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TMI Blog2016 (8) TMI 603X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ld. Assessing Officer. After making addition of Rs. 27,78,024/- by way of disallowance u/s 14A of the Act income was assessed at Rs. 1,71,35,544/- and book profit was assessed at Rs. 2,35,75,954/-. This disallowance was called for on the basis of observation of ld. Assessing Officer that assessee was unable to justify that the investment in shares was from his own funds or from the funds on which no interest payment is made by the assessee. By applying Rule 8D r.w.s. section 14A of the Act the disallowance of expenditure comes to Rs. 28,43,777/- out of which assessee company had itself disallowed Rs. 65,753/- in its computation of income and therefore, remaining amount of Rs. 27,78,024/- was disallowed u/s 14A by ld. Assessing Officer. 3. Aggrieved, assessee went in appeal before ld. CIT(A). Ld. CIT(A) partly allowed assessee's appeal by restricting the disallowance to Rs. 6,18,396/- out of the total disallowance of Rs. 27,78,024/- by observing as under :- 3.3. I have carefully considered the Assessment order and submission filed by appellant. It is noticed that Assessing Officer has made disallowance by invoking provisions of section 14A r.w. Rule 8D and same is worked out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, there is net interest income. (iv) For the purpose of working out disallowance, the balance in Orchid Developers is inclusive of profit element which was transferred on the last day of the concerned financial year hence same is required to be reduced. (v) The appellant has sufficient interest free funds in form of share capital and "reserves and surplus to cover aforesaid investments considered by Assessing Officer for making disallowance u/s 14A hence no proportionate interest expenditure can be disallowed. 3.4. On careful consideration of observation of Assessing Officer and contention of appellant, it is observed that identical issue has arisen in case of appellant for AY 09-10 and vide order dated 30th August 2012 in appeal no CIT(A)- VHI/ACIT/Circ 4/297/11-12, the issue of disallowance u/s 14A made by Assessing Officer was partly confirmed in said order. Following the observations made in said order and considering the facts of appellant's case for present assessment year, grounds of appeal filed by appellant is adjudicated as under (A) The argument of appellant that profit earned from partnership firm is not tax free in hands of appellant company as s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to tax and no tax free income has been earned hence no disallowance is called on such investment is found correct. Even Assessing Officer himself has not considered closing balance of such investment for 'the purpose of computing disallowance u/s 14A hence Assessing Officer is directed to exclude opening balance of investments in shares of KCCB for the purpose of disallowance u/s 14A of the Act. (E) The appellant has also argued that for the purpose of computing disallowance u/s 14A of the Act closing balance of investment of partnership firm is required to be reduced by share of profit received from firm on last day of financial year is also accepted as such amount has been received on last date and there is no actual utilization of funds by appellant firm. The closing investments considered by Assessing Officer are required to be reduced by such profit element. Assessing Officer has considered closing balance of investments in firm being Orchid Developers at Rs. 10,55,381 which is after considering share of profit of Rs. 3,86,07,902 hence Assessing Officer is directed to reduced investments of Rs. 10,55,381 from total investments considered by him. (F) The Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Average Average assets (A) 31,91,21,902 55,11,26,953 43,51,24,427 Interest expenditure (C) 1,19,91,671 (A) Direct Expenses 1,19,91,671 (A) Direct Expenses (B)Disallowance out of interest (C+B)/A 5,23,431 (C)Half Parcentage of average investment ().5% *B 94,955 Total 6,18,396 In view of aforesaid finding, disallowance under Section 14A made by Assessing Officer is restricted to Rs. 6,18,396/- out of total addition made in Assessment Order for Rs. 27,78,024/-. The related ground of appeal is partly allowed. 4. Aggrieved Revenue has filed the appeal vide TA No.2031/Ahd/2013 and the assessee has filed the Cross Objection No.8/Ahd/2014. 5. First we take up Revenue's appeal wherein following grounds have been raised :- 1. The Ld.CIT(A) erred in law and on facts in restricting the disallowance to Rs. 6,18,396/- and thereby deleting the addition of Rs. 21,59,628/- out of total addition of Rs. 27,78,024/-, without appreciating the fact that the assessee has made investment in shares and others of Rs. 43,93,062/- for which it could not justify the investment made in sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugh the decisions relied on by the ld. AR. Through this ground Revenue is aggrieved with the action of ld. CIT(A) in restricting the disallowance to Rs. 6,18,396/- at the place of 27,78,024/- thereby deleting the addition of Rs. 21,59,628/-. 10. We observe that the issue relating to disallowance u/s 14A of the Act in assessee's own case in Asst. Year 2009-10 came up before the co-ordinate bench wherein following decision was taken:- 10. We have heard the rival contentions and have carefully perused the orders of the authorities below. We have also gone through the relevant documentary evidences brought to the notice by the ld. counsel. The undisputed fact is that the investments of the assessee have been taken at Rs. 17.02 crore, assessee's own funds are at Rs. 17.60 crores. Thus, it can be safely concluded that the assessee was having sufficient own funds to make the investments and, therefore, the ratio laid down by the Hon'ble High Court of Bombay in the case of A.Y. 2009-10 Reliance Utilities & Power Ltd. 313 ITR 340 squarely apply. Wherein the Hon'ble High Court has held that if the assessee is having mixed funds i.e. own funds plus borrowed funds than the presum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T) 88). This notification amends the Income-tax Rules by insertion of a new Rule 8D providing for a "Method for determining amount of expenditure in relation to income not includible in total income". Reading this Rule it is evident that the Rule provides for disallowance of not only direct expenditure incurred for earning the exempt income but also for disallowance of proportionate indirect expenditure. This is clearly contrary to the main objective with which S. 14A was enacted. 2.2 Broadly stated, the new Rule 8D provides as under : (i) The method prescribed in the Rule is to be applied only if the AO is not satisfied with : (a) The correctness of the claim of expenditure incurred for earning the exempt income made by the assessee or (b) The claim made by the assessee that no expenditure has been incurred for earning exempt income. (ii) The method prescribed in the Rule states that the expenditure in relation to income which does not form part of the total income shall be the aggregate of the following amounts : (a) The amount of expenditure directly relating to income which does not form part of total income. (b) In the case of interest on borrowed funds which is not dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept the same as the amount of expenditure directly relating to income which does not form part of the total income and there is no dispute to the same by both the lower authorities. 14. Now we take (ii) part Rule 8D (2) which deals with disallowance of interest which is not directly attributable to any particular income or receipt and some portion of it is deemed to have been used on the funds used for the purposes of investments. To examine this aspect, we observe that as per audited profit and loss account for the year under appeal, the gross interest income earned by the assessee is shown at Rs. 1,60,47,758/- and expenditure under the head interest and financial charges have been claimed at Rs. 1,19,95,664/- therefore, the net interest income earned by the respondent during the financial year 2009-10 is at Rs. 40,52,094/-. There is no dispute from the side of Revenue to this fact that there is net interest income earned by the assessee during the year. We further observe that co-ordinate bench in the case of Safal Realty P. Ltd. vs. ACIT (OSD), Circle-8, Ahmedabad (supra) has dealt with similar issue in which disallowance u/s 14A r.w.rule 8-D was held to be not justified when t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for disallowance and for which he place reliance on the decision of Kolkata Tribunal in the case of Trading Apartment Limited and the decision of Tribunal in the case Morgan Stanley India Securities Private Limited. He however considered the administrative expenses to be 0.5% of the average investments and disallowed the same." 5.2 To complete this order, we deem it proper to reproduce a portion of the order of Hon'ble Delhi High Court pronounced in the case of Maxopp Investment Ltd. and Others Vs. CIT as follows: "Subs. (2) of s. 14A provides the manner in which the AO is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if one examines the provision carefully, one would find that the AO is required to determine the amount of such expenditure only if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the Act. In other words, the requirement of the AO embarking upon a determination of the amount of expenditure incurred in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in clause (i) incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure-one half percent of the average of the investment, income from which does not or shall not form part of the total income, appearing in the balance-sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under section 14A of the Act. It is, therefore, clear that in terms of the rule, the amount of expenditure in relation to exempt income has two aspects- (a) and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule(2) of rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment. Section 14A even prior to the introduction of sub-sections (2) and (3) would require the Assessing Office to first reject the claim of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (OSD), Circle-8, Ahmedabad (supra) and in view of our above discussion, with reference to part (ii) of Rule 8D(2) we are of the view that no disallowance is called for towards interest expenditure as the assessee has a net interest income during the year i.e. interest received is more than interest expenditure. 16. Now we take part (iii) of Rule 8D(2) wherein an amount equal to 0.5% of the average of the value of investment, income from which does not form part of the total income. In this regard, we observe that at the time of framing assessment ld. Assessing Officer took the value of average investment at Rs. 8,73,41,794/- and calculated 0.5% of this amount to arrive at Rs. 4,36,709/-. Thereafter when the matter came up before ld. CIT(A) the amount of Rs. 4,36,709/- was reduced to Rs. 94,965/- by ld. CIT(A) on the basis of his observation that investments held by the assessee company includes investment in partnership firm which fetches taxable income to the assessee, investments in shares on which taxable dividend income is earned and a few other investments which have been made at the end of the year and were made in the course of business which do not give any tax free return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of ld. CIT(A) we find that disallowance of Rs. 6,18,366/- was sustained on the following -
i)
Disallowance out of interest expenditure -
Rs.5,23,431/-
ii)
0.5% of average investment -
Rs. 94,965/-
We have dealt with disallowance u/s 14A of the Act while deciding Revenue's appeal in ITA No. 2031/Ahd/2013, wherein we have calculated the disallowance under all the three limbs of the method provided under Rule 8D(2) of the IT Rules and have accepted administrative expenditure of Rs. 65,753/- voluntarily shown by the assessee in the return of income, deleted the disallowance on account of interest expenditure as the assessee was having a net interest income during the year and have calculated 0.5% on average investment at Rs. 1,50,120/-. Our decision taken in Revenue's appeal will take care of the Cross Objection filed by the assessee and the only disallowance u/s 14A remains at Rs. 1,50,120/-.Cross Objection is partly allowed.
21. Other ground of C.O. is of general nature, which needs no adjudication.
22. In the result, Revenue's appeal and the Cross Objection of the Assessee both are partly allowed.
Order pronounced in the open Court on 23 June, 2016 X X X X Extracts X X X X X X X X Extracts X X X X
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