ACIT 18(2), MUMBAI vs. METROPOLITAN TRADING CO., MUMBAI

This appeal by the assessee is directed against the order dated 26.02.2014 of Commissioner of Income Tax (Appeals) {(hereinafter referred to as CIT(A)} for A.Y. 2009-10. The only ground raised in the appeal reads as under:-

Facts in brief are that the assessee was having tax free income by way of dividend on mutual funds and shares of Rs. 74,84,924/- and Long Term Capital Gain on shares of Rs. 5,54,362/-. The assessee itself made disallowance u/s 14A of the Act to the tune of Rs. 6,37,751/-. The assessee was doing job work for M/s Zodiac Clothing Co. and was dealing in ties and shirts etc. The AO during the course of assessment proceedings, noticed that the assessee disallowed only Rs. 6,37,751/- u/s 14A in relation to the exempt income being expenses relating to exempt income by not following Rule 8D which is applicable from A.Y. 2008-09, therefore, the AO after issuing show-cause notice worked out the disallowance under Rule 8D at Rs. 16,58,981/-. While

Aggrieved, the assessee carried the matter in appeal before CIT(A)

The CIT(A) deleted the addition of Rs. 10,21,230/- by holding that the assessee voluntarily disallowed Rs. 6,37,751/- including expenses on account of share transfer charges of Rs. 93/- and security transaction charges of Rs. 789/-. The CIT(A) further observed that major portion of the disallowance made by the assessee suo motu included salaries of two employees who used to partly look after the investment of the appellant firm as well as partners . Further on the safer side, the assessee disallowed the entire salary of these two employees . Ld. CIT(A) further noted that there was no expenses in the Profit & Loss Account which were of common nature which required apportionment between the exempt and non exempt income. Besides it, the CIT(A) also mentioned in para 5.1 of the impugned order that there was no other expenditure debited in the profit & loss account which could be Assessment year: - 2009-10 attributed to the exempt income and also that the AO’s satisfaction was not arrived at in a proper manner and, therefore, the provisions of Rule 8D were not applicable. The CIT(A) relied upon the decision in the case of ACIT Vs SIL Investment Ltd. 26 Taxman 78 and Sesa Goa Ltd. Vs. JCIT 38 Taxman 34.

Before us, the Ld. DR appearing for the Revenue, submitted that the order of CIT(A) is bad to the extent that the CIT(A) reversed the order of AO which applied Rule 8D for arriving at the disallowance relating to the exempt income of the assessee. He further pointed out that assessee had earned huge exempt income by way of dividend and Long Term Capital Gain and, therefore, the AO has rightly invoked the provisions of Section 14A r.w.r 8D.

The Ld. AR, on the other hand, argued that the assessee suo motu disallowed Rs. 6,37,751/- u/s 14A which could be the maximum amount disallowed u/s 14A as no other expenditure of exclusive or common nature was charged to the Profit & Loss Account. The Ld. Counsel further submitted that assessee was doing job work for M/s Zodiac Clothing Co. Ltd and was dealing in ties and shirts also and the expenses charged to the Profit & Loss Account were directly related to job work done or the trading activity carried out by the assessee, therefore, the Ld. AR prayed for upholding the order of CIT(A)

We have considered the rival submissions and carefully perused the relevant material on record and find from the profit & loss account filed by the Assessment year: - 2009-10 Ld. AR that there was no expense of common nature incurred or charged to Profit & Loss Account by the assessee. A close perusal of profit & loss account shows that expenses were either relating to manufacturing of ties relating to trading activity and, therefore, the invocation of section 14A r.w.r 8D appears to be wrong and incorrect. We further note that the CIT(A) had gone into issue of expenses relating to exempt income very minutely and arrived at a correct finding that the disallowance made by the AO to the tune of Rs. 10,21,230/- was wrong by applying .05% of average value of investment as made by the AO u/s subsection 3 to section 14A. The assessee’s case also finds support from the two Judgment (i) ACIT SIL Investment Ltd. 26 Taxman 78 (ii). Sesa Goa Ltd. Vs. JCIT 38 Taxman 34. In case of ACIT Vs SIL Investment Ltd (Supra) it has been held that it was wrong on the part of the AO to apply rule 8D(2)(iii) to compute the disallowance u/s 14A where the AO did not establish that the assessee incurred expenses in relation to exempt income. In the case Sesa Goa Ltd Vs JCIT(Supra), it has been held that the AO before rejecting the disallowance computed by the assessee , must give a clear cut finding having regards as to the account of the assessee as to how the expenditure claimed by the assessee out of non exempt income was related with the exempt income. We note that the assessee nowhere gave reasons or recorded his satisfaction as to how the disallowance worked out by the assessee was not correct and there the order of AO is wrong. We are therefore of the view that the facts of the assessee’s case are squarely covered by above two decisions and respectfully following the ratio laid down in we uphold the order of CIT(A).

In the result appeal of the Revenue is dismissed.