DCIT 8(2), MUMBAI vs. HSBC INVEST DIRECT (I) LTD, MUMBAI

At the outset, the Ld. Counsel submitted that ground no. 5 is not pressed and accordingly, the same is dismissed as not pressed.

The main issue involved, which has been raised vide ground no.1 is disallowance of Rs. 1,22,66,688/- made u/s 14A r.w. Rule 8D.

Brief facts are that, assessee is a Public Limited Company and is engaged in the business of investment in subsidiaries and associate companies; lending to subsidiary companies; employees welfare Trust; Loan Syndication; Investment in units of Mutual Funds-Growth plan; and equity shares considered as stock-in- trade, investment in Fixed Deposit with bank, etc. The Ld. AO noted that, assessee had earned dividend income of Rs.5,58,480/- under the head “income from stock-in-trade” and another dividend income of Rs. 10,37,760/- from investments under the head “income from investments”. Such a dividend income was claimed as exempt in the computation of income. The AO further noted that the Auditors have mentioned that the amount of deduction inadmissible in the terms of section 14A amounts to Rs. 2,53,35,688/- in its Tax Audit Report. Whereas, the assessee had suo moto offered the disallowance u/s 14A amounting to Rs. 1,30,69,000/- in its revised return of income. In response to the show cause notice, as to why Rule 8D should not be applied, the assessee submitted that it has made the investment in subsidiary companies and all these entities are handled by professionals who have respective expertise in diverse fields and no employees of the assessee company were involved during the year. However, the AO held that, since assessee has offered suo moto disallowance u/s 14A amounting at Rs. 1,30,69,000/- based on the estimate which cannot be accepted as such, and accordingly, he worked out the disallowance as per the amount quantified by the Auditors in accordance with the Rule 8D at Rs. 2,53,35,688/-. Since the amount of Rs. 1,30,69,000/- had already been offered by the assessee in the revised return, therefore, he restricted the disallowance to Rs. 1,22,66,688/-.

The Ld. CIT(A) held that, in the assessment year 2008-09 the CIT(A) has given certain directions to work-out the disallowance u/s 14A which has been referred by him in para 4.1 and 4 HSBC Invest Direct (I) Ltd. (Formerly IL & FS Investmart Ltd) Mum/2 AO to work out the disallowance as per the directions given by the CIT(A) in the earlier year.

Before us the Ld. Counsel submitted that, now various decisions of High Courts have come, wherein it has been held that, if there is no dividend income then no disallowance u/s 14A should be made or it should be in proportionate to the exempt income. Here in this case, the assessee’s dividend income is approximately 16 lakhs rupees, therefore, such a huge disallowance cannot be made. Accordingly, he submitted that, matter should be restored back to the file of the AO to deal and decide the issue in accordance with the decision of the Hon’ble Delhi High Court order dated 02.09.2015 vide Appeal in 799 of 2014, in the case of Chem Invest Ltd. vs CIT which has reversed the decision of ITAT Special Bench. He further pointed out that, ITAT Mumbai Bench in the case of Cox and Kings following the order of the said High Court has directed the AO to follow the ratio laid down therein.

On the other hand, Ld. DR submitted that, if the assessee has earned less dividend income, then it does not mean that expenditure attributable to earning of such exempt income should be less than the exempt income. Thus, he submitted that disallowance as worked out by the CIT(A) in view of the past history should be upheld.

We have heard the rival contentions and also perused the relevant finding given in the impugned orders. It is an admitted fact that assessee had offered suo moto disallowance u/s 14A amounting to Rs. 1,30,69,000/-, in its revised return of income. The AO has enhanced the disallowance to Rs.2,53,35,688/-, thereby making an addition of Rs. 1,22,66,688/- on the ground that in the Form 3CD of Tax Audit Report, the Auditors have quantified the disallowance u/s 14A r.w. Rule 8D. From the 5 HSBC Invest Direct (I) Ltd. (Formerly IL & FS Investmart Ltd) Mum/2 AO has relied upon the decision of ITAT Special Bench in the case of Chem Invest Ltd., reported in 317 ITR 86 (AT). Now, this decision of the Special Bench of the Tribunal, has been reversed by the Hon’ble Delhi High Court, as referred by the Ld. Counsel. However, if we agree with the contention of the Counsel that the decision of Delhi High Court should be applied and followed wherein it has been laid down that section 14A envisages there should be actual receipt of exempt income and in case there is no exempt income received or receivable, then no expenditure should be disallowed then here in this case it is also an admitted fact that dividend income was approximately Rs. 10 lakhs, whereas the assessee has suo moto disallowed Rs. 1,30,69,000/-, thus, the disallowance offered by the assessee itself is much more than the exempt income. Hence, we restrict the disallowance as offered by the assessee in the revised return of income. Accordingly, we hold that no further disallowance over and above the amount of Rs. 1,30,69,000/- should be made and accordingly, ground no. 1 as raised by the assessee is treated as allowed and enhancement of disallowance of Rs. 1,22,66,688/- stands deleted.

Ground no. 2 and ground no. 3 relates to disallowance under section 14A in the book profit computed u/s 115JB. Since we have upheld the disallowance offered by the assessee at Rs. 1,30,69,000/-, the same should also be part of the disallowance while computing the book profit u/s 115JB. Thus, ground no. 2 & 3 are treated as partly allowed.

In ground no. 4 the assessee has challenged levy of interest u/s 234B, which admittedly is consequential in nature and hence the same is dismissed.

In revenue’s appeal, following ground has been raised:-

In view of our finding given in the assessee’s appeal, we do not find any merits in the ground raised by the revenue and accordingly the same is dismissed.

In the result, appeal of the assessee is partly allowed whereas appeal of the revenue is dismissed.