DCIT CIR 3(1), MUMBAI vs. FLOREAT INVESTMENTS LTD, MUMBAI

आदेश / O R D E R Per Ashwani Taneja (Accountant Member):

2 Floreat Investments Ltd. 2. During the course of hearing, arguments were made by Shri Porus Kaka, Authorised Representative (AR) on behalf of the Respondent and by Shri Love Kumar, Departmental Representative (DR) on behalf of the Revenue.

The Assessing Officer has not related any of the expenses comprised in the expenses disallowed of Rs.34,63,411/- to the exempt income of Rs. 1 Lac.

In this connection a Tribunal decision passed for A.Y.2008- 09 by Hon’ble ITAT ‘J’ Bench under and 7851/Mum/2011 (copy enclosed) is referred to, especially at para 18 of the said ITAT order wherein in the last few lines of the para the following is mentioned:- “Disallowance under section 14A required finding of incurring of expenditure and where it was found that for 4 Floreat Investments Ltd. earning exempted income no expenditure has been incurred, disallowance under section 14A could not stand. We notice that assessee itself disallowed the interest which is directly applicable, Demat charges and administrative expenses on estimation totaling to Rs.1,55,44,610. Assessee is a hundred crore turnover company. Assessing Officer has not examined any expenditure claimed in P & L A/c so as to relate to exempt income, nor gave a finding that assessee claim is not correct for any reason. Rule 8D cannot be invoked directly without satisfying about the claims or otherwise. Consequently, the disallowance was not permissible. We therefore, allow the ground of appeal.”

As the Assessing Officer in our case has failed to relate the expenses of Rs.34,63,411/- claimed in P & L A/c so as to relate to exempt income nor gave finding that assessee’ claims is not correct for any reason, the disallowance therefore was not permissible.”

Ld. CIT(A) considered the submissions of the assessee in detail and found that the disallowance made by the AO was not sustainable and therefore, the same was deleted by him.

4.2. Before us Ld. DR has relied upon the order of the AO, whereas, Ld. Counsel appearing before us has vehemently argued that the assessee has made voluntary disallowance of more than sufficient amount i.e. Rs.25,44,53,328/-. It was further submitted that during the year, the assessee received dividend income only for Rs.1 lakh, therefore, no more disallowance was called for and thus, Ld. CIT(A) has rightly deleted the excessive disallowance made by the AO.

4.3. We have gone through the orders of the lower authorities and find that detailed reasoning has been given by the Ld.

5 Floreat Investments Ltd. CIT(A), while deleting the disallowance made by the AO. The relevant portion of the order of Ld. CIT(A) is reproduced below: “So far as the investment activity of the appellant in tax- free investments is concerned, from the above, it is evident that the same has remained static and no fresh investments have been made during the year. From the assessment order itself, it is evident that the tax-free investments at the beginning and end of the year were Rs.128,07,81,790/-. Since there is no investment activity during the year, the appellant’s argument that ‘no expenses (other than interest expenses and loan processing fees) can be attributed to the earning of exempt income’ has sufficient force. The AO has not at all analysed these facts and figures of the case of the appellant and has made general observations only in this regard to different from the claim of the appellant. In view of above facts, the two ITAT decisions relied upon by the AO become in-applicable to the facts of the case of the appellant. The binding decision available on this issue is the judgment of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. 328 ITR 81, wherein the Hon’ble Court has held that the dividend income and income from mutual funds, falling within the ambit of section 10(33) of the Act are not includible in computing the total income of the assessee. Consequently, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income. It has also been held that provisions of Rule 8D of the I-T Rules, 1962 shall apply with effect from assessment year 2008-09. However, in this decision, it is also held that recording of reasons for non-satisfaction with the claim of the assessee, is a must for the AO before applying the provisions of Rule 8D. The AO has although made general observations in this regard, he has not considered the facts and figures of the case of the appellant. This view is also supported by the Hon’ble Mumbai ITAT decision in the case of J. K. Investors Ltd. (supra) cited by the appellant. Hence, the action of the AO in applying the provisions of Rule 8D is wrong. In the case of ‘Godrej’, Hon’ble Judges of the Bombay High Court held that:

6 Floreat Investments Ltd. “The safeguard introduced by Sub-section (2) of Section 14A for a fair and reasonable exercise of power by the Assessing Officer, conditioned as it is, by the requirement of an objective satisfaction, must, therefore, be scrupulously observed. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that, he comes to the conclusion that, he is not satisfied with the claim of the assessee. “ From the above, it is seen that recording of reason for non- satisfaction with the claim of the assessee, is a must and such non-satisfaction should be objective and based on the relevant facts including the accounts of the assessee. As is evident, in the case of the appellant, there was no objective satisfaction recorded by the AO and only general observations have been made. In fact, in the case of the appellant, since no new investment activity has been carried out during the year, there was no case with the AO to differ from the claim of the appellant. In view of above reasons therefore, I do not agree with the decision of the AO so far as the additional disallowance made by him of Rs.34,63,411/- is concerned. The same is therefore ordered to be deleted. (emphasis supplied)

4.4. It is noted by us from the perusal of details contained in the orders of the lower authorities that the assessee has suo- moto made disallowance of sufficient amount. The remaining expenses, which were not included in statutory disallowance by the assessee, do not pertain to and cannot be said to have been incurred for the purpose of making investment in tax-free securities. These are apparently not related to the earning of the exempt income. No case has been made out by the AO as to how and why some more disallowance was called for. We find that Ld. CIT(A) has rightly recorded that AO has not 7 Floreat Investments Ltd. recorded satisfaction based on relevant facts before rejecting the claim of the assessee. We find findings of the Ld. CIT(A) are well reasoned and in accordance with the law and facts, and therefore, these are upheld. In view of the same appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 24th February, 2016.