SAHILESH R PARIWALA,MUMBAI vs. JCIT 24(1)(1), MUMBAI

Brief facts leading to disallowance u/s. 14A of the Act are that per the return of income the assessee claimed tax free dividend of Rs. 77,49,343/- and tax free interest of Rs. 26,82,197/-. While framing assessment, AO show caused the assessee as to why the addition to the total income should not be made in accordance with provision of section 14A r.w. Rule 8D of the Act. The assessee submitted his reply dated 30.08.2011, which are reproduced as under: “Out of the dividend of Rs.77,49,343/-,Rs.77,00,000/-has been received from Computer Graphics Ltd in which I am one of the Directors. Dividend is tax free in the hands of recipient as paying companies have paid dividend tax on it. Whatever investment I am holding, is from my own fund. I have not invested any sum from outside borrowing. To earn tax-free dividend, I have not borrowed single paisa from any bank or financial institution or anybody corporate and the investment is absolutely from my own fund.”

The contention of assessee was not accepted by the AO, and relying on the decision of Bombay High Court in the case of Godrej & Boyce Mfg. Co. reported in 328 ITR 81 and Daga Capital Management Pvt. Ltd., he worked out disallowance of Rs. 2,17,385/- u/s 14A r.w. Rule 8D(2)(iii). Aggrieved by the AO, assessee filed an appeal before the CIT(A). The CIT(A) after hearing the assessee restricted the disallowance to 2% of the total exempted income of the assessee. The total exempt income of assessee consist of dividend income of Rs. 77,47,343/- and tax free interest Rs. 26,82,197/- total of Rs. 1,04,29,540/-, thus disallowance was restricted to Rs. 2,08,950/- . Further aggrieved by the order of CIT(A), the assessee filed this appeal before us.

Before us, the Ld. AR of the assessee argued that assessee has not borrowed a single paisa from bank or financial institution or from any corporate body. The assessee has its own sufficient fund available with him. Assessee has drawn out attention to Profit & Loss A/c of assessee wherein the assessee has shown profession fees of Rs.21,500/- and bank charge of Rs.2069/- (page 7 of PB). Ld. AR for assessee further argued before working out the calculation of disallowance u/s 14A, the AO has not rejected the statement of account offered by the assessee. The assessee has not made any expenditure for earning exempt income, thus no voluntary disallowance was made in respect of earning of exempt income while filing the return. And argued that the order of AO for disallowance u/s 14A r.w. Rule 8D(2)(iii) which was restricted to Rs. 2,08,950/- is not sustainable. The AR of the assessee finally argued that a reasonable amount may be disallowed which this Hon’ble Tribunal may deem fit and proper in the fact and circumstances of the case. Ld. DR for the Revenue has argued that .5% of the average value of investment was correctly disallowed by AO, however, Ld. CIT(A) further restricted it only 2% of the total earning of exempt income, and the partial relief granted to the assessee is sufficient as the assessee has earned exempt income of Rs. 1,04,29,540/-.

We have considered the rival contention of the parties and perused the record. The only expenditure disallowed u/s. 14A by the AO, since restricted marginally by the ld. CIT(A), is qua indirect, administrative expenditure. The assessee’s claim of the entire investment in the tax-exempt securities being out of own interest-free capital, and not borrowed funds, is therefore of no moment. As regards the administrative expenditure, we have perused the assessee’s Profit & Loss A/c for the relevant year (PB Pg. 7), to find that the only expenditure debited thereto and claimed per its return which could have relation to his tax- exempt income (by way of dividend and interest) is professional fees (stated to be portfolio management charges, claimed against short-term capital gain, for Rs. 21,500/-), bank charges (Rs. 3069/-) and depreciation (Rs. 6653/-), i.e., at a total of Rs. 31,222/-, while the assessing and the first appellate authorities have made and confirmed the disallowance at Rs. 2.17 lacs and Rs. 2.09 lacs respectively. How could that be? The AO’s dissatisfaction u/s. 14A(2) with the assessee’s explanation – of having not incurred any expenditure in relation to its tax-exempt income, which is to be made with reference to and having regard to the accounts, thus, cannot be said to be proper. Rather, even this expenditure could perhaps be explained to have no relation with the tax-exempt income, leading to no disallowance u/s. 14A. Further, even the assessee’s contention of no expenditure having been incurred in relation to the said income, is without reference to and de hors his accounts. Though, therefore, the matter ought to, strictly speaking, travel back to the file of the AO, we, in view of the nominality of the amount involved, i.e., under the circumstances, consider it only proper to attempt to estimate the said amount, even as observed during hearing. We, accordingly, estimate the said amount of expenditure disallowable u/s. 14A at Rs. 10,000/- (ten thousand only). We decide accordingly.

In the result, the assessee’s appeal is partly allowed. Order pronounced in the open court on this 5th July, 2016.