RAGHUKOOL ESTATE DEVELOPEMENT P. LTD,MUMBAI vs. ASST CIT CEN CIR 29, MUMBAI

The present appeal has been filed by the assessee against order dated 05/03/2013 passed by the CIT(Appeals)-40, Mumbai pertaining to the assessment year 2010-11. The assessee has challenged the impugned order on the following effective ground:-

The CIT(A) erred in upholding the disallowance of administrative expenses of Rs 7,78,596/-out of Rs. 8,41,256/- made by the AO on investment in shares claiming the entire administrative expenses was incurred by the assessee for the purpose of investment in shares.

2.1 Brief facts of the case are that the assessee, a private limited company is engaged in the business of real estate development, trading and investment related activities. It filed its return of income for A.Y. 2010-11 declaring the total income of Rs. 1,39,92,884/-. The return was processed u/s 143(1) of the Income Tax Act, 1961 (in short ‘the Act’). The case was selected for scrutiny and after assessment proceedings the assessment order was passed.

2.2 During the assessment proceedings, the Assessing Officer noted that the assessee had shown investment as on 31/03/2010 amounting to Rs. 42,65,76,469/- as compared to Rs. 34,81,96,954/- in the preceding year, the assessee was asked to furnish explanation with regard to disallowance as per Section u/s 14A of the Act read with rule 8D(2)(iii) of the Income Tax Rules. In response thereof the appellant submitted that the company had disallowed Rs. 25,000/- on account of administrative expenses in its computation of income. It was further submitted that direct expenses of Rs. 62,660/- on account of de- mat charges could not be considered at the time of filing of return and hence the total disallowance worked out to Rs. 87,660/-. Without prejudice, it was further submitted that maximum disallowance under Rule 8D(2)(iii) may be restricted to the administrative expenses debited to Profit & Loss a/c amounting to Rs. 8,66,256/-. The AO did not accept the contention the assessee and after allowing set off suo moto disallowance of Rs. 25,000/-, made by the appellant made an additional disallowance of Rs. 8,41,256/-.

2.3 The Assessment Order was challenged by the assessee by filing first appeal before the CIT(A). The CIT(A) after hearing the parties upheld the assessment orders and dismissed the appeal of the assessee.

2.4 Feeling aggrieved by the impugned order passed by the Ld. CIT(A), the assessee is in appeal before the Tribunal.

2.5 Before us, the Ld. Counsel submitted that the case of the assessee’s is covered by the order of Mumbai Tribunal passed in ITA 3775/Mum/2013 vide which the identical issue was decided in favour of the assessee and in view of the aforesaid order the impugned order passed by the Ld. CIT(A) is liable to be set aside.

2.6. On the other hand the Ld. DR heavily relying upon the concurrent orders passed by the Assessing Officer and Ld. CIT(A) submitted that since Rule 8D is applicable for the year under consideration the disallowance has rightly been worked out as per Rule 8D.

“7. The Assessing Officer while making the disallowance u/s 14A worked out the disallowance under Rule 8D(2)(iii) at Rs. 20,86,230/- which shows that the working under the provisions of Rule 8D negates the actual total expenditure debited by the assessee in the P&L account on administrative and other expenses. In any case, disallowance cannot be made more than the total expenses debited to the P&L Account. From the details of the expenses, it is clear that most of the expenses are specific in nature and exclusively incurred for the business activity of the assessee. Therefore, the expenses on account of auditor fee, legal and professional fees, profession tax, business support fees cannot be said to have any direct or proximate nexus with the activity of investment or earning the exempt income. Thus the disallowance u/s 14A can be made only to the extent of allocation of these expenses which has direct or proximate nexus with earning of exempt income. From the details of the expenses, we find that the printing and stationary expenses and bank charges & commission are only two items which could have direct or proximate nexus with the investment and exempt income. Therefore, the disallowance u/s 14A r.w. Rule 8D(2)(iii) cannot exceed to the allocable expenses incurred by the assessee for a composite activity resulting taxable and exempt income. The working of disallowance under Rule 8D(2)(iii) by the Assessing Officer clearly shows that it exceeds not only the expenses debited and claimed by the assessee which could have a proximate nexus with the earning of exempt income but also to the total expenditure debited by the assessee in the P&L account under the head administrative and other expenses. Therefore, it turns out to be contradictory to the actual facts and gives absurd results in complete disregard to the scheme of disallowance u/s 14A. Therefore, the provisions of Rule 8D(2)(iii) cannot be applied in the case of the assessee as it becomes unworkable and unrealistic. In the facts and circumstances of the case, we find that when the provisions of Rule 8D(2)(iii) becomes unworkable then in the absence of any finding as well as any specific expenses debited to the P&L account which could have a direct or proximate nexus for earning the dividend income the disallowance made by the assessee suo motu is just and proper. Accordingly, we delete the disallowance made by the Assessing Officer.”

3.1 The aforesaid decision of Mumbai Tribunal was further followed by “C” Bench of the Mumbai Tribunal in Capstan Trading Pvt. Ltd. vs. ACIT, Mumbai ITA 4088/M/12, Palm Shelter Estate Development Pvt. Ltd. vs. ACIT, Mumbai ITA 4089/M/12 & Casa Maria Properties Pvt. Ltd. vs. ACIT, Mumbai ITA 4091/M/13 and all the three appeals filled by assessee were allowed.

3.2 In the case before us, the only grievance of the assessee is that the CIT(A) has wrongly upheld the disallowance of administrative expenses made by the AO on investment in shares holding that the entire administrative expenses was incurred by the assessee for the purpose of investment in shares. The ground in present case is identical to the ground in the case of Cape Trading Pvt. Ltd. vs. ACIT, Mumbai (supra) and the other appeals discussed in the foregoing paras. The co-ordinate Benches of ITAT Mumbai have already decided the identical issue in favour of the assessee. Following the decisions of co- ordinate Benches, we decide the sole ground of appeal in favour of the assessee and delete the disallowance made by the Assessing Officer.

Order pronounced in the open court on 29th February, 2016