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Income Tax Appellate Tribunal, “SMC” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM ]
Date of Hearing : 14.03.2016. Date of Pronouncement : ORDER This is an appeal by the Assessee against the order dated 14.12.2015 of CIT(A)-5, Kolkata, relating to AY 2006-07.
2. The only dispute in this appeal is with regard to disallowance made by AO u/s 14A of the Act.
The Asssessee is a company engaged in the business of investment and financing. On scrutiny of the details. documents and submission filed in course of the assessment proceedings the AO found that the assessee had earned dividend income and Long Term Capital Gain amounting to Rs.10,15,860/- and Rs.11,75,572/- totaling Rs.21,91,432/- in the financial year 2005-06 and the said income has been claimed exempt and not forming part of total income in the computation filed. In the computation, the assessee had not disallowed any expenditure out of the expenditure debited to the Profit & Loss Account for earning the said exempt income which does not form a part of total income of the assessee of the previous year relevant to the assessment year 2006 – 07.
-M/s. Mandya Finance Co.Ltd.,-A.Y.2006-07 1 3.1. The AO thereafter found from the accounts filed in course of the assessment proceedings that during the financial year 2005-06 the assessee had no sales of shares and redemption of Mutual Fund. However, there were purchase of shares and Mutual Funds amounting to Rs.1,55,410/-, opening stock of shares, Debentures and mutual fund amounting to Rs.20,47,187/-, and closing stock of shares, debenture and mutual fund amounting to Rs.21,46,847/-. In course of the assessment, the Assessee claimed that interest amounting to Rs.60,636/- debited to Profit and Loss Account was in relation to the business of the assessee. In the computation of the total income filed, the assessee has itself added back the STT amounting to Rs.23,140/- and FBT amounting to Rs.7,867/. Therefore, expenditure common to the activities of the assessee for earning different type of income was calculated by the AO at Rs.5,55,604/- [ Rs.28,49,844/- - (Rs.2047187/- + Rs.1 ,55,410/- + Rs.60,636/- + 23,140/- + Rs.7,867/.)]. .
3.2. The income credited to the Profit and Loss Accounts of the assessee for the year ended 31.03. 06 was Rs.45,73,584/- [Rs.10,15,860/- plus Rs.11,75,572/-]out of which the exempt income claimed by the assessee in the computation is Rs.21,91,432/- (Rs.10,15,860/- plus Rs.11,75,572/-). Therefore, the. exempt income constituted 47.91 % of the income credited to the Profit and Loss Accounts.
3.3. Since the assessee had not disallowed any part of the expenditure debited to the Profit & Loss Account for earning the above mentioned income of Rs.21 ,91 ,432/- claimed exempt in the computation of total income, the AO held that 47.91% of the above mentioned expenditure of Rs.5,55,604/- had to be disallowed u/s.14A of the I.T. Act considering the same as attributable to earning the said exempt income of Rs.21,91,432/-. Therefore, the disallowance u/s.14A of the I.T. Act was calculated at Rs.2,66,190/- (47.91 % of 5,55,604/-) .
On appeal before CIT(A), CIT(A) upheld the order of AO. Aggrieved by the order of CIT(A) assessee has preferred the present appeal before the Tribunal.
The learned counsel for the Assessee pointed out that in the following cases, the Hon'ble ITAT, Kolkata has held that 1% of the exempted income/dividend shall be -M/s. Mandya Finance Co.Ltd.,-A.Y.2006-07 2 considered as expenses/expenditure relating to the earning of exempted income u/s 14A in the assessment years where the rule 8D was not applicable:-
Himtaj Consultants Pvt. Ltd. vs. I.T.O. (ITA No. 721/Ko1l2007- AY. 2004-05) Order dated 27.04.2007.
CHNHS Association vs. ACIT(ITA No.74/KoI/2008-AY.2004-05) Order Dated 19.02.2008.
3. I.T.O. vs. M/s S.P.S. Securities (P) Ltd. (ITA NO.123/KoI/2010- AY.2000-01 Order dated 19.08.2010 He further pointed out that the Hon’ble Calcutta High Court in the case of CIT Vs. M/S.R.R.Sen & Brothers Pvt.Ltd. in GA No.3019 of 2012 in of 2012 dated 4.1.2013 held that computation of 1% of exempt income as disallowance u/s.14A of the Act was proper. The learned DR relied on the order of the CIT(A) and submitted that the disallowance in any case has to be 1% of the exempt income.
I have considered the rival submissions. The Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010J 328 ITR 87(Bom) has held that Rule 8D could not be considered as retrospective and the said Rule could be applied only with effect from the Assessment Year 2008-09. Further, the Bombay High Court also observed in the above-referred case that the Assessing Officer would first be required to check the concerned assessee's offer of disallowance and only after recording his dissatisfaction, if any, the Assessing Officer could commute the amount to be disallowed in accordance with sub-section (2) of section 14A. The above- referred subsection (2) of section 14A was inserted by the Finance Act, 2006, with effect from the Assessment Year 2007-08. The Assessee’s case being for the Assessment Year prior to AY 2007-8, there cannot be any applicability of the above- referred sub-section (2) of section 14A or Rule 8D in the Assessee's case for the present Assessment Year. In the given circumstances, the quantum of disallowance had to be decided in the light of the decisions rendered by the ITAT Kolkata Benches in the cases referred to by the CIT(A) in the impugned order. In those decisions, the -M/s. Mandya Finance Co.Ltd.,-A.Y.2006-07 3 ITAT, Kolkata Benches have consistently taken a view that 1% of the exempted income/dividend shall be considered as expenses/expenditure relating to the earning of exempted income u/s 14A in the assessment years where the rule 8D was not applicable. The same has also been upheld by the Hon’ble Calcutta High Court in the case of M/s.R.R.Sen & Brothers Pvt.Ltd. (supra). Following those rulings, I hold that 1% of the exempt income alone should be disallowed u/s.14A of the Act.
In the result, appeal of the Assessee is partly allowed.