IN INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D , MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA No.1588/M/2011 Assessment Year: 2007-08 M/s. Directi Internet Solutions Income Tax Officer, Pvt. Ltd., Circle-9(1)(3), 102, Osia Friendship, Mumbai Gaothan Lane No.4, Vs. Off: J.P. Road, Opp. Ram Mandir, Andheri West, Mumbai 400 058 PAN: AACCG4058M (Appellant) (Respondent) Assessee by : Shri Firoze Andhyarujina, A.R. Revenue by : Shri B.S. Bist, D.R. Date of Hearing : 28.07.2016 Date of Pronouncement : 14.09.2016 ORDER Per B.R. Baskaran, Accountant Member: appeal filed by assessee is directed against order dated 12.01.11 passed by Ld. Commissioner of Income Tax (Appeals) [hereinafter referred to as CIT(A)]-19, Mumbai relevant to assessment year 2007-08. 2. grounds of appeal by assessee give rise to following issues: 1. Treatment of interest income of Rs.23.94 lakhs. 2. Disallowance made under section 14A of Act. 3. Apportionment of common expenditure between STPI and non STPI units. 3. assessee company is engaged in information technology, computer software and IT enabled services, more particularly in web development and website services such as domain name registration, web using services etc. 2 ITA No.1588/M/2011 M/s. Directi Internet Solutions Pvt. Ltd. assessee is eligible for deduction under section 10A of Act in respect of profits derived from STPI unit. 4. first issue relates to treatment of interest income of Rs.23.94 lakhs received by assessee from inter-corporate loan given by it. During year under consideration, assessee had taken loan of Rs.3 crores from Karnataka Bank Ltd. for purpose of purchasing office premise. Since payment towards purchase of office premises was not required to be made immediately, assessee advanced above said amount of Rs.3 crores to M/s. Acme Housing India Pvt. Ltd., at interest rate of 18% per annum. assessee had borrowed money from Karnataka Bank Ltd., at rate of 11% per annum. interest income of Rs.23.94 lakhs received on inter corporate loan so given was offered by assessee as its business income. Assessing Officer (hereinafter referred to as AO), however, treated same as income from other sources and same was also confirmed by Ld. CIT(A). 5. Ld. A.R. submitted that assessee has given loan of Rs.3 crores to M/s. Acme Housing India Pvt. Ltd. in ordinary course of its business and hence interest income should be assessed under head Business . Alternatively, Ld. A.R. submitted that assessee has paid sum of Rs.15,38,239/- to Karnataka Bank Ltd. for availing loan of Rs.3 crores and same should be set off against interest income of Rs.23.94 lakhs and balance amount of Rs.8.56 lakhs of loan may be considered as income under head Income from other sources . 6. On contrary, Ld. D.R. submitted that giving of inter corporate loan is not business activity of assessee and hence Ld. CIT(A) was justified in confirming assessment of interest income under head Income from other sources . 3 ITA No.1588/M/2011 M/s. Directi Internet Solutions Pvt. Ltd. 7. We have heard rival contentions and perused record. assessee has furnished copies of bank account and also ledger account copy of M/s. Acme Housing India Pvt. Ltd. perusal of bank account shows that term loan amount of Rs.3 crores has been credited to account of assessee on 29.09.06. On very same day assessee has transferred Rs.1.50 crores to M/s. Acme Housing India Pvt. Ltd. and on 03.10.06 another amount of Rs.1.50 crores has been transferred. Thus, we notice that term loan of Rs.3 crores has been fully utilized for giving loan to M/s. Acme Housing India Pvt. Ltd. We have noticed earlier that business of assessee is related to information technology and IT enabled services. Hence, we do not find merit in submissions of assessee that above said loan of Rs.3 crores was given in ordinary course of carrying on business. assessee itself has submitted that loan was given to M/s. Acme Housing India Pvt. Ltd., since term loan proceeds were not immediately required. Ld D.R has also pointed out that lending of money is not part of business activities carried on by assessee. Hence interest income cannot be considered to be business income of assessee, since interest corporate loan was given out of term loan availed by assessee for purchasing house property, i.e., loan has been given as term loan was not required to be used immediately. Under these set of facts, we are of view that tax authorities are justified in assessing interest income of Rs.23.94 lakhs as income of assessee under head Income from other sources. 8. With regard to alternative contention of assessee that interest paid on term loan should be set off against interest income, we are of view that same requires examination at end of AO, since alternative contention has not been examined by him. It is not clear from record as to how interest expenditure relating to term loan was treated in books 4 ITA No.1588/M/2011 M/s. Directi Internet Solutions Pvt. Ltd. of account and how it was allowed by AO. If alternative claim of assessee is accepted, then corresponding adjustments are required to be made in other heads also. Accordingly we restore alternative contention of assessee to file of AO with direction to examine same afresh after affording adequate opportunity of being heard to assessee and take appropriate decision in accordance with law. 9. next issue relates to disallowance made under section 14A of Act. assessee has declared dividend income of Rs.2,03,820/- and claimed same as exempt. AO computed disallowance under section 14A of Act at Rs.5.70 lakhs by applying provisions of Rule 8D of IT Rules. Ld. CIT(A) however restricted addition to Rs.50,000/-, since Hon ble High Court has held that provisions of Rule 8D shall not apply to year under consideration. 10. We have heard rival contentions and perused record. Hon ble Jurisdictional Bombay High Court has held in case of Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT [(2010) 328 ITR 81 (Bom)] that provisions of Rule 8D shall be applicable from assessment year 2008-09 onwards and for earlier years disallowance should be made on reasonable basis. contention of assessee is that interest free funds available with was more than investments made and hence, no disallowance is required out of interest expenditure. We find merit in said contentions. Hence disallowance, if any, is required to be made only in respect of administrative expenses incurred in dividend income. Accordingly, we are of view that disallowance of Rs.50,000/- confirmed by Ld. CIT(A) is also on higher side. Accordingly, we modify order of Ld. CIT(A) and direct AO to restrict disallowance to 2% of dividend income as held by Hon ble Bombay High Court in case of Godrej Agrovet Ltd. vs. DCIT 232 ITR 97 (Bom.). 5 ITA No.1588/M/2011 M/s. Directi Internet Solutions Pvt. Ltd. 11. next issue relates to allocation of common expenses between STPI and non-STPI units. AO noticed that assessee has followed different criteria for apportioning common expenses between STPI and non-STPI units. AO was not convinced with same and accordingly allocated expenses in ratio of sales. Ld. CIT(A) also confirmed same. 12. Ld. A.R. contended that assessee has followed scientific basis for allocating various expenses and hence same should be upheld. On contrary, Ld. D.R. submitted that assessee has not given any justification for adopting different criteria for allocating various expenses. He further submitted that Ld CIT(A) has also highlighted flaw in method adopted by assessee. 13. We have heard rival contentions on this issue and perused record. We notice that Ld. CIT(A) has upheld action of AO with following observation: 8. I have considered said submissions. There is no dispute as regards allocation of direct expense since they are charged to respective units. dispute is with regard to allocation of indirect expenses. A.O. has taken view that such indirect expenditure is to be allocated in proportion of sales of eligible unit to that of total sales. In this regard, I have called for specific details of allocation as carried out by appellant. As per details submitted by appellant, it is seen that no uniform standards or parameters has been applied by appellant company for purpose of allocation. In fact, different variables have been used for purpose of allocation. For instance, it is seen that in respect of expenses debited under head "Administrative Expenses", canteen expenses are apportioned between domestic and STPI unit on basis of employee ratio, courier charges in ratio of Domain Name Registration Expenses, Electricity charges on basis of employee ratio, insurance on basis of employee ratio, traveling on basis of employee ratio. As regards Personal expenses allocation is on basis of employee ratio between domestic and STPI Unit. selling and distribution expenses are seen allocated either on basis of employee ratio or on basis of Domain Name Registration Expenses. foreign travel is seen allocated on basis of Domain Name Registration expenses ratio between domestic and STP Unit. As regard foreign exchange fluctuation it is seen that allocation has been done on basis of Domain Name registration Expenses/Server Ratio/Employee Ratio/Digital Certification 6 ITA No.1588/M/2011 M/s. Directi Internet Solutions Pvt. Ltd. Sales Ratio. Thus, it is seen that different variables have been used for purpose of allocation of common expenses. On consideration of standards used it cannot be stated that there is any scientific basis for same. For example it is seen that electricity expenses has been allocated on basis of employee ratio rather than space. Hence, I am unable to agree with contention of appellant that it is based on prudence and past practice that allocation as carried out by him has been made. On other hand A.O. has undertaken pro-rata approach which appears to be most reasonable considering fact that variable as adopted by appellant company is based on subjective judgment, rather than any rational or scientific method amenable to any transparent yardstick of measurement In circumstances, best course open is to allocate common expenses pro-rata on basis of turnover, which is standardized and reasonable method as carried out by A.O. action of A.O. in this regard is confirmed. 14. We notice that assessee has not given justification for adopting different criteria for apportioning expenses. Hence, we are of view that Ld. CIT(A) was justified in rejecting claim of assessee that criteria adopted by it was scientific, particularly in case of electricity expenses, i.e., allocation has been done on basis of employee ratio instead of floor space used. 15. At same time, we are of view that allocation of Canteen expenses on basis of employee ratio, Courier charges on basis of Domain Name registration expenses ratio, Personal expenses on basis of employee ratio cannot be found fault with. However, allocation of electricity expenses, Insurance expenses, Travelling expenses, Selling & distribution expenses on basis of employee ratio does not appear to be scientific. Similarly, allocation of foreign exchange fluctuation on basis of domain registration etc. does not appear to be scientific. foreign exchange fluctuation can be linked to specific items and how it is not understandable as to how same was treated as common expenses. At same time, adoption of sales ratio as basis for allocation of expenses across board also does not appear to be correct. Accordingly we are of view that this issue also requires fresh examination at end of AO. 7 ITA No.1588/M/2011 M/s. Directi Internet Solutions Pvt. Ltd. Accordingly, we set aside order passed by Ld CIT(A) on this issue and restore same to file of AO with direction to examine this issue afresh after affording adequate opportunity to assessee to present more suitable method of allocation and take appropriate decision in accordance with law. 16. In result, appeal filed by assessee is treated as partly allowed for statistical purposes. Order pronounced in open court on 14.09.2016. Sd/- Sd/- (Pawan Singh) (B.R. Baskaran) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Dated: 14.09.2016. * Kishore, Sr. P.S. Copy to: Appellant Respondent CIT, Concerned, Mumbai CIT (A) Concerned, Mumbai DR Concerned Bench //True Copy// [ By Order Dy/Asstt. Registrar, ITAT, Mumbai. M/s. Directi Internet Solutions Pvt. Ltd. v. Income-tax Officer, Circle-9(1)(3), Mumbai