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TMI Blog2016 (3) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... suitably modified. 2. The CIT (A) has erred in confirming action of assessing officer in making the disallowance u/s 40A(2) of Rs. 6,86,351/- without appreciating the facts of the Case. CIT(A) also failed to appreciate that the service charges were paid to Related Party for services of its employee and the Assessing Officer has disallowed fully such expenses without giving finding as to excessiveness or unreasonableness of such expenses. The Appellant prays that the disallowance u/s 40A(2) be deleted." 3. The brief facts of the case are that the assessee company is engaged in the business of trading of chemicals. During the course of assessment proceedings u/s 143(2) read with Section 143(3) of the Income Tax Act,1961 (Hereinafter called "the Act") , it was observed by the learned assessing officer (Hereinafter called "the AO") , that the assessee company has claimed dividend income of Rs. 18,86,490/- as exempt income u/s 10(35) of the Income Tax Act, 1961. The assessee company, further, suo-motu made disallowance u/s 14A of the Act amounting to Rs. 10,000/- which as per the AO is prima facie not as per Rule 8D of the Income Tax Rules, 1962. During the course of assessment p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estments is in the form of weekly "dividend reinvestments plan". The assessee company submitted that dividend was credited 51 times and the dividend was automatically reinvested as per the plan. The direct purchases of units were effected only 11 times and redemption (RTGS) was effected 7 times. There is no expenditure, whatsoever incurred on transactions relating to reinvestments of dividend, redemption of mutual funds as they are directly effected by the Fund Managers. As regards purchases made during the year on such 7 transactions, it was submitted that the assessee company had on its own disallowed a sum of Rs.I0,000/-. In view of the above, the assessee company submitted that the action of the AO is unwarranted and uncalled for. The CIT(A) after considering the submissions as made by the assessee company held that the assessee company has claimed dividend income of Rs. 18,86,490/- as exempt u/s 10(35) of the Act. The assessee company has suo-moto made disallowance of Rs. 10,000/- u/s 14A of the Act. Prima facie, the disallowance made by the assessee company u/s 14A is not as per Rule 8-D of Income Tax Rules, 1962. In response to the specific query raised by the AO during the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee company has voluntarily offered for disallowance of Rs. 10,000/- u/s 14A of the Act. There was a closing balance of Rs. 10.13 crores in the mutual fund as on 31- 3-2010. The ld. Counsel for the assessee company invited our attention to page 11 of the paper book whereby all the transactions with respect to the Birla Sun Life Mutual Fund are reflected. The assessee company submitted that no borrowed funds have been utilised for making the investment. The A.O. has taken 0.5% of average investments held by the assessee company which was disallowed by the A.O. while the A.O. has not recorded any reason/basis on which he rejected the claim of the assessee company, hence, the assessee company submitted that the disallowance of Rs. 10,000/- offered by the assessee company should be upheld. 7. The ld. D.R., on the other hand, relied upon the orders of authorities below and submitted that the A.O. has rightly applied Rule 8D of Income Tax Rules ,1962 in the case of the assessee company to make disallowance u/s 14A of the Act. 8. We have considered the rival contention and also perused the material available on record. We have observed that Rule 8-D of the Income Tax Rules, 1962 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Rule 8D of Income Tax Rules, 1962 in the instant case as the relevant assessment year is 2010-11 while Rule 8D of Income Tax Rules , 1962 is applicable from the assessment year 2008-09 , keeping in view the peculiar facts and circumstances of the case which we have discussed hereinabove in this order. We do not find any infirmity in the orders passed by the CIT(A) which we confirm and dismiss the grounds of appeal raised by the assessee company in this appeal. We order accordingly. 9. The next ground relates to the disallowance u/s 40A(2)(a) and 37(1) of the Act. From the details, it was observed by the AO that the assessee company has made payment of Rs. 6,86,351/- towards service charges to M/s Pidilite industries Ltd., which is an associate entity of the assessee company. The assessee company was asked to file the relevant details with necessary supporting evidence with respect to the above service charges. The assessee company submitted as under:- "In this connection we have to state that one Mr. A.D Ubhayakar, was over all incharge of imports/purchases and sales of raw material with the assessee company prior to A.Y.2010-11. During the year under consideration, Mr. A.D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the assessee company upto 30-04-2008, it had recovered salary from Pidilite Industries Ltd. fully except in the case of Mr. Ubhayakar, in which case 90% of salary was recovered from Pidilite Industries Ltd. and 10% from the assessee-company. The assessee company submitted that after 01-05-2008, Pidilite Industries Limited had paid salary to Mr. Ubhayakar, and accordingly recovered 10% from the assessee company. It was submitted that M/s.Pidilite Industries Limited paid Rs. 62,25,890/ - to Shri. Ubhayakar as salary during the accounting year 2009-10. The assessee company company only reimbursed Rs. 6,86,351/ - which is about 10% of the sum paid to him. In this regard, the photocopy of the debit note was enclosed. Finally, it was stated that the payment made to Pidilite Industries Limited has not given any tax benefit to the assessee company. The said service charges paid by the assessee company is nothing but to follow the principle of accounting so that the expenditure incurred by another person on behalf of the assessee company is given proper accounting treatment in the books of account. The CIT(A) after considering the submission of the assessee company held that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the assessee company and merged into Pidilite Industries Ltd. w.e.f 01.04.2007 and majority of the employees of the assessee company (including Shri Ubhayakar) were shifted to M/s Pidilite Industries Ltd w.e.f 01.05.2008. Earlier, the assessee company was raising debit note of 90% of salary of Shri Ubhayakar to M/s Pidilite industries Ltd. which are placed in paper book page 20 to 26 while Shri Ubhayakar was absorbed by M/s Pidilite Industries Ltd. pursuant to the demerger of the manufacturing unit of thee assessee company into M/s Pidilite Industries Ltd. and now M/s Pidilite Industries Ltd.. is raising debit note in favour of the assessee company with respect to 10% of the salary paid to Shri Ubhayakar, proof of which are placed in paper book page 12 to 19. The ld. Counsel submitted that Mr Ubhayakar is rendering services to the assessee company for purchase and marketing of products. The Ld. Counsel submitted that the service tax have been charged on these debit notes with respect to the services of Sh Ubhayakar being utilized by the assessee company and due Taxes have been paid to Government and he submitted that these expenditure should be allowed in the hands of the a ..... 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