RAVI MOHAN GEHI,MUMBAI vs. DCIT 20(2), MUMBAI

14/06/2016 सुनवाई क" तार"ख / Date of Hearing : 24/06/2016 आदेश क" तार"ख /Date of Order: आदेश / O R D E R Per Ashwani Taneja (Accountant Member): This appeal has been filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals), Mumbai- 31 {(in short ‘CIT(A)’}, dated 15.05.2014 passed against 2 Ravi Mohan Gehi assessment order u/s 143(3) of the AO for the Assessment Year 2009-10.

3.1. During the course of assessment proceedings, it was noted by the AO that assessee had earned exempt income of Rs.17,06,434/- in the form of dividend but no expenses had been allocated for earning the same. Accordingly, the AO computed disallowance u/s 14A r.w. Rule 8D(2)(iii) @ 0.5% of average value of investments.

3.2. The assessee carried the matter before the Ld. CIT(A) wherein disallowance was confirmed with following observations: “5. The only effective ground raised in appeal is challenging the disallowance of Rs.2,00,158/- u/s 14A. I have carefully considered the facts relating to the said ground as they emanate from the impugned order and the submissions made during these proceedings. 5.1 In the present case the appellant is deriving profit from real estate consultancy business as well as 'income from other sources.' During the year under consideration, the appellant has also derived exempt income of dividend on shares and mutual funds.

3 Ravi Mohan Gehi 5.2 The year under consideration is A.Y. 2009-10 and therefore where the appellant has received tax-exempt income and has incurred expenditure, the disallowance, if any, is to be computed with reference to the provisions of Rule 8D. The said rule envisages disallowance on accounts of expenditure directly related to the tax free income {Rule 8D(2)(i)}; interest expenditure, not directly attributable to any particular income or receipt {Rule 8D(2)(ii)}and .5% of the average value of investment{Rule 8D(2)(iii)}. The main thrust of the arguments of the appellant is that no interest bearing funds were used for the investments from which the dividend income has been derived. However, a perusal of the impugned order reveals that the disallowance made by the AO is not under rule 8D(2)(i) or (ii) but on the average value of investments as per Rule 8D(2)(iii). In view of the facts that the said rule, lays down the specific procedure to be adopted for computation of disallowance the argument of the appellant lacks force. The statutory disallowance @ 0.5% of the value of average investments has been held to be reasonable especially considering that the PMS providers charge between 2 and 2.5%. The said mechanism was found to be in order by the jurisdictional High Court in the decision rendered in the case of Godrej and Boyce Mfg. Ltd. v DCIT reported at 328 ITR 81, refer para 60 of the said order reproduced below: "60. In the affidavit in reply that has been filed on behalf of the revenue an Explanation has been provided of the rationale underlying rule 8D. In the written submissions which have been filed by the Additional Solicitor General it has been stated, with reference to rule 8D(2)(ii) that since funds are fungible, it would be difficult to allocate the actual quantum of borrowed funds that have been used for making tax-free investments. It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example - any aspect of the assessee's business such as plant/machinery etc.).

4 Ravi Mohan Gehi As regards rule 8D(2)(iii) it has been submitted that some mechanism or formula had to be adopted for attributing part of the administrative/managerial expenses to tax exempt investment income. The administrative expenses attributable to tax-free investment income have a fixed component and a variable component. A view was taken that the disallowance should also be linked to the value of the investment rather than the amount of exempt income. Under Portfolio Management Schemes (PMS) the fee charged ranges between 2 and 2.5 per cent of the portfolio value which would be inclusive of a profit element for the portfolio manager. While the fixed administrative expenses were excluded, on the ground that in the case of a large corporate taxpayer they would be spread over a large number of voluminous activities, the variable expenses were computed at one-half per cent of the value of the investment. The justification that has been offered in support of the rationale for rule 8D cannot be regarded as being capricious, perverse or arbitrary. Applying the tests formulated by the Supreme Court it is not possible for this Court to hold that there is writ on the statute or on the subordinate legislation perversity, caprice or irrationality. There is certainly no 'madness in the method"' 5.3 In the decision of Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT reported at 15 taxmann.com 390 (Delhi), the Hon'ble Court held as under: "31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount 5 Ravi Mohan Gehi of expenditure by way of interest [other than the amount of interest included in clause (I)] incurred during the previous year in the ratio of the average value of invesb77ent, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The Third Component is an Artificial Figure- one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year (emphasis supplied). It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is taken (emphasis supplied)." 5.4 As stated earlier, the disallowance in this case is limited to clause (iii) of Rule 8D and no expenses or interest have been added back by the AO. As discussed above, the artificial figure computed is statutorily disallowable. In view of these reasons, the grounds raised by the appellant are rejected and the disallowance made by the AO is upheld.

3.3. We have gone through the order of Ld. CIT(A). It is noted that no disallowance has been made on account of interest. No expenses were allocated by the assessee suo motto towards earning of exempt income. Nothing has been brought before 6 Ravi Mohan Gehi the lower authorities or even before us to show that no expenses were incurred at all towards earning of exempt income. Further, nothing has been brought before us to contradict the findings recorded by the Ld. CIT(A). Under these circumstances, we have no other option but to uphold the detailed and well reasoned findings to Ld. CIT(A). The order passed by Ld. CIT(A) is confirmed and appeal filed by the assessee is dismissed.

Order pronounced in the open court on 24th June, 2016. (Joginder Singh) (Ashwani Taneja) "या"यक सद"य / JUDICIAL MEMBER लेखा सद"य / ACCOUNTANT MEMBER मुंबई Mumbai; "दनांक Dated: 24/06/2016 ctàxÄ? P.S/."न.स.