1. This appeal by the assessee against the order of CIT, dt. 26th July, 2004, confirming the disallowance of administrative expenditure of Rs. 73,608 under Section 14A of the IT Act, 1961, for the asst. yr.
2001-02.
2. The assessee is a company engaged in the business of export and investment. During the course of assessment proceedings of the assessment year in appeal, on perusal of P&L a/c, AO found that assessee's income consists of interest received, other income, profit on sale of investment, profit on sale of share and profit on sale of fixed assets. The assessee has also received dividend of Rs. 3,40,170 which is claimed as exempt under Section 10(33). AO accordingly asked the assessee to explain as to why the provision of Section 14A should not be invoked because dividend is claimed exempt under Section 10(33) of the IT Act, 1961. In reply to this, assessee explained that they have not borrowed any money for investment in shares and no interest has been paid nor debits to P&L a/c it was also claimed that expenditure cannot be allocated because they have not incurred any specific or identifiable expenditure for earning dividend, therefore, it cannot be said that any expenditure can be attributed to dividend income. In support of this contention before the AO, assessee relied on the decision of CIT v. General Insurance Corporation of India . The AO rejected the explanation of the assessee, observed as under : "The explanation offered by the assessee is not acceptable as the dividend is exempt under Section 10(33) and is not forming part of total income. In view of this, expenditure on earning dividend income proportionately is disallowed. The total expenditure debited to P&L a/c works out to Rs. 23,49,910 (i.e., administrative expenses and depreciation), the proportionate expenditure on dividend, therefore, works out to Rs. 72,608, i.e., Rs. 23,49,910 divided by Rs. 1,08,59,722 x Rs. 3,40,170." 3. The assessee carried the matter in appeal and before the learned CIT(A). The assessee reiterated the submissions made before the AO. In the impugned order, the learned CIT(A) upheld the action of the AO on the ground that in the case of (supra), it was held that the expenses on account of salary paid are not directly relatable to earning of dividend so also payments of stamp duty, transfer fee and safe custody are not related to earning of dividend and are not to be deducted for the purpose of Section 80M of the Act. The learned CIT(A) found that the decision is distinguishable because Hon'ble Supreme Court in the case of CIT v. United General Trust Ltd. held that proportionate management expenses are also required to be deducted for arriving at amount of dividend qualifying for deduction under Section 80M of the Act. The learned CIT(A) further relied on the decision of Hon'ble apex Court in the case of Consolidated Coffee Ltd. v. State of Karnataka, wherein it is held that the apportionment of expenses on the basis of gross receipts from the agricultural and non-agricultural activities were justified in the absence of relevant details, Aggrieved by this order of the learned CIT(A), assessee is in appeal on the following grounds : "1. The learned CIT(A) has erred in confirming the disallowance of administrative expenditure of Rs. 73,608 under Section 14A of IT Act. On the facts and circumstances of the case the appellant submits that allocation of expenditure and depreciation amounting to Rs. 73,608 is not justified and be deleted.
2. The appellant submits that no expenditure has been incurred for earning dividend income and the AO has also not proved that the appellant has incurred direct expenses for earning dividend income.
On the facts and circumstances of the case, the appellant submits that allocation of pro rata expenses to dividend income is not justified.
3. Without prejudice to ground Nos. 1 and 2, the appellant further submits that depreciation cannot be treated as expenditure and is not covered by provisions of Section 14A. The disallowance of depreciation may be deleted." 4. At the time of hearing, on behalf of the assessee, Shri Dilip V.Lakhani appeared and reiterated the submissions made before the authorities below. The learned Counsel for the assessee submitted that no expenditure has been incurred for earning dividend income and AO has not proved that assessee has incurred direct expenses for earning dividend income, therefore, disallowance of Rs. 73,608 be deleted.
Alternatively, the learned Counsel for the assessee submitted that in case of apportionment of expenses is required to be made, in that event, the depreciation of Rs. 11,36,970 cannot be apportioned because depreciation also pertains to in respect of building of godown.
Further, depreciation is not an expenditure but an allowance. In support of this contention, reliance is placed on Tribunal, Mumbai Bench "E" (Third Member), decision in the case of Navin Bharat Industries Ltd. v. Dy. CIT (2005) 92 TTJ (Mumbai)(TM) 1166: (2004) 90 ITD 1 (Mumbai)(TM).
5. Shri D.S. Benupani, Departmental Representative appeared for the Revenue, supported the order of the CIT(A). The learned Departmental Representative drew our attention to details of expenses which inter alia include demat charges of Rs. 63,324, share stamp charges of Rs. 18,936 and director's remuneration of Rs. 1,20,000. The learned Departmental Representative submitted that depreciation is a replacement cost. As such, depreciation on motor car, computer and office fixtures is required to be apportioned. Looking into the nature of the income, the apportionment of expenditure was correctly made by the AO whose view has been upheld by the CIT(A). Therefore, the order of the CIT(A) be upheld.6. Having heard both the sides carefully, I have gone through the orders of authorities below. But Section 14A of IT Act provides that for the purpose of computing total income under Chapter-IV (i.e., Section 14-59), no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under the IT Act. Admittedly, dividend is exempt under Section 10(33) of the IT Act, 1961. In view of this AO, is required to disallow expenditure incurred in relation to earning of dividend income which is exempt under Section 10(33) of the IT Act, 1961.
7. Section 14A was inserted by the Finance Act, 2001, with retrospective effect from 1st April, 1962. The Tribunal, Kolkata Bench, had occasion to explain the phrase "in relation to" in the case of Dy.
CIT v. S.G. Investments & Industries Ltd. (2004) 84 TTJ (Kol) 143 (2004) 89 ITD 44 (Kol). The expression used in Section 14A of the IT Act, "has both (direct significance as well as indirect significance), the Kolkata Bench of the Tribunal held". Where the assessee is carrying on more than one business and is maintaining a common account for all businesses, apportionment of expenses between businesses has to be made.
8. In the assessment order, AO disallowed administrative expenses and depreciation expenses on proportionate basis. It is the duty of the assessee to allocate the expenditure but in case the assessee fails to allocate the same, the AO has no option but to disallow the same on proportionate basis. From the perusal of administrative and other expenses, I find that assessee has incurred expenses on demat for Rs. 63,324, share stamp charges of Rs. 18,936, the total of these two expenses works out to Rs. 82,260. In the assessment order, the AO has disallowed Rs. 73,608 only as expenses attributable to earning of dividend which is claimed exempt under Section 10(33) of the IT Act, 1961. From the perusal of administrative and other expenses, it can be seen that assessee has claimed computer expenses of Rs. 49,500, conveyance expenses of Rs. 28,577.50 and salary expense of Rs. 2,60,933. In the income side, total income shown is Rs. 4,42,577.75 which comprises of Rs. 3,40,170.75, being dividend exempt under Section 10(33), commission received Rs. 15,000 and warehousing charges of Rs. 87,407. Looking to the totality of the facts and circumstances of the case, disallowance made by AO under Section 14A is neither excessive nor unreasonable. I, therefore, incline to uphold the order of the learned CIT(A) on this issue.