IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO. 944/MUM/2015 : (A.Y : 2011-12) M/s. Prakash K. Shah Shares & Vs. ACIT-4(2), Mumbai Securities Pvt. Ltd., (Respondent) 8B, Rajabahadur Motilal Mansion, 11/43, Tamarind Lane, Mumbai 400 023 (Appellant) PAN : AABCP3900A Assessee by : Shri N.R. Agrawal Revenue by : Shri A.K. Kardam Date of Hearing : 21/07/2016 Date of Pronouncement : 30/09/2016 ORDER PER G.S. PANNU, AM : This appeal by assessee is directed against order of CIT(A)-9, Mumbai dated 01.01.2015, pertaining to Assessment Year 2011-12, which in turn has arisen from order passed by Assessing Officer, Mumbai under section 143(3) of Income Tax Act, 1961 (in short Act). 2. In this appeal, solitary grievance of assessee is with regard to disallowance of Rs.31,68,225/- made by income-tax authorities by invoking Sec. 14A of Act. 2 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd. ITA No. 944/Mum/2015 3. Briefly put, relevant facts are that appellant is company incorporated under provisions of Companies Act, 1956 and is, inter- alia, engaged in business of share and stock broking. During year under consideration, assessee had earned dividend income of Rs.15,68,512/-, which was claimed as exempt. In return of income, assessee had made suo motu disallowance of Rs.50,000/- on account of expenses incurred in relation to earning of such exempt income. Assessing Officer, however, applied formula contained in Rule 8D of Income Tax Rules, 1962 to compute disallowance u/s 14A of Act. Assessing Officer computed disallowance under Rule 8D(2)(ii) Rs.28,42,790/- out of interest expenditure and under Rule 8D(2)(iii) Rs.3,75,435/- out of other expenses thereby totalling to Rs.32,18,225/-. After reducing suo motu disallowance of Rs.50,000/- made by assessee, balance of Rs.31,68,255/- was added to returned income. Such disallowance has also been sustained by CIT(A) against which assessee is in further appeal before us. 4. Before us, first plea of assessee is that there was no justification for disallowing any interest expenditure since share capital and Reserves & Surplus available with assessee were more than investments made and thus, following ratio of judgment of Hon ble Bombay High Court in case of HDFC Bank Ltd., 366 ITR 505, no disallowance is called for. Apart therefrom, it was also pointed out that assessee is investor as well as trader in shares and, therefore, so far as investments in stock-in-trade are concerned, same are to be excluded while calculating disallowance u/s 14A of Act. At time of hearing, learned representative for assessee 3 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd. ITA No. 944/Mum/2015 also referred to earlier decision of Tribunal in case of assessee for Assessment Year 2010-11 vide ITA No. 5805/Mum/2013 dated 16.10.2015 as also for Assessment Year 2007-08 vide ITA No. 3339/Mum/2010 dated 29.09.2011, wherein disallowance of interest expenditure u/s 14A of Act has been deleted on ground that own funds of assessee are more than amount of investments. It was pointed out on basis of balance-sheet for year under consideration that fact-situation continues to be same as that considered by Tribunal in earlier years. 5. On other hand, ld. DR appearing for Revenue has relied upon orders of lower authorities in support of case of Revenue. 6. We have carefully considered rival submissions. In present case, dispute revolves around action of Assessing Officer in computing disallowance u/s 14A of Act by applying formula contained in Rule 8D of Rules. In terms of first limb of disallowance, interest of Rs. Rs.28,42,790 has been disallowed. said disallowance is being resisted on ground that amount of share capital and Reserves & Surplus available with assessee is more than investments, which have yielded exempt income and, therefore, following ratio of judgment of Hon ble Bombay High Court in case of CIT vs. Reliance Utility, 313 ITR 340 it can be presumed that such investments are out of such non-interest bearing funds. said proposition, in context of application of Sec. 14A of Act, has been approved by Hon ble Bombay High Court in case of HDFC 4 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd. ITA No. 944/Mum/2015 Bank Ltd. (supra). Factually speaking, said proposition is clearly attracted in present case. In statement of facts annexed to Grounds of appeal, assessee has brought out that Share capital plus Reserves and Surplus as on 1.4.2010, i.e., at beginning of year totalled to Rs.29,07,33,531/- whereas Investments in question stand at much lower figure. Therefore, under these circumstances, in our view, invoking of Rule 8D(2)(ii) to disallow interest expenditure u/s 14A of Act is untenable following ratio of Hon ble Bombay High Court in case of HDFC Bank Ltd. (supra). 7. In context of application of Rule 8D(2)(iii) to compute disallowance out of expenses of Rs. 3,75,435/-, learned representative submitted that in somewhat similar situation in case of Devkant Synthetics (India) Pvt. Ltd. vide ITA No. 2663, 2664 and 2655/Mum/2015 dated 28.10.2015 read with Corrigendum dated 16.11.2015, expenses were disallowed @ 5% of such exempt income. It is also pointed out that so far as shares held as stock-in- trade are concerned, same are excludible for purpose of disallowance u/s 14A of Act. said proposition asserted before us has been affirmed by our coordinate Bench in case of Devkant Synthetics (India) Pvt. Ltd. (supra). In coming to said decision, Tribunal referring to judgment of Hon'ble Karnataka High Court in case of CCI Ltd. vs. JCIT (2012) 250 CTR 291, as also judgment of Hon ble Bombay High Court in case of CIT vs. India Advantage Securities Ltd. (ITA No. 1131 of 2013 dated 17.3.2015). In our considered opinion, Assessing Officer has not furnished any reasons for rejecting suo motu disallowance of Rs.50,000/- computed by 5 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd. ITA No. 944/Mum/2015 assessee before invoking formula contained in Rule 8D(2)(iii) to compute disallowance. Notably, phraseology of Sec. 14A(2) of Act itself shows that computation of disallowance prescribed in Rule 8D of Rules can be resorted to if Assessing Officer is not satisfied with correctness of claim made by assessee. In present case, there is no satisfaction arrived at by Assessing Officer. Be that as it may, following ratio of our coordinate Bench in case of Devkant Synthetics (India) Pvt. Ltd. (supra), disallowance of expenses u/s 14A of Act is restricted to 5% of exempt income. Assessing Officer is directed to retain addition to extent of 5% of exempt income after allowing credit for suo motu disallowance of Rs.50,000/- already made by assessee. Thus, on this aspect, assessee partly succeeds. 8. In result, appeal of assessee is partly allowed, as above. Order pronounced in open court on 30th September, 2016. Sd/- Sd/- (AMARJIT SINGH) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai, Date : 30th September, 2016 SSL Copy to : 1) Appellant 2) Respondent 3) CIT(A) concerned 6 M/s. Prakash K. Shah Shares & Securities Pvt. Ltd. ITA No. 944/Mum/2015 4) CIT concerned 5) D.R, I Bench, Mumbai 6) Guard file By Order Dy./Asstt. Registrar I.T.A.T, Mumbai M/s. Prakash K. Shah Shares & Securities Pvt. Ltd. v. ACIT-4(2), Mumbai