DCIT CEN CIR 1(1), MUMBAI vs. ROLTA SHARES & STOCKS P.LTD, MUMBAI

Ground raised by the revenue is against the deletion of disallowance of Rs.26,61,748/- under section 14A of the Income Tax Act, 1961 by the ld. CIT(A) without appreciating the facts that sub-section 2 of section 14A was introduced with effect from 1.4.2007 was only clarificatory nature and main clause of section14A would apply from the introduction of section itself.

We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below and the case laws relied upon by the ld.AR. We find that the AO observed that the assessee has earned dividend income of Rs.97,58,289/- and no expenses was shown to the have been incurred in connection with. Accordingly, disallowed an amount of Rs.26,61,748/- towards expenditures incurred for earning the dividend income. Aggrieved by the order of AO, the assessee preferred an appeal before the ld.CIT(A), who partly allowed the appeal by directing the AO to reduce the investment of strategic nature made in the associate concern of the assessee while working the disallowance made u/s 14A of the Act. Now, aggrieved by the order of ld.CIT(A), the revenue is in appeal before the Tribunal.

We find that the section 14A sub-section (2) was applicable with effect from 1.4.2007 and therefore we are not in agreement with the plea raised by the revenue. However, we find that there has to be some disallowance relating to earning of exempt income by the assessee. Therefore, taking a consistent view with the earlier Tribunal orders we direct the AO to make disallowance @ 1% of the exempt income. Accordingly, we set aside the order of ld.CIT(A). This ground is partly allowed and the AO is directed accordingly.

The issue raised in ground no.2 is against the directing the AO to allow set off of carry forward long term capital loss of Rs.1,17,04,450/- against short term capital gain of current year without appreciating the fact that the assessee’s claim was disallowed as per section 74(1)(b) of the Act.

From the above discussion, it is clear that the ld. CIT(A) has correctly followed the decision of the Tribunal in the assessee’s own case, therefore, we do not find any merit in the submissions of the ld.DR and accordingly, we dismiss the appeal of the revenue. The AO is directed accordingly.

The appeal of the revenue is allowed partly. I.T.A. No.1356/Mum/2015

We have already decided an identical issue in (AY-2006-07) in ground no.1 thereof and therefore, our decision in ITA No.1355/Mum/2015 would mutatis mutandis apply to this appeal as well. The AO is directed accordingly.

Resultantly, the appeal of the revenue stands allowed partly.

Ground no.1 raised in this appeal by the revenue is against the disallowance of Rs.45,35,925/- u/s 14A of the Act by ignoring the fact that working of disallowance u/s 14A read with rule 8D is mandatory from the assessment year 2008-09 onwards. During the course of assessment proceedings, the AO noted that the assessee has earned dividend income of Rs.1,46,88,006/- which was claimed to an exempt income. The AO also noted that the assessee has not made any disallowance of expenses on its own which the assessee must have incurred for earning of said income. Besides, the AO observed that the assessee has borrowed funds and has incurred interest expenses out of which the proportionate disallowance has to be made and accordingly after issuing show cause notice to the assessee u/s 14A read with rule 8D by rejecting the reply of the assessee. It was submitted before the AO that the assessee has capital and reserve of Rs.17.00 crores against the borrowing of Rs.8 crores and the assessee company has purchased shares of other companies amounting to Rs.27.08 crores were strategic investments and not for the purpose of earning dividend income and also capitalized interest amounting to Rs.3,74,35,207/- and therefore no disallowance under rule 8D(2)(ii) was attracted. With regard to the disallowance under section 14A read with reule 8D(2)(iii), it was submitted that no expenditure was incurred by the assessee and accordingly no disallowance under this section was called for and 6 I.T .A. N o .1 3 5 5, 13 5 6 , 1 35 8 a nd 1 3 60 / Mum /2 0 1 5 hence the AO made disallowance of Rs.45,35,925/- comprising interest of Rs.23,28,525/- under rule 8(2)(ii) and Rs.26,04,836/- under rule 8D(2)(iii). During the course of appellate proceedings, the ld.CIT(A) directed the AO to recompute and rework the disallowance u/s 14A by excluding the investment made for strategic purpose. Now, the revenue being aggrieved by the order of the ld.CIT(A) has preferred an appeal before us.

At the out set, the ld. Counsel for the assessee pointed out that the issue raised in this ground stands covered in favour of the assessee by the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case in (AY-2010-11) order dated 26.7.2016 wherein an identical issue has been decided in favour of the assessee. Therefore, the ld. Counsel submitted that following the above said order the appeal of the revenue be dismissed.

On perusal of the decision of the Co-ordinate Bench of the Tribunal in assessee’s own case (supra), we find that the issue involved in this appeal has been decided by the Tribunal in favour of the assessee (wherein the author is one party). For the sake of convenience we reproduce relevant paras as under : “5. We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below and the case laws relied upon by the ld.AR. The issue of strategic investments in 7 I.T .A. N o .1 3 5 5, 13 5 6 , 1 35 8 a nd 1 3 60 / Mum /2 0 1 5 the subsidiary companies/sister concerns are meant to gain control over the subsidiary companies/sister concerns and are not governed by the profit consideration or the motive of earning dividend from the said investments. Therefore, for the purpose of disallowance u/s 14A r.w.r.8D(2)(iii) the investments in the associate concern are not to be considered as has been held in the afforestated cases.

In view of the ratio laid down in the above decisions, we are of the considered view that the issue raised by the assessee is squarely covered in favour and the appeal of the revenue is accordingly dismissed.”

Respectfully following the decision of the Tribunal, we uphold the order of ld CIT(A) and dismiss the appeal of the revenue. /Mum/2015

Grounds of appeal taken by the revenue is as under : “Whether on the facts and in the circumstances of the case the learned CIT(A) was justified in deleting the disallowance of Rs.3,35,57,910/- u/s 14A of the IT Act, ignoring the fact that working of disallowance u/s 14A read with rule 8D is mandatory from AY 2008-09 onwards as held by the jurisdictional High Court in the case of Godrej and Boyce Mft.Co.Limited (328 ITR 81)”