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JM Financial Consultants Pvt. Ltd. (Now Known As JM Financial Institutional Securities P. Ltd.) Versus DCIT, Cir 3 (2) Mumbai

2015 (11) TMI 1061 - ITAT MUMBAI

Disallowance u/s 14A - assessee made a suo motu disallowance u/s 14A - Held that:- In the present case, it is seen that conditions of subsection 2 of section 14A are not satisfied. The AO has not cared to examine the accounts of the assessee and correctness of the claim made by the assessee. Ld. AO in the present case has straight away proceeded to apply Rule 8D for the purpose of disallowance u/s 14A, without satisfying or applying with the mandatory requirement of section 14A(2) r.w. Rule 8D. .....

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g the year, an amount of ₹ 3,00,71,654/- was on the investments in Mutual Funds of group companies for strategic reasons and ₹ 50,00,000/- on the preference shares of subsidiary company. Both of these amounts have been received on the investments made ostensibly for strategic reasons. In our considered view, strategic investments are not made for the purpose of earning tax-free income. These should not be considered for making disallowance u/s 14A

The remaining amount of d .....

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JM And Ashwani Taneja, AM For the Appellant : Shri Vipsi T Patel (AR) For the Respondent :: Shri S S Kumaran (DR) ORDER Per Ashwani Taneja (Accountant Member) This appeal has been filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals) -4, Mumbai {(in short Ld. CIT(A)}, dated 11.12.2012 for the assessment year 2009-10, decided against the assessment order passed by the Assessing Officer (in short 'AO') u/s 143(3) of the Act. The assessee has raised following .....

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diture of ₹ 1,79,85,122/- under Section 14A of the Income-tax Act, 1961 ('the Act') r.w. Rule 8D of the Income-tax Rules as against ₹ 1,42,040/- worked out by the assessee in its return of income. 3. On the facts and circumstances of the case and in law, the learned CIT(A) further erred in confirming the application of Rule 8D while computing disallowance u/s 14A. 4. On the facts and circumstances of the case and in law, the learned CIT(A) further erred in not adjudicating 2n .....

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e to add, amend, delete or modify any of the above grounds of appeal.." 2. The solitary issue involved here is with regard to the disallowance made by the AO for ₹ 1,79,85,122/- u/s 14A. The facts of the case are that during the year under consideration, the assessee was engaged in the business of investment financial advisory service. The assessee received dividend income of ₹ 3.70 crores which was claimed as exempt from the income tax. The assessee made a suo motu disallowance .....

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wing that a maximum amount of ₹ 7.64 lakhs can be considered for making disallowance u/s.14A. But, the submissions of the Assessee were not accepted by the AO, and invoking the provisions of Rule 8D of section 14A, the disallowance of ₹ 1,79,85,122/- was made by the AO as expenditure incurred for earning of exempt income. 4. Being aggrieved, the assesse filed an appeal before the Ld. CIT(A), wherein it was submitted by the Assessee that the AO did not consider submissions of the asse .....

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tted that the working sheet was given by the Assessee to the AO during the course of assessment proceedings in which detailed reasoning and break up of expenses and other details have been given showing that as per the assessee, maximum amount of disallowance could have been made for only an aggregate amount of ₹ 7,64,949/-, keeping in view nature of business and facts and circumstances of the case. Our attention has been drawn on this working sheet available at page no. 54 -55 of the pape .....

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ies. It was submitted that disallowance was made by the AO as per law, and needs to be upheld. 6. We have gone through the submissions made by both sides. It is seen that the Assessee had made voluntary disallowance in the computation sheet. During the course of assessment proceedings, the Assessee submitted a note sheet wherein, justification was given for the amount that could be disallowed u/s 14A, keeping in view nature of business of the assessee and facts and circumstances of the case. For .....

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654 As regards dividend earned on investment in Preference Shares, there is no other expense incurred for earning this income. We get one cheque of dividend from our subsidiary company which is deposited into Bank A/c. As regards dividend earned on equity shares the same are directly deposited to our bank A/c by the respective companies without requiring anything to be done by us. As regards expenses for earning dividend on Mutual Fund investment, we submit as under: The surplus funds of the com .....

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cheques and checking of bank balances which is very in significant. In the Company, this function is handled by CFO, along with one junior assisstant, For estimate the expenses which can be attributed to earn dividend income on Mutual Fund we have assumed that on an average 10% of CFO time and 20% this junior assistants time is involved. Accordingly the cost attributable to this function has been calculated as under: Rs. Cost attributable to monitoring investment: Total Compensation cost* 6,40,5 .....

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(19.41%) 1,24,368 Disallowance u/s 14A 7,64,949 Statement showing calculation of % of overhead cost to compensation Total Expenses as per Profit & Loss Account 516,088,370 Add: Depreciation 25,680,928 541,769,298 Less: Compensation 439,443,069 Bad debts written off 11,064,393 Donation 500,000 Provision for doubtful debts 3,313,383 Loss on Scrap/Sale of fixed asset (net) 98,224 Net Loss on foreign currency transactions 2,032,833 456,451,902 Net Overhead cost 85,317,396 % of overhead cost to c .....

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e assessment order, on the basis of facts and figures, that some more expenses have to be disallowed, which have been incurred by the assessee for the purpose of earning exempt income. The AO has made merely general observations in the assessment order. Ld. Counsel has relied upon the judgment of Hon'ble Mumbai Bench in the case of Gravis Hospitality Ltd.,supra, on this issue. We find it appropriate to reproduce some relevant paras from this judgment: "10. We have heard the rival submis .....

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hich aggregated to ₹ 2,73,47,09,183/-. As against this, the total investment stood at ₹ 54,42,06,259/-. Thus surplus funds were sufficient to cover the investments. Not only that, the assessee has also given the nature of utilization of loan and details of interest paid which has been incorporated as above. For the purpose of indirect expenses, the assessee has given the calculation of expenditure from its account which can be said to be attributable for the purpose of earning of the .....

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he accounts of the assessee, the claim of the assessee in respect of expenditure debited is not correct and there could have been certain other expenditures which can be said to have been incurred in relation to the earning of exempt income. The disallowance u/s 14A (1) can only be triggered, once the conditions under sub section (2) are satisfied. To work out the disallowance u/r 8-D, the A.O. has to first examine the accounts of the assessee and the correctness of the claim and then, if having .....

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A.O. has failed to comply the statutory requirement, then he cannot proceed to make the disallowance u/s 14A(1) and accordingly, the disallowance made by the A.O. and partly sustained by the ld. CIT(A) over and above the disallowance made by the assessee is deleted. In the result, ground No. 1 of the Department's appeal is dismissed, whereas the assessee's ground No.1 is treated as allowed. 6.2. Hon'ble Mumbai Bench has held that once all the details were made available along with en .....

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ection 14A are not satisfied. The AO has not cared to examine the accounts of the assessee and correctness of the claim made by the assessee. Ld. AO in the present case has straight away proceeded to apply Rule 8D for the purpose of disallowance u/s 14A, without satisfying or applying with the mandatory requirement of section 14A(2) r.w. Rule 8D. It is seen that the Assessee has given item wise justification for determination of the proportionate expense incurred on making investments earning ta .....

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on the preference shares of subsidiary company. Both of these amounts have been received on the investments made ostensibly for strategic reasons. In our considered view, strategic investments are not made for the purpose of earning tax-free income. These should not be considered for making disallowance u/s 14A/. Recently, Hon'ble Delhi High court has taken same view in the case of Cheminvest Ltd vs CIT, ITA No.749/2014, order dt 9- 9-2015. The relevant observations are reproduced hereunder: .....

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