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TMI Blog2018 (9) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It can be seen from the impugned order that the AO even did not consider the correct amount offered by the assessee for disallowance at ₹ 4,01,209 (Rs.2,01,209 + ₹ 2,00,000). The authorities below have not rejected the claim of the assessee that it has not borrowed any funds for investment and that it was having sufficient own funds to make investment through Portfolio Managers - Ground of appeal of the assessee is allowed. - ITA. No. 3584/Del/2015 - - - Dated:- 4-9-2018 - Shri Bhavnesh Saini, Judicial Member And Shri Prashant Maharishi, Accountant Member For Assessee : Shri Hari Mittal, C.A. For Revenue : Shri A. K. Yadav, Sr. D.R. ORDER Per : Bhavnesh Saini, JM This appeal by Assessee has been directed against the Order of the Ld. CIT(A)-4, New Delhi, dated 31.03.2015, for the A.Y. 2011-2012. 2. We have heard the Learned Representatives of both the parties and perused the material available on record. 3. On Ground No.1, assessee challenged the order of the Ld. CIT(A) in confirming the action of the A.O. in excluding duty drawback of ₹ 57,771/- from eligible income under section 80IC in respect of Kotdwar Unit-III. The A.O. follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese Units and no further allocation of such expenses required to be made. The assessee apart from the above submission also submitted that even ignoring all the submissions of the assessee, it would be only an amount of ₹ 81,66,901/- that could be allocated to various units on turnover basis though the amounts so allocable to 10B Unit and Kotdwar Unit shall be reduced by ₹ 2,23,747.89ps and ₹ 1,42,969.89ps respectively. On this basis, it was submitted that expenditure allowable to EOU would amount to ₹ 12,78,120/- (15.65%) and to Kotdwar Unit-III ₹ 2,48,274/- (3.04%) as reduced by ₹ 2,23,747.89ps and ₹ 1,42,967.89ps respectively. In view of this, assessee has worked-out for further allocation of common expenses of ₹ 4,57,235/- and depreciation of ₹ 85,726/-. 4.1. The Ld. CIT(A) considering the facts of the case in the light of revised working filed by the assessee found the claim of assessee based on reasonable basis. The A.O. was accordingly directed to recomputed the disallowance in view of the submissions made above. This ground was partly allowed. 4.2. Learned Counsel for the Assessee in the written submissions submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement services may be considered for disallowance under section 14A and other expenses, if at all, at nominal level may be considered. The A.O. was not satisfied with the explanation of assessee and applied the provisions of Rule 8D and thereby, made disallowance of ₹ 26,48,712/- which includes disallowance of ₹ 2,01,209/- taken under Rule 8D(2)(i). Accordingly, addition of ₹ 26,48,712/- was made to the total income of assessee. 10. The assessee challenged the addition before Ld. CIT(A). Written submissions of the assessee is reproduced in the appellate order in which the assessee briefly explained that the job of portfolio management handling and advisor services were entrusted to well-known portfolio managers, namely, ICICI Prudential Assessment Management Company Ltd., which independently handled the entire working and furnish the account statement to the assessee. The Managing Director had done the only work by saying Yes or No to the major portfolio reshuffling, if any. The assessee itself had disallowed portfolio management fees aggregating to ₹ 2,01,209/- and for abundant precaution had further disallowed ₹ 2 lakhs. Even if A.O. was not sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny adhoc disallowance. Thus, the only expenditure of ₹ 4,01,209/- incurred by the assessee in relation to exempt income may be accepted. 11. The Ld. CIT(A) considering the explanation of assessee and material on record, rejected this ground of appeal of assessee. His findings in paras 5.8.3 to 5.8.5.2 of the appellate order is reproduced as under : 5.8.3. With regard Ground number 5 of the appeal, relating to disallowance under section 14A, I find that the appellant had made disallowance of an amount of ₹ 4,01,209/- in the return of income towards expenses incurred for earning the dividend income of ₹ 2.23 crores during the year. The learned AO examined the claim of the appellant and based on which, she observed that the appellant's claim was not correct, having regard the accounts of the appellant, based on which she invoked the provisions of Rule 8D by using power nested upon her u/sec. 14A(2). The learned counsel of the appellant pleaded before me that the disallowance of ₹ 4,01,209/- made by the appellant in the return of income comprised of an amount of ₹ 2,01,209/- towards the fees paid to two portfolio managers, who are managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over and above that would have sufficed any other administrative of expenditure, to avoid litigation, though in the opinion of the appellant, no other expenses other than the payment made to the two portfolio managers were incurred for earning the exempt income. Before me, the appellant filed the following brief on the nature of expenses incurred by the appellant for earning the dividend income, which reads as under: The Appellant has appointed two eminent Investment Portfolio Managers, namely, ICICI Prudential Asset Management Company Ltd., Bombay, and HSBC Asset Management (India) Pvt. Ltd., Bombay, who are authorized to purchase, acquire, obtain, take, hold, sell, transfer, substitute or change all or any of the investment of the Assessee. They are also provided with funds by the Appellant and are also authorized to operate the Bank Accounts of the appellant Company opened for the purpose. All the investments are held by them in Demat Account which is also operated by them. They maintain regular Accounts of the Investment portfolio and periodically render the audited Statements of Account showing the expenses incurred on the Investments and their portfolio management fees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there were occasional interactions of the Managing Director of the appellant company with the two portfolio managers. The appellant company owns several manufacturing undertaking and is significantly involved in export sales. Therefore, to hold that only the Managing Director was singularly responsible for dealing with the portfolio managers without the role of any other officials from the finance department looks unreasonable. In any case, the Managing Director and the Head of the Finance Department both are heavily compensated by the company. Therefore, even if disallowance was to be made in respect of the compensation paid to Managing Director and the Head of the Finance Department only with regard their salary and other emoluments, the ad hoc amount of ₹ 2 Lacs could not have reasonably covered the administrative efforts that these two high- ranking officials would have made in this regard. Moreover it cannot be conceived that in making a significant investment of ₹ 57 crores, that too, since the appellant is primarily a manufacturing concern and hence any diversion of funds away from core activity, would have required to be properly assessed, no consultation w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was also pleaded that assessee has no active role to deal with investment. It was also pleaded that assessee had not taken any loans, advances or borrowed funds for investments placed with the Portfolio Managers. The assessee has its own interest free reserves funds which aggregating to over ₹ 101 crores. The authorities below did not deal with the above explanation of the assessee in the impugned order. The AO merely observed that there are incidental expenses in relation to earning of the exempt income which are incurred by the assessee. It was also observed that since entire dividend income has been claimed exempt, therefore, Section 14A is attracted in this case and any expenditure relatable to earning of the dividend income shall have to be disallowed. Similar matter was considered by Hon ble ITAT, Delhi Bench in the case of the same assessee for the A.Y. 2012-2013 in which the departmental appeal has been dismissed vide order dated 28.02.2018 (supra). The findings of the Tribunal in paras 6 to 10 of the aforesaid order are reproduced as under:- 6. The only other ground in the appeal of the Revenue is against deletion of disallowance of ₹ 31,16,268/- u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to the exempt income. It can be seen from the impugned order that the Assessing Officer even did not consider the correct amount offered by the assessee for disallowance at ₹ 6.46 lac. In view of the fact that no proper satisfaction was recorded, in our considered opinion, the Assessing Officer did not acquire any valid jurisdiction for computing disallowance u/s I4A. Since the ld. CIT(A) has sustained the amount disallowable u/s 14A at ₹ 6,42,120/-, being the amount voluntarily offered by the assessee, we uphold the impugned order to pro tanto. 10. In the result, both the appeals are dismissed. 15. Considering the facts of the case in the light of the above decision of the Tribunal, it is clear that in the Assessment Order, AO has nowhere recorded any satisfaction about the incorrect claim having been lodged by the assessee with reference to its accounts. There is no discussion whatsoever about the examination of the assessee s claim about actual incurring of expenses in relation to the exempt income. It can be seen from the impugned order that the AO even did not consider the correct amount offered by the assessee for disallowance at ₹ 4,01,20 ..... 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