ALCO COMPANY P.LTD,MUMBAI vs. ITO WD 2(1)(1), MUMBAI

आदेश / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER :

ITA 1747/M/13 2

“1) The Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of Rs. 43,48,277/- u/s. 14A. 2) The appellant prays that: i) Disallowance of Rs. 43,48,277/- u/s. 14A may be deleted and/or reduced; ii) personal hearing may be granted; iii) any other relief your honours may deem fit.”

ITA 1747/M/13 3

(A) Interest paid = Rs. Nil (B) Average investments = Rs. 86,96,55,303/- (C) Average of total investments in Balance sheet = NA

Working of disallowance u/s 14A:

I Expenses directly attributable to Already disallowed in Nil exempt income computationRs. 5,13,278/- II Interest “NOT” directly attributable N.A. N.A. to exempt income (A x B/C) 0.5% of average value of 0.5% of Rs. 86,96,55,303/- Rs. 43,48,277 III investments TOTAL DISALLOWANCE U/S 14A Rs. 43,48,277/- read with RULE 8D OF I.T. RULES The A.O., thus added an amount of Rs. 43,48,277/- to the assessee’s company total income u/s 14A of the Act.

5. Aggrieved by the assessment orders dated 21-11-2011 passed u/s 143(3) of the Act of the AO, the assessee company preferred an appeal before the CIT(A) and submitted that the assessee company has earned dividend income of Rs. 8,40,14,978/- from listed companies and mutual funds and an amount of Rs.13,38,525/- as interest income on 6.75% A.R.S. Tax Free Bonds which has been claimed exempt from income tax whereas only Rs. 5,13,278/- were offered for disallowance u/s 14A of the Act . The A.O. applied Rule 8D of Income Tax Rules, 1962 and made further disallowance of Rs. 43,48,277/- being equivalent to 0.5% of average investment on account of administrative expenses. The assessee company submitted that an amount of Rs. 11,93,471/- are directly related to investment activity, which the assessee company agreed to disallowance as per details submitted to the CIT(A) . The assessee company claimed that only expenses totaling to Rs. 2,70,193/- are to be allocated between exempt income and other income. The assessee ITA 1747/M/13 4 company submitted that the balance expenses incurred by the assessee claimed to be relating to sales only and its additional disallowance cannot be more than Rs. 9,29,622/- , in addition to Rs. 5,13,278/- which has already been offered for disallowance. The assessee company submitted that it has purchased shares many years back and is not required to incur any expenditure for either maintaining its shareholding or earning dividend on such shares except for de-mat expenses, which has been voluntarily disallowed by the assessee company. The assessee company submitted that it has not incurred any expenditure to earn dividend income and the dividend declared by the company is generally received once a year and deposited in the bank account of the assessee company. The assessee company submitted that its own surplus funds have been invested in the securities from which the exempt dividend / interest income has been earned and no borrowed funds are utilized for making investments. Thus, in nutshell the assessee company submitted that it has not incurred any expenditure whatsoever for earning the exempt income except the amount voluntarily disallowed by the assessee company and all the expenditure debited to the P&L account of the assessee company has been incurred wholly and exclusively for the purpose of the assessee’s company business. The assessee company submitted that out of abundant caution and to buy peace of mind and to avoid litigation , the assessee company has voluntarily offered for disallowance of expenditure of Rs.14,42,900/- us/ 14A of the Act which includes Rs.5,13,278/- suo moto disallowed in the return of income filed with the Revenue .The assessee company submitted that AO erred in saying that the assessee company has not offered for disallowance any expenditure u/s 14A of the Act in the return of income filed with the Revenue while fact of the matter is that the assessee company disallowed expenditure of Rs.5,13,278/- u/s 14A of the Act . The assessee company submitted that AO cannot proceed to compute disallowance under Rule 8D of Income Tax Rules, 1962 before recording the finding that the disallowance made by the assessee company is incorrect.

ITA 1747/M/13 5 The CIT(A) after considering the facts of the case and submission of the assessee observed that by the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. CIT, 328 ITR 81(Bom.) , Hon’ble Bombay High Court has held that Rule 8D of Income Tax Rules, 1962 is applicable from assessment year 2008-09 for computing the disallowance u/s 14A of the Act and accordingly as per Rule 8D of Income Tax Rules, 1962, direct expenses on account of interest and other expenses are to be disallowed in addition on account of apportionable expenses of 0.5% of average investment made by the assessee company. The CIT(A) accordingly held that the A.O. has rightly applied Rule 8D of Income Tax Rules, 1962 for making the disallowance of expenses to the tune of Rs.43,48,277/- and the CIT(A) confirmed the additions made by the AO.

4. The ld. Counsel for the assessee company submitted that the assessee company has voluntarily offered an amount of Rs. 5,13,278/- while computing the disallowance u/s 14A of the Act. The ld. Counsel submitted that the investment of Rs. 90,43,30,175/- made by the assessee company are mostly old investments and the assessee company has not incurred any expenditure in relation to the exempt income except an amount of Rs. 5,13,278/-. The ld. Counsel submitted that the assessee company has voluntarily offered an amount of Rs. 14,42,900/- towards expenditure to be disallowed under section 14A of the Act in order to buy peace and avoid litigation with the Revenue but the A.O. has applied Rule 8D of Income Tax Rules, 1962 without any finding that how the amount of disallowance offered by the assessee company is incorrect. The ld. Counsel of the assessee company submitted that, before proceeding to apply Rule 8D of Income Tax Rules, 1962, first the A.O. has to bring on record cogent material to disallow ITA 1747/M/13 6 the claim of the assessee company as per mandate of Section 14A(2) of the Act. The ld. Counsel of the assessee company showed us the expenses of Rs. 1,03,30,994/- as per Schedule 11 which is part of audited accounts of the assessee company for the financial year 2008-09 which is placed at page 27 of assessee’s paper book and contended that these are the expenses incurred by the assessee company and most of the expenses are incurred for business purpose of the assessee. On being asked, the ld. Counsel submitted that the sales of goods dealt within by the assessee company effected by the assessee company during the assessment year 2009-10 was Rs. 62,48,788/- while the dividend /interest income received was Rs. 8,62,09,965/-. The ld. Counsel of the assessee company also submitted that no borrowed funds were deployed by the assessee for making these investments and the A.O. has wrongly applied Rule 8D(2)(iii) of Income Tax Rules, 1962 by disallowing the expenses of Rs.43,48,277/- being 0.5% of the total average investments of Rs. 86,96,55,303/- on which the exempt income is earned. The ld. Counsel for the assessee also submitted that for assessment years 2005-06 & 2006-07, the method of determination of disallowance adopted by the assessee company has been accepted by the CIT(A) which is not challenged by the Revenue.

6. We have heard the rival contentions and also perused the material placed on record. We have observed that the assessee company has made investment of Rs. 90,43,30,175/- as on 31st March, 2009 , of which the market value of the said investment as on 31-03-2009 is Rs.326.63 crores. The total dividend income earned by the assessee company is Rs. 8,40,14,974/- and interest of Rs13,38,525/- on 6.75% A.R.S. Tax Free bonds ITA 1747/M/13 7 is also earned by the assessee company during the previous year , which are claimed as exempt income. The assessee company has made sales of products in trading business of Rs. 62,48,788/- which is relatively a small amount as compared to the dividend and interest income of Rs.8,62,09,965/- earned by the assessee company during the year. The assessee company has purchases(net of increase/ decrease in stock ) of traded goods dealt in by the company of Rs. 50,14,097/- while sales of traded goods stood at Rs.62,48,788/- during the year and the expenses incurred by the assessee company is to the tune of Rs.1,03,30,994/- , out of which expenses on employees and their perks is Rs. 63,46,983/- , while the investment in shares and securities as per market value as on 31-03-2009 stood at Rs 326.63 crores and also cash flow statement of the assessee company as per audited accounts reveal that the total of sale and purchase of securities during the year stood at Rs.31.14 crores while there has been loss incurred on sale of investments of Rs.86,84,676/- during the year while in immediately preceding year the profit on sale of investment stood at Rs. 74,89,568/- which are all strong indicators on the touchstone of preponderance of probabilities that the main focus area and substantial activity of the assessee company is management and monitoring of investments in shares and securities , from which substantial stream of income by way of exempt income of dividend and interest are earned by the assessee company. The total share capital and reserves of the company are Rs. 102.85 crores, out of which Rs.90.43 crores are investments in the shares and securities , Rs. 11.10 crores in ‘loans and advances’ while approx Rs 99.92 lacs is ‘cash and bank balance’ and vis-à-vis investment in fixed assets is only Rs 22.65 lacs and the inventories are merely Rs 37.05 lacs while sundry debtors are Rs 3.32 lacs, which again strongly indicates on touchstone of preponderance of probabilities that the substantial activity of the company is making investments and granting loans and advances rather than doing trading of the goods dealt in by the assessee company which in our considered view is that the trading activity undertaken ITA 1747/M/13 8 by the assessee company constitutes insignificant area of operations vis-à-vis investment activity of the assessee company. The copies of audited accounts of the assessee company for the financial year 2008-09 are placed at page 16- 34 of paper book filed by the assessee company , from which the above figures are extracted .The authorities below have not accepted the contentions of the assessee company with respect to the claim of the assessee company with respect to the amount of expenditure incurred by the assessee company in relation to the earning of exempt income and thereafter, proceeded to apply Rule 8D of Income Tax Rules, 1962. Rule 8D of Income Tax Rules, 1962 is applicable from the assessment year 2008-09 as per the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) and in the instant appeal the relevant assessment year is 2009-10 whereby Rule 8D of Income Tax Rules, 1962 is clearly applicable which is merely a machinery provisions to compute disallowance u/s 14A of the Act which is a substantive Section to disallow expenditure incurred in relation to income which does not form part of the total income under the Act. In our considered view, the authorities below have rightly applied the Rule 8D of Income Tax Rules, 1962 in the instant case as the relevant assessment year is 2009-10 keeping in view the peculiar facts and circumstances of the case which we have discussed above in this order. The contentions of the assessee company that the CIT(A) has accepted the method of computation adopted by the assessee company for assessment year 2005-06 and 2006-07 can not be accepted as first of all principles of res-judicata are not applicable to income tax proceedings, Secondly Rule 8D of Income tax Rules, 1962 is applicable from assessment year 2008-09 as held by Hon’ble Bombay High court in the case of Godrej & Boyce Manufacturing Co. Ltd(supra) and the relevant assessment year under appeal is assessment year 2009-10 while Rule 8D of Income Tax Rules,1962 cannot be applied to the assessment year 2005-06 and 2006-07, and thirdly on merits based on facts and circumstances of the case , we have observed above that the substantial activity of the assessee company is to ITA 1747/M/13 9 make investments and substantial amount of revenue stream for the assessee company is from dividends and interest income which are exempt from tax. Thus, most humbly we reject the contentions of the assessee company and we uphold the disallowance of total expenditure of Rs. 43,48,277/- made by the AO under Section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 , in the case of the assessee company keeping in view the peculiar facts and circumstances of the case . We do not find any infirmity in the orders passed by the CIT(A) which we confirm and dismiss the grounds of appeal raised by the assessee company in this appeal. We order accordingly

Order pronounced in the open court on 23rd December, 2015. आदेश क� घोषणा खुले �यायालय म� �दनांकः 23-12-2015 को क� गई ।