EMERALD COMPANY LTD.,KOLKATA vs. DCIT, CIR-8, KOLKATA, KOLKATA

The sole issue that requires for our consideration is as to whether the CIT-A justified in confirming the disallowance of Rs.6,00,000/- u/s. 14A of the Act made by the AO in the facts and circumstances of the case.

Before us it was submitted by the assessee that M/s. Likhami Leasing Ltd got amalgamated and merged with the assessee herein, M/s. Emerald Co.Ltd in pursuance of amalgamation scheme as accepted by the Hon’ble High Court of Calcutta vide Company Petition no. 251 of 2014 connected with Company Application No. 101 of 2014 in the High Court of Calcutta, wherein M/s. Likhami Leasing Ltd was merged/amalgamated with the assessee company herein, M/s. Emerald Co. Ltd. A copy of the same is Emerald Co. Ltd. placed on record and submitted that M/s. Likhami Leasing Ltd is to be called/known as Emerald Co.Ltd.

The brief facts of the case are that the assessee is a company and dealing its business of trading in shares, securities, investments and financing. Initially the assessee was assessed to tax by the DCIT, Cir-4(1), New Delhi, wherein he computed the expenses under rule 8D(2)(i) to (iii) of the IT Rules 63,93,445/- and restricted such disallowance to Rs.46,49,066/- basing on the expenditure as claimed/debited by the assessee in its P & L account, WHICH was confirmed by the CIT-A, New Delhi vide his order dated 12-08-2010 in Appeal No. 87/2009-10.

On second appeal by the assessee, ITAT, Delhi vide its order dated 19- 11-2010 held that Rule 8D ought not to have applied for making disallowance u/s. 14A in view of judgment of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd Vs. DCIT reported in (2010) 328 ITR 81 and restored the issue to the file of AO for re-adjudication in accordance with law.

Due to change of jurisdiction the case was transferred to Kolkata and again the assessment was framed by the DCIT, Cir-8, Kolkata, wherein he computed the disallowance of Rs. 13,83,663/- as expenses towards exempt income u/s. 14A of the Act at 1% of Rs.13,83,66,272/- on account of dividend on shares/securities and tax exempt on LTCG and together with a sum of Rs.6,00,000/- which found paid to Mr.M.Bangur as retainership fee for rendering advisory services on investments totaling to an amount of Rs.19,83,663/- was disallowed by the AO u/s. 14A of the Act. In disallowing the same, the AO relied on the order of the ITAT, Kolkata in the case of M/s. Shree Capital Services Ltd in dated 07-09-2011 for the AY 2005-06, wherein the ITAT Kolkata relied on the said judgment of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd and Emerald Co. Ltd. the order of ITAT Kolkata in the case of Sagarika Goods & Services P.Ltd in for the AY 2005-06 order dated 24.09.2010.

Aggrieved by such order of the AO, the assessee challenged the same before the CIT-A and contended before him that the AO did not record his satisfaction disallowing the amount of Rs.6,00,000/- p.a being paid to Mrs. M.Bangur as retainership fees for rendering advisory services on investment in addition to 1% of dividend income. The specific contention of the assessee was before the CIT-A was that services of Mrs. M.Bangur was not only utilised for earning exempt income, but also utilized for other purposes as the assessee deals in trading of shares and securities and in investments. However, the CIT-A did not accept such contention of assessee for non production of any evidence and confirmed the impugned disallowance/addition as made by the AO on this issue.

Before us the ld.AR submits that the assessee derived its income for the year under consideration on short term capital gain and long term capital gain to an extent of Rs.16,11,132/- and Rs.21,22,433/- respectively and offered to tax @ 10% and referred to page-10 of the paper book. He also submits that the assessee availed advisory services of Mrs. M.Bangur in advising for investments, which yielded taxable income and non taxable income and referred to page-8 of the paper book and argued that adding the Rs.6,00,000/- towards expenditure on assumption that on such advise the assessee earned dividend income is not maintainable and urged to restrict the disallowance to an extent of Rs.13,83,663/- i.e 1% as made by the AO.

On the contrary, the ld.DR relied on the orders of the authorities below.

Heard rival submissions and perused the material available on record. We find that the contention of the assessee from the first instance that the advices rendered by Mrs. M.Bangur gained not only exempt income, but also taxable income. The CIT-A confirmed the said Rs.6,00,000/- as direct expenditure for investment activity and for non filing of any evidence to show that this is not direct expenditure. Before us also the ld.AR submitted that the AO ought not to have added the retainership fee as paid to Mrs. M. Bangur by the assessee as expenditure attributable to in earning to exempt income. Because in the taxable income the assessee offered 10% as tax, which can be seen from page no-10 of the paper book regarding computation of income. The assessee offered @ 10% as tax on short term and long term capital gains. The ld. AR also submits that the assessee appointed Mrs. M.Bangur as advisor to render her advice on the matters of investment in shares, securities and port folio management, which is placed at page no-8 of the paper book and which establishes that the she advised the assessee in respect of its investment applicable to taxable and non taxable income. We find that the assessee offered its income derived from short term and long term capital gains and taxed thereon @ 10% and again disallowing the retainership fee as paid to Mrs. M.Bangur, said advisor to the expenditure attributable in earning dividend income, in our view, this is not permissible.

It is pertinent to note that the AO disallowed in respect of other expenses at Rs.13,83,663/- being 1% total exempt income of Rs.13,83,66,272/- and in our opinion, it is justified as we derive support from the Hon’ble Jurisdictional High Court of Calcutta in the case of CIT vs M/s R.R.Sen & Brothers in GA No.3019/12 in ITAT No.243/2012 wherein it upheld the decision of the Kolkata Tribunal in computing the expenditure at 1% of dividend income. The relevant portion of which is reproduced herein below: The Court:- The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under the income tax. The Tribunal has computed expenditure at 1 per cent of such dividend income which,

In the light of principle laid down by the Hon’ble Jurisdictional High Court of Calcutta and in view of the discussion herein above, we are of the view the order of CIT-A is not justified and therefore, the said disallowance of Rs.6,00,000/- is liable to be deleted, accordingly, we restrict the disallowance Rs.13,83,663/- against Rs.19,83,663/- as disallowed by the AO. The sole ground raised by the Assessee is allowed.

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 25-01-2017