ACIT 20(3), MUMBAI vs. YOGESH M DESAI, MUMBAI

We heard the parties and perused the record. The assessee is owner of two proprietary concerns and the books of account of those business concerns are maintained separately. The investments made by the 2 assessee are accounted for in his personal books of account. During the year under consideration, the assessee earned dividend income of Rs.1.21 crores and Long term capital gain of Rs.3.30 crores and claimed both of them as exempt from taxation. The assessee did not disallow any amount u/s 14A of the Act on the plea that it has maintained separate books of accounts for investments and no expenditure was incurred. The AO, however, applied the provisions of Rule 8D of the IT Rules. Since the own funds available with the assessee was more than the investments, the AO did not make any disallowance out of interest expenditure. However, the AO applied provisions of Rule 8D(2)(iii) and computed disallowance out of administrative expenses @ 0.5% of the average value of investments. The ld CIT(A), however, deleted the addition by observing that the assessee has maintained separate books of account and he did not incur any expenses in relation to the exempted income. Aggrieved the revenue has filed this appeal before us.

The Ld A.R reiterated the contentions made before the tax authorities. The Ld D.R, on the contrary, submitted that though the assessee has accounted for investments in his personal books, yet the possibility of incurring certain expenses accounted in the business concerns towards the investments cannot be ruled out.

When the contentions of Ld D.R were put to the Ld A.R, he submitted that the application of Rule 8D, in the facts and circumstances of the case, was not warranted. He submitted that the assessee has sold shares of 22 companies and earned Long term capital gain; sold shares of 6 companies and earned short term capital gain and purchased shares of 38 companies. He further submitted that the dividends were directly credited to the bank account of the assessee. Accordingly, he submitted that the disallowance of administrative expenses, if any, can at the most be made to the extent of Rs.1.00 lakh.

Having heard rival contentions, we are of the view that the application of Rule 8D(2)(iii), i.e., computation of disallowance @ 0.5% of the average value of investments, is not warranted. It is an admitted fact that the assessee has maintained separate books of accounts for his business concerns and the investments have been accounted for in his personal books. However, as submitted by Ld D.R, the possibility of incurring certain expenses like telephone, travelling, premises, staff services, vehicles etc., cannot be altogether ruled out. Hence, we are of the view that some disallowance towards expenses, having regard to the accounts of the assessee, is called for. The Ld A.R has detailed the nature and quantum of transactions carried out by the assessee. From the details filed by the assessee, we notice that the assessee has incurred a sum of Rs.22.39 lakhs as administrative expenses and Rs.64.60 lakhs as staff expenses in his two business concerns. Considering the nature and volume of transactions carried on by the assessee during the year under consideration, we are of the view that a round sum disallowance of Rs.2.00 lakhs would fulfil the requirement of the provisions of sec. 14A and the same would also meet the ends of justice. Accordingly, we modify the order of Ld CIT(A) and direct the assessing officer to restrict the addition u/s 14A of the Act to Rs.2.00 lakhs.

In the result, the appeal filed by the revenue is partly allowed for statistical purposes. Order pronounced in the open court on 16th December, 2015 (संदीप गोसधई/SANDEEP GOSAIN) ( बी.आर.बास्करन/ B.R.BASKARAN) न्याययक सदस्य/Judicial Member ऱेखा सदस्य /Accountant Member मुंबई Mumbai; ददनांक Dated. 16th Dec,2015

DR, ITAT, Mumbai concerned 6. गार्ड पाईर / Guard file. आदेशानुसाय/ BY ORDER,सहामक ऩंजीकाय (Asstt.