DCIT 3(1), MUMBAI vs. DAMANI ESTATES & FINANCE P.LTD, MUMBAI

The revenue has filed this appeal challenging the order dated 09- 11.20.12 passed by Ld CIT(A)-6, Mumbai for assessment year 2009-10, wherein he has held that the disallowance under Rule 8D is required to be computed after excluding the shares held as stock in trade.

We heard the parties and perused the record. The assessee is in the business of trading in shares and it had earned a dividend income of Rs.1,95,19,358/-. The assessee had disallowed a sum of Rs.6,73,476/- u/s 14A of the Act. The AO disallowed interest expenses to the extent of Rs.8,03,425/- under Rule 8D(2)(i) of the I.T Rules by holding that this portion of interest is to be treated as direct expenses. He did not make any disallowance under Rule 8D(2)(ii) towards indirect interest expenses. The AO computed the disallowance under Rule 8D(2)(iii) at 0.5% of the average value of investments. While computing the average value of investments, the AO also took both the value of shares held as stock in trade and as investments. In the appellate proceedings, the Ld CIT(A) held that the interest expenses disallowed by the AO should be computed under Rule 8D(2)(ii) as indirect interest expenses and not under Rule 8D(2)(i) as held by the AO. With regard to the working of average value of investments for the purpose of Rule 8D(2)(ii) and Rule 8D(2)(iii), the Ld CIT(A) held that the shares held as stock in trade should not be taken as “investments”. The revenue is aggrieved by this direction of the Ld CIT(A).

We have heard the parties and perused the record. We notice that the assessee has not filed appeal challenging the order of Ld CIT(A), meaning thereby, the interest disallowance made by the AO, subject to the adjustments suggested by Ld CIT(A) has been accepted by the assessee. We notice that the assessee had contended before the AO that the own funds available with it is sufficient to cover the investments. Further, we notice that the unsecured loans held by the assessee was Rs.5.15 lakhs at the beginning of the year and Rs.21.00 lakhs at the end of the year, meaning thereby the interest expenditure of Rs.99.82 lakhs claimed by the assessee are mainly related to the trading activities. Under these set of facts, we are of the view that we need not go into the issue of the nature of “average value of investments” for the purpose of computing interest disallowance, since the interest disallowance as per the directions given by the Ld CIT(A) would result in a reasonable amount.

With regard to the disallowance of administrative expenses, we notice that the assessee has carried forward most of the investments from the preceding year. Further the assessee has claimed administrative expenses of Rs.88.57 lakhs, out of which a sum of RS.28.64 lakhs relate to the Service tax paid and a sum of Rs.11.47 expenses relate to the brokerage expenses. The salary expenses stood at Rs.23.63 lakhs. Thus, we notice that the major portion of the administrative expenses is also related to the business of the assessee. Under these set of facts, we are of the view that the disallowance that will be worked out by following the directions given by Ld CIT(A) would be reasonable.

Hence, without going into the merits on the direction given by the Ld CIT(A) with regard to the working of “Average value of investments”, we are of the view that the resulting disallowance would be reasonable with regard to the facts and circumstances of the case. The AO is required to ensure that the disallowance worked out as per the directions given by Ld CIT(A) does not fall below the disallowance made by the assessee, in which case, the disallowance made by the assessee shall stand.

With the above said observations, we restore the matter to the file of the AO.