I.T.O WD - 8(4),KOLKATA, KOLKATA vs. M/S SOYUZ TRADING CO LTD, KOLKATA

That on the facts and circumstances of the case, and in law, the Ld. CIT(A) has erred in directing the Assessing Officer to restrict the disallowance u/s. 14A of the Income Tax Act, 1961 to the extent of expenses claimed by the assessee during the year; whereas there is no such restriction in the provisions of the Act.”

Briefly stated facts are that the AO during the course of assessment proceedings noticed that it has earned dividend income of Rs.1,66,06,788/- and long term capital loss of Rs.3,97,694/- which does not form part of taxable income but assessee has not attributed any expenditure towards this except ad hoc disallowance of Rs.2,60,221/- offered u/s. 14A of the Act. Accordingly, he observed that “as is evident from the above submission, the assessee has not denied of incurring expenditure in relation to dividend income, which 2 M/s. Soyuz Trading Co. Ltd. AY 2009-10 does not form part of the total income, but it has not provided any basis for offering an ad hoc disallowance of Rs. 2,60,221/- u/s. 14A. It is observed from the accounts of the current year as well as of earlier years that the main activities carried on by the assessee are deriving income from long term and short term investments in shares of other companies and units of mutual fund . About 98.60% and 88.90% of the total funds at the disposal of the assessee have remained so invested during the previous years 2007-08 and 2008-09 respectively. The total value of investment on the first day and the last day of the current previous year 2008-09 as appearing in the balance sheet are Rs. 97,86,43,112/- and 101,56,18,232/- respectively. It would not be overemphasized to say that investment decisions are very complex in nature. The investment requires availability of funds and consequential blocking of funds, besides, investment decisions are generally taken by the management personnel or other professional experts employed for the purpose for which administrative, managerial and establishment expenses are incurred. It is, therefore, not correct to say that no or nominal expenses were incurred in managing such huge investments giving rise to tax exempt dividend income. In the instant case, the assessee has not maintained any separate details or accounts in order to account of expenditure incurred in respect of such volume of investment activity and for that matter, in relation to the income which does not form part of the total income.” Accordingly, he made disallowance of Rs.49,85,653/- by applying the provisions of section 14A of the Act read with Rule 8D(2)(iii) of the I. T. Rules, 1962 as under: “The average of value of Investment = (Rs.97,86,43,112 + Rs.101,56,18,232)/2 = Rs.99,71,30,672/- Disallowance u/s. 8D(2)(iii) = 0.5% of Rs.99,71,30,672/- = Rs.49,85,653/- 4.5. as the assessee has already offered Rs.2,60,221/- for disallowance u/s. 14A, the differential amount of Rs.47,25,432/- (i.e. Rs.49,85,653 – Rs. 2,60,221) is now disallowed u/s. 14A and added back in computing the income under normal provisions of the Act. Since the assessee did not add back the disallowance u/s. 14A in computing the book profit u/s. 115JB, the disallowance u/s. 14A computed at Rs.49,85,653/- as above is added back in computing the book profit.”

Aggrieved, assessee preferred appeal before CIT(A), who deleted the disallowance by observing in para 5.1.4 as under: “5.1.4. After carefully considering the submission of the appellant along with the supporting details/evidences, perusing the facts of the case and the observation of the AO and other materials on record, I find substantial force in the argument put forward by the appellant. I agree with the argument of the A/R that the direct expenses incurred for earning the taxable income, in any case, cannot be disallowed u/s. 14A of the Act which stipulates that such expenditure incurred to earn the income which does not form part of 3 M/s. Soyuz Trading Co. Ltd. AY 2009-10 the total income. However, I do not agree with the contention of the A/R that 1 % of the exempt dividend income can reasonably be considered as disallowable expenses u/s. 14A as has been held by the Hon'ble ITAT, Kolkata as because the judgements referred to are related to the AYs prior to the AY 2008-09 when the provisions of Rule 8D was not applicable. At the same time, I am of the view that the disallowable expenses cannot exceed the total expenses claimed by an assessee during a year as has been held by the Hon'ble Delhi High Court and other High Courts of India. In the light of the above discussion & observation, perusing the entire facts of the case, the AO is directed firstly to modify/recalculate the disallowance of expenditure made uls. 14A of the Act after reducing the direct expenditure of consultancy fees of Rs.46,10,000/- from the total expenses claimed by the appellant in the P &L A/C and thereafter restrict the disallowance of expenditure maximum to the extent of balance of expenses claim in the P&L A/C by the appellant. Thus, this ground of appeal is partly allowed.”

We have heard rival submissions and gone through facts and circumstances of the case. The facts are not in dispute that during the relevant year, the assessee earned divided of Rs. 1,66,06,788/- and long term capital loss of (Rs. 3,97,694/-) which do not form part of taxable income. The assessee has not denied of incurring expenditure in relation to dividend income, which does not form part of the total income, but has offered only an ad hoc disallowance of Rs. 2,60,221/- u/s. 14A of the Act. We find that about 98.60% and 88.90% of the total funds at the disposal of the assessee remained invested in shares during the previous years 2007-08 and 2008-09 respectively. Thus, the total value of investment on the first day and the last day of the current previous year 2008-09 as appearing in the balance sheet are Rs.97,86,43,112/- and 101,56,18,232/- respectively. But we find that the assessee considering all the facts of the case at its own disallowed a sum of Rs. 2,60,221/- u/s. 14A of the Act which was based upon the facts and figures calculated considering the total expenses incurred during the year and reducing the expenses directly related to the earning of the taxable income. In support its contention, the appellant furnished the details of such expenses and working of the disallowable expenditure arrived at Rs. 2,60,221/- as above. It is observed that the assessee had considerable business income from management consultancy to the extent of Rs. 73,50,000/- during the relevant year and majority of expenses were incurred by the company for earning such business income. Before us it was explained that for earning the management consultancy fees of Rs. 73,50,000/-, the assessee has to incur direct expenses of Rs.46,10,000/- as Consultant Fees. Therefore, we are of the view that while applying Rule 8D(2)(ii), the AO should have excluded those expenses which were directly attributable to consultancy business income earned by the 4 M/s. Soyuz Trading Co. Ltd. AY 2009-10 assessee. We find from records that the assessee filed the details of consultancy income and expenses incurred for the same before AO during the course of assessment proceeding but he has not considered the same. We further find that the dividend income amounting to Rs.1,66,06,788/- was received by the assessee only from eight companies and dividend cheques were received though post or were directly credited to the assessee' bank account through ECS. As such no major expenses were incurred by the assessee for earning such income and collection of dividend cheque. Similarly, in respect of long term capital loss of Rs. 3,97,694/- there were only two transactions for purchase and sale of shares and two for investment and redemption of units of mutual fund which too were transacted over telephone through the broker/bank. No separate staff was employed for this purpose and extra expenses were incurred for such transactions. In view of the above facts and circumstances of the case, we are of the view that we need not interfere in the order of CIT(A) and hence, the same is confirmed. This issue of revenue’s appeal is dismissed.

In the result, the appeal of revenue is dismissed.

Order is pronounced in the open court on 29.10.2015 Sd/- Sd/- (Waseem Ahmed) (Mahavir Singh) Accountant Member Judicial Member