 General office running expenses Water Charges 7,761 General office running expenses Interest on loan 39,34,995 Incurred for earning taxable income by way of interest Depreciation 4,60,21 Already added back in computation of income Grand Total 65,79,296 9. Thus as can be seen from the above, most of the expenditure is not at all attributable to earning tax free incomes, except of course some indirect expenses of office expenses and employees cost etc.
Subsection 2 of section 14A does not enable the Assessing Officer to invoke Rule 8D without determining, in the first instance the correctness of the claim of the Assessee, having regard to the accounts of the Assessee. Subsection 2 of section 14A mandates that it is only when having regard to the accounts of the Appellant, if AO is not satisfied with the correctness of the claim then only he can proceed to make determination under Rule 8D. The satisfaction envisaged by subsection 2 of section 14A is to be objective satisfaction that has to be arrived at by the AO. This is a safeguard introduced by subsection 2 for fair and reasonable exercise of power by the AO. This view was also supported by the judgment of the Hon’ble Bombay Court in the case of Godrej and Boyce Manufacturing Ltd. Vs. DCIT 234 CTR 1(Bom) therefore, without proper satisfaction on the part of the AO, Rule 8D cannot be invoked.
As seen from the assessment order, there is no discussion about Assessing Officer having arrived at the satisfaction. The detailed explanation by the Assessee on various facts were not considered by the AO. Having examined the facts as stated above, we are of the opinion that Rule 8D cannot be invoked as such in the given facts of the case. However, we can also not say that Assessee had not spent any amount for earning the dividend income. A part of the general expenses claimed also gets attributable to the earning of exempt income. Therefore, we are of the opinion that one percent of the dividend income from the Mutual Funds would be reasonable enough for disallowance u/s. 14A out of the expenses claimed by the Assessee ( other than those direct expenses mentioned above). In view of this, we modify the orders of the AO and CIT(A) and direct the AO to disallow one percent of the dividend income as disallowance u/s. 14A. The appeal is partly allowed. 12……. 13. Before parting with the issue, we would like to comment about the mechanical way in which Assessing Officer and CIT(A) passed the orders. Assessee established a direct nexus, in the detailed submissions filed before AO and also the submissions made before the CIT(A) which fortunately are extracted by the Ld. CIT(A) in the orders. However, in the decision part in para 5.2.1, same para in both the orders, the CIT(A) notes that Assessee could not establish the nexus between borrowed funds and capital being invested in securities and that it was impossible to believe that out of common hodgepodge of funds, the entire capital would have come into investment in shares. This indicates that the facts are not co-related in the decision by the CIT(A). First of all, Assessee has not invested in any securities, rather made
46/M/14 &705/14-Narang Overseas investment in Mutual Funds. Further there are no borrowals for the investment in Mutual Funds as Assessee had its own fund received by way of settlement amount from other group companies which has a direct nexus with the Mutual Funds Investments. The only unsecured loan received was directly advanced to another Company as Inter-corporate deposit. Findings/observations by the CIT(A) are not based on the facts available on the record. Therefore we are unable to approve the order or the CIT(A) in the given set of facts. The only option left to us is to reasonably determine the amount for disallowance u/s 14A on the facts of this case. ” Respectfully,following the above we hold that of FAA was justified in deleting the interest expenditure.Effective ground of appeal,filed by the AO,is dismissed.
ITA/705/Mum/2014: 5.First ground of appeal,raised by the assessee, is about disallowance made by the AO under rule 8D(iii) of the Rules.While dealing with the same issue,we have narrated the facts in the earlier part of our order.We have mentioned that the FAA had partly upheld the disallowance made by the AO.
6.We find that,while adjudicating the appeal for the AY.2009-10,the Tribunal had restricted the disallowance to 1% of the dividend income.Following the same,we hold that disallowance should be restricted to 1% of the exempt income.First ground of appeal is decided in favour of the assessee,in part.
7.Second ground of appeal is about disallowance of Rs. 7.78 lakhs. During the assessment proceedings,the AO found that assessee had claimed expenditure on account of repairs and maintenance of Rs.7,78,400/-.He directed it to file the nature of the expenditure and to prove the genuineness of the transaction.The assessee produced self generated vouchers in its support.The AO observed that there was no details of construction in the vouchers,that nobody had signed the vouchers.He directed the assessee to furnish the current address and confirmation from the persons who had carried out the preparing job. As per the AO,the assessee did not file any explanation in that regard. Accordingly, he made an addition of Rs. 7.78 lakhs to the income of the assessee.
8.During the appellate proceedings,before the FAA, the assessee did not file confirmation from the parties nor did it provide the current addresses of the persons carrying out repairing work.He observed that the address of the repairer was of Delhi whereas the PAN belonged to Mumbai. Considering these facts he held that the AO were justified in making the addition.
46/M/14 &705/14-Narang Overseas 9.During the course of hearing before us,the AR admitted that the assessee had not supplied the required information to the AO/FAA about the repairing.In our opinion,it is the duty of the assessees to produce evidence in their support if they claim that any expenditure was incurred for carrying out business. In the case under consideration,the assessee has failed to prove the genuineness of the expenditure incurred by it during the year under consideration. Therefore,we are of the opinion that order of the FAA does not suffer from any legal infirmity.Confirming the same,we decide ground number two against the assessee.