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2016 (6) TMI 639 - AT - Income TaxAddition u/s 14A - Held that - There is a reasonable disallowance to be made u/s 14A of the Act for administrative and other indirect expenses incurred by the assessee company for earning exempt income having regards to the accounts of the assessee company as laid down u/s 14A(2) of the Act. So, far as the contentions of the assessee company are concerned with respect to the investment of ₹ 1,10,30,000/- made in foreign subsidiary company, we are in agreement with the assessee company that such investments in foreign subsidiaries shall not be included for computing disallowance u/s 14A of the Act, as the income by way of dividend is chargeable to tax and is not an exempt income under the provisions of the Act. Thus , the said investments of ₹ 1,10,30,000/- in foreign subsidiary shall not be included for computing disallowance of indirect expenditure under Section 14A of the Act. However, with respect to the contentions of the assessee company regarding other investments in shares and mutual funds, in our considered view, the same shall be included for computing disallowance u/s 14A of the Act having regards to the accounts of the assessee company as contemplated u/s 14A(2) of the Act . The contentions of the assessee company that the investments are made in subsidiaries companies and hence no disallowance of indirect expenditure be made under Section 14A of the Act cannot be accepted. It is also a matter of fact as emerging from paper book/page 11 from Schedule F of audited financial statements that investments as at 31-3-2006 was ₹ 4.23 crores while investments as at 31-03-2007 was ₹ 7.53 crores, i.e. ₹ 3.30 crores net investments were made in the previous year relevant to the instant assessment year. We have observed that there are divergent view of the Tribunal on this issue and matter purely being factual is to be decided on the facts of the case keeping in view mandate of Section 14A of the Act whereby the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act having regards to the accounts of the assessee as contemplated u/s 14A(2) of the Act and hence the matter is to be decided on the facts of each case Addition being PMS Management Fee - Held that - Respectfully following the orders of the Mumbai Tribunal in the case of Captain Avinash Chander Batra v. DCIT 2016 (5) TMI 155 - ITAT MUMBAI we hold that the assessee company is not entitled for deductions of PMS Management fee paid to portfolio managers from the income computed under the head capital gains. Addition of being Interest Income as per the AIR information - Held that - being Interest Income as per the AIR information - this issue of reconciliation of the difference in the interest income earned by the assessee company vide ITS database of the Revenue and the books of accounts of the assessee company needs to be set aside and remitted back to the file of the AO for denovo determination of the issue after making necessary enquiries and verifications with both the parties who have supposedly given interest to the assessee company as to the grant of interest in favour of the asssessee company as reflected in the AIR information database ITS. Disallowance u/s 14A - Held that - Strategic investment in group concerns for the purpose of control and not for earning dividend attract disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, 1962., we hold that the investment made by the assessee company in shares and units of mutual funds( excluding investment of ₹ 1,10,30,000/- in foreign subsidiary) shall attract disallowance u/s 14A of the Act having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act keeping in view Rule 8D(2)(iii) of the Income Tax Rules, 1962,.We are therefore inclined to set aside the matter to the file of the AO for de-novo determination and quantification of disallowance u/s 14A of the Act of the indirect expenses incurred by the assessee company in relation to such income which does not form part of the total income having regards to the accounts of the assessee company as provided u/s 14A(2) of the Act and also keeping in view Rule 8D(2)(iii) of Income Tax Rules, 1962.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Disallowance of Portfolio Management Services (PMS) Management Fee. 3. Addition based on AIR information for interest income. Comprehensive, Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: Assessment Year 2007-08: The assessee company contested the addition of ?1,19,77,254/- as disallowance under Section 14A. The AO applied Rule 8D of the Income Tax Rules, 1962, retrospectively, which was challenged by the assessee. The AO’s reliance on the ITAT Special Bench decision in Daga Capital Management Private Limited and other judgments was noted. The CIT(A) held that Rule 8D is applicable from AY 2008-09, as per the Bombay High Court's decision in Godrej and Boyce Manufacturing Company Limited, and directed the AO to recompute the disallowance based on the assessee's accounts. Tribunal's Decision: The Tribunal agreed with the CIT(A) that Rule 8D is not applicable for AY 2007-08. However, a reasonable disallowance under Section 14A for administrative and indirect expenses is warranted. The Tribunal remanded the matter to the AO to determine the disallowance, excluding interest expenditure, as the investments were made from the assessee's own funds. Assessment Year 2009-10: The AO disallowed ?97,51,158/- under Section 14A read with Rule 8D. The Tribunal noted that Rule 8D is applicable from AY 2008-09 onwards. The Tribunal observed that the assessee's own funds were sufficient to cover the investments, and thus, no disallowance of interest expenditure is warranted. The Tribunal directed the AO to recompute the disallowance of administrative expenses under Rule 8D(2)(iii), excluding investments in foreign subsidiaries. 2. Disallowance of PMS Management Fee: Assessment Year 2007-08: The AO disallowed ?11,55,354/- claimed as PMS management fees, stating it was not a business expense and no tax was deducted at source. The CIT(A) upheld the disallowance, stating there is no provision under Section 48 of the Act to allow PMS fees as a deduction. Tribunal's Decision: The Tribunal upheld the CIT(A)'s decision, stating that PMS charges do not qualify as expenditure incurred wholly and exclusively in connection with the transfer of shares or as cost of acquisition/improvement under Section 48. The Tribunal relied on the Mumbai Tribunal's decision in Captain Avinash Chander Batra v. DCIT and other similar cases. 3. Addition based on AIR Information for Interest Income: Assessment Year 2009-10: The AO added ?2,58,415/- based on AIR information, which the assessee failed to reconcile. The CIT(A) confirmed the addition. Tribunal's Decision: The Tribunal remanded the issue back to the AO for verification and reconciliation of the interest income reported in the AIR information with the assessee's books of accounts. The AO was directed to make necessary enquiries with the parties involved and provide the assessee an opportunity to present evidence. Conclusion: The appeals for both assessment years were partly allowed. The Tribunal directed the AO to recompute the disallowance under Section 14A for both years, excluding interest expenditure for AY 2007-08 and excluding investments in foreign subsidiaries for AY 2009-10. The disallowance of PMS management fees was upheld, and the addition based on AIR information was remanded for further verification. The Tribunal emphasized the need for a reasonable basis for disallowance and proper verification of facts.
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