2018 (9) TMI 422 - AT - Income Tax

Disallowance made u/s 14A - assessee company made suo moto disallowance - Held that - The assessee s total income for the year under consideration has been computed under normal provisions of the Act since the tax payable under 115JB was less then tax payable under normal provisions of the Act. This fact is very much evident from the assessment order itself. Hence the plea of the learned AR that the assessee had paid tax on Long Term Capital Gain under section 115JB does not come to the rescue of the assessee. Only the dividend income had suffered dividend distribution tax u/s 115O and that too in the hands of dividend distributing company and not in the hands of the assessee herein. The assessee company having received dividend of ₹ 12,43,558/- had not suffered any tax thereon and had claimed the same as exempt in its return of income which is in accordance with the provisions of the Act. Hence the preliminary question reframed herein above that the provisions of Section 14A per se are not applicable to the assessee is decided against the assessee. With regard to the computation of disallowance u/s 14A read with Rule 8D of the rules, we find from the balance sheet of the assessee that the assessee has got sufficient own funds of ₹ 12.93 crores whereas investments made by the assessee was only ₹ 7.54 crores. Hence it can be safely presumed that the investments were made only out of the own funds of the assessee - As relying on Reliance Utilities & Power Ltd 2009 (1) TMI 4 - BOMBAY HIGH COURT no disallowance under the second limb of section 8D(2)(ii) towards interest is required to be made in the instant case. With regard to the disallowance made under Rule 8D(2)(iii) of the rules amounting to ₹ 3,26,941/-, we find that the Co-ordinate Bench of this tribunal in the case of REI Agro Ltd. reported in 2013 (9) TMI 156 - ITAT KOLKATA had held that only those investments which had resulted dividend income should be considered for the purpose of computing disallowance thereon. Accordingly, we direct the Ld. A.O. to recompute the disallowance to be made under Rule 8D(2)(iii) Addition on account of Portfolio Management Services (PMS) fees paid as not eligible for deduction while computing the capital gains of the assessee - Held that - As relying on KRA Holding & Trading Pvt. Ltd. vs DCIT 2011 (5) TMI 498 ITAT Pune PMS fees paid by the assessee in the sum of ₹ 18,93,788/- is eligible for deduction while computing Short Term Capital Gain. Accordingly, ground raised by the assessee is allowed.

Summary

Issues Involved:
1. Applicability of section 14A of the Income Tax Act to the assessee's appeal.
2. Justification of reducing disallowance under section 14A.
3. Disallowance of Portfolio Management Services (PMS) fees as not eligible for deduction.

Analysis:

Issue 1: Applicability of section 14A of the Income Tax Act
The appeal raised the question of whether the provisions of section 14A of the Act could be applied to the assessee's case. The assessee argued that Long Term Capital Gain and dividend income were already taxed under different sections, hence section 14A should not be applicable. However, the tribunal disagreed, stating that the total income was computed under normal provisions of the Act, and the Long Term Capital Gain was claimed as exempt. The tribunal also noted that only dividend income suffered tax under section 115O, not the assessee. Therefore, it was held that the provisions of section 14A were applicable to the assessee's case.

Issue 2: Disallowance under section 14A
Regarding the computation of disallowance under section 14A, the tribunal analyzed the assets and investments of the assessee. It was observed that the investments were made out of the assessee's own funds, leading to the conclusion that no disallowance under the interest component was necessary. The tribunal also directed the Assessing Officer to recompute the disallowance under Rule 8D(2)(iii) based on specific investments resulting in dividend income. The tribunal partly allowed the assessee's appeal on this issue.

Issue 3: Disallowance of Portfolio Management Services (PMS) fees
The tribunal reviewed the deduction of PMS fees paid by the assessee while computing Short Term Capital Gain. The assessee argued that the fees should be eligible for deduction, citing a decision by the Pune Tribunal. The tribunal found that the gains on sale of shares through PMS providers were to be taxed under capital gains, and the PMS fees were allowable as a deduction under section 48 of the Act. As the revenue had not appealed against this finding, the tribunal allowed the assessee's appeal on this issue.

In conclusion, the tribunal partly allowed the assessee's appeal for statistical purposes, upholding the applicability of section 14A, adjusting disallowances under section 14A, and permitting the deduction of PMS fees while computing Short Term Capital Gain.