KJMC FINANCIAL SERVICES LTD,MUMBAI vs. DCIT 3(2), MUMBAI

This is an appeal filed by the assessee and is directed against the order of the Ld. CIT(A)-4, Mumbai dt.18.12.2012 pertaining to A.Y. 2009- 10.

The issue raised in ground No.1 is with regard to confirmation of disallowance of Rs.11,28,990/- by the ld.CIT(A) by upholding the order of the AO as made by invoking the provisions of section14A of the Income Tax Act, 1961 (hereinafter called as the Act) as against Rs.41,753/- disallowed by the appellant under section 14A on its own and the issue raised in the second ground of appeal ,without prejudice, to the first ground is with respect to the investment made in subsidiaries company/ sister concerns amounting to Rs.16.61 crores which were wrongly considered by the AO while working out the average investment for the purpose of calculating the disallowance u/s 14A r.w.r. 8D(2)(iii) which was wrong and against the provision of the Act.

Brief facts of the case are that the assessee filed its return of income on 29.09.2009 declaring loss of Rs.6,22,06,413/- which was revised on 30.3.2010 and again on 28.1.2011. The return was processed under section 143(1) of the Act on 8.3.2011 and thereafter selected for scrutiny and statutory notices u/s 142(1) and 143(2) were issued and served upon the assessee. During the course of assessment proceedings, the AO found that the assessee has earned dividend income of Rs.4,33,671/- and long term capital gains of Rs.13,96,588/- which was covered u/s 10(38) of the Act and was claimed exempt accordingly. The assessee was issued show cause notice which was replied by the assessee vide is submissions dated 29.6.2011 and 30.11.2012 by submitting that no interest expenses were incurred as investments were made out of own funds and not made out of loan fund. The substantial part of investments Rs.16.61 crores out of the total Rs.20.34 crores were invested in the sister concerns/subsidiaries and were of strategic nature and not made with the profit motive. Ultimately the ld AR submitted that no expenses were incurred for earning the above said exempt income. The assessee itself on its own disallowed the expenditure of Rs.14.70 lakhs.

The AO after considering the submissions of the assessee came to the conclusion that the assessee has incurred Rs.13.17 lakhs as salaries and allowances, Rs.14.70 lakhs on account of operating and administrative expenses and Rs.9.22 lakhs as financial charges. The assessee has entered into several transactions of sales and purchases of shares out of which it has investments for its portfolio besides undertaking the similar type of transactions in the mutual funds. The AO observed that the assessee must have monitored the said transactions and therefore involved application of some human and financial resources and rejected the adhoc disallowance of Rs.41,753/- as made by the assessee suo-mottu and disallowed a sum of Rs.11,52,084/-by invoking the provisions of section 14A of the Act read with rule 8D 2(iii). Aggrieved by the order of AO, the assessee preferred an appeal before the ld. CIT(A), who also dismissed the appeal by observing and holding s under :

On the other hand, the ld.DR heavily relied on the orders of authorities below.

We have considered the rival contentions of the parties and perused the material placed before us. We shall first decide the issue raised in the ground No.2 of appeal that investments made by assessee were of strategic nature as these were not made with the purpose of earning any dividend on the investments but were prompted by strategic considerations in order to gain control over these subsidiaries/sister concern and thus should not be considered for the purpose of calculating the disallowance u/s 8D(2)(iii).The case of the assessee is also fortified by the decisions in the case of Interglobe Enterprises Ltd (supra), in which the coordinate bench of the Tribunal observed and held and under (pg 9 para 2 onwads): “However, we find that the calculation of disallowance under Rule 8D(iii) made by the Assessing Officer and upheld by Ld CIT(A) is not correct In view of the fact that Assessing Officer had included the value of total investments for calculation of disallowance whereas in our opinion the value of those investments should have been included which were made for the purpose of earning exempt income. The assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income. The Hon'ble Tribunal in in the case of Promain Ltd., after relying upon a Kolkatta judgment of Tribunal in I.T.A. No.1331 has held that strategic investment has to be excluded for the purpose of arriving at disallowance under Rule 8D(iii). The Tribunal had relied upon the findings of Kolkatta Tribunal in the case of Rei Agro Ltd. v. DCIT in I.T.A. No./ 1331/Del/2011 dated 29.7.2011. The relevant portion of Tribunal findings as contained in the Kolkatta Tribunal are reproduced below:- “(iii) Further in Rule 8D(2)(ii), the words used in numerator B are “the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance sheet as on the first day and in the last day of the previous year”. The Assessing Officer was wrong in taking into consideration the investment of Rs.103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus,. It is not the total investment at all beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term “average of the value of investment” is used to take care of cases where there is the issue of dividend striping. iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income/. Thus, under sub clause (iii), what is disallowed is ½ percentage of the numerator B in Rule 8D(2)Iii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in the Rule 8D(2)(ii). Thus, not all investments become the subject matter of consideration when computing disallowance u/s 14A read with Rule 8D. The disallowance u/s 14A read with Rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. (A.Y.) (I.T.A. No.1331/Kol/2011 dated 29.7.2011. ” Following the above judicial precedents, we held that value of strategic investments should be excluded for the purpose of disallowance under Rule 8D)iii) facts, we direct the Assessing Officer to calculate the disallowance under Rule8D(iii) by excluding the value of strategic investments in the calculation of disallowance. As regards disallowance under Rule 8D(i) and 8D(ii) we have already held that no disallowance is warranted.

In the result, the appeals filed by the assessee are partly allowed for statistical purposes whereas the appeal filed by the revenue is dismissed.” We have perused the facts of the case before us in the light of the decision of the tribunal (supra) and find that the assessee has made investments in the subsidiary companies to the tune of Rs.16.61 crores which in our opinion should not be considered for the purpose of working out the disallowance under section 14A read with rule 8D (2)(iii) of the Act. The facts of the assessee are fully covered in its favour by the above said decision. We, therefore, respectfully following the ratio laid down in the above case, set aside the order of ld. CIT(A) and direct the AO to verify the strategic investment and recalculate the disallowance accordingly by not considering the investments made in subsidiary companies/sister concern.