HARSH CHEMICAL LTD.,KOLKATA vs. DCIT, CIRCLE-3, KOLKATA, KOLKATA

The only issue to be decided in this appeal is as to whether the Ld. CIT(A) is justified in upholding the disallowance made u/s. 14A of the Act read with rule 8D of the I. T. Rules, 1962 (hereinafter referred to as the “Rules”) in the sum of Rs.1,16,870/- in the facts and circumstances of the case.

Brief facts of this issue are that the assessee is engaged in the business of investment in shares, securities and financial activities. The AO on perusal of the Balance Sheet and P&L Account observed that the assessee has investment in shares, debentures and other units to the tune of Rs.46,69,33,480/- as on 31.03.2011. It was also observed that the assessee had deposited total expenditure in its P&L Account to the tune of Rs.5,06,958/- and received dividend income of Rs.1,77,48,735/-. The AO also observed that the assessee had voluntarily disallowed a sum of Rs.3,90,088/- as expenditure relatable to the earning of Harsh Chemicals Ltd., AY 2011-12 dividend income u/s. 14A of the Act. The AO, however, ignored the disallowance made by the assessee and mechanically resorted to Rule 8D(2) of the Rules and arrived at the figure of Rs.22,23,684/- and finally concluded that since the total expenditure deposited by the assessee in its P&L Account was only Rs.5,06,958/- and in view of the fact that assessee itself has already disallowed a sum of Rs.3,90,088/-, he concluded that a sum of Rs.1,16,870/- alone is required to be disallowed u/s. 14A of the Act. This action of the AO was upheld by the Ld. CIT(A) in first appeal. Aggrieved, the assessee is in appeal before us on the following grounds: “

The Ld. AR placed reliance on the paper book filed before us wherein he drew our attention to the submissions made before the AO on 19.02.2014 detailing the total expenditure debited in the P&L Account and the basis of disallowance made voluntarily u/s. 14A of the Act in the return of income. He further argued that out of Rs.5,06,958/- a sum of Rs.1,16,870/- was not disallowed by the assessee in the return in view of the fact that the entire expenditure pertains to statutory filing fees and secretarial related expenses which had nothing to do with the earning of dividend income. It was also argued that the assessee had filed a detailed written submission together with various case laws before the ld AO which had been completely ignored by the AO and even without recording any satisfaction in terms of section 14A(2) of the Act read with Rule 8D(1) of the Rules as to how the figure of disallowance made by the assessee is incorrect, the ld AO had erred in mechanically applying Rule 8D(2) and made the disallowance. In response to this, the Ld. DR prayed for setting aside this issue to the file of the ld AO to examine the workings given by the assessee.

Similar view was expressed by the Hon’ble Calcutta High Court in the case of CIT Vs. Ashish Jhunjhunwala in G.A. No. 2990 of 2013 in ITAT No. 157 of 2013 dated 08.01.2014, which reads as under: “While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case, it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT(A).”

Similar view was also taken by the Hon’ble Delhi High Court in the case of CIT Vs. Taikisha Engineering India Ltd. 370 ITR 338 (Del), wherein the Hon’ble court disapproved of an ld AO invoking Section 14A of the Act read with Rule 8D(2) of the Rules without recording his satisfaction and noted that the recording of satisfaction as to why ‘the voluntary disallowance made by the assessee was unreasonable and unsatisfactory,’ is a mandatory requirement of the law.

In the result, the appeal of assessee is allowed.