EMKAY GLOBAL FINANCIAL SERVICES LTD,MUMBAI vs. DCIT CIR 4(1), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद"य लेखा सद"य राजे"" राजे"" केकेकेके अनुसार अनुसार PER RAJENDRA, AM- लेखा लेखा सद"य सद"य राजे"" राजे"" अनुसार अनुसार Challenging the order of the CIT(A)-8,Mumbai,dated 01.10.2014,the Assessee has filed the above appeal.The assessee-company,engaged in the business of share broking,trading and dealing in shares and securities,filed its return of income on 21.09.2010 declaring total income at Rs.17.16 crores.The Assessing Officer(AO)completed its assessmen on 23.03. 2013,determining the income of the assessee at Rs.17.56 crores.

2.The only ground of appeal is with regard to confirmation of disallowance of Rs.40,51,111/- u/s.14A of the Act.During the assessment proceedings,the AO found that the assessee had earned exempt income of Rs.2.58 lakhs,that it had made a disallowance of Rs.21,586/- (demat charges Rs.1,568+salary Rs.20,000/-)on an adhoc basis in its computation of income , u/s.14A of the Act.He directed the assessee to explain as to why expenditure should not be made as per the provisions of section 14A r.w. Rule 8D of the Income tax Rules, 1962. Vide its letter,dtd.26.11.12,the assessee filed a detailed explanation in that regard.After considering the submission of the assessee, the AO held that it had only disallowed a meagre amount on adhoc basis,that it had not disallowed any indirect expenses in its computation, that the stand taken by the assessee was irrational,illogical and in-correct,that it had deployed a huge amount of funds in the investment yielding tax free income,that the investment on the first day of the AY.was of Rs.34,50,04,526/- and on the last date investment stood at Rs.36.00 crores approximately,that huge deployment of funds could not be there without adequate availability of funds,manpower and infrastructure, that such activities could not be carried out 7218/Mum/2014(10-11) without associated costs,that when cost associated could not be ascertained the principles of apportionment would come into play. As per the AO the assessee had not produced cash flow statement and other documentary evidence to prove that borrowed funds had not been utilised in investments that yielded exempt income. Interest expenditure of Rs.1,50,04,264/- was to be considered as indirect interest expenditure as per Rule 8D of the Rules.He further observed that if a holding company makes strategic investment in subsidiary companies substantial efforts were required to preserve the value of the shares,that large part of expenses was definitely relatable towards earning of exempt income, that rule 8D was meant to remove the arbitrariness and to bring a fair treatment to all assessees,that if quantum of disallowance u/s.14A r.w.r8D worked out to be more it would not make disallowance as unreliable or inconsequential,that the method prescribed by the Rule was based on expenses and quantum of investments.He made a disallowance of 40,51,111/- (interest expenditure-Rs.23. 03 lakhs +0.5 %of the average value of investment i.e.Rs17.69 lakhs)in addition to the suo-motu disallowance made by the assessee of Rs.21568/-.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee made elaborate submissions and argued that it had made investment in subsidiaries,that its own capital and reserves were much higher than the investments, that expenses were incurred for broking and allied activities,that interest expenditure incurred for regular business could not be disallowed invoking the provisions of section 14A of the Act. After considering the submission of the assessee and the assessment order,the FAA held that the assessee had disallowed an amount of Rs. 21,568/-for earning dividend income of Rs. 2.58 lakhs, that it had not disallowed any indirect expenses in its computation,that it had deployed huge amount of funds in the investment yielding tax exempt income,that deployments of fund could not be there without adequate availability of funds, manpower,infrastructure to manage the same, that all those activities could not be carried out without associated costs,that when the costs associated could not be ascertained the principles of apportionment would prevail, that the AO was duty-bound to work out disallowance under section 14A of the Act.Finally,he upheld the order of the AO.

4.Before us,the Authorised Representative(AR)contended that the AO and the FAA had applied the provisions of section 14A in a routine manner,that investment made in subsidiary companies should not have been considered for disallowance,that the assessee had,on its 7218/Mum/2014(10-11) own,made disallowance of the expenses that were incurred for earning exempt income, stated that the disallowance should not exceed the dividend income.He relied upon the case of Garware Ropes (65SOT86).The Departmental Representative (DR) left the issue to the discretion of the Bench.

5.We have heard the rival submissions and perused the material before us.We find that the assessee had earned dividend income of Rs.2.58 lakhs, that it had made a disallowance of Rs. 21,568/-on its own with regard to earning of exempt income,that the FAA upheld the disallowance of Rs. 40.51 lakhs,made by the AO u/s.14A of the Act, that assessee had made investment in the subsidy companies,that the said fact was ignored by the AO and the FAA while working out the disallowance,that they did not consider the availability of assessee’s own funds including the reserves and surplus before making the disallowance.In our opinion, without considering this vital facts they should not have made the disallowance of Rs.40.51 lakhs against the exempt income of Rs. 2.58 lakhs.In our opinion,disallowance to be made u/s.14A of the Act should not exceed the exemption claimed by the assessee. The basic purpose behind introducing the section was to prevent the assessee claiming double deduction i.e.showing exempt income and claiming expenditure with regard to the same exempt income.Therefore,the Hon’ble courts are of the view that disallowance should be restricted to the interest-free income only.The AO and the FAA have mechanically applied the provisions of Rule 8D. In our opinion,the approach of both the authorities were not as per the provisions of the Act.The assessee had,on its own,made a disallowance with regard to the expenditure incurred for earning exempt income.The FAA has not pointed out any defect in the approach of the assessee.It had disallowed the amount that was incurred by it for earning exempt income.If there was no other expenditure related with the tax free income then there was no justification for disallowing it.Considering the above,we reverse the order of the FAA and decide the effective ground of appeal in favour of the assessee. As a result, appeal filed by the assessee stands allowed. फलतः िनधा"रती "ारा दािखल क" गई अपील मंजूर क" जाती है. Order pronounced in the open court on 13th July,2016. आदेश क" घोषणा खुले "यायालय म" "दनांक 13 जुलाई, 2016 को क" गई । (सी. एन. "साद / C.N. Prasad ) (राजे"" / Rajendra) "याियक सद"य / JUDICIAL MEMBER लेखा लेखा लेखा सद"य लेखा सद"य सद"य / ACCOUNTANT MEMBER सद"य मुंबई Mumbai; "दनांकDated : 13 .07.2016. Jv.Sr.PS.

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