LAUREL SECURITIES PVT. LTD.,KOLKATA vs. ITO, WD-6(2), KOLKATA, KOLKATA

The issue raised in Ground No. 1 of this appeal relates to the disallowance of Rs.27,80,423/- made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

The assessee in the present case is a Company, which is engaged in the business of stock broker. The return of income for the year under consideration was filed by it on 21.07.2011 declaring a loss of Rs.1,93,989/-. During the course of assessment proceedings, it was ./2015 Assessment year: 2011-2012 Page 2 of 5 noticed by the Assessing Officer that the assessee has made a substantial investment in the shares of other Companies. Since the income of the said shares in the form of dividend was exempt from tax, the Assessing Officer held that the expenses incurred by the assessee in relation to the said exempt income were liable to be disallowed under section 14A. He accordingly worked out such expenses by applying Rule 8D at Rs.27,80,423/- and made a disallowance under section 14A to that extent.

The disallowance made by the Assessing Officer under section 14A was challenged by the assessee in the appeal filed before the ld. CIT(Appeals). During the course of assessment proceedings, it was submitted by the assessee that a disallowance of Rs.71,226/- was offered by it under section 14A of the Act in the computation of income, while the Assessing Officer computed such disallowance at Rs.28,51,649/- by applying Rule 8D of Income Tax Rules, 1962. It was contended that there was, however, no satisfaction recording by the Assessing Officer with reference to the accounts of the assessee that the disallowance offered by the assessee under section 14A was not correct or it was wrong. Relying on the decision of the Tribunal in its own case for A.Y. 2009-10 (ITA No. 1849/KOL/2012), it was contended by the assessee that the action of the Assessing Officer in computing the disallowance under section 14A by applying Rule 8D without recording such satisfaction was not sustainable. This contention of the assessee was not found acceptable by the ld. CIT(Appeals). According to him, although his satisfaction was not specifically recorded by the Assessing Officer in the assessment order, such dissatisfaction was discernable from the observations made by him in his order. He also held that the disallowance offered by the assessee under section 14A in the computation of total income even otherwise was not correct in the facts and circumstances of its case. He, therefore, rejected the contention of the assessee on this issue and proceeded to confirm the disallowance made by the Assessing Officer under section 14A by applying Rule 8D. ./2015 Assessment year: 2011-2012 Page 3 of 5

I have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that this issue relating to the disallowance made under section 14A by applying Rule 8D as involved in Ground No. 1 of the assessee’s appeal is squarely covered in favour of the assessee by the decision of the Tribunal rendered in assessee’s own case for AY 2009-10 vide its order dated 24.07.2014 passed in wherein a similar disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A by applying Rule 8D was deleted by the Tribunal for the following reasons given in paragraph no. 4 of its order:- “We have heard the rival submissions and carefully considered the same. We noted that in this case the assessee while computing the taxable income has disallowed a sum of Rs.3,39,802/- u/s 14A of the I.T. Act. The AO did not agree with the assessee but without recording his satisfaction with reference to the accounts of the assessee and how he is not satisfied with the correctness of the claim of the assessee in respect of the expenditure in relation to the dividend income applied Rule 8D of IT Rules and computed the disallowance in accordance with Rule 8D. Section 14A(2) requires the AO to give a finding in respect of its non satisfaction for incorrect claim of the assessee with reference to the books of account. The AO in our opinion, cannot directly apply Rule 8D’.

As regards the issue involved in Ground No. 2 relating to the disallowance of Rs.75,027/- and Rs.20,791/- out of motor car depreciation and motor car expenses being 10% of the total expenses claimed by the assesese under these two heads, it is observed that the expenses claimed by the assessee under these two heads were found to be not fully verifiable by the Assessing Officer. He also held that in the absence of proper record maintained by the assessee, the element of personal use by the Directors of the assessee-company could not be ruled out. Accordingly, he made a disallowance of 10% out of these expenses, which the ld. CIT(Appeals) confirmed. Although the ld. counsel for the assessee at the time of hearing before me has contended that no disallowance on account of personal use by the Directors could be made in the case of a Company, it is observed that the disallowance out of motor car depreciation and motor car expenses was made by the Assessing Officer also for unverifiable element involved in these expenses. Since the said disallowance made to the extent of 10% to the respective expenses for such unverifiable element is quite fair and reasonable, I find no justifiable reason to interfere with the order of the ld. CIT(Appeals) confirming the said disallowance made by the Assessing Officer. Ground No. 2 is accordingly dismissed.

In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on October 04, 2016.