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Income Tax Appellate Tribunal, JAIPUR BENCHES “B”, JAIPUR
Before: SHRI SANDEEP GOSAIN, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 69/JP/2019
ORDER PER: SANDEEP GOSAIN, J.M. The present appeal has been filed by the assessee against the order of the ld. CIT(A)-2, Jaipur dated 08/11/2018 for the A.Y. 2013-14 wherein the assessee has raised following grounds of appeal:
“1. The impugned assessment order U/s 143(3) dated 27/11/2015 is bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same may kindly be quashed. 2. Rs. 5,18,894/-: The ld. CIT(A) has grossly erred in law as well as on the facts of the case in confirming the disallowance of Rs. 5,18,894/- u/s 14A. hence, the disallowance so made by the ld. AO and sustained by the ld. CIT(A) is being totally contrary to the provisions of law
2 ITA 69/JP/2019_ M/s Mount Malt Bru Ltd. Vs ITO and facts on the record and hence the penalty may kindly be deleted in full. 3. The appellant prays your honors indulgence to add, amend or alter all or any of the grounds of the appeal on or before the date of hearing.” 2. The hearing of the appeal was concluded through video conference in view of the prevailing situation of Covid-19 Pandemic.
Brief facts of the case are that the assessee is engaged in manufacturing of barley malt and trading of agro products. The assessee filed its return of income declaring total loss of Rs. 14,32,230/- for the year under consideration on 26/09/2013. The case of the assessee was selected for scrutiny and notice U/s 143(2) of the Income Tax Act, 1961 (in short, the Act) was issued on 02/09/2014. Thereafter, a notice U/s 142(1) of the Act alongwith questionnaire was issued by the A.O. on 03/08/2015. Thereafter, the A.O. made disallowance U/s 14A of the Act at Rs. 5,18,894/- and added the same to the total income of the assessee.
4. Being aggrieved by the order of the A.O., the assessee carried the matter before the ld. CIT(A), who after considering the facts and submissions available on record, confirmed the action of the A.O. Against which, the assessee is in further appeal before the ITAT.
3 ITA 69/JP/2019_ M/s Mount Malt Bru Ltd. Vs ITO 5. The only effective ground raised by the assessee is challenging the order of the ld. CIT(A) in sustaining disallowance of Rs. 5,18,894/- U/s 14A of the Act. The ld AR appearing on behalf of the assessee has reiterated the same arguments as were raised before the ld. CIT(A) and before the Bench, he has submitted as under:
“That the assessee is a public Limited company engaged in the business of manufacturing of Barley Malt. That during the course of assessment the Ld. Income Tax Officer has wrongly and arbitrary made the disallowance U/s 14A of Rs.5,18,894/. In this regard we submit as under:
That the main activity of the company is of manufacturing malt and gross receipts of Rs. 19,12,36,713/-.
That the company has earned income from dividend which is an exempt income of Rs. 85898/- which is very negligible in comparison to overall operation of the company.
3. That gross receipts of the company was Rs. 19,12,36,713/-, and the exempted income by way of dividend was merely Rs. 85,898/- which is 0.044% of gross revenue of the company.
Further the company has invested its own and spare funds in the shares of the listed companies and there were hardly 10— 15 transactions during the year in relation to the investment activity and on which the company has earned the short term capital gain of Rs. 68,079/- on which company has paid the tax as per the provisions of the Income Tax Act, 1961.
4 ITA 69/JP/2019_ M/s Mount Malt Bru Ltd. Vs ITO 5. We would like to draw your kind attention towards the fact that Provision of Rule 8D can be invoked when linkage or nexus has been established that the interest or expenses has been incurred to earn the exempted income since the assessee has not directly incurred any expenditure for earning exempt income Hence the provisions of section 14A read with Rule 8D cannot be invoked. The above view is accepted in number of cases including the following Raj Shipping Agencies Ltd. Vs. Additional Commissioner of Income Tax (2013) 24 ITR Trib 249 (Mumbai)
Balarampur Chini Mills Ltd. Vs. Deputy Commissioner of Income Tax (2011) 140 TTJ UO (Kol) (UO) 73
We would also like to draw your kind attention that the Delhi High Court in the case of Joint Investments Pvt. Ltd vs. CIT, 2015 held that The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. Later on the above view was also accepted by the Mumbai Tribunal in the case of Daga Global Chemicals Pvt Ltd V/s ACIT
From the above it is clear that if any disallowances could be made, that is to be restricted to exempt income.
7. Later on the above view is also accepted by the department through notification no. S.O. 1949(E) dated 02.06.2016 in which it is explicitly mentioned that interest would not be disallowed under section 14A even if it is not directly attributable to any other income.
5 ITA 69/JP/2019_ M/s Mount Malt Bru Ltd. Vs ITO Hence in view of the facts of the case and submission made herein above the disallowance made of Rs. 518894 / is without any basis, illegal, bad in law and against the principal of natural justice. We pray you to kindly delete the above disallowance or restrict the disallowance up to the amount of dividend of Rs. 85898/-.” 6. On the other hand, the ld DR has relied on the orders of the authorities below.
We have heard the ld. Counsels of both the parties and have perused the material placed on record. We have also deliberated upon the decisions cited in the orders passed by the authorities below as well as cited before us and we have also gone through the orders passed by the revenue authorities. From the record, we noticed that it is an undisputed fact that during the year under consideration the assessee had shown exempt income of Rs. 85,898/- and investment in shares of Rs. 1,31,41,924/-. As per the assessee, the main activity of the company is of manufacturing malt and income from investment activity in comparison to overall operation of the company. Out of gross receipts of Rs. 19,12,36,713/-, exempted income by way of dividend from investment activities was merely Rs. 85,898/- which is approximately 0.044% of gross revenue of the company. However, as per the revenue authorities, the assessee had shown dividend income of Rs. 85,898/- as exempt. However, no separate account was maintained for these
6 ITA 69/JP/2019_ M/s Mount Malt Bru Ltd. Vs ITO investments. There was no direct nexus between the borrowed funds and investments and therefore, the revenue authorities were not satisfied with correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Therefore, on this premises, the disallowance U/s 14A of the Act was determined at Rs. 5,18,894/-. The Hon’ble Delhi High court in the case of Joint Investments Pvt. Ltd vs. CIT (supra) had categorically held that:
The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. Later on, the above view was also accepted by the Coordinate Bench of Mumbai Tribunal in the case of Daga Global Chemicals Pvt. Ltd. Vs ACIT. Thus, while keeping in view the principles laid down by the Hon’ble Delhi High Court as well as the Coordinate Bench of the ITAT, Mumbai Benches we are of the view that the window for disallowance is indicated in Section 14A of the Act and is only to the extent of disallowing expenditure incurred by the assessee in relation to tax exempt income. Therefore, this proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. From the above facts and circumstances, we are of the view that the disallowance made U/s 14A of 7 ITA 69/JP/2019_ M/s Mount Malt Bru Ltd. Vs ITO the Act cannot exceed the exempt income, hence, we direct the A.O. to restrict the disallowance U/s 14A of the Act to the extent of exempt income earned by the assessee. With this direction, we partly allow this ground of appeal.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 27th October, 2020. Sd/- Sd/- ¼foØe flag ;kno½ ¼lanhi x®lkÃa½ (VIKRAM SINGH YADAV) (SANDEEP GOSAIN) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 27/10/2020 *Ranjan आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- M/s Mount Malt Bru Ltd. Jaipur. 1. izR;FkhZ@ The Respondent- The ITO, Ward 6(2), Jaipur. 2. vk;dj vk;qDr@ CIT 3. vk;dj vk;qDr¼vihy½@The CIT(A) 4. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File (ITA No. 69/JP/2019) 6. vkns'kkuqlkj@ By order,
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