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2016 (2) TMI 373 - ITAT PUNE

2016 (2) TMI 373 - ITAT PUNE - TMI - Disallowance u/s 14A - no separate books of account are maintained for taxable income and exempt income. - Held that:- Addition u/s.14A only the expenditure which has been proved to have been incurred in relation to the earning of tax free income can be disallowed and the section cannot be extended to disallow even expenditure which is assumed to have been incurred for the purpose of earning the tax free income. It has further been held that common expenditur .....

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all for earning the exempt income. However, considering the fact that out of total dividend income of ₹ 2.34 crores an amount of ₹ 2.32 crores are received from 3 group companies and an amount of ₹ 1.40 lakh has been earned on shares held for trading activities, disallowance of ₹ 4,77,740/- appears to be on the higher side. Various Benches of the Tribunal are taking the view that some expenditure on account of administrative expenses has to be disallowed on reasonable es .....

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DA, AM : This appeal filed by the assessee is directed against the order dated 29-11-2013 of the CIT(A)-I, Pune relating to Assessment Year 2007-08. 2. Disallowance of ₹ 4,77,740/- u/s.14A by the AO and upheld by the CIT(A) is the only issue raised by the assessee in the grounds of appeal. 3. Facts of the case, in brief, are that the assessee is a company engaged in the business of investment and trading in shares. It filed its return of income on 28-10-2007 declaring loss of ₹ 14,34 .....

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s attributable to such income should not be made under the provisions of section 14A of the I.T. Act. It was submitted by the assessee that no expenditure was directly incurred for earning the exempt income and therefore no disallowance u/s.14A was to be made. It was submitted that the provisions of sub-section (2) and (3) of section 14A and provisions of Rule 8D were applicable only w.e.f. A.Y. 2008-09 onwards. 4. However, the AO was not satisfied with the arguments advanced by the assessee. Ac .....

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der Sub Rule (iii) of Rule 8D at ₹ 4,77,740/- being 0.5% of the average value of investments and added the same to the total income of the assessee. 5. Before CIT(A) the assessee, relying on the decision of Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co.Ltd. Vs. DCIT reported in 328 ITR 81 submitted that Rule 8D was applicable w.e.f. A.Y. 2008-09 only and the same is not applicable for the impugned assessment year. It was further submitted that the assessee had not inc .....

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nk account being only credit per company during the whole year and no expenditure whatsoever has been incurred to earn this dividend income. It was further submitted that the remaining portion of the dividend income of ₹ 1,40,200/- claimed as exempt was earned on shares held for trading is merely incidental to the activity of share trading and no expenditure was incurred to earn the said dividend. It was argued that no direct expenses was also incurred in earning such exempt income and no .....

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has not incurred any expenditure in earning the tax free dividend income. It was submitted that in absence of such observation by the AO disallowance u/s.14A could not be made merely on the basis of presumptions. Relying on various decisions the assessee argued that disallowance u/s.14A cannot be made merely on the basis of presumption that some expenditure might have been incurred for earning the exempt income and for making the disallowance u/s.14A the AO must establish the nexus between the .....

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submitted that the Tribunal in the said decision has held that no disallowance u/s.14A can be made when the shares are held for trading purposes. It was further argued that no disallowance was made by the AO u/s.14A under similar factual position in A.Yrs. 2005-06 and 2006-07 where scrutiny assessments have been made and therefore there was no reason for the AO to adopt different view in this year. Relying on various decisions it was argued that in the absence of any material change justifying .....

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satisfied with the explanation given by the assessee. While he held that the provisions of Rule 8D are not applicable to A.Y. 2007-08, however, he held that the AO is justified in invoking the provisions of section 14A and the disallowance of ₹ 4,77,740/- out of total common expenditure debited to the profit and loss account of ₹ 12,82,011/- is more than reasonable. 8. Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 9. The Ld. Counsel for the assessee str .....

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ed at page 20 of the paper book he drew the attention of the Bench to the dividend income of ₹ 1,40,200/- which has been received on shares held as stock in trade. Referring to page 16 of the paper book he drew the attention of the Bench to the investments held by the company according to which the total investment during the year was ₹ 11.69 crores as against ₹ 11.47 in the preceding assessment year. He submitted that no disallowance u/s.14A has been made by the AO in the prec .....

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t Dividend (Rs.) 2005-06 1,54,72,738 13,25,350 1,67,98,088 2006-07 2,16,00,048 1,450 2,16,01,498 2007-08 2,32,09,107 1,40,200 2,33,49,307 10. Referring to the submissions to be made before the CIT(A), a copy of which is placed at pages 38 to 42 of the paper book, the Ld. Counsel for the assessee submitted that it was categorically submitted before the CIT(A) that out of the total dividend income of ₹ 2,33,49,307/- an amount of ₹ 2,32,08,107/- has been received from the 3 group compan .....

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expenditure which is assumed to have been incurred for the purpose of earning tax free income. It has further been held in the said decision that common expenditure incurred on the head office etc. cannot be broken up artificially to attribute or apportion a part thereof to the earning of the tax free income on the assumption that such part of the common expenditure was incurred in relation to the tax free income. 11. Referring to the decision of the Pune Bench of the Tribunal in the case of Sw .....

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the Pune Bench of the Tribunal in the case of Apoorva Patni Vs. Addl.CIT reported in 24 taxmann.com. 223. He accordingly submitted that no disallowance u/s.14A is called for in the instant case. 12. The Ld. Departmental Representative on the other hand heavily relied on the order of the CIT(A). Referring to Para 5.5 of the order of the CIT(A) the Ld. Departmental Representative submitted that the CIT(A) has given a finding on the basis of the financials of the assessee company that the assessee .....

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He submitted that having regard to the composite business and common profit and loss account and other financial statements the AO was fully justified in disallowing an amount of ₹ 4,77,740/- and the CIT(A) was fully justified in upholding such addition. He accordingly submitted that the order of the CIT(A) be upheld. 13. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also c .....

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mon profit and loss account for all the activities and the expenses incurred for all the activities are debited to the common profit and loss account, therefore, it cannot be said that there was no dominant and immediate connection between the expenditure incurred and exempted income. It is the submission of the Ld. Counsel for the assessee that under identical circumstances there was no disallowance u/s.14A during A.Yrs. 2005-06 and 2006-07. It is also the submission of the Ld. Counsel for the .....

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incurred any expenditure for earning the exempt income. The AO has not pointed out any specific instances out of ₹ 12.82 lakhs which is directly relatable to earning of dividend. 14. We find some force in the above arguments of the Ld. Counsel for the assessee. We find the Delhi Bench of the Tribunal (Third Member) in the case of Wimco Seedlings Ltd. (Supra) has categorically held that u/s.14A only the expenditure which has been proved to have been incurred in relation to the earning of ta .....

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