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Income Tax Appellate Tribunal, MUMBAI BENCH “I”, MUMBAI
Before: SHRI G.S. PANNU & SHRI AMARJIT SINGH
This appeal by the assessee is directed against the order of CIT(A)-9, Mumbai dated 01.01.2015, pertaining to the Assessment Year 2011-12, which in turn has arisen from the order passed by the Assessing Officer, Mumbai under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
In this appeal, the solitary grievance of assessee is with regard to disallowance of Rs.31,68,225/- made by the income-tax authorities by invoking Sec. 14A of the Act.
2 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd.
Briefly put, the relevant facts are that appellant is a company incorporated under the provisions of Companies Act, 1956 and is, inter- alia, engaged in the business of share and stock broking. During the year under consideration, assessee had earned dividend income of Rs.15,68,512/-, which was claimed as exempt. In the return of income, assessee had made a suo motu disallowance of Rs.50,000/- on account of expenses incurred in relation to earning of such exempt income. The Assessing Officer, however, applied the formula contained in Rule 8D of the Income Tax Rules, 1962 to compute the disallowance u/s 14A of the Act. The Assessing Officer computed disallowance under Rule 8D(2)(ii) – Rs.28,42,790/- out of interest expenditure and under Rule 8D(2)(iii) – Rs.3,75,435/- out of other expenses thereby totalling to Rs.32,18,225/-. After reducing the suo motu disallowance of Rs.50,000/- made by the assessee, balance of Rs.31,68,255/- was added to the returned income. Such disallowance has also been sustained by the CIT(A) against which assessee is in further appeal before us.
Before us, the first plea of the assessee is that there was no justification for disallowing any interest expenditure since the share capital and Reserves & Surplus available with the assessee were more than the investments made and thus, following the ratio of judgment of Hon’ble Bombay High Court in the case of HDFC Bank Ltd., 366 ITR 505, no disallowance is called for. Apart therefrom, it was also pointed out that the assessee is an investor as well as a trader in shares and, therefore, so far as the investments in stock-in-trade are concerned, same are to be excluded while calculating the disallowance u/s 14A of the Act. At the time of hearing, learned representative for the assessee
3 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd. also referred to the earlier decision of the Tribunal in the case of assessee for Assessment Year 2010-11 vide dated 16.10.2015 as also for Assessment Year 2007-08 vide ITA No. 3339/Mum/2010 dated 29.09.2011, wherein the disallowance of interest expenditure u/s 14A of the Act has been deleted on the ground that own funds of the assessee are more than the amount of investments. It was pointed out on the basis of the balance-sheet for the year under consideration that the fact-situation continues to be same as that considered by the Tribunal in the earlier years.
On the other hand, the ld. DR appearing for the Revenue has relied upon the orders of lower authorities in support of the case of Revenue.
We have carefully considered the rival submissions. In the present case, the dispute revolves around the action of Assessing Officer in computing disallowance u/s 14A of the Act by applying the formula contained in Rule 8D of the Rules. In terms of first limb of the disallowance, interest of Rs. Rs.28,42,790 has been disallowed. The said disallowance is being resisted on the ground that the amount of share capital and Reserves & Surplus available with assessee is more than the investments, which have yielded the exempt income and, therefore, following the ratio of judgment of Hon’ble Bombay High Court in the case of CIT vs. Reliance Utility, 313 ITR 340 it can be presumed that such investments are out of such non-interest bearing funds. The said proposition, in the context of application of Sec. 14A of the Act, has been approved by the Hon’ble Bombay High Court in the case of HDFC
4 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd.
Bank Ltd. (supra). Factually speaking, the said proposition is clearly attracted in the present case. In the statement of facts annexed to the Grounds of appeal, assessee has brought out that the Share capital plus Reserves and Surplus as on 1.4.2010, i.e., at the beginning of the year totalled to Rs.29,07,33,531/- whereas the ‘Investments’ in question stand at a much lower figure. Therefore, under these circumstances, in our view, invoking of Rule 8D(2)(ii) to disallow the interest expenditure u/s 14A of the Act is untenable following the ratio of the Hon’ble Bombay High Court in the case of HDFC Bank Ltd. (supra).
7. In the context of application of Rule 8D(2)(iii) to compute the disallowance out of expenses of Rs. 3,75,435/-, the learned representative submitted that in a somewhat similar situation in the case of Devkant Synthetics (India) Pvt. Ltd. vide 2664 and 2655/Mum/2015 dated 28.10.2015 read with Corrigendum dated 16.11.2015, the expenses were disallowed @ 5% of such exempt income. It is also pointed out that so far as the shares held as stock-in- trade are concerned, the same are excludible for the purpose of disallowance u/s 14A of the Act. The said proposition asserted before us has been affirmed by our coordinate Bench in the case of Devkant Synthetics (India) Pvt. Ltd. (supra). In coming to the said decision, the Tribunal referring to the judgment of Hon'ble Karnataka High Court in the case of CCI Ltd. vs. JCIT (2012) 250 CTR 291, as also the judgment of Hon’ble Bombay High Court in the case of CIT vs. India Advantage Securities Ltd. (ITA No. 1131 of 2013 dated 17.3.2015). In our considered opinion, the Assessing Officer has not furnished any reasons for rejecting the suo motu disallowance of Rs.50,000/- computed by the 5 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd.
assessee before invoking the formula contained in Rule 8D(2)(iii) to compute the disallowance. Notably, the phraseology of Sec. 14A(2) of the Act itself shows that the computation of disallowance prescribed in Rule 8D of the Rules can be resorted to if the Assessing Officer is not satisfied with the correctness of the claim made by assessee. In the present case, there is no satisfaction arrived at by the Assessing Officer. Be that as it may, following the ratio of our coordinate Bench in the case of Devkant Synthetics (India) Pvt. Ltd. (supra), the disallowance of expenses u/s 14A of the Act is restricted to 5% of the exempt income. The Assessing Officer is directed to retain the addition to the extent of 5% of exempt income after allowing credit for the suo motu disallowance of Rs.50,000/- already made by the assessee. Thus, on this aspect, assessee partly succeeds.
In the result, appeal of the assessee is partly allowed, as above.
Order pronounced in the open court on 30th September, 2016.