IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES SMC , MUMBAI Before Shri Joginder Singh, Judicial Member, ITA No.7216/Mum/2014 Assessment Year: 2011-12 DCIT-5(2)(1), M/s Narang Overseas Rom No.571, 5th Floor, Private Ltd. Aayakar Bhavan, 8-A Beach View Building, M.K.Road, Vs. 93 Warden Road, Mumbai-400020 Mumbai-400036 Revenue [ Assessee P.A. No.AABCN5004D ITA No.7476/Mum/2014 Assessment Year: 2011-12 Narang Overseas Private Ltd. DCIT-5(2)(1), 5th Floor, Unique Centre, Rom No.571, 5th Floor, Water Field Road, Aayakar Bhavan, Bandra West, Vs. M.K.Road, Mumbai-400050 Mumbai-400020 Assessee Revenue P.A. No.AABCN5004D Assessee by Shri K. Gopal & Shri Jitendra Singh Revenue by Shri Sumit Kumar-DR 2 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. Date of Hearing 08/09/2016 Date of Order: 03/10/2016 O R D E R assessee as well as Revenue is in cross appeals, aggrieved by impugned order dated 15/09/2014 of Ld. First Appellate Authority, Mumbai. 2. In appeal of assessee, only grievance is with respect to confirming addition of Rs.25,89,509/- u/s 14A of Income Tax Act, 1961 (hereinafter Act) read with rule 8D(iii) of Rules, ignoring material facts. Whereas, in appeal of Revenue, holding that interest bearing funds were not utilized for investment, yielding exempt income, further holding that there was no justification of disallowance of interest under Rule-8D(ii) has been challenged. 2.1. During hearing, ld. counsel for assessee, Shri K. Gopal along with Shri Jeetendra Singh, claimed that impugned issues are covered by decision of Tribunal in case of Narang Overseas Pvt. Ltd. (the assessee itself) for Assessment years 2008-09 and 2009-10 (ITA No.3343 & 4155/Mum/2012) order dated 30/04/2013. ld. DR, Shri Sumit Kumar did not controvert contention of assessee. 3 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. 2.2. I have considered rival submissions and perused material available on record. In light of above assertion, I am reproducing hereunder relevant portion from aforesaid order dated 30/04/2013 of Mumbai Bench of Tribunal for ready reference and analysis:- These two appeals of Assessee are against orders of CIT(A)-9 Mumbai dated 04.03.2012 and 04.04.2012 respectively for AY 2008-09 and 2009-10. 2. issue in these appeals is with reference to addition under section 14A made by Assessing Officer and was confirmed by CIT(A). ITA No. 3343/Mum/2012 AY 2008-09. 3. In this year, Assessee has declared total income at loss of Rs.25,16,414/- and AO determined total income at Rs.26,67,067/-. only addition made in assessment is with reference to section 14A at Rs.51,83,481/-. Assessing Officer on noticing that Assessee had earned tax free dividend income of Rs.3,79,84,245/- from units of Mutual Funds asked assessee why disallowance u/s 14A should not be made. As assessee Company had debited interest amount Rs.39,34,995/- in profit and loss account, he considered entire interest paid, under rule 8D (a). He arrived at average value of investments and proportionately disallowed above interest at Rs.3121267/-. Thereafter, 0.5% of average investments was considered and disallowance was arrived at Rs.20,62,214/-, thus total disallowance u/s 14A was arrived at Rs.51,83,481/-. 4. Assessee before CIT(A) submitted that AO has mechanically applied provisions of section 14A without going through accounts of Assessee Company, Assessee submitted that disallowance of expenditure should have some basis or nexus with exempt income. If expenditure is not at all related to earned exempt income under provisions of section 14A cannot be invoked. 4 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. 5. With reference to facts of case, assessee submitted that interest paid amounting to Rs. 39,34,995/- pertain to interest paid on loan taken from Ms. Sabita R Narang, and this loan was taken during this financial year. entire proceeds of said loan was advanced to M/s Nautilus Trading & Leasing Pvt. Ltd. as inter-corporate deposit. It was further submitted that Assessee Company received interest amounting to Rs. 37,93,770/- which was offered as income. It was submission that as Assessee has earned interest and paid interest, there is direct nexus with above two and therefore disallowing Rs.31,21,267/-of interest does not arise. With reference to disallowance of half percent of investment, it was submitted that assessee received lot of own funds as part of settlement in group in earlier year and thus funds, pending starting new project, have been invested in mutual funds for earning dividend. It was further submitted that out of dividend received most of amount was reinvested, therefore except banking charges on ECS credit no other expenditure was incurred, therefore mechanically invoking under section 14A does not arise. Ld. CIT(A) did not agree and confirmed same as assessment involved is assessment year 2008-09 and Special Bench decision of ITAT, available at point of time in case of Daga Capital Management 26 SOT 603, Mumbai SB supported view. 6. Ld. Counsel reiterating facts submitted that Assessee has not spent any amount and therefore question of disallowance any amount does not arise. Further referring to total expenditure of Rs. 65,79,296/- it was submitted that out of this amount, interest and depreciation are major components. Thereafter he referred to legal and professional fees paid to Advocates for litigation company is involved. He gave detailed submissions for various expenditure incurred by company. 7. Ld. DR however relied on orders of AO and CIT(A). 8. We have considered issue and examined facts available on record. Even though assessee has specifically explained facts, neither AO nor CIT(A) considered same, but invoked Rule 8D and disallowed amount. As far as interest is concerned, there is direct nexus between 5 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. loan obtained from Ms. Sabita R Narang and advancing same to M/s Nautilus Trading & Leasing Pvt. Ltd. on which interest income was earned. Therefore, even though Assessee claimed interest payment, same is directly relatable to interest earned and therefore same cannot be considered for disallowance, as there is direct nexus with taxable income. Now with reference to other expenditure claimed by Assessee entire expenditure debited to Profit and Loss Account is as under:- Account Head Amounts Rs. Remarks Employee 1,85,446 Paid to Office secretary and assistant Cost to look after day to day affairs of office work Auditor's 35,000 Statutory payment. Remuneration Appeal Fees 292 Statutory payment. Bank Charges 1,961 Debited bv Bank on account of specific services. Conveyance 43,409 Paid to office secretary and assistant to look after day to day affairs of office work. Car Insurance 4,426 To insure care used in business. Demat Fees 8,060 Fixed charge incurred for holding investments In non physical mode. Electricity 6,183 Part of office expenses. Expenses. Filing fees 3,000 Statutory payment. Loss on sale of 2.18,928 --- Motor-Cars Loss on sale of 14,064 --- mutual funds Legal and 6,56,230 Fees paid to Advocates Professional Fees Membership 60,628 Part of office expenses Fees Motor Car 76,021 Part of office expenses expenses Office 43,081 General officer running expenses. Expenses Printing & 9,523 General office running expenses. Stationerv Repairs & 1,64,600 General officer running expenses. Maintenance Building. Repairs & 1,41,926 General officer running expenses. Maintenance 6 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. others. Security 63,000 Office Security. charges. Society 2,31,880 General office running expenses. Charges. Staff Welfare. 27,308 General office running expenses. Telephone 88,J07 General office running expenses. Expenses. Transportation 75 General office running expenses. Expenses Travelling expenses 90,180 General Office running expenses Water charges 7,761 General Office running expenses Interest on loan 39,34,995 Incurred for earning taxable income by way of interest Depreciation 4,60,212 Already added back in computation of income Grand Total 65,79,296 9. Thus as can be seen from above, most of expenditure is not at all attributable to earning tax free incomes, except of course some indirect expenses of office expenses and employees cost etc. 10. Subsection 2 of section 14A does not enable Assessing Officer to invoke Rule 8D without determining, in first instance correctness of claim of Assessee, having regard to accounts of Assessee. Subsection 2 of section 14A mandates that it is only when having regard to accounts of Appellant, if AO is not satisfied with correctness of claim then only he can proceed to make determination under Rule 8D. satisfaction envisaged by subsection 2 of section 14A is to be objective satisfaction that has to be arrived at by AO. This is safeguard introduced by subsection 2 for fair and reasonable exercise of power by AO. This view was also supported by judgment of Hon ble Bombay Court in case of Godrej and Boyce Manufacturing Ltd. Vs. DCIT 234 CTR 1(Bom) therefore, without proper satisfaction on part of AO, Rule 8D cannot be invoked. 11. As seen from assessment order, there is no discussion about Assessing Officer having arrived at satisfaction. detailed explanation by Assessee on various facts were not 7 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. considered by AO. Having examined facts as stated above, we are of opinion that Rule 8D cannot be invoked as such in given facts of case. However, we can also not say that Assessee had not spent any amount for earning dividend income. part of general expenses claimed also gets attributable to earning of exempt income. Therefore, we are of opinion that one percent of dividend income from Mutual Funds would be reasonable enough for disallowance under section 14A out of expenses claimed by Assessee ( other than those direct expenses mentioned above). In view of this, we modify orders of AO and CIT(A) and direct AO to disallow one percent of dividend income as disallowance under section 14A. appeal is partly allowed. I.T.A No. 4155/Mum/2012 AY 2009-10. 12. In this appeal, Assessee had earned amount of Rs. 1,89,91,244/- as dividend from Mutual Fund Investment and claimed exemption. Assessing Officer without invoking section 14A(2) directly applied Rule 8D and disallowed amount of Rs.83,29,250/- as disallowance under section 14A which was confirmed by Ld. CIT(A). As discussed above in appeal for AY 2008-09, payment of interest to tune of Rs.84,65,740/- has direct nexus to interest income at Rs.84,09,148/- from inter-corporate deposit. Therefore same cannot be considered for disallowance under section 14A. With reference to entire expenditure details are as under:- 8 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. Thus as can be seen, there are certain direct expenses pertaining to various activities. General expenses are very few, mostly for maintaining corporate structure of Assessee. Therefore, reasons given above in ITA No. 3343/Mum/2012 equally apply to facts in this year. For detailed discussion made above, we are of view that Rule 8D cannot be invoked directly without any satisfaction recorded by AO and in facts of above case, one per cent of dividend income can be considered as reasonable amount for earning exempt income. AO is directed to modify order accordingly. Appeal partly allowed. 13. Before parting with issue, we would like to comment about mechanical way in which Assessing Officer and CIT(A) passed orders. Assessee established direct nexus, in detailed submissions filed before AO and also submissions made before CIT(A) which fortunately are extracted by Ld. CIT(A) in orders. However, in decision part in para 5.2.1, same para in both orders, CIT(A) notes that Assessee could not establish nexus between borrowed funds and capital being invested in securities and that it was impossible to believe that out of common hodgepodge of funds, entire capital would have come into investment in shares. This indicates that facts are not co-related in decision by CIT(A). First of all, Assessee has not invested in any securities, rather made investment in Mutual Funds. Further there are no borrowals for investment in Mutual Funds as Assessee had its own fund received by way of settlement amount from other group companies which has direct nexus with Mutual Funds Investments. only unsecured loan received was directly 9 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. advanced to another Company as Inter-corporate deposit. Findings/observations by CIT(A) are not based on facts available on record. Therefore we are unable to approve order or CIT(A) in given set of facts. only option left to us is to reasonably determine amount for disallowance u/s 14A on facts of this case. 15. In result, both Appeals are partly allowed. 2.4. In light of foregoing discussion, ld. Assessing Officer is directed to decide in accordance with law, in light of aforesaid order of Tribunal. assessee be given opportunity of being heard. It is made clear if ld. Assessing Officer finds facts to be different then he is free to take decision uninfluenced by aforesaid order. assessee is directed to explain facts before ld. Assessing Officer to substantiate its claim. Thus, both appeals are allowed for statistical purposes only. Finally, appeals are allowed for statistical purposes only. This order was pronounced in open in presence of ld. representative from both sides at conclusion of hearing on 08/09/2016. Sd/- (Joginder Singh) JUDICIAL MEMBER Mumbai; Dated : 03/10/2016 f{x {t ? P.S / 10 ITA No.7216 & 7476/Mum/2014 M/s Narang Overseas Pvt. Ltd. Copy of Order forwarded to : 1. Appellant 2. Respondent. 3. CIT, Mumbai. 4. CIT- Mumbai 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai DCIT-5(2)(1), Mumbai v. M/s Narang Overseas Private Ltd